Horizon Bancorp, Inc. (NASDAQ:HBNC) Q4 2022 Earnings Conference Call January 26, 2022 8:30 AM ET
Company Participants
Craig Dwight – Chairman and Chief Executive Officer
Thomas Prame – President
Mark Secor – Executive Vice President and Chief Executive Financial Officer
Lynn Kerber – Executive Vice President and Chief Commercial Banking Officer
Noe Najera – Executive Vice President and Senior Retail and Mortgage Lending Officer
Conference Call Participants
Terry McEvoy – Stephens
David Long – Raymond James
Nathan Race – Piper Sandler
Damon DelMonte – KBW
Brian Martin – Janney Montgomery
Operator
Good morning, everyone, and welcome to the Horizon Bancorp Conference Call to discuss Financial Results for the Fourth Quarter and Full Year of 2022. [Operator Instructions] There will be a question-and answer session after today’s remarks. [Operator Instructions] Please note, this event is being recorded.
Before turning the call over to the management, please remember that today’s call may contain statements that are forward-looking in nature. These statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those discussed, including factors noted in the slide presentation. Additional information about the factors that could cause actual results to differ materially is contained in the Horizon’s current 10-K and later filings.
In addition, management may refer to certain non-GAAP financial measures that are intended to help investors understand Horizon business. Reconciliations for these measures are contained in the presentation. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, you can access it at the company’s website, www.horizonbank.com.
Representing Horizon today are Chairman and Chief Executive Officer, Craig Dwight; President, Thomas Prame; EVP and Chief Financial Officer, Mark Secor; EVP and Chief Commercial Banking Officer, Lynn Kerber; and EVP and Senior Retail and Mortgage Lending Officer, Noe Najera.
At this time, I would like to turn the call over to Mr. Craig Dwight, Chairman and Chief Executive Officer. Thank you, and over to you, sir.
Craig Dwight
Thank you, Rocco, and good morning. And thank you for participating in Horizon Bancorp’s fourth quarter earnings conference call. Our comments today will follow the investor presentation and press release that we published yesterday, January 25. Horizon is pleased to report record earnings for 2022 in fourth quarter that continues our momentum into 2023 with strong commercial and consumer loan growth, efficiencies gained from closing seven offices and effective expense control.
The challenges during the quarter were the magnitude and velocity of the short term interest rate increases by the Federal Reserve’s Open Market Committee and the corresponding increased competition for deposits, which drove our cost of deposits up at a faster rate in the fourth quarter. The outlook for 2023 calls for the Federal Reserve Bank to slow the pace and magnitude of raising the Fed’s targeted interest rate with an expectation that our deposit betas will also moderate during the year. In addition, we see 2023 as a transition year as we continue to focus on reinvesting cash flows and maturing loans into higher yielding assets.
Now starting on our presentation slide deck of number four. Horizon met or exceeded most of our 2022 goals as announced in fourth quarter 2021. And revised upward in the second quarter of 2022. Total loans excluding PPP and sold commercial loan participations increased 14.6% for the year, led by consumer and commercial loan growth of 30.6% and 11.4%, respectively. Thomas Prame, our President will provide more detail on Horizon’s loan growth in a few minutes.
Other notable Horizon financial measures for the year include return on average assets of 1.24% and return on average equity of 13.66%. Given the size of our balance sheet, efficient operation, talented workforce and solid additions to our team, Horizon is well positioned to capitalize on significant organic loan growth as we focus on shifting our balance sheet to higher yielding assets and continue our disciplined approach to expense control.
So why invest in Horizon? Horizon continues to report solid returns to the low credit risk profile due to our diversified balance sheet, excess liquidity and low-cost core deposits. Horizon’s historical credit metrics, even during the Great Recession, have outperformed the U.S. commercial banks as a result of consistent underwriting and active portfolio management. Horizon’s deposit mix has improved compared to our pre-pandemic deposit mix as a result of the stabilizing the prior year’s 14 branch acquisition and good organic growth.
We are located in attractive Midwest growth markets where real estate values are not as volatile as in others in the country and where our manufacturing outlook calls for continued expansion. Regional infrastructure improvements are attracting record inflows of private investment to Indiana and Michigan and include the commuter rail expansion in Northwest Indiana, known as Double Track in West Lake County extensions, which is forecasted to have multi-million dollar – billion dollar positive economic impact into Northwest Indiana.
