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spk04: Hello and welcome to the Connect One Bancorp Incorporated third quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, again press the star 1. I will now turn the conference over to Sia Vanzia, Chief Brand and Innovation Officer. Please go ahead.
spk01: Good morning and welcome to today's conference call to review Connect One's results for the third quarter of 2023 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. I'd also like to caution you that we may make forward-looking statements during today's conference call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings. The forward-looking statements included in this conference call are only made as of the date of this call, and the company is not obligated to publicly update or revise them. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed today on Form 8K with the SEC and may be also accessed through the company's website. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.
spk02: Thank you, Sia, and good morning, everyone. We appreciate you joining us today as we discuss Connect One's recent quarterly performance. Before we take your questions, I'll review some of the challenges and opportunities that we're seeing while Bill will review our third quarter in more detail. With that said, let's jump right to the point. While we're proud of our determination to serve our clients in this challenging time, it has been a difficult operating environment. Our operating results remain solid. However, these are not the financial results we're accustomed to. We remain confident that we will return to our historical level of profitability based on the strength of our franchise. We understand that putting our clients first and putting our people first has a short-term cost in this difficult environment. We also understand that continuing to make investments in our talent, technology, and systems at this time is a choice we make. Nonetheless, as we collectively navigate near-term headwinds Connect One remains resilient and committed to maintaining and, in fact, improving our business model. Importantly, we have the financial strength, balance sheet, and capital structure to support this, with both strong liquidity and a fortified tangible common equity position. We also continue to generate a sound operating profit, which, when coupled with our solid capital levels, provides us with the flexibility to repurchase shares, pay dividends, invest in infrastructure and grow prudently. We're seizing opportunities to strengthen our teams by adding high performing talent across the organization. And we made some notable hires this quarter. This includes the appointment of a leading financial services executive as chief strategic operations officer, and the addition of a seasoned technology executive as chief digital office officer to further leverage technological innovations. At the same time, We remain one of the industry's most efficient banks nationwide as we continue to optimize operations, staff count, and our footprint. Demonstrating the diligent execution of our operating model, we continue to support the needs of our clients and build opportunities in new markets and new verticals. To that end, our teams in South Florida and Long Island continue to build momentum as they capture market share. Operationally, we continue to expand through digital enhancements, including Mantle's omnichannel deposit origination platform, Bowfly's franchise referral and lending marketplace, and our SBA lending platform. Turning to credit, Connect One's credit metrics remain stable and sound. We have a high-quality client base, and during the third quarter, delinquencies and non-accruals remained low, reflecting prudent underwriting, strong portfolio oversight, and a resilient economy. Regarding our CRE portfolio, our Manhattan office exposure is less than one-half of 1% of total loans, and our entire New York City office exposure is less than 1% of total loans. Our office exposure in New Jersey is less than 4%, which includes high-tenancy special services and multi-use buildings. And looking at our multifamily, as we've emphasized before, our Manhattan portfolio is less than 2.5% of total loans and only 5.5% in the other four New York boroughs. We're predominantly focused in purchase money loans within suburban and commuter-oriented areas in New Jersey. So to wrap things up, we remain very optimistic and committed to building Connect One's highly valuable franchise. We believe that the actions we've taken over the past 12 to 18 months position the company for sustainable, profitable, and rewarding growth going forward. With that, I'll turn it over to Bill for the details.
