ConnectOne Bancorp, Inc. Third Quarter 2026 Earnings Call - CONNECTONE BANCORP INC

Financial Performance:

• Operating EPS reached $0.95 (up 13% sequentially, 35% YoY), excluding a $23 million non-operating charge from the loan sale held-for-sale classification.
• Net Interest Margin (NIM) widened for the eighth consecutive quarter to 3.44% (+2 bps), driven by loan repricing ($1B repriced YTD).
• Operating Return on Tangible Common Equity (ROTCE) exceeded 15%, with Operating Return on Assets (ROA) at 1.35% and Pre-Provision Net Revenue (PPNR) at 2.01% of average assets.
• Total loan growth was 11% annualized (excluding loan sale impact); average client deposits grew 11% annualized, with non-interest-bearing demand deposits up 14%.
• Brokered deposits declined $150 million (13.7%), while non-interest-bearing deposits grew significantly.
• Net charge-offs were minimal at 7 basis points (annualized); provision for credit losses was $5 million, down from $8.3 million previously.
• Non-performing assets (NPA) ratio declined to 0.44% (from 0.55%) and non-accruals dropped to $64 million.
• Tangible Book Value (TBV) per share was $24.19 (down 1.9% due to AOCI, but up 5.9% over 12 months).

Guidance and Future Outlook:

• Q4 2026 NIM guidance is 3.50%, with expectations for continued widening into 2027, potentially reaching 3.60%+ depending on Federal Reserve rate movements.
• Full-year 2026 non-interest expense growth is projected at 2% to 2.5% sequentially.
• Long-term loan and deposit growth is expected to remain in the mid-single digits with a loan-to-deposit ratio maintained below 100.
• Management anticipates further reduction in the remaining rent-stabilized portfolio and expects quarterly net charge-offs to remain low ($3-$5 million).
• Credit quality is projected to remain stable with provision expenses expected to remain fairly consistent.

Business Segments and Product Lines:

• Executed a definitive agreement to sell $750 million of performing non-relationship multi-family loans, reducing CRE concentration and rent-stabilized exposure.
• Remaining rent-stabilized portfolio reduced to $235 million (2% of total loans) from 6%; over 50% of this remaining balance consists of relationship clients with >$100 million in deposits.
• SBA business pipeline remains strong, with potential for 50% growth in SBA gains in 2027.
• Acquired "First of Long Island" franchise, contributing deep deposit relationships and a portfolio of high-quality non-relationship multi-family loans (now being sold).
• Technology investments in "agentic workflows" are improving efficiency, keeping expenses flat despite growth.

Market and Competitive Landscape:

• Management perceives a robust underlying economy despite high interest rates and inflationary pressures, sustaining lending demand.
• Competition for deposits is stiff, but competitive pressure on loan pricing is manageable due to high client retention and execution certainty.
• The bank maintains a relationship-focused strategy, prioritizing clients with multi-product ties over transactional lending.
• Non-relationship assets are being systematically purged to align the balance sheet with the core banking strategy.
• Regulatory capital ratios are improving, with CRE concentration dropping pro forma to 3.97% from 4.39%.

Risks and Challenges:

• Interest rate risk: A 100 bps rise in rates since loan origination contributed to the $23 million non-operating charge on the loan sale.
• Rental market risks: Remaining rent-stabilized loans (though well-reserved) face regulatory and market uncertainty, though management views this exposure as largely in the "rearview mirror."
• Loan runoff: Potential runoff from loans reaching maturity in a competitive environment, though management expects limited net impact.
• Preferred stock redemption: The reset rate increased to ~8.8%; the timing of redemption is being evaluated for capital efficiency.

Management Commentary and Tone:

• Tone is highly confident, emphasizing "strong core operating performance," "momentum," and a "right-sized balance sheet."
• Management frames the $750M loan sale as a strategic de-risking move rather than a reaction to distress, citing deterioration in the rent-stabilized sector as a catalyst.
• CEO emphasized the shift away from transactional lending to deepen client relationships and improve earnings quality.
• CFO highlighted the efficiency ratio improvement (41%) and the strategic reinvestment of proceeds into lower-risk, higher-yield assets.

Analyst Questions and Answers:

• Fetty Strickland (Hubby Group): Asked about proceeds use and competition; confirmed proceeds will be reinvested in low-risk securities, pay down wholesale funding, and potentially preferred stock, while loan origination rates remain in the high 6% to 7% range.
• Bader Hele (Piper Sandler): Inquired about NIM drivers and deposit costs; clarified that the 3.50% Q4 NIM includes repricing, restructuring, and funding costs; noted deposit costs are flat but face upward pressure.
• Tim Switzer (KBW): Questioned expense leverage and rate sensitivity; stated expense growth will be mid-single digits max and that NIM benefits more from rate cuts than it is hurt by hikes.
• Tyler Cacciatore (Stevens Inc): Asked why the sale was executed now; explained the strategic desire to exit non-relationship loans and reduce rent-stabilized exposure; confirmed sold loans yielded ~6% and will be reinvested in similar yield vehicles.
• Daniel Tamayo (Raymond James): Asked about credit quality and rate sensitivity; affirmed charge-offs will remain low ($3-5M/quarter) and expects lending demand to grow with economic strength regardless of rate hikes.

Other Key Points:

• The loan sale incurred a 3% loss on the bank's carrying value ($0.93 vs $0.90 price) but effectively eliminated a 10% discounted PAR pool due to prior purchase accounting marks.
• The remaining rent-stabilized portfolio has a 30% "backstop" of offsets (reserves, prior charge-offs, purchase marks).
• Preferred stock redemption is planned but timing is flexible to maximize capital ratios; it may remain outstanding for another quarter.
• Share repurchases continue opportunistically ($50k shares bought last quarter); $500k shares remain authorized.
• The transaction is expected to improve the Loan-to-Deposit ratio to the high 90s and increase securities to 12.5% of assets.