Q1 2025 First Internet Bancorp Earnings Call
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Speaker Change: Good day, everyone and welcome to the first Internet Bancorp earnings conference call for the first quarter of 2025.
At this time all lines are in listen only mode.
Speaker Change: Following the presentation, we will conduct a question and answer session.
Speaker Change: If at any time during this call you require immediate assistance. Please press star zero for operator.
Speaker Change: And please note that today's call is being recorded.
Speaker Change: I would now like to turn the conference over to Ben brought switch from actual profiles Inc.
Speaker Change: Please go ahead.
Ben: Thank you Andrew Hello, everyone and thank you for joining us to discuss first Internet Bancorp's first quarter financial results.
Ben: The company issued its earnings press release yesterday afternoon, and it is available on the company's website at Ww doctors turn it back to our Dot com.
Ben: In addition, the company has included a slide presentation that you can refer to during the call.
Ben: You can also access these slides on the website.
Speaker Change: Joining us today from the management team are chairman and CEO David Becker.
President and C O O Nicole Lorch, executive Vice President and CFO and love it.
Speaker Change: David and Nicola will provide an overview and Ken will discuss the financial results then well 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, what first Internet bancorp that involve risks and uncertainty.
Speaker Change: Various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements.
Speaker Change: 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 direct 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 the GAAP to non-GAAP measures.
At this time I'd like to turn the call over to David.
Speaker Change: Okay.
David Becker: Thank you Ben good afternoon, everyone and thanks for joining us to discuss our first quarter 2025 retail.
Speaker Change: Hey, Nicole Lorch, our president and C O L will give an overview of the quarter.
Speaker Change: Any of you on the call have already met her and investor meetings over the past few years next Ken Lubbock, our CFO will walk through the numbers in more detail and I'll hop back on for the Q&A session that.
Speaker Change: The goal or what have you.
Thanks, David.
Speaker Change: The results for the first quarter were met we continue to see strong positive momentum in many key operating trend, which reflects a tremendous effort on the part of our team.
Speaker Change: Yeah that progress is tempered by credit issues in our small business lending and franchise finance portfolio, which I will address later in my commentary.
Speaker Change: Let's talk first about the things that are going really well.
Speaker Change: Net interest income continued to grow and net interest margin continued to expand.
Speaker Change: In fact, we achieved our sixth consecutive quarter of net interest income and core revenue growth.
Speaker Change: Those results were fueled by strong loan growth that drove yields on earning assets higher while deposit costs continue to decline.
Speaker Change: Simply put our revenue performance continues to demonstrate strong improvement across the board.
Speaker Change: There are to the prior quarters adjusted amount, we delivered total operating revenue growth of over 2% and more than 22% year over year.
Speaker Change: Our teams maintain a keen focus on controlling the controllable that means winning new relationships with timely follow up certainty of execution and disciplined pricing.
Speaker Change: And responsibly managing expenses.
Speaker Change: Starting with the highlights on slide three I would like to discuss some key themes for the quarter in more detail.
Speaker Change: As a result of our continued improvement in operating performance and revenue growth. We reported pretax pre provision net income pre provision income of $12 million, which is up 10, 8% over the prior quarters adjusted amount and up almost 50% over the first quarter of 'twenty 'twenty four.
Speaker Change: Revenue growth was driven by a 7% increase in net interest income compared to the fourth quarter and 20% compared to the first quarter of 2024.
Speaker Change: The yield on the overall loan portfolio increased six basis points from the fourth quarter dip.
Speaker Change: Deposit costs declined 12 basis points.
Speaker Change: The result was a 16 basis point improvement and fully tax equivalent net interest margin.
Speaker Change: We remain confident that net interest income and net interest margin will continue to trend higher throughout 2025.
Speaker Change: The fed takes no additional rate actions or is there a slower in either of those two scenarios deposit costs would decline over the course of the year driven in part by significant repricing gap on maturing Cds.
Speaker Change: Additionally, thanks in part to the success of our embedded finance Fintech partnerships scrubbed.
Speaker Change: We've been able to pay down higher cost brokered deposits.
Speaker Change: Side note, our fintech partnerships relationships also contribute noninterest income on oversight and transaction fees.
Speaker Change: And on a limited basis interest income.
Speaker Change: Embedded finance is a complex business and we are proud of our teams for the collaborative effort. It takes to grow meaningful partnerships, while maintaining an appropriate risk management framework.
Speaker Change: Another bright spot in the first quarter was new origination loan new loan origination yields to continue to remain well above our overall portfolio yield.
Speaker Change: During the first quarter, our weighted average rate unfunded originations was 7.78%, which was up 50 basis points over the prior quarter yet.
Speaker Change: Yet another positive trend is the continued strong performance of our small business lending team, which is a key component in our strategy.
Speaker Change: Originations were down compared to the fourth quarter that is seasonal and expected our.
Speaker Change: Our pipelines give us confidence, we will achieve $600 million of originations over the course of 2025.
Speaker Change: Solid loan volume and gain on sale revenue were both up over the prior quarter.