spk03: Okay, thanks, Frank, and good morning, everyone. I'm not going to take a lot of time this morning, but I want to highlight some of the more important third quarter metrics and also provide you all with some estimated forward guidance. Let me start off with deposits. Our client deposits continue to grow sequentially. Excluding broker, which declined by approximately $125 million, client deposits increased by $150 million on an average comparison. and by about $50 million on a point-to-point basis. Our liquidity remains very strong by any measure. Readily accessible liquidity remains nearly 2.5 times adjusted uninsured deposits. The liquidity consists largely of unbalanced cash, unencumbered, available for sale securities, and we have unused lines of credit at the Federal Home Loan Bank and the Fed. Each of those are well in excess of $1 billion. Adjusted Uninsured deposits, which excludes collateralized municipal deposits, as well as intercompany deposits, represents 21% of total deposits. Onto the net interest margin, which contracted sequentially by five basis points, and that is in line with our previous guidance, our cost of interest-bearing deposits increased by 28 basis points this quarter, reflecting a cumulative beta of about 50%. Average non-interest bearing declined by about 70 million, some due to seasonality, and it's more than we anticipated. However, those balances have remained somewhat consistent over the past 60 days and, in fact, have grown since quarter end. We are cautiously optimistic that deposit costs have nearly maxed out, but there still could be competitive and funding mixed pressures, so we could still see a modest amount of margin compression for another quarter. As I've mentioned before, we are in a liability-sensitive position and would benefit materially, I believe, from a decline in short-term rates and an upward sloping yield curve. In terms of loan repricing, fixed-rate loans went on the books this quarter. We're in the 8% to 9% range, while about $75 million of fixed-rate loans exited at about 5.5%. And the loan pipeline is predominantly wider-spread C&I and construction, while the tighter-spread multifamily originations are quite limited. Onto non-interest income, it continues to increase from SBA loan sales, and we expect revenue here to accelerate in the fourth quarter and beyond. I don't want to give you exact guidance right now because it's a little too early in the quarter, but I am confident of the upward trajectory. And in addition, both lines expected to be a further contributor to this line item. In terms of operating expense, as you know, we are already one of the most efficient banks. So efficiency is not a project for us. It is a way of life at Connect One. And so notwithstanding our success of bringing in new talent, sequential expense growth was less than 1% this quarter, and they expect the same level of expense growth for the fourth quarter. Our efficiency ratio has increased to about 50% from 40% historically, and that's largely due to margin compression. But our operating expense percentage of average assets remains less than 1.5%, and that is among the best in the industry. Next, I want to talk a little bit about capital. Our tangible common equity ratio at the holding company was 9.1, while at the bank level it is even higher at 10.7%. And the tangible equity ratio at the holding company, which includes perpetual non-cumulus and preferred, is 10.3. So this strong capital gives us significant financial flexibility And even though we'd still like to see our capital building, we also have room to moderately grow the balance sheet and continue our share repurchase program. Repurchases for the third quarter were about 300,000 shares. We bought those back below tangible book value, and that makes those repurchases accretive to tangible book value per share. And tangible book value per share was about flat from 630, but up 7% from a year ago. I expect continued growth in tangible book value per share, a hallmark of Connect One Bank. On credit quality metrics, non-accrual loans ticked up slightly due to one multifamily loan that is well-secured. And if you exclude the taxi medallion loans, which are more than adequately reserved for, that non-accrual ratio is 50 basis points, which is right on our historical average. We also had approximately 2 million commercial loan charge-offs that had largely been reserved for. And that led to 12 basis points of annualized charges for the quarter. But our delinquencies of 38.9 days were virtually nonexistent at just 3.5 million. That's just 0.04% of total loans. And criticized and classified fell by more than 15% to just 1.4% of total loans. This was the fourth consecutive quarter of improvement. Rollover risk. being well managed with the majority of loans repricing without any potential downgrades. Going forward to the end of next year, we have about 10% of the portfolio rolling over to a higher rate with 350 million coming in the fourth quarter and about 650 million for all of 2024. Obviously, we are proactively managing this group and again, have been largely successful. And before I end, I just want to reiterate that our exposure to New York City office is minimal. at less than 1% of total loans. So with that, Frank, back to you, and then we'll get to questions.
spk02: Great. Thanks, Bill. To wrap up, as we move through the fourth quarter and into 2024, let me once again reiterate that we have the financial strength, balance sheet, capital structure, and talent to support our future growth. We're confident in our direction and optimistic about our position. We look forward to updating you in the quarters ahead. And with that, happy to take your questions.
spk04: Thank you. If you have a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, simply press star 1 again. One moment, please, for your first question. Your first question comes from the line of Nick Cuccarelli of Havdi Group. Your line is open.
