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spk03: Greetings and welcome to Connect One's third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Sia Vencian, Chief Brand and Innovation Officer. Please go ahead.
spk02: Good morning and welcome to today's conference call to review Connect One's results for the third quarter of 2022 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. The results as well as notice of this conference 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 that 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 8K with the SEC and can 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. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.
spk05: Thank you, Sarah. Good morning, everyone. We appreciate you joining us today. By now, you've seen our release and the extraordinary organic growth we achieved this quarter on both sides of the balance sheet. Our deposits grew by 10.5%, while our loans grew by 8.5% sequentially. And importantly, average non-interest-bearing deposits increased by nearly 5%. So I'd like to reflect on just how Connect One continues to accomplish record levels of organic growth and superior operating metrics. At Connect One, we've established a long and proven track record of high performance with discipline and consistent growth through various economic cycles, with some of our best times coming at economic inflection points. The strength of our origination franchise is rooted in our relationship-based banking model. And that speaks directly to the team that we've built and our dedication to delivering a best-in-class banking and client experience, a direct founding principle here at Connect One Bank. We've always credited those factors as key market differentiators, the culture we've built, the team we have, and now the bankers who are actively seeking us out to join a known client-centric culture and organization. And those have resulted in consistent market share gains in our traditional operating area. And on top of that, over the past year, we've expanded into new geographic areas, including the robust southeast Florida and eastern Long Island markets. We're also creating opportunities across new verticals. We recently brought on a healthcare team, enhanced our SBA lending capabilities, and continue to build our franchise referral and lending platform in conjunction with BowFlight. Our net staff count has grown in excess of 75 people over the last year, now taking us over 500 employees as we continue to capitalize on M&A dislocation in our market. Several highly seasoned and talented bankers have joined the team, unsolicited in many cases, as they were attracted to Connect One's culture and reputation. Finally, we're executing on a number of innovation initiatives in order to enhance the client experience while digitizing workflows and expanding opportunities to generate deposits. As a result, a significant majority of this quarter's loan originations also have a base deposit relationship. With that backdrop, we're extremely pleased with Connect One's third quarter performance, yet again delivering high-quality earnings and strong performance metrics. PPNR increased by almost 4.5 percent for the quarter and 12 percent from a year ago and was in excess of 2 percent once again. Tangible book value per share increased for the 10th consecutive quarter and is up 30% over that period. And our efficiency ratio improved to 38.4%, even as we significantly invest in both technology and people. Notwithstanding this quarter's results, we are experiencing increased competition for deposits, but our client-focused model has proven adept at generating core deposits at a commensurate pace with loan growth. Our company-wide deposit focus, along with the investments we're making in our people and technology, give us confidence in our ability to continue that matched pace. Regarding loans, growth for the third quarter was higher than anticipated, but we expect growth rates to level off for the fourth quarter and heading into 2023. This tempered growth outlook reflects higher rates, the impact of the Fed tightening, and normalization in our pipeline. In this environment, Growth guidance is really challenging, but our best estimate right now is low double-digit on an annualized basis. From a business perspective, we have longstanding relationships with highly experienced operators. Simultaneously, as a result of our expansion, we're seeing a healthy diversification in the profile of our originations, including geography, segments, and business lines. Additionally, origination metrics remain strong, reflecting conservative underwriting standards. And for the third quarter, weighted average yields were near 5.5 percent. And as of today, yields are already well over 6 percent. We're clearly benefiting from our recent investments in our business and growth-focused initiatives we've shared over the last few quarters or years. Ultimately, our success comes down to our commitment to investing in our people and the digitization of our tech-focused infrastructure. both of which, in our view, enhances Connect One's competitive advantage and provides superior client experience. As I mentioned earlier, we're extending our New York and Long Island presence with a business development office in East Hampton. That office, which just opened this month, builds on our existing presence on Long Island, allowing us to support existing clients while building on opportunities in a new market. The East End of Long Island has a robust small business market that values the relationship-focused banking that Connect One provides and is yet another opportunity we're excited about. Let's turn to credit. Once again, the company's credit metrics remain sound. Our MPAs continue to trend lower. Delinquencies remain near zero. And we're prudently maintaining reserve levels, which are commensurate with our organic growth and the changing macroeconomic forecast. Bill will provide further color around our CECL-based provisioning, As we look ahead, a number of recent strategic tech investments are moving through to implementation. Earlier this year, we announced a partnership with Nimbus to build a new business