Q4 2019 Earnings Call

Greetings and welcome to the connect one Bancorp incorporated fourth quarter 2019 earnings call at this time, all participants sawhney listen only mode.

Question answer session will follow the formal presentation, if anyone should require operate assistance during the call. Please press Star then well on your telephone keypad. Please note. This conference is being recorded.

I'd now like to turn the conference over to your hosts today see offense senior Vice President of marketing piece, we'll see.

Good morning, and welcome to today's conference call to you come back ones results for the fourth quarter 2019 to update you on recent development on today's conference call will be from 17, <unk>, Chairman and Chief Executive Officer, and don't Burn Executive Vice President and Chief Financial Officer, There's always loved noticed on this conference call an older can only.

<unk> over the Internet were distributed this morning in a press release has been covered by the financial media.

Let me remind you that certain statements an assumption in this conference call container based upon forward looking information are being makers. She went to the safe Harbor provision the private Securities Litigation Reform Act nascent maybe by such forward looking statements are subject to numerous assumption uncertainties and known or unknown risks, which could cause actual results.

Differ materially from those at the state.

Factors are markedly stuff is a company filings with Securities and Exchange Commission. The forward looking statements included in this conference call or me only.

This call companies not obligated to publicly update or five.

In addition, certain terms vehicle or non-GAAP financial measure reconciliations are provided in the Companys earnings release, and accompanying tables or schedule, which had been filed today on form 8-K that the FCC and may also be accessed through the company's website at <unk>, our dot connect one day dot com.

Listeners are encouraged to review does reconciliations are provided in the earnings release together with all other information provided in the early.

I'll now turn the call over afraid turnkey outbreaks. Please go ahead.

Thank you Sam good morning, everyone, a the fourth quarter for was another productive quarter for cannot foreign capping one of our strongest and most successful years.

Throughout 2019, we executed against key operating objectives, and entered 2020, well position to capitalize on meaningful organic growth as well as potential.

M&A opportunities.

Second we completed the acquisition of Bank corporate New Jersey ahead of schedule. This financially savvy accretive acquisition of an end market billion dollar commercial bank brings a high level, let's just other efficiency opportunities.

It's also very low risk transaction that enhances our powerful franchise, given our overlapping geographic footprint cultural alignment and deep knowledge of the institution the market and the client base.

Well, we closed the acquisition only a few weeks ago, we're already developing client revenue synergies as well as opportunities to drive economies of scale.

Conversion is expected to occur this may at which point all bank of New Jersey clients will be transition to the connect one platform.

Few minutes Bill will provide you with some current estimates of the projected cost saves.

Additionally, the transaction increases our total assets the over $7 billion another meaningful milestone for cannot one.

I'd now like to review Suky fourth quarter financial highlights.

Aggregate new loan originations for the quarter were 243 million contributing to the growth was strong activity in our see an eye segment, reflecting our highly seasoned cnineteen and their deep commercial lending experience. Our strong originations were offset by expected payoff activity, especially in our construction portfolio.

Which reduce sequential growth in average total loans to 2.1% annualized well. This is well below our historical trend our loan pipeline remains strong and we are targeting a growth rate in the high single digits for 2020.

Having said that we cannot control the market and should spreads tighten further we may see lower growth indoor more loan sales.

On the funding side, we grew the pot client deposits to 4.8 billion at year end, and we were particularly pleased with a solid improvement in the deposit mix, which bill will also discuss shortly.

Our Siri regulatory concentration metric improved again to 450% from 480% a year ago.

For the fourth quarter return on assets reached 1.4% in return on tangible common equity exceeded 15% performance metrics, we continue to be very pleased with.

We remain one of the industry's most cost efficient banks with an efficiency ratio of 41.8% credit trends remain solid and our capital ratios increased once again, well tangible book value per share increased by 2.9% in one quarter to $16 in six cents.

I'm extremely pleased with our fourth quarter results and our continued outstanding execution operationally, we're gaining market share developing strong client relationships and enhancing connect ones digital strategy towards this end in early January we extended our presence in the Ironbound section in Newark, featuring a dance growing number of small to medium size.

Businesses, we've done well in this market and believe there are opportunities to take additional market share while building the location into a hub office.

Turning to both line our online business lending marketplace, we continue to enhance its infrastructure Ed new users and drive revenue looking ahead, we expect the platform to augment ultimate connect ones fee income in 2020, as well generate profitable S <unk> lending opportunities.

We also remain focused on investing in financial technology to stay ahead of the competition as part of our approach. We continue to work with Fintech companies to enhance our digital products streamlined enhance back office processes as well as offer competitive suite of consumer products, specifically, we see opportunities in the payments in lending spaces. So it's.

