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spk09: Hello everyone and welcome to the first Interstate Bank System Inc. fourth quarter earnings call. My name is Nadia and I'll be coordinating the call today. If you would like to ask a question at the end of the presentation, please press star followed by one on your telephone keypad. I will now hand over to your host, Lisa Slicer, ready to begin. Lisa, please go ahead.
spk01: Thanks, Nadia. Good morning. Thank you for joining us for our fourth quarter earnings conference call. As we begin, please note that the information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those expressed by those statements. I'd like to direct all listeners to read the cautionary note regarding forward-looking statements contained in our most recent annual report on Form 10-K filed with the SEC and in our earnings release. as well as the risk factors identified in the annual report and our more recent periodic reports filed with the SEC. Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filing. The company does not undertake to update any of the forward-looking statements made today. A copy of our earnings release, which contains non-GAAP financial measures, is available on our website at fibk.com. Information regarding our use of non-GAAP financial measures may be found in the body of the earnings release, and a reconciliation to their most directly comparable GAAP financial measures is included at the end of the earnings release for your reference. Joining us for management this morning are Kevin Riley, our Chief Executive Officer, and Marcie Mutch, our Chief Financial Officer, along with other members of our management team. At this time, I'll turn the call over to Kevin Riley. Kevin?
spk04: Thanks, Lisa. Good morning, and thanks again to all of you for joining us on our call today. Again this quarter, along with our earnings release, we have published an updated investor presentation that has additional disclosures that we believe would be helpful. The presentation can be accessed on our investor relations website, and if you have not downloaded a copy yet, I encourage you to do so. I'm going to start off today by providing an overview of the major highlights of the And then I'll turn the call over to Marcy to provide more details on our financials. Our fourth quarter performance tapped off a very strong year for the company as we executed well on the integration of our merger with Great Western, realizing cost synergies we projected for the transaction while continuing to generate solid organic loan growth throughout our footprint. Specific to the fourth quarter, it was a bit noisy. with a handful of cleanup items that should set the stage for a strong 2023. While these items had a 7 cent impact on earnings per share in the quarter, we continued to execute well and saw continued positive trends in our loan growth, core margin expansion, and asset quality. As a result, excluding selected items, which we will walk you through, the company generated $0.89 of earnings per share. It is worth noting that this quarter included a $0.07 less contribution from purchase accounting accretion because of fewer early payoffs. We also added to our already robust allowance for credit losses despite continued improvement in asset quality and only two basis points of net charge-offs in the quarter. As you can see on slide 10, of the investor deck, our ACL coverage ratio has expanded meaningfully over the last two quarters. With this strong financial performance and a positive shift in AOCI, we saw a 2.3% increase in our book value per share and a 4% increase in our tangible book value per share from the end of the prior quarter. The banking environment continues to be favorable for us in the fourth quarter. which we were able to take advantage of given our strong capital and liquidity position. Many banks seemingly pulled back on loan production due to capital and funding constraints. We were pleased with our ability to win deals. In our larger footprint and increasing production from our newer markets, we saw plenty of high-quality lending opportunities. As a result, while maintaining our conservative underwriting criteria, we were able to generate our highest level of loan growth of the year with total loans increasing and the annual rate of 11.1%. Going forward, we will be selected in our growth opportunities as the environment remains uncertain and funding is less bountiful. As such, we are prudently planning for a slower pace of growth in 2023 than we experienced in the second half of 2022. The largest area of growth during the quarter came in our commercial real estate, much of which was the result of construction loans moving into this portfolio. The majority of these projects were multi-family properties, which given the high constraint in many of our markets and the significant demand of affordable housing, are strong, low leverage credits that we are adding to the balance sheet. The average rate on our new loan production in the fourth quarter was between 5.5% and 6%, which was up considerably from the prior quarter and progressively increased as the quarter went on. However, the average rate on loans funding on the balance sheet was lower, as prior construction commitments made earlier in the year funded this quarter. This trend will impact us for the next several months with projects in process. On the deposit side, we indicated on our last earnings call that we expected balance to be relatively flat in the fourth quarter, and they were earlier in the quarter. The outflow in the fourth quarter was concentrated in the month of December. While it appears the outflows were largely seasonal in nature, there is an element of depositors putting some of their excess liquidity to work. While our base case for 2023 suggests flat deposit balances year over year, we do expect normal seasonal declines in the first quarter. We also anticipate a mix shift out of non-interest bearing and lower cost balances into our indexed money market and CD specials. You should expect to see deposit betas increase accordingly, but remain relatively benign over the full cycle when compared to prior cycles. In terms of time deposits, as a third