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 the company’s strengthened franchise positioning over the years, supported by increased scale and greater diversification across its operating footprint, loan portfolio, and deposit base. These enhancements have been facilitated by a seasoned management team with a demonstrated ability to successfully integrate acquisitions, most notably, the recent merger with First of Long Island Corporation in 2Q25. The leadership team’s capacity to execute additive transactions and sustain strong post-acquisition customer retention underscores its emphasis on culture and a relationship-driven philosophy. While KBRA recognizes the progress in these qualitative areas, such developments have yet to translate into measurable quantitative outperformance relative to the rated peer average, though the potential for improvement remains.

While the company, at times, has reflected top-quartile earnings performance (ROA above 1.4% during 2021 and 2022), it has fluctuated over the years, notably during the more volatile interest rate environment, especially given the reliance on spread income (fee income usually represents <5% of total revenue) and its historically more liability-sensitive balance sheet positioning. That said, following the recent deal, there is the potential for profitability improvements, including a path toward an ROA above the 1.0% mark in 2025, which could result in positive rating momentum over the medium term. Management is emphasizing fee income growth, with SBA and treasury management initiatives underway. Additionally, ConnectOne’s NIM now appears positioned for modest expansion, including a measure approaching the 3.25% level by YE25 (3.06% during 2Q25), supported by an improving deposit mix as well as continued back-book loan repricing and incremental growth, which, alongside anticipated cost synergies from the merger, should bolster core returns.

Asset quality remains sound, characterized by low levels of problem assets and only nominal credit losses in recent periods. While the loan portfolio is heavily weighted toward commercial real estate, noting investor CRE concentration remains elevated at >400% of total risk-based capital, as capital builds and some growth slants toward C&I and other non-CRE categories, we expect this measure to moderate over time. Multifamily loans, a significant portion of the CRE book (30% of total loans), generally carry low loan-to-value ratios, and the exposure to higher-risk segments such as office properties is modest (with minimal presence in Manhattan office credits, which often times actually reflect better fundamentals). Moreover, rent-regulated multifamily exposure is limited and, following the merger close, was subject to sizable purchase accounting and credit marks that enhance loss absorption for this segment. Aside from isolated issues in the legacy taxi medallion portfolio, which impacted many NY-centric banks, ConnectOne’s long-term credit performance has generally been strong.

ConnectOne’s funding profile has strengthened following the merger, benefiting from an influx of stable, low-cost deposits and reduction in higher-cost wholesale funding. This improvement in deposit mix has lowered the loan-to-deposit ratio to roughly 100% as of 2Q25 – a more balanced level compared to the company’s historically tighter liquidity position. The proportion of noninterest-bearing deposits has also increased, with added granularity enhancing the overall stability of the deposit base. Even so, the company continues to operate with a somewhat higher reliance on noncore funding than many peers, underscoring preference for ongoing core deposit growth. At the same time, ConnectOne’s core capital metrics were reduced by the acquisition (CET1 ratio of 10.0% as of 2Q25), though management has outlined plans to rebuild capital organically through retained earnings and moderated balance sheet growth. While capital levels have historically been viewed as adequate for the company’s risk profile, a gradual strengthening of related measures over the medium term would be viewed favorably.

Rating Sensitivities

Improved profitability and revenue diversity, facilitation of risk-based capital measures more in line with peer levels, and continued reduction in noncore funding could support a rating upgrade over time. Conversely, a downgrade is not anticipated, though unexpected NIM/earnings pressures, outsized credit issues, an aggressive capital stance, or any issues with merger-related integration could potentially pressure the ratings.

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Methodologies