Q4 2020 ConnectOne Bancorp Inc Earnings Call

Greetings and welcome to the connect one Bancorp, Inc. Fourth quarter of 2020 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being.

Recorded I would now like to turn the conference over to your hope for the year Fancier Chief brand and innovation officer for connect one Bancorp. Thank you you may begin.

Good morning, and welcome to today's conference call for US to review connect one of the results for the first and fourth quarter of 2020 and to update you on recent developments on today's conference call will be Frank Sorrentino, Chairman and Chief Executive Officer, and Bill Burns Executive Vice President and Chief Financial Officer, the results as well as notice of this conference call and a listen.

Only basis over the Internet were distributed this morning, and the press release the husband covered by the financial media.

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 provision and the private Securities Litigation Reform Act of 1995, such forward looking statements are subject to numerous assumptions, uncertainties and known or unknown risks which of course.

Could cause actual results to differ materially from those anticipated.

These risk factors are more fully discussed and the company's filings with the Securities and Exchange Commission and the forward looking statements included in this conference call are made as of the day of this call and the company is not obligated to publicly update or revise that in addition, certain terms used in this call are non-GAAP financial measures reconciliations of which are provided in the company's earnings release.

And <unk> and accompanying tables or schedules, which have been filed on form 8-K with the SEC and may also be accessed through the company's website and I are the connect one day dotcom. Each listener is encouraged to review the 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 Frank Sorrentino, Frank Please go ahead.

And good morning, everyone.

And so everyone knows 2020 was an unprecedented year and which we face the series of unexpected challenges as the pandemic works its way for our markets. We watched our communities demonstrate the resilience by continuing to respond and adapt and I'm proud of the role the Quebec and wanted to make one team played and supporting these communities through these challenging times.

Our team responded to the pandemic and a way that defines our core values demonstrating through action and our commitment to our clients for communities and our founding principles.

Unwavering commitment coupled with the tech forward operational environment.

Out of the continued business without skipping a beat and.

And we demonstrated clearly demonstrated in our metrics.

The outlook is better and when the pandemic first hit we're certainly not out of the woods. Yet. However, we see strong signs that we're on track to continue to build positive momentum towards the robust economic rebound and strong performance and.

Understanding the challenges we faced during 2020 and that we did not achieve some of the strategic goals. We had initially set for the company I am extremely pleased with.

With the continued execution of our operating strategies.

Metrics were once again industry, leading with pretax net revenue hitting a record for the second quarter and a row exceeding 2% as a percent of assets.

And we'll get into the details and.

And a little bit.

We're very proud of this accomplishment.

The solid revenues increased productivity from the technological improvements and the continued focus on streamlining connect one retail brick and mortar footprint, our efficiency ratio improved under 40% of key metric that we've been focused on.

Credit losses, and delinquencies remained very low while deferments and modifications continue their downward trajectory and year end of deferrals decline of approximately $210 million for three 5% of total loans just as we projected.

Turning to non origination, excluding PPP or portfolio growth, especially in the latter part of the quarter. As the result of continued increased demand from organizations that have enhanced their businesses through the pandemic.

Origination has been strong in the back half of the year. However, the growth was offset by significant payoffs and looking ahead. Our teams remain actively involved with our clients. Our overall pipeline is quite solid and we continue to expect net loan growth over the next few quarters accelerating and the back half of the year.

We're optimistic that the operating environment with true improve during 2021, resulting in opportunities for growth favorable lending spreads and best in class performance metrics for connect one over the past year, our capital and reserves have grown significantly positioning us for organic growth potential M&A and the <unk>.

Turn of excess capital.

We continue to view share buybacks as an important component of our capital management strategy and with our capital ratio is increasing our board of directors is reinstated the stock buyback program.

We have about 600000 shares remaining under the current program and expect the Opportunistically repurchase shares and the months ahead and.

Additionally, along with today's earnings release, our board of directors declared of <unk> <unk> per share quarterly common dividend with our growing capital base connect one has the capacity sustain a higher dividend and I expect our board could revisit our dividend level true.

As we all know think of is changing and the environment that Covid created has accelerated its transition with both clients and employees embracing the use of new tools, we've seen the meaningful technological shifts, including automated and digitized financial processes virtual deposits and reliance on.

And the most mobile banking platforms as many of you have heard me say before it's really the year of 2030 with just nine years early.

Over the past few years connect one has made meaningful investments and the dock and adopting technology to remain competitive and creating efficiencies and getting closer to our clients. These investments played a critical role and competitively positioned and connect one is of modern financial services company, we are well positioned to move into the future state of banking and the new digital world.

