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spk05: Thank you for standing by, and welcome to the Q3 2023 USCB Financial Holdings, Inc. Earnings Conference Call. I would now like to welcome Luis de la Aguilera, Chairman, President, and CEO, to begin the call. Luis, over to you.
spk02: Good morning, and thank you for joining us today for USCB Financial Holdings Third Quarter 2023 Earnings Call. With me today reviewing our Q3 highlights is CFO Rob Anderson and Chief Credit Officer Ben Passos, who will provide an overview of the bank's performance, the highlights of which you can see on slide three. As we report our third quarter earnings, I am pleased to highlight the rebound in loan growth following earlier concerns this year about the safety and soundness of the banking industry. The third quarter saw $135 million in new loan production, more than doubling the volume of the previous quarter. Our commitment to enhance net interest margin is evident in the 8% weighted average coupon on new loans in Q3 production, exceeding our portfolio average. Shortly, we will review this consistent increase in both production and yield. We are encouraged by the continued diversification of our loan growth, particularly the 59% in new non-SRE loans for the quarter. This diversification is a result of the contribution to loan production from our numerous business lines, including association lending, SBA lending, yacht loans, and correspondent banking. Throughout 2023, 65% of all loan production has been generated through these business lines, reducing CRE concentration since the beginning of the year to 363% and well spread over various asset classes. Furthermore, We took the opportunity to restructure our bank-owned life insurance, which bolstered BOLI revenue by $982,000 this quarter, and we offset this one-time non-recurring gain with a comparable-sized security loss trade. This small portfolio restructuring will allow us to optimize our investment portfolio by transitioning from lower-yielding securities to higher-returned investments. Despite a decrease in NIM early in the third quarter, September's NIM increased to 2.7%, which reflects the resilience and adaptive spirit of our bank in fortifying our financial performance. As a commercially focused SBA preferred lender, U.S. Century is committed to support South Florida's small business community. Early in 2020, we launched our SBA Business Initiative, which has generated over $115 million in and SBA 504 and 7 loans, while generating over 4 million fees on the gain on sale of the guaranteed portion of the 7 loans. Serving over 7,000 small business clients, we recognize the responsibility and business opportunity in supporting the lending needs of these clients. With that said, we launched this past quarter a strategic partnership with industry-leading technology partner NewTekOne, delivering a fully integrated small-ticket SBA 7A online application and expedited approval process. In business since 2000, NewTekOne is a publicly traded company listed on NASDAQ and an industry leader in the field. This partnership will efficiently support our existing small business relationships and attract new clients without additions to staff. Since launching this initiative this past September 7, 61 applications totaling $12.5 million have been submitted. The program accepts loans between $10,000 to $500,000. Management's commitment in ever-improving operational efficiency can be observed in the year-to-year declining trends seen in the bank's non-interest expense to average assets, which improved from 2.1% in 2021 to 1.97% in 2022, to 1.84% this past quarter. We are committed to running an efficient bank, and any expense saved allow us further investment in people and technology to improve our platform here in South Florida. To this end, our focus on growing low-cost deposits was reinforced in the third quarter with two new hires, one in our association banking group and another in the private client group which is focused on delivering personalized concierge level service to the local attorney market. These two deposit aggregating businesses have grown 300 million since their launch in 2017, and the new hires will support our targeted deposit growth plans. The following page is self-explanatory, directionally showing nine select historical trends since recapitalization. Profitable performance based on sound and conservative risk management is what our team is focused on consistently delivering. So let's now turn our attention to our specific financial results and key performance indicators, which were reviewed by our CFO, Rob Anderson.