quarter, we continue to selectively utilize our ability to offer higher rates to add and to retain profitable long-term relationships. While this has placed some upward pressure on our deposit costs, to this point, the expansion in earning asset yields has outpaced those increases, and our adjusted net interest margin expanded by another two basis points this quarter. While this margin expansion trend will be harder to sustain going forward due to the balance sheet mix, we do anticipate to see good year-over-year net interest income growth in 2023. Despite the more challenging economic conditions, our asset quality trends were favorable again this quarter, with total non-performing assets declining by 24% and net charge-offs of just two basis points. Criticized loan balances were vastly higher, however, There was nothing unusual about the inflows we experienced here. As you know, credit was the biggest question mark heading into the acquisition, and our board recognized that as well. During the fourth quarter, we exceeded targeted reductions of non-performing assets and criticized loans set by our board. This resulted in a $4.2 million incentive compensation adjustment you see referenced in our material. Overall, the portfolio continues to perform extremely well, and we are pleased with the significant improvements we have made since closing the Great Western Acquisition. And with that, I'll turn the call over to Marcie for some additional details around the fourth quarter results. Go ahead, Marcie.
spk12: Thanks, Kevin, and good morning, everyone. Just to make sure we're providing clarity, I'll start by summarizing the notable items that impacted our financial results in the fourth quarter. We had $3.9 million in merger-related expense, $4.2 million of additional incentive compensation related to asset quality improvement, which Kevin mentioned, a $1.3 million additional litigation accrual, which has now been settled, and a $400,000 reduction to the fair value of loans held for sale. These items had a $0.07 per share impact on our fourth quarter financial results. Additionally, the purchase planning accretion declined by $9.3 million from the prior quarter, or $0.07 per share, due to lower levels of early payoffs. Now I'll move into the rest of our financial results, which, unless otherwise noted, will be in comparison with the third quarter of 2022. Our fully tax equivalent net interest income decreased by $8.2 million which was entirely due to a lower impact from purchase accounting accretion, as I just noted. Excluding purchase accounting impacts, net interest income increased by $1.4 million. Our reported net interest margin decreased 10 basis points from the prior quarter to 3.61%. Again, excluding purchase accounting accretion, our adjusted net interest margin increased by 2 basis points to 3.49% from the prior quarter driven by a favorable shift in our earning asset mix and an increased yields on loans, investments, and cash. This offset the 36 basis point increase we saw in our cost of funds. As you have likely already noted, with strong loan growth and deposit outflows, we increased our use of short-term borrowings in the quarter, which ended a little over $2.3 billion. As noted on page 14 of the investor deck, Cash flows off the securities portfolio should mostly fund loan growth from here, but the higher balances of wholesale funds to start the quarter will mean we will see some compression in our adjusted net interest margin in the first quarter. From there, the net interest margin percentage will be a function of the mix of both earning assets and liabilities. During the quarter, we added $850 million in notional forward starting receipt fixed swaps against both loans and investment securities. Together with the changes in the composition of our balance sheet, we are now essentially neutral to changes in short-term rates. In 2023, net interest income growth will come from a combination of net loan growth and the remixing of our assets out of securities into loans and our liabilities out of borrowings into deposits. X purchase accounting impacts, we expect Q1 2023 net interest income to be down compared to Q4 2022, primarily as a result of lower day count and some margin compression. For the full year 2023, we expect net interest income growth to be in the low double digits, again, excluding purchase accounting accretion. As you can see on slide 12 of the investor presentation, we expect scheduled purchase accounting accretion to be about $15.8 million in 2023. This does not include accretion from early payoffs, which will likely be immaterial in 2023, given the current interest rate environment. Overall, for 2023, we expect average earning assets to remain relatively unchanged from Q4 2022 levels at around $29 billion. Our total non-interest income increased $18.7 million quarter over quarter to $41.6 million primarily due to the loss on investment securities realized in the third quarter. Excluding investment securities losses, non-interest income fell short of our expectations, declining by $5.5 million from the prior quarter. This included a net $400,000 reduction to the fair value of long-tail for sale, a decline in swap revenue to near zero, and lower payment services revenue resulting from declines in transaction volumes. We also increased our earnings credits in the quarter, which reduced our service charges on deposit accounts. For the full year 2023, as a result of the NSF and overdraft fee changes we made partway through 2022, lower swap revenue and other fee income expectations, we expect non-interest income to decline by low single-digit percentage when compared to reported 2022 revenue, excluding the securities losses. Second half results are likely to be stronger than the first half of the year as we begin to realize revenue synergies within the Great Western footprint. Moving to total non-interest expense. While it was a little messier this quarter than anticipated, on a run rate basis, we landed where we expected in the range of 163 to $165 million. As noted earlier, reported results included a $3.9 million acquisition expense $4.2 million in performance-related incentive adjustments, a $1.3 million litigation accrual, as well as a $2.2 