Q2 2023 Enterprise Financial Services Corp Earnings Call
Hello, and welcome to the Enterprise Financial Services Corp, second quarter 2023 earnings call.
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'd like to ask a question. During this time simply press star one on your telephone keypad.
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Now I'll turn the conference over to Jim Lally, President and CEO . Please go ahead.
Thank you Jill and good morning. Thank you all very much for joining us This morning, and welcome to our 2023 second quarter earnings call. Joining me. This morning is Keene Turner, <unk>, Chief Financial Officer, and Chief Operating Officer, and Scott Goodman, President of Enterprise Bank and Trust before.
Before we begin I would like to remind everybody in 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 today.
In mid March we made a strategic decision to continue our growth trajectory for 2023 supporting the needs of our clients. In addition to Onboarding several new relationships from competitors, who are inwardly focused much of this growth focused on C&I relationships typically come in with a floating rate loan structure and full treasury.
Products and deposits as you can see from our growth in the quarter. This decision paid off well for us.
As part of our effort to support clients and enhance long term shareholder and franchise value. We also we also saw some significant deposit wins in the quarter from our regions, especially deposit businesses that will fund over the remainder of this year Scott will provide much more color on these topics in his comments.
I spent the month of June visiting some of our markets and had a chance to visit with over 100 clients and prospects for the most part these companies continue to perform well and are optimistic about the remainder of this year and next despite the increased costs throughout their businesses inclusive of deaths that service.
Orders remained strong supply chain issues have improved labor cost and availability have not worsened and earnings remained good.
What they heard from me was that we would be there to support them through this time of opportunity just like we promised when we brought them onto our platform.
Despite this relatively optimistic viewpoint I do see loan growth for us moderating in the second half of this year and settling back into the mid to high single digit range for 2024.
For enterprise. This is reflective of the fact that we're seeing payoff activity moderate which we feel is an opportunity to garner more holistic customer relationships and situations, where we are lending. Additionally, with moderating payoffs. We believe this presents an opportunity to continue to apply pricing discipline and focus on elevating our spreads in certain.
Business lines.
As some competitors back away from certain sectors, we see this as an opportunity to earn more by doing slightly less.
This will drive loan origination growth into certain businesses business lines natural like C&I and may cause some moderation in certain real estate situations as well as other lower margin business lines.
Our financial scorecard can be found on slides three and four.
Our strong financial performance continued during the second quarter as expected most earnings related measurements declined when compared to the first quarter. Nonetheless, I believe that we continue to operate from a position of strength due to our diversified revenue base and strong balance sheet.
For the quarter, we earned net income of $49 $1 million or $1.29 per diluted share as we produced an R. O a a of 1.44% and at P. P. N R. R O a a of 2.0% to 2% our focus on growing operating revenue continued in the quarter.
<unk> as net interest income grew by $1 $2 million to $1 million to $147 million supported by a strong net interest margin of 449%.
While remixing of deposits continued during the quarter. We also saw our commercial clients in some instances utilizing cash for asset purchases instead of borrowing are putting much more cash into M&A and real estate projects than what we had traditionally experienced.
Entering the quarter, we were confident that we would be able to combat the earnings pressure created by the expected deposit remixing.
Loan growth in the quarter was just over $500 million and represented growth from all geographic areas and businesses are.
Our variable rate bias and C&I focus drove overall loan yields of 664% an increase of 31 basis points from the previous quarter. While this growth was ahead of expectations. It helped us weather the pressure from changes to deposit pricing and competition and we believe that has helped us set up to have a chance for stable quarterly.
NII for the remainder of the year.
We utilized brokered Cds to provide stable funding to support the growth in the second quarter. This strategy helped to preserve our wholesale borrowing capacity and liquidity measures, while weathering typical seasonal liquidity tightness and our customer base. This helped us maintain a stable loan to deposit ratio of 90% during the quarter while uninsured.
Deposits declined modestly due to continued shift in the deposit base.
