Q4 2024 ConnectOne Bancorp Inc Earnings Call
Hello, and thank you for standing by my name is Bella and that will be your conference operator today at this time.
I would like to welcome everyone to connect one Bancorp, Inc. Fourth quarter 'twenty 'twenty four earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Speaker Change: 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 question Press Star One again I would now like to turn the conference over to see events, Yeah, Chief brand and Innovation Officer. Please go ahead.
Speaker Change: Good morning, and welcome to today's conference call to review connect one's results for the fourth quarter of 'twenty 'twenty four 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.
Speaker Change: 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.
Speaker Change: Yeah.
Speaker Change: 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 8-K with the SEC and May also be accessed through the Companys website I will now turn the call over to Frank Sorrentino. Frank. Please go ahead.
Speaker Change: We appreciate everyone joining us this morning.
Speaker Change: So last year when we enter 2024, we fully recognize the challenges that lay ahead for the industry and for Kinect one.
Speaker Change: Despite that challenging environment the team here at Quebec, one persevered by reinforcing our focus on relationship banking, which strengthen our capital loan mix and our core deposits.
Speaker Change: Now, we're well positioned to dramatically improve our financial performance, which is accelerating as we look ahead to 2025 or.
Speaker Change: Our efforts also paved the way for our upcoming merger with first National Bank of long Island.
Speaker Change: 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 but more supportive regulatory environment.
Speaker Change: The merger is progressing on schedule and we are optimistic closing will occur in the second quarter of 2025.
Speaker Change: The company will operate under the connect one bank brand on day, one with the systems conversion. Following soon after the legal close.
Speaker Change: Teamed up with first of long island proactively getting in front of its clients anticipating in addressing their preferences and reinforcing a seamless transition.
Speaker Change: We're also actively engaging with first of long island team to share connect <unk> client first culture, which centers on our relationship banking business model in a sense of urgency in everything we do.
Speaker Change: Regarding the merger efficiencies, we're already working these into the institutions on a standalone basis, which gives us a strong head start and realizing financial projections.
Speaker Change: From a systems perspective, and efficient and successful core conversion has been planned.
Speaker Change: These costs have already been negotiated at very attractive terms and on a timetable.
Speaker Change: Ready to be quickly implemented.
Speaker Change: 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.
Speaker Change: And we'll size up to nearly 15 billion in assets.
Speaker Change: And a market capitalization of over $1 2 billion, placing connect one in a larger higher valuation peer group.
Speaker Change: Also be able to leverage the benefits of economic and market tailwind, which have already accelerated due to our liability sensitive positioning.
Speaker Change: In short I'm very excited about the opportunities. The transaction offers we look forward to serve in the first along islands clients and leveraging the expertise of its team to extend our reach across New York City Long Island and Florida.
Speaker Change: Turning now to connect one stand alone 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.
Speaker Change: So realized solid growth in both loans and core deposits connect one's ability to attract deposits as an important strengths. One we have nurtured by focusing on our unique client approach, while adding talent that fits the connect one team.
Speaker Change: Fourth quarter deposit activity accelerated with core deposits, increasing more than 3% on a quarter over quarter basis, reflecting notable success in noninterest bearing demand balances.
Speaker Change: Turning to lending connect one delivered quarter over quarter loan portfolio growth of 2% quarterly growth rate that we expect will continue.
Speaker Change: 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.
Speaker Change: Credit trends in key metrics remains sound and stable with all signs, indicating this will continue into 2025.
Speaker Change: 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 our more than 25 basis point improvement in our cost of deposits.
Speaker Change: Adding into 2025, we continue to anticipate further margin expansion and that is with or without any additional fed rate cuts.
Speaker Change: Performance metrics were much improved this quarter.
Speaker Change: And we firmly believe that our unique operating philosophy focused on our culture of client obsession.
Speaker Change: Forging a better place to be while expanding with a three X vision.
Speaker Change: Together with our strong balance sheet industry tailwind and our pending merger supports our long term focus on driving shareholder value.
Bill Burns: With that I'm going to turn it over to bill.
Bill Burns: Alright. Thank you Frank good morning to everyone on the call I think as you saw in our 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 interest bearing demand accelerated.
