4/25/2023

speaker
Elliot
Conference Coordinator

Hello and welcome to the Smart Financial first quarter 2023 earnings call. My name is Elliot and I'll be your coordinator for today's call. If you would like to register a question during the presentation, please press star followed by one on your telephone keypad. I'd now like to hand over to Nate Straw with Smart Financial. The floor is yours. Please go ahead.

speaker
Nate Straw
Director of Corporate Strategy

Thank you, Elliot. Good morning, everyone. I'm Nate Straw, Director of Corporate Strategy, And thank you for joining us for Smart Financial's first quarter 2023 earnings conference call. During today's call, we will reference the slides and press release that are available within the investor relations section of our website, smartbank.com. Chairman Miller-Wellborn will begin the call, followed by Billy Carroll, our president and chief executive officer. Ron Gorzinski, chief financial officer, and Rhett Jordan, chief credit officer, will also provide commentary. We will be available to answer your questions at the end of the call. Our comments include forward-looking statements. These statements are subject to risks and uncertainties, and the actual results could vary materially. We list the factors that might cause results to differ materially in our press release and our SSE filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early developments, or otherwise, except as may be required by law. During the call, we will reference non-GAAP financial measures related to the company's performance. You will see the reconciliation of these measures in the appendices of the earnings release and investor presentation filed on April 24th, 2023 with the SEC. And now, I'll turn it over to Chairman Miller-Wellborn to open our call.

speaker
Miller-Welborn
Chairman

Thanks, Nate. Good morning to all of you, and we appreciate you joining us today for our Q123 earnings call. We're excited to be on the call this morning to visit with each of you about our bank. We continue to make great progress on all fronts, execute better every quarter, and deliver quality shareholder returns. We thank you for the interest that you have in our progress, and it's important for us to hear your questions, comments, and feedback. The first quarter of this year has been an interesting and challenging quarter for the banking industry, but at the same time, a very rewarding quarter for our company. SmartBank has been very focused on our clients, and we have had hundreds, if not thousands, of conversations with our clients and others in the communities we serve. These conversations have allowed us to tell our SmartBank story and also to share with others about the strength and the importance of the community banking system in the Southeast. We're very proud of what we were able to accomplish for the quarter. Our Q123 versus Q124 increase in earnings for the bank was strong. And I also believe we executed much better than most of our competition for the quarter. I'm proud of the entire team for the focus and continued improvements we've made this quarter. With that, I'm going to turn it over to Billy.

speaker
Billy Carroll
President & Chief Executive Officer

Thanks, Miller. And good morning, everyone. Well, what a way to start 2023 for our industry. But as I tell our team all the time, challenges can open a lot of doors. And I believe, as you will see as we walk through the state of our company, SMBK is positioned well to navigate the current environment. Rhett and Ron will dive into the details on credit, balance sheet, and earnings momentarily, but I wanted to hit on some key numbers and some key points to open our call today. We had a very solid quarter to start the year. You can refer to page three of the deck for some of those highlights. We reported $11.5 million in operating earnings, equating to $0.68 per share, noting year-over-year revenue growth of 15%. Our balance sheet growth was solid for the quarter, growing deposits $152 million, or 15% annualized, and loans $53 million, or 7% annualized. We experienced some of the same pressure on them as many of our peers as some competitors were forced to push deposit rates higher than we really wanted, but we stayed competitive on those clients and didn't allow funds to move for clients we deemed core. All in all, I felt we held our own as it relates to deposit betas. I also felt extremely good about us finishing the quarter with no borrowings or additions to brokered funding. Proven use of those funding vehicles is absolutely fine, but to go through a quarter like our industry has and for us not to tap either shows the strength we've built in our balance sheet over the last several years. To that point, our model is showing its value in a time like this. We built this company through acquiring some great core-funded community banks with nice granular deposit bases over the last several years, and we've coupled that with strong commercial banking talent obtained through lift-outs in recent years. We have a unique ability to pivot and to lean on strengths of both strategies in a time like this. We've also got some great balance sheet flexibility with about 36% of our bond portfolio coming back to us in cash in the next 18 months. This is a huge reinvestment and earnings opportunity that Ron will discuss in a moment. Our credit quality remains outstanding with NPAs maintaining at 11 basis points, and we continue to feel very good about our loan book. There's been a lot of talk about CRE and office exposure of late. There's minimal office exposure in our book, and what we have is strong, leveraged appropriately with nice guarantor positions. We have them. Well, maybe except to reprice a couple with today's rates, but Rhett's going to dive into this more in a moment. As you can see on pages four and five in our deck, we operate in some of the country's best markets with great growth opportunities and population inflows. That, coupled with our historically strong credit culture, gives me great confidence in the strength of our bank. As a wrap, my opening comments, a couple of other highlights for the quarter. First, we merged our two insurance agencies and converted them into a common core system. We rebranded the agency, SBK Insurance, to capitalize on our company's strong brand position, but still to maintain independence and autonomy. I remain extremely excited about the future of this business line, and we're now synced up and ready to grow. Our fountain equipment finance subsidiary continues to perform very well. We increased our outstandings in that line of business to over $128 million, up from the $55 million when we acquired it back just a couple of years ago, and recently added new team members in Birmingham and Atlanta. Lastly, we just announced the addition of an outstanding group of financial advisors and our Smart Bank Investment Services team in our Dothan, Alabama market. Dothan has been a great market for us from a commercial and private banking standpoint, and this investment team is a great addition. Our wealth program now has over $1.2 billion in assets under management. All in all, a really good start to the year. So let me hand it over to Rhett and then on over to Ron to dive into some details, and I'll close with some additional comments in a moment.

