First Internet Bancorp (INBK) Q3 2020 Earnings Report, Transcript and Summary

Good day, everyone and welcome to First Internet Bancorp Earnings Conference Call for the Third Quarter of 2020. [Operator Instructions] Please note this event is being recorded. Now, I would like to turn the conference over to Mr. Larry Clark from Financial Profiles Inc. Please go ahead, Mr. Clark.

Thank you, Nick. Good day, everyone and thank you for joining us to discuss First Internet Bancorp’s financial results for the third quarter of 2020. The company issued its earnings press release yesterday and is available on the company’s website at www.firstinternetbancorp.com. 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, President and CEO, David Becker and Executive Vice President and CFO, Ken Lovik. David will provide a company update and Ken will discuss the financial results. Then we will open up the call to your questions. Before we begin, I would like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial conditions of First Internet Bancorp that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company’s SEC filings which are available on the company’s website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. At this time, I would like to turn the call over to David.

Thank you, Larry. Good afternoon, everyone and thank you for joining us today. We are very pleased with our third quarter results. Despite the challenges created by the COVID-19 pandemic, we delivered record net income and earnings per share driven by strong revenue growth, net interest margin expansion and moderate loan growth. Our significant earnings growth and this low interest rate environment demonstrated the power of our business model and the increasing diversity of our revenue streams. Ongoing favorable deposit re-pricing opportunities drove our interest costs lower, enabled our fully taxable equivalent net interest margins to expand by 17 basis points this quarter. Additionally, our asset quality metrics remains strong among the best in the industry, driven not only by our strong credit culture and disciplined approach to underwriting, but also by our focus on certain specialty lending minds that target lower risk asset classes, such as our public finance, single tenant leasing and healthcare finance businesses. During the quarter, non-performing loans and net charge-offs remained low and we continue to build reserves. We also continue to see a significant reduction in loan deferrals. By quarter end, over 99% of our borrowers, who needed payment relief early in the pandemic had resumed making payments. We are proud to have supported our customers and their time of need and are pleased that nearly all have been able to return to their normal payment schedules in such a short order. Finally, our record earnings allowed us to further strengthen our capital base, which remains one of our near-term strategic priorities. Our team delivered record quarterly net income of $8.4 million and adjusted net income of $10 million, when excluding a $2.1 million pre-tax write-down of a legacy commercial other real estate owned property more than double our net income from the prior quarter. Revenue increased 48% to $28.7 million driven by record performance in our direct-to-consumer mortgage business, which nearly tripled revenue on a linked quarter basis. Historically low mortgage rates continue to fuel robust demand in markets across the country and our mortgage banking pipeline remained strong heading into the fourth quarter. Our SBA business gained additional traction during the quarter as the accelerated build-out of our national SBA platform resulted in increased loan production and higher gain on sale revenue. Our near-term pipeline is robust and we look forward to further driving revenue in the quarters to come. As we continue to grow, this government guaranteed lending business and the economy, adapts to and recovers from the pandemic and as more small business and entrepreneurs seek financing to grow. As we have discussed in prior quarters, we are confident there is enormous potential in this phase with attractive opportunities on both sides of our balance sheet. Over the last couple of quarters, we capitalized on disruption among some SBA competitors and added sales and operations personnel to our already strong team of professionals. We brought on talent, expertise and debt, that will help drive originations well beyond our initial forecast for 2020 and 2021. Originally, we had envisioned about $60 million of originations for 2020, hitting $100 million annual run-rate by the fourth quarter. I am proud to announce that we have exceeded those expectations. In fact, during the third quarter alone, we funded small business obligations totaling almost $58 million and year-to-date we have funded over $80 million of small business originations. And note that these amounts do not include loans funded under the Paycheck Protection Program. Looking forward, we expect SBA production of between $25 million and $30 million in the fourth quarter and our forecasting originations in excess of $235 million next year, which we expect to translate into gain-on-sale revenue between $12 million to $14 million for 2021. I want to take a moment to recognize that less than 2 years ago, our SBA operation was in its infancy. Now, we are well on our way to building a leading national platform. The small business administration recently released its list of the most active 7(a) program lenders for a typical year ending September 30, 2020 and we placed number 40 on the list with almost $110 million and approved loans. I am very proud of what we have achieved so far in the small business lending and look forward to becoming a leader in providing financing for the small business and entrepreneurs across the country. With regard to credit, our asset quality remains strong and we are cautiously optimistic about the remainder of 2020 and into next year. Of course, the pandemic continues to create uncertainty. We are monitoring our loan portfolio very closely and working with our clients to help them navigate challenges related to this ongoing public health crisis. This is the right thing for us to do and it is also good for the bank as we are deepening our connections with existing clients and creating strong relationships for the long-term. That being said, we are very encouraged by the fact that nearly all of our borrowers, we offered loan deferral programs to have resumed making their normal monthly payment. As of October 16, we only had $20.8 million of loan balances remaining on deferral or less than 1% of the total portfolio, a sharp decrease from the $366 million when we spoke to you 3 months ago and down from the peak of $647 million in late May, which was about 22% of the total portfolio. We believe this speaks to the quality of our loan portfolio, particularly our focus on lower risk asset classes and our disciplined underwriting approach. As we move into the final months of 2020 and look ahead to 2021, we are confident about our prospects in the strength of the franchise. While the pandemic presented everyone in the banking industry challenges, our digital business model enable us to serve our customers with minimal interruption and remain focused on our core lines of business as well as earnings growth and profitability. As always, I would like to thank the entire First Internet team for the hard work and unwavering dedication to excellent customer service, delivering record revenue and earnings performance during these challenging times. We appreciate the flexibility and cooperation to work remotely over the last several months. And we are pleased that as of October 1, we are able to welcome back the vast majority of our employees who have been working remotely to our corporate headquarters in Fishers. Finally, First Internet was recently recognized with the seventh consecutive year in The Indianapolis Star’s Top Workplaces in Central Indiana list, placing in the top 10 in the medium-sized company category. We are proud of the sound culture and workplace environment that we have created. And with that, I would like to turn the call over to Ken to discuss our financial results for the quarter.

