ConnectOne Bancorp Inc (CNOBP) 2025 Q3 法說會逐字稿

Thank you and welcome to the Connect One Bancorp Inc. Third Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] It is now my pleasure to introduce your host, Sia Vonsia, our Chief Brand and Innovation Officer. Ma'am, please go ahead.

Good morning and welcome to today's conference call to review ConnectO's results for the 3rd quarter of 2025 and to update you on recent developments. On today's conference call will be Frank Sorrentino, Chairman and Chief Executive Officer, and Bill Burns, senior executive Vice President and Chief Financial Officer. I'd also like to caution you that we may make forward-looking statements during today's conference call that are subject to risks and uncertainties.

Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings. The forward-looking statements included in this conference call are only made as of the date of this call. The company is not obligated to publicly update or advise them.

In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules which have been filed today on Form 8K with the SEC and may also be accessed through the company's website. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.

Thank you, sir and good morning everyone. Pleased to report that during the 3rd quarter, we continue to build upon our strategic objectives. Clear reflection, our team's focus, client dedication, and discipline. As a result, the integration of our merger is complete, credit quality remains solid. And our margin continues to expand all while organically growing our balance sheet.

And so our systems merger, as we just talked about systems merger integration, which took place only 2 weeks after the legal close, went exceptionally well, driven by outstanding collaboration across our team and our first full quarter post merger we're operating seamlessly. One organization, consolidated systems, strong cultural alignment, 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.

This progress is especially evident on Long Island, where we're leveraging our strategy to drive growth and strengthen our. An attractive market he entered several years ago, the merger has accelerated our goal.

Importantly, the positive financial aspects of the transaction are beginning to take hold, and they discussed a little bit more about that, a little more a minute. Operationally, connect one's ability to attract and retain deposits remains a strength.

During the 3rd 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. Our team is energized, leverage our expertise and 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 for C&I, CRA, construction, SBA lending, demonstrating the strength and the reach of our franchise. Credit remains strong, supported by prudent and consistent underwriting standards, foo oversight.

Our non-performing assets were just 0.28% at the end of the quarter, annualized net charge-offs remained below 0.20%, and thirty-day delinquencies were just 0.08% of total loans.

Additionally, ConnectO's capital and tangible book value grew meaningfully. Overall, our 3rd 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.

Well, great, thank you, Frank. Good morning to everyone on the call. It was a great quarter and our outlook remains very positive with strong performance participated across all of our operations. Frank mentioned the merger, which was finalized 5 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 1st month. That rapid integration has a lot of performance metrics to excel with an acceleration of improvements expected in the 4th quarter and in 2026.

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 1.6%. Our earnings performance is being driven by the merger and a widening net interest margin which grew to 311 from 306 in the quarter and from 267 a year ago, and the spot margin at quarter end was already higher than 3,320. We expect 1/4 quarter margin at 325 or even above.

And the current quarter's margin of 311 reflected two temporary factors. One was the $75 million of high rates subordinated debt that was still outstanding but redeemed on September 15th. We also had higher than typical average cash balances due to the large deposit growth that we've had, which exceeded 600 million.

We anticipate average cash balances to be below $400 million in quarter 4 as that cash rotates into loan funding. So without those two items which work to compress the reporter margin, the third quarter would have been in excess of 350.

In terms of the balance sheet We continue to observe robust deposit growth following exceptional organic growth in the second quarter. Frontal basis, our client deposit growth was approximately 4% annualized, and that was building on the on the second quarter's annualized growth of 17%. annualized sequential loan growth of the quarter match deposit growth, and that maintained our loan to deposit ratio below 100%.

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 3rd quarter. But please keep in mind your model that average cash is likely to decrease and that will slow the increase in total interest earning assets. In 2026, we could easily see loan growth in the 5% plus range. So that'll be dependent on, of course, on the economy and loan.

Now adding to the strong performance of ConnectO this quarter were two non-recurring items that boost the pre-tax income by more than $10 million. Let me 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. Now, initially it was for companies with less than 100 employees.

And that was for the years 2019 and 2020. That employee threshold was raised for 2021 to include businesses up to 500 employees. That allowed ConnectO to qualify at the time ConnectO had 450 employees collecting our efficient operating model given our asset size. Now today our staff size has grown to about 750 employees due to organic growth and acquisitions, yet we remain a peer leading efficient organization, about $19 million in assets per employee.

