ConnectOne Bancorp Inc
NASDAQ:CNOB
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ConnectOne Bancorp Inc
Earnings Call Analysis
Q3-2023 Analysis
ConnectOne Bancorp Inc
In the face of a challenging environment, ConnectOne Bank (CNOB) has maintained resilience through a strong operating model and steadfast determination to service clients. While current financial results do not align with the bank's historical profitability, the management team is confident in a return to form. They have emphasized continued investment in talent, technology, and systems despite the short-term costs associated with such decisions in this difficult climate.
ConnectOne has reinforced its teams by strategically hiring high-performing talent across the organization. They've made notable hires, including a Chief Strategic Operations Officer and a Chief Digital Officer, aimed at leveraging technological innovations. The bank has increased its footprint by bolstering operations in South Florida and Long Island, and through digital enhancements of their platforms, including MANTL's omnichannel deposit origination platform and an SBA lending platform.
CNOB holds a strong liquidity position with readily accessible liquidity nearly 2.5x the amount of adjusted uninsured deposits. They have also maintained stable credit metrics with low delinquencies and nonaccruals, reflecting prudent underwriting and a resilient economy. In terms of exposure, the bank's Manhattan office portfolio is less than 0.5% of total loans, indicating a minimal risk exposure to potential downturns in the New York City office market.
CNOB saw an increase in client deposits and a slight contraction in net interest margin, which was anticipated. Optimism remains that deposit costs are nearing their peak, although margin pressure may continue for another quarter. Noninterest income is forecasted to rise due to SBA loan sales, and further contribution is expected from BoeFly. Operating expenses grew by less than 1%, with efficiency measures in place that have historically set the bank apart in the industry. On the credit front, nonaccrual loans only slightly increased due to a single multifamily loan, and charge-offs remained low.
CNOB anticipates a conservative approach in the near term as they see less demand in their traditionally active segments. However, they remain optimistic about future growth prospects, expecting forward momentum relative to the loan portfolio. The bank looks forward to capturing market share and opportunities in new markets and verticals, with a commitment to disciplined lending practices.
Management believes that the eventual lowering of short-term rates and an upward sloping yield curve would benefit CNOB more than other banks. As we move into next year, there is a possibility of margin stabilization and potential future profitability increases if rate cuts occur.
CNOB's measures have successfully immunized the bank against higher interest rates, indicating that extensions in the duration of their securities portfolio have been beneficial. Going into the next year, about 10% of their loan portfolio is set to reprice at higher rates, which the bank has proactively managed with success.
The bank has recognized that securities on the portfolio do not equate to the type of liquidity required in pressing situations. Instead, they focus on readily accessible liquidity from sources such as the Federal Home Loan Bank or the Fed, although they would prefer a slightly higher securities portfolio for the long run.
ConnectOne continues to evolve with significant technology initiatives. They have seen increased interest from potential hires attracted by the bank's innovative approach. Utilization of MANTL's digital onboarding platform has resulted in operational efficiency gains and provided vital data for future decision-making. BoeFly's contribution to the bank's technology drive has been influential, with the platform experiencing a 300% growth in franchiser usage since its acquisition by CNOB.
CNOB holds a favourable outlook for when the economic environment normalizes. The management foresees a period of stabilization for margins and a potential increase in profits if and when interest rates are cut later next year.
ConnectOne is adjusting to the new lending environment where higher interest rates are becoming the norm. Customers are now more accustomed to these rates and are looking at the net difference between deposit and loan rates, leading to more constructive banking relationship conversations. Management sees this shift as an affirmation of the value placed on strong banking relationships and remains very optimistic about the bank's position in the market.
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Hello, and welcome to the ConnectOne Bancorp, Inc. Third Quarter 2023 Earnings Call. [Operator Instructions] I will 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 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 through the company's website.I will now turn the call over to Frank Sorrentino. Frank, please go ahead.
Thank you, Siya, and 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. 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, localize 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 nonaccruals remained low, reflecting prudent underwriting, strong portfolio oversight and a resilient economy. Regarding our CRE portfolio, our Manhattan office exposure is less than 1/2 of 1% of total loans, and our entire New York City office exposure is less than 1% of total loans. Our office exposure in New Jersey is less than 4%, which includes high tenancy special services and multi-use buildings.And looking at our multifamily, as we've emphasized before, our Manhattan portfolio was less than 2.5% of total loans and only 5.5% in the other 4 New York boroughs. We're predominantly focused in purchase money loans within suburban and commuter-oriented areas in New Jersey. So to wrap things up, we remain very optimistic and committed to building 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.
