Q1 2021 First Internet Bancorp Earnings Call
Good day, everyone and welcome to the first Internet Bancorp earnings Conference call for the first quarter of 2021, all participants will be in listen only mode share do you need <expletive>istance. Please signal a conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question.
You May press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note that today's event is being recorded I would now like to turn the conference over to Larry Clark from Financial Profiles, Inc. Please go ahead Mr. Clark.
Thank you Carrie good.
Good day, everyone and thank you for joining us to discuss first Internet Bancorp's financial results for the first quarter of 2021 the.
The company issued its earnings press release yesterday afternoon, and it's available on the company's website at Www Dot first Internet Bank Corp, Dotcom and.
In addition, the company has included a slide presentation that you can refer to during the call. You can also access the slides on the website.
Joining us today from the management team are chairman, President and CEO David Becker.
And executive Vice President and CFO, Ken Lubbock.
David will provide the company update and Ken will discuss the financial results then we'll open the call up to your questions.
Before we begin I'd like to remind you that this call conference call contains forward looking statements with respect of the future performance and financial condition of first Internet 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 the SEC filings, which are available on 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 substitute the most 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 the reconciliation of the GAAP to non-GAAP measures at this time I'd like to turn the call over to David.
Thank you Larry and good afternoon, everyone. Thanks for joining us today.
We are very pleased with the first quarter financial performance, we produced strong earnings solid momentum to start the 2021 driven by net interest margin expansion continued healthy production and our direct to consumer mortgage business and strong credit performance.
Growth in net interest income combined with our strategy the Dell sustainable the revenue paid off as we generated an average return on <expletive>ets of one point or two per cent for the second straight quarter and strengthened our capital base.
Our tangible common equity to tangible <expletive>ets ratio by 43 basis points to just over eight per se.
We delivered the solid results for the pandemic continues to impact certain sectors of the economy.
Families and businesses are gradually returning to the routine and in many cases to a new normal way of life.
Our unique workplace culture of promote innovation collaboration and customer focus.
Collectively guiding us for our technology enabled workforce, who are uniquely positioned to adapt to the changes in the past year, while maintaining operations at the highest level sort of.
And our customers and supporting one another.
Despite the historically low interest rate environment, we generated a significantly improved net interest margin.
The key highlight of the quarter, we did debt through a combination of higher than average loan yields and low average deposit cost the.
The higher yields would do in parts of our ongoing pricing discipline the bad.
First of having diversified loan origination channel that we do not have the chase rates down while we are at the bottom of the interest rate cycle. We do continue the left for growth opportunities to capitalize on however, any new opportunities. We explore must provide a strong risk adjusted return that enhances profitability of.
The earnings as you know.
We have been proactively managing our deposit costs lower as we allow higher cost Cds and brokered deposit balances to decline.
We are placing them with much more attractively priced money market accounts and the lower rate C D.
Revenue for the first quarter totaled $28 9 million up 36 per cent from the first quarter of 2020, as we continued to benefit from a more diversified revenue stream and the important strategic goal for us our SBA team at the big part of that the team is fully engaged and we are well on our way to building the leading Nash.
On the platform.
I don't like weird <expletive>isting clients with the new P. P. P loans as part of the most recent phase of that program, but we also continue to meet the demand for traditional SBA seven day loves.
These loans out of the bread and butter of our SBA program.
While <unk> volumes were lighter in January and February we maintained our competitive position as the overall SBA market was slower to start the year.
However, SBA seven day activity begin to pick up in March and the pipeline is building daily.
Despite the lighter volume in the quarter, we are still targeting an SBA originations in the range of $200 million Bucks for 2021 and they are expected to produce the gain on sale revenue between $14 million to $15 million for the full year we.
We have the infrastructure in place to continue to ramp up this important part of our business and look forward to the strong year, providing financing for the entrepreneurs and small businesses that drive job creation across the country.
Our direct to consumer mortgage business continued to produce solid results as well.
We are capitalizing on the ongoing demand fueled by the low interest rate and a strong nationwide housing market, we are winning new business with our unwavering commitment to the exceptional service.
And the enhanced.
