Q1 2022 ConnectOne Bancorp Inc Earnings Call

Paul.

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MS <unk> <unk> Vice president of marketing thank.

Thank you and over to you.

Good morning, and welcome to today's conference call to review <unk> results for the first quarter of 2022 and to update you on recent developments on today's conference call will be bring sorrentino, Chairman and Chief Executive Officer, and Bill Burns Senior Executive Vice President and Chief Financial Officer. These results as well as notice of.

This conference call on a listen only basis over the Internet were distributed this morning, and the press release that has 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 that are being made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act.

1995, such.

Such forward looking statements are subject to numerous assumptions, uncertainties and known or unknown risks, which could cause actual results to differ materially from those anticipated.

These risk factors are markedly discussed in the company's filings with the Securities and Exchange Commission. The forward looking statements included in this conference call are only need as of the date of this call and the company is not obligated to publicly update or revise them. 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 accompanying tables or schedules, which have been filed filed today on form 8-K with the SEC and may also be accessed through the company's website at IR Dot connect one bank dot com. Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information.

I will now turn the call over to bring Sorrentino. Frank. Please go ahead. Thank.

Thank you Sarah and good morning, everyone. We appreciate you joining us today, we're very pleased to report another strong quarter delivering solid financial performance significant organic balance sheet growth and strong performance metrics here at <unk>.

Bill will discuss our financial highlights and some more detail.

I'd like to highlight that our <unk> as a percentage of assets again exceeded 2% for the seventh consecutive quarter return on assets was again above one 5% and our return on tangible equity was greater than 15% all while our efficiency ratio remained below 40% our tangible book.

Value per share was up again this quarter, increasing by 2% since the beginning of the year and Thats in an interest rate environment, where others have experienced significant dilution from reduction in fair value of the securities portfolios.

However, these once again impressive financial results really don't tell the whole story of what we're building here at connect one so first.

First we continue to invest in our invest in and strengthen our organic franchise, our origination franchise, sorry by by leveraging our strong franchise and client centric culture, we're gaining new clients as well as hiring experienced bankers from revenue generators the tech talent.

We are a destination of choice for some of the best business generating talent in the industry and a lot of that is stemming from the marketplace disruption created by M&A.

We've also taken proactive measures to retain our top talent with attractive compensation packages. So as we sit here today, we clearly see those efforts have enhanced an already stellar team and are paying dividends with yet another quarter of annualized sequential growth in loans exceeding 10% and nearly 15%.

Growth in deposits.

Secondly, our pipeline remains near historic levels with strong demand and favorable pricing characteristics across all business lines in our markets.

Part of this success is attributable to expanding our presence and proactively following our clients into new and growing markets. As you know, we recently hired a great team to lead our Florida office and already at this early stage. We are seeing very promising results traction is exceeding our initial expectations and the factors that made us successful.

The New York Metropolitan area translate very well to the growing Florida market and our culture with our client base focus is a clear differentiator we've already originated approximately $150 million in new commercial loans. Some from our existing connect one clients with business opportunities in Florida, and some from new clients based in flow.

<unk>.

Deal structures and opportunities are both favorable and in line with the lending to which we have extensive experience and expertise.

So with that let's move on to some other initiatives connect one it's been focused on.

We are continuing to successfully adopt and expand our utilization of technology to remain competitive to create efficiencies and to provide real time solutions. This includes improvements to internal workflows to support our hybrid work environment and support scale, along with our investments to enhance our data infrastructure, including digital.

Initiatives that also enhanced risk management tools and processes.

Look over at both why even as the number of our franchise of our brands on that platform increase we're turning our efforts towards automated underwriting through improved functionality for the franchisor and franchisee and ultimately increase the profitability of the core business line. These continued investments ultimately allow both light built for scale.

<unk>.

We're continuing to we're continuously improving the client experience, while also achieving greater efficiency and revenue generation for that platform. We're also creating additional opportunities beyond the SBA vertical with loyal client with a loyal client base that both lie has built.

Shifting gears as you may have seen connect one became an early member bank and the USPS consortium.

<unk>, which is an association of U S banks with a mission to build a network to further the adoption of the USPS, which as a token is deposit.

This is an early step in employing blockchain within the regulatory perimeter in order to offer enhanced solutions for our commercial banking clients.

We're also happy to announce that we recently signed an agreement with Nimbus.