spk05: Good morning, everyone. Hi, Nick. The relatively flat loan portfolio has been well telegraphed throughout the year, although growth is in the DNA of the franchise. Can you help us think about the conditions where a return to growth is more plausible and when we may see that?
spk02: Well, I think there's two parts to that, Nick. Bill, maybe you have additional thoughts. But the first part is just the economy in general. We're seeing less opportunities that we think make sense for us in the various lines that we're in. Our pipeline is still quite strong. We do see payoffs coming out of the portfolio that sort of mitigate a lot of the new business that comes on board. And we're being, you know, somewhat cautious looking at different ways of enhancing our underwriting relative to what we see. But the demand has definitely come down quite a bit. And certainly in a lot of the segments that we were the most active in, we've seen less demand. I think we are actually building more ability to grow the portfolio over time as more and more competition is walking away from a lot of the lines of businesses that we're bullish about. So, yeah, I think all things being equal, notwithstanding any news that's in the macro environment that could impact the economy, I think we will continue to have forward momentum relative to the loan portfolio and the entire balance sheet as a whole.
spk03: Yeah, Nick, I think it's hard to always predict all the things going on, but we are going to remain disciplined in terms of pricing. So, you know, one thing that can impact how much we grow is what the competition is doing and how aggressive the competition is being because we base our loan growth based on pricing in terms of discipline, getting the right price, as well as bringing on relationships and deposits along with those. So hard to say for sure, but as you know, our growth rate is typically pretty good in a growing economy.
spk05: That's very helpful. You also mentioned the pipeline and the wider spread businesses of CNI and construction. Is there a clear geography that's driving pipeline activity as well, especially just noting your more recent investments in Long Island and Florida?
spk02: I think the pipeline, more than 90% of the pipeline is right in our wheelhouse. It's within the New York metro market and growing a bit in Florida as well. So we're very happy about where the business is coming from. It's not coming from areas we're not familiar with. It's actually the reverse of that. We're doubling down in the areas that we are the most confident about and cherry-picking for the best client relationships and the best loan opportunities.
spk05: Thank you for taking my questions.
spk02: You're very welcome.
spk04: Your next question comes from the line of Daniel Tomeo of Raymond James. Your line is open.
spk07: Good morning, guys.
spk03: Hey, Danny.
spk07: Maybe, Bill, if you could just start on the margin. Appreciate your guidance for the fourth quarter for maybe a little bit more contraction. But just wanted to get your updated thoughts on, I guess, past that bottom in the fourth quarter, the type of expansion that you might be expecting next year if we're in this higher for longer type of rate scenario.
spk03: Well, I think higher for longer is a negative for the industry and that banks benefit from upward sloping yield curves. And the only comment I want to reiterate is that a return to lower short-term rates and upward sloping yield curve is going to help connect one more than other banks in my view.
spk07: Okay. I think last quarter, maybe I'm wrong, but I thought we talked about, um, even in that scenario, um, some expansion for the margin. Is that not, not the case in terms of how you're thinking about it now?
spk03: I, I, yes, I think it's possible as we get through into the beginning of next year that we can stabilize and start to increase the margin, but not in a dramatic way.
spk07: Okay. Understood. Um, and then I guess, uh, Just quickly on broker deposits, did you have that number, what that was in a period?
spk03: Well, it was, in terms of reduction, it was $125 million. It depends whether you look at it on an average or an as-of basis.
spk07: I was wondering as-of.
spk03: Oh, what, the total? The total broker is $1.1 billion. Okay. And, you know, there is some confusion out there because reciprocal balances, you know, typically ICS and CEDARS are included in some measures of brokered. But this $1.1 billion we call true brokered, and that's what our level is.
spk07: Okay. And then the borrowings that you have on your balance sheet, it looks like there was a difference in the end of period and the higher. I was wondering if some of those were replaced in the third quarter. And then what maturities on those might be if you do have any plans to replace them?
