GBank Financial Holdings - Q3 2023

Transcript

Edward Nigro (Executive Chairman)

Ladies and gentlemen, I'm going to start our Q3 Earnings Call for GBank Financial Holdings. In the room with me, of course, is Ryan Sullivan, our President and CEO of GBank Financial Holdings and GBank, and also Jeff Whicker, our Chief Financial Officer. This was a very unique quarter for us because there were a lot of moving parts, and I wanted to open by talking just a little bit about a very important pivot that we did in Q3. As we were coming through the middle of the quarter, we started to see the gain on sale prices for our SBA loans dropping precipitously. As a matter of fact, the GGAP gain got as low as, I think, 3.5%, 3.6%. You know, this is sort of an awakening when we're writing loans.

As a matter of fact, during Q3, we produced over—our production was over $81 million in our new originations for Q3. Of course, those sales come in later quarters. But having said that, these loans are being boarded at 10%, 10+% interest, and you can see that at 3.5%, to hold the loan is very accretive, very fast, 90 days in some of them. So we knew that by not putting as many loans up for sale and retaining them, that we would have an impact on this quarter, but we also knew that even selling as many loans as we sold last year, the returns would be far less, extraordinarily less. As a matter of fact, Q3 of 2022, we did $3.2 million in gain on sales.

In this quarter, we did $750,000. Our earnings didn't drop, you know, $2.9-2.7 million for a lot of important reasons. One of the things we tried to do was retain more of these loans, the guaranteed loans. The second part we saw was that there were requests for refinancing out in the marketplace. We made refinancing available to our loans that were in our servicing asset. Remember, we have over $700 million of SBA loans in our servicing asset, for which we receive a 1% fee.

What we began doing during Q3 was offering those who were looking for refinancing a fixed rate, somewhere between 8.55% and 8.75% on a five-year loan, and buying that loan back from our investors at par. So as a matter of fact, that program has become so successful, you're going to see that in the month of September, we grew our guaranteed loan portfolio from, excuse me, in Q3, from $47 million, which was what we used to carry on an average on our balance sheet, to $91 million. And the interesting thing is, already in September, we've already added, I mean, in October, another $80 million. So this is a growth in our guaranteed loan portfolio that we set to exceed $200 million by the end of the year.

And these are at a very, we're converting a 1% fee, if you will, or a 3.5% gap gain into an extended 8.75% or 8.55% interest. And it's not hard to see that that math is going to add up real fast, especially as we grow our balance sheet. The other beauty in this methodology is that we're going to secure a significant interest income in the future quarters increase, but we also, these are guaranteed loans, and as a guaranteed loan, you know, we are not increasing the risk to the bank from a loan, and a reserve asset. So it's a very, very important move for us, in which we're changing the nature of our balance sheet, and we're going to see it result in significant, we believe, interest income.

Now, we are not done selling SBA loans by a long shot. As I told you, our production was $81 million in Q3, which, you know, annualized out, is at a runway to $320 million, which is what our goal was for this year. The second quarter was a little less than the $81 million, but at the same time, that program on the top line is not declining. So we've been able to manage and increase our assets and increase our earnings, but we saw the decrease in the effect of it in Q3. Well, I wanted to give that introduction because that made the most difference.

When you look at our sales from $3.2 million, as I said in Q3, which is one of our largest quarters ever, of guaranteed loans, to $750,000 in round numbers, it's a dramatic change. But we've seen the power of our loan portfolio, and we've got some other very interesting things to tell you. And with that opening, I'm going to turn it over to Ryan to talk to you, more about the balance sheet meetings.

Ryan Sullivan (President and CEO)

Thank you, Ed. Hello, everyone. Well, as reported, Q3 for GBank Financial, net income of $1.8 million, diluted earnings of $0.14 a share. Greatly impacted by gain on sale, as Ed indicated, and I'll get into some details on that in just a moment. For the first three quarters, translating to $7.4 million of net income or $0.57 and 0.58, diluted and basic respectively. You know, income certainly was below our long-term expectations in Q3. Gain on sale is probably the area to focus on the most because that's had the largest departure from our run rate in prior periods. And it's really born out of, as Ed mentioned, the two things.

You know, the first was an election that we made to hold a much larger percentage of originated loans. And then secondary pricing, which, outside of probably three weeks beginning in mid-March, these loan prices gapped. The price for the quarter of $3.36 is the lowest I've ever seen. As Ed mentioned, he referenced, you know, whenever we have a loan, as we originate it, we do a buy-sell analysis on every single loan, and one of the things we look at is the payback period. How long, if we held that asset, would it take for us to recoup in net interest income what we would be foregoing in gain on sale?