vertical on a lean and nimble cloud-based tool. We've now branded this vertical Venture On, and it will provide bespoke banking services for deposit-rich, tech-focused businesses. You'll hear more details regarding Venture On later this year as we expect an early 2023 rollout. We're also well underway with the implementation of Mantle, a tool to enhance our deposit origination infrastructure. We expect the first phase of the initiative to be rolled out by year end. And then, of course, if both lie, we continue to enhance our platform and the user experience while increasing the number of net franchisors and franchisees. This is the foundation that contributes to loan opportunities in both the SBA and now non-SBA lending verticals. Connect One entered 2022 with a strong and resilient balance sheet, and we're committed to preserving that position going forward. We have a deep capital base and strong earnings that can support growth initiatives, dividends, and share repurchases. On a macro basis, there are certainly headwinds facing our industry, but our third quarter and year-to-date results fully support our belief that Connect One is operating from a position of strength. At Connect One, we've always set ourselves apart by making it easier for our clients to do business with us, while empowering them with the latest technology to meet their evolving needs. Powered by our operating leverage, Connect One remains one of the most efficient banks in the industry, leveraging both our technological advantages and our culture to drive our results. As we look ahead, in terms of size, it's likely we'll be crossing the $10 billion threshold in 2023, and we're both ready and prepared. And with that, I'll turn it over to Bill.
spk07: All right. Thank you, Frank. Good morning, everyone. As Frank mentioned, we have a long track record of organic growth while delivering leading performance metrics. And what we've built here is a highly valuable franchise, one that I believe is a compelling investment opportunity, especially at these market levels. We're currently trading at less than 1.2 times tangible book. And we believe and we estimate that is 20%. behind what the metrics tell us. I want to start there and add some more detail before covering the rest of the quarter. Overall, on operating earnings, PPNR easily reached a new record, reflecting that strong organic growth and a continued stable and strong net interest margin. This quarter, again, we're right at about 370. I have to tell you, although not completely unexpected, I was quite pleased with how the results turned out for the quarter. In particular, that large amount of growth combined with a stable margin. Spreads on new loan originations have tightened. And my initial outlook was the more we grew the balance sheet, the more compression we would have. But it turns out we had close to no compression on a core basis. I know all of you out there live and die by five basis points, but there is easily plus or minus five basis points of natural volatility in NIMS for all banks. And keep in mind, our margin never compressed over the past few years. We have maintained margins at a very profitable level for an extended period of time. I'll attribute our NIM performance and stability to pricing discipline to stability and pricing discipline from our lending team, combined with relationship banking, in other words, the building of deposits along with the loan growth. The other metric I'm watching is our efficiency ratio. We have reported and we've guided our expense growth has been accelerating, especially as we add significantly to staff, reward up people with incentive compensation and continue to make technology investments. But even with that double-digit growth in OPEX, efficiency ratio has remained very low decreasing again this quarter to 38.4 let me turn to some details on the quarter and i'll conclude with some comments on our outlook and give you guys some guidance so once again a truly remarkable quarter highlighting the strength of the organic origination franchise we've built here over the past decade deposits led the way this quarter growing by a record 700 million or more than 10 percent sequentially We were very effective at repricing deposits in terms of both magnitude and timing. That served to not only retain deposits, but also attract new clients. So we expect that a large majority of those new deposits will benefit us going forward. We believe most will stick and some will evolve into larger relationships. And in any case, the deposit growth and a good portion of it was CDs and a fixed duration for our liabilities, helping to protect the margin over the next year. Loans. They grew by 8.5% sequentially. The growth reflects not only strong market conditions for bank lending in general, but also our culture, our new hires, and our geographic expansion. As you know, rates have risen dramatically, but duration match spreads have been tight by historical standards, probably due more than anything else to the speed of rate increases, essentially the beta on loans. We have had success, probably a little better than most, on driving our origination rates higher. There's still room to go, even though, as Frank mentioned, our rates have already crossed well above 6% in the fourth quarter. So we do expect continued upward movement on loan pricing and wider spreads as we finish out the year and head into 2023. We all know the Fed is set to continue to raise short rates, but hopefully the longer end will be less volatile. We, of course, will continue to monitor that. With that in mind, we will continue to grow as we always have, that is, with a focus on relationship to banking, which includes deposits. Virtually all loans originated this quarter had at least some deposit relationship. The overall segment composition of loan growth was consistent for Connect One, although construction remained about flat, and that's typical for construction when rates are rising. And just to give you a little more color, 75% of the loan growth was from our traditional markets and existing clients, while about 25% of it came from new hires, new markets, such as Florida, and new verticals, such as franchise