Bank OZK (NASDAQ:OZK) Q4 2022 Earnings Call Transcript

Bank OZK (NASDAQ:OZK) Q4 2022 Earnings Call Transcript January 20, 2023

Operator: Good day and thank you for standing by. Welcome to the Bank OZK Fourth Quarter 2022 Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to today, Jay Staley. Please go ahead.

Photo by Bench Accounting on Unsplash

Jay Staley: Good morning. I am Jay Staley, Director of Investor Relations and Corporate Development for Bank OZK. 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 Hamlin, President; Tim Hicks, Chief Financial Officer; and Cindy Wolfe, 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.

See also 11 Best Dividend Stocks for Rising Interest Rates and 11 Best Debt Free Stocks To Buy.

Q&A Session

Operator: Your first question comes from the line of Steph Scouten from Piper Sandler. Your line is open.

Steph Scouten: Hey, good morning guys. Congratulations on a great quarter. First of all, I guess when you all are thinking about originations, I mean, I think it was 2.81%, it’s still extremely high relative to what we saw in €˜21 or early €˜22. What’s the reason maybe for the thinking it will be a little slower? Is it just overall economic slowdown? 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 are seeing from customers in that space?

George Gleason: Good morning, Steve. I am going to let Brandon Hamlin take that question if you will, Brandon.

Brandon Hamlin: Absolutely, Steve and great to hear from you this morning. Yes, 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, costs have continued to increase, although I would say that we are hearing and seeing anecdotal evidence that the velocity of those cost 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. And €“ 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 have had really good success in pushing into and getting our fair share or more given where the competition is. And as I have said in the past, the quality of what we are able to originate today in light of less competition is lower leverage and better spreads on the deals that we are quoting and winning.

Steph Scouten: Okay, great. And this question may be a little early, but I think it starts to become interesting. If rates begin to rollover in the back half of the year, how do your floors play into that?

George Gleason: Yes, 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 2 years ago out of floor near the origination rate on those loans, we are obviously way away from those floors before they would become active. The loans we originated last quarter maybe at or very near their floor rate. So, the longer the Fed stays at whatever the 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. So the scenario where the Fed slows their rate increases and maybe has 1, 2 or 3 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.

Steph Scouten: Yes, 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 are saying, George, is this €“ 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?

George Gleason: Yes, exactly. And if you think back a year or two, we had a lot of loans at 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. You can see the benefit of that in our record levels of net interest margin and core spread that we have been achieving. So yes, the flipside of that is true. And Stephen, that’s why we have made the comment that 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 have 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 0.25 point increases and the number of those as a legitimate question, is it 1? Is it 2? Is it 3? Is it 4? But those quarter point increases, we are going to see a catch-up in our deposit costs. So we are if we didn’t hit peak NIM and core spread in Q4 would probably would eke out some small incremental gain in Q1, I can’t even I hope we will have a gain in Q1, but that’s questionable. But at a slower rate of Fed increases with deposit costs, which lagged beginning to catch up, we will see some erosion of those recent gains probably in Q2 at least.

Steph Scouten: Yes. Well, the NIM peaks at 5.50 range, you are going to be doing better than 99% of banks anyway. So we are 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 are not, how do you think about that kind of lagged pressure in the back half of the year on deposit costs?

George Gleason: Well, our €“ the way we are 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, because and you saw that with an increase in the volume of CDs. That was 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 €˜23 and maybe not at all in 2023. So €“ but we are beginning to shorten the duration on new CDs we are adding and still doing a bid out longer, but we are pulling some of those and in some categories the 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 might be in a cutting mode if they are.

Steph Scouten: Yes, perfect. Great color, George. I appreciate it and congrats again on all the record results.

George Gleason: Thank you, Stephen. Well, I want to give a shout out to our Cindy Wolfe and Ottie Kerley, our Chief Deposit Officer and Drew Harper, who manages our wholesale funding that deposit team and all the guys that worked for Ottie and Drew and Cindy there, have done a really good job of making adjustments to what we thought our interest rate risk profile is. And we have had a really nice expansion in our net interest margin, core spread, net interest income and that just didn’t happen. They have been very strategic in the way they have managed that on the liability side as our asset guys have and the team deserves a lot of credit for how well they have managed that. Thank you, Stephen.

