First Interstate BancSystem, Inc. (NASDAQ:FIBK) Q4 2022 Earnings Conference Call January 27, 2023 11:00 AM ET
Company Participants
Lisa Slyter-Bray – Executive Assistant
Kevin Riley – Chief Executive Officer
Marcy Mutch – Chief Financial Officer
Michael Lugli – Chief Credit Officer
Conference Call Participants
Jared Shaw – Wells Fargo
Chris McGratty – KBW
Adam Butler – Piper Sandler
Todd Milliken – RBC Wealth Management
Bruce Zessar – Advisory Research
Chris McGratty – KBW
Andrew Terrell – Stephen
Tim Coffey – Janney Montgomery Scott LLC
Adam Butler – Piper Sandler
Operator
Hello everyone and welcome to the First Interstate BancSystem, Inc. Fourth Quarter Earnings Call. My name is Nadia, and I will be coordinating the call today. [Operator instructions]
I will now hand over to your host, Lisa Slyter-Bray to begin. Lisa, please go ahead.
Lisa Slyter-Bray
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. Actual results or outcomes may differ materially from those expressed by those statements.
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 SEC and in our earnings release, as well as the risk factors identified in the annual report and our most recent periodic reports filed with the SEC. 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.com. Information regarding our use of the non-GAAP financial measures may be found in the body of the earnings release, and a reconciliation to their mostly directly comparable GAAP financial measures is included at the end of the earnings release for your reference.
Joining us from management this morning are Kevin Riley, 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 Riley. Kevin?
Kevin Riley
Thanks, Lisa. Good morning, and thanks again to all of you for joining us on our call today. Again this quarter, along with our earnings release, we have published in 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 yet, I encourage you to do so.
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 Marcy to provide more details on our financials.
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 loan growth throughout our footprint.
Specific to the fourth quarter, it was a bit noisy with a handful of clean-up items that should set the stage for strong 2023. While these items had a $0.07 impact on earnings per share in the quarter, we continued to execute well and saw continued positive trends in our loan growth, core margin expansion and asset quality.
As a result, excluding selected items which we will walk you through, the company generated $0.89 of earnings per share. It is worth noting that this quarter included a $0.07 less contribution from purchase account accretion because of fewer early payoffs. 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 offs in a quarter.
As you can see on Slide 10 of the investor deck, our ACL coverage ratio has expanded meaningfully over the last two quarters. With this strong financial performance and a shift — 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.
The banking environment continues to be favorable for us in the fourth quarter, which we were able to take advantage given our strong capital and liquidity position. Many banks seemingly to pull back on loan production due to capital and funding rates, we were pleased with our ability to win deals.
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 at an annual rate of 11.1%.
Going forward, we will be selected in our growth opportunities as the environment remains uncertain and funding is less bountiful. As such, we are truly planning for a slower pace of growth in 2023 than we experienced in the second half of 2022.
The largest area 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 as prior construction commitments made earlier in the year funded this quarter. This trend will impact us for the next several months with projects and 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 liquidity 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 — 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 and 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 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 favorable again this quarter with total amount performing assets decline by 24% and net charge-offs of just two basis points. Criticized loan balances were modestly 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 well. During the fourth quarter, we exceeded targets of — targeted reductions of non-performing assets and criticized loans set by our board. This resulted in a $4.2 million incentive compensation adjustment, you see referenced in our material.
Over the — over the portfolio — 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 Marcy’s for some additional details around the fourth quarter results. Go ahead, Marcy.
Marcy Mutch
Thanks Kevin, and good morning, everyone. Just to make sure we’re providing clarity, I’ll start by summarizing the notable items that impacted our financial results in the fourth quarter. We had $3.9 million in merger related expense, $4.2 million of additional incentive compensation related to asset quality improvement, which Kevin mentioned, a $1.3 million additional litigation accrual, 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 $0.07 per share impact on our fourth quarter financial results. Additionally, the purchase planning accretion declined by $9.3 million from the prior quarter or $0.07 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 tax equivalent net interest income decreased by $8.2 million, which was entirely due to a lower impact from purchase account accretion 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%. 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 earning asset mix and an increase yields on loans, investments and cash. This offset the 36 basis point increase we saw in our cost of funds.
