Q3 2024 First Internet Bancorp Earnings Call
Speaker Change: The New York Times.
Speaker Change: [inaudible]
Speaker Change: Good day everyone and welcome to the first Internet Band Corp earnings conference call for the third quarter of 2024
Speaker Change: At this time, all lines are in the list in only mode.
Speaker Change: Following the presentation, we will conduct a question and answer session. And if at any time during a call you require me to the assistance, please press star 0 for the operator. And please note that today's event is being recorded. I would now like to turn the conference over to Ben Rutkovicz from Financial Profiles Inc. Ben, please go ahead.
Ben Rutkovicz: Thank you, Sylvie. Hello everyone, and thank you for joining us to discuss first in a net bank course third quarter financial results.
Ben Rutkovicz: The company issued its earnings press release yesterday afternoon and it is available on the company's website at www.firstairenetbankor.com In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website
Ben Rutkovicz: Joining us today from the management team are chairman and CEO David Becker and executive vice president and CFO Ken Lovik.
Speaker Change: David will provide an overview and Ken will discuss the financial results. Then we'll open up the call to your questions.
Speaker Change: 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 of FirstInternetBankCorp that involves risks and uncertainties.
Speaker Change: Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website.
Speaker Change: The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute, for the most directly comparable GAAP measures.
Speaker Change: The press release, available on the website, contains the financial and other quantitative information to be discussed today, as well as the reconciliation of GAAP to non-GAAP measures.
Speaker Change: At this time, I'd like to turn the call over to David.
David Becker: Thank you, Ben. Good afternoon, everyone, and thanks for joining us today as we discuss our third quarter 2024 results.
David Becker: We have turned in four consecutive quarters of double-digit earnings growth and improved profitability for the company.
David Becker: driven in large part by the recovery in our margin and the growth in net interest income that we projected at this time last year.
David Becker: Our third quarter results were strong in virtually all areas.
David Becker: Increase in net interest income was driven by solid loan growth.
David Becker: A larger balance sheet and higher yields on our earning assets. Anchored by continued stabilization in funding costs.
David Becker: Strong growth and non-interest income was powered by continued expansion of our national SBA platform with a record gain on sale revenue.
David Becker: In short, the revenue side of the equation is firing on all cylinders with total operating revenue growth of over 4% compared to the prior quarter and up over 36% year over year.
David Becker: At the same time, our efforts to improve the risk profile of the company are also bearing fruit.
David Becker: The exceptionally strong deposit growth in conjunction with the ongoing and deliberate shift in our loan mix have increased our balance sheet flexibility. Our balance sheet liquidity, as measured by the loan-to-deposit ratio, is the strongest it's been in recent history.
David Becker: Starting with the highlights on slide three, I would like to discuss some key themes for the quarter in more detail.
David Becker: As a result of our continued improvement in operating performance, we reported net income of $7 million, up 21%, and diluted earnings per share of $0.80, up over 19% from the second quarter's reported results.
David Becker: Compared to the second quarter's adjusted results, net income was up over 12% and earnings per share was up over 11%, which as I noted a moment ago, marks the fourth consecutive quarter of double digits earnings growth.
David Becker: Our earnings growth was driven by continued expansion of non-interest income and gain-on-sale revenue to complement our sustained growth in net interest income.
David Becker: The excess liquidity created by the robust deposit growth caused a short-term drag on net interest margin. But it provides us a great deal of balance sheet flexibility that will be useful to us over the next two quarters.
David Becker: On the lending side, new funded loan origination yields were 8.85%, consistent with the prior quarter. The yield on overall loan portfolio increased 7 basis points from the second quarter, with deposit costs increased only 1 basis point.
David Becker: As a result, net interest income was up over 2% from the prior quarter.
David Becker: Furthermore, compared to the third quarter of 2023, net interest income was up 25% and net interest margin expanded by 21 basis points on a fully taxable equivalent basis.
David Becker: We remain confident that net income will continue to trend higher in the fourth quarter, as we experience a full quarter's impact of the September Fed rate cut on deposit costs, and we continue to improve the composition of the loan portfolio.
David Becker: We also expect that net interest margin will rebound as we deploy liquidity to fund both loan growth and maturing higher cost CDs and wholesale funding.
David Becker: A key driver in our efforts to reposition the loan portfolio and diversify our revenue is our small business lending team, which delivered another standout quarter. The team continues to perform remarkably well, delivering strong production volume and another record quarter of gain-on-sale revenue.
David Becker: compared to 2023 year-to-date SBA loan originations are up 35% and sole loan volume is up almost 60%.
David Becker: demonstrating the tangible results of the investment we have made in providing growth capital to entrepreneurs and small business owners throughout the country.
David Becker: Our small business pipeline continues to flourish, and we are proud to announce that we were the eighth largest SBA 7A lender in the country for the SBA's 2024 physical year, which ended on September 30th.
David Becker: Congratulations to our SB 18 on another impressive quarter.
David Becker: The growth of our SBA business propels non-interest income, which now comprises one-third of total revenue year-to-date, compared to 25% for the comparable period last year.
