ConnectOne's third-quarter profit falls to $29.9 million on a $23.0 million loan-sale charge

ConnectOne Bancorp booked a $23.0 million pretax loss on a loan pool it moved to held-for-sale, and that charge, rather than the lending business, set the reported third-quarter numbers. Net income available to common stockholders was $29.9 million, or $0.59 per diluted share, against $39.5 million and $0.78 per diluted share in the same quarter a year earlier and $40.2 million and $0.80 per diluted share in the second quarter. Excluding the charge and other non-operating items, operating net income was $47.9 million, or $0.95 per diluted share, against $0.70 per diluted share a year earlier.

The reported decline is almost entirely a balance-sheet decision. ConnectOne transferred a pool of multifamily loans into held-for-sale during the quarter, marked it at the lower of cost or fair value, and ran the resulting loss through noninterest income, which turned negative at $(14.5) million from $19.4 million a year earlier. Beneath that line the bank earned more on its balance sheet than it did in either comparison period.

A $750 million multifamily pool moved to held-for-sale

The company said it entered into an agreement during the fourth quarter to sell up to approximately $750 million in unpaid principal balance of non-relationship multifamily loans to a single third-party purchaser, subject to adjustment under the transaction agreements. Loans secured by NYC rent-stabilized properties represent approximately 61% of the pool. ConnectOne Bank originated 30% of it and the First National Bank of Long Island, which ConnectOne acquired in June 2025, originated 70%.

The pool sat at $678.9 million as of September 30, 2026, and the sale is expected to close in late October, with the final balance determined at closing. ConnectOne attributed the loss to the gross discount on the sale price, substantially offset by interest-rate and credit purchase accounting marks recorded when it bought FLIC's parent. The company expects to reinvest most of the net proceeds in government-guaranteed securities yielding roughly what the loans did, and to use the remainder to pay down wholesale funding.

The concentration math is the point of the trade. Proforma for the sale, the bank's regulatory CRE concentration ratio falls to approximately 397% from 439% at June 30, 2026, and exposure to NYC rent-stabilized assets drops to approximately 2% of total loans from 6%. The loan-to-deposit ratio was 97.1% at September 30, and the tangible common equity ratio was 8.83% proforma, against 8.38% as reported.

The margin widened to 3.44% and operating PPNR cleared 2%

Fully taxable equivalent net interest income was $118.5 million, an increase of $3.7 million, or 3.2%, from the second quarter and $15.3 million, or 14.8%, from a year earlier. The net interest margin widened to 3.44% from 3.42% sequentially and 3.11% a year earlier, helped by a 15 basis-point increase in the yield on interest-earning assets and a 17 basis-point decrease in the average cost of deposits.

Noninterest expenses were $55.4 million, unchanged from the second quarter and below $58.7 million a year earlier, as a $2.9 million decrease in merger, restructuring and exit expenses offset a $500,000 increase in salaries and employee benefits. The provision for credit losses fell to $5.0 million from $8.3 million in the second quarter and $5.5 million a year earlier, a comparison the release attributes to second-quarter charge-offs on certain NYC rent-stabilized multifamily loans.

That combination lifted operating pre-provision net operating revenue to 2.01% of average assets from 1.94% and 1.61%, and operating return on average tangible common equity to 15.2% from 13.8% and 12.6%. Reported return on average assets was 0.86%, and reported return on average tangible common equity 10.1%.

Nonaccruals fell while criticized loans edged up

Nonperforming assets were $64.3 million, or 0.44% of total assets, down from $79.7 million and 0.55% at June 30 but above $39.7 million and 0.28% a year earlier. The ratio of nonaccrual loans to loans receivable improved to 0.56% from 0.67%, which the release credits to work-out loan sales, charge-offs and principal payments.

The allowance for credit losses fell $19.5 million to $120.6 million, or 1.06% of loans receivable, from $140.1 million and 1.18%. Most of that decline came from the charge-off of $22.2 million of allowance on purchased credit-deteriorated loans tied to the pending sale, which the company says required no additional provision because the allowance had been established at the FLIC acquisition. Excluding PCD loan charge-offs, the annualized net charge-off ratio was 0.07%, against 0.71% in the second quarter and 0.18% a year earlier. Criticized and classified loans rose to 2.02% of loans receivable from 1.89%, an increase the release attributes to the smaller denominator after the transfer to held-for-sale.

A held dividend and the fourth-quarter bill

The board declared a $0.195 per share common dividend payable December 1, 2026, to stockholders of record on November 13, and $0.556620 per depositary share on the Series A preferred. Buybacks stayed small: 50,000 common shares at an average of $32.37 during the quarter, and 140,000 shares at an average of $28.26 over the nine months, leaving 501,118 shares authorized.

Two items are still to come. Transaction costs of approximately $7 to $8 million will be recognized on payment at the fourth-quarter closing, and management projected a 27.5% effective tax rate for the fourth quarter after the loss pushed the third-quarter rate to 26.0%. The release contains no revenue or earnings guidance, and the sale price is not final until the transaction closes. ConnectOne filed the release as Exhibit 99.1 to a Form 8-K dated October 22, 2026, which ties the document to its Item 2.02 disclosure of results of operations.

"Our core performance was strong and reflects the successful execution of our relationship-driven banking strategy. Operating PPNR exceeded 2% of average assets and operating return on tangible common equity topped 15%," Chairman and Chief Executive Officer Frank Sorrentino said in the release. Of the sale, he said: "By selectively divesting non-relationship loans, this transaction reduces our CRE and rent-stabilized concentrations, strengthens key financial metrics and enhances our financial flexibility, while largely preserving our earnings power."