Q3 2020 First Internet Bancorp Earnings Call
Good morning, and welcome first quarter earnings Conference call.
2020.
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Now I'd like to turn the conference over to Mr., Larry Clark from financial profiles. Please go ahead Mr. Clark.
Thank you Nick.
Good day, everyone and thank you for joining us to discuss first <unk> Bancorp's financial results for the third quarter of 2020.
The company issued its earnings press release yesterday and is available on the company's website at Www Dot first Internet Bancorp Dot com.
In addition, the company has included a slide presentation that you can refer to during the call you could.
You can also access the 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 up the call to your questions.
Before we begin I'd like to remind you that this conference call contains forward looking statements with respect to the future performance and financial condition to first under the Bank Corp.
Risks and uncertainties various.
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 on the company's web site.
The company disclaims any obligation to update any forward looking statements made during the call addition.
Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute the most directly comparable GAAP measures the press.
The press release available on the website contains the financial and other quantitative information to be discussed today as well as a reconciliation to the GAAP to non-GAAP measures at this time.
At this time I'd like to turn the call over to David.
Thank you Larry and good afternoon, everyone and thank you for joining us today.
We're very pleased with our third quarter results. Despite the challenges created by the COVID-19 pandemic, we delivered record net income and earnings per share driven by strong revenue growth net interest margin expansion and moderate loan growth.
Our significant earnings growth in this low interest rate environment demonstrated the power of our business model and the increasing diversity of our revenue stream.
<unk> favorable deposit repricing opportunities drove our interest costs lower enabled our fully taxable equivalent net interest margin to expand by 17 basis points this quarter.
Lastly, our asset quality metrics remained strong among the best in the industry driven not only by our strong credit culture and disciplined approach to underwriting, but also by our focus on certain specialty lending mine that target lower risk asset classes such.
Such as our public finance.
Kinda leasing and healthcare finance businesses.
During the quarter nonperforming loans and net charge offs to remain low and we continue to build reserves. We also continued to see a significant reduction in loan deferral.
At quarter end over 99% of our borrowers who need it came up really early in the pandemic had resumed making payment.
We are proud to have supported our customers and they're kind of neat and are pleased that nearly all that then able to return to their normal payment schedules in such a short order.
Finally, I record earnings allowed us to further strengthened our capital base, which remains one of our near term strategic priorities.
Our team delivered record quarterly net income of $8.4 million and adjusted net income of $10 million.
When excluding a $2.1 million pre tax write down of the legacy commercial other real estate owned property more than double our net income from the prior quarter.
Revenue increased 48%.
28.7 million driven by record performance in our direct to consumer mortgage business, which nearly tripled revenue on a linked quarter basis.
Historically low mortgage rates continue to heal robust demand in markets across the country and our mortgage banking pipeline remains strong heading into the fourth quarter.
All right, let's be a business gained additional traction during the quarter as the accelerated build out of our national that'd be a platform <unk> increased loan production and higher gain on sale revenue our new.
Our near term pipeline is robust and we look forward to further driving revenue in the quarters to come as we continue to grow its government guaranteed lending business and.
And the economy adapt to and recoveries from the pandemic and it's.
And it's more small business and entrepreneur seeking financing to grow.
As we've discussed in prior quarters. We are confident there is enormous potential in this space with attractive opportunities on both sides of our balance sheet over the last.
Over the last couple of quarters, we capitalize on disruption among some F.B.A. compared to peers and added sales and operations personnel to our already strong team of professionals. We brought on college expertise expertise and depth that will help drive originations well beyond our initial forecast for 2020 and 22.
21.
Originally we had envisioned about 60 million of originations for 2020, and even 100 million annual run rate by the fourth quarter I'm proud to announce that we have exceeded those expectations.
In fact during the third quarter alone, we funded small business obligations totaling almost $58 million and year to date, we have funded over 80 million of small business originations and.
And note that these amounts do not include loans funded under the Paycheck protection program.
Looking forward, we expect it to be a production of between 25 and 30 million in the fourth quarter and are forecasting originations in excess of 235 million next year, which we expect to translate into gain on sale revenue between 12 to 14 million for 2021.
I want to take a moment to recognize that less than two years ago. Our SP a operation within attempt the thing that we are well on our way to building a leading national platform. The small business administration recently released its list of the most active seven eight program lender sports physical year ending September Thirtyth 2020.
And we place number 40 on the list with almost a 110 million an approved love.
I'm very proud of what we have achieved so far in the small business lending and look forward to becoming a leader in providing financing for the small businesses and entrepreneurs across the country.