David Becker: Bankwide we drove a four percent increase in total revenue over the prior quarter, our fifth consecutive quarter of revenue growth and continued improved profitability.
David Becker: Moving to the asset quality, our overall credit quality remained sound despite an increase in non-performing loans during the quarter. Non-performing loans to total loans were 56 basis points and non-performing assets to total assets were 39 basis points at quarter end.
David Becker: The increase in non-performers is due to additions in franchise finance, small business lending, and residential mortgage.
David Becker: Our metrics still compare favorably to similar-sized banks. Furthermore, we have specific reserves on about 45% of the total non-performing loan balance.
David Becker: Net charge-offs to average loans remain low at 15 basis points and were driven primarily by SBA charge-offs.
David Becker: which increased by 3.6% in the third quarter and is up almost 11% year-over-year.
David Becker: Since 2018, First Internet has grown tangible book value per share by more than 55 percent.
David Becker: We are among just a handful of banks that have grown tangible book value per share in each of the past five years Which is a testament to our prudent balance sheet management and operational discipline through some very challenging periods for the industry
David Becker: Turning now to slide four, I'll spend a couple minutes discussing our lending activity during the quarter. We produced solid loan growth of 7.5% on an annualized basis for the quarter.
David Becker: Growth was led by our commercial lending teams, where balances were up almost $75 million from the second quarter, or 9.6% on an annualized basis.
David Becker: Our construction team had another solid quarter, originating over $94 million in new commitments.
David Becker: Late in the third quarter, $71 million of construction balances converted to investor commercial real estate due to the projects being substantially complete. In the aggregate, construction and investor commercial real estate balances grew $84 million.
David Becker: At the quarter end, total unfunded commitments in our construction line of businesses were $515 million.
David Becker: As those projects progress, draws on these loans in the upcoming months.
David Becker: combined with the optionality to deploy excess liquidity.
David Becker: to hold a portion of our SBA originations on our balance sheet.
David Becker: will play a meaningful role in the continued shift of our loan portfolio towards higher-yielding, bearable-rate loans.
David Becker: On the consumer side, balances were up modestly as new originations and our specialty consumer channels were offset by declines in the residential mortgage and home equity balances.
David Becker: We focus on the super prime borrower and our consumer lending and rates on new production remained in the mid 8% range consistent with a second quarter Furthermore delinquencies in these portfolios remain extremely low at under one basis points of total loans
David Becker: To wrap up my comments, we continued to build off the last nine months of improving performance and delivered another solid quarter.
David Becker: We remain confident in the earnings momentum we have built and are excited to end the year on a high note.
David Becker: Liquidity, asset quality, and capital levels remain sound, with the continued evolution of our loan portfolio and greater revenue diversification, combined with expected declines in deposit costs following the first wave of Fed rate cuts.
Speaker Change: We believe we are well positioned to continue to achieve higher earnings and improve profitability in the fourth quarter and into 2025. Now I'd like to turn the call over to Ken for more details on our financial results for the quarter.
Ken Lovik: Thanks David. As David covered the loan portfolio, let's turn to slides five and six where I will cover deposits in more detail.
Ken Lovik: The average balance of deposits increased over $211 million, or 5% during the third quarter, and period end deposits were up almost $524 million, or 12%, from the prior quarter, driven by growth in CD production and FinTech partnership deposits.
Ken Lovik: Non-maturity deposits were up almost $123 million, or 6%, which reflects the increase in fintech partnership deposits.
Ken Lovik: Additionally, total deposits from our fintech partners, including those classified as broker deposits, were up 35% from the second quarter and totaled $507 million at quarter end.
Ken Lovik: Additionally, these partners generated almost $11.4 billion in payments volume, which was up 34% from the volume we produced in the second quarter.
Ken Lovik: Total FinTech partnership revenue was $771,000 in the third quarter, which was up over 30% from the second quarter, as contributions from one of our key partnerships began to scale up during the quarter.
Ken Lovik: Related to CD activity during the quarter, total balances were up $281 million, or 15% from the linked quarter, driven by continued strong demand in the consumer channel.
Ken Lovik: We originated $697 million in new production and renewals during the third quarter at an average cost of 4.77% and a weighted average term of 21 months. These were partially offset by maturities of $391 million with an average cost of 5.05%.
Ken Lovik: Looking forward, we have 238 million dollars of CDs maturing in the fourth quarter of 2024 with an average cost of 5.01 percent and 407 million dollars maturing in the first quarter of 2025 with an average cost of 5.08 percent.
Ken Lovik: CD pricing broke through its inflection point during the third quarter, as the weighted average cost of new CDs was 28 basis points lower than the cost of maturing CDs.
Ken Lovik: As interest rates across the yield curve began falling ahead of the expected cut in the Fed funds rate, we reduced CD rates significantly throughout the quarter.
Ken Lovik: Accordingly, the weighted average cost of CD production during the month of December was 4.45%, or over 30 basis points lower than the average cost of new CDs for the quarter. This is also 56 basis points lower than the rates on CDs maturing in the fourth quarter of 2024.