spk03: Thank you, Lou, and good morning, everyone. Overall, I would characterize this quarter as resilient. The management team executed on several initiatives, which we believe positively impact forward earnings. As we move through the slides, I'll be pointing out why we believe our financial performance is starting to recover compared to previous quarters and why management feels more optimistic about the upcoming quarters. With that, let's get into the numbers. Total assets were $2.2 billion for the quarter. Loan balances were $1.7 billion, up $81 million from the prior quarter. Deposits were $1.9 billion. At quarter end, we have $416 million in securities and total equity closed at $183 million, a slight decrease compared to the previous quarter due to the increase in unrealized losses in the security portfolio with higher interest rates. Despite a difficult operating environment, the deposit portfolio remains flat for the quarter. However, when we review average balances, you'll see an annual growth rate of 10.1%. Moving on to the P&L, net interest income was slightly down compared to the prior quarter, as we have been in an inverted yield curve for some time. The good news is that we saw an inflection point in our NIM with the low point in July and both August and September steadily increasing. I will expand on the NIM conversation as we progress with the call. Another good thing to report this quarter is the increase in non-interest income. Compared to the prior quarter and last year, the non-interest income was up due to SBA fees and higher wire fees where our high-touch concierge business verticals differentiate themselves from our competition. Furthermore, within this line item, we executed a small security loss trade and restructured our bank-owned life insurance portfolio, which will provide higher earnings going forward. Expenses were flat from the prior quarter, and we booked $653,000 for loan loss provision with growth in our loan book. On a gap basis, net income was $3.8 million, or 19 cents per diluted share. Let's briefly cover our performance metrics for the quarter. In terms of soundness, our credit metrics remain strong. Our loan loss reserve coverage was down slightly to 1.16%. In terms of profitability, our return on average assets was 0.67%, and our return on average equity was 8.19%. Our NIM was 2.6% down 13 basis points from the prior quarter, but we believe we are at or near an inflection point as we have started to see a normalization in the interest expense on our deposits, and we have been able to book higher-yielding assets this quarter. More on this in a bit. Non-interest expense to average assets ticked down to 1.84%. Intangible book value per share moved down to $9.36 per share. which is reflective of the negative mark of $2.62 per share in AOCI referenced earlier. Absent the AOCI mark, our tangible book value per share would have been $11.98. Moving on to the next slide. A big part of our NIMS story centers around our deposit costs and composition, where we are continuing to see the shift in deposit mix with balances moving out of DDA and into interest-bearing deposits, it is happening at a much slower pace. Many of our competitors are still offering higher rates on interest-bearing deposits, and we have felt that pressure. However, as mentioned before, we have maintained our deposit pricing discipline and believe that is evident in our overall deposit cost compared to peers. Overall, there are three positive takeaways from this slide. The first is that our deposit beta is within our modeling assumption at 41%. The second is the average DDA that total deposits was 30%, which is within our expectations. And the third is that monthly we have seen deposit costs increasing, but at a much slower pace. A slower interest expense growth and a faster yield on earning asset growth will have a positive impact on our NIM going forward. Nevertheless, a material positive NIM impact will depend on our ability to attract and retain DDA checking accounts. Let's move forward. Our deposit base reflects our business model, a diversified commercial community bank. 49% of our deposits are commercial accounts, 37% personal accounts, 11% public funds, which are partially collateralized, and 3% brokered. The total amount of uninsured deposits adjusted by the collateralized portion of the public funds is 49% for the quarter. And if you excluded the collateralized portion of public funds, The uninsured deposits are 53%. Let's move forward to liquidity. For this quarter, liquidity decreased from previous periods as we experienced strong loan demand. Accordingly, you'll notice our loan-to-deposit ratio increased to 87.3%, an increase of 420 basis points compared to the previous quarter, and an increase of 760 basis points compared to the previous year. Our on-balance sheet liquidity is $229 million, and our off-balance sheet sources, excluding brokered and listing CDs, is more than $513 million. Given this, we feel confident that these liquidity sources are adequate for us to navigate the current environment. With that, let me turn it back to Lou to discuss our loan book.
