Earnings Call
First Internet Bancorp (INBK)
Earnings Call Transcript - INBK Q4 2022
Operator, Operator
Good day, everyone, and welcome to the First Internet Bancorp Earnings Conference Call for the Fourth Quarter and Full Year 2022. Please note that today's event is being recorded. I would now like to turn the conference over to Nick Talboys from Financial Profiles, Inc. Please go ahead, Mr. Talboys.
Nick Talboys, Financial Profiles, Inc.
Thank you, Hanna. 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 is 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 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.
David Becker, CEO
Thank you, Nick. Good afternoon, everyone. And thanks for joining us today as we discuss our fourth quarter and full year 2022 results. For the fourth quarter 2022, we reported net income of $6.4 million in earnings per share of $0.68. For the full year in 2022, we reported net income and diluted earnings per share of $35.5 million and $3.70 respectively, compared to $48.1 million and $4.82 respectively for the 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 7.5% compared to the third quarter and 21% compared to one year ago. During the quarter, we posted strong growth across the board led by our commercial lending areas where balances were up $184 million or 7.3%. For the year, they were up $350 million or 15%. We saw growth in portfolios for construction, single tenant leasing, small business lending, and commercial and industrial. Our 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 mortgages and RVs leading the way. We achieved this exceptional loan growth without sacrificing our proven commitment to credit quality. The provision for loan losses in the fourth quarter was higher than in our prior quarters, primarily due to the strong loan growth as net charge-offs remained low, at about 3 basis points of average loan balances, and only $1.1 million throughout all of 2022. Again, only about 3 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. With the increase in interest rates throughout the year, we have been able to increase rates on loans, as new portfolio origination yields increased 84 basis points during the fourth quarter compared to the prior quarter, resulting in a total portfolio yield increasing 39 basis points quarter-over-quarter. However, intense competition for deposits through the most rapid set of federal funds rate hikes in decades has also driven interest expense higher, pressuring 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 other high-yielding portfolios such as franchise finance and consumer lending. 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 expectations, 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 show strong demand, the combination of housing prices, housing supply, economic uncertainty, and interest rates have caused mortgage applications nationally to plunge to the lowest level in 26 years. Due to the steep decline in mortgage volume and the unfavorable 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 local traditional consumer mortgage and construction-to-permanent business. This was a difficult but ultimately necessary decision, given the economic outlook we have reviewed which points to prolonged sluggishness across mortgage banking. Excluding one-time costs, we estimate we will deliver approximately $2.2 million in higher pre-tax income in 2023, and over a longer horizon remove an element of volatility from our earnings and make us 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, along with 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 launched our first program through that partnership with Ramp, the corporate card and spend management fintech. We are providing payment services to Ramp's bill payment offering for about 30% of their customers currently and are now processing between $8 million to $10 million a day in daily volume. We also have two other fintechs, a payroll provider and a neobank in the pilot phase, and we have four more fintechs that are approaching the pilot phase, and one in due diligence. We are exploring new opportunities with Increase on a weekly basis. We also expect our other partnerships with a platform Treasury Prime to be fully implemented in the first quarter of '23, with the first fintech partner to be onboarded 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 Prime. 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 champions teamwork and innovation. That is why we were named one of the best banks to work for by American Banker for the ninth consecutive year, and that's why I'm confident in our collective ability to identify compelling new opportunities that will further diversify our business lines, improve our funding profile, and elevate our status as a 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.
