Q1 2023 First Financial Bancorp Earnings Call
Speaker 1: Hello and welcome to today's conference call. Today's call will begin in just a few moments time. If you would like to ask a question during today's call, please press star followed by one on your telephone keypad. Again, today's call will begin in just a few moments time. Thank you for your patience.
Speaker 2: Music
Speaker 1: Hello and welcome to today's first Financial BanCulp first quarter 2023 earnings conference call and webcast. My name is Bailey and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
Speaker 1: If you would like to ask a question, please press star followed by 1 on your telephone keypad. I would now like to pass the conference over to Scott Crawley, Corporate Controller. Please go ahead when you're ready.
Speaker 3: Thank you Bailey. Good morning everybody and apologies for any technical difficulty you might have had logging on this morning.
Speaker 3: Thanks for joining us on today's conference call to discuss First Financial Bank's first quarter 2023 financial results. Participating on today's call will be Archie Brown, President and Chief Executive Officer, Jamie Anderson, Chief Financial Officer, and Bill Herrod, Chief Credit Officer.
Speaker 3: Both the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankatfirst.com under the investor relations section.
Speaker 3: We'll make reference to the slides contained in the accompanying presentation during today's call.
Speaker 3: Additionally, please refer to the forward-looking statement disclosure contained in the first quarter of 2023, already through lease.
Speaker 3: as well as our SEC filings for a full discussion of the company's risk factors.
Speaker 3: The information we will provide today is accurate as of March 31, 2023, and we will not be updating any forward-looking statements or reflect facts or circumstances after this call.
Speaker 3: And I'll turn the call over to Archie Brown. Thank you, Scott. Good morning, everyone, and thank you for joining us on our call. Yesterday afternoon, we announced our financial results for the first quarter.
Speaker 3: I'll provide a few high-level thoughts on our recent performance and then turn the call over to Jamie.
Speaker 3: I'll provide a few high-level thoughts on our recent performance and then turn the call over to Jamie to provide further details.
Speaker 3: The first quarter was a strong quarter for First Financial, and I'm very pleased with our operating performance.
Speaker 3: The company achieved record revenue of $215 million. Net income and total revenue increased 70% and 46% respectively from the same quarter last year with both increasing slightly.
Speaker 3: compared to the linked order.
Speaker 3: Our quarterly results were driven by strong,VO
Speaker 3: moderate long growth, and 8 basis point increase in our net interest margin.
Speaker 3: record leasing business income, and another great quarter from Bannock Burn, and strong performance for our Yellow Cardinal wealth division.
Speaker 3: We continue to effectively manage the significant increase in short-term rates.
Speaker 3: And during the first quarter, the increase in our asset yields exceeded the increase in total funding costs.
Speaker 3: by four basis points.
Speaker 3: Average deposit balances increased slightly from the linked quarter as an increase in retail and brokerage CDs, offset outflows in public funds, and business deposits, which were primarily seasonal. The majority of these outflows occurred in the first two months of the quarter.
Speaker 3: The deposit beta from the first quarter of 2022.
Speaker 3: through the first quarter of 2023 was 21%.
Speaker 3: From a liquidity standpoint, our loan to deposit ratio was 82 percent, and we also maintained flexibility through our investment portfolio, which was classified as 98 percent available for sale as of March 31st.
Speaker 3: Credit quality remained stable in the first quarter. Net charge-offs were minimal and non-performing assets declined slightly as a percent of total assets from the linked quarter.
Speaker 3: Additionally, the ACL increased $8.6 million during the quarter driven by loan growth, slower prepayments, and changes in economic forecasts.
Speaker 3: As a result, the ACL was 1.36% as a percentage of total loan balances.
Speaker 3: which was a seven basis point increase from the covered ratio at year end.
Speaker 3: We're very pleased with the strengthening of our capital ratios this quarter, our strong profitability and the recent decline in market rates led to a 52 basis point increase in our tangible common equity ratio. In addition, tangible book value per share increased 8% to $10.76.