speaker
Miller-Welborn
Chairman

Rhett? Thank you, Billy. For the first quarter of 2023, the bank saw total loans and leases grow at roughly a 7% quarter-over-quarter annualized pace. As you can see on slide 6, the portfolio mix saw very little change, with total loans outstanding at just under $3.3 billion. Average loan yields continued to rise for the latter half of the year in 2022, and we saw that continued yield improvement through first quarter as we ended the reporting period with average portfolio yield at 5.57%, our strongest quarter yield since 2018. Improved interest rates on new loan production and renewals, coupled with our short-term variable rate loans, continuing to generate stronger yields for all contributors to this improvement. Slide 7 shows a balanced and diversified commercial real estate portfolio as well. Non-owner-occupied non-construction represents 27% of the bank's total portfolio, with our largest segment concentration continuing to be in the hospitality sector, representing roughly 33% of all non-owner-occupied loans. As Billy referenced in his opening remarks, office space is a segment of the sector that has had considerable question about long-term viability and pressure on occupancy rates in a post-COVID business operation environment. However, our office segment represents a very manageable 14% of the overall non-owner-occupied CRE portfolio. This limited segment is also well diversified across our geography and very granular in scale. None of our geographic regions represent more than 30% of the office portfolio exposure, with the average loan size being roughly $1 million. We have a diversified tenant profile across the portfolio as well, with our largest segment being medical offices at 36% of very strong performance, and an average loan-to-value across the space of just over 50%. In the construction segment, the space is also very strongly diversified by product segment and by geography, with no more than 32% of the segment held in any one of our geographic regions and an average loan transaction of approximately $450,000. As we stated previously, we feel very comfortable with our positioning in the CRE space as we believe the risk profile of our portfolio has continued to demonstrate solid performance and our overall credit metrics are strong, with only 0.19% of the CRE segment balances impacting the over 30-day past dues position for the quarter end and 0.20% of the CRE segment balances carrying a classified risk rate. As the next slide indicates, our portfolio credit quality was consistently strong quarter over quarter. While we did see some slight increases, in some of the metric balances over fourth quarter 2022 results. A large portion of that was the result of transitioning our allowance method to the CECL model and the subsequent loss of applicable credit discounts in the acquired loan pool, as well as transitioning a few former PCI loans into a non-accrual classification in conjunction with the applicable accounting change. But despite these slight dollar increases, slide eight shows solid performance amongst our core asset quality metric ratios. NPAs, past dues, and classified loans to total loans are all in line with fourth quarter 2022 and consistent to our metrics throughout last year. Our CRE portfolio ratios continue their downward quarter-over-quarter trend from 2022, and we continue to see the segment below regulatory targets in both total and C&D segments. Overall, our first quarter loan production was lower than recent quarters, as predicted, but credit quality metrics continue to hold steady. We are cautiously optimistic about the near-term outlook and believe that should the economic challenges that are forecast become reality, our footprint's regional outlook is expected to perform above average compared to other parts of the country. We believe that will be beneficial to our client base in navigating the next few quarters, which, coupled with our conservative historical underwriting standards, will keep our portfolio performing strongly. Now I'll turn it over to Ron to talk through our allowance, deposit portfolio, and additional earnings details.

