Thank you for standing by. My name is Marvilou and I will be your conference operator today. At this time, I would like to welcome everyone to the ConnectOne Bancorp, Inc., First Quarter 2024 Earnings Call. [Operator Instructions] Thank you..

I would now like to turn the conference over to Siya Vansia, Chief Brand and Innovation Officer. You may begin. .

Good morning and welcome to today's conference call to review ConnectOne's results for the first quarter of 2024 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 would 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 and 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 and schedules, which has been filed on Form 8-K with the SEC and may also be accessed through the company's website..

I will now turn the call over to Frank Sorrentino. .

Thank you, Siya, and I appreciate everyone joining us this morning to discuss ConnectOne's first quarter performance. We entered the first quarter firmly on the offensive, and despite the backdrop of a challenging landscape, we remain dedicated to our relationship banking model.

The efforts of our team, the investments we've made in our future and our unwavering commitment to our clients is paying dividends and demonstrating the strong forward direction..

As you have heard me emphasize before, supporting our clients is ConnectOne's top priority, an approach that has consistently proven effective and has enabled us to expand our banking relationships, grow in the number of verticals, and expand into new markets, while also reducing exposure to non-relationship businesses.

Through the aligned efforts of our entire team, we began to see an increase in deposits in the fourth quarter of last year, and that momentum is continuing during this first quarter. We are optimistic that this trend will continue throughout the year..

Bill will get into this future, but the sources of deposit growth include building our C&I client list, our recent entry into the Long Island market, and the ongoing expansion of our presence in Florida.

As for the loan portfolio, we continue to see opportunities from our existing clients, particularly in the C&I and construction verticals, and we've begun to manage non-relationship loans off the balance sheet. These actions are intended to improve our loan-to-deposit ratio and lower our CRE concentration..

Shifting to net interest margin, we're already seeing a gradual expansion in our net interest margin ahead of Fed rate cuts, and as Bill will cover in more detail, our NIM showed a favorable trajectory during the first quarter. Turning to credit, several important credit quality metrics improved during this first quarter. Non-accrual loans declined.

Criticized and classified loans continue to decrease, and delinquencies remain very low.

These efforts all reflect our longstanding high credit standards, our relationship-based client philosophy, and our track record of avoiding riskier sub-segments, such as the New York City office, which represents just 1% of our total loans, and New York City regulated, where the exposure is less than 5%..

In terms of capital, our regulatory ratios remain well above required minimums, and our tangible common equity ratio was 9.25% at the quarter end, affording us the flexibility to repurchase stock during times of slower growth. We expect to continue repurchases under the current operating and economic environment.

Those who follow us closely know, we've had an excellent track record in growing tangible book value, and once again, our tangible book value per share increased during the first quarter and is up over 5.5% from a year ago..

Additionally, reflecting the confidence in our future profitability and a solid capital base, we're pleased to announce a $0.01 increase in our cash dividend to $0.18 a share. This is our fifth dividend increase since 2021, and our Board of Directors will continue to evaluate future dividend increases in the future.

Supporting our focus on driving growth, we continue to hire high-performing talent, adding to an already experienced team of bankers here at ConnectOne. This is nothing new for us, as we've always taken an opportunistic approach to talent acquisition and the shifts in our market and among the competitors that provide lucrative opportunities for us..

I am also pleased to note, we're seeing compelling opportunities for non-interest income growth, including within our BoeFly platform. The platform continues to onboard new franchisor or brands, while expanding the use of its hallmark product, bVerify, through the company's franchisee base.

As we look ahead, we continue to explore opportunities to build that ecosystem around the needs of franchisees. In summary, I'm pleased to report the company delivered a good start to the year, both financially and operationally, and we believe ConnectOne is well-positioned to execute on our long-term objectives..

So with that, I'll turn it over to Bill to give us a little bit more depth and some color on the results.

Bill?.

Okay, thanks, Frank. Good morning to everyone. I would like to start off by giving everyone on the call just a general view on where ConnectOne's financial state is and where our metrics are headed this year.

So notwithstanding the Fed's continued [ hawkish ] stance, our goal and our outlook is to finish 2024 with an even stronger balance sheet and increased profitability..

