Midland States Bancorp, Inc.MSBIPNASDAQ
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Operator: Good day, and thank you for standing by. Welcome to the Q4 2022 Midland States Bancorp Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there'll be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to your host today, Tony Rossi of Financial Profiles. You may begin.
Tony Rossi: Thank you, Kevin. Good morning, everyone and thank you for joining us today for the Midland States Bancorp fourth quarter 2022 earnings call. Joining us from Midland's management team are Jeff Ludwig, President and Chief Executive Officer; and Eric Lemke, Chief Financial Officer. We will be using a slide presentation as part of our discussion this morning. If you've not done so already, please visit the Webcasts and Presentations page of Midland's Investor Relations website to download a copy of the presentation. 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 Midland States 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 for 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. And with that, I'd like to turn the call over to Jeff. Jeff?
Jeffrey Ludwig: Good morning, everyone. Welcome to the Midland States earnings call. I'm going to start on Slide 3. Our fourth quarter performance capped a very successful year in which we generated a record level of earnings for the company. One of our goals over the past few years was to bring our level of returns more in line with our peer group and we believe our performance this year reflects the strong progress we have made in this area. For the full year, we generated a return on average assets of 1.31%, up from 1.18% in 2021 and a return on average tangible equity of 20.8%, up from 17.9% in 2021. Our improved profitability represents our strong execution on our strategies to generate profitable growth and realize more operating leverage, while at the same time prudently managing our growth as reflected in our continued strong credit quality. We have built a stronger, more diversified franchise with higher quality, more consistent sources of income, which has resulted in the steady improvement we have seen in our financial performance. Specific to the fourth quarter, we continued to generate strong financial performance despite moderating our level of loan growth given the likelihood of economic conditions weakening in 2023. We generated net income of $29.7 million, or $1.30 per share, which included $17.5 million gain we realized on the termination of forward starting FHLB interest rate swaps and $6.7 million in charges we took on commercial mortgage servicing rights and impairment on other real estate owned. On a core earnings basis, we continue to generate a higher level of profitability with adjusted pre-tax pre-provision earnings coming in at $33.2 million. We were able to continue generating solid loan growth even while being more selective in our new loan production. Our total loans increased at a 7% annualized rate with most of the growth coming in our commercial portfolio. Our Equipment Finance business has had another strong quarter, which contributed to the growth in commercial loans as this portfolio has now surpassed $1.1 billion. Our Community Bank group continues to be highly productive and with the increased exposure to higher growth markets we are seeing a larger volume of attractive lending opportunities, which has enabled us to continue generating solid loan growth while being conservative in our underwriting and pricing. We are seeing good contributions across our footprint, but in particular, we are seeing increased production out of our Eastern Illinois markets, which includes the Chicago MSA and the St. Louis market, where we have made investments to increase our business development capabilities over the past couple of years. For the full year, our Eastern Illinois loan portfolio increased 22%, while our St. Louis loan portfolio increased 40%. We also saw double-digit deposit growth in these markets as our teams are doing an excellent job of developing full banking relationships. As I indicated earlier, we have generated a higher level of earnings and loan growth over the past few years, while maintaining a conservative approach to risk management. As a result, we continue to see good asset quality trends. While we had a slight increase in non-performing loans in the fourth quarter, our net charge-offs were just 3 basis points of average loans. And importantly, at this point, we continue to see generally healthy trends across the portfolio with no meaningful change in delinquencies or watch list loans. Our strong financial performance continues to enhance the value of our franchise. During the fourth quarter, our book value per share increased 2.4% while our tangible book value per share increased 4%. And with the exception of our total capital ratio, which decreased due to the payoff of $40 million in subordinated debt in the fourth quarter, all of our capital ratios increased from the end of the prior quarter, as we continue to make progress on one of the most important financial goals. At this point, I'm going to turn the call over to Eric to provide some additional details around our fourth quarter performance. Eric?