Thanks, David. As David mentioned, we were very happy with our results for the third quarter delivering record revenue, net income and earnings per share. We generated these strong results on a relatively flat balance sheet during the quarter, which is consistent with our disciplined balance sheet management strategy. Our business model emphasizes capital efficiency and increasingly diverse revenue streams that drive increased profitability and our third quarter results reflect solid execution on this plan. Now, let’s turn to details of our performance for the quarter. We reported diluted earnings per share of $0.86, more than doubling last quarter’s results and up almost 37% over the third quarter of 2019. Excluding the impact of the $2.1 million pre-tax write-down of legacy other real estate owned, earnings per share were $1.03. Profitability improved significantly with return on average assets of 78 basis points and return on average tangible common equity of 10.83%. Adjusting for the write-down of OREO, return on average assets was 93 basis points and return on average tangible common equity, was 12.74%. Looking at Slide 5, total portfolio loans at the end of the third quarter were $3 billion, an increase of $39.2 million or 1.3% from the second quarter. Commercial loans increased $56.2 million or 2.4% compared with the second quarter due primarily to production in healthcare finance and construction lending. This growth was partially offset by lower public finance and single tenant lease financing balances due to portfolio amortization, decreased origination volumes and the sale of single tenant lease financing loans during the quarter. Consumer loans decreased $15.3 million or 2.9% compared to the second quarter due primarily to increased prepayment activity in residential mortgages as well as in the trailers and recreational vehicles portfolios. We sold the portfolio of $12.2 million of single tenant lease financing loans at an attractive premium during the quarter, which included loans that had properties occupied by tenants in both the quick-service and full-service restaurant industries. We continue to see healthy demand for our loans and are selling many of them to repeat investors. Subsequent to quarter end, we sold a $7.4 million public finance loan at a solid premium and we expect to continue to sell portfolio loans going forward if this generates fee income and frees up capital that can be used to fund new opportunities across our lines of business. Moving on to deposits on Slide 6, while overall deposit balances were relatively flat from the end of the second quarter, we saw continued improvement in the composition of the deposit base with growth in money market balances, interest and non-interest bearing demand deposits and savings accounts, which was mostly offset by a large decline in CDs and brokered deposits. Quarterly money market growth was $117 million and included $87 million in small business deposits. CDs and brokered deposits were down $138 million as higher cost CDs ran off the balance sheet and were replaced with much more attractively priced money market accounts and lower rate CDs. This activity drove our cost of interest-bearing deposits 43 basis points lower in the quarter and we believe that we still have a long runway ahead to re-price deposits lower. Due to the combination of significantly lower money-market pricing and the continued CD re-pricing opportunity, we are forecasting interest expense savings in excess of $22 million next year based on the current deposit pricing environment. Turning to net interest income and net interest margin on Slides 7 and 8, net interest income and net interest margin on both the GAAP and a fully taxable equivalent basis showed strong improvement compared to last quarter with lower deposit cost driving the increase. Interest income from the loan portfolio was relatively stable as higher average loan balances offset a modest decline in overall loan yields. As you can see from the net interest margin bridge on Slide 8, the securities portfolio had the largest negative impact on margins during the quarter as continued declines in short-term rate indices impacted variable rate securities and increased prepayment speeds resulted in accelerated premium amortization, which affected yields on mortgage-backed securities. With regard to the impact of elevated cash balances on net interest margin, you will see on the roll forward the cash only negatively impacted the quarterly change by 1 basis point. However, we like many other banks have experienced excess liquidity for several quarters now. In terms of how these balances are truly impacting margin, when we adjust to a more normalized level of cash, we estimate that excess cash is negatively affecting margin by about 13 basis points. We are pleased to have reached an inflection point in our net interest margin and expect the upward trend to continue next quarter and throughout 2021. Turning to non-interest income on Slide 9, non-interest income for the third quarter of 2020 was $12.5 million more than double the level generated in the second quarter. The increase was driven primarily by the record revenue for mortgage banking activities and increased gain on sale of loans, which was due mainly to a higher amount of SBA 7(a) guaranteed loan sales in the quarter as well as the sale of the single tenant lease financing loans that I mentioned earlier. Mortgage banking revenue benefited from strong mandatory lock activity and higher margins as well as increased best efforts revenue unsold production. While we expect mortgage revenue to remain strong in the fourth quarter, we are not