ConnectOne Bancorp Q2 2025 Earnings Call Transcript

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July 29, 2025

Key Takeaways

  • Positive Sentiment: ConnectOne completed the First of Long Island Bank merger on June 1, creating a unified bank with nearly $14 billion in assets and achieving overwhelmingly strong client retention during integration.
  • Positive Sentiment: The company delivered record core deposit growth, increasing noninterest‐bearing demand balances to over 21 % of total deposits and improving its loan‐to‐deposit ratio to 99 %, while reducing Federal Home Loan Bank borrowings by $200 million.
  • Positive Sentiment: Loan demand remains robust with a solid pipeline in C&I, construction, SBA and residential lending averaging a 6.77 % rate, positioning the bank for single‐digit loan growth in H2 '25.
  • Positive Sentiment: Management projects continued net interest margin expansion—10 bps each in 3Q and 4Q—to reach about 3.25 % for full‐year '25, with further widening in '26.
  • Positive Sentiment: Credit metrics strengthened as the nonperforming asset ratio fell to 0.28 %, charge‐offs held to 22 bps, and tangible common equity remained robust at 8.1 %, supporting ongoing growth and capital flexibility.
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Earnings Conference Call
ConnectOne Bancorp Q2 2025
00:00 / 00:00

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Operator

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the ConnectOne Bancorp, Inc. Second Quarter twenty twenty five Earnings Call. Today's conference is being recorded.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. At this time, I would like to turn the conference over to Sia Vanzia, Chief Brand and Innovation Officer. Please go ahead.

Siya Vansia
Siya Vansia
Senior VP & Chief Brand & Innovation Officer at ConnectOne Bancorp

Good morning, and welcome to today's conference call to review ConnectOne's results for the 2025 and to update you on recent developments.

Siya Vansia
Siya Vansia
Senior VP & Chief Brand & Innovation Officer at ConnectOne Bancorp

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 eight ks with the SEC and may also be accessed through the company's website.

Siya Vansia
Siya Vansia
Senior VP & Chief Brand & Innovation Officer at ConnectOne Bancorp

I will now turn the call over to Frank Sorrentino. Frank, please go ahead.

Frank Sorrentino
Frank Sorrentino
Chairman & CEO at ConnectOne Bancorp

Thanks, Sia, and thank you all for joining us this morning to discuss ConnectOne's second quarter, which reflects continued momentum in executing our strategy alongside successful integration of the largest merger in our company's history. On June 1, ConnectOne Bank officially launched as a unified entity completing the legal close of our merger, First of Long Island Bank. This milestone marks the beginning of an exciting new chapter for us, one that significantly enhances our scale and positions us to accelerate growth across all our markets, especially on Long Island. In line with ConnectOne's unique approach to M and A, we deployed a deliberate and focused effort to maximize synergies, both in preparation for and immediately following the close of the combination. The results are already clear, compelling and a direct reflection on our ability to execute, yet overwhelmingly strong client retention, demonstrating the success of our integration efforts and the continued loyalty of our combined client base.

Frank Sorrentino
Frank Sorrentino
Chairman & CEO at ConnectOne Bancorp

Steady momentum in new client onboarding as well as meaningful traction on new business opportunities. We had strong core deposit growth, including gains in DDA balances for both existing newly acquired relationships. We're also seeing strong loan demand as we combine ConnectOne's deep expertise with significant growth opportunities across our new market. We entered the 2025 with a solid and diverse pipeline, which includes C and I, Construction, SBA and Residential Lending Group. Prior to Bill providing additional details about the merger and its positive impact on our financials and performance metrics, I'd like to emphasize a few things.

Frank Sorrentino
Frank Sorrentino
Chairman & CEO at ConnectOne Bancorp

Our assets now stand at nearly $14,000,000,000 $11,200,000,000 in loans and $11,300,000,000 in deposits, while our market capitalization today exceeds 1,200,000,000.0 This quarter, we organically grew client deposits by a record amount, improving our loan to deposit ratio to 99% at the end of the second quarter, down from 106 as of March 31. Noninterest bearing demand composition now exceeds 21% of total deposits, up from 18% as of year end, reflecting both the merger and our client focused relationship based approach.

