Q4 2021 Enterprise Financial Services Corp Earnings Call
Good day and welcome to the E. F. F. C earnings Conference call. Today's conference is being recorded and at this time I'd like to turn the conference over to Jim Lally, President and CEO . Please go ahead Sir.
Well, thank you Catherine and good morning all.
Welcome everyone to our fourth quarter earnings call I. Appreciate all of you taking time to listen and joining me. This morning is Keene Turner, our company's chief financial and Chief Operating Officer, and Scott Goodman, President of Enterprise Bank and Trust.
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.
The presentation and earnings release were furnished on SEC form 8-K yesterday. Please refer to slide two of the presentation titled forward looking statements and our most recent 10-K and 10-Q for reasons why actual results may vary from any forward looking statements that we make this morning.
Please turn to slide three for our financial highlights of the fourth quarter.
2021 was another outstanding year for FSC, we were especially proud of our fourth quarter performance or earned net income of 51 million or one dollar and 33 cents per diluted share.
This compared favorably to our earnings per share for a linked and prior year quarters on both a reported and.
And as adjusted for merger and impairment charges.
Our return metrics were equally impressive as we posted a return on average assets of 1.52% and pre provision net revenue of 1.89%.
Our pre provision net revenue set a quarterly record at $63 million, increasing $7 million from the third quarter.
I would expect this momentum to continue into 2022, as our variable rate loan portfolio and strong noninterest bearing deposit base have us well positioned should we experienced expected interest rate increases.
This coupled with our solid loan production momentum that we've experienced for the last several quarters should provide for continued strong performance.
Jim will provide much more details on these results. In addition to our results for all of 2021.
All of these results came about is what I'd like to call your attention to.
Over the last several years, we have intentionally focused on building a diversified revenue stream oriented towards our commercial banking heritage.
Our strategy has been to diversify through both geography and types of businesses.
The acquisitions of seacoast in 'twenty 'twenty and first choice in 2021 further illustrates this as we added several new national business lines, along with growing markets of Los Angeles, Orange County, and San Diego Complementing a more established the more established markets in St. Louis, Kansas City and Phoenix.
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One final comment I would like to make relative to how we are doing this relates to a branch light model at year end, our average deposit per our 50 branches was over $200 million.
This will continue to serve us well amid wage and other inflationary trends.
With first choice fully integrated we now have a balance sheet that bolsters total loans of $9 billion and total deposits of 11 $3 billion, yielding a loan to deposit ratio of 80%.
More importantly, though when you dig into this further approximately 50% of our loan portfolio is oriented towards either our C&I.
<unk> occupied CRE and specialty businesses, while our noninterest bearing deposits total deposits remained at 40% when compared to the linked quarter.
This illustrates the value of the differentiated model that we continue to build.
Furthermore, when you look back five years, when our loan to deposit ratio was close to a 100% our return on tangible tangible common equity was closer to 12% at 12 31, 'twenty. One we have significantly improved our return on tangible common equity while also significantly enhancing our funding profile with a loan to the <unk>.
Posit ratio of 80% what.
What we continue to build represents a company that is much strong which is much stronger earner than we previously were while at the same time lowering our overall risk profile.
Scott will provide much more detail on the various regions businesses and product lines and the production and subsequent growth that we're seeing.
Our focus is on the long term, we teach and reward a consultative sales process that is simple and repeatable and our relationship managers and sales leaders know that the greatest success comes from relationships that choose us for our expertise and quick consistent responses. We were focused on the right businesses for us.
S not just any business.
Credit quality remains strong as evidenced by the statistics listed on this page.
But please know that we do not do not take this for granted our teams have used the current credit environment to improve an already very sound credit metrics.
Efficient capital management is our goal Keane will spend more time on the many positive moves that we've made in this area during the quarter.
I'll just comment that as part of our balance sheet is situated extremely well and has us well positioned for the growth that we expect in the years to come whether from organic or through acquisitions, we are positioned well for both.
During the fourth quarter, we successfully completed our core systems integration of first choice.
And have made significant progress in our cultural and sales process integration as well.
We have been successful in newer markets when we combined talent from legacy markets with our new associates and merged the enterprise how to local market Knowhow.
Very excited about what we can do in these markets in 2022 with results of this integration like this show up in our numbers in the second half of the year.