In the most extreme cases, as Ed said, it's 90 days, but even, you know, kind of the worst-case scenario in the current environment is about six months. So, you know, when we consider 3.36 on gap gain on sale, and the fact that these earning assets are very solid, 75% guarantee, you know, that's been a big part of the story, and that story will continue into Q4 and set us up for some significant net interest income expansion as we get into next year.

The gain on sale issue in terms of the reduction, you can see $763,000 for the quarter, a 53% reduction compared to the prior linked quarter, and a 76% reduction compared to the $3.2 million in revenue that we generated in Q3 of 2022. Now, on a year-to-date basis, it's kind of interesting to consider, you know, that $763,000 for the quarter takes us up for year-to-date 2023 gain on sale of loans of $4.4 million. That's a $7.4 million reduction compared to the same three periods, three quarters of the prior year, 63%.

So in other words, we had a $7.4 million revenue hole that we've been working very hard to fill, and margin expansion and increasing our earning assets is how we have done that. You can see that same period year to date, our net interest income increased by $10.8 million year-over-year. So our net revenue, which considers both, actually increased year-over-year from $30.4 million for the first three quarters of 2022, to the $34 million that we're reporting for the three quarters ending 9/30/2023. So you know, just a significant change in the composition of the revenue.

You know, the election to hold a higher percentage had an impact on obviously the gain on sale as well as earnings overall. Just kind of a what if, if you take a look at the linked quarter, we did $68 million in total originations in Q2. That related to $35.7 in sold volume for Q2, and compare that to 81.1 million in originations in Q3, and only $22.7 million in sold volume. Now, if we had just held the same sale rate, you know, which essentially and historically we generally sold nearly 100% of eligible loans as they become available for sale.

If we had held that same sell rate in Q3 that we had in Q2, that would—even with the depressed prices of 3.36, that would have translated to additional pre-tax GAAP revenue of $1.2 million. On a tax equivalent basis, that equates to $0.07 per share. In addition to that, if we had sold that volume and prices hadn't declined as they did, from 4.5 to the 3.36, that would have translated to an additional $680,000 pre-tax, which is $0.04 per share. So you can see the decisions and the impact that it's having on short-term earnings, but will have a significant impact on earnings in Q4 and in 2024 in a very significant way.

So combined between those two factors, and if we had sold the same sale rate and the prices hadn't declined, those two equate to $0.11 combined on a per diluted share basis. So as Ed referenced, we also during the course of the quarter, in addition to holding a larger portion of originated loans, we started the SBA Change in Terms program. He highlighted that. What we've seen this year as rates have gone up is we've seen an accelerated level of prepayments. It's had a relatively minimal impact on the balance sheet overall because most of those guaranteed balances for previous is sold.

You know, if we look at Q3, and this kind of gives you an indication of some of the prepayment activity that we've had, we had a total balance sheet effect on SBA loan payoffs during the quarter, totaling $10.6 million across 20 loans. So, what the Change in Terms program does several things for us. It allows us to help our borrower convert a quarterly variable rate loan to a 5-year fixed, and fix that rate at a lower rate than what they're paying today. If you think about, you know, our vintage origination going back over the past three years, our average origination pricing on SBA loans was typically around prime + 2%.

So a lot of those 10.5% loans are talking to us in terms of converting their loans and, changing that to a 8.55%-8.75%, five-year fixed loan. So in terms of, margin expansion, you can see, obviously we expanded the size of the balance sheet. The combination of all of these effects, even in a very competitive deposit rate environment, produced a net interest margin expansion of 32 basis points to 5.69% consolidated. Gross loan growth during the quarter of $66 million, or unannualized 14%, as Ed alluded to. That rate is going to, escalate going in, into Q4 on the guaranteed portion of the portfolio, which is now $91 million. We effectively doubled that in Q3. We will more than double it again in Q4.

So we will have approximately $200 million in guaranteed on-balance sheet loans by the end of this year. With that, I'll turn it over to Jeff, and he can go into the finer details. Go ahead, Jeff.