or healthcare lending. For the quarter, about two-thirds of the growth was CRE, while one-third was commercial, including owner-occupied. We've maintained strict underwriting standards with regard to LTVs, cap rates, and stress debt service coverage ratios. Now, turning to the margin net interest income, and there's always moving parts here, so let me just reset the landscape a little bit. As a reminder, the second quarter included $3.5 million in favorable but non-recurring items in our NIMS, so our core margin declined by just a few basis points. But more importantly, reported net interest income increased by 3.5 percent sequentially. And if you adjust out those special items on a core basis, it increased by 8.5 percent sequentially. Our net interest margin remains very strong relative to both the industry and to our own historical standards. and is driving solid performance metrics, including PPNR, return on equity and assets, and the efficiency ratio. Our static core balance sheet has been and is well immunized. In other words, we've been successful and we aim for interest rate risk neutrality. Our business development team, combined with our treasury team, have done a great job maintaining a strong net interest margin throughout the full cycle of the pandemic. In our view, the beta on our core deposits has remained quite low, below 20% per our calculations, Any beta above that typically comes from new growth, which we monitor religiously and have been effective at minimizing. Lower beta performance in many other banks also reflects deposit runoff at those banks. So the comparison to us is a little bit apples to oranges. Turning to non-interest income, at about $3.5 million for the quarter, it was lower than typical. BoFly is contributing about $400,000 per quarter now in fee income. That continues to grow. Gains on sale of loans declined as this quarter was represented only by SBA. There were no residential or CRE sales this quarter. As I mentioned before, we sell CRE strictly on an opportunistic basis, and we have some in the pipeline today, so you'll see some gains in quarter four. In terms of expenses, as I mentioned before, we continue to hire talented staff, and that along with wage inflation has caused a sequential increase at about 5% per quarter. I expect that to moderate a bit in quarter four. And for those out there who know us well, our best and cost efficiency is based on a branch line model, technology, and revenue growth. And in terms of credit quality and CECL provisioning, first, all signs remain positive. Chargers were next to nothing. Same is true for delinquencies. We have less than $1 million in 30-plus days delinquency at quarter end. That's 0.01% of loans. Non-performers continued to decline, and taxi medallion reserves are trending towards a recovery. There were virtually no additional reserves for any specific credits. The provisioning was elevated in the quarter, increasing our reserves by about 10 million, given the growth, and that basically maintained our reserve to loan percentage at 1.16. Actually, it was up a couple of basis points. About 6 million of the 10 million of the reserve supported growth in the portfolio. The other $4 million came from macroeconomic factors, namely a reduction in the forecasted GDP growth, and the biggest impact for us there was in the CNI segment. In any case, we think it makes sense to be building reserves at this time, notwithstanding the strong credit metrics for ConnectOne and for the industry in general. And finally, I do want to mention our tangible book value creation, which is up 30% over the last 10 quarters, and that reflects both our strong earnings and management of the securities book. All our securities are available for sale, which is the way it should be. The portfolio is a source of liquidity. We refrain from purchasing securities during the pandemic when rates were low, and we only restarted purchases recently at today's much higher treasury levels. We also haven't placed hedges protecting about half the portfolio, and with that, we offset about $50 million in pre-tax securities devaluation. All in all, The securities devaluation represents less than 4% in tangible capital, and our tangible book value per share is now up 10 consecutive quarters to about $21 per share. Looking forward, loan growth is expected to slow to an approximately 10% annualized rate in the fourth quarter. That's based on our actual pipeline. It could fluctuate by the level of prepayments, and we are attributing the decline in growth to a slowdown in demand resulting from higher rates. Loan growth in 2023 will naturally depend on economic conditions. On the net interest margin side, there are, of course, pluses and minuses. Loan yields continue to increase both in absolute terms and spread terms. Don't forget, 20% of our portfolio here is pure variable. 40% of it is adjustable. And our average rate on originations in the fourth quarter so far is approximately six and a quarter. The difficult part of the equation is the cost of funding. continue quantitative tightening and the recent data suggests that the Fed is working to actually reduce the money supply, there will be even more competition for deposits. So all in all, we could see some moderate core compression. I think that's true for Connect One and also true for the entire industry. But we still expect increased net interest income in quarter four. In terms of non-interest income, quarter three, as I mentioned before, represented a low point for us. I expect continued increases from a bow fly as well as CRE gains on sale from time to time. and SBA income is building and will likely contribute more in the future. On OPEX, I did mention earlier that we see the expense growth moderating a bit. We are looking at slower expense growth in quarter four, but that could pick up in quarter one as company-wide compensation increases go into effect. In terms of provisioning for loan losses, it's a little early to project, but with slower growth, I would expect reserve increases to slow down, with the caveat that economic forecasts could always take the turn for the worst. And with that, I'm going to turn it back over to Frank.
