Q3 2021 First Internet Bancorp Earnings Call
Inflation, there will be an opportunity to ask questions. You ask a question you May Press Star then one on your Touchtone phone and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. Larry Clark from financial profiles incorporated. Please go ahead Mr. Clark.
Thank you Chuck.
Good day, everyone and thank you for joining us to discuss first Internet Bancorp's financial results for the third quarter of 2021.
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. However.
However, before we begin I'd like to remind you.
<unk> Conference call contains forward looking statements with respect to the future performance and financial condition of first Senator 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 Companys.
<unk> 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 and 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.
The disk contains the financial and other quantitative information to be discussed today as well as a 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 and thanks for joining us today.
We are pleased with our results this quarter as.
Site, we reported net income of $12 1 million and diluted earnings per share of $1 21, both of which were up more than 40% from a year ago.
Excluding 800000 of pretax costs incurred as we redeemed $25 million up 6% sub debt. We recorded adjusted net income of $12 seven.
2 million or $1 27 per diluted shares.
The directors and management are intent on increasing shareholder value and I would like to highlight several ongoing initiatives in that pursuit.
We have improved profitability by expanding our net interest margin.
Buying our fee revenue.
Managing our expense.
Fences, our performance in the third quarter generated an adjusted return on average assets of 1.18%, marking a substantial advance from a year earlier. This is the fourth straight quarter, we have generated R. O a a an excess of 1%.
Confident in our ability to continue growing revenue and earnings for the remainder.
Major of the year and into 2022.
In the third quarter, we were very pleased with the balanced growth in C&I in single tenant lease financing our newest lending area franchise finance, which I'll talk about a little more about in just a moment got off to a great start with over 25 million in originations in just three months time.
<unk>.
Commercial loan pipeline heading into the fourth quarter are strong up 65% of our team's diligent war sourcing new opportunities. We expect construction activity in small business lending to be key areas of growth for us in the months and quarters ahead.
As of September 30th unfunded construction commitments across all business lines.
$190 million up 30% from the start of the year, our commercial real estate construction team has several new opportunities in the pipeline and we expect our unfunded commitments to increase by an additional 100 million during the fourth quarter. These projects.
Fleet bond over a 12 to 24 month horizon.
The second leading growth driver for us as small business lending, which remained strong in 2021, we made a 300 million dollar commitment to small business owners as part of that pledge. We recently announced that we have teamed up with Apple pie capital, a leading provider of growth financing to franchisees in various industries.
Three segments across the country.
Together, we are funding loans to proven businesses fueling economic growth and job growth, while deploying our capital into.
Attractive asset class with strong risk adjusted returns.
We began working with Apple pie in the third quarter as I noted earlier, we funded just over 25.
$5 million of loans during that time and expect to fund up to 100 million of originations in total by the end of 2021, we anticipate funding up to $150 million in additional loans next year.
We have had a very positive experience with Apple product to date and I would also note that we are actively exploring.
Flooring balance sheet relationships with several other Fintech company.
Of course, the cornerstone of our commitment to small business is the small business lending platform. We have built out over the past two years through the end of the SBA year ended September 30, we have secured approvals for $172 million in SBA.
700 program loan.
We also funded $30 million of PPP loans earlier this year to date, 85% of our PPP loans have been forgiven by the SBA.
I'm very proud of the way our team responded to the operational challenges brought on by a series of PPP rule changes <unk> program.
Ma'am updates and the SBA is move to a new transfer agent, which added complications to the collection of relief payments as well as the sale of loans.
Looking ahead to 2022.
We anticipate originating $215 million of SBA, seven loans, which is expected to generate.
<unk>.
On revenue in the range of $15 million for the year keep in mind that secondary sales volume will be impacted as the standard government guarantee on SBA seven loans reverts to 75% compared to the 90% guarantee temporary literally installed in response to the pandemic.
We are also building out a wider range of services to serve our small business customers. We recently announced the partnership with <unk>, a fintech provider of modern banking solutions to provide an innovative payments hub that will enhance the digital experience for our small business owners and empower them to manage their business and cash flows more effective.