With regard to credit our asset quality remains strong and we are cautiously optimistic about the remainder of 2020 and into next year.
Course of pandemic continues to create uncertainty we are monitoring our loan loan portfolio very closely and working with our clients to help them navigate challenges related to this ongoing public health crisis. This is.
This is the right thing for us to do and that is also good for the bank as we are deepening our connections with existing clients and creating stronger leasing relationships for the long term.
That being said we are very encouraged by the fact that nearly all of our borrowers we offered a loan deferral programs.
To have resumed making their normal monthly payment.
I've talked about 16.
We only had 20.8 million of loan balances remaining on deferral or less than 1% of the total portfolio a sharp decrease from the 366 million. When we spoke to you three months ago and down from the peak of 647 million in late May which was about 22% of the total.
Portfolio.
We believe that speaks to the quality of our loan portfolio, particularly our focus on lower risk asset classes and our disciplined underwriting approach.
As we move into the final months at 2020 and look ahead to 2021, we are confident about our prospects and the strength of the franchise well the pandemic presented everyone in the banking industry challenges are.
Our digital business model enabled us to serve our customers with minimal interruption and remain focused on our core lines of business as well as earnings growth and profitability. That's all.
As always I'd like to thank the entire first internet team for their hard work and unwavering dedication to excellent customer service delivering record revenue and earnings performance. During these challenging times.
We appreciate their flexibility and cooperation to work remotely over the last several months and we are pleased that as a Cobra first we were able to welcome back to the vast majority of our employees who had been working remotely so our corporate headquarters in past years.
By late first Internet was recently recognized with a seventh consecutive year, the Indianapolis Star as top workplaces in central Indiana less.
You've seen in the top 10 in the medium size company category. We're proud of the strong culture and workplace environment that we have created and with that I'd like to turn the call over to Ken to discuss our financial results for the quarter.
Thanks, David as David mentioned, we were very happy with our results for the third quarter delivering record revenue net income and earnings per share. We generated these strong results on a relatively flat balance sheet during the quarter, which is consistent with our disciplined balance sheet management strategy are busy.
Our business model emphasize this capital efficiency and increasingly diverse revenue streams that drive increased profitability and our third quarter results reflect solid execution on this plan.
Now, let's turn to the details of our performance for the quarter.
Reported diluted earnings per share of 86 cents more than doubling last quarter's results and up almost 37% over the third quarter of 2019 X.
Excluding the impact of the $2.1 million pre tax write down of legacy other real estate owned earnings per share were $1.37.
Profitability improved significantly with return on average assets of 78 basis points and return on average tangible common equity of 10.3%.
Adjusting for the write down of Oreo return on average assets was 93 basis points and return on average tangible common equity was 12.74%.
Looking at slide five total portfolio loans at the end of the third quarter were $3 billion, an increase of 39.2 million or 1.3% from the second quarter comes.
Commercial loans increased $56.2 million or 2.4% compared with the second quarter due primarily to production in healthcare finance and construction lending. This growth was partially offset by lower public finance and single tenant lease financing balances due to portfolio amortization decreased origination volume.
Yes, and the sale of single tenant lease financing loans during the quarter.
Consumer loans decreased $15.3 million or 2.9% compared to the second quarter due primarily to increased prepayment activity in residential mortgages as well as in the trailers and recreational vehicles portfolios.
We sold a portfolio of $12.2 million of single tenant lease financing loans at an attractive premium during the quarter, which included loans that had properties occupied by tenants in both the quick service and full service restaurant industries.
We continue to see healthy demand for our loans and our selling many of them to repeat investors [noise] sub.
Subsequent to quarter end, we sold a $7.4 million public finance loan at a solid green him and we expect to continue to sell portfolio loans going forward at this generates fee income and frees up capital that can be used to fund new opportunities across our lines of business.
Moving on to deposits on slide six while overall deposit balances were relatively flat from the end of the second quarter. We saw continued improvement in the composition of the deposit base with gross growth and money market balances interest and non interest bearing demand deposits and savings accounts, which was mostly offset by.
By a large decline in Cds and broker deposits.
Quarterly money market growth was $117 million and included $87 million in small business deposit.
Cds and broker deposits were down $138 million as higher cost Cds run off the balance sheet and were replaced with much more attractively priced money market accounts and lower rates eating this.
This activity drove our cost of interest bearing deposits 43 basis points lower in the quarter and we believe that we still have a long runway ahead to reprice deposits lower.
Due to the combination of significantly lower money market pricing and the continued CD repricing opportunity. We are forecasting interest expense savings in excess of $22 million next year.
