GBank Financial Holdings Inc. (GBFH) Earnings Call Transcript & Summary

Well, thank you, and I'd like to welcome all of those who are joining us on this call this afternoon for our second quarter of 2023 earnings call, and I'm going to start it off by talking mostly about our year-over-year results for the first two quarters because these first two quarters have been rather unique. There's been a lot of action on banking, as we all know, for what happened back in the March and kind of turned our banking room upside down for a while and created quite a bit of concern amongst a lot of business clients for banks. And also, for us, the first two quarters are a little seasonal, always have been, because of our SBA business. So as I look at the some of our comments today, I want to focus on what we have done because as I look at so many bank calls right now, there's been an enormous amount of work on their balance sheets. Repositioning assets, liabilities, issues with their investment portfolio, issues with deposit runoffs, issues with protecting their bank customers, and while we have seen like all banks, some pressure on deposits, ours was more focused on -- we responded by giving some returns, some additional return to our depositors. But even having said that, as we sit today, our noninterest-bearing deposits are still north of 40%. But we did respond, and we have paid attention to our depositors as well. But I want to look at our earnings from the standpoint of the fact that we are really still focusing on our strategic plan. While we haven't been addressing repositioning our balance sheet. As a matter of fact, we've been positioning it to grow, and we believe growth will be an important part of our story for the second half of this year. But when we look at some of the overall metrics, our net income was up 13% year-over-year, $5.6 million versus $5 million. And our net revenue was up 18%, $23.2 million versus $19.6 million, and of course, in our net revenue, our net income skyrocketed. I mean, that was up 87% year-over-year, $17.9 million versus $9.6 million. Those are -- usually don't see those numbers unless you've had a merger. But our noninterest income was a bit of the anchor, but the anchor was caused by a dramatic change from what was in existence a year ago to today. First two quarters of 2022, we have a real -- we were realizing in a really great growth program on our SBA division. Well, you know this year, for the first 2 quarters, we sold $83.7 million of loans. In last year, we sold $111 million in loans. Now I would be somewhat concerned about that. If we're not -- the fact that we generated $123 million in loans last year and $122 million this year. We just didn't sell the same amount because of timing. But we had -- we have $28 million more in originations that could have sold or if they were ready which would actually been another $1.2 million or $1.3 million on our net income line. But the -- I want to say the ammunitions there, it's already loaded and it's ready to launch. But again, it's timing, I think that because we've also had a price difference, we were really realizing about 4.3% gap on our first 2 quarters this year on our sale of SBA loans and last year was 7.7% gap. And we're starting to see the gap come up a bit, but I think that fact that the originations were there when we actually matched the originations of 2022, first two quarters was quite remarkable, I think, given the different nature of things and what was going on in banking in March and April and May, which was the biggest strategy. I believe that we'll get into some of the greater details with Ryan, I know we've been with Ryan and Jeff, but I just wanted to show that our dynamics based on the business we did could have easily been up $1.5 million more on our net income line, just with some timing of SBA sales that we already have in the bank or with kind of loans we already have in the bank. But that's timing and timing works for you sometimes and against you one time -- sometimes. The other little anecdote I'd like to point out is that June 30 was on a Friday before the biggest weekend, a very long weekend now when you consider that many people took the fourth of July weekend as a 5-day weekend, but many of our depositors, especially in our Gaming division, have to arm their casinos and especially one of our big depositors who is in the cash management business for 150 casinos. And we looked at our deposits 5 days later by just one customer, they were up $20 million. So timing again works for you sometimes, as I said, and sometimes against you. But we're very, very pleased with our results thus far, and I think you will be, too. But I also think you will be very interested in how we believe we are positioned for growing in the future. Ryan, I'll turn it over to you.

