First Internet Bancorp - Fixed- (INBKZ) Q4 2018 Earnings Report, Transcript and Summary

Good afternoon, and good morning and welcome to the First Internet Bancorp Fourth Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please also note that today's event is being recorded. At this time, I would now like to turn the conference call over to Ms. Allyson Pooley from Financial Profiles. Please go ahead.

Thank you Jamie. Good afternoon everyone and thank you for joining us to discuss First Internet Bancorp Financial results for the fourth quarter and full year ended December 31, 2018. Joining us today from the management team are Chairman, President and CEO David Becker; and Executive Vice President and CFO Ken Lovik, David and Ken will discuss the fourth quarter and full year results and then we'll open the call to your questions. Before we begin I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Internet Bancorp that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's 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 would like to turn the call over to David.

Thank you Allyson. Good afternoon everyone and thank you for joining us today. As we enter into our 20th year of operations we have a lot to be proud of. We had another successful year in 2018 as we reported record net income driven by 30% loan growth, excellent credit quality and well managed expenses. We furthered our mission of serving customers in the digital economy, providing them with customer-centric digital banking solutions, while maintaining the personal touch of relationship banking. Earlier in the year we surpassed $3 billion mark in total assets and ended the year at $3.5 billion which represents 35% compounded annual growth rate for the last five years. It took us 15 years of operations to reach $1 billion in total assets and must in five additional years to surpass $3 billion. Our quest towards achieving greater scale and operating leverage is working. We continue to strengthen growth and diversify our asset generation channels with our collection of specialty lending franchises, both nationwide and on the regional basis. In 2018, we strategically grew our loan balances by $625 million or 30% primarily driven by expansion in our specialty lending lines in the areas of public finance, single tenant leasing financing and healthcare finance. Which are on the commercial side of our business and then horse trailer and RV financing on the consumer side. We also grew our residential mortgage portfolio through the combined efforts of our nationwide direct-to-consumer mortgage business and our Indianapolis based construction team. We funded this loan growth primarily through new deposits which grew by $586 million or 28% for the year. We built $2.7 billion nationwide branchless deposit franchise that provides consumers, small businesses, commercial clients and municipalities with innovative technology, convenient access, high touch customer service and competitive deposit rates. That being said, our cost to funds continue to increase during 2018 as the competition for deposits remain high and the federal reserve continued on its path towards monetary policy normalization, implementing four interest rate increases over the course of the year. The increase cost to funds put pressure on our margins and adversely impacted our profitability. Somewhat muting the benefit of our loan portfolio growth. Over the last five years our net income has grown at a compounded annual rate of 37% and in 2018 despite the headwinds on the deposit cost, we once again delivered record net income which grew by 44% for the year. As we benefited from the growth in our balance sheet and increase operating leverage and ongoing excellent asset quality. Our asset quality is been driven by a combination of factors including our strong credit culture, disciplined approach to underwriting. But it is also the result of our focus on certain speciality lending minds that target lower risk asset classes such as our public finance and our single tenant lease financing businesses, which when combined make up nearly 60% of our total loan portfolio. We're proud of our track record in credit and believe that is one of our competitive advantages. Overall we delivered another strong year of performance despite some of the headwinds we faced. We entered 2019 with a renewed focus on our strategic initiatives and our commitment to building shareholder value. One of our near-term objectives includes further expanding the scope in market penetration and our speciality lending line, while also diversifying our asset generation in revenue channels. They're in the third quarter, we hired an experience SPA banker to begin building a platform and we began originating loans in the fourth quarter. We have been actively evaluating opportunities