Q2 2021 First Internet Bancorp Earnings Call
Good day everyone.
Welcome to the first Internet Bank Corp earnings Conference call for the second quarter of 2021.
All participants will be in listen only mode.
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Yes.
And please note 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 Sara Good day, everyone and thank you for joining us to discuss first Internet Bancorp's financial results for the second quarter of 'twenty 'twenty 1.
The company issued its earnings press release yesterday afternoon, and it's available on the company's website.
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 are chairman and CEO, David Becker, and executive Vice President and CFO, Ken Lubbock.
David will provide an overview and a company update and Ken will discuss the financial results. Then we'll open up the call to your questions.
As 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 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 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. This from the press release available on the 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'd like to turn the call over to David.
Thank you Larry and good afternoon, everyone and thanks for joining us today.
We produced strong operating results for the second quarter of 2021, driven by net interest margin expansion and disciplined expense management.
Reported net income was a record $13.1 million and diluted earnings per share was a record 13.1.
Excuse me 131 included in our results for the quarter was $2.5 million pre tax gain on the sale of our corporate headquarters. Excluding this amount adjusted net income was $11.1 million, which would still be our highest quarterly result ever and adjusted earnings per share was $1.11.
A penny shy of our quarterly record.
This strong performance enabled us to generate an adjusted return on average assets of 1 point or 6% demonstrating continuous improvement from the beginning of the pandemic crisis, and we increased our tangible common equity to tangible assets ratio by 31 basis points.
First over 8.4%.
Compared to the second quarter of 2020 performance has increased significantly due to the strong growth in net interest income and net interest margin as well as from the investments we have made in our fee revenue lines of business.
Using the adjusted earnings result, both from net income and earnings per share are up 182% and 178% respectively. While adjusted total revenue is up 45% or.
Our national SBA platform gained momentum during the quarter, producing 3 million of gain on sale revenue up significantly from the first quarter.
Due to the disruption in the small business lending market earlier in the year and the time it took to rebuild pipelines our level of forecasted originations for the year has bounced slightly from our prior forecast.
However loan pipelines have recovered we are actively engaged in meeting strong demand for the traditional SBA <unk> loans as the economic recovery accelerates. Their first 4 we still feel very confident in the growth of our SBA business with expected gain on sale revenue between 13 to 14.
<unk> million dollars for the full year.
Looking at the lending activity for the second quarter total loan balances were down just over $100 million as prepayment activity remained elevated in the health care finance and single tenant leasing financing portfolio.
Looking forward, though.
Loan pipelines across other commercial lines of business began to grow significantly during the second quarter. For example, the single tenant lease financing pipeline is at its highest level in 15 months as relationship borrowers are increasingly coming to us to finance additional opportunities in total our commercial pipeline.
It's up over 20% from the end of the first quarter.
Another area of focus for us has been increasing our presence in construction lending funding balances are up over 50% from 1 year ago and our team is actively sourcing new projects. Moreover, as of June 30th unfunded commitments and our construction line of business total of $159 million and then.
Increase of 39% over the balance at the end of the first quarter.
With regard to health care finance balances were down over $50 million from the first quarter driven by elevated prepayment activity and a very low level of new originations new origination activity. During 2021 has been light as the low interest rate environment and heightened competition drove pricing well below the floor.
We have in place.
Additionally in June our partner in this line of business provide formerly known as from Endeavour announced that it was going to be acquired by fifth third bank, who already had an ownership stake in the company going forward. We expect that fifth third will retain most if not all are provides new origination activity.
However, we continue to explore new lines of business and partnerships for example, during the second quarter, we finalized a partnership with a fintech oriented specialty lender that focuses on high quality loans through the franchise industry and we will fill the gap created by the decline in health care finance balances.
Though this relationship we expect to begin funding portfolio loans with attractive yields during the third quarter and have committed to fund up to 100 million of originations over the next 12 months. This relationship will also provide SBA 7 lending opportunities to supplement our own origination activities.
On the lending front overall, we feel really good about how pipelines increased during the second quarter, leaving us well positioned to deploy the elevated levels of cash on the balance sheet and capitalize on loan growth opportunities in the second half of 'twenty 'twenty 1.
Our credit quality. Meanwhile, remains among the best in the industry.
During the quarter nonperforming loans declined $5.4 million or 37% and nonperforming assets declined $4.1 million or 28% due primarily to positive developments on our single tenant lease financing relationship and a commercial and industrial real relationship both of which were previously.
Classified as non accrual.
At quarter end the ratio of nonperforming loans to total loans had declined to 31% and the ratio of nonperforming assets to total assets has declined to 25 basis points.
Additionally, delinquencies dropped significantly during the quarter, representing only 7 basis points of the total loan balances we are especially proud of the fact that as of June 30th we had no delinquencies in our originated consumer loan portfolio.
