First Internet Bancorp Q3 FY2021 Earnings Call

Good day, and welcome to the First Internet Bancorp Earnings Conference Call for the Third Quarter of 2021. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Mr. Larry Clark from Financial Profiles, Inc. Please go ahead, Mr. Clark.

Thank you, Chuck. Good day, everyone, and thank you for joining us to discuss First Internet Bancorp's financial results for the third quarter of 2021. The Company issued its earnings press release yesterday afternoon, and it's available on the Company's website. In addition, the Company has included a slide presentation that you can refer to during the call. You can also access these slides on the website. Joining us today from the management team are Chairman and CEO, David Becker; and Executive Vice President and CFO, Ken 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. However, 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. And additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute, the most directly comparable GAAP measures. The press release available on the website 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. Thank you for joining us today. We are pleased with our results this quarter as we reported net income of $12.1 million and diluted earnings per share of $1.21, both of which are up more than 40% from a year ago. Excluding $800,000 of pretax costs incurred as we redeemed $25 million of subordinated debt, we recorded adjusted net income of $12.7 million or $1.27 per diluted share. The Board of Directors and management are intent on increasing shareholder value, and I would like to highlight several ongoing initiatives in that pursuit. We have improved profitability by expanding our net interest margin, diversifying our fee revenue and managing our expenses. Our performance in the third quarter generated an adjusted return on average assets of 1.18%, marking a substantial advance from a year earlier. This is the fourth straight quarter we have generated an ROAA in excess of 1%. We are confident in our ability to continue growing revenue and earnings for the remainder of the year and into 2022. In the third quarter, we were very pleased with the balanced growth in C&I and single-tenant lease financing. Our newest lending area, franchise finance, got off to a great start with over $25 million in originations in just three months' time. Importantly, commercial loan pipeline heading into the fourth quarter is strong, up 65% through our team's diligent work sourcing new opportunities. We expect construction activity in small business lending to be key areas of growth for us in the months and quarters ahead. As of September 30, unfunded construction commitments across all business lines were $190 million, up 30% from the start of the year. Our commercial real estate construction team has several new opportunities in the pipeline, and we expect our unfunded commitments to increase by an additional $100 million during the fourth quarter. These projects typically fund over a 12 to 24 month horizon. The second leading growth driver for us is business lending, which remained strong. In 2021, we made a $300 million commitment to small business owners. As part of that pledge, we recently announced that we have teamed up with ApplePie Capital, a leading provider of growth financing to franchisees in various industry segments across the country. Together, we are funding loans to proven businesses, fueling economic and job growth, while deploying our capital into an attractive asset class with strong risk-adjusted returns. We began working with ApplePie in the third quarter. As I noted earlier, we funded just over $25 million of loans during that time and expect to fund up to $100 million of originations in total by the end of 2021. We anticipate funding up to $150 million in additional loans next year. We have had a very positive experience with ApplePie to date. And I would also note that we are actively exploring balance sheet relationships with several other fintech companies. Of course, the cornerstone of our commitment to small business is the small business lending platform we have built out over the past few years. Through the end of the SBA year ended September 30, we have secured approvals for $172 million in SBA 7(a) program loans. We also funded $30 million of PPP loans earlier this year. To date, 85% of our PPP loans have been forgiven by the SBA. I'm very proud of the way our team responded to the operational challenges brought on by a series of PPP rule changes, 7(a) program updates and the SBA's move to a new transfer agent, which added complications to the collection of relief payments as well as the sale of loans. Looking ahead to 2022, we anticipate originating $215 million of SBA 7(a) loans, which is expected to generate sales on revenue in the range of $15 million for the year. Keep in mind that secondary sales volume will be impacted as the standard government guarantee on SBA 7(a) loans reverts to 75% compared to the 90% guarantee temporarily installed in response to the pandemic. We are also building out a wider range of services to serve our small business customers. We recently announced a partnership with Finzly, a fintech provider of modern banking solutions to provide an innovative payment hub that will