CNOB

Business Context and Reporting Period

ConnectOne Bancorp, Inc. (NASDAQ: CNOB) is a New Jersey-chartered bank holding company operating as a community-based, full-service commercial bank. This summary covers the quarterly period ended September 30, 2024 (Q3 2024). The Company operates as a single segment and is currently in the process of merging with The First of Long Island Corporation, an agreement announced on September 4, 2024.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Decline: Net income available to common stockholders decreased by 21% year-over-year for the quarter and 23% year-over-year for the nine-month period. This was driven by a contraction in net interest margin, higher noninterest expenses, and increased provisions for credit losses.
• Net Interest Margin Compression: The net interest margin (tax-equivalent) declined to 2.67% in Q3 2024 from 2.76% in Q3 2023. This contraction was primarily due to a 40 basis-point increase in the average cost of deposits, partially offset by a 24 basis-point increase in loan yields.
• Expense Growth: Noninterest expenses increased by $2.9 million (8%) for the quarter and $7.2 million (7%) year-to-date. Key drivers included a $1.0 million increase in IT and communications costs, $0.7 million in merger-related expenses, and higher incentive-based compensation accruals.
• Asset Quality: The provision for credit losses increased significantly to $3.8 million for the quarter (from $1.5 million) and $10.3 million year-to-date (from $5.5 million). Net charge-offs for the nine months ended September 30, 2024, were $9.9 million, compared to $8.0 million in the prior year period.
• Loan Portfolio: Gross loans decreased by $235.5 million (2.8%) from year-end 2023 to $8.11 billion, with declines observed in commercial real estate and commercial loan segments.

Guidance, Outlook, and Risks

• Mergers and Acquisitions: On September 4, 2024, the Company entered into a definitive agreement to merge with The First of Long Island Corporation. The combined entity is expected to have approximately $14 billion in total assets. The transaction is valued at approximately $284 million. Merger expenses of $0.7 million were incurred in Q3 2024.
• Interest Rate Risk: The Company utilizes net interest income simulation and Economic Value of Equity (EVE) models. As of September 30, 2024, a 200 basis-point instantaneous increase in interest rates is estimated to decrease net interest income by 3.95% over the next year and decrease EVE by 9.81%.
• Liquidity: The Company maintains strong liquidity with $705.9 million in liquid assets (7.3% of total assets). It has approximately $2.9 billion in aggregate available and unused credit facilities, including $2.5 billion at the Federal Home Loan Bank and $1.6 billion at the Federal Reserve Bank.
• Capital Adequacy: As of September 30, 2024, the Company and the Bank are well-capitalized. The Total Risk-Based Capital Ratio was 14.29% for the Company and 13.77% for the Bank, significantly exceeding regulatory minimums and capital conservation buffers.
• Unrealized Losses: The Company holds $51.1 million in net unrealized losses on available-for-sale securities, primarily due to interest rate fluctuations. Management does not intend to sell these securities prior to recovery.

Investor Verification Checklist

• Verify the status and regulatory approval timeline for the merger with The First of Long Island Corporation.
• Monitor the trajectory of deposit costs and the ability to reprice loans to offset margin compression.
• Review the composition of the $9.9 million in net charge-offs, specifically the $7.8 million related to multifamily loans.
• Assess the impact of the $1.0 million increase in IT expenses on future operational efficiency.
• Confirm the stability of the $1.2 billion in reciprocal deposits (ICS/CDARS) within the deposit base.