Earnings Call Transcript - CNOB Q3 2021

Operator, Operator

Greetings, and welcome to ConnectOne Bancorp Inc.'s Third Quarter 2021 Earnings Conference Call. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Siya Vansia, Chief Brand and Innovation Officer.

Siya Vansia, Chief Brand and Innovation Officer

Good morning, and welcome to today's conference call to review ConnectOne's results for the third quarter of 2021 and to update you on recent developments. On today's conference call will be Frank Sorrentino, Chairman and Chief Executive Officer; and Bill Burns, Executive Vice President and Chief Financial Officer. The results as well as notice of this conference call on a listen-only basis over the Internet were distributed this morning in a press release that has been covered by the financial media. At this time, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information and are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous assumptions, uncertainties, and known or unknown risks, which could cause actual results to differ materially from those anticipated. These risk factors are more fully discussed in the company's filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call, and the company is not obligated to publicly update or revise them. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed today on Form 8-K with the SEC and may be accessed through the company's website at ir.connectonebank.com. Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.

Frank Sorrentino, Chairman and Chief Executive Officer

Thank you, Siya, and good morning, everyone. We appreciate everyone joining us today. I am very pleased to report a strong quarter and extremely proud of the year-to-date performance of our team. We leveraged the momentum in the first half of the year, demonstrating our ability to continue to execute and driving the strongest financial performance metrics in the company's history. Some highlights for the quarter include a return on assets of 1.62 and a return on tangible common equity of 16.9. Our pre-provision net revenue increased once again to 2.23% of average assets and our quarterly sequential annualized loan growth net of PPP was 21%. None of this is surprising for ConnectOne. We saw early on an opportunity in the rebounding New York Metro economy for banks like ours to take a proactive approach to the recovery. Our teams were prepared and we leveraged our technological investments to drive growth. We also moved quickly realizing market opportunities to add additional revenue-generating talent, and those efforts will support our outlook heading into the new year. Loan growth accelerated for a second consecutive quarter, a result of our strategic focus on our areas of expertise, coupled with our prudent adherence to strong credit standards and spread disciplines. All of this led to our margin expanding for the eighth consecutive quarter. Meanwhile, in August, we raised in excess of $100 million in non-cumulative preferred stock, increasing our flexibility in the deployment of our capital. And with that today, we announced a number of capital actions. First, based on our board's continued confidence in ConnectOne's performance, we raised our quarterly cash dividend for the second time this year to $0.13, up 18% from the last quarter and up 44% from a year ago. Second, the board authorized an increase to our repurchase program by two million shares, or 5% of the outstanding shares. We're also pleased to see positive momentum in our non-interest revenue sources, including our SBA platform, where we expanded our talent, allowing us to further grow this business line. The origination of portfolios of commercial real estate loans held to sale has continued to accelerate, reflecting our disciplined lending philosophy while generating additional non-interest income. Lastly, BoeFly, our FinTech subsidiary, continues to build momentum as it realizes the benefits of the investments we made. We are generating more traffic through proprietary products we verify and the patented equal. We also continue to scale and extend their competitive position amongst franchisors while continuing to support the banks that benefit from the loan marketplace. We look forward to further growth, both horizontally and vertically in both lines. The disruption in the M&A market in our markets continues to present numerous opportunities, which we're taking advantage of. We're attracting high-performing talent who are seeking the opportunity to join a growth-oriented, client-focused culture with a proven ability to execute. Toward that end, we've enhanced our competitive position within New York with the recent addition of a seasoned lending team in Eastern Long Island. This allows us to further extend our reach and capability while strengthening our position as a New York Metro bank. We're also excited to provide some details regarding the addition of a banking team in South Florida. This is a natural progression for ConnectOne's relationship-focused model, allowing us to further support our New York Metro-based clients who already have a presence in this market. Additionally, the commercial and small business community in South Florida is very dynamic, and we're seeing meaningful opportunities to couple our team's local expertise with the ConnectOne model in this growing marketplace. We plan to open our permanent office there in the early part of 2022 and look forward to sharing that update along with the progress of our team in the coming months. By the way, anyone interested in joining the ConnectOne team, we're still hiring in all of our markets. So come join us. So as expected, expenses were up sequentially, reflecting our recognition of our best-in-class team, the addition of new talent and the continued investments in our infrastructure and technology. I'd like to reinforce that our industry-leading efficiency ratio is a direct indicator of our ability to enhance revenue growth while continuously building our operational capabilities. In other words, bringing in more revenue supports progress in areas such as operations, credit, BSA, and compliance. I just wanted to reiterate, this is an exciting time for ConnectOne, and I'm pleased with the groundwork we're laying for our long-term success. I'll now turn it over to Bill to provide a little more detail on this quarter's financial performance. Bill?

