Q1 2024 First Internet Bancorp Earnings Call
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Speaker Change: They everyone and welcome to the first Internet Bancorp earnings Conference call for the first quarter of 2024 at the same note that all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session.
Any time during this call you'll require immediate assistance. Please press star zero for the operator, and I would like to turn the conference over to Larry Clark from Prevention Profiles, Inc. Please go ahead Mr. Clark.
Larry Clark: Thank you Sylvie good day.
Larry Clark: Hi, everyone and thank you for joining us to discuss first Internet Bancorp's financial results for the first quarter of 2024.
Larry Clark: The company issued its earnings press release yesterday afternoon, and it's available on the company's website.
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.
Larry Clark: And executive Vice President and CFO, Ken Lubbock.
David B. Becker: David will provide an overview and Ken will discuss the financial results then we'll open the call to your questions.
Larry Clark: However, before we begin I'd like to remind you that this conference call contains forward looking statements with respect to the future performance and financial condition. The first Internet bancorp that involve risks and uncertainties.
Larry Clark: Various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements.
Larry Clark: Factors are discussed in the company's SEC filings, which are available on the company's website.
Larry Clark: The company disclaims any obligation to update any forward looking statements made during the call.
Larry Clark: Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.
Larry Clark: Yes release available on the website contains the financial and other quantitative information to be just discussed today as well as the reconciliation of the GAAP to non-GAAP measures.
Larry Clark: At this time I'd like to turn the call over to David.
David B. Becker: Thank you Larry.
David: Good afternoon, everyone and thanks for joining us today as we discuss our first quarter 'twenty four results. Those of you who regularly attend these meetings will recall that two quarters ago, we called the bottom in late October we predicted the third quarter of 2023 would mark the low point for net interest margin and net debt.
David: Interest income.
David: We also estimated net interest margin would turn higher from there regardless of whether or not and at what pace that federal reserve chose to start reducing short term interest rates. Since then and despite ongoing uncertainty around the future monetary policy and continued volatility in long term rates we have now.
David: We reported two consecutive quarters of strong earnings growth.
David: And improved profitability.
Speaker Change: Okay, and then a large part by the recovery in our margin and growth in net interest income that we had projected.
Speaker Change: This quarter's results continued to demonstrate the meaningful progress we've made repositioning the loan portfolio and optimizing our overall balance sheet mix, while keeping deposit costs in check and improving our interest rate risk profile.
Speaker Change: Starting with the highlights on slide three I'd like to discuss some of the key themes for the quarter.
Speaker Change: As I just noted we continue to transition the composition of our loan portfolio and optimize both sides of the balance sheet, we experienced strong deposit growth during the quarter and deployed a portion of the liquidity to drive net loan growth of $70 million or over 7% on an annualized basis.
David: New funded loan origination yields were at 884% consistent with the fourth quarter of 2023 and up 108 basis points from the first quarter of 2023.
David: The yield on the overall loan portfolio increased 23 basis points from the fourth quarter of 2023, while deposit costs only increased 11 basis points.
David: As a result net interest income was up almost 5% and fully taxable equivalent net interest margin expanded by seven basis points.
David: Over the prior quarter since the third quarter of last year. When we believe those metrics hit their low net interest income has increased by 19% and net interest margin has expanded by 27 basis points with.
David: With our emphasis on improving the composition of the loan portfolio and stabilizing deposit prices. We remain confident that net interest income and net interest margin will trend higher for the remainder of this year, which is consistent with the guidance we issued in January.
David: Notably as a reminder, our estimates at student estimates do not reflect any expectation for short term rate cuts by the federal reserve this year.
David: Other highlights for the quarter was the performance of our SBA business. Despite the seasonally lower SBA activity in the first quarter of the year. The team continued to perform exceptionally well delivering solid production and another record quarter of gain on sale revenue.
David: Compared to the first quarter, one year ago, SBA origination and sold loan volume were up 27% and 55% respectively.
David: Demonstrating the tangible results of the investment we have made and providing growth capital to entrepreneurs and small business owners throughout the country.
David: Our small business pipeline continues to flourish and we remain among the top 10, most active SBA seven eight lenders in the country congratulations to our SBA team on another standout quarter.
David: It is the combination of all of these efforts solid loan growth net interest margin expansion net interest income growth and non interest income powered by record gain on sale revenue that drove a nearly 7% increase in our total revenue over the prior quarter.
David: Where does the revenue expansion and only moderate expense growth generally driven by the typical annual reset on employee benefit costs and merit pay increases we delivered our second consecutive quarter of positive operating leverage and continued improvement in operating efficiency.
David: Credit quality remains healthy overall with nonperforming loans to total loans at 33 basis points and non performing assets to total assets at 25 basis points at quarter end nonperforming loans did increase from the fourth quarter due primarily to additions in small business lending and to a lesser extent.
David: Legacy residential mortgage.
David: But our ratios continue to compare favorably to the rest of the industry. Furthermore, net charge off to average loans remained low at just five basis points.
David: We also saw an increase in delinquencies 30 days or more past due which totaled 53 basis points of total loans at quarter end. The increase during the quarter is due primarily to an increase in delinquencies and small business lending and franchise finance portfolios. Some of this was simply due to the timing of payments subsequent.
David: At quarter end, a number of these borrowers have become current on their payments and as of today. Those delinquencies have declined to 32 basis points in total markets.
David: Yes.
David: As it relates to current industry concerns around office real estate.
David: I'd like to remind everyone that our exposure to office commercial real estate remains at less than 1% of our total loan balances and does not include any central business district exposure.
David: Our capital levels remained sound with a common equity tier one capital ratio of nine 5% and 2%.