Eric Lemke: Thanks, Jeff and again, good morning, everyone. Before we move on, I would like to note that this is our first quarter reporting net income available to common shareholders following the capital we raised through the preferred stock offering in August. Our fourth quarter financials included the payment of the preferred stock dividend for the fourth quarter, as well as the portion of the third quarter after the stock was issued. Going forward, without the stub period included the impact to net income available to common shareholders will be $0.04 per share less per quarter. Now moving on to Slide 4, we'll take a look at our loan portfolio. Our total loans increased to $108 million from the end of the prior quarter. Most of the growth came in our commercial and construction portfolios, which more than offset a small decline in our commercial real estate portfolio. Equipment Finance was the largest contributor to the commercial loan growth as the fourth quarter is typically a seasonally strong period in this business. We also had a small increase in our consumer loan portfolio, which was attributable to an increase in loans generated through our new partnership with LendingPoint which more than offset a small decrease in our GreenSky portfolio. Jeff will talk more about our relationship with GreenSky later in the call. Now turning to Slide 5, we'll look at our deposits. We had a small decrease in total deposits from the prior quarter, largely due to declines in non-interest bearing and savings deposits. The decline in non-interest bearing deposits was primarily due to lower period end balances of commercial FHA servicing deposits as well as more commercial depositors moving some of their excess liquidity to interest bearing accounts in order to capitalize on the higher rates now being offered. As we indicated on our last call. We have selectively raised rates on deposits in order to continue funding our loan growth. We continue to see the opportunity to add high quality lending relationships with new commercial clients that we believe we can expand over time and we believe it is in the best interest of the company and our shareholders to add these relationships, even if the results in near term upward pressure on our deposit costs in order to fund the initial loans. Now looking at Slide 6, we'll walk through the trends in our net interest income and margin. The net interest income was down slightly from the prior quarter as a higher average balance of interest earning assets was offset by a decline in our net interest margin. Our net interest margin decreased 13 basis points from the prior quarter as the increase in our cost of deposits exceeded the increase we saw on earning asset yields. We've been able to generate our strong loan growth, without compromising on loan pricing and as a result, we continue to see positive trends in our average rate on new originations. In the month of December, the average rate on our new and renewed loans was 7.1%, an increase of 150 basis points from the month of September. In particular, we are seeing higher rates on commercial loans including equipment financing. As we indicated on our last call, we plan to take some steps to move the balance sheet into a more neutral position in terms of interest rate sensitivity and the termination of the forward-starting interest rate swaps has done that. Our goal this year is to try to keep our net interest margin relatively stable. The rapid increase in interest rates impacted our cost of funds significantly in the fourth quarter. However, if interest rate increases slow or moderate. It will allow our fixed rate assets to reprice and stabilize our margin going forward. Turning to Slide 7, we'll look at the trends in our Wealth Management business. Our assets under administration increased by $150 million from the end of the prior quarter, due to both market performance and inflows from new clients. The increase in assets under administration resulted in a slight increase in our wealth management revenue compared to the prior quarter. On Slide 8, we will look at non-interest income. We had $33.8 million in non-interest income in the fourth quarter, which included the $17.5 million gain from the termination of the forward-starting interest rate swaps. Excluding this gain, most fee generating areas were relatively consistent with the prior quarter. As we indicated on our last call, we are currently in the process of selling the commercial mortgage servicing rights portfolio, which will eliminate a source of earnings volatility. We are working with a potential buyer and expect the transaction to close during the second half of the year. We expect to retain the servicing deposits related to the commercial mortgage servicing rights portfolio. However, they will reprice to market rate upon completion of the sale. Now turning to Slide 9, we'll review our non-interest expense. Our non-interest expense was up from the prior quarter, primarily due to two non-recurring items. First, as part of the sale of the commercial MSR portfolio, we recorded a $3.3 million loss on MSRs held for sale to reflect the current valuation. And second, we recorded an other real estate owned impairment charges of $3.5 million. All the other areas of non-interest expense were relatively consistent with the prior quarter. For the near-term, we expect our operating expense to be in the range of $43 million to $44 million per quarter. Turning to Slide 10, we'll look at our asset quality trends. Our non-performing loans increased $2.5 million from the end of the prior quarter, which is entirely attributable to one commercial real estate loan. Within the consumer portfolio, the delinquency rate remains exceptionally low and should any deterioration begin to occur, we have approximately $41 million in an escrow account that is available to cover any losses on the GreenSky portfolio. As Jeff mentioned earlier, we had an extremely low level of loss in the portfolio in the fourth quarter with net charge-offs of just 3 basis points of average loans. We recorded a provision for credit losses on loans of $3 million, which was largely related to growth in total loans, changes in the mix of the portfolio and the impact of negative economic forecasts. On Slide 11, we show the components of the change in our allowance for credit loss from the end of the prior quarter with the provision being well in excess of net charge-offs, in the fourth quarter, our ACL increased by approximately $2.4 million, and the ACL to total loans increased by 2 basis points to 97 basis points. The increase in ACL was driven by growth in total loans, changes in the mix of the portfolio and changes in forecasts from weakening economic conditions. And finally, on Slide 12, we show our ACL broken out by portfolio. The most significant increases in coverage came in our commercial owner occupied CRE and construction and land portfolios. And with that, I'll turn the call back over to Jeff. Jeff?
