Q3 2021 Enterprise Financial Services Corp Earnings Call
Good day and welcome to the E. S. S. C earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Jim Lally, President and CEO. Please go ahead Sir.
Well, thank you John and good morning, everyone I welcome you to our 2021 third quarter earnings call. Joining me. This morning is Keene Turner, our company's Chief Financial Officer, and Chief Operating Officer, and Scott Goodman, President of Enterprise Bank and Trust. We sincerely appreciate your taking time to listen in.
Before we begin I would like to remind everyone on the call that a copy of the release and accompanying presentation can be found on our website and were furnished on SEC form 8-K yesterday.
Refer to slide two of the presentation titled forward looking statements and our most recent 10-K 10-K and 10-Q for reasons why actual results may vary from any forward looking statements that we may make this morning.
Please turn to slide three for the financial highlights of the third quarter Keene and Scott will provide much more details in their comments, but I wanted to call your attention to a few items at a very high level.
The third quarter was another outstanding quarter for E. F. S C.
<unk> net income for the quarter and earnings per share were $13 9 million and 38 cents respectively.
Or $1 27 per share on an adjusted basis building on the very strong performance that we posted during the second quarter of $1 23.
These results compare very very favorably with our performance of the third quarter 2020, where we earned <unk> 68 per share.
Included in our results this quarter was $3 $8 million impairment charge for the closure of five branch locations three.
Three of these locations are in California.
We're part of our acquisition plan for first choice.
The other two branches are in St. Louis.
And we had other locations in close proximity.
We continuously evaluate our operating structure and industry trends and make adjustments when necessary. The branch closures will be completed at the start of 2022, and we anticipate annual cost savings of approximately $2 million.
I'm extremely pleased with the strength consistency and diversification that these earnings represent digging.
Digging a little deeper you will see that we earned pre provision net revenue of $56 $1 million. This was a record for our company and produced P. P. N. Our return on average assets of 1.81%.
And adjusted our O T C E of 18.15% consistent to what we produced in the linked quarter and during the third quarter of 2020.
The third quarter saw continued growth in both loans and deposits.
Although our organic loan growth did not match, our second quarter performance. It did display the value of the intentionality that we have had in building a multifaceted loan portfolio.
Loan production from our C&I teams, our SBA business and a few other specialty verticals combatted some headwinds that we saw in our CRE investor portfolio.
The first choice portfolio Folio also positively contributed to the loan growth in the quarter growing loans over $70 million from the date of the acquisition.
With results from southern cut from the Southern California region, and our S. P. A specialty we remain optimistic that these areas will continue to enhance our loan generation capabilities.
Our focus on quality was exhibited through our stable yield on our loan portfolio and a very very solid credit statistics.
All deposits grew to $10 $8 billion and with the addition of the commercially oriented deposit base that FCB brought us and the continued outstanding performance of our specialty deposit team our DDA percentage to total deposits rose to 40%. This is a level that our company had never achieved.
The strength of these operating fundamentals supported an increase of our fourth quarter dividend by 5% to 20.
And the repurchase of approximately 470000 shares of stock at an average price of $45 15 per share during the quarter.
On last quarter's call I commented that we had just closed on the FCB acquisition. So our third quarter results only include a partial quarter contribution from this acquisition.
Southern California market is now our second largest market and our progress there continues with our systems integration occurring this past week and our cultural integration ongoing.
I'm happy to report that both have gone extremely well.
With every visit to this market and time spent with our new partners I'm more confident now about what we can do in this very attractive market amid ongoing economic expansion and ongoing market disruptions.
Looking forward, our focus remains on flawless execution organic loan growth and pipeline expansion remains a priority.
We have great markets and businesses on which to build we will leverage our position as a top 10 SBA seven lender to continue to recruit and grow. This business. We will continue to recruit in our higher growth markets and specialty businesses to continue the growth that you've seen over the last several quarters.
With our recent award of $60 million in new markets tax credits, we will continue to grow our very attractive tax credit business.
