First Internet Bancorp Q3 FY2024 Earnings Call

Good day, everyone, and welcome to the First Internet Bancorp Earnings Conference Call for the Third Quarter of 2024. At this time, all lines are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Please note that today's event is being recorded. I would now like to turn the conference over to Ben Brodkowitz from Financial Profiles, Inc. Ben, please go ahead.

Thank you, Sylvie. Hello, everyone, and thank you for joining us to discuss First Internet Bancorp's third quarter financial results. The company issued its earnings press release yesterday afternoon, and it is available on the company's website at www.firstinternetbancorp.com. In addition, the company has included a slide presentation that you can refer to during this call. You can also access these slides on the website. Joining us today from the management team are Chairman and CEO, David Becker; and Executive Vice President and CFO, Ken Lovik. David will provide an overview, and Ken will discuss the financial results. Then we'll open up the call to your questions. 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 First Internet Bancorp that involve risks and uncertainties. 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. The company disclaims any obligation to update any forward-looking statements made during this call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. 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.

Thank you, Ben. Good afternoon everyone, and thanks for joining us today as we discuss our third quarter 2024 results. We have turned in four consecutive quarters of double-digit earnings growth and improved profitability for the company, 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. Our third quarter results were strong in virtually all areas. The increase in net interest income was driven by solid loan growth, a larger balance sheet, and higher yields on our earning assets, anchored by continued stabilization in funding costs. Strong growth in non-interest income was powered by the continued expansion of our national SBA platform with a record gain on sale revenue. 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. At the same time, our efforts to improve the risk profile of the company are also bearing fruit. 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 is measured by the loan-to-deposit ratio and is the strongest it's been in recent history. Starting with the highlights on Slide 3. I would like to discuss some key themes for the quarter in more detail. 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. 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-digit earnings growth. 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. 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. On the lending side, new funded loan origination yields were 8.85%, consistent with the prior quarter. The yield on the overall loan portfolio increased 7 basis points from the second quarter, with deposit costs increasing only 1 basis point. As a result, net interest income was up over 2% from the prior quarter. 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. We remain confident that net income will continue to trend higher in the fourth quarter, as we experienced 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. 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. 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. Compared to 2023, year-to-date SBA loan originations are up 35%, and sold loan volume is up almost 60%, demonstrating the tangible results of the investment we have made in providing growth capital to entrepreneurs and small business owners throughout the country. Our small business pipeline continues to flourish, and we are proud to announce that we were the eighth largest SBA 7(a) lender in the country for the SBA's 2024 fiscal year, which ended on September 30th. Congratulations to our SBA team on another impressive quarter. The growth of our SBA business propels noninterest income, which now comprises one-third of total revenue year-to-date compared to 25% for the comparable period last year. Bank-wide, we drove a 4% increase in total revenue over the prior quarter, our fifth consecutive quarter of revenue growth, and continued improved profitability. Moving to the asset quality. Our overall credit quality remains sound despite an increase in nonperforming loans during the quarter. Nonperforming loans to total loans were 56 basis points and nonperforming assets to total assets were 39 basis points at quarter end. The increase in nonperformers is due to additions in franchise finance small business lending and residential mortgage. Our metrics still compare favorably to similar-sized banks. Furthermore, we have specific reserves on about 45% of the total nonperforming loan balance. Net charge-offs to average loans remain low at 15 basis points and were driven primarily by SBA charge-offs. A key measure of our focus on shareholder value creation is growth in the tangible book value per share, which increased by 3.6% in the third quarter and is up almost 11% year-over-year. Since 2018, First Internet has grown tangible book value per share by more than 55%. 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. Turning now to Slide 4. I'll spend a couple of minutes discussing our lending activity during the quarter. We produced solid loan growth of 7.5% on an annualized basis for the quarter. 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. Our construction team had another solid quarter originating over $94 million in new commitments. 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. At the quarter end, total unfunded commitments in our construction line of business were $515 million. As those projects progress, draws on these loans in the upcoming months combined with the optionality to deploy excess liquidity to hold a portion of our SBA originations on our balance sheet will play a meaningful role in the continued shift of our loan portfolio towards higher-yielding variable rate loans. On the consumer side, balances were up modestly as new originations in our specialty consumer channels were offset by declines in the residential mortgage and home equity balances. We focus on the super-prime borrower in our consumer lending, and rates on new production remained in the mid-8% range, consistent with the second quarter. Furthermore, delinquencies in these portfolios remain extremely low at under 1 basis point of total loans. To wrap up my comments, we continue to build off the last nine months of improving performance and delivered another solid quarter. We remain confident in the earnings momentum we have built, and are excited to end the year on a high note. 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. We believe we are well-positioned to continue to achieve higher earnings and improved 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.

