Q1 2024 First Internet Bancorp Earnings Call

Participants

Larry Clark; Investor Relations; Financial Profiles, Inc.

David Becker; Chairman of the Board, Chief Executive Officer; First Internet Bancorp

Kenneth Lovik; Chief Financial Officer, Executive Vice President; First Internet Bancorp

Tim Switzer; Analyst; Keefe, Bruyette & Woods North America

Brett Rabatin; Analyst; Hovde Group

Nathan Race; Analyst; Piper Sandler Companies

John Rodis; Analyst; Janney Montgomery Scott LLC

Presentation

Operator

Good day everyone, and welcome to the First Internet Bancorp earnings conference call for the first quarter of 2024. (Operator Instructions) I would like to turn the conference over to Larry Clark from Financial Profiles, Inc. Please go ahead, Mr. Clark.

Larry Clark

Thank you, Selby. Good day, everyone, and thank you for joining us to discuss First Internet Bancorp's financial results for the first quarter of 2024. The company issued its earnings press release yesterday afternoon, and it's available on the company's website. In addition, the company has included a slide presentation that you can refer to during the 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.
However, 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 the 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 a reconciliation of the GAAP to non-GAAP measures. This time turn the call over to David.

David Becker

Thank you, Larry, and good afternoon, everyone, and thanks for joining us today. As we discuss our first quarter '24 results. Those of you who regularly attend these meetings will recall that two quarters ago, we called the back in late October, we predicted the third quarter of 2023 would mark the low point for net interest margin and net interest income.
We also estimated net interest margin would turn higher from there regardless of whether or not and at what pace the Federal Reserve does to start reducing short-term interest rates. Since then and despite ongoing uncertainty around the future monetary policy and continued volatility in long-term rates, we have now reported two consecutive quarters of strong earnings growth and improved profitability driven in a large part by the recovery in our margin and growth in net interest income that we had projected.
This quarter's results continued to demonstrate the meaningful progress we've made, repositioning the loan portfolio and optimizing our overall balance sheet mix while keeping deposit costs in check and improving our interest rate risk profile.
Starting with the highlights on slide 3, I'd like to discuss some of the key themes for the quarter. As I just noted, we continue to transition the composition of our loan portfolio and optimize both sides of the balance sheet.
We experienced strong deposit growth during the quarter and deployed a portion of the liquidity to drive net loan growth of $70 million or over 7% on an annualized basis. New funded loan origination yields were 8.84%, consistent with the fourth quarter of 2023 and up 108 basis points from the first quarter of 2023.
Yield on the overall loan portfolio increased 23 basis points from the fourth quarter of 2023, while deposit costs only increased 11 basis points. As a result, net interest income was up almost 5% and fully taxable equivalent net interest margin expanded by 7 basis points over the prior quarter.
Since the third quarter of last year when we believe those metrics hit their low net interest income has increased by 19% and net interest margin has expanded by 27 basis points. With our emphasis on improving the composition of the loan portfolio and stabilizing deposit prices, we remain confident that net interest income and net interest margin will trend higher for the remainder of this year, which is consistent with the guidance we issued in January.
Notably, as a reminder, our estimates assume estimates do not reflect any expectation for short-term rate cuts by the Federal Reserve this year.
Another highlight for the quarter was the performance of our SBA business despite the seasonally lower SBA activity in the first quarter of the year, the team continued to perform exceptionally well, delivering solid loan production and another record quarter of gain on sale revenue.
Compared to the first quarter one year ago, SBA originations and sold loan volume were up 27% and 55%, respectively, 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 remain among the top 10 most active SBA seven a. lenders in the country. Congratulations to our SBA team on another standout quarter. It is the combination of all of these efforts, solid loan growth, net interest margin expansion, net interest income growth and non-interest income powered by record gain on sale revenue that drove a nearly 7% increase in our total revenue over the prior quarter.
With as revenue expansion and only moderate expense growth generally driven by the typical annual reset on employee benefit costs and merit pay increases, we delivered a second consecutive quarter of positive operating leverage and continued improvement in operating efficiency.
Credit quality remains healthy overall, with nonperforming loans to total loans at 33 basis points and nonperforming assets to total assets at 25 basis points at quarter end. Nonperforming loans did increase from the fourth quarter due primarily to additions in small business lending and to a lesser extent, legacy residential mortgage. But our ratios continue to compare favorably to the rest of the industry.
Furthermore, net charge-offs to average loans remained low at just 5 basis points. When we also saw an increase in delinquencies, 30 days or more past due, which totaled 53 basis points of total loans at quarter end.
The increase during the quarter is due primarily to an increase in delinquencies in small business lending and franchise finance portfolios. Some of this was simply due to the timing of payments subsequent to quarter end, a number of these borrowers have become current on their payments. And as of today, those delinquencies have declined to 32 basis points of total loans.
As it relates to current investor concerns around office real estate, I'd just like to remind everyone that our exposure to office commercial real estate remains at less than 1% of our total loan balances and does not include any central business district exposure.
