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spk08: Good morning, and welcome to the Connect One Bancorp, Inc. second quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. And now I'd like to turn the conference over to Sue Vancia. Please go ahead, ma'am.
spk02: Good morning, and welcome to today's conference call to review Connect One's results for the second quarter of 2023 and to update you on recent developments. On today's call will be Frank Sorrentino, Chairman and Chief Executive Officer, Bill Burns, Senior Executive Vice President, and Chief Financial Officer. Also with us is Elizabeth McGinnis, President of Connect One Bank, and Steve Premiano, EVP and Treasurer. I'd also like to caution you that we may make forward-looking statements during today's conference calls 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 8K with the SEC and may also be accessed through the company's website. I will now turn the call over to Frank Tarantino. Frank, please go ahead.
spk06: Thank you, Sarah, and good morning, everyone. We appreciate everyone joining us this morning for this call. As you saw in this morning's earnings release, ConnectOne's performance, while negatively impacted by it, impacted by Fed policy continues to demonstrate strong and stable qualities in this challenging operating environment. Since the beginning of the year and throughout the turmoil in March, we have maintained and even increased client deposits as we have diligently supported and deepened our client relationships along with adding new ones. Further, we continue to fortify our sources of liquidity while maximizing our matured deposits. leading to a top-tier uninsured deposit coverage ratio of about 250%. I'd like to summarize some of the key operating highlights from our quarter, and then Bill, of course, will give us some more detail later. As expected, our loan portfolio remained mostly flat for the quarter, although loan mix improved, reflecting a healthy 17% annualized growth rate in CNI. The investments we've been making in this area are beginning to move the needle on both sides of our balance sheet. Our capital levels remain strong, which, reflecting our proven philosophies and hedging strategies, have seen a minimal negative impact from AOCI. Tangible common equity increased 9.19% as of June 30th, which remains well above peer averages. And our tangible book value per share increased from the 13th consecutive quarter to 2334 as of 40% over that period. Our net interest margin decompressed sequentially by about 19 basis points, largely due to the shift from non-interest-bearing demand into interest-bearing accounts. However, both our net interest margin and EDA trends seem to stabilize at their current levels during the quarter, at least to the time being. So, of course, we'll discuss a little bit more about this in detail later. Our credit quality remained excellent. With delinquency, does the percentage of total loans remain near zero at just 0.04% of total loans? This reflects high credit standards, a well-diversified portfolio, and more importantly, our relationship-based client philosophy. In regards to our commercial real estate portfolio, as we mentioned in previous calls, we have a very minimal exposure to office, with New York City office representing less than 1% of total loans. Our aggregate office exposure is largely in northern New Jersey, which includes high-tenancy specialty services and multi-use buildings, and totals about 5% of our total portfolio. That portfolio is performing well and is all pass-rated. Taking a look now at our multifamily portfolio, historically our loans were underwritten with prudent standards, including high internally determined BFCRs and low LTVs. In addition, loan underwriting includes stress testing for interest and cap rate increases and stresses on potential net operating income. In terms of rollover risk, we have extensively reviewed our portfolio to determine the current level of risk. First off, only about $60 million of the multifamily loans will experience significant pricing during the remainder of 2023, and $190 million in the following 12 months. Of those, a large majority are financially strong, long-time clients of the bank and pose very limited risk. In some cases, we're proactively seeking credit enhancements such as additional collateral and or PGs and have largely been successful in this regard. We also have the ability, and we will utilize this in very limited cases, either rate or amortization concessions in order to maintain sound loan performance. Overall, while our loan performance pipeline remains robust, we continue to anticipate a relatively flat outlook regarding overall loan growth. Looking ahead, we're well-positioned with growth opportunities in key markets, such as Long Island and South Florida, and in deposit-rich verticals in CNI, along with healthcare and others. At the same time, we expect to see a decrease in multifamily lending, where purchase demand is obviously down and rate competition is still challenging. Moving on to our operating strategy, we focused on integrating key technology