Q4 2021 First Internet Bancorp Earnings Call
Good day, everyone and welcome to the first Internet Bank Corp earnings Conference call for the fourth quarter and full year 2021 and.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone to.
To withdraw your question. Please press Star then two.
And please note that today's event is being recorded I would now like to turn the conference over to Larry Clark from Financial Profiles, Inc. Please go ahead Mr. Clark.
Thank you, Matt and good day, everyone and thank you for joining us to discuss first Internet Bancorp's financial results for the fourth quarter and full year 2021 .
The company issued its earnings press release yesterday afternoon, and it's available on the company's website in.
In addition, the company has included a slide presentation that you can refer to during the call.
Can also access these slides on the website.
Joining us today from the management team are chairman and CEO , David Becker, and executive Vice President and CFO , Ken Lubbock.
David will provide an overview and a company update and Ken will discuss the financial results. Then we'll open the call up to your questions.
Before we begin I'd like to remind you that this conference call contains forward looking statements with respect to the future performance and financial 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 at this time.
I'd like to turn the call over to David.
Thank you Larry good afternoon, everyone and thanks for joining US today 2021 was a year of significant achievements for first internet as you've seen we had a strong fourth quarter. We generated record annual net income for 2021 highlighted by advances in key business lines and <unk>.
Exceptionally low credit cost net income for the year was $48 1 million and diluted earnings per share were $4.82.
With up over 60% compared to the 2020 result, this strong performance was driven by substantial growth in net interest income and net interest margin expansion.
Fully taxable equivalent net interest margin for the year was $2 25 up 57 basis points from 168 into 'twenty.
This was primarily the result of lower deposit cost is higher cost Cds matured and our deposit composition.
<unk> towards lower cost non maturity deposits.
We continue to exhibit stellar credit quality in 2021.
The balance of nonperforming loans decreased 27% over the course of the year, leading to a ratio of nonperforming loans to total loans are just 26 basis points at year end down from 33 basis points at the end of 2020 net charge offs for the year were only nine basis points, our strong performance in 2020.
One helped us generate a return on average assets of $1, one 4% for the year at 45 basis point improvement over 2020.
Additionally, the strong earnings allowed us to continue building capital, that's our tangible common equity to tangible and tangible assets ratio increased to $8 nine 3% at year end.
While delivering these results is a full team effort I'd like to highlight a few areas, where we are seeing strong growth.
We continued to build our national SBA platform, which steadily gained traction and contributed to our year over year revenue growth originations were particularly strong during the quarter and I'm proud to announce that first internet was ranked among the top 25 lenders for the first quarter of SBA as 2000 2022 year.
<unk> first quarter 'twenty, two is our fourth quarter 'twenty one.
SBA loan pipelines remain robust heading into January which will provide a fantastic start to 2022.
Our recently formed franchise finance business unit got off to a great start in 2021 funding over $80 million in loans since its launch in July our.
Partner Apple Pie capital is one of the leading providers of growth financing to franchise owners pipelines. In this line of business remained strong as well we are targeting an origination volumes in the range of about $115 million for 2022, our pipelines in construction lending and single tenant lease financing. They're also looking very good.
In total compared to the third quarter, our commercial pipeline is up 22% and unfinished unfunded commitments in our construction businesses are up 45%. In addition to our core banking and lending businesses. We have recently announced two strategic initiatives to expand our capabilities. As you know we are now.
It's a transformational acquisition of first century Bank Corp. During the fourth quarter 2021, with the addition of first centuries team. We will acquire four highly scalable business lines that bring fee revenue and additional funding diversification with low cost deposit platforms. These four business lines include payments tax.
Product lending sponsored card programs and homeowners Association services with our March much larger balance sheet additional dedicated resources and access to greater sources of liquidity.
And to aggressively pursue growth opportunities across each of these business lines. We are in conversations with first centuries key business partners and are excited about the ability to deepen and expand these relationships based on what we know today, we feel as good if not better about the forward estimates for the combined company.
Then when we announced the transaction.
The year ahead will be one dedicated in part to getting the first century transaction closed and I would like to thank the teams from first internet as well as for century, they've been diligently planning the integration of our respective organizations in a manner that will allow us to capitalize on the opportunities that will drive meaningful growth for us in <unk>.
'twenty 'twenty three and beyond.
Another area of strategic focus for us in 2022 will be to invest in fintech partnerships, but the rapid evolution of technology that enables consumers and small businesses to manage their finances digitally.
<unk> addressing a significantly growing marketplace partnering with these innovators will benefit first internet in two ways.
We have discussed before.
