Q2 2020 First Internet Bancorp Earnings Call
After today's presentation, there will be an opportunity asking questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then.
Please note so that is being recorded I would now like to turn the conference over to Larry Clark from financial profiles.
Please go ahead Mr. card.
Thank you Sean.
Good day, everyone and thank you for joining us to discuss first Internet Bancorp's financial results for the second quarter of 2020.
The company issued its earnings press release yesterday afternoon.
It's available in the company's website at Www Dot first Internet Bancorp Dot com and.
In addition, the company has included a slide presentation that you can refer to during the call.
You can also access these slides on the website.
Joining us today from the management team, our chairman President and CEO David Becker.
And executive Vice President and CFO, Ken Lubbock.
David will provide a company update and Ken will discuss the financial results then we'll open the call up your questions.
Before we begin to like to remind you that this conference call contains forward looking statements with respect to the future performance and financial conditions, a first <unk> bancorp that involve risks and uncertainties.
Various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements.
These factors are discussed in the company's FCC filings, which are available in the company's website.
The company disclaims any obligation to update any forward looking statements made during the call.
Additionally, management may refer to non-GAAP measures, which are intended to supplement but not subject to the most copper we directly comparable GAAP measures.
The press release available on the website contains the financial and other quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures.
This time I like to talk to turn the call over to David.
Thank you Larry good afternoon, everyone and thank you for joining us today.
We're very pleased with our results in the second quarter specially given the ongoing challenges as we navigate do the cobot 19 pandemic.
I thought there would the families and businesses, who have been most impacted as well, it's a health care professionals at first responders.
Priority continues to be the health of our team in clients and I would like to thank the entire first internet team for their resilience and hard work during these challenging time.
Our team delivered quarterly net income of 3.9 million in quarterly diluted EPS of 40 side.
Earnings for the quarter included a provision for loan losses of 2.5 million.
Which drove an increase and the allowance for loan losses to total loans of 82 basis points.
Or 84 basis points, excluding loans related to the S.P. AIDS Paycheck protection program.
Furthermore, asset quality remained solid with Npls to total assets, one week 24 basis points.
From an operating perspective, our cost of interest bearing deposits continued to decline decreasing 30 basis points for the first quarter two 1.94%.
Well, we did experience or that applying the net interest margin during the quarter due primarily to the impact of the federal reserve rate cuts in March on earning asset yield we expect asset yields to stabilize and when combined with continued deposit repricing opportunity we have over the next 12 months.
We should have the ability to significantly grow net interest margin and net interest income for the balance of 2020 and into 2021.
Our direct to consumer mortgage business had another strong quarter. That's what we were well positioned to capitalize on the ongoing refinancing sales activity across the country driven by historically low mortgage rates.
We expect residential mortgage originations to remain strong and the continued low rate environment.
Our loan growth during the quarter was primarily driven by our participation and the SBK PPP program loan balances were up 82 million or 2.8%, which included 59 million a P.P.P. balances.
We did not sell any portfolio loans during the quarter as market conditions were not as favorable as we would've liked.
However, we did sell 11.5 million.
Be a seven a guaranteed loans at a net gain of 800000 as we continued to grow this line of business.
I'd like to give you a brief update on the status of RSV a business as we have discussed in the past, we see great potential in that space with attractive opportunities on both sides of our balance sheet.
Now we have made tremendous progress and building out a that truly a nationwide platform.
In fact during the second quarter, we took advantage of market disruption among some other competitors in the S.P.A. space and if added sales and operations personnel to our already strong and talented team of professionals in this division.
We are about six months ahead of our original hiring plan and are very excited about the near term outlook for this business over the remainder of 2020 nm to 2021.
Our original forecast for 2020 included about 60 million of originations for the year.
The 100 million dollar annual run rate by the ended the fourth quarter, excluding TPP. Our current expectations for 2020 originations are now closer to $100 million, reflecting significant growth and the second half of the year and forecasting originations of 200 225 million.
We're 2021.
It's hard to believe that 18 months ago, we were barely a player in the has to be a world and today. We are rising four said, it's been able to attract top talent as we build a leading national small business lending platform.
As a reminder, our primary focus is that'd be a seven eight program lending.
Where we sell the guaranteed balances in the secondary market, what's your generally 75% to 90% of the total originated balances. This generates fee revenue an increase its profitability with minimal balance sheet growth.
Let me now pick a few minutes to update every one of the status of our loved the Pearl program.
Last call in July.
17th we had 366 million of loan balances on deferral or just under 13% of the total portfolio.
Basically back to where we were three months ago.
