Q2 2022 First Internet Bancorp Earnings Call
Booking my mother in law that plane ticket that can't do it right now.
[laughter].
Yeah.
Good day, everyone and welcome to the first Internet Bancorp earnings conference call for the second quarter of 2022.
And please note that today's event is being recorded.
I would now like to turn the conference over to your host Larry Clark from financial profiles. Please go ahead Mr. Clark.
Okay.
Thank you good day, everyone and thank you for joining us to discuss first Internet Bancorp's financial results for the second quarter of 2022.
The company issued its earnings press release yesterday afternoon, and it's available on the company's website at Www Dot first Internet Bancorp Dot com.
In addition, the company has included a slide presentation that you can refer to during the call.
You can also access these slides on the website.
Joining us today from the management team are chairman and CEO David Becker.
And executive Vice President and CFO , Ken Lubbock.
David will provide an overview and Ken will discuss the financial results then we'll open the call up to your questions.
Before we begin I'd like to remind you that this conference call contains forward looking statements with respect to the future performance and financial condition of first Internet Bancorp that involve risks and uncertainties.
Various factors could cause actual results to materially be different from any future results expressed or implied by such forward looking statements.
These factors are discussed in the company's SEC.
Which are available on the company's website.
The company disclaims any obligation to update any forward looking statements made during the call.
Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute the most directly comparable GAAP measures.
The press release available on the website contains the financial and other quantitative information to be discussed today as.
As well as the reconciliation of the GAAP to non-GAAP measures.
This time I'd like to turn the call over to David.
Thank you Larry good afternoon, everyone and thanks for joining us today, the first Internet team delivered another strong quarter highlighted by robust commercial and consumer loan production, while maintaining excellent credit quality.
First half of 2022 yields on new loan originations were up over 100 basis points compared to this point in time last year, we benefited from the rising rate environment and deployed existing on balance sheet liquidity to drive growth in net interest margin.
Fully taxable equivalent net interest margin increased five basis points to $2 74 for.
For the second quarter, we are reporting net income of $9 5 million and diluted earnings per share of 99 cents.
Excluding nonrecurring expenses, which we will cover in just a moment, we recorded adjusted net income of $10 3 million or $1.06 per diluted share.
Adjusted for the nonrecurring items, we generated a return on assets of 1% and a return on average tangible common equity of 11, one 5%.
Both tangible book value per share intangible common equity to tangible assets increased even as we repurchased over $11 million of our common stock during the quarter.
Loan production was the highlight of the quarter total loan balances increased $201 3 million or 7% from the prior quarter and now stand at an all time high of $3 $1 billion.
Total portfolio originations for the quarter was $333 5 million up almost 115% of origination volume in the first quarter.
Nearly $250 million of that came from our commercial lending line.
Our partnership with Apple Pie capital Fintech oriented specialty lenders that focuses on lending to the franchise industry.
<unk> to be a standout performer in the second quarter.
Together, we are providing credit to proven entrepreneur throughout the country, we funded over $63 million of attractively priced franchise loans during the quarter and now hold nearly a $170 million in this portfolio.
Our public finance team had an outstanding quarter as well with over $37 million of funded originations during the quarter.
Team has intentionally focused on shorter duration loans and with the rise in interest rates has capitalized on a number of opportunities to fund 12 to 18 month term loans at tax exempt spreads well above treasury yields.
Single tenant lease financing and also had a fantastic quarter and we funded over $50 million of new loans. During the period. The single tenant pipeline is that protein in all time high and as we near the end of the quarter. The majority of the new production came in at an interest rates north of 5%.
Construction lending continues to be another key line of business for us our teams sourced over $65 million in new originations during the quarter, which included almost 17 million of funded balances.
At the close of the second quarter unfunded commitments and our construction line of business totaled $211 million up 15% over the levels at March 31.
Despite the fact that gain on sale revenue was down in the second quarter, we remain very bullish on our SBA platform. We finished the quarter on a great. Note June production was a year to date high for us and that momentum has carried into July .
Second half of the year are seasonally stronger for small business lending pipeline is continuing to grow and we expect strong originations in the third quarter.
That said the secondary market for the guaranteed portion of these loans has reverted to historical averages. Following the conclusion of government programs that inflated. These premiums over the last two years, because we have balance sheet capacity, we can and have added SBA loans to our portfolio rather than sell them.
When the market premiums are sought after.
After taking into account the lower amount of loan sales in the second quarter as well.
Well as lower gain on sale premium expectations, we now forecast the SBA gain on sale revenue to be in the range of 10 and a half.
11 5 million for the year.
Overall, our commercial loan businesses are performing extremely well the pipeline is up 28% from the end of the first quarter, which leaves us well positioned to capitalize on growth opportunities for the remainder of the year.
And as we mentioned on the call in early May we have additional opportunities in the commercial finance space that we are confident have substantial upside as we pair our balance sheet capital and nationwide blending expertise with specialized asset generation platforms.
