Good day, and welcome to the ConnectOne Bancorp, Inc. Third Quarter 2017 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Joe Calabrese with the Financial Relations Board. Please go ahead, sir.

Thanks, David. Good morning. And welcome to today's conference call to review ConnectOne's results for the third quarter of 2017, 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 the accessibility 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 disclosed in the Company's filings with the Securities and Exchange Commission. 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 in accompanying tables of schedules, which have been filed on Form 8-K with the SEC on October 26, 2017, and may also be accessed through the Company's Web site at ir.connectonebank.com. Each listener is encouraged to review those reconciliations provided in the earnings release together with all and other information provided in release. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.

Thank you, Joe. Good morning, everyone. Welcome to our third quarter 2017 earnings call. During the call, I'll outline some of the highlights of our operating performance and Bill will take us through some of the numbers in a little bit more detail, we'll then turn the call over for any Q&A. This quarter produced very solid operating and financial results, highlighting our consistent execution against key operating objectives and continued ability to capitalize on opportunities in serving our growing client base. For the quarter, ConnectOne earned net income of $13.1 million or $0.41 per share, which on its own is impressive. However, excluding taxi, we earned $0.46 per share, up 10% sequentially from $0.42 last quarter and up 15% from the year ago quarter on an operating basis. Our operating results were very strong by any measure, with return on tangible equity surpassing 14% and return on assets of 1.25%. Importantly, our third quarter and year-to-date results reflect our continued success in executing against key objectives, which include maintaining strong organic loan and deposit growth, delivery accelerated and sustained earnings growth, improving return on equity and building and refining our infrastructure. As for the deposit growth, as we’ve talked about before, a principal focus of this Company is further developing our ability to accelerate core deposit growth. So that it is commensurate with ConnectOne’s strong loan growth. We’ve seen that this quarter with total core deposits increasing by 17.5% on an annualized basis. We’ve extended our competitive position, gaining market share and achieve strong progress in our deposit growth in part through operational excellence and our strategy of high quality client service, as well as our competitive rate structures. At ConnectOne, we set ourselves apart by making it easier for our clients to do business with us, providing the…

Thank you, Frank. So, as Frank just mentioned, we had another great quarter by all measures, reflecting the continued strength of our operating model. On an operating basis, which excludes taxi, we earned $0.46 for the quarter, up about 10% sequentially and that's a couple of penny ahead of where the Street was expecting us on an operating basis. Return on tangible common equity nearly hit our 15% objective, reaching 14.5%, and operating return on asset was 1.25%, that's among the very best in our peer group. Tangible book value per share increased another $0.36 this quarter and $0.82 for the first nine months to $12.78. That's despite all the reserves we've taken. And our efficiency ratio improved to below 40% for the first time. And although, we may be above or below that 40% threshold for the near future, the objective down the road is to remain below 40%. So, how did we accomplish this quarter? First and foremost, it was through strong organic balance sheet growth, average interest earning assets, primarily loans and deposits, both increased 5% sequentially. Meanwhile, the net interest margin was essentially flat, compression of just 1 basis point. On the positive side, regarding the NIM, our loans are being originated at rates slightly higher than they're maturing or prepay. Just couple of drivers to these rising loan yields; one is, we're continuing to get better spread today than we did earlier this year and last year when competitive pricing was very aggressive. And secondly, our focus has been on C&I where we're getting really good rates and fees above 5% total return with spreads pushing 4% or higher. Offsetting the loan yield increases, we're experiencing a good deal of rate competition with deposits. And like most banks, we've been forced recently to raise rates…

