First Internet Bancorp (INBK) 2020 Q2 法說會逐字稿

Good day, and welcome to the First Internet Bancorp's earnings conference call for the second quarter of 2020. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Larry Clark from Financial Profiles, Inc. Please go ahead, Mr. Clark.

Thank you, Sean. Good day, everyone, and thank you for joining us to discuss First Internet Bancorp's financial results for the second quarter of 2020. The company issued its earnings press release yesterday afternoon, and it's 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'll open the call up to 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 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 comparable -- 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.

At this time, I'd like to turn the call over to David.

Thank you, Larry, and good afternoon, everyone, and thank you for joining us today. We are very pleased with our results in the second quarter, especially given the ongoing challenges as we navigate through the COVID-19 pandemic. Our thoughts are with the families and businesses who have been most impacted as well as the health care professionals and first responders. Our top priority continues to be the health of our team and clients, and I would like to thank the entire First Internet team for the resilience and hard work during these challenging times.

Our team delivered quarterly net income of $3.9 million and quarterly diluted EPS of $0.40. Earnings for the quarter included a provision for loan losses of $2.5 million, which drove an increase in the allowance for loan losses to total loans of 82 basis points or 84 basis points, excluding loans related to the SBA's Paycheck Protection Program. Furthermore, our asset quality remains solid with NPAs to total assets of only 24 basis points. From an operating perspective, our cost of interest-bearing deposits continued to decline, decreasing 30 basis points from the first quarter to 1.94%. While we did experience a decline in net interest margin during the quarter due primarily to the impact of the Federal Reserve rate cuts in March on earning asset yields, we expect asset yields to stabilize and when combined with continued deposit repricing opportunity, we have over the next 12 months. We should have the ability to significantly grow net interest margin and net interest income for the balance of 2020 and into 2021.

Our direct-to-consumer mortgage business had another strong quarter as we were well positioned to capitalize on the ongoing refinancing and sales activity across the country, driven by historically low mortgage rates. We expect residential mortgage originations to remain strong and the continued low-risk rate environment. Our loan growth during the quarter was primarily driven by our participation in the SBA PPP program. Loan balances were up $82 million or 2.8%, which included $59 million of PPP balances. We did not sell any portfolio loans during the quarter as market conditions were not as favorable as we would have liked. However, we did sell $11.5 million of SBA 7(a) guaranteed loans at a net gain of $800,000 as we continue to grow this line of business.

I'd like to give you a brief update on the status of our SBA business. As we have discussed in the past, we see great potential in this space with attractive opportunities on both sides of our balance sheet, and we have made tremendous progress in building out truly a nationwide platform. In fact, during the second quarter, we took advantage of market disruption among some of the competitors in the SBA space and have added sales and operations personnel to our already strong and talented team of professionals in this division. We are about 6 months ahead of our original hiring plan and are very excited about the near-term outlook for this business over the remainder of 2020 and into 2021. Our original forecast for 2020 included about $60 million of originations for the year with $100 million annual run rate by the end of the fourth quarter. Excluding PPP, our current expectations for 2020 originations are now closer to $100 million, reflecting significant growth in the second half of the year and forecasting originations of $200 million to $225 million for 2021. It's hard to believe that 18 months ago, we were barely a player in the SBA world. And today, we are a rising force that has been able to attract top talent as we build a leading national small business lending platform. As a reminder, our primary focus is SBA 7(a) program, lending where we will sell the guaranteed balances in the secondary market, which are generally 75% to 90% of the total originated balances. This generates fee revenue and increases profitability with minimal balance sheet growth.

