管理層發言
Good morning, and welcome to today's conference call to review ConnectOne's results for the third 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 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. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.
Thank you, Siya, and good morning, everyone. Pleased to report that during the third quarter, we continued to build upon our strategic objectives, a clear reflection of 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. The integration of our systems merger, which took place only 2 weeks after the legal close, went exceptionally well, driven by outstanding collaboration across our team. In our first full quarter post-merger, we're operating seamlessly. One organization, consolidated systems, strong cultural alignment, and a unified client-first mindset. We have since built meaningful momentum across our markets, leading to accelerating performance metrics. We're seeing strong engagement, ongoing new client onboarding, and healthy growth in loans and deposits. This progress is especially evident on Long Island, where we're leveraging our strategy to drive growth and strengthen our business. An attractive market we entered several years ago, the merger has accelerated our goals. Importantly, the positive financial aspects of the transaction are beginning to take hold, and Bill will discuss that a little more in a minute. Operationally, ConnectOne's ability to attract and retain deposits remains a strength. During the third quarter, our core deposits continued to grow 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 to leverage our expertise and attract growth opportunities. Looking ahead, we're well positioned for the balance of 2025 and into 2026 with a healthy and diversified pipeline for C&I, CRE, construction, and SBA lending, showcasing the strength and reach of our franchise. Credit remains strong, supported by prudent and consistent underwriting standards and portfolio oversight. Our nonperforming assets were just 0.28% at the end of the quarter. Annualized net charge-offs remained below 0.20% and 30-day delinquencies were just 0.08% of total loans. Additionally, ConnectOne's capital and tangible book value grew meaningfully. Overall, our third quarter operating performance clearly demonstrates the strength and potential of this organization. And with that overview, I'll turn it over to Bill to walk through some of the performance...
All right. 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. As Frank mentioned, the merger, which was finalized 5 months ago on June 1, is now fully integrated, and that was due to a swift seamless brand and back-office systems conversion completed within the very first month. That rapid integration has allowed our performance metrics to excel with an acceleration of improvements expected in the fourth quarter and into 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 1.61%. Our earnings performance is being driven by the merger and a widening net interest margin, which grew to 3.11% from 3.06% in the sequential quarter and from 2.67% a year ago. The spot margin at quarter end was already higher than 3.20%. We expect the fourth quarter margin at 3.25% or even above. The current quarter's margin of 3.11% reflected two temporary factors. One was the $75 million of high-rate subordinated debt that was still outstanding but redeemed on September 15. 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 fundings. Without those two items, which work to compress the reported margin, the third quarter NIM would have been in excess of 3.50%. In terms of the balance sheet, we continue to observe robust deposit growth following exceptional organic growth in the second quarter. On a sequential basis, our client deposit growth was approximately 4% annualized, building on the second-quarter's annualized growth of 17%. Annualized sequential loan growth for the quarter matched deposit growth, maintaining our loan-to-deposit ratio below 100%. The loan pipeline is strong, and we expect loan growth to accelerate in the fourth quarter, with average loans increasing by more than 2%, not annualized, from quarter to quarter versus the sequential third quarter. Please keep in mind for your models that average cash is likely to decrease, which will slow the increase in total interest-earning assets. In 2026, we could easily see loan growth in the 5% plus range, dependent on the economy and loan demand. Adding to the strong performance of ConnectOne this quarter were two nonrecurring items that boosted pretax income by more than $10 million. First was a $6.6 million of cash received this quarter from the employee retention tax credit that was conceived during the pandemic. The second nonrecurring benefit recognized during the quarter was a $3.5 million pension curtailment gain relating to the freezing of the First of Long Island's pension plan effective September 30, with the 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, in addition to this one-time $3.5 million present value benefit recorded this quarter. In terms of noninterest income, it was a very strong quarter because of those nonrecurring items, exceeding $19 million. The recurring level of noninterest income right now remains at around $7 million per quarter. We expect growth, especially in gains on sales as we continue to build out SBA, BoeFly, and residential mortgage. We expect SBA to add significantly to our noninterest income in 2026. Keep in mind, with the government shutdown, we could see a backlog building in the fourth quarter, which will be addressed after the government reopens. Operating expenses, net of merger and restructuring charges, were $55.8 million, and our recurring run rate guidance remains approximately $55 million to $56 million for the fourth quarter and $56 million to $57 million per quarter during the first half of 2026. The latter part of 2026 could drift slightly higher. These amounts reflect normal expense growth, net of additional merger savings that have not yet been realized. Turning to taxes, our tax expense line for the full year has been a little tricky due to the merger, and we had a second-quarter charge related to intercompany dividends. Our actual marginal tax rate has trended upwards, but our growth and geographic reach have impacted our traditional tax strategies. For 2026, we plan to utilize new strategies that are expected to result in an effective tax rate in the range of 28%, maybe a little higher. As for credit, credit quality remains sound by all measures. The nonperforming asset ratio is at historical lows of 0.28%. Charge-offs for the quarter were just 18 basis points. Delinquencies over 30 days were only 0.08% of total loans, which is very low. CRE concentration continued its downward trend, falling to 4.34% at September 30. Our capital ratios continue to strengthen. The holding company tangible common equity ratio rose significantly to 8.4%. 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, with a 5% increase calculated in tangible book value per share since the merger's completion. With a higher level of projected retained earnings, we expect to have enough room in 2026 for a common dividend increase and opportunistic share repurchase. That's it for my introductory remarks, and back to you, Frank.
