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

The ratings are supported by the company's historically sound credit quality metrics, which demonstrate the management team's expertise and experience in commercial lending and the communities it serves, as well as its relationship banking philosophy and disciplined underwriting standards. Barring a distressed NYC taxi medallion portfolio, which affected many NY-centric banks, problem asset materialization and charge-offs have been nominal, a trend which KBRA anticipates continuing in future periods. However, ConnectOne reflects an elevated concentration in investor CRE, though we acknowledge that the portfolio is principally multifamily loans (30% of total loans), which are largely situated in the NJ markets, and includes a minimal amount of NYC rent-regulated exposure (majority rent-regulated accounts for just 4% of total loans). As such, given the healthy market conditions and some migration out of the NYC metro region that has benefitted many properties in Northern NJ, there have not been any notable cracks in performance thus far. While lending in the city presents challenges, particularly given scrutiny surrounding the office and rent-regulated sectors, ConnectOne’s relative exposures are not outsized, and these portfolios have remained healthy over time. While ConnectOne has typically outperformed peers over a longer time horizon, profitability trended lower throughout 2023/2024 due to an acutely competitive deposit environment, that, combined with a CRE-centric loan portfolio with less repricing opportunities, facilitated meaningful margin compression. Given that most deposit repricing has already occurred, management is confident of NIM tailwinds prospectively, which were evidenced during 2Q24 with 8 bps of sequential expansion. Looking ahead, the company is well positioned to benefit from prospective rate cuts from the Fed, given its liability-sensitive balance sheet, though its reliance on spread income (fee income represents 5% or less in total revenues) highlights the importance of a stronger margin in order for returns to revert to above peer levels. Despite the volatile deposit environment, ConnectOne has maintained relatively stable core deposit balances. However, noncore funding utilization has historically been above peer, which was exacerbated during 2022 due to strong loan growth. As such, the liquidity position measured by the loan-to-core deposit ratio has been managed aggressively, though we view liquidity as sufficient, with ~$4 billion available or over 2x uninsured/uncollateralized deposits. Moreover, we positively view the management team's proactive hedging that has reduced the AOCI burden and provides some liquidity in the event of need (unrealized gains of ~$40 million). With regard to capital, risk-based measures have generally tracked slightly below peer (CET1 ratio of 10.9% as of 2Q24), though offsetting that is a strong TCE ratio (9.5% as of 2Q24) that is wholly reflective of mark-to-market impacts (no securities designated as HTM). Moreover, management stated that capital levels should be fairly stable for the remainder of 2024.

Rating Sensitivities

A rating upgrade is not currently expected, though more diversity in revenue composition and in the loan book, maintenance of risk-based capital measures in line with peers, and less of a reliance on noncore funding could support an positive momentum over time. Conversely, a rating downgrade is not anticipated, though unexpected NIM/earnings pressures, elevated credit issues throughout a downturn, or a more aggressive stance with capital could potentially pressure the ratings.

To access rating and relevant documents, click here.

Methodologies