Our capital levels remain sound with a common equity Tier one capital ratio of 9.52% and tangible common equity ratio of 6.79% at quarter end. Tangible book value per share, a key measure of shareholder value creation increased 1% during the quarter and is up 6.6% year over year.
As a further example of the value we have created for shareholders since 2018, First Internet has grown tangible book value per share by nearly 50% compared to an average of 33% for all publicly traded banks during that time period.
We are among just a small handful of banks that have grown tangible book value per share in each of the past five years, which is also in part a testament to our prudent balance sheet management and operational discipline through a very challenging period for the banking industry.
As a result of our continued improvement in operating performance, we reported net income of $5.2 million, up 25% and diluted earnings per share of $0.59, up 23% from the fourth quarter of 2023. This was the second consecutive quarter of earnings growth in excess of 20%.
Let me now take a couple of minutes to discuss our lending activity during the quarter. Turning to slide 4, we produced solid loan growth during the quarter, led by our commercial lending teams where balances were up $75 million from year end or 10% on an annualized basis.
We generated growth in construction, small business lending and Franchise Finance. This was partially offset by declines in the fixed rate, public finance and the healthcare finance portfolios. Our construction team had another solid quarter, originating $90 million in new commitments.
Additionally, funded construction loans increased 24% on a linked quarter basis as borrows drew on existing mines to fund their projects. At quarter end, total unfunded commitments in our construction line of business increased to $552 million, up from $540 million at the end of the fourth quarter.
Alumina is very well-positioned to continue shifting the composition of the loan portfolio towards higher yielding variable rate loans. On the consumer side, balances were down modestly as expected declines in residential mortgages were partially offset by production in our specialty consumer channels, which is traditionally lower during the winter months.
Focus on the super-prime borrower and our consumer lending rates on new production were consistent with the prior quarter and in the mid 8% range. Furthermore, delinquencies in these portfolios remain low at just 8 basis points of the total loans.
Before I turn the call over to Ken to cover deposits in more detail, I want to provide an update on our fintech partnerships. Not long after launch First Internet Bank, 25 years ago, we entered into our first partnership program, recreational vehicle lending, a channel that continues to grow long term customer relationships with outstanding credit quality and favorable yield.
Over the years, we forged additional partnerships. Some of our initiative like the one delivering on-demand payments to workers in the gig economy drove innovation, while others helped establish entities like our home State's Department of Revenue, lower processing costs and build out online delivery channels.
Still other partnerships that provide a necessary growth capital to underserved market with niche partners and know their target audience well, bringing to us loan growth with acceptable yields and excellent credit quality without the costs of supporting in-house origination teams.
As anyone who has ever paid for coffee with an online wallet for use of P2P app to split the Vitter bill for carriers and affinity card to earn miles or reward points will tell you. Partnerships are vital to the evolution of financial services and First Internet Bank is proud of the role we have played in this financial services arena for the past 25 years.
As I noted last quarter, we currently have a dozen live programs of varying purposes. Scope and several other programs that are in various stages of implementation has our attention is focused on bringing these programs like we did not had any new programs during the quarter.
However, we did activate a new service channel for one of our more significant partners, which provided a sizable increase in quarterly fintech revenue. Ken will provide more details on that in just a moment, I want to temper your expectations.
We are not forecasting revenue to continue to grow at that same rate in the remaining quarters of this year. However, the additional reoccurring revenue from the service channel will enable us to hit our forecasted fintech revenue for the year, which we expect will be almost 3 times the amount we recognized last year.
To wrap up on my comments, we delivered improved performance in the first quarter and look forward to the rest of the year with confidence. Furthermore, liquidity and credit quality remains strong and capital levels are sound with the continued evolution of our loan portfolio mix.
The positive outlook for SV. 18 and stabilized deposit pricing, we believe we are well positioned to continue to achieve higher earnings and improved profitability for the remainder of 2024 and beyond.
Touch on a topic I covered last quarter. Many of you recall that First Internet Bank stock along with many other big stuff, the lot of the Russell 2000 Index around the same time as a regional bank failures in the spring.
As we head into the reconstitution of the Russell Index later this quarter, we are keeping an eye on where the estimates and minimum market capitalization are being reported. While there are certainly no guarantees with a recovery in the stock price over the last six months, especially relative to the small-cap universe as a whole, we remain optimistic that First Internet stock might again qualify for inclusion in the index.
Finally, I want to personally thank the entire first Internet team for their dedication to our clients and their contributions to our strong results. Our team's talents and commitment to constant improvement give me great confidence in the future for Santander and our long runway of opportunities ahead. As a premier technology forward digital financial services provider.
With that, I'd like to turn the call over to Ken for more details on the financial results.