Frank Sorrentino
Frank Sorrentino
Chairman & CEO at ConnectOne Bancorp

Additionally, while this transaction propelled us to above $10,000,000,000 asset threshold, ConnectOne was already well prepared to cross this hurdle. We proactively managed the associated regulatory requirements and as a result anticipate only modest expense growth while remaining well positioned to continue our growth trajectory. Next, I'm also extremely pleased to welcome our newest members to our talented team. Deep expertise in community banking aligns with our client first culture strategy. I'm equally proud of the commitment and dedication shown by our team immediately coming together as one organization.

Frank Sorrentino
Frank Sorrentino
Chairman & CEO at ConnectOne Bancorp

The energy in our combined team is palpable, and our bench strength and momentum position us to execute on the opportunities in our market. We had a flawless day one brand transition followed by the successful completion of a full systems conversion just two weeks later. Leading up to and throughout the transition, we placed a strong emphasis on delivering a seamless client experience. We proactively tripled our call center capacity to ensure responsiveness and continuity to address client needs in real time. Our clients were provided with broad access to the team, and I personally met with many, reinforcing our commitment, relationship banking that defines ConnectOne.

Frank Sorrentino
Frank Sorrentino
Chairman & CEO at ConnectOne Bancorp

As a result, we not only managed the conversion in under thirty days, we did so with excellent client and deposit retention while also growing balances and setting the stage for enhancing those relationships. Today, we're operating as one unified company, single culture, consistent brand presence and a shared vision. We're one team, fully aligned and better positioned than ever to drive organic growth, create long term shareholder value. And with that, I'll turn it over to Bill.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

All right. Thank you, Frank. Good morning to everyone on the call. I wanna start by reiterating that we are truly thrilled with the Percep Long Island merger. It's strategic in that it expands our geographic footprint and client base, also financially disciplined and compelling, strengthens our balance sheet, enhances our key financial metrics, and ultimately boosts our franchise debt.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

Now with any merger, particularly in the early stages of a transaction that closed mid quarter, can be challenging to digest what's going on behind the numbers. Therefore, I want to delve into some key areas to provide greater clarity. But first and foremost, I want to highlight the exceptionally strong deposit and funding trends that ConnectOne is generating right out of the gate. On a combined company basis, noninterest bearing demand deposits increased by more than 100,000,000 since March 31, approximately 15% annualized. And over the same time frame, total deposits are up an annualized 8%, which reflects solid performance, but it's even more encouraging that when you factor in a $200,000,000 decline in brokered deposits, our true core balances have increased by more than 500,000,000 or 17% annualized.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

And with that robust deposit growth, we've been able to reduce wholesale Federal Home Loan Bank borrowings by about $200,000,000 Another point we want to highlight is loan to deposit ratio. Premerger, our first quarter loan to deposit ratio was 106, climbing to 101 on a pro form a combined basis of March 31. Fast forward to today, loan deposit growth, the ratio has improved even further to a couple of percentage points below 100. Going forward, we expect to operate at about that 100% threshold. The deposit growth is a testament to the success across the entire organization, particularly healthy contribution from the Long Island market.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

Many banks' mergers often face challenges with positive attrition. However, our unwavering focus on client retention has led to accelerated growth. Let me now turn to our purchase accounting entries. I'm going to aim for full transparency regarding the merger's purchase accounting adjustments both now and in the future to ensure our core underlying trends remain clear. The merger has a total loan mark of two fifty million dollars that's comprised of $2.00 $7,000,000 fair value accretable mark and a $43,000,000 non accretable.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

Fair value mark of $2.00 5,000,000 reflects a 6.6% discount to First of Long Island's $3,000,000,000 loan portfolio. A good portion of that is attributable to the $1,100,000,000 in residential loans we're taking on. They have a relatively longer duration. 43,000,000 nonaccretable mark on 270,000,000 of PCD loans largely reflects portion of first of all New York City rem portfolio. When you combine that nonaccretable mark with the accretable mark on the PCB loans, those loans are now being carried on our balance sheet at about 70¢ of dollar.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

I wanna remind you that First of Long Island had a long standing track record of seeing credit quality. Nearly all the rent regulated loans are performing. Nevertheless, under GAAP, conservatively and appropriately allocated a healthy reserve due to the higher cap rates currently being applied to the subsegment. Now earnings accretion will be considerable. We are projecting them to be approximately $9,800,000 per quarter for 2025, declining to $9,200,000 per quarter in 'twenty six and $7,900,000 for the quarter in '27.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

