Q3 2022 First Internet Bancorp Earnings Call
Government programs that temporarily increase the guarantee from 75% to 90% have expired loans with a 90% guarantee.
<unk> touched higher gain on sale than those with 75%.
Additionally, rising rates also increased prepayment expectations driving secondary market prices lower with lower expectations on premium.
We are forecasting SBA gain on sale revenue to be in the range of 10 $5 million to $11 million for the year.
Our partnership with Apple Pie capital Fintech oriented specialty lender that focuses on lending to the franchising industry was another standout performer in the second quarter together, we're providing credit to proven entrepreneurs throughout the country, we funded over $60 million of franchise loans with pricing north of six <unk>.
During the quarter and now hold $225 million in this portfolio.
Overall, our commercial loan businesses are performing extremely well.
Additionally, we also continued to win new business in our consumer lending lines, and our horse trailer recreational vehicles and other consumer loan portfolios, we originated over $40 million of new loans yields north of 6%.
Limiting factor here, it's been inventory of new models, which are like passenger vehicles challenged by the current chip shortages.
As you have come to expect from US ongoing strong credit quality was a key contributor to our third quarter performance. Our total nonperforming assets remained low at 14 basis points of total assets.
Net charge offs to average loans were just two basis points and delinquencies 30 days or more were just six basis points of total loans consistent with the prior quarter.
Understanding that we are in an uncertain economic environment. We continue to review our loan portfolios for any areas of potential weakness, while we are diligent and thorough in our review we take comfort in the fact that we have never wavered from our consistent underwriting standards no matter, where we may find.
In the credit cycle.
As a result, our credit quality has remained strong over the long term and we expect that trend to continue.
Turning to where we saw the most disruption during the third quarter earnings were impacted by higher funding costs and our forecast for 2022, we had anticipated rising rates.
We have shared with you the strategies, we undertook over the past several years to better position our balance sheet for rising rate environment. One of those initiatives was to improve the composition of our deposits moving towards non maturity deposits, we have been winning small business and commercial checking account relationships throughout 2022.
Account volume is up by about 10%.
<unk> makes up 15% of our deposits as of September 30, compared to just 8% when we entered the last rising rate cycle.
As we look at savings balances, we do see a trend where consumers and business owners are taking down some of their savings after building up account balances during the depths of the pandemic.
Average savings balances are down slightly on a year to date basis. Additionally, the competitive environment has made it challenging to grow deposits as reported by the Wall Street Journal in mid September there was a record outflow of $370 billion in deposits from the banking system in the second quarter. The first decline since.
2018.
This intensified the competition for deposits in the third quarter, we have seen an escalation in rates being offered by digital direct bank <unk>.
Local banks in our market and in the banking as a service and wholesale deposit markets first Internet bank does not offer teaser rates or other incentives to new customers that are not available to existing customers and we have not negotiated rates with individual customers, we believe openness transparency and fair pricing.
For all our key to maintaining strong relationships and a loyal customer base.
As a result of acute deposit competition, our cost of interest bearing deposits increased 56 basis points from the second quarter to 141% an increase in earning asset yields of 26 basis points with a partial offset or fully taxable equivalent net interest margin.
For the third quarter was 253% down 21 basis points from the second quarter. We believe deposit rates will continue to increase through the fourth quarter as the September CPI report leads us to conclude that fed will continue on its path to a target fed funds rate of $4 50 to $4 70.
In an effort to beat down inflation.
Throughout 2022, we have increased rates on new loan originations, we will apply even more pricing discipline in the fourth quarter to mitigate the pressure on our net interest margin our third quarter funded loan origination yields were up 52 basis points from the second quarter and on a year to date basis are up 8%.
Seven basis points higher than they were for the same period in 2021.
Setting the stage for higher average loan yields in future periods.
The other area, where we believe we can meaningfully improve our results through banking as a service partnerships. We have entered into a partnership with the established platform Treasury Prime which is placed numerous fintech relationships across its network of 2015 financial institutions. We are currently working through the implementation.
We're expecting the onboard our first relationship in the early 2023, we are discussing both deposit programs with attractive funding costs as well as payment programs, which would be accretive to noninterest income.
Additionally, we are in a pilot phase with the best platform and program manager called increase we will be working through the balance of the year to get three programs from pilot from pilot to full production.