Ken Lovik, CFO
Thanks, David. The first thing I will 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 and increase annualized pre-tax income by approximately $2.7 million. We expect to realize about 80% of the annualized improvement in 2023 and 100% in subsequent years. Additionally, we estimate that we will incur a 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 impact of this decision will be felt over four to five quarters to exit a line of business that is otherwise forecast to remain subdued for the next three years. Now turning to Slide 7, 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. Our fourth-quarter funded portfolio origination yields were up 84 basis points from the third quarter and up 118 basis points year-over-year. We funded certain loans during the quarter that were in the pipeline before the September Fed rate increase and were 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, and with our focus on higher yielding asset classes, new production is coming on with yields north of 7%, and in many cases much higher, which sets the stage for higher average loan yields in 2023 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 continue 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, overall deposit balances were up $249 million, or 7.8% from the end of the third quarter. 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 deposits from our commercial construction borrowers. As we previewed in the third-quarter earnings call, we expected and we experienced a significant decline in brokered 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, which 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 broker deposits increased by $166 million as we accessed the wholesale market for longer duration funding to take advantage of the inverted yield curve and help to offset the impact of 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, continues to present challenges to grow non-maturity deposits. In both the digital bank and small business markets, we saw betas in the fourth quarter range from 80% to 100%. With the 425 basis point total increase in the Fed funds rate since March 2022, including 125 basis points in the fourth quarter. Our current pricing on money market products results in a 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 9 and 10, net interest income for the quarter was $21.7 million, and $23.1 million on a fully taxable equivalent basis, down 9.6% and 8.7% respectively from the third quarter. Our yield on average interest-earning assets increased to 4.40% from 3.91% 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 a 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 costs, 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. Fully taxable equivalent net interest margin was also down 31 basis points to 2.22% 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 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 to increase 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 costs to increase. The pace of increases will depend heavily on price competition and the magnitude of Fed rate increases, as well as how long it maintains the 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 2.15% 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, noninterest income for the quarter was $5.8 million, up $1.5 million from the third quarter. Gain on sale of loans totaled $2.9 million for the quarter, up slightly over the third quarter and consisting entirely of gains on sales of U.S. Small Business Administration 7A guaranteed loans. Our SBA team closed out the year well, as 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 from certain SBIC and venture capital fund investments. Moving to Slide 12, noninterest expense for the fourth quarter was $18.5 million, up $500,000 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 remain low. Net charge-offs of $238,000 were recognized during the fourth quarter, resulting in net charge-offs to average loans of 3 basis points as David referenced earlier. Total delinquencies of 30 days or more past due were 17 basis points of total loans as of December 31, compared to 6 basis points at September 30. When delinquencies are this low, it takes just one loan to make a difference. In this case, we had to delay converting a C&I construction loan to a 504 loan for its permanent mortgage when it was determined there was a mechanic's 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 $900,000 in the third quarter. As David commented earlier, 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 6.3%, to $31.7 million at quarter end, while the ratio of the allowance to total loans decreased by 1 basis point to 0.91%. While growth in the allowance was generally in line with overall loan growth, the 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 CECL 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, our overall capital levels at both the company and the bank remain strong. While total shareholders' equity increased in terms of dollar amount, our tangible common equity ratio declined to 7.94% as the combination of balance sheet growth and share repurchases offset the effect of net income earned during the quarter and the decrease in accumulated other comprehensive loss. During the fourth quarter, we repurchased 284,286 shares of our common stock at an average price of $25.16 per share as part of our authorized stock repurchase program. For the full year 2022, we repurchased just over 800,000 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 3.7% over the third quarter. 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 plan to exit the mortgage business, there will be some noise in the first quarter's results. But going forward from there, the impact should be accretive to earnings in the range of $0.25 to $0.26 on an annualized basis, so around $0.20 for 2023. The largest impact of exiting mortgage will be in non-interest expense. When excluding the one-time costs of $3.3 million, we expect total non-interest expense for 2023 to increase in the range of 2.5% to 3.5% compared to 2022's full year results, which is much lower than the previous guidance we provided on expense growth for the year. On the flip side, non-interest income will be down from the original forecast in the range of a 15% decline from 2022's total non-interest 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 quarter's results and remain stable from the first quarter through the third quarter of 2023 as earning asset growth and higher loan yields help to offset the increased deposit costs. If deposit costs stabilize in the fourth quarter as the forward curve suggests, 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 cost, 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 deposit 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 $0.92 to $0.98. 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 follow the market's expectations as opposed to the Fed dot plot, SBA gain and sale premiums reverting to historical averages as rates and prepayment speeds decline, and higher than expected non-interest income from banking as a service activities. To wrap up, the next several quarters may continue to provide challenges from an earnings perspective, but we're 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, which would have a meaningful and positive impact on net income and earnings per share. With that, I'll turn it back to the operator so we can take your questions.
Operator, Operator
The first question is from Brett Rabatin with Hovde Group.
Brett Rabatin, Analyst
Wanted to start with the buyback and wonder firstly, I think you had the $25 million authorization, how much is left and then how much or how active you think you might be this year, just given the opportunity with the stock where it is presently? Thanks.
David Becker, CEO
Brett, we're in the market, and have been since the first of the year, buying on average about 4,000 shares a day and intend to continue that.
