Connectone Bancorp (NASDAQ:CNOB) Q3 2026 Earnings Call

0:00 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 one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Siya Vansia, Chief Brand and Innovation Officer. Siya, please go ahead.

0:30 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.

1:31 I will now turn the call over to Frank Sorrentino. Frank, please go ahead.

1:36 Thank you, Siya, 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, multifamily 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.

2:22 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. Bancorp, Inc. Operating PPNR crossed 2% of average assets and operating return on tangible common equity exceeded 15%. Core deposit growth was exceptional this quarter.

3:19 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.

4:08 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 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. 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 stocks. 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?

5:08 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 executed on a right-sized balance sheet restructuring transaction. It meaningfully de-risks and repositions the balance sheet. I'll start with the restructuring, 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 entered into a contractual agreement to sell $750 million pool of performing non-relationship multifamily 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 Long Island acquisition.

6:10 as a result the weighted average carrying value of the total pool on Connect One's books was 93 cents versus the 90 cent 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 at 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. 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.

7:03 A smaller portion of the proceeds that will likely be used to pay down wholesale funding may slightly temper short-term reinvestment earnings, 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 6% of loans to just 2%, 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.

7:59 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% 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. Thank you for watching.

9:04 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 restructuring to be additionally accretive to the margin, primarily from paying down higher-cost wholesale funding. So putting it all together, we're now estimating a margin reaching $350 for the fourth quarter, Bancorp, Inc. for the quarter, loans grew at an annualized rate of approximately 11% sequentially, excluding the effect of the transfer to help for sale. Average client deposits, which exclude broker deposits, also grew about 11% annualized.

9:54 Average non-interest-bearing deposits increased about 14%, and broker deposits declined by 150 million, or 13.7%. 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 I'm going to turn to non-interest income and operating expenses. Excluding the restructuring charge, non-interest income was $8.5 million, up a little from $7.9 million last quarter. Bancorp, Inc., Mark Pappas, Mark Zurlini, Siya Vansia, Expenses this quarter came in better than our guidance.

10:49 Last quarter we projected 1.5% sequential growth. Instead, non-trust 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% for the prior year quarter. Our operating efficiency ratio improved to 41% from 43 last quarter and 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 $7 to $8 million of non-operating pre-tax transaction costs related to the loan sale that under GAAP ought to be recognized, not in the third quarter, but need to be recognized in the fourth quarter.

11:52 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 PCV loans and the loan sale, were just 7 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 declined as we moved loans from loans receivable into loans held for sale.

12:42 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.

13:27 The remaining balance of about $100 million 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-regulated 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.

14:18 Excluding AOCI changes, tangible book 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-weighted 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, and we will continue to repurchase opportunistically. Our board declared a common dividend of 19.5 cents per share, consistent with last quarter.

15:05 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 it's great Bill thank you to wrap things up the third quarter marked an important step in Connect One's evolution

15:44 Bancorp, Inc. 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.

16:29 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 Hubd Group. Your line is open. Please go ahead.

17:01 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, 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, you know, 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?

17:34 Yeah, that's the right way to think about it.

17:38 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 rate and maybe the level of competition?

17:53 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.

18:41 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.

18:59 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 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 seven percent on a similar amount so I would expect you know a similar amount of margin improvement coming from our loan originations.

19:38 Just one more question on the loan growth side.

20:04 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.

20:20 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.

20:33 Hey, good morning, guys. This is Bader. Good morning. 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. Maybe how much of that is factored in from, you know, the impact from the loan sale versus, you know, overall asset repricing, you know, thinking about the margin as we look over the next quarter or two?

20:59 Right. I mean, there's a lot of moving parts to the margin. We have the loan repricing. We have regular originations. And we have this restructuring. And they're all worth a few basis points each offset by increasing deposit costs. But the net is an increase of whatever, three to five basis points a quarter in the net interest margin. Hope that answers your question.

21:28 Yes, and then you mentioned increasing deposit costs. Do you happen to have the spot deposit deposits at the end of the quarter?

21:36 What, the cost for the Senate? It's been pretty flat. It just happens to be pretty flat. In the most recent couple of months, deposit costs have been pretty flat, but I do expect to continue to see upward pressure on deposit pricing. and that's what's tempering our margin widening projections. Got it. Thank you.

22:07 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 sized portion of the rent, stabilized exposure, are you guys thinking about potential restructuring or additional loan sales down the line?

22:43 Well, let's wait. The second question was on rent stabilized. I think we've got it down to exposure. I said 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 clients. And we have a lot of deposits associated with the rest of the portfolio. We've got a lot of reserves against it. And so we will be aggressive in reducing the remaining piece there. Thank you for joining us.

23:24 As far as loan sales, we've had a history of doing smaller type transactions when we determine we have non-relationship type loans that have accumulated in the portfolio.

23:39 It's possible, but it'd be further down the road if something like that happened. I wouldn't put it to your projections for the next year or two. Got it.