Jeffrey Ludwig: All right. Thanks, Eric. We'll wrap up on Slide 13 with some comments on our outlook and priorities for 2023. It's clear that the possibility of a recession is going to make 2023 a challenging year, but with the stronger franchise and earnings quality that we have built, we believe that we could continue to generate strong financial performance and a higher level of profitability while we maintain our more conservative approach to new loan production until economic conditions improve. At this point, it is difficult to provide a forecast for our level of expected loan growth given the uncertain economic environment, but we believe that we will continue to grow our total loans as a result of a more productive commercial banking team we have built, the greater exposure we have to higher growth markets like Chicago and St. Louis and the continued growth of the Equipment Finance business. Given the success we are having in generating commercial loan growth, and with the loan deposit ratio at 99%, we are now planning to accelerate our exit from the GreenSky partnership. On Tuesday of this week, we provided notice to GreenSky that we will exit the program in October of this year. Our required notice period under the contract. The contract includes certain minimum loan originations through the notice period and we have indicated the GreenSky that we will waive those minimums in order to lower our overall balances in the program. We believe that exiting the partnership will have a positive impact on our liquidity and capital, while having a relatively minimal impact on earnings. The average yield on this portfolio is currently 5%. As loans in the program pay off, the cash flow can be profitably invested in either loan originations or within the securities portfolio or used to pay-off some of our higher cost funding sources. As we've talked about over the past few quarters, one of our newer initiatives is building our Banking-as-a-Service platform, which we believe can be an important contributor to the continued profitable long-term growth of the franchise. We are being very selective in our approach to adding new partnerships in this initiative. So that we can ensure that any partners we add meet our high standards of risk management. During 2023, our primary focus will be adding partners that can contribute to deposit gathering. We are going to maintain disciplined expense management, while we focus on getting more leverage from our significant investments we have made in both banking talent and technology over the past few years. As we do this, we believe that we can keep our expense growth rate below our revenue growth rate which should help support our continued strong profitability. We have significantly strengthened our commercial banking team over the past few years and we are very happy with the group. We currently have and don't anticipate making any meaningful additions in the near term as we focus on keeping our expense levels relatively stable. However, we are making investments in the wealth management business in terms of adding some new personnel and enhancing our platform, which we believe will enable us to improve our business development efforts, increase our client base and grow the fee income that this business generates. In terms of the outlook for credit, we believe that our loan portfolio will continue to perform well given that we have a well-diversified portfolio with limited exposure to those areas that are most likely to be impacted by a recession. Most notably, office and retail commercial real estate, small business loans and subprime consumer loans. At the beginning of last year, we indicated that we are open to considering small strategic M&A opportunities that could further improve our deposit base, increase our exposure in higher growth markets or build the wealth management business. Our branch acquisition in Northern Illinois in June fit this criteria perfectly and enabled us to add low cost deposits and increase our exposure to the Chicago MSA without disrupting the organization's focus on the execution of strategies that have generated a strong improvement we have seen in our financial performance. In 2023, we will continue to be open to the same type of opportunities. And as we have mentioned in the past few earnings calls, we are focused on strengthening our capital ratios to better support the continued growth of our franchise. With the higher level of profitability that we are now generating and the lower level of balance sheet growth that we expect this year, we believe that we can continue to increase our capital ratios as we move through the year. While we expect the operating environment to be a challenging year with the strong execution we are seeing throughout the organization, we believe that we will continue to enhance the long-term value of our franchise in 2023. With that, we'll be happy to answer any questions you might have. Operator, please open the call.
