Hello and welcome to today's UMB Financial First Quarter 2022 financial results conference call. My name is Elliot, and I'll be coordinating your calls today. If you would like to register a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I would now like to hand over to Kay Gregory, investor relations. Please go ahead when you're ready.
Good morning, and welcome to our first quarter call. Mariner Kemper, President and CEO, and Ram Shankar, CFO, will share a few comments about our results. Jim Rine, CEO of UMB Bank, and Tom Terry, Chief Credit Officer, will also be available for the question- and- answer session. Before we begin, let me remind you that today's presentation contains forward-looking statements which are subject to assumptions, risks, and uncertainties. These risks are included in our SEC filings and are summarized on slide 43 of our presentation. Actual results may differ from those set forth in forward-looking statements which speak only as of today. We undertake no obligation to update them except to the extent required by securities laws. Our presentation materials and press release are available online at investorrelations.umb.com. Now, I'll turn the call over to Mariner Kemper.
Thank you, Kay, and thanks to everyone for joining us today. 2022 is off to a great start. Solid performance in the first quarter included 19.1% linked quarter annualized growth in average loans, and we posted a $6.5 million provision release reflecting the quality of our loan portfolio. Additionally, we had strong fee income combined with expense levels that moderated from the previous quarter. For the first quarter, net income was $106 million or $2.17 per share. Pre-tax, pre-provision income on an FTE basis was $125.7 million or $2.57 per share. First quarter net interest income was relatively flat on a linked quarter basis.
The positive impact from asset growth and balance sheet moves we made was offset by the sale of our factoring portfolio and the continued runoff of PPP balances, along with fewer days in the quarter. Non-interest income for the quarter totaled $123.7 million, an increase of 4.1% compared to the fourth quarter. Ram will share more detail on the various drivers, but we saw positives across many of our fee businesses highlighted in the line of business update in our presentation. In the current economic and regulatory environment, there are a few items that position us well from a fee income perspective. First, we don't rely on mortgage gain on sale income, which is likely to be a drag for some of our peers heading into a rising rate environment.
Second, NSF and OD fees are a very small portion of our deposit service charges and represent well less than 1% of total revenue. While early, we've begun to see a return of 12b-1 fees as interest rates rise. For the full year 2019, brokerage income, where those fees are booked, was $31.3 million. As rates fell in subsequent years, that total dropped to just $12.2 million in 2021. A normalization of that income stream is a tailwind for us. Total non-interest expense fell 3.5% on a linked quarter basis as some of the higher than typical expenses we discussed in the fourth quarter moderated.
Excluding contributions from PPP, we generated positive operating leverage in the first quarter of 2022 of 6.2% on a linked quarter basis and 7.8% versus first quarter of last year. Moving to the balance sheet, slide 24 is a snapshot of our loan portfolio showing the drivers behind loan growth I mentioned. Average loans for the first quarter, excluding PPP balances, increased 15.6% year-over-year and more than 19% on a linked quarter annualized basis. We saw phenomenal growth in C&I balances, with balances increasing 35% on a linked quarter annualized basis. Commercial real estate loan demand is strong, particularly in industrial projects, although developers are closely monitoring the cost of materials and labor. Most of our year-to-date activity in real estate has been in our Salt Lake City, Kansas City, Denver, and St.
Louis markets. Average residential mortgage balances grew 4.4% from the fourth quarter to just over $2 billion. As I mentioned, we don't rely heavily on mortgage gain on sale revenue. However, we continue to grow our own portfolio and recently implemented a new down payment assistance program. The program, launched in December of 2021, is geared towards underserved markets, and it had 47 new applicants just in the first quarter. Total top line loan production, as shown on slide 25, was again very strong, coming in at $1.1 billion for the quarter. Payoffs and pay downs were 5.1% of loans in line with recent quarters. While estimating payoffs can be unpredictable, we continue to see opportunities across all verticals in the second quarter.
Based on what we see now, gross loan production is likely to be stronger than the first quarter. Asset quality, as shown on slide 26 and 27, remains strong, with net charge-offs of 20 basis points for the first quarter, consistent with our outlook and our historical averages. We did see an increase in non-accruals from the fourth quarter levels, which is largely driven by one relationship. At this time, we feel like we're in a good position there and expect a favorable resolution in the coming weeks. As we head into this cycle, I've looked back on prior periods and how our credit metrics have performed. The real test of quality comes when conditions are negative. Back to the balance sheet. Strong deposit growth continued in the quarter, with average balances increasing nearly 12% on a linked quarter annualized basis.
