Q3 2024 Bankwell Financial Group Inc Earnings Call
Good morning, my name is Aura and I will be your conference operator today. At this time, I would like to welcome everyone to the Bank Well Financial Group EG 3rd Quarter, 2024 earnings call.
Today's conference is being recorded.
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After the Secrets remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key, followed by the number one on your telephone key pad. If you would like to withdraw your question, press star one again.
Speaker Change: At this time, I would like to turn the conference over to Courtney, to Jettie at CFO. Please go ahead.
Speaker Change: Thank you. Good morning everyone. Welcome to Bank of the Third Quarter 2020 for earning conference calls.
Speaker Change: To access the call over the internet and review the presentation materials that we will reference on the call, please visit our website at investor.mindankble.com and go to the event and presentations tab for supporting materials.
Speaker Change: Our third quarter earnings releases also available on our website. Our remarks today may continue forward looking statement and may refer to non-gaps financial measures.
Speaker Change: All participants should refer to our SEC filing, including those found on forms AK, TEMQ, and TEMK, for a complete discussion of what we're looking at statements in any factors that could cause actual results to differ from those statements.
Speaker Change: Thank you and now I will turn the call over to Chris Forsycki, our President and CEO. Thanks, 40.
Chris Forsycki: Welcome at thanks to everyone joining thankfuls first earnings conference call.
Chris Forsycki: This morning, I'm joined by Courtney Sikati, our Chief Financial Officer, Matt Nick Neill, our Chief thanking officer and Ryan Hill's a brand, our Chief Innovation Officer.
Chris Forsycki: We appreciate your interest in our performance and this opportunity to discuss a result with you.
Chris Forsycki: On today's call, we'll provide updates to the financial operating performance for the third quarter, including thorough credit updates.
Chris Forsycki: The four taking questions will also take a few minutes to update you on some strategic initiatives that are deemed as a significant progress on over the last several quarters.
Chris Forsycki: We pride ourselves on our ability to be nimble and efficient. I believe that team here has made great strides that will differentiate us from peer banks in the quarters and years to come.
Chris Forsycki: Our financial results for the third quarter included gap, fully diluted earnings per share of 24 sets, which were negatively impacted by an 8.2 million charge off against an office loan. Producing the third quarter's EPS by approximately 79 sets.
Chris Forsycki: We first reported this loss in an AK file on October 11.
Chris Forsycki: The loam was made against a class A office space in foreign park New Jersey.
Chris Forsycki: Having written off 60% of the loan balance and considering the location and quality of the office space, we're confident in our ability to collect the remaining balance.
Speaker Change: Matt will discuss credit for the detail in just a minute. But I'd like to know if we don't believe our two recent charge-offs are indicative of any negative credit trend on a goal forward basis.
Speaker Change: On the liability side of the balance sheet, we're pleased with continued strides we've made to improve the quality and diversity of the deposit base.
Speaker Change: We've made excellent headway with the rollout of bank well-direct, our online deposit channel. And we're working on technology solutions to enhance our deposit product offerings.
Speaker Change: These initiatives have helped us stay down appropriate deposits by $168 million this is the beginning of the year.
Speaker Change: With a liability sensitive balance sheet, we remain well-positioned for future racers by the Fed. Courtney will provide a further look at how lower rates should benefit the company's earnings in the quarters ahead.
Speaker Change: At this point, I'll hand it over to Matt McNeill to provide some additional details regarding credit quality and the $8.2 million charge-off we recently disclosed.
Matt McNeill: Thank you, Chris. We are disappointed that the floor on part office loan, in which we were a 13.7 million dollar participant in an $84 million club deal deteriorated to the point of requiring an $82 million charge off.
Matt McNeill: Fortunately, this loan is unique to our portfolio and that we have no other exposure to this sponsor and no other office loans in which we are participants.
Matt McNeill: Of additional note, this loan originated prior to the COVID-19 pandemic, thus prior to the banks amended risk tolerance regarding the office market.
Matt McNeill: Greater detail can be found on the slides 12 of our investor presentation.
Matt McNeill: I'd like to highlight several points regarding our remaining Office Portfolio.
Matt McNeill: We have reduced our office exposure to 166 million or approximately 6% of the portfolio.
