Good day, everyone, and welcome to the First Internet Bancorp Earnings Conference Call for the second quarter of 2021. I would now like to turn the conference over to Larry Clark from Financial Profiles, Inc. Please go ahead, Mr. Clark.

Thank you, Sarah. Good day, everyone, and thank you for joining us to discuss First Internet Bancorp's financial results for the second quarter of 2021. The company issued its earnings press release yesterday afternoon, and it's available on the company's website. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website. Joining us today from the management team are Chairman and CEO, David Becker; and Executive Vice President and CFO, Ken Lovik. David will provide an overview and a company update, and Ken will discuss the financial results. Then we'll open up the call to your questions. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition 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 a reconciliation of the GAAP to non-GAAP measures. At this time, I'd like to turn the call over to David.

Thank you, Larry, and good afternoon, everyone, and thanks for joining us today. We produced strong operating results for the second quarter of 2021 driven by net interest margin expansion and disciplined expense management. Reported net income was a record $13.1 million and diluted earnings per share was a record $1.31 million. Included in our results for the quarter was a $2.5 million pretax gain on the sale of our corporate headquarters. Excluding this amount, adjusted net income was $11.1 million, which would still be our highest quarterly results ever, and adjusted earnings per share was $1.11, a $0.01 shy of our quarterly record. The strong performance enabled us to generate an adjusted return on average assets of 1.06%, demonstrating continuous improvement from the beginning of the pandemic crisis. And we increased our tangible common equity to tangible assets ratio by 31 basis points to just over 8.4%. Compared to the second quarter of 2020, performance has increased significantly due to the strong growth in net interest income and net interest margin as well as from the investments we have made in our fee revenue lines of business. Using the adjusted earnings results, both net income and earnings per share are up 182% and 178% respectively while adjusted total revenue is up 45%. Our national SBA platform gained momentum during the quarter, producing $3 million of gain on sale revenue, up significantly from the first quarter. Due to the disruption in the small business lending market earlier in the year and the time it took to rebuild pipelines, our level of forecasted originations for the year is down slightly from our prior forecast. However, loan pipelines have recovered. We are actively engaged in meeting strong demand for the traditional SBA 7(a) loans as the economic recovery accelerates. Therefore, we still feel very confident in the growth of our SBA business with expected gain on sale revenue between $13 million to $14 million for the full year. Looking at the lending activity for the second quarter, total loan balances were down just over $100 million as prepayment activity remained elevated in the health care finance and single tenant leasing financing portfolios. Looking forward, though, loan pipelines across other commercial lines of business began to grow significantly during the second quarter. For example, the single tenant lease financing pipeline is at its highest level in 15 months as relationship borrowers are increasingly coming to us to finance additional opportunities. In total, our commercial pipeline is up over 20% from the end of the first quarter. Another area of focus for us has been increasing our presence in construction lending. Funding balances are up over 50% from one year ago, and our team is actively sourcing new projects. Moreover, as of June 30, unfunded commitments on our construction line of business totaled $159 million, an increase of 39% over the balance at the end of the first quarter. With regard to health care finance, balances were down over $50 million from the first quarter driven by elevated prepayment activity and a very low level of new originations. New origination activity during 2021 has been light as the low interest rate environment and heightened competition drove pricing well below the floors we have in place. Additionally, in June, our partner in this line of business previously known as Lendeavor announced that it was going to be acquired by Fifth Third Bank, who already had an ownership stake in the company. Going forward, we expect that Fifth Third will retain most, if not all, of our new origination activity. However, we continue to explore new lines of business and partnerships. For example, during the second quarter, we finalized the partnership with a fintech-oriented specialty lender that focuses on high-quality loans to the franchise industry, and we will fill the gap created by the decline in health care finance balances. Through this relationship, we expect to begin funding portfolio loans with attractive yields during the third quarter and have committed to fund up to $100 million of originations over the next 12 months. This relationship will also provide SBA 7(a) lending opportunities to supplement our own origination activities. Overall, we feel really good about how pipelines increased during the second quarter. We are well positioned to deploy the elevated levels of cash on the balance sheet and capitalize on loan growth opportunities in the second half of 2021. Our credit quality meanwhile remains among the best in the industry. During the quarter, nonperforming loans declined $5.4 million or 37%, and nonperforming assets declined $4.1 million or 28% due primarily to positive developments on single-tenant lease financing relationships and a commercial and industrial relationship, both of which were previously classified as nonaccrual. At quarter end, the ratio of nonperforming loans to total loans has declined to 31% and the ratio of nonperforming assets to total assets has declined to 25 basis points. Additionally, delinquencies dropped significantly during the quarter, representing only 7 basis points of the total loan balances. We are especially proud of the fact that as of June 30, we had no delinquencies in our originated consumer loan portfolio. Turning now to the Consumer and Small Business banking. Demand for digital banking services is at an all-time high. We have leveraged our customer-focused products, which include the nation's best checking account for small businesses as awarded by Newsweek Magazine, and expertise in digital service delivery. We have 22 years of experience in providing not just a robust customer-facing interface, but also the processes behind the scenes to support a seamless experience. During the first half of 2021, we have grown our small business checking relationships by more than 25% and to continue to win and retain these relationships, we are close to being able to announce several collaborative partnerships with fintech companies. We look forward to sharing more details about our next-generation customer experience that will also power internal efficiencies in a future call. In summary, we generated excellent results for our shareholders in the second quarter. We are in a great financial position to serve our customers and help fuel the broader economy as the country emerges from the pandemic. Before I turn it over to Ken, I would like to thank the entire First Internet team for the diligent efforts in delivering record earnings this quarter. We continue to challenge ourselves to imagine more, and First Internet Bank has cultivated a workplace culture that promotes innovation, collaboration, and customer focus, which is reflected in being named one of the top workplaces in Indiana for the eighth consecutive year. We are confident in the strength of our franchise and the momentum we have built heading into the back half of 2021. With that, I'd like to turn the call over to Ken to discuss our financial results for the quarter.

