Earnings Call Transcript
ConnectOne Bancorp, Inc. (CNOB)
Earnings Call Transcript - CNOB Q3 2023
Siya Vansia, Chief Brand and Innovation Officer
Good morning, and welcome to today’s conference call to review ConnectOne’s results for the third quarter of 2023 and to update you on recent developments. On today’s conference call will be Frank Sorrentino, Chairman and Chief Executive Officer; and Bill Burns, Senior Executive Vice President and Chief Financial Officer. I’d also like to caution you that we may make forward-looking statements during today’s conference call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings. The forward-looking statements included in this conference call are only made as of the date of this call and the Company is not obligated to publicly update or revise them. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the Company’s earnings release and accompanying tables or schedules, which have been filed today on Form 8-K with the SEC and may be also accessed in the Company’s website. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.
Frank Sorrentino, Chairman and Chief Executive Officer
Thank you, Siya, and good morning, everyone. We appreciate you joining us today as we discuss ConnectOne’s recent quarterly performance. Before we take your questions, I’ll review some of the challenges and opportunities that we’re seeing, while Bill will review our third quarter in more detail. With that said, let’s jump right to the point. While we’re proud of our determination to serve our clients in this challenging time, it has been a difficult operating environment. Our operating results remain solid. However, these are not the financial results we’re accustomed to. We remain confident that we will return to our historical level of profitability based on the strength of our franchise. We understand that putting our clients first and putting our people first has a short-term cost in this difficult environment. We also understand that continuing to make investments in our talent, technology and systems at this time is a choice we make. Nonetheless, as we collectively navigate near-term headwinds, ConnectOne remains resilient and committed to maintaining and in fact improving our business model. Importantly, we have the financial strength, balance sheet and capital structure to support this with both strong liquidity and a fortified tangible common equity position. We also continue to generate a sound operating profit, which when coupled with our solid capital levels, provides us with the flexibility to repurchase shares, pay dividends, invest in infrastructure and grow prudently. We’re seizing opportunities to strengthen our teams by adding high performing talent across the organization, and we made some notable hires this quarter. This includes the appointment of a leading financial services executive as Chief Strategic Operations Officer and the addition of a seasoned technology executive as Chief Digital Officer to further leverage technological innovations. At the same time, we remain one of the industry’s most efficient banks nationwide as we continue to optimize operations, staff count and our footprint. Demonstrating the diligent execution of our operating model, we continue to support the needs of our clients and build opportunities in new markets and new verticals. To that end, our teams in South Florida and Long Island continue to build momentum as they capture market share. Operationally, we continue to expand through digital enhancements, including MANTL’s omnichannel deposit origination platform, BoeFly’s franchise referral and lending marketplace and our SBA lending platform. Turning 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 remained low, reflecting prudent underwriting, strong portfolio oversight and a resilient economy. Regarding our CRE portfolio, our Manhattan office exposure is less than half of 1% of total loans and our entire New York City office exposure is less than 1% of total loans. Our office exposure in New Jersey is less than 4%, which includes high tenancy special services and multiuse buildings. And looking at our multifamily, as we’ve emphasized before, our Manhattan portfolio was less than 2.5% of total loans and only 5.5% in the other 4 New York boroughs. We’re predominantly focused on purchase money loans within suburban and commuter-oriented areas in New Jersey. So to wrap things up, we remain very optimistic and committed to building 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. With that, I’ll turn it over to Bill for the details.
