Please standby. Good day, everyone. And welcome to the ConnectOne Bancorp’s Fourth Quarter 2017 Year-End Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Joe Calabrese with the Financial Relations Board. Please go ahead.

Thanks, Kim. Good morning. And welcome to today’s conference call to review ConnectOne’s results for the fourth 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 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 are based upon forward-looking information, 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 items 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 January 25, 2018, 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 release. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.

Thank you, Joe, and good morning, everyone. And thanks for participating in today’s conference call. I will refer some headline results, recapping another successful year for our business and we will also provide some commentary regarding near-term operating objectives. Bill will review our financial performance in greater depth before we open the call for questions. We delivered a very strong financial and operating performance for the fourth quarter and full year 2017, and we are very pleased with the groundwork we are laying for continued success of our business. We entered 2018 well-positioned, driven by the diligent execution of key strategic objectives that we discussed on private calls. These include maintaining strong deposit and loan growth, delivering strong and sustainable earnings growth, improving return on equity, building our infrastructure, continued innovation, and of course, taking advantage of market opportunities. I am also proud to announce that ConnectOne exceeded $5 billion in total assets at year-end 2017. This is a significant milestone for the company and provides further affirmation that ConnectOne’s growth strategy and ability to capitalize on market opportunities has indeed been successful. And as our return on tangible equity rises, we are increasingly able to support our growth with internally generated capital. As you saw in today’s earnings press release, our 2017 financial results were solid. For the fourth quarter, ConnectOne earned adjusted net income of $16.3 million or $0.51 a share, while adjusted return on assets exceeded 1.3% and return on tangible equity surpassed 15% for the first time. Excluded from these performance results was the impact of Tax Reform, which resulted in an estimated fourth quarter deferred tax asset valuation adjustment of $5.6 million. Going forward we expect a lower effective tax rate will have a significant positive impact on our earnings in 2018. Solid organic growth…

Thank you, Frank. Good morning, everyone. So the strong earnings growth continues at ConnectOne, excluding the deferred tax charge that’s impacting many banks and a very small amount of taxi charges this quarter we earned $0.51, up more than 10% sequentially and 28% ahead of last year’s fourth quarter, and on that same basis return on tangible equity cleared the 50% hurdle for the first time at 15.6%. Return on assets was a very impressive 1.37%, up from 1.25% in the sequential quarter. Meanwhile, tangible book value per share increased another $0.23 this quarter to $1.05 for the year to $13.01. That’s despite the DTA charge and any taxi reserves we have taken over the course of ‘17. Our efficiency ratio remained below 40% for the second straight quarter hitting a new record of 38%. That ratio typically increases during the first quarter each year and I expect the similar trend this year. So as Frank mentioned, we recently completed the subordinated debt offering with the net proceeds to be downstream to our Bank. The capital raise will cost us about $0.04 per share in EPS this year, but in my view this is a very cost efficient way to support our growth and reduces our CRE regulatory concentration metric by about 10% from 550 range to maybe a little below 500 on a pro forma basis. And it was another quarter of strong organic balance sheet growth. For the second quarter in a row, average interest earning assets and deposits both increased about 5%, sequentially, average non-interest bearing deposits, a focus for us here to ConnectOne lagged a little, but increased about 3.5%, sequentially, that’s 14% annualized and that’s a growth rate we’re very pleased with. And despite increasing deposit costs, our margin has remained flat, with the margin…

Thanks, Bill. Before turning the conference call over to you for your questions, I’d like to conclude our prepared remarks with a review of our 2018 strategic priorities. We remain focused on achieving strong financial performance, deliver -- delivering customized banking solutions to our clients and driving momentum in our businesses by balancing our growth expenses and our investments. With a solid capital base and earning strength, we remain well-positioned to achieve those objectives by expanding the reach of our organization further into New York, 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 our personalized service vacated by the largest institutions and by banks leaving our mark -- market due to consolidation, and by building a desirable and valuable franchise in the $5 billion to $10 billion category. In summary, we’re confident that ConnectOne’s business model will continue to deliver strong long-term shareholder returns and we look forward to updating you on our progress in the quarters ahead. This concludes our prepared comments. We’re now going to turn the call over to the, Operator, and open it up to any questions that you may have.

Thank you. [Operator Instructions] Our first question today is from William Wallace from Raymond James.

Good morning, guys.

Good morning, Wally.

So on taxi, I am just curious maybe what we can read into the decision to move it back. Do we assume that there’s just no market for those or that there’s a market, but it’s just too far below what your estimate of economic value of the portfolio is?

So I think it’s two things. One, there really is no market -- trading market that’s available to sell the portfolio at this time and I think part of that is just because of the small size of our portfolio at this moment. Although, there haven’t really been any other trades in the market. The second part is that we really have had good success in moving delinquent borrowers to stronger borrowers who are making the payments and the loans are cash flowing as they were restructured.