Operator: [Operator Instructions] Our first question comes from Jeff Rulis with D.A. Davidson. Your line is open.
Jeff Rulis: Thanks. Good morning. Thanks for taking the questions.
Jeffrey Ludwig: Yeah. Good morning.
Jeff Rulis: Wanted to check in on the loan growth side. I respect that you said, a little uncertain on the growth rate. Could you remind me the impact of GreenSky and what that would mean from a balance standpoint and then even any sort of high level thoughts on growth as you talk about being a little guarded, in other words, just Q4 growth indicative of a guarded, but yet still growing portfolio?
Jeffrey Ludwig: Yeah. So, we didn't -- I'll provide some wide guide rails to GreenSky. We think at a very high level, we think the GreenSky balances could come down anywhere between $100 million and $300 million this year, depending on sort of the loan originations that we get from GreenSky during this, what we call this notice period. We've asked for GreenSky to reduce our origination, I think they're receptive to that. We're not exactly sure how that could go. If it goes, like, we would like it to, it will be on the higher end of that range and if it doesn't to be on the lower end of that range. So that's sort of from a total loan point of view, that will be a headwind. And so from there, we think we can grow the portfolio a little bit. So the commercial business and the equipment business will sort of help offset that and grow a little bit.
Jeff Rulis: Great. Thank you for that. And maybe just jumping over to the fee income outlook, kind of a similar kind of question, I guess, given the MSR sale, kind of expected in the latter part of the year, given your wealth management push, the puts and takes of that line item, I guess, on a core basis, kind of $16 million run rate, how should we think about kind of growth of the fee income layered in with that MSR sale? Thanks.
Jeffrey Ludwig: Yeah. I think that's about right. I think that's -- you're looking at it how we think it will go. I think -- we think we can grow wealth management, that revenue is going to -- it won't leave until the end of -- more towards the end of the year. And so that growth in wealth should offset whatever we lose there, and we think we can probably do a little bit better this year than we did last year.
Jeff Rulis: Appreciate it. And the last housekeeping item. Eric, I think you mentioned on the preferred quarterly kind of a stub period in Q4, that comes down to, I got, $2.2 million. Is that fair on a quarterly basis?
Eric Lemke: Yeah. That's fair.
Jeff Rulis: Okay.
Eric Lemke: That's what we're expecting.
Jeff Rulis: All right. Appreciate it. Thank you.
Operator: One moment for our next question. Our next question comes from Damon DelMonte with KBW. Your line is open.
Damon DelMonte : Hey. Good morning, guys. Hope you are – both doing well today. So my first question was regarding the outlook for margin. Eric, hoping you could just provide a little bit more color around kind of how you see things shaping up. Obviously, I understand the puts and takes for margins have responded this quarter the way it did. So kind of just wondering how you think about it kind of bottoming over the next quarter or so? Or do you think it could reverse sooner than that?
Eric Lemke: I think kind of, Damon, how we sort of think about it is, we may, this month, in particular, see a little bit of near-term pressure on the margin just from some of the deposit costs that we sort of talked about, and from some of these deposit relationships that we brought in to fund our loan growth. But then if we can keep the Fed at 25 basis points or less and give our fixed rate portfolios a month or two after that to continue to catch up on rates, then I think we're kind of looking at a margin that's relatively stable past this month into the rest of the quarter. If you look at our equipment finance portfolio in general, we had a really solid fourth quarter at really good rates. Those are fixed rate loans, but the portfolio turns over fairly quickly. We've seen as much as 40% attrition in that portfolio. So we see some rate pick up with that each month. So I think we're kind of looking stable, plus or minus a few basis points for the next quarter. And then beyond that, we'll see how the economic conditions kind of play out.