Our consumer lines of business also performed well during the quarter with higher balances in residential mortgage recreational vehicle and trailer loan portfolios.
Rising interest rates and inflationary pressures may inevitably impact consumer demand, particularly in the residential mortgage we experienced strong origination growth in our specialty consumer lines, which were up 72% over the first quarter.
Our credit quality, Meanwhile, remains excellent and among the best in the industry.
During the quarter, our ratio of nonperforming loans to total loans improved by 10 basis points and instead of just 0.15% as we continue to resolve problem credits and a very positive manner.
Last line of business I want to discuss is our ongoing strategy around fintech partnerships and banking as a service.
We have spent the last 12 months building out a robust risk management and compliance infrastructure to support this strategy.
My 40 year career, most of that and technology and software as a service.
Yeah.
I have seen time and time again that you have to have the back of the house ready before you turn on the sales second we have brought on new talent with deep risk management experience in the banking as a service space, we have reallocated internal resources to ensure that we are building the appropriate policies and procedures to read.
View onboard and monetary Fintech partners in a scalable manner.
It's 10 tax and bank partnerships with Fintech or.
Coming under increasing scrutiny from the regulatory world. Our goal is to ensure that we have a best in class risk management platform to support our banking as a service strategy. Furthermore, as many of you are aware the Fintech space is currently experienced some upheaval.
Venture capital firms are focusing more on long term viability and profitability as opposed to simply customer or revenue growth. We have a similar view in or a protein these potential partnerships and methodically with a rigorous due diligence to ensure that they have compelling unit economics, we will be which will be.
The earnings and are scalable across our platform.
With these objectives in mind, we do have a number of initiatives in motion to help drive higher financial performance over the next several years. We are currently working towards finalizing agreements with two leading banking as a service platforms that are expected to both increase the number of Fintech partnership opportunities and make it easy.
For us to bring the partnerships to market faster. We are also actively sourcing and evaluating our own direct contact partnership opportunities.
Since launching our Fintech partnership efforts, we have reviewed over 100 opportunities.
However to my comments earlier on the long term viability of Centex. The funnel is very steep most of them have been of low or average quality that do not meet our organizational objectives or quality standards and just the last two quarters alone we have evaluated over 80 opportunities.
While we are in various stages of evaluation with several of the Centex, we've only moved down to further due diligence with three of them and with only one have we elected to move on to implementation we.
We went into this with our eyes open about the state of the Fintech space and the patients to search for the right partnerships.
So to wrap up the Fintech discussion, we remain committed to building a strong presence in the banking as a service and Fintech partnerships face and remain optimistic that over the long run it will provide new channels for lower cost deposits fee revenue and lending capabilities.
However, we only do so in a manner that has a rigorous risk management framework and with partnerships and meet our organizational and financial objectives before I turn it over to Ken.
I would like to recognize the entire first internet team for their commitment to our customers and the company success.
In the second quarter, we said goodbye to three senior leaders who retired.
Associated with their departures, we incurred an expense of 300000 and accelerated equity compensation expense one time their legacy will be long lasting I wouldn't be surprised if they are listening to this presentation and so I think each of them for their enduring contribution to our organization I hope.
The fish are biting and the fairways are rising up to meet that.
I believe first Internet has been able to attack attract and retain talent of their caliber because we foster a workplace culture that encourages innovation collaboration and customer focus while supporting work life balance. We also championed diversity as evidenced by the composition of new hire.
So we brought on board in the first half of 2020 to a broader spectrum of backgrounds and experiences produces more ideas and creativity and ultimately better results for all of our stakeholders. It was gratifying to see these attributes recognized when our employees voted as one of the top workplaces in central Indiana.
By the indie star for the ninth consecutive year.
As an employer of choice.
We felt the responsibility to address the rapid rise in transportation housing and food cost in order to allow our employees to devote their best mental energy to serving our customers in the second quarter, we implemented a $20 minimum hourly wage for full time employees across the company the debt.
Summary, we paid a bonus to those employees most impacted by the current inflationary environment. The bonus amounted to $500000 of one time expense. One I was very proud to support for more than two years, we have been living in extraordinary times, we intend to stand behind our professionals, who have stood with us.
US and our customers through it all I would like to thank the entire first Internet bank team for their consistent execution of our strategies and for delivering solid operating and financial performance, while providing an exceptional experience for our customers.
With that I'd like to turn the call over to Ken to discuss our financial results for the quarter.
Thanks, David looking at slide four total loans at the end of the second quarter were $3 1 billion up 7% from the first quarter and up four 2% from June 30 of 2021.
David covered the highlights for the quarter from a lending perspective, including the growth pretty much across the board in our commercial segments as well as strong growth in our specialty consumer lines. This activity was offset by decreases in healthcare finance, which has been in a runoff mode for several quarters and in construction lending, where we had about 34.
Of loans convert to permanent financing and another $8 million payoff.