Turning now to the consumer and small business banking demand for digital banking services is at an all time high we have leveraged our customer focus products, which include the nation's best checking account for small business is awarded by Newsweek magazine and expertise in digital service delivery, we have 22 years of.
The experience in providing not just the robust customer facing interface, but also the processes behind the scenes to support a seamless experience during the first half of 'twenty 'twenty..1 we have grown our small business checking relationships by more than 25% and to continue to win and retain these relationships work.
Close to being able to announce several collaborative partnerships with Fintech companies, we look forward to sharing with you in the future call more details about our next generation customer experience. They will also power internal efficiencies.
In summary, we generated excellent results for our shareholders in the second quarter, we are in great financial position to serve our customers and help fuel the broader economy as the country emerges from the pandemic.
Before I turn it over to Ken I would like to thank the entire first internet team for their diligent efforts in delivering record earnings. This quarter, we continue to challenge ourselves to imagine more.
First Internet bank as walks out of workplace culture that promotes innovation collaboration and customer focus which is reflected in being named 1 of the top workplaces in Indiana for the eighth consecutive year. We are confident in the strength of our franchise and the momentum we have built heading into the back half of 2021 with that I'd like.
I turn the call over to Ken to discuss our financial results for the quarter.
Thanks, David it's.
As David mentioned it was a strong quarter with record net income of $13.1 million and $1.31 diluted earnings per share, which included a $2.5 million pre tax gain on the sale of our corporate headquarters.
After taking into account this onetime items adjusted net income came in at $11.1 million and adjusted diluted earnings per share was $1.11 increases of 6.2% and 5.7% respectively from the first quarter.
Profitability continued to improve with fully taxable equivalent net interest margin increased 7 basis points sequentially to 2.25% and adjusted return on average assets of 1.0% to 6% and an adjusted return on average tangible common equity of 12, 79%.
Looking at slide 4 related to revenue and drivers of revenue growth, we have outperformed the peer group a similarly sized institutions on a year over year basis, and we expect this trend to continue once each of the peer institutions have reported results for the second quarter.
Turning to slide 6 total loans at the end of the second quarter were $3 billion, a 3.3% decline from the first quarter and relatively comparable to June 30 of 2020.
The decline in loan balances from the first quarter was driven largely by net payoffs in our health care finance and single tenant lease financing and public finance portfolios as balances were down $54.3 million $28.2 million and $25.5 million respectively. Additionally.
Additionally, small business lending balances were down $9.2 million, largely due to $16.2 million of PPP loan forgiveness, but partially offset by new production.
Increases of $24.4 million in commercial and industrial and $14 million in Investor commercial real estate loan balances, partially offset the overall decrease in the loan portfolio.
Consumer loans decreased modestly compared to the first quarter due primarily to continued prepayment activity in the residential mortgage portfolio we.
We did however, see an increase in origination and origination activity within our specialty consumer lending business with trailer balances, increasing $5.3 million or 3.7% from the first quarter.
Moving on to deposits on slide 7 overall deposit balances were down slightly from the end of the first quarter and again, we saw improvement in the composition of our deposit base.
During the quarter Cds, and brokered deposits decreased $75.5 million or 5.1% on a combined basis, while 9 non time deposit balances increased $64.1 million or 3.7% on a combined basis.
Cds and brokered deposit balances continued to decline as higher cost CD maturities were either funded with on balance sheet liquidity or replaced with much more attractively priced money market accounts checking accounts and lower rates Cds. This deposit migration lowered our cost of interest bearing deposits 13 basis points in the quarter.
And we expect to experience continued reductions in deposit costs throughout the second half of the year compared.
Compared to the first half of 2020, we realized $16.6 million of deposits interest expense savings to date.
And expect to realize around $26 million for the full year based on the current deposit pricing environment.
Turning to slides 8 and 9 despite loan balances declining over the quarter net interest income and net interest margin on both a GAAP and fully taxable equivalent basis continued to increase compared to last quarter.
As you can see from the net interest margin bridge on slide 9 deposit pricing had the largest effect on margin during the quarter with a positive impact of 11 basis points.
Although loan yields were up 3 basis points from the prior quarter. The all in effect of the loan portfolio was a negative impact of 6 basis points driven by volume as average loan balances were down $62.8 million or 2% from the first quarter.
The average balance of interest, earning assets was relatively flat compared to the first quarter, but a shift in the mix of interest earning assets resulted in a 5 basis point decrease in the yield the decrease in the average balance of loans was essentially offset by growth in average cash balances, which increased $69.2 million from the prior.
Corner.
As cash balances continued to increase during the quarter, we deployed about $200 million of liquidity into 15, and 20 year agency mortgage backed securities in mid June which should have a positive impact on the earning asset mix in the near term looking ahead to the second half of 2021, we project our yield on interest earning assets.
