ConnectOne Bancorp Q3 2026 Earnings Call Transcript

ConnectOne Bancorp (NASDAQ:CNOB) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

ConnectOne Bancorp reported strong core operating performance in Q3 2026, with operating PPNR exceeding 2% of average assets and operating return on tangible common equity over 15%.

The company executed a definitive agreement to sell approximately $750 million of multifamily loans, reducing CRE concentration and improving liquidity.

Core deposit growth was exceptional, with client deposits growing at an annualized pace of 11%, and the net interest margin widened for the eighth consecutive quarter.

Credit quality improved, with a decline in nonperforming assets and a provision for credit losses of $5 million, down from $8.3 million last quarter.

The company plans to reinvest loan sale proceeds into lower-risk assets while enhancing capital flexibility to support organic growth and potential buybacks.

Management expressed confidence in continued margin expansion and a robust loan demand environment, despite competitive pressures.

Full Transcript

OPERATOR

After today’s prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star-one to raise your hand. To withdraw your question, press star-one again. I will now hand the conference over to Siya. Please go ahead.

Siya

Good morning and welcome to today’s conference call to review ConnectOne Bancorp’s results for the third 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.

Frank Sorrentino III (Chairman and Chief Executive Officer)

Thank you, Siya, and good morning everyone. I’m pleased to report that during the third quarter we continued to drive strong core operating performance and momentum across the franchise. We also took a decisive step to strengthen our balance sheet and enhance our capacity for future growth. When we acquired First of Long Island, we gained a terrific franchise, deep client relationships, and a strong deposit base. The acquisition also included a portfolio of high-quality non-relationship multifamily loans.

Last quarter we told you we were evaluating a bulk sale, and we’re pleased to announce we’ve executed a definitive agreement to sell up to approximately $750 million of those multifamily loans. The transaction, which emphasizes the sale of rent-stabilized assets, accomplishes several strategic objectives at once. It sharpens our focus on what we do best, serving core banking clients and deepening those connections while further aligning our balance sheet with our relationship-focused banking strategy. It accelerates the reduction of our CRE concentration, cuts our rent-stabilized exposure by up to two-thirds, improves our liquidity, and strengthens key capital and performance metrics across the balance sheet.

Bill will walk you through some more details on that. Turning to ConnectOne’s third quarter performance, our core results were strong and continue to build quarter over quarter. Operating PPNR crossed 2% of average assets and operating return on tangible common equity exceeded 15%. Core deposit growth was exceptional this quarter. Client deposits grew at an annualized pace of 11%, led by 14% growth in average noninterest-bearing demand, reflecting the staying power of our homegrown relationship banking culture.

Our margin widened again despite higher short-term rates and stiff competition for deposits. The pace of margin widening is steady and loan repricing continues to work in our favor. On efficiency, expenses were flat for the quarter, a reflection of our culture. We’re always looking for ways to work smarter and our investments in technology, including agentic workflows, are freeing our bankers to spend more time serving our clients. Efficiency has always been one of our core strengths and our efforts continue to improve this quality.

Credit quality improved across the board. Operating charge-offs were just a few basis points and nonperforming assets declined. Finally, following the loan sale, the remaining rent-stabilized loans represent a much smaller, well-reserved-for portion of our total loan portfolio. To provide full clarity and details, Bill will give you some more specifics on the remaining portfolio. On capital, we remain disciplined stewards. The restructuring enhances our flexibility to support organic growth, return capital through dividends and opportunistic buybacks, and pursue the most advantageous path to redeem our preferred stock. Overall, our third quarter performance clearly demonstrates the strength of our franchise. And looking ahead, we enter the final quarter of the year with a more liquid balance sheet, growing earnings profile, and a team focused on what we do best—serving our clients.

Bill, why don’t you walk us through the quarter’s financial performance in a little bit more detail.

