ConnectOne Bancorp - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 showed clear inflection: diluted EPS rose to $0.49 (operating $0.52), up 20.5% sequentially and 6.2% year over year, driven by a 19 bps net interest margin expansion to 2.86% and core deposit growth of 3.2% QoQ.
• Management guided to further NIM expansion to “more than 2.90%” in Q1 2025, with CFO projecting ~2.90% on a core basis (~2.90% reported), supported by lower funding costs and deployment of excess liquidity.
• Balance sheet momentum improved: loans grew 2% QoQ and noninterest-bearing demand balances rose 3.6% sequentially; loan-to-deposit ratio fell from 108% to 106%, improving funding flexibility.
• The First of Long Island (FLIC) merger remains on track for Q2 2025; management expects ~+10 bps to spot NIM at close and 2026 targets of ~3.20% NIM, ~1.15% ROA, and 12–13% ROTCE, reinforcing the medium-term re-rating case.
• Board declared a $0.18 common dividend payable Mar 3, 2025; tone was confident with accelerating operating momentum into 2025 and a potentially more supportive regulatory backdrop.

What Went Well and What Went Wrong

What Went Well

• Margin expansion and funding mix: NIM widened 19 bps QoQ to 2.86% on a 27 bps decline in average deposit costs; management sees Q1 2025 NIM >2.90% as CDs reprice lower and excess cash is deployed.
• Core funding and loan growth: Core deposits grew 3.2% QoQ, with average noninterest-bearing demand up 3.6% sequentially; period-end loans grew 2% QoQ on improving client confidence and a disciplined focus on relationship business.
• Merger synergy setup: FLIC integration progressing; CFO expects ~+10 bps NIM at close and 2026 metrics of ~3.20% NIM, ~1.15% ROA, 12–13% ROTCE as cost saves phase in; preliminary expense actions are already underway.

Selected quotes:

• “I’m extremely pleased…significant margin expansion and growth in both loans and core deposits.” – CEO Frank Sorrentino.
• “Our reported margin for the quarter was 2.86%…projecting an improvement to approximately 2.90% in the first quarter.” – CFO Bill Burns.

What Went Wrong

• Noninterest income softened: down to $3.7M from $4.7M QoQ, driven by lower equity securities gains and reduced BOLI death benefits, partially offset by higher gain-on-sale of loans.
• Classified credit uptick: criticized/classified loans rose to 2.66% of loans (from 2.23% in Q3); nonaccruals increased to 0.69% of loans, though management expects NPLs to trend down as certain assets are sold.
• Expense noise: GAAP opex included $0.9M merger and $0.5M branch closing costs; CFO guided to a seasonal 2–3% sequential opex increase in Q1 before tapering later in 2025.

Transcript

Operator (participant)

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. Q4 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. If you would like to ask a question during this time, simply press Star, then the number one on your telephone keypad. To withdraw your question, press Star one again. I would now like to turn the conference over to Siya Vansia, Chief Brand and Innovation Officer. Please go ahead.

Siya Vansia (Chief Brand and Innovation Officer)

Good morning, and welcome to today's conference call to review ConnectOne's results for the Q4 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 (Chairman and CEO)

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're 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 The 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 a more supportive regulatory environment. The merger is progressing on schedule, and we're optimistic closing will occur in the Q2 of 2025.

The combined company will operate under the ConnectOne Bank brand on day one, with a systems conversion following soon after the legal close. We've 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. 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 Q4 performance, our financial results were strong, highlighted by a 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've 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. Q4 deposit activity accelerated, with core deposits increasing more than 3% on a quarter-over-quarter basis, reflecting notable success in non-interest-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, and 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.

Bill Burns (Senior EVP and CFO)

All right. Thank you, Frank. Good morning to everyone on the call. I think, as you saw in the earnings release issued this morning, our financial performance turned the corner in a meaningful way. Earnings were up 21% sequentially. Client deposit growth, including non-interest-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 points of the 19% widening was due to elevated prepayment fees and the payoff and recapture of interest on a couple of non-accrual 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 Q1 of 2025, 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 Q1 versus the Q4. And second, the margin is still expanding. Our reported margin for the quarter was 286. The core margin I put out about 281.