The investment in quantum communication lines between Chicago, Lafayette, and South Bend, Indiana. Indiana’s $6 billion state surplus with plans to increase infrastructure spending. The continued outbound migration by Illinois, businesses and residents as they move into our attractive markets due to our quality of life, affordability and lower taxes.
Horizon has a proven history of organic growth, supplemented by strategic acquisitions as evidenced by our compounded annual growth rate for 2002 through 2022 for average assets at 12.7% and net income at 15.2%. In addition, Horizon has historically outpaced the change in GDP, which clearly demonstrates our ability to add market share, attract talent and grow organically. This is further supported in reviewing Horizon’s top 10 deposit market, five were entered into via acquisitions and five represent our legacy or de novo markets.
In the acquired markets, we increased market share over time which results of hiring and retaining local talent in our disciplined approach to market development. Since 2010, our legacy and de novo markets have also demonstrated our ability to increase market share.
A key long term focus for Horizon is digital transformation. Horizon’s advantages in technology over other community banks include our in-house CRM and core platforms, resulting in a lower cost per transaction than our peers and the ability to expedite the onboarding of new fintech partners and flexibility in data management by not relying on a core service provider. Horizon is able to select technology partners based on best-in-class and who can deliver strategic products and services at the best price with the optimum flexibility.
Our in-house core strategy has also proven very attractive for integrating acquisitions, including our most recent 14 branch deal. As a result of our investments in technology, our digital transactions increased from 44% in 2018 to 70% of total transactions in 2022. We increased online consumer deposit account openings to 19% in 2022 and 84% of our online chats are answered by our programmed bots.
Horizon manages and deploys capital efficiently, as evidenced by our most completed the integration of 14 acquired branches and continuing focus on organic growth in 2022. Through the fourth quarter end, Horizon Bank continues to report strong regulatory capital ratios which exceed the regulatory definition for well capitalized banks. In addition, Horizon has a consistent dividend policy as we fully expect to continue our 30 year plus of uninterrupted quarterly cash dividends.
We last increased our dividend in the second quarter of 2022, reporting a 6.3% increase from $0.15 to $0.16 per common share, which represents our tenth dividend increase in the past 11 years. Horizon’s historical dividend increases are aligned with earnings growth, sound capital management and as of December 31, 2022, our dividend yield was attractive at 4.2%.
Now I’d like to congratulate Thomas Prame on his recent appointment to Chief Executive Officer of Horizon Bancorp Inc. and Horizon Bank, effective June 1, 2023. We’re delighted with his addition to the team, with big bank experience and passion for strategic planning, technology and focus to move the company forward. Thomas Prame and our senior leadership team has what it takes to continue the bank success.
It’s now my pleasure to introduce Thomas Prame. Thomas?
Thomas Prame
Thank you, Craig, and appreciate the comments. As mentioned previously, it was another solid quarter in total loan growth of $145 million or just over 12% annualized. That’s excluding our PPP and sold loan participations. Highlighting the quarter was our commercial balances, increasing $63 million or just over 10% annualized.
Net commercial loan fundings of $98 million was well balanced across our commercial asset classes and our markets. The commercial loan pipeline is position at $134 million and continues to provide confidence in our ability to generate mid to high single digit growth in 2023 with yields continuing to increase as new production replaces our paydowns and our payoffs.
As we transition to slide 16, consumer loan balances increased $49 million or 21% annualized. As we discussed in Q3, the short term nature of the consumer portfolio creates opportunities to shift loan growth to higher yielding assets. In Q4, we enhanced the pricing structure of our indirect lending, increasing production yields and slowing the historical portfolio growth. This strategy was coupled with an acquisition of high quality variable rate home equity loans that provided over 300 basis points in improved yield when compared to the indirect portfolio. These loans are also well positioned with higher floors to protect against potential down rate environments. We anticipate having similar opportunities throughout 2023 as we leverage the diversity of our loan platform and manage new origination yields.
Looking at slide 17 with mortgage. Our Q4 production and fee income results aligned with industry trends and the team also completed proactive steps to further reduce staffing levels and overall costs relative to volumes. Mortgage warehouse balances also reflected current industry trends at $69 million, down slightly of $4 million from Q3. In concert with the consumer portfolio, we continue to be smart in our balance sheet deployment with mortgage balances growing about $18 million in Q4 with higher new production yields compared to payoffs and paydowns.