Moving on to deposits on slide five overall deposit balances were down modestly from the end of the first quarter, but we continue to see notable improvement in the composition of our deposit base during the quarter non maturity deposits increased by $53 $5 million due primarily to a 144.
Increase in banking as a service deposits from a relationship that we developed in the first quarter. However, this was partially offset by $112 million decline in money market accounts due mainly to some customer activity that can be uneven from quarter to quarter.
Additionally, Cds and brokered deposits continued their downward trend decreasing $119 million or 10, 2% compared to the first quarter the cost of interest bearing deposits increased four basis points.
Turning to slide six and seven net interest income for the quarter was $25 $7 million and $27 $1 million on a fully taxable equivalent basis, both were relatively stable with the first quarter with.
With the strong loan production during the quarter, we capitalized on the opportunity to further optimize the balance sheet by deploying excess liquidity to fund higher yielding originations as well as support continued CD and broker deposit maturities, we were especially thrilled that we were able to effectively offset the expected decline in net interest income.
From revenue on tax refund advance loans, which totaled $2 9 million in the first quarter.
The yield on average, earning assets increased to $3, 65% from $3 five 8% in the first quarter due primarily to a 33 basis point increase in the yield earned on securities and 66 basis point increase in the yield earned on other earning assets.
While the reported yield on average loans was down 21 basis points from the first quarter. If you exclude the effect of the revenue we received a tax refund advance loans the yield on the loan portfolio increased seven basis points to 429% again, reflecting the strong growth and higher pricing on new originations.
We recorded a net interest margin of 260% in the second quarter, an increase of four basis points from 256 in the first quarter and fully taxable equivalent net interest margin increased five basis points to 274%.
As you can see on slide seven the five basis point improvement was driven by a five basis point contribution from securities and a four basis point contribution from cash partially offset by modestly higher deposit costs and the impact of lower reported loan yields which again included the effect of tax refund.
Advanced lending in the first quarter.
As you can see on the graph on slide seven thus far in this rate tightening cycle, we have been able to keep deposit costs relatively constrained in comparison to the increase in the fed funds rate as we noted in the earnings release, given the 150 basis point increase in the fed funds rate beginning in March and through June .
<unk>, we have not increased the rate paid on consumer small business and commercial interest bearing demand deposits related to money market products. During this period the rate paid on consumer money market balances increased 50 basis points, resulting in a cycle to date deposit beta of 33% and the rate.
Paid on small business and commercial money market balances increased 30 basis points, resulting in a cycle to date deposit beta of 20% with.
With small business and commercial balances now representing 62% of total money market balances. The all in cycle to date deposit beta on money market products is 25%.
With regard to our outlook on net interest income and net interest margin for the remainder of the year I would like to highlight a couple of observations.
First this is one of the few times in the history of the bank that money market rates have been lower than the fed funds rate. So we are effectively making a positive spread on our cash balances at the federal reserve.
During the last cycle, we relied on higher cost higher beta Cds to support balance sheet growth as we entered the current cycle. The improved composition of our deposits means we are funding growth with lower cost and lower beta non maturity deposits.
As far as top line interest income goes for the second half of the year, we feel confident that the combination of continued loan growth and higher yields on new production as well as variable rate assets repricing higher will drive strong growth in total interest income.
On the funding side with higher forward rate expectations, we do expect deposit costs to increase as well. However, we also expect that the pace of increase in total interest bearing deposit costs to be somewhat lower than the increase in interest earning asset yields.
As a result, we forecast continued growth in net interest income with modest net interest margin expansion.
Turning to noninterest income on slide eight noninterest income for the quarter was $4 $3 million down from $6 8 million in the first quarter.
<unk> and.
And consistent with other mortgage originators, we saw a decline in mortgage revenue due to a decrease in interest rate locks and sold loan volume driven by the higher rate environment and its impact on both the purchase and refinance markets.
In terms of mortgage banking revenue going forward, given the broader negative outlook for the mortgage industry, where now decreasing our forecast for the remainder of the year. We now expect mortgage revenues to be in the range of five five to $6 5 million for the full year of 2022.
This forecast represents the outlook for our existing digital direct to consumer in central Indiana based mortgage businesses with the current challenges in the mortgage market. We are in the earlier stages of evaluating a couple of innovative partnerships that could potentially open up new origination channels for us.
More to come on these opportunities on future calls.
Moving to slide nine noninterest expense for the second quarter was $18 million down 800000 from the first quarter.
The decrease was due primarily to lower loan expenses consulting and professional fees and other expense, partially offset by increases in salaries and employee benefits and marketing costs.
The decrease in loan expenses was driven primarily by lower servicing fees as $900000 of fees related to the tax refund advance loans were incurred in the first quarter as opposed to a nominal amount of such fees in the second quarter.
The decrease in consulting and professional fees was due primarily to $900000 of nonrecurring consulting fees that were incurred in the linked quarter.
Additionally, we incurred $100000 of acquisition acquisition related expenses in the second quarter as opposed to $200000 of these costs in the first quarter.
