Q4 2022 First Internet Bancorp Earnings Call
Okay.
Good day, everyone and welcome to the first Internet Bancorp earnings conference call for the fourth quarter and full year 2022.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star one on your telephone keypad.
Please note that today's event is being recorded.
I would now like to turn the conference over to Nick Cowboys from financial profiles eight please.
Please go ahead, Mr tall boys.
Okay.
Thank you Hannah good day, everyone and thank you for joining us to discuss first Internet Bancorp's financial results for the fourth quarter and full year 2022.
The company issued its earnings press release yesterday afternoon, and it is available on the company's website at Www Dot first Internet Bancorp Dot Com. In addition, the company has included a slide presentation that you can refer to during the call.
You can also access these slides on the website.
Joining us today from the management team are chairman and CEO , David Becker, and executive Vice President and CFO , Ken Lubbock.
David will provide an overview and Ken will discuss the financial results then we'll open up the call 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 S E.
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 Nick and good afternoon, everyone and thanks for joining us today as we discuss our fourth quarter and full year 2022 result.
For the fourth quarter of 2022, we reported net income of $6 $4 million and earnings per share of <unk> 68 cents.
Full year 2022, we reported net income and diluted earnings per share of $35 5 million and $3.70, respectively, compared to $48 1 million and $44.82, respectively for full year 2021.
Most of our lending teams had strong production in 2022 net interest income for the year was up 12, 1% compared to 21.
As we deployed cash balances to fund loan growth driving average loan balances higher along with higher loan yields from the rise in interest rates throughout the year.
Loan demand was particularly strong in the fourth quarter as portfolio balances totaled $3 5 billion at year end, increasing seven 5% compared to the third quarter and 21% compared to one year ago.
During the quarter, we boosted posted strong across the board growth led by our commercial lending areas, where balances were up 184 million or seven 3% and were up $350 million or 15% for the year, we saw growth in franchise finance construction single.
Tenant leasing small business lending and commercial and industrial or consumer loan balances increased $61 million or 9% compared to the prior quarter and grew by $263 million for the full year 2022.
Or 56% with residential mortgage trailers and RBS, leading the way.
We achieved this exceptional loan growth without sacrificing our proven commitment to credit quality, while the provision for loan losses in the fourth quarter was higher than in our prior quarters. The increase was due primarily to the strong loan growth as net charge offs remain low.
We're about three basis points of average loan balances and only $1 1 million throughout all of 2022 again only about three basis points for the entire year.
In fact, our asset quality improved on a year over year basis with nonperforming assets, representing just 17 basis points of total assets at year end and nonperforming loans, representing just 22 basis points of total loans, both of which are well below industry averages while the increase in interest rates throughout the year.
We have been able to increase rates on loans as new portfolio origination yields increased to 84 basis points during the fourth quarter as compared to the prior quarter, resulting in the total portfolio yield increasing 39 basis points quarter over quarter.
However, intense competition for deposits. So the most rapid set of federal funds rate hikes. In decades has also driven interest expense higher pressure in net interest margin.
To defend net interest margin on the asset side, our 2023 loan origination efforts will be focused on variable rate loan products, notably commercial construction and small business lending and then other high yielding portfolio such as franchise finance and consumer lending we.
We believe the increasing mix of variable rate loans combined with new loan production coming on at higher rates will help to offset the pressure of higher deposit costs. If interest rates follow the market's expectation deposit costs should stabilize.
Later, this year and decline thereafter.
Setting the stage for us to achieve higher earnings and profitability in 2024.
Turning to mortgage while other lending lines has strong demand. So the combination of housing prices housing supply economic uncertainty and interest rates have caused mortgage applications nationally to funds to their lowest level in 26 years due.
Due to the steep decline in mortgage volume and favorable outlook for mortgage lending over the coming years, we announced yesterday that we are exiting our consumer mortgage business. This includes our direct to consumer mortgage business that originates residential loans nationwide for sale in the secondary market as well as our la.
<unk> traditional consumer mortgage and construction to Perm business there.
This was a difficult, but ultimately necessary decision.
Even every economic outlook, we have reviewed it points to prolonged sluggishness across mortgage banking.
Excluding onetime costs, we estimate we will deliver approximately $2 2 million and higher pre tax income in 2023 and over a longer horizon remove an element of volatility from our earnings and be a stronger more efficient company.
I want to thank everyone on the mortgage team for their hard work and dedication to homeowners, we are providing each of them with tools and resources to help them transition into new opportunities.
I would also like to note that our commercial construction and land development business will not be affected by this decision and remains an important part of our lending strategy.
To wrap up the lending discussion one final point I want to make is that we have never wavered from our underwriting and credit standards, regardless of market conditions, We believe our excellent asset quality and strong credit culture, and addition to our strong capital levels positions us well to weather any economic slowdown that might be on the horizon.
Lastly, I want to provide an update on our banking as a service and Fintech partnership initiatives. During the fourth quarter. We went live with our platform partner increase and launch our first program to that partnership with ramp the corporate card and spend management Fintech, we're providing payment services to ramps bill payment offering for them.