Thanks, David. As David mentioned, it was a strong quarter with record net income of $13.1 million and $1.31 diluted earnings per share, which included a $2.5 million pretax gain on the sale of our corporate headquarters. After taking into account this one-time item, adjusted net income came in at $11.1 million, and adjusted diluted earnings per share was $1.11, increases of 6.2% and 5.7%, respectively, from the first quarter. Profitability continued to improve with fully taxable equivalent net interest margin increasing 7 basis points sequentially to 2.25% and adjusted return on average assets of 1.06% and an adjusted return on average tangible common equity of 12.79%. Looking at total loans at the end of the second quarter were $3 billion, a 3.3% decline from the first quarter and relatively comparable to June 30, 2020. The decline in loan balances from the first quarter was driven largely by net payoffs in our health care finance, single-tenant lease financing, and public finance portfolios as balances were down $54.3 million, $28.2 million, and $25.5 million, respectively. Additionally, small business lending balances were down $9.2 million, largely due to $16.2 million of PPP loan forgiveness but partially offset by new production. Increases of $24.4 million in commercial and industrial and $14 million in investor commercial real estate loan balances partially offset the overall decrease in the loan portfolio. Consumer loans decreased modestly compared to the first quarter due primarily to continued prepayment activity in the residential mortgage portfolio. We did, however, see an increase in origination activity within our specialty consumer lending business, with trailer balances increasing $5.3 million or 3.7% from the first quarter. Moving on to deposits, overall, deposit balances were down slightly from the end of the first quarter, and again, we saw improvement in the composition of our deposit base. During the quarter, CDs and broker deposits decreased $75.5 million or 5.1% on a combined basis while non-time deposit balances increased $64.1 million or 3.7% on a combined basis. CDs and broker deposit balances continue to decline as higher-cost CD maturities were either funded with on-balance sheet liquidity or replaced with much more attractively priced money market accounts, checking accounts, and lower-rate CDs. This deposit migration lowered our cost of interest-bearing deposits by 13 basis points in the quarter, and we expect to experience continued reductions in deposit costs throughout the second half of the year. Compared to the first half of 2020, we've realized $16.6 million of deposit interest expense savings to date and expect to realize around $26 million for the full year based on the current deposit pricing environment. Turning to noninterest income, noninterest income for the quarter was $9 million, up from $8.4 million in the first quarter. However, as mentioned earlier, included in those results was a one-time pretax gain of $2.5 million due to the sale of the company's corporate headquarters. Adjusted for that sale, noninterest income was $6.4 million, down $1.9 million from the prior quarter. The decrease was driven primarily by lower revenues from mortgage banking activities but was partially offset by an increase in the gain on sale of loans. Mortgage banking revenue totaled $2.7 million for the second quarter, down $3.1 million from the prior quarter. Interest rate lock and origination volumes during the quarter were off the record high levels we saw in the past few quarters, mostly due to lower refinance activity as well as limited housing inventory in the marketplace. Furthermore, competition has intensified, which has put significant pressure on our margins. Although there may be volatility in mortgage banking revenue, we expect it to stabilize during the second half of the year. Gain on sale of loans totaled $3 million for the quarter, up $1.3 million or 75% from the first quarter as we sold a larger amount of the U.S. Small Business Administration 7(a) guaranteed loans at higher premiums. With respect to noninterest expenses, the decrease on a linked-quarter basis was driven primarily by a decline in salaries and employee benefits and the deposit insurance premium, which was partially offset by increases in marketing, advertising and promotion expense. The credit quality improved during the quarter, mainly due to the resolution of a number of legacy nonperforming loans. Nonperforming loans declined $5.4 million or 37% compared to the linked quarter due primarily to positive developments related to a single tenant lease financing relationship and a commercial and industrial relationship, both of which were classified as nonaccrual. Overall, I would like to wrap up my comments with a few thoughts on the balance sheet and revenue initiatives we have implemented over the last several quarters that position us much better to perform well in a variety of interest rate environments. First, we believe that our balance sheet and sources of fee revenue are in a much better position than they were several years ago, and we will continue to build off the improvements made over the last several quarters to create a franchise that will deliver high performance regardless of the interest rate environment.