Actively over the last year and a half the COVID-19 pandemic has accelerated the demand for digital banking services. Thanks to our branch was banking model. We did not have to lose time transitioning away from the branch operations, we were able instead to leverage our customer focused product and our expertise in the digital services.
Service delivery to attract new customers and enhance the customer experience, we continue to invest in our digital capabilities and expect to announce additional relationships within the next few weeks to conclude.
We're committed to continuous improvement to serve our growing base of customers nationwide and we believe.
Indications puts us in a great position to expand our relationships and generate strong results for our shareholders in the upcoming quarters.
Before I turn it over to Ken I'd like to call your attention to two important announcements.
I am pleased to share that our board of directors has authorized the repurchase of up to $30 million.
Our common stock. This authorization is open through the end of 2022.
Additionally, we released our first ESG report earlier this week.
Ford chronicles, our existing commitments and future priorities around mindful governance and responsible corporate citizen right.
Including the company's response to the financial effects of the COVID-19 pandemic on our customers and communities.
By advancing our ESG initiatives, we hold ourselves accountable for effectively managing risk will also.
Facilitating financial inclusion I'm proud of our team's efforts and successes.
I encourage you to read the report which is of course available exclusively in digital format at first Internet Bancorp Dot com with that ill turn the call over to Ken to discuss our financial results for the quarter.
Thanks, David as David mentioned, it was another strong quarter with net income of.
$12 $1 million and $1 21 diluted earnings per share, which included about 800 thousands of additional pre tax interest expense related to the redemption of $25 million of subordinated debt after taking into account. These costs. Adjusted net income came in at $12 $7 million.
Adjusted diluted earnings per share were $1 27 reps.
Representing increases of 14, 7% and 14, 4% respectively from the second quarter.
Profitability continued to improve with an adjusted return on average assets, increasing 12 basis points from the second quarter to one.
At one 8% and an adjusted return on average tangible common equity increasing 118 basis points to 13, 97%.
Looking at slide five total loans at the end of the third quarter were $2 9 billion.
Down modestly from the second quarter and down two 5%.
Sent from September 30 of 2020 as David mentioned earlier, we were pleased with the growth in commercial and industrial and single tenant lease financing during the quarter and are excited about the early performance in our new franchise finance lending area. The growth in these lines of business were largely offset by net payoffs in our health care finance and.
One finance portfolios as balances were down $38 5 million and $10 $4 million, respectively. Additionally, small business lending balances were down $24 million.
Due primarily to $25 million of PPP loan forgiveness, but partially offset by new production.
Public consumer loan balances increased moderately compared to the second quarter due primarily to higher balances in the residential mortgage portfolio.
Moving on to deposits on slide six overall deposit balances were up modestly from the end of the second quarter and we again saw improvement in the composition.
Of our deposit base.
During the quarter non maturity deposits increased by $58 3 million or three 2% driven primarily by increases in small business and commercial balances as our focus in this area continues to pay off.
Cds and brokered deposits decreased 39.
$9 million or two 8% on a combined basis.
Cds in broker deposit balances continue 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 lowered our.
<unk> interest bearing deposits nine basis points during the quarter and we expect to experience continued reduction in deposit costs in the fourth quarter and into next year.
Paired to the first nine months of 2020, we've realized $22 million of deposit interest expense savings to date and expect to realize around.
Around $26 million for the full year based on the current deposit pricing environment.
Turning to slide seven and eight compared to the second quarter. Both reported net interest income and fully taxable equivalent net interest income decreased $700000 or three 2% to 20.
Our coffee and.
$22 3 million respectively.
Excluding the cost associated with the redemption of subordinated debt net interest income increased $100000 to $21 7 million and fully taxable equivalent net interest income increased to $23 1 million.
The average balance of interest, earning assets increased $48 million or one 2% compared to the second quarter with higher average balances of securities being partially offset by lower average balances of loans and other earning assets.
The yield on interest, earning assets declined to 316%.
The changes in the earning asset composition as well as lower loan fees.
Net interest margin decreased 11 basis points from $2, one 1% for the second quarter to 2% for the third quarter and fully taxable equivalent net interest margin decreased 12 basis points from 225.
5% for the second quarter to two 3% for the third quarter.