Yes. Thank you, Ed. Good afternoon, everybody. As mentioned, happy to report solid earnings and performance for the year-to-date and quarter ending June 30, which, as we all know, has marked some significant shifts with the [indiscernible] industry. I would say marked by that and substantial increase in deposit pressure and competition, as we've heard many talk about. The competition in our local markets has been primarily driven by the mid and small regional banks and we remain in a very strong position to not only compete but win new business against some of those larger competitors. The good news is we have seen some degree of stabilization over the course of Q2 and as Ed was alluding to, and I'll get some further details on that. But we are expecting a pretty significant upshift in some of our growth metrics for the second half of this year. Also, I'd be remiss and if I did announce, we did go live with the GBank Visa Signature credit card in Q2. So we're very excited about that. Anyone that's interested, please check out our website, if you'd like to read more or even apply. We're excited about the future growth in credit card and the ability to really tie into and support gaming payment -- gaming payments. In terms of the income statement, year-to-date and quarterly consolidated earnings were $5.6 million and $2.3 million, respectively. As I mentioned, that's up year-over-year on the year-to-date basis by 13%. What we're seeing, as Ed was saying, for the last few years, there's a recurring seasonality in our Q2 that is mostly tied to SBA activity, there's normally a bit of a slowdown in pipeline build that typically occurs at year-end in December with 90 to 120 close windows, we see the full effect of that in Q2. However, if you take a look at Q2 of this year compared to Q2 of last year, it was a 34% increase year-over-year, those two quarters combined. So really, I think it's a continuation of supporting the resiliency of our earnings model and how we are getting to those earnings numbers have shifted dramatically, and we've talked about this in terms of the GAAP gain on sale noninterest revenue producing some lower volumes in Q2, especially the pricing on the secondary market for the sales of SBA loans is down, although we have seen it tick up closer to 5% on a GAAP basis, and we think we're going to probably see it at similar levels for the next few quarters. That being said, we will see an increase in production and sales in the second half of this year. I wanted to spend a little bit of time because I think as I've seen and heard a lot of earnings calls, the challenges in the industry as we all content with reality of paying more on deposits is a lot of bank balance sheets are anchored by legacy yields on the earning assets that are far from quick to adjust. We do not have that problem, if we take a look at the NIM and the average balance page on our supplement, you can see that Q2 compared to Q2 of last year, our earning asset yield has increased from 3.9% to 7.14%, so that's 324 basis points in expansion year-over-year in earning asset yield. The components of that, our loan yield for the quarter was 8.2% compared to 5.81% and year prior. Our securities yield has doubled and will go up from here. And obviously, our cash balance have gone up as well. So we, like everyone have seen some increased cost and cost of funding, but that increase in cost of funding is supported by our continued high level of noninterest-bearing deposits, which remain at 40% and margin is expanding accordingly. I will say also, and we talked about this in the last earnings calls, we thought that Q1 probably marked peak NIM. There was a lot of shift in Q2 and the margins that we report for the quarter are generally what we expect to see going forward as we continue to compete strongly in the deposit markets, but also maintaining our long-term average of 40% or better of noninterest bearing. In terms of the linked quarter, one of the things I'd highlight is we did see a decline in noninterest expenses centered in compensation. So you can see $769,000 linked quarter decrease and that just shows that our overall activity, particularly in SBA originations are tied directly to commissions and variable pay programs. So we will see some of those numbers go back up on the expense side for the rest of the year, although it will be with a much higher revenue figures to support that. In terms of overall expense management, we've talked a lot about growing our employees making investments in technology with the name change last year. The great news is we are through a lot of those investments now. We ended the quarter with 158 employees, and that rate of increase is going to now slow dramatically because we really have the right people with us to drive our significant growth going forward. So as we look ahead on the income statement, we're going to focus on earnings and revenue growth. A big uptick in balance sheet growth is our expectation, intelligence expense control and really driving that efficiency ratio back