Q4 2023 First Internet Bancorp Earnings Call
Good day everyone.
Welcome to the first Internet Bancorp earnings conference call for the fourth quarter and full year 2023.
At this time.
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I would now like to turn the conference over to Larry Clark from <unk>.
<unk> thousand incorporated please go ahead Mr. Clark.
Larry Clark: Thank you Jenny.
Larry Clark: Good day, everyone and thank you for joining us to discuss first Internet Bancorp's financial results for the fourth quarter and full year 2023.
Larry Clark: The company issued its earnings press release yesterday afternoon, and it's available on the company's website at Www Dot first Internet Bancorp Dot com.
Larry Clark: In addition, the company has included a slide presentation that you can refer to during the call.
Larry Clark: You can also access these slides on the website.
Larry Clark: Joining us today from the management team are chairman and CEO, David Becker and.
Kenneth J. Lovik: And executive Vice President and CFO, Ken Lubbock.
Kenneth J. Lovik: David will provide an overview and Ken will discuss our financial results.
Kenneth J. Lovik: We'll open up the call to your questions.
Kenneth J. Lovik: 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 that involve risks and uncertainties.
Kenneth J. Lovik: Various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements.
Kenneth J. Lovik: These factors are discussed in the company's SEC filings, which are available on the company's website.
Kenneth J. Lovik: The company disclaims any obligation to update any forward looking statements made during the call. Additionally.
Kenneth J. Lovik: Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.
Kenneth J. Lovik: The press release available on the website.
Kenneth J. Lovik: The financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures.
Kenneth J. Lovik: At this time I'd like to turn the call over to David.
David: Thank you Larry good afternoon, everyone and thanks for joining us today, as we discuss our fourth quarter and full year 2023 results.
David: The fourth quarter was notable for a multitude of reasons, but most importantly, because it shows the meaningful progress and early signs of the tangible financial benefits, resulting from our efforts to transform our company and balance sheet over the past few years in order to improve returns for our shareholders. We are.
David: Little less than a month away from our 20, <unk> anniversary and while each year brings both triumphs and setbacks I can honestly say that 2023 was peppered with a greater variety of challenges than the rest it was.
David: This time, one year ago that we announced our decision to exit the residential mortgage business, a cyclical transactional low multiple business.
Larry Clark: I'll turn in 'twenty three we managed successfully through a very challenging interest rate cycle, while also navigating an industry liquidity scare.
Larry Clark: Now stand poised to benefit as that policy look set to provide a helpful tailwind rather than a headwind to our business.
Larry Clark: We also effectively turned a battleship and transitioned our loan composition in favor of variable rate and higher yielding loan products, which have helped to diversify our loan portfolio.
Larry Clark: <unk> significantly improved our interest rate risk profile.
Larry Clark: Not necessary, but never easy these actions have in the aggregate improved our balance sheet positioning and financial results and will enable us to continue to drive improvement in our earnings and profitability.
Starting with the highlights on slide three I would like to discuss some key themes for the quarter.
Larry Clark: As I said, we continue to transition the composition of our loan portfolio and optimize our overall balance sheet mix. We deployed some of the liquidity we had built up in the previous quarter to drive loan growth of $105 million or two 8% during the fourth quarter new funded loan.
Larry Clark: <unk> yields were 885% relatively consistent with the third quarter and up over 275 basis points from the fourth quarter of 2022.
Larry Clark: Additionally, deposit costs increased at the slowest pace by far in the past six quarters at just five basis points.
Larry Clark: As a result net interest income was up 14% and net interest margin expanded by 19 basis points relative to the prior quarter we.
Larry Clark: We told you on our last quarterly earnings call that we believe net income and net interest margin had bottomed out in the third quarter and that has proven to be the case with our continued focus on improving the loan composition and stabilization in deposit pricing we.
Larry Clark: We're confident that net interest income and net interest margin will continue to trend higher.
Larry Clark: This calendar year.
Larry Clark: Another highlight for the quarter was the performance of our SBA business. The team delivered another quarterly record of gain on sale revenue, which was up 8% from the third quarter driven by another strong increase in both the origination and so loan volume.
Larry Clark: Our nationwide platform continues to provide growth capital to entrepreneurs and small business owners across the country.
Larry Clark: The year over year, SBA loan originations, increasing by almost 140% from the 2022 levels, we generated over $20 million of gain on sale revenue in 2023 from our SBA loan sales, which was up $9 million or more than 80% from 2022.
Larry Clark: This increase more than offset the $5 5 million of mortgage banking revenue we earned in 2022.
Larry Clark: Former.
Larry Clark: Correct to consumer mortgage business.
Larry Clark: <unk> successfully moved away from again, an overreliance on the cyclicality of the low multiple mortgage business in favor of a more consistent reliable and growth oriented revenue stream that can deliver regardless of the interest rate environment.
Larry Clark: Our small business pipeline continues to flourish and we remain among the top 10, most active SBA 700 lenders in the country.
Larry Clark: Solid loan growth net interest margin expansion net interest income growth and non interest income powered by record gain on sale revenue drove a nearly 10% increase in total revenues related to the prior quarter.
Larry Clark: While revenue search costs were held mostly in check as noninterest expense increased by less than 2% compared to the third quarter.
Larry Clark: As a result, we delivered positive operating leverage and a significant improvement in operating efficiency.
Larry Clark: Credit quality remains healthy overall with nonperforming loans to total loans at 26 basis points and nonperforming assets to total assets of 20 basis points at year end.
