ConnectOne Bancorp, Inc. (NASDAQ:CNOB) Q1 2025 Earnings Call Transcript

ConnectOne Bancorp, Inc. (NASDAQ:CNOB) Q1 2025 Earnings Call Transcript April 24, 2025

ConnectOne Bancorp, Inc. beats earnings expectations. Reported EPS is $0.51, expectations were $0.46.

Operator: Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the ConnectOne Bancorp, Inc. conference call. To prevent any background noise, after the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Siya Vansia, Chief Brand and Innovation Officer. Please go ahead.

Siya Vansia: Good morning, and welcome to today’s conference call to review ConnectOne Bancorp, Inc.’s results for the first quarter of 2025 and to update you on recent developments. On today’s conference call will be Frank Sorrentino, Chairman and Chief Executive Officer, and William Burns, Senior Executive Vice President and Chief Financial Officer. I’d also like to caution you that we may make forward-looking statements during this conference call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially 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 found through the company’s website. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.

Frank Sorrentino: Thank you, Siya, and good morning, everyone. We appreciate you joining our call today. I’m pleased with ConnectOne Bancorp, Inc.’s performance to start the year, reflecting the disciplined execution of our operating strategies as well as a continued commitment to our client-first culture and relationship banking model. Some highlights from the quarter include a nearly 20% year-over-year increase in net income available to common shareholders. Our net interest margin expanded again this quarter. Tangible book value per share continues to build ahead of our planned merger with First of Long Island, increasing by about 4% since the transaction was announced. Additionally, credit quality trends remain stable, and our balance sheet remains well-positioned.

Looking ahead, this positive momentum will continue, reflecting both ConnectOne Bancorp, Inc.’s standalone progress and the benefits of our pending merger with First of Long Island. William Burns will walk us through some additional details shortly. Regarding our lending, while our portfolio contracted slightly on a point-to-point basis during the first quarter, primarily due to elevated payoff activity within the commercial real estate segment, our loan pipeline remains robust as we continue to see healthy demand from our clients. Turning to deposits, while as-of demand deposit balances declined since year-end, our average demand deposits actually increased sequentially. This anomaly was due to temporary client inflows occurring at the end of last year.

As you’ve heard me emphasize before, supporting our clients is ConnectOne Bancorp, Inc.’s top priority, an approach that has consistently proven effective and has enabled us to expand our banking relationships, grow in the number of verticals, and expand into new markets. Shifting to credit quality, trends remain solid, reflecting proactive portfolio management, our long-standing high credit standards, our track record of avoiding riskier subsegments, and the success we’ve had last year actively managing non-relationship loans off our balance sheet. Next, we’re moving forward towards finalizing our planned merger with First of Long Island. I’m excited about the opportunity to serve their distinguished client base with the resources and products of our combined institution.

Our proactive engagement with First of Long Island clients has been very productive. These interactions have provided valuable insights and opportunities to deepen these relationships. We’re already seeing new business materialize on Long Island. We’ve already identified opportunities to leverage our South Florida footprint to support First of Long Island clients who, similar to ConnectOne Bancorp, Inc.’s client base, have a business presence in Florida. Integration planning efforts are well underway, and we’re seeing strong early synergies already emerge, fueled by a collaborative team mindset. The transaction remains on track to close during the second quarter, as we wait for final regulatory approval, which is expected shortly. At ConnectOne Bancorp, Inc., we remain highly optimistic about the path ahead for our clients, our team, and our shareholders.

Shifting to the economic environment, while there are still a number of unknowns, ConnectOne Bancorp, Inc. has a proven track record of adjusting to and navigating market uncertainty. We remain confident in our business strategy and proven ability to execute. Importantly, for the vast majority of our clients, we believe any effect of the tariff policy will be narrow in scope and not widespread. With all that said, I’ll turn it over to William Burns.

William Burns: Alright. Thank you, Frank, and good morning, everyone. Let me start by saying I too am very pleased with our performance, and I share Frank’s optimism regarding ConnectOne Bancorp, Inc.’s future financial performance. This quarter’s results reflected continued margin expansion to 2.93%, which I will confirm as core, and it was a little higher than expected. In addition, expense growth was slightly muted, as cost saves from the merger are already making their way into our results. Partially offsetting these improvements was loan portfolio growth that was below our guidance, but we believe that to be temporary due to the timing of actual loan closings and increased payoffs. Today, we possess a large and diversified loan pipeline, one that points to loan growth of at least 2.5% for the second quarter.

