Bob Kaminski: Thank you.
Chuck Christmas: You’re welcome.
Operator: And our next question will come from Daniel Tamayo with Raymond James. Please go ahead.
Daniel Tamayo: Good morning, guys. Thanks for taking my questions.
Bob Kaminski: Good morning.
Daniel Tamayo: Maybe just a follow-up on the balance sheet management question. So, given where — as Brendan mentioned, you had at 106% on loan/deposit ratio. Do you — I think last quarter you said 100% to 105% is kind of where you wanted to be. Does that mean you expect to see the balance sheet grow kind of in line with loan growth going forward? And then, I guess, along with that, is there a breakeven point or how are you thinking about the ability to — or your loan growth, given the ability to fund that — I mean, if you’re continuing to see net interest — noninterest-bearing deposits come off and you’ve got to fund that with CDs or wholesale deposits, is there a breakeven point where you would perhaps take the foot off the gas on the loan growth side?
Chuck Christmas: Yes, I’ll answer the first part, and let the guys chime in on the second part from an overall strategy standpoint. But you’re right on. We desire to have our loan to deposit ratio somewhere between the 100% and 105%, which as you noted, we’re pretty much there. So, our expectation is that if we do have additional growth on the asset side, which we certainly expect, is that a significant portion of that’s going to have to be funded. On the liability side, and it’s our druthers to certainly make sure that that’s core deposits as much as we can, trying to stay away from wholesale funds to the degree that we can, but that’s going to be based on the success of growing our deposit franchise. So, we typically — and I kind of mentioned it before in December, but we typically see deposits decline.
It’s seasonal for us. Because of our strong — our large commercial focus and because of the payments that we see for taxes and bonuses come out at the end of the year and the early part of the first quarter of each year, we generally do see a deposit decline this time of year and then that builds up over time as well. So, we expect some of that natural seasonality to help us out a little bit as we go into 2023. But clearly, that’s — as I mentioned before, that’s going to be a big challenge of all banks, and I think that’s what we’re seeing now with deposit rates escalating. Definitely, there was some lag going on there and, a large part, deposit rates are maybe getting back to where maybe they should have been using historical betas in that type of analysis as well.
But it’s going to be a battle out there for deposits. And what we’re going to strive to do is make sure that we can bring in those deposits when we need them, again as efficiently and as effectively as we can.
Bob Kaminski: Chuck gave some color as far as the annual cycle as to what our deposits do. But on a longer-term basis, Mercantile has been through these cycles previously where interest rates rising, interest rates falling, deposits being in high demand. And we’ve demonstrated an ability to cope with ideas and plans to be able to make sure that we don’t need to take the foot off the gas pedal at all from a loan growth standpoint. That’s been the nature of our company for a long, long time is commercial loan growth, overall asset growth. And so, we do the things that we need to do to make sure that, that continues to be the case, and we have some ideas that we’re working on to be able to come up with different flavors of deposits and things that are specific to certain markets or certain types customers that can help overall funding of that ongoing loan growth.
Daniel Tamayo: Okay. I appreciate that color. And then, switching gears here. Just on the fee income guidance, it seems like a decent drop. I know you talked about it a little bit in the prepared remarks, but from the fourth quarter level, the first quarter guidance is below kind of what I was expecting. Maybe you could talk a little bit more about what’s driving that? And then, kind of as it goes throughout the year, what you may be looking for?
Chuck Christmas: Yes, I think there’s two things going on there, Danny. One is just the seasonality of mortgage lending. You’re in the Midwest. There’s just not a lot of activity in January and February when it comes to buying and selling homes, and, of course, that’s what we’re relying on, certainly lot more than refinance. Although with rates — with the long end of the curve doing what it’s doing, it’s going to be an interesting time when it comes to — are there going to be some refinance opportunities from people that have gotten mortgage loans in 2022. So that’s a big part of it. The other thing that we’re seeing is in service charge income. One of the big calculations in that is the earnings credit rate. And with interest rates going up, we have had the need more recently to go ahead and increase that earnings credit rate, which effectively brings our service charge income down.
That earnings credit rate, which is kind of set right along with our deposit rates, while rates were increasing last year, it really wasn’t until the fourth quarter that we had to increase the earnings credit rate and we’ve had to do that again just kind of like lock, stock and barrel with the deposit rates. So, there’s a little bit of — it’s still going to be strong. We’re just not going to see the very strong loan — fee income growth that we saw on service charge income.
Daniel Tamayo: Okay. But the increase in the swaps in the fourth quarter, is that — are you still thinking that’s going to be a similar number or that comes down to what we saw more in the middle of the year as well?