23:51 That's all for me. Thank you very much. Sure. Yeah. Great. Your next question comes from the line of Tim Schweitzer with KBW. Your line is open. Please go ahead.

24:02 Hey, good morning. Thanks for taking my question.

24:07 Hey, Tim.

24:10 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?

24:25 Well, I think at the maximum, it's going to be 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.

25:00 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 – 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?

25:18 No, it's only like maybe two or three. And we benefit more on the way down. We benefit more on cuts than we get hurt on ups.

25:30 Okay, nice. And then can you remind us the amount of CD repricing you have over the next year? Sarge already mentioned that.

25:37 Oh, it's not a lot. What do we got? Oh, but it's just a small amount, though. The rate differential. $380 from where is it today?

25:48 I'm sorry, I'm asking Steve Fermiano, our treasurer.

25:50 We have $3 billion of CDs repricing over the next 17 months, but the differential in rate isn't all that much. It's repricing, but no change to the margin.

26:06 Gotcha. Okay. And then one last one for me. What was the purchase accounting accretion within NII for the last two quarters?

26:15 Oh, the purchase accounting accretion? 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 going to hurt margin in some way because, you know, 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 of the assets going on. and that includes the purchase accounting accretion. I think it's good that we'll have less purchase accounting accretion for those that, you know, treat that as lower quality earnings. It's good to have it lower.

26:56 Gotcha. Yep. Sounds like you replaced it 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.

27:13 Good morning, guys. This is Tyler. I'm from Adbris. Yes, Tyler. Hi, Tyler. Frank, maybe just going back to the multifamily sale, what ultimately led you guys to move forward with the transaction? Was it primarily an opportunity to strengthen the balance sheet, or was it more of you were starting to see additional signs of stress within the portfolio? Yeah.

27:37 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 we have a depository relationship, cash management, multiple points of contact with those clients, building 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 but they weren't you know they were transactions and so the opportunity was here to you know get rid of those and free up both capital deposit you know liquidity and resources to be able to redeploy in better assets going forward. And so we took the opportunity.

28:41 It's not lost on anyone that part of that portfolio is the rent stabilized. And since the time we announced the deal with First of Long Island, the environment for those assets is looking like it's deteriorating over time. But overall, the assets we had were performing well. The multifamily 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 strength that we now have to move forward, I just think was a smart move for us to make.

29:23 Got it. And then I think you mentioned it a bit in the prepared remarks, but could you provide a bit more color on what the yields were on the loans being sold and how that compares to what you're seeing on reinvestment on the securities front?

29:39 Yes. So 30 percent 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 Long Island had been five and a quarter or lower, but with the purchase of county marks, we're actually yielding 6%. So it's a weighted average between 70% at 6% and 30% at five and a quarter. And we expect to reinvest at yields in the low sixes on average.

30:14 Got it. And then, Bill, I guess another one for you. Average deposit growth looked pretty strong over the quarter, but period imbalances were a bit more modest. Can you just walk us through the dynamics there and what you're seeing early in the fourth quarter?

30:30 Well, one is you have to be careful to exclude brokered in there. And so when you exclude brokered, the actual point-to-point may have been a little bit higher. And 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 to 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 one to raise your hand Your next question comes from the line of Daniel Tomeo with Raymond James.

31:17 Your line is open. Please go ahead.

31:21 Yeah, thank you. Morning, Frank. Morning, Bill. Hi. Maybe just starting, you know, you've got this loan sale now in the rearview mirror. Really, credit outside of the rent regulated has been strong recently. I'm curious kind of how we should think about The Net Chargeoff Profile going forward here.

31:46 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 we, than the and three to five million, say a quarter. OK. OK. All right.

32:22 That's helpful. And so that's the that's the half that you're you're going to be getting rid of. And and just to kind of put a fine point on on kind of what you have remaining there, the 30 percent protection reserves marks prior to try jobs is against the total remaining or just the half that. Right. It's 30 percent on that remaining half.

32:43 The rest actually has a larger reserve than our loan portfolio, maybe about 3 percent. But those loans are all performing, and I think the weighted average rating is 4.1 on those loans, which is very strong.

33:06 Yeah, low LTV, strong debt service coverage. They can withstand a lot of change that's going on in the marketplace there in rent-stabilized world in New York City.

33:17 And very strong borrowers, as you said that, yeah.

33:21 Okay, great. And then I just wanted to kind of dig into the Maybe 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 it. The loan environment if we get kind of some meaningful amount of hikes this year, next year.

34:02 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 due to the wars and 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.

34:50 If the economy is building on that strength, there's going to be increased demand for lending. And so because you can if things are strong, you're going to be 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, 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 going to see increased demand or increased opportunities for lending going forward, irrespective of which way rates go.

35:38 If rates start coming down dramatically, that's going to portend that the economy is slowing. I'm more concerned about that than I am with where we are right at the present.

35:50 Got it. I appreciate your thoughts on that, Frank. That's all I had. There are no further questions at this time. I will now turn the call back to management for closing remarks.

36:04 This concludes today's call. Thank you for attending. You may now disconnect.