This is down from a peak of 647 million in late May which was about 22% of the portfolio.
Generally we have seen a significant decline a deferrals across most of our portfolios and all the bar is coming off the Pearl programs have anything making loan payments without any delinquency.
We have been particularly pleased with the performance and the consumer portfolio as a percentage of mortgage deferrals significantly lower than the national mortgage forbearance rates and less than 1% of the balances in our specialty RV and trailer volumes are all deferrals.
As you can see from the loan deferral information, we provided on slide 13, and the presentation the level of deferrals in the healthcare finance portfolio is down significantly from April and May.
In mid May nearly 80% of our health care balances were out of payment deferral plan now two months later that number has dropped the 15%.
The 58 million still currently on deferral plants about 40% represent balances that were granted a second deferral period. These are generally granted to dentist operating and stayed where they were late and reopening or have not yet reopened.
Additionally, the majority of healthcare finance loans still on the Pearl plan are expected to roll off in the next 30 days.
Our largest portfolio with referrals that single kinda lease financing with 277 million in balances on Deparle programs are about 28%, yes, yeah portfolio.
As a reminder, all of our single kind of borrowers made their April payments. So the deferrals did not start until may.
Therefore, the vast majority of these borrowers are expected resumed making payments in August.
A large portion of the loans on deferral or related to restaurant properties and of those approximately two thirds of the dollar balanced consists of full service restaurants and the remaining are quick serve.
Furthermore, the current weighted average loan to value ratio and think of panel deferrals, its 55%, which is relatively consistent with the portfolio as a whole.
Over the course of the corridor borrowers representing about 16 million imbalances sales to terminate their deferral agreements early and a similar number continued making some level the principal and interest payments, even while on a deferral program.
Additionally, we have not experience any delinquencies for the performing single tenant.
That are not under a deferral program.
Overall credit quality remained strong and we are cautiously optimistic about our future outlook.
There's still a tremendous amount of uncertainty regarding the economy due to the pandemic. We are monitoring our loan portfolio very closely and responding to the needs of our clients as they bridge the gap to recovery.
In doing so we are deepening our connections with existing clients, which we believe will lead to stronger and broader relationships over the long term.
Heading into the second half a 2020 and into 2021, we have many reasons to feel optimistic about our performance going forward well, we had to deal with the uncertainty of that pandemic, along with everyone else in the banking industry, our digital business model minimize the operational disruption and we continue to serve our clients.
Without missing a beat.
As others in the industry are now watching in the need for all of their physical locations and are struggling with the process to reopen branches. We can remain focused on our core lines of business and building the pathway towards greater earnings or profitability.
I would like to thank the entire first internet team for their resilience and hard work. During these challenging times as you've heard me say many times our people our greatest asset and the key to our long term success.
Their dedication and efforts have been very much appreciate it.
With that I'd like to turn the call over the weekend to discuss our financial results for the quarter.
Thanks, David.
Thanks to continued challenges created by the pandemic, we were relatively happy with the performance for the quarter as David mentioned, our asset quality metrics remain strong and we're particularly pleased by the positive trends with respect to our loans under Hurlyburly.
The balance sheet increased about $157 million during the quarter due to continued strong deposit inflows some of which were used to fund loan growth, while the rest added to our already strong liquidity.
Looking at slide four.
Outstanding at the end of the second quarter totaled $3 billion, an increase of 81.6 million or 2.8% from the first quarter.
Commercial loans increased $98.9 million were 4.3% compared with the first quarter due primarily the $59 million of PBP loan originations as well as higher public financing construction balances.
This growth was partially offset by lower commercial and industrial loan balances as borrowers paid down balances on lines of credit or paid off term loans.
Umer loans decreased 16.2 billion or 3% compared to the first quarter due primarily to increase the prepayment activity in the residential mortgage loan portfolio.
Okay.
We did not sell any portfolio loans during the second quarter due to less than optimal market conditions, resulting from the pandemic.
Well the loan sale market was opened during the quarter pricing was a bit lower than what we are used to seeing and we did not feel the need to forces sale as loan production was down and we knew overall portfolio growth would be modest we do expect to resume selling portfolio loans in the second half of 2020 and these sales are a key component of our bank.
She management strategy.
Moving onto deposits on slide five deposits at the end of the second quarter totaled 3.4 billion, an increase of 202 million or 6.4% from the first quarter.
Like the rest of the industry, we were not immune from the flight to safety as consumers small businesses and commercial clients look to conserve cash in the face of an uncertain environment.
Money market deposits increased by $311 million, 133% to 1.2 billion and now make up 37% of our total deposits up from 20% one year ago.