Despite our strong loan growth. Our average loan to deposit ratio remains low at just 53% for the first quarter. This provides us with flexibility in a rising rate environment. We have plenty of opportunity to fund growth potential we see in our pipeline. Yesterday, our board approved the quarterly dividend of $0.37 per share and renewed the standard annual 2 million share repurchase authorization. These remain important in our toolkit for capital deployment in addition to opportunistic M&A. Finally, our latest corporate citizen report has just been published and is available on our website. It highlights our continued efforts and actions related to environmental, social, and corporate governance issues. Our strong first quarter results position us well for the rest of the year, and we are encouraged by the activity we've seen so far in the second quarter. Now, I'll turn it over to Ram. Ram?
Thank you, Mariner. Net interest income was relatively flat compared to the fourth quarter at $210.4 million. The impact of the $1.2 billion in average earning asset growth was offset by the $4 million reduction in PPP income and fewer days in the quarter. We amortized $1.7 million of PPP origination fees into income, and the overall PPP contribution to the first quarter net interest income was just under $2 million, compared to $6 million last quarter and $13.4 million in the first quarter of 2021. At quarter end, our PPP balances stood at $77.2 million, down from $136.5 million at December 31st. Approximately $2 million in unamortized fees remain.
Average earning asset yields decreased 2 basis points to 2.47%, with loan yields impacted by the sale of the factoring book and the $118 million decline in average PPP balances. As shown on slide 21, our Fed account reverse repo and cash balances moderated slightly and now comprise 18% of average earning assets with a blended yield of 30 basis points compared to 26 basis points in the fourth quarter. As this shows, liquidity balances still remain elevated from pre-pandemic levels. The 3% increase in average deposits from the fourth quarter was driven by growth in DDA balances, and the total cost of deposits, including free funds, remained at 8 basis points.
First quarter net interest margin fell 2 basis points from the fourth quarter to 2.35%, driven largely by changes in loan mix, offset by positive impacts from changes in the AFS book, the decline in liquidity levels, and number of days in the quarter. We've added slide 30 in our deck to show the estimated impact to net interest income in various rate scenarios. In a rate ramp scenario of +100 basis points on a static balance sheet, net interest income is predicted to rise 1.7% in year one and 7.5% in year two. On the asset side, 56% or about $9.7 billion of average loans are variable rate, and of those 63% reprice within 12 months. They are tied to short-term rates with just under 60% tied to LIBOR.
Additionally, the securities portfolio is expected to generate nearly $1 billion of cash flow in the next 12 months available to be reinvested at higher rates. Notwithstanding our strong loan growth, our securities portfolio has continued to grow. As we indicated in our press release, we transferred securities with a fair value of $2.9 billion from the AFS to HTM book in March to help manage tangible capital and reduce the impact of rising rates on our equity. At March 31st, 34% of our securities portfolio was classified as held to maturity. As expected, the rate environment drove changes in AOCI, which declined by $469 million from year-end. Although fluctuations in AOCI don't affect earnings, we're mindful of the impact on tangible book value and will continue to evaluate potential opportunities to mitigate that impact.
As you've heard us say before, we run our business by focusing on regulatory capital ratios, which remain strong, with total risk-based capital at 13.55%, CET1 at 11.81%, and leverage ratio at 7.53%. Back to the income statement. Non-interest income for the first quarter was $123.7 million, an increase of $4.9 million from the fourth quarter. Deposit service charges increased $3 million and included a $3.5 million increase in client transfer and conversion fees in our healthcare business. As Mariner mentioned, NSF & OD fees included in this line represent less than 1% of our total revenue and came in at just $1.4 million for the first quarter.
Derivative income increased $1.9 million from the prior quarter, and company-owned life insurance income increased $823 thousand on a linked-quarter basis. Both are included in the other income line, and the COLI income has a similar offset in deferred compensation expense. Other drivers to fee income, including the $2.4 million gain on the sale of our factoring business and reduced investment security gains, are shown on slide 22. Non-interest expense trends are shown on slide 23. The $7.7 million linked-quarter decrease was driven by reductions from the elevated fourth quarter levels in variable costs such as incentive compensation and lower legal, consulting, and marketing costs. These were partially offset by the typical seasonal reset of payroll taxes, the increased deferred compensation I mentioned, and higher bank card expense.
