Q1 2022 Horizon Bancorp Inc Earnings Call
Good morning, everyone and welcome to the Horizon Bancorp conference call to discuss financial results for the three months ended March 31st of 2022.
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Including those factors noted in the slide presentation additional information about factors that could cause actual results to differ materially is contained in horizon. Its current 10-K and later filings. In addition management may refer to certain non-GAAP financial measures that are intended to help investors understand horizon's business reconciliations for these measures are contained in the.
Presentation.
The company assumes no obligation to update any forward looking statements made during this call. If anyone does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, you can access it at the company's website at Www Dot Horizon Bank dotcom, representing horizon today, our chairman and CEO .
Craig the white.
Executive Vice President and Chief Financial Officer, Mark C Corps Exec.
Executive Vice President and senior operations Officer, Kathy D writer Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber, and executive Vice President Senior retail and mortgage lender officer lending officer, excuse me no eating tahira and at this time I would like to turn the call over to Mr. Dwight. Please go ahead Sir.
Yeah.
Thank you Chuck and good morning, and thank you for participating in Horizon Bancorp first quarter earnings conference call. Our comments today will follow the Investor presentation and press release that we published yesterday April 27th.
Horizon is pleased to report a continuation a record earnings for the first quarter 2022, and solid momentum going into the second quarter with strong commercial and consumer loan growth.
The successful integration and stabilization of our branch acquisitions. The efficiency gained from the late summer consolidations of 10 offices. The recently announced plans to close an additional seven offices and continuation of our excellent asset quality. We are very proud of our associates at horizon, and how they've successfully shifted from an internal pandemic really.
The focus in 2020 to return to our growth and efficiency initiatives in 'twenty, one and 2022.
Starting on slide four of the presentation horizon completed the first quarter reporting record earnings of 54 cents per share, which compares favorably to the 49 cents per share reported for the fourth quarter.
Horizon's financial metrics are notable at quarter end as reported return on average assets of 1.31% return on average tangible equity of 17, 7% and an efficiency ratio of 58, 7%.
Driving the first quarter results were an increase in net interest margin annualized double digit organic commercial and consumer loan growth additional revenue from the acquired offices in the cost saves achieved from the 10 branch closures.
Given the size of our balance sheet highly efficient operations and talented workforce. We believe horizon is well positioned to capitalize on significant organic and strategic growth opportunities within our attractive Midwestern markets.
So why invest in horizon.
Horizon continues to report superior returns with a lower risk profile due to our diverse diversified balance sheet excess liquidity and low cost core deposits.
We're located in attractive Midwest growth markets.
Regional infrastructure improvements are tracking record inflows of private investment into Indiana, and Michigan and include the commuter rail line expansion in northwest, Indiana, No. One is double track in West Lake County extensions.
Accretion of a regional transportation authority focus in promoting transportation oriented development.
University partnerships to promote the quality of life investment in quantum communication lines between Chicago and walk yet in South Bend.
The American rescue planned dollars being invested in roads and infrastructure to support workforce housing.
Both Indiana and Michigan are ranked in the top quartile for manufacturing output and we are seeing considerable investment rolling back into manufacturing as they try to believe manage through supply chain and labor force availability challenges.
We have a positive earnings outlook for 2022, which we believe will provide us another opportunity to favorably distinguish horizon from our peers.
To further support that we are a growth company horizons compounded annual growth rate from 2002 to 2021 were 13% for total assets and 20% for net income.
Horizons ability to grow earnings faster than total assets illustrates the company's ability to efficiently increase the bottom line.
Moving on to digital transformation Horizon's key advantage due to technology or community banks include our in house, CRM and core platforms due to lower costs per transaction than our peers and the ability to expedite the onboarding of new Fintech partners and flexibility.
Data management.
Why not relying on our core service provider Horizon's able to select technology partners based on best in class and who can deliver strategic products and services at the best price and with optimum flexibility.
Our in house core strategy has proven very effective for when you're integrating acquisitions, including the last 14 branch transaction.
In addition, our Fintech partners are nimble have considerable resources focused on improving the customer experience and the long horizon to be an active voice in future developments as we have representatives on most of these entities advisory boards.
As you can see on page 11 horizon has more than doubled as a proportion of total tech spend devoted to sheets to a strategic customer and employee facing applications over the last four years.
As a result of our investments in technology Horizon has improved as productivity as measured in assets per employee from $5.4 million in 2000 $16 million to $8.7 million in 2021.
Our digital transactions increased from 44% in 2018 to over 75% in 2021.
