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

I believe we're now all in, and I want to introduce myself. I'm Ed Nigro, the Executive Chairman of GBank Financial Holdings and also GBank. And in the room with me today is Ryan Sullivan, our President and CEO of both, and Jeffery Whicker, our Chief Financial Officer, Executive Vice President. I might add. You're going to hear a lot of statistics today about our first quarter, which I believe you will particularly enjoy. I'd like to look at things sometimes on a more macro basis. And one of the parts I mentioned in our newest release, was that our bank, our financial institutions is becoming a complex entity of many driving forces. And yes, we have our SBA as an important engine in our commercial lending division, which is vital. We also are engaged in the gaming industry with our payments business. We have introduced our new printed card, which is going to be, we believe, a very important element of our future. And also our relationship with Bank card services, and in all, we really see multiple parts of our operation working very well and others that are yet to kick in. And the beauty of it is yet to kick in. But here's some important stats from year-to-year as I sat here with you last year at the same time in 2023, we had looked at results. And at the end of the first quarter, we stood at $444.8 million in gross loans. We're now at $776 million in gross loans. That's a 73% increase in 1 year, which is quite remarkable. We also have seen our assets grow from $685.2 million to $963.45 million or a 42% growth. Now this is because all our engines are operating, but this also comes at a time where some of our income has been adjusted by a rate structure. Some of our resales in SBA have achieved GAAP gain that's very small. And Ryan and Jeff will get more into that detail. But the important thing is we've established this engine that's going to continue to grow. And I'll be talking about that a little bit more. But right now, I'd like to turn the call over to Ryan Sullivan.