Towards this and both lie or Fintech subsidiary experienced the strong year pivoting quickly to support both small businesses and banks and the rollout of the PPP program both of them.

And that's involvement with PPP allowed them to further their marketplace model and expand our brand presence amongst banks franchise ores and small businesses simultaneously both lie completed its infrastructure rebuild and now moves into 2021 with a stronger and more robust digital foundation, we're seeing increasing.

Client acquisition on this platform as we invest for the future.

We've only scratched the surface on the benefits gained.

And from this bank Fintech alignment and look forward to working with our partners of both lies the fuel their forward momentum.

Also see attractive opportunities to work with Fintech companies to both enhance our digital products as well as to expand both life platform. We remain committed to leveraging our strong technological foundation and look forward to updating you on new digital and tech investments and the quarter ahead.

The bad weather.

I turn the call over to Bill I would like to mentioned and in December we further strengthen our management team, we promoted Elizabeth Mcginness, the president of the bank and as you. All know Elizabeth has been a critical part of the bank's growth and strategic direction and her appointment to president and there's a natural progression for our company. We also made an important hire with the <unk>.

And of Michael Omalley, as Chief Risk Officer, Michael brings with him extensive risk and Fintech experience, which will support the bank and building out of more robust risk framework as our balance sheet and our complexity grows.

These executive appointments allow us to further our competitive position, while supporting our growth into a modern financial services company. So in summary, we're proud of our performance. This past year I'm exceptionally proud of our team and their continued resiliency and we're excited about the prospects for growth and 2021, so with that I'll turn.

The call over to Bill to provide some more details on the quarters performance.

Thank you thank you Frank and good.

Everyone on the call.

And would like to very much thank our staff.

Tremendous response and their efforts over the past year.

Face of these difficult working conditions, and so that and we finished the year with a very very strong fourth quarter, our pre provision net revenue as a percentage of assets and past, 2%, placing of the again near the top of the industry.

Some of our peers are releasing reserves, but we added another $5 million in the same as and the sequential third quarter debt.

And that is approximately $3 million to $4 million and excess of what we have historically provided for a quarter or so.

Even with that elevated provision we reported on a GAAP basis, $1, 35, and ROA and return kind of tangible common equity exceeding 15%.

If you normalize our provision to what we've done.

And put aside before we would've had and ROA in excess of one 5% and and ROE approaching 17.

And that's sort of tangible equity base and has grown considerably over the past year or so so very very strong results on the other.

The GAAP or non operating basis.

Now of the past.

The economic recovery is becoming clearer and we see increased the ability to return excess capital of shareholders. We plan to do that through a combination of share buybacks and higher dividends of course subject to our board's approval.

Supporting this course of action, our tangible book value per share and capital ratio as of increase at a very nice pace over the past year were at about $17 50 per share.

Tangible book value of close to a 10% increase from $16 a year ago and <unk>.

All of our capital ratios and increased measurably for common equity tier one ratio of the holding company is 10, eight and at the bank is over 12% and.

And our dividend payout ratio is running below 15% and there is ample room to increase that ratio, even giving due consideration for increase organic growth.

Let me now turn to credit and reserves so bottom line of credit is performing well.

And our borrowers have benefited from the cares act and the accommodations of afforded them.

The benefit from the ongoing fiscal and monetary stimulus and and just in general and the improving economic outlook.

Of the loans that were deferred originally some 80% of returns the invoicing and over 95% of those loans with China and voices are paying and fall the archive.

And let me give you some details on what's left and the $210 million of permanent bucket of yearend and.

The <unk> does give us comfort first off more than 95% of collateralized.

70% of the tune of 10 million and continue to make some form of payment where the principal or interest.

And of the largest subset of about one third of the 210 is New York City multifamily properties, the collateral and it's very strong on those properties with underwrite and ltvs, averaging below 60% debt.

The coverage ratio is now lower than 125, but actually quite a bit higher and keep in mind. These loans are primarily used to fund purchases with significant equity invested by the sponsors we tend to do very little refinance lending and the multifamily space and.

We said this before we have minimal exposure to hop on and the industry, such as hospitality travel and energy.

The size of the deferrals of overall credit quality metrics of stable or improving actual charge offs and delinquencies continued to remain very low.

Level of non performing assets fell with those asset quality ratio ratios each improving by about six basis points sequentially, our reserve for loan losses as a percentage of the total loans.

The portfolio, excluding the PPP strengthened to $1 36 and.

Nearly double where it was a year ago.

