Q3 2024 ConnectOne Bancorp Inc Earnings Call
Yeah.
Speaker Change: Hello, and welcome to connect one Bancorp third quarter 'twenty 'twenty four earnings call. Please note that all lines are in listen only mode. At this time. It is now my pleasure to turn the call over to see advance yet Chief brand and innovation Officer, you may begin.
Speaker Change: Good morning, and welcome to today's conference call to review connect one of the results for the third quarter of 'twenty 'twenty four and to update you on recent developments.
Speaker Change: Today's conference call will be Frank Sorrentino, Chairman, and Chief Executive Officer, and Bill Burns Senior Executive Vice President and Chief Financial Officer at.
Speaker Change: I'd also like to caution you that we may make forward looking statements. During todays 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 the call and the company does not obligate.
Speaker Change: Just 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 schedule, which has been filed today on form 8-K with the SEC and may also be accessed through the company's website.
Speaker Change: I will now turn the call over to Frank Sorrentino. Frank. Please go ahead. Thank.
Frank Sorrentino: Thank you Sir and we appreciate everyone. Joining us. This morning. So throughout 2024, we remain committed to our strategic priorities, including supporting our clients extending our competitive position and driving profitable growth and investing in our valuable franchise.
Frank Sorrentino: Before discussing our third quarter performance I'd like to take a moment to review our recently announced merger agreement with first of Long Island Corporation.
Frank Sorrentino: Prudently structured transaction brings two strong complementary financial institutions that are well positioned in their respective markets.
Frank Sorrentino: Second to close during the first half of 2025, we believe it's a compelling financially disciplined transaction that creates meaningful synergies and a significantly enhanced platform for continued growth.
Frank Sorrentino: The feedback so far has been excellent.
Frank Sorrentino: Since the announcement I've personally heard from many clients employees and shareholders from both companies and the response has been overwhelmingly positive.
Frank Sorrentino: With the transaction connect one we'll size up to more than 14 billion in assets at $11 billion in loans and deposits. In addition, we'll have an improved balance sheet mix and expanded market reach.
Frank Sorrentino: Transaction increases our pro forma market cap to $1 3 billion, placing us in a larger higher valuation peer group, while also leveraging the benefits of economic and market tailwind already expected for our liability sensitive positioning.
Frank Sorrentino: <unk> connect one first of long island is commercially focused with a highly compatible client first culture and a strong credit track record.
Frank Sorrentino: Teams are energized and we expect to have a smooth process integration planning already well underway.
Frank Sorrentino: This combination meaningfully enhances connect one's presence on long island, our region, we've been organically focusing on over the past few years as a result of the merger the combined franchise in Nassau and Suffolk counties will immediately establish us as one of the top community banks on long island, furthering our position as a premier.
Frank Sorrentino: <unk>, New York Metro Community Bank.
Frank Sorrentino: In addition, the transaction is right with potential revenue synergies theres minimal client overlap and first of long island client base and operating areas likely to be a sizable source of new business opportunities, both spread and fee base.
Frank Sorrentino: Some of those areas will include additional products and services, including residential mortgage origination SBA lending deep.
Frank Sorrentino: Deepa commercial lending expertise, which will round out their C&I relationships and offer robust treasury solutions to enhanced commercial deposits and finally, just like it can make one there are numerous opportunities to leverage geographical synergies between our southeast, Florida team and first of long island clients, who have a presence in Florida.
Next turning to our 2024 third quarter operating performance, we remain laser focused and committed to our client first culture and relationship banking model as we've previously reported we have been active actively reducing our non relationship loans from our balance sheet. During the first nine months of 2012.
Frank Sorrentino: Four and these efforts should serve to improve our loan to deposit ratio and lower our CRE concentration as such there was a slight reduction in our portfolio this quarter, which really doesn't tell the whole story loan originations remained solid and we continue to build a steady and diversified loan pipeline going forward, we expect loan.