We increased online consumer deposit account opening from 12% over the past 12 months to 20% in the first quarter 2022.
Which compares favorably to our peer average of only 4% and 86% of our online chats are answered by our boss.
Horizon Technology plan over the next two years, we continue to see an increase in our annual spend to enhance the customer experience and make or model ever more scalable.
As in prior years, we intend to offset these investments by continually improving deficiencies in our retail network and throughout the organization even with these technology investments. For example, we continue to target noninterest expense levels at 2% or less than average assets for the full year of 2022.
Horizon manages and deploys capital efficiently as evidenced by our recent acquisition of 14 branches, our commitment to opportunistic stock buybacks dividend increases the wind with earnings growth and effective use of capital to organic initiatives.
Our ship this year is the rising interest rates.
In the interest of investment analysts focus on accumulative other comprehensive income and the mark to market adjustments occurring on the bank's balance sheet as a result of unrealized losses reported in the investment portfolio.
Horizon unrealized losses appear to be comparable to most financial companies based on recent reporting.
As a result of the unrealized losses Horizons TCE declined to $6, 94% as of March 31st.
All regulatory capital ratios continued to be robust and our economic value portfolio equity actually reported an increase in total capital when you mark the entire balance sheet.
This valuation also reflected in our earnings results for the first quarter.
Due to the bank strong capital position, we believe that we still have significant flexibility to pursue pursue our organic and acquisitive growth strategies and disciplined stock buybacks.
In addition, right and sees no change in our dividend policy as we fully expect to continue our 30 years plus of uninterrupted quarterly cash dividends and dividend increases aligned with earnings.
Now, it's my pleasure to turn this over to our executive Vice President and Chief Financial Officer, Mark C Corps Mark Thank.
Thank you Craig.
Horizon reported record net income in the first quarter due to strong loan growth and moving excess cash into higher yielding investments.
We are pleased with these results we achieved in the first quarter you can see strong momentum going into the second quarter.
Starting with slide 15, the company's first quarter results were positively impacted by the recapture of all the prior impairment on the mortgage servicing asset totaling $2 6 million along with the slowing of depreciation on the servicing asset due to slower prepayment speeds net.
Net interest income for the quarter was down from last quarter, primarily due to 900000 less from purchase accounting loan marks and 1.7 million less than P. P. P income.
We expect to see growth in net interest income is P. P. P income has been replaced by loan growth cash deployed into higher yielding assets and increasing interest rates.
We had a $1.4 million released for credit losses, compared to $2 1 million released in the linked quarter.
We see continued strong credit performance low nonperforming loans and loan charge offs and believe we are appropriately reserved given the current state of our portfolio and the current economic outlook for our seasonal modeling.
Slide 16, as we continue to focus on increasing net income and an expectation of a rising rate environment. We wanted to provide a few details on our balance sheet.
As of March 31st we are in an asset sensitive position with a 12 month GAAP ratio of 125% that includes approximately $1 9 billion of adjustable rate assets.
It's approximately $1 1 billion would move with a rate change to their index.
Asset sensitivity was reduced during the quarter as additional cash was moved to higher yielding assets and loans and investments to generate more net interest income.
This increase this increase the March 31st two base case in our interest rate risk model by 14 million of net interest income from our September 30, 'twenty one base case.
As a result of being less asset sensitive there's less volatility when modeling a shock to our balance sheet.
At 100 basis point increase as of March 31st we would generate an increase in net interest income of approximately one point and 21% or $2 5 million.
Contributing to this in this increase are the expected deposit betas used for the rising rates with rates, which is currently in a range from 4% for consumer deposits to 45% on money market and public funds.
Additional increases in short term rates are expected, how our asset sensitivity sensitive position will enable our net interest income and earnings to benefit from these increases.
Slide 17.
The adjusted margin increased seven basis points during the quarter and was positively impacted by only two basis points from P. P. P. Income is most of this revenue has now been realized.
This was offset by 11 basis points of margin compression from the high average cash balance held during the quarter.
This increase in the margins as expected as cash was applied to higher yielding assets and funding costs decreased.
With cash deployed and the impact of PPP loans reduced along with that.
The expected loan growth and rising interest rates. The margin is expected to continue to expand during 2022.
Slide 18.
Investment portfolio was at $3 1 billion at quarter end increased 405 million since the end of the last quarter.
We expect to maintain the portfolio during 2022 which has a book yield of two point, 23% and an effective duration of six eight years.