Bill Burns, Executive Vice President and Chief Financial Officer

Okay. Thank you, Frank, and good morning everyone. It was another great quarter for ConnectOne and I am happy to report that we are finally getting some recognition in terms of stock price performance. The stock price is up recently about 10% more than our peers, but I still believe we're undervalued. I base that view on our current earnings, our expected growth rate, and our strategic plans to capitalize on this evolving financial services industry. As you saw in today's release, we announced a couple of capital actions. First, we raised our dividend again this second this year by another $0.02. Naturally, this reflects the board's confidence in our future earnings, but also reflects the fact that our dividend pay ratio is very low and a bit out of step with the peer group. Even with this increase, the pay ratio is below 20%, so there is room for more increases in the future. We are aware of the differing views out there regarding our dividends, but all things considered, we think this move makes sense given our strong profitability and high return on tangible common equity. Secondly, our board just increased our stock purchase authority by two million shares or about 5% of outstanding shares. The non-cumulative preferred we just issued in August gave us added flexibility to establish a purchase plan. Capital ratios are strong and the target levels there are based on a host of factors, including growth earnings estimates as well as considerations for risk, but we presently have a cushion going forward. We're going to take into consideration these factors as well as our valuation on any given day, but bottom line, we stand ready to be aggressive when the timing is right. Now, in terms of our core profitability for the quarter, as Frank was talking about, our PPNR increased significantly both sequentially by 7% and from a year ago by 17% to 2.23% of assets; that's a very strong metric. I was happy when we were over 2% five quarters ago, and since then we've increased that metric every quarter. The main driver of the increase this time was interest income growth, which we achieved through a combination of strong loan originations and margin expansion. Average loan growth is an annualized rate of 13%, which includes the negative impact of PPP forgiveness. If you exclude the PPP, our loan portfolio grows at an annualized rate in excess of 20%, and then our margin widened by more than 10 basis points to 3.73%. To give you some color there, we continue to see improvement in both our cost of funds and deposit mix. As CDs reprice, we continue to grow core deposits. Meanwhile, the match funded spread originations remain favorable—I'd say above 3%. However, the margin for the quarter was aided by two non-core items. One was the acceleration of PPP fee accretion due to unexpected forgiveness that added about an extra $1 million to the quarter's net interest income. The other was the recovery of back interest we collected upon the resolution of a non-accrual loan. That was another $600,000. I want to make one more point on the PPP. I think there is a misconception that PPP is adding to margin on a recurring basis. PPP loan yields typically average below 3.25% per quarter. As they run off, we more than make up for it with new originations. What happened this quarter is we needed to accelerate the creation of fees, which temporarily increased the yield on this small portfolio for the quarter. Without those items I just mentioned, the core margin was still wider, but probably just a few basis points, not the 10 basis points on a gap basis. Let me give you some color on non-interest income. The non-interest income line was down slightly sequentially as the second quarter concluded some non-recurring PPP referral income coming out of BoeFly. However, the underlying trend for our non-interest income was positive across the board. Frank mentioned this as well. Our SBA lending initiative continues to accelerate, CRA loan sales continue to hold pace, and the outlook is for continued momentum. We have more and more small banks lacking the original capability of ConnectOne, and at BoeFly, we are seeing accelerating traffic and traction, increased core revenues from that platform. Now let me turn to OPEX for the quarter. Our efficiency ratio remained at a sub 40% level, and that was even with operating expenses increasing by 7% sequentially as was anticipated. As I alerted you to this on last quarter's earnings call, most of the increase was related to the hiring along with experienced support staff. The staff count was up 5% from our quarter investment, which will support our continued organic growth, and like others, we too are feeling the effects of wage inflation. But whether or not wage inflation pressures continue, we will continue to reward our employees with superior individual performance. We want them to share in the overall success of ConnectOne. Now, a little on credit metrics: overall underlying credit quality remains strong. We did have a slight uptick in non-accruals and TDRs. That NCR increase was largely due to two isolated credits that we have deemed to be impaired, but they are not delinquent; they are current. My expectation is that the aggregate NCRs will decrease over the next couple of quarters. TDRs increased as expected, and I did mention it last earnings call. These included a small handful of loans that were deferred under the CARES Act and are better served going forward with slightly relaxed terms. They are now performing under restructured terms. Speaking of deferred loans, that total is now down to just 10 loans aggregating just $10 million. As far as loan loss provisioning, many banks are still releasing reserves while we have a small group adding. We had significant non-PPP loan growth, and that was the driving factor for the very modest provision of $1 million for the quarter. Let me get into some guidance that I can feel comfortable giving you guys. The loan pipeline remains strong, so the fourth quarter is likely to be similar to the past two quarters in terms of loan growth. I think it's a little early to project 2022, but I expect things to slow down a bit. We still feel comfortable with approximately 10% growth next year, maybe a little more, maybe a little less. The core margin this quarter was in the 360 to 365 range, and I expect some compression from that level—maybe a few basis points per quarter. In terms of expense growth, we might see just a modest uptick for the rest of this year—not as big as the increase we had this quarter. Next year could be more challenging; the labor markets are tight, there is wage inflation, but we will continue to invest in our people, technology, and our overall infrastructure. I definitely think a 40% efficiency ratio is certainly achievable; I hope we can do a little better than that. Finally, with regard to the tax rate: a little bit higher than the street estimate, just given the increased level of taxable income and our expected growth. I do see the tax rate increasing modestly over time. Before we get to the questions, I'll turn it back over to Frank for closing comments.

