Q1 2022 Enterprise Financial Services Corp Earnings Call
Good day and welcome to the U 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.
Well, thank you Christina and good morning, and welcome to our first 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 for the first quarter.
On our fourth quarter earnings call I commented that I expected momentum, we had leaving 2021 would continue into 2022.
Our results for the first quarter of 2020 to show this to be true.
For the quarter FSC earned $48 million or $1 23 per diluted share this compared to one dollar and 33 cents and 96 cents per diluted share for the linked and prior year quarters, respectively.
This level of performance produced a return on average assets of 142% just slightly less than the 1.52% that we posted for the fourth quarter of 2021.
As you know the fourth quarter typically has the benefit of the peak of noninterest revenue in 2020 one was no different.
On a pre provision basis, we earned $57 million for the quarter, yielding a robust P. P. N R. R O a a a one 7%.
And a R O a TCE of 17, 5%.
<unk> posted another solid growth quarter for both loans and deposits net.
Net of PPP loans grew at an annualized rate of 8%.
Scott will provide much more detail about where we saw opportunities and where we experienced headwinds, but I will comment that we remain disciplined with respect to pricing and credit likely to the detriment of a few additional basis points of growth in the quarter.
Nonetheless, I'm confident about our ability to improve on this level of performance as we progress through the remainder of 2022.
The quarter also provided continued significant deposit growth for our company.
We are becoming increasingly comfortable with a diversified channels of deposit generation that we have added to our company over the last five years just in the last year, we have been able to grow our overall deposit base by 40% through organic growth and M&A.
Both improving our DDA to total deposit ratio to 42% and lowering our overall cost of deposits to 10 basis points.
This combination of an asset base that is interest rate sensitive combined with a diversified well priced deposit base will bode well over the next several quarters given the expected interest rate environment.
Credit quality remained very solid as evidenced by the statistics on this page as I've mentioned in the past we do not take this for granted and have worked incredibly hard to build a more diverse and resilient portfolio.
Due to the improvement in our credit quality and macroeconomic forecasts a provision benefit of $4 million was recorded in the first quarter of 2022.
Our capital position remains strong at $3 31, 22, we had total shareholders' equity of $1 $5 billion and the TCE to total assets assets ratio of seven 6% compared to eight 1% at 12 31 21.
During the quarter, we repurchased 351000 shares and increased the quarterly dividend, 5% to <unk> 22 per share.
Stepping back and looking at the last several quarters you begin to see the cadence of consistency that we've worked hard to establish.
This includes solid loan growth in the high single digits.
Confidence in our multifaceted reliable and low cost deposit generation capabilities.
A top quartile return profile.
A highly a high quality diversified loan portfolio, and a flexible and efficient capital base.
Moving on to slide four you will see where we remain focused for the remainder of 2022.
As we progress through the second quarter, we have our teams keenly focused on their loan deposit and net new relationship goals for 2022.
When we designed the business and diversified way to rely on multiple markets and businesses such that we can focus our efforts on the families and businesses that truly value our relationship and solution oriented model versus garnering growth at any cost.
Like with past new markets tax credit allocations, we are leveraging this to garner new relationships. We have found is especially true when we enter new markets, where the use of the program is not as prolific or to differentiate ourselves in a very crowded commercial real estate business.
I'm excited to share with you that I'm already seeing new opportunities added to our pipeline using this tool.
As it relates to our affordable housing business, we are seeing growth in existing and new markets that should build on our 2021 performance, which was a record year in terms of closings.
We have made significant progress in expanding our profile to attract new talent. We've invested we've invested more heavily in talent for current and new specialty businesses, along with bolstering our teams and our higher growth markets.
Our recent recruiting efforts and the Orange County, and L. A markets.
Complement our existing team and will introduce us to more middle market operating businesses.
The foremost recent hires came from four different organizations and they've hit the ground running and.
And as Tom and Scott will provide a little more detail around the most recent trends we are seeing in these markets. However, the progress we are the progress and early signs are positive and I'm excited to continue to expand our profile throughout southern California, and the southwest.
Additionally, in the fourth quarter of 2021, we were able to onboard a professional practice finance team.
With a national focus this group has come out of the gates very well in 2022 meeting the shared high expectations.
We've also bolstered our already high performing Phoenix team with three new ads, each coming out of different organizations.
Finally, we recently announced the opening of a new commercial office in North, Texas, We were able to land a proven leader and will build around his 30 year career and is very attractive market. We were eager to make these investments and we're confident that these are the new associates and teams will add to our current and expected level of growth.
With that I will now turn the call over to Scott Goodman Scott.
Thank you Jim and good morning, everybody.