Jeff Whicker (EVP and CFO)

Well, thank you, Ryan, and welcome, everybody. Good afternoon. I'd like to start actually by kind of focusing on the balance sheet. So GBank, as we talked about, ended the quarter at $729.3 million in total assets. So the asset increase of $44.4 million during the quarter was mainly due to the loan growth that Ryan actually just alluded to, with the $81 million in new originations and $21 million in repurchased guaranteed balances. Our pipelines remain super strong, and we anticipate that loan growth to continue with those guaranteed balances doubling by the end of the year. But as we look at deposits, our total deposits increased by approximately $41.2 million during the quarter.

Now, as expected, the deposit market is getting more and more competitive, and so due to the strong loan growth and the competitive nature of the deposits, the bank has brought in an additional $32 million of Brokered Funding during the course of the quarter, bringing our grand total up to about $72 million. Now, of that $72 million that we got in brokered funding, all of it is either callable currently or is going to be maturing within the next 12 months. So it's pretty short-term in nature, and that will allow us to hopefully refinance those costs at a lower rate in the future as we continue to work our deposits. Our cost of funds continues to creep up at approximately 2.26% in Q3 and 1.85% year to date.

This represents about a 30 basis point increase for the quarter. Our uninsured deposits came in about 36.3%, down slightly from the 43.25% that we reported in the prior quarter. Non-interest bearing to interest bearing deposits came in about 35.7%, and our loans to deposits came in at about 87.9%. So we still do have room to continue to grow, and we expect to be able to utilize that space through the end of the year. As we look at the securities portfolio, our securities portfolio decreased by about $10.8 million during the quarter. That was mainly due to two maturities on one-year Treasuries for about $10 million.

We do not anticipate any additional maturities in our securities portfolio until the month of February of next year, at which time, between February and June, we should have about $40 million of low-yielding Treasuries that will mature, and we'll be able to reinvest those at higher rates at that point in time. Overall, yield on the portfolio have, however, came in at 4.03% for the quarter. That's compared to a peer average of 2.46%, and that puts us in the 94th percentile for our securities portfolio. So we are still very competitive in that, in that market. The OCI held relatively flat at $270,000, with total unrealized losses on the total securities portfolio of about $1.69 million after tax. Equity is remaining strong.

Our holding company's equity to assets of 12.97%, combined with the bank's Tier 1 leverage ratio of 16.81%, shows that the bank has significant capital to keep moving forward with our current plans. This compares to a 10.51% peer average in the market, which is about, puts us in about the 96th percentile from an equity perspective. Our equity increase is mainly due to earnings from both sides, but we did have a downstream capital infusion of $2 million that came from the holding company to the bank during the course of the quarter. Balance sheet remains strong. We have started shifting temporarily to the short term, holding the loans rather than selling them.

But we do anticipate shifting that back as the loan markets strengthen, hopefully in Q4 and the beginning of next year. Income overall came in, as Ryan said, at $1.8 million, or $0.14 per diluted share. As we break that into its components a little bit, we talked a little bit about the net interest margin. Current quarter-over-quarter net interest income increased 10% to $9.5 million, compared to $8.7 million in Q2. Our net interest income is up both quarter-over-quarter and year-over-year, as the bank does continue to produce high yielding assets and reaps the benefits from the Fed rate increases that we've seen over the last year.

This has increased net interest income by $10.8 million year to date over prior 2022 year to date. The increase in yield on earning assets is partially impacted by the repurchase of the guaranteed loan balances that we talked about. So when we repurchase these SBA loans on the secondary market, we're required to write off both the servicing asset and the remaining discount on the loans. And both of those net to a very small number, but they hit two different places on the income statement, so it slightly inflates our yield on earning assets. About $140,000 of our net interest income was related to that. And that would have impacted our net interest margin.

It would have been 5.61% as opposed to 5.69% without that extra income. But that's offset by about $156,000 on the servicing rights that we'll talk about in the non-interest income portion. GBank has seen a 200 basis point expansion in net interest margin over the last 12 months at that 5.69%. When you compare that to the peer at 3.5%, that gives the bank a 217 basis point advantage over our competitors. Now, what does that mean to the bank's overall sensitivity? So sensitivity, we were highly sensitive a year ago. The sensitivity of the bank has come down significantly.

We do remain asset sensitive, but in the most recent testing, in a rate up environment, 200 basis points, we would expect the net interest margin to increase about 200 basis points. Oh, sorry, about 16%. And then in a rate down 200 basis points, we would expect it to decrease about 15%. So it's pretty even both directions currently. But the current balance sheet growth that we have is working very powerfully to secure the interest increased margins that we're seeing right now at the bank, and also put us in a much more neutral position overall from a sensitivity perspective, which is really good as we look at potentially rates coming down in the near future. Non-interest income totaled $1.2 million.