Our effective tax rate was 15.7% for the first quarter. For the full year 2022, we anticipate an approximate 17%-19%. That concludes our prepared remarks, and I'll now turn it back to the operator to begin the Q&A portion of the call.
Thank you. For our Q&A, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask a question, please ensure your phone is unmuted locally. Our first question today comes from Jared Shaw from Wells Fargo. Your line is open.
Hi, good morning. This is Timur Braziler filling in for Jared.
Hey, Timur.
Hey, guys. Maybe just starting on the funding outlook. Clearly, with a 53% loan to deposit ratio, you guys have options. I'm just wondering, you know, as you look at the loan pipeline and the optimism that remains there, how are you thinking about funding that growth in a rising rate environment? Are you going to primarily keep utilizing cash to help fund that growth? Going to utilize some of those securities cash flows? Or is the expectation that period end or end of period deposit balances ramp higher as the year goes on?
Yeah. Thanks for the question. I'd say we've got, obviously, with the loan to deposit ratio and the shortness of our investment book and what we keep at the window, we've got lots of flexibility to fund the growth, and we can kind of tap what we need to tap.
Okay. I guess as you think about, you know, the deposit book and rising rates and deposit betas, you know, is that going to be a driver of keeping betas lower for longer? How are you thinking about deposit betas in a rising rate environment?
Well, you know, Ram, you can take that. I mean, high level, we're, you know, we've shocked that. We've analyzed it seven ways to Sunday. At some level, we're just going to have to monitor it. A lot of what happens to deposit betas will have to do with what the three or four largest banks do with their deposit rates. We'll, you know, have to follow. We have some index funds. About 25% of them are hard indexed, you know, and that's going to do what it'll do. So deposit betas are something that we'll just be monitoring. You know, we have a history of being just around 50% on deposit betas, and we'll see where all that ends up.
Yeah. From a modeling perspective, Timur, we do assume, like, a similar deposit beta experience as last time. Certainly given the 53% loan to deposit ratio and the securities cash flow, there's a lot more flexibility on the SOFR-indexed and the non-indexed deposits for us to be a little bit more disciplined about it. Certainly that would be part of our thinking for 2022 and 2023.
Okay. Ram, I saw in the deck that the reinvestment yields in the first quarter were still kind of high at 1%. I'm just wondering, what are you seeing today for reinvestments out of the bond book?
Yeah. It's about 70 basis points higher than where the roll-offs are going to be. If you look at one of our slides, for the next 12 months, we expect roll-offs to be under 2%. Based on where the 2-year and the 5-year are today, our yields are closer to 265-270. There's a nice pickup, assuming this stays the way it is.
Okay. Just last for me, nice to see continued line usage ticking up in the commercial book. I'm just wondering, is there any particular industries that you're seeing, you know, incremental optimism or much of that line usage coming from? Are we pretty close to a level of stability there? Or is the expectation that line utilization continues to ramp higher through the year?
We've got Tom Terry with us. Let Tom take that.
Yeah, it's a good question. The utilization really has been across the board. Our C&I business has been very strong. There's not one particular industry to look at.
Okay, great. Thanks for the questions.
Thanks, Timur.
We now turn to Nathan Race from Piper Sandler. Your line is open.
Yep. Hi, guys. Good morning.
Morning, Nate.
Question just on the rate sensitivity. I appreciate the disclosures on slide 30. I think Mariner just mentioned that about 25% of the deposit base is hard or soft indexed. I believe, Ram, you threw out a number close to 30%, a quarter or two ago. I just want to confirm that and if, you know, the 100% beta on those deposits is contemplated in the interest rate sensitivity NII increase that you guys disclosed on slide 30.
Yeah. The hard index Mariner mentioned is about 28%. There's another 7% that's soft indexed. The hard indexed one is formulaic. It's not 100% beta. It doesn't mean that for every 25 basis points, the client gets 25%. It could be anywhere from, you know, 50%-80% of that. It's not always 100% beta. The 7%, the soft index, is where we have a lot of flexibility. We do it on a case-by-case basis as opposed to adjusting market rates. And that is contemplated in our projections on slide 30.
Okay, perfect. Just thinking about the securities portfolio balance on an absolute basis. You know, you had some growth in it this quarter. Just curious, you know, what the appetite is to continue to grow the securities book on an absolute dollar basis from here going forward versus maybe just allowing, you know, the cash that's on the balance sheet just to reprice higher as the Fed increases rates.