Let me now take a few minutes to update everyone on the status of our loan deferral program. As our last call on July 17, we had $366 million of loan balances on deferral or just under 13% of the total portfolio, basically back to where we were 3 months ago. This is down from a peak of $647 million in late May, which was about 22% of the portfolio. Generally, we have seen a significant decline in deferrals across most of our portfolios, and all the borrowers coming off deferral programs have resumed making loan payments without any delinquency. We have been particularly pleased with the performance in the consumer portfolio as the percentage of mortgage deferrals is significantly lower than the national mortgage forbearance rates and less than 1% of the balances in our specialty RV and trailer lines are on deferrals. As you can see from the loan deferral information we provided on Slide 13 in the presentation, the level of the deferrals and the health care finance portfolio is down significantly from April and May. In mid-May, nearly 80% of our health care balances were on a payment deferral plan. Now 2 months later, that number has dropped to 15%. Of the $58 million still currently on deferral plans, about 40% represent balances that were granted a second deferral period. These are generally granted to dentists operating in states where they were late in reopening or have not yet reopened. Additionally, the majority of health care finance loans still on deferral plans are expected to roll off in the next 30 days. Our largest portfolio with deferrals is single-tenant lease financing with $277 million in balances on deferral programs or about 28% of the STL portfolio. As a reminder, all of our single-tenant borrowers made their April payments, so the deferrals did not start until May. Therefore, the vast majority of these borrowers are expected to resume making payments in August. A large portion of the loans on deferral are related to restaurant properties, and of those, approximately 2/3 of the dollar balance consists of full-service restaurants and the remaining are quick serve. Furthermore, the current weighted average loan-to-value ratio on single tenant deferrals is 55%, which is relatively consistent with the portfolio as a whole. Over the course of the quarter, borrowers representing about $16 million in balances chose to terminate their deferral agreements early and a similar number continued making some level of principal and interest payments, even while on the deferral program.

Additionally, we have not experienced any delinquencies for the performing single-tenant loans that are not under a deferral program. Overall, credit quality remains strong, and we are cautiously optimistic about our future outlook. There is still a tremendous amount of uncertainty regarding the economy due to the pandemic. We are monitoring our loan portfolio very closely and responding to the needs of our clients as they bridge the gap to a recovery. In doing so, we are deepening our connections with existing clients, which we believe will lead to stronger and broader relationships over the long term.

Heading into the second half of 2020 and into 2021, we have many reasons to feel optimistic about our performance going forward. While we had to deal with the uncertainty of the pandemic along with everyone else in the banking industry, our digital business model minimized operational disruptions, and we continue to serve our clients without missing a beat. As others in the industry are now questioning the need for all of their physical locations and are struggling with the process to reopen branches, we can remain focused on our core lines of business and building the pathway towards greater earnings and profitability.

I would like to thank the entire First Internet team for the resilience and hard work during these challenging times. As you've heard me say many times, our people are our greatest asset and the key to our long-term success. Their dedication and efforts have been very much appreciated.

With that, I'd like to turn the call over to Ken to discuss our financial results for the quarter.

Thanks, David. Despite the continued challenges created by the pandemic, we were relatively happy with the performance for the quarter. As David mentioned, our asset quality metrics remain strong, and we are particularly pleased by the positive trends with respect to our loans on deferral agreement. The balance sheet increased about $157 million during the quarter due to continued strong deposit inflows. Some of which were used to fund loan growth, while the rest added to our already strong liquidity position.

Looking at Slide 4. Loans outstanding at the end of the second quarter totaled $3 billion, an increase of $81.6 million or 2.8% from the first quarter. Commercial loans increased $98.9 million or 4.3% compared with the first quarter, due primarily to $59 million of PPP loan originations as well as higher public finance and construction balances. This growth was partially offset by lower commercial and industrial loan balances as borrowers paid down balances on lines of credit or paid off term loans. Consumer loans decreased $16.2 million or 3% compared to the first quarter, due primarily to increased prepayment activity in the residential mortgage loan portfolio. We did not sell any portfolio loans during the second quarter due to less-than-optimal market conditions resulting from the pandemic. While the loan sell market was opened during the quarter, pricing was a bit lower than what we are used to seeing, and we did not feel the need to force a sale as loan production was down, and we knew overall portfolio growth would be modest. We do expect to resume selling portfolio loans in the second half of 2020 as these sales are a key component of our balance sheet management strategy.