Speaker Change: <unk> loan growth growth increased 8% driven by business loan demand.
Speaker Change: Our loan to 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.
Speaker Change: 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.
Speaker Change: Most of that margin increase was due to a steep decline in our average cost of deposits while about five of those basis points to 19, and widening was due to elevated prepayment fees and the payoff and recapture of interest on a couple of non accrual loans.
Speaker Change: 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 heading into the first quarter of 'twenty five we've got a couple of things positively impacting projected net interest income first we project average loans to be about 2% higher than the first quarter versus the fourth.
Speaker Change: And second the margin is still expanding our reported margin for the quarter was $2 86 the.
The core margin I put out about $2 81, and looking forward based on stronger spot rates today, we are projecting an improvement to approximately $2 nine in the first quarter.
Speaker Change: On 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.
Speaker Change: We continue to have CD repricing, there is $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.
Speaker Change: Also want to point out that our margin widening is strictly organic we have not utilized loss trades or restructuring transactions that would negatively impact tangible book value per share.
Speaker Change: I'm going to now turn to expenses.
Speaker Change: As disclosed in the release, we had roughly $1 4 million in after tax nonoperating adjustments that included merger expenses and a $500000 charge on the sale of a previously closed branch location, but excluding the nonoperating items expenses actually declined sequentially that reflected some accrual adjustments as well as the very early stages.
Expense savings for the pending first of all long island merger.
Speaker Change: Going into the first quarter I am currently projecting a 2% to 3% sequential increase in Opex.
Speaker Change: Typical as we head into a new year and on a standalone base expense growth would taper off a bit throughout the remainder of 'twenty five.
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.
Speaker Change: <unk> loans were just four basis points with zero past due more than 60 days I believe thats as good as it's ever been and our criticized and classified loans did increase from two two to $2 seven as a percentage of the portfolio, that's well within our historical range and our credit outlook remains sound.
Provision for credit losses of $3 5 million for the quarter, largely reflected loan growth and specific reserves and charge offs.
Speaker Change: With regard to the effective tax rate you may have noticed a decrease 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% level in the first quarter.
Speaker Change: 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 long Island is not set our expectations are for it to occur during the second quarter. After closing the transaction will enhance our net interest margin by about another 10 basis points that reflects both first of long island.
Speaker Change: <unk> Standalone margin in purchase accounting, so our spot NIM projection at closing should be about 310.
Speaker Change: As we head into 2026 with all cost saves fully implemented our margin protection increased $3 20, while operating ROA is projected to reach 115, and our return on tangible common equity expected to be in the 12% to 13% range.
Speaker Change: Also give you a quick update on the loan Mark risk free rates have increased since announcement, but the yield curve is no longer inverted so called liquidity premium has declined.
Speaker Change: Led to a total discount rate, that's just slightly above where it wasn't September so the loan Mark is just slightly larger increasing to about $250 million from $235 million, when we announced the deal.
Speaker Change: Our goal has always been to hit the ground running with this merger. The ahead of the actual closing we are already making headway with regard to client engagement staff integration efficiency and revenue enhancement.
Speaker Change: And before I turn it back to Frank I want to reiterate reiterate that we remain in 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 remained sound this value enhancing transaction with first of all I'll will bolster our performance metrics and increase our.
Speaker Change: <unk> is a premier New York Metro community banks 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.
Frank Sorrentino: Thanks, Bill to summarize we ended the year with meaningful earnings momentum strong capital ratios strong a solid balance sheet and our positive outlook for 2025, we are well positioned to expand our geographic footprint strengthen client relationships and capitalize on the organic growth in our core markets. Additionally.
Frank Sorrentino: We look forward to completing the first along island merger, which will further support our efforts to drive sustainable value enhancing growth.
Frank Sorrentino: Maximizing shareholder value is a top commitment of our team our board and by me personally as one of the largest shareholders with that I'd like to turn it over for some questions operator.
Frank Sorrentino: Okay.
Speaker Change: 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.
Speaker Change: Your first question comes from the line of Matthew Breese with Stephens Inc. Please go ahead. Your line is now open.
Matthew Breese: Hey, good morning.