Partnership is expected to drive primarily noninterest income payment programs with significant upside potential one of the opportunities that we are currently piloting has a projected $1 billion in payment volume over the next 12 months, we expect to announce more on this relationship. They are in our next earnings call.
We are carefully curated a pipeline of a dozen or so additional opportunities to include only opportunities that closely align with our high standards for compliance and risk management, we've kissed a lot of progress over the past two years, we have a robust pipeline of high quality deposit payments and lending.
<unk> as we work through the pilot stage and move them into full production, we expect the throughput of that pipeline to increase exponentially in the coming quarters and wrapping up my remarks on the quarter. While we were disappointed in the net interest income and net interest margin performance for the quarter. We are very pleased with the growth.
Of our construction lending business continued strides we are making in SBA lending both of which will add asset sensitivity to our loan portfolio going forward Craig.
Quality remains strong and our capital ratios provide the flexibility to support the balance sheet as well as allocate capital to continued share repurchases. When we believe there is a valuation disconnect in our stock price to that end I am pleased to announce that our board of directors. This past Monday have proved an extension to the current.
<unk> program, including an additional $5 million of repurchase authority.
As I outlined above we have some very exciting things going on with our Fintech and banking as a service partnerships that should provide long term scalable growth in revenue and lower cost deposits. While there may be some short term volatility in earnings until rates stabilize.
Leave the strategies and projects, we're working on today, we'll provide a far more resilient balance sheet and earnings profile over the long term before I turn it over to Ken I would like to thank the entire first internet team for their dedication to our customers and our success on behalf of investors, we excel because of <unk>.
Innovation and collaboration and our workplace culture celebrates develops and promotes are the people who embody these strengths.
Why we were named once again, one of the best banks to work for by American banker for the ninth year in a row, our team's talent and commitment to constant improvement give me great confidence in the future of first Internet and our long runway of opportunities ahead as the Premier technology forward growth oriented digital financial service.
As provider with that I'd like to turn it over to Ken to discuss our financial results for the course.
Thanks, David if we move to slide four in the presentation total loans at the end of the third quarter were $3 3 billion up five 6% from the second quarter and up 10, 9% from the from September 32021.
We are pleased with the growth in franchise finance small business lending and consumer as well as the strong origination activity in our construction business. We also saw growth in our single tenant lease financing portfolio as the team had another nice quarter of origination.
This activity was offset by the continued decrease in healthcare finance, which has been running off for several quarters now and we will continue to do so.
Moving on to deposits on slide five overall deposit balances were up modestly from the end of the second quarter, both non maturity deposits and Cds declined offset by an increase in brokered deposits. The decline in non maturity deposits was due primarily to lower bass deposits at quarter end and the.
Decline in Cds reflects the impact of our continued strategy to avoid the price competition in the CD market, which is even more intense than for money market balances.
Price competition in the digital checking and money market space combined with the secular trend of overall deposits, leaving the banking system has made it challenging to grow deposits.
Furthermore, as you can see on the deposit table in the earnings release, we experienced a significant decline in bass deposits. We expected some volatility in these deposits as we noted last quarter. The fintech space has been experiencing some upheaval, we are seeing a rational return and focus to long term viability and prop.
Stability as opposed to simply customer or revenue growth.
While we applaud the common sense approach.
Changes at <unk> in particular, this quarter impacted our pipeline.
In the first case, the pace of withdrawals in an existing fintech deposit relationship increased dramatically throughout the quarter. As a result, we had to access the wholesale deposit and funding markets to supplement our own deposit generation efforts. We expect further decline on this relationship in the fourth quarter.
Another fintech opportunity that was looking like a done deal dissipated on us entirely.
But our pipeline of Fintech opportunities continues to build and we have confidence the programs. We have in pilot now will be in full production in the fourth quarter.
As David noted earlier, the cost of interest bearing deposits increased 56 basis points competitive factors drove deposit betas far above those experienced during the second quarter in both the digital bank and small business markets, we saw peer betas ranging from 75% to 115 per.
<unk>.
While we were by no means a price leader in these spaces, we did have to increase pricing in order to maintain balances include.
Including the fed rate increase in late September our current pricing on money market products results in our cycle to date beta of about 60%.
In terms of how this pricing impacted results actual price increases beyond expected deposit betas impacted the third quarter's deposit costs by 10 basis points and the fully taxable equivalent net interest margin by seven basis points.
Furthermore, the incremental effect of higher pricing in the wholesale funding market affected deposit costs by four basis points and fully taxable equivalent net interest margin by three basis points.