enhance the digital experience for our small business owners and empower them to manage their business and cash flows more effectively. Over the last 1.5 years, the COVID-19 pandemic has accelerated the demand for digital banking services. Thanks to our branchless banking model, we did not have to lose time transitioning away from branch operations. We were able instead to leverage our customer-focused product and our expertise in digital service delivery to attract new customers and enhance the customer experience. We continue to invest in our digital capabilities and expect to announce additional relationships within the next few weeks. To conclude, we are committed to continuous improvement to serve our growing base of customers nationwide, and we believe this dedication puts us in a great position to expand our relationships and generate strong results for our shareholders in the upcoming quarters. Before I turn it over to Ken, I'd like to call your attention to two important announcements. First, I am pleased to share that our Board of Directors has authorized the repurchase of up to $30 million of our common stock. This authorization is open through the end of 2022. Additionally, we released our first ESG report earlier this week. The report chronicles our existing commitments and future priorities around mindful governance and responsible corporate citizenship, including the Company's response to the financial effects of the COVID-19 pandemic on our customers and communities. By advancing our ESG initiative, we hold ourselves accountable for effectively managing risk while also facilitating financial inclusion. I'm proud of our team's efforts and successes. I encourage you to read the report, which is, of course, available exclusively in digital format at firstinternetbancorp.com. 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 another strong quarter with net income of $12.1 million and $1.21 diluted earnings per share, which included about $800,000 of additional pretax interest expense related to the redemption of $25 million of subordinated debt. After taking into account these costs, adjusted net income came in at $12.7 million and adjusted diluted earnings per share of $1.27, representing increases of 14.7% and 14.4%, respectively, from the second quarter. Profitability continued to improve with an adjusted return on average assets increasing 12 basis points from the second quarter to 1.18% and an adjusted return on average tangible common equity increasing 118 basis points to 13.97%. Looking at Slide 5. Total loans at the end of the third quarter were $2.9 billion, down modestly from the second quarter and down 2.5% from September 30, 2020. As David mentioned earlier, we were pleased with the growth in commercial and industrial and single-tenant lease financing during the quarter and are excited about the early performance in our new franchise finance lending area. The growth in these lines of business was largely offset by net payoffs in our health care finance and public finance portfolios as balances were down $38.5 million and $10.4 million, respectively. Additionally, small business lending balances were down $20.4 million, due primarily to $25 million of PPP loan forgiveness, but partially offset by new production. Consumer loan balances increased moderately compared to the second quarter due primarily to higher balances in the residential mortgage portfolio. Moving on to deposits on Slide 6. Overall deposit balances were up modestly from the end of the second quarter, and we again saw improvement in the composition of our deposit base. During the quarter, non-maturity deposits increased by $58.3 million or 3.2%, driven primarily by increases in small business and commercial balances as our focus in this area continues to pay off. CDs and brokered deposits decreased $39.9 million or 2.8% 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 lowered our cost of interest-bearing deposits by 9 basis points during the quarter, and we expect to experience continued reduction in deposit costs in the fourth quarter and into next year. Compared to the first nine months of 2020, we have realized $22 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 Slide 7 and 8. Compared to the second quarter, both reported net interest income and fully taxable equivalent net interest income decreased $700,000 or 3.2% to $20.9 million and $22.3 million, respectively. Excluding the costs associated with the redemption of subordinated debt, net interest income increased $100,000 to $21.7 million and fully taxable equivalent net interest income increased to $23.1 million. The average balance of interest-earning assets increased $48 million or 1.2% compared to the second quarter with higher average balances of securities being partially offset by lower average balances of loans and other earning assets. The yield on interest-earning assets declined to 3.16% due to the changes in the earning asset composition as well as lower loan fees. Net interest margin decreased 11 basis points from 2.11% for the second quarter to 2% for the third quarter and fully taxable equivalent net interest margin decreased 12 basis points from 2.25% for the second quarter to 2.13% for the third quarter. Fully taxable equivalent net interest margin adjusted for