Q2 2022 ConnectOne Bancorp Inc Earnings Call
[music].
Greetings and welcome to the connect one Bancorp, Inc. Second quarter 2022 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
And as a reminder, this conference call is being recorded.
It is now my pleasure to introduce <unk> Chief brand and innovation officer. Thank you Sir you may begin.
Good morning, and welcome to today's conference call to review <unk> results for the second quarter of 2022 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, the results as well as notice of this conference call.
On a listen only basis over the Internet were distributed this morning in a press release that has been covered by the financial media.
At this time, let me remind you that certain statements and assumptions in this conference call contain or based upon forward looking information and are being made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
Such forward looking statements are subject to numerous assumptions, uncertainties and known or unknown risks, which could cause actual results to differ materially from those anticipated.
Risk factors are more fully discussed in the company's filings with the Securities and Exchange Commission. The forward looking statements included in this conference call are only made as of the date of this call and the company is not obligated to publicly update or revise them. In addition, certain terms used in this call are non-GAAP financial measures reconciliations of which are.
<unk> in the company's earnings release.
And accompanying tables or sketch.
Schedules, which has been filed today on form 8-K with the SEC.
Also accessed through the company's website at IR Dot connect one bank dot com. Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information I will now turn the call over to bring certainty now Frank. Please go ahead.
Thank you Sarah and good morning, everyone. We appreciate you joining us here today I thought before we before getting started though I'd like to take a moment to review our longer term track record, which of course, we are very proud of.
<unk> performance metrics are consistently top tier in the industry. Our net interest margin has expanded since the early stages of the pandemic.
Yes.
Excuse me.
Our net interest margin expanded since the early stages of the pandemic versus contraction for most of the industry. Our tangible book value per share continues to increase now for the ninth straight quarter, reflecting our core profitability and sound balance sheet management, our organic growth has consistently been above 10%.
We've expanded both geographically and through new verticals, and we remain disciplined to our commercial banking business model and focus on the lines of business, where connect one has expertise and competitive advantages.
We augmented our organic growth with opportunistic value enhancing M&A and our Fintech acquisition. Both lie is gaining momentum and is poised to create significant value.
Our client first tech forward culture has led to strong performance and increased market share through various business cycles and finally in our view with our track record of success, we are and remain a very compelling investment opportunity.
With that we're exceedingly pleased with connect ones all around performance in the second quarter highlighted by significant organic balance sheet growth and continued record performance metrics.
Annualized loan growth was 17%, while noninterest bearing demand grew by an annualized 20%.
<unk> as a percent of assets was 228% exceeding 2% for the eighth consecutive quarter return on assets was in excess of one 5% and return on tangible common equity was in excess of 15%. Our net interest margin has continued to expand and our efficiency ratio remains.
Below 40% and finally, our tangible book value increased again this quarter to almost $21 a share.
These results are a testament to the success of our client centric culture and relationship focused origination franchise. The investments we continue to make in our team infrastructure and Digitization are paying dividends as we again saw a record loan fundings this quarter.
We continued double digit our continued double digit growth illustrates both the strength and the diversification in the markets. We serve bolstered by recent acceleration of hires the lifting of teams and expansion of our geographic reach origination.
Origination metrics were favorable weighted average origination yields were in excess of four and three quarter percent and that number is now well in excess of 5% heading into the third quarter credit metrics were sound with strong ltvs and conservative debt service coverage ratios, reflecting very conservative underwriting.
This quarter's growth was higher than we initially guided but it does not come as a complete surprise to us we had a robust pipeline entering the quarter loan growth across the industry is off our originations were diverse spread amongst all segments and markets and notably C&I growth <unk>.
<unk> momentum this quarter with additional synergies driven through both light.
Looking ahead, the loan pipeline remains strong with increasing spreads and rates.
Our Florida team success also exemplify that connect ones relationship focused model can be a clear differentiator in these in these other markets.
Strong demand and core deposit growth there with the aggregate loan and deposit origination protect projected to be upwards of $200 million by year end and with the hiring of additional staff and the opening of our permanent office in West Palm, We expect even further momentum.