The increase in money market deposits included a 219 million dollar contribution from small business.
Strong money market deposit growth in the quarter was partially offset by declines of $161 million in higher cost BD and broker deposit balances.
Compared to the first quarter the cost of funds related to interest bearing deposits decreased by 30 basis point with the cost of money market deposits declined 43 basis points as we continue to reduce our pricing throughout the second quarter.
At the beginning of the quarter our rate on all money market products was 1.6%.
We ended the quarter our rate on the consumer money market product was 1% and on small business and all other commercial money market products was 90 basis points. Furthermore, we have lowered all money market rates, another 10 basis points so far in July.
The cost of Cds, and broker deposits decreased by 18 basis points as rates paid on news TV production remained well below the rates on maturing Cds.
Continued shift in the deposit mix from cities to money market accounts also favorably impacted deposit costs.
During the second quarter, new cities and broker deposits were originated at a weighted average cost of 1.08%, whereas mission maturing deposits rolled off at 2.64% a positive spread of 156 basis point.
Included in the maturing deposits were to higher cost broker deposit balances total totaling 117.5 million and having a weighted average cost of 2.97, which rolled off at the very end to the second quarter.
Looking forward, we have approximately $1 billion in Cds with a weighted average cost of 2.18% maturing in the next 12 months versus current production in the range of 100 to 105 basis point.
Turning to net interest income and net interest margin on slide six.
Net interest income on both a gap and fully taxable equivalent basis declined compared to the linked quarter as a decline in earning asset yield driven by lower short term rates. Following the federal reserve rate cuts in March more than offset funding cost reductions.
Looking at the quarterly net interest margin progression on the next slide slide seven the fully taxable equivalent net interest margin declined 15 basis points from the first quarter.
Loan yields negatively impacted the fully taxable equivalent net interest margin by 24 basis points and lower yields on securities in cash balances each had a negative impact of seven basis points.
However, those pressures were partially offset by lower deposit costs, which had a positive impact of 23 basis point.
Given the current interest rate environment, and our expectation that interest rates will likely remain lower for an extended period of time, we see a significant opportunity to reprice deposits lower in the second half of the here.
Naturally saving $2 million to $4 million per quarter, and we anticipate 2021 annual interest expense savings to be in the range of $17 million to $20 million.
We're also expecting yields on earning assets to stabilize going forward.
In the second quarter, we felt the full impact of the feds rate cuts on our variable rate loans and securities as well as non cash balances. However, the vast majority of our earning assets are fixed rate, including over 85% of our loan portfolio and as the pace of short term rates decline to slow and we are forecasting earning asset yields through.
Remained flat over the remainder of 20 point.
The impact of the deposit repricing combined with stabilized asset yields provides a significant opportunity to increase the net interest income and net interest margin during the second half of 20, pointing and throughout 2021.
During the quarter monthly net interest margin hit a low in May However, june's margin was up substantially compared to Mays result, so where would so we are beginning to move into right direction.
Turning to non interest income on slide eight noninterest income for the second quarter declined by $1.2 million to $5 million as compared to the linked quarter. The decrease was driven primarily by $1 million decrease and gain on sale of loans during the quarter.
And a 300000 dollar decrease in revenue for mortgage banking activity.
The declining gain on sale revenue was due primarily to not conducting any portfolio loan sales during the quarter. However, as David mentioned earlier, we didn't sell $11.5 million of SP, a seven a guaranteed loans for a gain of $800000, which was an increase of $300000 from the first quarter when we see.
$5.6 million loans at a gain of 500 million of $500000.
In terms of mortgage banking, our direct to consumer mortgage business is experiencing strong demand fueled by the declining mortgage rates and refinance activity.
Although our mortgage business experienced a market volatility, which negatively impacted revenue late in the first quarter and early in the second quarter. It rebounded in the latter half for the quarter and the pipeline remains very strong heading into the third quarter.
With respect to non interest expense shown on slide nine a decrease of $200000 from the first quarter 213.2 million was due primarily to decreases in consulting and professional fees loan expenses and deposit insurance premium partially offset by an increase in other expense the.
Increasing consulting and professional services reflected seasonal cost incurred during the first quarter related to the filing of our annual report and proxy statement.
The decrease in loan expense is related to cost incurred during the first quarter associated with nonperforming loans.
And the decrease in deposit insurance premium was due to declines in the balance of broker deposits and year over year asset grilling, both of which positively impact the formula used to calculate deposit insurance expense.