to expand in this area of lending which will diversify our sources of non-interest income while adding prime rates, base loans to the balance sheet. We look forward to updating you on our efforts in this area in the near future. I would also like to mention the share repurchase authorization that we recently announced, while our primarily goal is use our capital to reinvestment of business. We believe that our shares are trading at a significant to fair value and repurchases then reflects our confidence in the long-term opportunities for the company and demonstrates our commitment to enhancing shareholder value, while maintaining strong capital levels. And finally, we remain committed to our entrepreneurial culture of tracking and retaining top talent has always been of high priority for us as our people are our greatest assets and one of the keys to our long-term success. We continue to be recognized for our innovation and are consistently ranked amongst the best banks to work for and we're very proud of that fact. Now turning to some operating highlights for the fourth quarter. Our performance was highlighted by solid loan growth, excellent credit quality and well managed expenses. Our overearnings were adversely impacted by a write down of a legacy commercial OREO property and continued net interest margin compression. The short-term interest rates escalated during the quarter and yield curve continued to flat. Net income for the quarter was $3.6 million or $0.35 of diluted earnings per share which included $2.4 million pre-tax write-off of the OREO Properties excluding this charge net income of $5.5 million or $0.53 diluted earnings per share. This compares to $6.3 million or $0.61 diluted earnings per share for the third quarter of 2018. We continue to do a great job reaching our target customers. Our total loans outstanding increased by $223 million from the third quarter which equated to a 36% annualized growth rate. As demand for our specialty suite of commercial and consumer loan products remain strong. Public finance wrapped up the year with the strong December which accounted for over half of the teams' fourth quarter originations. We also experienced the surge in year-end demand in single tenant lease financing, a certain borrowers pull forward, planned activities from first quarter of 2019 fundings. From a deposit perspective, with continued focus on opportunities to generate lower cost funding to the expansion of our small business, municipal and commercial relationships as well as from traditional consumers. As we reported on our last call, we did win the operating account business from an important local municipality which funded in late December. So we'll see the full benefits from this in the first quarter, our commercial deposit team is working hard to leverage this win into additional opportunities. We have a number of product initiatives in place as we continue to invest in services and technology to improve our customer's ability to manage their finances. Among those we will be rolling out in 2019, our enhanced digital banking capability for small business and commercial clients and relaunching our small business checking product. On the process side, we have significantly improved our account servicing capabilities to provide a better customer experience, improve efficiency and reduce risk. For example, we replaced our point of sale engine for consumer and small business deposit accounts. With a process designed for mobile users that significantly reduces the time to submit an application and improves pull through rates. And from a marketing perspective our goal is to deliver the compelling value proposition we offer in a cost effective way in the highly targeted process. Marketing programs targeted towards consumers and small businesses are scheduled to launch in 2019. We are also exploring affinity relationship and we'll be partnering with an organization to drive increased affinity small business relationships. And finally we're working on the strategy to capture deposit business and the credit relationships in the healthcare finance through our partnership with Lendeavor. In summary, we finished 2018 strong. We remained committed to executing on our strategy to expand our specialty lending franchise and further build upon our expertise in financial banking. Utilizing our nationwide deposit gathering platform to fund our expected growth. We're also committed to continuing to deploy capital in a very disciplined and profitable manner and when combined with our strong credit culture and highly efficiently scalable back office operations should drive attractive long-term return to our shareholders. So that is an overview, let me turn the call over to Ken to provide additional details on our financial performance for the quarter. Ken?