Thank you very much, Phil. Before turning the conference call over to your questions, I’d like to take a moment just to review our strategic priorities and outlook for the remainder of 2017 and into 2018. ConnectOne’s management team continues to believe the overall environment provide significant opportunity to increase size and scale in a disciplined fashion. Our continuing momentum has provided enhanced earnings, building the book value and in turn better value for our shareholders. As we said last quarter, ConnectOne strategic position provides a very strong competitive advantage to deliver on our near term priorities by expanding the reach of our organization into New York and attracting new bankers and expanding our product offerings; by focusing on strong deposit growth in the commercial market; by maintaining a disciplined approach to our loan growth; by continued focus on personalized service vacated by the largest institutions; and by banks leaving our markets due to consolidation; and by building the Company with the operational excellence that creates scarcity value in the marketplace. We're moving ahead with a very solid capital foundation, and we remain on track to achieve our objectives to further strengthen our balance sheet, grow profits and book value per share for the full year. Looking ahead, our strategy remains consistent and we're confident that ConnectOne's business model will deliver strong long term shareholder returns. I will also like to mention that the banking market continues to consolidate and potentially new tailwinds in the regulatory framework maybe at our back. While our organic growth can sustain our plans, ConnectOne is creating an organization well suited to take advantage in the M&A environment, either by combing with a well suited partner or providing a near unique platform in the market we serve. This concludes our prepared comments. We're now going to turn the call over to the operator and open it up to any questions you may have.

[Operator Instructions] And we'll take our first question from Collyn Gilbert with KBW. Please go ahead, your line is open.

Bill, just to clarify some of the comments you made, first on the expenses. So did you say that you expect expense growth to be in the high single-digits annualized for the next few quarters? Is that what you said?

Yes, that's what I said.

And then on the CRE plans, so, I know you obviously tagged the $40 million to sell in the fourth quarter. Do you have, have you bracketed a dollar amount of what you think you could sell, going forward?

Not exactly, and I don't think we’ll be in the next, or we do it every quarter, but probably a couple of times in the next year we'll do another portfolio -- group of loans similar size to what we did this quarter.

And is that the motivation of that, I mean obviously to get the concentration level lower. But beyond that, is it just internally driven by you all or is this regulatory driven, or what's made you do it?

No, it's totally internally driven. And again, it's non-relationship multi-family in this case. And so there're no deposits associated with it and our origination franchise is so strong. It's just another way for us to earn more money with -- we'll get some slight gains from signing these loans, and then have the added benefit of reducing the CRE concentration.

And then on the taxi side, interestingly that you're considering putting it back to the loan -- into the loan book -- and I know you had indicated that the performance of it is improving. But can you just talk a little bit more about that decision, or how you're thinking about that?

Collyn, I'll take a first stab at that. We're seeing lots of progress with some of the loans that we have today, either in restructuring those transactions with existing borrowers or in the case where there is a default moving that fairly easily, moving that defaulted loan to a good operator under good terms for us in generating nice cash flows for us. And so we’re seeing more and more of that happen over time. And so, the natural conclusion is these are loans we may either need to keep or want to keep in our portfolio.

And I think what I want to add, at the same time, the institutional players we’ve been talking to are really not quite ready to buy portfolios. And so combination of those two things is leading us towards looking at a higher probability of keeping the loans in portfolio.

And the intention is still to have that portfolio run down, or are you originating new loans?

No, we’re not originating new loans. And because the loans are non-accrual, all payments are applied to principal and the loans are cash flowing. We’ve talked about that before 5% or 6% on the outstanding. So we continue to pay the loans down every quarter.

And then, Frank, just you take a little bit deeper in your comment on M&A. Obviously as you indicated creating a model here that could be suited either way. If we think about targets, potential targets for you all. What would be the type of institution that you would be looking at? And do you see a change in the market in terms of potential available banks?

So, I’ll start with the last part first. I think there is a change. I think, there people -- other banks are realizing there is a great benefit, the size scale, technological efficiency. Efficiency is becoming the new buzz word in the entire industry. We’ve always believed in being a very efficient organization. I think there are other organizations out there that are having difficulties getting to the efficiencies that I believe are going to be required to generate the right capital creation over time. And so in some cases, it’ll just be easier for people to partner up and take advantage of things we’ve already implemented here as opposed to reinvesting the wheel. I think at the same time though we have to be realistic. And to the extent that we can have this organization that’s very well suited relative to geography being right smack in the middle of the New York metro market, I think we are an attractive target to someone who want to enter the space, or will be as we continue to grow.