Amid all of this we will find ways to use the change in the environment of how we work.
To our advantage to combat the workforce challenges that all businesses are facing.
With that I would like to turn the call over to Scott Goodman for much more details about our markets and our businesses Scott.
Thank you Jim and good morning, everybody.
I'll start with loan growth loan growth for the quarter a quarter over quarter of $1 9 billion Sloan on slide five.
Cause. The addition of the FCB loan portfolio.
Net of the F C b impact and excluding Triple P. We posted Q3 organic loan growth of 111 million or 6% on an annualized basis.
Slide six and seven breakout quarterly and a year to date changes by category and also provide some visibility on what's attributable to organic loan activity in existing markets versus the addition of the first choice balances and.
And overall the specialized businesses are tracking very well.
Steady production and solid growth.
Within the geographic markets. There are some early signs that general C&I loan demand is starting to return, but net growth is still muted somewhat by continuing economic pressures and elevated payoffs on investor CRE.
Within our specialized banking division, we posted strong loan growth.
S P a and tax credit business lines with steady, albeit seasonally slower performance and life insurance premium and sponsor financed.
SBA continues to perform well taking advantage of attractive SBA program enhancements to position our product competitively in the marketplace.
And we are beginning to see some elevated pay off activity this quarter with conventional lenders generally stretching for growth.
However, we have been able to overcome this so far through steady production.
And once again through the first nine months Enterprise Bank and trust is placed in the top 10, SBA originators nationally in 2020 one.
We're also actively expanding this business both through the addition of new talent and geographic markets.
Tax credit loan portfolio continued its strong performance as well growing by a record $39 million in the quarter.
As I've mentioned in prior reports affordable housing programs have gained traction nationally in recent years with many states now initiating new programs or expanding your existing ones.
And our team is well aligned with partners that are recognized as experts in this specialty.
Working with the states to establish the frameworks as well as to attract seasoned and qualified investors developers and management companies.
This pipeline remains robust and the growth outlook near term remained sound.
Yeah.
Within our commercial geography, which are outlined on slide number eight.
Loan growth is somewhat mixed.
St. Louis rebounded nicely in Q3, posting an increase of 36 million or roughly six 8% annualized growth.
The deeper C&I book in the St. Louis market benefited from the higher line usage on revolving lines and.
And several large originations with new real estate and agricultural clients.
The Arizona team continued its strong growth in 2020, one posting another solid quarter.
Over the past year, we have seen traction from the new talent that was added in this market.
Growing by $127 million or nearly 32%.
As the fifth most populous city.
<unk> is routinely recognized as a high performer for job growth.
<unk> performance and personal income.
And now having been in this market for 15 years.
Continuing to add experienced talent, we are very well positioned to take advantage of the economic momentum in this region.
Yeah.
With reliance on CRE.
Larger reliance both Kansas City, and new Mexico posted modest declines in the quarter, mainly due to the aforementioned headwinds on payoffs.
However, production activity and near term pipelines, particularly in Kansas City with point to a good volume of new opportunities that should be able to get us back on a growth trajectory here.
As Jim mentioned, California, now becomes our second largest market.
Post FCB.
And a tremendous platform for additional growth.
As we assess our opportunity it's clear that many of the positive economic factors that we've seen in Phoenix are also present in southern California.
The competitive profiles vary somewhat in each of our metro markets here, but in general they're heavily concentrated amongst the national Bank.
Which we tend to compete effectively against for that private business segment.
The FCB team continues to produce new opportunities given through the disruption of integration, adding loan growth of 72 million since the closing in July.
I'm optimistic that these attributes will enable us to successfully execute our model over time in this region.
Deposit balances rose $2 2 billion in the quarter with the addition of FCB accounting for $1 9 billion of increase.
Organic core deposits also grew by 346 million most of which were D. D E and transactional account types.
New accounts continue to outpace closed accounts and at an average lower rate.
Specialty deposit segments, which are outlined on slide nine contributed roughly $270 million of this growth. Excluding first choice mainly across three primary verticals of community associations commercial property management and third party escrow.