Speaker Change: But to really see the results of the investment we've made in this business compare the progress we made on a year over year basis.
Speaker Change: Origination and loan sales volume were up 22% and 36% respectively over the first quarter of 2024.
Speaker Change: And through the date of this earnings call. We remain the eighth largest SBA seven a program lender, but he S. P. A is 2025 fiscal year to date.
Speaker Change: Turning to earnings for the quarter, we reported net income of $900000 and diluted earnings per share of 11% net.
Speaker Change: Net income for the quarter was significantly impacted by the elevated provision for loan losses.
Speaker Change: During the quarter, we took steps to address certain problem loans and recognize $9 $7 million of net charge offs, most of which were related to the franchise finance and small business lending portfolios.
Speaker Change: As a result, net charge offs to average loans totaled 92 basis points.
Speaker Change: I would note that approximately $5 $8 million of these charge offs were related to loans that had specific reserves existing.
Speaker Change: Similar to loans, we charged off last quarter the issues the issues with these loans and these credits where borrowers specific not driven by any particular industry geography referral source or lender nor are we seeing any significant trends of distress within certain industries or region.
Speaker Change: We had certain problem credits in various stages of workout or delinquency, where the outlook for a positive outcome was becoming less likely so.
Speaker Change: So we made the decision to charge these loans off and recognize the losses now.
Speaker Change: Overall credit quality remained sound.
Speaker Change: Nonperforming loans to total loans were 80 basis points and nonperforming assets to total assets were 61 basis points at quarter end.
Speaker Change: The increase in nonperforming loans came from franchise finance and small business lending.
Speaker Change: With the elevated level of economic uncertainty, we felt it was prudent to take action and get in front of some potential problem.
Speaker Change: Part of the actions taken include a record in specific reserves, where we believe impairment may exist, which added a net amount of $3 $3 million to the allowance for credit losses and was recognized in the provision for loan losses.
Speaker Change: At the moment, we have specific reserves on about a third of the total nonperforming loan balance while our teams worked diligently with these borrowers for positive outcomes.
Speaker Change: Despite the increase in nonperforming loans, our asset quality metrics remain in line with peers.
Speaker Change: While we're not pleased with the level of net charge offs and the migration of franchise finance and small business lending loans to nonperforming status.
Speaker Change: We felt it was prudent to get in front of credits, where there was no likely path to success and recognize those losses in the first quarter.
Speaker Change: Going back to the theme of controlling what we can control we have adequate resources on our loan servicing and special assets team as well as processes in place to address any loan showing signs of stress.
Speaker Change: Our credit teams review data constantly to look for trends and areas to refine our underwriting standards.
Speaker Change: Turning to slide four I'd like to take a few moments to highlight our lending activity for the quarter.
Speaker Change: We're proud of the work our lending teams did over the quarter to produce solid loan growth of 8% on an annualized basis nearly all of our lines of commercial lending experienced growth with balances up over almost $90 million from the fourth quarter of 2024 or 11% on an annualized basis.
Speaker Change: Our construction and Investor commercial real estate team delivered another strong quarter.
Speaker Change: Originating almost $70 million in new commitments.
Speaker Change: In the aggregate construction and investor commercial real estate balances increased $86 million.
Speaker Change: Projects continue to progress leading to strong draw activity on existing commitments.
Speaker Change: And certain completed projects transitioned to the investor commercial real estate portfolio.
Speaker Change: At quarter end unfunded commitments in our construction portfolio told it totaled $446 million.
Speaker Change: Upcoming draws on these loans along with the option to deploy excess liquidity to retain a portion of SBA originations on our balance sheet will play a meaningful role in the ongoing shift of our loan portfolio toward higher yielding variable rate loans.
Speaker Change: Roxanne at least 30% of our loan book is variable rate today, compared with 16% three years ago, demonstrating tangible evidence of our commitment to reduce interest rate risk.
Speaker Change: On the consumer side total balances were down with expected declines in residential mortgage and home equity balances.
Speaker Change: With seasonally lower originations in the recreational vehicles and other consumer loans portfolio.
Speaker Change: We did however have solid origination activity in the trailers portfolio.
Speaker Change: We focus on the Super Prime borrower and our consumer lending and rates on new production were in the low 8% range.
Speaker Change: Are there more delinquencies in these portfolios remain extremely low at 10 basis points of total consumer loans.
Speaker Change: I'm proud of the work that the employees at first Internet Bank put in to deliver continued improving performance and a six quarter streak for growth in revenue and net interest income and strong net interest margin expansion.
Speaker Change: Bind with the ongoing investments we've made in small business lending we remain confident in the earnings momentum we have built.
Speaker Change: With the ongoing evolution of our loan portfolio.
Speaker Change: Revenue diversification and anticipated reductions in deposit cost.
Speaker Change: We are well positioned to drive continued revenue growth and enhanced profitability for the balance of 2025.
Speaker Change: I will now turn the call over to Ken for more details of our financial results for the quarter.
Ken Lubbock: Thanks, Nicole since Nicole already covered the loan portfolio, let's turn to slides five and six where I will cover deposits in more detail.