Bill Burns (Senior Executive Vice President and Chief Financial Officer)

All right, Frank. Thank you. Good morning to everyone on the call. As Frank mentioned, we announced two items this morning. First, we delivered a continued step-up in our core operating performance. And second, we executed on a right-sized balance sheet restructuring transaction. It meaningfully de-risks and repositions the balance sheet. I’ll start with the restructuring, then we’ll get to operating results. So as we noted last quarter, we had been exploring a bulk loan sale, and within the past week we entered into a contractual agreement to sell a $750 million pool of performing, non-relationship multifamily loans to a single buyer at a price north of 90%. Having said that, the 10% discount to par resulted in only a 3% loss on the sale for our bank. That’s because we previously recorded significant purchase accounting marks—both interest rate and credit marks—on a large part of the pool back in the second quarter of 2025, concurrent with the closing of the First of Long Island acquisition.

As a result, the weighted average carrying value of the total pool on ConnectOne Bancorp’s books was $0.93 versus the $0.90 purchase price. Now, the sale is expected to be completed in the next week, but for accounting purposes it was classified as held for sale at September 30th, which required the recognition of a $23 million non-operating pre-tax charge in the third quarter. To be clear, this charge solely reflects changes in interest rates and does not stem from any additional credit losses. Interest rates are up about 100 basis points on average since the loans were originated or acquired.

Now in terms of our reinvestment of loan proceeds, our intention is to place the majority of the funds into lower-risk assets with slightly higher yields, effectively reducing balance sheet risk without impacting earnings power. A smaller portion of the proceeds that will likely be used to pay down wholesale funding may slightly temper short-term reinvestment earnings, but that strategic shift will expand our net interest margin and return on assets while enhancing capital flexibility.

The repositioning improves our balance sheet in several ways. On a pro forma basis, our regulatory CRE concentration declines on a June 30th pro forma basis to 397 from 439. Our loan-to-deposit ratio improves into the high 90s from the low 100s, and the securities portfolio as a percent of assets is expected to increase to 12.5% from its current 9%. In addition, post-loan sale our rent-regulated book declined significantly from 6% of loans to just 2%, or $235 million.

I’m going to provide more detail on loss coverage of that remaining piece when I cover credit in a few minutes. And now turning to operating results—again, we were very, very pleased with our performance and momentum. Excluding the restructuring charge and other non-operating items, operating EPS was $0.95 per share, up 13% sequentially from $0.84 last quarter, and that builds upon our strong second quarter sequential earnings growth. From a year ago, quarterly operating earnings are up 35%. Operating return metrics were outstanding, with PPNR improving to 2.01% of average assets, return on assets increasing to 1.35%, and return on tangible common equity of more than 15%, already hitting the target we laid out earlier this year.

Net interest margin widened for the eighth consecutive quarter to 3.44%, a 2 basis point increase. Looking ahead, loan repricing remains a tailwind. Year to date, just over $1 billion of loan balances have come up for repricing—20% paid off, but the remainder stayed on our books—at a weighted average rate increase of 258 basis points. We expect approximately $1.2 billion more to reprice over the next five quarters, still significant, although down slightly from prior estimates as a result of the loan sale.

And as I mentioned earlier, we expect the restructuring to be additionally accretive to the margin, primarily from paying down higher-cost wholesale funding. So putting it all together, we’re now estimating a margin reaching 3.50% for the fourth quarter, while for 2027 our models show continued widening throughout the year. Whether that gets us to 3.60% or higher at year-end ’27 is going to depend on the number and direction of Fed rate moves. For the quarter, loans grew at an annualized rate of approximately 11% sequentially, excluding the effect of the transfer to held for sale. Average client deposits, which exclude brokered deposits, also grew about 11% annualized. Average noninterest-bearing deposits increased about 14%, and brokered deposits declined by $150 million, or 13.7%. Looking ahead, we’re projecting loan and deposit growth remaining in the mid-single digits while maintaining a sub-100 loan-to-deposit ratio.