spk03: Well, the borrowings we replace as they mature. So we're not, I'm not sure if you're talking about doing anything ahead of time and paying a penalty. So we're not contemplating that. But yes, there could be increases in the borrowing costs as some of those roll over. Although some of them are short term. And they were at high rates. So they'll be gone. And if rates do decline, you'll see lower rates on the borrowing line as well. So it's a little bit of a mixed bag, Dan.
spk07: Okay. Yeah, I guess I was referring to the yield or the cost on those is pretty low at 241 in the quarter. And the average came down. So I was just wondering if that, but I think the end of period went up. So it looks like you're replacing. Sorry, go ahead.
spk03: Yes, I think I understand what you're saying. So a lot of our, a lot of our, we have federal home loan borrowings that are actually term. And we also have some that are overnight that are hedged. And so we locked in a lot of borrowings at a lower rate. And so when the short term paid off, that caused the rate to go down for the quarter.
spk07: Okay. Um, so how does that, I mean, is it, the hedges play through next year then so that you won't see too much, um, increase in cost there?
spk03: Yes, they continue to immunize us against higher rates. And so, like I said, we extend the duration of that portfolio, and that has helped us.
spk07: Okay, terrific. All right, I appreciate all that color, Bill. I'll step back. Thanks, guys.
spk03: Okay, thanks, Ben.
spk04: Your next question comes from the line of Frank Chiraldi of Piper Sandler. Sorry, your line is open.
spk06: Good morning. Just a follow-up on the margin. Bill, you know, your comments on NIM inflection, I thought you would, you know, in terms of a higher for longer rate scenario, so rates just basically stay where they are, you know, in your thought, in your thinking, do deposit balances for the industry, for CNOB, do they begin to stabilize? you know, in the next quarter or two? Or do you think there's a continued trickle up, which is why you wouldn't necessarily get inflection and then, you know, a trajectory upwards in the NIM in 2024?
spk03: I'm using trickle up in terms of rate. Yeah. Yes, I would say that that's exactly it. So, you know, our time deposits are very close to leveling out in terms of the cost. But, you know, there continues to be pressure on the non-maturity interest-bearing accounts. And so that's why I've been conservative about the margin. We have assets repricing, but it's a small amount, and it's worth a few basis points a quarter of a widening. But that continued pressure of interest rates increasing on those non-maturity deposits causes me to believe that there could still be compression.
spk06: And then just, you know, thinking about the buyback here, given maybe a bit slower growth in this environment, you know, do you think it's a reasonable level what you guys did in the quarter? Is that a reasonable bogey to think about going forward on a quarterly basis? Or do you think, you know, do you look to get more aggressive? What are your just general thoughts on the buyback?
spk03: I think that's the maximum that we would want to be. We're looking at growth. And also, I just feel in this environment, even though we have strong capital, it's good to show that we continue to build capital. I don't know how you feel about it, but everyone is concerned about bank balance sheets and liquidity. And I think continuing to show strong numbers and strengthening it while still growing a little bit and buying back is the best way to look at those three items. We'll watch it. We'll watch the numbers. To the extent we have more ability to buy back stock, we will, because I like buying stock back below tangible book value per share. Sure.
spk06: Okay. No, totally get that. And then lastly, just obviously you guys have some pretty good insight into the commercial real estate market in and around New York. Just wondered if you're curious your thoughts, particularly as it pertains to multifamily here. You know, you have some that talk about multifamily as being a dangerous place to be in New York in this environment, and others who sort of continue to look at it as, you know, this fortress balance sheet that's had these best-in-class returns in terms of risk-adjusted returns over the last, you know, 20, 30, 40 years. So just curious, you know, your thoughts. as it pertains to multifamily at Connect One, but also in general in the geography.
