ConnectOne (CNOB) Q3 2026 Earnings Call Transcript

ConnectOne Bancorp reported Q3 operating EPS of $0.95, up 13% sequentially and 35% year over year, with net interest margin widening 2 basis points to 3.44% and operating ROTCE reaching 15.2%. It agreed to sell up to $750 million of multifamily loans at a price above 90% of par, recording a 3% loss on the pool; the transaction is expected to reduce CRE concentration from 439% to 397% and rent-stabilized exposure from 6% to 2% of loans. Management forecast a 3.53% margin for Q4 2027 and at least 50% growth in SBA gains in 2027, while noting the preferred dividend reset to approximately 8.8% raises its cost of capital.

Analysis

The key investment change is a shift in CNOB’s risk mix, not simply a stronger quarter: selling nonrelationship multifamily loans should reduce capital tied to concentrated CRE and improve funding flexibility, but replaces loan yield with securities and wholesale-funding paydown. The benefit to normalized earnings depends on realized reinvestment yields, funding costs, and deposit pricing—not the headline margin trajectory alone. Loan repricing offers a near-term earnings tailwind, yet competitive loan pricing and rising deposit costs can absorb it; a stable or widening NIM is therefore the critical confirmation metric.

The cleanup also transfers risk rather than eliminating it: NYC rent-regulated exposure remains, with the most troubled portion apparently retained and offset by reserves and marks. A weakening property market could still produce losses or constrain future growth, while the disclosed sale loss and additional transaction costs obscure the next quarter’s underlying run rate. The higher preferred reset raises the hurdle for capital returns until redemption is resolved.

Contrarian view: the de-risking narrative may be rewarded before investors can verify execution and sustainable post-sale returns. Conversely, focusing on one-time costs could understate the value of lower concentration and improved liquidity. Over 1–3 months, verify sale close, proceeds deployment, deposit costs, and NIM; over 6–18 months, watch residual CRE credit performance and whether loan growth preserves spreads. nCino’s workflow use is not evidence of material revenue impact for NCNO.

Key Decisions for Investors

• CNOB: consider a measured long only after confirming the loan sale closes on disclosed terms and the next quarter shows stable-to-improving NIM without deterioration in deposit costs. Prefer relative exposure versus a broad regional-bank basket rather than treating the current quarter’s operating EPS as a clean run rate.
• Risk controls: reduce or exit the thesis if NIM contracts for two consecutive quarters, the sale fails or proceeds are materially redeployed below management’s stated yield expectations, or rent-regulated/CRE credit deterioration drives a meaningful rise in criticized assets, provision, or charge-offs.
• Near-term catalyst watch: obtain the final sale accounting, net proceeds and funding paydown, preferred redemption decision, and fourth-quarter transaction costs from filings/results. Until then, avoid sizing the position on management’s longer-dated margin outlook alone.
• NCNO: no standalone trade from this call; the operational reference to its software does not establish a material change in vendor economics or guidance.