Earnings Call Transcript - CNOB Q4 2021

Operator, Operator

Greetings and welcome to ConnectOne Bancorp, Inc. Fourth Quarter 2021 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Siya Vansia, Vice President of Marketing, ConnectOne Bank. Thank you. Please go ahead.

Siya Vansia, Vice President of Marketing

Good morning, and welcome to today's conference call to review ConnectOne results for the fourth 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 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. 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 discussed 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 and accompanying tables or schedules which have been filed today on Form 8-K with the SEC 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 the release. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.

Frank Sorrentino, Chairman and CEO

Thank you, Siya, and good morning everyone. We appreciate you joining us today. We're very pleased to report another strong quarter, capping off what was truly an exceptional year for ConnectOne. I'm extremely proud of our entire team's efforts to help achieve these results. Highlights for this quarter include some of the best metrics evidenced by our strong return on assets and our strong return on tangible common equity. This resulted in our pre-provision net revenue metric exceeding 2% for the sixth quarter in a row, and over 20% organic loan growth on an annualized basis, all while we improved our sub 40% best-in-class efficiency ratio. 2021 reaffirmed our operating philosophy that our focus on organically driven growth and efficiency through investment in technology, coupled with a strong client-centric culture, leads to greater financial strength and ultimately, the creation of shareholder value. As many of you are aware, stock price performance for the entire banking sector was strong over the course of 2021 with the BKX Index rising by about 35%, while ConnectOne's stock price increased by over 60%. We saw our market capitalization increase from about $800 million at the start of 2021 to approximately $1.4 billion today. Additionally, tangible book value per share increased 3.5% for the quarter and by more than 15% for the year, yet we're still trading at a discount to our peers, and we firmly believe we're still undervalued. We entered 2022 uniquely positioned to continue to deliver long-term sustainable growth and industry-leading returns. Our existing markets are growing and we expect to further capitalize on opportunities to expand our valuable franchise. Additionally, the expansion of our team is paying dividends while gaining momentum, translating into meaningful organic growth. Looking ahead, our current pipeline remains robust across all business lines. The outlook for the economy remains relatively strong, and client confidence seems to remain high. We continue to strengthen our position in the New York metro market while also successfully expanding into new markets that are a natural progression for us, such as Eastern Long Island and Southeast Florida. Further, we have a solid team of bankers with a proven ability to execute, and we continue to be a first choice for top talent in the industry seeking a dynamic, growth-focused organization. Additionally, our investments in technology continue to produce opportunities to deepen existing relationships and expand the potential of this platform. Lastly, we've built a strong technological foundation and are well-positioned to take advantage of the competitive FinTech environment. Expect to hear more about this as the year progresses. However, notwithstanding all this, we certainly see several headwinds forming, which may slow some of the extraordinary growth rates we experienced in 2021. As we move through the New Year, we expect competition to heat up, and the Fed's anticipated tightening could slow overall economic growth. But just to repeat, we're still experiencing strong growth in 2022, but it will likely be somewhat subdued from what we experienced in the latter half of 2021 and probably land somewhere in the low double-digits on the deposit side. Our focus has always been on core non-interest bearing demand, and in that regard, we expect those balances to keep pace with our loan growth. ConnectOne has a longstanding and proven track record of prudent and profitable growth supported by our people-first philosophy and a stellar reputation among our business lines. Additionally, the continued disruption caused by M&A is providing us even more opportunities to gain new clients and higher experienced bankers from revenue generators to tech talent. Speaking of M&A, while our last transaction was completed in January of 2020, we expect that strategic acquisitions will continue to be a part of our long-term growth plans. We, of course, are maintaining our disciplined approach when evaluating potential partners and providing a number of synergies with ConnectOne to strengthen our franchise. So now let me turn to our capital base. We currently stand with capital levels and earnings strength to support our projected growth, and we also plan to be opportunistic with regard to share repurchases, being mindful of market conditions and actual growth in our balance sheet. Further, as you may know, our board increased ConnectOne’s cash dividend twice during 2021 for a combined total of 44% in dividend increases during the year. Our board will continue to evaluate future dividend increases during 2022 and beyond. I want to reiterate that we're building on the solid momentum we've achieved and will continue to take an opportunistic approach to our growth, including continued strategic investments in technology and talent acquisition. As a result, expense growth is expected to accelerate at a pace that's faster than we have seen historically. Bill will provide a few more details on these projections in a minute. However, we continue to generate favorable operating leverage which ultimately empowers us to continue to invest in ConnectOne while maintaining superior financial returns. In summary, I'm pleased to report that the company experienced a very successful year, both financially and operationally, and we believe ConnectOne is poised to deliver on its long-term objectives. I'll now turn the call over to Bill to provide some more details on this quarter's financial performance. Bill.