Our first question comes from Michael Perito with KBW.

Dave, I'm sure that you're limited in what you can say about some of those fintech partnerships you alluded to coming in the near future here. But I was just curious if maybe you can give us some more structure behind that in terms of what type of opportunities we should expect to see financially? Are they primarily lending opportunities where you're using your balance sheet or deposit opportunities where you're offering insured checking accounts? Any color there would be helpful just so we know how you guys are thinking about those moving forward?

Yes. Technically, from the partnership discussed there, that's really internal software and infrastructure cleanups in the small business category. So it should provide both. Like I said, we've had great growth since the first of the year with commercial checking accounts going up 25%. But we think we're going to add some additional features on the back end, make smoother access, faster performance that will help both on the lending and the savings side of things and deposit base. So that is technically infrastructure updates. But obviously, with the fintech companies that we're partnering with, they also bring opportunity to the table and channels for delivery. The real focus of the first plus year, Michael, is going to be on the small business community and making a better service and better feature for them.

Helpful. And then on the SBA side, can you comment maybe a little bit more specifically about what margin you're seeing in the secondary market there? You guys maintained the $13 million to $14 million for the full year. Is the volume driving that similar? Or is it stronger margins to get you there? Could you explain the dynamics a little bit in that market right now? What gives you guys the confidence of hitting the revenue print?

I'll take the first half and then let Ken back me up here. The margins that we're making or the gain on sale, we've actually had a couple of loans in the 15% to 16% level. We're averaging probably about $1.13 in gain on sale. As we say, gross volume of loans will be down, but the fact that we're selling 90% versus 75%. And the margins, when we say 1.13, 1.14, we have to give half of it over 10% to the SBA. So that's a little smaller figure. But we're up probably at least 3% on the margin and selling 90 versus 75, even though volume is going to be down, we'll be very close to what we projected for total earnings for the year a year ago.