Ken Lovik: With the combination of CDs repricing at lower rates and the cost of high beta deposits coming down 50 basis points We feel confident that deposit pricing has hit its peak and will trend downward in the fourth quarter
Ken Lovik: Moving to slide 6, at quarter end with the heightened level of deposit growth, total liquidity remained very strong, reflecting cash and unused borrowing capacity of 2.1 billion dollars.
Ken Lovik: We deployed some of the liquidity to pay down FHLB borrowings, as well as to fund loan growth and securities purchases during the quarter.
Ken Lovik: With total deposit balances increasing 12% and loan growth of $75 million, or about 2%, the loans-to-deposits ratio declined to 84% from 93% at the end of the second quarter.
Ken Lovik: At quarter end, our cash and unused borrowing capacity represented 179% of total uninsured deposits and 230% of adjusted uninsured deposits.
Ken Lovik: Turning to slides 7 and 8, net interest income for the quarter was $21.8 million and $22.9 million on a fully taxable equivalent basis, up 2.1% and 1.8% respectively from the second quarter.
Ken Lovik: The yield on average interest earning assets increased to 5.58% from 5.54% in the linked quarter due primarily to a seven basis point increase in the yield earned on loans but partially offset by a decline in the yield earned on other earning assets.
Ken Lovik: The higher yield on the loan portfolio combined with higher average loans, securities, and cash balances produce solid top-line growth in interest income, increasing 5.7% compared to the linked quarter.
Ken Lovik: Factoring in the strong growth in average interest-bearing deposit balances, net interest income was up over 2% during the quarter, building on last quarter's increase and further distancing us from the low point in the third quarter of 2023 as shown in the bar chart on slide 7.
Ken Lovik: The net interest margin roll forward on slide 8 highlights the drivers of change in the fully taxable equivalent net interest margin during the quarter.
Ken Lovik: Similar to last quarter, I'd like to clarify one item on this chart.
Ken Lovik: The impact of deposits on net interest margin is more a factor of dollar volume than rate. That is, as I mentioned earlier, average interest-bearing deposits were up over $211 million during the quarter, whereas average loan balances were up only $93 million.
Speaker Change: As David referenced in his comments, net interest margin for the quarter was impacted by carrying higher cash balances.
Speaker Change: We estimate that the excess liquidity negatively impacted net interest margin by six basis points.
Speaker Change: However, the elevated on-balance sheet liquidity also provides a great deal of flexibility going forward.
Speaker Change: As I mentioned moments ago, we have over $600 million of higher-cost CDs maturing over the next two quarters, as well as nearly $250 million of higher-cost broker deposits maturing over that same time period.
Speaker Change: Furthermore, we estimate that loan activity, primarily early payoffs of higher yielding loans and loans with premiums, had an additional negative impact on net interest margin of six basis points.
Speaker Change: However, loan pipelines remain solid, especially in the small business lending and construction lines of business, and our focus on improving the composition of our loan portfolio gives us further confidence that net interest income will continue to increase in future quarters.
Speaker Change: Related to deposits, looking at the graph on slide 8 that tracks our monthly rate on interest-bearing deposits against the Fed Funds Rate, you can see the stability in deposit costs over the last several months.
Speaker Change: We anticipate that interest bearing deposit costs will begin trending downward in the fourth quarter. This should also drive further net interest income growth and provide a strong catalyst for net interest margin expansion.
Speaker Change: Turning to non-interest income on slide 9, non-interest income for the quarter was 12 million dollars, up 1 million dollars or 9% from the second quarter.
Speaker Change: Gain on sale of loans totaled 9.9 million dollars for the quarter, up 20% over the second quarter, setting another quarterly record for our SBA team.
Speaker Change: We originated over 163 million dollars of SBA loans during the quarter, an increase of 42% over the linked quarter.
Speaker Change: Furthermore, loan sale volume was $126.5 million, up 22%, while net gain on sale premiums saw a decline of 65 basis points.
Speaker Change: Other non-interest income declined from the prior quarter to 1.1 million dollars due primarily to lower distributions received from fund investments. These decreases were partially offset by a modest increase in net loan servicing revenue.
Speaker Change: Moving to slide 10, non-interest expense for the quarter was $22.8 million, up $450,000 from the second quarter.
Speaker Change: When you exclude non-recurring costs of almost $600,000 from the second quarter's results, operating expenses were up $1 million, or 4.7%.
Speaker Change: Driven by higher small business lending commissions in line with the higher volume of originations Additionally, we added staff to our small business lending and risk management teams as we continue to build bench strength to support further growth
Speaker Change: Turning to asset quality on slide 11.
Speaker Change: 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 provision for credit losses.
Speaker Change: The allowance for credit losses as a percentage of total loans was 1.13% at the end of the third quarter, up three basis points from the second quarter.
Speaker Change: The increase in the allowance for credit losses reflects growth in the loan portfolio and continued shift in the composition of the loan portfolio towards certain loan types with higher coverage ratios. The increase also reflected additional reserves related to small business and franchise loans.