Fully taxable equivalent net interest margin adjusted for the cost of the subordinated debt was $2 two 1% down four basis points from the prior quarter.
As you can see on slide eight the four basis point decline was driven primarily by lower.
Due to these loan balances and fees, which had a negative impact of 14 basis points. This was partially offset by continued decreases in deposit costs, which provided a benefit of eight basis points. The securities portfolio also added a benefit of three basis points.
Elevated cash balances also continued.
<unk> negatively impact net interest margin currently cash balances have already decreased by about $100 million compared to the end of the third quarter as we put cash to work by funding loans and retiring high cost CD maturities, although not included in the net interest margin roll forward as cash balances.
To note been elevated for some time $100 million of excess cash balances held at the Federal Reserve had a six basis point punitive effect on net interest margin.
Looking ahead to the fourth quarter and into 2022, we expect our yield on interest earning assets to revert closer to what they were in the second quarter.
<unk> and then increase from there as we grow the commercial loan portfolio compared to the end of the second quarter. We have seen loan pipelines increased 65% driven primarily driven by growth in SBA franchise finance and construction opportunities.
Additionally, we continue to see opportunities for further downward.
<unk> positive repricing in future periods over the next 12 months approximately $787 million of Cds are scheduled to mature with a weighted average cost of 122 basis points.
Currently the replacement cost of these deposits is in the range of 36 basis points.
Looking.
The 2022 with our expectations for loan growth and continued downward deposit repricing, we anticipate annual net interest income growth to be between $9 million and $11 million.
Turning to noninterest income on slide nine noninterest income for the quarter was $7 eight.
$8 million up from an adjusted $6 $4 million in the second quarter.
The increase was driven primarily by higher revenues from mortgage banking activities, but was partially offset by slightly lower gain on sale of loans, we sold $22 million of SBA seven guaranteed loans during the quarter.
Which was consistent with the second quarter. However, we experienced lower premiums on those sales.
As I mentioned earlier loan pipelines, especially in our SBA business are strong heading into the end of the year.
Therefore, we expect SBA gain on sale revenue to be up in the fourth quarter, probably in the range of $5 million.
Turning to noninterest expenses as shown on slide 10, the decrease on a linked quarter basis was driven primarily by a decline in consulting and professional fees and loan expenses. The decrease in consulting and professional fees was mainly due to the timing of normal third party loan review work performed on our loan portfolio.
Decrease in loan expenses was due to the reimbursement of costs incurred in prior periods related to nonperforming loans.
Now, let's turn to asset quality on slide 11 credit quality improved during the quarter as nonperforming loans declined by $1 2 million, mainly due to the payoff of our single tenant lease financing.
The <unk> chip, which had previously been classified as non accrual.
Nonperforming loans now represent 27 basis points of total loans down from 31 basis points last quarter and down from 32 basis points in the third quarter of 2020.
Net charge offs were less than $100000 during the quarter.
<unk> and net charge offs to average loans was one basis point, we are proud of the fact that we continue to exhibit high asset quality that is among the that is among the industry's best.
The provision for loan losses in the third quarter was a benefit of $29000 compared to a provision of $21000 in the prior quarter.
<unk> the.
The decrease was due primarily to the $22 million decrease in loan balances as qualitative factors in the allowance model remained consistent with the second quarter and net charge offs were low.
Overall, the ratio of allowance for loan losses to total loans remained unchanged from the prior quarter at 95.
Points, and 96 basis points, excluding PPP loans, which totaled $15 million at quarter end.
With respect.
Spectra capital as shown on slide 12, our overall capital levels improved and remain healthy at both the company and the bank with the strong earnings performance. This.
This quarter, our tangible common equity to tangible assets ratio increased to $8 six 1% up 18 basis points from the second quarter. Additionally, tangible book value per share increased to $37 12.
Up from $35 92 in the second quarter and over 16% higher.
Basis from a year ago.
As David mentioned earlier on the call. Our board of Directors has authorized a new stock repurchase program with an aggregate purchase price of up to $30 million that will run through the end of 2022, we also completed a $60 million offering of 375% fixed.