Speaker 3: With that, I'll now turn the call over to Jamie to discuss these results in more detail. After Jamie's discussion, I'll wrap up with some additional forward-looking commentary. Jamie.ran
Speaker 3: Thank you, Archie. Good morning, everyone.
Speaker 3: Slides four, five, and six provide a summary of our financial results. As Archie stated, first quarter performance was excellent.
Speaker 3: driven by an expanding net interest margin, solid loan growth, elevated fee income, and stable asset quality.
Speaker 3: Our balance sheet continues to react positively to the current interest rate environment, with our net interest margin increasing 8 basis points during the period.
Speaker 3: We anticipate modest margin contractions in the near term due to fewer rate hikes and expected deposit pricing pressures.
Speaker 3: We were once again pleased with loan growth during the quarter.
Speaker 3: Total loans grew 5% on an annualized basis with the growth in the C&I, leasing, and residential mortgage books, and stable balances in the other portfolios.
Speaker 3: Fee income remains strong in the first quarter, with record results on an adjusted basis.
Speaker 3: Wealth Management and Summit both posted record quarters and Vanticbir had another strong quarter.
Speaker 3: Higher rates have resulted in sustained headwinds for mortgage banking.
Speaker 3: with first quarter income relatively flat compared to the fourth quarter.
Speaker 3: Non-interest expenses declined from the linked quarter due to lower professional fees.
Speaker 3: tax credit investment write downs, charitable contributions, and incentive costs.
Speaker 3: While expenses were slightly higher than we anticipated at year end, this was due to elevated incentive compensation related to fee income.
Speaker 3: Asset quality was stable during the quarter with de minimis net charge-offs during the period.
Speaker 3: Classified assets increased during the quarter, primarily due to the downgrades of three relationships.
Speaker 3: Additionally, we recorded $10.5 million of provision expense during the period.
Speaker 3: which was driven by loan growth, slower prepayment speeds, and economic forecasts in the model.
Speaker 3: As a result, our ACL coverage ratio increased.
Speaker 3: coverage ratio increased by seven basis points.
Speaker 3: From a capital standpoint, our regulatory ratios remain in excess of both internal and regulatory targets.
Speaker 3: Accumulated other comprehensive income improved during the period. As a result, tangible book value increased 79 cents, or 8%, and our tangible common equity ratio improved by 52 basis points.
Speaker 4: Slide 7 reconciles our GAAP earnings to adjusted earnings.
Speaker 4: highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $71.9 million dollars or 76 cents per share for the quarter.
Speaker 4: Adjusted earnings exclude the impact of $500,000 of contract termination costs and $1.6 million of other costs not expected to recur. As depicted on slide 8, these adjusted earnings equate to a return on average assets of 1.72%.
Speaker 4: a return on tangible common equity of 30%, and an efficiency ratio of 53%.
Speaker 4: Turning to slides 9 and 10, net interest margin increased 8 basis points from the linked quarter to 4.55%.
Speaker 4: This increase was driven by an increase in asset yields due to elevated interest rates and a more profitable mix of earning asset balances during the period.
Speaker 4: The increase in asset yields was partially offset by higher funding costs.
Speaker 4: As a result of rising rates, asset yields surged during the period, with loan yields increasing 62 basis points.
Speaker 4: In addition, investment yields increased 26 basis points due to the repricing of floating rate securities. Trading of existing risk circles recent
Speaker 4: and slower prepayments on mortgage backed securities.
Speaker 4: Our cost of deposits increased 49 basis points compared to the fourth quarter, and we expect these costs to increase further in reaction to sustained competitive pressures in the coming quarters.
Speaker 4: Slide 11 details the asset sensitivity of our balance sheet.
Speaker 4: We believe we are well positioned in the near term as approximately two-thirds of our loan portfolio reprises fairly quickly.
Speaker 4: Slide 12 details the basis utilized in our net interest income modeling.