Matt McNeill: The majority of the Office portfolio has credit enhancements, such as personal recourse, owner occupancy, a credit tenant, or a GSA tenant. Only 7 million of the portfolio does not have these enhancements.
Matt McNeill: As of September 30th
Matt McNeill: 2024, our ACL against our Office for Polio was approximately 16%.
Matt McNeill: The bank has conducted a granular, least by least review of the entirety of a 166 million office portfolio and has not identified any loan where we would expect to take a material negative impact.
Matt McNeill: Turning to MPOs.
Matt McNeill: We had one multi-family loan downgraded in the third quarter, which is included in the 250-based points of non-performing loans.
Matt McNeill: We anticipate a full recovery on the $27 million balance.
Matt McNeill: As we have an agreement to sell the loan at par, the sell of this loan would have a 103 basis point positive in fact on the non-performing loan ratio. Bring the pro forma to approximately 147 basis points assuming no other changes.
Matt McNeill: These light temps
Matt McNeill: Meanwhile, the credit trends in our residential care portfolio continue to improve.
Matt McNeill: We have had four criticize loans received risk-graded upgrades during the third quarter. Two special mentioned relationships were upgraded to pass totaling 14 million dollars. Two sub-sandered relationships were upgraded to special mention totaling 28 million dollars.
Speaker Change: Now to discuss our financial results in greater detail, I will turn it over to our chief financial officer, Ford Nesta Caddy.
Speaker Change: Thank you, Matt. Our pre-provision net revenue of $9 million was down slightly, quarter over quarter, representing 113 basis points of PPNR return on average access.
Speaker Change: Reported in Addinterest Margin for the third quarter was 272 basis points.
Speaker Change: A 3-Base's Point Reduction Velutus is a Link's Quarter.
Speaker Change: Well, we had a few headwinds impacting names during the quarter related to not performing loans, and one time cost related to calling broken CDs. We expect our names to expand into 2025 as our term deposits reprise.
Speaker Change: As Chris indicated, our balance sheet is well positioned for a well-washed short-term rate and a more normalized yield curve.
Speaker Change: More specifically, we have 1.3 billion of time deposits maturing in the next 12 months, which on average would reprise approximately 26 basis points lower based on current rates.
Speaker Change: All out equal, we would expect to save a total of 3.35 million on an annualized basis from this repricing activity.
Speaker Change: This would equate to an approximate 33 cents pickup in earnings per share and about 11 basis points of margin expansion.
Speaker Change: Which to be clear assumes no benefit to non-matured deposit and no additional cuts in bedbub.
Speaker Change: Further, we anticipate half a billion in loans to reprise their mature over the same period. Given current rates, NIMC could further benefit by an additional 15-20 basis point on an annualized basis.
Speaker Change: Non-interesting come of 1.2 million benefit at slightly from higher SPA gain on sale revenue and improved trends and service charges relative to links quarter.
Speaker Change: The linked quarter increase in total non-intrastment to $12.9 million with mainly due to strategic investments. Although we remain steadfast in our goal to maintain a relatively stable non-intrastment to total asset ratio, which continues to operate at approximately 160 basis points.
Speaker Change: The significant increase in provision to 6.3 million was generally a function of the previously disclosed $8.2 million charge off. We also had a $1 million recovery on the sale of a previously disclosed non-performing office loan.
Speaker Change: Finally, a few thoughts on our financial condition. Our balance sheet remains well capitalized in liquid. We tow assets of $3.2 billion stable versus the linked quarter in prior year quarter.
Speaker Change: During the third quarter, we repurchased an additional 9,670 shares of Banquals stock at an average price of $23.86. And as noted in our earnings release, our board has authorized a new 250,000 share repurchased program. I'll now hand it back to Chris.
Chris Forsycki: Thanks for being here. We've now concluded the first part of today's call.
Chris Forsycki: Before moving on, some Q&A, I'd like to spend a few additional minutes discussing our vision for the future. You can follow along on the webcast beginning on slide 14.
Chris Forsycki: We've discussed our company's potential for significant earnings growth due to our balance sheet positioning and the possibility of further rate cuts by the Fed, but we've also been investing in our own internal catalysts for growth.
Chris Forsycki: Looking ahead, there are three broad areas of focus where we feel BankWell is well positioned to grow profitability and to differentiate ourselves from other banks.
