ConnectOne Bancorp, Inc. (NASDAQ:CNOB) Q4 2024 Earnings Call Transcript

ConnectOne Bancorp, Inc. (NASDAQ:CNOB) Q4 2024 Earnings Call Transcript January 30, 2025

Operator: Hello and thank you for standing by. My name is Bella and I will be your conference operator today. At this time, I would like to welcome everyone to ConnectOne Bancorp, Inc. Fourth Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference 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’s results for the fourth quarter of 2024 and to update you on recent developments. On today’s conference call will be Frank Sorrentino, Chairman and Chief Executive Officer; and Bill Burns, Senior Executive Vice President and Chief Financial Officer. I’d also like to caution you that we may make forward-looking statements during today’s conference call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations 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 accessed 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 we appreciate everyone joining us this morning. Last year, when we entered 2024, we fully recognized the challenges that lay ahead for the industry and for ConnectOne. Despite that challenging environment, the team here at ConnectOne persevered by reinforcing our focus on relationship banking, which strengthened our capital, loan mix and our core deposits. Now we are well positioned to dramatically improve our financial performance, which is accelerating as we look ahead to 2025. Our efforts also paved the way for our upcoming merger with First National Bank of Long Island. The strategic rationale of this financially attractive transaction remains compelling and has been reinforced in our view, by increased economic optimism and a potential for more supportive regulatory environment.

The merger is progressing on schedule and we’re optimistic closing will occur in the second quarter of 2025. The combined company will operate under the ConnectOne Bank brand on day one with the systems conversion following soon after the legal close. We have teamed up with First of Long Island, proactively getting in front of its clients, anticipating and addressing their preferences and reinforcing a seamless transition. We’re also actively engaging with First of Long Island’s team to share ConnectOne’s client-first culture, which centers on our relationship banking business model and a sense of urgency in everything we do. Regarding the merger efficiencies, we’re already working these into the institutions on a standalone basis, which gives us a strong head start in realizing financial projections.

From a systems perspective, an efficient and successful core conversion has been planned. These costs have already been negotiated at very attractive terms and on a timetable that’s ready to be quickly implemented. Looking at growth, we continue to see significant revenue synergies. This includes leveraging the Long Island footprint to extend client relationships and enhance our residential SBA and C&I lending. And we’ll size up to nearly $15 billion in assets and a market capitalization of over $1.2 billion, placing ConnectOne in a larger, higher valuation peer group. We’ll also be able to leverage the benefits of economic and market tailwinds, which have already accelerated due to our liability-sensitive positioning. In short, I’m very excited about the opportunities the transaction offers.

We look forward to serving the First of Long Island’s clients and leveraging the expertise of its team to extend our reach across New York City, Long Island and Florida. Turning now to ConnectOne ‘s standalone fourth quarter performance, our financial results were strong, highlighted by 21% quarter-over-quarter and a 6% year-over-year increase in quarterly net income available to common shareholders, reflecting the wider net interest margin that we’ve been anticipating. We also realized solid growth in both loans and core deposits. ConnectOne’s ability to attract deposits is an important strength. One, we have nurtured by focusing on our unique client approach while adding talent that fits the ConnectOne team. Fourth quarter deposit activity accelerated with core deposits increasing more than 3% on a quarter-over-quarter basis, reflecting notable success in noninterest-bearing demand balances.

Turning to lending. ConnectOne delivered quarter-over-quarter loan portfolio growth of 2%, a quarterly growth rate that we expect will continue. While remaining disciplined in our approach, we took advantage of strong market demand and we entered 2025 with solid momentum and a robust loan pipeline. Credit trends and key metrics remain sound and stable with all signs indicating this will continue into 2025. Next, the bank’s net interest margin improved by nearly 20 basis points during the quarter. Bill, of course, will go into further detail on that, but we benefited significantly from a more than 25 basis point improvement in our cost of deposits. Heading into 2025, we continue to anticipate further margin expansion and that is with or without any additional Fed rate cuts.

Our performance metrics were much improved this quarter. We firmly believe that our unique operating philosophy focused on our culture of client obsession, forging a better place to be, while expanding with a 3x vision, together with our strong balance sheet, industry tailwinds and our pending merger supports our long-term focus on driving shareholder value. And with that, I’m going to turn it over to Bill.