Speaker 4: Deposit costs increased with greater velocity in the first quarter, moving our current beta to 21 percent, with our through the cycle beta expected to be approximately 35 percent. Slide 13 outlines our various sources of liquidity and borrowing capacity.
Speaker 4: We continue to believe we have the flexibility required to manage the balance sheet through the expected economic environment.
Speaker 4: Slide 14 illustrates our current loan begs and balance changes compared to the length quarter.
Speaker 4: As I mentioned before, loan balances increase 5% on an annualized basis with growth driven by C&I, equipment leases, and other
Speaker 4: loan balances increase 5% on an annualized basis, with growth driven by C&I, equipment leases, and mortgage loans.
Speaker 4: The other loan portfolios are relatively flat when compared to period and bound.
Speaker 4: Slide 15 provides details on our loan concentration by industry.
Speaker 4: We believe our loan portfolio is sufficiently diversified to provide protection from deterioration in a particular industry.
Speaker 4: Flight 16 provides some details on our office space loans.
Speaker 4: As you can see, less than 5% of our total loan book is concentrated in office space.
Speaker 4: And the overall LTV in the portfolio is strong.
Speaker 4: We believe that lending to borrowers with Class A and Class B assets and primarily suburban markets within our footprint.
Speaker 4: mitigates our risk against the general stress expected across the broader industry sector.
Speaker 4: Slide 17 shows our deposit mix as well as the progression of average deposits from the late quarter.
Speaker 4: In total, average deposit balances increased $180 million during the quarter, driven primarily by a $662 million increase in brokered CD.
Speaker 4: This increase offset mostly seasonal declines in public funds and business deposits.
Speaker 4: Slide 18 depicts trends in our average personal, business, and public fund deposits as well as a comparison of our borrowing capacity to our uninsured deposits.
Speaker 4: While personal deposit balances were relatively stable in the first quarter, business deposits continued to decline.
Speaker 4: This decline is primarily related to a post-COVID decline from record high balances, as well as seasonal declines typically experienced in the first quarter.
Speaker 4: While we saw some runoff in reaction to the recent bank failures, this was not a major driver of the business deposit decline.
Speaker 4: Our decline in public fund balances has been driven by customers moving excess investable balances to funds managed by states in addition to some seasonal outflows.
Speaker 4: On the bottom right of the slide you can see our adjusted uninsured causes for $2.9 billion at March 31.
Speaker 4: This equates to 23 percent of our total deposits.
Speaker 4: We are comfortable with this concentration and believe our borrowing capacity provides sufficient flexibility to respond to any event that would stress our larger deposit balance.
Speaker 4: Slide 19 highlights our non-interest income for the quarter, which was another record quarter.
Speaker 4: Both Summit and Wealth Management had the best quarter in the history of those businesses, and Vannikburn posted another strong quarter.
Speaker 4: Consistent with the fourth quarter, mortgage demand remains soft due to higher rates.
Speaker 4: Non-interest expense for the quarter is outlined on slide 20. On an operating basis and excluding Summit, expenses declined $4.9 million compared to the linked quarter due primarily to lower professional fees.
Speaker 4: for the quarter is outlined on slide 20. On an operating basis and excluding summit, expenses decline $4.9 million compared to the linked quarter due primarily to lower professional fees, incentive compensation.
Speaker 4: charitable donations in the current period. Turning now to slide 21, our ACL model resulted in a total allowance which includes both funded and unfunded reserves of 162 million dollars and 10.5 million dollars in total provision expense during the period.
Speaker 4: This resulted in an ACL that was 1.36% of total load.
Speaker 4: which was a seven basis point increase from the fourth quarter.
Speaker 4: First quarter provision expense was driven by loan growth, economic forecasts, and slower prepayment speeds. Thanks for watching, see you next week.
Speaker 4: which increased the duration of the portfolio.
Speaker 3: Despite the increase in provision expense, credit quality remains stable.