About 30% of their customers currently and are now processing between $8 million to $10 million a day and daily volume. We also have two other phanteks payroll provider in a neo bank in the pilot phase and we have four more fin techs that are approaching the pilot phase and wanted to due diligence we are all.
So that any new opportunities with increase on a weekly basis.
We also expect our other partnership with a platform treasury crime to be fully implemented through the first quarter of 'twenty three with the first fintech partner to be onboard in the second quarter similar to our partnership with increase we are looking at new opportunities regularly as we get ready to go live with Treasury crime.
To wrap up my prepared comments. This past year was a mixture of both successes and challenges I'm proud of the business that we have built over the last two decades and of course, there is always still work to do we are focused on controlling what we can control to build an earnings stream that is resilient to changes in the economic and interest rate environment.
We have a strong balance sheet and are well capitalized, allowing us to withstand whatever challenges the economy may throw at us like you. We are shareholders and we are committed to continuous improvement and creating shareholder value.
Before I turn it over to Ken I'd like to thank the entire first internet team for their hard work and commitment to both our customers and our shareholders. We have developed a culture that fosters and champion team.
Teamwork and innovation. It is why we were named one of the best banks to work for by American banker for the ninth consecutive year and it's why I'm confident in our collective ability to identify compelling new opportunities that will further diversify diversify our business lines and improve our funding profile.
And elevate our status as the leading technology forward financial services provider.
With that I'd like to turn the call over to Ken to discuss our financial results for the quarter.
Thanks, David the first thing I'll start with is discussing the financial impact of the decision to exit the mortgage business that David spoke about earlier.
We expect this to reduce total annual noninterest expense by approximately $6 8 million an increase annualized pretax income by approximately $2 $7 million, we expect to realize about 80% of the annualized improvement in 2023, and 100 per 100% in subsequent years.
<unk>.
Additionally, we estimate that we will incur total pre tax expense of approximately $3 $3 million associated with the exiting of this line of business.
The majority of this is expected to be recognized in the first quarter of 2023 with the remaining amount in the second quarter. Therefore, the earn back on this decision will be between four and five quarters to exit a line of business that is otherwise forecast to remain subdued for the next three years.
Now turning to slide seven David covered the highlights for the quarter from a lending perspective, including the growth across the board in all active lines of business.
Throughout 2022, we increased rates on new loan originations are fourth quarter funded portfolio origination yields were up 84 basis points from the third quarter and up 180 118 basis points year over year, We did fund certain loans during the quarter that were in the pipeline before the fed September fed rate increase.
And we are therefore priced at lower rates, which created a drag on new origination yields. The majority of these loans have been cleaned out of the pipeline with our focus on higher yielding asset classes, new production is coming on with yields north of 7% and in many cases much higher setting the stage for higher average loan yields in 2000.
'twenty three and beyond.
While loan growth was very strong during the fourth quarter, we expect overall portfolio growth in 2023 to be lower than it was for 2022.
Our higher yielding and variable rate channels continued to have solid pipelines, but much of that growth is expected to be financed by cash flows from other portfolios over the course of the year as we remix the composition of the total loan book.
Moving on to deposits on slide eight overall deposit balances were up $249 million or seven 8% from the end of the third quarter non.
Non maturity deposits, excluding banking as a service broker deposits increased by $64 million compared to the linked quarter with money market accounts, leading the way, which were up $41 million. We also had a nice increase in noninterest bearing deposits of almost $33 million the majority of which were driven by the <unk>.
<unk> from our commercial construction borrowers.
As we previewed in the third quarter earnings call, we expected and we experienced a significant decline in vas broker deposits during the quarter due to the winding down of a fintech deposit relationship.
However, this was partially offset by just over $13 million of new deposits related to the payment services, we are providing to ramp that David referred to earlier.
We also brought in about $18 million of deposits from our relationship with increase which are classified within the interest bearing demand deposit line item.
As we grow the number of Fintech partners. We expect these types of deposit opportunities to expand in the future.
CD balances were up over $100 million compared to the prior quarter due to new production in the consumer channel, while brokered deposits increased $166 million as we access the wholesale market for longer duration funding to take advantage of the inverted yield curve and helped to offset the impact of <unk>.
Continued fed rate hikes on deposit costs.
Competition in the digital checking and money market space combined with ongoing fed rate increases and the continued trend of overall deposits, leaving the banking system continue to present challenges to grow non maturity deposits.
In both the digital bank and small business markets, we saw peer betas in the fourth quarter range from 80% to 100% with a 425 basis point total increase in the fed funds rates since March 2022, including 125 basis points in the fourth quarter, our current pricing on money parked money market.
Products results in our cycle to date beta of about 70%.
As a result of all the deposit and interest rate activity during the fourth quarter the cost of our interest bearing deposits increased by 104 basis points from the third quarter.
Turning to slides nine and 10 net interest income for the quarter was $21 $7 million and $23 $1 million on a fully taxable equivalent basis down nine 6% and eight 7% respectively from the third quarter.
