Good morning. My name is Zodra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Connect One Bancorp, Inc. second quarter 2025 earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad.
If you would like to withdraw your question press star one again at this time i would like to turn the conference over to sia vancia chief brand and innovation officer please go ahead good morning and welcome to today's conference call to review connect one's results for the second 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 I'd also like to caution you that we may make forward-looking statements during today's conference calls that are subject to risk and uncertainty. 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 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.
Thanks, Saya, and thank you all for joining us this morning to discuss Connect One's second quarter, which reflects continued momentum in executing our strategy alongside successful integration of the largest merger in our company's history. On June 1st, Connect One Bank officially launched as a unified entity, completing the legal close of our merger, First of Long Island Bank. This milestone marks the beginning of an exciting new chapter for us, one that significantly enhances our scale and positions us to accelerate growth across all our markets, especially on Long Island. In line with ConnectOne's unique approach to M&A, we deployed a deliberate and focused effort to maximize synergy, both in preparation for and immediately following the close of the combination. The results are already clear, compelling, and a direct reflection on our ability to execute, yet overwhelmingly strong client retention, demonstrating the success of our integration efforts and the continued loyalty of our combined client base. Steady momentum in new client onboarding as well as meaningful traction on new business opportunities. We had strong core deposit growth including gains in BDA balances for both existing newly acquired relationships. We're also seeing strong loan demand as we combine ConnectOne's deep expertise with significant growth opportunities across our new market. We enter the back half of 2025 with a solid and diverse pipeline. This includes C&I, construction, SBA, and residential lending. Prior to Bill providing additional details about the merger and its positive impact on our financials and performance metrics, I'd like to emphasize a few things. Our assets now stand at nearly $14 billion, $11.2 billion in loans and $11.3 billion in deposits, while our market capitalization today exceeds $1.2 billion. This quarter, we organically grew client deposits by a record amount, improving our loan-to-deposit ratio to 99% at the end of the second quarter, down from 106% as of March 31st. Non-interest-bearing demand composition now exceeds 21% of total deposits, up from 18% as of year-end, reflecting both the merger and our client-focused relationship-based approach. Additionally, while this transaction propelled us to above $10 billion asset threshold, ConnectOne was already well-prepared to cross this hurdle. We've proactively managed the associated regulatory requirements and, as a result, anticipate only modest expense growth while remaining well-positioned to continue our growth trajectory. Next, I'm also extremely pleased to welcome our newest members to our talented team. Deep expertise in community banking aligns with our client-first culture and strategy. I'm equally proud of the commitment and dedication shown by our team immediately coming together as one organization. The energy in our combined team is palpable, and our bench strength and momentum position us to execute on the opportunities in our market. We had a flawless day one brand transition, followed by the successful completion of a full systems conversion just two weeks later. Leading up to and throughout the transition, we placed a strong emphasis on delivering a seamless client experience. We proactively tripled our call center capacity to ensure responsiveness and continuity to address client needs in real time. Our clients were provided with broad access to the team, and I personally met with many, reinforcing our commitment to relationship banking that defines ConnectOne. As a result, we not only managed the conversion in under 30 days, we did so with excellent client and deposit retention, while also growing balances and setting the stage for enhancing those relationships. Today, we're operating as one unified company, single culture, consistent brand presence, and a shared vision. We're one team, fully aligned, and better positioned than ever to drive organic growth, create long-term shareholder value. And with that, I'll turn it over to Bill.
