ConnectOne Bancorp, Inc.
Q1 2021 Earnings Call Transcript

Published: 30 Apr 2021

[Operator:]

Greetings, and welcome to the ConnectOne Bancorp Inc. First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host Siya Vansia, Chief Brand and Innovation Officer for ConnectOne. You may begin.

[Siya Vansia:]

Good morning, and welcome to today's conference call to review ConnectOne's results for the first quarter of 2021, 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 on a listen-only basis over the Internet were distributed this morning in a press release that has been covered by the financial media.

[Frank Sorrentino:]

Well, thank you, Siya, and good morning, everyone. We appreciate you joining us today. As you've seen ConnectOne had a strong quarter and continues to build momentum as we move into the post-COVID economy. The first quarter highlighted by solid financial and operating results and diligent execution, against our strategic plan is a strong indicator of the performance, we can expect through the rest of the year. Our proactive position coupled with the improving operating environment, has allowed us to take advantage of many growing market opportunities. This is the third quarter in a row that operating earnings exceeded 2% of assets, and notably that's increased sequentially each quarter. Our loan production was robust. We utilized the full range of the company's banking expertise to support our clients, who are not only financially strong, but have also realized new opportunities through this pandemic. We stand ready to support them as they expand their businesses. Same time, we saw a large increase in pay downs and payoffs. There are number of reasons for this, which we believe are short-lived or one-time events. Our strongest clients are sitting on large cash balances, due to the liquidity that's in the market resulting in pay downs on lines of credit.

[Bill Burns:]

All right, Frank. Thank you, and good morning, everyone. So as Frank alluded to the first quarter was a strong start to the year and not only did we have a very solid quarter, I believe we are also very well positioned to excel, as we continue to come out of the pandemic. And let me go through some highlights for the first quarter. Loans grew by 2.5% annualized and that was aided by the second round of PPP. We were – our loan production was very strong but a lot was – a lot that was originated was offset by elevated prepayments. We are now though seeing strong production trends and that's combined with declining prepayments thus loan growth is expected to accelerate. In terms of deposits and funding, the mix continues to improve. Our average non-interest-bearing deposits as a percent of total deposits improved to 22.5%, this quarter and that's from 21.6% in the sequential fourth quarter and up a lot from 17.8% one year ago. And we continue to drive strong growth in core interest-bearing deposits, while the higher rate CDs, higher rate wholesale borrowings and subordinated debt all declined and we still have a large amount of CDs at 2% that will be rolling down in rate or just off the balance sheet.

[Frank Sorrentino:]

Thanks Bill. And I just like to reiterate a few key points that you heard -- that you did hear me mention before. Our earnings profile is strong, our balance sheet and credit and are in a good place. We continue to grow organically and we see a strong growth rate for the rest of the year. Our capital position is strong. We have a valuable franchise and continue to benefit from multiple streams of income and increase momentum across multiple platforms. We're a skilled acquirer, with a strong track record of integrating both traditional and fintech-focused transactions, quickly and effectively. We're continuing our digital enhancements and our investments and we continue to improve on our best-in-class efficiency. So looking ahead to the remainder of the year, we're optimistic that the operating environment will continue to improve and expected to gather momentum throughout 2021. We're excited about our future and we remain confident in our ability to drive value for our shareholders, our team and our clients. And with that, I'll be happy to take your questions. Operator?

[Operator:]

And at this time, we will be conducting a question-and-answer session. And our first question is from William Wallace from Raymond James. Please proceed with your question.

[Amar Krishnamurti:]

Hey good morning guys. It's Amar from Raymond James filling in for Wally.

[Bill Burns:]

Hi, how are you?

[Amar Krishnamurti:]

Hey, good. Good morning. So just a couple of quick model cleanup questions for me. The period PPP -- the period-end PPP balance for the quarter, do you have the average PPP for the quarter?

[Bill Burns:]

Yes, I do. It was something like $430 million was the average PPP balance for the first quarter?

[Amar Krishnamurti:]

Correct yeah.

[Bill Burns:]

Yeah. It was 400 -- sorry it was $417 million for the first quarter, $405 million for the fourth quarter.

[Amar Krishnamurti:]

Perfect. Thanks. And then just a second question on PPP, do you have the loan forgiveness figure for the quarter and if any additional PPP loans that you originated, do you have that figure as well?

[Bill Burns:]

I would've known -- $185. In round two, it was $185 million.

[Amar Krishnamurti:]

For the originations?

[Bill Burns:]

For originations in round two.