Nonperforming loans did increase from the third quarter due to additions in small business lending franchise finance and residential mortgage, but our ratio still remain well below industry averages.
Larry Clark: Additionally, delinquencies 30 days or more past due were 31 basis points of total loans, while net charge offs to average loans remained low at 12 basis points.
Larry Clark: I would also like to remind everyone that our exposure to office commercial real estate is less than 1% of total loan balances and does not include any central business district exposure.
Larry Clark: Our capital levels remained sound with a common equity tier one capital ratio of nine 6% and the tangible common equity ratio, increasing 30 basis points to six points to 94% at year end.
Larry Clark: Book value per share a key measure of shareholder value creation increased $4 seven during the quarter and is up four 2% year over year.
Larry Clark: Also like to point out.
Larry Clark: That the prudent conservative management of our investment portfolio and overall balance sheet as a resulted in first internet being among the few banks to have grown tangible book value per share from the start of this historic cycle of interest rate hikes that began in early 2022, we.
Larry Clark: We did slow the pace of share buybacks during the fourth quarter repurchasing 40000 shares at an average price of $18 78 per share for the full year, we repurchased just over 500000 shares or approximately 5% and one 5% of our total commentary.
Larry Clark: It was outstanding at the start of 2023 at an average price of $18 40 per share a discount of over 30% relative to the current stock price.
Larry Clark: Now turning to our financial and operating results for the fourth quarter of 'twenty. Three we reported net income of $4 1 million and diluted earnings per share of 48 <unk> in the fourth quarter.
Larry Clark: Increases of 22% and 23% respectively from the third quarter.
Larry Clark: Total revenue was $27 2 million up almost 10% from the third quarter driven by the expansion in net interest income.
Larry Clark: Operating expenses were in line with our expectations and noninterest expense to average assets remained low at 154%.
Larry Clark: We produced solid loan growth during the quarter led by our commercial lending areas, where balances were up $98 million or 13% on an annualized basis and were up $287 million or almost 11% for the year.
Larry Clark: During the quarter, we experienced growth in franchise finance small business lending commercial and industrial and construction lending. This was partially offset by declines in the fixed rate public finance in the health care finance portfolio.
Larry Clark: Okay.
Larry Clark: Our construction team had another great quarter originating $69 million in new commitments at quarter end total unfunded commitments and our construction line of business increased to $540 million.
Larry Clark: Nearly double the $275 million at year end 2022.
Larry Clark: Leaving us well positioned to continue shifting the composition of the loan portfolio towards higher yielding variable rate loans.
Larry Clark: Our consumer loan balances increased $10 million or five 3% on an annualized basis compared to the prior quarter and grew by $64 million or 9% on a year over year basis, we remain focused on high quality borrowers while rates on new production were consistent with the third.
Larry Clark: Order and in the mid 8% range. Furthermore, the delinquencies in these portfolios have remained very low at just seven basis points.
Larry Clark: And lastly, I want to provide some commentary on our Fintech partnerships program.
Larry Clark: In many respects first Internet bank was a fintech itself. When we launched in 1999 with a 25 year track record of innovation in financial services that is included partnerships over the years. It was out of our enduring passion to nurture new ideas that we launched our Fintech partnership program two years ago the probe.
Kenneth J. Lovik: <unk> as a source of inspiration and energy to all of US at first Internet Bank and importantly to our shareholders. It will be accretive to earnings in 2020 for Ken will provide some more details here in just a moment.
Kenneth J. Lovik: Today, we have a dozen life programs of varying purpose and scope.
The backdrop of a $5 billion balance sheet. The Fintech partnership program does not amount to a material part of our business today, but we intend for it to be one component of a well diversified portfolio of business lines, many of which I've already highlighted for you today.
Kenneth J. Lovik: I'm, a lifelong entrepreneur and one thing I learned from my years as a tech CEO is not to oversell the pipeline.
Kenneth J. Lovik: We have a healthy queue of new programs already in various stages of implementation and our attention is to stay focused there.
Kenneth J. Lovik: Some of the programs are not able to meet the requirements to go live we may bring in a new program, but overall, we expect a number of programs to be pretty flat over the next few quarters.
Kenneth J. Lovik: To wrap up my comments, we performed well in the fourth quarter and enter 2024 with momentum and confidence.
Kenneth J. Lovik: Our safety and soundness perspective liquidity and credit quality remained very strong and the capital levels ourselves with that.
Larry Clark: Interest rate hikes by the federal reserve likely now behind US, we expect deposit costs to stabilize <unk>.
Larry Clark: Bind with the continued improvement in our loan portfolio mix, a positive outlet for our SBA team and favorable asset pricing, we should be well positioned to achieve higher earnings and improved profitability in 2024 and beyond.
Larry Clark: A couple of final thoughts before I turn the call over to Ken. Many of you will recall that first internet stock along with many other bank stocks fell out of the Russell 2000 index around the same time at the regional bank failures in the spring.
Ken: We are keeping an eye out as we head into the reconstitution of the Russell Index. This year of course, there are certainly no guarantees, but it is possible given the recovery in the stock price, especially relative to the small cap universe as a whole that first internet stock might again qualify for inclusion in the index.
Ken: Finally, I want to personally thank our clients and the entire first internet team without whom our achievements this quarter and over the past 25 years would not have been possible.
Ken: And with that I'd like to turn the call over to Ken for more details on our financial results for the quarter.
Ken: Thanks, David since David covered the loan portfolio, let's jump to deposits on slides five through seven.
Ken: Deposit balances declined slightly from the prior quarter as we deployed some of the liquidity buildup in the prior quarter to fund loan growth and to pay down higher cost brokered deposits.
