ConnectOne Bancorp, Inc.

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to Connect One Bank Corp Inc. 4th Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star, then the number one on your telephone keypad. To withdraw your questions, press star 1 again. I would now like to turn the conference over to Sia Vanzia, Chief Brand and Innovation Officer. Please go ahead.

Good morning and welcome to today's conference call to review Connect One's results for the fourth quarter of 2024 and to update you on recent developments. On today's conference call will be Frank Sorrentino, Chairman and Chief Executive Officer, and Bill Burns, Senior Executive Vice President and Chief Financial Officer. I'd also like to caution you that we may make forward-looking statements during today's conference call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings. The forward-looking statements included in this conference call are only made as of the date of this call and the company is not obligated to publicly update or revise them. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed today on Form 8K with the SEC and may also be accessed through the company's website. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.

Thank you, Sia, and we appreciate everyone joining us this morning. Now, last year when we entered 2024, we fully recognized the challenges that lay ahead for the industry and for Connect One. Despite that challenging environment, the team here at Connect One persevered by reinforcing our focus on relationship banking, which strengthen our capital loan mix and our core deposits. Now we're well positioned to dramatically improve our financial performance, which is accelerating as we look ahead to 2025. Our efforts also paved the way for our upcoming merger with First National Bank of Long Island. The strategic rationale of this financially attractive transaction remains compelling and has been reinforced in our view by increased economic optimism and a potential for more supportive regulatory environment. The merger is progressing on schedule and we're optimistic closing will occur in the second quarter of 2025. The combined company will operate under the ConnectOne Bank brand on day one with a systems conversion following soon after the legal close. We have teamed up with First of Long Island, proactively getting in front of its clients, anticipating and addressing their preferences, and reinforcing a seamless transition. We're also actively engaging with First of Long Island's team to share ConnectOne's client-first culture, which centers on our relationship banking business model and a sense of urgency in everything we do. Regarding the merger efficiencies, we're already working these into the institutions on a standalone basis, which gives us a strong head start in realizing financial projections. From a systems perspective, an efficient and successful core conversion has been planned. These costs have already been negotiated at very attractive terms and on a timetable that's ready to be quickly implemented. Looking at growth, we continue to see significant revenue synergies. This includes leveraging the Long Island footprint to extend client relationships and enhance our residential, SBA, and C&I lending. And we'll size up to nearly $15 billion in assets and a market capitalization of over $1.2 billion, placing Connect One in a larger, higher valuation peer group. We'll also be able to leverage the benefits of economic and market tailwinds, which have already accelerated due to our liability-sensitive positioning. In short, I'm very excited about the opportunities the transaction offers. We look forward to serving the first of Long Island's clients and leveraging the expertise of its team to extend our reach across New York City, Long Island, and Florida. Turning now to Connect One's standalone fourth quarter performance, our financial results were strong. highlighted by a 21% quarter-over-quarter and a 6% year-over-year increase in quarterly net income available to common shareholders, reflecting the wider net interest margin that we've been anticipating. We've also realized solid growth in both loans and core deposits. ConnectOne's ability to attract deposits is an important strength, one we have nurtured by focusing on our unique client approach while adding talent that fits the ConnectOne team. Fourth quarter deposit activity accelerated, with core deposits increasing more than 3% on a quarter-over-quarter basis, reflecting notable success in non-interest-bearing demand balances. Turning to lending, Connect One delivered quarter-over-quarter loan portfolio growth of 2%, a quarterly growth rate that we expect will continue. While remaining disciplined in our approach, we took advantage of strong market demand, and we entered 2025 with solid momentum and a robust loan pipeline. Credit trends and key metrics remain sound and stable, with all signs indicating this will continue into 2025. Next, the bank's net interest margin improved by nearly 20 basis points during the quarter. Bill, of course, will go into further detail on that, but we benefited significantly from a more than 25 basis point improvement in our cost of deposits. Heading into 2025, we continue to anticipate further margin expansion, and that is with or without any additional Fed rate cuts. Our performance metrics were much improved this quarter. I firmly believe that our unique operating philosophy focused on our culture of client obsession, forging a better place to be while expanding with a 3X vision, together with our strong balance sheet, industry tailwinds, and our pending merger supports our long-term focus on driving shareholder value. And with that,