[Amar Krishnamurti:]

Okay. And then, how about the forgiveness that you guys saw from round one this quarter?

[Bill Burns:]

Should have that number. About $150 million in forgiveness.

[Amar Krishnamurti:]

Okay.

[Bill Burns:]

And we are really conservative I just -- I don't -- I'm not sure exactly, what you're using those numbers for, but we have -- we are being conservative in terms of the income we're recording and I did disclose that on -- in the release. So the return on those loans is about 3.1% or 3.2% and we've got another approximately $10 million in unrecorded income related to PPP.

[Amar Krishnamurti:]

No that's great. Yeah we're just trying to back into the core margin ex the PPP and then forecast forward.

[Bill Burns:]

Right it's 3.1% 3.2% including the 1% that's contractual on and plus the fees is what's included in the margin okay?

[Amar Krishnamurti:]

Okay. That’s very helpful. Thanks for taking the question guys.

[Bill Burns:]

Sure.

[Operator:]

And our next question is from Michael Perito with KBW. Please proceed with your question.

[Michael Perito:]

Hey good morning. Thanks for taking my question.

[Bill Burns:]

Hey Michael.

[Michael Perito:]

I had a couple of questions on the fintech side first. So it was good to hear that the kind of it seems like the activity on the BoeFly platform is kind of percolating here I imagine as the economy opens up that will be a nice tailwind for that platform. I was wondering if you could just give us a quick reminder about near-term long-term, if there is success and growth there what type of impact to the financials we can see? I mean is it fair to think near term it's more fee-driven but then as the product roadmap around it expands it could impact NII more materially or? Just any additional thoughts or reminders you guys want to provide on that platform as growth seems to post-accelerate here.

[Frank Sorrentino:]

I mean I'll let Bill speak to some of the numbers there but just in general right now what we are looking at is we continue to invest in that platform to make progress in two ways. One, to further develop with their baseline businesses which is this business marketplace which we think has a lot of value in this franchise market space. And two we find that there is a number of other business opportunities that that platform allows us to engage in and we're developing those as well. So right now any revenue, we drive and even if we were to drive multiples of the revenue that comes off the BoeFly platform we would probably reinvest it right back into the platform. So I don't think you're going to see anything meaningful in the near term. Bill may want to comment on that.

[Bill Burns:]

Okay yes. Well it depends on me to fill it I mean millions would be great. We run at about on average $250,000 of revenue there per quarter and I do see already the signs of that increasing based on the activity on the platform. So it's $1 million a year. And the question is how fast a growth we're going to apply to that. There is a big universe of franchisors out there who continue to try to increase the number of franchisers and use the platform, improve the usability of the platform, reduce the friction and it's getting people to use the platform that leads to loans requests which leads to referral fees. And where one of our main focus is driving those numbers.

[Michael Perito:]

Very helpful. And then kind of a similar question but on the JAM partners fund curious I mean I imagine there's going to be some type of potential financial impact was just wondering, if you could walk through that even if it's multi-years out? And the second is so is it correct to think about this more kind of as an -- like an idea incubator for you guys to get exposure and help that fintech partners and potential platforms and is that the more meaningful near-term piece strategically or? Just any additional comments there would be great.

[Frank Sorrentino:]

I think it's all of those things. I think it's a good opportunity to invest together with what we think are some of the best investors in the marketplace. I like the idea of getting together with other like-minded financial institutions who are thinking about the ecosystem in the same way and certainly really like the idea of a fund that is fully dedicated to the banking ecosystem and not fintech opportunities that are looking to compete with banks. So I think it does a lot of what you said I think it provides us with a lot of opportunities both economically based and just strategically based for the future along with the ability to have a view into what's going on in the marketplace in real time.

[Michael Perito:]

Great, thanks Frank. And then just last one for me that -- it's good to hear about the double-digit kind of loan growth annualized expectation for the balance of the year. Just wondering if you could maybe unpack that a little bit more where are you seeing the pipeline overall record levels any particular areas of pockets within that that are noticeably strong and you expect to drive that line to your growth? Any kind of updated views on the commercial recovery of the New York City metro that are relevant to share?

[Frank Sorrentino:]

I would say our pipeline right now pretty much reflects the diversity in our balance sheet as it exists. And so each of the various teams that are working out there today are seeing opportunities. So there is no one area that, I would say is lopsided in a concentration. We're seeing great opportunities across the entire spectrum of the products and services that we provide. So that's -- and likewise across the various geographies that we currently have markets in. So we're pretty happy about that part of it. I would also tell you though that we are seeing some tremendous opportunities for talent in many of those places as well, as I mentioned in my comments before there's a lot of M&A activity going on in our marketplace which is really just lodging some good people from different places and we're taking advantage of that.