And since the Onboarding of these business lines via the seacoast merger last year, we have been able to expand existing relationships as well as add new clients in part due to enhanced system integration capabilities developed by our team.
Deposit focus continues to be on new relationships and on lower cost sticky and well diversified sources of funding.
Turning briefly to credit.
We continue to experience stable performance in the legacy enterprise loan portfolio year to date.
Now combined with the addition of a strong performing 1.9 billion dollar FCB portfolio. The result is overall improved credit metrics in Q3.
On a consolidated basis total classifieds increased a modest 4 million to $104 million, but declined to 7% of capital from 9% of capital in the prior quarter.
Total nonperforming loans declined in the quarter to $41 5 million and as a percentage of total loans fell from 58 to 46 basis points.
Gross charge offs of $4 5 million in the quarter were largely related to a $2 $5 million charge on our previously discussed and reserve for C&I loan.
Also during the quarter, we were pleased to fully exit of defaulted hotel loan, which was previously written down and resulted in a recovery of nearly $1.5 million.
Overall net charge offs of 1.85 million for the quarter or eight basis points annualized remain well managed.
And with that now I'd like to hand things over to Keene Turner for a detailed financial commentary Keene.
Yes.
Thanks, Scott and good morning.
Obviously, a busy quarter for us with clothing burst stores acquisition and our start to the fourth quarter with the systems integration. So I'm going to start my comments on slide 10, and it shows our earnings per share compared to the second quarter and I'll run through the significant items.
We reported net income of $14 million and that includes the impact of merger expenses around 31 pence per share fecal double count of 51 cents per share, which is on the acquired first choice loan portfolio and the charge off branch closures of seven cents per share that Jim mentioned.
We earned 38 cents per diluted share compared to $1.23 in the second quarter, we believe that the second and the third quarter EPS performance is relatively comparable and that would have been around $1 27 fans in both quarters.
Most importantly, we're seeing that ppb contribution continue or begin to decline and more importantly, we're replacing those earnings through growth and the benefits of M&A.
This level of EPS reflects a modest provision reversal on the legacy portfolio of eight then I'll.
As well as the still continued strong contribution from P. P. P forgiveness of around 13000.
Nonetheless, our core fundamentals remained strong with an increase in overall operating revenue during the quarter, both excluding and certainly including the first choice acquisition.
Turning to slide 11, net interest income was $97 $3 million compared to $81 7 million in the second quarter, which is a $15 $6 million increase.
<unk> $16 $7 million from birth choice and partially offset by $2 million decrease in PPP income.
Average, earning assets increased $1 9 billion, mostly from first choice as well as organic growth.
Deposit generation has continued to be successful, particularly in our specialty areas as Scott noted and the success in deposit generation. In addition to general business conditions has resulted in continued cash build on the balance sheet and its compressed margin modestly which was around 10 basis points. This quarter. We believe these deposits are.
But long term funding source and slide 12 further reflects these trends.
We have steadily deployed excess liquidity into the investment portfolio over the last few quarters totaling around $240 million invested we plan to continue investing approximately $30 million per month in the near term as we focus on growing net interest income dollars. However, we're balancing the desire to deploy our excess liquidity, while not stretching for yield.
That'll be detrimental when rates begin to rise both for purposes of tangible common equity and our asset sensitive balance sheet.
As expected first choices accretive to margin, adding 11 basis points sequentially. This was offset by the liquidity build in a lower yield principally due to support from income from P. P. P. M. P D P loans.
The mix of deposits continued to improve with noninterest bearing now totaling over 40% that's.
This helped drive cost of deposits down to 11 basis points for the third quarter.
We still have an asset sensitive balance sheet, and we're well positioned to take advantage of higher interest rates in the future with approximately 63% of the loan portfolio investment and variable rate loans.
On slide 12, and 13, we depict asset quality position at September 30th, which as Scott noted improved during the quarter and continues to show an overall low level of nonperforming loans and assets.
