SmartFinancial, Inc.

Hello and welcome to the Smart Financial First Quarter 2022 Earnings Call. My name is Lauren and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I will now hand you over to your host, Miller Wellborn, to begin. Miller, please go ahead.

Thanks, Lauren. Good morning and thanks for joining us this morning for our Q1 2022 earnings call. It's a treat to be on the call this morning and share an update on our company. We appreciate the interest you each have in our progress, and it's incredibly important for us to hear your questions, comments, and your feedback. Joining me on the call today are Billy Carroll, our President and CEO, Ron Gorczynski, our CFO, Rhett Jordan, CCO, and Nate Strall, our Director of Corporate Strategy. Before we get started, I'd like to ask each of you to please refer to page two of our deck that we filed yesterday evening for the normal and customary disclaimers and forward-looking statements, comments. Please take a minute to review these. What a strong quarter by our team here at SmartBank on many fronts. Our year has started well, just as we anticipated and have projected. We demonstrated again our ability to outwork the competition and execute our strategic plan. Our organic pace of loan and deposit growth has been impressive. I'm extremely proud of the team for the focus and execution as our metrics continue to improve faster than forecasted in our 2022 strategic plan. With that, I'm going to hand it off to Billy.

Thanks, Miller, and good morning, everyone. As Miller said, this has been a nice start to 2022 for Smart Financial. We're going to change the format a bit this quarter and condense some of the commentary since our strategic shift to more organic growth leads to a little bit less noise. So I'll briefly touch on some highlights and then hand it over to Rhett to provide some color on balance sheet, lending, pipelines, and credit. And Ron will spend some time on financials, margins, and guidance. First, let's run through some highlights shown on page three of our deck. Not to bury the lead, we had a very nice growth quarter. Loans, excluding PPP, grew at 21% annualized, and deposits, total deposits, grew at 17% annualized, 23% if you look at just the non-time deposits. On the loan side, growth was well distributed throughout all of our regions, but the new lift-out groups in Alabama and Middle Tennessee were big contributors here. Rhett's going to add some more color on that shortly. Deposits continue to be very strong coming in on the upper end of our expectations with great growth in existing accounts coupled with some great new clients courtesy of the lift-out groups. Earnings were right on target with $8.6 million in operating net income coming in at $0.51 per share. Our diversification in revenue mix is also progressing well. Our wealth management platform posted nice revenue gains as our new financial advisors continued to move over assets. Our insurance subsidiary had a very solid income quarter, and our Fountain Equipment Finance subsidiary posted our best quarter of growth since acquiring it, and it continues to build a very solid pipeline. It's great to see these ancillary business lines beginning as we had anticipated. Also, as a reminder on page four, this is a great map of our franchise. It's a nice graphical representation of the footprint we're building out, a much stronger, denser zone than what we had just a couple of years back. As we stated on our last call, 2022 is a year to execute and capitalize on the investments we've made in 2021 as we move forward to get to stronger core earnings metrics. Continued positive trending of our ROA, ROE, and efficiency ratio are what we expect to see as these new investments start to continue to grow revenue. We've started the year off very well in that regard, and that is the goal. So, Rhett, let me hand it over to you now to jump into balance sheet trends and credit.

