Q4 2022 First Interstate BancSystem Inc Earnings Call
Speaker 3: I.
Speaker 4: Hello everyone and welcome to the first Interstate Bank System Inc. fourth quarter earnings call.
Speaker 5: My name is Nadia and I will be coordinating the call today. If you would like to ask a question at the end of the presentation please press star followed by 1 on your telephone keypad. I will now hand over to your host Lisa Slicer. Ready to begin. Lisa please go ahead.
Speaker 6: 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.
Speaker 7: Actual results or outcomes may differ materially from those expressed by those statements.
Speaker 8: 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 FCC 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 FCC.
Speaker 9: 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 filings. 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.
Speaker 10: Kevin Reilly, our Chief Executive Officer, and Marcy Mutch, our Chief Financial Officer, along with other members of our management team. At this time, I'll turn the call over to Kevin Reilly. Kevin? Thanks, Lisa. Good morning and thanks again to all of you for joining us on our call today.
Speaker 11: 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 of it, I encourage you to do so.
Speaker 12: I'm going to start off today by providing an overview of the major highlights of the quarter and then I'll turn the call over to Marcie to provide more details on our financials.
Speaker 13: Our fourth quarter performance capped 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 long-row throughout our footprint.
Speaker 14: specific to the fourth quarter.
Speaker 15: It was a bit noisy.
Speaker 16: with a handful of cleanup items that should set the stage for a strong 2023.
Speaker 17: While these items had a seven cent impact on earnings per share in the quarter, we continued to execute well and saw continued positive trends in our loan growth.
Speaker 18: Core margin expansion and asset quality.
Speaker 19: As a result, excluding selected items, which we will walk you through, the company generated 89 cents of earnings per share.
Speaker 20: It is worth noting that this quarter included a 7 cents less contribution from purchase to county accretion because of fewer early payoffs.
Speaker 21: 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 loss in a quarter.
Speaker 22: As you can see on slide 10 of the investor deck, our ACL coverage ratio has expanded immediately over the last two quarters.
Speaker 23: 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.
Speaker 24: The banking environment continues to be favorable for us in the fourth quarter.
Speaker 25: which we were able to take a page of, given our strong capital and liquidity position.
Speaker 26: Many banks seem to lead.
Speaker 27: To pull back on loan production due to capital and funding constraints. We were pleased with our ability to win deals
Speaker 28: 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.
Speaker 29: and the annual rate of 11.1%.
Speaker 30: Going forward, we will be selected in our growth opportunities as the environment remains uncertain and funding is less bountiful.
Speaker 31: As such...
Speaker 32: We are currently 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.
Overall, 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.
has 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 liquid heat to work.
Going forward, 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 index 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 term 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 fabled again this quarter.
with total non-performing assets declining by 24% and NetChargeOS adjusts two basis points.
criticized loan balance and 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 shut by our board.
This resulted in a $4.2 million incentive compensation adjustment. You see reference in our material.
Overall, the portfolio continues to perform extremely well, and we are pleased with the significant improvements we have made since closing in 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.
related expense. Thank you.
$4.2 million of additional incentive compensation related to asset quality improvement, which Kevin mentioned.
a $1.3 million additional litigation approval, which has now been settled.
and a $400,000 reduction to the fair value of loans held for sale.
In aggregate,
These items had a seven cent per share impact on our fourth quarter financial results.
Additionally, the purchase planning accretion declined by $9.3 million from the prior quarter, or 7 cents 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 taxed equivalent net interest income decreased by $8.2 million, which was entirely used to a lower impact from purchase account increases 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 percent.
Again, excluding purchase accounting accretion, our adjusted net interest margin increased by two basis points to 3.49% from the prior quarter, driven by a favorable shift in our earnings asset mix and an increase yield on loans, investments and cash.
This offset the 36 basis point increase we saw on our cost of funds.
As you have likely already noted, with strong loan growth and deposit outflows, we increased our use of short term grow rings in the quarter, which ended a little over $2.3 billion.
As noted on page 14 of the investor debt, 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 received 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 payoff, which will likely be immaterial in 2003 given the current interest rate environment.
Overall, for 2023, we expect averaging 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 one's help 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 NFS and overdraft feed 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 Footprints.
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.
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 for the
related to the write down of an Oreo property.
Net of these items, non-interest expense of $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 percent 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 percent of that growth.
or around $6 million.
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 declining construction loans was primarily attributable to projects being completed and moving into our commercial real estate portfolio.
On the liability side, our total deposit 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 helped flat.
Moving to asset quality, we continue to see positive trends with non-performing efforts declining 24%. Life loans increased only modestly from last quarter.
Our loss experience continues to be very low with net charge off of just $1.1 million or 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.
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 sense.
in 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 Marcia 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 booking.
