ConnectOne Bancorp Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 9 speakers on the call.

Operator

Morning, and welcome to the ConnectOne Bancorp, Inc. 2nd Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded.

Operator

And now I'd like to turn the conference over to Sue Vancia. Please go ahead, ma'am.

Speaker 1

Good morning, and welcome to today's conference call to review Results for the Q2 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 ConnectOne Bank and Steve Permiano, EVP and Treasurer, I'd also like to caution you that we may make forward looking statements during today's conference call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings. The Forward looking statements included in this conference call are only made as of the date of this call and the company is not obligated to publicly update or revise them.

Speaker 1

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 GAAP or schedule, which has been filed today on Form 8 ks of the SEC and may also be accessed through the company's website. I will now turn the call over to Frank Orentino. Frank, please go ahead.

Speaker 2

Thank you, Cia, 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 credit policy, continues to demonstrate strong and stable qualities 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 I'd like to summarize some of the key operating highlights from our quarter and then Bill will, of course, give us some detail in 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 C and I.

Speaker 2

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 prudent philosophies and hedging strategies have seen a minimal negative impact Tangible common equity increased to 9.19% as of June 30, which remains well above And our tangible book value per share increased for the 13th consecutive quarter to $22.34 and is up 40% over that period. Our net interest margin did compress 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 DDA trends seem to stabilize at their current levels during the quarter, at least for the time being. Bill, of course, will discuss a little bit more about this in detail later.

Speaker 2

Our credit quality remains excellent with delinquencies as Percentage of total loans remain near 0 at just 0.04 percent of total loans. This reflects high credit standards, Well diversified portfolio and more importantly, our relationship based client philosophy. In regard to our commercial real estate portfolio, As we mentioned in previous calls, we have 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, it totals about 5% of our total portfolio. That portfolio is performing well and is all pass through.

Speaker 2

Taking a look now at our multifamily portfolio, historically, our loans were underwritten with prudent standards, including I internally determined DSCRs and low OTVs. 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 of all, only about $60,000,000 of the multifamily loans will experience significant Pricing during the remainder of 20 3 and $190,000,000 in the following 12 months. Of those, a large majority are financially Long long time clients of the bank includes very limited risk.

Speaker 2

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 So overall, while our loan 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 C and I 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.

Speaker 2

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 For example, we recently launched our partnership with Mandeville 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 BoeFly. And during the quarter, we continue to enhance its infrastructure and new users and increase our clients' overall workflow efficiency and drive revenue.

Speaker 2

Additionally, I'm pleased to share that our SBA lending platform continues to gain traction It is accelerating our non interest income growth. We recorded $500,000 in gains during the Q2 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 prudently manage expenses.

Speaker 2

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 somewhat different message than you're hearing from other banks, many of whom are cost cutting or implementing expense We believe the current environment presents particular opportunities to invest in supporting ConnectOne'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 'twenty three, although the industry is facing headwinds, we firmly believe that ConnectOne'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

Speaker 3

it over to Bill. Bill? Okay. Thanks, Frank, and good morning. Thank you all for joining us today.

Speaker 3

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.

Speaker 3

And that's true whether you analyze the trends on a point to point On an average balance basis. Now we did increase brokerage by more than $300,000,000 during the latter part of the Q1 and that was To increase on balance sheet cash liquidity, but we have largely wound that down during the Q2. So that contributed to a decline in Aggregate deposits sequentially, but not client deposits, which are up. In terms of overall liquidity, we are now Covering our uninsured and un collateralized 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.

Speaker 3

We did experience another 19 basis points of sequential compression, But there's good news here and that the low point for the margin actually occurred in April, while May June saw some margin expansion. Several moving parts here. 1st, 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 the 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.

Speaker 3

As far as the NIMs for the remainder of 2023, there are factors working in our favor and some against. On the positive side, Our projected new loan funding rates are approximately 8.2% and are expected to replace loans going off the books at rates below 7. There's about $300,000,000 in turnover per quarter that we project and that $300,000,000 in turnover excludes any resets. Next, yesterday's Fed rate increase will likely help the margin albeit slightly. And finally, the non niche Brandon Mann appears to be flattening out.