Bill Burns, Senior Executive Vice President and Chief Financial Officer
Okay. Thanks, Frank, and 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 deposits continued to grow sequentially. Excluding brokered, which declined by approximately $125 million, client deposits increased by $150 million on an average comparison and by about $50 million on a point to point basis. Our liquidity remains very strong by any measure. Readily accessible liquidity remains nearly 2.5 times adjusted uninsured deposits. The liquidity consists largely of on-balance sheet cash, unencumbered available for sale securities and we have unused lines of credit from Federal Home Loan Bank and the Fed. Each of those are well in excess of $1 billion. Adjusted uninsured deposits, which excludes collateralized municipal deposits as well as intercompany deposits represent 21% of total deposits. Onto the net interest margin, which contracted sequentially by 5 basis points and that is in line with our previous guidance. Our cost of interest-bearing deposits increased by 28 basis points this quarter, reflecting a cumulative beta of about 50%. Average non-interest-bearing deposits 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 have nearly maxed out, but there still could be competitive and funding mix pressures, so we could still see a modest amount of margin compression for another quarter. As I’ve mentioned before, we are in a liability-sensitive position and would benefit materially, I believe, from a decline in short-term rates and an upward sloping yield curve. In terms of loan repricing, fixed rate loans that went on the books this quarter were in the 8% to 9% range, while about $75 million of fixed rate loans exited at about 5.5 and the loan pipeline is predominantly wider spread C&I and construction, while the tighter spread multifamily originations are quite limited. Onto non-interest income, it continues to increase from SBA loan sales and we expect revenue here to accelerate in the fourth quarter and beyond. I don’t want to give you exact guidance right now because it’s a little too early in the quarter, but I’m confident of the upward trajectory. In addition, BoeFly is expected to be a further contributor to this line item. In terms of operating expense, as you know, we are already one of the most efficient banks. So efficiency is not just a project for us; it is a way of life at ConnectOne. And so, notwithstanding our success in 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. Our efficiency ratio has increased to about 50% from 40% historically and that’s largely due to margin compression, but our operating expense percentage of average assets remains less than 1.5%, and that is among the best in the industry. Next, I want to talk a little bit about capital. Our tangible common equity ratio at the holding company was 9.1%, while at the bank level it is even higher at 10.7%. And the tangible equity ratio at the holding company, which includes perpetual non-cumulative preferred, is 10.3%. So this strong capital gives us significant financial flexibility. And even though we’d still like to see our capital building, we also have room to moderately grow the balance sheet and continue our share repurchase program. Repurchases for the third quarter were about 300,000 shares. We bought those back below tangible book value and that makes those repurchases accretive to tangible book per share. And tangible book value per share was about flat from June 30, but up 7% from a year ago. I expect continued growth in the tangible book value per share, a hallmark of ConnectOne Bank. On credit quality metrics, non-accrual loans ticked up slightly due to one multifamily loan that is well-secured. And if you exclude the taxi medallion loans, which are more than adequately reserved, that non-accrual ratio is 50 basis points, which is right on our historical average. We also had approximately $2 million in 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 our delinquencies of 30-89 days were virtually non-existent at just $3.5 million, which is just 0.04% of total loans. Criticized and classified fell by more than 15% to just 1.4% of total loans; this was the fourth consecutive quarter of improvement. Rollover risk is being well managed with the majority of loans repricing without any potential downgrades. Going forward to the end of next year, we have about 10% of the portfolio rolling over to a higher rate with $350 million coming in the fourth quarter and about $650 million for all of 2024. Obviously, we are proactively managing this group and again have been largely successful. And before I end, I just want to reiterate that our exposure to New York City office is minimal, at less than 1% of total loans. So with that, Frank, back to you, and then we’ll get to questions.
Frank Sorrentino, Chairman and Chief Executive Officer
Great. Thanks, Bill. To wrap up, as we move through the fourth quarter and into 2024, let me once again reiterate that we have the financial strength, balance sheet, capital structure and talent to support our future growth. We’re confident in our direction and optimistic about our position. We look forward to updating you in the quarters ahead. With that, I’m happy to take your questions.
Nick Cucharale, Analyst
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?
Frank Sorrentino, Chairman and Chief Executive Officer
I think there’s two parts to that, Nick. Bill, maybe you have additional thoughts. But the first part is just the economy in general. We’re seeing less opportunities that we think make sense for us in the various lines that we’re in. Our pipeline is still quite strong. We do see payoffs coming out of the portfolio that sort of mitigate a lot of the new business that comes on board. And we’re being somewhat cautious looking at different ways of enhancing our underwriting relative to what we see. But the demand has definitely come down quite a bit. And certainly in a lot of the segments that we were the most active in, we’ve seen less demand. I think we are actually building more ability to grow the portfolio over time as more and more competition is walking away from a lot of the lines of businesses that we’re bullish about. So, 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.
Bill Burns, Senior Executive Vice President and Chief Financial Officer
Yes. 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 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.
