What ConnectOne Bancorp (CNOB) Said on Its Q3 Earnings Call

Key Points

• ConnectOne agreed to sell approximately $750 million of performing multifamily loans at above 90% of par, reducing commercial real estate concentration and rent-regulated loans to about 2% of total loans. Most proceeds will be reinvested in lower-risk assets, with some used to reduce wholesale funding.
• Excluding restructuring costs, third-quarter operating EPS rose 13% sequentially to $0.95, while net interest margin expanded to 3.44% for its eighth consecutive quarterly increase. Management expects the margin to reach 3.50% in the fourth quarter and anticipates mid-single-digit loan and deposit growth.
• Credit metrics improved, with net charge-offs falling to 7 basis points, non-accrual loans declining to $64 million and non-performing assets dropping to 0.44% of assets. The loan sale is expected to increase the tangible common equity ratio by roughly 35 basis points, although additional transaction costs are expected in the fourth quarter.

ConnectOne Bancorp NASDAQ: CNOB said its third-quarter operating performance improved as it advanced a balance-sheet restructuring centered on the planned sale of up to approximately $750 million of performing, non-relationship multifamily loans.

Chairman and Chief Executive Officer Frank Sorrentino said the transaction is intended to sharpen the bank’s focus on relationship-based banking, reduce commercial real estate concentration, lower exposure to rent-stabilized properties and improve liquidity and capital flexibility.

The loan pool, which was acquired in part through ConnectOne’s acquisition of First of Long Island, includes rent-stabilized assets as well as other multifamily loans that do not have core customer relationships attached, management said. The company expects the transaction to close within the following week.

Loan sale to reduce rent-stabilized exposure

Chief Financial Officer Bill Burns said ConnectOne entered into an agreement to sell the $750 million pool to a single buyer at a price above 90% of par. Although the price represents roughly a 10% discount to par, Burns said the transaction results in only a 3% loss to the bank because of purchase-accounting interest-rate and credit marks recorded when the First of Long Island acquisition closed in the second quarter of 2025.

The weighted-average carrying value of the loans was $0.93 on the dollar, compared with a purchase price of $0.90, Burns said. Because the portfolio was classified as held for sale as of Sept. 30, the company recognized a $23 million non-operating pre-tax charge during the third quarter. Burns said the charge reflected interest-rate movements rather than additional credit losses.

The company expects to invest most of the proceeds in lower-risk assets with slightly higher yields, while using a smaller portion to reduce wholesale funding. Burns said the strategy should improve the net interest margin, return on assets and capital flexibility.

• Pro forma regulatory commercial real estate concentration is expected to decline to 397% from 439%.
• The loan-to-deposit ratio is expected to move into the high 90% range from the low 100% range.
• Securities as a percentage of assets are expected to rise to 12.5% from 9%.
• Rent-regulated loans are expected to decline to about $235 million, or 2% of total loans, from 6% before the sale.

Sorrentino said the sale was driven primarily by the company’s preference for client relationships that include deposits, cash-management services and multiple customer touchpoints. While he said the multifamily assets being sold were generally performing well, they were not considered core relationship loans.

Operating earnings and margin improve

Excluding the restructuring charge and other non-operating items, ConnectOne reported operating earnings per share of $0.95, up 13% sequentially from $0.84 and 35% from a year earlier. Operating pre-provision net revenue reached 2.01% of average assets, while operating return on tangible common equity exceeded 15%.

Net interest margin expanded for an eighth consecutive quarter to 3.44%, up 2 basis points from the prior quarter. Burns said more than $1 billion of loan balances have repriced year to date. Of the repricing loans, 20% paid off, while the balance remained on the company’s books at a weighted-average rate increase of 258 basis points.

Management expects roughly $1.2 billion of additional loans to reprice over the next five quarters, reduced somewhat from earlier estimates because of the loan sale. Burns said the company expects net interest margin to reach 3.50% in the fourth quarter and continue widening during 2027, though the year-end level will depend on Federal Reserve rate actions.

During the quarter, loans grew at an annualized rate of about 11%, excluding the transfer of loans to held-for-sale status. Average client deposits also increased about 11% annualized, while average non-interest-bearing deposits rose about 14%. Brokered deposits declined by $150 million, or 13.7%.

Looking ahead, the company expects loan and deposit growth to remain in the mid-single digits while maintaining a loan-to-deposit ratio below 100%.

Expenses, credit and capital

Non-interest expenses were flat from the second quarter, better than management’s prior expectation for 1.5% sequential growth. The operating efficiency ratio improved to 41% from 43% in the prior quarter and 48% a year earlier. Burns projected a 2% to 2.5% sequential increase in operating expenses in the fourth quarter and said a mid-single-digit increase would be the maximum expectation for 2027.

The company expects to recognize an additional $7 million to $8 million of non-operating pre-tax transaction costs tied to the loan sale in the fourth quarter.

Credit metrics improved during the quarter. The provision for credit losses declined to $5 million from $8.3 million in the second quarter. Annualized net charge-offs, excluding purchased credit-deteriorated loans and the loan sale, were 7 basis points, compared with 56 basis points in the prior quarter. Non-accrual loans fell to $64 million from $80 million, and the non-performing asset ratio declined to 0.44% of total assets from 0.55%.

Burns said the approximately $235 million of remaining rent-stabilized loans includes more than half in longstanding customer relationships with related deposits exceeding $100 million. The remaining balance includes non-accruals, select acquired purchased credit-deteriorated loans and other criticized credits. He said that portion has offsets equal to about 30% of unpaid principal balance, including prior charge-offs, purchase-accounting marks and reserves.

Tangible book value per share was $24.19, down 1.9% from the prior quarter, primarily because of accumulated other comprehensive income. The tangible common equity ratio stood at 8.38% at quarter-end and is expected to increase by about 35 basis points following the loan sale.

ConnectOne repurchased 50,000 shares during the quarter at an average price of $32 and has about 500,000 shares remaining under its authorization. The board maintained its common dividend at $0.195 per share. Management also said it intends to redeem its non-cumulative preferred stock, whose dividend rate has reset to about 8.8%, though it may remain outstanding for another quarter as the company evaluates the most advantageous approach.

About ConnectOne Bancorp (NASDAQ:CNOB)

ConnectOne Bancorp, Inc is the parent company of ConnectOne Bank, a full-service commercial bank headquartered in Englewood Cliffs, New Jersey. The bank primarily serves businesses, entrepreneurs, professionals, nonprofit organizations and individuals in the New York metropolitan area and surrounding communities.

ConnectOne Bank provides a range of commercial and personal banking products, including checking and savings accounts, certificates of deposit, commercial and industrial loans, commercial real estate financing, construction loans, residential mortgage loans and consumer lending.

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