Q4 2022 Enterprise Financial Services Corp Earnings Call
Good morning.
My name is Colby and I will be your conference operator today.
At this time I would like to welcome everyone to the Enterprise Financial Services Corp, fourth quarter 2022 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
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Thank you.
I will now turn the call over to Jim Lally, President and CEO you may begin.
Colby. Thank you and thank you all very much for joining us This morning, and welcome to our 2022 fourth quarter earnings call. Joining me. This morning is Keene Turner, <unk>, Chief Financial Officer, and Chief Operating Officer, and Scott Goodman, President of Enterprise Bank and Trust.
Before we begin I would like to remind everybody on the call that a copy of the release and accompanying presentation can be found on our website.
The presentation and earnings release were furnished on SEC form 8-K yesterday.
Please refer to slide two of the presentation titled forward looking statements.
Most recent 10-K and 10-Q for reasons why actual results may vary from any forward looking statements that we make today.
Throughout 2022, we stressed our commitment to building partnerships with our clients the execution of our strategic initiatives and our diversified business platform.
This cadence of consistency produced record results for both the fourth quarter and for the entire year.
The financial highlights for the fourth quarter begin on slide three.
We capped the year with tremendous momentum both for loan growth as well as earnings we earned $1 58 per share for the fourth quarter, which resulted in a 1.83% return on average assets and a 23% return on tangible common equity.
This is inclusive of our tangible common equity to tangible assets ratio of expanding during the quarter.
We closed the year at 843%.
Additionally, our robust earnings helped to contribute approximately $2 per share to our tangible book value during the fourth quarter, which closed at $28 67 per share.
Turning to slide four you can see that we had an outstanding quarter with respect to loan growth.
On annualized basis, we're able to grow the loan portfolio by 16%.
Moreover, the diversification on which we are focused was on full display as just about every market and business lines contributed to these outstanding results.
<unk> will provide much more color about these markets and businesses in his comments.
Our posture on deposits has not changed we continue to actively manage deposit rates and a focus on the relationship aspect of this side of our business.
All of this is to find the appropriate balance between retention growth competitiveness and stability.
I'm really pleased with how this has played out as evidenced by the de Minimis amount of run off a relatively low cost of total deposits and a stable D D, 8% ish right around 42%.
This level of discipline, coupled with the rise in short term interest rates resulted in a net interest margin expansion of 56 basis points.
Our credit statistics remain outstanding this both nonperforming loans to total loans and nonperforming assets to total assets improved from the very low levels that we reported at the end of the third quarter.
We did record a modest provision expense in the quarter due to our strong loan growth outpacing the risk reduction in the portfolio during the fourth quarter.
Slide five provides a recap of our highlights for the full year.
On a fully diluted basis, we earned $5 31 per share in 2022, an increase of 38% from 2021.
We grew portfolio loans at a rate of 11% for the year with contributions from all of our regions and businesses.
Along with our balance sheet performance. This growth supported a record financial results our pre provision net revenue expanded 25% over the prior period. This helps drive a pre provision net revenue return on average assets that easily surpassed 2% to end 2022.
All in all 2022 was an incredible year for FSC, we entered the year with a focused mindset of delivering consistent results there.
Record earnings per share that we produce is a product of a well executed plan that focused on diversified revenue growth disciplined pricing within our deposit base consistent credit and pricing fundamentals patient and thoughtful capital and investment management and responsible expense management.
As we turn the page and head into 2023, our areas of focus which are found on slide six have not changed spy.
Despite the continual change of our operating environment, which include ongoing short term rate increases intense deposit competition and the likelihood of a mild recession, we're confident of our ability to perform at a high level that we have become accustomed to.
The conversations we've had with our clients gives us confidence that 2023 should be another outstanding year for <unk> for the most part backlogs and order books of the operating companies that we serve are strong with corporate balance sheets that provide ample room for continued growth.
They are still dealing with some of the same issues that have become commonplace such as sufficient competent labor and reliable supply chains. However, we do not see these issues as do railroads to the success of these businesses.
We feel good about the continued growth of our investor CRE business due to the many projects that had broken ground in late 2021 and throughout 2022.