The increase in other expenses was due primarily to a $250000 charitable contribution to assist small businesses and nonprofits address the economic challenges of the covert 19 pandemic.
Now, let's turn to asset quality on slide 10.
The allowance for loan losses increased to $24.5 million up 7% on modest loan growth, excluding PPP balances, resulting in an increase in the allowance to total loans to 82 basis points or 84 basis points, excluding PBP loans.
The linked quarter increase was due primarily to additional adjustments to qualitative factors in our allowance model to reflect the continued economic uncertainty, resulting from the covert 19 pandemic.
Oh, no there were no new specific reserves taken on individual loan balances during the quarter.
Net charge offs of $900000 were recognized during the quarter, resulting in net charge offs. The average loans of 12 basis points compared to six basis points for the first quarter.
The net charge offs for the quarter included a $740000 charge offs in our healthcare finance portfolio, which is the first loss that we have ever experienced in that line of business and one that had some unique circumstances associated with them.
Nonperforming loans increased by $800000 in the second quarter to 8.2 million due primarily to a 700000 dollar owner occupied CRT loan that was placed on nonaccrual status during the quarter.
However, the ratios of nonperforming loans to total loans and nonperforming assets to total assets remained relatively consistent with the prior core.
While there is much that we still don't know about the longer term implications of cobot 19 on the economy and on our borrowers our credit metrics remained strong today and we continue to take comfort in the low ltvs on our real estate secured loans and our overall conservative approach to underwriting as reflected in our low levels.
Nonperforming loans and net charge offs.
With respect to liquidity and capital as shown on slide 11.
Our overall capital levels remain healthy due in part the balance sheet actions, we've taken over the last several quarters to manage and preserve capital.
Our tangible common equity the tangible assets ratio decreased to 7.01% in the second quarter from 7.22% in the first quarter, primarily due to the asset growth associated with our continued strong deposit inflows most of which was held in cash to fund the TPP loans excluding growth.
Cash and PBP balances the tangible common equity ratio would have been 35 basis points higher.
Additionally, tangible book value per share increased to $30.92.
Overall, our regulatory capital ratios at the holding company and the bank remains strong and we have more than sufficient on balance sheet liquidity supplemented by access to additional funding sources to manage the current economic impact of the coded 19 crisis.
In terms of capital and overall balance sheet growth going forward. Our intent is to reduce the size of the balance sheet over the second half of 2020 through continued deposit repricing and a lower but still prudent level of cash balances as a result, we expect cap capital levels the increase meaningfully with.
Improved earnings on a smaller balance sheet.
Looking ahead, we are extremely excited about our prospects moving into the second half of 2020 and 2021, we believe the trends we have experienced to date with respect to our loans on deferral speak to the quality of the loan portfolio.
Our stabilizing asset yields coupled with the opportunity to significantly lower deposit costs over the next 18 months are expected to drive substantial increases in net interest income net interest margin.
The income in the near term from our mortgage business should remain solid well gain on sale revenue from our small business lending division has the potential to become a significant source of revenue and driving increased profitability.
With that I will turn it back to the operator, so we can take your questions operator.
Thank you we will now begin the question and answer session.
To ask your question met Press Star then one on your Touchtone phone.
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Your first question today, we will come from Michael Perito with KBW. Please go ahead.
Okay.
Hi, gentlemen, good afternoon.
Hey, Mike I'd like.
A couple of questions for me thanks for the time.
I wondered if you could maybe put some numbers round that new trajectory intra quarter from May to June I guess for starters.
Yeah, we hit a low and may it was it was in kind of the lower one fortys.
I mean, it for April was out of bed relative kind of flattish with March and and in May we really hit the floor, but that in June it was.
Backup into into the mid to high 150, So we've got I've got the trajectory back on track and as I said.
You know, we really felt the full impact of the fed rate cuts.
In the first part of the in the first part of the quarter, but.
Half it yields have stabilized and I think with the deposit repricing opportunity going forward, there's a pretty solid upward trajectory.
Net interest margin here going forward.
Is there any timing, we should be mindful of around the repricing or anything else you asked side or do you think the third quarter could could start to show some that positive trajectory.
Yeah, I mean, I I wouldn't I would probably argue that we showed positive trajectory in the second quarter. We were off we were down about 1.4 million or so.
And that's just going to compound here, you know not I've compound [laughter] score.
But it will it it is expected to increase because one thing that I'd have to keep side is that were bad.
We are a bit tied to the to the schedule a CD maturities.
And in some months have chunky or maturities than others.
But we're starting to pick up the impact of the maturities from the earlier part of the near and obviously, we still have a nice spread to pick up throughout the remainder of the year, but.
