Q2 2022 Enterprise Financial Services Corp Earnings Call
Good morning, My name is Rex and I will be your conference operator today.
At this time I would like to welcome everyone to the Enterprise Financial Services Corp, Q2 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one.
At this time I would like to turn the conference over to Jim Lally.
President and CEO you may begin your conference.
Okay.
Hey, guys.
Welcome everyone to our second 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 Officer, 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 and 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 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 second quarter.
We're very pleased with the results of the second quarter, our cadence of consistency that we spoke of in previous quarters has continued.
Our highly consultative relationship approach works well in times of uncertainty that clients and prospects to get advice and guidance.
Our client base is in the best financial shape that we've seen a very long time and are seeking opportunities to grow their businesses.
Yet the economic tea leaves suggests that we may have a slowdown in the horizon.
While the interest rate environment creates additional challenges for our clients.
I am confident that the consistency of our model has and will continue to positively impact our results.
Over the last five years, we are focused on diversifying our revenue through geographic and business expansion, we've improved our funding by way of M&A, and we have bolstered our balance sheet and capital position with a strong reserve.
And well executed capital management. The bottom line is that we have built the company for times just like this and are excited to share with you our results.
For the quarter.
<unk> earned $1 19 per diluted share.
Our second quarter performance reflects the power of all of our lending businesses combined with our revamped deposit composition that we have assimilated starting with Trinity and most recently with recently with first choice.
Loan balances expanded at a 13% annualized rate with contributions from nearly every business line and geography.
Given the variable rate nature of many of those lending segments, our earnings power through existing and new loan production bolstered net interest income and outstrip declines from success in PPP as well as seasonal trends in noninterest income.
Net interest margin income and operating revenue all expanded substantially from the first and the second quarter.
Deposit levels remained above 11 billion at June 30, and the shift during the quarter reflects our approach to focus on supporting customer relationships rather than transactions, our actions to exit highly rate sensitive balances speaks to our confidence and our ability to continue to grow our relationship driven deposit base in our core and <unk>.
Specialty deposit businesses at quarter end, our loan to deposit ratio to 84% with DDA, representing 43% of total deposits.
In addition to our success in expanding customer relationships and growing loan Outstandings Treasury management, and our commercial card businesses remain strong and poised for continued growth during the year. Additionally, we expect the tax credit business will rebound in the third and fourth quarters based on the high project volume and activity.
These underlying business trends are reflected in the expansion of our pre provision net revenue, which grew at an annualized 10% rate to $58 $4 million for the quarter.
Our return profile to remain strong our AA and <unk>.
We're one of three 4% and 173% respectively. These are right in line with the levels that we achieved in the previous two quarters, but we believe our current performance is more reflective of a repeatable run rate.
Our integration of our southern California market has positively impacted our financial performance since we acquired FCB, but now we are beginning to see the returns from the influence of our sales model and supplemental talents adds.
Acquisitions of new clients and the ability to grow with our clients. We inherited has positively impacted loan growth in this market during the quarter.
With a combination of ongoing industry growth in southern California, the momentum that we have across all of our markets and national specialty businesses gives me confidence in our ability to maintain this level of performance for the remainder of this year and into 2023.
Additionally, we have begun to see the momentum from some of our newer markets like Texas, and Nevada as well as practice finance I expect we will have success over time, attracting talent and further scale in these businesses in the years to come.
Our consultative model shines during uncertain economic times, where we remain consistent in build the flames of long term relationships that span decades.
Additionally, I also believe that we will continue to benefit from disruption created by market consolidation and several of our markets.
Our approach to lending and asset quality has not changed and it remains uncompromised to achieve the growth we experience.
We remain vigilant around credit, but we are prudently reserved with our allowance for credit losses to total loans at June 30, virtually unchanged from the previous quarter at one 5% to 2%.
That being said we've been consistent in our view of the economy as seen by our hesitancy to release more of our reserves. Then we have our teams are working hard reviewing portfolios performing special loan reviews, but to date, we've seen no signs of weakness.