Frank Sorrentino: Growth may be relatively muted slightly up or slightly down during the next two quarters and beyond that we see a return to mid to high single digit growth means.
Frank Sorrentino: Meanwhile, we continue to grow our core deposits through both existing and new client relationships average client deposits since the second quarter were up by approximately $100 million of $130 million or 8% on an annualized basis.
Frank Sorrentino: Partially offset by a decline in average brokered deposits of $60 million and noninterest bearing DDA continues trending upward.
Frank Sorrentino: At the same time third quarter net interest margin on a core basis was flat. However, we ended the quarter with a spot margin wider upwards of 10 basis points wider as a result of the Feds 50 basis point cut in September.
Frank Sorrentino: We'll provide some more detail on our current margin expansion in a few minutes.
Frank Sorrentino: We're highly confident that <unk> is well positioned to drive increased profitability through the first fourth quarter and into 2025 and post merger completion.
Frank Sorrentino: Turning to credit coming off the transition away from a zero loss environment. The industry is starting to see isolated instances of credit impairment at.
Frank Sorrentino: At connect one we fared well, reflecting solid and consistent underwriting standards, while also maintaining a proactive approach to portfolio management and selective credit resolutions. This lending and credit philosophy has served us very well.
Speaker Change: With that as a strategic overview I'm going to turn the call over to Bill Bill take it away.
Bill Burns: Thanks, Frank Good morning to everyone on the call so I'm going to start right in there with the net interest margin.
Bill Burns: Try to give you some color both for the third quarter and where we are today post the fed's first rate cuts on our reporting on GAAP basis. The margin did compress slightly during the third quarter from the sequential third second quarter. However, on a core basis. The margin was actually up slightly the GAAP to core.
Bill Burns: Our adjustments to the sequential quarter comparison include.
Bill Burns: Higher average cash in the third quarter, which took the margin down by three basis points this quarter and in the second quarter, we had unusually high prepayment fees and non accrual interest income recapture which took the margin up by about four basis points in that second quarter. So taking those two items into account, we calculate our core margin.
Bill Burns: Slightly from quarter to after being up two basis points from quarter, one and three basis points from the fourth quarter of 2023. So the margin has been expanding at a modest clip over the past three quarters and going forward. We are now seeing more meaningful margin widening as the fed has begun its interest rate cuts.
Bill Burns: Spot net interest margin as of today is up approximately 10 basis points, putting our projected fourth quarter margin at about two <unk>.
Bill Burns: Now, let me dive a little deeper into our margin projections as of today the spot cost of our total deposits of nearly 20 basis points lower than it was during the third quarter that resulted from a 40 basis point lowering of rates on nearly $3 7 billion of non maturity interest bearing deposits and thats about 50%.
Bill Burns: Our total deposit base.
Bill Burns: On the asset side, we have a much lower amount that's repricing immediately just 19% of our loan book or $1 $5 billion as pure floating rate, which reprice downward immediately by 50 basis points late in the third quarter. So if you do the math on just those two items that calculates out to about nine basis point Mark.
Bill Burns: Your improvement as of today.
Bill Burns: That's not all we have several other items working to our advantage, namely got continued growth in core deposits with noninterest bearing demand growing since the end of the third quarter.
Cds will continue to be renewed at lower rates over time with approximately $200 million maturing each month the rates on Cds maturing over the next 12 months averaged $4 75. So you can figure about a 50 basis points improvement on that.
Bill Burns: And we have some $1 5 billion of adjustable rate commercial loans, which most commonly reset a five year intervals and they will reprice upward over the next couple of years and then finally the spread between newly originated loans recently being booked at rates above 7%. Maybe 750 is about 100 basis points more than loans come.
Bill Burns: Off the impact so far has been less significant than it could be but that is going to grow as loan originations increase.
Bill Burns: Other than that I'm going to refrain right now some specific guidelines for 2025, we've got a lot of tailwind out here, which are healthy, but I want to be cautious, especially in light of uncertain fed cut timing as well as competitive pressures that could slow down our deposit betas in a decreasing rate environment now.
