ConnectOne Bancorp, Inc. Stock

Hello everyone. Thank you for joining us and welcome to the ConnectOne Bancorp, Inc. Second Quarter 2026 Earnings Call. [Operator Instructions]

I will now hand the conference over to Siya Vansia, Chief Brand and Innovation Officer. Siya, please go ahead.

Good morning, and welcome to today's conference call to review ConnectOne's results for the second quarter of 2026 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 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 also be 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. I'm pleased to report that our operating performance continued to accelerate this quarter, building on the momentum we established since closing our Long Island acquisition a little over a year ago. Our results demonstrate the execution of our strategy highlighted by strong revenue and earnings, healthy deposit and loan growth, continued margin expansion, and accelerating financial returns.

At ConnectOne Bank, everything starts with a relentless focus on our clients, how we engage them, how we deepen those relationships, and how we make every interaction count. That client-centric approach continues to differentiate us and remains the foundation of our success.

Core deposit growth remains a top priority for our team while also driving disciplined, relationship-led growth across our loan portfolio. That focus continues to show up in our numbers. We're also seeing a similar trajectory in non-interest income led by SBA and BoeFly with our residential build-out gaining momentum. That's a direct result of the team, infrastructure, and the go-to-market plan that we've built over the past year, and we expect that momentum to continue.

Turning to efficiency, by leveraging agentic tools and optimizing our systems, we're continuously modernizing how we operate. For example, through our recent partnership with nCino, we're deploying digital agents and business intelligence into our loan platform, reducing time spent on some manual processes by over 50%. This capacity is enabling our team to spend more time serving clients, deepening relationships, and driving revenue growth. This is an ongoing effort, and it's core to how we intend to keep ConnectOne among the most efficient banks in the country while maintaining our high-touch client focus.

On capital, we remain disciplined stewards. We continue to generate capital supporting operational flexibility for organic growth, improving our CRE concentration over time as our earnings profile accelerates further and return excess capital to shareholders through both dividends and buybacks. Bill will give us a little more detail on that in a moment.

In terms of credit, we made meaningful progress resolving the rent-stabilized relationship we flagged last quarter. We brought a portion of that exposure current, and where a charge-off was warranted, we took it, supported by reserves that we have proactively built well in advance. Bill will walk through this in a little more detail, but I see this as our credit discipline working as intended. We have a long track record of being proactive on situational credits. And looking ahead, we remain attentive to the broader economic environment, including the Fed's path on rates and the pace of economic activity.

While external conditions may evolve, our priorities remain unchanged. The strength of our franchise and the dedication of our team position us well for the remainder of '26 and beyond. And with that, Bill will now walk us through some of the quarter's financial performance in a little bit more detail. Bill, take it away.

All right. Thanks, Frank. Good morning, everyone. Thanks for joining our call. As Frank just laid out, we delivered another quarter of accelerating operating performance, which reflected both margin expansion and balance sheet growth.

I'll start with our strong operating performance and then provide additional color around our second quarter credit actions. So for the second quarter, we reported net income available to common of $40.2 million or $0.80 per share. That's up more than 10% sequentially from the first quarter's $36.3 million or $0.72 per share. And operating PPNR improved to 1.94%, up from 1.81% a quarter ago and 1.52% a year ago. It's all up.

Now let me walk through the primary drivers. First, our net interest margin. It widened for the seventh consecutive quarter to 3.42%. This is a 3 basis point sequential increase building on a 12 basis point widening we reported last quarter and 16 basis points of widening 2 quarters ago. Now the margin increases for this quarter and for future quarters are being driven largely by the repricing of adjustable-rate loans.

Year-to-date for 2026, approximately $700 million of loan balance came up for repricing. That's roughly $100 million per month. About 20% of those loans scheduled to reprice actually paid off, while the remaining 80% were retained in our portfolio at a weighted average rate increase of 255 basis points. That's a strong result on a fairly large sample, and we expect similar dynamics to continue over the next 2 quarters and into 2027.

And notwithstanding what I just laid out, I'm going to be conservative here by maintaining our previous quarter's guidance of year-end spot margin of 3.50% as deposit costs not unexpectedly have begun to rise, partially offsetting the improvements from loan repricing. Still, all trends point to wider margins for the rest of '26 and continuing into '27.

Now on the balance sheet, loans grew sequentially at an annualized rate of approximately 5% period-to-period, while average loan balances grew faster. They were up 10% annualized, and that contributed to strong growth in net interest income. Client deposits, that's total deposits less brokered, grew 8% annualized on a point-to-point basis, driven by non-interest-bearing demand deposit growth of 20% annualized. Deposit growth has come from a wide range of sources, including commercial and retail accounts, as well as municipalities, particularly in the Southeast Florida market.

Now, briefly touching on the rest of the income statement. Non-interest income increased to $7.9 million for the quarter, up more than $1 million sequentially due to higher SBA loan sale gains, and we expect higher levels of non-interest income in the second half.

ConnectOne, as you know, is among the industry leaders in expense metrics, and operating expenses continue to be well controlled, decreasing sequentially to $55.3 million for the quarter, down slightly from $55.7 million last quarter. That decrease, combined with our revenue gains, drove our efficiency ratio even better to 42.7% from 45.4% last quarter and from 49.2% a year ago. Our disciplined expense management reflects continued merger synergies as well as operating leverage driven by a cost-conscious philosophy and an optimization of technology. Looking ahead, our internal models forecast about 1.5% sequential growth in each of the next 2 quarters, and that's due largely to increased staff count.

Now let's get to the credit quality. As a reminder, our first quarter release highlighted a single $63.8 million relationship comprised of non-credits secured by New York City rent-stabilized multi-family properties. During the first quarter, they moved into the 30 to 59-day delinquency category. The issue for the borrower centers on administrative issues, including the New York State tax abatement process, which has been delayed in part due to the volume of applicants. We will continue to work with our client.

This quarter on that relationship, we received debt service payments on a sizable portion, bringing $20 million of the exposure current, while the remaining $44 million was transferred to non-accrual status, followed by a $13.8 million charge-off based on conservative valuations.

In terms of the earnings impact, the $13.8 million charge-off was partially offset by a $9.2 million release of reserves previously allocated to the rent-stabilized subsegment, including this specific relationship. As a result, we added an extra $4.6 million to our provision, bringing the total provision for loan losses for the current quarter higher to $8.3 million versus $5.2 million for the linked quarter.

Our non-performing assets rose to 0.55% of total assets from 0.29% last quarter, and annualized charge-offs were 56 basis points for the quarter versus our typical 20 basis point level, with the increases substantially attributable to this one relationship.

Now, notwithstanding an increase to non-performing assets, total criticized and classified loans as a percentage of total loans have decreased to 1.89% from 2.26% last quarter, and 30 to 89-day delinquencies decreased to just 3 basis points of total loans, essentially 0.

So while this quarter's headline credit metrics may appear mixed, the underlying picture continues to reflect solid overall credit quality. Our allowance for credit losses to loans was 1.18% compared with 1.3% (sic) [ 1.30% ] last quarter. Again, this is just the mechanical effect of utilizing an allocated reserve, not a signal of broader reserve coverage change.

Now some -- I just want to give you some additional color on our rent-stabilized position. The rent-stabilized portfolio represents just 5% of our total loans. It's declined by approximately 10% year-over-year, driven by payoffs, paydowns, and aggressive workouts when they're advantageous for us, of course. It's a trajectory we continue -- we expect to continue. And to further accelerate our de-risking strategy, we are also actively exploring a potential bulk sale, which, depending on market conditions, could prove to be an attractive option.

Now turning to capital. Tangible book value per share increased 3.1% sequentially to $24.66, and it's up over 10%, 12.4% year-over-year, very, very strong result. Our tangible common equity ratio advanced to 8.78%, already higher by 70 basis points from last June when the First of Long Island merger closed. Year-to-date, we repurchased 90,000 shares at an average price of $26.21. Although we did not repurchase any shares during the second quarter, we have 550,000 shares remaining under our current authorization, and we will continue to repurchase shares opportunistically. Our Board declared a common dividend of $0.195 per share. That's the same as last quarter, but with our strong and growing earnings and our current dividend payout ratio sitting in the mid-20% range, we continue to maintain flexibility with regard to dividends and share repurchases.

And with that, I'm going to turn it back over to Frank for closing comments.

Thank you, Bill. To wrap things up, I'm proud of what we've accomplished and the momentum we built across our franchise. We continue to strengthen and diversify our business. We're well positioned with a growing earnings profile, sound credit fundamentals, and a strong balance sheet, and we're confident in the opportunities ahead to deliver sustainable growth and long-term value for our shareholders. With that, I'll turn it over -- I'll turn the call over for your questions. Operator?

[Operator Instructions] Your first question comes from the line of Feddie Strickland with Hovde Group.

Just wanted to start on the multifamily loans. I mean, as you mentioned in your opening comments, it seemed like the multifamily buffer really did work as intended here and kind of limited the impact to the income statement. But it does sound like a portion of the higher provision was still driven by these loans. Did I hear that right that it was about $4 million or so still related to these loans kind of in addition to what you tapped from that multifamily reserve?

Yes, that's right. We had an additional $4 million.

Okay. And then the $44 million in non-accruals still remaining from that multifamily group, what is the pathway to work out look like over time?

Well, first, with the charge-off, it's only $30 million. So the total exposure, if you will, going back to the release last quarter when we said there were $63.8 million, $20 million was resolved through payments and so those loans are current, and then we reduced the total outstanding by another $13.8 million. So we actually have $30 million outstanding. Look, they're going to continue to work with the city to attain the abatements that they're looking for. And so we're going to continue to work with our client and hopefully, we'll be able to resolve that credit over the next year.

Got it. And then just one last one for me real quick. Just you mentioned potentially a bulk sale of multifamily. How large or small could that be just in terms of either dollars or percentage of the current rent-stabilized multifamily portfolio?