Our yield on average interest, earning assets increased to 4.40% from 391% in the linked quarter due primarily to a 39 basis point increase in the average loan yield a 60 basis point increase in the yield earned on securities and 103 basis point increase in the yield earned on other assets.
The higher yields on interest, earning assets combined with the growth in average loan balances produced solid top line growth in interest income, increasing 16, 5% compared to the linked quarter deposit cost however increased at a faster pace, resulting in the decline in net interest income.
We recorded net interest margin of 2.09% in the fourth quarter, a decrease of 31 basis points from the third quarter.
And fully taxable equivalent net interest margin was also down 31 basis points to 222% for the quarter right in the middle of the range that we guided to on last quarter's call.
The net interest margin roll forward on slide 10 highlights the drivers of change in the fully tax equivalent net interest margin during the quarter.
For 2023, we continue to feel confident that the combination of higher priced new loan originations variable rate assets repricing higher and additional draws on the high level of construction commitments will drive strong growth in total interest income.
Currently we expect the yield on the loan portfolio to be up around another 40 to 45 basis points for the first quarter of 2023 with loan interest income up in the range of 10% to 12% compared to the fourth quarter and for the full year due to increased 35% to 40% compared to 2022.
On the funding side with higher forward rate expectations based on the Fed's continued language regarding rates and inflation. We also expect deposit cost to increase the.
The pace of increases will depend heavily on price competition and the magnitude of fed rate increases as well as for how long it maintains a terminal rate.
Assuming the fed continues to increase rates early in 2023, we expect the cost of deposit funding to increase 60 to 65 basis points in the first quarter with total interest expense up in the range of 25% to 30%.
In terms of how this impacts fully taxable equivalent net interest margin, we expect elevated deposit costs will compress margin further for much of 2023, however, as we improve the composition of the loan portfolio margins should stabilize and be in the range of 2.05% to $2 one five <unk>.
<unk> through the first three quarters of the year, if the fed hits its terminal rate. During 2023, we should see the dollar amount of interest expense stabilize in the fourth quarter, which would get us back to a higher fully tax equivalent net interest margin in the range of what we realized during the fourth quarter of 2022.
Turning to noninterest income on slide 11.
Noninterest income for the quarter was $5 8 million up one $5 million from the third quarter gain.
Gain on sale of loans totaled $2 9 million for the quarter up slightly over third quarter end, consisting entirely of gains on sales of U S. Small business administration seven a guaranteed loans are.
Our SBA team closed out the year well as solid loan sold loan volume was up 23% over the third quarter.
Net gain on sale premiums were down almost 120 basis points, however, offsetting the impact of greater sales volume.
Mortgage banking revenue totaled $1 million for the fourth quarter of 2022, and other income totaled $1 5 million for the fourth quarter up significantly over the third quarter due to distributions received on certain SB IC and venture capital Fund investments.
Moving to slide 12, noninterest expense for the fourth quarter was $18 5 million up $500000 from the third quarter.
Now, let's turn to asset quality on slide 13.
As David mentioned earlier credit quality continues to remain excellent as nonperforming loans and nonperforming asset ratios remained low net.
Net charge offs of $238000 were recognized during the fourth quarter, resulting in net charge offs to average loans of three basis points as David referenced earlier.
Total delinquencies 30 days or more past due were 17 basis points of total loans as of December 31, compared to six basis points at September 30th.
When delinquencies are this low it takes just one loan to make the difference in this case, we had to delay converting a C&I construction loan to a 504 loan towards permanent mortgage when it was determined there was a mechanics lien on the property. However, subsequent to year end. The construction loan was brought current.
The provision for loan losses in the quarter was $2 1 million up from about $900000 in the third quarter as David commented earlier the in the.
The increase was driven primarily by overall growth in the loan portfolio. This was partially offset by a reduction in specific reserves related to positive developments on a certain monitored loan.
The allowance for loan losses increased $1 9 million or six 3% to $31 7 million at year at quarter end, while the ratio of the allowance to total loans decreased one basis point to 0.91% while growth in the allowance was generally in line with overall loan growth.
Slight decline in the coverage ratio also reflects the removal of the specific reserve I just mentioned growth in the residential mortgage portfolio that has a lower coverage ratio and the continued decline in healthcare finance balances that have a higher coverage ratio.
We will be implementing the current expected credit losses or seasonal model. During the first quarter of 2023 as a result, we expect our initial adjustment to the allowance for credit losses to be in the range of $2 5 million to $3 million.
With respect to capital as shown on slide 14, our overall capital levels at both the company and the bank remained strong.
Total shareholders equity increased in terms of dollar amount our tangible common equity ratio declined to 794% as the combination of balance sheet growth and share repurchases offset the effect of net income earned during the quarter and the decrease in the accumulated other comprehensive loss.
During the fourth quarter, we repurchased 284286 shares of our common stock at an average price of $25 16 per share as part of our authorized stock repurchase program for.
For the full year 2022, we repurchased just over 800000 shares at an average price of $34 62 per share.