As you have likely already noted with strong loan growth and deposit outflows, we increased our use of short term borrowings 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. Ex 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 payoffs, which will likely be immaterial in 2023, given the current interest rate environment. Overall for 2023, we expect average earning 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 loans held 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 NSF and overdraft fee 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 footprint.
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 million to $165 million. 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 related to the writedown of an OREO property.
Net of these items, non-interest expense was $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% range from the full year 2022 expense base of about $647.1 million, excluding merger expenses. The two basis point FDIC surcharge accounts for 1% of that growth or 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 decline in construction loans was primarily attributable to projects being completed and moving into our commercial real estate portfolio.
On the liability side, our total deposits 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 term deposits as we see more customers taking advantage of the higher rates now being offered. The net outflow in business deposits and we were encouraged that consumer deposits held flat.
Moving to asset quality, we continue to see positive trends with non-performing assets declining 24%. Criticized loans increased only modestly from last quarter. Our loss experience continues to be very low with net charge offs 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.
Kevin Riley
Thanks, Marcy. 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 seventies 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 sets and 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 Marcy and I have alluded to, the piece 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, which 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 C&I. To support this effort, we plan to launch an ABL business later this year and we will redouble our effort in our small business lending. We are actively pursuing new household growth and deepen existing relationships to generate favorable deposit trends.
We are physically viciously pursuing the managed 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’ll 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 IMB acquisition and has been instrumental in moving us forward since that time. I’d also like to welcome Ashley Hayslip, 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 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 earlier 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.
And ultimately, 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.
Question-and-Answer Session
Operator
[Operator instructions] And our first question today comes from Jared Shaw of Wells Fargo. Jared, please go ahead. Your line is open.
Jared Shaw
Just I guess a couple questions. Maybe first on funding, it definitely seems like there’s been a shift in the outlook on funding in sort of your comments last quarter on the expectation for beta being smaller or lower. How should we be thinking about funding from here and do you think that we get back to DDA, when do DDA balances recover or should we expect that they continue to outflow and are the FHLB borrowings more temporary until we see that reversal? Or do you think we sit on higher FHLB borrowings for a while?
Kevin Riley
Well, I think the FHLB will be here for a while, Jared, but hopefully during 2023, we see a shift, as they slowly go out and reduce over time. That’s what we expect to see. So yes.
Jared Shaw
But what about data from here on the remaining deposits before you see that peeking out?
Marcy Mutch
So Jared at this point, we’re — 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.
Jared Shaw
Okay. and then on the asset yields, the loan yields were a little weaker than we were looking for. I hear your comments on the funding of loans that were previously committed. Where should we be thinking the loan yields trend from here and maybe starting to see any ability for spreads?
Marcy Mutch
So new loan yields are coming on in the high five. We’ll still be hampered by those construction loans that are funding at lower rates, which will be below kind of our core loan yield.
Jared Shaw
Okay. All right. 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 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, it says triggers for potential incentive payments through ’23?
Kevin Riley
Well, the incentive comp is 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, that was probably the biggest question on everybody’s mind.
So that was just one additional aspect. There’s no real other changes with incentive comp with regards to what we’ve, our normal practices have been.
Marcy Mutch
And, Jared as far as the 6.47%, if you — we talked all year about the fourth quarter kind of base run rate to be around $160 million or $161 million. If you take that quarterly rent 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 6.47% expense base, with between 3% and 4% inflation and that includes the FDIC insurance. So you get the same place either way.
Jared Shaw
Okay. Thanks. And then just finally for me, maybe you have 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?
Kevin Riley
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 use. 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 that’s all I can pretty much say on that.
Operator
And the next question — the next question goes to Chris McGratty of KBW. Chris, please go ahead. Your line is open.
Q – Chris McGratty
Oh, great. Thanks for the question. I guess Kevin or Marcy, the math you gave us on the growth in the margin, maps very similarly to the earnings that you gave when the merger was announced, $3.65 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’s getting harder for everyone, but I guess what am I missing is that changed so much in the earnings power
Marcy Mutch
Deposit outflows in 2022?