To floating rate subordinated notes due in 2031 during the quarter, while a portion of the proceeds were used to redeem the $25 million of subordinated debt callable at the end of the quarter. The offer further strengthened regulatory capital and provides greater flexibility to evaluate strategic opportunities or deploy.
Then once towards share repurchases.
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 and if at any time your question has.
Been addressed and you would like to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
Okay.
And the first question will come from John <unk>.
<unk> with Janney. Please go ahead.
Hey, good or good afternoon, guys How're you doing.
Good John how are you.
Good so look.
I've got a few questions I guess first off let me just start on the buyback great to see that announcements.
You know the stock's up some this.
Morning, but obviously stocks still trading below tangible book.
For modeling purposes, how how should we model.
Our aggressive I guess do you guys plan to be with this buyback.
Uh huh.
I think you know obviously, we're a we're in a blackout period.
Right now I think as we you know it was nice to see the price pop up today, but yeah to your point, John we were still below tangible book.
And we have it in place through the end of next year.
So I think you know obviously, we need to weigh strategic opportunities we have in front of us with the buyback.
But I.
We can do both.
So I think it's really a timing issue I think.
Ideally we feel like through the end of 2022, we should be able to to do a I think a pretty good portion if not all of the buyback, but just timing timing may impact that just due to other.
Other strategic opportunities, we have in front of us that we're evaluating.
Okay. Okay. So okay. So it sounds like it'll be more of a I guess just to rephrase more of a drawn out process, it's not something you'd look to.
Do the whole $30 million in the next quarter or two.
Correct.
Yes.
As Ken said, we've got other opportunities or taken a look at it John.
We think theres a position.
To do both.
If for some reason, we get something over the finish line that the market doesn't like.
Then we'll come in with guns blazing on the buyback and.
Take advantage of it so.
But we have definitely enough capital and with the increase in.
Earnings over next year.
We're in a position we can feasibly do both very easily.
Okay, and Ken switching gears on expenses they were you know.
Down linked quarter, but it looked like there was some noise I guess you said some oh.
While REO sale gain and then it looks like you had the reimbursement of some expenses. So how should we think about operating expenses going forward.
Yeah. They were I mean, obviously, we're pleased with how they came in but there are some moving parts in there that were been a benefit of timing and.
Just.
Other offsets too too expensive.
I think you know if we can.
Go back and look at we're probably close to a call. It a 15 to $15 5 million run rate as we get it.
For the fourth quarter, that's probably a good estimate in that line and then kind of looking forward.
We've continued to build out our SBA platform in terms of head count some of that was delayed over the course of the year due to the timing of originations, but we've continued to add there and obviously have focused around that.
The banks so.
Take a full years run rate of head count.
<unk> two into next year's expenses.
We're probably closer to.
15, five to 16 looking forward to the next next year.
Okay.
Okay. Thanks, Ken and it maybe just one more question can you I guess.
And near term drivers the increase in spread income of 9% to $11 billion. Just curious does that off of 'twenty off of this year does that is that with or without the 800000 of sub debt expense in spread income.
That would be without.
Okay. Okay.
The reported number.
Yeah.
Okay makes sense, thanks, guys. Thanks.
Thanks, John.
The next question will come from Michael Perito with <unk> W. Please go ahead.
Hey, good afternoon guys.
Hey, Mike.
I wanted to start on the Apple Pie partnership.
David I was wondering if you could maybe just give us a little bit more color.
On on kind of how those loans are sourced and then what the nature of the partnership is are they originating loans and you guys are are holding them.
On balance sheet or are you guys involved in the underwriting is there something more to that.
Beyond that within the partnership just love a little bit more color. There if you don't mind.
Sure Michael partnership its actually almost identical to what we were doing with provide healthcare lender flashman endeavor over the last three or four years.
Apple pay has been around about eight to 10 years I think in existence has originated over $1 billion worth.
Franchise loan and they have long term relationships with franchisees all over the country continue to increase.
Like the banking world as a whole were a little soft.
During the Covid crisis, because the franchise or is it kind of pull in the reins to help existing franchisees instead of expanding so theyre at a nice growth curve themselves here in the second half of the year, which is great timing for us.