Speaker Change: Now I want to comment a little further on the transaction with first of long Island, we've all seen a lot of mergers, but this one in my opinion is as compelling as they come checks all the boxes pricing discipline to acceleration of our strategy and it's a great cultural fit and adding to some of Frank's previous comments. The first one and on balance sheet is.
Speaker Change: Highly complementary accelerating the positive trends connect one has been realizing over the past couple of years. This transaction lowers our CRE composition by five percentage points and lowered our loan to deposit ratio by five basis five percentage points.
Speaker Change: It improves our noninterest bearing deposit composition also by five percentage points from 17% in 2000.
Speaker Change: And then our allowance for credit loss percentage will be strengthened we are at one point or two today and that ratio jumps to 133 on a pro forma basis and that higher loan loss ratio combined with first of loans islands, well known pristine asset quality creates an enviable credit reserve position like connect one first of all <unk>.
Speaker Change: Is also positioned to benefit from lower short term rates, resulting in no change to our forecast of widening net interest margin.
Speaker Change: In addition versus long Island, 35, plus branch retail network will enhance our ability to drive additional revenue opportunities, particularly in residential and SBA lending.
Speaker Change: Lastly, I want to mention that that interest rate mark of six 5% and when we announced the deal is likely to improve to lower market rates today and the passage of time and right now we estimate a one percentage point drop to that right Mark.
Speaker Change: Turning back to connect one on a standalone basis I just want to comment on a few items core noninterest income and expenses are each expected to increase modestly in the fourth quarter and into early 2025, and our credit quality remains sound with a level of non accrual loans and charge offs fluctuating are remaining within our expectations, we had a modest.
Speaker Change: Taken nonaccrual loans, one loan was paid off while two were placed on non accrual, but both of those are secured and appropriately valued criticized and classified totals increased to two 2% of total loans largely result of loan modifications that were re rated special mention those loans are well secured and on a path to full full restoration.
Speaker Change: And before turning it back to Frank I want to emphasize that our capital CRE concentration on loan to deposit ratios have been trending in a positive direction over the past year. These favorable trends are expected to continue pre merger and then accelerate post closing.
Frank Sorrentino: So Frank <unk> Napoli, Thanks, Bill so to wrap things up our earnings profile remains solid our balance sheet and credit are in a good place and we remain focused on our relationship driven business model. We look forward to the transaction with first of long island, the growth opportunities related to that expansion ongoing market opportunities that drive organic growth.
Frank Sorrentino: Our combined efforts all contribute to building connect one bank into a highly valuable franchise that is well positioned to take advantage of our expanded market opportunities driving sustainable go forward growth I want to thank you again for joining us today and now we'd be happy to respond to any questions operator.
Speaker Change: Thank you the floor is now open for questions. If you would like to ask a question and have dialed in please press star and the number one on your telephone keypad to raise your hand to enter the queue.
We will pause for just a moment to compile the Q&A roster.
Speaker Change: Great. Our first question comes from Matt Breese with Stephens, Inc. Your line is now open.
Matt Breese: Hey, good morning.
Speaker Change: Good morning, Matt.
Matt Breese: Frank just just wanted to clarify you discussed loan growth being a bit muted.
Speaker Change: Here in near term before.
Speaker Change: <unk> back to a mid single digit high single digit pace can you just clarify around timing.
Speaker Change: More muted for another two or three quarters or is it taking longer than that.
Speaker Change: No I think Theres a couple of things that go into that one I think as you've seen across the banking sector.
Speaker Change: The economy is a little bit on the slow side relative to loan growth.
Speaker Change: C&I generation is sort of slow although it is beginning to come back to life.
Speaker Change: Our originations are definitely down in a lot of different areas.
Speaker Change: We are seeing some increases in places like construction and.
Speaker Change: Some of the owner occupied areas and we are because of our internal efforts in conjunction with that being a bit disciplined about renewals for non relationship type type clients. So while we have a pretty strong pipeline and we see it growing over time, we're also.