speaker
Ron Gorzinski
Chief Financial Officer

Thanks, Rhett, and good morning, everyone. Let's move forward to slide nine, our allowance for credit losses. On January 1st, we officially adopted CECL. In conjunction with the adoption, we added 8.7 million to our allowance, increasing it to 32 million, bringing our ACL to total loans to .99%. Additionally, we had 10.2 million of fair value discount that was transferred to an unamortized fee account, which will be subsequently recognized over the life of the loans. We also recorded a 3.1 million unfunded commitment liability. The adoption resulted in a reduction to equity net of tax of 6.6 million. On to slide 10. Our deposit portfolio increased by 153 million or over 15% annualized for a quarter ended loan to deposit ratio of 78%. This impressive growth is directly attributable to the deep client relationships built over time by our outstanding relationship managers even as we've continued to be judicious in our approach to raising deposit pricing. That said, significant pricing competition from less liquid competitors has caused rates to increase quickly. Our total deposit cost increased 71 basis points to 1.56% for the quarter and was 1.76 for the month of March. We do anticipate this upward pricing pressure to continue, albeit at a more moderate pace throughout the remainder of the year. On slide 11, we provide a detailed look at the composition of our deposit portfolio. A few takeaways we'd like to highlight. Our average deposit account balance is $39,000, spread across approximately 87,000 accounts, with our average commercial and consumer account balances being approximately 103,000 and 23,000, respectively. Approximately 74% of our deposits are either guaranteed or collateralized. We have approximately $964 million in public funds, of which $550 million is guaranteed through reciprocal deposit programs, and the majority of the remainder is collateralized by pledged securities. And lastly, our total reciprocal deposits totaled almost $800 million, which includes the $550 million of public deposits previously mentioned. Overall, we are extremely fortunate to have such granularity in our deposit base as we have intentionally built our business around serving the needs of a diversified range of clients across a broad spectrum of industries and geographies. Moving on to slide 12. In light of the recent events, we've added some additional information regarding our liquidity position. We currently have over $1.6 billion of liquidity consisting of cash, unfledged securities, and collateralized LISA funding available from the FHLB and discount window, representing over 1.4 times coverage of our uninsured deposits. More broadly, during 2021 and 2022, we adopted a conservative approach to deploying excess liquidity, opting to hold cash in short-term securities to fund future loan growth, rather than deploying to longer-term securities. While this approach was to the detriment of our short-term earnings, we are now, unlike many of our peers, not beholden to a large underwater securities position. Instead, We now have sufficient funding without the need for costly borrowings or wholesale funding. On slide 13, at quarter end, our securities portfolio was at $880 million with a 69% AFS, 31% HDN mix of securities and effective duration of 3.1 years. Our strategy to invest in short term in 2021 and 2022 is now set to provide significant earnings tailwinds as over 307 million of principal will be returning to our balance sheet over the next year. This 307 million, which is currently yielding 1.8%, redeployed at a current market rate of 5%, results in an earnings pick of over 9.8 million in additional revenue. On slide 14, you will see that this quarter, we had an increase in both cash and, more notably, securities. As one may think, why are we buying securities at this point of time? Simple. We took advantage of a unique opportunity to purchase approximately 50 million of SBA floating rate securities at a deep discount from a distressed institution. These securities have a three-year average life with yields in the mid-6% range and, at quarter end, had an unrealized gain of over $1.7 million. Our first quarter net interest margin was 3.31%, representing a 20 basis point quarter-over-quarter contraction. Our yield on interest-earning assets increased by 47 basis points, primarily as a result of an increase in our base loan portfolio yield and 37 basis points of loan fees, which included 18 basis points or $1.4 million of loan fees associated with an acquired loan that paid off. For the quarter, our loan portfolio yield, less fees, was 5.20%, and for the month of March, it was 5.27%. Our interest-bearing liabilities increased 85 basis points driven by an increased deposit cost, which totaled 2.05% for the first quarter, and for the month of March was 2.27%. At quarter end, our cumulative deposit beta during this cycle has been approximately 28%. Looking ahead, we estimate our second quarter cumulative beta to be approximately 32%, and we are modeling a cumulative beta of 36% by the end of the year. Our margin and rate guidance should be taken with the understanding that we are in an extremely dynamic market and any guidance is subject to change rapidly. That said, we are modeling second quarter loan yields in the 5.60% range, interest-bearing deposit costs in the 2.35% range, and then interest margin in a range of 3.05% to 3.1%. Given these margin projections, coupled with the non-interest income and expense projections we will discuss momentarily, We anticipate maintaining operating revenue in the $42 million range. On slide 15, you'll see that we experienced an interest rate sensitivity shift from a generally neutral position at 1231 to a slightly liability sensitive position at quarter end. This shift was primarily driven by the movement of approximately 90 million of existing money market deposits from sheet rate to an index pricing rate and Additionally, new money market growth of approximately 75 million also had an index price rate. To counter this impact, we are not only reinforcing pricing disciplines in our markets, but also looking at various balance sheet strategies to ease some of the funding pressures. On slide 16, our operating non-interest income remained flat quarter over quarter. While our first quarter results were lighter than expected, The slowdown was attributable to decreased capital markets and wealth management activity, both of which are heavily impacted in times of market volatility. As markets steady, we expect our entire platform to return to stable, reoccurring income production. Looking ahead, we anticipate our noninterest income to be in the $7 million range for the next several quarters. On slide 17, you see we did a great job in managing our operating noninterest expenses. coming in better than our quarterly guidance and virtually unchanged from the prior one quarter. While the efficiency ratio did rise to 64% for the quarter, it was a result of external market pressures on revenue rather than internal expense increases. Looking at next quarter, we are forecasting expense run rate in the $28 million range, with salary and benefit expenses of 16.9 million, which represents a full quarter of merit increases and associated taxes. As we said before, longer term, we do expect ebbs and flows in various expense categories as we reinvest in our ability to acquire and serve clients and ultimately grow shareholder value. On the slide 18, capital. During the quarter, our capital benefit from strong earnings and positive movement in our AOCI position. As we move through 2023, we fully anticipate generating earnings at a rate sufficient to fund growth and build our capital ratios. While we continuously monitor our capital levels and are prepared to adjust quickly if needed, today we are well capitalized and strategically aligned to deliver strong ROEs and tangible book value growth. With that said, I'll turn it back over to Billy.