Also during the quarter, we increased held to maturity investments to 64% of the investment portfolio from 57% at December 31, 'twenty, 'twenty, one which helped lessen the impact of the increase.
Back to the increase in longer term rates.
Slide 19.
The unrealized loss on a bill for sale securities in the first quarter reduced tangible common equity to buy 67 basis points, which is in line with what we are seeing in the industry.
As we have the ability and intent to hold these investments to maturity. These losses are expected to recover over time as investments pay down and cash flows are invested at higher interest rates.
In addition, the current reduction to T. C. We'd have an earn would've been earned back in approximately three quarters from retained earnings.
As a jump in longer term rates specifically in the two to seven year range resulted in unrealized loss being more in line with the rate increase of over 100 basis points.
We currently estimate that an additional hundred rate 100 basis point rate shock over the next quarter would result in approximately another 40 basis point decline in T. C E.
The move of approximately $450 million of available for sale securities to held to maturity in the fourth quarter, along with the with purchases of longer term investments being held at being put into held to maturity has helped manage the impact of the rising rates to our T. C E.
The impact of rising rates when they recognize certain items like unrealized losses on a bill for sale investments and not the increase in value of liabilities like core deposits.
The entire balance sheet is valued our economic value of equity increased in the first quarter compared to the fourth quarter.
With this decrease in TCE, we believe the banks capital is strong and sufficient enough to fund growth and will not restrict our ability to consider merger or share repurchase activities in the future.
Slide 20.
Margin improvement was slightly tempered by our continued improvement in funding costs, which reflected it was reflected the low cost funding acquired in the branch acquisition in September .
We believe that our valuable low cost core deposits will provide significant opportunity attunity and flexibility going in to a rising rate environment.
Slide 21.
Core operating expenses were impacted by higher health care costs seasonal maintenance expense and continued investments in technology.
Expenses continued to be leverage as noninterest expense to total average assets was 2.3% for the first quarter.
Continuing to leverage the expense run rate in the first quarter during 2020 to generate additional revenue will help move noninterest expenses to total average assets to our goal of 2% or less.
To help with this goal the P. P income seen in the past quarters has been absorbed by strong commercial and consumer loan growth along with cash moved to higher yielding assets.
Mortgage servicing income will continue to help hedge the anticipated lower mortgage gain on sale income as refinancing and prepayment speeds have slowed.
Due to our commercial loan growth. We've also seen a strong pipeline and a trader in management services and anticipate growth in fee and merchant income.
That's part of our annual branch optimization process, we announced plans to consolidate seven branches in 2022, which will continue to help manage expenses well.
One time charge charge on fixed assets of approximately 432000 before tax will be realized in the second quarter with another participant dissipated payback of the park approximately six months.
We also have made additional investments in tax credits and continue that will continue to support and improve our effective tax rate.
Now now I'll turn it back over to Craig to provide an update on our lending activities.
Thank you Mark for the good report now for a quick loan update core commercial loan growth for the first quarter. Excluding P. P. P and sold participations was reported at a 13.5% annualized growth rate as we continue to see loan growth across most business sectors contributing to the commercial loan growth is.
The increase the number of loan officers and increase in commercial line of credit Outstandings rebound in Midwest manufacturing and at regional infrastructure investments. In addition, we have a good momentum going into the second quarter with the commercial pipeline of approximately 156 million up from the first quarter's pipeline of approximately.
$120 million.
Consumer loans for the first quarter reported a 14.9% annualized increase in loans as we continued to experience strong consumer loan demand for home equity and the car loans. In addition home equity line balances increased for the second quarter in a row.
We were also pleased with our first quarter consumer loan production of 147 million, which compares favorably to the total record production for 2021 mm $397 million.
Given the low unemployment in our markets, even with high inflation rates, we expect consumer loan demand to remain robust.
Mortgage loan production declined in the first quarter by 24% over the prior year period, which does compare favorably to Fannie Mae's in mortgage bankers Association is forecasted reductions of 41% and 39% respectively.
The first quarter is typically our slowest season for mortgage production, so even with the rising rate environment, We do expect improvement in the second quarter's production.
As a result of the rising interest rates and lower production or gain on sale of mortgage loans with the first quarter was reported at 2 million down 51% over linked quarters, resulting in a 3.75 per cent gained unsold mortgage loans for the quarter.
As a reminder, gain on sale of mortgage loans and mortgage warehousing income constitutes only four 7% of Horizon's total revenue in the first quarter.
Overall asset quality remains strong in the first quarter evidenced by low net charge offs and nonperforming loans and a solid credit loss reserve to total loans at 1.41%.