Now the second one-time benefit recognized during the quarter, the pen3.5 millionsion curtailment gain relating to the freezing of First of Long Island's pension plan effective September 30th, with the shifting of those benefit values to our 401k match program.

The realignment of the benefit plans will result in mergering that cost savings of $1 million annually, and that's in addition to this one-time $3.5 million present value benefit recorded this. Now in terms of non-interest income.

Very strong quarter because of those non-recurring items that exceeded $19 million. Recurring level non-interest income right now remains at about $7 million per quarter. We expect growth, especially in gains on sales. We continue to build out SBA both by and residential mortgage.

We expect SBA to add significantly to our non-interest income in 2026. Keep in mind with the government shutdown, we could see a backlog building in the 4th quarter and that will be made up after the government reopened.

Operating expenses that have merger and restructuring charges were $55.8 million and our recurring run rate guidance remains approximately 55 to 56 for the fourth quarter and $56 million to $57 million per quarter during the first half of 26. And the latter part of 26 could drift to a slightly higher. 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 not yet been FY.

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 charge related to inter-company dividends. 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. 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.

Let me turn now to credit, as Frank mentioned, I'm going to repeat some of these numbers. Credit quality remains sound by all measures. Non-performing asset ratio is at historical lows at 0.28%. Car drops to the quarter were just 18 basis points. Delinquencies more than 30 days were only 0.08% of total loans, very low in terms of like. The CRE concent ratio continued its downward trend falling to 434, September 30th. Our capital ratios continue to strengthen.

Holding companies tangible common equity ratio rose pretty significantly to 8.4%. 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, a 5% increase we've calculated in tangible book value per share since the merger's completion.

And with a high level projected retained earnings, we expect to have enough room in 206 for a common dividend increase and opportunistic share repurchase. That's it my introductory Walmarts and back to you.

Frank. Okay, thank you, Bill. Simply put, we built the premier commercial bank with the scale and talent to serve the largest and one of the best markets in the country. ConnectO'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. As always, we appreciate your interest in Connect One Bancorp. Thanks again for joining us today. And with that, I'd like to turn it over for your question, operator.

Thank you. ladies and gentlemen [Operator Instructions] our first question comes from the line of Daniel Tamayo from Raymond Janes. Sir, please go ahead.

Hey, thank you. Good morning, Frank. Good morning Bill. It may be starting on your profitability target. I think last quarter you talked about Franc hoping to hit 1.2 ROA and 15% ROTCE in 2026. I'm just interested in your current thoughts around profitability targets for next year.

I think those targets are in line, still in line worldwide. Said before, easily see you 120 by the second quarter and my model at least is showing us getting close to 130 by the end.

Okay, great. Thanks for that. And then follow-up, kind of unrelated, but we saw yesterday the announced. End of quantitative tightening. I'm just curious, maybe you guys' thoughts on on how that could impact deposit growth and and or pricing in your markets.

Well, 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. 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, I think everyone has seen over the last quarter or two.

Some of it, while, short-term rates have gone down, there's been competition for deposit. So a steepening yield curve, more liquidity, and a robust economy that's pretty stable, I think certainly for Connect one, bodes well. I think it bodes well for our industries.

I agree with what Frank said and also, the margin continues to expand for all the reasons we talked about before. 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, and our loans are repricing faster. Even in a downright environment our loans are repricing upwards so still looking at margins. I'll be bold enough to say approaching in the 340 to 350 range by the end of next year.

That's great. Yeah, let's hope all the, all of that works out in your favor. It seems like it's trending certainly positively. So, anyway, appreciate all that color, guys, and for taking my question.

Thank you. Thanks Daniel.

Thank you. Our next question comes from the line of Tim Sitzer from KBW. Please go ahead.

Hey, good morning. Hope you guys are doing well. Hi Tim.

Hey Tim, good morning.

So the.

First question I have is, now that you guys have, closed the merger, full quarter in, how do you guys think about the capital allocation and deployment going further? Frank, you mentioned you think your stock is a value, or share repurchases on the table here and, I would just like to get some color on that.

Well, I, from my perspective, I know, Bill made some comments relative to our ability to build capital. Capital's building quite quickly at the company, as from a variety of areas including profitable growth that we have. So I do think we'll have a lot of flexibility in 2026.

To make some determinations as to what we should do with that capital. Obviously if we see higher growth rates and you know we're opportunistic to gauge in organic growth at the at the higher end of the spectrum, that'll leave a little bit less for other opportunities, but overall I think we can pretty much do anything we want to do. So, I know you had some strong yeah.