The higher salaries and employee benefits expense was due mainly to the $500000 discretionary inflation bonus and $300000 of accelerated equity compensation that David mentioned in his comments, partially offset by lower incentive compensation and the company's small business lending and mortgage banking division.
<unk>.
The increase in marketing costs was due to higher meteor higher media costs mortgage lead generation costs and sponsorships.
Now, let's turn to asset quality on slide 10, as David mentioned earlier credit quality remains excellent and even improved during the quarter as nonperforming loans and nonperforming asset ratios continued to decline.
Net charge offs of $283000 were recognized during the second quarter, resulting in net charge offs to average loans of four basis points.
Excluding net charge off activity related to the final balance of tax refund advance loans, we recognized net recoveries of $100000, resulting in net recoveries to average loans of one basis point during the quarter, our second straight quarter of net recoveries.
The provision for loan losses in the second quarter was $1 2 million compared to $791000 for the first quarter. The linked quarter change was driven primarily by the growth in the loan portfolio.
The allowance for loan losses increased $900000 or three 2% to $29 2 million as of June 32022, compared to $28 $3 million as of March 31, 2022, and the ratio of the allowance to total loans decreased three basis points to <unk>.
<unk>, 95% as of June 32022.
The ratio of the allowance to nonperforming loans increased to 644% at quarter end compared to 399% as of March 31.
Due to the increase in the allowance and a decrease of $2 6 million or 36% and nonperforming loans.
The decrease in nonperforming loans was due primarily to the upgrade of the C&I relationship and the full pay off of our single tenant lease financing loans.
With respect to capital as shown on slide 11, our overall capital levels at both the company and the bank remained strong our tangible common equity to tangible assets ratio increased four basis points to 881%, which is the highest it has been in recent history. Additionally, while many banks are experiencing a <unk>.
Decline in tangible book value per share increased during the quarter to $38 to $38 35 up from $38 21 in the first quarter and up almost 7% year over year.
During the second quarter, we repurchased 294464 shares of our common stock at an average price of $37 77.
For sure as part of our authorized stock repurchase program, including shares repurchased in the FERC in the fourth quarter of 2021, and the first quarter of 2021. Our 2022, we have repurchased 498000 167 million shares at an average price of $41 50.
<unk> per share through June 30th in.
In total we have repurchased $20 million $27 million of stock under the total authorization of $30 million.
With regard to capital management going forward, we enjoy being in the position of having excess capital as it provides tremendous flexibility as David mentioned earlier, our lines of business have strong pipelines and we continue to explore new opportunities in both the commercial finance space and through banking as a service and Fintech partnerships.
We want to be able to capitalize on these opportunities as they arise as these are what will drive outsized earnings growth in the years to come.
However that flexibility also allows us to remain in the market for our stock supporting our shareholders. When the price is not reflective of our franchise value.
And now turning to slide 12, we continue to feel we are much better positioned for a rising rate environment than we were at the beginning of the last rate tightening cycle over.
Over the last two years, we have improved our deposit composition with a larger percentage of non maturity deposits and as I mentioned earlier during the last cycle. We were much more reliant on Cds to support balance sheet growth, which experienced deposit betas at or in excess of 100%.
Furthermore cycle to date, we are experiencing much lower betas in our non maturity deposits than in previous cycles, and even within money market balances our ability to grow small business accounts, which are much less rate sensitive than consumer balances has muted the impact of price competition on our all in cost of deposits.
We also continue to remain focused on originating higher yielding variable rate and short duration loans, notably through both SBA and construction lending and while we are still originating longer fixed rate loans areas of growth, notably franchise finance and single tenant lease financing new originations are coming on at much.
Higher yields and.
And finally, while mortgage revenue is expected to pull back from the historic highs we have seen over the last two years, our long term investment in SBA lending his added greater diversification to noninterest income, which we expect will be further diversified as we onboard fintech and banking as a service partnerships, providing revenue stability regardless of the <unk>.
Interest rate environment.
With that I will turn it back to the operator, so we can take your questions.
We will now begin the Q&A session. If you would like to ask a question. Please press star followed by one on you touched on key pack.
If for any reason you would like to remove that question. Please press star followed by Tim again to ask a question. Please press star one.
As a reminder, ECR misspeak or phone please remember to pick up your handset before asking your question.
We will pause briefly to allow questions to generate in Q.
Our first question is from the line of Michael Perito K B W. You May proceed.
Okay.
Yes.
Hey, good afternoon guys.
Hi, Mike.
Yes.
So thanks for.
The prepared remarks, a lot of helpful Kam.
Commentary in there there are a couple of things I wanted to to expand on first just on the Opex side I wanted to hit this before I I kind of dig into some of the growth opportunities, but you talked about some of the pressures from one time items, but.
Obviously, the run rate was a little lower I mean is there any more specifics you can give kind of on the back half here.
Understanding it's kind of a difficult opex prediction environment, but but just any kind of range you guys are thinking of especially with the mortgage run rates stepping down to the range you guys.