Our capital position remains strong at June 30, TCE to total assets expanded to seven 8%.
We returned $24 million to common shareholders through a blend of share repurchases and increased common stock dividends.
We also announced another increase in our third quarter dividend of <unk> 23 per common share, reflecting both our commitment to shareholder returns as well as our confidence in further expanding our earnings profile.
The second quarter of 2022 represents the third full quarter since the acquisition of first choice Bank over this time, we've established a predictable pattern of performance that is characterized by a strong return profile on both assets and GCE strong organic diversified loan growth.
<unk> percentage of total deposits greater than 40% pristine asset quality flexible capital management and steadfast expense controls.
Despite this level of performance, we know that there is still room for improvement with that in mind, our focus for the remainder of the year can be can be found on slide four.
You can see we've accomplished a few of the goals that we set for ourselves at the end of 2021 for.
For the remainder of the year, we will focus on the basics.
Guiding our clients through whatever economic climate that lies ahead and proven an already strong pipeline with solid new relationship opportunities paying close attention to the trends related to our very attractive diversified deposit base and continue to monitor our loan portfolio for any early indications indicators of weakness.
With that I would like to turn the call over to Scott Goodman, who will provide much more color on our businesses and markets Scott.
Thank you Jim and good morning, everybody.
Focusing first on the loan book, which is referenced on slide five we posted strong performance in core loans net of Triple P growing by $298 million in the quarter or 13, 4% annualized and this compares with $176 million in the prior quarter.
The loan details by segment are outlined on slides six and seven.
On a trailing 12 month basis backing out. The addition of the first choice portfolio and the impact that Triple P. From an organic standpoint, we've grown by $733 million or 10, 7% and as Jim mentioned, we're seeing contributions from nearly all markets and business units, providing a nice level of bally.
And diversity in our sources of growth.
For the quarter, we experienced solid C&I growth coming from our regional banking markets and specialties with less impact from commercial real estate.
Overall the increase in C&I was a result of our continued success in bringing on new operating company relationships as well as elevated usage on existing client facilities and revolving lines of credit.
Average usage on revolving lines was up over 3% from the prior quarter.
Commercial real estate originations were down modestly in the quarter and while we do see existing construction loans continuing to fund new deals have slowed as developers re pencil that projects for higher rates and material costs.
Fewer new commercial real estate closings also reflects our disciplined approach as we hold the consistent underwriting and pricing guidelines in the shifting rate environment.
As we've discussed in prior calls we employ a spread based pricing philosophy for the term fixed rate portion of our business.
We believe this provides a more easily managed and transparent approach for our banking teams and clients as.
As well as a more consistent profitability profile for our company.
With rates rising and competitive pressures at times pushing spreads below our thresholds, we have recently walked away from some deals.
Turning to our specialty lending segments.
SBA life insurance premium and tax credits all continued to perform well in the quarter.
In the SBA business I spoke last quarter about some competitive pressures in this space from non SBA lenders on the existing book.
And our plans to proactively incorporate retention strategies.
In Q2, we were successful in slowing early payoffs, while also increasing new originations to post net growth of $34 million.
We also continue to recruit new originators, particularly in our higher economic growth markets.
The life insurance premium finance team has successfully developed several new referral partner relationships in 2022 due to introductions from our existing client base as well as our entrants into the California market.
Outsized growth of $52 million in what is typically a slower time of year for this vertical as a result of originations from these newer partners as well as continued fundings from the commitment base of the existing book.
Fundings in the tax credit portfolio reflect a consistent pipeline of new affordable housing projects.
And steady draws on existing projects within this portfolio.
These specialties in particular have historically shown their steady performance and resilience in the face of shifting economic pressures and we expect this to be the case moving forward.
Sponsor finance posted software growth this quarter, but is up $183 million or 39% year over year.
While this can be a slower time of the year seasonally for this business. It also reflects a slight pause by many of our sponsor partners, who revisited acquisition pipelines in the light of rising rates continued supply chain and other economic impacts.
