Growth Catalysts

• Commercial finance repositioning: triple resources devoted to commercial finance vs beginning of 2023 (budget neutral via reduced real estate personnel)
• Higher utilization/commitment draw dynamics in commercial finance (focus on increasing line usage to protect intra-period interest income)
• Equipment Finance cash-flow redeployment: ~$130M expected cash flows coming off the portfolio in 2024
• Real estate normalization: improving refinance/origination interest as treasury curve declines (real estate positioned as smallest originations segment in 2024)

Business Development

• Healthcare commercial finance pipeline: “reasonably good” and building through 2024
• Equipment Finance: “adding some new lessors” in lessor finance
• Chicago commercial finance pipeline starting to build
• Example commercial customer utilization volatility: $7M commitment at 12/31 with $700k balance, increased to $15M for seasonality with reduction expected after seasonal activity (by end of Q3) to avoid non-use fees
• Branch facility sale: under contract; final State of Illinois approval due in next couple weeks; expected close in March

Financial Highlights

• Q4 interest income decline: about $200k due to (1) decline in interest-earning assets and (2) lower origination/line activity vs Q3; deposit interest expense increased in Q4
• Net interest margin (NIM) outlook: relatively stable as a % in the first six months; hopes to expand in 2H as cash flows are reinvested and securities/loans roll
• Securities portfolio: average yield on securities portfolio maturing this year is ~3%; management expects at least “a couple hundred points” improvement during 2024
• Equipment Finance cash flows: expected yields on reinvested cash flows are mid-to-high 4s; expects +100 to +150 bps on those cash flows
• Credit quality: stable QoQ; federal credit cases net of prime contractors at ~31 bps at year end
• Credit quality ex-federal (and excluding one equipment deal): drops to ~15–18 bps
• Equipment Finance credit remediation: one equipment deal being listed for sale; marketing process starts next week; expected to move within next “couple of months” (not “give it away”)
• Government portfolio contribution to Equipment Finance payments: of ~$200M payments received in 2023, $96M came from government portfolio (did what it was supposed to do except the two federal credits)
• Expense guidance for 2024: total expenses expected around $41.0M to $42.5M; GAAP compensation tied to originations volume; branch sale expected to remove facility in March; legal claims process expected to decline YoY and “not recur” given current credit quality

Capital Funding

Strategy & Ops

• Credit training standardization: in Q4, all credit personnel (including analysts) put through a “graduate style course” to align skills, then product training for selling standard bank credit loan + ABL platform + accounts receivable factoring combinations
• Marketing emphasis: commercial finance takes the lion’s share of commercial marketing expense in 2024
• Pricing update: equipment finance pricing revised in January; outreach and originations ramp depends on timing/utilization
• Branch disposal: sale under contract; final Illinois approvals expected in next couple weeks; target close in March

Market Outlook

• NIM trajectory: stable first half (as %), then expand in the second half as cash flows are deployed
• Earnings target referenced: management stated it is “possible” to reach EPS approaching low $0.20s and up to ~$0.25/share in Q3 and Q4 if originations rise and interest-earning assets remain stable
• Loan-to-deposit ratio target: work back up to ~90%
• Loan growth goal: if deposits down ~3% from 12/31, implied loan portfolio ~$1.1B; management indicated ~5% to 8% loan growth needed for the year to reach ~90% LDR
• Deposit outlook: deposits stabilized in Q4; 2024 “good case scenario” is deposits remain flat (public funds seasonal decline noted); no expectation of material use of broker deposits

Risks & Headwinds

• Utilization risk: growing commitments does not guarantee draw activity; intra-quarter interest income depends on draw/payoff behavior (example $15M seasonal increase, then reduction back toward savings of non-use fee by end of Q3)
• Spread compression / recession concern: higher-quality investment grade & high-quality corporate spreads are “very tight”; yields: CDs mid-to-high 5s vs investment-grade corporates mid-to-high 5s
• Competition for assets: Q&A repeatedly stressed intense competition and fragmented market dynamics (management acknowledged competition)
• Equipment credit overhang/exit risk: one equipment deal in marketing/disposition process; management trying to move within “couple of months” but not at any price
• Operating expense variability: compensation expense varies with loan originations; legal claims expense may add with review/comments until process concludes; inflation still driving technology/maintenance contract increases (high single-digit / low double-digit)