Brett Rabatin, Analyst
Would you have an idea, David, of how much you might purchase this year or retargeted capital ratio or how to think about the volume you might do this year?
David Becker, CEO
Well, targeted capital ratio, we want to stay pretty close to that 8% level. So as Ken said, there's little noise here in the first quarter. So we'll definitely be in that $4,000 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 that out of the $25 million, by year end getting to $20 million in buybacks. But the balancing act, as you said, is between TCE and share buyback too.
Brett Rabatin, Analyst
And then you've made some progress on the fintech front, and just wanted to make sure I understood the implications of the two that you've got and then Treasury Prime, as well as the two fintechs in the pilot phase and the four others that could be soon. Can you give us any color on expectations for various metrics? Any thoughts on what those fintechs might contribute or how to think about that this year?
David Becker, CEO
Well, the one that we discussed that came live back in November, Ramp, which is the National Credit Card program, we're doing their bill payment services. Between November and now, we've converted about 30% of their customers onto our side. So that $10 million a day we're clearing in payments should go up to $30 million plus a day in the next few months. That deposit balance offset from them is going to triple down. The same way we have a clearing account. The two that are in the pilot phase, one is a small business payroll system, and the other is a Neobank that's launching and is in pilot phase with kind of friends and family side of things that we hope to go live with 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 and income somewhere from $750,000 to $1 million in income from the fintech side, along with a couple of hundred million in pretty low-cost deposits to kick it off. The Neobank could be a home run hit. It's backed up by some phenomenally strong VCs on the West Coast. That one could be an out-of-the-park play, but, like you say, it's stable and running, and we're really looking forward with Treasury Prime. They got a couple of good candidates for us, and we're doing the final phase of testing on, I think, the credit card portion of their interface, and we'll be live with them hopefully in the second quarter with one or two opportunities as well.
Brett Rabatin, Analyst
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 100% and how much growth would you expect from here in the construction portfolio?
David Becker, CEO
We won't even be close to the 100% threshold because I remember that's done at the bank level, Brett. I mean, we have well over half a billion in capital at the bank. But 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 good part about the construction piece is that, historically, we've maintained balances in the $50 million-ish range revolving around residential land development here in our home market. As we build out construction, I mean, we're really starting from a low base. So, even if we hit our targets for next year, that construction portfolio is still under 10% of the total loan portfolio and well under capital limits.
George Sutton, Analyst
I just wondered if you could walk through the decision to exit the mortgage business versus just pulling it back to a smaller level and being able to reenter the market when that seemed to be the right thing to do?
David Becker, CEO
George, we probably spent the last 60 days doing all kinds of configurations of cutting back on sales, marketing efforts, and staffing, trying to hold a shell together. There was just no way to get there, we couldn't even get it close to breakeven. So staring at a solid $6 million potentially plus in losses over the next three years with no clear idea about recovery. I mean, that's as far forecasting out as Annie and Jenny have been doing; they don't even know if mortgages will rebound by 2026. Consumers are getting used to a 6% interest rate, assuming that's all they can get. The market fell off so dramatically that we couldn't make sense out of taking that kind of a loss for that extended period. It's one of those products where you're damned if you do, damned if you don't. It was, 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, and I've loved working with them for some of them now almost 16 years. It’s tough, it is really tough. And as you know, the national market is just blowing up. So, there's not a lot of great opportunities staring them in the face in the industry they've been a part of for years, and mortgage has been cyclical. I've been around it now for close to 25 years, and I've seen that three or four cycles, but this is by far the worst that I've seen in my lifetime, and probably the worst we've seen in the country in 40 to 50 years.
George Sutton, Analyst
I appreciate that perspective. One of the things I can mention, you're doing this active buyback, which we love to see, but you mentioned you're doing it in part because you're well below what you find to be your franchise value. I just wanted to see if we could get a picture into what you believe your franchise value to be?
David Becker, CEO
From my perspective, franchise value should be book value, and that's almost on $40, which will be $40 by the end of the year. When we're below that, I think it's a 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 in a full-blown recession, and the walls are coming down. But based on everything we see and know of what we're doing today, we're comfortable to keep buying back shares when we're below $40 as we think it's a great use of capital.
Nathan Race, Analyst
Apologize I paused a little late. As you're going through, can your comments around the margin? Look for the first half of the year? We get the grades twice. We know and then, I was worried.
David Becker, CEO
Hey, Nat, you're cutting out.