This acquisition has provided us with significant financial benefit as we cross the $10 billion Mark has given us wonderful wonderful platform in terrific markets and further diversifies our revenue base.
Moving on to slide four you will see the list of items that were particularly focused on in 2022.
We have our teams keenly focused on their loan deposit and net new relationship goals for 2022, as Scott will comment our production throughout the company has been solid and we expect this to continue.
Our SBA team had a record production year in 2020 . One we expect this level of achievement to continue but expect some pressure with respect to refinancing of the existing portfolio.
We have the team. Additionally focused on stemming the tide by proactively addressing this where it makes sense.
We will continue to invest in talent for current and new specialty businesses, along with bolstering our teams in higher growth markets.
Like with past new markets tax credit allocations, we will leverage leverage this to garner new relationships. We have found and this is especially true when we enter new markets, where you said this program is not as prolific.
This is a significant differentiator for us.
You also see new market penetration for our affordable housing business as well.
Finally, I'm a crown has delayed our fully implemented hybrid strategy, but we look forward to rolling this out later in the first quarter or early second.
With that I will now turn the call over to Scott Goodman Scott.
Yeah.
Thank you Jim and good morning, everybody.
As you'll see on slide five loans at the end of the year totaled just over $9 billion, representing a 24, 8% increase from the prior year.
The growth was most heavily impacted by the addition of the legacy first choice book in Q3 as.
As well as well diversified organic growth across core business line net of a reduction in total fee balances.
Slide six reflects the full year performance of the legacy core book for which we posted annual growth of 554 million or eight 5%.
Most notably we experienced strong performance across the board in our specialty lines.
The C&I business was bolstered through the addition of new relationships and a modest rebound in usage of revolving lines.
For the quarter, which is detailed on slide number seven we.
We achieved net growth of $68 million before the impact of Triple P balances.
Our focused sales process continues to produce healthy deal flow with total originations up over 30% from the prior quarter.
Eni balances grew as we on boarded new clients as well as Dod businesses more actively using revolving lines of credit.
While still below pre pandemic levels of line draws rose steadily throughout the quarter.
With an average usage up roughly 2%.
Specialized lending unit had another robust quarter growing by $143 million or 22% annualized.
Sponsor finance had a record quarter closing over $100 billion in new commitments with 20 different companies and posting net growth of $53 million.
As I've mentioned in prior calls this year of the deal flow in this unit is at an all time high.
Spite elevated competition, our long tenure in this sector and deep sponsor relationships have allowed us to take advantage of the active private equity markets. While also remaining selective to maintain our return and our quality standards.
The SBA team has also continued its stellar performance in Q4 of the top 10, SBA originator with growth of 41 billion or 13, 6% annualized.
Despite some elevated pay offs from a more active conventional loan competition.
Deal flow is solid and we also remain active in recruiting new talent.
Rounding out the specialties for Q4, both life insurance premium finance and tax credit teams continued their steady growth trajectories.
Life insurance premium posted a seasonally strong $21 million increase resulting in $60 million or 11, 2% growth for the year.
Tax credit also executed well with $25 million of quarterly growth.
The total to $104 million or 27, 2% for the year.
The popularity of affordable housing and the continued adoption of these programs by more states will provide a solid pipeline in this business looking forward.
Commercial real estate originations remained strong.
With the net growth in the category moderated by the impact with payoffs and Paydowns.
Generally from Refis in the permanent market structures and the sale of assets.
Disbursements in the construction portfolio on existing projects, where improved supply chain issues ease somewhat.
But the net decline in these categories was more materially impacted by a decision to reduce certain loan types within the California market, which I'll touch on in more detail.
Turning now to the markets, which is on slide number eight.
And breakout the portfolios by business unit.
St. Louis represents the largest C&I book and was the beneficiary of the improved line usage as well as generating significant new loan originations in the quarter.
New commitments were more than double the prior quarter.
And included several new relationships asset purchases and new real estate acquisition and tax credit based fund lines.
Arizona and Kansas City loan books also grew in the quarter as construction fundings ramped up and new commercial real estate opportunities were originated.
Examples of new deals in these markets include the acquisition and development of new multifamily projects.
Expanded owner occupied real estate for a large car dealership.
And acquisition of New class, a office and industrial properties under long term leases.
