Good day, and welcome to the ConnectOne Bankcorp Incorporated First Quarter 2019 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Siya Vansia. Please go ahead..

Good morning. Welcome to today's conference call to review ConnectOne's results for the first quarter of 2019 and to update you on recent developments. On today's conference call will be Frank Sorrentino, Chairman and Chief Executive Officer and Bill Burns, Chief Financial Officer.

The results as well as notice of this conference call on a listen-only basis over the Internet was distributed this morning in a 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 are based upon forward-looking information and are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

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 more fully discussed in the company's filings with the Securities and Exchange Commission.

Forward-looking statements included in the conference call are only made 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 on Form 8-K with the SEC on April 25, 2019, and may also be accessed through the company's website at ir.connectonebank.com.

Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release. I will now turn the call over to Frank Sorrentino. Frank, please go ahead..

Good morning. And thanks, Siya, and thank you for attending our first quarter conference call. We've continued the momentum we achieved throughout 2018 and believe we're very well-positioned with more scale, more reach and enhanced technological capability under our belt. I'd like to go through a summary of some of our first quarter accomplishments.

We completed the Greater Hudson transaction in early January and integrated those systems less than 30 days after closing. As of today cost saves are fully implemented and clients have seamlessly been transitions over to ConnectOne. Essentially the merger is behind us.

From a financial perspective, the benefits of this value-added transaction and why we believe it would be beneficial to shareholders has proven to be true. Our loan-to-deposit ratio improved. Our CRE concentration was reduced. Our net interest margin was strengthened. And the upward trajectory of tangible book value per share continued.

As discussed on prior calls, ConnectOne is focused on disciplined growth opportunities, expanding geographically within our target markets and making investments in the best interests of long-term shareholder value creation.

As a growth company we're committed to our people-first culture and continue to invest in financial technology to stay ahead of the competition. In this regard, we recently announced an agreement to acquire BoeFly, a New York City and Boston-based privately held fintech company.

With dynamic patented technology BoeFly helps connect small- to medium-size businesses with professional loan brokers and lenders across the United States.

This transaction which is expected to close in May provides ConnectOne with an avenue to leverage the digital foundation we've built here at ConnectOne while also expanding and diversifying our revenue streams. Additionally, it allows us to jumpstart our recently-established SBA lending platform.

While we don't expect SBA lending to be a significant segment of our loan portfolio going forward, the risk-adjusted returns in SBA are strong and we will look to expand in this area in a prudent and measured way. We've received a lot of calls of interest around this transaction, which has largely gone under the radar.

We believe partnerships like this are critical for the future of banking with the industry becoming less brick-and-mortar oriented. Given the synergies, the strong cultural alignment between the companies this is a low-cost transaction with very limited downside.

And by establishing a national presence in the digital marketplace there's a meaningful upside to enhance ConnectOne's digital bank strategy. Additionally, in an effort to position BoeFly to potentially create significant value for ConnectOne shareholders down the road it will operate as an independent division of ConnectOne.

It will be led by Mike Rozman, BoeFly's current CEO under the BoeFly brand and business model. We look forward to welcoming the BoeFly team and leveraging our operating expertise to drive its growth. While disciplined growth is exciting, we've also been very successful in investing in process improvements in all areas of ConnectOne.

As we've discussed, we've been evaluating every area of the bank's operations, funding, deposit gathering and back office to determine where technology can create efficiencies while also supporting our client's demand for always-on banking services.

As part of our approach to improve our client's digital experience we continue to partner with leading technology companies to enhance our digital products and to offer a competitive suite of consumer products. Towards this end our nCino platform rollout continues. As you may recall, the rollout was initially focused on digitizing our lending process.

We're now expanding the nCino process into additional business lines including deposit gathering, further strengthening the alignment between our deposit and loan originations. In addition to our technological investments ConnectOne has grown responsibly within our target markets surrounding New York City.

We expanded our footprint while also continuing our branch rationalization strategy, ultimately increasing our total assets per employee to $17 million, placing us well above, in fact more than double the average for banks under $10 billion in assets.

Those who saw the earnings release you probably notice we had an isolated charge for one credit related to a loan on a New Jersey commercial office building that was mismanaged by the owners and operators. While we are very disappointed, this is also a very rare occurrence for ConnectOne.

We have various avenues to pursue a recovery and believe we are now more than adequately reserved. That said, overall our credit quality measures improved significantly during the quarter. And Bill will be sharing a little bit more about these improved metrics with you shortly.

Before turning the call over to Bill I'd like to highlight that given our strong financial performance, our rising capital levels and current favorable repurchase economics, we recently announced the stock repurchase program. The plan authorizes the repurchase of up to 1.2 million shares or approximately 3.5% of our common stock.