Disclose the five five to six and a half with the Opex could look like here.
Yeah, Yeah, I think obviously it was it came in a little bit lower than our forecast when you get rid of the onetime charges and obviously some of that as we talked about had to do with mortgage commissions being down as well as SBA commissions being lower.
Some of it is just the timing of new hires and in scheduled technology investments I think for the for the.
<unk> of the year on a quarterly basis.
I think what the I think you guys got a pretty good out there I mean, I think we're probably looking at.
Probably somewhere in the call it 18.
Low.
Low a teens to high teens over the next couple of quarters, probably ramping up a little bit I mean, as David talked about in the on the tax side, we continued to invest in people in and as I mentioned, we got some scheduled investments at that are coming on board. So it'll it'll creep up a little bit, but I don't think.
Really out of line with with what a lot of you guys have in your models already.
Got it helpful. Thank you.
And then.
Secondly, here on some of the Fintech partnership initiatives.
It sounds like you guys are being highly selective which I think makes a lot of sense because obviously it's a.
It's an interesting market in the realm of Fintech right now, but I was wondering if you could maybe bifurcate for us a little bit more.
How are you viewing these opportunities in terms of kind of <unk>.
Ending deposits and fees and where the pipeline sits today and you know maybe.
What what opportunities you think could be the most meaningful near term could we see some fee acceleration or are they largely deposit opportunities.
Opportunities that we've seen you guys had success with already I know you mentioned a couple of lending just trying to get a little bit more time, there could be helpful.
Mike we have a lending opportunity that's rolling up.
Somewhere here in the next 30 to 45 days, we should be live.
Deposits is.
Ken it's already related to them from the Fintech side of things, we've got another pretty good sized relationship come.
Coming up in the next 45 to 60 days.
It really is a mix across the line service fee income potential I can tell you is.
<unk> been a little bit frustrating.
I've used the statement before we've kept an awful lot of frogs looking forward Prince but I got to tell you as we've been out in the marketplace and we're getting more visibility and we're really getting attached to good partners that have been in this space for a long period of time.
There's probably three deals out there now that we've been exposed to in the last three weeks that are probably the best deals we've seen all year. So it's one of those you just have to.
Keep going to go into that and one of them will come over the finish line. We got a couple in the pipeline that we think could speed up.
Talking to gentlemen on Monday afternoon. He said you know, it's really frustrated it takes a fintech six months to lineup of partnership and then it takes six months to get that partnership law.
And talking to him I think we can narrow that window from.
And true conversation.
From being a 12 month process down to a 90 day to six month process. So that's what we've kind of created internally and I think we're in a position to deliver that.
And it's really created some good opportunities we have.
Good partners.
Kind of legal and accounting side that have been working with Fintech.
A couple of fin techs that are now looking for new banks because.
<unk> banks have gotten sideways to the regulators for one reason or another so there's some that could drop in with steady volume and I think there's still a lot of really good novel opportunities out there.
Give it a solid shot of it so it's been frustrating for all of US internally, but we've also had the opportunity to really build out a good system.
On the Onboarding people and hopefully we have more then builds up.
<unk>.
Back office teams. So we don't put up all of the regulators as we bring these people on some of our peers.
Got it David Thank you very helpful. And then just last for me.
Maybe a question back to Ken and I apologize if I missed this I heard some of the.
Micro NIM commentary or whatever but it's just as we think about your overall positioning the rate environment as it stands today the balance sheet positioning as it stands today I mean, you guys have kind of been flat at about $27 million on the NII for the last two quarters. I mean are you guys hopefully be able to hold the line there.
In a reasonable range or do you think there will be some downward pressure that starts to manifest, particularly if we get another 75 basis point hike next weekend and the rate of hikes remains accelerated.
No.
I think the way that we look at it is is if you back out the tax revenue.
The revenue from tax refund advance lending last quarter, which was about $2 9 million and youre familiar with that business, Mike Thats pretty.
Yes.
This quarter event when you back that out I think what we were really really happy about is that we made up that difference right. So if you want to back that out I would call that a core number for lack of a better term I mean, we picked up almost $3 million of NII.
And I think with with the way looking at what the forward rate curves look like with our production our loan production.
Focus on higher yielding products.
Things repricing higher.
And where we're beta as we've been on deposits and we do we're going to do everything we can I mean, we're not really getting pressure to go above these betas on the deposit side. So with that I mean, we continue to expect to see as far as net interest income grows continued growth I think one thing this quarters.
We did put a lot of cash to use.
And they tried it with respect to call. It a 30 basis point bump in net interest margin is probably unrealistic because of our deployment of cash.
But I think in terms of being able to creep net interest margin up as well as grow NII dollars, we see a clear pathway to being able to do that.
Great, Yes, no I mean, it's.
Definitely the balance sheet definitely seems like it's positioned.
Positioned much differently. This time around so that's good to hear thank you guys for taking my questions.
Yes, Thanks, Mike.
Thank you.