spk02: So you got the New York City and the five boroughs, and then you have the suburbs, which would include Long Island and New Jersey, where the vast majority of our portfolio exists. And I will tell you that what's similar about both of those markets is there is just not enough supply. The demand is outstripping the supply. And even today, rental rates continue to march higher. I think that's even more pronounced in the New York City market. Market rate rents continue to move northward. I think in New Jersey, the newer product is still renting very quickly. We're not hearing about any buildings that have vacancies. New construction that we financed, the minute it's completed, it's completely filled in record time. So there's definitely large demand for that because we're undersupplied. And so people have gotten raises. Everybody has a job. I think the dynamics around the multifamily business are actually quite good right now. And for the foreseeable future, I think they remain good. The anomaly there, though, is the rent-stabilized product in New York City that was negatively impacted by the changes in the law in 2019. some of those properties are challenged. And so when those come up on a refinance and a repricing, there are issues there. And in cases where folks lent on a pro forma rent projection based on that change and going from rent stabilized to market, and that's not available anymore, and now the interest rate went up, there could be some losses in those portfolios. So I think underwriting is important. The type of product, where it is, what it represents is important. That entire bucket of rent stabilized. I'm not saying it's all bad. There are lots of good properties in there that cash flow well and can in fact withstand the rate increases. And they may be closer to 100% loan to value, but that's okay if they can afford to maintain their mortgage payments. So overall, I wouldn't call it bullish, but I would tell you that we're definitely quite confident and comfortable in our portfolio at CNOB, and I would say for the vast majority of the portfolios that I'm aware of across the industry.
spk06: Great. I really appreciate all the color, Frank. Thanks, guys. Thanks, Frank.
spk04: Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Matthew Brees of Stevens. Your line is open.
spk08: Hey, good morning, guys. Morning, Matt. Bill, maybe the first one for you. I was hoping you could provide just sort of your near-term net interest margin outlook. Feels like it's slightly lower, but to what extent? And then where do you think we might see stability as we look out the next several quarters? Either what quarter or at what level?
spk03: Hold on, I'll get Bill's crystal ball. I knew you were going to ask that, man. Look, there's a number of factors going on for the fourth quarter. And we're only a month into it. So it is difficult to give you exact numbers. What's working for us, I think I said before, is that we're basically pricing out on the time deposits. And those have been about the same. The non-interest bearing demand fell more than I had thought. But it has leveled out for now. So I'm not 100% sure about the level of those. We have loans that are going on the balance sheet at 300 basis points more than they're coming off, but it's a small amount. So with the continued competition on the non-maturity interest bearing, which is still floating up, I see some compression. It may be similar to what we had in the last quarter. hard to read out into next year, but I do see it stabilizing, you know, because eventually, right, the Fed, we don't know, there might be one more raise, but, you know, that could be it, and it is going to stabilize. And eventually, when we get to a period of a stable margin, we're going to be in a very, Connect One is going to be in a very good position to widen margin as short-term rates come down. I hope that answers your question, Matt, on that.
spk08: it's great it's about as good as can be given the information we have okay i do want to ask you whether or not um you know beneath the hood you you mentioned you're starting to see some stabilization and non-interest bearing what are the indications of that what are the measures you're using and do you have any sort of best estimate at this point of where we might see peak deposit costs well
spk03: I answered a little bit before. So right now, the balances in non-interest bearing are slightly higher than they were in the last 60 days. So I'm hopeful, you know, once again, that that's going to level out. And in terms of total deposit costs, as I said, if non-interest bearing remains where it is, if the CDs stay where they are, which I expect that to be, You know, the only thing moving the number is the non-maturity interest bearing. And it depends on the money supply and total deposits in the system, but that's the, you know, one lever that could continue to increase deposit costs. Obviously, as the, you know, the Fed pricing interest rate levels out, that's going to put pressure on stabilizing deposit costs as well.
spk08: And then on low-yield, what is the roll-on versus roll-off dynamic currently?
spk03: Right now, it's about between $850 to $550.
spk08: $850 roll-on, $550 roll-off. Right.
spk03: And that's great, right? But it's a small portion of the portfolio because there's such small growth and there's such small amount of prepayments.
spk08: Yeah. Could you just talk about the strategy on the securities portfolio? It's been a runoff mode for a while, but I was curious at what percentage of total assets would you like to keep it at?