Hi, Matt.
Frank Sorrentino: Frankly, bill I wanted to start with loan growth results were a bit better than expected for the quarter and your commentary suggests it will continue so I guess.
Frank Sorrentino: Curious what the pipeline looks like Youre seeing in terms of spreads and I guess bigger picture whats change on this front in the last couple of quarters, there's been some hesitancy some cautiousness here it feels like the return from the better.
Frank Sorrentino: What are you seeing from a boots on the ground perspective.
Frank Sorrentino: Matt I'll, let bill comment on some of the spread in actual numbers and.
Speaker Change: The nuts and bolts to the pipeline, but I can 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. It was a couple of things at work there was an emphasis here on <unk>.
Speaker Change: Emphasizing non relationship business and so at the same time, we were bringing new loans on we're also pushing some off.
Speaker Change: Where folks that had made promises to keep deposits with us and didn't we sort of called through the portfolio and 24 was a year of doing that as.
Speaker Change: As we got closer to the end of the year, there is less and less of that to do right. So the actual incur.
Speaker Change: The increase from the loan pipeline starts to add up I do think there was some level of hesitancy on a number of our clients and the beginning part of 'twenty four 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.
Speaker Change: Got closer to completion and there was a hell of a lot more confidence.
Speaker Change: 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.
Bill Burns: And Matt This is bill in terms of spreads.
Speaker Change: First off we always remain disciplined when we price loans and make sure we get the appropriate return spread around all the transactional loans that we do so you can just give you some numbers for the fourth quarter.
Speaker Change: We book loans at 745, they came off at like $6 86 to 90. So it was a little bit of spread improvement there in our pipeline right now has a weighted.
Speaker Change: Average rate of 762.
Speaker Change: Sure.
Speaker Change: Great. Okay, and then Frank one of the other positives this quarter was just.
Speaker Change: Deposit growth as a whole, but really within that noninterest bearing deposit growth and hoping for some color as to what kind of drove that and expectations for both deposit growth and composition into 2025.
Speaker Change: Yes.
Speaker Change: 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 promise to do I think some of.
Speaker Change: Our deposit initiatives around the organization have been working quite well people are finding <unk> to be.
Speaker Change: A great bank to do business with and so that we've been able to cajole people to bring more deposits here.
Speaker Change: And as we've said in previous calls.
Speaker Change: Previous calls there.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Just let me add let me add to that Matt.
Speaker Change: I am definitely seen we track. This every single day and the core noninterest bearing demand is heading upwards and maybe even accelerating we did have some seasonal things I would call. It that that increase the growth rate even more I don't think we're going to have a 50% annualized growth rate in noninterest bearing.
Speaker Change: But the trends are that it is heading up nicely.
Speaker Change: Great and then last one for me.
Speaker Change: We're still kind of.
Speaker Change: Thinking about our capital raise in the first quarter I'm assuming in.
Speaker Change: And curious if that will include the upcoming kind of repricing of sub debt for later this year and if you are still kind of considering sub debt versus some other form.
Speaker Change: Yes, no we still have sub debt as part of our plans.
Speaker Change: As part of the transaction and then we do have $75 million reprice.
Speaker Change: Repricing so.
I expect we probably do $1 $75 million to $200 million does it take care of all of that.
I'll leave it there. Thank you for taking my questions.
Speaker Change: Thank you Matt.
Speaker Change: Again, if you would like to ask a question press star one on your telephone keypad.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Daniel Tamayo with Raymond James.
Speaker Change: Please go ahead.
Daniel Tamayo: Yes. Thank you good morning, guys.
Speaker Change: Okay.
Speaker Change: Maybe just a follow up on the loan growth question. So clearly.
Speaker Change: A really nice quarter from from the perspective of loan growth.
Speaker Change: Just curious how the.
Speaker Change: The CRE concentration factors into that growth going forward seeing as that was.
Speaker Change: And a big big driver of the growth in the in the fourth quarter.
Speaker Change: Yes, that's basically the question well Dan gross idea.
Dan: Sure Dan It shows up on the FSC codes FCC codes as CRE concentration, but a lot of that was owner occupied as well as construction. So we're we're happy with.
