Q3 2023 First Internet Bancorp Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to the first Bancorp third quarter.
Earnings Conference call.
All lines are in listen only mode.
Following the presentation, we will conduct a question and answer session.
At any time during this call jewelry Grammy Tc sounds pretty spruce, our CEO for the operator.
This call is being recorded today 26.
Sure.
I would now like to turn the conference or to Larry Clark from financial profile.
Please go ahead Mr. Clark.
Thank you Sergio and good day, everyone and thank you for joining us to discuss first Internet Bancorp's financial results.
Third quarter of 2023.
The company issued its earnings press release yesterday afternoon, and it's available on the company's website. In addition, the company has included a slide presentation that you can refer to during the call.
You can also access these slides on the website.
Joining me 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 would like to remind you that this conference call contains forward looking statements with respect to the future performance and financial condition of first Internet Bancorp.
Risks and uncertainties.
Various factors could cause actual results to materially be different from any future results expressed or implied by such forward looking statements.
These factors are discussed in the company's SEC filings, which are available on the company's website.
The company disclaims any obligation to update any forward looking statements made during the call.
Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute 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 a reconciliation of the GAAP to non-GAAP measures.
At this time I would like to turn the call over to David.
Thank you Larry.
Good afternoon, everyone and thanks for joining us today as we discuss our third quarter 2023 results.
Starting with the highlights on slide three I would like to discuss some key themes for the quarter.
We generated strong deposit growth during the quarter bolstering, our liquidity profile and driving down our loan to deposit ratio below 92%. We also continue to transition the composition of our loan portfolio and optimize our overall balance sheet mix as new origination yields were up 50 basis points.
During the second quarter to 892% and they were up over 360 basis points from the third quarter of 2022.
At the same time, both the pace of deposit cost increases in the rate of compression in our net interest margin with the slowest they've been in five quarters.
Moreover, while one month does not make a trend we were encouraged by the month over month increase in our net interest margin in September.
Recognizing that macroeconomic and geopolitical factors remain outside of our control. We continue to believe that our net interest margin and overall net interest income have likely bottomed out and we will follow on that port path from here.
Another highlight for the quarter was our SBA teams continued outstanding performance.
Team again posted its highest level of quarterly gain on sale revenue to date, which was up over 14% from the second quarter, driven primarily by a strong increase in the sold loan volume.
Following our exit from the consumer mortgage business earlier this year, our mix of non interest revenue has shifted from what was an overreliance on the cyclicality of the low multiple mortgage business to what we believe is a more consistent reliable and growth oriented revenue strength, regardless of the interest rate environment and the <unk>.
Our nationwide SBA team is doing a great job of providing growth capital to entrepreneurs and small business owners across the country with year to date originations up 165% over the first nine months of 2022.
I am, especially proud to announce that for the Sba's physical year ended September 32023, we were the ninth largest seven a program lender in the country. This is a notable increase from a ranking of 27% position in the prior physical year.
We believe that the combination of our continued loan portfolio repositioning and consistent revenue growth from our SBA business positions us well for higher earnings and profitability as deposit costs stabilize.
Our overall credit quality remains strong as nonperforming loans to total loans declined to 16 basis points and nonperforming assets to total assets declined to 12 basis points.
Additionally, delinquencies 30 days or more were 22 basis points of total loans, while net charge offs to average loans remained low at 16 basis points.
And again I would like to remind everyone that our exposure to office commercial real estate is less than 1% of our total loan balance and does not include any central business district exposure.
Our capital levels remained sound with a common equity tier one capital ratio of nine 5%, 9% at quarter end, our deposit growth resulted in carrying an above average cash balances, which we think is prudent to do in the current environment.
Impact of higher interest rates also contributed to an increase in the accumulated other comprehensive loss that runs through equity. These factors weighed on the tangible common equity ratio. However, our capital regulatory capital ratios at both the company and bank levels remain well above minimum requirements.
Tangible common equity was also affected by our share repurchase activity.
We repurchased nearly 100000 shares during the quarter at an average price equaling equating to less than half of our tangible book value per share.
Also like to point out that the prudent conservative management of our investment portfolio and overall balance sheet has resulted in first internet being among the few banks to have grown tangible book value per share a key measure of shareholder value creation from the start of this historic cycle of interest rate hikes at the beginning.
Last year through the end of the most recent quarter.
Now turning to our financial and operating results for the third quarter of 2023.
We reported net income of $3 4 million and diluted earnings per share of 39%.
Despite higher funding cost total revenue was $24 8 million up from $24 million in the second quarter as the growth in SBA revenue helped to offset a decline in net interest income.