Ken: Non maturity deposits were up over $82 million or four 6% due to increases in fintech partnership deposits and money market balances.
Ken: Deposits from our Fintech partners were up 34% from the third quarter and totaled $218 million at quarter end. Additionally, these partnered partners generated over $4 $7 billion in payments volume, which was up 23% from the volume we processed in the third quarter.
Larry Clark: So total fintech partnership revenue almost doubled quarter over quarter to $414000 with the large majority of the increase consisting of recurring interest income oversight and transaction fees.
Related to CD activity during the quarter total balances were down about $19 million from the linked quarter, we originated $278 million in new production and renewals during the fourth quarter at an average cost of 5.0% to 3% and a weighted average term of 15 months.
Larry Clark: These were more than offset by maturities of 297 $297 million with an average cost of $4 three 4%.
Larry Clark: Looking forward, we have $466 million of Cds maturing in the first quarter of 2024 with an average cost of $4 six 1% and $337 million of maturing in the second quarter with an average cost of $4 eight 1%. So as we noted last quarter the repricing gap.
Larry Clark: 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.
Larry Clark: Additionally, as I noted earlier, we use liquidity to pay down broker deposits, which decreased $79 million from the end of the third quarter as we continued to reduce higher cost portions of our deposit base.
Larry Clark: As we discussed in the prior quarters calls our expectation was that when the federal reserve was done raising rates, we should see stability in the cost of our deposit funding.
Larry Clark: This was the case in the fourth quarter as the cost of interest bearing deposits increased only five basis points, which as David mentioned is by far the slowest pace of growth over the last six quarters.
Larry Clark: Looking at slide six at quarter end, we estimate that our uninsured deposit balances with just over $1 billion or 25% of total deposits, which is up from $948 million or 23% at the end of the third quarter. The increase was due primarily to new customer balances and growth.
An existing depositor balances.
Larry Clark: After adjusting for Indiana base municipal deposits and larger balance accounts under contractual agreements are adjusted uninsured balances dropped to $774 million or 19% of total deposits, which compares favorably to the rest of the industry.
Larry Clark: Moving to slide seven at quarter end total liquidity remains very strong as we had cash and unused borrowing capacity of $1 6 billion.
Larry Clark: As we mentioned a moment ago, we deployed some of the liquidity, we built up in the prior quarter to pay down broker deposits and also to fund loan growth.
Larry Clark: As a result, the loans to deposits ratio increased to 94, 4% at quarter end, our cash and unused borrowing capacity represents 156% of total uninsured deposits and 208% of adjusted uninsured deposits.
Larry Clark: Turning to slides eight and nine net interest income for the quarter was $19 $8 million and $21 million on a fully taxable equivalent basis up 14% and 12, 9% respectively from the third quarter.
Larry Clark: The yield on average interest, earning assets increased to $5 two 8% from five 2% in the linked quarter due primarily to a 26 basis point increase in the yield earned on loans, a 40 basis point increase in the yield earned on securities and a 27 basis point increase in the yield earned on other earning assets.
Larry Clark: The higher yields on interest, earning assets combined with the growth in average loan and securities balances pretty strong topline growth in interest income increasing over 5% compared to the linked quarter.
Larry Clark: As deposit costs and average interest bearing balances were up modestly net interest income grew during the quarter reversing a trend that began in the second quarter of 2022.
Larry Clark: Net interest margin for the fourth quarter was $1 five 8% and 168% on a fully taxable equivalent basis in the fourth quarter, both of which were 19 basis points increases of 19 basis points from the third quarter.
Larry Clark: The net interest margin roll forward on slide nine highlights the drivers of change and the fully taxable equivalent net interest margin during the quarter.
Larry Clark: Last quarter, we told you we believe the third quarter would be the inflection point for net interest income and net interest margin as long as the federal reserve rate hike cycle was near completion.
Larry Clark: Stability in deposit costs as highlighted in the graph on slide nine that tracks our monthly rate on interest bearing deposits against the fed funds rate, which is a significant catalyst in driving net interest margin expansion going forward.
Larry Clark: With our focus on improving the composition of the loan portfolio, and replacing lower yielding assets with higher yielding and variable rate production. We continue to forecast growth in total interest income in the first quarter of 2024 and throughout the year.
Larry Clark: Currently we expect the yield on the loan portfolio to be up around 20 to 25 basis points for the first quarter.
Larry Clark: Furthermore, with short term interest rates stabilized in the narrowing repricing gap in Cds, we anticipate only a modest increase in interest bearing deposit costs similar to what we experienced in the fourth quarter.
Larry Clark: Yes.
Larry Clark: Turning to noninterest income on slide 10, noninterest income for the quarter was $7 $4 million consistent with the third quarter and up $1 $6 million or 27% over the fourth quarter of 2022.
Larry Clark: Gain on sale of loans totaled $6 million for the quarter up 8% over the third quarter and setting another quarterly record for our SBA team loan sales volume was nearly $90 million for the quarter, an increase of over 11% when compared to the linked quarter.
Larry Clark: We also saw a net gain on sale premiums stabilize up a modest 11 basis points quarter over quarter.
Larry Clark: However, the increase in gain on sale revenue was almost entirely offset by a decline in the net servicing revenue due to a lower fair value adjustment to the loan servicing asset.
Larry Clark: Moving to slide 11, noninterest expense for the quarter was $21 million up 300000 from the third quarter, we saw increases in premises and equipment due to a lower property tax accrual in the third quarter consulting and professional fees due to the timing of third party loan review and stress testing.