David: Tangible common equity ratio of 679% at quarter end.
David: Tangible book value per share the key measure.
David: Shareholder value creation increased 1% during the quarter and is up six 6% year over year.
David: As a further example of the value we have created for shareholders since 2018.
David: The Internet has grown tangible book value per share by nearly 50% compared to an average of 33% for all publicly traded banks during that time period.
David: We are among just a small handful of banks had a ground tangible book value per share in each of the past five years, which is also in part a testament to our prudent balance sheet management and operational discipline through a very challenging period for the banking industry.
David: As a result of our continued improvement in operating performance. We reported net income of $5 2 million up 25% and diluted earnings per share of 59.
David: Up 23% from the fourth quarter of 2023. This was the second consecutive quarter of earnings growth in excess of 20%.
Speaker Change: Let me now take a couple of minutes to discuss our lending activity during the quarter turning to slide four.
Speaker Change: We produced solid loan growth during the quarter led by our commercial lending teams, where balances were up $75 million from yearend or 10% on an annualized basis, we generated growth in construction small business lending and franchise finance. This was partially offset by declines in the fixed rate pubs.
Speaker Change: <unk> finance and the healthcare finance portfolios.
Speaker Change: Our construction team had another solid quarter originating $90 million in new commitments. Additionally, funded construction loans increased 24% on a linked quarter basis as Barros drew on existing lines to fund their projects.
Speaker Change: At quarter end total unfunded commitments and our construction line of business increased to $552 million up from $540 million at the end of the fourth quarter.
Speaker Change: <unk> is very well positioned to continue shifting the composition of our loan portfolio towards higher yielding variable rate loans.
Speaker Change: On the consumer side balances were down modestly as expected declines in residential mortgages were partially offset by production in our specialty consumer channels, which is traditionally lower during the winter months.
Speaker Change: Before I turn the call over to Ken to cover deposits in more detail I want to provide an update on our fintech partnerships.
Speaker Change: Long after launch first Internet Bank 25 years ago, we entered into our first partnership program recreational vehicle lending channel that continues to grow long term customer relationships with outstanding credit quality and favorable yields over the years, we forged additional partnerships some of our initial.
Kenneth J. Lovik: Like the one delivering on demand payments to workers in the gig economy drove innovation, while others helped establish entities like our home States department of revenue lower processing costs and build out online delivery channels.
Speaker Change: Still other partnerships have provided necessary growth capital to underserved market with niche partners that know their target audience, well, bringing to us loan growth with acceptable yields and excellent credit quality without the cost of supporting and house origination teams.
Speaker Change: As anyone who has ever paid for coffee with an online wallet or use of PDP app to split the dinner bill or carry an affinity card to earn miles or reward points will tell ya partnerships are vital to the evolution of financial services and first Internet bank as proud of the role we have played in this natural search.
Speaker Change: Mrs Arena for the past 25 years.
Speaker Change: As I noted last quarter. We currently have a dozen live programs of varying purpose and scope and several other programs that are in various stages of implementation.
Speaker Change: As our attention is focused on bringing these programs live we did not have any new programs during the quarter.
Speaker Change: Ken will provide more details on that in just a moment.
Kenneth J. Lovik: I want to temper your expectations.
Kenneth J. Lovik: We are not forecasting revenue to continue to grow at that same rate in the remaining quarters of this year. However, the additional reoccurring revenue from this service channel will enable us to hit our forecasted fintech revenue for the year, which we expect will be almost three times the amount we recognized last year.
Kenneth J. Lovik: To wrap up on my comments, we delivered improved performance in the first quarter and look forward to the rest of the year with confidence. Furthermore, liquidity and credit quality remained strong and capital levels are sound with.
Kenneth J. Lovik: Continued evolution of our loan portfolio mix and the positive outlook for SBA team and stabilize deposit pricing. We believe we are well positioned to continue to achieve higher earnings and improved profitability for the remainder of 2024 and beyond.
Speaker Change: Touch on a topic I covered last quarter. Many of you recall the first Internet bank stock.
Speaker Change: Along with many other banks that fell out of the Russell 2000 index around the same time with a regional bank Tigers in the spring.
Speaker Change: As we head into the reconstitution of the Russell Index. Later this quarter, we are keeping an eye on where the estimates a minimum market capitalization are being reported while there are certainly no guarantees with a recovery in the stock price over the last six months, especially relative to the small cap universe as a whole we will.
Speaker Change: Remain optimistic that first internet stock.
Speaker Change: Mike again qualify for inclusion in the index.
Speaker Change: Finally, I want to personally thank the entire first internet team for their dedication to our clients and their contributions to our strong result, our team's talent and commitment to constant improvement gives me great confidence in the future. It firsthand in that and our long runway of opportunities ahead as a premier technology forward digital financial service.
Speaker Change: As provider with that I'd like to turn the call over to Ken for more details on the financial results.
Kenneth J. Lovik: Thanks, David as David covered the loan portfolio, let's turn to slides five through seven where I will cover deposits in more detail deposit balances grew by $206 8 million or five 1% from the prior quarter as we saw strong demand across our customer base.
Kenneth J. Lovik: Non maturity deposits were up over $66 million or three 6% due to increases in fintech partnership deposits and money market balances deposits from our Fintech partners, including broker deposits were up 32% from the fourth quarter and total over $280 million at quarter end. Additionally.
Kenneth J. Lovik: These partners generated almost $6 1 billion in payments volume, which was up 29% from the volume we processed in the fourth quarter total Fintech partnership revenue was $610000 in the first quarter, an increase of 47% over the linked quarter with the mature with the majority of this revenue.
