Q3 2023 ConnectOne Bancorp Inc Earnings Call

October 26, 2023

Speaker 1: transcript

Speaker 1: Hello and welcome to the ConnectOne Bancorp Incorporated 3rd 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.

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.

The speaker's remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star one on your telephone keypad. If you would like to withdraw your question again press. The Star One I will now turn the conference over to Shia venture Chief brand and Innovation Officer. Please go ahead.

Speaker 2: transcript

Speaker 2: 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 filing.

Good morning, and welcome to today's conference call to review connect one's results for the third quarter of 2023 and update you on recent developments on today's conference call will be bring 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.

Speaker 2: transcript

Speaker 2: 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.

In 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 schedule.

Speaker 3: transcript

Speaker 3: which have been filed today on form 8K with the SEC and maybe also access through the company's website. I will now turn the call over to Frank Sorangina. Frank, please go ahead. Thank you, Sian. Good morning, everyone. We appreciate you joining us today as we discuss Connect One's recent quarterly performance. But before we take your questions, I'll review some of the challenges and opportunities that we're saying while Bill will review our third quarter in more detail. With that said, let's jump right to the point.

It has been filed today on form 8-K, with the SEC and maybe also accessed through the company's website I will now turn the call over to France, Argentina. Frank. Please go ahead. Thank you Sarah and good morning, everyone. We appreciate you joining us today as we discuss <unk> recent quarterly performance before we take your questions I'll review some of the challenges and opportunities.

<unk> that we're seeing while Bill will review, our third quarter in more detail.

That said, let's jump right to the point.

Speaker 3: transcript

Speaker 3: 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 for a customer.

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 remained solid. However, these are not the financial results were accustomed to we remain confident that we will return to our historical level of profitability based on the strength of our franchise.

Speaker 3: transcript

Speaker 3: We remain confident that we will return to our historical level of profitability based on the strength of our franchise.

Speaker 3: transcript

Speaker 3: 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, ConnectOne remains resilient and committed to maintaining and in fact improving our business model. Importantly, we are all committed to maintaining and improving our business model.

We understand that putting our clients first and putting our people first as a short term cost in this difficult environment. We also understand and are 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.

Maintaining and in fact, improving our business model importantly, we.

Speaker 3: transcript

Speaker 3: 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 prudent.

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.

<unk> 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.

Speaker 3: transcript

Speaker 3: We're seizing opportunities to strengthen our teams by adding high-performance 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 season technology executive as chief digital officer to further leverage technological innovation.

<unk> as Chief Digital Officer officer to further leverage technological innovations.

Speaker 3: transcript

Speaker 3: 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 foot-

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.

Speaker 3: transcript

Speaker 3: Demonstrating the billage and 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 Army Channel Deposit Origination Platform, both flies franchise referral and lending marketplace, and our SBA lending platform.

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 and our teams in south Florida in long Island continue to build momentum as they capture market share operationally, we continue to expand through digital enhancements, including mantles omni.

Channel deposit origination platform, both lives franchise referral and lending marketplace, and our SBA lending platform.

Speaker 3: transcript

Speaker 3: Turning to credit, connect one's credit metrics remains stable and sound. We have a high quality client base. And during the third quarter, delinquencies and non-acruals remained low, reflecting prudent, underwriting, strong portfolio oversight, and a resilient economy.

Turning to credit connect ones credit metrics remained stable and Sam 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.

Speaker 3: transcript

Speaker 3: Regarding our CR report folio, 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.

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 tendency special services and multi use buildings.

Speaker 3: transcript

Speaker 3: Our office exposure in New Jersey is less than 4%, which includes high-tenancy special services and multi-use buildings.

Speaker 3: transcript

And looking at our multifamily as we've emphasized before our Manhattan portfolio was less than two 5% of total loans and only five 5% and the other four in 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.

Speaker 3: transcript

Speaker 3: 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

Domestic and committed to building connect one's highly valuable franchise, we believe that the actions we've taken over the past 12 months to 18 months positioning the company for sustainable profitable and rewarding growth going forward.

With that I will turn it over to bill for the details.

Speaker 4: transcript

Speaker 4: Okay, thanks, Frank. Good morning, everyone. I'm not going to take a lot of time this morning, but wanted 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...

Okay, Thanks, Frank and good morning, everyone.

I think a lot of time this morning, but wanted 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.

Speaker 4: transcript

Speaker 4: a scooting broker which declined by approximately $125 million. Flying deposits increased by $150 million on an average comparison, and by about $50 million on a point-to-point basis.

<unk> broker, which declined by approximately $125 million on him.

Deposits increased by $150 million on an average comparison by about $50 million on a point to point basis, our liquidity remains very strong by any measure readily accessible liquidity remained nearly two five times adjusted uninsured deposits.

Speaker 4: transcript

Speaker 4: or liquidity remains very strong by any measure. Reddily accessible liquidity remains nearly 2.5 times adjusted under shared deposits. The liquidity consists largely of on-

The liquidity consists largely of on balance sheet cash unencumbered available for sale securities and we have unused lines of credit and federal home loan bank and the fed each of those are well in excess of $1 billion.

Speaker 4: transcript

Speaker 4: Unencovered, 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.

Speaker 4: transcript

Speaker 4: adjusted uninsured deposits, which excludes collateralized municipal deposits, as well as intercompany deposits represents 21% of total deposits.

Adjusted uninsured deposits, which excludes collateralized municipal deposits as well as intercompany deposits represents 21% of total deposits.

Speaker 4: transcript

Speaker 4: On to the net interest margin, which contracted sequentially by five basis points, and that is in line with our previous guidance. Our costs of interest bearing deposits increased by 28 basis points this quarter, reflecting a cumulative beta of about 50%.

On to 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% <unk>.

Speaker 4: transcript

Speaker 4: Average non-interest bearing declined by about $70 million, some due to seasonality, and it's more than we had anticipated. However, those balances have remained somewhat consistent over the past 60 days and in fact have grown since quarter end.

Average noninterest bearing declined by about $70 million, some due to seasonality and it's more than we had 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 of nearly <unk>.

Speaker 4: transcript

Speaker 4: 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 pressure for another quarter.

But there still can be competitive and funding mix pressures. So we could still see a modest amount of margin pressure for another quarter.

Speaker 4: transcript

Speaker 4: As I've mentioned before, we are in a liability-sensitive position and would benefit materially, I believe, from other climate short-term rates and an upward sloping yield curve. In terms of loan repricing, fixed rate loans went on the bookstice quarter where the 8 to 9% range while about 75 million of fixed rate loans exited at about five and a half. And the loan pipeline is predominantly wider spread C&I and construction while the tighter spread multifamily originations are quite limited.

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 were in the 8% to 9% range, while about $75 million of fixed rate loans exited at about <unk>.

Five five and the loan pipeline is predominantly wider spreads C&I and construction, while the tighter spread multifamily originations are quite limited.

Speaker 4: transcript

Speaker 4: On to non-invasive 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, Bowfly is expected to be a further contributor to this line item.

On to non interest income it continues to increase from SBA loan sales and we expect revenue here to accelerate in the fourth quarter and beyond.

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 lie is expected to be a further contributed to this line item.

Speaker 4: transcript

Speaker 4: 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 that connects one. 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 $14.3 million.

