ConnectOne Bancorp (CNOB) Q3 2026 earnings review
ConnectOne operating profit rises 36%, and a loan sale cuts property risk
ConnectOne Bancorp, a New Jersey and New York commercial bank, took a one-time loss to clear out its troubled apartment loans while its regular lending business grew. Reported profit fell by a quarter because the bank took a $23 million charge to sell up to $750 million of apartment loans. Excluding one-offs, profit per share jumped 36% from a year ago as loans repriced at higher interest rates and operating costs stayed flat, chief executive Frank Sorrentino said.
| Operating revenue, excluding one-offs | $127.2M +15% from a year ago |
|---|---|
| Profit per share, excluding one-offs | $0.95 +36% from a year ago |
| Net interest margin | 3.44% +0.33 percentage points from a year ago |
| Rent-stabilized loan share outlook | ~2% down from 6% before the $750M loan sale |
⚖️ Verdict: 🟢 Bullish
The story got better because the loan sale resolves the bank's two biggest credit worries at once. Selling the pool cuts exposure to New York City rent-stabilized apartments from 6% of loans to 2% and pulls commercial real estate concentration below the 400% regulatory mark. One caution: the sale used up $22 million of acquired loan-loss reserves, and period-end borrowings jumped 50% as deposit costs rose.
The question now is whether the bank can still reach its 3.50% year-end interest margin goal after the loan sale closes. Reinvesting the sale cash into government bonds and paying down expensive borrowings could lift the margin, or rising deposit costs and lost merger-accounting income could hold it back. Fourth-quarter net interest margin and borrowing balances will settle it.
🐂 Bull Case
Loan Sale Cuts New York Rent-Stabilized Exposure
ConnectOne, a commercial bank serving New Jersey and New York businesses, has carried two connected risks since buying First National Bank of Long Island (FLIC) in June 2025: heavy exposure to commercial real estate (CRE, loans backed by business and apartment buildings) and troubled New York City rent-stabilized apartments. In the third quarter, the bank signed an agreement to "sell a pool of up to approximately $750 million in unpaid principal balance of non-relationship multifamily loans" in late October.
- New York City rent-stabilized share of total loans: projected to drop to about 2%, down from 6% in June
- Regulatory CRE concentration ratio (commercial property loans as a share of risk-based capital): down to about 397% after the sale, from 439% in June
- Pretax loss on loans moved to held-for-sale: $23.0 million, plus $7 million to $8 million of closing costs in the fourth quarter
- Tangible common equity ratio (shareholders' equity minus goodwill as a share of tangible assets): rises from 8.38% to 8.83% after the sale
This transaction eases both standing concerns at once because it pulls the regulatory CRE ratio below the 400% threshold years ahead of schedule and removes two-thirds of the rent-stabilized apartment book. Chief executive Frank Sorrentino said the deal strengthens key metrics "while largely preserving our earnings power" because ConnectOne plans to put most of the cash into government-guaranteed securities at yields similar to the loans it sold.
What to watch: the final closing balance and reinvestment yields in the fourth-quarter report. A clean closing near $750 million with matching bond yields would confirm that the bank removed its biggest credit overhang without hurting future interest income.
Flat Costs Push Profitability Above Targets
Sorretino said "Our core performance was strong and reflects the successful execution of our relationship-driven banking strategy." Excluding one-offs, operating revenue on a tax-equivalent basis rose 14.8% from a year ago to $127.2 million, while operating noninterest expenses (overhead such as staff, branches, and technology) stayed flat at $52.5 million. Total noninterest expenses were $55.4 million, unchanged from the second quarter and beating management's internal plan for 1.5% quarterly cost growth.
Because revenue grew while overhead stood still, the operating efficiency ratio (operating expenses as a share of operating revenue) improved by 6.2 percentage points from a year ago to 41.3%. Salaries and employee benefits, the largest expense line, fell by 3.4 percentage points of operating revenue from a year ago, to 25.9% from 29.2%. That pushed operating return on average tangible common equity (profit excluding one-offs as a share of tangible book value) to 15.2%, topping the bank's 15% goal.
What to watch: fourth-quarter operating noninterest expenses against the $52.5 million level. Holding overhead near that mark would keep return on tangible equity above 15% even after preferred dividends rise.