Chris Forsycki: First, we'll continue to embrace innovation and to foster an entrepreneurial culture.
Chris Forsycki: Size and agility are a competitive advantage for us.
Chris Forsycki: Our $3.2 billion bank is delivering results with a branch light model.
Chris Forsycki: Although our business has grown in scale and profitability, the bank's employee base has remained relatively flat over these last few years. With our current headcount of approximately 140 team members, this translates to about $25 million of assets per FTE.
Chris Forsycki: Relatively unhindered by legacy issues, our entrepreneurial management team can embrace innovation to improve our processes, improve the quality and diversity of our deposit base, and explore new business lines.
Chris Forsycki: We'll focus on opportunities where we can compete on expertise and relationships instead of price.
Chris Forsycki: In particular, we'll continue to deploy technology with precision.
Chris Forsycki: This separates us from the community banking industry at large for whom innovation simply means catching up.
Chris Forsycki: For most of those banks, innovation will prove to be too tall a hurdle.
Chris Forsycki: Technology and talent will be our keys to differentiation and staying several steps ahead of the pack.
Chris Forsycki: Next, with innovation comes change management. We'll continue to invest in appropriate risk management, both in infrastructure and in people.
Chris Forsycki: Over the last few quarters, we've already made excellent strides strengthening our risk team and adding capabilities for program and project management.
Chris Forsycki: Our current level of operating expenses already includes expenditures on talent and technology to enable continued innovation.
Chris Forsycki: We have a proven track record as a very efficient operator, and we believe that as we work with innovative technologies, we'll be able to continue this efficiency while maintaining best-in-class risk and change management protocols.
Chris Forsycki: Last.
Chris Forsycki: We aim to provide all our clients with an elite customer experience.
Speaker Change: As Matt will discuss, our bank is built upon meaningful customer relationships in lending and business verticals where we've provided significant value via our industry expertise and our reputation for outstanding execution.
Speaker Change: And the ultra-competitive banking industry will need to be even better to ensure continued success.
Speaker Change: We've already initiated a new customer experience program, adding seasoned managers with significant experience on innovative platforms.
Speaker Change: Team members have been participating in workshops meant to enhance and foster a client-centric culture that results in an elite customer experience.
Speaker Change: With this foundation, we'll continuously look to implement innovative solutions for our clients.
Speaker Change: Whether it's working on new partnerships to empower the largely underserved small business community,
Speaker Change: or creating a bespoke deposit product for commercial customers, we'll always be prepared to have our clients bank well.
Speaker Change: With these three foundational elements in mind, I'll now invite Matt and Ryan to share some specific examples of our growth strategy in practice.
Speaker Change: Bankwell has had great success over the past several years, transforming into a full-service commercial bank.
Speaker Change: We have done the work to build out our infrastructure and have made significant strides digitizing our products and interfaces.
Speaker Change: We now have well-established lending verticals in residential care and insurance agency financing. We are currently developing a lineup of digital products for small business to drive our SBA loan production.
Speaker Change: Each of these verticals provides diverse lending opportunities, fee income, and deposits. For example, slides 15 and 16 walk through the life cycle and economics of a residential care loan.
Speaker Change: We rely on our deep client relationships to originate high-quality skilled nursing and assisted living bridge loans, which typically are owner-operated.
Speaker Change: At origination, the bank provides operating accounts for the facility, an accounts receivable line of credit,
Speaker Change: and a lockbox for the accounts receivable payments. Additionally, the bank receives the rights to the economics gained when the loan is eventually refinanced with HUD. We design the operating accounts, lockbox, and the line of credit to comply with the eventual HUD financing.
Speaker Change: This allows the borrower to easily transition to a HUD mortgage and leave all the other banking services at the bank. Over time, deposit balances and fee income build as more bridge loans are refinanced at HUD and are replaced with new originations.
Speaker Change: Although the bank has been in the Small Business Administration's Preferred Lender Program for over a decade, we have begun to reimagine our place in business banking.
Speaker Change: Small business banking is the last large banking segment that is not dominated by money center banks or fintechs.
Speaker Change: The fractured nature of the business banking market has created large gaps in the availability of lending and provided few innovative financial tools to help owners manage their business.