Stable and strong is how I would characterize both our capital and credit ratios at quarter end, our tangible common equity to total assets came in at $8 six 5% and we grew our tangible book value per common share from $30 55 to $31 23.
This represents over a 17% increase from where we were just a year ago.
Our credit statistics to remain strong as both nonperforming loans to total loans and nonperforming assets to total assets remained low and relatively unchanged when compared to the previous quarter and the second quarter of 2022 <unk>.
Consistent reviews of the portfolios and early identification of potential issues is how we manage and continue to manage the portfolios. This includes targeted reviews utilizing both internal and external resources and expertise.
Slide five reflects our focus for the foreseeable future.
And our future loan growth from core client relationships remains our biggest opportunity going forward, we have invested in and grown several markets and businesses that provide us the opportunity to do just that our asset growth will moderate back to that mid to high single digit range focus on expanding our credit spreads and continued this continued.
Disciplined credit structures. This will allow us to maintain an incredibly strong balance sheet and continue to produce the best in class earnings profile that we all have become accustomed to with <unk>.
That I would like to turn the call over to Scott Goodman for much more insight and details on our markets and our businesses Scott.
Thank you Jim and good morning, everyone.
Moving on to slide six as you heard from Jim we posted robust loan growth for the quarter totaling 501 million, adding to a pace, which resulted in a 12 month increase of over 13%.
Growth over this timeframe is broken out on slide seven and has come from all primary categories, well balanced between the metro markets and specialty verticals.
Accelerated growth in Q2 detailed on slide eight was primarily the result of strong pull through of opportunities from the pipeline with originations up 13% from the prior quarter.
In addition, net growth was aided by a reduced payoff activity and a modest increase in usage on revolving lines of credit.
Within the specialty channels sponsor finance experienced strong growth this quarter through both higher originations and lower churn in the portfolio.
Following a brief pause earlier in the year to digest, the impacts of rising rate and some shifting economic factors.
<unk> restarted their process during the quarter with closings in Q2 double that of Q1 levels.
We remain disciplined in this channel underwriting to proven and consistent credit structures.
Pissing on well known sponsor relationships and Opportunistically elevating spreads to boost our return.
Life insurance premium finance posted a relatively strong growth quarter with slightly higher pay offs more than offset by a new policy financings and increased advances on existing policy loans.
We continue to see a steady pipeline of new opportunities from an expanding referral network as well as a larger funding tail on a growing book of commitments.
Following a seasonally softer Q1, and the tax credit lending business activity ramped up this quarter.
Hosings interbank advances on existing loans increased as well as affordable housing projects accelerating from Q1 levels.
Following some re budgeting and capital raising associated with the higher cost environment.
Okay.
SBA posted $12 million of growth in the quarter was steady originations and modestly improved payoff paydown impacts, reflecting our proactive defense of the existing portfolio.
Our sales channel remains active and is well positioned to take advantage of elevated demand that could result from any potential credit tightening or liquidity constraints that effect alone appetite of traditional bank lenders.
Within the geographic markets displayed on slide nine we posted solid loan growth for the quarter across the footprint.
And continue to steadily grow these portfolio through a consistent value added and a relationship based sales process.
In the Midwest, we've grown nine 5% year over year, including $53 million of growth in Q2, which included several prized new middle market relationships and St. Louis acquisition financing for existing relationships.
As well as some modest growth on lines of credit from working capital revolvers and construction loan projects in process.
Our southwestern region had a particularly successful quarter with loans up by $88 million, placing year over year growth at roughly 24%.
This level of growth is reflective of the strong economic profiles in these markets and our teams ability to develop deep relationships with businesses that are well positioned to benefit.
The Texas team, which has been onboard now just over a year has gained traction quickly and continues to bring on new relationships in the quarter, both C&I operating businesses and commercial real estate.
Arizona and Las Vegas, as new originations in Q2, we're mainly focused around commercial real estate, including projects in the industrial student housing medical office and grocery anchored retail space.
