Q3 2025 ConnectOne Bancorp Inc Earnings Call
Speaker #4: Thank you . And welcome to the ConnectOne Bancorp Inc Third Quarter 2025 Earnings Call . At this time , all participants are in a listen only mode .
Speaker #4: A brief question and answer session will formal presentation . As a reminder , this conference is being recorded . It is now my pleasure to introduce your host Siya Vansia , our chief brand and Innovation Officer .
Speaker #4: Ma'am , please go ahead .
Speaker #5: Good morning and welcome to today's conference call to review Connect One's results for the third quarter of 2025 and to update you on recent
Speaker #5: be Frank Sorrentino Chairman and Chief Executive Officer and Bill Burns , Senior Executive Vice President and Chief Financial officer . It would also like to caution follow the that we may make forward looking statements during today's conference call that are subject to risks and uncertainties .
Speaker #5: 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 .
Speaker #5: 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 8-K with the SEC and may also be accessed through the company's website .
Speaker #5: I will now turn the call over to Frank Sorrentino . Frank . Please go ahead .
Speaker #6: Thank you , and good morning , everyone . Pleased to report that during the third quarter , we continued to build upon our strategic objective , clear reflection of our team's focus .
Speaker #6: Client dedication and discipline . As a result , the integration of our mergers complete credit quality remains solid and our margin continues to expand , all while organically growing our balance sheet .
Speaker #6: And so our systems merger as we just talked about , systems merger , integration , which took place only two weeks after the legal close when exceptionally well driven by outstanding collaboration across our team and our first full quarter post-merger , we're operating seamlessly .
Speaker #6: One organization , Consolidated Systems , strong cultural alignment and unified client first mindset . We have since built meaningful momentum across our markets , leading to accelerating performance metrics , seeing strong engagement , ongoing new client onboarding , healthy growth loans and deposits .
Speaker #6: This progress is especially evident on Long Island , where we're leveraging our strategy to drive growth and strengthen our position in attractive market .
Speaker #6: We entered several years ago . The merger has accelerated our goals . Importantly , the positive financial aspects of the transaction are beginning to take hold .
Speaker #6: And Bill discussed a little bit more about that . A little more detail in a minute . Operationally , connect one's ability to attract and retain deposits remains a strength .
Speaker #6: During the third quarter , our core deposits continued to grow across across both established and newly acquired client relationships . Loan originations this quarter remained healthy , with over $465 million in new funding .
Speaker #6: Our team is energized as leverage . Our expertise in attract growth opportunities across our expanded . Looking ahead , we're well positioned for the balance of 2025 and into 2026 with a healthy and diversified pipeline across CNI construction , SBA lending demonstrating the strength and the reach of our franchise .
Speaker #6: Credit our Annualized net third quarter operating performance clearly demonstrates the strength and the potential of this organization . And with that overview , I'll turn it over to Bill to walk through some of the performance in more .
Speaker #6: remains strong , supported by prudent and consistent underwriting standards . Although oversight . Our non-performing assets were just 0.28% at the end of the quarter .
Speaker #6: Well , great .
Speaker #7: Thank you Frank . Good morning to everyone on the call . It was a great quarter . And our outlook remains very positive with strong performance anticipated across all of our operations .
Speaker #7: As Frank mentioned , the merger , which was finalized five months ago on June 1st . Now fully integrated . And that was due to a swift , seamless brand and back office systems conversion completed within the very first month .
Speaker #7: And that rapid integration has allowed performance metrics to excel, with an acceleration of improvements expected in the fourth quarter and into 2026.
Speaker #7: Operating performance metrics already show significant year over year improvement in the current quarter . Operating return on assets increased by over 30 basis points to 1.05% , while ppnr as a percentage of assets rose by approximately 50 basis points over the past year to 1.61 .
Speaker #7: Our earnings performance is being driven by the merger and a widening net interest margin , which grew to 311 from 306 , and the sequential quarter , and from 267 a year ago , and the spot margin at quarter end was already higher than 320 .
Speaker #7: We expect a fourth quarter margin at 3.25 , or even above the current quarter's margin of 311 , reflected two temporary factors . One was the 75 million of high rate subordinated debt that was outstanding , but redeemed on September 15th , and we also had higher than typical average cash balances due to the large deposit growth that we've had , which exceeded 600 million .