the cost of the subordinated debt was 2.21%, down 4 basis points from the prior quarter. As you can see on Slide 8, the 4 basis point decline was driven primarily by lower average loan balances and fees, which had a negative impact of 14 basis points. This was partially offset by continued decreases in deposit costs, which provided a benefit of 8 basis points. The securities portfolio also added a benefit of 3 basis points. Elevated cash balances continued to negatively impact net interest margin. Currently, cash balances have already decreased by about $100 million compared to the end of the third quarter as we put cash to work by funding loans and retiring high-cost CD maturities. Although not included in the net interest margin roll forward as cash balances have been elevated for some time, $100 million of excess cash balances held at the Federal Reserve had a 6 basis point punitive effect on net interest margin. Looking ahead to the fourth quarter and into 2022, we expect our yield on interest-earning assets to revert closer to what they were in the second quarter and then increase from there as we grow the commercial loan portfolio. Compared to the end of the second quarter, we have seen loan pipelines increase 65%, primarily driven by growth in SBA, franchise finance, and construction opportunities. Additionally, we continue to see opportunities for further downward deposit re-pricing in future periods. Over the next 12 months, approximately $787 million of CDs are scheduled to mature with a weighted average cost of 122 basis points. Currently, the replacement cost of these deposits is in the range of 36 basis points. Looking ahead to 2022, with our expectations for loan growth and continued downward deposit re-pricing, we anticipate annual net interest income growth to be between $9 million and $11 million. Turning to noninterest income on Slide 9. Noninterest income for the quarter was $7.8 million, up from an adjusted $6.4 million in the second quarter. The increase was driven primarily by higher revenues from mortgage banking activities, but was partially offset by slightly lower gains on the sale of loans. We sold $22 million of SBA 7(a) guaranteed loans during the quarter, which was consistent with the second quarter. However, we experienced lower premiums on those sales. As I mentioned earlier, loan pipelines, especially in our SBA business, are strong heading into the end of the year. Therefore, we expect SBA gain on sale revenue to be up in the fourth quarter, probably in the range of $5 million. Turning to noninterest expenses, as shown on Slide 10. The decrease on a linked quarter basis was driven primarily by a decline in consulting and professional fees and expenses. The decrease in consulting and professional fees was mainly due to the timing of normal third-party loan review work performed on our loan portfolio. The decrease in loan expenses was due to the reimbursement of costs incurred in prior periods related to nonperforming loans. Now let's turn to asset quality on Slide 11. Credit quality improved during the quarter as nonperforming loans declined by $1.2 million, mainly due to the payoff of a single tenant lease financing relationship, which had previously been classified as nonaccrual. Nonperforming loans now represent 27 basis points of total loans, down from 31 basis points last quarter and down from 32 basis points in the third quarter of 2020. Net charge-offs were less than $100,000 during the quarter, and net charge-offs to average loans was one basis point. We are proud of the fact that we continue to exhibit high asset quality that is among the industry's best. The provision for loan losses in the third quarter was a benefit of $29,000 compared to a provision of $21,000 in the prior quarter. The decrease was due primarily to the $22 million decrease in loan balances as qualitative factors in the allowance model remained consistent with the second quarter and net charge-offs were low. Overall, the ratio of allowance for loan losses to total loans remained unchanged from the prior quarter at 95 basis points and 96 basis points, excluding PPP loans, which totaled $15 million at quarter end. With respect to capital, as shown on Slide 12, our overall capital levels improved and remain healthy at both the Company and the bank. With the strong earnings performance this quarter, our tangible common equity to tangible assets ratio increased to 8.61%, up 18 basis points from the second quarter. Additionally, tangible book value per share increased to $37.12, up from $35.92 in the second quarter and over 16% higher than one year ago. As David mentioned earlier on the call, our Board of Directors have authorized a new stock repurchase program with an aggregate purchase price of up to $30 million that will run through the end of 2022. We also completed a $60 million offering of 3.75% fixed to floating rate subordinated notes due in 2031 during the quarter. While a portion of the proceeds were used to redeem the $25 million of subordinated debt callable at the end of the quarter, the offer further strengthened regulatory capital and provides greater flexibility to evaluate strategic opportunities or deploy cash towards share repurchases. With that, I will turn it back to the operator so we can take your questions.