Now over the past year, we have strengthened our financials in several respects. Our net interest margin has widened significantly. It bottomed out about a year ago, and since that time, we’ve widened 30 basis points with further widening on the horizon. The improvement is strictly organic without any reliance on loss trades, and we expect the core net interest margin to reach 3% this second quarter. Our loan-to-deposit ratio continues to trend lower, reflecting solid core deposit growth. It was below 106% at quarter-end. All of our capital ratios have increased. Our company tangible common equity ratio stands at 9.73%, while the bank leverage ratio was 11.67%. In addition, our tangible book value per share continues to increase each and every quarter, up 4% over the past year to $24.16.

Our commercial real estate concentration continues its steady decline, down 40 percentage points from a year ago to 420%, reflecting successful efforts to diversify our loan originations, a renewed focus on relationship lending, and a consistent capital build. Our goal is to reduce this ratio to below 400% during 2026. Turning to credit, our charge-offs and provisioning remained at relatively low levels, which is consistent with 2024 metrics. Nonaccrual loans declined by 13% this quarter, and we already expect further declines during the current quarter. Thirty to eighty-nine day delinquencies ticked up slightly, but that ratio today amounts to only 0.18% of total loans, while criticized and classified also increased, but again, very slightly from 2.68% to 2.79%.

Although our performance measures in terms of return on assets and return on equity may not be at the levels of a couple of years ago, our balance sheet positioning and the merger will facilitate and accelerate our return to top-tier financial performance. I want to give you more color on our net interest margin outlook. I’m just going to reiterate our prior guidance of a five basis point improvement each quarter independent of any Fed rate reductions, plus an additional five basis points for each 25 basis points of Fed cut. And that guidance, at least for now, also holds post-merger, which includes purchase accounting accretion and First of Long Island’s balance sheet positioning. First of Long Island’s performance is following a similar trajectory to ours, and we expect to close the transaction in the latter part of the second quarter.

When we report next in July for the second quarter, we will have nearly $15 billion in assets and $1.2 billion in market cap. In terms of longer-term projections, we all understand that it is particularly challenging today given the uncertainties related to the impact of tariff policy on economic growth and the timing of rate cuts. For now, I’m going to generally stick with our previously disclosed conservative estimates regarding the merger, which include upon full phase-in of cost saves a return on assets exceeding 1.2% and a return on tangible common equity of approximately 15%. And that’s supported by an interest margin of 3.20% or greater. Clearly, these projections are subject to change, and we will, as always, update you regularly. And with that, Frank, I’ll turn it back to you for closing remarks, and then we’ll take your questions.

Frank Sorrentino: Thanks, William. In summary, ConnectOne Bancorp, Inc. was built for moments like this. With our client-centered culture and disciplined execution, we’re ready to capitalize on the momentum we’ve built. We’re energized with our impending increased scale to accelerate growth on Long Island, expanding both our team and our client relationships along with our reach in markets where we’ve already built success. We’re significantly enhancing financial performance while building New York Metro’s premier bank that offers a compelling investment opportunity. At this juncture, as always, we appreciate your interest in ConnectOne Bancorp, Inc. Thanks again for joining us today. And with that, I’d like to turn it over to some questions. Operator?

Operator: At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Timothy Switzer with KBW. Please go ahead.

Q&A Session

Timothy Switzer: Good morning. Thank you for taking my questions.

Frank Sorrentino: Morning, Tim.

Timothy Switzer: The first question I have is related to the economic uncertainty here, and I appreciate some of the color you guys gave. I know it’s still a little early, but have you guys seen a large customer reaction at all in terms of any notable changes in behavior or spending, their willingness to invest into the company, anything like that?

Frank Sorrentino: We’ve spoken to a number of our clients specifically about what may be the impact of some of the various proposals that have been spoken about to this point. And there are certain industries, companies, specific instances where there could be some changes in either the cost structure of some part of some businesses. For the most part, we don’t see anything that is dramatic. There may be some small issues across the board in different places. Construction comes to mind. What’s going to happen to lumber, steel, concrete, things like that? But when you look at what the percentage of those things are relative to the overall project, and what sort of the pricing of the product will be in the future, we really don’t see anything that’s dramatic at this point.

