管理層發言
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 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, measured by the loan-to-deposit ratio, 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 were 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 increased 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 non-interest 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 points 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.
Thanks, David. Now that David has discussed the loan portfolio, I will elaborate on deposits using slides 5 and 6. During the third quarter, the average balance of deposits rose by over $211 million, or 5%, and period-end deposits increased nearly $524 million, or 12%, compared to the previous quarter, driven by growth in CD production and fintech partnership deposits. Non-maturity deposits grew by around $123 million, or 6%, reflecting the rise in fintech partnership deposits. Total deposits from our fintech partners, which also include broker deposits, surged 35% from the second quarter, totaling $507 million at the end of the quarter. These partners also facilitated almost $11.4 billion in payments volume, up 34% from the second quarter's volume. Total fintech partnership revenue for the third quarter was $771,000, an increase of over 30% from the previous quarter as contributions from a key partnership began to scale.
Regarding CD activity this quarter, total balances increased by $281 million, or 15%, due to persistent strong demand in the consumer channel. We originated $697 million in new productions and renewals during the quarter with an average cost of 4.77% and a weighted average term of 21 months. This was partially offset by maturities of $391 million, averaging a 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%. CD pricing crossed its inflection point in the third quarter, with the weighted average cost of new CDs being 28 basis points lower than that of maturing CDs. As interest rates started to decrease in anticipation of an expected reduction in the Fed funds rate, we significantly lowered CD rates throughout the quarter. Consequently, the weighted average cost of CD production in December was 4.45%, which is over 30 basis points lower than the average cost for 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 high beta deposit costs declining by 50 basis points, we are confident that deposit pricing has reached its peak and will trend downward in the fourth quarter. Moving to slide 6, total liquidity remained very strong at quarter end, supported by cash and unused borrowing capacity of $2.1 billion, reflecting heightened deposit growth. We used some of this liquidity to reduce FHLB borrowings and to fund loan growth and securities purchases during the quarter. Total deposit balances rose by 12%, while loan growth was $75 million, or approximately 2%, resulting in a loans-to-deposits ratio decrease to 84% from 93% at the end of the second quarter. Our cash and unused borrowing capacity covered 179% of total uninsured deposits and 230% of adjusted uninsured deposits. Turning to slides 7 and 8, net interest income for the quarter amounted to $21.8 million, or $22.9 million on a fully taxable equivalent basis, which is an increase of 2.1% and 1.8% respectively from the previous quarter.
The yield on average interest-earning assets rose to 5.58% from 5.54% in the prior quarter, primarily due to a 7 basis point increase in the yield on loans, though this was somewhat offset by a decline in yield on other earning assets. The increased yield on our loan portfolio, along with higher average loans, securities, and cash balances, produced solid top line growth in interest income, which increased by 5.7% compared to the previous quarter. With strong growth in average interest-bearing deposit balances, net interest income rose over 2% during the quarter, building on last quarter’s gains and further distancing us from the low point in the third quarter of 2023, as illustrated in the bar chart on slide 7. The net interest margin for the third quarter was 1.62%, or 1.70% on a fully taxable equivalent basis, reflecting decreases of 5 and 6 basis points respectively from the second quarter.
The net interest margin roll forward on slide 8 details the factors influencing changes in fully taxable equivalent net interest margin during the quarter. As noted last quarter, it's important to clarify that the influence of deposits on net interest margin is more dependent on dollar volume than on rate. As previously mentioned, average interest-bearing deposits increased by over $211 million during the quarter, while average loan balances grew by only $93 million. As David noted in his comments, net interest margin for the quarter was affected by carrying higher cash balances, which we estimate negatively impacted net interest margin by six basis points. However, having elevated on-balance sheet liquidity provides us with considerable flexibility moving forward. As mentioned, we have over $600 million of higher-cost CDs maturing in the next two quarters, along with nearly $250 million in higher-cost broker deposits maturing in the same timeframe.