We also recently increased our quarterly dividend by 20% to $0.09 a share. These decisions reflect on our track record, our confidence in the future and our ability to use our free cash flow to return capital to shareholders without impeding our investment strategy. At this time I'll turn the call over to Bill..

Thank you, Frank. So it was a busy quarter but a very productive one. And I'm going to dig a little more into the details. Then Frank and I will be happy to answer any of your questions. As Frank mentioned, we closed the Greater Hudson acquisition at the beginning of the quarter. And I'm going to go through the financial impact of the transaction.

First, the merger added about $375 million of loans and $425 million of deposits. On top of that, with the loan-increased sequential footings by about 8% we had annualized loan growth of a little more than 5% and annualized average deposit growth of more than 10%.

Tangible book value per share increased by nearly 2% for the quarter, including dilution from the merger so organically we grew by more than 3% for the quarter and about 15% over the past year. Tangible book value per share is now $14.67, up from $12.93 a year ago.

The merger and our growth in deposits contributed to further improvement in our loan-to-deposit ratio, which is now down to 108% from 111% at year-end. Greater Hudson bank was less concentrated in CRE than ConnectOne, and that contributed to a further decline in our CRE concentration metrics, improved slightly to 475% for 480%.

Our net interest margin widened by 7 basis points to 3.34% in the quarter. With that increase attributable to about $1 million of pre-tax purchase accounting income in this quarter.

That accretion amount currently maps out at a similar quarterly level until the end of 2020, tails off a little bit after that can vary of course depending on the performance of the acquired assets. And even without purchase accounting accretion the NIM was maintained in the sequential quarter and up 1 basis point from last year's first quarter.

We've been able to maintain a fairly consistent core margin in this challenging interest rate environment. But going forward I'm going to be a little bit conservative and forecast slight compression due to competitive pressures over the remainder of the year.

As for merger cost saves, as of today we already have achieved full phase-in of the 40% targeted cost saves. During the first quarter probably about 75 percent of those saves were realized, and that was without any branch closures. Although we continue to rationalize our entire branch network, we probably will be closing 1 or 2 in the coming months.

Turning to overall earnings for the quarter. As Frank mentioned, we had that one isolated charge and had an elevated provision and with it a slight decrease in our performance metrics. Nevertheless, excluding merger charges ROA was 1.18% and return on tangible common was 13.7%, both very strong metrics relative to our peers.

Meanwhile, credit quality metrics improved significantly, Nonaccrual loans as a percentage of total loans excluding the taxis declines to 0.41% from 0.53% quarter ago, and from 0.49% one year ago. Non-performing assets ratio, that includes the taxies, declined to 0.79% from 0.95% sequentially and from about 1% a year ago.

Reserves as a percent of nonaccruals excluding the taxis jumped to 181% from 147% at year-end. In terms of capital, the holding company's tangible common equity ratio increased for the fourth consecutive quarter to 8.83% at 3/31. That's a 50 basis point increase over the past year.

And as you know, early this year we announced the stock repurchase plan. And just before the window closed for the quarter we were able to buy some stock at about $19 a share. We expect to resume repurchase activity very soon.

Also we increased our common dividend this quarter 20% to $0.09 per share per quarter based on our expectations for strong performance going forward. Now let me give you some color around our tax revision with New Jersey still not providing any clear clarification on the exact impact of last year's legislation.

We're taking a middle-of-the-road approach. In other words, we are reserving for a moderate increase in state taxes. That raises our core effective rate to approximately 22% to 23%.

You may notice that our effective tax rate for the quarter came in only at 17.6%, but that was largely the result of merger expenses, which decreased the percentage of income from taxable versus nontaxable sources, and that leads to a lower rate. I like to talk a little about the BoeFly acquisition.

We view this as a low-risk high-reward undertaking, adding digital functionality to asset generation. The entry price is low in the single digit millions and is variable based on certain predefined performance targets. Currently, BoeFly's revenue is strictly fee income, largerly referral fees earned through marketplace platform.

Our goal is to expand those revenues as well as provide opportunities for some SBA lending at the bank either for gain on sale or for portfolio as market conditions dictate. So I'm going to recap these highlights for the quarter. Greater Hudson merger is fully integrated just 3 months after it closed.

Our performance metrics, although slightly lower than usual this quarter are still very strong. And we are targeting a 15% ROE going forward even with a higher tax rate. We continue, as always, to keep an eye on tangible book value per share which continues to increase at a nice pace.