Thanks David. And thank you everyone for joining us today. Total loans increased by $223 million or 8.9% from the end of the third quarter and exceeded the high end of the guidance we provided on last quarter's call. As David mentioned, we saw significant origination activity in December including $27 million of single tenant lease financing builds that were pull forward from planned first quarter 2019 activity. Our commercial portfolio grew by $164 million in the quarter driven by $217 million of funded originations primarily due to increased production in public finance, single tenant lease financing and health care lending. Healthcare finance loans again grew at the highest rate posting a 31% increase from the third quarter albeit of a lower base as compared to single tenant leasing and public finance. We launched this product just over a year ago via our strategic partnership with Lendeavor, a San Francisco based technology enabled lender focused primarily on dental practices. And we're excited about the success that we're seeing within this business line. Public finance also continue to contribute to loan growth as it increased by $95 million or nearly 16% from the third quarter. We continue to put resources into this business and plan to continue our geographic expansion with lending relationships now in 17 States. As we've discussed in the past we particularly like this asset class due to its high credit quality and lower regulatory capital requirements. And these loans are very easy to hedge with interest rates swaps to create LIBOR based floating rate assets. Single tenant leased financing balances increased $36 million or 4.1% from the prior quarter due to the increasing activity at year end. This growth does include the impact of a loan sale we conducted during the quarter. we sold approval of single tenant leased financing loans with unpaid principal balance of $15.4 million and a gross weighted average coupon rate of 4.4%for a modest premium during the quarter resulting in a gain of approximately $90,000. On the consumer side, residential mortgages grew by $37 million or 10% driven by construction activity as well as or on production originated by our internet team. Additionally, our specialty lending areas of trailers and recreational vehicles continue to grow increasing 6% on a combined basis during the quarter. Moving to deposits and funding, the largest increase in our funding base was in broker deposits which was primarily driven by our long-term funding strategy. As discussed in the earning's release, we used brokered variable rate money market deposits to supplement organic deposit funding and then convert a portion of those balances into fixed rate funding with interest rate swaps to better match the duration of the loan portfolio. We also accessed the traditional brokered CD market to lengthen the duration of our liabilities and complement our organic CD production which was on the shorter end of the curve. While the longer duration brokered CDs carry a higher relative cost. During the fourth quarter, we found that we could save five to 10 basis points in the brokered market compared to paying up in the traditional institutional CD channels. In addition, we used federal home loan bank advances to supplement to deposit funding. To manage interest rate risk, we structured these as long-term funding using interest rate swaps, saving an excess of 30 basis points compared to standard FHLB bullet rates. Turning to net interest margin, the ongoing flattening of the yield curve and the continued rise in short-term interest rates combined with the competitive deposit pricing environment put more pressure on our net interest margin than anticipated. Our reported net interest margin decreased 17 basis points to 1.89% from 2.06% in the third quarter and on an FTE basis net interest margin declined to 16 basis points to 2.07% from 2.23% in the prior quarter exceeding the guidance we provided last quarter. The cost of funds related to interest bearing deposits increased 19 basis points to 2.14% and our overall cost to funds increased 18 basis points to 2.19%. While we expected deposit cost to rise during the quarter due to a full quarter's impact of long-term hedging strategies related to brokered money market balances and the planned replacement cost of maturing CDs, the pace of the increase in short-term interest rates exceeded our forecast. When combined with the heightened competition in the online deposit space, deposit pricing related to money market balances and CDs rose faster than anticipated and negatively impacted net interest margin by approximately 6 basis points beyond our original forecast. However I do want to point out that since the end of the quarter, we have seen CD rates pull back a bit and as a result we have reduced rates in our institutional and public funds channels by an average of 17 basis points and in our consumer and small business channels by 7 basis points across all maturities. The yield on the loan portfolio declined 2 basis points to 4.17% as higher yields earned on the C&I, residential mortgage and consumer portfolios were offset by significantly lower prepayment fees in the single tenant lease financing and healthcare finance portfolios. Overall the decline in prepayment fees accounted for about 6 basis points of the decline in net interest margin quarter-over-quarter. Turning to non-interest income compared with the prior quarter our non-interest income was essentially flat as lower revenue for mortgage banking activities was offset by the gain on sale of single tenant lease financing loans and other non-interest income. During the quarter revenue from mortgage banking was down over 18% as mandatory pipeline volumes declined compared to the third quarter and for the year mortgage revenue was down 27% to some price appreciation and higher interest rates, impacted application volumes across the industry. As a reminder last quarter we reduced staffing in this area and we're in the process of upgrading our technology which is expected to lower the cost for close loan and increased closed volume per loan officer. The implementation of this technology is on track to go live during the first quarter and we're expecting a lift in revenue this year. Moving to expenses, non-interest expense of $12.7 million increased by $2.7 million or 27% as compared to the third quarter due primarily to the $2.4 million write off of commercial OREO Properties that David mentioned earlier. These are two student housing properties located in Illinois that were originally underwritten in 2010 and transferred in OREO in 2012 and it was determined that the