Speaker 4: Net charge-offs were de minimis during the quarter, however, classified assets increased to $159 million due to the downgrade of three relationships.
Speaker 4: We continue to expect our ACL coverage to increase slightly in the coming periods as our model responds to changes in the macroeconomic environment.
Speaker 4: Finally, as shown on slides 23, 24, and 25, regulatory capital ratios remain in excess of regulatory minimums and internal targets.
During the first quarter, tangible book value increased 79 cents or 8 percent and the TCE ratio increased 52 basis points due to our strong earnings.
Accumulated other comprehensive income improved slightly compared to the linked quarter, but remains a drag on our capital ratios.
Absent the impact from AOCI, the TCE ratio would have been 8.54% on March 31, compared to 6.47% as reported.
We also included slide 24 this quarter to demonstrate that our capital ratios would remain in excess of regulatory targets.
including the unrealized losses in the securities program we have. Our total shareholder return remains robust.
with 31% of our earnings returned to our shareholders during the period through the common dividend.
We believe our dividend provides an attractive return to our shareholders and do not anticipate any near-term changes. We believe our dividend provides an attractive return to our shareholders and do not anticipate
However, we will continue to evaluate various capital actions as the year progresses. I'll now turn it back over to Archie for some comments on our outlook going forward. Archie. Thank you, Jamie.
Before we end our prepared remarks, I want to comment on our forward-looking guidance, which can be found on slide 26.
Low demand remains solid and we continue to expect Summit to be a significant contributor to long growth early this year. However, we're being more selective in certain segments and expect overall growth in the mid-single digits in the near term.
Regarding securities, we will continue to utilize the portfolio cash flows to support long growth.
We expect deposit balances to stabilize in the near term as seasonality subsides and our pricing strategies gain additional traction.
There's still uncertainty around said rate management, loan demand, and deposit pricing competition.
Our asset-sensitive balance sheet has driven substantial margin expansion thus far in the cycle.
We expect modest contraction moving forward with the second quarter in a range between 4.35 to 4.45% based on one additional anticipated interest rate increase.
Specific to credit, much uncertainty remains regarding inflation and the impact of higher rates to the economy and our customers.
Over the second quarter, we expect continued stability in our credit quality trends and ACO coverage to be slightly higher.
We expect the income to be between $57 and $59 million in the second quarter with growth in the leasing business being the primary driver.
specific to expenses expected between $118 and $120 million, which includes the depreciation expense from the leasing portfolio.
Excluding the leasing expense, we expect expenses to be slightly lower in the second quarter.
Lastly, our capital ratios remain strong and we expect to maintain our dividend at the current level.
The quarter's had its challenges for the industry and there's still near-term uncertainty regarding the economy.
We're extremely pleased with our results and how we have managed the challenges today. Overall, our first quarter performance was outstanding and record-breaking on many levels, and we believe we remain well positioned to manage future uncertainty due to our profitability, net interest margin, ample liquidity, and strong levels of capital.
We've made the strategic efforts to diversify our business lines in recent years, and we believe those efforts continue to position us to deliver industry-leading services to our clients and consistent, sustained, industry-leading returns to our shareholders.
We've made the strategic efforts to diversify our business lines in recent years and we believe those efforts continue to position us to deliver industry leading services to our clients and consistent sustained industry leading returns to our shareholders. We will now open up the call for questions.
Thank you.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question.
and please ensure that you have unmuted locally. Our first question today comes from the line of Daniel Tomayo from Raymond James. Daniel, please go ahead, your line is now open.
Thank you. Good morning everybody. Maybe we start.
Maybe we start first on just the NIINM expectation. Appreciate the near-term guidance, but just curious your thought on how you see that playing out in the back half of the year with...
You mentioned the 35% deposit data. Can you give us a little idea of how you're thinking that cadence plays out throughout the year?
Yeah, this is Jamie. So yeah, we gave the outlook kind of near term in the earnings deck on our margins.