The reduction in the new Mexico loan book, mainly reflects the run off of some of the legacy commercial real estate transactions, which were part of the L. A N V acquired book.
And a slower ramp up of newer commercial real estate and C&I relationship based originations, which would be more consistent with the organic growth model.
We have successfully transitioned a significant portion of this portfolio over to our business banking team, which enables us to better service and cross sell these smaller businesses with a more efficient cost base.
Also important to note within this market and a key driver of our entrance into new Mexico through the L. A N V deal.
We continue to nurture our large low cost and well diversified deposit base here, which has performed well and is growing.
Evidenced by more than $50 million of increased savings balances during Q4.
In California during the fourth quarter as you heard from Jim.
Our sales team has been primarily focused on supporting a smooth conversion classes, including frequent communication with the client base and thorough training on our workflow and sales systems.
In the loan book C&I balances net of Triple T were up over $50 million in the quarter.
The net decline is primarily attributable to the construction and residential real estate categories. As we have opted to deemphasize the speculative construction and residential fix and flip type loans.
Generally these loans have a shorter duration and a higher risk profile, while also requiring higher administrative and support costs.
There are however, a strong opportunities for us to further leverage the existing client base through deepening credit relationships with larger borrowers and by offering more medium term credit structures to extend the bridge in commercial construction loans, which was sampling something generally not offered by first choice.
Looking ahead, our focus is also on expanding the talent base in this market.
We recently announced the promotion of an experienced commercial leader in long term employee of our company, who will relocate to lead the commercial teams in Orange County and L. A.
Additionally, we're transplanting product and client service expertise into the market through the assignment.
Enterprise experienced treasury management officers.
Externally our early recruiting efforts are also promising with recent new hires.
S E P CNI producer.
C&I portfolio manager and a treasury management sales associates.
Moving now to deposits accounts continue to grow in the quarter with ending balances up $516 million or $4, 77%, 19% annualized.
Quarterly average core balances were up across the board in all of our geographic markets with the largest growth in low cost checking and transaction account types.
Most notably within the California market average deposit balances were up nearly 20% in the quarter.
Specialty deposits, which are highlighted on slide number nine.
Also performed well in the quarter with growth across each of the primary verticals.
These balances, which are generally comprised of noninterest bearing accounts now represent 20% of the overall deposit portfolio.
Account activity also remains well positioned with new accounts outpacing closed accounts and at a lower average cost.
Now I'd like to turn the call over to Keene Turner Keene.
Thanks, Scott and good morning, everyone. My comments start on Slide 10, where we reported earnings per share of one dollar and 33 cents for the quarter. Most importantly on an adjusted basis when excluding merger related expenses.
Earnings per share was one dollar and 37 cents per share, which was a 10% improvement from the linked third quarter.
In addition to record net income. We also had operating income that drove a 20 cent per share sequential increase in earnings per share are fee income results were seasonally strong due to tax credit and fees from community development activities.
And we also had the first full quarter of first choice of operations in both revenue and expenses.
To that end expenses reflect.
The combined entities and are in line with our expectations with strong asset quality.
On slide 11, net interest income was $102 million or $5 million increase compared to the linked third quarter. This includes approximately $4 $5 million from the full quarter impact of first choice along with higher earnings on loan growth, partially offset by P. P. P trends.
In the quarter deposit balances continued to grow with average deposit balances, increasing $870 million, including nearly $500 million of D. A.
Balances increased across all of our markets and throughout our specialty lines during the quarter, providing additional core funding and flexibility in managing costs.
As Scott highlighted the growth is both a function of underlying strong liquidity of our customers as well as from new business development activities.
Yeah.
Slide 12 depicts net interest margin trend, which indicates the strong deposit growth resulted in higher cash balances and was the largest driver of the eight basis point net interest margin declined in the quarter.
With that said the fundamentals of net interest margin were strong as our overall loan yield was stable and our cost of funds declined modestly.
Our balance sheet remains positioned to take advantage of higher interest rates in the future.
We estimate that a 50 basis point increase in interest rates will result in an additional 3% to 4% increase in net interest income dollars on an annual basis.
The asset sensitivity is principally driven by our loan portfolio of which 63% of loans are variable rate.
More than half of those loans have interest rate floors, and approximately 95% of those floors are currently priced at the floor.