Speaker Change: The SBA provides many resources, including government-backed loans to small businesses. However, the loans are difficult to access and require the entrepreneur to engage in a cumbersome, time-consuming application and closing process.
Speaker Change: We believe there is an inflection point now to utilize new technologies to reduce friction between small businesses and access to SBA-backed loans.
Speaker Change: To help us stride this initiative, we have hired top-tier proven SBA lending leadership, invested in technology partnerships, and strengthened our small business lending, credit, risk, and compliance infrastructure.
Speaker Change: To create a successful SBA lending vertical, we will require more thoughtful technology interfaces than what is currently available in the market. Ryan Hildebrand will now discuss how this and other journeys will be traveled at BankWell.
Ryan Hildebrand: Thank you, Matt. As Bank Wealth's Chief Innovation Officer, I'm excited to share our recent innovations and strategic initiatives for growth and efficiency.
Ryan Hildebrand: Before discussing our actions, I'd like to provide context and share our guiding themes for how Bankwell views this defining moment.
Ryan Hildebrand: The last four years have been turbulent with the pandemic, PPP, rise of digital, remote work, crypto scandals, rapidly rising interest rates, regional bank failures, and rapid advances in artificial intelligence.
Ryan Hildebrand: The next four years might not have as many storylines, but what is abundantly clear is we are in a new technology world.
Ryan Hildebrand: The concept of digital transformation is vital and its meaning is rapidly changing. Banks serve as custodians of client data and financial products, both driven by technology and people. With generative AI, products that traditionally required years of development can now be launched in just a weekend.
Ryan Hildebrand: Bankers can work more quickly and possibly with greater precision, aided by Gen AI as their assistant.
Ryan Hildebrand: In the past, the banking sector hasn't kept pace.
Ryan Hildebrand: with other industries in its adoption of new technologies, and most innovations were a function of scale. But now, with today's tools, anyone can take on a role of a technology developer, which means there's no longer a need for massive engineering teams.
Ryan Hildebrand: Organizations that embrace agility and adaptability are positioned to gain a significant strategic edge. We feel that nurturing a culture of technology and innovation is critical, and Bankwell is excited to be one of the banks leading the way in this journey.
Ryan Hildebrand: Our team is crucial. We've doubled our efforts to invest in existing talent and add strategic roles. We have an exciting story that tracks others to our vision.
Ryan Hildebrand: Many of our team members have thrived in larger institutions and are now enjoying greater freedom to do meaningful work at BankWell. Hiring has expanded beyond southern Connecticut based on need.
Ryan Hildebrand: Risk management is priority number one for us. We continue to invest in talent and technology there. We refined our third party risk management process from vendor intake all the way up to adding key board members well versed in technology bank risk.
Ryan Hildebrand: We've also added top-tier talent around security and compliance.
Ryan Hildebrand: With no immediate plans to enter the banking as a service market in the coming quarters, we are well positioned for opportunities in embedded lending and banking.
Ryan Hildebrand: We believe that we need to be nimble and flexible. This allows us to jump on opportunities that others might not be able to take. Mind you, there are a lot out there.
Ryan Hildebrand: Along those same lines, launching pilots are key to success without putting all of our eggs in just a few baskets. You'll hear about some successful pilots shortly.
Ryan Hildebrand: Prioritization of the client is an important theme as we work to build bespoke products for them that you will hear about in 2025.
Ryan Hildebrand: We have also hired a Chief Customer Experience Officer with strong FinTech and FinTech Bank experience.
Ryan Hildebrand: We do more with less.
Ryan Hildebrand: Our strategy centers on efficient technology investment for maximum returns.
Ryan Hildebrand: As an example, we've spent $4 million in the first nine months of the year on technology.
Ryan Hildebrand: much less than the industry average of 10% of revenue.
Ryan Hildebrand: As to this quarter, we concentrated on executing our strategy and discovered several expansion opportunities to enhance our growth.
Ryan Hildebrand: I want to draw your attention to five key launches that occurred this quarter, showcased in the next few slides.
Ryan Hildebrand: First, we relaunched the Bankwell brand with a more modern look.
Ryan Hildebrand: but still core to the appearance their clients are used to.
Ryan Hildebrand: We also refreshed the mybankwell.com client site and will update our investor website in the coming weeks.