To remain relatively stable as we expect to deploy liquidity to fund new new loan originations as pipelines continue to build.
Overall, we are pleased to have delivered a 7 basis point improvement in our fully taxable equivalent net interest margin during the quarter and expect the upward trend to continue throughout the second half of the year.
Turning to non interest income on slide 10, noninterest income for the quarter was $9 million up from $8.4 million in the first quarter. However, as mentioned earlier included in those results was onetime pretax gain of $2.5 million due to the sale of the Companys corporate headquarters.
Adjusted for that sale noninterest income was $6.4 million down $1.9 million from the prior quarter.
The decrease was driven primarily by lower revenues from mortgage banking activities.
Firstly offset by an increase in gain on sale of loans mortgage banking revenue totaled $2.7 million for the second quarter down $3.1 million from the prior quarter interest rate lock and origination volumes during the quarter were off the record high levels. We saw in the past few quarters, mostly due to lower refinance activity.
<unk> as well as limited housing inventory in the marketplace. Furthermore, competition has intensified which has put significant pressure on our margins.
Although there may be volatility in mortgage banking revenue, we expect it to stabilize during the second half of the year.
Gain on sale of loans totaled $3 million for the quarter up $1.3 million or 75% from the first quarter as we sold a larger amount of U S. Small business administration, 7 a guaranteed loans at higher premiums.
With respect to non interest expenses shown on slide 11, the decrease on a linked quarter basis was driven primarily by a decline in salaries and employee benefits and deposit insurance premium, which was partially offset by increases in marketing advertising and promotion expense the decrease in salaries and employee benefits was due mainly to a D.
Increase in medical claims expense during the quarter, while the decrease in deposit insurance premium was due to the decline in total assets year over year the.
The increase in marketing expenses was due to higher mortgage lead generation cost and increased sponsorship initiatives.
Now, let's turn to asset quality on slide 12.
Credit quality improved during the quarter, mainly due to the resolution of a number of legacy nonperforming loans nonperforming loans declined $5.4 million or 37% compared to the linked quarter due primarily to positive developments related to a single tenant lease financing relationship and a commercial and industrial relationship.
Of which had been classified as non accrual the single tenant lease financing relationship included 2 loans, 1 of which was paid off at net book value and the other was transferred to other real estate out the commercial and industrial relationship included 4 loans 2 of which paid off during the quarter.
As a result nonperforming loans now represent 31 basis points of total loans down from 48 basis points from the prior quarter.
In addition, we eliminated $2.9 million of specific reserves related to these loans net charge offs increased by $2.5 million in the quarter and net charge offs to total average loans increased to 35 basis points from 2 basis points in the first quarter the.
The increase in net charge offs was due primarily to the single tenant lease financing relationship that was resolved as the loan payoff and the transfer to other real estate owned were recorded at net book value, which consisted of unpaid principal balance less specific reserves.
The provision for loan losses in the second quarter was $21000 compared to $1.3 million from the prior quarter. The decrease was due primarily to the $101.1 million decrease in loan balances was partially offset by continued upward adjustments to certain qualitative factors in the allowance model.
Although the economic outlook continues to improve and we have seen positive credit quality trends within our portfolio, we recognize that certain aspects of the economy have yet to fully recover and the potential still exist for future pandemic related disruption disruption.
Because of this we felt it was important to continue to maintain a larger qualitative reserve until there is a greater consensus on the overall health and direction of the economy I would like to point out that had we not made these further adjustments to the qualitative factors in our model. We would have recorded a negative provision of about $800000 for the.
Quarter.
Overall, the allowance for loan losses decreased $2.6 million during the quarter and the ratio of the allowance to total loans decreased to 95 basis points from 1% as of the prior quarter.
Excluding PPP loans, which totaled $39.7 million at quarter end. The allowance coverage ratio was 96 basis points down 6 basis points from the linked quarter. The decline in the allowance was driven primarily by the removal of the specific reserves discussed earlier as well as the decrease in total loan balances.
Which included declines in certain commercial certain commercial loan portfolio portfolios with higher allowance coverage ratios. These items were partially offset by the upward adjustments to the qualitative factors in the model, which resulted in a 6 basis point increase to the allowance coverage ratio related to the general reserve.
On the company's commercial loan portfolio.
With respect to liquidity and capital as shown on slide 13, our overall capital levels improved and remained healthy at both the company and the bank with the strong earnings performance. This quarter, our tangible common equity to tangible assets ratio increased 31 basis points to 843% from $8.1 2% in.
The first quarter.
Additionally, tangible book value per share increased to 35, $35.92 up from $34.60 from the first quarter and just over 16% higher than 1 year ago.