This is Jamie. So yeah, we gave the outlook kind of near term in the earnings deck on our margins.
Yeah, I mean, we think our, our still are, we've moved up a little bit. I would say our overall. Outlook on the.
on the deposit data just from what's been going on here over the last 30, 45 days or so. Before that, we were saying we thought that the overall deposit data, and when we say deposit data, I just want to make sure for everybody, we're talking about our total deposit data.
deposit data, not just our interest-bearing deposit data. So our total deposit data, before 60 days ago, we were talking about a total deposit data somewhere in the low 30s.
So 30, 32%, you know, with everything going on in the last, you know, 30, 45 days.
We think that has moved up a little bit and in the mid 30s, so call it 35 to 37 percent range. And so I think we've moved up a little bit, but...
and
And our margin will obviously be impacted then. I think what it did is it accelerated some of that movement that we were expecting to see anyway from a deposit pricing standpoint. Just move some of that forward into the next couple of quarters.
So I think we get close to the same spot, maybe a little bit higher from a cost of deposits and total cost of funds standpoint. But I think we get close to the same spot.
But not significantly different. It just kind of moved everything forward.
Okay. And then on the deposit mix itself, you access the broker deposit market in the quarter. Loan deposit ratio is still relatively low, at least when you look at that compared to other banks in low 80s. You can see that the broker deposit is still relatively low, at least when you look at that compared to other banks in low 80s. And then on the deposit mix itself, you access the broker deposit market in the quarter.
Is that something that was?
something that was
kind of driven by what happened in March with the environment or do you expect to continue to access the brokerage market going forward? Just overall thoughts on how you think the deposit mix shakes out from a non-conspiring perspective and the rest of that portfolio. Thanks. Yeah, Dave, this is Archie. Maybe Jim and I will tag-team this a little bit, but I...
I think our view was, if you were to go back, we've been layering in some broker deposits for probably
a couple of quarters now and we just continued that in the fourth quarter and into the first quarter. And most of that that occurred in the first quarter occurred actually before March 1st. And it was primarily to support the loan demand that we were anticipating along with, we knew there were some seasonal outflows coming. We've left, if you could tell, we've left some of our other sources around some of my FHLB, we've left those.
Kind of flat this quarter, but we like that source of funding. We think it's part of our primary source, and we hold that for later when needed. I think low 80s is...
It's kind of just gradually moving up and as deposits stabilize with moderate long growth, it's going to continue to move some.
kind of just gradually moving up and as deposits stabilize with moderate long-growth it's going to continue to move some but I think
I guess in that order that's how we see the picture. And Danny, when we looked at the deposit flows during the quarter, about two-thirds of the – so we were expecting some seasonal drop in the deposit base coming into the first part of the year. We were expecting that anyway. So we still don't either.
side and the public fund side. And about, you know, if you look at our month-to-month deposit trends, about two-thirds of the drop in those, and really in those two categories, public funds and business side and on the NID side.
About two-thirds of that drop occurred in January and February . So, and the other third, obviously, then occurred in March. But a lot of it is really those.
those accounts. So we didn't lose accounts. It was just customers and public funds lopping off that top, you know, they call it the adjustable balance, not their operating balance.
and moving it out of the bank to potentially get some more yield.
diversifying and or we also saw some movement over into our wealth management side.
Slide 18 that Jamie covered, that was a good slide because it shows you, I think you recall in the...
In the last quarter we always have a seasonal uptick in public funds in the fourth quarter. So there was some of that in the balances that rolled off in the first quarter. And then we had a seasonal uptick in business deposits in the fourth quarter. And you can see that it looks like it's about 80, 90 million dollars in Q4 that rolled out. Along with just the general outflows.
you know, from what we call the COVID surge.