spk02: Thank you, Rob. Average loans increase $41.6 million, or 10.52% annualized compared to the prior quarter, and $212 million or 15.2% compared to the third quarter 2022. Directionally, portfolio loan yields have increased 103 basis points compared to the third quarter 2022, a trend that will continue through the end of the year. The slowdown in loan demand seen after the crisis in confidence triggered by the sudden failure of SVB and other banks has abated. Our lenders responded, so did the market, and production more than doubled over the previous quarter. As noted, loan production was well diversified over various asset classes. As we see in the graphic, quarter to quarter, the weighted average coupon on new production continued to increase from 485 basis points in Q3 2022 to 800 basis points in Q3 2023, or 247 basis points above the portfolio average. In the third quarter, gross closings topped $135 million, and the active pipeline is strong as we forecast similar activity, diversification, and pricing into Q4. Asset quality and continued portfolio diversification is our ongoing priority. Chief Credit Officer Ben Fossels will be reviewing on slide 16 our loan portfolio mix as well as growing production volumes contributed by our non-CRE business verticals.
spk03: Okay, let me pick it up on page 12 or slide 12. Net interest income decreased by $151,000 compared to the prior quarter, predominantly due to an increase in deposit costs. While deposits grew from year to year on average, the growth has been towards interest-bearing accounts, which had a negative impact on our interest expense and consequently on the margin. Despite a decrease in our NIM quarter over quarter, we saw an inflection point early in the third quarter with both August and September's NIM higher than July's NIM. September's NIM increased to 2.7%, which was 10 basis points above the quarterly average. Absent further rate hikes, we have reasons to believe that our NIM will continue to improve and stabilize going forward. This includes the following. First, the third quarter new loan production coupon was 8%, and we expect similar coupons in the coming quarters. With consistent loan growth and increasing yields, we can eventually overcome the historical rise and pace of interest rates that has impacted our deposit book. Second, and to the point above, we have already experienced slower increases in deposit costs. In September, our deposit cost was 2.42%, while for the quarter was 2.39%, which reflects a slower pace of increasing rates compared to prior quarters. Next, we executed a small security loss trade with our BOLI restructuring. This allowed us to sell 7 million low-yielding securities and put the cash flow into loans yielding 8% more than a 625 basis point improvement. While small, it does provide incremental benefit, and as everyone knows, it is the cumulative effect of multiple items that eventually make a difference. Last, we further prepared for a higher-for-longer rate environment by putting on another 100 million notional pay fixed interest rate swaps. This tranche of interest rate swaps was similar to the previous set in which we took advantage of the inverted yield curve by paying a fixed amount at the two and a half year tenor spot and receiving floating rate SOPR. The interest rate swaps do two things for us. First, it provides us with an additional $2 million in net interest income on an annual basis at current rate. And second, it positions our balance sheet to be less liability sensitive. In fact, when you turn to the next page, you'll notice our balance sheet is now asset sensitive. And according to our model, our balance sheet went from neutral to liability sensitive in year one and asset sensitive in year two to now being asset sensitive for both years, as you can see in the chart. This is a direct result of booking $250 million notional of interest rate swaps in totality over the past couple quarters where we went out on the curve and paid a fixed amount and received a variable SOFR payment on the front end of the curve. Furthermore, the efforts of diversifying our loan book with shorter duration, yacht and CNI loans increases our asset sensitivity. As discussed before, our practice is to book 10-year fixed rate CRE loans that have a repricing mechanism after year five. We price these loans with an index tied to the five-year CMT. And while we expect 31% of the variable and hybrid loans to reprice within a year, we have $210 million of loans repricing within the next six months. And we expect to reprice $66 million of securities between now and the end of 2024, which leads me to the next slide. A key component of our balance sheet and liquidity management is our securities portfolio. And for the third quarter, the fair market value of the securities portfolio was $416 million, of which 52.6% is classified as AFS, while the remaining 47.4% is classified as HTM or held to maturity. By classifying 47.4% of our portfolio as HTM, we have saved approximately $35 $6 million on unrealized losses, and that helps to preserve our tangible book value per share. Our portfolio has a modified duration of 5.4 years and the average life of seven. Duration has increased as the result of extended higher rates, which has also slowed prepayments and cash flows. And for the rest of the year, we expect to receive $29.8 million from the securities portfolio. And for 2024, we expect to receive another $36.7 million. And we intend to invest these cash flows at considerably higher yields as most of the securities portfolio was purchased when rates were at historical lows. With that, let me turn it over to Ben Pasos to discuss asset quality.