Speaker 3

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 continuing repricing of CDs. In this regard, we have about $400,000,000 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.

Speaker 3

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 And longer term, we are in a liability sensitive position and would expect material margin expansion When that inverted yield curve returns to a traditional shape, we've run some preliminary modeling and so the 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 interest margin, which over the course of a complete cycle would bring us back to our 3.40%, 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-up our longer term strategic review. We will capitalize on opportunities for talent And we'll continue to invest in technological improvements.

Speaker 3

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. Now 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 On the non interest income front, we remain optimistic about our growth prospects, especially given the momentum from SBA. We reported $500,000 of gains this quarter and expect that number to increase in the coming quarters.

Speaker 3

And BoeFly 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 of just 4 basis points Total loans at quarter end and net charge offs for the quarter were just 5 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.

Speaker 3

The provision for the quarter was $3,000,000 and as you know, it's difficult to project CECL modeling, but right now, my outlook is similar provisioning for the remainder of 20 A little bit about capital. Capital remains at very strong levels and it continues to grow. Stock repurchases were modest at 270,000 shares during the current quarter. They were completed at about $15 per share. It's a good 20% below And with our stock still trading today below tangible book value and what we believe is a significant discount for long term value, we plan Continue that program at a similar pace for the duration of 2023.

Speaker 3

Our dividend, which was increased last quarter, Still represents just a 33% payout even based on this quarter's EPS. So we have a good cushion for stock repurchases. And before we get to questions, I'll turn it over to Frank again.

Speaker 2

Thanks, Bill. 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 We'll allow us to not only remain resilient, but take advantage of the unique opportunities ahead. We look forward to sharing our continued progress in the quarters ahead.

Speaker 2

And with that, We're happy to take your questions. Operator?

Operator

Yes. Thank you. At this time, we will begin the question and answer session. At this time, we will pause momentarily to assemble the roster. And the first question comes from Michael Perito with KBW.

Speaker 4

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?

Speaker 4

Or is that For the back half of the year, next year? I'm sorry if I missed that, but I didn't hear the call.

Speaker 3

Well, I would say it's for the next couple of quarters, And we'll see how things are going on the revenue side before we give further guidance for 2024.

Speaker 4

Okay. So 5% growth off of the

Speaker 3

So annualized. Annual. Annualized. So divide that by 4 for a sequential number.

Speaker 4

Got it. Perfect. All right. Thank you for that. And just curious about behind that, I imagine you guys mentioned it.

Speaker 4

I think Frank mentioned in his prepared remarks, you mentioned in the release. 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? I mean, have you started I feel like there's always kind of 2 iterations of that type of disruption. There's the initial wave, then people then there's the second wave.

Speaker 4

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.

Speaker 2

Yes. 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 some of the turmoil that erupted in Mid to late March. And there are folks that are still trying to figure out where they want to go, what they want 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.

Speaker 2

And so they're seeking out Some place that resembles home to them. We're taking advantage of both of those. On top of which, All the opportunities in the marketplace relative to the M and 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 a place where they can get business done, where they can actually So As far as where we're seeing opportunities here, what we're taking advantage of, clearly, we're beginning to see Transformation of our C and I operation here, which has been a long time in building, but we keep adding really great talent there. 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 I don't know that we at any other time we'd have been able to do so.

Speaker 2

And that's why we're speaking up about the expense Everybody is 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, We get the best talent that we can onboard and we think that's going to be net positive over any longer term time horizon.

Speaker 4

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 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

Speaker 5

Yes. We have a very good pipeline ahead of us. The team is about 10 people, there's probably 4 business developmentoriginators on that team and the rest of 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.

Speaker 5

But primarily the loans that we have in that pipeline are pretty strong.

Speaker 3

Okay. And is this a decent

Speaker 4

run rate, Liz, based on the pipeline? I mean, I'm sure it can move around a little

Speaker 3

Yes, Mike, this is Bill. I'd say a minimum of $500,000 and possibly up to $750,000 and that's just for this year and then we'll Okay.

Speaker 4

Okay. Yes, perfect. Thanks. And then just last one for me, then I'll step back. Just trying to get I apologize if 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.