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. ConnectOne'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 ConnectOne. 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 your questions.
分析師問答
Our first question comes from the line of Daniel Tamayo from Raymond James.
Maybe starting on your profitability targets. I think last quarter, you talked about, Frank, hoping to hit 1.2% ROA and 15% ROTCE in 2026. Just interested in your current thoughts around profitability targets for next year.
I believe those targets are still consistent with what we mentioned previously, and I can easily see us reaching 1.20 by the second quarter. My projections indicate we could approach 1.30 by the end of the year.
Okay. Great. And then a follow-up kind of unrelated, but we saw yesterday the announced end of quantitative tightening. I'm just curious maybe you guys' thoughts on how that could impact deposit growth and/or pricing in your markets.
I believe this will be beneficial for us moving forward. It seems the Fed thinks the economy will remain fairly strong and that additional liquidity is needed in the market, which tends to convert into bank deposits. Therefore, I expect to see continued growth in deposits across various banks, which is favorable. This will help ease some of the competitive pressures that have emerged recently. While short-term rates have decreased, competition for deposits has intensified. A steeper yield curve, increased liquidity, and a stable, robust economy should be advantageous for ConnectOne and our industry as a whole.
I agree with what Frank said. Also, the margin continues to expand for all the reasons we've talked about before. We don't know exactly how many Fed cuts are at the end of next year, but there are going to be a few. Our loans are repricing faster. Even in a down rate environment, our loans are repricing upward. So still looking at margins. I'll be bold enough to say approaching the 3.40% to 3.50% range by the end of next year.
That's great. Yes, let's hope all of that works out in your favor. It seems like it's trending certainly positively. So anyway appreciate all that color, guys.
Our next question comes from the line of Tim Switzer from KBW.
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. Are share repurchases on the table here? And I would just like to get some color on that.
Well, from my perspective, I know Bill made some comments relative to our ability to build capital. Capital is building quite quickly at the company, as you know, 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 we're opportunistic to engage in organic growth at the higher end of the spectrum, that will leave a little bit less for other opportunities. But overall, I think we can pretty much do anything we want to do in 2026.
Yes. No, I agree with that. Our growth is going to be prudent and disciplined in terms of spreads. I'd 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'll have room for opportunistic share repurchase.
Okay. Great. That's good to hear. And then I was also looking to get an update on BoeFly and maybe the growth outlook there, putting aside the government shutdown, the impact on SBA it's more near, but I'd love to get an update on that. And then also maybe some color on the recent changes to rules governing the smaller dollar million dollar or less loans in SBA in terms of underwriting and the new fees that came back in over the summer.
So we'll start with BoeFly. Bill will talk a little bit more about the specifics of the various programs. BoeFly since its inception here at ConnectOne has continued its upward trend. We now represent over 250 national franchise brands across the nation, which is an all-time high. When we purchased the company, I think they represented less than 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. This has led to this growth 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 growing SBA platform. We're really beginning to start to see from a financial perspective the fruits of all that labor. You will continue to see that in the future with the SBA revenue line continuing to expand. We're very happy about where we are, where we're headed, and about how it's translating into quality revenue here at ConnectOne. Bill, maybe you want to add.
We have spent the past couple of years building and perfecting the BoeFly platform, which has led to a significant increase in the number of franchisors participating. We are now starting to convert that into more income through SBA sales, which was already reflected this quarter, and we expect the increase to accelerate. The timeline for franchise loans typically takes longer from inception to gain, so we are building a strong pipeline for next year, and I am very optimistic that we will see substantial gains there. Additionally, we have been developing our SBA lending efforts on the ground, and everything is working in our favor. We started from scratch, and this will become a significant part of our noninterest income moving forward.
Our next question comes from the line of Matthew Breese from Stephens Inc.
First one for me. It was really nice to see those noninterest-bearing deposits up, I think, 3.7% quarter-over-quarter and then CDs down 2.8%. Maybe just talk to us about what's going on, a few of the wins there? Are they acquisition related? Meaning is the FLIC deal and the brand starting to bear some fruit? And then looking ahead, can we see deposit growth match or exceed loan growth for next year, maintaining that sub 100% loan-to-deposit ratio?