spk05: Thanks, Phil. As you know, our team joined the Connect One de Novo just over 15 years ago. And today, we now stand at the precipice of 10 billion in assets driven primarily through organic means, something we are very proud of here. Moving ahead, our foundation is stronger than ever. and we're prepared and geared to continue to gain market share, even with a number of uncertainties hanging over the industry. We have a dynamic team, one that's uniquely accustomed to high growth on both sides of the balance sheet. We have a scalable operating model that continuously evolves by leveraging technology. And we view 2023 as a year that will be ripe with opportunities for continued execution of our prudent growth model, particularly given the M&A disruption and our proven success at capitalizing in these moments. We're very excited for the future ahead. In our view, Connect One continues to generate meaningful shareholder value and remains a very compelling investment opportunity. So thanks again. And at this time, we're happy to take your questions. Operator?
spk03: At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Michael Perito with KBW. Please proceed with your question.
spk06: Hey, guys. Good morning. Thanks for taking my question. Hi. Good morning, Mike. I wanted to start on the margin. I appreciate the color. I guess just kind of conceptually, though, and realizing this is kind of a challenging question, but if we just kind of look at the consensus rate forecast that's out there right now, and then we look back to kind of the last time rates were rising and where the NIM kind of troughed out, I guess, any thoughts around where this NIM could normalize, assuming that that consensus rate forecast has some, you know, spec of credibility here, which I realize is a big assumption. But just trying to get a better grasp of kind of structurally where you guys think the NIM could trend over a multi-quarter period.
spk07: Yeah, Mike.
spk06: Right.
spk07: Mike, I mean, good question. There's a lot of uncertainty out there. We've done a great job of maintaining our margins. If you take a look historically, we've done a great job of maintaining our margins historically. We focus on immunizing the portfolio, and we're very focused on spreads on loans. And so, yes, you could see some margin compression. I think I mentioned before, I didn't see, maybe we could get as low as 350. But to me, that's going to drive, you know, superior, continued superior performance. So I just, you have to remember, our margin never compressed. And so when other banks are taking their excess cash and putting it into new securities and loans at higher rates, probably at rates lower than we are originating new assets today. So I'm confident we're on the right track and we're going to continue to drive performance in terms of return on equity, return on assets, efficiency ratio.
spk06: Great. Thank you. Helpful caller. And then on the... on the, on the growth side, I was wondering if you guys can give a little bit more detail, you know, appreciate the comment in the release about how new commercial customers are bringing in deposits with them. I mean, any more kind of context you could provide in terms of like, you know, what types of deposits, how much, you know, like just any thoughts around that would be helpful. So we try to get an idea of the magnitude. Cause I imagine you guys expect that to continue moving forward as, as loans grow.
spk05: Well, as, Like as we mentioned before, just about every loan that we brought in had a depository relationship. As you would expect, you know, in the one-third of the pipeline that we brought on board this quarter that was CNI, that meant all their deposits. It meant non-interest-bearing, interest-bearing, time deposits, the whole nine yards. In the CRE buckets, it's a little bit harder to bring on those non-interest-bearing deposits. We had some success there. a little bit easier to bring on some of the interest-bearing deposits. So it's really a mix across the board. And as you also know, typically the deposit growth from new clients lags the closing of a loan, especially in the CRE world. Everybody wants to close, get the loan done, and then everybody lags on the deposit side. So there's still a lot of work to be done with that large volume of increase in loan origination. But I think the most important point that we tried to make here is that these are all relationship-based businesses. We weren't out buying loans. We weren't out doing things just to put numbers up on the board. We were, in fact, originating high-quality relationships that will bring in deposits. It's never a perfect match. But in this case, we were pretty happy with the overall movement, both in the deposit growth and the loan growth.