Okay. Fair enough. So even though we see non-accruals, I guess, going from what 47 to staying about 47, I guess, you still have some borrowers that are, I guess, I am not seeing it, I guess, in the non-accrual numbers?

Well, don’t continue to remain on non-accrual, which allows us to put all payments to principal and that’s a prudent thing to do.

You can -- even if you shift from one borrower to another?

Yeah. You can’t just put it back on accrual status, because you shift to a new borrower and based on the terms of the loan, it’s a replacement borrower.

Okay. Got you. Okay.

Yeah. Thank you.

Okay. Fair enough. Okay. And then the $300,000 adjustment suggests that that’s kind of representative of what you’re seeing from the cash flows and the strengthening in the market from a cash flow perspective.

The $300,000.

Yeah. The valuation adjustment that you took in the quarter versus what was a $2 million last quarter?

Yeah. It’s just based -- it’s based on our model, which is a combination of cash flows and trades that are reported by the TLC. So there can be fluctuation in that calculation from time-to-time.

Yeah. Sure. Sure. Okay. On the accretion, you had a big jump in the fourth quarter. I assume that most of that was accelerated. Should we be thinking still around the kind of $300,000, $350,000 per quarter for the next few quarters?

Yeah. That’s about right, because it was accelerated, it took away from future accretion, but not a time.

Okay.

30,000 or 40,000 possibly…

Okay.

… a reduction going forward and I haven’t looked at the numbers exactly, but it’s not much of a change on that line, but not -- we’re not going to see that $1 million quarter again.

Okay. So, Frank, you’ve done 20% basically loan growth, the last three quarters actually kind of adjust for some of that noise. You’re sticking to the low to mid-teens loan growth, you mentioned some of the risks that you see in the market with the potential for some core margin pressures, and obviously, we -- the sub-debt is what it is. It sounds like you’re still anticipating that you can improve your returns on equity. So I am just curious does M&A play into the future of ConnectOne more so today than it did say a year ago with loan growth expectations that are somewhat tempered compared to where you had -- have been growing?

I -- Wally, I think, the best way to answer that is, we’re always looking at opportunities in the market that makes sense to us. At this moment, I don’t see our business plan dictating that we need to do something, clearly we don’t. But certainly with a stronger currency, a stronger operating company, all the things that I think make ConnectOne somewhat unique. I think we can play in the marketplace and further improve what we’re doing today. But I don’t feel any pressure to do anything.

Has your desire to have conversations, has it, I mean, has it stayed the same it’s always been or have you been maybe a little bit more active in communicating and meeting with and trying to build relationships with other potential partners?

Yeah. I mean, I think, on both sides of the equation, I think, we continue to have conversations as, I think, I should, but as you know, as we sit here today, we have not found the right combination yet.

Sure. Okay. That’s all I had, guys. I appreciate pretty straightforward quarter and look forward to seeing 2018 unfold. Thanks, guys.

Thank you, Wally.

Thank you, Wally. Yeah.

And moving on our next question is from Matthew Breese from Piper Jaffray.

Good morning, guys.

Good morning, Matt.

Just on the hiring front, I know you mentioned, there are some new ads in Long Island, in Melville. Just curious if you’re seeing any fallout from disruption tied to M&A in that market? And then as a follow-up, you also mentioned build out in New York and New Jersey. Just curious in terms of geography, where you’re most focused on there?

If you don’t mind, Matt, I’ll take that in revise order. So we’ve always stated that ConnectOne is a New York, New Jersey -- New York Metro market bank. And so we continue to believe that that’s the market that we will serve. I am not saying, we’ll never be outside that for the time being though, that is our market and so we look for opportunities within that market. As you know we’re pretty heavily concentrated in New Jersey or have been in the past in New Jersey, and we are looking to expansion across the Hudson River. We entered into New York City two years ago. We opened the Melville office or will be opening it this quarter and we are looking for additional opportunities there. As far as where those opportunities come from, we always like to lead with bankers, it’s not necessarily geography and certainly the disruption that’s going on in the marketplace either from the M&A or in some cases just larger banks not being able to service their clients appropriately, we are finding a tremendous amount of opportunity. I think there’s actually more opportunity in the market than we can actually execute on and so we see that as a pipeline going forward for us as far as I can say.

Okay. Great. And then on the construction front, obviously balances were up quite a bit quarter-over-quarter. Just curious what kinds of projects are been underwritten and are there any consistent themes on the types of things you’re doing there?

