First Internet Bancorp Q4 FY2021 Earnings Call

Good day everyone, and welcome to the First Internet Bancorp Earnings Conference Call for the Fourth Quarter and Full Year 2021. All participants will be in a listen-only mode. Please note that today’s event is being recorded. I would now like to turn the conference over to Mr. Larry Clark from Financial Profiles, Inc. Please go ahead, Mr. Clark.

Thank you, Matt. 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 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 Lovik. David will provide an overview and a company update, and Ken will discuss the financial results. Then we'll open up 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 a 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 exceptionally low credit costs. Net income for the year was 48.1 million and diluted earnings per share were $4.82, both up over 60% compared to the 2020 results. The strong performance was driven by substantial growth in net interest income and net interest margin expansion. Our fully taxable equivalent net interest margin for the year was 2.25, up 57 basis points from 1.68. This was primarily the result of lower deposit costs as higher cost CDs matured and our deposit composition shifted towards lower-cost non-maturity deposits. We continued to exhibit stellar credit quality in 2021. The balance of non-performing loans decreased 27% over the course of the year, leading to a ratio of non-performing loans to total loans of just 0.26% for the year, down from 0.33% at the end of 2020. Net charge-offs for the year were only 0.09%. Our strong performance in 2021 helped us generate a return on average assets of 1.14% for the year, up 45 basis points improvement over 2020. Additionally, the strong earnings allowed us to continue building capital as our tangible common equity to tangible assets ratio increased to 8.93% 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 continue 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's 2022 year. Our SBA loan pipelines remained 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 18 million in loans since its launch in July. Our partner ApplePie Capital is one of the leading providers of growth financing to franchise owners. Pipelines in this line of business remain strong as well. We are targeting origination volumes in the range of 115 million for 2022. Our pipelines in construction lending and single-tenant lease financing are also looking very good; and total compared to the third quarter, our commercial pipeline is up 22%, and 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 announced a transformational acquisition of First Century Bancorp during the fourth quarter of 2021. With the addition of First Century's 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 much larger balance sheet, additional dedicated resources, and access to greater sources of liquidity, we plan to aggressively pursue growth opportunities across each of these business lines. We are in conversations with First Century's 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 than 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 First Century who have 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 2023 and beyond. Another area of strategic focus, whereas in 2022, will be to invest in fintech partnerships, with the rapid evolution of technology that enables consumers and small businesses to manage their finances digitally, we are addressing a significantly growing marketplace. Partnering with these innovators will benefit First Internet in two ways. First, as we have discussed before, fintechs have created robust digital offerings unburdened by legacy tech impediments that meet and exceed customer expectations. Our teams have 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. First Internet has now almost 23 years of experience in delivering digital services, including numerous sponsorships that would have 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 succeed in the banking as a service space. Earlier this week, we announced a formal agreement with Cinque Terre, a 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 enabling us to drive new revenue streams, acquire lower cost deposits, and pursue additional asset generation capabilities. Banks offering banking as a service partnerships with fintechs 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 than the banks can accommodate. Given the high degree of confidence that there is a long runway as a banking as a service provider, we are actively working with three fintechs on the banking as a service front that will provide a combination of low-cost deposits and non-interest 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 sourced through our own efforts as well as through the relationship with Cinque Terre 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 achievements in four primary areas: governance and leadership, environmental management, human capital, and social responsibility, detailing our existing commitments and future priorities around mindful governance and responsible corporate citizenship. By advancing our ESG initiatives, we hold ourselves accountable for effectively managing risk while 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've built a workplace culture that continuously develops the people who embody these strengths. This is the 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're confident in our franchise's 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 650,000 of additional pre-tax expense related to certain non-recurring items. After factoring in these items, adjusted net income was $13 million and adjusted diluted earnings per share were $1.30, increases of 2% and 2.1% 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 1.24%, and adjusted return on average tangible common equity is 13.84%. 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 5.6% 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 in construction, where we had strong drawdowns from existing projects, and in small business lending, where we originated $54 million of SBA 7(a) loans, $14 million of which were unguaranteed 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 consumer balances as our focus in this area continues to pay off. CDs and broker deposits decreased $97.3 million, or 7.1%, as higher cost CD maturities were 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 7.7% from the third quarter. The yield on interest-earning assets improved to 3.34% 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 2.3% 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 2.21% for the third quarter to 2.43% for the fourth quarter. As you 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 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 increase steadily as we grow the commercial loan portfolio. Compared to the end of the third quarter, we've seen loan pipelines increase 22% driven by growth in single tenant lease financing, franchise finance, and SBA, as well as fundings of construction lines. Additionally, we expect deposit costs to continue to reduce over the next year as $713 million of CDs are scheduled to mature in 2022 with a weighted average cost of 1.02%. Our current replacement costs on these deposits is in the range of 55 basis points. Turning to non-interest income on Slide nine, non-interest 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 non-interest 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 $900,000 gain on the sale of single-tenant lease financing loans and a $500,000 increase in the gain on sale of SBA loans. Mortgage banking revenue totaled $2.8 million 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 revenue to be in the range of $12 million to $13 million for the full year 2022. With regards to SBA gain on sale revenue, we are forecasting that to be in the range of $13.5 million to $14 million for the year. Our outlook there has been somewhat impacted by more normalized gain on sale premiums, as we begun to see premiums come down from the elevated levels experienced during much of 2021. Moving to Slide 10, non-interest 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. The higher salaries and employee benefits expense were due mainly to higher incentive compensation, increased medical claims expense, and headcount growth. The increase in premises and equipment is driven primarily by a $500,000 termination fee related to an information technology contract. The increase in consulting and professional fees was due primarily to $200,000 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 whom were hired 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 in 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 as a leading provider of financial services to the small business market. 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 non-performing loans declined by $500,000 from the third quarter; non-performing 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 $100,000 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 $238,000, compared to a benefit of $29,000 for the third quarter. The increased benefit was due primarily to the decrease in loan balances that was partially offset by adjustments to qualitative factors that increased the overall allowance as a percentage of loans. 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 8.93%, up 32 basis points from the third quarter. Additionally, tangible book value per share increased to $38.51, up from $37.12 in the third quarter and approximately 16% higher than one year ago. Lastly, during the fourth quarter, we repurchased 100,000 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 continue 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.