Summary, 2019 was a very strong year for can they want.

And it was highlighted by profitable organic growth.

Execution on a disciplined M&A strategy prudent credit underwriting investments in technology and of course continued stewardship of our shareholders' capital.

I'm not going to turn the call over to Bill will provide a few more details in the quarters performance said, okay. Thank you Frank and Hello, everyone. So as Frank mentioned it was another great quarter connect one let me start with some overall highlights for the year first off our stock price performed very well gaining 40% over the course of the year bidding.

The general market and bank specific indexes still our stock trades that just 11.2 times 2020 Street estimates, which is still a 15% discount to that peer group.

Also this year, we commenced the stock repurchase program increased our dividend and still our tangible book value per share increased by 11.3% $16.06.

Earnings per share increased by 10.3% over 2018.

Balance sheet growth was 13%, reflecting a combination of organic business generation and then in <unk> and today.

And speaking of that today, we announced or completed three transactions during the year. One was a geographic expansion in our footprint. Another was strictly an end market deal and the third both wireless fintech and through all the negotiations due diligence regulatory processes and conversions and integration we continued to grow organically.

Thats skipping a beat.

So 2019 was a year, where we focused on strengthening our balance sheet.

Over 50% of the year over year loan growth was a non CRM segments as we benefited from our deep experience unite team members. They continue to drive value on both sides of our balance sheet.

Proven that the foundation, we began building over five years ago is hitting on all cylinders.

With this year's growth our salary concentration prove to about 450, a yearend, reflecting a function that fundamentally stronger invaluable balance sheet.

And through continued focus on commercial banking relationships, we're driving our core deposit base lowering our loan to deposit ratio and positioning us to generate even stronger earnings to build capital and that capital fuels organic growth in sports other value enhancing uses of capital such as stock repurchases dividend increases in cash acquisitions.

So let me talk a little bit about net interest margin continues to be an investor focus.

Sequentially, our net interest margin, we corrected by about seven basis points, both on a pre and post purchase accounting basis.

They seem like a lot for one quarter, but actually I was pleased with where the margin ended up which is three 336 on a GAAP basis up nine basis points from last year's fourth quarter.

The decline for the sequential quarter was almost entirely due to lower prepayment and other fees, meaning the declining yields on loans. After you backup purchase accounting of fees was virtually matched by an improvement in funding costs and those funding cost benefits came from a shift in our funding mix with demanded interest bearing transaction accounts, increasing and Cds and borrowings.

Accretion.

And one more point I want to make you weren't potentially less aggressive in lowering deposit rates. After the October fed rate cuts. So we still have some hours in our clever.

Keep in mind also we were coming off a quarter, where the margin had just extend the by upwards of 15 basis points.

And the 336 cap and 326 adjusted this quarter net interest margin is still above the first half of this year.

Of 2019.

So going forward from what I can see right now and it's still early in the first quarter. The margin is looking stable.

Let's now move on to noninterest income, we continue to make strides in deposit fee income for the year core deposit fees are up 50% from 2018 result at some of that came from the acquisition of greater Hudson. We also had higher than usual residential loan sale gains going forward in 2020, I expect continued residential and an increase.

Coming from commercial loan sales.

And both light is now contributing about 200000 per quarter a level, we expect to approve upon this year based on a recent increasing the number franchisors using the platform.

So want to close with some guidance on the amount and timing of merger cost saves with bank of New Jersey deal.

So we originally estimated 60% costs phase I think many at the time that thought that seemed aggressive well as we disclosed when the deal was announced there's a lot of French overlap and we recently made a decision to close as many as seven of the nine branches and that 60% cost save numbers, probably closer to 70%.

We're converting bank of New Jersey back office to connect one in early May so the timing of saves a little spread out so I'm estimating right now a third of the saves coming in the first quarter.

Second third and the in the second quarter and the full complement of savings by the beginning of the third quarter. So all in all it was a very good quarter and full year. We remain optimistic for continued superior financial performance in 2020, and Frank turn Vaccina, great well, thanks, Phil and not so looking back on 2019 a very.

I'm pleased with what we've accomplished as we look ahead to 2020 I'd like to reiterate a few key points, we continue to grow organically, even in a tough environment and see a strong growth rate for the coming year, we've a valuable franchise and continue to benefit from multiple streams of income and increased momentum across the platform.

We're skilled acquired with a track record of integrating both traditional and Fintech focused transactions quickly and effectively.

We've established connect one as an employer of choice in the market and continue to attract high quality talent to the culture and opportunities connect one offers we continue to enhance our efficiency to reduce friction from the banking process for the benefit of our clients.