and infrastructure investments. This optimization will continue to position ConnectOne for the future while enhancing our franchise value. We're executing on several innovation initiatives focused on enhancing the client experience while digitizing workflows and expanding opportunities to support our deposit franchise and drive organic growth. For example, we recently launched our partnership with Mantle and successfully integrated the first phase of this omnichannel deposit origination platform. We're also creating opportunities across new verticals. We continue to build our franchise referral and lending platform in conjunction with Bowfly. And during the quarter, we continue to enhance its infrastructure, add new users, and increase our clients' overall workflow efficiency and drive revenue. Additionally, I'm pleased to share that our SBA lending platform continues to gain traction and is accelerating our non-interest income growth. We recorded $500,000 in gains during the second quarter and aim to improve on that in the quarters ahead. While we invest in ways our clients can access our products and services and continue to make enhancements in our systems and communication tools, we're also seizing on opportunities driven by the market disruption to attract high performing revenue producing talent to support future growth. Over the past several months, we've onboarded about a dozen client-facing team members in both new and existing markets. As ConnectOne continues to leverage opportunities to grow smartly, we continue to prove we manage expenses. This includes our ongoing focus on optimizing operations, staff count, and branch footprint, while also leveraging technology to increase human capital efficiency. Saying that, while we understand this may be a somewhat different message than you're hearing from other banks, many of whom are cost-cutting or implementing expense cuts, we believe the current environment presents particular opportunities to invest in supporting Connect One's distinct growth strategies and offer the potential for attractive returns. This philosophy is consistent with our track record of superior growth and profitability over the longer term. Regarding our outlook for the remainder of 23, Although the industry is facing headwinds, we firmly believe that Connect One's conservative, client-centric model, diversified balance sheet, solid liquidity, and track record of prudent underwriting and profitability positions us for the challenges ahead and the flexibility to continue to invest in our valuable franchise. And with that, I'll turn it over to Bill.
spk05: Bill? Okay. Thanks, Frank. Good morning. Thank you all for joining us today. We'll get to your questions shortly, but first I'd like to start off with some comments regarding deposits and liquidity. First off, we are in very good shape regarding client deposit flows. And here, I'm defining client deposits as all deposits other than broker. And in this economic environment where, first, the money supply and aggregate deposits are contracting, and second, where regional community bank deposits have been migrating to the largest banks, we have maintained and even have grown our client deposit base. And that's true whether you analyze the trends on a point-to-point or on an average balance basis. Now, we did increase brokers by more than $300 million during the latter part of the first quarter, and that was to increase on-balance sheet cash liquidity. But we have largely wound that down during the second quarter. So that contributed to a decline in aggregate deposits sequentially, but not client deposits, which are up. And in terms of overall liquidity, we are now covering our uninsured and uncollateralized deposits by more than 2.4 times, and that is a very, very strong metric. So the next area I'd like to cover is the net interest margin. We did experience another 19 basis points of sequential compression, but there's good news here in that the low point for the margin actually occurred in April, while May and June saw some margin expansion. Several moving parts here. Non-interest-bearing demand, which declined heading into the month of April, remained relatively constant for the remainder of the quarter. And second, since we had been proactive and aggressive with rate increases early on during this cycle, we were generally able to hold off rate increases for much of the current quarter. Looking at deposit rate trends, we appear to be approaching our terminal beta, which is about 50 to 55, depending on how you measure it. As far as the NIMS, the remainder of 23, There are factors working in our favor and some against. On the positive side, our projected due loan funding rates are approximately 8.2% and are expected to replace loans going off the books at rates below 7. There's about $300 million in turnover per quarter that we project. And that $300 million in turnover excludes any resets. Next, yesterday's Fed rate increase will likely help the margin, albeit slightly. And finally, The non-interest brand demand appears to be flattening out, and as I've spoken to this before, the value