down to our target of 6% or better. On the balance sheet, really, it was flat. Total assets were flat at $685 million. Deposits were flat, now a little bit, $4 million for the quarter, as I mentioned, up about $20 million a few days later. Year-over-year, deposits are up by approximately $33 million. The pressure on deposits, as I said, have the effect of increasing pay on interest-bearing deposits, but it also did have the effect of liquidity shift out of noninterest-bearing checking accounts into interest-bearing as even our best clients are now asking for, and I think this is reasonable, some return on their operating cash. As mentioned, our long-term average is 40%, and we expect to be able to manage at that or better going forward. The peer average for noninterest-bearing is long term, 15% to 20%. So certainly, our goal is to be twice or better than the care group and our funding mix. Gross loans increased by $13.2 million, that's 12% annualized. We talked about the expansion of growth in pipelines, we're seeing that. In fact, our pipeline grew by about 14% during the quarter, our expanded 90- to 120-day lending pipeline now stands at $160 million. We will see that continue to grow certainly through Q3. And we may even approach the record in pipeline we reported in the middle of last year where we may even get up to as high as $200 million in active pipeline. Liquidity remains very strong, not only to support the balance sheet, but our future growth initiatives. We ended the quarter with $85 million in total cash and equivalents, which is roughly 12% of total assets. Additionally, our gross loan-to-deposit ratio was 83% and other than the subordinated loans, subordinated debt that we took out in 2020 and '21, we have no borrowings outstanding, which means we have full borrowing capacity from the Fab, the FHLB and our Fed funds lines, which after moving some collateral within the next few days, it's going to be well over $300 million in total borrowing capacity, which I don't think we'll need, but it's nice to know that it's there. On the capital side, we finished the quarter with consolidated equity of $92.6 million. That's a year-over-year increase of 15% purely from operating earnings and after-tax profitability. We did continue to have a negligible amount of AOCI to $300,000 -- excuse me, $231,000 on a small AFS portfolio. As a reminder, there, we report approximately $112 million in total securities, $112 million. $109 million of that is in the held-to-maturity designation, a majority of which are short-term treasuries and full faith and credit to make floaters. The short-term treasuries are maturing starting this quarter in Q3, and we'll roll off between now and through Q3 of next year. So that's one of the reasons we expect that securities yield will be going up quite a bit over the next few quarters. As we look forward to balance sheet growth, again, managing the 40% or better NIB. One of the things that I think that you can keep an eye out for the next few quarters is we are seeing some opportunities to retain larger portions of SBA guaranteed balances which we designate on the balance sheet. So don't be surprised if you see that line item start to grow rather dramatically over the next few quarters and overall escalating growth rates to support our lending pipeline and liquidity and deposit initiatives. A couple of words on asset quality, you may have noted our NPAs did tick up to $7.1 million in the quarter other than a small $100,000 business loan that migrated to NPAs, it's the same too 7(a) loans that we've been reporting on. The increase was really us buying back guaranteed portions of the secondary market so we can manage the liquidation of those assets ourselves directly, and we expect those dispositions to happen in the next 120 days. The $7.1 million of NPAs of that $5.3 million are guaranteed balances, so we feel good about our overall position here. You may have noted after having no provision in Q1, we did have a small $408,000 ACL provision in Q2. About half of that was related to the loan growth and then approximately $200,000 was related to expected disposition costs on the NPA, so we are well marked there. Overall, the ACL to loans stayed flat quarter-over-quarter, both on a gross loans basis and net of guarantees. The hospitality book continues to perform very well. Summer months are typically very good months for hospitality borrowers. A lot of interest in office exposure, I know that's been coming up in a lot of earnings calls, so I just thought I'd quickly mention. We have very limited exposure in office overall, approximately $35 million in total outstandings and less than 8% of total loans. And I will say, if you like our metrics on SBA, you love our office metrics, our weighted average LTV for office is less than 53% average debt service coverage of 3x or more. The breakdown between that portion of the loan book is 43% owner occupied and the rest, 57% non-owner-occupied. So with that, I'll turn it over to Jeff who will get into some of the details.

