GBank Financial Holdings - Q2 2023

Transcript

Ed Nigro (Executive Chairman)

Well, thank you. I'd like to welcome all of those who are joining us on this call this afternoon for our second quarter of 2023 earnings call. I'm gonna start it off by talking mostly about our year-over-year results for the first two quarters, because these first two quarters have been rather unique. There's been a lot of action on banking, as we all know, from what happened back in March, and kind of turned our banking world upside down for a while and created quite a bit of concern amongst a lot of business clients for banks. Also for us, the first two quarters are a little seasonal, always have been because of our SBA business.

As I look at some of our comments today, I wanna focus on what we have done, because as I look at so many bank calls right now, there's been an enormous amount of work on their balance sheets, repositioning assets, liabilities, issues with their investment portfolio, issues with deposit runoffs, issues with protecting their bank customers. While we have seen, like all banks, some pressure on deposits, ours was more focused on we responded by giving some return, some additional return to our depositors. Even having said that, you know, as we sit today, our non-interest-bearing deposits are still north of 40%. We did respond, and we have paid attention to our depositors as well.

I wanna look at our earnings from the standpoint of the fact that we are really still focusing on our strategic plan. While we haven't been addressing repositioning our balance sheet. As a matter of fact, we've been positioning it to grow, and we believe growth will be an important part of our story for the second half of this year. When we look at some of the overall metrics, our net income was up 13% year-over-year, $5.6 million versus $5 million. Our net revenue was up 18%, $23.2 million versus $19.6 million. Of course, in our net revenue, our net income skyrocketed. I mean, that was up 87% year-over-year, $17.9 million versus $9.6 million.

You usually don't see those numbers unless you've had a merger. Our non-interest income was the, there was a bit of the anchor, but the anchor was caused by a dramatic change from what was in existence a year ago, to today. The first two quarters of 2022, we were realizing in a really great growth program on our SBA division. You know, this year, for the first two quarters, we sold $83.7 million of loans, and last year, we sold $111 million in loans. I would be somewhat concerned about that if were it not the fact that we generated $123 million in loans last year and $122 million this year. We just didn't sell the same amount because of timing.

We had 28 million more in originations that could have sold or if they were ready, which would have actually been another $1 million, $2 million or $3 million on our net income line. I wanna say, the ammunition's there, it's already loaded, and it's ready to launch. Again, it's timing. I think that, because we've also had a price difference, we were really realizing about 0.3% gap on our first two quarters this year on our sale of SBA loans, and last year it was 7.7% gap. We're starting to see the gap come up a bit.

I think that fact that the originations were there when we actually matched the originations of 2022, first two quarters, was quite remarkable, I think, given the different nature of things and what was going on in banking in March and April and May, which was a bit distracting. I believe that we'll get into some of the greater details with Ryan. I know we've built with Ryan and Jeff, I just wanted to show that our dynamics, based on the business we did, could have easily been up a million and a half more on our net income line, just with some timing of SBA sales that we already have in the bank, or with loans we already have in the bank. That's timing, and timing works for you sometimes and against you sometimes.

The other little anecdote I'd like to point out is that June 30th was on a Friday before the biggest weekend, a very long weekend now, when you consider that many people took the 4th of July weekend as a, as a five-day weekend. Many of our depositors, especially in our Gaming Division, have to arm their casinos, and especially one of our big depositors, who is in the cash management business for 150 casinos. Had we looked at our deposits five days later, by just one customer, they were up $20 million. Timing again, works for you sometimes, as I said, and sometimes against you. We're very, very pleased with our results this far, and I think you will be too.

I also think you will be very interested in how we believe we are positioned for growing in the future. Ryan, I'll turn it over to you.

Ryan Sullivan (President and CEO)

Yeah. Thank you, Ed. Good afternoon, everybody. As mentioned, happy to report solid earnings and performance for the year today, and quarter ending June 30th, which as we all know, has marked some significant shifts within the industry. I would say marked by a rapid and substantial increase in deposit pressure and competition, as we've heard many talk about. The competition in our local markets has been primarily driven by the mid and small regional banks. We remain in a very strong position to not only compete, but win new business against some of those larger competitors.

The good news is we have seen some, a great degree of stabilization over the course of Q2, you know, as Ed was alluding to, and I'll get some further details on that, we are expecting a pretty significant upshift in some of our growth metrics for the second half of this year. Also, I'd be remiss and if I didn't announce, we did go live with the GBank Visa Signature Credit Card in Q2, we're very excited about that. Anyone that's interested, please check out our website if you'd like to learn more or even apply. We're excited about the future growth in credit card and the ability to really tie into and support gaming payment and gaming payments.