of DDA is even greater in a higher rate environment. Working against the margin is the continued repricing of CDs. In this regard, we have about $400 million per quarter over the course of the next year, and an estimated 100 basis point increase in cost. I just mentioned that we have been able to hold firm on deposit pricing recently. We, of course, are keenly aware that competition could intensify, which would accelerate our deposit costs once again. So when you add it all up, I'm going to give some conservative guidance here and say that although we expect some further compression, it is not likely to be anywhere near what we've experienced over the past year. I would hope compression, if any, would be no higher than the single digits. And longer term, We are in a liability-sensitive position and would expect material margin expansion when that inverted yield curve returns to its traditional shape. We've run some preliminary modeling, and this is a rough cut. We'd expect for every 100 basis point drop in short-term rates, we'd see a 20 basis point improvement in the net excess margin, which over the course of a complete cycle would bring us back to our 340, maybe a little higher, long-term margin. And along with that, all the other metrics that reflect the high-performing banking organization. On expenses, we will, in some respects, as Frank was talking about, follow our longer-term strategic view. We will capitalize on opportunities for talent and will continue to invest in technological improvements. Now, this is not to say we won't also focus, as we always do, on efficiency in terms of continued rationalization, always, of vendors and consultants and reallocation of resources depending on the changing landscape For example, we plan to close another New Jersey branch late in the year. And we recognize some of our peers have reported cost-cutting programs. However, as a top-tier efficient bank with non-interest expenses as a percent of assets consistently less than 1.5%, we are in a constant optimization mode. So given all I've just stated, I'm going to forecast expense growth of approximately 5% on an annualized basis. On the non-interest income front, we remain optimistic about our growth prospects, especially given the momentum from SBA. We recorded $500,000 of gains this quarter and expect that number to increase in the coming quarters. And BoFly is expected to contribute to non-interest income growth as well. Now moving on to the ACL and credit. Frank mentioned this as well. Credit quality remains sound with delinquencies at just four basis points of total loans at quarter end and net charge-offs for the quarter were just five basis points annualized. The non-performing asset ratio was basically flat, increasing slightly to 0.53 from 0.48 a quarter ago, but it is down from 0.69 a year ago. The provision for the quarter was $3 million, and as you know, it's difficult to project CECL modeling, but right now, my outlook is similar provisioning for the remainder of 2023. A little bit about capital. Capital remains at very strong levels, and it continues to grow. Stock and purchases were modest at 270,000 shares during the current quarter. They were completed at about $15 per share. That's a good 20% below the current stock price. And with our stock still trading today below tangible book value at what we believe is a significant discount for long-term value, we plan to continue that program at a similar pace for the duration of 2023. Our dividend, which was increased last quarter, quarters EPS. So we have a good cushion with stock repurchases. And before we get to questions, I'll turn it over to Frankie again.
spk08: Thanks, Bill.
spk06: In summary, despite the ever-changing environment and the headwinds being faced by the industry, we remain committed to our long-term strategic priorities. As we have in many prior cycles, ConnectOne's deep, experienced team continues to remain focused on serving our clients, building a best-in-class team, and creating long-term value to our shareholders. We're confident that our commitment to improving and building upon our distinctive operating platform and maintaining our people-focused mission will allow us to not only remain resilient, but to take advantage of the unique opportunities ahead. We look forward to sharing our continued progress in the quarters ahead, and with that, we're happy to take your questions. Operator?
spk08: Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, Please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Michael Perito with KBW.
spk03: Hey, good morning, guys. Thanks for taking my questions. Bill, just a quick clarification. The 5% expense growth, what's the period of time on that? Is that an annual 23 number? Is that for the back half of the year, next year?
spk05: I'm sorry if I missed that, but I didn't hear the... Well, I would say it's for the next couple of quarters. And, you know, we'll see how things are going on the revenue side before we give further guidance for 2024. Okay, so 5% growth off of... Annualized growth. annualized. So divide that by four for a sequential number.
