Q3 2021 ConnectOne Bancorp Inc Earnings Call
Standing shares.
We're also pleased to see positive momentum.
And our noninterest revenue sources and these include our SBA platform, where we expanded our talent, allowing us to further grow this business line.
The origination or originating portfolios of commercial real estate loans held for sale has continued to accelerate reflecting our disciplined lending philosophy, while generating additional noninterest income.
And lastly, both lie.
Fintech subsidiary continues to build momentum as it realizes the benefits of the investments. We've made we're generating more traffic through its proprietary product be verify and the path of the <unk>. We also continue to scale and extend their competitive position amongst franchise ores, while continuing to support the banks who.
Benefit from the loan market.
We look forward to further growth both horizontally and vertically from both line.
The disruption in the M&A market and our markets continues to present numerous opportunities, which we're taking advantage of.
We're attracting high performing talents, who are seeking us out to the opportunity to join a growth oriented client focused culture with a proven ability to execute toward that end, we've enhanced our competitive position within within New York.
With the recent addition of a seasoned lending team in eastern long Island.
This allows us to further extend our reach and capabilities, while positioning while strengthening our position as the New York Metro Bank.
We're also excited to provide some details regarding the addition of a banking team in South Florida. This is a natural progression for connect one's relationship focused model, allowing us to further support our New York Metro based clients already have a presence in this market.
Additionally.
The commercial and small business community in South, Florida is very dynamic and we're seeing meaningful opportunities to couple of our team's local expertise with the connect one model to this growing marketplace with.
We plan to open a permanent office there in the early part of 2022 and look forward to sharing that update along with the progress of our team in the coming months.
By the way anyone interested in joining the <unk> team, we're still hiring in all of our markets So come join us.
So as expected expenses were up sequentially, reflecting our recognition and our best in class team. The addition of new talent and the continued investments in our infrastructure technology and I'd like to reinforce that our industry, leading efficiency ratio is a direct indicator of our ability to enhance revenue growth while continuously building our.
<unk> capabilities in other words, bringing in more revenue supports more in the areas such as operations credit BSA and compliance.
I just wanted to reiterate this is an exciting time for connect one and I'm pleased with the groundwork that were laying for our long term success I'll now turn it over to bill to provide a little more detail on this quarter's financial performance.
Okay. Thank you Frank and good morning, everyone.
Another great quarter for connect one and I am happy to report that we are finally getting some recognition in terms of stock price performance.
The stock prices up recently about 10% more than our peers, but I still believe we're undervalued at base that few on our current earnings our expected growth rate and our strategic plans to capitalize on the evolving financial services industry and.
As you saw in today's release, we announced a couple of capital actions first we raised our dividend again, the second time this year by another <unk> <unk>.
Naturally this reflects the board's confidence in our future earnings but also reflects the fact that our dividend payout ratio is very low and a bit out of step with the peer group.
And even with this increase the payout ratio is below 20%. So there is room for more increases in the future.
Now we are aware of the different views out there on dividends, but all things considered we think this move makes sense given our strong profitability and high return on tangible common equity secondly, our board just upped our stock repurchase authority by 2 million shares or about 5% of outstanding shares.
The non cumulative preferred we just issued in August gave us added flexibility to establish a large repurchase plan.
Capital ratios are strong and the target levels. There are based on a host of factors. Those include growth earnings estimates as well as considerations for risk, but we presently have a cushion going forward, we're going to take into consideration. These factors as well as our valuation on any given day, but bottom line, we stand ready to be aggressive when the timing is right.
So now in terms of our core profitability for the quarter as Frank was talking to our <unk> increased significantly both sequentially by 7% from a year ago by 17% to two 3% of assets at a very very strong metric.
Was happy when we were over 2% five quarters ago and since then we've increased that metric every quarter.
The main driver of the increase this time was net interest income growth, which we achieved through a combination of strong loan originations and margin expansion average loans grew at an annualized rate of 13%, which includes the negative impact of PPP forgiveness. So if you exclude the PPP loan portfolio grew at an annualized rate in excess of 20%.
