Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- ConnectOne Bancorp Inc (CNOB, Financial) reported solid second-quarter results, reflecting the company's disciplined approach and commitment to relationship banking.
- The company saw continued deposit growth from both existing and new clients across New York, New Jersey, and Florida markets.
- Net interest margin increased by eight basis points sequentially, with expectations for continued expansion.
- Nonaccrual loans declined, and credit metrics remained healthy, with low levels of criticized and classified loans and delinquencies.
- Capital ratios and tangible book value per share increased, providing capital flexibility and a fortified balance sheet.
Negative Points
- Loan portfolio decreased sequentially due to higher-than-usual paydowns and payoffs, driven by the strategy to manage non-relationship loans off the balance sheet.
- Reported deposits remained flat, with a decrease in brokered deposits offsetting the increase in client deposits.
- Operating expenses increased by 1.4% sequentially, with expectations for continued expense growth due to new investments.
- The company is just below the $10 billion asset threshold, which may lead to increased regulatory oversight and potential impacts when crossing this threshold.
- Classified loans increased slightly, although they remain at historically low levels.
Q & A Highlights
Q: Have you had an opportunity to selectively lower deposit rates in certain categories or markets? What has been the customer response?
A: We are anticipating the ability to lower rates, which will help us as it will help other banks. We are managing client expectations carefully to maintain our strong client base. This is a work in progress, but we are focusing on it.
Q: What about on the expense side? Are there levers you can pull if rate cuts don't happen or revenue doesn't improve as expected?
A: We have some investments that will increase expenses as they are put into service. We can adjust staff levels and incentive compensation accruals based on revenue growth. This flexibility helps us remain efficient.
Q: Can you provide any expectations around deposit growth in the back half of the year?
A: The trend is looking good, and we expect client deposits to exceed loan growth, leading to a lower loan-to-deposit ratio. We have outpaced the market in terms of deposit growth over the past few quarters.
Q: What is your expectation regarding deposit costs, especially if there are no rate cuts?
A: While we have seen a dramatic improvement in non-deposit funding costs, the increase in deposit costs is slowing down. We are being conservative and expect the rate on our assets to improve faster than the cost of total funding.
Q: What are your expectations for loan growth and CRE concentration levels over the next several quarters?
A: We expect a declining trend in CRE concentration but not a seismic shift overnight. We believe it is prudent to show lower levels of CRE concentration over time, which is healthy for the bank and aligns with investor and regulatory expectations.
Q: Are you assuming further reductions in wholesale funding in your NIM guidance?
A: We expect some more reductions in Federal Home Loan Bank borrowings but not to the same magnitude as before. We aim for more client deposits and less wholesale funding, with solid loan growth in the 1% to 2% range.
Q: What is the right level of capital for ConnectOne Bancorp?
A: We manage our capital stack to maintain similar cushions across various ratios. We feel comfortable with our current position and have the ability to leverage our capital moderately if needed. We do not foresee a significant drop in our tangible common equity ratio.
Q: Can you provide details on the increase in classified loans?
A: The increase to 150 basis points is still at a historically low level. This specific change does not indicate a significant potential for additional charge-offs.
Q: What is the duration of your borrowings and CDs, and are you starting to price CDs lower?
A: We are beginning to be more aggressive on CD repricing, aiming to lower rates without losing deposit balances. This strategy allows us to stay ahead of the curve if rate cuts are expected.
Q: What drove the increase in non-interest income this quarter, and how sustainable is it?
A: The increase was partly due to the sale of a large non-relationship loan. We expect gains on sale to be slightly lower going forward, but underlying growth in our SBA platform and other income sources should continue.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
