ConnectOne Bancorp, Inc.

Good morning and welcome to the Connect One Bancorp, Inc. first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Sia Van Sia, Chief Brand and Innovation Officer. Please go ahead.

Good morning and welcome to today's conference call to review ConnectLens results for the first quarter of 2023 and to update you on recent developments. On today's conference call will be Frank Sorrentino, Chairman and Chief Executive Officer, and Bill Burns, Senior Executive Vice President and Chief Financial Officer. Also with us is Elizabeth McGinnis, President of Connect One Bank and Steve Premiano, EVP and Treasurer. I'd also like to caution you that we may make forward-looking statements during today's conference calls that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings. The forward-looking statements included in this 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 today on Form 8K with the SEC and may also be accessed through the company's website. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.

Thank you, Sia, and good morning, everyone. We appreciate you joining our earnings call today. Let's get started and kick it off with what you've seen in our earnings release this morning. We're in a strong and solid position today, reflecting continued success in growing our deposits and enhancing our liquidity base with over 250% coverage of uninsured, uncollateralized deposits. I began last earnings call by reiterating Connect One's commitment to serving our clients, despite the cyclical ups and downs of the economy. and never before has our focus on client relationship banking been so important. While the industry was surprised by the specific events of mid-March, we at Connect One anticipated the repercussions of quantitative tightening, and our team began to take intentional actions as early as the fourth quarter of last year. Those efforts have positioned us well with a relationship-driven deposit base, increased total available liquidity, a diversified loan portfolio of quality assets and sponsors, solid credit metrics, and a strong overall balance sheet and capital position. Looking back a few weeks to March, I'm proud of the way our team responded with a sense of urgency, proactively reaching out to our clients to provide them with peace of mind solutions while diligently enhancing our liquidity position and securing our deposit base even further. In fact, for the fifth quarter in a row, we've now realized net deposits That success is a credit to a few things. First, a relentless continuation of our ongoing efforts towards onboarding new client relationships and expanding into deposit-rich verticals, while many others have allowed their deposits to leave their balance sheets. Second, part of our focus of our business development team continues in non-CRE-type verticals. in order to further diversify our loan portfolio and provide additional sources of deposit growth. In this regard, our CNI division has grown at a consistent pace over the past decade, and our expertise has continued to evolve over that time, notably in the private school, healthcare, and franchise segments, providing deeper and attractive market opportunities for our team. Third, our investments in technology, such as our partnership with Mantle, play a key role in accelerating these efforts. We have now deployed the first phase of this omnichannel deposit origination platform, which has already led to seamlessly onboarding of new client relationships. Now for some color on the significant improvement in our uninsured deposit percentage. An operating advantage for Connect One was our existing knowledge and use of the Intrify reciprocal deposit product, facilitating immediate availability to our existing client base and new clients. Connect One is one of the longest and most established banks in the Intrify network, having utilized the product for over a decade, predominantly to meet the needs of some of our more sophisticated client fiduciaries, such as in the private school business segment. Through the efforts of our team, our uninsured and uncollateralized deposits improved to just 20% of total deposits. Shifting to our margin, On our last earnings call, we laid out our strategic rationale for being more aggressive toward maintaining our client relationships despite deposit rate competition resulting in increasing our unique client count and total deposits. That said, we experienced and expected what I believe is temporary net interest margin compression during the quarter. That's the near-term cost of successfully achieving our goal of preserving and building our banking relationships. That should not obscure the fact that the underlying fundamentals and returns of our business remain solid. Bill will talk a little bit more about the net interest margin and its impact on our reported results for the quarter and the outlook in detail in a little bit. In regards to our commercial real estate office portfolio, first off, office represents today a very small amount of our portfolio. Our total office exposure is approximately 5% of total loans, but a majority of that is represented by specialty services such as medical, or other service-oriented businesses or multi-use buildings where tenancy is very high and leases are very secure. New York City is even lower at less than 1% of total loans. And in addition, loans in this segment were underwritten with LTVs that average below 50% and are to strong borrowers with 80% of them personally guaranteed. A recent review of this portfolio indicates vacancy rates are near zero and the stressed renewal rollover risk is low. Turning to our multifamily portfolio, as I mentioned before, our focus is predominantly on purchase money loans to large generational owners and skilled operators based in more suburban and commuter-oriented areas. Additionally, our multifamily portfolio in Manhattan is less than 2.5 percent of total loans and 5.8 percent in the other four boroughs. Back to the focus on purchase money mortgages, This ensures significant equity in these projects and underwriting that includes stressed DSCRs and minimum cap rates with tremendous upside from better management. We're always happy to see our clients create significant value and refinance us out to one of the life companies or Freddie or Fannie or some other institution. And as a result of these prudent lending standards, including minimum realistic cap rates, When we stressed the portfolio for renewal pricing, the potential for significant increase in impaired loans was very limited. Our stress testing considered increases in debt servicing, changes in property NOI, and amortization of principal since origination. Multifamily loans repricing or renewing in 2023 total only 6% of the multifamily portfolio, with only another 15% through the end of 2025. Overall, ConnectOne's credit performance remained solid during the first quarter. Delinquencies and non-accruals remain low, and as they are identified, we're proactively managing through those credits. So looking ahead, we'll maintain reserve levels commensurate with our growth and aligned with the changing macroeconomic forecast. With that, we expect our loan portfolio to remain essentially flat this year, with originations mostly offset by amortization, maturities, and paydowns. In addition, we could see a slight change in composition away from some CRE, including multifamily, and towards C&I and construction, where we remain very opportunistic. Given the strength of our earnings and capital position, we have a great deal of financial flexibility and confidence in our trajectory forward. To that end, earlier today, we announced a 9.7 percent increase to our quarterly dividend to 17 cents per share, which is consistent with dividend increases over the past few years. our payout ratio remains at a conservative level below 30 percent. In summary, we remain focused on serving our clients, supporting our staff, creating long-term value to our shareholders, and improving and building upon a distinctive operating platform. Further, while maintaining our longstanding financial discipline, we're well positioned to take advantage of possibly once-in-a-generation market opportunities that could produce strong returns for our shareholders and be very beneficial to our franchise. And with all that, I'll now turn it over to Bill.