Frank Sorrentino, Chairman and Chief Executive Officer

Thanks, Bill. We have a solid foundation and we're looking forward to building the next chapter of our company here. There's never been a more exciting time to be a ConnectOne. We're in a unique place because of the market in which we operate, the position of our balance sheet for enhanced scale, and the opportunities to utilize digital tools to grow efficiently. Our strong earnings power, coupled with our enhanced capital, allows us to execute on a multitude of strategic initiatives. The potential for our FinTech subsidiary is exciting as we see opportunity for growth across a number of verticals. Finally, we're a dynamic, highly valuable franchise, and we continue to explore financially attractive opportunities that could enhance our organic momentum on both the traditional bank side and in other financial services. As you can see, we're very excited about our future; we're pressing forward and expanding our client-first model. We remain confident in our ability to drive value for our shareholders, our team, and our clients. With that, we're happy to take your questions.

Operator, Operator

Thank you. We will now be conducting a question and answer session. Our first question is from Frank Schiraldi with Piper Sandler. Please proceed.

Frank Schiraldi, Analyst

I wanted to ask about the Florida team, and I just wanted if you could share what sort of balances you have on the books currently in that geography, and then Frank, I think you mentioned an office down there or opening an office down there. Is that, are you talking to full service branch or, what are your longer-term plans for that geography?

Frank Sorrentino, Chairman and Chief Executive Officer

Sure, Frank. Up to today, we have about $100 million in footings in Florida that we've accumulated over the last couple of years as our clients have seen Florida as, I like to call it, the sixth borough of New York. We see that building over time. The team that we've hired there will occupy what we've been building for the last number of years here, which is a full-service office. Generally, these are not retail-type locations, but they're more for the promotion of good business development officers, but we'll have full branch and deposit-taking capability.

Frank Schiraldi, Analyst

Okay. And as you see Florida has in terms of the rate of growth, better rate of growth than up here in the Northeast. So just wondering how you think percentage-wise that could trend, and is there any interest in maybe acquiring something down there?

Frank Sorrentino, Chairman and Chief Executive Officer

Hard for me to say at this point in time. We are looking at that Florida market, and I think we'll continue to look at it more through the lens of what our clients are thinking here in New York. Florida, because of the convenience of getting there, and the favorable tax status has really attracted a lot of our top name developers and real estate folks, and even other commercial business enterprises to open either offices or put some capital into that marketplace. So we'll be following that, and I think that'll be leading the charge for us as to where we are, how big that gets, and how much of that winds up here at ConnectOne while we're there. I think we also see there are opportunities to grow there, a number of interesting types of businesses and other opportunities in and around that same marketplace. That growth could be accelerated a little bit by what we find once we're there, but I think it's going to be led mostly by what the clients that we have, and through COVID, we've seen that a lot of our clients now are, I know we keep using these words, mobile and remote, but our clients are no longer geographically anchored. Capital is starting to find its way into places in different ways, and I think we needed to think about that in the same way. We're pretty excited about the opportunity. The bankers that we've been able to hire there were hired from organizations that resembled us and may have been acquired. Those folks feel disenfranchised working at much bigger organizations, and so being able to join the ConnectOne team has been a big plus for them. Relative to acquisitions, I think it's a little early to talk about that. Obviously, if something made a lot of sense, we'd consider it. That outlook relative to the acquisitions that we might look at may be a little bit different today than it was a couple of years ago.

