First Internet Bancorp (INBK) CEO David Becker on Q1 2019 Results - Earnings Call Transcript

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About: First Internet Bancorp (INBK)
by: SA Transcripts
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Earning Call Audio

First Internet Bancorp (NASDAQ:INBK) Q1 2019 Earnings Conference Call April 25, 2019 12:00 PM ET

Company Participants

Allyson Pooley - Investor Relations

David Becker - Chairman, President and Chief Executive Officer

Ken Lovik - Executive Vice President and Chief Financial Officer

Conference Call Participants

Brad Berning - Craig-Hallum

Michael Perito - KBW

Andrew Liesch - Sandler O’Neill

Joe Fenech - Hovde Group

John Rodis - FIG Partners

Alec Rutherford - Race Rock

Joe Steven - Steven Capital

Operator

Good day, everyone and welcome to the First Internet Bancorp’s First Quarter 2019 Financial Results Conference Call. [Operator Instructions] And please note that today’s event is being recorded. I would now like to turn the conference over to Allyson Pooley from Financial Profiles. Please go ahead.

Allyson Pooley

Thank you, William and good afternoon everyone and thank you for joining us today to discuss First Internet Bancorp’s financial results for the first quarter ended March 31, 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 results and then we will open up the call to your questions.

Before we begin, I would like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial 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.

And at this time, I will turn the call over to David.

David Becker

Thank you, Allyson. Good afternoon, everyone and thank you for joining us today. We have had a good start to 2019 as quarterly earnings increased driven by revenue growth, well-managed expenses and low credit costs. We reported first quarter net income of $5.7 million and diluted earnings per share of $0.56. This compares to reported net income in the fourth quarter of 2018 of $3.6 million or $0.35 diluted earnings per share.

As a reminder, the fourth quarter results included a $2.4 million write-down of a legacy commercial other real estate owned. Adjusting for this write-off, the first quarter’s net income and diluted EPS were up 3.8% and 5.7%, respectively, over the prior quarter’s results. Our tangible book value per share increased to $28.57 and is up 9.7% on a year-over-year basis. As an organic growth story, we are proud of the fact that we’ve been able to deliver consistent growth in tangible book value, while investing in asset and revenue-generation channels over the last several years.

During the quarter, we had a nice lift in both net interest income and fee-based income, which helps drive our financial performance. Our strategy of focusing on our specialty lending areas continued to produce results, as loan growth was driven by originations in single tenant lease financing and healthcare finance. Revenue from the mortgage banking was up significantly from the prior quarter and was in line with our expectations, as we work towards building a more efficient and profitable mortgage operation.

We are also pleased with the relative stability in our net interest margin, as a 10 basis point increase in our yield on interest earning assets driven primarily by increased loan pricing, largely offset the increase in deposit costs. We continue to work to achieve one of our near-term objectives, which is to further extend the scope and market penetration in our specialty lending lines, while also diversifying our revenue and asset-generation channels in a capital efficient manner. To this end, we recently announced hiring of a talented and experienced SBA lender in the Indianapolis market. We also attained preferred lending partner status from the small business administration both are exciting developments as we work to grow this business line. We will continue to build our talent in our lending areas, and we feel very good about our ability to continue generating high-quality assets at attractive risk-adjusted yields. However, it’s important to reiterate that we are also mindful of where our stock price is trading and the need to manage capital efficiently and to deploy it in a manner that enhances profitability. We are actively managing the balance sheet so that we can capitalize on the opportunities our lending teams have, while also preserving capital in the current market environment.

As we indicated last quarter, we are proactively looking to reposition portions of our loan portfolio in order to improve the mix of earning assets, and therefore, enhance net interest margin and EPS. To that end, we sold $31 million of lower yielding loans during the quarter that enabled us to free up liquidity to fund new originations at higher rates. Included in these loan sales was our first-ever sale of public finance loans allowing us to establish a secondary market for these high-quality credits. Going forward, we plan to continue selling loan pools on a selective basis, particularly when we see the opportunity to improve net interest margin and where it is accretive to our earnings.

Our asset quality continues to remain among the best in the industry and is driven not only by our strong credit culture and disciplined approach to underwriting, but also our focus on certain specialty lending lines that target lower-risk asset classes, such as our public finance and our single-tenant lease financing businesses. Compared to similar size publicly traded banks, our percentage of risk-weighted assets to total assets remained well below the peer group average. Not only this just allow us to stretch capital further than other comparably sized institutes, but it also gives us confidence in our ability to withstand a recessionary environment should the economy turn downward.

