Enterprise Financial Services Corp (NASDAQ:EFSC) Q3, 2022, Earnings Call October 25, 2022 11:00 AM ET
Company Participants
Jim Lally – President and Chief Executive Officer
Keene Turner – Chief Financial Officer and Chief Operating Officer
Scott Goodman – President, Enterprise Bank and Trust
Conference Call Participants
Jeffrey Rulis – D.A. Davidson
Andrew Liesch – Piper Sandler
Damon DelMonte – KBW
Brian Martin – Janney Montgomery
Operator
Good day. And welcome to the Enterprise Financial Services Corporation Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Thank you.
At this time, I would like to turn the conference over to Jim Lally, President and CEO. Sir, you may begin your conference.
Jim Lally
Well, thank you, Erica and good morning. I welcome everyone to our third quarter earnings call. I appreciate all of you taking time to listen in. Joining me this morning is Keene Turner, our company’s Chief Financial and Chief Operating Officer; and Scott Goodman, President of Enterprise Bank & Trust.
Before we begin, I would like to remind everyone on the call that a copy of the release and accompanying presentation can be found on our website. The presentation and earnings release were furnished on SEC Form 8-K yesterday.
Please refer to Slide 2 of the presentation titled forward-looking statements and our most recent 10-K and 10-Q for reasons why actual results may vary from any forward-looking statements that we make this morning.
Please turn to Slide 3 for our financial highlights of the second quarter. We’re very pleased with our third quarter as they reflect the cadence of consistency that we established since the beginning of the fourth quarter of 2021. These earnings are a product of the diversified franchise that we are building with a laser focus on establishing long-term relationships with privately held businesses while building a culture of operational excellence. For the quarter we were in $1.32 per diluted share, which compared favorably to the $1.19 that we earned in the second quarter. Our patience with respect to our loan and investment portfolios, coupled with our low-cost deposit base allowed us to take advantage of the rising interest rate environment. For the quarter, our net interest income increased to $124 million. This represented a 13% increase over the linked quarter. It was bolstered by our net interest margin of 4.10%.
Our return profile improved as well. Pre-provision return on average assets was 1.96% versus 1.73% in the second quarter, and 1.81% a year ago. Return on tangible common equity also improved increasing to 19% compared to 17% at 6/30/22. Scott will provide much more detail on how our markets and specialty businesses fared during the quarter. At a very high level, loans increased 5% annually net of PPP and depository made north of $11 billion, decreasing modestly by $35 million. At the end of the quarter, our loan to deposit ratio stood at 85% with DDA representing 42% of our total deposits. Keen will spend much more time on capital. But I just wanted to comment that our TC to total assets was stable at 7.86% despite AOCI pressure and CET1 was 11%. Keeping with the pattern that we established several quarters ago; we did increase our dividend per common share for the fourth quarter to $0.24 cents from $0.23.
Our asset quality remained very solid at quarter end. While our portfolio statistics remain pristine, we do understand what the impact of rising interest rates in a prolonged recession could have been our loan portfolio. With that in mind, we have conducted segmented internal loan exams that have stress test. And we stress test larger for direct portfolios and potentially higher loss portfolios and feel very confident about the resiliency. This segmented testing will continue for the foreseeable future. It goes without saying, but we are looking for the proverbial cracks in the portfolio. But we have yet to see anything. I would like to provide some color on the themes I’m hearing from our clients. In my most recent meetings with several of our C&I clients, I’m hearing that orders are strong. Balance sheets are good, but labor and supply chains still remain a bit challenging. That being the case, for the most part we feel confident about their performance to plan for fiscal 2022. And their ability to continue to perform at this level into ’23 and into early 2024. We are also preparing for a mild recession in early 2024. But think this will be short lived, and things will rebound by the end of that year.