We have created a credit box like we did with provide.
They.
Sorts of loans that fit that credit box and I can tell you from our underwriters and internal folks there is static with what we've seen.
Today, and I think out of all the loans, we process, we even we only had a discussion about maybe one or two.
As far as some of the information in the file so it comes to US We fund.
Stays on our books, we're doing full servicing they do the origination.
But we take.
Take it from there so.
<unk> been a great program.
We are excited about the kick off and it looks like it's going to be very strong for 2022.
And is there any opportunity.
With these.
These customers too.
Pick up funding or anything else like along those lines that over time or is it really just purely.
A lending relationship.
Partnership.
No theyre, taking a look at the funding side and I misspoke there Michael.
They are doing the servicing.
We purchased the loan, but we have talked to them about getting the deposit opportunity when these folks as well.
And one of the nice things about it they've been in the industry long enough a lot of these individuals are not brand new franchisees, there's a guy coming back per store number.
Store number four there.
<unk> multi franchise.
Franchiser franchisees so it's.
It's a good strong credits the Trump businesses kind of the opposite of our STL program. Historically, we've financed the facility and not the operator.
It's Ben.
And interesting time for us to look at the credits but.
Three is definitely with this program, where it is not just the real estate that.
Hopefully working on a program get that deposit relationship as well.
And is this.
Kind of.
An indicator of the type of things that you guys are looking at that are in the pipeline or are they mostly <unk>.
Partnerships that would fall into.
Yes. They are in this type of arrangement or is there more diversity and some of the incremental things that you guys are alluding to that that could come in the near term.
A lot of diversity the other.
Partnership we announced here during the third quarter with Penn Flea, that's just a technology, which actually complement our small business products we have.
So we're it's a lending.
<unk>, we have two or three fintech firms out here, where it's a deposit opportunity. So we're.
We're looking at all facets and we obviously have other fintech companies that have technologies that just to make our existing systems work better. So we've got it.
I think I said.
Probably one or two calls that we've got about 10 different services that we are actively looking at and talking to and should have hopefully several more announcements here in the fourth quarter and early next year.
And what are the the rates kind of on these.
Apple pie loans roughly.
Apple Pie and it's a little over 5% and the term is a little lower than the healthcare loans, where we're averaging I think about a seven year term on it versus 10, so got.
Got it a nice bump up in yield as well as the shorter term.
Got it helpful.
And I wanted to clarify on the topline guidance Ken.
9% to $11 million of growth in 2022.
Or are we basing that off kind of like an annualized year to date run rates or something like in the high $90 million range is that is that the right way.
Way to think about it or is there a different.
Just clarify that at all that's exactly it Mike on an <unk>.
FTE basis Youre spot on.
Okay.
And then just lastly, I was wondering if you guys could just spend a minute on the dynamics within the SBA.
In the quarter.
<unk> it sounds like.
Was pipeline pushed out.
Was it really just the margin contracted more than you expected, but now the pipeline is larger than you expected for the fourth quarter, just curious about the dynamics there with the revenue pickup in the fourth quarter and then.
Part B of that I'm, just wondering if you can provide a little bit more color behind the scenes.
<unk> is about.
The pipeline for next year the revenue target.
Is that the.
Our current team is that continue to add more salespeople just would love a little bit more insights. There if you guys don't mind.
Yes, a quick one for you at the end of the third quarter.
During the month of September the SBA.
<unk> used colson is their transfer agent I think from the beginning of time, they switched over to a new firm called guide.
That created a lot of slowdown and complications with the carats payments that were being made by the government as well as.
Sales to the secondary market so part of the approach here.
Quarter and that bump up as stuff that we just couldnt get through the pipeline.
Obviously September 30th physical year in which is just massive volume for them to begin with it was also at the end of the 95% insurance writers so.
SBA was flooded ticked up pretty poor time to change to transfer.
Fourth neogen in hindsight, but so a little bit in the fourth quarter bump up as carryover going into.
2022, we just had a.
Meaning with the SBA team of plotting out with financing their budget.
Hope that another BDO or two.
But we've got a good.
For <unk>, we are definitely adding some more back office staff.
To support that volume growth, but.