And then our margin it widened by more than 10 basis points to $3 73, and let me give you. Some color there we continue to see improvement in both our cost of funds and deposit mix as Cds reprice, we continue to grow core deposits.
While the match funded spreads.
Originations remains favorable I'd say above 3%.
However, the margin for the quarter was aided by two noncore items, one was an acceleration of PPE PPP fee accretion.
Due to faster than expected forgiveness.
That added about an extra $1 million to the quarter's net interest income and the other was the recovery of back interests. We collected upon the resolution of a non accrual loan that was another 600000 I just want to make one more point on the PPP I think there is a misconception that PPP is adding to margin on a recurring basis.
<unk> loan yields typically average below $3 25 per quarter as they run off we more than make up for it with new originations.
This quarter as we needed to accelerate the accretion of fees, which typically increase the yield on this small portfolio for the quarter. So without those items I just mentioned the core margin was still wider but probably just a few basis points not the 10 basis points on a GAAP basis.
Let me give some color on noninterest income.
The noninterest income line was down slightly sequentially as the second quarter included some nonrecurring ETP referral income coming out of both lie.
However, the underlying trend for core noninterest income was positive across the board.
Frank mentioned this as well our SBA lending initiative continues to accelerate.
Sorry loan sales continue to hold pace and the outlook is for continued momentum we have more and more smaller banks lacking the original capability of Kinect one.
And at <unk>, we're seeing accelerating traffic and traction driving increased core revenue from that platform.
Let me turn to Opex for the quarter, our efficiency ratio remained at a sub 40% level and that was even with operating expenses, increasing by 7% sequentially as was anticipated as I alerted you to this on last quarters earnings call.
Most of the increase was related to the hiring.
Along with experience support staff, our staff count was up 5% from our quarter.
This investment will support our continued organic growth.
And like others, we too are feeling the effects of wage inflation, but whether or not wage inflation pressures continue we will continue to reward our employees with superior individual performance and we want them to share in the overall success of Kinect one.
Now a little on credit metrics overall underlying credit quality remains strong we did have a slight uptick in non accruals and <unk> that non accrual increase was largely due to two isolated credits that we have deemed to be impaired, but they are not delinquent. They are current.
<unk> is my expectation is that the aggregate non accruals will decrease over the next couple of quarters.
<unk> those increase as expected and I did mention it last earnings call. These included a small handful of loans that were deferred under the cares Act and our better serve going forward with the <unk> relax terms. They are now performing on the restructuring terms and speaking of deferred loans that total is now down to just 10 loans aggregating just 10 million.
As far as loan loss provisioning. Many banks are still releasing reserves, while we have a small group, adding we had significant non PPP loan growth and that was the driving factor for the very modest provision of $1 million for.
For the quarter.
Let me get into some guidance that I feel comfortable giving you guys loan pipeline remains strong. So the fourth quarter is likely to be similar to the past few quarters in terms of loan growth.
I think it's a little early to project 2022, and I expect things to slow down a bit, but we still feel comfortable with approximately 10% growth rate next year, maybe a little more maybe a little less.
The core margin this quarter was in the $3 60 to $3 65 range and I expect some compression from that level, maybe a few basis points per quarter.
In terms of expense growth.
We might see just a modest uptick for the rest of this year not as big as the sequential increase we had this quarter.
Next year could be more challenging the labor markets are tight there is wage inflation, but we will continue invest in our people technology and our overall infrastructure. So.
I definitely think a 40% efficiency ratio is certainly achievable. We hope we can do a little better than that.
And then finally, just with regard to the tax rate little bit higher than the street had estimated just given the increased level of taxable income and our expected growth I do see the tax rate increasing modestly over time.
And before we get to questions I'll turn it back over to Frank for closing comments. Thanks Bill.
We have a solid foundation and we're looking forward to building the next chapter of our company here.
Never been a more exciting time to be a connect one.
We're in a unique place because of the market in which we operate the position of our balance sheet for enhanced scale and the opportunities to utilize digital tools to grow efficiently.
Our strong earnings power, coupled with our enhanced capital position allows us to execute on a multitude of strategic initiatives the potential for our Fintech subsidiary <unk> as exciting as we see opportunity for growth across a number of verticals and finally, we are a dynamic highly valuable franchise and we continue.