I think deal.
Just as far as what we're forecasting today that.
That dollar pick up will be much more significant didnt in the third and fourth quarters I think as I mentioned in in the in your prepared remarks that.
We're looking at $2 million to $4 million of additional savings per quarter here throughout the rest of year.
What are the things that will help us out im ethylene Mike.
Like most institutions across the country, the consumer would save me and every dime they had to the second quarter, our cash on hand jumped up to 612 million on June path was our high during the quarter. We've now lower that adds up this morning, we're down to 465. So we continue to bring we think we Pete.
During the second quarter, we brought it down significantly and we hope by year end to have that down in that $200 million to $250 million range. So that along with the decrease decrease in cash loans at a bottom and the deposits continuing decline should show tremendous increase and a net between down year end.
Helpful. Thank.
Thank you and then on the.
Can you expand a little on them so what drove kinda the the lower mortgage production in the early part of the quarter. You want me. It seems like pipelines are strong today and based on kind of some of the dip the pure performances from other banks I want to where it's probably a little bit of a pretty big quarter on the mortgage you did I mean, it's still well sizable but it seems like there was something that I have you guys out of the gates.
Little bit can you expand on what occurred.
I'll try and then let can fill it in a we did not drop off in units and tail, but we had we had.
The volume coming through the door and the market just blew up the end of March.
Early part of April we lost 2 million in revenue due to this fluctuation in market pricing on the had just so we moved to best efforts.
Position got back into hedging here in July.
So to the quarter, we had solid volume actually a record volume for the bank in the history of originations our pipeline today, we're setting up 375 loans last year. We originated a 1300 60 loans total so the numbers are great. The units are great.
But.
The craziness in the market than people worried about a massive non payment and all the agencies running into trouble just crossed our yield the last two weeks a margin for the month of April.
Got it helpful and and then.
Just lastly for me on on the credit side of things.
You know what do.
It's obviously, a challenging environment, but you know and I know the LTV is on your SDLP <unk>, our low but at the same time are there any concerns on your end about kind of the ultimate value. Some of these these properties that that you're using as collateral is as you know kind of a lot of the restaurant.
And other retail businesses are seemingly under pressure, which I know, it's a lot of worthy exposure is in this portfolio.
I don't know that we have tremendous concerns were talking to the clients were talking we have the two large chains that we have.
The largest volume in our Red lobster and Bob Evans.
Bob Evans is back and going strong in fact.
They had asked our clients for deferrals up to year end and they started making payments already now there's a second wave in the states come through in shutdown stuff again that could impact them, but they seem to be rock solid red lobsters.
Still trying to get their arms around some kind of a carry out a remote.
Delivery capability.
They have never had in the history of the restaurant chain that kinda impact them, probably a little tougher Bob Evans got it set up early on in the program and Rolling So we're not seeing as she is a quick service restaurants that we have they're not missing a beat all of them are going solid.
Obviously red or heard about the large wendy's pizza hut franchisee that filed for bankruptcy. He's just doing using that as a tool that kind of do some house cleaning.
I think we had four of our one to use our part of his portfolio and they're all painting and processing fine. So.
We're in contact with these folks Mike on them their daily basis, and talking to them and both customer level and there are obviously talking to the restaurant out ever said right now we're not seeing any major cracks.
If we go into a pole nationwide shut down again.
Obviously, a lot of restaurants have brought people back they bought inventory they restocked.
Thats going to be a double whammy Tom.
That could impact folks more so than anything else, but if things stay where they're at don't get any worse, we think we're going to sale feeling really good shape.
Great. Thank you guys, taking my questions appreciate it.
Thanks, Mike.
And the next question will come from George Sutton with Craig Hallum. Please go ahead.
Good morning, Ah, David and Ken This is James on for Jordan.
Thanks, Jeremy here.
Then the CRN SGL books, and then are you taking additional reserves for borrowers and states that have been imposing the tighter restrictions or you're not looking at it on that level of granularity.
You know were in terms of what we reserve in the portfolio. It's more of a portfolio level reserve I mean, you know our credit team.
Has worked very closely with the CRT team to go through the portfolio on a loan by loan basis and track identify areas, where there there may be more risk or or reaching out to borrowers to touch base and see how things are going.
Yeah, I guess the good thing for US is that we have a pretty diversified portfolio across the country.
And one time not the locations.
In those geographies are pretty good I mean, we certainly keep our eye on again geographic factors.
The things developing with tenants as David talked about earlier.
You know things overall and whether that's a quick service industry I mean, we keep on top of all of that stuff.