Speaker #7: We anticipate average cash balances to be below 400 million in quarter four , as that cash rotates into loan fundings . So without those two items , which work to compress a reported margin , the third quarter Nim would have been in excess of 350 .
Speaker #7: In terms of the balance sheet , we continue to observe robust deposit growth following exceptional organic growth in the second quarter . Potential basis , our client deposit growth was approximately 4% annualized , and that was building on the quarter .
Speaker #7: On the second quarters annualized growth of 17% annualized sequential loan growth for the quarter matched deposit growth . And that maintained our loan to deposit ratio below 100% .
Speaker #7: Now , the loan pipeline is strong , and we expect loan growth to accelerate in the fourth quarter . Average loans increasing by more than 2% , not annualized 2% from quarter to quarter versus the sequential third quarter .
Speaker #7: And please keep in mind for your models that average cash is likely to decrease , and that will slow the increase in total interest earning assets .
Speaker #7: For 2026 , we could easily see loan growth in the 5% plus range that will be dependent on core . Of course , on the economy and loan demand .
Speaker #7: Now , adding to the strong performance of Connect One this quarter were two non-recurring items that boosted pre-tax income by more than 10 million on the .
Speaker #7: Explain those to you . First was a 6.6 million of cash received this quarter . The Employee retention tax credit that was conceived during the pandemic .
Speaker #7: Now , initially , it was for companies with less than 100 employees , and that was for the years 2019 and 20 . That employee threshold was raised for 2021 to .
Speaker #7: Include businesses with up to 500 employees . That allowed Connect One to qualify at the time , Connect one had 450 employees collecting our officiant operating model .
Speaker #7: Given our asset size . Now , today , our staff size has grown to about 750 employees due to organic growth and acquisitions .
Speaker #7: Yet we remain a peer-leading, efficient organization, with about $19 million in assets per employee. Now, regarding the second one-time benefit recognized during the quarter, there is the $3.5 million pension curtailment gain relating to the freezing of the personal pension plan.
Speaker #7: Effective September 30th , with a shifting of those benefit values to our 401 K match program . The realignment of the benefit plans will result in merger net cost savings of 1 million annually , and that's in addition to this one time 3.5 million present value benefit recorded this quarter .
Speaker #7: Now , in terms of noninterest income 19 million recurring level noninterest income . Right now remains at about 7 million per quarter . We expect growth , especially in gains on sales .
Speaker #7: We continue to build out SBA , both and residential mortgage . We expect SBA to add significantly to our income in 2026 . Keep in mind with the government shutdown , we could see a backlog building in the fourth quarter , and that will be made up after the government reopens .
Speaker #7: Operating expenses , net of merger and restructuring charges , were 55.8 million and our recurring run rate guidance remains approximately 55 to 56 .
Speaker #7: For the fourth quarter . And 56 to 57 million per quarter during the first half of 26 , and a latter part of 26 could drift to slightly higher .
Speaker #7: I'll keep you updated on our targets as we move forward . These amounts reflect normal expense growth , net of additional merger savings , which have been fully realized .
Speaker #7: Turning to taxes , our tax expense line for the full year has been a little tricky . That reflected the merger , and we had a second quarter surcharge relating to intercompany dividends .
Speaker #7: I also want to mention that our actual marginal tax rate has trended upwards . Our growth and geographic reach have impacted our traditional tax strategies .
Speaker #7: Now for 26 , we plan to utilize new strategies . Those are expected to result in an effective tax rate in the range of 28% , maybe a little higher , maybe a little .
Speaker #7: Let me turn now to credit . Credit as Frank mentioned , I'm going to repeat some of these numbers . Credit quality remains sound by all measures .
Speaker #7: Non-performing asset ratio is at a lows at 0.28% . Charge offs for the quarter were just 18 basis points . Delinquencies more than 30 days were only 0.08% of total loans .
Speaker #7: Very , very low in terms of delinquencies . The CRE concentrates show , continued its downward trend , falling to 4.34 September 30th , while our capital ratios continue to strengthen , holding companies tangible common equity ratio rose significantly to 8.4% .
Speaker #7: And while our goal is to reach 9% , there's no immediate need to achieve this . Additionally , tangible book value growth has resumed its upward trend of 5% increase .