The customer experience that are technology, driven online mortgage application process for box our credit quality remains among the best in the industry. We have a strong credit culture disciplined approach to underwriting and the focus on the specialty lending lines that target lower risk <expletive>et cl<expletive>es and like many banks that have ripped.
For it so far we continue to build the allowance for loan losses during the quarter, even if net charge offs remain low.
We expect the maintain and perhaps even continue to bill our allowance coverage ratio and do not perceive the releasing any reserves in the near term.
We did experience an uptick of nonperforming loans during the quarter due primarily to one C&I relationship. We recorded a specific reserve of 600000 against this relationship and believe we are well collateralized on the remaining exposure even with the increase in non performing loans, our nonperforming loan level.
The total loans and nonperforming <expletive>ets to total <expletive>ets remained relatively low at a point for sick and the 0.34, respectively.
Additionally, remaining loans from the portal programs are relatively low at this point, representing just 20 basis points of total loans at the end of the quarter.
And so we look forward to the remainder of 2021 of the Ark, We will continue to focus on some key areas of value creation.
<unk> continued to scale, our SBA business to take advantage of the operational infrastructure, we put in place too.
To look for new innovative technology, driven partners to enhance our existing lines of business or the capitalized on opportunities to further diversify revenue on a capital efficient manner three.
Three continue to improve the efficiency of our business, while enhancing the customer experience for both existing and positive.
Prospective clients.
We have been successful of doing this in the past the collaborative partnerships with Fintech companies that have helped us in our direct to consumer mortgage business as well as on our consumer and small business deposit gathering and account opening of effort.
For I would like to take a moment to recognize the today April 22nd is for the 51st the anniversary of Earth day.
The first Internet bank, we're working to develop in the ESG strategy that incorporates our existing commitment to the environment and the communities and stakeholders, we serve as well as advances the diversity equity and inclusion initiatives within the organization.
Putting our community is of high priority at first Internet and during the first quarter. We made the $250000 contribution to the local foundation that supports not for profit and community based initiatives and of the marketplace.
In summary, we are pleased with the first quarter performance, which was driven by the consistent.
Consistently excellent work under the entire first Internet team and we're excited about the year ahead of us.
We are of great financial shape, and well positioned to serve our customers as the country of emergence from the pandemic and businesses work of totally reopen as always on what to think of all of our employees for their efforts and once again delivering on our goal of.
A high level of commitment throughout the organization remains the key to our ongoing success. We are confident in the strength of our franchise and the potential for ongoing growth in the year ahead.
I'd like to turn the call over to Ken to discuss our financial results for this quarter.
Thanks, David.
David mentioned, we were very happy with our performance for the first quarter delivering near record revenue net income and earnings per share. We generated the strong results with a relatively stable balance sheet during the quarter, which is consistent with our focus on improving profitability through net interest margin expansion diversified fee income.
And deploying capital in an efficient manner, our financial results for the quarter continued to reflect solid execution of this plan.
Now, let's turn to the details of our results for the first quarter, we reported diluted earnings per share of $1.05 down 6% from our record fourth quarter results, but up 69% from the first quarter of 2020.
Profitability was strong with fully tax equivalent net interest margin, increasing 27 basis points sequentially to 2.18% of return on average <expletive>ets of 1.0% to 2% for the second quarter on a route and a return on average tangible common equity of $12 six 1%.
We have been able to successfully navigate the low rate environment and challenges created by the pandemic to deliver outstanding results, including a significantly improved net interest margin through lower deposit pricing and stabilize the <expletive>et yields strong revenue growth and excellent credit quality.
Looking at slide four we saw these trends continue in the first quarter and when all of the results are reported we believe our performance relative to the similarly sized institutions will once again compare favorably.
Looking at slide six total portfolio loans at the end of the first quarter were $3 1 billion relatively consistent with December 31 of 2020, and an increase of $167 million or five 8% compared to March 31st 2020.
During the quarter commercial loans increased slightly due primarily to production in public finance construction and small business lending.
This growth was partially offset by lower single tenant lease financing and healthcare finance balances due mostly to elevated prepayment activity.