Nathan Race, Analyst
Yes. Again, I apologize. I was just wondering. Can you hear me better?
Operator, Operator
The next question is from the line of John Rodis with Janney.
John Rodis, Analyst
Ken, you said I think you said in your discussion, your comments about loan growth, you said loan growth for '23 would be less than '22. What loans were up? I think, by my math 20%, 21% in '22? I mean, can you narrow down the growth a little bit more? Are we talking 10% to 12%? Are we talking 15%? Or what are we sort of talking about?
Ken Lovik, CFO
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, as we talked about focusing on remixing the composition of the loan book. I mean, we still have great opportunities in construction, SBA, franchise, and consumer to put on higher rate and variable rate loans. But a lot of that financing is going to be done through amortization and cash flows from other parts of the portfolio. Some of our lending areas right now are so competitive that the rates are very low, which just don't work for us. So, we expect to see roughly $250 million of lower balances year over year. So, again, a lot of that focus on the higher yielding asset class is going to be a reshuffling of the loan book, if you will.
David Becker, CEO
One of the other issues out there, John, is on the consumer lending side. We had tremendous growth in RV and horse trailers last year. A lot of that was pent-up demand because of the pandemic and the demand for those units. The 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 '22 versus fourth quarter '21 sales are down 26%, about close to 30%. So that's going to drop down tremendously over the course of the next year. We were up over $200 million last year compared to '21. That will follow-up. So as Ken said, with the repayment of existing loans, the healthcare portfolio, and total wind down and repayment status that 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.
John Rodis, Analyst
And then, the securities portfolio was down I think 10%, 12% this year. Would you expect sort of a similar amount next year just to fund that loan growth too?
Ken Lovik, CFO
Well, I mean, we'll probably got to keep it somewhat flattish or better, 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'll tell you right now, we might be better off just keeping it in cash in fed funds than buying mortgage backs. I would expect to see higher cash balances at quarter end than what you've seen here, maybe in the past couple of quarters.
John Rodis, Analyst
And then Ken, just a couple of other quick notes. On your expense guidance, you set up 2.5% to 3.5%, excluding the $3.3 million. Is that based on total expenses for the year, so $73 million?
Ken Lovik, CFO
Yes.
John Rodis, Analyst
I'm sorry, just I was trying to write while you were talking, but on spread and net interest income? I think you said the first quarter is sort of flat with the fourth quarter and then stable for the first three quarters. Is that right?
David Becker, CEO
Yes.
John Rodis, Analyst
And then I guess you would expect to see some ramp in the fourth quarter of what you said?
David Becker, CEO
Yes, that's what we said. We think as the Fed hits the terminal rate, deposit costs will stabilize and net interest income will begin to start growing again in the fourth quarter.
Operator, Operator
The next question is from the line of Tim Switzer with KBW. Please proceed.
Unidentified Analyst, Analyst
I'm on for a clarifying question first real quick. You mentioned $250 million lower balances year-over-year, and like some of the portfolios are paying off. Was that in reference to the residential mortgage portfolio only or all of the…
David Becker, CEO
No, that probably spread among three or four different portfolios. Resi is going to be down. We talked about healthcare finance, and that's basically, we're not originating anything new there. I would expect to see balance declines in public finance and single-tenant lease financing as well, just simply because the competition in those markets right now has price floors that we might win a deal every now and then, but we're not chasing; we're not doing deals below 7%. When we can't get that, it's tough. So you'd expect to see some decline in those portfolios.
Unidentified Analyst, Analyst
Okay, yes, just making sure that wasn't just the residential mortgage. That seems a little, that's like at the end of the year. So, what you're talking about $250 million?
David Becker, CEO
Yes, I was talking about year-over-year.
Unidentified Analyst, Analyst
And then, with all the actions, you guys have taken the initiatives you have going on with the banking as a service program, as we look out over the next few years, what is like a realistic mix of revenue? If you have a target or anything, kind of like spreading, Converse fee income, trying to get an idea of what that could look like over the long term?