I would like to wrap up my comments with a few thoughts on the balance sheet and revenue initiatives. We have implemented over the last several quarters that position us much better to perform well in a variety of interest rate environments as shown on slide 14.
First as compared to the last time interest rates began to consistently increase we have significantly improved the composition of our deposit base our efforts to drive growth in small business and consumer money market and checking accounts have reduced the need to fund loan growth with Cds, which experienced much higher price and betas in the last rate tightening.
Cycle.
We have made a substantial investment in building a sustainable SBA lending platform that has grown and diversified our noninterest income and should provide a level of stability to overall revenue and times of interest rate volatility that may compressed net interest income.
And third we have increased our focus on building lines of business with higher yielding variable rate and shorter duration loan originations retained SBA 7.8 balances price that healthy spreads over the prime rate and our growing construction line of business are examples of these efforts and are expected to become larger components of our loans.
Portfolio.
Overall, we believe that our balance sheet and sources of fee revenue are in a much better position than they were several years ago and we will continue to build off the improvements made over the last several quarters to create a franchise that will deliver high performance, regardless of the interest rate environment.
With that I'll turn it back to the operator, so we can take your questions.
Thank you we will now begin the question and answer session.
First question you May Press Star then 1 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 2.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Michael Perito.
<unk>. Please go ahead.
Hey, good afternoon, guys. Thanks for taking my questions.
Hey, good afternoon, Mike.
David I'm sure that you are limited in what you can say in terms of some of those fintech partnerships you alluded to coming in the near future here, but I was just curious if maybe you can give us some more structure behind that in terms of.
<unk>.
What type of opportunities, we should expect to see financially or are they primarily lending opportunities, where you're using your balance sheet or deposit opportunities, where we're offering you know ensure checking accounts or just just any color. There would be helpful. Just so we know how you guys are thinking about those opportunity broadly moving forward.
Yes, technically from the partnership's discuss there that's really internal.
Software and infrastructure cleanups and the small business category. So it should provide both from like I said, we've had great growth since the first of the year with commercial checking accounts going up 25%, but we think we've.
We're going to add some additional features on the backend make smoother access faster performance.
That will help both on the lending and the savings side of things and deposit base. So that is.
Technically infrastructure updates, but obviously with the fintech companies that we're partnering with they also bring opportunity to the table and channels for delivery, but the real focus of the first blush here Michael is going to be on the small business community and making a better service and better feature for them.
Helpful. Thanks, David and then the.
On the SBA side.
I guess can you comment maybe a little bit more specifically about what the margin you're seeing in the secondary market. There are and you know you guys maintained at $13 million to $14 million for the full year as if the volume driving that similar or is it stronger margins.
Just can you explain a little bit in that market right now and what gives you guys the confidence of hitting the revenue front.
I'll take first stab and then let can back me up here the <unk>.
Margins that we're making there was a gain on sale, we've actually had a couple of loans in the 15 to 16.
I sent a level were averaging probably about a $1.13 on gain on sale.
As we say gross volume of loans will be down, but the fact that we.
We're selling 90% versus 75% and the margins.
When we say $1.13, $1.14, and we have to get half of it over 10% to the SBA. So net is a little smaller figure, but we're probably at least 3% on the margin and selling 90 versus <unk> 75, even though volume is going to be down we'll be very close to what we projected for total earnings for the year a year.
No.
Yes.
Okay.
Got it.
Lastly from me.
Looking at the balance sheet right you guys $4.2 billion TCE ratio has got a handle on it you've got some capacity on a loan to deposit ratio, obviously a much different.
Position and then a few years ago, but should we be expecting some balance sheet growth from here now I mean, it sounds like you guys are are working to add some new lending partnerships and vertical seal pipelines are decent shape I mean, the balance sheets been flat for better part of.
10 quarters now I mean are we close to reaching an inflection there or do you think theres still more remixing that can happen behind the scenes and more capital building that needs to happen before that switches kind of turned.
Mike I think we've obviously been pretty pleased with how capital is built and can certainly support growth and as David talked about in his comments, we feel pretty good about pipelines and starting to see pipelines build.
So I think we should expect to see loan growth between now and the end of the year I think in terms of the total balance sheet, what probably offsets that a bit is we still have a lot of excess cash in the balance sheet.
So we continue to remix the deposit composition, which in this quarter was kind of a wash and didn't really produce much growth.
But we have that you know I guess the cushion there with the excess cash to redeploy the excess liquidity on the balance sheet.
So well, it's probably maybe like what we've talked about in the past, we may see a higher percentage of loan growth.
We now and the end of the year, but not a lot of overall balance sheet growth.
And I would also say probably the the little bit of a wildcard to offset that would be what prepayment activity is going to look like in the second half of the year.