Turning to deposits, we expect competition to continue to increase however, connect one is well positioned to adapt to changing market dynamics, our client focused model is.
A proven record of generating core deposits to keep pace with loan growth.
We also have a number of tech initiatives that are geared toward augmenting that deposit growth to that end. We're excited to announce a partnership with mantle to enhance the bank's deposit origination platform. This partnership allows us to leverage technology to expand our reach and supporting consumer small business.
And commercial clients, while optimizing our workflows and each of these improvements allow connect one to build frictionless client experiences and processes that support continued scale and efficiency.
As a reminder, last quarter, we announced the partnership with Nimbus to launch a new <unk> vertical on the Nimbus platform. This partnership provides connect one the opportunity to expand into new business verticals, while leveraging lean and nimble cloud based tools and ultimately create a new Avenue to drive deposits implementation has begun on both.
These fronts. So you can expect to hear more about this at the end of the year.
Onto both why our Fintech subsidiary, which continues to shine.
The platform continues to generate noninterest income in fees and revenues growing as franchise or adoption is running strong the franchisee market is ripe with opportunities and we continue to explore avenues to expand that platform under the leadership of Mike <unk>. Both lie is not only expanded its core business. It is also.
<unk> helped spawn new verticals within connect one our SBA unit is now generating respectable volume and our franchise lending group is seeing great deal flow in the franchise or lending opportunities are providing high quality clients to the bank expect to hear more about this as the year progresses.
Shifting to the macro environment.
We're certainly conscious of the possibility of a potential recession, which may lead to some loan stress across the industry.
Just want to remind everyone. We operate in some of the strongest markets in the country and so far our clients appear to be in sound financial condition overall, nonperforming assets and delinquencies or connect one remained low and we have very limited exposure to consumer business lines, which may be more susceptible to the recent market dynamic.
X.
Before I turn it over to Bill let me just mentioned that.
We continue to attract top talent to bolster bench strength across all lines at connect one.
Capitalizing on M&A disruption, we've been very successful in adding staff in all areas of the company connect one continues to be a top choice for displaced experienced bankers and we are building for the future across all of our markets. So with that let me now turn it over to Bill Alright. Thank you Frank good morning, everyone.
I also would like to say a few words before getting started and I wanted to address head on.
Probably the two most important factors currently depressing bank stocks, including our own first and foremost is the possibility of a recession and the resulting potential impact on credit losses.
Second.
To a lesser degree is the uncertain impact continued fed tightening will have on net interest margins. So first with regard to potential recession and its impact on connect one.
The credit story connect one is excellent.
Our long track record of solid credit performance.
We've been able to produce strong organic growth, while avoiding heartburn in industries, such as New York City Office Hospitality Big box retail in New York City luxury multifamily.
Our construction portfolio was about 10% of the total portfolio. We have a particular expertise here. It provides a nice returns and losses have been virtually zero.
Immaterial amounts of consumer debt with virtually no second position retail and no credit card exposure and even our taxi portfolio is now expected to generate recoveries.
We are well reserved under Cecil with healthy total level of total coverage.
And our deep commercial origination franchise allows us to generate meaningful growth without reaching on credit pricing or terms. So all in all we believe we're in a solid position to withstand an economic downturn.
And that takes me to the net interest margin for connect one the second quarter reflected record high net interest margin it eclipsed three 9%.
<unk> three nine O metric with some extra PPP accretion and some back interest recoveries. So on a core basis I estimate we were still slightly above $3 70, still very high by historical and industry standards and moderately higher from the first quarter on that.
Our margin has continued to widen since the early stages of the pandemic, which is remarkable.
But I'm, even more proud of the fact that it remains relatively stable and we attribute that to two things first we have been proactive and reactive to anticipated an actual marketing competitive rate moves anticipating rate declines a couple of years ago and locking in longer term funding and along with that hedges to our <unk> portfolio when rates were low.
We tend to move quickly when market deposit rates start to change whether it is to improve profitability or maintain our market share.
Second and just as important our strong business development team continues to build a book of business that I believe is generally more valuable than the risk reward spectrum. The most our clients are typically willing to pay just a little bit and our service response time, while our non interest deposit growth remained strong reflecting our relationship based approach.