Looking at slide 18, our credit metrics remain strong as evidenced by our 0.01% charge offs and low non-performing loans in the quarter and also the last several quarters. Additionally, our allowance for credit losses is well positioned at 1.21% of total loans. This is down from 1.27% in the third quarter. This is primarily due to low historical charge off levels and improvement in specific segments adjustments, such as hotels, that was offset by increased allocation for consumer loans in indirect auto.
As we look at slide 19, Horizon’s historical credit metrics display our ability to outperform the market during the previous economic cycle. We attribute this to our consistent and conservative underwriting practices. As Craig mentioned earlier, the strength of the markets we serve and the talent within our local bankers and credit teams. As this graph shows, the performance of our credit metrics lessens the impact from credit cycles and we exit the cycle at a faster pace. As we move into a fluid economic environment, we feel confident our current credit profile will produce very similar results.
At this time, I’ll transition to Mark for highlights into our financial highlights.
Mark Secor
Thank you, Thomas. Horizon reported a solid quarter for net income and loan growth as interest rates continue to increase in the competitive landscape for funding and pricing intensified.
Starting with slide 21, fourth quarter net income results were primarily impacted by lower net interest income, offset partially by improvements in non-interest income and expenses compared to the third quarter. Annualized total loan growth of 13%, excluding PPP loans and sold commercial participations was a strong contributor to the quarter.
Slide 22, the company’s diversified business model has provided leading returns over various periods. Over the last 10 years, Horizon has produced a return on average tangible common equity greater than peers 71% of the time and was 35% less volatile. This was through economic cycles including the recovery from the Great Recession, the pandemic shutdown and reopening. In addition, during the last three years, through September 30, 2022, peer data, Horizon beat the KRX Index for return on tangible — average tangible common equity and return on average assets 92% and 85% of the time, respectively.
Slide 23. As deposit betas increased during the quarter, deposit balances remain flat. However, we are experiencing movement from lower cost deposit products to higher yielding money market and CDs, resulting in the balance sheet continuing to be liability sensitive. As a result, at an up 100 basis point parallel shock as of December 31, we model a decrease in net interest income of approximately $5.1 million or 2.48% over the next 12 months. During the quarter, core net interest income declined approximately $900,000, excluding the change in loan fees, purchase accounting and dealer reserve amortization, which was in line with the modeling at the end of the third quarter.
Contributing to these results are the expected deposit betas used for rising rates, which currently range from 6.5% for consumer deposits to 60% on public funds with an average beta for non-maturity interest bearing deposits of approximately 31%. The actual beta for the fourth quarter was 24% from non-maturity interest bearing deposits compared to 23% in the third quarter. Including CDs, the beta for this interest rate cycle has been 24% with a projection of interest rates peaking in the first quarter of 2023. The estimated full interest rate cycle beta is estimated to be 28%. We have approximately $2.2 million of assets, representing 30% of earning assets, which are expected to reprice within the next 12 months. Included in this estimate are adjustable rate loans representing $90 million that adjust immediately — $900 million that adjust immediately with short term rate move and additional $400 million that adjusts within 90 days and $60 million that will adjust throughout the year. The estimated remaining $840 million in assets that will reprice represent investment cash flows, principal loan payments and prepayments and loan maturities. This liquidity is forecasted to fund the growth in our higher yielding originations and increased overall portfolio yields.
Slide 24, during the fourth quarter, we determined that a revision for the treatment of the indirect dealer reserve asset and the related amortization expense to be made to prior periods. This revision has no impact to net income or total assets and was determined to be immaterial. The results of this revision decrease other assets for the dealer reserve asset on the balance sheet and increases total loans. On the income statement, the amortization expense of the dealer reserve asset currently expensed as non-interest expense and loan expense is now recognized as a reduction to loan interest income that reduces the net interest income. The results of this revision reduces the net interest margin and reduces non-interest expenses. All prior periods have been revised for this revision. The details are included in the press release and the presentation for the change to the balance sheet, income statement and ratios.