Consumer loans decreased slightly compared to the fourth quarter due primarily to increased prepayment activity across the RV and trailer portfolios.
Moving on to deposits on slide seven while overall deposit balances were down 2% from the end of the fourth quarter. We again saw improvement in the composition of the deposit base during the quarter Cds and brokered deposits decreased $110 million or six 9% on a combined basis while.
Total non time deposits increased $56 million or three 4% on a combined basis.
Cds in broker deposit balances declined as higher cost CD maturities were either funded with on balance sheet liquidity or replaced with much more attractively priced money market accounts and lower rate T D.
This lowered our cost of interest bearing deposits of 17 basis points in the quarter and we see further opportunity to reduce deposit costs over the remainder of 2021.
Compared to the first quarter of 2020 deposit costs were down $8 $6 million essentially cut in half and we continue to expect interest expense savings of approximately $25 million for 2021 based on the current deposit pricing environment.
Turning to net interest income and net interest margin on slides eight and nine net interest income and net interest margin on both the GAAP and a fully taxable equivalent basis. Once again showed strong improvement compared to last quarter.
Net interest income was up in excess of 30% compared to the first quarter of 2020.
As you can see from the net interest margin bridge on slide nine deposits and loans continued to have a positive impact on margin during the quarter.
While the average balance of interest, earning <expletive>ets was down three 4% from the fourth quarter interest income from earning <expletive>ets was down only one 1% due mostly to a 14 basis point increase in the yield on those <expletive>ets.
The yield on interest, earning <expletive>ets for the first quarter of 2021 increased to 331% from $3 one 7% in the prior quarter due primarily to changes in the composition of interest earning <expletive>ets supplemented by prepayment fees.
Average loan balances were down $25 million or just under 1% from the fourth quarter due mainly to lower average balances in the single tenant lease financing public finance and small business lending, but partially offset by an increase in the average balances of construction lending and health care finance as.
As we've mentioned before we continue to expect our yield on interest earning <expletive>ets to remain relatively stable during 2021, as we deploy the liquidity to fund new loan originations.
Overall, we are very pleased to have delivered a 27 basis point improvement in our fully tax equivalent net interest margin during the quarter and expect the upward trend to continue throughout 2021, they'll likely at a slower pace.
Turning to non interest income on slide 10.
Non interest income for the for the quarter was $8 $4 million down from the record $12 $7 million in the fourth quarter. The decrease was primarily driven by lower revenues from mortgage banking activities and a decrease in gain on sale of loans.
Mortgage banking revenue totaled $5 $8 million for the first quarter down $2 $2 million from the prior quarter due primarily to a decrease in interest rate lock volume and a decrease in margin as competition in the market increased.
Gain on sale of loans totaled $1 $7 million for the quarter decreasing $2 million compared to the prior quarter due to a lower amount of U S. Small business administration of 708 guaranteed loan sales in the quarter Dave.
David covered the market factors impacting SBA revenue for the quarter, but reaffirmed that our outlook remains optimistic in this important and growing line of business.
With respect to noninterest expenses shown on slide 11, the increase on a linked quarter basis was driven primarily by an increase in salaries and employee benefits marketing advertising and promotion expense and consulting and professional fees the.
The increase in salaries and employee benefits was due mainly to higher medical claims experience share based compensation and seasonal resets of employee benefits and payroll taxes.
The increase in marketing expenses was due to higher mortgage lead generation costs and increased digital marketing initiatives.
The increase in consulting and professional fees included seasonally higher legal expenses related to year end reporting and the preparation of materials for our annual meeting of shareholders. Additionally.
Additionally, David also mentioned the $250000 contribution we made to of local community based foundation that was recognized in the first quarters expenses.
Now, let's turn to the <expletive>et quality on slide 12, the allowance for loan losses increased $1 $2 million from the fourth quarter to $36 million, resulting in the allowance to total loans, increasing to 1% or 1.02% excluding PPP loans.
Up four basis points from the linked quarter.
For the balance of total loans was relatively flat compared to the prior quarter. We continued to make additional adjustments to qualitative factors in our allowance model and recorded specific reserves on two commercial relationships totaling $1 $1 million in the aggregate. These.