New priorities have been slower to materialize as the sharp rise in interest rates require the owner developers to recalibrate their input metrics inclusive of additional equity.
On the deposit side of things, we believe that we will continue to see a bit of pressure on rates throughout the year, there's always a lag on rate increases, especially for higher balance commercial accounts.
Been hard at work throughout much of 2022, identifying specifically, where we need to make proactive movements to preserve these highly valued relationships and feel very good about where these stand with that said I feel very confident that we can fund our expected loan growth with the various deposit generators that we currently have.
With that I would like to turn the call over to Scott Goodman, President of Enterprise Bank and trust for his insights about our markets and business lines Scott.
Yeah.
Thank you Jim and good morning, everyone.
As you'll see on slide number seven loans at year end totaled just over $9 7 billion, representing an 11, 3% increase from the prior year net of Triple T.
$984 million of core growth was well diversified across the major loan categories as detailed on slide number eight.
Strong growth in C&I reflects continued success in attracting new operating company relationships across our footprint.
Specialty business lines contributed a similar level of growth overall is C&I.
And also continue to perform consistently.
Growth in commercial real estate, while more modest overall generally reflects an intentional approach to partner and go deeper with a select set of strong investors and developers in each market rather than chase projects or transactions.
Q4 was a period of strong loan growth as reflected on slide number nine with contributions by nearly all markets and lines of business.
Originations for the quarter were up nearly 15% from the prior period.
Q4 is typically a seasonally strong loan production quarter for us, but this was further bolstered by wins on a number of larger new C&I relationships and nice performance out of the gate by our new team in Dallas.
The specialty lending units contributed roughly a third of the growth this quarter with an aggregate increase of $141 million.
SBA finished strong posting growth of $43 million in the quarter. Despite the continuing headwinds of higher short term rates.
The team is focused on proactive steps to moderate payoff activity with existing borrowers and continued consistency in our product offering to the market with a relatively stable pipeline heading into 2023.
Life insurance premium finance had a seasonally strong quarter based on the timing of premium renewals in the book.
But growth has been further accelerated by additional new referral partners in 2022, including new opportunities from the legacy first choice book, which we have been able to nurture and grow.
Tax credit also executed well with $52 million of quarterly growth pushing the total to $73 million or 15% for the year.
Strong quarter, mainly reflects advances on the existing projects and process along with several new ones.
The necessity for affordable housing and the continued adoption of these programs by more states should provide continuity of our opportunity pipeline in this business looking forward.
Sponsor finance posted a small decline in the portfolio for the quarter, mainly relating to slightly lower origination activity and some churn in the existing book due to the sale of platform companies.
Year over year growth for this business has been quite strong at $127 million or 25%.
Much of the activity in this channel as timing contingent due to the aspects of the M&A process.
And the lower origination volume reflects some delayed closings, which will carry over into Q1.
In general, though the pipeline of new deals for the specialty remains healthy and active.
Turning now to the regional results, which are on slide 10.
Our Midwestern markets of St. Louis and Kansas City grew $99 million in Q4, and posting year over year growth of nine 4%.
Both markets experienced a modest increase in revolving line outstandings.
And had solid new origination activity in the quarter.
Notably we on boarded several new middle market C&I relationships, along with a nice volume of refinance and new commercial real estate development loans in the Kansas City market.
Our southwestern markets grew by $81 million for the quarter, resulting in solid year over year growth of 14, 6%.
This includes $27 million and growth from our new Texas team.
Wringing their production to $43 million for 2022.
This office, which opened mid year is off to a strong start.
And with a nice balance of both new C&I and commercial real estate clients.
The Arizona team also had some nice closings this period, including a large retail center for a new investor relationship.
And a development loan for a large well known community based organizations serving children in the Phoenix Metro under our new market tax credit structured.
In Southern California, we grew $51 million in the quarter and are building nice momentum heading into 2023.
We continue to execute our strategy in this market of expanding the legacy relationships from credit sensor banks.
And developing a larger C&I portfolio through talent acquisitions.
This period, we on boarded several new C&I relationships assisted a large legacy franchise, operator with an acquisition.
And materially expanded our credit facility with a legacy CRE investor.
Moving now to deposits, which are on slides 11 and 12.