And the $5 million, we added the reserves. This quarter reflects the continued uncertainty with respect for the timing and ultimate impact of the pandemic. The thinking is consistent with the fed's recent statements.

And let me comment on seasonal.

I think you are aware of and of the most recent extension of the cares Act.

Banks are allowed to postpone the implementation and we will do so our current thinking is we were postponed the implementation of my just one day that is from year end 2022 at the beginning of the year of 2021, the rules actually allow for a deferral until 2022, and we continue to run estimates and the seasonal and don't believe there will be a material impact.

Of our financial statements upon adoption, probably a slight increase of our allowance.

Now, let me get back to our operating performance.

Especially I want to talk about the net interest margin our net interest margin widened once again adjusted by one basis point. This time, but this was the fourth consecutive quarter of expansion or margin performance has been strong and stable up slowly and steadily by a total of 14 basis points from the year ago 2019 fourth quarter.

As you know there are a lot of moving parts of the margin, but we have benefited over the past year from the structure of our balance sheet from our overall, earning asset structure, which reflects a relatively low amount of pure floating assets and.

Combine that with liabilities the contractually reprice fairly quickly combined with our proactive management of the pricing of non maturing deposits.

And during the recent most recent fourth quarter, we did have a larger than normal level of prepayment income, but that was completely offset that benefit by increased the liquidity and a slower amortization of PPP fees, we slowed them down by about $1 million from from the sequential third quarter on the PPP and we've got another $5 $7 million of line items.

The go I'd like to say that that would be substantially pick up by midyear, but it is likely that a portion of the PPP loans will remain outstanding beyond that.

So let's look forward with regard for the margin.

Over the past year originations have largely been of spreads well in excess of pre pandemic levels.

I think as we deploy our excess liquidity and grow we will continue to do so at loans spreads which of them wider.

And this will continue to benefit the NIM, but notwithstanding the they just said we are at the early stages of competition based narrowing history tells us. These wider spreads will continue the narrow but at the same time. Thanks for the benefit from the steep yield curve along with historically low short term rates.

There are also a couple of out of items working to our advantage as we start 'twenty. One first we redeemed $50 million of high rates of debt at the beginning of January that in and of itself will help the margin by three to four basis points and second we continue to see significant repricing and reduction of our CD portfolio, we have another $600 million and a portfolio of Satsuma Charles.

The next six months there at rates of over 150 day the.

And the volume of that the majority of those maturities will ramp down throughout the second half of the year and.

And now we're looking forward in terms of protecting our margin for future years, we have begun the lengthen our liabilities locking and funding and the five year plus back instead of a very attractive cost of 50 to 60 basis points. So all and all I see a fairly strong stable margin of of Kinect, one through 2021, possibly the beyond that although it is very challenged.

And to project margins beyond the one year and timeframe.

Now it was also a strong quarter for non interest income was driven by gain on sale of loans.

This is not a big business for us, but we continue to have success on the commercial loan sales side largely on an opportunistic basis for the quarter residential loan sales also saw an uptick as a guide of before we will continue to see modest amounts of revenue here.

On the expense side, we were flat sequentially.

And I think I did mention that and the prior call.

And my expectation going into next year for mid to single digit expense growth.

We continue to invest and people and technology now we did drive the efficiency ratio of below 40% for the quarter that is our goal to be sub 40%, but that will depend in 2021 on revenue growth, which I think is likely to occur of more towards the latter part of the year is dependent on the points now so I look forward to taking the question that the bank's credit.

Remarks back to you for.

Inc.

Thanks Bill.

While we plan for very different year and 2020, we adapted and ended the year on a very strong note at all levels, our infrastructure and talent, we're able to respond to the challenges while also delivering solid returns and our earnings profile and strong balance sheet and credit or and are in a good place our already best in class and efficiency.

Improved even further and our capital position is solid and so as we look ahead I'd like to reiterate a few key points, we continue to grow organically and see a strong growth rate for the coming year, which we expect to reach high single digits, if not possibly double digits and the latter part of 2021, we are of valuable franchise and we can.

And you to benefit from multiple streams of income and increased momentum across the entire platform. We're a skilled acquirer with a track record of integrating both traditional and fintech focused transactions quickly and effectively.

We're continuing our digital enhancements and our investments and our.

Excited about our future and remain confident and our ability to drive value for our shareholders our team and our clients. We look forward the sharing updates with you as the year unfolds and with that I'd be happy to take any questions.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on the telephone keypad a confirmation tone will indicate your line is and the question Kim you.

You May press star, two and if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Okay.

Yeah.

Thank you. Our first question comes from the line of Fred Cannon with Keyw. Please proceed with your question.