So that combination of organic growth and margin stability has led to a very strong performance track record, including PNR return on assets and equity tangible book value per share growth and along with those metrics are very low efficiency ratio.
Now in terms of the margin going forward again, our goal is for stability and we believe our margin will continue to be relatively stable now.
Now just speaking structurally there are asset sensitive characteristics on our balance sheet, namely 20% of the loan book is pure floating.
Another 40% is adjust the bullet resets at various times over the next three years and noninterest bearing deposits have grown and are presently a healthy 26% of total deposits.
Notwithstanding those positive attributes there is some deposit beta catch up going on impacting the entire industry, which is going to quicken. The pace of increased funding costs and of course, you have an inverted yield curve and for however that long that lasts it'll be challenge for all of us.
On a related issue the performance of connect one securities portfolio has been among the best out there we refrained from buying securities where wage rates were at the bottom we hedge what we had and the result has been just a very very slight impact to our OCI and intangible book value per share more recently, we've been buyers of securities.
Yields in excess of four to $4 75, and those are now being marked up not down.
So tangible book value share per share increased once again in the second quarter is the ninth consecutive quarter of upward movement, and it's up 10% from a year ago and by the way as a result of that we are now trading at a very low price tangible book just one two times. We continue to believe we are undervalued, we have the capital strength to retain there.
Continued stock repurchases.
Switching gears, a little I just want to emphasize some of Frank's remarks on both Leigh <unk> bread and butter, which is the referral fees on SBA loans to franchisees gained modestly as we continue to build our franchise our network, but an additional avenue for growth is in the non SBA franchisee lending space as well as the franchise or lending space.
We're making headway and that has already contributed that connects ones increase C&I originations. We're also researching avenues to sell those loans in the secondary market, but either way they bring value to us.
Now, let me move on to operating expenses adjusting for the final <unk> earn out payment was 833000 for the quarter expenses accelerated a little faster than I had previously guided you, but you should view this as a good thing is it's all related to planned additions to staff that came on board earlier than expected.
<unk> continues to be a top choice for experienced bankers displaced or disillusioned by M&A, we're building for the future and our traditional operating markets as well as an extended geographies.
For next quarter as I said, the both by earn out payments are done, but we do expect to see some more core expense increases followed by probably a flattening out in the fourth quarter. So we're going to be okay with a slight increase in our efficiency ratio, but I expect that to continue to trend downwards towards the end of the year and into 2023.
In terms of loan growth the pipeline remains strong and another five another 5% sequential quarterly growth rate as possible, but with rates rising we expect a slowdown in the fourth quarter and that trend is likely to continue for us in the industry into 2023 and with that I will turn it back over to Frank.
Thanks, Bill I have to say I'm extremely proud of all that we accomplished here in the second quarter.
We as a team continue to leverage the momentum that we've built we delivered really strong performance, which is truly a testament to the connect one team and I mean, the entire team.
We've built momentum in the technology space launching several initiatives to create more opportunities for us to enhance our shareholder value and our franchise value I got to say I feel really good about where we are and what we have the potential to do a lot of the work. We've done is beginning now to pay dividends and we've got a lot.
Got more runway ahead of us our best day, certainly lie ahead, and I'm confident we will navigate any challenges that we encounter along the way.
Look forward to updating on updating all of you on continued developments in the third quarter and with that we're happy to take your questions operator.
Thank you, Sir we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing any star keys.
One moment, please when we poll for any questions.
Our first question comes from the line of Frank <unk> with Piper Sandler. Please proceed with your question.
Hey, good morning, its actually Justin Crowley on for Frank This morning.
Just one.
Morning, So I just wanted to start so with the with the strong loan growth in the quarter.
The loan to deposit ratio sort of running at the higher end of where you guys have been recently.
Could you maybe just provide some commentary on the strong loan growth continues.
Particularly as you alluded to maybe in the third quarter seeing somewhat of a similar result.
Sort of the strategy strategies behind.
Managing that at this level or below this level as you.
Think about margin going forward.
Sure why don't I, just start with that.