Thank you, David. As David discussed the loan portfolio, let's move to slides 5 and 6, where I will delve into the details of our deposits. The average balance of deposits rose by more than $211 million, or 5%, during the third quarter, and period-end deposits increased nearly $524 million, or 12% from the previous quarter, thanks to growth in CD production and deposits from fintech partnerships. Non-maturity deposits grew by almost $123 million, or 6%, which highlights the uptick in fintech partnership deposits. Additionally, total deposits from our fintech partners, including those classified as broker deposits, surged by 35% from the second quarter, reaching $507 million by quarter's end. These partnerships generated approximately $11.4 billion in payment volume, a 34% increase compared to the second quarter's volume. Total revenue from fintech partnerships amounted to $771,000 in the third quarter, an increase of over 30% from the previous quarter as contributions from one of our primary partnerships scaled up. Regarding CD activity this quarter, total balances rose by $281 million, or 15% from the linked quarter, driven by strong demand in the consumer channel. We originated $697 million in new production and renewals at an average cost of 4.77%, with an average term of 21 months. These figures were somewhat offset by $391 million in maturities at an average cost of 5.05%. Looking ahead, we have $238 million of CDs maturing in the fourth quarter of 2024 at an average cost of 5.01%, and $407 million maturing in the first quarter of 2025 at an average cost of 5.08%. During the third quarter, CD pricing reached a turning point, with the weighted average cost of new CDs being 28 basis points lower than the cost of maturing CDs. As interest rates across the yield curve started to decline in anticipation of the expected Fed funds rate cut, we significantly reduced our CD rates throughout the quarter. Thus, the weighted average cost of CD production in December was 4.45%, over 30 basis points lower than the average cost of new CDs for the quarter and 56 basis points lower than the rates on CDs maturing in the fourth quarter of 2024. With CDs repricing at lower rates and the cost of high beta deposits decreasing by 50 basis points, we are optimistic that deposit pricing has peaked and will trend downwards in the fourth quarter. Moving to slide 6, at the quarter's end, with the significant deposit growth, our total liquidity remained robust, showing cash and unused borrowing capacity of $2.1 billion. We utilized some of this liquidity to reduce FHLB borrowings and support loan growth and securities purchases during the quarter. With total deposit balances increasing by 12% and loan growth of $75 million, or about 2%, the loans-to-deposits ratio fell to 84% from 93% at the end of the second quarter. At quarter's end, our cash and unused borrowing capacity accounted for 179% of total uninsured deposits and 230% of adjusted uninsured deposits. Turning to slides 7 and 8, net interest income for the quarter was $21.8 million, or $22.9 million on a fully taxable equivalent basis, reflecting increases of 2.1% and 1.8%, respectively, from the second quarter. The yield on average interest-earning assets improved to 5.58% from 5.54% in the previous quarter, primarily due to a 7 basis point increase in the yield on loans, although this was partially offset by a decline in yields on other earning assets. The combined effect of a higher yield on the loan portfolio and increases in average loans, securities, and cash balances resulted in strong top-line growth in interest income, which rose by 5.7% compared to the linked quarter. Considering the robust growth in average interest-bearing deposit balances, net interest income increased by over 2% during the quarter, following 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. The net interest margin for the third quarter was 1.62% and 1.70% on a fully taxable equivalent basis, with decreases of 5 and 6 basis points, respectively, from the second quarter. The roll forward of net interest margin on Slide 8 shows the factors affecting the changes