David Becker, CEO
Well, Tim, if I had a crystal ball that could do that, I could make a small fortune on that prediction. The banking as a service world was the darling of everybody 12, 18 months ago; now everyone is questioning whether they should be in it. There is a tremendous opportunity with partnerships with great organizations like Ramp that we're working with on the bill payments. There are a lot of banks and fintechs getting into trouble with the regulators because they're not doing the proper due diligence and overseeing compliance issues, which is one of the reasons we're a little slower to market than a lot of others; we wanted to make sure we had our house in order. So, we're very thoughtful and judicious. I've said several times on these calls that we're kissing lots of frogs to find the princess, and we think there are very good companies in the pipeline. The one I mentioned a minute ago, the Neobank, could potentially be the unicorn that just blows up generating deposits, fees, limiting income; there's just a ton of things that could come out of that. So, our projection might be somewhere between $500,000 to $1 million in revenue for 2023. That might be a little conservative with some of the things that are already signed, sealed, and delivered in the pipeline. We'll have a better handle on that as the year goes by, and we see how the market settles. There are some other institutions that might have to exit from some of their programs. We could be in a position to pick up some very well-established customers because they got into regulatory issues, and we could move forward. So we probably can't give much more guidance, that kind of $0.5 million to $1 million in revenue this year. As these come online and we get a handle on how they're going to grow, we'll be updating you on that quarterly.
Unidentified Analyst, Analyst
And if I could ask one more, maybe you need a crystal ball too. But what is a realistic expectation for how these banking as a service deposits can help on the funding side? Or like, I know, it's still a small part of your business right now. But what is sort of the cost range? Are these deposits coming on at and they price it fed funds minus something, or how should?
David Becker, CEO
I would tell you historically, a lot of the banking as a service funds were zero cost, but much like HOA dollars and $1,031, all these funds that historically have never cost an institution anything. These folks are getting smarter; the banking as a service companies and fintech companies all have to make a profit, and for them to survive and get VC money, they have to find a path to profitability. So were they were giving away deposits that didn’t have any value to them, they now know they do. I would say ours are somewhere between fed funds minus 50 and fed funds minus 75. Most of them are not above fed funds. So, it's not free money but I'd say generally speaking, the two accounts that Ken talked about are both free. If it's a settlement account, where we're just drawing funds for payments against them, those are still free. But if we get positive base from a Neobank, that’s probably going to be somewhere in the range of fed funds minus 50 and fed funds minus 75.
Operator, Operator
The next question is a follow-up from Nathan Race with Piper Sandler.
Nathan Race, Analyst
A lot of my questions have been asked and answered at this point, but just one to think about kind of the reserve trajectory, maybe on a percentage or absolute dollar basis after the CECL adjustment in the first quarter. I guess I'm just curious about if you get any major charge offs on the horizon, or how you guys are kind of thinking about the reserve trajectory over the course of 2023?
David Becker, CEO
Well, I guess the question on the horizon is no. We continue to try to stay on top of the portfolio and have all of our teams and credit administration looking at things closely given the uncertainty. That's why I kind of threw the number in, in with everything we released just so you guys out there would see that the reserve is going to go up, call it in the 98 basis point range or so, 98 – 99. I guess what I would also add to that, though, is most banks, especially banks our size don’t have 20% of their loan portfolio in public finance. We’ve never had a credit loss and 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, the coverage ratio is closer to 115 basis points. So I think even though, again, maybe credit losses, the unforeseen none of us have a crystal ball, maybe credit losses or net charge-offs tick up a little bit, but I think with the increase in where we're at with CECL plus factoring in what the coverage ratios are in our commercial lines and consumer lines, I think we feel pretty good about where the coverage is.
Operator, Operator
The next question is a follow-up from Brett Rabatin with Hovde Group.
Brett Rabatin, Analyst
I just wanted to follow up on a couple of 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 or the bucket of loans it's repricing in the first quarter? How you got to that 45 basis points? I guess just the first part of that.
David Becker, CEO
Well, I mean, it's a combination, Brett. We do have construction, I mean, if you figure that right now, the market's got a couple Fed increases in there, because you're talking about '23, correct?
Brett Rabatin, Analyst
Correct.
David Becker, CEO
Okay. Yes. I mean, between our construction portfolio which is virtually all variable, the SBA is virtually all variable. There's a component of C&I that's variable. And we also have pipelines in franchise finance that, again, that pipeline continues to remain strong. Those yields now are coming on high sevens, eights, and nines in some cases. And again, we're not really lending in certain other areas unless we can get really good pricing. So it’s a combination of all those factors that should continue to drive the overall portfolio yield higher.