Now I’m going to turn to noninterest income and operating expenses. Excluding the restructuring charge, noninterest income was $8.5 million, up a little from $7.9 million last quarter. That included some one-time BOLI income items leading to a $1.1 million increase. While quarterly results may fluctuate, execution remains solid on the SBA front and our SBA business continues to strengthen. The SBA pipeline is strong, and I wouldn’t be surprised if we are up 50% or more in SBA gains in 2027 versus this year.

Expenses this quarter came in better than our guidance. Last quarter we projected 1.5% sequential growth; instead, noninterest expenses were flat. That reflects our culture of working smarter along with continued technology efficiencies. For your models, I’m targeting a 2% to 2.5% sequential increase in opex for the fourth quarter. In terms of operating expenses as a percent of average assets, we remain an industry leader with just 1.45% of average assets in the current quarter versus 1.47% sequentially and 1.5% for the prior-year quarter.

Our operating efficiency ratio improved to 41% from 43% last quarter and 48% a year ago. We have reported sub-40% efficiency ratios before, and we are on track to get there again. And just want to remind you, keep in mind as we disclosed in the release, we will be recognizing approximately $78 million of non-operating pre-tax transaction costs related to the loan sale that under GAAP are not recognized in the third quarter but need to be recognized in the fourth quarter.

Credit quality, as Frank mentioned, improved across the board. The provision for credit losses was $5 million. That’s down from $8.3 million last quarter. Annualized net charge-offs, excluding those PCD loans and the loan sale, were just 7 basis points versus 56 basis points last quarter. Provision expense is expected to remain fairly stable for the foreseeable future. Nonaccrual loans declined to $64 million from $80 million, driving the nonperforming asset ratio lower to 0.44% of total assets from 0.55% one quarter ago.

And 30 to 89 delinquencies are just 5 basis points — almost nothing. Criticized and classified assets were 2% of loans. That’s up from 1.9%, but that’s only because loans receivable declined as we moved loans from loans receivable into loans held for sale. The balances in classified and criticized were relatively stable. The allowance was 1.06% of loans, down from 1.18%. That’s mechanical — we eliminated $22.2 million of allowance on PCD loans in connection with the sale.

Now a word on the rent-stabilized loans that remain on our books, which total approximately $235 million — as we said, down to 2% versus 6% prior to the sale. First off, except for a de minimis amount, these loans were not part of the original pool offered for sale by our own design. And of that $235 million, more than half consists of long-standing clients with related deposits in excess of $100 million. Therefore, there was no desire whatsoever to exit those relationships.

The remaining balance of about $100 million includes nonaccruals, select PCD loans acquired from First of Long Island, and other criticized credits. And importantly, these remaining loans have robust offsets — approximately 30% of unpaid principal balance — protecting our exposure. These offsets include prior charge-offs, purchase accounting marks, specific reserves, and additional general reserves that we’ve increased through qualitative allocations.

So, with a large reduction in overall rent-regulated exposure combined with significant backstops on any remaining credits, the New York City rent-regulated issue is in our rearview mirror. That’s a result we can all feel good about. Now, turning to capital, tangible book value per share was $24.19, down 1.9% from last quarter due primarily to the AOCI. Excluding AOCI changes, tangible book value would have grown; and over the past 12 months, tangible book is still up 5.9%, and we would expect to return to an upward path going forward from here. Our tangible common equity ratio was 8.38% at the end of the quarter, but it’s going to be approximately 35 basis points higher due to the loan sale.

And regulatory risk-based ratios rise on the transaction, with lower risk-weighted securities taking the place of higher risk-weighted loans. During the quarter, we repurchased 50,000 shares at an average price of $32. We have approximately 500,000 shares remaining under our authorization, and we will continue to repurchase opportunistically. Our board declared a common dividend of 19.5 cents per share, consistent with last quarter. That’s roughly 20% of operating earnings, which leaves us significant flexibility.