To explore financially attractive opportunities that could enhance our organic momentum on both the traditional bank side and in other financial services. So as you can see we're very excited about our future. We're pressing forward and expanding our client first model and we remain confident in our ability to drive value for our shareholders.
Our team and for our clients and with that we're happy to take your questions operator.
Thank you.
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A moment please pull for questions.
Our first question is from Frank Schiraldi with Piper Sandler. Please proceed.
Good morning.
Our friendly.
The Florida team and I was just wondering if you could share what sort of balances you have on the books currently in that geography, and then Frank I think you mentioned.
And office down there more opening an office down there is that are you talking to full service branch or what are your longer term plans.
For that geography.
Sure Frank.
Up to today, we have about $100 million in footings in Florida that we've accumulated over the last couple of years as our clients have.
<unk>, Florida as I like to call it the <unk> of New York.
So.
And we see that building over time.
The team that we've hired there will occupy a what we've been building for the last number of years here, which is a full service office generally these are.
Not retail type locations, but.
More for the promotion of good business development officers, but we will have full branch and deposit taking capability.
Okay.
And as you see.
Florida has.
In terms of the rate of growth better rate of growth than up here in the northeast. So just wondering how you think.
Percentage wise that could trend and is there any interest in maybe acquiring something down there.
Hard for me to say at this point in time.
We are looking at that Florida market and I think we will continue to look at it.
More through the lens of what our clients are thinking here in New York.
Florida because of the convenience of getting there the favorable tax status.
Has really attracted a lot of our top name developers and real estate folks and even and even other commercial business enterprises.
To open either offices or put some capital into that marketplace. So we will be following that and I think that will be leading the charge for us as to where we are how big that gets.
And how much of that.
Winds up here at connect one while we're there I think we also see that there are opportunities to grow there are a number of interesting.
Types of businesses and other opportunities within in and around that same marketplace, and so that growth could be accelerated a little bit by what we find once we're there but I think it is going to be led mostly by what the clients that we have in through Covid, we've seen that a lot of our clients now.
I know, we keep using these words mobile remote whatever but.
Our clients are no longer geographically anchored and so theyre starting in capital is starting to find its way into places in different ways and I think we needed to think about that in the same way and so we're pretty excited about the opportunity the bankers that we've been able to hire there were hired from.
Organizations that resembled us that may have been acquired and now those folks feel disenfranchised working at much bigger organizations.
And so being able to join the <unk> team has been a big plus for them.
Live to acquisitions I think it's a little early to talk about that.
Obviously, if something made a lot of sense, we'd consider it.
And that outlook relative to the acquisitions that we might look at maybe a little bit different today than it was a couple of years ago.
Gotcha Okay.
And then just lastly on bill on the buyback.
The additional.
Authorization does this signal maybe a pickup in activity or is it still more opportunistic just given your.
Both opportunities organically.
Yes, I think we're going to do this is bill.
I think we are going to be opportunistic there watch the level of growth.
Going to remain active and how aggressive we are will be dependent on a bunch of things, including growth as well as what the share prices.
Alright, okay. So what's the given growth.
Particularly strong right now is it fair to say.
The levels, we saw in this quarter might be a reasonable place to think about buybacks.
Okay.
You could say that one of the reasons for the preferred issue was to give us more flexibility.
On buying back common.
So.
So it depends.
If that's what you want to use for your model that's fine it could be a little more aggressive than that.
Got you I still think the stock.
And we still think the stock is cheap here.
Okay, Alright, great. Thank you.
Our next question is from Michael Perito with <unk>. Please proceed.
Hey, good morning, Thanks for taking my questions.
Good morning, Michael.
Sorry, if I missed it but did you say where.
South Florida. The office you were planning to open is going to be.
Thank you very helpful.
It'll be in the west.
Okay.
Yes.
Actually I don't know if it was just.
But you broke up there a little bit frankly, what was that.
West Palm Beach area got it okay.
And then in terms of the loan growth outlook Bill.
You mentioned, you're still comfortable with kind of a 10% plus or minus next year.
