Q2 2019 Earnings Call
Good day, everyone and welcome to the first Internet Bancorp second quarter 2019 financial results Conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After todays presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then too.
Please also note that todays event is being recorded I would now like to turn the conference over to Larry Clark from financial profiles Bank. Please go ahead Mr. Clark.
Joining us today for the management team, our chairman President and CEO David Becker.
And executive Vice President and CFO , Ken Lubbock.
David Campbell discuss the second quarter results and then we'll open up the call for your questions.
Before we begin I'd like to remind you that this conference call contains forward looking statements with respect to the future performance and financial condition a person in a bank corp that involves 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 actually see filings, which are available on the company's website.
The company disclaims any obligation to update any forward looking statements made during the call.
Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute the most directly comparable GAAP measures.
The press release available on the website contains the financial and other quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures.
This time I'd like to turn the call over to David.
Thank you Larry good afternoon, everyone and thank you for joining us today.
We're excited about the earning results for the quarter, which were driven by solid top line revenue growth strong production in our specialty lending areas.
Continued excellent excellent credit quality and well managed expenses.
We're also pleased with our ongoing balance sheet repositioning efforts as we were able to effectively manage our capital and significant loan sale activity during the quarter.
For a quick summary of our results we posted second quarter net income of 6.1 million and diluted earnings per share of 60 cents.
Oh, seven and a half a percent and 7.1% from the first quarter respectively.
The primary driver of our financial performance was revenue growth.
Which increased again this quarter and what supported by strong performance from our direct to consumer mortgage business, which had its best quarter and more than two years.
During the quarter, we sold $148.4 million of loans and 30.6 million of lower yielding securities.
Does that help.
Sales are part of our balance sheet management strategy, which involves repositioning portions of our loan and security portfolios in order to improve the mix of earning assets.
We are particularly proud of the fact that we were able to successfully execute on this strategy without having to pull back on our origination activity, enabling us to capitalize on the opportunities our lending team path, while also preserving capital in the current interest rate environment.
Total loan commitments during the quarter were 267 million up 19% from the first quarter as we saw increased activity across virtually all lines of business.
With commercial real estate and healthcare finance, leading the way.
The interest rate environment remains challenging that's a rapid decline in short term rates impacted asset yield while the decline in longer term rates did not have a significant impact on loan portfolio yields during the second quarter, new origination yields in certain lines of business may drift lower said long term rates mean, what remained low for an extended period of time.
To mitigate the risk of declining interest rates, we have implemented price floors, and most of our commercial lending area.
The upside of declining interest rates is that we have been able to aggressively lower CD rates throughout the year.
Our new production rates are still above the cost of maturing Cds, which combined with the strong production volumes, we experienced in the quarter. The Perth put further pressure on our net interest margin.
That said our residential mortgage business turned in a strong performance has originated origination activity picked up due to continued decline in mortgage rates during the quarter. The mortgage banking revenue was up significantly from the linked quarter, providing a natural hedge and the down rate environment. That's often the downward pressure on net interest income.
As we position for the future.
Further diversifying our revenue stream.
And expanding our asset generation channel in a capital efficient manner.
Remains a top priority.
Our expansion into small business lending and deposit services has been a key component of that strategy that complements our existing business line.
There are opportunities on both sides of the balance sheet.
On the asset side to the production of higher yielding loans for our portfolio, while generating incremental gain on sale revenue and on the liability side with small business and commercial deposit.
Gathering initiatives.
During the quarter, we continue to advance our small business banking initiative as our pipeline of new lending opportunities has grown significantly the combined efforts of the SP 18, we have put together and our cnine lenders in Indianapolis in Phoenix.
We also began to see tangible results on the deposit side as business money market account.
Provided over $34 million and new balances during the quarter.
We are excited about the opportunity small business banking provides and we are working diligently towards building a full service nationwide platform.
Related to credit overall, our asset quality metrics continue to remain among the best in the industry as our perform nonperforming ratios were well below those of comparable banks.
As I've stated before this is driven not only by our strong credit culture and disciplined approach to underwriting, but also our focus on certain specialty lending line that include lower risk asset classes, such as our public finance and our single tenant lease financing business.
With a lower percentage of risk weighted assets could total assets and strong credit metrics. We believe we can leverage our capital further another league than other comparably sized institutions.
We also believe that this will position us well relative to our peers in the event the economy softened.
Before I turn the call over to Ken to provide additional details on our financial performance.
I'd like to state that I'm very proud of our team that we have assembled and I. Thank them for their dedication to helping us generate strong results in what was a very active quarter.
We are proud of the strong culture, we havent first internet and the high level of engagement from our team members remain the key to our success.
As always we continue to further our mission by serving customers in the digital economy, providing them with customer centric digital banking solutions, while maintaining the personal touch of relationship banking.
Okay.
