SmartFinancial - Q1 2023
April 25, 2023
Transcript
Operator (participant)
Hello, welcome to the SmartFinancial, Inc. 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 Strall with SmartFinancial, Inc. The floor is yours. Please go ahead.
Nate Strall (Director of Strategy and Corporate Development)
Thank you, Elliot. Good morning, everyone. I'm Nate Strall, Director of Corporate Strategy, and thank you for joining us for SmartFinancial, Inc.'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 Welborn will begin the call, followed by Billy Carroll, our President and Chief Executive Officer. Ron Gorczynski, 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 SEC 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. Now, I'll turn it over to Chairman Miller Welborn to open our call.
Miller Welborn (Chairman of the Board)
Thanks, Nate. Good morning to all of you. We appreciate you joining us today for our Q1 23 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. At the same time, a very rewarding quarter for our company. SmartBank has been very focused on our clients. 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 Q1 2023 versus Q1 2022 increase in earnings for the bank were strong. 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 gonna turn it over to Billy.
Billy Carroll (Director, President and CEO)
Thanks, Miller, good morning, everyone. Well, what a way to start 2023 for our industry. As I tell our team all the time, challenges can open a lot of doors, 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, 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 NIM 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. 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 in 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. What we have is strong, leveraged appropriately, with nice guarantor positions. I don't think I would trade any of them, well, maybe except to reprice a couple with today's rates. Rhett's gonna 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 a historically strong credit culture, gives me great confidence in the strength of our bank. As I 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, 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 in our SmartBank 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.
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. Rhett?
Rhett Jordan (EVP and Chief Credit Officer)
Thank you, Billy. For the first quarter 2023, the bank saw total loans and leases grow at roughly a 7% quarter-over-quarter annualized pace. As you can see on slide six, 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, 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 were all contributors to this improvement. Slide seven 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. 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 the segment.
The relationships hold solid debt coverage profiles, 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 grade.
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. 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 continued their downward quarter-over-quarter trend from 2022. We continue to see the segment below regulatory targets in both total and C and D segments. Overall, our first quarter loan production was lower than recent quarters, as predicted. Credit quality metrics continued to hold steady. We are cautiously optimistic about the near-term outlook. We 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.
Ron Gorczynski (EVP and CFO)
Thanks, Rhett, 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 0.99%. 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. 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, unpledged securities, and collateralized lines of funding available from the FHLB and discount window, representing over 1.4x coverage of our uninsured deposits. During 2021 and 2022, we adopted a conservative approach to deploying excess liquidity, opting to hold cash and short-term securities to fund future loan growth rather than deploy 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% HTM 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 $370 million of principal will be returning to our balance sheet over the next year. This $370 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 in time? Simple.
We took advantage of the 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 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 net interest margin in the range of 3.05%-3.1%. Given these market 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 12/31 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 indexed pricing rate, and additionally, new money market growth of approximately $75 million also at an indexed 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 steady reoccurring income production. Looking ahead, we anticipate our non-interest 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 non-interest expenses, coming in better than our quarterly guidance and virtually unchanged from the prior linked 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 to slide 18, capital. During the quarter, our capital benefited 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.
Billy Carroll (Director, President and CEO)
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. 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 the time where we do plan to keep it in the fairway, 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, disruption creates opportunities, we're gonna continue to play offense prudently and cautiously. Sometimes it's just harder for math to work on deals in an 8% prime rate environment. When they do work, we're gonna 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. 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.
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.
Operator (participant)
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.
Will Jones (Associate VP of Equity Research)
Hey, thanks. Good morning, guys. This is Will stepping in for Katherine. How's everybody?
Billy Carroll (Director, President and CEO)
Hey, Will.
Ron Gorczynski (EVP and CFO)
Morning, Will.
Billy Carroll (Director, President and CEO)
Doing well.
Will Jones (Associate VP of Equity Research)
Hey. Thanks again for the guidance. 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 gonna 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?
Ron Gorczynski (EVP and CFO)
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's set in stone, but most of the conversations right now is higher level.
Will Jones (Associate VP of Equity Research)
Yeah, got it. 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 will you just be methodical with it and, you know, deploy evenly in the loans and bonds? Or how should we think about that $300 million?
Billy Carroll (Director, President and CEO)
I'll tell you, Will, this Bill, you know, it's tough. Yeah, 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. I think, you know, there's still probably a little bit of TBD in that. Obviously, we're gonna look at it and kind of at that time, see where the market is positioning and, you know, our forecast internally has us looking to reinvest it.
Will Jones (Associate VP of Equity Research)
That's very helpful. Then, just lastly for me on the margin. On the margin guidance for this upcoming quarter, it's great that you guys provide the deposit beta expectations. It helps a lot with the visibility. What do you assume for further mix shift, you know, out of non-interest bearing and into, you know, more interest-bearing accounts?
