CNOB — Q2 2026 Financial Report Analysis

Overview

ConnectOne Bancorp, the Englewood Cliffs, New Jersey parent of ConnectOne Bank (56 offices across New Jersey, New York and Florida), earned $40.2 million for common shareholders, or $0.80 per diluted share, in the second quarter of 2026, against a loss of $21.8 million ($0.52 per share) a year earlier. That swing is mostly an accounting artefact of the bank's June 1, 2025 takeover of The First of Long Island Corporation (FLIC): the year-ago quarter carried a $27.4 million "day one" provision for credit losses on FLIC's loans and $30.7 million of merger charges, and it included only one month of FLIC's business. The cleaner comparison is with the first quarter of 2026, when EPS was $0.72: on that basis earnings rose about 11%, driven by a wider lending margin and flat costs. The weak spot was credit: a group of New York City rent-stabilized apartment loans produced a $13.8 million charge-off and nearly doubled the bank's non-paying loans in three months.

At a glance

• Net interest margin 3.42%, up from 3.06% a year ago and 3.39% in Q1 — the seventh straight quarterly increase, per management. The bank now keeps more of each dollar it lends after paying depositors.
• Operating efficiency ratio 42.7%, versus 49.2% a year ago — ConnectOne spent about 43 cents to earn each dollar of revenue (excluding merger costs and intangible amortization), a low cost base relative to revenue.
• Non-paying (nonaccrual) loans $79.7 million, up from $41.6 million at March 31 — still only 0.67% of loans, but the increase came almost entirely from New York City rent-stabilized buildings, an exposure that new city rent policy is making worse.

The numbers

Sources: Q2 2026 Form 10-Q (income statement, average balance table, allowance tables, regulatory capital table); the efficiency ratio, return on tangible common equity, operating EPS and year-ago CET1 come from the company's July 23, 2026 earnings release (Exhibit 99.1), which reconciles them to GAAP. Net income is before $1.5 million of preferred dividends; EPS is per common share. "n/m" = not meaningful, because the year-ago figure is a loss.

Why the margin keeps widening

A bank's core business is borrowing money from depositors and lending it out at a higher rate. Net interest margin (NIM) measures that spread: net interest income (interest earned minus interest paid) as a share of the loans and securities that earn interest. ConnectOne's rose 36 basis points (0.36 percentage points) from a year ago to 3.42%.

Two things moved, per the 10-Q's average balance table:

• Funding got cheaper. The average rate on interest-bearing deposits fell from 3.39% to 3.06%; time deposits (CDs) dropped from 4.01% to 3.72% and other interest-bearing deposits from 3.02% to 2.74%. Including deposits that pay no interest, the average cost of deposits fell 32 basis points. Non-interest-bearing demand deposits averaged $2.42 billion, up from $1.68 billion, largely because FLIC brought a base of cheap checking accounts.
• Loans earn a bit more. The average loan yield rose from 5.84% to 6.01%, which the earnings release attributes mainly to loans repricing. Part of that yield, though, is accounting accretion from the FLIC deal (see below).

Against the first quarter, the margin edged up 3 basis points to 3.42% and average earning assets grew 2.2%, lifting tax-equivalent net interest income by $4.9 million (4.4%) to $114.8 million. One counter-current: the release notes the average cost of deposits rose 6 basis points quarter on quarter, so the pace of funding-cost relief has slowed.

The bank's own rate model (10-Q, Item 3) says it benefits when rates fall: an immediate 100 basis-point cut would raise net interest income over the next year by an estimated 3.27%, while a 200 basis-point rise would cut it by 5.63%.

Costs: the merger savings are showing up

The efficiency ratio is what a bank spends to run itself per dollar of revenue — lower is better. ConnectOne's operating version (which strips out merger charges and the amortization of intangible assets created by the acquisition) fell to 42.7% from 45.4% in Q1 and 49.2% a year ago. On a plain GAAP basis — total noninterest expenses of $55.4 million divided by $121.6 million of revenue — it was about 45.6%.

Excluding merger charges, expenses were $55.3 million, down $0.4 million from Q1 mainly on a $1.2 million drop in salaries and benefits, while revenue rose. Against a year ago, adjusted expenses rose $12.4 million, but that reflects three months of FLIC's branches and staff instead of one: salaries and benefits +$6.3 million, occupancy and equipment +$2.0 million, core deposit intangible amortization +$1.6 million.

Credit: the New York rent-stabilized problem

This is the part of the quarter that deserves the most attention.

• Charge-offs jumped. Net charge-offs (loans written off as uncollectable, minus recoveries) were $21.0 million, or 0.71% of average loans annualized, versus $4.9 million (0.22%) a year ago. The 10-Q attributes the increase primarily to a $13.8 million charge-off on a group of New York City multi-family loans secured by rent-stabilized buildings. Excluding loans acquired already impaired from FLIC ("purchased credit-deteriorated," or PCD, loans), the company's preferred ratio was 0.56%, versus 0.08% in Q1.
• Non-paying loans nearly doubled in a quarter. Nonaccrual loans rose to $79.7 million (0.67% of loans) from $41.6 million (0.35%) at March 31. The same borrower group added $29.9 million net of charge-offs, though the release says $20.0 million of the previously announced $63.8 million of loans to that group were brought current.
• Why it's happening. The 10-Q points to New York's 2019 rent laws, which limit rent increases while costs keep rising, and to the city administration's support for a rent freeze: the NYC Rent Guidelines Board approved no increases for one- and two-year lease renewals after October 1. ConnectOne holds $1.48 billion of New York multifamily loans out of $3.72 billion of multifamily overall, plus a separate $146.3 million pool of rent-regulated loans inside the PCD book.
• The broader book looks cleaner. Criticized and classified loans (the bank's own watch-list) fell to 1.89% of loans from 2.26% in Q1 and 2.44% a year ago, and loans 30–89 days past due were just 0.03%, down from 0.81% in Q1.