These increases for the allowance were partially offset by loan portfolio composition changes that included declines in certain portfolios with higher coverage ratios and growth in portfolios with lower coverage ratios.
As a result of the continued reserve build we continue we recognize the loan loss provision of $1 $3 million for the first quarter.
As David mentioned earlier overall credit quality remained strong during the quarter as nonperforming loans to total loans.
Does the <unk> four 6% at quarter end and net charge offs remained low at $100000, resulting in net charge offs. The average loans of two basis points.
As shown on slide 13, our overall capital levels improved and remained healthy at both the company and bank levels with the solid earnings performance for the quarter, our tangible common equity to tangible <expletive>ets ratio increased 43 basis points to 812% from $7 six 9% in the fourth quarter and.
It is well on track to exceed our forecast from earlier in the year.
Additionally, we continued our trend of consistently growing tangible book value per share, which increased to $34 60.
Up from $33 29 in the fourth quarter net up nearly 13% from one year ago.
To summarize some of the key points mentioned on this call. We remain confident that we're well positioned for the current low interest rate environment and continue to expect approximately $25 million of annual deposit interest expense savings compared to 2020.
When combined when combining this interest expense savings and our expectation that earning <expletive>et yields should remain relatively stable. This should drive consistent growth in net interest income and further expansion of net interest margin in.
In terms of non interest income, although SBA seven day originations and sales came in lighter than expected for the first quarter. We remain confident in our previous guidance of $14 million for $15 million of SBA gain on sales revenue for 2021.
Additionally, we are optimistic that mortgage banking revenue will remain solid and above historical levels, but likely down from the record revenue recognized during 2020 as refinance activity is beginning to slow and housing inventory remains tight.
Consistent with our view about credit last quarter, we continue to be vigilant in our monitoring and underwriting procedures and do not see elevated credit losses on the horizon at this time.
As a result, we remain confident in our ability to generate of quarterly return on average in the range of 1% throughout 2021.
And finally, we are forecasting increased capital levels with tangible common equity to tangible <expletive>ets in the range of eight 6% to eight 9% by the end of 2021.
With that I will turn it back to the operator, so we can take your questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at.
At this time, we will pause momentarily to <expletive>emble our roster.
Yeah.
The first question will be from John <unk> with Janney. Please go ahead.
Hey, Hey, guys good morning.
Hi, John Hi, John.
Not too bad on that used to be in the first on the call usually.
The.
The comments the comments on on the mortgage business, obviously, you sort of changed the language from strong in the near term to solid and I guess my question is either David or Ken do you do you think I I get mortgage being down year over year, but do you think the first quarter is going to be the highest quarter for the year or do you think you might see some.
You know seasonally a little bit stronger in the second quarter.
Oh, I think it will run its normal season seasonal patterns down I think second quarter and third quarter.
Should the high fourth quarter, we could go back to the real seasonal pattern of.
Kind of falling off between Thanksgiving and Christmas the real issue out of here right. Now is just the availability of housing a couple of weeks ago. There was an article put out that there are more real estate agents in the United States and there are of houses for sale I mean, it's just it's unbelievable and one of them.
Of our finance guys here that the Bakken is up for the call.
He scrambled for them three months to try and find the house and had to actually find out of that.
It was not on the market yet from a real appear to be in the by itself.
It's really a focus of the market.
As Ken and I, both stated I think the.
<unk> game is down new home activity is up and actually permit and we track of kind of here in a local community not on the national basis, but I think permits here in central Indiana on new housing permits were up 33% of of what they were at this time last year. So.
It really is just the supply demand issue right now that's impacting the market.
Okay makes sense, Thanks, David and then Ken one other question on the tax rate of dip back down to about 15%. This quarter, how should we think about that going forward. Yeah. There. There were a couple of factors. There first of all of it was just you know pre tax income was down quarter over quarter and you know.
Probably one of the factors that drove it up at the end of last year was obviously the strong mortgage revenue and the strong SBA revenue.
Which carry a fully baked tax rate on that those numbers were down a bit.
And we've made some adjustments to our state tax accrual as well are the rate.