Operator: Thank you. Our next question comes from the line of Manan Gosalia of Morgan Stanley. Your line is open.

Manan Gosalia: Hey, good morning. Thanks for taking my questions.

George Gleason: Good morning, Manan.

Manan Gosalia: Good morning. So I just wanted to follow-up quickly on the last line of questioning. So I guess with the new cities that you are putting on and the fact that you are reducing the term of those cities, should a large chunk of the CDs come due for repricing towards the mid to end of 2023. Did I hear you right there?

George Gleason: Manan, I would say that they are more laddered out throughout €˜23 and into early €˜24. So it’s a pretty well-managed ladder. We have got CDs maturing everyday and we have 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.

Manan Gosalia: Got it. Perfect. 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 and based on what €“ how you have seen this play out before I guess, what’s the best estimate in terms of how high repayments can go this year?

George Gleason: Well, again, we have said that we think our RESG repayments will be in the range that we achieved during 2021 and 2022. So that’s $6.22 billion to $5.65 billion is the likely number there. It could be a little more than that. It could be a little less than that. But we are thinking that, that is the range for repayments next year. And I would tell you that the capital markets are not closed. Transactions are getting done. Sponsors were just not as excited about the rates they are getting as they would have been on rates a year ago. One phenomenon that we have seen and I want Brandon to comment on this, but one phenomenon that we have seen in the past, Manan, in response to your question is, if sponsors tend to think that they are going to get a much better exit 6 months or 12 months down the road than they are today.

A lot of times, they will stay in our more expensive construction loan a little longer if they think they are going to exit today at a 7% long-term rate and they think it 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 are just ready to put the permanent bed and go on down the road. But Brandon, do you want to comment on refinance activity next year or this year in €˜23?

Brandon Hamlin: Sure. No, you characterized it correctly, George. I think one of the €“ we will likely have a number of those short-term extensions, 6, 9, 12 months just as you said. And really, there is 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 back half of the year is likely to be higher than the front half of the year. But as we know and there is to our benefit certainly from an average earning assets point of view and when we make those loan extensions a lot of times, we will obviously get more, little more fee income, perhaps little more minimum interest and but they are not long-term in nature. And so when the capital markets come back, they will move on. Our rates are not as attractive, obviously, as the long-term rates.

George Gleason: Yes. And I would emphasize Brandon’s point that we are €“ we view loans staying on the book 6 months longer, 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.

Manan Gosalia: Right. So I think 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 on the different macro assumptions, is there €“ 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?

George Gleason: Well, that’s a good question, Manan. I would tell you that our prevailing thought is, 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 in average earning assets. We alluded to this in our management comments specifically and I have referred to it internally as a baton handoff where that growth in net interest income is ceases to be driven by NIM that actually becomes a little headwind, but we have 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.

Manan Gosalia: Appreciate it. Thanks so much.

George Gleason: Thank you.

Operator: Thank you. Our next question comes from the line of Timur Braziler from Wells Fargo. Your line is open.

Timur Braziler: Hi, good morning.

George Gleason: Good morning.

Timur Braziler: Just following up on that last line of commentary, 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 are expecting from a funding standpoint or could that too slow?

George Gleason: Tim, do you want to address that?

Tim Hicks: Hi, good morning. Tim here. Given the level of origination volume we’ve had over the last four to six quarters, that €“ given our construction loans and the fact that in 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 5 that we said we thought for 2023 that loan growth €“ 2023 would meet or exceed the $2.47 billion we achieved in 2022. So €“ and a lot of that is just the delayed funding sequence we have in those RESG loans and 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.

Timur Braziler: Okay. Great. And then maybe just a follow-up for you, Brendan. 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 valuation.

George Gleason: Great question. I don’t know if you take that.