The business part of it and then maybe bill can talk a little bit about what's behind that.
We connect one of always operated in and the geography above Andre percent loan to deposit ratio and it's.
Sort of bounced around between 105 and 115 or so.
It really depends on which quarter, we have stronger loan growth as opposed to others, but generally theres with the loan growth, there's corresponding deposit growth and sometimes there is timing mismatches.
And so that loan to deposit ratio may bounce around a bit but in general just about every single relationship that we're onboarding comes with the depository relationship and we're seeing that in the growth of <unk>.
Bearing demand, which is the place that we care about the most so.
And on top of that this quarter was really interesting to dive into the loan growth because a lot of it came from.
Non CRE components.
NII was a pretty big percentage. This time and so we are seeing more opportunities for onboarding deposit rich clients along with their loans as we've seen in the past now that will take some time the balance sheet big So it does take time to move any of those metrics.
We do monitor this incredibly closely and we watch for what we're doing we do price accordingly.
Relative to who brings us deposits and who doesn't.
So overall, we're pretty comfortable with where we are we'd like to see the loan to deposit ratio a little bit lower and we'll be working towards that as we move forward. Phil maybe I think Justin I think you were suggesting that a low higher loan to deposit ratio means lower margin and I don't necessarily agree with that.
The most important thing in terms of funding is building noninterest bearing demand deposits, we've been doing a good job at that in terms of the other sources of deposits. There are more market based sources deposits that we can utilize if we want to or the federal home loan bank.
Probably doesn't matter, which one so and the other aspect of the margin is.
Right, we're earning on our loans. It continues to go up I think we averaged $4 75 in the quarter.
And we're right now.
Average loan rate weighted average rental rate for this month has been over 5%. So all in all I talked to that looking for stability in the margin, where we've been operating at some of our highest levels.
If it goes down a little it's not going to be too much and I still think we can drive the returns we've driven before which includes return on assets of over one 5% and return on equity over 15%.
Okay, Great. That's helpful. Yes, no I guess I was just trying to get a sense for as you look at that loan to deposit ratio changes your thinking on <unk>.
Sort of.
Having to pass off these costs to your depositors as far as rates you're paying.
I guess sort of in that vein could you provide just maybe a little more detail.
On this new partnership with mantle, and then sort of square that with the Nimbus partnership what that does on the deposit gathering side sort of outside from the core banking functionality that I believe nimbus wall so well.
We will also bring.
Alright, so let's start with Nimbus first and work backwards Nimbus.
The new core that were bringing on for a specific purpose to stand up a particular vertical service of certain market segments, and so that'll work completely independently and we're pretty excited about the opportunity there to be able to create a bespoke solution for a particular segment of the market.
Place.
That really doesn't interact with the whole rest of the <unk> one.
Set of relationships that we have our other market segments mantle on the other hand for all the other business or the vast majority of the business. We do here at connect one will replace a variety of systems that we have here today in order to onboard new clients and be able to manage the deposit origination.
<unk>.
Product set services the way in which we reach out to clients the way in which clients can access.
<unk> products here at Quebec, one so it will transform not only the front end front end, which will make the ability to open an account pretty seamless and within minutes.
But it will also dramatically transformed the back of the house.
We will allow for a lot less friction a lot less duplication of services a lot less duplication.
<unk> location of data and better clean data for us to use going forward. So we're really excited about the idea of taking all these.
Variety of things that we've built up over the years and how we open new accounts for folks and really streamline that process, making it so much easier and especially in light of the fact that we are now in multiple markets market expansion is important to us both geographic and otherwise and so having a very high and what we think.
As the best in the business.
High end platform to digitize this entire prospect is everyone.
I care a lot about efficiency here.
Being able to eliminate duplication of services.
Is high on my.
On my checklist. So we're pretty excited about what that will bring to us going forward and that will run the gamut of just about every product that we run here at Kinect one.
Okay, Great I appreciate that and then just quickly.
On the buyback it sounds like you guys are.
There'll be the stock is pretty attractive were fairly active in the quarter.
Falling activity.
The March quarter.
Is there anything either on the growth side or just as far as macroeconomic uncertainty that could.