Taxes, so I think probably.
A good number with with SBA coming back.
And mortgage remaining solid is probably somewhere in that 15% to 17% range.
15 to 17, okay yeah.
Okay. Thank you guys nice quarter, Okay I appreciate it thanks Ken.
The next question is from Michael Perito of K B W.
Hey, guys how are you.
Yeah, and Mike how are you.
Oh. Thank you. Thanks for taking my questions I wanted to just start I was wondering if maybe I appreciate the kind of the the broader guidance comments on on margin and the ROI and honestly with people from the numbers out of ourselves, but I'm. Just wondering if you had a better sense of where kind of the exit NIM was at the end of the first quarter of March maybe just the kind of give us a sense of.
On.
For the direction that we could possibly be seeing near term here.
Yeah I'll tell you in March it was really strong, but we did I will say, we did have a fairly high amount of prepayment fees in there as well.
So it was probably a little bit higher than kind of what our run rate would look like but I think by the end of by fourth quarter. I think we feel pretty good that we'll probably be in the range of say $2 40 on net interest margin and I think we're probably you're probably looking at of five to 10 basis point increase on it.
Orderly basis throughout the end of the year.
Got it so certainly that makes the.
The target of staying above 100 on the our way of life.
On each year.
Sure Yeah.
Obviously.
Proving NIM combined again with with just the enhanced fee revenue.
The it creates a very easy pathway for us to maintain that one are away.
Got it and then.
For the bigger picture questions.
Sure.
We've always been asking you guys about the plant to build capital for the last two three years now and I'm glad you asked this question differently now I mean, you know as you get to towards 9% on the TCE I guess, where it is kind of of the dam of the breakpoint, where maybe the.
Capital posture changes a little bit of whether that's you know maybe being opened for a little of balance sheet growth or maybe looking at other items like for purchases or what have you I mean, how do you guys think about this evolving capital of store and clearly you guys are are are really making a nice.
Movement here to build and I'm just curious how you think about that in and at what point do we think should we maybe be thinking about you guys doing things a little bit differently versus kind of the capital preservation mode. You've been in for the last couple of years here.
Yeah.
Okay.
[laughter] everybody's looking in the either Michael I would tell you. We are we're looking at stuff on a daily basis and.
Right opportunities come along we would definitely take advantage of them.
Is that in the last couple of calls Theres been some question about repurchasing shares that's not on the horizon of the game plan would be to.
The excess capital to work and we've got a couple of two or three opportunities we're working on debt.
Can do that seriously between here and year end so.
We want to stay and we've always tried to stay above that 7% range I think we're getting a little more comfortable trying to hold it into eight or thereabouts, but yeah definitely we get up to nine to 10. So we're gonna put at the work.
And when you stack opportunities of that.
On.
Hiring people with that that would drive more balance sheet growth is that it made the balance sheet growth.
Balance sheet growth, we're pretty well set of internally, we still have some things to do with the SBA team, but the rest of the organization we staffed up.
On the latter half of <unk>.
The 2020, so were pretty solid across the mine with a couple of more additions in the SBA team.
Got it.
You know obviously the.
The first quarter I think was.
From a valuation perspective, one of the the better quarter for you guys have seen in some time now and and as we think about trying to keep this momentum going here you know I I feel like.
The digital disruption of the banking sector continues to be elevated riding out. The I imagine you guys are spending time thinking about how to kind of keep your customers engaged and especially your consumer deposit customers engaged in your mobile App and what have you on is there any thought being sort of ore resources being spent to kind of expand the product roadmap on.
The mobile banking side I mean, when you see some of these other kind of digital disruption of business models, you know, adding things like robo advisors of NASDAQ or stuff like that on it.
Any kind of thoughts you're willing to share about how you're thinking about the product roadmap on the consumer deposit banking side at this point.
Yeah, we're quite honestly looking at all of that stuff, we have some internal things that we're working on some external partners debt, where we have conversations with on a daily basis.
The roadmap of if you could get a hold of our the CTO. He would tell you. He's got the 40 more projects and he can handle the in the next 12 months, but it keeps them busy and keeps them out of trouble. So.