million expense related to the write-down of an Oriel property. Net of these items, non-interest expense was $163.7 million, and our run rate efficiency ratio would be closer to 53% in the fourth quarter, which by definition would also exclude the $4.1 million of intangible amortization expense. For the full year 2023, we expect operating expenses to increase in the 3% to 4% range from the full year 2022 expense base of about $647.1 million excluding merger expenses. The two basis points FDIC surcharge accounts for 1% of that growth or around $6 million. Moving to the balance sheet. Our loans held for investment increased $496 million from the end of the prior quarter, with growth in all major portfolios with the exception of construction and commercial. As Kevin mentioned earlier, the decline in construction loans was primarily attributable to projects being completed and moving into our commercial real estate portfolio. On the liability side, our total deposits decreased $811 million, with much of the decline coming in non-interest-bearing deposits due to the seasonal outflows and clients utilizing some of their excess liquidity, as Kevin noted earlier. This was partially offset by increases in our balances of time deposits, as we see more customers taking advantage of the higher rates now being offered. The net outflow was in business deposits, and we were encouraged that consumer deposits held flat. Moving to asset quality, we continued to see positive trends, with non-performing assets declining 24%. Criticized loans increased only modestly from last quarter. Our loss experience continues to be very low with net charge-offs of just $1.1 million, our two basis points of average loans in the quarter. Strong loan growth and qualitative additions related to a more conservative economic forecast push our funded allowance up by $7.1 million from the prior quarter, resulting in a modest increase to our ACL to 1.22% and an increase in our coverage of non-performing loans which now stands at 3.3 times. Our total provision expense for the quarter was $14.7 million, which included $6.5 million related to unfunded commitments. And with that, I'll turn it back to Kevin.
spk04: Thanks, Marcie. Now I'll wrap up with a few comments on our outlook and priorities for 2023. 2023 is shaping up to be a more challenging year with more uncertainty around the macroeconomic environment and the path of future interest rates, which is complicated by the quantitative tightening. While we are mindful of these circumstances, our franchise has never been stronger, and our balance sheet is in great shape with strong levels of capital, liquidity, and reserves. We believe we are well-positioned to effectively manage through a wide range of economic scenarios and continue to play offense. With a loan deposit ratio in the low 70s and strong credit quality, our fundamentals are strong. Our core deposit base will remain a focus this year, which, as you all know, is core to the strength of our franchise. We also will continue to focus on scalability, automating manual processes, enhancing our product sets, and right-sizing our departments while maintaining talent. As the company has grown over the past decade, we have not deviated from our conservative approach to loan underwriting and risk management. 2023 will be no different. As Marcy and I have alluded to, the pace of net interest income growth is likely to moderate when compared to the past few quarters. As such, we are focused on what we can control. We will remain highly selective in loan growth we are bookings. which should yield mid-single-digit growth in 2023, while moderating from the double-digit pace we have delivered in recent quarters. We believe this level of activity is prudent for what we see in our markets today. Going forward, we intend to have greater focus on C&I. To support this effort, we plan to launch an ABL business later this year, and we will redouble our efforts in our small business lending. We are actively pursuing new household growth and deepening existing relationships to generate favorable deposit trends. We are viciously pursuing the synergistic opportunities the Great Western Acquisition affords us, which is a differentiator for First Interstate this year. We expect these to show up in payment services, home lending, treasury management, and indirect We have and we will continue to be out front actively managing our credit book. As such, at this point, we do not see significant credit deterioration on the high horizon. And finally, we will remain vigilant in managing our expenses and expect to deliver a solid year of positive operating leverage as we drive toward a sustainable efficiency ratio in the low 50s. In wrapping up, I would be remiss not to thank Russ Lee who retired at the end of the year. Russ joined us after our IMB acquisition and has been instrumental in moving us forward since that time. I'd also like to welcome Ashley Hayslip, our new Chief Banking Officer. Ashley has joined the team in a challenging banking environment, but we are confident that she will help us continue to grow our client base. With this addition, I have an executive team in place that I am very excited about. They are diverse in age, gender, and background. I am confident they'd have the ability to continue to move the company forward. I would also like to take a moment to acknowledge Ross Leckie, who retired from our board of directors earlier this month after having served as a director for more than a decade. On behalf of the entire board, I want to thank Ross for his many years of valuable service to our company. So in summary, While we expect 2023 to be a challenging year from a macro perspective, these are times when the strength of our franchise is most valuable. We are well positioned to protect shareholder value during an economic downturn while continuing to make progress on strategic initiatives that we believe will continue to enhance the long-term value of our franchise. And ultimately, given the strong execution we are seeing throughout the organization, We believe 2023 will prove to be another positive year for the company and our shareholders. So with that, operator, I will open the call up for questions.