Along the lines of controlling what we can control our solid capital position allowed us the flexibility to be in the market repurchasing our shares at a price far below what we believe to be our franchise value, helping to increase tangible book value per share to $39 74 at quarter end up <unk>.
Three 7% over the third quarter before.
Before I wrap up my comments I would like to provide some comments on our forward outlook for earnings.
Earlier I provided some thoughts on loan yields deposit costs and net interest margin.
With the planned exiting of the mortgage business there will be some noise in the first quarters results, but going forward from there the impact should be accretive to earnings in the range of 25 to 26 on an annualized basis. So around 20 for 2023.
The largest impact of exiting mortgage will be on noninterest expense when excluding the onetime costs of $3 $3 million. We expect total noninterest expense for 2023 to increase in the range of two 5% to three 5% compared to 2020 two's full year results, which is.
Much lower than the previous guidance, we gave on expense growth for the year.
On the flip side noninterest income will be down from the original forecast in the range of a 15% decline from 2020 twos total noninterest income.
In line with the fully tax equivalent net interest margin expectations discussed earlier, we expect net interest income to remain consistent with the fourth quarters of results and remained stable from the first quarter through the third quarter 2023, as earning asset growth and higher loan yields helped to offset the increased deposit costs.
If deposit costs stabilize in the fourth quarter as the forward curves suggest we would expect to see low double digit growth in net interest income during the back end of the year.
For the full year, we are expecting operating earnings per share excluding the mortgage exit costs to be in the range of $2 55 to $2 75 per share with the first quarter to be roughly in line with the average estimate and improving in the second and third quarters as dip.
Posit costs stabilize and loan income continues to grow combined with the seasonality of the SBA business. We are expecting significantly improved results in the fourth quarter with earnings per share in the range of <unk> 92 to 98.
Looking ahead to 2024, if you simply take the low end of that range and annualize. It the results are significantly higher than the current 2024 estimates.
Some factors that might provide additional upside to 2024 results may include the pace of fed reductions should they followed the market's expectations as opposed to the fed dot plot SB.
SBA gain on sale premiums reverting to historical averages as rates and prepayment speeds decline and higher than expected noninterest income from banking as a service activities.
To wrap up while the next several quarters may continue to provide challenges from an earnings perspective, we are beginning to see light at the end of the tunnel when the fed begins to bring rates back down whether in line with the forward curve expectations or the fed dot plot deposit costs should come down significantly with a meaningful and positive impact on <unk>.
Net income and earnings per share.
With that I will turn it back to the operator, so we can take your questions.
Hey, Lee.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
For any reason you would like to remove that question. Please press star followed by two again to ask a question press Star one.
Binder, if you're using a speaker phone. Please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered.
The first question is from the line.
Robertson with holiday group. Please proceed.
Good afternoon wanted to start with the buyback and wonder Firstly I think you had the 25 billion to our authorization how much is left and how much.
How active do you think you might be this year, just given the opportunity with the stock where it is presently.
Yeah.
Brett we're in the market have been since the first of the year by on average about 4000 shares a day.
And intend to intend to continue that.
Would you have an idea David of how much you might purchase this.
This year or targeted capital ratio or how to think about the.
The volume that you might do this year.
Well targeted capital ratio that we wanted to stay pretty close to that 8% level. So as Ken said, there is a little noise here in the first quarter. So it will definitely be in that $4000 range, probably the same for the second quarter and then we'll figure out as things start to come our way in the second half of the year.
We're forecasting out of the $25 million, probably by year end getting to $20 million in buybacks.
Yeah.
Okay, but I'm wondering just try in a balancing act as you said between TCE and share buyback too.
Okay.
And then you've you've.
Made some progress on the Fintech front and just wanted to make sure I understood the implications of.
The.
To that you've got and then treasury prime as well.
The <unk> in the pilot phase.
For others that could be soon what can you give us any color you gave us a lot of color on expectations for various metrics any any thoughts on what those.
Fintech might contribute or how to think about that for sure.
Well the one that we discussed in there that came live back in November ramp.
Which is the national credit card program, we're doing their bill payment services in between November and now we've converted about 30% of their customers onto our sides. So that $10 million a day were clearing in payments should go up to $30 million plus a day in the next few months the deposit balance offsetting from them.
Kind of tripled down the same way, we have a clearing account.
<unk>.
The two that are in pilot phase one is a small business.
Payroll system and the other is a neo bank.
Thats launching and in pilot phase with kind of friends and family.
Side of things that we hoped to some live maybe beginning of the second quarter. So.
Our overall forecast being pretty conservative.
On the rollout of this stuff is probably about $1 million. This year in income somewhere 750000 $10 million in income.
For the Fintech side, and a couple hundred million dollars and pretty low cost deposits to kick it off.
<unk> bank could be a homerun hit it's backed up by some phenomenally strong vcs on the West coast.
That one could be.
Out of the park play but.
I can say, it's stable, it's running and we're really looking forward with treasury Prime they've got a couple of good candidates for US we're doing the final phase of testing on the I think the credit card portion of their interface.
We'll be live with them hopefully in the second quarter with one or two opportunities as well.