And while vast deposits decline from one quarter into the next the overall average balance was up from the second quarter as pricing on the bass deposits is tied to fed funds and the increase in the cost of these deposits also contributed to overall higher deposit costs.
Turning to slide six and seven net interest income for the quarter was $24 million and $25 $3 million on a fully taxable equivalent basis, both down around six 5% from the second quarter.
The yield on average interest, earning assets increased to $3, 91% from $3 six 5% in the second quarter due primarily to a 22 basis point increase in the yield earned on the securities and 167 basis point increase in the yield earned on other assets.
The reported yield on average loans was up two basis points from the second quarter.
The increase in new origination yields experienced during the quarter were offset by a number of factors.
Over 50% of loan balances funded during the quarter occurred during September .
Average balances in certain higher yielding portfolios were lower than expected.
Loan growth composition, and prepayment fees declining by almost $800000, while we do not expect those to remain elevated given the interest rate environment actual fees came in well below expectations.
Another factor that impacted loan portfolio yields as the fixed rate nature of certain larger portfolios and the lagging impact of the higher origination yields on the portfolio, which are expected to increase over time.
In total we estimate that these factors impacted the total loan yield for the quarter.
By about 14 basis points and the fully taxable equivalent net interest margin by 11 basis points.
As David noted, we recorded a net interest margin of 240% in the third quarter, a decrease of 20 basis points from the second quarter and fully taxable equivalent net interest margin was down 21 basis points to 253% for the quarter.
The net interest margin roll forward on slide seven highlights the pressure we experienced on both sides of the balance sheet as the positive impact from the loan portfolio, which came in below expectations was not nearly enough to offset the effect of increased price competition and higher pricing in the wholesale funding markets.
As demonstrated on the graph on slide seven the impact of deposits, leaving the banking system and the effect on price competition in wholesale deposit costs drove our monthly deposit cost higher throughout the quarter.
As far as top line interest income goes for the fourth quarter and into 2023, we continue to feel confident that the combination of new loan originations priced at higher levels variable rate assets repricing higher and draws on the significantly increased construction commitments, we will drive strong growth in total interest.
Income.
Currently we expect the yield on the loan portfolio to be up around 40% to 45 basis points for the fourth quarter with loan interest income up in the range of 16% to 17% compared to the third quarter.
Yes.
On the funding side with higher fluid rate expectations based on the federal reserve's aggressive language regarding rates and inflation, we do expect deposit costs to increase as well.
The pace of increases will depend heavily on price competition and the magnitude of fed rate increases throughout the quarter.
Across various scenarios, we expect the cost of deposit funding to increase anywhere from 75 to 95 basis points with total interest expense up in the range of 50% to 60%.
In terms of what effect. This has on fully taxable equivalent net interest margin. We expect a continued rise in deposit costs to compress margin further.
We're from 35 basis points in a more aggressive rate scenario to 25 basis points in a less competitive environment.
Turning to noninterest income on slide eight.
Noninterest income for the quarter was $4 $3 million consistent with the second quarter gain on sale of loans totaled $2 $7 million for the quarter up 800000 and.
Consisted entirely of gain on sales of U S. Small business administration, seven eight guaranteed loans, which activity in market premium commentary we're covered earlier.
Mortgage banking revenues were down this quarter due to a decrease in interest rate locks and sold loan volume as well as gain on sale margins again, driven by the higher rate environment and its impact on both the purchase and refinance markets as.
As far as expectations go for the fourth quarter, we expect noninterest income to be up as gain on sale of SBA loans should be comparable to the third quarter results and other <unk>.
Other income will benefit from planned distributions related to fund investments.
The near term outlook for mortgage remains challenging, but our team has been exploring new channels to increase origination activity that should help to maintain revenue consistent with the third quarter.
Yes.
Moving to slide nine noninterest expense for the second for the third quarter was $18 million consistent with the second quarter.
Salaries and employee benefits and consulting and professional fees declined from the linked quarter, while loan expenses in premises and equipment costs were higher.
The lower salaries and employee benefits expense was due mainly to nonrecurring items incurred in the second quarter, partially offset by increased head count and higher incentive compensation in small business and construction lending.
The decrease in consulting and professional fees was due to seasonality around the timing of third party loan review and stress testing.
