First Internet Bancorp Q1 FY2022 Earnings Call

Hello, all and a warm welcome to the First Internet Bancorp Earnings Conference Call for the First Quarter of 2022. Please note that today's event is being recorded. I would now like to turn the conference over to Larry Clark from Financial Profiles, Inc. Please go ahead, Mr. Clark.

Thank you. Good day, everyone and thank you for joining us to discuss First Internet Bancorp's financial results for the first quarter of 2022. The company issued its earnings press release yesterday afternoon and it's available on the company's website at www.firstinternetbancorp.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 Lovik. 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 call contains forward-looking statements with respect to the future performance and financial condition of First Internet Bancorp that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures which are intended to supplement but not substitute the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. At this time, I'd like to turn the call over to David.

Thank you, Larry. Good afternoon, everyone and thanks for joining us today. We are off to a strong start in 2022. But before I get into the details of our results from this past quarter, I would like to provide an update on our strategic initiative that we expect will have a meaningful impact on our future results. We are still waiting on certain regulatory approvals required to complete the acquisition of First Century that we announced on November 2. We hope that closing can occur next month. We are in discussions with First Century to extend our outside date to close the transaction. Over the past quarter, we began delivering on our objective to provide banking-as-a-service to fintech companies. We expect those relationships to translate into a combination of low-cost deposits and noninterest income for us. In the first quarter, we entered into a relationship that has thus far generated $50 million of new deposits at a fixed cost of only 20 basis points which is well below our average cost of funds. The fintech channel has special appeal to us primarily because as a branchless bank launched pre-2000, we see ourselves as an early fintech and we support the spirit of innovation and disruption. Moreover, banks that offer banking-as-a-service partnerships to fintechs are growing quicker and more efficiently than the overall industry. We believe there are strong secular tailwinds to this demand providing us with a long runway as a provider in this sector. We have been selective and intentional in our fintech partner rollout. We are planning to announce a second partnership here in the second quarter and we have a pipeline of opportunities under review. Now, I will turn to our operating results for the first quarter. We reported net income of $11.2 million, up 7% from a year earlier and diluted earnings per share of $1.14, up nearly 9%. We recorded adjusted net income of $12 million or $1.22 per diluted share when excluding nonrecurring consulting fees and acquisition-related expenses. These solid results helped us to generate an adjusted return on average assets of 1.16% and adjusted return on average tangible common equity of 12.98%. Loan balances were relatively flat from the prior quarter as robust growth in key lending areas such as franchise finance and construction were offset by payoffs in healthcare finance, owner-occupied commercial real estate and public finance. Our partnership with ApplePie Capital, a fintech-oriented specialty lender that focuses on lending to the franchise industry, continued to drive meaningful growth in the first quarter. In our third quarter of working together, we funded $28 million in loans and now hold over $100 million in this portfolio. We still anticipate originations for the year to be in the range of $150 million and could exceed that amount if the growth-oriented brands ApplePie works with achieve their targets. As we have discussed in the past, construction lending is another area of focus. Our team continued to successfully source new opportunities during the quarter within the commercial and residential housing markets. At the close of the first quarter, unfunded commitments in our construction line of business totaled $183 million which was down slightly from the start of the year but we were pleased with the draw activity and expect outstanding balances to continue growing throughout the rest of the year. Pipelines across other commercial lines of business, including our national SBA operations, are also very strong. Given that SBA originations are historically lighter in the first part of the year, we are extremely pleased with where the pipeline stands today. Our consumer lines of business also started the year on a very positive note. In addition to growth in portfolio residential mortgage balances, we were especially pleased with growth