I can't get into specifics at the current time, but we have some things working for us right now, and that's why we're looking at the option. One is, as you know, a large portion of our rent-regulated portfolio has been marked in the transaction with First of Long Island, marked for both credit and interest rates. So we're in a good position there from what the value is on our books. And the second thing is that, based on the demand out there for these assets, we seem to be hitting the bottom in terms of valuation. So we're going to take a careful look at that, see what we can get accomplished. I think, listen, any kind of reduction here would be a positive in terms of the valuation for the stock.

Your next question comes from the line of Tim DeLacey with Raymond James.

Tim DeLacey on for Danny here. Just hoping you could help us frame up how much factor payoffs played during the quarter. And maybe help us kind of gauge what you're thinking for the back half of the year in terms of what the loan pipeline looks like today?

What was the question about loan growth?

About loan payoffs?

Loan payoffs. Well, each quarter we have a tremendous amount of originations and payoffs that net to a loan growth rate in the mid-single digits. So we're still on track as we've been in the past for that. So it's really hundreds and hundreds of millions of originations and a slightly lower number of payoffs that lead to the increases. And we expect that to continue over the course of the year. We had a pretty strong loan growth this quarter. Hard to say exactly where it's going to be because there's lots of ins and outs. But still...

There seems to be momentum around the loan pipeline itself. So the things coming into the top of the funnel are giving us a real good sense that the back half of 2026 will continue with the momentum that we saw building through the first half.

Understood. And kind of taking that all together, does the mid-single-digit kind of pace for 2026 still stand for you guys today?

Yes. I mean, for your model, I think that's a good guess, okay?

Okay. I appreciate that, Bill. And maybe just flipping over, Frank, I heard you in your prepared remarks on the CRE concentration ratio. And we had discussed before maybe trying to get the concentration ratio below 400% sometime in 2026. But just curious if that's still a desire to get that ratio sub-400% or have thoughts kind of changed here in the current environment?

So, a couple of things there. One, I don't believe I said that we would get it down in 2026. I said it would continue to trend down through this year. I think our emphasis is still around diversifying the portfolio over time to see that trend continue to trend lower. And at some terminal point in the future, I don't know if that's in '27 or '28, see that number approach or get below 400%.

All that being said, we're still in the CRE business. We have a pretty strong construction portfolio and business model there. We're well respected in the industry. We represent some of the best names in the Northeast relative to that portfolio. And so we're going to continue to put resources and continue to -- we'll actually continue to grow the portfolio, but at the same time, it'll shrink relative to the size that it represents for the entire balance sheet. We're seeing growth in other areas of the bank as well.

So a combination of increasing capital, building other parts of the portfolio, and being very disciplined about what new CRE opportunities we bring on board, I think we'll see that sort of trend of having the CRE ratio continue to decline.

Okay. I appreciate that color, Frank. And maybe last one just staying here on capital. I hear you guys on the continued appetite for buybacks here, but just curious if there's any early thoughts about potentially redeeming or replacing the preferred shares that are scheduled to reset here in September?

Well, we have not made a final decision on the timing of that yet. And well, the market will know when the time comes.

Your next question comes from the line of Tim Switzer with KBW.

On the credit side, it seems like there's just been a little bit of a pickup in these larger one-offs across the banks this quarter, not just in multifamily. Are there any other problem loans you guys are watching that could be at risk of a larger write-down near term?

Well, I think this was a particularly large one for us. When you look historically, we haven't had too many of these. So from time to time, there are charge-offs. But I would expect our charge-off levels to revert back to what we've been experiencing over the past couple of years.

Okay. Good to hear...

And the comparison lately has been to a 0 credit charge-off environment, which is quite unrealistic.

Yes, it's a tough comparison. And then changing topics here. Is there any interest -- can you update us on your thoughts around M&A and your interest in participation, maybe looking at another bank?

Right now, I have to tell you with what we're working on currently, our organic growth has really been the focus of what we're doing these days. And it's paying a lot of dividends. We're building a terrific pipeline across all of our markets. There's a lot of opportunities in the marketplaces that we operate in. And for right now, that's where our focus is. I think the numbers have proven that the transaction we did last year is proving to be beneficial going forward. It's opened up a fantastic market for us to take advantage of.

And in the future, obviously, just like we have through our last 21 years of existence, we'll be opportunistic when those opportunities present themselves. At this time though, I think the organic machine that we have is really, really doing well.

Your next question comes from the line of Justin Crowley with Piper Sandler.

This is Bader Hijleh on for Justin Crowley. I had a question about the deposit cost. Given the current rate environment, and I know this quarter, deposit costs have gone up. How are you guys modeling deposit beta sensitivity in the coming quarters? And is it fair to assume that deposit costs are going up in the coming quarters? Or how should we think about that?

Well, it's hard to predict exactly, but the trends have been up, just up slightly. Like our CD rates are at 4% now. At this point, I was hoping it to be lower. But in order to compete, we need to be at that level. So I think you saw for the quarter, our total deposit costs were up several basis points. Part of it is the mix of deposits. We've had some strong growth in non-interest-bearing demand. So to the extent we have better mix, we'll be able to maintain our deposit levels.

But having said that, the main issue is what's going to happen to the net interest income and net interest margin, and we still believe that the repricing that's going on in the portfolio for the next 1.5 years is going to outweigh any increase in deposit costs.

Now, if rates are cut by the Fed in the future, that's going to help our deposit costs. If rates are increased, it could hurt our deposit costs. But by the same token, we're going to earn more on our loan balances. And so the net effect is going to be muted on that side. So we just -- I got to tell you overall, we're very bullish on the direction of our margin.

Got it. And then one follow-up with regard to credit, and thank you for the commentary on the rent-regulated portion of the loan book. Outside of the rent-regulated, criticized assets have trended downward. With the remainder of the portfolio, are there any pockets of concern you're monitoring closely? Or how are you thinking about the rest of the book?

There's really no one area that has particular focus. Some credits pop up from time to time. They've been included in our charge-off numbers for the past few years, but nothing else in the portfolio that we're particularly concerned about.

[Operator Instructions] Your next question comes from the line of Tyler Cacciator with Stephens Inc.

This is Tyler on for Matt Breese. Just thinking about the NIM longer term, how much longer might we see fixed-asset repricing benefits to the NIM and overall NIM expansion? I'm more focused on 2028, given 5 years prior in 2023, loan yields kind of spiked. So just thinking as we start to roll some of these into 2028, I'm curious about what the impacts are?

No, absolutely. Let me give you how long this is going to go on. It's about $1.5 billion -- it's about $1.5 billion and $500 million is in 2028 in the first -- I'd say the first 6 months of '28.

Okay, great. And then.

I think this will be helpful.

Yes. And then just lastly for me, as you work through the -- trying to sell these rent-regulated multifamily loans, how are current appraisals comparing to the marks that you established at the time of the FLIC acquisition? And then with the rent freeze currently set through 2027, does that kind of factor into the timing of these sales at all?

Well, let me first answer. From the marks, we've been pretty right on. I have to tell you, it was a difficult exercise when we did the transaction, trying to come up with valuations on a loan-by-loan basis. But so far, we've been pretty much right on target. So -- possibly because we were aggressive in the acquisition, but it served us well because we seem to be on track.

And...

In terms of the rent...

Yes, as far as the rent freeze goes, as I'm sure you saw yesterday there was a pretty substantial and very well-thought-out lawsuit challenging the arbitrary and capricious nature of that rent freeze. I think it's the first time that a realistic challenge to the Rent Guidelines Board's thought process has been lodged. So certainly that's going to require close monitoring to see what happens there.

Any review of what the actual facts are on the ground would tell you that some sort of increase was warranted in 2026. So I don't think that story is completely written as we sit here today. It's obvious that if there is a rent freeze for the next 2 or 3 years or 4 years, that, that would probably be a negative relative to the portfolio or to some portion of the portfolio. But I agree. I think this is a major component of the story that's going to bear careful monitoring.

Your next question comes from the line of Feddie Strickland with Hovde Group.

Just had one follow-up really on Florida and geography down there. I know you've been building out the franchise down there the last couple of quarters, LPO in Orlando and the existing presence down in South Florida. Can you talk about maybe just the level of opportunity you see down there in terms of growth and of loans, deposits, and maybe even fee income?

Yes, I think it's a great market for us. It's very small relative to the entire balance sheet. I think it's approaching some $700 million in footings there. We continue to grow. We continue to see opportunities. We're continuing to see sort of the same distribution of about 50% of the growth coming from our transplants from here in New York, New Jersey that are putting footings down in Florida. A lot of the dynamic of the economy in Florida appears to be very favorable and continues to be favorable, especially in the markets that we serve.

So I do see that the emphasis in the Florida market for us for ConnectOne continuing. And we're continuing to hire good seasoned bankers. We're continuing to attract high-quality clients within the market itself organically. And I think it'll continue to contribute to the bottom line over time. The pricing in that market is competitive. It's becoming almost as competitive as it is here in the Northeast, but that's not something we're immune to. So I'm pretty optimistic about what it will represent as time moves forward.

We have reached the end of the question-and-answer session. I will now turn the call back to management for closing remarks.

Well, thank you and thanks again for joining us today. And we look forward to speaking with you during our third quarter earnings conference call in a few months. So enjoy your summer and thank you again for joining today.

This concludes today's call. Thank you for attending. You may now disconnect.

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the ConnectOne Bancorp, Inc. First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Siya Vansia, Chief Brand and Innovation Officer. You may begin.