Could we read into the rightsizing of the CRE portfolio giving you more flexibility, should you acquire another CRE heavy lender, or that’s not? Those two things are not…

I think, that’s a great comment. I think we are. So look, we stated earlier in the year that we were going to focus on our deposit gathering that we were going to focus on the diversity in our loan portfolio. We said these were business objectives. We’ve accomplished those things. And we’re continuing to work towards getting to a place where we’re more comfortable. I think, if we were to look at someone who was heavier in CRE, certainly, we’d be able to continue to work on whatever those issues were. So, I believe we have -- management has the focus to be able to parse what we think is appropriate. And I think that’s another reason we’d make a good partner for a number of people.

[Operator Instructions] We’ll take our next question from Matthew Breese with Piper Jaffray. Please go ahead, your line is open.

Just on the course of the real estate sale. What is the anticipated gain there?

Not at time, but say about 0.5% to 1% in that range.

And then thinking about the margin Bill, obviously, it held up pretty well this. But as you look behind the hood, deposit costs were up a little bit more than loan yields were. And I just wanted to get a sense for which one of those trends is going to continue more so than the other? We're growth to see a pickup in loan yield depreciation, or deposit cost increase is going to slow down. I just wanted to pick apart those two items as we think about the margin guide?

Well first off, you're looking at the interest bearing deposits. So right, we also need to look at the total cost of deposits, including non-interest bearing demand. So still seeing some pressure on rising rates, probably a little bit less now than it was a couple of months ago. And on the loan side, continued increase in the loan yields. Matt, it's really hard to predict, because there's so many factors. But there could be some contraction in the next quarter, but don't shoot me if we actually have expanding margin.

And then also behind the scenes, you mentioned you've hired some folks, which will be focused on deposit gathering. It sounds like loan growth and deposit growth will be more or less matched. Can you talk about some of the incentive structures and the folks that you did hire focused on that? And in terms of maybe the loan to deposit ratio where we should be modeling that out too?

I'll take the incentive part of the question. It's not typical at ConnectOne Bank to have pretty much anybody here on an incentive program, strictly dependant on their volume production. That's just not the way we've built the Company. So yes, people get incentives, but it generally revolves around the success of the entire organization. And that's just been how we've created our compensation schedules and plans. I don't really love mercenary tactics where people tend to run their own businesses within business. And so we want everyone rolling in the same direction. In terms of trends in loan to deposit, we were little bit below 110 this quarter, 108 or so. I'm hopeful we'll keep at 108, maybe a little bit lower. But I'd like to always see it at 110 or better.

And then last one, it's really just ticky tacky. BOLI income was up little bit this quarter. Was there a debt benefit or anything more on that item?

Yes, there was just one debt. It was one debt benefit, yes. We did purchase some more BOLI at the end of the quarter. So there’s going to be about 100,000 in income per quarter extra from the new BOLI we just purchased, and that would be recurring.

And then -- and actually on the growth side, you guys are still forecasting pretty robust growth. But as I think about some of the other commentary, especially in regard to New York City transaction volumes being down. Can you tie that into your growth commentary, and how you plan to offset such large headwinds with solid growth?

Matt, there is still -- even with the lower or slower growth rate, there's still growth going on in the New York City market. We're just able to take a portion of that growth, it's a very, very small portion and there is still very high demand for sense of urgency type of transactions. We just had the discussion last night with a group of clients that they are just -- the banks in the market are just getting bigger, and the client service levels just aren’t there like they used to be. And so a bank like ConnectOne really stands out. Our name is getting out into the marketplace. We’re becoming a known entity in that New York City market, and the Borough. And so, again, if you look at it relative to the size of the loans that we’re booking there, it’s tiny relative to the entire market. So the whole market doesn’t dictate whether or not we can increase or decrease our loan growth. We’re finding great opportunities and we continue to execute on our strategy of providing a very high level of client service, and that’s generating increased loan production.

And then Bill, last one, just the tax rate came in a hair lower than what at least that what I was thinking for the quarter. Is 30% what we should be figuring on for the next year?

Well, on the operating basis, we are at 31.5% but the taxi charges are expected at a margin rate of 40%, and so that’s what causes the rate to be lower. But even with that 4% rate, we still for the foreseeable future meaning next year, are still going to come in at 31.5% on our operating basis.

And we’ll take our next question from William Wallace with Raymond James. Please go ahead, your line is open.