Additionally, operating expenses were in line with our expectations given the strong origination activity in SBA and our noninterest expense to average.
Assets was relatively flat at 153%.
We produced a healthy nine 6% annualized rate of overall loan growth with gains in franchise finance construction small business lending and consumer.
These were offset partially by declines in public finance health care finance single tenant lease financing and Investor commercial real estate as a reminder, the shift in loan mix as a result of a strategic initiative to focus on variable rate higher yielding products during our historic rapidly rising interest rates.
Our construction team had another strong quarter originating almost a $180 million in new commitments and producing growth of nearly $60 million in funded balances.
At quarter end total non unfunded commitments and our construction line of business increased to $527 million, leaving us well positioned to continue shifting the composition of the loan portfolio towards higher yielding variable rate loans.
Consumer lending team also had another solid quarter as the trailers recreational vehicles and other consumer loan portfolios were up on a combined basis over $17 million.
We remain focused on high quality borrowers and continue to obtain rates on new production in the mid 8% range delinquencies in these portfolios remained low as well at just one basis point in.
And lastly, I want to provide an update on our banking as a service and Fintech partnership initiatives in the third quarter, we announced a new relationship with Jarrett.
<unk> financial technology provider of fully manage commercial financial solutions for small businesses. Initially we will provide loan origination services for a large portion of those short term working capital lending product offered to the client base. We're very impressed with the <unk> team and excited about the.
<unk>.
This partnership will enable us to further increase our goal of providing small business owners and entrepreneurs access to capital, while maintaining the highest compliance and credit quality standards.
Is emblematic of the potential we see for banks and 10 text partner for positive customer outcomes and.
In conclusion, our third quarter results provide us with optimism regarding the outlook for our business from a safety and soundness perspective liquidity and credit quality remained very strong and capital levels or sale.
With the federal reserve rate hikes likely nearing an end we expect to see a continued decline in the pace of deposit cost increases and eventually stabilization. This combined with the strong performance of our SBA team and then continued improvement in our loan product portfolio competencies comp position leaves us.
Well positioned to achieve higher earnings and profitability as we look to 2024 and beyond with that 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 provide some additional color.
Consistent with our focus on variable rate and higher yielding asset classes. We are pleased that our third quarter funded portfolio origination yields continued to increase from the second quarter.
Because of the fixed rate nature of some of our larger portfolios. There is a lagging impact of the higher origination yields on the overall loan portfolio. However, as new origination yields had been consistently higher throughout 2023, we expect the overall loan yield to continue to increase in future periods.
Our SBA construction and franchise finance channels continued to have very strong pipelines. There is one caveat to our outlook on loan pipelines that I will speak to in a little more detail later that being the possibility of a government shutdown in November and the potential impact on the SBA pipeline.
As David just said moments ago, some macroeconomic and geopolitical factors remain outside of our control if we avert a shutdown and similar to what we accomplished in the second and third quarters. Our goal is to fund a portion 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 deposit balances continued to increase and were up $229 million or 6% from the end of the second quarter. The majority of the deposit growth during the quarter came from Cds with strong demand from consumers and small business we.
<unk> $428 million in new production and renewals during the quarter at an average cost of $5 one 4%.
And a weighted average term of 15 months.
These were partially offset by maturities of $180 million with an average cost of 3.07%.
Looking forward, we have $276 million of Cds maturing in the fourth quarter with an average cost of $4, three 4% and $459 million maturing in the first quarter of 2024 with an average cost of $4 62%.
So you can see the repricing gap between the cost of new Cds and the cost of maturing Cds is closing, which will contribute significantly to the continued pace of slowing deposit costs.
Non maturity deposits were down slightly at quarter end as declines in interest bearing checking and money market balances were offset by an increase in banking as a service deposits driven by higher payments volume.
Deposits from our banking as a service partners were up 5% from the second quarter and totaled $162 million at quarter end. Additionally, these partners generated over $3 $4 billion in payments volume, which was up 16% from the volume we processed in the second quarter.
From a revenue perspective total banking as a service fees were up 24% quarter over quarter with the large majority of the increase consisting of recurring oversight and transaction fees.
Additionally, brokered deposits decreased $12 million from the end of the second quarter as a contractual relationship matured early in the quarter and we continued to reduce higher cost portions of our deposit base.
As a result of all the deposit and interest rate activity during the third quarter the cost of our interest bearing deposits increased by 34 basis points from the second quarter.
As David mentioned is the slowest pace of growth over the last five quarters.
In addition to the large volume of Cds maturing over the next two quarters. We also have about $75 million of broker deposits maturing in the fourth quarter with a weighted average cost of almost 5%.
