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First Internet Bancorp  (NASDAQ:INBK)
Q2 2019 Earnings Call
Jul. 25, 201912:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the First Internet Bancorp's Second Quarter 2019 Financial Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Larry Clark from Financial Profiles, Inc. Please go ahead, Mr. Clark.

Larry A. Clark -- Senior Vice President

Thank you, Kary. Good afternoon, everybody, and thank you for joining us to discuss First Internet Bancorp's financial results for the second quarter ended June 30th, 2019.

Joining us today from the management team are Chairman, President and CEO, David Becker; and Executive Vice President and CFO, Ken Lovik. David and Ken will discuss the second quarter results and then we will open up the call for your questions.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Internet Bancorp that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call.

Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures.

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

David B. Becker -- Chairman, President and Chief Executive Officer

Thank you, Larry. Good afternoon, everyone, and thank you for joining us today. We are excited about the earnings results for the quarter, which were driven by solid top line revenue growth, strong production in our specialty lending areas, continued excellent credit quality and well-managed expenses. We're also pleased with our ongoing balance sheet repositioning efforts, as we are able to effectively manage our capital for the significant loan sale activity during the quarter.

For a quick summary of our results, we posted second quarter net income of $6.1 million and diluted earnings per share of $0.60, up 7.5% and 7.1% from the first quarter, respectively. The primary driver of our financial performance was the revenue growth, which increased again this quarter and was supported by strong performance from our direct-to-consumer mortgage business, which had its best quarter in more than two years.

During the quarter, we sold $148.4 million of loans and $30.6 million of lower-yielding securities. These asset sales are part of our balance sheet management strategy, which involves repositioning portions of our loan and security portfolios in order to improve the mix of earning assets. We are particularly proud of the fact that we were able to successfully execute on this strategy without having to pull back on our origination activity, enabling us to capitalize on the opportunities, our lending teams have, while also preserving capital in the current interest rate environment.

Total loan commitments during the quarter were $267 million, up 19% from the first quarter, as we saw increased activity across virtually all lines of business, with commercial real estate and healthcare finance leading the way.

The interest rate environment remains challenging, as the rapid decline in short-term rates impacted asset yield, while the decline in longer-term rates did not have a significant impact on loan portfolio yields during the second quarter. New origination yields in certain lines of business may grow slower should long-term rates remain low for an extended period of time.

To mitigate the risk of declining interest rates, we have implemented price floors in most of our commercial lending areas. The upside of declining interest rates is that we have been able to aggressively lower CD rates throughout the year, however, new production rates are still above the cost of maturing CDs, which combined with the strong production volumes that we experienced in the quarter to put further pressure on our net interest margin.

That said, our residential mortgage business turned in a strong performance as originated -- origination activity picked up due to continued decline in mortgage rates during the quarter. The mortgage banking revenue was up significantly from the linked quarter, providing a natural hedge in the down rate environment that softened the downward pressure on net interest income. As we position for the future further diversifying our revenue stream and expanding our asset-generation channels in a capital efficient manner remains a top priority.

Our expansion in the small-business lending and deposit services has been a key component of that strategy that complements our existing business lines. There are opportunities on both sides of the balance sheet, on the asset side to the production of higher-yielding loans for our portfolio, while generating incremental gain on sales revenue. And on the liability side, with small business and commercial deposits gathering initiatives. During the quarter, we continue to advance our small business banking initiative as our pipeline of new lending opportunities has grown significantly due to the combined efforts of the SBA team, we have put together and our C&I lenders in Indianapolis and Phoenix.

We also began to see tangible results on the deposit side as business money market accounts provided over $34 million in new balances during the quarter. We're excited about the opportunities small business banking provides, and we are working diligently toward building a full service, nationwide platform.

Related to credit. Overall, our asset quality metrics continue to remain among the best in the industry, as our non-performing ratios were well below those of comparable banks. As I've stated before, this is driven not only by our strong credit culture and disciplined approach to underwriting, but also our focus on certain specialty lending lines that include lower risk, asset classes, such as our public finance and our single tenant lease financing business.

With the lower percentage of risk-weighted assets to total assets and strong credit metrics, we believe we can leverage our capital further than other comparably sized institutions. We also believe that this will position us well relative to our peers in the event the economy softens.

Before, I turn the call over to Ken to provide additional details on our financial performance, I'd like to state that I'm very proud of our team that we have assembled, and I thank them for their dedication to helping us generate strong results and what was a very active quarter. We are proud of the strong culture we have at First Internet, and the high level of engagement from our team members remains a key to our success.

As always, we continued further emission by serving customers in the digital economy, providing them with customer-centric digital banking solutions, while maintaining the personal touch of relationship banking. Ken?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Thanks, David, and thank you, everyone for joining us today. Given the continued challenging interest rate environment, we were very happy with our results for the quarter. We were especially pleased with the net income and EPS growth, while demonstrating the ability to manage loan growth through the significant loan sale activity we conducted during the quarter.

While total asset growth appeared strong for the quarter, I will point out that cash balances at quarter end were inflated, as two of our loan sales closed during the last week of the quarter. Additionally, the securities that we sold also closed during the last week of the quarter. We expect to deploy the excess liquidity resulting from the loan sales throughout July and August to fund new loan originations, as well as fund runoff of maturing CDs. The proceeds from the securities sales have been fully deployed into higher-yielding investments.