Frank Schiraldi, Analyst

Got you. Okay. And then just lastly on, Bill on the buyback the additional authorization, does this signal maybe a pickup in activity, or is it still more opportunistic just given your growth opportunities organically?

Bill Burns, Executive Vice President and Chief Financial Officer

Yeah, I think we're going to—I think this is Bill. I think we're going to be opportunistic there, watch the level of growth. How aggressive we are will depend on a bunch of things, including growth as well as what the share price is.

Frank Schiraldi, Analyst

Right. Okay. So with the given growth particularly strong right now, is it fair to say the levels we saw in this quarter might be a reasonable place to think about buybacks?

Frank Sorrentino, Chairman and Chief Executive Officer

You could say that. One of the reasons for the preferred issue was to give us more flexibility on buying back common shares. So if that's what you want to use for your model, that's fine. It could be a little more aggressive than that. We still think the stock is cheap here.

Operator, Operator

Our next question is from Michael Perito with KBW. Please proceed.

Michael Perito, Analyst

Sorry if I missed it, but did you guys say where in South Florida the office you were planning to open is going to be?

Frank Sorrentino, Chairman and Chief Executive Officer

Yeah, it'll be in the West.

Michael Perito, Analyst

I'm sorry. I don't know if it was just my phone, but you broke up there a little bit. Frank, what was that?

Frank Sorrentino, Chairman and Chief Executive Officer

West Palm Beach area.

Michael Perito, Analyst

Got it. Okay. And then in terms of the loan growth outlook, Bill, you mentioned still comfortable with kind of the 10% plus or minus next year. Don’t want to push too hard on it, but it seems like there are quite a few tailwinds at your back here. I guess are there any other dynamics in the marketplace that you think could slow down the production that you guys have seen in the last couple of quarters and seemingly expect to continue into next quarter?

Frank Sorrentino, Chairman and Chief Executive Officer

Mike, maybe I'll say a couple of words, and maybe Bill will add to it. Certainly, we have a strong pipeline sitting here. We are taking advantage of many of the opportunities that have built up in the marketplace here in 2021. But when we look ahead, while we see a strong pipeline, there are a lot of headwinds out there. The economy in general could possibly slow down; we're seeing signs of that already. A lot of the pent-up demand that existed in the New York marketplace is beginning to wane a little bit. Really, if you could tell me what's going to happen with interest rates, maybe we could talk a little bit more about it. There are those who think interest rates will definitely rise, which will definitely tamp down some of the interest in various markets. So if you think interest rates are going to remain low, then I would tell you there is going to be fierce competition for assets. So there are just a lot that when we sit here that we can’t sustain 5% per quarter growth. The answer's probably not. We would probably be happier, especially with our disciplined approach. Keep in mind, we're not just having growth for growth's sake. We're putting growth on while being disciplined around margin spread and credit quality. Therefore, we just don't see as we look out over the horizon that in 2022 we can get higher than probably single-digit, high single-digit and possibly breaking double digits for the year of 2022. Now we could be wrong in either direction, but we think that's probably the most reasonable assessment based on what we know today. It's going to take everything that we're doing at this moment in time. I think that's why we talk a little bit more about expense growth. To achieve even that level of growth, which you may think is conservative, it's going to take everything we have, including bringing on new lenders, new markets, and new products and services to achieve that. I hope we're wrong, and I hope we're sitting here a year from now laughing about how we underestimated it, but I think to be realistic about it, when you think about the numbers, the amount of payoffs, what's happening with interest rates, and what's really going on in our marketplace, I think we'd be very pleased to be able to hit that level of target.