We are also working hard on the other side of the balance sheet, as we are making progress on the strategies to drive lower-cost deposit growth. In particular, we are seeing opportunities in the small business space as we rolled out our first phase of our enhanced digital banking capabilities for small business. We have seen an uptick in small business account opening and are optimistic that these will translate to meaningful deposit growth. We are also exploring a partnership with an online small business lender to provide a business checking product to their customers. Additionally, we are working with our partner, Lendeavor, to capture deposits from the credit relationships in the healthcare finance area.

And finally, our commercial deposits team has a couple of opportunities in the pipeline in the governmental and not-for-profit areas that would add to our lower-cost deposit base. We celebrated our 20th anniversary in February and the unique culture we have created was, again, recognized as we are named one of the Best Places to Work in Indiana by the Indiana Chamber of Commerce for the fifth time. This is on top of being named as one of American bankers best banks to work for, for the fifth year in a row in 2018 and one of the top workplaces in Indianapolis by the Indianapolis Star again for the fifth year in a row.

As always, I want to acknowledge the entire First Internet Bank team who worked diligently and tirelessly to achieve strong results for our shareholders, customers and the communities in which we operate. Our culture is one that champions an innovative spirit, and the recognition we continue to receive for a positive workplace environment and company leadership only serves to reinforce our foundational approach to business. As consumers and small businesses continue to embrace online banking, our 20 years of experience has uniquely positioned us to build upon our legacy and make the next 20 years an even more exciting and pursuing endeavor.

With that, let me turn the call over to Ken to provide additional details on our financial performance for the quarter. Ken?

Ken Lovik

Thanks, David and thank you everyone for joining us today. Given the continued difficult interest rate environment, we were very pleased with our results for the quarter. As David mentioned, we produced linked quarter net income and earnings per share growth driven by revenue growth, manageable expenses and lower credit costs. Revenue growth resulted from an increase in net interest income due to the growth in average interest-earning asset balances as well as an increase in non-interest income driven by improved mortgage results.

Total loans outstanding increased by $124 million or 4.6% from the fourth quarter, which was lower than recent quarters, but essentially in line with expectations as we balance solid origination activity, with strategy is to manage overall portfolio growth. Our commercial portfolio grew by $106 million in the quarter driven by $163 million of funded originations primarily due to increased production in single-tenant lease financing and healthcare lending.

With regard to healthcare finance, our partner in this space, Lendeavor, continues to build brand recognition in the dental finance market and has been successful in recruiting experienced lenders to join its platform. We continue to believe there is tremendous opportunity in this business line, as we have expanded the credit products set. And as David mentioned earlier, we are getting started on the potential to drive lower-cost deposit growth from the attractive client base. Single tenant lease financing balances increased $56 million or 6.1%. The yield on the single tenant portfolio improved as new originations came on at higher rates and fee income increased modestly. As the pipeline remains relatively strong, we have bumped our pricing to manage overall growth and improved net interest margin.

Additionally, the quarter’s activities included the impact of a $4 million sale, which was basically a carryover from the larger sale we executed in the fourth quarter. We recognized a small gain on the sale, which partially offset the losses on the sales of public finance and residential mortgage loans. Public finance balances were essentially flat from the fourth quarter, as $35 million of new originations were offset by the sale of a $26 million pool of loans. The environment in municipal finance was intense with competitors aggressively pricing new deals to add assets. We have increased our pricing targets to manage growth and improve margins. So while quarterly originations were like by our standards, new deals were booked at an average fully tax equivalent yield of 5%. The pool of loans we sold, which were seasoned and some of which were originated in 2017 when corporate tax rates were higher, had a weighted average fully taxable equivalent yield of 4.04% and was priced at a slight discount, resulting in a loss of approximately $78,000. From a balance sheet management perspective, however, we felt it was a smart trade to essentially self-finance new originations and pick up about 100 basis points of yield, thus preserving capital, while improving net interest margin and profitability.

As expected, our consumer business was seasonally slow during the first quarter, increasing $9.5 million or 1.3% from the fourth quarter. Our horse trailer and RV loan balances were up 3.5% with new originations coming on at higher yields, as we have increased pricing several times over the past few quarters. Residential mortgage balances were up modestly as draw-downs on construction lines and new portfolio originations were offset by early payoffs and the sale of a $5 million pool of loans. These loans had an average yield of 3.3%, and we recognized a loss of $54,000 on the transaction.