Ken Lubbock: The average balance of deposits increased by $111 million or over 2% during the first quarter and period end deposits were up modestly from the prior quarter Roseland.
Ken Lubbock: Growth in deposits were primarily driven by growth in Fintech partnership deposits, which are reflected in both noninterest bearing and interest bearing demand deposits as well as money market accounts the.
Ken Lubbock: The growth in deposits was partially offset by a decline in higher cost Cds and brokered deposits.
Ken Lubbock: Non maturity deposits were up almost $335 million or 15%, reflecting the increase in fintech partnership deposits.
Ken Lubbock: Total deposits from our Fintech partners were up 37% from the FERC from the fourth quarter and totaled $881 million at quarter end.
Ken Lubbock: Additionally, these partners generated almost $23 billion in payments volume, which was up 21% from the volume we processed in the fourth quarter.
Ken Lubbock: Total Fintech partnership revenue was over $1 $1 million in the first quarter, which was up 30% from the fourth quarter as contributions from key partnerships continued to scale up and new pricing terms went into effect.
Ken Lubbock: Related to CD activity during the quarter total balances were down $104 million or 5% from the linked quarter the.
Ken Lubbock: The strong growth in Fintech deposits allowed us to keep CD pricing lower and manage new production volume, we originated $285 million of new production and renewals during the first quarter at an average cost of 4.07% and a weighted average term of 12 months. These were more than offset by a mature.
Ken Lubbock: <unk> is a $414 million with an average cost of 5.06%.
Ken Lubbock: Looking forward, we have $355 million of Cds maturing in the second quarter of 2025, with an average cost of 4.87% and $486 million maturing in the second third quarter of 2025 with an average cost of $4 eight 4%.
Ken Lubbock: In total for the remaining of the year, we have $1 $1 billion of CD remaining CD maturities with an average cost of $4 seven 3%.
Ken Lubbock: With current new production rates remaining in the range of 4.05 to four 1%. We expect a continued positive pricing gap between new production in maturing Cds over the next several quarters, giving us confidence that deposit costs will trend lower over the course of the year.
Ken Lubbock: Moving to slide six at quarter end total liquidity remained very strong, reflecting cash and unused borrowing capacity of $2 $1 billion.
Ken Lubbock: On balance sheet liquidity grew through the quarter as growth in fintech deposits supplemented with existing cash balances from the end of the fourth quarter.
Ken Lubbock: We deployed a portion of this liquidity to pay off a significant amount of higher cost brokered deposits. In addition to the net client net decline in CD balances as well as fund loan growth and securities purchases.
Ken Lubbock: With modest deposit growth and loan growth of $84 million or 2% our loans to deposit ratio increased to 86% from 84, 5% at the end of the fourth quarter at quarter end, our cash and unused borrowing capacity represent represented 180% of total uninsured departure.
Ken Lubbock: And 230% of adjusted uninsured deposits.
Ken Lubbock: Turning to slide seven and eight net interest income for the first quarter was $25 $1 million and $26 $3 million on a fully taxable equivalent basis up six 6% and six 3% respectively from the fourth quarter.
Ken Lubbock: The yield on average interest, earning assets increased to $5, 57% from 552% in the linked quarter due primarily to a six basis point increase in the yield earned on loans and a 12 basis point increase in the yield earned on securities, partially offset by a 31 basis point decrease in other earning assets.
Ken Lubbock: A full quarter's impact of the fed funds rate cuts in November and December were felt during the first quarter as higher yields and average balances in our loan and securities portfolio were more than offset by the large decline in both average cash balances and the rate earned on these balances leading to a one 2% decrease in <unk>.
Ken Lubbock: Interest income compared to the linked quarter.
However, the impact of the fed rate cuts was more pronounced on deposit pricing, which when combined with significantly lower average federal home loan bank advance balances resulted in an almost 5% decline in interest expense and drove continued growth in net interest income.
Ken Lubbock: Net interest margin for the first quarter was 182% and 191% on a fully taxable equivalent basis, representing increases of 15, and 16 basis points, respectively compared to the linked quarter.
Ken Lubbock: The net interest margin roll forward on slide eight highlights the drivers of change and fully taxable equivalent net interest margin during the quarter.
Ken Lubbock: The yield unfunded portfolio originations was 778 in the first quarter up 50 basis points for the fourth quarter, reflecting the strong growth in construction investor commercial real estate small business lending and C&I pipelines remain solid in these lines of business, giving us further confidence that net interest income will continue.
Ken Lubbock: To grow in future quarters.
Ken Lubbock: Related to deposits looking at the graph on slide eight the tracks are monthly rate on interest bearing deposits against the fed funds rate you can see that our deposit costs are continuing to trend down along with the decline in fed funds with lower CD pricing across the maturity curve, we anticipate that interest bearing deposit costs will continue to decline.
Ken Lubbock: In the second quarter as high cost Cds mature and are replaced at much lower rates with either fintech deposits or new Cds.
Ken Lubbock: This is expected to help drive helped drive continued net interest income growth and net interest margin expansion, even without any further fed rate cuts at quarter end, we had $1 $5 billion of deposits indexed to fed funds. So if the fed does resume lowering rates later in the year that potential exists.