That gets further complicated by the fact that we really don’t know what’s going to happen, and how much of it’s actually going to take effect. And we also don’t know what the offsets are to that. We’ve already heard clients who are talking about products that maybe they source in a European market that they can get domestically today. So there already seems to be solutions for some of the problems that we’re not even sure are going to present themselves. So it’s a very difficult thing to be working through today. But for the most part, I have a pretty good feeling from speaking directly to the clients that whatever issues there are, are fairly contained.

Timothy Switzer: Okay. Got it. That’s really helpful. And I appreciate your commentary on the upcoming First of Long Island merger, and it sounds like you’re pretty optimistic about achieving the cost saves. Can you give us an update on if the areas you’re achieving these cost saves from have changed at all and if you found other opportunities? And then if we get into 2026 and it’s maybe a worse macro environment, slower growth, revenues coming down, what levers will you have as a combined company to help buy profitability?

Frank Sorrentino: Let me just make a general statement, and then William, you can talk a little bit to the cost saves. But one of the things we really have not spoken about relative to the value of the First of Long Island transaction is that this is a gem. This is a Long Island-based organization in one of the strongest markets in the New York Metro market, which is one of the strongest markets in the country. And so for us to take advantage of being able to work together with folks at First of Long Island and provide additional products and services to their extremely deep client base, I think, gives us an enormous amount of confidence in our ability to not only achieve some revenue synergies but also be able to leverage the expense base that’s there at Long Island. On top of that, we have our projected cost savings, which William can talk a little bit more about.

William Burns: Yeah. No. Good question, Tim. There’s a lot of moving parts here. But I do feel confident we’ll get to those return objectives that we talked about one way or another. One of the areas that the projections might be conservative is on the net interest margin. We’re seeing a lot of momentum on the net interest margin, and the accretion from the deal could add anywhere from five to 15 basis points. So I want to be conservative with projections right now, but having that kind of margin over and above projections will add a lot to our earnings going forward. So even if growth was a little bit slower, I think we could make it up in margin. As far as cost saves go, I think we have about $24 million or so in total cost saves.

I know, originally, we said we’d have them all done by, say, January 1. It’s possible that it takes us a little bit longer. Might want to stretch that out a little bit towards a year from closing. But all in all, one way or another, I feel pretty good with the projections that I laid out.

Timothy Switzer: Got it. Thank you, guys. Very helpful.

Operator: Your next question comes from the line of Curtis Franklin with Hovde Group. Please go ahead.

Curtis Franklin: Hey. Good morning.

Frank Sorrentino: Yes. Good morning, Curtis. Good to have you on board, you know, covering the company. We’re really pleased with that.

Curtis Franklin: Thank you very much. We’re happy to be here. And just wondering if you could talk a little bit more on the puts and takes on credit. I know you talked a little bit in your prepared remarks, but just trying to think through what areas are you looking at a little bit more closely, and are there any kind of specific credits where maybe we could see some positive movement over the next couple of quarters?

Frank Sorrentino: It’s just been really steady, and the delinquencies are at historically extremely low levels. So, knock on wood, the credit quality’s been, if anything, improving, and we don’t really see a pipeline at this point of any kind of workouts.

Curtis Franklin: Understood. And can you refresh us on the repricing opportunity you see over the next twelve months? Just high level in terms of both fixed-rate loans and deposits?

William Burns: Yeah. What we’ve had so far, and I track this pretty closely, is close to a billion dollars of loans that have already repriced going back to February. And so the credit quality of those has performed remarkably well. It’s been a very low level of charge-offs on those repricings. Even the downgrades, although there have been some downgrades, overall, it’s really, really small. So that’s good news, and we continue to track that each quarter. Going forward, we’re going to have, I think, somewhere around a billion dollars of repricings through 2026. So obviously, we continue to monitor that as we have in the past. But so far, the track record is good, and so I’m pretty optimistic that if there are any issues with those repricings, we’ll be able to handle that in terms of regular earnings and provisioning.

Curtis Franklin: That’s helpful. And if I could squeeze in just one last one here. Understand the margin expansion. Is that mostly driven really by the funding side here? I mean, can we see loan yields creep back up a little bit given what’s in the pipeline? Just trying to think through the dynamics of the yield versus cost.

William Burns: Well, yeah, we still have CDs repricing, some billion dollars or so over the next six months. So that’s helping on the funding side. Obviously, Fed rate cuts will lower deposit pricing further. And we have a large portion of our loan portfolios in that adjustable category, so it takes time. So we could be in a position where the loan yields are going up, and deposit costs go down. And those two things combined will accelerate our margin improvement.