When speaking with our key sponsors related to our sponsor and finance business, they too are confident about their portfolios, and feel really good about near-term performance and the resiliency of their balance sheets of their portfolio companies should have recession last longer than anticipated. Finally, I will say that some of our larger developer clients are being cautious about new projects that are still on the drawing board. But the recent rise in interest rates these projects have difficulty penciling, so this will obviously have an impact on new development projects that would have likely closed in mid to late 2023. Our formula for success for the remainder of the year is relatively simple. Slide 4 lists a sampling of our focus, we need to continue our strong momentum in both organic loan and deposit growth. And doing this with a relationship focus while keeping discipline on both pricing and credit quality. Credit and capital are always a focus for us but given the current climate we will remain especially vigilant in both of these areas. And finally, times and change and uncertainty are typically ideal for us to add good talent everywhere in our organization. As we always do, we will do this with an accretive mindset. We especially think that there are very good opportunities there are newer markets like Southern California, and Dallas Fort Worth.
With that, I’d like to turn the call over Scott Goodman, President of Enterprise Bank and Trust.
Scott Goodman
Thank you, Jim. And good morning, everybody. As you heard from Jim, and as shown on slide 6, we posted solid loan growth of $122 million for the third quarter, resulting in a trailing 12-month growth rate of 8% net of PPP changes. Despite Q3 typically being a somewhat seasonally soft period for a number of our specialty business lines, in general, we’re very pleased with the overall growth in this portfolio, being successful conversion of our regional C&I and CRE pipelines, and continuing steady execution of new opportunities within the specialty businesses. Loan details by segment are outlined on slide 7 and 8. And year-over-year growth has been contributed by nearly all segments of the business. Reduction in the residential real estate portfolio mainly reflects the addition of these loan types through the First Choice acquisition and our subsequent intentional shift away from short-term bridge or fix and flip lending in the California market.
Most of this reduction occurred in prior quarters. For the third quarter, the largest contributors to growth were within our regional and commercial banking units in general C&I and commercial real estate categories. We have been able to successfully win a number of new larger C&I relationships during Q3 across most of our geographic markets, reflecting a steady and consistent sales process. Overall, C&I originations increased nearly 14% from the prior quarter, and are up nearly 65% from the same quarter last year. We also continue to see good activity in our real estate pipeline, particularly with our existing investor clients, and within the Western geographies.
New development loans have slowed somewhat as developers consider elevated project costs and some shifting economic factors, but our existing construction portfolio continues to and perform well. A number of these projects are moving to a stabilized status and remaining within our portfolio which is partially contributing to the reduction that you see in construction development category and the increase in CRE investor-owned balances. The change in tax credit balances also reflect some shift in categorization this quarter as projects that have aged past their qualification periods move into a more permanent category.
Moving to slide 9, please note that we have consolidated our metro markets into geographic regions, as outlined in the footnote. The specialized lending units continue to perform well and have shown some level of immunity to the shifting economic conditions growing in Q3 by $46 million. Life Insurance Premium Finance grew by $30 million in a seasonally softer time of the year, due mainly to elevated activity from newer referral partners. The California market has presented an opportunity to more fully introduce our expertise in this niche two COIs within this targeted segment. And we are getting introductions to new COIs from our existing insurance partners as well. Practice finance, which is a new team for us in 2022 has hit the ground running and continues to perform well, contributing $25 million to growth this quarter, and $73 million for the year. Sponsor finance which was essentially flat for the quarter, which is not uncommon for this time of year, deal flow and pipeline has begun to regenerate following a mid-year pause and look solid heading into Q4, which tends to be a more active quarter leading up to year end closings.
In the SBA business, we did experience some decline in originations for new 7 (a) loans this quarter, due to lower demand, as well as competition from conventional bank lenders. We were able to offset much of this impact on the portfolio through efforts to proactively retain and extend existing SBA loans with payoffs and pay downs, diminishing to roughly 65% of levels experienced in the prior quarter. We have also recently bolstered our traditional owner-occupied floating rate product with fixed options, as well as extending our SBA capabilities to target other business purposes in an effort to elevate production. Within the Midwestern region, St. Louis and Kansas City both had good growth quarters resulting from landing a balanced mix of new middle market C&I relationships, and commercial real estate opportunities.