Don't want to kind of push too hard on it but it seems like there is quite a few tailwind at your back here.
So is there is that more just.
Conservatism and obviously, it's hard to have line of sight on the pipeline that far out or are there other kind of dynamics in the marketplace that you think could could slow down the production that.
That you guys have seen the last couple of quarters and seemingly expect to continue into next quarter.
Mike maybe I'll say, a couple of words and maybe Phil.
Add to it but.
Certainly we have a strong pipeline sitting here today and I think we are taking advantage of a lot of the opportunities that are built up in the marketplace here in 2021, but when we look ahead.
While we see a strong pipeline, there's a lot of headwinds out there in the economy in general.
Could possibly slow down we're seeing signs of that already.
A lot of the pent up demand that existed in the New York marketplace is beginning to wane a little bit.
Really if you can tell me, what's going to happen with interest rates, maybe we could talk a little bit more about there are those who think interest rates will definitely rise, which will definitely tamped down.
Down.
Some of the interest in various markets.
So if you think interest rates are going to remain low then I would tell you. It is going to be fierce competition for assets. So theres just a lot that when we sit here.
Can we sustain 5% per quarter growth the answer is probably not.
And we would probably be happier.
Especially with our disciplined approach to keep in mind were not just hasnt growth for growth sake, we're putting growth on while being disciplined around.
Margin spread and credit quality and so therefore, we just don't see.
As we look out over the horizon into 2022 being able to get higher than probably single digit high single digit and possibly break double digits for the year of 2022, now we could be wrong in either direction.
But we think thats, probably the most reasonable assessment based on what we know today and it's going to take everything that we're doing at this moment in time and I think Thats why bill talks a little bit more about.
Expense growth to achieve even that level of growth, which you may think is conservative is going to take everything we have.
Including bringing on new lenders new markets new new.
New products and services I think to achieve that.
Hope were wrong and I hope, we're sitting here a year from now sort of laughing about.
How we underestimated it but I think to be realistic about it when you think about what the numbers are the amount of pay offs, what's happening with interest rates and what's really going on in our marketplace. I think we'd be very pleased to be able to hit that level of target.
Makes sense. Thanks.
Thanks for that additional color and then kind of leads into my last question, which is just nothing major but we saw a couple.
Been a handful of banks in the Metro New York area. This quarter, where we've seen some upticks on non accruals or delinquencies or things like that I know personally we've started going back into the office a little bit still a lot of vacant buildings, but definitely some more activity and I was curious if you could just give you.
You kind of you sort of data in your prior answer, but just maybe a little bit more credit specific update on on the Metro New York area, and if youre seeing any trends or anything that's like kind of more how you more alert that may be three or six months ago.
Listen I think this had to be some fallout from the pandemic.
A year and a half ago, we all are really nervous and we're in a much much better place. So there are select areas select credits, where there is some.
Impairment going on.
We've run into a couple of those were taken care of them.
Even the charge offs that we had this quarter that slight charge offs were 10 basis points, we already had taken a reserve for it. So I think we're well ahead of the curve on it but.
Any bank that says they don't have any issues from the pandemic I just can't believe it so.
We've taken reserves well in excess of anything that we need.
Great. Thank.
Thank you guys I appreciate the insight.
Yeah.
Great Michael.
Our next question is from Matthew Breese with Stephens. Please proceed.
Hey, good morning.
Good morning, Matt.
A few questions maybe first could you give us an idea of where incremental loan yields are coming on versus what's on the books, particularly in kind of commercial real estate multifamily and C&I.
The blended rate, excluding any fees associated with its about $3 75.
So thats pretty strong my view, yes.
Okay, and then bill I appreciate the NIM guidance, it's been a tough one to model during the cycle because of fluctuations in high quality for for the industry not just yourselves.
Can we maybe try to hone in the guide on and on NII versus NIM I mean year to date, you are up about 10%.
Do you feel like.
The pace of NII growth can mimic what youre seeing on loan growth from here, maybe give us some color there.
Well.
I think the growth is going to surpass the margin compression. So we will continue to have increases in net interest income, but if you have margin compression youre going to that's going to put a little bit of a damper on net interest income growth.
Alright.