So again, these are things that we mostly anticipated. There was a little bit of certainly after the news on the two bank letters, there's a little bit of money that moved out of some of our deposits, and primarily into our yellow cardinal wealth unit, where they lattered in typically treasuries. So again, these are on the Gabriel games page, websites, expressed questioning posts. Here are some new progress an alliance planburyitans, you have to have your dash into their3 busses to get rains,
It was a little less than 1% of our overall deposit base. Thank you. The next question today comes from the line of Chris McGratty from KBW.
Chris, please go ahead, your line is now open. Oh, great. Good morning. Jamie or Archie, can you – a little bit of – hey, good morning. Can I get a little bit more color on the three credits you were talking about in your prepared remarks? Yes.
Jamie, or Archie, can you – a little bit of – hey, good morning. Can I get a little bit more color on the three credits you were talking about in your prepared remarks? Okay. This is going to be a busy corner, because Barry Tyler's Class of 2014.
Yeah Chris, I'll have Phil here at CD just for a couple of minutes.
Bill Herrick, did you just click that? Bill. Yeah.
When we take a look at what was downgraded to the quarter, what we're really seeing is some businesses that are really tied to some COVID hangover, mostly in the over inventory due to fear of missing out during supply chain issues.
as well as some hospitality assets that haven't rebounded as some of the other hotel properties.
And there was one small office in the three that really launched right in the midst of COVID that has struggled to lease up during this period.
But most of it is, like I said, very much tied to
the remnants of COVID.
In terms of you guys have been building the reserve, how much of this quarter, the last couple quarters have been specific to these three? How much I think about just the incremental.
In terms of you guys have been building the reserve, how much of this quarter, the last couple quarters have been specific to these three? How should I think about just the incremental potential loss in these credits?
I will cover the first part, Chris, in terms of the reserve. I would say the incremental amount due to the downgrade of these credits is relatively insignificant. There is a small piece of it as things get downgraded.
to substandard, but the more significant piece over the last, really over the last couple of quarters in terms of the reserve bill is due to really, I would say two factors. Just the overall macroeconomic environment and the forecast that are coming through.
which then, you know, under sea soil, when you're looking at the life of low, it obviously then spits out a higher required reserve. So those have really been the two bigger factors in terms of...
how the model is reacting to the environment and why that you're saying that.
you're seeing that reserve bill. So maybe Bill you can address any potential losses or whatever. Chris was asking about potential losses in those three credits at this point. Yeah, I mean at this point, you know, we have various treatment strategies on each of them. We don't anticipate any material charges at this point on the assets.
Yeah, we're still early to work out the process longer.
Yeah, we're still early to work out the process. Great. Thank you very much. Yep.
Thanks very much. Yep. Great, thanks.
Thank you. The next question today comes from the line of Scott Seifers from Piper Sandler. Please go ahead Scott, your line is now open.
Good morning, guys. Thank you. Tim, we wanted to… Go. …
I just wanted to revisit the deposit mix question again. So non-interest bearing levels have come down but are still around 30% of the total. I think it was like 25% prior to the pandemic. Do you see it – are we going to go back to that level or do we blow through it a little just sort of in this new regime for bank deposits? How do you think?
So, you know, you're going to see that shift over to, you know, a higher percentage of interest bearing, you know, maybe, you know, back to those levels and that 30, 31% starts to
It starts to migrate down, I mean, where it ends, you know, two or three years from now. I'm not 100% sure, but I think it does start to bleed down to those, you know, in those general levels. Okay, perfect. Thank you. Let's go to ROI and I see that we have roughly 500,000 people with us today.
I want to make sure I understood your response to a couple questions ago, just regarding where the margin ends up drifting. I think previously you had sort of suggested kind of a 410, 420 would be sort of a good floor for the margin eventually.
Did we just, are we going to maybe get back down there a little faster or just given the higher betas, is that we maybe lower the floor a bit of where the margin could go?
Yeah, I think the floor comes down into the high three. So the $410 to $420 was really where the margin, when we were talking about that set, where it's kind of migrated to before, that would have been maybe in the fourth quarter of this year.