In terms of operating expense as you know we are already one.

One of the most efficient banks so efficiency is not a project for us It is a way of life or connect one and so notwithstanding notwithstanding our success of bringing in new talent sequential expense growth was less than 1% this quarter and I expect the same level of expense growth for the fourth quarter.

Speaker 4: transcript

Speaker 4: 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.

Our efficiency ratio has increased to about 50% from 40% historically and thats largely due to margin compression, but our operating expense percentage of average assets remains less than one 5% and that is among the best in the industry.

Speaker 4: transcript

Speaker 4: Next one, I'll talk a little bit about capital. Our tangible common equity ratio at the Holy Company was 9.1. Well, at the bank level, it is even higher at 10.7%.

Next I wanted to talk a little bit of our capital our tangible common equity ratio at the holding company was nine 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 Noncumulative preferred is 10 three so this strong capital gives us significant finance.

Speaker 4: transcript

Speaker 4: and the tangible equity ratio at the Holy Me Company, which includes perpetual non-cument 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.

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 300000 shares we bought those back below tangible book value and that makes those repurchases accretive to tangible book value per share.

Speaker 4: We purchased it for the third quarter. We're about 300,000 shares. We bought those back below tangible book value, and that makes those repurchases a creative, tangible book value per share.

Speaker 4: transcript

Speaker 4: And Tansville Book Value for Share was about flat from 630, but up 7% from a year ago. I expect continued growth in Tansville Book Value for Share, a hallmark of Connect 1 bank.

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.

Speaker 4: transcript

Speaker 4: On credit quality metrics, non-acool loans picked up slightly due to one multifamily loan that is well secured. And if you exclude the tax burden of the loan, which are more than adequately reserved for, that non-acool ratio is 50 basis points, which is right on our historical average.

On credit quality metrics non accrual loans ticked up slightly due to a one multifamily loan that is well secured.

And if you exclude the taxi medallion loans, which are more than adequately reserved for nine nonaccrual 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 charge offs for the quarter, but.

Speaker 4: transcript

Speaker 4: We also had approximately 2 million commercial loan charge off that had largely been reserved for, and that led to 12 basis points of annualized charge off for the quarter, but at the link with C's of 38 and 9 days were virtually nonexistent at just 3.5 million. That's just 0.04% of total loans. And criticized the classified, fell by more than 15% to just 1.4% of total loans. This was the fourth consecutive quarter of improvement.

Our delinquencies of 30 89 days were virtually nonexistent at just $3 5 million Thats, just 0.04% of total loans and criticized the clarice classify fell by more than 15% of just one 4% of total loans. This was the fourth consecutive quarter of improvement.

Rollover risk being well managed with the majority of majority of loans repricing without any potential downgrades.

Speaker 4: transcript

Speaker 4: being well managed with the majority of loans re-pricing without any potential downgrades.

Speaker 4: transcript

Speaker 4: Going forward to the end of next year, we have about 10% of the portfolio rolling over to a higher rate with...

Going forward through 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 through this group and again has been largely successful and before I end I just want to reiterate that our exposure to <unk>.

Speaker 4: transcript

Speaker 4: 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.

Speaker 3: transcript

Speaker 3: And before I end, I just want to reiterate that our exposure to New York City office is minimal, a less than 1% of total loans. So with that frank, back to you, and then we'll get to questions. 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.

New York City office is minimal at less than 1% of total loans, so with that Frank back deal and then we'll get to questions. 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.

Speaker 3: transcript

Speaker 3: balance sheet, capital structure, and talent to support our future growth.

Speaker 3: transcript

Speaker 3: We're confident in our direction and optimistic about our position. We look forward to updating you in the quarters ahead. And with that.

Optimistic about our position we look forward to updating you in the quarters ahead with that happy to take your questions.

Operator: Hello, and welcome to the ConnectOne Bancorp Inc. Third Quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise.

Speaker 1: transcript

Speaker 1: Thank you. If you have a question, please press star one on your telephone keypad. If you wish to remove yourself from the key, simply press star one again. One moment please for your first question.

Thank you. Thank you I have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue simply press Star One again one moment. Please for your first question.

Operator: After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad. If you would like to withdraw your question, again, press the star one.

And your first question comes from the line of.

Speaker 1: transcript

Speaker 1: Nick Cukarelli of Havdi Group. Your line is open. Good morning.

Siya Vansia: I'll now turn the conference over to Siya Vansia, Chief Brand and Innovation Officer. Please go ahead. Good morning and welcome to today's conference call to review ConnectOne's results. We're the third quarter of 2023 and to update you on recent developments.

Nick Zuccarelli of.

Have the group your line is open.

Good morning, everyone.

Hi, Nick.

Speaker 1: transcript

Speaker 1: 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?

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 were a return to growth as more plausible and when we might see that.

Siya Vansia: 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 violence. The forward-looking statements included in this conference call are only made as a date of its call and the company is not obligated to publicly update or revise them.

Speaker 3: transcript

Speaker 3: 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.

I think there's two parts to that Nick.

Maybe you have additional thoughts, but the first part is just the economy in general we're seeing less opportunities that we think makes sense for us in the in the various lines that were in.

Speaker 3: transcript

Speaker 3: 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.

Our ports our pipeline is still quite strong we.

We do see payoffs coming out of the portfolio that sort of mitigate a lot of the new business that comes on board.

Siya Vansia: In addition, certain serums used in this call are non-gap financial measures, recommendations 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.

Speaker 3: transcript

Speaker 3: 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.

And we're being 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.

Frank Sorrentino: I will now turn the call over to Frank Sorrentino. Frank, please go ahead. Thank you, CNN.

Siya Vansia: I will now turn the call over to Frank Sorrentino. Frank, please go ahead. Thank you, CNN.

Speaker 3: transcript

Speaker 3: 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.

Frank Sorrentino: Good morning, everyone. We appreciate you joining us today as we discuss ConnectOne's recent quarterly performance. But 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.

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, yes, 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.

Frank Sorrentino: 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, ConnectOne remains resilient and committed to maintaining and, in fact, improving our business model.

Yes, Nick I think it's hard to always predict.

Speaker 4: transcript

Speaker 4: you know, all the things going on, but we are going to remain disciplined in terms of pricing. So, you know, one thing that can impact, um,

All the things going on but we are going to remain disciplined in terms of pricing. So one thing that can impact.

Speaker 4: transcript

Speaker 4: how much we grow is what the competition is doing and how aggressive the competition is being. Because, you know, 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.

How much we grow as what the competition is doing and how aggressive the competition has been 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 us so hard to say for sure but as you.

Frank Sorrentino: Importantly, we have the financial strength, balance, 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, provide 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.

No.

Our growth rate is typically pretty good and a growing economy.

Speaker 5: transcript

Speaker 5: That's very helpful. You also mentioned the pipeline and the wider spread businesses of C&I 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?

That's very helpful. You also mentioned the pipeline and the wider spread businesses of C&I and construction is there a clear geography, thats driving pipeline activity as well, especially just noting your more recent investments in long island in Florida.

Speaker 3: transcript

Speaker 3: I think the pipeline, more than 90% of the pipeline is in our, 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.

I think the pipeline.

More than 90% of the pipeline is in our writing.

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 are doubling down in the areas that we are the most confident about it.