Damon DelMonte: Got it. Fair enough. Okay. That's helpful. Thanks. And then with regards to the commentary about more cautious outlook for a recessionary environment. Can you give us a little guidance on the loan loss provision outlook. This quarter came in lower than it had three previous quarters. So just wondering if we should expect to go back to like maybe an average of what we saw during the first three quarters of 2022 or what are your thoughts on that?
Jeffrey Ludwig: I'll take that one. Because as you know, Damon, that one is the hardest one I told on the income statement that is to predict. But as you mentioned, this was our lowest provision quarter of the year. We've been internally working really hard around asset quality around underwriting. We've probably tightened our credit box and pricing box up a little bit, which, over time, right, should help with loan losses, which then helps with the provision. I think we're expecting probably a little more provision than what we had in the current quarter, but not dramatically more over the year. Now if things really turn around for the worst then that changes as well. But I think if the environment kind of stays like this, and we don't go into a real deep recession, it's sort of a mild recession with like lots of folks are talking about, I don't think our provision should be much different than what we saw this year and could be better.
Damon DelMonte: Got it. Okay. That’s helpful. That’s all that I had. Thank you.
Jeffrey Ludwig: Yeah.
Operator: One moment for our next question. Our next question comes from Nathan Race with Piper Sandler. Your line is open.
Nathan Race: Yeah. Hi, guys. Good morning. Hope you are doing well.
Jeffrey Ludwig: Good morning.
Nathan Race: Just want to kind of zoom out on the margin outlook, maybe kind of thinking about 2Q and the back half dynamics. Eric, I appreciate your comments earlier in terms of just trying to get the balance sheet to more neutral position. And I guess I'm trying to understand, with the termination of the swaps that you guys executed in the quarter, how does that kind of play out from just an earning asset yield expansion perspective going forward? And I guess also within that context, how are you guys kind of thinking about kind of what inning you're in, in terms of additional upward pressure on deposit costs?
Jeffrey Ludwig: Yeah. I'll touch on some of that, and then Eric can follow up. On the interest rate swaps, these are forward starting, so they're not impacting the financial statements right now. They would have gone into play as we move through this year, and with our sort of more neutral view where we want to be and the fact that we're going to sort of roll GreenSky off, there's funding that we may not need as we go into 2024. So those are sort of the decisions we made around that and when the five-year rate got into the like 430s and 440s, the value there was just too good to pass up. So between all of those, we made the decision to move off of the forward starting swaps. On the deposit side, I think the way we viewed this year from the very beginning was, we needed to get ahead of the deposit costs. We have a higher loan-to-deposit ratio. We can't afford to let deposits just roll off our balance sheet, so we were very proactive starting in the first quarter of this year to be, one; get in front of our commercial clients begin to run some specials on the retail side and began to give rate to customers earlier in the cycle. So I would say, we're deeper in the game than others. If we want to do the baseball analogy, I don't know, maybe we're in the later innings. But depending on where the Fed goes from here, I mean, if they do 25 for the next couple of meetings, we can -- I think we have the ability to now lag some without losing deposits at this point. But it's a pretty fluid situation. We meet -- our teams are meeting every week. I'm involved every other week, talking about deposits, and that market is pretty dynamic right now with competition, doing lots of different things. But I think what we did early in the year is going to sort of help us a little more as we get into ‘23 around how much more the interest expense needs to increase. Eric, anything else?
Eric Lemke: No. I think the other thing I would say is, Jeff talked about leveraging technology earlier in the call, and we've really been focused on technology and how it applies to our retail team. If you look at our -- we increased retail deposits by just short of 7% over the past year and by focusing on that sales culture and the technology, we think that can continue. And so we're hoping to continue to increase in that area in 2023, which will allow us to pull back on some of those other funding that we've put on the books as well.
Nathan Race: Got it. Under the scenario where the Fed maybe cuts rates a couple of times in the back half of this year as implied by the forward curve currently. I'd imagine that would be supportive of some margin expansion depending on loan growth dynamics as maybe you can kind of unwind some of the wholesale overnight borrowings that have been added to the balance sheet recently. Is that a fair scenario in terms of expecting some expansion just given some of the lagging earning asset repricing that we discussed earlier?