The next question is from the line of Nathan race with Piper Sandler You May proceed.
Yes, hi, guys.
Good afternoon.
Hey, Nick.
Question, maybe just drill into the margin outlook, a little bit more.
It became a deck that.
Rates on new loan originations at a 100 basis points above what we saw last year. So I was hoping you could just kind of quantify where you guys are putting loans on the portfolio today relative to I believe the portfolio yield at.
431, or so in the quarter.
Yeah, I mean, obviously, that's kind of a blended yield for it but in the I would say on the commercial and the consumer side.
Keep in mind that.
Some of the deals that funded.
In May and June were being priced in April .
New production during the quarter and all came on.
In the north of four and a half.
But I think what again, what we remain up.
What's exciting for US is at new deals now are being quoted at.
In the single tenant world New deals are above 5%.
Our partnership with Apple Pie those deals are priced close to 6%.
As we've seen the rate bump we've seen the yields and the variable stuff in the.
Construction and SBA I mean, our SBA portfolio as you know on average prime plus $2 50 ish.
So that continues to go up so I think that again, we will continue to see a nice bump in the overall yield I mean to some extent, it's a little bit like turning a battleship because you got a <unk>.
$3 billion portfolio, but.
Excluding tax excluding.
Excluding tax stuff there is call. It $4 30 ish, we expect to see continued growth in that all in yield on the loan book.
Okay great.
And then just maybe thinking about the right side of the balance sheet.
Positive growth lagged relative to loans in the quarter I know you guys spoke about.
Taken as a service deposit wins I was just curious kind of what rates you're paying on those deposits and just the opportunity to.
On deposit growth commensurate with that of loans, which it sounds like you guys are still comfortable with kind of 10% to 12% loan growth going forward.
Yes.
Our intent is to is to fund loans with with deposits.
So we continue to see again, we had some volatility in some money market balances at the end of the quarter, but we.
We continue to grow small business money markets and.
In the banking as a service deposits those are those are priced close to fed funds.
So those those do have.
Those will increase but I think the good thing about those are that much call. It 200 basis points less than say funding with Cds.
Another way to look at that though and we don't want to go borrow to necessarily make loans, but we can go to the federal home loan bank and do a five to seven year loan cheaper than we can go get six to nine months.
Commercial Cds.
So as crazy as the market is with long term rates not moving in short term escalating.
We can be fed does 75 basis points in the next week the short term money.
Costs could be 100, 125 basis points higher than five year money. So it's.
We're weighing all avenues believe me.
Ken's team are watching rate curves and activity on a almost minute by minute basis, but there is.
A lot of turbulence in the marketplace that could be beneficial.
Obviously detrimental at the same time.
We're watching it all but I think <unk> laid out a pretty good play we think we have opportunities to bring in deposits, where we're looking at them as explained by committed to go on a day to day basis from <unk> and other players that are somewhere between that one.
1% right up to the fed funds rate so.
We're hustling and looking at a daily and taken advantage of opportunities where they exist. Yes. One thing. We are I think will be a very interesting prospect for us is where we're getting ready to launch a partnership with.
With with a commercial finance company that both on the lending and the deposit side and the deposit opportunities are really operating accounts for their client base.
And that's exciting because that small business checking that we're paying 40 basis points on.
Oh.
Okay got you. So just trying to put those pieces together it sounds like youre still comfortable with kind of 10% to 12% loan growth and maybe a moderate lagging.
Deposit gathering.
Yes.
Okay.
Great and just kind of thinking about that loan growth outlook. Obviously, you guys had to provide for really strong growth in the quarter and assuming growth reverse that 10% to 12% range. How are you guys thinking about providing better growth relative to where the reserve stands today.
It'll it'll probably be in line with that.
Obviously, we reserve a little heavier on the on the commercial side than the consumer.
But some of that is offset as we continue to put some short term money to use in public finance. So I would say just kind of model model the reserve where it is at today.
Okay perfect I appreciate all the color.
Thank you for taking the questions.
Thanks, Nick.
Thank you.
The next question is from the line, Brett Robinson with Huff growth.
Proceeds.
Hey, guys good afternoon.
Hey, Brett Hey, Brett.
Wanted to talk about Fintech for a second and on the <unk>.
With the first century transaction cancellation, you indicated that the things that were in progress could add about 35.
Sure 223 earnings can you give us an update on that and then also wanted to ask about these from a lending perspective opportunity.
These credits have you are putting on are there any credit enhancements are generally speaking what is the framework on the loans that are going to come from Fintech players.
Maybe I'll maybe address the.
Address the.
EPS buildup first I mean I think.
When we look at those opportunities going forward I think the.
Kind of the guidance, we gave them I would say is probably on the low side, when we talked about existing opportunities with 35 <unk> of additional EPS on that.
Some of them some of those players some of those things that we're working on again the thing I mentioned before with the loans and deposits thing that is one of the items and we're getting closer to launching on that and that probably to be honest is more earnings upside than we initially.