Our net interest margin has been remarkably stable in a very tough operating environment. Our credit quality metrics improved significantly. And finally, with the fintech acquisition of BoeFly we are now positioned to participate in the digital lending space.

Going forward, we will continue to focus on both organic growth and value enhancing opportunistic M&A. And now it's time to turn back over to Frank..

Great, Bill. Thanks. We covered a lot today. And as I'll note, ConnectOne has an excellent foundation to build upon. We've demonstrated that we are -- that we are a skilled acquirer with a track record of integrating transactions quickly and effectively.

We're well-positioned to continue to grow organically even in a tough environment and still see our growth rate in the high single digits for the year in both deposits and loans. And we're continuing to transform by expanding our digital channels and becoming more technologically focused than even before.

As we look ahead to the remainder of 2019 our priorities remain solid organic execution, supplementing growth with M&A, advancing our best-in-class efficiency, being good stewards of our shareholders' capital and continuing to make strategic investments for the future. I want to thank everyone for listening. We appreciate your interest in ConnectOne.

And at this time, operator, we'll take any questions from the audience..

Thank you [Operator Instructions]. The first question will come from William Wallace with Raymond James. Please go ahead, sir..

On BoeFly can you maybe help us with the economics of the business, maybe give us a sense of currently what the run rate of loans that the business is connecting with brokers and lenders might be. And then I'd like to get a sense as to how aggressively you think you might be able to grow that..

Well first, the current run rate is on referral fees from that marketplace platform. And that is in the $1 million to $2 million range currently. Look, we're going to try to grow there a number on that annually, and so obviously we're going to try to grow that and I can't give you an exact number..

As far as, I believe you mentioned that there is potential opportunity that there could be a balance sheet opportunity from this business.

Should we assume that any loans that you put on the balance sheet from BoeFly would be in market? Or does it expand your thinkings about what you might be willing to put on your balance sheet from a geographic prospective?.

Wally, I'll take that question. So certainly we would be one of the participating lenders that are on the platform. There are many banks that currently go to that marketplace for loans today. We would just be added to that roster.

And yes, we would be looking for loans that fit the same model that we've been running all along here which is clients that are within our market area plus the ability to look at other opportunities that make sense for us maybe outside the market for organizations that are either headquartered here or have a presence within the marketplace itself..

And then on the office building that you had the charge up on, was that already in nonperforming?.

Yes, it was already on nonaccrual and there had been a previous charge on it..

Had you had a contract on this building a while back that fell through?.

Not to best of my knowledge..

No..

And then last question. Bill, could you update us on your thoughts around the net interest margin just given the current rate environment and the potential..

Yes, we've been very successful on maintaining the margin. But it has been difficult. The rate of increase in our loan portfolio I feel is going to go a little bit slower than the cost of deposits. But it all depends on the mix of loans as well as our success in raising noninterest-bearing deposits.

So my best guess is again 1 or 2 basis points quarter compression. I'm hopeful that we can do better than that..

Thank you from the question. The next question will come from Matthew Breese with Piper Jaffray. Please proceed with your question..

Bill, I know you mentioned what you thought the accretable yield might be. I think I missed it.

Did you say $1 million a quarter through year-end or through 2020?.

Through 2020..

So similarly….

And that's from the Greater Hudson, yes, from the Greater Hudson transaction..

And then as we think about.

There is some left over from Union Center still, but it was about $1 million from Greater Hudson..

Understood, okay. And then I was hoping to gain some color related to the loan pipeline, how that stacks up now versus the prior period.

And how does the blended yield on that stack up versus the roughly 5% you had on the average balance sheet this quarter?.

Yes, so the pipeline is strong -- our -- look, we still have our growth target in the high single digits and we probably grew by 5% in the first quarter after adjusting for Greater Hudson. And now as expected, it's always a little bit slow at the beginning of the year so the pipeline is robust.

There is competitive pressures on the lending side, but we're still originating loans on average about the 550 base, so we still see continued increase in the loan yield. And the only question is how is that going to compare to the increase in deposit cost..

And just from a perspective of mix, I think it's the mix you would expect with some increases in the C&I portion..

Now you did mention deposit competition is still pretty stiff. A number of your competitors have noted that competition at least this quarter seems to be leveling off.

Are you seeing that as well? Or would you characterize the environment any differently?.

It depends how you -- see, we talked about this yesterday. So what I think is happening is that the level of increase in the increase in the competition has leveled off. But there's clearly a heightened level of competition going on.

I believe the expectation though going out into the future of increasing or continued increases in rates is probably not as strong, but certainly the competition for each dollar today is pretty fierce..

And I think this is not just affecting ConnectOne it's everyone. The spreads on deposits aren't getting better. And we're still having the rollover of CD impact that is increasing the total cost of funds even if the fed isn't raising rates..