Slide 25. In the fourth quarter, adjusted net interest margin decreased 16 basis points and adjusted net interest income decreased by $2.6 million, primarily due to $1.2 million in lower loan fee income and $490,000 higher amortization of the dealer reserve asset compared to the third quarter. As I previously mentioned, the remaining $900,000 was due to the increase in funding costs. There is volatility in the recognition of purchase counting loan fees and the amount of dealer reserve amortization that will affect net interest income and the margin.
With the pace of rate increases anticipated to slow and potentially stabilizing and decreasing towards the end of 2023, we believe that Horizon is nearing the low end of its margin and is expected to begin to stabilize over the next two quarters. This will be the result of assets continuing to reprice, replacing asset cash flows into higher yielding assets, continuing to grow interest earning assets and the stabilization of short term borrowing costs.
Slide 26. Our stable deposit base continues to provide core funding as rates have rapidly increased. The increasing betas and some deposit flow from lower cost to higher cost products has increased funding costs, but they still provide a strong spread to the earning asset yield of 3.88% for the quarter with a total cost of deposits of 71 basis points. By maintaining a disciplined approach with deposit pricing, the total cost of deposits increased 43 basis points during the quarter compared to the average Fed fund rate increase of 147 basis points, while deposit account retention remained strong.
Slide 27. The core funding mix, which is non interest and interest bearing deposits, has remained stable and has slightly improved compared to the pre-pandemic funding. At the end of 2019, core funding was 65% of total funding at the end of 2022. Core funding was 68% of total funding at the end of 2023, a 3% increase. Stimulus money, the branch acquisition in 2021 and the long term customer base have all contributed to providing consistent core funding.
Slide 28. A lower unrealized loss on available for sale securities in the fourth quarter helped increase tangible common equity from 6.25% at September 30 to 6.56% as of December, 31. This is a result of the inversion in the yield curve reducing the unrealized losses on the longer duration AFS investments. Because we have the ability and the intent to hold all investments to maturity, these unrealized losses are expected to decline over time as investments pay down and mature. The bank’s regulatory capital is strong and exceeds the regulatory definition for well capitalized and will continue to fund our growth without restricting our ability to utilize our capital to fund organic growth in the future.
Slide 29. Non-interest expenses were 1.84% of average assets for the quarter compared to 1.91% last quarter. This was partially attributed to the reduction of direct expenses from the changes in business cycle, including mortgage and indirect lending. These expense percentages reflect the revision for the dealer reserve expense. Expense management will continue to be a focus in 2023 to help offset lower revenues.
Slide 30. As competition for funding has quickly increased in the latter part of 2022, and expected to continue into 2023, there is an increased focus on balance sheet liquidity. Due to the structure of our balance sheet, which includes the majority of our investment portfolio unpledged, we have approximately $2.7 billion of available liquidity from borrowings, brokered CDs and unpledged investments. In this time of uncertainty, safe and sound liquidity provides additional strength to our balance sheet.
Now Craig will provide some final thoughts.
Craig Dwight
Thank you, Mark. To summarize Horizon Bancorp’s key franchise highlights. Horizon is a growth company as evidenced by 20 years of compounded annual growth rates for net income and total assets of 15.2% and 12.7%, respectively. Our balance sheet had diversified loan portfolio with a product mix and geography, with ample liquidity and cash flows to fund future growth into higher yielding assets.
Horizon’s asset quality has historically outperformed the industry in varying economic cycles. The combination of Horizon’s historical solid returns in average assets and average equity, our ability to increase market share in our top 10 markets and weather varying economic cycles, our diversified balance sheet and current high dividend yield offer support that we have an attractive long term investment.
This concludes our prepared remarks today. And now, I’ll ask the operator to please open it up for questions. Thank you.
Question-and-Answer Session
Operator
Thank you. We will now begin the question and answer. [Operator Instructions] Today’s first question comes from Terry McEvoy with Stephens. Please go ahead.
Terry McEvoy
Hi, good morning everyone.
Craig Dwight
Hi, Terry. Good morning.
Terry McEvoy
Craig, just maybe a question for you. In your prepared remarks you talked about 2023 being a transition year and were you just specifically talking about the margin outlook and the interest rate sensitivity or should we read into that more than just the margin?
