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

hello everyone thank you for joining us and welcome to the connect one bancorp inc third quarter 2026 earnings call after today's prepared remarks we will host a question and answer session if you would like to ask a question please press star 1 to raise your hand to withdraw your question press star one again i will now hand the conference over to via vancia chief brand and Innovation Officer. Sia, please go ahead. Good morning and welcome to today's conference call to review Connect One's results for the third quarter of 2026 and to update you on recent developments. On today's Conference Call will be Frank Sorrentino, Chairman and Chief Executive Officer, and Bill Burns, Senior Executive Vice President and Chief Financial Officer. I'd like to caution you that we may make forward-looking statements during today's Conference Call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings. The forward-looking statements included in this conference call are only made as of the date of this call and the company is not obligated to publicly update or revise them. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed today on Form 8K with the SEC and may also be accessed through the company's website. I will now turn the call over to Frank Sorrentino. Frank, please go ahead. Thank you, Sia, and good morning, everyone. I'm pleased to report that during the third quarter, we continue to drive strong core operating performance and momentum across the franchise. We also took a decisive step to strengthen our balance sheet and enhance our capacity for future growth when we acquired first of long island we gained a terrific franchise deep deposit deep client relationships and a strong deposit base the acquisition also included a portfolio of high quality non-relationship multi-family loans last quarter we told you we were evaluating a bulk sale and we're pleased to announce we've executed a definitive agreement to sell up to approximately 750 million of those multifamily loans the transaction which emphasizes the sale of rent stabilized assets accomplishes several strategic objectives at once it sharpens our focus on what we do best serving core banking clients and deepening those connections while further aligning our balance sheet with our relationship focused banking strategy it accelerates the reduction of our cre concentration cuts our rent stabilized exposure by up to two-thirds improves our liquidity and strengthens key capital and performance metrics across the balance sheet bill will walk you through some more details on that turning to connect one's third quarter performance our core results were strong and continue to build quarter over quarter. Operating PPNR crossed 2% of average assets and operating return on tangible common equity exceeded 15%. Core deposit growth was exceptional this quarter. Client deposits grew at an annualized pace of 11%, led by 14% growth in average non-interest bearing demand, reflecting the staying power of our homegrown relationship banking culture. Our margin widened again, despite higher short-term rates and stiff competition for deposits. The pace of margin widening is steady, and loan repricing continues to work in our favor. On efficiency, expenses were flat for the quarter, a reflection of our culture. We're always looking for ways to work smarter, and our investments in technology, including agentic workflows are freeing our bankers to spend more time serving our clients efficiency has always been one of our core strengths and our efforts continue to improve this quality credit quality improved across the board operating charge-offs were just a few basis points and non-performing assets declined following the loan sale the remaining rent stabilized loans represent a much smaller well reserved for portion of our total loan portfolio To provide full clarity and details, Bill will give you some more specifics on the remaining portfolio. On capital, we remain disciplined stewards. The restructuring enhances our flexibility to support organic growth, return capital through dividends and opportunistic buybacks, and pursue the most advantageous path to redeem our preferred stock. Overall, our third quarter performance clearly demonstrates the strength of our franchise, And looking ahead, we enter the final quarter of the year with a more liquid balance sheet, growing earnings profile, and a team focused on what we do best, serving our clients. Bill, why don't you walk us through the quarter's financial performance in a little bit more detail? All right, Frank. Thank you. Good morning to everyone on the call. As Frank mentioned, we announced two items this morning. First, we delivered a continued step-up in our core operating performance. and second we execute it on a right-sized balance sheet restructuring transaction it meaningfully de-risks and repositions the balance sheet i'll start with the restructing then we'll get to operating results so as we noted last quarter we had been exploring a bulk loan sale and within the past week we had entered into a contractual agreement to sell 750 million dollar pool of performing non-relationship multi-family loans to a single buyer at a price north of 90 Having said that, the 10% discounted PAR resulted in only a 3% loss on