Nick Cucharale, Analyst
That’s very helpful. You also mentioned the pipeline in 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?
Frank Sorrentino, Chairman and Chief Executive Officer
I believe that over 90% of our pipeline aligns well with our strengths. It is primarily focused in the New York metro area and is also seeing some growth in Florida. We are very pleased with the sources of our business. We are concentrating on areas we know best and are selectively choosing to build strong client relationships and identify the best loan opportunities.
Daniel Tamayo, Analyst
Maybe, Bill, just if you could just start on the margin, I appreciate your guidance for the fourth quarter for maybe a little bit more contraction. But just wanted to get your updated thoughts on, I guess, past that bottom in the fourth quarter, the type of expansion that you might be expecting next year if we’re in this higher for longer type of rate scenario?
Bill Burns, Senior Executive Vice President and Chief Financial Officer
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 an upward sloping yield curve is going to help ConnectOne more than other banks in my view.
Daniel Tamayo, Analyst
Okay. I think last quarter I might be mistaken, but I thought we discussed some margin expansion even in that scenario. Is that still how you're considering it?
Bill Burns, Senior Executive Vice President and Chief Financial Officer
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.
Daniel Tamayo, Analyst
And then, I guess, just quickly on brokered deposits, did you have that number for what that was in a period?
Bill Burns, Senior Executive Vice President and Chief Financial Officer
Well, in terms of reduction, it was $125 million. It depends whether you look at it on average or as of a specific date.
Daniel Tamayo, Analyst
I was wondering as of.
Bill Burns, Senior Executive Vice President and Chief Financial Officer
The total brokered is $1.1 billion. And there is some confusion out there because reciprocal balances, typically ICS and CDARS are included in some measures of brokered, but this $1.1 billion we call true brokered and that’s what our level is.
Daniel Tamayo, Analyst
And then, the borrowings that you have on your balance sheet, it looks like there was a difference in the end of period and the higher. I was wondering if some of those were replaced in the third quarter and then what maturities on those might be if you do have any plans to replace them?
Bill Burns, Senior Executive Vice President and Chief Financial Officer
Well, the borrowings we replace as they mature. So, we’re not sure if you’re talking about doing anything ahead of time and paying a penalty. So, we’re not contemplating that. But yes, there could be increases in the borrowing costs as some of those roll over. Although some of them are short term and they were at high rates, so they’ll be gone. And if rates do decline, you’ll see lower rates on the borrowing line as well. So, it’s a little bit of a mixed bag, Dan.
Daniel Tamayo, Analyst
I was talking about the yield or cost, which is quite low at 2.41 for the quarter and the average has decreased. I was just curious if that has changed, as it seems the end of the period rate has increased. It looks like you are replacing something. Please, go ahead.
Bill Burns, Senior Executive Vice President and Chief Financial Officer
Yes, I understand your point. We have federal home loan borrowings that include both term borrowings and some overnight ones that are hedged. We secured many of our borrowings at a lower rate. As a result, when the short-term borrowings were paid off, it led to a decrease in the rate for the quarter.
Daniel Tamayo, Analyst
So, is the hedge going to extend into next year, meaning there won't be a significant increase in costs?
Bill Burns, Senior Executive Vice President and Chief Financial Officer
Yes. They continue to protect us from higher rates. By extending the duration of that portfolio, we have benefited from this strategy.
Frank Schiraldi, Analyst
I wanted to follow up on margins. Bill, regarding your comments on NIM inflection, in a scenario where rates remain elevated for an extended period, do you think deposit balances for the industry and for CNOB will start to stabilize in the next quarter or two? Or do you anticipate a continued increase, which might mean we won't see a significant shift and upward trend for the company in 2024?
Bill Burns, Senior Executive Vice President and Chief Financial Officer
You’re saying trickle up in terms of rate?
Frank Schiraldi, Analyst
Yes.
Bill Burns, Senior Executive Vice President and Chief Financial Officer
Yes. I would say that that’s exactly it. So, our time deposits are very close to leveling out in terms of the costs, but there continues to be pressure on the non-maturity interest bearing accounts. And so, that’s why I’ve been conservative about the margin. We have assets repricing, but it’s a small amount and it’s worth a few basis points a quarter of widening. But that continued pressure of interest rates increasing on those non-maturity deposits causes me to believe that there could still be compression.