[Bill Burns:]

And to help you with your model, I just want to add -- I just wanted to add that the rate on that pipeline is from about 350 to 375.

[Michael Perito:]

And that kind of factors -- I guess just to wrap it all up here I mean that the comment about adding talent and the comment about the rate we know these were both factored into your margin and expense comments previously Bill correct?

[Frank Sorrentino:]

Mike would you repeat that again for Bill?

[Michael Perito:]

I was just saying to just kind of close the loop on that your comments about adding talent and then the rate comment on 350 to 375 I mean, it's fair to think that those were both factored into kind of your near-term expense and margin outlook commentary from your prepared remarks?

[Bill Burns:]

Yeah. Yeah, absolutely.

[Michael Perito:]

Great. Thank you guys. Really appreciate it.

[Bill Burns:]

You're welcome.

[Operator:]

And our next question is from David Bishop with Seaport Global Securities. Please proceed with your question.

[David Bishop:]

Yeah. Thank you. Good morning gentlemen.

[Bill Burns:]

Good morning, David.

[Frank Sorrentino:]

Good morning.

[David Bishop:]

Hey, sort of dovetailing or pending to Mike's question in there, Frank, you noted the opportunity to pick up talent from some of the end market consolidation obviously it's been pretty active of lately. Within that opportunity are there any sort of loan segments or niches that sort of excites you more than others, are there any sort of being a particular niches that maybe you're focus on -- focusing on over and above others?

[Frank Sorrentino:]

I think we're seeing opportunities across the board and I think in some of the places where we might want to see some faster growth let's -- in some of our C&I segments we're seeing some great opportunities, but we're also seeing some great opportunities in our CRE space, construction space. I want to say, it's pretty much across the board.

[David Bishop:]

Got it. I think you noted within the preamble within the release, loan deferrals expect a pretty material decline in those, just curious what you're seeing in terms of cash flow updates, is that -- the pay downs or improvement there, is that sort of a function of fiscal stimulus or maybe sort of a more endemic of an economy that's reopening in cash flows or improving from the borrower standpoint?

[Frank Sorrentino:]

I mean one thing we definitely have noticed a lot in our underwriting is specifically with our business clients they definitely have cash on their balance sheets, whether it came from PPP, whether it came from increased sales, whether it came from figuring out that they can operate their business with 50% of the employees they had before, there's lots of reasons why a lot of our clients are sitting on increased amounts of liquidity. And if they're sitting on liquidity and interest rates are at zero, they're not going to pay a credit line of 4%, so many of them are paying down their credit lines until business improves even more dramatically. So we're seeing a lot of that and I think that is -- again, I think that was a product of the time, I think those things are going to start to change as we continue to move forward as more businesses are open in a full capacity and as businesses start to normalize whatever that means.

[David Bishop:]

Got it. And then I guess one final question, Bill, you noted, I think it was about $800 million I think you said in CDs that are maturing or rolling off, just curious what the current pay rate is in terms of current-time deposit offerings?

[Bill Burns:]

It's about 2%. So it's either going to come down or it's going to roll off.

[David Bishop:]

And what would they -- what sort of rate would they be rolling into it the term offerings?

[Bill Burns:]

50 or less, right. 50 basis points or maybe less.

[David Bishop:]

50 or less. Got it. Thank you.

[Operator:]

Our next question is from Zachary Westerlind with Stephens Inc. Please proceed with your question.

[Zachary Westerlind:]

Good morning. It's Zach Westerlind filling in for Matt Breese. How's everyone doing?

[Bill Burns:]

Good.

[Frank Sorrentino:]

Hi, Zachary.

[Zachary Westerlind:]

So apologies, if I missed this earlier, did you guys give a guidance for 2021 loan growth ex PPP like mid single-digits, high single-digits something like that?

[Frank Sorrentino:]

I mean we are hoping to get it to double-digits from this point out from March 31 to the end of the year on an annualized basis.

[Zachary Westerlind:]

Got it. Thank you. And then I'm just kind of curious on the construction pipeline. I live in New York City, I feel like I've been just seeing a lot more construction activity generally, was just curious if you've noticed anything picking up in terms of construction permits or activity in the pipeline?