We also saw some additional paydowns due to the normal churn from the sale of portfolio companies in the quarter.
So we head into Q3, and Q4 sponsors seem to have restarted their processes and the origination pipeline opportunities are starting to resell.
Moving to the business units profiled on slide eight.
The $152 million or 20% annualized increase in specialty lending reflects my prior comments on these niche segments.
Additionally, the professional practice finance team, which was added late in 2021 is off to a strong start.
Adding $29 million of growth in this quarter and $48 million year to date.
St. Louis carries the largest C&I portfolio of our geographic markets and benefited from some higher usage on revolving lines of credit as well as elevated borrowing activity from existing clients in the private investment tax credit and packaging spaces.
New business activity was also up with double digit increase in new originations from last quarter and several new relationships added.
Kansas City shows continued steady growth up nearly $50 million or six 3% year over year.
Eight 9% annualized growth for the quarter.
This market has a relatively balanced portfolio and also benefited from improved borrowing from C&I clients.
New originations included refinancings of several commercial real estate developments, and new project and M&A based financing to expand existing C&I relationships.
The southwest region, which includes Arizona and Las Vegas posted strong results again, this quarter, adding $43 million of growth in Q2, resulting in a 37% increase in the loan portfolio year over year.
As we've developed strong relationships with top tier real estate companies in Arizona over the past 15 years.
The economic growth and expansion in Arizona continues to provide opportunities to assist these relationship based clients with solid acquisition development and refinancing the.
The quarter included several new deals as well as fundings on existing construction lines.
Okay.
Last quarter I discussed the change in leadership for the Albuquerque team within New Mexico, which represents the predominant share of loan outstandings for the market.
As part of a plan to address the declining loan balances there.
Does this change take hold the remainder of the year I expect to see improved trends and ultimately growth in this portfolio.
In the meantime.
Africa, which in addition to Albuquerque also includes Submarkets of Los Alamos and San Jose.
<unk> is an important and growing base of well diversified and low cost deposits.
In Southern California for Q2, I'm pleased to report that our loan portfolio here grew by $29 million in the quarter.
And represents a third consecutive quarter of positive momentum in net loans, resulting from both higher originations and lower payoffs compared to the previous quarter.
The improvements come as we continue to see competitive pressures on the real estate heavy book, particularly.
Particularly in the area of high end residential remodel and fix and flip.
However, we are intentionally emphasizing our strategy to deepen our relationships with clients that are balanced and mutually beneficial.
Also adding new relationships with C&I operating companies through the addition of new talent to our platform.
We're already seeing traction on these goals.
Answering over $70 million in new projects with existing clients.
And adding new C&I relationships and metal fabrication and health care spaces during the quarter.
The new team in North, Texas now composed of three experienced local bankers with Onboarding smoothly and quickly developing a qualified pipeline of new opportunities.
I would expect to see these begin to transition to closings during the next quarter.
Lastly, I'll touch briefly on deposits, which are beginning to elevate within our client conversations with the recent rate increases.
The decline in total deposits within the quarter of $611 million was largely the result of managed decisions relating to a handful of rate sensitive interest bearing specialty deposit accounts.
Youll see this evidenced on slide number nine within the third party escrow portion of the chart.
Q2 also typically see the seasonal rundown of deposits in the commercial book, which also impacted balances to a lesser degree.
All in all the diversification of our deposit book by geographic market and the continued growth in lower cost specialty deposits provides confidence in our ability to walk away from these larger concentrations of higher cost more transactional balances.
Activity for the quarter shows net new account openings continues to outpace closed accounts and at an average rate below our peer group.
The focus on new relationships also is helping drive deposits with new depository relationship balances for the quarter exceeding balances in closed accounts by nearly 301.
Now I'd like to turn the call over to Keene Turner for his comments on the quarter.
Thanks, Scott and good morning, everybody turning to slide 10, we reported earnings per share of $1 19 on net income of $45 million in the second quarter compared to $1 23 in the first quarter.