Thanks very much, Ryan, and good afternoon, everyone. So we talked about the current income, profitability raising about 13.3% year-over-year. So I'm going to break out some of those numbers that maybe Ryan skimmed over a little bit, give you a little bit of detail. So when you look at the net interest income overall, we saw that increase, it was $8.6 million for the quarter, $17.9 million year-to-date. That's a year-over-year increase of 87% or $8.3 million as discussed. That's a pretty large increase, we saw that net interest margin spike up close to 6% last quarter. We did agree that, that was an unusually high net interest margin because we haven't seen the deposit rates adjust nearly as much as we were expecting them to, and we have seen now a lot of that deposit adjustment -- deposit rate adjustment come in as deposit rates increased about 54% on our cost of funds for the quarter. But that brought us to that normalized kind of number of about 5.37% that we really don't anticipate going forward for our net interest margin overall. That's 245 basis points over the prior year, so you're seeing -- we're seeing a lot of expansion in that net interest margin that does allow us the opportunity to continue to grow and continue to see the bank role over all. So as we look to the future and at all of our yields, our yields are super strong. We're getting Fed funds on our cash. We're down to 4%, we're getting 4% or better on our securities currently. Our security is very short term in nature. So we'll be able to reprice those probably even to higher rates as they mature. Going forward, we'll talk about that a little bit more in a second. As we look over to the noninterest income, our noninterest income, of course, has been our challenge. The great news is that I think we've seen that bottom out in the first quarter as it was kind of a really difficult quarter. A lot of the buyers pulled out of the market and the rates really kind of plummeted the sales rates. But we did see about 113 basis points of growth in that sales rate in the current quarter. So we really do believe that, that has bottomed out, we're going to start seeing that more normalize going forward, which will allow us to really continue to monopolies our profit -- bring profitability and from the SBA perspective. So that will continue to be a strong product for us going forward. Noninterest expense, you talked -- Ryan talked about that decreasing in the current quarter about $728,000. About $300,000 of that was really staffing, and we were able to capitalize on the implementation of our core processor for our credit card product. And then another $300,000 was reversals of commissions just that we were able to take based on trajectories of the growth overall. But the year-over-year, we did see a 29% increase in that number. And I just want to kind of point out we did have that increased staffing. And that increased staffing is very critical to the bank as we look to the future, our investments that we've made in people and processes and the implementation of the new products that we've got out there. As we look to the future, we're going to really grow that. We talked about the efficiency ratio at 68% and we are going to bring that efficiency ratio down below the 60%, but we're going to do that not by managing our expenses so much as we are going to do that by increasing our revenues, and so that's really as we look to the future, what we've been planning on doing for the last about 18 months, and we are now poised and prepared to execute on that plan going forward. Looking at the sensitivity, I want to talk a little bit about sensitivity of the bank. So as we modeled in our most recent quarter, if -- with the rates up 200 basis points, we would expect our net interest income to go up about 16%. And that same rate is down 200 basis points. We would expect our net interest income to go down about 17%. The important thing about that number is that that's about 50% of what it was 12 months ago. So we're moving that asset sensitivity back to a more neutral position as we work to bring some additional longer-term fixed rate assets onto the books. And we want that more neutral position as the interest rates in the industry have increased so significantly. And what that will do is it will protect us and that rates down environment if rates were to start significantly dropping again, we wouldn't see that significant impact all over the margin in the future. So we're going to continue to move that to a more neutral position over the probably 12 months as we bring on some additional assets. But that's a very important, I think, movement for the bank as we look to the future. We had some very significant returns. Our ROA 1.34% for the quarter, 1.67% for the year. ROE came in, return on equity came in at 12.57% year-to-date. Those returns have been super strong, and those are returns with the bank significantly investing in its future, and a lot of times when companies have to do that, they have to sacrifice that strong return to their shareholders in order to prepare their bank or their company for growth. So I think that puts us in a strong position. When you look at the balance sheet overall, we talked about the loan growth, we've talked about our deposits and where we sit right now from a deposit standpoint, our uninsured deposits have come down slightly. We're looking at just under 50% on uninsured deposits, we talked about our liquidity levels and how we're going to be able to grow those. We anticipate that by next week, we'll be able to produce -- replace about 72% of our total deposit base within hours if we needed to. Now we don't anticipate needing that because of the core customer base that we have being super strong, but we do sleep better, knowing that, that number is in place. So investment securities, $65 million of those are under 15 months to maturity, $10 million of it will mature in a week. So $97 million of our $112 million are fully backed by the United States government, and our current total unrealized loss on the entire portfolio, net of tax is $1.8 million. So when you compare that to the other banks that are out there in the industry, we have a super strong securities portfolio at super short nature. It is not sitting -- we are not sitting with the risk on investments that a lot of banks out there sitting on currently. So you take that, you combine it with the asset quality, we have super strong asset quality still, we've seen some losses, but comparatively speaking, it's way better than even our own expectations going forward. We have a strong allowance, we got the ACL at 1.56%, we feel like we're in a very comfortable position there, and then we've got equity. Equity kind of rounds out the balance sheet and it continues to grow with earnings every single quarter. Quarter-over-quarter, we've got a bank Tier 1 leverage ratio of 15.71% and that's super strong. So we can take the super strong balance sheet and our really strong deposit customers, and the management team we've got here in our plants, and all together, and we are ready and poised to really execute on a strong growth plan in the future, and we -- and we'll be able to turn that into continued strength for returns for our shareholders. So with that, I'll turn that over to you, Ed to talk about FinTech.