Our portfolio hasn’t changed that much, Matt, over time. We continue to underwrite owner-occupied type real estate, small residential for-sale projects, relatively small, multifamily projects and a mix of all of those things. The balances do change, as I mentioned in the report from quarter-to-quarter. The rise this quarter, a lot of it was due to construction draws and but overall, the portfolio runs in about that $400 million to $500 million range. We could see a little bit of growth there. We are well known in the market for how we deliver the product and we’ve had a lot of builders that we’ve done a good job for over the years continue to come back to us. The for-sale market even with the [ph] Salt Packs (24:17) discussion is still pretty robust in the markets we serve and we believe we’ll continue to be a strong player in that market.

Okay. And then, one last one from me just on the expense front looking for a little bit of an outlook for 2018, given the move, especially with the move from taxi from held-for-sale to held-for-investment. Just want to get a sense for where that year-over-year increase in expense could be?

Well, I mean excluding the any valuation allowance I would project about 10% increase in OpEx.

Okay. That’s great. That’s all I had. Thank you.

Great, Matt.

Our next question today is from Collyn Gilbert from KBW.

Thanks. Good morning, guys.

Hi.

Hi, Collyn.

Bill, so just quick for you first, on the securities growth that you laid out. I presume that’s within that that’s incorporated in your NIM guidance, right, like just the lower…

Yeah.

… the lower related yields to that, okay?

Yeah.

And then also to what -- you had indicated in opening remarks that loan growth, law of numbers all sorts of things might be a little bit lower. Can you talk about what the loan, kind of the new loan pricing is that you’re seeing and where maybe you’re seeing stresses from a competitive standpoint that’s causing you to sort of step away on some credits?

With…

Yeah.

… multifamily has gotten tighter over the last six months and to a point where not that we’re out of the business, but we’re probably going to do a little bit less.

Okay.

But I would say in every category we’re actually seeing…

Yeah.

… the ability to expand spreads.

Because you are seeing good movement in your loan yields, so just -- and I presume that means loan origination…

Yeah.

… yields are obviously higher than portfolio yields. So just I was trying to get a little bit more color as to some of the, yeah, the trends there?

Right. And I mentioned it was because of a change in mix, and of course, that change in mix is a change in spreads, so right the…

Yeah.

C&I spreads are much higher than the multifamily spreads with other types of loans into somewhere between.

Okay. Okay. All right. That’s helpful. And Bill, you may have covered this on the first question, I apologize. But for the evaluation allowance of that 3.43% that you guys are using.

Yeah.

A lot of that, it’s a combination, I guess, I mean, the question maybe people ask is look at transfer value then we go through every time and I really can’t wait for us to have stopped this conversation. But the -- so the transfer rates, but it’s as much as the point that you’re getting that 4% to 5% on those cash flows, I presume that’s allowing you to feel comfortable with that per medallion evaluation level?

Well, it’s part of the analysis, because it gives us an idea of where the cash flows are, but it’s not the only component of the analysis.

Okay. Okay. Okay. That’s helpful. And then, Frank, just to your initial comments, you talked about newer markets in New York City that you’re looking to expand into, I mean, are there and I know you had said, you guys are led more by the bankers and the lenders than you are by geographies. But is there -- is there an opportunity that you see in any of the boroughs or anything that’s going on that makes you feel more encouraged in kind of a specific submarket, where you maybe would set up an LPO?

Yeah. Sure, Collyn. We -- and typically we don’t set up an LPO, we do a full service office. Not necessarily a retail branch. As you know they’re generally more full service office type operations. But there’s lots of opportunity in every one of those markets, in every one of the other boroughs, there’s very little competition left from the smallest players. Bankers are available because of mergers acquisitions and also, I said law of large numbers, well that applies to some of the competition that we’ve had in the past that have now gotten so big that they maybe crossing over the $50 billion mark or touching the $50 billion mark and so can’t increase their loan volumes or don’t want to or have regulatory pressure not to. And so, we have the field pretty much wide open to us and when you look at the other four boroughs we’re not in, I mean, those are just incredibly deep markets, and if we just get a small sliver of any one of them, it’s meaningful to ConnectOne Bank.

Okay. Okay. That’s helpful. And then, just a final question, Bill, obviously, the cost of the sub-debt is going to raise the interest expense. But aside from that, what are you kind of anticipating even in a broader sense for what deposit pricing will look like in 2018?

Yeah. Well, I am being conservative here, and Collyn, some margin compressions solely based on the pricing pressures we’re seeing on the deposit side.

Okay.

But I did say that it could write -- it could, depending on our ability to raise demand deposits, depending on our loan…

Right.

… mix and loan spreads, it could be different than that. But I think that’s a fair estimate.

Okay. Okay. That’s it. I’ll leave you there. Thanks, guys.

Thank you, Collyn.

And that concludes today’s question-and-answer session. At this time, I’ll turn the conference back to management for any additional or closing remarks.

Thank you all for joining us on this fourth quarter conference earnings call. We appreciate your interest and look forward to speaking with you again on our next call this spring.

And that does conclude our conference today. Thank you for your participation. You may now disconnect.