Good morning, and welcome to today's conference call to review ConnectOne's results for the first quarter of 2026 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 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 also be 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 kick off 2026 with strong momentum, firing on all cylinders as demonstrated by our results. 12 months ago, we detailed our strategic objectives heading into the largest merger in our company's history. I'm pleased to report that we are not only delivering on those goals, we're exceeding initial expectations. Today, our franchise is stronger and better balanced. We diversified our client base and revenue streams, materially improved deposit mix, including core and noninterest-bearing deposits and diversified our loan portfolio. We scaled the balance sheet from under $10 billion to nearly $15 billion in assets, increased our market capitalization to over $1.4 billion and built a valuable franchise, accelerating our presence across Long Island. Our geographic footprint now spans the entire New York City metro region and naturally extends to the growing South Florida market. We're positioned for a very strong start to 2026, and we're confident in that momentum continuing for the year ahead. Turning quickly to our first quarter performance. We delivered loan growth, margin expansion, accelerating return metrics and further increased tangible book value per share. Reflecting our success and confidence in future performance, we opportunistically repurchased shares in the first quarter and increased our common dividend. Bill will provide some more details regarding our financial performance this quarter and our continued confidence in further margin expansion for 2026. On the expense side, we remain highly disciplined as we continue to realize merger synergies and steadily return to best-in-class efficiency levels. To ensure we continue to operate as a top-tier efficient bank, this discipline is being further enhanced by our focus on optimizing all systems, products and services, along with the thoughtful integration of AI across the organization. Taken together, these initiatives will drive continued improvement in our expense metrics going forward while also enhancing scalability as we continue to grow. Our first quarter credit quality remained solid. Net charge-offs declined to a recent low. Our nonaccrual loan ratio also decreased while criticized and classified assets remained at historically low levels as disclosed in our earnings release, delinquencies increased due to an isolated client relationship collateralized by 19 multifamily New York City rent stabilized properties.

The client who we're working closely with has had a strong track record of payment performance spanning more than 5 years and significant portions of the credit remain fundamentally sound. While it may be too early to determine any financial impact, Bill in a minute will review with you the significant reserves we've recorded against the entire rent stabilized portfolio.

Look, we've always been supporters of affordable housing in all the markets we serve. New York City is a somewhat unique market with its rent stabilized portion of affordable housing. Our interest continues to be to support the owners that work hard every day to provide solutions for all in the greatest city in the United States.

Just a reminder, ConnectOne has a strong track record of successfully resolving situations either through negotiated adjustments to interest rates and payment terms with clients or alternatively through selling loans. Next turning to noninterest income growth. Momentum continues to build. Subsequent to the quarter end, we saw accelerating activity in SBA loan sales, supplemented by BoeFly and Bill will share some more details on that shortly.

Notwithstanding headline economic uncertainties and volatility, we're confident ConnectOne will deliver sustained long-term value for shareholders in 2026 and beyond. And with that, I'll turn the call over to Bill will walk us through some of our performance in a little bit more detail.

All right. Thank you, Frank, and good morning to everyone on the call. So as Frank just laid out, we delivered another excellent quarter characterized by accelerating operating performance, robust loan growth and a significant widening of our net interest margin. For the first quarter, we reported operating earnings per share of $0.79 and operating PPNR as a percentage of average assets of 1.81%, that's up 3.5% from last quarter and up 35% from a year ago.

Now let me walk you through some of the primary drivers of these results. Clear highlight of the quarter was our net interest margin, which expanded by 12 basis points sequentially to $3.39 and that builds upon a 16 basis point widening in the prior quarter. This current quarter exceeded our initial projections and was primarily driven by contractual loan repricings and improved deposit costs. Looking ahead, advancing loan portfolio yields are expected to support continued margin expansion even without the benefit of further rate cuts. On the asset side, loan originations were strong with the portfolio growing by an annualized rate of approximately 10%. This was $300 million in growth for the quarter, and that's double the pace we saw in each of the 2 prior quarters.

The pipeline remains strong and portfolio growth net of payoffs is anticipated to be in the mid-single digits. Now maintaining deposit growth that keeps pace with our loan growth is a primary focus for our team. And while we achieved client deposit growth this quarter, our accelerated loan growth was also funded through a reduction in cash and investment securities and supplemented with some wholesale deposits.

In terms of margin outlook, we are maintaining our previous guidance. It's a year-end spot margin of 350. So by the end of the year, we'll be at 350. This factors in lower probability of rate cuts, maybe there's one to come loans repricing higher and a competitive deposit pricing environment where we are seeing unfolding.

Now turning to asset quality. The broader portfolio metrics continue to show strength. Our total nonperforming assets declined to just 0.29% of total assets and our criticized and classified loans dropped to a historically low level of 2.26% of total loans. Further, net charge-offs on our non-PCD portfolio were exceptionally clean at just 8 basis points annualized, and that's a recent low.

As Frank mentioned, we did experience an increase in 30 to 59 day delinquencies and which rose to 0.81% due to 1 relationship which we are in the process of working out. And we recognize the market's focus on the New York City rent stabilized space. That's why we provided additional information in this morning's release. In the release, you can see our total rent stabilized portfolio has been reduced over the past year to $675 million that was accomplished through paydowns, payoffs and loan sales it was $750 million of the total portfolio at merger closed.

Now $413 million, or 61% of that $675 million is attributable to the First of Long Island acquisition. And that portion was fully reviewed in our merger due diligence and was marked down aggressively with reserves and yield adjustments aggregating to $66 million bringing today's carrying value on that part of our portfolio to less than $0.85 on the dollar. The remaining $263 million, which was originated by ConnectOne represents just 2.2% of total loans and that, too, has an elevated reserve. It's $15 million for that portion. So between the general reserves and the purchase accounting marks, we have a 12% offset to our aggregate rent stabilized exposure providing more than $80 million in total value absorbing cushion.

Now the provision for loan losses for the first quarter was $5.2 million. That reflected a number of items. First, the strong loan growth. Also, we increased qualitative factors tied to the multifamily portfolio. And the provision was partially offset in a good way by improved economic forecast in our CECL model. And today, our total allowance and credit losses to loans remains healthy at 1.3%.

Now let me touch on a little bit on the income statement. Operating expenses remain well controlled across the bank excluding merger and restructuring charges, noninterest expenses were $55.7 million for the quarter, and I'm targeting a 1.5% per quarter sequential growth rate going forward. On the revenue side, noninterest income was $6.8 million for the quarter. SBA gains were approximately $400,000 for the quarter, with that, plus $1.1 million in additional SBA gains recorded in April puts us ahead of our 2026 target with the third generated by BoeFly.

Finally, our capital position continues to strengthen through solid retained earnings. Tangible book value per share increased by 1.7% to $23.93. That brings us very close to our premerger of tangible book value of $24.16. The tangible common equity ratio at the Bancorp advanced to be at 64 and the bank's leverage ratio at 10.81%. And reflecting confidence in our capital generation and forward margin outlook, the Board declared an 8.3% increase in our common dividend.

In addition, we repurchased 90,000 shares in the quarter at 26.21 per share, and we will continue to opportunistically repurchase shares, taking into account market pricing and asset growth. We have more than 500,000 shares remaining in our repurchase authorization.

Before we get to Q&A, I'll turn it back over to Frank for some closing comments. Frank?

Thanks, Bill. To wrap things up, our earnings profile is solid and growing. Credit quality remains sound, and we have a well-positioned balance sheet. We're incredibly proud of what we've accomplished so far, having established a powerful and strong framework for our next phase of growth. Our tech forward, highly efficient culture is driving continuous optimization across the organization, allowing us to maintain our relationship-focused banking model as we continue to scale. Our teams are energized and are executing on the momentum we've created.

In short, our franchise has never been stronger. At our current valuation, we believe ConnectOne Bank represents an interesting opportunity to own a high-quality franchise in one of the most desirable markets in the country. I want to thank you for joining us here today. And as always, we appreciate your interest in ConnectOne Bank. And with that, I'd like to turn it over for your questions. Operator?

[Operator Instructions] Our first question comes from Tyler Castor from Stephens Inc.

This is Tyler on for Matt Breese. Just starting with loan growth for the quarter. Can you kind of walk us through some of the dynamics there and if there were any accelerated pull-throughs? Or kind of lower-than-anticipated payoff activity. And then just with the stronger growth here, is there any opportunity to be on the higher end of that mid-single-digit guide?

I would say the answer is yes. I do think that payoffs have come down a little bit, which helped to bolster the loan growth. But the pipeline is strong. We are seeing the types of business that we are looking for in all of the markets we serve. So I do think we are executing on what our objectives are relative to that. As far as what the loan growth is going to be for the rest of the year, the mid-single digits is probably where we feel the most comfortable. It could be a little higher, it could be a little lower.

Okay. Great. And then just on new originations. What are you putting on new loans at? And are you seeing any compression? .

The pipeline right now was about $635 million and the loans that we've put on most recently were $620. So that's the general [indiscernible] we're putting on. I'm trying to -- I think the spreads are being maintained nicely. .

Okay. Great. And then if I could just squeeze one more in on the regulated side. I know the release had an uptick in past due loans. Was that from the legacy portfolio or from and then if you could just talk about the portfolio as a whole and then potential impacts from Mandy's new insurance program for rent-regulated properties?

Well, you packed a lot in there. Maybe I'll give a quick overview.

From the legacy portfolio. .

Legacy ConnectOne, it's a relationship that goes back a number of years. We've been working together with them very closely. I do -- I think everyone is aware, there are challenges in the rent-stabilized portfolio across everyone's portfolios. Those that have the value-add components in their portfolios probably see the most amount of challenges. That was an area that we generally stayed away from. So this is definitely a combination of higher interest rates and many other factors that are coming to play within New York City itself predominantly the 2019 change in the rent stabilization was.

All that being said, we've had great track record of being able to work with most of these borrowers to provide solutions and answers for them to work out their challenges as they go forward. I am fairly optimistic that based on the way we have the portfolio positioned. And as Bill went into a lot of detail and maybe he can give you a little bit more around the way that we provision that entire portfolio that we are well prepared going forward into the future.

Yes. And I think the strong reserves we provided really give us some comfort going forward on the total portfolio. And most of the portfolio of 60% of the portfolio was done through the acquisition, which gave us the opportunity to take significant reserves. So significant reserves that have turned out to be probably overly conservative, plus adding to reserves over the past couple of years puts us in a very good position.