We're pretty comfortable.
<unk> is a 48 hours ago that the $2 15 is a realistic number and.
Good opportunity for us so.
Obviously SBA has been up PPP is getting.
Out of the way and kind of getting cleaned up for everybody so to make it a little more competitive.
We think we've got a great team great program and look forward to really growing significantly again next year.
Awesome. Thank you guys for the color and taking my questions I appreciate it.
Appreciate it thanks, Mike.
The next question will come from Brent <unk> with hub group. Please go ahead.
Hey, good afternoon.
Hey, Brett.
Good I wanted to first ask when we think about the loan portfolio growth in the fourth quarter.
Looking at some of the individual.
Vigils segments that have had pay offs I guess I'm curious does do you can do you expect that some of the.
The long items like health care, maybe you continue to have some some atrophy due to rate competition and as we think about fourth quarter in 2022.
I mean, it looks like you could be a double digit.
Core grower.
As the PPP whines down here what are your thoughts on.
Net origination versus payoffs that you might might be looking at.
Yeah, I think we feel pretty good about pipelines going into the.
Into the fourth quarter here.
I do obviously health care finance is it's an asset class, we like and we love to find.
A new team to work with in that area and grow that portfolio, but there may be some continued decline in the short run there, but obviously.
The Apple pie growth.
Forecasted for the year, which is right on track.
That remains right on track remains pretty pretty robust.
But we're also seeing in areas.
Single tenant for example.
Paydowns prepayment activity has slowed a bit.
Right there.
And what's kind of the bump up in the longer rates on the curve our pricing is more competitive than it was earlier in the year when the 10 year was at a.
At a bottom.
So I think kind of across the board in a handful of areas.
And what we retain on the SBA as well.
Our origination our SBA pipeline is strong.
We're still probably selling some of that volume at the 90% guarantee.
So we're not retaining as much as we would kind of in a normalized environment, but I think kind of across the board as we look at loan growth for the for the second quarter excuse me for the fourth quarter I think we feel.
Feel good about it and a handful in several different areas about just overall net growth.
The only area that is going to be a little software. It's here in the fourth quarter.
Our teams feel like they've been running in place all year, we've got a couple of very large.
Ni opportunities or C&I loans.
And on the books today.
With the sale of the companies here in the fourth quarter.
So that could have some impact on the C&I business.
<unk> said everything else looks really stable and growing.
We're pretty pumped up obviously, the Apple pie, adding $100 million there were more than compensated, particularly with the yield on it any losses.
We would have from healthcare so we're pretty excited about fourth quarter numbers.
Okay.
And then the other thing I was curious about was just thinking about the deposits you've obviously manage the CD costs down nicely.
Most of the industry is just have so much liquidity kind of come at them from a deposit perspective.
You guys deposits have been fairly fairly stable can you talk maybe about the management of the deposit base and then you know I think people are starting to think about rates and don't know if its a 'twenty late 'twenty two or 'twenty three.
Possibility, but as we think about the eventuality of higher rates how are you.
For your.
Thinking about managing the deposit costs when we go to the other side of calling on rates.
Yes, I mean, obviously, we're like many other banks and the many other banks in the industry that have suffered from excess liquidity on the balance sheet, we alluded to it I.
<unk> had it in my comments on the margin.
But we also had the position of.
CD maturities.
Coming off and really I mean, we've had the growth that we've seen the growth in money markets and checking accounts, especially in the small businesses, we've thrown a lot of.
I alluded to in effort in marketing behind growing those balances.
In terms of deposit growth overall, we had the luxury of having those dollars come in the door that really replace the maturities on the CD side.
And I think as we kind of look forward into 'twenty, two as well we continue to see that happen eventually.
Time Cds cant.
There is essentially gets to a point, where the maturity is kind of the pace of maturities will go down but just looking into 2022, we just see continued again I'll call. It just continued shift in the composition of deposits from.
Cds to money market checking.
King et cetera, and I think when we think about pricing and what may happen in different rate environments.
The last time the rate environment was.
We were in an up rate environment betas on Cds were at 100%.
Whereas in the other non maturity deposits.
Non maturity products, they were lower than that in the money market space to they were.
