ConnectOne Bancorp, Inc.

Good morning, and welcome to the Connect One Bancorp, Inc. second quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for 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 touchtone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. And now I'd like to turn the conference over to Sue Vancia. Please go ahead, ma'am.

Good morning, and welcome to today's conference call to review Connect One's results for the second quarter of 2023 and to update you on recent developments. On today's call will be Frank Sorrentino, Chairman and Chief Executive Officer, 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 Tarantino. Frank, please go ahead.

Thank you, Sarah, and good morning, everyone. We appreciate everyone joining us this morning for this call. As you saw in this morning's earnings release, ConnectOne's performance, while negatively impacted by it, impacted by Fed policy continues to demonstrate strong and stable qualities in this challenging operating environment. Since the beginning of the year and throughout the turmoil in March, we have maintained and even increased client deposits as we have diligently supported and deepened our client relationships along with adding new ones. Further, we continue to fortify our sources of liquidity while maximizing our matured deposits. leading to a top-tier uninsured deposit coverage ratio of about 250%. I'd like to summarize some of the key operating highlights from our quarter, and then Bill, of course, will give us some more detail later. As expected, our loan portfolio remained mostly flat for the quarter, although loan mix improved, reflecting a healthy 17% annualized growth rate in CNI. The investments we've been making in this area are beginning to move the needle on both sides of our balance sheet. Our capital levels remain strong, which, reflecting our proven philosophies and hedging strategies, have seen a minimal negative impact from AOCI. Tangible common equity increased 9.19% as of June 30th, which remains well above peer averages. And our tangible book value per share increased from the 13th consecutive quarter to 2334 as of 40% over that period. Our net interest margin decompressed sequentially by about 19 basis points, largely due to the shift from non-interest-bearing demand into interest-bearing accounts. However, both our net interest margin and EDA trends seem to stabilize at their current levels during the quarter, at least to the time being. So, of course, we'll discuss a little bit more about this in detail later. Our credit quality remained excellent. With delinquency, does the percentage of total loans remain near zero at just 0.04% of total loans? This reflects high credit standards, a well-diversified portfolio, and more importantly, our relationship-based client philosophy. In regards to our commercial real estate portfolio, as we mentioned in previous calls, we have a very minimal exposure to office, with New York City office representing less than 1% of total loans. Our aggregate office exposure is largely in northern New Jersey, which includes high-tenancy specialty services and multi-use buildings, and totals about 5% of our total portfolio. That portfolio is performing well and is all pass-rated. Taking a look now at our multifamily portfolio, historically our loans were underwritten with prudent standards, including high internally determined BFCRs and low LTVs. In addition, loan underwriting includes stress testing for interest and cap rate increases and stresses on potential net operating income. In terms of rollover risk, we have extensively reviewed our portfolio to determine the current level of risk. First off, only about $60 million of the multifamily loans will experience significant pricing during the remainder of 2023, and $190 million in the following 12 months. Of those, a large majority are financially strong, long-time clients of the bank and pose very limited risk. In some cases, we're proactively seeking credit enhancements such as additional collateral and or PGs and have largely been successful in this regard. We also have the ability, and we will utilize this in very limited cases, either rate or amortization concessions in order to maintain sound loan performance. Overall, while our loan performance pipeline remains robust, we continue to anticipate a relatively flat outlook regarding overall loan growth. Looking ahead, we're well-positioned with growth opportunities in key markets, such as Long Island and South Florida, and in deposit-rich verticals in CNI, along with healthcare and others. At the same time, we expect to see a decrease in multifamily lending, where purchase demand is obviously down and rate competition is still challenging. Moving on to our operating strategy, we focused on integrating key technology and infrastructure investments. This optimization will continue to position ConnectOne for the future while enhancing our franchise value. We're executing on several innovation initiatives focused on enhancing the client experience while digitizing workflows and expanding opportunities to support our deposit franchise and drive organic growth. For example, we recently launched our partnership with Mantle and successfully integrated the first phase of this omnichannel deposit origination platform. We're also creating opportunities across new verticals. We continue to build our franchise referral and lending platform in conjunction with Bowfly. And during the quarter, we continue to enhance its infrastructure, add new users, and increase our clients' overall workflow efficiency and drive revenue. Additionally, I'm pleased to share that our SBA lending platform continues to gain traction and is accelerating our non-interest income growth. We recorded $500,000 in gains during the second quarter and aim to improve on that in the quarters ahead. While we invest in ways our clients can access our products and services and continue to make enhancements in our systems and communication tools, we're also seizing on opportunities driven by the market disruption to attract high performing revenue producing talent to support future growth. Over the past several months, we've onboarded about a dozen client-facing team members in both new and existing markets. As ConnectOne continues to leverage opportunities to grow smartly, we continue to prove we manage expenses. This includes our ongoing focus on optimizing operations, staff count, and branch footprint, while also leveraging technology to increase human capital efficiency. Saying that, while we understand this may be a somewhat different message than you're hearing from other banks, many of whom are cost-cutting or implementing expense cuts, we believe the current environment presents particular opportunities to invest in supporting Connect One's distinct growth strategies and offer the potential for attractive returns. This philosophy is consistent with our track record of superior growth and profitability over the longer term. Regarding our outlook for the remainder of 23, Although the industry is facing headwinds, we firmly believe that Connect One's conservative, client-centric model, diversified balance sheet, solid liquidity, and track record of prudent underwriting and profitability positions us for the challenges ahead and the flexibility to continue to invest in our valuable franchise. And with that, I'll turn it over to Bill.