To summarize our key franchise highlights horizon as a growth company as evidenced by 20% compounded annual growth rate for net income or balance sheet has a diversified loan portfolio, both in product mix and geography with ample liquidity and cash flows to fund future growth, which provides for a lower risk profile than <unk>.
Many of our peers the.
The combination of Horizons high returns on tangible capital at 17, 7% and lower balance sheet risk profile is the sweet spot for investors, especially given the volatility related to rising interest rates wage rates wage inflation and supply chain disruptions.
Horizon is positioned well for earnings growth in 2022, and 2023 as a result of an increase in commercial and consumer loan demand. Our recent acquisition of 14, new branches and expanded footprint low operating cost discipline and our disciplined approach to branch rationalization.
As noted on slide 28, and given our first quarter production results.
Current strong loan pipelines low unemployment rates and pent up consumer demand. We are adjusting two of our full year 2022 loan growth goals upward and increasing our return on average assets outlook.
Commercial loans, excluding P. P loans, we currently expect growth in the range of 10% to 14%, which is an increase from our 10% forecast in December 2021 for consumer loans.
Truly expect to growth in the range of 10% to 14% up from our original forecast of 5% to 9%.
We are increasing our return on average asset outlook from one 2% to greater than one 3%.
This concludes our prepared remarks today and now I'll ask the operator to please open the lines for questions. Thank you.
We will now begin the question and answer session.
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Please limit yourself to one question and one follow up and if you have further questions. You may reenter. The question queue. At this time, we'll pause momentarily to assemble our roster.
And the first question will come from Terry Mcevoy with Stephens. Please go ahead.
Hi, Thanks, good morning, everyone.
Good morning, Jerry.
Maybe the first question to the branch closures in the second half of this year.
The cost savings is the plan to continue to invest that and in talent and technology and if that's the case can you be a little bit more specific on where you plan on making those investments across the company.
Yeah sure Yeah, that's exactly the plan is to redeploy the cost saves to technology as well as to our growth markets such as the.
The Oakland County, Michigan area of Grand Rapids, Michigan, Indianapolis isn't even northwest, Indiana, which experienced some groups. So yes. That's the plan is to offset the other.
Cross saves from really non growth markets to deploy it to growth markets.
Thank you for that and then Mark a question for you on page I guess, it's page 16.
So I read it correctly, while the asset sensitivity is down over the last six months on a dollar basis in an up 100 basis point environment, If I'm doing the math correctly. The dollar amount is higher today versus six months ago is that correct.
Yeah cause of the base case grew that 14 million from the September information we provided.
That's great. Thank you.
Thank you Terry.
The next question will come from Nathan race with Piper Sandler. Please go ahead.
Yeah, Hi, guys good morning.
Our names.
I'm going to dig into the outlook for you know the increased expectations for a 130 or away versus 'twenty. When we last spoke in the at the December Investor Day.
The primary contributors to that to that.
The increased outlook, just the higher loan growth expectations that you guys are.
I'm going to in Europe , due to 2022 goals as the cost saves I imagine is there any other component that'd be curious within that context, let me get your expectations for a fed rate hikes. This year in terms of getting that one three ROA target.
Yeah.
There's a lot of components that are moving toward a it number one is the improvement and expansion of net interest margin due to loan growth.
The first quarter is typically our seasonally low volume wise and so we're kind of optimistic about the second quarter coming up. In addition, we have plans to increase our bullied by $50 million, which is not a in the balance sheet today. So there's a lot of ways.
Ways to increase our earning assets are through the rest of the year. In addition, our cost will become lower percent of total assets as we improve our earnings performance too. So we do expect to hit that 2% or less our cost of total assets. This year. So there's a lot of different moving parts.
Got it understood I guess kraft within that context, Mark maybe just would love to get some thoughts on just in terms of how the core margin trend.
Trends from here you know, obviously, we'll likely get a half a.
A point.
Fed funds.
Next week, and then perhaps another half a point in June as well so just within that kind of near term rate backdrop, how do you kind of see the margin.
Over the next couple of quarters.
Yeah as I said I mean, we anticipate the margin continuing to grow I think the low point was you know last quarter.
And contributing to that too as we have deployed all the cash so the cash had a drag just on an average basis over the first quarter, but that 11 basis points. So it's getting that cash moved into loans and investments. It helps it helps the margin improve going forward also.
Okay, Great I'll step back thank you for the color.
Thank you Nathan.
The next question will come from David Long with Raymond James. Please go ahead.