Kenneth Lovik

Thanks, David. As David covered the loan portfolio let's turn to Slides 5 through 7, where I will cover deposits in more detail. Deposit balances grew by $206.8 million or 5.1% from the prior quarter as we saw strong demand across our customer base.
Non-maturity deposits were up over $66 million or 3.6% due to increases in fintech partnership deposits and money market balances. Deposits from our fintech partners, including brokered deposits, were up 32% from the fourth quarter and totaled over $280 million at quarter end.
Additionally, these partners generated almost $6.1 billion in payments volume, which was up 29% from the volume we processed in the fourth quarter. Total fintech partnership revenue was $610,000 in the first quarter, an increase of 47% over the linked quarter, with the majority of this revenue consisting of recurring interest income oversight and transaction fees.
Related to CD activity for CD activity during the quarter, total balances were up $134 million from the linked quarter, driven by strong demand in the consumer channel. We originated $632 million of new production and renewals during the first quarter at an average cost of 4.96% and a weighted average term of 23 months. These were partially offset by maturities of $475 million with an average cost of 4.62%.
Looking forward, we have $360 million of CDs maturing in the second quarter of 2024 with an average cost of 4.76% and $383 million maturing in the third quarter with an average cost of 4.96%. So as we noted last quarter, the repricing gap between the cost of new CDs and the cost of maturing CDs is narrowing, which will continue to contribute to slowing the pace of increases in deposit costs.
Additionally, we continued to reduce higher cost deposits when we can and used on-balance sheet liquidity to pay down some callable brokered CDs as well as a maturing Federal Home Loan Bank advance.
Looking at Slide 6 at quarter end, we estimate that our uninsured deposit balances were $1.1 billion or 26% of total deposits, which is up $76 million from the end of the fourth quarter. The increase was due primarily to new customer balances and growth in existing depositor balances.
After adjusting for Indiana based municipal deposits and larger balance accounts under contractual agreements, our adjusted uninsured balances dropped to $859 million or 20% of total deposits, which continues to compare favorably to the rest of the industry.
Moving to Slide 7. At quarter end, total liquidity remains very strong as we had cash and unused borrowing capacity of $1.7 billion. As mentioned a moment ago, we deployed some of the liquidity provided by deposit inflows to pay down higher-cost brokered deposits and to reduce our borrowings at the Federal Home Loan Bank as well as to fund loan growth during the quarter.
As deposit growth outpaced loan growth, the loans-to-deposits ratio declined to 91.5% from 94.4% at the end of 2023. At quarter end, our cash and unused borrowing capacity represented 158% of total uninsured deposits and 203% of adjusted uninsured deposits.
Turning to Slides 8 and 9. Net interest income for the quarter was $20.7 million and $21.9 million on a fully taxable equivalent basis, up 4.7% and 4.2%, respectively from the fourth quarter. Yield on average interest-earning assets increased to 5.45% from 5.28% in the linked quarter due primarily to a 23 basis point increase in the yield earned on loans and a 9 basis point increase in the yield earned on securities, partially offset by a 6 basis point decline in the yield earned on other earning assets.
The higher yields on interest-earning assets, combined with the growth in average loan and securities balances produced solid top line growth in interest income, increasing nearly 3% compared to the linked quarter.
As deposit costs and average interest-bearing balances were up modestly, net interest income was up almost 5% during the quarter, building on last quarter's increase and further reinforcing our belief that net interest income hit its low point in the third quarter of 2023, as shown in the bar chart on slide 8.
Net interest margin for the first quarter was 1.66% and 1.75% on a fully taxable equivalent basis, which were increases of 8 basis points and 7 basis points, respectively from the fourth quarter.
The net interest margin roll-forward on Slide 9 highlights the drivers of change in fully taxable equivalent net interest margin during the during the quarter, the relative stability in deposit costs, as highlighted in the graph on slide nine that tracks our monthly rate on interest bearing deposits against the Fed funds rate which has been and will continue to be a catalyst in driving net interest margin expansion.
With our focus on improving the composition of the loan portfolio and replacing lower yielding assets with higher yielding and variable rate production. We continue to forecast growth in total interest income in the second quarter of 2024 and throughout the year.
Currently, we expect the yield on the loan portfolio to be up around 15 basis points to 20 basis points for the second quarter. Furthermore, with short term interest rates stabilized and narrowing repricing gap in CDs, we anticipate only a modest increase in interest bearing deposit costs similar to what we experienced in the first quarter.
Turning to noninterest income on Slide 10. Noninterest income for the quarter was $8.3 million, up $900 million -- up $900,000 from the fourth quarter. Gain on sale of loans totaled $6.5 million for the quarter, up 8% over the fourth quarter and setting another quarterly record for our SBA team.
Loan sales volume was $80 million, down 11.5% due to seasonal factors compared to the linked quarter, but this was more than offset by higher net gain on sale premiums, which were up 150 basis points quarter over quarter. We also saw an increase in net servicing revenue during the quarter as our serviced SBA portfolio continued to grow following the strong origination results of the last two quarters.
Moving to Slide 11. Noninterest expense for the quarter was $21 million, up almost $1 million from the fourth quarter and in line with our expectations. The increase was due primarily to higher salaries and employee benefits and marketing expenses.
The increase in salaries and employee benefits was the result of annual resets on certain employee benefits, payroll taxes and incentive compensation accruals as well as annual merit increases and new hires, partially offset by lower Small Business incentive compensation and lower medical claims. The increase in marketing expenses was due mainly to higher advertising media and seasonal sponsorship costs.
Turning to asset quality on Slide 12, David covered the main major components of asset quality for the quarter and his comments. So I will just add some commentary around the allowance for credit losses and the provision for credit losses.
The allowance for credit losses as a percentage of total loans was 1.05% at the end of the first quarter, up 4 basis points from the fourth quarter. The increase in the allowance for credit losses reflects the addition of specific reserves related to the additional nonperforming SBA loans as well as loan growth in portfolios with higher ACL coverage ratios, partially offset by the positive impact of economic data on forecasted loss rates in other portfolios.
Provision for credit losses in the first quarter was $2.4 million compared to $3.6 million in the fourth quarter. The provision for the first quarter was driven primarily by the additional specific reserves growth in certain loan portfolios and the modest net charge-offs.
If you exclude the balances and reserves on our public finance and residential mortgage portfolios, which have lower coverage ratios given their lower inherent risk. The allowance for credit losses represented 1.25% of loan balances. Furthermore, with minimal office exposure, we do not require the excess reserves around that asset class that many other banks have.
Moving to capital on Slide 13. Our overall capital levels at both the company and the bank remained solid and the tangible common equity ratio was 6.79%, down modestly from the fourth quarter. This was due primarily to an increase in accumulated other comprehensive loss as medium and long-term interest rates increased throughout the first quarter.
The tangible common equity ratio was also impacted by the strong deposit growth and increases in cash balance cash balances during the quarter. If you exclude accumulated other comprehensive loss and adjust for normalized cash balances of $300 million, the adjusted tangible common equity ratio would be 7.61%.
From a regulatory capital perspective, the common equity Tier one capital ratio remained solid at 9.52% at quarter end. Tangible book value per share was $41.83, which is up 1% from the fourth quarter and up almost 7% year over year.
Before I wrap up, I would like to provide some updates on our outlook for the remainder of 2024. As a reminder, our approach to forecasting this year is to assume that the Federal Reserve maintains a higher for longer outlook and does not lower the Fed funds rate during 2024.
We still feel confident that annual earnings per share for the full year of 2024 will be in the range of $3 per share. However, some of the moving parts that get us to that number have changed a little bit. With regard to net interest income as I mentioned earlier, we expect loan yields to continue to increase.
While growth in deposit costs should be relatively modest with loan growth in the range of 5% to 10% for the year, we still expect annual net interest income to be up 20% for 2024 with fully taxable equivalent net interest margin continuing to increase throughout the year and be in the range of 1.9% to 2% in the fourth quarter.
Related to noninterest income, with the combination of our SBA team continuing to deliver consistently higher origination activity and stabilization in the secondary and secondary market pricing, our outlook is even more optimistic than it was at the beginning of the year.
However, the expectations for higher fee revenue will be partially offset by higher expenses as we expect to add additional personnel in SBA and risk management as well as make additional investment investments in technology and in our risk management processes around our fintech partnerships program.
With that, I will turn it back to the operator so we can take your questions. Selby?