We saw that decrease about $1.1 million quarter-over-quarter or 48%. This is due mainly to the bank's pivot towards holding more of the assets as opposed to selling them in the secondary market, as Ryan alluded or discussed earlier in the discussion. Year-to-date, we have shifted our focus to maintain those guaranteed loans as opposed to selling them in the secondary market. And over time, we do believe that this will increase income for the bank overall, but it's spread out, as Ed talked about earlier, over time, as opposed to getting that one-time hit from the purchase. And then again, as we discussed a little earlier, we did see a decline in loan servicing income of about $156,000 during the quarter, due to those repurchases.

Non-interest expense increased about $649,000 during the quarter. This is mainly due to the increased commissions related to the higher loan originations. We had about a $13 million increase in loan production for the quarter. On top of that, salaries and data processing costs do remain elevated as we've worked to position the bank to be a much larger organization in the future. So, we are currently working to grow the bank into that position. So we do expect that number to stay pretty flat over the next little while, but that the bank's revenue will then grow into that. Credit card non-interest expense for the quarter was $435,000, approximately. The efficiency ratio still hovering just slightly over 70% as the bank continues to invest in its future.

We do anticipate this improving in Q4 and through 2024 as we grow into our expense structure, net interest income, and will continue to stay high. We also expect to see a return of those sales volumes from the SBA sales, as pricing hopefully returns back to normal. Our returns on the bank, as we talked about the ROA, 1.44%. When compared to our competitors or our peer group at 1.08% remains strong, even with these changes that we've had. While this income is a little lower than the bank's historical average, it is part of the current plan, and we do anticipate seeing long-term, more stable income as a result of the actions that we've gone through over the last quarter.

As we look at liquidity, our liquidity ratio came in 27.8%. On balance sheet liquidity, we've got cash of $66 million. We've got a total liquidity, including our secondary sources, we approximate of about $399 million, that we could turn around and bring into the bank in relatively short order. $244 million of that is in borrowing capacity that we could bring in the bank, within a few hours if necessary. So we've worked really hard to secure our liquidity going forward so that it won't interrupt our growth strategies, and the overall balance sheet will remain strong and we can continue to grow into the future. Asset quality improved significantly in the quarter. Our provision came in better than we expected. This was a lot due to the government guaranteed growth that we've got.

Brought the overall allowance for credit loss down to 1.27% of gross loans. This is 1.54% of the loans at risk if you take out the guaranteed balances that are on the balance sheet right now, and this is compared to a peer group average of about 1.3%. So we're still adequately provisioned at this time. Overall, the ACL decreased to $6.6 million or $439,000. And this is mainly due to the resolution of the two non-performing loans that we had on the books at the end of last quarter. One of those loans was sold off at a sheriff sale. The other loan we brought into OREO.

It shows that we have about $1.1 million of OREO on the books at the end of the quarter. This OREO has been sold off during the month of October with no additional losses. We are now sitting at amounts from an asset of zero currently on the bank. We had a charge-off during the quarter of $668,000. Overall, the balance sheet capital and liquidity for the bank remains strong, and this is allowing the bank to take advantage of this market and really utilize this time to grow with very strong accretive assets. So we do anticipate that, you know, overall, in the near future, we'll see significant benefits from what we've done over the last quarter. With that, I will turn it back to you, Ryan.

Ryan Sullivan (President and CEO)

Okay. Just a couple things on asset quality and the reserve. As indicated, NPAs were 0.15% of total assets with the disposition of the one. The other one NPA loan brought back into OREO as of 9/30, as Jeff mentioned, but it's since been sold and actually was under contract immediately. We did have one unfortunate event with the OREO property. It was damaged during the quarter, which translated to some additional costs borne by the bank. Outside of that issue, we would've had a zero provision for the quarter. So that was the negative of that, but it's fully marked forward and off the books, so we're happy about that.

You know, from a ACL standpoint, one of the things that's driving our reserve rate down in relation to total loans, a few things. The shortening of the portfolio is having the effect as the average life shortens under the current expected credit loss. You know, the function of that calculation goes down. And then we also expect those levels to probably continue to come in as we increase the percentage of guaranteed loans that we're holding on the books. In other words, you know, as mentioned, we're targeting year-end to be approximately $200 million in total guarantees on the balance sheet. So in other words, in two quarters, we will have quadrupled the size of our held on balance sheet guaranteed loans.