Frank Sorrentino: This includes the appointment of a leading financial services executive as Chief Strategic Operations Officer and the addition of a season technology executive as Chief Digital 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 foot. 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.

And.

Cherry picking for the best client relationships and the best loan opportunities.

Thank you for taking my questions.

You're very welcome.

Speaker 1: transcript

Speaker 1: Your next question comes from the line of Daniel Tameo of Raymond James. Your line is open.

Your next question comes from the line of Daniel to Mail of Raymond James Your line is open.

Good morning, guys.

Danny.

Speaker 6: transcript

Speaker 6: Maybe Bill, just, you know, if you could just start on the, on the margin, appreciate your, your guidance for the fourth quarter for, for maybe a little bit more contraction, but just wanted to get your updated thoughts on, you know, I guess past that bottom in the fourth quarter, the type of expansion that you, you might be expecting next year, if we're in this higher for longer type of rates in there.

Maybe.

Frank Sorrentino: To that end, our teams in South Florida and Long Island continue to build momentum as they capture market share. To credit, ConnectOne's credit metrics remain stable and sound. We have a high quality client base, and during the third quarter, delinquencies and non accruals remain low, reflecting prudent, underwriting strong portfolio oversight and a resilient economy. Regarding our CRPortfolio, our Manhattan office exposure is less than one half of 1% of total loans than our entire New York City office exposure is less than 1% of total loans.

Bill just if you could just start on the on the margin I appreciate your.

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.

Speaker 4: transcript

Speaker 4: 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.

Well I think higher for longer as 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.

Speaker 7: transcript

Speaker 7: Okay, I think last quarter, we maybe I'm wrong, but I thought we talked about even in that scenario, some expansion for the margin. Is that not not the case? And in terms of how you're thinking about it now, 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. Okay, understood.

Frank Sorrentino: Our office exposure in New Jersey is less than 4% which includes high tendency 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 and purchased money loans within suburban and commuter oriented areas in New Jersey. So to wrap things up, we remain very optimistic and committed to building ConnectOne'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.

Okay, I think the last quarter.

Maybe I'm wrong, but I thought we talked about.

Even in that scenario.

Some expansion for the margin is that not the case in terms of how youre thinking about it now.

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.

Okay understood.

And then.

Speaker 6: transcript

Speaker 6: I guess just quickly on broker deposits, did you have that number, what that was on a period?

Frank Sorrentino: 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.

I guess.

Just quickly on.

Broker deposits did you have that number what that was in a period.

Speaker 4: transcript

Speaker 4: Well, in terms of reduction, it was 125 million. It depends whether you look at it on average or on an asset basis.

Well it was in terms of reduction it was $125 million.

Bill Burns: With that, I'll turn it over to Bill for the details. Okay, thanks for having me. Good morning, everyone.

It depends whether you look on average on an as is basis.

Bill Burns: I'm going to take a lot of time this morning, but one of the highlights, some of the more important third quarter metrics and also I'll 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, buying 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.

Speaker 4: transcript

Speaker 4: Yeah, I was wondering as of. Oh, what the total? The total brokered was $1.1 billion. And there is some confusion out there because reciprocal balances, typically ICS and CDERs are included in some measures of brokered. But this $1.1 billion, we call true brokered. And that's what our level is.

Yes.

I was wondering as of what.

What's the total.

The total broker was $1 1 billion.

And there is some confusion out there because reciprocal balances.

Typically Ics and Cedar as are included in some measures of brokered, but this $1 1 billion, we call true brokered and Thats where were at a level is.

Okay.

Speaker 6: transcript

And then.

The borrowings that.

Do you have on your balance sheet.

Bill Burns: Readily accessible liquidity remains nearly 2.5 times adjusted, uninsured deposits. The liquidity consists largely of unbalanced cash, uninccovered available for sale securities, and we have unused lines of credit, federal home loan bank and the Fed. Each of those are well in excess of one billion adjusted, uninsured deposits, which excludes collateralized municipal deposits, as well as intercompany deposits represents 21% of total deposits.

It looks like there was a.

A difference any 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.

Speaker 4: transcript

Speaker 4: Well, the borrowings we replace as they mature. So we're not sure 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.

While the borrowings we replace as they mature so we're not I'm not sure. If you are talking about doing anything ahead of time and paying a penalty. So we're not contemplating that but.

But yes, there could be increases in the borrowing cost as some of those rollover. Although some of them are short term and they were at high rates. So that will be gone and if rates do decline youll see youll see lower rates on the borrowing line as well so it's a little bit of a mixed bag Dan.

Bill Burns: On to 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 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.

Speaker 6: transcript

Speaker 6: Okay, yeah, I guess I was referring to the, the, the yield or the cost on those is pretty low at 241 in the quarter and the average came down. So I was, I was just wondering if that, but I think the end of period went up. So it looks like you're replacing. Sorry.

Okay, Yeah, I guess I was referring to.

The yield or the cost on those is pretty low at $2 41 in the quarter.

And the average came down so I was I was just wondering if that but at the end of period.

It looks like Youre, replacing sorry, 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.

Speaker 4: transcript

Speaker 4: 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.

Bill Burns: We are cautiously optimistic that the positive 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 in pressure for another quarter. As I've mentioned before, we are in a liability sense of position and would benefit materially, I believe, from other climate short-term rates and an upward sloping yield curve.

Down for the quarter.

Speaker 6: transcript

Speaker 6: So how does that, I mean, is it that had just played through next year then so that you won't see too much? Increasing cost there.

Okay.

So how does that I mean is it the hedges play through next year, then so that you won't see too much.

Bill Burns: In terms of loan repricing, fixed rate loans went on the bookstice quarter where the 8 to 9 percent range while about 75 million of fixed rate loans exited at about five and a half, and the loan pipeline is predominantly wider spread CNI and construction, while the tighter spread multifamily originations are quite limited.

Increase in costs there.

Speaker 4: transcript

Speaker 4: Yes, they continue to, they continue to immunize us against the rates, higher rates. And so like I said, we extend the duration of that portfolio and that has helped us.

Yes, they continue to they continue immunize us against against rates higher rates.

So like I said, we extended the duration of that portfolio and that has helped us.

Speaker 6: transcript

Speaker 6: Okay, terrific. All right. I appreciate all that color, but I'll step back. Thanks, guys.

Okay terrific alright, I appreciate all that color, but I'll step back thanks, guys. Okay. Thanks, Dan.

Bill Burns: On to non-issue 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 lies expected to be further contributed to this lie in item.

Speaker 1: transcript

Speaker 1: Your next question comes from the line of Frank Schiraldi of Pepper Sandler. Your name is, sorry, your line is open.

Your next question comes from the line of Frank Gerardi Piper Sandler Your name is sorry. Your line is open.

Good morning.

Thanks, Brian.

Speaker 8: transcript

Speaker 8: 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.

Just.

I'll follow up on the margin Bill.

Comments on NIM inflection.

Bill Burns: 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 ConnectOne, and so notwithstanding our success of bringing in new talent, sequential expense growth would less than 1 percent this quarter, and they expect the same level of expense growth for the fourth quarter. Our efficiency ratio has increased to about 50 percent from 40 percent historically, and that's largely due to margin compression, but our operating expense percentage of average assets remains less than 1.5 percent, and that is among the best in the industry.

I saw you.