Moving on to deposits on Slide 5. Deposits at the end of the second quarter totaled $3.4 billion, an increase of $202 million or 6.4% from the first quarter. Like the rest of the industry, we were not immune from the flight to safety as consumers, small businesses and commercial clients look to conserve cash in the face of an uncertain environment. Money market deposits increased by $311 million or 33% to $1.2 billion and now make up 37% of our total deposits, up from 20% 1 year ago. The increase in money market deposits included a $219 million contribution from small business. The strong money market deposit growth in the quarter was partially offset by a decline of $161 million in higher cost CD and broker deposit balances. Compared to the first quarter, the cost of funds related to interest-bearing deposits decreased by 30 basis points with the cost of money market deposits declining 43 basis points as we continue to reduce our pricing throughout the second quarter. At the beginning of the quarter, our rate on all money market products was 1.6%. At the end of the quarter, our rate on the consumer money market product was 1% and on small business and all other commercial money market products was 90 basis points. Furthermore, we have lowered all money market rates another 10 basis points so far in July. The cost of CDs and broker deposits decreased by 18 basis points as rates paid on new CD production remained well below the rates on maturing CDs. The continued shift in the deposit mix from CDs to money market accounts also favorably impacted deposit costs. During the second quarter, new CDs and broker deposits were originated at a weighted average cost of 1.08%, whereas maturing deposits rolled off at 2.64%, a positive spread of 156 basis points. Included in the maturing deposits were 2 higher cost broker deposit balances, totaling $117.5 million and having a weighted average cost of 2.97%, which rolled off at the very end of the second quarter. Looking forward, we have approximately $1 billion of CDs with a weighted average cost of 2.18%, maturing in the next 12 months versus current production in the range of 100 to 105 basis points.

Turning to net interest income and net interest margin on Slide 6. Net interest income on both a GAAP and fully taxable equivalent basis declined compared to the linked quarter as a decline in earning asset yields, driven by lower short-term rates following the Federal Reserve rate cuts in March more than offset funding cost reductions. Looking at the quarterly net interest margin progression on the next slide, Slide 7, the fully taxable equivalent net interest margin declined 15 basis points from the first quarter. Loan yields negatively impacted the fully taxable equivalent net interest margin by 24 basis points and lower yields on securities and cash balances each had a negative impact of 7 basis points. However, those pressures were partially offset by lower deposit costs, which had a positive impact of 23 basis points. Given the current interest rate environment and our expectation that interest rates will likely remain lower for an extended period of time, we see a significant opportunity to reprice deposits lower in the second half of the year, potentially saving $2 million to $4 million per quarter, and we anticipate 2021 annual interest expense savings to be in the range of $17 million to $20 million. We are also expecting yields on earning assets to stabilize going forward. In the second quarter, we felt the full impact of the Fed's rate cuts on our variable rate loans and securities as well as on cash balances. However, the vast majority of our earning assets are fixed rate, including over 85% of our loan portfolio. And as the pace of short-term rate declines have slowed, we are forecasting earning asset yields to remain flat over the remainder of 2020. The impact of the deposit repricing combined with stabilized asset yields provides us a significant opportunity to increase both net interest income and net interest margin during the second half of 2020 and throughout 2021. During the quarter, monthly net interest margin hit a low in May. However, June's margin was up substantially compared to May's results, so we are beginning to move in the right direction.

Turning to noninterest income on Slide 8. Noninterest income for the second quarter declined by $1.2 million to $5 million as compared to the linked quarter. The decrease was driven primarily by a $1 million decrease in gain on sale of loans during the quarter and a $300,000 decrease in revenue from mortgage banking activities. The decline in gain on sale revenue was due primarily to not conducting any portfolio loan sales during the quarter. However, as David mentioned earlier, we did sell $11.5 million of SBA 7(a) guaranteed loans for a gain of $800,000, which was an increase of $300,000 from the first quarter when we sold $5.6 million of loans at a gain of $500,000.

In terms of mortgage banking, our direct-to-consumer mortgage business is experiencing strong demand, fueled by the declining mortgage rates and refinance activity. Although our mortgage business experience some market volatility, which negatively impacted revenues late in the first quarter and early in the second quarter, it rebounded in the latter half of the quarter, and the pipeline remains very strong, heading into the third quarter.

With respect to noninterest expense shown on Slide 9, the decrease of $200,000 from the first quarter to $13.2 million was due primarily to decreases in consulting and professional fees, loan expenses and deposit insurance premium, partially offset by an increase in other expense. The decrease in consulting and professional services reflected seasonal cost incurred during the first quarter related to the filing of our annual report and proxy statement. The decrease in loan expenses is related to cost incurred during the first quarter associated with nonperforming loans and the decrease in deposit insurance premium was due to declines in the balance of broker deposits and year-over-year asset growth, both of which positively impact the formula used to calculate deposit insurance expense. The increase in other expenses was due primarily to a $250,000 charitable contribution to assist small businesses and nonprofits address the economic challenges of the COVID-19 pandemic.