Kevin Riley
And then, we had, as you recall, we reduce our NSF and od, fees.
Q – Chris McGratty
And then the FDIC insurance is an additional up expense that we didn’t anticipate. So…
Kevin Riley
Okay. Yeah, it feels like the, I got the NNSF and FDIC. It feels like it’s more the NII in the deposits that are absolutely deposit, mainly deposits ground?
Q – Chris McGratty
Yep. I get it. Kevin, in terms of next step for maybe following on Jared’s question, what are the thoughts on doing another deal? Obviously the balance sheet’s in great shape. You got a ton of capital. Deals are — good deals get struck when really no one wants to do them, but what are the thoughts on doing a deal?
Kevin Riley
I get the next question as well, Tom. Maybe cause I do deals. The thing is, Chris, I’ll be honest with you. Right now, I think when you — 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 in anything. We’re, more focused on driving positive operating leverage within the institution.
But if something comes up that’s, that we believe, as you always know, we have a, a priority list of banks that we believe will increase the franchise value of this company. And we’re kind of sticking to that list, and if something comes along, we’ll look at it.
But, 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, we’re going to stick to our knitting and, and make sure this bank is, is, is performing at the ultimate level of performance. And then if something comes up that’s, that we believe will increase the franchise value, we’ll go to it. But nothing is right currently on the horizon.
Operator
And the next question goes to Adam Butler of Piper Sandler.
Adam Butler
This is Adam on for Matthew Clark. Just to go back to Jared’s question on the deposit balances. Overall, they came down this linked quarter do you expect a similar decrease in the first quarter or maybe slower? Curious about your comments on that.
Kevin Riley
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 a week before the pandemic seasonally, we see a little bit of 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’re expecting this year because I think what we have seen as the excess deposits go out in 2022, that’s slowing down.
And then go 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 been already migrated over to some of these products and are satisfied. So we’re just expecting maybe a little bit of seasonal decline in the first quarter, but I feel like things will start moving in the right direction once we start going further into the year.
Adam Butler
And then 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? Was it several credits geography or sectors?
Kevin Riley
Okay. We’re going to have our Chief Credit Officer, Michael Lugli kind of address that question, Michael?
Michael Lugli
Yes. So overall, the portfolio, there was no overall decline in the portfolio. In fact, it did fairly well. It was really driven by 3 relatively large credits that totaled a little over $98 million, which drove down our criticized performance that increased that by a corresponding $38 million. So you can’t net those three credits out. But if you look at the overall portfolio, the trend was actually positive in criticized.
Operator
And the next question goes to Andrew Terrell of Stephens.
Unidentified Analyst
Hey, Kevin, and Marcy. This is Zack on for Andrew. Just some housekeeping questions here. Do you have the monthly December NIM available?
Marcy Mutch
Yes. Monthly NIM was in the low-3.40s ex-purchase accounting.
Unidentified Analyst
And then do you happen to also have the spot on the interest-bearing deposits at 12/31?
Marcy Mutch
Yes, it was in the high-70s.
Operator
And the next question goes to Todd Milliken of RBC Wealth Management.
Todd Milliken
I appreciate it. Today’s results were clearly a sizable operational miss on earnings reflected in the stock price today. Prior calls that I’ve listened to you guys have been very optimistic about the operations. 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?
Kevin Riley
Well, that’s pretty — I would say that the operating performance is strong. It might not be — if you go back and look at the earnings projections as people under thought what we were going to perform earlier in 2022 than they might believe they overestimated what we’re going to end up.
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.
Todd Milliken
Well, I get that, but this is clearly an operational miss by a significant amount. And I guess I’m a little bit taken back by why that’s surprising?
Kevin Riley
It’s not an operational mix by much by us. So that’s just your perspective.
Operator
And the next question goes to Bruce Zessar of Advisory Research.