Bill Burns, Executive Vice President and CFO

Thank you, Frank. Good morning everyone. So as Frank mentioned, we are very pleased to report another great quarter and year with financial metrics that place us among the highest performing banks in the country. Of particular note, our pre-provision net revenue as a percentage of assets increased for the seventh consecutive quarter to 2.28%, and the net interest margin widened for the eighth consecutive quarter to 3.75%. In another metric, that is very important to many of our investors and to us as well, and that's the upward trajectory of tangible book value per share. We surpassed $20 per share at year-end, selecting a 15% increase over the past year, and that comes on top of a 10% increase for each of the prior two years. That type of book growth comes from strong earnings that are primarily organically driven, combined with financially disciplined M&A. As Frank alluded to, our stock price performance in 2021 was exceptional, but we still traded at a discount to our peers on a fee basis. And so that, plus the fact we probably should be trading at a premium based on performance metrics and our growth, leads me to believe there is significant room to further outperform. Our loan portfolio, excluding the non-performing loans, continues to grow at a double-digit pace while credit quality remains sound. Our deferred loans under the Cares Act are now down to almost zero. Our charge-offs this quarter were next to nothing, and non-accruals declined during the most recent quarter. Even with strong balance sheet growth, our capital ratios continue to increase. The tangible common equity ratio on a consolidated basis surpassed 10% at year-end. That puts us in a great position to do all or a combination of the following: grow organically at double-digits, repurchase stock, increase dividends, and have the flexibility to utilize cash in an acquisition. Let me dive a little deeper into our financial results versus the net interest margin. As we mentioned earlier, our margin has continued to expand while the industry is mostly contracted. In fact, the NIM here at ConnectOne on a GAAP basis has expanded for eight consecutive quarters. That's been a result of several structural factors related to our earnings and interest-earning assets and loan portfolio. For us, we just have a low percentage of immediately repricing loans and a high percentage of floating rate loans in place. We also have significantly less exposure than most banks to prepaying mortgage interest. On top of that, since the beginning of the pandemic, we were very aggressive on repricing our deposits. Now, as rates rise, there will be several factors in play when determining our margin going forward. First, on the positive side, we're going to benefit from utilizing excess cash. We don't have as much as some banks, but we have a good $100 million or so that we can put to work. Second, during the latter half of last year, we locked in excess of $500 million of fixed funding rates. Additionally, our core non-interest bearing relationship balances have been increasing significantly. Over the past year, that number is up more than 20% commensurate with the loan growth, and that source of funds will help drive net interest income in a higher rate environment. However, there are also several factors working against the margin. First, there's a reduction in market liquidity that’s coming, which will lead to deposit pricing competition. Additionally, we have pricing competition on loan originations that is already taking place and compressing spreads on new business today. There's also been prepayment activity and fees, which have been significant in 2021 but are expected to decline in a rising rate environment. At the end of the day, we've been operating at the widest net interest margin in our history, and I expect some margin compression in 2022. Next, I want to talk about the progress we've made on non-interest income initiatives. The core non-interest income is up 10% year-over-year. Our newly formed SBA team is generating meaningful success in originating and selling SBA loans. We continue to invest in bolstering resources there. Also, our CRE origination for-sale platform continues to accelerate and expand its reach, which is a natural progression for us given our ability to generate strong credits with favorable terms in markets where others may lack our origination power. With regard to technology, we continue to invest in that platform, as well as marketing and product development. The number of franchisers using our proprietary products is accelerating, and the pipeline for fee generation is increasing. You may also be aware that we do not rely significantly on overdraft fees, so fees at risk are relatively low at ConnectOne. With all that said, I conservatively predict approximately a 15% increase in non-interest income in 2022. Let me turn to Ops. OpEx for the fourth quarter was about flat from the sequential third quarter, as I expected. But now going into 2022, we will see an increase in expenses, especially in the compensation line. This is due in part to wage inflation, which impacts not just our existing staff, but also new hires. As Frank was alluding to, we are expanding organically into new markets, capitalizing on disruption caused by M&A, which has been driving revenue-generating talent to ConnectOne. Additionally, you should expect increased technology expenses here, including enhancements to our bank infrastructure, build-out of our product offerings, and continued investments in our digital platform. Together, these items are driving expense growth, which I estimate to be approximately 3% to 5% in the first quarter over the sequential fourth quarter. I estimate that expenses will continue to increase over the remainder of 2022 but at a slower sequential pace than I just mentioned. Turning to credit quality, we have had positive trends, which speaks highly to the strength of the portfolio, and our team has responded well during the pandemic. We are seeing a reduction in non-accruals attributable to solid underwriting and our proactive workout strategy. Delinquencies continue to remain extremely low, and deferred loans I mentioned before are down to next to nothing — we have one loan left. Regarding credit loss, I said this before and it's still true: it's just a complex and difficult thing to project over any reasonable horizon, especially in a volatile economic period like the one we are in today. For the quarter, we provided a small addition to our ACL primarily due to significant core loan growth offsetting the increase in the provision due to growth. The releases represented our seasonal model reflecting improved economic forecasts as well as qualitative factors related to the reduction in deferred loans, lower levels of delinquencies, and improvements in our overall portfolio. Going forward, I think it's fair to project provisioning commensurate with portfolio growth, although everyone is in the same boat regarding economic forecasts, which are uncertain. I also want to mention our tax expense line; our effective tax rate jumped a little to 27% for the quarter, reflecting a significant increase in taxable income. Going forward, we will have more room to invest in tax-advantaged investments, but my expectation is that our effective tax rate will increase for the full year of 2021. The annual effective tax rate was 25.5%. So the forecast for the increase is based upon more growth and our expanding geography, which can reduce the benefit of some of our tax strategies. That's the end of my remarks, and I will now turn it back over to Frank for concluding remarks.