Thank you, Billy. Looking at slide five on your deck, we have a very solid first quarter in loan growth with net organic Scroll just over $136 million, ending the period with just over $2.8 billion in outstanding. Production was solid across all of our market areas in first quarter, with our newer market areas contributing over 25% of new loan balance production for the bank this past quarter. As Billy mentioned, we ended the first three months with a compound annualized organic growth rate of approximately 21% over prior period. The overall yield in the full portfolio was slightly lower in Q1 compared to prior period. We believe this trend will improve in the near term as PPP balances continue to decline and the upward interest rate environment begins to affect very competitive new loan origination rates more positively. In addition, we continue to see deposit growth for the quarter with total deposits up $169 million every year in 2021. Complementing this continued positive momentum was another quarterly decline in total deposit costs to just 20 basis points for the quarter. Moving to page six of the deck, Long portfolio mix held relatively steady in first quarter with the growth mentioned previously. While we recognize our loan-to-deposit ratio continues to track below historical levels, we're excited to continue to have excess liquidity to fund what we believe will be a significant year of production from our new lending team members and our legacy core markets. While some economic outlooks and market guidance from various sources indicate a higher probability of slowing economic growth over the next several quarters, Our market areas continue to see strong inflows of new permanent residents and business relocations into our footprint. We believe this will continue to drive solid business financial performance and continued loan and deposit growth opportunities within our market areas when compared to other parts of the country over the next few periods. We also are extremely pleased with the continued improvement to our overall deposit portfolio composition, with growth in non-time deposits once again outpacing time deposit runoff. At quarter end, non-time deposits represented almost 87% of the total deposit portfolio, and non-interest-bearing deposits represented approximately 26% of total deposits. Slide 7 shows a continued solid trend in overall asset quality metrics, continuing the same results we saw throughout the year in 2021. Q1 salary report at 0.11%, net charge-offs of 0.04% and over 30-day past due ratio of 0.20%, and classified low 0.31% of total all improved over Q4 21 performance. End of the year it's 89% and 299% capital for our regulatory C&D trends over a four quarter look back. We have historically managed our portfolio in the upper quartile of the ratio guidance and continue to feel very comfortable doing so given the diversification, product mix and credit profiles of our CRE book. Our loan pipeline continues to be strong across all of our market areas with a large majority of the opportunities being non-CRE in nature and over 20% of the bank-wide pipeline fueled by our newer lift-out markets. Overall, our asset quality continues to show strong, consistent results, and our near-term outlook for loan growth remains positive. Now I'll turn it over to Ron to walk you through our allowance position.