Larry Clark: And deposit insurance premium as assessments of increase due to year over year asset growth in loan composition.
Larry Clark: These increases were partially offset by a decline in salaries and employee benefits due to lower incentive compensation and lower benefits cost and lower data processing costs, driven by lower variable deposit account opening costs related to lower new CD production.
Larry Clark: Turning to asset quality on slide 12, David covered the major components of asset quality for the quarter in his comments. So I will just add some commentary around the allowance for credit losses, and the provision for credit losses.
David: The allowance for credit losses, as a percentage of total loans was 1.0% to 1% at the end of the fourth quarter compared to 0.98% in the third quarter. The increase in the allowance for credit losses reflects the addition of specific reserves related to small business lending and franchise finance as well as loan growth.
David: Portfolios with higher ACL coverage ratios to.
David: The provision for credit losses in the fourth quarter was $3 $6 million compared to $1 9 million in the third quarter.
David: The provision for the fourth quarter includes the additional specific reserves and net charge off activity as well as the ACL build related to the healthy pace of loan growth during the quarter.
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 121% of loan balances.
Furthermore, with minimal office exposure, we do not require the excess reserves around that asset class that many other banks have.
David: Moving to capital on Slide 13, our overall capital levels at both the company and the bank remains solid the tangible common equity ratio increased 30 basis points to 694%. This was due primarily to the decline in the accumulated other comprehensive loss as interest rates declined during December as well as net <unk>.
Larry Clark: <unk> earned during the quarter.
Larry Clark: If you exclude accumulated other comprehensive loss and adjust for normalized cash balances of $300 million. The adjusted tangible common equity ratio would be 766%.
Larry Clark: From a regulatory capital perspective, the common equity tier one capital ratio remained solid at nine 6%.
Larry Clark: At quarter end tangible book value per share was $41 43.
Larry Clark: Which is up almost 5% from the third quarter.
Larry Clark: Before I wrap up I would like to provide some commentary on our outlook for 2024, our current forecast Conservative conservatively assumes that the federal reserve maintains a higher for longer outlook and does not lowered the fed funds rate during 2024.
Larry Clark: We expect loan yields to increase as we continue to remix the portfolio, while we expect deposit cost to stabilize.
Larry Clark: Assuming loan growth in the range of 5% to 6% for the year, we expect that annual net interest income will increase by a minimum of 20% and fully taxable equivalent net interest margin will increase throughout the year and should be in the range of 195% to 2% by the fourth quarter of 2024.
Larry Clark: If the federal reserve were to begin reducing short term interest rates, our net interest income and net interest margin would likely exceed these projections.
Larry Clark: With regard to noninterest income as our SBA team continues to grow and deliver consistently higher origination activity. We expect annual noninterest income to be up by at least 30% over our reported amount to 2023.
Larry Clark: A primary risk to this forecast will be loan sale pricing in the secondary market.
While gain on sale premiums stabilized in the fourth quarter and we are encouraged by pricing received on our January sales higher interest rates have created volatility in gain on sale premiums and if pricing were to soften it may make economic sense to hold alone, yielding 11% or more versus selling for a premium far below the <unk>.
You will spread income we would earn.
Larry Clark: And of course, a government shutdown would bring a temporary halt to secondary market sales that would impact all SBA lenders equally.
In connection with the continued investment in personnel to support the planned increase in the level of SBA originations as well as additional personnel in risk management and compliance to support our Fintech partnership initiatives.
Larry Clark: We do expect compensation expense to increase in 2024.
All in we expect annual noninterest expense to be up in the range of 8% to 10%.
Larry Clark: With that I will turn it back to the operator, so we can take your questions.
Larry Clark: Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone.
Larry Clark: You will hear at retail and prompt acknowledging your request.
Larry Clark: Questions will be taken in the order received should you wish to cancel your request. Please press the star followed by the tail. If you are using a speaker phone. Please lift the handset before pressing any key.
Larry Clark: Once again that is star one should you wish to ask a question.
Your first question is from Brett Robinson.
Larry Clark: Please ask your question.
Brett D. Rabatin: Hey, guys good afternoon.
Brett D. Rabatin: I wanted to start with Hey.
Brett D. Rabatin: Hey, guys I wanted to start with just the funding.
Brett D. Rabatin: Mix from here and just thinking about you mentioned the fintech.
Brett D. Rabatin: Opportunities and those seem to be slightly lower cost than maybe the CD.
Larry Clark: Rates just wanted to see what the what the outlook was for growth off of those deposits and then it does seem like your cost of funding has kind of gotten close to peaking out.
Larry Clark: I see on the Internet or $5 35 rate for a one year CD. So maybe there is still a little pressure left.
Can you maybe talk about the funding mix from here and obviously if rates do go down I would assume you will see some benefit from that in the back half of the year.
Yes.
Larry Clark: The Cds and the benefit in the back half of the year.
Larry Clark: I think in the CD, what we have found here in the first quarter here actually our CD origination new new new origination costs have actually come down what we've seen is actually consumers and small business going out longer on the curve.
Larry Clark: Sure.
Larry Clark: Yield curve is still inverted.
Larry Clark: So we're seeing more <unk>.
Larry Clark: Three year and five year CD mix than say one year. So our new CD volume is actually coming in around 480 right now.
Larry Clark: That could change based on the outlook, but but that's what we're seeing right now.
Larry Clark: And certainly in the back end of the year.
Larry Clark: It's hard to predict when when or if rates will come down.
