Keene Turner: Yes. We — when — there was no loan growth during the pandemic and PPP, obviously, a lot of banks were issuing sub debt. We participated to a modest degree in both the investment loan portfolio. Signature was one of very few $5 million positions, most were $1 million to $3 million positions and Signature at the time had a better credit rating than we did and was issuing at a nice coupon. And so, we bought a small piece of that. So again, not ideal, but we did like we do with everything, we deploy cautiously and we try not to get drunk on anything. And so, we’re happy we kept that parameter to $5 million.
Damon DelMonte: Okay. So, if you back out that $5 million from the loan loss provision this quarter, it kind of leaves you with not much of a provision for this quarter. So, how do we kind of think about the provision in the coming quarters?
Keene Turner: Yes. So what’s interesting is that the underlying economic data, unemployment and GDP in our model actually improved from the fourth quarter. And I think if you roll back the calendar for the prior six or eight quarters, I mean, we tried to be conservative because we kept feeling like the economy was going to have a more negative sentiment, and we built a lot of those things into our qualitative factors. And the good news is that credit quality and asset quality continue to be stellar. And with the passage of time, what happens is that the key factors that we have get more and more baked into the forecast. And so, we have to be mindful of that and rotate out of that and be intellectually honest with what’s going on.
So that’s really what’s driving that overall composition. And then, obviously, also it’s just both certain places where the growth — how the growth formulates in the quarter and where we get the origination activity. So, it’s really a combination of those three factors in addition to a sequential reduction in the level and the reserve for unfunded commitments from 4Q to 1Q that really drove that. So, I think you’ve got a modest provision for new loan growth, but then underlying that, there’s some favorable remixing as well as composition between allowance for loan losses and unfunded commitments that’s kind of baked net into that provision number.
Damon DelMonte: Got it. Okay. That’s all I had for now. Thank you.
Keene Turner: You’re welcome. Thanks, Damon.
Operator: Okay. Next, we’ll go to Brian Martin with Janney. Your line is open.
Brian Martin: Hey, good morning, guys.
Jim Lally: Hey, Brian.
Brian Martin: Hey, Keene, just going back, maybe I missed it as I joined us late a little bit as well. Just on your kind of your margin commentary. Just can you talk about just where the March margin was? I think you gave the spot rate for the funding, but just where the March margin was? And just kind of how you’re thinking about NII or margin perspective? And I apologize if you already covered that.
Keene Turner: No, I didn’t give an actual number. So, obviously, first quarter margin was 4.71%, March was 4.64%, and then our spot margin right now is just under 4.6%. Loan yield is roughly 6.4%. And then, as I indicated, we’ve got about 1.25% rate that we’re assuming on deposits, and we triple check that this morning through the first 24 days of March, and that data is still holding up. So, all else equal, as long as that, we’ve got some level of degradation of funding costs in there for the remainder of April and then May and June. But when we look at that, combined with the growth that Scott and Jim talked about, that’s what gets us to the second quarter net interest income dollars potentially being level here to the first quarter.
Brian Martin: Okay. And then, as far as kind of the balance of the year, it sounded like — I thought your comment was your hope was to see the dollars of NII sequentially going up in the back half of the year? Is that…
Keene Turner: Yes. I mean — I think, Brian, the way we’re thinking about this is the level of competition intensity and remixing is still there, but it’s lessening. And I think all of the big major moves and all the massive shifts out of DDA into CDARS or a CD are just playing out of the bank and having to replace those with incremental funding. I think our sense is that the chunkiness of that is slowing and we’ll continue to experience some of that in the second quarter, but that if we can really get much of that remixing behind us, we have the benefit of day count moving forward. And our asset origination is — we’re being as thoughtful as we can about where to allocate that and as disciplined as we can, especially with Scott’s comments about others potentially pulling back.
So, there is a path to that. Now that’s really dependent on the second quarter kind of being the final remixing quarter, so to speak, and being able to get back to some with the business, albeit with higher deposit costs across the industry and for ourselves. So, I mean I think there’s a path. I think for me to say that I can really predict two quarters out from here is extremely challenging. We don’t control the environment. But I mean, I think that’s how we’re thinking about the rest of the year. But even if it’s worse than we anticipated and we generally defend the net interest income dollars that we have, I think that still potentially shapes up to be pretty good and pretty strong for us to build on for the upcoming years.
Brian Martin: Got you. Perfect. And I think you talked about also lessening some of the asset sensitivity. I guess, is that — I guess, how are you thinking about potential rate cuts and just kind of managing the balance sheet there if you do see that?
Keene Turner: Yes. So, we have done some swaps, so some swaps principally on variable rate loans. We had set out to do a decent portion of that. We’ve only executed a modest percentage at this point. So, if we’re going to try to do $500 million to $1 billion, we’re at half to 25% of that level. So, we’re doing something. We’ll continue to play that out as the interest rate environment shapes up. We certainly want to do, I think, a little bit more of that to protect the downside. And that is — we did see that eat 1 basis point here and some margin in the quarter. So, it is having some effect. But really, the investment portfolio too also helps that. And we’re just trying to sit tight and see what happens in terms of pressures to accumulate cash and shrink funding, which creates additional asset sensitivity and then going and putting on a swap.
So, I think what we’re trying to do is resume business as usual and then use the swaps opportunistically to maybe change the downside, minus 100, minus 200, a couple of basis points here and there if there’s an opportunity. So that’s how we’re thinking about it.
Brian Martin: Got you. Cool. Thank you. And then it sounded like, Jim, I know you said that maybe kind of the same stance as last quarter on the buyback. I mean, I guess, just wondering what’s kind of — what is the point where maybe if you’re building capital and business kind of goes back to usual, do you get back to looking at the buyback? Or is that something that just you think for the remainder of the year, much of it is probably just off the table just until some of the dust settles here?
Jim Lally: I think that what you said is correct, Brian. Your lips to God’s ears is about getting back to normal, and when it does, we’ll certainly reassess that.
Brian Martin: Okay. And maybe just one for Scott. I guess, on the — just on the trends, I mean, credit quality is just very, very strong. Just on the trends in criticized this quarter, was there anything positive or negative on the criticized front that trend-wise that you’re seeing, that you’re watching?
Scott Goodman: No major trends. It’s pretty flat, Brian. As I said, we’re looking hard. So, we feel really good about the quality of the portfolio right now.
Brian Martin: Okay. Perfect. And just maybe the last one for me, just, Keene, on with some of the lumpiness within fee income. Just any thoughts on — I mean, the tax business kind of back this quarter from what we saw last quarter. Just how should we think about that? Or just kind of the bigger picture on fee income outside of kind of the lumpiness of the private equity and the CDE?
Keene Turner: Yes, I would say there’s really no revelations on the change in the pause around fee income. I think as the environment pressures margin, I think that the tax credit business from a fair value perspective does hedge that slightly, and we saw that last year with some of the negatives last year with margins rapidly expanding. So, this quarter was really a reflection of just a modest fair value change. And just even every quarter, even if rates don’t change as we move forward, just present value of cash flows. You pick up a couple of hundred thousand dollars, just a fair value. And the longer term, 10-year SOFR rate moves down slightly obviously, your discount rate declines and then you’re going to pick some of that back up.
So, it’s a little bit challenging to predict. The sensitivity hasn’t changed about $800,000 for 10 basis points. And I think our expectation moving forward is that second and third quarter will be fairly light on the nonrecurring items, and then we’ll have a seasonally strong fourth quarter on tax credit and maybe we’ll have some private equity or CDE hit along the way. But generally, our expectation is there are a couple of million dollars for each in total.