Now let's turn to asset quality on Slide 10. The allowance for loan losses increased to $24.5 million, up 7% on modest loan growth excluding PPP balances, resulting in an increase in the allowance to total loans to 82 basis points or 84 basis points, excluding PPP loans. The linked quarter increase was due primarily to additional adjustments to qualitative factors in our allowance model to reflect the continued economic uncertainty resulting from the COVID-19 pandemic. Of note, there were no new specific reserves taken on individual loan balances during the quarter. Net charge-offs of $900,000 were recognized during the quarter, resulting in net charge-offs to average loans of 12 basis points compared to 6 basis points for the first quarter. The net charge-offs for the quarter included a $740,000 charge-off in our health care finance portfolio, which is the first loss that we have ever experienced in that line of business and one that had some unique circumstances associated with them. Nonperforming loans increased by $800,000 in the second quarter to $8.2 million, due primarily to a $700,000 owner-occupied CRE loan that was placed on nonaccrual status during the quarter. However, the ratios of nonperforming loans to total loans and nonperforming assets to total assets remained relatively consistent with the prior quarter. While there is much that we still don't know about the longer-term implications of COVID-19 on the economy and on our borrowers, our credit metrics remain strong to date, and we continue to take comfort in the low LTVs on our real estate secured loans and our overall conservative approach to underwriting as reflected in our low levels of both nonperforming loans and net charge-offs.

With respect to liquidity and capital, as shown on Slide 11, our overall capital levels remain healthy due in part to balance sheet actions we have taken over the last several quarters to manage and preserve capital. Our tangible common equity to tangible assets ratio decreased to 7.01% in the second quarter from 7.22% in the first quarter, primarily due to the asset growth associated with our continued strong deposit inflows, most of which was held in cash or to fund the PPP loans. Excluding growth in cash and PPP balances, the tangible common equity ratio would have been 35 basis points higher. Additionally, tangible book value per share increased to $30.92. Overall, our regulatory capital ratios at the holding company and the bank remain strong, and we have more than sufficient on balance sheet liquidity, supplemented by access to additional funding sources to manage the current economic impact of the COVID-19 crisis. In terms of capital and overall balance sheet growth going forward, our intent is to reduce the size of the balance sheet over the second half of 2020 through continued deposit repricing and a lower, but still prudent, level of cash balances. As a result, we expect capital levels to increase meaningfully with improved earnings on a smaller balance sheet. Looking ahead, we are extremely excited about our prospects moving into the second half of 2020 and 2021. We believe the trends we have experienced to date with respect to our loans on deferral speak to the quality of the loan portfolio. Our stabilizing asset yields coupled with the opportunity to significantly lower deposit costs over the next 18 months, are expected to drive substantial increases in net interest income, net interest margin. Fee income in the near-term from our mortgage business should remain solid, while gain on sale revenue from our small business lending division has the potential to become a significant source of revenue and drive increased profitability.

With that, I will turn it back to the operator so we can take your questions. Operator?

(Operator Instructions) The first question today will come from Michael Perito with KBW.

A couple of questions for me. Ken, I wondered if you could maybe put some numbers around that NIM trajectory intra quarter from May to June, I guess, for starters.

Yes. We hit a low in May. It was in the kind of the lower 140s. I mean April was down a bit relative -- kind of flattish with March. And in May, we really hit the floor. But then in June, it was back up into the mid- to high-150. So we kind of got the trajectory back on track. And as I said, we really felt the full impact of the Fed rate cuts in the first part of the quarter, but asset yields have stabilized. And I think with deposit repricing opportunity going forward, there is a pretty solid upward trajectory for net interest margin here going forward.

Is there any timing we should be mindful of around the repricing and anything else on the asset side? Or do you think the third quarter could start to show some of that positive trajectory?

Yes. I mean I would probably argue that we showed a positive trajectory in the second quarter. We were up -- we were down about $1.4 million or so. And that's just going to compound here -- not compound, (inaudible) this quarter. But it will -- it is expected to increase because one thing that we kind of have to keep in mind is that we're a bit tied to the schedule of CD maturities and in some months have chunkier maturities than others, but we're starting to pick up the impact of the maturities from the earlier part of the year. And obviously, we still have a nice spread to pick up throughout the remainder of the year. But I think you'll -- at least, as far as what we're forecasting today is that dollar pickup will be much more significant in the third and fourth quarters. I think as I mentioned in the prepared remarks that we're looking at $2 million to $4 million of additional savings per quarter here throughout the rest of the year.