speaker
Billy Carroll
President & Chief Executive Officer

Thanks, Ron. As you can see from Ron and Rhett's comments, we're seeing some of the same impacts that everyone is dealing with this cycle, but our positioning remains very sound while we adjust real time to what's happening in our markets. I'm hopeful we'll see funding pressures ease a bit, but we are prepared to defend our base. Loan yields are starting to edge up and repricing loan maturities will continue to help bolster asset yields. But as Ron alluded to, we'll probably continue to experience a flattish margin environment for the near term. And we're fine with that and fine to hold serve for a couple of quarters as we get some market clarity. I do feel we will continue to see and grow and believe mid-single digits on both loans and deposits is a fair outlook. This is a time where we do plan to keep it in the fairway, but we will still continue to take swings. We are seeing some nice opportunities in areas where others may be pulling back, and our team is levering those to grow full relationships. We are definitely open for business. There's no doubt this is an unusual time, but disruption creates opportunities. So we're going to continue to play offense prudently and cautiously. But sometimes it's just harder for Matt to work on deals in an 8% prime rate environment. But when they do work, we're going to take a look at them. We are continuing to handle this rate environment with a heightened focus on non-interest bearing and low-interest bearing deposits. We've ramped up our treasury platform and resources and continue to make this an area of emphasis for the bank. We're also continuing our focus on our non-interest income areas like investments and insurance. While recognizing the industry headwinds, I firmly believe what investors want in a time like this are banks with a history of strong credit, flexibility in their balance sheet, and management teams that can capitalize on uncertain markets. Check, check, and check for SMBK. Plus, the loyalty our clients have shown to our bank has been so reassuring and confirms that what we're building isn't just deposit and loan transactions, but strong relationships from very strong advocates. Our earnings momentum remains solid as we continue our focus on revenue and EPS, and our business model and culture have us well-positioned to be opportunistic. We continue to remain very bullish about our future. And to close, just a big thanks to our SMBK team for continuing to do such a great job for this company and for taking such great care of our clients. I'll stop there and open it up for comments.

speaker
Elliot
Conference Coordinator

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question today comes from Will Jones from KBW. Your line is open.

speaker
Will Jones
Analyst, KBW

Hey, thanks. Good morning, guys. This is Will stepping in for Catherine. How's everybody? Good morning, Will. Hey, so thanks again for the guidance sheets. It's always very helpful to hear, you know, and just thinking about the margin. You know, I know you guys are guiding down again a bit this next quarter, but you also, it feels like you could have, you know, some tailwinds coming in through this next year. You know, I know you mentioned you're looking at various balance sheet, you know, restructuring strategies, and you're going to have some tailwinds from, you know, the notable, you know, bond cash flows at the end of this coming year. Could you just talk about maybe what's kind of under contemplation when you're talking about, you know, the various balance sheet strategies?

speaker
Ron Gorzinski
Chief Financial Officer

Well, one specifically, you know, a lot of, you know, we're kicking a lot of stuff around, but probably on the hedging side of some pay fixed strategies with some swaps on funding. Again, a lot of different things. That's probably the top of the list of what we're looking at. And, you know, kind of cautious on where do we go next with our, you know, the $300 million that will be coming due next year. Nothing set in stone, but most of the conversations right now is higher level.

speaker
Will Jones
Analyst, KBW

Yeah, I got it. And as we think about that $300 million that will be coming due, you know, and you guys do contemplate, you know, how to kind of deploy those funds, you know, would you expect to, you know, kind of instantaneously, you know, reinvest in the bond book or would you just be methodical with it and you know, deployed evenly in the loans and bonds? Or how should we think about that $300 million?

