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spk07: Good day and thank you for standing by. Welcome to the Bank OZK fourth quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11. You will then hear an automating message advising your hand is raised. Please be advised that today's conference is being recorded I would now like to hand the conference over to Jay Staley. Please go ahead.
spk12: Good morning. I'm Jay Staley, Director of Investor Relations and Corporate Development for BankOZK. Thank you for joining our call this morning and participating in our question and answer session. In today's Q&A session, we may make forward-looking statements about our expectations, estimates, and outlook for the future. Please refer to our earnings release, management comments, and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements. Joining me on the call to take your questions are George Gleason, Chairman and CEO, Brandon Hamblin, President, Tim Hicks, Chief Financial Officer, and Cindy Wolf, Chief Operating Officer. We will now open up the line for your questions. Let me now ask our operator, Victor, to remind our listeners how to queue in for questions.
spk07: As a reminder, to ask a question, you need to press star 11 on your telephone. Please stand by. We'll compile the Q&A roster. Your first question will come from the line of... Steph Scotland from Piper Sandler. Your line is open.
spk11: Hey, good morning, guys. Congratulations on a great quarter. First of all, I guess when y'all are thinking about originations, I mean, I think it was 2.81. It's still extremely high relative to what we saw in, you know, 21, early 22. What's the reason maybe for the thinking it'll be a little slower? Is it just overall economic? flow down? Are you seeing more construction projects kind of get tabled today than you were maybe 90 days ago? Or how can we think about those trends that you're seeing from customers in that space?
spk03: Good morning, Stephen. I'm going to let Brandon Hamlin take that question, if he will. Brandon?
spk11: Absolutely, Stephen. Great to hear from you this morning. Yeah, we actually, last quarter, we had the same question and the answer is similar. You hit on a couple of the items that are impacting deal flow, you know, costs have continued to increase, although I would say that we are hearing and seeing anecdotal evidence that the velocity of those costs increases is coming in, so it's still up, but at a slower pace, but obviously interest rates have not slowed down, so that piece of the puzzle still pressing against new deals. But we are still seeing new deals. We are still signing up new opportunities. But given that the pie is a bit smaller, we will probably take a little bit less in 2023. I mean, competition is really not a piece of that answer. We've had really good success in pushing into and getting our fair share or more given where the competition is. And as I've said in the past, the quality of what we're able to originate today in light of less competition is lower leverage and better spreads on the deals that we are quoting and winning. Okay, great. And this question, you know, maybe a little early, but I think it starts to become interesting. If rates begin to roll over in the back half of the year, how do your floors play into that?
spk03: Yeah, Stephen, let me tell you that. Obviously, the longer the Fed stays at whatever their terminal rate is, the better that works for our floors because – loans that we originated two years ago at a floor near the origination rate on those loans were obviously way off, way away from those floors before they would become active. The loans we originated last quarter may be at or very near their floor rate. So the longer the Fed stays at whatever their peak rate is, the more we roll off older loans that are far from the floor and replace those with new loans that are at or near the floor at the time of origination. The scenario where the Fed slows their rate increases and maybe has one, two, or three more quarter point increases and then stays at that rate for a year or longer, the longer they stay there, the better it is for our floors. and the more defensive it is for our margin.
spk11: Yeah, that's helpful. I mean, like at a very high level, is it fair to just kind of think about the – and I understand what you're saying, George, is these numbers are improving every quarter, but almost the inverse of the charts you were showing previously as rates went higher and just how the percentage of loans that would fall into protection from those floors, is that kind of roughly how we could think about it?
