ConnectOne Bancorp (CNOB) Q3 2025: Net Interest Margin Jumps to 3.11% as Merger Integration Accelerates

October 30, 2025 | By EarningsIQ Research

ConnectOne Bancorp’s third quarter delivered a decisive step-up in profitability, powered by rapid merger integration, margin expansion, and disciplined balance sheet growth. Management’s confidence in further net interest margin gains and capital flexibility sets up a robust outlook for 2026, with new revenue streams from SBA lending and franchise finance poised to scale. Investors should monitor the sustainability of deposit growth and the evolving credit environment as the franchise leverages its expanded platform.

Summary

• Merger Synergy Realization: Seamless integration drove operating leverage and set the stage for accelerated margin expansion.
• Deposit and Loan Growth Balance: Relationship-focused strategy is yielding quality deposit inflows, supporting prudent loan growth.
• Capital Optionality for 2026: Strong capital build enables potential for higher dividends and share repurchases next year.

Performance Analysis

ConnectOne delivered a strong third quarter, with net interest margin (NIM, the spread between interest income and expense) rising to 3.11% from 3.06% sequentially and 2.67% a year ago, reflecting merger-driven scale and improved funding mix. The spot margin at quarter-end already exceeded 3.20%, and management expects Q4 NIM to reach 3.25% or higher. Temporary factors—redeemed high-cost debt and elevated cash from deposit inflows—muted the reported NIM; excluding these, underlying margin would have surpassed 3.50%.

Organic growth remains disciplined, with sequential client deposit and loan growth both at roughly 4% annualized, maintaining a loan-to-deposit ratio below 100%. Non-interest income was elevated by $10 million in one-time items: a $6.6 million employee retention tax credit and a $3.5 million pension curtailment gain. Excluding these, recurring non-interest income holds steady near $7 million per quarter, with SBA (Small Business Administration) lending and franchise finance positioned to drive future gains. Credit quality is robust, with non-performing assets at 0.28% and net charge-offs below 0.20% of loans. Tangible book value per share rose 5% since the merger, and capital ratios are trending upward, providing flexibility for capital return.

• Margin Expansion Momentum: Underlying NIM is set to accelerate further as excess cash is deployed and funding costs normalize.
• One-Time Income Boosts: $10 million in non-recurring pre-tax gains inflated reported earnings but do not reflect ongoing run-rate.
• Deposit Franchise Strength: Core deposit growth and a focus on relationship banking underpin funding stability and future lending growth.

Management’s tone and guidance reinforce confidence in hitting and potentially exceeding targeted return on assets (ROA) and return on tangible common equity (ROTCE) metrics in 2026, with operating leverage and capital return optionality as key levers.

Executive Commentary

Strategic Positioning

1. Merger Integration and Scale Effects

Rapid systems and brand integration, completed within weeks of closing, have positioned ConnectOne as a unified platform with expanded reach and operational efficiency. The merger’s benefits are visible in margin expansion, tangible book value growth, and improved operating leverage, with further synergy realization expected in 2026.

2. Relationship Banking and Deposit Strategy

Management’s pivot to relationship-driven banking—aligning deposit and loan origination— is yielding higher-quality, stickier funding. The focus on clients who bring both loans and deposits, coupled with pruning of transactional-only accounts, is stabilizing funding costs and supporting margin resilience.

3. SBA and Franchise Lending as Growth Engines

Bowfly, ConnectOne’s franchise finance platform, has scaled to over 250 national franchise brands, up from 60 at acquisition. This ecosystem is feeding a growing SBA pipeline, with management projecting SBA revenue to become a significant non-interest income contributor in 2026 as backlog builds and gain-on-sale activity accelerates.

4. Capital Allocation Flexibility

With tangible common equity at 8.4% and a low dividend payout ratio, ConnectOne is positioned to deploy capital toward growth, dividend increases, or opportunistic buybacks in 2026. Management signaled that capital build is outpacing needs, affording strategic optionality as opportunities arise.

5. Credit Quality and Risk Discipline

Credit metrics remain best-in-class, with conservative underwriting, low delinquencies, and a 1.35% loan loss reserve that may trend lower as acquired portfolios reprice and stabilize. Rent-regulated loan exposure is modest and well-underwritten, with management expressing comfort in portfolio resilience regardless of political or regulatory shifts.

Key Considerations

This quarter marks a turning point in ConnectOne’s scale, profitability, and capital flexibility, but the sustainability of these gains will depend on disciplined execution as market conditions evolve.

Key Considerations:

• Margin Upside from Loan Repricing: Over $2 billion in fixed-rate loans are set to reprice through 2027, offering a runway for further NIM gains even in a flat or declining rate environment.
• SBA and Franchise Revenue Ramp: The Bowfly platform’s maturation and pipeline build suggest non-interest income could inflect higher, diversifying revenue beyond traditional spread income.
• Deposit Competition Remains Dynamic: Despite recent growth, the competitive landscape for deposits is fluid, and any resurgence in rate pressure could test funding cost discipline.
• Capital Deployment Optionality: With capital ratios rising, management has latitude to increase dividends or execute buybacks, but will balance this against growth opportunities and regulatory expectations.

Risks

Key risks include potential shifts in deposit pricing competition, slower-than-expected loan demand if economic conditions weaken, and regulatory or political changes affecting rent-regulated real estate portfolios. While credit quality is currently strong, any macroeconomic deterioration could pressure asset quality or require higher reserves. One-time income items this quarter inflate core profitability, so investors should focus on run-rate earnings.

Forward Outlook

For Q4 2025, ConnectOne guided to:

• Net interest margin at or above 3.25%
• Operating expense run-rate of $55 to $56 million

For full-year 2026, management maintained guidance for:

• ROA of 1.2% by Q2, approaching 1.3% by year-end
• Loan growth in the 5%+ range, contingent on economic conditions

Management highlighted several factors that will shape performance:

• Loan pipeline strength, especially in C&I and SBA segments
• Continued margin expansion as loan repricing accelerates and excess cash is deployed

Takeaways

ConnectOne’s Q3 results underscore the power of merger integration and relationship banking to drive sustainable margin and earnings growth.

• Margin Expansion and Capital Build: Underlying profitability is set to improve further as temporary margin headwinds abate and loan repricing accelerates.
• Non-Interest Income Levers: SBA and franchise lending platforms are building momentum, with Bowfly’s brand reach and pipeline growth poised to diversify revenue in 2026.
• Strategic Optionality in 2026: Capital strength and operational discipline give management flexibility to balance growth, dividends, and buybacks as market conditions dictate.

Conclusion

ConnectOne enters the final stretch of 2025 with accelerating margin, resilient credit, and a clear path to capital return optionality. The sustainability of deposit growth and the ramp of new fee income streams will be critical watchpoints as the bank seeks to translate scale into durable shareholder value.

Industry Read-Through

ConnectOne’s rapid merger integration and margin expansion highlight the value of operational discipline and scale in regional banking. The focus on relationship-driven deposit gathering and SBA lending offers a template for peers seeking to offset funding cost pressures and diversify revenue. The measured approach to credit, especially in sensitive segments like rent-regulated real estate, reflects a broader industry pivot toward risk-aware growth. As margin tailwinds persist and capital builds, expect more regionals to weigh dividend hikes and opportunistic buybacks—provided credit remains contained and deposit competition does not re-intensify.

CNOB Financials Banking Margin Expansion SBA Lending Franchise Finance Capital Return