Our next question comes from Tim DeLacey from Raymond James.

This is Tim DeLacey on for Dan this morning. I was wondering if we could just get an update here on your Florida markets and how active this is trending there? And maybe in conjunction with that, you recently opened an LPO in Orlando. And I was wondering if you could share some details on any recent or planned hires you intend to make there or kind of maybe your longer-term view of that market?

Look, we're very bullish on the Florida market. We've been growing there in, I think, a very measured way. I think we started there with 4 or 5 individuals. We're now up past 18 or 19 individuals that are working in that market. And I would tell you that the mix of business that's coming from there continues to stay pretty steady. It's a great mix of both C&I, owner-occupied and nonowner-occupied real estate type transactions, very, very similar to the types of transactions that we do in our primary markets here in New York. And a decent portion of the business there is related to our New York business. I've joked on these calls before that Southeast Florida is sort of like the sixth borrow of New York. And it becomes more true every single day.

So we're very optimistic about a lot of different parts of Florida. But again, we're growing in a measured way. So that would be my response to that question.

Great. Thanks for the color there, Frank. And just maybe switching over to the margin, maybe for you, Bill. You kind of mentioned in your comments that the competitive landscape for deposit cost remains competitive out there. Do you have any kind of thoughts on where deposit costs might trend here absent further rate cuts through the rest of the year?

About flat I mean, I think we're planning it to be flat for the year. So most of our margin widening is coming from the repricing of the loan portfolio.

Understood. Appreciate that. And then just a quick modeling question for me. Do you happen to have the accretion that impacted that margin during the quarter?

The accretion in the net interest margin? .

Yes, correct.

Do we have it in the -- what was that. So hold on for a sec. We'll get back to -- yes, we'll get back to you on that, okay, on the amount that's included in net interest income.

Our next question comes from Feddie Strickland from Hovde Group.

Just ex multifamily, it seems like you had some solid progress on already pretty good credit metrics here. Is there anything else kind of in the existing either criticized and classified or NPAs that maybe we could see work out on later in the year to maybe make those balances fall even a little further.

Nothing more than typical. There's always a few assets that we're working on all the time, but nothing out of the ordinary in terms of dollar amounts.

Got it. And just wanted to clarify, Bill, on your spot margin comment of 350 at year-end. Should I take that to mean you expect the margin to be 350 for the fourth quarter? Or is that more as you kind of exit the year in December?

I would say as we exit the year. So I think that's similar to what we've said before, which was 345 or so for the quarter -- for the fourth quarter. It's hard to exactly predict we could get a little bit more on the loan repricing side, but we also could see deposit costs go up. And that's why we're coming out with, I would say, a conservative estimate of the quarter and 350 spot at the end of the year. .

And just one more for me. Did you happen to have the quantity of fixed rate loans coming up for repricing? I apologize if I missed that.

About $100 million yes. Yes, it's -- put it simply, it's about $100 million a month. Okay, fluctuate it a little bit that's a good way to model it. .

[Operator Instructions] Our next question comes from Emily Lee from KBW.

This is Emily Lee stepping in for Timothy Switzer. Congrats on the quarter. Yes. So really great to see the dividend increase. Just wondering where would you like the payout ratio to go over time? And you also mentioned in your opening remarks that you plan to continue repurchasing shares. So just wondering how we should think about capital allocation and deployment for the rest of the year?

All right. Well, on the repurchases, we did 90,000 in the quarter. Our plan is to do about 100,000 a quarter for the next -- for the rest of the year, although it could depend on what the stock price is as well as what our growth rates are. And in tandem with that is our payout ratio. We've always liked to have a lower payout ratio.

So although I see us continuing to increase dividends each year, with the expected increase in earnings going forward and into '27, I would say that our payout ratio would be similar.

Understood. Yes. And then you kind of provided a bit more color on the past due credits coming from legacy. I'm just wondering, do you have any metrics such as like LTVs or anything you could provide to kind of give some more comfort on those?

Don't -- nothing at this time. The rent regulated market is a little bit of in a state of flux and it's difficult to determine exactly what the current LTVs on those loans are. But the majority of our portfolio is current and not impaired. And so we feel pretty good about the whole portfolio.

Our next question comes from Daniel Tamayo from Raymond James.

Yes, I know you took some questions from Tim earlier, I appreciate that. I just jumped on a little bit later. And I think everything has mostly been asked. So I'll ask you, Frank, about the state of the M&A market. I know you've asked -- you answered these questions over the last several quarters, but we've had some changes in the macro environment. Curious how that's impacted just conversations, where you guys stand in that in those conversations, anything noteworthy from your standpoint within just general conversations in the market.

Dan, I -- my answer is kind of sort of standard. We're highly focused, and I think this quarter really demonstrated that we're highly focused on our organic growth, our ability to expand within our markets, take advantage of the market opportunities that exists. I think we did a really fantastic job with the merger with First of Long Island that has been integrated really well and is providing us tremendous opportunities.

And while I see the headlines that there's lots of other M&A occurring in and around the marketplace. There's -- again, we've been opportunistic. We've only done a couple of deals in our existence -- and certainly, we'll talk to anyone. We like to know what's going on within the marketplace. We'd like to understand what the environment looks like. But it's very difficult to get to a place where something makes a lot of sense, specifically with where we are today, both in size, scale, capability and what we see as opportunities going forward. We have -- we're doing a great job of building capital, providing a return to our shareholders and to us, that's incredibly important.

If the right opportunity presented itself, of course, we would take a look at that. I do think those are becoming fewer and farther in between as the ramp-up in some of the other M&A that's occurred within the market has taken place. I'm happy to participate either way. If we get the opportunity, great. If we don't, we'll take advantage of someone else taking advantage of an opportunity. And we've generally been very successful in providing a safer or better home for some of the clients that feel negatively impacted or disaffected by those M&A transactions taking place. So I think that's a real long way of saying, yes, I know there's a lot in the headlines, but I don't see anything right at the moment that's compelling.

Great. I think we've hit on everything else. I appreciate it. I'll step back.

And I just want to follow up and give an answer to the question about the purchase accounting interest -- so it was $9.3 million in the most recent quarter, averaging $9 million a quarter for this year. And for '27, it would be $8 million a. .

Our next question comes from Emily from KBW.

I just wanted to hop on with a quick follow-up. But in your opening remarks, you mentioned the implementation of AI within your organization. So I was wondering if you could provide some color on maybe potentially use cases or opportunities for further efficiencies related to AI?

So Emily, AI is pervasive for everyone. I believe. And if you're not thinking about it or utilizing it in your day-to-day operations. So I think you have to question what are you doing? We see it in 2 different ways. We see lots of opportunities within the organization for folks to utilize AI tools to make their everyday processes better, more streamlined, more effective cut down on repetitive tasks. And we're seeing tremendous opportunities in all aspects of the bank in that. We use use tools like Encino and Slack and Google here for our e-mail platform, which has Gemini built into it, -- and so all of these things provide AI components that just make our jobs a lot easier.

And I am so proud of the team here that have been able to turn over opportunities for use cases as small as they may be, sometimes they can be really effective in how we go about doing more accurate work in a much more efficient way. The other part of it is that many of the vendors that we work with, specifically, whether it's Encino or it's Google or it's Verafin or whomever are incorporating AI in their platforms. And so we are really seeing a groundswell of opportunities with some of the more modern platforms that are incorporating systems to be able to do things in an incredibly efficient way that may, in the future, allow us to scale faster and better with less human resources and, at the same time, provide additional accuracy better opportunities and the ability to actually look at how we run the business in a completely different way as opposed to just trying to design a faster horse.

So I really am excited about the opportunities that are coming forward because of some of these changes within the marketplace. And we're using it from the smallest opportunities to some of the largest, and I think it's a great tool going forward.

That concludes the question-and-answer session. I would now like to turn the call back over to the management for closing remarks.

Well, I want to thank everyone again today for joining us and for some of those great questions, and we look forward to speaking with you during our second quarter conference call in a few months. Have a great day.

This concludes today's conference call. Thank you for joining. You may now disconnect.

Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin and I will be your conference operator today. At this time, I would like to welcome everyone to the ConnectOne Bancorp, Inc. Fourth Quarter 2025 Earnings Call. [Operator Instructions].

Thank you. I would now like to turn the call 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 fourth quarter of 2025 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 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 on Form 8-K with the SEC and may also be 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. 2025 was a defining period for ConnectOne, one that demonstrated the strength of our business model, the value of our client-first culture and our team's ability to execute on all fronts. Looking back, we delivered on a set of highly aspirational goals for the year, culminating in strong returns backed by solid profitability, efficiency and asset quality metrics. We seamlessly integrated the largest transaction in our history. We completed a full systems conversion within 2 weeks of that closing and bolstered our franchise value and competitive position in the New York Metro market.

This meaningfully propel the company beyond the $10 billion asset threshold, a transition ConnectOne was well prepared for, and we ended the year with $14 billion in assets a market cap in excess of $1.4 billion. These results directly reflect the strength and the dedication of our exceptional team whose talent and client-focused obsession continue to distinguish ConnectOne across our markets. The natural alignment of our expanded team drove meaningful progress in strengthening client engagement exemplified by remarkable retention through the merger all while simultaneously deepening existing client relationships.

As Bill will discuss in greater detail, we closed 2025 with meaningful momentum, delivering strong fourth quarter performance highlighted by robust core earnings, expanding margin and accelerated returns.

Turning to some of the recent highlights and our near-term outlook. Deposit gathering remains a core competitive advantage. During the second half of 2025, client deposits increased by approximately 5% on an annualized basis, reflecting strong relationship inflows and a sizable reduction in brokered deposits. Meanwhile, our loan portfolio also grew by an annualized 5% on the strength of strong originations, offset by elevated payoffs in part due to higher refinancing rates for borrowers.

We anticipate these portfolio dynamics continuing into 2026. The bank's net interest margin widened significantly over the past quarter and year and with our liability-sensitive positioning, we expect that positive trajectory will continue throughout 2026.