Speaker Change: So that's also being offset somewhat by some of the.
Speaker Change: The relationships are non relationship rather that we're trying to work out of the out of the.
Speaker Change: Company I don't think that goes beyond another quarter or maybe two I am not even sure. If it goes out that far I do see signs of.
Speaker Change: A pickup both organically because of connect ones efforts, but also because of the combined efforts with first of long Island.
Speaker Change: I would expect certainly by the second quarter of 2025 that we would.
Speaker Change: Again regain our more normalized growth path.
Speaker Change: Come sooner.
Speaker Change: Could be wrong.
Speaker Change: A lot of it depends on how quickly pay offs come in and how quickly loans close and what the balances are at closing date.
Speaker Change: But.
Speaker Change: Maybe I'm being a little bit conservative here pushing out two quarters, but probably for the next quarter or so I would say it.
Could be slightly up slightly down.
Speaker Change: Okay.
Speaker Change: And then Bill just turn to the NIM I would just love to hear your thoughts and expectations around loan and deposit betas. If we follow kind of the fed dot plot and whether or not you expect those figures to be fairly similar to what they were on the upcycle.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Payers were a little bit higher on the upside it cycles. So it just gives us more room to keep those betas high on the way down and we were as I think I mentioned on the call.
Speaker Change: 80%, 80% data for the first shift coming forward I forgot you had a question on that.
Speaker Change: It could range anywhere from 60 to 100 data on the on the next Scott, Okay. So I'm sticking with the 80% data for now.
Speaker Change: Okay.
Speaker Change: And then last one from me.
Speaker Change: With the deal there was talk of.
Speaker Change: I think it was $100 million sub debt raise.
Speaker Change: Could you just update us on whether this remains intact timing.
Speaker Change: Expectations on pricing and whether or not this kind of remains the chosen course of capital just given how expensive stuff that has been recently thank you.
Speaker Change: Look the expectation is to do that transaction a little bit before closing so some time.
Hopefully in the first quarter of next year, we have a $75 million.
Speaker Change: Sub debt repricing I think its in June or July.
Speaker Change: And so we'll probably put those two together for $175 million offering then I think right now the rates are $8 50 to $8 75.
Speaker Change: Hopefully they'll come down Matt, but whatever it is I think we will be in your models I think we would be committed to doing it at those levels.
Matt Breese: Okay I appreciate all that I'll leave it there. Thank you.
Speaker Change: Yes, Thanks, Matt.
Speaker Change: Alright, great. Thank you. The next question comes from Dan <unk> with Raymond James Your line is now open.
Speaker Change: Thank you.
Speaker Change: Good morning, everybody.
Speaker Change: Good morning, Dan maybe.
Dan: Yes, maybe first just clarification I know you guys.
Speaker Change: You mentioned the spot net interest margin was up 10 basis points.
Speaker Change: Can you just.
Speaker Change: Give us a sense for what that was I'm not sure. If you were saying up from prior three months or from the third quarter average.
Speaker Change: Yes, so from yes from the third quarter average is what I'm talking to.
Speaker Change: There's always some fluctuation and noncore items, but I feel comfortable with the spot margin plus the way. The other items are coming through that we could get to $2 80.
Speaker Change: For the for the third quarter and that so im sorry for the fourth quarter and that right now is assuming one more.
Speaker Change: Okay. So so $2 77.
Speaker Change: The third quarter, Youre, saying $2 80 in the fourth quarter with with one more cut so it seems like.
Speaker Change: I was wanted to cut and other things that are working to our favor okay.
Speaker Change: Right because we have more we have more cd's repricing. There is a whole bunch of Bob there's a whole bunch of things going into the margin, but when I put it all together, we're coming out as a projection of $2 80, so, possibly a little bit lower we're also possibly a little bit higher.
Speaker Change: Okay. Okay. Thank you.