borrower committed fraud. The revaluation of these properties was driven by deteriorating conditions in the local market and the initiation of a marketing strategy to move the properties off our books. I think it is important to note that given the circumstances surrounding these properties in the nature of the lending we do today. We believe these are isolated incidents and are in no way an indication of an systemic credit issues within our portfolio. Aside from these properties the only item in OREO is a residential mortgage property with a carrying value of $554,000. Excluding the write down of the OREO Properties operating expenses remained well contained and rose less than 3% compared to balance sheet growth of almost 11%. Now turning to asset quality, credit quality was again very solid as non-performing loans to total loans remain low at 3 basis points. We did see an uptick in the dollar amount of non-performing as two credits, one C&I and other owner occupied CRE moved to non-accrual status. We are in the process of exiting those relationships and below we're well collateralized. As additional color related to our credit administration activities, during the fourth quarter we exited almost $18 million in C&I and owner occupied CRE relationships rated either monitor or special mention. While these credits were currently performing in the borrowers demonstrated strength at the time of underwriting, there were subsequent indications that weaknesses could develop should economic conditions deteriorate. Delinquencies 30 days or more past due did increase 15 basis points of total loans were approximately $3.5 million. While still a lower number compared to the rest of the industry it was a large increase for us and was due primarily to one seasoned residential mortgage loan with an unpaid principal balance of $3.1 million. The property is located in a desirable area and a recent appraisal valued the home at $5.3 million. We are working with the servicer to bring the borrower current. We continue to have minimal net charge offs which were $295,000 during the quarter or 5 basis points of average loans on an annualized basis. In general, net charge offs were confined to the consumer loan portfolios with no individual loans comprising a material portfolio of the total amount charged off. Provision expense for the fourth quarter increased to $1.5 million driven primarily by the growth in the loan portfolio. Our allowance for loan losses to total loans was again relatively stable at 66 basis points as of December 31 down 1 basis points from the prior quarter. Portfolio metrics continue to remain strong as the portfolio LTV in the single tenant lease financing book was 50% at quarter end and new origination came on with an average LTV of 51%. In the public finance portfolio almost 70% of the loans were made to borrowers with underlying credit ratings of BBB plus or better and over 47% to borrowers with a rating of A plus or better. Related to capital despite the strong balance sheet growth during the quarter capital levels remain solid and can support continued growth. Tangible common equity to tangible assets declined to 8.03%, but given the lower risk nature of our balance sheet and top quartile asset quality, we believe we have plenty of runway to support balance sheet growth. As David touched on earlier in the discussion, we did repurchased shares under the announced stock repurchase program. In December, we repurchased 10,897 shares at an average price of $19.83 per share of $216,000 in total. So far in the first quarter we have purchased another 17,101 shares at an average price of $23.07 per share. In total, we have repurchased over $610,000 of our stock at prices significantly below tangible book value. Despite the write down of OREO and interest rate news that impact shareholders' equity through AOCI we continue to grow tangible book value per share. At year end tangible book value per share was $27.93 an increase of nearly $2 or 7% year-over-year and at a premium to where our shares currently trade. Before I wrap up my comments, I want to provide some color on our outlook for 2019. Related to loan growth and balance sheet management, we feel very good about our ability to continue generating assets. Our CRE team has built finally tuned machine in single tenant financing and current pipelines look pretty good. Our C&I teams in Indianapolis and Arizona are picking up traction and have the potential to have a very solid year. Public finance has been an enormous success since we launched it in early 2017 and we expect continued success. Although the recent decline in long-term rates may have an impact on production as potential borrowers look to the public market. However we're also cognizant of where our stock price is trading and the need to manage capital efficiently and to deploy it in a manner that enhances profitability. To that end, we will actively manage the balance sheet so that we can capitalize on the opportunities in front of us, while preserving capital in a difficult environment. To reposition the balance sheet and improve the mix of earning assets and therefore improve net interest margin and EPS as well. We may pursue loan sales that allow us to move lower yielding assets off the books and free up liquidity and capital to fund new originations at higher rates. With regard to our outlook on net interest margin. The yield curve has flattened even more with the recent decline in long-term interest rates. Current interest rate forecast are predicting some volatility on the front end of the curve with short rates beginning to decline last half of 2019, while longer rates stay relatively static. If the implied forward rate expectations hold, 2019 will continue to be a difficult interest rate environment. The upside to this, is that we eventually see a ceiling on deposit costs early in the second quarter. The downside is that, net interest margin compression will likely continue into the first quarter probably in the range of 6 to 9 basis points on an FTE basis as we deploy existing balance sheet liquidity before starting to come back up in the second quarter. Related to loan growth expectations, given the challenging interest environment and our objective to drive profitable we're targeting annual portfolio growth in the range of 18% to 20%. This expectation is somewhat lower than our historical track record but with the existing market conditions being what they are, we believe a strong focus on enhancing the mix of earning assets will create greater shareholder value in the long run. With that I'll turn it back over to the operator, so we can take your questions.