The continued improvement in the macroeconomic forecast and stable credit performance resulted in a provision benefit of approximately $5 million in the third quarter.
This was mitigated by the seasonal day to double count on first choice acquired loans of $24 million and another $1 million for unfunded loan commitments.
As of September 30th the allowance for credit losses totaled $152 million or $1, 67% of total loans compared to 177% at the end of June.
The contemplating the SBA guarantees that's 1.94% at the end of the third quarter.
A $31 million of allowance for credit losses on the acquired first choice loan portfolio represented approximately one 6% of total loans 7 million of which was recorded through a purchased through purchase accounting on the <unk> portfolio, which as purchase credit deteriorated.
The provision benefit on the legacy enterprise portfolio combined with the allowance on the first choice portfolio resulted in the overall decrease in the allowance coverage.
On slide 14.
Fee based income grew $1.4 million.
I'm sorry on slide 15.
Fee based income grew $1 $4 million from Q2 levels as we reported $17 $3 million in the third quarter compared to $16 $2 million in the second quarter led primarily by a partial quarter.
Post close our first choice fee income.
Tax credit services momentum from the second quarter continued into the third and helped to mitigate the decline in other miscellaneous income.
I will mention that we're excited to see the SBA has ranked US again as one of the top 10, SBA seven eight lenders in the nation through the.
For the fiscal year 2021 with the addition of first choice in their SBA lending expertise, we expect solid SBA generation to continue and with SBA loan premiums at attractive levels. It affords us the flexibility in the future to potentially use loan sales to further supplement our fee income.
Turning to slide 16, excluding $14 7 million of merger costs and $3 $4 million of branch impairment charges operating expenses were higher in Q3 at $58 8 million compared to $50 5 million in the second quarter. Most of the increase was a result of the partial quarter.
<unk> a post close first choice operating expenses, which were $7 million in third quarter with the remainder of the increase primarily driven by an increase in compensation and benefits related to opportunistic hiring of targeted teams and continued investment in current associates.
Noninterest expense totaled $26 million in the third quarter, an increase of $1.7 million in the second quarter and this increase was due partially to higher data processing and FDIC assessments related to the acquisition.
Year to date, other noninterest expenses totaled $55 $8 million.
The third quarters, resulting efficiency was 51.3 of roughly 60 basis point improvement from the second quarter and for the fourth quarter, we expect to incur approximately $3 million of merger related costs as we complete the first choice integration and the remainder of core systems conversion.
On slide 17, our capital metrics are demonstrating we start with an 18% return on tangible common equity that aided the sequential tangible book value per share increase of around 2%.
This significant return of capital of $21 million in the third quarter was through share buyback and then we also announced a dividend increase for the fourth quarter.
Of note, we previously announced to that the pro forma tangible book value dilution of the first choice acquisition was expected to be two 7% and based on the financial performance between announcement and legal close and the final fair value adjustment to the closing balance sheet. The actual tangible book value dilution is only one point.
8% and that is expected to reduce our earn back under two years to 1.7 years.
From a capital perspective, we expect to continue to Opportunistically manage our capital position.
Based on our financial performance and low risk profile and we have started the redemption of our $50 million subordinated debentures that was originally issued in 2016 and is callable on November 1st.
We will also continue actually executing excuse me on share repurchases to deploy excess capital and manage to 8% to 9% tangible common equity ratio.
We had a strong quarter across all fronts, and we're seeing the benefits of our recent acquisitions and driving growth and earnings momentum.
We expect that this will remain our near term focus and that these efforts will help to differentiate us competitively for our shareholders.
We appreciate you joining our call today, and we're now going to open the line for analyst questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function is turned off people know your signal to reach our equipment.
Again press Star one to ask a question.
We'll take our first question.
I'm, Jeff fruitless of D. A davidson.
Thanks, Good morning.
Good morning, Jeff.
First question would be on.
Trying to get.
Re centered on the on the expense base I guess it they've got.
$58 million core and the <unk>.