My last one is just in regards to the tax rate. I wanted to better understand the middle-of-the-road approach.

So what are we waiting on for clarification? And then best-case scenario what could it be? And then in a worst-case scenario would it be back to the 26%, is that way to think about it?.

Yes, it's probably -- it could be up by 3 to 4 basis points or down by 3 to 4. Sorry, it could be up by 3 to 4 percentage points or down by 3 to 4 percentage points from that middle 22 to 23. And I think different banks are reporting different amounts right now but nobody knows for sure.

And this is of course what we reported, it's not necessarily what we -- how we handle it on our tax return. And I said it's a reserve. So we're essentially creating a reserve right now, right..

So should we anticipate that for the remainder of the year it's in that 22% to 23% range where you accrue and then we'll have some clarity at the end of the year when you actually file?.

Well, you're asking me to guess if we'll get clarification before the end of year. I think we probably won't. And that could take a very long time to know for sure. And so my best guess is we'll continue that the rest of the year. If it changes and everybody knows how this is going to work, then obviously we'll adjust immediately..

The next question will come from Austin Nicholas with Stephens..

Most of my questions were answered. But maybe just back on the expenses, could you maybe just provide some outlook on how you see the expense base kind of trending from here and then on top of that kind of $1 million to $2 million of fees that you're getting from BoeFly.

Can you maybe give us a feel of what the incremental expense is on that?.

It's roughly the same. It's basically a breakeven at the present time. So I wouldn't change any earnings estimate relative to BoeFly at the current run rate. As far as expense growth, I mean I kind of give the same answer all the time for that. It really depends on our revenue growth.

And I see maintaining the efficiency ratio relatively in the range we're in now. So we've been in the single -- probably in the mid-single-digit expense growth..

And then maybe just on capital. Any updated thoughts on uses of capital and how you're viewing the M&A environment kind of with your acquisitions integrating to the remainder of the year.

Any opportunities that you're seeing in the market?.

Yes, I mean I think there's lots of opportunities but as you know, someone has to be a buyer and someone has to be a seller. And it has to make good sense for us, right? It's got a check a lot of the boxes.

We've got to do something where we either gain an expertise we don't have today, it's got to be a deposit franchise, it's got to be something that we believe is either in market or expands our market in a way that we think is meaningful. So it has to check lots of boxes before it fits in.

It's not that we're just looking for anything just to fill out the balance sheet. I think we've demonstrated time and time again that we've been able to be patient but strike when the transaction looks right. And at the end of the day I think we've created value for our shareholders..

In terms of other -- other than some capital-changing event, it looks like based on our return projections, our dividends and our growth we'll be able to handle all that growth and also be able to continue the stock repurchase program and continue with the higher dividend level..

Thank you for your question [Operator Instructions]. Your next question will come from Collyn Gilbert with KBW. Please go ahead..

Just to follow up on your comment on the stock repurchase. You had indicated to be able to continue. Do you foresee a scenario where you would go and issue another authorization? Or just trying to get your kind of longer term view on utilizing repurchases as part of the capital management tool..

Well, when we're done with this one we'll take a look at doing another one. That's my what I would say. But let's finish this one first before addressing that..

And your price level you said before the window closed was around 19. How are you thinking about….

Yes, the stock price is growing….

Yes, how are….

Yes, we really think the stock is undervalued. So we're very happy to buy back stock at this level..

And then just on the loan growth front. Frank, I know you said, kind of assume similar mix of loans going forward or whatever, but just, as you, how you're seeing sort of the construction pipeline kind of near term and then longer term too..

Yes, I think our construction pipeline has been fairly consistent. We're seeing a good level of turnover within the portfolio. Projects are getting completed and being refinanced, sold or whatever.

And so to the extent that we can look ahead and believe that the marketplace is still an inviting place that provides for construction lending, we're going to continue to do it.

And at this moment in time with interest rates where they are and the demand in this market the way it is and, we have to get into a much bigger conversation about that relative to specific areas of the market. But for the things that we're doing we feel pretty confident about what we have in the portfolio today.

I would not expect it to change materially one way or the other. But as you've seen over the past quarters, it goes up and down depending on the completion cycle and then payoffs and whatever happens as we go through that. But right now we like the asset and we like the borrowers that we have in the asset class..

Thank you. This concludes today's Q&A session. I'll now turn it back to management for closing remarks..

Well, great. Well, thank you all. And thanks for joining us on our first quarter earnings call. We appreciate your interest and we look forward to speaking with you again next time. So thank you all and have a great day..

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect your lines..