Moreover, we estimate that loan activity, particularly early payoffs of higher-yielding loans and loans with premiums, also had a negative impact on net interest margin of 6 basis points. Nevertheless, loan pipelines remain robust, particularly in small business lending and construction sectors, and our emphasis on enhancing the composition of our loan portfolio reassures us that net interest income will continue to grow in upcoming quarters. Regarding deposits, the graph on slide 8 depicts the monthly rate on interest-bearing deposits compared to the Fed funds rate, illustrating the stability in deposit costs over recent months. As I mentioned earlier, with the recent Fed funds rate cut and other short-term rates following suit, we expect interest-bearing deposit costs to trend downward in the fourth quarter. This should further encourage net interest income growth and serve as a strong catalyst for net interest margin expansion.
Moving on to non-interest income on slide 9, non-interest income for the quarter reached $12 million, up $1 million or 9% from the second quarter. Gains from the sale of loans were $9.9 million for the quarter, reflecting a 20% increase over the second quarter and setting a new quarterly record for our SBA team. We originated over $163 million of SBA loans this quarter, a 42% increase over the previous quarter. Additionally, loan sale volume amounted to $126.5 million, an increase of 22%, though the net gain on the sale premium saw a decline of 65 basis points. Other non-interest income declined to $1.1 million from the prior quarter, primarily due to reduced distributions from fund investments, though these decreases were partially mitigated by a slight rise in net loan servicing revenue. Moving to slide 10, non-interest expense for the quarter was $22.8 million, an increase of $450,000 compared to the second quarter.
Excluding non-recurring costs of about $600,000 from the previous quarter’s results, operating expenses rose by $1 million or 4.7%, primarily due to increased salaries and employee benefits linked to higher small business lending commissions corresponding with the increased volume of originations. We also expanded our staff in small business lending and risk management teams to strengthen our capacity for further growth. Regarding asset quality on slide 11, David has already covered the main aspects of asset quality for the quarter, so I will add commentary on the allowance for credit losses and the 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, marking an increase of three basis points from the second quarter. This rise in the allowance reflects growth in our loan portfolio and a continued shift in its composition towards loan types with higher coverage ratios, in addition to extra reserves for small business and franchise loans.
The provision for credit losses in the third quarter was $3.4 million, down from $4 million in the second quarter, driven by loan growth, shifts in loan portfolio composition, net charge-offs, and additional reserves for small business and franchise lending. If we exclude balances and reserves for our public finance and residential mortgage portfolios, which have lower coverage ratios due to their lower inherent risk, the allowance for credit losses would represent 1.35% of loan balances. Furthermore, we have minimal office exposure, meaning we do not carry excess reserves for that asset class, in contrast to many other banks. Turning to capital on slide 12, our overall capital levels at both the company and the bank remain robust. The tangible common equity ratio is at 6.54%, which has declined primarily due to strong deposit growth this quarter and increased cash balances. Excluding accumulated other comprehensive loss and adjusting for normalized cash balances of $300 million, the adjusted tangible common equity ratio would be 7.49%.
From a regulatory capital perspective, our common equity Tier one capital ratio remains solid at 9.37%. Before concluding, I'd like to share our outlook for the fourth quarter of 2024. Regarding net interest income, with a strong loan pipeline, we expect loan balances to rise by another 1.5% to 2% in the fourth quarter, while the overall yield on the portfolio should see a slight increase as origination volume is expected to surpass the impact of recent rate cuts. We also anticipate that the rate cuts will positively influence the cost of funds related to deposits, although total interest expense might increase slightly due to higher average balances. Nevertheless, we believe interest income growth will significantly overshadow any increase in deposit costs, with net interest income anticipated to grow between 10% to 15% quarterly. We also expect net interest margin to rebound and start an upward trend.
Though elevated cash balances will continue to affect margin expansion in the near term, we expect fully taxable equivalent net interest margin to fall between 1.8% and 1.85% for the fourth quarter. Regarding non-interest income and non-interest expense, our outlook remains consistent with what we stated during last quarter's call. With our SBA team consistently achieving higher origination activity, we remain very optimistic and expect gain on sale revenue to be consistent with this quarter’s elevated results. On the expense side, we foresee continued growth in salaries and employee benefits as we further develop our capacity in risk management and small business lending, especially with our plans for SBA origination growth of 15% to 20% in 2025. Additionally, we have technology investments planned for the fourth quarter, many of which aim to enhance the digital experience and add product features for our consumers and small businesses. I will now turn it back to the operator for your questions.
分析師問答
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?