Fin techs have created robust digital offerings unburdened by legacy Tech impediments that meet and exceed customer expectations. Our teams had been systematically overhauling our digital service delivery capabilities with the introduction of carefully selected partners. We believe these tools will enhance our.
Ability to win and retain consumer and small business relationships well into the future second a growing number of Fintech partners seek to take their products directly to consumers and small businesses. These entrepreneurs need banking expertise and capabilities to go to market for our Internet has now almost 23 years of it.
Variance in delivering digital services.
Moving numerous sponsorships that would've been called banking as a service had the term existed at the time given both our history and forward looking vision. We believe first internet is well positioned to exceed in the banking as a service space.
Earlier this week, we announced a formal agreement with seat tariffs, leading technology platform and matchmaker for bank Fintech partnerships. The relationship will enable us to manage a multitude of partners on a single platform, making it highly scalable and then enabling us to drive new revenue streams acquire lower.
Cost of deposits and pursue additional asset generation capabilities.
<unk> offering banking as a service partnerships with Fintech are growing quicker and more efficiently than the overall industry. We believe there is and will be for some time more demand for banking as a service and the banks can meet.
There's a high degree of confidence that there is a long runway as our banking as a service provider.
We are actively working with <unk> on the banking as a service Scott that we will provide a combination of low cost deposits and noninterest income we expect to begin announcing these partnerships as we get closer to the formal launch dates. We also continue to have discussions with additional fintech partners sorts through our own efforts.
As well as through the relationship with St. Terra as we build out this attractive line of business and finally I want to once again acknowledge our inaugural environmental social and governance report otherwise known as ESG, which we published in 2021 the report highlights the company's ongoing practices.
And achieved much in four primary areas governance, and leadership environmental management, human capital and social responsibility. It chronicles our existing commitments and future priorities around mindful governance and responsible corporate citizen.
Advancing our ESG initiatives, we hold ourselves accountable for effectively managing risk.
Also facilitating financial inclusion before I turn it over to Ken I would like to thank the entire first internet team for their hard work and commitment throughout the year, we celebrate innovation and collaboration here, we have built a workplace culture that continuously develops that people who embody the strength. It is a reason why we were named.
One of the best banks to work for by American banker for the ninth consecutive year.
Our team's talent and dedication are why we are confident in our franchises ability to capitalize on these new opportunities.
With that I'd like to turn the call over to Ken to discuss our financial results for the quarter.
Thanks, David as David mentioned, we posted record annual earnings capped off by fourth quarter net income of $12 $5 million and diluted earnings per share of $1 25, which included about 650000 of additional pre tax expense related to certain nonrecurring items. After factoring in these items.
<unk> adjusted net income was $13 million and adjusted diluted earnings per share were $1 30.
Increases of 2% and two 1% respectively from the third quarter and up over 16% from the fourth quarter of 2020.
Profitability continued to be solid with adjusted return on average assets, increasing six basis points from the third quarter to $1, two 4% and adjusted return on average tangible common equity of 13 eight 4%.
Looking at looking at slide five total loans at the end of the fourth quarter were $2 $9 billion down modestly from the third quarter and down five 6% from December 31 2020.
We were pleased with the growth in our recently launched franchise finance line of business in total we originated $58 million of loans during the fourth quarter and closed the year with over $80 million in balances in the specialized lending area. We also grew balances and construction, where we had strong drawdowns from existing projects and in <unk>.
Business lending, where we originated $54 million of SBA seven loans $14 million of which were on guaranteed balances retained on the balance sheet. This was partially offset by $12 million in PPP loan forgiveness.
However, this activity was more than offset by elevated net payoffs in our single tenant lease financing healthcare finance owner occupied commercial real estate commercial and industrial and public finance portfolio.
Also contributing to the decline in loan balance was the sale of $20 million of single tenant lease financing loans that were sold at an attractive premium.
Consumer loan balances decreased moderately compared to the third quarter due primarily to prepayment activity in the residential mortgage trailers and other consumer loan portfolios.
Moving on to deposits on slide six overall deposit balances were down modestly from the end of the third quarter and we continue to see improvement in the composition of our deposit base during the quarter non maturity deposits increased by $51 $6 million driven primarily by increases in small business commercial and <unk>.
Consumer balances as our focus in this area continues to pay off Cds and brokered deposits decreased $97 3 million or seven 1% as higher cost CD maturities. We are either funded with on balance sheet liquidity or replaced with much more attractively priced money market accounts checking accounts and lower rates.
Cds.
This lowered our cost of interest bearing deposits six basis points during the quarter.
In total we realized $26 million of deposit interest savings for the full year 2021, which is in line with our guidance.