spk03: Yes, exactly, and if you think back a year or two, we had a lot of loans that the floor rate was way above what the formula rate was at the time, and rates had to rise 50 or 100 or 150 or 200 basis points before we got above those floors and those loans activated. The Fed kept that from being a big issue by raising rates a lot in big chunks and quickly in big chunks. So we quickly got over those floors. And you can see the benefit of that in our record levels of net interest margin and core spread that we've been achieving. So yes, the flip side of that is true. And Stephen, that's why we've made the comment we will, when the Fed stops raising rates and deposit costs catch up, we will see a reversal of some of this significant improvement in net interest margin and core spread that we've had over the past year. It's possible that Q4 was the peak in our net interest margin and core spread. It's likewise possible that we could have another quarter where we have some improvement in NIM and core spread. But based on the fact that the Fed is going, it seems like the quarter point increases and the number of those is a legitimate question. Is it one? Is it two? Is it three? Is it four? But those quarter point increases, we're going to see a catch-up in our deposit costs. So if we didn't hit peak NIM and core spread in Q4, you know, would eke out some small incremental gain in Q1. I can't even, you know, I hope we will have a gain in Q1, but that's questionable. But at a slower rate of bed increases with deposit costs, which lag beginning to catch up, we'll see some erosion of those recent gains probably in Q2 at least.
spk11: Yeah, well, if the NIM peaks at 550 range, you're going to be doing better than 99% of banks anyway, so we're fine with that. I guess the one follow-up is just when you think about that deposit lag in the back half of the year, how do we try to frame that up at all? Because that, to me, is the hardest thing to try to anticipate. We can think about betas when rates are rising, but when they're not, how do you think about that kind of lagged pressure in the back half of the year on deposit costs?
spk03: Well, the way we're thinking about it is doing everything we can do to roll floors up and make sure that the deposits that we put on are not too long a duration. Now, we added some duration to the deposit base last year, and you saw that with an increase in the volume of CDs. That was a intentional to put some duration in that book, knowing that we were going to have strong loan growth in 2023 and probably weren't going to see rates coming down much, at least in the front half of 2023 and maybe not at all in 2023. But we're beginning to shorten the duration on new CDs we're adding and still doing a bit out longer, but We're pulling some of those in in some categories of deposits just to get ready to have deposits repricing late 23 and early 24, as we think that's probably the likely timing that the Fed may be in a cutting mode if they are. Yeah, perfect. Great color, George. I appreciate it, and congrats again on all the record results. Thank you, Stephen. I want to give a shout-out to our Cindy Wolfe and Adi Curley, our chief deposit officer, and Drew Harper, who manages our wholesale funding. That deposit team and all the guys that work for Adi and Drew and Cindy there have done a really good job of making adjustments to what we thought our interest rate risk profile is. You know, we've had a really nice expansion in our net interest margin, core spread, net interest income, and that just didn't happen. They've been very strategic in the way they've managed that on the liability side, as our asset guys have, and the team deserves a lot of credit for how well they've managed that. Thank you, Stephen.
spk07: Thank you. One more for our next question. Our next question comes from the line of Manan Ghassan from Oregon Stanley. Your line is open. Hey, good morning.
spk04: Thanks for taking my questions. Good morning, Manan. Good morning. So I just wanted to follow up quickly on the last line of questioning. I guess with the new CDs that you're putting on and the fact that you're reducing the term of those CDs, should a large chunk of the CDs come due for repricing towards the mid to end of 2023? Did I hear you right there?
spk03: Manon, I would say that they're more laddered out throughout 23 and into early 24. So it's a pretty well-managed ladder. We've got CDs maturing every day, and we've kept a considerable focus on keeping that distributed fairly even so we can just manage that effectively instead of having big, chunky pieces of it maturing here and there. So it's very well diversified on a day-to-day basis throughout 23 and into 24. Got it, perfect.
spk04: And then maybe just a big picture question on repayments. Just given that the refi market takes out a larger portion of your loans, I guess just based on your conversations and given how close we are to peak Fed rates, how quickly do you think that the capital markets can open up and push sponsors to move to more permanent financing? And maybe you can just add, based on how you've seen this play out before, I guess what's the best estimate in terms of how high repayments can go this year?