But certainly as as the fed brings if the fed were to bring the front end of the curve down there is a benefit for us I mean, just kind of as a data point that we have we got a $1 billion of Cds that are tied in or not Cds, rather a $1 billion of deposits that are tied in in.
Larry Clark: In some way directly to fed funds.
Larry Clark: So you can you can kind of do the math on what impact rate declines will have on deposit costs, when when when and if the fed starts bringing rates down.
Okay. Thanks.
Larry Clark: That side of things Nate Ken made the comment that.
Nate Ken: In his presentation I cant remember off top my head that we had an increase in the fourth quarter, we have that capability going forward.
Nate Ken: As stated earlier, we are still a little bit cash flush.
Nate Ken: So kind of depending upon loan demand, we can move that number up and down but you hit the nail on the head it is.
Nate Ken: Very inexpensive compared to some of the other alternatives for cash so.
Nate Ken: That'll be.
Nate Ken: Dependent upon what goes on.
Nate Ken: We don't want to be in a position to bring in a ton of cash and then have to move it out into the secondary market.
Nate Ken: Where we're paying attention and trying to balance both sides, but youre right. It is less expensive than Cds today, it's on par with our internal money market accounts.
Nate Ken: So.
Nate Ken: It's not as expensive as it was in the first quarter of last year by any means and most of those higher balances we've been able to run off and we're kind of at the end of the line on swapping higher rate for lower rates. So.
Nate Ken: It's available to us and we will take it as needed I guess would be how I'd leave it for you.
Larry Clark: Okay and that brings up the second question you mentioned liquidity in cash you, obviously use some cash this quarter to fund the loan growth.
Nate Ken: Can you talk about what the right liquidity level is or cash and where you see that that number bottoming out or whats the good good liquidity.
Nate Ken: Ratio.
Larry Clark: I think as you know.
Larry Clark: Kind of the things that went on earlier in 23 of kind of settle down I mean, I think for us a good liquidity number is probably somewhere in the 3% to $3 50 range on any given day.
Larry Clark: We have been maintaining slightly higher than that and certainly much higher than that earlier in the year, but that's probably a good balance on it on a day to day basis for us.
Larry Clark: Okay.
Larry Clark: Great if I can sneak in one other I've got a final question I'll jump back in the queue, but on the on the fee income growth of 30%.
Larry Clark: Can you break out maybe how much of that would be SBA versus other <unk>.
Nate Ken: Sources of fee income fintech opportunities et cetera.
Larry Clark: Yes, I would say that.
Larry Clark: Probably well I would say SBA is forecasted to be up about maybe 25%, but that's obviously the biggest number in there. So that's the biggest driver.
Nate Ken: There is certainly are seeing.
Nate Ken: There is probably about an additional I don't know maybe $1 million of extra income that we're forecasting from fintech.
Larry Clark: We also expect to start to get some distributions from some of our fund investments that's a piece of it as well.
Larry Clark: Certainly the biggest piece of it is just growth in SBA.
Larry Clark: Okay, great. Thanks for all the color.
Larry Clark: Thank you.
Larry Clark: Thank you.
Larry Clark: Next question is from Michael Perito from <unk> W. Please ask your question.
Speaker Change: Hey, guys. Good afternoon happy new year, Thanks for taking my question.
Mike: Hey, Mike.
Michael Perito: I wanted to maybe just start building on some of the guide that you guys provided which was helpful. So thanks for that but just as we think about the NIM getting to 195, two by the end of the year rate cuts obviously.
Michael Perito: Come to fruition, probably helpful on top of that like.
Mike: Can we start kind of getting back in the conversation about like the ROE on the business year on what you guys think we.
Nate Ken: We can maybe exit the year at conservatively on that 195 to two name and probably have some upside if we get two or three cuts just trying to think about how you guys are positioning the business from a profitability standpoint, and kind of prioritizing growth like I mentioned SBA has been very ROE accretive you've exited some lower yielding loans just trying to get some updated thoughts around that.
Nate Ken: I'll, let Ken hit the ROE question for you, but from an earnings perspective, as we discussed last quarter.
Ken: Thank <unk> for the year will be.
Ken: Right at the $3, Mark a little above maybe a penny or two below.
Ken: Compared to and Thats with no.
Ken: Change in the fed funds rate if that happens then.
Ken: Kind of a little bit of modeling for every quarter point a drop.
Ken: The fed rate that impact us is going to be somewhere in the five to $600000 range.
Ken: So it could move significantly if the fed starts popping, but we're pretty comfortable we're going to have a three handle on earnings at the end of the year, Ken can convert death row for me.
Ken: Yes.
Ken: Yes, maybe yes, I mean in terms of our if we just look at are certainly asking for like ROE guide, but like just where you guys are picking where to allocate capital.
Ken: To grow what are the ROE do you think the business can start to January that finally get some recovery here, which is great to see.
Ken: Well I mean, I think if you if you think about like what we've been doing on the lending side.
Where we've been in terms of.
Ken: Maybe you can say allocating or reallocating capital right with this interest rate environment. It hasn't made sense to be lending in competitive long term fixed rate verticals and we focused on the SBA, which obviously has higher yield and you have the fee income you have construction, which when we started we were coming from almost nothing.
Ken: <unk>.
Ken: And in a higher <unk>.
Ken: Not only the benefit of a higher yield but certainly.
Ken: <unk> improves the interest rate risk profile of our institution.
Ken: And we've had some growth in franchise finance and some of that growth will probably not be as pronounced as it was this past year, we pulled forward some growth there.