forecasting it to be at the record level we generated in the third quarter. In regards to small business lending activities, the strong third quarter origination activity David mentioned earlier translated into about 100% growth in SBA gain-on-sale of revenue from the prior quarter. Additionally, as the significant portion of the third quarter originations occurred in September, we currently have $35 million of guaranteed SBA 7(a) balances pending sale into the secondary market, which we expect to close early in the fourth quarter. These pending sales coupled with new origination and sale activities should drive increased fee revenue on this line of business in the fourth quarter. Looking forward into 2021, we are conservatively forecasting lower mortgage revenue as compared to 2020 performance thus far. However, it is still expected to be very strong on a historical basis. That being said, in comparison to 2020 level of non-interest income, we expect that gap to be filled by a continued strong increase in SBA gain-on-sale of revenue. With respect to non-interest expenses, shown on Slide 10, the increase to $16.4 million was mainly the result of two factors: one, a $2.1 million write-down of two legacy OREO commercial properties; and two, higher salaries and employee benefits. These items were partially offset by lower other expenses and consulting and professional fees. The higher salaries and benefits were due primarily to incentive compensation for SBA business development officers and mortgage loan officers due to increased origination volumes and increased headcount in small business lending. Now, let’s turn to asset to quality on Slide 11. The allowance for loan losses increased $2.5 million or 10% to $26.9 million, resulting in an increase in the allowance to total loans to 89 basis points or 91 basis points, excluding PPP loans, up 7 basis points from the linked quarter. As growth in the loan portfolio was modest during the quarter, the increase in the allowance was driven primarily by further modifications to qualitative factors in our allowance model to reflect the ongoing economic uncertainty related to the COVID-19 pandemic as well as changes in portfolio composition. Non-performing loans increased by $1.6 million compared to the linked quarter as two single-tenant leased financing loans with balances of $2.5 million in the aggregate, were placed on non-accrual status partially offset by a $700,000 loan previously on non-accrual that paid down in full and other smaller balance non-accrual loans that were charged-off in the third quarter. We placed the two single tenant loans on non-accrual because the properties are currently vacant. However, both borrowers are still current on their mortgage payments and are working to get the properties released. Net charge-offs of $100,000 were recognized during the quarter, resulting in net charge-offs to average loans of 1 basis point as compared to 12 basis points in the prior quarter. We recognized the loan loss provision of $2.5 million for the third quarter consistent with the second quarter. The provision for the third quarter was driven primarily by the continued reserve built in the allowance for loan losses as mentioned earlier. While we continue to build our reserves out of an abundance of caution in this ongoing uncertain environment related to the pandemic, we also continue to feel very good about our asset quality and credit performance to-date. With respect to liquidity and capital, as shown on Slide 12, our overall capital levels remained healthy both at the company and bank levels. With the solid earnings performance for the quarter, our tangible common equity to tangible assets ratio increased to 7.24% from 7.01% in the second quarter. Additionally, tangible book value per share increased to $31.98, up from $30.92 in the second quarter. In terms of our outlook for the fourth quarter and into 2021, we believe we are extremely well-positioned for the lower interest rate environment. And there are few items I want to reiterate and summarize for you. As mentioned earlier, we are forecasting in excess of $22 million in interest expense savings next year from deposit re-pricing. When you combine that with stabilized asset yields which should improve in future periods due to a better asset mix, we are expecting significant growth in net interest income and expansion in net interest margin for 2021. We also expect to maintain a stronger level of non-interest income going forward. As David mentioned earlier, we are forecasting $12 million to $14 million of gain-on-sale revenue from SBA loan sales next year, which will be supplemented by gains on portfolio loan sales as well as increased servicing revenue as our managed SBA portfolio grows. When combined with a solid outlook for mortgage production, we feel very confident in our ability to increase non-interest income from historical levels. We continue to remain cautiously optimistic regarding the impact of the pandemic on the credit quality of the loan portfolio. While we remain vigilant in our monitoring and underwriting procedures, we do not see elevated credit losses on the horizon at this point. With the forecasted revenue growth, we see a clear pathway to net interest margin expansion and a return on average assets approaching 1% and higher on a quarterly basis in 2021. And finally, with increased profitability and modest balance sheet growth expectations, we are forecasting increased capital levels with tangible common equity to tangible assets in the range of 8.5% by the fourth quarter of 2021. With that, I will turn it back to the operator so we can take your questions. Nick?