We are closer to $50 to 60% than the 100% on Cds, So I think going into an up rate.
Operating environment when that occurs I think we feel much much better about the composition of the deposit.
Base.
Like I said, we're not we're not done we continue to foresee this continual shift well into 'twenty two and beyond.
One of the things we're doing Brad obviously.
Somewhere in 2000.
Probably going to have to do something on rate.
You made a comment that everybody is flushed with cash so hopefully.
As the rates start to climb it won't be the feeding frenzy, we had the last time in <unk>, where as a bad move 25 institutions, we're moving 35 to get the money as Ken said, but one of the other things we're doing right now we can lockups.
Commercial CD opportunities or insurance companies et cetera, and that 345 year.
Our range that are under 100 basis points. So we are trying we adjusted pricing a little bit to pick up some stuff little longer in term.
Obviously, a little more costly, but still in the big scheme of things vary.
Funny or that next three to five year window.
Okay.
Maybe just one last one if I could just around capital you could obviously due to the entire $30 million.
It wouldn't really you still not have any issues with capital.
I'm curious some of these other investments that you are thinking about or partnerships are they going to require equity.
And then ethanol to be deployed.
With these firms or how should we be thinking about some of these additional.
Partnerships that you're considering.
Yeah.
Acquisition opportunities, obviously thats going to involve some dollars I will tell you in a couple of the.
Fintech companies that we're working with them.
<unk>, we are making.
Hopefully in some cases capital investments in that company.
As a percentage a lot of them are in our series B series C round et cetera. There is an opportunity to participate not only are we signing on as customers and providing.
<unk> services to each other but.
And it will take it on.
An equity stake in the companies if possible so little bit its not massive dollars, we're not playing in Silicon Valley Bank here, but it's a good opportunity for us to kind of get on the ground floor with some really really strong opportunities at least from my background in 40 years in technology. There is some neat things.
Happening out here that I think could be in the long term very beneficial to us but.
As Ken said, we're continuing to look at opportunities for acquisition.
That obviously.
Hit the capital pretty heavily but.
On a cash basis pretty heavily back capital.
But we've generated.
<unk>.
I guess, we're in a great position right now we're closing in on 9% TCE, that's probably the highest we've been since the very earliest days of the bank. So we've got a lot of flexibility in that.
Lot of opportunity here.
Okay, Great appreciate all the color.
Thanks, Brett.
The next question will come from George Sutton with Craig Hallum. Please go ahead.
Thank you I wanted to address David if we could the commercial pipeline in a little more detail how much of that is market.
Dynamic because I haven't heard much of increased commercial demand out there.
So I'm wondering market versus your execution and just the strength of your go to market, that's really creating these opportunities.
We're kind of in an enviable position George I think.
Last expansion, we had of the Fedex hub here in Indianapolis, we are now actually larger than the Homebase in Memphis, Tennessee.
There are warehouses popping up there is this little firm called Amazon is trying to suck up every square inch of space in and around Indianapolis for distributions.
It's just that we're in the right place right time with a great team.
Some folks that we've worked with over the years that are just having a tremendous opportunity right now I think.
Close to.
Seven 8 million square feet of warehouse space.
Up in the next 12 to 14 months here in the Indianapolis marketplace. We.
Haven't ventured a little bit outside of the Indianapolis marketplace on commercial real estate with some of these firms obviously amazon's throwing all it takes into one basket here in Indianapolis.
So it's been a nice opportunity for us to take some long term connections.
We have taken advantage of the market.
Got you.
Helpful perspective, actually Ironically I was in Indianapolis last week, and I saw that Amazon operation that Youre talking about it is quite impressive so I'm sorry, Fedex operations, yeah, So relative to the series B deal B and C deals that you mentioned you work contemplate.
<unk> is this incremental to the.
Investments you've made through private equity funds, you're referring to additional opportunities just to be clear some of them were some of them. We're still working with the private equity funds and some were going direct into the company's ourselves in fact, we're working on what it would be call. It yesterday.
Right.
First IV venture Saab or something of that nature that we.
We're not going to go crazy with it.
There are just a lot of really good companies coming up out here right now an opportunity to get in on the ground floor.
