Q2 2023 First Internet Bancorp Earnings Call
Good day, everyone and welcome to the first Internet Bancorp earnings conference call for the second quarter of 2023.
Be advised that all participant lines have been muted to prevent any background noise. After the presentation. We will conduct a question and answer session and please note that today's conference is being recorded.
I'll now turn the conference over to Larry Clark from Financial Profiles, Inc. Please go ahead Mr. Clark.
Thank you Sylvie good day, everyone and thank you for joining us to discuss first Internet Bancorp's financial results for the second quarter of 2023.
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 this 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 up the call 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 that person in a bancorp that involve risks and uncertainties.
Various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements.
These factors are discussed in the company's SEC filings, which are available on the company's website company.
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 for 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 well as the reconciliation of the GAAP to the non-GAAP measures at this time I'd like to turn the call over to David.
Thank you Larry good afternoon, everyone and thanks for joining us today as we discuss our second quarter 2023 results.
Starting with the highlights on slide three I would like to take a few minutes to discuss some of the key themes for the quarter.
Following the events that occurred in March we responded quickly to further enhance our balance sheet liquidity, we produced strong deposit growth during the quarter, which far outpaced loan growth and drove our loan to deposit ratio down to below 95%. While these actions resulted in higher deposit cost and cash balances.
Which impacted net interest margin during the quarter the pace of increase in deposit costs slowed to its lowest point in four quarters and loan portfolio yields continue to rise.
The yield on our new loan originations increased to $8 four 2% during the quarter up 66 basis points from the first quarter.
Continue to execute our strategy of optimizing loan portfolio composition to funding growth in higher yielding and variable rate lines of business with cash flows from longer term fixed rate portfolios are.
A notable highlight of the quarter was the performance of our SBA team, which posted its highest level of quarterly gain on sale revenue to date up 20% over the prior quarter. The team is firing on all cylinders as year to date originations are up 216% over the same period of 2022.
For the SBA 2023, physical year to date, we remain a top 10 seven a program lender.
The combination of repositioning the loan portfolio and delivering consistently higher revenues from our SBA business provides a foundation for us to achieve stronger earnings and profitability.
Deposit costs stabilize our capital levels remained solid with tangible common equity to tangible assets of seven point of 7% and a common equity tier one capital ratio of 10 point, 10%.
While we are in a much better position than many other banks related to the impact of unrealized securities losses on tangible common equity.
Does have an effect on the ratio. Furthermore, carrying above average cash balances essentially an inflated balance sheet also affects the tangible common equity ratio.
With no real impact to most of our regulatory capital ratios.
Tangible common equity was also affected by our share repurchase activity as we purchased over 200000 shares during the quarter, which allowed us to once again deliver an increase in our tangible book value per share and finally related to credit I would like to remind everyone that our exposure to the office commercial real estate Mark.
It is less than 1% of our total loan balances.
Small amount does not include any central business district exposure and is limited to suburban medical office space.
Now turning to our financial and operating results for the second quarter of 2023, we reported net income of $3 9 million and diluted earnings per share of <unk> 44 cents.
Despite higher funding cost total revenue was $24 million down modestly from $25 million in the first quarter as the growth in SBA revenue helped to offset a decline in net interest income.
<unk> operating expenses were relatively in line with our expectations given the strong origination activity in SBA and you can see the impact of the cost savings from existing mortgage from exiting mortgage as noninterest expense to average assets declined to 152%.
Overall loan growth was relatively modest growth in construction small business lending and consumer was offset by declines in public finance healthcare and single tenant lease financing.
Our construction team had another excellent quarter originating over $115 million in new commitments and growth of over $34 million in funded balances.
At quarter end total unfunded commitments rose to $450 million, leaving us well positioned to continue optimizing the composition of the loan portfolio.
Consumer lending team also had a great quarter as the trailers recreational vehicles and consumer loans portfolio were up on a combined basis almost $14 million. We remain focused on the super Prime market and have been increased rates with new production coming in well above 8% delinquency in these ports.
<unk> remains very low as well at just four basis points.
Overall credit quality remains strong as nonperforming loans to total loans declined to 17 basis points nonperforming loans declined $3 million in the second quarter due primarily to the resolution of the C&I a participation loan that was partially charged off in the first quarter.
In late May we see the pay off of our remaining balance and recognized a recovery of about $200000.
With the decline in nonperforming loans nonperforming assets to total assets improved to 13 basis points down from 20 basis points last quarter.
Additionally, delinquencies 30 days or more were just nine basis points of total loans down from 13 basis points at March 31.
Lastly, I want to provide an update on our banking as a service and partnership initiatives.