Thanks, David and thank you everyone for joining us today.
Given the continued challenging interest rate environment, we were very happy with our results for the quarter, we were especially pleased with the net income and EPS growth, while demonstrating the ability to manage loan growth through the significant loan sale activity, we conducted during the quarter.
While total asset growth appeared strong for the quarter I will point out the cash balances at quarter end were inflated as two of our loan sales closed during the last week of the quarter. Additionally, the securities that we sold also quotes close during the last week or.
We expect to deploy the excess liquidity, resulting from the loan sales throughout July and August to fund new loan originations as well as fund runoff of maturing Cds. The proceeds from the security sale has been fully deployed into higher yielding investments.
Overall total loans outstanding at the end of the second quarter were 2.9 billion, an increase of $21 million or 0.7% from the first quarter in terms of portfolio composition total commercial loans were up 86.3 million or 4.1% compared to the linked quarter and driven by $167 million funded originations, primarily due to solid production and single tenant lease financing and healthcare finance.
Total consumer loans were down $78.2 million or 10.9% compared to the first quarter due primarily to the sales of portfolio residential mortgages, however, trailers and recreational vehicles originations were up almost 18% over the prior quarter with the balance in these portfolios up 3.7%.
As David noted earlier, we sold $148.4 million of loans during the quarter in connection with our balance sheet management strategy.
Let me take a few moments here to provide more details on these transactions.
First we sold $95 million of portfolio residential mortgages in two separate transactions, which included a mix of jumbo fixed rate and seasoned lower yielding adjustable rate mortgages, recognizing a combined loss of $759000. As these loans at a weighted average yield of 3.86%. These transactions not only helped to preserve capital, but also improved earning asset yields are redeploying the proceeds into higher yielding new loan originations.
Second we executed the sale of $30.9 million of single tenant lease financing loans at a price of one or two generating a gain of $684000 to help offset the loss from the mortgage sale.
And third we sold $22.4 million of public finance loans at essentially book value.
These loans were originated back in 2017 and had a fully taxable equivalent yield of 3.21% and effectively funded $24 million of new originations during the quarter with a fully taxable equivalent yield of approximately 4.5%.
Related to the Securities. We sold this quarter those consisted of 30.6 million of lower yielding seized into mortgage backed and U.S. government agency securities with a weighted average yield of 1.88% we recognized a loss of approximately $500000 on this transaction, but have reinvested the proceeds in new securities with yields north of 3%.
We also took advantage of an opportunity to sell our holdings of visa class B shares, which generated a gain of $500000 and offset the loss in the securities transaction.
When you combine the gains and losses from all these balance sheet management activities. The net result was a nominal gain of $17000. As a result, the 60 cents of EPS, we reported for the quarter was a clean operating number.
Going forward, we expect to continue pursuing loan sale opportunities in order to manage balance sheet growth and capital while also helping to improve net interest margin and profitability.
Moving onto the composition funding.
During the quarter the cost of funds related to interest bearing deposits increased 10 basis points to 2.39%.
While average interest bearing deposit balances increased $150.3 million or 5.5% and period end total deposit balances increased $195.2 million or 6.9% compared to the first quarter.
Rates paid on new CD production declined compared to the first quarter dropping across the curve. However, despite the reduction in pricing our overall cost of deposits increased as rates paid on new Cds came on at a weighted average cost of 2.74% as compared to maturing Cds that rolled off at a weighted average cost of 2.22% difference of 52 basis points.
To put this in perspective, though in the second quarter of 2018 when rates across the curve rising and deposit competition was intense. This difference was 109 basis points and last quarter. It was 88 basis points.
Subsequent to quarter end, we have seen new weighted average production rates come down almost another 20 basis points to 2.55%, while the cost of scheduled maturities for the third quarter's 2.35%.
Over the next 12 months, we have approximately $1 billion of Cds maturing at a weighted average cost of 2.72%.
The key takeaway from this is that for the first time in many quarters, we feel pretty good about where deposit pricing is going and we are rapidly approaching the inflection point, where new production rates are below rates on maturities.
Turning to net interest margin, our NIM declined to 13 basis points from the first quarter on both a reported and a fully taxable equivalent basis. The fully taxable equivalent net interest margin came in at 1.91% well below where we were estimating for the quarter. This was due primarily to two factors.
First the pace of decline in three month LIBOR during the quarter, which outpaced the forward curve projections had a greater than expected impact on the swaps used to probably hedge public finance loans and longer term securities.
Second despite our constant production in CD rates deposit growth was strong during the quarter, which had a volume impact on net interest margin.
And Additionally, the issuance of 30 million $37 million of subordinated debt in June had a one basis point negative impact on net interest margin.
With regard to our outlook on net interest margin.