Our deposit portfolio is roughly 40% noninterest bearing deposits and we have less than $500 million of total transaction accounts, formerly tied to an index.
Based on our current liquidity position and ability to generate low cost funding through our specialty vertical we believe our ability to control deposit costs is greatly enhanced versus prior interest rate cycles.
Slide 13 depicts our asset quality position at the end of the year, which continues to show an overall level of nonperforming loans and assets, which has improved sequentially.
Net charge offs were $3 $3 million or 14 basis points annualized compared to $2 million or eight basis points in the prior quarter.
On slide 14, our expectation for overall credit losses in the portfolio continue to improve and resulted in a negative provision of $4 million for the fourth quarter.
The allowance for credit losses totaled $145 million at the end of the quarter or represented 1.61% of total loans or 1.84% of on guaranteed loans.
While our outlook has continued to improve we believe there is enough uncertainty in the economy and the effect that COVID-19 various supply chain issues and the masking effects of government stimulus to warrant continued strong coverage.
On slide 15 fee income grew $5 million from the third quarter, as we reported $23 million compared to $18 million in the third quarter.
The increase led primarily by fees on community development investments and seasonally strong tax credit income.
The trends in deposit service charges are the result of a fee holiday. We provide you in core system conversion in this case the first choice customers.
While tax credit income continues to be seasonal our momentum in this space continues to be continues.
Also fees earned on community development investments are not consistent sources of income on a quarterly basis, but we do expect to generate meaningful additional fees on our remaining investments this year.
Turning to slide 16, noninterest expense was $64 million, including $2 3 million of merger related expenses in the fourth quarter core operating expenses were $2 $6 million higher than the fourth quarter at $61.5 million compared to $59 million in the third quarter the.
The drivers include a full choices for the.
The drivers include a full quarter of first choice operations. Some deposit service charges expect expenses as well as the write off of the remaining debt issuance costs related to the redemption of our $50 million of subordinated debentures.
We expect 2022 expenses will be approximately $250 million with seasonal trends in the first quarter and then normal trends. Thereafter. In addition, we do not expect to incur any material merger costs related to closing our first choice.
On slide 17, we demonstrate our capital metrics and obviously, we were busy on the capital front in the fourth quarter as we took action to further optimize our capital stack and to continue providing returns to shareholders.
We redeemed $50 million of subordinated debentures issued $75 million of preferred stock that increased both the quality and quantity of regulatory capital.
Notwithstanding we also continue to manage our outstanding shares by repurchasing nearly $30 million of common shares in the fourth quarter.
For the year, we have repurchased one 3 million shares totaling $61 million and.
And we've also increased our dividend for each of the last two quarters and announced another dividend increase for the first quarter of 2022, as we look to continue to return capital to our shareholders.
In addition, with strong earnings we have increased tangible book value per common share or 3% sequentially and 11% for the year.
Our strategic management of both the type and amount of capital helped us drive a return on tangible common equity of 19% in the fourth quarter.
Our fourth quarter results cap, a busy but an important year for our company on multiple fronts. We successfully completed the systems integration for both seacoast and first choice, while generating net income of $133 million and a return on tangible common equity of more than 18% excluding merger related and other.
Sure.
Nonrecurring events.
Adjusted for merger charges branch impairment and FIFA double count.
Earnings per share for the full year with $4.97 compared to $3.21 in the prior year.
We finished the year strong and diversified business platform and sales culture that Jim discussed along with the talent activity as Scott highlighted has us well positioned for 2022.
Thanks for joining the call today, and we're going to now open the line for analysts questions.
Yeah.
At this time, we'll take analyst questions. Please operator.
If you'd like to ask a question. Please signal by pressing star one on your telephone.
Pat.
The speaker phone. Please make sure your mute function is turned off to allow the signatory chocolate line.
Again, that's a question we will now take the first question from Jeff Lewis with D. A Davidson. Please go ahead.
Thank you good morning.
Good morning.
On the.
The loan growth and pay downs, maybe for Scott just the.
You know paydowns are tough to to to predict what you saw in Q4, mudie meetings and some good origination production, but it.
We're looking into 'twenty two.
Momentum you've got on the specialty finance.
How about any can you speak to any expectations on a net basis do you feel like payoffs.