Performance metrics improved significantly this quarter, and we remain committed to building strong capital, driving efficiency and generating profitable growth with the goal of delivering even higher returns on assets and equity. As capital generation accelerates, we'll have flexibility to support our growth, increase our common dividend and stand ready for opportunistic stock repurchases. As we move through the year, we will remain focused on further efficiencies, particularly across Long Island, where our team continues to generate opportunities for expansion.

In addition, consistent with our branch late relationship-driven approach, we've identified 5 branch locations to consolidate, continuing our branch rationalization efforts. Furthermore, we have a deeply talented and expanded team in place, so we anticipate modest staffing growth going forward that will also drive improved revenue and operating synergies.

In closing, as we enter 2026, ConnectOne is uniquely positioned to capitalize on client-driven opportunities in some of the best markets in the country. Even with these strengths, we also recognize that competitive pressures, political developments and broader market sentiment will continue to shape and challenge our environment. Rest assured, we're prepared to meet these hurdles head on while remaining focused on executing our long-term vision and delivering sustainable value to all our stakeholders.

So with that overview, I'll turn it over to Bill to walk through some of our performance in a little more detail. Bill?

All right. Thank you, Frank, and great to be speaking with you this morning as we delivered another excellent quarter was highlighted by improving net interest margin and performance ratios, robust loan originations and core client deposit growth, combined with the reduction in wholesale deposits, clean asset quality, and healthy capital and tangible book value accretion.

Just going back to deposits for a moment. Since the acquisition, we have significantly improved the quality of our deposit base, reflecting a substantial increase in the percentage of noninterest-bearing demand went from 17% to more than 21% today as well as a reduction in brokers, which declined from a high of 12% of total assets to just 6% today.

Now for the quarter, our operating PPNR percentage grew sequentially by nearly 10%. That was the fifth consecutive increase, while earnings were further augmented by a lower provision for credit losses and a reduced effective tax rate. Putting it all together, operating earnings for the current quarter represents an 18.6% increase sequentially over the third quarter.

This drove our quarterly operating return on assets all the way up to 1.24% and a return on tangible common equity to 14.3%. And while we expect these performance metrics to moderate in the first quarter, we anticipate a quick return to an upward trend. Future earnings and performance returns will be driven higher by ongoing margin expansion, improved operating efficiencies and modest loan portfolio growth and increased noninterest income. Now the margin expansion this quarter stemmed from 3 key factors.

First, we had a decline in our cost of deposits following the Fed rate cuts. Second, the redemption of high coupon subordinated debt late in last year's third quarter was an action that was delayed by the merger. And lastly, our liability-sensitive position where rate cuts favorably impact our deposit costs without a reduction in loan yields.

2026 guidance on the net interest margin is as follows: I'm going to get specific here, but keep in mind, there are many uncontrollable factors that can impact the margin. First, were likely to be up by 5 basis points in the first quarter, putting us in the low [ 3.30s ]. Then we should see 5 basis points of improvement for every 25 basis points of Fed rate cut, not sure where there's going to only be 1 or 2 coming in '26.

In addition, we should see 5 basis points improvement per quarter due to higher loan yields that is not going to kick in really until the midyear -- until midyear. Now partially offsetting those, we could see 5 basis points of contraction due to a potential preferred redemption, which would lower margin in the fourth quarter, but it would actually improve EPS. Now let me turn to operating expenses. We continue to drive efficiencies related to the merger. And following a detailed review of our footprint, we have decided to close 5 branches and due to proactive client engagement, which we always know we do not anticipate measurable deposit runoff. And while future branch closures are always possible, no decisions have been made for 2026.

We also anticipate realizing further synergies by optimizing our staff count over the coming year, even as we strategically hire new talent in revenue-producing and back-office operations. Now for OpEx-specific guidance, including the additional efficiencies identified, the objective I have right now calls for a 4% increase in quarter 4 '26 from the current quarter, and that increase would occur over the course of 2026.

Loan originations have been robust all year and we anticipate this continuing in 2026. Our philosophy focuses on maintaining appropriate risk-adjusted loan spreads and value-enhancing client relationships. So this, combined with a significant portion of our portfolio maturing or repricing in 2026 and '27, leads us to expect higher than typical payoffs.

Consequently, we now anticipate a more modest loan portfolio increase in the 3% to 5% range. In regard to growth in noninterest income, I am aware that we have fallen a bit short of my prior guidance. But with the pipeline of SBA loan sales building, now we're pretty confident of more than $4 million in loan sale gains in 2026, and I'll provide updates throughout the year on that.

Now turning to the allowance loan losses. We recorded a relatively low provision this quarter. The reasons for this were multifaceted. First, the CECL models economic projections improved slightly. Second, we recalibrated loss drivers to align with a new and larger peer group. And finally, we've worked out several PCD loans at values exceeding merger markdowns, and that resulted in favorable reserve releases. There was a slight increase in the nonperforming asset ratio to 0.33 from 0.28 a quarter ago due to 1 multifamily loan relationship.

Having said that, and not included in the year-end ratio is a multifamily market that occurred in January, which brought total nonaccruals back down to the lower level. Going forward, I don't see any significant change in the level impaired loans, but as always the case, these levels can vary from quarter-to-quarter. One thing I can tell you is we always try to get ahead of any issues with conservative valuation adjustments.

In terms of the effective tax rate, which I mentioned before, it was adjusted downward for the quarter to 26% that was due to the true-up of our deferred tax assets, largely having to do with the merger, but we expect the go-forward rate of 28%. Capital continues to strengthen. Our tangible common equity ratio has steadily increased to 8.62 as of year-end. This strong capital position gives us the opportunity to increase our dividends we engage in share repurchases, and we're building firepower for opportunistic M&A.

I also want to mention that we've always placed a great deal of importance and focus on tangible book value per share and at $23.52 which is where we are at year-end, we anticipate returning to premerger levels within 1 year of the June merger completion.

Before turning over -- back over to Frank, I do believe we are well positioned to deliver best-in-class results while continuing to capitalize on prudent growth opportunities. And that to me makes our stock one of the most compelling investment opportunities out there.

And back to you, Frank.

Thank you, Bill. With a full balance sheet, a top-tier team and expanded footprint, a 21-year track record of strategic execution and growing market dynamics, we've never been more competitively positioned. Operationally, we're maintaining rigorous discipline around product pricing and remain diligently focused on managing our balance sheet in a mature and strategic way. That means prioritizing balance sheet optimization while leveraging our size and scale to support sustainable, moderate growth.

At the same time, we're consistently recognized as one of the most efficient banks in the industry and that focus remains unwavering. We'll also continue to innovate while maintaining disciplined execution around true relationship-based banking. Collectively, we believe these efforts are driving better financial results generating meaningful shareholder value and as Bill highlighted, making us one of the most compelling investment opportunities.

As always, we appreciate your interest in ConnectOne Bancorp, and thanks again for joining us today. And with that, I'd like to turn it over for your questions. Operator?

[Operator Instructions]. Your first question comes from the line of Feddie Strickland of Hovde Group.

Just wanted to touch on something you missed in your opening comments, Bill, you talked about maybe the preferred being redeemed later this year. Can you speak a little more broadly about how you view the capital stack today and kind of where you'd like it to optimally be?

Well, we really do focus on tangible common equity at the end of the day. We've been trying to get that ratio back to 9%. We're getting very close. And at that level, it really opens us up to as I said before, potential for dividend increases, stock buybacks and a position -- better position for M&A.

And on M&A, I mean, do you view that likelihood is a little greater in 2026 than maybe in the past? How conversations gone there? And just how do you view that versus other forms of capital return?

Well, it really depends. As you know, M&A is heating up a little bit out there. The lots of transactions to look at, we've always been financially disciplined. And we, of course, take a look at the value, the IRR of a transaction versus the IRR buying back our stock. So all the pieces have to fall online in order for us to do a transaction. I think we've got a pretty good track record there.

Frank, if you wanted to add anything to that comment?

Yes. I mean I think it's pretty obvious. There's a lot more activity going on in the marketplace for a variety of reasons, but I don't think that really changes very much the way we look at M&A, that may potentially move a few sellers into our sites. But overall, we're focused pretty much in market and again, looking to be very disciplined around what makes sense for us to do.

And just 1 quick follow-up on the cash balances piece. Do we see that getting deployed again in the loans this quarter, maybe earning assets are a little slower in growth?

Yes, exactly. So we'll continue to see more cash transition into loan balances. So higher growth in loans than in assets.

Your next question comes from the line of Tim Switzer, KBW.

My first one is kind of on the trajectory of the expense outlook. I appreciate the color on 4% year-over-year by Q4. But what is the timing of this branch rationalization and the new hires? And -- is that all mostly Q1, Q2 and then do expenses just kind of move sequentially higher each quarter as we move through the year?

Yes. Good question. If you're trying to do your model as precisely as possible. that brand closure isn't going to occur until the end of the first quarter. And the staff changes might not take place. So after a quarter, middle of the year. So I would say that the expense increase will step up a little bit more in quarter 1 and then flatten out.

Got you. Okay. That's great. And then the other question I had is on -- the other question I had was on deposit competition. We've been hearing about rising deposit costs and a little bit more pressure. You guys obviously have had pretty good ability to move deposit rates lower, but are you finding that more difficult lately?

I think we've seen a little bit of that, that the competition has heated up. We monitor that very carefully. And to the extent we're losing -- if we think we're losing deposits on rates, we'll make adjustments there. So my margin projection for the year takes that into account. In the best case, our margin can be much higher than it is today, but more likely than not, we're probably in the 3.35 to 3.40 range by year-end.

Your next question comes from the line of Mark Fitzgibbon of Piper Sandler.

I guess I was curious, could you share with us perhaps the size, complexion and maybe average rate of your loan pipeline?

Yes. So which was the size, we have this $600 million -- about $600 million is in the pipeline. -- and that rate -- that average weighted rate is 6.2.