First, we see a wider net interest margin coming for ConnectOne, which will drive improved profitability. Second, we are aiming for slow but smart fund growth, which will contribute to wider margins, improve our loans and deposit ratio, and reduce our commercial real estate concentration regulatory metric.

Third, of course, we want to maintain our sound capital base and credit quality. Lastly, I want to mention that we remain very close to the $10 billion threshold. It's not clear right now if we're going to cross that in 2024 or early '25, but we want to make it perfectly clear that we have been and continue to be well-prepared with our regulators..

The [ Durbin hit ] would be small, and expenses associated with the threshold are already in our expense base. Our regulatory risk-based capital ratios remain strong, as does our tangible common equity ratio, which is in excess of 9% of the holding company, and it's in excess of 10% at the bank level.

These TCE ratios have largely been unaffected by AOCI due to the hedging that we put in place several years ago. Our capital plans call for continued stock repurchases along with today's modest dividend increase, but also, we are targeting to end 2024 capital levels at or above where they are now..

So the margin did compress slightly during the first quarter from the sequential fourth quarter, but the good news is that, the margin appears to have bottomed out in January and is now headed upwards. Our February net interest margin was 2.66%, and that widened by 6 basis points to 2.72% in March, and April is also off to a good start.

The margin stabilization comes as our cost of funds is remaining relatively constant..

That's helped in part by growth in non-interest bearing demand and the fact that, we have probably hit our terminal beta. At the same time, the loan portfolio yield continues to inch up. Recently, we've been booking loans at about 8.5%, while the loans rolling off are at 6.5% or below.

Our loan pipeline predominantly consists of wider spread C&I and construction, while tighter spread multifamily originations have been limited, and we foresee that trend continuing..

So if those dynamics of the past couple of months continue, and we believe they will, our projections indicate that even without any rate cuts during 2024, our margin could expand upwards of 15 basis points between the first quarter and what we expect in this year's fourth quarter.

And on top of that, I'm going to stick with my previous guidance, which stated that, for each 25 basis point Fed cut, our margin will expand almost immediately by 5 basis points..

For the first quarter, deposits grew while loans decreased. As Frank alluded to, deposit traction is building through several sources, including our C&I team continuing to onboard new clients, the continued build of our South Florida foothold, and entry into the Long Island market.

In terms of loan growth, we will continue to prioritize relationship-based non-CRA lending, while placing less emphasis on commercial real estate lending, and proactively reduce non-relationship credits, all of which is expected to result in subdued, if not flat, net loan growth..

Switching over to non-interest income, the quarterly run rate has been approximately $3.7 million. I am projecting modest increases here are coming from higher SBA loan sale gains, higher fee revenue at BoeFly, and we also expect to implement a tax-based restructuring of some of our outstanding building policies.

All-in-all, I am just projecting that, we have about 10% growth in non-interest income by year end..

On the OpEx side, sequential growth from the fourth quarter was 3.7%, not unexpected. It is typical to ConnectOne for the first quarter, and going forward, I am estimating 1% to 2% sequential growth in expenses throughout the rest of 2024.

Now, that expense growth rate could be higher or lower, and could be influenced by actual revenue growth, but as Frank has mentioned many times, we are committed to investing in our infrastructure, as well as taking advantage of opportunities created by M&A disruption..

In terms of credit, we continue to feel very comfortable with overall portfolio credit quality. Non-accrual loans fell by about 10%, while our 30- to 89-day delinquencies were at an historic low at just 0.04% of loans. The total criticized assets came down again, the fifth straight decline to 1.3% of loans.

Our provision for the quarter was $4 million, approximately in line with Street expectations. We had 15 basis points of charge-offs in the quarter, coming from a handful of partial charge-offs related to loans acquired as part of an acquisition.

Now, we could see similar levels of charge-offs for the remainder of 2024, but my expectation is that the charge-off level is likely to subside as we get beyond the end of the year..

Adding to the provision for the quarter were some modest upward adjustments to our CECL qualitative factors, and that pushed the allowance percentage to above 1%. At this point in the economic cycle, we certainly believe, it makes sense to be conservative by increasing the allowance coverage.