Dan: The mix of growth and I would still say that our CRE concentration it will be trending downward.
Dan: Okay.
Dan: Alright, I'm glad to hear it.
Dan: And then I guess.
Speaker Change: You guys have.
Speaker Change: You had you had a great quarter from a revenue perspective.
Speaker Change: The credit you sounded relatively bullish given the increase in classifieds and mpls.
Speaker Change: Appreciate your comments that mpls sounded like they were trending down in the first quarter.
Speaker Change: I guess my question is.
Just curious how you feel about the sensitivity of your credit.
Speaker Change: The book overall to rates from here.
Speaker Change: If we do have.
Speaker Change: Declines or even increases just how you view the overall sensitivity from a credit perspective.
Dan: Well, Dan we obviously watch that very closely.
Dan: The repricing of loans as each quarter goes by there is more and more of a track record right. That's being built we have a portfolio of some $875 million of loans have repriced.
Dan: Recently at higher rates and.
Dan: 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 our indications are that.
Dan: Any any increases in nonperforming loans or charge offs can be handled through earnings as we've been doing the past few quarters.
Dan: Okay, and what would you say is do you have a sense for what's driving the.
Dan: Decline in Mpls like what you had this run up probably due to higher rates I mean is it.
Dan: What do you what do you think the only way.
Dan: The portfolio of nonperforming non accrual loans is like there is 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 negotiating pricing on that and so that would be the driver of rigs.
Dan: <unk>, our non accruals.
Speaker Change: Okay, Alright, that's helpful. Alright, thanks for taking my questions.
Dan: Thanks, Dan.
Speaker Change: Your next question comes from the line of Tim Sweitzer with K B W. Please go ahead.
Tim Sweitzer: Hey, good morning, Thank you for taking my question.
Speaker Change: Chandler.
Speaker Change: 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 in the middle of the quarter back into the quarter or anything like that.
Speaker Change: Hard to tell.
Speaker Change: At this time I would say it will be it should be somewhere in the second quarter, but at this moment I think it would be very difficult.
Speaker Change: And then whether it's in the beginning or the end.
Speaker Change: Yes totally understand.
Speaker Change: And we appreciate the 2025th U curve.
Speaker Change: Are you able to discuss some of the expense assumptions you have behind that.
Speaker Change: And now you are expecting to get all the cost saves but.
Speaker Change: Any guidelines on like an efficiency ratio or core expense run rate would be helpful.
Speaker Change: Hi.
Speaker Change: I'm not ready to give that out at this moment, Tim because I need to know the closing date as well as.
Speaker Change: We will need some time to fully implement those.
Speaker Change: But I'm confident that we're going to hit our numbers.
Speaker Change: Whether it's through expense growth at the two separate entities versus the street targets and.
Speaker Change: And the cost saves coming from the transactions, which will occur over time so.
Speaker Change: <unk>.
I'm bullish.
Speaker Change: Good about what I see out there in terms of of Street estimates for expenses that we can beat those.
Great Okay.
Speaker Change: And the last question I have is and sorry.
Speaker Change: Sorry, if I missed this but what are the right assumptions behind.
Speaker Change: The NIM outlook, you gave with the 310 spot them in through 202020.
How could you know.
Speaker Change: Lesser more rate cuts impact that.
Speaker Change: Oh so.
Speaker Change: In fact, just to try to give you. Some guidance you know, there's always moving parts right that impacts us.
Speaker Change: Fees and other things that I'll call nonrecurring as well as.
Speaker Change: The shape of the yield curve, but I'm generally expecting about a five basis point increase in the margin without any rate cuts.
Speaker Change: Similarly, 10 basis points from the merger and then maybe another five from any rate cuts should they materialize over the year. So.
Speaker Change: You can add that up any way you want.
Speaker Change: And that gets us to about $3 20, or so at the start of 2006.
Speaker Change: Okay. So it sounds like that's assuming no rate cuts.
Speaker Change: Right right right Navy Navy one.
Speaker Change: Got it okay. Thank you that's okay helpful. Thank you.
Speaker Change: That concludes our Q&A session I will now turn the conference back over to the management for closing remarks.
Speaker Change: 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.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
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