Ron Gorczynski (EVP and CFO)
Yeah, at this point, you know, we went from 26% non-interest bearing to 23%. Through the remainder of 2023, we are modeling to go down to the 21% level. I think more of the shift will go to money market funds rather than any other category. The non-interest bearing will get squeezed a little bit as time goes on for 2023.
Will Jones (Associate VP of Equity Research)
Awesome. Great color. Thanks, guys.
Billy Carroll (Director, President and CEO)
Thanks, Will.
Ron Gorczynski (EVP and CFO)
Thanks, Will.
Operator (participant)
We now turn to Graham Dick from Piper Sandler. Your line is open.
Graham Dick (VP of Investment Banking and Equity Research Analyst)
Hey, guys. Good morning.
Billy Carroll (Director, President and CEO)
Morning, Graham.
Ron Gorczynski (EVP and CFO)
Morning, Graham.
Graham Dick (VP of Investment Banking and Equity Research Analyst)
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, you know, your propensity to do more of that in the future, or if you think the, you know, those opportunities still exist out there?
Billy Carroll (Director, President and CEO)
Well, I hope we don't have opportunities to buy distressed stuff from banks, Graham. 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. Really don't anticipate something like that popping up again. If they did, we would definitely look to take advantage of it.
Graham Dick (VP of Investment Banking and Equity Research Analyst)
Okay. Thanks. That's helpful. 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 market are indexed, would you expect, I guess, the liability sensitive side of it to grow?
Ron Gorczynski (EVP and CFO)
Yeah. This is Ron. Yeah, not as much as what we see during the first quarter. There's 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-interest bearing going to money markets, as what we're projecting, not much more at this point forward. Again, anything's subject to change based on market conditions and competitors, but right now it's where we're kind of staying at this point.
Graham Dick (VP of Investment Banking and Equity Research Analyst)
Okay. Then I guess just this is a little bit bigger picture, but, you know, obviously there's a ton of strategic action at your all's bank over the last couple of years. I know the revenue environment is kind of challenging right now. As you look at the franchise and you kind of take everything for what you have right now, is there any sort of profitability metric you guys are looking at like I said, even as the revenue environment remains challenging, something that, you know, investors or analysts can kind of look to as something you all are guiding towards? Guiding the ship towards rather?
Billy Carroll (Director, President and CEO)
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 revenue growth and EPS growth. As I alluded to in my comments, you know, we're in a market in a time right now where, you know, kind of hold and serve for two quarters, isn't a bad thing in our opinion. You know, while that may look a little flattish for one or two quarters, you know, our focus is still on growing revenue and growing EPS. That's where, and we still feel very good about our ability to do that over the long term.
I just think, you know, 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. That, that still is the focus. Again, you know, with that efficiency ratio, as it crept up a little bit, it's probably gonna stay a little higher than we want it to be, during the next little bit in the next near term. You know, we still have a long-term goal of getting that, down in the low sixties, and below that, even longer term. I think, those are the things that we're gonna continue to focus on even in this environment.
Graham Dick (VP of Investment Banking and Equity Research Analyst)
Okay, great. That's it for me. Thanks, guys.
Billy Carroll (Director, President and CEO)
Thank you, Graham.
Operator (participant)
Our next question comes from Thomas Wendler from Stephens. Your line is open.
Thomas Wendler (Analyst)
Hey, good morning, everyone.
Billy Carroll (Director, President and CEO)
Hey, Thomas.
Ron Gorczynski (EVP and CFO)
Good morning.
Thomas Wendler (Analyst)
Just, one final question from me. We saw a step up in loan fees last quarter to 37 bits. Can you just give us an idea of the driver behind the higher loan fees and what we should expect moving forward?
Rhett Jordan (EVP and Chief Credit 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.
Thomas Wendler (Analyst)
All right. I appreciate it. Good quarter, guys. Thank you.
Rhett Jordan (EVP and Chief Credit Officer)
Thanks.
Billy Carroll (Director, President and CEO)
Thanks, Thomas.
Operator (participant)
Our next question comes from Kevin Fitzsimmons from D.A. Davidson. Your line is open.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Hey, guys. Good morning.
Rhett Jordan (EVP and Chief Credit Officer)
Oh, Kevin.
Billy Carroll (Director, President and CEO)
Hey, Kevin.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
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, is the way to think about it is that we obviously have more margin pressure coming, in second quarter, as you indicated. Then if, you know, you're able to stretch and look into the back half of the year, let's assume the Fed has one more hike or and pulls back at, you know, pushes away after that point. Are we looking at more dollars of NII starting to stabilize in the back half of the year?
Do you think would you describe it more as grinding lower, given the competition on funding? Thanks.