As a reminder, our exposure to New York City office is 1.2%, and all New York City multifamily is 7.5%, but only a portion of that 7.5% are rent-regulated loans, so the risk exposure is even less. I'd say it's in the 4% to 5% range. We continue to scrutinize and stress our rollover and repricing risk..

We do this both on a top-down basis, utilizing electronic analyses, as well as bottom-up loan-by-loan reviews when needed. The results of those stress tests analyses show a limited potential impact on credit costs going forward. .

Just 1 more item before I send this over back to Frank. I just want to give you guidance on the effective tax rate, for the quarter was 25.5%. That was helped by the expiration of New Jersey's surtax rate that had been in place for several years.

Going forward, our effective tax rate could increase due to growth in taxable income, and we always try to mitigate some of that increase with additional tax-free income sources..

So with that, Frank, back to you. .

Thanks, Bill. In summary, our operating results remain solid, our balance sheet remains strong, and our credit metrics remain resilient. Looking ahead, we're optimistic about 2024.

There are attractive opportunities in the markets we serve, and we are confident that by diligently pursuing our strategic objectives, ConnectOne is well-positioned for enhanced profitability and sustained success, which would also be amplified by the Fed lowering rates.

As always, we appreciate your interest in ConnectOne, and thanks again for joining us today..

Operator, we'll now open the line for any questions. .

Thank you. [Operator Instructions] And your first question comes from the line of Daniel Tamayo with Raymond James. .

First, I guess, on the loan growth guidance, you mentioned you're going to be managing non-relationship balances off the balance sheet and then remixing or reducing the commercial real estate concentration.

So just curious kind of how you are thinking about non-relationship balances that you have got right now? What that might look like in terms of run-off, and then on the other side, just where you are expecting to see growth, not in multifamily or commercial real estate?.

Dan, it's Frank. I would tell you that, we go through our portfolio on a one-by-one basis. It's not that we are looking at a spreadsheet of numbers. These are relationships or people that have promised us true relationships that consist of deposits and loans.

In the cases where we find that those things are not true or not to the point where we are comfortable with them, we have asked those people to look for other places to do their banking. In most cases, and part of the reason you saw the increase in deposits this quarter, we did get people to recommit some of their efforts to us..

Part of that was because of a lot of disruption in the market, but part of it's also just because we're out there asking the right questions and holding people accountable for what they promised us in the past.

We've always been a relationship bank here at ConnectOne, and so that means having a full relationship, which includes your deposits and your loans. But as you know, some people make promises. We're generally the type that put our best foot forward first. We trust everyone, and now we are in the verify part..

And if we don't like what we see, we are asking people to move out. So very difficult to say with any certainty what the numbers would look like. That is a very general theme around the entire organization, and it is showing up in the numbers.

We do have an emphasis today on, or have had for quite a while, on our C&I portfolio, and that's showing some results too, which is also showing up in the deposit growth numbers..

And there it is almost a guarantee that if we are taking on a C&I relationship, we are getting the deposits along with the loans. And we also, since our inception almost 20 years ago, we've always been pretty active in the construction marketplace. I like that business. My background is in it.

We think there's a lot of compelling projects around the New York Metro market that make a hell of a lot of sense, especially with the housing dynamics here, and we like the types of relationships that brings to the table. So we've had a bit of a focus there as well. .

I appreciate that, Frank. .

And Danny, it's Bill. Just to give you some guidance on how we get to a growth rate, likely to see some decline in multifamily. And then overall, this would just be an educated guess here.

It's hard to be precise with these projections, but I'd see very low growth, anywhere from 0% to, say, 2.5% total growth in the portfolio, including declines in multifamily. .

Okay.

On the personnel side, I guess, given that shift, are some of these lenders historically just commercial real estate and/or multifamily lenders? Are they going to be kind of just shifting over to looking at construction and C&I and anything else or do you expect to be going out and looking to hire new lenders or teams to accelerate that growth?.

Yes, I wouldn't see it as a shift. I do think we have expertise in particular areas, and we continue to maintain that expertise in the various verticals that we represent.