We began to slow down here have you seen any indication of that and maybe just net that against production expectations. Thanks.
Yeah.
Sure happy to.
Yeah, I think first on production.
Certainly the pipeline remains steady.
I would expect to see continued growth in really most of the specialty lines.
I think the the increase in revolving usage. It is good to see I think we're seeing some of the larger companies.
And are there lines some of the smaller ones, maybe running through some of the triple P liquidity and I think maybe a little bit of a moderation in supply chain. So that's that's a good sign I think the payoffs as you said.
Most highly concentrated within the commercial real estate area.
And I think potentially increasing rates could certainly help moderate that level the playing field with.
What I would call the non traditional bank structures secondary market.
Activity that we see certainly could also affect the.
The velocity of sale of assets that we've seen as well.
We're well positioned with the investors in that market. So some of the runoff that we've seen particularly in California that I mentioned are more than the shorter term fix and flip.
<unk> construct and so kind of activity and more of what we're originating in the longer term hold investors, where we can we can go deeper with them. We can do the construction level. We can do the acquisitions all of them, but it's more of a mini perm structure. So.
I think if that trend continues the net effect will be positive.
Okay Fair enough and then just a couple of questions on the fee income.
The what was the fee waiver.
Is that it is that number.
Half a million a quarter.
He gave up or kind of what.
The deposit service line, how does that rebound.
I guess.
Q1, and then well I'll just leave it there for now.
Yeah, Jeff, it's probably three to 500000 a quarter.
It's not a big number but the reason we called it out is just because you do see that negative trend from <unk> to <unk>, but we do expect that to come back here in earnest in the first quarter.
And then as we get into the third quarter. If you could just remind us of the durbin headwind I think it.
Is that about a $3 million annual impact.
Yeah, and I think just overall for you know for.
For 2022.
You know I think we believe that with some of the momentum we have some of the sequential improvements from leveraging with first choice I mean, we still can.
Have a mid single digit overall growth rate for the year, but yeah that.
Sort of little over a million a quarter starts to hit us in in <unk>.
Okay, so closer to 1 million a.
Doing an okay.
And lastly, just that the other income so within miscellaneous I think you guys called out the servicing income was down but the.
Actual miscellaneous income up.
Doubled within the income statement there what was the other figure.
And that seemed seem larger than the normal run rate.
Jeff I'm looking at the slide I've got a million three of miscellaneous and <unk> and a million two in.
The fourth quarter, So you know everything.
Fairly level, we had a little bit of decline in private equity and swap fees were up in the fourth quarter modestly, but really the big the big driver there is going to be the.
C D E.
Exit.
Okay that figure.
Could you just could you detail that that's probably what it is the five <unk>.
Is that nonrecurring in I guess.
Go ahead, yes, so so I would say the 5 million and I tried to hit this in my comments, but I'll give you a little bit more flavor for it. So you know the C. D E exits.
For the year were fairly strong there.
Moving forward it it's probably not going to be that magnitude, but we do expect you know roughly.
$2 million in the first quarter and then there's the potential for another 2 million in the fourth quarter.
For 2022, so there that's not a complete going away for that line item on an annual basis.
But it isn't something that happens consistently on a quarterly basis and certainly the magnitude of that is and isn't likely to continue.
Okay. So just to wrap up that entire Congress again mid single digit growth on on total non interest income is the expectation.
Yeah, and again, that's going to be principally driven by you know call. It a 15% to 20% expansion of.
The tax credit business that continues to have strong momentum and we see some some good progress here at the end of the year and we should have a strong start to 2022 in the first quarter with that business.
I appreciate it thanks.
Thanks, Jeff.
We will now take the next question from Andrew Liesch.
Sandra Please go ahead.
Good morning, guys.
Good morning Education question on the the resident for real estate and the construction and the fix and flip here. So is the decline in our residential book is that fix and flip loans or is that just other mortgages that maybe you would would've acquired in California.
No. Those are those are more of that fix and flip those are there's a lot of residential properties coastal properties that are residential that those investors are.
We're coming to the first choice for.
Got it okay until it with the de emphasis on that product I mean, how far how much further do you think this this portfolio could decline.
Yeah, I mean, I think you may see some near term pressure still.
But I think you know as we continue to originate and I'm happy with what I see.
On the originations that we're putting on the books as well as deepening their relationships with.