in recreational vehicle, trailers and other consumer lines, as new originations exceeded $25 million for the quarter despite continued inventory shortages and elevated inflation. In total, consumer loan balances rose 4% on a linked quarter basis. In addition to our existing loan pipeline, we are actively involved in multiple discussions that can provide additional asset generation capabilities to supplement our existing lines of business. The opportunities involve strategic partnerships that cover a range of asset classes, from specialty commercial lending to consumer lending to residential mortgage. We're very excited about the growth and potential each could provide. Our credit quality meanwhile remains excellent and among the industry's leaders. During this quarter, our ratio of nonperforming loans to total loans declined to 0.25% and our ratio of nonperforming assets to total assets declined to 0.17%. Highlight in the quarter was the recovery of a single tenant lease financing relationship that previously had been charged off with the remaining balance transferred to other real estate owned. In total, we received net proceeds of $1.2 million in excess of the carrying value of the other real estate owned balance which, excluding tax refunds, advance loan activity resulted in net recoveries to average loans of 16 basis points. In 2022, we will continue to leverage our customer focused products, expertise in digital service delivery to deepen banking relationships with existing and new customers. We will further invest in our digital capabilities, prioritize recruiting and talent development and build additional collaborative partnerships with fintech companies. And of course, we plan to integrate First Century and expand our emphasis on banking-as-a-service capability to further position us as a premier technology-forward digital financial services provider. In summary, we are in great financial shape to continue producing strong results for our shareholders while improving our capabilities to serve our growing base of customers. Before I turn it over to Ken, I would like to thank the entire First Internet team for their tireless work throughout the quarter, ensuring a smooth integration process while never losing focus of our hallmark customer service. Our team's unwavering commitment fuels our confidence in the strength of our franchise and ability to seize potential growth opportunities ahead. I'm proud of what we've accomplished to date through the compassion and innovative ideas from our team members. On behalf of each of them, I'd like to share a sincere thanks to our shareholders for the continued support. 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 strong earnings to start the year with first quarter income of $11.2 million and diluted earnings per share of $1.14 which included about $1 million of additional pretax tax expense related to certain nonrecurring items. Factoring in these items, adjusted net income was $12 million and adjusted diluted earnings per share was $1.22, a decrease of 7.3% and 5.7% respectively from the fourth quarter of 2021 but up 15.2% and 16.5% respectively from the first quarter of 2021. Profitability continued to be solid with adjusted return on average assets of 1.16% and adjusted return on average tangible common equity of 12.98%. As you can see from the earnings release, we participated in First Century's tax refund advance lending activity which added some additional new moving parts to the financial results for the quarter. If you remove this activity from our results which included program fees that are classified as net interest income for GAAP accounting purposes, the related provision for loan losses and a servicing fee that we paid First Century, the impact was relatively immaterial and increased net income by less than $100,000. Our intent in participating in the tax refund advance lending business was not to maximize profitability but rather to provide balance sheet support to our partner and ensure that they had efficient access to funding for the thousands of loans originated during the quarter. Looking at Slide 4; total loans at the end of the first quarter were $2.9 billion, down slightly from the fourth quarter and down 5.8% from March 31, 2021. David covered the highlights for the quarter from a lending perspective, including the growth in franchise finance, construction and consumer lending. This activity was offset by net payoffs in our healthcare finance, small business lending which included PPP repayment as well as some prepayments and sales of seasoned loans, owner-occupied commercial real estate and public finance portfolios. Also contributing to the slight decrease in loan balances was the sale of $14 million of single tenant lease financing loans with a gross weighted average coupon of 3.51% that were sold at a gain of approximately $400,000. Moving on to deposits on Slide 