Curtis Franklin: Alright. Great. Thanks for taking my questions.

Operator: Your next question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.

Daniel Tamayo: Hey. Good morning, guys.

Frank Sorrentino: Hey. Good morning, Dan.

Daniel Tamayo: I apologize if I missed this. I jumped on a little bit late, but just on the loan growth side, just wondering if you can talk about a little bit of the puts and takes of kind of where you’re seeing what you’re seeing right now relative to what you’re expecting for the rest of the year. Just curious how much of the slowdown is impacting the current months and how much kind of improvement you’re baking into any guidance in the back half of the year?

Frank Sorrentino: I would say, Dan, that we definitely have seen a little bit of a pullback on enthusiasm to move forward with certain projects, certain types of expansions, or any other opportunities, but it’s really a bit of a pause, and I think I’m already starting to see some of that dissipate. So it’s really kind of hard to get our hands on it, but if you think about whether it’s a construction project or someone who’s growing their business, if that particular business is doing well and continues to grow, they’re going to need funding to be able to continue to compete. So, you know, we have spent the last twenty-four months or so really doubling down with our existing client base and supporting all of their needs. And, certainly, as you know, the New York Metro market is still pretty hot.

You can’t build enough inventory in the housing. The businesses that are here are doing quite well. It’s difficult to hire people in order to expand. So there’s a lot of great dynamics that are taking place within this New York Metro market where our bank is located that are supporting that level of growth that we’ve projected for the year, which I would say is somewhere in the mid to high single digits.

Daniel Tamayo: Okay. Mid to high single digits. You know, obviously, weighted to the back half of the year, maybe a little bit of slowness in the second quarter. Don’t mean to put words in your mouth, but it sounds like…

Frank Sorrentino: We see our pipeline is quite strong as we stand here right today. And, you know, it’s hard to forecast exactly when things are going to close and when things pay off. And so we saw a little bit of that in the first quarter. We actually had a fairly strong loan generation quarter, but we also saw a number of payoffs. Now those payoffs are good. That means construction projects got done, got sold, and we got paid back. But from what we can see right at this moment, there appears to be a pretty robust pipeline ahead of us. And it should be fairly consistent going through the rest of the year. And I did say you may have missed it, Danny, that we expect 2.5% sequential loan growth for the second quarter.

Daniel Tamayo: Oh, great, Bill. Yeah. Okay. So…

William Burns: You know? And then, you know, I just did some numbers on a piece of paper here before the call, and probably about a 5% increase for the year from December 31.

Daniel Tamayo: Okay.

William Burns: But that’s taking into account by our news cycle. Right?

Daniel Tamayo: Yeah. It’s changing every day. Yeah. Every day. And maybe a follow-up question kind of unrelated, but, you know, you guys are in the middle of closing a deal, and you’re obviously dealing with the regulators. I’m just curious if you can give any color on the types of conversations that you’re having with regulators now relative to, you know, a year ago or prior to that, if there’s like, a tangible difference in those conversations and the relationships if you’re seeing any kind of progress on the regulatory front in this new administration.

Frank Sorrentino: Yeah. I would say we have a very good relationship with the regulators that are weighing in on this application, and the folks we’ve been dealing with are all here, all working very earnestly to get the application completed. I personally think I can speak to the team. I don’t think we’ve seen any change of direction or focus or the issues or challenges that they look at when they look at these types of applications. It seems pretty standard business to me. Right. Now, keep in mind, we’re not regulated by the CFPB, so we really don’t have that comment about. We’re not regulated by the Federal Reserve either. So, you know, our regulator is the State Department of Banking in New Jersey and the FDIC. And with both of those entities, they seem to be doing the job that they’ve always done, and, you know, we’re doing what we need to do.

They have a lot of boxes to check to get these mergers through, and that’s what they’re working on. That’s basically it. It’s always been that way. They’ve been very cooperative, and that’s always been the case with our relationship with them.

Daniel Tamayo: Okay. Great. Thanks for answering that one. I know it’s a little tricky, but thanks for taking the questions. Appreciate it.

Frank Sorrentino: Yep.

Operator: Before going to the next question, again, if you would like to ask a question, press star 1 on your telephone keypad. Your next question comes from the line of Matthew Breese with Stephens Inc. Please go ahead.

Matthew Breese: Hey. Good morning.

Frank Sorrentino: Hi, Matt.

Matthew Breese: You know, first, I just hope we could start with expenses and the near-term expectations for expense growth.