Thank you. We will now start the question-and-answer session. Our first question will come from Nathan Race with Piper Sandler. Please go ahead.

I was hoping to just start on the loan growth outlook. It sounds like maybe on a legacy basis, you guys are feeling increasingly optimistic and where the pipeline stands, in terms of just those opportunities, being well positioned to offset some continued runoff in the healthcare books. So as you kind of look out over the course of this year and excluding the impact from FCB, how you guys kind of think about overall loan growth levels and the legacy basis that is?

Yes. Currently, as we assess the environment and our pipelines, we are comfortable forecasting loan growth for the year in the range of 10% to 12%. As noted in our prepared remarks, franchise financing will be a significant contributor to our net loan growth this year. Our construction sector has also performed very well; our team has been actively securing new commitments. We anticipate a substantial increase in loan balances in that area. The single-tenant lease pipeline appears to be expanding daily. With the longer end of the curve rising, we have become more competitive with our pricing. We no longer need to pursue the lowest rates, and rates are aligning more closely with what we are accustomed to seeing, which gives us confidence. Additionally, there are opportunities in the commercial and industrial sector and for owner-occupied commercial real estate.

Nate, backing up Ken. Actually, we had a very strong fourth quarter in new loan originations, and showed a positive play; we had two very large C&I loans. One, a life sciences company, and one, a privately held group of 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 in single-tenant leases that were paid off during the month of December. We're guessing that was folks just trying to shuffle the deck a little bit before there are any tax law changes on 1031. So had we not had over $100 million and somewhat unexpected pay-offs during the quarter, we've had a very solid fourth quarter. So yes, as Ken said, we're very confident in looking at that 10% to 12% growth over the course of 2022.

Got it. It’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 are priced into the forward curve by the end of this year?

Yes, I think when you think about when we get First Century integrated, obviously, that's going to give us a significant benefit on the deposit side with the zero-cost, low-rate deposits that they have there. And that's going to provide a much more stable floor, then what we've had in the past as far as deposit pricing goes. I mean, I think we'll probably see rates tick up a little bit on some of the deposit products. But, I think, as we shifted to on our own X, First Century, the composition has 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; CD betas were very high, whereas the other betas were lower. So I think we feel pretty good about the impact of interest rate increases, and I think we’d probably try to manage to a neutral position. And then, once we get First Century integrated, get their deposits on board, and begin to build out the deposit opportunities there, I think we feel 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.

Perfect, that's super helpful. Thanks, Ken. And one last one for me. And I apologize if you've 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?