Our strategy and driving deposit growth earlier in the third quarter was to get in front of the July fed rate hike and lock in lower cost to replace the outflows from maturing deposits, while still maintaining more than adequate liquidity.
As I mentioned earlier, the weighted cost of new Cds during the third quarter was $5, one 4%, whereas the market is now pricing 12 to 24 month Cds between five 6% and 6%.
While we expect a certain percentage of maturing consumer and small business Cds to renew we're not competitive in pricing in the institutional and public funds markets.
When combined with the broker deposit maturities, we do expect deposit and cash balances to be lower at the end of the year, which should have the added benefit of relieving some pressure on both our capital ratios and our net interest margin.
Looking at slide six at quarter end, we estimate that our uninsured deposit balances were $948 million or 23% of total deposits down slightly from 24% at the end of the second quarter. The decrease was driven primarily by the new CD production, which generally consisted of balances below.
Insured limit.
As a reminder included in the uninsured balance total our Indiana based municipal deposits, which are insured by the Indiana Board for depository and neither require collateral nor are reported as preferred deposits at the banks call report.
As well as 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 $704 million or 17% of total deposits comparing favorably relative to the rest of the industry.
Moving to slide seven at quarter end total liquidity remains very strong as we had cash and unused borrowing capacity of $1 7 billion, our unused borrowing capacity increased during the quarter as we pledged additional collateral to the federal reserve with.
With the deposit growth over the course of the quarter cash balances increased over $55 million.
Furthermore, our loans to deposits ratio declined to 91, 5% at quarter end, our cash and unused borrowing capacity represents 182% of total uninsured deposits and 244% of adjusted uninsured deposits.
Turning to slides eight and nine net interest income for the quarter was $17 4 million and $18 $6 million on a fully taxable equivalent basis down four 2% and four 4% respectively from the second quarter.
The yield on average interest, earning assets increased to 5.0% to 2% from $4 eight 9% in the linked quarter due primarily to a 29 basis point increase in the yield earned on other earning assets.
Nine basis point increase in the average loan yield and a 20 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 over 8% compared to the linked quarter.
While deposit costs continue to rise again, the pace of increase was the slowest in the past five quarters and as a result net interest income contraction was also the lowest in the past five quarters and in line with our expectations.
We reported a net interest margin of 139% in the third quarter, a decrease of 14 basis points from the second quarter fully taxable equivalent net interest margin for the quarter was 149% down 15 basis points from the prior quarter, we estimate the higher cash balances we carried during the quarter.
<unk> impacted net interest margin by 10 to 12 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.
Similar to this quarter with higher priced new loan originations and variable rate assets repriced higher for an entire quarter. We believe that we will deliver another increase in total interest income for the quarter. Currently we expect the yield on the loan portfolio to be up around 20 to 25 basis points for the fourth quarter.
Furthermore, with short term interest rates stabilizing in the repricing gap in Cds expected to narrow we anticipate only a modest increase in interest bearing deposit costs.
With these expectations combined with our forecast for a smaller balance sheet by year end and with the acknowledgment that some macroeconomic factors remain outside of our control. We continue to believe that the third quarter will represent the inflection point for net interest income and net interest margin consistent with our comments from last quarters call.
Turning to noninterest income on slide 10, noninterest income for the quarter was $7 4 million up $1 $5 million from the second quarter.
Gain on sale of loans totaled $5 $6 million for the quarter up 14% over the second 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 is sold loan volume increased 22% quarter over quarter.
<unk>, which was partially offset as net premiums were down 38 basis points.
Furthermore, the growth in our SBA business has resulted in our servicing portfolio approaching $500 million, which produced $800000 of net servicing revenue during the quarter.
Additionally, other income was up $500000 from the linked quarter due primarily to distributions from fund investments.
Looking at the Bar chart of quarterly noninterest income you can see that with the growth in our SBA business over the last several quarters, we have effectively backfield and even exceeded any potential gap and revenue from exiting the mortgage business.
Moving to slide 11, noninterest expense for the quarter was $19 8 million up $1 $1 million from the second quarter. The majority of the increase was in salaries and employee benefits due primarily to higher benefit plan costs as well as higher incentive compensation related to SBA and construction lending.
Loan expenses were up due mostly to higher third party loan servicing fees and other miscellaneous lending costs.
Our processing cost increased primarily because of variable deposit account opening costs driven by the significant deposit growth earlier in the quarter.
These increases were partially offset by declines in several other expense categories.
Turning to asset quality on slide 12, David covered the major components of asset quality for the for the quarter in his comments I will just add some color around the provision and the allowance for credit losses.