Tim Hicks: Yes, yes. So what’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 then it continues to be the case. We’re still looking at deals there, but just on a relative basis to our history, a bit slower there. But when I look at what we’ve got signed up in the pipeline to close, it has a pretty similar mix as historically, you’re less office probably than we’ve seen, but we are still seeing office opportunities with pre-leasing frequently 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, little slower on the coast, but we’re still doing deals on both coasts as well.

Timur Braziler: 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 a record year. How can we start thinking about normalized charge-offs? And then as we’re looking at provisioning levels, just maybe talk us through your thoughts on proven trajectory here in €˜23, given the broader uncertainty?

George Gleason: Tim, do you want to take that?

Tim Hicks: Sure. Yes, 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 4 basis point net charge-off ratio, which is an all-time low. The range that we’ve had over the last 3 or 4 years in 2020, we had 16 basis points. Obviously, there is a lot of uncertainty with the pandemic going on that year and 6 basis points in 2021 and 11 basis points in 2019. It’s hard for us to know what the net charge-off number is going to be for 2023. It’s likely to be somewhere in that range, would be our best guess based on what we know today. As it relates to provisioning, obviously, a lot goes into that. The macroeconomic factors that we get from Moody’s and used 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 9/30. 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’d look at those during a 2-year forward projection. And so as you get towards the end of 2023, the 2 years ahead of where you are, are the scenarios that we’re looking at.

And so obviously, there is a lot of uncertainty of what 2023 brings. And so when we get more clarity, that may influence Moody’s forecast to 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 the last €“ both 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.

Timur Braziler: Thank you.

George Gleason: Tim, I’m going to add a comment here on something there. comment has been made that our ACL for unfunded loans is a lower percentage than our ACL for funded loans. And the question has come up previously. As funded loans moved to €“ or 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 percentages because RESG is a much higher mix. It’s 90% roughly of the unfunded at 60 €“ low 60%ish of the funded and our RESG loans are lower leverage, so they have lower risk associated with the 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 part. 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.

Timur Braziler: Great. Thanks, George.

George Gleason: Thank you.

Operator: Thank you. Our next question comes from the line of Catherine Mealor from KBW. Your line is open.

Catherine Mealor: Thanks. Good morning.

George Gleason: Good morning, Catherine.

Catherine Mealor: 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.

George Gleason: Yes. yes, I’ll jump into that, Catherine. The €“ I don’t know exactly the funded versus unfunded dollars off the top of my head. But with respect to leasing, that as we’ve said, some of the projects we originate have pre-leasing when we originate on some or spec. And €“ but when we look at projects that that are complete. We are seeing continued green on the screen moving forward with improved leasing. Obviously, there is 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 is a range of success across the portfolio, some slower than others, some knocking it out of the park. But on the whole, we’re pleased with what we see there.

Catherine Mealor: Great. And then on €“ back to the margin conversation, can you talk to us about where your deposit rates work towards the end of the quarter just to get a sense as to where funding costs might be coming as we reach the near to peak Fed?

George Gleason: Cindy?

Cindy Wolfe: Yes. Catherine, this is Cindy. December was 1.66% on cost of interest-bearing deposits.

Catherine Mealor: And on average €“ I know your CD rates kind of range in different markets. But on average, we’re a new CD is coming on?

Cindy Wolfe: I don’t have that information. I don’t have an average, and you’re right, it varies depending on the market.

Catherine Mealor: Okay. And so then €“ 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. So just trying to think about obviously, as the margin peaks and then fall, 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 at that margin falls as funding cost increase?

George Gleason: Tim, why don’t you take that one?

Tim Hicks: Yes, Catherine. Yes, you’re correct. Year-over-year, obviously, we have find up the potential to have a really, 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.

Catherine Mealor: Great. Okay, that’s very helpful. Alright, thank you.

Operator: Thank you. Our next question comes from Matt Olney from Stephens. Your line is open.

Matt Olney: 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.

George Gleason: Tim?

Tim Hicks: Yes, Matt. Obviously, our growth in both funded and unfunded, has contributed to our risk-weighted 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-weighted asset side. So we’ve got some internal targets on CET1. We’re well ahead of those and expect to continue to be well ahead of those as we go throughout the year.