We will now start the question-and-answer session. The first question will come from John Rodis with Janney. Please go ahead.

So I guess I got a few questions. I guess, first off, let me just start on the buyback. Great to see that announcement. The stock is up some this morning, but obviously, stock is still trading below tangible book. For modeling purposes, how should we model it? How aggressive, I guess, do you guys plan to be with this buyback?

I think we are currently in a blackout period. It was nice to see the stock price increase today. However, as you mentioned, we are still trading below tangible book value. We have plans in place through the end of next year, and we need to balance the strategic opportunities ahead of us with the buyback. I believe we can manage both, but it really comes down to timing. Ideally, by the end of 2022, we should be able to execute a significant portion, if not all, of the buyback, although timing may be influenced by other strategic opportunities that we are assessing.

Okay, Ken. It seems like this will be more of a drawn-out process. Are you indicating that you don't plan to execute the full $30 million in the next quarter or two?

Correct.

Yes, as Ken mentioned, we are exploring other opportunities and believe we can manage both. If we happen to finalize something that the market doesn't respond positively to, we will actively pursue the buyback to take advantage of the situation. We definitely have sufficient capital, and with the expected earnings growth next year, we are confident that we can easily handle both initiatives.

Okay. And Ken, switching gears on expenses. They were down linked quarter, but it looked like there was some noise, I guess, you said some OREO sale gain and then looks like you had the reimbursement of some expenses. So how should we think about operating expenses going forward?

Yes, they were, I mean, obviously we're pleased with how they came in, but there were some moving parts in there that were benefit of timing and just other offsets to expenses. I think, if we go back and look at, we're probably close to a, call it a 15 million or 15.5 million run rate, as we get into for the fourth quarter, that's probably a good estimate in that line. And then kind of looking forward, where we've continued to build out our SBA platform in terms of headcount or some of that was delayed over the course of the year due to the timing of originations that we've continued to add there, and obviously add both the bank. So, you take a full year run rate of headcount into next year's expenses, and we're probably closer to 15.5 to 16 looking forward to next year.

Maybe just one more question. Ken, regarding your near-term drivers, the increase in spread income of 9 million to 11 million. I'm curious if that figure includes or excludes the 800,000 of sub debt expense and spread income.

That would be without.

Okay, so the reported number?

Yes.

I want to start on the ApplePie partnership. David, I was wondering, if you can maybe just give us a little bit more color on kind of how those loans are sourced? And then, what the nature of the partnership is? Are they originating loans and you guys are holding them on balance sheet? Are you guys involved in the underwriting, if there's something more to the beyond that within the partnership? Just a little bit more color there, if you don't mind.

Sure, Michael. The partnership is actually almost identical to what we were doing with a healthcare endeavor over the last three or four years. ApplePie has been around about 8 to 10 years and has originated over $1 billion in franchise loans. They have long-term relationships with franchisees all over the country and continue to increase. They like the banking world as a whole where I thought during the COVID crisis, because the franchisers kind of pulled in the ratings of existing franchisees instead of expanding. So, they're on a nice growth curve themselves and in the second half of the year, which was great timing for us. We have created a credit box like we did before, and they sort loans that fit that credit box. And I can tell you from our underwriters and internal folks they're ecstatic with what we've seen today. I think out of all the loans we processed, we’ve only had a discussion about maybe one or two regarding the information in the file. So it comes to us, we find a space on our books, we're doing full servicing. They do the origination, but we take it from there. So it's been a great program, we're really excited about the kickoff, and it looks like it's going to be very strong for 2022.

Is there any opportunity with these customers to pick-up funding or anything else along those lines that overtime or is it really just purely a lending relationship partnership?