spk07: And let me just add, you know, the value deposits come from those relationships. As Frank said, a mix of non-interest bearing and interest bearing at rates that are, you know, that add to earnings and add to the spreads. We've been proactive on the other side in terms of you saw our CD balances go up. You know, we always, we try to be, we're both reactive and proactive. We went out and raised CDs under 3%. We think that's good. We locked those rates in. Right today, I think we're issuing CDs at three and a quarter. When you mix that whole thing together, it leads to a very, and combined with the loan origination rates, we're now well over 6% and loans are coming out at 493 and we're putting back on at 625. When you put all those things together, the margin is fairly stable.
spk06: Got it. Thanks for that. And then just lastly, Frank, appreciate that the loan growth outlook beyond the next few months here is challenging, but just the low double-digit number you referenced, Wondering if you got like what are some of the levers within that that could maybe push that higher or lower? I mean, are you guys factoring in kind of a contribution rate from some newer markets and lending offices or just curious if you could take that a layer deeper for us? That'd be great.
spk05: Look, I think when you look at the third quarter, it really represents sort of everything colliding at one time. We've made so many different initiatives or participated in so many different things over the last, let's call it 12 months to both enhance markets we're in today. Take advantage of all the M&A disruption that's going on in the marketplace and you bring on new talent, again, either to bolster existing markets or to take advantage of operating in new markets. I think when you add the products, the people, the services, and just the way that Connect One does business, it just all added up to a really spectacular quarter. We made a lot of hires. I think we, you know, we said that we had 75 hires in the last year or over the last 12 months. Those folks are going to, you know, they brought a lot of business early on. You know, I think those things are going to moderate over time. We'll get back to a more normalized growth rate, but even a normalized growth rate at 10%, or so for us for Connect One means we're going to be growing over a billion dollars in a 12 month period. That's a lot of loan growth. So that's net by the way. So, you know, I think everything conspired in this quarter to come together, all the different initiatives. Look, I hope we have enough, I would hope we have more quarters like that, but I'm not so sure that's realistic.
spk06: Nope, it makes sense, and I appreciate you guys taking my question.
spk05: Thank you, Michael.
spk03: Our next question comes from Frank Sheraldi with Piper Sandler. Please proceed with your question.
spk01: Good morning. Good morning, Frank. Hi, Frank. Just on the, you mentioned, Bill, I think you mentioned that 25% of the growth in the quarter was in new markets or new verticals. um can you just remind us of or let us know how much of that was florida specifically and just remind us what total balances are uh around down there in terms of the loan and deposit side florida market has about 180 million dollars approaching 200 million in in today okay deposit growth has been pretty good in those areas Okay. And then, you know, you mentioned going through the $10 billion threshold probably in 2023. You know, I know it's, I think it's less impactful for you guys and some others in terms of going through that in terms of associated expense. But obviously one popular way to handle that is to do it through acquisition. And just wondered if that's less likely just given this environment or just, you know, your general thoughts on M&A here.
spk05: Look, we've always been opportunistic when it comes to M&A. If something presents itself and makes good financial sense for us to do, we'll do it. But I will tell you, sitting here today and thinking about how we're going to cross the $10 billion mark, it's really of almost no consequence to us. We will just charge ahead. And whenever we cross over, we cross over. um we're well prepared as you can well imagine um all the what's considered to be additional costs that are baked in relative to regulatory compliance and other you know systems management uh are already baked in you don't get right to this point without having um you know very in-depth thought process around it so those things are already here uh we are mostly a commercial bank, and so there's virtually no Durbin charge. It's very small. There are some other small costs, FDIC insurance, whatever, but overall, we do not expect it to be anything other than a small wrinkle as we move forward through that. Now, if we had a M&A transaction at some point in 2023, would that make it a little bit easier? Yeah, maybe, but it's marginal. Either way, expect us to cross over unless something really dramatic happens.