Frank Schiraldi, Analyst
Considering the current slower growth environment, do you believe the buyback level you achieved this quarter is reasonable? Should we consider this as a benchmark for future quarterly buybacks, or are you planning to take a more aggressive approach? What are your general thoughts on this matter?
Bill Burns, Senior Executive Vice President and Chief Financial Officer
I think that’s the maximum that we would want to be. We’re looking at growth. And also, I just feel, in this environment, even though we have strong capital, it’s good to show that we continue to build capital. I don’t know how you feel about it, but everyone is concerned about bank balance sheets and liquidity, and I think continuing to show strong numbers and strengthening it, while still growing a little bit and buying back is the best way to look at those three items. We’ll watch 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.
Frank Schiraldi, Analyst
I would like to get your insights on the commercial real estate market in and around New York, particularly regarding multifamily properties. Some people view multifamily as a risky area in this environment, while others see it as a strong option with excellent risk-adjusted returns over the last several decades. What are your thoughts on multifamily both at ConnectOne and in the broader region?
Frank Sorrentino, Chairman and Chief Executive Officer
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 those markets, there is just not enough supply. The demand is outstripping the supply. And even today, rental rates continue to march higher. I think that’s even more pronounced than New York City market. Market rate rents continue to move northward. I think in New Jersey, the newer product is still renting very quickly. We’re not hearing about any buildings that have vacancies. New construction that we finance, the minute it’s completed, it’s completely filled at record time. So, there’s definitely large demand for that because we’re undersupplied. And so, people have gotten raises; everybody has a job. I think the dynamics around the multifamily business are actually quite good right now, and for the foreseeable future, I think they remain good. The anomaly there though is the rent-stabilized product in New York City that was negatively impacted by the changes in the law in 2019. Some of those properties are challenged. And so, when those come up on a refinance and a repricing, there are issues there. And in cases where folks lent on a pro forma rent projection based on that change in going from rent-stabilized to market, and that’s not available anymore, and now the interest rate went up, there could be some losses in those portfolios. So, I think underwriting is important, the type of product, where it is, what it represents is important, that entire bucket of rent-stabilized. I’m not saying it’s all bad. There are lots of good properties in there that cash flow well and can in fact withstand the rate increases. And they may be closer to 100% loan-to-value, but that’s okay if they can afford to maintain their mortgage payments. So, overall, I wouldn’t call it bullish, but I would tell you that we’re definitely quite confident and comfortable in our portfolio with CNOB, and I would say for the vast majority of the portfolios that I’m aware of across the industry.
Matthew Breese, Analyst
Bill, maybe the first one for you. I was hoping you could provide just sort of your near-term net interest margin outlook, feels like it’s slightly lower, but to what extent? And then where do you think we might see stability as we look out the next several quarters? Either what quarter or at what level?
Frank Sorrentino, Chairman and Chief Executive Officer
I’ll get those crystal balls.
Bill Burns, Senior Executive Vice President and Chief Financial Officer
I anticipated your question, Matt. There are several factors at play for the fourth quarter, and since we’re only a month in, it’s challenging to provide precise figures. What's beneficial for us is that we are maintaining our pricing on time deposits, which have remained consistent. However, the non-interest-bearing demand has decreased more than expected, though it seems to have stabilized for now. I'm not completely certain about its current level. We have loans being added to the balance sheet at 300 basis points higher than those being removed, but the volume is small. Due to ongoing competition in non-maturity interest-bearing accounts, which continues to rise, I am noticing some compression. This may mirror what we experienced last quarter. It’s tough to predict what next year will look like, but I do sense it stabilizing. Eventually, the Fed may implement one more rate hike, but that could be the last, leading to stabilization. Once we reach a period of steady margins, ConnectOne will be well-positioned to expand margins as short-term rates decrease. I hope that addresses your query, Matt.
Matthew Breese, Analyst
Great. It’s about as good as it can be given the information you have. I do want to ask you whether or not, beneath the hood, you had mentioned you’re starting to see some stabilization in noninterest-bearing. What are the indications of that? What are the measures you’re using? And do you have any sort of best estimate at this point of where we might see peak deposit costs?