Speaker Change: The provision for credit losses in the third quarter was $3.4 million compared to $4 million in the second quarter. The provision for the third quarter was driven by loan growth and changes in the loan portfolio composition, net charge-offs, and the additional reserves related to small business and franchise lending.
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 1.35% of loan balances.
Speaker Change: Furthermore, as a reminder, with minimal office exposure, we do not have the excess reserves for that asset class that many other banks require.
Speaker Change: Moving to capital on slide 12, our overall capital levels at both the company and the bank remain solid. The tangible common equity ratio was 6.54%, which experienced a decline due primarily to the strong deposit growth during the quarter and the increase in cash balances.
Speaker Change: If you exclude accumulated other comprehensive loss and adjust for normalized cash balances of $300 million, the adjusted tangible common equity ratio would be 7.49%.
Speaker Change: From a regulatory capital perspective, the Common Equity Tier 1 Capital Ratio remains solid at 9.37%.
Speaker Change: Before I wrap up, I'd like to provide some updates on our outlook for the fourth quarter of 2024.
Speaker Change: With regard to net interest income, as I mentioned earlier, with a solid loan pipeline, we expect loan balances to be up another 1.5% to 2% in the fourth quarter, while the all-in yield on the portfolio should be up a few basis points as origination volume is expected to outweigh the impact of recent rate cuts.
Speaker Change: Additionally, we expect the rate cuts to have a positive impact on the cost of funds related to deposits, although dollars of interest expense may be up a little bit due to the increase in average balances.
Speaker Change: However, top-line interest income growth should far outweigh the dollar growth in deposit costs, with net interest income increasing in the range of 10 to 15 percent on a quarterly basis.
Speaker Change: We also expect net interest margin to rebound and resume an upward trajectory. While the elevated cash balances will still weigh on margin expansion in the near term, we expect fully taxable equivalent net interest margin to be in the range of 1.8% to 1.85% for the fourth quarter.
Speaker Change: And related to non-interest income and non-interest expense, our view remains consistent with our comments on last quarter's call. With the combination of our SBA team continuing to deliver consistently higher origination activity, our outlook remains extremely optimistic and we expect gain-on-sale revenue to be in the range of this quarter's elevated results.
Speaker Change: On the expense side, we expect continued growth in the salaries and employee benefits line item as we build further bench strength in risk management and small business lending, especially as we plan for SBA origination growth in the range of 15 to 20% for 2025.
Speaker Change: Furthermore, we have technology investments slated for the fourth quarter, many of which pertain to further enhancing the digital experience and adding product features for our consumers and small business.
Speaker Change: With that, I will turn it back to the operator so we can take your questions.
Speaker Change: Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request.
Speaker Change: And if you would like to withdraw from the question queue, simply press star followed by 2. And if you're using a speakerphone, we ask that you please lift the handset first before pressing any keys. Please go ahead and press star 1 now if you do have any questions.
Speaker Change: And your first question will be from Brett Rabotin at Hovde Group. Please go ahead.
Brett Rabotin: Hey guys, good afternoon.
Speaker Change: Hi, Brett. Hey, Brett.
Brett Rabotin: I wanted to start with just the comments or the franchise finance and the small business loans that were either past due or moved to non-accrual. Can you give us some additional color on what components of franchise finance that was, what small businesses?
Brett Rabotin: is doing, and then just maybe any comments on the RV portfolio, and I know like Walgreens and CVS have also had some recent mentions of foreclosures, etc.
Speaker Change: With regards to...
Speaker Change: Like in the franchise and small business, Brett, so on the franchise side, we've just had a handful of delinquencies there, mostly having to do with, you know, certain brands.
Speaker Change: Closures of units, trying to work with the borrowers to, you know, get them to the table to restructure a loan, pay off the loan, that we just, we've had to take some action on and move to non-accrual since they went 90 days past due.
Speaker Change: probably not, you know, a common theme other than what you're hearing across the industry as far as restaurants and other retail entities struggling a bit But we just had to take action on a pool of those loans that hit 90 days
Speaker Change: On small business, there's really no consistent theme amongst them. In small business, it's like every credit is a story.
Speaker Change: But kind of similar along the lines of franchise, just had either businesses closing or struggling. Again, where we've had to kind of take action and maybe where we've offered a deferral or two and the borrower is struggling, so we just have to move it to non-accrual.
Speaker Change: Work with the SBA to repurchase the loan and and work with the borrower to you know finalize an exit strategy
Ken Lovik: When it hits 90 days, as Ken said, we move it to non-accrual. We take a specific reserve against it.
Ken Lovik: The portfolio, as he said, the loans are that bad. It's more an internal policy. We've had a tough time.
Ken Lovik: third-party servicer.
Ken Lovik: work on the loans, they're not really incented to do anything until the loans hit that 90-day bucket, then they get 35 cents on the dollar of everything they recover, so...
Speaker Change: We're coming at this from different viewpoints.