I think it would speak more to who we're hiring, what teams we're enhancing or building or creating, as opposed to -- I think, it's hard to take somebody who's been, whatever in one particular vertical and move them immediately to the other. I'm not so sure that's the best way to go about it.

But when we're thinking about adding folks or people who have a desire to come to work for ConnectOne, we've gotten a lot of inbound calls. We're picking and choosing the folks that will help expand the areas that we think make sense for us to expand in the markets in which we hope to do that as well. .

Okay, all right. And then just a small one. The loan-to-deposit ratio, you said you're going to manage that down. Obviously, the loan growth being close to flat will help do that.

But do you have a target that you want to get to before the loan growth starts to ramp back up?.

I don't want to really give a target out here, Dan, but rather say that we're working towards reducing that ratio over time. .

Your next question comes from the line of Frank Schiraldi with Piper Sandler. .

Talk a little bit about growth into Long Island and continued growth in South Florida.

I wonder if you could just talk a little bit more about your strategy in those 2 geographies and kind of where you guys are at this point in total loans/deposits?.

Yes. I'll let Bill give you some actual figures. But Long Island has been -- actually, both markets are what I consider to be adjacent markets, and even though one of them has got 1,000 miles between us. But they're adjacent in that, that's where our clients either live or work or have business interests or are developing or whatever..

And we find Long Island to be almost an exact mirror image of what we've created in the northern New Jersey market. We've been very successful in hiring some really terrific folks that represent that market in the way in which we go about doing business, that care about their clients.

And we're finding that, there's not a whole lot of really strong competition in that Long Island market for that type of relationship business..

So we've had a lot of success there. We're continuing to have success. We're going to continue. You're going to continue to hear. We're making hires there. We're putting brick and mortar there. And we're picking up a significant amount of business in that marketplace. Florida, I would say, is almost exactly the same thing.

We have a lot of our New York, New Jersey base is also planting roots in Florida, and we're supporting that. And as word is getting out about the way in which we do business, the types of businesses that we've been supporting, we've also been getting organic growth in that Florida market as well..

We're very excited about the folks that are supporting our team down there. And we've had, I think, some really good successes for the short amount of time that we've represented that market. Now, we've always had some assets in Florida. I would say always, probably for the last 10 or 15 years.

But it got to a critical point where we really needed to have a substantial boots-on-the-ground effort there, and that is now paying some very, very nice dividends.

Bill, I don't know if you want to add some color to that?.

Yes, I know we have close to $500 million of deposits that are domiciled in Florida, so that's a nice number. The loan total is about $200 million to $250 million down there and growing.

And Long Island, we've always done some business in Long Island, so it's part of our balance sheet, and there's close to $500 million of deposits there and we're going to continue to make inroads to grow in that region. .

Okay, great.

And then just in terms of with a little bit of a mix shift anticipated on the loan side, can you just remind us, where your CRE concentrations are currently and where do you think you'll get to or what are you anticipating to get to on that front, say, by year-end?.

Frank, it's similar to the loan-to-deposit ratio. There's no one out there forcing us to lower our concentration levels, but, we recognize that the market likes to see lower levels, so we're moving that ratio down slowly.

I think it's been down the last 5 quarters at least and we're somewhere in the [ 4.35% ] range is the percentage, and that's down from the previous quarter. .

Okay.

So, it'll continue to fall, but there's no hard and fast target?.

Right. .

And then just lastly on the -- you guys talked about in the release, a $20 million, 90 days plus still accruing. You talked about low-LTV, and I wonder if you could just give us a little bit more color on that front in terms of location.

Is this, I guess, investor CRE? And on that loan-to-value ratio, how updated is that appraisal?.

Yes, so it's a New Jersey multifamily property. The loan-to-value at 60% is very recent. We just got a recent appraisal on it, and the owner is just going through some negotiation issues with the purchaser, and that's what's holding it up but, very well secured. .

Okay.

I'm sorry you just said the borrower is going through some negotiation with the buyer?.

Yes, the borrower-seller, and it's under contract right now. .