spk09: Thank you. If you would like to ask a question today, please press star followed by one on your telephone keypad. If you do have a question, please press star followed by two. I'm preparing to ask a question. Just ensure your phone is on mute. And our first question today goes to Jared Shaw of Wells Fargo. Jared, I think your headline is open.
spk03: Hey, everybody. Good morning. Good morning, Jared. Just, I guess, a couple questions. Maybe first on funding, you know, it definitely seems like there's been a shift in the Outlook on funding and sort of your comments last quarter on the expectation for beta being smaller or lower. How should we be thinking about funding costs from here? And do you think that we get back to DDA? When do DDA balances recover or should we expect that they continue to outflow? And are the FHLB borrowings more temporary until we see that reversal or do you think we should run higher FHLB borrowings for a while?
spk04: Well, I think the NFL will be here for a while, Jared. But hopefully during 2023, we see a shift as they slowly go out and reduce over time. That's what we expect to see. So, yes.
spk03: But what about data from here on the remaining deposits? Do you see that peaking out?
spk12: So Jared, at this point, we've said all along that our last cycle beta was 27. We're still below that right now. We expect it to kind of still stay in that range. It may bump up a little as we increase deposit costs, but nothing material at this point.
spk03: OK. And then on the asset yields, the loan yields were a little weaker than we were looking for in the comments on the funding of loans that were previously committed. Where should we be thinking loan yields from here? Are you starting to see any ability for spread?
spk12: So new loan yields are coming on in the high fives. will still be hampered by those construction loans that are funding at lower rates, which will be below kind of our core loan yield.
spk03: Okay. All right. I guess maybe just shifting to expenses. You know, when you look at the expense base that we should be growing off of, I guess that includes some of the stuff that we're calling out as is not occurring this quarter. So is that one, the right way to be looking at it? And then two, when you look at that incentive comp that happened this quarter, what are the incentive targets for next year that we should be thinking about as triggers for potential incentive payments through 23? Well, the incentive comp is
spk04: Going pretty much back to the normal incentive comp plan that we've had in our proxy for years, it's not going to change, but this was just a unique item so that the board and management would focus really on asset quality, because going into the Great Western acquisition, that was probably the biggest question on everybody's mind. So that was just one additional aspect. There's no real other changes with incentive comp with regards to what our normal practices have been.
spk12: And, Jared, as far as, you know, the 647, if you, I mean, we talked all year about the fourth quarter, you know, kind of base run rate to be around between 160 million and 161 million. If you take that quarterly run rate times somewhere between 3% and 4% inflation plus the FDIC insurance adjustment, you get to the same place. So, again, we were just trying to simplify that by using the 647 expense base, you know, between 3% and 4% inflation, and that includes the FDIC insurance. So you get the same place either way.
spk03: Okay, thanks. And then just finally for me, maybe thoughts on capital management here. You brought back stock earlier in the year at higher prices. How do you feel about capital ratios here and potential for buybacks?
spk04: Well, Jared, as you know, you've been around us for a long time. We have a number of arrows in our quiver that we look at how to effectively use our capital. That's one of them. And we always are analyzing our capital levels and what we might do going forward. So that's all I can pretty much say on that. Okay, thanks.