A lot of those clients that are not doing those fixes, let's I think it's going to.
It's going to moderate but you know short term I think there.
Could still be some pressure.
Got it.
Perfect.
Mmhmm perspective that book was around 150 million when we acquired it so you're pretty much halfway through it.
One says they're going to come back.
Okay. That's very helpful. There and then just how is the rest of the integration in California going with respect to generating new loan growth it sounds like youre, bringing on.
Someone new to leave that.
To lead that market I guess, what's been the tone from customers and are in the windows that you've picked up there.
Some of the tone is extremely positive.
If you have a conversation with a client or a business owner.
In California, it's the same kinds of conversations we're having in other markets. So.
I am very confident that our model is resonating here.
I think our clients are really pleased to hear that we havent, maybe a little bit bigger checkbook, we have.
A broader product line and are very willing to continue to explore those things with us I think the other thing is just <unk>.
Talent as well.
Now I talked about some of the talent that we added and I've.
I have been pleasantly surprised with the strong interest in our model by those external candidates because I think this provides an opportunity maybe to reinvest some of those resources.
That we have available and.
I think the.
The disruption here with deals like the Union U S Bank bank of the West BMO.
There is also kind of levels the playing field for us.
As a new name in the market and gets people talking that otherwise would not be in place. So I'd.
I feel very confident about continuing to bring on new talent.
Got it.
Thank you for taking the questions I'll step back I appreciate it.
We will now take the next question from Damon Delmonte.
Please go ahead.
Hey, Good morning, guys hope everybody is doing well today.
Just looking to get a little bit more color on the.
The bullet regarding the strategic approach to the participations could you talk a little bit more about that please.
I can take that Okay. Go ahead go ahead go ahead, Jim because I mean it.
It was going to say, let me just I'll, let Scott give me detail here's what it's not Damon it's not a snack strategy right, we're not out looking at large.
Hunks of face those credit right. That's what it is not but I'll, let Scott described more strategically what it is.
Yeah I think.
As we've grown maybe back up a minute you know them in the past we may have let relationship managers help source other banks within their markets to do larger deals.
And you know that that's not a real efficient strategy.
And it's not a real repeatable strategy. So as we've we've grown and entered new markets and moved upmarket a little bit but it does look like larger companies really centralizing that in an area that can do that leg work for those are Ms.
But also centralize it so that we're able to find partners that can go across markets go into some of the specialties with us and that we can develop that relationship at the bank level, which a lot of times. It runs through a participation desk or syndication desk through the credit side.
Because what we weren't necessarily getting in.
The cases, where we're selling credit is an opportunity to buyback and so this also leverages that relationship to where those that we sell to we can also buy back from them.
With companies that have similar credit cultures.
Cultures with us.
Got it okay. That's helpful. Thanks, and and how big is.
The participation book today, and how big do you envision that getting over time.
I don't know Ken if you can help me there I can tell you exactly go ahead rough numbers I'm going to say that you know we buy a half a billion and we sell over 1 billion. So that's a pretty big imbalance, but not a lot in terms of.
And what is spot versus what's all then again their club deals and deals where people are out there.
In house limit and things like that with banks that are covered in your likely coverage community bank coverage universe. So.
Think that that what Scott is referring to is the strategy to try to equal out that imbalance with back in the days when we were a 100% loan to deposit we were just trying to sell any loans to the small local banks to try to be able to do it.
And now recognizing we've got some more expansion and some more power. We're looking at peers, who are similarly, situated in the same boat and I'm just trying to make sure that it's a two way street, when we look at originating and managing their credits.
Got it okay. That's great. Thank you and then.
For you Keene as you think about the provision going forward I mean credit trends, obviously, you are strong and very solid.
You know base of of of loans how.
How do we think about the provision here over the coming quarters.
Yeah, I mean, you know we said this before I mean, I think a peaceful adoption you know that.
We adopt it about 130 basis points obviously the.
The guaranteed versus on guaranteed proportions are slightly different so I think we probably think of the low.
When we when we're perfectly comfortable with the environment and everything being similar to when we adopted diesel.
I think that Thats, probably you know.
Call. It 125 to 135 basis points, that's sort of where we think the model comes out and you know as we continue to.