Similar to the public finance loan sale, we’ve viewed the mortgage sale as an opportunity to improve the mix of our earning assets by redeploying the proceeds into higher-yielding new loan originations. We will continue to pursue potential loan sale opportunities to manage balance sheet growth and capital and improve net interest margin and profitability. We are actively engaged on additional potential sales of single tenant, public finance and residential mortgage loans and remain optimistic that we can push several of them over the finish line during the second quarter.

Moving to deposits and funding. From a deposit perspective, we continue to focus on opportunities to generate lower cost funding through the expansion of our small business, municipal and commercial relationships as well as from traditional consumers. However, the cost of funds related to our interest-bearing liabilities continued to increase in the first quarter, putting pressure on net interest margin. The cost of funds related to interest-bearing deposits increased 15 basis points to 2.29% and our overall cost of funds increased 14 basis points to 2.33%.

During the quarter, rates paid on new CD production stabilized compared to the fourth quarter, as most interest rates across the curve declined. In fact, we reduced pricing on CDs 5 times during the quarter. However, the overall cost of deposits increased as rates paid on new CDs came on at a weighted average cost of 2.92% as compared to maturing CDs that rolled off at a weighted average cost of 1.97%. Subsequent to quarter end, we have seen new production rates come down another 10 basis points, while we expect the cost of scheduled maturities will continue to increase.

Turning to net interest margin, our net interest margin declined just 3 basis points from the fourth quarter on both a reported and an FTE basis, which came in better than we forecasted 3 months ago. Our reported net interest margin was 1.86% compared to 1.89% in the fourth quarter. And on an FTE basis, net interest margin was 2.04%, down from 2.07% in the prior quarter. As expectations for future rate increases were significantly reduced and certain rates actually declined during the quarter, our cost of funds increased at a slower pace compared to recent quarters. When combined with the benefit of higher loan yields resulting from increased pricing, which was 10 basis points to 4.27%, we were able to effectively offset some of the ongoing net interest margin pressure.

As we have discussed throughout this call, we are actively pursuing strategies to reduce the net interest margin compression we have experienced in prior quarters. Loan sales, disciplined loan pricing and lowering rates paid on deposits are all evidence of this. Additionally, we have other levers we can pull, such as repositioning the securities portfolio, deploying excess liquidity into securities with attractive relative values or taking advantage of lower cost in certain wholesale funding channels.

With regard to our outlook on net interest margin for the second quarter, the flatness of the yield curve continues to present a challenging rate environment. Current rate forecasts are predicting short rates to decline, while long rates are expected to increase modestly during the second half of the year. If these implied rate expectations hold, we expect to see some moderate net interest margin compression in the second quarter in the range of 3 to 5 basis points before stabilizing in the second half of the year.

Non-interest income was $2.4 million compared to $2 million in the fourth quarter of 2018. The increase was due primarily to higher revenue from mortgage banking activities partially offset by the losses on the sales of public finance and residential mortgage loans. Mortgage banking revenue increased 42%, as mandatory pipeline volumes increased during the quarter. As a reminder, we upgraded our mortgage origination technology during the quarter, which is intended to increase application completion and pull-through rates and thus lower the cost per closed loan and increased closed loan volume per loan officer. The implementation went live in the middle of the first quarter and initial results have been positive.

Moving to expenses, non-interest expense of $11.1 million declined from $12.7 million in the fourth quarter. Excluding the $2.4 million write-off of commercial OREO last quarter, expenses increased $800,000 due mainly to higher salaries and employee benefits and premises and equipment costs. The increase in compensation expenses related mostly to annual resets on employee benefits, payroll taxes and bonus accruals as well as higher medical and prescription drug claims, the increase in premise and equipment expenses pertain mostly to higher software costs.

Shifting to income taxes, our effective tax rate for the quarter was 8.5%, reflecting the continued impact of tax income related to the public finance portfolio. We also recognized an additional tax expense of $125,000 associated with equity compensation vesting events during the quarter. Going forward, our effective tax rate will probably bounce around in the high single digits and will be impacted by how we manage growth in the public finance portfolio as well as performance in mortgage and how quickly we can get to scale on SBA loan sale.

Now turning to asset quality, credit quality was again solid as our ratios of nonperforming assets and loans remain among the best in the industry. Nonperforming loans as a percentage of total loans did increase to 12 basis points due to a large residential real estate loan being placed on non-accrual during the quarter. You may recall that last quarter this property drove a higher delinquency ratio. As we indicated then, it is a seasoned residential mortgage loan with an unpaid principal balance of $3.1 million. The property is located in a desirable area and a recent appraisal valued the home at $5.3 million. We are working to exit the loan and based on the appraisal, we believe we are well collateralized. Partially offsetting the increase related to the residential mortgage were declines in owner-occupied CRE and consumer non-performers. We continue to have minimal net charge-offs, which were $340,000 during the quarter or 5 basis points of average loans on an annualized basis and these were generally confined to the consumer portfolios.