No. They kind of look at the funding side and I misspoke there, Michael. They are doing the servicing. We purchased the loan, but we have talked to them about giving the deposit opportunity with these folks as well. And one of the nice things about it, they've been in the industry long enough. A lot of these individuals are not brand new franchisees. So, the guy coming back was store number three or store number four. They're multi-franchisers. So, it's good, strong credit, strong businesses kind of the opposite of our previous program. Historically, we've financed the facility and not the operator. So, it's been an interesting time for us to look at the credits. But yes, there is definitely an opportunity with this program where it is not just the real estate; we're hopefully working on a program to get the deposit relationship as well.

And is this kind of an indicator of the type of things that you guys are looking at that are in the pipeline? Are they mostly partnerships that would fall into this type of arrangement? Or is there more diversity and some of the incremental things that you guys are alluding to that could come in the near term?

We announced a partnership in the third quarter with Finzly, which enhances our small business products. We are also exploring lending opportunities with various companies and have a few fintech firms focused on deposits. We are considering various aspects and have additional fintech partners whose technology can improve our current systems. As I mentioned in a previous call, we are evaluating multiple services and expect to make several more announcements in the fourth quarter and early next year.

And what are the rates kind of on these ApplePie loans roughly?

ApplePie net is a little over 5%, and the term is a little lower than the health care loans we were averaging, I think, about a 7-year term on them versus 10. So, it's a nice bump up in yield as well as the shorter term.

Got it. Helpful. And I wanted to clarify on the top line guide, the $9 million to $11 million of growth in 2022. I mean just are we basing that off kind of like an annualized year-to-date run rate or something in the high $90 million range, is that the right way to think about it? Or is there a difference, would you clarify that at all?

No, that's exactly it, Mike. On an FTE basis, you're spot on.

Okay. Lastly, I was curious if you could share a bit about the dynamics within the SBA for the quarter. Was the pipeline pushed out, or did the margin contract more than anticipated, resulting in a larger pipeline for the fourth quarter? I'm interested in understanding the revenue pickup for the fourth quarter. Additionally, could you provide more details about the pipeline for next year and the revenue target? Is the current team sufficient, or are there plans to add more salespeople? I'd appreciate any insights you can share.

At the end of the third quarter in September, the SBA transitioned from using Colson as their transfer agent to a new firm called Guidehouse. This switch caused significant delays and complications related to the CARES payments from the government and affected sales to the secondary market. Consequently, part of the increase seen in the fourth quarter is a result of items that were stuck in the pipeline. With September 30 marking the fiscal year-end, there was already considerable volume, compounded by the end of the 95% insurance writers. The timing of the transfer agent change was unfortunate. Some of the increase in the fourth quarter can be attributed to carryover into 2022. We recently had a meeting with the SBA team to discuss financing their budget, and we hope to add one or two more business development officers. Our current team is solid, and we will be adding more back-office staff to support the expected growth in volume. They are optimistic that a target of 215 is realistic and presents a good opportunity for us. The SBA is seeing improvements as PPP processes are being finalized, which is increasing competition. However, we believe we have a strong team and a well-structured program, and we look forward to significant growth next year.

The next question will come from Brett Rabatin with Hovde Group. Please go ahead.

David, I wanted to first ask, when we think about the loan portfolio growth in the fourth quarter. Looking at some of the individual segments that have had payoffs, I guess I'm curious, do you expect that some of the line items like health care maybe continue to have some atrophy due to rate competition? And as we think about fourth quarter and 2022, I mean, it looks like you could be a double-digit core grower as the PPP winds down here, what are your thoughts on net origination versus the payoffs that you might be looking at?

We are feeling optimistic about our pipelines heading into the fourth quarter. Health care finance remains a desirable asset class for us, and we are keen to partner with new teams in that sector to expand our portfolio. There may be some short-term declines, but the growth forecast for ApplePie is strong and on track. In single-tenant areas, we have noticed a slight slowdown in prepayment activity. With the recent increase in longer-term rates, our pricing is now more competitive compared to earlier this year when the 10-year yield was at its lowest. Overall, our SBA pipeline remains robust, though we are selling some of that volume at the 90% guarantee, which means we are not retaining as much as we would in a more typical situation. However, we are positive about loan growth in the fourth quarter across various segments. The only area that may be a bit weak is C&I loans, as teams feel they have been stalled this year. We have a couple of significant C&I loans that may see sales in the fourth quarter, which could affect this segment. Nonetheless, as Ken mentioned, everything else appears stable and growing, and we're excited about the fourth quarter performance, especially with the $100 million boost from ApplePie that should offset any losses in health care.

