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SmartFinancial Inc
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Hello. And welcome to the SmartFinancial First Quarter 2023 Earnings Call. My name is Elliot, and I will be your coordinator for today’s call. [Operator Instructions]
I would now like to hand over to Nate Strall with SmartFinancial. The floor is yours. Please go ahead.
Thank you, Elliot. Good morning, everyone. I am Nate Strall, Director of Corporate Strategy, and thank you for joining us for SmartFinancial’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 24, 2023, with the SEC.
And now, I will turn it over to Chairman, Miller Welborn to open our call.
Thanks, Nate. Good morning to all of you and we appreciate you joining us today for our Q1 2023 earnings call. We are 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 and 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 are very proud of what we were able to accomplish for the quarter. Our Q1 2023 versus Q1 2022 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 am proud of the entire team for the focus and continued improvements we have made this quarter.
With that, I am going to turn it over to Billy.
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 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. Prudent 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 have 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 have coupled that with strong commercial banking talent obtained through lift outs in recent years.
We have a unique ability to pivot and the lean on strengths of both strategies in a time like this. We have 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 and what we have is strong, leveraged appropriately with outstanding [ph] positions. I don’t think I would trade any of them, well, maybe except to reprice a couple with today’s rates, but Rhett is 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 opening comments, a couple of other highlights for the quarter. First, we merged their 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 are 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 advisers 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. So let me hand it over to Rhett and then on over to Ron to dive into some details and I will close with some additional comments in a moment. Rhett?
Thank you, Billy. For the first quarter of 2023, the bank saw total loans and leases grew 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 of 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 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.
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 and 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 on 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 for 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 of 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 ratio has continued 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 forecasted to 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 and navigating the next few quarters which, coupled with our conservative historical underwriting standards, will keep our portfolio performing strongly.
Now I will turn it over to Ron to talk to our allowance, deposit portfolio and additional earnings details.
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 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 have continued to be judicious in our approach to raising deposit pricing.
That said, significant pricing competition from less local competitors has caused rates to increase quickly. Our total deposit costs 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 would 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 have added some additional information regarding our liquidity position. We currently have over $1.6 billion of liquidity, consisting of cash, unpledged securities and collateralized lives of 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% HTM mix of securities, an 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 returned to our balance sheet over the next year. This $307 million is currently yielding 1.8%, redeployed at a current market rate of 5%, results in earnings stack 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 costs, 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 the 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% 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 will see that we experienced an extra 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 index pricing rate, and additionally, new money market growth of approximately $75 million also at 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 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 a $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 drive shareholder value.
On 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 will turn it back over to Billy.
Thanks, Ron. As you can see from Ron and Rhett’s comments, we are seeing some of the same impacts that everyone is doing with this cycle, but our positioning remains very sound, while we adjust real time to what’s happening in our markets.
I am hoping we will 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 will probably continue to experience a flattish margin environment for the near-term and we are fine with that and find the whole 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, 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 are going to continue to play offense prudently and cautiously, but sometimes it’s just harder for map to work on deals in an 8% prime rate environment. But when they do work, we are 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 have ramped up our treasury platform and resources and continue to make this an area of emphasis for the bank. We are also continuing our focus on our non-interest income areas like investments in 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 their bank has been so reassuring and confirms that what we are book -- we are building isn’t just deposit and loan transactions, the 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 will stop there and open it up for comments.
Thank you. [Operator Instructions] Our first question today comes from Will Jones from KBW. Your line is open.
Hey. Thanks. Good morning, guys. This is Will stepping in for Catherine. How’s everybody?
Hey. Good morning, Will.
Good morning, Will.
Hey. So thanks again for guidance. It’s always very helpful that you are and just thinking about the margin, I know you guys are guiding down again a bit this next quarter, but you also -- it feels like you could have some tailwinds coming in through this next year. I know you mentioned you are looking at various balance sheet restructuring strategies and you are going to have some tailwinds from the notable bond cash flows at the end of this coming year. Could you just talk about maybe what’s kind of under contemplation when you are talking about the various balance sheet strategies?
