Good day. Thank you for standing by. Welcome to the Bank OZK fourth quarter 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you need to press star one one on your telephone. You will hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I will now attend the conference over to you today. Jay Staley, please go ahead.
Good morning. I'm 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, Brannon Hamblen, 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.
As a reminder, to ask a question, you need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Stephen Scouten from Piper Sandler. Your line is open.
Hey, good morning, guys. Congratulations on a great quarter, first of all. I guess when y'all are thinking about originations, I mean, I think it was 2.81. It's still extremely high relative to what we saw in 2021, early 2022. What's the reason maybe for the thinking it'll be a little slower? Is it just overall economic slowdown? Are you seeing more construction projects kinda get tabled today than you were maybe 90 days ago? Or how can we think about those trends that you're seeing from customers in that space?
Good morning, Stephen. I'm gonna let Brannon Hamblen take that question if he will. Brannon.
Absolutely, Stephen. Great to hear from you this morning. 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. You know, 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. Obviously, interest rates have not slowed down, so that piece of the puzzle is still pressing against new deals. You know, we are still seeing new deals. We are still signing up new opportunities.
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've had really good success in pushing into and getting our fair share or more given where the co-competition is. As I've said in the past, the quality of what we're able to originate today in light of less competition is lower leverage and better spreads on the deals that we are quoting and winning.
Okay, great. This question, you know, may be a little early, but I think it starts to become interesting. If rates begin to roll over in the back half of the year, how do your floors play into that?
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 two years ago at a floor near the origination rate on those loans were obviously way off, way away from those floors before they would become active. The loans we originated last quarter, you know, may be at or very near their floor rate. The longer the Fed stays at whatever their peak rate is, the more we roll off older loans that are, you know, far from the floor and replace those with new loans that are at or near the floor at the time of origination.
The scenario where the Fed slows their rate increases and maybe has, you know, one, two, or three more quarter point increases and then stays at that rate for, you know, 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.
Yeah, that's helpful. I mean, like at a very high level, is it fair to just kinda think about the and I understand what you're saying, George, these numbers are improving every quarter? Almost the inverse of the, of the charts you were showing previously as rates went higher and just, you know, how the percentage of loans that would fall, you know, into protection from those floors. Is that kind of roughly how we could think about it?
Yes, exactly. You know, if you think back a year or two, we had a lot of loans that 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. We quickly got over those floors, and you can see the benefit of that in our record levels of net interest margin and core spread that we've been achieving. Yes, the flip side of that is true.
Stephen, that's why we've made the comment, you know, 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've 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, you know, have another quarter where we have some improvement in NIM and core spread. Based on the fact that the Fed is going, it seems like the 0.25 point increases and the number of those is of, you know, legitimate question, is it one, is it two, is it three, is it four? Those 0.25 point increases, we're gonna see a catch-up in our deposit costs.
We're if we didn't hit peak NIM and core spread in Q4, we'd probably, you know, would eke out some small incremental gain in Q1. I can't even. You know, I hope we will have a gain in Q1, but that's questionable. At a slower rate of Fed increases with deposit costs, which lag beginning to catch up, we'll see some erosion of those recent gains probably in Q2, at least.
Well, if the NIM peaks at 550 range, you know, you're gonna be doing better than 99% of banks anyway. We're 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? That to me is the hardest thing to try to anticipate. You know, we can think about betas when rates are rising, when they're not, how do you think about that kind of lagged pressure in the back half of the year on deposit costs?
Well, you know, the way we're 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. Knowing that we were gonna have strong loan growth in 2023 and probably weren't gonna see rates coming down much, at least in the front half of 2023 and maybe not at all in 2023. We're beginning to shorten the duration on new CDs we're adding.
Still doing a bit out longer, but we're pulling some of those in some categories of deposits just to get ready to have deposits repricing late 2023 and early 2024, as we think that's probably the likely timing that the Fed may be in a cutting mode if they are.
Yeah. Perfect. Great color, George. I appreciate it, and congrats again on all the record results.