the sale for our bank. That's because we previously recorded significant purchase accounting marks, both interest rate and credit marks, on a large part of the pool back in the second quarter of 2025, concurrent with the closing of the first of Long Island acquisition. As a result, the weighted average carrying value of the total pool on ConnectsOne's books was $0.93 versus the $0,90 purchase price. Now, the sale is expected to be completed in the next week, but for accounting purposes, it was classified as held for sale on September 30th, which required the recognition of a $23 million non-operating pre-tax charge in the third quarter. To be clear, this charge solely reflects changes in interest rates and does not stem from any additional credit losses. Interest rates are up about 100 basis points on average since the loans were originated or acquired. Now, in terms of our reinvestment of loan proceeds, our intention is to place the majority of the funds into lower-risk assets with slightly higher yields, effectively reducing balance sheet risk without impacting earnings power. A smaller portion of the proceeds that will likely be used to pay down wholesale funding may slightly temper short-term reinvestments, but that strategic shift will expand our net interest margin and return on assets while enhancing capital flexibility. The repositioning improves our balance sheet in several ways. On a pro forma basis, our regulatory CRE concentration declines on June 30th pro forma basis to 397 from 439. Our loan-to-deposit ratio improves into the high 90s from the low 100s, and securities portfolios of percent of assets is expected to increase to 12.5% from its current 9%. in addition post loan sale our rent regulated book declined significantly from six percent of loans to just two percent or 235 million i'm going to provide more detail on lost coverage of that remaining piece when i cover credit in a few minutes now turning to operating results again we're very very pleased with our performance and momentum excluding the restructuring charge and other non-operating items operating eps was 95 cents per share up 13 percent sequentially from 84 cents last quarter, and that builds upon our strong second quarter sequential earnings growth. And from a year ago, quarterly operating earnings are up 35%. Operating return metrics were outstanding with PPNR improving to 2.01% of average assets, return on assets increasing to 135, and return on tangible common equity of more than 15%, already hitting the target we laid out earlier this year. Then interest margin widened for the eighth consecutive quarter to $344, a two basis point increase. Looking ahead, loan repricing remains a tailwind. Year to date, just over $1 billion of loan balances have come up for repricING. 20% paid off, but the remainder stayed on our books at a weighted average rate increase of 258 basis points. We expect approximately 1.2 million more to reprice over the next five quarters, still significant, although down slightly from prior estimates as a result of the loan sale. And as I mentioned earlier, we expect the restructuring to be additionally accretive to the margin, primarily from paying down higher costs wholesale funding. So putting it all together, we're now estimating a margin reaching 350 for the fourth quarter, while for 2027, our models show continued widening throughout the year. Whether that gets us to 360 or higher at year-end 27 is going to depend on the number and direction of Fed rate moves. For the quarter, loans grew at an annualized rate of approximately 11% sequentially, excluding the effect of the transfer to help or sale. Average client deposits, which exclude broker deposits, also grew about 11% annualized. Averaged non-interest-bearing deposits increased about 14%, and broker deposits declined by 150 million or 13.7%. percent looking ahead for projections we're projecting loan and deposit growth remaining in the mid single digits while maintaining a sub 100 loan to deposit ratio now going to turn to non-interest income and operating expenses excluding the restructuring charge non-trust income was 8.5 million up a little from 7.9 million last quarter that included some one-time bully income items leading to a 1.1 million increase while quarterly results may fluctuate execution remains solid on the sba front and our sba business continues to strengthen sba pipeline is strong and i wouldn't be surprised if we're up 50 or more in sba gains in 2027 versus this year expenses this quarter came in better than our guidance last quarter we projected 1.5 sequential growth instead non-interest expenses were flat that reflects our culture of working smarter along with continued technology efficiencies. For your models, I'm targeting 2% to 2.5% sequential increase in OPEX for the fourth quarter. In terms of operating expenses as a percent of average assets, we remain an industry leader with just 1.45% of average assets in the current quarter versus 1.47% sequentially and 1.5%, uh, for the prior year quarter um our operating efficiency ratio improved to 41 from 43 last quarter and 40 48 a year ago we have reported sub 40 efficiency ratios before and we are on track to get there again and just want to remind you keep in mind as we disclose in the release we will be recognizing approximately 