The increase in loan expenses was driven primarily by fees associated with growth in our franchise finance portfolio, while the increase in premises and equipment costs was impacted by a nonrecurring 125000 write down.
On a software license we discontinued.
Now, let's turn to asset quality on slide 10.
Credit quality remains excellent as nonperforming loans and nonperforming asset ratios remain extremely low net charge offs of $179000 were recognized during the third quarter, resulting in net charge offs to average loans of two basis points.
Provision for loan losses in the third quarter was $892000 compared to $1 2 million for the second quarter.
The linked quarter change was driven primarily by reductions in specific reserves related to positive developments on certain monitored loans, partially offset by growth in the loan portfolio.
Yeah.
The allowance for loan losses increased $713000 or two 4% to 22 to $29 9 million as of September 30, and the ratio of the allowance to total loans decreased three basis points to <unk>, 92%. The decline in the coverage ratio was driven by the <unk>.
Changes in portfolio composition and reflects growth in certain portfolios with lower coverage ratios as well as the continued decline in healthcare finance balances that have a higher coverage ratio.
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 was 836% down from the second quarter due primarily to the increase in accumulated other comprehensive loss.
But while many banks continue to experience a decline in tangible book value per share ours remains stable during the third quarter at $38 34 per share.
During the third quarter, we repurchased 120000 shares of our common stock at an average price of $36 56 per share as part of our authorized stock repurchase program.
Including shares repurchased during the fourth quarter of 2021, we have now repurchased $25 $1 million of stock under the total upsized authorization of $35 million.
With capital ratios are strong as they are it provides the flexibility to support balance sheet initiatives, while also allowing us to remain in the market for our stock supporting our shareholders. When the price is not reflective of our franchise value.
With that I will turn it back to the operator, so we can take your questions.
Thank you we will now start today's Q&A session. If you would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by <unk>.
First question today is from George Sutton from Craig Hallum. Your line is now open.
Thank you guys. Thanks for all the detail provided so real.
We have one key question is related to the best deposit so.
We anticipated with these relationships.
<unk> rates would be relatively low to nonexistent.
They moved very quickly in the quarter and you mentioned they were tied to fed funds rate can you just walk through that specific dynamic a little bit more.
Well I think what we've seen in the vast space is.
That we've seen the pricing on bass opportunities increase as well.
And that specific opportunity that that we had.
That was in partnership with another bank that was working with the Fintech directly.
And in all honesty. The Fintech partnership there was it was a fintech depository that.
Kind of had a constantly changing business model.
And with the increase in market rates throughout the core really throughout the year.
The program Bank, we worked with kind of had to change pricing on it with that and move towards more of a market rate. So that's that's what impacted the pricing there I will say in some of the other opportunities with the platform partners. We're working with those deposit opportunities are priced much lower then.
This particular opportunity so I think our expectation on deposit opportunities in the bass basin with Fintech partners going forward will be priced at a lower level than what we witnessed with this particular partnership.
In the Fintech space George normally deposits today that we're seeing and at least at this current point that are totally free or the settlement accounts.
The payment services, which can be hundreds of thousands of dollars potentially.
Potentially approaching a $1 billion on large payment servicers, but the Fintech world, obviously, they're scrambling for earnings they need to make money.
And they know there is value in that deposit base. So six months ago. They are free today. They have a charge as Ken said not all of them are at pet.
<unk> funds rate, but the idea of just the Fintech world, providing billions of dollars of pretty money, that's really not out there today.
They are having to prove our path to profitability to continue to get funding Theyre looking for earnings wherever they can and some of that comments, obviously and selling off the cash so.
It's still opportunities and we're seeing some very good ones at much lower cost than fed funds rate, but it's not.
Totally pre game like it was two years or three years ago.
Understand thanks for the clarity.
I appreciate it thank you Sir.
Yes.
Our next question today comes from Michael Perito from <unk>. Your line is now open.
Hey, guys.
Good good afternoon.
<unk>.
I guess, just maybe a big picture question here.
With the stock where it is today I mean, where do you guys kind of see yourself proceeding from here right I mean, it doesn't seem like it it pays to grow the consumer books and funded with higher cost money market deposits. I mean, you guys mentioned the buyback and it seems like that's in play here, but just would love a comment on just.
Overall, maybe David about how youre thinking about what the priority should be is your budget for next year, just given this quarter and maybe a little bit of a slower rollout here on the SaaS side at least from a lower cost funding perspective.
Yes, Michael.