It was elevated in single tenant in health care certainly in the second quarter.
But right now I'd say at least you know.
Quarter to date, which were really not that far into the quarter, but prepayment activity seems to have slowed.
In single tenant and it seems to have slowed a bit in health care as well.
So that that would be the only kind of the offset to to overall loan growth would be the estimated prepayment activity.
Maybe to ask the question a little bit differently I guess.
There's clearly still some dynamics in the market right that are impacting the balance sheet size, and and and and as you alluded to Ken but as we look to next year. I mean would you guys be surprised it's kind of flat balance sheet, you've been operating with you know holds further or are you have much more appetite for growth than maybe you did 18 months ago.
We have a higher appetite without question Mike.
And we're looking very helpful. Thanks, Yes, sorry, yeah, I was going to say, we're looking at partnerships internally and externally to help push that up as Ken said, we're still there's a lot of market forces as you pointed out too that our kind of beating on US right now, but we're open to offset that with some external partnerships that will help drive.
Even though our existing channels are getting better.
Still looking for other opportunities to that should come to fruition between now and year end. So we do anticipate growth next year.
Helpful. Thank you guys for taking my question.
Appreciate it Mike. Thank you thanks, Mike.
Our next question comes from Brett Rabat and always have degree. Please go ahead.
Hey, good afternoon guys.
Hey, good afternoon Bret.
I wanted to first ask you just mentioned your strong capital ratios and obviously the outlook for the balance sheet why not given where the stock is here why not do a buyback at these levels. It would seem like it'd be pretty huge good use of capital.
These prices.
As Ive stated on many many occasions I would much rather put it to work to buy something and acquire something and gather more opportunities. We we have a couple of fairly solid opportunities that we're looking at that could.
Gain lakes between now and year end, but I'd tell you Brett if it doesn't happen in the share price stays where it is obviously trading in the 31.32 range with a book value of almost 36, it wouldn't make a lot of sense to buy back some shares and we do have capital capacity for the first time in a long time to do that so.
We want to play out a couple of opportunities we're looking at but if they don't come to fruition, we will do a buyback.
We're a year into early 2022.
Okay.
And then wanted to follow up on the points you made about the payoffs decreasing so far at least this quarter I mean, it seems like.
There were some large regionals out there that are doing some pretty aggressive fixed rate stuff from the health care business from.
I guess I'm, just trying to make sure I understand the dynamics of your expectations for pipelines and single tenant leasing.
Maybe offset any additional pressure you might see in the other portfolios, particularly health care public finance.
What kind of gives you the confidence that those payoffs are going to abate or I guess, they have this quarter, but.
What.
Visibility do you have in that.
Well I think in certainly in the in the first half of the year.
When rates they even the longer end of the curve was still down very low.
I mean, there there was quite a bit of competition across all areas of our business, whether it's single tenant financer health care finance C&I lending and we had floors in place and really made the decision not to chase rates down to the bottom.
So that certainly impacted loan growth and pipelines here in the first first quarter and certainly into the second quarter. I think is as rates have come up a bit. The economy has improved somewhat we've just seen more activity than in single tenants for example, you've had.
You know kind of the back end of the curve come up a little bit on the rate side, which helps our pricing and gets pricing on new deals more in line with you.
At least where our floors are if not higher.
We've seen a lot more activity in this space as well we've seen.
Borrowers customers already who had new opportunities come to approach us with new opportunities.
And we are just kind of seeing what our sweet spot is in that space in terms of just more transactional kind of smaller smaller dollar levels kind of in that mill.
2.1 million 5 range come into play so in single tenant as David said in his comments that pipeline is the highest it's been in and are in 15 year or 15 months rather.
And then also on the other side the new partnership we talked about in the franchise space. We've got a pipeline building there that.
Again over the next 12 months.
Who could provide up to $100 million of of new loan volume.
And even in public finance, we've seen some payoffs there too just scheduled maturities and some prepayments there we continue to look at limited opportunities in that space trying to keep the duration short.
There is a ton of competition in that vertical you do have large regionals, who compete in public finance driven we see kind of what the final rates are on and on.
On deals in our team goes in and tries to.
Look at it at a reasonable rate and we're getting outbid by sometimes hundreds of basis points there. So.
The competition is there, but I think the backup in rates and kind of the reopening of the economy is kind of you know things have kind of moved a little bit towards where we feel.
Comfortable doing deals from a pricing perspective.
1 day plus force threat on the single tenant side of things about 95% of those loans have some kind of a 10.31 exchange involved in it and with what's going on in Congress and discussion about changing capital gains came in maybe eliminating 10.31, an awful lot of people are reevaluating their portfolios.
Selling and moving in and doing a lot of transactions in anticipation of possibly a negative impact from.
From Congress so.