The provision for credit losses in the third quarter was $1 $9 million compared to $1 $7 million in the second quarter. The provision for the third quarter reflects net charge off activity during the quarter additional specific reserves and an increase in the reserve for unfunded commitments, partially offset by the positive impact of.
Economic forecasts on loss rates and qualitative factors related to the allowance for credit losses for certain portfolios.
The allowance for credit losses, as a percentage of total loans was 98 basis points as of September 30th compared to 99 basis points as of June 30th.
The decrease in the allowance for credit losses reflects the impact of certain economic data on forecasted loss rates and adjustments to qualitative factors on certain portfolio as mentioned earlier, partially offset by higher coverage ratios in the C&I and SBA portfolios and additional specific reserves.
If you exclude the balances and reserves on our public finance and residential mortgage portfolios, which have modest coverage ratios given their lower inherent risk the allowance for credit losses represented 117% of loan balances.
Additionally, with minimal office exposure, we do not have the excess reserves around that asset class that many other banks have.
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 43 basis points to 664%. This was due to a combination of factors.
First like many other banks have experienced this quarter our accumulated other comprehensive loss grew as interest rates increased at quarter end.
Second we continued to repurchase shares throughout the quarter and third as David mentioned earlier, the tangible common equity ratio was impacted by deposit growth during the quarter and maintaining elevated cash balances.
If you exclude accumulated other comprehensive loss and adjust for normalized cash balances of $300 million. The adjusted tangible common equity ratio would be 777%.
However, we do expect the balance sheet to shrink in the fourth quarter due to a decline in deposits in cash, which will have a beneficial impact on the tangible common equity ratio.
From a regulatory capital perspective, the common equity tier one capital ratio remains solid at 959%.
During the quarter, we repurchased over 97000 shares of our common stock at an average price of $18 29 per share as part of our authorized stock repurchase program in total we have repurchased almost $41 million of stock under our authorized programs since November of 2021.
At quarter end tangible book value per share was $39 57.
Which is up over 3% on a year over year basis.
Before I wrap up my comments I'd 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 5 million to $7 million in the fourth quarter. However, two factors may affect our forecast.
First if the government shuts down in mid November for an extended period of time sales of SBA loans and the origination of new SBA loans will be halted.
And second if we see a continued softening in gain on sale premiums. It may makes economic sense to hold alone, yielding 11% or more versus selling for a premium far below the annual spread income we would earn.
In connection with the continued increase in the level of SBA originations and additional back office personnel to support the increase we do expect compensation expense to increase as well. Therefore, we now expect total noninterest expense to be in the range of $20 million to $21 million for the fourth quarter.
Looking towards the future. It is undeniable that there are macroeconomic and geopolitical forces beyond our control yet we maintain confidence in our stalwart foundation remains firmly intact overall asset quality is sound and our capital position is strong. Our teams are focused we believe we are well positioned to improve our earnings.
Profitability profile as funding costs stabilized.
With that I'll turn it back to the operator, so we can take your questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
Should you have a question please press star one.
If you want to withdraw your question. Please press star two.
Your questions will be bolt in the order they are received.
If you are using a speaker phone please lift the handset before pressing any keys.
One moment. Please for your first question.
Your first question comes from Matthew Breese from Piper Sandler. Please go ahead.
Yes.
Hey, guys. Good afternoon, thanks for taking my questions.
Hey.
Just wanted to clarify the margin outlook for the fourth quarter I appreciate the guidance for loan yields I think it was the 2025 basis points versus the third quarter.
But it sounds like the margin pressure is going to continue but should slow versus the pace of pressure from <unk> into <unk> and then with the fed remain on pause hopefully we get some stability is not expansion. Starting early next year is that the right way to think about the trajectory.
Okay.
Yes, I mean as I said I think we think the inflection point as the third quarter.
We continue to optimize the loan book and pick up more more yield there.
With regards to deposit costs, especially with the CD repricing gap narrowing and frankly, a lot of our deposits really tied to direct moves in fed funds I mean, we do not forecast.
Deposit costs really increasing all that significantly in the fourth quarter.
And again notwithstanding forces outside our control we expect net interest income net interest margin to be up in the fourth quarter.
But you're spot on.
If the fed.
And that is predicated on the fed not bumping anything here in November which indications are.
We're going to stay the course so.
We got a shot at it if you go back.
Ken made a comment the excess cash on the balance sheet as that rolls off here. This quarter, we think that will get us back in that positive vein and we had not had the excess cash in the third quarter. We only had a compression on NIM of three hundreds of a point so.
Three basis points, so I think.
Agree with Ken I think we hit rock bottom on that compression and should start to see it expand here in the fourth quarter.
Okay.
Within that context, it sounds like you know pipelines are in pretty good shape.