[Operator Instructions] First question comes from Michael Perito, KBW. Please go ahead.

Thanks for taking my questions. I wanted to ask a quick clarification question on the mortgage outlook. I understand it’s probably a little hard to put an exact number out there. But Ken, I mean, is it fair to say that the revenue production in the fourth quarter will be down materially from the third quarter, but still up materially from where kind of the first half run-rate was, I mean and I know it’s kind of broad, but do you think that’s kind of a fairway to capture based on the pipeline issue today?

Yes, Mike, I think that’s a good way to summarize. And I think we have – obviously, it was extremely strong, well above any prior performance that we have had in the past, but we still feel good about given where interest rate markets, refinance purchase activity that it should remain at a higher level than kind of prior run-rates if you will. So, I mean, will it be down from 9.6? Yes, but it’s probably going be in the range of call it somewhere $5 million to $6 million.

There is a little seasonality, Mike, obviously December kind of that Thanksgiving to December, things roll along the new home side of things. It won’t have obviously any impact on the re-buy, but yes, again, pretty comfortable, we are pretty comfortable in that $5 million to $6 million number for the quarter as we think about next year, I feel like maybe there were a couple of things you guys were doing on your end over the last 12 to 18 months on that with that platform. And it seems like based on the third quarter here that it is ready to go. And, obviously, there is a lot of volume and demand. So if you think about next year, I mean, certainly it’s not going to be $22 million to $23 million. But is it, like a mid to high teens revenue type opportunity for you guys you think a little bit the environmental drop off, the more severe than that.

I would probably put it in the mid-teens, where we are not overly zealous, I guess we are not anticipating anywhere near what we had this year. But I would say but in mid teens, $14 million $15 million is kind of what we are using internally.

Okay, very helpful I know similarly, on an NIM, Ken, I was wondering if you could maybe kind of translate that interest expense savings comment to a more – a little bit more on the margin? And I guess, maybe an easier way to ask the question is if you just look at the curve and where rates are today, and you assume that that’s kind of the environment going forward once all your liabilities price as two part question, one, can you give me a little more color on what kind of incremental loan yields you are doing here? And then, the follow up for that being where does the NIM settle in this environment once, you worked through all the liability re-pricing opportunities that you have?