You know, in terms of growth, you know, this, as alluded to, growth is escalating into Q4. You can see total assets of approximately $729 million as of 9/30. We're currently anticipating it being at or near $850 million in total assets at year-end, with a large portion of guaranteed loans. You know, so we're pretty excited about that. One of the things that is part of kind of these joint strategies that I did want to touch on a little bit is this notion of sensitivity. And, you know, Jeff talked about how we've been mitigating our asset sensitive position, and we started that actually two years ago.

One of the strengths that we have as an organization and what is allowing us to not only compete in a hyper-competitive, deposit market, but actually expand our margins doing that, is strength that we have in our asset model and our, our asset generation. In fact, if you go back two years, one of the things, and if we just look at assets, short-term assets is a percentage of our earning assets, so assets that are fully variable or, mature within a one-year period. That portion of our earning assets two years ago, 9/30/2021, was 80% of our earning asset base. So as many were saying, they were asset sensitive, we were in fact asset sensitive.

You further see that further supported by the fact, again, I'm going back a while now, but two years ago, in Q3 of 2021, we had a net interest margin of 3.23% compared to the 5.69% that we reported for the most recent quarter. Now update that 80% in short assets to where we are today. As of 9/30/2023, that 80% has gone down to 63% and will most likely be down to the mid-50s%, probably about 55%, by year-end. So when Jeff talks about getting to a more neutral position, one of the ways that we're doing that is by very materially changing the nature and composition of our earning assets.

So, you know, we will be well prepared to maintain a very strong net interest margin should rates go down, if and when that happens. So another couple of updates, we do, you know, continue to develop the credit card program. You know, we're still really kind of in a beta at this point. We're expecting 2024 really to see some scale there. So, we are seeing some encouraging preliminary metrics as we see the portfolio grow. You know, maintaining our credit quality within that portfolio of our average FICO is above 750. We still have less than 200 accounts in total, but one of the things that we're particularly excited about is the spend rate that we're seeing in gaming compared to non-gaming.

It's much higher than the original model. So, we're seeing right now the gaming spend as a percentage of overall spend within a small portfolio, but it's approximately 85% of the total spend. So we're encouraged by that, and really focusing on the credit card program scaling and growth in 2024. We believe one of the best ways we would be able to do that is through co-branding and co-marketing, affiliate relationships with gaming entities. And we have a number of conversations going on with some significant gaming operators who have an interest in our credit card program. So with that, I'll turn it back to you, Edward.

Edward Nigro (Executive Chairman)

Thank you, Ryan. I'm gonna switch gears a minute here to our gaming fintech division, which, as you've seen in the press release, I commented about Sightline, and I commented about the fact that there is an interesting, to coin the phrase again, pivot going on in our gaming division. Because Sightline's participation in sports wagering, their market penetration has been declining substantively. But also our participation in the pooled player accounts and the pooled consumer accounts that are patents that BCS has, and we, through our contract with BCS right now, have access to those tools. We're seeing those accounts start to grow. Now, it's interesting that while the sports wagering accounts through Sightline have declined, our balances with Sightline used to average about $35-40 million.

Our balances with Sightline right now average about $9 million, and it's just because of the decline in market penetration of prepaid, generally loadable prepaid cards, that is issued by two banks. We're one of them, and there's another bank back east that issues about the other half of their business. It was in it actually prior to us. Having said that, we still are carrying average balances of over $30 million, with some days higher than $40 million. And, these are being developed by new clients of ours. We talked about Bobby, which is a cash management company for about 150 tribal casinos back east, but they are also developing their own wallet through a company.

Their first effort is through an entity called BetApps, which they're making available to their tribal casinos for various cashless gaming. Also, though, we have companies like Bobby, BetHub, PayVala, Ten Ten. The other three are game skills game company. As a matter of fact, 10Ten is promising. They were some of their founders were part of Chumba, and I'm not a big game player, but for those who are, Chumba is a pretty big name, that they have over 100 active games that are being played. Now, they look very promising and are starting to actually pay their fees to BCS, and we're starting to see some deposit growth. But some of these startups look more promising than some of the others have been.