Matt Olney: 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. And 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, do we see any of that in the fourth quarter? Thanks.

George Gleason: 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 will see a fairly typical 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.

Matt Olney: 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?

George Gleason: Everything that was variable was off its floor essentially and the Fed was moving quickly. So we €“ those translates to into our loan yields. Obviously, loan yields will go up less rapidly with the Fed moving 25 basis points instead of 75 and 50. So there is €“ what we can do there on increasing loan yields is definitely tied to a large extent to the magnitude of Fed rate increases.

Matt Olney: Okay. And then just lastly, around thinking about liquidity and funding the growth in €˜23. Clearly, deposit growth is going to be a big factor this year. But on the securities portfolio, you disclosed kind of what the 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?

George Gleason: Matt, that’s going to depend purely on what we see as reinvestment opportunities 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 is not much attractive for us to buy out there. So we’re pretty much on the sidelines and 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 market seems €“ the bond market seems to be a little ahead of itself right now with that steep inversion in the yield curve. So, we are sidelined and we are not going to chase it. So, if we miss that in that portfolio just gets smaller and we are okay with that.

Matt Olney: Okay. Alright. That’s all for me. Thanks and congrats on the quarter.

George Gleason: Thank you so much.

Operator: One moment for our next question. Our next question will come from the line of Jennifer Demba from Truist. Your line is open.

Jennifer Demba: Thank you. Good morning. 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?

George Gleason: Yes. We are working on the technology. We have got our three senior members of the mortgage team onboard, and they are doing all their process build 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 will start adding some origination teams and begin doing business. That probably, Jennifer, is third quarter before we actually start that business. So €“ and we will start it in a small scale way and ramp it up slowly. So, that really is probably a 2024 matter that you will begin to see a little bit of trickle of results in there, late €˜23, but nothing that’s going to move the needle until possibly sometime into 2024.

Jennifer Demba: Great. Thank you.

Operator: Thank you. One moment for our next question. Our next question will come from the line of Michael Rose from Raymond James. Your line is open.

Michael Rose: 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 wondered to see if you had anything on tap for 2023? And then how should we think about different components, whether it would be kind of wage inflation, annual merit increases healthcare costs, FDIC costs going up. If you can just kind of contextualize the expense outlook, I would appreciate it. Thanks.

George Gleason: Tim, go ahead.

Tim Hicks: Hey Michael. Yes, you rattled off a laundry list, and we have got probably more that we could add to that list. But 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 have €“ 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 01/01. We will continue to add headcount as we go through this year. We have already gotten started in January with additional headcount. So, that headcount will continue. I mean we were really at 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 a quarter, but you also have to take into account the increase in assessments that we will get from our growth in average assets as well. Really, we will 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 have got the inflationary pressures and all of 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 1-year or 2-year or 3-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 the full year €˜22. We would expect kind of in that low double-digit range increase in total non-interest expense. Well, I am 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.

Michael Rose: Yes, exactly. Just one follow-up, separate question. Figure 25 on Page 23, the RESG chart. So, I noticed that the LTV on the Tahoe credit was up from 79% to about 84%, 85%. Any sort of updates there on that particular credit and any sort of resolution opportunities at some point? I know it’s a longer term kind of credit, but just looking for any updates.

George Gleason: Brandon?

Brandon Hamlin: Yes. I would 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 have got roughly €“ well, there are 17 town homes under construction and 34 to construct and sell beyond that. So €“ and those town homes have had because of the price appreciation they have 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 have got others that are not as high. It has a slight impact on your LTV. But we did close one town home sale in the quarter at a very nice price. We have got, as I have said, 17 under construction and six of those are under contract.

We still feel good about the project. I would tell you that 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 where we definitely saw the benefit of that. It’s pull-back a bit as rates have increased, and that has affected things. But still a good mark resale prices in the community 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 made a lot of good progress in the last couple of years and expect that to continue, albeit at perhaps somewhat reduced pace.