speaker
Billy Carroll
President & Chief Executive Officer

I'll tell you, Will, this is Bill. You know, it's tough. Well, it's tough to look that far ahead. Even though it's not that far, you know, I think kind of what we're assuming for our forecast is that we would turn around probably and look to reinvest the bulk of that. As Ron alluded to his commentary with reinvesting at market rate, But I think, you know, there's still probably a little bit of TBD in that. Obviously, we're going to look at it and kind of at that time see where the market is positioning. And, you know, but our forecast internally has us looking to reinvest it.

speaker
Will Jones
Analyst, KBW

That's very helpful. And then just lastly for me on the margin, on the margin gap for this upcoming quarter, it's great that you guys provide the deposit beta expectations helps a lot with the visibility. What do you assume for further makeshift, you know, out of non-interest-bearing and into, you know, more interest-bearing accounts?

speaker
Ron Gorzinski
Chief Financial Officer

Yeah, at this point, you know, we went from 26% non-interest-bearing to 23%. The remainder of 2023, we are modeling to go down to the 21% level. I think More of the shift will go with the money market funds rather than any other category. But the non-interest bearing will get squeezed a little bit as time goes on for 2023. Awesome.

speaker
Will Jones
Analyst, KBW

Great call, Anthony. Thanks, guys. Thanks, Will. Thanks, Will.

speaker
Elliot
Conference Coordinator

We now turn to Graham Dick from Piper Sandler. Your line is open.

speaker
Graham Dick
Analyst, Piper Sandler

Hey, guys. Good morning.

speaker
spk00

Morning, Graham.

speaker
Graham Dick
Analyst, Piper Sandler

Morning, Graham. I just wanted to, I guess, just start on the securities purchase that you guys mentioned quickly, the SBA portfolio. Can you just talk a little bit about how that deal came about, how you all found it, your propensity to do more of that in the future, or if you think those opportunities still exist out there?

speaker
Billy Carroll
President & Chief Executive Officer

Well, I hope we don't have opportunities to buy distressed stuff from banks. But again, just kind of, you know, our mantra is be opportunistic. And, you know, just through relationships we had with some different brokers, we were able to take advantage of some bonds that needed to be sold quickly. And so really don't anticipate something like that. popping up again. But if they did, we would definitely look to take advantage of it.

speaker
Graham Dick
Analyst, Piper Sandler

Okay, thanks. That's helpful. And then I guess on the liability sensitive move this quarter, do you guys expect this kind of shift to continue from here? I guess as you just mentioned that you expect a shift out of non-interest bearing and into money market. If those money markets are indexed, would you expect I guess the liability-sensitive side of it to grow.

speaker
Ron Gorzinski
Chief Financial Officer

Yeah, this is Ron. Yeah, not as much as what we've seen during the first quarter. Probably be some marginal shifting. I think most of the majority of the shifting has occurred. We're not really expecting, you know, other than obviously the non-transparency going to money markets as what we're projecting, not much more at this point forward. Again, anything subject to change based on market conditions and competitors, but right now it's where we're kind of staying at this point.

speaker
Graham Dick
Analyst, Piper Sandler

Okay. And then I guess just this is a little bit bigger picture, but obviously there's a ton of strategic action at Urals Bank over the last couple of years, and I know the revenue environment is kind of challenging right now, but as you look at the franchise and you kind of take everything for what you have right now, is there any – any sort of profitability metric you guys are looking at, like I said, even as the revenue environment remains challenging, but something that, you know, investors or analysts can kind of look to as something you all are guiding towards, guiding the shift towards?

speaker
Billy Carroll
President & Chief Executive Officer

You know, I'll start. Yeah, I'll shift, and any of the guys can chime in. You know, for us, Graham, I think a lot of it just kind of continues to go back to, to revenue growth and EPS growth. As I alluded to in my comments, we're in a market in a time right now where kind of hold and serve for a couple of quarters isn't a bad thing in our opinion. And so while that may look a little flattish for a quarter or two, our focus is still on growing revenue and growing EPS. And that's where, and we still feel very good about our ability to do that over the long term. I just think, you know, you're probably a little flattish in the next couple of quarters and then give us a chance to kind of watch the market recalibrate where we need to. But that still is the focus. Again, you know, with that efficiency ratio, as it crept up a little bit, it's probably going to stay a little higher than we wanted it to be during the next year, a little bit in the next near term. But, you know, we still have a long-term goal of getting that down in the low 60s and below that even longer term. But I think those are the things that we're going to continue to focus on even in this environment.

speaker
Graham Dick
Analyst, Piper Sandler

Okay, great. That's it for me. Thanks, guys. Thank you, Graham.