We are encouraged by the growth we are seeing from our existing programs total deposits from our banking as a service partners were up 86% from the first quarter and totaled $154 5 million at quarter end.
Additionally, these partners generated almost $3 billion in payments volume, which was just about triple the volume we processed in the first quarter.
From a revenue perspective total banking as a service fees were up 34% quarter over quarter.
More importantly, the revenue channel is becoming more durable with reoccurring revenue from oversight and transaction fees up almost a 180% from the prior quarter.
Our banking as a service channel is more than a promising opportunity for diversified revenue streams.
We view, our fintech relationships is a vital resource for expanding our capabilities for our consumer and small business banking customers in the second quarter, we began testing payments through the RTP network from the regional clearinghouse and this month first Internet bank was proud to participate in the first ever transactions processed through the.
A long awaited fed now service.
These are just the latest evidence of our 25 year commitment to delivering leading edge financial solutions, our capabilities and our Osprey Nerio spirit and sure. We will continue to be the bank of choice for consumers small business and Fintech partners alike.
To recap my prepared comments there were several good things about the quarter that leave us very optimistic regarding the outlook for our first center that from a safety and soundness perspective liquidity has very robust credit quality remained strong and capital levels are solid.
The pace of the federal reserve rate hikes declining and perhaps nearing the terminal rate, we experienced a corresponding decline in the pace of that.
Increase of deposit costs.
This combined with the strong and still growing performance of our SBA team and the continued improvement in our loan portfolio composition leave us feeling very confident that once the federal reserve hits its terminal rate revenue will rebound with growth and profitability accelerating quickly once interest rates start coming down.
I'd like to turn the call over to Ken for more details of our financial results for the quarter.
Thanks, David now turning to slide four David covered the highlights for the quarter from a lending perspective, so I will just add some additional color consistent with our focus on higher yielding asset classes. We were pleased to see that our second quarter funded portfolio loan origination yields continued to increase from the first quarter.
Of the fixed rate nature of some of our larger portfolios. There is a lagging impact of the higher origination yields on the overall portfolio.
However, these originations should have a positive impact on the loan yield in future periods.
Our SBA construction and franchise finance channels continue to have very strong pipelines similar to what we accomplished in the second quarter. Our goal is to fund. The majority of this production using cash flows from other portfolios as we continue to rebalance and optimize the composition of the total loan portfolio.
Moving on to deposits on slides five through seven for the quarter, our deposit balances were up $232 million or six 4% from the end of the first quarter.
The majority of the deposit growth during the quarter came from Cds, where strong demand led by consumers resumed across the board we originated $417 million in new production and renewals during the quarter at an average cost of $4, 93% and a weighted average term of 15 months. These were partially.
Really offset by maturities of $177 million with an average cost of $2 four 1%.
Looking forward, we have $180 million of Cds maturing in the third quarter with an average cost of 3.07% and $263 million maturing in the fourth quarter with an average cost of $4 three 2%.
Additionally, brokered deposits increased $36 million from the end of the first quarter as we brought in some funding early in the period to supplement on balance sheet liquidity.
Non maturity deposits were essentially flat quarter over quarter as declines in noninterest bearing checking and money market balances were offset by an increase in interest bearing demand balances primarily related to banking as a service.
With the strong deposit growth during the quarter and a high level of on balance sheet liquidity, we are able to rationalize the deposit base and lower overall deposit cost by returning over $160 million in deposits priced at premiums to fed funds.
Yes.
As a result of all the deposit and interest rate activity during the second quarter the cost of our interest bearing deposits increased fifth by 51 basis points from the first quarter, which as David mentioned is the slowest pace of growth over the last four quarters.
Looking at slide six at quarter end, we estimate that our uninsured deposit balances were $938 million or 24% of total deposits down from 26% at the end of the first quarter the.
The decrease was driven primarily by the decline in money market balances conversions to reciprocal deposits and drawdowns on construction related noninterest bearing balances.
As a reminder included in the uninsured balanced total our Indiana based municipal deposits, which are insured by the Indiana Board for depository and neither require collateral nor are nor are reported as preferred deposits on the banks call report.
There are also certain larger balance accounts under contractual agreements that only allow withdrawal under certain conditions.
After adjusting for these types of deposits are adjusted uninsured balances dropped to $685 million or 18% of total deposits comparing favorably relative to the rest of the industry.
Moving to slide seven at quarter end, we had total liquidity of $1 2 billion, including cash and unused borrowing capacity.
With the deposit growth over the course of the quarter cash balances increased over $160 million.
Furthermore, our loans to deposit ratio declined to 94, 6% at quarter end, our cash and unused borrowing capacity represents 127% of total uninsured deposits and 174% of adjusted uninsured deposits.