Total deposit balances were down $229 million for the quarter and $515 million or four 5% year over year.
Breaking this down noninterest.
Noninterest bearing accounts were stable for the quarter and up year over year.
The declines were really isolated to the interest bearing categories, where the majority of the funds being a limited number of higher cost transactional accounts or idle balances of larger businesses.
As you heard from Jim.
<unk> taken an intentional approach of selectively managing our deposit pricing to prioritize retention deepened.
Deepen our key relationships and attract new ones.
We've also developed a number of competitive deposit options for clients and our bankers are having proactive conversations to mitigate outflows.
The deposit breakdown on slide number 13 provides some clarity by region.
Larger impacts tend to be within our more concentrated C&I markets and legacy portfolios.
In the Midwest for example, a large portion of their $281 million decline for the quarter is attributable to a single up on upper Middle market company that we had assisted with a main street loan.
Upon the recent repayment of the main street loan we were unable to retain the full relationship let's move back to a national bank, along with the accompanying deposits of roughly $120 million in the quarter.
More generally, though we have been successful in growing relationship based balances originating over $1 billion of deposits from new relationships during the year.
Average balances for these new accounts materially exceeding those in closed accounts.
Lastly, I'd like to point to the growth of our specialty deposit verticals, which are detailed on slide number 14.
And which continue to enhance our flexibility to optimize our funding strategy.
During Q4 balances grew within each of our specialties.
Energy Association's property management and third party escrow.
Specialized deposits in aggregate grew $102 million in the quarter and $302 million or 13, 6% for the year.
Now I'd like to turn the call over to Keene Turner for further financial highlights Keene.
Thanks, Scott and good morning, everyone. My comments begin on slide 15, where we reported earnings per share of $1 58 in the fourth quarter on net income of $60 million organic.
Organic growth in earning assets and continued margin expansion drove a meaningful increase in operating revenue in the fourth quarter.
This led to record earnings per share that expanded 20% from the third quarter.
Noninterest expense and the provision for credit losses, both increased in the quarter, but these increases were more than offset by the 16% sequential increase in operating revenue.
For full year 2022, we reported net income of $203 million and earnings per share of $5 31.
Compared to $3.86 in the prior year.
Turning to slide 16, net interest income for the quarter was $139 million compared to $124 million in the linked quarter, an increase of $15 million.
The increase came as a result of higher average loan balances along with the benefit of increasing interest rates driving our asset yields higher the.
The increase in net interest income was primarily driven by a $21 million increase in loan income and was partially offset by a $6 million increase in deposit expense.
With the current composition of our balance sheet as of December 31, we expect the full impact of the existing interest rate increases will result in a quarterly net interest income in the range of $143 million to $146 million.
As noted in the earnings release, approximately 17% of the variable rate loan portfolio re prices on the first day of each quarter and did not benefit from the fourth quarter interest rate increases.
We expect that with the fed reducing the magnitude of interest rate increases that first and second quarter actions will be largely offset by lagged deposit costs.
We're experiencing better than expected pricing on interest bearing deposits.
However, we do expect that we will continue to address deposit costs and competition in 2023 that.
That is to say that net interest income growth will be correlated with loan growth and any additional actions by the fed.
Moving on to slide 17, net interest margin on a tax equivalent basis was $4 six 6% an increase of 56 basis points from the linked quarter.
With an asset sensitive balance sheet, we continue to benefit from rising rates and asset yield rose more than liability costs in the period.
Earning asset yields improved 78 basis points, which included 77 basis points of loan yield improvement.
Including a $6 six 4% original nation rate on new loans and the investment yield improved 26 basis points as reinvestment rates continued to increase to a five 2% fourth quarter tax equivalent rate.
Asset yields were also aided by an enhanced asset mix as we continue to grow loans and investments, while reducing cash balances.
Cost of interest bearing liabilities increased 40 basis points from the prior period, driven mainly by higher deposit rates and variable rate borrowings our deposit portfolio remains more than 40% noninterest bearing balances, which allows us to be more deliberate with deposit pricing compared to prior rate cycles.
The loan portfolio is our largest driver of asset sensitivity at 63% of loans are variable rate.
More than 60% of those have interest rate floors, and essentially all of those with floors are currently priced above before while.