Continuing our digital enhancements and investments.

We are well positioned to grow our lucrative franchise, while at the same time building a valuable industry, leading company in the New York Metro market with that we're happy to take your questions operator.

Thank you at this time, we will conduct a question answer session. If you like to ask a question. Please press star one on your telephone keypad.

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For participate juices speak we quit that maybe necessary to pick up your handset before parts of the Starkey one moment lobby poll for first question.

Our first question comes from Matt Breese with Stephens. Please proceed with your question.

Good morning, everybody.

What I'm asking that.

I appreciate the loan growth commentary and the outlook can you just give us a sense as we think about not just the next quarter, but the next year.

Can you give us a sense of composition your expectations for composition, and whether or not we should expect a continued trend a relatively balanced seen I in commercial real estate growth in 2020.

I would say Matt organically the answer to that would be yes, we believe will continue the trend.

Approximately 50% of Ah you asset growth coming from see an eye segments and the other 50 coming from I'm more traditional CR rate, including construction.

And other however, the numbers might be a little bit skewed with the acquisition of back in New Jersey, who was a little bit more real estate focus.

But the organic growth will definitely be continuing the trend that we've set forth thus far.

And frankly, not too long ago, you were pretty bullish on single family housing inside your market just.

Noticing supply demand dynamics of younger folks that need houses.

You still feel that way we've seen a couple of quarters were Reggie is decline could we see a pick up there.

Oh I am still bullish I think we have a low interest rates. There is clearly not enough inventory in the marketplace. The inventory that is being built that's a I don't want call affordable, but thats, a ah ah relevant to the marketplaces that we serve flies off the shelf, but but.

On the other side of that approval processes are incredibly long it takes a.

A very long time pretty went to get anything to get shovels in the ground. It takes even longer to get things built and so I think we will see a longer lead uptime, but all the projects that we've been involved then we've seen sales actually that's that actually was part of the reason that construct.

And portfolio sold off as quickly as it did in the fourth quarter are those were successful projects, we like to see construction loans get paid off so yeah, I still see great opportunities in this marketplace.

Rental continued declines in house affordability, even better.

Just on the scene I front.

You know we've seen a lot of your peers turn from heavy commercial real estate concentrations looking to see Nye for a source of growth to diversify fiduciary concentrations. We've also seen more recently, a hiccup or two from some of your peers not from you.

Could you just give us an idea in your she and I book of the types of industries, you're exposed to the types of underwriting you're dealing collateral values and a general idea of you know the quality of underwriting that you're putting on the books.

So Matt as you know we didn't just wake up last year and decide to go into C. and I. This is something that was started back at.

The old Center Bancorp unions International Bancorp, they had a very.

Large focus in the independent schools space, we've taken that and move that across a few other lines. We still are probably the largest provider of independent school loans in the state in New Jersey, where our expanding that market into New York.

As well as looking at other opportunities whether they're in the health care space. The foodservice space there were certain segments that we like the play in a I would consider our underwriting standards to be quite conservative. We don't do the full complement of all types of see an eye lending our that get lots of people in trouble that's.

Just not where we are we're generally there to support.

Growing businesses for either acquisitions and door lines of credit to support their businesses. So.

Overall, I mean, the entire thrust of the see an eye program here has been to develop deep seated relationships with those clients. It's been probably the largest driver of our deposit growth on our balance sheet and and it's been while the growth has been somewhat we could say it's been faster.

Fast relative to that portfolio, which has been really slowed sorts of the entire balance sheet to the gross growth of the entire balance sheet here connect one we're still in particular significant.

We're still we also do provide a lot of.

Services banking services and see an eye type loans for industries that are related to construction something we have a lot of knowledge about so I think where I think we're about is conservative as you can be in that space.

Okay, and then just two more for me.

Yeah, you mentioned fee income a especially in regards to the Bofa acquisition as as a potential.

Why not and I could see some some of the profit in 2020 could you just give us an extensive.

How how much opportunity there is stemming from both fly and other fee income sources and to what extent, maybe the revenue pie starts to change as they start to kick in.

So.

I would say a good objective for us is to double that income over the course of the next year.

Well, we're continuing to have more users franchisors using the platform and that directly leads to revenue out two or three or four months.

So that would be my target.

So do you mean on a quarterly basis, meaning if this quarter was 2.3 million in operating fees. We should look for 4.6 a year from now.

I'm, saying in both for both fly you had asked about.

Well earned 200000, a quarter daughter and of that end of this year would be a good target for us.

And then just my last one it's on Cecil <unk>.