And loan growth should pick up in the fourth quarter I apologize. If you guys alluded to this earlier, but just in terms of what our loan growth expectations for the fourth quarter, and perhaps even looking out to 2024 as well.
Okay.
I mean, I think we'll probably continue to see loan growth in the fourth quarter similar to what we saw in the third quarter, maybe a little bit more in.
Again to remind folks that we are some of our longer term fixed rate portfolios.
We're kind of letting some of those really cash flow off and just replacing the bat reduces replacing those balances with SBA franchise and construction.
So, we're obviously going to be able to pick up yield and optimize the portfolio.
Fourth quarter, probably similar to a bit more than the third quarter and looking into next year.
Some of the loan growth within individual line items will be pretty strong, but again those will be offset by declines in others. So.
Could be mid single digit growth or.
Mid to high single digit growth next year.
The one caveat that could change that.
Nick.
We were just talking a minute ago Nate is.
The SBA.
Either stops and we're prohibited from selling we do have a strong pipeline.
Loans here in the Q that will get closed here in the fourth quarter and we put those on the balance sheet and that grew.
The percentage is going to blow up pretty quickly, but as Ken said, we're probably looking at 2% to 3% per quarter of loan growth going forward for the fourth.
<unk> fourth quarter here as well as per quarter through 2024.
That's not annualized.
Growth for annualized we'd be at about 9% to 10%.
Right around two to three per quarter.
Ted.
Okay.
Just to clarify there.
And obviously you guys did a great job of growing deposits in the third quarter is the expectation based on what Youre seeing in terms of new client wins, and just where your pricing is across your product set.
Deposit growth can largely keep pace with loans going forward.
Yes, we think it will keep pace with loans will actually see a little shrinkage here when some of the Cds roll off one of the things we didn't talk about in the call but.
During the third quarter, and particularly we rolled out some really nice features as add ons to our small business checking accounts, we now have a <unk>.
Forward looking cash forecast for them built into the product as well as automated cash sweeps that they want to keep ex balance and the checking account to move the rest to money market it'll move both ways I just set a balance at the end of the day.
We're really getting some good traction on that small business checking account, we won an award last year.
One of the best in the country and with the New features we got a really nice new automated tool on the front end to help with the opening process. So yeah that volumes picking up and that's by far the cheapest.
Funds that we have in the institution. So yes continued growth there, we're doing real well with the consumer.
Kind of post Covid small businesses and consumers learn that they really don't need to have that traditional bank and our pricing and products are much better.
The normal community bank. So we're seeing nice pickup without a real ton of advertising expense to go with it and it's really worked well for us.
Gotcha.
If I could just ask a couple last questions on credit quality.
Particularly curious on the franchise growth.
Really impressive over the last year or so balances.
Around 100%.
Just curious.
The underlying credit quality, there we've seen some issues within the franchise space. Thus far in earnings season. So just just curious what you guys are seeing there in terms of any criticize.
Migration and just kind of how comfortable you guys are growing that portfolio to a certain level going forward.
Yeah, I mean, historically I mean to date, we've had we've had 300000 of charge offs to date, we've had pretty pretty good credit quality I think.
It'll probably over over time, there probably will be some charge offs, there, but so far I mean to date delinquencies have been very low.
Continue to stay on top of it and monitor the portfolio, but I think probably like small business. There may be some pop ups here and there, but I don't think theres any.
From our perspective, Theres no systemic real issues with the franchise to date.
In the months here with absolutely no delinquency in that portfolio, So as Ken said in historically.
Apple Pie, it's been around 10 to 12 13 years.
Historically, they haven't had about a one 6% loss ratio.
But so far we're doing well.
Got it.
Great to hear and then just lastly in terms of the charge offs this quarter.
How much of it was related to the fingers of Bank Alliance loan that we've been talking about the last couple of quarters versus just kind of a smaller number of SBA loans that were called out.
In the press release.
You know what the Bank Alliance deal was a couple of quarters ago.
We did have really really the charge offs can be boiled down into two components. One one piece of it being a handful of smaller SBA loans and then we did have we did charge off we were a participant in a deal in the lead bank.
Put the put the low end pool that as part of a larger pool of loan sales.
And.
We had we worked with them on that but we had to take a small charges the sale price was less than the carrying value.
Got it.
So C&I loan charge off in the third quarter was yes, yes, and yes, but it was not to be clear it had nothing to do with the bank Alliance deals from earlier this year.
Joe.
And based on what you're seeing across the portfolio would have.
I imagine it's fair to maybe you expect some.
Moderation charge off levels going forward.
Yes.
It's an intriguing time Dave.
The.