We're looking at both.
The consumer side of things as well as small business. There was a lot of things. We still think we can do to make our small business product even more attractive than it is today. So.
We're spending a lot of time and money.
Looking at both sides of that equation.
Great.
Really helpful guys. Thank you for taking my questions as always I appreciate it.
I appreciate it thanks, Mike Thanks, Mike.
The next question is from Nathan race with Piper Sandler.
Hey, guys good afternoon.
Good afternoon day.
Going back to the kind of outlook.
Outlook for the balance sheet growth over the near term I understand you know that's kind of the the main Avenue you guys are looking to deploy.
Deploy excess capital to some extent moving.
Next few quarters so just.
Kind of thinking about the margin outlook expanding further from here.
Can you kind of thinking about just the overall, earning <expletive>et based side.
Should we just expect you know the.
Average balances of excess liquidity to continue can be the come down over the next few quarters and just do the.
The mix improvement, it's also support the margin or how should we kind of just thinking about loan growth sizes various portfolios going forward.
Well I think probably from an overall perspective.
You'll probably see you know mid.
Mid single digit type balance sheet growth, but again as you. If you look at the balance sheet, you'll see that we have.
No quite of bit of cash on hand, I know a lot of other banks are experiencing the same.
The same issue as us and but really I think we can grow the loan portfolio without necessarily growing the balance sheet debt at a.
Higher than average rate, it's just putting putting cash to work, whether it's cash on hand or.
The securities portfolio continues to spit off a fair amount of cash.
We'll continue to see earning <expletive>et growth of I would say the the one wildcard on that is just the level of prepayment activity, sometimes that's a little bit hard to project.
But it has longer rate start to go off the bit we may see that kind of pull back a little bit, but I think it's a matter of you know the.
The loan portfolio, continuing to increase and maybe the composition and their changing a little bit maybe of seed more a little bit.
Higher rate of growth in the construction portfolio, which has been an area of emphasis for us we have quite of bit of unfunded.
Commitments in there.
And obviously, we expect small business to start picking back up here over the remainder of the year.
But really it's going to be putting liquidity to use in and kind of.
A little bit of a shift in the mix and the composition of the loan book.
One of the things out here.
As we've talked and you mentioned a lot of liquidity in the marketplace. A lot of banks are getting squeezed a lot of banks of doing some pretty silly things for example on the health care Finance area.
The two big competitors out there are of financing 10 years deals on five year of pricing and we're just not going to chase it down to keep of volume and the staff. So there's opportunities for us in different markets and we stay true to the pricing, which has enabled us to as Ken stated earlier to keep the expand the NIM on both sides of the law.
Of our cost of funds and solid interest on the loan side, we're going to continue to stick with that I think as the year wears on in Covid goes away and there's more activity in the marketplace everybody ill go back to a little more of a reasonable basis and how their pricing and the covenant structure et cetera on loans and it gets back to what.
Banks should be doing so.
Probably as Ken said for a lot of reasons in particular, the cash on balance sheet not of lot of growth in the first half of the year, but we could have some pretty solid growth in the second half.
And of this.
As the end and on the other side of the balance sheet too I know you were talking about earning <expletive>et growth in loans, but always keep in mind as well that you know of.
The excess liquidity can also be put to use just by by funding Cds that don't mature.
And by not renewing some of those Cds and having some of the historical kind of seasoned higher rate institutional and public fund Cds roll off and not renewed.
That is the lift in margin as well through a low of continued lower deposit costs.
Yes, absolutely it makes sense I appreciate all the color guys.
Maybe changing gears and just thinking about the expense growth for this year I think in the past you kind of talked about.
The mid to high single digits, I guess, just as we kind of think about extrapolate. The <unk> run rate is that sort of kind of a good target to think about with some of the.
The work that slipped on the SBA from you guys on accomplish over the next quarter or two.
Yeah, it's it's probably a good run rate it might tick up a little bit you know obviously in the first quarter you. We have some costs that are seasonal.
Those will probably be replaced by.
Continuing to add to some head count in SBA and we continue to grow in other areas of the bank as well.