To renew and and originate a lot of credit relative to the net growth I think the balances will come down so depending on what we see from a growth perspective, you could continue to see some negative provisions if growth is muted growth.
Growth is more substantial or depending on the composition of that growth.
You could have them.
Provision, but certainly I think if asset quality continues to be as strong as it is.
There is definitely going to continue to be downward pressure with a continued improvement.
And overall economic factors and also just comfort with some of the factors that I mentioned, which is the full absorption of stimulus and some of the segments that we thought were maybe a little bit more distress, making it through kind of pandemic operations.
Got it okay. That's all that I had thank you very much.
Thank you we'll now take the next question from David Long at Raymond James. Please go ahead.
Thank you and good morning, everyone.
Good morning.
As you as you look at your deposit fees you know appreciate the guidance for 2022.
The noninterest income.
Within that on the deposit fee side is there any consideration for adjustments to overdraft and non sufficient fund fees.
As with seeing a lot of your peers or the bigger banks.
<unk> change how they are charging for those products is that something that you guys have considered in and do you have any plans for that for 2022.
David we're going to work our way through that I'll, just give you some comfort by saying that that number is also less than $2 million on an annual basis.
So.
From our perspective.
We'll take a look at it but I don't think we're going to follow closely on the heels of the top 25, there I would just say that consumer although important to us.
In certain pockets of there is still a fairly muted.
Part of the business with you know three.
$3 billion of balances, but really only driving.
About a million.
Nine of our fees and in that regard, both overdrafts and maintenance fees on an annual basis. So we will continue to evaluate it and have discussions with our regulators but.
The the pain of that if we did anything as you know.
<unk> two to that amount or less.
Absolutely great. Okay I appreciate the color there and then.
On the cash.
Cash side, obviously, a lot of liquidity on your balance sheet with rates moving higher here, how aggressive do you want to be in moving that into securities in the near term until loan growth really accelerates.
And it does it is that impacted by sort of the stickiness you expect in your you know rapidly growing deposit balances.
Yeah, David that's a it's a good question I would say nothing we do at least in terms of deployment of cash or.
Any balance sheet Remixing is coupled with the term aggressive certainly.
Try to take on strategies and manage them as the rate environment or the operating environment dictates. We continue to expand the size of the investment portfolio, because I think we think that the target should be around 20%.
Of the asset base, and we were short of that most notably because both first choice in Cecos really didn't have proportionate sized portfolios and I think we'll let that dictate overall, where we ended up with investments I think certainly from my perspective with there being some optimism about rate increase.
Is it takes a little bit of the pressure off to continue to move to securities, but I do think you'll see over the next couple of quarters will still expand.
The size of the portfolio, but but I don't think we would increase the amount that we're moving to the securities portfolio unless you continue to see significant cash build and in business development activities.
That might change our answer but I think that's a it's a good point it's a it's.
Our net interest income that'll that'll benefit us as we move forward and we certainly want to be mindful of the fact that with a potential tightening that but some of that liquidity could get wrung out of the system and we don't want to put ourselves.
In a position, where we've moved too much or taken too much asset sensitivity out and didn't get the upside. So I would say status quo will continue.
$30 million to $40 million, a month moving into the investment portfolio for the foreseeable future and we'll just continue to monitor that versus overall cash levels, but I do think we sit and we have a good position here from.
Being asset sensitive and we certainly don't want to flush that through for a short term.
Pick up in investment portfolio net interest income.
For sure cool. Thanks, again I appreciate the color.
Welcome Thanks, David.
Once again to ask a question please press star one.
Now take the next question from Brian Martin with Janney. Please go ahead.
Hey, good morning, guys.
Brian just wanted to touch on maybe I don't know if maybe Keene just on the margin and just kind of your commentary on the asset sensitivity it sounds like Theres some floors on me.
On the loan so maybe that there's a.
A little bit of a lag before you get the impact on.
On the benefits of the asset sensitivity, but can you just give a little bit more color on just kind of your expectations on on that.
Yeah, Bryan I actually think it's it's pretty linear with the first increase I mean, there's a good portion of.
That's on the floor. So you know we've got five 7 billion a variable interest rate loans, two and a half billion have no floor. So it will start to see the benefit there.
And I think also just deposit behavior, we expect that deposit repricing is less with initial increases.
And then there's just over 3 billion with a floor.