Frank Sorrentino, Chairman and CEO

Thank you, Bill. As you just heard, ConnectOne delivered a record financial performance during 2021 and we had great success in creating positive operating leverage, which drove a sub 40% efficiency for the year. We achieved this efficiency not by being cost-cutters, but rather the direct opposite. We are continuing to make all the necessary investments in ConnectOne. As we move into 2022, I’d like to reiterate a few points. We're projecting strong, organically driven growth. We are continuing our digital enhancements and investments on both the ConnectOne and BoeFly platforms. Our margins and efficiencies are expected to remain among the best in the industry, our balance sheet and credit are in good shape, and we continue to pursue attractive opportunities to further maximize long-term shareholder value. We're excited about our future and look forward to updating you in the quarters ahead. And with that, we're happy to take your questions, operator.

Operator, Operator

Thank you. At this time, we will be conducting the question-and-answer session. One moment, please while we poll for questions. The first question comes from Frank Schiraldi with Piper Sandler. Please go ahead.

Frank Schiraldi, Analyst

Morning.

Frank Sorrentino, Chairman and CEO

Morning.

Bill Burns, Executive Vice President and CFO

Morning Frank.

Frank Schiraldi, Analyst

First, on the outlook for the margin. Any sort of guidance or color you can give, Bill, on your thoughts of what a 25 basis point rate hike would do to NIM here? And sort of what sort of deposit betas you're thinking about right out of the gate.