Most importantly, we have developed, BCS has developed a referral pool that's been created because of the business BCS is in, because of these patents, but also because BCS's agreement with GBank. Our referrals come from people at i2c. i2c is our processor for our credit cards, but they're also the processor for the Sightline prepaid card. i2c is one of the largest prepaid processors in the world. They're referring customers to us. Eucharist Shipboard, they're referring customers to us, as are many gaming attorneys and Worldpay, one of the largest acquirers, who was our acquirer originally for the Sightline prepaid card. We've created this network, and we really believe that the gaming fintech division is going to manifest itself in future deposits.

And, and this is very important to our growth, very important to our growth in terms of being able to continually increase our guaranteed loan portfolio. And we believe that this growth will be there for us as we move forward. So I wanted to point that out, because had we been just totally engaged without these other resources, our deposits would be fairly, really low right now. But we think that this is going to be the machine and the mechanism that it was. It's just a very few, two or three years ago, we were—our loans were up to $70 million a month with Sightline, and they're down to about $24 million a month right now. So that's the difference in market penetration.

But they are working on cashless gaming solutions for bricks-and-mortar casinos, and as we are talking to more and more of the bricks-and-mortar casinos that have cashless gaming apps, about our credit card and about our PPA. So we believe there's a lot of opportunity yet on the horizon with this pivot as well, and we wanted to discuss some of those with you today. Actually, I think Ryan has a brief summary, and then I'll close the meeting. Did you have anything else?

Ryan Sullivan (President and CEO)

No, it's okay, Edward.

Edward Nigro (Executive Chairman)

Yeah. Mm-hmm. I, I wanted to point out something that when we look at the overall discussions today, our top end is really strong. I mean, our loan portfolio grew 30%, you know, year-over-year since the last quarter, and it's going to grow substantially between now and the end of the year, which is going to reflect, we think, in our future earnings. We believe our gaming fintech division is going to have some similar growth. There's something that I want to announce today, that we were debating on the timing of this, but we think it's important, and we're going to put another press release out after this meeting, because we believe that this is becoming more known, and it's the potential acquisition and merger of GBank with Bankcard Services.

We actually. This is not new effort for us. Back in 2020, we entered into a firm agreement, acquisition agreement for BCS to be part of the holding company. But as a single bank holding company, it wasn't the best fit, so we withdrew that application. And this, this time we are looking at a merger with GBank, where it would be a subsidiary of GBank. Now, we've, the actions we've taken, we have appointed an independent, directors, two directors from, the holding company and two directors from GBank that have no interest in BCS, because as many of you know, and we've reported consistently, that, there is cross-ownership. As a matter of fact, everyone knows with Hanan Sabry as our president and I, we operate. I'm very much involved in the operations of BCS as well.

I'll be very glad if this transaction occurs so that we're all under the same umbrella. But I wanted everyone to know that that board has been appointed. They've engaged a company, and we'll be coming out with more specifics very soon to look at a valuation and a fairness opinion. And there's an entire process that we're looking at for this potential acquisition. We think it will be important. There'll be many details coming out yet. I cannot give you any right at this point because they may change. But what I can say is that we're excited about BCS's patents.

We think they're very real and very strong to attract things like stored funds and consumer payments companies, as well as protecting the consumer with another layer of providing individual insured accounts at GBank for many of our customers to handle consumer funds, whether they're wagering accounts or payments businesses. So wrapping this all up, we think this was a very important quarter for us. Granted, we saw some impacts upon earnings, but every now and then, it's important, we think, to put the bit in our teeth and make sure we're ready for the future. And this is one of those quarters where we made some decisions, and I think you can see from our report today that impacted our earnings for Q3, that we feel are going to be well-earned in the future.

So with that, we'll open it up to any questions.

Brad McCallum (Associate Director)

Hey, guys, this is Brad McCallum. How you doing?

Edward Nigro (Executive Chairman)

Good, Brad. Hi, Brad. Hi.

Brad McCallum (Associate Director)

Thanks for the detailed update. You know, if you're buying back, you know, $110 million of these guaranteed loans in Q4, what does the opportunity look like in 2024 for similar repurchases?

Ryan Sullivan (President and CEO)

I think that there's the opportunity for that to continue, and we expect it will. I do think that probably the largest portion of that activity or volume will be recognized in Q4. Because typically, you know, the candidate loans that are the best fit for that are loans that are, you know, three years or older. And there's, you know, some of the—it's obviously an optional program, and some borrowers, you know, don't participate. But I think that, you know, we had the $21.5 million, we're going to do another $80 million in Q4.