For the third quarter, the two items, we see driving margin lower our one a full quarters impact of the new subordinated debt issuance and to the expected continued decline in three month LIBOR. However, pursuant to my earlier comments on deposit pricing, we are estimating very little impact on margin from deposit costs. Additionally, we expect asset yield excluding the impact of LIBOR on the interest rate swaps to remain relatively flat looking beyond the third quarter. We are forecasting modest net interest margin expansion in the fourth quarter.
As we did in the second quarter, we will continue to pursue strategies to improve net interest margin, including further loan sales discipline loan pricing.
Additional restructuring of securities in wholesale borrowings port borrowing portfolios, if opportunities arise and utilizing excess liquidity to fund a portion of CD runoff.
Now turning to asset quality as David already touched upon credit quality was again solid as our ratios of nonperforming assets and loans remain among the best in the industry. We did see an increase in both delinquencies and non performing loans, which was due primarily to a commercial relationship consisting of two loans a C. III loan and in owner occupied commercial real estate loan that was placed on non accrual status during the quarter. As a result, the ratio of nonperforming loans to total loans increased to 19 basis points from 12 basis points in the first quarter.
We also recorded a specific reserve of $600000 related to this relationship which negatively impacted earnings per share by six cents.
As a result of the provision for loan losses was up slightly from $1.3 million in the first quarter to $1.4 million in the second quarter, partially offset by the impact of loan sales during the quarter.
Outside of this commercial relationship credit results were consistent with our historical performance. We continued to have minimal net charge offs, which were $254000 during the quarter or four basis points of average loans on an annualized basis and were generally confined to the consumer portfolios.
With respect to capital our capital levels remain sound with total regulatory capital enhanced by the new subordinated debt issuance, which allows us to strengthen capital levels at the bank level without diluting shareholders.
While tangible common equity to tangible assets declined to 7.37% some of the decline can be attributable to the higher cash balances at quarter end that I mentioned earlier in my comments.
As we deploy this excess liquidity and continue to pursue loan sale opportunities to manage balance sheet growth. Our goal is to keep the tangible common equity ratio flat to modestly up through the end of the year.
And finally, we continued to repurchase shares under our stock repurchase program during the quarter, we repurchased 112129 common shares at an average price of $21.28 per share.
Subsequent to quarter end, we purchased another 37862 common shares at an average price of $20.75 per share.
And since inception of the program, we have repurchased 246174 shares of stock at an average price of $20.86 per share, which represents approximately 2.4% of common shares outstanding at the end of the fourth quarter of 2018, when we initiated the program. The combination of solid earnings and share repurchases allowed us to increase tangible book value per share to $29.10.
We remain committed to producing consistent growth in both EPS and tangible book value per share.
With that I will turn it back over to the operator, so we can take your questions.
We will now begin the question.
Answer session.
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To assemble our roster.
The first question will come from Andrew.
Hello, everyone how are you.
No good Andrew how are you good thanks.
Just wanted to touch on the.
Share buybacks here.
Just kind of curious like why not be a little bit more aggressive with with these what's the what's the governor on that.
Well I think I mean, obviously, where you were tangible common equity is today as you know.
Call it 7.4%.
For us we need to be conscious of not really allow us that that ratio to go too low.
Obviously using loan sales and other means to manage balance sheet growth growth helps us.
I will participate in the share repurchase plan, but I think I think for US. It's just the balancing act between.
Obviously, we're very conscious of not running that level too low the Tc ratio too low.
Given where the stock price is trading today.
So I mean, it's again I think maybe perhaps the the ability to drive perhaps larger loan growth may influence some of that repurchase activity, but again its for us its just the balancing act.
And being conscious of where the TC ratio is at any given time.
Okay.
Are there opportunities to.
Maybe step on the accelerator for some of the loan sales and then use those proceeds to.
To buy back stock or is the plan still to this.
Some of the lower yielding portfolios and recycle that into into new higher yielding production.
Well I think I mean, I think our results on the loan sale side. This quarter were pretty pretty aggressive I mean, I think we were very pleased with the volume of loans, we were able to sell.
I think if it were up to some of US here, we love to be able to sell $150 million of once a quarter.
But but having all all of that come together in one particular quarter is tricky to manage and our teams internally here, we're extremely hard to get that done I mean like I said in the prepared comments, we're still actively pursuing loan sale opportunities across all the various areas.
Within the bank and our objective is to get as many of those deals done as we can.
In the third quarter and the fourth quarter.
Gotcha Okay.
And then just one question on just on the on the pace of the asset growth I mean, you referenced.
Some of the cash coming in late in the quarter, but.
Also just the large CD growth even with the decline in you guys offered rates.
What's a what drove that does that deposit growth in the quarter for you. If you can if you don't need to be offering rates that high.
With loan deposit ratio down a 95% why not lower them further in trying to slow that deposit growth.
We are Andrew in fact, Weve lowered rates on a weekly basis I think for seven weeks in a row here.