And looking forward, based on stronger spot rates today, we're projecting an improvement to approximately 2.90% in the Q1. 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. You know, we continue to have CD repricing. There's $2 billion set to reprice over the next year. That'll 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 non-operating adjustments.

That included merger expenses and a $500,000 charge on the sale of a previously closed branch location. But excluding the non-operating 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 Q1, I'm currently projecting a 2%-3% sequential increase in OpEx. That's typical as we head into a new year. And on a standalone base, expense growth would taper off a bit throughout the remainder of 2025. 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. Non-accruals were up slightly this quarter but appear to be trending down next quarter. Delinquent loans were just 4 basis points, with 0 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%-2.7% 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%-27% level in the Q1. 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 Q2.

After closing, the transaction will enhance our net interest margin by about another 10 basis points. That reflects both First of Long Island's standalone margin and purchase accounting. So our spot NIM projection at closing should be about 310. As we head into 2026, with all cost saves fully implemented, our margin projection increased to 320, while operating ROA is projected to reach 1.15, and return on tangible common equity expected to be in the 12%-13% range. I'll also give you a quick update on the loan mark. You know, risk-free rates have increased since announcement, but the yield curve is no longer inverted. So-called liquidity premium has declined, and that 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 remains 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 (Chairman and CEO)

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 larger shareholders. With that, I'd like to turn it over for some questions. Operator?

Operator (participant)

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. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Matthew Breese with Stephens Inc. Please go ahead. Your line is now open.

Matthew Breese (Managing Director & Research Analyst of Northeast Mid-Atlantic Regional Banks)

Hey, good morning.

Frank Sorrentino (Chairman and CEO)

Hi, Matt.

Bill Burns (Senior EVP and CFO)

Hello, Matt.

Matthew Breese (Managing Director & Research Analyst of Northeast Mid-Atlantic Regional Banks)

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, you know, curious what the pipeline looks like, what you're seeing in terms of spreads, and I guess, bigger picture, you know, what's changed on this front? The last couple of quarters, there's been some hesitancy, some cautiousness here. It feels like this has turned for the better. What are you seeing from a boots-on-the-ground perspective?

Frank Sorrentino (Chairman and CEO)

Matt, I'll let Bill comment on some of the spread and actual numbers and, you know, 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 on there were a couple of things that worked. There was an emphasis here on de-emphasizing non-relationship 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, you know, we sort of culled through the portfolio, and 2024 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?

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 2024, 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 Q4. So the combination of all those things, I think, actually positioned us well to have a fairly strong Q4, and we see that continuing as we move through 2025.

Bill Burns (Senior EVP and CFO)

And Matt, this is Bill. In terms of spreads, you know, first off, we always remain disciplined when we price loans and make sure we get the appropriate return and spread on all the transactional loans that we do. To just give you some numbers for the Q4, we booked loans at 745. They came off at like 680, 690. So there's a little bit of spread improvement there. And our pipeline right now has a weighted average rate of 762.

Matthew Breese (Managing Director & Research Analyst of Northeast Mid-Atlantic Regional Banks)

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

Frank Sorrentino (Chairman and CEO)

Yeah. 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, you know, 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, you know, 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.

Bill Burns (Senior EVP and CFO)

Just, Matt, let me add to that, Matt. You know, I am definitely seeing. We track this every single day, and the core non-interest-bearing demand is heading upwards and maybe even accelerating. We did have some, you know, seasonal things, I would call it, that increased the growth rate even more. I don't think we're going to have a 50%, you know, annualized growth rate in non-interest-bearing demand, but the trends are that it is heading up nicely. Great, and then last one for me. You know, we're still kind of thinking about a capital raise in the Q1, I'm assuming, and curious if that will include the upcoming kind of repricing of sub-debt for later this year, and if we're still kind of considering sub-debt versus some other form.

Yeah. No, we still have sub-debt as part of our plans, you know, $100 million as part of the transaction. And then we do have $75 million, you know, repricing. So I expect we probably do $175-$200 million, you know, to take care of all of it.