Thank you. We have part of our discussion on our Gaming FinTech division, and there has been a lot of movement in that division in the last six months or actually with Sightline, the last 12 months. Sightline payments, as you know, was one of our very first contracts in Gaming FinTech and we issued prepaid cards that are embedded in Sightline's mechanisms to load the various customer apps that are in gaming and annual draft games, BetMGM, and PENN National, William Hill, list goes on and on. And we have reached a peak of about $75 million a month of loads back into April of 2022. And at that time, a couple of things happened to Sightline, which were a change in the nature of the business. 70% of Sightlines loads were through credit cards to the debit card, and when the credit card companies changed the merchant code, it was applied to loading these prepaid cards, which were issued by us, which were up to that point, they were financial transactions, and so they were very inexpensive to do in every -- all of the issuing banks, the various credit cards had no issue with loading a financial instrument. When it was changed to the gaming code, the 70% load factor went down to about 15%. So they lost an enormous amount of the loading mechanisms to load the prepaid card. The prepaid card switched to debit card loads, but the debit card users were much different economics than the credit card users because the credit card users were creditworthy customers and many times, debit card users are more cash than credit-rated customers. So the spend in the loads went down substantially. Our loads now have been seeing about $40 million to $35 million a month, that's in the stock season. But Sightline's deposit activity has declined about 40%. And we knew and Sightline knew, this was happening, and Sightline has been trying to pivot to make sure that they stay relevant in the industry, and we believe they will by pushing their new wallet that they're working on, they will be work -- they want to see work with various fixed mortar casinos. So they are not -- when I say they are not and can no longer rely on being one of the primary mechanisms for loading these gaming apps, but they do have an important spot still as a prepaid card in these wallets because it is the point-of-sale exit for a wallet, you either have a credit card or a debit card. When you want to do point of sale or a retail activity with your wallet. They're focusing on that, they're working to diligently improve their wallet they've launched with several bricks-and-mortar companies, but they haven't gotten any adhesiveness yet to the customer. The customer is not overwhelmed with the way they work yet, so they realize they have a lot of work to do but we've seen this coming as well for some time, and that's why we were focusing a lot on our pooled player accounts. And if you remember the old Oregon story where we brought Oregon alive by putting the player accounts in the bank and the wagering accounts in the bank controlled by the player with the account in the name of the bank, and BCS patented that process. So our process and what we do in our gaming Fintech business bring gaming and bring banking solutions to these gaming apps. But an interesting thing happens because what we were focusing on was telling these big gaming companies, look, like DraftKings, FanDuel, BetMGM and others that why would you want this liability of all these wagering accounts on your books. Why wouldn't you want to give the consumer a consumer protection against any failures and put the funds and hold the funds in banks with consumer protection from the FDIC. What we were overlooking and I think we realized as we started our pivot because we also started a process of not only doing pooled player accounts but doing pooled consumer accounts with the same technology and the same -- and with a new patent, which we -- BCS has accomplished. And what the consumer accounts, they do for the consumer in a payments arena, the same thing they would have done and will do for a gaming app. And that is when someone goes to put money in one of these payments apps, it goes to their own bank account, it goes to their own account and a pooled player account in the bank, so that this app isn't holding the funds and there's not the stored funds. And some of you may have seen the CFPB spotlight that came out June 1 talking about the concern they have for storage funds and all these payment apps, both they didn't mention gaming, they mentioned a lot of payment companies that I won't mention, but you can read the bullet in it if you want to see who they were. But the fact is there's enormous amount of stored funds on these apps and in these companies' names, billions upon billions and they are, in essence, acting as banks. They're investing in them, they're borrowing them, they're using them because the float is enormous. The stored funds are quite large, and the consumer is using them to pay bills. The stored funds become extraordinarily large. We saw this on the consumer side as well, but -- and the interesting thing is that many of these funds are held in quite a few banks. And when the bank crisis happened, just like some of the businesses with SVB bank demanded that they pull their deposits out or that the bank make them stay. So what did many of these banks do, regionals, big regionals and some large independent banks, they push these deposits out of these companies on IntraFi so that they could go to the company and say, "Well, all right, we're holding a $200 million or $300 million or $400 million or whatever the number might be, or $1 billion of your money in various accounts, operating accounts and we pushed them all