[Operator Instructions] our first question today comes from Adela Dashian from KBW. Please go ahead with your question.

This is Adela on for Mike Perito. Thanks for taking my questions. I was just wondering about that profitability outlook for your mortgage business given recent volumes and do you think there's [indiscernible] expenses in this business going forward?

I mean in terms of profitability in the mortgage business, we do expect some revenue growth over the course of 2019 while keeping expenses relatively in check. I mean, we're not projecting a tremendous increase in overall expenses for next year and certainly not in the mortgage space as we have repositioned it. We don't expect a lot of increase in overall in the expense space and mortgage but our forecasting and increasing revenue for the year given the technology enhancements that we've invested in.

We turned group to profitability even with the lower originations they're in the fourth quarter. So if - Ken just stated the investments we're making in the technology side pan out as we anticipate they will, but their numbers are actually going to come up quite significantly next year for the bottom line. Again market is in front of us, for us as a general when tenure goes down it's not a good position, but that helps the mortgage side of the operation, so we're looking for a good solid year out in 2019.

Okay great and then if I could also ask, I know you've been active in the share repurchase space really. What's your top priorities in terms of capital deployment at this point?

I think our primary objective is to continue deploying the capital we have into earning assets that enhance profitability and drive increased earnings. I mean we recognized where the stock price is and to be honest with you being buyback our stock at a significant discount to tangible book value per share is attractive. But I think I mean in terms of deployment the number one priority is to continue funding profitable growth, but do that in a disciplined manner understanding that the capital is not unlimited and taking a little bit there and continuing to repurchase shares in the market.

Okay, thank you very much.

Our next question comes from Andrew Liesch from Sandler O'Neill. Please go ahead with your question.

Good morning, this is actually Thomas on for Andrew today. So actually you guys answered quite a few of my questions in your commentary but I was just wondering, do you guys have a preliminary estimate on the basis point benefit from the swaps that are becoming effective.

It's a little bit tricky to tell. I mean what's happened with the hedging and keep in mind there is a couple reasons why we have to hedge these assets. The majority of our internal asset generation capabilities today are longer term in nature whether it's single tenant lease financing, public finance, healthcare finances is longer term albeit fully amortizing loans. Same in the consumer space, so we have to balance short-term interest rate risk which is what probably most of the folks on this call are interested in and the immediate impact on net interest income along with balance long term interest rate risk and economic value of equity which is what our regulators are most focused on these days. In terms of the impacts of the hedges in this quarter we had a slight negative to that as kind of the first round of hedges began to become effective and some of that had to do with timing of when the swaps weren't effective. For example, three month LIBOR ran up over 40 basis points during the quarter, so we had a couple of our earlier hedges go effective with rates of kind of the 250, 255 range and LIBOR ended the quarter in kind of 278, 280 range. So we did, we saw a slight negative there due to timing plus we had some other hedges that went effective that didn't have defer starts, they didn't have full one year deferred starts on them, but had partial year deferred starts and had a higher fixed rate. kind of all in all, the weighted average pay rate on our public finance hedges is in the range of call it 280 to 285 and three month LIBOR right now is at, again call it 278, 279 so on a weighted average basis the floating rate is right in line with the pay rate on the, I guess the impact of those will benefit current period NII depends on the view in where LIBOR rates go. If we go back in time, two to three months ago, the forward the implied rate curve, all had LIBOR rates continuing to escalate higher throughout 2019 as the fed had three planned rate hikes on the horizon and the fed funds features market follow that, fast forward to today and while the fed may have, may say they have a coupled planned rate hikes, the market is doing something else with LIBOR curves coming down over the course of 2019. Fed funds rates are predicted to decline as well. All in all I think with regards to our outlook for net interest margin we're not pumping up short rates in our models, so right now the impact is really net neutral on the swaps over the course of the year with certain timing differences may impact quarter-to-quarter. I know that was a long winded answer, but hopefully it answered the question.

No definitely. Thank you for the color on that. And then just looking at the OREO Properties. I may have missed this, but did you guys discuss what drove the revaluation right now and then had you tried to market the properties in prior year?

Yes actually in 2018 we had a health services company that was looking to buy one of the properties. From us they were actually subleasing it for a period of time. we did engineering studies, they were looking to make a more than $1 million investment in the property to get standards as they needed, it was a publicly traded health services company [indiscernible] of the year, they have to buy the building from us in fact they closed down their facilities and Carbondale in total moved to another location, so that profit us to the properties back out in the market. Obviously the problems that they've had in the state of Illinois over the last few years and not having a budget created problems for universities throughout the stake, they finally passed a budget here in 2018, things seem to stabilize, but the market is down significant and without finding an alternative purpose to the education market, that why we opted for the write off and went ahead and listed. We were in a position over the last couple of years, we really couldn't market the properties because there was a lot of question within the university would even remain in Carbondale. That stabilized though it's now in the commercial opportunity we had [indiscernible] so it's time to put it out on the market and let them to still student housing that's the plan to.