In terms of the income statement, year-to-date and quarterly consolidated earnings were $5.6 million and $2.3 million, respectively. As Ed mentioned, that's up year-over-year on the year-to-date basis by 13%. What we're seeing, as Ed was saying for the last few years, is a degree of seasonality in our Q2 that is mostly tied to SBA activity. There's normally a bit of a slowdown in pipeline build that typically occurs at year-end in December, with 90-120-day close windows. We see the full effect of that in Q2. However, take a look at Q2 of this year compared to Q2 of last year, it was a 34% increase year-over-year, those two quarters combined.

Really, I think it's a continuation of supporting the resiliency of our earnings model and how we get and are getting to those earnings numbers has shifted dramatically. We've talked about this in terms of the GAAP gain on sale, non-interest revenue, you know, reducing some lower volumes in Q2, especially, you know, the pricing on the secondary market for the sales of SBA loans is down, although we have seen it tick up closer to 5% on a GAAP basis, and we think we're going to probably see it at similar levels for the next few quarters. That being said, we will see an increase in production and sales in the second half of this year.

I wanted to spend a little bit of time because I think as I've seen and heard a lot of earnings calls, the challenges in the industry as we all contend with the reality of paying more on deposits, is a lot of bank balance sheets are anchored by legacy yields on their earning assets that are far from quick to adjust. We do not have that problem. If we take a look at the NIM and the average balance page on our supplement, you can see that Q2 compared to Q2 of last year, our earning asset yield has increased from 3.9%-7.14%. So that's 324 basis points in expansion year-over-year in earning asset yield.

The components of that, our loan yield for the quarter was 8.2%, compared to 5.81% a year prior. Our securities yield has doubled and will go up from here, and obviously, our cash rates have gone up as well. We, like everyone, have seen some increased cost and cost of funding, but that increase in cost of funding is supported by our continued high level of non-interest-bearing deposits, which remain at 40%. Margin is expanding accordingly. I will say also, and we talked about this in the last earnings call, is we thought that Q1 probably marked peak NIM.

The margins that we report for the quarter are generally what we expect to see going forward, you know, as we continue to compete strongly in deposit markets, but also maintain our long-term average of 40% or better of non-interest bearing. In terms of the linked quarter, one of the things I'd highlight is, you know, we did see a decline in non-interest expenses centered in compensation. You can see a $769,000 linked quarter decrease. That just shows that our overall activity, particularly in SBA originations, are tied directly to commissions and variable pay programs.

you know, we will see some of those numbers go back up on the expense side for the rest of the year, although it will be with much higher revenue figures to support that. In terms of, you know, overall expense management, we've talked a lot about growing our employees, making investments in technology. We had the name change last year. The great news is we are through a lot of those investments now. We ended the quarter with 158 employees, and that rate of increase is going to now slow dramatically because we really have the right people on the bus to drive our significant growth going forward. As we look ahead on the income statement, we're going to focus on earnings and revenue growth.

A big uptick in balance sheet growth is our expectation. Intelligent expense control and really driving that efficiency ratio back down to our target of 60% or better. On the balance sheet, you know, really, it was flat. Total assets were flat at $685 million. Deposits were flat, down a little bit, $4 million for the quarter, as I've mentioned, up about $20 million a few days later. Year-over-year, our deposits are up by approximately $33 million.

You know, the pressure on deposits, as I said, had the effect of increasing what we pay on interest-bearing deposits, but it also did have the effect of a liquidity shift out of non-interest bearing checking accounts into interest-bearing, as even our best clients are now asking for, and I think this is reasonable, some return on their operating cash. You know, as mentioned, our long-term average is 40%, and we expect to be able to manage it that level or better going forward. The peer average for non-interest bearing is long-term, 15%-20%. Certainly our goal is to be twice or better than the peer group in our funding mix. Gross loans increased by $13.2 million. That's 12% annualized. You know, we talked about the expansion of growth and pipelines.

We're seeing that. In fact, our Pipeline grew by about 14% during the quarter. Our expanded 90-120-day lending Pipeline now stands at $160 million. We will see that continue to grow, certainly through Q3, and we may even approach the record in Pipeline we reported in the middle of last year, where we may even get up to a size $200 million in active Pipeline. Liquidity remains very strong, not only to support the balance sheet, you know, our future growth initiatives. We ended the quarter at $85 million in total cash and equivalents, which is roughly 12% of total assets. Additionally, our gross loan to deposit ratio was 83%.