out to IntraFi now and they're all FDIC insured. The consumer, though, is remember, is not the one insured, what that money is protected against is for a bank bidding, but it's not protected to the consumer against a failure of the company. If FGX had all their money out in various consumer in various accounts to protect against bank failure, their failure didn't say -- wouldn't have saved one of the dollars that all the consumers lost. So this story is not over yet but it sort of changed the metrics a bit for us. So one of the things that we find is that many payments companies, the big ones included, are also starting and using and putting out and creating different mechanisms for other companies to use to become payments -- by certified payments companies have their own wallet to be able to use a wallet, to benefit their own companies and those all need banks behind it. The storage fund issue is not going to become as big an issue because our solution, which we now have, where we take the consumer money and we put it in an account held by the bank administered by the bank and the funds where the consumers need, that is gaining traction. Our consumer business has the potential to be far, far bigger than our gaming business. And our gaming business is not over by a long shot. We pulled back on pushing it hard with some of the big players because they too have enormous amounts of stored funds that they're using, and they're using in accordance with certain gaming regulations, too. So as long as there's a use for these funds, the consumer is -- if the consumer is not concerned for the company, and the company has their business monies protected then the consumer feels more protected. That will last until there is the first big failure, unfortunately, they happen. At the same time, the smaller companies that we are finding, and I'm not talking about small companies, I'm talking about companies as an example. We're working with a consumer company that wants to create a wallet for a health care company in order to pay their employees and another wallet for their patients to be able to pay through their insurance company, their own bills. And we are looking at issuing prepaid cards and creating a PPA account attached to them for those customers. So there is a great deal going on out there, this payments world is just starting and the protection of the consumer is just starting. And we now have deposit -- all the deposits that have run out from Sightline, we've replaced with other deposits, and those deposits are growing faster than any of our -- faster than the losses we've had with Sightline. But Sightline's not done. We believe in them, we believe in their prepaid product, we believe that the prepaid card, which we are now in issue with Visa, MasterCard and Discover prepaid cards. We were just approved by Visa as well, and also, we have -- we are a Visa Signature credit card issue. In our credit card -- the initial cards we have launched where we have gone out and said this credit card, this Visa Signature card, and the average customer has a $10,000 credit limit, this Visa credit card will load your gaming app and we've had a few cards of existence for parts of July and 70% of the activity is loading gaming apps. So it's working, our initial testing is looking very, very promising in terms and the average customer spending 4x what a normal customer does on these gaming apps. So we know we're heading down the right path on the consumer side, on the gaming side and the ability to grow has been important payments arm and so our technology is really the banking solution for the technology. So we are dealing on things we really know how to do. We know how to manage these accounts, we know how to do the settlements, we've been doing them, we've settled billions of dollars in this already. So we know what we're doing, we know that it works and we believe that we'll be making greater and greater in loads. So I wanted to explain it in a little detail for you because we've always said there is 3 legs to our stool: commercial side -- the commercial lending; the SBA lending and the Gaming FinTech division. Well, it's going to be consumer Gaming FinTech division. And we're good -- we see our consumer accounts growing really larger than our gaming accounts. But having said that, this is going to take time to deal, we've maintained our running average of about $50 million in deposits. What we had program this year, we wanted to reach $100 million for the end of the year, we may not reach that goal this year, but we think that, that goal is going to be far more achievable than we even thought before. And I'm not just limiting it to $100 million in deposits but I also believe that this credit card launch, even from the initial 60 cards we have, we see the patterns being 70% loading the gaming app, that's what we want. And we see that the average card is having $1,500, $2,000 of transaction, some as high as $7,000. So we believe that we are on the right correct path, we have the correct technology, we have correct banking skills and we have a product that this consumer is really going to need and want. The CFPB doesn't want all these storage funds being used when the consumer wants to pay a bill, they expect to given the money to that payment company to pay the bill. They don't know that money is being invested, loaned, they're basically acting as banks. So we know the smaller companies aren't going to be able to have that luxury, they're going to have to protect the consumer, and we're going to be there for them to do it. So with that, I know we're about used up our 30 minutes. But I wanted to open it up to any questions that any of you may have.