Turning to slide seven and eight net interest income for the quarter was $23 $5 million, an increase of $2 6 million or 12, 4% compared to the third quarter on an adjusted fully taxable equivalent basis net interest income was $24 $9 million up $1 8 million or seven.
One 7% from the third quarter the yield on interest, earning assets improved to 334% in the fourth quarter due primarily to an increase in loan fee income as well as higher yields on new loan production, which included the growth in franchise finance balances.
The average balance of other earning assets and securities decreased $47 million and $36 million, respectively compared to the third quarter, while the average balance of funds was down $9 million.
We recorded a net interest margin of two 3% in the fourth quarter, an increase of 30 basis points from 2% in the third quarter adjusted fully taxable equivalent net interest margin increased 22 basis points from $2 two 1% for the third quarter to 2.43% for the fourth quarter as you can.
Can see on slide eight the 22 basis point improvement was primarily driven by higher loan yields, including the impact of higher loan fees, which had a positive impact of 21 basis points and lower deposit costs, which provided a benefit of five basis points. This was partially offset by lower yields in the securities portfolio, which had a negative impact of <unk>.
Three basis points.
Looking ahead to this year, we expect our yield on interest, earning assets to revert closer to our results in the third quarter, but increased steadily as we grow the commercial loan portfolio compared to the end of the third quarter. We have seen loan pipelines increased 22% driven by growth in single tenant lease financing franchise finance and SBA.
As well as fundings of construction lines.
Additionally, we expect deposit cost to continue to reduce over the next year at $713 million of Cds are scheduled to mature in 2022 with a weighted average cost of 1.0% to 2%. Our current replacement cost on these deposits is in the range of 55 basis points.
Turning to noninterest income on slide nine noninterest income for the quarter was $7 $7 million down slightly from $7 8 million in the third quarter. The decrease was the result of lower revenues from mortgage banking activities and a decrease in other noninterest income partially offset by an increase in gain on sale of loans.
Gain on sale of loans totaled $4 $1 million for the quarter, increasing $1 4 million compared to the third quarter driven by a $900000 gain on the sale of single tenant lease financing loans and a $500000 increase in the gain on sale of SBA loans mortgage banking revenue totaled $2 eight.
Million dollars for the quarter down $1 1 million from the prior quarter due to a decrease in interest rate locks sold loan volume and margins.
In terms of our outlook for mortgage it remains relatively consistent with our prior comments, we expect mortgage revenues to be in the range of $12 million to $13 million for the full year 2022 with.
With regard to SBA gain on sale revenue, we are forecasting that to be in the range of 13, 5% to $14 million for the year. Our outlook. There has been somewhat impacted by more normalized gain on sale premiums.
As we've begun to see premiums come down from the elevated levels experienced during much of 2021.
Moving to slide 10, noninterest expense for the fourth quarter was $17 million the $2 $5 million increase from the third quarter was driven by higher salaries and employee benefits consulting and professional fees and premises and equipment.
Higher salaries and employee benefits expense was due mainly to higher incentive compensation increased medical claims expense and head count growth the.
The increase in premises and equipment was driven primarily by a $500000 termination fee related to an information technology contract.
The increase in consulting and professional fees was due primarily to 200000 of acquisition related expenses as well as third party external loan reviews.
With regard to our outlook on expenses, we expect to see an increase in the range of 15% to 17% for the year driven by several factors.
First we have made a significant investment in SBA personnel, many of which were higher throughout 2021. So we will realize a full year's impact of those additions plus we expect to continue adding personnel as we build out the platform.
However by the fourth quarter of 2022, we expect to be at an annual run rate of $300 million of originations in SBA with plenty of room to grow.
We also expect to add personnel and technology and risk management to support the Fintech and banking as a service initiatives that David talked about earlier.
Also related to both our Fintech and small business initiatives, we expect to invest in partnerships and incur certain consulting fees that will significantly enhance our digital offerings and position first internet is a leading provider of financial services to the small business market.
And finally, we do expect an increase in premises and equipment costs as we recently moved into our new headquarters location, which is a larger facility that accommodates our growing workforce.
Now, let's turn to asset quality on slide 11 credit quality improved again during the quarter as nonperforming loans declined by 500000 from the third quarter nonperforming loans represent 26 basis points of total loans down from 27 basis points last quarter and down from 33 basis points at the end of 2020.
Net recoveries of 100000 were recognized during the fourth quarter, resulting in net recoveries to average loans of approximately one basis point.