Michael Perito, Analyst

Makes sense. Thanks for that additional color. And then, kind of leads into my last question, which is just a small detail. We've seen a couple—there's been a handful of banks in the Metro New York area this quarter where we've seen some upticks on non-accruals or delinquencies or things like that. I know personally we've started going back into the office a little bit, still a lot of vacant buildings, but definitely some more activity. I was curious if you could just give us a little more credit-specific update on the Metro New York area and if you're seeing any trends or anything that’s had you more alert than maybe three or six months ago.

Frank Sorrentino, Chairman and Chief Executive Officer

Listen, I think there had to be some fallout from the pandemic. A year and a half ago, we all were really nervous, and we're in a much, much better place. So there are just select areas, select credits where there is some impairment going on. We've run into a couple of those. We're taking care of them. Even the charge-off that we had this quarter, that slight charge-off got us 10 basis points. We already had taken a reserve for it. I think we're well ahead of the curve on it, but any bank that says they don't have any issues from the pandemic, I just can't believe it. We've taken reserves well in excess of anything that we need.

Operator, Operator

Our next question is from Matthew Breese with Stephens. Please proceed.

Matthew Breese, Analyst

A few questions. So maybe first, could you give us an idea of where incremental loan yields are coming on versus what's on the books, particularly in kind of commercial real estate, multifamily and CNI? The blended rate, excluding any fees associated with is about 3.75%, so that’s pretty strong in my view.

Bill Burns, Executive Vice President and Chief Financial Officer

Well, I think the growth is going to surpass the margin compression. So we'll continue to have increases in net interest income, but if you have margin compression, that's going to put a little bit of a damper on that interest income growth. I keep saying we're going to have compression, and we don't. We continue to reprice CDs lower, and we seem to benefit from that. But if you add up our spreads without including match funding and include the value of core deposits increasing, it's still a little bit lower than our core margin.

Matthew Breese, Analyst

Understood. Okay. And then just on the hiring front, obviously there's a lot of your key competitors involved in deals now, or recently have been. Can you just talk about the conversation flow on new lenders, new lending teams and hires? Have those conversations accelerated or decelerated, and then along those same lines, does all this disruption and change, does it change where whole bank M&A stacks up on your priority list?

Bill Burns, Executive Vice President and Chief Financial Officer

So I'll take the first question first, which is, I think the conversations have modestly increased over time, although this year, it's been dramatically more than in years past. We've talked about this the last couple of calls where we think we're in a fairly unique marketplace relative to the amount of M&A activity that's going on specific to our organization, meaning, for a bank our size with our capabilities and the types of talent we're looking to hire, we feel this is sort of a unique time. Most of the talent that's reaching out to us is at organizations where they felt that they had a really good thing going and now are not so confident in the future. They've learned about the culture here at ConnectOne or they've come in contact with it because they've competed with us in the past. When they made a decision about where they think they want to go, one of the first places they're calling is ConnectOne. Those conversations are modestly accelerating. I know there's inbound calls here all the time. We continue to interview and place people; growing our staff 5% in one quarter is not typical here at ConnectOne bank. We are clearly taking advantage of those increased phone calls and we expect that to continue over the short to moderate term. I think that's great and these are great folks. They fit right in here at ConnectOne and they've been making a difference from the moment they hit the ground. As far as how we think about M&A, we always projected the company as an organic first growth company. To me that's the best way to create value. It's the best way to maintain our culture, which is the thing that scares me the most—how do we do all these things and still maintain who we are and what we do? That being said, we've done some pretty good things that have allowed us to leapfrog in size, scale, and in some cases, ability. Those opportunities, I think, are still out there. But Matt, I think the point you're trying to make is, yeah, it's hard. We have to put it up against that to say where do we want to put our efforts? How do we want to deploy our capital and what makes sense? We say over and over again, we are a disciplined acquirer again. All that being said, we're going to do things that we think make sense here at ConnectOne, and I think that's why we are where we are today with probably some of the best metrics we've ever had in our history.

Matthew Breese, Analyst

Great. Appreciate that. Just two more from me. So the first one is how many lenders are part of the South Florida team and is this team native to Florida or are they planted from somewhere else?

Bill Burns, Executive Vice President and Chief Financial Officer

Yeah, this is a team that originally was at Stone, which is a bank we had a lot of respect for. There are two lenders there today together with the support team, and we expect to add to that team over the course of time.

Matthew Breese, Analyst

Okay. And then the other one is obviously throughout history, there's been a lot of banks that have made the jump from Metro New York City and the Northeast to Florida. Some of these have gone really well; others have not. Can you talk a bit about the demographic trends in Florida this cycle and what gives you confidence about what's going on down there that you can underwrite to the same high credit standards you do in New York City and things can go well?