175 of those are priced at or above the floor. So they'll move.
And then.
You've got another call it $125 million that are zero to 25 basis points and then another almost half a billion that are 25 to 50. So there's a pretty good chunk that if you got 25 or 50 basis points, even when they are at the floor start to move.
But again I think the important part is that you've got $2 5 billion Theyre moving right away.
And you know call. It another 200 million that are going to move somewhere between zero and 25 basis points.
And again I think some of that's just.
As much on the deposit side as it is on the asset side and I think right now with the level of cash we've got on the balance sheet to David's question.
Interest rate increases based on what forecast are fairly linear in terms of the guidance. We gave you 50 basis points, but you could probably interpret that and in 25 basis point increments up and down it would be pretty accurate as the way we see it today.
Got you and what was the I guess annual increase for 50 that you guys.
You said earlier King yes.
Yes, it was 3% to four 4% net interest income dollars and that's you know call. It 10 to 15 basis points of margin based on you know.
<unk> cash position.
Okay Gotcha, Okay, and then how about just your expectation for that excess liquidity position, because that's over and above the asset sensitivity I mean, where do you where do you see that playing out of deploying that excess liquidity kind of throughout the year, how does that impact kind of your outlook.
What I would say is our guidance that we've given it includes a variety of scenarios.
One being that I think early you know call. It in the you know if you thought about it in terms of.
100 basis points fed funds increase I think they're at a 50, we probably don't think that there is a ton of cash moving out but on the upside. When you know you go 50 and beyond I think we think that at least conservatively cash moves out.
But with that said, that's all static balance sheet analysis, if you couple that with the loan growth that.
We're I think anticipating and that everyone expects of US you know at call it eight 8% or sort of mid to high single digits.
When you start booking that loan growth. Its also picking up from zero in your booking that at some nice rates and that that loan yield is additive to margins. So I think thats. The reason why I said, it's generally linear but.
But we haven't spoke it.
Shouldn't that we focused a lot on what happens with cash in each component of.
The deposit side, but I think at some point, there's a tipping point that when the cash moves out.
Make up for that with loan originations are remixing. So.
It moves from static to dynamic balance sheet analysis, if that makes sense.
Yeah no. It does okay. I appreciate the help there and then just going back to the fees kind of with those C. D. In there and kind of whatnot, just given that's a little bit volatile I mean year over year.
The youre kind of looking at.
All in with those added fees potentially on the CD side.
And the Durbin kind of all in is everything kind of that upper single digit type of growth off of 'twenty one's level.
Yeah, I would say, it's like mid single digit Brian I think it's probably five 6% overall with you know robust growth in the tax credit line item at 15 or so percent.
Okay.
And I.
I guess this is maybe for Scott just the deposit growth I mean do you guys expect in this deposit growth has been stronger.
I mean do you anticipate that slowing some this year is that kind of thing here.
Your expectations.
Yeah, I mean, certainly we've been the beneficiary of excess liquidity I think I wouldn't expect the production as it relates to.
New business, new accounts to slow down I think.
Particularly in the specialties I think we've done a good job and that was our you know our primary interest in developing that line of business is local continue to be low cost steady you know quarter over quarter type growth businesses.
Okay, perfect and just last one for me was just maybe Keene on the tax rate you know given kind of these investments you know I guess can you give some thought on how you're thinking about the tax rate for 'twenty two.
Yeah, I think the tax rate is going to move up a little bit. It's a function of profitability I think we haven't quite kept up as much on the tax credit investment side in the municipal side. Despite that we've we've really tried to.
But we've been disciplined in terms of duration on the portfolio principally with the muni. So it's going to tick up call. It one to one 5%. So 20 to 22 and a half something like that for 2022, depending on what you look at from a profitability perspective versus 21 and also just some of that is a little bit of a function of.
A few more assets in California, with a higher state rate as well.
Yeah, Okay perfect. Thanks for taking the questions.
Of course, thanks, Brian .
That concludes today's question and answer session. At this time I'd like to turn the conference back to Ms. Jen <unk>.
Mr. Jim Lally. Please go ahead.
Thanks, Katherine and thank you all for your interest in our company.
And for joining us this morning, and we look forward to seeing to being with you. After the first quarter, if not sooner so have a great day.
That concludes today's call. Thank you for your participation you may now disconnect.