Ken: But in terms of the lending areas that will be the primary focus as we remain in this elevated rate environment.
Ken: All in if we're looking on our baseline assumption, we're probably getting starting to get close to a 10 ROE by the fourth quarter.
Ken: And as David David talked a little bit about the impact of rate hikes or excuse me rate cuts on that then it goes north of that.
David B. Becker: Free the run up in rates and stuff and we were running at a 1% ROA.
David B. Becker: ROE was in that.
David B. Becker: 10, five or 11, 5% range and I can tell you is senior management for the bank our long term incentive this year is based on Mike.
Mike: I was getting back to a 1% ROA.
Michael Perito: That's going to be a tough call, but we think it's achievable.
Michael Perito: So we hit the 1% as Ken said, we should be back into the low double digits on Roe.
Michael Perito: That's helpful guys and it makes a lot of sense and then I guess the follow up I have is just.
Michael Perito: Understanding.
Nate Ken: You guys are allocating capital to a bunch of different things, but with that ramp.
Nate Ken: In mind.
Nate Ken: Does it make does it makes sense for buybacks to continue at some pace here and any updated thoughts around that use of capital.
Nate Ken: For the for the next couple of quarters here.
Yes, we're still in the market and we're buying back shares, but I would tell you we slowed down significantly in the fourth quarter and until we get kind of back above the.
Nate Ken: 7% in the 10% on the TCE and <unk>.
Nate Ken: Common equity tier one common equity tier one.
We are going to be conservative a little bit on the stock.
Nate Ken: Purchase, but we are in the market. We're out there the numbers will be a little thinner than it was last quarter, but.
Nate Ken: Again, that's a tremendous use when book values 45 Bucks I think we were top 30 today, that's still a pretty serious discount to book value. So.
Nate Ken: We will take advantage of it and for some reason some geopolitical event or something blows up out here, we will be back in the market with locks down pricing and become an active purchaser again.
Nate Ken: Got it and then just lastly for me.
Nate Ken: <unk>.
Nate Ken: The SBA and the banking as a service businesses seem like good stories, where you guys invested early and they're now kind of bearing fruits from those early labor or is there any other kind of initiatives you feel like youre at earlier stages, where you think over the next year or two we should be mindful of revenue ramp or is it just kind of.
Nate Ken: Or is there just more kind of continued runway in those two that you think is still work to be the majority of your attention just would love a kind of a initiative update.
Nate Ken: I would tell you that yes, there's still a tremendous upside for both of those and as I stated, we don't EBIT within the Bath businesses. We have aligned today, if we don't add another one we have phenomenal upside and opportunity.
Nate Ken: Somebody falls out we might take less of a good opportunity comes along but yes, there is tremendous upside there.
Nate Ken: We continue to look at other verticals we've talked to.
Nate Ken: Equipment leasing firms of things, but I would tell you those two will be the lion's share of our effort and focus in 2004.
Got it great Hey, guys. Thanks for taking my questions for all the color I appreciate it.
Nate Ken: Thank you.
Nate Ken: Thank you.
Our next question is from George Sutton from Craig Hallum.
Nate Ken: Please ask your question.
Nate Ken: Thank you David you were pretty optimistic about the construction loan market and you have some pretty big year over year growth can you just talk about the pricing dynamics in that market, how it might compare to the.
Nate Ken: Overall portfolio.
Nate Ken: Yes.
George: Yes, George it's.
Ken: And Ken Correct me, if I get this wrong.
Ken: So for so far bingo plus 3% on average some cases, a little bit higher maybe just a tad bit lower but its all yielding north of 8% now adjustable rate.
Ken: So it is very accretive to <unk>.
Ken: Day in day out earnings for Us, where the portfolios averaging a little over 5%.
Ken: A nice bump in it.
It's a big number its solid we've got no concerns about any of the commitments that we've made and it's.
Ken: It's a real strong piece of business for us.
Ken: That sounds great one quick question for Ken.
Ken: What how do we think of the economic impact to you. What you mentioned $1 4 billion of volume coming through the Fintech partnerships.
Ken: Do we think of that netting down to you.
Ken: That's on the payment processing side of things.
Larry Clark: That's really just a transactional fee on the AC H clearings, where they are.
Income comes into Us Georges.
Speaker Change: We're in the lending side of things.
Speaker Change: Today, we're getting and obviously, it's kind of the.
Speaker Change: Buyer's market today is the fin techs are having some issues and concerns out in the marketplace. We're adjusting pricing on a unit by unit basis.
Speaker Change: On a fee on a transaction will play as well as <unk>.
Speaker Change: Base fees for the ongoing monitoring.
Speaker Change: So.
Speaker Change: Revenue is going to increase but as we said we went up 83% fourth quarter over third quarter and I would tell you it will be up.
Probably double that by the end of the year. So.
Speaker Change: We're looking at this year, we had probably about $1 million right at $1 million, a little over $1 billion in revenue out of bass next year, it'll be closer to $2 5 million in total revenue.
Larry Clark: Yes. The added the added piece too on payments volume is just more deposit activity because you have higher balances. There. So if you look at the line item. That's the bass broker deposits you saw that go up I mean that kind of goes up in line with the volume of payments volume processed.
Larry Clark: Perfect. Thanks, guys. Thanks.
Larry Clark: Thanks, George appreciate it.
Larry Clark: Thank you. Your next question is from John Rodriguez from Janney. Please ask your question.
John Rodis: Hey, good afternoon guys.
John: Hey, John Hey, Jeff.
David: And David.
David I guess a question for you.