Got it. Helpful. And then just lastly for me. Looking at the balance sheet, you guys have $4.2 billion. You have a TCE ratio handled on it. You got some capacity on a loan deposit ratio, obviously a much different position than a few years ago. Should we be expecting some balance sheet growth from here now? I mean, it sounds like you guys are working to add some new lending partnerships and verticals, pipelines are in decent shape? I mean the balance sheet has been flat for the better part of 10 quarters now. I mean, are we close to reaching an inflection there? Do you think there's still more remixing and that can happen behind the scenes and more capital building that needs to happen before that switch has kind of turned?

Mike, I think we've obviously been pretty pleased with how capital is built and can certainly support growth. And as David talked about in his comments, we feel pretty good about pipelines and starting to see pipelines build. So I think we should expect to see loan growth between now and the end of the year, I think in terms of the total balance sheet, what probably offsets that a bit is we still have a lot of excess cash on the balance sheet. So we continue to remix the deposit composition, which in this quarter was kind of a wash and didn't really produce much growth. But we have that, I guess, the cushion there with the excess cash to redeploy the excess liquidity on the balance sheet. So while it's probably maybe like what we've talked about in the past, we may see a higher percentage of loan growth between now and the end of the year, but not a lot of overall balance sheet growth.

Maybe ask the question a little bit differently. I guess there's clearly still some dynamics in the market, right, that are impacting the balance sheet size and as you alluded to Ken. But as we look to next year, I mean, would you guys be surprised at kind of flat balance sheet you've been operating with holds further? Or do you have much more appetite for growth than maybe you did 18 months ago?

We have a higher appetite without question, Mike. Yes. I was going to say we're looking at partnerships internally and externally to help push that up. As Ken said, we're still, there's a lot of market forces, as you pointed out, too, that are kind of beating on us right now, but we're open to offset that with some external partnerships that will help drive volume. Even though our existing channels are getting better, we're still looking for other opportunities, too, that should come to fruition between now and year-end. So we do anticipate growth next year.

I wanted to first ask about your strong capital ratios and the outlook for the balance sheet. Given the current stock price, why not consider a buyback at these levels? It seems like a beneficial use of capital at these prices.

As I've stated on many occasions, I would much rather put it to work to buy something and acquire something and gather more opportunities. We have a couple of fairly solid opportunities that we're looking at that could gain traction between now and year-end. But I'll tell you, Brett, if it doesn't happen and the share price stays where it is, obviously, trading in the $31, $32 range with a book value of almost 36%. It wouldn't make a lot of sense to buy back some shares. And we do have capital capacity for the first time in a long time to do that. So we want to play out a couple of opportunities we're looking at. But if they don't come to fruition, we will do a buyback somewhere year-end, early 2022.

Okay. And then I wanted to follow up on the points you made about the payoffs decreasing so far, at least this quarter. I mean, it seems like there are some large regionals out there that are doing some pretty aggressive fixed-rate stuff in the health care business. I'm just trying to make sure I understand the dynamics of expectations for pipelines and single-tenant leasing to maybe offset any additional pressure you might see in the other portfolios, particularly health care, public finance. What kind of gives you the confidence that those payoffs are going to abate or I guess they have this quarter, but what visibility do you have in that?