No, I agree with that. Our growth is going to be prudent and disciplined in terms of spreads. I like to see the capital ratios trend upwards, but I think I said on the call even with all that because of the low dividend payout ratio we have today and the high level of earnings, we have room. of opportunistic and reverse.

Okay, great, that's good to hear. And then I was also looking to get an update on Bow fly and maybe the growth outlook there, putting aside the government shut down, the impact on SBA it's more here, but I, I'd love to get an update on that and then also maybe some color.

On this, the recent changes to rules governing kind of like the smaller dollar, million dollar or less loans and SBA that in terms of like underwriting and the new fees that came back in over the summer.

So we'll start with both fly and they will talk a little bit more about the, specifics of the various programs, but, both fly since since inception here at Connect One has continued its upward trend. We now represent some over 250 national brand fran franchise brands across the nation, which is an all-time high when we purchased the company, I think they represented 60s that. So this trajectory upward and we put a lot of effort into being the predominant.

Company that can validate franchisee applications in that space and so that's led to this growth in that in that portfolio. We've really focused over the last year or so to drive the opportunities that come out of that business to our to our growing SBA platform and we're really beginning to start to see on a from financial perspective.

That The fruits of all of that labor and you will continue to see that in the future by the SBA, 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 Connect one.

So maybe just to repeat a little bit of what you said and that we've spent the past couple of years really, building and perfecting. Platform ofli led to significant increase in the number of franchisors to participate and we're now starting to translate that into more income through SBA sales so already was reflected this quarter and.

The increase is expected to accelerate. There's a little bit more of a time when it comes to franchise loans, there's a little bit more of a period that it takes from exception to gain. So the pipeline is building heavily for next year and I'm very optimistic we'll have a lot of.

Being on sale there. In the meantime, we've been building our boots on the ground, SBA lending. Everything is working in our favor there. So, but we started off from 0 and it's going to be a big portion of our non going forward.

Great, I appreciate all that color there. Thank you for taking my questions.

Thank you. Our next question comes from the line of Matthew Brees from Stephens, Inc. Please go ahead.

Hey, good morning.

Matt.

The first one for me, it's really nice to see those non-interest-bearing deposits up 3.7% quarter to quarter, and then, CDs down 2.8%. Could you just talk to us about, what's going on, a few of the wins there, are they acquisition related, meaning, is the flick deal and the brand starting to bear some fruit? and then looking ahead, and we see deposit growth matter or the loan growth for next year. maintaining that 100% of the deposit ratio.

Yeah, we'll take, I'll take your questions in reverse order, so the goal would be to, match the deposits with the loans, and that that actually answers the first part of your question. There's been a focus here at ConnectO over the last couple of years to really, redefine and make certain that the business we're in is to be a relationship bank that takes in deposits and makes loans and we like taking in deposits with the same folks that we make loans to.

So we've had an effort ongoing here through all of our lending teams to really focus on making sure we're going after the types of clients that bring us substantial depository relationships and we've been weeding out part of the slowdown in the overall growth.

Eating out of clients who maybe promised us depository relationships and never delivered or just folks that wound up here with a transaction. We really don't want to be just a transaction-oriented bank. So I think, with that focus and that focus continues going forward, I think actually the, merger that we just completed, the group of clients that we onboarded there actually they have had the.

Sort of a reverse issue there where they were very deposit rich and didn't take advantage of all the lending opportunities for those clients. So I think, rounding out the folks that we're getting in front of on Long Island, this continued focus on high-quality relationship type clients, is really what's driving the the profitable and as Bill said, spread dependent business that we have and also, it, it's allowing us to bring on high-quality type clients that should ensure that we keep a loan to deposit ratio in and around the ranges.

Great, and then, Bill, maybe you could help me out with a couple things. What proportion of loans are now pure floating rate? And and and this quarter, what did you see for roll on versus roll off dynamics on fixed rate or adjustable rate loans? I guess where I'm going with this are you starting to see any spread compression as some of your competitors have indicated? Well.

First off, answer your first question. It's only about 15% of pure floating. So we're we're in good shape there in terms of the roll on and roll off of fixed versus floating I'm not sure whether.

How much has changed the dynamics of the balance sheet? I know you usually ask about what rates loans are going on versus coming off, when you add drawdowns to it and pay downs like in the high sixes going on the low 6 is going off.