While it appears that the worst of the crisis is behind US we continue to feel comfortable that we have the ability to meet any future customer liquidity needs if they arise.
Turning to slides eight and nine net interest income for the quarter was $18 1 million and $19 $5 million on a fully taxable equivalent basis down seven 3% and 7% respectively from the first quarter.
The yield on average interest, earning assets increased to $4 eight 9% from $4 six 9% in the linked quarter due primarily to a 19 basis point increase in the average loan yield.
A 49 basis point increase in the yield earned on other earning assets and a seven basis point increase in the yield earned on securities.
The higher yields on interest, earning assets combined with growth in average loan and cash balances produced strong top line growth and interest income, increasing almost 12% compared to the linked quarter.
As David mentioned earlier, while deposit costs continue to rise the pace of increase was the slowest in the past four quarters and as a result, net interest income contraction was lower and in line with our expectations.
We recorded a net interest margin of 153% in the second quarter, a decrease of 23 basis points from the first quarter.
Fully taxable equivalent net interest margin for the quarter was 164% down 25 basis points from the prior quarter.
As David mentioned in his comments, we carried higher cash balances during the quarter given the volatility in the banking industry, which we estimate to have negatively impacted net interest margin by 6% to seven basis points.
The net interest margin roll forward on slide nine highlights the drivers of change and fully taxable equivalent net interest margin during the quarter.
So similar to this quarter with higher priced new loan originations and variable rate assets repricing higher we believe that we will deliver another increase in total interest income for the third quarter. Currently we expect the yield on the loan portfolio to be up around another 15 to 20 basis points for the third quarter.
Based on Yesterdays Federal reserve rate increase and perhaps another one later in the year. We also expect deposit cost to increase in the third quarter, although at a much slower pace than what we saw in the second quarter.
Given these expectations as well as the impact of carrying higher on balance sheet liquidity, we anticipate the net interest margin and net interest income will contract further in the third quarter, although again not nearly at the same pace as prior quarters.
Assuming the federal reserve hits its terminal rate later in the third quarter deposit costs are expected to stabilize allowing net interest income and net interest expense to be kind of rebounding or net interest margin to begin rebounding upward in the fourth quarter.
Turning to noninterest income on slide 10, noninterest income for the quarter was $5 9 million up 400000 from the first quarter.
On sale of loans totaled $4 9 million for the quarter up 20% over the first quarter and consisted entirely of gain on sales of U S. Small business administration seven a guaranteed loans.
Our SBA team continued its track record of growth as sold loan volume increased 16% quarter over quarter, while net premiums continued to improve and were up 40 basis points.
Looking at the Bar chart of quarterly noninterest income and item that I want to point out was that with the growth in our SBA business over the last several quarters, we have been able to backfill and even exceed any potential gap in revenue due to exiting the mortgage business.
Moving to slide 11, noninterest expense for the quarter was $18 7 million down $2 3 million from the first quarter, excluding $3 $1 million of mortgage operation and exit costs recognized in the first quarter noninterest expense on a comparable basis increased $800000 in the.
Quarter. The majority of the increase was in salaries and employee benefits due primarily to higher SBA incentive compensation related to the increased origination activity.
Deposit insurance premium increased as well due to year over year asset growth and changes in the composition of the loan portfolio. These increases were partially offset by declines in several other expense categories.
Now, let's turn to asset quality on slide 12, David covered the major components of asset quality for the quarter in his comments I will just add some color around the provision and the allowance for credit losses the.
The provision for credit losses in the second quarter was $1 7 million compared to $9 $4 million in the first quarter, which included the partial charge off of this large C&I participation loan.
The provision for the second quarter reflects net charge off activity during the quarter and an increase in the reserve for unfunded commitments, partially offset by the positive impact of zinc economic forecasts on quantitative factors related to the allowance for credit losses on certain portfolios.
The allowance for credit losses, as a percentage of total loans was 99 basis points as of June 30th compared to 102 basis points as of March 31.
The decrease in the allowance for credit losses reflects the positive impact of economic data on forecasted loss rates on certain portfolios mentioned earlier, partially offset by higher <unk> higher coverage ratios in the C&I and SBA portfolios, excluding the public finance portfolio the allowance for credit losses represented one one.
2% of loan balances.
With respect to capital as shown on slide 13, our overall capital levels at both the company and the bank remains solid the tangible common equity ratio declined 37 basis points to 7.07% due to the combination of an increase in the accumulated other comprehensive loss as interest rates ticked a little.
Higher at quarter end and share repurchase activity, partially offset by net income for the quarter.