Well, specifically, a lot of -- we are 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. It’s probably the top of the list of what we are looking at.
And kind of cautious on where do we go next with our -- the $300 million that will be coming due next year. Nothing said in stone, but we are -- most of the conversations right now is higher level.
Yeah. Got it. And as we think about that $300 million that will be coming due and you guys do contemplate how to kind of deploy those funds. Would you expect to kind of instantaneously reinvest in the bond book or would you just be methodical with it and deployed evenly in the loans and bonds or how should we think about that $300 million?
I will tell you. Will, this is Billy. It’s tough to look that far ahead, even though it’s not that far. I think kind of what we are 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 probably there’s some -- there’s still probably a little bit of TBD in that. Obviously, we are going to look at it and kind of at that time to see where the market is positioning and but our forecast internally has us looking to reinvest it.
Got you. 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 mix shift? I don’t know interest-bearing and into more interest-bearing accounts?
Yeah. At this point, no, 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 the shift will go into 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. Great color. Thanks, guys.
Thanks, Will.
Thanks, Will.
We now turn to Graham Dick from Piper Sander. Your line is open.
Hey, guys. Good morning.
Good morning, Graham.
Good morning.
I just wanted to, I guess, just start on the securities purchases 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?
Well, I hope we don’t have opportunities to buy distressed stuff from banks, Graham. But, again, just kind of, our mantra is be opportunistic and 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 I really don’t anticipate something like that popping up again, but if they did, we would definitely look to take advantage of it.
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 -- in those money market are indexed, would you expect, I guess, the liability-sensitive side of it to grow?
Yeah. This is Ron. Not as much as what we have seen during the first quarter, probably, be some marginal shifting. I think most of the majority of the shipping has occurred. We are not really expecting -- other than obviously the non-interest bearing going to money markets as what we are projecting, not much more at this point forward. Again, anything subject to change based on market conditions to competitors, but right now, it’s where we are kind of staying at this point.
Okay. And then I guess just this is a little bit bigger picture, but obviously, there’s a ton of strategic action at your all 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 sort of profitability metric you guys are looking at, like I said, even as the revenue environment remains challenging, but something that investors or analysts can kind of look to something you all are guiding towards -- guiding the shift toward?
Yeah. I will start. Yeah. I will shift and any of the guys can chime in. 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, we are in a market in a time right now. We are kind of hold and serve for a couple of quarters, isn’t the 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 are 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, with that efficiency ratio, as it crept up a little bit, it’s probably going to stay a little higher than we want it -- we want it to be during the next year -- a little bit in the next near-term, but 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 are going to continue to focus on even in this environment.
Okay. Great. That’s it for me. Thanks, guys.
Thank you, Graham.
Thank you.
Our next question comes from Thomas Wendler from Stephens. Your line is open.
Hey. Good morning, everyone.
Hey, Thomas.
Good morning.
Good morning.
Just one final question for 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?
Yeah. Sure. We did have one previously acquired loan that paid off that gave us a 17-basis-point, 18-basis-point bump. That’s what was the big kind of creeping up for this quarter. Going forward, we are estimating about 20 basis points of fees quarter-over-quarter. That’s probably a good benchmark to go by.
All right. I appreciate and good quarter guys. Thank you.
Thanks, Thomas.
Thanks, Thomas.
Our next question comes from Kevin Fitzsimmons from D.A. Davidson. Your line is open.
Hey, guys. Good morning.
Hi, Kevin.
Hi, Kevin.
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? And then if you are 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.
Yeah. Hi, Kevin. This is Ron. Yeah. We are modeling another 25 basis points in May and for dollar-wise the income will stabilize. That’s what we are kind of forecasting at this point of time. So not grinding lower, just kind of hang in Q3, Q4, pretty much steady as she goes.
And then, I think, as we look ahead, we think that number is going to expand.
It will expand. Yeah.