Based on the current deposit pricing environment.
Turning to net interest income and net interest margin on slides seven and eight net interest income and net interest margin on both a GAAP and a fully taxable equivalent basis showed strong improvement compared to last quarter with lower deposit cost driving the increase.
Interest income from the loan portfolio was relatively stable as higher average loan balances offset a modest decline in overall loan yields.
As you can see from the net interest margin bridge on slide eight the securities portfolio had the largest negative impact on margin during the quarter as continued declines in short term rate indices impacted variable rate securities and increased prepayment speeds resulted in accelerated premium amortization, which affected yields on mortgage.
Each backed securities.
With regard to the impact of elevated cash balances. Our net interest margin you will see on the roll forward the cash only negatively impacted the quarterly change by one basis point.
However, we like many other banks have experienced excess liquidity for several quarters now in terms of how these balances are truly impact in margin when we adjust for a more normalized level of cash we estimate that excess cash is negatively affecting margin by about 13 basis points.
We are pleased to have reached an inflection point in our net interest margin and expect the upward trend to continue next quarter and throughout 2021.
Turning to non interest income on slide nine.
Non interest income for the third quarter of 2020 was $12.5 million more than doubled the level generated in the second quarter.
The increase was driven primarily by the record revenue from mortgage banking activities and increased gain on sale of loans, which was due mainly to a higher amount of SB seven a guaranteed loan sales in the quarter as well as the sale of the single tenant lease financing loans that I mentioned earlier.
Mortgage banking revenue benefited from strong mandatory lock activity and higher margins as well as increased the best efforts revenue unsold production while.
While we expect mortgage revenue to remain strong in the fourth quarter, we're not forecasting it to be at the record level, we generated in the third quarter.
In regards to small business lending activities, the strong third quarter origination activity, David mentioned earlier translated into about 100% growth in SP, a gain on sale revenue from the prior quarter.
Additionally, as a significant portion of the third quarter originations occurred in September we currently have $35 million or guaranteed SP, a seven a. balances pending sale into the secondary market, which we expect to close early in the fourth quarter. These pending sales coupled with new origination and sale activities should drive.
<unk> increased fee revenue on this line of business in the fourth quarter.
Looking forward into 2021, we're conservatively forecasting lower mortgage revenue as compared to 2020 performance. Thus far however, it is still expected to be very strong on a historical basis.
That being said in comparison to 2020 level of noninterest income, we expect that gap to be filled by continued a strong increase in SP a gain on sale revenue.
With respect to non interest expenses shown on slide 10, the increase to $16.4 million was mainly the result of two factors one a $2.1 million write down of two legacy Oreo commercial properties and to higher salaries and employee benefits. These.
Yes were partially offset by lower other expenses and consulting and professional fees.
The higher salaries and benefits were due primarily to incentive compensation for SP, a business development officers and mortgage loan officers due to increased origination volumes and increased headcount in small business lending.
Now, let's turn to asset quality on slide 11.
Allowance for loan losses increased $2.5 million or 10% to $26.9 million, resulting in an increase in the allowance to total loans to 89 basis points or 91 basis points, excluding PPP loans up seven basis points from the linked quarter.
As growth in the loan portfolio was modest during the quarter. The increase in the allowance was driven primarily by further modifications to qualitative factors in our allowance model to reflect the ongoing economic uncertainty related to the COVID-19 pandemic as well as changes in portfolio composition.
Nonperforming loans increased by $1.6 million compared to the linked quarter as two single tenant lease financing loans with balances of $2.5 million in the aggregate were placed on nonaccrual status, partially offset by a $700000 loan previously on non accrual that paid down in full and other smaller bags.
Non accrual loans that were charged off in the third quarter.
We placed the two single tenant loans on non accrual because the properties are currently vacant. However, both borrowers are still current on their mortgage payments and are working to get the properties released.
Net charge offs of $100000 were recognized during this quarter, resulting in net charge offs to average loans of one basis point as compared to 12 basis points in the prior quarter.
We recognize the loan loss provision of $2.5 million for the third quarter consistent with the second quarter. The provision for the third quarter was driven primarily by the continued reserve build in the allowance for loan losses as mentioned earlier.
While we continue to build our reserves out of an abundance of caution in this ongoing uncertain environment related to the pandemic. We also continue to feel very good about our asset quality and credit performance to date.
With respect to liquidity and capital as shown on slide 12, our overall capital levels remain healthy both at the company and bank level with the solid earnings performance for the quarter, our tangible common equity to tangible assets ratio increased to 7.24% from seven point.