78 million of non-operating pre-tax transaction costs related to the loan sale that under gap ought to be recognized not in the third quarter but need to be recognized in the fourth quarter now credit quality as frank mentioned approved across the board the provision for credit losses was 5 million that's down from 8.3 million last quarter annualized net charge-offs excluding those pcd loans in the loan sale with just seven basis points versus 56 basis points last quarter provision expenses expected to remain fairly stable for the foreseeable future Non-accrual loans declined to $64 million from $80 million, driving the non-performing asset ratio lower to 0.44% of total assets from 0.55% one quarter ago. And 30 to 89 delinquencies are just five basis points, almost nothing. Criticized and classified assets were 2% of loans. That's up from 1.9. But that's only because loans receivable decline as we move loans from loans receivables into loans held for sale. the balance in classified and criticized were relatively stable. The allowance was 1.06% of loans, down from 1.18%. That's mechanical. We eliminated $22.2 million of allowance on PCD loans in connection with the sale. Now a word on the rent-stabilized loans that remain on our books, which total approximately $235 million, as we said, down to 2% versus 6% prior to the sale, First off, except for a de minimis amount, these loans were not part of the original pool offered for sale by our own design. And of that $235 million, more than half consists of longstanding clients with related deposits in excess of $100 million. Therefore, there was no desire whatsoever to exit those relationships. The remaining balance of about $100 billion includes non-accruals, select PCD loans acquired from First of Long Island and other criticized credits. And importantly, these remaining loans have robust offsets, approximately 30% of unpaid principal balance, protecting our exposure. These offsets include prior charge-offs, purchase accounting marks, specific reserves, additional general reserves that we've increased through qualitative allocations. So, with a large reduction in overall rent-regulated exposure, combined with significant backstops on any remaining credits, the New York City rent-legulated issue is in our rearview mirror. That's a result we can all feel good about. Now, turning to capital, tangible book value per share was $24.19, down 1.9% from last quarter, due primarily to the AOCI. Excluding AOCI changes, tangible books value would have grown despite the one-time charge. And over the past 12 months, tangible book is still up 5.9%, and we would expect to return to an upper path going forward from here. Our tangible common equity ratio is 838 at the end of the quarter, but it's going to be approximately 35 basis points higher due to the loan sale. And regulatory risk-based ratios rise on the transaction, with lower risk-weighted securities taking the place of higher risk-weighed loans. During the quarter we repurchased 50,000 shares at an average price of $32. We have approximately 500,000 shares remaining under our authorization. We will continue to repurchase opportunistically. Our board declared a common dividend of 19.5 cents per share, consistent with last quarter. That's roughly 20% of operating earnings, which leaves us significant flexibility. And one last item, our non-cumulative preferred stock. It reached its reset date, and the dividend rate has moved higher to approximately 8.8%. We do intend to redeem that preferred. However, in light of the restructuring and the resulting improvement in regulatory capital ratios, we're still evaluating the best and most advantageous way to do it. As a result, it may remain outstanding at the higher rate for another quarter, but we will update you once we finalize our approach. And with that, Frank, I'm going to turn it back over to you. That's great, Bill. Thank you. To wrap things up, the third quarter marked an important step in Connect One's evolution. We de-risked our balance sheet, strengthened our liquidity and financial flexibility and continued to grow ConnectOne's core business through strong client relationships. We're well positioned with a growing earnings profile, sound credit fundamentals, and a balance sheet built for the next phase of growth. And we're confident in our ability to deliver long-term value for our shareholders. Our profile has strengthened significantly, reflecting improved quantity and quality of earnings, while growth prospects remain solid. With those positives and a discounted valuation, we remain a very compelling investment opportunity. With that, I'd like to turn the call over for your questions. Operator? We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Fetty Strickland with Hubby Group. Your line is open. Please go ahead. Hey, good morning, Frank and Bill. Congratulations on the loan sale here. You wanted to ask about the use of proceeds. I know you covered it in your opening comments and you had some stuff in the release, but just to make sure I have it clear, is the intention to hold those proceeds in government-guaranteed securities near term? You'll pay down some wholesale funds and then you're retaining some for both paying down the preferred here as well as long-term organic loan growth. Is that the