A leading Fintech company to provide cloud based banking core services working in partnership with Nimbus will be building, a niche focused offering providing us a new avenue to collect deposits.

We're set to kick this project off in the near future and we will share more details as we progress.

Supporting our industry, leading efficiency ratio was our ability to leverage technology and streamline internal processes. A great example of this you've heard me discuss before is our partnership with Encino, which has been instrumental in this regard we partnered with <unk> in 2017, when our total asset size is just for $1 billion to help deploy as a single class.

Based platform throughout the organization and business lines.

Today, we've doubled more than doubled in size and yet we've been able to create efficiencies as we continue to build scale. So we look forward to sharing our progress in the quarter at quarters ahead. In summary, this has been an exciting time to connect one we're well position our capital position remains strong and we continue to internally generate.

<unk> capital to support growth as.

As you saw in our press release. This morning, the board of directors today announced another increase to our common dividend an increase of nearly 20%.

Also we continue to be opportunistic with share repurchases, having about $2 million in authorized capacity at the present time.

So with that I'll turn it over to bill to give us a little more depth.

And some color on our results.

Thank you Frank Good morning, everyone. So there continues to be a tremendous amount of excitement and optimism uric connect one Frank just mentioned, we've been focusing our resources on accelerating organic growth at the same time, we're embracing technology and making the investments and progress on several fronts, but.

Even with that increased investment and the associated additional expense, we continue to produce superior financial metrics with stability across the board the <unk> as a percent of average assets actually exceeded $2 one five for the fourth consecutive quarter.

Our return on tangible common equity again exceeded 15% and that was without the benefit of any reserve releases our efficiency.

The ratio for the quarter was 38, 7% and that's improved to just slightly above 40% in the prior year first quarter.

Our net interest income contracted by just four basis points, but remained above $3 seven now near historic highs for connect one.

And tangible book value per share increased by 2%. The fact that our TB our tangible book value increased by most of the industry saw decreases was due to a disciplined approach to securities investments during the low rate environment of the pandemic, we chose to stay out of the market and let the securities run down combined with that we were effective at hedging.

Most of the existing portfolio and you know really behind all of this is the strong organic loan growth. We maintained at good spreads, which enabled the investment discipline and hedging strategies I just mentioned.

I just wanted to add one more point here all of our securities are in the available for sale category. So complete transparency. There. There is no hiding of the fair value adjustment. So all in all connect one is faring quite well in a rising rate environment. The NIM remains high and we continue to grow per share book value.

Let me turn to the income statement and give you guys. Some color net interest income was flat sequentially. That's that I expected, but was up a significant 15% from the first quarter of last year average loans for the quarter grew by 10% from the year ago quarter, and combined with that the margin expanded by 15 basis points over the past year.

In terms of the net interest margin just to repeat our margins have been expanding throughout the pandemic and today remains at or near historic highs.

And we continue to originate loans at favorable rates and spreads on the asset side are improving in my view loan origination for the quarter was an average weighted rate of about three 8%, but based on our pipeline indications offer origination yields to be above 4% for the second quarter could be as high as four 5%.

Our dynamic modeling continues to show asset sensitivity and although I expect the margin to remain relatively flat for the remaining nine months of the year I just want to remain cautious cautious with respect to any guidance as we are seeing competition for deposits heating up now.

Now, let me turn to noninterest income. This line item came in lighter than I expected and the street expected, but most of that was due to evaluation charge against the CRA fund that we hold so excluding that valuation charge because of the rise in interest rates. We were about three to 400000 below expectations, but both lie out of.

Good quarter and recorded fees in excess of 400000.

The franchisers utilizing this platform has increased significantly over the past few quarters. So I can't promise exactly what that will translate into but the trend is clearly positive.

<unk> on sale of loans were down some of that was residential and some of this decline was commercial and I've mentioned this before that there will be some volatility in gains on sale numbers, but my expectation with the rest of 'twenty. Two is for that number to increase for the first quarter levels and just one last item in there is going to be some additional bally. This quarter. So we are.

Probably at about 200000 per quarter going forward.

Turning to expenses, we grew 4% sequentially as I did indicate on the last call.

Most of that increases on the comp line that reflects new hires salary increases wage inflation and the assertive stance, we've been taking to both add to and retain our team.

The other items I want to mention these two things special items essentially offset one another there was an additional earn out charge for the <unk> acquisition and that was offset by a favorable lease termination that was something we had written off at a higher level as a merger charge and in fact, New Jersey deal.

