ConnectOne Bancorp Earnings Call Highlights Margin Momentum

ConnectOne Bancorp Inc. ((CNOB)) has held its Q4 earnings call. Read on for the main highlights of the call.

ConnectOne Bancorp’s Earnings Call Signals Constructive Outlook Despite Competitive Pressures

ConnectOne Bancorp’s latest earnings call struck an upbeat but grounded tone, underscoring a year of transformative growth and successful execution against a tougher operating backdrop. Management highlighted the seamless integration of a large acquisition and systems conversion, the company’s expansion to $14 billion in assets, and a step-change improvement in margin, deposit mix, and profitability. While acknowledging headwinds from deposit competition, moderating loan growth and some provision and nonperforming asset volatility, executives stressed that these risks appear manageable relative to the firm’s strengthened balance sheet, capital position, and operating momentum heading into 2026.

Crossing Key Size Thresholds with a Larger Market Footprint

ConnectOne’s first major storyline was scale. The company crossed the key regulatory and strategic threshold of $10 billion in assets and closed the year at $14.0 billion, reflecting the impact of its recent large acquisition and organic expansion. The bank now carries a market capitalization in excess of $1.4 billion, positioning it more firmly in the mid‑cap regional banking universe. Management framed this milestone as a competitive advantage, providing greater resources, a broader client offering, and improved access to capital markets, while also acknowledging the need to extract efficiencies as they grow into this larger footprint.

Balanced Deposit and Loan Growth Through a Choppy Year

Despite a challenging funding environment, ConnectOne delivered moderate but steady balance‑sheet expansion. Client deposits grew about 5% on an annualized basis in 2025, and the loan portfolio expanded at a similar ~5% annualized rate. Management emphasized that loan growth was powered by robust originations, partially offset by elevated payoffs, reflecting refinancing and normal portfolio churn. The company appears to be prioritizing disciplined underwriting and pricing over chasing headline growth, particularly as competition for both loans and deposits intensifies.

Deposit Mix Upgraded as Low‑Cost Funding Improves

A core positive from the call was the improvement in deposit quality. Noninterest‑bearing demand deposits rose from 17% to more than 21% of total deposits, a significant move in a high‑rate environment where many banks have struggled to maintain cheap funding. At the same time, brokered deposits declined sharply from 12% to 6% of total assets, effectively halving reliance on this more rate‑sensitive funding source. Management presented this shift as a structural upgrade to the balance sheet that should support net interest margin (NIM) resilience and reduce liquidity risk over time.

Margin Expansion and Detailed NIM Playbook

Net interest margin widened meaningfully over both the quarter and the year, a central driver of earnings strength. Management offered unusually specific NIM guidance: they expect an approximate 5‑basis‑point increase in the first quarter, taking NIM into the low‑330s basis‑point range. Thereafter, they anticipate about 5 bps of margin improvement for every 25‑basis‑point cut in Federal Reserve policy rates, plus roughly 5 bps per quarter later in the year from loan repricings. That said, they flagged that a potential preferred stock redemption could trim about 5 bps from NIM, partly offsetting some of this tailwind. Even after this adjustment, management’s base case calls for year‑end 2026 NIM around 335–340 bps, signaling confidence in their asset‑liability positioning.

Operating Momentum: PPNR and Earnings Step Higher

The quarter showcased strong operating performance, with pre‑provision net revenue (PPNR) rising nearly 10% sequentially—marking the fifth consecutive quarterly increase—and operating earnings up 18.6% versus the prior quarter. Profitability metrics were solidly above typical regional‑bank norms: operating return on assets reached 1.24% and return on tangible common equity came in at 14.3%. Management framed these numbers as evidence that the post‑merger franchise is gaining traction, with improved scale and margin translating into higher, more consistent earnings power.

Capital Strength and Optionality for Shareholder Returns

ConnectOne’s capital position is another area of clear progress. The tangible common equity ratio improved to 8.62% at year‑end, with management suggesting a target nearer 9% over time. Tangible book value per share stood at $23.52, and the company expects to return to pre‑merger TBV levels within a year of the June merger close—a key milestone given typical merger‑related dilution concerns. With capital building and asset quality still broadly sound, the bank sees room for enhanced capital deployment, including potential dividend increases, opportunistic share buybacks, and selective M&A, while remaining disciplined about maintaining a solid capital buffer.

Loan Pipeline and Yield Support Future Earnings

Looking ahead, ConnectOne highlighted a loan pipeline of roughly $600 million at a weighted average rate of about 6.2%, indicating that new production continues to be attractively priced. Management expects loan‑sale gains of more than $4 million in 2026, which should help bolster noninterest income and earnings diversification. While overall loan growth is expected to moderate, this combination of decent volume, solid spreads, and fee income from loan sales provides a supportive backdrop for maintaining healthy returns.