spk00: Thank you, Rob, and good morning to all. Our A-triple-L increase in absolute numbers, yet it is slightly lower in percentage than the previous quarter. The increase of $678,000 was strictly due to portfolio growth. The reduction in percentage from 118% to 116% was due to improvement of the economic outlook of the model. We continue with our Oreos and with just one CNI loan in non-accrual status. Moving to slide 16, we have information our loan portfolio makes. Out of a book of $1.675 billion, CRE loans amount to a little bit over $1 billion. However, our CRE concentration has decreased and is now at the lowest point of the year. Our biggest concentration is in the retail segment with $296 million, which translates into 29% of our CRE portfolio. as we usually do every quarter, the table on page 16 gives you the metrics of this theory book. Weather average loan-to-value ranging from 54 to 60%. Depth service coverage ratio ranging from 138 times to 2.18 times. And average loan size, considerably low, ranging from 1.3 million to $4.8 million. Going to slide 17, Rob will talk about our non-interest income.
spk03: Okay. Thank you, Ben. We had a positive quarter for non-interest income. Service fees increased compared to the prior quarter and year, which is driven by an increase in wire fees in both foreign correspondent banking and our private client group. The main activity here was the strategic restructuring of our bank-owned life insurance, which increased other income by $982,000. In short, we surrendered a portion of lower-yielding bully for higher-yielding bully, which will provide an additional $400,000 annually going forward. This $982,000 gain is a one-time, non-recurring item. And given this, we also took the opportunity to offset the bully gain with a similar-sized securities law. As mentioned before, the loss provided us with $7 million of liquidity, which reinvested in loans at 8%. This provided us with an additional 625 basis points and earned back on the loss at approximately two years. Let's take a closer look at our expenses for the quarter. Our total expense base was $10.5 million and flat compared to the prior quarter. Salaries and benefits were up as we adjusted the sales incentive accrual based on performance through Q3. Consulting and legal fees increased $150,000 due to a one-time non-recurring legal expense. Overall, this was a good quarter in terms of expense discipline as we were able to improve the non-interest expense to average assets by 14 basis points year over year. In terms of a forward run rate, we feel our quarterly expenses will be at or near $10.5 million per quarter near term and increase slightly more in 2024. Let's take a quick look at capital. Capital levels remain above well-capitalized levels, and as discussed before, AOCI was negatively impacted by higher rates this quarter. We have 172,000 shares remaining under our current authorization, which allows us to be opportunistic if the share price retreats. And with that summary, I'll turn it back to Lou for some closing comments.
spk02: While 2023 has presented a challenging operating environment for the industry, our management team has taken a prudent yet active approach in managing our balance sheet, liquidity, expenses, and capital. Our focus is on taking action that will safely enhance our margin and profitability as we prepare for a higher for longer interest rate environment. The Florida economy is strong and growing and amongst the best in the country, and we will take full advantage of these conditions as we operate in a dynamic market with many opportunities. To this point, we expect steady growth for USCB and forecast continued low double-digit diversified loan growth. In Q3, we added new production personnel focused on deposit growth, maintaining expense control as we reinvest personal cost savings in supporting growth strategies. We launched a complementary business line to our SBA initiative focused on small-ticket lending, leveraging a best-in-class technology partner, Again, this partnership will efficiently support our existing small business relationships and attract new clients without additions to staff. We have new initiatives coming online which will support 2024 performance with a continued focus on deposit growth. Deposit costs are slowing and we feel that we are at or near an inflection point as our name rebounded in September. Balance sheet and liquidity management actions are ongoing and have included interest rate swaps and the restructure of our bank-owned life insurance, which bolstered our boldly revenue. While the economic headwinds are evident, our management team is actively navigating a challenging operating environment focused on delivering sustainable results. With that said, let's open the floor for questions.