In terms of any additional future both fly.

Charges, we've still got a little to go later this year, but its under $1 million and that would be the last of any expense associated with.

Both fly earn out.

I also wanted to make you aware that we reorganized the opex section of the financials. So we have now one line item that now essentially as technology expense I think that'll be helpful and add some transparency going forward I want to add our operations and tech teams have done a great job of strategic spending on technology, but they've also reduced the cost.

A core and legacy systems.

Going forward I think some of the same trends will continue.

<unk> sequential growth in expenses, probably in the 2% range I will give you guys an update on that after the second quarter.

I just want to talk a little bit about.

Seasonal provisioning.

Many banks release reserves in the quarter, while others added modest announced we were in that latter category, adding a small amount of reserves $1 5 million.

The reserving first reflected loan growth, but it also reflected that we made some minor qualitative adjustments to our seasonal model and that reflects an expectation that economic forecast could trend in a negative direction keep in mind. These are macro forecasts. It is not an indication of credit quality or connect one our non accrual assets non accrual assets.

The decline for the second straight quarter, while delinquencies and charge offs remain very very low.

Before turning it back to Frank I want to add a couple of things.

Look we're very optimistic about performance in 2022 strong loan growth is anticipated in margin pressure is likely to be moderate with building noninterest income at both client through SBA and CRE loan sales.

Spencer do continue to grow to support our growing businesses and the investments that <unk> been highlighting but as always we aim to grow revenues faster than expenses.

Wrap up with final for a few comments given the strength of our earnings and capital position, we have a great deal of financial flexibility first we have the capital to support double digit organic growth along with that there's still room for continued dividend increases share repurchases.

And as always.

Although our strength is organic growth, we continued to opportunistically explore growth through M&A.

As you know deals are hard to come by.

But we have a track record of being financially disciplined and we're going to stick to that.

And with that I'll turn it back to Frank.

Thank you Bill.

Hosing.

<unk> delivered strong performance for this first quarter and more importantly, we expanded our market presence and we continue to invest in top talent to support our clients as they expand and capability and in reach.

So launched several initiatives to extend the technological foundation, we built while also exploring new opportunities as we participate in shaping the future of commercial banking.

As we move through the rest of 2022 I'd like to reiterate that we're.

We're projecting strong organically driven growth, which will be supported by the investments we've made in our talent and our technology infrastructure and we expect our financial performance to remain among the best in the industry. We're excited about our future and we look forward to updating you in the quarters ahead and with that I'd be happy to take your questions.

Thank you.

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Yes.

Thank you.

The first question comes from the line of Matt Breese with Stephens. Please go ahead.

Hey, Bill I wanted to go back to your comments on new loan yields being that 445 range.

Or are we essentially nearing the point of it being positive to the core portfolio and then maybe along the same lines could you just give us some.

Some color on commercial real estate multifamily spreads I had been hearing that there had been some spread compression through March but it sounds like it's starting to reverse.

Yes truth to all of that.

We are seeing the point, where the loan yields are adding to our portfolio. So that obviously helps us as.

As rates are rising.

And then yes, the spreads were very tight on the multifamily.

See we are seeing some relief there.

And so even on that and the expectation.

As for higher yields.

Multifamily is typically lower spreads for the rest of the business and depending on the mix.

Originations and what sticks.

Terms of loan growth that can affect the total yield on our portfolio.

Okay.

And the other thing is one thing that stands out is despite.

On paper the balance sheet being relatively interest rate neutral the loan to deposit ratio is on the Fuller side. So could you talk to me about the incremental funding sources and the ability to protect and maintain just an overall lower cost of funds in EMEA, along those lines where expectations for beta is around 100 or 200.

Yes.

No. Good question, a lot's of the question there.

Little bit of a moving target.

Right now deposit rates are we're starting to feel pressure however.

However, even though its higher deposit rates are lower right now than our wholesale cost of funds. So.

I typically use a very conservative approach when I, when I look and analyze spreads using our highest wholesale wholesale cost upfront to calculate spreads that's usually the federal home loan bank, but we're picking up spread in that we can use deposit to fund more of the growth right now I think that will.

Work itself out and we will get back to a normal place.

But I hope I answered your question, but it's like kind of a mix right now rates deposit rates are going up but they are actually helping to add to the spreads.