As Jim had mentioned were out of the gates well in 2022 with loan growth for the quarter of 176 million net of Triple T.
Or 8% annualized as represented on slide number five.
In general the specialty business units continue to perform well with additional growth contributed from our commercial real estate activity in the southwestern region driven in large part by Arizona.
Alone details by segment are outlined on slide number six and seven.
On a TTM basis organic loan growth net of Triple T and none of the recent first choice acquisition.
770 million or 12%.
With nearly all key areas of the loan portfolio showing increases.
As you heard from Jim We've remained disciplined in our pricing philosophy is relating to the fixed rate portion of our business as competitive pressures pushed spreads well below our targets.
While this did dampen some growth in the Investor CRE book over the past year, we see longer term value in maintaining consistency and transparency in our loan process, both with clients and with our sales teams.
That said, we've been able to lean into other channels that were more immune to the environmental headwinds and competitive pressures to provide the growth and improved returns proving the fundamental benefit of our diversified revenue model.
In recent calls Ive talked about the robust activity in our sponsor finance business being driven by a strong M&A market and the deep relationships that we've nurtured with our private equity partners through the years in this line of business.
As a result sponsor finance posted a record growth of $133 million in the quarter.
This does not signal any changes to our strategy is our approach to credit structure to pricing.
With our targeted sponsors remains consistent.
Although the net growth may vary quarter to quarter based on seasonality and the timing of portfolio company sales production activity remains strong in this business.
Solid growth in life insurance premium finance, mainly reflects several new clients as well as seasonal premium payments on existing policies.
As the aggregate portfolio has steadily built a funding tail on this annual premiums that naturally adds elevated quarterly growth momentum.
Yeah.
The tax credit business also continues to perform well with new fundings related to the expansion of affordable housing programs across multiple states.
In the SBA business production remains solid and consistent with prior Q1 levels, but payoffs and paydowns have risen somewhat.
Due to competitive pressures from non SBA lenders.
We're executing plans to proactively address improve retention.
The well seasoned loans as well as continuing to recruit and originators to boost production in higher growth markets.
Aggregate portfolio trends in specialty lending along with the local markets are outlined on slide number eight.
In addition to the aforementioned specialties. We've also added a small experienced team of experts located in California dedicated to the professional practice space. This group focuses on lending to dental veterinary and smaller medical practices and is off to a nice start adding $18 million of growth in core.
<unk>.
The southwest region, which includes Arizona and Las Vegas.
<unk> to post strong growth in Q1 of $70 million.
And has grown 182 million or 42% year over year.
Larger originations during the quarter have been composed of new CRE acquisition and development deals for existing relationships or which we can leverage our proven ability to perform and obtain targeted yields.
In St. Louis the portfolio was up approximately 2% year over year.
<unk> declined slightly during the quarter.
St Lewis and Clark includes a large base of C&I clients, who was working capital borrowing needs have been suppressed by the larger cash balances and continued supply chain obstacles.
After a slight uptick at fiscal year end average line usage leveled off during Q1 at around 40% of total commitments.
Fundamental sales indicators, though remain positive with healthy new origination levels additional new relationships and our four quarter low in terms of payoffs.
And I expect that as liquidity continues to work its way through the system that these activities will ultimately result in better net growth in the market.
Kansas City loans were up $21 million in the quarter or 10, 8% annualized with a balanced mix of new CNI and CRE loans into various industries, including logistics foodservice broadcasting and metal fabrication.
In general the Kansas City team is producing steady originations.
Okay.
In new Mexico, we've.
We've experienced a decline in loan balances over the past year.
As a reminder, we entered new Mexico market through the L. A N b acquisition.
Into three primary submarkets of Los Alamos, Santa Fe and Albuquerque.
The primary value driver was and continues to be the low cost and well diversified deposit book, which is primarily concentrated in Los Alamos and San Jose.
We've successfully grown this deposit base, while maintaining its low cost profile as well as developed some nice commercial relationships in these communities.
Albuquerque, However makes up the predominant share of loan balances from new Mexico with a heavy commercial real estate portfolio.
Our goal in Albuquerque has been to maximize retention of loans that fit the enterprise Bank and trust client profile.
While developing a CNI strategy similar to our other markets.
Certainly the Covid and related economic factors have impacted our ability to achieve these goals as quickly as expected.
But we also felt that a leadership change was necessary here to better position us going forward.
This change was made during the quarter with the promotion of an existing high performer as.
As well as repositioning this region under the leadership of our senior team in Arizona.
Our expectation here is to slow the runoff near term.
And build a well balanced relationship based loan portfolio with modest but steady growth potential over time.