Ron Gorczynski (EVP and CFO)
Yeah. Kevin, this is Ron. Yeah, we, you know, we're modeling another 25 basis points in May, and, for dollar-wise, net interest income will stabilize. That's what we're kind of forecasting at this point of time. Not grinding lower, just kind of just hanging, you know, Q3, Q4, pretty much steady as she goes.
Billy Carroll (Director, President and CEO)
I think as we look ahead, we think that number is gonna expand.
Ron Gorczynski (EVP and CFO)
It'll expand out even more.
Billy Carroll (Director, President and CEO)
I mean, as we start to reprice and, you know, we get the cash flows back in from bond portfolio, Kevin. Yeah, we still have a fairly bullish internal 2024 outlook, just because we do think we'll get a lot of the funding is gonna stabilize, and we pick up some yield.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Got it. Great. Great. Thank you. I guess, Billy, I think you alluded to it. The, 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. Maybe a similar loan deposit ratio going forward. Is the strategy basically, hey, you know, we're gonna fund our loan growth with deposits and to the extent that non-interest spend is going down, we're gonna 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 growing at roughly the same pace?
Billy Carroll (Director, President and CEO)
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 gonna be, you know, it's just gonna be muted a little bit from what we've seen over the last year or so. 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 gonna 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. We feel pretty good that the balance sheet can kind of hold steady.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Yeah.
Billy Carroll (Director, President and CEO)
Over the next little bit. You know, may have, as Ron alluded to, you may have some ebbs and flows, and we're gonna look to try to take advantage of the, you know, the best funding vehicles and the lowest cost funding vehicles. Yeah, I think we're gonna look to match it and, you know, kind of stay in that mid-singles over the next little bit.
Rhett Jordan (EVP and Chief Credit Officer)
It's no secret it's a mighty competitive market out there.
Billy Carroll (Director, President and CEO)
Yeah.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
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 CECL, but it still seems like that ratio screens a little light relative to some peers. I mean, is the way to think about it that, you know, it's gonna be to the extent we have deterioration in economic forecast, we could see that pace of provisioning step up? Just, you know, on a side note, you guys did discuss non-owner occupied CRE. 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.
Rhett Jordan (EVP and Chief Credit Officer)
The first part of your question on the CECL parameters, you know, 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 total allowance position as a result of that. You know, it's a function of the factors, of the qualitative factors that go into the model itself. You know, as to the portfolio performance, you know, we certainly don't have a negative outlook as it relates to a 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 the question regarding the CRE outlook, yes, we are doing some forward-looking there. We've actually got a product specialty right now, doing checking on maturities that are happening over really 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.
The, you know, the indications are that our portfolio is still gonna perform well, even as the repricings occur. We still are, as I mentioned in the comments, pretty optimistic on the portfolio's ability to absorb the rate change.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Okay, great. Thanks, guys.
Thanks. Thanks, Kevin.
Operator (participant)
We now turn to Steve Moss from Raymond James. Your line's open.
Steve Moss (Managing Director)
Good morning. Apologize if I missed it here.
Rhett Jordan (EVP and Chief Credit Officer)
Good morning, Steve.
Steve Moss (Managing Director)
Just apologize if I missed it, but on loan pricing here, just kind of curious, you know, where are you seeing new loans coming on the books for these days?
Rhett Jordan (EVP and Chief Credit Officer)
Steve, I'll start. Yes, as John, I think we're in, I call it 7-ish ±, is really where we are. I think kind of looking at spot marks, we were coming in high 6s. I think kind of going forward, we're kind of in that high six-low seven range. No high enough, Steve. That's helpful. It could always be higher. Trust me, we're pushing every lever we can. You know, it is. It's just, yeah, there's still some competitive market pressure on some of their deals. You know, if we can't get the yields, we're not doing them in today's environment. You know, it's just pretty matter of fact. We're seeing around that 7% handle, a little bit higher sometimes.
Steve Moss (Managing Director)
Okay, that's helpful. 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 CRE be up a little bit higher in yields. 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?
Billy Carroll (Director, President and CEO)
All right. Do you got some of that? I do. Yeah, Steve, we've got about $83 million or so, that'll be maturing, between now and the end of calendar year, that will be repriced. In 2024, we've got another $90, $93, $94 million or so. We do have a decent segment, in that axe that will be maturing and thus, subject for repricing.
Steve Moss (Managing Director)
Okay. That's helpful. Got it. Great. That's helpful. In terms of just as we think about kind of, you know, the remixing 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 stay 5% or north of that, you know, how much do you think the non-disbursing deposits could remix towards money market or CDs?
Rhett Jordan (EVP and Chief Credit Officer)
You know, Ron, I think you alluded to that a little bit, or you touched on that, I believe. 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. Rod? Yeah, exactly. I think we like to say 20% would be our floor. Again, market conditions, if it, you know, if the rate environment keeps going up further, who knows at this point? We're modeling 21, but I think 20 probably should be our bottom at this point in time.