Operating revenue increase in the linked quarter driven by strong organic loan growth an expanded net interest margin, which more than offset the decline in pvp and noninterest income in the quarter.
We continue to show strong credit metrics in all areas, but loan growth and changes to the economic forecast resulted in a provision expense compared to a provision benefit in the first quarter.
Noninterest expense increased on a linked quarter basis, due to higher compensation and namely deposit service charges costs.
It was in line with our expectations and the guidance I provided last quarter and finally, our earnings per share benefited from a lower share count due to repurchases in both the first and second quarter.
Turning to slide 11, net interest income was $110 million compared to $101 million in the first quarter.
And an increase of $9 million, which was favorably impacted by higher average loan and investment balances along with the benefit of rising interest rates driving net interest margin higher.
The increase in net interest income was primarily driven by a $6 million increase in loan income despite a $1 $3 million reduction in PPP income.
With the current composition of our balance sheet as of June 30th another 75 basis point increase in interest rates will result in an additional $6 million to $7 million in quarterly net interest income.
This is in addition to the full impact of the existing interest rate increases, which will also add another three $5 million to $4 million to quarterly net interest income as noted in the earnings release, approximately 20% of the variable rate loan portfolio re prices on the first day of each quarter and did not benefit from the second quarter interest rate increases.
Moving on to slide 12, net interest margin on a tactical basis was 355% an increase of 27 basis points from the linked quarter, our asset sensitive balance sheet benefited from an increase in interest rates.
As a result asset yields improved 31 basis points, which included 17 basis points of loan yield improvement and the investment yield improved 20 basis points.
Additionally, the increase in the fed funds rate led to improved earnings on our interest bearing cash balances.
Net interest margin was also aided by an enhanced asset mix as we continue to fund growth in loans and the investment portfolio, while reducing excess cash.
The cost of interest bearing liabilities increased seven basis points from the prior period, driven mainly by variable rate borrowings as our cost of deposits increased only three basis points.
The loan portfolio is our largest driver of asset sensitivity at 64% of loans are variable rate nearly 60% of those have interest rate floors and approximately 90% of those with floors are currently priced at or above the floor.
All of the remaining loans with floors are within 50 basis points with a floor.
We ended the quarter with nearly $1 billion of cash on the balance sheet, which affords us the opportunity for favorable asset remixing in upcoming quarters.
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.
Our interest bearing deposit beta during the last rate cycle was 32%.
With ample liquidity, our expanded footprint and strong low cost deposit generation through our specialty vertical we believe our ability to control deposit costs as rates rise as rates rise is greatly enhanced versus that cycle.
Moving on to slide 13, it reflects our credit trends, we continue to have strong asset quality metrics and have not observed any weakness in our loan portfolio segments.
We had a net recovery of one basis point during the quarter and our nonperforming assets declined $2 1 million or 9% from the first quarter.
Nonperforming assets were only 16 basis points of total assets and nonperforming loans are only 21 basis points of total loans.
Now, let's look at the allowance on slide 14.
Loan growth and deterioration in the economic factors used in our seasonal model resulted in provision expense of approximately $1 million in the quarter. This reverses the trend of reserve releases that we have had over the last four quarters excluding acquisition.
The allowance for credit losses increased to $141 million from 131 $139 million at the end of March and represents 152% of total loans.
When adjusting for government guaranteed loans the allowance to total loans was 169% at June 30.
While there have been no signs of credit stress that indicate a trend within our customer base. We continue to believe that the potential risks to the economy warrant the current level of our allowance coverage.
Excuse me on slide 15 fee income for the second quarter was $14 2 million as well as a decline of $4 4 million compared to the first quarter.
Results.
The decline was led primarily by reduced fees from community development investments reduce tax credit income and that was consistent with our expectation as well as lower swap revenue as activity levels were not as strong during the second quarter.
Service charges and card services revenue increased in the second quarter compared to the first quarter as volumes expanded in these areas.
While tax credit income will continue to be seasonal our momentum in this business line continue.