Overall, total loans outstanding at the end of the second quarter were $2.9 billion, an increase of $21 million or 0.7% from the first quarter. In terms of portfolio composition, total commercial loans were up $86.3 million or 4.1%, compared to the linked quarter and driven by $167 million of funded originations primarily due to solid production in single tenant lease financing and healthcare finance. Total consumer loans were down $78.2 million or 10.9%, compared to the first quarter, due primarily to the sales of portfolio residential mortgages.

However, trailers and recreational vehicles originations were up almost 18% over the prior quarter with the balance in these portfolios, up 3.7%. As David noted earlier, we sold $148.4 million of loans during the quarter in connection with our balance sheet management strategy.

Let me take a few moments here to provide more details on these transactions. First, we sold $95 million of portfolio of residential mortgages in two separate transactions, which included a mix of jumbo-fixed rate and seasoned lower-yielding adjustable rate mortgages, recognizing a combined loss of $759,000. As these loans had a weighted average yield of 3.86%, these transactions not only helped to preserve capital, but also improved earning asset yields through redeployment proceeds into higher-yielding new loan originations.

Second, we executed a sale of $30.9 million of single tenant lease financing loans at a price of $102, generating a gain of $684,000 to help offset the loss from the mortgage sales.

And third, we sold $22.4 million of public finance loans at essentially book value. These loans were originated back in 2017 and had a fully taxable equivalent yield of 3.21%, and effectively funded $24 million of new originations during the quarter with a fully taxable equivalent yield of approximately 4.5%.

Related to the securities we sold this quarter, those consisted of $30.6 million of lower yielding seasoned mortgage back and US government agency securities with a weighted-average yield of 1.88%. We recognized the loss of approximately $500,000 on this transaction, but have reinvested the proceeds in new securities with yields north of 3%. We also took advantage of an opportunity to sell our holdings of Visa Class B shares, which generated a gain of $500,000 and offset the loss in the securities transaction.

When you combine the gains and losses from all these balance sheet management activities, the net result was a nominal gain of $17,000. As a result, the $0.60 of EPS we reported for the quarter was a plain operating number. Going forward, we expect to continue pursuing loan sale opportunities in order to manage balance sheet growth and capital, while also helping to improve net interest margin and profitability.

Moving on to deposit and funding. During the quarter, the cost of funds related to interest-bearing departments increased 10 basis points to 2.39%, while average interest-bearing deposits balances increased $150.3 million or 5.5%. And period end total deposits balances increased $195.2 million or 6.9%, compared to the first quarter. Rates paid on new CD productions declined, compared to the first quarter, dropping across the curve.

However, despite the reduction in pricing, our overall cost of deposits increased as rates paid on new CDs came on at a weighted-average cost of 2.74%, as compared to maturing CDs that rolled off at a weighted-average cost of 2.22%, a difference of 52 basis points. To put this in perspective though, in the second quarter of 2018, when rates across the curve were rising and deposit competition was intense, this difference was 109 basis points. And last quarter, it was 88 basis points. Subsequent to quarter end, we have seen new weighted-average production rates come down almost another 20 basis points to 2.55%, while the cost of scheduled maturities for the third quarter is 2.35%.

Over the next 12 months, we have approximately $1 billion of CDs maturing at a weighted-average cost of 2.72%. The key takeaway from this is that for the first time in the many quarters, we feel pretty good about where deposit pricing is going, and we are rapidly approaching the inflection point where new production rates are below rates on maturities.

Turning to net interest margin, our NIM declined to 13 basis points from the first quarter on both a reported and a fully taxable equivalent basis. The fully taxable equivalent net interest margin came in at 1.91%, well below where we were estimating for the quarter. This was due primarily to two factors. First, the pace of decline in three months LIBOR during the quarter, which outpaced the forward curve projections had a greater-than-expected impact on the swaps used to fund hedge public finance loans and longer-term securities.

Second, despite our constant reduction in CD rates, deposit growth was strong during the quarter, which had a volume impact on net interest margin. And additionally, the issuance of $37 million of subordinated debt in June had a 1 basis point negative impact on net interest margin.

With regard to our outlook on net interest margin for the third quarter, the two items we see driving margin lower are: one, a full quarter's impact of the new subordinated debt issuance; and two, the expected continued decline in three months LIBOR. However, pursuant to my earlier comments on deposit pricing, we are estimating very little impact on margin from deposit costs.

Additionally, we expect asset yields, excluding the impact of LIBOR on the interest rate swaps to remain relatively flat. Looking beyond the third quarter, we are forecasting modest net interest margin expansion in the fourth quarter. As we did in the second quarter, we will continue to pursue strategies to improve net interest margin, including further loan sales, disciplined loan pricing, additional restructuring of the securities and wholesale borrowings portfolios, if opportunities arise and utilizing excess liquidity to fund a portion of CD runoff.

