ConnectOne Bancorp, Inc. (NASDAQ:CNOB), a leading community bank in the Northeast, has reported its financial results for the second quarter of 2024, showcasing the company's disciplined approach and a promising outlook for the future.

Financials

In the second quarter of 2024, ConnectOne reported net income of $17.2 million, or $0.46 per diluted share, compared to $24.9 million, or $0.59 per diluted share, in the same period of the prior year. The company's annual net income for 2023 was $87.0 million. Revenue for the second quarter of 2024 was $65.8 million, a 2.1% decrease from the $67.1 million reported in the second quarter of 2023. The company's annual revenue for 2023 was $504.1 million.

Business Overview

ConnectOne's focus on core relationships, expansion of its C&I initiatives, and investments in opportunities to drive noninterest income have been key priorities for the company. This disciplined approach has positioned the bank to capitalize on the current industry upswing, which is further bolstered by the expectation of lower short-term rates, improved market liquidity, and recent cyclical rotation into regional banking.

Net Interest Margin

The company's net interest margin (NIM) improved by 8 basis points sequentially to 2.7% in the second quarter of 2024. Management expects continued NIM expansion, projecting a trajectory of a few basis points of improvement per quarter, with the potential for an additional 5 basis points of improvement for each Federal Reserve rate cut, the first of which is expected in September. This outlook could result in the NIM surpassing 3% or reaching the high 2.60s on a core basis by the end of 2025, potentially driving the pretax pre-provision return on assets near or above 1.5% and returns on tangible common equity back into double-digits.

Loan Origination and Portfolio Management

Loan origination levels remained strong during the quarter, with an annualized run rate in excess of $1 billion, though the overall loan portfolio decreased sequentially due to higher-than-usual pay-downs and payoffs. This was a strategic move by the company to actively manage non-relationship loans off its balance sheet, which is intended to improve the loan-to-deposit ratio and enhance the loan mix. The company expects loan growth to be in the 1% to 2% range for the remainder of 2024, reflecting approximately $1 billion or more of annualized originations offset by payoffs and paydowns.

Credit Quality

ConnectOne's credit quality metrics remained healthy, with nonaccrual loans declining and criticized and classified loans, as well as delinquencies, remaining low. The company's allowance for credit losses (ACL) increased during the quarter, reflecting charge-offs, a decline in loan balances, an improved economic forecast, and an increase in qualitative factors to account for elevated risks not inherent in the CECL model.

Noninterest Income

Noninterest income was a bright spot, increasing to $4.4 million in the second quarter, driven by a gain on the sale of a large non-relationship loan, as well as continued momentum in the company's SBA lending platform and BoeFly, its financial technology subsidiary. Management expects this momentum to continue as the company invests in these areas.

Liquidity

ConnectOne's capital position remained strong, with the tangible common equity ratio increasing to 9.46% and the bank's leverage ratio reaching 11.3%. The company declared a quarterly cash dividend of $0.18 per share, with a common dividend payout ratio currently below 40%.

Outlook

Looking ahead, ConnectOne is well-positioned to capitalize on the industry's upswing. The company's focus on core relationships, expansion of C&I lending, and investments in noninterest income opportunities, combined with the expected improvements in the interest rate environment, position the bank for continued success. Management's disciplined approach and commitment to executing on its long-term objectives have been instrumental in navigating the current challenges and positioning the company for future growth.

Conclusion

Overall, ConnectOne's solid second-quarter results and promising outlook underscore the company's ability to adapt and thrive in a dynamic banking landscape. With a strong balance sheet, healthy credit quality, and a diversified business model, ConnectOne is poised to deliver value for its shareholders in the years to come.