Q2 2020 ConnectOne Bancorp Inc Earnings Call
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Second quarter 2020 earnings conference call.
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After today's presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like turn the conference over to Miss you have dance Yeah, Let's connect one. Please go ahead.
Good morning, and welcome to today's conference call to review connect ones results for the second quarter 2020 into update you on recent developments on today's conference call will be Frank Sparacino, Chairman and Chief Executive Officer, and over an executive Vice President and Chief Financial Officer results as well as noticed Oh This conference call and I'll listen only piece is over.
To answer that were distributed this morning in a press release that had been covered by the financial media at this time, let me remind you that certain statements and assumptions in this conference call contain or based upon forward looking information and are being made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 cents.
Forward looking statements are subject to numerous assumptions, uncertainties and known or unknown risks, which could cause actual results could differ materially from those anticipated. These risk factors are more fully discussed.
In the company's filings with the Securities and Exchange Commission. The forward looking statements included in this conference call are made.
As of the date of this call and the company's not obligated to publicly update or revise them. In addition, certain terms used in the call or non-GAAP financial measures reconciliations of which are provided in the companys earnings release, and accompanying tables or schedule, which have been filed today on form 8-K, with the FCC and they also.
He asked us through the company's website <unk> IR Dot connects one bank dotcom. Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release I will now turn the call over to bring Sorrentino. Frank. Please go ahead.
Thank you Sarah and good morning, everyone and thank you for joining us on our conference call today.
I Hope you and your families have all been safe and healthy.
We hear connect one had a good second quarter and I'm proud of how conduct one has responded to the current challenges the industry is facing in this uncertain economy.
Looking at some of the key quarterly metrics for connect one.
We continue to generate very strong earnings delivering earnings of 30 cents per share, which included 15 million of reserves predominantly due to the uncertainty regarding the pandemic.
The strength of our organization continues to be demonstrated by our strong pretax net operating revenue, which was in excess of 1.95% of total average assets, placing us among the strongest in the industry.
We also delivered on an improved net interest margin this quarter, resulting in sequential net interest income growth of 10%.
Over 30% on a year over year basis.
Our many other banks are experiencing margin contraction and in some cases significant compression we continue to demonstrate the ability to drive exceptionally strong organic earnings power.
In regard to provisioning, we're essentially matching our reserves from the first quarter. We now have close to 28 million reserves for issues related to the pandemic should they arise, bringing our total reserves for loans to approximately 1.08%.
Bill had a little bit more to say about the provision in the reserves in a little later on in this presentation.
Despite the large reserve build we still managed to grow our tangible book value per share to $16 and 20 assets.
Overall, we continue to navigate through the pandemic in a solid forward looking fashion, which is a testament to the resilience of our team and our relationship banking model.
Operationally, we adopted a comprehensive return to work strategy with a heavy focus on leveraging our technology, including reopening our offices with enhanced contact with solutions.
While we're taking gradual steps to retorts north to return to normalcy. We've also learned through this pandemic how to best serve our clients, whether that's in person or through our digital channels and in turn our clients have shown less reliance on our physical locations.
The investments we've made in financial technology and in our infrastructure over the past few years played a critical role in competitively positioning connect ones virtual hybrid bank model, while the environment that cobot created has accelerated the transition to our digital banking products for many of our clients.
Additionally, we move into the future state of banking in the digital World. We're excited to further leverage our strong technological foundation to take advantage of new opportunities.
Most recently, we partnered with Encino to launch a virtual portal to digitize the paycheck protection program forgiveness process, which is now available to our borrowers on the program.
As you know we were in active participant in the SBH Paycheck protection program funding over 470 million of loans.
Very proud of our team for quickly responding to our clients needs, especially in this time crisis.
While some banks consider these loans is giving up economics are paycheck protection program loans are generally done with existing clients and we believe it's a service necessary to provide in order to ensure the continuity of our clients businesses.
Bill will touch a little bit on the economic impacts for that program momentarily.
Suing additional opportunities in the future.
Also.
Both why generally has done best in times of higher than normal unemployment when folks who are laid off decide to start a business.
And we expect to see a pickup in business. There one stabilization begins with the Kobe pandemic.
We also worked with some of our borrowers by helping them through challenges that have resulted from the pandemic as of June 30th we had approximately $930 million departments. However, since the end of the second quarter There've been virtually no first time deferment request from borrowers and we expect that more than 50% of the deferments will return to original terms in the.
Third quarter.
Many segments and geographic regions of the U S economy are experiencing stress and I'd be remiss by not stating that as a pandemic prices persists. There's still remains the potential for increased levels of impaired loans across all segments of the portfolio.