Fourth quarter will we're going to have first choice for the full quarter, but you've got the conversion occurring.
So just kind of near term kind of how does that settle in and then.
Capture of cost savings from there kind of high level, just kind of reoriented.
On timing there.
Jeff. This is Keene I think what we said last quarter was first quarter of 2022 clean at right around 62, and a half million give or take and that essentially reflects fully phased in cost savings I think that based on where we're running the as the expenses are coming in with first.
Choice, where we're getting blending of cost savings as we go here.
So I don't think they'll actually be of a spike on recurring expenses between.
Q4, and Q1, I think that we're going to essentially be.
A modest increase and somewhere you know 62, and a half for the fourth quarter, maybe even a little bit better.
You know with the core conversion here happening. The first two weeks of October. So I think we're on track there I know that's probably not.
It was much yeah, you wanted a number but you know call. It low sixty's is probably a good number.
From a run rate perspective.
Oh, Okay, if I follow that right.
Effectively said that earlier, you thought 62, and a half would be the number for the first quarter of 'twenty two as you kind of get savings a little earlier that maybe the run rate starting in Q4 is that.
Yeah, Yeah, that's essentially what I bet better said.
Thanks, Paul.
And then kind of a jump off point from there as I.
I know, you're making more investments.
With the legacy well.
What is combined now.
Looking at 'twenty, two and in the expense growth rate in any kind of catch that versus.
M D.
And do you think you have additional branch Hum COO.
Consolidations I know that that's sort of ongoing that's always a key tenet to be mindful of expenses, but maybe just to narrow that down.
Overall expense growth rate in 'twenty to kind of the puts and takes even if it's on a.
Specific number would be helpful.
Sure.
So I think that you know the branch rationalization here the clothing in two locations in St. Louis.
Give us some headroom for.
You know mitigating things like some of the compensation and other pressures that we're seeing in I'll say that I think if you look at just the trends in 2021 I think we've.
We've done about 6% to 7% in salaries and wage increases throughout the year to help kind of mitigate maybe some of that headwind.
But there is still a little bit to go but the way I tend to think of that and the timing of it is you know first quarter expenses, let's call. It let's say if they are at 62 and a half.
Those are usually pretty full with employer taxes and in some of those items and then I would generally.
Hope that second quarter and third quarter.
You can kind of keep those relatively modest or then maybe have some slight growth in <unk> and <unk>. So to me that that would be a fairly successful run rate, what I would say with.
All the external factors you know specifically you know some some tighter labor markets and then also just underlying organization you know me.
Materially increasing in size and scale and.
Adding to the teams and things like that.
Yeah.
I appreciate it that's really helpful.
And my other questions just on the on the loan growth and similarly.
You talked about some of the trends in the quarter maybe.
Payoffs impacting net growth, but a bigger picture kind of looking at 'twenty two with me.
Maybe a question for Scott is just the.
Do you think that SBA platform is kind of fully operational I know that it's a source of growth and you want to continue to grow that but.
You hit going into 'twenty two.
Platforms in place that high.
High single digit loan growth is is doable for the year and any any commentary on expectations on loan growth that would be helpful.
Maybe I'll hit SBA and then Scott can maybe fill in on maybe some of the other pieces. So I think that in 2021.
Essentially the highest level of production.
For.
Seacoast inclusive of first choice ever.
Ever and so I think you know to have two integrations and have that occur.
Estimate to both teams are all three teams.
And I think that our goal given the conditions would be to repeat that performance in 2022 to me. The only caveat from a net perspective is we are starting to see a little bit of an uptick in prepayments in that space.
2020 in 2021 we're aided by historically low prepayments I think you can see that in the sequential trend in the third quarter here from a net perspective.
And then also the other caveat would be.
Whether or not we feel like it's valuable to sell some of that production and bring gains.
Near term in December some of the weaker fee income quarters call It second quarter.
You know versus the longer term strategy of keeping those loans on the balance sheet.
So from an SBA loan perspective, I think that that's what we're you know we're fighting against so I think similar level of gross production.