5. Overall deposit balances were up modestly from the end of the fourth quarter and we continued to see improvement in the composition of our deposit base. During the quarter, non-maturity deposits increased by $136.6 million, due primarily to approximately $100 million in deposits with a contractual term of five years and a fixed rate of 1.15% pursuant to a new customer relationship. Additionally, as David discussed earlier, we generated $50 million of new banking-as-a-service deposits during the quarter at a cost of 20 basis points. CDs and brokered deposits continued their downward trend, decreasing $97.7 million or 7.7% as higher cost CD and brokered deposit maturities were either funded with on balance sheet liquidity or replaced with much lower deposit costs. In total, the cost of interest-bearing deposits declined by 3 basis points during the quarter. Turning to Slide 6 and 7. Net interest income for the quarter was $25.8 million, an increase of $2.3 million or 9.6% compared to the fourth quarter. On a fully taxable equivalent basis, net interest income was $27.1 million, up $2.2 million or 8.9% from the fourth quarter. The yield on interest-earning assets improved to 3.58% in the first quarter, up 24 basis points from 3.34% in the linked quarter due primarily to the recognition of $2.9 million of income from tax refund advance loans which contributed 30 basis points to the increase in average loan yields, partially offset by significantly lower loan fees. In addition, we experienced a 25 basis point increase in the yield on securities mostly related to a decrease in prepayment activity in the mortgage-backed securities portfolio. We recorded a net interest margin of 2.56% in the first quarter, an increase of 26 basis points from 2.3% in the fourth quarter. Fully taxable equivalent net interest margin also increased 26 basis points from 2.43% for the fourth quarter to 2.69% for the first quarter. As you can see on Slide 7, the 26 basis point improvement was driven primarily by a 21 basis point contribution from loans, mostly due to income from tax refund advance loans, partially offset by the impact of lower loan fees. In addition, we experienced higher yields in our security portfolio which provided a benefit of 3 basis points, as well as lower deposit costs which provided a further benefit of 2 basis points. Excluding the income from the tax refund advance loans, fully taxable equivalent net interest margin was 2.41% which was a 2 basis point decline from the prior quarter but was on the higher end of our forecast. As a reminder, we received a fairly high amount of prepayment fees last quarter which translated into the strong net interest margin expansion we saw in the fourth quarter. Looking ahead for the remainder of this year, we expect our yield on interest-earning assets in the second quarter to revert closer to our results in the fourth quarter of 2021 but increase steadily as we deploy on balance sheet liquidity into commercial and consumer loan growth. In terms of deposits, we expect deposit cost to remain relatively stable for most of 2022. Given the significant on balance sheet liquidity across the industry, we don't believe increases in market interest rates will have a significant impact on our deposit pricing in the near term. We will also be bringing approximately $300 million of low-cost deposits onto the balance sheet following the close of the First Century Bancorp acquisition. Furthermore, with regard to the new banking-as-a-service relationship that provided $50 million in deposits, we expect that balance to grow and be in the range of $150 million by year end. And we continue to explore additional deposit opportunities through the banking-as-a-service platform. Turning to noninterest income on Slide 8. Noninterest income for the quarter was $6.8 million, down from $7.7 million in the fourth quarter. The decrease was a result of lower revenues from mortgage banking activities and a decrease in gain on sale of loans. Mortgage banking revenue totaled $1.9 million for the quarter, down $900,000 from the prior quarter due to a decrease in interest rate locks, sold loan volume and margins. Gain on sale of loans totaled $3.8 million for the quarter, up $300,000 from the fourth quarter and included $3.5 million of gains on the sale of SBA loans as well as the gain on the sale of single tenant lease financing loans mentioned earlier. We are revising our outlook for mortgage revenue for the remainder of the year given the rapid rise in mortgage rates and the ongoing limited supply of new and existing homes for sale across most major markets. We now expect mortgage revenue to be in the range of $8 million to $9 million for the full year 2022. With regard to SBA gain on sale revenue, we continue to forecast that to be in the range of $13.5 million to $14.5 million for the year. Moving to Slide 9. Noninterest expense for the first quarter