right way to think about these proceeds here? Yeah, that's the right way to think about it. Okay. And just in terms of the competitive environment on loans, I mean, it seems like you've got a pretty good pipeline here, given your guidance. Can you talk about what you're seeing on RAID and maybe the level of competition? There's a fair amount of competition in the marketplace today. Certainly, we are competing with every other organization that is in our market. I do think that the rise in rates has dampened some of the demand out there. But believe it or not, there's a very robust economy underneath all of this. Folks are still doing lots of really exciting things within the marketplace. The clients that we have, we're doing more business with. And so competitive pressures there are lower. There are lots of other reasons why people seek out Connect One. The certainty of execution here at Connect One is at an all-time high, and our clients really respect that. So while I would agree there's increased competition, we seem to have been able to figure out how to continue to get the pricing that we need to get, the proper spreads, make sure we're onboarding the right types of client relationships, and continue to grow the balance sheet. Yeah, and Fetty, in terms of the rates, I've been very pleased with our progress. We originated as much as $800 million of loans in the last quarter and rates in the high sixes. Rates that came off were at lower rates, and my calculations say that contributed about five basis points to the margin. And when I look at the pipeline, we're over 7% on a similar amount. So I would expect a similar amount of margin improvement coming from our loan originations. Got it. And just one more question on the loan growth side. I mean, I appreciate the guidance here. Does reduced pay downs and maybe the ability to hang on to more of the loans reaching maturity given higher rates factor into your overall net loan growth number going forward? I don't know. I don' think so. I think they're, you know, again, thinking about a highly competitive marketplace, you know, there are institutions out there that are doing lower spread business. And so we do see some runoff out of the portfolio. It's welcome when it happens. So, no, I don't really see that dynamic change in all that much. Got it. Thanks for taking my question. I'll step back. Your next question comes from the line of Bader Hele with Piper Sandler. Your line is open. Please go ahead. Hey, good morning, guys. This is Bader. Good morning. On for a just rally. Yep. I just had a question about the, you know, maybe the impact from the loan sale. I know you guys guided to a 350 margin next quarter. how much of of that is factored in from you know the impact from the loan sale versus you know overall asset repricing uh you know thinking about the margin as we look over the next quarter or two right i mean there's a lot of moving parts to the margin um we have the loan repriced we have a tip our regular originations and we have this uh restructuring and they're all worth you know a few basis points each offset by increasing deposit costs but the net is you know an increase of whatever three to five basis points a quarter uh in the net interest margin hope that answers your question yeah um and then you mentioned um increasing deposit cuts do you happen to have the spot positive deposits at the end of the quarter what does the cost for the same one it's been pretty been pretty flat right it just it has to be pretty flat from from you know um in the in the most recent couple of months deposit costs been pretty but um i do expect to continue to see upward pressure on deposit pricing and and that's what's tempering that's what's tampering our our margin widening projections Got it. Thank you. And then, lastly, if I may, I know you guys mentioned potential close next week. I don't know how much color you guys can give, but do you know if the interest in the loan sales is coming outside of the banking system or any detail on that process you can give? and then maybe as a follow-up you know given that you've taken care of a good size portion of the rent stabilized exposure are you guys thinking about potential restructuring or additional loan sales down the line well let's wait the first the second question was on on rent stabilized i think we've got it down to exposure i said to a little over 200 million more than half of that are loans we wouldn't want to sell because they're strong quality loans with strong uh clients and we have a lot of deposits associated with the rest of the portfolio um we've got a lot reserves against it and so we will be aggressive in reducing the the remaining piece there on the on the rent regulated okay so like i said as as far as the financials go it's it's in it's the rear view mirror now but but you will see continued decline in the rent regulated uh balances that are left and the first question was yeah as far as loan sales uh we've we've had a history of doing smaller transactions right when we determine we have non-relationship type loans uh that have accumulated in the portfolio so i mean that it's possible but it'd be further down the road yeah if something like that happened i wouldn't put it i wouldn't print it to your projections for the next year or two okay