Sort of.
Cause you guys to take a step back.
We head into the end of the year as far as repurchases go or does the level.
Buybacks this quarter is that sort of makes sense here.
I think.
I think we I think we think we're very undervalued and it's a good buy at these levels.
<unk> of capacity.
Lot of people were hurt by the <unk>.
<unk> hit.
We don't have we didn't have that and so we've got a tremendous amount of return on equity our dividend rate. Although we've increased it is still pretty low in the dividend payout ratio is 20%. So we have capacity to continue the buyback.
Got it I'll leave it there. Thank you guys for taking my question.
Thank you. Our next question comes from Michael Perito with <unk>. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my question, Hi, Karen and Michael.
Obviously, a good kind of good results here in.
Frank I've been following your your public commentary over the last 90 days and obviously the environment, though.
<unk> just from a credit quality standpoint, I was curious, though it sounds like all your borrowers are healthy and there's kind of this <unk>.
Perception versus reality gap here, where.
Borrower seeing healthy, but youre seeing kind of retailers start to report some stuff thats concerning and I'm. Just curious as you guys kind of comb through your portfolio.
Are there any areas where.
Maybe youre more or less concerned or thinking about maybe prioritizing growth whether that be.
Commercial real estate with exposure to kind of consumer discretionary or anything of that nature. Just curious how you guys are thinking about it.
So Michael yes, so over the last 90 days, obviously I've made a lot of commentary about what I think is happening in that.
Whether or not we're going into a recession is going to wind up being semantics.
Climate is still pretty good I think consumers still have very strong balance sheets.
Businesses have good strong balance sheets, but the psychology has changed everybody's talking about interest rates everybody's talking about a slowdown everybody's talking about are we going to have work from home or is everyone going to be forced to go back to the office.
So there's clearly a change in sentiment around.
Where are we headed what are we going to look like I stand firm that yes, we're going to have a bit of a slowdown.
And I don't know if it will technically be a recession or not but I think whatever it is it will be short lived.
Theres more liquidity in the system now than there has ever been before I've never seen stronger balance sheet than I've ever seen before leading into what is supposed to be a recession. So we're pretty bullish about taking advantage of the opportunities presented to us in this market now that being said, we're going to be disciplined and cautious.
And.
Not just throw darts at anything but do what we've always done here. If you recall over I don't know whatever it is 17 years of our existence now.
We've always done best in turbulent times and so.
<unk> appears to be one of those turbulent times the sectors that concern as you know we have a very very small consumer business. So I really have very little concern there that we're going to see any issues.
The only sector that we have that I would say some grey around it to say hey, what do we think is going to happen would be our office sector, which is quite small on our balance sheet is mostly concentrated in new Jersey and is over 80% personally guaranteed and has good good credit pipe tender.
<unk> that occupy the space.
That's really the segment that we've watched a lot we certainly put a lot of detail into our construction portfolio.
We actually feel really good about that portfolio going forward and we actually see opportunities. We've seen a lot of players pull away from that market and I believe there are some good sponsors out there that still warrant the ability to finance their projects. So those would be the two areas that I'd say need to be watched the most one is quite small.
<unk> for us and the other we certainly are watching like a hawk.
Helpful perspective, Thank you and then in terms of both lie and how that position.
For this environment and I don't necessarily need from a credit perspective, because I know most of those loans.
Move elsewhere right.
Just competitively.
The SBA secondary market for fixed loans has basically been frozen.
Move at this pace.
Are you seeing players pull back has there been market share opportunities or do you expect that maybe happened, but it hasn't happened yet or do you think there are some maybe some potential challenges.
We get into a kind of a more challenging environment for the consumer that some of these SBA type products could could slowdown from origination standpoint.
Yes, I think we have seen a little bit of a slowdown within the SBA vertical itself, but we're also seeing lots of opportunities outside of the SBA vertical as I mentioned in my comments. So with both La has really been successful at doing for US is expanding other verticals and other areas of <unk>.
<unk> for us so while the core business of both lie.
And their ability to generate those types of loans may slow a little bit although I will tell you they keep adding franchise orders to the platform, which is incredibly encouraging to us.