was $18.8 million. The $1.8 million increase from the fourth quarter was due primarily to higher loan expenses, consulting and professional fees, premises and equipment and other expense, partially offset by a decrease in salaries and employee benefits. The increase in loan expenses was driven primarily by the servicing fees related to the tax refund advance loans that I mentioned earlier which totaled $900,000. The increase in consulting and professional fees was due primarily to $875,000 of nonrecurring consulting fees and $170,000 of acquisition-related expenses, partially offset by lower third-party loan review fees. The increase in premises and equipment is primarily related to costs associated with our new corporate headquarters, partially offset by the $475,000 IT termination fee incurred in the fourth quarter. Salaries and employee benefits expense came in lower than expected due mainly to lower incentive compensation in the small business lending and mortgage banking divisions and lower medical claims expense, partially offset by higher employee benefit costs due to annual resets. Now, let's turn to asset quality on Slide 10. As David mentioned earlier, credit quality was strong again during the quarter as nonperforming loans and nonperforming asset ratios continued to decline. Our provision for loan losses and net charge offs were both relatively modest on a reported basis but were also impacted by tax refund advance lending. Net charge offs of $381,000 were recognized during the first quarter, resulting in net charge offs to average loans of approximately 5 basis points. Excluding $1.5 million of net charge offs related to tax refund advance loans, net recoveries of $1.1 million were recognized during the first quarter, resulting in net recoveries to average loans of 16 basis points. The provision for loan losses in the first quarter was $791,000 compared to a benefit of $238,000 for the fourth quarter. The linked quarter change was driven by the provision related to tax refund advance loans which totaled $1.8 million and to a lesser extent adjustments to qualitative factors that increased the overall allowance as a percentage of loans. This was partially offset by the $1.2 million recovery that David mentioned earlier. Excluding the provision related to tax refund advance loans, the company recognized a benefit of $1.1 million for the first quarter. The allowance for loan losses as a percentage of total loans was 98 basis points at the end of the first quarter which represents a 2 basis point increase from the fourth quarter. With respect to capital, as shown on Slide 11, our overall capital levels remained solid at both the company and the bank. Our tangible common equity to tangible assets ratio decreased modestly to 8.77%, down 16 basis points from the fourth quarter. This was due primarily to an increase in accumulated other comprehensive loss resulting from a decline in the value of the available-for-sale securities portfolio arising from the rapid rise in interest rates during the quarter as well as stock repurchase activity. This was partially offset by the net income earned as well as an increase in the fair value of interest rate swaps classified as cash flow hedges. As a result, tangible book value per share decreased slightly to $38.21, down from $38.51 in the fourth quarter which was approximately 10% higher than one year ago. During the first quarter, we repurchased 103,700 shares of our common stock at an average price of $49.35 per share as part of our authorized stock repurchase program. Including shares repurchased in the fourth quarter of 2021, we have repurchased 203,703 shares at an average price of $46.90 per share through March 31. Furthermore, so far in the second quarter, we have purchased an additional 43,628 shares at an average price of $41.63 per share. In total, we have repurchased $11,400,000 of stock under the total authorization of $30 million. And turning to Slide 12; we feel we are much better positioned for a rising rate environment than we were at the beginning of the last rate tightening cycle. Over the last several quarters, we have improved our deposit composition with a larger percentage of non-maturity deposits which we believe will only get better as our fintech and banking-as-a-service initiatives grow. We've also increased our focus on higher yielding variable rate and short-duration loans, notably through both SBA and construction lending. Furthermore, while mortgage revenue is expected to pull back from the historic highs we have seen over the last few years, our investment in SBA lending has added greater diversity to noninterest income which we expect will be further diversified as we onboard fintechs and banking-as-a-service partnerships, providing stability regardless of the interest rate environment. Overall, we had another solid 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.