Oh, thank you.

And it's.

The pleasure to have you guys at least and the short term and.

Continue that just to kind of broad questions really one is on PPP 2.0, and how you see that evolving versus the first round and that we had.

During the 2020.

Well I would have to say that and PPP. One I think we can confidently say, we have no idea of what we were doing going into that.

Right.

We have a much much better handle this time around I also think that.

It'll be more commonplace and PPP to the deal with clients that have already been through the pipe with us on PPP, one and so the vast majority of those clients. We will have already been through the process. Once we have some new technology up and ready to simplify.

The process, we understand the process.

So I think it would be a.

A less stressful time, not no stress, but a lot less stress than the original process. I also think that there will be some opportunity to onboard from new clients.

And that may be with dissatisfied with the treatments that they received the first time around and we're seeing some evidence of that as well.

But I would say probably the vast majority will be existing clients.

And just as a clarification do you see most of majority of clients who've received PPP, one reapplying for PPP too.

Right now it's about half.

And I, just think that just maybe people need to assess what the program provides for the firm.

And first time around pretty much if you had a warm forehead you could apply.

This time around I think you.

You need to actually demonstrate what types of.

Revenue declines.

That you could show between 2019, and 2020 and onto the now 2021.

And if theres, a little bit more responsibility on the borrower to demonstrate the actual need and so that will.

Weed out some of the folks that will be entitled to PPP, but.

And.

And the process to tell you what percentage is actually going to come through or not.

And then thanks, that's helpful and.

In terms of you mentioned fintech of additions.

One last 0.1 last point going back to the PPP was the.

I also think we're not going to see there was a mad rush and PPP one for very large borrowers.

We're trying to do.

Utilize the program and I think that's pretty much all but gone.

Okay.

And hopefully it'll be less chaos, because as you said.

In terms of Fintech acquisitions, we've seen this for the last few months, we've seen the stack impact on fintech firms and driving.

Acquisition prices up significantly do you see that.

And what's going on and with the stock market and the number of fintech firms coming to market affecting your acquisition.

Strategy and that better.

Well I think it's.

Still the right down the fairway as far as we're concerned about evaluating looking for good opportunities and looking for where we can work together with the fintech either if it's in a pure acquisition of JV partnership or.

And some sort of strategic alliance so yes the evaluations.

And make it a little bit more difficult from from my perspective, but.

And I think at the end of the day, we're still be able to accomplish the goals that we set out.

Alright, thanks, so much and great to see the strong momentum coming into the new year.

Thank you. Thank you.

Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Frank for Aldi with Piper Sandler. Please proceed with your question.

Good morning.

Alright.

Just wanted to start on.

Frank on the.

The momentum and loan growth you talked about particularly <unk>.

Thoughts on the back half of the year.

And if some of the.

Acceleration based on the fact that the multifamily space of <unk>.

Have you gotten a little less competitive or just a little more color maybe if you could.

What's driving your optimism there.

Well as we.

As I spoke to in the.

And my comments.

The strong growth.

And a strong pipeline EBIT in 2020.

A lot of the business is that.

We have a priority and have.

Done quite well, our construction portfolio and our builders developers managers. They are all hitting on quite a few cylinders, especially in the suburban markets here in New Jersey long Island and elsewhere.

So unfortunately that was offset by a lot of pay offs, but if you saw the real strength behind the number of loan originations. We did in 2020 and that was and the.

And the teeth of the Covid pandemic.

As we look forward into 2021, our expectation is a lot of the backdrop is going to fall away a bit and the efforts we put in in 2020 or just kind of roll forward and 2021, we will continue to see.

Additional growth and our pipeline, but we will have less and the way of pay offs.

And that's also against the backdrop of I believe.

I believe collectively that the economy is just going to get a little bit better and a little bit stronger.

Whether it's because of the vaccine whether its because we figured out how to live with Covid whatever it is I think all of the.

And really significant ups and downs and the economy, you're going to start to flatten out a bit and.

And I think people are going to start to realize that.

And he is not going to empty out completely and they're not going to put a fence around it and close it.

People are going to start the return to some semblance of normal life, and that's going to bode very well for us plus we find ourselves and <unk>.

Variety of markets.

And I have shown resilience and strength throughout the pandemic and we expect those to get even stronger as we move through 2021. So the combination of all of those things gives us a lot of.

The confidence to say that in 2021, our organic growth will continue to increase the net.

Both of the company.

Okay.

And just as it pertains to the multifamily side of things and how do you see those loan balances.

Flat up down and I know you've been kind of contracting over time.