There are 1% in the second quarter. Additionally, tangible book value per share increased to $31.98 up from $30.92 in the second quarter.
In terms of our outlook for the fourth quarter and into 2021. We believe we are extremely well positioned for the lower interest rate environment and there are a few items I want to reiterate and summarize for you.
As mentioned earlier, we are forecasting an excess of $22 million in interest expense savings next year from deposit repricing when you can.
When you combine that with stabilized asset yields which should improve in future periods due to a better asset mix. We are expecting significant growth in net interest income and expansion in net interest margin for 2021.
We also expect to maintain a stronger level of non interest income going forward as David mentioned earlier, we are forecasting $12 million to $14 million of gain on sale revenue from SB a loan sales next year, which will be supplemented by gains on portfolio loan sales as well as increased servicing revenue as our managed SP a port.
Folio grows when.
When combined with a solid outlook for mortgage production, we feel very confident in our ability to increase non interest income from historical levels.
We continue to remain cautiously optimistic regarding the impact of the pandemic on the credit quality of the loan portfolio, while we remain vigilant in our monitoring and underwriting procedures, we do not see elevated credit losses on the horizon at this point.
With the forecasted revenue growth, we see a clear pathway to net interest margin expansion and a return on average assets approaching 1% and higher on a quarterly basis and 2021.
And finally with increased profitability and modest to balance sheet growth expectations. We are forecasting increased capital levels with tangible common equity to tangible assets in the range of 8.5% by the fourth quarter of 2021.
With that I will turn it back to the operator, so we can take your question Nick.
Well now begin the question and answer session to ask a question press star one on your Touchtone phone.
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At this time, we'll pause momentarily to assemble the roster.
Question comes from Michael.
Oh KBW. Please go ahead.
So again, thank you all.
Thanks for taking my questions I wanted to ask a quick clarification question on the mortgage outlook I understand it's probably a little hard to put that number out there, but but Ken I mean is it fair to say that.
The revenue production in the fourth quarter will be down.
Materially from the third quarter, but still up materially from where kind of the first half run rate was meaning I know, it's kind of broad, but do you think that's kind of a fair way to capture based on the pipeline you see today.
Yeah, Mike I think that's a good way to summarize it I think we you know obviously it was extremely strong.
Well above any prior.
Performance.
We've had in the past, but we still feel good about given where interest rate markets, our refinance purchase activity.
That it should remain at a higher level than than kind of prior run rate. So I mean will it be down from 9.6, yes, but you know it's.
It's probably going to be in the range of call it somewhere $5 million to $6 million.
There is a little seasonality on go ahead.
There is a little seasonality Mike.
Obviously December kind of that Thanksgiving to December things roll off the new home side of things. The it won't have obviously any impact on the revised but yes I can.
Any comfortable we're pretty comfortable that five to 6 million dollar number for the quarter.
As we think about next year.
Maybe they were a couple of things that we're doing on your end over the last 12 to 18 months on that with that platform and it seems like based on the third quarter here that it's.
It's ready to go and then Neil obviously, there's a lot of volume and demand. So as we think about next year I mean, certainly it's not going to be $20 million to $23 million, but what is it like a mid to high teens revenue type opportunity for you guys, you think or will that be environmental drop off the more severe than that.
I'd, probably put it in the mid teens.
Sure.
We're not overly zealous I guess, we're not anticipating anywhere near what we had this year, but I'd.
But I'd say put it in mid teen 14, 15 million, it's kind of what were using internally.
Okay.
Very helpful.
And then similarly on the on the NIM Count was wondering if you could maybe kind of translate that interest expense savings comment to a more.
A little bit more on the on the margin and I guess, you know maybe an easier way to ask the question is if you just look at the curve and where rates are today, you assume that that's kind of the environment going forward you know once all your liabilities reprise I guess two part question. One can you give me a little more color on what kind of incremental loan yields are doing here and then the follow up to that being where it is.
The NIM settle in in this environment. Once you work through all the liability repricing opportunities that you have.
Yeah, I think on the loan side I think we we probably seen things kind of flatten out.
I will say as we kind of look forward, we do see the opportunity just from an overall, earning asset perspective to continue to redeploy excess cash as well as cash flows from securities and to say other lower yielding assets into higher yielding loan production. So we do expect kinda overall yields on earning.
The assets to trend upward in.
In to 2021 inch.
In terms of that deposit savings in <unk>, and that's really going to be like a larger driver of NIM.
NIM performance I mean, I think we feel pretty comfortable sitting here today that fourth quarter NIM will be kind of in the range of 1.9% to 2%.