In terms of a higher for longer rate scenario. So so rich just basically stay where they are.

Speaker 8: transcript

Speaker 8: 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? I'm using trickle up in terms of rate.

And your thought and Youre thinking.

Deposit balances for the industry for <unk> do they begin.

To stabilize.

And the next quarter or two or do you think there is a continued trickle up.

Which is why you wouldnt necessarily get inflection and then and then.

Trajectory upwards in the NIM in 2020, trickle trickle up in terms of rate.

Yes.

Speaker 4: transcript

Speaker 4: Yes, I 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.

Yes, yes, I would say that thats exactly yet so our time deposits are very close to leveling out in terms of the cost, but there continues to be pressure on the non maturity.

Bill Burns: Next, we want to talk a little bit about capital, our tangible common equity ratio at the Holy Company was 9.1, while at the bank level it is even higher at 10.7 percent, and the tangible equity ratio at the Holy Company, which includes perpetual non-culement to preferred is 10.3. So this strong capital gives a significant financial flexibility, and even though we still like to see our capital building, we also have room to moderately grow the balance sheet and continue our share repurchase program.

Speaker 4: transcript

Speaker 4: But the continues to be pressure on the non-maternity interest bearing accounts. And.

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.

Speaker 4: transcript

Speaker 4: 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 that could still be compression.

Bill Burns: Repurchases for the third quarter were about 300,000 shares. We bought those back below tangible book value, and that makes those repurchases a creative, tangible book value per share. And tangible book value per share was about flat from 6.30, but up 7 percent from a year ago, I expect continued growth in tangible book value per share, a hallmark of ConnectOne bank. On credit quality metrics, non-cule loans ticked up slightly due to one multifamily loan that is well-secured, and if you exclude the taxee of the value loans, which are more than adequately reserved for, that non-cule ratio is 50 basis points, which is right on our historical average.

Deposits causes me to believe that that could still be compression.

Got you okay.

Speaker 8: transcript

Speaker 8: And then just thinking about the buyback here, given maybe a bit slower growth.

And then just.

I am thinking about the buyback here, given maybe a bit slower growth.

Speaker 8: transcript

Speaker 8: in this environment, you know, is

In this environment.

Speaker 4: transcript

Speaker 4: 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 spot? 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.

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.

Do you look to get more aggressive on what are your just general thoughts on.

I think that's the maximum that we would want a day where.

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.

Bill Burns: We also had approximately 2 million commercial loan charge-offs that have largely been reserved for, and that led to 12 basis points of annualized charge-offs for the quarter, but the link with C's of 38 and 9 days were virtually nonexistent at just 3.5 million. That's just 0.04 percent of total loans, and criticized the class of I fell by more than 15 percent to just 1.4 percent of total loans. This was the fourth consecutive quarter of improvement.

Speaker 4: transcript

Speaker 4: 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.

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 in buying back is the best way to look at those three items.

Speaker 4: transcript

Speaker 4: 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.

We'll watch it for Watson numbers of extent, we have more ability to buy back stock, we will because they like buying stock back below tangible book value per share.

Bill Burns: Roll over risk being well managed with a 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.

Speaker 8: transcript

Speaker 8: 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 wondering if you curious your thoughts, particularly as it pertains to multi-family here. You know, you have some that talk about multi-family as being a...

Alright, okay.

Okay, No I totally get that and then.

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 curious your thoughts.

Particularly as it pertains to multifamily here.

You have some talk about multi.

Multifamily is being a.

Speaker 8: transcript

Speaker 8: 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 ConnectOne, but also in general in the, you know, geography.

Bill Burns: And before I end, I just want to reiterate that our exposure to New York City office is minimal, less than 1% of total loans.

A dangerous place to be.

In New York in this environment.

Others, who sort of continue to look at it is this fortress balance sheet.

Frank Sorrentino: So with that frank, back to you and then we'll get questions. Great. Thanks, Bill.

Had these best in class returns.

Frank Sorrentino: 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.

In terms of risk adjusted returns over the last 2030 40 years. So just curious your thoughts as it pertains to multifamily.

Can I ask one but also in general in the.

Geography.

Operator: And with that, happy to take your questions. Thank you. If you have a question, please press star one on your telephone keypad. If you wish to remove yourself from the queue, simply press star one again. One moment, please for your first question.

Speaker 3: transcript

Speaker 3: 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 in both of the, what's similar about both of those markets.

So you got the New York City.

Five borrowers and then you have.

The suburbs, which would include long island in New Jersey, where the vast majority of our portfolio exists and I will tell you that in both of the Westwood similar about both of those markets is there is just not enough supply the demand is outstripping the supply.

Nick Cukarelli: Your first question comes from a line of Nick Cukarelli of Havdi Group. Your line is open.

Speaker 3: transcript

Speaker 3: that there is just not enough supply, that demand is outstripping the supply. And...

Speaker 3: transcript

Speaker 3: Even today, rental rates continue to march higher. I think that's even more pronounced in the New York City market.

Frank Sorrentino: 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 of growth is more plausible and when we may see that? 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.

<unk>.

Even today.

Rental rates continue to March higher I think that's even more pronounced in New York City market.

Speaker 3: transcript

Speaker 3: The 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 finance, the minute it's completed, it's completely filled in record time.

The 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.

Speaker 3: transcript

Speaker 3: So there's definitely a large demand for that because we're under supply.

So there is definitely.

A large demand for that because we're under supplied and so people have gotten raises everybody has a job.

Frank Sorrentino: 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 somewhat cautious looking at different ways of enhancing our underwriting relative to what we see. But the demand is 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.

Speaker 3: transcript

Speaker 3: And so people have gotten raises, everybody has a job. I think the dynamics around the multi-family business are actually quite good right now. And for the foreseeable future, I think they remain good.

I think the dynamics around the multifamily business are actually quite good right now and for the foreseeable future I think they remain good.

Speaker 3: transcript

Speaker 3: 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.

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.

Speaker 3: transcript

Speaker 3: 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...

Some of those some of those properties are challenged and so when those come up on.

Frank Sorrentino: 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 did impact the economy. I think we will continue to have forward momentum relative to the long portfolio and the entire balance sheet as well.

<unk> and our repricing there are issues, there and in cases, where.

Folks went on a pro forma rent projection based on that change in going from rent stabilize the market and thats not available anymore and now the interest rate went up there could be there could be some losses in those portfolios. So.

Speaker 3: transcript

Speaker 3: 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, you know, 100% loan-to-value, but that's okay if they can afford to maintain their, you know, their mortgage payment.

<unk> 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 Ken can in fact withstand.

Frank Sorrentino: 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 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 us. So hard to say for sure, but as you know, our growth rate is in typically pretty good in a growing economy.

The rate increases and they may be closer to 100% loan to value, but that's okay. If they can afford to to maintain there.

Their mortgage payments so overall.

Speaker 3: transcript

Speaker 3: 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.

I wouldn't call it bullish but I would tell you that we're definitely quite confident and comfortable in our portfolio with <unk> and I would say for the vast majority of the portfolio is that I'm aware of across the industry.

Alright, I really appreciate all the color Frank Thanks, guys.

Frank Sorrentino: That's very helpful. You also mentioned the pipeline and the Widersport businesses of C&I 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? I think the pipeline, more than 90% of the pipeline is in our, 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.