One of the things that will help us out immensely, Mike, like most institutions across the country, the consumer was saving every dime they had through the second quarter. Our cash on hand jumped up to $612 million, on June 10 was our high during the quarter. We've now lowered that as of this morning, we're down to $465 million. So we continue to bring -- we think we peaked during the second quarter, we brought it down significantly. And we hope by year-end to have that down in the $200 million to $250 million range. So that along with a decrease in cash, loans at a bottom and the deposits continuing to decline, should show a tremendous increase in then between now and year-end.

Helpful. And then on the -- can you expand a little on the -- what drove kind of the lower mortgage production in the early part of the quarter? I mean it seems like pipelines are strong today and based on kind of some of the peer performances from other banks, I would have thought, it would be a pretty big quarter on the mortgage unit. I mean it still was sizable, but it seems like there was something that kind of hampered you guys out of the gates a little bit. Can you expand on what occurred?

I'll try and then let Ken fill it in. We did not drop off in units, in sales, but we hedged the volume coming through the door and the market just blew up the end of March, early part of April. We lost $2 million in revenue due to this fluctuation in market pricing on the hedges. So we moved to best efforts, position got back into hedging here in July. So throughout the quarter, we had solid volume, actually a record volume for the bank in the history of originations. Our pipeline today, we're setting up 375 loans. Last year, we originated 1,360 loans total. So the numbers are great, the units are great, but the craziness in the market when people worried about massive nonpayment and all the agencies running into trouble just crossed our yield the last 2 weeks of margin for the month of April.

Got it. Helpful. And then just lastly for me. On the credit side of things, what -- it's obviously a challenging environment, but -- and I know the LTVs on your STL are low. But at the same time, are there any concerns on your end about kind of the ultimate value of some of these properties that you're using as collateral as kind of a lot of the restaurants and other retail businesses are seemingly under pressure, which I know is a lot of where the exposure is in this portfolio?

I don't know that we have tremendous concerns. We're talking to the clients who are talking. We have the 2 large chains that we have. The largest volume in are Red Lobster and Bob Evans. Bob Evans is back and going strong. In fact, they had asked our clients for deferrals up to year-end, and they've started making payments already. Now if there is a second wave when the states come through and shut down stuff again, that could impact them, but they seem to be rock solid. Red Lobster is still trying to get their arms around some kind of a carryout or remote delivery capability, which they have never had in the history of the restaurant chain that kind of impacted them probably a little tougher. Bob Evans got it set up early on in the program and rolling. So we're not seeing issues. The quick service restaurants that we have, they're not missing a beat. All of them are going solid. You obviously read or heard about the large Wendy's, Pizza Hut franchisee that filed for bankruptcy. He's just doing -- using that as a tool to kind of do some housecleaning. I think we had 4 of our Wendy's are part of his portfolio, and they're all paying and processing fine. So we're in contact with these folks, Mike, on them, their daily basis and talking to them and both customer level, and they're obviously talking to the restaurant owners. And right now, we're not seeing any major cracks. If we go into a full nationwide shutdown again -- obviously, a lot of restaurants have brought people back. They've bought inventory, they've restocked. That's going to be a double whammy to them. That could impact folks more so than anything else. But if things stay where they're at, they don't get any worse, we think we're going to sail through in really good shape.

And the next question will come from George Sutton with Craig-Hallum.

David and Ken, this is James on for George. Two for me here. Within the CRE and STL books, I mean, are you taking additional reserves for borrowers in states that have been imposing these tighter restrictions? Or are you not looking at it on that level of granularity?

We're -- in terms of what we reserve in the portfolio, it's more of a portfolio level reserve. I mean our credit team has worked very closely with the CRE team to go through the portfolio on a loan-by-loan basis and identify areas where there may be more risk or reaching out to borrowers to touch base and see how things are going. I guess the good thing for us is that we have a pretty diversified portfolio across the country, and more times than not the locations within those geographies are pretty good. I mean we certainly keep our eye on, again, geographic factors. The things developing with tenants, as David talked about earlier, things overall and whether it's a correct service industry. I mean we keep on top of all of that stuff. But no, we're not reserving -- we're not going to that level of detail on reserving it in the portfolio.