Provision expense for the first quarter declined from $1.5 million in the fourth quarter of 2018 to $1.3 million in the first quarter due primarily to slower loan growth, and our allowance for loan losses to total loans was flat at 66 basis points as of March 31. Portfolio metrics continue to remain strong as the portfolio LTV in the single-tenant lease financing book was 50% at quarter end and new originations came on with an average LTV of 52%. In the public finance portfolio, almost 60% of the loans were made to borrowers with underlying credit ratings of BBB+ or better and over 41% to borrowers with a rating of A+ or better.

With respect to capital, our capital levels remained sound, while tangible common equity to tangible assets declined to 7.89% given the lower risk nature of our balance sheet, top quartile asset quality and our active strategies to manage the balance sheet. We believe we have sufficient equity capital to support forecasted loan growth. And finally, we continue to repurchase shares under our stock repurchase program. During the quarter, we repurchased 85,286 common shares at an average price of $20.47 per share. Subsequent to quarter end, we purchased another 32,000 common shares at an average price of $20.81 per share. And since inception of the program, we have repurchased over 128,000 shares of our common stock at $20.50 per share, which is significantly below tangible book value, which as David mentioned increased to $28.57 as of March 31.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first questioner today will be Brad Berning with Craig-Hallum. Please go ahead.

Brad Berning

Good afternoon, guys. Congrats on the initiatives in the quarter. I wanted to touch base a little bit more detail on some of the deposit franchise efforts can you give a little bit of sense of timing and magnitude of these initiatives and when do you expect them to start to contribute incrementally to the net interest margin? Just wondering if you could kind of give us some thoughts on how to think about that going forward?

David Becker

Brad, this is David. We rolled out during the first quarter a revamp of the online boarding process for the small business money market side of things, which we did with a consumer in the third quarter of last year and it increased significantly. We brought in $1 million in new deposits yesterday. We are revamping the checking account product and the onboarding process and should have that rolled out here by mid-quarter. We are talking to a lender in the small business space fintech company that is looking for deposit channel for these clients and the checking account services and products. We are holding that back, completing that new onboarding system. It’s kind of complicated the way it is out there today and we can get that down to 2 to 3-minute process. And they are talking hundreds of accounts per week. So we think its good opportunities internally with our organic growth. With the fintech lender, there is a good opportunity. We are starting to get traction with our municipal and business accounts. We are also picking up with the Lendeavor team and working with the dentists and veterinarians, which are generally pretty decent size deposits and good operating accounts. So we should see a nice pickup here in the second quarter, but it will probably be third quarter before we get significant numbers running.

Brad Berning

And then one follow-up to that, obviously, the kind of the banking as a service stuff, we have talked about this a little bit before. But this fintech opportunity, do you see that is the beginning of something that you want to build upon further initiatives and partnering that channel or is this just an opportunistic kind of a situation?

David Becker

So we are right up. When we talked to a couple other folks that talking to us about asset generation which we are doing quite handily ourselves at the current time, but yes, we are wide open to bank as a service on anybody, particularly on the deposit side of things. And we will look at asset generation as well, but yes, we are wide open to talking to anybody about the deposit generation capabilities.

Brad Berning

Good to hear. Last follow-up, the SBA announcement that you had in the press release, can you talk about how investors should think about, how that business should ramp as you guys kind of push that initiative forward, just want to make sure expectations are appropriate and obviously a good opportunity there?

David Becker

Yes. We still have a group that we are working on trying to bring over a team and a group of assets, but internal generation with the team we have today and a couple of people in the pipeline, we think we could get to an origination level of somewhere in the vicinity of $100 million in SBA loans over the course of this year, so current pipeline is sitting at about $20 million where on month-to-date, we have closed over $2 million this month. So it’s ramping up nicely. And if we get this third-party one that keeps moving month by month, but we do see a light at the end of the tunnel. We should have a good solid year with about $100 million in originations by year end.

Brad Berning

Excellent to hear. I will get out of this and back into queue. Thanks, guys. Appreciate it.

Operator

And the next questioner today will be Michael Perito with KBW. Please go ahead.

Michael Perito

Hey, good afternoon guys.

David Becker

Hey, Mike.