I'll address the impact of the accretion on our margin this year. Now the provision and allowance, I'm going to talk about that a little bit. The total provision for credit losses for the second quarter was $35,700,000 including a day one provision for First of Long Island, dollars 27,400,000.0, and an operating provision of $8,300,000 Now that 8,300,000 is higher than usual for ConnectOne. It was largely due to upward adjustments in our quantitative loss factors resulting from the merger, particularly attributable to the longer duration loan portfolio acquired. So in my view, the impact to CECL modeling is more or less a onetime adjustment.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

As such, all things equal, we expect lower levels of quarterly for the remainder of '25. As many of you are aware, there is a pending rule of change that would eliminate the day one provisioning. We will be able to reverse that charge in the future should it become effective. That would flow through earnings and add about 15 basis points of the TC ratio. Let me review the merger charges and cost saves so far.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

So far, we've recognized $40,000,000 in aggregate merger charges, and my expectation is we'll record up to an additional $10,000,000 over the next quarter or two. Target was approximately $52,000,000 so expect to remain below that after the full write. In terms of cost saves, we are on track. First thing I want to explain is that the second quarter was a mixed bag, just one month of the combined expense base and significant merger charges. Calibrating for those items, our expense base is what I've expected.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

Going forward, as a 100% combined company, twenty twenty five quarterly expenses projected in the $55,000,000 range, while in 'twenty six, the quarterly run rate is likely to be slightly higher, 56,000,000 to $57,000,000 And these projections are consistent with the achievement of 35% previously accounted target. Just the other income line for a moment. Premerger ConnectOne standalone was running at 4 to $5,000,000 On a merged basis, that's going to go up to $6,700,000 per quarter for the next few quarters, reflecting continued build of our SBA business, the Antelope Island market, but we also expect both Fly to be an increasing source of gains on sale. Let me talk a little bit about the net interest margin. As always, there are many moving parts, but overall, we expect continued expansion.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

Those moving parts include the merger and purchase accounting, organic widening as our deposit mix and loan pricing continue, sub debt issuance we just did and redemptions coming up and Fed rate cuts. So a lot of moving parts there. Our competitions call for an approximate increase to our margin of 10 basis points for each of the third and fourth quarters versus the 3.06 reported quarter two. That results in an interest margin of about 3.25% for the full year. Further expansion expected from 26%.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

That estimate assumes just one rate cut in '25 In terms of projected return on assets and return on tangible common equity, we're still comfortable with the previously announced 1.2 ROA, 15% return on tangible common equity as we head to '26, but we will refresh that analysis once we have a full quarter behind us. I'm hopeful for an even better outlook. Credit quality. The metrics saw significant improvement due to the merger and the work out of the sale of certain impaired loans. Our nonperforming asset ratio improved dramatically, just 0.28% from 0.51% a year ago.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

And the ACL as a percentage of loans jumped to 1.4% from from just 1%, although the significant increase reflects the non accretable mark. Charge offs remained in a reasonable range of 22 basis points in the quarter. There's no significant increase expected. CRE concentration ratio, as expected, has ticked up slightly to 438%. But with the merger, reduced CRE composition in the loan portfolio and higher earnings projections, we anticipate a sub 400 level by the 2000.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

I know you'll have questions about loan growth. Frank spoke to it a little bit. Genetically speaking, the loan portfolio has recently remained relatively flat, largely due to elevated payoffs. Having said that, we continue to see solid demand. The pipeline continues to.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

And along those lines, our capital remains strong to support growth. Bancorp tangible common equity ratio stands above 8% at 8.1%, will trend upwards with strong levels of retained earnings, while the bank's fee ratio today remains above 12%, down just a little from before the acquisition, and that reflects first of all, lower risk weighted assets of company. With that, I'll turn it back over to Frank, and we'll take some of your questions.

Frank Sorrentino
Frank Sorrentino
Chairman & CEO at ConnectOne Bancorp

Thank you, Bill. As you just heard, proud that we've been able to successfully close and immediately integrate this merger while also delivering on our strategic objectives as planned. We acquired culture complementary turnkey organization in an adjacent market, enviable client base and proven track record. Our markets are ripe with opportunities for a truly client focused bank, Our expanded footprint and team, coupled with the momentum we built, lay the foundation for a strong second half. As we move through the second half of the year, we look forward to driving growth and creating long term value for our clients, team members and our shareholders.