Speaker Change: Consisting of recurring interest income oversight and transaction fees.
Speaker Change: Related to CD activity for CD activity during the quarter total balances were up $134 million from the linked quarter driven by strong demand in the consumer channel, we originated $632 million in new production and renewals during the first quarter at an average cost of $4 96%.
Speaker Change: <unk> and a weighted average term of 23 months.
Speaker Change: These were partially offset by maturities of $475 million with an average cost of 462%.
Speaker Change: Looking forward, we have $360 million of Cds maturing in the second quarter of 2024, with an average cost of $4, 76% and $383 million maturing in the third quarter with an average cost of $4, 96%. So as we noted last quarter the repricing gap between.
Speaker Change: The cost of new Cds, and the cost of maturing Cds is narrowing which will continue to contribute to slowing the pace of increases in deposit costs.
Speaker Change: Additionally, we continued to reduce higher cost deposits when we can and used on balance sheet liquidity to pay down some callable brokered Cds as well as the maturing federal home loan Bank advance.
Speaker Change: Looking at slide six at quarter end, we estimate that our uninsured deposit balances were $1 1 billion.
Speaker Change: Or 26% of total deposits, which is up $76 million from the end of the fourth quarter. The increase was due primarily to new customer balances and growth in existing deposit balances.
Speaker Change: After adjusting for Indiana based municipal deposits and larger balance accounts under contractual agreements are adjusted uninsured balances dropped to $859 million or 20% of total deposits, which continues to compare favorably to the rest of the industry.
Speaker Change: Moving to slide seven at quarter end total liquidity remains very strong as we had cash and unused borrowing capacity of one 7 billion as mentioned a moment ago. We deployed some of the liquidity provided by deposit inflows to pay down higher cost brokered deposits and to reduce our borrowings at the federal home loan bank as well.
Speaker Change: Well as to fund loan growth during the quarter as deposit growth outpaced loan growth the loans to deposits ratio declined to 91, 5% from 94, 4% at the end of 2023 at quarter end, our cash and unused borrowing capacity represented 158% of total uninsured deposits and.
Speaker Change: 203% of adjusted uninsured deposits.
Speaker Change: Turning to slides eight and nine net interest income for the quarter was $27 million and $21 $9 million on a fully taxable equivalent basis up four 7% and four 2% respectively from the fourth quarter.
Speaker Change: The yield on average interest, earning assets increased to 545% from 5% to 8% in the linked quarter due primarily to a 23 basis point increase in the yield earned on loans and a nine basis point increase in the yield earned on securities, partially offset by a six basis point decline in the yield earned on.
Speaker Change: Other earning assets.
Speaker Change: The higher yields on interest, earning assets combined with the growth in average loan and securities balances produced solid top line growth in interest income, increasing nearly 3% compared to the linked quarter as deposit costs and average interest bearing balances were up modestly.
Speaker Change: Net interest margin for the first quarter was 166% and 175% on a fully taxable equivalent basis, which were increases of eight and seven basis points, respectively from the fourth quarter.
Speaker Change: The net interest margin roll forward on slide nine highlights the drivers of change and fully taxable equivalent net interest margin during that during the quarter.
Speaker Change: The relative 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 has been and will continue to be a catalyst in driving net interest margin expansion.
Speaker Change: 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 second quarter of 2024 and throughout the year. Currently we expect the yield on our loan portfolio to be up around 15 to 20 basis.
Speaker Change: For the second quarter.
Speaker Change: Furthermore, with short term interest rates stabilized and narrowing repricing gap in Cds, we anticipate only a modest increase in interest bearing deposit costs similar to what we experienced in the first quarter.
Speaker Change: Turning to noninterest income on slide 10, noninterest income for the quarter was $8 3 million up $900 million are up 900000 from the fourth quarter gain on sale of loans totaled $6 $5 million for the quarter up 8% over the fourth quarter and setting another quarterly record for our SBA.
Speaker Change: <unk> loan.
Speaker Change: Loan sales volume was $80 million down 11, 5% due to seasonal factors compared to the linked quarter, but this was more than offset by higher net gain on sale premiums, which were up 150 basis points quarter over quarter.
Speaker Change: We also saw an increase in net servicing revenue during the quarter as our service SBA portfolio continued to grow following the strong origination results over the last two quarters.
Speaker Change: Moving to slide 11, noninterest expense for the quarter was $21 million up almost $1 million from the fourth quarter and in line with our expectations.
Speaker Change: The increase was due primarily to higher salaries and employee benefits and marketing expenses.
Speaker Change: The increase in marketing expenses was due mainly to higher advertising media and seasonal sponsorship costs.
Speaker Change: 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.
Speaker Change: The allowance for credit losses, as a percentage of total loans was 1.05% at the end of the first quarter up four basis points from the fourth quarter.
Speaker Change: The increase in the allowance for credit losses reflects the addition of specific reserves related to the additional nonperforming SBA loans as well as loan growth in portfolios with higher ACL coverage ratios, partially offset by the positive impact of economic data on forecasted loss rates and other portfolios.
Speaker Change: The provision for credit losses in the first quarter was $2 $4 million compared to $3 $6 million in the fourth quarter. The provision for the fourth first quarter was driven primarily by the additional specific reserves growth in certain loan portfolios and the modest net charge offs.
Speaker Change: If you exclude the balances and reserves on our public finance and residential mortgage portfolios, which have lower coverage ratios given their lower inherent risk the allowance for credit losses represented $1 two 5% of loan balances. Furthermore, with minimal office exposure, we do not require the excess reserves.
Speaker Change: Round that asset class that many other banks have.