Ken Lovik

Hey, Mike.

Michael Perito

I wanted to ask maybe just strategically obviously you guys are trying to reposition the balance sheet a little bit here doing quite a few things on the deposit side. If we try to think about what your strategic priorities are today that will kind of guide the next phase of growth of this company, how would you kind of simplify and classify those at this point?

Ken Lovik

Well, I think in the near-term, Mike, obviously, we are dealing with a difficult rate environment. So, you have some different priorities you are managing here. And I think we talked a lot – made a lot of comments on repositioning the loan book and moving lower yielding assets off of the balance sheet and replacing with new higher yielding originations in order to manage capital and enhance earnings. I think if you are talking big picture, historically, we have – and David alluded to this in his last set of comments, the focus prior to the difficult rate environment was always kind of a focus on – not always, but a big focus on asset generation and expanding channels there. And while we continue to remain interested in exploring and building an SBA business, probably the opportunities to build new asset channels is probably secondary as compared to some of the deposit opportunities David mentioned as well as just repositioning the balance sheet, so that when we do eventually come out of this difficult interest rate environment, we are well positioned to just take off from an earnings perspective and have balance sheet power and capital to continue to build out all aspects of the business.

Michael Perito

Okay. And then on that point as you guys look out, can you maybe give us an update on the capital planning size of the strategic plan? I mean, it seems like you are good for the next four quarters or so, but still growing at a fairly healthy clip. Can you give us maybe just a 24 month outlook as it relates to capital and any external capital need and how are you guys reviewing that possibility?

Ken Lovik

I think over the next – as you mentioned it, perhaps the next four quarters or so, I think when we look at our forecast and think about the balance sheet strategies we have in place in trying to balance that with new origination opportunities. I think, as David mentioned in his comments, several of our asset generation areas still have a lot of opportunities in front of them and we don’t necessarily want those folks to pull out of the market, but at the same time, we need to be cognizant of balance sheet growth. And again, it comes back to reposition loan sales or securities sales to free up liquidity and capital. So I think from over the next, call it, four to six quarters we will have a strong focus on managing the capital levels such that to the point we feel today as we feel like we are well-positioned to support growth over that time horizon notwithstanding any other unforeseen opportunities that may arise down the road.

David Becker

At the current time, Mike, we have close to $100 million in portfolios that the outside world is bidding on currently. And as Ken said too, asset sales of some lower-yielding assets, we can definitely stretch capital further. I’d say over the next 24 months, we would be in a position to have to do anything at all it’d be sub-debt versus the stock offering. So we’re pretty comfortable we’ll get to 19 and well into 20 before we’d have to think about anything on a capital basis primarily by – we now have opened up the market and that opportunity to sell some of the municipal loans. Obviously, STL has been a good opportunity. We are selling off some of the lower-yielding long-term mortgages that we have on the balance sheet. So, it’s I think, we can stretch capital much, much further than we have in the past, but and continue to grow. As Ken said, we don’t want to cut off the sales pipeline that we have out there technically pretty much in all divisions. The pipelines are rock solid and some of the strongest we’ve ever seen. But by kind of selling off part of the portfolio and self-funding, we can stretch capital for a long, long way.

Michael Perito

Helpful. Thank you. And then do the asset sales, I mean, what’s the pricing dynamic moving forward? I mean, is that expected to turn into kind of a pretty steady contribution as opposed to a drag or can you maybe elaborate a little on what you are seeing from a pricing dynamic standpoint?

David Becker

I think towards the second half of the year it could turn into a contribution. At the current time, we’re obviously getting a premium of the single-tenant product. But some of the mortgages, 30-year fixed mortgages that we have on the books, we’re taking a haircut on those. So, for the next 3 to 6 months, we hope to kind of keep it even Steven that we will making up off of sales to cover the losses on the other side. But as we get to reposition, we have a minimum amount of kind of really low balance assets that we like to get rid off. So, if you can wrap that up here in the second quarter, early third quarter, we should be in a position that we could actually turn, I’d say, a de minimis profit, but we should be profitable in the second half of the year on the loan sale.

Michael Perito

Helpful. And then just one last one from me, Ken, on the NIM, so basically, I mean, if I’m interpreting your comments correctly, it sounds like the NIM is going to stabilize in the 2% range on a tax equivalent basis over the balance of the year. Is that correct, assuming that the rate forecast that you’ve mentioned is played out?