Other than the subordinated loans, subordinated debt that we took out in 2020 and 2021, we have no borrowings outstanding, which means we have full borrowing capacity from the Fed, the FHLB, and our Fed funds lines, which, after moving some collateral, you know, within the next few days, is going to be well over $300 million in total borrowing capacity, which I don't think we'll need. It's nice to know that it's there. On the capital side, we finished the quarter with consolidated equity of $92.6 million. That's a year-over-year increase of 15%, purely from operating earnings and after-tax profitability. We did, you know, continue to have a negligible amount of AOCI to $231,000 on a small AFS portfolio.

As a reminder there, we report approximately 112 in total securities, $112 million. $109 million of that is in the held-to-maturity designation, a majority of which are short-term treasuries and full faith and credit Ginnie Mae floaters. You know, the short-term treasuries are maturing starting this quarter in Q3, and will roll off between now and through Q3 of next year. That's one of the reasons we expect that securities yield will be going up quite a bit over the next few quarters. As we look forward to balance sheet growth, again, managing the 40% or better NIB.

One of the things that I think that you can keep an eye out for the next few quarters is we are seeing some opportunities to retain larger portions of SBA guaranteed balances, which we designate on the balance sheet. Don't be surprised if you see that line item start to grow rather dramatically over the next few quarters, and overall escalating growth rates to support our Lending Pipeline and, you know, liquidity and Deposit Initiatives. A couple words on asset quality. You may have noted our NPAs did tick up to $7.1 million in the quarter. Other than a small $100,000 business loan that migrated into NPAs, it's the same 2 7(a) loans that we've been reporting on.

The increase was really us buying back the guaranteed portions off the secondary market, so we can manage the liquidation of those assets ourselves directly. We expect that those dispositions to happen in the next 120 days. The $7.1 million of NPAs, of that, $5.3 million are guaranteed balances. We feel good about our overall position here. You may have noted, after having no provision in Q1, we did have a small $408,000 ACL pre-provision in Q2. About half of that was related to loan growth, approximately $200,000 was related to expected disposition costs on the NPA. We are well marked there.

Overall, the ACL to loans stayed flat quarter-over-quarter, both on a gross loans basis and net of guarantees. The hospitality book continues to perform very well. Summer months are typically very good months for our hospitality borrowers. A lot of interest in office exposure. I know that's been coming up in a lot of earnings calls, so I just thought I'd quickly mention, we have very limited exposure in office overall, approximately $35 million in total outstandings, or less than 8% of total loans. I will say, if you like our metrics on SBA, you'll love our office metrics. Our weighted average LTV for office is less than 53%. Average debt service coverage of 3x or more.

The breakdown between that portion of the loan book is 43% owner-occupied, and the rest, 57%, non-owner occupied. With that, I'll turn it over to Jeff, and we'll get into some of the details.

Jeff Whicker (EVP and CFO)

Thanks very much, Ryan. Good afternoon, everyone. We talked about the current income profitability raising about 13.3% year-over-year. I'm going to break out some of those numbers that maybe Ryan skimmed over a little bit, give you a little more detail. When you look at the net interest income overall, we saw that increase. It was $8.6 million for the quarter, $17.9 million year-to-date. That's a year-over-year increase of 87% or $8.3 million as discussed. That's a pretty large increase. You know, we saw that net interest margin spike up close to 6% last quarter.

We did agree that that was an unusually high net interest margin because we hadn't seen the deposit rates adjust nearly as much as we were expecting them to, and we have seen now a lot of that deposit rate adjustment come in as deposit rates increased about 54% on our cost of funds for the quarter. That brought us to that normalized kind of number of about 5.37% that we really do anticipate going forward for our net interest margin overall. That's 245 basis points over the prior year. We're seeing a lot of expansion in that net interest margin that does allow us the opportunity to continue to grow and continue to see the bank grow overall.

As we look to the future and at all of our yields, our yields are super strong. We're getting Fed funds on our cash. We're getting 4% or better on our securities currently. Our security is very short-term in nature, so we're going to be able to reprice those probably even to higher rates as they mature going forward. We'll talk about that a little bit more in a second. As we look over the non-interest income, now, non-interest income, of course, has been our challenge. The great news is that I think we've seen that bottom out in the first quarter as it was kind of a really difficult quarter. A lot of the buyers, you know, pulled out of the market, and the rates really kind of plummeted the sales rates.

We did see about 113 basis points of growth in that sales rate in the current quarter. We really do believe that that has bottomed out. We're going to start seeing that more normalized going forward, which will allow us to really continue to bring profitability in from the SBA perspective. That will continue to be a strong product for us going forward. Non-interest expense, Ryan talked about that decreasing in the current quarter by about $728,000. About $300,000 of that was really staffing, that we were able to capitalize on the implementation of our core processor for our credit card product.