spk03: Well, I'd like to see it a little bit higher, you know, for the long run. You know, it's part of, it's a good question. It's part of, you know, for us, the securities portfolio is not about profitability, but it's about liquidity. And, you know, what we've learned, you know, over this year and the crisis is that, Having securities on portfolio isn't the type of liquidity that you really need. You really need readily accessible liquidity. So in my mind, the securities on the portfolio, unencumbered securities on your balance sheet are less important because you can't get the cash for those in a few hours, whereas you can get cash for the Federal Home Loan Bank or the Fed on a moment's notice. So I like... My goal has been a little bit higher than it is right now, but I don't see moving that up significantly over the next couple of quarters. Okay.
spk08: And then, Frank, one for you. One, you had mentioned in your opening comments just some of the quality of talent you've been able to bring in and hire. I'd be curious what the current pipeline looks like in terms of resumes on your desk, how qualified these people are and if you're impressed by them and Can this continue? And then secondly, on the tech stuff, just give us an update on Mantle, Nimbus, and Boklai, and how are all those efforts going?
spk02: So I would tell you that the phones keep ringing. Now it's pretty much all inbound calls. You can well imagine with all the disruption in the marketplace, there's just been a lot of people who either were cut loose or found that the new place that they're at or the reformulated place that they're at is not meeting their expectations and they want to work from a place that's exciting and a place that's innovative and a place where they're not stuck in a particular lane. So Connect One has definitely built a reputation in the marketplace as a place that's moving and shaking and lots of stuff going on. And so The phone keeps ringing. We certainly have lots of folks to pick from across all the various specialties, whether it's in operations, technology, revenue producers, it doesn't matter, in various markets, new markets potentially, whatever. So we're getting to pick and choose from the best of the best. And I have to tell you, I think we've made some really exciting hires over the last few months that are going to help to propel the company forward. As I mentioned in my comments, I'm incredibly optimistic and confident in the direction we're going in. Certainly, we'd like to see some of the financial metrics and stock valuation be better, but the business itself, the core business and what we're doing with it and how we're positioning ourselves for the coming challenge is in a more normalized interest environment are really exciting. When you start to talk about things like, you know, the digital onboarding platform through Mantle, I mean, that's making serious change throughout the organization. It's giving team members that either ones that we've had with us for years or newer team members that come on board the ability to really close transactions with potential clients in record speed. It's given us the opportunity to go back to existing clients and be able to move additional deposits over to the bank with just a lot of ease. It's taken some pressure off the back office. The operations areas are being re-optimized because we don't have as many manual processes, including in compliance and BSA and other areas that are incredibly critical to the organization. But now we have much better operations that also provide data for us to look at and be able to make future decisions about how we want to do things. So those platforms are all working really well. We're still working together with Nimbus in our Venture On unit, and certainly because of the events that have occurred recently, we're reevaluating how we can be effective in that space. And we'll have more to talk about that in the future. And BowFly just keeps chugging along. I mean, BowFly, as you know, has been one of the primers for a lot of the technology initiatives here at the bank and has really forced us to focus on the ability to write commercial-type loans, to be able to do SBA at scale, to be able to rebuild or have technology platforms that function differently than banks normally function. And so BowFly has been a great catalyst for the entire organization. That being said, if you look at the top of the funnel at BowFly and the number of franchisors that now utilize that platform for all of their data gathering, it's gone up some 300%. When we purchased the company, they had about 35 or 40 brands on the platform. Today, it's over 130. So we're really happy about the growth that that company is providing and the opportunities that it's building for us. On a standalone basis, I wouldn't tell you it's doing a whole lot to the bottom line, although it keeps getting better quarter after quarter. But the contributions that it's making to other aspects of the business, which are really hard to get down onto a piece of paper, you'd have to be inside the management team to understand it, I think are just genuinely really great. I don't know if I answered your entire question, so if I forgot something, let me know.
spk08: No, that was it. You hit on all three. I appreciate it, Frank. Thank you, Bill. That's all I have. Thanks, Matt.
spk04: Your next question comes from the line of Michael Perito of KBW. Your line is open.
spk03: Michael. Hey, Mike.
spk09: Hey, guys. How are you doing? Good. We're doing well.
spk03: Yeah.