Speaker #7: We've calculated in tangible book value per share since the merger is completion , and with a higher level projected retained earnings , we expect to have enough room in 26 for a common dividend increase and opportunistic share repurchases .
Speaker #7: That's it for my introductory remarks . And back to you , Frank .
Speaker #6: Okay . Thank you , Bill . Simply put , we've built a premier commercial bank with the scale and talent to serve the largest and one of the best markets in the country .
Speaker #6: Connect one's franchise value is in its strongest position ever , driven by accelerating financial performance , prudent organic growth opportunities , a strong technological focus and solid credit quality based on where our stock is trading today , we believe there's never been a more compelling time to invest in Connect One .
Speaker #6: As always , we appreciate your interest in ConnectOne Bancorp Inc . Thanks again for joining us today . And with that , I'd like to turn it over for your questions .
Speaker #6: Operator .
Speaker #4: Thank you , ladies and gentlemen . We will now begin the question and answer session . Should you have a question , kindly press star , followed by the number one on your telephone , and you will hear a prompt that your hand has been raised .
Speaker #4: Should you wish to withdraw . Please press star followed by the number one . Again , if you're using a speakerphone , please leave the handset before pressing any keys .
Speaker #4: One moment please . For your first question . Our first question comes from the line of Daniel Tamayo from Raymond James . Sir , please go ahead .
Speaker #8: Hey . Thank you . Good morning Frank . Good morning Bill .
Speaker #9: Daniel .
Speaker #8: Maybe starting on on your profitability targets . I think last quarter you talked about Frank hoping to hit 1.2 ROA and 15% ROTC in 2026 .
Speaker #8: Just interested in your current thoughts around profitability targets for next year ?
Speaker #7: I think those targets are in line . Still in line where said before , easily see 120 by the second quarter and my motto at least is showing us getting close to 130 by the end .
Speaker #8: Okay , great . Thanks for that . And then follow up kind of unrelated , but we we saw yesterday the announced end of quantitative tightening .
Speaker #8: I'm just curious , maybe you guys thoughts on on how that could impact deposit growth and and or pricing in your markets .
Speaker #6: Well , I think it I think it will bode well for us going forward . Certainly it appears the fed believes the economy is going to continue to be somewhat robust and that more liquidity is needed in the marketplace and that liquidity generally turns into deposits at banks .
Speaker #6: So I think across the spectrum of banks , you'll see deposits continue to grow , which I think will be good . It'll reduce some of the competitive pressures out there .
Speaker #6: You know , I think everyone has seen over the last quarter or two , some of the while , you know , short term rates have gone down .
Speaker #6: There's been increased competition for deposits . So a steepening yield curve , more liquidity , a robust economy that's pretty stable . I think .
Speaker #6: I think certainly for connect One bodes well . I think it bodes well for our industry as .
Speaker #10: Well .
Speaker #7: I agree with what Frank said . And also , you know , the margin continues to expand for all the reasons we've talked about before .
Speaker #7: It's still going to be we don't know exactly how many fed cuts at the end of next year , but there are going to be a few .
Speaker #7: And our , you know , our loans are repricing faster even in a down rate environment . Our loans are repricing upwards . So still looking at margins , you know I'll be bold enough to say approaching in the 340 to 350 range by the end of next year .
Speaker #8: That's great . Yeah . Let's let's hope all all of that works out in your favor . It seems like it's trending certainly positively .
Speaker #8: So . Anyway , appreciate all that color , guys . And for taking my questions .
Speaker #9: All right .
Speaker #7: Great . Thanks ,
Speaker #6: Thanks .
Speaker #9: Daniel .
Speaker #4: Thank you . Our next question comes from the line of Tim Sweitzer from KBW . Please go ahead .
Speaker #11: Hey . Good morning . Hope you guys are doing well .
Speaker #9: Hi , Tim . Hey , Tim .
Speaker #6: Good morning .