Okay. Thanks, Frank, and good morning, everyone. I'm going to take a lot of time this morning, but want to highlight 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 continued to grow sequentially. Excluding broker, which declined by approximately $125 million, client deposits increased by $150 million on an average comparison and by about $50 million on a point-to-point basis. Our liquidity remains very strong by any measure. Readily accessible liquidity remains nearly 2.5x adjusted uninsured deposits. The liquidity consists largely of on-balance sheet cash, unencumbered available-for-sale securities, and we have unused lines of credit at the Federal Home Loan Bank and the Fed, each of those are well in excess of $1 billion. Adjusted uninsured deposits, which excludes collateralized municipal deposits as well as intercompany deposits represents 21% of total deposits.On to 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 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 have nearly maxed out, but there still could be competitive and funding mix pressures, so we could still see a modest amount of margin pressure for another quarter.As I've mentioned before, we are in a liability-sensitive position and would benefit materially, I believe, from a decline in short-term rates and an upward sloping yield curve. In terms of loan repricing, fixed rate loans went on the books this quarter, 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.On to noninterest 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. And 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 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 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 noncumulative preferred is 10.3%. So this strong capital gives us significant financial flexibility. And even though we'd still like to see our capital building, we also have room to moderately grow the balance sheet and continue our share repurchase program.Repurchases for the third quarter were about 300,000 shares. We bought those back below tangible book value. And that makes those repurchases accretive to tangible book value per share. And tangible book value per share was about flat from 6.30%, but up 7% from a year ago. I expect continued growth in tangible book value per share, a hallmark of ConnectOne Bank.On credit quality metrics, nonaccrual loans ticked up slightly due to one multifamily loan that is well secured. And if you exclude the taxi medallion loans, which are more than adequately reserved for, then 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 our delinquencies of 30-89 days were virtually nonexistent at just $3.5 million. That's just 0.04% of total loans. And [indiscernible] 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 a majority of loans repricing without any potential downgrades. 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 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.
Great. Thanks, Bill. To wrap up, as we move through the fourth quarter and into 2024, let me once again reiterate that we have the financial strength, balance sheet, capital structure and talent to support our future growth. We're confident in our direction and optimistic about our position. We look forward to updating you in the quarters ahead.And with that, happy to take your questions.
[Operator Instructions] Your first question comes from the line of Nick Cucharale of Hovde Group.
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?
Well, I think there's 2 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.
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 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.
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?
Yes, 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.
Your next question comes from the line of Daniel Tamayo of Raymond James.
Maybe, Bill, just if you could just start on the margin. Appreciate your guidance for the fourth quarter for maybe a little bit more contraction. But just wanted to get your updated thoughts on, I guess, past that bottom in the fourth quarter, the type of expansion that you might be expecting next year if we're in this higher-for-longer type of rate scenario?
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 ConnectOne 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 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.
Okay. Understood. And then I guess just quickly on broker deposits. Did you have that number, what that was in the period?
Well, it was -- in terms of reduction, it was $125 million. It depends whether you look at it on an average or an as of basis.
Yes, I was wondering as of.
What the total...
Yes.
The total broker 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.
Okay. And then the borrowings that you have on your balance sheet, it looks like there was a difference in the period in 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.
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.
Okay. Yes, 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 just wondering if the -- but I think the end of the period it went up. So it looks like you've replaced -- sorry, go ahead.
Yes, I think I understand what you're saying. So 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.
Okay. So how does that -- I mean, is it -- do the hedges play through next year then so that you won't see too much increase in cost there?
Yes, they continue to immunize us against rates -- higher rates. And so like I said, we extend the duration of that portfolio and that has helped us.
Your next question comes from the line of Frank Schiraldi of Piper Sandler.
Just a follow-up on the margin. Bill, your comments on NIM inflection. I thought you -- in terms of a higher-for-longer rate scenario, so rates just basically stay where they are. In your thought -- in your thinking do deposit balances for the industry, for CNOB, do they begin to stabilize in the next quarter or 2? Or do you think there's a continued trickle up, which is why you wouldn't necessarily get inflection and then a trajectory upwards in the NIM in 2024?
We think trickle up in terms of rate.
Yes.
Yes. Yes, I would say that, that's exactly it. 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 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.
Got you. Okay. And then just thinking about the buyback here given maybe a bit slower growth in this environment, is -- 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? What are your just general thoughts on the buyback?
No, 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 3 items. We'll watch it. We'll watch the numbers. And 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.
All right. 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 -- curious your thoughts particularly as it pertains to multifamily here. You have some that talk about multifamily as being a dangerous place to be in New York in this environment and others who sort of continue to look at it as this fortress balance sheet that had these best-in-class returns in terms of risk-adjusted returns over the last 20, 30, 40 years. So just curious your thoughts as it pertains to multifamily at ConnectOne but also in general in the geography.
So you got the New York City and the 5 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 -- what's similar about both of those markets is there is just not enough supply. The demand is outstripping the supply. And even today, rental rates continue to march higher. I think that's even more pronounced in the New York City market. Market rate rents continue to move northward.I think in New Jersey, the newer product is still renting very quickly. We're not hearing about any buildings that have vacancies. New construction that we 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 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 refinance and 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 at CNOB and I would say for the vast majority of the portfolios that I'm aware of across the industry.
[Operator Instructions] Your next question comes from the line of Matthew Breese of Stephens.
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 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?
I'll get the crystal ball.