William Burns: All right. Thank you, Frank. Good morning to everyone on the call. I think as you saw in our earnings release issued this morning, our financial performance turned the corner in a meaningful way. Earnings were up 21% sequentially. Client deposit growth, including noninterest-bearing demand accelerated. Annualized loan growth increased 8%, driven by business loan demand. Our loan-to-deposit ratio declined from 108 to 106. Efficiency and return metrics all improved. Credit quality remained sound and the merger is moving ahead on schedule. Now those improved results are largely due to a significant sequential increase in net interest income, reflecting a 19 basis point widening in our net interest margin. And most of that margin increase was due to a steep decline in our average cost of deposits, while about 5 of those basis of the 19 and widening was due to elevated prepayment fees and the payoff and recapture of interest on a couple of nonaccrual loans.

I also want to point out that the loan portfolio growth of 2% from September 30th occurred near year-end and therefore average loans for the quarter were about flat. So heading into the first quarter of ’25, we’ve got a couple of things positively impacting projected net interest income. First, we project average loans to be about 2% higher in the first quarter versus the fourth quarter. And second, the margin is still expanding. Our reported margin for the quarter was 2.86%. The core margin, I put at about 2.81%. And looking forward, based on stronger spot rates today, we’re projecting an improvement to approximately 2.90% in the first quarter. Beyond quarter one, on a standalone basis pre-merger, we still see our margin widening albeit at a slower pace due to the current hawkish view on short-term rates.

We continue to have CD repricing. There’s $2 billion set to reprice over the next year. That will be at a 50 to 75 basis point improvement. And we have an adjustable rate loan portfolio that will continue to reprice upward over the next couple of years. I also want to point out that our margin widening is strictly organic. We have not utilized loss trades or restructuring transactions that would negatively impact tangible book value per share. I’m going to now turn to expenses. As disclosed in the release, we had roughly $1.4 million in after-tax nonoperating adjustments that included merger expenses and a $500,000 charge on the sale of a previously closed branch location. But excluding the nonoperating items, expenses actually declined sequentially.

That reflected some accrual adjustments as well as the very early stages of expense savings from the pending First of Long Island merger. Heading into the first quarter, I’m currently projecting a 2% to 3% sequential increase in OpEx as typical as we head into a new year. And on a standalone basis, expense growth would taper off a bit throughout the remainder of ’25. Now to credit quality, I want to expand on Frank’s earlier comments. Charge-offs remain at a very reasonable level and we don’t anticipate any significant increase. Nonaccruals were up slightly this quarter, but appear to be trending down next quarter. Delinquent loans were just four basis points with zero past due more than 60 days. I believe that’s as good as it’s ever been. And our criticized and classified loans did increase from 2.2% to 2.7% as a percentage of the portfolio.

That’s well within our historical range and our credit outlook remains sound. The provision for credit losses of $3.5 million for the quarter largely reflected loan growth and specific reserves and charge-offs. With regard to the effective tax rate, you may have noticed a decrease this quarter that reflected some year-end adjustments and true-ups, but I would expect the effective rate to return to the 26% to 27% level in the first quarter. I’d like to now give you at least some color on the projected impact of the merger on our financials. Although the closing date of the merger with First of Long Island is not set, our expectations are for it to occur during the second quarter. After closing the transaction will enhance our net interest margin by about another 10 basis points.

That reflects both First of Long Island standalone margin and purchase accounting. So our spot NIM projection at closing should be about 3.10%. As we head into 2026, with all cost saves fully implemented, our margin projection increased to 3.20%, while operating ROA is projected to reach 1.15 and return on tangible common equity expected to be in the 12% to 13% range. I’ll also give you a quick update on the loan mark. Risk free rates have increased since announcement, but the yield curve is no longer inverted, so-called liquidity premium has declined and led to a total discount rate that’s just slightly above where it was in September. So the loan mark is just slightly larger, increasing to about $250 million from $235 million when we announced the deal.

Our goal has always been to hit the ground running with this merger. Ahead of the actual closing, we are already making headway with regard to client engagement, staff integration, efficiency and revenue enhancement. And before I turn it back to Frank, I want to reiterate that we remain an especially compelling investment. In my view, it’s one of the best out there. Our net interest margin, earnings and all performance metrics are accelerating. Credit quality remained sound. This value enhancing transaction with First of Long Island will bolster our performance metric and increase our franchise value as a premier New York Metro Community Bank. And with all of that, where we trade today, in our view, we’re clearly at a discount to peer group averages.

And with that, Frank, back to you.