So we.
Typically we may be slowing down relative to the percentage of pull through rate on the franchise stores, we have but we keep adding thanks, Laura so at the end of the day I do think we're going to continue to grow that core business.
But all of these other verticals that are coming off that Mike Rozman <expletive>.
Really.
We've been able to piece together and put a strategy around all different types of financial needs, including credit.
For whether their SBA non SBA, whether they're for the franchisee or the franchise or is really generating some great opportunities for us and.
We're at the very early innings here with a lot of those things as.
As the year goes on I think we'll be able to report in more detail about some of these developing segments, but we're very bullish about what's happening around that both light platform.
Great and then just lastly for me.
Obviously, you guys just given a lot of color already on margin and I appreciate it.
A lot of time over the last year talking about the disruption in Europe .
And the asset opportunity I guess I was just curious on the deposit side.
Have you guys seen anything structurally a little different I mean, it seems like you're outperforming your expectations has it been less competitive as that had maybe less to do with any M&A disruption or less competitiveness and more to do with just how much liquidity a lot of your peers are sitting with this time versus last time I was just curious if you could maybe just break that down a little bit more and see if there's anything.
Structurally it may be that that might help you guys.
Some of this outperformance.
Yes, a bunch of all of those things you said are happening right now and we haven't seen a dramatic rise in our cost of funds.
In our non interest bearing transaction accounts.
I think the average rate for last quarter was 38 basis points at the end of the quarter was 45 basis points. So that hasn't moved much but I do anticipate with all of that increase is that at some point. The beta is to catch up so I'm just being cautious about it.
We're not seeing too much pressure right now on the core deposit side, but.
I imagine it's going to come.
But to answer the other part of your question Michael I think there is still a lot of competition in the marketplace today, it's not like it disappeared but.
It has changed there is different competitors now.
A business has.
<unk> has changed a bit I would say in some places we have better competitive advantages in other places.
It is getting tougher the one.
One thing that is helping us a bit and where we do feel we're gaining on the competition is in our C&I platform. As you know we've been building that for the last eight years.
And it's really gotten some momentum recently and we have made some really great hires in that space over the last 12 months to 18 months.
And some of that stuff is really starting to pay dividends today and we're seeing it.
Our PVA percentage is now at a record here for Kinect one.
We still think it's too low for US we wanted to go higher and I think we'll make progress on that over time, obviously that that number jumps around a bit but.
We're seeing the progress we want to see in those particular areas, notably this is the first quarter that our multifamily exposure actually declined a little bit.
While C&I sort of bolted ahead. So all the transitions we are making are actually showing up in the numbers. So it's not just the story a story with some thoughts behind that.
Great. Thank you guys for the color.
Thanks Heiko.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone Keypad you May Press Star two if you would like to remove your question from the queue.
Our next question comes from the line of Matthew Breese with Stephens. Please proceed with your question.
Hey, good morning.
Alright.
You talked a little bit about recession fears.
I'm also focused on higher interest rates and cap rates I guess, it's part and parcel.
Im just curious whether or not youre seeing any sort of valuation deterioration across commercial real estate multifamily as a result of higher cap rates.
And then secondly in regards to the recession fear.
Commentary have you changed how you are underwriting.
At all to reflect the weakening environment, whether it's.
More cash upfront.
Personal guarantees that sort of thing.
So what I would say to that Matt is we constantly look over our portfolio and monitor what's happening in the various segments.
Relative to our multifamily portfolio if you recall.
We're very much debt service constrained.
And when we underwrite these transactions so typically from an LTV basis, they're quite low there I think our portfolio was in the high <unk> or just under 60% from an LTV perspective, and I think if you were to stress any of the assets that are in our portfolio today.
With higher interest rates.
You would see because we did that when we underwrote them that they would they would pass the test and the current market that we see ourselves in today keep in mind, even with the three quarter.
At this point or I'm, sorry, 75 basis point move yesterday, the 10 year fell. So there are still banks out there that are providing in their insurance companies and Fannie Freddie and whatever you can still get a loan for a multifamily with a four handle on it today.