Loan Repricing Lifts Net Interest Margin
ConnectOne's main growth engine since the FLIC merger has beenadjustable-rate loans resetting to current market interest rates. In the third quarter, net interest margin (NIM, the profit spread between interest earned on loans and paid on deposits) widened for an eighth straight quarter, rising 0.02 percentage points from the second quarter and 0.33 points from a year ago to 3.44%. Tax-equivalent net interest income rose 3.2% from last quarter to $118.5 million.
Loan repricing drove the gain, lifting the average yield on loans by 0.05 percentage points from the second quarter to 6.06%. However, the 0.02-point margin step was smaller than the 0.04-point quarterly pace implied by management's 3.50% year-end spot target, because deposit costs ticked up by 0.03 points. By our math, the margin must widen another 0.06 points by December to hit that year-end goal.
What to watch: fourth-quarter net interest margin after the apartment loan sale closes. Paying down wholesale borrowings with part of the sale proceeds should help the margin cover the remaining 0.06 percentage points.
Positives this quarter didn't test
Two standing growth drivers from earlier in the year had a quiet quarter or received no new detail in the earnings release.
- Small Business Administration (SBA) and BoeFly loan-sale gains: slipped to $1.2 million from $1.6 million in the second quarter, bringing the nine-month total to $3.2 million against management's full-year goal of more than $4.0 million; fourth-quarter gains of at least $0.8 million by our math will test that target.
- Florida banking expansion: the release gave no update on loan and deposit balances in Florida; the quarterly filing or conference call will show whether the expanded team kept growing above the bank average.
🐻 Bear Case
Deposit Costs and Wholesale Funding Are Rising
Sorrentino noted that the bank widened its margin "despite higher short-term rates and a competitive funding environment" and highlighted 11% annualized growth in average client deposits. Earlier this year, management had planned for deposit costs to stay flat across 2026, so the macro rate environment is now working against that plan.
- Average cost of total deposits: rose 0.03 percentage points from the second quarter, offsetting more than half of the 0.05-point gain in earning-asset yields
- Money market deposit rate: rose to 2.98% from 2.91% in the second quarter, while time deposit rates rose to 3.75% from 3.72%
- Period-end noninterest-bearing demand deposits: fell by $33.3 million from June to $2.48 billion, slipping to 21.1% of total deposits by our math
- Period-end wholesale borrowings: rose 49.9% from June to $1.07 billion, as period-end total deposits grew just $38.0 million (0.3%)
This cuts against the headline claim of 11% average deposit growth because period-end balances barely moved and the bank leaned on $357.0 million of new borrowings to fund its loans. ConnectOne plans to use part of the October loan-sale cash to pay down wholesale funding, which is necessary to keep funding costs from eating up future loan repricing gains.
What to watch: period-end borrowings and the average cost of deposits in the fourth quarter. A drop in borrowings back toward $700 million after the loan sale closes would show that the third-quarter borrowing jump was temporary.
Loan Sale Drains Reserves and Book Value
When ConnectOne bought FLIC in 2025, it recorded purchase-accounting discounts (marks for expected credit losses and lower interest rates) on the acquired loans. Moving the $678.9 million apartment loan pool to held-for-sale consumed most of those buffers. The bank charged off $22.2 million of reserves on purchased credit-deteriorated (PCD) loans — loans that already had credit problems when acquired — and used interest-rate marks to offset the gross discount on the sale price.
As a result, the allowance for credit losses (ACL, the total reserve for bad loans) fell to 1.06% of loans receivable from 1.18% in June and 1.38% a year ago, while remaining nonaccretable credit marks shrank from $34.0 million to $11.8 million. The $23.0 million pretax charge and a larger unrealized bond loss also pushed tangible book value per share down 1.9% from June to $24.19. In addition, consuming the FLIC rate marks now means less discount accretion will flow into future interest income.
What to watch: loan yields and purchase-accounting accretion in the first quarter of 2027, the first full period after the sale. A drop in loan yields would mean the lost discount accretion weighed on net interest income more than management expected.
Preferred Stock Reset Lifts Dividend Cost 70%
ConnectOne has $110.9 million of Series A preferred stock whose fixed 5.25% dividend rate was scheduled to reset in September 2026 unless the bank redeemed the shares. Rather than paying off the preferred stock, the board kept it outstanding and declared a December dividend of $0.556620 per depositary share, up 69.6% from the $0.328125 paid in prior quarters by our math.