spk03: Got it. Perfect. All right. Thank you for that. And just curious about behind that, you know, I imagine you guys mentioned it. I think Frank mentioned it, a pair of remarks you mentioned in the release. It sounds like there's still opportunities around all the dislocation in the local market here. Frank, can you maybe just go a layer deeper on that? You know, I mean, have you started I feel like there's always kind of two iterations of that type of disruption. There's the initial wave, then people, then there's the second wave. I mean, where do you think we are in that process? And what are the types of talents that you guys are looking at? I mean, I imagine there's a lot of stuff you're not looking at as well or not interested in. Just curious if you could spend a minute on that.
spk06: Yeah, I probably wouldn't spend any time on what we're not interested in, but I would tell you that I think we're in between that first phase and second phase. Certainly a lot of people are still shell-shocked by some of the changes that, you know, some of the turmoil that erupted in mid to late March. And there are folks that are still trying to figure out, you know, where they want to go, what they want to do, or how they want to do it. I think there is the second wave forming, which are people that have been either displaced or have defaulted to other organizations and finding out that it's not so great there. And so they're seeking out someplace that resembles home to them. We're taking advantage of both of those, on top of which there's all the opportunities in the marketplace relative to the M&A that's occurred in our market, which is really driving a lot of people out of some of these larger size regional banks and into places that more resemble, you know, a place where they can get business done, where they can actually shake hands with a client and have meaningful dialogues and be able to be seen as a decision maker. So as far as where we're seeing opportunities here, what we're taking advantage of, clearly we're beginning to see the transformation of our CNI operation here, which has been a long time in building, but we keep getting really great talent there. And it's in all parts of that bucket, but it's also allowing us to expand our reach into other adjacent markets that are close to where we are today. So we're really excited about some of the opportunities that we've been able to pick off that I don't know that we, at any other time, we'd have been able to do so. And that's why we're speaking up about the expenses where everybody's talking about layoffs and cost containment and this and that. We actually see it going the other way. We see that this is the time to double down. get the best talent that we can on board, and we think that's going to be net positive over any more time horizon.
spk03: That's helpful. Maybe a follow-up on that for Liz, just on the SBA side. Can you remind us the size of that team today and maybe just some near-term expectations around origination, growth? I mean, that was a nice line item this quarter for you guys. Just curious where that could trend over the next few quarters here.
spk01: Yeah, we have a very good pipeline ahead of us. The team is about 10 people. There's probably four business development slash originators on that team and the rest is support. But we're remaining optimistic for that line of business. So we're getting in front of some nice deals there. And of course, we're also looking at deals that we're saying no to. But primarily, the loans that we have in that pipeline are pretty strong.
spk03: okay I did just a decent run rate was based on the pipeline and I'm sure can move around a little but yeah Mike this is this is Bill I pay a minimum of $500,000 and possibly up to $750,000 and that's just for this year and then we'll finish this year okay okay yeah perfect thanks and then just last one for me then I'll step back just Frank I apologize if I I missed this but I was wondering if you could expand a little bit more just on the dynamics of when kind of a resumption of balance sheet growth makes sense for you guys. And what are the key kind of contributors to that decision? Is it macro? Is it pipeline levels? Is it incremental spread? All the above. Just curious how you guys think about that. If you can give us some expanded thoughts, that'd be great.