Ryan Hildebrand: These visual changes may seem superficial at a glance, but they reinforce our commitment to existing assets, including employees, and bring the bank's brand into alignment with its modern product offerings.
Ryan Hildebrand: Second.
Ryan Hildebrand: This quarter, we launched our BankWell Direct pilot, a national consumer digital bank aimed at acquiring new clients and reducing brokered deposit concentration.
Ryan Hildebrand: Our marketing efforts led to $97 million in growth in our customer base.
Ryan Hildebrand: The average deposit was $60,000, costing just 11 basis points in marketing costs versus the industry standard of 100 basis points.
Ryan Hildebrand: This pilot is an example of how our digital strategy allows us to grow and test new deposit offerings without affecting our local branches.
Ryan Hildebrand: Third, we proudly launched our Connecticut Small Business Growth Loan Program in August. This initiative supports Connecticut's vibrant small business community, providing them with a boost of capital to thrive and grow.
Ryan Hildebrand: The program is a flat $10,000, 9.75% five-year loan with an easy monthly payment of $215 for working capital.
Ryan Hildebrand: We've already begun seeing very positive responses from local business owners, which speaks volumes about the demand for this straightforward product.
Ryan Hildebrand: We partnered with an AI company, Tosca, to scale this product by using Gen AI to help potential borrowers quickly check their credit eligibility. Our offering features a five-minute digital application and can close loans in one day.
Ryan Hildebrand: Serving as a client acquisition and relationship management tool, it also ensures we meet Community Reinvestment Act requirements.
Ryan Hildebrand: Moreover, it's a starter loan that integrates into our larger SBA program, helping clients transition into more complex relationships with bank wealth.
Ryan Hildebrand: In September 2024, we partnered with Lendio, an online small business marketplace that has financed over 400,000 borrowers in 13 years.
Ryan Hildebrand: This collaboration improves our ability to serve small businesses by using Lendio's platform to simplify the SBA lending process, providing clients with a more efficient way to access funding and boosting our growth in the small business loan market.
Ryan Hildebrand: Finally, I'm also excited to reveal that we launched a pilot for our new business banking digital suite, a sub-brand of BankWell called Spire, in October 2024.
Ryan Hildebrand: This product is designed with the needs of modern businesses in mind, offering competitive features and a user-friendly experience that can help businesses manage their finances more effectively.
Ryan Hildebrand: We believe Spire will help our lending clients run their businesses faster and more efficiently.
Ryan Hildebrand: These five launches represent our commitment to providing innovative and accessible financial services to communities we are now serving. We are optimistic about their impact on our growth and are dedicated to seeking new opportunities to serve existing and new clients better. Thank you for your time. Over to you, Courtney, to take us home.
Courtney Sikati: Thanks, Ryan. Given the strategic updates we discussed with you today, we wanted to provide some high-level thoughts about our financial outlook and tie things back to our earnings performance.
Courtney Sikati: Looking ahead to 2025, we expect to hold total assets stable, as most of the growth initiatives Matt and Ryan have discussed today will be opportunities for us to remix our assets and liabilities with a focus on driving improved profitability, expanding our non-interest income, and further reducing broker deposits.
Courtney Sikati: As noted previously, we anticipate more meaningful margin expansion into 2025 as short-term rates move lower, which will be a function of lower deposit costs, largely due to the significant amount of CD maturities we have on our balance sheet over the next 12 months.
Courtney Sikati: We expect a stable asset base and improved profitability to grow our regulatory capital position, including our consolidated CET1 ratio, even if we continue to utilize our buyback authorization in the near term.
Courtney Sikati: Finally, our focus on efficiency is unchanged, and we continue to balance our growth and strategic investments against our organizational size and scope.
Speaker Change: Thanks, Courtney. We appreciate everyone joining us today for our first earnings call. While the third quarter credit performance wasn't where we'd like it to be, we remain quite optimistic about our future.
Speaker Change: I'd also especially like to thank all of our teammates at BankWell whose excellent effort and dedication have made the continuous evolution of our company possible.
Speaker Change: We've now concluded our prepared remarks. Operator, will you please begin the question and answer session.
Speaker Change: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again.