Thanks, Rhett, and good morning, everyone. Let's move forward to slide eight, loan loss reserve. As Rhett indicated, Our strong credit quality has led to minimal credit-related provisioning for the quarter. At quarter end, our allowance to originated loans and leases was at 74 basis points and our total reserves to total loans . Given our positive credit outlook going into, we expect to continue to support our loan production to assess the allowance and adequate credit conditions change. Moving on to Slide 9, during the quarter, we continued to generate additional liquidity for deposit growth and were able to utilize a significant portion for loan fundings and security purchases. For the quarter, we funded over $113 million in loans and increased our securities portfolio over $270 million, focusing on shorter maturity, shorter duration securities. The majority of these purchases were placed in the health and maturity classification to help counter the impact of rising rates. At quarter end, Our health and maturity to total securities elevated to 35% of the portfolio, up from 14% at year end. Additionally, we retired $50 million of FHLV borrowings. Overall, our liquidity position at quarter end, which includes cash and securities, was approximately 34% of total assets, significantly stronger than the 22% from the prior year quarter, and our cash to total assets stood at over 16%. Looking forward into Q2 and the remainder of 2022, with our securities to assets ratio over 17%, we are not anticipating any meaningful security purchases as we believe some of our excess liquidity will be absorbed by our strong long production. We also want to remain vigilant and prepared for any potential deposit outflows that may occur as rates continue to rise. Moving to the right of the slide, Our interest margin was 2.91%, consisting with the prior quarter, despite having further pressure from excess liquidity. Our security purchases over the last two quarters provided over $1 million of additional interest income, more than offsetting the reduction of $650,000 of PPP income. Further, loan yields, less all accretion, remained in line with the past few quarters as a result of our continued pricing discipline. Our interest-bearing deposit costs continue to march lower by three basis points. Given our strong loan pipeline from both legacy and new markets, we believe we will start to see some margin expansion over the second half of 2022 as excess liquidity is deployed. Before we leave the slide, let's touch base on operating revenue. PPP fee income for the quarter was $1.1 million, a significant decrease from the $2.4 million experienced in the prior year quarter. Despite this, We expect operating revenue to continue its upward trajectory, with growth in traditional non-interest income sources outpacing the loss of PPPP income. For the quarter, non-interest income totaled $7.1 million, or over 19% of total operating revenue. Overall, total operating revenue increased 1.5% quarter-over-quarter to $37.2 billion, which, when factoring in the loss of PPP income and two less days on the quarter, becomes a more impressive statistic. We are very pleased to start reaping the benefits of our strategies and look forward to additional operating revenue tailwinds to come. We are expecting a margin that includes estimated loan accretion of eight basis points, approximately $560,000, and estimated PPP loan fee accretion of 14 basis points, approximately $175,000. On slide 10, you'll find some interest rate sensitivity information. Currently, we have approximately 1.1 billion in variable rate loans. With the inclusion of the recent 25 basis point rate increase, we have over 450 million of variable loans that will now reprice with any future upward rate change. Looking ahead, we have approximately 85 million of variable rate loans that will leave their floors with the next 100 basis point rate increase. Given the asset-sensitive nature of our balance sheet, any increase to short-term interest rates will have a meaningful impact to our net interest income. At quarter end, our static interest rate shock analysis shows a net interest income increase of over 4% and an up 100 basis point rate scenario. Additionally, we ended the quarter with $645 million of interest earning cash and $162 million in floating deposits that will immediately reprice with any rate move. We are currently modeling interest rate sensitivity using historical betas, as this provides the most conservative picture of our sensitivity in this environment. Having said that, We believe our liquidity position and deposit composition, as well as the overall liquidity in the market, will allow us to lay increasing deposit rates and insulate us from the full effects of any market rate increases. On slide 11, our non-interest income continues to build momentum. Non-interest income increased over $300,000, or almost 5% from the prior quarter, and more impressively, almost 25% from the prior year quarter, and currently approaching 20% of total revenue. Investment services was a large contributor as revenue continues to grow as a result of a full quarter's activity from our recently added wealth team and increased fines from the legacy. Additionally, our insurance unit experienced stronger than projected seasonal contingency commission payments. Overall, we remain excited and optimistic regarding the opportunities for fee generation within our family of fee generators. For our non-interest income forecast for the second quarter is $7.1 million. On to slide 12. As expected, our operating efficiency ratio continues to be elevated from our previously discussed strategic expansion initiatives. We expect this ratio to have a steady decline in the near term to the low 60s range as newly hired teams gain further momentum and our internal platform optimization strategies unfold. For the quarter, we experienced only a slight increase of $200,000 in operating expenses directly in line with previous quarter guidance, but no material increases. For the second quarter of 2022, we expect an expense run rate of $25.7 million range, with salary and benefit expense of approximately $15.6 million. Our guidance is slightly higher than our actual Q1 results, as Q1 benefited from our strong loan production, which provided a larger amount of deferred loan origination costs. On to slide 13, capital. Even with continued asset growth, our capital ratios remain stable as a result of our profitability. Management routinely evaluates the bank's capital position as it relates to projected forecasts, lending opportunities, as well as potential strategic initiatives, always with an eye towards maximizing long-term shareholder value. At quarter end, the company and bank both exceeded well-capitalized regulatory standards, and we are well covered with excess liquidity and excellent credit quality. We are well positioned for executing on our 2022 strategic plan. And finally, our tangible book value per share experienced a 3% reduction impacted from unrealized losses in our securities portfolio. Since this reduction is interest rate related, The impact is temporary and will be gradually recovered over time as the securities return to the original par, with no long-term impact to equity. At quarter end, our tangible book value was at $18.64 per share, and when excluding the temporary effects of our accumulated other comprehensive income component, our tangible book value was $19.56 per share, representing a quarter-over-quarter annualized growth of over 6%. With that said, I'll turn it back over to Billy.