That's really driving pipelines are getting better on a day in day out basis.
It's an interesting time in the marketplace. We are had the change in the Fannie Freddie penalties.
Come out on the mortgage side, the extra 50 basis points and locks have.
Jumped up in the mortgage side double triple what they were 2 weeks ago. So it's just.
Even though the economy I think is very stable very strong.
Also very chaotic and a whole lot of different places.
1 day something top of the next day, it's something else, but overall it is kind of sad.
We love the.
In the second half of the everything will be very strong and loan origination.
Okay.
1 last quick 1 just the sale of the headquarters I thought that was I am sorry, what.
I'm not expecting not can you maybe talk about that transaction.
Yeah, we've been in a building here for about 5 years that.
We acquired.
We're really in the middle of the crisis, when the markets were going kind of nuts and.
We are tapped out on space.
Kinda thankful in some respects that Panther.
Pandemic came along because we got about 25% to 30% of our people working remotely because we don't have space here in the building we.
We are building a new facility in downtown Fisher.
Should come on line.
Either the very end of this year early.
Next year well.
Did a partnership with the city.
On some land cost abatement from the city as well as a parking garage attuned to it.
Should be online at the end of the year were 23, 22.23 year old company. We've made 6 moves during that time and the size that we're at today move estimated it's going to cost us about a million bucks to do it. So we built a little more space than we need we're gonna assemblies are part of the building.
And should be a facility that will last us for 10 to 15 years into the future.
Okay, great. Thanks appreciate the color.
Thank you thanks Brett.
Our next question comes from Nathan race with Piper Sandler. Please go ahead.
Yes, I guess the afternoon.
Hey, Nate.
Not to beat a dead horse on the balance sheet and capital discussion well it sounds like you know with the health care books, Luckily running off just given the sale of that platform recently, you know that's going to be somewhat of a growth headwind going forward.
But it also sounds like from a capital deployment perspective, there's the opportunity to maybe add another production platform to offset some net runoff.
On top of the other growth that youll be seeing it across the other parts of the portfolio and that's kind of the reason why our buybacks maybe less.
Of a possibility near term zone.
Thinking David.
Correct Yep.
Yes.
Gotcha great.
And then just maybe kind of changing gears, a little bit and I'm thinking about just where the reserve can.
Trajectory over the next few quarters here it sounds like the charge offs here in the second quarter were somewhat of an anomaly.
How are you guys thinking about providing for some expectations for net growth just given where the reserve stands today.
Yeah, I mean, obviously from a dollar amount the reason why the allowance came down with just the removal of the specific reserves.
Associated with the positive developments on on the single tenant lease financing relationship and those were I mean, those were big dollars is where you know in excess of $2.5 million.
Okay.
So the dollar amount went down to the the overall coverage ratio went down but I think as we pointed out in the release and then we continue to bump up the qualitative factors.
I would say that if loan growth and loan opportunities come in then.
That we've been talking about here on the call come in where we believe them to do that that coverage ratio is going to migrate upwards.
Because what we're talking about are commercial oriented businesses that have allowance coverage ratio was in excess of 1% to begin with so it's kind of like the right volume thing if we have a higher rate on new volume.
The overall allowance itself and she's going to migrate upwards.
And back towards the 1% and net net.
In excess of 1% depending on how strong the growth is in those categories.
And Nathan again, just to reinforce as Ken talked in his comments in earlier the loss that we had this quarter really goes back to a loan that went sideways back in 2019.
<unk>.
Principal we see of the buildings filed bankruptcy.
Closed down.
We put them into non accrual status in the middle of 19. So we've gone through foreclosure..1 building is sold we have 2 other.
Total is out there to buy the second building should hopefully clear up here.
End of this quarter very early fourth quarter. So that goes back from a long term net portfolio. It's a whole is rock solid we have absolutely no delinquency in the portfolio as it exists out there today so.
You hit the nail on to have this as kind of an abnormal number for us and we do have a potential to recover some dollars on net loss as well, but we're being kind of conservative flushing. It out and then we're going to go after the sponsors so.
Got it that's great color.
And maybe just last 1 on.
The expense run rate from here its great to see it flat sequentially. How are you guys thinking about the run rate going forward. It sounds like maybe there's a little bit of pressure from the headquarter.
Relocation and so forth or is that built out going forward, but just any kind of high level thoughts on kind.
The run rate going forward and expectations for expense growth in 2022, as well would be helpful.
Yeah, I think probably over the course of the remainder of this year, you'll probably you know we would expect to see expenses, probably tick up a little bit from where they are right now.
We do.
We have continued to add to our our head count in certain areas across the bank continued to add folks in SBA as.
As well as certain areas. So it will probably should expect to see a bit of the head count go up a bit and it's kind of mortgage comes back a little bit and SBA continues to ramp up we'll probably see overall conditions continue to increase a little bit as well.