We don't want to get a 110% out of the market, but we drop them again as of today.
I would go back to the beginning of the year, particularly on the commercial.
Side of the deposit base some of the CD rates.
All of the rates across the border down at least 50% from what they were at the beginning of the year some of the commercial or over 100 or 50 basis points to have some of the commercial or over 100 basis points down from rates were offering at the beginning of the year. So.
We're moving it down.
What's happening I guess everybody's trying to second guess, what the fed is going to do next week.
We turned away.
Our $75 million deposit opportunity. This week as we just don't need the funds. So we're cautious we're watching large dollar items coming in.
We're just kind of turn them away, we can't close the virtual north because they are very hard to reopen but we are moving that down five.
Six seven basis points a week.
Okay that clarity is very helpful. Thanks, so much ill step back.
Thanks, Andrew Thanks Andr.
The next question will come from Michael Perito of KBW.
Hi, good afternoon guys.
Hey, Michael.
Thanks for taking my questions I wanted to ask a kind of a strategic question first just as we look at the margin down here, south or two and it sounds like I guess first just to clarify the.
So it sounds like there is a plan for a little bit more compression next quarter and then inflection some expansion in the fourth quarter, just what's the interest rate assumptions behind that.
You mean, what what.
In terms of are we looking at the forward curve are we looking at static rates is that your question.
Type of rate cuts or are you assuming in fed funds, if any and anything else that's driving those assumptions well we use we use the forward the implied forward rates.
That have some but wouldn't that have fed rate cuts kind of baked into them on the short end of the curve I mean, obviously, it's not just.
Fed rate cuts that drive everything you'd have LIBOR rates you have swap rates you have longer term treasury rate.
But its essentially the forward curve.
The implied forward rates that we have in our model.
Okay, and then just as we think about kind of how you're managing the business here I mean, it would seem like I guess, where do you think and I are we really have been in kind of bizarre environment for a while it's flattish moving up now it's moving down but where do you think you can get this NIM to realistically if and I guess.
Reasoning behind the question is I mean, it just doesn't seem like a south to to NIM will really no matter what the expense infrastructure is really support kind of appear like profitability profile and I'm. Just curious how you guys are thinking about that challenging and where do you think you can move that name with your mix of business and what you're doing now to get to a point, where we could see profitability maybe start to close the gap towards peers.
As we I think as we look forward I mean as I mentioned, we're going to have a couple of factors here.
That are going to put pressure on NIM here in the third quarter.
But as I mentioned I think the good thing from our perspective and what we're excited about is it's no longer being driven by.
A rapid pace and deposit costs were seeing deposit cost come down and we're going to start to see.
New deposit cost at lower levels than.
Deposit costs rolling off the books.
So I think we'll probably as we get into the fourth quarter and into 2020.
We're probably not going to see net interest margin John .
Maybe 10 to 15 basis points, a quarter, but I think we'll probably start to see it climb call. It five to seven a quarter.
And that just in a lot of that depends on the shape of the yield curve as well, we're not trying to predict that by any means if we get back to a normalized rate environment.
Where there is some some spread between long term rates in short term rates. That's obviously, it's great for the industry and its certainly great for us and that would help us accelerate a NIM.
North of 2% and growing beyond that.
Historically in the 20 year history of the bank, Mike We brought about 75 basis points below the NIM.
Of our peers from beginning of time.
Due to the craziness in the market starting kind of September of last year running through March.
Have a race to the top on CD rates and money market rates et cetera.
Yes.
It's probably the worst while it is by far the worst compression we've ever seen as Ken said were.
We've got almost a billion and.
Deposits repricing over the next 12 months, we're seeing significant drops on a daily basis on that.
Side of the balance sheet, we have floors installed in our.
Loan side that are keeping our yields up and not affecting production and actually coming on at higher yields on whats rolling off.
So we think we'll we'll get back above that 2% level in the not too distant future.
We jump back up to the 250 to 75, we've run historically, we need to get Slocum, the yield curve to get back to that level, but we should see some nice changes over the next three to six months and.
Definitely into the.
Early part of 2020.
Obviously, the higher yield activity in the us FDA markets and potential earnings there.
Create other opportunities for us to Bob's the bottom line mortgage just our second strongest we've discussed earlier, that's kind of our natural hedge as the markets fall apart.
If you go back to our balance sheet. There is a lot of banks during earnings calls that have.
Predicated and set the market up for further reduction in them.
During the third and fourth quarter as soon as the fed or the fed does lower rates.
A lot of our portfolio is static.
So it's not going to have a tremendous impact on our loan yields and we'll have hopefully a very strong impact on our cost of funds we've seen.
The markets and allies, and big banks of the world pulling back on money market rates as well as CD rates and I'm sure when they.
That drops if they dropped 20 550 basis points next week.