But I think that as we think about next year, you know, probably a smaller amount in this program, somewhere around 50 or 60 in the first half of the year is what we expect.

Edward Nigro (Executive Chairman)

I think as Ryan said, you know, in the first three years of these loans, there's prepayment penalties for our borrower. And, of course, the money for our buyers of our loans and the, and the reason that it's growing right now is because they're willing. They do not want the fixed rate. They'd rather buy new ones from us at 10.25%. And after three to four years, many of these loans do refinance out in the marketplace. We see in the, on the, at the end of the third year anniversary, as we look at our loans to check out, those, that's our target. And so we would be looking at calculating what that looks like as we get closer, you know, to past the first quarter of next year.

Brad McCallum (Associate Director)

Okay, great. So it seems like for next year, that 30% loan growth that I was modeling should be somewhat easy to hit if you're repurchasing $50 million.

Ryan Sullivan (President and CEO)

I like the way you just said that.

Brad McCallum (Associate Director)

Sure.

Edward Nigro (Executive Chairman)

We happen to agree with your analysis, Brad. Thank you.

Brad McCallum (Associate Director)

Okay. So when I think of the fintech deposits, you know, sitting there at $35 million, what should I think about year-end, you know, next year? You know, can that be, you know, $150 million,200 million, or, like, what do you guys project for the fintech deposits?

Edward Nigro (Executive Chairman)

Let me tell you how difficult that is to project and give you an idea. So, we, we believe that, one of these companies, BetHub, PayValla, Ten Ten, a couple of others we have in the pipeline, if one of them, any one of them hits, can bring $20 or 30 million. So it, it's... And if they don't, I mean, look, Wagerr went away, Loop Golf went away, Game Plus went away, and they all had great potential. So it's... In, in today's, ability for some of these people to get, you know, to get capital, it's harder for them. But these companies have, that we're working with now, have been in betting for six months with us, some of them eight months, in developing.

We actually help them develop their programs because we have so much experience in the wagering arena as it comes to dealing with their terms and conditions. It's, uh... We also, you know, if this acquisition occurs, there's another entire income stream we believe, which is in the licensing of these IPs. I don't want to get into that yet because we think an enormous opportunity is there, but we don't-- there's more to come out on that transaction, and let's see where we end up with it, and we can give a full release and some more analysis. We believe that there are some significant income sources for us in that arena as we look forward.

And some of it is gonna take time to develop because some of it is involved some very large clients, because we're gonna be going after stored funds, and companies with stored funds. And what I mean by companies with stored funds, where they hold consumer funds and actually use them, for many different reasons. I think that that's going to change. We know the CFPB and many regulators want to see those funds in banking. So we feel that we're in a somewhat pioneering, but also have some solutions that we're working with BCS on as a contractor, and we would be able to work with them, you know, even more closely as part of the bank. So we shall see where that comes and where that goes.

So, to tell you, to answer your question, Brad, do we believe it's going up? Yes. By how much? It's really hard for me to put my hands around right now.

Brad McCallum (Associate Director)

Understandable. And to the extent, you know, the funding isn't keeping up with this tremendous loan growth, I imagine continued reliance on just brokered CDs and the like. You know, net-net, what does that mean for your net interest margin trajectory, you know, as I look out, you know, the next six months or so?

Ryan Sullivan (President and CEO)

Let me take a stab at that. I think, you know, even with us, you know, taking down some of those higher cost deposit sources, we're still able to increase the margin. So I think that, you know, with the expansion that we expect into year-end, and then, you know, we're still forecasting, you know, roughly about 30% growth in 2024 overall. You know, I think that we'll be able to manage. We'll probably see net demand come in a little bit from 569. It'll probably be, you know, about that for the same Q4. But we really believe that we can maintain, above, you know, in the low fives. I think it's what we're modeling for, you know, 5.520 pretty much.

Edward Nigro (Executive Chairman)

Okay. Yeah, I expect that.

Brad McCallum (Associate Director)

Great, thanks. I, I will let some other people ask some questions, especially from on.

Edward Nigro (Executive Chairman)

Thank you, Brad.

Ryan Sullivan (President and CEO)

Brad always asks good questions. Do you have any other questions? No? Then, Brad, if you don't have anything else, we're going to sign off the meeting, but let me give you a chance to ask anything else you wish.

Brad McCallum (Associate Director)

Oh, you know, let me... I'm sure I can think of something here.

