So we think we’re a better, stronger industry and bank with rate cuts. But on the margin specifically, I don’t think it changes our margin a lot. And Rich may want to add.
Rich Bradshaw: Yes, I was trying to think the best way to illustrate that. Currently our underwriting interest rate is 8.5%. So that makes it difficult for some of these deals and projects to pencil out where if rates go down, then all of a sudden you’re talking this makes a lot more sense. So that’s why we’re very optimistic if we see some rate decreases.
Russell Gunther: That’s really helpful color, guys. I appreciate it. And then last one for me would just be on expenses. So you gave some good direction in terms of the dynamics this quarter. Just how do you see that playing out for the remainder of ’24 on the non-interest side? Thank you.
Jefferson Harralson: Yes. Thank you. Good question. And so, to lay out the expense, what it looks like this year, number one, we had some eliminations at the end of the year that we started getting benefit from probably in February. We have four branch closures that should be kind of late April, early May. So we have many projects across the bank with targeted outcomes either via new technology, making us more efficient or just trying to be more efficient with people or processes. So that is kind of the bigger picture and the more direct picture is in the second quarter, we have about a $2 million increase due to merit. We have a little bit of offset of that from seasonal FICA expenses declining. Then I would expect kind of that normal kind of low single digit growth rate kind of besides that. So you have a little bit of a bump in Q2 and then flattens out for the rest of the year.
Russell Gunther: That’s great, guys. Thanks very much.
Operator: The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Gary Tenner: Thanks. Good morning. I had a little bit of a follow up to the NIM question. As we’re looking at it from the loan yield side, 9 basis points expansion this quarter, a little bit less than you had in the fourth quarter, barring any changes to the rate environment, do you suspect we’d have a similar amount of yield pickup 2Q, 3Q or is the kind of lower loan growth outlook maybe an impediment to that level of expansion?
Jefferson Harralson: Yes. So I think in Q2 that 9 basis point range is a good target. I can see it waning off a little bit in third and fourth quarter if the growth doesn’t pick up a little bit, because that replacement with the new 8.5% loans coming on, slowing down, I can see that slowing it down a little bit, but I like the plus 9 for Q2 and then maybe slowing down a little bit from there.
Gary Tenner: Thanks, Jefferson. And then as it relates to your guide then, that 5 basis point plus or minus 2 basis points is, would you say that deposit pricing or loan growth, which one of those is a bigger lever right now for you?
Jefferson Harralson: That’s a good question. I would say it’s more on the deposit side as our bigger lever. We have a little more control over that. And it seemed and it has more, I guess — well, yes, I would say deposit pricing on that, but they both affect it, of course.
Gary Tenner: All right. Thanks for the questions.
Operator: The next question comes from Christopher Marinac with Janney Montgomery Scott LLC. Please go ahead.
Christopher Marinac: Thanks. Good morning. Wanted to ask either Rob or Rich just about the inflows and outflows on sort of criticized assets this quarter whether you look at it from the special mention or the classified side. Just wanted to get more detail on the puts and takes of what’s coming and going on and off.
Rob Edwards: Hi, Chris, it’s Rob. So on the classified side, basically we upgraded one very large substandard credit, C&I credit. And so that played a role there. In terms of other items, we do go through a process, and we just finished one in Q1 where we look at maturing loans in the next 12 months and re-amortize them, look at the impact of interest rate on payments and trying to identify upcoming problems and address the risk rate at that time. So we did have a senior care project that got downgraded and we had a large C&I credit that got upgraded. So just some movement in those types of spaces.
Christopher Marinac: And, Rob, I presume that some of that also is just debt service coverage and normal things, but they’re still performing as agreed.
Jefferson Harralson: That’s correct. Yes. That’s right.
Christopher Marinac: Okay. And then my follow-up question just has to do with kind of risk adjusted returns. I mean, it kind of lends itself to the slide on the Navitas every quarter. But it’s also part of a broader question. Are you comfortable with what you’re getting across the various business lines? Do you think those may even expand as rates stay high for longer?