Got you. And then on the public finance book, I'd assume there'll be some demand for borrowings to fill some of the budget deficit. What's sort of your approach to underwriting within that segment?

Yes. Actually, we're -- James, we don't have a tremendous amount of growth in that area at the current time. We've been to that portfolio top to bottom. Obviously, with the concerns of some of the states and collection of income tax, property taxes, et cetera. And we're, again, very, very comfortable. There is a lot of different levers to pull in that area. We don't have any single loan that we're worried about at the current time. In fact, we actually have an upside value to that portfolio. We have about $200 million that we estimate we could sell in the secondary market right now at probably 103 to 104 premium. And we've opted not to do that till we -- again, we need loan income more than we need extra cash coming back in. So again, we're very comfortable the way that those loans are set up and the quality. A lot of it's Midwest based here in our back door in Indiana, not in Illinois. So we're very comfortable with that portfolio kind of top to bottom. I don't know, you got anything to add, Ken?

No. I think we're -- our team, I think as David mentioned, our team did kind of a bottoms-up analysis on just about -- on every loan in the portfolio and really did a deep dive on the source of repayments for all the borrowers and beat it up pretty good and came away feeling pretty good about the portfolio.

Just for everybody's notification on the phone today, we just completed this past month. We had [Cril Horvat] come in and do a loan review for us. And obviously, right in the midst of the crisis and in the play. And at the end of the day, they had no adjustments. They had a couple of suggestions of things for us to look at due to the crisis in play, but they really had no concerns and questions whatsoever on the portfolio, the underwriting and the way we're processing. So we're very comfortable that we are doing everything we can and then some to stay on top of the whole lending side of the operation.

Good to hear. And then given your position, sort of, I'll call it, a digital centric bank, as a surgeon, digital banking and seeing how successful some of the fintech lenders have been in distributing the PPP loans sort of influence your strategic priorities at all?

Yes. I think the PPP loan side of things, it was an interesting exercise for us. We had kind of -- as most institutions that are all hands on back. We had people from every department doing it because we originated more PPP loans in a 10-day period than we normally do loans in a calendar year. So it was an interesting exercise. We stayed to just our existing clients. And as this program has kind of morphed over the last 60 days, we're very thankful that we did that. We definitely don't want to put a lot of 1% loans on the books for 5 years. Now with the repayment terms, we have looked at the outside services that are willing to buy the PPP loans and take them off our hands. But since they're existing clients, our fear is kind of when you get to the very background, although they're being fronted by 4 or 5 different people, the background operation buying the PPP loans, it's the same organization. And they're going to have billions of dollars and thousands, hundred thousands of people to deal with over the next 6 to 9 months, and we don't want the quality of service to blow up. If they move forward with proposed plans now to basically forgive every loan under $150,000, that would take up over 80% of the loans we originated. So we can get out of this thing in the next 3 months with virtually no hangover. Obviously, that revenue recognition would move forward. So that's kind of an ace in the hole that could be a good opportunity, I can tell you. We have really solidified our position with a lot of our clients, helping them through the PPP process and getting them some cash to really take the edge off. And particularly, if it's for given, we'll be heroes with them for years and years. So it's an interesting time in the marketplace, and I think we're very well positioned to take advantage, the great part, as you say, a lot of institutions, there's estimates of 5 million to 10 million consumers across the United States were forced into the electronic world over the last 90 days that probably would never have touched online banking in their life, and that's a tremendous opportunity for customers that most of them are a little further up in the age category. They -- a lot of them living on fixed incomes. Once they get through the dust and realize this thing really works without a lot of marketing effort, I think we'll pick up significant client count over the next few months, and we're already seeing it on the small business side of things.

And the next question will come from Nathan Race with Piper Sandler.

I wanted to just touch base on just the loan sale expectations outside of SBA going forward. It sounds like you guys expect to kind of prune the portfolio in the back half of this year. So just wondering if you can kind of size up the expectation there in terms of loan sales?

We're probably -- it's probably in the range of maybe $25 million to $35 million, $45 million a quarter. Maybe a little bit more in the fourth quarter, but starting to look at putting together a potential transaction in single tenant for this quarter. And then perhaps, a single tenant in the public finance deal in the fourth quarter. So probably somewhere -- if you're going to take them all together, probably somewhere in the neighborhood of $50 million to $75 million.