Thank you, Stephen. I wanna give a shout-out to our Cindy Wolfe and Hayden Curley, our Chief Deposit Officer, and the Drew Harper, who manages our wholesale funding. That deposit team and all the guys that work 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. You know, we've had a really nice expansion in our net interest margin, core spread, net interest income. That just didn't happen. They've been very strategic in the way they've managed that on the liability side as our asset guys have, and the team deserves a lot of credit for how well they've managed that. Thank you, Stephen.
Thank you. One moment for our next question. Our next question comes from the line of Manan Gosalia of Morgan Stanley. Your line is open.
Hey, good morning. Thanks for taking my questions.
Good morning, Manan.
Good morning. I just wanted to follow up quickly on the last line of questioning. I guess with the new CDs that you're putting on and the fact that you're reducing the term of those CDs, should a large chunk of the CDs come due for repricing towards the mid to end of 2023? Did I hear you right there?
Manan Gosalia, I would say that they're more laddered out throughout 2023 and into early 2024. It's a pretty well-managed ladder. We've got, you know, CDs maturing every day, and we've kept a considerable focus on keeping that distributed fairly even so we can, you know, just manage that effectively instead of having big chunky pieces of it maturing here and there. It's very well diversified on a day-to-day basis throughout 2023 and into 2024.
Got it. Perfect. Then, you know, maybe just a big picture question on repayments. You know, 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? Maybe you can just add and based on how you've seen this play out before, I guess what the best estimate in terms of how high repayments can go this year?
Well, again, we've said that we think our RESG repayments will be in the range that we achieved during 2021 and 2022. That's $6.22 billion-$5.65 billion is the likely number there. You know, it could be a little more than that, it could be a little less than that. We're thinking that that is the range for repayments next year. You know, I would tell you that the capital markets are not closed. Transactions are getting done. Sponsors are just, you know, not as excited about the rates they're getting as they would have been on rates a year ago.
One phenomena that we've seen, and I want Brannon to comment on this, but one phenomena that we've seen in the past, Manan, in response to your question, is if sponsors tend to think that they're gonna get a much better exit six months or 12 months down the road than they are today, a lot of times they'll stay in our more expensive construction loan a little longer. You know, if they think they're gonna exit today at a 7% long-term rate, and they think they can get a 6% if they wait 9 more months, they will tend to stay in our loan a little longer to get that better exit. Sometimes they do that. Sometimes they're just ready to put the permanent bed and go on down the road.
Brannon, you wanna comment on refinance activity next year or this year in 23?
Sure. No, you characterized it correctly, George. I think one of. You know, we will likely have a number of those, short-term extensions, you know, six, nine, 12 months, just as you said. Really there's so much we don't know about exactly where longer-term rates are gonna 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, you know, back half of the year is likely to be higher than the front half of the year. You know, it, as we know, inures to our benefit, certainly from a average earning assets point of view.
We're when we make those loan extensions, a lot of times we'll obviously get a little more fee income, perhaps a little more minimum interest and, but they're not long-term in nature, and so when the capital markets come back, they'll move on. Our rates are not as attractive, obviously, as the long-term rates.
Yeah. I would emphasize Brannon's point that we are, you know, we view loans staying on the books six months longer or 12 months longer as a very positive thing. It greatly improves our return on equity on those loans to have them sit on the books longer.
Right. Perfect. Yeah, that was gonna be my follow-up. I mean, if it stays on the books for longer, you have higher earning assets that helps your NII, even if, even if NIM is declining. As you run your scenarios on the different macro assumptions, are there any situations in which NII peaks and starts to decline? Should we just continue to see this NII ramp up and, you know, get to peak NIMs in the next couple of quarters and then move down from there?
Well, that's a good question, Manan. I would tell you that our prevailing thought is that, you know, we will see some compression in NIM and core spread in the coming quarters, but that's gonna be more than offset by growth in average earning assets. We alluded to this in our management comments specifically, and, you know, I've referred to it internally as a baton handoff where that growth in net interest income ceases to be driven by NIM. That actually becomes a little headwind. We've got great originations that have occurred in 2022 that will drive loan growth in 2023 and 2024. The continued increasing diversification of our portfolio should also help us drive loan growth in 2023 and 2024.