Rich Bradshaw: That’s a great question. I’ll start with that. So I would say, on Navitas, where it’s a very profitable company, but we’re used to it being a lot more profitable than it is today. So we are really looking forward to those losses normalizing between now and Q4 to get that back up to the profitability that we like.
Jefferson Harralson: If you look at our marginal deposit yield or cost and our marginal loan yield that maybe speak to that because it’s really a matter of we’ve got to burn off some of these old fixed rate loans.
Lynn Harton: That’s right.
Jefferson Harralson: Yes. So along those lines, if you think about our new loan yield, our new loans coming on at 8.5 and our new deposits coming on in the low 4s, that’s a really wide, nice incremental margin. Now you’re seeing pricing pressures on both sides of the balance sheet. It’s not an easy environment, but it’s optimism as we go into the back half as we go into ’25, because just like Lynn was saying, these older fixed rate loans that are hurting our profitability burnout over time. And so time is our friend to increase these ROAs and ROEs that you’re seeing. We don’t like having an ROA below 1%. Our budget and our forecast have us moving over that over time. We expect to be there over time. And so we feel good about our individual businesses and their improvements over time as well.
And we can talk about any specific business. I don’t want to — if you’re talking about more specific businesses, we can talk about that too. But we are targeting to be in a more profitable bank and having our ROAs and ROEs increase over time.
Rich Bradshaw: Jefferson, I would add, we’ve probably been about two months ago now, but we spent a lot of time on pricing strategy and a new pricing model, and that’s been in place, and we’re going to see those benefits now and a little more emphasis on C&I versus CREE. And that’s been a big part of all this. We’re measuring that on a monthly basis by geography and how — what the results are.
Christopher Marinac: Great. That’s super helpful. Thank you all for the — for your contributions there. I mean, it’s an interesting illustration that the new borrower paying 8.50 certainly comes on as a strong credit, strong coverage, so that their ability to repay is still very good.
Jefferson Harralson: Yes.
Operator: The next question comes from David Bishop with Hovde Group. Please go ahead.
David Bishop: Yes. Good morning. Jefferson, a follow-up question on the balance sheet. How should we think about the securities cash flows per quarter and assume some of that’s going to flow into funding loan growth this year? Just curious how those balance sheet dynamics should work.
Jefferson Harralson: That’s right. So if we are getting a couple $100 million a quarter, let’s call it, $150 million or $200 million a quarter of cash flow coming from the securities portfolio, our loan growth has been wider than that. So you’ve seen a lot of more reinvestment to the securities portfolio, and that is a reason that you’re seeing, and we’re expecting to see that securities yield to grow throughout the year because we are investing into new securities. So a lot of that question, the answer we’ll see comes from our expected deposit growth. If the deposit growth with our strategies that we’ve been talking about can stay flat, then you’re going to see a lot more reinvestment in the securities portfolio, and that can fund the loan growth as well.
So my base plan is for relatively flat deposits. Take the cash flow from the securities, see how much of that is funds and loans, and maybe it funds all the loans, we don’t know. But I think maybe the bigger question that you’re asking is, I think you will see balance sheet be relatively flat this year, but grow a little bit, all depending upon where — what deposits do.
David Bishop: Great. Appreciate that guide. Then one final question. You’d mentioned the hope or desire potentially to start dialing back rates there. Are you seeing any of your competitors tap down rates yet on money market or CD specials or how they stabilize your market and allowing you to move down? Just curious what you’re seeing from a competitive backdrop. Thanks.
Jefferson Harralson: Maybe I’ll start real quick and pass to Rich. I would say very limited and scattered, but we’re a little bit. Would you…
Rich Bradshaw: I would agree. And there’s still every once in a while an irrational one, but it’s calmed down a lot. Certainly has calmed down a lot.
David Bishop: Great. Thank you.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Lynn Harton for any closing remarks.
Lynn Harton: Great. Well, thank you all for joining the call. We look forward to additional questions. If you have them, please reach out directly. And we look forward to talking soon. Thanks so much.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