Question and Answer Session

Operator

Thank you sir. (Operator Instructions)
Tim Switzer, KBW.

Tim Switzer

Very good afternoon. Thanks for taking my question.

David Becker

Hi Tim.

Kenneth Lovik

Hey Tim.

Tim Switzer

My first one is I appreciate the guide on NII and NIM trajectory. And you guys have been conservative excluding the impact of rate cuts. If we get say one or two rate cuts and near the back half of the year. What kind of impact do you guys think that has on NII and the NIM.
And then does the beta on deposits kind of change over time. If we get into 2025 minutes a series of rate cuts, does that beta kind of accelerate and you start to get even more of a benefit over time?

Kenneth Lovik

Let's take the first part of your question first, I think roughly speaking, depending on how you want to slice it, it's you know, a 25 basis point rate cut is roughly $1 million or so of NII. So that's on an annualized basis. So I guess you would have to wherever you want to choose to put the timing on that.
But that's about an annualized number on the betas on the deposit side, we do have we have over $1 billion of deposits that are tied directly to Fed funds. So the beta on those is going to be 100% regardless. And then you get into CDs if you're repricing CDs, those generally follow 100% beta are pretty close to that as well. So CDs will reprice down as well.
And we've probably got some other money market and savings accounts where the beta isn't going to be 100%. It's probably closer to say 50% or 60%. And those have been pretty consistent over time. But that's kind of I mean, that's kind of the way that I would look at deposit betas on the way down.

Tim Switzer

Great. That's really helpful on. And then I have kind of a more specific question, but one of your disclosed borrowers in your single-tenant lease financing portfolios. Red Lobster recently is going through a bankruptcy and I don't know if you can talk about its customer specifically.
But could you generally talk about your collateral and how it bankruptcy could works. I know it's the company not necessarily the franchises on your single-tenant portfolio, how that could work. And then if you have other exposure and your other portfolios like franchise.