speaker
Elliot
Conference Coordinator

Our next question comes from Thomas Wendler from Stevens. Your line is open.

speaker
Thomas Wendler
Analyst, Stephens

Hey, good morning, everyone. Hey, Tom. Good morning. Just one final question from me. We saw a step up in loan fees last quarter to 37 bps. Can you just give us an idea of the driver behind the higher loan fees and what we should expect moving forward?

speaker
Ron Gorzinski
Chief Financial Officer

Yeah, sure. We did have one previously acquired loan that paid off that gave us a 17, 18 basis point bump. That's what was the biggest kind of creeping up for this quarter. Going forward, we're estimating about 20 basis points of fees quarter over quarter. That's probably a good benchmark to go by.

speaker
Thomas Wendler
Analyst, Stephens

All right. I appreciate it. And good quarter, guys. Thank you.

speaker
Elliot
Conference Coordinator

Thanks, Thomas. Our next question comes from Kevin Fitzsimmons from DA Davidson. Your line is open.

speaker
Kevin Fitzsimmons
Analyst, DA Davidson

Hey, guys. Good morning.

speaker
Miller-Welborn
Chairman

Hey, Kevin.

speaker
Kevin Fitzsimmons
Analyst, DA Davidson

Just most of my questions have been asked and answered, but maybe pulling back a little bit on, I appreciate all the detailed guidance and outlook on margin and cost of deposits. Maybe if we pull back and look at dollars of NII, the way to think about it is that we obviously have more margin pressure coming in second quarter, as you indicated. And then if you're able to stretch and look into the back half of the year, let's assume the Fed has one more hike and pulls back, pushes away after that point. Are we looking at more dollars of NII starting to stabilize in the back half of the year, or do you think it – would you describe it more as grinding lower, given the competition on funding? Thanks.

speaker
Ron Gorzinski
Chief Financial Officer

Yeah, hey, Kevin. This is Ron. Yeah, we – you know, we're modeling another 25 basis points in May, and for dollar-wise, then it's just income will stabilize. That's what we're kind of forecasting at this point of time. So not grinding lower, just kind of just hanging Q3, Q4, pretty much steady as she goes.

speaker
Billy Carroll
President & Chief Executive Officer

And then I think as we look ahead, we think that number is going to expand. It'll expand after 2024. As we start to reprice and we get the cash flows back in from the bond portfolio, Kevin, so forth. Yeah, we still have a fairly bullish internal 2024 outlook, just because we do think a lot of the funding is going to stabilize and we pick up some yield.

speaker
Kevin Fitzsimmons
Analyst, DA Davidson

Got it. Great. Great. Thank you. And I guess, Billy, I think you alluded to it. So, you know, there was obviously a concerted effort to grow deposits this quarter. And, you know, I know the mix shift is still going on. But it seems like, you know, now going forward to expect that loan and deposit growth to be about the same pace. So maybe a similar loan and deposit ratio going forward. So is the strategy basically, hey, you know, we're going to fund our loan growth with deposits and to the extent that non-interest bearing is going down, we're going to tap, you know, some money market or CDs to more than offset that. Is that the right way to think about it, that those two things grow at roughly the same pace.

speaker
Billy Carroll
President & Chief Executive Officer

It is. It is. You know, I think, you know, we're, as I said, we feel pretty good about our ability to grow, but I think it's going to be, you know, it's just going to be muted a little bit from what we've seen over the last year or so. But I think what you said is the right way that we're approaching it. You know, it's just, You know, we think we're going to continue to focus on self-fund. You know, if we need to add some CDs or something like that, if there's a little bit of a gap here or there, we can do that. But we feel pretty good that the balance sheet can kind of hold steady over the next little bit. And, you know, as Ron alluded to, you may have some ebbs and flows, and we're going to look to try to take advantage of the best funding vehicles and the lowest cost funding vehicles. But, yeah, I think we're going to look to match it and kind of stay in that mid-singles over the next little bit.

speaker
Miller-Welborn
Chairman

But it's no secret. It's a mighty competitive market out there.

speaker
Billy Carroll
President & Chief Executive Officer

Yeah.

speaker
Kevin Fitzsimmons
Analyst, DA Davidson

Yeah. No, I appreciate that. Maybe one last one for me on credit. Just, you know, how should we think about provisioning going forward? I know now you're under Cecil, but it still seems like that ratio screens a little light relative to – some peers. So, I mean, is the way to think about it that, you know, it's going to be to the extent we have deterioration in economic forecasts, we could see that pace of provisioning step up. And then just, you know, on a side note, you guys did discuss non-owner-occupied CREE. Just wondering if you did any deep dives on the renewals you have coming up over a certain period of time on that book. Thanks.