Another $300,000 was reversals of commissions, just that we were able to take based on trajectories of the growth overall. The year-over-year, we did see a 29% increase in that number, and I just want to kind of point out, you know, we did have that increased staffing, and that increased staffing is very critical to the bank as we look to the future, our investments that we've made in people and processes and, you know, the implementation of the new products that we've got out there. As we look to the future, you know, we're gonna really grow that. We've talked about the efficiency ratio at 68%.

You know, we are going to bring that or that efficiency ratio down below the 60%, but we're going to do that not by managing our earning, our expenses so much as we are going to do that by increasing our revenues. That's really as we look to the future, what we've been planning on doing for the last about 18 months, and we are now poised and prepared to execute on that plan going forward. Looking at the sensitivity, I want to talk a little bit about sensitivity of the bank. As we modeled, in our most recent quarter, if with the rates up 200 basis points, we would expect our net interest income to go up about 16%.

If that same rate's down 200 basis points, we would expect our net interest income to go down about 17%. The important thing about that number is that that's about 50% of what it was 12 months ago. We're moving that asset sensitivity back to a more neutral position, as we work to bring some additional, you know, longer-term fixed rate assets onto the books. We want that more neutral position as the interest rates in the industry have increased so significantly. What that will do is it'll protect us in that rates down environment as if rates were to start significantly dropping again, we wouldn't see that significant impact all the way through the margin in the future.

We're going to continue to move that to a more neutral position over the next probably 12 months as we bring on some additional assets. That's a very important, I think, movement for the bank as we look to the future. We have some very significant returns. Our ROA, 1.34% for the quarter, 1.67% for the year. ROE came in, return on equity came in at 12.57% year-to-date. Those returns have been super strong, and those are returns with the bank significantly investing in its future. A lot of times when companies have to do that, they have to sacrifice that strong return to their shareholders to in order to prepare their bank for or their company for growth.

I think that puts us in a strong position. You know, when you look at the balance sheet overall, we talked about the loan growth, we talked about, you know, our deposits and where we sit right now, from a deposit standpoint, our uninsured deposits have come down slightly. We're looking at just under 50% on uninsured deposits. We talked about our liquidity levels and how we're going to be able to grow those. We anticipate that by next week, we'll be able to produce, re-replace about 72% of our total deposit base within hours, if we needed to. Now, we don't anticipate needing that because of the core, you know, customer base that we have, being super strong, but we do sleep better knowing that that number is in place.

Investment securities, you know, $65 billion of those are under 15 months in months to maturity. $10 billion of it will mature in a week. $97 million of our $112 billion are fully backed by the United States government, and our current total unrealized loss on the entire portfolio, net of tax, is $1.8 million. When you compare that to the other banks that are out there in the industry, we have a super strong securities portfolio at super short nature. We are not sitting with the risk on investments that a lot of banks out there are sitting on currently. You take that, you combine it with the asset quality. We have super strong asset quality still.

You know, we've seen some losses, comparatively speaking, you know, it's way better than even our own expectations going forward. We have a strong allowance. We've got the ACL at 1.56%. We feel like we're in a very comfortable position there. We've got equity. Equity kind of rounds out the balance sheet, and it continues to grow with earnings every single quarter. Quarter-over-quarter, we've got a bank Tier 1 leverage ratio of 15.71%. That's super strong. We can take this super strong balance sheet, our really strong deposit customers, and, you know, the management team we've got here, and our plans, and all put together, and we are ready and poised to really execute on a strong growth plan in the future.

we'll be able to turn that into continued strength for returns for our shareholders. With that, I'll turn that over to you, Ed, to talk about Fintech.

Ed Nigro (Executive Chairman)

Well, thank you. We have part of our discussion on our Gaming FinTech division. There has been a lot of movement in that division in the last 6 months, or actually with Sightline, the last 12 months. Sightline Payments, as you know, was one of our very first contracts in Gaming FinTech. We issued the prepaid cards that are embedded in Sightline's mechanisms to load the various customer apps that are in gaming, FanDuel, DraftKings, BetMGM, BetNational, William Hill. The list goes on and on. We had reached a peak of about $75 million a month in loads back in April of 2022. At that time, a couple of things happened to Sightline, which were a change in the nature of the business. 70% of Sightline's loads were through credit cards to the debit card.