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

Yes, Brad.

I noticed on your loan yields for the quarter. They were down from the previous quarter. For one, why is that?

I would count on you to catch this, Brad. So the answer to the question is, in Q1, we actually had a few, including one rather notable commercial loan payoff that happened excuse me -- in Q1. So we actually had, on one a realization of prepayment penalty of $200,000, and that hit in Q1. So the other would be the composition. I mean, overall, if you look at interest revenue quarter-over-quarter, it's up by nearly $0.5 million but we did start to see average balances a shift a little bit more outside of SBA which instead of having a 9% to 10% yield quite often has about a 7% yield. So really two big things. The $200,000 prepayment that was realized in Q1 and then a bit of a change in shift on the average balances quarter-over-quarter.

Okay. Great. I'll just keep on going. Normally, I'm not the only one asking questions. So I'm just going to shoot. You guys mentioned a couple of times about the really big growth you have going forward. Can you quantify like what should we expect, whether that's deposit growth, loan growth, before the end of this year and maybe into 2024?

Let me start with that because these are forward-looking statements. And obviously, we wanted to be careful in the sense that we say things we can't say right now. But we mentioned earlier and where you're going to see it is that -- and Jeff mentioned this, we are doing so well because we have an asset-sensitive balance sheet. And we spend a great deal of time making sure we had an asset balance -- an asset-centric balance sheet, meaning that as interest rates went up our earnings went up. And as you can see, huge jump. $330 million of our balance sheet loans are adjustable rate, so we're going to be looking at easing that when I say easing that, shifting that sensitivity a bit. Because when interest rates go up, and if you stay stagnant, when interest rates go down, you'll see the retreat just as Ryan mentioned, could be just as volatile. And so we're going to be instituting programs to grow our fixed rate portfolio. And we also are looking at other ways of growing our guaranteed loan portfolio. So we'll be publishing a little bit more on that as we firm it up.

In broad strokes, I would say, we've long talked about 30% CAGR. I think that annualize, we'll start to see 30% CAGR, Brad started back again in Q3 and I made a mention of guaranteed loans that we retain on the book. I believe, between now and here and that number will double.

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

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

Okay. Great. And out of that $80 million to $90 million, do you anticipate retaining half maybe?

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

Okay. Got it. And did I hear you correctly that you were thinking net interest margin could be kind of flattish from this level of $550-ish going forward?

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

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

Yes, that's the interest bearing. I think that, that's going to -- it might tick up a little bit, but generally, that's a good place to start. If you look at the overall cost of funding just for Q2 includes the effect of noninterest bearing. Our overall cost of funding for the quarter was [ $177 million ]. So we might pick up a few basis points from that, that will largely offset the increase in earning asset...

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

No, there isn't, actually. We've got verbal indications actually that are better than what we're marking on the ACL right now. So we'll cautiously move forward without liquidation. That should take about 20 days. Like I said, there's a small C&I loan in there, that's fully marked. But really, the major component of that $7.1 million is those 2 SBA loans that $5.4 million approximately is guaranteed, and we are fully commercial real estate collateral. So we do not expect losses moving forward from here on those.

Okay. Great. Just a couple more from me. So what are the balances of the PPA deposits now?