Yes, real quick update, we've been in conversation; we obviously have three players out here, the Department of Financial Institutions for the State of Indiana, the FDIC, and then ultimately, the Federal Reserve. Conversations are going great. We hope to hear some positive news in the state of Indiana and during the board meeting in February, with the FDIC and Federal Reserve behind that. So hopefully, we'll see it close in the latter part of this quarter or very early on in the second quarter.

Our next question will come from Michael Perito with KBW. Please go ahead.

I wanted to touch on a couple of points, specifically regarding the expenses. I want to clarify what I heard. You mentioned a growth of 15% to 17% for 2022 based on a starting core run rate of 60.5 million. Is that accurate? Also, does this growth rate include First Century?

First Century would be on top of that. What was the first number you said, Mike, I didn't hear you correctly or clearly.

I was just noting that the growth of 15% to 17% was based on a starting point of 60.5 million for the full year 2021.

I would say it's probably off the 61.5 million.

Got it. Okay. And then First Century is on top of that, and is that still approximately 11 million to 12 million annually of kind of OpEx that's coming on a full year run rate?

Yes, I would probably reconsider the cost savings assumption we had.

Correct. Just ensuring we're on the same page. You mentioned the news about Centerra, which we are familiar with. It seems like, if I'm not mistaken, First Century had a solid list of partners but wasn't actively seeking to expand, which aligns with your upcoming acquisition. It's clear that you are aiming to grow that area of your business. I’m curious about the new hires you referred to. How do you view your position regarding technology, customer service, and regulatory oversight in this vast industry? Additionally, how do you see yourselves fitting into the competitive landscape, which is not overly saturated at the moment? Are you planning to focus initially more on deposits, or will there be a combination of different asset and deposit partnerships? I would appreciate any additional insight you can provide.

Yes, actually, we're almost on a 50:50 basis, Mike, with the folks who we're talking to right now. Obviously, there's some very good low deposit, low-cost deposit channels that we’re on, and there are some very interesting loan opportunities at a higher yield than we’re used to seeing, so the great part about it is, we had already started a lot of build-outs and a lot of testing and work on kind of banking as a service. Centerra has been in the works for months now. What First Century's announcement did, along with Centerra 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. But for the demand in the fintech space, there are not nearly as many banks that need to be in the space; there are plenty of folks to choose from. I will 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 First Century that we talked to, we turned up additional opportunities with them. The tax servicing side of things is going to be, at least, 2019 numbers almost double what they did in 2020, if not more. The largest player on tech services, we're actually going to help them because they wanted to boost the volume above First 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 talked to, if anything, right now, it's a decision time 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 First Century and a lot of the regulatory DSA, KYC, and other concerns from the regulators, they got a tremendous team in Georgia that's been doing a lot of this for years. In payment services, it's also very similar to banking as a service from a regulatory compliance place. So their team added to our team and the new people that we hired made us very confident, and we've had no pushback at all from the regulatory agencies on our forward-looking plans that handle all those components. So it's looking rock solid. And like I say, there's tremendous opportunities out here; the phones are ringing on a daily basis. And the First Century move really put us in kind of a spotlight that we're in it. And as we said, thinking about banking as a service long before they coined that term. We were, I think, the fintech before the fintech term was coined if you take a look at how the bank got off the ground. So it's kind of fun. 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 Ken and the rest of the team here are taking care of the day-to-day issues, and 2022 will be a little crazy. We will try to give you guys guidance as much as we can as the year evolves. 2023 is looking absolutely like it's going to be headed out of the park here. So very excited about everything that's going on.

That's a great update. Thank you for that, David. Lastly for me, Ken, I want to focus a bit more on the net interest margin. If we can assess this directionally, you are currently at 243. In the third quarter, it seems likely you could reach between the repricing of CDs and the addition of First Century, possibly in the high 260 to 270 range without too much effort. The future movement in rates will largely depend on the growth rate of the banking as a service initiative and the increase in the higher-cost deposit rate portfolio over time. Is there anything in this that concerns you, or do you think this assessment is generally accurate based on what we know?