The provision for loan losses in the fourth quarter was a benefit of $238000 compared to a benefit of 29000 for the third quarter. The increased benefit was due primarily to the decrease in loan balances, but was partially offset by adjustments to qualitative factors that increased the overall allowance as a percentage of loans.
<unk>.
The allowance for loan losses as a percentage of total loans was 96 basis points at year end or 97 basis points when excluding PPP loans, both represent a one basis point increase from the third quarter.
With respect to capital as shown on slide 12, our overall capital levels improved and remained healthy at both the company and the bank with a strong earnings performance. This quarter, our tangible common equity to tangible assets ratio increased to 893% up 32 basis points from the third quarter. Additionally, tangible book.
Value per share increased to $38 51 up.
Up from $37 12 in the third quarter, and approximately 16% higher than one year ago.
Lastly, during the fourth quarter, we repurchased 100000 shares of our common stock at an average price of $44 36.
As part of our authorized stock repurchase program.
Overall, we had an outstanding quarter and continued to position ourselves well for success in future periods with that I will turn it back to the operator, so we can take your questions.
Yes.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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Okay.
And our first question will come from Nathan race with Piper Sandler. Please go ahead.
Hi, everyone. Good morning.
Okay.
Was hoping to just start on the loan.
The loan growth outlook it sounds like maybe on a legacy basis, you guys are feeling increasingly optimistic on where the pipeline stands.
In terms of just those opportunities.
Being well positioned to offset some.
Continued run off in the health care book, So as you kind of look out over the course of this year and excluding the impact from FCB. How are you guys kind of thinking about overall loan growth levels.
Legacy basis that is.
Yeah, you know right now Nate is we kind of look at the world look at pipelines.
I think we feel comfortable forecasting loan growth.
The range of the year for somewhere between 10% to 12%.
I think as we mentioned in the prepared comments that our franchise finance is going to be a big driver of net loan growth for the year, our construction business as well as has really done well. This year are our guys have been out there hustling and.
Generating new commitments. So we expect to see a significant increase in loan balances there.
Single tenant lease pipeline seem to be growing every day.
As the longer end of the curve has come up.
It's allowed us to be more competitive on pricing, we don't necessarily have to chase rates down to the bottom and I guess, you would say that rates are kind of moving more into the rates that we're used to seeing so.
So we feel pretty good there.
And then there will be there are some opportunities as well throughout the in the in the <unk>.
C&I business and owner occupied commercial real estate as well.
Backing up Ken we actually we had a very strong fourth quarter in new loan originations and she has just showed a positive play we had two very large C&I loans, one a life Sciences company and won a privately held.
Group.
Car washes in Phoenix, Arizona, the two loans together totaled almost $70 million that were paid off in the fourth quarter.
Due to mergers and acquisitions and then.
We also had almost $40 million and single tenant leases that were paid off during the month of December .
Gasoline there was folks just trying to shuffle the deck a little bit before there were any tax law changes on 10 31.
So had we not had over $100 million and somewhat unexpected.
Payoffs during the quarter, we had a very solid fourth quarter. So yeah as Kevin said, we're very confident in looking at that 10% to 12% growth over the course of 2022.
Got it that's very helpful.
Changing gears, a little bit and just thinking about the overall.
Balance sheet interest rate sensitivity position, if we were to look out over the next few quarters and after we get FCB integrated how do you guys kind of think about the overall balance sheet sensitivity to the first couple of fed rate hikes that you know kind of priced into the forward curve.
By the end of this year.
Yes, I think when you when you think about when we get first century integrated obviously that that's going to be.
Give us a significant benefit on the deposit side with the zero cost and the low rate deposits that they have there and.
And that's going to provide a much more stable stay.
Stable floor than what we've had in the past as.
As far as deposit pricing goes I mean, I think we'll probably see rates tick up a little bit on some of the deposits.
Products, but.
I think as we shifted to on our own X first century. The composition has obviously, it's migrated towards a heavier weighting on the checking account and the money market side and.
All of our non maturity products had a much lower beta in the last upgrade cycle.
<unk> data were very high whereas the other betas were lower so I think we feel pretty good about what we as far as the interest as far as the impact of interest rate increases and I think we'd probably try to manage to a to a neutral position.
And then once we get first century integrated get their deposits onboard and begin to build out the deposit opportunities there.
I think we feel pretty good in combination with the addition of construction balances, which are all variable rate more SBA balances, which are all variable rate and just shorter duration loans overall that.
I think over time, we migrate towards an asset sensitive position.
Yes.
Perfect that's super helpful. Thanks, Ken.
One last one for me and I apologize if you touched on this and I hopped on the call a bit late but just in terms of the timing.