Speaker Change: They wanted to get the linguists so they could pick up a little income. We want to be at the front of the food chain when things go south, so we're renegotiating.
Speaker Change: Currently a service in agreement with them, so we're in the deal and have an opportunity to get involved much earlier in the process, not waiting until it gets to 90 days.
Speaker Change: The SBA side of things kind of peaked in July. The outstanding problem loans dropped in August and September.
Speaker Change: tremendously, but they're not continuing to climb.
Speaker Change: period over period.
Speaker Change: SBA is, as Ken said, there is no specific...
Speaker Change: No real common themes within.
Speaker Change: On the consumer side of things, we have less than 1% delinquency.
Speaker Change: Horse trailers, RVs are not a problem. The resale value, they were selling at a premium during COVID when nobody could get a new one.
Speaker Change: Resale has come down and we happen to have one come back to us, but outside of that we're not seeing any cracks whatsoever there.
Speaker Change: The CBS and the Walgreens is kind of the same story that we had with the Red Lobster when everybody's worried about them 90, 120 days ago.
Speaker Change: recently put on
Speaker Change: four CBS stores, taking us up to, I think, 31 or 32 outstanding.
Speaker Change: and in their region.
Speaker Change: They were all four of the top performers, and they were in the upper 4% of performance within CBS.
Speaker Change: Again, because we have the national footprint in the play, we're buying grade-A quality locations, loan-to-value still in that 47-50% range, and good, solid, you know, quality
Speaker Change: sponsors behind them. Walgreens, the same boat. We've not had anything go dark on us. We haven't got any notices of closure.
Speaker Change: We did have a Rite Aid.
Speaker Change: where they had two in a town and they opted to...
Speaker Change: Closed a new one on the outskirts versus the older one that was kind of in the heart of town But the again the sponsor on that is continuing payments and is repurposing the store. So The STL product right now. We don't have a delinquent account
Speaker Change: And if you remember over the years, we've gone through all kinds of crises over the last 12 years.
Speaker Change: We've only had two loans go bad on $2 billion in origination. There are total losses of...
Speaker Change: have been a little over a million dollars, so we're not worried about the STL products nor the consumer side. Time will tell. Obviously, rates going down, particularly on the SBA, will help. That does, they're adjustable on a quarterly basis, so that'll help lower payments and help the cash flow. And I think just...
Speaker Change: Give the SBA and small business owner just a kind of a light at the end of the tunnel that things are getting better and rates are coming their way. Inflation continues to slow. Obviously there's certain spots that are still high, but as a whole it's coming down. So I think everything is going in the right direction for them as well.
Speaker Change: That's a lot of great color. And just to clarify, if I heard you correctly,
Speaker Change: The peak of SBA delinquencies in your portfolio is in July. There's another competitor that...
Speaker Change: is, you know, out today with...
Speaker Change: some adverse migration in their non-guaranteed SBA book, and so they made a big provision. I know you can't comment on someone else's portfolio, but you know, I think that might be weighing someone on your stock as well as theirs.
Speaker Change: We had that same thought this morning when we saw the same thing you did.
Speaker Change: As Ken said, we've taken specific provisions and we think...
Speaker Change: If it's over 90 days past due, we think we're going to have some kind of impairment.
Speaker Change: on that non-guaranteed part, we've already taken a provision against it. So we evaluate them as they kind of break that barrier. But yeah, we hit the top and it's come down a little bit. Who knows what, we're still early in October here too. 15th is kind of a universal payment date, so we'll have a better handle in another week to 10 days. But yeah, we seem to be headed in the right direction.
Speaker Change: at least stabilizing, I guess, if nothing else. So, yeah, we read the same thing you read this morning and that was kind of a shock to us. We're not experiencing anything like they're experiencing.
Speaker Change: Okay, so we're talking about the same
Speaker Change: And then the other question I had was just I kind of figured you guys might wait a quarter or two for rates to come down, possibly a little more before you went and maybe built some liquidity and put on more CDs, but you seem to do that a little earlier. And if I heard right, the production on CDs...
Speaker Change: in the last month of the quarter was $4.45, was that correct? I'm just curious why you guys may be building a little...
Speaker Change: It was not intentional.
Speaker Change: We had been lowering rates. We actually started lowering rates probably about a month before the Fed made a cut, anticipating... We were thinking it'd be 25, and we had lowered rates about 40 basis points.
Speaker Change: on the 45-day period prior to the cut, but when it hit 50...
Speaker Change: basis points.
Speaker Change: The good and bad part about being an internet institution is experienced by...
Speaker Change: Silicon Valley and First Republic, when they started to hit the wall, all the deposits were called in 24 hours, 36 hours. On our side, when the consumers and the business folks thought, oh my god, the bottom's falling out on the savings rates, they slammed in and bought CDs.
Speaker Change: Please see the complete disclaimer at https://sites.google.com or in the description of this video.
Speaker Change: They were flying through the door faster than we could lower the rates. Lesson learned, that that sword cuts both ways on withdrawals as well as deposits.