Bill Burns, Executive Vice President and Chief Financial Officer

I certainly sat among the folks who years ago did not or could not understand making the leap from New York to Florida. I may not have seen it early enough, so Matt, I share the skepticism relative to can this work, will it work? It's worked for some; maybe it hasn't worked for others. History would tell us that moving out of geographic markets may or may not be a good move for some organizations. When I really start to think about and all of us here sit with our clients and listen to what they're doing and why they're doing it and how they're thinking about businesses, I actually started to think about Florida not as an offensive move, but almost a defensive move. We have clients that are devoting a fair amount of their capital to the Florida marketplace because of demographic trends, because of tax scenarios, and because of the growth in that marketplace. There are quite a number of New York banks or New York located banks that have a presence in Florida. As we all know, every one of 5,000 banks today can do business in Florida. There is really no more geographic traffic boundary around where a bank can do business or not, especially in this new digital age. I started to think about our clients going to Florida and having to go to a different bank to do business there, and that bank would have exposure to New York. Therefore, we'd have competition from Florida for our New York business. From our perspective, this just made perfect sense.

Matthew Breese, Analyst

Understood. I appreciate all that color. That's all I had. Thank you.

Operator, Operator

Our next question is from David Bishop with Seaport Research Partners. Please proceed.

David Bishop, Analyst

Hey, most of my questions have been asked and answered, but Bill, I think you alluded to the fact that there could be some opportunities still to lower deposit costs, maybe on the CD front. Maybe give us an update what the repricing schedule maturity schedule looks like, and maybe the cost benefit from what's rolling off in current rates.

Bill Burns, Executive Vice President and Chief Financial Officer

Yeah, it's about still another $800 million over the next year. The benefit of the rate, about a hundred points. A benefit of about a hundred basis points, so still continuing, not as steep as it was.

David Bishop, Analyst

Got it. Then maybe Frank, obviously another strong quarter for multifamily. Maybe just update what you're seeing in that market in terms of supply and demand and pricing opportunities on that product. Thanks.

Bill Burns, Executive Vice President and Chief Financial Officer

Yeah, I think it was a strong quarter for multifamily. A lot of that had to do with some very specific opportunities in the marketplace. Some organizations out there that are competitors also had big pipelines of multifamily could not get deals done on time and so we saw a little bit of an advantage from being able to execute better than maybe some of the competitors that had their pipelines clogged up. The multifamily space is still a strong asset here in the New York metro market; rents have definitely rebounded from their lows. There are now bidding wars over rents on particular sites, but it's still a tricky asset relative to pricing competition and really knowing where the asset's located and having a great relationship with the operator. For those operators and managers that we have an ongoing and longstanding relationship with, we're continuing to support those folks. They're seeing some opportunities; some are finding that the market is getting overheated in certain places, and so they're deciding not to participate in particular areas. Others are moving more quickly into areas where they think opportunities exist, and we're there to support them. I think it's one of the reasons why I said before, I do think there are some headwinds as we start to move into the early part of next year with potentially rising interest rates and just a quite hot or maybe even in some cases overheated market as we move into the end of this year. We need to keep a close eye on that entire portfolio—not so much the portfolio, but the pipeline going into that portfolio over the next quarter. To add, the yield including fees is in the 3.25% to 3.50% range. The spreads are a little narrower than our other segments of our loan portfolio, but still wider than the tightest it's ever been in the multifamily market.

David Bishop, Analyst

Got it. And then one final question, Bill. I don't know any color you can provide. I think you mentioned two credits drove the increase of the Fanon loans. Maybe any sort of color in terms of segments and maybe what sort of collaterals behind that? Thanks.

Bill Burns, Executive Vice President and Chief Financial Officer

Those were commercial real estate deals. As I told you, we deem them to be impaired based on the values of the properties. We expect them to—well, they're current and they continue to pay, but we decided to take a conservative approach and put them on non-accrual.

Operator, Operator

Thank you. As gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to management for any closing remarks.

Bill Burns, Executive Vice President and Chief Financial Officer

I just want to say thank you to everyone. This was a great quarter here at ConnectOne, and we look forward to speaking to you at the end of the year. We're actually in the beginning of next year. So thank you all for your time today.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation and have a great day.