Thanks, Ron. To close, first I would ask you to take a look at page 14. Our tech initiatives are really progressing well. One of the biggest initiatives this year is the full installation of Encino's Loan Workflow Platform. That's moving along and we plan to be live by the third quarter and shortly after We will be adding the Encino customer pricing and profitability platform. We're thrilled to get these platforms operating in the bank this year as we believe they'll have great impacts to efficiency and profitability. Shifting over to our outlook, we're also continuing to watch the economic landscape closely. Geopolitical issues, inflation, tightening by the Fed, are all elements that could have an impact on us, and we're managing our company prudently That said, we do remain bullish on the market where we're doing business and believe we continue to grow at a very nice pace. The Southeast continues to shine as a pro-business region. The anecdotes I hear from our local boards about companies looking to relocate to our areas or store from our realtor clients about the number of people moving to our region because of our low-tax pro-growth philosophy gives me confidence that we'll continue to outpace many others. and other parts of the country. As we've gotten some size on us now as we're approaching $5 billion in assets, we're hitting a great sweet spot where we have the size and sophistication to bank larger companies as well as having the ability to be nimble and responsive in our community markets. We see this playing out daily as we're having great success in our legacy zones like Knoxville, Chattanooga, Tuscaloosa and Pensacola, but we're also starting to build great momentum in new markets like Nashville and Birmingham. I love our position right now and I can't wait to watch that momentum continue. And in order to keep this moving now more than ever, having a strong culture is critical to attracting and retaining talent. Our continued work on being a top workplace is key and this is an area we're emphasizing more than ever. We continue to be recognized as a great place to work and we do not take those accolades lightly. So thanks so much to our associates who do a tremendous job every day Delivering wow experiences to our clients. The excitement that is being built in our company is strong right now. And as we execute a plan, it will be transformative to our financials. It's a great time to be part of this company as a client, as an associate, and as an investor. And we're very well positioned to move forward. So I'll stop there and we'll open it up for questions.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. As a reminder, that is star followed by one on your telephone keypad. Our first question comes from Brett Rabitin from Hoverday Group. Brett, please go ahead.

Hey guys, good morning. Good morning, Brett. Wanted to first ask, you know, impressive loan growth in the quarter, and I've been a little surprised with some opportunities in some of the markets. A large transaction appears to not be going initially as smooth as some were hoping, and so there may be an opportunity to move talent before a deal even closes. I'm curious to hear what you're hearing in your East Tennessee markets information. If you think you'll continue to add teams and if the focus here now is pausing for improvement more in efficiency like you talked about a little bit or if the opportunities are there to go and continue to ramp up on the lending side.

Yeah, Brett, I'll take that. Yeah, from our standpoint, obviously our number one priority right now is just execution on what we've and many more. We can find the right sales talent that we can add to the team regardless of market. We'll continue to look at it. I don't think we have really a specific initiative out there today, but I will say we're always looking for great new production talent.

Okay, that's helpful. I wanted to talk about the margin and the asset sensitivity and the four and many more.

35%, 36%. That's what we use, as you said, conservatively as modeled. We don't anticipate to hit that beta. Based on my commentary, we think we're going to be much lower than that. But we're a totally different bank today than we were through the last cycle. Even our deposit mix is so different. So we can't expect to run off for our loan fundings. and then kind of through our earnings, kind of keep the cash steady and then wean down deposits. It's kind of a loaded question and probably a high level answer, but there's a lot of moving pieces for that. All actuality on that slide 10, we think the ramp 200 is based on where we're at and looking at the Fed cycle is probably a better gauge over the next 12 months. But it seems the 100 staff.

Okay. And then just one last quick one on concentrations. You know, the commercial real estate is now around 300. I'm just curious if the pipeline... More CNI in it than the construction... And what... An appetite for commercial real estate...

We have historically managed the upper quartile of the guidance, but our pipeline is definitely weighted more non-CRE right now. We've got a little over 60% of the pipeline that is not in a CRE level type, and it is spread across our geography. So we are seeing a lot of new activity coming.

We're a little bit outpaced. Our next question comes from Stephen Scouting from Piper Soundler. Stephen, please go ahead. Hey, good morning, everyone. Thanks for the time.

I thought the market was going to give you some credit for a really good quarter today, but it looks like the sentiment is still too bad. That's frustrating because I think this loan growth was particularly impressive, even above and beyond what we've seen from some other companies. I just wanted to talk more about the loan pipeline. I know you mentioned, you just said maybe 60% non-ZRE. Can you give us a feel for what that pipeline is? Looks like today, maybe relative to where it was at this point, heading into the first quarter, just kind of frame that pipeline up a little bit more for us potentially.

Rhett, you want to start with that? I'll add a little bit of color.

I can't. Yeah, I mean, actually, it has continued to grow. You know, we are certainly beginning to see a lot of throughput coming from markets that we added to over the course of last year predominantly. As I mentioned, in the first quarter, we had about 25% of production. The first quarter came from those markets, and the pipeline is weighted about that same amount. We are continuing to get new opportunities added to it every day, especially coming out of several of those areas. I guess in relation to where we started the year, it is continuing to grow. and grow in the types of loans, as I mentioned, that do not add to our CRE positioning.