But no we were not reserving we're not we're not going to that level of detail on reserving in the portfolio.
Gotcha, and then err on the public finance bucket it seemed there'd be some demand from borrowings to fill some of the budget deficits, what sort of your approach to underwriting within that segment.
Yeah actually word James we don't have a tremendous amount of growth in that area. The current time.
We've been to that portfolio top to bottom, obviously with the concerns or some of the states and collection of.
Income tax property taxes, et cetera, and where again very very comfortable.
There's a lot of different levers to pull in that area. We don't have any single loan that we're worried about at the current time in fact.
We actually have an upside value to that portfolio, we have about 200 million.
That we estimate we could sell in the secondary market right now it is probably a 103 to one or for premium and we've opted not to do that till we again would we need loan income more than we need a.
Extra cash coming back end so.
Again, we're very comfortable the way there those loans are set up and the.
Quality a lot of its Midwest based here in our back door in Indiana not in Illinois.
We're we're very comfortable with that portfolio kind of top to bottom I don't get anything to add Ken.
No I think we're up our team think as David mentioned that team did kind of.
Bottoms up analysis on just about every loan in the portfolio and really did a deep dive on the source of repayments.
All the borrowers and beat it up pretty good and you know came away feeling feeling pretty good about the portfolio.
Just for everybody certification on the phone today, we just completed this past month, we had grow horrible come in to do a loan review for us and obviously right in that I met so the crisis and and the play and at the end of the day. They had no adjustments. They had a couple of suggestions of things for us.
To look at due to the crisis and played but.
They really had no concerns and.
Questions whatsoever on the portfolio the underwriting and the way we're processing so.
We're we're very comfortable that where you are doing everything we can and then some to stay on top of the whole lending side of the operation.
Good to hear and then given your physician sort of I'll call. It a digital centric bank as a surgeon digital banking it seeing how successful some of the integral interdependent distributing the PPP log it's sort of influence your strike strategic priorities at all.
Yeah, I think the the P.P.P. loan side of things.
It was an interesting exercise for us we had kind of the as most institutions that all hands on deck. We had people from every department doing it because we originated.
More PPP loans, and a 10 day period than we normally do loans at a calendar year. So.
It was an interesting exercise we stayed to just our existing clients and as this program that's kind of market over the last 60 days were very thankful that we did that.
We definitely though I want to put a lot of.
1% loans on the books for five years now with the repayment terms.
We have looked at the outside services that are willing to buy the pp the loans and take them off our hands with sensor existing clients our fear is.
Okay kind of when you get to the varied background, although they're being fronted by four or five different people the background operation by the PPP loans, the same organization and they're going to have billions of dollars and thousands upon thousands of people to deal with over the next six to nine months and lead on what the quality of service to blow up.
They move forward with propose plans now to.
Basically forgive every loan under $150000 that would take up over 80% of the loans. We originated so we can get out of this thing in the next three months with.
Fortunately no hang over obviously that revenue recognition would move forward. So that's kind of an ace in the whole that could be a good opportunity I can tell you we have really solidified our position with a lot of our clients, helping them through the PPP process and getting them some cash to really take the.
Edge off and particularly that's forgiven will be he was with them for years and years. So.
It's an interesting time and.
In the marketplace and I think we're very well positioned to take advantage that great part as you say a lot of institutions.
There's estimates a five to 10 million consumers across the United States were forced into the electronic world.
Over the last 90 days that probably would never have touched online banking in the right and that's a tremendous opportunity for customers that most of them are a little further up in the age category.
They are a lot of I'm living on fixed incomes once they get through the dust and realize this thing really works without a lot of marketing effort I think we'll pick up significant.
Client counts over the next few months and we're already seeing it on the small business side of things.
Great that for me Thanks Jess.
Thank you Sir James.
And the next question will come from nascent rates with Piper Sandler. Please go ahead.
Hi, guys good afternoon.
And it.
Wanted to touch based on just the loan sale expectations out of a outside of this going forward. It sounds like you guys expect to kind of pruning the portfolio I'm in the back half of this year. So just wonder if you can kind of size up you know the expectations there in terms of loan sales.
You know, where we're probably you know it's probably in the range of maybe 25 to 35 45 million a quarter.
Maybe a little bit more on the in the fourth quarter aside.
Starting to look at.
Putting together a potential transaction in single tenant for this quarter.
And perhaps a single tenant in the public finance deal with fourth quarter.
Yeah, so probably somewhere if you're going to take them altogether, probably somewhere in the neighborhood of 50 to 75 million.
Got it is helpful. Appreciate.