Regarding the franchise and small business segments, we have encountered some delinquencies on the franchise side, primarily related to certain brands and unit closures. We are working with the borrowers to restructure their loans or to pay them off. Some of these loans have had to be moved to non-accrual status since they are more than 90 days past due. This situation is not unusual as it reflects trends we are seeing throughout the industry, particularly with restaurants and other retail sectors facing difficulties. For small businesses, there isn't a consistent pattern; each case is unique. However, similar to the franchise segment, we have seen businesses closing or struggling. In these instances, we have taken necessary actions, including providing deferrals, but in some cases, we've also had to move loans to non-accrual status, collaborating with the SBA to repurchase the loans and assist borrowers in creating exit strategies.
The ApplePie situation is mainly an internal policy for us. As Ken mentioned, once it reaches 90 days, we transition it to non-accrual status and set aside a specific reserve for it. I don't believe the loans in the portfolio are particularly problematic; it's primarily an internal guideline. We've faced challenges with the servicers who manage these loans, as they aren’t incentivized to act until the loans hit the 90-day mark and they recover a fraction of what they can. This creates different perspectives; they prefer delinquency for income, while we aim to intervene earlier in the process. We are currently renegotiating our servicing agreement to engage much sooner, rather than waiting until after 90 days. The SBA segment saw a peak in July, but the number of problematic loans has decreased slightly in August and September, without a continual increase. As Ken noted, there isn't a specific trend in terms of industry or loan type; it's quite diversified across the country.
On the consumer front, delinquency is under 1%. Wholesale RVs aren't an issue as resale values, which were high during COVID, have recently stabilized. We're not seeing any significant issues there. Likewise, with CVS and Walgreens, we haven't encountered any delinquencies or closures. We have about 35 CVS stores, all current and most still have five-year or longer lease agreements. We've recently monitored four CVS locations that are performing exceptionally well. Our approach focuses on securing Grade A properties with a loan-to-value range of 47% to 50%, supported by strong sponsors. With Walgreens, we're in a similar situation, with no stores dark and no notifications of closure. There was one instance with a Rite Aid where they chose to close a newer location instead of an established one. The sponsor is maintaining payments and repurposing those stores. Right now, our STL product has no delinquent accounts.
Historically, in the past 12 years, we've only seen two loans default on $2 billion in originations, with total losses just over $1 million. Therefore, we're not concerned about the STL products or the consumer side. Over time, we expect that decreased rates, especially for SBA loans, will lower payments and enhance cash flow for small business owners. This gives them hope as inflation subsides, although some areas remain high. Overall, the trend is moving in a positive direction for them.
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 reaction this morning when we noticed the same issue. From our perspective, as Ken mentioned, we've made specific provisions. If a payment is over 90 days past due and we believe there will be an impairment on that non-guaranteed portion, we've already accounted for it. We assess them as they cross that threshold. It seems we reached a peak and there has been a slight decline. However, it's still early in October, and the 15th is a common payment date, so we should have a clearer picture in a week to ten days. Overall, we appear to be stabilizing, at the very least. We also saw the same news this morning, which was surprising to us. However, we are not facing the same challenges they are.
Okay. I had another question regarding your strategy. I thought you might wait a quarter or two for rates to decrease before increasing liquidity and offering more CDs, but it seems you acted a bit sooner. If I heard correctly, the production on CDs in the last month of the quarter was 4.45%. Is that correct? I'm just curious about why you are building a little.
Yes, that is correct.
Okay.
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'd 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 between $525 million and $530 million in originations this year, with a target of $600 million for next year. When you do the calculations, you are likely looking at about 15 percent growth. We believe we have assembled a strong team, including effective business development officers and robust support in credit, servicing, and closing. This capability has been evident over the last few quarters. We are continuously enhancing our team's strength to support this growth, which will be essential for reaching our targets. We feel confident about the people we have actively sourcing deals. If you examine our progress this year, especially in the third quarter and what we anticipate for the fourth quarter, it seems reasonable to aim for that $600 million goal next year.