And as we look forward into 2021, we continue to see incremental improvements in NIM over the course of the year. So you're kind of in that call. It low twos to you know to 10 to 20 ish range earlier in the year.
And then fourth quarter closer to that 2.32 0.4 range.
But that deposit that $22 million of deposit repricing.
Savings over the course of the year is very powerful when it drops down to the bottom line.
And obviously the tax you know those are pretty.
Pretty significant improvement right on on the margin. So I can you just maybe walk me through the rest what could happen that could dampen that upward trajectory over the next few quarters here.
I mean, I think right now if the if the if the current short of rates going up obviously yeah.
It doesn't seem like that short short rates going up is probably the biggest risk on the deposit side I mean, the the good thing about the deposit piece of it is it's really just math.
You think about it I mean, we have almost a billion dollars of Cds that are kind of two plus percent maturing over the course of the next couple of months or excuse me. The next 12 months that are new Cds are coming on in the range of 50 basis points today no.
Not all of those Cds are being renewed.
Some are just rolling off some are some are renewing at a much lower rate.
But when you combine that with just really resetting the entire cost of the money market base. You go back to think about it at the beginning of the year, our money market rates were 1.9% and today we're paying.
60 basis points on consumer and 50 basis points on small business and commercial and we have even other more in institutional accounts higher balance that we're paying a much lower rate on so when you translate that into a full year of savings. It's it's you know it's.
Large contribution to that $22 million.
Got it Okay and then last question for me and I'll step back and lets mother company temperatures. David you know I mean, I think over the last six months to the banking industry's been exposed to a lot of.
Oh teams that will kind of simmering and then got accelerated around digital banking Union and I feel like one one.
One thing historically that has been difficult for the purely digital bank is to really kind of cultivate costs.
Customer relationships that that weren't very very price sensitive and I guess, just kind of a broad strategic question here, but do you feel that foundation shifting at all and are you more optimistic going forward here that.
With customer preferences really started to tilt digital that that you guys will be able to drive more.
You know kind of sticky relationships overall weather lending or <unk> or <unk> or deposit base that maybe you were historically or or do you think that it's too early to tell.
Michael I'd tell you they and argue our relationships with particularly the retail customer it's been very sticky from day, one we do attract them with rates, but once we got them they've stayed with us for.
Many many many years I wouldn't tell you that last.
Probably six to nine month, when the global crisis that there's got to be millions of consumers and individuals small businesses all across the country that would have never gone to a digital platform had they not been forced to do that by the covenant virus. So it's twofold. One we have millions of clients out there that now.
We're comfortable with the platform and when there are traditional bank. They start to do a little shopping and luck or you know the branches I'm on a call every other week with a lot of Ceos here in Indiana for the last three months they've been very worried about how to get branches open safely for both our customers and their staff and we've been going about business and.
Open an account so left and right. So I think yeah, there's been a monumental shift in our bid.
And our business opportunity, we're spending virtually nothing on the marketing side of things and as Ken said in the last quarter, Oh third quarter over second quarter, we picked up a 117 million in money market, but the most 87 million of that coming from the small business community.
Finally caught it yet Newsweek release yesterday, they rated up there.
Annual survey on banks and they rated our small business checking account as the best in America. So I think the SP, a small business opportunity as I said earlier really helps both sides of our balance sheet from the asset generation and earnings as well as the deposit side and I see nothing to slow that down.
Excellent. Thank you guys for taking my questions I appreciate it thank you.
Thank you next question is from George Sutton of Craig Hallum. Please go ahead.
[noise], Thanks, guys great results by the way congrats on the Newsweek. That's that's impressive talk about bearing the lead deepen the queue in a though so on that note though the.
The when we talk about the SP, a strength that you're seeing and that disruption that you are seeing from competitors in your ability to bring new salespeople in.
What is the pitch to them what what is unique about your offering in your capabilities and how much of that is digitally driven.
It to two factors George its a digital platform is huge for everybody that they love the focus and quite honestly the the play up my entrepreneurial background and not being a banker as Ben phenomenally attractive and bringing the videos onboard because of the under.
Standing in the way, we operate and think about small business and then it also remain very true to the small business community was that checking account product that we have out there now the services we have bundled around that.
It's just a it's a rock solid platform and what happened a lot of our peers, particularly those in the SP, a world where chasing after the PPP program thinking they can get in and out in 60 to 90 days well, it's a drag on forever a lot of them. It strained their capital base that are really not in a position to make loans.
Today, So we had plenty of capacity and just the whole story the platform the structure of the bank itself and.