When the credit card companies changed the merchant code, it was applied to loading these prepaid cards, which were issued by us, which were up to that point, they were financial transactions, and so they were very inexpensive to do. All of the issuing banks, the various credit cards, had no issue with loading a financial instrument. When it was changed to the gaming code, the 70% load factor went down to about 15%. They lost an enormous amount of the loading mechanisms to load the prepaid card. The prepaid card switched to debit card loads, but the debit card users were much different economics than the credit card users, because the credit card users were credit-worthy customers, and many times debit card users are more cash than credit-rated customers. The spend and the loads went down substantially.

Our loads now have been seeing, about $40 to million to $35 million a month. That's in the off season. Sightline's deposit activity has declined about 40%. We knew, and Sightline knew this was happening, and Sightline has been trying to pivot to make sure that they stay relevant in the industry, and we believe they will, by pushing it, their new wallet that they're working on, that will be that they want to see work with various bricks-and-mortar casinos. They're not when I say they're not, and can no longer rely on being one of the primary mechanisms for loading these gaming apps, but they do have an important spot still as a prepaid card in these wallets because it is the point-of-sale exit for a wallet.

You either have a credit card or a debit card, when you want to do point of sale or retail activity with your wallet. They're focusing on that. They're working to diligently improve their wallet. They've launched it with several bricks-and-mortar companies, but they haven't gotten any adhesive just yet to the customer. The customer is not overwhelmed with the way they work yet, so they realize they have a lot of work to do. We've seen this coming as well for some time, and that's why we were focusing a lot on our Pooled Player Accounts. If you remember the old Oregon story, where we brought Oregon live by putting the player accounts in a bank, and the wagering accounts in a bank, controlled by the player, with the account in the name of the banks.

BCS patented that process. Our process and what we do in our Gaming fintech division is bring gaming and bring banking solutions to these gaming apps. An interesting thing happened, because what we were focusing on was telling these big gaming companies, Look, like DraftKings, FanDuel, BetMGM, and others, that why would you want this liability of all these wagering accounts on your books? Why wouldn't you want to give the consumer protection against any failures and put the funds, and hold the funds in banks, with consumer protection from the FDIC?

What w e were overlooking, and I think we realized as we started our pivot, because we also started a process of not only doing Pooled Player Accounts, but doing Pooled Consumer Accounts, with the same technology and the same with a new patent, which we've, BCS has accomplished. What the consumer accounts they do for the consumer in a payments arena, the same thing they would have done and will do for a gaming app, that is when someone goes to put money in one of these payments apps, it goes to their own bank account. It goes to their own account in a Pooled Player Account in the bank, that this app isn't holding the funds, there's not the stored funds.

Some of you may have seen the CFPB spotlight that came out June 1st, talking about the concern they have for stored funds in all these payments apps. They didn't mention gaming, they mentioned a lot of payment companies that I won't mention, but you can read the bulletin if you want to see who they were. The fact is, there's enormous amount of stored funds on these apps and in these companies' names, dollar-billions upon billions. They are, in essence, acting as banks. They're investing them, they're borrowing them, they're using them because the flow is enormous. The stored funds are quite large, and the consumer is using them to pay bills. The stored funds become extraordinarily large. We saw this on the consumer side as well, but ...

The interesting thing is that many of these funds are held in quite a few banks, and when the bank crisis happened, just like some of the businesses with SVB Bank demanded that they pull their deposits out, or did the bank make them safe? What did many of these banks do? Regionals, big regionals and some large independent banks, they pushed these deposits out of these companies on IntraFi, so that they could go to the company and say, Well, all right, we're holding $200 million or $300 million or $400 million, or whatever the number might be, or $1 billion of your money in various accounts, operating accounts, and we pushed them all out in IntraFi now, and they're all FDIC insured." The consumer, though, is remember, is not the one insured.

What that money is protected against is a bank failure, but it's not protected for the consumer against the failure of the company. If FTX had all their money out in various consumer and various accounts to protect against bank failure, their failure didn't save, wouldn't have saved one of the dollars that all the consumers lost. This story is not over yet, but it sort of changed the metrics a bit for us. One of the things that we find is that many payments companies, the big ones included, are also starting and using and putting out and creating different mechanisms for other companies to use to become payments companies, have their own wallet or be able to use a wallet to benefit their own companies, and those all need banks behind it.

The stored fund issue is not gonna become as big an issue, because our solution, which we now have, where we take the consumer money and we put it in an account held by the bank, administered by the bank, and the funds are in the consumer's name. That is gaining traction. Our Consumer business has the potential to be far, far bigger than our Gaming business. Our Gaming business is not over by a long shot. We pulled back on pushing it hard with some of the big players because they, too, have enormous amounts of stored funds that they're using. They're using them in accordance with certain gaming regulations, too.