In the Southwest, growth was modest this quarter, we did onboard a number of new C&I relationships in Arizona, Las Vegas and New Mexico, as well as some momentum of fundings from CRE and construction commitments, flows throughout the year. Net growth was lowered somewhat due to pay offs related to the sale of a large Arizona C&I business to private equity, and the sale of investor-owned properties in Arizona and New Mexico.
In the West region, the portfolio declined slightly by $10 million, due to mainly to lower advances on existing lines of credit. On a positive note, we’re seeing good activity from new talent brought into this market over the last year, and our California pipeline is building heading into Q4, payoffs there continuing to moderate relating to our decision to move away from the aforementioned residential fix and flip business, with total payoffs roughly half the level experienced last quarter. Moving to deposits, covered on slides 10 and 11. As the market has placed more emphasis recently on deposits, and competition increases, our focus continues to be on retaining our existing low cost and relationship-based funding, while leveraging specialty channels and new commercial relationships to attract additional balances. Year-over-year deposit balances have risen $230 million or roughly 2%, primarily driven by an increase in new noninterest-bearing accounts from the specialty deposit lines and new commercial relationships.
For the quarter, overall balances were relatively steady compared to the prior quarter, down just $35 million. Areas of decline were primarily in interest sensitive consumer and time deposits, while commercial, business banking and specialty deposit channels remained strong. Average DDA balances per account continue to move down as businesses spend through stimulus dollars and excess liquidity. We’ve been able to offset the end factor this trend though, through sourcing new relationships, and expanding existing ones, with the current annualized growth rate of deposit accounts just under 9% in the quarter. On a regional level, which is displayed on slide 12, we saw growth in all areas with the exception of the Midwest. This was primarily due to the movement of balances from one large commercial client in Kansas City, which was acquired in the quarter. Specialty deposits profiled on slide 13 grew by $19 million in the quarter, with the largest contributions coming from the Community Association and Property Management segments. These continue to be an efficient and low-cost source of funding now representing 22% of total deposits. Across our markets, we had positive net new accounts in the quarter with higher average balances than in our closed accounts and at attractive rates as our average open interest rate for the quarter was well below our peer average. In general, we’re pleased with our ability to hold relationship balances, to originate new accounts, and to maintain an attractive blended deposit costs.
Now I’d like to turn the call over to Keene Turner for his comments on the quarter. Keene?
Keene Turner
Thanks Scott. Any my comments begin on slide 14 of the webcast, we reported earnings per share of $1.32 in the third quarter on net income of $50 million. Earnings per share expanded 11% sequentially due to 8% growth in operating revenue, which totaled $134 million, or a $0.20 per share sequential increase. This growth was driven by 13% expansion of net interest income, while noninterest expense expanded into a more controlled rate, resulting in a 35% marginal efficiency rate for the third quarter.
Turning to slide 15, net interest income for the quarter was $124 million, compared to $110 million in the second quarter, or a $14 million increase. Net interest income was favorably impacted by an improved earning asset mix, including higher average loan and investment balances, along with the benefit of rising interest rates driving asset yields higher. The increase in net interest income was primarily driven by a $16 million increase in loan income despite a $1.1 million reduction from PPP income. With a composition of our balance sheet as of September 30, we expect the full impact of the existing interest rate increases will result in quarterly net interest income in the range of $130 million to $132 million. We estimate another 100-basis point increase in interest rates will result in an additional $5 million in quarterly net interest income.