spk06: When I look at it, what I see is that interest rates and Fed policy have definitely dampened demand. And so we see a lot less purchase activity, we see a lot less business combination, we see a lot less of the things that generate the types of business that we like to be involved in. So I would say half of why there's a slowdown in our ability to put on new and more assets to generate balance sheet growth is macro. On the other side, certainly when we start to look at credit metrics and what makes sense for us to do and where we want to put our focus, again, there's just less demand for or less initiative on our part to go after certain types of business and certain lines of business. Our pipeline actually is surprisingly pretty strong, but for the most part, it's replacing existing business that's coming off just a natural cycle. And I do think as the Fed starts to loosen up a little bit, as people start to get more comfortable with where the rate environment actually is, and as the economy in general just, I hate to use the word rebound because I don't really think it's that bad, but as the economy starts to move into its next phase, I do think we're going to see a natural increase in demand. And so we should start to see some asset generation, along with deposit generation. I think the two things are going to come hand in hand because the Fed takes its foot off the accelerator relative to the interest rate increases and the quality of tightening. I think we'll start to see deposits start to flow back in, and I think we'll see demand for business-type loans increasing again.
spk05: Of course, we always keep an eye on spreads and profitability, so You know, just like in the past, we're not going to chase deals based on pricing. So, you know, how aggressive the competition also factors into how large a growth rate we have.
spk03: Yeah. Yeah, that all makes sense. Thank you guys for taking my questions this morning. I appreciate the color.
spk08: Great, Mike. Great, Mike.
spk03: Thank you.
spk08: And the next question comes from Daniel Tamayo with Raymond James.
spk04: Thank you. Uh, good morning guys. Um, maybe just, uh, maybe just, uh, first on the, uh, securities portfolio, I mean, you're kind of, it's a similar question to the loan growth, but you're, you're letting that, uh, come down a little bit over the last few quarters. Uh, how, how far are you comfortable letting that come down before you, you want to start providing for, uh, for, uh, for some additional securities again?
spk05: You know, we, we, We try to keep it at a certain level of total interest earning assets. I think at the max, it was probably around 10%. It's gone down to where it is today at 8%. So it's not that big a number either way for us. But for now, probably flat. I wouldn't want to see it go down too much, just from an unbalanced sheet liquidity perspective.
spk04: OK. Thanks, Bill. And then maybe just to dig in a little bit on the margin comments that you had, I think you said no more than single-digit pressure is what you're expecting from here. I guess putting aside the potential for change in the yield curve or any kind of cuts, if we stay relatively flat from this level, how do you think that's kind of the most likely? third quarter and then relatively stable after that or more volatile?
spk05: I hate giving exact projections on net interest margin, but it's hard to say right now that there couldn't be any more compression because there continues to be competition on the deposit side. But the structure of the way assets and liabilities are repricing right now, I'm looking at a a margin that's maybe just a little bit lower than where it is today, where it would flatten out.
spk04: Okay. All right. I appreciate that. Thanks for taking my questions. Thank you.
spk08: Thank you. And the next question comes from Frank Sciarraio with Piper Sandler.
spk09: Good morning. Bill, I just want to make sure I heard correctly. On the new loan funding, it sounds like you said 8% is where the pipeline is. Was that right?
spk05: Yes, that is right.
spk09: We've been booking loans. What is the makeup of that? Is that in terms of CNIs, stabilized Cree construction? What's mostly in that number?
spk05: A big portion of CNI is trying to mention that we've had some good growth in CNI. Even though the loan portfolio is flat, we had some good growth in CNI. So that's what's driving both some of the rate, which is a good rate to put loans on at, and also our deposits.
spk09: Okay. And I just wondered if you could just maybe talk a little bit more about um the the area of the uh the market you guys are in terms of cni like what you know the average size of loans the the the geography that that drove that uh growth in the quarter or the mix shift in the quarter um you know is there generally real estate collateral as well um in there i'm just kind of curious and get a little more color on um on the cni growth in the quarter
spk06: Yeah, I think it's a little bit of everything you just said. So it's predominantly within our market footprint, you know, clearly the New York metro market. It is loan sizes anywhere generally from $3 to $15 million in size. Mostly businesses. There is some real estate involved where there's an unoccupied building involved in particular, whether it's manufacturing or something else that's going on. here in the northern New Jersey market or in the Long Island market. But mostly it's just pure C&I. It's business lending for a variety of different reasons. It's very diversified amongst many different segments that I like a lot. But all pretty common in that they're mostly family-owned businesses. Businesses have them all the time. And the other common denominator, these are mostly clients that we probably would have never seen before but for all the destruction that's going on where they either don't have a bank anymore or are really dissatisfied with the changes in the bank that they're at because of either a merger or some of the turmoil from mid-March.