spk09: Yeah, obviously a lot's been addressed, so I'll try to be brief here. I first wanted to just kind of, you know, I was working on my model, Bill, as I listened to you answer a lot of these questions. I guess just really big picture, I just want to clarify. So, I mean, it sounds like, you know, operating revenues were about $67 million in the third quarter. You know, you think that should grow modestly from here. And with your expense guide, is it fair to think that the efficiency ratio should kind of be topping out next quarter with some modest improvements? Next year, is that kind of directionally fair if I'm trying to piece together everything that was disclosed thus far?
spk03: I hope so. That sounds good. Yeah, I think that's a good way of looking at it. I just think we're going to, you know, if rates are cut middle of next year, you know, towards the end of next year, we'll see a big bump up in profitability. So the things that you're talking about now are just really on the margin. But directionally, I think you have them right. Got it.
spk09: Okay. Thanks. And do you have any early expectations around your tax rate for 2024? Just as we think about the model, it's been a little up and down the last few quarters. Just want to make sure I'm in the right range.
spk03: I haven't really given guidance on that, but there's a, and I think I mentioned this before, that there's a bias towards a higher rate of tax rate as the tax, basically our wheat is utilized to reduce state and local taxes, and there's always pressure for that number to come down as the bank gets bigger. So that's what's really driving it. We're not big believers in investing in municipals and other tax-advantaged assets. So you can see the tax rate inch up.
spk09: Got it. And then just lastly for me, I think you mentioned kind of new yields in the mid-8s and roll-off yields in the mid-5s. Ballpark, if I have those wrong, I apologize. But question more in terms of – and maybe this is a question for Frank, but just what's the appetite for customers at this yield level? I mean, is it generally – accepting of the realities. Is there still some sticker shock when you're talking about this pricing level with small businesses, a lot of which are probably still trying to be leveraged given the uncertainty? Just curious what the feedback is as we try to think about growth for next year and what some of the pros and cons are.
spk02: I think if you asked me that question three or four months ago, I would tell you there's just an enormous amount of sticker shock and people are just not accustomed to here in 8% as a handle on an interest rate. There are people in the industry that never saw an 8% handle. I mean, I remind people my first home mortgage was 13 and 3 quarters percent in 1984. So it's not surprising to me. I actually counsel people and say, hey, rates really aren't that high. If you can't run a business with a 7% to 8% cost of money in it, then maybe you got to reevaluate what you're doing. I would tell you today when we're speaking to clients, people certainly are more accustomed to what's actually happening in the rate environment. And most banks, including the largest, have caught up. And so even home mortgages are approaching 8% or right at 8%. Um, so everyone's sort of gotten the message. I think the challenge now or the conversation now has shifted to, Hey, look, I get where the right environment is. I under, and by the way, most of those people have also, um, you know, renegotiated their deposit relationships as well. And now all of a sudden they're getting, you know, three, four and five percent on money. And so when they look at the net differential between those two, that's not so bad. The conversation today now is, hey, I have something with a three and a half percent rate attached to it. It's going to refinance. You know, what can we do? Is there is you know, what's the best way for me to think about it? Should I go short term? Should I go long term? Should I lock this rate in? Should I wait for better times? Is there something we could do? Can I increase my deposits with you so that you'll afford a better rate? And so I think the conversations now are definitely more constructive around the banking relationship. I do believe, and I hope that came across, we're very optimistic here at Connect One. People are putting a large value on their banking relationship today. I think this became too much of a transactional business you know, back a year or so ago and before. And I think people now are starting to look at, hey, I need to understand the cost of my money. I need to understand the services that are required to run my business. And I've got to pick a partner. And so in one regard, I actually think it's all good news.
spk09: Very helpful, guys. Thank you for taking my last questions here. Appreciate it. Thank you, Michael. Thanks, Mike.
spk04: There are no further questions at this time. I'll now turn the call over to the management team for closing remarks.
spk02: Well, I want to thank everyone again for your time today. We look forward to speaking to you again at our year end and fourth quarter conference call. So everyone, please have a really nice day. Thank you.
spk04: This concludes today's conference call. You may now disconnect.
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