Center Bancorp Inc 2026 Q3 Earnings Call

Zia, please go ahead. Good morning, and welcome to today's conference call to review ConnectOne's results for the third quarter of 2026 and to update you on recent developments.

On today's conference call will be Frank Sorrentino, Chairman and Chief Executive Officer, and Bill Burns, Senior Executive Vice President and Chief Financial Officer. I'd like to caution you that we may make forward-looking statements during today's conference call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings. The forward-looking statements included in this conference call are only made as of the date of this call, and the company is not obligated to publicly update or revise them.

In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed today on Form 8-K with the SEC and may also be accessed through the company's website. I will now turn the call over to Frank Sorrentino.

Frank, please go ahead. Thank you, Zia, and good morning, everyone.

I'm pleased to report that during the third quarter, we continued to drive strong core operating performance and momentum across the franchise. We also took a decisive step to strengthen our balance sheet and enhance our capacity for future growth. When we acquired First of Long Island, we gained a terrific franchise, deep deposit, deep client relationships, and a strong deposit base. The acquisition also included a portfolio of high-quality, non-relationship multifamily loans. Last quarter, we told you we were evaluating a bulk sale, and we're pleased to announce we've executed a definitive agreement to sell up to approximately $750 million of those multifamily loans. The transaction, which emphasizes the sale of rent-stabilized assets, accomplishes several strategic objectives at once.

It sharpens our focus on what we do best, serving core banking clients and deepening those connections while further aligning our balance sheet with our relationship-focused banking strategy. It accelerates the reduction of our CRE concentration, cuts our rent-stabilized exposure by up to two-thirds, improves our liquidity, and strengthens key capital and performance metrics across the balance sheet. Bill will walk you through some more details on that. Turning to ConnectOne's third quarter performance, our core results were strong and continue to build quarter over quarter. Operating PPNR crossed 2% of average assets, and operating return on tangible common equity exceeded 15%. Core deposit growth was exceptional this quarter. Client deposits grew at an annualized pace of 11%, led by 14% growth in average non-interest-bearing demand, reflecting the staying power of our homegrown relationship banking culture. Our margin widened again, despite higher short-term rates and stiff competition for deposits.

The pace of margin widening is steady, and loan repricing continues to work in our favor. On efficiency, expenses were flat for the quarter, a reflection of our culture. We're always looking for ways to work smarter, and our investments in technology, including agentic workflows, are freeing our bankers to spend more time serving our clients. Efficiency has always been one of our core strengths, and our efforts continue to improve this quality. Credit quality improved across the board. Operating charge-offs were just a few basis points, and non-performing assets declined. Following the loan sale, the remaining rent-stabilized loans represent a much smaller, well reserved for portion of our total loan portfolio. To provide full clarity and details, Bill will give you some more specifics on the remaining portfolio. On capital, we remain disciplined stewards.

The restructuring enhances our flexibility to support organic growth, return capital through dividends and opportunistic buybacks, and pursue the most advantageous path to redeem our preferred stock. Overall, our third quarter performance clearly demonstrates the strength of our franchise. Looking ahead, we enter the final quarter of the year with a more liquid balance sheet, growing earnings profile, and a team focused on what we do best, serving our clients. Bill, why don't you walk us through the quarter's financial performance in a little bit more detail?

All right, Frank. Thank you. Good morning to everyone on the call. As Frank mentioned, we announced two items this morning. First, we delivered a continued step-up in our core operating performance, and second, we executed on a right-sized balance sheet restructuring transaction. It meaningfully de-risks and repositions the balance sheet. I'll start with the restructuring, then we'll get to operating results. As we noted last quarter, we had been exploring a bulk loan sale, and within the past week, we entered into a contractual agreement to sell a $750 million pool of performing non-relationship multifamily loans to a single buyer at a price north of 90%. Having said that, the 10% discount to par resulted in only a 3% loss on the sale for our bank.

That is because we previously recorded significant purchase accounting marks, both interest rate and credit marks, on a large part of the pool back in the second quarter of 2025, concurrent with the closing of the First of Long Island acquisition. As a result, the weighted average carrying value of the total pool on ConnectOne's books was $0.93 versus the $0.90 purchase price. The sale is expected to be completed in the next week, but for accounting purposes, it was classified as held for sale at September 30th, which required the recognition of a $23 million non-operating pre-tax charge in the third quarter. To be clear, this charge solely reflects changes in interest rates and does not stem from any additional credit losses. Interest rates are up about 100 basis points on average since the loans were originated or acquired.

In terms of our reinvestment of loan proceeds, our intention is to place the majority of the funds into lower risk assets with slightly higher yields, effectively reducing balance sheet risk without impacting earnings power. A smaller portion of the proceeds that will likely be used to pay down wholesale funding may slightly temper short-term reinvestment earnings, but that strategic shift will expand our net interest margin and return on assets while enhancing capital flexibility. The repositioning improves our balance sheet in several ways. On a pro forma basis, our regulatory CRE concentration declines on June 30th pro forma basis to 397% from 439%. Our loan-to-deposit ratio improves into the high 90s from the low 100s. And securities portfolios as a percent of assets is expected to increase to 12.5% from its current 9%.

In addition, post-loan sale, our rent regulated book declines significantly from 6% of loans to just 2%, or $235 million. I am going to provide more detail on loss coverage of that remaining piece when I cover credit in a few minutes. Turning to operating results, again, we were very, very pleased with our performance and momentum. Excluding the restructuring charge and other non-operating items, operating EPS was $0.95 per share, up 13% sequentially from $0.84 last quarter, and that builds upon our strong second quarter sequential earnings growth. And from a year ago, quarterly operating earnings are up 35%. Operating return metrics were outstanding with PPNR improving to 2.01% of average assets, return on assets increasing to 135%, and return on tangible common equity of more than 15%, already hitting the target we laid out earlier this year.

Net interest margin widened for the eighth consecutive quarter to 3.44%, a 2 basis point increase. Looking ahead, loan repricing remains a tailwind. Year to date, just over $1 billion of loan balances have come up for repricing. 20% paid off, but the remainder stayed on our books at a weighted average rate increase of 258 basis points. We expect approximately $1.2 million more to reprice over the next five quarters. Still significant, although down slightly from prior estimates as a result of the loan sale. As I mentioned earlier, we expect the restructuring to be additionally accretive to the margin, primarily from paying down higher cost wholesale funding. Putting it all together, we are now estimating a margin reaching 3.50% for the fourth quarter, while for 2027, our models show continued widening throughout the year.