Got it. That's all from me. Thank you very much. Sure. Yeah. Great. Your next question comes from the line of Tim Switzer with KBW. Your line is open. Please go ahead. Hey, good morning. Thanks for taking my question. Hey, Tim. First one I have is on the expense outlook. Could you maybe provide some parameters in your expectations for 27? And what levers do you have to pull in front of you if we get into a tougher environment here? Well, I think, you know, at the maximum, it's going to be, you know, a mid-single digits increase in expenses. Obviously, we can continue to leverage our fixed costs and continue to drive the efficiency ratio down. So we don't really necessarily have expense budgets that we have to stick to. It depends what's available to us out there, what the opportunities are, and we adjust accordingly and continue to try to improve our efficiency ratio and our return on equity. Okay, great. And then a couple questions on the NIM, trying to get an idea of the impact of a Fed rate hike. It sounds like you believe you're able to continue expanding the NIM next year regardless of the rate environment. But for each rate hike, is it like five basis points? No, it's only like maybe two or three, and we benefit more on the way down. We benefit more in cuts than we get hurt on ups. Okay, nice. And then can you remind us the amount of CD repricing you have over the next year? Sorry, you already mentioned that. oh it's not a lot what do we got oh but it's just a small amount though uh the the rate differential 380 from where is it today i'm sorry i'm asking c fermiano our treasurer that we have we have three billion of cds repricing over the next 17 months but the differential in rate isn't all that much so right so it says yeah it's repriced but but no change to the margin Gotcha. Okay. And then one last one for me. What was the purchase accounting accretion within NII for the last two quarters? The purchase accounting accretition? Yes. So it's been about, it's running at about 8 million, okay? And we're going to lose about 20% of that with the loan sale. But you shouldn't look at that, that that's to hurt margin in some way because that you know that's the that's the yield on the assets coming off versus the yield going on so i'm already taking that into account the yield of the assets going off is less than the yield that the asset's going on and that includes the purchase accounting appreciation i think it's good that we'll have less purchase accounting accretion for those that you treat that as lower quality earnings it's good to have it lower gotcha yep sounds like you replaced it um with the repurchases all right thank you okay you're welcome your next question comes from the line of tyler cacciatore with stevens inc your line is open please go ahead hey good morning guys this is uh tyler i'm from mad breeze yes tyler hi tyler uh frank maybe just going back to the multi-family sale uh you know what ultimately led you guys to move forward with the transaction you know was it primarily an opportunity to strengthen the balance sheet or was it more of you were starting to see additional signs of uh stress within the portfolio look you know we we've mentioned here i don't know how many different times about building a business that's really focused on high-value client relationships where you know we have a depository relationship cash management multiple points of uh of contact with those clients building you know a bigger base with each of those clients over time as our balance sheet strengthens and so when we looked at the portfolio especially some of the acquired portfolio and saw a very high percentage of non-relationship based loans it almost didn't matter to me what they were uh but they weren't you know they were transactions and um so the opportunity was here to you know uh get rid of those and free up both capital deposit you know liquidity um and and resources to be able to redeploy in better uh better assets going forward and so we you know we took the opportunity it doesn't you know it doesn t um it's not lost on anyone that part of that portfolio is the rent stabilized and since the time we you now announced the deal with first of long island the environment for those assets um is looking you know looking like it's deteriorating over time but overall the assets we had were performing well uh the multi-family assets that were not rent stabilized were performing extremely well but they just weren't high quality client relationships and so the opportunity to clean up the balance sheet and give us the you know the strength that we now have to move forward i think uh i i just think was a smart move for us to make got it um and then i think you mentioned it a bit in the prepared remarks um but could you provide a bit more color on what the yields were on the loans being sold and uh how that compares to what you're seeing uh on reinvestment on the securities front yeah so um 30 of the loans in the portfolio were connect one originated and those were on an average rate of five and a quarter and the loans that we picked up from first of all on island had been five and a quarter or lower but with the purchase the county marks were actually yielding six percent so it's you know a weighted average between seventy percent at six percent uh and