ConnectOne Bancorp (NASDAQ:CNOB) used its fourth-quarter 2025 earnings call to highlight integration progress following its largest-ever transaction, improving profitability metrics, and management’s expectations for further net interest margin expansion in 2026.
Management highlights post-merger scale and operating momentum
Chairman and CEO Frank Sorrentino described 2025 as a “defining period” for the company, pointing to the integration of its largest transaction and a full systems conversion completed within two weeks of closing. Sorrentino said the deal helped propel the bank beyond the $10 billion asset threshold, and he noted ConnectOne ended 2025 with $14 billion in assets and a market capitalization “in excess of $1.4 billion.”
Fourth-quarter performance: higher operating earnings and expanding margin
CFO Bill Burns said results were “highlighted by improving net interest margin and performance ratios,” along with robust loan originations, core client deposit growth, reduced wholesale deposits, and “clean asset quality.” Burns also pointed to capital strengthening and tangible book value accretion.
Burns said the quality of the deposit base improved following the acquisition, citing an increase in non-interest-bearing demand deposits from 17% to more than 21% and a reduction in brokerage deposits from a high of 12% of total assets to 6%.
On profitability, Burns said operating pre-provision net revenue (PPNR) percentage increased nearly 10% sequentially, marking a fifth consecutive increase. He said earnings also benefited from a lower provision for credit losses and a reduced effective tax rate. Operating earnings rose 18.6% sequentially versus the third quarter, driving operating return on assets to 1.24% and return on tangible common equity to 14.3%.
While Burns said he expects performance metrics to “moderate” in the first quarter, he added the company anticipates a “quick return” to an upward trend, supported by margin expansion, efficiencies, modest loan growth, and higher non-interest income.
2026 outlook: margin sensitivity, loan growth tempered by payoffs, and non-interest income goals
Burns attributed fourth-quarter margin expansion to three main factors:
- Lower deposit costs following Federal Reserve rate cuts
- Redemption of high-coupon subordinated debt late in the third quarter (delayed by the merger)
- A liability-sensitive balance sheet positioning, where rate cuts reduce deposit costs without lowering loan yields
Burns provided specific net interest margin guidance for 2026, while cautioning that “many uncontrollable factors” can influence results. He said the company is “likely” to be up 5 basis points in the first quarter, placing margin in the “low 330s,” and projected roughly 5 basis points of improvement for each 25 basis points of Fed rate cuts (uncertain whether there will be one or two cuts). He also projected about 5 basis points of quarterly improvement due to higher loan yields, though he said that dynamic is expected to begin around mid-year. Partially offsetting this, Burns said a potential preferred redemption could create about 5 basis points of margin contraction in the fourth quarter, while improving EPS.
In response to analyst questions about deposit competition, Burns acknowledged competitive pressures have “heated up” and said management would adjust pricing if it believes deposits are being lost on rate. He said his margin projection factors this in and suggested a more likely year-end range of 335–340 basis points, adding later in the call that this base case “probably includes one rate cut.” He also cautioned that contractual repricing benefits may be tempered if borrowers choose to pay off loans rather than accept higher rates.
On loan growth, Burns said originations have been robust and are expected to continue, but elevated payoffs are also expected due to significant portfolio maturities or repricings in 2026 and 2027. As a result, the company guided to more modest loan portfolio growth of 3% to 5% in 2026. Management said it continues to let “non-relationship-based” loans run off the balance sheet and cited competition affecting loan rates.
Burns also addressed non-interest income expectations, saying the company fell short of prior guidance but is now “pretty confident” it can generate more than $4 million in SBA loan sale gains in 2026, with updates to be provided through the year.
Expense actions: branch closures, staffing optimization, and technology focus
On expenses, Burns said the company is continuing to drive merger-related efficiencies and has decided to close five branches after reviewing its footprint. He said management does not anticipate “measurable deposit runoff” due to proactive client engagement. While additional closures are possible, he said no decisions have been made for 2026.
For modeling purposes, Burns said branch closures are expected to occur at the end of the first quarter, while staffing changes may take effect “middle of the year.” He said the expense increase is expected to step up more in the first quarter and then flatten, and provided operating expense guidance calling for a 4% increase in fourth-quarter 2026 from the current quarter, with the increase occurring over the course of 2026.
Sorrentino also discussed technology and AI, saying the company and its vendors are incorporating AI into systems that improve processes and support ConnectOne’s approach of “utilizing technology to replace labor.” He said the bank can grow the balance sheet “without significant additions” beyond revenue-producing personnel, while back office functions become more efficient. On regulatory adoption of new technologies, Sorrentino said regulators recognize changes underway but may be cautious about “black box” outcomes, adding that ConnectOne has not been “stopped” or “curtailed” in its efforts.
Asset quality, provision outlook, tax rate, and capital priorities
Burns said the company recorded a relatively low provision in the quarter due to improved CECL economic projections, recalibration of loss drivers to a new and larger peer group, and favorable reserve releases after working out several purchased credit deteriorated (PCD) loans above merger markdown values.
He noted a slight increase in the non-performing asset ratio to 0.33% from 0.28% in the prior quarter due to one multifamily loan relationship, but said a multifamily workout in January (not included in the year-end ratio) reduced non-accruals back down. Burns said he does not expect a “significant change” in impaired loan levels, while cautioning that levels can vary quarter to quarter. When asked about a normalized provision level, Burns said it may be “more like $5–$6 million,” adding that part of the quarter’s reduction was non-recurring.
Burns said the effective tax rate was adjusted downward to 26% due to a deferred tax asset true-up related largely to the merger, but the expected go-forward rate is 28%.
On capital, Burns said tangible common equity ratio increased to 8.62% at year-end and management is targeting a return to roughly 9%, which would increase flexibility for dividend increases, share repurchases, and M&A. Tangible book value per share was $23.52 at year-end, and Burns said management anticipates returning to pre-merger levels within one year of the June merger completion.
During Q&A, management reiterated that any M&A would be evaluated with financial discipline, comparing transaction returns to the returns of buying back stock. Sorrentino said the company remains primarily focused “within market,” defining its market broadly as the New York Metro region within roughly a 100–150 mile radius of New York City, while not fully ruling out other opportunities.
About ConnectOne Bancorp (NASDAQ:CNOB)
ConnectOne Bancorp is a New Jersey‐based bank holding company whose primary subsidiary, ConnectOne Bank, offers a suite of commercial banking services to small and medium‐sized businesses, professionals and individuals. Established in 2005 and headquartered in Englewood Cliffs, New Jersey, the company seeks to deliver customized lending and deposit solutions through a network of branches across northern New Jersey and the New York metropolitan area.
The company’s lending portfolio centers on commercial real estate financing, construction lending, owner‐occupied real estate loans and working capital lines of credit.
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