Okay. And is it mostly commercial real estate construction? Or what does the mix look like?

It's a real mix similar to what's on our composition today.

Okay. And then I was curious, are you seeing much of a difference in terms of the loan and deposit growth activity between the New Jersey franchise and the Long Island franchise?

I don't think so. Frank, did you have any thoughts on that?

Yes. I mean I would say there may be some skewed interest to the Long Island market only because a lot of the products and services that ConnectOne provides warrant being provided by the first Long Island folks. And so there may be some additional opportunities there within the existing client base. I think once we capitalize on all of that, all of that opportunity that's out there, I think you'll see the balance sheet growth relative to the composition we have today across all our markets.

Mark, we had early gains in deposits at Long Island. So between the closing of the transaction June 1 and June 30, we had significant deposit increases at the Long Island part of the franchise.

Okay. And then lastly for me is on the provision. There's obviously a lot of puts and takes, and I heard your comments on the call. We've had some volatility in that line related to the deal, et cetera. I mean, based on the pipeline that you have and your perception that credit is going to stay strong, should we be expecting provisions in the sort of $4 million to $5 million a quarter range, assuming no surprises?

I'm pretty good with what the Street estimates are. I think it might be a little bit harder than that you said $4 million to $5 million? $4 million to $6 million, maybe more like $5 million to $6 million would be my projection. It's hard to tell, lot of moving parts, okay? But there was definitely -- a part of the reduction was nonrecurring, okay, for the quarter.

Your next question comes from the line of Daniel Tamayo of Raymond James.

I guess -- so is there a chance that deposit growth exceeds loan growth this year, given the slower loan growth guide from the payoffs?

Yes, I think that is a possibility, but more likely than not, if I just had to project, it would be about equal.

Okay. And then I got on late, so I apologize if this was mentioned already, but the deposit declined in the fourth quarter. But I guess you just said that you had some pretty good gains in the Long Island franchise post close. So my question was going to be, is that related to the acquisition, if not, what -- deposit decline...

No, that little anomaly, if you will, has to do with that we took the client deposits and used it to pay off broker deposits. So we're focused on quality of our deposit base. And I think that's big determinant and evaluation of a bank is the quality of the deposit base. So we are focused on that. Obviously, earnings are important, right, and growth is important. But we are focusing on smart, profitable growth, quality of the balance sheet and return metrics.

Understood. And then I guess a clarification on your margin guidance, which was great, very specific. So I think I get everything except the 5 basis points from loan yields that you mentioned we should think about that? And I think you said starting kind of midyear or second quarter. That's kind of a gradual build to that overall 5 basis points. Is that the way to think about that?

Well, It's like -- it's about 5 basis points a quarter for each of the third and fourth quarter is what I'm projecting right now, okay? The amount of loans repricing are skewed towards the latter half of the year. and that's why we are pushing that aspect of the margin increase out, okay?

The second thing is there's going to be pressure on those repricings. Contractually, the repricings are significant, but contractually, might not match market, right. Contractually, might not match borrowers who say don't need to take the loan, but see that the rate is higher and they're just going to pay the loan off. and we've started to see that happen. So the actual contractual that might be in our ALCO model doesn't necessary match or probably overstates what the margin widening will be. And so I've tempered our margin guidance because of that.

Understood. Okay.

Directionally, everything is plunging in the right direction.

[Operator Instructions]. Your last question comes from the line of Matt Breese of Stephens Inc.

I was hoping if we could just touch on the updated loan growth guide. You had also mentioned some payoff or prepayment activity. What's driving that? Are you seeing spread compression better offers for your clients from the agencies and insurance companies. We've heard quite a bit of that this quarter?

And then, Bill, you had mentioned the pipeline both in amount and rates, how does that look relative to last quarter or a year ago? I guess I'm trying to get a better idea of why with everything and all the chess pieces where they are, why there's not a little bit better loan growth outlook for the year?

Yes. I think it's self-explanatory. The spread the loan rates are a little bit lower than what was before. A lot of it has to do with competition out there. and we continue to allow loans that are non-relationship-based to drift off the balance sheet. So I think some of your projections, Matt, probably are may be overly optimistic in terms of us achieving contractual repricing at the maximum amount. And I think it's smarter to temper that a little bit and be a little bit more conservative. On the upside, what you have, I think is accurate, okay? That would be the upside. But more conservatively speaking, more like it is a little bit lower in terms of growth and margin expansion.

Got it. Okay. Yes. And then, Frank, you had mentioned additional efficiencies. I'd love to kind of get your more holistic view on the expense base. There's a little bit of growth, but how are you using the newer technologies available to you? Have you test run any AI how productive, how impactful is that? And how do you think about operating leverage over the next couple of years?

I think it's going to be terrific, Matt. We've incorporated a number of leading technologies in the company going back years. And many of those are taking advantage of AI. Look, I'm not a big fan of talking about how great we're going to be utilizing AI. But the reality is every vendor, every partner we have is incorporating artificial intelligence into their systems which is just naturally making a lot of the processes better if you're utilizing those types of systems. It also forces us to think in that way and provide for a foundation here at ConnectOne, which is we've always been utilizing technology to replace labor. And so not only are we becoming more efficient internally, but the vendors that we partnered with are also becoming more efficient. So I think we can grow the balance sheet without significant additions other than revenue-producing people, people who are creating those relationships that we highly value.

But all of the back office functionality and the ability to serve our clients is just getting more efficient in every single thing we do. Now we've made a lot of investments over the years. relative to picking those systems that are probably going to be the winners to allow us to take full advantage of those types of efficiencies. It's what we're focused on. It's why we're in the top 1% of all banks in the country relative to efficiency ratio even after doing this acquisition with First of Long Island, which dramatically expanded our retail branch presence.

As I mentioned on the call, we're looking to rationalize that over time. and be able to provide our clients a first-class experience but be able to do it with the technological advantages that keep us in the lane of gaining operational leverage and operational efficiencies over time.

And then one thing we've heard a lot about with these newer technologies is being able to use them to your point on back office compliance but even BSA/AML, know your customer type applications. Are you seeing the regulators adopt this as well? Or are they okay with you all trying to apply it there, are they onboard with that kind of transition?

Yes. I think they are, Matt. I think they recognize the changes that are taking place. Of course, there's always some skepticism relative to totally eliminating or creating what they perceive to be potentially a black box scenario where they can't really understand how something is happening. So there's a fine line there. And I do think that there is some limitations there as to how far we can go at this point in time.

But overall, I don't believe we've been stopped or even been curtailed in any effort that we've tried to put forward. But I will tell you this, I used to say this just about technology in general. You just can't -- you can't buy AI in a box and just open the box and turn it on and plug it and it doesn't work that way. There needs to be to gain efficiencies and to be able to get that leverage that we're talking about, you got to have a holistic approach across the entire company to have good data to have systems that speak to each other to have all kinds of operational efficiencies that are already built into your system to take advantage or full advantage of some of these newer technologies. And so I think we're doing a good job of managing that process going forward and being able to extract those types of efficiencies.

At the same time, we're able to grow our ability to get in front of more clients. And so the more we can spend time in the field meeting with and going back to old world technology. I tell everybody go out and have 50 cups of coffee. That's what brings in new business. I think the better off we're going to be.

Appreciate that. Just last one is, you discussed M&A a little bit. Given your size now at $14 billion, is there a lower bound of yield that just doesn't make sense anymore? And then secondly, maybe you could just speak to what markets or contiguous markets would be interesting to you or oppositely, is there something in market that might be more of a financial deal that you'd be interested in?

Yes. Matt, I think it's hard to set a lower bound. I mean like I could envision a really small transaction that could be somehow transformative in a particular line of business we want or there's a group of folks that we want to get. So I don't think we can evaluate opportunities solely based on size. Now of course, all things being equal and if all we're doing is adding to the balance sheet, yes, there are some scale issues relative to just wanting to do a deal that's too small and yet takes the same amount of time that something else might take.

But again, I think we look at these things on a one-off basis. We try to determine. Does this make sense? Will it be additive? Are there synergies going forward? Are there things that we can create real value moving forward, and that's the basis of being financially disciplined and looking how we're going to build a better valuation for the franchise in general.

As far as markets, I've been pretty consistent spot, I'll say, staying within market. Within market, though, I consider us the New York Metro market, which is a huge market. And to me, that makes the most sense I really don't want to rule anything else out. There could be something that's compelling that I haven't seen yet or that we haven't evaluated yet.

But for the -- mostly, we believe, and we have our roots based in this New York Metro Market, which, as I said, is an incredibly large market it extends beyond Philadelphia out to the western part of New Jersey all the way along the Long Island sound on both sides. So it's an enormous market.

To me, the most what makes the most sense is within that 100, 150-mile radius of New York City about a 2-hour drive, that's be driving real fast. That's the market that I see. And of course, as I've joked before, I consider Southeast Florida to be the 6 bar of New York. So that I include that within the marketplace.

Your next question comes from the line of Daniel Tamayo of Raymond James.

Just a quick follow-up here. Okay. And it's for you, Bill. The first one, at least. Just wanted to clarify again on the margin, the 3.35 to 3.40 base case, I think you called it for the end of the year, by the end of the year. Does that include any rate cuts in that number?

Yes, it probably includes 1 rate cut.

Okay. And then for Frank, just a clarification on the buyback talk. I hear you on the 9% TCE. The way to think about that, you want to get there before you're going to do buybacks are you comfortable kind of some buybacks with the stock price still low and more gradual uptake at 9%.

Hard to say. Look, I think we're on the trajectory to meet and exceed that 9% number. I feel comfortable here. I do think we want to see how the year progresses. We want to look at what else is out in the marketplace, what opportunities they really are either for organic growth or any potential M&A activity down the road. So I think we're going to be very judicious with our capital. I think we've been good stewards of capital over time. And I think you've known us to do the right thing relative to our shareholders.

Understood. Okay. That's all that I have -- go ahead.