Now turning to asset quality. As David already touched upon, credit quality was again solid as our ratios of non-performing assets and loans remain among the best in the industry. We did see an increase in both delinquencies and non-performing loans, which was due primarily to a commercial relationship consisting of two loans, a C&I loan, and an owner-occupied commercial real estate loan, that was placed on non-accrual status during the quarter. As a result, the ratio of non-performing loans to the total loans increased to 19 basis points from 12 basis points in the first quarter.

We also recorded a specific reserve of $600,000 related to this relationship, which negatively impacted earnings per share by $0.06. As a result, the provision for loan losses was up slightly from $1.3 million in the first quarter to $1.4 million in the second quarter, partially offset by the impact of loan sales during the quarter. Outside of this commercial relationship, credit results were consistent with our historical performance. We continued to have minimal net charge-offs, which were $254,000 during the quarter or 4 basis points of average loans on an annualized basis and were generally confined to the consumer portfolios.

With respect to capital, our capital levels remained sound with total regulatory capital enhanced by the new subordinated debt issuance, which allows us to strengthen capital levels at the bank level without diluting shareholders, while tangible common equity to tangible assets declined to 7.37%. Some of the decline can be attributable to the higher cash balances at quarter end that I mentioned earlier in my comments.

As we deploy this excess liquidity and continue to pursue loan sale opportunities to manage balance sheet growth, our goal is to keep the tangible common equity ratio flat to modestly up through the end of the year.

And finally, we continue to repurchase shares under our stock repurchase program. During the quarter, we repurchased 112,129 common shares at an average price of $21.28 per share. Subsequent to quarter end, we purchased another 37,862 common shares at an average price of $20.75 per share. And since inception of the program, we have repurchased 246,174 shares of stock at an average price of $20.86 per share, which represents approximately 2.4% of common shares outstanding at the end of the fourth quarter of 2018 when we initiated the program.

The combination of solid earnings and share repurchases allowed us to increase tangible book value per share to $29.10. We remain committed to producing consistent growth in both EPS and tangible book value per share.

With that, I'll turn it back over to the operator, so we can take your questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Andrew Liesch of Sandler O'Neill.

Andrew Liesch -- Sandler O'Neill -- Analyst

Hello, everyone. How are you?

David B. Becker -- Chairman, President and Chief Executive Officer

Good, Andrew. How are you?

Andrew Liesch -- Sandler O'Neill -- Analyst

Good, thanks. I just wanted to touch on the share buybacks here. Just kind of curious, like, why not be a little bit more aggressive with these? What's the govern around that?

David B. Becker -- Chairman, President and Chief Executive Officer

Well, I think -- I mean, obviously, where tangible common equity is today, as you know, call it, 7.4%. For us, we need to be conscious of not really allowing that ratio to go too low. Obviously, using loan sales and other means to manage balance sheet growth helps us participating in the share repurchases plan. But I think for us it's just a balancing act between -- obviously, we're very conscious of not running that level too low, the TCE ratio too low, given where the stock price is trading today.

So I mean, it's -- again, I think, maybe perhaps the ability to drive, perhaps, larger loan growth may influence some of that repurchase activity. But again, it's -- for us, it's a just balancing act and being conscious of where the TCE ratio is at any given time.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay. Are there opportunities to maybe step on the accelerator for some of the loan sales and then use those proceeds to buy back stock? Or is the plan still to just sell some of the lower yielding portfolios and recycle that in the new higher-yielding production?

David B. Becker -- Chairman, President and Chief Executive Officer

Well, I think -- I mean, I think, our results on the loan sales side this quarter were pretty aggressive. I mean, I think, we were very pleased with the volumes of loans we were able to sell. I think, if it were up to some of us here, we'd love to be able to sell $150 million of loans in a quarter. But having all of that come together in one particular quarter is tricky to manage, and our teams internally here worked extremely hard to get that done. I mean, like I said in the prepared comments, we are still actively pursuing loan sale opportunities across all -- the various areas within the bank, and our objective is to get as many of those deals done as we can in the third quarter and the fourth quarter.

Andrew Liesch -- Sandler O'Neill -- Analyst

Got you. Okay. And then just one question on -- just on the pace of the asset growth. I mean, you referenced to some of the cash coming in late in the quarter, but also just the large CD growth even with the decline and you guys offered rates. What's -- what drove that deposit growth in the quarter, if you can -- if you don't need to be offering rates that high with lowering deposit ratio down at 95%, why not lower them further and try to slow that deposit growth?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

We are, Andrew, in fact, we've lowered rates on a weekly basis, I think for seven weeks in a row here. We don't want to get 110% out of the market. But we dropped them again as of today. I would go back to the beginning of the year, particularly on the commercial side of the deposit base. Some of the CD rates, all of the rates across the board are down at least 50% from what they were at the beginning of the year. Some of the commercial are over a 100 -- or 50 basis points down. Some of the commercial are over 100 basis points down from rates we were offering at the beginning of the year. So we're moving it down.

What's happening, I guess, everybody is trying to second guess what the Fed is going to do next week. We turned away a $75 million deposit opportunity this week as we just don't need deposit. So we're conscious we're watching large dollar items coming in, and we're just kind of turning them away. We can't close the virtual doors because they're very hard to reopen, but we are moving them down, 5, 6, 7 basis points a week.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay. That clarity is very helpful. Thanks so much. I'll step back.