While our variable rate loans have enhanced earnings during the cycle, we executed several interest rate swaps in the fourth quarter to protect future earnings if rates should begin to move the opposite direction.
Our interest bearing deposit beta with approximately 30% in the fourth quarter and while it is higher than the previous period in 2000 periods in 2022, it remains below our expected and historical level.
We expect this lag in deposit pricing to abate, we believe our ability to control deposit costs through this rising rate environment has been greatly enhanced versus prior interest rate cycles.
We remain committed to funding asset growth through relationship based deposits and our specialty verticals.
On slide 18, we demonstrate our credit trends.
Annualized net charge offs remained low at nine basis points in the fourth quarter compared to two basis points in the linked quarter.
For the full year net charge offs were $3 $9 million or four basis points, compared with $11 $6 million or 14 basis points in the prior year.
Overall asset quality improved in the quarter with nonperforming assets and nonperforming loans declining in dollar and percentage terms from both the linked quarter and prior year end.
Nonperforming assets were eight basis points of total assets and nonperforming loans were 10 basis points of total loans.
In addition to the improvement in the nonperforming category. We also experienced a decline in past due loans in the quarter.
On slide 19, we demonstrate the allowance for credit losses, the allowance for credit losses declined $3 6 million in the quarter to $137 million, primarily due to net charge offs and the overall improvement in asset quality.
While the economic forecast factors used in our seasonal model generally worsened in the fourth quarter the loan portfolio mix shifted to areas that carry a lower reserve.
Provision expense of $2 $1 million was recognized in the quarter, which primarily reflect an increase in the reserve for unfunded commitments.
The allowance for credit losses represents 141% of total loans compared to one 5% at the end of the third quarter when adjusting for government guaranteed loans the allowance to total loans was at 1.56% at the end of December .
Turning to slide 20.
Our fourth quarter fee income was $17 million, an increase of $7 million in the quarter. The increase was led primarily by a $6 million increase in tax credit income.
As you recall this line item was negatively impacted in the third quarter by rising interest rates on tax credit projects carried at fair value, while fourth quarter results did not see the same negative impact as rates were steady in the quarter and benefited from seasonally strong sales of tax credits.
Tax credit income will continue to be seasonal and subject to further interest rate movements. However, fair value adjustments that reduce tax credit income are more than offset by higher net interest income in a rising interest rate environment.
The fourth quarter also saw fees earned on community development investments compared to the linked quarter increase and they were partially offset by a decrease in deposit service charges driven primarily by an increase in earnings credits to clients based on recent interest rate trends.
Turning to slide 24th quarter noninterest expense was $77 million, an increase of $8 million compared to $69 million in the third quarter deposit service expenses were the main driver and increased $6 million from the linked quarter due to rising interest rates and growth in certain specialized deposit businesses.
Compensation and benefits increased $1 $2 million from the linked quarter, principally from higher performance based incentive and bonus accruals due to the company's strong financial results.
The fourth quarter's core efficiency ratio was 48, 1% an improvement of 170 basis points compared to the third quarter.
This reflects the continued momentum in operating revenue outpacing the rise in noninterest expense during the quarter.
Looking to 2023, we're expecting the core efficiency ratio to be in the 50% to 51% range as we expect to see margin expand further from our fourth quarter levels.
First quarter trends typically include an expected seasonal decline in fee income as well as higher compensation expense.
Overall for 2023, we expect salaries and benefits to increase around 6% from the fourth quarter annualized run rate.
Next big driver of expenses from increased deposit service expense from both rate and growth in certain specialized deposit businesses. We view this space is competitive and evolving and there may be some opportunity for us to manage throughout the year, but not necessarily in the next couple of quarters.
Our efficiency ratio guide reflects our posture on how we expect this line item to trend in 2023.
Our capital metrics are shown on slide 22, and our record earnings we generated in the fourth quarter of $60 million combined with an improvement in accumulated other comprehensive income resulted in tangible book value per share of $28 67.
An increase of 8% from the third quarter.
During 2022, we still increased tangible book value per share by roughly <unk> 40.
With our strong earnings level, while returning $67 million to common shareholders through dividends and share repurchases.