Bill Burns, Senior Executive Vice President and Chief Financial Officer
Well, I addressed part of this earlier. Currently, the balances in noninterest-bearing accounts are slightly higher than they were over the past 60 days. I'm optimistic that this will stabilize. Regarding total deposit costs, if noninterest-bearing balances remain steady and CDs stay the same, which I anticipate they will, the only factor affecting the overall number will be the non-maturity interest-bearing accounts. This depends on the money supply and total deposits in the system, but that’s the one area that could lead to an increase in deposit costs. Additionally, as the Fed's interest rate levels off, it will likely help stabilize deposit costs.
Matthew Breese, Analyst
And then on loan yield, what is the roll on versus roll off dynamic currently? And what…
Bill Burns, Senior Executive Vice President and Chief Financial Officer
Right now, it’s about between 850 to 550.
Matthew Breese, Analyst
850 roll on, 550 roll off?
Bill Burns, Senior Executive Vice President and Chief Financial Officer
Right. And that’s great, right? But it’s a small portion of the portfolio because there’s such small growth and there’s such small amount of prepayments.
Matthew Breese, Analyst
Can you just talk about the strategy on the securities portfolio? It’s been a one-off mode for a while, but I was curious, at what percentage of total assets would you like to keep it at?
Bill Burns, Senior Executive Vice President and Chief Financial Officer
I would prefer to see it increase a bit for the long term. It's a valid question. For us, the securities portfolio isn't focused on profitability; it's focused on liquidity. What we've learned this year, especially during the crisis, is that having securities in the portfolio doesn't provide the necessary type of liquidity; what you really need is readily accessible liquidity. In my opinion, having unencumbered securities on your balance sheet is less crucial because you can't quickly convert those to cash, while you can obtain cash from the Federal Home Loan Bank or the Fed instantly. My goal has been to see that number rise slightly higher than it currently is, but I don’t anticipate a significant increase in the next couple of quarters.
Matthew Breese, Analyst
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, 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 MANTL, Nymbus, and BoeFly, and how are all those efforts going?
Frank Sorrentino, Chairman and Chief Executive Officer
So, I would tell you that the phones keep ringing. Now, it’s pretty much all inbound calls. You can well imagine with all the disruption in the marketplace, there’s just been a lot of people who either were cut loose or found that the new place that they’re at or the reformulated place that they’re at is not meeting their expectations. And they want to work from a place that’s exciting and a place that’s innovative and a place where they’re not stuck in a particular lane. So, 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 specialties, whether it’s in operations, technology, revenue producers, it doesn’t matter, in various markets, new markets potentially, whatever. So, we’re getting to pick and choose from the best of the best. And I have to tell you, I think we’ve made some really exciting hires over the last few months that are going to help to propel the Company forward. As I mentioned in my comments, I’m incredibly optimistic and confident in the direction we’re going in. Certainly, we’d like to see some of the financial metrics and stock valuation would 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 like the digital onboarding platform through MANTL, I mean, that’s making serious change throughout the organization. It’s giving team members that either ones that we’ve had with us for years or newer team members that come on board the ability to really close transactions with potential clients in record speed. It’s given us the opportunity to go back to existing clients and be able to move additional deposits over to the bank with just a lot of ease. It’s taken some pressure off the back office. The operations areas are being reoptimized because we don’t have as many manual processes, including in compliance and BSA and other areas that are incredibly critical to the organization. But now, we have much better operations that also provide data for us to look at and be able to make future decisions about how we want to do things. So, those platforms are all working really well. We’re still working together with Nymbus in our VentureOn 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 BoeFly just keeps chugging along. I mean, BoeFly, as you know, has been one of the primers for a lot of the technology initiatives here at the bank and has really forced us to focus on the ability to write commercial type loans, to be able to do SBA at scale, to be able to rebuild or have technology platforms that function differently than banks normally function. And so, BoeFly has been a great catalyst for the entire organization. That being said, if you look at the top of the funnel at BoeFly and number of franchisors that now utilize that platform for all of their data gathering, it’s gone up some 300%. When we purchased the company, they had about 35 or 40 brands on the platform. Today, it’s over 130. So, we’re really happy about the growth that that company is providing and the opportunities that it’s building for us. On a standalone basis, I wouldn’t tell you it’s doing a whole lot to the bottom line, although it keeps getting better quarter after quarter. But the contributions that it’s making to other aspects of the business, which are really hard to get down onto a piece of paper, you’d have to be inside the management team to understand it, I think are just genuinely really great. I don’t know if I answered your entire question. So, if I forgot something, let me know.