Okay, yes thanks for the details on that. Those are my only questions. Thanks.

Our next question comes from Brad Berning from Craig-Hallum. Please go ahead with your question.

Can you spend a little bit more time on the deposit franchise kind of efforts you talked about some of the efforts there? But just help us think about when do you think we'll see potentially more materially shifts in the funding mix given the little bit slower targeted loan growth rate obviously still strong loan growth. But can you talk about whether that will be helpful for you and moving the needle from a deposit and mix standpoint?

Yes I think there's a couple of things that we're working on, Brad. We - I think we talked about it on the last call, we put in a new front end POS system. We're having tremendous results from that, we're getting to ready to roll that same type product out in the small business community, it took out pull through and applications from 3% to 4% to closer to 40% and the folks that actually come in and start the application process now 80% of them are completing it, so we're starting to see pick up in the basic [indiscernible] process. We're looking at maybe an adjustment on the money market rate as the market seems to be stabilizing. Obviously the money market cost is considerably less than the sum of the CD products out there today. We talked about the municipality that we opened up here in Central Indiana, we hope to leverage that. Our C&I kind of business team is out working with the small business components, we've had a lot of I guess products and services to offered up, that we have not offered in the past. We also just recognized there will be a press release similar [indiscernible] name is one of the top 10 best checking accounts in the country for consumers based on price product features. So we're working the deposit side of the balance sheet as hard as we're working the lending side of the balance sheet. We have the affinity program. we'll be rolling out, it's not a huge kind of branding but it's a first for us, kind of the affinity processing and we've got other opportunities let's face we're looking at. So getting more traditional money market checking account, but from consumers and small business major driven for our marketing team here in 2019.

Given that, do you think like the mix more core deposit, lower cost of funding at the end of 2019, do you think you know is that something it can be meaningfully moved to mix or is it to keep pace with kind of the loan growth mix?

Again, we're - we've given up trying to forecast what's going to happen rates on - I think the least significant is the fed stays to one [indiscernible] over the course of year. I think that's kind of built into a lot of deposit base and by sitting out of the higher cost CDs we can see 50, 60 basis point savings and when our cost to fund, new cost to funds are coming in at, so yes potentially the fed does what they're kind of forecasting at the current time of the funded stake of what increase, it can be pretty significant by year end. We dropped as Ken reported in his details some of the rates in 10, 15 basis points here in January. We only had in the fourth quarter two small increases and we're still seeing good volume coming in and it's not, that [indiscernible] at the current time. So I think kind of the rest of the world is realizing that the race to the top of deposit races not smart for anybody and we're seeing it kind of come back to a more neutral position. In fact, I think Ken also mentioned that we think it's going to top out here in the first quarter and start to drop over the course of the year, across the board.

Understood and that's helpful. Thank you. Last follow up. SBA. Can you touch base with how new teams are going, new team prospects are going to help improve the kind of the non-interest margin side of the equation for the fee side of the world?

Yes we were actually having tremendous success at the end of the fourth quarter, we still have a group that we're looking to acquire coming on board in 2019 but internally our pipeline exceeded $20 million and we're looking at adding staff still here in our backdoor in the SBA like the rest of the world is kind of at grinding half, our PLT application is sitting on an empty desk in Washington DC right now. The SBA market is - I think the last headcount we have there is four individual [indiscernible] community. So not the start we were hoping, but we have made some significant hires and have asked the back office honed and we're hoping to our PLT status at this point and once the government gets back to work, we think that could be fairly significant opportunity for us here in 2019.

Excellent. I'll get back in the queue. Thank you.

And our next question comes from John [indiscernible] from Feig [ph] Partners. Please go ahead with your question.

Ken, you said you expect the margin to be down so what 6 to 9 basis points in the first quarter and then maybe flat out in the second quarter? With that said, do you still you can grow net interest income dollars for the year in the 10% or better range? You grew net interest income 16% to 17% in 2018.