We continue to execute our integration plans for the legacy first choice and seacoast commerce local commercial loan books in Southern California.
As I discussed last quarter, the primary objectives were to retain and deepen key client relationships.
Maintain a steady production process.
And expand our talent base to support the expansion of our C&I strategy into this market.
In Q4, I also set the expectation that near term, we would see some pressure on net growth extending from a portion of the legacy Bank book, which was focused on shorter duration CRE bridge lending.
And residential fix and flip loans we.
We did continue to experience. This pressure in Q1. However, we are getting traction on our longer term objectives and the quarterly trends are positive.
Relative to the loan portfolio here originations were up in southern California by 25% over Q4.
I'll pay offs declined by 46% over the same period.
Our loan pipelines has also been building nicely, including both opportunities to expand exposure with legacy clients as.
As well as new CRE and C&I relationships.
On the talent front, we're also making solid progress.
In addition to the relocation of a long term proven senior leader within the enterprise organizations to integrate the commercial team in L. A and Orange County, we have also recruited for new C&I focused relationship managers from several end market competitors.
We expect these experienced bankers to help expand our reach into the networks and the C O I as necessary.
Introduce CNI growth into the region.
Expanding a bit on Jim's remarks in a challenging environment for talent.
Our new adds in the existing markets like Southern California, and Phoenix as well as the new team in North, Texas provide solid opportunities to leverage the higher economic growth profile of these metro areas.
And support the attractiveness of our business model to the experience to these experienced commercial bankers.
Finally.
Touching on deposits from slide number nine.
Total deposit balances and in Q1 were up $360 million from Q4 to 11 7 billion driven by ongoing liquidity within our commercial client base.
Steady consumer saving levels also continued particularly in new Mexico.
And continued growth of specialty deposit lines.
Specialized deposit teams for community associations and the third party escrow business also produced steady new accounts for our key existing relationships as well as onboarding several new relationships in the quarter.
In general New accounts continued to outpace closed accounts.
And we are well prepared to maintain a disciplined approach to pricing, both new and existing balances.
Now we have not experienced significant attrition balances due to rate for our relationships, but we continue to watch this closely through further fed interest rate moves, albeit with a disciplined and relationship focused approach.
Now I'd like to turn the call over to Keene Turner for further comments.
Thanks, Scott and good morning, everyone. My comments begin on slide 10, where we reported earnings per share of $1 23 on net income of $48 million in the first quarter compared to one dollar and 33 cents in the fourth quarter.
The loan and deposit growth that Scott discussed benefited net interest income and helped offset the impact of the decrease in PPP earnings.
And the two fewer days in the quarter.
Noninterest income is typically highest in the fourth quarter of each year and we experienced the expected seasonal decline in the first quarter.
We also declared and paid our first dividend on our preferred stock this quarter and that reduced earnings per share by three <unk> in the period and lastly, our continued management of capital through share repurchases added approximately one to earnings per share in the quarter.
Turning to slide 11, net interest income was $101 million compared to $102 million in the prior quarter. The decrease was primarily driven by a $2 million reduction in PPP related income along with the two fewer days in the period. Despite the sequential decline we continue to build repeat.
<unk> net interest income were strong organic loan growth higher earnings in the investment portfolio and stable net interest margin.
Moving on to slide 12, net interest margin on a tax equivalent basis declined four basis points in the first quarter to $3 two 8%.
This was mainly the result of higher average balances on the interest bearing cash stemming from the strong deposit growth in both current period and the prior quarter.
Loan yields were higher by two basis points, despite a $170 million reduction in average PPP balances and we continue to add to the investment portfolio at a measured pace to deploy excess cash and take advantage of higher available yields.
Funding costs were stable as our total cost of deposits remained at just 10 basis points, we anticipate that net interest margin and net interest income will expand now that rates are moving higher.
Our balance sheet remains asset sensitive and we expect that each 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, which is approximately eight to 12 basis points of net interest margin based on 331 asset composition.
The loan portfolio is our largest driver of asset sensitivity at 63% of loans are variable rate nearly 60% of those happen.
Have rate floors, and approximately 40% with floors are currently priced at or above the floor.
The additional 20% are within 50 basis points of the floor.
The high level of cash on the balance sheet and continued deployment with investment yields up help us helps us to mitigate the impact of those floors and make the lift off the low interest rates more meaningful.
Our deposit portfolio remains more than 40% noninterest bearing balances and we have less than $500 million of total transaction accounts, formerly tied to an index with ample liquidity, our expanded footprint and strong low cost deposit generation through our specialty verticals, we believe our ability to control deposit costs as rates rise.
Is greatly enhanced versus prior tightening cycles.
Okay.