Matthew Breese (Managing Director & Research Analyst of Northeast Mid-Atlantic Regional Banks)

I'll leave it there. Thank you for taking my questions.

Frank Sorrentino (Chairman and CEO)

Yep. Thank you, Matt.

Operator (participant)

Again, if you would like to ask a question, press star one on your telephone keypad. Your next question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.

Daniel Tamayo (VP of Banks Industry)

Yeah. Thank you. Good morning, guys.

Matthew Breese (Managing Director & Research Analyst of Northeast Mid-Atlantic Regional Banks)

Good morning, Matt.

Daniel Tamayo (VP of Banks Industry)

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 the big driver of the growth in the Q4. Yeah, that's basically the question on the loan growth side.

Bill Burns (Senior EVP and CFO)

Yeah. Sure, Dan. It shows up, you know, on the SIC codes, SEC codes, CRE, and 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 (VP of Banks Industry)

Okay. All right. I'm glad to hear it. And then I guess, you know, you guys have had a great quarter from a revenue perspective. The credit, you sounded relatively bullish given the increase in classifieds and NPLs. And I appreciate your comments that NPLs sounded like they were trending down in the Q1. I guess my question is just curious how you feel about the sensitivity of your credit, you know, of the book overall to rates from here. You know, if we do have, you know, declines or even increases, just, you know, how you view the overall sensitivity from a credit perspective?

Bill Burns (Senior EVP and CFO)

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

Daniel Tamayo (VP of Banks Industry)

Okay, and what would you say is do you have a sense for what's driving the decline in MPLs? Like, what you had this run-up probably due to higher rates. I mean, is it? What do you think?

Bill Burns (Senior EVP and CFO)

You know, we're, you know, the portfolio of non-performing non-accrual loans is like there's lots of ins and outs all the time. And I expect we've written down a group of loans to a certain level that we can pretty much unload it, but we're just working on, you know, negotiating pricing on that. And so that would be the driver of reducing our non-accruals.

Daniel Tamayo (VP of Banks Industry)

Okay. All right. That's helpful. All right. Thanks for taking my questions.

Bill Burns (Senior EVP and CFO)

Thanks, Danny.

Operator (participant)

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

Tim Switzer (VP of Equity Research)

Hey, good morning. Thank you for taking my question.

Bill Burns (Senior EVP and CFO)

Hi.

Frank Sorrentino (Chairman and CEO)

Hi, Tim.

Tim Switzer (VP of Equity Research)

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 or back into the quarter or anything like that?

Bill Burns (Senior EVP and CFO)

Hard to tell at this time. I would say it should be somewhere in the Q2, but at this moment, I think it would be very difficult to pin down whether it's in the beginning or the end.

Tim Switzer (VP of Equity Research)

Yeah. 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 know, I know you're expecting to get all the cost saves, but, you know, any guidelines on like an efficiency ratio or core expense run rate would be helpful.

Bill Burns (Senior EVP and CFO)

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, you know, whether it's through expense growth at 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.

Tim Switzer (VP of Equity Research)

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 310 spot NIM in 320 in 2026? And how could, you know, less or more rate cuts impact that?

Bill Burns (Senior EVP and CFO)

Oh, so I just have to try to give you some guidance. You know, there's always moving parts, right, that impact this, you know, fees and other things that I'll call non-recurring as well as, you know, the shape of the yield curve. But I'm generally expecting about a five basis point increase in the margin without any rate cuts, approximately 10 basis points from the merger, and then maybe another five from any rate cuts should they materialize over the year. So, you know, you can add that up any way you want. And that gets us to about 320 or so at the start of 2026.

Tim Switzer (VP of Equity Research)

Okay. And that's so it sounds like that's assuming no rate cuts then?

Bill Burns (Senior EVP and CFO)

Right. Right. Maybe one.

Tim Switzer (VP of Equity Research)

Got it. Okay. Thank you. That's helpful.

Bill Burns (Senior EVP and CFO)

Okay. Thank you. Yep.

Operator (participant)

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

Frank Sorrentino (Chairman and CEO)

Thanks again for your time today. We look forward to speaking with you again during our Q1 earnings call in April. With that, have a great day.

Operator (participant)

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