Just being ready to go and take advantage of the shake up in the market has helped tremendously.
Instead, we had a bang up into that.
And to the third quarter and we've got a pipeline in excess of 100 million out there right now.
Little bit of the same question on the mortgage side.
Obviously, the market itself has been strong but I'm.
But I'm wondering if there's something that you've been doing uniquely that has been a further accelerant to the strength there.
Yeah kind of the same game about 18 months ago, we made a pretty major investment into the Oh my.
Mortgage.
Back office and structure of the product increased our efficiencies tremendously this past quarter I mean, we have definitely a pressured our employees and put them through the ringer over the last 90 days with the volume that has come through here, but.
But we did almost a year's worth of volume traditionally in 90 days and we were able to do that because we made a little over a million dollars investment in a new platform about 18 months ago that really create a much better experience for both the customer and our staff. So.
They've worked extremely hard gotta give them all they accolades in the world they've done one thing up job, but the platform in the changes we made made a very simplistic for the customers to come back.
A lot of the business I would tell you that in the last 90 days, we spent virtually nothing on marketing and advertising to bring in leads for the mortgage there either find in a straight up on the web or are there.
Customers that we've had in the past that because of the low rates are in a position to re Fi and come back again, and they're telling their friends, probably 30% to 40% of the activity. We've had over the last six months have either been prior customers their folks at referred people to us that havent costs as the diamond marketing expense.
Great just one other question relative to the 12 to 14 million dollar assumption for gain on sale next year, what what is the what's being assumed in that what's the risk if if any to those expectations is it is a rate driven is it loan demand driven is it.
Is that currently in your production just curious how the those numbers were dropped.
Other than the numbers are based on getting roughly 230 million.
Million in total originations next year and sitting on 100 million dollar pipeline now that has grown month to month.
Over the summer from.
When we were sitting here back at the end of the first quarter, we had a pipeline of about 25 to 30 million. It's now in excess of 100 million it and growing by.
By the day right now the SP, a product, particularly because of some of the economic situations is just it's the best game in town for a lot of small businesses traditional banks.
And I program to tightened up.
The true believer that the SBA guaranteed isn't not make a bad loans good but it takes somebody that might be a little bit on the costs than Gibson, the edge of the startup or new business and for every company. That's in trouble across America. They do the cobot. There's two that are absolutely getting that out of the park give you. An example, we had a gentleman that.
Well, it's been in the liquor business for the last five years, making the.
Specialty whiskey he.
He applied for $150000 alone to modify one of his manufacturing lines from alcohol for whiskey to alcohol for hand, sanitizer demands made more money in the last six months any ads last five years, and we're finding opportunities like that all across the country and the SP is a perfect fit and the perfect product for those costs.
Thank you.
Perfect I appreciate the answers.
Thank you next question is from Nathan race Piper Jaffray. Please go ahead.
Sorry to confuse the margin discussion.
No curious within the context for the extension that you alluded to your question.
What your interest in terms of deposit flows I think there is the expectation that there would be some outflows.
In the third quarter it doesn't seem like that happened and you guys are seeing alone.
It appears.
Within that dynamic so just kind of curious how you guys are thinking about deposit run off within that guidance.
Guidance you provided for expansion going forward in the margin.
Yeah. It's interesting it's that I think that you know we continued to what we believe aggressively reprice deposits lower.
And yet we continue to grow money market balances.
And certain segments of the C D base, particularly consumers and small business renew.
Renewal rates kind of remain in the 75% to 80% we have seen some some very stronger runoff in what we call the institutional Cds in the institutional deposit.
Trust companies and credit unions public.
Public funds of that.
That nature that are kind of more color on professional investors for lack of a better term.
But you know I I think we were probably over the course of the year expecting some deposit more deposit run off.
What really happened and I.
And I think that some of that's probably just a factor of the the interest rate environment and.
Most a lot of other banks out there reducing rates as well.
I think as we kind of look forward into into 2021, I think we're forecasting that we may have some you know probably modest deposit growth kind of low mid single digit.
But I think we do expect some what we call maybe maybe full to have small businesses or consumers.
Who have been hoarding cash for lack of a better term and with the uncertainty of the pandemic and this kind of assumes we return to some sense of normalcy.
Those those those those depositors will put some cash to work.
And and reduced balances, but at the same time I think we feel comfortable in.
In our ability to continue to grow that so they'll probably be a bit of an offset there.
But we're not I think we're you know as we look forward into into 2021, I mean, the composition of the deposit base should remain fairly stable.
And not a lot and not a lot of growth.