Speaker Change: Moving to capital on Slide 13, our overall capital levels at both the company and the bank remains solid the tangible common equity ratio was 679% down modestly from the fourth quarter. This was due primarily to an increase in accumulated other comprehensive loss as medium and long term interest rates increased throughout.
Speaker Change: In the first quarter.
Speaker Change: The tangible common equity ratio was also impacted by the strong deposit growth and increases in cash balance cash balances during the quarter.
Speaker Change: If you excuse if you exclude accumulated other comprehensive loss and adjust for normalized cash balances of $300 million. The adjusted tangible common equity ratio would be 761%.
Speaker Change: From a regulatory capital perspective, the common equity tier one capital ratio remains solid at 99, 5% and 2%.
Speaker Change: At quarter end tangible book value per share was $41 83.
Speaker Change: Which is up 1% from the fourth quarter and up almost 7% year over year.
Speaker Change: Before I wrap up I would like to provide some updates on our outlook for the remainder of 2024 as a reminder, our approach to forecasting. This year is to assume that the federal reserve maintains a higher for longer outlook and does not lower the fed funds rate during 2024.
Speaker Change: We still feel confident that annual earnings per share for the full year of 2024 will be in the range of $3 per share. However, some of the moving parts that get us to that number has changed a little bit.
Speaker Change: With regard to net interest income as I mentioned earlier, we expect loan yields to continue to increase while growth in deposit costs should be relatively modest with loan growth in the range of 5% to 10% for the year. We still expect annual net interest income to be up 20% for 2024 with fully taxable equivalent net interest margin.
Speaker Change: Continuing to increase throughout the year and be in the range of one 9% to 2% in the fourth quarter.
Speaker Change: Related to noninterest income with the combination of our SBA team continuing to deliver consistently higher origination activity and stabilization in the secondary and secondary market pricing our outlook is even more optimistic than it was at the beginning of the year.
Speaker Change: However, the expectations for higher fee revenue will be partially offset by higher expenses as we expect to add additional personnel in SBA and risk management as well as make additional investments investments in technology and in our risk management processes around our Fintech partnerships program.
Speaker Change: With that I will turn it back to the operator, so we can take your questions Sylvie.
Operator: You Sir ladies.
Speaker Change: Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone you will then hear esquivel.
Speaker Change: Prompt acknowledging your request and should you wish to withdraw the question queue simply press star followed by two and if you're using a speaker phone. We do ask that you. Please lift the handset before pressing any keys. Please go ahead and press Star one now if you have any questions.
Speaker Change: And your first question will be from Tim Switzer at <unk>. Please go ahead.
Tim Switzer: Hey, good afternoon, Thanks for taking my question.
Tim Switzer: Hi, Tim Hi, Tim.
Tim Switzer: My first one is I appreciate the guide on NII and NIM trajectory.
Tim Switzer: You guys are being conservative excluding the impact of rate cuts.
Tim Switzer: We get say, one or two rate cuts.
Tim Switzer: Near the back half of the year, what kind of impact do you guys think that has on NII and the NIM and then.
Tim Switzer: Does the beta on deposits kind of change over time as we get into 2025 minutes a series of rate cuts.
Tim Switzer: Does that kind of accelerate and you start to get even more of a benefit.
Speaker Change: Overtime.
Speaker Change: Let's take the first part of your question first I think roughly speaking depending on how you want to slice it.
Speaker Change: A 25 basis point rate cut is roughly $1 million or so of.
Speaker Change: NII.
Speaker Change: So that's on an annualized basis. So I guess you would have to wherever you want to choose to put the timing on that but that's about an annualized number.
Speaker Change: On the betas on the deposit side.
Speaker Change: We do have we have over $1 billion of deposits that are tied directly to fed funds. So the beta on those is going to be 100% regardless.
Speaker Change: And then you get into Cds, if you're repricing Cds, those generally follow a 100% beta or pretty close to that as well, so Cds will reprice down as well.
Speaker Change: We've probably got some other money market and savings accounts, where the beta isn't going to be 100, it's probably closer to say 50 or 60.
Speaker Change: Those have been pretty consistent over time.
Speaker Change: But that's kind of I mean, that's kind of the way that I would look at deposit betas on the way down.
Speaker Change: Great that's really helpful.
Speaker Change: And then I have kind of a more specific question, but one of your disclosed.
Speaker Change: Borrowers in your single tenant lease financing portfolios Red lobster. He recently.
Speaker Change: Going through a bankruptcy and I don't know if you can talk about customers.
Speaker Change: Customers, specifically, but can you generally talk about.
Speaker Change: Your collateral and how a bankruptcy could work because I know, it's the company not necessarily the franchises and.
Speaker Change: In your single tenant portfolio, how that could work and then if you have other exposure and your other portfolios like franchise finance.
Speaker Change: The Red lobster side of things, we just actually had quite a committee meeting this morning, and got an update at our peak, we were almost $82 million and Red lobster.
Speaker Change: Facilities across the country and Thats now down.
Speaker Change: Around the $40 million Mark we've been.
Speaker Change: On a single tenant lease portfolio, it's the borrower one <unk>.
Speaker Change: <unk> second franchise or.
Speaker Change: <unk> Red.
Speaker Change: Red lobster happens to all be company owned stores, there's not really a franchisee involved.
Speaker Change: What we are hearing.
Speaker Change: From the company at this point it's been.
Speaker Change: Post Covid the company has changed hands twice.
Speaker Change: It's really a restructuring of some of their long term debt.
Speaker Change: You remember back when Covid hit.
Speaker Change: Red lobster was in trouble with.