Okay.

Thank you Frank.

Speaker 1: transcript

Speaker 1: 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.

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 Breese of Stephens. Your line is open.

Hey, good morning, guys.

Speaker 9: transcript

Speaker 9: Morning Matt. Bill, maybe the first one for you, I was hoping you could provide just sort of your near-term manager's 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 what level?

Good morning, Matt.

Bill maybe the first one for you.

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 where do you think we might see stability as we look out the next several quarters, either what quarter or at what level.

Frank Sorrentino: 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.

Speaker 4: transcript

Speaker 4: but I'll get those crystal balls. I knew you were gonna ask them. Ha ha. Um.

But I'll get Bill Crystal ball.

I knew you were going to ask.

Nick Cukarelli: Thank you for taking my questions. You're very welcome.

Nick Cukarelli: Thank you for taking my questions.

Yeah.

Speaker 4: transcript

Speaker 4: Look, there's a number of factors going on for the fourth quarter.

Daniel Tamayo: You're very welcome. Your next question comes from line of Daniel Tamayo of Raymond James. Your line is open.

Look there is a number of factors going on for the for the fourth quarter.

Daniel Tamayo: Your next question comes from line of Daniel Tamayo of Raymond James. Your line is open. Good morning, guys. 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, you know, 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 rates in Arizona.

Speaker 4: transcript

Speaker 4: 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-forsparing demand fell, you know, more than I had thought, but it has leveled out for now. So I'm not 100% sure about the level of those.

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 our basically pricing out on the on the time deposits and those have been about the same the noninterest bearing demand fell more than I had thought but it has leveled out for now.

Daniel Tamayo: Good morning, guys. 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, you know, 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 rates in Arizona. Well, I think higher for longer is a negative for the industry and that banks benefit from upward bloating yield curves.

So I'm not 100% sure about the level of those we have loans that are going on the balance sheet of 300 basis points, one in the coming off but it's a small amount.

Speaker 4: transcript

Speaker 4: We have loans that are going on the balance sheet at 300 points more than they're coming off, but it's a small amount.

Speaker 4: transcript

Speaker 4: So with the continued competition on the non-maturity interest pairing, which still is starting, still floating up, I see some compression. It may be similar to what we had in the last quarter.

So with the continued competition on the non <unk>.

Daniel Tamayo: Well, I think higher for longer is a negative for the industry and that banks benefit from upward bloating yield curves. And the only comment I want to reiterate is that a return to lower short term rates and upwards hoping yield curve is going to help connect one more than other banks in my view. Okay, I think last quarter, maybe I'm wrong, but I thought we talked about even in that scenario, some expansion for the margin.

Maturity interest bearing which still is starting is still floating up I see some compression. Okay. It may be similar to what we had in the most in the last quarter.

Daniel Tamayo: And the only comment I want to reiterate is that a return to lower short term rates and upwards hoping yield curve is going to help connect one more than other banks in my view. Okay, I think last quarter, maybe I'm wrong, but I thought we talked about even in that scenario, some expansion for the margin. Is that not not the case in terms of how you're thinking about it now? 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.

Speaker 4: transcript

Speaker 4: hard to read out for the next year, but I do see it stabilizing, because eventually, right, the Fed, we don't know, there might be one more race, but that could be it, and it is going to stabilize. And eventually, when we get through a period of...

Hard to read out into.

Into next year, but I do see it stabilizing because essentially the.

The fab, we don't know there might be one more race, but.

That could be at 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.

Speaker 4: transcript

Speaker 4: 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.

Daniel Tamayo: Is that not not the case in terms of how you're thinking about it now? 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.

I hope that answers your question Matt on that.

Speaker 9: transcript

Speaker 9: It's great. It's about as good as can be given the information we have.

Great. It's about as good as can be given the information yet.

Speaker 9: transcript

Speaker 9: I do want to ask you whether or not you know beneath the hood, you would mention you're starting to see some stabilization and not interest bearing. What are the indications of that? What are the measures you're using? And do you have any sort of that estimate at this point of where we might see peak deposit costs?

I did want to ask you whether or not.

<unk> you had mentioned you are starting to see some stabilization in noninterest bearing what are the indications of that what are the metric you're using.

Bill Burns: Okay, understood. And then I guess just quickly on broker deposits, did you have that number, what that was in a period? Well, it was in terms of reduction, it was 125 million. It depends whether you look on average or an as of basis. I was I was I was wondering as of what the total the total broker is 1.1 billion. And you know, there is some confusion out there because reciprocal balances, you know, the typically ICS and cedar is are included in some measures of broker, but this 1.1 billion we call true broker and that's what level is.

Daniel Tamayo: Okay, understood. And then I guess just quickly on broker deposits, did you have that number, what that was in a period? Well, it was in terms of reduction, it was 125 million. It depends whether you look on average or an as of basis. I was I was I was wondering as of what the total the total broker is 1.1 billion. And you know, there is some confusion out there because reciprocal balances, you know, the typically ICS and cedar is are included in some measures of broker, but this 1.1 billion we call true broker and that's what level is.

And do you have any sort of best estimate at this point of where we might see peak deposit cost.

Well.

Speaker 4: transcript

Speaker 4: I almost answered a little bit before. So right now the balances in non-intersparing 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 cost, as I said, if non-intersparing remains where it is, if...

I almost I answered a little bit before so right now the balances and noninterest bearing or slightly higher than they were in the last 60 days. So I'm hopeful once again that thats going to level out.

And in terms of total deposit costs as I said, if noninterest bearing remains where it is.

If.

Speaker 4: transcript

Speaker 4: 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.

The Cds stay where they are which I expect that today, the only thing moving the number is.

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. 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.

Daniel Tamayo: 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. 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.

Non non.

Non maturity interest bearing and it.

It depends on the money supply and total deposits in the system, but thats. The one lever that could continue to increase deposit cost obviously as the fed.

Speaker 4: transcript

Speaker 4: pricing interest rate levels out, that's going to put pressure on stabilizing deposit costs as well.

Sure.

Pricing interest rate levels out that's going to put pressure on stabilizing.

Deposit costs as well.

Speaker 10: transcript

Speaker 10: And then a low yield, what is the roll on versus roll off dynamic currently? So right now, it's about between $8.50 to $5.50.

And then our loan yield.

What is the role on versus roll off dynamic currently and.

Daniel Tamayo: 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. Okay, yeah, I guess that was referring to the cost on those is pretty low at 241 in the quarter.

Right now its about between $8 50 to $5 50.

850 rollout $5 50 rollout right.

Speaker 4: transcript

Speaker 4: And that's great, right? But it's a small portion of the portfolio because it's such a small growth and there's such a small amount of prepayments.

And that's great right, but but.

It's a small portion of the portfolio because it's such a small growth and as such small amount of prepayments.

Okay.

Speaker 9: transcript

Speaker 9: Could you just talk about the strategy on security 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?

Can you just talk about the strategy on the securities portfolio. Its been a run off mode for a while but I was curious what percentage of total assets would you like to keep it up.

Daniel Tamayo: And the average came down. So I was I was just wondering if that, but it may be in the period enough. It looks like you're replacing, sorry, good. Yes, I think I understand what you're saying. So a lot of our, a lot of our, we have federal home owned borrowings that are actually termed and we also have some that are overnight that are hedged. And so we locked in a lot of borrowings at a lower rate.