spk03: Well, again, we've said that we think our RESG repayments will be in the range that we achieved during 2021 and 2022. So that's $6.22 to $5.65 billion is the likely number there. You know, it could be a little more than that. It could be a little less than that. But we're thinking that that is the range for repayments next year. And, you know, I would tell you that the capital markets are not closed. Transactions are getting done. Sponsors are just, you know, not as excited about rates they're getting as they would have been on rates a year ago. One phenomenon that we've seen, and I want Brandon to comment on this, but one phenomenon that we've seen in the past, Manon, in response to your question, is if sponsors tend to think that they're going to get a much better exit six months or 12 months down the road than they are today, a lot of times they'll stay in our more expensive construction loan a little longer if they think they're going to exit today at a 7% long-term rate, and they think they can get a 6%. If they wait now more months, they will tend to stay in our loan a little longer to get that better exit. Sometimes they do that. Sometimes they're just ready to put the permanent bid and go on down the road. But Brandon, you want to comment on refinance activity next year or this year in 2023? Sure.
spk11: No, you characterized it correctly, George. I think one of, you know, we will likely have a number of those short-term extensions, you know, six, nine, 12 months, just as you said. And really, there's so much we don't know about exactly where longer-term rates are going to go. As George said, the market is still open, but as those rates move back to a more normal place, we would expect the repayments to accelerate. I think, you know, back half of the year is likely to be higher than the front half of the year. But, you know, it, as we know, inures to our benefit certainly from an average earning assets point of view. And we're when we make those loan extensions, a lot of times we'll obviously get a little more fee income, perhaps a little more minimum interest, but they're not long-term in nature, and so when the capital markets come back, they'll move on. Our rates are not as attractive, obviously, as the long-term rates.
spk03: Yeah, and I would emphasize Brandon's point that we view loans staying on the books six months longer or 12 months longer is a very positive thing. It greatly improves our return on equity on those loans to have them sit on the books longer.
spk04: Right, perfect. Yeah, that was going to be my follow-up. So, I mean, if it stays on the books for longer, you have higher earning assets that helps your NII even if NIM is declining. But as you run your scenarios under different macro assumptions, Are there any situations in which NII peaks and starts to decline, or should we just continue to see this NII ramp up and get to peak NIMS in the next couple of quarters and then move down from there?
spk03: Well, that's a good question, Manon. I would tell you that our prevailing thought is that we will see some compression in NIM and core spread in the coming quarters. but that that's going to be more than offset by growth and average earning assets. We alluded to this in our management comments specifically, and I've referred to it internally as a baton handoff where that growth in net interest income ceases to be driven by NIM. That actually becomes a little headwind. But we've got great originations that have occurred in 2022 that will drive loan growth in 2023 and 2024. And the continued increasing diversification of our portfolio should also help us drive loan growth in 2023 and 2024. So we are cautiously optimistic about a positive net interest income story.
spk04: Appreciate it. Thanks so much.
spk03: Thank you.
spk07: Thank you. One moment for our next question. Our next question comes from the line of Timur Braziler from Wells Fargo. Your line is open.
spk08: Hi, good morning. Good morning. Just following up on that last line of commentary, you know, how should we be thinking about balance sheet loan growth in 2023 given the expectation for slowing originations? Is that pretty much scheduled and you know what you're expecting from a funding standpoint, or could that too slow?
spk03: Sam, you want to address that?
spk02: Yeah, hey, good morning, Kamir. You know, given the level of origination volume we've had over the last four to six quarters, Given our construction loans and the fact that many of these loans were funding later in the construction phase, we do kind of know the schedule to a great extent of the funding for those loans. And so that gives us confidence. And you saw on page five that we said we thought for 2023 that loan growth 2023 would meet or exceed the $2.47 billion we achieved in 2022. And a lot of that is just the delayed funding sequence we have in those RESG loans in combination with the growth profile that we have from some of our other business lines like asset-based lending and our community bank. We've got pretty good visibility into that for the 2023 year.
spk08: Okay, great. And then maybe just to follow up with you, Brennan, in looking at the national markets and kind of asset classes within RESG, where are you seeing the most amount of resiliency right now? And then conversely, are there any geographies or asset classes that are seeing any kind of marked slowdown in either activity or evaluations? Great question.