spk05: And at this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile any questions. Again, if you'd like to ask a question, please press star 1 on your telephone keypad now. Our first question comes from the line of Graham Dick with Piper Sandler. Please go ahead.
spk08: Hey, guys. Good morning. Morning. Morning, Graham. So I guess I just wanted to start on the margin. It seems like things are moving in the right direction there, but there's definitely a lot of moving parts right now with the swaps, the bond maturities, and then whatever loan growth you're putting on today that I assume is accretive to the margin, given what you said on the 8% new yield. So as you look at it from here, is there any... I mean, if you were to say that the Fed doesn't raise rates again and the environment remains pretty, I guess... as calm as it could be on the funding side, is there any reason we shouldn't see more margin expansion? I mean, it sounds like there was a large or there, you know, there was a sizable step up in September from, you know, the July and August levels just to be at 270 versus the average of 260. So is there anything that should stop the momentum heading into 4Q?
spk03: No, I mean, it's, we're throwing a lot at the margin and, uh, You know, we've taken a lot of pain early on because of the rise in rates pretty quickly and how that's impacted our deposit. We think our deposit cost is beginning to slow. And now our earning assets have to catch up. And a good piece of that was the loan production that we put on, which was $135 million at 8%. So that did impact the margin. And we booked a lot of that at the end of the quarter and predominantly in the last two to three weeks. You know, with some of the movement out of DDA and interest-bearing, I think management and our ALCO wanted a more neutral balance sheet. So we are prepared for a higher for longer rate environment. So the margin is the number one focus for us, putting on profitable business. And, you know, there's a number of things that impact it, but one, raising low-cost deposits and building relationships, putting on strong earning assets will outrun it. And, you know, Tinkering around the edges, I mean, I mentioned a $7 million loss trade. I mean, it's very small, but, you know, we're doing what we can to move it. So I think we're moving in the right direction, and we fully anticipate to keep that trend moving in the fourth quarter and into 2024.
spk08: Yeah, and then I guess just on the bonds that are maturing in 4Q, I think you said $30 million will mature in the fourth quarter. Correct. What is your thought process of...
spk03: We had a U.S. Treasury bond there that was maturing. That will either most likely go to loan demand or we could pay down some borrowing depending upon how deposits come in. But that will give us some optionality there.
spk08: So what would the spread pickup be there if you put into loans? So if you're getting a loan at 8% today, what's the bond yield?
spk03: Probably 300 basis points on $30 million.
spk08: Okay, 300 basis points pick up, got it. And so there is actually a question there on do you put it to loan growth or do you pay down borrowings? How do you guys think about, I guess, that decision?
spk03: I would say loan growth right now, and we're looking to raise some of the deposits. We have, as Lou mentioned, we hired some new talent that are focused on deposit aggregating, and we're focusing a lot on the deposit gathering. As you know, and I'm sure you've heard throughout the calls this quarter, it is a real slugfest for deposits right now.
spk08: Yeah. Okay, well, if you do generate some, I guess, some good deposit growth and the new hires can contribute, do you think that even not putting that $30 million into the, not paying off borrowings, do you think you could pay borrowings down just organically through deposit growth going forward?
spk03: Yeah, I mean, we could tap some public funds. Clients, you know, we'll have some seasonality there that we think on the public funds side that we'll have tax revenue that kicks in. That's seasonally, you know, higher in the fourth quarter. So we can use that to pay down some borrowings as well. But, you know, those are probably priorities as a loan growth and to maintain our borrowings or to pay it down.