Speaker 4

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 would be great.

Speaker 2

Mike, 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 It's a combination.

Speaker 3

We see a lot of the

Speaker 2

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 businesses, 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 due to just the natural 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.

Speaker 2

And as the economy in general just I hate to use the word rebound, because I don't really think it's 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 So asset generation along with deposit generation, I think the 2 things are going to come hand in hand, because the Fed Just put off the accelerator relative to the interest rate increases and the qualitative 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.

Speaker 3

Of course, we always keep an eye on spreads and profitability. So just like in the past, we're not going to chase deals based on pricing. How aggressive the competition also factors into how larger growth rate we have.

Speaker 4

Yes. That all makes sense. Thank you guys for taking my questions this morning. Appreciate the color.

Speaker 2

Great, Mike. Thanks, Mike.

Operator

Thank you. And the next question comes from Daniel Tamayo with Raymond James.

Speaker 6

Thank you. Good morning, guys.

Speaker 3

Good morning,

Speaker 6

Maybe just first on the securities portfolio, I mean, you're kind of is it kind of similar question to the loan growth, but you're letting that Come down a little bit over the last few quarters. How far are you comfortable letting that come down before you want to start providing For some additional securities again?

Speaker 3

We try to keep it at a certain level Of total interest earning assets, I think at the max it was probably around 10% and 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, Okay. Just from an on balance sheet liquidity perspective.

Speaker 6

Okay. 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 kind of the most 3rd quarter and then relatively stable after that or more volume I

Speaker 3

hate to be exact Projections on net interest margin, but it's hard to say right now that there couldn't be any more compression because there used 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 margin that's maybe just a little bit lower than where it is today, where it would flatten down.

Operator

Okay.

Speaker 6

All right. I appreciate that. Thanks for taking my questions.

Speaker 3

Thank

Operator

you. And the next question comes from Frank Schiraldi with Piper Sandler.

Speaker 7

Good morning. Just on the Bill, I just want to

Operator

make sure I heard correctly

Speaker 7

on the new loan funding. It sounds like Said 8% is where the pipeline is. Was that right?

Speaker 3

Yes, that is right.

Speaker 7

What is the makeup of that? Is that in terms of C and I, Stabilized Cree construction, what's mostly in that number?

Speaker 3

It's a big portion of C and I, as Frank mentioned that we've had some good growth in C and I. Even though the loan portfolio was flat, we had some good growth in C and I. So that's what's driving, both some of the rate, which is good rate to put loans on that and also our deposits.

Speaker 7

Okay. And I just wondered if you could just maybe talk a little bit more about the area of The market you guys are in terms of C and I, like what the average size of loans, the geography that drove that Growth in the quarter or the mix shift in the quarter, is there generally real estate collateral as well In there, just kind of curious and give a little more color on the C and I growth in the quarter.

Speaker 3

Yes. I think it's

Speaker 2

a little bit of everything you just said. So it's predominantly within our market footprint, clearly the New York It is loan size was anywhere generally from $3,000,000 to $15,000,000 in size. Mostly businesses, there is some real estate involved where there's an owner occupied 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 and I, it's business lending for a variety of different reasons. It's Very diversified amongst many different segments, I like a lot, but all Pretty common in that there are mostly family owned businesses, businesses. And the other common denominator, these are mostly Clients that we probably would have never seen before, but for all the disruption that's going on where they either don't have a bank anymore or I'm 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.

Speaker 7

Okay. All right. That's helpful. And then, 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 C and I from Cree. And just Wondering, I don't know if you can give any sort of thoughts on how much we're talking in terms of C and I growth or mix shift Through the end of the year that kind of lines up with your low single or whatever was single digit margin contraction from here?

Speaker 3

I'll say the exact answer, but it's not that great in terms of mix in the entire portfolio And probably add 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.

Speaker 7

Okay. So yes, it's not a big driver, but just curious, what do you think in mix shift back half of the year. Sorry if I missed it, in terms of potential growth in C and I.

Speaker 3

Maybe just a couple of percent on the pie chart.

Speaker 7

Okay. And then just lastly on efficiencies. As we think about, you guys have always been a very efficient bank, And just given what the Fed's done and the contraction in margin, 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?