speaker
Miller-Welborn
Chairman

Yeah, so the first part of your question on the CECL parameters, you know, yeah, obviously if you do continue to see forecasted deterioration in economic factors, you know, unemployment factors, things of that nature with the way the model is built, there could be some slight adjustment upwards in our forecast. in our total allowance position as a result of that, but it's a function of the factors, the qualitative factors that go into the model itself. As to the portfolio performance, right now we certainly don't have a negative outlook as it relates to deterioration in the portfolio itself. All of the indications we have are that so far so good, I guess is the best way I would say it in regard to what's being reported from our clients. On your question regarding the CRE outlook, yes, we are doing some forward-looking there. We've actually got a project underway right now checking on maturities that are happening over the next two years and beginning to do some forward-looking assessments of transactions that would be maturing, repricing, et cetera, during the term. So far, indications, as you would expect, you know, the coverages are tightening, but the indications are that our portfolio is still going to perform well, even as the repricings occur. So, we still are, as I mentioned in the comments, pretty optimistic on the portfolio's ability to absorb this rate change. Okay, great. Thanks, Gus.

speaker
Elliot
Conference Coordinator

Thanks, Gavin. We now turn to Steve Moss from Raymond James. Your line is open. Good morning.

speaker
Steve Moss
Analyst, Raymond James

Apologize if I missed it here, but just on loan pricing here, just kind of curious, where are you seeing new loans coming on the books for these days?

speaker
Billy Carroll
President & Chief Executive Officer

Steve, I'll start. I call it seven-ish. Plus minus is really where we are. I think kind of looking at spot marks, we were coming in high sixes. I think kind of going forward, we're kind of in that high six, low seven range. Not high enough, Steve. It could always be higher. Trust me, we're pushing every lever we can. But, you know, it is. It's just, yeah, there's still some competitive market pressure on some of those yields. But, you know, if we can't get the yields, we're not doing them in today's environment. You know, it's just a pretty matter of fact. But we're seeing around that 7% handle, a little bit higher sometimes.

speaker
Steve Moss
Analyst, Raymond James

Okay. That's helpful. And maybe just in terms of, you know, thinking about, you know, the overall fixed-rate portfolio that you have, you know, I hear you, Billy, saying, you know, we would love to have our lower-rate CRE be up a little bit higher in yield. Just kind of curious, kind of what is the pace of repricing of your fixed-rate portfolio, loan portfolio, over the next 12 months, if you have it?

speaker
Miller-Welborn
Chairman

All right, you got some of that? I do, yeah. Steve, we've got... We've got about $83 million or so that will be maturing between now and the end of the calendar year that will be repriced in 2024. We've got another $93 million, $94 million or so. So, you know, we do have a decent segment in that batch that will be maturing and thus subject for repricing.

speaker
Steve Moss
Analyst, Raymond James

Okay.

speaker
Miller-Welborn
Chairman

That's helpful. That's a big one for us.

speaker
Steve Moss
Analyst, Raymond James

Got you. Right. That's helpful. And then in terms of just as we think about kind of, you know, the remixing of deposits, you're kind of curious as to, you know, how much, you know, when you think about going forward a little further out and let's say rates today 5% or north of that, you know, how much do you think the non-transparency deposits could remix towards money market or CDs?

speaker
Billy Carroll
President & Chief Executive Officer

You know, Ron, I think you'll allude to that a little bit, or you touched on that, I believe. But I think, Ron, you can add any detail, but I think we're probably looking for a few basis points shift down. I still think we can hold a reasonably good level, probably in that 20-21%, even going forward, even if rates edge up a little bit more. But, Ron?

speaker
Ron Gorzinski
Chief Financial Officer

Yeah, exactly. I think we'd like to say 20% would be our floor, but, again, market conditions, if it you know, if the rate, if the rate environment keeps going up further, who knows at this point, but we're modeling 21, but I think 20 probably should be our bottom at this point in time.

speaker
Steve Moss
Analyst, Raymond James

Okay. And one last one for me, just on office here, you know, here are you guys on having diversified commercial real estate portfolio, but just in terms of office in particular, Just wondering if you happen to have the loan-to-values or debt service coverage, any financial metrics in particular.

speaker
Miller-Welborn
Chairman

The average LTD in that portfolio is around 54% in the full book. And as I mentioned, it's pretty well diversified across our footprint. You know, when you look at us from East Tennessee, Denver to Panhandle, we don't have a concentration more than 29% in any single subset. measure in the book. And their coverages are strong. They're well above 125 for averaging around 140. All right.

speaker
Steve Moss
Analyst, Raymond James

Great. Thank you very much for all the color.

speaker
Miller-Welborn
Chairman

Thanks, Dave. Thanks, Steve.