spk11: Yeah, yeah. So, you know, it's interesting. The book that we see coming to us continues to be a fairly diverse book, both geographically and from a property type perspective. I think one that stands out, and we've talked about it before, the upper Midwest, which includes Chicago, has been a little slower the past several quarters, and that it continues to be the case. We're still looking at deals there, but just on a relative basis to our history. bit slower there but but when i look at what we've got signed up you know in the pipeline to to close it has a a pretty similar uh mix as historically they're less office probably uh than we've seen but we are still uh seeing office opportunities with with you know pre-leasing frequently uh available in those opportunities and as i said before really great position to achieve the low leverage that is our standard and really improving on that. But the southeast continues to be south-southeast, southwest. Those states where we've seen so much good origination historically remain sort of the feature, I would say.
spk08: little slower on the coast but we're still doing deals on both coasts as well okay great and then just last for me looking at the comments made around net charge-offs for the coming year recognizing that 22 was was a record year you know how how can we start thinking about normalized charge-offs and and then as we're looking at provisioning levels just maybe talk us through your thoughts on um provisioning trajectory here in 23, given the broader uncertainty. Tim, you want to take that?
spk02: Sure. Yeah, I mean, you can look on Figure 15 and our net charge-off history, obviously. What a great year in 22 to be able to record a four basis point net charge-off ratio, which is an all-time low. You know, the range that we've had over the last three or four years in 2020, we had 16 basis points. Obviously, there was a lot of uncertainty with the pandemic going on that year and, you know, six basis points in 2021 and 11 basis points in 2019. It's hard for us to know, you know, what the net charge-off number is going to be for 2023. It's likely to be somewhere in that range. would be would be our best guess based on what we know today as it relates to provisioning obviously a lot a lot goes into that you know the macro economic factors that we get from Moody's and use for Moody's go into that they did those factors those scenarios became a little bit more adverse compared to what they were as of 930 and so you saw us shift our weighting slightly although we still are weighted to the downside through our combined weightings on Moody's S4 and S6 scenarios. The provision in the last two quarters has greatly been influenced by the growth that we've had in our funded balance and unfunded balance. So the impact of our growth in funded and unfunded obviously will impact the level of provision we have from quarter to quarter. And then as we get through 2023, obviously Moody's economic scenarios, we look at those during a two-year forward projection. And so as you get towards the end of 2023, the two years ahead of where you are, are the scenarios that we're looking at. And so obviously there's a lot of uncertainty of what 2023 brings. And so when we get more clarity that may influence Moody's forecast too and our weightings related to those as well. So a lot of factors go into that. Obviously, the last two quarters related to the growth that we had in both our funded and unfunded balance. And you did see our overall total ACL to total commitments move up a couple of basis points in both of the last two quarters. reflective of that growth and really the economic forecast you're seeing from Moody's and our selection of those. Hopefully that helps.
spk03: Thank you. Hey, Tim, I'm going to add a comment here on something. A comment has been made that our ACL for unfunded loans is a lower percentage than our ACL for funded loans, and the The question has come up previously, as unfunded loans fund and move to the funding category, does that mean we're going to put up more ACL on it? That doesn't follow. That's not a connect. The reason that our unfunded percentage is lower than our funded percentage is because RESG is a much higher mix. 90% roughly of the unfunded, it's low 60% of the funded. And our RESG loans are lower leverage, so they have lower risk associated with them, lower loss exposure if you have a default on one of those loans. So the ACL for those loans is lower. The other loans, the typical community bank loans, consumer loans, RV and marine loans, all the other stuff that is mostly funded has higher ACL allocations for it. So the movement of a loan from unfunded to funded doesn't change the allowance allocation really for that loan in any meaningful way. So I thought I might clarify that because I think there is some confusion out there about that.
spk07: Thanks, George. Thank you. Thank you. One moment for our next question. Our next question comes from Catherine Miller from KBW. Thanks. Good morning.
spk01: Good morning.
spk09: Good morning, Catherine.
spk01: I wanted to talk about maybe the office portfolio, which you gave a little bit of disclosure on in your management comments. Can you Walk us through how much of that, I think that $4.9 billion is funded versus unfunded and kind of what the leasing looks like for some of these newer projects.