Yeah. We'll continue. Our whole strategy is to continue to increase the size of our securities book. What is understated in the period-end balances for investment securities, as I talked about in my prepared comments, is we had about $450 million of market value decline because of what happened with rates. Each month we talk about in our asset liability committee about reinvesting cash flows based on the current conditions and, you know, last few months, and we'll probably continue this. We'll also do some over buys with expected cash flows, either from deposit flows or just the cash on balance sheet.
We're keeping pretty short.
Okay.
That's the other part of that.
Yeah. If you look at our AFS portfolio, the duration swap-adjusted duration is 52 months. The nice thing in the last 90 days is the two-year part of the curve, you know, as you see, has increased about 150 basis points. We're keeping some of our cash flows, 40% of our cash flows invested on the two-year part of the curve, two- to three-year part of the curve. We're managing duration in the context of extension risk that's gonna happen to all of us given where rates are headed.
I did mention in my prepared remarks, also that second quarter loan growth. The pipeline looks even stronger than the first quarter, so you know, that'll sop up some of that, also.
Got it. Just maybe turning to fees. Just maybe first one clarifying question. The $3 million in healthcare solutions conversion costs, is that more kind of one time in nature, or is that more of a seasonal item that impacts one, two results each quarter?
Yeah. Nate, this is Jim Rine. That is a one-time event, and we don't anticipate that. That's happened this year and last year. We don't anticipate that happening again going forward in any material amount.
It's the tail end of a couple omnibus relationships that we've talked about in previous quarters. Moving off our companies that we partner with that are really decided to do the business for themselves. That has. It's the tail end of that behind us. The growth of the. You wanna talk about the growth?
Yeah. The growth on the book that was by design that those were going to go away. On the book that we have, the growth has been 12% year-over-year, and the card spend has been up 8% year-over-year as well without those relationships.
That's more the forward-looking trajectory of the business versus what was left from those two relationships.
Understood. Very helpful. Also on fees. You know, as we look out over the next few quarters, curious, you know, where you guys see a lot of the growth opportunities. You know, obviously, fund services and the corporate trust and institutional asset management, you know, remain bright spots across the various fee income lines. Just curious if you expect those two lines in particular to be kind of primary drivers for overall fee income growth going forward.
Yeah. Those are areas we are very excited about. The backdrop for continued expansion and growth continue to be great for both of those specific businesses you brought up, corporate trust and fund services. The comments that I've been making in the past would be similar to the ones I'm about to make, which is the backdrop for fund services in particular are two-fold. One, what's happened in the public markets has really driven a lot of success in the private markets. Our business is really heavily weighted towards being a fund services provider for the private equity, hedge fund, real estate, you know, markets, where there is enormous amount of strength from an investor community perspective. We're positioned very well in that space as one of the leaders.
The second piece is with the disruption. The activity from private equity firms in the space has created a lot of disruption in the sector, and that has created you know, an outsized opportunity for us within the space. That continues to be the case. We're very excited. You know, when you see the numbers. On a linked-quarter basis, the numbers are downsized. That's just market activity. Number of accounts is up. We continue to really you know, on a year-over-year basis, it's about a little over $100 billion in assets under administration. So the trends continue to be great there. Corporate trust is a fantastic story. A bit of a latent earnings story.
We continue to see the activity, but as we talked about 12b-1 fees and also, the eventual accelerated spending from state and federal government as we talk about, you know, building bridges, highways, sewer districts, et cetera, on a national basis. We stand poised to be the main player, certainly in our footprint and with our offices in New York and Dallas. We continue to pick up our share in the coastal markets where the dollar volumes are larger. So we played heavily for years as the number three player on a number of issues. But we're now number three on volume because we're playing in the coastal space where the deals are larger.
If you take a water district deal in, you know, Illinois or Iowa or something, that's gonna be $200 million. You do a water district deal in New York, and you're talking $ billions. That's the trend in that business along with our aviation business, which has been, you know, sliding sideways because of the pandemic, and we're starting to see that unleash as people are traveling again, and transactions are picking up again. We're super excited about what's going on in both of those businesses. I'd say all the institutional businesses have great profiles right now, across the board. You know. As Jim just mentioned, what the trends are now for our healthcare business, those are nice go-forward trends.