Tim, one of the uncertainties is the sales price in the secondary market that 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 in 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 with 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 factor here is our cash balance and how it's allocated. To give you some numbers to consider, we have approximately $1.3 billion to $1.4 billion in high beta deposits, which include both brokered deposits and some of our own that are larger in balance. These deposits reset immediately. For instance, you can calculate the impact of every 25 to 100 basis points cut. On the other hand, we have about $760 million in loans that will reprice immediately or within three months, particularly with SBA loans. While we hold more variable rate loans in our portfolio, some are already at price ceilings. Additionally, we have $1.4 billion in CDs maturing over the next 12 months, with an average cost close to 5%. New loans being produced this October are coming in at about 4.19% to 4.2%. Therefore, there is a significant amount of net interest income we expect to gain over the next year.
Projecting how this will affect our margin is challenging due to excess liquidity and how it will be utilized. However, I believe we could anticipate at least 10 basis points of margin expansion each quarter, depending on how we manage liquidity. Furthermore, as David mentioned, holding onto SBA loans, for example, could greatly enhance both our net interest margin and net interest income. We are still finalizing our forecasts for next year, as long rates are behaving differently from short rates, and we have an upcoming election that could influence long rates. Overall, based on our calculations, we expect a notable increase in net interest income next year.
We still believe we will achieve the $3 target we set for this year. As we close the fourth quarter, we anticipate nearly $1 in income. We projected $4 for the next year. With the Fed beginning to make moves, we are confident about that forecast. Depending on how the Fed rates change throughout the year, we could see that figure rise from 4 to 5 relatively quickly. We expect a strong finish this year, and 2025 appears to be very promising. If the political situation remains stable both domestically and internationally, we should have 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 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 for 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 the key factor here is the liquidity on our balance sheet. As I mentioned earlier, we have over $600 million in certificates of deposit maturing in the next six months, $1.4 billion maturing next year, and $250 million of higher-cost brokered deposits maturing in 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 utilize some of that cash to pay down higher-cost deposits. Year-over-year, our total loan growth for 2024 is expected to be in the range of 7% to 9%. If we continue our current strategy, that growth rate should remain the same. However, as David pointed out, we have flexibility with SBA loans and other initiatives that could potentially drive even greater growth beyond that.
We've been collaborating with some of our fintech partners, especially Jaris, as we anticipated launching the loan program in the third quarter. In October, we made a small purchase to test and validate our systems. They are acquiring a few new clients, and we expect that progress could come quickly. Recently, we've also introduced two new programs in the fintech sector that may offer us additional opportunities. As Ken mentioned, we have many options and are approaching each day as it comes, but overall, the outlook for our future is positive.
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 got 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 preliminarily 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?
Yeah. Well, I think we've done quite a bit of hiring this year to build out the SBA platform and enhance risk management and add some positions around the country as I like to say add bench strength. So we'll have a full year's run rate of folks there. But if I'm thinking about next year, you're probably looking at 7% to 8% expense growth for next year for the year.
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%.
And is 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.
I think right now we believe that the tax rate in the fourth quarter will likely be in the same range as it was in the third quarter. With increased earnings, we see a significant advantage from our public finance portfolio. However, as our pre-tax earnings continue to rise, the benefit in percentage terms will diminish. Therefore, I expect our tax rate for next year, with these higher earnings, to gradually shift over the year, possibly ranging from a high of around 8% to maybe 11% or 12% by the year's end. 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 believe we're seeing a significant improvement for the fourth quarter. If the Federal Reserve continues to lower rates substantially throughout 2025, we could see a dramatic increase in our earnings and structure. Using a racing analogy, I think we will set a record by the end of the year. There's a lot of positive momentum across the board, and our balance sheet has been exceptionally strong historically. We have faced minor issues with the SBA and franchise sectors, but those are manageable. The outlook for us appears very promising. I've had a productive discussion with the gentleman you mentioned, and there may be potential opportunities ahead. We're receiving numerous inquiries as the market stabilizes. We recently concluded a client relationship in the FinTech sector because they were unable to secure additional funding, despite having a solid program and product. As institutions begin to reduce their involvement in venture capital, there may be chances to acquire one or two FinTech firms and integrate their offerings into our portfolio. Several reputable programs are looking for trustworthy partners who can deliver the necessary services. Overall, I'm optimistic about our diverse product range and the positive developments coming our way. Therefore, 2025 looks very promising.
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 after almost 50 years. There's been a lot of support for basketball over the years, but that has been quite rare. There was plenty of tailgating, but most people just enjoyed that and didn't attend the games. Now they have a full house, which is wonderful. Thank you.
Thanks guys.
Thanks George.
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.