As David mentioned earlier, the tangible common equity ratio was also impacted by deposit growth during the quarter and maintaining higher cash balances.
If you exclude the accumulated other comprehensive loss and adjust for normalized cash balances of $300 million. The adjusted tangible common equity ratio was 8.0% to 1%.
From a regulatory capital perspective, the common equity tier one capital ratio remained very strong at 10, one zero percent.
During the quarter, we repurchased two two.
200, 203000 shares of our common stock at an average price of $13 52 per share as part of our authorized stock repurchase program.
In total we have repurchased $38 $9 million of stock under our authorized programs since November 2021 as.
As a result of share repurchase activity tangible book value per share increased to $39 85 at quarter end up almost 4% year over year.
Before I wrap up my comments I would like to provide some additional comments on components of forward earnings.
With regard to noninterest income as our SBA team continues to grow and deliver consistently higher origination activity. We expect noninterest income to be in the range of 6 million to $7 million in the third and fourth quarters, which equates to a range of $23 $5 million and 20 to $25 5 million.
For the full year 2023 above our previous guidance.
In connection with the increased level of SBA originations, we do expect compensation expense to increase as well. Therefore, we now expect total noninterest expense to be in the range of $18 5 million to $19 $5 million for the third and fourth quarters. This equates to a range of approximately $73 five.
To $75 5 million for the full year, which excludes approximately $3 million of mortgage related costs recognized in the first quarter.
Looking forward to 2024, we are extremely optimistic about the ability to generate strong revenue growth, even if the federal reserve stays higher for longer continued improvement in the composition of the loan portfolio combined with stable deposit costs should produce growth in net interest income and an improved net.
Interest margin.
Furthermore, noninterest income should continue an upward trend as SBA and banking as a service fees increase when adding a mid single digit percentage growth in operating expenses. We are currently forecasting 2024 earnings earnings per share to be north of $3 per share.
With that I will turn it back to the operator, so we can take your questions.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone you will then hear a sweet home prompt acknowledging your request and if you would like to withdraw from the question queue. Please press star followed by two and if Youre using a speakerphone you will need to lift the handset before pressing any keys. Please go ahead.
Press Star one now if you have any questions.
And your first question will be from Michael Perito.
<unk>. Please go ahead.
Yes.
Hey, guys. Thanks for taking my questions good afternoon.
Hey, Mike.
Ken Sorry, I was kind of just like furiously scribbling there at the end and I. Just did you give any color to the $3 EPS for 24, what are some of the kpis behind that around like name in credit assumptions I heard the mid single digit expense growth I think off of the <unk>.
<unk> 1918, five to 19, five I guess, but what were some of them did you communicate anything else or if not can you.
No I gave you a little bit more color I mean, I think once once the fed gets to its terminal rate deposit costs are going to stabilize I mean in terms of the cost of funds.
And dollar costs. So any any dollars of interest expense would just be in line with balance sheet growth and it's really getting net interest income growth is really as deposit costs are stable, we're going to drive higher growth out of the loan book because we're going to continue to remix the portfolio I guess the point to the example of that we talked about.
David mentioned, we have $450 million of unfunded commitments in our construction business and the vast majority of that salt priced itself plus III. So as we kind of let some of the longer term fixed rate portfolios continued to pay down I mean like for example, health health care, we're not originating anything new that's going to pay down.
The inverted yield curve is making business difficult in other lines of business. It's really just continuing to remix that with growth in construction and growth in SBA growth in franchise.
We will probably expect continued modest growth in <unk>.
In the consumer verticals as well so it's just really driving more loan income while deposit costs remained flat to drive kind of get NII and net interest margin rebounded in 'twenty four.
And again on the fee side as well.
Look the past couple of quarters.
Extremely well theyre going to continue to grow.
And we're picking up an increased amount of bass fee. So we do expect growth in noninterest income as well.
I mean, that's got to assume well I got two in a quarter or $2 15, a M. Right I mean, just ballpark like you get to that.
Fourth fourth quarter, Michael will be back in the 190 range pretty close to two.
I mean for 'twenty four.
24, that's what I'd say by fourth quarter, 'twenty or will be setting about somewhere in the 190 to 195 range.
Okay.
And thats coming off it sounds like I mean, you guys are going to trough around maybe $150 55 next quarter based on what you see today in the high class night.
Yes, it kind of depends on how the rest of the market responds to it but right now nobody seems to be going crazy.
Bumping up the rates.
So if.
We can stay in that 10 to 15 basis point move.
Yes, okay.
And Mike we're taking I think we're taking a pretty we're assuming in those numbers, we talked about that with the fed is higher for longer.