Okay, and if I could sneak in one last one on the loan growth the construction growth, specifically where might you guys be on a risk.
Adjusted basis to capital are you close to a 100% and how much growth would you expect from here in our construction portfolio.
We won't even be close to the 100% because that remember that's done at the bank level, Brett. So I mean, we got well over half a billion dollars of capital at the bank.
But we do obviously, we expect we do have our construction team had a great year this year with.
Originations and those will fund we actually pulled forward some of that funding this quarter as some deals started to fund earlier than we expected, but we expect next year I guess the the good part about from the construction pieces that historically we've had a.
Maintain balances in the $50 million ish range revolving around residential land development here around.
In our home market here, but as we built out construction I mean, we're really starting from a low base. So.
Even if we hit our targets for next year. The construction portfolio is still under 10% of the total loan portfolio and well.
Well under.
Capital limits.
Okay, great. Thanks for all the color.
Thank you.
Thank you Mr Robinson.
The next question is from the line of George Sutton with Craig Hallum. Please proceed.
Thank you I just wondered if you could walk through the decision to exit the mortgage business versus just pulling it back to us.
A smaller level being able to reenter the market when that seemed to be the right thing to do.
George we probably spent the last 60 days doing all kinds of configurations of cutting back on sales and marketing efforts.
Staffing trying to hold the shell together.
There was just no way to get there we couldn't even get it close to breakeven basis, so staring at.
Solid 6 million potentially plus and losses over the next three years.
And no idea I mean, thats as far forecasting out as Fannie and Ginnie and everybody is doing.
Even now kind of 2026, whether mortgages kind of rebound or not.
Consumers are getting used to a 6% interest rate.
That's all they can get but.
It fell off so dramatically that.
We just couldn't make sense out of it.
To have that kind of a loss for that long a period of time and the sad part about it on the other side when mortgages going great. The market doesn't give us credit for it and when mortgages bad everybody else at it. So it's one of those products, where you're damned. If you do damned if you don't.
Believe me from my perspective, probably the toughest business decision I've made in my 40 year career.
It's been a tremendous group of individuals loved working with them for some of them now almost 16 years and.
It's tough it is really really tough.
As you know the market nationally is just blowing up so there is.
Not a lot of great opportunity staring in the face and the industrial <unk> been a part of for years and mortgage has been cyclical I've been around now for close to 25 years and I've seen three or four cycles, but this is by far the worst that I've seen in <unk>.
My lifetime, and probably the worst we've seen in the country and 40 to 50 years.
I appreciate that perspective, one of the thing Ken mentioned.
During this active buyback, which we love to see but you mentioned you're doing it in part because youre well below what you do find to be your franchise value I just wanted to see if we could get a picture of it.
And to what you believe your franchise value to be.
Well at least from my perspective franchise value should be book value.
And thats almost $40 will be $40 by the end of the year.
And when we're below that I think its good use of capital we don't want to put ourselves in a bad position, obviously with TCE.
And capital risk out here, but again the quality of our portfolio.
Who knows six months from now we might be at a full blown recession in the walls are coming down but.
From everything we see and what we know of what we're doing today, we're comfortable to where below 40 bucks to keep buying back shares. So we think it's a great use of capital.
Perfect. Thanks, guys.
Thanks, George Nice touch.
Thank you Mr. Sutton.
The next question is from the line of Nathan race with Piper Sandler. Please proceed.
Yes, hi, guys.
Afternoon.
Hey, Nick.
Hi, Paul.
As youre going through Ken your comments around the margin outlook for the first half of this year we get.
But.
Twice.
<unk>.
I was wondering youre cutting out.
Yes, Ken I apologize I was just wondering if.
Can you hear me any better.
Not really.
Yeah, we get about every third word.
I'll call back sorry about that.
Okay. Thank you.
Thank you Mr <unk>.
The next question is from the line of John Rowan with Janney. Please proceed.
Hey, good afternoon guys.
Hey, guys Hey, Jon.
Ken You said I think you said in your discussion in your comments about loan growth you said loan growth for 23 would be less in 'twenty. Two what loans were up I think by my math, 2021% in 'twenty two.
Can you narrow down the growth a little bit more I mean are we talking 10% to 12% or are we talking 15% or what are we sort of talking about.
No overall, John we're probably talking in the range of 5% to 7%.
And maybe I'll just elaborate on that a bit I mean, we have.
Sure.
As we talked about focusing kind of remixing. The composition of the loan book I mean, we still have within construction and SBA and franchising consumer we still have some great opportunities to put on.
Here right in variable rate and in both cases.
Both the variable rate or higher rates.
But a lot of that financing is going to be done through amortization and cash flows from other parts of the portfolio.
There is just some of our some of our lending areas right now the market is so the competition.
Still has rates very very low that just don't work for us. So we're going to see I mean, there is there is probably there is probably in combination within say residential mortgage in some other areas that theres going to be roughly 200 field $250 million of lower balances year over year. So.
Again, a lot of that focus on the higher yielding asset classes, just going to be a reshuffling of the loan book If you will.