William Burns: Well, you know, the next time we report, we’re going to be a combined company. So it starts getting a little bit challenging to project when dealing with cost saves. But for this quarter, I think I mentioned that some of the cost saves were in the first quarter numbers. I’d say probably about half a million out of $24 million in total cost saves. So, on a standalone basis, we’re probably growing in the four to 5% range. And, obviously, you can run your own numbers to come up with what the combined base will be. And that’s four to 5% annual.

Frank Sorrentino: And, Matt, just to add a little bit more color to what William said during our prepared remarks, you know, this transaction we feel very strongly about the quality of the franchise that we’re getting together with. And it is our goal to make certain that we do everything possible to satisfy and embrace the client base that First of Long Island has. It is a phenomenal client base. Goes back over decades. Very strong relationships. Relationships we couldn’t get out of there with a crowbar before. And so we’re going to take every precaution, every measure. We’re going to put everything we have into not only saving but nurturing every single one of those relationships. And so, you know, if there’s a little bit of cost involved in doing that, we’re okay with that.

So, you know, I think we may drag out a little bit how long it takes to get some of the expenses, but we think it’s well worth it to really bring that franchise together in a way that’s incredibly meaningful to the overall company.

Matthew Breese: No. That makes sense. Maybe just turning to incremental loan yields in the pipeline. I’m curious where those stand. And I’m curious what spreads are doing. I could see it either way. We hear a lot about a lot of payoff activity and customers going to bigger banks, so competitive pressures. But with everything going on macro-wise, I could see spreads moving higher due to risk premiums. So could you help me out with that?

William Burns: Yeah. I mean, the pipeline that we have has a rate of 7.25%. And the loans that we put on in the past quarter, I think, was about 7.40%. So it’s within that range of what loans are going on at. Spread versus max funding is $2.50 to $3.00 even sometimes. And I would agree with you that spreads should widen out based on economic conditions. But always a lot of competition out there, Matt. So I wouldn’t count on that. I know you feel, Frank.

Frank Sorrentino: Yeah. I think you would expect spreads to widen out based on everything that’s going on. But there are certain segments of the market where I would tell you spreads are becoming tighter than I would have expected. And then there are others where it’s obvious that some of the larger banks don’t want to play in a particular space, and so you get the wider spreads. So I don’t think you can look at it as an across-the-board indication of what’s going on in the market relative to whether it’s the news, the tariffs, or whatever. I think it’s dependent on what particular banks are focused on. You know, I can tell you, for instance, construction lending, anything CRA-related, multifamily, God forbid, you do an office loan. Those spreads are really, really wide. You start looking at C&I. I’m sure you’ve heard it in everybody’s call. Everybody’s focused on C&I. Certain parts of that portfolio, I think that we’re seeing spreads that are somewhat uncompetitive.

William Burns: And, Matt, if you’re asking that question because you’re also trying to figure out where margin is going, certainly, a steeper curve would help with the industry and ConnectOne Bancorp, Inc. in particular.

Matthew Breese: All of the above. Yeah. I appreciate that. And then in terms of close timing for the deal, and maybe just an update on closing time for the deal, and then where do we stand in terms of pools.

Frank Sorrentino: Well, we’ve indicated thus far that we believe that we will have the deal closed by the end of the second quarter, at some point in the second quarter. We still believe that to be true. And so for that to be true, that means regulatory approvals have got to be around the money somewhere.

Matthew Breese: Yeah. And then the last one is just, you know, with the deal, there was talk about a debt raise to help on the capital ratio front. Where do you stand on that front, and has anything changed in terms of desire for sub-debt or alternative forms of capital?

William Burns: No. We’re sticking with the sub-debt. And so that’ll take place most likely prior to closing.

Frank Sorrentino: Yeah. And it appears that the market’s been sort of friendly towards what we need to accomplish relative to that. Pricing has come down a bit, and there appears to be a tremendous appetite for that type of bank sub-debt today.

William Burns: I think a couple of months ago, the stock prices were 10 to 20% higher, and the sub-debt rate had a hundred basis points more expensive. So it’s much more beneficial to the sub-debt right now.

Matthew Breese: Understood. I appreciate taking all my questions. Thank you.

Frank Sorrentino: Yeah. Thanks, Matt.

Operator: I will now turn the call back to the management for closing remarks.

Frank Sorrentino: Okay. Well, thanks, everyone, again, for your time today. We look forward to speaking to you again during the second quarter earnings. So have a great day.

Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.