ConnectOne Bancorp (CNOB) Q4 2025: Net Interest Margin Climbs to Low 330s, Margin Expansion Signals 2026 Upside
ConnectOne Bancorp’s Q4 marks a decisive inflection, driven by robust net interest margin expansion and disciplined balance sheet optimization. The integration of First of Long Island propelled asset scale, while margin levers and deposit mix improvements underpin future earnings visibility. Management’s guidance signals continued operational efficiency and capital flexibility, but competitive deposit dynamics and tempered loan growth remain watchpoints for the year ahead.
Summary
- Margin Expansion Trajectory: Liability-sensitive positioning and lower deposit costs drive net interest margin higher into 2026.
- Efficiency and Integration: Branch rationalization and technology adoption support top-tier operating leverage post-merger.
- Capital Allocation Optionality: Strengthening capital base sets up for dividend increases, buybacks, and selective M&A.
Performance Analysis
ConnectOne Bancorp closed 2025 with strong sequential operating momentum, highlighted by an 18.6% increase in quarterly operating earnings and a net interest margin (NIM) that widened significantly both YoY and QoQ. The bank’s asset base surpassed $14 billion post-acquisition, reflecting the largest transaction in its history and a seamless systems conversion. Core client deposit growth and a marked reduction in brokered deposits improved funding stability, while the percentage of non-interest bearing demand deposits rose from 17% to over 21% of the total base.
Loan originations remained robust, but portfolio growth guidance was tempered to a 3–5% range for 2026 due to higher borrower refinancing activity and competition-driven payoff rates. Operating PPNR (pre-provision net revenue, a key bank profitability metric) rose nearly 10% sequentially, marking the fifth consecutive quarter of improvement. Asset quality remained “clean,” with a slight uptick in non-performing assets (0.33%) attributed to a single multifamily loan, but subsequent resolutions already reduced this ratio in January.
- Deposit Mix Shift: Brokered deposits halved to 6% of assets, while non-interest bearing demand deposits rose, improving funding cost dynamics.
- Margin Leverage Realized: NIM expansion stemmed from deposit cost declines, redemption of high-coupon debt, and liability-sensitive rate positioning.
- Efficiency Ratio Remains Elite: Despite acquisition-driven branch growth, ConnectOne remains in the top 1% of banks for operational efficiency.
Management’s disciplined approach to both growth and risk is evident in the measured expense outlook and continued focus on high-quality relationship banking. Return on tangible common equity reached 14.3%, and tangible book value per share is expected to return to pre-merger levels within a year.
Executive Commentary
"We seamlessly integrated the largest transaction in our history... bolstered our franchise value and competitive position in the New York Metro market. This meaningfully propelled the company beyond the $10 billion asset threshold... Performance metrics improved significantly this quarter and we remain committed to building strong capital, driving efficiency, and generating profitable growth."
Frank, Chief Executive Officer
"Our operating PPNR percentage grew sequentially by nearly 10%. That was the fifth consecutive increase, while earnings were further augmented by a lower provision for credit losses and a reduced effective tax rate... Capital continues to strengthen. Our tangible common equity ratio has steadily increased to 8.62 as of year end. This strong capital position gives us the opportunity to increase our dividends, re-engage in share repurchases, and we're building firepower for opportunistic M&A."
Bill, Chief Financial Officer
Strategic Positioning
1. Liability-Sensitive Margin Management
ConnectOne’s asset-liability strategy is built to benefit from falling rates, with deposit costs declining faster than loan yields. Management expects each 25 basis point Fed cut to add five basis points to NIM, and further margin upside from loan repricing in the second half of 2026. This positioning provides a structural earnings tailwind if the rate environment softens.
2. Deposit Quality and Funding Discipline
Deposit base transformation—reducing brokered funding and increasing non-interest bearing accounts—has improved funding cost resilience and balance sheet quality. Management emphasized that recent deposit declines were intentional, using client funds to pay down brokered deposits and focus on relationship-based growth.
3. Operational Efficiency and Technology Leverage
Branch rationalization (five closures identified) and ongoing technology investments, including AI-powered vendor solutions, are expected to drive further efficiency gains. The company’s “branch-light, relationship-driven” model is designed to support scalable growth without significant back-office headcount increases.