Speaker Change: We'll take our first question from Christopher O'Connell at KBW.
Christopher O'Connell: Hey, good morning.
Christopher O'Connell: I appreciate the strategic update.
Christopher O'Connell: I just wanted to start off with the balance sheet and appreciate the long-term margin commentary going into next year on the CEDs and the loan repricing.
Christopher O'Connell: As far as what the loan repricing is, about half a billion over the course of the next year, what's roughly the average rates that those are coming off at?
Speaker Change: Yeah, go ahead Courtney. Well, approximately, you know, in the mid sixes at this point is what we're going to be repricing.
Speaker Change: Okay great. And then I was wondering if you had the either the spot margin for September or the spot cost of deposits for September?
Speaker Change: Actually, I don't have that in front of me because, you know, we've had some unusual items that happen. I, you know, I think I referenced calling of the broker CD. So we've had some some fees that we've had to accelerate in there. So it's kind of a huge number.
Speaker Change: But, you know, I did review your estimate for the, for the 4th quarter regarding, I believe you have a 270 name for the 4th quarter. And I would say that's in line with what we were expecting.
Speaker Change: Hey guys, this is Chris Grosecki and your first question, I believe you're asking what the roll off rate was on loans that are maturing over the next 12 months, correct?
Speaker Change: Correct. Yeah, so we can add some colors to what they would roll to, I think, given today's break, because all the comments we made were based on today's yield curve.
Speaker Change: Correct. Hey, Chris, it's Matt. We expect to, you know, that half a billion dollars to reprice higher than the six and a half, I think our yield in.
Speaker Change: 2024 had an eight handle on it. So it'd probably be a little less than that, but we think there's some room to go up higher above that six and a half number.
Chris: Okay, great. Thanks, Matt.
Speaker Change: And, um, I guess just, you know...
Speaker Change: I appreciate the comments on going into the Q4 margin. You know, so far, you know, outside of the CD portfolio with the initial 50 basis points of Fed funds cuts.
Speaker Change: Maybe you guys can just provide a little bit of color about, you know, any moves that you made or, you know, reductions on, you know, the rest of the non-maturity deposit portfolio so far.
Speaker Change: Yeah, sure, we've made some adjustments on our on some of our exception pricing that we have. So we've probably repriced, let's say, about a hundred and.
Speaker Change: 75 million in line with Fed funds, so we've reduced their pricing approximately 50 basis points as well. So that's all non-maturity.
Speaker Change: We did that at the time of the breakup.
Speaker Change: Right, that wouldn't have been priced into this quarter's results fully yet. Correct, because it would have been mid-September.
Speaker Change: Great. Thank you.
Speaker Change: And so thinking about, you know, the forward, you know, the new initiatives and, you know, the mix on, you know, forward loan growth.
Speaker Change: in terms of the Lendio and the CASQA partnerships on the small business side.
Speaker Change: What should we be expecting in terms of either, you know, dollar amount or contribution to kind of, you know, gross percentage?
Speaker Change: loan growth going forward and, you know, over the course of the next year or so, it sounds like, you know, the net loan growth is going to be relatively stable. How should we be thinking about, you know, the level of, you know, paydowns versus originations going forward?
Speaker Change: We think we can keep the balance sheet relatively flat. There may be some modest growth.
Speaker Change: I don't think it'll be attributable to SBA as we'll look to sell those guaranteed portions, so 75% of those loans.
Speaker Change: you know, go off the balance sheet. And the reason that that's attractive is, you know, for the capital build that that helps with. So relatively flat to modest growth, but not necessarily attributable to SBA.
Speaker Change: In terms of the mix of the origination or growth going forward versus where you guys expect to have the loans falling off, I guess, to offset that.
Speaker Change: Bye-bye. Bye-bye.
Speaker Change: I believe that we'll continue to expand our C&I lending and owner-occupied lending. We'll probably de-emphasize investor-free. We've obviously not been very active in the office market for a while now. So,
Speaker Change: That's that is that that answer your question Chris. Is that what you're driving towards is, you know, how those larger Buckets will line up with the balance sheet
Christopher O'Connell: Yep, that's it. Thanks, Matt.
Christopher O'Connell: And then Chris, in the second half of the year, I would think that we'd see SBA originations picking up, but keep in mind we're going to be selling the vast majority of those off so we won't have growth there, but that will begin in the second half of the year to add to the non-interesting number.