Frank Sorrentino
Frank Sorrentino
Chairman & CEO at ConnectOne Bancorp

Let me close by saying that our company was undervalued before. Today, I truly believe our valuation is even more compelling, ConnectOne, one of the best investments. As always, we appreciate your interest in ConnectOne Bancorp. Thanks again for joining us today. And with that, I'd like to turn it over for some questions. Operator?

Operator

Thank you. We will now begin the question and answer We'll go first to Fetty Strickland at HUBD.

Feddie Strickland
Director at Hovde Group

Good morning, Frank and Bill.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

Hi, Fetty.

Feddie Strickland
Director at Hovde Group

It's great to see the criticized and classifieds as well the NPAs down in the quarter. Are there any other opportunities in the back half of the year to maybe reduce those even a little further? They're already pretty low, but just wondering if there's any big boogies there.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

He's asking about our projection with classified and criticized. I don't see any major change from where we are today. You know, there's there's some stresses out there in the marketplace that have classified credit that wouldn't be unexpected. You know, with the with the write downs in loans, there's opportunities potentially unload some loans there. So we'll watch that number, but I wouldn't expect any change.

Feddie Strickland
Director at Hovde Group

Got it. And then just switching gears to capital. With the deal behind you now and the likelihood of pretty good capital generation in the next couple of quarters, how do you think through the dynamic between capital deployment and managing CRE concentration?

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

Well, the numbers pan out very nicely to see CRE concentration. That's based on the new origination of I hope that's part of it. And then part of the accretion of the deal, we're really in our relatively low dividend rate, really adding capital quickly. So I think I answered your question. We're to see that go down on its own. Are you asking about stock repurchases and growth?

Feddie Strickland
Director at Hovde Group

Yes. I'm just curious if there's like a target level of common equity Tier one or any other metric where you'd be a little more likely to engage in share repurchases.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

There's always a possibility. I mean, we came out of the gate when we talked about the deal that we hold off on share repurchases. In my view, the capital ratios are looking a little bit stronger than I originally anticipated. So I'll just leave that open for now, and we continually look at that in terms of share repurchases. It obviously depends on growth in the loan portfolio.

Operator

We'll move next to Daniel Tamayo at Raymond James.

Analyst

This is Tim Delacion filling in for Danny.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

Absolutely. Hi. Good morning.

Analyst

Hey. Just shifting to the margin here. Saw a really nice tick up in the securities portfolio this quarter. Curious what were the drivers there? And were there any actions taken on the legacy Flick portfolio that you did?

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

Well, we brought the securities portfolio increased because of the acquisition. So you see, you know, as of the balances on on an average basis, it's less because it's only one month. But we did do some restructurings. We think we improved our interest sensitivity and earnings from those restructurings. So you'll see the benefits of those going forward.

Analyst

Understood. And kind of following up on that five basis point positive impact for the 25 basis rate cut previously, should we kind of be thinking about that somewhat differently now kind of post merger here?

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

No. I'm still we're still sticking with that, that it's approximately five basis points for each cut. And in the estimates I gave you, we estimated one cut. So, you know, it could be up or down depending on how many cuts we see through '26. You know, as we build a bigger noninterest bearing deposit base, that would reduce the benefit of of of rate cuts, but it would improve the overall interest rate profile of the company.

Analyst

Okay. Understood. Thank you. Great color there. And then finally, you know, just looking at reserve levels here going forward, you know, you know, standing at, you know, one forty here, you know, obviously, a little bit elevated relative to historical levels.

Analyst

So how should we be thinking about those, you know, levels kind of trending from here?

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

Well, I did try to mention that we were we were up slightly excluding the nonaccretable reserve. So that was the reason for the jump. You know, to the extent I don't wanna comment on how much of that reserve we'll use, but I think we set up a pretty conservative one. So to the extent we we were conservative and we perform well, we'll have the ability to raise our reserves more going forward. Yeah. Our core reserves.

Analyst

Great. Awesome. Thanks, guys. Appreciate you taking my questions. You're welcome. Yep.

Operator

We'll go next to Tyler Cacciatore at Stephens Inc.

Tyler Cacciatori
Equity Research Associate at Stephens Inc

Hey. Good morning. This is Tyler on for Matt Breeze.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

Yes. Okay.

Tyler Cacciatori
Equity Research Associate at Stephens Inc

Sorry if I missed it. I think you said the reserve was a bit higher due to increased cap rates on regulated housing. Do you know the cap rates that were used for that?