Okay, so kind of a static deposit portfolio is embedded in guidance interest expense savings you're it.
<unk>.
Correct.
Okay great.
Great and then.
And then kind of changing gears and look at the left on the balance sheet healthcare Finance group was pretty impressive in the quarter and imagine that still a good pipeline along those lines just given the disruption on that exists within that asset class. So just curious to know how the.
The weighted average rate on those on that production kind of compare to the portfolio yield at around three D.A. <unk> third quarter and the outlook for for loan growth on Bill.
On balance sheet into 2021 as well.
On the healthcare finance portfolio that production generally is coming in around 4% on average.
So as you know.
We've probably seen loan yields drip drip lower in loans is obviously, we're in the new interest rate environment, New production comes on at a lower rate, but it's it's kind of in that 4%, sometimes we'll get more maybe a little bit less at other times, but it's you know pretty much it.
Pretty much in line with what the rest of the new production we have.
And that was that to my point earlier about you know trying you know.
We kind of have the ability to put some cash to work.
And redeploy cash flows from the securities portfolio. Obviously, those are two lower yielding asset classes and put cash to work, whether it's in new construction lending which has relatively.
Relatively stronger yields.
And and healthcare finance as well as continued and we continue to fund new loans and single tenant as well pipelines are starting to improve there.
And obviously are seeing eye teams are out working hard as well and yields on what they are doing are above 4% as well.
Okay got it it's helpful and then changing gears a little bit about the expense right.
You take out the Oreo write down on the quarter and based on the mortgage banking.
Mortgage banking guidance for the fourth quarter, how should we be thinking about the overall operating expense run rate for the fourth quarter.
You know fourth quarter should be relatively consistent with.
Kinda data that adjusted number for they are.
For this for this past quarter for the third quarter.
Might might pick up a little bit because we continue to add talent and.
In SP, a especially kind of on the credit administration side. So we'll kind of have a full quarter baked in of of expense there.
But it should probably be relatively consistent.
With that with with the third quarter's activity.
Okay, So about 15, and a half or so give or take.
14, and a half.
Okay.
Got it and then just lastly from me just a housekeeping question on the tax rate going forward.
Let me pass along those lines.
Well, obviously as you fall fall, so our our tax rate jumped up here.
In this quarter you know, obviously, we had much much larger proportion of revenue coming from.
Taxable sources mortgage and and SP, a and I think as we kind of look forward I mean, if you think about the revenue mix this quarter, even though we we expect SPD to continue to grow and into 21.
Mortgage as David talked about a little bit earlier mortgage our forecast is conservative we pulled back from what we expect this year to be when we get to the end of the year.
But that revenue mix will probably stay the same with the SP, a making up the difference there on mortgage so.
I think probably the days of the tax rate less than 10% are probably past.
So we're probably somewhere in a lot of.
On a 12 to 12% to 13% basis I think.
I think it's probably a good estimate looking forward into 2021.
Okay.
Super helpful. I. Appreciate you guys, taking my questions congratulations great quarter.
Thank you. Thank you.
Thank you. The next question for John Rogers of Janney. Please go ahead.
Good morning, guys or I guess, good afternoon nice quarter.
Hey, John how you doing good.
Good good do hope you're doing well can I just wanted to make sure.
I heard you right. So you said.
As far as our away you could you guys feel like you can do a 1% or sort of in the 1% area for 2021 or do you think you hit that.
In the back half of the year.
I think I think what we earlier in the year, we're probably getting close to that we're probably call. It the high Eightys low ninetys.
But I think definitely in the back half of the year right now as we look at it where were we should be north of north of 1%.
Probably not not terribly far north of that but we should be kind of call. It 105 110.
In the back half of the year.
So in that in that and that assumes based on the prior question just the tax rate of 12% to 13%.
Correct, yes.
Okay, so assuming a relatively stable balance sheet and this is.
And this is sort of simple math, but then we're talking about earnings for a full year with a four handle $4.
$4 am I missing something there.
Oh, you're spot on moment.
It's it's it's simple math, but its back of the envelope. So I just wanted to make sure.
Yes.
As my envelope [laughter].
[laughter] I'm, just asking can just asking the for next year. The expense question, you know with a one hour away, what's sort of the efficiency ratio do you think it's sort of mid fiftys to high fiftys to six call it 55% to 60%.
It's going to it's a low fiftys.
Okay.
And.
Based on your balance sheet strategy, you know originating and selling loans Theres. No reason to think we you guys need to raise any more capital or anything like that in this environment correct.
No that's correct no okay.
Okay. Thank you guys nice quarter, Okay. Appreciate it thanks.