As well so we're trying to take a very I think conservative approach to that and I think if.
Let's just say they start cutting rates next year that's great.
I gotcha.
Very good and.
On the SBA piece.
The first half of this year was great. It sounds like the pipelines are good or are you actively adding more talent. There still is and I guess are you starting to kind of formulate any niches or areas of strength like on a more granular level or is there still pretty broad based general <unk> lending in gist.
Some more color is that group becomes a bigger contributor here.
Say as far as a niche Michael probably 60%.
70% of the deals we're doing our business acquisitions. They are not startups, so we're helping either generational transfer wealth or it.
Employees, taking over for founder this leaving the company. So we're not doing a tremendous amount of brand new startups, it's not a husband and wife team getting Papa John's.
Franchise or something of that nature.
It is very diversified all across the country, we've been very fortunate in getting some very solid bdo's from other organizations that have kind of pulled back on lending in general.
So yes, the pipeline is the strongest it's ever been great quality.
Getting good margins in the future is really really bright on the SBA side.
And you guys have been what are the margins you've been selling that generally at this point as it been in the.
The 6% range or or wherever you guys Ben.
No Mike we've been higher than that in fact for the quarter. Our net premium which is gross premiums were 109 and a half and after you net out some of the costs are net premium was was closer to a one O way.
Okay, and most of that's variable rate production or yes.
Yes. It is.
Yeah, Yeah, okay.
And.
Then just lastly on on the.
Credit side it.
It was good to see some recovery in no recovery, but just some normalization of rebound whatever words, you want to use and then the credit cost and just curious I mean, it didn't seem like it based on the prepared remarks, but have you done any.
Has anything else popped up as an area of concern or have you guys run any recent like third party stress test or anything like that around any of the commercial real estate book I'm. Just curious if you could give us anymore.
Color kind of recently on any analysis, you've done on the strength of that loan portfolio.
I would say on the single tenant side, we actually did a review of every one of those loans about 60 days ago went through and finding no.
Cracks no kinks in the armor, we just completed a review with cant remember was it Rms Rsi.
Sam RSM I keep getting the letters turned around they just came in and then an external review Michael are probably about 60% to 70% of our total commercial both single tenant commercial real estate, C&I et cetera, and they had no degradation of any of the loans.
No questions comments issues on anything out there obviously is the.
Volume has fallen off on single tenant public finance and stuff. We're spending both teams are very active talking to clients staying on top.
If there are any issues, we're making sure everything is up to date on financials.
Tax returns et cetera et cetera. So.
The books, probably as solid as it's ever been.
Quality of it obviously.
With the repayment activity going on I think our average loan to value on single tenant now is approaching 45%. So.
Yes, we're not seeing anything I will tell you the SBA world obviously.
Some of the smaller loans from individuals.
<unk>, four or five years ago, or something that kind of halfway through it and have run their business for five years with a.
5% interest rate now pain soon to be almost 11%.
Put some squeeze on them, but the SBA has a lot of programs in deferral services and things available to those folks like I said as Ken said earlier, yes.
The fed stops moving the needle I think everything we will.
Settle down in the SBA space as well as.
Our general business and activity, we're not seeing anything whatsoever out there that's causing concern.
Great. Thank you guys for taking my questions for the color I appreciate it alright appreciate it Mike Thanks.
Next question will be from Brett Robinson.
Please go ahead Sir.
Hey, guys. Good afternoon, thanks for the questions.
Wanted to first.
Ken I didn't quite get what you were intimating on the third quarter in terms of the margin at <unk>.
Relative to the dollars of NII, if I heard you correctly.
Youre expecting the margin up 15 to 20, but I thought I heard that you are I know youre expecting NII to be a little lower and <unk> and then building back in <unk> was that was that the implication.
Yes, let me clarify.
We expect like loan yields overall, the overall loan portfolio yield to continue going up in the range of 15 to 20 basis points, but.
Given the rate hike yesterday from the fed and perhaps another one here on the horizon, we do expect deposit costs to continue to go up as well.
You look back in prior quarters and the pace of deposit cost is obviously it has outpaced the increase in loan and securities and cash income.
We expect that gap to narrow significantly in the third quarter, we still expect a little bit of compression on net interest margin.
Net interest income and again some of that is also just being driven by just carrying higher cash balance as well.
The pace of D of I guess decrease in NIM the pace of increase in deposit costs will be down significantly from what we even saw in the second quarter.
Okay that makes more sense.
And then wanted to ask on the fee income guidance are you basically assuming that the SBA is kind of flattish in the back half of the year. Please I know we had.
We discussed as you just mentioned the payments, possibly adding fee income on the Fintech side is there any guidance.