As noted in the earnings release approximately 20% of the variable rate loan portfolio reprice is on the first day of each quarter and did not benefit from the third quarter interest rate increases. Moving on to slide 16, net interest margin on a tax equivalent basis was 4.10%, an increase of 55 basis points from the linked quarter, our balance sheet has been positioned to be asset sensitive and accordingly, it continues to benefit from an increase in interest rates. As a result, asset yields improved 71 basis points, which included 59 basis point of yield improvement and investment yield improvement of 14 basis points. New loan originations in the quarter were five — at a rate of 5.7%. And we invested at a rate of 3.7% in the investment portfolio on a tax equivalent basis. Additionally, the increase in Fed funds rate led to improve earnings on our interest-bearing cash balances. Net interest margin was also aided by an enhanced asset mix, as we continue to fund growth in loan and the investment portfolio, while reducing excess cash. The cost of interest -bearing liabilities increased 30 basis points from the second quarter driven mainly by higher deposit rates and variable rate borrowings. The loan portfolio remains our largest driver of asset sensitivity as 63% of loans are variable rate. More than 60% of those have interest rate floors. And essentially all those floors are nonexistent, the rate is above the floor.
We ended the quarter with nearly $750 million of cash on the balance sheet. And that affords us the opportunity for favorable asset re-mixing and liquidity defense in upcoming quarters. Our deposit portfolio remains more than 40% interest bearing balances. And we have less than $500 million of total transaction accounts formally tied to an index with ample liquidity our expanded footprint and strong low-cost deposit generations through our specialty verticals we’ve been able to maintain our beta 20% in the current cycle. While we expect this lag in deposit pricing to abate, we believe our ability to control deposit costs through this rising rate environment is greatly enhanced versus prior interest rate cycles.
On slide 17, we demonstrate our credit trends, our asset quality metrics improved in the quarter as both nonperforming loans and assets declined. Nonperforming assets were 14 basis points of total assets, and nonperforming loans were 19 basis points of total loans. Realized credit losses continue to be very low and net charge-offs were only two basis points in the quarter compared to one basis point recovery in the prior quarter.
Slide 18 presents the allowance for credit losses. Each of the economic forecast factors we use in our CECL model deteriorated as expected during the quarter. The impact on the allowance for credit losses from the worsening forecast and loan growth in the quarter was partially offset by a favorable shift in the risk composition loan portfolio. Certain loans segments that have higher reserve levels declined for other categories with lower reserve percentages increased that some of these moving pieces resulted in a provision expense of approximately $1 million in the third quarter. The allowance for credit losses was stable at $141 million compared to the end of June, and represents 1.50% of total loans. When adjusting for government guaranteed loans, the allowance to total loans was 1.67% at the end of September.
As you heard from Jim, we’re diligently monitoring credit risks in the loan portfolio and to continue to believe that our allowance coverage is both warranted and sufficient to address those risks. On slide 19, third quarter fee income was $9.5 million. This was a sequential decline of $4.7 million, and was led primarily by a $4.8 million reduction in tax credit income, as rising rates in the quarter had a negative impact on tax credit projects that are carried at fair value. Tax credit income will continue to be seasonal and subject to further interest rate movements. However, fair value adjustments that reduce tax credit income are more than offset by higher net interest income in a rising interest rate environment. Card services revenue also declined by less than $1 million in the quarter primarily related to the Durbin impact on debit card transactions, which went into effect for us for the third quarter.
Turning to slide 20, third quarter noninterest expense was $69 million, an increase of $3 million compared to $65 million in the second quarter. Compensation and benefits increased $1 million in the quarter, principally from new hiring and an increase in performance-based accrual instead of accrual sorry. Other expenses were $2 million higher in the third quarter primarily related to an increase in deposit servicing expenses that have continued to be impacted by higher interest rates. The third quarter’s efficiency ratio was the 51.5%, an improvement of 130 basis points compared to the second quarter. This reflects the momentum in operating revenue outpacing the rise in noninterest expense during the quarter. The expense trends are in the quarter continues to be driven by customer analysis expense, which increases as rate increase. Also incentive and bonus accruals as well as fewer open positions that then plan resulted in the sequential increase to employee compensation and benefits. Looking to the fourth quarter, we’re expecting noninterest expense to be in a range of $71 million to $73 million. This is principally due to unexpected increase in headcount and higher deposit costs from an expanding specialty deposit base, as well as higher interest rates from the Federal Reserve’s actions.