Again, if you have a question. Please press Star then one.
Next question comes from Lance God God Foundation. Please go ahead.
Hi, Great quarter I was wondering if you could give us some color on that $2.1 million Oreo legacy Oreo write off.
I think you mentioned there were it was more than one loan, but I'd like to I'd like full color up what was the amount of what happened any color you could give us.
Yeah Lance the.
It was actually one loan to properties. They were student housing at University of Southern Illinois in Carbondale.
We put it into Oreo almost eight years ago, and quite honestly with co bed dropping.
Drop in enrollment at the University drop in funding from the state of Illinois, Theres. Some question whether there was.
There was a question I don't know that it's still out there the university was even going to go.
Go forward or be consolidated into another school that.
We've had it on the books for eight years, and just decided it was time to get it off so.
We wrote it down and we are looking.
Looking we had a national broker lifted it for six months, we got one nimble in six months that did not panned out.
And they specialize in student housing. So we just figured it was time to to make it go away.
What was the gross amount before the 2.1 million.
The loan initially started at 5 million.
We took a charge of time back we've recovered a little bit from the gentleman who own the property. So it originally started at 5 million.
The remaining balance on it was 2.1.
Oh, when you took the whole you took a write off the whole thing.
Correct, it's off the balance sheet in total.
Oh, Yeah, just to clarify we wrote part of it down three years ago right. So we didn't we.
We wrote a piece we wrote a portion of it down or yeah. I think it was the fourth quarter of 2017.
Or 20.
For 2018 and.
You know so we recognize that back then and there was a case there there is a there was some fraud involved on the lender side with that.
Generally.
Oh is that occupy either at all.
Oh, we have a very nominal number of students in one building one building has been mothballed for probably about a year and what kind of it had the other dormitory was predominantly a foreign exchange student and with a combination of coated and current practice.
Practices out of DC lemonade foreign students coming into the U.S. that number dropped off precipitously at the beginning of the year. So those two factors on top of everything else. That's why we decided it's time to make it go away.
Well, let me know if youve taken off for book value for it okay well.
Well do Sir Thank you. Thank you.
Thank you.
Thank you you have a follow up question next from John wrote Us with Janney.
Hey, Ken just one other question just on provisioning.
You know you guys were 2.5 million this quarter sort of in line with the second quarter.
How should we think about provisioning going forward into next year just based on based on your outlook based on what you see as far as credit you said you know you don't really see much in the way of charge offs with us at this time.
Yeah, I think you know right now.
We probably feel like fourth quarter's provision won't be at that two and a half million dollar level maybe.
If you look at the end of the charge off history.
The nonperforming loan history.
I think we feel pretty good about that I mean, I think we'll continue to build the reserve just probably not at the same pace.
So you're probably look I mean, looking at a reserve lower than than two and a half million and I guess, if you want to look forward into.
You know into 2021.
You know our forecast on on that provision is somewhat lower as well than what we have for a year to date here.
Okay, and again as far as Cecil goes for you guys. That's not until 20 to 2023 correct, Yeah, Cesar as first quarter of 2003.
So.
So as we look well okay. So as we look out to I mean, assuming the balance sheet is still relatively flat.
Sort of the the current level annualized around that ballpark sort of makes sense.
Well right now we're doing about two and a half million dollars.
Probably reel it back down to historically, we were in that 757 million I'd say as Ken stated, we will continue to build a little bit I plug in if you want to plug a number for next year I'd look at about a million and a half a quarter unless something changes in the.
Dynamics of the economy, but probably back to something in the line a million and a half we want to continue to build it a little bit and as we said the asset they should stay.
Relatively stable so that's.
That should allow us to cover anything coming in that's on the horizon and continue to build to the outstanding a little bit.
But I mean, obviously, David I mean, there's still a lot of a known is out there, but I guess that just goes to how good you feel about your current.
Your borrowers borrowers and stuff what you know today.
Yeah, exactly you're exactly right done unless there's a full scale shutdown again, what's starting to happen spots across the country, but if there's a nation wide shut down kind of all bets are off shy of that I think were in really really good shape.
Okay. Thank you.
Thank you.
Thank you. This concludes our question and answer session.
Like to turn the conference over to Mr. Becker for closing remarks.
Okay, if I could say it was a it was a good run this quarter I'd like to thank all of you for joining our call today I think we ran a little longer than we normally do we appreciate you hanging with US we hope everyone remains healthy and safe during these challenging times.
Great day, Thank you for your time.
This concludes the conference.
Thank you for attending you may now disconnect.