For the Fintech fee income in the back half of the year.
I think we'll continue to see it increase it.
It's the the dollar amount on a quarterly basis isn't huge yet, but it is growing as we talked about as David mentioned the recurring fees are were up significantly quarter over quarter and that is growing it's going to be a much more meaningful contributor next year.
The SBA side.
I think we will probably see a little bit higher than what we averaged here.
And what we recorded in the second quarter.
Up a little bit there in both quarters.
So does that help you.
Yes, that's helpful.
And then maybe just last one for me on the.
On the Fintech front still.
I know we've talked about up.
Up to a 1 billion dollar deposit opportunity.
With with Fintech.
<unk> shifts any any update on that and kind of where you see that.
Fintech relationships playing out in the next year in terms of.
Both deposits and loans.
Yeah on that side, the $1 billion opportunity is still out here.
Issues, we're trying to negotiate on is the pricing for those deposits as we're sitting here now as Ken said, we sent over $100 million back in the last quarter and we are setting here since quarter end, our cash balance has already increased almost $200 million since the end of the quarter. So all of a sudden we're phenomenally cash.
Cash flush.
So I don't want to make a commit on the other side, taking a $1 billion that topic.
Fed funds.
<unk>.
We don't need to so we're negotiating a little bit on price there and we have other opportunities.
We do have a couple of very very strong lending programs that where we.
Working on one is heavy heavy into due diligence that could come together.
Hopefully we're targeting to.
Habit to all the processes and ready to go by the end of August the other one we're just getting started on it will come on in the fourth quarter, but we hope early on in the fourth quarter to have a couple of really.
Kind of brand name Unicorn type opportunities that we can announce.
One of the issues we have in the bass game is we've got about seven or eight companies that were over the finish line, there and testing and Theyre doing.
Their work on their side I think a couple of them have slowed down the launch.
And hesitation about their capital stack and whether they're going to how they can make it or they're kind of readjusting the business side, a little bit to make sure.
Fire something up and run out of cash that we've got probably four or five startups that we have been setting on for several months that.
All kind of seem to be getting excited and some movement going on.
The intriguing part probably in the last 30 to 45 days, we've seen by far and again the largest opportunities that have ever been presented to us. Some of them are individuals that are working with other financial institutions that they are.
Trade theyre going to run into some regulatory issues or some servicing issues that are looking for a new home. We have a number of folks that are back.
Backing themselves up that are working with other banks and they want it kind of spread the risks they are not in a situation of one institution gets sideways with the regulator they are cut off overnight.
I think the activity, we've done with our TP and the fed now program has kind of put a little bit of a spotlight on it is for some of the real time payment processing services that are coming.
The big opportunity and just to add one presented to me Tuesday of this week that could really really be intriguing a new company coming to us.
Trying to get into <unk> on the UCC stuff so.
They are coming through the door on a weekly basis, probably our biggest issues trying to decide who to who to work with and who to pursue.
But a lot of them are either bigger established programs are phenomenally well funded unicorns that are coming out that are getting ready to launch so that's good.
Third and fourth quarter here, it's going to be a lot of fun on the Bath side.
Okay. That's great appreciate the update there and thanks for all the color.
Thank you.
Question will be from Nathan race of Piper Sandler. Please go ahead.
Yes.
Hi, everyone I appreciate your questions.
Just curious in terms of kind of margin expectations that you laid out for the balance of this year and kind of getting back up to 190 by the fourth quarter of next year, what kind of deposit growth expectations.
Layering into that outlook and is the goal just to kind of keep.
The loan deposit ratio kind of near the <unk> level or do you guys anticipate kind of slowing growth and really stepping up on the <unk>.
The gathering side of things just to continue to bring down the.
That ratio.
I would tell you.
We're trying to actually kind of run a matched book.
Like I say, we're a little over flush on cash right now.
But ideally with new deposits coming in as I'm, telling everybody we have to have somewhere to put that out and if we can get it out.
Coming to the door.
Under five with the fed bumping again, we'll get closer to that 5% range that we can put it back out in the eight 5% to 9% range.
We will continue to do that Nate we're not going to we're not growing the balance sheet for the sake of growth by any means we also have a lot of capacity and with monthly repayments on the municipal and single tenant and stuff. We've got millions of dollars coming back in a month to month basis that are probably yielding an average of 4% that we're putting back.
And that eight nine range so.
We're semi flat kind of from year end and looking through 24 on the overall asset side, but we're definitely changing up the mix internally so.
Yes.
It will.
Be over 5 billion before the end of the year and probably stay somewhere in the $2 million to $300 million in growth over the course of next year.