Maybe just going to the CRE sales and the focus on getting that CRE concentration sub-500%. Is there a timeline in mind that you guys have that you would like to get there?

Not really. It depends how things shape out in terms of building our C&I business, as well as the sub-debt transaction when we decided to pull the trigger on that with effect of timing of the CRE concentration level.

Would a sub-debt raise and the range that you’re thinking, would it drop you below the 100% on the construction concentration?

Probably, I think we’re a little bit lower this quarter than we were last quarter already.

Should we be thinking about maybe staying below 100% or is that not necessarily something that you guys are focused on…

No one is forcing. You know what nobody is forcing us to do anything in this regard. We just think it make sense, especially with all the investor commentary around and concern about CRE concentrations to show a trend in the right direction than the lower. We think that’s important and it’ll translate into more value for our shareholders.

On the interest rate positioning of the bank, feel like historically you’ve always classified the bank as being asset-sensitive. But it seems like maybe you’re more positioned now for neutral. Is there -- how do you position your interest rate sensitivity?

Yes, it’s a good point. We were overly asset-sensitive before. And we’ve reduced that somewhat, but we still remain asset-sensitive would benefit from rising rates.

So all else equal, if we get a move in December, what impact do you think that would have to the core margin?

Just to move on the short end would have a very slight benefit, not a negative impact but a slight benefit. But of course when we're talking about interest sensitivity, it means the whole yield curve shifting up. I don't know if that's happening.

Yes, I mean it's obviously -- so assuming a shift, what kind of benefit would you anticipate?

Like a 100 basis points shift of a whole curve, 2% or so, about 2% in net interest income.

On the M&A side…

That'll be out in our Q when we understand and review the analysis, yes.

But it hasn't changed really from the last year. Is that fair?

Yes.

Frank, you have remarks in your prepared commentary on M&A. I'm curious as you think about ConnectOne as a partner of choice, what's the ideal candidate that you think would be somebody that you would be interested in acquiring? What are the characteristics?

So I think I made it pretty clear over the last year or sometime that we are still very-very much focused in this New York metropolitan market. And there're a number of names there of companies that would allow us to continue to increase our scale, would be able to take advantage of our low efficiency ratio where we think we could make a really terrific financial transaction that would increase our ability to have a bigger legal lending limit. So we can get in front of and maybe even bigger clients than we have today. So capital would be an important part of it. And of course, ideally, we'd like for someone to have a really strong deposit franchise. But with deposit gathering that we're getting today, we think we could also augment if that was not a top strength in another organization. So for me, I just think size matters in this environment. And as you look around us, there are a number of other like size or somewhat smaller organizations that I think if you put those two organizations together, you wind up with a significantly better combined entity.

And last question, Frank, you've always been pretty close to what's going on in New York City around CNC and Uber and other share ride platforms. I'm curious, can you just update us on what you're seeing, are there any changes coming out of TLC that could be beneficial to the medallions, or vice versa?

It certainly appears that the pendulum is beginning to swing in the other direction. There's a lot of negative news today about CNC for a while as it sounded like everything was going great on the CNC platform. That's no longer the case today. Certainly, there's been a tremendous amount of negativity around some of those companies, whether from internal issues or even just quality of service in the marketplace, it's not the new shiny thing anymore. The quality of the drivers has gone down dramatically the quality of the cars has gone down dramatically, and just the quality of service in general has gone down. On the other side, taxi has done a decent job of bringing a better client experience. The TLC has been very active over the last let’s call it, six months or so. And certainly, there is number of proposals on the table today that are all beneficial to taxi and taxi operators. As I predicted almost two years ago, there is a consolidation going on in the taxi industry. All the small mom and pops are basically being consolidated with the bigger operators. And I think that will continue to occur. So we’re certainly in a state of transition. But I think it’s going a little bit better than maybe what was being experienced six months or a year ago.

And there are no further questions, at this time. I’ll turn the call to management.

So I want to thank everyone for joining us on our third quarter earnings call. We appreciate your interest and look forward to speaking to you again on our next call in early 2018. Thank you.

Thank you.

This does conclude today’s program. Thank you for your participation and you may disconnect at any time.