All right. Thank you, Frank. Good morning to everyone on the call. I want to start by reiterating that we are truly thrilled with the First of Long Island merger. It's strategic in that it expands our geographic footprint and client base. It's also financially disciplined and compelling. It strengthens our balance sheet, enhances our key financial metrics, and ultimately boosts our franchisees. Now, with any merger, particularly in the early stages of a transaction that closed mid-quarter, it can be challenging to digest what's going on behind the numbers. Therefore, I want to delve into some key areas to provide greater clarity. First and foremost, I want to highlight the exceptionally strong deposit and funding trends that ConnectOne is generating right out of the gate. On a combined company basis, non-interest-sparing demand deposits increased by more than 100 million since March 31st, approximately 15 percent annualized. And over the same time frame, total deposits are up in annualized 8 percent, which reflects solid performance, but it's even more encouraging that when you factor in a $200 million decline in broker deposits, our true core balances have increased by more than $500 million, or 17% annual. And with that robust deposit growth, we've been able to reduce wholesale Federal Home Loan Bank borrowings by about $200 million. Another point we want to highlight is the loan-to-deposit ratio improvement. Pre-merger, our first quarter loan-to-deposit ratio was 106, declining to 101 on a pro-forma combined basis to March 31st. Fast forward to today, going to positive growth, the ratio is improved even further to a couple percentage points below 100. Going forward, we expect to operate at about that 100% threshold. The deposit growth is a testament to the success across the entire organization, particularly healthy contribution from the Long Island market. Many bank mergers often face challenges with positive attrition. However, our unwavering focus on client retention has led to accelerated growth. Let me now turn to our purchase accounting entries. Now, we're going to aim for full transparency regarding the merger's purchase accounting adjustments, both now and in the future. I'm sure our core underlying trends remain clear. The merger has a total loan mark of $250 million. That's comprised of $207 million spare value, accretable mark and a 43 million dollar non-accretable fair value mark of 205 million reflects a 6.6 percent discount the first of long island's three billion dollar loan portfolio good portion of that is attributable to the 1.1 billion of residential loans we're taking on they have a relatively longer duration 43 million non-accretable mark on 270 million of pcd loans largely reflects a portion of First of Long Island's New York City rent-regulated portfolio. When you combine that non-accredible mark with the accredible mark on the BCD loans, those loans are now being carried on our balance sheet at about 70 cents of the dollar. I want to remind you that First of Long Island had a long-standing track record of pristine credit quality. Nearly all of the rent-regulated loans are performing. nevertheless under GAAP conservatively and appropriately allocated a healthy reserve due to the higher cap rates currently being applied to the subsegment. Now earnings accretion will be considerable. We are projecting them to be approximately 9.8 million per quarter for 2025, declining to 9.2 million per quarter in 26 and 7.9 million per quarter in 27. I'll address the impact of the accretion on our margin. Now the provision and allowance, I'm going to talk about that a little bit. The total provision for credit losses for the second quarter was $35.7 million, including a day one provision for the first of Long Island, $27.4 million, and an operating provision of $8.3 million. Now that $8.3 million is higher than usual for Connect One, but it was largely due to upward adjustments in our quantitative loss factors resulting from the merger particularly attributable to the longer duration loan portfolio required so in my view the impact to cecil modeling is more or less a one-time adjustment as such all things equal we expect lower levels of quarterly as many of you are aware there is a pending rule change over eliminate the day one provisioning WE WILL BE ABLE TO REVERSE THAT CHARGE IN THE FUTURE SHOULD IT BECOME EFFECTIVE. THAT WOULD FLOW THROUGH EARNINGS AND ADD ABOUT 15 BASIS POINTS OF THE PC. LET ME REVIEW THE MERGER CHARGES AND COST SAVES SO FAR. SO FAR WE'VE RECOGNIZED 40 MILLION IN AGGREGATE MERGER CHARGES AND MY EXPECTATION IS WE'LL RECORD UP TO AN ADDITIONAL 10 MILLION OVER THE NEXT QUARTER OR TWO. Target was approximately $52 million, so expect to remain below that after the full recognition. In terms of cost saves, we are on track. First thing I want to explain is that the second quarter was a mixed bag, just one month of a combined expense base and specific emergent charges. Calibrating for those items, our expense base is what I've expected. Going forward, as a 100% combined company, 2025 quarterly expenses projected in the $55 million dollar range while in 26 the quarterly run rate is likely to be slightly higher 56 to 57 million and these projections are consistent the achievements are 35 previously downstate target um just the other income line for a moment pre-merger connect one standalone was running at four to five million on a merge basis that's going to go up to 6.7 million per quarter for the next few quarters reflecting a new build of our SBA business against the Long Island market, while we also expect both fly to be an increasing source of gains on sale. Let me talk a little bit about the net interest margin. As always, there are many moving parts, but overall we expect continued expansion. Those moving parts include the merger and purchase accounting, organic widening as our deposit mix and loan pricing continues, sub-debt issuance we just did and redemptions coming up and said rate cuts. So a lot of moving parts there. Our competition's called for an approximate increase to our margin of 10 basis points for each of the third and fourth quarters versus the 3.06 reported quarter two. That results in an interest margin of about 325 for the further expansion expected from 26. That estimate assumes just one rate cut and 25. In terms of projected turn on assets and return on tangible common equity, I'm still comfortable with the previously announced 1.2% ROA, 15% return on tangible common equity as we add to 26, but we will refresh that analysis once we have a full quarter behind us. I'm hopeful for an even better outlook. Credit quality. The metrics saw significant improvement due to the merger and the work out of the sale of certain impaired loans, our non-performing asset ratio improved dramatically, just 0.28% from 0.51% a year ago, and the ACL as a percentage of loans jumped to 1.4% from just 1%, although the significant increase reflects the non-accredible mark. Charge-offs remain in a reasonable range of 22 basis per quarter.