Craig Dwight
No, it’s focused on the margin sensitivity as well as the transition to a new CEO. So –
Terry McEvoy
Okay, great. And then maybe you talked about, Mark, the margin kind of bottoming out. I was wondering if you could maybe frame some expectations about the first quarter based on the interest rate environment and the forward curve? And maybe specifically net interest income, when do you think that is positioned to bottom based on kind of the loan growth and the outlook you just ran through?
Mark Secor
Yes, Terry. Thanks for the question. I think as we’re going into the first quarter, we will see the additional pressure with some of the traditional — hopefully smaller rate increases. Because we have the borrowing side, in the short term we impact that — most of that impact hit us with all the rate increase through the fourth quarter. And our super sensitive deposits also moved during the quarter. So we would anticipate less, although, when you’re getting into the cycle, the betas on the rate increases are higher, which is why we see that the cycle beta right now is about 24% and we see it increasing to about 28% for the full cycle. Assuming that rates will flatten out or the rate increases will flatten out in the first quarter. So I think the first quarter is a challenge and then is our assets reprice going into the rest of the year, we would anticipate to see the stabilization and then improvement as assets reprice.
Terry McEvoy
And then maybe just one last quick one. The CET1 is really strong at 13.6% and nice to see some recovery in the TCE ratio. And when the stock hit 1.3% of book, is the buyback being discussed at all?
Mark Secor
Yes, I think as we — and Craig and Thomas, you can comment too. I think as we see stabilization in the economic factors, I think that is a discussion to have. And — but we want to see — we want to make sure that we have a good outlook for credit and the economic issues.
Terry McEvoy
Great. And I should have said welcome to the call Thomas and thanks for taking my questions.
Thomas Prame
Thank you. Thank you, Terry.
Operator
And our next question today comes from David Long of Raymond James. Please go ahead.
David Long
Good morning, everyone. And let me say congratulations, Craig as well on the fine retirement and Thomas to adding the CEO role. So congratulations to both of you. My question is, looking at the deposit base here and you’re at 22% at non-interest bearing. Where do you see this going over the course of the next couple of quarters when you think about a couple more rate hikes baked in?
Thomas Prame
Thanks for the question, David. This is Thomas. We anticipate that our non-interest bearing portfolio directly will be relatively quarter-over-quarter. That’s a very granular portfolio on the consumer side, specifically as we brought in some of the new assets or the new teams from TCF. It does have a little bit of volatility with some seasonality around the public funds, but I’d say on an average quarter basis, it should be relatively consistent.
David Long
Great. Thanks, Thomas. And then thinking about the borrowings, obviously, up year-over-year loan growth, it sounds like, or loan demand still seems like it’s prevalent. If you do have a flat environment, how are you going to fund that? Will your use of FHLB increase? And where do you see overall the borrowings as a percentage as you move through the year this year?
Mark Secor
Yes, it’s twofold. The cash flows from investment portfolio flowing into higher yielding assets into the loan portfolio. We won funding source to help keep borrowings steady through loan volume growth. The other is, we are trying — we have been successful and continue to look at retail CD opportunities to be able to use CDs to fund the growth and to help maintain the borrowing. Our goal would be to try to keep the borrowings fairly stable if we can succeed in getting those deposit flows.
David Long
Got it. Thanks Mark. And then just as a follow-up, when you talk about the cash flows, do you have a contractual number of cash flows that you — that you’re expected to see in 2023?
Mark Secor
From the investment portfolio, we — right now, it looks like it’s about $130 million to $150 million and that range has slowed due to prepayment speeds than what we originally had worth seeing last year into the first part of this year. So that would be the cash flows. Additionally, as discussed, we’ve got $840 million of loans that will reprice payment and so forth. That includes the investment portfolio that can reprice into higher yielding assets.
David Long
Got it. Thank you very much. Appreciate it.
Operator
And our next question today comes from Nathan Race with Piper Sander. Please go ahead.
Nathan Race
Yes. Hi, everyone. Good morning, and appreciate taking the questions. I just want to echo David’s comments and congratulating Craig on your upcoming retirement and Thomas, as well on the promotion of CEO.
