ConnectOne Bancorp, Inc.

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Connect One Bancorp, Inc. first quarter 2025 earnings call. All points 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 star followed with the number one on your telephone keypad. If you would like to withdraw your question, press part one again. Thank you. I would now like to turn the call over to Siavanshah, 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 first quarter of 2025 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 filing. 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 found through the company's website. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.

Thank you, Sia, and good morning, everyone. We appreciate you joining our call today. I'm pleased with Connect One's performance to start the year, reflecting the disciplined execution of our operating strategies. as well as a continued commitment to our client-first culture and relationship banking model. Some highlights from the quarter include a nearly 20% year-over-year increase in net income available to common shareholders. Our net interest margin expanded again this quarter. Tangible book value per share continues to build ahead of our planned merger, with First of Long Island increasing by about 4% since the transaction was announced. Additionally, credit quality trends remain stable, and our balance sheet remains well positioned. Looking ahead, this positive momentum will continue, reflecting both Connect One's standalone progress and the benefits of our pending merger with First of Long Island. Bill will walk us through some additional details shortly. Regarding our lending, while our portfolio contracted slightly on a point-to-point basis during the first quarter, primarily due to elevated payoff activity within the commercial real estate segment, Our loan pipeline remains robust as we continue to see healthy demand from our clients. Turning to deposits, while as of demand deposit balances declined since year end, our average demand deposits actually increased sequentially. This anomaly was due to temporary client inflows occurring at the end of last year. As you've heard me emphasize before, supporting our clients is Connect One's top priority, an approach that has consistently proven effective. and has enabled us to expand our banking relationships, grow in the number of verticals, and expand into new markets. Shifting to credit quality, trends remain solid, reflecting proactive portfolio management, our longstanding high credit standards, our track record of avoiding riskier subsegments, and the success we've had last year actively managing non-relationship loans off our balance sheet. Next, we're moving forward towards finalizing our planned merger with First of Long Island. I'm excited about the opportunity to serve their distinguished client base with the resources and product set of our combined institution. Our proactive engagement with First of Long Island clients has been very productive. These interactions have provided valuable insights and opportunities to deepen these relationships. We're already seeing new business materialize on Long Island. We've already identified opportunities to leverage our South Florida footprint to support First of Long Island clients, whose similar to Connect One's client base have a business presence in Florida. Integration planning efforts are well underway, and we're seeing strong early synergies already emerge, fueled by a collaborative team mindset. Transaction remains on track to close during the second quarter as we wait for final regulatory approval, which is expected shortly. At Connect One, we remain highly optimistic about the path ahead for our clients, our team, and our shareholders. Shifting to the economic environment, while there's still a number of unknowns, Connect One has a proven track record of adjusting to and navigating market uncertainties. We remain confident in our business strategy and proven ability to execute. Importantly, for the vast majority of our clients, we believe any effect of the tariff policy will be narrow in scope and not widespread. With all that said, I'll turn it over to Bill.