Yes, I think on the loan side, I think we, we probably seen things kind of flatten out, I will say, as we kind of look forward, we do see the opportunity just from an overall earning asset perspective to continue to redeploy excess cash, as well as cash flows from securities and to say other lower yielding assets into higher yielding loan production. So we do expect kind of overall yield on earning assets to trend upward into 2021. In terms of that deposit savings in and that is really going to be the larger driver of NIM. NIM performance. I mean, I think we feel pretty comfortable sitting here today, that fourth quarter NIM will be kind of in the range of 1.9% to 2%. And as we look forward into 2021, we continue to see incremental improvements in NIM over the course of the year. So you kind of in that, call it choose to 10 to 20ish range earlier in the year, and in fourth quarter closer to that 2.3 to 2.4 range. But that deposit that $22 million of deposit re-pricing savings over the course of the years is very powerful, when it drops down to the bottom line.

And obviously, the tax those are pretty significant improvement right, on the margins. Can you just maybe walk me through the rest of what could happen that could dampen that upward trajectory, over the next few quarters here?

I mean, I think right now, if the curves were to break up…

Obviously.

Yes, [indiscernible] going up is probably the biggest risk on the deposit side, I mean, the good thing about the deposit piece of it is, it’s really just math. If you think about it, I mean, we have, almost a billion dollars of CDs that are, kind of 2% plus maturing over the course of the next couple of months, excuse me, the next 12 months that are, new CDs are coming on in the range of 50 basis points today. Not all of those CD’s are being renewed, some are just rolling off, some are some are renewing at a much lower rate. But when you combine that with just really resetting the entire cost of the money market base, you go back to think about it at the beginning of the year, money market rates were 1.9%. And today we are paying 60 basis points on consumer and 50 basis points on small business and commercial. And we have even other more institutional accounts, higher balance that we are paying a much lower rate on. So when you translate that into a full year of savings, it’s a large contribution to that $22 million.

Got it, okay. And then last question for me and I will step back and let some other jump in. But just David, I mean, I think, over the last 6 months the banking industry has been exposed to a lot of, I think themes that were kind of simmering and then got accelerated around digital banking and, I feel like one thing historically that has been difficult for the purely digital bank is to really kind of cultivate, customer relationships that that were not, very, very price sensitive and again, Just kind of a broad strategic question, but do you feel that foundation shifting at all? And are you more optimistic going forward here that with customer preferences really starting to tilt digital that you guys will be able to drive more kind of sticky relationships overall whether lending or deposit base that maybe you want historically or do you think that it’s too early to tell?

Michael, I tell you, in our view, our relationships with particularly the retail customers have been very sticky from day one, we do attract them with rates, but once we are done and they stayed with us for many, many, many years, I would tell you that last, probably 6 to 9 months, when the COVID crisis hit, there has got to be millions of consumers and individual small businesses all across the country that would have never gone to a digital platform having not been forced to do that by the COVID virus. So it’s twofold. One, we have millions of clients out there that now are comfortable with the platform and when their traditional bank, they start to do little shopping and luck or the branches, I am on a call every other week with a lot of CEOs here in Indiana for the last 3 months, they have been very worried about how to get branches open safely for both the customers and their staff and we have been going about business and opening accounts left and right. So I think yes, there has been a monumental shift in our business opportunity. We are spending virtually nothing on the marketing side of things. And as Ken said, in the last quarter, third quarter over second quarter, we picked up $117 million in money markets, with almost $87 million of that coming from the small business community. And I don’t know you have got it yet, Newsweek released yesterday, they rated their annual survey on banks and they rated our small business checking account as the best in America. So I think the SBA small business opportunity, as I said earlier, really helps both sides of our balance sheet from the asset generation and earnings as well as the deposit side and I see nothing to slow that down.

Excellent. Thank you, guys for taking my questions. I appreciate it.

Thank you, Michael.

Thank you. The next question is from George Sutton from Craig-Hallum. Please go ahead.

Thanks, guys. Great results. By the way, congrats on the Newsweek, that’s impressive. Talk about burying the lead deep in the Q&A though. So on that note though, the – when we talk about the SBA strength that you are seeing and the disruption that you are seeing from competitors and your ability to bring new salespeople in, what is the pitch to them, what is unique about your offering and your capabilities and how much of that is digitally driven?

Its two factors, George, as the digital platform is huge for everybody. They love to focus in quite honestly the play of my entrepreneurial background and not being a banker, has been phenomenally attractive in bringing the BDOs on board because of the understanding and the way we operate and think about small business. And then it also rings very true to the small business community, was that checking account product that we have out there now, the services we have bundled around that, it’s just that – it’s a rock solid platform. And what happened at lot of our peers, particularly those in the SBA world, went chasing after the PPP program thinking they could get in and out in 60 to 90 days, while it’s drug on forever, a lot of them had strained their capital base, they are really not in a position to make loans today. So, we had plenty of capacity and just the whole story, the platform, the structure of the bank itself and just being ready to go and take advantage of the shakeup in the market has helped tremendously. As Ken said, we had a thing up into the third quarter and we have got a pipeline in excess of $100 million out there right now.