spk09: Thank you. And the next question. The next question goes to Chris McGrathy of KBW. Chris, please, your headline is open.
spk05: Oh, great. Thanks for the question. I guess, Kevin or Marcy, the math you gave us on the growth and the margin maps very similarly to the earnings that you gave when the merger was announced, you know, 365 or so, plus or minus. But we've had much higher rates. And so it feels like uh there's been a notable change obviously the margin is getting harder for everyone but i guess what am i what am i missing that um that changed so much in the earnings power deposit outflows in 2022 and then also we had as you recall we reduced our nsf and od uh you know fees and then the fdic insurance is an additional up you know expense that we didn't anticipate so Yeah, I get the NSF and FDIC. It feels like it's more the NII and the deposits that are leading. Absolutely, it's the deposits. Yeah. Yep. Mainly deposits, Chris. Yep, I get it. Kevin, in terms of next step for maybe following on Jared's question, what are the thoughts on doing another deal? Obviously, the balance sheet's in great shape. We've got a ton of capital. Yeah. Good deals get struck when really no one wants to do them, but what are the thoughts on doing a deal?
spk04: I get that question asked all the time, maybe because I do deals. The thing is, Chris, I'll be honest with you. Right now, I think when you look at banks, people are worried about the AOCI, where that's going to go. People are worried about credit, where that might go. What we're focused mainly on right now is preparing this institution to be scalable. We're making all the operations and everything and get prepared if one comes about. But we're not going to rush into anything. We're more focused on driving positive operating leverage within the institution. But if something comes up that we believe, as you always know, we have a priority list of banks that we believe will increase the franchise value of this company, and we're kind of sticking to that list. And if something comes along, we'll look at it. I mean, as you probably know, there's a lot of banks out there for sale, but we're not interested in all the ones that are out there for sale. So we're going to stick to our knitting and make sure this bank is performing at the ultimate level of performance. And then if something comes up that we believe will increase the franchise value, we'll go there. But nothing's right currently on the horizon. Thank you very much.
spk09: Thank you. And the next question goes to Adam Butler of Piper Sandler. Adam, please go ahead. Your line is open.
spk08: Hey, good morning, everybody. This is Adam on for Matthew Clark. Just to go back to Jared's question on the deposit balances. Overall, this went quarter. Do you expect a similar decrease in the first quarter? or maybe slower. I'm curious about your comments on that.
spk04: Well, seasonally, if you go back, I mean, as you know, the pandemic threw all sorts of seasonal trends out of whack. So if you go back earlier, you know, before the pandemic, seasonally, we see a little bit decline in the first quarter. And then we start seeing deposits start picking up in the second quarter and faster in the third. that's kind of the seasonal direction so that's kind of what we're expecting uh this year because i think what we have seen is the excess deposits go out in 2022 that's slowing down and go back to our beta in the sense where a lot of the our deposits we increased our deposit uh pricing you know a while back with the index money market account and cd rates so a lot of our customers have been moved already migrated over to some of these products and are satisfied so we're just It's expecting maybe a little bit of seasonal decline in the first quarter, but I feel that things will start moving in the right direction once we start going further into the year.
spk08: Okay. That makes sense. Thank you. And then moving over to credit, I know you mentioned that the uptick in criticized here isn't of concern, but I was wondering if you could provide some additional commentary on kind of where that came from. Was it several credits?
spk04: Okay, we're going to have our chief credit officer, Michael Ludley, kind of address that question. Michael?
spk15: Yeah, so overall, the portfolio, there was no overall decline in the portfolio. In fact, it did fairly well. It was really driven by three relatively large credits that totaled a little over $98 million, which drove down our criticized portfolio. performance that increased that by our corresponding $38 million. So you can't net those three credits out, but if you look at the overall portfolio, the trend was actually positive and criticized.
spk08: Okay. Makes sense. And that's all the questions that I have. Thank you for taking them. Thanks, Adam.
spk09: Thanks, Adam. Thank you. And the next question goes to Andrew Terrell of Stevens. Andrew, please go ahead. Your line is open.
spk16: Hey, Kevin and Marci. This is Zach on for Andrew real quick. Just some housekeeping questions here. Do you have the monthly December NIM available?
