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 demonstrated success of integration efforts, with momentum in new client onboarding and new business opportunities.
• Deposit and loan trends: Solid core deposit growth, including gains in DTA balances; loan-to-deposit ratio improved to below 100%; merger had a total loan mark of $250 million.
• Expense management: Anticipate modest expense growth while remaining well-positioned for growth; recognized $40 million in aggregate merger charges with up to $10 million more expected, on track for cost saves.
• Team and transition: Welcomed new team members, had flawless brand transition and successful systems conversion, tripled call center capacity to ensure client experience.

ConnectOne Bancorp's assets stand at nearly $14 billion, with $11.2 billion in loans and $11.3 billion in deposits. The company organically grew client deposits by a record amount, improving the loan-to-deposit ratio to 99% at the end of the second quarter, down from 106% in Q1. Noninterest-bearing demand deposits now exceed 21% of total deposits, up from 18% at year-end. On a combined company basis, noninterest-bearing demand deposits increased by over $100 million since March 31, and total deposits were up annualized 8%, with true core balances increasing by over $500 million or 17% annualized after factoring out a $200 million decline in brokered deposits.

• Earnings accretion: Projected to be approximately $9.8 million per quarter in 2025, declining to $9.2 million in 2026 and $7.9 million in 2027.
• Expenses: 2025 quarterly expenses projected in the $55 million range, with 2026 quarterly run rate likely $56 million to $57 million.
• Net interest margin: Expect continued expansion, with approximate increase of 10 basis points for third and fourth quarters, resulting in ~3.25% margin by 2026 assuming one rate cut in 2025.
• Loan growth: Strong loan demand, though organic loan portfolio growth has been flat due to payoffs, with pipeline including C&I, construction, SBA, and residential lending growth.

• Market stresses: Potential for classified and criticized loans due to marketplace stresses; pending rule change on day 1 provisioning could impact earnings if effective.
• CRE concentration: CRE concentration ratio ticked up, but expected to decline by end of 2025 with continued origination and accretion.

Q: Are there opportunities to reduce classified and criticized loans in the back half of the year?

A: No major change expected, but watch for potential loan write-downs and unloading.

Q: How does capital deployment relate to managing CRE concentration?

A: CRE concentration will decrease on its own due to accretion and low dividend rate adding capital quickly.

Q: Target level for share repurchases?

A: Open to share repurchases, depends on capital ratios and loan portfolio growth.

Q: Drivers of securities portfolio pickup?

A: Increase due to acquisition, with restructurings improving interest sensitivity and earnings.

Q: Reserve levels trending?

A: Reserve jump due to nonaccretable reserve, set conservatively with ability to adjust based on performance.

Q: Cap rates for regulated housing in purchase accounting?

A: Ranged from 6.5% to 8.5%.

Q: DTA balance growth outlook?

A: Opportunity to continue growing DTA higher with loan portfolio execution on Long Island.

Q: Loan pipeline yields and growth projections?

A: Weighted average loan rate on pipeline is 6.77%, growth expected in low to mid-single digits in next 6 months, impacted by payoffs.