Slide 13 depicts our asset quality, which showed continued improvement on already strong position nonperforming assets were 23 million or 17 basis points of total assets net charge offs were $1 $5 million or seven basis points annualized compared to 14 basis points in the fourth quarter.
On slide 14, we reduced the allowance for credit losses, with a $4 million provision benefit in the first quarter due to improvement in our credit quality metrics forecasted macroeconomic factors, most notably unemployment rates in the commercial real estate price index.
The allowance for credit losses totaled $139 million or 1.54% of total loans compared to $1 six one at the end of the year exclude.
Excluding guaranteed loans the allowance to total loans was 173% at March 31st.
Our forecast improved in the quarter, we do believe the existing level of allowance reflects heightened risk to the economy from inflation rising interest rates and continued disruptions in the supply chain that warrant ongoing consideration.
On slide 15 fee income for the first quarter started out strong at $19 million. This was a decline of $4 million compared to our seasonally high fourth quarter result of $23 million. The decline was led primarily by reduce fees earned on community development investments and reduced tax credit income that was consist.
With our expectation.
Card services revenue declined as debit card volumes decreased in the first quarter compared to fourth quarter levels.
Slot revenue was strong in the first quarter at $1 million and deposit service charges rebounded in the first quarter as the fourth quarter included a fee holiday provided a first choice customers during core system conversion.
While tax credit income will continue to be seasonal our momentum in this business line continues however, rising interest rates do pressure. This line item due to its impact on the inventory held at fair value.
Also fees earned on community development investments are not consistent sources of income quarterly, but we do expect continued contribution in the latter part of this year card services will face the durbin impact.
Headwind starting in the third quarter of around $750000 per quarter.
Turning to slide 16 first quarter total noninterest expense was $62 $8 million, which was roughly $1 million lower than the fourth quarter, which included $2 3 million merger related expenses. There were no merger related expenses in the first quarter.
Core operating expenses were $1.4 million higher than the first quarter at $62 8 million compared to $61 4 million in the fourth quarter. The driver of this increase was primarily seasonally higher payroll taxes and along with the 401K match.
Expenses for 2022 have performed as expected and we're encouraged by the numerous positive business trends to begin this year.
As both Jim and Scott discussed, we continued to invest in our markets and I have successfully recruited new production associates in both our commercial and specialty lines.
These investments will allow us to build and strengthen our growth targets, but we do expect to see a sequential increase in our expense run rate from the first to the second quarter specifics.
Specifically hires in commercial banking units will allow us to build upon the current growth rate for loans and more confidently maintain that rate of growth over a sustained period.
Additionally, stronger than planned momentum in specialty deposit areas as well as forecasted net interest rate trends has and will drive continued servicing expenses.
As a result, it appears that the current quarterly run rate will step up modestly from roughly $63 million per quarter to a range of $64 million to $66 million for the remaining quarters in 2022.
To reiterate these trends will be we expect these trends will be asked more than offset by net interest margin trends, but more importantly, we think these investments and continued growth will allow for stronger revenue trend longer term.
Our capital metrics are demonstrated on slide 17, our tangible book value per share was $27 six and our tangible tangible common equity to tangible assets ratio was seven 6%.
This compares to $28 28, and eight 1% at the end of the year. The 4% linked quarter decrease was primarily due to a decline in accumulated other comprehensive income due to the impact of rising interest rates on our available for sale investment portfolio. We.
We currently have 28% of our investment portfolio and held the maturity, including more than $100 million. We transfer early in the first quarter to protect tangible book value further from rising rates. It is important to note that the decrease in the fair value of the portfolio does not impact earnings or our regulatory capital ratios, where we continue to have excess capacity overwhelmed.
Capitalized limits.
With our strong capital position and equity market trends, we repurchased over 350000 common shares totaling $17 million in the first quarter and announced another increase to our quarterly dividend.
Turned approximately $25 million to shareholders this quarter through repurchases and common dividends, while our earnings drove a 17% return on tangible common equity.
We had a strong start to the year and with solid loan and deposit growth high quality credit metrics and continued deployment of excess liquidity.
Highlights drove a 1.4% return on average assets.
And our pre provision return on average assets of one 7%.
We believe we are well positioned for the remainder of 2022 and to continue to execute on our strategic initiatives.
Thanks for joining the call today, and we're going to now open the line for analyst questions.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad.
Yes.
Please make sure your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question.
Our first question from Jeff <unk> with D. A davidson.
Thanks, Good morning all.
Good morning, Jeff.
Question on the expenses I appreciate the guidance there just wanted to confirm the cost saves on deals at that is that.
They've been captured at this point.