As I previously mentioned, we continue to expect that the increase in customer analysis and other expenses will be more than offset by higher net interest income trends as rates continue to move upward. Our capital metrics are shown on slide 21, the new record earnings we generated in the third quarter of $50 million, offset the $45 million decline in accumulated other comprehensive income from the continued impact of rising interest rates on the market value of our available for sale investment portfolio. Despite the headwinds in the AFS investment market value, change on tangible common equity this year, our tangible common equity ratio has now expanded for two consecutive quarters. Tangible book value per share was relatively stable compared to the second quarter. Our strong capital foundation is reflected in the common equity Tier 1 ratio of 11% at the end of September. Common equity Tier 1 does not include the effects of unrealized losses of $153 million in accumulated other comprehensive income at September 30, that will be returned to equity over the life of those securities and derivatives portfolios.
Given the strength of our earnings, and the capital position, we announced another increased to our dividend for the sixth consecutive quarter. While we repurchased over 700,000 shares in the first half of the year, we did not repurchase any shares during the quarter. We have 2 million shares available under a board approved program. But we do not currently plan to execute on a repurchase plan until we see more build in our tangible common equity ratio. Overall, we had a very strong quarter. And we’ve been pleased with our performance so far this year, as Jim mentioned, we delivered a 19% return on tangible common equity and a 2% pre-provision return on assets during the quarter. We have taken the steps to position our balance sheet to capitalize on the current interest rate environment, while prudently deploying our liquidity and managing our credit risk profile. I thank you for joining the call today. And we’ll now open the line for analyst questions.
Question-and-Answer Session
Operator
[Operator Instructions]
Your first question comes from Jeff Rulis with D.A. Davidson.
Jeffrey Rulis
Thanks. Good morning. Wanted to sort of unpacked the tax credit line item, a number of $3.6 billion loss is, so I just want to understand, is there a — was there a fair value adjustment that offset actual revenue? And if so, could you tell us what the revenue associated with it was or if that’s maybe not thinking about it correctly?
Keene Turner
No, Jeff, this is Keene. You are thinking about it correctly. So there’s a portfolio of credits that, as we originated into this type of business that we fair value to work through some of the expenses. And what I’ll say then prior to the third quarter, and maybe a more normalized interest rate, tightening environment, we expected to always be able to, at least, mitigate out that expense with how aggressively specifically tenure so far moved up, right at the end of the third quarter. And with the fact that closings on projects were fairly minimal in the quarter, we took about a $12 million fair value decline or negative adjustment. And then the resulting Delta was offset by some new projects and sales and things like that. So that gets you to that essentially that minus $4 million for the quarter. And moving forward, I think with what’s happened so far, in the year, I think we’re prepared for anywhere from call it a negative and of another couple million in the fourth quarter to potentially a zero or a positive as we move forward here, just rates have moved on the long end of the curve, I guess, more than we’ve thought and we probably should have given some sensitivity to you guys in advance of this.
Jeffrey Rulis
Okay, but as you said gains on the top line, more than offset that, but just I, so, I guess that kind of look at that as a breakeven or maybe a slight loss in the coming quarters or one to two, I mean, any visibility on how long that goes out till it resumes to, I mean, tough question, but —
Keene Turner
Yes. So, yes, it’s going to depend on what your view on interest rates are, and also, how much long, longer term rates, specifically tenure. So for move up, as we get shortly into the Fed moving the short end of the curve, I think, as we look out to call it 2023 that numbers unfortunately, if we get more rate increases, it might be kind of zero to something. And that’s probably shy of the $10 million. But I think the opportunity here is we’ve revalued these credits, I’ll say on the way down with the idea or in the back of our minds that maybe at some point, there’s a recessionary impact later in ’23 or early ’24. And maybe the Fed moves down from where Fed Funds end up. This can also then be a hedge to maybe some slight declination of net interest income, or higher provisioning or both of those. So I know that’s probably not as much clarity as you’d like, but it’s going to be a more modest contributor to ’22 and ’23 than we originally thought. But I think net interest income is far outstripping that. And I think we’ll take that trade as operating revenue strong. So maybe more color than an answer. But hopefully that’s helpful.