Okay. And then the other thing I was curious about was just thinking about the deposits. You've obviously managed the CD cost down nicely. Most of the industries just had some less liquidity kind of come at them from a deposit perspective, but you guys' deposits have been fairly stable. Can you talk maybe about the management of the deposit base? And then I think people are starting to think about rates and don't know if it's a late '22 or '23 possibility? But as we think about the eventuality of higher rates, how you're thinking about managing the deposit costs when we go to the other side of the coin on rates?

Yes, like many banks in the industry, we have experienced excess liquidity on our balance sheet. I mentioned this in relation to margins. Additionally, we are seeing CD maturities coming due. We have experienced growth, particularly in money markets and checking accounts, especially among small businesses, as we have invested significantly in marketing those products. Overall, our deposit growth has been supported by incoming funds that have replaced maturing CDs. Looking ahead into 2022, we anticipate this trend to continue. There will come a point when the pace of CD maturities will slow down. However, for 2022, we foresee a continued shift in the composition of deposits moving from CDs to money markets and checking accounts. Regarding pricing in different rate environments, previously, during a rising rate environment, betas on CDs reached 100%, whereas non-maturity products were lower, around 50% to 60%. As we enter another rising rate environment, we feel more optimistic about our deposit base's composition. As I mentioned, this shift is ongoing, and we expect it to continue well into 2022 and beyond.

One of the things we're doing, Brett, is that we may need to adjust rates in '22. You mentioned that everyone has a lot of cash. Hopefully, as rates begin to rise, it won't be as chaotic as it was in '18 when the Fed moved rates by 25 basis points, and we had to move by 35 to attract funds, as Ken noted. Additionally, we are locking in some commercial certificate of deposit opportunities with insurance companies and others in the three- to five-year range that are below 100 basis points. We’ve adjusted pricing slightly to take on some longer-term investments, which may be a bit more expensive, but overall, we feel confident about the outlook for the next three to five years.

Okay. I have one last question about capital. You could easily utilize the entire $30 million without facing any capital issues. I'm interested in understanding the other investments or partnerships you are considering. Will these require equity capital to be invested with these firms? How should we view these additional partnerships?

Acquisition opportunities will require some investment. We are exploring collaborations with several fintech companies where we are considering making capital investments in exchange for equity. Many of these are in their Series B or C funding rounds. This allows us to become customers and provide services to each other while also acquiring equity in these companies when possible. Although the investments are not substantial, they present a valuable opportunity for us to engage early with promising ventures. Having spent 40 years in technology, I've observed some unique developments that could be beneficial in the long run. As Ken mentioned, we are actively seeking acquisition opportunities that could be capital-intensive, but we’re currently in a strong financial position, approaching 9% TCE, which is the highest since the bank's early days. This gives us significant flexibility and numerous prospects moving forward.

The next question will come from George Sutton with Craig-Hallum. Please go ahead.

I wanted to address, David, if we could, the commercial pipeline in a little more detail. How much of that is market dynamic because I haven't heard much of increased commercial demand out there. So I'm wondering, market versus your execution and just the strength of your go-to-market that's really creating these opportunities?

We're in a fortunate position. With the recent expansion of the FedEx hub in Indianapolis, we've become larger than the main hub in Memphis, Tennessee, and there are new warehouses being developed. A company like Amazon is trying to acquire every available space for distribution in and around Indianapolis. We're in the right place at the right time with a fantastic team. We've collaborated with some skilled individuals over the years, and they now have a tremendous opportunity. I believe close to 70 million square feet of warehouse space will be developed in the Indianapolis area over the next 12 to 14 months. We've also explored commercial real estate opportunities outside of Indianapolis with various firms. Notably, Amazon is diversifying its operations and not putting all its efforts into Indianapolis alone. This has created a good opportunity for us to leverage long-term relationships and capitalize on the market.