Ryan Sullivan (President and CEO)

Okay, I saw it then.

Brad McCallum (Associate Director)

Yeah. So with the credit card business, I imagine that, you know, if you're spending as you are on it, and it's, you know, beta, so you're not bringing in any revenue, that probably becomes increasingly accretive to earnings, as I think about kind of the quarterly sequence in 2024. Would you maybe project it to be earnings neutral by Q4, or do you have higher ambitions for that program?

Ryan Sullivan (President and CEO)

Yeah, I think it depends on the ramp rate. You know, what we're seeing with, you know, kind of our marketing efforts right now is originally we thought we'd start to see some ramp this year. I think everything's gonna, you know, happen in 2024 at this point. But we'll-- we're definitely targeting, you know, what we've modeled as our breakeven, which is, fifteen thousand accounts. It actually probably come in a little bit from there because of the high percentage of gaming spend, and, and that has an effect on, on the, net, net interchange. But, but I think that it is possible, you know, by year-end that it's, that it's neutral. One of the things, as you know, Brad, that, you know, as, as you build that portfolio upfront, you're taking some pretty heavy provisioning.

You know, so as you grow it, you know, that's a big impact to that. And of that $435,000, I mean, it's just mostly compensation. You know, we've got a small team there of about six. You know, so we've been able to scale, you know, those non-interest expenses and not spend more than we need to until we know that it's ready to scale upward.

Edward Nigro (Executive Chairman)

Well, one of the things, Brad, with this interesting program, from the perspective of why we created this card that would accept the gaming code, merchant code, and not deny that transaction for people who are trying to load, like, Sightline apps or any other gaming app. We showed that back in 2022, where the credit card denials when the gaming code was changed, went as high as 70% in these apps. So that the cards were being denied by all the issuing banks because they did not want to participate in a gaming code transaction. We understand that transaction. Many of these are our clients or people who we have had prepaid cards with. And so we created this card to be able to have it be effective in loading many different gaming apps.

The interesting thing is, out of the first couple of hundred thousand spends that we've seen, 85% has been loading gaming apps. They're using it for the app which we marketed, so that you could have an access, you know. Remember, we're only getting these out to prime and super prime customers, too. The average credit rate—credit that we are receiving is around $11,000. Now, what is going to attract these gaming app creators and users and owners is that kind of success in achieving a transaction applicable to our card is not matched by anyone. One of the apps—one of the processes we're looking at is to ultimately do a branded card for some of these gaming operators or apps. We believe that's a distinct possibility.

I hope that sheds some light on what our marketing efforts and what we hope to do in the year to come.

Brad McCallum (Associate Director)

Yeah. Thank you. I'll just say one more question, then I'll step away. With all of these really exciting things on your plate and a lot of things, the credit card program, BaaS, et cetera, and Avenu tremendous growth all seem very, you know, accretive to earnings and accretive to profitability. Maybe you could remind me and everyone else on the call, kind of the end game as far as, you know, ROA targets. You know, is that 2%? Is that 3% in, you know, two years, three years? Just, you know, some general roadmap.

Ryan Sullivan (President and CEO)

You're looking for help on your model? Well, we think, you know, it's very easy to... Not very easy, easy to very easy. Two percent ROA is, is, is always been our target. So we think, we think we can get back there. Now, the composition of that could change because typically what we see in credit card build is just that component. Once stabilized, the stabilization can take two to three years, just that component can be upwards of, you know, 3.5%-5% ROA. So if that scales up much more significantly, then that 2% would, would scale up appropriately.

Edward Nigro (Executive Chairman)

You remember, Brad, I go back to my Western Alliance days when I was on the board, and we were about a $5-6 billion bank, and we always our goals were always 2 and 20.

Ryan Sullivan (President and CEO)

ROA.

Edward Nigro (Executive Chairman)

ROE. So I like those numbers. You know, anything that starts with a two, but we'll see. Right. Right. Just a headache sometimes when I go to those board meetings, but remember that, you have to, you know, if you aim low, you achieve low, that's right.

Brad McCallum (Associate Director)

Great. Thank you. I love those goals also. Good job, guys. Thanks.

Ryan Sullivan (President and CEO)

Thanks, Brad.

Edward Nigro (Executive Chairman)

Any other questions? Okay, well, thank you all very much for tuning in, and, like we say, stay tuned. Watch for our press releases. We have some interesting things happening.

Ryan Sullivan (President and CEO)

Thanks. Thank you, everybody.