I mean, as -- just…
…2024. Yeah.
As we start to reprice and we get the cash flows back in from the bond portfolio, Kevin. So we still -- really we have a fairly bullish internal 2024 outlook just because we do think we will get a lot of the funding is going to stabilize and we pick up some yield.
Got it. Great. Great. Thank you. And I guess, Billy, I think, you alluded to it, so there was obviously a concerted effort to grow deposits this quarter and I know the mix shift is still going on. But it seems like now going forward to expect that loan and deposit growth to be about the same pace. So maybe a similar loan-to-deposit ratio going forward. So is the strategy basically had -- we are going to fund our loan growth with deposits and to the extent that non-interest-bearing is going down, we are going to tap 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?
It is. It is. I think we are, as I said, we feel pretty good about our ability to grow, but I think, it’s going to be -- it’s just going to be muted a little bit from what we have seen over the last year or so. But I think what you said is the right way that we are approaching it.
It’s just -- we think we are going to continue to focus on self-fund 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 may -- as Ron alluded to, you may have some ebbs and flows, and we are going to look to try to take advantage of the best funding vehicles and the lowest cost funding vehicles. But, yeah, I think we are going to look to match it and kind of stay in that mid-singles over the next little bit.
But it’s no secret as so many competitive market out there.
Yeah.
Yeah. No. I appreciate that. Maybe one last one for me on credit. Just the -- how should we think about provisioning going forward, I know now you are under CECL. 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 it’s going to be to the extent we have deterioration in economic forecast, we could see that pace of provisioning step-up. And then just on a side note, you guys did discuss non-owner-occupied fee. Just wondering if you did any deep dives on the renewals you have coming up over a certain period of time on that book?
Yeah. So the first part of your question on the CECL parameters. Yeah, obviously, if you do continue to see forecasted deterioration in economic factors, 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, 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 are not -- 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 your question regarding the CRE outlook. Yes, we are doing some forward-looking there. We have actually got [inaudible] 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 indication that you would expect the coverages are tightening, but the indications are that our portfolio is still going to perform well even as the re-pricings occur. So we still are -- as I mentioned in our comments, pretty optimistic on the portfolio’s ability to absorb this rate change.
Okay. Great. Thanks, guys.
Thanks, Kevin.
Thanks, Kevin.
We now turn to Steve Moss from Raymond James. Your line is open.
Good morning. Apologies if I miss here, but on…
Hi, Steve.
Just apologies if I miss this, but on loan pricing here, just kind of curious where are you seeing new loans coming on the books for these days?
Steve, I will start, yes, and I think, we are in -- I call it, 7-ish plus/minus is really where we are. I think kind of looking at spot March, we were coming in high 6s. I think kind of going forward, we are kind of in that high 6, low 7 range.
That’s high, Steve.
That’s…
It could always be higher. Trust me, we are pushing every lever we can. But you -- it is. It’s just -- yeah, there’s still some competitive margin pressure on some of those yields. But if we can’t get the yields, we are not doing in today’s environment. It’s just pretty matter of fact. But we are seeing around that 7% handle, a little bit higher sometimes.
Okay. That’s helpful. And maybe just in terms of thinking about the overall fixed rate portfolio that you have, I hear you Billy saying we would like -- we would love to have our lower 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?
Rhett, you got some of that?
I do. Yeah. Steve, we have got about $83 million or so that will be maturing between now and the end of the calendar year that will be repricing. 2024 we have got another $93 million, $94 million or so. So we do have a decent segment in that bag that will be maturing and thus, subject to repricing…
Okay. That’s helpful.
…there is a fixed proportion.
Got it. Great. That’s helpful. And then in terms of just as we think about kind of the remix on deposits here kind of curious as to how much -- when you think about going forward a little further out in, let’s say, rates stay 5% or north of that, how much do you think the non-interest-bearing deposits could remix towards money market or CDs?
Ron, I think, you will 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 are probably looking for a few basis point 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?