Frank Sorrentino, Chairman and CEO

I don't think it's going to have a major impact on our margin for the reasons that I just spoke to—there are a lot of moving parts. At the end of the day, it doesn't have a significant impact that alone.

Frank Schiraldi, Analyst

Okay. So more neutral.

Frank Sorrentino, Chairman and CEO

I would say it's a neutral rate.

Frank Schiraldi, Analyst

And then just in terms of growth, the growth outlook is a lot better, I think than you noted last quarter in terms of 2022. I think you talked about maybe 10% growth. Now, are you talking about double digits? So just wondering in terms of geography, if the— I know you have a small amount of footing in Florida. Is that additive to that growth rate or is that going to grow faster than the overall bank or about the same, do you think?

Frank Sorrentino, Chairman and CEO

Well, I think there are a lot of different things we're doing here at ConnectOne that may have higher growth rates than the overall growth in the balance sheet. So some of the—obviously just a rule of small numbers, you know, but small footings in certain places may have higher growth rates. But I think somewhere around the 10% to low double-digits is within the realm of what we're thinking as we sit here today. There are lots of things that could impact that going forward, but we have more lines of business, more in the way of geography, and more opportunities to hire revenue-generating individuals than maybe we've ever had before. So I think pegging it down at the low double-digits is probably the right place for us to be thinking about.

Frank Schiraldi, Analyst

Got you. Okay. I appreciate the call. Thank you.

Frank Sorrentino, Chairman and CEO

You're welcome. Thanks Frank.

Operator, Operator

The next question comes from David Bishop with Seaport Research Partners. Please go ahead.

David Bishop, Analyst

Yes. Good morning, Frank and Bill as well.

Frank Sorrentino, Chairman and CEO

Good morning.

David Bishop, Analyst

Hey, Frank, just curious, sort of circling back to that you mentioned the opportunity to higher revenue producers on the impact of the expenses. But just curious in terms of the types of bankers you might be targeting. Are these more in C&I or CRA focused, and just curious how many maybe individuals will be added this year or maybe what the budget could be for this year?

Frank Sorrentino, Chairman and CEO

It's hard to say who is going to pick up the phone calls tomorrow, but we are seeing inquiries from various types of individuals as well as entire teams, both in the C&I and commercial real estate and in other specialty type markets. So really hard for me to predict who those are going to be. I would venture to say and I would believe based on where we are, the banks that they’re calling from, that they’ll probably be some mix of C&I and commercial real estate. We are targeting other potential verticals as well. We’re building out our expertise relative to our BoeFly platform and some of the franchise lending there. We have a healthcare group that’s been building, and we have our SBA team that we’ve been building as well. Certainly, those things rise to the top of the pile. As far as numbers go, I think I made an advertisement in our last call — if you're interested, please call us. I'll make it again. Sort of no cap on what we'd be willing to look at relative to the number of people that we'll be willing to hire in 2022. We'll pick those opportunities as they come, because some of them are just great opportunities, they're almost once-in-a-lifetime opportunities. But I think in 2021 we hired probably about a dozen — dozen and a half individuals over the course of 2021. I think we're going to see similar growth in 2022.

David Bishop, Analyst

Got it. And Frank, you mentioned just one potential use of excess capital M&A — would your preference be in terms of the target bank? Would it be something—will it be core deposit-driven? Something that augments your fee income generation? Is there sort of a top-line characteristic you're looking for in terms of a potential acquisition target?

Frank Sorrentino, Chairman and CEO

I think you've made a list of all the reasons why we even entertain an M&A transaction. I would say yes to all of them. We don't generally get to pick exactly what it is that's going to present itself as an opportunity. But there are so many different reasons why, and I think even if you look at some of the transactions we've done in the past, whether it was bringing on another line of business, expanding a geography, or increasing other sources of income, or moving more in the technology world — each acquisition brings its own unique strengths to the transaction. I think we've developed a reputation here at ConnectOne of being quite opportunistic. When we see opportunities that fit within a particular disciplined financial model and provide some expansion of our existing franchise—whether that expansion is human capital, geographic, or whatever—we will take advantage of that when we think all those things line up the right way. All that being said, some of our best performance has come from straight-out organic growth, and the vast majority of our growth has been organic. We continue to develop resources to attract that organic growth, but coupled with that organic growth, and with the concept that we continue to grow capital, I do believe that selected M&A and disciplined M&A can play a really valuable role in our future growth plans.