Yeah, Jeff.
We have actually and I would say on the first choice side, probably more so and as you heard from Scott some redeployment.
On that front as we move forward, but we feel like from a net run rate. There. We're in we're in good shape and in fact at the end of the year.
We had a retirement and a planned transition of the SBA team from Dave Barter I'm, sorry, Rick Vista, and so that concluded the final cost saves as we see it from the.
Seacoast merger. So we're in good shape, there and I think it's it's clean run rate from here on out so to speak.
Got it.
And then.
Moving to the funding side and this is a little more.
Maybe detailed trying to get a sense for the specialty funding versus your traditional funding sources what is.
The typical betas or what would you broadly speaking.
View with what betas, how that would.
Translate to the specialty group versus the traditional or perhaps there's not much of a difference.
So Jeff in the in the guidance that I gave on the the margin impact on a static balance sheet read essentially modeled on interest bearing accounts. The same betas, we had in the last cycle, which was around 75%, we think that with the deposit composition I mean, we've more than doubled DDA with some of the transactions we've.
Done.
And in the specialty specifically I think overall that'll help control deposit costs and I think it'll help us control that non interest or.
Or that interest bearing piece more favorably and then in addition, the savings accounts and at particularly in New Mexico.
We'll also helped drive that beta further down so we think our guidance is fairly conservative there and then there is an expense component to some of the specialty businesses in.
In 2021 that was around $14 million of run rate expense.
In the first quarter, that's roughly $4 $5 million, that's running through other expenses and we think that that steps up to around $5 million in the second quarter and then from there on out it's going to be a function of growth and some impact of rising interest rates on those balances, but we think that's about <unk>.
20% to 30% in terms of if you look at it from a beta perspective on the overall balances that's what we were seeing from.
Prior research on the big players in those markets and that's essentially what we're modeling in signaling to our teams in terms of our tolerance for moving forward. So I think we feel well positioned there and again I think our guidance and that you know.
3% to 4% from 50 basis points is is conservative to a degree.
And we're going to manage that to be a little bit better than that we'd been in the past.
So again, if I correct me if I'm wrong here.
The kind of the betas on the specialty you sort of diverted that too it's actually up.
Operating expense type growth versus impact to them.
Traditional margin betas is that did I hear that correct.
Yeah. That's that's generally correct. So yeah. It within my comments. The there is some money market component in interest bearing component that I bumped into what I talked about in terms of the overall deposit betas.
But then it's that high DDA that really is.
A pass through and where we're refunding and paying certain expenses for those accounts, but it's reflecting as BVA and would also drawing fees on it and so those dollars that I gave and the sensitivity that I gave really reflects those expenses in noninterest income and is also part of what's driving the slightly higher guide on the expense side.
Got it perfect. Thank you and maybe last one.
The hidden hitting back to the to the buyback pace this quarter.
If you match that I guess, you would almost be at the end of the authorization, but just if you could comment on the appetite of our buyback and Jim I guess any other.
You could round that out with.
Any kind of M&A discussions that the appetite there as well. Thanks sure do you want to touch on the buyback first.
Yes, Jeff I'd say that your comment about the assumption of that continuing to roll forward with market trend is is fairly accurate and where we're close to the end of the existing authorization. We're in the time frame, where we come out of year end planning and and we're working through our capital plan and you know I would.
Anticipate that barring M&A or outsized growth.
Our dividend posture sort of remain similar and we would use the share repurchase to filling the gaps. There. So you know from a capital management perspective, the only caveat as you know with rates continuing to trend a little bit higher we're just going to be mindful of TCE levels and the impact of the available for sale portfolio on Tc.
<unk> levels, but we have that extra layer of.
Tier one capital from the 2021 preferred issuance that gives us more confidence to run.
Down at this level will say you know slightly below 8% if necessary given market weakness so.
Our our posture in terms of capital management remains very much the same and we haven't we haven't pivoted.
Okay.
And Jeff I'll, just comment on M&A, we think about it in multiple ways, we did a little bit relative to.
Onboarding new teams in specialty so that's one way to look at it from a whole bank perspective, as you know it's a process.
And we're focused on you know being able to fill in where we possibly have needs in certain markets and talent and things of that nature as we look at possible partners and things of that nature.
Thank you.
And we'll take our next question from Andrew Liesch with.
Piper Sandler.
Hey, good morning, everyone.
The commentary around the margin and obviously rates are moving higher can you give us a.
Samsung what new yield what loan yields new loans are being added versus last.
Last quarter and relative to the portfolio average.
Okay.
Yeah. So so Andrew it for us it always depends on where the growth is growth. This quarter was in particular in.
Senior debt financing so that helped drive.