We 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 CNI.
To support this effort, we plan to launch an APL business later this year.
And we will redouble our effort 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-rise.
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 INB acquisition and has been instrumental in moving us forward since that time.
I'd also like to welcome Ashley Caselift, 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 am going to go ahead and close the session.
I have an executive team in place that I'm 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 early 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.
of 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, we will continue to make progress on strategic initiatives that will continue
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.
Thank you. If you would like to ask a question today please press star followed by one on your telephone keypad. If you would like to ask a question please press star followed by two. When preparing to ask a question please enter your phone into the communication. And our first item today goes to Jared Shaw of Wells Fargo Technology. Jared, take your head your line and say...
with funding in terms of your comments last quarter on the expectation for beta being smaller. How do you think about funding and costs from here? And do you think that we get back to PDA? Should we expect that they continue to outflow?
we see the shift as they slowly go out and reduce over time. That's what we expect to see.
So, yes.
But what about data from here on the remaining deposits?
I know. It's 83. I'm out.
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.
And then on the asset yields, the loan yields were a little weaker than we were looking for in the period of comments on.
you know the funding of loans that were previously
committed, where should we be thinking the colonial's from here and are you starting to see any ability for spread spread evidence?
So new loan yields are coming on in the high five.
will still be hampered by those.
that are funding it at lower rates.
which will be below kind of our core learn yield.
I guess maybe just shifting to expenses. 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 non-recurring 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?
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, you know, that was probably the biggest question on everybody's mind.
all year about the fourth quarter 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 percent inflation, and that includes the FDIC insurance.
So you get there at the same place either way.
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?
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 I applaud you for doing that.
That's all I can pretty much say in that.
Okay, thanks.
Thank you.
The next question goes to Chris McGrathy of KBW. Chris, please go ahead and line this in.
Thanks for the question.
on the growth in 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 there's been a notable change. Obviously the margin is getting harder for everyone, but I guess what am I missing that changed so much in the earnings power.
And then also we had, as you recall, we reduced our NSF and OD.
you know, fees.
And then the FDIC insurance is an additional up, you know, expense that we didn't anticipate.
Yeah, it feels like the, I guess the FVIC, it feels like it's more the NII and the deposits.
All right, we absolutely laborhood time.
Yep. Mainly the positive, Chris.
Yep, I get it. Kevin, in terms of next step for maybe following on Jared's question.
What are some thoughts on doing another deal? Obviously the balance sheet is in great shape, we've got a ton of capital.
good deals get struck when really no one wants to do them, but what are the thoughts on doing a deal?
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.
So 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.
leverage within the institution, that 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. We're kind of sticking to that list. 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 just 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.
Thank you and the next question goes to Adam Butler of Piper-Sana. Adam please go ahead to line is a pen
Hey, good morning, everybody. This is Adam on for Matthew Clark.
Thank you.
Just to go back to Jared's question on the deposit balances, overall, they came down to this one quarter. Do you expect a similar decrease in the first quarter?
Maybe slower.
I'm curious about your comments on that. Well, seasonally, if you go back, I mean, as you know, the pandemic through all sorts of seasonal trends out of whack. So if you go back earlier, you know, the week 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 are expecting this year because I think what we have seen as the excess deposits go out in 2022, that's slowing down. And going back to our data in a sense, where a lot of our deposits, we increased our deposit pricing.
a while back with the index money market account and CD rates. So a lot of our customers have already migrated over to some of these products and are satisfied. So we are just expecting maybe a little bit of a seasonal decline in the first quarter.
Feel that things will start moving in the right direction once we start going further into the year
Okay, that makes sense, thank you.
Moving over to credit, I know you mentioned that the uptick in criticized here isn't a concern, but I was wondering if you could provide some additional commentary on kind of where that came from. With several credits.
with785 int.
Okay, we're going to have our Chief Credit Officer, Michael Ludwig, address that question. Michael? Yes, 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 performance. That increased that by a corresponding $38 million.
You can't net those three credits out, but if you look at the overall portfolio, the trend was actually positive and criticized.
Okay, makes sense. And that's all the questions that I have. Thank you for taking the time.
Thanks, Adam.
Thank you and the next question goes to Andrew Carroll of Stevens. Andrew, please go ahead, your line is open.
Hey Kevin and Marcie, this is Zach on for Andrew real quick. Just some housekeeping questions here. Do you have the monthly December NIST available?
Yeah, monthly NIM within the low 340s.
Next, purchase accounting.
Gotcha. And then do you happen to also have the spot on interest bearing deposits at 1231?
Yeah, it was in the high 70s.
Perfect.
That's all I've got, just some housekeeping questions. I appreciate you taking them.
Thank you. Thanks.
Thank you and the next question goes to Todd Milliken of RBC Wealth Management. Todd, please go ahead and unmute yourself.