spk01: Great. Okay. And then just lastly, I wondered if you could just talk about any more color on some of the, you know, you talked about fee initiatives coming down the pike. Any more color on that front? And I know you guys have held the efficiency ratio below 40%, even with investment. Just curious if maybe that could tick up in the, you know, as we look out and think about 2023, tick up. as you maybe accelerate some of that investment ahead of potential revenues?
spk05: Well, look, we've, I think, been very clear that we intend to keep growing and taking advantage of market opportunities as they present themselves. Now, that's not, you know, it's generally not a straight line, and sometimes more opportunities present themselves than you feel like you're prepared for, or, you know, there could be somewhat of a drought at any point in time. So it could be lumpy. So we have conditioned everyone to understand that we might cross back over 40% efficiency ratio if there are really great opportunities for us in the marketplace. I'm very proud of the fact that thus far, we've been able to take advantage of all the opportunities that we thought made sense for us to do, and at the same time, continue growing our revenues in such a way that our efficiency ratio has remained below 40%. That's the ideal place where we want to be. I think you could do the math pretty easily and see that if we stopped investing in the future, we could get our efficiency ratio significantly lower. But that's not part of our model. We need to prepare the company for the future, making both technology and people-focused acquisitions over time. So, yes, it's possible that the efficiency ratio could bounce around a little bit. BUT OVERALL, THE TREND IS LOWER. THE BALANCE SHEET GETS BIGGER AND THE REVENUE OPPORTUNITIES GET HIGHER AND THE MORE WE'RE PUTTING FOCUS, YOU MENTIONED ON NON-INTEREST INCOME TYPE PROJECTS, THOSE THINGS KEEP PICKING UP STEAM. I THINK BOWFLY AS WE SIT HERE TODAY IS PROBABLY CLOSE TO DOUBLE WHERE WE STARTED WITH IT THREE YEARS AGO. THE SBA DIVISION STARTED AT ZERO AND IT'S NOW a fairly decent contributor to non-interest income, and that continues to grow. And there are a lot of other smaller opportunities that we're seeding at this time and investing in that may be not contributing necessarily to the bottom line, but will over time. So we're pretty confident that as time goes on, that diversification of that income stream and the growth of revenue will keep that efficiency ratio below that 40% range. Okay.
spk01: Great. Thanks for all the color. Thanks, Frank.
spk03: As a reminder, if you would like to ask a question, please press star 1. Please press star 1 on your telephone keypad. Our next question comes from Matthew Breeze with Stephen Sink. Please proceed with your question.
spk04: Good morning, everybody. Hi, Matt.
spk03: Good morning, Matt.
spk04: I had a bunch of questions, so if I go on too long, just please let me know. Bill, when you said that NIM can get as low as 350, I just wanted to make sure I understood you're right there. Were you referring to perhaps like a full cycle trough NIM or a worst-case scenario, or is that indicative of what we should expect in the fourth quarter?
spk07: Oh, no, not the fourth quarter. I still see a stable margin maybe compressing a little bit, but I'm just thinking about the whole market out there. and that the money supply is getting tighter and tighter and everyone's going to be affected by it. And so I think you're going to see a trend of lower margins at some point. So I'm just trying to give you guys an idea of how low I think it could go. And that's based on the spreads on our new business and the ability to bring in deposits. And so it can't get below that because that's our way of doing business. That's how we price our business going forward. Next quarter, no. That's more out a few quarters.
spk04: Okay. And then in terms of deposit funding, maybe just give us some idea of the near-term sources. And was the CD effort we saw this quarter more of a, in your mind, kind of a one-time effort, get ahead of price increases for the rest of the year? Yes.
spk07: Well, yes. Right. We wanted to get ahead of price increases. And we think that's going to work out really well for us. As I said, those deposits, they have a duration of about one and a half years. So we actually locked in some cheaper funding. As the Fed raises, there may be more opportunities to do that. So that's part of the strategy. But, you know, the most important thing is, you know, bringing in relationship deposits because that's where the real, you know, the funding, the spread boost comes from. And when I talk about spreads on loans, you know, we've talked about this before. We're very disciplined in looking at what the marginal costs of match duration funded costs are. Anything that we get in terms of deposits of those relationships adds to the spreads.