Frank Sorrentino: Thanks, Bill. To summarize, we ended the year with meaningful earnings momentum, strong capital ratios, a solid balance sheet and a positive outlook for 2025. We’re well positioned to expand our geographic footprint, strengthen client relationships and capitalize on the organic growth in our core markets. Additionally, we look forward to completing the First of Long Island merger, which will further support our efforts to drive sustainable value enhancing growth. Maximizing shareholder value is a top commitment of our team, our Board and by me personally as one of the largest shareholders. With that, I’d like to turn it over for some questions. Operator?

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Matthew Breese with Stephens Inc. Please go ahead. Your line is now open.

Matthew Breese: Hey, good morning.

Frank Sorrentino: Hi, Matt.

William Burns: Hi, Matt.

Matthew Breese: Frank and Bill, I wanted to start with loan growth. Results were a bit better than expected for the quarter and your commentary suggests it will continue. So I guess curious what the pipeline looks like you’re seeing in terms of spreads? And I guess bigger picture, what’s changed on this front? The last couple of quarters, there’s been some hesitancy, some cautiousness here. It feels like this is turned from the better. What are you seeing from a boots on the ground perspective?

Frank Sorrentino: Matt, I’ll let Bill comment on some of the spread and actual numbers and the nuts and bolts to the pipeline. But I can tell you that the pipeline has continued to strengthen throughout the year. Our loan pipeline was actually pretty strong going through all of 2024. But there was an emphasis here, there was a couple of things at work. There was an emphasis here on deemphasizing nonrelationship business. And so at the same time, we were bringing new loans on, we were also pushing some off, where folks that had made promises to keep deposits with us and didn’t. We sort of called through the portfolio and ’24 was a year of doing that. As we got closer to the end of the year, there’s less and less of that to do, right.

So the actual increase from the loan pipeline starts to add up. I do think there was some level of hesitancy on a number of our clients in the beginning part of ’24 just through some of the uncertainty that was going on in the economy. And as we got closer to the end of the year, more things sort of got closer to completion and there was a hell of a lot more confidence as we started to move through the fourth quarter. So the combination of all those things, I think, actually positioned us well to have a fairly strong fourth quarter and we see that continuing as we move through 2025.

William Burns: And, Matt, this is Bill. In terms of spreads, first off, we always remain disciplined when we price loans and make sure we get the appropriate return spread on all the transactional loans that we do. So just to give you some numbers for the fourth quarter, we book loans at 7.45. They came off at like 6.80, 6.90. So there’s a little bit of spread improvement there. And our pipeline right now has a weighted average rate of 7.62.

Matthew Breese: Great. Okay. And then, Frank, one of the other positives this quarter was just deposit growth as a whole, but really within that noninterest-bearing deposit growth. And hoping for some color as to what kind of drove that and expectations for both deposit growth and composition into 2025?

Frank Sorrentino: Yes. I think a lot of it was, again, just focused on bringing in high quality relationship business going back to our existing clients and making sure that folks are doing what they promised to do. I think some of our deposit initiatives around the organization have been working quite well. People are finding ConnectOne to be a great bank to do business with. And so that we’ve been able to cajole people to bring more deposits here. And as we’ve said in previous, on previous calls, there’s been a lot of disruption in the marketplace. And so there are a lot of people out there looking for a new home. And we’ve succeeded in a lot of those places. And so we’re quite happy with the result and we see it continuing as we move through 2025.

William Burns: Just, Matt, let me add to — let me add to that, Matt. I’m definitely seeing we track this every single day. And the core interest-bearing demand is heading upwards and it may be even accelerating. We did have some seasonal things, I would call it, that increased the growth rate even more. I don’t think we’re going to have a 50% annualized growth rate in noninterest-bearing demand, but the trends are that it is heading up nicely.

Matthew Breese: Great. And then last one for me. We’re still kind of thinking about a capital raise in the first quarter I’m assuming and curious if that will include the upcoming kind of repricing of sub debt for later this year and if you’re still kind of considering sub debt versus some other form?

William Burns: Yes. No, we still have sub debt as part of our plans, $100 million as part of the transaction. And then we do have $75 million repricing. So I expect we probably do $175 million to $200 million to take care of all of that.

Matthew Breese: I’ll leave it there. Thanks for taking my questions.

William Burns: Thank you, Matt.

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

Daniel Tamayo: Yes, thank you. Good morning, guys.

Frank Sorrentino: Hi, Danny.