I guess first question, just as we kind of zoom out on the margin outlook perhaps into the back half of this year, just given the liability sense of nature of the balance sheet, if we were to get one or two Fed rate cuts, do you think that would drive some margin expansion under that scenario, or how you guys kind of think about the margin trajectory with perhaps more [Technical Difficulty]
Craig Dwight
Yes, Nate. Thanks for the question. Yes, I think the nature of the balance sheet and what we’re modeling with the lag of repricing on the asset size versus the loan portfolio, that would continue to improve and then the immediate repricing of short term borrowings. And we would look to be as aggressive bringing rates down as we — as the market would allow as they — as we’ve seen an increase here on the deposit side, especially the more rate sensitive deposits. So yes.
Nathan Race
Okay. Great. And is the kind of loan growth environment or the loan growth environment were to soften to some degree, what potential is there to maybe unwind some of the higher cost borrowings that you guys have brought on balance sheet? Just to maybe kind of reduce the overall liability sensitive nature of the balance sheet. Again assuming kind of overall loan growth kind of slows to some degree in 2023?
Craig Dwight
Yes, I think we’re going to see — the loan growth projection will probably require some funding. And like I said, I think we would like to see that funding come from the retail side of CDs. But if we had opportunities, we would definitely be replacing those short term liabilities or short term borrowings.
Nathan Race
Okay, great. And then just one last one from me, just on the kind of reserve outlook from here. Obviously credit metrics continue to improve generally in the quarter. How do you guys kind of think about where you can expect the reserves to kind of settle out maybe as percentage of loans or on absolute dollar basis as 2023 progresses and kind of absent any meaningful seasonal adjustments relative to the two factors?
Lynn Kerber
Good morning, Nathan. This is Lynn Kerber. How are you?
Nathan Race
Hi, Lynn. Good.
Lynn Kerber
Hi. So as far as the allowance go, we continue to work within our model. And as you know, there’s different components to that and drivers. We are seeing some change in mix as far as outlook for possible recession. So you see some increase related to some of the econometrics. And as Thomas mentioned earlier, just overall consumer area and watchful in that. Meanwhile, we’ve seen some reduction in some of the commercial sectors that we had heavier allocations on, because they’ve been performing really well. And so, personally, I think the outlook is pretty stable. But some of that’s going to depend on the economic conditions, of course.
Nathan Race
And is that stable outlook percent, the economic conditions on an absolute dollar basis on the reserve or as a percentage of loans?
Lynn Kerber
I would say percentage of loans.
Nathan Race
Okay, great. Thanks again.
Operator
And our next question today comes from Damon DelMonte with KBW. Please go ahead.
Unidentified Participant
Hello everybody. This is [Matt Ryan] (ph) filling in for Damon DelMonte. Congrats to Craig and Tom. Most of my questions have been asked and answered, but just as a follow-up to Nate’s questions on credit. Could you provide a little color on your office segment and what types of exposures do you have there?
Lynn Kerber
Yes. Thank you. We have — let me just turn to that page. We have both medical and general office exposure just for some context though. I know that there’s been a lot of focus on office exposure and a lot of the metropolitan areas. And Horizon, as you know, our primary markets are considered midsize cities. So Grand Rapids, [indiscernible], Indianapolis. And those have all been performing very well for us. So I would say, overall, there’s really been no deterioration in credit metrics. Lease rates have been maintained. And we traditionally have done business with very strong sponsors and some conservative loan to values in that space. So it’s been performing pretty well for us.
If you turn to page 35, we’ve got our office metrics there. As of December 31, 2022, we had $164 million and it was 6.6% of our commercial portfolio, 3.9% of the total bank portfolio, so not a significant exposure.
Unidentified Participant
Great. Thank you very much. I’ll step back.
Operator
[Operator Instructions] Our next question comes from Brian Martin with Janney Montgomery. Please go ahead.
Brian Martin
Hey, good morning guys.
Craig Dwight
Good morning, Brian.
Thomas Prame
Good morning.
Brian Martin
Just a — I guess, want to touch on the expense side of things, maybe if I missed it. Just kind of your thoughts about how to think about expense? I know you guys have talked and met your goal on the expense assets. Just thinking about that as you go into 2023, if there’s a new target on that if that’s kind of how you’re still thinking about things or any outlook you can provide on just kind of your expense guide?
Mark Secor
Yes, Brian, we still expect it to be under the 2% and also maybe in the range of $185 million, $195 million. We’ve — as it commented, we kept expenses lower this quarter, some due to business cycle reduction in staff in those business cycles that are slowed. We — that’s going to flow into the first quarter. A lot of the reduction was done right at the end of the year. So that’s going to give some kind of help to expense control. And then just overall, just in this environment, a hard look at controllable expenses and wanting to be as cautious as we can on where we’re spending. So we anticipate that expenses should be in that range coming into 2023.