Yes. Thank you, Ed, and good afternoon, everyone. Very pleased to report positive results for our first quarter of 2024. Marked by strong balance sheet growth, a continuation of that after Q4 and as well as new loan production and solid earnings performance. Overall, the income statement for Q1 for GBank, we generated $3.7 million in after-tax earnings, which equates to $0.28 per diluted share. Earnings for this quarter were up well [ 12% and 5% ] on a year-over-year and linked-quarter basis, respectively. As we look at the components of revenues Net interest income was reported for the quarter at $10.8 million, which was up 15% and 4% on a year-over-year and linked-quarter basis, respectively. And then our other major driver of revenue, noninterest income was $2.4 million which was up significantly from Q4, driven by an increase in gain on sale, which was $2.1 million for the quarter. As we think about our revenue generators and overall revenue growth, happy to report an all-time record in net revenue prior to net interest expenses of $13.2 million. And the composition of those, which we track strategically, and we've talked about this for some time now is really growing and diversifying our revenue streams. And as much as we have challenges in one major revenue stream, it's supported and offset by strength in the other and vice versa. With the rate increases, we have seen significant increases in net interest income over the past year as a composition of our revenues, net interest income was 82% in Q1 and noninterest income was 18%. You may have noted there was a slight full-time employee reduction during the quarter, down to 150 employees as of March 31, and that's really highlighting our efforts to focus our staffing models to directly support our key growth and revenue initiatives. Including that reduction was a small reorganization that we actually did in February. That led to the elimination of 9 positions in total. On top of that, we also had a small amount of attrition. As we look ahead to compensation expenses in our employee count, we will be growing back. And obviously, we're expecting some significant growth for the remainder of the year. But again, focused on our balance sheet growth and revenue generation. I would say by year-end, we're probably going to get back near to the 165 employees again year-end of 2024. Another big part of the story, obviously, in the quarter is our continued balance sheet growth and production levels overall in terms of our new loan originations. Year-over-year, our asset and net loan growth places us at the very top of our national peer group, which is about 1,300 banks. And in fact, a lot of that growth has been centered in the last 2 quarters. specifically from September 30 of last year, our net loans have increased by a total of $256 million, and that's net of sales. Now certainly, SBA note modifications and repurchases have played a part, and I'll discuss that activity more in just a moment. However, we are particularly pleased with our recent increases in both SBA and commercial new loan origination activity. Specifically, pleased to report an all-time record of Q1 in new loan originations, both in SBA and commercial of $137 million. That's an all-time record. And it's immediately following what was our all-time record in Q4 of $135 million. These levels are up significantly, particularly in comparison to Q3 of last year when new loan originations were approximately $81 million. So turning to the liability side and funding. There certainly has been a cost related to a rapid growth over the last 2 quarters, specifically. And most notably, you'll see our certificates of deposits are now at $327 million. That's a 2-quarter increase of $168 million, and the average cost on those CDs is 5.26%. So we're certainly paying on that side. in terms of the growth. The good news is all together, we've done a very good job of managing these effects, and we posted a consolidated bank NIM of 4.98% and consolidated all in NIM at 4.85%. As we've grown the CD book, and you've heard me say this before, we're keeping it very short and specifically, of that $327 million, nearly $287 million of that or 88% of our CD book either matures or is callable by the bank within the next year. So moving on a little bit to SBA. We're very pleased with our continued progression there. Happy to announce at the end of the quarter, we were the tenth largest SBA 7(a) lender by loan volume in the entire country. And as we think about when we launched that program in mid-2015, happy to report that our SBA lending division has originated and funded a total of $1.65 billion in new loans. The largest subset of that is SBA 7(a), which obviously, as stated, we're very active in that program. Approximately $1.4 billion of that total over these approximately 9 years that we've been in the business, has been through the 7(a) program. So that's $1.4 billion in approved and funded loans for small businesses all across the country. Now we've been able to do that and build that growth with and experienced very good performance in our loan portfolios. And specifically, if you look back at our 5-year default and loss rates, both of those metrics are well below 1%, which is far below our SBA lender peer group. And it bears the question why is that? Why have we been able to perform so much better than other SBA lenders. And I really think it goes back to our focus in terms of how we approach that business. And the fact that we've really worked tirelessly to both support our borrowers and in the case of government guaranteed lending protect the SBA. And this goes back, and there's certainly occasions of this that we're reminded of even back in COVID and when we announced the Bank of Georgia at the time, small business relief program, where we provided to all of our small business borrowers the option to go on payment deferral ranging between 3 and 12 months. More recently, there was a lot of conversation and I can give you an update on the SBA repurchase and note modification program. As you saw in the release, we have repurchased a total of just under $153 million of previously sold loans. And to date, we have done modifications on SBA 7(a) loans for 73 of our 470 SBA 7(a) borrowers with the net effect of lowering their interest rate by 153 basis points, and you saw that in the release. What that actually means is prior to the modification, the weighted rate for this pool of loans was 10.21% and we're able to lower that average rate all the way to 8.68%. And in many cases, depending on the vintage of the loan, the loan was originated when prime was 3.25% and our average loan rate was 5.25%. Well, that same loan today is 10.5%. So what the effect of those rate reductions have been is, overall, we've reduced the payment amount for our borrowers by an average of 11%. Which we're very proud of, and we think it's a strong support of our small business borrowers. To put that into dollars, those payment savings on this $166 million translate to $2.1 million annualized in reduced payments, which supports their business operations, supports their working capital and provides a great deal of relief on [ date ]. Really quick, an update on credit card, and I'll turn it over to Jeff. The credit card rollout that began about a year ago. We're seeing some encouraging development there, still a small program overall. We have less than 500 accounts, less than $500,000 on the balance sheet and balances. But what we're seeing that we're very excited about is we're seeing a very high utilization in the signature Visa Signature card. And what I mean by utilization is what we're seeing in terms of activity is the credit card account holders are using the card to a great extent they're paying it, which is always good, and then they're using it again. And that utilization rate is a very important metric that we track. We're also seeing a very high average transaction amount on these. And we have some experience, as you know, in the prepaid space where we saw transactions per transactions of $100 or less depending on the program. Our average transaction size and credit card has been ranging around $1,000 range. So both of these issues are important because there's two main revenue drivers from credit card that will be significant, probably going into the second half of this year. First of all, is interest revenue, obviously, on the credit card, but also interchange. So interchange, particularly in gaming net to us, the range is typically from 1.5% to 2%. And as we see the portfolio grow, we're seeing a higher level of spend. A little bit of a subsequent event here. Happy to announce that April will actually mark the first month that total credit card spend in the GBank portfolio has exceeded $1 million. And actually, that's the third month in a row that, that number has doubled month-over-month. So as we go into the rest of the year, we're going to be focusing on developing those credit card and our marketing specifically and by marketing increasing visibility, focusing on key partnerships with other companies that can help get the word out about our amazing product and then also developing our products. And we're actually working on right now our follow-on product, which is a cash secured card, and we're very excited about that. So with that, I'll turn it over to Jeff to go into the final details.