Great.
Slightly so we're at 434 total loan yield at the end of the quarter.
Those rates are going to be just modestly higher than that.
SBA Similarly, and then premium finance and in some of the other more credit immune.
<unk> disciplines are gonna be below that so it's a function of.
Of of.
Where that growth is coming in and Scott or Jim can comment, but I think they made this comment that you know our spread appetite hasnt changed and were being disciplined in terms of how we're quoting loan rates and so it's cut in the growth a little bit because we feel like we've been better in terms of pricing on what are the moving interest rate curve.
And quoting spreads over the index versus generally.
Flat rate.
So we're still trying to maintain our spreads and.
Variable rate loans and keep that high variable composition. So hopefully that's helpful. We try not to give away too many direct secrets, there, but it's safe to say I think the premiums above.
Certain.
Areas and below for for credit characteristics generally remain intact and the growth in the quarter is really reflective of our continued pricing discipline.
Okay.
Andrew you know Juliet opportunities and you know the markets well that you know there is demand out there for longer term fixed rate financing, especially tied to.
Certain real estate.
Markets that we just shows that for the longer term, it's up but that's not what we wanted to do right and we feel that there's a bit of transactional and commodity related to some of those opportunities that those circle back maybe a different name may be a different project, but we'll circle back certainly and we'll capture it at a better yield for for all.
All of us.
Got it so I guess reading through that Thats kind of what may have driven the decline in loans in St. Louis and then maybe I guess slower pace of growth than in other quarters in Kansas City.
Well in certain secondary head right.
Go ahead Scott.
I was just going to say I think I think St. Louis is more a factor of the CNI headwinds.
Although I would say just as Jim said, we did back away from Sierra CRE opportunities in all markets, probably a larger impact in the higher growth markets for CRE I think St. Louis maybe to a lesser extent, Kansas City is still seeing some of the headwinds on the liquidity that sitting on the balance sheets of our of our C&I borrowers.
I think that was more of a headwind there.
Okay.
Got it thanks for taking the questions I'll step back.
Thanks, Andrew.
And if you would like to ask a question. Please press star one at this time.
And we'll take our next question from Damon Delmonte with K B W.
Hey, good morning, guys about what he is doing well today.
First question, just regarding credit and the kind of the outlook there when we think about the provision.
You know do you guys feel like you have additional capacity to release reserves and you feel like given the.
The last couple of quarters of releases, you've kind of right sized or normalize the the loan loss reserve.
Okay.
Yeah.
I think our posture there is we feel like we've been.
Appropriately flow in.
Reducing coverage because of the uncertainty from quarter to quarter remained at shifts in terms of what the topic is.
And it's been moving fairly quickly so.
Based on diesel and it forward look right now you know we.
The allowance levels appropriate you know when we adopted fee. So we were at basically one 3% of loans. Our view of that is is probably a little bit more conservative as we sit here today and we've got all these economic factors that you know we probably werent.
Appropriately.
Aiding in the initial adoption so to speak because they haven't been prevalent for a number of years.
But with that said credit quality continues to be.
On the upswing in terms of improvement from from already high levels and so there might be some some work moving forward that it'll come down either as a function of growth depending on where asset classes, we originate in.
Or continued behavior or movement of credits that are driving some of the heavier reserve, but generally I think based on the <unk>. So we feel like at 331 week, we have the appropriate allowance.
And there is probably not what I would call a material move either way as.
As we sat there if there was we would have had to recognize that in the first quarter.
Got it okay.
So we should probably fair then to start to you now expect some.
Modest provisioning here in the upcoming quarters.
Yeah, I think all else being equal if that's probably going to drive some provision like I said, unless we see some movement in credits that are carrying stronger reserves or just shifts in asset classes for example growth in SBA offset by declination.
In areas that we've got a little bit higher reserve wood wood costs, and some mixing and shifting around.
Life insurance premium finance, another allowance category that carries a fairly light reserves out yet.
In full disclosure there.
Got it okay.
That's helpful. Thanks, and then.
Could you just talk a little bit more about the sponsored finance growth this quarter and kind of you know it was pretty outsized. So can you just talk a little bit about some of the characteristics that resulted in that that growth during the quarter.
Sure David I think I can cover that you know as I said, we've been in this business a long time now and we've built some some pretty deep relationships I think.
Even going back to Triple T, where we were able to help many of those sponsors because.
A large majority are formed under the FDIC program on the SBA.
We just we just generated.
A lot of goodwill with those sponsors and so we were if we werent at the top of their list we are now.
And I think just the robust activity youre seeing in M&A.
These these funds.