in fully taxable equivalent net interest margin during the quarter. As I mentioned earlier, the influence of deposits on net interest margin is more a function of dollar volume than of rate. During the quarter, average interest-bearing deposits rose by over $211 million, while average loan balances increased by only $93 million. As David noted in his comments, the net interest margin for the quarter was affected by maintaining higher cash balances, which we estimate negatively impacted the margin by six basis points. However, the elevated on-balance sheet liquidity also provides significant flexibility going forward. As I mentioned earlier, we have over $600 million of higher cost CDs maturing over the next two quarters, along with nearly $250 million of higher cost broker deposits maturing in the same timeframe. We also believe that loan activity, particularly early payoffs of higher-yielding loans and loans with premiums, had an additional negative impact on net interest margin of 6 basis points. Despite this, loan pipelines remain solid, particularly in small business lending and construction, and our focus on enhancing the composition of our loan portfolio gives us added confidence that net interest income will continue to grow in the upcoming quarters. In relation 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 observe the stability in deposit costs over recent months. With the recent cut in the Fed funds rate and other short-term rates following suit, along with lower CD pricing across the maturity curve, we expect interest-bearing deposit costs to start trending downward in the fourth quarter. This should also foster further growth in net interest income and serve as a strong catalyst for net interest margin expansion. Turning to non-interest income on Slide 9. Non-interest income for the quarter was $12 million, up $1 million or 9% from the second quarter. Gain on sale of loans totaled $9.9 million for the quarter, up 20% over the second quarter, setting another quarterly record for our SBA team. We originated over $163 million of SBA loans during the quarter, an increase of 42% over the linked quarter. Furthermore, loan sale volume was $126.5 million, up 22% while net gain on sale premium saw a decline of 65 basis points. Other non-interest income declined from the prior quarter to $1.1 million due primarily to lower distributions received from fund investments. These decreases were partially offset by a modest increase in net loan servicing revenue. Moving to Slide 10. Non-interest expense for the quarter was $22.8 million, up $450,000 from the second quarter. 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%. The increase was due almost entirely to an increase in salaries and employee benefits 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. Turning to asset quality on Slide 11. 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. 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. 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. 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. 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. Furthermore, as a reminder, with minimal office exposure, we do not have the excess reserves for that asset class that many other banks require. 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. 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%. From a regulatory capital perspective, the common equity Tier one capital ratio remains solid at 9.37%. Before I wrap up, I'd like to provide some updates on our outlook for the fourth quarter of 2024. With regard to net interest income, as I mentioned earlier, 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. 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. 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% on a quarterly basis. 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. 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. 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. 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 in small business. With that, I will turn it back to the operator so we can take your questions.