Our first question today comes from Brett Rabatin of Hovde Group. Your line is open. Please go ahead.

Hey guys, good morning. I wanted to first ask if you could provide some detail on fintech relationships from here on the lending side. I know it's still early but I think one of the questions people have is you're obviously having initiatives to grow loans at a faster pace but you're still having payoffs affect the net balances. Can you give us some color on what we might expect in the back half of the year from fintech and other initiatives from a loan growth perspective? And any color on potential payoffs would be helpful in the three portfolios that are obviously having some atrophy.

First, I’ll start with the payoff aspect. The healthcare finance sector is expected to continue its consistent paydown, maintaining a similar level of payoffs. However, as long rates rise, we may reach a point where some borrowers lose refinancing incentives, even though the portfolio will still decrease. In the single tenant segment, while balances dipped slightly, the decrease primarily resulted from a loan sale we executed during the quarter. New funded originations in single tenant showed strong performance, despite some ongoing elevated prepayment activity. This quarter, we observed that many existing and new borrowers were actively engaging and trying to take advantage of rate fluctuations. Some potential borrowers dropped out of the process while others hurried to secure their rates. This led to some level of reshuffling and higher prepayment activity, but origination levels remained robust. Looking ahead, with long-term rates increasing, our pricing will align more favorably, and we expect to see growth in both originations and balances throughout the rest of the year. As mentioned before regarding ApplePie, we are optimistic about achieving $150 million in originations this year. After accounting for regular portfolio amortization, we project ending balances to be around $240 million, though that figure could rise given the popularity of the growth-oriented brands ApplePie is collaborating with. Even in the short time since the quarter ended, we have observed strong origination activity. Overall, we anticipate growth in both our consumer and commercial loan portfolios, and we have exciting strategic partnerships that present significant potential for growth beyond these projections.

Brett, we can't really pitch out names to you of the fintech opportunities we're taking a look at it but it's a nice mix. There's some consumer-oriented products. There's commercial products. Not much in the line of real estate opportunities but it's a nice mix. And as Ken said, some of those are potentially hundreds of millions of dollars in opportunity on an annualized basis. So we've got a lot of good activity in the hopper. And don't forget on the other side. Right now, it's still much more conducive for us to sell the SBA portfolio in the secondary market due to the fees we're receiving. But as interest rates continue to climb, there's potential. As the Fed does everything that they're talking about by year-end, it would be more conducive for us to hang on to those on the balance sheet versus selling. So we're real confident we're going to get to the year-end forecasted targets on the loan side. And as Ken said, it's going to be a whole combination of a lot of different moving parts. But we've got great confidence in seeing good solid asset growth over the course of the year.

Okay, that's helpful. And then I wanted to talk about the margin. Obviously, a lot of moving parts this quarter and in 2Q as well. It would seem like with the First Century transaction and the improving deposit funding mix that the margin could actually stay at the present level versus kind of the core 240-ish level this quarter. Do you guys have any thoughts you could share on your margin expectations for 2Q? And how much more you think CDs could run off? And what sort of the mix looks like going forward?

Yes. If we set aside the First Century transaction for a moment and focus on the existing First Internet franchise, we have substantial cash on hand and rising interest rates. By the fourth quarter, our tax business margin was $2.41, which is at the higher end of our expectations. Looking ahead, as we deploy assets and take advantage of opportunities on the liability side, I anticipate a margin expansion of about 20 to 30 basis points, with a midpoint of 25 basis points by the fourth quarter. On the liability side, we have some flexibility and a limited number of traditional maturing brokered CDs, with a smaller amount maturing soon. Although it's not a significant amount, it is costly. Later in the year, we will see more of this, and there is also some flexibility with the Federal Home Loan Bank side. With rising rates, the prepayment penalties are less severe than they were several months ago. These higher costs affect margins in two ways: they lower our expense and decrease our earning asset balance. Additionally, in the next year, about two-thirds of our remaining CD portfolio will mature, many of which were short-term, so we expect lower costs on them. With the shift in our deposit mix towards more banking-as-a-service deposits and continued growth in small businesses, money markets, and checking accounts, we are optimistic about increasing our net interest margin throughout the year.

Okay. Great. I appreciate all the color.

Thanks, Brett.

Our next question today comes from Michael Perito of KBW. Please go ahead.

Hey, good afternoon, everyone. I want to begin by discussing the $50 million banking-as-a-service deposit relationship that you mentioned. I have a couple of questions regarding that. First, was this relationship established through the Synctera partnership, or was it sourced independently? Second, could you clarify whether the capacity to grow to $150 million is by year-end and if that is based solely on this one relationship or if it includes the potential for adding more relationships over time?