spk11: Yeah, I'll jump into that, Kathryn. I don't know exactly the funded versus unfunded dollars off the top of my head, but with respect to leasing, As we've said, some of the projects we originate have pre-leasing when we originate them, some are spec. But when we look at projects that are complete, we are seeing continued green on the screen moving forward with improved leasing. Obviously, there's a range of results across that portfolio. But we are still seeing positive leasing momentum in those projects. And as I said, the newer stuff that we're putting on the book is predominantly going to have pre-leasing involved with it. So on the whole, as we've noted numerous times, the flight to quality thesis, we are seeing that continue to play out both in the loans that we have in our portfolio and in the markets generally in terms of the lease activity that we see out there. Again, there's a range of success across portfolios, some slower than others, some knocking it out of the park, but on the whole, we're pleased with what we see there.
spk01: Great. And then back to the margin conversation. Can you talk to us about where your deposit rates were towards the end of the quarter, just to get a sense as to where funding costs might be coming as we reach near the peak Fed? Cindy?
spk06: Yes, Catherine, this is Cindy. December was 1.66 on cost of interest-bearing deposits.
spk01: And on average, I know your CD rates kind of range in different markets, but on average, where are new CDs coming on?
spk06: I don't have that information. I don't have an average, and you're right, it varies depending on the market.
spk01: Okay. And back to your previous comment, George, about NII growing from here. Should we think about that on a year-over-year basis, or should we think about that from a fourth-quarter annualized basis? Because you've seen such a big increase in your NII growth over the course of the year. And so just trying to think about, you know, obviously as the margin peaks and then falls, you know, I think year-over-year growth is for sure going to happen just given the ramp we've seen throughout the year. But is it fair to say we could see just from this quarter's annualized run rate a little bit of a compression just NII as that margin falls as funding costs increase?
spk03: Sam, why don't you take that one?
spk02: Yeah, Catherine. Yes, you're correct. Year-over-year, obviously, we have lined up the potential to have a really strong year-over-year comparison. If you're comparing it to just each quarter compared to fourth quarter, I think there will be one or more quarters in which we have higher net interest income than we did in the fourth quarter.
spk01: Great. Okay. That's very helpful. All right. Thank you.
spk07: Thank you. A moment for our next question. Our next question is from Matt Olney from Stevens. Your line is open.
spk09: Hey, thanks. Good morning. I wanted to ask more about capital and specifically the CET1 ratio. It's come down a little bit over the last few quarters from the Strong loan growth. I'm just curious what you think about further capital deployment and what you consider the floor for the CET1 ratio. Thanks.
spk02: Yeah, Matt. Obviously, our growth in both funded and unfunded has contributed to our risk-weight asset growth over the last several quarters. We've got a lot of earnings power, obviously, as we've demonstrated over the last quarter or two. And we have the ability to do multiple capital deployments, which you saw in the fourth quarter where we had good growth and a little bit of share repurchases. So we're comfortable where we are on CET1. I don't know that you'll see that much risk-weighted asset growth that we have. Obviously, the funded growth, we've outlined our thoughts there on the unfunded. As we approach the end of the year, the unfunded balance is likely to decline some, which will give us some relief on the risk-rate asset side. So we've got some internal targets on CEP1. We're well ahead of those and expect to continue to be well ahead of those as we go throughout the year.
spk09: Okay, perfect. Thank you for that, Tim. I appreciate it. And then going back to the core spread discussion, obviously impressive in the fourth quarter. The loan yields were particularly impressive in 4Q. I think those loan betas moved up higher than 4Q versus 3Q. Any color you can give us as far as the higher betas we're seeing in 4Q? I know Brandon mentioned some potential extension fees in 2023. In the future, did we see any of that in the fourth quarter? Thanks.
spk03: I would say, Matt, that was a fairly typical run rate for minimum interest, extension fees, and so forth in Q4. It wasn't particularly low. It wasn't particularly high. It was kind of in the range of what we would have considered to be a normal range, and I don't think we have the expectation that's going to be a huge factor in 2023. I think we'll see a fairly typical run run rate on that. I mean, it will vary up and down a few million dollars from quarter to quarter, but that's not going to have a big impact on our margin over the course of the year or probably more than a few basis points in any particular quarter.