Eric Lemke: Yeah. Nate, if that scenario happens, I think there'd be some benefit to us with some of the additional funding we've added that floats with Fed funds, seeing the Fed cut later in the year would definitely help.
Nathan Race: Okay. Great. And then just going back to the credit discussion. I think we've talked in the past that kind of normalized charge-off levels are maybe in the 25 basis point range historically. Is that kind of a fair scenario to think about this year, just based on kind of what you guys are seeing in terms of criticized classified trends as well as just obviously given some improvement in non-performers in the quarter or do you guys think that's maybe too high of an expectation for this year just based on how much the portfolio credit metrics have improved recently?
Jeffrey Ludwig: Yeah. I mean I personally, so I think it's -- that's too high. We came in at 13 basis points this year. Yeah, I do think that's high. But depending on where this economy goes, that's hard -- is hard to predict. But again, what I said earlier, we're working real hard around here to get our credit quality metrics down closer to the peer group, which is going to then impact charge-offs. We saw some of that in the current quarter. One quarter is not a trend. So we're hoping as we move forward, we can minimize our charge-offs which then impacts the provision and really impacts the bottom line profitability of our company. So that's a big focus here and has been for the last couple of years.
Eric Lemke: One thing, Nate, one thing I'd tag along to that too is, if you look at our ACL by portfolio, that page in the slide deck, as over the next year, we'll see some provisions just because of the remixing of our loan portfolio as GreenSky comes down. As we've talked about in the past, I mean, our ACL right now is at 97 basis points of total loans. The credit enhancements of GreenSky is only about 25 basis points to 30 basis points. So as that pays down, and we remix into other loan areas, you're going to see our ACL go more to that adjusted number that we disclosed, which is 113 at the end of the quarter. So there'll be some remixing in our allowance, and we'll see some provisions just related to that because of those loan portfolio changes.
Nathan Race: Okay. So yeah, under that scenario, I'd imagine the ACL as a percentage of loans maybe steadily rises this year, again, assuming maybe charge-offs are kind of low or similar to kind of what we've seen historically from you guys?
Eric Lemke: Yeah. That's where we see it, yes.
Nathan Race: Okay. Perfect. Thank you. I appreciate all the color guys. I’ll step back.
Eric Lemke: Thanks, Nate.
Operator: One moment for our next question. Our next question comes from Daniel Tamayo with Raymond James. Your line is open.
Unidentified Participant: Hey. Good morning, guys. This is Tim [indiscernible], actually on for Danny this morning. I was hoping if you guys could expand kind of on the plans on the BaaS partnerships. Just giving us an update on how talks of partnerships are going and then some of the nature of the deposits that could be coming in, are those interest-bearing, non-interest-bearing. Just any color there would be helpful.
Eric Lemke: Yeah. So we've worked pretty hard this year sort of laying the foundation, both on the technology side and sort of the, I'll say, the risk management compliance governance side here, lots of sort of meetings. The key for us is to do this right. So slow is good. And we've looked at a fair amount of partners at this point and haven't sort of got to the -- we're going to do one of them yet. So it's like sales, right? You got to look at -- or it's like M&A. We got to look at a lot of banks before you buy the one that you're going to buy. So it's really important for us to get the first partnership really right with the right partner, and make sure that's going well before the next partner comes on. So this will be sort of the year where I think we can bring on a partner or two, and make sure that's going really well. We are focused solely on deposits at this point and partnerships that are deposit driven. In this rate environment, you can imagine that there's some rate involved here. It might be to the end customer. These are non-interest bearing accounts, but then there's some fee share or if you will, deposit placement fee arrangement from that fintech partner that is being negotiated on a lot of these, but I would say our position there is, we will not -- it will be at some margin less than Fed funds. And I think where we're targeting mostly now is like half of that number. So if we brought some of those funds on today, it would be materially cheaper than wholesale today.
Unidentified Participant: No, that's very helpful. Thank you. And if we could just go to the loan-to-deposit ratio here, it ticked up a little bit, just sitting just below 100%. Could you just remind us around where you could see that going or you're comfortable with that trending up towards?