Anticipated with FCB closing any updates along those lines.
Yeah, a real quick update we've been in conversation with obviously, a three players out here.
The department of financial institutions for the state of Indiana as the FDIC and then ultimately the federal reserve.
Conversely actions are going great.
We hope to hear some positive news from the state of Indiana. During the board meeting in February and FDIC and Federal reserve behind that so hopefully latter part of this quarter or very early on in the second quarter, we hope to get them over the finish line.
Got it that's very helpful. I. Appreciate you guys, taking the questions I'll step back thanks again thanks.
Thanks, Nick Thanks Nate.
Our next question will come from Michael Perito with K B W. Please go ahead.
Hey, guys how are you.
Hi, Mike how are you.
Great. Thank you. Thanks for taking my question. So I just had a couple of things I wanted to hit and I wanted to drill in on the expense commentary for a second here. So so can I just want make sure I was hearing you correctly. So you guys were saying <unk>.
15% to 17% growth.
In 2022.
After the kind of $60 5 million starting core run rate is that correct and then as his first century on on top of that growth rate.
First century would be on top of that what was the first number you said, Mike I didn't hear you correctly arent clear I just wanted to come back I'm, sorry, I was just seeing if that 15% to 17% growth was off of kind of like a 16 and a half core full year 'twenty one starting point.
I would say, it's probably off the 60 watt just call it off $61 5 million.
Got it Okay, and then for centuries on top of that and is that still approximately 11 to 12 million annually of kind of Opex that's coming.
On a full year run rate.
Yeah, but I would I would back I would probably back out of that the cost savings assumption.
That we had which was correctly yes.
I was just making sure that the starting point alright cool.
And then kind of all of that.
So you saw the news obviously you guys mentioned in the prepared remarks about some Kara which company we're familiar with.
It seems like correct me, if I'm wrong here, David but I mean, obviously it seemed like first century had a pretty good roster of partners, but hadn't really been pushing to grow kind of leaning into your your pending acquisition of that but clearly you guys are looking to grow and that line of business for you. So I'm just I guess I'm wondering you guys kind of alluded to some hires book, but where do you.
See yourselves in terms of kind of the tech customer service and regulatory oversight.
Ingalls up all the <unk>.
S business in terms of your efforts there and I guess, how do you kind of see yourself necessarily get into the competitive landscape.
Which isn't very crowded today, but there are other players.
What are you guys can primarily be going after or is it could it be more deposit oriented to start or is it going to be mixed amongst assets and deposit type partnerships just would love some more color. There if you don't mind.
Yes actually were almost on a 50 50.
<unk>, Mike with the folks we're talking to right now obviously there is some very good low deposit.
<unk> low cost deposit channels that were on there are some very interesting loan opportunities at a higher yield than where the higher yield in a.
Shorter duration than we're used to seeing so.
The great part about it we've discussed this in previous calls over the last 18 months during the Covid crisis. We had already started a lot of build out and a lot of testing and work on.
Banking as a service sink tara's.
Been in the works for months on in here.
What first centuries announcement did along with seeing Tara intensely and other things, we've announced and more to come has put us on everybody's radar screen as you pointed out there are other players.
The demand in the Fintech space, there is not nearly as many banks.
That need to be in the space. So theres plenty of folks to choose from I would tell you we're way down the road with three to four folks that could get announced in process. Yet this quarter every one of the customers.
For essentially that we've talked to you we've turned up additional opportunities with them.
The servicing side of things is going to be at least 19 or 2019 numbers almost double what they did in 2020, if not more.
The largest.
Layer on tax services, we're actually going to help them because they wanted to boost the volume above <unk> century. So we will actually take some of those loans over the course and participate with them during the first quarter. So it's coming up Roses, absolutely every person that we talk to.
If anything right now it's a decision.
Trying to pick the best of the best.
As Ken pointed out in his comments, we've hired some people in anticipation.
The good part about the <unk> century, and a lot of the regulatory BSA cable I see et cetera, et cetera, et cetera concerns from the regulator. So you've got a tremendous team in Georgia, that's been doing a lot of this for years and payment services. It's also very similar to banking as a service from a regulatory compliance.
So their team added to our team and the new people that we've hired were very confident and we've had no pushback at all from the regulatory agencies about our forward looking plans to handle all of those components.
It's looking rock solid and like I say, there's tremendous opportunities out here the phones ringing on a daily basis.
The first century move really but.
And kind of a spotlight on that we're in it and as we said.
And banking as a service long before they coined that term.
We were right. The Fintech before this fintech term was coined if you take a look at how the bank got off the ground. So it's kind of flatten now I'm back in my element. This is what I've been doing for 40 years, and having a great time, and Nicole and Kim and the rest of the team here.