Bruce Zessar
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 bps gap. You’re 64 in the fourth quarter, they’re 35. So now it’s a 29 bps gap. And I’m just wondering if you’ve had a chance to look at how they performed on that side, and you could explain maybe what the differences are and why yours gapped out more than theirs?
Kevin Riley
Well, have you seen their deposit performance this quarter?
Bruce Zessar
I haven’t.
Kevin Riley
So the thing is this, the gap out 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 that 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 the only net up in the core and the margin a little over six basis points for me. It’s a whole different ballgame. 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 it’s just a different model.
Bruce Zessar
But then why isn’t it dropping to the bottom line? They were a lot closer on earnings. All right.
Kevin Riley
To whose earnings. That’s — these are analysts’ expectations.
Bruce Zessar
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. And 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?
Kevin Riley
Well, if you — I’m not going to get how you run a balance sheet because let somebody else talk about that. That’s not an effective approach. So we will take the next question please.
Operator
Yes, our next question go to Jeff Rulis of D.A. Davidson.
Unidentified Analyst
This is Andrew on for Jeff today. Just a couple of quick questions on loan growth. You guys mentioned — you guys noted earlier, higher production in new markets, and you’re seeing opportunities to grow new loans. I was just wondering what — where you guys are seeing the most growth and the most opportunities by state or by region?
Kevin Riley
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.
Unidentified Analyst
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?
Kevin Riley
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.
Operator
[Operator Instructions] And we have a follow-up question from Chris McGratty of KBW.
Chris McGratty
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, you kind of agree with that? And then two, can you just remind me, Marcy, the beta — the full beta assumption that’s in the ’23 guide?
Marcy Mutch
We haven’t provided the full beta assumption in the ’23 guide, Chris, but your first assumption would be accurate.
Kevin Riley
Yes, 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. And I think we struck some good derivatives or interest rate swap that Marcy mentioned earlier, to hedge that portfolio at a 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.
Operator
And we have another follow-up from Andrew Terrell of Stephen.
Andrew Terrell
Just a quick question. Thinking about the mid-single-digit loan growth guidance. I guess, can you help me out with some color on just what’s the incremental margin on a dollar of loan growth is for you today. Just understanding that the funding cost could be a little bit higher. But just what is the incremental spread that you’re already seeing the big growth would look like relative to the 360 or so margin in the fourth quarter?
Marcy Mutch
Andrew, it’s kind of a mixed bag. So new loan growth, again, is going on in the high-fives. 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 high-fours. So it’s kind of be that mix of funding that kind of impacts of inflow.
Andrew Terrell
Do you have the dollar amount of that construction book that is funding in that kind of territory. I’m just trying to quantify that impact.
Marcy Mutch
We don’t. That’s not something.
Kevin Riley
Number disclosing.
Andrew Terrell
And then the last one for me, just more housekeeping just the tax rate, what’s driving the step-up in tax rate?
Marcy Mutch
It has to do with some accounting around LIHTC. So it’s coming up a little bit.
Operator
And our next question goes to Tim Coffey of Janney Montgomery Scott LLC.
Tim Coffey
I apologize if I missed it, but Marcy, but what is the cash flow coming out from securities portfolio?
Marcy Mutch
$70 million to $80 million a month.
Tim Coffey
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?
Kevin Riley
Well, it all depends really on deposit growth. So what we estimated and what I think Marcy 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 on the balance sheet will kind of remain flat, but we’ll get better yields on our earning assets in total.
Operator
And our next question to you, Adam Butler of Piper Sandler.
Adam Butler
Just going into the interest-bearing deposit data. Do you guys have any guidance for 2023 where that is headed?
John Stewart
It’s John. I think as Marcy said in her prepared remarks, at this point, the beta assumptions versus the prior cycle, we wouldn’t be changing those assumptions. But we haven’t specifically disclosed in the NII guidance that you gave, what those interest-bearing deposit cost assumptions would be.
Operator
We have no further questions. I’ll now hand back to Kevin Riley for any closing remarks.
Kevin Riley
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.
Operator
Thank you. This now concludes today’s call. Thank you so much for joining. You may now disconnect your lines.
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