Bump up in interest rates, particularly in some of the older SBA loans that when we bought that first Colorado portfolio again, we discussed two or three in credit. This morning that are getting the permits from the SBA world that will hopefully help them through the crunch, but we have people there that were at 3% from the beginning days of the loans that are now.
Page 11, five to 12 and it is just putting a squeeze on them but.
Nothing systemic no.
Particular vertical in the lending area, that's a problem and I think we'll continue to see some of these one offs.
But stabilization of bumping the rates will help immensely.
No question about it and if at some point in 'twenty four we start to see them go down.
We'll be in great shape there.
SBA does have a lot of tools to help some of these smaller guys too.
Go to an interest only basis to actually given the total payment deferment for 60 90 days up to six months in some cases, so we're playing by the rules and as I said credit Committee. This morning numbers are still down over what we finished at quarter end and looking good but.
Who knows what Mike pop out.
<unk>.
Got it makes sense I appreciate the color. Thank you guys I'll step back thank you.
Thanks Nate.
Thank you.
Your next question comes from Mike Perito from <unk>. Please go ahead.
Hi, This is mikes associate Andrew selling and thanks for taking my questions.
Sure.
I just wanted to start off here I was wondering if you could give some more color on the vast space.
You commented on that new partnership be launched.
I was just kind of wondering what.
What's the appetite look like for new partnerships.
Like what kind of maybe revenue expectations can we see from from.
Some of the new partners you've onboard in the last few quarters.
Well I was actually at the money 2020 on Tuesday, I heard that's where Mike said, they're kind of running around as well.
We had great meetings out there with all of our partners from increase to Treasury Prime too.
We saw actually probably a half a dozen independent tech companies.
We're working with US importantly spent a fair amount of time with.
Jarrod so.
It's looking good.
Everything takes always a little longer than you think it's going to to get things up in mind, but as Ken said in his comments, we had a nice boost up in <unk>.
Deposits the payment services side, we are processing over $1 billion, a month in payments and still continuing to grow quite significantly month over month, Jaras I was hoping to have them live.
Here kind of mid month in October we've got a couple of Ts to cross and I's to dot we should be live by.
Month in early November at the latest.
So everything is positive we have a number of folks that we've been completing.
Completing due diligence that our.
Live in two pilot programs and are actually opening real accounts with real customer at all.
So it's first quarter next year, it should be really really strong and hopefully we'll get a couple over the finish line and turn up some volume here in December obviously, the credit card World shuts down and I think this year. The blackout date is November 10th so.
We're pressing real hard to get a couple two final.
Due diligence and in order to get their credit card systems moved and re pointed in our direction before November 10th So that doesn't happen then it goes into mid January before they reopen but.
Not a tremendous amount of impact here in the fourth quarter, but we could.
I think first quarter next year, we will make as much as we did in the whole calendar year here of 2023.
Great that sounds amazing I appreciate the update.
Maybe just jumping around a bit here.
Could you provide a little color maybe around the ROA you kind of what's a reasonable target there for 2020 for kind of what the expectation is as some of these initiatives kind of wholesale.
Yes, I mean, I think as we look into I mean, I think we feel.
Feel good about what next quarter looks like and I think over the quarter of a little over the course of next year in terms of like NII, we should continue to see gradual improvement quarter by quarter.
In terms of NIM improvement in NII improvement.
We expect the SBA team to continue to grow next year as well David talked about.
About the bass initiatives and the revenue opportunities there.
So I mean I think we're.
Look it'll be it'll be a little bit lighter in the front end of the year, probably similar to fourth quarter are probably a little bit better than fourth quarter, maybe in the mid 40 basis point of our away, but I think by the end of the year by fourth quarter, we're looking to be back up north of 80, and perhaps closer to 90 basis points.
Okay.
Great appreciate that and then just last question for me and then I'll hop back.
Any room for buybacks to accelerate here I know there was some.
Good production good activity there in the third quarter, but maybe just is there any acceleration here in the fourth quarter and then into 'twenty four.
One of the things that we're focused on and we know the outside world pays a lot of attention to it as the TCE, we fell under seven our goal is to get us back above seven.
At the current time at the price, we really can't be out of the market on share repurchase but were diligently paying attention to that 7%.
By chance the fed does nothing in the long term rates come back and ALC eye drops down yes, we will stay in actively purchasing I.
I think we will do something I wouldn't doubt that we're going to expand much over what we did last quarter.
Particularly hopefully the share price continues to climb as well as our numbers are getting better so.
But when we're trading.
30%, 40%, 50% of book, we can't afford not to purchase shares back, but it'll be a balancing act really kind of keeping an eye on TCE as well as the price of the shares. So we're in the market will stay in the market, but it won't be probably as aggressive as we were in the first half of the year.