We are cautiously optimistic about a positive net interest income story.
Appreciate it. Thanks so much.
Thank you.
Thank you. One moment for our next question. Our next question comes from the line of Timur Braziler from Wells Fargo. Your line is open.
Hi, good morning.
Good morning.
Just following up on that last line of commentary, you know, 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're expecting from a funding standpoint, or could that too slow?
Tim, you wanna address that?
Yeah. Hey, good morning, Timur. You know, given the level of origination volume we've had over the last four to six quarters, you know, that, given our construction loans and the fact that many of these loans we're funding later in the construction phase, we do kind of know the schedule to a great extent of the funding for those loans. That gives us confidence. 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.
A lot of that is just the delayed funding sequence we have in those RESG loans 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.
Okay, great. Maybe just to follow up with 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? Conversely, are there any geographies or asset classes that are seeing any kind of marked slowdown in either activity or valuations?
Great question.
Why don't you take that?
Yeah. Yeah. You know, it's interesting, the book that we see coming to us continues to be a fairly diverse book, both, you know, geographically and from a property type perspective. I think one that stands out, and we've talked about it before, the upper Midwest, which, you know, includes Chicago, has been a little slower the past several quarters, and that continues to be the case. We're still looking at the deals there, but just on a relative basis to, you know, to our history, a bit slower there. When I look at what we've got signed up, you know, in the pipeline to close, it has a pretty similar mix as historically.
I, they're less office probably, than we've seen, but we are still seeing office opportunities with, you know, pre-leasing frequently available in those opportunities. As I said before, really great position to achieve the low leverage that is our standard and really improving on that. You know, 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 coasts, but we're still doing deals on both coasts as well.
Okay, great. Just last for me, looking at the comments made around net charge-offs for the coming year, recognizing that 2022 was a record year, you know, how can we start thinking about normalized charge-offs? As we're looking at provisioning levels, just maybe talk us through your thoughts on, provisioning trajectory here in 2023, given the broader uncertainty.
Tim, you wanna take that?
Sure. Sure. Yeah, I mean, you can look on figure 15 and our net charge-off history, obviously. What a great year in 2022 to be able to record a 4 basis point net charge-off ratio, which is an all-time low. You know, the range that we've had over the last three or four years, in 2020, we had a 16 basis points. Obviously, there was a lot of uncertainty with the pandemic going on that year and, you know, 6 basis points in 2021 and 11 basis points in 2019. It's hard for us to know, you know, what the net charge-off number's gonna 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. You know, the macroeconomic factors that we get from Moody's and use from 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, 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. The impact of our growth in funded and unfunded obviously will impact the level of provision we have from quarter to quarter.
Then as we get through 2023, obviously Moody's, economic scenarios.
You know, we look at those during a two-year forward projection. As you get towards the end of 2023, the two years ahead of where you are the scenarios that we're looking at. Obviously, there's a lot of uncertainty of what 2023 brings, and so when we get more clarity, that may, you know, influence Moody's forecast too, and our weightings related to those as well. 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.
You did see our overall total ACL to total commitments move up a couple of basis points for 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.
That helps. Thank you.
Hey, Tim, I'm gonna add a comment here on something there. A comment has been made that our ACL for unfunded loans is a lower percentage than our ACL for funded loans. The question has come up previously as funded loans move to or as unfunded loans fund and move to the funded category, does that mean we're gonna 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 percentage is because RESG is a much higher mix. It's 90% roughly of the unfunded. It's 60%, low 60s% of the funded. Our RESG loans are lower leverage, so they have lower risk associated with them, lower loss exposure if you have a default on one of those loans.
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 for it. The movement of a loan from unfunded to funded doesn't change the allowance allocation really for that loan in any meaningful way. I thought I might clarify that because I think there is some confusion out there about that.