spk08: Okay. Okay. And then just on the swap, can you walk me through the math on that again? I mean, I forgot it here from the last quarter, but it sounded like you guys added another $100 million this past quarter. And you're paying, what are you paying fixed on that new 100 million? If I remember correctly, the other two were paid 3.5%, right?
spk03: Yeah, so right now we have 250 million notional in total on our interest rate swaps. We did 50 million in the second quarter. We did 100 million early on in the third quarter. And then we just did another 100 million in September. And again, on this last 100 million, we went out on the curve. We did roughly $50 million at the three-year spot, $50 million at the two-year spot. We're paying $450. And then on the fixed portion of that, that's a two-and-a-half-year tenor spot. And then we're receiving SOFR, which is about $533 right now, so more than an 80 basis point carry at current rates.
spk08: Okay. Okay, got it. That's really helpful. And then I guess just the last thing on the margin, and then I'll leave it. On the fixed rate loan book, which is, I guess, true fixed rate is 41%. I see you guys break the variable down with a lot of detail. But on the fixed rate side, how much of that is up for maturity or repricing over the next, I don't know, call it through 2024? Not a lot.
spk03: I'll have to give you the specific number, but not a lot.
spk08: Okay. Okay. That's helpful. That's really all I needed. All right. Well, I appreciate it. I guess if I could just sneak one more in, it would be on expenses. It sounds like you guys are trying to optimize the expense base, taking out costs that don't need to be there, and spending them on revenue-driving personnel and technology. So what's sort of your outlook going forward? Do you think this $10.5 million is a good run rate, and then maybe you just grow slightly from here in 2024? I think we'll grow slightly in 2024.
spk03: We're looking at a couple new hires. whether or not we get them in the fourth quarter or not or the first quarter, but certainly there's some available talent in the marketplace. We are keeping a keen eye on the expenses right now with, you know, revenue being down in the quarter, you know, at 1.84% to non-interest expense to average assets. You know, I would argue that peers and benchmarks well. And, you know, I would say that 10.5% near term is a good number, but it will creep up in 2024, but we need to put the revenue on first. Okay, got it.
spk06: All right, I appreciate it. Thank you, guys. Thanks, Frank. Thank you.
spk05: Our next question comes from the line of Michael Rose with Raymond James. Please go ahead.
spk07: Hey, good morning, guys. Thanks for taking my questions. Just wanted to follow up on the expense commentary. you've noted now a couple of times, you know, how well you've done with the expense to the asset ratio. And I, I totally appreciate that just given the environments, you know, challenging for, for revenue growth. But yeah, you, you did mention there's a bunch of talent out in the market. You know, just given how strong, you know, South Florida is performing at this point. Why not be a little bit more aggressive? I understand you, you're trying to balance and get back to a 1% ROA, 10%, you know, ROTC, but, If it's going to be tough for now, why not accelerate some of those hiring efforts to position yourself better for a better environment, which I hope is going to be 2025. Just wanted to get some thoughts there as you guys think about balancing expense savings, but also the investment side. Thanks.
spk02: Oh, without question, we are. I have scheduled two interviews next week and two the week after that. And we're looking at talent. We're looking especially on the HOA side and on all the initiatives that are focused on deposits. We have a new initiative that we're going to be announcing in the fourth quarter. Those hires are already in place. We got them earlier in the year, but we're going to be ready to launch it in Q1. And so they're already in place. We're very conservative and very focused on our expenses. But we want to find the hires that fit the bill for the business lines that we have plans for. So we will always be opportunistic. And the fact that we're keeping our costs in check
spk07: uh does it mean that we won't move quickly if the opportunity presents itself um thanks for the color louise and then um if you can just i i appreciate you know the the outlook for for loan growth next year but can you give us a sense of the breakdown i know there's been an initiative to to grow the cni you know customer you know base and diversify a little bit from from real estate you know just in terms of kind of if you could just broadly kind of discuss you know, what that could contribute for next year versus, you know, real estate versus maybe some of your specialty vehicles that might be, or businesses that might be, that would be appreciated. Thanks.