Losses have raised new funds as well so they're deploying capital. So I think it's just a function of a lot of things coming together our longevity in the business, we have an active active sponsor base.
And.
We're just reaping the benefits of that right now.
We've been in the business, a while and so we've seen it.
Can ebb and flow with cycles, and we're taking advantage of it we're not changing credit parameters.
We're being disciplined with our underwriting and with our pricing.
So I feel good about the quality of what we've added and we're just going to continue to take advantage of that opportunity while it exists.
Yeah.
Got it Okay. That's helpful. Thank you and then I guess, just lastly, maybe Keith can you just kind of.
Revisit your commentary on on our noninterest income and the outlook going forward just given some of the.
Items that may or may not have influenced this quarter's results just kind of looking for a bit of a projection to expect over the next three quarters. Thank you.
Yeah.
I don't think you know I think we've got Durbin impact nail down I think we talked a little bit about the private equity I would say in total for 2022, we haven't really adjusted our expectations upward or downward I think the quarters in which it's going to occur.
Our different particularly in tax credit so we could see.
Lighter than expected second and third quarter.
More so due to re measurement and evaluation and it is possible that if the activity in that.
Segment flows a little bit we might even see a couple a couple of negatives in the upcoming quarters with rates up and having a value of the tax credits lower but we feel like with the first quarter performance and what we expect for third and fourth quarter.
We will be able to achieve the targets that we have pretty handedly for the year and still meet the guy that was out there for that line item.
Okay, great. Thank you very much.
Youre welcome.
And again, if you would like to ask a question. Please press star one at this time.
Take our next question from Brian Martin with Janney Montgomery.
Hey, good morning, everyone.
Good morning, Brian just hey, just a follow up to that last the last question just that tax credit Guy the initial guide for the year.
Here <unk> can you remind us what that was.
I think it was around $10 million, let me just make sure that that's accurate in my notes.
But I think we're expecting around $10 million in solar for that which is that <unk>.
One 8% from 2021.
Okay. So the 20% growth Okay, and then just your outlook for I guess, it's kind of you guys think about it with kind of your rate outlook. As you think about it I guess, how are you thinking about the rate increases here.
Yeah, Brian I mean, I think we're preparing for what we think is the most likely forecast that's out there which is two near term 50 basis point hikes.
I don't know that we're thinking about a heck of a lot after that because that's going to affect 23 more than it affects 22 from.
Earnings perspective, it probably affects the way, we manage and price deposits and gather them then it does.
P&L so to speak in the near term.
But I think that.
That's pretty much what we thought about in terms of how we prepared our guidance here and prepared our expense guidance from from those revisions gotcha.
Gotcha, Okay, and then just maybe I missed what you said earlier on the deposit betas came but I guess.
The part about the you know what.
What's going to flow through the expenses, but just as far as kind of a total paid I guess, how do we think about our beta maybe on the first 100 versus maybe the second hundred can you give any thought on how that progresses I think he said the last time you guys were.
The number you gave of 70, but maybe that was total but just kind of how your progress here for the first for the immediate increases in the near term here.
The 75% Beta I gave was on just the interest bearing piece.
I think it's pretty clear that you know.
You know we're in within that first 25 basis point hike and we don't expect much movement.
There. So our view is from here on out I think.
Terms of what we would expect obviously, we would expect deposit to react more slowly initially and then become more rate sensitive as rates move up.
I think embedded in our net interest income and margin commentary is the fact that.
Also we get off the floors and so I think there's a variety of offsetting factors.
So I think that the betas early on are going to be lower and then I think thereafter will track closer to that 75% and then that's how aggressive do we get.
But not we but does does the right.
Do the rate increases get them, but for US. It's you know we do expect that it's going to be more than paid for on the asset side with with the sensitivity. So again I gave betas because I knew.
You know that that's a fairly hot topic right now, but we also always try to guide people towards the net interest income and margin expansion because.
The beta is not the single determinant for us of of what profitability is going to be it's really that asset sensitivity. The investment portfolio opportunities, we have with the amount of cash that we have yet to deploy so.
We look at all of those factors and we think that that gives us confidence that we.
We're three years to 4% annual pickup in earnings for every 50 basis points and we think that's consistent for you know what I'll say is our foreseeable future until we speak again and.
Have a couple more quarters under our belt.
Gotcha No. That's helpful. I appreciate it and just your comments about I guess, maybe just I don't know.
I don't know for I guess, how who takes it but just maybe for Scott just kind of the loan growth you know all the hires you guys kind of outlined here, maybe just talk about does it change does that just kind of support your existing growth outlook is that and to your point can I guess it doesn't sound like it sounds like it from an efficiency standpoint.