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Thank, Andrew.

David B. Becker -- Chairman, President and Chief Executive Officer

Thanks, Andrew.

Operator

The next question will come from Michael Perito of KBW.

Michael Perito -- KBW -- Analyst

Hey, good afternoon, guys.

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Hey, Michael.

David B. Becker -- Chairman, President and Chief Executive Officer

Hey, Michael.

Michael Perito -- KBW -- Analyst

Thanks for taking my questions. I wanted to ask kind of a strategic question first. Just as we look at the margin down here, south of 2% and it sounds like -- I guess, first just to clarify the -- so it sounds like there's a room for a little bit more compression next quarter and then inflection and then some expansion in the fourth quarter. Just what's the interest rate assumptions behind that?

David B. Becker -- Chairman, President and Chief Executive Officer

You mean what -- in terms of how we're looking at the forward curve? Are we looking at static rates, is that your question?

Michael Perito -- KBW -- Analyst

Yes, like what type of rate cuts are you assuming in Fed funds, if any and anything else pertinent to that, that's driving those assumptions?

David B. Becker -- Chairman, President and Chief Executive Officer

Well, we use the forward -- the implied forward rates that have some -- that have fed rate cuts, kind of, baked into them on the short end of the curve. I mean, obviously, it's not just Fed rates cuts that drive everything, you have LIBOR rates, you have swap rates, you have longer-term treasury rates. But it's essentially the forward curve, the implied forward rates that we have in our model.

Michael Perito -- KBW -- Analyst

Okay. And then just as we think about kind of how you're managing the business here. I mean, it would seem like, I guess, where do you think -- and I know we really have been in kind of a bizarre rate environment for a while. It's flat, it was moving up, now it's moving down. But where do you think you can get this NIM too realistically if -- and I guess, the reasoning behind the question is, I mean, it doesn't seem like a south of 2% NIM what really -- no matter what the expense infrastructure is really support, kind of, a peer like profitability profile.

And I'm just curious how you guys are thinking about that challenge and where you think you can move that NIM with your mix of business and what you're doing now to get to a point where we could see profitability, maybe start to close the gap toward peers?

David B. Becker -- Chairman, President and Chief Executive Officer

As we -- I think as we look forward, I mean, as I mentioned, we're going to have a couple of factors here that are going to put pressure on NIM here in the third quarter. But as I mentioned, I think the good thing from our perspective and what we're excited about is that it's no longer being driven by a rapid pace in deposit costs. We're seeing deposit costs come down, and we're going to start to see new deposit costs that lower levels than deposit costs rolling off the books.

So I think as we'll probably -- as we get into the fourth quarter and into 2020, we're probably not going to see net interest margin jump maybe 10 to 15 basis points a quarter, but I think we'll probably start to see it climb, call it, 5 to 7 a quarter. And that just -- and a lot of that depends on the shape of the yield curve as well. We're not trying to predict that by any means, if we get to actually a normalized rate environment, where there is some spread between long-term rates and short-term rates, that's obviously -- it's great for the industry and it's certainly great for us. And that would help us accelerate the NIM north of 2% and growing beyond that.

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Historically, in the 20 year history of the bank, Mike, we brought about 75 basis points below the NIM of our peers from beginning of time due to the craziness in the market starting kind of September of last year, running through to March. A race to the top on CD rates and money market rates, etc. It's probably the worst -- well, it is, by far, the worst compression we've ever seen. As Ken said, we're -- we've got almost $1 billion in deposits repricing over the next 12 months. We're seeing significant drops on a daily basis on that side of the balance sheet. We have floors installed on our loan side that are keeping our yields up and not affecting production and actually coming on at higher yields and what's rolling off.

So we think we'll get back above that 2% level in the not-too-distant future. We will jump back up to the 2.50%, 2.75%, we've run historically. We need to get slope in the yield curve to get back to that level. But we should see some nice changes over the next three to six months and definitely into the early part of 2020.

Obviously, the higher yield activity in the SBA markets and potential earnings there create other opportunities for us that -- the bottom line, mortgage are staying strong as we discussed earlier. That's kind of our natural hedge as the markets fall apart. If you go back to our balance sheet, there's a lot of banks during earnings call that have predicated and set the market up for further reduction in NIM during the third and fourth quarters as soon as the Fed does lower rate. A lot of our portfolio is static, so it's not going to have a tremendous impact on our loan yield, and we'll have hopefully a very strong impact on our cost of funds.

We've seen the markets and allies and big banks of the world pulling back on money market rates as well as CD rates. And I'm sure, when the Fed drops -- if they drop 25, 50 basis points next week, we will see pretty much an overnight activity in those rates coming down further. So everything poised in the marketplace today says we're going to have a strong second half of the year, up for grabs, I guess, kind of depending on what the Fed does.

Michael Perito -- KBW -- Analyst

Helpful. And then how should we think about net loan growth, because to your earlier comments coming -- to the last question just to do the same level of loan sales would be great but challenging. So I guess what are good base line assumptions for loan sales and kind of net loan growth moving forward that you think are fair to model in?