Investor solutions business is all of our clients grow their clients, we grow our business. What isn't institutional, which is our wealth business, we've seen really good trends for new business and wealth. We're pretty pumped about the trends for all of our fee businesses and excited about what lies ahead. I don't know if you want to add anything, Jim.
I would just add fund services. There is a crossover to the commercial division with the liquidity lines we provide for those funds. Commercial's been able to provide referrals over to fund services. Additionally, more traditional lines, integrated payables is really one of the best ways we can increase commercial fee income too. That has been a great product for us, producing seven-figure fees for first quarter as far as with a tail to them, and the backlog's very strong.
Coupled with commercial card.
Exactly.
Yeah.
With card spend, which is in your deck, which has been up as well.
That's great color. If I could just ask one more on investor solutions in particular. I noticed that you guys re-termed that in the deck as banking-as-a-service solution. I'm not sure if that implies kind of any shift in your strategy within that line or kind of how you guys are thinking about the opportunities. Obviously, it's a term we hear increasingly among banks these days that want to provide more deposits or more depository services and the like to a non-bank entity. I was just curious if there's kind of an update along those lines and kind of how you think about the opportunities going forward within that in particular.
Well, I'm not sure. Yeah, I'm not sure exactly. I mean, banking-as-a-service is what that business is. I mean, that's just what we've been doing. It's just providing. The historical part of that business has been wirehouses and brokerage firms, and that's the mature part of the business. We have seen a lot of growth, as you can see in our deck, with some of the fintechs that are wanting to provide banking services for their customers. We are a premier provider for them as well to white label our banking products to and through their customers as well. I don't know if that answered your question, but that is the business is white labeling our banking products for broker-dealers, wirehouses, and fintechs.
Right. No, I understand that. You know, the approach to that business isn't really changing, but I'm not sure if there's any kind of shift in strategy going forward in terms of maybe working with some other entities outside of the historical wirehouses and fintechs historically. I appreciate that color, Mariner.
Yeah, no, I think that's the path. I mean, the new path is the fintech. As they create new ideas and new companies come up through the pipeline, we would be ready as a kind of a premier provider in the space. We're a go-to player for folks with new ideas.
We've continued to build out APIs.
Okay, great.
Okay. No, we've continued to build out APIs to make it easier to access our systems. As far as the shift in strategy, we have not shifted that strategy.
Understood. Okay. Again, I appreciate all the color. Thanks, guys. I'll step back.
Thanks, Nate.
Our next question comes from Chris McGratty from KBW. Please go ahead.
Sure. Good morning.
Good morning, Chris.
Ram, I want to make sure I got the color on the 12b-1 fees. Could you just repeat? I think you said it was $12 million last year. Can you remind us what it was pre-cut? How we should be thinking about the correlation between revenues and rates. Thanks.
Yeah. In 2019, before the Fed cut rates by 150 points on the onset of COVID, our run rate for that line item was $31 million. 31 dropped to 12. The point that we also make is back in 2019, the $31 million was based on a book that was significantly smaller than what it is today. The potential for revenue with interest rates being hiked the way they are is pretty significant on that line item for us. We haven't given specifics about the beta on that. There's a lag usually typically between when the rate goes up and when we get to see the benefit of that.
It should be a nice tailwind for us to hit in 2023 and 2024 if the future rates are where gonna be.
Rates have been rising sooner than we anticipated, so that lag is shorter.
Sure.
You know, I would also just add, as Ram mentioned, related to the old book and the new book of business, one example, pretty decent-sized example, would be that back in 2019, our aviation trust business would have been very nascent. The business that is one particular example. You've got all the growth we've had in the aviation trust and will have in the aviation trust, corporate trust that will benefit from 12b-1 fees.
Would those revenues pick up this year if you believe the forward curve? Where exactly in the fee income line would that be?
Well, it'll be the brokerage and insurance line, and we expect to see some benefits starting the second quarter based on what transpired in March.
Okay, great. Thanks, Ram. The other question I had, it relates to the index deposits that you referenced, the 20 kind of hard index. Could you just remind us where those. Certainly you don't need the deposits from a liquidity perspective. Can you just remind us where the other benefits to having these deposits lie? Like, where else in the full relationship do you realize the benefit for these higher beta deposits?
Well, I mean, broadly speaking, obviously deposits are our raw material, and we're willing to take the pain and pressure for building our business for the long term. I think you're asking specifically about some of the hard indexed money and why we take it.