However, the next one is very low exposure because of hot-button industry, such as transportation energy and hospitality and our portfolio was underwritten with low ltvs and reasonable cap rates. Additionally, overall covid 19 trends are vastly improved in the northeast since the onset of the pandemic Earth.
This year.
Multifamily rent collections and the new Jersey market are tracking and approximately 95% and restaurants in our market have been doing pretty well and this transition.
Home sales and our suburban markets in some cases right near all time hives and our construction portfolio is performing very well with projects moving to completion.
Since our inception connect one has developed it's expertise in commercial real estate and is committed to having a well diversified loan portfolio.
While overall loans are down slightly this quarter result, as a result of our conservative stance given the current environment with constantly looking at where we can get the best rate of return relative to the risk that we taken our company.
We also take great pride in our team's focus of expanding client relationships and I'm pleased to note that total average deposits for the second quarter increased by $240 million, which is nearly 20% on an annualized basis.
We've always been committed to being good stewards of our shareholders capital resources Conservative in our financial commitments and continue to return capital to shareholders through quarterly dividends. This approaches served as well and in that regard. The board just declared are nine per share common dividend along with today's earnings release.
While we expect a relatively flat balance sheet for the remainder of 2020, depending on the duration of this pandemic, we believe our balance sheet remains well positioned.
We have sound growing capital levels and our position was further strengthened with the recent completion of 75 million subordinated that offering.
A significant portion of that offering upwards of $50 million is intended to pay off existing subordinated that.
So switching gears and taking a look at our acquisition of Bancorp of New Jersey.
The final phase of our integration conversion was completed virtually on may 4th with no delays the transition has been seamless and as we previously mentioned we closed eight branches during the quarter. We also continue to evaluate all of our brick and mortar strategy and plan to close an additional four locations later this.
Year.
As we rationalize our physical footprint, we believe that connect ones performance, especially are operating efficiency will reflect the benefits of this initiative.
In conclusion with diligently executing on our priorities and continue to use our full range of banking expertise to support our clients I'm pleased with our second quarter results and the underlying fundamentals of the company.
And with that as a strategic update I'd like to know turn the call over to build a provide some more details on this quarters performance.
Okay. Thank you Frank and good morning, everyone.
So we had another great quarter on operating basis or pre provision net operating revenue was up significantly on a sequential basis.
Reached 37 $5 million this quarter versus 32, six in the first quarter notes and increase of $5 million.
As a percentage of assets that amounts to 195% for the quarter is that metric continues to be in the upper end of our peer group ranging from 175% to 2% consistently over the past five quarters.
So the primary reason for the exceptionally strong performance this quarter was a $5 million increase in that interest income.
Most of that about four of the $5 million was driven by PPP loans on a balance sheet and the remaining $1 million a positive variance being due to hire net interest margin.
So the P. P. P fees are running through interest income over a nine month paradigm period on average.
Creates a current yield on that portfolio on the low 5% range.
Our core margin is directionally performing stronger than most so I'll review with you again color on that you may remember, we did anticipated widening margin and our last earnings call three months ago. So first off we have a relatively small percentage of loans are reprice immediately about $1 billion a R 6 billion calories.
Palio.
And all of that 1 billion virtually all have built in floors. So all the although the average loan yields to decline the decline was less than it was for most of the banks.
<unk> and far less NIM pressure on the acid side of the balance sheet.
Next even before the pandemic, we we're anticipating a stable lower interest rate environment, and we had shifted are wholesale funding towards shorter term structures. So with the fed actions in the first quarter those positions repriced immediately and significantly and then finally, we've been aggressive and reducing reducing deposit rates.
Probably leading the pack, while still retaining and growing our core deposit base.
Now it is true that in the quarter. The name benefited from the PPP and I was by upwards of 10 basis points.
But the name also contracted by debit 10 basis points due to excess liquidity. So our margin was strong on a core basis and frankly any way you want to look at the name we were strong.
So going forward to the non interest margin we have some moving parts is usually the case, let me tell you what I can first the PPP will continue to help for a couple of quarters, then trail off concurrent with a loan forgiveness timeline.
Our excess liquidity, we've already been working that down and removing that drag will improve margin immediately.
And we still have some room to lower deposit rates, especially scd's continue to run off over the next six months, 40% of the CD portfolio will mature it carries a weighted average right right. Now is 220 and so we'll have a choice when those mature whether we want to be competitive or let some of those cities runoff.
Now offsetting those positive modern items.
Recent sub that offering that's going to compress nearby about five basis points and the third quarter, although that will come down to just to basis point compression. Once we paid off $50 million a sub that it's outstanding will do that either later the sure early next year and finally I want to add there may be a bias towards lower loan origination rates versus the average yet.