Little bit of the same question on the mortgage side, obviously, the market itself has been strong, but I am wondering if there is something that you have been doing uniquely that has been a further accelerant to the strength there?

Yes, kind of the same game about 18 months ago, we made a pretty major investment into the mortgage back office and structure of the product, increased our efficiencies tremendously this past quarter. I mean, we have definitely pressured our employees and put them through the ringer over the last 90 days with the volume that has come through here, but we get almost a year’s worth of volume traditionally in 90 days and we are able to do that because we made a little over a $1million investment in a new platform about 18 months ago that really created much better experience for both the customer and our staff. So they worked extremely hard. Got to give them all the accolades in the world, they have done one thing up job, but the platform and the changes we have made it very simplistic for the customers to come back. A lot of the business, I would tell you that in the last 90 days, we spent virtually nothing on marketing and advertising to bring in leads for the mortgage, they are either finding it straight up on the web, or the customers that we have had in the past that because of the low rates are in a position to re-buy and come back again and they are telling their friends, probably 30% to 40% of the activity we have had over the last six months have either been prior customers or folks that referred people to us and have not costs us a dime in marketing expense.

Great. Just one other question relative to the $12 million to $14 million assumption for gain on sale next year, what is the – what’s being assumed that what is the risk if any to those expectations? Is it rate driven? Is it loan demand driven? Is it is that currently in your production, just curious how they those numbers were derived?

The numbers are based on getting roughly $230 million in total originations next year and setting on a $100 million pipeline now that has grown month to month, over the summer from, when we are sitting here back at the end of the first quarter, we had a pipeline of about $25 million to $30 million. It’s now in excess of $100 million and growing by the day. Right now the SBA product, particularly because to some of the economic situations is just it’s the best game in town for a lot of small businesses, traditional banks, CNI programs has tightened up I am the true believer that the SBA guarantee does not make a bad loan good, but it takes somebody that might be a little bit on the cusp and gives them the edge of a startup or a new business. And for every company that’s in trouble across America today due to COVID, there is two that are absolutely hitting that out of the park. Give you an example we had a gentleman that has been in the liquor business for the last 5 years making specialty whiskey. He applied for $150,000 loan to modify one of his manufacturing lines from alcohol for whiskey to alcohol for hand sanitizers, the man has made more money in the last 6 months than he has the last 5 years and we are finding opportunities like that all across the country and the SBA is a perfect – kind of perfect product for those companies.

Perfect. Appreciate the answers.

Thank you. Next question is from Nathan Race, Piper Jaffray. Please go ahead.

I was hoping if you can continue the margin discussion. I am curious, within that context for the expansion that you alluded to, Ken, what you are interested in terms of deposit flows, I think there was the expectation that there could be some outflows in the third quarter, it doesn’t seem like it happened and you guys have seen alone, but it appears within that dynamic. So, just kind of curious how you guys are thinking about deposit runoff within that guidance you provided for expansion going forward in the margin?

Yes, it’s interesting it’s that I think that we continue to what we believe aggressively re-price deposits lower and yet we continue to grow money market balances in certain segments of the CD base, particularly consumers in small business, renewal rates kind of remain in the 75% to 80%. We have seen some very stronger run-off in what we call the institutional CDs and the institutional deposits, trust companies and credit unions, public funds of that nature that are kind of more call it professional investors for lack of a better term. But I think we were probably over the course of the year expecting some deposit more deposit run-off than what really happened. And I think that some of that is probably just a factor of the interest rate environment and most – a lot of other banks out there are reducing rates as well. I think as we kind of look forward into 2021, I think we are forecasting that we may have some probably modest deposit growth kind of low mid single-digits, but I think we do expect some what we call maybe folks who have small businesses or consumers who have been hoarding cash for lack of a better term, with the uncertainty of the pandemic and this kind of assumes we return to some sense of normalcy, those depositors will put some cash to work and reduce balances, but at the same time, I think we feel comfortable in our ability to continue to grow that. So, there will probably be a bit of an offset there, but we are not, I think we are – as we look forward into 2021, I mean, the composition of the deposit base should remain fairly stable and not a lot of growth.