Yeah. Exactly. I think we would like to say 20% would be our floor, but again, market conditions if it -- if the rate environment keeps going up further, who knows at this point. But we are modeling 21%, but I think 20% probably should be our bottom at this point in time.
Okay. And one last one for me, just on office here. I hear you guys on having diversified commercial real estate portfolio. But just in terms of office, in particular, just wondering if you have had the loan to values or debt service coverage, any financial metrics in particular?
The average LTV in that portfolio is around 54% in the full book. And as I mentioned, it’s pretty well diversified across our footprint. When you look at us from east industry during the pan handle [ph], we don’t have a concentration more than 29% in any single subset region that we measure in the book. And the coverages are strong, they are well above of $125 per average is around $140 million.
All right. Great. Thank you very much for all the color.
Thanks, Steve.
Thanks, Steve.
Our next question comes from Brett Rabatin from Hovde Group. Your line is open.
Hey, guys. Good morning.
Good morning.
Hi, Brett.
I wanted to -- I guess, first, I joined a little late, had an issue joining, but I wanted to make sure -- I was trying to write down everything that you guys were talking about for guidance. I heard you correctly the operating revenue for 2Q, you are expecting to be $42 million. Was that correct, with a margin of 3% to 3.10%, I am sorry, 3.05% to 3.10% [ph]?
Correct.
So if I just back into -- it would seem like if I am backing that number with a $7 million fee income run rate, it would seem like you are expecting some solid average earning asset growth in 2Q. Is that a fair assessment?
It is yes. Probably similar, we are looking at the mid-single digits of asset growth. Again, sometimes it may trend higher, but that’s what we are modeling at this point in time.
Okay. And then, if I heard you correctly, you expecting the loan yield in the second quarter to be about 5.6% versus the 5.57% in 1Q. Does that essentially mean that your variable rate loans repriced to kind of market and from here, you are just kind of more waiting for the fixed rate loans to reprice over the next year.
Well, remember, the first quarter had that a little bit -- had the accretion or the extra loan fees for the paid off loan. At this point…
Okay.
… we are still expecting our loan portfolio going forward to still adjust a couple basis -- a few basis points, 5 basis points, 10 basis points every quarter going forward, probably closer to 5 basis points…
Okay.
Sorry.
Okay. And then just lastly, for me, I noticed the FDIC insurance costs were a little lower linked-quarter, which most are higher with the 2 basis point change. Any thoughts on that line item and does that -- is that a part of the $28 million or $0.5 million increase in 2Q?
We had an over accrual situation. We were accruing a little heavier than we should. So we decided to adjust it this quarter. So it -- going forward it will normalize. We are probably looking at -- give me a second here, yeah, Q2, we are up around $600. So, yeah, it will be increase going forward, it will be $600,000 plus a quarter.
Okay.
So, again, Q1 was a normal accrual adjustment.
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.
Thanks, Brett.
Thanks, Brett.
Thank you.
Our next question comes from Feddie Strickland from Janney Montgomery Scott. Your line is open.
Hey. Good morning, everybody.
Good morning, Feddie.
Good morning, Feddie.
Just wanted to ask a question on the FHLB contingent liquidity figure. I know you have 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 that FHLB?
Yeah. No. That’s what we currently have. No, we do have more capacity at FHLB.
Got it. Okay. I was just curious. I have seen a couple of different banks disclose that differently. So I was just curious there. And then one additional one, is the average deposit balance figure that you disclosed skewed a little bit by some of the larger public funds, just curious whether that has an impact on it?
Obviously, the average balance is higher. We did have some short-term inflows and outflows of deposits during the quarter, so that’s probably why it looks a lot. 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.
Got you. All right. That’s all I had. Thanks, guys, and congrats on the great quarter.
Thank you.
Thank you.
This concludes our Q&A. I will now hand back to Miller Welborn for any closing remarks.
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. Good-bye.
Ladies and gentlemen, today’s call has now concluded. We would like to thank you for your participation. You may now disconnect your lines.