All right. Thank you, Frank, and good morning, everyone. Let me start by saying I, too, am very pleased with our performance, and I share Frank's optimism regarding Connect One's future financial performance. This quarter's results reflected continued margin expansion to 2.93 percent, which I will confirm is core, and it was a little higher than expected. In addition, expense growth was slightly muted as cost saves from the merger are already making their way into our results. I'm partially offsetting these improvements with loan portfolio growth that was below our guidance, but we believe that to be temporary due to the timing of actual loan closings and increased payoffs. Today, we possess a large and diversified loan pipeline, one that points to loan growth of at least 2.5% for the second quarter. Now over the past year, We have strengthened our financials in several respects. Our net interest margin has widened significantly. It bottomed out about a year ago, and since that time, we've widened 30 basis points with further widening on the horizon. The improvement is strictly organic without any reliance on loss trades, and we expect the core net interest margin to reach 3% this second quarter. Our loans and deposit ratio continues to trend lower, reflecting solid core deposit growth. It was below 106 at quarter end. All of our capital ratios have increased. The holding company tangible common equity ratio stands at 9.73, while the bank leverage ratio is 11.67%. And in addition, our tangible book value per share continues to increase each and every quarter. It was up 4% over the past year to $24.16. And commercial real estate concentration continues its steady decline. It's down 40 percentage points from a year ago to 420%, reflecting successful efforts to diversify our loan originations, a renewed focus on relationship lending, and a consistent capital build. Our goal is to reduce this ratio to below 400 during 2026. Turning to credit, our charge-offs and provisioning remained at relatively low levels, which is consistent with 2024 metrics. Non-accrual loans declined by 13% this quarter, and we already expect further declines during the current quarter. 30 to 89-day delinquencies ticked up slightly, but that ratio today amounts to only 0.18% of total loans, while criticized and classified also increased, but again, very slightly, from 2.68% to 2.79%. Although our performance measures in terms of return on assets and return on equity may not be at the levels of a couple of years ago, Our balance sheet positioning and the merger will facilitate and accelerate our return to top tier financial performance. I want to give you more color on our net interest margin outlook. I'm just going to reiterate our prior guidance of a five basis point improvement each quarter, independent of any Fed rate reductions, plus an additional five basis points for each 25 basis points of Fed cuts. And that guidance, at least for now, also holds post-merger, which includes purchase accounting accretion and first of Long Island's balance sheet positioning. First, Long Island's performance is following a similar trajectory to ours, and we expect to close the transaction in the latter part of the second quarter. When we report next in July for the second quarter, we will have nearly $15 billion in assets and $1.2 billion in market cap. In terms of longer-term projections, we all understand that it is particularly challenging today, given the uncertainties related to the impact of tariff policy on economic growth and the timing of rate cuts. For now, I'm going to generally stick with our previously discussed conservative estimates regarding the merger, which include, upon full phase-in of cost saves, a return of assets exceeding 1.2, and a return on tangible common equity of approximately 15%. And that's supported by an interest margin of 320 or greater. Clearly, these projections are subject to change, and we will, as always, update you regularly. With that, Frank, I'll turn it back to you for closing remarks, and then we'll take your questions.

Thanks, Bill. In summary, Connect One was built for moments like this. With our client-centered culture and disciplined execution, we're ready to capitalize on the momentum we've built. We're energized with our impending increased scale to accelerate growth on Long Island, expanding both our team and our client relationships, along with our reach in markets we've already built success in. We're significantly enhancing financial performance while building New York, Metro, premier bank that offers a compelling investment opportunity at this juncture. As always, we appreciate your interest in Connect One, and thanks again for joining us today. And with that, I'd like to turn it over to some questions. Operator?

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

Hey, good morning. Thank you for taking my questions. The first question I have is related to kind of the economic uncertainty here, and I appreciate some of the color you guys gave. I know it's still a little early, but have you guys seen, you know, a large customer reaction at all in terms of any notable changes or behavior or spending, their willingness to invest into the company, anything like that.

We've spoken to a number of our clients specifically about what may be the impact of some of the various proposals that have been spoken about to this point. And there are certain industries, companies, specific instances where there could be some changes in either the cost structure of some part of some businesses, but for the most part, we don't see anything that is dramatic. There may be some small issues across the board in different places. you know, construction comes to mind, right? What's going to happen to lumber, steel, concrete, things like that. But when you look at what the percentage of those things are relative to the overall project and what sort of the pricing of the product will be in the future, we really don't see anything that's dramatic at this point. That gets further complicated by we really don't know what's going to happen and how much of it's actually going to take effect and We also don't know what the offsets are to that. We've already heard clients who are talking about product that maybe they sourced in maybe a European market that they can get domestically today. So there already seems to be solutions for some of the problems that we're not even sure are going to present themselves. So it's a very difficult thing to be working through today, but for the most part, I have a pretty good feeling from speaking directly to the clients that whatever issues there are, are fairly contained.

