ConnectOne Bancorp, Inc. Q1 FY2024 earnings call

Management Statement and Operational Highlights

• Relationship Banking: Top priority, expanding relationships, reducing non-relationship businesses to grow verticals and enter new markets.
• Deposit Growth: Traction from C&I client onboarding, South Florida expansion, and Long Island market entry.
• Loan Strategy: Prioritizing C&I and construction loans, managing non-relationship loans off balance sheet, and reducing CRE concentration.
• Net Interest Margin: Margin bottomed out in January, expected to expand with Fed rate cuts and favorable loan portfolio dynamics.
• Credit Quality: Strong metrics due to high credit standards and relationship-based philosophy, limiting exposure to risky sub-segments.
• Capital and Dividends: Strong regulatory ratios, continued stock repurchases, and dividend increase reflecting confidence in future profitability.
• Talent Acquisition: Hiring high-performing talent to support growth.
• Non-Interest Income Opportunities: Growth expected in BoeFly platform, SBA loan sales, and tax restructuring.

Segment Performance

• Deposits: Grew through sources like building C&I client list, entry into Long Island market, and expansion in Florida. Contribution from these sources not specified by exact percentage but noted as key drivers.
• Loan Portfolio: Focus on C&I and construction verticals; managing non-relationship loans off balance sheet to improve loan-to-deposit ratio and lower CRE concentration. Loan growth expected to be subdued, prioritizing relationship-based non-CRA lending.
• Net Interest Margin: Showed a favorable trajectory in Q1, with gradual expansion ahead of Fed rate cuts. February NIM was 2.66%, widening to 2.72% in March, and expected to expand further with Fed cuts (5 bps per 25 bps cut).
• Credit Quality: Non-accrual loans declined, criticized and classified loans decreased, delinquencies remained very low. NYC office loans represent 1% of total loans, NYC regulated exposure less than 5%.
• Capital: Regulatory ratios well above minimums; tangible common equity ratio 9.25% at quarter end; tangible book value per share up over 5.5% y-o-y. Dividend increased by $0.01 to $0.18 per share.
• Non-Interest Income: Quarterly run rate ~$3.7M, projecting 10% growth by year end from SBA loan sale gains, higher fees at BoeFly, and tax-based restructuring of building policies.

Guidance

• Net Interest Margin: Expected to expand ~15 bps by end of 2024 without Fed rate cuts; for each 25 bps Fed cut, margin to expand ~5 bps immediately.
• Deposits: Continued growth from C&I, Long Island, and Florida initiatives.
• Loans: Subdued net loan growth, prioritizing relationship-based non-CRA lending and reducing CRE exposure.
• Non-Interest Income: Projected 10% growth by year end.
• Expenses: Estimated 1%-2% sequential growth in 2024, typical for Q1.
• Capital: Continue stock repurchases, target capital levels at or above current levels.

Risks

• Market Volatility: Could impact deposit growth and loan performance.
• Fed Rate Cuts: Effect on net interest margin dependent on deposit beta and liquidity conditions.
• Credit Risk: Potential impact from economic changes despite current strong credit metrics.
• Regulatory Changes: Possible impact on capital ratios and business operations.

Question and Answer Q: On loan growth guidance, how about non-relationship balances and where growth is expected?

A: Frank Sorrentino mentioned they go through portfolio one-by-one, asking non-relationship clients to move if not meeting standards; growth expected in C&I and construction.

Q: On personnel shift, are lenders moving to other verticals or hiring new?

A: Frank Sorrentino said they maintain expertise in verticals and focus on hiring for desired growth areas, not immediate shift of existing lenders.

Q: Talk about growth into Long Island and South Florida, and loan/deposit totals there?

A: Bill Burns said Florida has ~$500M deposits and ~$200M-$250M loans growing; Long Island has ~$500M deposits and ongoing inroads.

Q: On NIM expansion with Fed cuts, how much and deposit beta?

A: Bill Burns said for every 25 bps Fed cut, margin improves 5 bps; beta is a middle-of-the-road estimate.

Q: On loan growth de-emphasis and capital deployment priority?

A: William Burns said loan growth muted, first priority is widespread lending business, with buybacks at current levels if capital allows.