Okay. That's great. And then just a point of clarification, Bill, you mentioned, I think 10% growth in fee income.

Was that year-over-year, or what was the guide there?.

I'm hoping that the fourth quarter will be 10% higher than the first quarter. Okay, that's my objective. .

Your next question comes from the line of Tim Switzer with KBW. .

Hey, good morning.

I appreciate the color on the degree of NIM expansion you guys expect over the rest of the year without any Fed rate cuts? Can you maybe help us quantify, the magnitude of NIM expansion once we get maybe 1 or 2 Fed rate cuts in the back half of the year, and, the deposit beta expectations you guys have on that?.

Well, first, I love your optimism that we're going to get 1 or 2 rate cuts at the end of the year. I think that's starting to get a little faded. But let's hope you're right. .

I'm not sure, Tim, if you were on the last call. But we have a formula that for every 25 basis points of fed cut, we'll improve our margins by 5 basis points. And, of course, that's on top of the, margin expansion going on without any rate cuts. And, yes, it's dependent upon what the beta might be.

Some of us believe that the banking industry is just waiting for a rate cut and it's going to be a very high beta on the way down. It depends, how tight money is, right, and whether or not, we're still fighting over funds. So it's a middle-of-the-road beta that we use for that estimate. .

Okay, that's helpful.

And do you think that 5 basis points changes one way or the other as we progress through the cycle? I know this could be getting really optimistic, but if we get a series of rate cuts, does that change over time, maybe deposit competition lessens as we get deeper?.

Yes, it's always subject to volatility, those estimates. As we pass through, let's say, for example, there are no rate cuts for 5 years, okay, we would continue in our view having improvement in our margin. And so the rate cuts would have less of an impact.

But I'm looking out -- right now in my head, let's say, we're going to go through the end of the year with no rate cuts and then it's going to start next year, and then those estimates, I stand by, okay, if that helps you. .

Yes, that makes sense. .

And just looking at the business, our business for ConnectOne, I'm much less concerned about the rate cuts. I don't want to say, I don't care, but I almost don't care about the rate cuts.

I care a hell of a lot more about the liquidity that's available in the marketplace and the ability to track deposits and what you mentioned, this competitive environment. To me, that's way more important to whether our margin goes up or down or stays flat than whether the rates are -- stays.

I actually prefer a market where the rates stay right where they are, but liquidity improves and we're not fighting as hard for every next dollar. .

Yes, well, that makes sense.

Speaking of the yield curve would be helpful as well?.

Yes, it would. .

I was wondering, have you guys started testing maybe lower deposit rates in certain categories or certain markets at all and what's kind of been the customer response to that?.

It's hard to say. And that's an ongoing challenge to see how low we can go. We think, it's over the time when people said, hey, my deposit, I'm only getting 50 basis points. Why am I not getting 450 basis points or 500 basis points? And so today, we do feel there's some room for lower rates to some extent without losing deposits.

So we are looking into that in certain instances. The whole deposit portfolio is a little bit complicated, whether it's commercial customers, big retail customers, small retail customers in different products. And so as you said, we should be testing those things and we are. .

[Operator Instructions] And your next question comes from the line of Matthew Breese with Stephens. .

I did want to go back to the loan growth discussion.

And I was curious for how long do you think it'll take you to kind of de-emphasize non-relationship lending? Is that isolated to just 2024? Do you expect that to continue to 2025?.

Yes, I think the most of it occurs this year as we go through a complete cycle or a cycle and a half of bringing loans up on review, going through the entire portfolio, and getting the message out there that, this is that, we're pretty serious about this aspect of the business.

Yes, I would say by year end -- look, it's a continuous practice because, as you know, Matt, everybody promises you the world on the day you sign all the documents and, someone needs something from you..

And then a year later you look back and you say, wait a minute, this isn't what we all signed up for. And I've got to believe that's going to continue in the future as well.

But we certainly have a very laser-focused eye on those types of relationships and whether or not people did, in fact, do what they said they were going to do and how we recognize those things. .

Yes.

I mean, the follow-up here is, you know, in 2025, and I know it's a long way off, do we get to some normalcy in terms of loan growth, even if it's kind of mid-single-digit growth for you all?.