I'm going to turn it over to Bill. All right. Thank you, Frank. Good morning to everyone on the call. I think as you saw in earnings release issued this morning, our financial performance turned the corner in a meaningful way. Earnings were up 21% sequentially. Client deposit growth, including non-just bearing demand, accelerated. Annualized loan growth increased 8%, driven by business loan demand. Our loans and deposit ratio declined from 108 to 106. Efficiency and return metrics all improved. Credit quality remains sound, and the merger is moving ahead on schedule. Now, those improved results are largely due to a significant sequential increase in net interest income, reflecting a 19 basis point widening in our net interest margin. And most of that margin increase was due to a steep decline in our average cost of deposits, while about five of those basis of the 19 and widening was due to elevated prepayment fees, and the payoff and recapture of interest on a couple of non-accrual loans. I also want to point out that the loan portfolio growth of 2% from September 30th occurred near year end, And therefore, average loans for the quarter were about flat. So headed into the first quarter of 25, we've got a couple of things positively impacting projected net interest income. First, we project average loans to be about 2% higher in the first quarter versus the fourth quarter. And second, the margin is still expanding. Our reported margin for the quarter was 286. The core margin I put at about 281, and looking forward, based on stronger spot rates today, we're projecting an improvement to approximately 2.90 in the first quarter. Beyond quarter one, on a standalone basis, pre-merger, we still see our margin widening, albeit at a slower pace due to the current hawkish view on short-term rates. You know, we continue to have CD repricing. There's $2 billion set to reprice over the next year. That'll be at a 50 to 75 basis point improvement. And we have an adjustable rate loan portfolio that will continue to reprice upward over the next couple of years. I also want to point out that our margin widening is strictly organic. We have not utilized lost trades or restructuring transactions that would negatively impact tangible book value per share. I'm going to now turn to expenses. As disclosed in the release, we had roughly $1.4 million in after-tax non-operating adjustments. That included merger expenses and a $500,000 charge on the sale of a previously closed branch location. But excluding the non-operating items, expenses actually declined sequentially. That reflected some accrual adjustments, as well as the very early stages of expense savings for the pending first Long Island merger. Heading into the first quarter, I'm currently projecting a 2% to 3% sequential increase in OpEx. That's typical as we head into a new year. And on a standalone base, expense growth would taper off a bit throughout the remainder of 25. Now to credit quality, I want to expand on Frank's earlier comments. Charge-offs remain at a very reasonable level, and we don't anticipate any significant increase. Non-accruals were up slightly this quarter, but appear to be trending down next quarter. Delinquent loans. were just four basis points with zero past due more than 60 days. I believe that's as good as it's ever been. And our criticized and classified loans did increase from 2.2 to 2.7 as a percentage of the portfolio. That's well within our historical range, and our credit outlook remains sound. The provision for credit losses of $3.5 million for the quarter largely reflected loan growth and specific reserves and charge drops. With regard to the effective tax rate, you may have noticed it decreased this quarter. That reflected some year-end adjustments and true-ups, but I would expect the effective rate to return to the 26 to 27 percent level in the first quarter. I'd like to now give you at least some color on the projected impact of the merger on our financials. Although the closing date of the merger with First Lawton Island is not set, our expectations are for it to occur during the second quarter. After closing the transactional enhance our net interest margin by about another 10 basis points that reflects both first of Long Island standalone margin and purchase accounting. So our spot NIM projection at closing should be about 310 as we head into 2026. With all cost saves fully implemented, our margin projection increased to 320, while operating ROA is projected to reach 1.15 and return on tangible common equity expected to be in the 12% to 13% range. I'll also give you a quick update on the loan mark. You know, risk-free rates have increased since announcement, but the yield curve is no longer inverted. So-called liquidity premium has declined, and that led to a total discount rate that's just slightly above where it was in September. So the loan mark is just slightly larger, increasing to about $250 million from $235 million when we announced the deal. Our goal has always been to hit the ground running with this merger. Ahead of the actual closing, we are already making headway with regard to client engagement, staff integration, efficiency, and revenue enhancement. And before I turn it back to Frank, I want to reiterate that we remain an especially compelling investment. In my view, it's one of the best out there. Our net interest margin, earnings, and all performance metrics are accelerating. Credit quality remains sound. This value-enhancing transaction with First of Long Island will bolster our performance metric and increase our franchise value as a premier New York metro community bank. With all of that, where we trade today, in our view, we're clearly at a discount to peer group averages. And with that, Frank, back to you.

Thanks, Bill. To summarize, we ended the year with meaningful earnings momentum, strong capital ratios, a solid balance sheet, and a positive outlook for 2025. We're well positioned to expand our geographic footprint, strengthen client relationships, and capitalize on the organic growth in our core markets. Additionally, we look forward to completing the first Long Island merger, which will further support our efforts to drive sustainable value-enhancing growth. Maximizing shareholder value is a top commitment of our team, our board, and by me personally, as one of the larger shareholders. With that, I'd like to turn it over for some questions. Operator?

At this time, I would like to remind everyone, in order to ask a question, press the star then the number one in your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Matthew Breeze with Steven Inc. Please go ahead. Your line is now open.