We announced another increase to our dividend for the first quarter of 2003, marking the seventh consecutive quarter. The dividend has been increased in.
In 2022, we paid common dividends of <unk> 90 per share, a 15% increase or 20% compared to the prior year.
While our dividend has increased our dividend payout ratio of 17% in 2022 remains at a level that provide flexibility in our capital structure moving forward.
The tangible common equity to tangible asset ratio improved to eight 4% at the end of the year.
After the initial decline in the first quarter when market interest rates increased and negatively impacted impacted accumulated other comprehensive income the tangible common equity ratio has improved in each of the last three quarters.
While the tangible common equity ratio is now within our target range of 8% to 9%, we do not plan to execute any meaningful share repurchases in the near term.
With the uncertainty on the path of interest rates and the potential economic impact of further short term rate increases we intend to let our organic earnings further strengthen our capital base when market conditions and our capital position aligned we still have 2 million shares available under our board approved repurchase program.
We had great momentum throughout the year and finish 2022 with a strong quarter, we delivered a 23% return on tangible common equity and a one 8% return on average assets in the fourth quarter with a 19% return on average tangible common equity and a one 5% return on average assets for the full year two.
<unk> thousand 22, we believe that we are well positioned and look forward to carrying this momentum in 2023.
Thank you for joining the call today and were now open the line for analyst questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad will pause just for a moment to compile the Q&A roster.
Your first question comes from the line of Chuck ruling from D. A Davidson your line is open.
Hi, Good morning, good morning, Jeff.
Yeah, just wanted to kind of get a sense for the <unk>.
The variable deposit costs Kean, we got Ya.
Kind of high end guardrails on efficiency and.
And expectations on on margin and how that all flows through but just wanted to narrow in on the <unk>.
Variable variable deposit costs.
Thats sort of a onetime catch is that seasonal in nature. I know you referenced credits rate driven but is there anything kind of year end, just trying to predict that line a little bit better.
And how that.
From a run rate perspective.
Sure Jeff.
Happy to give you some color there. So there was a little bit of catch up that was in there from year end and it really related to a competitive decision we made in the fourth quarter.
Obviously everybody's fighting for liquidity now and I think the specialized deposit space is one where we're seeing some of the key players there they've had some major deposit outflows and really trying to get aggressive. So we're just holding our ground. There I think we had a good quarter in terms of balances and we were responsive to some competitive pressures that had a little bit of an affair.
Act on.
Some of what was the earned throughout the year and there was some catch up I would say going forward. When you look at <unk> sequentially. We're thinking that that line item was up maybe $2 million to $3 million, just depending on what happens with balances and rates and sort of everything that we know at the end of the year. So.
Maybe based on December run rate itself, it's probably $2 million and based on growth and maybe some more leakage from a competition perspective that that increases up to 3 million.
<unk> and then I think you know if you layer that in with our efficiency ratio Guide I think you can kind of see how we think that that plays out for 2023.
Okay, if I catch that right youre referencing the the.
Variable deposit cost line item.
Specifically.
In addition to the correct, Okay, Brian and then we got your salaries and comp in Q1 commentary as well so it looks like in Q1, but again kind of use that efficiency ratio to back in for the full year.
Yeah, I think Q1, obviously won't compare to the 48% efficiency with the seasonal fee income and a little bit shorter day count from AR.
Net interest income perspective, and you have some seasonal expenses, there, but I think with that $2 million to $3 million for the first quarter sequentially on that.
Tax credit line or sorry, the ECR line item that should give you some good starting points for modeling the expenses for <unk>.
Okay.
I wanted to jump over to the.
The the margin.
I think you had referenced putting on some swaps in the quarter.
I can't remember if thats the first we've heard of that.
Just trying to get a sense for have you been.
Putting those on in quarters prior.
<unk> just trying to get the strategy.
Trying to be more aggressive in moderating our locking in.
Again margin to the downside should we slip on rates just trying to sense for the appetite of.
Could we see more and how far do you go obviously clearly benefiting on the asset sensitivity front, but I wanted to see what the.
What the other side and what you plan to do into 'twenty three.
Yes, Jeff I think.
So certainly we were we then focused in 'twenty three on various strategies to.