Hold back where pricing any loans that we're doing today on a 4% cost of funds, which obviously, we're not even remotely close to that yet, but anticipation of the fed pushes through to $4 $54 75 in early 2023, we're going to be there by the end of the year, depending on how long they hold that rate.
So we're not focused on growth we're focused on good solid margins.
We're focused on variable rate product, replacing some of the fixed term stuff that is rolling off our portfolios are large enough and the repayment structure that we're funding a lot of the new loan activity with cash coming back that was in the 4% to 5% range now rolling out the door in a $6, 7% to 8% range. So.
Yes, you're spot on it's not.
We're not totally done.
Done a lot of calculations for 2023, but we're not anticipating tremendous growth of any kind in any fashion until rates stabilize and we get a handle on where the marketplace is going I guess.
A little bit of maybe a good indication with a 10 year starting to rise.
The markets.
Thank you that things are stabilizing a little bit, but with an inverted yield curve when a lot of an awful lot of our product is priced off of 10 year does it make sense, we literally shut down a couple of the verticals in total where we just can't get competitive pricing.
And then.
Thanks, David and then on the maybe on the margin. So I mean, it sounds like you guys are good at.
Down to where you were at the beginning of 2021 give or take.
Obviously, there is some range on that but.
I mean.
What about after that I realize that's a loaded hard question, but I mean is this with the <unk>.
Fed on the trajectory. It is I mean is this a NIM in this with this balance sheet now that that likely head back down towards two or.
I hear David say about maintaining kind of good margin, but.
It's a challenging curve for your book of business as currently constructed so just wondering structurally if you guys think.
If you still think there's room for that margin to kind of trough.
The cycle much much higher than where it had the prior rate cycle on relative basis.
I think that's an accurate observation I think between this quarter, the third quarter, the fourth quarter and probably into the first quarter a bit is probably where we will feel the biggest impact of these rate increases if you think about it.
Kind of modeling as we said earlier, we're modeling towards the fed hitting $4 75, and if you.
You assume we got a 75 basis point rate rate rate hike coming up here in a couple of weeks and perhaps anywhere from 25% to 75 on top of that.
We're getting to that one.
We have already felt the full brunt of that so we'll kind of see those deposit costs continue to model a model upward.
But as David said on the loan side.
A lot.
The.
As opposed to where we were sitting maybe three months ago six months ago with a lot of loan growth in front of US today, it's going to be much more measured loan growth priced very rationally priced on the higher and lower growth.
Probably looking forward to next year, and not try and not giving any credit to any vast deposits or any cheaper deposits that come in the door, but just kind of looking at the deposit mix as it is today I mean, we're probably looking next year for the full year. Our margin is probably anywhere from say call. It $2 10 to $2 <unk>.
<unk>.
Yes, 210 to $2 20 with taking the.
The kind of the hits upfront and then over the course of the year kind of stabilizing and hopefully, bringing a kind of back kind of slowly upward near the end of the year.
And again Mike.
Sorry go ahead, Dave we just had a conversation about the best deposit there are a couple of opportunities out here that could really put significant.
Money on board quickly.
Quickly and one of the reasons that we didn't chase kind of the institutional CD gain one it's a 130 to 140 basis points higher than the consumer but some of the money market opportunities that we have opened up we can.
Stepped down pretty quickly and get out of that if we do land one of the whales that can drop several hundred million dollars in low cost deposits on this and there is still out there we're working with a couple.
We're not building that in the forecast until we have it in hand, so I agree with Ken I think we're going to get crunched during the fourth quarter will get crunched, probably a little bit in the first quarter, but with some of the pipeline and believe me you guys will be the first Mel.
If we can land a couple of these we could we could see a significant change to that.
Third second or third quarter 2023.
Have a good shot at pulling it back and pretty quickly.
Yes, and I think David hit on a key point there with that we have the ability.
If we do have those opportunities we have the ability to scale back in exit.
Some of the higher some of the higher cost deposit funding that we have on our balance sheet. It wouldn't take a terribly long time to move a lot of that off the balance sheet should we have an opportunity.
In the das or other fintech space or other deposit vertical opportunities. We're looking at so we can we can reposition very quickly.
Got it.
Thanks for spending a minute on that and then just lastly for me just to kind of pull this all together on that.
I mean, so you're at a little over $4 2 billion today on total assets I mean is it fair to think that that probably does not grow much as long as this kind of margin dynamic.