Michael Rose: 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 is any concerns on your end. Thanks.

Brandon Hamlin: Yes, sure. No, that credit is 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 this vertical development there. And in light of his abandoning the development plan, we obtained a new appraisal date December 22nd, actually or December 22, which concluded 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 loans current sponsors actively marketing working to liquidate the property. But given the order development plan and their decision to liquidate the property, we concluded that a special mention rating was appropriate for that credit.

Michael Rose: Great. Thanks for taking my questions.

Brandon Hamlin: You bet.

Operator: One moment for our next question. Our next question comes from the line of Brian Martin from Janney Montgomery. Your line is open.

Brian Martin: Hey. Good morning guys.

Brandon Hamlin: Hey Brian.

George Gleason: Good morning Brian.

Brian Martin: Maybe just one on the loans side for a second. Just I appreciate the commentary about the growth outlook this year. Just kind of wondering if you can provide any perspective on just where that growth, how you are thinking about the different buckets of where that growth comes from both from the RESG standpoint? 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 coming from this year?

George Gleason: 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. So, 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 are 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 chose a slight reduction in funded balances at a couple of quarters since 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 are 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 are constructive on the continued trend toward diversification in the portfolio.

Brian Martin: Got it. And the pipeline in the ABL portfolio is pretty healthy at this point.

George Gleason: Yes. Brandon, do you want to comment on that?

Brandon Hamlin: Yes. No, it is. And as George said, they had a good year last year, and they have got some great credits on the book, and looking at some others here early in the year. And 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. But defensively as sales volume pulls in, our credit to weigh ahead of that with the formulaic structure, but also as these businesses experience great health and expansion opportunities. 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 was it more last night with another credit a customer that is contemplating expansion as well. So, really, really encouraged about the growth opportunities for that portfolio.

Brian Martin: Got it. 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 even the increases starting this year, just kind of the growth rate, or how should we think about that ramp-up in expense growth from kind of this fourth quarter level, which is obviously a peak as we get into 2023 and would it be year-over-year or quarterly, just did you provide anything on that, or maybe I missed what you said there?

Tim Hicks: Yes. No, year-over-year, we are expecting low double-digit increase. If you are starting with fourth quarter, Q1 is always seasonally tough. You got a full load of FICA. You have got health insurance increases. You have got a good amount of raises that come in. So €“ and then you have got the FDIC insurance that’s kicking in. The increase there is kicking in 01/01. And then advertising and marketing, we are 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.

Brian Martin: Got it. Okay and 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 appetite is there, just kind of where you want to see that trend as you kind of go throughout the year or just over the next couple of years?

George Gleason: Tim, do you want to take the repurchase?

Tim Hicks: Yes. 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 have got really good capital levels and a good earnings profile. I think we can do multiple things at the same time. So, we will 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 where we are below that number. So, we will be opportunistic and try to find opportunities to see where we use that authorization.

Cindy Wolfe: And this is Cindy. On the brokered, I am going to borrow Tim’s words and completely pair that and say we are going to continue to be opportunistic and disciplined and look for the opportunities that Audi 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, where we are being very surgical and focused on finding the best possible opportunities we can. So, we are pleased with the way we are managing our increase in our brokered book.

George Gleason: And the percentage of brokered is probably not going to €“ you are not going to see any material increase in that percentage going forward. We are in a €“ in our target zone for what’s acceptable on that and in our internal standards, and we are not going to materially increase it. So, you are not going to see that at 12% or 13% or 14% of deposits would be our expectation. We are not going there. So, probably sub-10% or around the 10% sort percent range is probably about the max you will see on that.

Brian Martin: Got it. Thank you. Okay. Thanks for taking the questions and great quarter guys.

Operator: Thank you. And I am not showing any further questions in the queue. I would like to turn the call back over to Mr. Gleason for any closing remarks.

George Gleason: Alright. Thank you, guys very much for joining the call today. We are glad to celebrate a really great quarter and a great year with you. We appreciate your interest in our company and we will see you in about 90 days. Thank you so much. Have a great day. That concludes our call.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.