ConnectOne Bancorp - Q4 2025
January 29, 2026
Transcript
Operator (participant)
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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. I would now like to turn the call over to Siya Vansia, Chief Brand and Innovation Officer. Please go ahead.
Siya Vansia (Chief Brand and Innovation Officer)
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.
Frank Sorrentino III (CEO)
Thank you, Siya, and good morning, everyone. 2025 was the 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, completed a full systems conversion within two weeks of that closing, and bolstered our franchise value and competitive position in the New York Metro market. This meaningfully propelled 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 and 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 broker 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-light relationship-driven approach, we've identified five 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?
William Burns (CFO)
All right. Thank you, Frank, and great to be speaking with you this morning as we delivered another excellent quarter. It 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 non-interest-bearing demand, which went from 17% to more than 21% today, as well as a reduction in brokerage, 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 represented 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%. Now, 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, modest loan portfolio growth, and increased non-interest income. Now, the margin expansion this quarter stemmed from three 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 for 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, we're likely to be up by 5 basis points in the first quarter, putting us in the low 330s. Then we should see five basis points of improvement for every 25 basis points of Fed rate cut. Not sure whether it's going to only be one or two coming in 2026. In addition, we should see five basis points improvement per quarter due to higher loan yields. That's not going to kick in really until mid-year.
Now, partially offsetting those, we could see five 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 five branches. Due to proactive client engagement, which we always do, we do not anticipate measurable deposit runoff. Now, 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 four 2026 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. Through this, combined with a significant portion of our portfolio maturing or repricing in 2026 and 2027, leads us to expect higher than typical payoffs. Consequently, we now anticipate a more modest loan portfolio increase in the 3%-5% range.
In regard to growth in non-interest 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 for loan losses, we recorded a relatively low provision this quarter. The reasons for this were multifaceted. First, the CECL model's 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 non-performing asset ratio to 0.33 from 0.28 a quarter ago due to one multifamily loan relationship.
Having said that, and not included in the year-end ratio is a multifamily workout that occurred in January, which brought total non-accruals back down to the lower level. Now, going forward, I don't see any significant change in the level of impared 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, re-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 pre-merger levels within one year of the June merger completion. Now, before turning 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.
Frank Sorrentino III (CEO)
Thank you, Bill. With a strong 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.
With that, I'd like to turn it over for your questions, operator.
Operator (participant)
Ladies and gentlemen, we will now begin the question and answer session. As a reminder, to ask a question, please press the star button followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. One moment, please, for your first question. Your first question comes from the line of Feddie Strickland of Hovde Group. Please go ahead.
Tim Switzer (Analyst)
Hey, good morning. I guess.
Operator (participant)
Hi, Fede.
Tim Switzer (Analyst)
Just wanted to touch on something you mentioned in your opening comments. Bill, you talked about maybe the preferred being redeemed later this year. Can you speak a little more broadly about kind of how you view the capital stack today and kind of where you'd like it to optimally be?
William Burns (CFO)
Well, you know 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 better position for M&A.
Tim Switzer (Analyst)
On M&A, I mean, do you view that likelihood is a little greater in 2026 than maybe in the past? How have conversations gone there, and just how do you view that versus other forms of capital return?
William Burns (CFO)
Well, you know it really depends. As you know, M&A is heating up a little bit out there. There's 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 of buying back our stock. So all the pieces have to fall in line 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?
Frank Sorrentino III (CEO)
Yeah. 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 sights, but overall, we're focused pretty much in market and, again, looking to be very disciplined around what makes sense for us to do.
Tim Switzer (Analyst)
Just one quick follow-up on the cash balances piece. Do we see that getting deployed again into loans this quarter, maybe earning assets or a little slower in growth?
William Burns (CFO)
Yes, exactly. So we'll continue to see more cash transition into loan balances. So higher growth in loans than in assets.
Tim Switzer (Analyst)
All right. Great. Thanks. Thanks for my questions.
Operator (participant)
Your next question comes from the line of Tim Switzer of KBW. Please go ahead.
Tim Switzer (Analyst)
Hey, good morning. Thank you for taking my questions.
Frank Sorrentino III (CEO)
Hey, Tim.
William Burns (CFO)
Hi, Tim.
Tim Switzer (Analyst)
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?
William Burns (CFO)
Yeah. Good question. If you're trying to do your model as precisely as possible, that branch closure isn't going to occur until the end of the first quarter, and the staff changes might not take place till after a quarter, middle of the year. So I would say that the expense increase will step up a little bit more in quarter one and then flatten out.
Tim Switzer (Analyst)
Gotcha. Okay. That's great. And then the other question I had is on, sorry, go ahead.
William Burns (CFO)
No, go ahead. I'm sorry.
Tim Switzer (Analyst)
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?
William Burns (CFO)
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 335-340 range by year-end.
Tim Switzer (Analyst)
Okay. Got it. That's really helpful. Thank you.
Operator (participant)
Your next question comes from the line of Mark Fitzgibbon of Piper Sandler. Please go ahead.
Mark Fitzgibbon (Analyst)
Hey, guys. Good morning.
William Burns (CFO)
Hey, Mark.
Frank Sorrentino III (CEO)
Good morning.
William Burns (CFO)
Good to have you on this call. Yep.
Mark Fitzgibbon (Analyst)
Thank you. I guess I was curious, could you share with us perhaps the size, complexion, and maybe average rate of your loan pipeline?
William Burns (CFO)
Yeah. So which one was the size? We have the $600 million, and about $600 million is in the pipeline, and that average weighted rate is 6.2%.
Mark Fitzgibbon (Analyst)
Okay. Is it mostly commercial real estate, construction, or what does the mix look like?