As long as there's a use for these funds, the consumer is, if the consumer is not concerned with the company, and the company has their business monies protected, then the consumer feels more protected. That'll last until there's the first big failure. Unfortunately, they happen. At the same time, the smaller companies that we are finding, and I'm not talking about small companies, I'm talking about companies, as an example, we're working with a consumer company that wants to create a wallet for a healthcare company in order to pay their employees and another wallet for their patients to be able to pay through their insurance company, their own bills. We are looking at issuing prepaid cards and creating a PPA account attached to them for those customers. There is a great deal going on out there.

This payments world is just starting, and the protection of the consumer is just starting. We now have deposits that all the deposits that have run off from Sightline, we've replaced with other deposits, and those deposits are growing faster than any of our faster than the losses we've had with Sightline. Sightline's not done. We believe in them. We believe in their prepaid product. We believe that the prepaid card, which we are now an issuer of Visa, Mastercard, and Discover prepaid cards, we were just approved by Visa as well. Also we are a Visa Signature Credit Card issuer.

Our credit card, the cards, the initial cards we have launched, where we have gone out and said, this credit card, this Visa Signature Card, the average customer has a $10,000 credit limit with it. This Visa Credit Card will load your gaming account. We've had a few cards of existence for parts of July, 70% of the activity is loading gaming accounts. It's working. Our initial testing is looking very, very promising in terms. The average customer is spending four times what the normal customer does on these gaming apps. We know we're headed down the right path on the consumer side, on the gaming side, and the ability to grow this as an important payments arm.

Our technology is really the banking solution for the technology. We're dealing in things we really know how to do. We know how to manage these accounts. We know how to do the settlements. We've been doing them. We've settled $billions in this already. We know what we're doing, we know that it works, and we believe that we'll be making greater and greater inroads. I wanted to explain it in a little detail for you because, you know, we've always said there's three legs to our stool: the Commercial side, the Commercial lending, the SBA lending, and the Gaming FinTech division. It's gonna be Gaming, Consumer Gaming, FinTech division. We see our consumer accounts growing really larger than our Gaming accounts. Having said that, this is going to take time to build.

We've maintained our running average of about $50 million in deposits. We had programmed this year, we wanted to reach $100 million before the end of the year. We may not reach that goal this year, but we think that that goal is going to be far more achievable than we even thought before, and I'm not just limiting it to $100 million in deposits. I also believe that, you know, this credit card launch, even from the initial 60 cards we have, we see that the pattern being 70% loading the Gaming, and that's what we want. We see that the average card is having, you know, $1,500, $2,000 in transactions, some as high as $7,000.

We believe that we are on the right, correct path. We have the correct technology, we have the correct banking skills, and we have a product that the consumer is really going to need and want. The CFPB doesn't want all these stored funds being used. When a consumer wants to pay a bill, they expect they're giving the money to that payment company to pay the bill. They don't know that money is being invested, loaned. They're basically acting as banks. We know the smaller companies aren't gonna be able to have that luxury. They're gonna have to protect the consumer, and we're gonna be there for them to do it. With that, I know we're about used up our 30 minutes.

I'm sure a little more, but I wanted to open it up to any questions that any of you may have.

Speaker 3

Hey, guys, this is Brad. Can you hear me?

Ed Nigro (Executive Chairman)

Yes, Brad, how are you?

Ryan Sullivan (President and CEO)

Hi, Brad.

Speaker 3

Doing good, thanks. you know, I noticed on your loan yields for the quarter, they were down from the previous quarter. For one, why is that?

Ryan Sullivan (President and CEO)

I would count on you to catch this, Brad. The answer to the question is in Q1, we actually had a few, including one rather notable commercial loan payoff that happened, excuse me, in Q1. We actually had on one loan a realization of prepayment penalty of $200,000, and that hit in Q1. The other would be the composition. I mean, overall, if you look at interest revenue, quarter-over-quarter, it's up by nearly half a million. We did start to see, you know, average balances shift a little bit more outside of SBA, which instead of having, you know, a 9% or 10% yield, quite often has about a 7% yield.

Really two big things, the $200,000 prepayment that was realized in Q1, and then a bit of a change in shift on the average balances quarter-over-quarter.

Speaker 3

Okay, great. Thanks. I'll just keep on going. Normally, I'm the only one asking questions, so I'm just gonna shoot.

Ed Nigro (Executive Chairman)

Sure.