Yeah, and I'll add, Steve, even, you know, the teams that we brought on now and the comment I made about, you know, being able to bank larger companies, I think we're seeing that play through. It's, you know, what we've seen out of especially the new teams is a really nice diversification of clients, a lot of New businesses, operating companies, nice mix of lines and some owner-occupied components. So we really see, I think this quarter was a little bit outpaced with real estate just because of primarily some draws on some larger projects. But I think you'll see that kind of settle back down and diversify out over the next little bit.

That's helpful. I think if I'm looking at the data right, you have maybe about $4.5 million left in the share repurchase that's authorized. How would you think about that today, especially given some of the weakness in the equity markets here we've seen as of late?

We always watch it. Share repurchase right now is not front of mind, primarily as We're watching the growth. We're watching capital. Ron's comments. Our capital ratios, even with the growth that we had, our capital ratios remained constant, which was great. From our standpoint, we'll probably have a little more clarity on that as the year goes out as far as the appropriate use of capital, whether it's growth or other means. Right now, We're going to watch it. Obviously, if share price drops far enough, we'll take a look at some options there. But right now, we're trying to keep some powder really more so for growth.

Makes sense. And maybe just last thing for me, just diving back over to the asset sensitivity. It looks like I'm looking at apples to apples. Maybe that went down from up 6.5% to the up 4.2% or what have you. Is that largely driven by the incremental investments you made this quarter in the securities book already? And then along with those investments in securities, can you give us a feel for what those new yields were on that money you put to work?

Yeah, the majority is that. The investment purchases kind of changed a little bit in our loan production, obviously. We did purchase $270 million. The majority of that... There's two-year treasuries, so all in for about $140,000, $145,000, maybe $142,000, just kind of cut it in the middle. That's kind of the yields that we put on the books for Q1.

Okay, great. Very helpful. Congrats on a great quarter, everyone.

Thanks.

Thanks, Stephen.

Our next question comes from Kevin Fitzsimons from D.A. Davidson. Kevin, please go ahead.

Hey, good morning, everyone. Good morning, Bill. Inclined to be looking for additional opportunities or do you feel you have plenty of runway ahead in these and not, you know, it's that, you know, another question referred to this earlier, it's that tightrope of, you know, do you take advantage of opportunities available to you, but then it maybe slows down the ability to demonstrate bottom line profitability if you have A lot of these things going on at one time. So I'm just wondering, given what you're seeing, how do you feel about that strategy doing it on a continuous basis going forward with additional markets?

Thanks. Yeah, it's a great question that we talk a lot about. And it is the balance. You know, I think for us, you know, again, Our priority one is to really get this expense base, get the revenue growing commensurate with the expense base. I think that's first and foremost. But at the same time, I think strategically, we don't want to turn our backs on good opportunities. So we're always keeping an eye out for that, especially now that we've been able to have success You know, recruiting and bringing over really strong sales talent. The bank has changed so much in the last couple of years, just from the sophistication, the way we operate, the way we underwrite, the way we handle the sales process. And so I think we're building something that can continue to plug on more of that, more of those types of organic opportunities, but I know right now we're laser focused on making sure that we can control this expense line, which we feel really, really good about, and really get this revenue growth. So we're going to balance it. So it's a little bit of a hedged answer, but we're going to continue to balance it and look at both sides.

I'll add, too, I'll give Billy and the team credit. There are some institutions that have a different philosophy that will just AdLenders, AdProducers, No Budget Line for Producers. Ours is a little different in that, sure, we've had other opportunities and we think we'll have some in the future, but I will say culture and fit is a huge component of what we're looking at. We're talking to folks about wanting to come on board and the lift outs and the legacy lenders we have all understand we're all on the same page of where we are and where we're going. I just think that's a huge component of it. We're not looking for a Somebody just come in with a bunch of transactions. We're looking for long-term clients, and the lenders that we have and the producers are just a great fit, and that would be very important as we look forward to bringing more on.