So there may be a little bit of offset there, but I think yeah. The first quarter was probably maybe a little bit of growth here.
Here and there.
Tween, you know depending on what quarter. It is but that's probably a good run rate to look at.
With maybe again with the little bit of growth off of that for the full year.
Okay, Great. That's all I have I'll step back for now thank you.
Thank you.
Once again, if you have a question. Please press Star then one the next question is from George Sutton of Craig Hallum.
Hey, guys I wanted to focus a little more on the SBA side you defined your goal here to become a leading national platform, that's not something I've heard you.
Specifically say in the past so I wondered if you could give a little bit more of a of of a vision. There and then you also mentioned on the demand side, you know things started slow in the quarter I believe they picked up a bit by the end of the quarter and Youre still very encouraged by what you're seeing I wondered if you could just give us a little bit.
At or sense of what you are seeing to give you that confidence.
Sure George we the the SBA runs the physical year closed out on the 930 last year, we were number 40 in the country in originations in the seven day category.
In that space I think as of today or yesterday, we're like number of 41. So we've kind of kept our position we're not growing as fast the SBA gain because of the advent of PPP three and all of the stuff that came out at the beginning of the year the chaos and confusion there about a form of process et cetera, just kind of.
<unk> brought SBA and somewhat of the marketplace of little bit of of grinding halt what theyre going to be we have a lot of folks hold up deals because they thought they were going to get another six months of prepayment. So they didn't move them into closing until March when the.
Payment amounts kind of cut back so there's a lot of confusion on the program solid.
Pop in.
In March of <unk>.
Strong pipelines out of here today in new activity coming on also fourth quarter kind of balloons out because of the physical year end of 930.
Pushed the numbers.
If anybody does when the kind of year end closing so all of that was sold into the secondary market in the fourth quarter.
We hope to get to a point where on the top 10 producers of seven eight loans in the country.
Which would be kind of pretty much of double down on the volume that we did well the triple down on the volume. We did last year. We still think we can hit the 200 million mark we'd like to see that over time go for the 350 $400 million range. So we wanted to be a big player in both SBA, but just the small business the industrial as a whole instead of a.
And as the opportunity for us over the past year.
And growth of savings and checking accounts at very low cost funds for us.
We've got some new things, we're going to be adding to that platform to make it a more comprehensive.
Product and we got the Newsweek pitch towards the end of the year, if the best small business checking account in America, we're working on some credit card piece.
Pieces for them.
I'm proud of half a dozen places in the last couple of weeks that the last six months of.
2020 in the first three months of this year there are more new companies for them than theres been in the almost of the last two decades. So.
Small businesses are getting really springing to life for a lot of folks.
Not going to show up when they get the call the come back to the office because they started something else and we think with our platform. We we learned an awful lot of in the second half of the year.
Part of the better service that small business marketplace.
Again, I think we've made the comments on the last call of that we're one of the things that really benefited from the pandemic are millions of small businesses and consumers that would've never got the online banking on their lifetime.
Because they had no choice branches were closed and they were shut down and they realize that what they could do without the branch into.
But there are better products and better opportunities out there. So we think there's just a tremendous opportunity for us to really make this the Keystone part of our organization.
One other thing for me you mentioned, putting the excess capital to work two or three opportunities to do that by year end I know you don't want to go on any specific details, but I'm. Just curious are we talking about vertical additions or are we talking about.
These these would be within your current specific areas of focus just just curious from that perspective.
A little bit of both from new channels in the areas that we're already in in a couple of verticals that were not yet.
Got you great. Thanks, guys.
Thanks for thanks George.
The next question is from Brett Robinson of half day, Chris.
Hey, guys good afternoon.
Hi, Brett.
One of just a follow up on the SBA.
We had talked about the SBA rule changes that are that are temporary and.
Been hearing that some players we're indicating that the real change was really driving increased demand you know I'm curious if that's changed at all for you guys and if you anticipate that being a part of the opportunity here.
Here in the next few months in particular.
Oh, it's definitely a part of the opportunity the.
I think within the SBA organization and again it goes back to all of the chaos last summer.
They did more of PPP loans in a matter of.