Danny, I was just going to say, with the continually increase return on equity, a relatively low dividend payout ratio and subdued growth on the balance sheet, that ratio is headed up at a good pace capital ratio.

There are no further questions at this time. With that, I will now turn the call over to management for closing remarks. Please go ahead.

Well, I want to thank everyone again for joining us today. And certainly, we look forward to speaking with you during our first quarter conference call. And with that, please have a great day.

Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect.

Thank you, and welcome to the ConnectOne Bancorp, Inc. Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Siya Vansia, our Chief Brand and Innovation Officer. Ma'am, please go ahead.

Good morning, and welcome to today's conference call to review ConnectOne's results for the third quarter of 2025 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. 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 also be 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. Pleased to report that during the third quarter, we continued to build upon our strategic objectives, a clear reflection of our team's focus, client dedication and discipline. As a result, the integration of our merger is complete, credit quality remains solid and our margin continues to expand, all while organically growing our balance sheet. And so our systems merger, as we just talked about, systems merger integration, which took place only 2 weeks after the legal close, went exceptionally well, driven by outstanding collaboration across our team.

In our first full quarter post-merger, we're operating seamlessly. One organization, consolidated systems, strong cultural alignment and unified client-first mindset. We have since built meaningful momentum across our markets, leading to accelerating performance metrics. We're seeing strong engagement, ongoing new client onboarding, healthy growth in loans and deposits. This progress is especially evident on Long Island, where we're leveraging our strategy to drive growth and strengthen our business. An attractive market we entered several years ago, the merger has accelerated our goals.

Importantly, the positive financial aspects of the transaction are beginning to take hold, and Bill will discuss a little bit more about that in a little more in a minute. Operationally, ConnectOne's ability to attract and retain deposits remains a strength. During the third quarter, our core deposits continued to grow across both established and newly acquired client relationships. Loan originations this quarter remained healthy with over $465 million in new funding. Our team is energized to leverage our expertise and attract growth opportunities across our expanded.

Looking ahead, we're well positioned for the balance of 2025 and into 2026 with a healthy and diversified pipeline for C&I, CRE, construction, SBA lending, demonstrating the strength and the reach of our franchise. Credit remains strong, supported by prudent and consistent underwriting standards and portfolio oversight. Our nonperforming assets were just 0.28% at the end of the quarter. Annualized net charge-offs remained below 0.20% and 30-day delinquencies were just 0.08% of total loans.

Additionally, ConnectOne's capital and tangible book value grew meaningfully. Overall, our third quarter operating performance clearly demonstrates the strength and the potential of this organization.

And with that overview, I'll turn it over to Bill to walk through some of the performance...

All right. Thank you, Frank. Good morning to everyone on the call. It was a great quarter, and our outlook remains very positive with strong performance anticipated across all of our operations. As Frank mentioned, the merger, which was finalized 5 months ago on June 1, now fully integrated, and that was due to a swift seamless brand and back-office systems conversion completed within the very first month. That rapid integration has allowed our performance metrics to excel with an acceleration of improvements expected in the fourth quarter and into 2026.

Operating performance metrics already show significant year-over-year improvement. In the current quarter, operating return on assets increased by over 30 basis points to 1.05%, while PPNR as a percentage of assets rose by approximately 50 basis points over the past year to 1.61%.

our earnings performance is being driven by the merger and a widening net interest margin, which grew to 3.11% from 3.06% in the sequential quarter and from 2.67% a year ago. And the spot margin at quarter end was already higher than 3.20%. We expect the fourth quarter margin at 3.25% or even above. Now the current quarter's margin of 3.11% reflected 2 temporary factors. One was the $75 million of high rate subordinated debt that was still outstanding but redeemed on September 15. And we also had higher than typical average cash balances due to the large deposit growth that we've had, which exceeded $600 million. We anticipate average cash balances to be below $400 million in quarter 4 as that cash rotates into loan fundings. So without those 2 items, which work to compress the reported margin, the third quarter NIM would have been in excess of 3.50%.

In terms of the balance sheet, we continue to observe robust deposit growth following exceptional organic growth in the second quarter. On a sequential basis, our client deposit growth was approximately 4% annualized, and that was building on the second quarter's annualized growth of 17%. Annualized sequential loan growth for the quarter matched deposit growth, and that maintained our loan-to-deposit ratio below 100%. Now the loan pipeline is strong, and we expect loan growth to accelerate in the fourth quarter, average loans increasing by more than 2%, not annualized, 2% from quarter-to-quarter versus the sequential third quarter.

And please keep in mind for your models that average cash is likely to decrease and that will slow the increase in total interest-earning assets. In 2026, we could easily see loan growth in the 5% plus range, that will be dependent, of course, on the economy and loan demand. Now adding to the strong performance of ConnectOne this quarter were 2 nonrecurring items that boosted pretax income by more than $10 million. Let me explain those to you. First was a $6.6 million of cash received this quarter, the employee retention tax credit that was conceived during the pandemic. Now initially, it was for companies with less than 100 employees, and that was for the years 2019 and '20. That employee threshold was raised for 2021 to include businesses with up to 500 employees, that allowed ConnectOne to qualify. At the time, ConnectOne had 450 employees, reflecting our efficient operating model given our asset size.

Now today, our staff size has grown to about 750 employees due to organic growth and acquisitions, yet we remain a peer-leading efficient organization, about $19 million in assets per employee. Now the second onetime benefit recognized during the quarter $3.5 million pension curtailment gain relating to the freezing of First of Long Island's pension plan effective September 30, with the shifting of those benefit values to our 401(k) match program. The realignment of the benefit plans will result in merger net cost savings of $1 million annually, and that's in addition to this onetime $3.5 million present value benefit recorded this quarter.

Now in terms of noninterest income, very, very strong quarter because of those nonrecurring items, it exceeded $19 million. The recurring level of noninterest income right now remains at about $7 million per quarter. We expect growth, especially in gains on sales as we continue to build out SBA, BoeFly and residential mortgage. We expect SBA to add significantly to our noninterest income in 2026. Keep in mind, with the government shutdown, we could see a backlog building in the fourth quarter, and that will be made up after the government reopens.

Operating expenses, net of merger and restructuring charges were $55.8 million and our recurring run rate guidance remains approximately $55 million to $56 million for the fourth quarter and $56 million to $57 million per quarter during the first half of '26. And the latter part of '26 could drift to slightly higher. I'll keep you updated on our targets as we move forward. These amounts reflect normal expense growth, net of additional merger savings, which have not yet been realized.

Turning to taxes. Our tax expense line for the full year has been a little tricky that reflected the merger and we had a second quarter charge related to intercompany dividends. I also want to mention that our actual marginal tax rate has trended upwards, but our growth and geographic reach have impacted our traditional tax strategies. Now for '26, we plan to utilize new strategies. Those are expected to result in an effective tax rate in the range of 28%, maybe a little higher, maybe -- let me turn now to credit.

As Frank mentioned, I'm going to repeat some of these numbers, credit quality remains sound by all measures. Nonperforming asset ratio is at historical lows at 0.28%. Charge-offs for the quarter were just 18 basis points. Delinquencies more than 30 days were only 0.08% of total loans, very, very low in terms of. The CRE concentration continued its downward trend, falling to 4.34% at September 30. Our capital ratios continue to strengthen. Holding company tangible common equity ratio rose pretty significantly to 8.4%. And while our goal is to reach 9%, there's no immediate need to achieve this.

Additionally, tangible book value growth has resumed its upward trend, a 5% increase we've calculated in tangible book value per share since the merger's completion. And with a higher level of projected retained earnings, we expect to have enough room in '26 for a common dividend increase and opportunistic share repurchase.

That's it for my introductory remarks, and back to you, Frank.

Okay. Thank you, Bill. Simply put, we've built a premier commercial bank with the scale and talent to serve the largest and one of the best markets in the country. ConnectOne's franchise value is in its strongest position ever, driven by accelerating financial performance, prudent organic growth opportunities, a strong technological focus and solid credit quality. Based on where our stock is trading today, we believe there's never been a more compelling time to invest in ConnectOne. As always, we appreciate your interest in ConnectOne Bancorp. Thanks again for joining us today.

And with that, I'd like to turn it over for your questions. Operator?

[Operator Instructions] Our first question comes from the line of Daniel Tamayo from Raymond James.

Maybe starting on your profitability targets. I think last quarter, you talked about, Frank, hoping to hit 1.2% ROA and 15% ROTCE in 2026. Just interested in your current thoughts around profitability targets for next year.

I think those targets are in line -- still in line with where we said before, easily see 120 by the second quarter. And my model at least is showing us getting close to 130 by the end.

Okay. Great. And then a follow-up kind of unrelated, but we saw yesterday the announced end of quantitative tightening. I'm just curious maybe you guys' thoughts on how that could impact deposit growth and/or pricing in your markets.

Well, I think it will bode well for us going forward. Certainly, it appears the Fed believes the economy is going to continue to be somewhat robust and that more liquidity is needed in the marketplace, and that liquidity generally turns into deposits at banks. So I think across the spectrum of banks, you'll see deposits continue to grow, which I think will be good. It will reduce some of the competitive pressures out there. I think everyone has seen over the last quarter or 2, some of the -- while short-term rates have gone down, there's been increased competition for deposits. So a steepening yield curve, more liquidity and a robust economy that's pretty stable. I think certainly for ConnectOne bodes well, and I think it bodes well for our industry...

I agree with what Frank said. And also the margin continues to expand for all the reasons we've talked about before. It's still going to be -- we don't know exactly how many Fed cuts at the end of next year, but there are going to be a few. And our loans are repricing faster. Even in a down rate environment, our loans are repricing upward. So still looking at margins. I'll be bold enough to say approaching in the 3.40% to 3.50% range by the end of next year.

That's great. Yes, let's hope all of that works out in your favor. It seems like it's trending certainly positively. So anyway appreciate all that color guys.

Our next question comes from the line of Tim Switzer from KBW.