There's no significant increases expected.
CRE concentration ratio, as expected, it ticked up slightly to 438%, with the merger reduced CRE composition in the loan portfolio and higher earnings projections. We anticipate a sub-400 level by the end of 2020. I know you'll have questions about loan growth. Frank spoke to it a little bit. Ironically speaking, the loan portfolio has recently remain relatively flat largely due to elevated payoffs having said that we continue to see solid demand the pipeline continues to and along those lines our capital remains strong to support growth the Bancorp tangible income and equity ratios and above 8 percent at 8.1 will trend upwards with strong levels of savings while the bank's key ratio today remains above 12 percent down just a little from before the acquisition, and that reflects, first of all, lower risk-rated assets. With that, I'll turn it back over to Frank and we'll take some of your questions.
Thank you, Bill. As you just heard, proud that we've been able to successfully close and immediately integrate this merger while also delivering on our strategic objectives as planned. We acquired culture-complementary turnkey organization in an adjacent market, enviable client base and proven track record. Our markets are ripe with opportunities for truly client focused bank. Our expanded footprint and team coupled with the momentum we built lay the foundation for a strong second half. As we move through the second half of the year, we look forward to driving growth and creating long-term value for our clients, team members, and our shareholders. Let me close by saying that our company was undervalued before. Today, I truly believe our valuation is even more compelling, ConnectOne is one of the best investments. As always, we appreciate your interest in ConnectOne Bancorp. Thanks again for joining us today. And with that, I'd like to turn it over for some questions. Operator?
Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. We'll go first to Fetty Strickland at Hub D. Hey, good morning, Frank and Bill.
It's great to see the criticized and classifieds as well as the NPAs down in the quarter. Are there any other opportunities in the back half of the year to maybe reduce those even a little further?
They're already pretty low, but just wondering if there's any big bogeys there. and he's asking about our projection with classified and criticized um i don't see any major change from where we are today um you know there's there's some stresses out there in the marketplace that have uh classified and criticized that that wouldn't be unexpected you know with the write downs loans there's opportunities to potentially unload some loans there so we'll watch that number but I wouldn't expect any change.
And then just switching gears to capital with the deal behind you now and the likelihood of some pretty good capital generation in the next couple quarters, how do you think through the dynamic between capital deployment and managing CRE concentration?
Well, the numbers pan out very nicely to see CRE concentration. That's based on that's part of it and then because of the accretion of the deal we're really and our relatively low dividend rate really adding capital quickly so um i think i answered your question um we're gonna we're gonna see that go down on its own own are you are you asking about stock repurchases and growth?
Yeah, I'm just curious if there's like a target level of common equity tier one or any other metric where you'd be a little more likely to engage in share repurchases.
You know, there's always a possibility. I mean, we came out of the gate when we talked about the deal that we hold off on share repurchases in the beginning. In my view, the capital ratios are looking a little bit stronger than I originally anticipated, So I'll just leave that open for now, and we continually look at that in terms of share repurchases. It obviously depends on growth in the loan portfolio.
All right, great. Thanks for taking my questions. Thanks, Eddie.
We'll move next to Daniel Tameo at Raymond James.
Hey, good morning, guys. This is Tim DeLacy on filling in for Danny. Thanks for taking my questions.
Hey, you know, just shifting to the margin here, you know, saw a really nice pickup in the securities portfolio this quarter. Curious, you know, what were the drivers there and, you know, were there any actions taken on the Lexi-Flick portfolio that you did?
Well, the securities portfolio increased because of the acquisition. So you see, you know, as of the balances on an average basis, it's less because it's only one month. But we did do some restructurings. We think we improved our interest sensitivity and earnings from those restructurings. So you'll see the benefits of those going forward.