Ken Lovik

Yes. That’s fair to say. I think what we expect to see and across what we as compared to say at this time 3 months ago, pretty much most rates across the curve have come down and some details of the flat rate curve have changed, but it’s still a flat rate environment. So, I think, we expect to continue to see, again, kind of modest compression in the range of what we had this past quarter. And then on the back end of the year, see that kind of stabilize and kind of yes, that’s probably high 19s to something like that throughout the rest of the year.

David Becker

Just backing up a quick second, Mike, and I forgot to mention to you when we were talking about loan sales. To date, we have not sold anything that we’ve originated on the SBA side. But with the volume picking up during the second half of the year, we should have some loan sales that will definitely contribute to the bottom line. The kind of balance sheet management and portfolio management, that will be kind of a neutral base, but we should see a couple of million over the second half of the year and SBA loan sales for income.

Michael Perito

Helpful guys. Thank you for taking my questions. Appreciate the color.

David Becker

Thanks Mike.

Operator

And our next questioner today will be Andrew Liesch with Sandler O’Neill. Please go ahead.

Andrew Liesch

Hi guys. How are you? Good things. Thanks for a lot of this guidance today. Just on the mortgage business, the mortgage banking, it seems like kind of streamlining that process has gone well. And that you had good revenue beat or boost this quarter. What’s the outlook here? I mean, is this maybe being a lighter selling season in the first quarter, should we see an increase in the gain on sale revenue from mortgage?

David Becker

Yes. Activity has been good, Andrew. The without question, the new software we installed in the first quarter, our pull through has doubled down from application process to completion to coming through the system. So, we’re seeing much better pull through. Pricing is okay, obviously, with the dip in the 10-year to the level it hit. We have a spike in refinance activity towards the middle, latter half of last year. That was about 30% of the monthly originations. It’s now climbed back up to the 60%-plus. So, 10-year stay is fairly stable. We could see, obviously, it’s coming into selling season. We could see a little pick up. I don’t think we’re going to get back to the heydays of 2014, 2015, but it was a good solid performer for us in the first quarter. We were really excited with the pick up we got on the new software. And again, as Ken stated, it makes our guys much more efficient. They’re able to handle more accounts. So too early to give you a hard number. We probably have a better play for where we’re at the end of the quarter, but it’s looking much brighter than it has in several quarters.

Andrew Liesch

Great, great. And then just on expenses, sorry if I missed it, but what’s your outlook on the expense base here going forward? I mean, should there be like a decline in some of the seasonal compensation? And what other and then, what areas do you need to invest to invest in? I think you’re guiding maybe towards 10% expense growth year-over-year. Is that still your forecast?

Ken Lovik

Yes. I think that’s a fair estimate. I think, again, in the first quarter, you have your kind of your seasonal resets in the top line items. That was the line item that drove the most of the increase. I will tell you that during the first quarter and into the second quarter here, we have continued to hire people in addition to the individual, the experienced SBA lender we hired here in the market. We have added again, added talent around the organization as we have grown as some has been replacement positions, for example. We had a new we our former Head of HR resigned and we hired a new head, who started in January. But that person has beefed up her HR staff a little bit by hiring a very experienced payroll and benefits person. We recently replaced our Head of Marketing. We’ve added some people in credit administration and within the portfolio management areas, within the lines of business and technology. So, we have there’s probably an increase in their in that expense line item for comp that’s really not reflected in the first quarter number. So, we’ll probably see a pickup there. But I think across most line items, you’ll probably see some consistency, maybe a little bit of increase in premises and equipment as we continue to invest in new technology initiatives, but I do think yes, I feel pretty good about kind of that 10% growth year-over-year is a good estimate.

Andrew Liesch

Okay, great. Thank you. That covers all my questions.

Operator

And the next questioner today will be Joe Fenech with Hovde Group. Please go ahead.

Joe Fenech

Good afternoon guys. Most of my questions were answered, but just a couple more here. I guess, first, the overall increase in funding cost was about half the level the prior few quarters and with you held the FTE NIM relatively steady. Ken, if you were to kind of parse it out for us just in a 40,000 foot view, how much of that would you say was roughly due to the change in the rate environment or sort of the macro if you will versus like company-specific action things like the derivatives and actions you have taken that were more specific to your business model?