Ken Lubbock: For further deposit cost reductions.
Ken Lubbock: Turning to noninterest income on slide nine.
Ken Lubbock: Noninterest income for the quarter was $10 4 million down $5 $5 million or <unk>, 35% from the fourth quarter. As a reminder, the fourth quarter benefited from $4 $7 million of prepayment and terminated interest rate swap gains related to the pay down of federal home loan bank advances excluding.
These gains the sequential decrease was $800000 or 7%.
Ken Lubbock: Gain on sale of loans totaled $8 $7 million for the quarter up 1% over the fourth quarter with SBA loan sales driving this increase.
Ken Lubbock: SBA loan sales volume was $108 $8 million up 2% quarter over quarter, while net gain on sale premiums were down a modest six basis points.
Ken Lubbock: The majority of the decrease in noninterest income was driven primarily by lower net servicing revenue, resulting from a negative fair value adjustment to the loan servicing asset.
Ken Lubbock: Moving to slide 10, noninterest expense for the quarter was $23 6 million down $400000 or one 7% from the fourth quarter. The main driver was salaries and employee benefits, which decreased $900000 or six 7% due primarily to a decrease in incentive comp.
Ken Lubbock: <unk> the.
Ken Lubbock: The lower salaries and employee benefits expense was partially offset by seasonally higher consulting and professional fees as well as higher loan expenses due to collection costs.
Speaker Change: Turning to asset quality on slide 11, Nicole covered the major components of asset quality for the quarter in her 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 111% 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 specific reserves taken on loan relationships in the franchise finance and small business lending portfolios that were placed on non accrual during the quarter as well as growth in the overall loan portfolio, partially offset by the impact of economic metrics and qualitative factors in certain portfolios.
At quarter end, the small business lending ACL to on guaranteed SBA loan balances was five 8%.
Speaker Change: Additionally, at a higher level, 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 132% of loan balances.
Speaker Change: The provision for credit losses in the first quarter was 11 9 million compared.
Speaker Change: Compared to $7 $2 million in the fourth quarter the provision for the quarter was driven primarily by the elevated net charge offs and the increase in specific reserves related to franchise finance and small business lending.
Speaker Change: Moving to capital on Slide 12, our overall capital levels at both the company and the bank remains solid the tangible common equity ratio was 655%, which declined seven basis points as balance sheet growth outweighed the positive impact of lower interest rates on the accumulated other comprehensive loss.
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 717%.
Speaker Change: From a regulatory capital perspective, the common equity tier one capital ratio remains sound at nine 6%.
Speaker Change: And before I wrap up I would like to provide some updates on our outlook for 2025.
Speaker Change: We expect loan yields to increase as we continue to originate new production at rates well above the current portfolio yield.
Speaker Change: We also expect deposit cost to continue declining as one we recognize the significant CD repricing gap on over a $1 billion of Cds maturing over the next nine months.
Speaker Change: And two we see the benefit of paying down a significant amount of higher cost brokered deposits at the end of the second at the end of the first quarter.
Speaker Change: Assuming loan growth remains in the range of 10% to 12% for the year and deposit growth in the range of 5% to 7%. We expect that full year net interest income will increase in the neighborhood of 40% or more over 2020 four's full year amount.
Speaker Change: Fully taxable equivalent net interest margin will increase throughout the year and should be in the range of $2, 35% to 245% by the fourth quarter of 2025.
Speaker Change: If the federal reserve were to resume reducing short term interest rates, our net interest income and net interest margin would likely exceed these for these projections.
Speaker Change: One near term change to our revenue outlook relates to noninterest income and specifically gain on sale revenue related to SBA loans.
Speaker Change: As many of you have probably read the small business administration is going through a number of changes right now, including elevated repurchase rates across its entire portfolio as well as fresh amendments to seven a program standard operating procedures. Additionally.
Speaker Change: Additionally, we have established first Internet bank as a top 10, seven a program lender our activities are falling under a more watchful eye at the SBA.
Speaker Change: Therefore, we are making some changes to our loan sale process that aligns completely with SBA standard operating procedure in order to protect the guarantee on these loans, which will result in a longer hold period before we sell alone on the secondary market.
Speaker Change: This process enhancement will cause a temporary one quarter decline in gain on sale revenue. However, we anticipate we will return to a normalized gain on sale run rate as we approach the second half of the year.
Additionally, the decline in noninterest income during the second quarter will be partially offset by higher interest earned on the loans during the whole period, which will also benefit net interest margin for the quarter.
Speaker Change: On the expense side, our outlook remains consistent with the guidance. We provided on last quarter's call that is we expect annual noninterest expense to be up in the range of 10% to 15% over the full year 2024 amount with a modest ramp up on a quarterly basis.
Speaker Change: And finally with respect to the provision as Nicole mentioned in her comments. We believe we have made significant progress in identifying and acting on problem loans in the franchise finance and SBA portfolios, we recognized an elevated level of losses this quarter.