Essentially take some asset sensitivity off the balance sheet.
Initially I think that with cash into securities and I think just.
Moving to the loan to deposit up.
In and of itself did that to a degree with with soaking up some of that excess liquidity and letting some of that go and then once rates were up what we would say is meaningfully call that late second quarter early third.
We started looking at our hedging strategy to take somewhere between 50, and 100 basis points of asset sensitivity to the downside off the table.
I'd say, we're about halfway there we've done a couple of hundred million dollars, so far and we might have two to 300 to go.
We're not getting we're not going to be incredibly.
Aggressive.
We would have liked to be maybe a little bit more assertive earlier on putting the hedges on but quite frankly.
The the loan hedges moved the same direction as the fair value of securities in comprehensive income and so that was a guardrail that caused us to be a little bit more cautious so.
Now with TCE.
And a little bit better spot.
We're layering some of those in and with the way the rate curve as those are probably shorter term hedges.
But we're not.
We're not going to take 3% sensitivity off the table, where we're probably going to take the.
The better part of a 100 basis points, and we'll probably end up up sitting there so.
That's the way we're thinking about it.
And then all of our net interest income and margin guidance is reflective of of that that we provided on my comments earlier.
That's helpful. Thank you.
Youre welcome.
Your next question comes from the line of Damon Delmonte from K B W. Your line is open.
Hey, good morning, guys hope everybody's doing well today.
So first just wanted to kind of.
Continue on the margin commentary there so.
So Ken do you think you guys kind of peak here in the first quarter for your margin and then kind of are able to defend it and hold it as you progressed through 'twenty three or do you think you still see a rise as far as the second quarter of this year.
Okay.
Yes, I think based on my comments I think that theme to reflect more defensive with first quarter peak I think when you really look out at how we've forecasted it.
I think that margin on a monthly basis peak some time in the third quarter, but I'm not saying that that would actually result in third quarter margin being higher than second and again thats all dependent on.
What.
What if when when we get the quote 75 basis points of fed funds increases that we're expecting to get if thats all layered into the first quarter then obviously.
Quarter is probably more like the peak, but if that's a little bit more.
Drawn out I think maybe the peak is lower but <unk>.
Maybe it's later so.
We're thinking about it call. It June July timeframe in terms of peak and probably.
First to second quarter is when you get what you guys will see as peak margin.
Got it okay. That's helpful. Thanks.
With regards to the outlook for loan growth.
Provide a little color on <unk>.
But the expectation would be for for next year. The commentary seemed pretty positive do you think you could kind of replicate the level you had in 'twenty two or do you think we start to see a bit of a pullback. David This is Jim I'll handle that one you know what we were very comfortable in that mid to high single digit number with everybody contributed.
About the fact that we own.
We don't want to jump into transactional lending or due to the last project in any market just keep keep to the game plan. Then we're going to have quarters like we had in the fourth quarter. When it all comes together, but we're comfortable with it.
Mid to high single digit growth going forward.
Great and then do you guys do much in the office space in your commercial real estate portfolio.
Scott you want to talk about that.
Yeah.
Damon it's I wouldn't say, it's a focus it's a function of those relationships that I talk about in each of our markets but.
It's not it's not a large focus of our concentration for us and I think the portfolio. We do have it seems to be performing well generally it's like neighborhood type offices.
We don't have a large metro class AA type portfolio.
And are you able to quantify the percentage of overall loans or of the CRE portfolio.
Yes, yes.
Roughly do you have 450 to $450 to $500 million.
Sitting here today, so pretty.
Yes, pretty diversified in terms of industry as well so relatively small in terms of the whole.
Got it and then maybe I'll just add we had done it targeted.
A review on that portfolio, not too long ago, and we're talking about Ltvs <unk>.
<unk> and 50% range debt service coverages above a $1 50, so also performing pretty well.
Okay, Great. That's all I had thank you very much.
Your next question comes from the line of Brian Martin from Janney Montgomery. Your line is open.
Hey, good morning, guys.
Hi, Brian .
Just wanted to find out just get a little bit more insight on that can you.
Talk a little bit keen about the tax credit business and kind of the rebound in the seasonality you know at one point that maybe there is some seasonality going away and then last quarter. The issue, but just in general that kind of a tax credit or fee income just kind of some.