Is ongoing so maybe call it into the early part of next year that the balance sheet size likely doesn't change a whole lot is that a fair generally fair assumption.
Yes, I think so Michael if anything it will shrink a little bit so yeah, we're not going to do growth for the sake of growth by any means.
Okay.
Thank you guys I appreciate the taking my questions.
Thank you all right. Thanks, Mike.
Our next question today comes from Nathan race from Piper Sandler. Please go ahead.
Yes, hi, guys good afternoon.
And a question.
Just kind of drilling into the balance sheet and loan growth outlook. It sounds like you guys are going to be much more selective in terms of what you guys.
The balance sheet going forward. So I was wondering if you could just help kind of frame that up or are we thinking kind of more <unk>.
Oh single digit or mid single digit loan growth from here.
<unk> is around how you guys are thinking about the loan growth opportunities.
Or what you want to put on the balance sheet going forward in the context of the rate environment and what you guys are having to do on the deposit pricing side of things.
Well from the from the loan perspective, a lot of that is really just repositioning the loan book and letting some of the lower yielding assets just lower lower yielding books that were really not going to be originating new product and roll off with as we've said kind of a strong focus.
Again, we expect SBA to do well in the fourth quarter.
And SBA guaranteed.
Guaranteed balances we retain are priced after another rate hike those are going to have a nine in front of them.
Construction balances as we talked about our construction team had a great year.
So there is going to be a lot of draw activity over the next 12 to 18 to 24 months and those rates again with another rate hike on top of those I mean those are priced at.
Prime plus or <unk>, plus type spreads so youre going to have <unk> in front of those.
In.
In the franchise finance those new deals are being priced with <unk> in front of those.
So it's really just an even in the consumer space those rates have moved up as well in the <unk> and the horse trailers and theyre going to be mid high sevens, probably moving towards eights. There. So some of it is just repositioning the balance sheet a bit.
They are repositioning the loan portfolio could be a little bit of growth, but as we talked about it's really just letting some of the other portfolios cash flow and just replacing lower yielding stuff maturing with higher yielding originations.
If the fed stops at $4 70, or $4 50 to $4 75.
We will see almost overnight stabilization on the deposit side from our end and we will.
Revisit kind of what the lending opportunities are at that point, particularly 10 years starts decline.
And we get out of the <unk> verdict curve, our opportunities will change.
Tremendously part of RFP are obviously to date, they haven't had tremendous success and shutting down.
Lowering the CPI so if.
$454 75 doesn't get God forbid they decide they're going to move it up again into the five range.
We don't want to be kind of hung out to dry by doing a lot of activity now that's not adjustable rate and movable with the fed activity. So it's kind of a safety net for caution on our side.
Third.
<unk>.
Overshoots their target, we're not going to get crushed by it. So we will sit on the sidelines and kind of let the dust settle here and then kind of reevaluate.
Hopefully at year end, if they send out a message that they are done with the fantastic.
We'll wait and see what theyre up to.
Got it Super helpful and perhaps within that context can I appreciate your margin thoughts for next year.
And I guess, just thinking just in terms of the potentially cutting rates at some point next year, how elastic do you think your deposit breaking it can be.
Type of scenario or does the.
Outflows liquidity industrywide crops.
As a result of the competitive environment remaining pretty fierce from a deposit pricing perspective, even if the fed were to cut rates at some point.
Middle late next year.
Yeah.
I think from the deposit side it'll move as fast as it did this time around when they.
Okay.
We're going to be doubling up that drops back down to zero.
But if they cut rates.
Our peers are in the same position, we are particularly the <unk>.
Folks have you caught it yesterday citizens bank jumped money market rates to the consumers.
3% it had been in the $222 25 with the rest of us.
Lot of different reasons I can understand why they did what they probably did but.
Everybody will be as anxious as we are to bring it back down so I think the <unk>.
The fed has overshot the runway and they realize that and they start backing off early in 2023, we'll be able to almost get a penny for penny drop a quarter I think we can get that quarterback.
Okay great.
And then just in terms of thinking about the expense run rate lastly.
Any thoughts on just how youre kind of thinking about the timing of additional investments just given the margin environment that we find ourselves in today into the fourth quarter into 2020 through as well.
Yeah, I think if you probably look at what we had here for the fourth quarter.
<unk>.
You take that and maybe.
Run rate that and maybe add high single digit growth to that.