Brian Martin
Got you. Okay. Thanks, Mark. And then just the loan pipelines, unless I missed it, just kind of your — if someone, I guess, can you just give a little color on just kind of the different buckets, the consumer, the commercial and the residential, just kind of how you’re thinking about growth for 2023 and just kind of the pipelines where they are today?
Thomas Prame
Thank you for the questions. This is Thomas and I’ll pass it over to Noe or Lynn to give some color on the individual lines of business. Overall, as we exited the fourth quarter, our pipelines were strong. Quite a little bit stronger in the commercial side. The consumer side has seen the cyclical portion of the fourth quarter and also the adjustments that everyone has seen across the marketplace in mortgage. But our pipelines overall look like they’re well positioned and continue the mid upper single digit loan growth throughout 2023, but I’ll pass over to Noe to give some additional color.
Noe Najera
Yes. Good morning, everyone. This is Noe Najera. Yes, our consumer pipeline has remained consistent. We are at a cyclical as well. In direct, we expect to remain flat for the most part. We are going to see some single digit growth in direct consumer, primarily in the HELOC portion of our portfolio. On mortgage, we will again remain in low to single digit growth expected in the first quarter as well. And we will mimic really the industry standards that’s being published in the forecast as well.
Lynn Kerber
This is Lynn again. Concerning commercial, as we indicated in a deck, we’re positioned with a pipeline of $134 million as we go into Q1, 2023. This is on — following on for the Q4 quarter, which was $126 million gross pipeline. So pretty consistent, a little bit better actually than what we had maybe anticipated for first quarter with all of the interest rate increases. Overall demand has been pretty good. I will say that with the rate increases, as far as new projects, those are getting a little tighter for some of the developers. But at this point, the metrics are working and we’re seeing some continued demand there. So a little over 10% annualized growth in the fourth quarter. For 2023, we’re looking at high single or mid-single digits. So we’re looking at that perhaps moderating a bit with the rate environment and the economy, but overall it’s been good growth and good demand. And we’re continuing to entertain new packages.
Brian Martin
Perfect. Thank you for the added color and maybe just the last one or two for me. Just on the mortgage side, I don’t know if it’s Noe or who, but just kind of the dollar amount that we saw on the gain on sale this quarter. I know the expectations relative to the peers is likely to outperform, but just kind of in dollars how we should be thinking about the mortgage operation this year? I mean, is this kind of a base to build off of in fourth quarter, I think it’s just over — a little over $1 million or just any thoughts on your outlook on mortgage?
Noe Najera
Yes, thank you for the question. And the first quarter outlook will be very similar to what we saw in the fourth quarter. As far as the pipeline, we obviously saw a decrease late in the year with the rising rate environment as the forecast for the pricing has stabilized somewhat. We still expect a few rate hikes, but — So we expect that will perform very similar to the fourth quarter as far as dollar wise.
Brian Martin
Okay, perfect. And last one was just on — maybe for Mark, on the margin. I think you said a little bit lower second quarter. And I guess is the — I guess is that the inflection point, Mark? Is the third quarter kind of in your mind today how we should — as assets begin to reprice trending higher, is that what I’m hearing or maybe I missed what you said there?
Mark Secor
No, I think that’s the trend as we have a lag in the asset repricing and we see — with the anticipation that rate increases will stop here in the first quarter and let the assets start to catch up. That would be the trajectory, Brian.
Brian Martin
Yes. Okay, perfect. Thanks for taking the questions and congratulations to Craig and Tom. Thanks.
Craig Dwight
Thank you, Brian.
Operator
And ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Dwight for any closing remarks.
Craig Dwight
Thank you, Rocco. In closing, we’d like to invite you to join us for our 2023 Virtual Investor Analyst Day on Tuesday, February 21st, starting at noon Eastern Time. Registration information will be sent out next week and we will post on the Investor Relations section of our website. Thank you for participating in today’s earnings call. And we look forward to speaking to you again at our Investor Day conference. Now I’ll turn the call back over to Rocco to close out the conference. Thank you.
Operator
Thank you, sir. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.
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