Yes. Well, I'll take your questions in reverse order. The goal would be to match the deposits with the loans. That actually answers the first part of your question. There's been a focus here at ConnectOne 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. We like taking in deposits from the same folks that we make loans to. So we've had an ongoing effort 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. We've been weeding out part of the slowdown in growth by excluding clients who promised us depository relationships but never delivered or just folks that wound up here with a transaction. We really don't want to be just a transaction-oriented bank. I think with that focus continuing going forward, the merger we just completed has a group of clients that we onboarded who were very deposit-rich and didn't take advantage of all the lending opportunities we offer. Rounding out the folks we're getting in front of on Long Island and this continued focus on high-quality relationship-type clients is driving a profitable spread-dependent business. It's allowing us to bring on high-quality clients that should ensure that we keep a loan-to-deposit ratio in and around the range today.
Great. And then, Bill, maybe you could help me out with a couple of things. What proportion of loans are now pure floating rate? 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 is, are you starting to see any spread compression as some of your competitors have indicated?
First off, to answer your first question, it's only about 15% of pure floating. So we're in good shape there. In terms of the roll-on and roll-off of fixed versus floating, I'm not sure 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, it's like in the high 6s going on and the low 6s coming off.
Great. And then just two others for me. First one is just on the reserve. You have a 1.35% reserve to loans ratio. Historically, ConnectOne has been a lot lower, maybe 1% to 1.05%. 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 FLIC loans reprice? It seems high relative to the credit quality.
Yes, I believe that it will work that way. It will likely trend back towards the 1 level or possibly a bit higher. We'll see how the economy performs and how CECL is applied at that time.
Okay. All right. And then last one is just, Bill, you had mentioned elevated cash; cash could come down next quarter. What should we be thinking of in terms of normalized cash to assets? That's all I had.
For now, I would say $350 million to $400 million would be normalized. It could go lower than that. But for this upcoming quarter, that's what I would say. If you look at our loan growth on an average basis, you're going to see pretty flat interest-earning assets. And that's fine by me in terms of capital ratios and margins.
Our next question comes from Feddie Strickland from Hovde.
I would like to focus on the loan repricing opportunity. Bill, could you help us estimate the amount of fixed-rate loan repricing we might see in the coming quarters? I am trying to understand the extent of this opportunity.
The opportunity is quite large, probably have about $1 billion repricing in 2026 and another $1 billion in 2027.
And then I wanted to follow up on credit. Obviously, it's good to see NPA stable, net charge-offs step down a bit. Do we expect charge-offs to kind of remain in the high teens to low 20s range just in terms of basis points of average loans? Or does that step down? Just trying to get a sense for what we should see...
Yes. I mean it's hard to predict, but we've been pretty steady with that. So I'm running my own model, and that's what I would have going forward for the next 4 quarters.
Our last question comes from the line of Daniel Tamayo from Raymond James.
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 the quarter. And then the follow-up to that is just curious kind of if you could update us on your thoughts if we do get a Mamdani win next week in the mayoral election, what that means for the whole rent-regulated kind of industry in your opinion?
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. In my view, that's completely ring-fenced. The rest of the ConnectOne portfolio is about $275 million, which is less than 2.5% of our total loan portfolio, conservatively underwritten with no value-add projects. These continue to perform well, showing moderate stress in the portfolio. Frank, do you want to comment?
Sure. As you can well imagine, we get this question a lot, certainly being centered in the New York Metro market. My answer has been fairly consistent. There are so many variables as to what will happen from today forward, whether he wins or he doesn't win. Let's not forget the other alternative to Mamdani is Cuomo, who is the one who signed the 2019 rent regulation law that's causing a lot of the consternation in the portfolio anyway. Rent stabilized is here to stay. It's a constant struggle within that marketplace relative to the expense base versus the revenue stream. On the positive side of the equation, we saw this year a 3% increase that came on the back of a 2.7% increase the year before. It looks like for the next couple of years, we're still going to have a rent-regulated board that is reasonably taking into account inflation and other costs being pushed through the system. There are those who would argue that potentially a Mamdani administration might actually be good for the rent-regulated portfolio in that he's looking to work to reduce the expense side by reorganizing the tax basis for real estate taxes and other potential solutions to allow landlords to invest in the property to get more units back on the market. As you know, there are about 50,000 rent-stabilized units that are vacant today because of the change in the 2019 law. So there are just too many variables to put your finger on. What's going to happen? All I know is this has been something that has existed 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. There's going to be programs put in place to make sure that product continues to be available to residents in New York City. It will change over time, and how that change occurs is hard for me to say right now. We're very comfortable with the loans that we underwrote. We were never part of the whole value-add story to get rent-stabilized tenants out and replace them with market tenants. We really don't have that risk on our balance sheet in those lending opportunities. I think over time, it's just going to get figured out what to do with that product set. So we're comfortable with the operators that run the assets we have. We have very strong LTVs and debt service coverage ratios at properties 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 is going to happen with any immediacy in the short term.
There are no further questions at this time. I'd now like to turn the call over back to management for closing remarks.
I want to thank you, everyone, for joining us today and for some really great questions. 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.