Thank you, sir. And your first question will be from Brett Rabatin at Hovde Group. Please go ahead.

Hey guys, good afternoon.

Hi, Brett.

Hi. 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 business 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 store closures, et cetera?

With regards to 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 certain brands and closures of units, trying to work with the borrowers to get them to the table to restructure a loan, pay off the loan that we’ve had to take some action on and move to non-accrual since they went 90 days past due. Probably not 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. On small business, there's really no consistent theme amongst them. In small business, it's like every credit is a story. 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 and work with the SBA to repurchase the loan and work with the borrower to finalize an exit strategy.

The ApplePie situation is primarily based on our internal policy. Once loans reach 90 days, as Ken mentioned, we shift them to non-accrual and establish a specific reserve for them. I don't believe the portfolio is as problematic as suggested; it's more about our internal guidelines. We have faced challenges since the servicers, whether in-house or third-party, don’t feel incentivized to act until the loans reach that 90-day mark, which allows them to recover only 35 cents on the dollar of what they manage to collect. We have differing perspectives here; they seem to prefer loans to become delinquent to earn some income, while we aim to intervene sooner when issues arise. We are currently renegotiating our servicing agreement to engage much earlier in the process rather than waiting until loans hit 90 days. Our SBA loans peaked in July, and the number of problem loans slightly decreased in August and September, which is encouraging as they are no longer climbing consistently. The SBA loans are broadly diversified across the nation without significant commonalities. On the consumer side, our delinquency rate is under 1%. Wholesalers and RVs aren't a concern; their resale values were inflated during COVID when new units were unavailable, but the resale has since decreased for any returned units. Overall, we are not observing any significant issues. CVS and Walgreens are currently stable, mirroring our earlier concerns regarding Red Lobster. We have around 35 CVS stores, all current with no delinquencies or closures. Most are still under five-plus year leases, and we haven't received any concerning updates. A new service we added involves checking four CVS stores, bringing our total to about 31 or 32, with those four being top performers in their region. Due to our national presence and focus on high-quality locations, our loan-to-value remains around 47% to 50%, backed by solid sponsors. Walgreens is performing similarly; we have not encountered any closures or received notices regarding them. There was an instance with a Rite Aid where they closed a newer location in favor of an older one in a prime area, but the sponsor there continues to make payments and is repurposing their stores. Currently, we have no delinquent accounts in the STL product, and over the last 12 years, despite various crises, we have only experienced two loan failures, resulting in total losses of just over $1 million from $2 billion in originations. Therefore, we are not concerned about the STL products or the consumer side. Time will reveal more, and a decrease in rates, especially for SBA loans, will contribute positively as they adjust quarterly. This would lower payments and boost cash flow, offering small businesses a brighter outlook as conditions improve and rates decrease. Inflation is gradually slowing, although some areas may still be high; overall, the trend is downwards, indicating progress for them as well.

That's a lot of great color. And just to clarify if I heard you correctly, kind of the peak of SBA delinquencies in your portfolio is in July. There's another competitor that is out today with 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 I think that might be weighing somewhat on your stock as well as theirs.

We had the same thought this morning when we saw the same information you did. From our perspective, as Ken mentioned, we’ve made specific provisions. If an account is over 90 days past due and we believe there may be some impairment on that non-guaranteed portion, we have already made a provision for it. We assess them as they exceed that threshold. We did reach a peak, and it has decreased slightly since then. Being early in October, the 15th is a common payment date, so we should have a clearer picture in about a week to ten days. We appear to be moving in the right direction, at least in terms of stabilization. We read the same information you came across this morning, and it surprised us. We are not facing the same challenges they are.

Okay. We're discussing the same institution. I was wondering if you might wait a quarter or two for rates to come down before building liquidity and increasing your CDs, but it seems you did that a bit earlier. If I heard correctly, the production on CDs in the last month of the quarter was 4.45%. Is that accurate? I'm curious about your reasoning behind building a little more.

Yes, that is correct. It was not intentional. 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 would be 25 and we had lowered rates about 40 basis points on the 45-day period prior to the cut. But when it hit 50 basis points, the good and bad part about being an Internet institution is experienced by 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 is falling out on the savings rates, they slammed in and bought CDs faster than we could lower the rates. We took them down another 40 basis points on the consumer side and 50 basis points on the commercial. We've cut off the inflow. But in that 24, 36, 48-hour period post the Fed announcement, they were flying through the door faster than we could lower the rate. So, lesson learned that that sword cuts both ways on withdrawals as well as deposits.

Okay, that makes sense. Great color guys. Thanks.

Appreciate. Thanks, Brett.

Thank you. Next question will be from Tim Switzer at KBW. Please go ahead.

Hey, good afternoon. Thanks for taking my questions.

Hey, Tim.

I wanted to ask about the SBA origination outlook. I think you gave a pretty wide range of 15% to 25% in 2025. What are some of the factors that could drive it to the lower or high end of that range? Is it mostly rate driven? And then what are your expectations for pricing as we get into next year?

Our current expectation is that we will achieve around $525 million to $530 million in originations for this year, with a target of $600 million for next year. This implies a growth rate of approximately 15%. We have assembled a strong team of business development officers along with robust support in areas like credit, servicing, and closing. This effort is evident, and we have mentioned this in recent quarters. We are continuously strengthening our team to support our growth, which is essential for reaching our goals. We are confident in our team's ability to source deals effectively. Looking at our performance, we have shown growth each quarter this year. Considering our achievements in the third quarter and our projections for the fourth quarter, reaching the $600 million target next year seems attainable.