45 to 60 days and they've done total loans and like the <unk>.
Last 15 years, so I think SBA itself has a little different mindset.
Plugged in some new technologies that make things a little easier to.
To play in their field and I think some of the technologies that we've plugged into place.
One of the biggest issues in the small business person.
With the SBA is the timing from the request for the loan can actually close and we're doing a lot of things with automation and tools to make the underwriting the processing through the SBA system much faster more efficient and I think yeah, I think there's going to be really really strong demand for the SBA products out of here.
Particularly as businesses.
Start to come out of the pandemic and reopen the restaurant industry, there's a lot of granting gifts coming from by the.
Federal and the state level to help them get back on their feet.
So as things reopen in the second half of the year I think we're gonna see of pretty good sized book.
Okay. That's helpful and on the other thing I'm. Just curious about was you know when you look at the Fintech space in particular on the valuations are a lot different than where you guys are and you know I'm sure that put somewhat of a chip on your shoulder I'm you know I'm curious is your capital builds.
Is there any.
Conceptual thought to maybe pairing up with the Fintech partner, adding went on to the platform of any kind of partnerships that you might do.
That would be thin tech oriented that would maybe improve the valuation.
Yeah.
And we made early we're continually looking at opportunities out here.
Lot of the Fintech play.
Obviously, the the organizations that are out there with the huge multiples of you're right. The the only time I'm happy about our stock price of the last day of the month, one of our employee purchase plan by shares.
It's tough to think about what we've done in kind of the position. We're in is really probably the first true fintech and financial space for.
Do not get the valuations. They are we look at it consistently.
We've looked at several opportunities to the.
The service provider for them kind of banking as the service.
When it gets down to the bottom line the return on it and that space. There's a lot of volume and there's a lot of activity, but when you have 35000 accounts for the balance of $300. It doesn't really gave me a lot of.
A lot of overhead a lot of expense of lot of headaches and it's real hard to justify on the bottom line. So we're judiciously looking at opportunities.
Something crosses the path with US, we'll find one or.
Or to do it more no question of AD and we're also looking as Ken pointed out we discussed we are working with a lot of <unk> to improve our services and programs.
Internally, we just made an investment in the.
Kind of a bank back the seed bun.
That is going to work with Fintech startups and kind of early stage seed capital.
All across the country. So we will get first crack at not only being in investment, but the first crack at looking at their software or their products and services and see how they might apply to our bank. So yeah, we're focused on of continually.
Okay.
And then I'm curious and just lastly for me you know you can add the the 1% ROA target and just give them a path that you're on.
I'm just curious if theres any reason you didnt want update that or gift maybe.
Maybe the longer term call it seems like youre going to be able to easily be above the level for for the samples for the foreseeable future.
Yeah, the longer term, it's our our goal is to be a well above one in Montana.
One can't or of $1 15 hard hard to tell what the long term was gonna be with the without knowing what the long term tax rate is going to be.
But I certainly we all foresee the ability to provide the produced an ROE way above.
The above one over the long term as we again continue to build out the S. P. A and as David talked about the aspiration to be of nationwide platform in SBA and you think about just the revenue lift between just saying.
Knowing from $50 million to of $100 million of originations for 200 and beyond that.
The the revenue on the profitability lift from that certainly provides a clear pathway to weigh a solid one plus our away.
So that is our goal and we feel that thats achievable.
Okay, we're still on that.
Yeah, that's kind of take just the the back of that went up on Ken's part.
Still investing a lot to get to that level. So.
The investments we make today will definitely start you'll see some hopefully pop towards the end of this year of definitely in the first half of next year.
Okay, great. Thanks for all the color.
I appreciate it thanks Brett.
And this concludes our question and answer session I would now like to turn the conference back over to David Becker for any closing remarks.
Hey, guys. We appreciate all of you joining us today, we hope you have a nice day.
From parts of the country of the jump back into the winter instead of the springtime and summer here, but the Ah stay safe and enjoy it and the.
We will continue to push the success forward here in 2021. Thank you very much for your time.
Thank you the conference has now concluded.
You all for attending today's presentation. You may now disconnect your lines have a great day.
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