But we'll stay out there.
Alright. Thank you that's all for me appreciate all the color.
Alright, great. Thank you.
Thank you.
Your next question comes from George Sutton from Craig Hallum. Please go ahead.
Thank you David you mentioned in your script that you've grown to be the ninth largest SBA player. What is your goal what is the governor to your growth how much more can you expand in that area.
George we really don't have any limitation out here I think we're going to finish this year at about $3 80.
Hi, guys, we'll be beating on me here, but we haven't forecast at four.
$444 50, I think they've got a real shot at 500 next year and you're going to be hearing phones drop all over the office here are the folks that are listening in on the call, but I wouldn't be surprised to see us get pretty close to <unk>.
$500 million next year.
As long as we're selling 75% the insured portion and getting a good return on that we're in great shape.
I'd say, we could run up to probably a $1 billion on ours.
Internal portfolio and 25 cents on the dollar that gives us a lot a lot of room for a new production. So if.
If we start Buckingham and holding them on the balance sheet.
Could slow down the gross number a little bit, but as Ken said, a couple of minutes ago, We're getting 11, 512% yield versus a 5% or something on the purchase side. It makes sense that hanging on the balance sheet, but anything less than $1 billion, we have no qualms whatsoever and keeping it going.
And I wanted to make sure that I understood the 11% opportunity in terms of what.
Because you were couching it in the sense that the government could shut down and I think therefore would hold more.
Hearing that correctly or what would motivate you to.
Increase the amount that you're holding.
If the government closes will hold the assets because we can sell them in the secondary market of the government's not there to make the transfer so we'll hang onto them that could reopen if theyre down for a couple of days that have reopened in a week to 10 days to get the machine oiled and back running thats not if theyre down for 24 hours that they're going to.
Come right back so might put a little lagging there.
The return as Ken said and I'm not I'm going to blow. This up so you can go back and fact check me, but we grew the <unk>.
Sales by 20%, but the actual sale.
Sales yield we got was down 30% over last quarter. If that continues to decline as the market set market is saturated a lot of banks across the country are not buying assets are boosting their balance sheet. So if the market falls off and I can only get a five or 6%.
Purchase price why would I sell 11, 512% asset because they will make that back up in 12 months. So it's really two focuses government shutdown could slow it down as well as if the yields in the secondary market continues to soften and we'll just keep them on the balance sheet.
Perfect that's it for me.
Thanks, Sir thanks to hear from you.
Thank you.
Your next question comes from Julien <unk> from Janney. Please go ahead.
That was close hey, good afternoon guys.
Hey, John.
Yes.
Good good good David.
Ken maybe just circling back to the margin.
I think last quarter, you talked about by the fourth quarter of next year the margin could sort of be 190 to 195 do you still think that's possible.
Yes, I think there is a pathway there I mean, certainly into the 180 ish range in the upper bound of that but yes, I think we still feel good about that.
That outlook.
Okay. Okay.
And again you feel like the.
The third quarter was sort of the inflection for the margin and net interest income dollars.
That's how we feel right now.
Again, the caveat of things that are out of our control, but but right now at least with our forecast.
And what we saw I think as David said in his comments we were.
We probably hit bottom in July and August in terms on a monthly basis and in September we had a nice nice rebound there so that.
The trajectory is already going up interest expense actually dropped.
September over August by over $400000 in portion some higher cost funding walked out and we trunk cash.
Cash just a little bit.
We really are leveling off in the when our peers are out here. It's 30 40 basis points on Cds, having to buy in today's market for 400, plus as Ken said, our CD average out here now what's coming up for renewal is a $444 50 range and if we <unk>.
Pick them up at $4 90 at 30 basis point move to us is going to be nonexistent. So.
We really really do think we get the bottom of the barrel on NIM compression.
Okay. Good.
Maybe just two other things on.
Expenses, you upped the targeted 20% to $21 million would you still expect for next year sort of mid single digit growth off of off of the fourth quarter level.
Yeah, probably yes that sounds that's about right.
And then.
Also on the fee income side, I think last quarter, you talked about growth of 15% to 20% next year is that still.
Sort of a good ballpark figure.
If they hit my $500 million number I, just threw out it's going to be better than that.
I'd, rather see you under promise and over deliver David.
And then book in the 440 that Theyre, telling me youll be okay, Yes, I think youre, okay with that someday.
Okay. Okay. Okay guys. Thank you. Thank you.
John Sorry, I missed your show, but I had a conflict I couldnt get out of that.
Sure, Ken and Nicole did a great job no problem at all.
Alright, thank you.