Ken Lovik, CFO
The 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'll have a full 90-day quarter run on those balances, which we only had them for the last five to seven days of the fourth quarter. So that’s part of the increase.
Brett Rabatin, Analyst
And the same sort of topic on the funding side, the 60 to 65 basis points. When I look at the current rates, I see it looks like from a NMDA perspective, you're at 335, maybe retail and maybe 340-ish on the commercial for that, versus the 289 for the $1.4 billion average in the fourth quarter. Can you remind me how much of the money market is retail versus commercial? And then, those rates, I assume you're kind of thinking those rates have topped out on the money market, but any color on that would be helpful.
David Becker, CEO
Yes. The breakdown is roughly 1/3 commercial to 1/3 to 40% consumer, and the remainder is commercial. And we do have two tiers of pricing in there. We do have some that are, if your balance is above a certain amount you're getting a higher rate. But probably the biggest single bucket in there is small business and commercial money markets, and those the current rate on that is 280. I would say we, again, I know we got a Fed rate hike coming up in a week or expected, possibly another one. But as of late, the pace of increase has slowed down. I mean, we still run what I'll say pretty high betas through our model. But the pace of increases seemed to slow a bit. So I don’t think, obviously, we saw over 100 basis points of increase in the last quarter. Again, think about it; it was a 125 basis points of Fed increases in the fourth quarter, whereas, this could be a minimum of 50 to a maximum of 100, depending on your view on what the Fed is going to do. So, by virtue of what the Fed did is expected to do this quarter versus what they did in the fourth quarter. Our forecast suggests that the pace of increase shouldn't be as high quarter-over-quarter as it was last time.
Brett Rabatin, Analyst
That's helpful.
David Becker, CEO
And I guess one thing, probably one more thing, I'd probably add to that as we did see the balance of broker deposits go up. And I said in my prepared comments, we probably pulled forward some deposit funding because of where the long rates were relative to the short end of the curve. We took advantage and did some three, four, and five year brokered CDs 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 trying to go out and do more in the Fed funds plus wholesale market in the quarter.
Brett Rabatin, Analyst
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 color on SBA? I know that's not necessarily an easy business to predict, given lower gain on sale margins, etc. But any color on how much that might contribute to the income this year?
David Becker, CEO
Yes. The thing is, we still have, we continue to bring on high performing videos. We brought some on within the later part of the year. You have staff in place to service and we have originations up year-over-year. However, I will tell you that from our perspective right now, gain on sale premiums in the fourth quarter net gain on sale premiums were very low. They're in the 6.5, 107 range. Our forecast, we're not making any assumptions that those go up. So we're just assuming while we 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. We're probably modeling that number that we recognized for the full year for 2022; we think we're modeling that to be flat to down a little bit, but entirely driven by gain on sale premium.
Ken Lovik, CFO
Real quick. Just $10.5 million to $11 million.
Operator, Operator
Next question will be a follow-up question from the line of John Rodis with Janney.
John Rodis, Analyst
Ken, just back on fee income, in my notes did you say fee income down 15% for the year? Is that total fee income, or did I…
Ken Lovik, CFO
Yes, that is total non-interest income. So, if we take the $21.3 million for 2022 and just cut that 15%, that's probably what we're estimating. So, we obviously did have mortgage revenue that's not going to be here this year. And as we talked about SBA here being flattish, David did talk about what we think our conservative expectations on some increase from revenue, but for this year, we’re forecasting that to be down just by the biggest piece is just removing the mortgage number out.
John Rodis, Analyst
And then just one other question, Ken, the tax rate kind of made new low in the fourth quarter. What should we use for next year?
Ken Lovik, CFO
Yes. 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 forecast—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 rapidly raising rates, and we’re having the subsequent impact on earnings in the back end of the year. Our taxes, we were estimating higher net income. So all it really takes for us to get our taxes in line for the full year. So again, I probably just guide you back to the 12% to 13%, and that will probably be a reasonable estimate.
Operator, Operator
Thank you, Mr. Rodis. There are no additional questions waiting at this time. So I will turn the call over to David Becker for any closing remarks.
David Becker, CEO
Everyone, I’d like to thank you for joining us on today’s call. We’ll continue to exercise discipline and use all of the tools at our disposal to preserve earnings in 2023. Fellow shareholders, we remain very committed to driving improved profitability and enhancing shareholder value. Thank you again for your time and have a good afternoon.
Operator, Operator
That concludes today’s call.