Speaker Change: Yeah, okay, that makes sense. Great call, guys. Thanks.
Speaker Change: Appreciate it. Thanks, Brett.
Speaker Change: Thank you. Next question will be from Tom Spitzer at KBW. Please go ahead.
Tom Spitzer: Hey, good afternoon. Thanks for taking my questions.
Speaker Change: Hey, Tim.
Tom Spitzer: I wanted to ask about the SBA origination outlook. I think you have a pretty wide range of 15 to 25 percent in 2025. What are some of the factors that could drive it, you know, to the lower high end of that range? Is it mostly rate driven? And then, you know, what are your expectations for pricing as we get into next year?
Speaker Change: Well, I, you know, our expectation right now is that we'll, you know, somewhere be in the range of say 525 to 530 million of originations for this year
Speaker Change: and we're targeting $600 million for next year. So you do the math on that and you're probably in the range of $15 million. You know, I think for us...
Speaker Change: I think we've just we've put together just a really good team. We have a great team of BDOs out there and we have a great support team behind them on credit, servicing, closing.
Speaker Change: And, you know, it is reflected. We've made this comment the past couple of quarters. We continue to build the bench strength to support that growth. And that'll be key to achieving it. But I think we feel, again, we feel really good about, you know, the folks we have out there sourcing deals for us.
Speaker Change: One of the uncertainties is the sales price in the secondary market. I think Ken made a comment that it had dropped 65 basis points third quarter over second quarter.
Speaker Change: People try to get comfortable with what the Fed's going to do. Do we do two more quarter point drops in this quarter? The excess liquidity that we have on the balance sheet, as I stated in my comment,
Speaker Change: gives us a position if the bottom falls out in the secondary market, we have cash and liquidity rather than sell a 10.5-11% yearly loan in the secondary market for 5.5-6%, carry it on the books.
Speaker Change: and we'll make up that difference in a five, six month window of time.
Speaker Change: We've got a lot of optionality and a lot of flexibility going into 2025, and we can handle kind of whatever the market gives us on the SBA side. As Ken said, we've got a team and an organization out here now that is just a pretty well-oiled machine that can produce.
Speaker Change: If we get it, we can hold it on the books, we can sell it in the secondary market, we'll do whatever's in the best interest of the institution. The good part about the excess cash is it gives us an awful lot of flexibility.
Speaker Change: Okay, great. Yeah, that was really helpful. And then I wanted to ask about...
Speaker Change: The NIM trajectory, obviously pretty good expansion expected in Q4. How should we think about 2025, particularly the Fed cutting rates? I think last quarter you guys said each 25 base points is about a $2.8 million annual benefit.
Speaker Change: Is that still the right range and, you know, with the loan growth you're expecting to put on, you know, how should we expect them to move next year?
Speaker Change: Well, I think the last last quarter that math was based on a static balance sheet I think the the wild card for this is just the cash balance that we have and how that's deployed
Speaker Change: I mean, I think about, if you just, I'm gonna give you some numbers here to think about that you can run some math on, but we got about 1.3 to $1.4 billion of,
Speaker Change: what I'd call high beta or 100% beta deposits that, you know, are a combination of some brokered and some of our own deposits that are higher balance.
Speaker Change: you know really offsetting that we probably got about seven hundred and sixty million
Speaker Change: of loans that would reprice, you know, either immediately or within three months in the case of SBA loans. We do have more variable rate loans on our balance sheet, but some are at price ceilings already.
Speaker Change: So, you have that going one direction, but then we also have 1.4 billion of CDs with an average cost of close to 5% that mature over the next 12 months.
Speaker Change: So there's a lot of dollars of NII that we expect that we will pick up.
Speaker Change: over the course of next year.
Speaker Change: How that translates exactly into margin is a little bit hard to project in terms, you know, because of the excess liquidity and what you're going to run it off at. But I, you know, just...
Speaker Change: sitting here thinking about it. I mean, I would think that we would be able to at least expect perhaps 10 basis points of margin expansion a quarter, just depending on how we get the liquidity out the door. And as David said, too, if there's optionality for holding
Speaker Change: SBA loans, for example, that would be incredibly accretive to net interest margin and net interest income.
Speaker Change: So we're still we're still working on our on our forecast for next year. You know, it's hard to you got the long rates that are doing something different than the short rates right now. And we got an election to get through. So I guess we'll see what rates happens to long rates after that.
Speaker Change: But I think all in all, just doing math on what we have today for just dollars of net interest income, I think we see a significant pickup next year.
Speaker Change: We still think we're going to hit the $3 mark that we had forecasted for this year.
Speaker Change: Closing out here in the fourth quarter, we'll be pretty close to almost a dollar in income. We had forecasted four for next year. Obviously, with the Fed starting to move, that's a lock.
Speaker Change: on our side, and it could...
Speaker Change: depending on, as Ken just outlined for you, how the Fed rates move over the course of the year, that could move.
Speaker Change: from four up to five pretty quickly.
Speaker Change: We think we're going to finish strong here for this year, and 25 looks real, real good.