See uh on a fin, you know, from Financial perspective uh that the fruits of all of that labor and and you will continue to see that in the future, by the SBA uh revenue revenue line continuing to expand. So we're very happy about where we are. We're very happy about where we're headed with that. And we're very happy about how it's translating into quality Revenue here at Konnect 1 Bill, maybe 1. Well, just to repeat a little bit of what you said and that we've spent the past couple of years. Really, you know, building and perfecting platform of like led to to give it significant increase in the number of franchises that participate. And we're now starting to, uh, translate that into more income through SBA sales. So we already was reflected this quarter.
and um,
the the increase is expected to accelerate. Um, there's a little bit more of a time when it comes to franchise loans. There's a little bit more of a, a period that it takes from perception to gain. So the pipeline is building heavily for next year, and I'm very optimistic, we'll have a lot of, uh, gain on sale there and the meantime we've been building our boots on the ground, SBA lending, and everything is working in our favor there. So, um, look, we started off from zero and um, it's going to be a big portion of
I think I'm going forward.
Great, I appreciate all that color there. Um, thank you for taking the questions.
Thank you. Our next question comes from the line of Matthew Breeze from Stevens, and please go ahead.
Hey, good morning.
Morning. Matt. Um the first 1 for me you know is really nice to see those non-interest bearing deposits up. I think 3.7% quarter of a quarter and then you know, CDs down 2.8%.
Just talk to us about, you know, what's going on. A few of the Winds. There are the acquisition related meaning, you know, is the flick deal and the brand starting to Bear some fruit.
And then looking ahead and we see deposit growth metrics, see loan growth for next year.
Um, you know, maintaining that sub 100% promote the deposit ratio.
Yeah, we'll we'll take, I'll take your questions in reverse order. So the the goal would be to, you know, match the deposits with the, uh, loans and and that, that actually answers the first part of your question. There's been a focus here at Konnect 1 over the last couple of years, you know, to really, you know, redefine and make certain that the business we're in is to be a relationship Bank uh that takes in deposits and make loans. And we like picking in deposits from the same folks that we make loans to. So we're we we've had an effort ongoing here through all of our lending team,
Thanks so I I, I think, you know, with that focus and that Focus continues, um, going forward. I think actually the, you know, merger that we just completed the group of clients that we onboarded there. Actually, they have had the, the sort of a reverse, uh, issue there where they were very deposit, rich and didn't take advantage of all the lending opportunities for those clients. So, I think, you know, rounding out the, you know, the folks that, uh, were getting in front of, on Long Island. Uh, this continued focus on high quality relationship type clients, uh, is really, what's driving. Uh, the growth, the profitable and as you know, Bill said um, spread dependent business that that we have. And also you know it it's um it's it's allowing us to bring on high quality type clients. Um that should ensure that we keep a low.
Amount deposit ratio in and around the range of each day.
Great. And then you know, Bill maybe you could help me out with a couple couple things.
What proportion of loans are now pure floating rate. And, um, and and this quarter, what did you see for Roland versus Roloff Dynamics on fixed rate or adjustable rate loans? I guess where I'm going with this? Are you starting to see any spread compressions, uh, as, as some of your competitors have indicated? Well, first off, it's your first question. It's only about 15% off of pure floating.
So, we're in good shape there. Um, in terms of the role on and roll off of fixed versus floating, I'm not sure whether
How much has changed the Dynamics of the balance sheet? Uh, I know you usually ask about what rates loans are going on versus coming off, you know, when when we add draw Downs to it and pay Downs, like in the high, sixes going on and the low sixes going off.
Great. And then just 2 other for me.
Yeah you know first 1 is just on the reserve you have a 1.35% reserve the loan brief. So historically connect 1 has been a lot lower maybe 1 to 105 credit remains solid.
Over some period of time. Should we expect that Reserve to kind of trend back to where you were? Um, you know, as as kind of flick loans free price.
It just seems high relative to the credit quality. Yes, I think that. Yes, that's how it will work.
Okay. It'll gravitate back towards the 1 level, or maybe a little bit higher, we'll see where the economy is and how the Cecil works at the time.
Okay.
all right, and then last 1 is just
Uh bill, you had mentioned elevated. Cash Cash, could come down next quarter, what should we think of, in terms of normalized cash assets? That's all I had. Thank you.
Um, for now, I would say, um, 350 to 400 million.
Would be normalized. Um,
It could go lower than that, uh but for this quarter coming up, that's what I would say.
okay, so if you look at our loan growth on an average basis, you know, you've got to see pretty flat, not interest earning assets and that's fine by me, you know, in terms of capital ratios
In terms of margins.