And one last item: our noncumulative preferred stock reached its reset date, and the dividend rate has moved higher to approximately 8.8%. We do intend to redeem that preferred; however, in light of the restructuring and the resulting improvement in regulatory capital ratios, we’re still evaluating the best and most advantageous way to do it. As a result, it may remain outstanding at the higher rate for another quarter, but we will update you once we finalize our approach.

And with that, Frank, I’m going to turn it back over to you.

Frank Sorrentino III (Chairman and Chief Executive Officer)

That’s great, Bill. Thank you. To wrap things up, the third quarter marked an important step in ConnectOne Bancorp’s evolution. We de-risked our balance sheet, strengthened our liquidity and financial flexibility, and continued to grow ConnectOne Bancorp’s core business through strong client relationships. We’re well positioned with a growing earnings profile, sound credit fundamentals, and a balance sheet built for the next phase of growth. And we’re confident in our ability to deliver long-term value for our shareholders.

Our profile has strengthened significantly, reflecting improved quantity and quality of earnings, while growth prospects remain solid. With those positives and a discounted valuation, we remain a very compelling investment opportunity. With that, I’d like to turn the call over for your questions.

OPERATOR

We will now begin the question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Fetty Strickland with Hovde Group.

Your line is open. Please go ahead.

Fetty Strickland (Analyst)

Hey, good morning, Frank and Bill. Congratulations on the loan sale here. I wanted to ask about the use of proceeds. I know you covered it in your opening comments and you have some stuff in the release, but just to make sure I have it clear, is the intention to hold those proceeds in government-guaranteed securities near term, you’ll pay down some wholesale funds, and then you’re retaining some for, you know, both paying down the preferred here as well as long-term organic loan growth?

Is that the right way to think about these proceeds here?

Bill Burns (Senior Executive Vice President and Chief Financial Officer)

Yeah, that’s the right way to think about it.

Fetty Strickland (Analyst)

Okay. And just in terms of the competitive environment on loans, I mean, it seems like you’ve got a pretty good pipeline here, given your guidance. Can you talk about what you’re seeing on rate and maybe the level of competition?

Frank Sorrentino III (Chairman and Chief Executive Officer)

Yeah, there’s a fair amount of competition in the marketplace today. You know, certainly we are competing with every other organization that is in our market. I do think that the rise in rates has dampened some of the demand out there. But believe it or not, there’s a very robust economy underneath all of this. Folks are still doing lots of really exciting things within the marketplace. The clients that we have, we’re doing more business with, and so competitive pressures there are lower.

There are lots of other reasons why people seek out ConnectOne. The certainty of execution here at ConnectOne is at an all-time high, and our clients really respect that. So while I would agree there’s increased competition, we seem to have been able to figure out how to continue to get the pricing that we need, to get the proper spreads, make sure we’re onboarding the right types of client relationships, and continue to grow the balance sheet.

Bill Burns (Senior Executive Vice President and Chief Financial Officer)

Yeah. And Fetty, in terms of the rates, I’ve been very pleased with our progress. We originated as much as $800 million of loans last quarter at rates in the high sixes. Rates that came off were at lower rates, and my calculations say that contributed about 5 basis points to the margin. And when I look at the pipeline, we’re over 7% on a similar amount. So I would expect, you know, a similar amount of margin improvement coming from our loan originations.

Fetty Strickland (Analyst)

Got it. And just one more question on the loan growth side. I mean, I appreciate the guidance here. Does reduced paydowns and maybe the ability to hang on to more of the loans reaching maturity, given higher rates, factor into your overall net loan growth number going forward?

Frank Sorrentino III (Chairman and Chief Executive Officer)

I don’t know. I don’t think so. I think, you know, again, thinking about a highly competitive marketplace, there are institutions out there that are doing lower-spread business, and so we do see some runoff out of the portfolio. It’s welcome when it happens. So, no, I don’t really see that dynamic changing all that much.

Fetty Strickland (Analyst)

Got it. Thanks for taking my question. I’ll step back.

OPERATOR

Your next question comes from the line of Bader Hale with Piper Sandler. Your line is open. Please go ahead.