Steve Moss (Managing Director)
One last one for me, just on office here. You know, hear 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?
Rhett Jordan (EVP and Chief Credit Officer)
So, uh, average LTV in that portfolio is around fifty-four percent, um, in the, uh, in the, in the full book. Um, and as I mentioned, it's pretty well diversified across our footprint. You know, when you look at us from east to west and to the panhandle, uh, we don't, we don't have a concentration more than, um, uh, twenty-nine percent in any single, um, subset region that, that we, um, that we measure, uh, in the book. Um, and their coverage is strong. They're, uh, they're well above, uh, um, one twenty-five. We're asking around one forty.
Steve Moss (Managing Director)
All right, great. Thank you very much for all the color.
Billy Carroll (Director, President and CEO)
Thanks, Steve.
Rhett Jordan (EVP and Chief Credit Officer)
Thanks, Steve.
Operator (participant)
Our next question comes from Brett Rabatin from Hovde Group. Your line's open.
Brett Rabatin (Managing Director and Head of Equity Research)
Hey, guys. Good morning.
Billy Carroll (Director, President and CEO)
Morning. Hey, Brett.
Brett Rabatin (Managing Director and Head of Equity Research)
Wanted to, I guess first I joined a little late, had an issue joining, wanted to make sure I was trying to write down everything 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 three-
Billy Carroll (Director, President and CEO)
Right.
Brett Rabatin (Managing Director and Head of Equity Research)
To 3-10? Oh, I'm sorry, 305-310.
Billy Carroll (Director, President and CEO)
Correct.
Brett Rabatin (Managing Director and Head of Equity Research)
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 Q2. Is that a fair assessment?
Ron Gorczynski (EVP and CFO)
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.
Brett Rabatin (Managing Director and Head of Equity Research)
Okay. 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 5.57 in 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?
Ron Gorczynski (EVP and CFO)
Well, remember the first quarter had that had the accretion or the extra loan fees for the paid off loan. At this point.
Brett Rabatin (Managing Director and Head of Equity Research)
Okay.
Ron Gorczynski (EVP and CFO)
we're still expecting a loan portfolio going forward to still, you know, adjust, you know, few basis points, five, 10 basis points every quarter going forward. Probably closer to five basis points, sorry.
Brett Rabatin (Managing Director and Head of Equity Research)
Okay. Just lastly from, for me, I noticed the FDIC insurance costs were a little lower last quarter, which, you know, most are higher with the two basis point change. You know, any thoughts on that one item? Is that a part of the $28 million or half million dollar increase in 2Q?
Ron Gorczynski (EVP and CFO)
We had an overaccrual situation. We were accruing a little heavier than we should, so we decided to adjust it this quarter. It.
Brett Rabatin (Managing Director and Head of Equity Research)
Forward.
Ron Gorczynski (EVP and CFO)
Going forward, it will normalize. We're probably looking at, give me a second here. Q2, we're up around $600. The increase will going forward will be at $600,000+ a quarter.
Brett Rabatin (Managing Director and Head of Equity Research)
Okay.
Ron Gorczynski (EVP and CFO)
Again, Q1 was an accrual adjustment.
Brett Rabatin (Managing Director and Head of Equity Research)
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.
Miller Welborn (Chairman of the Board)
Thanks, Brett.
Ron Gorczynski (EVP and CFO)
Thanks, Brett.
Operator (participant)
Our next question comes from Feddie Strickland from Janney Montgomery Scott. Your line is open.
Feddie Strickland (VP of Equity Research)
Hey, good morning, everybody.
Miller Welborn (Chairman of the Board)
Morning, Feddie.
Ron Gorczynski (EVP and CFO)
Morning, Feddie.
Feddie Strickland (VP of Equity Research)
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 pledged additional loans or securities, or is that more or less the firm limit at FHLB?
Ron Gorczynski (EVP and CFO)
No, no, that's what we currently have. No, we do have more capacity at FHLB.
Feddie Strickland (VP of Equity Research)
Got it. Okay. I was just curious. I've seen a couple different banks disclose that differently, so I was just curious there. 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.
Ron Gorczynski (EVP and CFO)
I'd say 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 during the portfolio.
Feddie Strickland (VP of Equity Research)
Gotcha. All right, that's all I have. Thanks, guys. Congrats on a great quarter.
Ron Gorczynski (EVP and CFO)
Thank you, Feddie.
Miller Welborn (Chairman of the Board)
Thanks, Feddie.
Operator (participant)
This concludes our Q&A. I'll now hand back to Miller Welborn for any closing remarks.
Miller Welborn (Chairman of the Board)
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 now.
Operator (participant)
Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.