David Becker

Red Lobster side of things. We just actually had a credit committee meeting this morning. I got an update at our peak. We were almost $82 million in Red Lobster facilities across the country, and that's now down around the $40 million mark. We've been on our single tenant lease portfolio. It's the borrower first property, second franchise or center Red Lobster happens to all the Company owned stores.
There is not really a franchisee involved what we are hearing from the company at this point, it's been post-COVID. The companies change hands twice. It's really a res structuring that some of their long-term debt would be remember back when COVID hit Red Lobster was in trouble with no delivery system, no online ordering or whatever.
So they put a lot of infrastructure in the play over the last three or four years, ran up some pretty significant costs question, whether the current owner paid the right price for the how when they bought the services. But all of our buildings are in great metropolitan locations. Our average loan to value on the real estate itself is under 50%.
We have had Red Lobster's over the years go dark and the reposition generally as some other franchise restaurant or a label within a matter of a couple of two or three months, and we've been in it for seven, eight years now. And we've never had an account. So abundant delinquency less.
So we're pretty confident right now that we're okay, I don't think they're going to go into full liquidation. That would definitely change things a little bit. But with particularly the borrowers we have in the Red Lobster vertical, they have the capacity to carry those loans from months until they can be repositioned into something else. So at the current time, we're not too worried about what's going on with it.

Tim Switzer

Great. That was all some color, really appreciate it. Did you say all these properties there are company owned and none of them are franchises?

David Becker

Yeah, the actual operations of the restaurant are done by Red Lobster is not a franchisee. They're all company-owned locations.

Tim Switzer

Okay. So your borrower for all of these is actual red lapse to the company?

David Becker

No, no, no, they're individual real estate investors, individual models of all of them, virtually all of our consumers that are single tenant lease product. We I don't know, can you kind of view and listening in on our call, the single tenant lease side of things. It's individuals that I buy.
I take Red Lobster side, but like a CBS comes in and puts a new drug store here in Fishers. They don't want to hang onto the property in the real estate and a single store doesn't get the insurance companies or the big banks interested in buying them and the one off. So we kind of fill that market.
Four of them were an individual investor will come in and buy it most of them have [$10, $31] associated with them. So the portfolio as a whole is right at 50% or less in loan to value and the actual property. So we value the property, we make that credit decision based on the investor, and then we look to the franchisee or franchisor as kind of a third party repayment stream.
And we've been doing this for 12 years now, probably $2 billion plus in origination. And all that time, we've only had one loan that we took a loss on. So it's just a rock-solid product. We've weathered a different reorganizations Applebee's a few years ago and into massive reorganization six, nine months ago. Burger King did the same thing in it. It had no impact on our portfolios and our clients.

Tim Switzer

Got you. That makes sense. I really appreciate the color details there. That's all for me.

David Becker

Yes, welcome aboard.

Operator

Brett Rabatin, Hovde Group.

Brett Rabatin

Hey, good afternoon, guys.

David Becker

Hey Brett.

Kenneth Lovik

Hey Brett.

Brett Rabatin

I wanted to start with SBA and well, I guess I guess first, just want to go back to the guidance from I think you were giving guidance for 30% fee income growth of 8% to 10% expense growth. And it sounds like both those numbers are a little higher now, but I didn't get if I heard you guys gave an exact number. I didn't get one if here pointing gives a specific number for those two items.

David Becker

That gets wanted to let you do a little bit of homework.

Kenneth Lovik

Yeah, I would say that the expenses are probably, you know, probably closer to some with some of the investments we have to make and probably closer to the 10% to 12% range. But I can tell you that the outlook for SBA is up significantly from where we had to talked about at the end of the year.

Brett Rabatin

Okay. And as it relates to SBA, another bank today was out building reserves on their SBA portfolio and was basically just indicating that some mainstream SBA borrowers were struggling with the higher rate environment and the impact to their overall debt obligations. Can you guys maybe talk about how much of your SBA portfolio on balance sheet is guaranteed versus nonguaranteed. And then if you're seeing anything specific in that portfolio,

David Becker

What's on the balance sheet is our risk that at 100% on I said that in the outstanding asset as we've sold loans over time and during COVID, there was a period where the SBA was guaranteed 90% of the balance. So I don't know how that blends out between that [25%, 10%] number.
But to give you a feel, Brett, we just the most current information, the SBA, like any governmental agency run slow we received a report last week. That's the end of November data and what they classify as nonperforming assets, anything over 90 days or more past due or on nonaccrual.
Our ratio was 2.19% and were rated low risk compared to our peer group, which was 8.02%. So we're one quarter of a percent of what the industry as a whole was experienced. And so we did SBA has a higher delinquency and will potentially have higher loss rates than we're used to.
And we've been in the RV industry for 25 years and have a cumulative or an average of less than 75 basis points of losses. So SBA numbers are a little high for us, but again on industry standards were on the low end of the risk spectrum as far as the SBA products.
So we're diligent on the underwriting. Some people view. Anybody can get an SBA loan because it's government guaranteed, we only have a 25% risk. We don't view it that way. We still have very solid credit underwriting standards that we comply with So again, it's high for us, but from an industry level, we're very comfortable where our portfolio is at.

