ConnectOne Bancorp, Inc. Q2 FY2024 earnings call

• Commitment to relationship banking, strengthening client base, entering new markets, and exiting non-relationship business. - Continued deposit growth from existing and new clients across markets. - Lending origination at over $1 billion annualized run rate, with loan portfolio decreasing due to pay-downs/payoffs to manage non-relationship loans. - Net interest margin widened by eight basis points, expecting continued expansion. - Momentum in noninterest income, including SBA platform and BoeFly, with potential fee income opportunities from lending platform. - Capital and tangible book value per share increased, dividend declared with payout ratio below 40%. - Balance sheet focus on relationship-based business, improving loan-to-deposit ratio and CRE concentration ratio. - Asset quality remains healthy with nonaccrual loans declining, criticized/classified loans and delinquencies low.

No distinct product segments were specifically detailed. However, key performance areas included: reported deposits had client deposits increase while brokered deposits decreased; quarterly lending origination levels were at an annualized run rate over $1 billion with C&I accounting for nearly half; net interest margin widened by eight basis points sequentially; noninterest income saw improvements in areas like BoeFly and SBA platform; capital and tangible book value per share increased, and a quarterly cash dividend of $0.18 per share was declared.

• Projected net interest margin to widen a few basis points per quarter without Fed rate cuts, and another five basis points improvement for each Fed rate cut (first expected in September). By end of 2025, margin could surpass 3% or be in high 2.60s on core basis, with pretax pre-provision return on assets near/above 1.5% and returns on tangible common equity in double-digits. - Loan portfolio expected to grow slowly in 1%-2% range in 2024, with loan paydowns normalizing from elevated second quarter levels. - Expect continued noninterest income growth as investing in areas like SBA and BoeFly continues, and operating efficiency to be maintained.

• Factors in SEC filings that may cause actual results to differ materially from expectations. - Select credits could come under stress from time to time, though team is managing portfolio well. - Uncertainty around competition and impact of not getting expected rate cuts or revenue improvements.

Q: Have you selectively lowered deposit rates in certain categories/markets and what's the customer response?

A: It's a work in progress, being careful to manage client expectations and maintain strong client base. When rates are cut, there'll be greater opportunity to lower rates.

Q: On the expense side, are there levers to pull if rate cuts or revenue don't improve as expected, and investments if earnings improve?

A: There are investments that lead to expense growth, and flexibility in staff and incentive compensation accruals. Expenses can be adjusted based on revenue growth, with revenue growth influencing expense amounts.

Q: Guardrails on deposit growth in the back half of the year and expectation on deposit costs?

A: Deposit growth trend is good, outpacing market in recent quarters. Deposit costs are slowing but not certain if they will increase; overall confident asset yield will improve faster than total funding cost.

Q: Loan growth and CRE concentration goals?

A: Loan portfolio expected to grow slowly in 1%-2% range, with declining CRE concentration seen as healthy for the bank, aligning with C&I lending and desired client relationships.

Q: NIM guidance and balance sheet mix outlook?

A: Long-term trend to reduce wholesale funding, but conservative due to competition; looking to maintain client relationships. - Q: Thoughts on capital levels and buybacks?

A: Tangible common equity is key capital ratio, comfortable with current position; 9.5% TCE ratio not expected to drop soon but could change with opportunities/acquisitions. - Q: What drove classified loans increase?

A: 150 classified loans is historically low, normalization happening, still at a very low level. - Q: NIM details on floating vs fixed rate loans, CRE loan yields, CD repricing, fee income sustainability, subdebt call date plans?

A: Pure floating rate loans at 20% of balance sheet with 9% yield; CRE loan yields 7%-8%, rolling off in low 5s/4s; starting to be more aggressive on CD repricing, careful not to lose deposits; fee income driven by gain on sale of non-relationship loan and SBA/BoeFly growth; plans for subdebt call date under review.