Jeffrey Ludwig: Yeah. I mean I think that's as high as we would like it to be. I mean, ideally, we would like to be probably closer to 90%. But banking is about cycles and there's -- we talk about our management meetings all the time. There's times where loans are coming in faster than deposits. There's times on deposits coming in faster loans. And unfortunately, they don't come in at the same rate all the time. And right now, loans have been coming in faster than the deposit side. So we're really focused on, as I talked about earlier on deposits and deposit gathering and that will continue as we move into the year -- into this year. We do think the loans are going to slow some, and that's going to sort of help us -- sort of move that loan to deposit ratio down. The unwinding of GreenSky is also going to help, and as we sort of unwind that cash flow, as I talked about, that -- those cash flows will either go into the investment portfolio or take some of this sort of higher cost non-core funding off the balance sheet at very frankly, minimal impact to the income statement.
Unidentified Participant: Now I appreciate the color there. And then just one more housecleaning item from us here. Tax rate kind of jumped around a little bit over the past few quarters. Any additional color on where that could shake out for 2023 would be helpful.
Eric Lemke: Yes. Good question. I think it's going to be relatively stable where it was in the fourth quarter going into 2023. The tax rate jumps around a little bit as we've grown our revenues fairly significantly in 2022, our percentage of tax exempt income, say, from like a [indiscernible] portfolio dropped as a percentage of that total revenue or that total income. So I think the fourth quarter is probably a good measure going forward.
Unidentified Participant: Great. Appreciate that. That’s all I had.
Operator: One moment for our next question. Our next question comes from Terry McEvoy with Stephens Inc. Your line is open.
Unidentified Participant: Good morning. This is Brandon Rode (ph) on for Terry. I just have a couple of questions here. Good, good. I think on Slide 3, you mentioned you're being more selective in new loan production. Can you expand on that and if it's in a specific area like CRE or is it just broadly across the whole portfolio?
Jeffrey Ludwig: It's broad. I think I would say, it's broad, although in the quarter, our CRE was down slightly. So we are being more selective in the CRE space. But I would say, it's mostly broadly looking at deals with even a more critical eye than maybe we were six months to eight months ago. Yeah.
Unidentified Participant: Okay. Thank you. Another one, the equipment finance portfolio reached about a little over $1 billion this quarter. Is there a size or how large relative to the whole portfolio would you be willing to grow those loans to?
Eric Lemke: Yeah. It's roughly -- Yeah. It's roughly 17% or 18% right now. I think that's probably is about where we would want it to be that range. I don't want it to be 20 somewhere between 15 and 20, but on the lower end of that range would be sort of where I'd like to see it.
Unidentified Participant: Okay. Thank you. And your comment earlier was NIM stable in 2023. Net interest income kind of took a small step down in the fourth quarter. Do you see that trending lower through 2023 or is that holding stable as well? Maybe with your loan growth, can you expand on that, please?
Eric Lemke: Yeah. I think we're real focused on dollars. Dollars is what pays the bills. The margin rate doesn't. So we -- I think we can grow dollars. There'll be a little pressure. GreenSky will provide a little pressure. But really, I think that's a flat move. And then it's how well can we grow the loan portfolio and the repricing of our fixed rate loans over time at these higher rates, even if we don't have a lot of loan growth, that's going to help. And if the rate -- if the Fed slows rates down, as I said earlier, if we're deeper in the game, that means we're -- we don't need to raise our deposit rates as much going forward. So as those assets reprice, we think the dollars could go up.
Unidentified Participant: Understood. All right. Those are the questions I had, so I appreciate your time.
Eric Lemke: Yeah. Thank you.
Operator: And I'm not showing any further questions at this time. I'd like to turn the call back over to management for any closing remarks.
Jeffrey Ludwig: Yeah. Thank you. So before we end the call today, I want to mention that we have decided to discontinue our practice of holding these quarterly earnings calls. After much consideration, we have determined that the benefit of the call doesn't justify the amount of time and resources required for preparing for and holding them. We will continue to have an active investor relations program and maintain a regular dialogue with our analysts and both current and potential shareholders. And where appropriate, we will expand disclosures in our earnings release and investor presentation to provide information that was typically discussed on these calls. And with that, I'd like to thank everybody for joining us today. Have a good day.
Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.