No, Mike, that's just one relationship. We had $50 million at the end of the quarter and we anticipate that this relationship will grow to $150 million on its own. As David mentioned, we have many opportunities under review that could provide additional deposit options beyond this.

And this is a relationship, Mike, that we brought on by ourselves. It's not through Synctera or outside. It's a relationship we developed.

Got it. And what was the time frame on that $150 million, Ken? Did you mention that? Or is it just over the immediate...

No, it will be spread evenly over the remaining course of the year.

And could potentially expand a minimum of $150 million by year-end coming in. As Ken said, an equal amount at the beginning of the month between now and end of year.

And is it fair to say that the deposit relationship pipeline, is that additive to kind of the margin story, Ken, that you just laid out for legacy First Internet here? Or was that taken into account in some of the budgeting that you guys have done around the margin in the current environment?

No, we are considering that as we think about remixing the deposit composition.

Mike, I want you to consider that there could be another 50 basis points increase in the bed. Last time, overnight funding rose by 25 basis points. If that happens again, it will shift from 33 basis points to 83. We haven’t felt any need to adjust our money market accounts. There are numerous articles indicating that banks still have plenty of cash. If we see a 50 basis point difference and we don't feel compelled to adjust our money market funds, it will mark the first time in the bank's history that we'll be paying 50 basis points on money market accounts and yielding 83 on overnight deposits. This is an experience we haven't encountered in 23 years. While this is not currently accounted for, it illustrates the various factors at play and their potential impact on us. We're in a strong cash position. Excluding the First Century funds, we still have over $300 million on our balance sheet in cash. Unless something unusual occurs in the market—which it seems banks have learned from in the past—we have a chance to make progress. I believe Ken's estimate on the margin increase by year-end may be slightly conservative, but there are many options available to us in the coming months.

That's helpful. I have two more quick questions. First, regarding the operating expenses. Ken, as we look towards the latter half of the year when the deal is expected to close and the cost savings are accounted for, considering some inflation, do you believe a blended number in the mid-20s is still a likely outcome? Or do you think there might be upward pressure on that due to inflationary factors?

I believe the initial assumption is sound. There may be some inflationary factors, but what might influence that more is our efforts in sourcing new partnerships and integrating new technologies. While there could be upward pressure due to these new opportunities requiring fresh investments, it's challenging to predict those impacts at this moment. So, I think your initial assumption stands.

Still valid.

Okay. Lastly, regarding the First Century deal, the expectations for the rate environment have changed significantly since the announcement. They had their tax product lending revenues in the first quarter, which you did not capture because the deal had not closed. I'm curious whether the balance sheet impact or any of the evaluations might differ from what was initially communicated and if we should be aware of that.

I would say not really. When you consider traditional mergers and acquisitions, one of the main impacts will be on the loan portfolio. However, they aren't primarily the lender. I believe the portfolio is down to about $20 million and is priced quite well, so I don't foresee any significant changes there. We will likely make some adjustments to the securities portfolio, as it has suffered like many others. Regarding deposits, there may be some modifications to the rate mark. However, I don't think these factors will have a significant impact on the overall purchase accounting adjustments.

Great. Thank you guys for taking my questions.

Appreciate it. Thank you, Mike.

Our next question today comes from Nathan Race of Piper Sandler. Please go ahead, Nathan.

Hi guys, good afternoon. A clarifying question just to Mike's last one on the impact from FCB just from a tangible book value perspective and goodwill. Just given that the deal hasn't closed yet and FCB recognized a good chunk of revenue and earnings in the first quarter from their tax anticipation lending segment. Is it fair to assume that the goodwill number should be lower because the retained earnings and equity components will be higher for them once the deal ultimately closes out?