In the first half of the year, with lower rates across the board, we experienced significant competition in various sectors of our business, including single-tenant finance, health care finance, and C&I lending. We opted to maintain our established floors instead of chasing rates down to their lowest points, which affected loan growth and our pipelines in both the first and second quarters. However, as rates have risen slightly and the economy has shown some improvement, we've observed increased activity in single-tenant finance. The back end of the curve has also seen rising rates, which benefits our pricing and aligns new deals with our established floors or even surpasses them. This uptick in activity has led to new borrowing opportunities with clients. Notably, as David mentioned, our single-tenant pipeline is currently at its highest point in 15 months. Additionally, our new partnership in the franchise sector is generating a building pipeline that could potentially yield up to $100 million in new loan volume over the next year. We’ve also witnessed some payoffs in public finance due to scheduled maturities and prepayments. While we continue to explore limited opportunities in this space with a focus on keeping durations short, we are facing significant competition from large regional players in public finance who are aggressively bidding, sometimes by hundreds of basis points. Nonetheless, the increase in rates and the recovery of the economy have shifted conditions to a point where we feel more comfortable engaging in deals from a pricing standpoint.

One big advantage for the spread on single-tenant loans is that about 95% of these loans involve some form of 1031 exchange. With the current discussions in Congress regarding capital gains and the potential elimination of 1031 exchanges, many individuals are reassessing their portfolios and engaging in numerous transactions to prepare for any negative implications from Congress. This is significantly enhancing our pipelines on a daily basis. We are observing an intriguing moment in the marketplace. Recently, changes concerning penalties from Fannie Mae and Freddie Mac have been announced, allowing for 50 basis points, and we have seen mortgage locks increase significantly, sometimes doubling or tripling compared to two weeks ago. While I believe the economy is quite stable and strong, it also feels chaotic in many respects. One day a specific issue is at the forefront, and the next day it changes. However, as Kenneth mentioned, we are optimistic that the second half of the year will see a robust increase in loan origination.

Okay. One last quick question about the sale of the headquarters. I didn't see that coming. Can you discuss that transaction?

Yes. We've been in a building here for about 5 years that we acquired. We were really in the middle of the crisis when the markets were going kind of nuts. And we are tapped out on space we're kind of thankful in some respects that the pandemic came along because we got about 25% to 30% of our people working remotely because we don't have space here in the building. We are building a new facility in downtown Fishers. Should come online either at the very end of this year or early next year. We did a partnership with the City and received some land cost abatements as well as a parking garage unto it. So it should be online at the end of the year. We're a 22, 23-year-old company, and we've made 6 moves during that time. The size that we're at today, this move estimated is going to cost us about $1 million to execute. So we built a little more space than we need. We're going to sublease part of the building and should be a facility that will last us for 10 to 15 years into the future.

Our next question comes from Nathan Race with Piper Sandler.

Not to beat a dead horse on the balance sheet and capital discussion. It sounds like with the health care book likely running off just given the sale of that platform recently, that's going to be somewhat of a growth headwind going forward. But it also sounds like from a capital deployment perspective, there's the opportunity to maybe add another production platform to offset some of that runoff on top of the other growth that you'll be seeing across the other parts of the portfolio. Is that the right thinking, David?

Correct.

Yes.

Got you. Great. And then just maybe kind of changing gears a little bit and thinking about just where the reserve can trajectory to over the next few quarters here? It sounds like the charge-offs here in the second quarter were somewhat of an anomaly. How are you guys thinking about providing for some expectations from net growth just given where the reserve stands today?

Yes. I mean, obviously, from a dollar amount, the reason why the allowance came down was just the removal of the specific reserves associated with the positive developments on the single-tenant lease financing relationship. Those were big dollars, in excess of $2.5 million. So the dollar amount went down. The overall coverage ratio went down. But I think as we pointed out in the release and in the note, we continue to bump up the qualitative factors. If we have a higher rate on new volume, the overall allowance itself is just going to migrate upwards and back towards the 1% in excess of 1% depending on how strong the growth is in those categories.