Okay, got it. That's really helpful. And I appreciate your commentary on the upcoming flick merger, and it sounds like you're pretty optimistic about achieving the cost. Say, can you give us an update on, you know, if the areas you're achieving this cost is coming from a changed at all and if you found other opportunities And then if we get into 2026 and it's maybe a, you know, a worse macro environment, slower growth, revenues coming down, you know, what levers will you have as a combined company to help fight profitability?

Let me just make a general statement, and then, Bill, you can talk a little bit to the cost saves. But, you know, one of the things we really have not spoken about relative to the value of the First of Long Island transaction is that You know, this is a gem. This is a Long Island-based organization in one of the strongest markets in the New York metro market, which is one of the strongest markets in the country. And so for us to take advantage of being able to work together with the folks at First of Long Island and provide additional products and services to their extremely deep client base I think gives us an enormous amount of confidence in our ability to not only achieve some revenue synergies, but also be able to leverage the expense base that's there at Long Island. On top of that, we have our, you know, what we project to be the cost savings, which I'll let Bill talk a little bit more about.

Yeah, no, good question, Tim. There's a lot of moving parts here, but I do feel confident we'll get to those returns objectives that I talked to one way or another. You know, one of the areas that the projections might be conservative is on the net interest margin. We're seeing a lot of momentum on the net interest margin. And we also, you know, the accretion from the deal could add anywhere from five to 15 basis points. So I want to be conservative with objections right now, but having that kind of margin over and above projections will add a lot to our earnings going forward. So even if growth was a little bit slower, I think we could make it up in margin. As far as cost saves go, I think we have about $24 million or so in total cost saves. I know originally we said we'd have them all done by, say, January 1st. It's possible that it takes us a little bit longer. You might want to stretch that out a little bit towards the year from closing. But all in all, one way or another, I feel pretty good with the projections that I laid out. Got it. Thank you, guys. Very helpful.

Your next question comes from the line of Freddy Strickland with Hofstede Group. Please go ahead.

Hey, good morning.

Good to have you on board, you know, covering the company. We're really pleased with that.

Thank you very much. We're happy to be here. And just wondering if you could talk a little bit more on the puts and takes on credit. I know you talked a little bit in your prepared remarks, but just trying to think through, you know, what areas are you looking at a little bit more closely? And are there any kind of specific credits where maybe we could see some positive movement over the next couple of quarters?

It's just been really steady and, you know, the delinquencies are at, you know, historically extremely low levels. So, you know, knock on wood, the credit quality has been, if anything, improving and we don't really see a pipeline at this point of any kind of workouts.

Understood. And can you refresh us on the repricing opportunity you see over the next 12 months, just high level in terms of both fixed rate loans and deposits?

Yeah, well, we've had so far, and I track this pretty closely, close to a billion dollars of loans that have already repriced going back to the middle of 2023. And so the credit quality of those has performed remarkably well this past year. very low level of charge loss on those repricings. Even the downgrades, although there has been some downgrades, overall, it's really, really small. So that's good news, and we continue to track that each quarter. Going forward, we're going to have, I think, somewhere around a billion dollars of repricings through 2026. So obviously, we continue to monitor that, as we have in the past, but so far, the track record is good, and so I'm pretty optimistic that you know, if there are any issues with those repricings, we'll be able to handle that in terms of, you know, regular earnings and provisioning.

That's helpful. And if I could squeeze in just one last one here, you know, understand the margin expansion. Is that mostly driven really by the funding side here? I mean, can we see loan yields creep back up a little bit, given what's in the pipeline? Just trying to think through the dynamic of the yields versus costs.

Well, yeah, we still have CDs repricing some billion dollars or so over the next six months. So that's helping on the funding side. Obviously, cuts, you know, Fed rate cuts will lower deposit pricing further. And we have, you know, a large portion of our loan portfolios in that adjustable category, so it takes time. So we could be in a position, right, where the loan yields are going up and deposit costs go down. And those two things combined, you know, will accelerate our margin improvement.

All right, great. Thanks for taking my questions. Yep. Thanks, Teddy.

