ConnectOne's Credit Blemish Doesn't Dent the Margin Machine
ConnectOne's second-quarter report was a study in contrasts. On the surface, the headline credit numbers looked ugly: a $13.8 million charge-off on a New York City rent-stabilized multifamily relationship, non-performing assets up to 0.55% of assets, and provision more than double the linked quarter. Yet the stock rallied 14.8% over the past 90 days, and management spent most of the call defending the underlying strength of the franchise. The story here is not that credit is deteriorating—it's that one idiosyncratic relationship is being resolved aggressively while the core earnings engine keeps compounding.
A credit event, not a credit crisis
The rent-stabilized relationship first surfaced last quarter as a $63.8 million exposure. This quarter, ConnectOne took a decisive step: it brought $20 million current, charged off $13.8 million, and moved the remaining $30 million to non-accrual. CFO Bill Burns framed the move in the call: “the $13.8 million charge-off was partially offset by a $9.2 million release of reserves previously allocated to the rent-stabilized subsegment—including this specific relationship.” — William Burns · 2026-07-23 The net income impact was muted—only $4.6 million of incremental provision—and the bank absorbed it easily.
The more telling development is management's openness to a bulk sale of the remaining rent-regulated portfolio. Burns noted, "Any kind of reduction here would be a positive in terms of the valuation for the stock," and that the portfolio is already marked down from the First of Long Island acquisition. This is a deliberate de-risking exercise, not a fire sale. The rent-regulated book is down 10% year-over-year, and management is actively exploring a sale to accelerate the decline.
I think, listen, any kind of reduction here would be a positive in terms of the valuation for the stock.
Frank Sorrentino put the credit event in context: "the comparison lately has been to a 0 credit charge-off environment, which is quite unrealistic." Indeed, ConnectOne's historical charge-off rate has been sub-20 basis points, but this quarter's 56 bps is almost entirely this one loan. Criticized and classified loans actually fell to 1.89% from 2.26%, and 30–89 day delinquencies were essentially zero.
The margin engine keeps building
What makes this quarter's credit noise tolerable is the relentless improvement in net interest margin. NIM widened for the seventh consecutive quarter to 3.42%, and management maintained its year-end spot margin guidance of 3.50%, despite rising deposit costs. The driver is the repricing of adjustable-rate loans: roughly $700 million repriced year-to-date at a weighted-average rate increase of 255 basis points, with 80% retention. Burns described the outlook: "all trends point to wider margins for the rest of '26 and continuing into '27."
It's about $1.5 billion—and $500 million is in 2028 in the first six months of '28.
The repricing tailwind is massive, and it's showing up in the numbers. Net interest income reached $109 million in the quarter, up 65% year-over-year, and operating PPNR improved to 1.94%. The efficiency ratio also improved to 42.7%, aided by business intelligence and automation that Frank touted as reducing manual processing time by over 50% in the loan platform.
This margin momentum is the real story for investors. Even with deposit costs rising, the repricing backlog—$1.5 billion over the next 18 months—is expected to keep pushing NIM higher. Prior calls consistently highlighted this repricing opportunity. In Q4 2025, Burns said, "the amount of loans repricing are skewed towards the latter half of the year," and the bank has delivered on that promise quarter after quarter.
What to watch: rent freeze and the bulk sale
The wildcard is the rent freeze in New York City, which could pressure the entire rent-regulated portfolio. Frank Sorrentino acknowledged a lawsuit challenging the rent freeze: "I think it's the first time that a realistic challenge to the Rent Guidelines Board's thought process has been lodged." If the freeze persists, it could prolong the workout process and potentially accelerate the portfolio sale.
Despite the credit overhang, ConnectOne's fundamentals remain resilient. The efficiency ratio improved from 49.2% a year ago to 42.7%, and tangible book value per share rose to $24.66, up 12.4% year-over-year. The bank also continues to build capital, with the tangible common equity ratio at 8.78%, up 70 bps since the merger closed. This leaves ample room for dividends and opportunistic buybacks.
The market is clearly rewarding the operating strength—the stock is up 14.8% in the past 90 days, well off its 52-week low. Investors are buying the story that this credit issue is a one-off, and that the bulk sale could actually be a catalyst to reduce the CRE concentration and unlock valuation. As Burns said on the prior call, "we're getting very close to 9% tangible common equity," and every quarter of strong earnings pushes that goal closer.
ConnectOne's management has a track record of navigating situational credits. On the April call, Sorrentino noted, "we have a great track record of working with borrowers to provide solutions." This quarter's actions—charging off the weakest piece and actively marketing the rest—fit that playbook. The question for 2027 is whether the rent freeze breaks or the bulk sale happens; either way, the margin tailwind offers a strong offset.