We have positioned our CRE strategy around experienced proven developers and investors, where we are not a transactional lender, but can go deep and gain a meaningful relationship on both sides of the balance sheet.
In our western region of Southern California, we have focused our energy on expanding the diversity and the growth profile of the legacy acquired portfolios by deepening existing loan and deposit relationships.
And adding resources to our C&I channel consistent with our other markets.
This work has gained traction in the market with year over year loan growth of nearly 8%, including 80 million in the second quarter.
Near term new originations consisted.
Mainly of new C&I relationships across a range of industries, including distribution construction manufacturing and transportation.
Moving now to deposits, which are outlined for the last 12 months and for the quarter on slides 10 and 11.
Total deposit balances grew by $465 million in Q2.
Overall client deposit balances were relatively stable with most of the category changes attributable to the remixing of DDA to interest bearing account types in.
And an increase in the broker deposits used in conjunction with loan growth for the quarter.
Within the regions shown on slide 12.
Deposit balances did grow accustomed across a majority of our major markets.
And the specialty channels.
With the rest west region experiencing a modest decline.
The larger reductions in southern California are consistent with stronger reactions of depositors to the bank failures located in that geography.
As we continue to build our brand and gain traction with our new talent.
Consistent with our loan trends here, we expect core deposit growth to follow.
While mid year is typically a softer period of seasonal growth in the commercial book, our commercial and business banking teams are squarely focused on deposit retention and growth.
Specifically regionally focused plans.
We have arm these themes with competitive and flexible product set designed to convert our solid pipeline of qualified opportunities to both recapture excess cash balances from existing clients.
And attract new accounts.
Following strong growth in the first quarter, the specialty deposit businesses posted more than modest growth of $30 million in Q2 reflective of a typical seasonal slowdown in mid year.
Year to date, these low cost channels have grown $458 million or <unk>, 19%.
And now represent 25% of total deposits as Youll see broken out on slide 13.
We continue to see inflows from our existing clients in this space as well as a steady stream of new opportunities originating from property management relationships within our commercial base.
And the competitive disruption from a few larger players in many lines of business.
Slide 14.
Shows some additional detail on our core funding mix and account activity for the quarter.
Deposits are well diversified among our four main channels and remain anchored to a well rounded client relationships across a diverse set of industries households and markets.
Within the commercial base, 80% of these clients are using treasury management products and 90% of checking and savings clients are using online banking, which elevates the stability of these balances and reflects their relationship orientation of our base.
Our sales process continues to produce positive results.
Generating net new account balances across all channels.
We've also seen steady net new account open in consumer and specialty channels, while the reduction in the number of accounts year to date in the commercial and business banking space, primarily reflects the consolidation of balances and the closure of certain account types associated with remix into the interest bearing and time deposit products.
Now I'd like to turn the call over to Keene Turner for his comments Keith.
Thanks, Scott and good morning, everyone turning to slide 15, we reported earnings per share of $1 29 in the second quarter on net income of $49 million.
Our net interest income expanded from the linked quarter, which combined with growth in earning assets helped to outpace expected compression in net interest margin.
Additionally fee income declined modestly which is in line with seasonal expectations.
The provision for credit losses was more significant this quarter driven by loan growth.
And finally noninterest expense was higher in the current quarter with continued growth in deposit costs to support our expanding specialized deposit business.
All things considered we're pleased with the performance of net interest income loan growth and overall profitability or return profile remains robust and supports our strategy for continued growth.
Turning to slide 16, net interest income for the quarter expanded by $1 2 million to $141 million net.
Net interest margin of 449% is a 22 basis point reduction from the linked quarter as expected rising deposit and funding costs led to margin compression.
However, we were able to defend net interest income through relationship based loan growth.
More detailed follow on slide 17.