Bader Hale (Analyst)

Hey, good morning, guys. This is Bader on for Justin Rulis. I just had a question about, you know, maybe the impact from the loan sale. I know you guys guided to a 3.50% margin next quarter. How much of that is factored in from, you know, the impact from the loan sale versus, you know, overall asset repricing — thinking about the margin as we look over the next quarter or two?

Bill Burns (Senior Executive Vice President and Chief Financial Officer)

Right. I mean, there’s a lot of moving parts to the margin. We have the loan repricing, we have regular originations, and we have this restructuring, and they’re all worth a few basis points each, offset by increasing deposit costs. But the net is an increase of whatever, three to five basis points a quarter in the net interest margin. Hope that answers your question.

Bader Hale (Analyst)

Yes. And then you mentioned increasing deposit costs. Do you happen to have the spot cost of deposits at the end of the quarter?

Bill Burns (Senior Executive Vice President and Chief Financial Officer)

What the cost was? Yeah, it’s been pretty flat. It just happens to be pretty flat in the most recent couple of months. Deposit costs have been pretty flat. But I do expect to continue to see upward pressure on deposit pricing, and that’s what’s tempering our margin-widening projections.

Bader Hale (Analyst)

Got it, thank you. And then, lastly, if I may, I know you guys mentioned potential close next week. I don’t know how much color you can give, but do you know if the interest in the loan sale is coming outside of the banking system, or any detail on that process you can give? And then maybe as a follow-up, you know, given that you’ve taken care of a good-sized portion of the rent-stabilized exposure, are you thinking about potential restructuring or additional loan sales down the line?

Bill Burns (Senior Executive Vice President and Chief Financial Officer)

Well, let’s wait. The second question was on rent-stabilized. I think we’ve got it down to exposure, I said, to a little over $200 million. More than half of that are loans we wouldn’t want to sell because they’re strong-quality loans with strong clients, and we have a lot of deposits associated with them. The rest of the portfolio, we’ve got a lot of reserves against it, and so we will be aggressive in reducing the remaining piece there on the rent regulated.

Like I said, as far as the financials go, it’s in the rearview mirror now. But you will see continued decline in the rent-regulated balances that are left. Yeah, as far as loan sales, we’ve had a history of doing smaller loan sale actions when we determine we have non-relationship-type loans that have accumulated in the portfolio. So, I mean, it’s possible, but it’d be further down the road if something like that happened. I wouldn’t put it into your projections for the next year or two.

Bader Hale (Analyst)

Okay, got it. That’s all for me. Thank you very much.

Frank Sorrentino III (Chairman and Chief Executive Officer)

Yeah. Great.

OPERATOR

Your next question comes from the line of Tim Switzer with KBW. Your line is open. Please go ahead.

Tim Switzer (Analyst)

Hey, good morning. Thanks for taking my question. First one I have is on the expense outlook. Could you maybe provide some parameters and your expectations for ’27, and what levers do you have to pull in front of you if we get into a tougher environment here?

Frank Sorrentino III (Chairman and Chief Executive Officer)

Well, I think, you know, at the maximum it’s going to be, you know, a mid–single-digits increase in expenses. Obviously we can continue to leverage our fixed costs and continue to drive the efficiency ratio down. So we don’t really necessarily have expense budgets that we have to stick to. It depends what’s available to us out there, what the opportunities are, and we adjust accordingly and continue to try to improve our efficiency ratio and our return on equity.

Bill Burns (Senior Executive Vice President and Chief Financial Officer)

No, it’s only like two. Maybe two or three. And we benefit more on the way down. We benefit more on cuts than we get hurt on ups. Oh, it’s not a lot. What do we got? Oh, but it’s such a small amount, though. The rate differential. 380 from. Where is it today? I’m sorry, I’m asking Steve Premiano, our treasurer, that we have 3 billion of CDs repricing over the next 17 months. But the differential in rate isn’t all that much. Current rate’s about 3 and we’re putting them on there, so. Right. So it’s just—yeah, it’s repricing, but no change to the margin.