Jeffrey Rulis
No, that is, it is good detail there. So let’s jump into that. The top line discussion. Just curious, do you have a September monthly average on margin versus the quarterly average of 4.10%?
Keene Turner
Yes. So based on the September balance sheet and rate I think we think net interest income is roughly just north of $130 million with net interest margin, right around 4.35% that includes the quarterly resets, we talked about predominantly on the SBA portfolio, and then call it another 10 to 15 basis point increase in deposit rates based on where we sit today, and what we’ve done with sheet rates and exception pricing.
Jeffrey Rulis
Okay, so the, maybe the 4.35% and NII north of $130 million that’s kind of a Q4 figure. And then you also sort of outlined additional rate hikes will lead to, could you — go ahead?
Keene Turner
Yes, so another 100 basis points, which is, I think what it seems like it’s lining up for in the fourth quarter, I mean, that’s going to generate roughly $5 million of extra net interest income per quarter. And we’re using like just under a 50% beta on earning assets and like a 35%, interest bearing deposit data for that.
Operator
[Operator Instructions]
Your next question comes from the line of Andrew Liesch with Piper Sandler.
Andrew Liesch
Hey, guys, good morning. Just want question on the long rope, okay, I hear some optimism in some areas, but also some cautious miss in others. I guess it’s mid-single digit this quarter, is that the right way to think about growth, say over the next 12-months or maybe we get a little bit stronger growth here with the sponsor finance book. But if we’re looking at 12-months from now, is mid-single digits right place to be.
Jim Lally
This is Jim. I would tell you, we’re very comfortable with that mid to high single on a go forward basis. The production levels have been solid, we’re very pleased. We’re not going to expand the credit window to get that reach. But we’re very confident about our ability to continue performing that mid to high single going forward.
Andrew Liesch
Got it. And then just one housekeeping question here on the margin. How much dis accretion was in that 4.10% number?
Keene Turner
Andrew, the discount accretion that’s in the 4.10% is pretty negligible, I’d have to pull that out of there. But at this point, we had a fair amount of burn off in the SBA portfolio. I think in the quarter, it’s less than $1.00. So it’s not moving the needle either way.
Andrew Liesch
Got it. Alright. My other questions were on the fees and the margin. So I’m going to go step back. Thanks so much.
Operator
Your next question comes from the line of Damon DelMonte with KBW.
Damon DelMonte
Hey, good morning, guys. How you doing today? I joined a little bit late. So I apologize if you address this in your prepared remarks. But can you just give a little color on the provision outlook? I know you’ve talked about the puts and takes for this quarter, but how do we kind of think about the reserve level and maybe expertise for loan growth and kind of what you’re seeing on the credit front, as you try to kind of model out provision level?
Keene Turner
Yes, Damon, I think in the quarter, when we look at it sequentially. I mean, we did provide for growth. And I think the coverage right now is like is 150 that obviously includes loan deterioration and substandard loans, which are still minimal, but so I think provisioning on new loans is call it right around that 110 to 125 basis points, depending on what category it’s in, and then I think with the recovered, the coverage ratio, we have 150 and 170 sort of total and unguaranteed I think based on where we sit today, we feel like we’re well positioned, if we see the horizon or the environment deteriorating further, and we get some of that data in the economic forecast that we can be further responsive to it, and deal with those provisions over the coming quarters fourth quarter, and then into ’23. But we also feel like we’re conservatively positioned, given what the portfolio looks like, and what all of the credit quality indicators are. So, again, I think we’re at a point here, where if we start to get some less aggressive moves from the Fed, and that looks more like a softer landing. I think we think that 130 is a good number, I think if it continues to be aggressive tightening, we, our view would be in from a safety perspective that we probably go a little bit heavier on the provisioning and maybe move coverage up to account for higher interest rates in the portfolio and higher than they’ve been in recent years.