Brett Rabatin

Okay. That's helpful. And then just lastly, you mentioned building up the fintech from a risk perspective with back office Pires. Um, you know, with the novel activity guidance from the SEC and now from other regulators as well, is it fair to assume that you're going to be building capital ratios and liquidity from here?
Or how should we think about what are some of the requirements that the regulators are imposing on balance sheet.

Kenneth Lovik

And well, I think, well, I mean, probably I mean, just from an overall perspective, our we view this year is building capital anyways. And I think we've maintained pretty high liquidity high levels of liquidity over the last several years. I don't think I mean, we think about it in the context of the overall organization, not necessarily specific to one line of business.

David Becker

And we can take we obviously can't give you ratings, Brett, but we've completed the safety soundness exam for 2023, and they had no questions or concerns on our capital ratios, liquidity.

Brett Rabatin

Okay, great. Appreciate the color. Thanks, guys.

David Becker

All right, appreciate sir.

Operator

George Sutton, Craig-Hallum Capital Group.

Yes, this is James on for George, nice results and thanks for taking my question.

Kenneth Lovik

Hey James.

David Becker

Hi James, how are you doing sir?

So I'm good, could you talk about the fintech partner pipeline, all that, that pipeline growing? How have conversations with customers that have been in the pipeline for a while kind of evolving? And then longer-term, what's sort of your vision for the fintech franchise in terms of types of partnerships like lending versus deposit, the potential financial contribution?

David Becker

I'll take it and then Ken might give you some more color on the sales side or the pipeline into that we have can in some state of being live or in process of testing. We've got 10 more. We're sitting on about 20 that were in some kind of contract negotiations, some part of due diligence that we're looking at our play is to kind of clean up that pipeline.
There's a lot of a lot of noise in fintech now with Synapse being acquired are in the process of being purchased. Treasury Prime is change their operation. There's just a lot of craziness going on. We've got some very solid prospects. As Ken stated, we had a nice bump up in revenue here in the first quarter. Is that going to double down for the rest of the year every quarter.
But we've got some really strong players in the pipeline and some nice stuff coming. So we're getting some interesting at that with some of the things that's happening in the marketplace. So we're going to kind of keep our powder dry and look for really good opportunities.
I would tell you in the 10 that are not live, there are some of them now because of capital constraints on their part or ability to raise additional capital and pressure that they're getting from their original investors.
As we all know, 12, 18 months ago is all about growth. Nobody cared about the bottom line, and that's done a [180] on and now it's all about bottom line, not necessarily growth and some are trying to figure out how to get to a positive bottom line.
So far, one of my philosophies for 40 years in businesses when there's the greatest chaos in the marketplace is also the greatest opportunity. So we're kind of watching what's going on and we'll selectively pick up opportunities where we can with some of the folks who have dropped out and some folks have pop in. So it's still a good growing part of our business.
Can say we're going to at minimum triple down on what we did last year, which is great growth and some of the stuff on the other side, I go back to the comment about staffing and compliance stuff. A lot of those parts is Ken also mentioned we're installing some new tools.
A lot of those things can be tracked electronically. Now new tools new services. So it is a combination of staff. Somebody it's obviously got to run those tools, but control and operation and staying on top of the best companies are a lot easier with some of the newer technology tools out here today.
So a little bit of that is get the house in order to get that set up and that will allow us to even grow some a little bit faster. So crazy market, but I still think it's a good market all in.

Just on what percent of the loan book today is variable rate? And where would you expect that mix to trend in a higher for longer scenario versus scenario where we get a couple of rate cuts?

Kenneth Lovik

You know, we're kind of in the low 20% of the portfolio, probably getting closer to 25% and look our goal, and that's probably coming from somewhere closer to 10% to 12%. So I think the higher for longer scenario, we certainly want to keep managing it, but probably just even if rates come down, it's still just prudent to have a higher portion of the portfolio in variable rate assets. So our we're trying to trying to drive that number as high as we can here over the next, you know, next couple of years.

Makes sense. And then last one for me. Just what do you guys think is working so well in SBA? Thanks guys.