Ken Lovik

I would say a big piece of that did have to do with the slowdown in the pace of increase on deposits and a lot of that is really a combination of what the competition is doing out there as well as company-specific decisions to manage liquidity and make sure that we have adequate funding in place to fund new opportunities. And I guess, on the other side of the equation as well, we talked a lot about better and increased pricing on new loan originations. And I would say that’s purely a company-specific decision. Obviously, you need to be in the ballpark to be competitive, but I think with active fairly active pipelines and single tenant, we have the luxury to be able to bump up our pricing on average 5 or 10 basis points. Maybe that slows down growth a bit, which maybe okay, but we’re booking things at a higher yield. Same goes in the public finance business. I mean, we’ve implemented kind of minimum pricing thresholds in that business. And there are times when the competition, especially this quarter, they were a lot of the bigger players out there who were very aggressive, trying to grow their tax-exempt books. And our guys were getting outbid by 30 to 40 basis points, but that’s okay because we go out there and we look to a deal and we price it based on what works for us. And if somebody else wants to price it lower, so be it. We’ll move on to the next deal. So probably a long-winded answer, but I think it’s a combination of both market and company-specific decisioning that helped improve the net or really slowed down the pace of net interest margin decline this past quarter.

Joe Fenech

So, it sounds like it wasn’t I guess, what I am trying to get is it wasn’t like an episodic thing where you took some specific action, but the trend from last year is uninterrupted. It’s more like this seems like you’re approaching more of an inflection point where that trajectory should really start to slow?

David Becker

Yes. From the outside world, Joe, without question, the rates to the top on deposit rates have slowed down dramatically. As we said we pulled back 5 times during the first quarter. We pulled back again yesterday, watching the earnings release coming out, seeing a lot of banks who have significant NIM compression in the teens, some of that probably is 20% or 20 points, I mean that’s got a lot of the institutions. They were kind of rate chasers. They are re-pricing on a daily basis. So, I think we are seeing from a market play, once the Fed is settled down here, they continue to hold interest rates. Without question, the macro environment of the interest rate deposit interest rate as a whole will continue to decline over the course of the year, which helps us. And if you remember back here, we discussed in prior meetings of probably average CD coming on the books is about an 18-month duration. So, we had a lot of price inflection earlier on. So, we don’t have the big gap. It is where it is from new CDs today that some of the other institutions still have. What they’re repricing and working on, they’re going to continue to see higher compression than we are. So, we’re kind of we’re through the worst of it, and I think it’s coming back our way for sure.

Joe Fenech

Okay, that’s helpful. And then guys as we think about balance sheet, liquidity, deposit growth exceeded the loan growth on an end of period basis, but we’re short of loan growth on an average basis. So that gave you a little bit of breathing room on that end of period loan-to-deposit ratio. Can you remind us what your upper bound is on the loan-to-deposit ratio? And then also, your confidence level in being able to continue to piece that together quarter-to-quarter, just trying to assess the risk that in a given quarter if you’re not able to piece together and you kind of hit that upper bound on the loan-to-deposit that we might see the loan growth snap back in any given quarter just to kind of maintain those liquidity constraints?

Ken Lovik

Well, I yes. I don’t think we have, what you call, a documented upper bound on loan-to-deposits. We obviously want to manage the balance sheet from a liquidity perspective in a responsible way. So, I don’t think our strategy is to manage it as close to 100% or lower if possible. And I think there are times when, as you know, loan pipelines back loan sales out of the equation for a second, but there are times when loan pipelines and deposit generation don’t necessarily line up. We have been carrying higher cash balances off late, which gives us a little bit of flexibility there. And some of that to your first comment, we did end the year with a fair amount of cash on the balance sheet. So, some of them in the first half of the quarter first part of the quarter was really just deploying that excess liquidity out of cash balances and into the loan book. But if there are shortfalls too and maybe it’s not even a liquidity play, but it becomes levers to pull our net interest margin, some of the wholesale funding channels that we’ve used in the past whether it’s the FHLB or broker deposit structures, there are times when their pricing may be more advantageous there. So, we can and we are applying a capacity to access those channels, too. So, if we need to, for any reason, shore up the funding or the liquidity, we have a few, leverage there to pull.

Joe Fenech

Okay. And then last one from me guys. I guess, with the it seems like you alluded to kind of a stabilization and inflection point with maybe a little bit more confidence in the outlook. Does that leave you a little more inclined with the valuation being where it is and the growth in tangible book? Have a share re-purchase kind of stack up against growth opportunities and then kind of your lower bound threshold on that TCE ratio?