Hey, good morning. Hi, Matt. Frank and Bill, I wanted to start with loan growth. uh results were a bit better than expected for the quarter and your commentary suggests it will continue so i guess um you know curious what the pipeline looks like you're seeing in terms of spreads and i guess bigger picture you know what's changed on this front the last couple of quarters there's been some some hesitancy some cautiousness here it feels like this has turned from the better um what have you seen from a boots on the ground perspective

Matt, I'll let Bill comment on some of the spread and actual numbers and, you know, 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 on – there were a couple of things at work. There was an emphasis here on de-emphasizing non-relationship 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, you know, we sort of culled 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.

And Matt, this is Bill. In terms of spreads, you know, first off, we always remain disciplined when we price loans and make sure we get the appropriate return spread on all the transactional loans that we do. just give you some numbers for the for the fourth quarter um we booked loans at 745 they came off at like 680 690 so it was a little bit of spread improvement there and our pipeline right now has a uh an outweighted average rate of 762. great okay and then frank one of the other positives this quarter was just um

you know, deposit growth as a whole, but really within that not interest-bearing deposit growth and hoping for some color as to what kind of drove that and expectations for, you know, both deposit growth and composition into 2025.

Yeah, 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 Connect One 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 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, you know, 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.

Just now, let me add to that, Matt. You know, I am definitely seeing we track this every single day, and the core non-trust bearing demand is heading upwards, and it may be even accelerating. We did have some, you know, seasonal things, I would call it, that increased the growth rate even more. I don't think we're going to have a 50%, you know, annualized growth rate in non-trust bearing demand, but the trends are that it is heading up nicely.

Great. And then last one for me, you know, 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.

Yeah, no, we still have sub-debt as part of our plans, you know, $100 million as part of the transaction. And then we do have $75 million, you know, repricing. So I expect we probably do $175 to $200 million. you know, to take care of all of that.

I'll leave it there. Thank you for taking my questions.

Thank you, Matt.

Again, if you would like to ask a question, press star 1 on your telephone keypad. Your next question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.

Yeah, thank you. Good morning, guys. 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. Yeah, that's basically the question.

Yeah, sure, Dan. It shows up, you know, on the SEC codes as CRE and 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.

Okay. All right. I'm glad to hear it. And then I guess, you know, you guys have, you had a great quarter from a revenue perspective. The credit, you sounded relatively bullish given the increase in classifieds and MPLs. I appreciate your comments that MPLs 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 performance. you know, of the book overall to rates from here. You know, if we do have, you know, declines or even increases, just, you know, how you view the overall sensitivity from a credit perspective.

Well, Dan, we obviously watch that very closely. You know, the replacing of loans as each quarter goes by, there's more and more of a track record, right, that's being built. We have a portfolio of some 875 million of loans have repriced, you know, 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 non-performing loans or charge-offs can be handled through earnings, as we've been doing the past few quarters.

Okay. And what would you say is, do you have a sense for what's driving the decline in MPLs? Like what, you had this run-up probably due to higher rates. I mean, is it, what do you think?

Well, you know, we're... You know, the portfolio of non-recrual loans is like there's lots of ins and outs all the time. And I expect we'll 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, you know, negotiating pricing on that. And so that would be the driver of reducing our non-recruals. Okay. All right. That's helpful.

All right. Thanks for taking my questions. Thanks, Danny.

Your next question comes from the line of Tim Switzer with KBW. Please go ahead.

Hey, good morning. Thank you for taking my question.

Hi.

Hi, Tim. 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 or back into the quarter or anything like that?

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.

Yeah, totally understand. And we appreciate the 2026 outreach you've provided. Are you able to discuss some of the expense assumptions you have behind that? I know you're expecting to get all the cost saves, but You know, any guidelines in like an efficiency ratio or core expense front rate would be helpful.

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.

Great. Okay. And the last question I have is, And sorry if I missed this, but what are the rate assumptions behind the NMAT list you gave with the 310 spot and then the 320 in 2026? And how could, you know, less or more rate cuts impact that?

Oh, so I have to try to give you some guidance. You know, there's always moving parts, right, that impact this. You know, fees and other things that I'll call non-recurring as well as, you know, the shape of the yield curve. But I'm generally expecting about a five basis point increase in the margin without any rate cuts, approximately 10 basis points from the merger, and then maybe another five from any rate cuts should they materialize over the year. So, you know, you can add that up any way you want. And that gets us to about 320 or so at the start of 26. Okay.

So it sounds like that's assuming no rate cuts then.

Right, right. Maybe one. Got it. Okay. Thank you. Okay. Thank you. Yep.

That concludes our Q&A session. I will now turn the conference back over to the management for closing remarks.

Well, thanks again for your time today. We look forward to speaking with you again during our first quarter earnings call in April. And with that, Have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.