KBRA Affirms Ratings for ConnectOne Bancorp, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, the preferred stock rating of BB+, and the short-term debt rating of K3 for Englewood Cliffs, New Jersey-based ConnectOne Bancorp, Inc. (NASDAQ: CNOB) ("ConnectOne" or "the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its main subsidiary, ConnectOne Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

ConnectOne’s ratings reflect a stronger franchise profile following the First of Long Island Corporation (FLIC) acquisition, with greater scale, improved geographic reach, and a broader funding base. While earnings generally outperformed peers prior to the higher interest rate environment, CNOB’s profitability has begun to trend back toward historically stronger relative performance. ROA has improved as the company moves beyond integration, rising to 1.1% in 1H26, primarily due to NIM expansion and realization of cost-savings. Revenues remain predominantly spread-driven (fee income represented 6% of total revenues in 1H26), though management remains focused on building out fee income sources, including SBA and mortgage banking. Moreover, management’s medium term target of a 1.5% ROA should be primarily driven by continued NIM growth from back-book loan repricing, disciplined expense management, a return to normalized credit costs, and strong growth in fee income. The broader franchise also benefits from improved branch density in key markets and a more scalable operating platform, which should support additional operating leverage over time. Continued integration benefits and further deposit franchise deepening should also help sustain earnings momentum.

The loan portfolio remains meaningfully concentrated in investor CRE, although that concentration has eased from nearly 500% in 2022 as the merger provided diversification and loan growth has increasingly targeted C&I and other non-CRE categories. Over time, management is targeting a concentration ratio of below 400%. Multifamily remains the largest CRE component at ~31% of total loans as of 2Q26, but the exposure is partly mitigated by conservative underwriting, including an average LTV of ~57%. Recent stress within the rent-regulated NYC multifamily portfolio (5% of loans) contributed to higher NPA and NCO ratios in 2Q26. Management is evaluating a potential bulk sale of certain loans in order to de-risk the balance sheet. The company also continues to manage concentration through gradual growth in owner-occupied CRE and relationship-driven C&I, which should help diversify the overall credit mix over time. Even so, CRE will remain a defining feature of the balance sheet and a key area for continued monitoring.

Given a more concentrated geographic footprint, the company, at times, has been impacted by credit problems that have arisen in its markets, including NYC taxi-medallion headwinds between 2016-2018, as well as recent issues in the NYC rent-regulated space. The latter resulted in an uptick in NPAs and NCOs in 2026, primarily related to an institutional borrower in that segment. As noted, given the conservative marks on that portfolio following the FLIC acquisition, management is contemplating a de-risking from that book given the headwinds (rent freezes, higher rates, and change in legislation back in 2019). Outside of these problems, CNOB has generally reflected sound asset quality measures, supported by disciplined underwriting. Moreover, criticized and classified loan balances declined from YE25, and early-stage delinquencies also improved materially, suggesting a moderating pipeline of potential problem loan formation and indicating that current credit stress remains concentrated rather than broad based.

Capital and funding trends are constructive. In our view, capital remains adequate for the company’s risk profile. Over time, management is targeting a 9% TCE ratio, which we view as appropriate. Funding has also strengthened meaningfully, supported by a larger and more granular deposit base and lower wholesale reliance. Even so, the balance sheet remains relatively loan intensive, with a loan-to-deposit ratio of 101%, and noncore funding remains somewhat elevated compared to the rated peer average. Liquidity remains adequate, with on-balance sheet and contingent sources covering all uninsured and uncollateralized deposits. The funding mix should continue to benefit from deposit growth in the company’s core markets, while disciplined pricing and improved relationship depth should support ongoing funding cost moderation.

Rating Sensitivities

Sustained profitability improvement, higher revenue and loan diversification, continued sound asset quality, rebuilding of core capital toward peer levels, and further strengthening of the funding profile could support positive rating momentum over time. Conversely, rating pressure could emerge from meaningful deterioration in asset quality, particularly broader weakness within the CRE portfolio beyond identifiable acquired exposures, sustained earnings pressure, more aggressive capital management, or deterioration in the funding and liquidity profile.

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