So for the most part that portfolio is pretty sound and I think it will remain pretty sound going forward, a new project or a new.
Opportunity that comes in the door today might have.
Slightly different challenges and the cap rates that we would apply to that would be higher.
And so there are a lot more deals that fall out.
Put a lot of emphasis on that type of stress testing, especially in our construction portfolio because projects that start today, probably arent going to be completed <unk>.
Online for the next 18 to 24 months and so we have to make some guesses to what we think interest rates will be at that time and what the cap rate needs to be at that time for that project to be successful we have definitely seen.
We have conversations with developers and after our conversation with them. They have shelved the project for the time being and are waiting to see where things actually shake out. So if that's your definition of changing our lending standards I would say, yes, we're guilty and yes, we do that I would tell you, though our loan Paula.
She hasnt changed a bit we've always maintained that we have a disciplined and conservative approach to our underwriting, especially in the construction segment.
And I think it's doing what it's supposed to do it's it's not allowing for certain projects, which are on the borderline to go through.
On the flip side of that though I will tell you that the projects that are successful and that we do wind up financing. We are seeing developers with a lot of liquidity on their balance sheets I have never seen in the run up to any sort of recession.
The amount of strength on developers or borrowers balance sheets as I'm seeing today and so for the deals that we do decide we want to do we're pretty comfortable that they have the means irrespective of whatever happens in the interest rate environment.
Got it I appreciate all that.
Bill maybe turning to your commentary around NIM stability I, just want to clarify that and just make sure. We're on the same page youre defining stability off the core NIM around $3 70 versus the all in that was a notch on Iraq.
Yep.
Sure.
And then last one Frank I got to pull on the string of bit more both life plus more robust SBA platform.
Other tech capabilities and it sounds like you have a great leader in place.
Just talk to us a bit about the ultimate vision here, what the fee income or loan growth opportunities are.
Extent this Ken helped the bottom line.
You mentioned that exploring new verticals curious what those are.
We've been talking about both lie for quite some time now and yet if someone were to press me on the Bottomline impact from both lied I'd have a tough time articulating that.
Should we expect a more material benefit from this and over what time.
Yes.
<unk> indicated for the last couple of quarters I said by year end I think we'd be in a position where we could start to develop a model around what both lives contributing to connect one both from its core business and from the other verticals that it's.
That is helping us to build and I think we're on track to be able to do that.
Whether it's the fourth quarter or the first quarter of next year, we should be able to lay out both fly almost as an individual entity and what it what it is truly contributing from a financial perspective, right now theres lots of overlaps where in.
In the testing phase on a lot of different products, so were tepidly launching them and doing a lot all at the same time.
I think that will all come into clearer focus it's b, it's already beginning to do that we're beginning to see that but I think more towards the end of the year, we will be able to speak more about the <unk> unit itself and what it does it actually presents from a financial perspective, or I'm trying to say or do right now is say that.
The things that we are.
Putting forth today are producing benefits, maybe not to the net profitability of the company, but they are definitely producing benefits. We're hiring people. We're building out these different segments, and we will see a financial benefit from it.
I know it is.
It's been somewhat of a long journey, but not really it's only really.
They both lie basically from the end of the pandemic because when we bought the company we were rebuilding their platform. They were ramping up a little bit and then we got hit with both why so I'm sorry, we got hit with the pandemic, which then turned the company completely into a PPP machine.
And it wasn't until after that was over that we really started to refocus on the things we're talking about today. So it's really only been a year 18 months that we've been developing these various lines around both lie and all I can tell you is I am pretty optimistic about Mike Rozman <unk> team there.
He is building.
And how that's going to turn into a pretty much a complete financial services company that would rival any bank.
And we're excited about that.
Great to hear and look forward to learning more towards the end of the year. That's all I had thanks for taking my questions.
Thanks, Matt Thanks, Matt.
Thank you at this time, we have reached the end of the question and answer session and I would now like to turn the floor back over to management for any closing remarks.
Well, thank you and thank you for all those great questions I really appreciate everyone joining us for our second quarter conference call and we look forward to speaking to you again.
Everybody has a great summer.
Thank you will see in the third quarter.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
[music].