We're going to take advantage of that.
Okay, and then finally just sorry.
I appreciate the buyback that.
That you are looking at that is really a result of the valuation opportunity that you see that is in no way shape or form related to any diminishment of M&A opportunities that you are considering or could pursue is that is that a reasonable.
You hit the nail on the head George that's exactly right.
Okay actually right I've always been grow for buybacks. So we're.
Still still looking at the acquisition market is extremely heavily.
Perfect. Thanks, guys I appreciate.
Appreciate it thank you thanks George.
Again.
If you have a question. Please press Star then one our next question will come from Nathan race with Piper Sandler. Please go ahead.
Yes, hi, guys.
Okay.
Going back to the acquisition discussion, obviously with the stocks still trading below tangible book, it's difficult to use your currency.
I would imagine so.
Within that context, how should we be thinking about you know potential earn back periods on tangible.
Solution and so forth.
You guys consider complete.
Acquisitions, and so forth and that just partnerships per se.
The ones we're looking.
At the current time need our cash deals that is not an equity situations. So.
Really only dilution would be if there was any goodwill in the deal.
But it's coming out of cash we're obviously trading at I guess, we're closer to I don't know where were exactly.
David yesterday, where 90% of book.
That's still not good currency to buy anything with so we're looking at cash opportunities.
And what's the earn back period on those potential deals be south of three years or how are you guys going to think about just the tangible.
Book value dilution associated with.
The acquisitions.
Near term yes.
We're using the three year is kind of the.
Play a month or two shorter a month or two longer.
It doesn't really excited but yeah, we're focusing on a three year return.
Okay, Great and then maybe changing gears and thinking about.
Balance sheet size.
But you know theres been some quarterly fluctuations just between the average and the period balances in the securities portfolio for the last couple of quarters, how should we be thinking about the size of the securities book as you guys have a pretty strong loan pipeline.
Sticking with Apple pie coming on board.
Does the securities book kind of hold steady here over the next few quarters kind or does it.
We can also support the expanding outlook.
Outlook.
Jim.
Yes, I think probably the way to look at that as a segue kind of a secondary support on that obviously, we want to take our cash and fund loans first.
And as we've said on numerous times I think we feel really.
Really great about the pipelines, we have in front of us of course, sometimes you can't always control timing.
But I would say that on average that you would probably expect the securities balance to drift down.
Over from where it's at today, we did if you remember earlier in the year in June.
Really really we did take a lot of our cash balances were well north of $500 million in.
We put a lot of cash into the securities portfolio than with the expectation that.
We wouldn't need to put much in there and just let cash balances.
Loan growth.
So I wouldn't expect I.
That cash or securities balances to go up from here and would expect them to drift down.
Drift down over the next 12 months.
But as I said, depending on loan loan timing, we may put some money away into the securities portfolio and sometimes we we buy mortgage backs.
<unk> purposes.
So that's really probably all of the activity you would see in that in that area over the next six months minimum yeah. One other thing thats happening in the marketplace to Nathan as Ken said in his comments today, we picked up three.
<unk> three point.
This past quarter on the securities.
For sea Oleo, a lot of it is mortgage backed product that we've had on the books. Some of them are quite some time and obviously as the refis slowdown and repayments on those things slowdown that's going on.
One boost the yield on the securities portfolio and also a slowdown.
Payback so.
<unk>.
It won't run off quite as fast as it has been in particularly if there is real solid indication that kind of bump up rates a little bit Refis I think that are down over 60.
62% on a year over year basis, so that has an impact on our mortgage side.
It kind of hurts us, but on the other side it helps us because it really slowed.
Slow down some of the payback on those securities and the premiums that we have to write down so double edge sword, but it should be pretty stable for the balance of the year.
'twenty two.
Okay. That's helpful. I appreciate all the color. Thank you guys.
Yeah.
Thank.
Yes.
This concludes our question and answer session I would like to turn the conference back over to David Becker for any closing remarks. Please go ahead Sir.
Thank you Chuck and I would like to thank all of you for joining us today.
Had a tremendous quarter, we're happy to share with you. We hope you have a great day and continued success. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yeah.