Got it and then maybe going down a different path, but good outcome.

If we do get a plus plus 200 basis point.

Fed hikes by the end of the year could you provide some longer term core net interest income guidance by the end of this year.

Assuming the outlook is NIM NIM flat, but what does the NII can actually do.

Yes, our models are showing like 2% to 3% increase with a 200 basis point.

Rate shock.

Got it okay.

And then Frank.

Different ways people up.

I think we've had this discussion before offline.

Banks look at it differently some do static some do dynamic it's hard to compare apples to apples, but I just feel comfortable.

That we're going to be able to maintain our margins one way or the other.

<unk> through this and that and since we never our margin never got compressive widened over the last year. So.

Just feel comfortable that.

We're going to have stable margins and stable returns.

In the coming year.

Understood.

Frank You had mentioned Nimbus as a third party that you're using.

Sweet of products and services.

It was pretty robots can occur.

<unk> core systems have you taken it that far and considered using them.

Core system provider and what do they offer versus the traditional <unk>.

Big three on that regard.

So.

Hey, doing that I think.

Nimbus office offers us an opportunity to.

Custom design, a vertical for our new line of business potentially where we will use their core and we will use their ability.

Two.

Really with laser focus identify what a particular client niche needs and how to attack that particular vertical.

Ed.

The purpose here is certainly for deposit gathering.

But there'll be some lending opportunities there too and I don't think that any of our existing capabilities can do what we anticipate doing together with nimbus.

So.

Im pretty confident that it's going to going to allow us to be very very hyper focused in a particular in particular.

Client vertical.

Yeah.

Over time I mean.

For you, who you use right now as a core provider, but over time do you anticipate fully moving to <unk> in that regard.

Hard to say that I think you realize the entire world of the core is moving around pretty dramatically it used to be pretty easy to take the top three <unk> using this punching bags I don't think you can do that today I think even.

Companies like <unk> and others, Jack Henry are being pretty progressive about how they're thinking about the future.

What I, what I do think I see us in the past. It was you had to identify a core and you ran everything on your bank.

In concert with one basic operating system.

Today, it's just not that way.

It started when once Api's came out and you can now start with actual different products and services to whatever core you had but now.

It is not uncommon for banks to run multiple cores.

So I think Thats I think thats, what were going to see going forward.

Interesting, Okay excited to see where you go with this that's all that's all I had thanks for taking my questions.

Matt Thanks, Matt.

Thank you.

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Yes.

The next question comes from the line of Michael Perito with K B W.

Please go ahead.

Hey, everyone. Good morning.

Right.

I wanted to start on both like Bill you mentioned that it had a nice quarter I was wondering if you guys could maybe just give us at.

Now an update on kind of the the.

Product roadmap there on that platform.

I think when we have had some conversations in the past there was discussions about adding some new new layers to that and maybe even some.

Fee and other fee income opportunities like interchange your cards or deposits or things of that nature. Just curious where you guys are in that thought process.

And.

Maybe just a broader comment overall about how we think the fee income growth could could trend in that for that business specifically over the balance of this year.

Alright.

I would I would start and maybe bill can add some color but.

I would say that what we're doing with both like today is thinking about the entire client journey that enters through the both life platform and where they ultimately want to go and how we can support that.

Need that they have and do it in a.

Either friction less or a lot less friction that exists today on the platform.

So.

The first thing we're looking at is what does the core platform to do which is to supply an opportunity for a franchisee applicant obtained financing how do we do that in the most cost efficient and highest revenue producing way for us.

And I think we're doing that today, we're actually building out the entire loan.

Pipeline from beginning to end for anyone that.

Enters the bulk buy platform, but that's the core business.

I think as you mentioned before there are lots of other things. We can do there there are a number of opportunities that don't necessarily need to go through the SBA program, which is where both live really cut its teeth.

There are repeat clients who come.

Come back to <unk> for additional funding opportunities, where they didn't have product before and now we're building that capability to be able to fund that second third fourth request, which would definitely not go through the through the SBA.

There is opportunities on the franchise or side.

And then when you think about both lie having a loyal client.

Of course, we can start to think about all the other products and services that a financial company would want to provide.

Or the next most logical being all the payments.

Our capabilities. So that's that's what's on our sort of.

Year or long term radar, but the first part is really getting this whole loan products.

Really done in a in a automated way in a way that client really feels almost no friction where we pretty much eliminate most of the competition that's out there for that type of business.