Speaker Change: And I guess the related question in the third quarter it looks like loan yields were actually.
A little bit just curious what drove that given well.
Speaker Change: On a coupon basis, but it was because of of having we had a large.
Speaker Change: Non accrual interest recapture so that had a lot to do with SAP part and obviously the cut and fill.
Speaker Change: 50 basis points cut did reduce loans loan yields at the end of the quarter.
Speaker Change: So I think I said it may have to turn the call. We had I guess right now is a 20 basis point reduction in the deposit costs.
Speaker Change: And a 10 basis point reduction in the loan from the from the cut.
Speaker Change: Okay, Alright thats helpful. Thanks.
Speaker Change: And then finally, just moving over to credit so just looking at the.
Speaker Change: The criticized loans.
Speaker Change: I was just doing some back of the envelope math it looks like that number was was up a decent amount in the third quarter Wonder if you could provide.
Speaker Change: Provide any color on the drivers of that number.
Speaker Change: Yeah, we just we did some loan modifications that put the loans into special mention.
Speaker Change: Which is the best of the classified and criticized categories.
Speaker Change: And those loans are and we in our view on a better position and we will be restored in due course.
Speaker Change: And these were you mentioned.
Speaker Change: Sorry loan I think relative to a year ago in the release, how much of that move was that one loan.
Speaker Change: I don't know.
Speaker Change: Recall Dan.
Speaker Change: This release and our prior release.
Speaker Change: This release you said.
Yes.
Speaker Change: The increase was primarily due to a loan modification of one CRE relationship those special items.
Speaker Change: Yes that was that's what I'm talking about it was one relationship with many loans.
Speaker Change: Understood. Okay. So that was that was really the big driver on a quarter to quarter basis as well.
Speaker Change: Right yes.
Speaker Change: As I said the loans are valued appropriately on our books.
Speaker Change: Got it okay alright. Thank you for all the color I'll step back I appreciate it sure.
Speaker Change: Thanks Ben.
Speaker Change: Okay.
Speaker Change: The next question comes from the line of Frank Schiraldi with Piper Sandler Your line is now open.
Frank Schiraldi: Good morning.
Frank Schiraldi: Frank.
Frank Schiraldi: Just on the <unk>.
Frank Schiraldi: The one on the on the margin Bill in terms of the $2 80.
Frank Schiraldi: Yes, just curious about $2 80 still assumes similar liquidity levels to what we what we saw in <unk>.
Speaker Change: We're going to pick up a couple of basis points, because we have already begun to reduce some of that liquidity. So.
Frank Schiraldi: Some of that is in there.
Frank Schiraldi: I can't I can't predict exactly what the margin is going to be but we will probably pick up a couple of basis points from reduced liquidity.
Frank Schiraldi: Okay.
Frank Schiraldi: And my $2 80 projection as I said before.
Frank Schiraldi: It could be a little bit higher it could be a tiny bit lower it could be higher.
Frank Schiraldi: And then.
Frank Schiraldi: Okay.
Speaker Change: <unk> data you talked about is that.
Speaker Change: Basically it seems like the NIM is trough here.
Speaker Change: Even in a in a steady rate environment.
Speaker Change: With the rate cut that's still a pretty.
Speaker Change: Immediate five basis point benefit.
Speaker Change: Yes.
Speaker Change: We're still good with that.
Speaker Change: We tried to be as precise as we can it's like four or five basis points on that but.
Speaker Change: The margin when we look at it on a core basis has actually been trending upward by a couple of basis points each quarter. So, yes kind of flat in a way but.
Willing to tell you that it's being with even without cuts are margins going up slightly.
Got you and then.
Speaker Change: And then just on the expenses you mentioned moderately higher in the fourth quarter right.
Speaker Change: Any sort of guardrails you can put around that do you think you can hold it in sort of that $38 million range in the near term.
Speaker Change: It could be what could be a 1% to 2% increase sequentially.
Speaker Change: Okay great.