David B. Becker -- Chairman, President and Chief Executive Officer

I don't see a significant amount of loan growth. I don't know perhaps, maybe, 5% over the course of the year. I mean our forecast we are assuming a certain level of loan sales probably trying to be conservative here -- less than $150 million a quarter. Probably, closer to the $75 million a quarter is what we have in our forecast. But I think we're -- like I said earlier, if we can exceed those numbers that'd be fantastic. But we're -- our origination teams, our commercial tales, public finance, healthcare, they're out there engaged, they're still originating. We want them out there. But would love to be able to fund the majority of new production through loan sales.

Michael Perito -- KBW -- Analyst

So mid-single-digit net loan growth with about half of the loan sale activity is a good base line then obviously that could alter from quarter-to-quarter depending on the market appetite for purchases and production levels?

David B. Becker -- Chairman, President and Chief Executive Officer

Yes. That's a good way to look at it.

Michael Perito -- KBW -- Analyst

Okay. And then just lastly, sorry if I missed it, but can you just talk about what your expense expectations are for the back half of the year?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

I think we -- obviously, we saw expenses come up a bit here in the second quarter and a lot of that was driven by higher incentive compensation paid for the mortgage originators, obviously, in conjunction with much -- with that increased origination activity. I think for the rest of the year will probably -- it'll probably in the same kind of range. Again, I think right now if rates kind of stay where they are and mortgage rates stay where they are, I think we should have a good back half of the year on the mortgage as well. I know we've had a really good July. So that's going to keep that comp number inflated a bit. But I'll take the trade off on the higher revenue.

But if we assume that, that mortgage stays relatively consistent in the back half of the year, probably that $11.5 million, $12 million is probably a decent number, minus any other outside activities or impact from, I guess, other strategic pursuits.

Michael Perito -- KBW -- Analyst

Got it. Helpful. Thanks, Ken. Thanks, David. Appreciate it.

David B. Becker -- Chairman, President and Chief Executive Officer

Thanks, then.

Operator

The next question will come from Brad Berning of Craig-Hallum.

Brad Berning -- Craig-Hallum -- Analyst

Good afternoon, guys. I wanted to touch base, you've been making some progress on the deposit of franchise side. And I was just wondering if you could expand a little bit deeper about the initiatives you're working on, the progress you're at, outlook for those initiatives?

And then the second follow-up question is, if you could go through the different, kind of, competitive dynamics on the asset side areas -- you, obviously, had some good growth in some areas this quarter. You're seeing opportunities. Just talk about the competitive dynamics that you're saying that has gotten your appetite strong there?

David B. Becker -- Chairman, President and Chief Executive Officer

I'll take the deposit side updates and a little bit on loans and Ken can fill in. We created a product, we internally are calling it Amplify to go after the small business market. We made some changes toward the beginning of the last quarter to streamline the process much like we did on the consumer side back in 2018 to get the online application process down to minutes instead of 15 minutes to 20 minutes. We introduced a small business checking accounting, 75 bps, the money market account services. And those products literally almost overnight went from ground zero to 16 million to 18 million a month in new account openings. Through this morning, we're already at 17 million in new deposits and new customers in that segment.

So from our perspective, I think it blends in at somewhere in the mid-1.5, 1.6 on the cost of the funds. It's great accounts, good balances, good transaction and obviously the small business loan and the business credit card opportunities come along with those clients. So kind of hit the ground running. And with minimal marketing effort, we wanted to make sure we had all the mechanics and pieces. We've introduced a new online product for small business that gives them a lot of the tools of the traditional big bank treasury management program in an online environment that are -- we got converted during the quarter. Those seem to be running very effectively. So we think it's a good opportunity to continue to grow that side of the balance sheet significantly, which also enables us to cut back on the CD side and the higher cost.

Brad Berning -- Craig-Hallum -- Analyst

It's good to hear. And then just a quick follow-up on that before we switch to the assets. And so if you are treasury management, is that on a cloud based? Or is it that an integration or systems just kind of curious as to the functionality that you're finding the markets attracted to?

David B. Becker -- Chairman, President and Chief Executive Officer

It's tied in with our online tools through digital insight. So it's on the web, it's not -- I can't tell you for sure whether or not it's cloud based. The mechanics on the back-end from those side on the actual tool itself, but it is seamless, it's on the front end it gives them wire ACH origination capabilities, multi-tiered security logins, so you can segregate duties and abilities of individuals within the website. It truly is -- allows them to really kind of run a zero balance accounting structure if they want to and gives a lot of tools that you would normally see in the upper end. They can do -- again, back to the small business side, they don't need the $1,500 scanner, it has the mobile deposit capture via the phones. It's a very slick, and to date both from our side and consumer side, it's been a very seamless product to roll out with great growth and really no hiccups in it.

Brad Berning -- Craig-Hallum -- Analyst

Excellent. And the asset side?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

I think on the asset side, Brad, if you just look at a couple of our different channels here. Health care finance was -- actually had a very strong quarter in terms of growth. We originate those loans with our partners -- through our partnership with Lendeavor, which is focused in the dental and veterinary and finance industries. They've been building their business over the course of several years now and have hit their stride. They've made some strategic hires here in the past six months.