spk02: Well, with the rise in interest rates, a lot of CRE deals down here just simply don't work. There's no refinancing. The refinancing market is pretty much shut down, has been all year. And there's a lot of investment deals that because of the quick rise in rates just simply do not Cash flow. I am very pleased that over time we developed all the business lines that we have. We are very confident with the continued growth in the yacht lending, which has been great. The Fort Lauderdale boat show is this weekend. And then you've got the Miami International in February, followed by Palm Beach. And usually during that period of time is when you really see volume come in. Our HOA initiative is going to continue very strongly. We, I think, are looked at in the market as a very active player, and it's no longer a bank that had kind of an idea to put their toe into HOA. We have a senior product specialist, which is the person who heads this. He has trained our lenders over time, and they're all sourcing those deals. SBA will continue, and C&I will continue in equipment and whatnot. So we're very pleased that right now 65% of all our loan production is coming in through these business lines. And I think we reported last time that in a period of three years, our non-CRE went from 9% to 26% in less than three years. I expect that that's going to continue to grow to maybe, I think the number we were looking at is about 35% to 40% within the next three years. So I think these are all going to continue. And this is a real estate-denominated economy, but we will choose those deals that make sense, that are prudent, and that credit quality is very strong on.
spk07: Thanks for that, Luis. And maybe just one last quick one for Rob. I understand the bully trade this quarter. I'm not sure when you did in the quarter, but I assume next quarter, I think you had mentioned that the bully income will be higher. Can you just kind of describe what that pickup will be?
spk03: Yeah, we said it's probably going to be $400,000 annually, so maybe $100K on the bully. Okay.
spk06: Sorry if I missed that. Thanks a lot. Thanks for taking my questions. Thanks, Mike.
spk05: Our next question comes from the line of Freddie Strickland with Jannie Montgomery Scott. Please go ahead.
spk04: Hey, good morning, gentlemen.
spk03: Good morning. Good morning, Freddie.
spk04: Just following up on Michael's last question there, the overall level of non-interest income will be a little lower next quarter, though, right, just because you had – some of the non-core items backing out, the securities loss. I mean, is something like a 175 to 190 kind of range for non-interest income X gain on sale a good number or a good range, I guess?
spk03: Yeah, I think on our non-interest income, we have Three things that I would point to to be positive about, one, and we've talked about this in prior calls, is our wire fees. We're seeing a lot of demand in our foreign correspondent business and our high-touch, you know, jurist advantage private client group where we cater to the attorney crowd, and we're doing a lot of wires in that business as well. So you can see that the service fees has picked up, and that's mainly on the wire fees. If you take out kind of the one-off things like the gain or loss on the securities, the BOLI piece. The other thing that's going to continue to climb is our SBA initiative. As Lou mentioned, we just partnered with a fintech company here in Fort Lauderdale called New Tech One. That shall have benefits beginning in the fourth quarter, albeit a little small, but that should prove helpful. And then on the treasury management side as well. You know, I think what you'll see, you know, take out the, you know, one-time kind of non-recurring type stuff, and we expect our non-interest income to steadily increase year over year. Now, is that 12% per year, 15% per year? I think those are good modeling numbers for that line item in total.
spk04: Got it. That's perfect. I was going to ask about SBA as well, so two birds, one stone there. And just as we look back to the sensitivity slide, and I know we've had all the discussion about the swaps you've put on, should we expect a slight benefit to net interest income if we see a 25 basis point hike in December? And then conversely, I don't think this happens anytime soon, but down the road, if we see a rate cut, would that end up causing net interest income and the margin to come down incrementally? Just trying to make sure I understand where your sensitivity is today.
