ConnectOne Bancorp, Inc. Q2 FY2025 earnings call

• Merger Completion: ConnectOne Bank officially launched on June 1, completing the merger with First of Long Island Bank, enhancing scale and positioning for growth, especially on Long Island.
• Client Retention: Strong client retention, with core deposit growth including existing and newly acquired relationships, and strong loan demand.
• Financials: Assets near $14 billion, loans $11.2 billion, deposits $11.3 billion, market capitalization over $1.2 billion. Organic client deposit growth was record, loan-to-deposit ratio improved to below 100%.
• Integration: Flawless brand transition, full systems conversion in two weeks, tripled call center capacity, excellent client and deposit retention.
• Purchase Accounting: Merger has a total loan mark of $250 million, provision for credit losses $35.7 million, merger charges $40 million with up to $10 million more expected, cost saves on track.

No specific product segment financial performance details provided in the transcript.

• Net interest margin expected to expand, approximately 10 basis points increase in third and fourth quarters, leading to ~3.25% by 2026.
• Projected return on assets 1.2%, return on tangible common equity 15% entering 2026.
• Loan growth projections in low to mid-single digits over next 6 months, driven by strong loan demand but affected by payoffs.

• Potential for deposit attrition, though focus on client retention mitigates this.
• Market stresses could impact classified and criticized loans.
• Uncertainty around number of Fed rate cuts and their impact on margin.

Q: Are there any other opportunities in the back half of the year to maybe reduce those even a little further?

A: I don't see any major change from where we are today. There are some stresses out there in the marketplace. I have classified that wouldn't be unexpected. With the write-downs in loans, there's opportunities for us to potentially unload some loans there. So we'll watch that number, but I wouldn't expect any change.

Q: How do you think through the dynamic between capital deployment and managing CRE concentration?

A: The numbers pan out very nicely to see CRE concentration. That's based on continued origination. That's part of it. And then because of the accretion of the deal, we're really -- and our relatively low dividend rate, really adding capital quickly. So I think I answered your question. We're going to see that go down on its own. Are you asking about stock repurchases and growth?

Q: What were the drivers of the securities portfolio increase this quarter? And any actions on legacy portfolio?

A: The securities portfolio increased because of the acquisition. So you see as of the balances on an average basis, it's less because it's only one month. But we did do some restructurings. We think we improved our interest sensitivity and earnings from those restructurings. So you'll see the benefits of those going forward.

Q: How should we be thinking about reserve levels trending from here?

A: I did try to mention that we were up slightly excluding the nonaccretable reserve. So that was the reason for the jump. To the extent -- I don't want to comment on how much of that reserve we'll use, but I think we set up a pretty conservative one. So to the extent we were conservative and we perform well, we'll have the ability to raise our reserves more going forward, core reserves.

Q: Do you know the cap rates that were used for the regulated housing in purchase accounting?

A: This is in our in our purchase accounting, okay? And when you look at purchase accounting, you have to look as a buyer of as we do, that's what purchase accounting means for buying those loans. So you use cap rates that a buyer would use -- so they probably ranged anywhere from 6.5% to 8.5% for the purchase accounting adjustment. If you get the loan appraised, you might see lower rates cap rates, but we use higher cap rates as a potential buyer of loans.

Q: How do you feel about DTA number going forward and its growth?

A: I think there's a lot of opportunity to continue the trend of growing DTA higher relative to the entire portfolio. And part of that is the mix of the loan portfolio as we continue to execute on C&I and other opportunities in the marketplace that come naturally with deposits and having what is a pretty substantial now presence on Long Island, that had a higher DTA balance to begin with, we think there's some real great opportunities there to enhance a lot of the relationships that were formed there over the years. So I would say, really look forward to continuing to build the book in a way that helped to keep the loan-to-deposit ratio low and the DTA balance is growing and a very well-diversified level.

Q: What are the yields on the loan pipeline and near-term growth projections?

A: The loan rate on our pipeline is 677, okay? That's a weighted average rate. In terms of the growth rate, want to tell you that we are originating a lot of loans. And so there's still a lot of demand out there. The reason for the lower than anticipated growth has been payoffs. So it's hard to say going forward, but I'd say we'd be in the single digit going forward for the next 6 months. It could be in the low single digits to be mid-single digits. Frank, do you agree with that?

A: Yes. Again, I'd like to characterize it as strong loan demand, whether -- how much that translates into actual balance sheet growth. Is still a little bit subject to some of the payoffs. By the way, a number of the payoffs we're seeing, we're happy to see. So overall, I think it gives us a better balance sheet going forward. I have to tell you, we seem to be very happy with both what's in the pipeline, what's coming off and what the balance sheet should look like at year-end, both from a composition standpoint, earnings yield, depository relationships, all the things that we've been working for. Whether we grow at 2%, 5%, 6%. I don't want to say it doesn't matter, but -- to the extent that we can get the balance sheet that we want and we can continue to focus on treating our clients in the way that they want to be treating and being the bank that they choose as their #1 institution that's where we see success coming from and that will translate into a profitable model.