I appreciate it.
Today's results were clearly a sizable operational miss on earnings reflected in the stock price today. Here are calls that I've listened to. You guys have been very optimistic about the operations.
So, 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 results as they should have maybe previously?
Thank you.
That's pretty sorry. I would say that the operating performance 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...
In my belief, they overestimated what we were going to end up. You know, 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 deposit 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.
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.
It's not an operational mission by us, so that's just your perspective.
Okay, I appreciate it.
Thank you and the next question goes to Bruce Sezar of Advisory Research. Bruce, please do you need a line of voices?
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-bit gap. You're 64 in the fourth quarter. They're 35. So now it's a 29-bit gap. And I'm just wondering if you've had a chance to look at how they performed on that side and could explain maybe what the differences are and why yours gapped out more than theirs.
Well, have you seen your deposit performance this quarter?
The thing is to say.
So the thing is this, there's the gap out 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 out 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 it went down. I think they're only net up in the core and their margin a little over six basis points for many. It's a whole different ball game. 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.
But then why isn't it dropping to the bottom line?
Oh, sir.
They were a lot closer on earnings.
All right.
Thank you.
To whose earnings? These are analyst's expectations.
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.
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? Well, I'm not gonna get into how you run a balance sheet because let somebody else talk about that. That's not an effective approach. So, we'll take the next question, please.
Thank you.
Yes, our next question goes to Jeff Ruelas of BA Davidson. Jeff, please go ahead, your line is open.
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 draw new loans. I was just wondering what...
where you guys are seeing the most growth and the most opportunities by state or by region.
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.
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?
Well, I think we're winning relationships because we're growing the assets. So we have net customer account increases. So we are winning customers and it's again pretty much even across our footprint.
Chris, please your line is open.
Hi Chris your line is open.
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, do you kind of agree with that?
And then two, can you just remind me, Marcy, the full beta assumption that's in the 23 guide? Thanks.
We haven't provided the full beta assumption in the 23 guide, Chris.
but your first assumption would be accurate.
Chris, what we're trying to do is, as we said in the past, many calls is that we were rotating our balance sheet to be less asset-sensitive and to prepare for the downturn. I think we struck some good derivatives or interest rates, Pop
to hedge that portfolio of 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.
Thank you.
Thank you very much.
Thank you and we have another follow up from Andrew Terrell or Stephen. Andrew please go ahead your line is open.
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 the color on just what's the incremental margin on a dollar of loan growth is for you today? Just understand that the funding costs could be a little bit higher, but just what is the incremental spread that you're already seeing, the growth look like relative to the 360 or so margin in the fourth quarter.
Well, Andrew, that's it.
It's kind of a mixed bag. New loan growth, again, is going on in the high-five.
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...
You know, high force.
So it's kind of be that mix of funding that kind of impacts.
Aren't that giveven of the inflicence?
Do they 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, we, that's not something...
Okay, fair enough. And then the last thing for me, just more housekeeping, was just the tax rate, what's driving this stuff up in tax rate.
It has to do with some counting around Lytex.
So it's coming up a little bit.
Okay. Thank you for taking the call.
Thank you Andrew. Thank you and our next question goes to Tim Coffey of Jamie Montgomery Scott. Tim please go ahead and line your thing.
Great, thanks. I appreciate the opportunity to ask a couple of questions here. I apologize if I missed it, but Marcy, but what is the cash flow coming up with period of time?
$70 to $80 million a month.
Okay, great. And Kevin, as we look out across this year, what is your expectation for absolute growth in the balance sheet in terms of total assets? Well, it all depends really on deposit growth. So what we estimated and what I think Marcia alluded to is that...
earning assets should be flat for the year. And what we're kind of modeling is that the investment portfolio will run down and loans will go up. So earning assets in the balance sheet will kind of remain flat, but we'll get better yields on our earning assets in total.
Okay, great. Those are my questions. Thank you very much.
Thank you. Thanks, Jim. Thank you.
Thank you and our next question goes to Adam Butler or Piper Sandler. Adam please go ahead line is 8 print.
Hey everyone, thanks for taking the follow up. Going into the interest bearing deposit data, do you guys have any guidance for 2023 as to where that is headed?
Hey Adam, it's John . I think as Marci said in her prepared remarks, at this point the beta assumptions versus the prior cycle, we wouldn't be changing those assumptions, but we have them specifically disclosed in the NII guidance that she gave what those interest-bearing deposit cost assumptions would be.pace.org Eahahh
Okay, fair enough. Thank you.
Thank you, we have no further questions. I'll now hand back to Kevin Riley for any closing remarks.
Thank you.
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.
Thank you, this now concludes today's call. Thank you so much for joining, you may now disconnect your lines.
Thank you.