Thank you very much, Ryan, and good afternoon, everyone. Yesterday, GB Financial Holdings reported earnings of $3.7 million or $0.28 per diluted share. Now this is compared to $3.5 million in the prior quarter or $0.27 per diluted share and puts the bank in the 89th percentile compared to our peers. Quarter-over-quarter net interest income increased 4% to $10.8 million compared to $10.4 million in Q4 2023. And when compared with the same quarter prior year, net interest income increased 15% from $9.4 million. Net interest income is up both quarter-over-quarter and year-over-year as interest income on loans has grown 15% from the prior year and 74% year-over-year. The bank loans yield at 8.43%, which is in the 97th percentile of our peer group. Investment securities are yielding 4.2%, which are in the 92nd percentile of our peer group, and our net interest margin of 4.98% is in the 95th percentile when compared to our peers. GBank has seen net interest margin compression in Q1 2024 due mainly to higher cost of the wholesale deposits that we were used to fund the unusually high asset growth rates the bank has been experiencing. The bank's key 2024 initiatives include significant growth in core deposits, which will reduce the dependence that we have on wholesale funding, we expect this and the credit card growth to combine and raise our margins back up above 5% during the course of the year. Noninterest income totaled $2.4 million and increased $1.1 million or 86% over the prior quarter. Gain on sale of loans increased $907,000 quarter-over-quarter due to a $31 million increase in loans sold, offset by a 14 basis point decrease in the GAAP gain on sale price. We are seeing better pricing in April and do expect that to start increasing going forward. Also contributing to the favorable increase in noninterest income was an increase in loan servicing income of $147,000. This was mainly due to less servicing asset write-offs related to the repurchase of the previously sold loans. We anticipate loan servicing income to continue to increase in the second quarter as the bank reversed $400,000 in servicing income on loans purchased in the first quarter. Noninterest expense is expected increased $1.5 million during the quarter as the fourth quarter of 2023 reflected $1 million in nonrecurring adjustments to salaries due to the dollar amount and volume of deferred loan origination costs on repurchases and originations and a $400,000 release of certain early year accruals from our IT initiatives. Typical seasonal factors related to the reset of the payroll taxes and incentive plans also contributed to the increase in salaries and employee benefits in Q1. In addition, the bank recorded approximately $200,000 of severance costs related to a small reorganization in force that was executed to improve the overall efficiency of the organization, as was discussed by Ryan earlier. Noninterest expense related to credit card is expected to be approximately $400,000 per quarter through the remainder of 2024. Year-over-year, the efficiency ratio decreased to 63.4% from 68.2% primarily due to the increase in revenues and relatively unchanged noninterest expenses year-over-year. The efficiency ratio for the fourth quarter increased 428 basis points when compared to the previous quarter, primarily due to the nonrecurring adjustments in 2023 that I just discussed. Consolidated ROA was 1.59%. The bank's ROA was 1.84% compared to our peer average of 1% and puts the bank in the 89th percentile for income. The return on average equity was 14.67%. So moving on to the balance sheet. The consolidated company ended March 2024 with $963.5 million in total assets. Assets increased by $45.1 million or 5% during the quarter due mainly to an increase of $93.9 million in gross loans. This puts the bank of a 98 percentile in growth when compared to its peers. The bank paid down $30 million in short-term borrowing from the Federal Reserve Bank early in the quarter and executed a new short-term borrowing of about $10 million towards the end of the quarter that was subsequently paid off in early April. The bank continues to see broad momentum in the SBA and conventional lending as balances increased 14% for the quarter and 75% over the prior year. New originations were approximately $136 million during the quarter with $129 million coming from SBA and $7 million from conventional lending. The bank repurchased $44 million in SBA government guaranteed loans and repriced them to a 5-year fixed term with interest rates between 8.75% and 9%. In addition, the bank sold SBA guaranteed loan balances of approximately $69 million during the quarter. 