But what are your thoughts for for 2021 is maybe the space has changed a little bit.

Yes, I think we will see.

I think we'll see either flat or as far as percentage of portfolio I think we'll see flat or possibly increasing slightly.

Okay.

And then bill.

Bill just on the deferral.

Yeah.

Now that were at year end and we've gone through I guess pretty much six months I know theres an extension now for the Covid deferrals what of your thoughts for how this.

Migrates over the next couple of quarters do we.

See decent amount of migrate into NPA status.

And if so just wondering it seems like you guys are pretty.

Comfortable with the your reserves to date here.

No no that's a good question.

Some point right the deferrals can't they can't go on forever.

And then thanks, and clearly connect one and all the banks will have to make the determination for loans that are impaired to put them in those categories. So.

I think youre going to see industry wide at some point and increase and impaired loans.

And potentially non performers.

But I don't see the losses being all of that big the.

The collateral is pretty strong.

And.

I think we're well reserved at this point so from a capital perspective.

Book value of perspective don't think theres going to be and much of an impact, but yes. It's possible, we will see an uptick and those numbers.

Cost of the industry.

Okay alright, thank you.

Youre welcome.

Thank you once again, ladies and gentlemen at Star one if you'd like to join the question queue. Our next question comes from the line of Matthew Breese with Stephens Inc. Please proceed with your question.

Hey, good morning.

All of Matt and Matt.

Was hoping to get a I know you said spreads are wide you expect compression and maybe could you frame for us. If you look at the pipeline what the blended loan yield is today versus a year ago and.

And the extent of spread compression that we might see maybe you could give us an idea of what youre thinking there.

Well the first off.

The spread expansion widening as and the order of 50 basis points from more when I'm looking at the past since the pandemic started.

Per to before so right now we're starting off with spreads that are typically wider and we've been used to and the years, leading up to the pandemic.

How fast it is kind of compressed.

Sure.

Hard to say.

But all things considered I feel confident about the margin here of connect one of being able to stabilize it.

<unk> levels and as I mentioned, there's a couple of reasons why our margins will improve.

And being that the repurchase of the sub debt and two we've got a lot of repricing going all of the Cds. So we'll now, but we will be able to handle some compression on the on the asset generation side and still maintain our margin.

As you think about the the interest rate positioning of the balance sheet can you just talk a little bit about where you stand today as far as asset sensitive neutral liability sensitive and how youre kind of thinking about the next few years and where you want to be.

What was that.

Yes.

I think we're just.

And we're in good shape right now too.

Two benefits front look of the yield curve Steepens, that's kind of help us.

For the extent.

Youll stay where they are I see the margins staying within it and within a band debt.

<unk> been talking about plus or minus five basis points.

Okay.

And then.

And I'm sorry, Bill go ahead.

No no I wouldn't worry too much about rates rising or falling and what the impact is going to be on us, we're pretty well managed to me try and maintain a stable margin.

Understood.

And then beyond just the fundamentals of the bank you guys have done a few deals more recently whole bank deals just curious.

And have conversation flows and over the last handful of months.

The most banks have reported lower deferrals out of.

Assume conversation flow the increased just wanted to get a sense and.

How do you think about participating in M&A.

Matt I would tell you that.

And Mark and the March April timeframe, Nobody wanted to talk about M&A and I think in the November December timeframe and January.

Everybody is talking about some form of M&A.

And I don't think it's lost on any bank CEO today that the world is changing and on my comments about it's not really 2021 and 2030, we just got the opportunity to see at nine years early.

Is really awaking people to think about things that they probably didn't think about prior to the pandemic and there has been a real acceleration and the marketplace.

Fedex shift and how people think about just ordinary everyday occurrences and the way. They go through their lives and banking is not immune from that so I think everyone's talking about it.

Youre asking me specifically, yes, there is definitely conversations.

The ore and increase in the number of conversations across the entire spectrum. So I think we're going to see a very active.

As an industry I think we're going to see a very active 2021.

Yes.

Yes.

That's great just last one.

What was the Accretable yield income this quarter.

On.

Compared to the mechanic.

Yes.

Yes.

Okay.

13 basis points.

Alright, that's all I had I appreciate it thank you.

Sorry, Matt.

Thank you, ladies and gentlemen that concludes our time allowed for questions I'll turn the floor back to management for any final comments.

Well I just wanted to thank everyone for tuning in here today for our for our fourth quarter reported and year end review for connect one bank and I certainly look forward.

To being together with you again as we reported on our first quarter. So thank you all and enjoy the rest of your day.

Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.