Chris: Okay, great.
Chris: And then, you know, longer term.
Chris Forsycki: You know, I think you guys mentioned it continued, you know, new authorization continue to use, you know, some buyback here and there near term. You know, do you have any kind of long term targets on the capital side, either from. You see T1 perspective or overall CRE concentration.
Speaker Change: Yes, so not necessarily on CRE, but if you look at the consolidated CET-1
Speaker Change: Position, which I believe is currently around 9 and a half percent 970 by the end of 26. we probably want to see that north of 11 somewhere. We have some.
Speaker Change: maturing subject, repricing subject in 26.
Speaker Change: That's 27.
Speaker Change: But I think there's enough wiggle room and it's going to be more of an art than a science depending on where the stock is.
Speaker Change: and what impact we have buying it back versus what is the growth opportunity versus we're committed to a capital build. But certainly at these, when we're trading below book, we're gonna be looking at what that trade up will be.
Speaker Change: Okay, got it.
Speaker Change: Um.
Speaker Change: And then, you know, on the expense side, you know, obviously you guys are, you know, juggling a lot of initiatives here and, you know, trying to do that in, you know, the most efficient way possible. You know, it sounds like.
Speaker Change: You know, on the whole, though, you know, based on the commentary around, you know, expenses to average assets.
Speaker Change: keeping relatively stable and the growth outlook relatively stable, that outlook into next year should be kind of modestly upward on the expense side, but not an outsized pickup, even with these initiatives relative to historical levels.
Speaker Change: Yeah, I would agree with that. Chris, I looked at your estimate. I think it's 55,250,000 for next year and that's.
Speaker Change: Like, 166 as average assets in your model, which again. It does have some investment there, but any investment that we make will be tied to revenue producing initiatives. So we may see a slight uptick in that to assets ratio, but we'll be generating revenue.
Speaker Change: Yep.
Speaker Change: Right. Chris, this is Chris Krusecki again, and we did want to underline the point in our prepared remarks today.
Speaker Change: that much of the investment and expenditure
Chris Krusecki: for the things we're looking to grow into next year has already been made. We've reconfigured positions and added different talent and invested in different systems. A lot of that is already in the run rate.
Chris Krusecki: And so we wanted to really make sure that we told the world that there's not a lot of extra expenses coming. Now, if we had an opportunity to.
Chris Krusecki: Spend some money that is directly tied to revenue
Chris Krusecki: Then, sure, that number could go up modestly, but any increase that would be ahistorical for us would mean that the efficiency ratio is coming up because there'd be more revenue. I'm sorry, down. Down. Better.
Chris Krusecki: We haven't increased revenue with that expenditure and I would just add that, you know, as we have in prior years, you know, we've given, I think.
Chris Krusecki: a little bit more guidance on the 4Q call. So we're in the middle of our budgeting cycle now. So we'll, when we regroup again in January on the fourth quarter, we'll have a better outlook for you for next year.
Speaker Change: Okay. Thanks, Corey, Chris.
Speaker Change: It sounds like the resolution is more or less in hand, but any color around, you know,
Speaker Change: you know, what happened to make the, you know, 27 million multifamily go NPL and, you know, why it was able to be, you know, I guess.
Speaker Change: taken off at a pretty attractive sale at par.
Speaker Change: So, we've been in the works selling that loan. There was a...
Speaker Change: There was a fire at the property that made 1 of the buildings unhabitable for a period of time insurance proceeds were received. Sponsor has been a little bit. Uncooperative, so we made the decision to market alone and set a. Relatively low, so it was an attractive by for.
Speaker Change: someone who was in the market for that type of property.
Speaker Change: Got it. Makes sense.
Speaker Change: And then as far as, sorry, you go first, go ahead, Chris.
Chris: Well, I was going to add, you had mentioned a couple or a few initiatives that we have on.
Chris: tap for next year, but I think it's worth adding a comment or two from our side that there may be, you know, three, four, five, six different initiatives, but that doesn't mean we'll go whole hog into all of them because I think part of the business plan is to be ready to be flexible and, you know, feed the ones that are working and
Chris: pull back on the ones that may not look so good. And I think Brian can maybe add a little bit to that.