[Frank Sorrentino:]

Yeah. I think we're seeing a lot of activity in the construction pipeline. As I mentioned in my previous comments, there were two different things going on with construction that actually negatively impacted us all those -- was Liz Magennis, our President will tell you it's a positive development and that is that construction loans paid off at a higher rate in the first quarter and that was really attributable to jobs being shut down early on in the pandemic, in the first and second quarters of 2020. A number of construction projects were shut down and then the inevitable delay of restarting either those projects or new projects as we went through the balance of 2020 brought us to a place where we're here today, where we're having more payoffs than draws on new construction projects. But the pipeline for construction at ConnectOne is very strong, we are seeing it across all of our markets both in New Jersey and New York and across various types of asset classes. So I'm pretty bullish about construction right now, there is -- clearly when you talk to realtors in the market, there is just not enough homes being -- new homes being constructed, even the apartment space which many thought may have been overbuilt is still showing high levels of demand both here in New Jersey and in New York City there's actually bidding wars breaking out in parts of New York City on rental apartments, especially some of the ones that had large price declines. So I think your instincts are correct, there's more cranes, more concrete trucks, more construction workers going back into the workplace and I think this all really bodes well for both ConnectOne and in the markets in which we serve.

[Zachary Westerlind:]

Appreciate that color. That's really encouraging to hear. And then just one last question for me. Considering how well BoeFly has worked out for you guys, could you just discuss any other potential fintech acquisitions -- not specific companies, but more like tools that you'd like to have in-house or proprietary?

[Frank Sorrentino:]

I think we're really focused on a couple of different areas and we're looking at BoeFly as sort of the center of our universe. There is lots of opportunities to do things that are complementary or adjacent to what BoeFly does. And so whether it's an infrastructure company, whether it's a payments company, whether it's something to do with data, whether it has something to do with AI to be able to speed up some of our processes, we are looking at things that create both a good client experience, but also allow us to continue to build on our operational efficiency, which I know we keep saying is best-in-class and is great. But I think for an industry it's terrible it has to go lower than where it is today. So that's -- those are the two things that I think are driving us, it's either how do we improve our client experiences or how do we get even better efficiencies out of what we do with the people that we have.

[Zachary Westerlind:]

Great. Appreciate that. And thanks for taking my questions.

[Frank Sorrentino:]

You’re welcome.

[Operator:]

And our next question is from Frank Schiraldi with Piper Sandler. Please proceed with your question.

[Frank Schiraldi:]

Good morning, guys.

[Frank Sorrentino:]

Good morning, Frank.

[Bill Burns:]

Good morning, Frank.

[Frank Schiraldi:]

Just on the -- so on the untapped well, I mean you're accreting capital even with double-digit loan growth as PPP runs off, maybe you could continue to accrete capital I'm just wondering if -- your thoughts on capital level today versus the end of the year and if you would maybe consider getting more aggressive on capital return, more aggressive on the buyback special dividend that sort of thing. Any thoughts there?

[Frank Sorrentino:]

Yeah. I think I did mention that depending on growth, well, we would be adjusting our repurchase activity. And like I said, I expect us to continue to do that for the foreseeable future. And we'll see if the growth rate is a little bit higher maybe we'll do a little bit less repurchases, if the growth's a little lower we'll do more, but we certainly feel that we're a little bit overcapitalized right now. I don't know I want to say exactly what capital ratio we're targeting, but I do feel we're above where we need to be.

[Frank Schiraldi:]

Okay. And then I think you might have touched on the reserve to loan ratio as well, but in terms of -- if the economy continues to reopen, the environment continues to improve, uncertainty comes out. Where do you see that reserve to loan ratio? Are there additional releases that we could see, where do you see that migrating towards?

[Frank Sorrentino:]

Well it is -- we have less control, I don't want to use that word over what that ratio should be because of CECL. And so to a large extent, we're tied into the model and that model is tied to Moody's forecasts. So for example, the forecast that just came out in the middle of April was better than the forecast at the end of March and we use the forecast at the end of March. So right off the bat, we probably have a little bit more releases. I imagine at some point that's going to stabilize and as we grow our loan portfolio, we'll be adding reserves. So Frank, it's hard to say. And then in terms of specific credits having issues, things that we can try not just for ConnectOne, but for everyone. So not sure what other bankers are telling you, but it's hard to project and I don't think it's going to move too much from where it is in the day.

[Frank Schiraldi:]

Okay. Great. Thank you.

[Operator:]

And we have reached the end of the question-and-answer session. And I will now turn the call over to management for any closing remarks.

[Frank Sorrentino:]

Well, thank you. I thank you for all the questions. I hope you found this to be an informative earnings call and I want to thank you for joining us and I look forward to speaking to you again at our next call. Thank you.

[Operator:]

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