Good morning, everyone.
Yeah.
Mark you've talked about the cash on the balance sheet and then when I look at the the numbers here in the quarter you still had about 10% in the quarter on average in cash how aggressive will you deploy that here are in in the second quarter and going forward do you want to get aggressive and put that into securities or are you holding off for loan growth.
How should we think about the pace of that deployment.
Yeah, we ended the quarter with with a cash balance where it would probably be at this point total cash was 120 million. We are daily operations of between 80, and 100 million just for a cat cash settlements.
So are we we got it all deployed through through the first quarter and some investments and then also the loan growth is absorbing it. So so we'll just gonna advantage now in the past I always wanted to be in a slightly borrowed position just to make sure we're maximizing and and that's where we're trying to manage to at this point.
Guy and Marc Yep, Yep, I see that now thank you the the.
Purchase accounting.
Accretion in the quarter I think we're I think we're at right around five basis points does that is that the right level.
Going forward and how should that change as we look at that and how should that impact on the NIM change throughout 2022.
Yeah, and you know we dropped 900 and 900000 from last quarter, we didn't pick up a lot in the last transaction with the branch acquisition. So I think we're gonna be trending downward and we still have a couple of chunks that can come in but I think that that the impact of purchase accounting.
We will continue to be less and less as we get through the next a year and a half.
Got it and then and then finally the reserve level you know pre pandemic.
Talking about a day one sees the level just under 1% I E.
Where we are with the backdrop and in Moody's numbers do you still see your reserve level coming down from here, then closer to that or what's what's the right level given your loan mix now that you'd expect from the reserve level relative to you know what we're looking at pre pandemic.
Okay.
Yeah, David I'll jump in here. This is Craig we expect a minor releases so going forward, but however, we shifted our allocation from specific portfolio of sectors in the commercial portfolio to qualitative sectors based on the AR world.
Variability taken place the Russia, Ukraine situation supply chain issue. So we've shipped some to more to qualitative and quantitative and until we see that settle down I don't see us aggressively releasing our reserves back down to the 1% range you mentioned.
Got it thanks, guys. Appreciate you taking my questions.
Thank you Dave and thanks.
The next question will come from Damon Delmonte with K B W. Please go ahead.
Hey, good morning, guys hope everybody's doing well today.
Good morning, My first question. Good morning, first question on unexpected Mark could.
Could you just give a little guidance from this quarter's $36 6 million dollar level.
Are you seeing wage inflation issues kind of creeping up on salaries employee benefits and how should we think about like the cadence over the next couple of quarters.
Yeah I think.
The first quarter has wage increases from I'm from.
Raises for the firm last year, we do have some wage pressure, it's not been significant but I think we will continue to see some of that Oh, what also plays into it as having full employment and obviously like every other company we do have.
Physicians that there are harder to fill so full employment just isn't a is unexpected.
I think there's going to be some pressure going forward are to some degree but we also had in that category are more on the benefits. We saw a significant increase in health care costs over what we would have anticipated and I would anticipate that are hopefully would come down a little bit to balance out.
You know wage increase over the over the remaining part of the year. So I think the run rate is pretty good. The technology spend is in we had like I said some seasonal maintenance costs that are that are always higher in the first quarter, but we.
We feel like the run rate that we're seeing right now yeah, we would like to just continue to leverage that through the rest of the year.
If I could.
Our investments in technology have increased our capacity to do more with fewer people over the last several years. So we feel very comfortable with that not expanding staff.
Loan growth anyway.
Yeah.
Got it Okay. That's helpful. Thanks, and then on the on the fee income side I'm kind of a two part question here.
Is your outlook on mortgage banking for the year, you know do you still feel comfortable with your previous guidance of outperforming.
The MBA expectations for the year would be number one and then number two mark I think you had.
Said, what the impact or what the Mark was on the mortgage servicing income line. This quarter. If you could just repeat what that was that'd be great. Thank you.
Yeah, I'll take that part first and then no I'll, let you talk about the mortgage outlook.
Yeah. We are we had $2 6 million of impairment on the servicing asset that we've taken over the last two years when a refinancing that was booming and prepayment speeds are high so with the slowdown in the increased value of the portfolio. We did recover all of our impairment. So there's no more impairment to pick up so that was.
2.6, but on the other side also ongoing depreciation because of our portfolio. Our servicing portfolio is servicing asset is still undervalued them on the books the.
Asian servicing outside hasn't been slowed so we would anticipate that we could see a range of you know, Florida 600000, a month of additional servicing income from what we had seen in our in the last year.