William Burns (CFO)
It's a real mix similar to what's on our composition today.
Mark Fitzgibbon (Analyst)
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?
William Burns (CFO)
I don't think so. Frank, did you have any thoughts on that?
Frank Sorrentino III (CEO)
Yeah. 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 weren't being provided by the First of 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 grow relative to the composition we have today across all our markets. Great. And then lastly.
William Burns (CFO)
Mark, we had early gains in deposits at Long Island. So between the closing of the transaction, June 1st and June 30th, we had significant deposit increases at the Long Island part of the franchise.
Mark Fitzgibbon (Analyst)
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, etc. 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-$5 million a quarter range, assuming no surprises?
William Burns (CFO)
I'm pretty good with what the street estimates are. I think it might be a little bit higher than that. You said four to five? Four to six.
Mark Fitzgibbon (Analyst)
Yeah.
William Burns (CFO)
More like 5-6. Maybe more like $5-$6 million would be my projection. It's hard to tell. A lot of moving parts. Okay? But there was definitely a part of the reduction was non-recurring. Okay?
Mark Fitzgibbon (Analyst)
Got it.
William Burns (CFO)
For the quarter.
Mark Fitzgibbon (Analyst)
Thank you.
William Burns (CFO)
Yep.
Operator (participant)
Your next question comes from the line of Daniel Tamayo of Raymond James. Please go ahead.
Daniel Tamayo (Analyst)
Thanks. Good morning, Frank. Good morning, Bill.
Frank Sorrentino III (CEO)
Hey, Danny. How are you?
Daniel Tamayo (Analyst)
Doing well. Thanks. I guess, so is there a chance that deposit growth exceeds loan growth this year given the slower loan growth guide from the payoffs?
William Burns (CFO)
Yeah. I think that is a possibility, but more likely than not, if I just had to project, it'd be about equal.
Daniel Tamayo (Analyst)
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. But so my question was going to be, is that related to the acquisition? If not, what was the deposit decline?
William Burns (CFO)
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 a big determinant in 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.
Daniel Tamayo (Analyst)
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 mid-year or second quarter. That's kind of a gradual build to that overall 5 basis points. Is that the way to think about that?
William Burns (CFO)
Well, it's about five basis points a quarter for each of the third and fourth quarters where 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's 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 outcome model doesn't necessarily match. It probably overstates what the margin widening will be. And so I've tempered our margin guidance because of that.
Daniel Tamayo (Analyst)
Understood. Okay. I think.
William Burns (CFO)
Directionally, everything is pointing in the right direction.
Daniel Tamayo (Analyst)
Got it. Okay. All right. Well, thanks for the color. Appreciate it, guys.
William Burns (CFO)
Yep. Yep.
Operator (participant)
Again, if you would like to ask a question, please press star one on your telephone keypad. Your last question comes from the line of Matt Breese of Stephens Inc. Please go ahead.
Matthew Breese (Analyst)
Hey, good morning.
William Burns (CFO)
Hi, Matt.
Frank Sorrentino III (CEO)
Good morning, Matt.
Matthew Breese (Analyst)
Good morning. I was hoping 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 rate. 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.
William Burns (CFO)
Yeah. I think it's self-explanatory. The loan rates are a little bit lower than what it 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 maybe 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.
Matthew Breese (Analyst)
Got it. Okay.
William Burns (CFO)
Okay?
Matthew Breese (Analyst)
Yep. 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?
Frank Sorrentino III (CEO)
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 at 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.
Matthew Breese (Analyst)
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? Are they okay with you all trying to apply it there? Are they on board with that kind of transition?
Frank Sorrentino III (CEO)
Yeah. 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's happening. So there's a fine line there. And I do think that there are 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 can't buy AI in a box and just open the box and turn it on and plug it in. 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.
Matthew Breese (Analyst)
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 deal 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?
Frank Sorrentino III (CEO)
Yeah. Matt, I think it's hard to set a lower bound. I mean, 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?" That's the basis of being financially disciplined and looking at how we're going to build a better valuation for the franchise in general. As far as markets, I've been pretty consistent speaking about, 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 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, what makes the most sense is within that 100-150-mile radius of New York City, about a 2-hour drive. That's me 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 sixth part of New York. So I include that within the marketplace.
Matthew Breese (Analyst)
Thank you for taking all my questions. I'll leave it there.
Frank Sorrentino III (CEO)
Great, Matt.
Operator (participant)
Your next question comes from the line of Daniel Tamayo of Raymond James. Please go ahead.
Daniel Tamayo (Analyst)
Thanks, guys. Just a quick follow-up here. It's for you, Bill, the first one at least. Just wanted to clarify again on the margin, the 335-340 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?
William Burns (CFO)
Yeah. It probably includes one rate cut.
Daniel Tamayo (Analyst)
Okay. And then for Frank, just a clarification on the buyback talk. I hear you on the 9% TCE. Is the way to think about that? You want to get there before you're going to do buybacks, or are you comfortable kind of some buybacks with the stock price still low and more gradual uptakes at 9%?
Frank Sorrentino III (CEO)
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 there 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.
Daniel Tamayo (Analyst)
Understood. Okay. That's all I had. Thanks, guys.
William Burns (CFO)
Yeah. Yep.
Daniel Tamayo (Analyst)
Go ahead.
William Burns (CFO)
Matt, Danny, I was just going to say, with the continually increased 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.
Operator (participant)
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.
Frank Sorrentino III (CEO)
Well, I want to thank everyone again for joining us today. Certainly, we look forward to speaking with you during our first quarter conference call. With that, please have a great day.
Operator (participant)
Ladies and gentlemen, this concludes today's call. Thank you for participating. You may now disconnect.