One of the other industries that are out there John on the consumer lending side, we had tremendous growth.
RV horse trailers last year, a lot of that was.
Pent up demand because of the pandemic and the demand for those units.
Elkhart, Indiana, and northern Indiana is kind of the heartland for the RV industry.
Their pipelines are getting caught up they're getting back to normal sales activity I think fourth quarter 'twenty two versus fourth quarter 21 sales are down 26.
Percent thereabouts close to 30%.
So that's going to drop down tremendously too but of course.
The next year, we were up 200 million plus over 'twenty, one and that will fall off so as Ken said between.
Repayment of existing.
Again, the healthcare portfolios and a total wind down.
And repayment status.
We could we're still going to do a lot of volume of new loans, but the overall balance sheet growth is not going to be that huge.
Okay.
Nintendo Securities portfolio was down.
10% to 12%. This year would you expect sort of a similar amount next year just to fund that loan growth too.
Well, Yeah, I mean, we'll probably got to keep it.
We got we kind of got to keep it somewhat flattish a bidder or perhaps down a little bit because.
Right now we still have to maintain a certain amount of liquidity on the balance sheet, but I will tell you right now you might we might be better off just keeping it in cash at fed funds than buying mortgage backs.
Yes, so I would expect probably you might see higher cash balances at quarter end than what you've seen here maybe in the past couple of quarters.
Okay.
And then Ken just a couple of other quick notes.
On your expense guidance, you said up two and a half to three 5%, excluding the $3 3 million.
Is that based on total is that based on total expenses for the year, so $73 million yeah.
Yep.
Yes.
And then.
I'm sorry, just I was trying to write while you were talking about on spread net interest income I think you said the first quarter sort of flat with the fourth quarter, and then sort of stable for the first three quarters is that right.
Yes.
Okay.
Okay, and then and then I guess you would expect to see some ramp in the fourth quarter is what you said.
Yes, that's what we said we'd liked it yes, we think is.
Assuming the fed at the terminal rate and keeps it there that the.
Deposit costs will stabilize and we will be able to start kind of net interest income will begin to start growing again in the fourth quarter.
Okay.
Okay. Thank you guys.
Alright, Thanks, John Thanks, John .
Thank you Mr Roadhouse.
The next question is from the line of Tim that split there with <unk>. Please proceed.
Hey, good afternoon I'm on for Mike Perito, Thanks for taking my question.
Nice to talk to you you got the tough job Tim.
Yeah, Yeah I do.
I had a clarifying question first real quick you mentioned $250 million of lower balances year over year.
And like the.
Some of the portfolios are paying off was that in reference to the residential mortgage portfolio only or all of like like <unk>.
Got it.
Probably spread among three or four different portfolio stats resi is going to be down David talked about health care finance stats.
That's basically.
Not originating anything new there.
I would expect to see balanced declines in public finance and single tenant lease financing as well as simply as my comments earlier that the some of those markets right. Now are just so competitive we got price floors in there and we might win a deal every now and then but we're not we're not chasing we're not doing deals below <unk>.
7%, so when you when we can't get that its hard so.
As you would expect to see some decline in those portfolios.
Okay. Yeah, I was just making sure that it wasn't just the residential mortgage it seemed a little that's.
At the end of the year, so what you're talking about $2 50, yeah, I'm just talking year over year yeah.
Got you.
And then.
With all the actions you guys have taken and the initiatives you have going on the Paas program.
As we look out over the next few years.
What is a realistic mix of revenue.
Do you have a target or anything you can kind of like spread income versus fee income just trying to get an idea of what that could look like over the long term.
Well, Tim if I had a crystal ball that could do that I could.
Small fortune predictions.
The vast world.
It was a darling of everybody 12 to 18 months ago. Now everybody's question is should we be in there in two or three of American banker article from last couple of days Bank should run from the best oil in play there is tremendous opportunity do partnerships with great folks like the ramp organization that we're working with now on the Bill pay services.
There's a lot of those out there.
Obviously, there are banks and phanteks getting in trouble with the regulators because they're not doing the proper due diligence and the.
Overseeing on the compliance issues.
Which is one of the reasons, we were a little slower to market than a lot of other people because we wanted to make sure. We have the house in order and we could handle our prior acquisition opportunity would have given us a great team we had to build that so we're very thoughtful very judicious use the term.
Several times on the calls.
<unk> seen a lot of frogs to find the Frances and.
We've got we think very good company in the pipeline.
The one I talked about a minute ago, the neo bank could be an absolute.
It could be the unicorn that just blows up and thats deposits thats fees.
Lending income, there's just a ton of things that could come out of that so.
<unk>.
<unk>.
Probably that half a million $10 million in revenue for 'twenty.
Three that might be a little bit to the conservative side with some of the things that are in signed sealed delivered and then the pipeline but.
We will have a better handle on that as the year goes by and again, we see how the market shuffled theres some other institutions that.
Might have to exit from some other programs that we could be in position to pick up some very well established customers just because they got into regulatory issues.
We could pick up and move forward so.
We probably can't give you much more guidance than that kind of half a million $10 million in revenue this year.