And then you know net is probably going to be a little bit more muted next year, just with what I would think is a similar level of prepayments here in.
The third quarter, and you know a quarter isn't a trend so when we come back for the fourth quarter. We may have a little bit more specific color on what that actual level is but I think you know.
Third quarter here with something like 4% to 5% prepayments, which as you know a little bit of an uptick problem essentially nothing in the first you know the last prior four quarters before that and then Scott I'll turn it to you for some color on the rest of the portfolio.
Yeah sure Keene I.
What I would add on SBA, though is.
There's opportunity to take that national model and continuing to expand it I think we think the southeast in particular is attractive.
The market's there and in talent that can be recruited.
And then also you know a point on SBA.
Much of our competitive advantage there is on the operational backroom side, the ability to turn things around quickly.
And I think there's opportunity to bring more SBA into our existing geographic markets as well so.
But on the overall you know maybe to hit the pipeline a little bit.
Generally it's solid I think one the specialties have been less impacted by some of the external headwinds.
And.
Q4 tends to be a typical.
Upswing for some of those businesses like sponsor finance and life insurance premium. So I'm optimistic on continued performance there and then on the community banks.
We can talk about some of the headwinds more if you want I think they are pretty well documented in the industry, but.
You know, we're adding commitments, they're just leading to less outstandings in the short term, particularly on lines and construction loans. It's just that the process is slower from start to end on the sales funnel.
But I will say I think we see more construction.
Projects coming back online that had been on hold so I would expect.
Maybe that activity to pick up.
We're focusing on where we can really add value to investors, who are we positioning commercial real estate properties, we tend to be a strong performer there because we can we can close quickly.
And then C&I you know, we're starting to see an elevated mood for some working capital as companies work through their liquidity and maybe look for potential capex on equipment and automation to help offset some of the labor issues that they're experiencing so I'm optimistic and hopefully that gives you a little bit of a better idea of what the pipeline looks like.
Yep.
Appreciate the color. Thank you.
Thank you once again, if he would like to ask a question. Please press star one we'll take our next question from Andrew Liesch with Piper Sandler.
Hey, good morning, everyone.
Andrew I think you mentioned some opportunistic hiring of targeted teams.
More detail you can provide regarding that that took place in the third quarter like location or like specialty or what type of lending they typically engage them.
We will pass that one to Scott I didn't mention that but we'll let him talk about the the team hires.
Sure.
Andrew.
Well I would I would go back to recall last quarter I mentioned, we just picked up a team in Las Vegas, three person commercial team.
So we continue to be focused on adding talent I think particularly to the more robustly growing economic markets I mentioned SBA.
Continuing to add talent there we've recruited in Phoenix I mentioned, you know how the new talent, we have there is helping us.
Lift the the loan growth there. We also did hire recently, a small practice finance team.
Just a couple of people.
And you know I would expect that that I'll be talking about some of what they've added as we go through the two future quarters, but I think it's just a good example of our understanding of how to provide a great environment for specialty teams that allows them to execute within their segment and this is a team that's had deep experience going back.
15, 20 years in this vertical so you know that that's an opportunistic hire but one that we've been working on for several years.
And then I think you know we're actively looking to recruit.
In other markets as well, particularly ones as Jim mentioned that are disrupted.
With.
Potentially with the management changes or or acquisitions.
Okay.
Got it that's very helpful.
Jim just looking at capital here.
Even with the deal being tangibles for larger asset base.
Capital ratios of our building.
And just given your outlook it sounds like that will continue to do so and even though you increased the dividend now another penny for the last three quarters that I.
I mean, the outlook looks like with the payout ratio is still going to be well below where it was even a couple of years ago. So how should we look at the dividend versus buybacks what's the.
Capital deployment strategy here.
It seemed that it looks like it's going to rise pretty rapidly.
Yes, I think all the all the options are on the table and you know obviously, we'd prefer to keep moving it into growth and then as a as it makes sense.