Yeah.
I'm, sorry was that a month or per quarter.
A month, so you know.
16 to 1800, a quarter or six one.
One six to one 8 million.
On a quarter yeah, yeah, yeah, yeah, okay.
Thanks.
Damian this is knowing her out and I just wanted to add that.
We are expecting to beat the projections and the market currently at 24% we have hired and will continue to look for talent in the markets that we serve we are positioned well with our construction products a portfolio of products that play well in the markets that we serve so we anticipate that trend to continue.
Throughout the remainder of this year.
Excellent. Okay. Thank you very much guys appreciate it.
Thank you didn't make sense.
The next question will come from Brian Martin with Janney Montgomery. Please go ahead.
Hey, good morning, guys.
Good morning, Brian Good morning.
Hey, just mark just on that last question on the servicing the impact that a million six or a million eight a quarter. There was yes. There was something in there this quarter from that is it maybe half of that about half of that amount within this quarter and in the first quarter results just to make sure that again.
Yes, that's correct, Okay perfect and then just maybe just your Congress you your comments about capital.
As we think about the and the capital that the cash has been deployed I mean, just the size of the balance sheet music I think kind of is the expectation. This year that that loan growth will just be a remix I mean kind of funding. It from you know the our investment in the investment portfolio and cash rather than yeah. I guess, that's the best way to think about this year is 22.
You too.
Yeah, I think that's a safe comment that's part of our plan, Brian However, our regulatory capital ratios are robust and so it doesn't stop work caused us to slow down and looking at alternatives use of the capital deployment of that capital in the other comprehensive.
Hence of income is the one item on the balance sheet does things.
It does raise.
Viewpoints from an investment you would do from a price to tangible book by you've got a price to earnings.
Should look attractive so you look at both measure them, it's not just one by itself, but so we don't see a slowdown in looking at other alternative investments Yeah. No I I go ahead, Mark I'm, sorry look through opportunities are to leverage or to maintain depending on what we see in the market. So our so it does.
And it'll be made on.
What we wanted to do with our with the investment portfolio and growth.
As we get through the year.
Yeah that makes sense, okay and just the last one from me just Craig on your comments on upping the loan growth is your expectation.
You know the the personnel you have as Amp I mean, you guys have hired a lot of people or is there in that kind of guidance is there. A is there expectations are going to add more people are kind of like you know maybe the talent pipeline, where that's at today.
Yeah, Brian .
Plans are not to add any people. However, however, with that said if good talent.
And the window of opportunity open to that talent, we will hire them and so you could have to seize the opportunity when it's presented but we're not going to be aggressively increasing like we did in the last 12 months. Okay. Yeah that makes sense and last one was just mark can you give any more color on just the sort of the March increase in rate.
How that impacted the margin I know it hasn't been fully through the numbers, yet, but kind of what you expect to have come out of that one and then maybe on this next 50, you put some numbers behind kind of how we should think about that benefit to NIM at least on the first 50 basis points of hikes here.
Yeah from the information, we provided 100 basis point increase from where we are is a it was around 2.5 million I think under 100 basis points additional net interest income.
And that's because that base case says guys grown lending by shrink.
Shrink or reducing our asset sensitivity from where it was six months ago. We've realized a lot of that income that we would have picked up and rate increases.
The average about a $14 million change yeah.
Pretax pick.
Pick up okay.
Perfect. Okay. Thank you for taking the questions guys.
Thank you Ryan.
The next question will come from Nathan race with Piper Sandler. Please go ahead.
Yeah. Thanks for taking the follow up to a point of clarification, because I've received questions from investors just in.
Terms of the balance sheet Reclassifications in terms of I think assets.
Loans and and on the liability side as well did that primarily solely stem from just the review of the commercial participation agreements or are there any other factors that play there.
No that was that it's some interpretation of accounting interpretation of our agreements for participations sold. So it was just through the audit and through this first quarter and we we went ahead and booked them all of our participations sold on the balance sheet with of course.
Bonding.
Secured borrowing on the balance sheet or on the liability side. So no impact to income we it doesn't even impact average assets because of where we're looking at it at the end of each quarter. So we don't skew the average assets.
Okay.
Understood and I appreciate that clarification marketing just want to make sure that ironed out.
Thanks, again for taking the follow up.
Thank you Nate.
Yeah.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Mr. Quite Craig the white for any closing remarks. Please go ahead Sir.
Well, thank you for participating in todays earnings call and we look forward to speaking with you again in the near future have a good day.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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