We'll see pretty much almost overnight activity on those rates coming down further so.
Everything poised in the marketplace. Today says, we're going to have a strong second half of the year.
Our progress I guess kind of depending what the fed does.
Helpful. Thank you and then.
How should we think about net loan growth because you know to your earlier comments come into to the last question just.
Do the same level of loan sales would be great, but challenging so I guess what are a good baseline assumptions for loan sales and kind of net loan growth moving forward.
Our our fair to model on.
You know I don't I don't see a significant amount of loan growth.
I don't know, perhaps maybe 5%.
Over the course of over the course of the year I mean, our forecast we are assuming.
A certain level of loan sales.
Probably.
Trying to be conservative here less than a 150 million quarter, probably closer to the 75 million a quarter is what we have in our forecast, but I think we're.
Like I said earlier, if we can exceed those numbers that would be fantastic.
But you know were.
Our origination teams our commercial teams public finance health care.
They are out there engage there's still originating we want them out there.
But would love to be able to fund the majority of new production through through loan sales.
So mid single digit net loan growth with about half the loan sale activity is a good baseline and obviously that could alter from from quarter to quarter, depending on the market appetite for purchases and production levels.
Yes, Thats a good way to look at it.
And then just lastly, sorry, if I missed it but can you just talk about what your expense expectations are for for the back half of the year.
You know I think we obviously, we saw expenses come off a bit here.
In the second quarter and a lot of that was driven by higher incentive compensation paid to the mortgage originators, obviously in conjunction with.
With.
Mike with increased origination activity.
You know I think from the court the rest of the year probably.
Probably in the same kind of range again, I think right now is if rates kind of stay where they are in mortgage rates stay where they are.
You know I think we should have a good back half of the year on the mortgage side as well I know we've had a really good July .
So thats going to keep that that comp number inflated a bit but I'll take the trade off on the higher revenue.
But if we assume that that mortgage stays relatively consistent in the back half of the year.
Probably that 11 and a half 12 million is probably a decent number.
Minus any other.
Outside.
Activities or impact from.
I guess other strategic.
Pursuits.
Got it helpful. Thanks, Ken Thanks, David appreciate it.
Thanks.
The next question will come from.
Burning of Craig Hallum.
Hi, good afternoon guys.
Wanted to touch base, you've been making some progress on the deposit franchise side and is there just wondering if you could expand a little bit deeper about the initiatives you're working on the progress you're at outlook for.
Those initiatives and then the second follow up question is if you could go through the different.
Kind of competitive dynamics on the asset side areas. You, obviously had some some good growth in some areas. This quarter, you're seeing opportunities just talk about the competitive dynamics that you're seeing that.
It's got near your appetite strong there.
I'll take the deposit side updates.
Little bit on loans and can can fill and we've created a product we internally are calling to amplify that go after the small business market.
We made some changes.
Towards the beginning of the last quarter.
To streamline the process much like we did on the consumer side.
Back in 2018 to get the online application process down to minutes instead of 15 to 20 minutes.
We have introduced a small business.
Checking account paying 75, bips the money market account services and those products.
Literally almost overnight went from ground zero to 16 to 18 million a month, a new account openings.
Through this morning, we're already at $17 million in new deposits and.
Customers in that segment so.
From our perspective as I think it blends ended.
Somewhere in the mid one and a half 1.6 on the the cost of the funds its.
Great accounts, good balances good transaction, and obviously, the small business loan and the business credit card opportunities that come along with those clients. So.
Kind of hit the ground running and.
With minimal marketing effort, we wanted to make sure we had all the mechanics and pieces, we've introduced a new.
Online product for small business. It gives us a lot of the tools of the traditional Big Bank Treasury management program in an online environment that are.
We got converted during the quarter those seem to be running very effectively.
So we think it's a good opportunity to continue to grow that side of the balance sheet significantly, which also enables us to cut back on the CV side and the higher costs.
That's good to hear and then just a quick follow up on that before we switch to the assets.
And so if you're doing treasury management is that on a cloud based or is that an integration with systems just kind of curious as to.
The functionality that you're finding the market's a attractive too.
It is tied in with our.
Online tools through digital insight so it's on the web as Doug.
I can tell you for sure whether or not as cloud based.
The mechanics on the back end from their side on the the actual tool itself, but it is seamless it's on the front end it gives them a wireless PCH origination capabilities multi tiered.
Security log in so you can.
Second.
Segregate duties.
Abilities of individuals within the web site.
It truly is a allows them to really kind of run a zero balance accounting structure, they want to and.
Just a lot of tools that you would normally see in the upper end. They can do again back to the small business side. They don't need the $1500 scanner. It has no mobile deposit capture via the phones.
It's a very slick and to date, both from our side and the consumer side has been a very seamless product to rollout with great growth and really no hiccups at it.
Excellent.
And the assets.