Speaker Change: If economic uncertainty is prolonged we may experience additional losses in the second quarter. However, we are seeing a slowdown in the pace of new delinquencies, which provides some level of optimism that the provision for credit losses will moderate in the second half of the year.
Speaker Change: With that I will turn it back to the operator, so we can take your questions.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.
Speaker Change: Do you have a question. Please press the star followed by the number one on your Touchtone phone.
Speaker Change: You'll hear a prompt that you had has been raised.
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Speaker Change: One moment. Please for your first question.
Speaker Change: Okay.
Speaker Change: Your first question is from Tim Switzer from <unk>. Please go ahead.
Tim Switzer: Hey, Good afternoon Hope you guys are doing well.
Speaker Change: Hi, Tim.
Speaker Change: I appreciate your commentary on the impact of some of the changes going on at the SBA.
Speaker Change: A few follow ups on that.
Speaker Change: One more specifically I'm sorry, if I missed it did you quantify or can you quantify the expected onetime impact on fees in Q2.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Probably in terms of just total noninterest income for the quarter were probably going to be somewhere closer in the range of say $5 million to $6 million for the quarter.
Speaker Change: But then if you think about if you look at the estimates for the back end of the year third quarter and fourth quarter. I think we feel we will be back to those levels.
Speaker Change: Really just a one quarter impact as we hold loans longer and then the cycle catches up.
Speaker Change: Okay, and that's all that's all.
Ken Lubbock: Non interest income, but we also will pick up as Ken mentioned earlier additional revenue on the loan side. So we will actually although were down.
Speaker Change: Four to five will pick up part of that loan.
Ken Lubbock: Loan interest income.
Speaker Change: Right as you hold them on the balance sheet makes sense Brian.
Speaker Change: Looking further out beyond Q2.
Speaker Change: SBA reinstated a lot of the fees for smaller dollar loans, particularly those below a $1 million.
Speaker Change: Are you able to tell us what your average loan sizes in the SBA or like what percent of your originations are below a $1 million.
Speaker Change: Okay.
Speaker Change: Our average loan size, Tim is it's right just north of $1 million. So the fees that are small loan that had been waived on small lung really didn't apply to us we're not doing volume in the small loan game.
So we were passing along to the borrower.
Speaker Change: Guaranteed fee on our seven eight loans that we're doing we don't expect much impact there and as it relates to the S. O P. Generally I mean, we're certainly digesting those changes that go into effect on June one along with every lender in this space, we have a fantastic pipeline right now.
Speaker Change: And we are looking at the loans that are in our underwriting phase to ensure that nothing needs to be restructured in response to the changes that are coming.
Speaker Change: Okay got it.
Speaker Change: The last question I have switching topics a little bit.
Speaker Change: But could you provide some details on just some updated expectations on what the impact of <unk> <unk>.
Speaker Change: 25 basis point rate cut would be to NII.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: If you you know obviously, we're going to run this on a static balance sheet.
Speaker Change: But on a static balance sheet of 25 basis point rate cut on an annualized basis is about $3 $6 million of NII.
Speaker Change: Again, that's annualized and the way to think about it is it does kind of ramp up on a quarterly basis, you can't just take three six and divide by four there is kind of a phase in period. So.
Speaker Change: You are probably ramping up.
Speaker Change: $4 to 500001st quarter, then double that.
Speaker Change: And then just kind of ramp up from there over the course of the 12 months period.
Speaker Change: Got it very helpful. Thank you guys.
Speaker Change: Okay.
Nathan Race: Your next question is from Nathan race from Piper Sandler. Please go ahead.
Nathan Race: Hey, everyone. Good afternoon, thanks for taking the questions.
Speaker Change: My name is Robert.
Nathan Race: Going back to SBA.
Nathan Race: Just curious if kind of the loss assumptions that you guys laid out last quarter have changed margin. If the fed remains on pause for longer than the market's expecting how do you kind of think about SBU loss content. In this kind of current short term rate environment going forward relative to last quarter.
Nathan Race: Yes.
Nathan Race: Well, maybe we'll address the rate piece of it first it's yeah, I think the higher rate environment, certainly makes an interest payment higher but when you.
Nathan Race: When you think about a 25 or 50 basis point decrease on a monthly payment on a loan it's not really significant.
Nathan Race: It's the I think the higher rate environment, probably doesn't play as bigger role on on that I think it's just more of the economic uncertainty.
Nathan Race: We have currently as I mentioned, we got almost 6% reserved against the UN guaranteed balance on our on our loan book.
Nathan Race: I think we've we've had some some borrowers.
Nathan Race: That have struggled and have either working with those borrowers and either addressed.
Nathan Race: Either taken action via charge offs or specific reserve or continuing to work with the borrower.
Nathan Race: But it's an uncertain environment. So I think the loss history of the past couple of quarters has been elevated.
Nathan Race: I think we've put a big dent in that piece of it and expect.
Nathan Race: The loss rate should decline, but if you look at the SBA seven program overall.
Nathan Race: As a whole I mean, it's the default rates.
Nathan Race: Have been increasing.
Nathan Race: So they are like I said, there is that there's a certain amount of economic uncertainty, that's that's kind of affecting the small business community today.