If liquidity conditions improve, there would be more higher probability of higher growth. .

And maybe that speaks more to why we should be voting for some Fed rate cuts, right? There's definitely parts of a variety of businesses that have been negatively impacted by higher rates, and so they're just borrowing less.

So while we may be out there and we may have a very strong pipeline of new loan product coming in, which now currently is being offset by loans that, we're intentionally moving off the balance sheet, at some point that's going to right-size itself.

And at some point I would hope that liquidity comes back to the market, rates begin to get more in line with a steeper yield curve, and there'll just be additional opportunities. But I don't know. Can you tell me if that's going to be at the end of this year, the beginning of next year, or the end of next year? I don't know the answer to that. .

Neither do I. But I did want to touch on, Frank, maybe the priority stack of capital deployment options for you right now. I mean obviously loan growth is going to be muted this year.

If you have to deploy the next dollar, does it go into buybacks? Does it go into securities? Where are you putting it right now?.

Well, I think our first choice is widespread lending business. As long as it's a good deal and it's bringing in deposits, that's going to be the priority. The dividend is kind of fixed. And whatever's left over, as long as I'm seeing the capital ratios constantly reaching up, we would go for that. At this level, we did 280,000 shares this quarter.

That seems to be the right level, the way things are going now, in terms of buybacks per quarter. .

Okay. So we can assume kind of security portfolio flat at this point.

That's not going to move too much?.

Yes. Our securities portfolio has never really been widely fluctuating. We've kept a certain amount, and that's about it. .

It's margin dilutive, right, securities purchases. And I'm of this belief, Matt, once upon a time the securities portfolio was viewed as a place for liquidity. Today I'm thinking more, what is readily available in cash this minute? And, securities portfolio takes time to convert into cash.

So if you need the money today, it may not be good to have that. Not that we're cutting back the securities portfolio, we've played a greater emphasis on the lines, readily accessible lines at the Federal Home Loan Bank and the Fed. .

Right. Okay. The last one for me is that you'd mentioned that rent-regulated multifamily is less than 5% of loans. That's a tough one to define, and [ companies ] are defining rent-regulated differently.

How are you defining it? Is that the bucket that's 100% rent-regulated or 50% and above or any?.

It's about 5%, a little under 5%. All of it, all of it, any portion. If it has no rent-regulated unit in it, then it's not rent-regulated. But if it has one, then it goes into the 5% bucket. If you go to the 50%, I think we're down to 3.75%, something like that.

Does that make sense?.

Yes, that makes sense. And I guess there's a follow-up there. In the State of New York, they're kind of slowly passing or looking to pass another kind of piece of legislation on housing with a cap on rents, market rate rents, some flexibility on the rent-regulated stuff. But the big thing is a cap on market rate rents.

And I was curious your thoughts on potential impacts from that?.

Yes, I was having a discussion the other day with a couple of owners that, one of the interesting things about the bill that is probably going to get, I think it has been passed, is that everybody's unhappy with it. So it must be a pretty good bill.

I think that, it's hard to argue against the fact that you can have up to 10% increases and still be within the law. So I'm not too upset with that overall. There are very few times in history where you're entitled to more than a 10% increase. So I think that gives a lot of flexibility to, a variety of owners..

Now, certainly if you're way under market in a rent-stabilized scenario or even a rent-regulated scenario, 10% may not be enough. But it's better than what was on the table before by a significant margin. I think it helps for the new construction and development that we need in the New York metro market.

And I think it gives probably more than 3-quarters of the market the amount of relief that they really needed in order to make a lot of these buildings viable. .

On the rent-regulated side, the ability to adjust?.

Right, on the rent-regulated side because before, you had no opportunity to raise rents or very limited opportunities. So now, I put it in the reasonable bucket. .

There are no -- that concludes our Q&A session. I will now turn the conference back over to the management team for closing remarks. .

Well, thank you, everyone, for joining us today. And, of course, thank you for all the great questions. We look forward to speaking with you again during our second quarter call in July. Everyone enjoy. .

This concludes today's conference call. You may now disconnect..