Okay, Great and Ken I think you had mentioned that you have 100 million selman deposits or I'm, sorry Cds maturing.
In the third quarter.
Q.
100, 180 in the third quarter and over $260 million in the fourth.
Okay, and I guess any color just in terms of the replacement cost of those Tvs based on maybe your June spot rate or anything along those lines.
Yes, the third quarter going out the door in a renewal and that they're at a cost of $3 7 million and it's coming in right now just right at 5% and then the fourth quarter. The big note at $2 63.
At $4 32, and it will be covered with the CD in the range of that $4, 95%.
So that's another reason why our margins get a little bit better our CD book for probably the last 18 24 months has been pretty.
Nominally probably about 10 to 11 month maturity.
Great. So as that number is now off we're sitting at $4 32 is going to be replaced by five versus this past quarter, where we had 240 replaced by 480 that spread between them is getting thinner and thinner. So thats what helps the overall cost of funds won't increase at the rate that the.
Loan yield is increasing so that's helping that margin turnaround for us in the fourth quarter and early next year.
Got it that's very helpful.
Maybe one last one for me on just kind of the.
Outlook for share repurchases, obviously, you remain active in the quarter are there any kind of guidepost that we should be thinking about in terms of kind of the appetite to remain active and.
Just in light of what.
What's remaining on the.
Authorization.
I would tell you, yes, we've got about $16 million or so left on the authorization side of things.
One of the targets that we've kind of got internally.
Just a piece of the marketplace I guess more so than anything else is to try and keep the <unk>.
Tangible common equity around that 7% figure.
So to do that there is a lot of things. We can do we can shrink the balance sheet. We can pull back on the cash we can stop the share repurchase I would tell you the appetite when.
This past quarter, where we bought 200000 shares at an average cost of $13 52.
We were at that price, we'd be doing that all day everyday.
When we're getting back into the Twenty's and if we get back up towards.
Mid Twenty's, then will think twice about <unk>.
Mount that we're putting out and maybe hang on to a little bit slow it down a hair too.
Maintain capital we don't want to.
I guess, we just kind of have a soft target and obviously <unk> plays into that there's a lot of factors that come into play.
What it is as Ken said, if we normalized cash and we did not have the OCI.
Charge against that our TCE would be 8% plus so it's.
It's one we're playing with internally, we still have powder obviously.
For some reason.
Sure start going South again, and we'll get back heavy into the market, but I would guess it will slow down this quarter over what we bought last quarter.
Yes.
Yes, that's great color.
Just one last one.
On the tax rate going forward.
Yes.
I think right now with where with where earnings are we put into our forecast maybe a four 5% tax rate but.
As you know as you look over the at least this quarter is a good example, right we get we get a very strong benefit from the public finance portfolio.
So probably while earnings are kind of in the range, where they are here for.
This quarter next quarter.
That tax rate is going to be low if not a benefit.
Looking forward to next year, when we see rates rebound when we see earnings and revenue and earnings rebounding Youre migrating back to closer to probably a 10 to 12 right.
But here in the near term, it's going to remain low if not a benefit.
Got it.
Very helpful. I appreciate all the color. Thank you guys.
Thank you.
The next question will be from John <unk> at Janney. Please go ahead Sir.
Good afternoon guys.
Okay.
Ken just back to your comment on the tax rate. So when you are talking about you threw out a $3 number for next year.
Using a 10% to 12% tax rate.
Yes that one we are yes.
And then again sticking to the $3 for next year, what sort of I know you said, David you said 16 million share or 16 $16 million remaining under the buyback, but what sort of share count or buyback activity are you assuming with that $3 number.
None.
No.
Matt.
In 2024.
Okay.
Ken.
Yes, the book value by then John right.
David I own some stock personally so that would be great.
Yeah.
I'd be very happy.
Thanks for that one.
Ken on.
Your comment about fee income for the second half of the year, 6% to $7 million. So.
Kind of back of the envelope I guess that would imply SBA for the year, maybe 19% to $20 million for this year, where do you what sort of growth rate or where do you see that for next year for 2004.
Well I think we are.
We're probably looking at overall, maybe overall noninterest income growth in the.
Call it 15% to 20% with some of that coming from some growth in the bag fees as well as.
Growth in SBA.
Okay.
So yes.
As far as like if you if we look at.
Noninterest income to total revenues.
This quarter it was around 23% give or take so I would think if you're doing that sort of growth and given the what the margins doing and so forth fee income to total revenue is probably going to be what 25% to 30% give or take mid 20% to 30%.
It's probably closer to mid mid to higher <unk> I mean look we just repositioning the loan book with no increase in deposit cost is going to produce a nice increase in NII I mean, we're forecasting NII to have some nice solid growth there so that <unk>.