Look at buybacks as well and then to the extent that.
It makes sense to continue the uptick and the dividend will do that as well. So I think we've we've shown over the last several years.
We've optimized the use of capital in all the right ways to really improve the company and we'll keep that front and center going forward.
Got it alright, thanks for taking the question step back Yes got you.
You bet.
Thank you we'll take our next question from Damon Delmonte with a B W.
Hey, good morning, guys hope everybody's doing well today.
Thanks, Dan My first question.
My first question, probably directed to Keene on the margin the core margin and the outlook in some of the puts and takes there.
Can you kind of just you know.
Give us a little little guidance with the first choice deal in place now and what Youre thinking going forward.
Yeah.
Damian.
Think every quarter I give margin commentary, if assuming liquidity stays about the same level and we've continued to see it build but I think.
For the <unk>.
Fourth quarter ROE ex PPP.
Margin fundamentals are very stable. So we're seeing new loan production generally where the existing loan yield is.
I actually expect that.
This quarter was maybe a little bit lower and contribution from some of the higher yielding segments, but I do expect that the addition of the first choice team and having those originations come on you know not being marked in purchase accounting should also provide a slightly greater aid to maintaining.
And that that new loan yield and then.
On the on the funding side.
Theres a basis point or two here and there, but but there arent any big levers.
Even with the sub debt redemption from an overall margin perspective.
That's not going to be you know necessarily highly material and then really that we just continue to find it on the investment portfolio side. So the investment portfolio activities that we're undertaking.
<unk>, obviously slightly detrimental to our investment portfolio yield.
Because the rates that are coming off and and the absolute increase in investment is driving down that yield but it is also helping to maintain margin because theoretically we're coming out of cash and AR and its adding some basis points to overall.
Earning asset so.
With all of that said I expect it to be reasonably stable and really at the end of the day. Some of it is going to be loan growth and composition that really drive. It. So we generally held up well from a margin perspective, and I expect that to continue and there were a couple of bumps and and AIDS in early in 2002.
One and just legacy purchase accounting accretion that is out of the run rate here in the <unk>.
Third quarter, and I don't expect that the battle.
That'll be something that we talk about materially moving forward. So all of those things I think bode well for stable margin outlook all else being equal.
Got it that's helpful. Thank you.
And then just with regards to you know where the reserve is today in your outlook for provision going forward.
You know if you back out the day to see if bill you had a negative provision this quarter is it reasonable to think we could see something again like that next quarter.
Yeah to me.
Where we fit in the environment, we're operating in as time passes.
It generally looks less and less like.
The other there's going to be the loss content that that was provided for initially.
And I think some of that's just a function of the magnitude of growth. So last quarter. The the reversal was much more modest with.
More more robust growth this quarter growth was a little bit more muted and didnt absorb as much of that so.
It is likely that our provision in either direction will be I think fairly muted but.
It certainly does seem like you know modest releases at least theres pressure on modest releases X you know.
Significant or outperformance on loan growth for the call. It next couple of quarters.
Got it okay, great. Thank you very much appreciate the commentary.
Youre welcome. Thank you.
Thank you we'll take our next question from Brian Martin with Janney Montgomery.
Hey, good morning.
Hey, Brian.
Hey, just maybe starting keene or somebody I guess just on the fee income side. If you can just give a little bit of thought on just how we say absent I know there's seasonality in fourth quarter with tax credits in your gyms.
Tim's earlier comments.
You gave a little color on how you're thinking about I. Appreciate the breakdown you can give a little bit more breakdown on the other sector. Other sections of fee income, but how we should think about that maybe over the next couple of quarters here.
Yeah, Bryan I generally think that when you look at the fee income trend I expect the tax credit is going to be up call.
Call it somewhere between 10, and 20% sequentially from third to fourth quarter.
And then if you look at the third quarter results here. The other fees were one of the lower quarter. So I would expect with some of the items that we tend to have falling in our favor.
Either private equity distributions or C. D income that it's likely that fourth quarter is going to have some some level of that penny or something like that maybe two and then when I look at 2022.