I'm, sorry to interrupt you Frank.

I was going to say, we do expect some commercial loan sales. So I do see that loan sale income increasing.

In 2020 versus 2019.

Okay.

With that mind, you expect net loan growth to be 7.5% to 10% or with the loan sales below that.

I still think we're targeting high single digits, just it depends on those spreads and if the spreads are narrower and we don't want to put them in portfolio, we might opt to sell more loans.

I don't think significant enough to change the.

The target for growth.

Okay.

That's all I had I appreciate taking my questions. Thank you.

Uh huh.

Once again to ask a question at this time. Please press star one on your telephone keypad. Our next question comes from Collyn Gilbert with KBW. Please proceed with your question.

Thanks, Good morning, guys.

Column.

Maybe I will start with where Matt left off that I think he was that kind of ask about t.. So, but just curious if you could give us an update on not bell.

[noise] [laughter], well, we're going to be compliant and we will have.

Oh charges, so I'm not I don't want to give out the amount right now and we'll probably be when we do determine the amount we'll probably.

Put it out with the possibility of changing dark there are three different ways. You can go with that you come out with an amount unsafe defended as you can come out with a range or you come out, but specifically to mountain say.

That's not.

Definitive but.

As you know there's lots of work going into that calculation.

But I think we'll be in the in the same ballpark as most other institutions.

Okay, Okay, Alright, and then going back to the NIM [noise].

And I appreciate your comments that the NIM came in better than what you were thinking I don't know maybe there was an interpretation or perception that didn't in what's going to be quite a quite stable for the fourth quarter. So just and I and you had indicated that you intentionally did not pushed deposit costs down after that the October cut so just maybe walk through a little bit of how you're thinking about.

You know kind of the components of that and I guess, especially I you know how aggressive you think you can be going forward on on deposit cuts and perhaps what didn't happen this quarter that maybe the rest of a thought would happen.

Right well well first off there are a lot of components of the NIM that are choppy.

And so when I said stable last quarter. It was really a core NIM is the way I look at it.

Well, there's a bunch of different ways to look at its with purchase accounting its without purchase accounting there are prepayment fees. So there's different ways of looking at the at the NIM, but we're not when we analyze what happened in the fourth quarter.

The decline in rate on interest, earning assets basically matched the decline and the benefit in funding costs. So to me. The margin really was stable. We did have a decline in some choppy fees and prepayments that caused that.

Just a compressed in the fourth quarter, but you can see it was probably more than average trade above average in the third quarter with a jumping my 15 basis points. So looking forward I believe the same thing is true there are some things that are pushing the margin down one of them is the is the bank, New Jersey transaction, where they had a more.

I should have to 75 to three.

So that sounds like it could be a lot, but it really isn't because it's not that big a component of our balance sheet and we already are working on ways to restructure their margin.

But secondly, we should we still have room as I said to lower our deposit rates.

Cds that are repricing, so and on the and on the asset side, you know, we're being disciplined and and continuing to get fairly decent spreads on the asset. So all those things together there's lot of moving parts leaves me to the conclusion that it's stable, but yes, we could go up and down by six or seven basis points, each quarter and that wouldn't bother me.

As long as we are driving you know our OE over 15%.

Okay. Okay, Alright, that's helpful and I apologize if you included and really what was the what were the Prepays. This quarter and then what were they in the third quarter.

What do you mean in terms of basis points, Yeah alright.

Following up I think we lost about four or five basis points quarter over quarter to quarter.

Okay.

Okay.

Okay, and then [laughter] just on the I need to spend side. So for the FDIC expense again, perhaps misinterpreted. So there was obviously you know the credit didn't come through in the fourth quarter, beginning to pay but what's the outlook for at the FDIC expense line as we look forward.

We talked I believe it's the right accounting, although some banks have done it differently.

We didn't get all the cash related to the to the rebate in the third quarter, but we took the entire benefit because it was just a receivable.

So we try to retire third quarter had a negative expense in the third quarter, which we took out of our core earnings, but that's not that's not core operating earnings.

So I think it's just a miscommunication about the timing.

Of recognizing that first is realizing it so going forward I think it's about $8000 a quarter. That's that's that's the run rate.

Paul Us okay. Okay.

Okay. That's helpful I will I'll leave it there.

Yeah I'll leave it there thanks guys.

No.

Thank you at this time I would like to turn the call back over to management for closing comp.

Okay. So thank you everyone for.

Joining us on this a fourth quarter conference call. We look forward to speaking to everyone next time, either on our next quarterly conference call or where maybe before I have a great day.

This does conclude today's teleconference. You may disconnect. Your lines. This time and thank you for your participation.