Great. Thanks, George.
Thank you.
Thank you. One moment for our next question. Our next question comes from the line of Catherine Mealor from KBW. Your line is open.
Thanks. Good morning.
Morning.
Morning, Catherine.
Wanted to talk about maybe the office portfolio, which you give 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 vs unfunded and what the leasing looks like for some of these newer projects?
Yeah.
Go ahead.
Yeah, yeah, I'll jump into that, Catherine Mealor. I don't know exactly the funded vs unfunded dollars off the top of my head, but with respect to leasing that, you know, as we've said, some of the projects we originate have pre-leasing when we originate them, some are spec. But when we look at, you know, projects that are complete, we are seeing continued green on the screen moving forward with improved leasing. You know, obviously, there's a range of results across that portfolio, but we are still seeing positive leasing momentum in those projects. As I said, the newer stuff that we're putting on the book is predominantly going to have pre-leasing involved with it.
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's a range of success across the portfolio, some slower than others, some knocking it out of the park. On the whole, we're pleased with what we see there.
Great. On back to the margin conversation, can you talk to us about where your deposit rates were towards the end of the quarter, just to get a sense as to where funding costs might be coming, as we reach near the peak fed?
Cindy?
Yes, Catherine, this is Cindy. December was 1.66% on cost of interest-bearing deposits.
Okay. On average, I know your CD rates kind of range in different markets, but on average, where are new CDs coming on?
I don't have that information. I don't have an average. You're right, it varies depending on the market.
Okay. 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? You've seen such a big increase in your NII growth over the course of the year. Just trying to think about, you know, obviously, as the margin peaks and then falls, you know, I think year-over-year growth is for sure gonna happen just given the ramp we've seen throughout the year. Is it fair to say we could see just from this quarter's annualized run rate a little bit of a compression, just NII as that margin falls as funding costs increase?
Tim, why don't you take that one?
Yeah, Catherine, yes, you're correct. Year-over-year, obviously we'll have lined up the potential to have a really strong year-over-year comparison. If you're comparing it to just each quarter compared to fourth quarter, I think there'll be one or more quarters in which we have higher net interest income than we did in the fourth quarter.
Great. Okay. That's very helpful. All right, thank you.
All right. One moment for our next question. Our next question comes from Matt Olney from Stephens. Your line is open.
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.
Tim?
Yeah, 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. 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. 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. 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.
Okay. Perfect. Thank you for that, Tim. I appreciate it. Then going back to the core spread discussion, obviously impressive in the fourth quarter, the loan yields were particularly impressive in four Q, and I think those loan betas moved up higher than four Q vs three Q. Any color you can give us as far as the higher betas we're seeing in four Q? I know Brannon mentioned some potential extension fees in 2023. In the future, did we see any of that in the fourth quarter? Thanks.
I would say, Matt, that was a fairly typical run rate for, you know, 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. I don't think we have the expectation that's gonna be a huge factor in 2023. I think we'll 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 gonna 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.
George, if it wasn't the fees in the fourth quarter, any other color on the stronger loan betas we saw in four Q vs three Q?
Everything that was variable was off its floor, essentially, and the Fed was moving quickly, so those translates through into higher loan yields. Obviously, loan yields will go up less rapidly with the Fed moving 25 basis points instead of 75 and 50. There's, you know, what we can do there on increasing loan yields is definitely tied to a large extent to the magnitude of Fed rate increases.
Okay. Just lastly around thinking about liquidity and funding the growth in 23, clearly deposit growth is gonna be a big factor this year. On the securities portfolio, you disclosed kind of what 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?
Matt, that's going to depend purely on what we see as reinvestment opportunities. You know, with the inverted yield curve, and steeply inverted as it is, and assuming a likely Fed pivot as seems to be priced into the yield curve faster than what we would think the Fed's gonna pivot, there's not much attractive for us to buy out there. 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.