100% government guaranteed loan balances grew on our balance sheet to $259 million and represents 33% of the bank's total loan portfolio. That's up 27% from the prior quarter and 485% from the prior year. Asset growth was funded mainly by increasing total deposits by $61.2 billion during the quarter. Deposit growth was mainly in CDs and money market accounts, which increased $77 million, while the noninterest bearing and other demand deposits decreased about $6 million during the quarter. Looking at the asset quality relating to loans, no provision for credit losses was recorded and the allowance for credit losses remained unchanged at $7.1 million. The overall growth of the loan portfolio was offset by slightly higher prepayment speeds and improved macroeconomic factors. Asset quality continues to hold at historically low levels, while nonperforming loans remained relatively stable and the net charge-offs were within our expectations. Growth within government-guaranteed balances reduced the overall allowance for credit losses to 0.91% of gross loans and 1.37% of at-risk loans which is net of the government guaranteed balances, which is right in line with our peer group. Nonperforming assets decreased from $6.3 million on December 31, 2023 to $6.1 million at March 31, 2024. The balance is comprised of two unrelated nonaccrual loans totaling $6.1 million, of which $4.6 million is guaranteed. No charge-offs were recorded during the first quarter. Deposit acquisition and -- deposit acquisition retention remains very competitive but the bank has been able to find new avenues for deposit generation that has provided the necessary funding to meet the needs of the company. More expensive wholesale funding has increased cost of funds 37 basis points for the quarter to 3.25% from 2.8% in the previous quarter. Uninsured deposits are estimated to be [ 8.24% ] of total deposits. Noninterest-bearing deposits have held very steady in balance but continue to follow as a percent of the total portfolio and represent now 26.8% of total deposits. The loan-to-deposit ratio has increased to 96.3% from 91.6% in the prior quarter, and we do not anticipate this ratio growing significantly from this -- at, this point. The securities portfolio has not significantly changed since the prior quarter and continues to be made up of mainly short duration treasuries and variable rate Ginnie Mae mortgage-backed securities. Treasuries matured during Q1 of 2024, and we anticipate $35 million of low-yielding treasuries to mature between April and June that will be reinvested at higher yields or pay off high-cost deposits. As discussed previously, the overall yield on the portfolio was 4.2% year-to-date. OCI is still negligible and was relatively unchanged during the quarter at $258,000 compared to $252,000 on December 31. The total unrealized loss on the combined held-to-maturity and AFS portfolio is $869,000, which is actually down 47% from the prior quarter due to maturities and valuation adjustments related to anticipated rate changes. Consolidated equity to assets ended at 10.6%, down from 10.7% in the prior quarter. And the bank's Tier 1 leverage ratio was 13.03% compared to $14.06 in the prior quarter, due mainly to asset growth, which was offset by organically produced retained earnings. Tangible book value per share has continued to increase from retained earnings and has crossed $8 per share in the current quarter. Sensitivity of the bank continues to decrease. The large increase in fixed rate loans in recent quarters, combined with the short-term funding have continued to reduce the asset sensitivity of the bank. The most recent model reflects -- results Reflect a 30% fluctuation in net interest income and a 200 basis point rate change scenario. Current balance sheet growth is working to secure the increased margins and continue to move the bank into a more neutral position related to sensitivity. Liquidity remains an overall strength of our organization. During the quarter, the bank continued to enhance liquidity options to provide additional security to fund bank operations. The bank has on balance sheet liquidity of $100 million and total liquidity, which also includes borrowing capacity, of $622 million, of which $429 million is secured by loans and investments. This puts the bank in a position to replace 76% of the deposit base, if needed, with short notice. The first quarter of 2024 has been incredible, and the bank is anticipating earnings and growth to remain strong throughout the remainder of this year. So with that, I will turn it back over to you, Ed.