4. Capital Flexibility and Shareholder Returns
With tangible common equity approaching the 9% target, management is positioned to increase dividends, reinitiate share repurchases, and pursue disciplined M&A. Capital allocation decisions will weigh organic growth, market opportunities, and relative IRR (internal rate of return) across buybacks and acquisitions.
5. Prudent Loan Growth and Credit Risk Management
Loan portfolio growth is guided conservatively, reflecting heightened payoff activity and competitive spread compression. Management’s willingness to let non-relationship loans roll off and focus on risk-adjusted spreads demonstrates a disciplined approach to credit and portfolio quality.
Key Considerations
ConnectOne’s Q4 performance reflects a business model that prioritizes sustainable growth, efficiency, and capital flexibility, but also faces evolving competitive and macro headwinds.
Key Considerations:
- Deposit Competition Intensifies: Management acknowledged rising competition for deposits, with rate adjustments likely if outflows accelerate, potentially capping margin expansion upside.
- Expense Management in Focus: Branch closures and technology adoption are expected to offset modest staffing increases, with a 4% OPEX increase guided for Q4 2026.
- Loan Growth Headwinds: Payoff rates and competitive pressures are likely to constrain net loan growth, with guidance reduced to 3–5% for 2026.
- Non-Interest Income Pipeline: SBA loan sale gains are expected to exceed $4 million in 2026, supporting non-spread revenue streams.
- M&A Optionality Remains: Management remains disciplined, but increased market activity could present selective acquisition opportunities within the New York Metro area.
Risks
Competitive deposit pricing and elevated refinancing activity may pressure both margin and loan growth, especially if market rates fall faster than anticipated. Regulatory scrutiny on technology adoption, particularly AI in compliance, could slow efficiency gains. Further, any deterioration in asset quality or unexpected credit events could challenge the current “clean” portfolio narrative. Management’s margin and growth guidance assumes stable macro conditions, but market volatility or policy surprises could quickly shift the outlook.
Forward Outlook
For Q1 2026, ConnectOne guided to:
- Net interest margin up by five basis points, entering the low 330s range
- Operating expenses to step up in Q1, then flatten through the year
For full-year 2026, management maintained:
- Loan portfolio growth of 3–5%
- Net interest margin improvement of five basis points per 25bp Fed rate cut
- OPEX increase of 4% by Q4 2026
- Return of tangible book value per share to pre-merger levels within one year
Management highlighted several factors that will drive results:
- Continued margin expansion from liability-sensitive positioning and loan repricing
- Expense discipline through branch consolidation and technology synergies
- Capital return optionality as tangible common equity approaches 9%
Takeaways
ConnectOne’s Q4 results validate its balance sheet optimization and efficiency leadership, but investors should monitor deposit competition and loan growth headwinds as rate dynamics shift.
- Margin Expansion as Core Earnings Driver: Liability-sensitive positioning and funding mix improvements set up for further NIM gains, providing a structural earnings tailwind into 2026.
- Efficiency and Capital Strength: Technology leverage and branch rationalization support best-in-class operating ratios, while capital levels enable flexible shareholder returns.
- Loan Growth and Deposit Competition Watchpoints: Elevated payoff rates and market competition temper near-term loan growth, and deposit pricing pressure could limit upside if competitive dynamics intensify.
Conclusion
ConnectOne Bancorp enters 2026 with momentum in margin, efficiency, and capital flexibility, but faces a nuanced environment where disciplined execution on deposits, loan growth, and technology-driven efficiencies will be critical to sustaining outperformance. Investors should closely monitor the interplay between margin expansion and competitive pressures as the year unfolds.
Industry Read-Through
ConnectOne’s results reinforce several sector-wide themes: Liability-sensitive banks with strong deposit franchises and branch-light models are best positioned for margin expansion as rates fall. The rapid integration of large acquisitions and focus on technology-driven efficiency set a high bar for regional peers. However, competitive deposit pricing and muted loan growth guidance highlight industry-wide headwinds, especially as refinancing activity accelerates and credit spreads compress. Banks with flexible capital allocation and disciplined relationship banking are likely to outperform in an environment of heightened M&A activity and evolving regulatory expectations around technology adoption.