David Bishop, Analyst

Got it. Maybe a question for Bill, I think you mentioned in terms of the name competitive pressure on the loan front. Just curious what you're seeing in terms of loan spreads currently versus maybe last quarter? Which way?

Frank Sorrentino, Chairman and CEO

Yes. My most recent reading is that spreads were coming in 35 to 50 basis points, which is a lot.

David Bishop, Analyst

Got it. Thanks.

Operator, Operator

Thank you. Next question comes from Matthew Breese with Stephens Inc. Please go ahead.

Matthew Breese, Analyst

Good morning.

Bill Burns, Executive Vice President and CFO

Hey, Matt.

Frank Sorrentino, Chairman and CEO

Morning, Matt.

Matthew Breese, Analyst

Hey, Bill. Going back to the NIM — you mentioned in the prepared remarks that you expect some pressure from here. Along these lines, one of the things I struggle with is the sustainability of the overall core loan yield, which still comes in a little bit north of 450. So can you discuss where new loan yields, not the spreads, are actually coming on? What portfolios come above 450 and what the blended new rate is relative to that?

Frank Sorrentino, Chairman and CEO

It depends on the portfolio. Obviously, construction lending C&I as well, over 4%, as we get into owner-occupied, non-owner-occupied commercial real estate, it’s a little bit lower, and then multi-family is the lowest of those. The overall spread is, I think the overall loan origination rate is about 25 or 30 basis points below where we are—it's about that—maybe 35 or 40 basis points lower than we are today for new loans. But our cost of funds continues to go down. The other aspect to it is the growth when you look at the margin, is growth in non-interest bearing demand. When I put all those things together, and none of those assumptions that I made or projections are certain, I come out that I expect some margin compression. Not—and again, we talked about before—we are at the highest level we've ever been at a 3.75%. So even if for margin compressed by 10 or even 20 basis points, we're still in really good shape in terms of driving return on equity.

Matthew Breese, Analyst

Okay. Just considering the absolute level of loan yields, it still strikes me as quite a bit higher than a lot of your peers. Why is that? Does it come down to the relationship-driven model, or is it the structure of the loans? Maybe give me a little more insight there.

Frank Sorrentino, Chairman and CEO

I think part of it is the relationship aspect where we're getting something more than the market—an eighth to a quarter higher than that. We also have less residential mortgages than most, and those tend to be lower yielding. So when you put it all together, I don't think we are that far off market; we're not out there. It's not an indication that there are riskier assets. It's just that the proof is in the performance of our portfolio. We're very careful in how we lend, and we don't chase yield down. We can say no if we don't want to compete at a given rate.

Matthew Breese, Analyst

Got it. Okay. And then last one. I think all things credit quality related are on very solid ground at this point. Kind of the lone remaining asset class I get questions on is office, particularly New York City office, and I'm just curious to your thoughts on the health of that segment over time, and do you see any incremental anecdotes that give you a feeling, one way or another, whether or not there's real valuation impacts to be had there?

Frank Sorrentino, Chairman and CEO

I would tell you that, first off, we don't have a lot of offices in our portfolio, but that being said, the New York office market is actually pretty strong. It's hard to find office space; everybody thinks everyone is just leaving the keys on the desk and working out of their offices. That's not what's happening. The offices may look partially vacant today because of all the COVID issues, but that's very rapidly changing. I go by my traffic index at how many minutes it takes me to get from the city to Englewood Cliffs, and that’s continuing to increase. Traffic is going up, and there are more and more people in the city. Subways are filling up. There are still large firms executing large leases in Manhattan. I think that trend is only going to continue to rise. There's actually some conversation about a shortage of office space in the city that we can see going into the future. So I wouldn't be overly concerned. Properties are trading at pretty good valuations going forward, so it doesn't give me a lot of concern, even though it's an incredibly small part of our portfolio.