Understood. And kind of following up on that, five basis point positive impacts for the 25 basis rate cut previously. Should we kind of be thinking about that somewhat differently now, kind of post-merger here?
No, we're still sticking with that, that it's approximately five basis points for each cut and in the estimates I gave you we estimated one cut so you know it could be up or down depending on how many cuts we see through uh 26. um you know as we build a bigger non-interest bearing deposit space um that would reduce the benefit of of uh of rate cuts but it would improve the overall interest rate profile of the company okay understood thank you great color there and And then finally, just looking at reserve levels here going forward, standing at 140
here, obviously a little bit elevated relative to historical levels. So how should we be thinking about those levels kind of trending from here?
Well, I did try to mention that we were up slightly excluding the non-accredible reserve. So that was the reason for the jump. You know, to the extent I don't want to comment on how much of that reserve will use, but I think we set up a pretty conservative one. So to the extent we were conservative and we performed well, we'll have the ability to raise our reserves more going forward, our core reserves.
Great. Awesome. Thanks, guys. I appreciate you taking my questions.
And as a reminder, if you would like to ask a question, please press star one. We'll go next to Tyler Cacciatore at Stevens, Inc. Hey, good morning.
This is Tyler. from every's yes okay um sorry if i missed it uh i think you said the reserve was a bit higher due to increased cap rates on regulated housing uh do you know the cap rates that were used for that well they're they this is in our i'm in our purchase accounting okay and when you when you look at per when you look at purchase accounting you have to look as a buyer of as we do that's what purchase accounting means for buying those loans so you use cap rates that a buyer would use so they probably ranged anywhere from uh six and a half to eight and a half percent you know for the for the purchase accounting adjustment you know if you get the loan appraised you might see lower rates uh cap rates but we use higher cap rates as a potential buyer of the loans okay great that That helps.
And then moving on to deposits, it's nice to see DDAs above 20% with the deal. How do you feel about that number going forward? And is growing that realistic given the current environment? And then if you could just talk a little bit about overall composition and growth heading forward.
Yeah, I think there's a lot of opportunity to continue the trend of growing DDA higher relative to the entire portfolio. And part of that is, you know, the mix of the loan portfolio as we continue to execute on CNI and other opportunities in the marketplace that come naturally with deposits and having, you know, what is a pretty substantial now presence on Long Island that had a higher DDA balance to begin with, we think there's some real great opportunities there to enhance a lot of the relationships that were formed there over the years. So I would say really look forward to continuing to build the book in a way that helps to keep the loan deposit ratio low and the DDA balance is growing and a very well diversified loan And I'll just say, we're certainly off to a really great start, so I'm pretty Thank you.
And then if I could just squeeze one more in. I know you talked a little bit about the loan pipeline heading forward. What are the yields you're seeing on that right now? And then if you could give us some sense for near-term growth projections. I think on last quarter's call, you spoke about 5% for the year. What do you see heading forward?
Well, first, the loan, sorry, the loan rate on our pipeline is 677. Okay, that's a weighted average rate. In terms of the growth rate, I want to tell you that we are originating a lot of loans. And so there's still a lot of demand out there. The reason for the lower than anticipated growth has been payoffs. So it's hard to say going forward, but I'd say we'd be in this, you know, single digit going forward, you know, for the next six months. It could be in the low single digits, could be mid single digits. Frank, do you agree with me?
Yeah, again, I like to characterize it as strong loan demand, whether how much that translates into actual balance sheet growth is still a little bit subject to some of the payoffs. By the way, a number of the payoffs we're seeing you know we're happy to see so uh overall i think it gives us a better balance sheet going forward i have to tell you we we seem to be very happy with both what's in the pipeline what's coming off and what the balance sheet should look like at year end both from a composition standpoint a uh earnings yield uh depository relationships all the things that we've been working towards. Whether we grow at 2%, 5%, 6%, I don't want to say it doesn't matter, but to the extent that we can get the balance sheet that we want and we can continue to focus on treating our clients in the way that they want to be treating and being the bank that they choose as their number one institution, that's where we see success coming from. And that will translate into a profitable model.
Great, thank you. That'll be it for me.
And that concludes our Q&A session. I will now turn the conference back over to management for closing remarks.
Well, I want to thank everyone again for your time today. We look forward to speaking with you again during the third quarter earnings call. With that, everyone, enjoy your summer.
And this concludes today's conference call. Thank you for your participation. You may now disconnect.