Daniel Tamayo: Maybe just a follow-up on the loan growth question. So clearly a really nice quarter from the perspective of loan growth. Just curious how the CRE concentration factors into that growth going forward seeing as that was kind of a big driver of the growth in the fourth quarter. Yes, that’s basically the question on the loan growth side.

William Burns: Yes. Sure, Dan. It shows up on the SEC codes as CRE concentration, but a lot of that was owner occupied as well as construction. So we’re happy with the mix of growth. And I would still say that our CRE concentration will be trending downward.

Daniel Tamayo: Okay. All right. I’m glad to hear it. And then I guess you guys have — you had a great quarter from a revenue perspective. The credit, you sounded relatively bullish given the increase in classified and NPLs. I appreciate your comments that NPLs sounded like they were trending down in the first quarter. I guess my question is, just curious how you feel about the sensitivity of your credit of the book overall to rates from here if we do have declines or even increases, just how you view the overall sensitivity from a credit perspective?

William Burns: Well, Dan, we obviously watch that very closely. The repricing of loans as each quarter goes by, there is more and more of a track record, right, that’s being built. We have a portfolio of some $875 million of loans have repriced recently at higher rates. And the credit quality of that portfolio, although under a little bit of stress, has been remarkably sound. And so we’re going to continue to watch that. But so far indications are that any increases in nonperforming loans or charge-offs can be handled through earnings as we’ve been doing the past few quarters.

Daniel Tamayo: Okay. And what would you say is, do you have a sense for what’s driving the decline in NPLs like what you had this run up probably due to higher rates? I mean is it — what do you think?

William Burns: The portfolio of nonaccrual loans is like there’s lots of ins and outs all the time. And I expect will be — we’ve written loans, a group of loans down to a certain level that we can pretty much unload it, but we’re just working on negotiating pricing on that. And so that would be the driver of reducing our nonaccruals.

Daniel Tamayo: Okay. All right. That’s helpful. All right. Thanks for taking my questions.

William Burns: Thanks, Danny.

Operator: Your next question comes from the line of Tim Switzer with KBW. Please go ahead.

Timothy Switzer: Hey, good morning. Thank you for taking my question.

Frank Sorrentino: Hi. Good morning, Tim.

William Burns: Good morning, Tim.

Timothy Switzer: Great to hear you guys are confident in the merger closing in Q2. For modeling purposes, do you guys have any idea on if we should be doing this like middle of the quarter, back end of the quarter or anything like that?

Frank Sorrentino: Hard to tell at this time. I would say it should be somewhere in the second quarter. But at this moment, I think it would be very difficult to hem in whether it’s in the beginning or the end.

Timothy Switzer: Yes, totally understand. And we appreciate the 2026 outlook you’ve provided. Are you able to discuss some of the expense assumptions you have behind that? You’re expecting to get all the cost saves, but any guidelines in like an efficiency ratio or core expense run rate would be helpful?

William Burns: I’m not ready to give that out at this moment, Tim, because I need to know the closing date as well as we’ll need some time to fully implement those. But I’m confident that we’re going to hit our numbers, whether it’s through expense growth of the two separate entities versus the street targets and the cost saves coming from the transactions, which will occur over time. So I’m bullish. I feel good about what I see out there in terms of street estimates for expenses that we can beat those.

Timothy Switzer: Great. Okay. And the last question I have is, and sorry if I missed this, but what are the rate assumptions behind the NIM outlook you gave with the 3.10 spot and then 3.20 in 2026? And how could less or more rate cuts impact that?

William Burns: So I just have to try to give you some guidance. There’s always moving parts, right, that impact this. Fees and other things that I’ll call nonrecurring as well as the shape of the yield curve. But I’m generally expecting about a 5 basis point increase in the margin without any rate cuts, approximately 10 basis points from the merger and then maybe another 5 from any rate cuts should they materialize over the years. So you can add that up any way you want. And that gets us to about 3.20 or so at the start of ’26.

Timothy Switzer: Okay. And that’s so it sounds like that’s assuming no rate cuts then?

William Burns: Right, right. Maybe one.

Timothy Switzer: Got it. Okay. Thank you. That’s very helpful.

William Burns: Okay. Thank you.

Operator: That concludes our Q&A session. I will now turn the conference back over to the management for closing remarks.

Frank Sorrentino: Well, thanks again for your time today. We look forward to speaking with you again during our first quarter earnings call in April. And with that have a great day.

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