And Nate, again, just to reinforce, as Ken talked in his comments earlier, the loss that we had this quarter really goes back to a loan that went sideways back in 2019. The principal we see of the buildings filed bankruptcy and closed down. I think we put them into nonaccrual status in the middle of '19. So we've gone through foreclosure. One building is sold. We have 2 other proposals out there to buy the second building should hopefully clear up here into this quarter or very early fourth quarter. The portfolio as a whole is rock solid. We have absolutely no delinquency in the portfolio as it exists today. So you hit the nail on the head, this is kind of a normal number for us, and we do have a potential to recover some dollars on that loss as well, but we're being kind of conservative flushing it out and then we're going to go after the sponsors.

Got it. That's great color. And maybe just last 1 on the expense run rate from here. It's great to see it flat sequentially. How are you guys thinking about the run rate going forward? It sounds like maybe there's a little bit of pressure from the headquarter relocation and so forth. Any kind of high-level thoughts on kind of the run rate going forward and expectations for expense growth in 2022 as well would be helpful.

Yes. I think probably over the course of the remainder of this year, you'd probably expect to see expenses tick up a little bit from where they are right now. We have continued to add to our headcount in certain areas across the bank. So we should expect to see a bit of an increase on headcount and commissions as mortgage comes back a bit and SBA continues to ramp up. Next year or two, we will see a little bit of a pickup related to the new building coming online.

We also have some activity going on, on the software side of things and some of these new programs and pieces we're putting in. A lot of that is incremental, it's built on a SaaS model. So we're paying for it as we use it. It won't have a tremendous impact, but there will be a little pressure kind of latter part of fourth quarter. We think, as Ken said, the cost should stay very stable through the course. And once we get our arms around the building and finalize numbers, we'll give you indications next quarter as to what impact that will have for 2022.

Next question comes from George Sutton with Craig Hallum.

David, you referred to 2 to 3 opportunities by year-end that could be areas of capital use. And I just wanted to confirm, these are the same 2 to 3 opportunities that you had discussed last quarter? My sense at that time was these could be new verticals or expanded vertical opportunities for you. Is that correct?

That's correct. One is one we talked about last quarter that's moving along and the other is a new one that's presented. In the second one, if you want to refer to that, we talked about last quarter, we couldn't come to terms on the price. One is a continuation that we've been talking to for a while and one is relatively new.

Okay. And just to make sure I understood correctly, you last quarter mentioned 40 CTO projects that were occurring and now you're talking about collaborative partnerships. Are those related? Those would be the that's why that's more of an internal improvement focus.

Yes, we have two external acquisition opportunities currently available, in addition to various internal activities. We are aiming to release a comprehensive overview during the fourth quarter that will highlight the different software components we've developed throughout the pandemic. This will likely be implemented early in 2022. Our strategy involves both external acquisitions and new verticals, as well as enhancements to our internal software to support these businesses and improve our back-office operations, thanks to our partnerships with fintech companies.

Great. Finally, I want to make sure I understood the change with provide. I understand what happened there, and you are now backfilling with a new partnership that you've made some commitments to. Can you just give us a sense of the strength of that partner relative to the provide relationship?

Yes. Yes, we're pretty excited about it. It's a specialty lender focused on the franchise finance space, who's got a really good track record. They're helping franchisees finance both new locations and existing locations in kind of retail franchise space, things like quick service restaurants, gyms, salons, and things of that nature. The volume we've committed to funding up to $100 million over the next 12 months. What we like about this space, too, is in the franchise space, pricing is a little bit more attractive. So relative to health care finance, we might not see the volume because health care finance was such a strong growth engine last year. We won't match that volume exactly, but what we will see are much higher yields. So I think it's a pretty good trade-off, a pretty good opportunity to backfill some of that growth we've had in the past, and feel pretty optimistic about the partnership we've entered into with them.

Our next question comes from John Rodis with Janney.

Most of my questions have been asked and answered. Ken, I just wanted to confirm that you mentioned you expect mortgage revenues to stabilize in the second half of the year, particularly with the second quarter?

Yes, the second quarter was noticeably lower. In the third and fourth quarters, I believe we can be comfortable projecting revenue in the $3 million to $3.5 million range. This reflects an increase from our previous figures and a slight improvement from the second quarter as the market has begun to stabilize.

