ConnectOne Beats On Operating EPS As $750 Million Multifamily Sale Largely Removes The Rent-Stabilized Overhang

ConnectOne Bancorp delivered operating earnings of $0.95 per share for the third quarter, beating the $0.85 consensus by 11.8% and growing 35.7% from a year ago. That beat came during a quarter in which management also restructured the balance sheet. A $23.0 million pretax loss from moving roughly $679 million of non-relationship multifamily loans to held-for-sale cut GAAP diluted EPS to $0.59, down from $0.80 in the second quarter. The central development is that ConnectOne accepted a one-time hit to substantially reduce its NYC rent-stabilized exposure, and its core earnings power improved at the same time.

The operating trend supports the headline. Operating EPS has risen each quarter, from $0.79 to $0.84 to $0.95. Operating PPNR improved from 1.81% of average assets in the first quarter to 2.01%, and operating return on tangible common equity reached 15.2%. Net interest income rose 3.2% sequentially and 14.8% year over year. The margin widened to 3.44% from 3.42% last quarter and 3.11% a year ago. Operating expenses were flat sequentially, beating management's 1.5% growth guide, and the operating efficiency ratio fell to 41.3% from 47.5% a year earlier.

The reported revenue figures need context. Revenue of $208.67 million beat consensus by 66.9%, which likely reflects a difference in definition between the reported figure and the consensus estimate rather than a true surprise of that size. Reported revenue grew only 0.7% year over year because of the restructuring loss and last year's $10.1 million of one-time ERTC and pension gains. Operating revenue is a better guide to the underlying business, and it climbed to $127.2 million from $110.8 million a year ago.

The call showed growth reaccelerating:

• Loans grew about 11% annualized, versus roughly 5% in the second quarter.
• Client deposits also grew about 11% annualized, and noninterest-bearing deposits rose 14%.
• Brokered deposits fell $150 million.
• The pipeline is above 7%.
• Management now targets a 3.50% margin for the fourth quarter itself, followed by 3-5 basis points of expansion per quarter. That is a clear upgrade from the prior framing of a 3.50% exit rate and a roughly 3.45% fourth-quarter average.

Credit improved after the second quarter's rent-stabilized charge-offs. Non-PCD net charge-offs fell to 7 basis points from 56, nonperforming assets declined to 0.44% of assets from 0.55%, and the provision dropped to $5.0 million from $8.3 million.

The loan sale is the strategic catalyst. Management said the pool is being sold at more than 90% of par. The sale cuts rent-regulated loans to about 2% of total loans from 6%, and it lowers the pro forma CRE concentration ratio to 397% from 439%. Management had previously placed that sub-400% milestone in 2027-28. Pro forma tangible common equity rises to 8.83%. Most proceeds go into government-guaranteed securities at yields similar to the loans sold, which supports management's claim that the deal largely preserves earnings power.

Bears still have legitimate ammunition:

• **Transaction costs:** About $7-8 million more will land in the fourth quarter.
• **Book value:** Tangible book value per share slipped to $24.19 from $24.66.
• **Smaller tailwinds:** The loan repricing opportunity shrank to about $1.2 billion over five quarters from roughly $1.5 billion, and purchase accounting accretion falls by about 20%.
• **Expenses:** Opex growth guidance steps up to 2-2.5% for the fourth quarter and mid-single digits for 2027.
• **Funding costs:** Deposit costs are rising, with CDs near 4%.
• **Preferred stock:** The preferred dividend resets to roughly 8.8%, and its redemption may slip a quarter.
• **Remaining credit risk:** About $100 million of weaker rent-regulated credits remain and could generate $3-5 million of charge-offs per quarter.

Investors were not positioned for a clean story. Earnings Whispers sentiment deteriorated meaningfully ahead of the report, falling from -0.08 to -0.43. Price action was muted by comparison. Shares at $30.88 were up only 0.7% since the opening after the July report. They sat 3.6% above the 200-day moving average but 9.2% below the August 4 inter-earnings high of $34.01. The stock had drifted back toward the bottom of its range, touching a low of $29.30 on October 14. The trend readings are mixed: momentum is positive, while AVWAP remains negative. That fits a stock that gave back its summer gains as investors waited for the rent-stabilized issue to be resolved.

The bottom line is that ConnectOne turned a lingering credit overhang into a defined, mostly absorbed charge, while operating EPS, margin, efficiency and loan growth all improved. The GAAP miss and the remaining cost headwinds are real, but they are largely known quantities. The quarter improves the investment setup, and the gap between this improved setup and sharply weaker pre-report sentiment is the key tension to watch as the sale closes and fourth-quarter margin guidance is tested.

Read our earnings preview for ConnectOne Bancorp, Inc.: https://www.earningswhispers.com/article/CNOB/20511

This earnings review was originally published on Earnings Whispers.

This article is for informational purposes only and is not investment advice. Earnings Whispers and its staff may hold positions in the securities mentioned. It was generated automatically, with the help of AI, from Earnings Whispers and company data, and checked by Earnings Whispers before publication.