Okay. Thanks, Miller. Thanks, Billy. And one quick follow-up on expenses, so I appreciate the run rate from Ron. I'm just What's the best way to think about as we look into the back half of the year? Is that a decent run rate to think about? Because you mentioned the efficiency ratio coming down. I'm assuming that's more from the revenues picking up. But you also have some initiatives in the Encino rollout that you talked about later in the year. Is it a realistic goal to expect just kind of low? Very low single-digit type of expense growth, or is there something more we need to be aware of?

Yeah, Kevin. Actually, the guidance for the expenses today is pretty much what we see for the rest of the year, quarter over quarter. As Billy had indicated, we've controlled our expenses, and we feel we can absorb. Everything we can do is absorbing, and we will gain efficiencies, which you can see now. to offset to other be controlled. No incremental growth for that line item at this point.

Yeah, and I'll just add, you know, we may have a little bit of an uptick if we, you know, add some occupancy in Birmingham or in Nashville, some markets where we're looking to get some. But to your point, I think to your point, it's going to be a relatively low tick up in the expense line, and then we think this revenue line is going to are going to start to move up nicely for us. I think that's where the efficiency gains come in.

Got it. Thanks very much, guys.

Our next question comes from Matt Olney from Stevens, Inc. Matt, please go ahead.

Hey, thanks. Good morning, guys. Hey, Matt. I just want to clarify the outlook on the margin, the 310 and 2Q. I assume that captures the Fed hike from a few weeks ago, 25 bps. Does it assume any kind of Fed hike in the May or the June timeframe at all?

Yes, we are in court. We're following the Fed cycle. We expect two more. Again, we'll have half of a 50 in May and then expect another 50 in June. We didn't go any further than that, but it's all baked in that margin.

Got it. Okay. Thank you for that. And then on the deposit side, I guess there was some commentary in the prepared remarks that you've been a little bit cautious about deposits and any kind of potential for outflows during this cycle. Is there anything in particular at the bank that you're more concerned on than others? Just trying to get a sense of kind of a cautiousness there about the deposit outflows over the next few quarters. Thanks.

Yeah. And I'll take that, and Ron, you can add anything that you feel pertinent. But I think for us, Matt, I think the cautiousness is really just trying to watch what's going on with these rates. Again, looking obviously to lag at least this first rate increase or two on deposit costs. The liquidity position that we're sitting in gives us some ability to Thank you for joining us today. I think it gives us a little bit of, it gives us some comfort there. But again, just being cautious. We're going to look, and if we get a little bit of runoff, we've got enough, we've got plenty of powder to allow that to happen. Ron, is that a fair statement?

Yeah, that's fair. And, you know, we don't know when this deposit cycle will end, or maybe it won't. We've been blessed with our growth in our deposits, and we're still seeing deposit growth today. But we just want to be just cautious to say, okay, what happens if it does slow down or stop? That's kind of what we put out there. But, no, we're not seeing any evidence of that happening whatsoever.

And I guess just following up on that, Ron, does the outlook, does the guidance assume any kind of deposit growth from current levels? It seems like the long growth you expect to fund with the excess liquidity position coming down, It seems like you're not assuming any kind of deposit growth from here. And as you said, you can be pretty careful on deposit pricing as rates move higher. So just trying to appreciate at what point could we see deposit growth? And if we did see some, would that be the catalyst to increase the size of the securities portfolio? I know there's a lot there. I'm trying to appreciate kind of the way you guys are thinking about this now.

Yeah, I can go. Go in any direction with that and getting the weeds. We're modeling around a 3% deposit growth for the year. So, again, we are expecting a little bit. Still seeing, you know, having the loans outpaced. You know, seeing that 67% loan-to-deposit ratio, we really are encouraged to keep our loan production going to start getting more into the 70 range, 70s, you know, ideal mid-80s, but... And today, where our asset, where our securities are, we are comfortable where we're at with the level of securities. I think going over that, approaching the 20% level of assets, again, it's quarter by quarter at this point to see how the numbers are shaking out. We're just being patient with our stands. We think we're in a great position to execute one way or the other, and we just don't want to jeopardize the execution for any reason. So we're just going to be patient over the next quarter. Now, my guidance next quarter may change, but right now we're just kind of pausing a little bit and just seeing how it settles down.

Okay. Got it. Understood. Yeah, you guys are in a great spot for rising rates. Thank you.

Thank you. Thanks, Matt.