Speaker 3

Yes. The banks that were at 50 are now at 6. 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 expense as a percentage of assets.

Speaker 3

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, We got the margin back up to 3.40 percent or so. I think we'd be back on that efficiency level of 40% or so.

Speaker 7

Got you. Okay, great. Thanks for all the color.

Speaker 3

Sure. Thanks, Craig.

Operator

Thank you. And the next question comes from Matthew Breese with Stephens Inc.

Speaker 8

Hey, good morning.

Speaker 3

Good morning, Matt. Hey, Matt.

Speaker 8

Hey, Bill. 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?

Speaker 3

It's got it leveled off completely in the Q2 and then I saw a little bit And very early in July. And so it's hard to tell right now whether or not we're continuing to see demand deposits fall. Usually what happens, 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.

Speaker 4

Okay.

Speaker 8

And then I appreciate all the NIM commentary.

Speaker 2

Yes.

Speaker 8

Maybe just give us some update on the NII outlook. It's been coming down for a couple of quarters for obvious reasons, deposits and rates. Is this a floor in your view or are we near a floor?

Speaker 3

In terms of net interest income?

Speaker 8

Net interest income?

Speaker 3

Yes, because net interest income, yes. Because If we have obviously, if we have flat loans and there's market compression, then just think of it's 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.

Speaker 3

And 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 will probably be in the single digits and we'll start seeing widening margin again. So I hope that helps you with your models.

Speaker 8

Yes, yes, 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. Right. What is the breakdown between BoeFly, SBA, other items? And is This quarter's $3,400,000 rate something we can work off of and grow off of?

Speaker 3

Yes. My best guess would be yes. That's something we can grow off of in terms of the SBA increasing A little bit and Bowfly as well. So, Bowfly generates about $1,000,000 a year in revenue. And right now, we're on a $500,000 a quarter pace on SBA.

Speaker 3

We did have some CRE sales And that was causing some volatility, that I was aware of. It's been a tough market for that right now, but something that we Probably we'll pick up again. There are a bunch of banks to this area we have relationships with that book to us For product and so I feel good about this being the bottom and that we can see growth from there.

Speaker 8

Okay. Appreciate that. Last one, Frank. I was hoping for some color on the late June inter agency 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?

Speaker 8

What do you think the tools are that are at your disposal? And how does this pan out from a disclosure standpoint in your

Speaker 3

view? Yes.

Speaker 2

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 the 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. If you have a contractual obligation at 250 or 300 basis points of some index and that's way outside of market, then Obviously, we're going to try to make an accommodation. I will tell you though that it's been pretty Few are in between. Most folks are just happy that we're renewing loan Whatever the contracted rate was, but those that really aren't and want to seek out a better alternative 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 Y to get you through the next cycle.

Speaker 2

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 That's a non technical answer. I don't

Speaker 3

know where I come out of this, whether it was constructive or not, That statement by the regulators, the accounting for modifications changed. So That already happened and that's a good thing because it doesn't if you modify a loan and help a borrower and it continues to perform, everybody wins, 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 modified during the period that are troubled, but it doesn't last forever as long as that loan continues to perform. So I'm not really sure how constructive it was.

Speaker 3

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.

Speaker 8

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, a so called cash and refi to keep the property in their pocket, so to speak.

Speaker 3

Yes. Matt, I would say

Speaker 2

definitely that is the case. I think In the cases where we have sat down with that type of borrower that has maybe got caught up in a transition 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 Lateral, 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 buzz saw of a problem loan in that regard. So I think we are reasonable here at ConnectOne Bank in working with our clients and I think Clients because of the quality of our client base has been reasonable in working with us.

Speaker 8

Great. Well, I appreciate all the color. Thank you for taking my questions.

Speaker 3

Thank

Operator

you. And this concludes the question and answer session. I would like to return the floor to management for any closing comments.

Speaker 2

Well, I want to thank everyone again for their time today and certainly look forward to speaking with you all again during our Q3 conference call.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Speaker 1

Goodbye.

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Earnings Conference Call
ConnectOne Bancorp Q2 2023
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