<unk>, probably ticks up a few percentage points, but it doesn't go to like 35%.
Okay. Okay.
And then one other thing you said I think on expenses for next year, you sort of said mid single digit growth again kind of getting towards that $3 number.
Yes.
Okay.
Next year, yes.
Okay, and then just circling back guys overall big picture credit quality you saw.
You had the one issue last quarter this quarter it looks.
More like what you guys have done in the past.
Any major concerns from a credit quality perspective, I mean, obviously for most banks still pretty much as good as it is as good as things can get but overall it looks like credit is pretty good for you guys.
Yes, John we've like I say, we might have a little bit of that's showing up in some of the older SBA loans, but.
Small size nothing huge and on the commercial side of things, where our portfolio of solid out there right now we're not really seeing anything at all.
Yeah.
Okay, and the single tenant lease portfolio still feel good about that.
Well that wasn't pristine theres no delinquency I think we only have.
Two units or three units that are dark and all of them have new tenants coming.
It's been phenomenal it's performing tremendously.
Okay. Okay. Thank you guys.
Thank you.
The next question will be from George Sutton at Craig Hallum. Please go ahead Sir.
Thank you David you provided a good perspective on your bass plans going forward in terms of some of the new potential partnerships I'm curious with the success you've seen in the growth quarter over quarter can you just talk about some of your existing partnerships where that strength was coming from.
The majority of it is coming to us to increase.
Who is in the Treasury Prime area, we're doing a lot of activity with <unk> and his team.
We are bringing we have officially.
Finished testing and whether we have our first treasury prime client coming forward.
Honestly the one we talked about a couple of months ago real real activity, we're fully engaged with ramp on their payment services at the current time.
And in the early stages, when we first signed with ramp we were doing a small number of states for them across the U S. But we are now I think nationwide and that volume is just going through the ceiling.
By far the biggest player that we have is the ramp credit card program.
Super and relative to fed now can you just walk through how this will wash through your.
Business model as it as it rolls out.
Yes, it's going to be interesting George.
Yes, see how that comes about we happened.
<unk>.
Thanks, I wanted to send it out in our press release, but we actually wound up doing the very very first transaction with that now with the credit Union right now its incoming only they haven't opened the payment side yet to be done here very shortly.
It'll be interesting to see how the fed now competes with RTP real time processing.
We actually have that channel up and running and we are using that with a couple of our fintech clients are testing that with us to the instantaneous payments and.
That will kind of compete with each other it will be interesting to see if the.
The logo of the Fad carries weight of RTP.
Yet to be determined, but the fed's throwing a lot of muscle at it kept on on time and so first thing in the.
20 years in.
Tried to deal with the Federal reserve, particularly in the tech space that they got something to the finish line on time.
So.
They don't want to get left behind by the rest of the world. So they really have some marketing muscle at it could be a really interesting program.
Obviously, everybody wants their money now and as you can move money seamlessly between individuals and companies on a real time basis.
Have a basically guarantee you eliminated really the need for wire services on a day to day basis.
It's got a lot of just huge potential in obviously, the economics of it versus wires and player much much easier to work with as well.
Great and one last question and I will be the only analyst to hold to one last question when I say that.
Very simple one.
Ken what.
What percentage of your loan book is variable rate.
Today, it's probably we're getting close to 15% today.
Perfect and as we grow that.
Look we're trying to trying to get that closer to 25% and higher as we kind of remix the loan book.
Thanks, guys.
Thanks George.
At this time I would like to turn the call back over to Mr. Becker for closing remarks.
Greg.
Thank you Sylvie.
Yes, I'd just like to thank you all for joining us today on the call. We're looking forward to finishing up the rest of the year and going into 2024, we probably gave you a little more forward guidance than we have traditionally and I would like to say that his guidance for 2024.
You have forecasted for us here in the third and fourth quarter is kind of we're laying in almost exactly on top of what you have out there a couple or a little higher a little low that youre averages when we put it together third and fourth quarter, we're going to be pretty close to what you have in the Q4 as and it really starts if the fed does call. It <unk>.
It's here.
With one more raise after this one we really start to see daylight at the end of the tunnel. So we're really excited about what the future has to offer us.
Our balance sheet positioning combined with our expansion in the small business and the banking as a service.
To drive greater revenue growth.
Bind with stabilized deposit costs next year and that obviously come to the bottom line and stronger earnings So as fellow shareholders. John We appreciate you being out there with us.
We remain very committed to driving improved profitability and enhance shareholder value. We thank you for your time and have a good afternoon.
Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
Okay.
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Yeah.
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