They did book all the revenue and had a good tax season. However, when considering GAAP and purchase accounting, their securities portfolio has been negatively impacted like everyone else's. Overall, we're likely in the same position as before, with slightly higher tax revenues but offset by a larger negative mark on the securities portfolio. Thus, we won't see a meaningful change from our initial assumptions.

We're still modeling going forward at the same cost that it was.

Understood. Makes sense. And then just maybe thinking a little further out about the impact from FCB from an income statement perspective. I would be curious to get some color on kind of how their volumes trend in the first quarter. I appreciate all the details in the deck in terms of the income statement impact from your kind of flow arrangement that you had with them here in the first quarter. When I look back at their call report data, it seems like the tax credit business in the first quarter has been anywhere between a $12 million to $9 million figure for these guys. Is that kind of a good starting point to think about kind of the revenue impact for you guys in the first quarter of next year?

It's probably a solid starting point. In our conversations about this business, they've experienced a noticeable increase due to last year's activities, which aligns more closely with 2019. One key point we've consistently mentioned is that the merger opens up opportunities due to the larger balance sheet. So, I believe it's a conservative baseline to use. However, both we and they are actively exploring new partners to bring on board. For those familiar with this business, there's also an untapped revenue stream related to payments that First Century hasn't leveraged before. We're planning to offer these services to their partners as well. Overall, we believe that combining our strengths with First Century presents significant opportunities to grow this business.

Understood. That's helpful. And then maybe just one last one. And going back to Brett's question earlier, just trying to kind of fine-tune the loan growth outlook for this year. I think last quarter, you guys were thinking low double digits. Obviously, there's some moving pieces across a number of portfolios. Is it more kind of maybe a high single-digit trajectory for this year based on kind of what was described earlier? Or how you guys just really think about overall loan growth for this year today?

No, I think we still feel good about the low double-digit number. Even though prepayment activity was down relative to the fourth quarter, it still remained fairly strong. However, we will probably see elevated prepayment activity waning. We are very pleased with the originations on the consumer side and the returns on the horse trailers. Additionally, as we discuss ApplePie and single tenant properties, the outlook is promising. Funded balances in construction are expected to increase substantially over the course of the year. Therefore, we remain confident in achieving double-digit loan growth by the end of the year, not factoring in any additional opportunities mentioned earlier.

If I could just ask one last question about FCB. Does the delayed timing with closing that acquisition change the timeline for when you plan to transfer a significant portion of the core deposits, which is essential for the transaction in terms of adjusting the balance sheet to at least a neutral position with the asset sensitive outlook going forward?

Let me address that. Ken can provide more specifics. The key takeaway is that, as Ken mentioned earlier, the first quarter is crucial for First Century due to tax revenue and historical income. The last nine months of the year have been mostly revenue neutral, but we hope that will change and that they will actually generate a profit during this period. Regardless, we are moving forward with or without that number. We are confident we will achieve the $4.72 forecast for this year. As we've discussed, there are many moving pieces that affect our projections. We continuously adjust our models based on current news. As long as World War III doesn't start, we believe we are solid on the $4.72 target. The timing for First Century is somewhat irrelevant, and we feel we are well-positioned for 2022. Much of the market movement, excluding mortgages, is favoring us, and we anticipate clarity as rates stabilize. If 30-year first mortgages exceed 6%, the mortgage market will decline rapidly. However, we're optimistic, as Ken mentioned, that we have other components to mitigate any declines in mortgage revenue. We remain committed to the $4.72 target, which we consider very reliable. For the 2023 projections, unless there are major global issues, we expect to be in strong shape as well. We are very excited about the developments within the organization and the new opportunities that arise daily.

I share that excitement as well, David. I appreciate all the color, guys. Thank you.

We appreciate it.

Thank you. We have a question from John Rodis of Janney Montgomery Scott. Please go ahead.

Hey, good afternoon, everyone. I hope you’re all doing well. David, regarding your comment about the $4.72 for this year, does that include the $1.14 from the first quarter, or does it reflect the operating number of $1.22?