Damon DelMonte
Got it. Okay. And then just to circle back on the margin, I know didn’t get your prepared comments on this. But did you say to answer the one of the questions, what was the commentary around $130 million of NII in the 4.35% NIM? Is that what you’re forecasting for the fourth quarter?
Keene Turner
That’s correct. That’s based on everything that’s happened today. Right, that’s not increased, it’s not any future increases. That’s essentially the increases that we have in place hitting the repricing on October 1 for certain loans. And then also what we’ve rolled out in terms of deposit pricing on commercial consumer customers. Yes, so that’s the fourth quarter number at $131 million. And then, like a 4.35% NIM. And so I’m giving you numbers. And obviously, that’s, you’ve got to apply your level of boundaries on those. And then another 100 bps on the first fourth quarter would give us a roughly another $5 million of net interest income quarterly thereafter. And again, we’re using 47% beta on earning assets and a 35% beta on interest-bearing deposits.
Operator
Your final question comes from the line of Brian Martin with Janney.
Brian Martin
Hey, good morning, guy. Sorry, joined a bit late. So just wanted — one last follow-up keen on the margin, just when you see the Fed pause. I guess can you talk about how you think the margin behaves then? I mean, I guess with your expectation maybe see a little bit of a decline in the margin, but the dollars of NII going up because of the growth? Is that kind of how you’re thinking about it today?
Keene Turner
Yes, I think it’s certainly the directional trend. Deposit costs lagged quite a bit. They’re certainly continuing to move. I don’t know that they’re necessarily catching up, but they’re moving an asset rate wouldn’t move up much more beyond it. I think some of it, Brian, depends on when the pause comes. So if, for example, you got two more 75 basis point increases, and then there was a pause, obviously, we get much more rapid expansion of net interest margin and net interest income, but then there would be slight margin compression from there. And I think the question is just can you out-earn that with growth in dollars quickly enough? But you’re still — I think our view is that margin based on where we think rates are going to go here at — for the rest of ’23 — or sorry, ’22, even if you got some of that compression, we’d be well north of 4% net interest margin even when it comes back down.
And if our hope is that you get sort of one more bold Fed action and then we start to move back to like 25 basis points, and that will help create some stability while we earn through the shorter quarter days in early 2023 and then also can layer into some growth and have strong net interest income grow from there on out. So I think that would be ideal. I’m not sure we’re taking a position one way or another on whether that’s going to happen. But I think that generally is how we expect the balance sheet to behave.
Brian Martin
Yes. No, that’s helpful. I appreciate it, Keene. And then how about just on I think you guys probably covered a fair amount of the tax credit. But just the outlook just in business and if I heard the tail end of it, right, Keene, the outlook for the tax credit in ’23, is maybe just a modest contribution at this point is how you’re thinking about the world and then we’ll see what rates change or how rates change?
Keene Turner
Yes, I think that’s right. I think if we stop having interest rate moves at the end of 2022, then I think next year, you can have some — expect some net contribution from tax credit. I think if rates continue to move, particularly boldly, it could be a zero or a negative. So I don’t think — I’d be surprised next year unless we got some material decline in longer-term rates that the tax credit business would be kind of the $10 million or more than we thought it was going to be this year. And I think that’s sort of — I think when — if you’re thinking about in terms of how to model it, you have to pull it out of net interest income and put it into the fee line item vice versa. I think there’s sort of some mutual parity there.