The bond market seems to be a little ahead of itself right now with that steep inversion in the yield curve, so we're sidelined. You know, we're not gonna chase it, so if we miss that, then that portfolio just gets smaller, and we're okay with that.
Okay. All right. That's all from me. Thanks, and congrats on the quarter.
Thank you so much.
One moment for our next question. Our next question will come from the line of Jennifer Demba from Truist. Your line is open.
Thank you. Good morning. I'm 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.
Yeah. We're working on the technology. We've got our three senior members of the mortgage team on board, they're 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'll start adding some origination teams and begin doing business. That probably, Jennifer, is third quarter before we actually start that business. We'll start it in a small scale way and ramp it up slowly. That really is probably a 2024 matter that, you know, you'll begin to see a little bit of trickle of results in there in late 2023, nothing that's gonna move the needle until possibly sometime into 2024.
Great. Thank you.
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.
Hey, good morning, guys. Thanks for taking my questions. 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 wondering to see if you had anything on tap for 2023. Then, you know, how should we think about, you know, different components, whether it be, you know, kind of wage inflation, annual merit increases, you know, healthcare costs, FDIC, costs going up. If you can just kind of contextualize the expense outlook, I would appreciate it. Thanks.
Tim, go ahead.
Hey, Michael. Yes, you rattled off a long laundry list, and we've got probably more that we could add to that list. You know, we added a chart on page 28, which was figure 31, which shows you the headcount increase that we had throughout last year. You can see that we've, you know, really from our low point on June thirtieth, 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 1/1. We'll continue to add headcount as we go through this year. We've already gotten started in January with additional headcount.
That headcount will continue. I mean, we were really at a 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. If the balances didn't change, it would go up $1.2 million a quarter. You also have to take into account the increase in assessments that we'll get from our growth in average assets as well. You know, really we'll 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.
Then you've got the inflationary pressures and all 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, you know, one year or two year or three-year contracts. All of that kind of adds up to our expectation for low double-digit increase year-over-year, full year 2023 compared to full year 2022. We would expect kind of in that low double-digit range increase in total non-interest expense.
That's helpful.
But-
Yeah. Go ahead, sorry.
Yeah. Well, I'm 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.
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, you know, 79% to about 84%-85%. Any sort of updates there on that, on that particular credit and, you know, any sort of, you know, resolution opportunities at some point? I know it's a longer term kind of credit, but just looking for any updates.
Brannon?
Yeah. Be happy to take that, Michael. As it relates to the bubble floating, you know, that has to do more with the asset mix at any given point in time. You know, we have a few remaining single-family lots at the project, and a club, and then we've got a roughly... Well, there are
17 townhomes under construction and 34 to construct and sell beyond that. Those townhomes have had, because of the price appreciation they've had over time, when we originate those loans, they have a pretty attractive LTV on them. When you sell them, and start, you've got others that are not as high. It has a slight impact on your LTV. We did close one townhome sale in the quarter at a very nice price. We've got, as I said, 17 under construction, six of those are under contract. We still feel good about the project.
I would tell you that it's, you know, 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 gonna have to sort of hunker down and work from home, if you will. We definitely saw the benefit of that. It's pulled back a bit. You know, as rates have increased and that has affected things. Still a good market. You know, resale prices in the community are doing well. That one sale we had was at a very, very nice price point.
As you said, it's a long-term sort of resolution, but you know, certainly made a lot of good progress in the last couple of years and expect that to continue, albeit at perhaps a somewhat reduced pace.
Okay. 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 and if there's any concerns on your end. Thanks.
Yeah, sure. No. That credit's a site that was planned for a very high-end development, construction costs have escalated materially over the last couple of years. Ultimately, the borrower decided not to proceed with his vertical development there. In light of his abandoning the development plan, we obtained a new appraisal, dated December 22nd or December 22, which concluded to 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%. The loan's current. Sponsor's actively marketing, working to liquidate the property.
Given the aborted development plan and their decision to liquidate the property, we concluded that a special mention rating was appropriate for that credit.
Great. Thanks for taking my question.
You bet.