Matthew Breese, Analyst

Great. Well, I appreciate taking my questions. That's all I had. Thank you.

Operator, Operator

Thank you. The next question comes from William Wallace with Raymond James. Please go ahead.

William Wallace, Analyst

Putting it all together with the—morning.

Frank Sorrentino, Chairman and CEO

Morning.

William Wallace, Analyst

With the expense pressures that you are talking about and then the potential for margin pressures, I'm just curious. What do you think efficiency can do in the year with the loan growth?

Frank Sorrentino, Chairman and CEO

In terms of the efficiency ratio?

William Wallace, Analyst

Yes. Yeah. You can.

Frank Sorrentino, Chairman and CEO

I think it will trend up a little bit, but not too much—maybe a few percentage points, and maybe we could reach 40%. But as we get bigger, I think in the long run, we'll be able to drive efficiencies down even further as we increase our size. But for this year, given the wage inflation and the margin pressures, you could see some pressure on the efficiency ratio.

William Wallace, Analyst

Okay. Thank you. That's helpful. And then my last question, Frank, you kind of teased us a little bit in your prepared remarks. I believe you said something along the lines of the potential opportunities that the BoeFly technological platform might provide—and to stay tuned. I'm wondering if you might give us a little bit of a handset or just like what kind of opportunities might a platform like that provide other than expanded verticals or something.

Frank Sorrentino, Chairman and CEO

Well, the platform itself today, from when we bought it, has more than doubled the amount of business it does with individual franchisors, which then in turn opens up the channels for more franchisees to make applications to BoeFly. When we look at the original platform and what BoeFly's mission was, we've created a lot of efficiencies there, and that part of it is growing. It's growing on top of a marketplace where there are more and more people who are interested in franchise opportunities. So when you put all that together, I'm pretty confident that that platform will continue to grow over time and gain some meaningful scale relative to what the marketplace provides. But then you start to look at all those clients that we have access to in the franchisee space—what other products they need as they grow their businesses outside of what BoeFly's primary mission is. We're starting to take advantage using their technology, our technology, where nCino platform using lots of other tools we have here, both at ConnectOne and BoeFly, to take advantage of those opportunities. Just like we do at ConnectOne, when we try to onboard a client and get the entire relationship, you start thinking about the people that are coming through that platform and the reach of that platform, which, as you know, is national. There are a lot of great opportunities for fee income without the use of ConnectOne's balance sheet to grow that platform. So we've been making investments there, we're seeing those opportunities. I don't want to put any numbers to paper today, but we're seeing clear and consistent growth not only in the platform itself, but in the other— the expansion of that platform into other verticals, into other types of businesses. And then, when you take one more step away from it and say, okay, that's the franchise world, there are other places where this applies as well. For me, every dollar we're putting into that platform has some multiplier effect as we continue to expand what we're doing there. Mike Rosman and his team are doing an outstanding job of building that out and utilizing the resources that we're giving him to be able to do that. So that's why I say — I think as we go through 2022—2020 and 2021 were challenging years for BoeFly because, think about it—All the food franchisers and the automotive franchisers and everyone—they were basically shut down for parts of that timeframe. They're all roaring back, and there are more and more franchise opportunities. There are franchise aggregators that are now interested in the BoeFly platform. You can't be in the franchise space without knowing about BoeFly today. So we're pretty optimistic about what our possibilities are there. I think as the year goes on, we're going to see some muscularity that will start to show up in some of the numbers. We'd be happy to report that when it happens.

William Wallace, Analyst

Okay. Great. Yeah. Thanks, Frank, that's helpful. I appreciate that additional commentary, and we'll look forward to watching how it unfolds. So thank you, that's all I had.

Frank Sorrentino, Chairman and CEO

Thank you, Wallace.

Operator, Operator

The next question comes from Michael Perito with KBW. Please go ahead.

Michael Perito, Analyst

Hey, good morning.

Frank Sorrentino, Chairman and CEO

Hi, Michael.