Taking care of the day to day issues in 2022 will be a little bit crazy and we we.
We will try to give you guys guidance as much as we can as the year evolves.
'twenty three is looking absolutely like it's going to be.
Hit it out of the Park theater so.
Very excited about everything that's going on.
That's great update thank you.
Thank you for that David and then just lastly for me Ken just to drill in on the NIM a little bit more I mean, if we can just kind of directionally try and gauge. This thing here I mean, you guys are obviously at $2 43 in the third quarter.
It sounds like you guys can Ken can probably get.
Between the Cds repricing in first century coming on and into kind of like the high you know maybe like the $262 70 type range without really pushing too hard and then where are you guys go from there with with rates will really dependent kind of on the the rate of growth of the banking as a service initiative and where that C D and kind of high.
Cost deposit rate portfolio grows to over time is that anything in there that kind of gives you heartburn or do you think that's generally pretty fair at this point given what we know, yes, and I would say with regards to the NIM numbers you threw out that's that's probably 'twenty three and beyond.
And in 2022 here.
You keep one thing about our performance in the fourth quarter here is that we did have a lot of loan fees in there. We did have as David talked about there was elevated prepayment activity.
At a million a million one of X, what I'd call excess loan fees in there with the prepayment activity David talked about the C&I loans in the single tenant.
We usually run about one point.
Two 1 million one of prepayment fees and loan fee income a quarter.
And we were we were about double that this quarter, which kind of equates into about maybe 12, 11% to 12 basis points of margin.
So with my comment earlier about our asset yields kind of reverting back to where they were in the third quarter I mean that we would probably really in for the quarter about a low two <unk> NIM.
And I think that's probably a good starting point for the year, but we obviously expect that to drift upwards the deposit leverage isn't quite as strong this year as it was last year, but there still is re pricing leverage.
Just the deployment of loans in the deployment of cash into the into commercial loans I think Mike you kind of hit it right there.
When we do get first century onboard and integrated with their low cost platforms and start building those out I think.
Call it longer term that NIM trajectory you talked about is what our goal is.
One of the things.
Like once we get past tax season, and the demand for the.
Tax funds here the cash on balance sheet, when we get first century and ourselves together, we're going to be in the 6% to $700 million range. So the real key and that's why we're looking for Fintech loan opportunities. We've got to put that money to work just as quick as we can so obviously the securities industry in the other.
Alternative sorry, the yields there are significant enough to make a big difference. So it is much lower cost thankfully it won't be as big a drag as our traditional excess cash has been but we're going to have about $700 million to play with come April may that we need to put to work as soon as possible so that could hold us back.
A little bit for the first half of the year as Ken said the numbers you are quoting.
Very reasonable for 2023 and above but.
Bob.
I'd keep it in that $2 40 to $2 45 range by year end here.
In 2022.
Got it very helpful. And then just to kind of be crystal clear about it though I mean with the first century deal. Your name if if we do get some type of more aggressive for hike scenario in the next four to five quarters, where historically would have been pretty punitive to you guys on a relative basis. I mean, you don't expect that to be the case.
This time around now with with the changes you've already had your balance sheet and the addition of our first century, you would expect that margin should be able to hold.
Steady at a minimum in a rising rate environment is that is that fair or is that too shrunk yeah.
That's fair, Mike because I mean, if you just think about the simple math is even if we are carrying the excess liquidity, but you get that many rate hikes, where we'll make that much more yield on the cash balances at the fed and elsewhere versus paying zero to very very low amount of basis points on it. So yes, youre right I think that it's a <unk>.
David said the.
Depending on how many rate hikes, you want to look at it it's really just getting that cash put to work.
Yes, technically we get three to four rate hikes over the course of the year, our overnight or our investment yields will be.
Above our cash costs for maybe the first time in the history of the bank.
Yeah.
Very good thank you for the for all the color I appreciate it.
Thank you, yes, thanks, Mike.
Our next question will come from Brett Robinson with Hobdy Group. Please go ahead.
Hey, guys good morning.
Good morning, Brett.
I wanted to first ask you were just mentioning the excess liquidity that you are going to be getting with the FCB deal can you talk about with the initial.
Terms of the deal you anticipated, having 21% accretion in.
In 2003 and that included the excess liquidity deployment.
The rate environment looks different now can you maybe give us an update on how.
How accretive this deal could be now relative to when you announced.
Well I think as David as David mentioned that back I leave and back out the excess liquidity question because some of that to some extent may just be financial engineering, but.