And then just trying to credit I'm just curious if you guys have kind of the rent collection data for the single tenant portfolio over the course of the second quarter, just trying to get a sense of them, how that's trended across your investor base.
We haven't talked too.
We haven't got specific to ask about some that were gauging that by the payments data can play we do know.
Red Lobster I believe asked for some amount of rebate between now and year end.
Bob Evans and come back and said, we'd like to go half payments until we reopened in virtually all of those restaurants to reopen today those are the only to kind of big players that we know.
Directly came in and ask the owners for some kind of a rental abatement, but all of that was being deferred it wasn't asked as a give away that they anticipate like with red lobster, they make a payment and a half once they get back up and running full steam till they get caught up so.
And I think the majority.
Outside of the restaurant area I think all the others, it's business as usual, they're getting monthly payments and we're not hearing anybody or any complaints and even on the quick service there they're chugging along there they're all doing good.
Okay great.
Richard Gere.
And then just staying within credit you know just think about the reserve build going forward.
Sounds like the provision this quarter was largely a function of just qualitative inputs.
But I guess kind of looking ahead.
Contracts of the second quarter trends in terms of charge off I'm, sorry with in terms of.
Hi.
Great and so forth.
That's what you saw in terms of criticized classified trends in the quarter and just maybe how you see that maybe evolved into the third quarter as well.
You know I would say that level classified criticized has remained relatively relatively flat.
You know I would.
Say that we have not seen.
Significant her substantial negative migration.
At all.
So far I mean, obviously as we've said its and in single tenant in health care and some of these portfolios that have large.
Or had one point large deferral levels I mean, we stay on top of these portfolios in yeah try to stay in touch with the borrowers and we track the payments you know we track our payments coming in the door on these loans on a daily basis.
But I would say so far have not seen a lot of had not seen any negative migration that.
Would you consider out of the norm.
Actually on the other side of it we've got a.
The about a million and a half dollars that are 90 days plus delinquency to business owner operated properties. Currently that are getting a refinance all indications are there there will be done an off the delinquency list by the end of the third quarter. So yeah, we're not seeing any specific reserves any issues.
Just because of what's going on in anticipation will probably take fairly close to two and a half a million dollar.
Reserve again during the third quarter and then we'll.
Kind of re evaluate where we're at during the first fourth quarter, if things have stabilized across country. The bump up is purely.
Based on unknown factors.
As Ken said it it's not specific as single loans and there's no specific reserves out there. So we even absorbed the one loan that a kind of got squarely in the health care facility. We just took 100 sense on a dollar loss on that one during the second quarter, we're gonna get.
078 percent of that back and selling the the equipment and stuff and the secondary market but.
We're not seeing and I'd say the things that help me sleep at night is the fact that absolutely every loan that has come off deferral has now made a payment.
And.
So we're not seeing any push from people getting back into business. It.
Business operating as usual.
Got it and.
Just curious if that helps your charge off was that a function of just what's going on in the.
Oh.
You know Bart.
Well it depends dynamic or was that just kind of up more one off operational issue so to speak.
The combination of the two it was a single client in California. When they did not released the did not allow him to reopen he just in the use of relatively new operator, he just lost that.
And I know to all of his clients. He was going out of business file bankruptcy packed up his family and left out literally so it was.
Just a one off combination I think a business then experience and frustration and concern about the pandemic so I.
I don't know, we I think could have come out of that whole data given as a weaker due to define somebody to work with them, but he just panicked and nothing we can do about it.
No understandable okay.
And then just a couple of housekeeping questions for me I apologize if you touched on a 10, but just kind of the operating expense run rate from here.
The second they get back up to 31 half like we saw in first quarter, how does that kind of trend I'm in the back after this year.
Yeah, I would say all things equal that that's probably you know probably 13 and a half is probably in okay number, but as David talked about in his comments I mean, we have.
You know, we've been able to pull forward our sta hiring about six months I mean, we were at the end of it at the end of June we were we we had the budgeted number of BT O is onboard that we had originally forecasted for the end of this year.
So what that means is that they've been able to hit the ground running in start to get out there and origination business. So we'll probably see.
Again as long as we're hitting our forecasted number on originations in the SBH space, which are which are up significantly from.
Three months ago.
Well, probably see some increased.
In the compensation line item because of the increased levels increased level of originations are going to translate into increased commissions.
So that that's kind of that I, you know the call. It a wildcard for lack of better term, but as long as we're getting as long as we're heading to the origination targets that would that we sat you're probably going to see that bottom line noninterest expense creep up as well, obviously, it's well far more than offset.