Speaker 4: transcript

Speaker 4: Well, I'd like to see it a little bit higher, you know, for the long run.

Well I'd like to see it a little bit higher for the long run.

<unk>.

Speaker 4: transcript

Speaker 4: 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.

Yes.

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 what we've learned.

Speaker 4: transcript

Speaker 4: 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 portfolio, unencumbered securities on your balance sheet are less important because you can't get the cash for those in a few hours.

Daniel Tamayo: And so when the short term paid off, that caused the rate to go down to the quarter. Okay, so how did that, I mean, is it the head just played through next year then so that you won't see too much increase in cost there? Yeah, so they continue to, they continue to immunize us against the, against the rates higher rates. And so like I said, we understand the duration of that portfolio and that has helped us. Okay, terrific.

Over this year and the crisis is that having securities in our portfolio isn't the type of liquidity that you really need you really need readily accessible liquidity. So in my mind the securities on 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 from the federal home loan bank or the <unk>.

Speaker 4: transcript

Speaker 4: where you can get cast on the federal home loan bank or the Fed, and you know, on a moment's notice. So...

On a moment's notice so.

Speaker 4: transcript

Speaker 4: I like my goal has been a little bit higher than it is right now, but I don't see moving that up significantly, you know, over the next couple of quarters.

I'd like.

My goal is spent a little bit higher than it is right now, but I don't see moving that up significantly over the next couple of quarters.

Operator: All right, I appreciate all that color, but I'll step back. Thanks, guys. Okay, thanks Dan.

Frank: Your next question comes from line of Frank. Should I be a 5% there? Your name is, sorry, your line is open.

Speaker 9: transcript

Speaker 9: Okay, and then Frank, 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.

Okay.

And then Frank.

Are you one.

You had mentioned in your opening comments just some of the quality of talent <unk> been able to bring in in higher I'd be curious what the current pipeline looks like in terms of resumes on your desk.

Frank: Morning. Hi, Frank. Just a follow up on the margin. Bill, you know, your comments on name 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 and your thinking, do deposit balances for the industry, proceed knob, 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, and then, you know, a trajectory upwards in the, in the name in 2020.

Speaker 9: transcript

Speaker 9: how qualified these people are, and 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 BowFly, and how are all those efforts.

How qualified these people are impressed by them and can this continue and then secondly on the tax stuff.

Just give us an update on mantle nimbus and both lie and how are all those efforts going.

Speaker 3: transcript

Speaker 3: So I would tell you that the phone's 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, you know, the new place that they're at or the reformulated place that they're at, it's not meeting their expectations.

So I would tell you that the phones keep ringing.

Now, it's pretty much all inbound calls as 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 sound that the.

The new place that they are at or the reformulated place that they are at its not meeting their expectations and they want to they want to they want to work to replace that.

Frank: I'm using trickle, trickle up in terms of rate. Yeah. Yes, I, 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, they continue to be pressure on the non maturity interest bearing accounts. And so, that's why I'm been conservative about the margin. We have assets repricing, but it's a small amount and it's worth a few basis points of quarter of widening, but that continued, you know, pressure of, of interest rates increasing on those non maturity deposits causes me to believe that that could still be compression.

Speaker 3: transcript

Speaker 3: They want to work for a place that's exciting and a place that's innovative and a place where, you know, they're not stuck in a particular lane. So ConnectOne 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.

Exciting in a place that's innovative and a place where they're not stuck in.

In a particular lanes so.

Connect one is definitely built a reputation in the marketplace is a place that's moving and shaken and lots of stuff going on.

So the phone keeps ringing, we certainly have lots of folks to pick from across all the various spur.

Speaker 3: transcript

Speaker 3: specialties, whether it's in operations, technology, revenue producers, it doesn't matter. In various markets, new markets, potentially, whatever. So we're getting a 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-

Specialties, whether it's in operations technology revenue producers it doesn't matter in various markets new markets potentially whatever so we're getting a 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.

Frank: That's here. Okay. 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, I think that's the maximum that we would want to be.

Speaker 3: transcript

Speaker 3: a 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,

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.

Speaker 3: transcript

Speaker 3: 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 challenges in a more normalized interest environment are really exciting. When you start to talk about things

Wed like to see some of the financial metrics and.

Stock valuation would be better, but the business itself the core business and what we're doing with it and how we're positioning ourselves.

Frank: 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, you know, 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, we'll, we'll watch it, to watch the numbers, so that the extent we have more ability to buy back stock, we will, because I like buying stock back below 10s, we'll put value for share.

For the coming challenges in a more normalized interest environment are really exciting.

When you start to talk about things like.

Speaker 3: transcript

Speaker 3: you know the digital onboarding platform from mental. I mean that's making serious change throughout the organization, it's giving.

The digital Onboarding platform through mental I mean, thats, 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 <unk>.

Speaker 3: transcript

Speaker 3: 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.

<unk> clients and be able to move additional.

Speaker 3: transcript

Speaker 3: Additional deposits over to the bank, you know, with just a lot of

Additional deposits over to the bank.

Frank: 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 curious your thoughts, particularly as it pertains to multi-family here. You have some that talk about multi-family as being a dangerous place to be in New York, in this environment. And others who sort of continue to look at it as this fortress balance sheet that's had these best in class returns in terms of risk adjusted returns over the last 20, 30, 40 years.

With just a lot of EES, it's taken some pressure off the back office. The operations area 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.

Speaker 3: transcript

Speaker 3: 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 work.

Frank: So just curious, your thoughts as it pertains to multi-family at ConnectOne, but also in general in the geography. 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 in both of what's similar about both of those markets, there is just not enough supply. The demand is outstripping the supply.

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.

Speaker 3: transcript

Speaker 3: So those platforms are all working really well. We're still working together with Nimbus and our venture on.

Working together with Nimbus and our venture on.

Speaker 3: transcript

Speaker 3: 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

Unit and certainly because of the events that have occurred recently, we are reevaluating, how we can be effective in that space and that will have more to talk about that in the future and both lie just keeps chugging along I mean, both lie.

As you know has been one of the.

Speaker 3: transcript

Speaker 3: primers for a lot of the technology initiatives here at the bank and is really

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.

Speaker 3: transcript

Speaker 3: 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.

To be able to rebuild or have technology platforms that function.

Speaker 3: transcript

Speaker 3: differently than banks normally functioned. And so Bowfly's been a great catalyst to 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.

Frank: And even today, rental rates continue to march higher. I think that's even more pronounced than the New York City market. You know, 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 finance, the minute it's completed, it's completely filled in record time. So there's definitely a large demand for that because we're under supplied.

Differently than banks normally function and so <unk> been a great catalyst to the entire organization that being said if you look at the top of the funnel, let Bo fly in a number of franchise or is that now utilize that platform for all of their day.

Data gathering it's gone up some 300% when we purchased the company, we had about 35% or 40 brands on the platform today, it's over 130.

Speaker 3: transcript

Speaker 3: 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 is getting, 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.

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 is get it keeps getting better quarter after quarter.

Frank: And so people have gotten raises, everybody has a job. I think the dynamics around the multi-family 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.

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 would have to be inside the management team to understand it I think are just genuinely really great.