Our next question comes from Fetty Strickland from Johnny Montgomery. Fetty, please go ahead.

Hey, good morning, guys.

Good morning, Fetty.

So I appreciate the overall guidance on the non-interest income, but I was wondering if we could dig in a little bit just so I can understand longer term. It seems like mortgage held up pretty good in the quarter. I'm just kind of curious what your outlook was there and what percentage of production is purchased versus refunded.

Yeah, I'll take that. We think our, you know, we're never a really big mortgage shop. We're very steady. Throughout the last few years we've been very steady. Coming off record highs, we think our Q1 is probably a good indication of probably the remainder of the year. You know, we have a lot of Headwinds with supply rates and such, but we do have a strong pipeline coming in, and we don't think that will change much. And I'm sorry, the other part of the question?

It was really more about percentage of refis.

Oh, well, yeah, right now we're at 50-50. 50 is, oh, refi or what we're putting in the portfolio, or probably a combination of both.

Refi.

Yeah, refis. I would say for the refi size, probably higher to 85% refis. I'm sorry, back that up. Let's keep 50-50. I'm getting my numbers mixed up.

Yeah, we've not had a really, we've never had a huge refi, just a little more refi in 2021. We're seeing, I think the pipeline right now is obviously, it is much more per slot, and we've seen a lot construction firms in our markets, too, with supply changing a little bit, even though you're getting some upward tick in materials costs. We're still seeing a lot of construction firms. I think our mortgage ought to hold pretty steady this year. We don't see it taking a big dive down because we just I think what we'll lose in the refi piece we'll be able to pick up in just some new purchases. And we've added a couple of new production team members there late in the year last year.

Gotcha. So it sounds like overall just y'all's footprint effectively really helps with keeping that steady just because you've got continued population inflow. Is that right?

It is. And I think that's really the key. Again, I think what we lose on the refi side, we should be able to replace on the purchase side pretty close, you know, at the end of the day. We like the business. I think the way we've got our structure is really, quite frankly, pretty good kind of given where the market is today. We don't have a ton of overhead in that line of business. And so, you know, we've got a very efficient mortgage shop and believe that, you know, what we'll see is, is continued purchase money opportunities as we move forward.

Gotcha. And then just one more for me, still in non-interest income. It seems like investment services was up a good bit this quarter. Was that just, is any of that seasonal or is that just solid growth? I saw you guys had a technology initiative related to that. So I wasn't sure if that's just some of You know, reaping the benefit of some of that, or is that just growth in that division?

The wealth side is really just growth in that division. I don't believe there's much seasonality in that at all. It's primarily just the new teams coming online that we had. You know, we made a push, added a really nice group of financial advisors down in our Gulf Coast region. Late last year, those folks are continuing to move assets and perform well. And really, all of our markets are trending nicely from an investment wealth platform side. So most of that should be recurring, we believe, moving forward and hopefully growing as we continue to build AUM.

Got it. Thanks, guys. Appreciate the call and really appreciate all the detail on the slides as well. Thanks for having me.

As a reminder, to ask any further questions, please press star followed by one on your telephone keypad. Our next question comes from the line of Catherine Mealer from KBW. Catherine, please go ahead. Hey, good morning.

Good morning, Catherine.

I just want to follow up on the margin. I wanted to ask about loan yields. Both Yield X, Accredible Yield, and PPP has remained really steady over the past few quarters at 418 now. How do we think about how that compares to where new loan yields are coming on? And then as we think about finally getting the impact of higher rates, is there still some kind of downward repricing just from the new loan production? Or do you think this is the bottom of the loan yield and we'll start to see that move up next quarter? Thanks.

I think it's kind of a joint question.

You start, Ron, then Rhett, give us some follow-up on what you're seeing in the pipeline.

Yeah, we're expected our loan yields, you know, with baked in with the increases, we should see about a 25, 30 basis point lift over the next quarter for that purposes. And I think we're at the bottom. I don't see us at the bottom of the cycle, as you've indicated.