Kind of probably ramping up over the course of the year I mean, the one thing.
Obviously.
I think a lot of our costs, probably don't fully reflect true inflationary cost yet.
And obviously there is as we've been talking about here.
Over the course of the year, we have again continued to add to our staff continued to build out small business lending we've had to add folks in risk management to help with the bats side of things and the fintech initiatives in and just kind of bolstered some groups around the bank. So we have had some head count increase and there is probably going to be some inflation.
Aerie effects, there as well.
But we're going to try to do our best to keep.
Keep overall costs.
Within.
Under a double digit increase for next year.
Actually carrying that this one step further.
Yes.
Growth in staff numbers I think we are.
Ken said, we're kind of settling down.
We're getting a very robust SBA team.
With a great capacity and opportunities we've repositioned some folks internally.
And areas that we have growth and we have activity in compliance and wherever from the mortgage area. So we're trying to keep.
Key existing employees employed maybe in different positions. They have been historically, one thing that is going to hit us and I think it is hitting everybody in the industry.
Not going to get away with a 335% increase on salaries for.
For next year with <unk>.
<unk> social security being eight 2%, we're not going to match that but I would tell you.
We're probably looking instead of a three three and a half somewhere in that 67% average salary increase so that will be more impactful than it's been in past years, but.
The fight for good quality employees on a national basis with people, having the ability to work for virtually any company in the U S from home.
We are going to have to put in a pretty significant bump.
Bump on base salaries through 2022, or 2023 I'm sorry.
Yes.
Got it very helpful. I appreciate it guys.
Taking the questions.
Thank you.
Thanks, Sir Thanks Nate.
Just to reiterate if you would like to ask a question on todays call. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by chain.
Next question today is from Brett Robertson from Health, Greg Your line is now open.
Hey, guys good afternoon.
Hey, Brian .
Wanted to just go back to the Fintech for a second.
Maybe start with Treasury crime as I understand it it's more of a middleware and ledger that kind of integrates fintech. Some of the core and allows the bank to all of the single account for each fintech client versus plugging the pincheck directly into the core can you maybe explain a little bit more.
Scope.
The opportunity as it relates to Treasury Prime and these others that you are.
Looking at.
What.
Size range, we might be talking about them relative to the current.
Cost of the fantastic insight improves I'm not sure if I'm entirely clear on.
If you're expecting relative improvement in the beta is related to the syntax.
Okay.
Yeah, you may have.
Bret Treasury Prime is the long term seasoned veteran.
That kind of third party integration the fintech connects to them. They have a single source connection. So the overhead is minimal on our side return is much greater higher then going direct.
They have been around for a very long time and have a tremendous reputation.
Fintech companies.
That might have started with another provider.
That's not as strong.
And they are growing and outgrow the capacity if somebody else. These guys are the seasoned veteran they get the best deals the largest deals in the largest opportunity. So we've chatted with them off and on for months. It took us time to.
Get establish we are technically linked with treasury Prime we're finishing the testing of the credit card debit card connection with them.
They have a half a dozen.
Solid very large fin techs.
In Q that theyre working on integrating with that will need a banking partner. So we're now one of the 15 banks.
That are part of their organization so.
Where a lot of the other kind of middleware.
Services, they do service fintech organizations, but they're getting smaller.
If youre a credible fintech and you have capital and you have a real product that will go to treasury Prime first so it's taken us time to get that interface done and ready to go but we think there's tremendous opportunity there increase on the other side is a relatively new but dara the gentleman that runs.
The increase was like employee number three.
Of.
The large.
Unicorn credit card company.
As I mentioned in meetings before conversation, so it's kind of a fintech too.
<unk> coming back.
Background and what he helped create a strike.
The next wave.
Companies coming on board is who he is getting the shot at so but between these two connections we should get the hottest newest fintech to opportunities and we should also get some very stable.
Larger opportunities that maybe there the current situations not working for them anymore. So we think these two connections it's been a long time coming and it's taken some work on our part in their part.
Get things lined up but we think we have a really really strong future. The three we have in process with increase should all be live.
Two will definitely be live.
Real testing stages, now, but third should come live first quarter next year that one is deposit lending, it's the full gamut of services.
He has a queue behind that of another seven to eight opportunities for us to look at so.
As I mentioned time and again, we've looked at an awful lot of opportunities as we've looked at a lot of third party providers, but we think we've really honed in on two of the best in the industry that we can now.