Turning to slide 16 second quarter noninterest expense was $65 4 million compared to $62 8 million in the first quarter, a $2 6 million or increase the driver of this increase was primarily a $1 $6 million increase in deposit servicing expenses and zero point $8 million increase in loan related and legal.
Due to growth.
Compensation and benefits increased $200000 in the quarter, principally from new hiring and a full quarter of merit increases and an increase in performance based incentive accruals, which were partially offset by seasonally higher payroll taxes and 401 came out for the first quarter.
The second quarter's efficiency ratio was 52, 8% and expenses for 2022 have performed as expected with our revisions for the revised interest rate environment.
Additionally, stronger than planned momentum and especially deposit areas as well as forecasted interest rate trend has and will drive related servicing expenses.
As a result of higher than planned fed funds increases. It appears the current quarterly run rate will step up in the next two quarters from roughly $65 million to $67 million to possibly $69 million for the remaining two quarters of 2022.
To reiterate these trends will obviously be more than offset by net interest margin trends, but more importantly, we think these investments and continued growth will allow for stronger revenue growth longer term.
On slide 17, we display our capital metrics and the rise in interest rates continued to impact the market value of available for sale investments, which impacted the accumulated other comprehensive income by $49 million in the period.
Bite that we expanded tangible common equity to seven 8% with our strong earnings and mitigated the negative impact on tangible book value per share grew one 6%.
Our strong capital position gives us flexibility to actively manage our balance sheet during the quarter, we utilize our capital to redeploy excess cash to the loan and investment portfolios, helping drive our capital ratio closer to our optimal target as Jim noted, we also returned nearly $25 million to shareholders.
We carried the momentum from the first three months of the year into this quarter and we continue to grow customer relationships, while maintaining a focus on pricing both sides of the balance sheet in order to drive shareholder value.
We began to see the acceleration of our operating revenue due to growth trends and a balance sheet that is well positioned to benefit from rising interest rates for the quarter, we delivered a 17% return on average tangible common equity.
Combination of strong earnings and continued cost and capital optimization. We also believe that with the strength of our earnings capital liquidity and allowance coverage, we are well prepared to address any potential economic challenges that may arise.
Thanks for joining the call today, and we're going to now open the line for analyst questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad Gopal.
We'll pause for just a moment, while the Q&A roster.
Yeah.
Your first.
First question comes from the line of Jeffrey Rewis.
Jeffrey Your line is open.
Thanks, Good morning.
Morning, just a question on the AD.
Question on the fee income components.
In terms of.
Well the community development.
Volatile is there any way to sort of model that in a in a more consistent manner any any idea there.
Jeff the answer is not really I think.
Okay.
Comparison to the first quarter was pretty tough because it was there was so robust.
I do think that there'll be some level of income here in the next couple of quarters, and we'll get some rebound, but we sort of had the worst kind of comparison, where we had strong.
Any development and swap and.
Tax credit revenue in the first quarter and then they all kind of went away here in the second so.
I think that we expect some level of that in in the third and the fourth quarter.
But it probably isn't as substantial as the.
Amount was in the first quarter in each individual quarter. So hopefully that provides a little bit of help but kind of $2 million, maybe in total and depending on how you model it.
One <unk> or two in the fourth is the way I'd think about it.
Got you and then the just the Durbin hit.
Can we modeled added about a $1 million a quarter run rate.
Yes, it's about $1 million that that gets you to where you need to be I think an and.
That's in line with with where we were previously I think.
For better for worse, we have grown that interchange a little bit.
Since.
Preparing to cross $10 billion and so we will lose just just a smidge more but 1 million should cover it.
Okay, Thanks, and Scott one other one just on.
The deposit management.
It sounds like focusing on kind of core depositors.
I get the sense that this was sort of the lion's share of that the rate chasers or hot money that kind of flushed out or or could we see more balances.
Come out of that.
From that group.
Yes, Jeff if you look at the 600 million decline I think it's a handful of accounts I'd say six maybe.
Three of those were.
The lion's share of that more interest rate sensitive specialty in and I would say those arent loss relationships either.
