ConnectOne Bancorp, Inc. Q4 FY2025 earnings call

• Successfully integrated the largest transaction in history, completing a full systems conversion within two weeks of closing, propelling the company to over $14 billion in assets and a market cap over $1.4 billion.
• Deposit gathering remains a core competitive advantage with client deposits up 5% annualized and brokered deposits reduced. Loan portfolio grew 5% annualized. Net interest margin widened due to factors like decline in cost of deposits, redemption of high coupon subordinated debt, and liability-sensitive position.
• Identified five branch locations to consolidate as part of branch rationalization efforts. Anticipate modest staffing growth to drive improved revenue and operating synergies.
• Focus on building strong capital, driving efficiency, and generating profitable growth to deliver higher returns on assets and equity.

Client deposits increased by approximately 5% annualized in 2025, with noninterest-bearing demand rising from 17% to over 21% and brokered deposits decreasing from 12% to 6% of total assets. Loan portfolio grew by 5% annualized. Net interest margin widened significantly. Operating PPNR percentage grew sequentially by nearly 10% for the fifth consecutive increase. Quarterly operating return on assets was 1.24% and return on tangible common equity was 14.3%.

• Net interest margin likely to be up by five basis points in Q1 2026, with five basis points improvement for every 25 basis points of Fed rate cut and five basis points per quarter from higher loan yields (starting midyear), partially offset by potential preferred redemption. End-of-year margin expected in low 330s to 340s range.
• OpEx guidance calls for a 4% increase by Q4 2026 from current quarter, with branch closures in Q1 and staff changes midyear.
• Loan portfolio growth anticipated in 3%-5% range due to higher than typical payoffs. Expect more than $4 million in loan sale gains in 2026.
• Tangible common equity ratio aiming for 9% to enable dividend increases, stock buybacks, and M&A opportunities.

• Competitive pressures, political developments, and broader market sentiment continue to shape and challenge the environment.

Q: Could you speak more broadly about the capital stack today and where you'd like it to optimally be?

A: We focus on tangible common equity, aiming to get the ratio back to 9% to open up potential for dividend increases, stock buybacks, and better M&A position.

Q: Do you view M&A likelihood as greater in 2026 than past? How do conversations go?

A: M&A depends on value and IRR vs. stock buybacks. We're financially disciplined and take a look at transactions, with more activity in market potentially moving some sellers into our sights but remaining disciplined.

Q: Is there a chance deposit growth exceeds loan growth this year?

A: It's a possibility, but more likely to be about equal.

Q: On margin guidance, clarification on five basis points from loan yields starting midyear?

A: Loan yields repricing is skewed to latter half of year, with contractual repricings potentially not matching market, so margin increase from loan yields is tempered.

Q: On M&A lower bound of deal and interesting markets?

A: Hard to set lower bound; evaluate opportunities on a one-off basis. Focus on New York Metro market, including areas like Southeast Florida, within 100-150 mile radius of NYC.