spk04: Understood. And maybe along those lines, you know, you talked about new loan yields coming into that kind of over 60% range. Not that long ago, rates were kind of 3%, 4% in your market. As you refi old customers from those low rates into something higher, 6% yield, what have you, particularly in commercial real estate and multifamily, how are debt service coverage ratios reacting to the higher rates? And then when you do stress the new paper, what are you stressing for in terms of cap rates or rates on top of the 6%? And how are customers reacting to that?
spk05: So, Matt, cap rates, as you would well expect, are up fairly significantly from a year ago. Our stress models are probably about the same, meaning we have the same level of basis points up when we put them in the stress model. What I don't think enough people are giving credit for is that most multifamily projects that we finance have seen rent increases of over 25%. So, you know, while that operator, when they refinance that project, let's say this year or next year, they may not be able to pull out a lot of cash. Their debt service coverage ratio is going to be well in line with where we started, let's say, three years ago or so. So we've seen a good rollover track record for the projects that we have. Keep in mind, a fair amount of the projects that we financed either were construction projects that we started. So we're at a lower LTV. Or they were purchased money, in which case, again, the LTV was probably lower. The biggest portion of our multifamily portfolio comes from purchased money mortgages. And so we've been in a good place with strong capital cushions or equity cushions in those properties. And again, with the rapid rise in rents over the last, I don't know, 12, 18 months, um, the numbers are still looking pretty good. Now, again, they're not looking as great as they were a year ago where people were able to, uh, get lower rates and take out additional cash. There's, there's, you know, there's a lot of pressure there in that part of the marketplace, which is why I think, you know, the entire multifamily market has just slowed down dramatically.
spk04: Understood. Okay. Um, and then two other items, um, Frank, you had mentioned NIMIS, and that could get up and running early 2023. Could you just provide us an update on where that partnership is heading? I think the way you last described it was it was a new core being brought on for a specific purpose to stand up a particular vertical, but I don't really have the details as to what the vertical is, what the purpose is.
spk05: As I mentioned a little earlier this morning, we've branded that vertical. It's going to be called Venture On. And it will be focused on tech-type companies, generally that are venture-backed, that typically carry large deposit balances. And so we'll be going after that segment or that industry. And we are building together, in partnership with Nimbus, a very bespoke deposit gathering model that takes into account what those businesses need in order to flourish and in order for them to do their business and not have to worry too much about their banking needs.
spk04: Could you better describe the types of deposits, whether they will be non-interest bearing or interest bearing? And then generally when you provide deposit services for the venture industry, there's lending along with it. Will you be providing that
spk05: So again, it'll be a full banking relationship that we're envisioning, and that would include all the various types of deposits. And if there are lending needs, of course, that would be something we would consider. But we believe that this vertical, the way in which we're attacking it is going to be much more deposit rich and less reliant on lending. Most of the things we do here at Connect One lead with our lending. This is really one of the first places where we're specifically designing products to lead with the deposit gathering capabilities.
spk04: Okay. Okay. And then the last one, Frank, you'd also mentioned a couple of hires in the healthcare segment. I haven't heard you talk about this segment in a little while. Maybe provide some updates, types of loans, geographies, size of that portfolio. Okay.
spk05: Yeah, I mean, we've been in the healthcare space for quite a while. It includes all the various, whether it's senior living, assisted living, skilled nursing, right down to, you know, doctors, nurses, dentists, you name it. But we've always had an area here that worked, not always, but certainly over the last number of years, we've had a number of folks here that worked in that space. We had the opportunity because of one of the mergers in our market to lift out an entire team that specialized there, had a fairly decent sized book of business. And they are coming on board or have come on board and are helping us to build out that entire space from pretty much to nuts. So we're pretty excited about that. It is, as you know, a lot of these operators, we focus on operators that are located within our geography, but generally those operators will have assets outside the market, and we're okay with that. So we will see assets that are outside our primary market area, but generally for operators that are within our market area.
spk07: And Matt, if you wanted to know, right now we have about $200 million in outstandings in that healthcare group, and 30 or 40 percent of it is deposits associated with it.
spk04: Great. Okay. I've taken up enough of your time. I appreciate it. Thank you.
spk07: All right. Thanks, Matt.
spk05: Thank you. Okay. Well, thanks. Okay. I was going to say thank you. I really appreciate everyone's time today, and we certainly look forward to speaking with you again at our year-end conference call, which will be held in early 2023. So thank you.
spk03: This concludes today's conference. You may disconnect your lines at this time.
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