We when we put out the original guidance on 'twenty three earnings.
I think we knew that they were going to be a number of opportunities to look at it and I think we felt conservative at the time, we felt good about what we put out there, but conservative and as we've gotten in and gotten too.
Really get really get under the Hood and get.
Familiar with and you get to know some of their customers their clients their key business partners and the opportunities there as well as the expanded opportunities in the tax business I think just from their core business alone fee revenue and tax tax revenue.
Should exceed the number that we put out there in our initial guidance and then to me.
If rates are going up and we do get this we will get this very low cost deposit platform, whether we deploy those proceeds into loans.
Or.
Or even just deploying into securities I mean at the time, we did the the.
The DAC.
I think our assumption on putting some of that cash to work in mortgage backed securities were just plain Vanilla agency MBS was $1 50 to $1 55, and I think now we can buy those same bonds. It.
<unk> hundred 90% to 2%.
And the cost of the deposits isn't changing so.
So I think there is certainly some upside leverage there.
But I think it'll be again as we talked about it will just be how fast we can put that cash to work.
Okay.
That's helpful.
And then wanted to just all you didn't really talk a whole lot about the HOA business on the payments and card.
Programs, obviously fee income is a big piece of this transaction can you. It sounded initially like you were optimistic that those things could continue to grow and you wanted to invest in them can you maybe give us some color on or an update on the homeowners Association.
Platform in particular, if you think if youre optimistic there'll be able to grow.
That business and what the outlook might be for that to contribute to the deposit growth.
The HOA business as we're getting more under the covers and more detailed information.
It's strong it's a great opportunity for us, it's a very stable base that they have today.
Growing that base is fairly seasonal there is two times in the course of the year that an HOA, we'll change banking relationships. One is kind of here at the end of the year beginning of the year when they start it fresh they'll make a move to a new bank.
A lot of it is one of the things we needed to do at the current time, there HOA team only has integration into the sink software platform builds other platform to really make that grow and go.
We need to.
There's probably four to five kind of major platform that 90% of the HOA business, we need to build out a couple of additional API. So they can sell.
Other platforms, but we still think it's solid it's growing.
It's very stable.
The HOA World is woke up to the fact that they don't have to give their money away where it used to be very low balance it's still I think on the <unk>.
All in blended cost between the checking and the long term kind of money market or savings.
Savings side of things are still in the 'twenty two 'twenty three basis points, which is tremendous for us compared to our traditional cost of funds. The one that has really taken off and has grown significantly through the course of the fourth quarter. Since we've been involved in knowledge of what's going on.
In their world is the deposits come with a prepaid card programs and some of the payment services, obviously, there's cash moving in there, but some of that on the.
Prepaid and the virtual credit cards and stuff.
Our deposit base to support those have gone up 45 $50 million and that's intra.
Interest free cash that we're not paying anything on that so.
Our thought that first century, it's going to drop and $500 million in la.
Low cost deposits over the next 24 months that's still.
It might even be a little bit of a low numbers. So it'll be a combination of HLA and the card services side of things but.
<unk>.
We think it is very very doable, and maybe even a little bit low.
Okay. That's helpful. And then one last quick one on the center of our relationship and our Fantastic partners that you would expect from you indicated kind of a 50 50.
Blends with new partners on the lending side would you anticipate that mostly being consumer oriented or would that also be commercial opportunities as well.
We're looking at actually quite honestly, we're looking at both.
We've got two very attractive consumer and one commercial opportunities that we're looking at at the current time.
Sure.
Both of them have also opportunities obviously in the consumer lending side, we've been online banking for 23 years cross sell opportunities huge there as well as from the commercial side with the small business opportunities. We're looking at to bring in deposit base as well so.
Most of the pantex or single dimension are either looking at lending there they're looking at savings.
But all the ones that we're looking at we think there's a cross sell opportunity to pick up the other side of the coin. So we hope it really comes in at about a 50 50 split and kind of balances each other out.
Okay, Great appreciate all the color.
Thank you.
Our next question will come from George Sutton with Craig Hallum. Please go ahead.
Thank you just to clarify on the Fintech side, you did mention and I think it was the prepared comments that noninterest revenues could be nicely impacted could you just explain what you meant by the noninterest revenue side.
Yeah in the noninterest income side, there's a lot of the the partnerships and defend it whether it's banking as a service or enhancing our own offerings.
Can generate noninterest income whether it's through interchange split.
Or fees for providing access to the credit or to the rails to the debit and credit rails.
<unk>.
As well as just fee revenue for providing a service.
Got you Okay I just wanted to clarify that so when you talked about your commercial pipeline being up 22% in your construction unfunded up 45.