David Becker

I would say, yes, some of our peers over the last 18 to 24 months for any myriad of reasons coming out of COVID, balance sheet issues, deposit issues and some of the smaller community banks are obvious and their customers have woken up to the fact they get much better money elsewhere and pulling deposits.
There's just a lot of people that have pulled back in the SBA arena over the last 12 to 18 months. And we've been able to hire some absolutely tremendous people with very seasoned veterans in the industry with good lead sources.
Good operational background, good oversight. So I think our key to success versus the rest of the market, quite honestly, has been the people we've been able to track over the last 24 to 36 months has a lot of folks have put the brakes on it, either stopped lending and total or pulled back for a period of time.
As you well know, any good salesperson can't stand idle for very long. So we've been very, very fortunate to kind of hit the market at the right time and really build a tremendous team people all across the country in the SBA arena. So I think that's our key to success compared to some of the other folks in the market today.
And again, our underwriting standards, we don't view SBA licenses ability to loan to anybody. We still have some standards and protocols that we go through. We do not approve every loan that we see. And I think in some respects, we're a little faster and maybe a little more efficient than some of the other facilities.
Because of some of the tech, we're able to use some of the systems and SBA very antiquated, some lumber real close to old green screen still, but we've got great people behind it that can move things along in that. I think our key to success really is people.

Operator

Nathan Race, Piper Sandler.

Nathan Race

Hi guys, good afternoon. Thanks for taking the question. Just going back to your comments, kind of around some of the CDs that are maturing over the next couple of quarters? I'm not sure if you called it out, but just in terms of the our replacement costs.

David Becker

(inaudible)

Kenneth Lovik

Oh, yes. Well, I mean, if you I guess you if you make the assumption that our kind of our blended rate on new originations and renewals currently, which is kind of a [495] number by the time we get to the third quarter, we're pretty much right on top of that.
And in fact, over the next over the next 12 months, there's $1.2 billion of CDs maturing at roughly that same rate. So we've kind of, you know, again in another quarter. So we're going to hit that repricing where the repricing gap is essentially zero.

David Becker

Okay. Provided that that doesn't generate a ton of it, right, right.

Nathan Race

Right. In assuming the Fed remains on pause through the end of this year, just based on what you guys are seeing from a competitor just from a competitive perspective, excuse me, relative to them other it banks do foresee the opportunity in your margin guidance to reduce certain rates ahead of Fed cuts or how are you guys kind of thinking about that opportunity potentially?

David Becker

We dropped CD rates need from six months up about a month ago, and we just talked earlier this week on a few of them, we're going to drop another 5 basis points. So I think everybody's been at it for the financial institution level. If you've been watching money market rates, American Express, Ally, a bunch of folks have bumped down.
I think Cap One have lowered their money market rates by 5 basis points, 10 basis points here in the last 30, 45 days. So I think the industry is ready to drop rates. And as they do, we will as well. And as Ken said, we're right on top of it on the CD. level.
And I think we'll actually get that turned around the other way. So the replacements coming onboard today will be cheaper than what's rolling off in the not-too-distant future. And if the February 100% with Ken, if the Fed does Bob, anything, it will be 100% data, obviously, on the Fed funds floaters.
But on the CD world, that will be almost 100% across the line to our basic money market account rate for the folks less than $1 million in deposits, that'll probably stay pretty constant and won't be a 100% beta, maybe a 5 point, 10 point bump down when the Fed moves.
But yes, anything will help us in I think we're in a great position going forward. We could actually be in a position in the third and fourth quarter for the replacement funds to be cheaper than what's rolling off.

Nathan Race

Okay. Great. Very helpful. And then just on deposit growth expectations, I think, Ken, you guided to 5% to 10% loan growth this year is expectations that deposit growth will largely are running at a consistent level, or is there maybe just now to bleed down some of the excess cash that you still have on the balance sheet?

Kenneth Lovik

It probably little bit of both, right. I mean, we built some liquidity here in the first quarter. I think we recognize is probably smarter to keep higher liquidity than historical. But there's I think we expect to probably bleed down a little bit of that.
But I expect deposit growth to obviously it was much more than loan growth in the first quarter, but it should keep pace with loan growth, maybe a little bit more as we bleed some cash down, but it should I mean, it should be relatively in line with loan growth throughout the rest of the year.

David Becker

And we also have some commitments we made back in the financial year craziness following Silicon Valley and everything blowing up. We made some pretty long-term commitments with long term at the time of 12 month, 14, 18 month commitments with individuals that had a Fed funds [plus 10 plus 20 plus 25]. And we've got a bunch of that coming due here, almost $250 million to $300 million over the next three to six months.
And we're in a position now that we can let that go away and replace it with less than Fed funds money. So as Ken said, we're keeping a little extra liquidity on the balance sheet and today for opportunities like that, repriced up and let some of that more brokered type money go away here over the next three to six months.

Nathan Race

Yes, it makes sense on. And David, I think earlier you mentioned our revenue from partnerships is expected to double year over year versus 2023. I get those numbers down as we've disclosed the release. So can you kind of help frame out specifics around that?

Kenneth Lovik

Yeah, we are as I think I said in my comments, we had about $600,000 plus of fintech partnership revenue in the first quarter. And when we look at our forecast that number's going to grow, it was up almost 50% over Q4.
And David's comments, what he was trying to say is I don't expect that to grow 50% every quarter here, but there is a big piece of that that's recurring revenue. So we're going to see some more kind of more single, the low double digit growth in that number.
But for the full year, our expectation is that fintech partnership revenue, which includes interest income and fee income, will be about 3 times what our revenue was last year.

