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

Explicit Guidance:

• Net Interest Margin (NIM): Projected to reach 3.50% in Q4 2026; expected to continue widening throughout 2027, potentially reaching 3.60% or higher by year-end 2027 depending on Federal Reserve rate direction.
• Operating Expenses: Guidance set for a 2% to 2.5% sequential increase in OPEX for Q4 2026. Long-term expense growth capped at a maximum of "mid-single digits" annually in 2027, with flexibility to adjust based on revenue opportunities to further lower the efficiency ratio.
• Revenue/Growth: Loan and deposit growth projected to remain in the "mid-single digits" for the foreseeable future, maintaining a loan-to-deposit ratio under 100. SBA pipeline expected to generate "50 or more" gains in 2027 compared to the current year.
• Non-Interest Income: Projected to see fluctuations due to one-time items but solid execution expected on the SBA front.
• Provision/Credit: Provision expenses expected to remain "fairly stable" for the foreseeable future; net charge-offs anticipated at low levels of $3–5 million per quarter.
• Transaction Costs: Approximately $78 million of non-operating pre-tax transaction costs related to the loan sale recognized in Q4 2026 (non-GAAP impact).

Business-Segment Outlook:

• Multi-Family Portfolio: Following the $750 million sale, rent-regulated exposure reduced from 6% to 2% of the loan portfolio ($235 million). Remaining balances include non-accruals and criticized credits but have robust offsets (30% of unpaid principal via reserves/marks). Management plans to "aggressively reduce" this remaining piece, though no specific timeline is set.
• Loan Repricing: Approximately $1.2 billion in loans expected to reprice over the next five quarters (excluding sale impact), representing a weighted average rate increase of 258 basis points from the previous period.
• CD Repricing: $3 billion of CDs repricing over the next 17 months, though yield differential is noted as minimal; no margin impact expected from this repricing.
• SBA Business: Pipeline described as "strong" with expectations for significant gain acceleration in 2027.

Market and Competitive Outlook:

• Demand Dynamics: Management views the economy as "robust" despite rate-driven headlines. Believes higher rates have dampened some demand but that the underlying economy supports increased lending demand irrespective of rate direction (up or down).
• Competition: Acknowledges "fair amount of competition" and a marketplace with institutions offering lower spreads. Connect One differentiates via execution certainty, allowing retention of desired pricing/spreads.
• Pricing Power: Confident in maintaining pricing and spreads despite competition. New originations in Q3 achieved rates in the "high sixes"; current pipeline is "over 7%," expected to drive similar margin improvement as recent originations.

Macro / Industry Outlook:

• Interest Rates: Management does not expect Fed rate hikes ("i don't think they're going to"). Believes the economy is building strength; if hikes occur, they would signal continued economic expansion. Expresses greater concern over a dramatic rate drop signaling economic slowing than over current rates.
• Deposit Costs: Expects "upward pressure" on deposit pricing, which will temper margin widening projections.
• Economic Environment: Cites inflationary pressures, geopolitical wars, fuel prices, and AI investment as macro factors. Believes current rates are not "high" relative to the cost of capital for business opportunities (construction, development).

Strategic Initiatives:

• Capital Deployment: Proceeds from the $750 million loan sale (priced north of 90) intended for: (1) Reinvestment into lower-risk assets with yields in the "low sixes"; (2) Paydown of wholesale funding; (3) Opportunistic repurchases of preferred stock; and (4) Organic loan growth.
• Balance Sheet Restructuring: Transaction classified to improve pro forma regulatory CRE concentration (439 to 397 bps), Loan-to-Deposit ratio (into high 90s from low 100s), and Securities portfolio (9% to 12.5%).
• Preferred Stock: Dividend rate reset to ~8.8%. Redemption intended, but timing delayed pending final evaluation of capital ratios; may remain outstanding for "another quarter."
• Acquisitions/Partnerships: No new M&A or partnerships announced; focus remains on organic growth and relationship banking.

Risks and Headwinds to Outlook:

• Margin Compression: Upward pressure on deposit costs and potential Fed rate moves could cap NIM expansion at 3.60% rather than higher levels.
• Loan Sales/Rollover: Potential runoff from portfolio due to competitive lending environments where institutions accept lower spreads; not expected to significantly change net loan growth outlook.
• Credit Quality: Remaining rent-regulated portfolio carries specific reserves and marks; however, management views NYC rent-regulated issue as being in the "rearview mirror."
• Regulatory/Tax: Recognition of non-operating charges related to the loan sale impacts quarterly reporting (held for sale accounting).

Management Tone on the Future:

• Confidence: High confidence in long-term value delivery and ability to maintain margin widening through loan repricing and balance sheet repositioning.
• Strategy: Describes current path as a "decisive step" and "smart move" to de-risk the balance sheet, focusing on "high-value client relationships."
• Guidance Revision: Margin guidance for 2027 remains open-ended ("360 or higher") contingent on Fed moves; expense guidance tightened to 2-2.5% sequential for Q4.
• Sentiment: Positive on the "staying power" of the deposit culture and the "robust economy," though hedged on deposit pricing costs.

Miscellaneous:

• Transaction Specifics: Loan sale executed at a 10% discounted PAR, resulting in a 3% book loss ($23 million charge) due to previous purchase accounting marks (interest rate and credit).
• Share Buybacks: $500,000 remaining under authorization; will continue "opportunistically."
• Capital Ratios: Tangible common equity ratio expected to rise by ~35 bps post-sale due to risk-weighting changes.