spk12: Yeah, monthly NIM within the low 340s. Ex-purchase accounting.
spk02: Gotcha. And then do you happen to also have the spot on interest-bearing deposits at 1231?
spk12: Yeah, it was in the high 70s.
spk02: Perfect. That's all I've got. Just some housekeeping questions. I appreciate you taking them.
spk09: Thank you.
spk02: Thanks.
spk09: Thank you. And the next question goes to Todd Milliken of RBC Wealth Management. Todd, please go ahead. Your line is open. Hi.
spk14: I appreciate it. Today's results were clearly a sizable operational miss on earnings reflected in the stock price today. Prior calls that I've listened to, you guys have been very optimistic about the operations. It seems to me that there's a notable change in that viewpoint. Can you address why investors should have the same kind of confidence in you based on this quarter's as they should have, you know, maybe previously?
spk04: Wow. That's pretty stark. I would say that the operating performance, you know, is strong. It might not be, you know, if you go back and look at the earnings projections, people under-thought what we were going to perform earlier in 2022. Then they might believe they overestimated what we were going to end up. The performance of the company really hasn't changed much. The only thing that I would say that's different is that we had some deposited outflows in the fourth quarter that we didn't anticipate, but the fundamentals of the operation of this company have not changed at all and, quite frankly, get stronger and stronger month by month.
spk14: Well, I get that, but this is clearly an operational miss by a significant amount. I guess I'm a little bit taken aback by why that's surprising.
spk04: It's not an operational myth by much by us, so that's just your perspective.
spk14: Okay. I appreciate it.
spk09: Thank you. And the next question goes to Bruce Cesar of Advisory Research. Bruce, please, your headline is open.
spk10: Yeah, thanks for taking my call. I know that Glacier reports at the same time as you, but in looking at cost of funds, your cost of funds widened compared to theirs. I mean, you guys were at 28 basis points in the third quarter. They were 15, so there was a 13-bip gap. You're 64 in the fourth quarter. They're 35, so now it's a 29-bip gap. And I'm just wondering if you've had a chance to look at, you know, how they performed on that side and could explain maybe what the differences are and why yours gapped out more than theirs.
spk04: Well, have you seen their deposit performance this quarter? I haven't looked. So the thing is this. The gap is because we're trying to take care of our customers and retain deposits by paying up and putting people into money market accounts and CDs. And we started that back in the third quarter and taking care of our customers. The fact of the matter is if you look at our performance, our margin has expanded. Their margin barely expanded over the second and third quarter. this quarter went down, I think, they're only net up in the core and their margin is a little over six basis points. It's a whole different ballgame. We're making a lot more money on the rate increases, and we can afford and still have margin expansion by paying our depositors and trying to retain that business. So just a different model.
spk10: But then why isn't it dropping to the bottom line?
spk00: I think we're a lot closer.
spk10: They were a lot closer on earnings. All right.
spk04: To whose earnings? These are analysts' expectations.
spk10: I'm aware of that, but people are going off of the guidance that you provide on a quarterly basis, and there was clearly a difference in expectations versus what happened. And that's what's driving my question. You just said you made a lot of money, and I'm just asking if that's the case, why didn't it fall to the bottom line? Why wouldn't it have been better to sell some securities, let that part of the portfolio run off, let the loan-to-deposit ratio go up instead of taking on expensive borrowings?
spk04: Well, I'm not going to get into how you run a balance sheet because let somebody else talk about that. That's not an effective approach. We'll take the next question, please.
spk09: Yes, our next question goes to Jeff Rulis of DA Davidson. Jeff, please go ahead. Your line is open.
spk07: Hi. Good morning. This is Andrew on for Jeff today. Just a couple quick questions on loan growth. You guys mentioned You guys noted earlier higher production and new markets, and you're seeing opportunities to grow new loans. I was just wondering where you guys are seeing the most growth and the most opportunities, by state or by region?
spk04: The interesting thing, quite frankly, is pretty even across our whole footprint. There wasn't really any one market that outperformed another, so it's pretty level across our whole footprint.
spk07: Got it. That's helpful. And then another one kind of following up on that. Are you guys winning new relationships in those new markets or are they just good markets in general?
spk04: Well, I think we're winning relationships because we're growing the assets. So we have net customer or account increases. We are winning customers, and it's, again, pretty much even across our footprint.