By the revenue on on the the gain on sale side.
But that would be the one piece that kind of increases noninterest expense throughout the course of year.
To give you an IDE idea of the growth in the magnitude of the SB a opportunity out here at the beginning of year, we had a stanley pipeline of about 10 million right now that pipeline has 100 million. So it's grown tenfold over what we were doing it the first part of the year and as Ken said, we've got a great opportunity did really knock some numbers out of the park.
In the second half and then double down on that are more and 2021.
Got it.
Switching gear and congrats on that hiring so I'm just one last one for me Ken any thoughts on a tax rate going forward.
Uh huh.
You know what tax rate is always a bit of a bit of a moving target for us.
You know I think we're probably.
You know.
I I think as we some of it obviously has to do with the percentage.
Percentage of.
Taxable income, but as long I think as long as mortgage is solid and we pick up more revenue from.
From SBK going forward, that's going to that's going to increase the level of taxable or or pre tax income.
I mean, I think I and I know, we had a negative provision this quarter.
But we probably still model internally somewhere in the range of 8% to 9%.
Okay.
Very helpful. Appreciate getting the questions.
Thank you.
The next question will come from John wrote US with Janney. Please go ahead.
Good morning, or do they afternoon guys.
Hey, John how are you doing.
Not too bad Dave how are you doing.
Good.
Interesting times [laughter].
Yes, Ken I I know, there's a lot of moving parts just with the margin, but I'm just sort of try and trying to put a pencil to paper here in and assuming.
You know your shrinking the balance sheet, some two and given the CD repricing I mean do you think the margin can get close to 2% over the next few quarters.
Or is it too aggressive.
I know I think I think we can I I think I think we definitely have the trajectory to get there I think the.
I'll not we're not going to put out formal guidance or something because there's just too many unknowns out there right now and you know again, we're trying to keep the cat you know run the cash balances down a bit obviously, we'll probably keep them a little bit higher than we have.
Historical basis, just because of the uncertainty of of the pandemic.
But but lower those cash balances lower deposit.
But I I can tell you, we certainly see a pathway doing a 2% Ah man here, probably you know over the call at the next two to three to four quarters.
You know given given kind of the forecast that we have for you know kind of what we're thinking about with the balance sheet. We're you know.
Well you don't have have at the end of the year a month, a smaller balance sheet kind of targeting that 4.1 billion sites by the ended the year.
With cash balances reduce callous cash balances being the largest contributor to the decrease in size.
Yeah. There is certainly a pathway that we're looking at two way.
And in the range of two over the next you know two to three to four quarters.
Okay.
I just wanted to make sure I wasn't.
Too aggressive for Okay. I think we're on the same page and Dave just to follow up on your comment on Sps. So I think you said for next year you said.
Loan production on the SPD side of 200 to 225 million is that correct.
Correct.
Just sort of in the current current environment, what sort of revenues I guess on on loan sales do you think that could throw off they just sort of based on current pricing and stuff.
If everything goes right.
Uh huh.
Piece that we just sold.
We got a little under 10% we were in the I think a low.
Either somewhere in the 10 to 11, another couple of more than nine range and I think we balanced out too.
About 9% them with all the charges and stuff we take out of it we probably net after fees somewhere in that seven seven at a 5% range.
So if you take the.
25 times 70, 580%.
And by it seven and a half and that rate has stayed consistent John all the way as every other market one upside down the SBH stayed very stable and obviously you know there's a big crunch kind of at year end of folks.
Buying that so premiums can jump during the fourth quarter, but do you take a kind of a 7.5% net on those sales that's probably pretty good figure to work with.
<unk>.
Just just to be clear do the.
The the two two and a half or two or 3% difference that net.
That's basically accounting for the expenses that would flow through for you guys.
Yeah long piece commissions things that we're paying out on the outside of mind that where we're modeling that about a seven and a half for sad that on those sales.
Okay, Yeah, I mean that I would say that top topline gain on sale premiums at least in our experience in the stuff. We've sold is kind of help that one and I mean, do we've gotten I think pretty decent pricing overall, but yet you just got you gotta net out the Fas 91 deferred loan fees in.
Or deferred cost.
And then any other costs you incur.
Yes, Okay makes sense, okay. Thank you guys ticker.
Appreciate it thanks John.
This concludes today's question answer session I would like to turn the conference back over to Mr. Baker for any closing remarks.
Hey, I would like to thank all of you for joining on our call today, we know it's pretty Crazy times out here and we hope everyone remains healthy and say during the challenging times and have a great day. We appreciate your time. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect [noise].
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