The first question I have is now that you guys have closed the merger full quarter in, how do you guys think about the capital allocation and deployment going further? Frank, you mentioned you think your stock is a value. Are share repurchases on the table here? And I would just like to get some color on that.

Well, from my perspective, I know Bill made some comments relative to our ability to build capital. Capital is building quite quickly at the company, as you know, from a variety of areas, including profitable growth that we have. So I do think we'll have a lot of flexibility in 2026 to make some determinations as to what we should do with that capital. Obviously, if we see higher growth rates and we're opportunistic to engage in organic growth at the higher end of the spectrum, that will leave a little bit less for other opportunities. But overall, I think we can pretty much do anything we want to do in '26. Bill, I know you had some strong...

Yes. No, I agree with that. Our growth is going to be prudent and disciplined in terms of spreads. I'd like to see the capital ratios trend upwards. But I think I said on the call, even with all that because of the low dividend payout ratio we have today and the high level of earnings, we'll have room for opportunistic share repurchase.

Okay. Great. That's good to hear. And then I was also looking to get an update on BoeFly and maybe the growth outlook there, putting aside the government shutdown, the impact on SBA it's more near, but I'd love to get an update on that. And then also maybe some color on the recent changes to rules governing kind of like the smaller dollar million dollar or less loans in SBA that in terms of like underwriting and the new fees that came back in over the summer.

So we'll start with BoeFly. Bill will talk a little bit more about the specifics of the various programs. But BoeFly since inception here at ConnectOne has continued its upward trend. We now represent some over 250 national franchise brands across the nation, which is an all-time high. When we purchased the company, I think they represented that. So this trajectory upward, and we put a lot of effort into sort of being the predominant company that can validate franchisee applications in that space. And so that's led to this growth in that portfolio.

We've really focused over the last year or so to drive the opportunities that come out of that business to our growing SBA platform. And we're really beginning to start to see on a -- from a financial perspective, the fruits of all of that labor. And you will continue to see that in the future by the SBA revenue line continuing to expand. So we're very happy about where we are. We're very happy about where we're headed with that, and we're very happy about how it's translating into quality revenue here at ConnectOne. Bill, maybe you want to add.

Just to repeat a little bit of what you said and that we spent the past couple of years really building and perfecting platform for BoeFly led to significant increase in the number of franchisors that participate. And we're now starting to translate that into more income through SBA sales. So it already was reflected this quarter. And the increase is expected to accelerate. There's a little bit more of a -- when it comes to franchise loans, there's a little bit more of a period that it takes from inception to gain. So the pipeline is building heavily for next year, and I'm very optimistic we'll have a lot of gain on sale there.

In the meantime, we've been building our boots on the ground SBA lending and everything is working in our favor there. So look, we started off from 0, and it's going to be a big portion of our noninterest income going forward.

Our next question comes from the line of Matthew Breese from Stephens Inc.

First one for me. It was really nice to see those noninterest-bearing deposits up, I think, 3.7% quarter-over-quarter and then CDs down 2.8%. Maybe just talk to us about what's going on, a few of the wins there? Are they acquisition related? Meaning is the FLIC deal and the brand starting to bear some fruit? And then looking ahead, can we see deposit growth match or exceed loan growth for next year, maintaining that sub 100% loan-to-deposit ratio?

Yes. Well, I'll take your questions in reverse order. So the goal would be to match the deposits with the loans. And that actually answers the first part of your question. There's been a focus here at ConnectOne over the last couple of years to really redefine and make certain that the business we're in is to be a relationship bank that takes in deposits and make loans. And we like taking in deposits from the same folks that we make loans to. So we've had an effort ongoing here through all of our lending teams to really focus on making sure we're going after the types of clients that bring us substantial depository relationships.

And we've been weeding out part of the slowdown in the overall growth is weeding out of clients who maybe promised us depository relationships and never delivered or just folks that wound up here with a transaction. We really don't want to be just a transaction-oriented bank. So I think with that focus and that focus continues going forward, I think actually, the merger that we just completed, the group of clients that we onboarded there, actually, they have had the sort of a reverse issue there where they were very deposit-rich and didn't take advantage of all the lending opportunities for those clients. So I think rounding out the folks that we're getting in front of on Long Island, this continued focus on high-quality relationship-type clients is really what's driving the profitable and as Bill said, spread-dependent business that we have. And also, it's allowing us to bring on high-quality type clients that should ensure that we keep a loan-to-deposit ratio in and around the range today.

Great. And then, Bill, maybe you could help me out with a couple of things. What proportion of loans are now pure floating rate? And this quarter, what did you see for roll-on versus roll-off dynamics on fixed rate or adjustable rate loans? I guess where I'm going with this is, are you starting to see any spread compression as some of your competitors have indicated?

First off, to answer your first question, it's only about 15% of pure floating. So we're in good shape there. In terms of the roll on and roll off of fixed versus floating, I'm not sure whether -- how much has changed the dynamics of the balance sheet. I know you usually ask about what rates loans are going on versus coming off. When you add drawdowns to it and pay downs, it's like in the high 6s going on, the low 6s going off.

Great. And then just 2 others for me. First one is just on the reserve. You have a 1.35% reserve to loans ratio. Historically, ConnectOne has been a lot lower, maybe 1% to 1.05%. Credit remains solid. Over some period of time, should we expect that reserve to kind of trend back to where you were as kind of FLIC loans reprice? It just seems high relative to the credit quality.

Yes. I think that -- yes, that's how it will work. Okay. It will gravitate back towards the 1 level or maybe a little bit higher. We'll see where the economy is and how the CECL works at the time.

Okay. All right. And then last one is just, Bill, you had mentioned elevated cash, cash could come down next quarter. What should we be thinking of in terms of normalized cash to assets? That's all I had.

For now, I would say $350 million to $400 million would be normalized. It could go lower than that. But for this quarter coming up, that's what I would say. Okay. So if you look at our loan growth on an average basis, you're going to see pretty flat interest-earning assets. And that's fine by me in terms of capital ratios, in terms of margin.

[Operator Instructions] our next question comes from the line of Feddie Strickland from Hovde.

Just wanted to stick on the loan repricing opportunity piece there. Bill, can you help us quantify just on the amount of fixed rate loan repricing we could see over the next several quarters? What -- just trying to figure out the size of the opportunity there.

The opportunity is quite large, probably have about $1 billion repricing in '26 and another $1 billion in '27.

And then wanted to follow-up on credit. Obviously, good to see NPA stable, net charge-offs step down a bit. Do we expect charge-offs to kind of remain in the high teens to low 20s range just in terms of basis points of average loans? Or does that step down? Just trying to get a sense for what we should see...

Yes. I mean it's hard to predict, but we've been pretty steady with that. So I'm running my own model, that's what I would have going forward for the next 4 quarters.

Our last question comes from the line of Daniel Tamayo from Raymond James.

Just a follow-up here for me. So maybe first, you can just remind us what your balances of rent-regulated loans are at the end of the quarter. And then the follow-up to that is just curious kind of if you could update us on your thoughts if we do get a Mamdani win next week in the mayoral election, what that means for the whole rent-regulated kind of industry in your opinion?

All right. Let me start with the numbers, and I think we're positioned well. The total aggregate exposure to majority-owned rent-regulated $700 million. 60% of it or $400 million came from First of Long Island, where we have a 20% mark against it. So in my view, that's completely ring-fenced -- rest of it, ConnectOne portfolio is about $275 million, less than 2.5% of our total loan portfolio, conservatively underwritten, no value-add projects, continue to perform well, moderate, I would say, not super significant stress in the portfolio.

And Frank, do you want to comment on.

Sure. As you can well imagine, we get this question a lot, certainly being centered in the New York Metro market. And my answer has been fairly consistent. There are so many variables as to what will happen from today forward, whether he wins, he doesn't win. Let's not forget the other alternative to Mamdani is Cuomo, who is the one who signed the actual 2019 rent regulation law that's causing a lot of the consternation in the portfolio anyway. So it's not like we're going from one side of the spectrum to the other.

Rent regulated is here to -- rent stabilized rather, is here to stay. It's a constant struggle within that marketplace relative to the expense base versus the revenue stream. On the positive side of the equation, we saw this year a 3% increase that came on the back of a 2.7% increase the year before. It looks like for the next couple of years, we're still going to have a rent-regulated board that's fairly reasonable and is taking into account inflation, other costs that are being pushed through the system.

There are those who would argue that potentially a Mamdani administration might actually be good for the rent-regulated portfolio in that he's looking to work to reduce the expense side by reorganizing the tax basis and tax base for real estate taxes and other potential solutions to allow landlords to be able to invest in the property to get more units back on the market. As you know, there's some 50,000 rent stabilized units that are vacant today because of the change in the 2019 law. So there's just too many variables to put your finger on, here's what's going to happen. All I know is this has been something that's been in existence for a very long time. It's ebbed and flowed. And for the most part, I'm pretty optimistic that one way or another, people need places to live. I think there's going to be programs put in place to make certain that, that product continues to be available to residents in New York City. It will change over time, how that change occurs. Hard for me to say right now.

We're pretty -- we're not pretty, we're very comfortable with the loans that we underwrote. We were never part of the whole value-add story to get rent stabilized tenants out and replace them with market tenants. So we really don't have that risk on our balance sheet in those lending opportunities. And I think over time, it's just going to get figured out what to do with that product set. So we're comfortable with the operators that run the assets that we have. And we have very strong LTVs and debt service coverage ratios at properties that are in our portfolio. Of course, we're going to watch very, very closely what happens over time. But I do think this is a very, very slow-moving process. I don't think anything is going to happen with any immediacy in the short term.

There are no further questions at this time. I'd now like to turn the call over back to the management for closing remarks.

Well, I want to thank you, everyone, for joining us today and for some really great questions. And we look forward to speaking with everyone during our year-end and fourth quarter conference call. Everybody, have a great day.

Thank you. You may now disconnect.