Thanks. Your next question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.

Hey, good morning, guys. I apologize if I missed this and jumped on a little bit late, but just on the loan growth side, just wondering if you can talk about a little bit of the puts and takes of kind of where you're seeing, what you're seeing right now relative to what you're expecting for the rest of the year. Just curious, you know, how much of the slowdown is impacting the current months and and how much kind of improvement you're baking into to any guidance in the back half of the year?

I would say, Dan, that we definitely have seen a little bit of a pullback on enthusiasm to move forward with certain projects, certain types of expansions or, you know, any other opportunities. But it's really a bit of a And I think I'm already starting to see some of that dissipate. So it's really kind of hard to get our hands on it. But, you know, if you think about whether it's a construction project or someone who's growing their business, if that particular business is doing well and they continue to grow, they're going to need the funding to be able to continue to compete. So, you know, we have spent the last 24 months or so really doubling down with our existing client base. um and supporting all of their needs and certainly as you know the the new york metro market is still pretty hot um you can't build enough inventory in the housing market the businesses that are here are doing quite well uh difficult to hire people uh in order to expand so there's a lot of great dynamics that are taking place within this new york metro market where our bank is located that are supporting that level of growth that we've forecasted for the year, which I would say is somewhere in the mid to high single digits.

Okay. So mid to high single digits, obviously weighted to the back half of the year, maybe a little bit of slowness in the second quarter. I don't mean to put words in your mouth, but it sounds like, yeah.

We see our pipeline is, quite strong right here right today. And, you know, it's look, it's hard to forecast exactly when things are going to close and when things pay off. And so we saw a little bit of that in the first quarter. We actually had a fairly strong long generation quarter, but we also saw a number of payoffs. Now, those payoffs are good. That means construction projects got done, got sold, and we got paid back. But from what we can see right at this moment, there appears to be a pretty robust pipeline ahead of us, and it should be fairly consistent going through the rest of the year.

And I did say, you may have missed it, Danny, that we expect 2.5% sequential loan growth for the second quarter. Oh, great, Bill. Yeah. Okay. And then I just did some numbers, a piece of paper here before the call, and probably about 5% increase for the year from December 31st. Okay.

I'm taking into account my hour news cycle.

Yeah, it's changing every day. Yeah, every day. And maybe a follow-up question kind of unrelated, but you guys are in the middle of closing a deal and you're obviously dealing with the regulators. I'm just curious if you can give any color on the types of conversations that you're having with regulators now relative to a year ago or prior to that, if there's a tangible difference in those conversations. And the relationships, if you're seeing any kind of progress on the regulatory front in this new administration.

Yeah, I would say we have a very good relationship with the regulators that are, you know, weighing in on this application. And the folks we've been dealing with are all here, all working very earnestly to get the, you know, get the application completed. I personally, I think I can speak to the team. I don't think we've seen any change of direction or focus or, you know, that the issues or challenges that they look at when they look at these types of applications. It seems pretty standard business to me. Now, keep in mind, we were not regulated by the CFPB, so we really don't have that to comment about. We're not regulated by the Federal Reserve either. So our regulator is the State Department of Banking in New Jersey and the FDIC. And with both of those entities, they seem to be doing the job that they've always done, and we're doing what we need to do.

They have a lot of boxes to check to get these mergers through, and that's what they're working on. That's basically it. It's always been that way.

They've been very cooperative, and that's always been the case with our relationship with them.

Okay, great. Well, thanks for answering that one. I know it's a little tricky, but Thanks for taking the questions. Appreciate it.

Yep. Before going to the next question, again, if you would like to ask a question, press star 1 on your telephone keypad. Your next question comes from the line of Matthew Brees with Stevens Inc. Please go ahead.

Hey, good morning. Hi. Hi, Matt. You know, first I just hope we can start with expenses and near-term expectations for expense growth.