Youre going to get the benefits of the efficiency ratio shouldn't see that much much change as a result of the the.
The talent you've added here.
Brian This is Jim let me, let me tackle that one I would tell you that the expectation given where we're making the investments in these higher growth markets will take us from talking about being you know mid to high singles to high singles low doubles in terms of run rate growth rate. So you'd think about quarters further into 22 that would be our <unk>.
Expectations.
Okay perfect.
That's helpful. I just had on the efficiency side, just it seems like that.
There shouldn't be much change there just as it is going to get paid for with the additional growth do you expect to put on.
Yeah look Brian I think if you go from 63 to 64, you're talking about $2 million of revenue I think just a day.
Day Count alone is going to give you.
That expense coverage back and then you have the 25 basis point hike that we already have that you didn't really see any through the P&L in the first quarter, but its fully impacting the second quarter and our midstream hike here continued earning on the growth for the first quarter.
I do think that efficiency generally improves from here, but that doesn't mean, it doesn't get a little bit.
The Lumpier bouncy from first to second or third quarter, where some of the tax credit trends that I talked about but generally I think your point is right you know from our perspective low rate environment, we performed well, but this balance sheets ready to move up and we're happy for that and that will drive some optical gains and core efficiency ratio.
Yeah Gotcha, Okay. That's that's it for me I appreciate that you're taking the questions congrats on a nice quarter.
Thanks, Brian I appreciate it.
And we will take our next question from Daniel Cardenas with bedding and Scattergood.
Good morning, gentlemen.
Hey, good morning, Daniel.
Just a couple of quick questions here, what what's the duration on the securities portfolio and then.
As we think about growth.
In the securities portfolio is that going to be primarily in the held to maturity portfolio or the available for sale portfolio.
Hey, Dennis just king the portfolio has extended a little bit and so it's actually pretty long.
We've been heavily investing in muni is over the last year year and a half so yeah. The.
<unk> north of six years, but we did put the bulk of those securities and held to maturity. So the duration on the <unk> five and under and based on what we're buying today in the complexion of what we're buying today, we're working on shortening that that duration back on the portfolio, but again I think optically at Sao.
<unk> long, but the loan portfolio duration is under three years.
You know as we sit here so that's it.
Asset class decision with the munis.
As well as an overall balance sheet.
The discussion there in terms of the portfolio and then please remind me what the second part of your question was.
Just in terms of.
Future expansion in the securities portfolio is that going to be primarily done into the held to maturity or the available for sale portion.
I would say that the composition is going to continue to be about the same we'll put a municipal purchases probably generally in held to maturity as we make them and that's about a third or less of the portfolio from a new purchase perspective, and then agency.
Bullets and mortgage backs will go in our available for sale.
For obvious reasons and that will be around two thirds of more purchases. So I think you know that's that's generally what we expect and we expect that will help drive down some of the duration of <unk> in.
In particular and the portfolio overall with with the short end of the curve coming up and being more cooperative in terms of reinvestment rates.
Okay. Good.
Alright got it. Thanks, and then just just one quick question on on the credit quality front metrics are very strong but just.
Kind of given the backdrop of rising rates and inflationary pressures or are there any portions of your loan portfolio that that cause you concern.
Maybe.
Two or three rate hikes from now.
Dan This is Scott I can I can kind of address that.
I think we've been sensitizing our analysis on our deals on rates certainly as a general practice for a while now originations renewals tried to incorporate that into our underwriting and our structures I would say looking at the portfolio on the C&I side.
The impact of higher prices the scarcity maybe of some inventory in the supply chain issues.
Aren't really impacting CNI other than obviously access to credit.
Need for credit, but generally a strong demand in these businesses and they have been able to pass along a rising costs, so far or kind of lean into the liquidity. They have but I would say we've got a particular I on a consumer discretionary goods those are probably going to see impacts earlier travel leisure luxury.
AG is another business that we're in.
We've been we've been able to see them pass along I think.
The increased input costs right now commodity prices are keeping up but will they be able to maintain that pace I think that's a question and we're watching that.
And then I think on the specialty side, you know life insurance premium finance.
Slow a bit as rates rise the cash value of it.
Policies don't quite keep up I think those are the ones that will probably.
On the forefront now.
Okay, Great Alright.
That's it for me thanks, guys good quarter.
There are no further questions at this time I'll turn the call back for any additional or closing remarks.
Thank you Kristina, that's really for us to them and thank you for joining us. This morning. Thanks for the great questions and your interest in our company and wish you. The best for the remainder of this week and the remainder of the quarter. So I'll talk to you later thanks.
Today's call. Thank you for your participation you may now disconnect.
Yeah.
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