Tim, 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. As people try to get comfortable with what the Fed is going to do, we do two more 0.25 point drops this quarter? The excess liquidity that we have on the balance sheet as I stated in my comments 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% yielding loan in the secondary market for 5.5%, 6% carry it on the books and we'll make up that difference in a 5, 6-month window of time. So we 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 the product and the volume we're looking for. I think I made a comment in the last call probably somewhere in that $600 million range might be kind of our cap looking at annual sales growth. But if we get it we can hold it on the books we can sell it in the secondary market. We'll do whatever is in the best interest of the institution. The good part about the excess cash is it gives us an awful lot of flexibility.

Okay. Great. Yes, that was really helpful. And then I wanted to ask about 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 basis points is about a $2.8 million annual benefit. Is that still the right range? And with the loan growth you're expecting to put on? How should we expect the NIM to move next year?

Last quarter, our calculations were based on a static balance sheet. The key variable here is our cash balance and its allocation. To illustrate, we have approximately $1.3 billion to $1.4 billion in high beta deposits, which include a mix of brokered and our own higher balance deposits that reset immediately. You can calculate the effects of cuts of 25 to 100 basis points from that. Additionally, we have around $760 million in loans that will reprice either immediately or within three months for SBA loans. While we do have more variable rate loans, some have already reached price ceilings. On the other hand, we also possess $1.4 billion in CDs with an average cost nearing 5% that will mature in the next year. Currently, new production rates are around 4.19% to 4.2%, indicating a significant increase in net interest income expected over the coming year. While precisely projecting how this will impact margin is challenging due to excess liquidity, I would anticipate at least 10 basis points of margin expansion per quarter, depending on how we manage our liquidity. Furthermore, if we hold onto SBA loans, that would greatly enhance our net interest margin and income. We are still refining our forecast for next year, understanding that long and short rates are behaving differently, with an election also influencing future rates. Overall, our calculations indicate a notable increase in net interest income next year.

We still believe we will reach the $3 target we had projected for this year. As we conclude the fourth quarter, we expect to come close to $1 in earnings. We anticipate $4 for next year, and with the Fed beginning to take action, that's on our side. Depending on how the Fed rates change throughout the year, that could increase from $4 to $5 fairly quickly. We expect to finish this year strong, and 2025 looks very promising. If the political situation remains stable both domestically and internationally, we are positioned for an excellent year in 2025.

Yes. We'll all pray for that. But thank you guys for the color. Appreciate it. Thank you.

Thanks, Tim.

Next question will be from Nathan Race at Piper Sandler. Please go ahead.

Hey, guys. Good afternoon. Thanks for taking my questions.

Hey, Nate.

Ken, I just want to clarify on the loan growth expectations for 4Q. Did you mention 1% to 2%? And then I’d also be curious to get your preliminary thoughts on overall balance sheet growth expectations next year as well?

Yes. I believe I mentioned 1.5% to 2%, which is likely in line with what we experienced in the third quarter regarding loan growth.

Okay. So that's not annualized?

No, no, no, no. Yes, that's not annualized. That's just gross for the quarter.

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, just given the fluid curve as well?

I believe it really ties back to the liquidity we have on our balance sheet. To reiterate my earlier comments, we have over $600 million in certificates of deposit maturing in the next six months, $1.4 billion maturing next year, and $250 million in higher cost brokered deposits maturing within the next six months. I anticipate that our balance sheet will decrease in the fourth quarter compared to the end of the third quarter as we use some of that cash to pay down higher cost deposits. Year-over-year, I expect our total loan growth for 2024 to be around 7% to 9%. If we continue with our current strategy, that figure may remain unchanged. However, I want to emphasize what David mentioned regarding the optionality we have with SBA loans and other initiatives we are pursuing that could lead to additional growth beyond that.

We have been collaborating with some of our fintech partners, particularly Jaris. We expected to launch the loan program in the third quarter, but we made a small purchase in October to validate and test the system. They are gaining new clients, which could lead to rapid growth. In the past 30 to 45 days, we introduced two new programs in the fintech sector that present potential opportunities. As Ken mentioned, there are numerous possibilities, and we're approaching things one day at a time. Overall, everything looks promising for our future.