And the portfolio, which would.
Compressed the margin, but all in all I see a relatively stable if not slightly improving margin for the rest of 2020.
Want to make a couple of comments about both fly because there were a couple of items that impacted noninterest income an expense first we recorded two $3 million in PPP referral fees. These who are on loans referred by both lie to it originated by other banks.
And next offsetting that income in the quarter accruing an adjustment to the valuation of the both lie acquisition due to all the PPP volume connect one had and that resulted in recognizing similar to $3 million expense offsetting.
Fees.
Let's turn now to credit and reserves are provision for loan losses was elevated and that was due to qualitative factors, namely an increase in the projected duration of the pandemic. We believe the $15 million total provision for the quarter is conservative, especially when we consider the positive trends in deferred loans and I want to add when it comes to us.
Serves we'd much rather be ahead of the car versus playing catch up.
Once in a elaborate a little bit more on what Frank said about deferments that fifth 150%.
Are coming off deferral, that's based on loans that had been reviewed so far so that number is likely to get even better as all the different terms run their course.
A percentage reserves as a percentage of allowances increased to 1.8 on a cat basis. If you will but if you were to exclude the PPP allowance whichever zero percent risk waiting and add back to purchase accounting discount that ratio increases the approximately 125.
Ratio was only 75, a year and 2019, so we've had growth in bulk reserves and capital during the quarter.
Improving our fortress, even further to go along with ongoing strong that operating revenue successfully withstand any prolonged crisis, our bank leverage ratio stands a a healthy 10, 1%.
Just a couple of.
Comments on expense growth and efficiency.
Extent expense growth I expect will continue to be moderate as we have more bank, New Jersey expense saves coming and we are closing form our branches later this year.
Having said that they will likely be more back office expense associated with managing the departments and processing PPP for gives us as well as as always continued investment in technology infrastructure as far as the efficiency ratio goes look without are typical revenue growth it will be challenging to improve where we are at 41, 42%.
Level, but I felt confident that we can at the worst stay at that level.
And I'm going to turn it back over to Frank for closing comments and then we'll have some questions.
Great. Thank you Bill.
So while we've all seen improvement in reports on business reopening the.
The nation and the banking industry still face considerable uncertainty about how long this pandemic will persist.
The longer it persists the more pressure there is an borrowers and the higher the expectations may become for loans to become an pear.
Unless we remained disciplined and steadfast in our beliefs that our experienced management team strong balance sheet and risks controls will help us successfully navigate this operating environment.
We're confident that together, we'll all get through this.
And when we come out on the other side connect one will get back to executing on prudent growth trends and producing strong metrics as we've always focused on in the past.
So with that we're happy to take your questions operator.
Thank you we will now begin the question and answer your question to ask a question you May press dark.
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Draw. Your question. Please pass Star then too.
At this time, we will pause momentarily to assemble they're all sir.
Oh.
The first question today comes from Matthew Breeze Piper Jaffray. Please go ahead.
Good morning.
Alright, and that Bill there's a lot of.
A lot of pluses and minuses to the name outlook.
If we were to just say longer term a year round or 18 months out once we put behind us.
The deployment of liquidity PPP, the stuff that range lower deposit caused where do you think the settling point in this environment for the core name is.
Well like I said before.
It's flat to up through this year and then going into next year, it's going to depend on whether the economy's back what the shape of the yield curve how stupid is.
Where spreads R.
And so it's really hard for me to predict but I think that will be starting off in a good place.
Okay.
And then.
You had some very encouraging.
Data points on deferrals coming due in the cure right alright, and the case of those loans that aren't caring and therefore need an additional 90 days or whatever you're providing.
Could you just talk about with that book what does it comprised of most typically and some of the underwriting characteristics in terms of ltv's or that service coverage just wanted to get a sense for.
The stuff that needs additional help what your protection against last content looks like.
Yeah, well the majority of it is collateralized loans.
That were underwritten with good Ltvs and so we feel we have a lot of question in those and so if there is a loss and knows.
Don't think it can be much as a small portion and C&I.
We've stayed away from high risk industries.
They're strong Barbara guarantees.
And at the end of the day, there's just probably a small portion and that bucket.
Okay. Okay, and then my last one just obviously very strong fees from bow fly that was match with an expense.
Does that does that acquisition.
A justman.
Does that persist for awhile or at some point does that trail off and if if both like continues to.
To perform well.
They can drop more to the bottom line, how does that how does that dynamic work, yes, yes, yes, they drop the drop more of the bottom line there could be a little bit more adjustment, but it's very small.
And so the successful not be.
Heart materially by any adjustments to the acquisition price.