Speaker Change: Political and third world or overseas wars off the table, if everything stays fairly stable in the political arena and the world arena, we should have one bang up year in 2025.
Speaker Change: Yeah, we'll all pray for that, but thank you guys for the commentary. Appreciate it. Thank you. Thanks, Tim.
Speaker Change: Next question will be from Nathan Reyes at Piper Sandler. Please go ahead.
Nathan Reyes: Hey guys, good afternoon. Thanks for taking the questions.
Nathan Reyes: I just want to clarify on the loan growth expectations for 4Q, did you mention 1-2% and then also be curious to get your preliminary thoughts on overall balance sheet growth expectations next year as well.
Speaker Change: Yeah I think I said one and a half to two percent which probably is kind of in the range of where we were in the second or excuse me the third quarter for loan growth.
Speaker Change: Okay, so that's not analyzed. Like you said, maybe the wild card for that could be if we don't like what we see in the secondary market for SBA, retaining some SBA loans.
Speaker Change: That could boost that a bit but Yeah, probably in the range of growth that we saw this quarter
Speaker Change: Thank you.
Speaker Change: Okay, so that's one and two percent not annualized.
Speaker Change: No, no, no, no. Yeah, that's not annualized. That's just gross for the quarter. Gotcha. OK. And then just any thoughts on how you see organic balance sheet growth in terms of both loans and deposits playing out next year as well?
Speaker Change: Just given the fluid curve as well
Speaker Change: Well, I think, yeah, again, I kind of come back to with.
Speaker Change: you know, the liquidity we have on the balance sheet.
Speaker Change: You know, over, you know, 600 million of, you know, well, you got 600 million of CDs maturing in the next six months, 1.4 billion maturing next year, 250 million of higher cost brokered deposits maturing over the next six months.
Speaker Change: You know, I think if we're doing what we're doing today that number might be still the same But again, I'll come back to what David said with the optionality we have on on SBA loans And you know some other, you know initiatives that we that you know that we're working on that can drive further growth beyond that
Speaker Change: We've been working with some of our Fintechs, we have Jarus in particular that
Speaker Change: We kept thinking we would get the loan program up and running during the third quarter.
Speaker Change: We just made a small purchase here in October just to kind of validate and test everything to make sure all the mechanics and stuff are in play. They've got a couple new clients coming their way. That one could jump up pretty quickly. We brought on two new programs.
Speaker Change: have some opportunities for us, so.
Ken Lovik: As Ken said, there's a lot of options and a lot of play.
Ken Lovik: and we're just kind of taking stuff day by day, but it's, everything really does look good for us going forward.
Speaker Change: got it that's helpful and then just within that context a high-level strategic question you know just with the momentum you're seeing on the SBA side of things and with some of the partnerships
Speaker Change: Just curious if it makes sense, maybe slow balance sheet growth.
Speaker Change: particularly just given coming out of 3-2 it seems like.
Speaker Change: You know, the loan and deposit growth is margin dilutive and, you know, that may change and should change with, you know, Fed cuts and depending on the forward curve or depending on how the yield curve plays out.
Speaker Change: But just curious on your thoughts around slowing balance sheet growth and just leaning on some of those more profitable lines of business. And then just build capital and perhaps resume buying back the stock just given where it's trading relative to tangible book.
Speaker Change: Well, hopefully you're spot on. We have a lot of flexibility without growing the balance sheet to kind of remix things and get higher earnings and higher yield. We can get that 10 percent growth technically right now with the cash we have on the balance sheet, so there's no need to bring in deposits for the sake of deposits or grow the balance sheet. So we agree with the 100 percent.
Speaker Change: Kind of remix things a little bit maximize earnings and not necessarily pump up the balance sheet and we're spot-on. I would hope that the stock appreciates quickly as we add better earnings to the bottom line and gets back towards that book value plus but
Speaker Change: I don't think.
Speaker Change: Be in real honest in 2025 that I don't want to set the stage that we're going to go back and do a big stock repurchase because if we get
Speaker Change: into that 40 range, it doesn't make a lot of sense. I'd rather build.
Speaker Change: Thank you for your time.
Speaker Change: Commission costs tied to the similar SBA Revenue expectations and some other investments, but just curious how your preliminary thinking about
Speaker Change: expense growth in 2025. I know it's going to be contingent on the SBA revenue side of things, but assuming SBA revenue continues to ramp up by maybe at least 5%, just curious how you're thinking about the overall expense trajectory within that context.
Speaker Change: Yeah, well, I think we've done quite a bit of hiring this year to build out the SBA platform and enhance risk management and kind of add some positions around the country to, as I like to say, add bench strength.
Speaker Change: You know, we will have kind of a full year's run rate of folks there. But, you know, if I'm, you know, thinking about next year, you're probably seven to eight percent.
Speaker Change: expense growth for next year for the year
Speaker Change: I was going to guess 9 to 10, so blend this together and come in front of me. If we get the ball out of the park on SBA, then we'll be closer to that 9 to 10.