Okay, guys. So kind of the static deposit portfolio is embedded in that guidance for the interest expense savings, I am hearing you are right?

Correct.

Okay, cool. Great. And then kind of changing gears and looking at the left side of the balance sheet, healthcare finance growth is pretty impressive in the quarter. And imagine, just to look at pipeline along those lines, just given the destruction that exists within that asset class, so just curious to know how the yields are the way [indiscernible] on those – on that production kind of compares to the portfolio yield at around 388 in the third quarter and just kind of the outlook for loan growth on balance sheet into 2021 as well?

On the healthcare finance portfolio, that production generally is coming in around 4% on average. So, it’s – we have probably seen loan yields drift lower in loans is obviously when the new interest rate environment, new production comes on at a lower rate, but it’s kind of in that 4%, sometimes we will get more maybe a little bit less at other times, but it’s pretty much in line with the rest of the new production we have. And as I said to my point earlier about trying – as we kind of have the ability to put some cash to work and redeploy cash flows from the securities portfolio, obviously, those are two lower yielding asset classes and put cash to work whether it’s in new construction lending, which has relatively stronger yields and healthcare finance as well and we continue to fund new loans in single tenant as well, pipelines are starting to improve there and obviously our CNI teams are out working hard as well and you have gone on the [indiscernible] above 4% as well.

Okay, got it. That’s helpful. Changing gears a little bit thinking about the expense run-rate, if you take out the OREO write-down in the quarter and based on the mortgage banking guidance to the fourth quarter, how should we think about the overall operating expenses run-rate for the fourth quarter?

Fourth quarter should be relatively consistent with kind of that as that adjusted number for this past quarter, for the third quarter, might pickup a little bit, because we continue to add talent in SBA, especially kind of on the credit administration side. So, we will kind of have a full quarter baked in of expense there, but it should probably be relatively consistent with that – with the third quarter’s activity.

Look, it’s about 15.5 or so give or take?

14.5, yes.

Okay. And then just lastly for me, just a housekeeping question on the tax rate going forward, can you pass along those lines?

Well, obviously, as you saw, our tax rate jumped up here in this quarter. Obviously, we had much larger proportion of revenue coming from taxable sources, mortgage and SBA. And I think as we kind of look forward, I mean, if you think about the revenue mix this quarter, even though we expect SBA to continue to grow and into ‘21 mortgage as David talked about a little bit earlier mortgage – our forecast is conservatively pulled back from what we expect this year to be when we get to the end of the year that, that revenue mix will probably stay the same with the SBA making up the difference there on mortgage. So, I think probably the days of the tax rate less than 10% are probably past. So, we are probably somewhere in the 12% to 13% basis. I think it’s probably a good estimate looking forward into 2021.

Okay, super helpful. Appreciate you guys taking the questions and congrats on the great quarter.

Thank you.

Thank you.

Thank you. The next question is from John Rodis from Janney. Please go ahead.

Good morning, guys or I guess good afternoon. Nice quarter.

Hey, John. How are you doing?

Good, good Dave. Hope you are doing well. Ken, I just wanted to make sure I heard you right. So you said as far as ROA you guys feel like you can do a 1% or sort of in the 1% area for 2021 or do you think you hit that in the back half of the year?

I think what we earlier in the year, we are probably getting close to that, we are probably call it the high 80s to low 90s, but I think definitely in the back half of the year, right now, as we look at it, where we should be north of 1%, probably not terribly far north as I thought we should be kind of call it 105, 110 in the back half of the year.

So – and that assumes, based on the prior question, just the tax rate of 12% to 13%?

Correct, yes.

Okay. So assuming a relatively stable balance sheet and this is sort of simple math, but then, we are talking about earnings for a full year, for the full year worth of [indiscernible] $4, am I missing something there?

You are spot on, my man.

It’s simple math, but it’s back of the envelope. So I just wanted to make sure okay.

Your envelope matches my envelope, John.

Just asking Ken , just asking the for next year, the expense question, with 1 ROA, what sort of efficiency ratio, do you think it’s sort of mid 50s to high 50s to 6, call it 55% to 60%?

It’s going to – it’s the low 50s.

And based on your balance sheet strategy originating and selling loans, there is no reason to think where you guys need to raise anymore capital or anything like that in this environment, correct?

No, that’s correct.

No.

Okay, thank you guys. Nice quarter.

Okay.