Obviously, we've got we lose some interchange in the second half of the year, but I generally think that you know from where we are we can still grow.
Fee income call it mid single digit using.
The tax credit is the primary driver of growth in <unk> and just some of the layering in from from first choice that we expect to get and then there's opportunities for upside both in the tax credit business, which we would expect you know we continue to expand into new states or states that are coming back online, Missouri is an example of that.
As well as in and I signaled this whether we want to use some modest gain from SBA to help to help aid that and make our what is you know fairly lumpy income a.
A little bit more predictable, particularly on the fee line. So I will owe you that when we come back on the next call because I'm not sure. We've we've particularly on the SBA side cross that.
Particular bridge, but hopefully that gives you some flavor as to how we're thinking about trying to solve for.
22, and in the overall trend.
Yeah, No. That's helpful. I appreciate it and maybe just a couple of other housekeeping ones just on the P. P. P.
Timing of kind of the the forgiveness in the.
The recognition of the remaining fees how are you thinking about that.
So if you'd asked me six weeks ago I would have told you that it was fast and furious and I would have expected it to come in fairly shortly quarter to date in the fourth quarter here, we've really seen that abate quite a bit.
And so I don't have a great answer for you on that.
It's declining.
It's really the opportunity is declining.
But I really don't have a great sense for if there's going to be another push here in the fourth quarter to get a bunch of these off the books or not.
Okay.
And in the the contribution this quarter, our first choice to the net interest income you know roughly how much was it was just I think you talked about trying to grow the dollars of NII like some of the bonds that but just trying to think about what the NII lands in fourth quarter kind of a full quarter of inclusive.
Inclusive of them.
Brian I'm grabbing that I know Theres a chart here and I know I've said it.
My apologies I think it.
If not I can follow up my life.
Yeah, I think it's $19 million, but for.
For the life of me I don't have that opinion in front of me here.
Okay. That's okay, I'll follow up online or a circle back and then just the last one is maybe for Scott or Jim just on.
The opportunistic hiring you guys talked about versus kind of now that you've got this deal is closed but not yet integrated just how we think about the potential for M&A versus organic growth just hiring.
One of them is more likely in the near term it sounds like Theres a lot of opportunities youre seeing particularly on the you.
The hiring front so.
Yeah, Let me just start with that so I think there is a lot of opportunity I think there's a.
As you know, Brian there's a lot of disruption, especially in the southern California market. So I think there's some incredible opportunities there. The other thing too is I think you know even though we have been in Phoenix for many years I think our brands growing well there such that it's a you know platform that season success.
Bankers can do well and then even back in the Midwest, We're seeing good opportunities both in St. Louis and Kansas City as you know there's there.
There is turnover within the industry and we're getting our fair share of looks there.
And then, especially as Scott mentioned, it's about lift out of teams and and other experts there that our work in constant conversations and just trying to find the right cultural fit as well as entities in and people that can plug into the ecosystem that we currently have.
Gotcha, and just how that how are you thinking about M&A today. My guess is that still kind of on I would say looking at Opportunistically, but you get this one integrated maybe a little bit less like less likely.
So so as you know for us it's a it's not event driven it's a process. So we got a lot on our plate. So we have to make sure that what we've done over the last 18 to 24 months is integrated well. So that's number one focus.
But our job at the top is to continually.
I'll speak to seek out find avenues to continue to improve our business and M&A as a tool we use effectively so certainly it's part of what we do daily, but we have to really provide some time now to let what we've purchased integrate well.
Got you it makes sense okay. Thank you for taking the questions.
Okay.
Thank you.
Thank you once again, if he would like to ask a question. Please press star one.
Yeah.
And at this time I show no further questions in queue I'd like to turn the call back to Jim Lally for any closing remarks.
Sure. Thank you Todd and thank you all for joining us today and for your interest in our company and we sincerely appreciate it and have a great day.
This concludes today's call. Thank you for your participation you may now disconnect.
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