Keeping the preferred shares preserves regulatory capital while the bank absorbs the apartment loan sale loss, asBancorp Tier 1 capital dipped 0.21 percentage points in the quarter to 11.01%. However, by our math, the higher rate raises preferred dividend payments from $1.5 million a quarter to about $2.6 million, taking an extra $4.2 million a year (about $0.08 per share) out of profit available to common stockholders starting in the fourth quarter.
What to watch: fourth-quarter preferred dividends on the income statement and any commentary on redeeming the Series A shares once the loan sale lifts capital ratios.
👓 Other Themes
Restructuring Costs Carry Into the Fourth Quarter
Because the apartment loan sale closes in late October, the cleanup spans two quarters. ConnectOne booked the $23.0 million valuation loss in the third quarter, which lowered taxable income and cut the effective tax rate to 26.0%. In the fourth quarter, the bank will record $7 million to $8 million of transaction costs upon closing, and it expects the effective tax rate to return to 27.5%.
💲 Other KPIs
Total loans rose by $242.4 million from June (up 8.2% annualized, or 11% before charge-offs and transfers) and 7.1% from a year ago. Excluding the $678.9 million apartment pool moved to held-for-sale, loans receivable on the balance sheet fell 3.7% from June to $11.43 billion, which lowered the loan-to-deposit ratio to 97.1%.
Nonperforming assets (overdue loans no longer accruing interest) dropped 19.2% from $79.7 million in June, falling to 0.44% of total assets from 0.55%. The bank reduced problem loans through "work-out loan sales, charge-offs and principal payments", while net charge-offs excluding acquired credit-deteriorated loans fell to 0.07% of average loans from 0.56% in the second quarter.
ConnectOne resumed buybacks after buying no shares in the second quarter, spending $1.6 million at an average price of $32.37 per share. That brings nine-month repurchases to 140,000 shares at $28.26, with 501,118 shares still authorized. Weighted average diluted shares stayed flat from a year ago at 50.5 million.
🔮 Guidance
Cut slightly. "The projected effective tax rate for the fourth quarter of 2026 is 27.5%", down from the prior ~28.0% full-year target after the third-quarter loan-sale loss lowered taxable income and pushed the third-quarter rate down to 26.0%. By our math, a 27.5% fourth-quarter rate leaves the full-year tax rate near 27.5%.
New. The bank will record $7 million to $8 million of transaction costs in the fourth quarter when the apartment loan sale closes and settles in late October. That follows the $23.0 million pretax valuation loss recorded in the third quarter, bringing total pretax charges for the balance sheet cleanup to $30 million to $31 million.
Unchanged. The board declared a quarterly cash dividend of $0.195 per common share, payable December 1, 2026, keeping the payout level for a third consecutive quarter after raising it from $0.18 in the first quarter.
Raised. Following the scheduled five-year rate reset on the Series A preferred stock, the quarterly dividend per depositary share increases by 69.6% on December 1, 2026. By our math, that lifts the quarterly preferred dividend deduction from $1.5 million to about $2.6 million.
❓ Key Questions
How much purchase-accounting accretion remains after the loan sale?
FLIC loans made up 70% of the sold pool, and ConnectOne used their interest-rate marks to offset the sale discount. Investors need to know how much quarterly discount accretion is left compared with the prior $9 million quarterly run rate.
Did the $30 million nonaccrual apartment relationship leave in the sale?
Nonperforming assets fell by $15.3 million through workout sales, charge-offs, and payments, while the $750 million bulk sale sits in held-for-sale. Management did not say how much of last quarter's troubled rent-stabilized relationship remains on the books.
Does the 3.50% year-end spot margin target still hold?
The earnings release did not mention the 3.50% year-end spot net interest margin goal. With deposit costs rising 3 basis points and the loan sale swapping loans for government securities and debt paydowns, the net impact on the December margin is unclear.
Why didConnectOne keep the Series A preferred stock after the reset?
The preferred dividend jumped 70%, costing common shareholders an extra $4.2 million a year by our math. Now that the loan sale lowers risk-weighted assets and lifts tangible equity to 8.83%, will the bank redeem the preferred shares?