Speaker Change: No delivery system, no online ordering no whatever so they put a lot of infrastructure into play over the last three or four years ran out of some pretty significant cost question, whether the current owner paid the right price when they bought the services, but all of our buildings are in great metropolitan local.
Speaker Change: <unk>.
Speaker Change: Our average loan to value on the real estate itself is under 50%.
Speaker Change: We have had red lobster's over the years go dark and the REIT positioned generally as some other franchise.
Speaker Change: Restaurants are.
Speaker Change: Label within a matter of a couple of two to three months and we've been in them for seven or eight years now and we've never had an account show up on a delinquency list. So.
Speaker Change: We're pretty confident right now that we're okay.
Speaker Change: I don't think they're gonna go into full liquidation.
Speaker Change: That would definitely change things, a little bit, but with particularly the borrowers we have in the.
Speaker Change: Red lobster vertical they have the capacity to carry those loans for months until they can be repositioned into something out at.
Speaker Change: At the current time, we're not too worried about what's going on with them.
Speaker Change: Great that was awesome color really appreciate it did you say all these properties. They are all company owned and none of them are franchises.
Speaker Change: Yes.
Speaker Change: The actual operations of the restaurant are done by Red lobster is not a franchisee.
Speaker Change: All company owned locations.
Speaker Change: Okay. So youre borrower for all of these is actual red lobster. The company no no no. They are individual real estate investors.
Speaker Change: Individuals most of them were all up in virtually all of them are consumers that.
Speaker Change: And our single tenant lease.
Speaker Change: Product we.
Speaker Change: I don't know Tim.
Speaker Change: And listening in on our call the single tenant lease side of things, it's individuals' that'll buy.
Speaker Change: Take red lobster side, but like CBS comes in it puts a new drug store here in fishers.
Speaker Change: They don't want to hang onto the property in the real estate in a single store doesn't get the insurance companies or the big.
Speaker Change: Interested in buying them and the one off so we kind of feel that market.
Speaker Change: Four of them were an individual investor will come in and buy most of them have.
Speaker Change: 10 to $31 associated with them. So the portfolio as a whole is right at 50% or less in loan to value on the actual property. So we value of that property.
Speaker Change: Makes it credit decision based on the Investor and then we look to the franchisee or a franchise or as kind of a third party repayment stream.
Speaker Change: And we've been doing this for 12 years, now probably $2 billion plus in origination and all of that time, we've only had one loan that we took a loss on so it's just a rock solid product with weather.
Speaker Change: Different reorganizations Applebee's, a few years ago went into massive reorganization six nine months ago Burger King did the same thing and it's had no impact on our portfolios and our clients.
Speaker Change: I got you that makes sense really appreciate the color of detail Sir that's all from me.
Speaker Change: Yes welcome aboard.
Speaker Change: Thank you <unk>.
Speaker Change: Next question will be from Brett Robinson of Degroup. Please go ahead.
Brett Robinson: Hey, good afternoon guys.
Brett Robinson: Hey, Brett Hey, Brett.
Brett Robinson: Wanted to start with SBA and well I guess first just wanted to go back to the guidance.
Brett Robinson: I think you were giving guidance for 30% fee income growth I think the 10% expense growth and it sounds like both those numbers are a little higher now, but I didn't get if I heard you guys gave an exact number I didn't get one if you are.
Speaker Change: Specific.
Speaker Change: Number for those two items.
Speaker Change: Ken I wanted to let you do a little bit of homework.
Kenneth J. Lovik: Yes, I would say that the expenses are probably.
Kenneth J. Lovik: Probably closer to summit with some of the investments we have to make are probably closer to the 10% to 12% range, but I can tell you that the outlook for SBA is up significantly from where we had talked about at the end of the year.
Kenneth J. Lovik: Okay and as it relates to SBA another bank today without building reserves on.
Kenneth J. Lovik: On the SBA portfolio.
Speaker Change: And was basically just indicating that some mainstream.
Speaker Change: Main stream SBA borrowers were struggling with the higher rate environment impacted our overall debt obligations can you guys maybe talk about how much of your SBA portfolio on balance sheet as guarantee versus non guaranteed and then if youre seeing anything specific in that portfolio.
Speaker Change: Whats on the balance sheet is.
Speaker Change: Our risk that's 100% on us and Thats in the outstanding asset as we've sold loans over time and during Covid. There is a period, where the SBA was guarantee and 90% of the balance. So I don't know how that blends out between that $25 10 number but to give you a feel Brett we just.
Speaker Change: The most current information SBA like any governmental agency run slow we received the report.
Speaker Change: Last week, that's the end of November data.
Speaker Change: And what they classify as nonperforming assets anything of 90 days or more past due or on non accrual our ratio was $2, one 9% and were rated low risk compared to our peer group, which was eight 2%. So we're one quarter of a percent of what the industry is.
Speaker Change: A whole was experienced and so.
Speaker Change: SBA is a higher delinquency and will potentially have higher loss rates than we're used to and we've been in the RV industry for 25 years have accumulated over an average of less than 75 basis points of losses. So SBA numbers are a little high for us, but again on industry standards.
Speaker Change: We're on the low end of the risk spectrum as far as the SBA products.
Speaker Change: We're diligent on the underwriting some people view.
Speaker Change: Anybody can get an SBA loan because it is government guaranteed and you only have 25% risk we don't view it that way, we still have very solid credit underwriting standards that we comply with.
Speaker Change: Okay. That's helpful.
Speaker Change: And then just lastly, you mentioned building up the Fintech from a risk perspective.
Speaker Change: Back office hires.
Speaker Change: With the novel activity guidance from the FCC.