The Purchase Accounting Accretion? So it’s been about—it’s running at about 8 million. Okay. And we’re going to lose about 20% of that with the loan sale. But you shouldn’t look at that, that that’s going to hurt margin in some way because that’s the yield on the assets coming off versus the yield going on. So I’m already taking that into account. The yield of the assets going off is less than the yield of the assets going on, and that includes the Purchase Accounting accretion.

I think it’s good that we’ll have less Purchase Accounting accretion for those that, you know, treat that as lower-quality earnings. It’s good to have it lower. Okay. You’re welcome.

OPERATOR

Your next question comes from the line of Tyler Cacciatore with Stephens Inc. Your line is open. Please go ahead.

Tyler Cacciatore (Analyst)

Hey, good morning, guys. This is Tyler.

Frank Sorrentino III (Chairman and Chief Executive Officer)

Yes, Tyler. Hi, Tyler.

Tyler Cacciatore (Analyst)

Frank, maybe just going back to the multifamily sale. You know, what ultimately led you guys to move forward with the transaction? You know, was it primarily an opportunity to strengthen the balance sheet or was it more of you were starting to see additional signs of stress within the portfolio?

Frank Sorrentino III (Chairman and Chief Executive Officer)

Look, you know, we’ve mentioned here, I don’t know how many different times, about building a business that’s really focused on high-valued client relationships where, you know, we have a depository relationship, cash management, multiple points of contact with those clients, building, you know, a bigger base with each of those clients over time as our balance sheet strengthens. And so when we looked at the portfolio, especially some of the acquired portfolio, and saw a very high percentage of non-relationship-based loans, it almost didn’t matter to me what they were.

But they weren’t—you know, they were transactions. And so the opportunity was here to, you know, get rid of those and free up both capital, deposit, you know, liquidity and resources to be able to redeploy in better, better assets going forward. And so we, you know, we took the opportunity. It doesn’t—you know, it doesn’t—it’s not lost on anyone that part of that portfolio is the rent-stabilized. And since the time we, you know, announced the deal with First of Long Island, the environment for those assets is looking—you know, looking like it’s deteriorating over time.

But overall, the assets we had were performing well. The multifamily assets that were not rent-stabilized were performing extremely well, but they just weren’t high-quality client relationships. And so the opportunity to clean up the balance sheet and give us the, you know, the strength that we now have to move forward, I think—I just think—was a smart move for us to make.

Tyler Cacciatore (Analyst)

Got it. And then I think you mentioned it a bit in the prepared remarks, but could you provide a bit more color on what the yields were on the loans being sold and how that compares to what you’re seeing on reinvestment on the securities front?

Bill Burns (Senior Executive Vice President and Chief Financial Officer)

Yes. So 30% of the loans in the portfolio were ConnectOne originated, and those were on at an average rate of five and a quarter. And the loans that we picked up from First of Long Island had been five and a quarter or lower. But with the purchase accounting marks, we’re actually yielding 6%. So it’s, you know, a weighted average between 70% at 6% and 30% at five and a quarter. And we expect to reinvest at yields in the low sixes on average.

Tyler Cacciatore (Analyst)

Got it. And then, Bill, I guess another one for you. Average deposit growth looked pretty strong over the quarter, but period-end balances were a bit more modest. Can you just walk us through the dynamics there and what you’re seeing early in the fourth quarter?

Bill Burns (Senior Executive Vice President and Chief Financial Officer)

Well, one is you have to be careful to exclude brokered in there. And so when you exclude brokered, the actual, the point-to-point may have been a little bit higher. And listen, this is the way I look at it. When it comes to loans, I review our success on a period-end to period-end basis. But when it comes to deposits, it’s always average over average. Okay. Deposits are going up and down every single day. So not a great exercise to review success based on period-end to period-end.