Luring away producers, who've been in the space for a long time with a track record from the larger kind of money-center institutions, who play in that area, they've obviously -- they've done a great job building their brand and getting their name out there. So that's obviously a very -- I think every lending area is competitive. There's lending business because their time, their ability to get a loan from start through the pipeline to finish is much faster pace than the bigger banks they compete with. So they are winning on speed and execution and customer service, which is fantastic.

In the single tenant space, it's obviously, being one of our 800-pound gorillas here for a long time. I think it's -- that market is competitive. Again, it's one of those -- we've developed an expertise in it. We know the product, we can get loans through the pipeline very quickly, we can get to a credit decision quickly. Obviously, in that space, we'll see sporadic competition whether it's a regional basis or you might have a regional player or credit union too, who play in the space, who really want to go after a loan. And we have pricing discipline.

And if a borrower gets an offer from someone else that's well below ours or below our offer, we'll just walk away because our pipeline is usually full. Now we do -- we will probably see a little bit of seasonality in that business here in the third quarter. We've people who're on vacation and away from the office. So pipeline usually declines a bit at the end of the summer and it'll tick back up after Labor Day. But I think the dynamics are fairly consistent with what we've seen over the last several years.

Our C&I teams are doing very well. They are out originating. We've added some personnel in our office in Phoenix. And they've got -- get putting some wins on the board out there. We've had some strong origination. We've had a lot of activity in the owner occupied and the construction space with our teams. So origination activity has been strong. They just really haven't fully funded a lot of these projects yet, which hasn't made it's way through actual balances on the balance sheet. But again, it's like every other area it's very competitive out there. And people are doing -- in some cases, doing crazy things to get to the high tier credits.

But as David mentioned in his comments, we try to be -- obviously, manage the balance sheet, be disciplined on pricing and be cognizant of the declining rate environment. So we've put floors in place across most of our commercial verticals to ensure that we're adequately defending net interest margin. And sometimes we have to walk away from deals, because we put the floors in and competition is -- we'll do something at 50 basis points less then we'll do it. But that's OK. Because we have plenty of deals in front of us, and we want to be prudent about manage -- again, help in managing the decline in net interest margin and being prudent about what we've put on our balance sheet.

David B. Becker -- Chairman, President and Chief Executive Officer

Just a step back, real quick, Brad too, on the healthcare finance side, we just had a meeting with Lendeavor team, kind of got all the folks together in Columbus, Ohio and chat. And one of the things we're working on with them that still got some rough edges around how we pitch the deposit base in a corporate credit card. Obviously, we're approving the dentist for $1 million loan to buy a practice and build a new building. We can fill in a credit card. We can go after the deposit base and still a lot of mechanics and individual actions as we don't have it 100% automated yet.

But the success rate has been tremendous for the folks that we've gone face-to-face. Again, we're picking up on average six-figure checking account and $25,000 kind of corporate credit card for them to work in the practice. So we've got a couple of things to tweak there yet this quarter. But that's also a great source and a good strong relationship with toward, I mean, both the deposit side and the credit card as well as the loan.

Brad Berning -- Craig-Hallum -- Analyst

Lastly, the consumer side? On the assets still?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Consumer business will remain strong. We -- last year, when we were raising -- in the rising interest rate environment, I think we were pretty disciplined there and increased pricing in chunks of 25 and 50 basis points at a time in the consumer verticals and continued to generate originations. I think last year, our originations in the RV and the horse trailers businesses were some of the strongest they've been in their history. As we look here into 2019 -- obviously, in the first quarter, seasonally slow. I think as I mentioned in my comments, originations were up 18%.

We're obviously trying to be disciplined on pricing there as well. But I don't -- I guess, it's kind of steady as you goes in that business. Originations remain strong, yields are hanging in there, not really seeing any cracks in the consumer credit side, FICO scores are where they've always been, in the 760, 770, 780 range. And credit results have been consistent.

David B. Becker -- Chairman, President and Chief Executive Officer

We did have a large national player jump into the horse trailer business for about 30, 45 days with just an ungodly rate, suck a lot of opportunities up. But they've come and gone already. And as Ken said, we're kind of right back to normal. And again, in all of our verticals, we'll have certain regional institutions or a national player jump in and do something just totally out of sorts. We don't compete with them. We sit on the sidelines, they come and go. And still probably in all of our product lines, we're bidding on about 20% to 25% of what we actually take a look at or have an opportunity.

Again, with a national footprint, it enables us to stick to our underwriting criteria and our pricing, and we really don't have to play the whim of the game of whatever local institution or a credit union that might show up and really try to buy the deal. We just go on to the next deal. And the pipelines are really, really strong, as Ken said, all across the country. So It's not a situation that we're in order to -- we're not buying business by any means.

Brad Berning -- Craig-Hallum -- Analyst

Really appreciate all the thoughts. Thank you.

David B. Becker -- Chairman, President and Chief Executive Officer

Thank you.

Operator

The next question will come from Joe Fenech of Hovde Group.

Joe Fenech -- Hovde Group -- Analyst

Afternoon, guys.

David B. Becker -- Chairman, President and Chief Executive Officer

Hey Joe.

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Hey Joe.