And certainly into next year or 2 we'll see a little bit.
Pick up having to do with the.
The new building coming on line.
We also have some activity going on on the software side of things and some of these new programs and pieces, we're putting in a lot of that is incremental it's building. It's a SaaS model. So we're paying for it as we use it.
Won't have tremendous impact, but there'll be a little stuff kind of latter part of fourth quarter, We think as Ken said that the cost should stay very stable.
Of course, and then actually once it all gets installed and up and running.
We will actually see a savings over some of the expenses we have out there today so.
I think the net play with a lot of the.
Kind of Fintech tools, we're looking at are actually going to help the bottom line on day 1.
<unk> expenses, and we're getting fairly stable, we still adding to the BDO component.
<unk> side and the support staff for them, but thats stabilizing as Ken said, we're adding some bodies in other areas of commercial real estate is picking up etcetera. So.
We don't want to.
I have a service fault here as things start to kick back into gear.
But it should be very stable for this year and then once we get our arms around the building and final members, who will give you indications next quarter as to what impact down on that for 2022.
Okay perfect I appreciate all the color. Thank you guys.
Thank you our next question.
Comes from George Sutton with Craig Hallum. Please go ahead.
Yeah.
Thank you David you referred to 2 to 3 opportunities by year end that could be.
There is a capital use and I just wanted to confirm these are the same 2 to 3 opportunities that you had discussed last quarter and my sense at that time was these could be new verticals or expanded vertical opportunities for you is that correct. That's correct..1 is 1 we've talked about last quarter, that's moving along and the other is a new 1 that's <unk>.
<unk>.
I guess second line, maybe you want to refer to that that we talked about last quarter, we couldnt come to terms on the price.
1 is a continuation that we've been talking to for a while and what is a relatively new.
Okay, and just to make sure I'm not conflating other thing she last quarter mentioned 40, CTO projects that were occurring and now you're talking about collaborative partnerships are those related those would be the that's that's why that's more of an internal improvement.
Yes.
Yes, it does.
Yeah, we have 2 external actual acquisition opportunities and then we have a lot of activity and we will have a.
Ashish will try and release.
Probably during the fourth quarter.
Knowing all of the different components of the internal pieces of software and things that we've been working on through the pandemic and pulling the stuff together that will come into play probably early on in 2022. So it is it's both channels external acquisitions, and new verticals as well as internal and software to run those.
And our businesses as well as internal improvements and back office operation feature functionality due to some of the Fintech partners that we're working with.
Great Finally, I wanted to make sure I understood.
The the change with provide I understand what what happened there and you are now back filling with a new partnership that you've made some commitments to can you just give us a sense of the strength of that partner relative to the provide relationship.
Yeah, Yeah, we're pretty excited about it.
Our specialty lender focused on in the franchise finance space has got a really good track record.
Their health and franchisees finance, both new locations and.
And our existing locations in a kind of a retail franchise space think quick service restaurants.
Things like gyms, and salons things of that nature.
The volume.
We are committed to funding up to $100 million over the next 12 months.
What we like about this space to us in the franchise space pricing is a little bit more attractive so.
So relative to health care finance.
We might not see the volume.
Health care finance with such a strong growth engine last year, we won't match that volume exactly but what we will see a much higher yields.
So it's it's a pretty good I think it's a pretty good trade off a pretty good opportunity to backfill some of that growth. We've had in the past and feel pretty pretty pretty optimistic about the partnership we entered into with them.
Gotcha helpful color alright, thanks, guys.
Thanks George.
Our next question comes from John Rowan with Janney. Please go ahead.
Good afternoon guys.
Hey, John how are you.
I'm good how are you doing David.
Good most of my questions have been asked and answered but can I just wanted to make sure I heard you say did you say that mortgage I guess mortgage revenues you expect it to do to sort of stabilize in the second half of the year. So I guess stabilized with the second quarter.
Yeah, I think second quarter, obviously, it was down quite a bit I mean I think in.
In the second and third quarters.
Excuse me and then in the third and fourth quarters, I mean, I think we probably feel comfortable with.
Probably somewhere in the 3 to $3.5 million range of revenue.
So op.
Up from where we were up a little bit from the from the second quarter is kind of the market has stabilized a bit.
Okay. So it sounds like I think in your press release, you said.
That sounds like I guess towards the backend back half of the quarter or back end of the quarter the.
Trends were better in mortgage I guess.
It jumped all over John during the course of the quarter, probably our weakest month was actually made in activity.
Overall volume is pretty solid on a year over year basis, but our margins if we go back to.
Second quarter of last year.
No everybody calculates margins on a different level and Ken tells me not to talk about this because low.
Confused everybody but.