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

Well, they're they it this is in our, I mean, our purchase accounting. Okay? And when you when you look at per when you look at purchase accounting, you have to look as a buyer of as we do that's what purchase accounting means for buying those loans. So you use cap rates that a buyer would use. So it probably ranged anywhere from six and a half to eight and a half percent, you know, for the for the purchase accounting adjustment.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

You know, if you get the loan appraised, you might see lower rates cap rates, but we use higher cap rates as a potential buyer of the loans.

Tyler Cacciatori
Equity Research Associate at Stephens Inc

Okay. Great. That helps. And then moving on to deposits. Is nice to see DDAs above 20% with the deal.

Tyler Cacciatori
Equity Research Associate at Stephens Inc

How do you feel about that number going forward? And is growing that realistic given the current environment? And then if you could just talk a little bit about overall composition and growth heading forward?

Frank Sorrentino
Frank Sorrentino
Chairman & CEO at ConnectOne Bancorp

Yes. I think there's a lot of opportunity to continue the trend of growing DDA higher relative to the entire portfolio. And part of that is you know, the mix of the loan portfolio as we continue to execute on C and I and other opportunities in the marketplace that come naturally with deposits and having, you know, what is a a a pretty substantial now presence on Long Island that had a higher DDA balance to begin with, we think there's some real great opportunity there to enhance a lot of the relationships that were formed there over the years. So I would say really look forward to continuing to build the book in a way that helps to keep the loan deposit ratio low and the DPA balances growing and a very well diversified loan.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

And I understand we're certainly off to a really great start, so I'm pretty optimistic.

Tyler Cacciatori
Equity Research Associate at Stephens Inc

Okay, great. Thank you. And then if I could just squeeze one more in. Know you talked a little bit about the loan pipeline heading forward. What are the yields you're seeing on that right now?

Tyler Cacciatori
Equity Research Associate at Stephens Inc

And then if you could give us some sense for near term growth projections. I think on last quarter's call, you spoke about 5% for the year. What do you see heading forward?

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

Well, first, the loan sorry, the loan rate on our pipeline is 6.77%. Okay? That's the weighted average rate. In terms of the grow growth rate, I wanna tell you that we are originating a lot of loans, and so there's still a lot of demand out there. The reason for the lower than anticipated growth has been payoffs, So it's hard to say going forward, but I'd say we'd be in the, you know, single digit going forward, you know, for the next six months.

William Burns
William Burns
Senior EVP & CFO at ConnectOne Bancorp

It could be in the low single digits, could be mid single digits. Frank, do you agree with me?

Frank Sorrentino
Frank Sorrentino
Chairman & CEO at ConnectOne Bancorp

Yeah. I I I I I'd like to characterize it as strong loan demand. Whether how much that translates into actual balance sheet growth is still a little bit subject to some of the payoffs. By the way, a number of the payoffs we're seeing, you know, we're happy to see. So overall, I think it gives us a better balance sheet going forward.

Frank Sorrentino
Frank Sorrentino
Chairman & CEO at ConnectOne Bancorp

I have to tell you, we we we seem to be very happy with both what's in the pipeline, what's coming off, and what the balance sheet should look like at year end, both from a composition standpoint, a earnings yield, depository relationships, all the things that we've been working towards. Whether we grow at 2%, 5%, 6%, I I I don't wanna say it doesn't matter, but to the extent that we can get the balance sheet that we want and we can continue to focus on treating our clients in the way that they wanna be treating and being the bank that they choose as their number one institution, that's where we see success coming from. And that will translate into a profitable model.

Tyler Cacciatori
Equity Research Associate at Stephens Inc

Great. Thank you. That'll be it for me.

Operator

And that concludes our Q and A session. I will now turn the conference back over to management for closing remarks.

Frank Sorrentino
Frank Sorrentino
Chairman & CEO at ConnectOne Bancorp

Well, I want to thank everyone again for your time today. We look forward to speaking with you again during the third quarter earnings call. With that, everyone, enjoy your summer.

Operator

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Executives
    • Siya Vansia
      Siya Vansia
      Senior VP & Chief Brand & Innovation Officer
    • Frank Sorrentino
      Frank Sorrentino
      Chairman & CEO
    • William Burns
      William Burns
      Senior EVP & CFO
Analysts
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