Joe Fenech -- Hovde Group -- Analyst

Hey, guys, just to lead off, just hopefully a pretty simple question. I mean just setting aside the noise and the near-term gyrations from what this first rate cut from the Fed might mean for you. I know that's where most of the questions have been focused. I mean just looking out way longer term, are you guys just thinking about this as a major inflection point for your model, you're among the most severely impacted from the rate environment the past two years? Logic would seem to suggest that the opposite might now be true if you think we're at that inflection point. I mean do you agree with that? Or am I looking at that too simplistically?

David B. Becker -- Chairman, President and Chief Executive Officer

I'd probably tend to agree with you a little more than Ken might agree with you. Yes, and I go back and we've seen obviously cycles over the last 20 years. This one has been so far off the chart in the play both from the Fed level and then the financial institution's reaction to the bumps.

I mean Feds moving 25, and they are moving 35. It's just the craziest thing I've seen. And I think we're going to see that same kind of rates back down to the bottom, faster than some folks think. They historically don't raise rates, particularly on the cost of fund side as fast as they'll bump the loan rates. But when they go down, they plug-in instantaneously. So I think we could see a real significant shift over the next six months and put us back into kind of the driver seat.

And again, when you take a look at the big scheme of things, over the last couple of years, we've grown a couple of billion in assets, literally doubled our size and headcount and internal expenses, we're now down to non-operating or non-interest expenses, down in that lower than 120 basis points. So that number is getting better day by day. And yes, I think we have an opportunity, we're going to see a significant shift in the next three to six months. And then without question if the Fed comes in, if they do 25 and then another 25, set the stage for before year-end or if they come in to do 50, I mean, we could see the bottom fall out on it -- deposit rates again.

Joe Fenech -- Hovde Group -- Analyst

Yes, OK. And then guys, what becomes now of that derivatives swap progress and the implications? And what are the implications of what you've already put on as a result of this inflection point in rates?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Obviously, we put the hedging strategy in place in late 2017 when rates were increasing, and as they rapidly increased throughout 2018, we continued to have. I guess the one thing that I would point out with that is even with -- even when you include the impact of the swaps, our loan portfolio is 70% fixed, 30% variable or adjustable, which -- when I look at some of the -- I track a lot of the higher performing $20 billion to $30 billion commercial-oriented banks, their loan books are flipped, right? They're about 70% to 80% variable, and much of which are tied to LIBOR. LIBOR-based C&I, middle-market and larger corporate credits.

So obviously, with the rate environment being where it is today and the risk that LIBOR continues to decline, we haven't put any new swaps on this quarter. And of course, I don't foresee us doing any other hedging here assuming where -- the interest rates stay where they are. Obviously, in terms of managing long-term interest rate risk, which is something our regulator's focused on, hedging in any market is good when you have as many fixed rates loans as we have. But we've made a conscious decision to kind of manage longer-term interest rate risk through other means, predominantly loan sales, always having swaps in our back pocket if we have to worry about that.

But I don't really see us doing much hedging. We probably won't really be unwinding those hedges either right now, that would be prohibitively expensive. But it's just going to be -- LIBOR's, looking at the rates that are on Bloomberg LIBOR is down again today as it continues to kind of creep down at least to Fed. So I think it puts us probably in the same boat as some of these other commercial-oriented banks that have large LIBOR-based commercial loan portfolios.

Joe Fenech -- Hovde Group -- Analyst

So I guess, what sort of the time line, if you were really simplify it, Ken, where -- as a period of time, I'm guessing where what you've already put on eats up some of the benefit of this new rate environment. I mean, how should we think about that? And sort of when you get over the hump? And what needs to happen from a rate perspective for that not to be as big of an impact to you?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Well, I think -- I'll go back to my comments earlier on kind of our forecast today day of where we believe net interest margins go. And again, I think the two biggest drivers in -- that will put pressure on margins during the third quarter are going to be, again, a fully baked quarter of the subordinated debt and the combination, again, the impact of LIBOR on the hedging that we've put in, as kind of asset yields are expected to remain fairly consistent and deposit costs -- the impact of rising deposit costs isn't really expected to have a meaningful impact.

And as we see margin go forward, margin increased modestly in the fourth quarter and beyond obviously, we're still absorbing the cost of a lower LIBOR rate. I mean we're not forecasting LIBOR to go up in those future periods, LIBOR is still low and remains low. So I think we're absorbing the cost of that through the inflection in deposit pricing as well as just being disciplined on the fixed rate side of the loan book.

Joe Fenech -- Hovde Group -- Analyst

Okay. That's helpful. And then last one from me, guys. Geographically speaking, where were the non-performers? And what was the approximate size of each? The increase this quarter?

David B. Becker -- Chairman, President and Chief Executive Officer

The one is $1.6 million, it's here in Indianapolis. We took the $6 million. We have real estate and receivables to cover roughly $1 million, and we took the $6 million of special reserve, and we got aggressive on that one. We don't know that it's going to be $6 million, we've got some work out folks in there taking a look at it.

So we put it together. And the other one is actually our first STL property that's located, I'm going to say of the top of my head, I think it's in North Carolina. It have to -- the 60 day, and that the person who owns the property, it went dark. The restaurant team that was in there went into bankruptcy, it went dark. She has another tenant that -- it's supposed to come in and start picking up payments, August 1. They're in the midst of build out, but she has just refused to make payments. So that one could completely reverse itself here in the next 30 to 45 days.