Speaker Change: And it's hitting the ballpark out on SBA. Is that growing SBA revenue 5-10% next year? How do you quantify that, I guess?
Speaker Change: Well, I guess on the sales volume side of things, as Ken said, we're going to end up a little over $500 million probably this year, and we're looking at $600 million next year, so we've got a...
Speaker Change: a nice bump up which also
Speaker Change: If you take a look at where we're at this quarter, it's only going to get bigger through the course of the year as long as premiums don't fall apart on us.
Speaker Change: And if they start to, or we take that excess growth into next year and put it on the balance sheet, we've got a real chance of picking up a nice uptick in earnings out of SBA, either way it goes in the secondary market or on the balance sheet. So it will compensate for the growth in the expense side.
Speaker Change: Please see the complete disclaimer at https://sites.google.com
Speaker Change: Got it. And then just one last one, just from a housekeeping perspective, any thoughts on the tax rate going forward?
Speaker Change: Thank you for joining us today.
Speaker Change: depends on who wins the election. You know what I think right now we're probably thinking that
Speaker Change: You know probably like fourth quarter will be kind of in the same tax rate area as
Speaker Change: as it was in the third quarter.
Speaker Change: You know, with higher earnings, you know, we do get a very strong benefit from our public finance portfolio.
Speaker Change: But as as our you know Just our pre-tax earnings continue to grow that benefit on a percentage basis is less So, you know I would think our tax rate for next year with with higher earnings is probably going to migrate over the course of the year from
Speaker Change: You know, maybe ranging from anywhere from, you know, call it, you know, a high 8 to, you know, somewhere perhaps as high as 11 to 12% by the end of the year. It's kind of the way I would look at it.
Speaker Change: Got it. Very helpful. I appreciate all the color. Thanks guys.
Speaker Change: Thank you. All right.
Speaker Change: Next question will be from George Sutton at Craig Hallam. Please go ahead.
George Sutton: Thank you David. I wanted to test one statement you made in your prepared comments. You mentioned we in Q3 were firing on all cylinders. I think if you really thought about it that might you might say firing on many cylinders. I'm just curious what you think firing on all cylinders should look like?
George Sutton: drop rates significantly through the course of 2025. We
Speaker Change: We're going to just kind of blow the roof off in earnings and structure here in the institution. Taking it back to the racing analogy, we'll set a track record by the end of the year. We've just got a lot of good things going every place.
Speaker Change: We got it for us and our balance sheet historically has been unbelievably pristine that we've got a bumper to on the
Speaker Change: A little bit on the SBA side and a little bit on the franchise end, but that's all.
Speaker Change: Manageable, we'll get a handle on it. So I think the...
Speaker Change: The future is really, really looking good for us. The gentleman you had in my way, we've had a good conversation. I think there might be some opportunities there. We're getting a lot of good inquiries from people.
Speaker Change: You know the dust is just settling the fintech space
Speaker Change: We wound down a client here over the last quarter who just could not raise any additional capital. They had a great program, they had a great product, but they just couldn't get the capital to get there. And as the institutions...
Speaker Change: kind of pull back on some of the VC stuff. There might be opportunities to actually pick up.
Speaker Change: Fintech or two
Speaker Change: and put that product into our mix. There are other very solid programs that are looking for solid players that understand and can provide the services they're looking for. So, I just think we have an awful lot of good things going on within our product mix and good things coming to us from the outside world. So, 25 looks really strong.
George Sutton: Fabulous. I did want to say congratulations to Ken and Nicole and Anne and Tim and Nick and Dustin and Maris, fellow Indiana graduates on the 7-0 start to the year.
Speaker Change: Ha ha ha ha ha ha
Speaker Change: Ha, ha, ha, ha.
Speaker Change: Yeah, believe me they had their first sellout football game last year in like 50 years, so it's Yeah, it's it's a very
Speaker Change: A lot of cheering for basketball over the years, but it's been very rare. A lot of good tailgating, but most people just tailgate and pass on the games. They got a full house now, so that's great. Thank you.
Speaker Change: Thanks guys.
Speaker Change: All right. Thanks, George.
Speaker Change: At this time, I would like to turn the call back over to David Becker for closing remarks.
David Becker: Thank you, Sylvie. Thanks, everybody, for joining us today. As I said, we've kind of produced some really consistent, improving results throughout 2024. We're extremely confident in our ability to deliver a strong finish to the year. And as we looked at 2025 and beyond, we're extremely excited about what the future holds.
David Becker: Strong performance of the lending teams including continued execution in the SBA and construction area emerging growth opportunities with key fintech partnerships
David Becker: are expected to drive greater, more diversified revenue growth. We combine that with the prospects for a more favorable interest rate environment and the positive impact that will have on deposit costs.
David Becker: We believe we are very well positioned to achieve stronger earnings over the next several quarters. As fellow shareholders, we remain committed to driving improved profitability and enhanced shareholder value. We thank you for your support and wish you a good afternoon.
Speaker Change: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending.
Speaker Change: And at this time, we do ask that you please disconnect your lines.