Some guidelines as far as how to think about.
How you guys are thinking about that this quarter, obviously, the <unk> <unk> this quarter was a little bit of inflator, but just.
Any any.
Input or thoughts you have on the fee income would be helpful.
Yeah, I mean I think.
Year to date, Brian I think for for this year we're at.
Call It $2 5 million for tax credit income in total and I think that without any material movement in what we'll say our longer term rates.
And we look at that as probably a similar level for the upcoming year.
Sure.
If 10 years so for moves further down I think there is opportunity for more fair value and vice versa. So we're kind of teetering at that point and I think there are some cash sales that we do expect we will.
Offset some of the startup and operating costs of that business for US and then you asked about the kind of other income Cte private equity.
We generally think about that annually as call it $2 million to $3 million that we feel comfortable and then there is upside in some of those depending on.
How some of those projects ultimately work out and.
Our our exited so.
Both of those businesses I think are seasonal.
And we probably think that there are second half weighted with obviously the tax credit business is fourth quarter weighted for us. So hopefully that gives you some perspective on on where we think it is and what those will call variable line items look like in 'twenty three.
If you take out the tax credit line chemo volatility this fee income kind of in that when you look at all the line items, maybe a kind of a mid single digit type of grower is that how youre thinking about it if you strip out the Liza one item, which had had more noise in the last year or is that or is that a.
And where what's reasonable.
Yes, if youre looking at third and fourth quarter call. It recurring fee income I think we think of those as kind of mid single digit businesses together overall.
And I think there is there is maybe a little bit of pressure and competition in their traditional earnings credit space.
In some of our cash management and Treasury management products, but we're working to mitigate that so you know, we we sort of think between card well deposit service charges.
That 5% from where we are operating in the second half of the year is gets you in the ballpark, yes, Okay. That's perfect. That's what I thought and then just on the capital.
Getting back here.
As far as the buyback and potential M&A I guess organic growth it sounds like its there I guess when you look at the other options. How are you guys thinking about the buyback today and in the.
M&A I mean, you talked about the dividend already so just any feedback on how to think about those or how you're thinking about those going into 'twenty three.
Can you handle the buyback and I'll handle M&A.
Yes sounds good Jim.
I would say, Brian that we're trying to be.
Thoughtful here about all of the volatility that we've been through that investors have been through.
And I think the idea is to create.
A really really strong balance sheet and we already have at the earnings power and the dividend profile give us the ability to do that I think.
The allowance is maybe.
A little bit lighter than than we would want it to be if there is a recession coming but asset quality is so good that that's a struggle. So I think the next line of defense is besides earnings and the allowance is capital and I think our goal would be in the near term to just let that build and be a little.
Bit conservative and if we're operating with a little bit too much capital I think that you know.
As.
We will say.
The environment improves and valuations improve.
We are clearly a strong acquirer and we can deal with excess capital in a deal structure or something like that and then Jim do you want to talk about our appetite for M&A.
Now, it's probably the perfect time, yeah sure Brian It's one of those things, where we've got such great momentum in the business.
M&A is on the list is further down the list in 2023 than say it was in 19 and 20.
Still do our normal calling and meetings and things of that nature, but it's going to be a pretty dynamic and pretty special to stop what we're doing now to put something on top but we've talked about this in the past M&A also includes lift outs. M&A also includes teams and new businesses and that's always an ongoing opportunity for.
<unk>.
Got you Okay. That's helpful.
And maybe just on the deposit beta I guess any change as far as where you think the cumulative beta.
Shakes out here, given and I think it sounds like your outlook is for a couple of more rate hikes here in February and March, but I'm not sure if thats.
It does play out how are you guys thinking about that deposit beta cumulatively.
Yeah. So.
I've got a I'm looking at it here in front of me and honestly that the cumulative beta has obviously been increasing but it's not.
It's not dramatic.
<unk> pricing, particularly in.
Interest bearing accounts has behaved extremely well and even in December the beta is cumulatively under 25% and even you know we made some pricing adjustments late in the year and even the monthly data is 50% and under and if you look at it for the quarter, it's kind of a third.
And under.