I think on the asset side Brad.
Hey, just look at a couple of our different channels here healthcare finance was actually actually had a very strong quarter in terms of growth. We we originate those loans with our partners through our partnership with one devore.
Which is focused in the dental and veterinary and.
Finance industries.
They've been they've been building their business over the course of several years now and is it hit their stride they've they've made some strategic hires here in the past six months.
We're in a way.
Producers who've been in the space for a long time with a track record.
From the larger kind of money center institutions, who play in that in that area.
They've obviously they have done a great job building their brand and getting their name out there. So.
That's obviously, a very I think every lending areas competitive.
They are winning business because there.
Their time their ability to get a loan from start through the pipeline to finish.
It is a much faster pace than.
Then then the bigger banks they compete with so they're they're winning on speed and execution.
And customer service, which is fantastic.
In the single tenant space, It's obviously been one of our 800 pound gorillas here for a long time.
You know I think that.
That that market is competitive.
You know again, it's one of those we have developed an expertise in it.
We know the product we can get loans through the pipeline very quickly. We can we can get to a credit decision quickly.
Obviously, we in that space, we'll see sporadic competition, whether it's a regional basis or you might have a regional player or a credit union to who play in this space, who really want to go after alone and.
We have pricing discipline and.
If if a borrower gets an offer from someone else that well below ours are below our offer will just walk away because our pipeline is.
Usually full now we do we will probably see a little bit of seasonality in that business here in the third quarter.
When people are on vacation and away from the office so.
Pipeline, usually decline a bit at the end of the summer and they'll pick back up after labor day.
But I think the dynamics are fairly consistent with what we've seen over the last several years.
I see and I teams are doing very well the route.
They're out originating we've added some personnel in our office in Phoenix.
And they've got.
Get putting some wins on the board out there and we've had some strong origination we've had a lot of activity in the in the owner occupied in the construction space with our teams.
So origination as that activity has been strong they just really haven't fully funded a lot of these projects, yet which hasn't made its way through actual balances on the balance sheet.
But again it looks like every other areas, it's very competitive out there and.
You know people are.
Doing some cases doing crazy things to get to the high tier credits.
But as David mentioned in his comments.
We've tried to be obviously manage the balance sheet be disciplined on pricing and be cognizant of what of a declining rate environment. So we've put floors in place across.
Most of our commercial verticals to to ensure that that we're adequately defending net interest margin and sometimes we have to walk away from deals because we put the floors in and competition is we'll we'll do something at 50 basis points less than we'll do it but that's okay. Because we have plenty of deals in front of us and.
We want to be prudent about.
Managing again help in managing the decline in net interest margin and being prudent about what we put on our balance sheet.
Just to step back real quick Brad too on the healthcare finance side, we just had a meeting with the endeavour team kind of gut.
All the folks together in Columbus, Ohio, and sat in one of the things we're working on with them that.
Still got some rough edges around how we pitch the deposit base and a corporate credit card obviously were approved in a dentist for.
The $1 billion loan to buy a practice or build a new building.
We can so in a credit card we can go after the deposit base and.
Still lot of mechanics in individual actions, we don't have a 100% automated yet but.
The success rate has been tremendous for the folks that we've done face to face.
Again, we're picking up on average six figure.
Checking account and a $25000 kind of.
Corporate credit card for them to.
Work on the practice so we've got a couple of things to tweak there yet this quarter.
But thats also a great source and a good strong relationship for us on both the deposit side and the credit card as well as the loan.
Lastly, the consumer side on the assets still.
You know consumer business remained strong we.
Last year, when we were.
You know raising.
Does it in a rising interest rate environment.
I think we were pretty.
Pretty disciplined there and increased pricing.
Alan Johnson, 25, and 50 basis points at a time in the consumer verticals and continued to generate originations I think last year originations in the RV and the horse trailers.
Businesses were some of the strongest they have been in their history.
As we look here into the 29, obviously in the first quarter seasonally slow.
I think as I mentioned in my comments originations were up 18%.
Yeah, we're obviously trying to be disciplined on pricing there as well.
But I don't.
I guess as you know.
Kind of steady as she goes in that business originations remained strong yields are hanging in there.
Not really seeing any cracks and the consumer credit side FICO scores are they've always been in the 767 70 780 range.
And credit results has been consistent.
We did have a large national player Jeff into the horse trailer business for about 30, 45 days with just and undoubtedly rate.
Second a lot of opportunities up but they have come and gone already and as Ken said, we're kind of right back to normal and again in all of our verticals will have certain regional institutions, who are national player.
Jump in and do something just totally out of sorts, we don't compete with them. We said on the sidelines they come and go and still probably in all of our product lines were bidding on about 20% to 25%.
What we actually take a look at or have an opportunity.