David: Maybe I guess, Ken really David David You mentioned sort of $3 ish for this year in earnings.
David: I guess the question is for you can what sort of tax rate would that risk.
David: And then how should we think about provision expense.
David: Yes, I think obviously our tax our tax rate. This year was wonky because of what went on in the first quarter. Obviously, we had the.
Ken: The charges on shutting down mortgage and we had the large charge offs. So we kind of started the year and a loss in kind of a tax benefit throughout the year in.
Ken: Fourth quarter had some additional state tax adjustments in it as well so.
Ken: Think as we forecast them.
Ken: We're forecasting obviously, a quite a significant increase in net income, but but net income for the year. So the way that we're modeling it right now internally is about a 12% tax rate effective tax rate.
And then on the provision side.
Ken: Historically.
Ken: Our quarterly provision has kind of been in the one to one $5 million a quarter.
Ken: Back out one unusual events in the first quarter of last year, but we've kind of seen that.
Ken: Net charge offs creep up a little bit at least relative to what we've done historically so.
Ken: We're modeling more like a two to $2 $5 million provision a quarter.
Ken: Versus which is which is higher than our historical average.
Ken: But trying to be kind of in line with what we've done over the last few quarters.
Ken: Okay.
Ken: Yes, it makes sense, so, but probably not as high as you saw in the fourth quarter Ken.
Ken: On the from now now.
Ken: Okay. Okay.
Ken: One other quick.
Ken: On the balance sheet and the size of the securities portfolio.
Things equal.
Ken: Continuing to see decent deposit growth will those securities portfolio will be flattish or maybe trend down some.
Ken: It would probably I would look at it as maybe the percentage of the balance sheet. That's in security should remain consistent.
Ken: Over the course of the year.
Larry Clark: I mean, it is the securities portfolio as a source of liquidity.
Larry Clark: So I would just I would just view it in terms of being a consistent percentage.
Larry Clark: Okay. Okay. Thank you guys.
John Rodis: I appreciate it thanks John.
John Rodis: Thank you. Your next question is from Nathan race from Piper Sandler. Please ask your question.
John Rodis: Yes, hi, guys good afternoon.
Hey, Nate.
Just a question on kind of the outlook for deposit growth and the sources, there and kind of what are you seeing in terms of the blended rate on deposits come in the door across the various channels that you guys are generating deposit growth across.
Nate Ken: Well as I said earlier right now we're seeing on the CD side, we're seeing new volume come in around a 4.8% range.
Nate Ken: Sure.
Nate Ken: And then on the other side too like the Fintech deposits that we talked about a little bit earlier I mean, those can range anywhere from say a fed funds minus 102 fed funds.
Nate Ken: Fed funds minus 50.
Nate Ken: We are still having success on small business checking.
Nate Ken: That we can.
Nate Ken: Grow that business that would be fantastic, because we're paying $50 sitting there I think maybe 80 basis points on that.
Nate Ken: Bob.
Nate Ken: That's very low cost funding.
Nate Ken: And the money market side, we have different tiers in the heavier side of that the two thirds of that is we're kind of paying.
Nate Ken: Our rate anywhere from three four to three 6%.
Nate Ken: So money that's coming in the doors that kind of yield so.
Nate Ken: We prefer the lower cost sources that we can but the CD side is certainly very consistent.
Nate Ken: Okay got it so it still sounds like you're putting new loans on the portfolio around 8% versus those blended rates I mean, there's definitely margin accretive even if you don't use some of the cash on hand to fund loan growth going forward.
Yes, absolutely yes.
Nate Ken: Gotcha Okay.
Nate Ken: Just changing gears a little bit on credit.
Nate Ken: Curious outside of the handful of loans that you guys called out within the franchise in SBA portfolio, just curious more broadly what you're seeing in terms of.
Nate Ken: Credit migration to criticized classified.
Those two portfolios in particular lately.
Nate Ken: Actually we had credit committee.
Nate Ken: This morning, so fresh off the list here.
Nate Ken: And the nonperforming asset side of things.
Larry Clark: We mentioned a couple of minutes ago, we kind of bumped up reserves in the fourth quarter everything that setting in the NPA today is fully reserved that we have a loss or a write down we've got.
Larry Clark: A couple of SBA loans in there.
Larry Clark: We have five residential properties two of those are from.
Larry Clark: Mortgage portfolios, we purchased in the past three or locally.
John Rodis: Originated by Us.
John Rodis: So where we are in good shape coming into the pipeline, we had a little tick up in.
John Rodis: The actual delinquency.
John Rodis: During the fourth quarter that was primarily due to a one.
John Rodis: Loan it it's an urban air organization, one of our franchise loans and Thats current it was supposed to be paid by quarter and didn't make it an added credit committee. This morning, we're not seeing any significant bump ups.
John Rodis: We will probably have somewhere in the range of a <unk>.
Larry Clark: Half a million dollars in specific reserves on SBA this quarter, but that's as bad as it is and right now we don't see anything else in the franchise. So.
Larry Clark: A little bit was timing.
John Rodis: One thing that we have looked at obviously, we've grown SBA phenomenally fast.
John Rodis: The quality is great.
John Rodis: For us it is a different asset class than we've had in the past and we've kind of resigned ourselves were phenomenal yield off of it and phenomenal income, but delinquency and some of those issues are going to run a little higher than we have in the past losses might be.
John Rodis: Tad bit higher but compared to the national figures and about all categories were below national averages on delinquencies and losses on reserves whatever so we think we're in good shape there.
John Rodis: Part of the.