Got it. That's helpful. And then just within that context, a high-level strategic question. Just with the momentum you're seeing on the SBA side of things and with some of the partnerships, just curious if it makes sense to maybe slow balance sheet growth, particularly just given coming out of 3Q, it seems like the loan and deposit growth is margin dilutive, and that may change and should change with Fed cuts and depending on the forward curve or depending on how the yield curve plays out. 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?

Well, hopefully, you're spot on. We have a lot of flexibility without growing the balance sheet to remix things and get higher earnings and higher yield. We can get that 10% 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 you 100%. It's 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 I don't think, being 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 into that 40 range, it doesn't make a lot of sense. I'd rather build capital and save that for a rainy day or save it for a position. We have a couple of sub-debt items coming up. We could take the extra capital and pay down some sub-debt and get the stability in the capital network. So we might have other options for it versus buying back stock.

Understood. Very helpful. And Ken, I think you mentioned expenses should be up a little bit just based on some commission costs tied to the similar SBA revenue expectations and some other investments. But just curious how you're preliminary thinking about 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?

We've made significant hires this year to enhance our SBA platform and improve risk management while adding positions nationwide to strengthen our team. This will give us a full year's worth of staff. Looking ahead to next year, we anticipate expense growth of around 7% to 8%.

I was going to guess 9% to 10%, so blend this together…

You get the ball out of the park on SBA then we'll be closer to that 9% to 10%.

Yeah.

And it's in the ballpark out on SBA, is that growing SBA revenue 5% 10% next year? Or how do you quantify that I guess?

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 got a nice bump up, which also if you take a look 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. And as they start to or we take that excess growth into next year and put it on the balance sheet, we 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.

Got it. And then just one last one, just from a housekeeping perspective, any thoughts on the tax rate going forward?

Depends on who wins the election.

Right now, we expect the tax rate for the fourth quarter to be similar to what it was in the third quarter. With increased earnings, we benefit significantly from our public finance portfolio. However, as our pre-tax earnings continue to rise, this benefit becomes a smaller percentage. Therefore, I anticipate that our tax rate for next year will likely range from a high 8% to possibly 11% or 12% by the end of the year. That's how I see it.

Got it. Very helpful. I appreciate all the color. Thanks guys.

Thank you.

Thanks, Nate.

Next question will be from George Sutton at Craig-Hallum. Please go ahead.

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 you might say firing on many cylinders. I'm just curious what you think firing on all cylinders should look like?

I think we are seeing an uptick for the fourth quarter. If the Fed significantly lowers rates throughout 2025, we could see a substantial increase in our earnings and structure. Using a racing analogy, we're on track to set a record by the end of the year. There's a lot of positive momentum on multiple fronts, and our balance sheet has been remarkably strong. We have a few minor issues on the SBA and franchise sides, but those are manageable. I believe our future looks very promising. I've had a productive conversation with someone heading my way, and I see potential opportunities. We're receiving numerous inquiries as the market stabilizes. We recently ended a relationship with a client in the FinTech space who couldn’t secure additional funding. They had a great offering but struggled to attract capital. As institutions scale back on some venture capital areas, there may be chances to acquire a FinTech or two to enhance our offerings. There are also other solid programs seeking partners that can provide the services they need. Overall, I see a wealth of positive developments within our product lineup and upcoming opportunities. Therefore, 2025 appears to be very strong.

Fabulous. I did want to say congratulations to Ken and Nicole and Ann and Tim and Nick and Dustin and Maris fellow, Indiana graduates on the seven and will start to the year.

Yes, they had their first sellout football game last year in about 50 years. There has been a lot of support for basketball over the years, but that's been quite rare. There was a lot of good tailgating, but most people would just tailgate and skip the games. Now they have a full house, which is great. Thank you.

At this time, I would like to turn the call back over to David Becker for closing remarks.

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 look to 2025 and beyond, we're extremely excited about what the future holds. Strong performance of the lending teams, including continued execution in the SBA and construction area, emerging growth opportunities with key FinTech partnerships 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. 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.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.