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

And Joe, to clarify, the single tenant loan that was an increase in delinquencies, not non-performers.

Joe Fenech -- Hovde Group -- Analyst

Got it. Thank you, guys.

Operator

The next question will come from John Rodis of Janney Montgomery.

John Rodis -- Janney Montgomery -- Analyst

Good afternoon, guys.

David B. Becker -- Chairman, President and Chief Executive Officer

Hi, John.

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Hey, John.

John Rodis -- Janney Montgomery -- Analyst

Ken, just real quick. You said operating expenses $11.5 million to $12 million in response to an earlier question, it that with or without the new SBA team?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

That's without.

John Rodis -- Janney Montgomery -- Analyst

Okay. And then, Ken, the tax rate going forward?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Every time I think it can't go lower, it seems to go lower. I guess we're in kind of the 5% range. Obviously, we manage that single -- excuse me, the public finance portfolio and drive revenue from other taxable side. I mean, again, I'd probably steer you to the mid-to-high single-digit just to be conservative. I know it was 5% and it was 6% and changed last quarter. So I think, if you want to use anywhere between 5.5% to 7.5%, that's probably a good estimate.

John Rodis -- Janney Montgomery -- Analyst

Okay. And maybe Dave, just your comments on the STL loan you just said North Carolina it's not non-performing. But can you just remind us, I guess, that portfolio, the average LTV and maybe specifically on that loan, what is the LTV?

David B. Becker -- Chairman, President and Chief Executive Officer

Yes. On that particular loan, LTV is 50%. We just had a new appraisal done on the property. So we're -- if the lady does -- refuses to pay, we're in good position, she actually had an offer to sell, but it was less than she originally paid for the property. So she passed on that, she's not as we found out a real seasoned real estate investor. Portfolio as a whole, John, has approached $1 billion. Overall, we're at 50% loan to value on all of the properties, and we've originated close to $2 billion in this asset class since we first got into it, and this is the first loan that we've had in a -- it's the first loan ever hit the delinquent schedule period. So I think, John, we're very well positioned. And technically, she has a new tenant coming on board, she should get cleaned up here in the next 30 to 45 days.

John Rodis -- Janney Montgomery -- Analyst

Okay. Thanks, guys.

Operator

The next question is a follow-up from Michael Perito of KBW.

Michael Perito -- KBW -- Analyst

Hey, guys. Thanks, so I've just one quick last follow-up here. It sounds like, when we -- talking about the net loan growth kind of in the mid-single digits, I mean -- but it sounded like from some broader comments earlier on the call that deposit growth might not slow quite to that level. So I'm just curious if you could make a quick comment. The liquidity in the -- investments and cash in the quarters was a little elevated. I mean do you expect those levels to kind of persist going forward and the loan to deposit to stay sub 100 given the net loan growth expectations?

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Yes. I think the loan-to-deposit ratio will remain below 100%. I mean, I think, it may cripple up slightly throughout the end of the -- through the end of the year, but it's definitely going to remain below 100%. I mean, I would expect as -- we'll probably keep the level. I would expect the level of cash, as I said before, it's inflated at the end of the quarter. So that cash balance of $350 million, will not -- will trend down over the course of the year.

I would expect securities balances to kind of be consistent -- call it on a percentage basis, consistent with where it's been the last several quarters as a percentage of the overall balance sheet. I mean we kind of try to target what we call liquid assets in the range of 18% to 20%, which obviously consists of cash mortgages held for sale and securities.

And deposit growth, as we've mentioned a lot here on this call, we're -- we've been reducing rates throughout the course of the year, have continued to reduce rates here in July, and we'll continue to do so. So I'm not -- if you look at the deposit growth, I mean, we do have some deposit growth models, but I wouldn't say it's an excessive amount.

Michael Perito -- KBW -- Analyst

Got it. Helpful. Thank you.

David B. Becker -- Chairman, President and Chief Executive Officer

Hey, guys, I want to jump back in with clarity on the two commercial loans that went on to nonaccrual. It was actually the same client. It's two separate loans. It was owner-occupied real estate and then a working line of credit. So when we say that the commercial loans bumped up 2.1 [Phonetic] on non-accrual, it's actually the same, and it is combined, it is that $1.6 million figure that I threw out. So just for clarity. And Ken was correct. The other STL is not in nonperforming status, just in the first time to have an STL loan and delinquent status.

Operator

And this concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

David B. Becker -- Chairman, President and Chief Executive Officer

Guys, we appreciate your time today. As you know in the past we're always is available if you think of anything later in the day, Ken and I are around. We appreciate your time, and look forward to catching up to several of you next week when we are in New York. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Larry A. Clark -- Senior Vice President

David B. Becker -- Chairman, President and Chief Executive Officer

Kenneth J. Lovik -- Executive Vice President and Chief Financial Officer

Andrew Liesch -- Sandler O'Neill -- Analyst

Michael Perito -- KBW -- Analyst

Brad Berning -- Craig-Hallum -- Analyst

Joe Fenech -- Hovde Group -- Analyst

John Rodis -- Janney Montgomery -- Analyst

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