Yes I think we feel good about being able to grow net interest income. I think in the first quarter it's going to be challenging no doubt, as we see continued compression but as net interest margin stabilizes and begins to tick upward in the second half of the year, we do forecast growth in that NII line item and we do have growth year-over-year growth in it. So we do feel like we should be able to do that assuming that's interest rates hold to the forward curve. I mean the thing that really benefits us to is, and we haven't - these aren't in our models because what we have is a basically a very flat yield curve, but assuming that we do expect growth in NII kind of second quarter and beyond, but the thing that would actually benefit up the most is if, we could just get the loan rates to go back up. I mean right now the 10 year treasury at somewhere floating between 270 and 280 with elevated short-term rates, creates a difficult operating environment when several of our assets classes price off that treasury or rates tying to that. If that 10 year treasury would trend back up to that 3 plus to 310, 320 range that would be a net benefit for us, but we're not expecting that. We're not holding out, hope for that over the course of the year. But we still, we do expect net interest income to begin growing again. We acknowledge on a GAAP accounting basis, it's been flattened out for four, five quarters on an FTE basis, it continues to trend up with the impact of public finance portfolio. But no, we get some stabilization, the key is the stabilization of the deposit costs and we can get those to stop rising and then we can kind of go on offense again and get that net interest income number to start growing.

Okay, can the - what sort of effective tax rates should we use for 2019?

I mean I think right now I mean probably somewhere in - probably 10% is probably is good estimate as there is, I mean I know that obviously backing out the OREO write down which created a tax benefit for us this quarter our effective rate was 3%, with that I would say you got to keep in mind that mortgage revenue was, but was probably even below seasonal low expectations. So with mortgage revenue again it's not going to double over the course of 2019, but we do expect to see some modest increases in that and kind of get that proportion of tax exempt to taxable revenue kind of back in line with perhaps where it was throughout month, parts of 2018. I think a 10% rate is good as anything.

Okay, that's it from me guys. Thanks guys.

[Operator Instructions] our next question comes from Bill [indiscernible] from Team [ph] Capital.

I had a couple of questions, first of all would you please discuss your thoughts relative to prepayments going forward and how that would compare to what you experience in Q1, Q2, Q3 last year?

Generally on average we see, we see a pretty consistent average amount of prepayments in the CRE space particularly single tenant lease financing because in that space consumer activity or customer payment behaviour isn't always driven by rate, there is a huge tax component to it as well as people manage their tax position and work with 1031 exchanges and things related to that. so relative to our average kind of what our average balance kind of floats around prepayment in the fourth quarter were significantly lower than that and in the third quarter, significant I wouldn't say they were a little bit elevated more than average. So when you think of the delta between third quarter and fourth quarter it was a fairly significant dollar amount and again the level in the fourth quarter was low. It's hard to - we have a good average of what those numbers are, but it can vary from quarter-to-quarter and over the course of 2018 we probably experience the greater degree of higher amount of prepayments on the front end of the year versus the back end of the year. So it's just sometimes very tricky to predict with exact precision, the timing of that. in healthcare finance, which is a newer line of business not a lot of season loans in there, but you do see prepayment behaviour there and it's a little bit too early in our lifecycle there to kind of project those with precision, but we have seen those because we build into that those loans pretty good, prepayment protections and in the C&I space, owner occupied it's kind of - its case specific on the timing of that.

You anticipate the number is going closer to the first half of the year the second.

Yes in the absence of other information, I'd say that there should be a reversion to the mean.

That's helpful and then, would you talk about the loan yield in the fourth quarter and how it held reasonably constant relatively to the third quarter. Would have thought it may have picked up with rates directionally up.

Yes the overall decline in the loan yield was driven by lower than average prepayment penalties because under GAAP accounting prepayment penalties flow through net interest margin. So across certain portfolios we saw an increase in some cases nice healthy increases in the yields on the C&I portfolio consumer, the RV and the horse trailers, yields and residential mortgage portfolio that we hold on our balance sheet those continue to go up and even new production in CRE single tenant and healthcare finance were higher yielding than they were earlier in the year, but in those two loan categories in particular the decline in prepayment penalties resulted in declines overall in those portfolios and when you blend all the dollars together it resulted in a 2 basis points decline in the portfolio yield, ex-that amount - ex-the change in prepayments are being lower than the mean, the yield in the portfolio would have gone up now when the match the increase and the deposit cost, but it probably would have been up a few basis points.

Great, thank you.

And ladies and gentlemen and showing no additional questions. We'll end today's conference call. We do thank you for attending. You may disconnect your lines.