speaker
Elliot
Conference Coordinator

Our next question comes from Brett Ravitan from Hove Group. Your line is open.

speaker
Brett Ravitan
Analyst, Hovde Group

Hey, guys. Good morning. Wanted to, I guess, first, I joined a little late, had an issue joining, but wanted to make sure I understood. I was trying to write down everything that you guys were talking about for guidance. If I heard you correctly, the operating revenue for 2Q, you're expecting to be $42 million. Was that correct? With a margin of 3 to 310? I'm sorry, 305 to 310? Correct.

speaker
Ron Gorzinski
Chief Financial Officer

Correct.

speaker
Brett Ravitan
Analyst, Hovde Group

So if I just back into, it would seem like if I'm backing that number with a $7 million fee income, one rate, it would seem like you're expecting some solid average earning asset growth in 2Q. Is that a fair assessment?

speaker
Ron Gorzinski
Chief Financial Officer

It is, yes. Probably similar, you know, we're looking at the mid-single digits of asset growth. again, sometimes may trend higher, but that's what we're modeling at this point in time.

speaker
Brett Ravitan
Analyst, Hovde Group

Okay. And then if I heard you correctly, you know, you're expecting the loan yield in the second quarter to be about 5.6 versus the 557 and 1Q. Does that essentially mean that, you know, your variable rate loans reprice to kind of market and from here you're just kind of more waiting for the fixed rate loans to reprice, you know, over the next year or two?

speaker
Ron Gorzinski
Chief Financial Officer

Well, remember, the first quarter had that a little bit of, had the accretion or the extra loan fees for the paid off loan. At this point, we're still expecting a loan portfolio going forward to still, you know, adjust, you know, a couple basis, a few basis points, five, 10 basis points every quarter going forward. Probably closer to five basis points, sorry.

speaker
Brett Ravitan
Analyst, Hovde Group

Okay. And then just lastly for me, I noticed the FDIC insurance costs were a little lower than quarter, which, you know, most are higher with the two basis point change. You know, any thoughts on that one item? And is that a part of the $28 million or half a million dollar increase in 2Q?

speaker
Ron Gorzinski
Chief Financial Officer

We had an over-accrual situation. We were accruing a little heavier than we should, so we decided to adjust it this quarter. Going forward, it will normalize. We're probably looking at Q2, we're up around $600,000, so it'll be increaseable going forward. We're there at $600,000 plus a quarter.

speaker
spk00

Okay.

speaker
Ron Gorzinski
Chief Financial Officer

So again, Q1 was an anomaly adjustment.

speaker
Brett Ravitan
Analyst, Hovde Group

Okay. Great. I appreciate the color. Congrats on the quarter and the environment. Obviously, it's a slog for everybody, which you guys are obviously executing pretty well.

speaker
Miller-Welborn
Chairman

Thanks, Brett. Thank you, Brett.

speaker
Elliot
Conference Coordinator

Our next question comes from Freddie Strickland from . Your line is open.

speaker
Patty Strickland
Analyst

Hey, good morning, everybody.

speaker
Elliot
Conference Coordinator

Morning, Patty.

speaker
Patty Strickland
Analyst

Good morning, Patty. Just wanted to ask a question on the FHLB contingent liquidity figure. I know you've already got a good bit of contingent liquidity with them, but is there potentially even more capacity there if you pledge additional loans or securities, or is that more or less the firm limit at FHLB?

speaker
Ron Gorzinski
Chief Financial Officer

Yeah, no, that's what we currently have. No, we do have more capacity at FHLB.

speaker
Patty Strickland
Analyst

Got it. Okay, I was just curious. I've seen a couple different banks disclose that differently, so I was just curious there. And then one additional one, is the average deposit balance figure that you disclose skewed a little bit by some of the larger public funds? Just curious whether that has an impact on it.

speaker
Ron Gorzinski
Chief Financial Officer

Obviously, the average balance is higher. We did have some, you know, short-term inflows and outflows of deposits during the quarter. So that's probably why it looks a little odd. Again, it was kind of an expected in and out that we don't expect it to repeat during Q2. It was for a sale of some companies that happened in the portfolio.

speaker
Patty Strickland
Analyst

Gotcha. All right. That's all I had. Thanks, guys, and congrats on a great quarter.

speaker
Elliot
Conference Coordinator

Thank you, Benny.

speaker
Patty Strickland
Analyst

Thank you.

speaker
Elliot
Conference Coordinator

This concludes our Q&A. I'll now hand back to Miller Welburn for any closing remarks.

speaker
Miller-Welborn
Chairman

Thanks again to each of you for joining us today. As always, please reach out to us directly if you have any additional questions and have a great week. Goodbye.

speaker
Elliot
Conference Coordinator

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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