Frank: And in cases where folks lent on a pro forma rent projection based on that change in going from rent stabilized to market. And that's not available anymore. And now the interest rate went up. There could be some, 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.

Speaker 9: transcript

Speaker 9: I don't know if I answered your entire question, so if I forgot something, let me know. No, that was it. You hit on all three. I appreciate it, Frank. Thank you, Bill.

I don't know if I answered your entire question. So if I forgot something let me know.

No that was that you hit on all three I appreciate it Frank Thank you Bill that's all I had.

Thanks, Matt.

Speaker 11: transcript

Speaker 11: Your next question comes from the line of Michael Perito of KBW. Your line is open. Michael, hey Mike. Hey guys.

Your next question comes from the line of Michael Perito of <unk>. Your line is open.

Brian Michael and Mike.

Hey, guys.

How are you doing good.

Good good.

Speaker 12: transcript

Speaker 12: Yeah, obviously a lot's been been addressed. So I'll try to be brief here. I first wanted just kind of...

Yes, obviously, a lot's been been addressed so I'll try to be brief here.

First wanted to just kind of working.

Speaker 12: transcript

Speaker 12: You know, I was working on my model bill as I listened to answer a lot of these questions. I guess just really big picture. I just want to clarify. So, I mean, it sounds like.

Working on my model Bill as I listen to your answer a lot of these questions, but I guess, just really big picture I just wanted to clarify so it sounds like operating revenues were about $67 million in the third quarter.

Frank: 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 with CN OB. And I would say for the vast majority of the portfolios that I'm aware of, of course, and District.

Speaker 12: transcript

Speaker 12: operating revenues were about 67 million in the third quarter. 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

Think that should grow modestly from year end with your expense guide is it fair to think that the efficiency ratio should kind of be topping out next quarter with some modest improvement next year.

Frank: Great.

Speaker 12: transcript

Speaker 12: topping out next quarter with some modest improvement next year. Is that kind of directionally fair if I'm trying to piece together everything that was disclosed thus far?

That kind of Directionally fair, if I'm trying to piece together everything that was disclosed thus far.

Speaker 4: transcript

Speaker 4: I hope so. That sounds good.

I hope so.

Sounds good.

Speaker 4: transcript

Speaker 4: Yeah, I think that's a good way of looking at it. I just think we're gonna, you know, if rates are cut middle and 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, uh, directly, I think you have them right.

Yes, I think thats, a good way of looking at it and I just think we're going to.

If rates are cut middle of next year towards the end of next year, we'll see a big.

Frank: I really appreciate all the color, Frank. Thanks, guys.

A 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.

Operator: Again, if you would like to ask a question, press star, then the number one on your telephone keypad.

Matthew Breese: Your next question comes from the line of Matthew Breese of Stevens. Your line is open. Hey, good morning, guys. Good 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. It feels like it's slightly lower, but 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?

Speaker 12: transcript

Speaker 12: 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 quarter. Just want to make sure I'm in the right range.

Got it 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.

Speaker 4: transcript

Speaker 4: I haven't really given guidance on that, but there's a there's and I think I mentioned this before that there's a bias towards a higher rate of tax rate as the, you know, tax.

I haven't really given guidance on that but there is there is and I think I've mentioned this before that there is a bias towards a higher rate of.

Matthew Breese: I'll get Bill Crystal-Blaw. 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-susparing demand fell more than I had thought, but it has leveled out for now, so I'm not 100% sore about the level of those.

Tax rate.

The tax.

Speaker 4: transcript

Speaker 4: Basically, our wheat is utilized to reduce local 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 municipalities and other tax-advantaged assets. So you can see the tax rate in shop.

Basically our wheat is utilized to reduce local state and local taxes and there is always pressure for that number to come down.

As the bank gets bigger so that's what's really driving again, we're not big believers in investing in municipals and other tax advantaged assets.

So you can see the tax rate.

Chuck.

Speaker 12: transcript

Speaker 12: Got it. And then just just lastly for for me, I think you mentioned kind of new yields in the the mid eights and roll off yields in the mid five ballpark if I have those wrong. I apologize, but but but question more in terms of Maybe there's a question for Frank, which is what's the appetite for for customers at this yield level? I mean is it generally

Got it and then just lastly for me I think you mentioned kind of new yields.

Matthew Breese: We have loans that are going on the balance sheet at 300 basis points more than the coming off, but it's a small amount. So with the continued competition on the non-maternity interest sparing, 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 for the next year, but I do see it stabilizing, because eventually, the Fed, we don't know, there might be one more raise, but that could be it, and it is going to stabilize.

The mid eights and roll off yields in the mid fives ballpark, if I have this wrong I apologize, but the question more in terms of.

And maybe just a question for Frank.

What's the appetite for customers at this yield level I mean is it generally.

Speaker 12: transcript

Speaker 12: 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 that feedback is as we try to think about growth for next year and what some of the pros and cons are.

Accepting of the reality is there still some sticker shock when youre talking about these this pricing level with small businesses a lot of what you are probably still trying to delever just given the uncertainty just I'm 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.

Speaker 3: transcript

Speaker 3: I think if you ask me that question three or four months ago, I would tell you it's just an enormous amount of sticker shock and people are just not accustomed to hear an 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 3.25% in 1984.

So I think if you asked me that question three or four months ago I would tell you. It is just an enormous amount of sticker shock and people are just not accustomed to here and 8% is a handle on an interest rate there.

Matthew Breese: And eventually when we get through a period of a stable margin, we're going to be in a very good position to why margin as short-term rates come down. I hope that answers your question, Matt, on that. It's great. It's about as good as can be given the information we have. I do want to ask you whether or not you know beneath the hood, you would mention you're starting to see some stabilization and non-maternity sparing.

There are people in the industry that never saw an 8% handle I mean I.

People My first home mortgage was 13 and three quarters percent percent in.

In 1984 so.

Speaker 3: transcript

Speaker 3: 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.

It's not surprising to me I actually counsel people and say hey rates really arent that high if you can't run a business.

Speaker 3: transcript

Speaker 3: you know, with a seven to eight percent cost of money in it, then, you know, 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...

Matthew Breese: What are the indications of that? What are the measures you're using? And do you have any sort of assessment at this point of where we might see peak deposit cost? Well, I answer a little bit before. So right now, the balances in non-intersparing 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 cost, as I said, if non-intersparing 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-maternity interest sparing.

With the 7% to 8% cost of money in it than maybe you got to reevaluate. What you are doing I would tell you today when we're speaking to clients people certainly our depth are more accustomed to.

Speaker 3: transcript

Speaker 3: 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%.

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%.

Speaker 3: transcript

Speaker 3: 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. And by the way, most of those people have also...

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 rate environment is I and by the way most of those people have also.

Speaker 3: transcript

Speaker 3: you know renegotiated their deposit uh... 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

Renegotiated their deposit relationships as well and now all of a sudden they are getting three 4% and 5% on money and so when they look at the net.

Matthew Breese: And it depends on the money supply and told deposits in the system, but that's the one lever that could continue to increase deposit cost. Obviously, as the, you know, the fed pricing interest rate levels out, that's going to put pressure on stabilizing deposit cost as well. What is the role on versus role off dynamic currently? Right now, it's about between 850 to 550. 850 role on 550 role off. Right. And that's great, right?