It jumped all over, John, during the course of the quarter. Probably our weakest month was actually May in activity, where our overall volume is pretty solid on a year-over-year basis. But our margins, if we go back to the second quarter of last year, and I know everybody calculates margins on a different level, and Ken tells me not to talk about this because it confuses everybody, but we kind of look at a net gain on the mortgages, and we were somewhere around 3.4% to 3.5% per loan. And during the second quarter, we were at 1.48%. So the margins were cut by over half. Volume is still fairly strong, but it's kind of the same game that happened back in 2013, a little bit in 2016, as the refinance gain slows down. The independent brokers just give the shop away to try and maintain their staff and keep their volume up and keep their mortgage folks happy. So that is what we're starting to see stabilize. Pricing is getting a little more consistent. I mean we could see swings in the market of 25, 30 basis points a day up or down, and it's starting to stabilize a little bit. I think some of those folks are realizing that the new normal is probably 60% to 50% new construction and 40% on the refi gains. So change, obviously, from what it was last year.

Okay. It seems that in your press release, you mentioned that towards the end of the quarter, the trends in mortgage improved.

Yes, I'm not sure if I would label what we accomplished this quarter as a reserve release, as we had resolutions on specific reserves. We continue to see increases in qualitative factors. The allowance coverage ratio related to the unallocated portion of the portfolio has been increasing. The provision as an expense will primarily depend on loan growth and any further adjustments to qualitative factors moving forward.

Okay. Makes sense. And then just, Ken, one other question. The securities portfolio, you talked about the growth in the quarter. Do you sort of expect it to level out here if you do see the loan growth play out?

Yes, the increase in the securities portfolio was really a temporary situation. We had a significant amount of cash, which continued to accumulate throughout the quarter, exceeding $500 million and reaching about $550 million. We invested this cash primarily into traditional mortgage-backed securities that offer strong cash flow and relatively short durations. Overall, we expect the portfolio to generate over $100 million in cash over the next year. Therefore, we do not anticipate further growth in the securities portfolio. This was primarily a short-term strategy to generate earnings on our assets without locking up cash for the long term. We may continue to purchase securities occasionally for community reinvestment purposes or other reasons, but I don't expect the balance to increase; rather, it will likely decline.

Our next question is a follow-up from Michael Perito with KBW.

Sorry to probably make you repeat yourself here, but I was just scanning my notes, and I apologize if I missed it. But Ken, do you mind just offering some consolidated thoughts on where the NIM might move near term here? I think you provided some high-level commentary, but where the NIM might move near term here? Do you still think there's some legs for multi-quarter expansion as long as rates remain where they are?

Yes, most definitely. Our outlook on net interest margin is very similar to what it was last quarter. I think probably on a quarter-over-quarter basis between now and the end of the year, we're probably still looking to see anywhere from maybe a 5 to 10 basis point increase going to be impacted by things such as prepayment levels or loan growth opportunities. I still feel good and target somewhere in the range of 2.4% on a fully taxable equivalent basis in the fourth quarter. We also believe there's still opportunity to generate NIM growth next year as well. Some of that is going to be dictated by how well some of these loan opportunities continue to develop through 2022.

Michael, to carry that on just a little different angle. We have over $750 million in CDs that will either run off or reprice over the next 12 months. The rate has dropped geometrically from what it was 18 months ago, but there's still an average cost of about 1.45%. The new stuff coming on the books today ranges from 39 to 41 basis points. So there's still a big pickup on the CDs on rollover and pricing, as well as bringing in the checking account balances and the small business accounts that are much lower cost to us than our traditional costs. Savings on the interest side and as well as Ken pointed out, hopefully, some pickup on the loan side too.

This concludes our question-and-answer session. I would like to turn the conference back over to David Becker for any closing remarks.

Thank you, Sarah, and I'd like to thank all of you for joining us today. This is a great Q&A session. We hope you have a great balance of the day and continued success. Thank you very much.

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