I think we feel good about that.
The stability of the deposit base and where the current rates are and what we've done to be responsive to it.
And I think we generally feel good about how how we can generate enough funding to.
Fund high single digit call it 8% organic loan growth in 2023 with contribution from commercial specialty and then business in consumer banking so.
You know I I.
We're cautious about it.
From a lag perspective, I think all the guidance, we give has some caution above where it is currently performing so.
For it.
High Twenty's cumulatively are mid Twenty's cumulatively, you know, we think of marginal beta moving forward is 40% but.
The reality is we haven't we've had that view since the third quarter and we haven't seen it so.
I think we feel like we've got a really good sense of what the account types are used for where we need to be responsive.
And where are we just have good stable core funding that that really doesn't have to move from a rate perspective.
Gotcha.
Makes sense.
And maybe just last one for me was on the.
The funding of the loan growth this year given the liquidity levels is obviously come that way down so.
Fair to think about the balance sheet or just the funding loan growth is coming from the deposit growth. This year is that how you're looking at a little bit more liquidity to come down, but that's how we're.
We're thinking about what we will fund it through all funded through everything can you just mentioned all of the various units and teams and specialties that we have we feel confident that we can do that yes got you. Okay. That's it thanks.
The questions and a nice quarter guys. Thank you Brian .
Your next question comes from the line of Michael Hultquist from Piper Sandler Your line is open.
Hey, guys. Good morning, I'm on for Ann Good morning, Michael.
Morning.
I just wanted to follow up on the last question can.
Can you give some color surrounding kind of the leftover runoff of potential rate sensitive deposits on the balance sheet right now.
Scott you want to talk about that.
Yes.
It's kind of what I've said in the commentary.
A majority of the decline is really a handful of larger commercial clients that are redeploying excess funds.
Into nonbank alternatives T bills, maybe well call competitive specials, we see that in <unk>.
Certain markets.
But I feel really good about how we are having conversations with our clients. We know that handful of clients. We have also developed.
Some products that we can use and we're proactively approaching <unk>.
Clients that we know have those excess funds and we've been able to really moderate that.
We're also having really good conversations with other deposit prospects in the market as well and I feel good about our pipeline of being able to bring in new deposits and I think the results that I talked about in the quarter show that we've been successful there as well so.
Hopefully that helps.
Yes, that's super helpful. And then my follow up question, you kind of just touched on with the outlet growth, but do you think it's reasonable to repeat.
Specialty deposit growth this year compared to last year at that same pace.
Yeah, We think there's we think.
But those businesses for us are consistent providers.
No.
We've added some new salespeople there so we feel good about.
Its ability to contribute appropriately for the total funding growth for our company.
Okay.
Great that's super helpful. Thanks, guys.
Yes. Thank you.
Again, if you'd like to ask a question press Star then the number one on your telephone keypad.
Next question comes from Chuck <unk> from Bofa Davidson Your line is open.
Just a follow up.
The non accruals decline any color on that.
The loans that were either back on nonaccrual or or paid off.
Looking for some detail there thanks.
Hey, Chuck it's Scott I can I can.
Take that one it's really the majority of it was in two credits.
Not new that has kind of been in our workout process most of the year or maybe even in the prior year, but really successful conclusions to both one was in AG credit.
We completed a charge off on a workout on and then.
Our C&I credit that we actually had a recovery on as well so.
That's probably the bulk of the reduction in non accruals for the quarter.
Yeah.
Got you then Keene did that jus the margin at all on that recovery I mean is that.
Meaningful at all.
It was a relatively modest recovery sorry, yes.
Yes, no recovery, Jeff went through.
The allowance so I think thats, what Scott is referring to so that was part of the net.
But it didn't meaningfully impact margin I think margin and.
Net interest income were fairly clean in the quarter. So nothing nothing too consequential either way that you'd need to think about for <unk> or anything like that.
Great. Thanks, guys.
Thank you Jeff.
There are no further questions at this time I will now turn the call back over to Jim for closing remarks Colby. Thank you and thank you all for joining us today and for your interest in our company, we look forward to speaking to all.
Have you again at the end of our first quarter take care and have a great day.
This concludes today's conference call you may now disconnect.
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