Really start to produce some results in the not too distant future.
Okay.
That's really helpful. And then I guess I just wanted to make sure I am clear on the.
The opportunity to improve the relative deposit beta on the spin taxes is that an in play or is it more just managing.
The relative opportunities for the Fintech growth on the deposit side.
It's a little bit of both I think we can.
So we've talked as Ken mentioned, a while ago and added to that.
Some of the beats up the policy that we have now we can unwind pretty quickly. So if we truly do get a fintech opportunity that several hundred million dollars.
Low to no cost as George stated.
Our chatting with a couple that have that potential.
But I can't give you a number at this point.
We thought as I talked last time that we had a lending opportunity that would have been a tremendous fee income producer for us here in the fourth quarter and it just literally evaporated it walked away so.
We're not forecasting anything at the current time, but if we get one running that is significant and believe me. We will we will put out a press release and let you guys know just as soon as it's queued up but there are.
Without question some opportunities in the pipeline today that could have significant impact on our cost of funds.
Okay.
With that.
And then the other question was just around the loan growth in the production of our originations in the quarter of $190 million I think you mentioned and obviously.
A lot of the growth this quarter was in the franchise finance portfolio, how much of the originations wasn't construction and is back if I understand correctly going to be the <unk>.
<unk> of the growth on the maybe the next quarter or two or maybe can you walk through a little bit of that piece as well.
Yes. The 190, you referenced that was the that was the amount of <unk>.
Unfunded originations I guess, a little bit of it funded but for the most part that was the origination activity from our construction team.
Okay and that added to what we already had in unfunded commitments basically unfunded commitments right now or as of the end of the third quarter of roughly $365 million.
So that is going to be a significant part of loan and written by true funded originations over the next 12 to 18 months and longer.
And that's obviously something we're happy with and want to fund because thats. The vast majority of that activity is all variable rate construction priced at higher yields in the environment that we're in.
So yes, that's that's going to be a big piece of the growth of the well, let's I'd say growth, it's going to be part of what you would see a change in the composition of the loan portfolio youre going to see other portfolios, perhaps decline, but youre going to see construction balances.
Again.
Hard to always predict the timing quarter to quarter of draws but over the course of the year, we feel confident that we're going to have significant drilling activity and again as we've said very nice tie rate variable rate.
Activity.
Okay, and then just lastly for me on expenses and cash.
The run rate you mentioned for 23.
Is the compliance and back office fully built out with a fintech.
What form or do you need to have some additional hires.
From my perspective.
At the current time, we we actually just completed our safety soundness exam and one of the things they focused on as you've probably seen in the press a couple of banks have gotten in trouble for not having good compliance programs in place for their vast operations and.
We passed and with flying colors. So yeah, we've got a significant team structured today.
Sure.
If we get a couple of whales, we might add a body or two that there'll be paid for but the crew to get us off the ground and get us up and established with everything we have in the pipeline as is with US today. So yes, that's already all built in.
Okay great.
Great appreciate all the color guys.
Thank you Sir Thanks, Brett.
We now have a follow up question from Michael Perito from <unk>. Your line is now open.
Okay.
Hey, guys yeah. Thanks.
Just wanted to make sure I heard you guys for you.
You were mentioning a couple of different like individual growth rates, but overall, you had said low double digit growth on noninterest expense next year correct.
Yeah correct.
Okay. Thank you.
And then just secondly, just last two quick questions. Just obviously the earnings kind of mix and the growth it's all shifting.
Quite a bit the next few quarters, just any initial thought on kind of where the tax rate might shake out.
Just I guess near term, but also a pleasure to have for next year. The range that we should be thinking of.
Yes, I think we will.
Robbie migrate down a little bit I mean, I think we are.
Roughly.
10, five or so this quarter.
That's probably I would say probably 10% to 11% over the next probably it probably over the next several quarters is the right way to look at it.
Great. Thanks, guys for the follow up.
Thanks, Mike.
Sure.
There are no further questions at this time, so I'll hand, you back over to David <unk> for closing remarks.
Thank you do well obviously guys. This is a very historic rising rate environment.
Leave me, we are using all of the discipline and tools that are disposal to preserve earnings and we remain intently focused on driving higher driving higher levels of return for.
For the shareholders and we appreciate your time and conversation today.
For joining us.
That does conclude today's call you may now disconnect your line.
Okay.
Yeah.