I knew you were going to ask that, Matt. 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 noninterest-bearing demand fell more than I had thought, but it has leveled out for now. So I'm not 100% sure about the level of those. We have loans that are going on the balance sheet at 300 basis points more than they're coming off, but it's a small amount. So with the continued competition on the non-maturity interest-bearing which still is starting -- it's still floating up, I see some compression, okay? It may be similar to what we had in the last quarter. Hard to read out into next year, but I do see it stabilizing because essentially, right, the Fed -- we don't know. There might be one more raise, but that could be it and it is going to stabilize. And eventually, when we get through a period of a stable margin, we're going to be in a very -- ConnectOne is going to be in a very good position to widen margin as short-term rates come down. I hope that answers your question, Matt, on that.
It's great. It's about as good as it can be given the information you have. I do want to ask you whether or not beat 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?
Well, I almost -- I answered a little bit before. So right now, the balances in noninterest-bearing are slightly higher than they were in the last 60 days. So I'm hopeful once again that, that's going to level out. And in terms of total deposit costs, as I said, if noninterest-bearing remains where it is, if the CDs stay where they are, which I expect that to be -- 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 one lever that could continue to increase deposit costs. Obviously, as the Fed pricing -- interest rate levels out, that's going to put pressure on stabilizing deposit costs as well.
And then on loan yield, what is the roll-on versus roll-off dynamic currently? And what's...
Right now, it's about between [ 8.50 ] to [ 5.50 ].
[ 8.50 ] roll on, [ 5.50 ] roll-off?
Right. And that's great, right? But it's a small portion of the portfolio because there's such a small growth and there's such a small amount of prepayments.
Okay. Could you just talk about the strategy on the securities portfolio? It's been on a runoff mode for a while, but I was curious at what percentage of total assets would you like to keep it at?
Well, I'd like to see it a little bit higher for the long run. It's part of -- it's a good question. It's part of -- for us, the securities portfolio is not about profitability, but it's about liquidity. And what we've learned 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, whereas you can get cash from the Federal Home Loan Bank or the Fed on a moment's notice.So I'd like -- my goal has been a little bit higher than it is right now, but I don't see moving that up significantly over the next couple of quarters.
Okay. And then, Frank, some for you. One, you had mentioned in your opening comments just some of the quality of talent you've been able to bring in and hire. I'd be curious what the current pipeline looks like in terms of resumes on your desk, how qualified these people are and 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?
So I would tell you that the phones keep ringing. Now it's pretty much all inbound calls. So 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 for 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 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 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 re-optimized because we don't have as many manual processes, including in compliance, in 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 and 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 to the entire organization.That being said, if you look at the top of the funnel at BoeFly and the number of franchisers 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 stand-alone basis, I wouldn't tell you it's doing a whole lot to the bottom line, although it is -- it keeps getting better quarter after quarter. But the contribution 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 3. I appreciate it, Frank.
Your next question comes from the line of Michael Perito of KBW.
Yes. Obviously, a lot has been addressed. So I'll try to be brief here. I first want to just kind of -- I was working on my model, Bill, as I listened to you answer a lot of these questions. So I guess just really big picture. I just want to clarify. So I mean it sounds like operating revenues were about $67 million in the third quarter. Do you think that should grow modestly from here? And with your expense guide, is it fair to think that the efficiency ratio should kind of be topping out next quarter with some modest improvement next year? Like is that kind of directionally fair if I'm trying to piece together everything that was disclosed thus far?
I hope so. That sounds good. Yes, I think that's a good way of looking at it. 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 bump up in profitability. So the things that you're talking about now are just really on the margin. But directionally, I think you have them right.
Got it. Okay. 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.
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 tax -- basically, our REIT is utilized to reduce state and local taxes, and there's always pressure for that number to come down as the bank gets bigger. So that's what's really driving it. We're not big believers in investing in municipals and other tax advantaged assets. So you could see the tax rate inch up.
Got it. And then just lastly for me. I think you mentioned kind of new yields in the mid-8s and roll-off yields in the mid-5s ballpark. If I have this wrong, I apologize. But a 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, 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.
I think if you asked me that question 3 or 4 months ago, I would tell you there'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 13.75% in 1984. So it's not surprising to me. I actually counsel people and say, "Hey, rates really aren't that high. If you can't run a business with a 7% to 8% cost of money in it, then maybe you got to reevaluate what you're doing."I would tell you today when we're speaking to clients, people certainly are more accustomed to what's actually happening in the rate environment. And most banks, including the largest have caught up. And so even home mortgages are approaching 8% or right at 8%. 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 renegotiated their deposit relationships as well. 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 2, well, that's not so bad.The conversation today now is, "Hey, I have something with a 3.5% rate attached to it. It's going to refinance. What can we do? Is there" -- "what's the best way for me to think about it? Should I go short term? Should I go long term? Should I lock this rate in? Should I wait for better times? Is there something we could do? Can I increase my deposits with you so that you'll afford a better rate?"And so I think that 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 ConnectOne. People are putting a large value on their banking relationship today. I think this became too much of a transactional business back a year or so ago and before. And I think people now are starting to look at, "Hey, I need to understand the cost of my money. I need to understand the services that are required to run my business. And I've got to pick a partner." And so in one regard, I actually think it's all good news.
There are no further questions at this time. I'll now turn the call over to the management team for closing remarks.
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.
This concludes today's conference call. You may now disconnect.