As these come on and we get a handle for how they're going to grow and go we will have better numbers.
<unk> on a quarterly basis.
Great Yeah, no that's helpful a lot of guidance on there.
I could ask one more area, maybe you need a crystal ball too but like.
What is sort of a realistic expectation for.
How these vast deposits can help on the funding side I know, it's still a small part of your business right now.
What is sort of the cost range. These deposits are coming on that are they priced at fed funds minus.
Something or.
Yeah, I would tell you historically.
A lot of the bass funds were zero cost, but much like HOA dollars much like 10 to $31. All these funds had historically have never.
Cost an institution anything these folks are getting very smart.
The vast companies of the Fintech companies all have to make a profit.
And for them to continue to survive and yet VC money they have to show our path to profitability, so where they were giving away the deposits.
Have any value to them. They now know they do have value I would say ours are somewhere between.
Fed funds minus 50 minus 75, most of them are not above fed funds.
But yes, it's not free money, but I'd say.
Well I can take that back on the other side. The two accounts that Ken talked about are both great EBITDA.
A settlement account.
There were just drawing funds for payments against them those are still free.
But if we get deposit base with the Neo bank Thats, probably going to be somewhere in the range has fed funds minus 50 minus <unk> 75.
Got you that's great really helpful. Thank you guys.
Okay. Thanks, Tim tell Mike, We said hi.
I will.
Thank you Mr Chair.
The next question is a follow up as a follow up question from the line of Nathan race with Piper Sandler. Please proceed.
Yeah, Hi, Mike went through okay.
Hey.
So far in <unk>.
Okay. Good to hear a lot of my questions have been asked and answered at this point, but just wanted to think about kind of the reserve.
<unk>, maybe on a percentage or.
Absolute dollar basis after the seasonal adjustment in the first quarter I guess I'm just curious about you guys seen any major charge offs on the horizon or how you guys are kind of thinking about the reserve.
Trajectory over the course of 2023.
Well I guess.
The question on the Horizon is no.
We continue to.
Sorry to stay on top of the portfolio and.
Have all of our teams and credit admin looking at things real closely given the uncertainty.
That's why I kind of threw the number in.
With everything we released just so you guys out there would see that the reserve is going to go up.
Call it.
98 basis point range, or so 90 899.
I guess, what I would also add to that though is most banks, especially banks our size don't have a.
20% of their loan portfolio that is with that is in public finance that is we've never had a credit loss never had a delinquency and the coverage ratio for that portfolio because of its nature and sources of repayment is very low when you exclude the public finance portfolio.
<unk> ratio is closer to a 115 basis points.
So I think even though again maybe credit losses.
Foreseeing, none of us have a crystal ball, maybe credit losses, or net charge offs ticked up a little bit, but I think.
The increase in where we're at with the increase was seasonal plus factoring in what the coverage ratios are in our commercial lines and consumer lines I think we feel feel.
Feel pretty good about where that coverage is.
Yes.
Okay great.
That's all I had I'll step back thank you.
Great. Thanks Shannon.
Thanks for calling back.
Yes.
Great.
Yes.
Once again to ask a question press star one.
The next question is a follow up question from the line of Brett Robinson with Hyundai Group. Please proceed.
Hi, I just wanted to follow up on a couple topics if I could one on the linked quarter increase in loan yields and funding costs I guess first a 45 basis point increase in loan yields in the first quarter can you talk about how many loans are the bucket of loans reprice.
<unk> in the first quarter or how you get to that 45 basis points. So I guess, that's the first part of that.
Well I mean, it's a combination Brad it's we do have.
Construction I mean, if you figure that.
Right now the market has got a couple fed increases in there because youre talking about 23 correct.
Correct.
Okay, Yes, I mean between our construction portfolio is virtually all variable the SBA is virtually all variable.
There is a component of C&I that's variable.
We also have pipelines in.
In franchise finance that again that pipeline continues to remain strong those yields now are coming on high Sevens eights and nines in some case.
And.
Again, we're not really lending in certain other areas unless we can get really good pricing. So it's.
It's it's a it's continued higher yield new production lower yielding stuff paying off or just amortizing cash flowing.
So it's just it's a combination of all those factors that should continue to drive the overall portfolio yield higher.
Other issue, that's going to make it a little stronger in the first quarter. Brett is a lot of those loans that we added in the fourth quarter came on in the last two weeks everybody was trying to get things done before year end. So we will have a full 90 full quarter run on those balances, which we only had them for the last five to seven days of the fourth quarter. So.
Part of that those two.
Okay. That's helpful. And then the same sort of topic on the funding side, the $60 to 65 basis points.
When I look at the <unk>.
Current rates I see it looks like from an NMDA perspective, you're at $3 35, maybe retail and maybe 340 ish on the commercial for that versus the $2 89 for the $1 billion for average in the fourth quarter can you remind me how much of the money market is retail versus commercial and then.
Did those rate I assume you're kind of thinking those rates.
Close to have topped out on the money market, but any color on that would be helpful. Thanks, Yeah.