Efficiency Gains from Integration, Technology and Branch Rationalization

A significant focus was on efficiency and operating leverage. Management stressed that the largest transaction and systems conversion in the company’s history was completed quickly and effectively, laying the groundwork for cost savings. Five branch consolidations have already been identified, with closures slated by the end of the first quarter, and further staffing optimization is planned. The bank is also leaning into technology and AI‑enabled vendor solutions to streamline processes and reduce manual workloads. These moves are designed to counteract inflationary cost pressures and support profitability as the institution scales.

Tempered Loan Growth Outlook Amid Elevated Payoffs

While 2025 saw approximately 5% annualized loan growth, management now expects a more modest 3–5% expansion for 2026. The softer outlook reflects elevated payoffs and refinancing activity, particularly as a sizeable portion of the loan book is scheduled to mature or reprice in 2026–2027. This could trigger higher‑than‑normal payoffs, dampening net portfolio growth even as new originations remain solid. Management characterized this as a timing and mix issue rather than a demand problem, but investors should expect more muted balance‑sheet growth in the near term.

Deposit Competition and Rate Pressures Cap Upside

The call underscored that competition for deposits has intensified, with peers aggressively bidding for funds. ConnectOne is feeling some pressure on deposit costs and has prudently baked this into its margin guidance. While the bank’s improved deposit mix provides an important cushion, management cautioned that aggressive pricing in the market could limit upside to NIM beyond their current expectations. The message to investors: margin improvement is likely, but the environment remains fluid and highly competitive.

Operating Expense Outlook: Controlled Growth with Upfront Step‑Up

On costs, management guided to a roughly 4% increase in operating expenses by the fourth quarter of 2026 compared with the current quarter. The bulk of the expense step‑up is expected in the first quarter, tied to branch consolidation actions, modest hiring in revenue‑generating roles, and ongoing integration and technology investments. After that initial rise, expenses are expected to flatten, with efficiency gains from branch closures, staffing optimization, and tech enhancements helping to offset underlying cost inflation. The strategy is to invest selectively for growth while keeping overall expense growth in check.

Provision Volatility and a Slight Uptick in Nonperformers

Credit quality remains generally sound, but the call did flag some noise. The provision for credit losses was relatively low this quarter, driven in part by one‑time factors including CECL model refinements, reserve calibrations, and workouts tied to purchased credit‑deteriorated loans. The nonperforming asset ratio crept up to 0.33% from 0.28%, largely due to a single multifamily relationship. Management noted that an action taken in January subsequently reduced nonaccruals, suggesting this may prove transitory. Still, they acknowledged that provision expense could be somewhat volatile around a normalized run‑rate, reinforcing the need for ongoing credit discipline.

Noninterest Income Shortfall and Path to Recovery

Noninterest income came in below prior expectations, and management was candid about missing their earlier guidance on this line item. The shortfall reflects softer fee generation than anticipated, but the bank expects to recover some ground in 2026 as loan‑sale activity ramps up, with more than $4 million in gains projected. While noninterest income remains a smaller contributor compared with net interest income, the company is clearly focused on broadening and stabilizing this earnings stream to reduce reliance on spread income alone.

Macro and Market Headwinds Remain on the Radar

Management did not shy away from discussing broader uncertainties. They pointed to competitive pressures, political developments, and overall market sentiment as ongoing sources of risk. In addition, a possible preferred stock redemption could trim NIM by around 5 basis points, though it may prove neutral to slightly positive for earnings per share depending on the final structure. The tone was measured: leadership believes the bank is well positioned to absorb these headwinds, but they are planning conservatively and emphasizing flexibility in capital and balance‑sheet management.

Forward‑Looking Guidance Signals Steady, Incremental Progress

Guidance for 2026 calls for modest but tangible improvement across key metrics rather than outsized growth. The bank expects NIM to rise about 5 bps in the first quarter into the low‑330s and to drift higher through the year, helped by loan repricing and potential rate cuts, partially offset by funding costs and any preferred redemption. Loan growth is forecast at 3–5%, supported by a $600 million pipeline at a 6.2% weighted average rate and anticipated loan‑sale gains of more than $4 million. Provision expense is targeted in a $5–6 million per‑quarter range, with the effective tax rate guided to about 28%. On the capital side, tangible common equity is expected to edge toward roughly 9%, and tangible book value per share is projected to return to pre‑merger levels within a year of the acquisition. Operating expenses are set to rise about 4% by late 2026, front‑loaded in early quarters but tempered by branch closures, technology‑driven efficiencies, and staffing optimization. Collectively, these forecasts frame a story of steady improvement in earnings, margin, and capital, with room for enhanced shareholder returns over time.

In sum, ConnectOne Bancorp’s earnings call painted the picture of a growing regional bank that has effectively digested a major acquisition, upgraded its funding mix, and built a stronger capital and profitability base, even as it navigates intense deposit competition and a more moderate growth environment. Margin expansion, improved deposit quality, and disciplined cost control underpin a constructive outlook for 2026, while management’s candid acknowledgment of credit, market, and competitive risks suggests a prudent approach. For investors, the story is less about rapid expansion and more about durable, incremental value creation from a now‑larger and more efficient franchise.