Yes, and I would say with regards to the NIM numbers you just threw out, that's probably 23 and beyond. In 2022 here, one thing about our performance in the fourth quarter is that we did have a lot of loan fees in there. We did have, as David talked about, there was elevated prepayment activity. We probably had a 1.1 of excess loan fees in there with the prepayment activity David talked about with the C&I loans in the single tenant. We usually run about $1 million to $1.1 million in prepayment fees and loan fee income a quarter. And we were about double that this quarter, which kinds of equates into about maybe 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 were probably really in for the quarter about a low 230s 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 repricing leverage. And just the deployment of loans and the deployment of cash into commercial loans. I think, Mike, you kind of hit it right there. When we do get First Century on board 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, Mike, once we get past tax season and the demand for the tax volunteer, the cash on balance sheet where we get First Century and ourselves together, we're going to be in the $600 to $700 million range. So it's the real key. And that's why we're looking for fintech loan opportunities; we've got to put that money to work as soon as possible. So obviously, the securities industry and the other alternatives aren't significant enough to make a big difference. 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 quickly as possible. So that can hold us back a little bit for the first half of the year, as Ken said the numbers here floating, that's probably very reasonable for 2023 and above. That would keep us in that 240 to 245 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 NIM if we do get some type of more aggressive four hikes 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 the changes you've already had in your balance sheet, and then the addition of First Century; you would expect that margin should be able to hold steady at a minimum in a rising rate environment. Is that fair? Is that too strong?

Yes, that's fair, Mike. Because I mean, if you just think about the simple math, even if we've carried the excess liquidity, but you get that many rate hikes, it will 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 yeah, you're right. I think that David said, depending on how many rate hikes you want to look at, 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 and investment yields will be above our cash costs for maybe the first time in the history of the bank.

Our next question will come from Brett Rabatin with Hovde Group. Please go ahead.

Wanted to first ask, you're just mentioning the excess liquidity that you're going to be getting with FCB deal. Can you talk about with the initial terms of the deal? You anticipated having 21% accretion in 23, and that included the excess liquidity deployment, and the rate environment looks different now. Can you maybe give us an update on how creative this deal could be now, relative to when you announced?

Well, I think, as David mentioned, I'll even back out the excess liquidity question, because some of that to some extent may just be financial engineering. But, I think when we put out the original guidance on 23 earnings, I think we knew that there were going to be a number of opportunities to look at. I think we felt conservative at the time, we felt good about what we put out there, but conservative. As we've gotten in and gotten familiar with some of their customers, their clients, their key business partners in 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 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 very low-cost deposit platform, whether we deploy those proceeds into loans or really even just deploying to securities. I mean, at the time we did the Zig, I think our assumption on putting some of that cash to work in mortgage-backed securities was just plain vanilla agency MBS was 150 to 155. And I think now we can buy those same bonds at 190% to 192%. And the cost of the deposits isn't changing. So I think there's certainly some upside leverage there. But it will 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 want to just, you didn't really talk a whole lot about the HOA business and the payments and card programs. Obviously, the income is a big piece of this transaction. It sounded initially like you were optimistic that those things could continue to grow, and you want to invest in them. Can you maybe give us some color on the homeowners association platform in particular, if you think if you're optimistic they'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 is 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 are two times in the course of the year that an HOA will change banking relationships. One is kind of here at the end of the year, beginning of the year, when they start fresh; they'll make a move to a new bank. A lot of it is, one of the things we need to do at the current time, their HOA team only has integration into the sync software platform bills and other platforms to really make that grow and go. We need to build out a couple of additional APIs so they can service other platforms. But we still think it's solid, it's growing, it's very stable. The HOA world has woken 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 all in blended costs between the checking and the long-term kind of money market or saving side of things, they're still in the 20 to 23 basis points, which is tremendous for us compared to our traditional cost of funds. The one that is really taking off and has grown significantly through the course of the fourth quarter since we've gotten involved and knowledgeable of what's going on in their world is the deposits come with the prepaid card programs and some of the payment services, which obviously has cash moving in there. But some of that on the prepaid and the virtual credit cards and stuff. Their deposit base to support those have gone up 45 million, 50 million, and that's interest-free cash, and we're not paying anything on that. So our thought that First Century is going to drop in $500 million in low-cost deposits over the next 24 months, that still might even be a little bit of a low number. So it'll be a combination of HOA and the card services side of things, but we think it's very, very doable, and maybe even a little bit low.

Okay, that's helpful. And then one last quick one on the Centerra relationship and the fintech partners that you expect, and you indicated a kind of a 50:50 blend with new partners. On the lending side, would you anticipate that mostly being consumer-oriented or would there also be commercial opportunities as well?