He's saying, we're going to have compression and we don't.
We continue to reprice Cds lower.
It seems to benefit from that but.
If you add up our our spreads which you don't include match funding and include the value of core deposits, increasing it's still a little bit lower than our core margin. So when I look at that that's how we come up with my estimate of a few basis points per quarter on a core margin compressing for any given quarter youre right its very.
Hard to assess theres still prepayments fluctuating.
Income accretion is not consistent all the time.
And then of course for all banks less so for connect one excess cash is all over the place.
But look we pride ourselves on keeping a stable margin and.
We continue to.
<unk> focus on that and as Frank was alluding to before about loan growth.
Yes, we can load grow loans at 20%, if we cut our rates.
But we're going to be disciplined and make sure. The margin is make sure the margin on new loans as appropriate to maintain the margin where it is and that could keep our loan growth and just the 10% level, which is not bad.
Understood Okay.
And then just on the hiring front, obviously there is a lot of your key competitors involved in deals now are recently have been can you just talk about the conversation flow on new lenders are lending teams and hires.
Those conversations accelerated or decelerated and then along those same lines does all of this disruption and change.
Is it does it does it change where whole bank M&A stacks up on your priority list.
So I'll take the first question first which is I think.
The conversations I would say that modestly increased over time, although this year, it's been dramatically more than in years past.
We've talked about this the last couple of calls where we think we're in a fairly unique marketplace relative to the amount.
M&A activity Thats going on specific to our organization, meaning for a bank our size with our capabilities.
And the types of talent, we're looking to hire we feel this is sort of a unique time.
Most of the talent, that's reaching out to us.
Is at organizations, where they felt that they had a really good thing going and now are not so confident in the future going forward.
<unk> learned about the culture here at connect one or they come in contact with it because they've competed with us in the past and when they made a decision about where they think they want to go one of the first places theyre, calling us connect one so I think those conversations are modestly accelerating I know there is inbound calls here all the time.
Tim.
We continue to interview and place people growing our SaaS, 5% in one quarter is not typical here at connect one bank. So we're clearly taking advantage of those increased phone calls and we expect that to continue over the short to moderate near term so.
Look I think thats, great and these are great folks.
They fit right in here and connect one and they've been making a difference from the moment they hit the ground.
As far as how do we think about M&A I really think we always thought about it. This way we've always projected the company is in organic growth or organic first growth company.
And to me, that's the best way to.
To create value, it's the best way to maintain our culture, which is the thing that scares me. The most how do we do all these things and still maintain who we are and what we do and how we do it.
But that being said.
I think we've done some pretty good.
Questions that have been allowed us to leapfrog.
In size scale and in some cases capability.
So those opportunities I think are still out there.
But Matt I think the point you are trying to make is yes. It's hard we do have to put it up against that to say, where do we want to put our efforts how do we want to deploy our capital and what makes sense and I think we say over and over again, we are a disciplined acquirer and and I think that's true.
Again, all that being said, we're going to do things that we think makes sense here connect one and I think thats why we are where we are today with probably some of the best metrics, we've ever had in our history.
Great I appreciate that just two more from me. So the first one is how many lenders are part of the South Florida team is this team native to Florida or are they planted from somewhere or are they coming from somewhere else.
Yes. This is a team that originally was at Stonegate, which as a bank we had a lot of.
A lot of respect for their two lenders there today together with the support team and we expect to add to that team over the over the course of time okay.
Okay.
And then the other one is obviously throughout history, there's been a lot of banks that have made the jump from Metro New York City in the northeast to Florida.
Some of these jumps have gone really well others have gone not so well can you just talk a bit about the demographic trends in Florida. This cycle and what gives you confidence about what's going on down there that you can underwrite.
To the same high credit standards that you do in New York City and things can go well.
So.
I certainly sat among the folks who years ago did not or could not understand making the leap from New York to Florida, and maybe I didn't see it early enough.
So Matt I share.
Skepticism relative to Ken This work will it work it's worked for some maybe hasn't worked for others here.
History would tell us moving out of geographic markets is may or may not be a good good move for some organizations but.