Well, you know, the next time we report, we're going to be a combined company. So it starts getting a little bit challenging to project when we're dealing with cost saves. But for this quarter, I think I mentioned that some of the cost saves were in the first quarter numbers. I'd say probably about half a million, you know, out of 24 million total cost saves. So on a standalone basis, we're probably growing in the 4% to 5% range. And obviously, you can run your own numbers to come up with what the combined base will be. And that's 4 to 5% annual.

Yeah, just to add a little bit more color to what Bill said during our prepared remarks. You know, this transaction, we feel very strongly about the quality of the franchise that we're getting together with. And it is our goal to make certain that we do everything possible to satisfy and embrace the client base that First of Long Island has. It is a phenomenal client base. It goes back over decades. very strong relationships, relationships we couldn't get out of there with a crowbar before. And so we're gonna take every precaution, every measure, we're gonna put everything we have into not only saving, but nurturing every single one of those relationships. And so if there's a little bit of cost involved in doing that, we're okay with that. So I think we may drag out a little bit how long it takes to get some of the expenses But we think it's well worth it to really bring that franchise together in a way that's incredibly meaningful to the overall company.

So that makes sense. Maybe just turning to incremental loan yields and the pipeline, I'm curious where those stand and where those stand. And I'm curious what what spreads are doing. I could see either way. We hear a lot about a lot of payoff activity and customers going to bigger banks, so competitive pressures. But with everything going on macro-wise, I could see spreads moving higher due to risk premiums. So could you help me out with that?

Yeah. I mean, the pipeline that we have has a rate of seven and a quarter, okay? And the loans that we put on in the past quarter, I think, was about 740. So it's within that range of what loans are going on at. The spread versus match funding is 250 to three even sometimes. And I would agree with you that spread should widen out, you know, based on economic conditions. But there's always a lot of competition out there, Matt. So I wouldn't count on that.

I know you feel frank. I think you would expect spreads to widen out based on everything that's going on. But there are certain segments of the market where I would tell you, Spreads are becoming tighter than I would have expected. And then there are others where it's obvious that some of the larger banks don't want to play in a particular space, and so you get the wider spreads. So it's not I don't think I don't think you can look at it as an across the board. This is, you know, some sort of indication of what's going on in the market relative to whether it's the news, the tariffs or whatever. I think it's dependent on, you know, what particular banks are focused on. You know, I can tell you, for instance, you know, construction lending, anything CRA-related, multifamily, God forbid you do an office loan, those spreads are really, really wide. You start looking at CNI, I'm sure you've heard it in everybody's call, everybody's focused on CNI, and in certain parts of that portfolio, I think we're seeing spreads that are, you know, are somewhat uncompetitive.

And Matt, if you're asking that question because you're also trying to figure out where margin is going, certainly a steeper curve, you know, would help the industry and Connect One in particular. All of the above.

Yeah, I appreciate that. And then in terms of closed timing for the deal, and maybe, so update on closing time for the deal, and then where do we stand in terms of approvals?

Well, we indicated thus far that we believe that we will have the deal closed by the end of the second quarter. At some point in the second quarter, we still believe that to be true. And so for that to be true, that means regulatory approval has got to be around somewhere.

Right. And then the last one is just, you know, with the deal, there was talk about a debt freeze to help on the capital ratio front. Where do you stand on that front, and has anything changed in terms of desire for sub-debt or alternative forms of capital?

We're sticking with the sub-debt, and so that'll take place most likely prior to closing.

Yeah, and it appears that the market's been sort of friendly towards what we need to accomplish relative to that. Pricing has come down a bit, and there appears to be a tremendous appetite for that type of bank sub-debt today.

I think a couple of months ago, the stock prices were 10% to 20% higher, and the sub-debt rate had 100 basis points more expensive. So it's much more beneficial to the sub-debt right now. Understood.

I appreciate you taking all my questions. Thank you. Thanks, Matt.

I will now turn the call back to the management for closing remarks.

Okay. Well, thanks, everyone, again, for your time today. We look forward to speaking to you again during the second quarter earnings. So have a great day.

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