<unk> modeled out.
And we continue to work on some of these other other projects as well I mean, I know, it's like one of the things we were moving towards was more of a consumer lending opportunity, we're probably slowing that down a bit just kind of in the wake of.
In the wake of potential recessionary fears and just kind of making sure we got our arms around that.
But we've had a couple of other things slide in as well that.
As David alluded to on projects, we're working on in the Fintech space. So I think couple of moving parts, but I think we sales still feel pretty good about the upside earnings contribution, which quite frankly could be conservative in the long run.
Okay again.
Credit enhancement question I didn't quite.
Yes, I'm sorry.
Yes, David.
What I was just trying to figure out is on these <unk> lines that you'll add to the balance sheet.
Is there any structure, where they have to set up a reserve.
For the loans that youre that youre, putting on your balance sheet or is it just straight sorry amortization in there is there is.
No credit enhancement, what what kind of terms are you doing anything slowing loan.
It's a mixture of both there is some.
Call It escrowed funds that come in on a percentage basis.
On a per loan deal on some that are in the commercial segment.
But I would say the lion's share is just straight up.
Credit and we're getting the yield to cover.
The reserves and stuff so the net effect of the yield on the loans will compensate for the higher reserving on some of the <unk>.
More consumer oriented pieces as Ken said, we kind of stepped back on a couple of the consumer opportunities just for the risk.
You hear some of our peers talking about hurricanes coming.
Don't think theres hurricanes, but there could be a tornado here and there that kind of hit spot places so.
Consumer this showed no kinks to date, our RV portfolio, whether the $5 of gasoline without a blip and it.
It seems to be very very stable and continuing to grow with tremendous volume. So.
Consumer came into this exercise in much better position than they have historically.
But we are still a little bit cautious is probably the biggest issue we have in the fintech space right now there's an awful lot of people. We've been chatting with that are trying to wrap up their b and C and D rounds of financing to help take them up to that next level and.
Folks have said hey, we're going to have money in June or July or August . It's now maybe it will be October September .
So that's what's kind of slowed down.
The game at the current time is to make sure they get the right funding to kind of get up to the next level.
Vcs private equities.
They are all focused on what's the path to profitability as you've seen the articles has been reprinted a think about every trade magazine going that they estimate 95% of all fintech companies at the current time have no clear path to profitability. So.
If by chance that next round doesn't come in and it blows up.
Not technically our problem because they are the ones that made the promises and servicing to the customer but it is still the customers left an alert.
Almost guilt by association so its reputation risk.
We don't have control over and we don't want to.
Step off a cliff here.
And just in search of opportunities.
We're being very very methodical to the point of frustrated probably some of my team because 40 years in the software industry.
<unk> seen a lot of the pitfalls and can see a lot of the warning signs so.
We do have some really strong.
Fintech players very well capitalized.
But when you have public companies out here.
Folks at upstart were trading eight nine months ago $400 a share another 26.
That whole market is just getting beat up so.
We want to make sure we got it right before we.
Jump in here.
Brent maybe to address the question on the credit enhancement, what I hear that I kind of.
I I associate that with perhaps lending opportunities that are a little bit further out on the risk spectrum.
That's that's not the type of lending that we're looking at most of the lending opportunities. We're looking at it's about like on the consumer and the consumer side, it's going to be prime Super Prime type of consumer that were used to underwriting and comfortable with and on the credit the commercial side, it's going to be more.
More established types of credits than than say lending to <unk>.
Start ups or something like that so we're not we're not going out on the risk spectrum. When we're looking at fintech lending opportunities.
Okay. That's really helpful. And then I wanted to make sure I understood. The discussion around the deposit betas from here and just thinking about money market in particular.
Money market didn't really move much and <unk> when I look online I see a lot of pretty high rates and I see a posted rate of.
102016.
For you guys.
Higher rates even than that.
Explain to me.
If you can kind of the thought process on the deposit betas from here and specifically in the money market account.
Well I mean again, what we've what we've seen to date is that pricing has been relatively well constrained and the competition out there, especially on the consumer side Theres a lot more competition on the consumer side, it's been a little bit more well behave.
Then it was the last time around last rate tightening cycle. It was a race to the top.
So I mean.
Look as what we've seen to date and we don't there's not money money is not going out the door.
So I think with.
Our view right now is that we expect at least over the next several quarters here that betas should.
B should remain relatively well constrained.
A point I know I talked about it in my prepared comments, but I think it's important to hit home is that.
Since the last rate tightening cycle, where our money markets were almost exclusively consumer.
With the growth in our small business and the efforts that we've put in there.
Almost two thirds of that money market base now is small business or commercial and it's predominantly small business.
That pricing has been much less rate sensitive this time around.
It was much it was.
Less rate sensitive before but we just didn't play in that space, whereas today, that's where the bulk of our money markets are in that pricing is.
Ben been less less rate sensitive so I think as we sit here today I think our belief is that betas on the money market should remain well below what they were in the last cycle.
Okay.