spk09: Okay. All right. That's helpful. Bill, in your sort of, I guess, soft margin guidance or thoughts on margin going forward, does that, I guess, would include some continued mix shift into CNI from Cree? And just wondering, I don't know, if you can give any sort of thoughts on how much, you know, we're talking in terms of CNI growth or mix shift through the end of the year that kind of lines up with your, you know, low single or whatever it was, single digit margin contraction from here.
spk05: I'll try to give you an exact answer, but it's not that great in terms of mix in the entire portfolio. It probably adds just a couple of basis points in terms of margin. It's not the real driver. The real drivers are that the non-interest bearing demand is leveling off and that we're seeing less pressure on the deposit pricing side because we raised prices earlier and had more compression than others early on in the cycle.
spk09: Okay. So yeah, it's not a big driver, but just curious, you know, what are you thinking? Make sure, uh, back half of the year. Sorry if I missed it.
spk05: Um, in terms of, uh, you know, potential growth, maybe just a couple of percent on the pie chart.
spk09: Okay. Um, and then just, just, uh, lastly on efficiencies, um, you know, as we think about you guys have always been a very efficient bank, obviously. Um, and just given what the fed's done and, and, and the contraction and margin, you know, you have efficiency ratios now above the 50% mark. In your mind, do you think you just need to get back to more normalized margins to get back below that 50% range, particularly as you look at further investments? Is that the best way to think about it, or how should we think about it?
spk05: Yes, you know, the banks that were at 50 are now at 60. We were at 40, we're at 50. The banks that were at 50 are now at 60. The thing that's constant, though, is the non-expenses or percentage of assets. And if you analyze peers on that basis, you'd see we were one of the best. And that's sort of holding constant. So based on that number, if we got the margin back up to 340 or so, I think we'd be back on that efficiency level of, you know, 40% or so.
spk09: Gotcha. Okay, great. Thanks for all the color. Sure. Thanks, Randy.
spk08: Thank you. And once again, please press star then one if you would like to ask a question. And the next question comes from Matthew Breeze with Stephen Link.
spk07: Hey, good morning. Morning, Matt. Hey, Matt. Hey, Bill. You know, I sense some cautious optimism on the demand deposit front and stability in the mix of deposits. Has that held up so far in July? Are you seeing continued stability?
spk05: It's... It leveled off completely in the second quarter, and then I saw a little bit very early in July. And so it's hard to tell right now whether or not, you know, we're continuing to see demand deposits fall. You know, usually what happens is what is happening for other banks as well. So I wonder what others are experiencing. But my belief is that it's certainly leveling off compared to the speed that it was declining earlier in the year.
spk07: Okay. And then I appreciate all the NIM commentary. Maybe just give us some update on the NII outlook. It's been coming down for a couple of quarters, you know, for obvious reasons, deposits and rates. Is this a four in your view, or are we near a four?
spk05: Well, in terms of NIM, it's the same kind.
spk07: Net interest income.
spk05: Yes, because... Net interest income, yes, because if we have...obviously, if we have flat loans and there's market compression, net interest income is going to go down. That's just math. But I think we're getting close to margin flattening out. And I do...even though we're talking about flat growth, we'll probably have a small amount of growth of loans over the course of the year. So that's for this year. Next year is another story. Probably get back, even if we're not back to very large amounts of growth, it'll probably be in the single digits, and we'll start seeing winding margin again. So I hope that helps you with your models.
spk07: Yeah, yeah, it does. Maybe touching on fee income, the gain on sale items, and I believe that's tucked within other income, it's been volatile.
spk05: Right.