spk09: And George, if it wasn't the fees in the fourth quarter, any other color on the stronger loan betas we saw in 4Q versus 3Q?
spk03: everything that was variable was off its floor, essentially, and the Fed was moving quickly. So those translate into higher loan yields. Obviously, loan yields will go up less rapidly with the Fed moving 25 basis points instead of 75 and 50. So what we can do there on increasing loan yields is definitely... tied to a large extent to the magnitude of Fed rate increases.
spk09: Okay. And then just lastly around thinking about liquidity and funding, the growth in 2023, clearly deposit growth is going to be a big factor this year. But on the securities portfolio, you disclosed kind of what cash flows you expect this year from that. Will that be a source of funding for loan growth? Just curious if you think you could work down that portfolio in terms of size this year? And if so, how much?
spk03: Matt, that's going to depend purely on what we see as reinvestment opportunities. You know, with the inverted yield curve and steeply inverted as it is and assuming a likely Fed pivot seems to be priced into the yield curve, faster than what we would think the Fed's going to pivot. There's not much attractive for us to buy out there, so we're pretty much on the sidelines in letting that portfolio run off. If there is a reversal in that sentiment and we get some higher yields and a better entry point, we would buy bonds and might buy a lot of bonds if it were what we thought was a very attractive entry point. But the bond market seems to be a little ahead of itself right now with that steep inversion in the yield curve. So we're sidelined, and we're not going to chase it. So if we miss that, then that portfolio just gets smaller, and we're okay with that.
spk09: Okay. All right. That's all from me. Thanks, and congrats on the quarter.
spk03: Thank you so much.
spk07: One moment for our next question. Our next question will come from, I know, Jennifer Demba from True. It's open.
spk00: Thank you. Good morning. I'm just curious how the new mortgage lending operation is going and if you have any interest in starting any other new business lines anytime in the next several quarters.
spk03: Yeah, we're working on the technology. We've got our three senior members of the mortgage team on board, and they're doing all their process bills and governance and risk build-out around that. We are in testing on the technology product that's going to... drive that business. When we get the technology product fully vetted and tested, we'll start adding some origination teams and begin doing business. That probably, Jennifer, is third quarter before we actually start that business. And we'll start it in a small scale way and ramp it up slowly. So that really is probably a 2024 matter. that you'll begin to see a little bit of trickle of results in there in late 23, but nothing that's going to move the needle until possibly sometime into 2024. Great.
spk05: Thank you.
spk07: Thank you. One moment for our next question. Our next question will come from Raymond James. Your line is open.
spk13: Hey, good morning, guys. Thanks for taking my questions. I wanted to start on the expense side of the house. You guys have done a bunch of different initiatives and projects kind of over the years. Just wanted to see if you had anything on tap for 2023 and then, you know, how should we think about, you know, different components, whether it be, you know, kind of wage inflation, annual merit increases, you know, healthcare costs, FDIC costs going up. If you can just kind of contextualize the expense outlook, I would appreciate it. Thanks. Sam, go ahead.
spk02: Hey, Michael. Yes, you rattled off a long laundry list, and we've got probably more that we could add to that list, but, you know, we added a chart on page 28, which was figure 31, which shows you the headcount increase that we had throughout last year, and you can see that we've Really, from our low point on June 30th through the back half of the year, we added 172 people, which is a 7.5% increase in the headcount. We also gave a lot of good raises throughout the year and some additional raises that go into effect one-to-one. We'll continue to add headcount as we go through this year. We've already gotten started in January with additional headcount, so that headcount will continue. I mean, we were really at a pandemic diminished level, as we said there at our headcount. So we needed to add back staff to support our growth initiatives. You mentioned wage pressures. Those are real. Those will continue throughout this year. You mentioned the deposit insurance assessment that's going up. And if the balances didn't change, it would go up 1.2 million dollars a quarter, but you also have to take into account the increase in assessments that we'll get from our growth and average assets as well. You know, really we'll have increased advertising and marketing as we go throughout this year, similar to really probably similar to Q3 and Q4 levels to support our deposit growth initiatives. And then you've got the inflationary pressures and all the other kind of line items, some of which are probably delayed a little bit when you think about vendor contracts that come up for renewal for, you know, one-year or two-year or three-year contracts. So all of that kind of adds up to our expectation for low double-digit increase year over year, full year 2023 compared to full year 22. We would expect kind of in that low double-digit range increase in total non-interest expense. Well, I'm sure you were about to point this out, but I wanted to at least point out that that would still put us at a mid-30% efficiency ratio for the year, which would still be among the industry's best.