thirty percent of five in a quarter and we expect to reinvest at yields in the low sixes on average got it and then uh bill i guess uh another one for you um average deposit growth looked pretty strong over the quarter but period imbalances were a bit more modest uh can you just walk us through the dynamics there and what you're seeing early in the fourth quarter well one is you have to be careful to exclude brokered in there and so when you exclude broker the actual the point to point may have been a little bit higher and i listen this is the way i look at it when it comes to loans i review our success on a period end to period end basis but when it comes to deposits it's always average over average okay deposits are going up and down every single day so not a great exercise to uh to review success based on period end period end got it that'll be it for me thank you very much just a reminder if you would like to ask a question please press star 1 to raise your hand Your next question comes from the line of Daniel Tamayo with Raymond James. Your line is open. Please go ahead. Yeah, thank you. Morning, Frank. Morning Bill. Maybe just starting, you know, you've got this loan sale now in the rear view mirror. Really credit outside of the rent regulated has been strong recently. I'm curious kind of how we should think about the net charge-off profile going forward here? Well, we don't have a huge pipeline, okay, of charge-offs, which is great. The only place that I might be using it is that I'd like to continue to be aggressive to get off the books any remaining, that small remaining piece of rent regulated. And so I wouldn't be surprised to see further decreases in that. with small levels of charge-offs, you know, no more than 3 to 5 million, say, a quarter, okay? Okay. All right. That's helpful. And so that's the half that you're going to be getting rid of. And just to kind of put a fine point on kind of what you have remaining there, the 30% protection reserves marks prior charge ops is against the total remaining or just the half that or less than half or whatever that's uh that you've talked about um it's it's 30 it's thirty percent on that remaining half the rest has a actually has a larger reserve than our loan portfolio maybe about three percent okay but those zones are all performing and i think the weighted average uh rating is 4.1 on those loans which is very strong yeah low ltv strong yeah strong debt service coverage they can withstand a lot of change uh that's going on in the marketplace there in rent stabilized world in new york city and strong very strong borrowers as you said that yeah okay great um and then i just wanted to uh kind of dig into the maybe the the sensitivity on demand from rate hikes. You mentioned there's still kind of plenty of loan demand right now. But as you see it, if we continue to get hikes from here, is there a level that things really start to slow down from your perspective, or is it somewhat ratable as we move up if we do on the rate side? I'm just curious how you're thinking about the loan environment if we get kind of some meaningful amount of hikes this year, next year. You know, I think what's happening in the marketplace today is that there is a very robust economy going on underneath all of the headlines that's causing a lot of uncertainty. The clarity part, though, is that we have a strong economy. Rates are going up because there are some inflationary pressures. There's, again, uncertainty you know due to the war you know the wars and uh fuel prices ai investment many of those things can't be controlled by higher interest rates and so i think if the fed continues to raise interest rates which by the way i don't think they're going to but if they were it would be an indication that the economy continues to get and continues to build on that strength if the economy's building on that strength there's going to be increased demand for for lending and so because you can if things are strong you're going to able to borrow at higher rates and still make whatever it is you're doing make sense and you know we don't we should it shouldn't be lost on anybody either that from a historical perspective rates are not high they're higher but they're not really high relative to the cost of capital what you can get as far as a return from whether it's It's, you know, a business opportunity, you know, construction opportunity, development opportunity, whatever it happens to be. And I think we're going to settle into that environment a little bit more. I believe we're gonna see increased demand or increased opportunities for lending going forward, irrespective of which way rates go. If rates start coming down dramatically, that's gonna portend that the economy's slowing. I'm more concerned about that than I am with where we are right at the present. Got it. I appreciate your thoughts on that, Frank. That's all I had. Great. There are no further questions at this time. I will now turn the call back to management for closing remarks. Okay. Well, again, thanks everyone for joining us today. And we look forward to speaking with you during the fourth quarter earnings conference call in a few months. So have a great day and thank you again for joining. This concludes today's call. Thank you for attending. You may now disconnect.