spk07: what are, what is the breakdown between both fly SBA other items? And is this quarter's $3.4 million rate something we can work off of and, and grow off of?
spk05: Yeah, my best guess would be, yes, that's something we can, we can grow off of, um, in terms of the SBA increasing a little bit and both fly as well. So, um, Boat flight generates about a million a year in revenue, and right now we're on a $500,000 a quarter pace on SBA. We did have some CRE sales, and that was causing the volatility that I was aware of. It's been a tough market for that right now, but something that we probably will pick up again. There are a bunch of banks in this area we have relationships with that look to us for products. And so I feel good about this being the bottom and that we can see growth from here.
spk07: Okay. Appreciate that. Last one, Frank. I was hoping for some color on the late June interagency guidance around CRE accommodations and workouts that basically the regulators are saying we acknowledge commercial real estate headwinds. Please work with your customers. What does that mean in practice? What do you think the tools are that are at your disposal, and how does this pan out from a disclosure standpoint in your view?
spk06: I think that just from a high-level perspective, anything that we've seen has really been the delta between what the contractual change and the obligation of a loan is relative to its interest rate, and what is a market rate today is where the change has occurred. I don't want to give anyone the idea that we've done anything for anybody to go below what the market rate should be at this moment in time. But if you have a contractual obligation, you know, at 250 or 300 basis points off some index, and that's way outside of market, then obviously, you know, we're going to try to make an accommodation. I can tell you, though, that it's been pretty... Few and far in between. Most folks are just happy that we're renewing the loan at whatever the contracted rate was. But those that really aren't and want to seek out a better alternative somewhere else, there's options to do that. And in very few cases that we had to actually sit down with the borrower and say, hey, we know your rate is supposed to contractually change to X, but we're willing to take it to wide and, you know, get you through the next cycle. But my comments were that if we need to do that and it makes good economic sense, we're going to do that. We're a client-focused bank. That's the non-technical answer.
spk05: Matt, I don't know where I come out of this, whether it was constructive or not, that statement by the regulators. You know, the accounting for modifications changed. So that already happened. And that's a good thing. Because if you modify a loan and help a borrower and it continues to perform, everybody wins. The borrower, the bank, and our shareholders. So those are good things. And it shouldn't sit on your books as a non-performing asset, if you will. So we still have disclosure for loans that we modify during a period that are troubled. But it doesn't last forever, as long as that loan continues to perform. I'm not really sure how constructive it was. It was like no big deal. Obviously, we don't want to give it away, but in the cases where it's needed, absolutely needed, that's a tool we've always had and will use.
spk07: Okay, understood. I appreciate that. Maybe just as a follow-up, in the case where you do have maybe a bad set of circumstances, a nasty rate reset combined with a nasty cap rate reset, Are you finding that your clients, your borrowers are willing to put additional cash and equity into the deals, you know, a so-called cash and refi to keep the property in their pocket, so to speak?
spk06: Yeah, Matt, I would say definitely that is the case. I think in the cases where we have sat down with that type of borrower that has You know, they got caught up in a transitional property where things didn't work out exactly the way they wanted, and now the rate is resetting. They've been more than willing to give us personal guarantees, other collateral, potential cash into the deal, whatever it's going to take to right-size the loan. As you can see by our credit metrics, we have not run into the buzzsaw of a problem loan in that regard. I think we are reasonable here at Connect One Bank in working with our clients, and I think the clients, because of the quality of our client base, has been reasonable in working with us.
spk07: Great. Well, I appreciate all the color. Thank you for taking my questions.
spk08: Thank you. Thank you. And this concludes the question and answer session. I would like to return the floor to management for any closing comments.
spk06: I want to thank everyone again for their time today and certainly look forward to speaking with you all again during our third quarter conference call. So have a nice day. Enjoy the rest of your summer. Thank you again.
spk08: Thank you. The conference is now concluded. Thank you for attending today's presentation. May others connect your lines.
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