Yeah.
That would be like, for example, an example would be a government, a piece of government business that would come with Treasury, would come with lockbox, would come with bond issuance opportunities, et cetera. You can't look at it at our deposits in a, you know, a singular vertical. You got to look at the overall profitability. We do that, right? We will move off something if the overall profitability isn't good. We'll take on some indexed or higher beta deposits because of the overall relationship that comes with lending, treasury, bond issuance fees, et cetera.
Yep, that's what I was looking for.
Card.
Thanks, Kemper.
Yeah, card service income. You name it. Yeah.
Okay. I guess the final question I had would be, we've seen so much liquidity flow into the system and we're all, as analysts, trying to figure out what will stay and what will not. Are there any pockets of your deposit base that you're particularly worried about given the growth over the last 24 months?
Sorry, we have a little technical. Can you repeat that?
Yeah, no problem. I guess the risk of deposits, you know, parked money with the Fed unwinding the balance sheet. Your deposit growth's been great, as have a lot of banks. I'm just wondering if you've done any analysis to say, "Hey, is there any more chunky deposits that might be at risk of flight?
You know, I mean, if you look at the pre- and post-pandemic volumes, we're up about $4.5 billion.
Yep.
You know, we debate internally a lot, you know, how much of that $4.5 billion is excess and how much of that's based on new customer growth, customer success, et cetera. You know, just the growth of our business. We all have different answers to that internally, and I think what you're describing is really that dialogue the whole country's having about how much of this is excess liquidity. I'm not sure that we want to claim to be any experts on that. You know, we're watching it closely. I don't know, Ram, you want to add to that?
No, no, we do alternative scenarios on the interest rate modeling for precisely that surge deposits, right? If you just go back to history, during the last rate cycle, just before the Fed started cutting rates, our DDA balances were like close to 43% of our total deposits. What happened as the cycle transpired was it came down to 35, right? We are assuming some kind of disintermediation from DDAs to, you know, money market or other types of deposits. That's all built into our alternative scenario beta assumption. We do expect some of that to transpire where, you know, our DDAs are not going to be always at 45% because of the interest rate cycle.
Yeah. Where that lands-
Where that lands is anybody's guess and, you know, where the dart lies.
I mean, the good news for us is sitting at, you know, 50% loan to deposit ratio is whether $1 billion goes into other products or off balance sheet or $2 billion. You know, we still have an enormous amount of room to run up loan growth and feel very safe and sound about our liquidity and our loan to deposit ratio.
That's great. Thank you very much.
As a reminder to ask any further questions, please press star followed by one on your telephone keypad now. We now turn to David Long from Raymond James. Your line is open.
At a bottom rate.
Good morning, everyone.
Morning, David.
Morning.
Wanted to dig a little deeper into the drivers on your C&I growth, and your expectations and your pipeline there. Is it driven by the PPP relationships that you gain? Is it just traditional market share gains, obviously utilization? You know, have you been hiring veteran bankers within your footprint? Can you just talk about how some of those are impacting that growth and really the core drivers are?
Well, this is Jim Rine. It's really been the same story we've been telling the last several quarters, and it's been the market penetration. It's coming really from all regions and we're under-penetrated in every market except Kansas City. In markets, whether it be St. Louis, Dallas, Phoenix, Colorado, there hasn't been one particular industry. We're hiring the right talent. They're calling on the right types of companies. Said it before we have a compelling story. We are able to turn things around quickly. We are competitive on rates, et cetera, et cetera.
We target the right types of companies that we want to do business with, and then we're able to retain the top talent that we need in order to handle clients to grow the business. It's been our formula, and it's been really what's made us successful for many years.
You can't turn on C&I overnight. When your mortgage business dries up, and you want to turn on your C&I business, which some talk about, it doesn't happen overnight unless you're taking on stuff you shouldn't be taking on. This is a long calling cycle with people that have been around a long time. We've been building this business for 109 years, and the pipeline is built as such. It takes a lot of things to get to where we are.
We're not doing things we haven't done. We're doing more of what we do.
Yeah.
So.