That actually refers back to your forecast of $1.04, which we haven't changed. So we have second quarter at $1.14, third quarter at $1.26, and fourth quarter at $1.28. We're just calculating the totals and haven't adjusted for the actual performance yet. These figures could vary as mortgage rates may decline, and the SBA could impact other elements. I believe $1.14 for the second quarter is realistic, but it could potentially be higher. However, I can assure you that when we combine the four quarters, the total of $4.72 is secure. We want to clarify this with you, John, but with the fluctuations in interest rates, everything is changing rapidly. Ken and his team are adjusting estimates daily. We're confident that if we take $1.14 and project it into the first quarter, we will reach the $4.72.

Got you, David. That's fine. I understand a lot of moving parts. Ken, just back to expenses real quick. I think last quarter you talked about mid-teens growth on the legacy First Internet without FCB. Is that still what you're thinking, kind of 15% to 17% I think you said?

Yes, that's still good. The changes might relate to mortgages because if mortgage rates continue to decline, we could see reduced headcount costs, lower salaries and employee benefits due to diminished commissions, and likely some decreased variable expenses. However, I believe the initial assumption remains valid.

Okay. Thank you, guys.

Appreciate it. Thanks, John.

And our next question today comes from George Sutton, Craig-Hallum. Please proceed.

Thank you. David, you mentioned last quarter three to four potential partnerships. You didn't really give a number this quarter but you did mention you're being very selective. And I'm just curious if you could walk through the competitive landscape as you see it. How many of these are opting for other opportunities? How many of these are you opting out of? Just curious from that perspective.

In the past six months, specifically the fourth and first quarters, we've evaluated around a dozen deals. Currently, we have three that are progressing quickly. We decided not to proceed with the other nine but did not lose any due to competition. Some opportunities require our Synctera relationship, while others can be pursued independently. Our focus has been on a careful selection process rather than market conditions. I can tell you that we've been receiving numerous inquiries daily, but many are not substantial enough for us to engage. We have a dedicated team of four individuals who focus solely on fintech opportunities. They joined us recently, and we established a review committee in the last six months, which we didn’t have before. This team gets regular phone calls about potential opportunities. Out of the twelve we closely examined, three were selected to move forward, while three remain under consideration. The remaining offers were not pursued.

That is super detail. One other thing. You mentioned you were making further investments in your digital capabilities. Could you just give us a sense of what you mean by that?

Yes, we are developing a new front end for our Internet banking that is primarily aimed at small businesses. It is still a bit unpolished, with new account openings taking about 15 to 20 minutes due to a lack of smooth document integration and no automated approval process. We are currently revamping this and testing it, aiming to launch it before the end of the quarter. We have introduced new accounting controls and improved bill payment features. There is also a robust front-end API that will allow integration with third-party services, enabling small business owners to manage all their business operations through their first ID account, including payroll and accounting. Additionally, we plan to add insurance products and various tools. We are excited about the growth of our SBA business; in 2021, we were recognized as having the best small business account in America, and in 2022, we earned the title for the best savings account program for small businesses. We believe we can make significant advancements in this market. Traditional commercial lenders have been hesitant to issue smaller loans, often citing that they are not profitable; however, we believe we are close to developing a system that can automate many processes and cater to small businesses through smaller loans and credit card services, moving into a space where banks have typically been reluctant. There is a lot happening on the software side, though it's less chaotic than it was 20 years ago. Most of our activity is with third-party solutions, and we are actively integrating the best options available into our system. It is an exciting time for us.

Great. Ken mentioned RVs, horse trailers and ApplePie driving your loan volume. I'd say God bless America.

Thank you. We have no further questions in the queue. So I will hand the call back over to David Becker for closing remarks.

Well, everyone, we want to thank you for joining us today. As you can tell by our comments, we're off to a great start in '22, looking for even a better finish. We hope you have a great day. Looking forward to speaking with all of you again soon. Appreciate it. Thank you.

This concludes today's call. Thank you for joining. You can now disconnect your lines.