We are currently exploring two attractive consumer opportunities and one commercial opportunity. Both areas present significant potential for consumer lending, especially given our 23 years in online banking, which offers substantial cross-sell opportunities. On the commercial side, we are also looking at small business opportunities to grow our deposit base. Unlike most fintechs that tend to focus solely on either lending or savings, we believe the opportunities we are considering each provide a chance to cross-sell. Our goal is to achieve a balanced approach with a roughly equal split between the two sides.

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 in the, I think was the prepared comments that non-interest revenues could be nicely impacted. Could you just explain what you meant by the non-interest revenue side?

Yes, and the non-interest income side, there's a lot of the partnerships in the fintech, whether it's banking as a service, or enhancing our own offerings, can generate non-interest income, whether it's through interchange split, or fees for providing access to the credit or to the rails, to the debit and the credit rails, as well as just fee revenue for providing a service.

Got you. Okay. I just want to clarify that. Ken, you talked about your commercial pipeline being up 22%, and your construction unfunded up 45. I wanted to better understand. 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're looking to try to fund? Can you just give us a little bit more perspective on what's driving that strength?

Yes, it's a combination of factors. We have increased our staff by adding three people to the commercial real estate team over the past year, which has allowed us to tap into a lucrative niche, especially amid the logistics challenges across the United States. There is significant warehouse activity happening nationwide, and we are collaborating with a builder that has substantial Amazon-related projects. While working with known builders, we are expanding beyond our Midwest base. If they are developing in cities like Denver or Miami, we are partnering with them. This has led to an expanded market presence and a larger team, along with carving out a successful niche in single-tenant and franchise properties. We are focusing on big warehouses that can be constructed quickly, which tend to sell very fast. Many of these facilities are occupied by single tenants, such as Amazon, making them highly attractive investments. We manage the construction phase without engaging in long-term financing arrangements; instead, we handle the upfront construction costs, and then those projects are transitioned to the Department of Financing upon completion.

That's great to hear. I want to credit you for purchasing some stock back in Q4 at good prices as your tangible book continues to increase. I'm curious if you can provide some insight on what might happen with the rest of your program.

We just completed our strategic planning Monday and Tuesday with our Board, looking through 2022. We're going to continue to buy shares over the course of the year that is under 1.5 times book. So obviously, pulling in 100,000 shares in the fourth quarter at $44 and change was a tremendous investment. It's paid off handsomely, and we're getting close to that 1.5x book and we'll see where it goes. But if it stays below 1.5, we'll continue to buy.

Like you have $4.5 to go. I like that.

Your math was faster than mine. I was trying to do that in the back of my head.

Our next question will come from John Rodis with Janney. Please go ahead.

David, you said, I think one of your comments on the margin was roughly 240 to 245. By the end of this year, was that on a combined basis with FCB?

No, that's really us on a standalone basis, John. I think it comes back to the second half of this year being a bit uncertain regarding the impact of First Century. We will see a lot of very low-cost deposits, but we will also have a significant amount of cash on the balance sheet. This could lead to some excess liquidity drag as we deploy those funds. Whether we use them to purchase bonds, fund loans, or support higher-cost CDs as they mature, there will be some positive benefits, but we might also experience some drag due to the excess liquidity.

Okay. And then, Ken, I guess a quarter or two ago, I think you put it in the presentation that as far as cost savings on the deposit side, I think it was around $10 million? Do you still expect that for legacy for Senate?

We previously discussed our expectations for 2021, and we achieved that target of $26 million. Currently, our deposit leverage isn't quite as strong. If you recall from when we started discussing our deposit costs, the maturing CDs over the next year will average 1.02%. Looking back a year or 18 months ago, that figure was between 1.5% and 2%. So, there's a reduction in that area. However, I anticipate that, over this year, we could see savings of around $3 million to $4 million from our legacy First Internet deposit base. Our models account for this, as we follow the predicted trends for short-term rates. As the CDs mature and are substituted with money market accounts or checking accounts, we are planning for an increase in short-term rates later in the year, which is reflected in the figures I provided.

Okay. Okay. And then maybe one more can just the tax rate data, do you have what the tax rate should be going forward on a combined basis with FCB ballparks?

Yes, I would bump it up a couple points from where we're at today; we kind of have settled into this, let's 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%.

This concludes our question-and-answer session. I would like to turn the conference back over to David Becker for any closing remarks.

Hello, everybody. I'd like to thank you for joining us today. Obviously, we're very excited about '22 and beyond. Hopefully, you are as well we wish, hope you have a great day and continued success, and we'll talk to you again soon. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.