Got it. That's helpful. I appreciate that, Ken. And then just turning to credit, just curious if you guys have kind of the rent collection data for the single tenant portfolio over the course of the second quarter? Just trying to get a sense of how that's trended across your investor base?

We haven't talked to -- we haven't gotten specific to ask folks on that. We're engaging it by the payment status in play. We do know Red Lobster, I believe, asked for some amount of rebate between now and year-end. Bob Evans had come back and said, we'd like to go half payments until we reopen. And virtually all of those restaurants are reopened today. Those are the only 2 kind of big players that we know directly came in and asked the owners for some kind of rental abatement, but all of that was being deferred. It wasn't asked as a giveaway that they anticipate like with Red Lobster, they'd make a payment in a half once they get back up and running full steam until they get caught up. So -- and I think the majority outside of the restaurant area, I think all the others, it's business as usual. They're getting monthly payments, and we're not hearing anybody or any complaints. And even on the quick service, they're chugging along. They're all doing good.

Okay. Great. That's great to hear. And then just staying within credit, just thinking about the reserve build going forward. It sounds like the provision this quarter was largely a function of just qualitative inputs. But I guess, kind of looking ahead and within the context of the second quarter trends in terms of charge-off -- I'm sorry, with terms of classified migration and so forth. Just any sense what you saw in terms of criticized, classified trends in the quarter? And just maybe how you see that maybe evolving into the third quarter as well?

I would say that the level of classified, criticized has remained relatively flat. I would say that we have not seen significant or substantial negative migration at all so far. I mean, obviously, as we've said, it's in single tenant and health care and some of these portfolios that have large -- or had, at one point, large deferral levels. I mean we stay on top of these portfolios and try to stay in touch with the borrowers, and we track the payments. We track our payments coming in the door on these loans on a daily basis. But I would say, so far, have not a lot of -- have not seen any negative migration that you consider out of the norm.

Actually, on the other side of it, Nate, we've got about $1.5 million that are 90-day plus delinquent 2 business owner-operated properties currently that are getting refinanced. All indications are that they'll be done and off the delinquency list by the end of the third quarter. So we're not seeing any specific reserves, any issues. Just because of what's going on in anticipation, we'll probably think fairly close to $2.5 million reserve again during the third quarter, and then we'll kind of reevaluate where we're at during the fourth quarter. If things have stabilized across the country, the bump-up is purely based on unknown factors. As Ken said, it's not specific to single loans, and there is no specific reserves out there. So we even absorbed the one loan that kind of got squarely in the health care facility. We just took hundred tens on the dollar loss on that one during the second quarter. We're going to get 7% to 8% of that back and selling the equipment and stuff in the secondary market, but we're not seeing -- and I'd say the things that help me sleep at night is the fact that absolutely every loan that has come off deferral has now made a payment. And so we're not seeing any push from people getting back into business and business operating as usual.

Got it. And I guess, just curious if that health care charge-off, was that a function of just what's going on in the environmentally, was the pandemic? Or was that just kind of a more one-off operational issue, so to speak?

Combination of the 2. It was a single client in California when they did not release the -- did not allow him to reopen. He just -- and he was a relatively new operator. He just lost it, send it out to all of his clients. He was going out of business, filed bankruptcy, packed up his family and left town literally. So it was just a one-off combination, I think, of business inexperience and frustration and concerned about the pandemic. So I don't know. We, I think, could have come out of that hole. If either given us a week or 2 to find somebody to work with him, but he just panicked and nothing we could do about it.

Yes. Understandable. Okay. And then just a couple of housekeeping questions for me. I apologize if you touched on it, Ken, but just kind of the operating expense run rate from here, any thoughts? Does that kind of get back up to $13.5 million like we saw in the first quarter? How is that kind of trend in the back half of this year?

Yes. I would say, all things equal, that's probably $13.5 million, is probably an okay number. But as David talked about in his comments, I mean we've been able to pull forward our SBA hiring about 6 months. I mean we were -- at the end of June, we were -- we had the budgeted number of BDOs on board that we had originally forecasted for the end of this year. So what that means is that they've been able to hit the ground running and start to get out there and originate business. So we'll probably see, again, as long as we're hitting our forecasted number on originations in the SBA space, which are up significantly from 3 months ago. We'll probably see some increase in the compensation line item because of the increased level. The increased level of originations are going to translate into increased commissions. So that's kind of the, call it a wildcard, for lack of a better term. But as long as we're hitting the origination targets that we've set, you're probably going to see that bottom line noninterest expense creep up as well. Obviously, it's well far more than offset by fee revenue on the gain on sales side, but that would be the one piece that kind of increases noninterest expense throughout the course of the year.