The breakdown is roughly one third commercial maybe one 3rd% to 40%.
One 3rd% to 40% consumer.
And the remainder is commercial and we do have two tiers of pricing in there. We do have some that are <unk>.
Balances above a certain amount youre getting higher rate, but.
Probably the biggest single bucket in there is the is what we'll call small business and commercial money markets and those are those the current rate on that $2 80.
I would say, we again I know, we get a fed rate hike here coming up in a week or expected, possibly another one but I would say as of late the pace of increase has slowed down.
We still kind of run what I will say pretty high betas through our model.
But the pace of increase has seemed to slow a bit.
<unk>.
So.
Don't think obviously, we saw over 100 basis points of increase in the last quarter again think about it you had 125 basis points of fed increases in the fourth quarter, whereas.
<unk>.
This could be.
I guess, a minimum of 50 and a maximum of 100.
Depending on your view on what the fed's going to do so I mean, just by virtue of what.
What the fed did is expected to do this quarter versus what they did in the fourth quarter I would.
Our forecast suggests that the pace of increase shouldnt be as high quarter over quarter as it was last time.
Okay. That's helpful. And then I guess, one thing probably probably one more thing I'd, probably add to that as we we did is as you see the you saw the balance of brokered deposits go up and I said in my prepared comments, what we we probably pulled forward some deposit funding as well just because of where the.
Where the long rates were relative to again the short end of the curve continue to go up we took advantage and did some three four and five year brokerage Cds that what else at a blended rate that's lower than fed funds.
So some of that is good for long term interest rate risk, but also good to give us some stability pulling that funding forward as opposed to <unk>.
Trying to go out and do more in the fed funds plus wholesale market in the quarter.
Okay.
And then maybe one last one.
I was trying to keep up with the notes I missed what the commentary around the SBA expectations were.
For the full year any.
Any color on SBA and I know, that's not necessarily an easy business to predict.
Given lower gain on sale margins et cetera.
Any color on how much that might contribute to fee income this year.
Yeah.
Thing is we still have we continue to bring on high performing bdo's.
We brought some on you in the later part of the year.
You have staff in place to service and we have originations.
Up year over year.
But I will tell you that from our perspective right now I mean gain on sale premiums in the fourth quarter net gain on sale premiums were very low.
They are in kind of the mix in a half 107 range.
And our forecast, we're not making any assumptions that those go up. So we're we're just and for the full year of 2022 and the front end of the year, we were getting higher gain on sale premiums. We were getting 110 <unk> hundred <unk> in some cases higher than that and that came down so where.
While we do have origination growth for the year.
A lot of that is really offset by just assuming lower gain on sale numbers for the full year. So I mean, we're probably right now modeling that number that we are.
That we recognized in.
For the full year for 2022, we're probably think rough modeling right now that to be flat to down a little bit.
But entirely driven by.
Really driven by gain on sale premium.
Okay.
English for you real quick that's $10 5 million to $11 million.
Alright, okay. Thanks.
Thanks, guys.
Youre welcome. Thank you Mr Robertson.
The next question is a follow up question from the line of John <unk> with Janney. Please proceed.
Hey, Ken just just back on fee income in my notes did you did you say fee income down 15% for the year is that total fee income.
Or did I Miss yes that isn't that is total non interest income so I mean, thats still a while.
If you take the 21 $321 3 million for 2022.
And just cut that 15%, that's probably where it will be that that's we're estimating so where obviously we did have mortgage revenue that's not going to be here. This year.
And as we talked about SBA here being.
Being flattish Dave.
David did talk about our what we think are conservative expectations on some increase from Vas revenue.
But for this year, we're forecasting that to be down just by virtue of the biggest piece is just removing the mortgage number out.
Yeah, Okay, and then just one other question tend to tax rate kind of made a new low in the fourth quarter, what should we use for next year.
Yeah.
I'll Guide you back to about 12 to 13. The one reason why the tax rate was low in the fourth quarter is when we do taxes I will tell you the calculation isn't necessarily done for a quarter at a time, what we're trying to do is.
Forecasts, we use earnings taxable income estimates for the year.
And I will tell you back earlier in the year in the first couple of quarters before the fed started really rapidly raising rates and we're having the subsequent impact on earnings in the back end of the year our taxes we were.
We were estimating higher net income so all it really is I don't like to use the word true up but maybe that's the best term I can come up with is that effective tax rate is really what it takes for us to get our taxes in line for the full year. So again I'd, probably just guide you back to the 12% to 13%.
Sure.
I think that will probably be a reasonable estimate.
Okay. Thank you guys.
Yep. Thanks.
Thank you Mr <unk>.
There are no additional questions waiting at this time I will turn the call over to David Becker for any closing remarks.
Yeah.
Everybody I'd like to thank you for joining us on today's call. We will continue to exercise discipline and use all the tools at our disposal to preserve earnings in 2023 as fellow shareholders. We remain very committed to driving improved profitability and enhance shareholder value.
Thank you again for your time and have a good afternoon.
That concludes today's call. Thank you for your participation you may now disconnect your lines.