Chris: Sure. Hey, Chris. Ryan Hildebrandt here.
Ryan Hildebrand: Really excited about the opportunity going into 2025 to really be able to increase on the small business SBA side.
Ryan Hildebrand: Fee income and deposits are really the square name of the game on this.
Ryan Hildebrand: Also thinking about how do we increase
Ryan Hildebrand: more deposits that are non-brokered and also thinking about
Ryan Hildebrand: you know, lower cost, if not non-interest bearing deposits with some of the initiatives on the innovation side. So more to share in 2025 on that, but we're really excited about kind of the next steps as well as increasing efficiency. So being able to lower expenses using technology and looking at some of the opportunities there is something that I'm focused on.
Speaker Change: Great. And then, yeah, maybe just on the bank, we'll direct. I mean,
Speaker Change: Do you guys have any targets for where that could get to in the first year, and how you see managing those deposit costs as we get further along in this cutting cycle?
Speaker Change: I'd say it's really a lever for us when we stood it up quickly to be able to have
Speaker Change: that ready to figure out as rates dropped.
Speaker Change: It's something that we're really focused on. I think it's, you know, obviously we want to pay down as much brokerage as possible. We don't necessarily want to pay it down if it's too expensive. So we're really paying real close attention to markets.
Speaker Change: We think there's a lot of opportunity locally as well, so it's really thinking about how do we move forward with that lever and then being able to add additional levers to it. But I wouldn't say that we have strict targets yet. It's something that we'll pull together when we go to budget period here. Yeah, the important part of that, Chris, this is Chris.
Chris Krusecki: perspective again, was our ability to stand it up quickly and understand that once we got it up and running we had a lever that could meaningfully add to deposit flow when we needed to.
Chris Krusecki: and then you can ratchet your rates back and slow it down. So it's up to us to decide what we want the flow to look like. And I will point out, I think at 930 it was less than 4% of our total deposit. So it's not an overtly large concentration.
Speaker Change: Great. Um. Okay.
Speaker Change: And then, you know, thinking about, you know,
Speaker Change: you know, go forward in the trend of, you know, where the reserve.
Speaker Change: you know, could be, you know, over time, you know, based on kind of the loan mix that you guys are putting on now versus, you know, the historical mix of the portfolio, you know, I guess, where do you see the, you know, reserved alone in kind of a normal economic environment, you know, trending to longer term?
Speaker Change: Yeah, so the mix.
Speaker Change: Bye.
Speaker Change: Thank you.
Speaker Change: The mix, you know, as stated before, you know. The emphasizing investor free paying a lot more attention to. Uh, C and I businesses, uh, looking, you know, to keep the residential care. Uh, portfolio around the level that it's at, it's not, you know.
Speaker Change: modestly higher you know I think we have a we have a limit of around 300% of capital on health care so we don't think that we're going to raise that limit but those loans just stay up there and then really turning the focus to SBA
Speaker Change: That's really where the lending focus in 25 is going to be. We want to build a, you know, respectable SBA department and have that really be the focus, you know, being 1 of the. The pillars of, you know, non interest income production.
Speaker Change: going forward.
Speaker Change: Okay, got it.
Speaker Change: Do you guys have a reminder on what the level of pure floating rate loans are in the portfolio right now? No. Okay.
Speaker Change: It's still pretty consistent, about 20%.
Speaker Change: [inaudible]
Speaker Change: Okay.
Speaker Change: Um
Speaker Change: And then last one for me, just what's a good go forward tax rate?
Speaker Change: You know our tax rate was a little high this quarter and that's really a function of our
Speaker Change: In 48, our uncertain tax position entry, that's kind of a fixed rate. And obviously we. Our income is a lot lower, so as a percentage, it kind of skews the effective tax rate. But I think that's 24 and a half is what we.
Speaker Change: striving for when you kind of have a more normal income profile. We've had a couple of down quarters.
Speaker Change: Okay, perfect.
Speaker Change: Awesome. Thanks, Chris, Courtney, Matt, Ryan. Appreciate the time and strategic update.
Speaker Change: Thank you, Chris.
Speaker Change: And that concludes our Q&A session and today's conference call. I would like to thank everyone for your participation. You may now disconnect.