Michael Perito, Analyst

Most of my questions had been asked, but just a couple follow-ups. Sorry if I missed this, but on the SBA gain on sale, I was curious if you guys could provide any outlook commentary for 2022? I mean, it seems like you guys have good momentum there and maybe gaining some market share with some hires you made. But the overall SBA market, I imagine will take a step back just from the record levels it was at last year. Just curious if you could break out what you think you see there, especially on the gain on sale margin side too, which were elevated in the last couple of quarters.

Bill Burns, Executive Vice President and CFO

This is Bill speaking. I don't want to give an exact projection because we don't know ourselves, but it is going to be up significantly. We're hoping — we're actually hoping to double the amount of gains that we had in 2021. I think the margins are holding in there pretty well. So it may be seen, but we are continuing to put resources there and building it.

Michael Perito, Analyst

Is most of your production today on the seven a side or are you guys doing anything else within the SBA product verticals?

Frank Sorrentino, Chairman and CEO

That’s mostly the case.

Michael Perito, Analyst

That's helpful. And then just lastly, curious on the low double-digit loan growth. I know you guys spend a bit of time on it already, but just if we try to understand, geographically, where some of your opportunities are, just curious if there's anything specific really to add in terms of being down in Florida or some of the M&A and a disruption in New York has any particular kind of locations or verticals that seem to have a little bit more momentum or strength possible for next year that we should be mindful of.

Frank Sorrentino, Chairman and CEO

The general answer is, yes. We see it from—we're going to see it from everywhere. It’s pretty much going to come, in my opinion, from all the various markets, verticals, and various teams that we have. I think when you look at the company at the end of 2022, you'll see the pie of distribution is probably going to be about the same across verticals, markets, geographies; maybe some of the smallest geographies will see a little somewhat of an increase just because of their size. But Mike, don't forget, we're in the New York metro market. It's an enormous market, and we have such a tiny market presence that we can do big numbers and still not change anybody's presence in the market. So I think when you look at how ConnectOne is structured, both geographically and in terms of different lines of business, you can see a similar story when we get to the end of the year. I just wanted to add, we continue to be disciplined both in terms of the quality of deal and pricing. Having multiple growth avenues is very helpful. We don't need any one of them, and it contributes to sustainable margins and high returns. Mike, let me just add too. You mentioned specifically Florida. I think I mentioned on a previous call or maybe the one before that Florida was more of a defensive strategy for us, not an offensive strategy. It's almost hard to differentiate when we do a loan in Florida, is that really New York business or is it Florida business? Just because the assets in Florida may not mean necessarily that we brought on a new business relationship. As I mentioned, many of our New York and now New Jersey relationships here are also expanding their presence into Florida. Again, that's why I said, when you look at the balance sheet, you'll see a similar but larger balance sheet at the end of 2022.

Michael Perito, Analyst

Got it. Very helpful. Thank you. And then just lastly, as a little bit of a ticky-tacky question here, but just on the NIM outlook, the compression expectation for this year. Bill, what do you think the best—what type of starting point are you using? I mean, because obviously the NIM shows some really good expansion over the year. Are we talking compression all kind of the exit core in the fourth quarter, kind of year-on-year, just trying to get a better gauge of what?

Bill Burns, Executive Vice President and CFO

I'm looking for where we are today and what's going to happen going forward. Obviously, internally, I look at it month-by-month, but when I report to you, it's on a quarterly basis.

Michael Perito, Analyst

Nope. That's perfect. That's what I figured, just wanted to double-check. Thank you guys. I appreciate it.

Frank Sorrentino, Chairman and CEO

Thank you, Michael.

Bill Burns, Executive Vice President and CFO

Thanks, Michael.

Operator, Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to the management for closing remarks. Please go ahead.

Frank Sorrentino, Chairman and CEO

Well, I want to thank everyone, and especially thank all the great questions that were asked here today and thank you for joining us on our year-end conference call. We certainly look forward to speaking to you throughout the year of 2022. Thank you and enjoy.

Operator, Operator

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