And so I think just given the higher data that we're going to see, that floor comes down a little bit more into that. It eventually settles. And this could be even out into the first quarter of 24 and maybe the second quarter of 24.
migrates down into that 390 to 4 range.
All right, wonderful. That's good color. And if I could sneak a final one in, Archie, so you guys will sort of fall outside the purview of sort of the side banks that regulators might target for explicitly tighter regulation. And then, you know, I guess aside from what's going on with rate expectations and industry deposit mix issues, you guys haven't really been asked about long finger scheme rules or
impacted by last month's events. Even so, do you feel that there are changes that you or more broadly other banks your size might make to become just sort of more conservative or bulletproof, just generally speaking, going forward, even if you're not required to? Oh, Scott.
I would tell you even before what happened in
mid-March we were already I think just taking a more conservative view of where the economy was going and how we thought about credit. I think we alluded to there are probably some segments in particular in our commercial real estate book that we've...
even during COVID and before COVID we were slowing. So there's probably more conservatism there.
I don't know that it changes really our view of how we manage liquidity specifically. We'll see how this unfolds for the industry, but we'll continue to take a measured kind of –
I think conservative approach to how we manage the balance sheet in general.
Okay. All right. Perfect. Thank you very much.
Okay, perfect. Thank you very much. Yep. Thank you.
The next question today comes from the line of Terry McAvoy from Stevens. Please go ahead Terry your line is now open.
Everyone, maybe a first call, maybe provide a refresher on the lease business revenue accounting, as it'll kind of be the growth of fee income and also drive some expenses. I had it from when you made the acquisition about a third of the yield went through the residual real estate.
It's Jamie. So… So…
They are obviously generating both finance leases and operating leases. Currently, they are doing roughly 75% or so finance leases and then the rest operating leases. So the operating leases, you know, you have you.
We put that in, that runs through other assets.
They typically have about a four-year life. Those get depreciated and then we run the rental income through fee income. And then I guess overall to answer your question about yield, when we look at the yield, the actual gross loss from a terrible shorts and I just
kind of all in, well I guess maybe in two parts. When we look at kind of the quote coupon yield of our leasing business right now, it's somewhere in the sevens.
So, depending on the month, but in that 7 to 7.5 range, and then on the backside, they will get residual income that will bump that yield up, call it around, maybe around 9.
And then that residual income obviously then also runs through
the fee income section. When I look at that kind of the relative ratio in the fee income and the expense side, I mean you kind of look at generally a kind of a one and a half to one ratio of
of fee income to expenses down there. Great. That's helpful. Thank you. Terry, on efficiency, I don't know that we're there yet to probably give you the right with what that looks like. If they're still building. We went from...
a company that when we bought it was primarily originating and selling to building the balance sheet. So it's going to be a couple more years.
to get that balance sheet built to get to kind of a more stabilized look at what the efficiency ratio will be. It's going to be a lot more efficient than what you're seeing today, though, as that balance sheet builds.
Thanks for that. Very helpful. And maybe just as a quick follow-up, I appreciate the details on the office portfolio. That office – I'm sorry, average LTV of 64 percent, was that at origination or has that been updated or refreshed since then?
Yeah, that's been updated as loans mature. We're pretty early in that process. Over the next several months, we have very few maturing, but they get updated as they go. So it's probably weighted more towards origination.
point. That's great. Thank you very much.
That's great. Thank you very much. Thanks, Jerry.
Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad.
The next question today comes from the line of John Arthstrom from RBC Capital Markets. Please go ahead John , your line is now open. Thanks, good morning guys.
question today comes from the line of John Arstrom from RBC Capital Markets. Please go ahead John your line is now open. Thanks good morning guys.
Okay, just want to say this is a good quarter. We've struggled through a lot of releases and yours looks good.
I want to go back to the margin.
monster increases in the margin sequentially.
And then you've got a in slide 11 you've got the rate cut margin impact of down 100 and 6.3 percent Guys do anything to protect the downside if the Fed starts to cut rates later You know, or do you just is it just let it ride or how do you think about that Jamie?