Ken Lovik

Well, maybe I’ll address the first task, the TCE ratio. And then I think as we’ve talked about quite a bit on this call, I mean our goal is to actively manage the balance sheet and stretch capital for as long as we can. So when you think about I know in the past that we have said we’re comfortable with because of the low-risk nature of our balance sheet and the high-asset quality of the loans we have on our books, we believe we have the latitude to be able to run TCE lower than, say, your average $5 billion to $10 billion commercial bank. We certainly have no expectation in the near term of running that anywhere near, say, $6.5 billion. I mean, I think when we look at our forecast for this year and even including some aspect of share repurchases combined with active management of the balance sheet, I mean, we’re forecasting TCE to kind of be in the mid-7s, call it, $7.5 billion, $7.6 billion at the end of the year, which we believe, again, given the low-risk nature of the balance sheet and the asset quality, it still gives us plenty of room to continue executing on the business plan if conditions remain unfavorable. With regards to the share repurchase activity, if you look at total purchases to date, we’ve spent about $2.6 million on share repurchases thus far going back into the fourth quarter, roughly a quarter of our share authorization. We will continue to be in the market. We are currently in the market. But again, it’s I think as you alluded to in your first in your initial comments there that, it’s for us, it’s we need to make sure that we’re preserving capital for the medium term as well, but also want to be out there to support shareholders and take advantage of pricing well below tangible book to repurchase shares and enhance EPS that way. So I expect for us to continue to be in the market here in the near term, but it’s constantly in internal discussion on strategy and obviously weighing the opportunities we have in front of us as well as looking at the loan sales and the loan sale opportunities we have over the near term and balancing that against the volume of shares we’ve repurchased throughout the course of the rest of the year.

Joe Fenech

Got it. Thank you.

Operator

And the next questioner today will be John Rodis with FIG Partners. Please go ahead.

John Rodis

Good afternoon guys. Ken, I guess, just one question from me, just your margin guidance. Does that factor into or how do you factor in the potential benefits from the new deposit initiatives? Is that sort of built into your stable outlook for the second half of the year?

Ken Lovik

A little bit, it is a little bit. I think we’ve tried to take a conservative approach on forecasting deposit costs. So, we’ve probably taken the lower balance of what we expect from some of these new deposit initiatives and probably have maybe a greater percentage of CDs representing that growth. And that way if the deposit initiatives come through and exceed expectations, then we have a nice surprise on the margin side, but we’ve tried to just approach it from a conservative perspective.

John Rodis

Yes, that makes sense. Dave, just one follow-up for you, I think you mentioned on the SBA side. You said you could see gains of maybe $1 million to $2 million later this year. Is that right?

David Becker

Yes.

John Rodis

Okay. So that would be aside from repositioning the lower sales in repositioning. Okay thanks guys.

Operator

And the next questioner today will be Alec Rutherford with Race Rock. Please go ahead.

Alec Rutherford

Hi guys. Thanks for taking my question. My question related to conserving your equity capital, but you’ve covered that pretty well in the call. So, I think I’m good. Thank you.

Operator

[Operator Instructions] Our next questioner will be Joe Steven with Steven Capital. Please go ahead.

Joe Steven

Hi guys.

David Becker

Good morning Joe.

Ken Lovik

Good morning Joe.

Joe Steven

Yes. My questions were both on deposit rates and share repurchase. But I would just I’ll go back to the share repurchase. It sounds like what you’re saying a little bit on share repurchases is that maybe with the stock still down here, you’re still going to be pretty active. But let’s say, for example, if the stock runs back at 30, you’ll probably then sort of take your foot off the gas on that side. Because I think we are shareholders, especially with the stock $6 under TBV, really think you got to continue to be active in here. So that’s it, can you just give a little color on that comment?

David Becker

You had it, Joe. We’re still in the market. We’re still buying. We’re not going on do anything crazy. If God forbid, we hit back into the teens again. We’ll buy like a drunken sailor. But the play, if it gets into that 30-mark-plus, then we’ll probably back off and conserve the capital, so we can keep the sales engine running, particularly if we’re continuing to improve the margins. So, we’re active in the market and we’ll stay out there at the current price. We think its way below where it should be. Any comments below tangible book value, we’re a buyer and we’ll continue to do that without question.

Joe Steven

Okay thank you.

David Becker

Thanks Joe.

Operator

[Operator Instructions] And there looks to be no further questions at this time. So, this will conclude our question-and-answer session. And I will now like to turn the conference back over to management for any closing remarks.

David Becker

Thank you very much. We appreciate everybody’s time today. We like we said, we had a good start to the year. We’re looking forward to continued growth in the earnings and the asset base over the course of the year. If you’ve got any follow-up questions, you know how to find us. We appreciate your time today. Thank you very much for being the part of the call. And with that, we’re done on this.

Operator

The conference has now concluded. Thank you for attending today’s presentation. And you may now disconnect your lines.