spk13: Yes, exactly. Just one follow-up separate question. Figure 25 on page 23, the So I noticed that the LTV on the Tahoe credit was up from, you know, 79% to about 84%, 85%. Any sort of updates there on that particular credit and, you know, any sort of, you know, resolution opportunities at some point? I know it's a longer-term kind of credit, but just looking for any updates.
spk03: Brandon?
spk11: Yeah, I'd be happy to take that, Michael. As it relates to the bubble floating, that has to do more with the asset mix at any given point in time. We have a few remaining single family lots at the project and a club, and then we've got roughly, well, there are 17 townhomes under construction and 34 to construct and sell beyond that. And those townhomes have had, because of the price appreciation they've had over time, when we originate those loans, they have a pretty attractive LTV on them. And then when you sell them and start, you've got others that are not as high. It has a slight impact on your LTV. But we did close one townhome sale in the quarter. at a very nice price. We've got, as I said, 17 under construction and six of those are under contract. We still feel good about the project. I would tell you that it's, you know, COVID created sort of a frothy pace of transactions in that market as people were really focused on getting out of town and being in a better place if they were going to have to sort of hunker down and work from home, if you will, and So we definitely saw the benefit of that. It's pulled back a bit. Its rates have increased, and that has affected things. But still a good market. Resale prices in the community are doing well. That one sale we had was at a very, very nice price point. So as you said, it's a long-term sort of resolution, but certainly profitable. certainly made a lot of good progress in the last couple of years and expect that to continue, albeit at perhaps a somewhat reduced pace.
spk13: Okay. And then just finally, the special mention rated credit, I think that's a new kind of addition. Just wanted to get any sort of details there if there's any concerns on your end. Thanks.
spk11: Yeah, sure. No, that credit's a site that was planned for a very high-end development, and construction costs have escalated materially over the last couple of years, and ultimately the borrower decided not to proceed with his vertical development there. In light of his abandoning the development plan, we obtained a new appraisal dated December 22, which concluded to an as-is value of $100.4 million. That compares to the original 2021 appraisal of $139.1 million. and results in a current LTV on the new appraisal of 63%. So the loan's current sponsor is actively marketing, working to liquidate the property. But given the aborted development plan and their decision to liquidate the property, we concluded that the special mention rating was appropriate for that credit.
spk13: Great. Thanks for taking my question. You bet.
spk07: Thank you. And as a reminder, that's star 11 for questions. One moment for our next question. Our next question will come from Brian Martin from J&E Montgomery.
spk10: Hey, good morning, guys. Hey, Brian. Hey, Brian. Maybe just one on the loan side for a second. Just I appreciate the commentary about, you know, the growth outlook this year. Just kind of wondering if you can provide any perspective on just, you know, where that growth, you know, how you're thinking about, you know, the different buckets of where that growth comes from, both from the RESG standpoint, and I think you also called out kind of the community opportunities on the community banking and the ABL front, just kind of trying to understand where the growth might be, you know, coming from this year.
spk03: Brian, I would tell you I think it's going to be diversified again. Obviously, with the high level of RESG originations, the record level of originations in 2022, a lot of those loans will start funding up in 2023 and finish funding up in 2024. you know, RESG's funded balances will undoubtedly grow and should grow in a decent manner because of the big originations last year. But at the same time, we are getting good traction as shown in the little waterfalls there on growth in the portfolio. This last year, we're getting good traction in our ABL group and various elements of our community banking group as well as some positive momentum in indirect marine and RV. The corporate and business specialties group that shows a slight reduction in funded balances at a couple of quarters this last year has actually had nice growth in their commitments outstanding for funding. So even that group is growing in total commitments. So we think we're going to see good diversification and probably better contributions from some of those community bank units in the next year than we saw in the last year, and that was positive. So we're constructive on the continued trend toward diversification in the portfolio.