What have you seen in the pipeline? I would say the same. I mean, obviously, you're still continuing to see some pretty aggressive pricing in the marketplace from time to time, depending on the transaction. But we're also beginning to see some creep up in what rates we're able to still win the business at, at least certainly in the past probably 45 days or so, what's been added. Also, we've got A handful of transactions that came on the bank's books as floating rate debt, which would be positive as rates begin to move up. But we also did have the interest rate swap side of that as well that contributed to the overall yield for the bank. So at the end of the day, we'll get the benefit of the upward rising rate side on the loan piece and any kind of and many more.

The real thing that we're watching is just, you know, you're still seeing a lot of competition be extremely aggressive. We think in some cases too aggressive on the pricing side. You know, especially folks with, you know, the liquidity that's sitting on balance sheets right now. You know, so we're kind of watching that. But we're trying to stay, and I think the guys used the word discipline. I think we are really trying to start to build some discipline in their pricing and We feel pretty good about our ability to get a little bit more right moving forward.

And then on that $1.1 billion of variable rate loans, can you help us think about the timing? Like how much of that floats immediately and reprices kind of immediately with the rating increase versus maybe a variable piece that, you know, wags by a month or a quarter or rather long term?

We've got that. I think that's in the deck.

That's in the deck. $450 million of the variable rate loans will reprice immediately with any rate increase. And then looking forward after the next 100 basis point rise, we'll add on another $85 million to that.

Okay, great. And then the delta of that, what's the timeline on that?

It's more of a timeline. I think very minimal for the remainder of 22. These are largely 5-7-1 arms, and some that are U.S. Treasury-based, so it's really a time element. The majority of those will really come in over the next several years, so not really meaningful. Again, probably I would say an extra $40 million at the end of 2022, and for 2023, we'll look at $60 million. So incrementally, it's going to be thrown in. The majority of it's, you know, out a few years where the fix turns back to floating.

Great. Okay. That's super helpful. And again, to just reiterate, you said you think there'll be a 25, like within your 310 margin guide for next quarter, you're thinking we'll see a 25 to 30 bits lift in loan yields all else equal.

Did I hear that right? Loan yields. Yeah. Yes.

Great. Perfect. All right. Thank you for taking the question.

Thanks, Catherine.

Our final question comes from Williams Wallace from Raymond James Williams. Please go ahead.

Thanks. Morning, guys. Just a couple of follow-ups. Wondering on Longoats, if we could talk a little bit about your pipelines. How do they stand at the end of the quarter versus the end of the fourth quarter? And based on the pipelines and the pull-through rate that you're seeing quarter to date, are you guys maybe feeling before it's one of the maybe stroke?

I'll start. Pipelines just kind of into Q4, into Q1 are a little bit higher, I think, when we look at those. For us, in converting what we're not seeing that we saw in the last couple of quarters of 2021, or the payoffs, payoffs have slowed it. Production numbers and pipelines have been relatively good, so we're getting a little bit more, we're picking up a little bit more in the net balance. From a guidance standpoint, the guidance that we gave last quarter for 2022 was a mid-teens number. I think we still feel good about that mid-teens number when you look at it for the year. Again, we're really kind of trying to address it really on a quarter-by-quarter basis as As we kind of watch what rates, you know, as these rates move up, does that slow pipelines a little bit? We've not seen signs of that yet. Pipelines are still strong. So we feel good about Q2 from where we're sitting today and still feel good about that mid-teens annual guidance.

Okay, great. Thank you. And then I had a couple of housekeeping. Keeping questions. In your guide, the 310 margin guide, what did you say was the anticipated impact from purchase accounting accretion?

Oh, I'm sorry. The purchase accounting accretion, I believe, was $580,000. Okay. And the PPP fee income was $975,000.

How much in fees do you have left in the PPP program, and what was the ending balance?

That's it. We're hopeful we can be out of the PPP business by the end of this quarter, you know, on that side of the house. But we have very little left after that, $50,000 left after that. So we're at the end of that cycle.

Okay, great. So we're done. Okay. That was all I had just from a housekeeping perspective. I appreciate the time, guys.

Thank you. Thanks.

We currently have no further questions, so I'll now hand back over to Middlewell for any closing remarks.

Thanks, Lauren, and thanks again to each of you for joining us today. I hope you have a great rest of your week, and as always, feel free to reach out to one of us if you have additional questions. Goodbye.

This concludes today's course. Thank you for joining. You may now disconnect your line.