spk03: Yeah, so we have $250 million of notional interest rate swaps. It's probably the tenor spot on all of those combined is probably about 2.4 years. We have, with those swaps at current rates, about an 80 basis point carry, maybe slightly over that, maybe 81. And that's $2 million of additional net interest income. If rates go up, we'll receive the additional SOFR benefit on that. And if rates go down, that would be less. So that certainly can be somewhat volatile and rate dependent. But management and our ALCO believe that we're in a higher rate for longer. And for right now, that's going to provide a benefit and positions our balance sheet to be a little bit more neutral because we are liability sensitive, which the management team didn't like.
spk06: That's helpful. Thanks.
spk04: And just one last one for me, just with the potential margin pickup here and limited expense growth, the loan growth you talked about, could we see efficiency start to go back below 60%, maybe the high 50s by late 2024, assuming we have a Fed pause?
spk03: Yeah, I mean, the efficiency ratio is certainly why we pointed out the non-interest expense to average assets. Efficiency has both the revenue and and the expense piece in the calculation. So as we expand our margin into 24 and bring more revenue in, certainly, and hold our expenses steady, that's going to bring the efficiency ratio back down under 60%. When and how quickly that happens depends a little bit on rates and how we perform, but that's certainly the goal.
spk06: Got it. Thanks for all the color. Thanks for taking my questions, guys. Thank you, Freddie.
spk05: Our next question comes from a line of Brady Gailey with KBW. Please go ahead.
spk01: Hey, thank you. Good morning, guys. Morning, Brady. Morning. I know you've talked about double-digit loan growth, which clearly you did in the third quarter at 20% linked quarter annualized. But, you know, deposits were flat, so the loan-to-deposit ratio ticked up a little bit linked quarter. Maybe just remind us, given kind of the new environment, are we still targeting loans double-digit loan growth, and what are the expectations on the deposit side as well?
spk06: Yeah, Brady, I'll answer first.
spk03: I would say yes on the loan side, on double-digit loan growth. We think we feel confident about the pipeline that we have right now for the fourth quarter. I think if you looked at the new loan production, this past quarter was $135 And that was up from the previous quarters where we kind of stalled a little bit with all the activity that was happening with Silicon Valley Bank. But we think we can grow the loan book double digits, and we have to grow the deposit book in a similar fashion to keep pace with that and have it be – diversified and low cost. So, you know, money market will not just get it done. That'll be tougher, but we definitely need to grow the deposit book, probably at or near double digits to fund the loan growth. Because we'll have very little on the security side, as I mentioned, that will come off on cash flows. So Lou mentioned a couple new hires that we have. Those new hires are targeted towards deposit aggregating strategies. And we believe we'll have some others coming in the first quarter that we'll mention where the hires are already here that we'll announce as well. But we will have a big push on the deposit side.
spk01: All right, that's helpful. And then finally for me, it's good to hear about the partnership with New Tech One and SBA. I'm just wondering, just kind of if you isolate that new partnership, what's the earnings impact do you think that that could have on U.S. Century over time?
spk03: You know, Brady, it is very new with them, and, you know, I wouldn't put much money in our forecast. We haven't just yet. We're really working with them. But I can tell you, and Lou quoted some of the numbers, you know, we have traditionally done larger size SBA, and some of our clients want the small ticket SBA, and we really didn't have a platform to do that. I think within the first month, we had over $12.5 million. It's very granular in terms of the requests to look at, and all the requests are not going to make it through the funnel, but certainly we're getting a lot of early looks on that, and we will have a revenue share with NewTekOne, and we do expect to start making some money off that, and we'll see the size of that grow over a period of time, and we'll be able to answer that probably a little bit better in the first quarter of next year.
spk06: Okay, great. Thanks for the call, guys. Thank you, Brady.
spk05: There are no further questions at this time. I would like to thank our speakers for today's presentation, and thank you all for joining us. This now concludes today's call. You may now disconnect.
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