Helpful Great.
Congrats on the strong loan growth in the quarter.
Thanks, Sir thanks.
Thank you.
The next question is from the line of Jon Raviv.
Jamie you May proceed.
Hey, good afternoon guys.
Hey, Jeff Hey, John .
Hey, Ken just on the.
The tax rate dropped down some this quarter with shorter rates should we use going forward.
Yes, I mean.
<unk>.
Really what drove the rate down is when you think about the all in composition of revenue with.
With the big decline in mortgage as well as the decline in SBA and the growth on the.
The public finance side as well as just the proportion of tax exempt income was a little bit higher.
I think as we have.
We continue to.
Have the success with the.
Yeah.
Commercial loan growth in single tenant and franchise.
See some rebound in SBA.
I think if you use a 13 to 13, 5% tax rate that would be fine.
Okay.
Ken just one more question on your comments on the margin.
I think you said modest expansion from the second quarter level and if you look at the reported margin from the first quarter. The second quarter was up five basis points.
T E basis from $2 69 to $2 74 is a five basis point increases that modest.
Or how should we think about this.
Yeah.
That's what is that thats in the range.
Okay. Okay, just wanted to check thanks.
Okay.
Thanks, Jeff.
Yeah.
Thanks.
The next question.
On the line George Sutton with Craig Hallum, You May proceed.
So guys relative to the gain on sales spreads having come down I'm curious how you are now going to market with your SBA.
Offering you were fairly active in the market at times many were not.
And that.
I think at the end of the day was related to the high spreads.
How are you going to market now given that it's more on your balance sheet, just curious about the total volume opportunity.
Actually George we are probably as active or more active than we've been historically for the reasons you just outlined a lot of folks are starting to pull back on the SBA side of things.
And from our balance sheet perspective, if we can put a 75% guaranteed loan on the books for 7% to 8% rate, we'll do it all day every day so we.
We had.
Got it finished the quarter with what we called internally about a $28 million bubble. It is $28 million worth of loans that were the unapproved ready to go.
As you well know the SBA has a myriad of Sop piece you have to comply with so.
The stuff that's been through credit to underwriting we're just waiting on a specific document piece of paper a signature on something R. T.
To get it to the finish line. So we had $28 million pending that's ready to close plus we add another $34 million in pipeline. So.
SBA is as strong or stronger than it's been.
We were targeting this year that gives us $200 million I think just with the.
The market activity and the rate increases or some folks.
As the housing market is starting to.
Shrink a little bit.
In the refi game is completely gone away because of the higher rates I think SBA overall activity will slow down in the fourth quarter due to 70, 758% rates with the fed policy with another 75 points, but as far as our activity in the market and our pursuit of SBA.
The title is still down and we're going after them.
Gotcha, Okay. Thank you for that one.
<unk> to an earlier question related to the first century call that you had the suggestion at that time was when we we bulk up the various opportunities in the core business and then the buybacks that you were doing the thought was that you could get to $6 type of a number for 2023 is.
Are you still suggesting that kind of opportunity or has there been a change to that.
I would say George is probably the one if you wanted to take the most conservative look at that possible I would think about mortgage because obviously mortgage our forecast for 2022 mortgage was coming down right. It was down and we were kind of forecast.
And consistent with for 'twenty three with what we have for 'twenty. Two will now obviously as we mentioned earlier and what's gone on we've revised mortgage down a bit.
Tom.
One one conservative way to look at that as you could probably take $4 million or call. It roughly 40 cents of EPS away due to mortgage.
And look at it that way is the most conservative sense on the other side of it I would say that some of these other opportunities we had where maybe we were seeing 35 cents of opportunities that could be north of 50% or 60, where we have to let some of those play out but I think we have some tremendous opportunity with some of these others.
<unk>.
On the low end you could cut but I think on the high end and some of the things we're looking at.
I think we feel that we could get back to that number anyways.
The big play too will be George depending on what the fed does for the balance of the year.
The forward curves are showing that by first quarter next year theyre going to be back in a position of the lower them a little bit.
If they keep going up at 50%, 75% every time they meet so.
That could bring mortgage back mid year, I think mortgages got back into.
Mid four handle.
To pop right back to where it was released on the purchase side of things refi, maybe not so much. Although there are some people that are out there now getting $5 $55, 75%, 6% mortgages that are in the mid four could open up a refi business second half of the year. So.
I agree with Ken 100% the biggest wildcard we have we think SBA will be strong we think all of the other lending verticals. We've got a strong a couple of verticals and new opportunities, we're bringing on have tremendous potential that we're going to hit it all across the line the real real wildcard for us is mortgage.
Perfect. Thanks, guys.
Thank you.
There are no additional questions at this time I will pass it back to David Becker for any closing remarks.
Well again, we appreciate all of you joining us today, we hope you have a great day and look forward to speaking with you all again soon.
Very much.
That concludes today's conference call. Thank you you may now disconnect your line.
Uh huh.
Okay.
Okay.