Okay, and just just following the fee income.
Discussion so.
This quarter I view is more was one time.
Because of PPP.
<unk> fee income to trend back to that too and a half hour or two and a half to 7 million kind of core run right.
In the coming quarters.
It could be it could be a little bit lower yeah for both lie.
It could be a little bit lower because of the cost saving the economy unless activity going on.
But we do feel confident in the long run.
<unk> through the P. P program is increase the distribution channels and so on net this is a good day.
Fees, they generated from the PPP and the outlook for the future and that's offset slightly biased.
Sure fees for their regular business through the duration of the crisis.
Okay, just last one I really quick.
Tax rate has come in in about 14, 85% first two quarters of the year, where do you expect it to be for.
Back half of the year and then 2021.
Well, it's a hands on the level of pretax income so right.
It gets impacted by what the level of.
Provisioning as to the level of provisioning go lower we're going to get back up to the 20% range.
If it stays at this level it'll sort of be consistent with what it was this quarter.
Understood. Okay. Thanks, that's all I had.
Okay. Thanks.
Again, if you have a question please.
And one the next question comes from Chris O'connell of Katie W. Please go ahead.
Good morning, this is craig willing and for calling.
Two.
Start off morning.
Wanted to start off on the expenses I appreciate it.
The guidance.
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Is the four additional branches was that outside of the original cost Saint plans for the acquisition, yes that is separate from the acquisition.
I'm, sorry, <unk> savings.
And do you have an idea as the timing of that or the plan for the time in the back of the year.
But by the end of the year.
Okay.
Any idea if it's going to be more waited for the savings coming in and the third quarter of the fourth order.
Let me know.
Accounting is.
Changed over the years, but it's more you're right there'll be more than the third quarter.
We'll accrue okay bottom line.
Got it.
Okay, Great and then.
You mentioned that you are already starting to work down the excess liquidity levels.
Right.
Is that.
To our understanding is that.
Non interest bearing deposits are coming down as well.
Customers utilized that PPP funds.
No no it's not the non interest bearing balances those have remained pretty constant.
And that's really good news because they went up with the P. P. P program and even as the P. P funds are being used or non interest bearing demand balances of staying higher. So that's good news for profitability on the margin.
In terms of liquidity coming off we have what the <unk>. The P. P. P borrowings we'll save.
3500, 40 basis points on a liability side.
As if you could trying to calculate this.
Now, we're getting nine basis points, and we're paying 35 basis points on it.
So there's a negative.
Okay.
And that helps do you see do you see the cash all over the next.
Two to three quarters coming back down to kind of that 135.
Yeah $1 million I was going to say one <unk> 135 is fine.
Okay great.
And how are you how are you guys, assuming the trajectory for the PPP loan forgiveness.
Well.
We are estimating on average nine months timeframe.
We'll reassess on October one.
For the for the fourth quarter, but right now we're amortizing it over a nine month life, which results in a yield on the portfolio of in the low fives.
Okay great.
And just last question.
As for the I know it hasn't been an issue.
And a while.
But as for the.
The tax the remaining taxi portfolio.
Alright anything change up the pandemic and.
How did you guys are looking at that portfolio.
Well, we'll quantitatively we haven't valued at 150000 a medallion.
We understand that some pressure on it now we just don't know for sure.
The valuation is based on the long term outlook and not necessarily the short term of the pandemic. So.
That's that's why we are right now and.
I'm Gonna just to save any qualitative thoughts Frank on the.
Part prospect of the industry.
It's just hard.
Term and what's ultimately going to happen there the city is.
Really operating add 20% to 30% of it's ultimate capacity and all forms of business there. So.
It's really hard all forms of transportation and the city or negatively impacted right now.
The transportation network companies are down, 70% or so geyser afraid to drive the unemployment benefits are impacting people not going to drive.
Rather stay home and collect the extra $600. So until this pandemic sort of makes its way through it's going to be really hard to determine what's happening one of the encouraging things that we had seen in the last two weeks, though with the number of taxicabs that are getting onto the road are beginning to increase it affairs 70 page.
So.
Certainly going to keep our eyes on that and.
Keep.
Keep well.
Positioned follow the trends there, but I think it's a little too early to make any determinations.
Got it understood I appreciate the color. Thanks.
Okay. Thank you Chris.
This concludes our question and answer session I would like to turn this conference talk over to management for any closing remarks.
Yeah. So thank you. Thanks for the questions. We really appreciate everyone taking the time in joining us on our second quarter conference call and.
We certainly look forward to speaking with you again at our at our next call. So thank you everyone and I enjoy the rest of the summer.
Conference is now concluded. Thank you for attending today's presentation you may know disconnect.
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