Again with a national footprint enables us to stick to our underwriting criteria and our pricing and we really don't have to play the whim of the game of whatever local institution or a credit union that might show up and really tried to buy the deal.
We just go onto the next deal.
In the pipelines are really really strong as Ken said all across the country. So.
It's not a situation that we're in order to we're not buying business by any means.
Great I appreciate the thoughts thank you.
Thank you question will come from Joe Fenech pop secret.
Afternoon, guys.
Hey, Joe Hey, Joe.
Hi, guys just to lead off just hopefully a pretty simple question I mean, just setting aside the noise in the near term gyrations from what this first rate cut from the fed might mean for you I know, that's where most of the questions, but focus I mean, just looking out way longer term.
Are you guys just thinking about this as a major inflection point for your model you are among the most severely impacted from the rate environment. The past two years logic would seem to suggest that the opposite might now be true. If you think we're at that inflection point I mean, do you agree with that or am I looking at that too simplistically.
[laughter] probably tend to agree with you a little more than Ken might agree with you.
Yeah, and I go back and we've seen obviously cycles over the last 20 years. This one has been so far off the chart in the up play both from the fed level and then the financial institutions reaction to the bumps I mean beds move and 25 and they're moving 35. It's just the craziest thing I've seen that I think we're going to see that same kind of race back down to the bottom.
Faster than some folks think.
They historically no raise rates, particularly on the cost of fund side as fast as though bumped the loan rates, but when they go down they plug them in instantaneously. So I think we could see it a real significant shift over the next six months and put us back into kind of the driver seat and again and then when you take a look at the.
The scheme of things were over the last couple of years, we've grown.
A couple of billion in assets literally doubled our size and head count and internal expenses were now down to.
Non operating or non interest expenses down in that.
Lower than 120 basis points so.
That number is getting better day by day and.
I think we have an opportunity we're going to see a significant shift in the next three to six months and then without question. If the fed comes and they do 25 and then another 25.
Set the stage for something before year end or did they come in to do 50, meaning we can see the bottom call out on it deposit rates again.
Okay, and then I guess, what what becomes now that derivative swap program and the implications on what are the implications of what Youve already put on as a result of this inflection point in rates.
You know obviously, we put the the the hedging strategy in place in late 2017, when when rates were increasing and is a rapidly increase throughout 2018, we continued to hedge I guess the the one thing that that I would point out with that is even with even when you include the impact of the swaps our loan portfolio is 70% fixed 30% variable or adjustable.
Which when I look at some of the.
I track a lot of the higher performing $20 billion to $30 billion commercial oriented banks.
Their loan books are flipped right, there about 70% to 80%.
Variable and much of which are tied to LIBOR.
LIBOR base, Cnine middle market and larger corporate credits.
So obviously with the rate environment being where it is today and the risks that LIBOR continues to decline.
We haven't put any new swaps on this quarter.
In the fourth I don't foresee us doing any other hedging here.
Assuming where the interest rate.
The interest rate.
Interest rates stay where they are.
Obviously in terms of managing long term interest rate risk.
Which is something our regulators focus on hedging in any market is good.
When you have as many fixed rate loans as we have.
But weve made a conscious decision to kind of manage longer term interest rate risk through other means predominantly loans sales.
Always having swaps in our back pocket, if we had to worry about that.
But I don't I don't really see us doing much hedging.
But we probably won't really be unwinding, those hedges either right now that would be prohibitively expensive.
But it's going to be LIBOR or looking at the rate the rates today and Bloomberg LIBOR is down again today as it continues to kind of creep down it leads the bad.
So I think it puts us probably in the same boat is some of these other commercial oriented banks that have large linerboard.
Based commercial loan portfolios.
So I guess, what sort of the timeline if you were to really some simplify it Ken.
Where you know there's a period of time, I'm guessing where what you've already put on eats up some of the benefit of this new rate environment. I mean, how should we think about that and sort of when you get over the hump.
And what needs to happen from a rate perspective for that not to be as big of an impact you.
Well I think I'll go back to my comments earlier on kind of our forecast today.
Where where we believe net interest margins going again, I think the two biggest drivers in.
In the that will put pressure on margin here in the third quarter are going to be again.
Fully dates quarter of the subordinated debt and the combination again, but the impact of live or on on the hedging that we've put in as kind of asset yields are expected to remain.
Fairly consistent and deposit costs the impact of rising deposit cost isn't really expected to have a meaningful impact and as we see margin go forward.
Margin.
Increase modestly in the fourth quarter and beyond.
Obviously, we're still absorbing the cost of a lower LIBOR rate I mean, we're not forecasting linerboard to go up in those in those those future periods Livewatch is still low.
And remains low so I think we're.
We're we're absorbing the cost of that.
Through the inflection in deposit pricing as well as just being disciplined on the fixed rate side of the loan book.
Okay. That's helpful and then last one for me guys.
Geographically speaking where where the nonperformers.