Tyler Cacciatore (Analyst)

Got it. That’ll be it for me. Thank you very much.

OPERATOR

Just a reminder, if you would like to ask a question, please press star one to raise your hand. Your next question comes from the line of Daniel Tamayo with Raymond James. Your line is open. Please go ahead.

Daniel Tamayo (Analyst)

Yeah, thank you. Morning, Frank. Morning, Bill. Maybe just starting, you know, you’ve got this loan sale now in the rearview mirror really. Credit outside of the rent regulated has been strong recently. Curious kind of how we should think about the net charge-off profile going forward here.

Bill Burns (Senior Executive Vice President and Chief Financial Officer)

Well, we don’t have a huge pipeline, okay, of charge-offs, which is great. The only place that I might be using it is that I’d like to continue to be aggressive to get off the books any remaining—that small remaining piece of rent regulated. And so I wouldn’t be surprised to see further decreases in that with small levels of charge-offs. You know, no more than 3 to 5 million, say, a quarter. Okay, okay.

Daniel Tamayo (Analyst)

All right, that’s helpful. And so that’s the half that you’re going to be getting rid of. And just to kind of put a fine point on kind of what you have remaining there, the 30% protection reserves marks, prior charge-offs is against the total remaining or just the half that—or less than half or whatever—that’s talked about.

Bill Burns (Senior Executive Vice President and Chief Financial Officer)

It’s 30% on that remaining half. The rest actually has a larger reserve than our loan portfolio, maybe about 3%. But those loans are all performing, and I think the weighted average rating is 4.1 on those loans, which is very strong. Yeah, low LTV, strong, strong debt service coverage. They can withstand a lot of change that’s going on in the marketplace there in rent-stabilized world in New York City, and very strong borrowers, as you said.

Daniel Tamayo (Analyst)

Yeah. Okay, great. And then just wanted to kind of dig into maybe the sensitivity on demand from rate hikes you mentioned. There’s still kind of plenty of loan demand right now. But as you see it, if we continue to get hikes from here, is there a level that things really start to slow down from your perspective, or is it, you know, somewhat ratable as we move up—if we do—on the rate side? I’m just curious how you’re thinking about, you know, the loan environment if we get kind of some meaningful amount of hikes this year, next year.

Frank Sorrentino III (Chairman and Chief Executive Officer)

You know, I think what’s happening in the marketplace today is that there is a very robust economy going on underneath all of the headlines that’s causing a lot of uncertainty. The clarity part, though, is that we have a strong economy. Rates are going up because there are some inflationary pressures. There’s, again, uncertainty due to the wars and fuel prices, AI investment. Many of those things can’t be controlled by higher interest rates. And so I think if the Fed continues to raise interest rates, which, by the way, I don’t think they’re going to, but if they were, it would be an indication that the economy continues to get and continues to build on that strength. If the economy’s building on that strength, there’s going to be increased demand for lending. And so because you can, if things are strong, you’re going to be able to borrow at higher rates and still make whatever it is you’re doing make sense.

And, you know, we don’t—we should—it shouldn’t be lost on anybody either that from a historical perspective, rates are not high. They’re higher, but they’re not really high relative to the cost of capital—what you can get as far as a return from whether it’s, you know, a business opportunity, you know, construction opportunity, development opportunity, whatever it happens to be. And I think we’re going to settle into that environment a little bit more.

I believe we’re going to see increased demand or increased opportunities for lending going forward, irrespective of which way rates go. If rates start coming down dramatically, that’s going to portend that the economy is slowing. I’m more concerned about that than I am with where we are right at the present.

Daniel Tamayo (Analyst)

Got it. I appreciate your thoughts on that, Frank. That’s all I had. Great.

OPERATOR

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

Frank Sorrentino III (Chairman and Chief Executive Officer)

Okay. Well, again, thanks everyone for joining us today and we look forward to speaking with you during the fourth quarter earnings conference call in a few months. So have a great day and thank you again for joining.

OPERATOR

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

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.