Thank you.
Your next question comes from Brett Robinson from <unk> Group. Please.
Please go ahead.
Hey, guys. Good afternoon, thanks for the questions.
Wanted to wanted to Hey wanted to go back to the loan yields.
And you talked about 20 to 25 basis points of improvement in the fourth quarter. They were up nine basis points and three Q what.
Can you talk about the loans that matured <unk> versus <unk>.
And then maybe if you have.
And maturity schedule for 24 out of the fixed bucket.
Yeah.
The loan yield some of it is just timing of funding.
The the opportunity for us on the loan book is again, we continue to let some of the lower stuff come off and we did have we.
We had good quarter over quarter growth in construction, but the timing of that was probably a little bit more weighted on the back end of the quarter, so that impacted the the yields a little bit.
In terms of for the quarter.
And then we had we had good production in franchise for the quarter.
That sets us up for a good starting point for the fourth quarter.
And obviously, the SBA balances were up as well so.
I, just think with some of the production, perhaps being a little bit more weighted in the back end of the third quarter. It sets us up really good for.
For the fourth quarter in terms of loan yield increase in loan yield improvement then.
I guess looking over the course of the next let's just call. It. The next 18 months in terms of.
Our variable rate loans are about 20% of our loan portfolio today and then when you take into account what's going to mature.
And also pay down and our fixed loan portfolio I mean, we're probably looking at almost $1 1 billion or so about 30% of the loan book, that's going to turn over between now and the end of 'twenty four.
So that's that's.
For us a lot of the loans arent necessarily renewals, they just mature and they are replaced with new loans or new borrowers but.
As we remix and optimize the compensation, we're just going to see a lot of good loan repricing.
And loan replacement if you will over the next 15 months.
A lot of our clinical portfolio also Brett.
Have semiannual payments on it so we get a big bump in June and we also get a big bump in December.
I think this quarter $20 million, plus and repayment on the municipal loans and that's the $2 five three and a half 4% papers, so that'll help as well.
Okay. That's helpful.
And then you guys talked about some of the Cds that are coming off the books and those rates versus the market CD rates.
Youre seeing.
Obviously, the five handle five 6% where are you guys pricing Cds today.
How does that contrast to the Cds that are rolling off the book here in the fourth quarter.
Right now were priced in that six to 12 month range in the upper fours and what's going to be rolling off is going to be.
On the commercial side, it's going to be about five and a half in.
On the consumer side, it's about $5 12, $5 14 so.
We should pick up 40, 50 basis points and plus we we hope to reduce the outstanding cash a lot of that is kind of rolled during December.
Over $157 million I think coming up for maturity in the month of December.
We'll probably see about half of that go away. So it's late in the quarter, but it should still have an impact on our interest expense.
Okay, and then just lastly.
The DDA growth this quarter can you talk about that and if that's the start of a trend or if that was helpful.
A function of particular.
Clients are business.
Yes, most of that growth in interest bearing demand is actually bass deposits.
Which we've been continuing to grow.
Obviously over the last two to three quarters, but most of most of that growth is bass within that category.
Okay, what about what about the noninterest bearing piece Ken.
The noninterest noninterest bearing sometimes that can be a little bit volatile summer there can be some big balances that impact that because a lot of times in our construction business.
When when the sponsor the borrower puts equity into the deal upfront they'll put that into a noninterest bearing balance here and then that gets drawn down but as we do more construction it'll go up. So there is that's probably the biggest piece of any quarter to quarter movement in that line item.
We also have some municipal debt.
Like the city of Fisher.
Fishers here come mid November they will have a big pop when they get property taxes in <unk>.
And that will set in our noninterest account for 30 60 days until they get reallocated. So theres some seasonality in some of our municipal deposits.
Okay, all very helpful. Thanks, so much.
I appreciate it Sir thank you.
Next week.
See you next week that's alright.
Yeah.
Okay.
Thank you.
There are no further questions at this time.
Back to David Becker for closing remarks, Mr. <unk> you May proceed.
Thank you Sergio and thanks, everybody for joining us on today's call.
As we look forward to 'twenty four and beyond we remain extremely excited about the future and the opportunities here strong performance in the commercial and consumer lending teams, including our growth in the small business construction lending and further growth opportunities with a fintech partnerships and banking as a service are expected to drive greater revenue growth.
Combined with stabilized deposit cost.
Believe will translate into the stronger earnings in the increase.
NIM over the course of the next year as fellow shareholders, we remain committed to driving improved profitability and enhance shareholder value and we certainly thank you.
For your time today and have a good afternoon. We appreciate it thanks.
Okay.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating.
Please disconnect your lines.
Sure.