There are some specialty clients that are a little more interest rate sensitive than others and I think with this one in particular.
That was in the top 10 at the time I think they were our largest third party escrow balance we kind of went in eyes open on this knowing that it was a little more interest rate sensitive, but knowing we could have some flexibility to walk away. If we needed to not typically that concentrated I think theres only other one one other.
Third party escrow account and our top 10, and maybe two in our top 50. So I think that was a little bit of an anomaly and then.
I commented on this but we do typically see kind of net outflows from existing commercial clients. This time of year anyway for bonuses and distributions and personal taxes. So.
No I don't I don't think youre going to see any any.
Single depositor of this level that would move.
Going forward.
Okay. Thank you.
Okay.
Your next question comes from the line of Andrew Liesch. Your line is open.
Hey, Thanks, guys.
Brexit covered a lot of my questions that I've had but just curious on the buyback.
What are the thoughts around that and tap into the new authorization.
Hey, Andrew this is keene.
What I'll say is.
We completed the prior authorization before the new one and then I think you saw kind of sit tight.
Here on the $2 million I think.
The continued pressure in <unk> I think we just don't want to get caught behind that too far.
If longer term rates continue to move up so I think what you'll see is we'll TCE will be a little bit of the guide there and the good news is we're getting really good.
Loan growth.
Im optimistic that in the coming quarters, we will get.
Deposit expansion here and overall balance sheet growth, particularly as we head.
Late in the third and fourth quarter, where we typically see some strength. So I think youll see us be patient there and we'll probably use TCE as a guide.
I think we've been pretty.
Particulate on this point, we don't we don't love or I don't Love TCE below 8%, we're okay with it where it is given cash balances in.
The strong earnings profile, but I think youre going to see is let it rebuild somewhat.
In the upcoming quarters in weeks.
We may decide to be opportunistic if if we continue to get at unfavorable tape, but I don't think the dollar amount of anything we would do there would be substantial because over the last year. We did repurchase 2 million shares and we think we did so favorably and opportunistically, but but most of the pieces of the capital.
<unk> and our REIT at optimal targets are right now and I think we just need to be mindful of potential impact on OCI moving forward.
Gotcha.
Yeah like I said, you've covered all my other questions. So thanks for taking that one I'll step back.
Thanks, Andrew.
Again, if you would like to ask a question Chris.
And the number one on your telephone keypad.
Your next question comes from Brian Martin.
Your line is open.
Hey, good morning, guys, sorry, Julian joined late so keen if you've covered some of this maybe I'd just let me know and I'll go back and go back and listen just kind of wanted to get your thoughts regarding kind of margin and repricing and just kind of how we think about that in kind of the deposit betas. So if you've covered that I'm happy to go back and listen if you provide a little a little insight on that that'd be.
Paul.
Yes.
I'll give you a 90 give you margin I mean I can give you.
Fed funds moves and what we think it happens in annualized run so.
I think yes, 75 basis points moving forward would equate to roughly 5% on the current run rate of net interest income so that's a little bit north of $20 million and.
Our our modeling we're using just under 50%.
Data, which.
Is a little bit more conservative than what we experienced before and I think in my comments, we indicated that.
We expected with the composition of the deposits the beta to be better and I think you can see that just based on the outflows we had in the quarter.
And our posture there.
Our behavior has has changed as well.
To a degree and we lap some of those more sensitive accounts that existed previously go and then also we lapped the.
DDA specialty Diego that you'd say well, how does that rate sensitive, but it was it was on an earnings credit or.
Deposit.
The rebate program, that's consistent with that industry. So and then Brian the other comment I did make is that just sitting here today, we're going to get roughly another three $5 million to $4 million of NII boost in the third quarter, because the SBA portfolio, where prices. The first day of each period, so that will be a benefit even.
If nothing happens here in July which.
<unk>.
Something is going to happen, but also just be mindful of that as youre looking to how the 75 basis points impact.
Third in <unk>.