David Becker

And then help pinpoint that one for you, Nate, our revenue last year was around $900,000. So we're going to push it up between that $2.5 million to $3 million mark this year.

Nathan Race

And that's including both fee income and interest income?

David Becker

Yeah.

Kenneth Lovik

Yep.

Nathan Race

Okay. I believe that's all I had. Thank you. And Ken just lastly on the tax rate going forward.

David Becker

Depends on who becomes President right now.

Kenneth Lovik

I think you know, our effective tax rate, our effective tax rate, this quarter was 7.5%. And you know, it's probably that's probably not a bad number for the next few quarters. Obviously, as income continues to grow and as we now get into next year as well.
If you take a fourth quarter EPS number and just run rate that for next year, that that number is going to migrate probably closer to 10% to 12%. But I think in the near term here, kind of 7.5% to 8% is probably an okay number.

Nathan Race

Okay, great. Thanks, guys.

David Becker

Thanks sir.

Kenneth Lovik

Thanks, Nate.

Operator

John Rodis, Janney.

John Rodis

Hey, good afternoon, guys.

David Becker

Hey John.

John Rodis

Actually can I was going to ask you on the tax rate, but I guess I am just curious on the loan growth, 5% to 10%, that's a pretty wide range last quarter, you said 5%, 5% to 6%. Just curious why such a wide range.

Kenneth Lovik

You know, some of it is, you know, in this environment to I think what we've seen and this probably doesn't surprise anyone, is it some of we probably had to slow down some. I mean, we had slow prepayment speeds in the model to begin with, but they probably even slowed down further this year. So we're probably retaining balances at a higher rate than we would have originally forecast.
And then just as we've talked about with SBA having very strong year, our construction team continues to do well. We've had a few deals in our construction space that were scheduled to pay down here in the for the first quarter, early second quarter.
But we've kind of converted them to a mini-perm and we put them into the investor CRE bucket, and we'll be holding those for longer. So those are just some of the dynamics that are impacting that estimate of growth overall growth for the year.

John Rodis

Okay.

David Becker

The other side on John, we're out there. We're seeing larger deals on the construction opportunities, particularly in the warehousing space as more and more stuff is coming back to the US and beyond, built locally stored locally yet locally warehouse transactions are huge.
Just here in the state of Indiana, in the last 48 hours they've announced like $4 million in warehouse space needs and companies coming into the state of Indiana. And those are big, choppy, big chunks that are kind of choppy. So we could pick up some of that business and which would be great for us. And there's just a lot of activity. So our CRE guys are pretty bullish on what's out there in the marketplace right now.

Nathan Race

Okay. Thanks David. Ken, just back to the tax rate, so you said near term, so sounds like the next couple of quarters, you said 7.5% to 8% and then could maybe go into sort of that 10% to 12% range?

Kenneth Lovik

Yes, I would I would probably walk it up in your model as we get you know, again, as we continue to build net income quarter over quarter.
Yes. I mean, you can probably walk it up from 7.5% to 8% through this year. And if you're starting to work on a have a 25% number. It's probably maybe somewhere in the 8% to 10% range. There may be a maybe even that's probably maybe even higher maybe 10% to 12% there.

Nathan Race

Okay. And then, Ken, just one final question. Just if you look at the level of fee income to total revenue for the quarter, it's 27%, 28%. Do you think do you think you can grow that if SBA continues to be strong, but the margins going up to do you sort of think you stay in that stay in that high 20s, 25%, approaching 30%, I guess. Is that sort of the right way to think about it?

Kenneth Lovik

Yes, I think so. I mean, I think eventually we'll probably, you know what I guess if we assume for this year with no rate cuts and we're growing NII because we're repositioning the loan book and making more on loan yield and deposit costs are going up.
That's good. I mean, when we start getting some real rate cuts, that might change a little bit because NII growth will accelerate, but I think you're looking at it. I think there I think that's the right way to look at it, John.

Nathan Race

Okay. Thanks, guys. Have a great day.

David Becker

Thank you.

Kenneth Lovik

Thank you.

Operator

Thank you. And at this time, Mr. Becker, we have no other questions registered. Please proceed.

David Becker

All right. Thank you, Selby. Thanks, everybody, for joining us on today's call. I'm happy to say there's a lot of craziness out here in the market at the current time, a lot of the issues about the past inflation is going to take. And based on that, what the Fed might do on rate cuts. We're optimistic about our outlook, irregardless of kind of what happens in that space.
Strong performance as we just discussed about our commercial and consumer lending teams, including all the growth we've experienced in small business and construction can drive even greater revenue growth for us. So in a stabilized deposit costs and it paints a real favorable earnings picture for us going forward.
As fellow shareholders, we remain committed to driving improved profitability and enhancing shareholder value. And we thank you for your support your time today and wish you a good afternoon. Thanks, everybody.

Operator

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 line.