Thank you, Jeff. We're going to open it up to questions in a few minutes. A few closing comments that I know are of interest. We are still working with the FDIC on our application to acquire DCS. I thought it was interesting timing that this morning, it was testimony by the FDIC in front of the House of Representatives with respect to the statutory requirements that the FDIC has for any merger under the Bank Merger Act. And our acquisition has now is under the Bank Merger Act. So there is a bit of additional information a bit understated that we are required to give. So we do not anticipate the closing to be in the second quarter, and we will also be having an update on this probably about 2 weeks from now as we will have more information available to us. So we'll pick that up, let's say, 2 to 3 weeks down the road with additional information to our investors and shareholders as to where we believe we are with that application. The next that -- there was an interesting little statistic I did for our Board recently and they thought it might be really interesting to you because we were reporting on our credit losses. And we had a very important ALCO committee meeting minutes that we're going over with the Board. And we were looking at our SBA division, particularly because we had given relief -- interest rate relief that Brian referred to, to 73%. I believe it was, Brian, about 470 borrowers in the SBA. And -- but yes, -- it wasn't because we were facing an imminent additional loss of credit on a particular project, but because we always look after our borrowers. Let me give you the statistics that some of our borrowers were facing. I did a little study for the Board. And this is one of the reasons why we're in the hotel business. I was in the hotel business for 17 years. You can see other members on our holding company and bank boards that are in the hotel business today. We didn't get into the 7(a) business in the SBA by accident. We like hotels and they're resilient. We now have 28,200 rooms in our SBA hotel portfolio. In that amounts to $1.1 billion in loans to that industry, 379 loans in 40 states, so we're diversified. But what we like about the hotel business is what I always looked at when I ran hotels is the hotel department in a multi-department operation that does more than rooms that does food beverage, conventions, weddings and catering. The most profitable department in your hotel -- always your hotels. In our hotels, we could get a 70% departmental profit in our hotel rooms. Because the cost of operating the hotel rooms was far less than the cost of operating restaurants, or operating our catering division or operating conventions. All of these were extremely labor and food cost expensive. But hotel rooms are not. So we take these 28,200 rooms, and I did a little study for the Board that I thought was interesting because if we take a 5.5% loan on these 28,000 rooms, and we up it to a 9.5% loan, that increases the 1.1 billion, remember, in amounts of our loans out there, that increases the interest payments substantially, double for them. If we take an average loan of $2.9 million, which we have, and we take it at 5.5%, it amounts to about a $5.98 per day, interest rate cost to that operate. Did you take a $2.9 million loan and go to 9.5%, at cost and interest per day, just calculating interest rate and not amortization schedules goes to $10.34 per day. Now the difference is $4.36 increase per day. Now the average rooms of this $2.9 million or 74. So if we take the 74 rooms and we take a 60% occupancy, the operator has had to come up with about $7 a day more in revenue on the -- on a per room basis. And that's over a 3-year period. So many, many have been able to do it very well. And there are some that haven't been able to do it as well. Their margins were a little tighter but they're still performing under all the aspects of the loan. So I point this out because they have this amazing tool called average daily rate to work with. And inflation has kept pace with a lot of this for our operators. And right now, our entire loan portfolio is averaging about 2.21%, 2.25% debt coverage ratio. That is very good times, 2.2x. The debt coverage ratios, which is the amount -- we always look at these and we manage this portfolio very carefully, but we understand their business. And if we see a problem, we can get in front of it early because we'll see the ADRs. We'll see what's happening in different operations, and we're able to help those borrowers right away, solve these problems. But anyway, I thought I pointed out because people have -- some investors ask me, well, why is your SBA division holding up strong. We see other banks pulling back or we see other banks registering some significant losses. And that's kind of why, because we have amazing tools available to us, and we've always used them. And finally, I think that I always want to say -- and I thought I'd point out a little bit of history. One of the things that our Board does in our officers, we always remind [ mother to ] treasure, our shareholders. When we started Bank of George in 2007, we had a premise. And the premise I wanted to make sure we followed was that no one or two people could control the space. So we set up our initial investment that no one could own more than 10% of the bank. And in particularly, we wanted shareholders so we had 180 shareholders who raised our $22 million. 180. And these were all businesses and families that were long-time Nevadans and they pay $10 a share. And we went through this recession in 2008, 2013, and there's not one night that went by that we didn't think about our shareholders because our board at that time had a lot of shares. We still do. about the losses when we went all the way down to $1.50 a share. In 2013, we came out at $1.50 a share raise with it. So people are very happy they bought in there. A lot of our 180 shareholders didn't have the resources to buy in there. So our goal and our objective every day and every night was to get our stock back to $10 a share for our shareholders. And now we've pledged we're going to go far beyond that, and we are building this engine to do that. So by the way, I only mention that because I want to make sure you vote. We have an annual meeting coming up, I'm on the ballot. So this is a campaign speech. Thank you very much for tuning in today. And now I'd like to open it up to any questions.