Third quarter is there'll be a delay on that SBA portfolio, and then maybe just a little bit of additional color.
Most of the loans here with this next rate increase.
<unk> hundred 7500, regardless will be off of the floors and so even with the slightly reduced cash balance we still feel good about net interest income dollars growth with future increases.
You will see deposit costs lag just slightly up here in the quarter, but but the dollars of growth reflect all of that so I think we feel really.
Really bullish about.
Both growth in the overall loans deposits.
And and Securities books, and we're getting good origination yields there and new originations are boosting.
Yields across the board there. So again I think we feel like we're well positioned so hopefully that's some color that's helpful to you.
Yeah, no it is an existing.
She said this came at the loans that have floors. There effectively we'll all be through this next Tycho. The one we just had in June all the loans through their floor. So you guys are what about 60% variable rates are all those loans moving now or is it just not they will be on the next type is that what you said.
Yeah.
I think.
What I was trying to make sure of is that this July hike. If it's at least 50 basis points you want us to think about floors anymore.
Yes, so I think that number is roughly $350 million to $400 million are still on a on a floor that's kind of call it 50 bps or more.
And those will be lifted off.
Here with another increase as long as it is in line with I think general expectations.
Got you Okay perfect. That's all I wanted to cover so I appreciate you taking the question King.
Great. Thanks, Brian .
The next question comes from the line of Damon Delmonte. Your line is open.
Hey, good morning, guys similar to Brian .
In between calls as well.
Did catch a little bit keen of your commentary about expenses and kind of the forward look there could you just kind of repeat what you had said on that.
Yes, I think we're running right now at about $65 million a quarter I think we think that that's going to step up pretty meaningfully and it's really driven by.
The servicing expenses on the <unk> on the specialized deposit so we.
We think that.
Stepping up in the third and into the fourth quarter that youre going to be somewhere about 67% to $69 million, which is just slightly higher than.
What we had indicated last quarter.
And the reason is that I think.
We got a little bit higher rate hike here in June which is driving a little bit more.
On the on the ECR side.
And so.
With another July increase debt.
We're going to be probably 75 to 100 basis point I think we need to kind of push that quarterly run rate because it does have.
And impact on the what we call this servicing expense related to those those items.
Got it okay. That's helpful.
And then with regards to the provision going forward.
Continued strong loan growth opportunities for you guys. How you think about provision over the back half of the year.
Yes so.
Yes.
It's a really tough question to answer I think I'll say, a couple of things first and foremost.
<unk>.
Didn't reduce from the 2020 build as much as maybe.
Others have in the industry and really worked hard to hold that reserve in there and we believe there was some uncertainty we just didn't know where it was.
With the Moody's forecast continuing to reflect some of those factors, where we moved.
Some of the things that were previously qualitative into that forecast, but we still have about $40 million of qualitative.
And I think.
The challenger, they're confusing part here is that we've got such outstanding credit quality that.
It's hard to justify building additional allowance.
Based on those factors and the forecast continues to move around.
We have a lot of of clamoring, but really no signs per se that that credit is going to get worse. So my view would be that at least for the next quarter.
And maybe even into the fourth quarter, unless we get a lot of additional clarity.
We have the opportunity to to less coverage, maybe slide down just slightly for a combination of a worsening.
Worsening forecast, but still really strong credit and asset quality.
And if we get any other indicators that are that are different and that might cause us to build the allowance more more aggressively but I wouldnt think we would bring.
Bring it down or have have any negatives moving forward barring some substantial.
Decliner or some material recoveries that are that affect the allowance itself. So.
Hopefully that's clear and if not please just pushed back with another question.
And it wasn't an easy question to answer so I appreciate the color and the commentary around that.
Okay. That's all I had guys. Thank you very much I appreciate it.
Thanks Damon.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
There are no further questions at this time, Mr. <unk> I'll turn the call back over to you.
Thank you and thank you to all of you for joining us today and for your interest in our company and we look forward to speaking to you again at the end of the next quarter take care.
This concludes today's conference call you may now disconnect.
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Okay.
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