I wanted to better those are huge numbers and I just want to understand is this driven by having more people out in the market pursuing opportunities I assume there's been no change to what you were looking to try to fund could you just give us a little bit more perspective on what's driving that strength.
Yeah, George its a combination of both we have additional staff. We've added three people to kind of the commercial real estate side of things over the past year.
Where we got into a nice niche on.
I'd call it with obviously the logistics issues all over the United States, there's massive amounts of warehouse activity going on across the country.
When our pipeline with a builder that.
Has a lot of Amazon activity.
So it's we.
One of the biggest issues with known builders and people that we've worked with in the past, we're kind of moving out of the Midwest footprint. So if they are building something that Denver, Miami and it's folks that we know we're going along with them. So it's expanded market as well as expanded teams and.
Just a nice niche as we carved out single tenant and.
Franchise et cetera, we've found a nice niche end of big large warehouses.
Quick to Bill most of them sell very quickly obviously a lot of cases, it's a single tenant occupancy like in Amazon. So there.
They're a very investable product and would do the construction phase.
We're not doing long term 2030 year financing, we're doing the upfront on the construction site and then they get turned over to permanent financing at the end.
Oh, that's great to hear so lastly for me just some credit.
See for stepping up and buying some stock back in Q4, and you've got some good prices with your tangible book continuing to move higher I'm. Just curious if you can give us some sense of the what may happen with much of the rest of your program.
We just completed our strategic planning.
Monday, and Tuesday, with our board looking for through 2022.
We're going to continue to.
Buy shares over the course of the year. If it is under one five times book, So obviously pulling in.
100000 shares fourth quarter at $44 and change was a tremendous investment.
Paid off handsomely in where we're getting close to that one five times book and.
We will see where it goes but if it stays below one and a half will continue to buy.
I think you have four and a half dollars ago. So.
[laughter] Matchwood faster the mind I was trying to do that.
Back in my head.
Yeah.
Yeah.
Okay.
Our next question will come from John <unk> with Janney. Please go ahead.
Good afternoon guys.
Hey, John Hey, Alright.
Good good how are you doing David.
David You said you said I think one of your comments on the margin was roughly $2 40 to $2 45 by the end of this year was was that on a combined basis with FCB.
Okay.
No that's really awesome on a standalone basis John .
Yes.
And I think again it kind of comes back to the second half of this year being a little bit uncertain as to the impact of Av.
First century right. So we're going to get we're going to get a lot of very low cost deposits.
But we're also going to have a lot of cash on the balance sheet. So there could be some excess liquidity drag as we deploy those funds.
Again, whether we get them out so it gets them out the door to buy some bonds, we get some out to fund loans, if we get some out to.
Fund higher cost Cds as they mature.
Theres going to be some positive benefits, but there may be just some drag just due to the excess liquidity.
Okay, and then Ken I guess, a quarter or two ago I think you put it you put in the presentation that as far as cost saves on the deposit side I think it was around $10 million do you still expect that for legacy first internet.
Well I know, we talked about what we expected in 2021, and we hit that number of $26 million. The deposit leverage we have today isn't quite that great.
As you can tell if you if you can go back and remember when we started talking about our deposit our CD costs that mature over the next 12 months, it's one point or 2% today.
You go back in time, a year or 18 months and that number was 152%.
So there's not as much but I would say on the deposit side, you know theres probably over the course of this year just on our legacy <unk>.
First internet deposit base.
$3 million to $4 million of of.
Savings on the deposit side and again our models do take into account, we kind of follow the forward curve on the short term rates.
So that the as some of those Cds roll off and are replaced with money markets or checking accounts. We are forecasting because of the market is forecasting higher short term rates and the <unk>.
Back half of the year and we are capturing that in those numbers I gave you.
Okay. Okay.
And then maybe one more kind of just the the the tax rate.
Do you have what the tax rate should be going forward on a combined basis with FCB.
Ballpark, yeah, Yeah, I would I would bump it up a couple a couple of.
Points from where we're at today, we kind of settled into this call it 15% ish range give or take.
We're obviously going to be collecting a bunch of new revenue from.
Revenue and net earnings from FCB, very little of which has any sort of tax exempt status to it.
So probably looking forward that that rate longer term, probably bumps closer to 17% to 18%.
Okay.
Okay. Thanks, guys.
Thank you.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to David Becker for any closing remarks.
Well everybody I'd like to thank you for joining us today, obviously, we're very excited about the 'twenty two and beyond hopefully you are as well, we wish and hope you have a great day and continued success and we will talk to you again soon thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.