And what was the approximate size of each.
The increase this quarter.
The one is a 1.6 million.
It's here in Indianapolis, we took the 6 million we have.
Real estate and receivables to cover.
Roughly a million and we took the $6 million special reserve and we we got aggressive on that one we don't know that it's got to be 6 million and they've got some workout folks in there.
Taking a look at it.
So we.
Put it together and the other one is actually our first STL property. That's located them then to stay up happened right I think it's in North Carolina.
It is the 60 day in that.
Person, who owns the property and went dark the restaurant chains and they went into bankruptcy and went dark she has another tenet that.
It's supposed to.
Come in and start picking up payments August onest.
They are in the midst of build out but she is just refuse to make payments so that wasn't good.
Completely reverse itself here in the next 30 to 45 days.
And Joe to clarify the single the single tenant loan that was an increase in delinquencies not nonperformers.
Got it thank you guys.
The next question will come from John Rogers of Janney Montgomery.
Good afternoon guys.
Hey, Jeff John .
Ken just just real quick.
You said operating expenses 11, and a half to 12 million in response to an earlier question is that with or without the new SP 18.
That that.
He is that's without.
Okay.
And then Ken the tax rate going forward.
You know I.
Every time I think it cant go lower it seems to go lower yes, we're in kind of the 5% range.
You know obviously as soon as we manage that single our skews me the public finance portfolio.
And drive revenue from other taxable side, I mean, I'd again, I'd, probably steer you to the mid to high single digits just to be conservative.
You know I know I know it was five and it was 66% in change last quarter.
So I think if you want to use anywhere between five and a half to seven and a half that's probably a good estimate.
Okay.
Maybe Dave just your comments on the STL loan you just said in North Carolina, it's not on nonperforming, but can you just remind us I guess that portfolio. The average LTV and maybe specifically on that loan what is the LTV.
We just had a new appraisal done on the properties. So were if the Lady goes.
Refuses stay were in good position, she actually had an offer to sell but it was less than she originally paid for the property. So she passed on that she is not up as we found out a real season in real estate investor portfolio as a whole John as approach the $1 billion.
Overall, we're at about a 50% loan to value on all of the properties and Weve originated close to 2 billion and this asset class since we first got into it and this is the first loan that we've had any it's a first load to ever get the delinquent schedule period. So.
Well again, we're very well positioned at technically.
She has a new tenant coming onboard she should get cleaned up here in the next 30 to 45 days.
Okay. Thanks, guys.
No.
The next question is a follow up from Michael Perito of KBW.
Hey, guys. Thanks, sorry, just one quick last follow up here. It sounds like you are we talking about the net loan growth.
Ken in the mid single digits, I mean, but it sounded like from some broader comments earlier on the call that deposit growth might not slowed quite to that level. So I'm. Just curious if you could make a quick comment no liquidity in the <unk>.
Investments and cash in the quarter was little elevated I mean, do you expect those levels to kind of persist going forward.
And the loan and deposit to stay sub 100, given the net loan growth expectations.
Yes, I think the loan the loan to deposit ratio.
Remained below 100% I mean, I think it may trickle.
Up slightly.
Throughout the end of the that through the end of the year, but it's definitely we're definitely going to remain below a 100%.
I mean, I would expect as we.
We'll probably keep the level I would expect the level of cash as I said before inflated at the end of the quarter.
So that cash balance of 350 million will will not will you know will trend down over the course of the year.
Yeah, I would expect securities balances to kind of be consistent call. It on a percentage basis consistent with.
You know where its been the last several quarters.
As as a percentage of the overall balance sheet I mean, we kind of try to target will be called liquid assets.
Now in the range of 18% to 20%, which obviously consistent cash mortgages held for sale in securities.
And deposit growth.
You know as we've we've mentioned a lot here on this call, where we've been reducing rates throughout the throughout the course of the year.
I have continued to reduce rates here in.
In July and we'll continue to do so.
So I'm not I look at deposit growth I mean, we do have some deposit growth model, but I wouldn't say, it's an excessive amount.
Got it helpful. Thank you.
Hey, guys I want to jump back end with clarity on the two.
Commercial loans that went on to nonaccrual it was actually the same client.
It's two separate loans there was a.
Owner occupied real estate and then a working line of credit so when we say that the commercial loans.
Bumped up to one on non accrual it's actually the same end. It is combined it is at $1.6 million.
Figure that I threw out so just for clarity in Canada is correct. The other STL is not in nonperforming status just in the first time to have an FC alone and delinquent status.
And this concludes our question and answer session I would now like to turn the conference back over to management for any closing remarks.
Yes, we appreciate your time today as.
In the past we're always available if you think of anything later on in the day, Ken and I are around.
We appreciate your time and look forward to catching up to several of you next week when were in New York. Thank you very much.
Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines have a great day.
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