A couple areas I think that are benefiting right now, you know, the energy sector is pretty strong, and so we've had some nice benefit in the energy sector. There's a nice rebound in agribusiness with commodity prices, and so we're seeing some nice activity there. You know, industrial on the CRE side continues to be very strong as companies build inventories on a national basis for same day, last mile distribution. You know, there's depending on the market, particularly in our marketplace, which is mountain Midwest, there's a shortage of housing. The multifamily continues to be strong. While Jim says it's across all areas, those are some areas that are outperforming and see some pretty strong directional trends.
Got it. No, that's appreciated. Good color. Then, on the competitive side, how is the competition impacting spreads in the commercial side of the business?
It's always robust. I mean, I don't know if there's anything else to say. It's always. You know, we go after the best business out there, and everybody wants the best business, and it's always competitive.
The pricing's always competitive in this rising rate environment. People are wanting to lock things in for longer periods of time. We're doing what we're comfortable with. When you see a 10-year, the request for the 10-year fixed rates, we would want to have those swapped versus fixing those on balance sheet. You see some people stretching right now, and we're not willing to do that. Outside of a few folks reaching, it's as competitive as it's ever been.
You might see some continued back-to-back swap income for us, you know, over the next handful of quarters grow because of what Jim just mentioned, which is as customers look to lock rates, we'll be increasing our swap fees.
Got it. Thanks, guys. Appreciate you taking my questions.
Thanks, Dave.
I might just add on slide 21, for those of you who are interested in this excess liquidity, and we talked about that, I think we have a slide in the bottom right quadrant of slide 21 in our deck. I'd point you there. It's a new little chart we put in place. It's very helpful, I think, to thinking about what's happened to excess liquidity and where you find it on our balance sheet and likely others' balance sheets. I'd point you there.
We have a follow-up question from Nathan Race from Piper Sandler. Please go ahead.
Yeah. Thanks for taking the follow-up. Just curious on, you know, how we should think about the trajectory of the reserve. It doesn't sound like, you know, charge-offs are likely to deviate from, you know, the historical ranges that you guys have talked about in the past. Just, you know, curious if we could kind of expect the reserve to kind of hold around 1% over the next few quarters, or do you guys expect it to build just given, you know, at least high single-digit% loan growth expectations going forward?
Thanks. That's a great question. It's another one of those sort of million-dollar questions right now, I think, as you think about all of us staring at this uncertain forward-looking environment, whether it's recessionary or not, or how deep the recession might be, et cetera. Yeah, this. I'll do a little bit of soapbox here for a guy who's been a CEO for 18 years and watched this happen a few times. It seems as though, you know, pre-CECL, we all as an industry seem to draw down our reserves towards the end of a cycle so that we had less reserves at the end of a cycle, which is always a big mistake and has been a historic repeated deal for our industry.
We have always, you know, pushed against that, and, you know, CECL has caused that to be a lot more of a algorithm, you know, a lot less optionality to how it works. We've got to be. It's very math driven based on, in our case, Moody's. What Moody's says is a big part of their forward-looking projections has a lot to do with how we have to set our reserves. I am kind of concerned at the industry level that, you know, you hear a lot of banks bragging about what their charge-off rates are, and I'm not sure it's much to brag about when everything's perfect, that your charge-off rates are perfect. It's really what matters about your charge-off rates is what they look like when times are tough, not when they're good.
I'm a little concerned at the industry level that we're seeing it again, you know, that we're drawing down our reserves. So that's a little bit of kind of philosophical statement I'd make. Just as it relates specifically to us, you know, I'm concerned about what late this year and next year looks like as it relates to the economy. I'm not worried about our charge-offs or our performance necessarily, but I think the desire would be to hold. You asked where they should be, and my desire would be that they should hold around where they are.
That's my hope that using CECL now that our friends at Moody's will also project that there's slightly higher unemployment and some weakened economic conditions that will allow us to hold our reserve around where it is. I don't know if that's helpful. We have a lot of bosses when it comes to what our reserves look like. My hope is that our friends at Moody's do the right thing and see the right things, and we can keep our reserves around where they are.
Yeah. Until that happens, Nate, as you know, a lot of our provision comes for loan growth. Obviously, a lot of organic loan growth, and that's what's driving our provision expense. But clearly with the Moody's variables economic forecast becoming more and more favorable each subsequent quarter, the pressure on allowance ratio to come down, it's there, right? If you look at what our day one CECL allowance was, it was 85 basis points. I echo what Mariner said, if we get back to 85 basis points, that this is not the right time to get there. But that said, the quantitative part of the model is what it is, right?
Yeah.