Nathan Race: Great.
Speaker Change: Perfect I understand it's kind of tough to predict kind of the magnitude of kind of how much loss content goes down during the second quarter and kind of think he alluded to that dropping even further in the back half of the year, but just curious if you can kind of frame up kind of <unk>.
What youre seeing more specifically here in <unk> in terms of SBA charge offs.
Speaker Change: And then what that translates into kind of the overall charge off level as this year progresses.
Speaker Change: Well so far in two Q I think we've seen activity I think we've seen delinquencies come down.
Speaker Change: We've seen so far in <unk>, we've seen charge off activity.
Or <unk> specific reserve come down.
Say compared to last quarter.
Speaker Change: But theres still a pipeline of loans, we're keeping an eye on but certainly activity seems a bit lower at least so far through the second quarter.
And then what we saw last quarter.
Speaker Change: Okay that helps and then we'd love to just get kind of your updated thoughts on share buybacks, just given where the stock is trading and maybe kind of slow and balance sheet growth just to.
Speaker Change: Buy back the stock more soldiers based on.
Speaker Change: Where that's at today.
Speaker Change: Yeah, well cover balance sheet growth first I mean, we do have we had I think we had a solid quarter of loan production.
Speaker Change: <unk> talked about the SBA portfolio or the SBA team continuing to have high pipeline.
Speaker Change: Some of the some of our commercial lending verticals still have good pipelines in front of them good good optimism.
Speaker Change: And we always do this too, but we're certainly looking at ways, where we can kind of.
Speaker Change: Find some balance sheet capacity elsewhere in.
Speaker Change: The loan sale market Hasnt.
Speaker Change: And then SBA loan sale market is starting to come back a bit. So we're looking at some other areas there to free up some balance sheet space. So we're certainly looking to manage capital that way and kind of manage balance sheet growth overall.
Speaker Change: And on the buyback.
Speaker Change: We're certainly getting.
Speaker Change: Getting prepared and getting our ducks in a row to look.
Speaker Change: Look back at that market.
Speaker Change: Yes.
Speaker Change: <unk>.
Speaker Change: Yes.
Speaker Change: Great stays below 50% of book will definitely get back into the buyback situation.
Speaker Change: The slower than it should be so.
Speaker Change: As Ken said, we will look at.
Speaker Change: It does settle for a few days, but if it hangs here will definitely step back yet.
Speaker Change: Gotcha.
Speaker Change: I'm, sorry, I didn't catch if you remind me what you're thinking for expenses in terms of that trajectory over the balance of this year.
Speaker Change: I think we remain pretty confident in the guidance, we gave last quarter about 10% to 15% growth year over year kind of annual over 2024.
Speaker Change: So obviously kind of in prior years. It is a bit of a ramp right a little bit more higher each quarter, but yeah that 10% to 15% year over year growth is a good number.
Speaker Change: Of $90 million or so in 'twenty four correct.
Speaker Change: Yes.
Speaker Change: Okay, Great I appreciate all the color thanks, everyone.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Your next question is from Brett Robinson from Citigroup. Please go ahead.
Brett Robinson: Hey, good afternoon, everyone.
Brett Robinson: Wanted to make sure I understood I understand.
Brett Robinson: You know in the fourth quarter, we had the highest quality clean up and then this quarter. It seems like franchise finance in particular.
Brett Robinson: More problematic and just wanted to see what what kind of transpired.
Brett Robinson: During <unk>.
Brett Robinson: Obviously some of these franchise finance loans.
Brett Robinson: We are stressed and then I didn't hear a number I don't know how many.
Brett Robinson: How much how many specific credits that $5 8 million.
Brett Robinson: Related to in terms of total Paul.
Brett Robinson: Deals.
Brett Robinson:
Brett Robinson: You know I think what we saw in there all kind of divided into two buckets. One is what we charged off and we had we had loans that we had specific reserves on.
Brett Robinson: At the whether it was sometime in the fourth quarter of prior to then.
Brett Robinson: And we put a reserve on it and move it to non accrual, but we obviously continue to work with the borrower trying to to get to the best possible outcome.
Brett Robinson: And late in the quarter, we just had some had some developments on.
Brett Robinson: Some of those loans that are.
Brett Robinson: You know a guarantor a strong guarantor that we were working with dependent.
Brett Robinson: Decided ultimately throughout their arms and filed bankruptcy.
Brett Robinson: Just some others, where the unit was still open but struggling and then ultimately closed near the end of the quarter.
Brett Robinson: So that kind of drove some of that drove the charge off activity and then on the specific reserve side again, there were some loans that earlier.
Brett Robinson: Go back to fourth quarter were.
Brett Robinson: You know, maybe maybe 10 days delinquent and something like that the borrower may.
Brett Robinson: Maybe it's been alone we identified to keep on keep our eye on but as we work through the quarter. We just we had.
Brett Robinson: A handful of loans that as we kind of got into really late in the quarter hit 90 days delinquency.
Brett Robinson: Had whether it was a unit again.