Appreciate it. Thanks, John.

[Operator Instructions] The next question comes from Lance Scott [indiscernible] Foundation. Please go ahead.

Yes, hi, great quarter. I was wondering if you could give us some color on the $2.1 million OREO, legacy OREO write-off, I think you mentioned there were it was more than one loan, but I would like full color, what was the amount, what happened, any color you could give us?

Yes, Lance, it was actually one loan two properties. They were student housing at University of Southern Illinois in Carbondale. We put it into OREO almost 8 years ago. And quite honestly, with COVID, drop in enrollment at the university, drop in funding from the state of Illinois, there is some question whether there was a question, I don’t know if it’s still out there. The university was even going to go forward or be consolidated into another school that we have had it on the books for years and just decided it was time to get it off. So, we wrote it down and we are looking, we had a national broker listed it for 6 months. We got one nimble in 6 months that did not pan out and they specialize in student housing, so we just figured it’s time to make it go away.

What was the gross amount before the $2.1 million?

The loan initially started at $5 million. We took a charge at time back. We recovered a little bit from the gentleman who owned the property. So, it originally started at $5 million and the remaining balance on it was $2.1 million.

You took a write-off for the whole thing?

Correct. It’s off the balance sheet in total.

Oh I see okay.

Yes, just to clarify, we wrote part of it down 3 years ago, right. So, we didn’t – we wrote a piece, we wrote a portion of it down. Yes, I think it was the fourth quarter of 2017 or 2018 and so we recognized that back then. And there was case – there was some fraud involved on the lender side with that deal originally.

You said occupied at all?

We have a very nominal number of students in one building. One building has been mothballed for probably about a year. And once COVID hit, the other dormitory was predominantly foreign exchange students and with a combination of COVID and current practices out of DC and eliminating foreign students coming into the U.S. that number dropped off precipitously at the beginning of the year. So, those two factors on top of everything else, that’s why we decided it’s time to make it go away.

Well, let me know if you take and offer a book value for it, okay.

We will do so.

Thank you.

Thank you.

Thank you. You have a follow-up question next from John Rodis of Janney.

Hey, Ken. Just one other question just on provisioning, you guys were $2.5 million this quarter sort of in line with the second quarter. How should we think about provisioning going forward into next year just based on your outlook based on what you see as far as credit and you said you don’t really see much in the way of charge-offs at this time?

Yes, I think right now we will probably feel like fourth quarter’s provision won’t be at that $2.5 million level. If you look at the charge-off history, the non-performing loans history, I think we feel pretty good about that. I mean, I think we will continue to build the reserve, just probably not at the same pace. So, you would probably look – I mean looking at a reserve lower than $2.5 million and I guess if you want to look forward into 2021, our forecast on that provision is somewhat lower as well than what we have for year-to-date here.

Okay. And again, as far as CECL goes for you guys, that’s not until 2023, correct?

Yes, CECL is first quarter of ‘23.

Okay. So, as we look – well, okay, so as we look at, I mean assuming the balance sheet is still relatively flat sort of the current level annualized around that ballpark sort of makes sense?

Well, right now, we are doing about $2.5 million, I probably reel it back down to, historically, we ran that $752 million, I’d say – as Ken stated, we will continue to build a little bit, I plug in if you want to plug a number for next year, I would look at about $1.5 million a quarter unless something changes in the dynamics of the economy. But probably back to something in the light of $1.5 million, we want to continue to build it a little bit. And as we said, the asset they should stay relatively stable, so that should allow us to cover anything coming in that’s on the horizon and continue to build the outstanding a little bit.

But obviously, David, I mean, there is still a lot of unknowns out there, but that I guess that just goes to how good you feel about your current, your borrowers and stuff of what you know today?

Yes, exactly.

You are exactly right, John.

Unless there is a full scale shutdown, again, which starting to happen in spots across the country, but if there is a nationwide shutdown kind of all bets are off shy of that, I think we are in really, really good shape.

Okay, thank you.

Thank you.

Thank you. This concludes our question-and-answer session. I would like to turn the conference over to Mr. Becker for closing remarks.

Okay. I would like to say it was a good run this quarter. I would like to thank all of you for joining our call today. I think we ran a little longer than we normally do. We appreciate you hanging with it. We hope everyone remains healthy and safe during these challenging times. Have a great day. Thank you for your time.

This concludes the conference. Thank you for attending. You may now disconnect.