Thank you. As a reminder, that's star 11 for questions. One moment for our next question. Our next question comes from the line of Brian Martin from Janney Montgomery. Your line is open.
Hey, good morning, guys.
Hey, Brian.
Morning, Brian.
Maybe just one on the loan side for a second. Just appreciate the commentary about, you know, the growth outlook this year. Just kind of wondering if you can provide any perspective on just, you know, where that growth, you know, how you're thinking about, you know, the different buckets of where that growth comes from, both from the RESG standpoint, and 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, you know, coming from this year?
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. You know, RESG's funded balances will undoubtedly grow and should grow in a decent manner because of the big originations last year. 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're 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 shows a slight reduction in funded balances at a couple of quarters this last year has actually had nice growth in their commitments outstanding for funding. Even that group is growing in total commitments. We think we're gonna 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. We're constructive on the continued trend toward diversification in the portfolio.
Got you. The pipeline in the ABL portfolio is pretty healthy at this point?
Yeah.
Brannon, you want to comment on that?
Yeah. Yeah, no, it is. As George said, they had a good year last year. They've got some great credits on the book and looking at some others here early in the year. One of the things I would note about that particular portfolio, you know, those credits have a very nice sort of accordion characteristic to it, if you will, that defensively, you know, as sales volume pulls in, you know, our credit's way ahead of that with the formulaic structure, but also as these businesses
You know, experience, great health and expansion opportunities. You know, 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 I was at dinner last night with an, you know, another credit that customer that is contemplating expansion as well. Really encouraged about, you know, the growth opportunities for that portfolio.
Gotcha. Okay. No, that's helpful. 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 and even the increases starting this year, just kind of the growth rate or, you know, how should we think about that ramp up in expense growth from kind of this fourth quarter level, which is obviously a peak, you know, as we get into, you know, 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?
Yeah, no, year-over-year, we're expecting low double-digit increase. You know, if you're starting with fourth quarter, you know, Q1 is always seasonally tough. You got a full load of FICA. You've got health insurance increases. You've got a good amount of raises that come in. You know, you've got the FDIC insurance that's kicking in. The increase there is kicking in 1/1. You know, advertising and marketing, we're doing a lot of that right now. I would expect another healthy level of increase in Q1 maybe not as much increase as we get throughout the year. Overall, year-over-year, low double digits.
Gotcha. Okay, that's helpful. Just one other one was on the repurchases, just kind of your outlook there. Just on the deposit front, just the broker deposits were up a bit. Just kind of wondering what the appetite is there or just kind of where you wanna see that trend as you kinda go throughout the year or just, you know, over the next couple of years.
Tim, you wanna take the repurchase part?
Yeah. 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've got really good capital levels and a good earnings profile. I think we can do multiple things at the same time. You know, we'll 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 or below that number. We'll be opportunistic and try to find opportunities to see where we use that authorization.
This is Cindy. On the brokered, I'm gonna borrow Tim's words and completely parrot that and say we're gonna continue to be opportunistic and disciplined and look for the opportunities that Ottie 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, we're being very surgical and focused on finding the best possible opportunities we can. We're pleased with the way we're managing our increase in our brokered book.
The percentage of brokered is probably not gonna, you're not gonna see any material increase in that percentage going forward. You know, we're in our target zone for what's acceptable on that and our internal standards, and we're not gonna materially increase it. You're not gonna see that at 12 or 13 or 14% of deposits, would be our expectation. We're not going there. Probably sub-10 or around the 10% range is probably about the max you'll see on that.
Gotcha. Okay. Thanks for taking the questions and, great quarter, guys.
Thank you. I'm not showing any further questions in the queue. I'd like to turn the call back over to George Gleason for any closing remarks.
All right. Thank you guys very much for joining the call today. We're glad to celebrate a really great quarter and a great year with you. We appreciate your interest in our company, and we'll see you in about 90 days. Thank you so much. Have a great day. This concludes our call.
This concludes today's con- call. Thank you for participating. You may now disconnect. Everyone, have a good night.