Got you. That's a helpful perspective. Actually, ironically, I was in Indianapolis last week, and I saw the FedEx operation you're talking about; it is quite impressive. So, regarding the Series B and C deals that you mentioned you were considering, is this in addition to the investments you've made through private equity funds? Just to clarify, are you referring to additional opportunities?

Yes, some of them are still collaborating with private equity funds while others are working directly with the companies. We are currently developing what we might refer to as our first investment in this area. We won't overspend, but there are many strong companies emerging at this time, and we see a great opportunity to get involved early. We plan to capitalize on this.

Okay. And then finally, just so I fully appreciate the buyback that you are looking at. That is really a result of the valuation opportunity that you see that is in no way, shape or form related to any diminishment of M&A opportunities that you are considering could pursue? Is that a reasonable solution?

You hit the nail on the head, George, that's exactly right. I've always been grow for buyback second. So we're still looking at the acquisition market extremely heavily.

Our next question will come from Nathan Race with Piper Sandler. Okay. And then finally, just so I fully appreciate the buyback that you are looking at. That is really a result of the valuation opportunity that you see that is in no way, shape or form related to any diminishment of M&A opportunities that you are considering could pursue? Is that a reasonable solution? You hit the nail on the head, George, that's exactly right. I've always prioritized growth over buybacks. So we're still looking at the acquisition market extremely heavily.

Going back to the acquisition discussion. Obviously, with the stock still trading below tangible book, it's difficult to use your currency, I'd imagine. So I guess, within that context, how should we be thinking about potential earn-back periods on tangible solutions and so forth as you guys consider complete acquisitions and so forth and not just partnerships per se?

Currently, we are focusing on cash deals rather than equity options. The only potential dilution would arise from goodwill in the transaction, but it would be funded by cash. We're trading at around 90% of book value, which is not an ideal position for making acquisitions. Therefore, we are concentrating on cash opportunities.

And would the earn-back period on those potential deals be south of three years? Or how are you guys going to think about just the tangible book value associated with acquisitions near term?

Yes, we're using the three-year as kind of the play a month or two shorter or a month or two longer, doesn't really excite us. But yes, we're focused in on a three-year return.

Yes. I believe the best way to view this is as a secondary support. Clearly, our priority is to use our cash to fund loans first. As we've mentioned several times, we are very optimistic about the pipelines we have ahead. However, timing isn't always within our control. Generally, you can expect the securities balance to gradually decrease from its current level. Earlier this year in June, we moved a significant portion of our cash balances, well over $500 million, into the securities portfolio with the anticipation that we wouldn't need to add much there and would instead focus on cash balances related to loan growth. Therefore, I don't foresee cash or securities balances increasing from this point and expect them to decline over the next 12 months. Nonetheless, depending on the timing of loans, we might allocate some funds into the securities portfolio. Additionally, we occasionally purchase mortgage backs for CRA purposes, but that's likely the extent of our activity in that area for at least the next six months.

Yes. One of the things, that's happening in the marketplace, too, David, as Ken said in his comments today, we picked up three points this past quarter on the securities portfolio. A lot of it is mortgage-backed products that we've had on the books for some time, and obviously, as refis slow down and repayments on those things slow down, that's going to help one boost yield on the securities portfolio and also slow down the payback. So it won't run off quite as fast as it has been and particularly if there is real solid indication that the Fed kind of bumps up rates a little bit. Refis, I think are down over like 62% on a year-over-year basis. So that has an impact on our mortgage side, which kind of hurts us, but on the other side, it helps us because it really slows down some of the paybacks on those securities and the premiums that we have to write down. So double-edged sword, but it should be pretty positive in the balance of the year and into 2022.

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

Thank you, Chuck, and I'd like to thank all of you for joining us today. We had a tremendous quarter. We're happy to share it with you. We hope you have a great day and continued success. Thank you very much.

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