And do you have any.

The timing of all of that be rolled out and launched.

I mean, obviously you have to be too specific but just can you give us some general indication of where you guys feel like those things are in varying stages of rollout our exploration.

While all the all the lending product disc.

A discussion that I just had is all being done this year and we're actually piloting right now some of the.

Complete loan product.

Working with technology vendors to complete that whole process. So within this year, we're going to see.

Or will be able to discuss exactly how that entire loan pipeline works for all the products that we supply at both like simultaneous to that we're working on some of the other products I would say by year end, we will have better discovery around what those things will be what they look like and what we'll be working on next but we really want to get this entire.

Loan pipeline.

Under wraps and working well and be able to demonstrate to the marketplace whats coming through there what the pull through rate is.

What the profitability of that line of businesses and what it looks like.

I fully expect before year end, we will have those discussions.

But Mike this is bill I, just wanted to add that behind at all.

Volumes through <unk> are increasing.

And I think when we bought them. They were they had 30 franchise on the market I think last time, we spoke with you.

A few months ago, it was 80% or 90, we're well over 100 now so that's the key towards the traditional income at both lie which is getting.

Carl fee for another bank to place the loan the other things we're talking about are just going to be additive to that which includes.

Franchisees that are little bit bigger some business with franchise ores and potentially.

Doing the entire underwriting process at connect one which right now we for the most part we don't do that.

Hope that's helpful.

It is and we often.

You guys often talk about your profitability and obviously, it's top quartile very strong and I think investors, sometimes wonder like what could make it improve is it fair to say that that profile could be an area of possible improvement I mean, it sounds like you guys are investing pretty heavily today I don't know if you guys break out or willing to break out kind of what the return metrics of that platform look like but is it fair.

Fair to say that it's probably from a net bottom line standpoint, not contributing as much as it could in future periods at some of these initiatives take hold that you're investing in today.

I think it will be I think it will be significant in the future.

Right now theres lots of lot of revenues, but we're also building the platform. So we're probably at a breakeven, even though and as far as 1000 this quarter of revenue.

Great and then just one last one for me just on.

On the loan growth side, the pipeline commentary strong I imagine you guys feel pretty confident on the lines of sight to the next quarter or two as we move beyond that obviously, the economic outlook becomes a little bit more subjective opinion and challenging to pin down and I'm. Just curious how you guys are feeling overall.

About loan growth opportunities in your markets longer term any maybe kind of.

Qualitative feedback youre getting from commercial customers that might be helpful around their whether it's their outlook with a positive outlook for their concerns or just anything of that nature. If it would be great. Thanks.

I think it's a tale of two stories.

Certainly seeing things I don't want to slow down, but people are being a little bit more thoughtful about.

Whether they are at.

Attaining a construction project or buying a commercial property or starting a business or buying a business.

There's talk of me.

And the news about a possible recession and so people certainly are being more thoughtful but that we also have to look my own personal belief is with the amount of money. That's in the economy today, the health of the consumer today, how much liquidity still exists both on business balance sheet.

And personal balance sheets, I think the risk of an outright recession is low I think we are going to have a reset I think we are going to slow down the inflation rate I think we are going to see a higher interest rate environment, which is going to force people to make different financial decisions, but.

But the backdrop to that is that the markets in which we're in all of them.

We are seeing tremendous M&A going on and so there is enormous amount of disruption and so we're picking up some great talent today.

Which is going to offset any bit of that slowdown because we're going to organically grow new business from new sources and.

And to me it's.

It feels like it could be one of the best times, we've ever been in relative to our ability to grow.

I think we are in some of the best markets in the country. We're in New York, New Jersey, the entire New York Metropolitan area and Florida.

So I think there is in every one of those markets is being affected by what I said before about the M&A.

So I feel pretty good about overcoming the slowdown thats just naturally happening happening in the economy and taking a bigger piece of the pie.

That's really helpful color Frank Thank you both for taking my questions.

Thanks, Michael Thanks, Michael.

Thank you ladies and gentlemen, we have reached the end of question and answer session and I would like to turn the call back to the management for closing remarks.

Well. Thank you everyone for joining us today for our first quarter report, we certainly look forward to.

Coming back to you in future quarters, and speaking about our results as we move through 2022. So again thank you.

Thank you.

Today's conference you may disconnect your lines at this time, thank you for your participation.

Yes.