spk07: Got it. That's super helpful as well. Thank you. I'll step away.
spk09: Thank you. And as a reminder, if you would like to ask a question today, please press star followed by one on your telephone keypads. And we have a follow-up question from Chris McGrathy of KBW. Chris, please, your headline is open.
spk00: Hi, Chris. Your line is open.
spk05: That was me. I'm sorry about that. The comment in the deck about being neutral to rates with the balance sheet today, it would feel like that's perhaps on the conservative side of the Fed cuts. So the Fed cuts, the pressure on the funding would seemingly ease. I guess, number one, you kind of agree with that. And then, two, can you just remind me, Marcy, the beta, the full beta assumption that's in the 23 guide? Thanks.
spk12: We haven't provided the full data assumption in the 23 guide, Chris, but your first assumption would be accurate.
spk04: Yeah, Chris, what we're trying to do is, as we said in the past, you know, many calls, is that we were rotating our balance sheet to be less asset-sensitive and to prepare for the downturn. And I think, you know, we struck some good derivatives or interest rates popped up, Marcia mentioned earlier, too. to hedge that portfolio at a variable rate loans on the way down in a higher rate environment. As you can see, the yield curve has dropped off dramatically. So we're trying to protect the balance sheet on the way down.
spk05: Got it. Thank you. Thank you very much.
spk09: Thank you. And we have another follow-up from Andrew Terrell of Stevens. Andrew, please go ahead. Your line is open.
spk06: Hey, good morning. Good morning, Andrew. Just a quick question. I'm thinking about the mid-single-digit loan growth guidance. I guess, can you help me out with some color on just what the incremental margin on a dollar of loan growth is for you today? Just understand that the funding cost could be a little bit higher, but just what is the incremental spread that you're already seeing relative to the 360 or so margin in the fourth quarter?
spk12: Well, Andrew, it's kind of a mixed bag. So new loan growth, again, is going on in the high fives. What's going to dampen the overall yield is the construction book that's funding closer to kind of our core loan yield today, which is high fours. So it's going to be that mix of funding that kind of impacts.
spk06: Do you have the dollar amount of that construction book that is funding in that kind of territory? I'm just trying to quantify that impact. We don't. We don't. That's not something.
spk14: Okay. Okay.
spk06: Fair enough. And then the last one for me, just more housekeeping, was just the tax rate. What's driving the step up in tax rate?
spk12: It has to do with some accounting around LIHTCS. So it's coming up a little bit.
spk06: Okay. Thank you for taking the call. Thank you, Andrew.
spk09: Thank you. And our next question goes to Tim Coffey of Janie Montgomery Scott. Tim, please go ahead your line is open.
spk13: Great, thanks. I appreciate you asking me to ask a couple questions here. I apologize if I missed it, Marcie, but what is the cash flow coming off of ?
spk12: Seventy to eighty million dollars a month.
spk13: Okay, great. Kevin, as we look out across this year, what is your expectation for absolute growth in the balance sheet in terms of total assets?
spk04: Well, it all depends really on deposit growth. What we estimated and what I think Marcy alluded to is that earning assets should be flat for the year. What we're modeling is that the investment portfolio will run down and loans will go up. earning assets and the balance sheet will kind of remain flat, but we'll get better yields on our earning assets in total.
spk13: Okay. Great. Those are my questions. Thank you very much. Thank you.
spk09: Thanks, Jim. Thank you. And our next question goes to Adam Butler of Piper Sandler. Adam, please go ahead. Your line is open.
spk08: Hey, everyone. Thanks for taking the follow-up. Just going into the interest-bearing deposit data, do you guys have any guidance for 2023 as to where that is headed?
spk11: Hey Adam, it's John. I think as Marcie said in her prepared remarks, you know, at this point the data assumptions versus the prior cycle, we wouldn't be changing those assumptions. But we haven't specifically disclosed in the NII guidance that she gave what those interest-bearing deposit cost assumptions would be.
spk08: Okay, fair enough. Thank you.
spk09: Thank you. We have no further questions. I'll now hand back to Kevin Riley for any closing remarks.
spk04: I want to thank everybody for their questions. And as always, we welcome calls from our investors and analysts. Please reach out to us if you have any follow-up questions. Thank you for tuning in today, and goodbye.
spk09: Thank you. This now concludes today's call. Thank you so much for joining. You may now disconnect your lines.
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