We use Moody's forecast, and we have to wait till Moody's changes their forecast in anticipation of any economic conditions. At this point, it's hard to say. That's the million-dollar question, really.
Yeah. The good news about us, though, is we have a very, very long track record of having industry-leading charge-offs, that being low charge-offs, right? We don't expect our performance to be any different than it's been the last 20 years, regardless of what the environment is.
Yeah. Got it. That's helpful, and I fully appreciate it's difficult to predict under a CECL framework, particularly with all the uncertainties that exist out there. Perhaps maybe just one last one on capital. You know, obviously, TCE came down with the AOCI swing this quarter. Just curious to get an update just in terms of the buyback appetite. You know, obviously, the stock's been under pressure over the last few months like a lot of your peers. Just curious, you know, how you guys are thinking about the appetite for buybacks over the near term, and then also just any update just in terms of what you're seeing from an acquisition opportunity perspective these days.
Yeah. You know, obviously, capital deployment as a broad statement, the first thing we want to do is invest in our business. Loan growth, hiring people, et cetera, that's where our money is going to go. You know, making sure our technology is fresh. Second to that, would be M&A type activity. And same comments we've always made is that we continue to look for companies that fit, you know, both culturally and then add value. You know, they're accretive and add value to what we're doing long term. Then lastly, we always want to perform well enough to be able to increase our dividend, you know, every year.
That is our goal to be able to have the performance to allow us to continue to be one of the highest performers in the country as it relates to a consistency of approach with our dividend. Lastly would be opportunistic buybacks, just keeping an eye on the market. It's the last on the list. We've demonstrated that we do it. We've done it in the past at the right time, and we'll continue to look at it and see if all of those other things are not available to us at the time in which we believe the price is right, we will be buyers.
Yeah. The only thing I'd add is if you look at the year-end share count, we did have 200,000 shares bought back early on in the first quarter. To Mariner's point, we will be opportunistic about buybacks. I'll just echo my comments from the script, which is, you know, even though TCE has gone down, it's what we focus on is more the risk-based regulatory capital ratios. That's what we base our capital decisions on. That's, you know, even though TCE temporarily might be impacted based on what's happening with interest rates, our focus for running the business is primarily the risk-based capital ratios.
Okay. Great. If I could just actually ask one more on just the expense outlook. It seems like the salary line was, you know, seasonally impacted by, you know, the payroll impacts and so forth in the first quarter. Just around maybe any thoughts on just directionally how expenses trend into the second quarter and just kind of overall expense growth expectations for 2022.
Yeah. Without giving specific guidance. A lot of puts and takes from where our first quarter levels are. Generally, the $214 million that you see is a good jump-off point. Obviously, you know, as you mentioned, there's a lot of, you know, FICA and payroll expenses that spiked in the first quarter, especially with our bonus payments, and so that should moderate a little bit. Then the first quarter also had two less days or one less day compared to the second quarter, so that should probably go the other way. Then in April, our normal merit cycle kicks into effect, so that'll have some wage inflation in that salary numbers. Generally speaking, I would say 214 is a good jump-off point for the remainder of this year.
Okay, perfect. I appreciate you guys taking the follow-ups. Thanks again.
Thank you. Thanks.
Our final question comes from Jared Shaw from Wells Fargo. Please go ahead.
Hey, guys. Timur here with two more follow-up questions. Just maybe for Ram. Looking at the kind of variable rate loans, what portion of that is currently at floors? Can you just give us an update on kind of floor run off schedule?
Yeah. Of the $10 billion or so of variable rate loans that we have, we have floors that are in consideration on $1.8 billion of those loans. If the Fed increases by 50 basis points, more than $900 million of it will be in the money. You know, 50 basis points later, most of those will be in the money on the floor side.
Okay. Great, thanks for that. Then last for me, just the tick up in non-performing loans. I know it was called out in the prepared remarks. Can you give us any additional color on loan type or industry? Any additional color would be helpful there. Thank you.
Yeah, I don't think we're really prepared to disclose that for various sundry reasons. It is one credit, and as we mentioned in the comments, we expect it to resolve itself favorably.
Okay, great. Thank you.
We have no further questions. I'll now hand back to the management team for closing remarks.
All right. Well, thank you for joining us this morning. We appreciate your time and your interest. The recording replay will be on the website shortly. If you have any follow-up calls, you may reach us at 816-860-7106. Thank you.
Today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.