Speaker 3

You guys mentioned a couple of times about the really big growth you have going forward. Can you quantify, you know, like, what should we expect, whether that's deposit growth, loan growth, you know, for the end of this year and maybe into 2024?

Ed Nigro (Executive Chairman)

Let me start with that, because these are forward-looking statements, and obviously we want to be careful in the sense that we say things we can say right now. We mentioned earlier, and where you're gonna see it is that, and Jeff mentioned this, we are doing so well because we have an asset-sensitive balance sheet. We spend a great deal of time making sure we had an asset balance, an asset-centric balance sheet, meaning that as interest rates went up, our earnings went up. As you can see, huge jump. $330 million of our balance sheet loans are adjustable rate. We're gonna be looking at easing that. When I say easing that, shifting that sensitivity a bit.

When interest rates go up and if you stay stagnant, when interest rates go down, you'll see the retreat, just as Ryan mentioned, could be just as volatile. We're going to be instituting programs to grow our fixed-rate portfolio. We also are looking at other ways of growing our, a guaranteed loan portfolio. We'll be publishing a little bit more on that as we firm it up.

Ryan Sullivan (President and CEO)

Yeah, broad strokes. I would say, you know, we've long, you know, talked about 30% CAGR. I think that annualized, we'll start to see 30% CAGR, Brad, starting back again in Q3. You know, I made the mention of guaranteed loans on that we retain on the book. You know, I believe between now and year-end, that number will double.

Speaker 3

Okay. As far as SBA originations, should we assume, like, current originations at this quarter, at $50 million a quarter?

Ryan Sullivan (President and CEO)

No, we'll do, you know, much higher than that in Q3 and Q4. I think that overall, you know, originations were kind of hit the low mark in Q2, as we described. You know, we'll be looking at probably more. In terms of the origination side, we'll be looking at closer to $100 million, maybe slightly below that, between $80 million and $90 million per quarter for the next couple of quarters.

Speaker 3

Okay, great. Out of that $80 million-$90 million, do you anticipate retaining half, maybe?

Ryan Sullivan (President and CEO)

Probably about that. That's probably a good ratio to think about going forward. you know, the part of that is we're winning some new business, you know, within the 7(a) program, with fixing some rates at very attractive yields, and there's not really a sellable market for that. Particularly in Q3, I think, you know, you know, probably near 50% will be retained as opposed to sold.

Speaker 3

Okay, got it. Did I hear you correctly, that you were thinking net interest margin could be kind of flattish from this level of 5.50%-ish going forward?

Ryan Sullivan (President and CEO)

That is our expectation, yeah. We obviously, you know, we had double-booked with the FOMC release today. That's probably why Mr. Powell isn't with us. I think that a lot of that expansion, obviously in the SBA book, any Fed moves this quarter will go into effect October 1. We think a lot of that margin expansion or revenue expansion on earning asset side will probably be dialing back into deposits for growth. We expect margins to be generally flat for the rest of the year.

Speaker 3

Okay. That probably assumes greater yields on the loan side, given the rate hikes, and it assumes 40% non-interest-bearing, kind of those non-interest-bearing deposits staying relatively flat. What does it assume regarding costs on your interest-bearing deposits? Like, how high does that go? I think they were 3.17% for the quarter.

Ryan Sullivan (President and CEO)

Yeah, that's the interest-bearing. I think that that's gonna. You know, it might tick up a little bit, but generally, that's a good place to start. If you look at the overall cost of funding just for Q2, which includes the effect of non-interest-bearing, our overall cost of funding for the quarter was 1.77%. We might tick up a few basis points from that, you know, that will largely offset the increase in earning asset yields.

Speaker 3

The tick-up in non-performers, I believe you said most of it was guaranteed, but I thought $1.9 million was non-guaranteed. Can you just give some detail about that credit, and is there any expected loss?

Ryan Sullivan (President and CEO)

No, there isn't, actually. We've got verbal indications, actually, that are better than what we're marking on the ACL right now, you know, we'll cautiously move forward with that liquidation. That should take about 120 days. Like I said, there's a small C&I loan in there, that's fully marked, the really, the major component of that $7.1 million is those two SBA loans that, you know, $5.4 approximately is guaranteed, and we are fully commercial real estate collateralized, we do not expect losses moving forward from here on those.

Speaker 3

Okay, great. Just a couple more from me. What are the balances of the PPA deposits now?

Ed Nigro (Executive Chairman)

They, we gave the averages, they go up and down because of one of our clients who provides cash management to 150 casinos, but they're averaging about $47 million right now.

Ryan Sullivan (President and CEO)

Well, that's total gaming. If you exclude some of the other partners, I would say just PPA.