We kind of look at a net gain on the mortgages and we were somewhere around 3 quarter 3.5% per loan and during the second quarter. We were at a 148. So the margins were cut by over half.
Volume is still fairly strong, but it's kind of the same game that happened back in 2013, a little bit in 2016 as the refi gain.
<unk> down.
The independent brokers, they just give the shop away to try and maintain their staff and keep the volume up in it.
Keep their mortgage folks happy so.
That is what we're starting to see stabilized pricing is getting a little more consistent I mean, we could see swings in the market of 25.30 basis points, a day up or down.
Starting to stabilize a little bit I think some of the folks are realizing that the new normal is going to be probably.
60%, 50% to 60%, new construction and 40% on the.
Refi gain so.
Changed obviously from what it was last year.
Yep.
Ken just on the provision I think you said it could have been negative this quarter.
Do you think going forward, it's more closely similar to I guess, the first quarter or can we still see some reserve release.
Well I, yeah, I don't know if I'd classify what we did this quarter is reserve release, because we had resolution out specific reserves.
And we continue and we offset that with continued increases to qualitative factors.
And the general kind of the reserve.
The allowance coverage ratio related to the the the.
The unallocated part of the portfolio continued to go up.
I don't think.
I really don't expect us to have a negative provision I think we'll continue to adjust qualitative factors and again, if we hit the growth.
And these loan portfolios I mean, if you think single tenant you have growth there we're reserving in excess of 100 basis points. There this franchise finance opportunities going to be in excess of 100 basis points.
Any any any growth in any commercial line of business outside of public finance is going to have a coverage ratio.
In excess of 1% or so.
The provision as an expense piece will really be dictated by loan growth and then secondarily by adjustments to additional adjustments to qualitative factors going forward.
Okay makes sense and then just kind of 1 other question. The securities portfolio, you talked about the growth in the quarter do you sort of expect it to level out here. If you do see the loan growth play out.
Yeah the growth in the Securities portfolio was really just kind of I don't want to say a 1 time thing, but we we were sitting on.
A lot of cash and net cash balance was continuing to build throughout the quarter. I mean, we were in excess of $500 million $550 million.
And put the cash to work in in basically plain vanilla mortgage backed securities that have strong cash flow characteristics.
Relatively short duration and the portfolio as a whole is going to spit out over $100 million of cash over the next 12 months anyway. So really we don't we don't expect that portfolio to grow from this perspective net securities level to grow it was really just putting cash to work here in the near term to.
Kind of help.
Give give our earning asset yields a boost while not really tying up cash over the long term.
We will probably we will continue to buy securities here and there for things like CRA purposes et cetera, but.
I wouldn't expect the securities balance to grow from here or be flat, it's it's going to decline more than anything else.
Okay makes sense. Thank you guys.
Sure.
Our next question is a follow up from Michael Perito with <unk>. Please go ahead.
Hey, guys sorry.
Probably make you repeat yourselves here, but I was just so I'm just getting my notes and I apologize if I missed it but can do you mind just offerings from consolidated thoughts on where the the NIM I think you provided some high level commentary, but where the NIM might move near term here and he took still think theres. Some legs for some multi quarter expansion as long as rates remain where they are.
Yeah, most definitely I think I think our outlook on net interest margin is very similar to what it was last quarter I think.
Probably on a quarter over quarter basis between now and the end of the year, we're probably still looking at.
Anywhere from maybe a 5 to 10 basis point increase.
I'm going to be impacted by things such as prepayment levels.
Or loan growth opportunities, but I think we still feel good.
Targeting that kind of somewhere in the range of 2.4%.
On a fully taxable equivalent basis in the fourth quarter.
So we still feel good about those numbers and I think next year as well, there's still going to be some ability to.
To generate NIM growth next year as well and again some of that is going to be dictated by how well. Some of these loan opportunities continue to develop over the course of 2022.
But I think there's still an opportunity to expand NIM next year.
Michael they carry that I'm going to just a little different angle. We have over the next 12 months, we don't run past 12 months and our internal projections, but we have over $750 million in Cds that will either run off or re price and now the rate has dropped geometrically from what it was.
18 months ago, but they are still our average cost of about a $1.45, and then the new stuff coming on the books today ranges from 39 to 41 basis points.
There is still a big pickup on the Cds on rollover and pricing as well as bringing in the checking account balances from the small business accounts that are much lower cost to us in our traditional cost so.
Savings on the interest side and as well as Ken pointed out hopefully some pickup on the loans side too.
Helpful. Thank you first hand.
I appreciate it.
This concludes our question and answer session I would like to turn the conference back over to David Becker for any closing remarks.
Thank you Sarah and I'd like to thank all of you for joining US today. This was a great Q&A session. We hope you have a great balance of the day and continued success. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.