What the headline numbers hide

• The year-over-year swing is mostly comparison base, not improvement. The prior-year loss came from $27.4 million of day-one provisioning, $30.7 million of merger charges and a $3.0 million state tax charge on intercompany dividends, all tied to FLIC. Operating EPS — the company's figure excluding those items — rose from $0.55 to $0.84, and even that year-ago figure includes only one month of FLIC. The quarter-on-quarter gain ($0.72 to $0.80 GAAP; $0.79 to $0.84 operating) is the more honest measure of momentum.
• The provision was held down by a reserve release. The $8.3 million provision is below the $21.0 million of net charge-offs. Management released $9.2 million of qualitative reserves on multifamily loans that had already been set aside for the troubled group, and cited better economic forecasts. As a result the allowance for credit losses fell to 1.18% of loans from 1.30% in Q1 and 1.40% a year ago, and coverage of nonaccrual loans dropped from 368% to 176%. Using reserves that were built for exactly these losses is legitimate, but earnings would have been lower if the allowance had been held at the Q1 level while nonaccruals were climbing.
• Some income is accounting accretion, not cash. When ConnectOne bought FLIC it marked FLIC's loans down to fair value; that discount is booked back into interest income as the loans pay down. The cash flow statement shows $19.5 million of non-cash net loan accretion in the first half of 2026 (versus $3.7 million a year earlier), and the fair-value discount on commercial real estate loans shrank from $105.8 million at year-end to $91.8 million. This flatters the loan yield and margin and will fade as acquired loans pay off.
• Cash conversion is modest. Operating cash flow for the first six months was $49.8 million against net income of $79.5 million (about 63%), mainly because of that $19.5 million of non-cash accretion and a $22.2 million increase in other assets. Bank operating cash flow is noisy, so this is a watch item rather than a red flag.
• Buybacks and tax did not drive EPS. ConnectOne bought back no shares in Q2 (90,000 shares in Q1); the share count is up because 11.8 million shares were issued for FLIC. The effective tax rate was 28.0%, higher than before the merger because more income is now taxed in New York State and City.

Takeaway: ConnectOne's core engine is clearly stronger a year after the FLIC deal — a 3.42% margin and a low-40s efficiency ratio produced a 13.8% return on tangible equity. The open question is credit in New York City rent-stabilized buildings: one borrower group drove a $13.8 million write-off and a near-doubling of non-paying loans, and this quarter's earnings were helped by releasing reserves built for those same loans rather than adding new ones.

Capital and balance sheet

The holding company's common equity Tier 1 ratio — the core capital regulators require a bank to hold against risk-weighted loans and assets — was 10.28%, up from 10.04% a year ago, and the bank subsidiary's was 12.31%. The tangible common equity ratio rose to 8.78% from 8.62% at year-end, and tangible book value per share grew 12.3% from a year ago to $24.66 as retained earnings built up. Because both period-ends include FLIC, the balance sheet comparison is like-for-like: loans grew 6.3% and deposits 4.1% from June 2025, with gross loans up 3.6% since December, driven by commercial real estate. Management cited annualized sequential growth of about 5% in loans and 8% in core deposits. The board declared a quarterly common dividend of $0.195 per share.

Outlook

ConnectOne gives no revenue or earnings guidance. The one numeric target is a full-year 2026 effective tax rate of about 28%, which the bank is protecting with a $50.0 million commitment, signed June 30, to a renewable-energy tax credit fund; the related capital calls and tax credits are expected in tranches during the second half of 2026. CEO Frank Sorrentino pointed to further productivity gains from technology, including "agentic workflows." There is no new acquisition announced: the company's 8-K filings since the quarter are investor presentations and a call notice.

Third-quarter results are scheduled for October 22, 2026, before the market opens (8-K filed October 8). What to watch:

1. Nonaccrual loans and charge-offs in the New York rent-stabilized group — whether the $79.7 million of nonaccruals stabilizes or the rent freeze pushes more borrowers into default, and whether the provision has to rise above charge-offs again.
2. Margin — whether NIM holds above 3.40% as the Q1-to-Q2 rise in deposit costs continues and purchase-accounting accretion runs off; a further Federal Reserve rate cut would help, per the bank's own rate model.
3. Efficiency — whether the operating efficiency ratio stays in the low 40s now that merger charges are essentially finished ($0.1 million in Q2).

Our read: the earnings power is real and still improving modestly quarter to quarter, but the reserve cushion is thinner than it was, so credit costs in New York multifamily are the main swing factor for the second half.