Differential between those two.

Speaker 3: transcript

Speaker 3: The conversation today now is, hey, I have something with a 3 1 1 1% rate attached to it. It's gonna 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 to better rate? And so I think the conversations now are definitely more instructive.

So bad the conversation today now is hey, I have something with a three 5% rate attached to it it's going to refinance what can we do as there is whats 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 have a fourth to 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.

Speaker 3: transcript

Speaker 3: 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.

Matthew Breese: But it's a small portion of the portfolio because it's such small growth and there's such small amount of prepayments. Could you just talk about the strategy on security portfolio? It's been a runoff mode for a while, but I was curious what percentage of total assets would you like to keep it at? 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.

On their banking relationship today I think this became too much of a transactional business.

Speaker 3: transcript

Speaker 3: 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 goodness.

Back a year or so ago and before.

And I think people now are starting to look at hey, I need to 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.

Okay.

Speaker 12: transcript

Speaker 12: Very helpful guys. Thank you for taking my last question, too. I appreciate it.

Matthew Breese: It's part of, you know, for us, the security 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 portfolio, unencumbered securities on your balance here are less important because you can't get the cash for those in a few hours, where you can get cash for the federal home loan bank or the Fed, you know, on a moment's notice. So I like my goal is spent a little bit higher than it is right now, but I don't see moving that up significantly, you know, over the next couple of quarters.

Very helpful guys. Thank you for taking my last question here I appreciate it.

Thank you Michael Thanks, Mike.

Speaker 1: transcript

Speaker 1: There are no further questions at this time, I'll not turn the call over to the management team for closing remarks.

There are no further questions at this time I will now turn the call over to the management team for closing remarks.

Speaker 3: transcript

Speaker 3: Well, I want to thank everyone again for your time today. We look forward to speaking to you again at our year end and a fourth quarter conference call. So everyone, please have a really nice day. Thank you.

Well I want to thank everyone again for your time today, we look forward to speaking to you again at our yearend and fourth quarter conference call. So everyone. Please have a really nice day.

Thank you.

Speaker 13: transcript

Speaker 13: This concludes today's conference call. You may now all disconnect. Thank you. Thank you.

This concludes today's conference call you may now disconnect.

[music].

Yes.

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Frank Sorrentino: Okay, and then Frank, so for you, you know, one, you would mention 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 guests, how qualified these people are and you're impressed by them and can just continue.

Sure.

[music].

Yes.

Frank Sorrentino: And then secondly, on the tech stuff, you know, just give us an update on mantle, nimbus and both why and how are all those efforts going. So I would tell you that the phones keep ringing. Now it's pretty much all inbound calls. You can well imagine with all disruption in the marketplace, there's just been a lot of people who either were cut loose. Or found that, you know, the new place that they're at or the reformulated place that they're at, it's not meeting their expectations and they want to, they want to, they want to work for a place that's exciting in a place that's innovative in a place where, you know, they're not stuck in a, in a particular lane.

[music].

Sure.

[music].

Frank Sorrentino: So connect one is definitely built a reputation in the marketplace as a place that's moving and shaken 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 a 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.

Frank Sorrentino: 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, you know, financial metrics and stock valuations be better, but the business itself, the core business and what we're doing with it and how we're positioning ourselves for the, you know, for the coming challenges in a more normalized interest environment are really exciting. When you start to talk about things like, you know, the digital onboarding platform from mental, I mean, that's making serious change throughout the organization.

Frank Sorrentino: It's giving team members that either ones that we've had with us for years or newer team members that come onboard 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, you know, 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.

Frank Sorrentino: 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 re-evaluating how we can be effective in that space and that we'll have more to talk about that in the future. And both why just keeps charging along. I mean, both why, as you know, has been one of the primers for a lot of the technology initiatives here at the bank and is 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 functioned.

Frank Sorrentino: And so both lies been a great catalyst for the entire organization. That being said, if you look at the top of the funnel at both lie and number of franchisers that now utilize that platform for all of their data gathering, it's gone up some 300%. And so when we purchase the company that 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.

Frank Sorrentino: On a standalone basis, I wouldn't tell you it's doing a whole lot to the bottom line, although it is getting 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. No, that was it. You hit on all three. I appreciate it Frank. Thank you Bill. That's all I have.

Matthew Breese: Thanks Matt.

Michael Pareto: Your next question comes from the line of Michael Pareto of KBW. Your line is open. Right. Michael. Hey Mike. Hey guys. How are you doing? Good. We're doing well. Yeah, obviously a lot's been been addressed. 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 listen to answer a lot of these questions. I guess just really big picture.

Michael Pareto: 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 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 improvement next year? Is that kind of directionally fair if I'm trying to piece together everything that was disclosed thus far?

Michael Pareto: I hope so. That sounds good. Yeah, that's a good way of looking at it. I just think we're going to, you know, if rates are cut middle and next year, you know, towards the end of next year, we'll see a big bump up and profitability. So the things that you're talking about now are just really on the margin, but directly, I think you have them right. Got it. Okay. Thanks. And do you have any early expectations around your tax rate for 2024?

Michael Pareto: Just as we think about the model, it's been a little up and down the last quarter. Just want to make sure I'm in the right range. I haven't really given guidance on that, but there's, and I think I mentioned this before, that there's a bias towards a higher rate of tax rate as the, you know, tax, basically our weed is utilized to reduce local, staying local taxes, and there's always pressure for that number to come down as the bank gets bigger.

Michael Pareto: So that's what's really driving again. We're not big believers in investing in municipal and other tax-advantaged assets, so you can see the tax rate in shop. Got it. And then just, just lastly, for me, I think you mentioned kind of new yields in the mid-eighths and rolloff yields in the mid-fives ballpark, if I have those wrong, I apologize. But question more in terms of, maybe there's a question for Frank, which is, what's the appetite for customers at this yield level?

Michael Pareto: I mean, is it generally accepting of the realities? There's still some thicker 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 that feedback is as we try to think about, you know, growth for next year and what some of the pros and cons are. I think if you ask me that question three or four months ago, I would tell you this is just an enormous amount of thicker shock and people are just not accustomed to hear an 8% as a handle on an interest rate.

Michael Pareto: There are people in the industry that never saw an 8% handle. I mean, I remind people my first home mortgage was 13 and 3.4% 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, you know, with a 7% to 8% cost the money in it, then, you know, maybe you've got to reevaluate what you're doing.

Michael Pareto: 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%. 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 rate environment is. And by the way, most of those people have also renegotiated their deposit relationships as well.

Michael Pareto: And now all of a sudden, they're getting 3, 4% and 5% 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 3 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?

Michael Pareto: 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 to better rate? And so I think the conversations now are definitely more instructive around the banking relationship. I do believe, and I hope that came across, we're very optimistic here at Connect1. People are putting a large value on their banking relationship today.

Michael Pareto: 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, 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.

Michael Pareto: And so, in one regard, I actually think it's all good news. Thank you for taking my last questions here, I appreciate it. Thank you, Michael.

Operator: There are no further questions at this time.

Frank Sorrentino: I will now turn the call over to the management team for closing remarks. Well, I want to thank everyone again for your time today.

Operator: 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.

Operator: This concludes today's conference call. You may now all disconnect.

Q3 2023 ConnectOne Bancorp Inc Earnings Call

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