John Rodis: Growth side of things, though that obviously impacts our upfront reserving because of the amount and the volume and it is a higher percentage.
John Rodis: Then most of our loan categories today, So it's bumping reserves and that will continue as Ken said, a little higher in 'twenty four than we did in 'twenty three but its more over the growth factor than the loss factor.
John Rodis: Okay got it and then just thinking about the drivers or I think you said.
Five years to 6% loan growth this year Ken.
Ken: Just in terms of the drivers to get there I mean, obviously you guys had tremendous growth in the franchise book. This year, how do you guys kind of thinking about where that growth is going to come from it does.
Ken: Does that type of growth incrementally require higher levels of provisioning and reserving needs.
Ken: Relative to what we saw during 2023.
Nate Ken: <unk> Standalone production, yes, I think.
I think David just commented that some of the.
Nate Ken: Were some of the provision.
Nate Ken: Increase is going to come from growth in portfolios with kind of higher coverage ratios.
Nate Ken: We look about growth a lot of it's a lot of very similar to what we did in 2003.
Nate Ken: For some of our verticals that are longer term fixed rate. It's just right now the market is still competitive and pricing deals low that doesn't make any sense for us. So it's still it's kind of just continued remixing of youre going to see balances down certainly in healthcare, where we are not originating new loans anymore.
Nate Ken: Youll, probably see a net decline in public finance, we still will do deals in public finance in the shorter end of the curve. There are some good opportunities that our team gets looks at but net net that will probably be down year over year.
Nate Ken: Kind of hard to predict what the long end of the curve is doing right now but it's.
Nate Ken: It makes the single tenant business very very competitive.
Nate Ken: Folks out there who are who are doing stuff that at rates that don't make sense to us so you'll probably see.
Nate Ken: Net decline there, but you combined you have run off there, but youre going to see you expect to see growth in construction as some of the commitments the unfunded commitments become funded our team had a tremendous year last year on the origination side and now those now those balances need to be drawn.
Nate Ken: SBA is forecasted to have a fantastic year and you will see balances up in franchise, although probably not nearly not nearly as much as you saw last year. We pulled we pulled forward a little bit of our volume from our partner in the fourth quarter that was budgeted for first half of this year.
And just in terms of again, just kind of allocating where we're allocating capital.
Nate Ken: Youll see is youll see a little youll see lower growth in franchise compared to what you saw last year.
Nate Ken: Got it very helpful.
Nate Ken: And just a clarification question lastly, I was scribbling down your guidance Ken in terms of kind of the SBA gain on sale revenue for this year and I think you also provided some guidance around.
Nate Ken: Banking as a service as well revenue.
Nate Ken: Well on the total that we talked about in terms of total noninterest income, we expect that to be up in excess of 30%.
Nate Ken: And one of them.
Nate Ken: One of the other.
Nate Ken: Folks on the call asked about the components of that I mean, the biggest component is going to be SBA, we expect growth in the 'twenty three 'twenty, 4% range there.
Larry Clark: As well as growth in in the banking as a service we're probably on the fee income side.
Larry Clark: About one maybe 1 million to 1 million and a half of growth there year over year.
Larry Clark: And then the other pieces of it are we expect to get some distributions from some of the funds spic's funds like that we've invested in.
Larry Clark: Understood and just trying to understand kind of the.
Larry Clark: Significant ramp in SBA revenue.
Larry Clark: Can you just remind us in terms of how large that team it today versus maybe a year or so.
Larry Clark: Hi, Joe.
Joe: I think on the staffing side, but we're up.
Joe: Probably in the range of 20% to 25% on a year over year basis.
Joe: We added a number of folks at the end of the year.
Joe: And it's going to go up and it's in the earnings release or the numbers from Ken about the.
Joe: Biggest expense, we're going to have in cost next year is still going to be in the employee Q and a big chunk of that is going to be for SBA and compliance.
Joe: Issues within the vast world so.
Joe: That's where most of the employee growth is coming from.
Joe: Through 2024, and I think that's going to put it somewhere it was in the 6% to 8% bump in salaries and employee expenses. We gave total noninterest income in the range of eight 8% to 10%.
Joe: Total non interest income up 8% to 10% I'm, sorry, 90, non interest expense sorry.
Joe: Yes.
Joe: Noninterest income is going to be off hire that's gone up 30 right.
Joe: That's right, that's what I thought I heard.
Nate Ken: Okay, Great I appreciate you guys, taking the questions and all the color. Thank you great. Thanks, Nate Thank you.
Nate Ken: Thank you.
Nate Ken: There are no further questions at this time I will now hand, the call back to Mr. Becker for any closing remarks.
Jenny: Great. Thank you Jenny.
Thank all of you for joining us on today's call. The anniversary it gives us an opportunity to reflect and it is really remarkable the storms. We've weathered in our first 25 years from the Dot com bubble burst in the early days the mortgage meltdown of <unk>, a global pandemic followed by.
David B. Becker: The steepest fastest rate increase in history.
David B. Becker: We have survived them all we have live to fight another day and as we look forward to 2024 and our next 25 years, we're extremely optimistic about our outlook the strong performance of our commercial and consumer lending teams, including our growth in small business in construction lending and drive greater revenue growth throw in the <unk>.
<unk> deposit cost and it paints a real favorable picture for earnings as fellow shareholders, we remain committed to driving improved profitability and enhance shareholder value. We thank you for all your support and wish you a good afternoon. Thanks, everyone.
David B. Becker: Thank you ladies and gentlemen, the conference has now ended thank you all for joining you may all disconnect.