To give you an idea of the growth and the magnitude of the SBA opportunity out here, at the beginning of the year, we had an outstanding pipeline of about $10 million. Right now that pipeline is $100 million. So it's grown tenfold over what we were doing at the first part of the year. And as Ken said, we've got a great opportunity to really knock some numbers out of the park here in the second half and then double down on that or more in 2021.

Got it. That's encouraging here and congrats on that hiring success. Just one last one for me. Ken, any thoughts on the tax rate going forward?

Tax rate is always a bit of a moving target for us. I think we're probably -- I think as we -- some of it obviously has to do with the percentage of taxable income. But as long I think -- as long as mortgage is solid and we pick up more revenue from SBA going forward, that's going to increase the level of taxable or pretax income. So I mean, I think -- and I know we had a negative provision this quarter, but we probably still model internally somewhere in the range of 8% to 9%.

And the next question will come from John Rodis with Janney.

Interesting times. Ken, I know there is a lot of moving parts just with the margin, but I'm just sort of trying to put pencil to paper here. And assuming you're shrinking the balance sheet some too and given the CD repricing. I mean do you think the margin can get close to 2% over the next few quarters? Or is that too aggressive?

No. I think we can. I think we definitely have the trajectory to get there. I think that we're not going to put out formal guidance or something because there is just too many unknowns out there right now. And again, we're trying to keep the cash -- run the cash balances down a bit. Obviously, we'll probably keep them a little bit higher than we have on a historical basis just because of the uncertainty of the pandemic, but lower those cash balances, lower deposits. But I can tell you, we certainly see a pathway to a 2% NIM here probably over the, call it, the next 2 to 3 to 4 quarters, given kind of the forecast that we have for kind of what we're thinking about with the balance sheet. We have at the end of the year, a smaller balance sheet, kind of targeting that $4.1 billion size by the end of the year with cash balances, reduced cash balances being the largest contributor to the decrease in size. But yes, there is certainly a pathway that we're looking at to a -- again in the range of 2, over the next 2 to 3 to 4 quarters.

Okay. No, I just wanted to make sure I wasn't too aggressive or -- okay. I think we're on the same page. And Dave, just a follow-up on your comment on SBA. So I think you said for next year, you said loan production on the SBA side of $200 million to $225 million. Is that correct?

Correct.

Just sort of in the current environment, what sort of revenues, I guess, on loan sales do you think that could throw off, just sort of based on current pricing and stuff, if everything goes right?

Piece that we just sold, we've got just a little under 10%. We were in the, I think, a low -- some of them were in the 10% to 11%, and a couple of them were in the 9% range. And I think we balanced out to about 9% then with all the charges and stuff we take out of it. We probably net after fees, somewhere in that 7%, 7.5% range. So if you take the 225x 75%, 80% and by 7.5%, and that really has stayed consistent, John, all the way. As every other market went upside down, the SBA has stayed very stable. And obviously, I know there is a big crunch kind of at year-end of folks buying that. So premiums could jump during the fourth quarter. But if you take kind of a 7.5% net on those sales, that's probably a pretty good figure to work with.

So just to be clear, Dave, the 2%, 2.5% or 2%, 3% difference that net, that's basically accounting for the expenses that would flow through for you guys?

Yes, loan fees, commissions, things that we're paying out on the outside line that we're modeling at about a 7.5% net on those sales.

Yes. I mean, I would say that topline gain on sale premiums at least in our experience and the stuff we've sold is kind of healthy at that 110. I mean we've gotten, I think, pretty decent pricing overall. But yes, you just -- you got to net out the FAS 91 deferred loan fees and -- or deferred costs and then any other costs you incur.

This will conclude today's question-and-answer session. I would now like to turn the conference back over to Mr. Becker for any closing remarks.

I would like to thank all of you for joining on our call today. We know it's pretty crazy times out here, and we hope everyone remains healthy and safe during the challenging times, and have a great day. We appreciate your time. Thank you.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.