When I really start to think about and all of US here start to sit with our clients and listen to what they're doing and why they're doing it and how they are thinking about their businesses.
I actually started to think about Florida, not as an offensive move but almost a defensive move.
We have clients that.
Devoting a fair amount of their capital to the Florida marketplace because of demographic trends because of tax scenarios because of the growth in that marketplace.
And there are quite a number of New York banks or New York located banks that had presence in Florida and as we all know I mean, everybody around all 5000 banks today can do business in Florida, There's really no more geographic boundary around where a bank can do business are not especially.
And this new digital age and so I started to think about our clients go into Florida, having to go to a different bank to do business, there and that bank would have exposure to New York and so wed have competition from Florida for our New York business.
And so from our perspective.
I don't want to say it was <unk>.
Just as easy as going along island from New Jersey, but it's almost at a decision relative to or there is no place else in the country that looks like that to us at this moment in time.
There is clearly a very strong connection between the New York City market and the south.
Eastern part of Florida from Miami up to Palm Beach County, and so from our perspective.
Just just made perfect sense.
Understood I appreciate all that color that's all I had thank you.
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Our next question is from Dave Bishop with C seaport.
The Seaport Research partners. Please proceed.
Hey, good morning, gentlemen.
Good morning, David.
Okay.
Most of them.
<unk> been asked and answered, but bill I think you alluded to the fact that there could be some opportunities still to lower deposit cost maybe on the CD front, maybe give us an update what the repricing schedule maturity schedule looks like and maybe the.
The cost benefit from what's falling off in current rates.
Yes, it's about still another $800 million over the next year.
The benefit of that.
About 100 basis points benefit at a 100 basis points benefit.
So.
Still continuing not as steep as it was.
Got it and then maybe Frank obviously, another strong quarter for multifamily, maybe just update what youre seeing in that market in terms of.
Supply demand and pricing opportunities on all of that product.
Yes, I think it was a strong quarter for multifamily I think a lot of that had to do with some very specific opportunities in the marketplace.
Some organizations out there that are competitors.
Also had big pipelines of multifamily Couldnt get deals done on time, and so we saw a little bit of an advantage from that.
Being able to execute better than maybe some of the competitors that had their pipelines clogged up.
I do think the multifamily space is still a strong asset here in the New York Metro market rents have definitely rebounded from their lows. There are now bidding wars over rents.
In particular at particular sites, but it's still a very tricky asset relative to pricing competition.
And really knowing where we are the assets located and having a great relationship with the operator for those operators and managers that we have an ongoing and long standing relationship with we're continuing to support those folks. They are seeing some opportunities. Some are finding that the market is getting over.
Heated in certain places and so their disk.
Deciding not to participate in particular areas others are moving more quickly into areas, where they think opportunities exist and we're there to support them.
I think it's one of the reasons why I said before I do think there are some headwinds as we start to move into the early part of next year with potentially rising interest rates and.
Just.
A quite hot or maybe even in some cases overheated market as we move into the end of this year. So I think we I think we need to keep a close eye on that entire portfolio.
Not so much the portfolio, but the pipeline thats going into that portfolio over the next quarter or so and I'll just add.
The yield including fees is in the $3 25 to $3 50 range. So.
Our <unk>.
A little narrower than our other lines of the other.
Other segments of our loan portfolio, but still.
Wider than the tightest, it's ever been in the multifamily market.
Got it and then one final question.
Bill I don't know any color you can provide on the I think you mentioned to two credits drove the increase of the non accruals, maybe any sort of color in terms of.
Segments, and maybe what sort of collateral behind that thanks.
Yes.
Those were commercial real estate deals as I told you.
We didn't we deem them to be.
<unk> based on the values of the properties.
But.
We expect them to.
They are current and they continue to pay but we decided to take conservative approach and put them on non accrual.
Great. Thank you.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session I would like to turn the call back to management for any closing remarks.
Well I just wanted to say thank you to everyone. This was a great quarter here at <unk> and we look forward to speaking to you at the end of the year, we're actually in the beginning of next year. So thank you all for your time today.
This concludes today's conference you may disconnect. Your lines at this time. Thank you very much for your participation and have a great day.
Okay.
Okay.