It's Tim Coffey from Janney. How are you doing? First question, what kind of trends do you see for your net interest income in the next couple of quarters given there was such a big delta between period end loans and average loans that period loans are much bigger.

Yes. I'll take a first stab at that, Tim. So yes, with the increased growth, the average loans over the entire quarter were actually up $113 million. Q1 compared to the prior quarter. We still are getting good rates, certainly on our SBA activity, although the spreads have come down with the increase in prime. But as we think about NIM going forward, we're going to have some positives in Q2 and future quarters with some of the maturities of securities that Jeff mentioned specifically, I think we've -- we've got quite a bit in Q2 and Q3 treasury maturities. So that will certainly help. I think that we'll see NIM that probably is a little bit above Q1 and Q2. And then as Jeff mentioned, we think with kind of continued production and then a little bit of credit card by year-end, that NIM should be in the low 5s by year-end.

Okay. Yes. And that NIM, is that bank only? Or is that company-wide?

We report both. So I know you look at consolidated, but I'm talking consolidated in terms of what we're talking about here.

Okay. Great. You almost got the loan sale volume, about $69 million in the quarter. Is that kind of a good run rate?

It's probably a little bit high. We think it's going to come in a little bit. Tim, we're targeting for each quarter this year. On the production side, we're targeting $100 million per quarter. That's what we're going for. So as a normal sale percentage, I would expect that to be a little bit lower than the most recent quarter, but certainly in the $50 million to possibly up to $60 million range. As was kind of alluded to, obviously, the gain on sale was bolstered by that increase in volume. The secondary market continues to be -- pricing is still pretty low. Although anecdotally, and this has been part of our premise, we do expect some improvements over the rest of the year. We saw -- it's early on in the quarter, but we saw some pretty marked improvements in April.

Okay. And then in noninterest expenses, were there any M&A merger expenses this quarter?

There were, yes. So I think the BCS related merger expenses were approximately $230,000.

Hello, guys. This is Brad. First question here. So what should we expect going forward from some of these SBA repurchases? Is there room left to do more?

No, to put not to find a point on it. So that was really centered in Q4 and Q1. We've gotten through that activity. As mentioned, for the two quarters, it was about $153 million in total repurchases. We still have a couple of modifications to do as the borrowers are waiting to get back to us. But that activity is going to be greatly diminished if not totally gone starting in Q2. So it's really going to be, as you think about going forward, it's really going to be focused on new loans and originations.

Okay. Great. And what should we expect from here regarding loan growth, maybe total year-end balance, $900 million to $1 billion.

On the loan side?

Yes.