Great, and then just 2 others for me. First one is just on the reserve. You have a 1.35% reserve the loan ratio. Historically connect one 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, as kind of flip loans free price? It just seems high relative to the quality.

I think that, yes, that's that's how it will work. Okay, it'll gravitate back towards one level or maybe a little bit higher. See where the economy is and how the Cecil works at the time.

Okay, alright, and then last one is just, Bill, you had mentioned elevated cash cash could come down next quarter. What are we thinking of in terms of normalized cash assets? That's all I had.

Thank you.

For now I would say $350 million to $400 million would be normalized. It could go lower than that, 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're going to see pretty flat not interest earning assets, and that's fine by me, in terms of capital ratios, in terms of margins.

All right, thank you. Before I proceed with the next question, again, should you have a question, please press star followed by the number one on your telephone keypad. Our next question comes from the line of Betty Strickland from Hovde. Sir, your line is open.

Hey, good morning. Just wanted to stick on the loan repricing opportunity piece there. Bill, can you help us quantify to send the amount of fixed rate loan repricing we could see over the next several quarters of what just trying to figure out the size of the opportunity there.

The opportunity is quite large, probably have about a billion dollars repricing at 26 and another $1 billion in $27.

And then, one of the follow-up on credit, obviously good to see a stable, that charge off step down a bit. do we expect charge-offs to kind of remain in the high 10s or low 20 range just in terms of basis points, so average loans, or does that set down just trying to get a sense for what we should.

Yeah, I mean, it's hard to predict, but we've been pretty steady with that. So, I'm running my own model that's what I would have going forward for the next 4 quarters. Got it. Perfect.

That's all I have.

Thanks for taking the questions.

Thank.

You, Patty.

Thank you. Our last question comes from the line of Daniel Tamayo from Raymond James, sir, go ahead.

One more.

Yeah, just a follow-up here for me. So, maybe first you can just remind us what your balances of rent regulated loans are at the end of quarter and then. a the follow-up to that, it's just curious kind of if you could update us on your thoughts if we do get a a mom Donny win next week in the mayoral election, what that means for for that, the whole rent regulated kind of industry in your opinion.

Thanks. All right, let me start with the numbers, and I think we're positioned well. The total aggregate exposure to majority owned rent regulated is $700 million. 60% of it or $400 million came from First of Long Island, where we have a 20% mark against it. So in my view that's completely ring fenced. The rest of it, a one portfolio is about $275 million less than 2.5% of our total loan portfolio.

It's certainly the underwritten. No value add projects, continue to perform well, moderate, I would say not super significant stress in the portfolio. and Frank, you want to.

As you can well imagine, we get this question a lot, certainly being 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 Mandani is Cuomo, who is the one who signed the actual 2019.

A rent regulation law that's causing a lot of the consternation in the portfolio anyway, so it's not like we're going from, one side of the spectrum to the other. Rent regulated is here to rent stabilize rather is here to stay. It's a constant struggle within, that marketplace relative to the expense base versus the revenue stream, on the on the.

Positive side of the equation we saw this year a 3% increase that came on the back of a 7% 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 is taking into account inflation, other costs that are being pushed through the system.

There are those who would argue that, potentially a Mandami administration might actually be good for the rent regulated portfolio and that, he's looking to work to reduce the expense side by, reorganizing the tax base and or tax base for 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 there's some 50,000. 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, this is, this has been something that's been in existence for a very long time. It's ebbed and flowed, and for the most part I'm pretty optimistic that one way or another, people need places to live. I think there's going to be programs put in place 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. Hard for me to say right now. We're pretty, we're not pretty, we're very comfortable with the loans that we underwrote. We were never part of the whole value add story to, get.

And stabilize tenants out and replace them with market tenants, so we really don't have that risk on our balance sheet, in those lending opportunities, and I think over time it's it's going to get figured out what to do with that product.

So, we're comfortable with the operators that run the assets that we have and. We have very, strong LTVs and debt service coverage ratios, properties that are in our portfolio. Of course we're going to watch very closely what happens over time, but I do think this is a very slow moving process. I don't think anything's going to happen with any immediacy in the short-term.

That'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'd now like to turn a call over back to the management for closing remarks.

Well, I want to thank you everyone for joining us today and for some really great questions, and we look forward to speaking with everyone during our year-end and 4th quarter conference call. Everybody have a great day.

Thank you may now disconnect.