Speaker Change: Now from other regulators as well is it fair to assume that youre going to be building capital ratios and liquidity from here or how should we think about maybe some of the requirements from the regulators are imposing on balance sheets.
Speaker Change: Well I think well I mean, probably I mean, just from an overall perspective are we view. This year is building capital anyways and I think.
Speaker Change: We have maintained pretty high.
Speaker Change: Liquidity.
Speaker Change: High levels of liquidity over the last several years.
Speaker Change: I don't think I mean, we think about it in the context of the overall organization not necessarily specific to one line of business.
Speaker Change: Yeah.
Speaker Change: We can take.
Speaker Change: Obviously can't give your ratings spread but we've completed the <unk>.
Speaker Change: Safety and soundness exam for 2023, and they had no questions or concerns on our capital ratios or liquidity.
Speaker Change: Okay.
Speaker Change: Great appreciate all the color thanks, guys.
Speaker Change: I appreciate it Sir.
Speaker Change: Next question will be from George Sutton of Craig Hallum Capital Group. Please go ahead.
Speaker Change: Hey, guys. This is James on for George Nice results and thanks for taking my question.
Speaker Change: Hey, James.
James: Hey, Dan.
James: Hi, again.
James: Could you talk about the Fintech partner pipeline a little bit.
James: That pipeline growing our conversations with customers that have been in the pipeline for a while kind of evolving.
James: And then longer term with sort of your vision for the Fintech franchise in terms of types of partnerships like lending versus deposit.
James: Potential financial contribution.
Speaker Change: I'll take that and then Ken might give you some more color on the sales side or the pipeline end of it.
Speaker Change: We have 10 in some state of being live or in process of testing. We've got 10 more we're sitting on about 20 that were in some kind of contract negotiation in some part of due diligence that we're looking at.
Speaker Change: <unk>.
Kenneth J. Lovik: Our play is to kind of clean up that pipeline. There is a lot a lot of noise in fintech now with <unk>.
Kenneth J. Lovik: Synapse being acquired.
Kenneth J. Lovik: In the process of being purchased.
Kenneth J. Lovik: Treasury Prime has changed.
Kenneth J. Lovik: There were operation Theres, just a lot of craziness going on we've got some very solid prospects as Ken stated, we had a nice bump up in revenue here in the first quarter is not going to double down for the rest of the year every quarter, but.
Kenneth J. Lovik: We've got some really strong players in the pipeline and some nice stuff coming so.
Kenneth J. Lovik: We're getting some interesting at that.
Kenneth J. Lovik: With some of the things that's happening in the marketplace. So we're going to kind of keep our powder dry and look for really good opportunities I would tell you in the 10 that are not live there are some of them that.
Kenneth J. Lovik: Now because of capital constraints on their part or ability to raise additional capital in pressure that they're getting from their original investors as we all know 12 18 months ago is all about growth nobody cared about the bottom line and Thats down a 180 on them now it's all about bottomline not necessarily growth.
Kenneth J. Lovik: And some of them are trying to figure out how to get to a positive bottom line. So.
Speaker Change: One of my philosophies for 40 years and businesses when there is.
Speaker Change: The greatest chaos in the marketplaces also have the greatest opportunity. So we're kind of watching what's going on and we will selectively pick up opportunities, where we can some of the folks will drop out and some folks are pop and so.
Speaker Change: Still a good growing part of our business, Ken said, we're going to.
Speaker Change: Minimum triple down on what we did last year.
Kenneth J. Lovik: Which is great growth in.
Kenneth J. Lovik: Some of the stuff on the other side I'll go back to the comment about staffing in.
Kenneth J. Lovik: Compliance stuff a lot of those part as Ken also mentioned, we're installing some new tools a lot of those things can be tracked electronically now new tools new services. So it is a combination of staff somebody has obviously got to run those tools, but.
Kenneth J. Lovik: Control and operation and staying on top of the best.
Kenneth J. Lovik: Companies are a lot easier with some of the newer technology tools out here today, so a little bit of that is to get the house in order to get that set up and that will allow us to even grow some of them a little bit faster. So.
Kenneth J. Lovik: Crazy market, but I still think it's a good market all in all.
Kenneth J. Lovik: Yeah.
Speaker Change: Got you.
Kenneth J. Lovik: And then what percent of the loan book today is variable rate and where would you expect that mix to trend in a higher for longer scenario versus a scenario, where we get a couple of rate cuts.
Kenneth J. Lovik: We're kind of in the low 20%.
Kenneth J. Lovik: The portfolio, probably getting closer to 25 and look our goal and thats, probably coming from somewhere closer to 10% to 12%.
Kenneth J. Lovik: So I think the higher for longer scenario, we certainly want to keep managing it but probably just ive, even even if rates come down it's still just prudent to have a higher portion of the portfolio in variable rate.
Kenneth J. Lovik: So we're trying to trying to drive that number as high as we can here over the next next couple of years.
Speaker Change: Makes sense and then last one for me just what do you guys think is working so well in SBA.
Speaker Change: Thanks, guys.
Speaker Change: I would say.
Speaker Change: Yes.
Kenneth J. Lovik: Some of our peers over the last 18 to 24 months.
Kenneth J. Lovik: For any myriad of reasons coming out of Covid.
Kenneth J. Lovik: <unk> sheet issues.
Kenneth J. Lovik: Deposit issues in some of the smaller community banks, where all of a sudden they're customers of woke up to the fact, they get much better money elsewhere pulling deposits theres just a lot of people that have pulled back in the SBA arena over the last 12 to 18 months and we've been able to hire some absolutely tremendous people with very seasoned veterans in the.
