ConnectOne Bancorp, Inc. Q4 FY2024 earnings call

• Reinforced focus on relationship banking in 2024, strengthening capital, loan mix, and core deposits.
• Merger with First National Bank of Long Island is progressing on schedule, expected to close in Q2 2025, with the combined company operating under ConnectOne Bank brand, leveraging Long Island footprint for growth in lending and client relationships.
• Standalone fourth quarter results showed strong net income, loan and core deposit growth, and improved net interest margin.
• Actively engaging with First of Long Island's team to share client-first culture and working on merger efficiencies already on a standalone basis.

ConnectOne's standalone fourth quarter performance was strong. Quarterly net income available to common shareholders increased 21% quarter-over-quarter and 6% year-over-year. Loans had a quarter-over-quarter growth of 2%, and core deposits increased more than 3% quarter-over-quarter. The net interest margin improved by nearly 20 basis points. Revenue synergies from the potential merger with First National Bank of Long Island were also highlighted, with the combined company expected to size up to nearly $15 billion in assets and over $1.2 billion in market capitalization.

• Merger with First National Bank of Long Island expected to close in Q2 2025. Combined company to be ~$15 billion in assets with over $1.2 billion market cap.
• Projected net interest margin to improve to ~2.90% in Q1 2025. Standalone margin expected to widen but at a slower pace due to short-term rate outlook. $2 billion in CDs set to reprice over next year with 50-75 basis point improvement. Adjustable rate loan portfolio to reprice upward.
• Expenses excluding nonoperating items declined sequentially, with expense growth expected to taper off in 2025 post-merger.

Q: Hello, good morning. 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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.

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: Hey, good morning. Thank you for taking my question. 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

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

A: Right, right. Maybe one.