Well, yes, so I really, I would say two things. I mean, there's a little bit of, you know, call it the let it ride philosophy there. I mean, there's also some work that we are doing in terms of providing.
what I would call significant down rate protection. So to buy protection for down 100 just doesn't.
isn't really feasible, but for what I would call severe downrate protection and putting in some floors.
you know, we can do that. You know, if you look back to where our margin really got, you know, really had some significant pressure back in, you know, the beginning of COVID when rates plummeted, you know, we're trying to protect against that and putting in some...
floors where our margin went down to in that 315 range during that period of low rates.
We're looking at providing some protection for the extreme rate cuts, not buying protection for marginal Fed movements.
Okay, good. And then just to clarify this, it's probably annoying to get asked this every quarter, but that's 435 to 445.
margin range you're talking about. That's Q2 and that compares to the 439 core that you did last quarter, is that right?
Well, that would be $455 all in margin compared to the range that we gave in the outlook.
Okay, so that guidance is fully loaded, the 435 to 445? All in, yes. Yes, all in. Okay, good. Yeah, good. Yeah, because at this point now, I mean, John , the variability of the other things are, you know, we don't have a ton of accretion income anymore.
Yeah, 15 basically. The variation we have is really in loan fees, which are fairly steady at this point. Okay. Archie, any changes in corporate behavior and kind of the mood?
of the borrowers over the last, you know, you could say six weeks, but over the last couple of months.
John , I think you mean in terms of just their outlook and how they're doing? Yep. Yeah, and I'm thinking more about like that kind of 40% of the book that's like commercial, small business, franchise, that kind of stuff. Yeah. I can tell you we're showing kind of moderate long growth expectations in the near term and
talk with them is a little more negative.
the further you go out. But when you look at where they are over the next few months, there's still some really nice...
We think some decent low demand coming from those types of companies in the next few months. Okay, good. They're probably like us waiting for the big one. And don't know when it's going to hit us, but yeah. Yeah. Okay, okay, and then just just kind of following up on Terry's question on
take out leasing on non interest income. You guys have a lot of records and I think Bannock Burn was a record last year as well. If you take out leasing what what do you expect from some of the bigger line items in non interest income maybe kind of near to medium term. Thanks.
Sure, well start with Bannockburn then and you know I think we're probably in that 14 to 16 million dollar range a quarter kind of just generally as you go out I think you know we're probably thinking 14 15 million coming up.
the near term but they're hitting they're hitting a level that's a little seems a little more sustainable at this high level added a couple more sales people here but one recently another one coming on so you know we think we think that they can kind of run at that level more consistently
You know, wealth is doing well. It's not as large of a line for us doing well, and we'll continue to do, I think, do well as long as the market is holding up. Service charge income is, I think, fairly stable for us. It may have some slight movement up. It's not going to be a big grower, but it seems pretty stable as well.
Mortgages, you know, has been soft. We do expect to see some seasonal improvement in mortgages as we get into the middle part of the year, but there's a lot of uncertainty about where that's going to go. Some of that's...
you know, has been soft. We do expect to see some seasonal improvement in mortgage as we get into the middle part of the year, but there's a lot of uncertainty about where that's going to go. You know, some of that's availability of inventory, some of that's interest rates.
But I do think we'll see a little bit better mortgage performance than we've seen in the last couple quarters.
I think those are probably the bigger line items.
those are probably the bigger line items. Okay, all right, that helps. I appreciate it guys.
bigger line items. Okay, all right, that helps. I appreciate it guys.
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So we'd like to pass the call back over to Archer Brown for any closing remarks. Please go ahead. Thank you, Bailey. Thank you, Bailey. I want to thank everybody for joining the call today and hearing more about our quarter. We're really pleased with the quarter overall and look forward to reporting to you again next quarter. Have a great day. Bye now.
This concludes today's conference call. Thank you all for your participation. You may now disconnect your line.