Speaker Change: And then I guess, just lastly on.
Speaker Change: The.
Speaker Change: Slipped deal, obviously brings down the loan to deposit ratio a bit.
Speaker Change: So there's less.
Speaker Change: <unk> pressure or less focus on reducing that I mean, it seems like.
Speaker Change: Within your sweet spot or allowable range.
Speaker Change: But the flip deal. So is there would you say theres a little bit less emphasis on moving that lower engineering time.
Speaker Change: No I was going to say that I think this transaction with all the benefits on the balance sheet gives us more flexibility.
Speaker Change: Two.
Speaker Change: Opportunistically capitalize on growth opportunities in the marketplace in the second half of next year. So we're in a much better position than we were before.
Speaker Change: Before the transaction from a balance sheet perspective.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: It also gets Frank it also gives us the capability to rely more on the core deposit base.
Speaker Change: Which has a better pricing dynamic to it and reduce our reliance on.
Speaker Change: Brokered or borrowings or whatever and gives us the firepower to continue to grow the balance sheet on the lending side, which we've really never really felt we've had a constraint before but I will tell you it feels better with lower loan to deposit ratio.
Speaker Change: Okay.
Speaker Change: Alright, great I appreciate it.
Speaker Change: Alright, Thanks Danny.
Frank Schiraldi: Frankly, it was Frank sorry.
Speaker Change: Yes.
Speaker Change: And before we take our next call I just want to remind you. If you would like to ask a question. Please enter star one on your telephone keypad now.
Speaker Change: <unk> one to enter the queue.
Speaker Change: Our next question comes from the line of Tim Sweitzer with K B W.
Speaker Change: Your line is now open.
Tim Sweitzer: Hey, good morning, Thanks for asking my question.
Speaker Change: Thanks Kurt.
Tim Sweitzer: But I wanted to ask is there any opportunity with the flick merger and you guys have strong capital and sub debt raise to.
Tim Sweitzer: Maybe do a little bit of a securities restructuring, particularly with.
Tim Sweitzer: Flip portfolio that would be taking on a fair value.
Tim Sweitzer: What's the potential earnings upside you guys see there.
Speaker Change: There certainly is some potential after their balance sheet as mark to do restructuring I don't think it's necessary to make our numbers, but to the extent improve improves entered our ratios will provide.
Tim Sweitzer: Additional capacity to grow.
That's something that we would consider so we're in a good position in that that portfolio is going to be mark to market.
Speaker Change: Okay and in terms of securities and loans.
Okay that makes sense.
Speaker Change: I wanted to ask about.
Speaker Change: Both fly.
Speaker Change: What's kind of the long term growth outlook and revenue potential here any update you can provide does that improve at all with rates moving lower and then.
Speaker Change: Is there any opportunity to kind of.
Speaker Change: All right.
Speaker Change: Leverage the <unk> merger as well and some of their customer base and the new market.
Speaker Change: I think the answer to that is yes on all counts lower rates, obviously promote more business startups, which is work with the business that <unk> is really <unk>.
Speaker Change: <unk> seen.
Speaker Change: Fairly decent uptick recently.
Speaker Change: In the last quarter or so on franchise ores that are utilizing the platform for both lie and then.
Speaker Change: Put through business that winds up in the SBA portfolio.
Speaker Change: We've dramatically improved by the by the branch network that's available.
Speaker Change: At first of long Island, and the fact that they did not do any.
Speaker Change: Virtually.
Speaker Change: No SBA lending, so I think theres a lot of great opportunities.
Speaker Change: That's great I appreciate it thanks for taking my questions.
Speaker Change: Youre welcome.
Speaker Change: At this time there are no further questions I would like to turn the call back over to the management team for closing remarks.
Speaker Change: Thank you I would like to thank everyone for their time today and of course. Thank you for all the questions. We look forward to speaking with you again during our year end conference call in early 'twenty five so with that have a great day.
Speaker Change: This concludes today's conference call you may now disconnect.
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