All right, thank you. Our
All right, our next or before I, um, proceed with the next question? Again, should you have a question please? Press star. Followed by the number 1 on your telephone keypad.
Our next question comes from the line of fetty.
Strickland from Javi, sir. Your line is open.
Good morning. Um,
Just just wanted to to stick on the loan repricing opportunity. Piece there, Bill C. Can you have a quantify to send the amount of fixed rate loan repricing? We could see over the next several quarters? What? Just trying to figure out the size of the opportunity there.
An opportunity is quite large probably have about a billion dollars repricing its 26 and another billion in 27.
But we've been pretty steady with that. So, um, I'm running my own model. That's what I would have going forward for the next 4 quarters.
Perfect. That's all I have. Thanks for taking my questions. Thank you, Patty.
Thank you. Our last question comes from the line of De Tamayo. From Raymond James, sir, go ahead.
Ah, 1 more.
Uh yeah just to follow up here for me. Um, sure. So yeah. Maybe first you can uh, just remind us what your balance is of uh rent regulated loans are at the end of the quarter and then um, the follow up to that. It's just, you know, just curious kind of if you get update us on your thoughts. If, if we do get a, uh, a mom Donnie win next week in the mail election, what that means for, um, for that the whole rent regulated kind of, uh, industry in your, in your opinion. Thanks.
All right, let me start with the numbers, and I think we're positioned well.
Total aggregate exposure to majority on rent regulated. 700 million 60% of it or 400 million came from first of Long Island where we have a 20% Mark against it. So my view that's completely ranked fans, the rest of it. I connect 14 f is about 275 million less than 2.5% of our total loan portfolio, conservatively underwritten.
No value are projects. Um continues to perform well moderate. I would say not super significant stress in the portfolio.
Um, and Frank. You want to comment on sure what's happening? Well, imagine as you can. Well, imagine we get this question a lot. Uh, certainly being, uh, centered in the New York Metro Market. And my answer has been fairly consistent. There are so many variables as to what will happen from today forward, whether he wins he doesn't win, let's not forget the other alternative to mandami is Cuomo, who is the 1, who signed the actual 2019?
Uh rent regulation law. That's causing a lot of the consternation in the portfolio anyway. So it's not like we're going from, you know, 1 side of the spectrum to the other. Rent regulated is here to rent stabilized, rather is here to stay. It's a constant struggle within you know that Marketplace relative to the expense base versus the revenue stream, you know, on the on the positive side of the equation, we saw this year. Uh a 3% increase that came on the back of a 27% increase. The year before, it looks like for the next couple of years we're still going to have a rent regulated board, that's fairly reasonable and uh is taking into account inflation. Other costs that are being pushed through the system. Um, there are those who would argue
That, you know, potentially a mandami, uh, Administration might actually be good for the rent regulated portfolio in that, you know, he's looking to work to reduce the expense Side by, you know, uh, re uh, reorganizing the tax basis and or tax base for, uh, real estate taxes and other potential solutions to allow landlords, to be able to invest in the properties to get more units back on the market. As, you know, there's some 50,000 uh, rent stabilized units that are vacant today because of the change in the 2019 law. So there's just too many variables to put your finger on. Here's what's going to happen. All I know is, you know, this is this has been something that's been in existence for a very long time. It's ebbed and flowed. And uh, for the most part, I'm pretty optimistic that 1 way or another. Um, people need places to live, I think there's going to be uh, programs put in place.
Uh, to make certain that that product continues to be available to Residents in New York City, it will change over time. How that change occurs?
Art for me to say right now we're pretty. We're not pretty, we're very comfortable with the loans that we underwrote, uh, we would never part of the whole value. Add, uh, story to, you know, uh get uh, rent stabilized, tenants out and replace them with Market tenants. So we really don't have that risk on our balance sheet. Uh,
But I do think this is a very, very slow moving process. I don't think anything's going to happen with any immediacy in the short term.
Yeah, it's terrific. Thanks for the data and all the, all the color on that very helpful.
Thank you. There are no further questions at this time. I would now like to turn the call over back to the management for closing remarks.
Well, I want to thank you everyone for joining us today and uh for some really great questions and uh we look forward to speaking with everyone during our year end and fourth quarter conference call, everybody have a great day.
Thank you. You may now disconnect