Brett Robinson: Unit closed or some kind of negative band to a perhaps a drink.
Brett Robinson: Dropping the guarantor strength just a.
Brett Robinson: Some credits near the end of the quarter that.
Brett Robinson: The prudent course of action I mean again, we're still continuing to work with these borrowers towards.
Brett Robinson: The optimal outcome.
Brett Robinson: But decide but <unk>.
Brett Robinson: Selected the prudent thing to do was put a put a specific reserve on these now the one thing about these franchise loans in particular is it does take a while sometimes to kind of work through.
Brett Robinson: The collection process and work through the legal process, it's a little bit different than a piece of real estate.
Brett Robinson: You know there's there's options you have as you work through these weather through legal proceedings potential refis franchise or stepping in to find a stronger franchisee to buy the unit.
Brett Robinson: That is a course of action on some of these and it just take but it just takes a while to get there.
Brett Robinson: Or another we've had some success with structured settlements on some of these where the borrower you might have one guarantor, who is willing to pay off 85% of the loans and we're starting to get some success working on those.
Brett Robinson: But it just takes a while to work through some of those but.
Brett Robinson: <unk>.
Brett Robinson: Most prudent course of action is put a reserve on it.
Brett Robinson: And when we collect recoveries if at all down the road, we'll recognize him that.
Brett Robinson: And I would also note just are anecdotally Brett our our credit teams are noting that recent trends were getting better rates better better rate of call back from our borrowers and more interaction with them. So we're cautiously optimistic that that's showing some positive trend.
Speaker Change: Okay Brett.
Brett Robinson: Yes.
Brett Robinson: Go ahead, Matt.
Brett Robinson: Oh I was I was just going to ask.
Nathan Race: Nicole I think you indicated I'm looking at slide 18, with the detail on the franchise finance portfolio and I think you indicated that there wasn't any kind of rhyme or reason in terms of concentration but.
Brett Robinson: It <unk>.
Speaker Change: More limited service restaurants was there anything in particular.
Brett Robinson: Seems to have been.
Brett Robinson: An issue from a from a borrower use perspective.
Brett Robinson: I would say Brett that we're not necessarily seeing a category that is problematic on both a retrospective and a prospective basis. There may be some brands that we feel are not going to be a good match for our portfolio.
Brett Robinson: Categorically on the franchise finance.
Brett Robinson: Theres nothing that we.
Brett Robinson: We talk about it with SBA and we're seeing it in franchise as well that these are very borrowers specific situations.
Speaker Change: Okay, and Nicole would you happen to have the total criticized number four.
At the end of the quarter.
Speaker Change: It's $13 8 million loans on the.
Speaker Change: Franchise category, and we've reserved 44% against that $13 eight.
One other point on our breath.
Speaker Change: Okay.
Speaker Change: Our internal policy as Ken said.
Speaker Change: These loans are not as black and white as our consumer loans are.
Speaker Change: Property loans and stuff, but we had an internal policy hits 90 days, we charged it I'll take a specific reserve. So we kind of got caught up a little bit here in the first quarter.
Speaker Change: Kudos to the Apple pie team they have.
Speaker Change: Switch servicers that we talked about a couple of quarters ago.
Ken Lubbock: We're getting in faster more furious and pressing obviously some of these folks had been fighting inflation for a long period of time I think if theres anything that caused a little bit of a blip up here in the first quarters and the threat of potential tariffs on top in cost of goods going up. So if somebody was kind of on the border it's Ken.
Kevin: Kevin said, we out of the Blue with somebody just said.
Speaker Change: And we'll go on but we.
Speaker Change: We're much better on getting in contact getting in front of them. It takes a longer workout cycle. So some of the reserves that we took and some of the charge offs. We had during the first quarter, we anticipate getting some of that money back and as.
Speaker Change: We've stated time and again here in both the SBA and the.
Speaker Change:
Speaker Change: Okay.
Speaker Change: Apple pie in the franchise.
Speaker Change: What is in that 30 60 category right now is now over what it was at this time in the first quarter, so hopefully heading in the right direction.
Speaker Change: Economic factors could be.
Speaker Change: Blow it up again.
Speaker Change: Okay.
Speaker Change: If I could ask one last quick one just around deposits you had a nice shift towards.
Speaker Change: Interest bearing deposits and maybe away from what you might call Hot hotter.
Speaker Change: Money.
Speaker Change: What was the.
Speaker Change: Just to kind of get stuck in that bucket, which increased the <unk>.
Speaker Change: Linked quarter interest bearing deposit number what.
Speaker Change: What's the rate on those and Ken It sounds like with all these Cds repricing at some I got the impression that maybe there wouldn't be more mix shift change, but just wanted to make sure I understood that correctly.
Speaker Change: Well, what's really driving the interest bearing demand in the noninterest bearing demand as well as just growth in fintech relationships.
Speaker Change: Those are all classified in interest bearing demand.
Speaker Change: So obviously with the strength and those have kind of talked about the growth in quarter over quarter. There. So those certainly were more than able to replace some of the CD funding.
Speaker Change: So and we continue to experience growth in Cds, So I expect.