Matthew Breese, Analyst
No, that was it. You hit on all three. I appreciate it, Frank. Thank you, Bill. That’s all I had.
Frank Sorrentino, Chairman and Chief Executive Officer
Thanks, Matt.
Operator, Operator
Your next question comes from the line of Michael Perito of KBW.
Michael Perito, Analyst
A lot has already been discussed, so I'll keep this brief. I was working on my model while listening to your responses to the questions. To clarify the overall picture, it seems like operating revenues were around $67 million in the third quarter. Do you believe this will grow modestly from here? Regarding your expense guidance, is it reasonable to expect that the efficiency ratio will peak next quarter with some modest improvement next year? Would that be a fair interpretation of what has been shared so far?
Bill Burns, Senior Executive Vice President and Chief Financial Officer
I hope so. That sounds good. Yes, I think that’s a good way of looking at it. I just think if rates are cut in the middle or toward the end of next year, we’ll see a significant increase in profitability. So the points you’re making now are really just minor, but overall, I think you have the right perspective.
Michael Perito, Analyst
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.
Bill Burns, Senior Executive Vice President and Chief Financial Officer
I haven't provided specific guidance on that, but there is a tendency towards a higher tax rate because our REIT is used to minimize state and local taxes, and there's ongoing pressure for that rate to decrease as the bank grows. That's the main factor driving it. We don't typically invest in municipal and other tax-advantaged assets, so you might see the tax rate gradually increase.
Michael Perito, Analyst
And then just lastly for me, I think you mentioned kind of new yields in the mid-8s and roll off yields in the mid-5s, ballpark, if I have those wrong, I apologize. But question more in terms of, I know this is a question for Frank, but just what’s the appetite for customers at this yield level? I mean, is it generally accepting of the reality? 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 deleverage just given the uncertainty? Just curious what the feedback is as we try to think about growth for next year and what some of the pros and cons are?
Frank Sorrentino, Chairman and Chief Executive Officer
If you had asked me that question three or four months ago, I would have said there was a significant amount of sticker shock, and people were unaccustomed to an 8% interest rate. There are industry professionals who have never experienced an 8% rate. I often remind people that my first home mortgage was 13.75% back in 1984, so I’m not surprised by the current rates. I advise people to consider that rates aren't as high as they might think. If operating a business is impossible with a 7% to 8% cost of capital, it may be time to reassess their approach. Currently, when we engage with clients, they seem more aware of the prevailing rate environment, and most banks, including the largest ones, have adjusted accordingly. Home mortgage rates are also nearing or at 8%, so the message is getting through. The current discussions have shifted towards understanding the rate environment, with many customers having also renegotiated their deposit terms, now earning 3%, 4%, or 5% on their funds. When they compare these numbers, the situation looks more favorable. Today, clients are inquiring about options for refinancing something with a 3.5% rate. They want to explore what strategies to adopt, whether to choose short-term or long-term options, if they should lock in rates now, or wait for potential improvements. They’re also considering increasing their deposits to obtain better rates. Overall, these conversations reflect a more constructive approach to banking relationships. We remain optimistic at ConnectOne. Clients are increasingly valuing their banking relationships. The business had become overly transactional over the past year or so, but now, clients are focusing on understanding the costs associated with their finances and the services needed for their businesses while selecting the right banking partner. In that sense, it’s positive news.
Operator, Operator
There are no further questions at this time. I’ll now turn the call over to the management team for closing remarks.
Frank Sorrentino, Chairman and Chief Executive Officer
Well, I want to thank everyone again for your time today. We look forward to speaking to you again at our year-end and fourth quarter conference call. So, everyone, please have a really nice day. Thank you.
Operator, Operator
This concludes today’s conference call. You may now disconnect.