Ed Nigro (Executive Chairman)

PPA. Excuse me. I, you know, the total PPA is running about.

Ryan Sullivan (President and CEO)

$25 million.

Ed Nigro (Executive Chairman)

Let's see, $20 million, almost $30 million.

Ryan Sullivan (President and CEO)

About $30 million, yeah.

Okay.

Ed Nigro (Executive Chairman)

Growing? Yeah.

Ryan Sullivan (President and CEO)

Yeah.

Ed Nigro (Executive Chairman)

That's pretty nice.

Speaker 3

Yeah. It seems like that's about where it was last quarter also.

Ed Nigro (Executive Chairman)

Yeah.

Speaker 3

What type of traction are you getting?

Ed Nigro (Executive Chairman)

What was that? What kind of traction?

Speaker 3

What type of traction should we assume as far as, like, growth in this area?

Ed Nigro (Executive Chairman)

Well, we have a wonderful pipeline of companies that are coming to us for PPA. So we haven't quantified that pipeline like we do the SBA lending in terms of deposits. What we're trying to do is quantify it really in terms of the companies that are coming on board. Now, remember, for every company that comes on board, the PPA fees they have to pay, there's a PPA fee they have to pay, and their deposit expectations are, I think, what? $1 million-$2 million per customer, just to start...

Ryan Sullivan (President and CEO)

Yeah.

Ed Nigro (Executive Chairman)

As a minimum. Right now, we have about seven customers that we're trying to board.

Speaker 3

Okay, great. Great. let me just switch to the credit card. You mentioned that 70% of the activity has been for gaming. What's the decline rate? I know that was a problem.

Ed Nigro (Executive Chairman)

Go ahead, Brad.

Ryan Sullivan (President and CEO)

The decline rate's high. We, you know, we definitely have shot with a rifle on the credit card product. Obviously, it's prime and super prime. We're seeing that with the approvals. Our weighted average FICO so far is north of 760, which is great. You know, in a broad invitation to apply, we're getting a lot of applications with people that have FICOs in the mid-500s, which we don't have a product for that. The decline, you know, rate on the applications is, you know, what we've experienced so far, it's a small sample set, but it's.

It's north of 80%. About half of that is credit decline, but the other half approximately are KYC, you know, identification declines.

Speaker 3

What should we expect going forward with this credit card rollout?

Ryan Sullivan (President and CEO)

Well, we're really bullish on it. You know, we've modeled that as a, you know, breakeven, 15,000 accounts. We think we might actually do better than that, based off of what we're seeing early on in terms of the composition spend. With 70% of the spend being in gaming, obviously, the net interchange is a big component as a credit card issuer. That net interchange is much richer in the Gaming environment, which is, you know, we're obviously encouraged to see that. We think that we could be looking at breakeven, you know, certainly in the next 12 months.

Ed Nigro (Executive Chairman)

All our test marketing have only been emails. We haven't marketed, we haven't advertised, we haven't spent. You know, we haven't gone into social media. We haven't gone into the sites. We haven't gone into. We're just starting to have some discussions on branding for some of the gaming companies. We're just starting, Brad, so we can't really. What we're looking at right now is some of the test marketing programs we've done to see. What we really wanted to know was to see if they're going to really use it, what we had hoped, and there was really a demand for it out there, and that will be to use it to load your gaming app.

Speaker 3

Right. Right. How many accounts do you have right now?

Ryan Sullivan (President and CEO)

Oh, it's less than 100. I mean, it's very slow so far. I will say, in addition to that, you know, in as much as we could see some big bumps in volume, you know, there's still some significant operators.

Ed Nigro (Executive Chairman)

Yeah.

Ryan Sullivan (President and CEO)

that don't have a credit card of their own.

Co-branded credit cards are a pretty big opportunity.

Ed Nigro (Executive Chairman)

Yeah. The interesting thing is the average credit per card, you know, it, the credit available is over $10,000 a card.

These are good. The ones we're getting are the ones we want, the prime and super prime.

Speaker 3

Right. Perfect. Thanks, guys. I will open it up for other people asking questions.

Ed Nigro (Executive Chairman)

No, thanks, Brad. We always welcome your questions because you know, you ask what other people are thinking as well.

Ryan Sullivan (President and CEO)

You bet. Thanks, Brad. Any other questions?

Ed Nigro (Executive Chairman)

All right. Well, we'll see you next quarter, so hold on. Stay tuned.

Ryan Sullivan (President and CEO)

Thank you, everyone.

Ed Nigro (Executive Chairman)

Thank you.

Ryan Sullivan (President and CEO)

Have a great day.