Speaker Change: Our expectation is that CD balances will continue to decline.
Now some of those some of those maturities will be replaced to a limited extent by new new production and renewals.
Speaker Change: But really the bulk of whats going to backfill it and even grow the deposits is going to be on the fintech side.
Okay.
Speaker Change: Great appreciate all the color.
Speaker Change: Great. Thanks, Brett.
Speaker Change: Your next question is from George Sutton from Craig Hallum. Please go ahead.
Speaker Change: Hey, Good afternoon, guys. This is Logan on for George.
Speaker Change: Maybe just kind of following up there on <unk>.
Speaker Change: Hi.
Speaker Change: On some of the deposit benefit you're seeing on the Fintech side can you just give us an update on <unk>.
Speaker Change: The pipeline there both from a new partner perspective, and the partners that you're kind of trying to ramp things going as you would expect.
Speaker Change: And then it seems like we've kind of continued to see attrition in this space more broadly.
Speaker Change: Are you seeing anything change in terms of your opportunities maybe.
Speaker Change: Take more share just an update there would be appreciated.
Speaker Change: Sure I'll take that thanks slogan for the question our Fintech partners.
<unk> and embedded finance team is doing really well with managing our relationships that we have we have a couple of new prospects in the pipeline.
Speaker Change: As as things have evolved over time, we are seeing better quality more mature programs that are coming and looking for a bank partner and because of our success and reputation in the space has been a solid reliable bank bond.
Speaker Change: Sponsor, we are winning good look so.
Speaker Change: I would say that the outlook there is strong and what we expect to keep the numbers somewhat moderate in terms of programs that we sponsor right now at less than two dozen.
Speaker Change: And there is no reason for us to go nuts in that space, because as you've seen where we're having good growth in deposits and in transaction volume.
Speaker Change: With the partners that we have and we're expanding our relationships with partners that we had so.
Speaker Change: Partner, where we have been doing only a deposit program now we're talking about some lending opportunities I'd always love to talk about growing programs and relationships with our existing partners.
Speaker Change: Because that's just going to bring success for everyone. So I don't expect us to go nuts in terms of growing the number of programs and relationships that we have that certainly expanding the ones that we do have so grateful for the relationships that we've been able to forge there we have seen some movement in the sponsor bank space.
Speaker Change: This overall, but I would say that yes, we try to stay focused on what we do well.
Speaker Change: And.
Speaker Change: When they come knocking we have a good story to tell.
Speaker Change: Logo on it.
Speaker Change: You always ask me, what's going on on the revenue side. So you can fill them in on the other part.
Speaker Change: Bottom line on the Fintech space is $1 1 million in the first quarter compared to $2 million for all of last calendar year and it continues to grow quarter over quarter, we had forecasted.
Speaker Change: $4 million in revenue for this year and all indications are we're going to blow through that so as Nicole said, we have great partners today that are getting bigger and growing we're adding on a judicious basis new partners and.
Speaker Change: It's going pretty solid and pretty smooth for us right now.
Speaker Change: Got it well that's great to hear maybe just a quick follow up you guys got the the 15 basis points of expansion on the NIM. This quarter I think the full year guide implies you do on average just a little bit more than that is there anything that.
Speaker Change: We should be aware of in terms of the cadence.
Speaker Change: <unk> see a little better given that you're going to hold some of the SBA on the balance sheet or or should that be kind of a good baseline for the rest of the year on a quarter to quarter basis, yes.
Speaker Change: Yes, I think we will probably see a bigger benefit in the second quarter again going back to the SBA and the whole period on that.
Speaker Change: And then kind of kind of maybe ramping I mean, I think we will see so that will continue to see some nice growth in the third quarter, albeit maybe not as much as second quarter, and then fourth quarter or probably not as much as <unk>.
Speaker Change: Third quarter.
Logan, we also had $200 million in high cost deposits that we paid off right at quarter end.
Speaker Change: Brokerage stuff that we've done back from the SBB Bank.
David Becker: Dave So that had no impact on the first quarter and that'll show up here in the second quarter. So both.
David Becker: Both sides of the equation the yield should go up because of the SBA side as well as the cost of funds continue to decline both for the pay off we did at the end of the quarter end.
David Becker: Recycling of the Cds.
Speaker Change: Okay. That's helpful. Thanks for taking my questions.
Brett Robinson: Alright, Thanks Logan.
Speaker Change: Thanks, everybody. We appreciate you joining today's call for a center that has consistently produced improving revenue net interest income while the macro environment remains uncertain. We are excited about the future. Our lending teams have continued to deliver very strong performance, particularly in the.
Brett Robinson: Small business in construction lending.
Brett Robinson: Furthermore, emerging growth opportunities with key Fintech partnerships as I've just discussed are expected to further diversify and drive revenue growth. So given our ongoing effort to improve our loan mix and anticipated reduction in deposit cost.
Brett Robinson: Confident that we are well positioned to achieve stronger earnings in the coming quarters as fellow shareholders. We remain committed to driving improved profitability and enhance value. We thank you for your support and wish you a good afternoon.
Brett Robinson: Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.