Kenneth J. Lovik: <unk> with.
Kenneth J. Lovik: Good.
Kenneth J. Lovik: Lead sources, good operational background good oversight so.
Kenneth J. Lovik: I think our key to success versus the rest of the market quite honestly has been the people we've been able to attract over the last 24 months to 36 months is a lot of folks have put the brakes on it either stopped lending in total or pulled back for a period of time as you well know and it get salesperson can't stand idle for very long so.
Kenneth J. Lovik: We've been very very fortunate to kind of hit the market at the right time and really build a tremendous team of people all across the country in the SBA arena, So I think that.
Kenneth J. Lovik: That's our key to success compared to some of the other folks in the market today and again our underwriting standards.
Kenneth J. Lovik: The U S.
Kenneth J. Lovik: License has an ability to loan to anybody we still have some standards a protocol that we go through we do not.
Kenneth J. Lovik: We've got great people behind it that can move things along in that.
Kenneth J. Lovik: By the time, we get to the third quarter were pretty much right on top of that and in fact over the next over the next 12 months, there's $1 $2 billion of Cds maturing at roughly that same rate. So we've kind of again in another quarter or so we're going to hit that <unk>.
Kenneth J. Lovik: Rising where the repricing gap is essentially zero.
Kenneth J. Lovik: Okay, but it is a bad doesn't jump right Thomas.
Kenneth J. Lovik: Right right.
Kenneth J. Lovik: Assuming the fed remains on pause.
Kenneth J. Lovik: Into this year.
Kenneth J. Lovik: Just based on what you guys are seeing from a competitive.
Kenneth J. Lovik: From a competitive perspective excuse me relative to.
Kenneth J. Lovik: Other.
Kenneth J. Lovik: Internet.
Kenneth J. Lovik: <unk> do you foresee the opportunity in your margin guidance to reducer and rates ahead of fed cuts are.
Kenneth J. Lovik: How are you guys kind of thinking about that opportunity potentially.
Speaker Change: We dropped CD rates Nate from six months up about a month ago and we do.
Kenneth J. Lovik: Just talked earlier this week on a few of them were going to drop another five basis points. So.
Kenneth J. Lovik: I think everybody's.
Kenneth J. Lovik: Financial institution level have you been watching money market rates American Express.
Kenneth J. Lovik: Ally a bunch of folks have bumped down I think cap one has lowered their money market rates by 510 basis points here in the last 30 45 days. So I think the industry is ready to drop rates and as they do we will as well and as Ken said, we're right on top of and on the CD level and I think.
Kenneth J. Lovik: We will actually get that turned around the other way so the replacements coming onboard today will be cheaper than what's rolling off in the not too distant future and if the.
Speaker Change: I agree 100% with Ken if the fed does bump anything it'll be 100% data obviously on the fed funds floaters, but on the CD world.
Speaker Change: That will be almost 100% across the line to our basic money market account rate for the folks less than $1 million in deposits that will probably stay pretty constant and won't be a 100% beta may be a 510 point bumped down when the fed moves, but yes anything will help us and I think we're in a great position going forward with that.
Speaker Change: We could actually be in a position in the third and fourth quarter for the replacement pumps to be cheaper than what's rolling off.
Speaker Change: Okay, great very helpful.
Speaker Change: And then just on deposit growth expectations I think.
Speaker Change: 10 year guided to 5% to 10% loan growth. This year is the expectation that deposit growth will largely.
Speaker Change: Hello, Brian.
Speaker Change: Consistent level or.
Speaker Change: Maybe just an opportunity to bleed down some of the excess cash that you still have on the balance sheet.
Brian: Yes, probably a little bit of both right I mean, we.
Brian: We've built some liquidity here in the first quarter I think we ran.
Brian: Recognize there's probably smarter to keep higher liquidity than historical but there is I think we expect to probably bleed down a little bit of that but I expect deposit growth to obviously it was much more than loan growth in the first quarter, but it should.
Speaker Change: Keep pace with loan growth, maybe a little bit more as we bleed some cash down but it should.
Speaker Change: I mean, it should be relatively.
Speaker Change: In line with loan growth throughout the rest of the year.
Speaker Change: We also have.
Speaker Change: Commitments, we made back in the financials.
Speaker Change: Craziness following silicon Valley, and everything blowing up we made some pretty long term commitments with long term at the time of 12 months of 2014 18 month commitments with individuals that had a fed funds plus 10, plus 20, plus 25, and we've got a bunch of that coming due here.
Speaker Change: Almost $250 million to $300 million over the next three to six months and we're in a position now that we can let that go away and replace it with less in fed funds money. So as Ken said, we're keeping a little extra liquidity on the balance sheet.
Speaker Change: Today for opportunities like that re priced up and let some of that more broker type money go away here over the next three to six months.
Speaker Change: Got it.
Speaker Change: That makes sense and.
Speaker Change: And David I think earlier you mentioned.
Speaker Change: Revenue from partnerships.
Speaker Change: This is expected to double year over year versus 2023.
David B. Becker: That number is not necessary disclose the release, so can you kind of help frame out.
Speaker Change: Specifics around that.
Speaker Change: Yes.
Speaker Change: As I think I said in my comments, we had about 600000 plus of Fintech partnership revenue in the first quarter.
Speaker Change: And when we look at our forecast that number is going to grow it was up almost 50% over fourth quarter and David's comments. What he was trying to say is that don't expect that to grow 50% every quarter here, but there is a big piece of that that's recurring revenue. So we're going to see some more kind of more single the low double digit growth in.
Speaker Change: That number but for the full year, our expectation is that Fintech partnership revenue, which includes interest income and fee income will be about three times, what our revenue was last year.