Brian Martin
Got you. And the rate that we should be paying attention to is I mean you say if rates are going to change is what rate is it most sensitive to when we think about the outlook?
Keene Turner
So for every 10-basis point increase or decrease in 10-year SOFR, that’s about just roughly a $900,000 impact on fair value of tax credits.
Brian Martin
Okay. Perfect. Okay. And then just the last one if you could move just on the — it sounds like the loan growth is — I guess, are you getting, it doesn’t appear that there’s a lot of cautiousness among your borrowers. If you — the outlook still seems pretty favorable from what you said, Jim, as far as mid- to high single-digit growth. I mean is that any slowdown from what you were expecting earlier? Just given kind of what we’re seeing and how the economy may play out next year? Or is that pretty consistent?
Jim Lally
Yes. The only area that I would say that we’re already starting to see it is in the larger development client where the math just isn’t working. And those projects, you win it, quote unquote win it, they don’t start funding up until six months down the road anyway. So I would tell you that business is impacted mid to late 2023. From a C&I perspective, our borrowers certainly recognize what’s happening in the economy, but business is still decent. Business is good. Order books are growing, and they’ll go ahead and purchase equipment is needed, they’ll need working capital and things of that nature. So we feel good about our book.
And the other thing too is the diversification of the book. So not any one region, not any one business has to operate at full tilt to reach these numbers. It’s about each of them doing what they can do. And we did a deep dive with the teams to feel comfortable about where we’re headed not only to finish this year, but into ’23.
Brian Martin
Yes. Okay. No, it seems positive. So and then just the last one was just on the deposits. It looked like the activity from last quarter slowed and it was more stable this quarter. Just your outlook to fund the loan growth on the deposit side. How are you thinking about the deposit growth or stabilization from here?
Scott Goodman
He, Brian, it’s Scott. I can take that one. If you remember, last quarter, we had just a large client in the specialty deposit business that moved out, and that was really the main reason for the decline that quarter. I think you saw a little more consistency this quarter. But I think when you look at how our deposits are spread across channels, commercial, specialty business banking, a lot of that cash is used in the business needs to be accessible. I think we feel good about what we’re seeing from a behavior standpoint and the ability to retain and grow that. And then as we bring on new relationships through C&I, obviously, that brings new deposits as well. I think specialty also is somewhat immune to what you see going on externally with chasing rates. So all those things, I think, bode well. We feel good about being able to fund the growth.
Brian Martin
Okay. And the deposit beta, Scott, I guess you’re thinking where does the deposit beta shake out as you get a couple more rate hikes here in the fourth quarter?
Keene Turner
Yes. Brian, this is Keene. I think what we said, so far, deposit beta has been roughly 20%, obviously, just there’s some lag in there, so that helps the optic of it. In the guidance I gave on another — for the fourth quarter and then also for moving forward with further increases, we’re at like a 35% beta that we’re modeling that we think is a good number. And I think, over time, 20% and 35% converge. And the asset beta is strong at 47%, and we still have north of 40% DDA. So we think that, that’s a really good recipe and equation. And we’ve gotten off of, as you remember back to the question about second quarter deposits, we’ve largely gotten away from Fed fund plus funding that we had in the last cycle.
And we’ve been willing to move deposit rates as necessary to defend relationships and keep those intact. And with the way the balance sheet is positioned, I think we’re in good shape to continue to maintain and grow net interest income and margin, and we’ll probably give up just a little bit in terms of the deposit costs accelerating in these most recent quarters, but starting from north of a 4% net interest margin and growing. So we feel good about the earnings profile and being able to preserve that.
Operator
There are no further questions. At this time, I’ll turn the call back over to management for any closing remarks.
Jim Lally
Thanks, Erika, and thank you, everyone, for joining us today. Thank you for your interest in our company, and we’ll speak again to you at the end of next quarter. Have a great day.
Operator
Thank you for participating. You may disconnect at this time.
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