spk10: Gotcha. And the pipeline in the ABL portfolio is pretty healthy at this point?
spk03: Brandon, do you want to comment on that?
spk11: Yeah, no, it is. As George said, they had a good year last year. They got some great credits on the book and looking at some others here early in the year. One of the things I would note about that particular portfolio, those credits have a very nice sort of accordion characteristic to it, if you will, that defensively you know, as sales volume pulls in, you know, our credit's way ahead of that with the formulaic structure, but also as these businesses, you know, experience great health and expansion opportunities, you know, you don't have to necessarily book a new credit to realize a good pipeline there. We actually had three different credits expand during Q4 and I was at dinner last night with, you know, another credit customer that is contemplating expansion as well. So really, really encouraged about, you know, the growth opportunities for that portfolio. Gotcha.
spk10: Okay. No, that's helpful. And maybe, Tim, I might have missed it, what you said earlier on the expenses, but just given that ramp up and kind of the hiring and what you guys talked about and even the increases starting this year, just kind of the growth rate or, you know, how should we think about that ramp up in expense growth from kind of this fourth quarter level, which is obviously a peak, you know, as we get into, you know, 2023 and whether it be year over year or quarterly, just did you provide anything on that or maybe I missed what you said there?
spk02: Yeah, no, year over year, we're expecting low double digit increase. You know, if you're starting with fourth quarter, Q1 is always seasonally tough. You've got a full load of FICA. You've got health insurance increases. You've got a good amount of raises that come in. And then you've got the FDIC insurance that's kicking in. The increase there is kicking in 1-1. And then advertising and marketing, we're doing a lot of that right now. So I would expect another healthy level of increase in Q1 and maybe not as much increase as we get throughout the year. But overall, year over year, low double digits.
spk10: Gotcha. Okay, that's helpful. And then just one other one was on the A, the repurchases, just kind of your outlook there. And then just on the deposit front, just the broker deposits were up a bit, just kind of wondering what the appetites are there, just kind of where you want to see that. trend as you go throughout the year or just over the next couple of years.
spk03: Tim, you want to take the repurchase part?
spk02: Let me take the repurchases. Obviously, we grew a lot in our funded and unfunded balance in Q4. We purchased some, not as much as we had in previous quarters. We've got really good capital levels and a good earnings profile. I think we can do multiple things at the same time. We'll look to be opportunistic on the share repurchase and find opportunities where we may have quarters that are above that fourth quarter number and there may be quarters below that number. So we'll be opportunistic and try to find opportunities to see where we use that authorization.
spk06: And this is Cindy. On the brokered, I'm going to borrow Tim's words and completely parrot that and say we're going to continue to be opportunistic and disciplined and look for the opportunities that Adi and Drew and the teams are finding for the brokered. We had worked it way down, as you know, and as we get back into that space, we're being very surgical and and focused on finding the best possible opportunities we can. So we're pleased with the way we're managing our increase in our brokered book.
spk03: And the percentage of brokered is probably not going to – you're not going to see any material increase in that percentage going forward. You know, we're in our – target zone for what's acceptable on that in our internal standards and we're not going to materially increase it. So you're not going to see that at 12 or 13 or 14% of deposits would be our expectation. We're not going there. So probably sub 10 or around the 10 sort of percent range is probably about the max you'll see on that.
spk10: Gotcha. Okay. Thanks for taking the questions, and great quarter, guys.
spk07: Thank you. And I'm not sure we have any further questions in the queue. I'd like to turn the call back over to Richard Gleason for any closing remarks.
spk03: All right. Thank you guys very much for joining the call today. We're glad to celebrate a really great quarter and a great year with you. We appreciate your interest in our company, and we'll see you in about 90 days. Thank you so much. Have a great day. Concludes our call.
spk07: This concludes today's conference. Thank you for participating. You may now disconnect. Everyone, have a great day.
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