Speaker Change: To help pinpoint that one for you Nate our revenue last year was around 900000, so we're going to push it up between that two $5 million to $3 million Mark This year.
Speaker Change: Yes.
Speaker Change: That's including both fee income and.
Speaker Change: Interest income I heard your Yep Yep Yep.
Speaker Change: Okay.
Speaker Change: Thats all I had thank you I'm sorry, Ken just lastly on the tax rate going forward.
Speaker Change: It depends on who becomes president Brad.
Speaker Change: No I think our effective tax rate.
Speaker Change: Our effective tax rate this quarter was seven and a half.
Kenneth J. Lovik: It's probably that's probably not a bad number for the next few quarters, obviously as income continues to grow and as we go.
Kenneth J. Lovik: Get into next year as well if you take our fourth quarter EPS number and just run rate that for next year that that number is going to migrate probably closer to 10% to 12%, but I think in the near term here kind of seven 5% to eight is probably an okay number.
Kenneth J. Lovik: Okay.
Kenneth J. Lovik: Right.
Speaker Change: Thanks, Thanks, Sir Thanks Nate.
Speaker Change: Next question is from John <unk> of Janney. Please go ahead.
John: Hey, good afternoon guys.
John: Hey, Jeff.
John: Actually I was going to ask you on the tax rate but.
John: Yes.
Speaker Change: I guess so.
Speaker Change: I'm just curious on the loan growth, 5% to 10%, that's a pretty pretty wide range last quarter, you said five 5% to 6% just curious why why such a wide range.
Speaker Change: Some of it is.
John: In this environment to I think what we've seen in this probably doesn't surprise anyone is it some of we probably had to slow down. Some I mean, we had slow prepayment speeds in the model to begin with but they've probably even slowed down further this year. So we're probably retaining balances at a higher rate than we would've originally forecast.
John: Then.
John: As we've talked about with SBA, having a very strong year, our construction team continues to do well.
John: We've had a few deals in our construction space that we're scheduled to pay down here in the FERC in the first quarter early second quarter, but we've kind of converted them to a mini perm and we put them into the investor CRE bucket and we will be holding those for longer. So those are just some of the dynamics at R. R.
John: Impacting that estimate of growth overall growth for the year.
Speaker Change: Okay. The other side John.
Speaker Change: We're out there we're seeing larger deals on the construction opportunities, particularly in the warehousing space.
Speaker Change: As more and more stuff is coming back to the U S.
Speaker Change: Beam build locally stored locally locally.
Speaker Change: Warehouse transactions are huge just here in the state of Indiana, and the last 48 hours, they've announced like $4 million in warehouse space needs and companies coming into the state of Indiana and those are big.
Speaker Change: We could pick up some of that business in <unk>.
Speaker Change: Which would be great for us and Theres, just a lot of activity.
Speaker Change: So our.
Speaker Change: CRE you guys are pretty bullish on whats out there in the marketplace right now.
Speaker Change: Okay. Thanks, David.
Speaker Change: Ken just back to the tax rates. So you said near term so it sounds like the next couple of quarters, you said seven 5% to 8% and then and maybe go into sort of that 10% to 12% range.
Kenneth J. Lovik: Yes, I would I would probably work it up in your model.
Kenneth J. Lovik: Again, as we continue to build net income quarter over quarter.
Kenneth J. Lovik: Yes, you can probably walk it up from seven 5% to eight through this year.
Kenneth J. Lovik: If you are starting to work on the 20, <unk> 25 number its probably maybe somewhere in the eight to 10 range there.
Kenneth J. Lovik: And maybe even that's probably maybe even higher maybe 10 to 12 there.
Kenneth J. Lovik: Okay.
Kenneth J. Lovik: And then Ken just one final question just if you look at the level of fee income to total revenue for the quarter, 2728%.
Kenneth J. Lovik: Do you think do you think you can grow that.
Kenneth J. Lovik: <unk> continues to be strong, but the margins going up too do you sort of think you stay in that stay in that high <unk>.
Kenneth J. Lovik: 2000.
Kenneth J. Lovik: 25, yes approaching 30% I guess is that sort of the right way to think about it yes, I think so I mean, I think eventually we'll probably.
Kenneth J. Lovik: I guess, if we assume for this year with no rate cuts and we're growing NII because we are repositioning the loan book and making more on loan yield and deposit costs are going up thats. Good I mean, when we start getting some real rate cut that might change a little bit because NII growth will accelerate but.
Speaker Change: I think youre looking at it I think I think that's the right way to look at it John Okay.
Kenneth J. Lovik: Okay.
Speaker Change: Okay. Thanks, guys a great day.
Speaker Change: Thank you thank.
David B. Becker: Thank you and at this time Mr. Becker, we have no other questions registered please proceed.
Becker: Alright. Thank you. So thanks, everybody for joining us on today's call.
Becker: Obviously, theres a lot of craziness out here in the market at the current time a lot of the issues about the pass inflation is going to take and based on that what the fed might do on rate cuts. We are optimistic about our outlook irregardless of kind of what happens in that space. The strong performance as we just discussed.
Becker: About our commercial and consumer lending teams, including all the growth we've experienced in small business and construction can drive even greater revenue growth for us.
Becker: We are in a stabilized deposit costs and that paints a real favorable earnings picture for us going forward.
Speaker Change: Fellow shareholders, we remain committed to driving improved profitability and enhancing shareholder value and we thank you for your support your time today and wish you a good afternoon. Thanks everybody.
Speaker Change: Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
Speaker Change: Okay.
Speaker Change: [music].