On the asset side of the balance sheet, a combination of carrying higher cash mid quarter and portfolio loan growth drove $567 million of average, earning asset growth yield on earning assets improved by 28 basis points led by the 31 basis point increase in total loan yield in support of that trend.
New loan originations were the largest driver of the change with new loans booked in an average interest rate of seven 6%.
This was supported most substantially by origination of C&I loans at seven 9% and SBA loans at 875% during the second quarter.
I mentioned cash balances were higher in the second quarter as we elected to carry more on balance sheet liquidity in light of the debt ceiling issues, we navigated mid quarter. While this decision was largely neutral to earnings. It was a couple of basis points dilutive to net interest margin in the period.
Total average deposit balances grew $474 million in the quarter, including average increase of $431 million and brokered Cds and $43 million in customer deposits.
We've utilized brokered Cds, because it adds stability and predictability to our funding base, along with reasonable flexibility moving forward to support our asset growth all while navigating typical mid year seasonality of deposit outflows.
Our cost of deposits increased during the quarter as we continue to experience deposit remixing and repricing.
This was driven by a combination of interest rate economic and industry base factors.
While our average cost of deposits interest bearing deposits rose 70 basis points from the prior period, our cumulative deposit beta for the rate cycle is in line with our historical level and reflects the diversified deposit base that's been enhanced since the last cycle.
And the use of brokered Cds has been an intentional strategy that has provided maximum flexibility on our liquidity position. However, this has increased our total cost of deposits and our total deposit beta excluding brokered our deposit beta for the quarter would have been 30% lower than our total cost of deposits would have been 18 basis points lower.
We are pleased with the cost of deposits all things considered given the current fed funds target rate at over 5%, while our total cost of deposits was 146%.
Despite the Remixing our demand deposits to total deposits is above 33% and reflects some of the business model advantage that we have in funding the balance sheet.
Based on our second quarter performance, we believe we have the ability to outpace expected net interest margin compression in the upcoming quarters with a posture of balance sheet growth.
Compared with the second quarter performance, we have the opportunity to expand loan pricing.
Moderator loan growth levels and achieve a greater contribution to the funding through our growth in customer deposits.
That means we generally expect to see stable net interest income moving forward, while net interest margin drift downward approximately 10 to 15 basis points per quarter.
We're not immune to the Remixing and increased competition. However, our business model helps drive the asset side of our balance sheet to mostly absorbed those costs.
With that we'll move on to slide 18, where we demonstrate our credit trends.
Annualized net charge offs were 12 basis points in the period compared to a modest recovery in the first quarter overall credit losses continued to be to trend below historical levels and asset quality metrics remained strong the provision for credit losses of $6 $3 million during the second quarter largely reflects our strong loan growth along with the.
Teary ration and projected economic factors.
Slide 19 presents the allowance for credit losses, the allowance for credit losses increased $3 million in the quarter and represents 134% of total loans or 148% of.
Guaranteed loans.
We continue to use several economic forecast and the allowance model with a weighted bias toward a downside scenario and a higher reserve focus on certain segments, such as office commercial real estate. This this was reflected with qualitative reserves totaling approximately 30% of total allowance.
On slide 30.
Second quarter fee income of $14 million was a decrease of $3 million from the first quarter. This was primarily due to lower tax credit income in the first quarter included gains on both sale of investment Securities and SBA loans tax credit income has some seasonal volatility and is typically strongest at the end of each year we.
We expect fee income to moderate to roughly 12% to $13 million in the third quarter as we do not anticipate similar levels of community development related income to repeat however, we do expect typical seasonal strength in fee income to round out 2023.
Turning to slide 21 second quarter noninterest expense was $86 million, an increase of $5 million compared to the first quarter deposit service expense as well as other expenses were high or higher compared to the linked quarter, which was partially mitigated by a sequential decline in employee compensation and benefits.
<unk>.
Deposit servicing expense grew roughly $4 million in the quarter due to both rate and volume on certain specialized deposits.
As a reminder, the first quarter deposit servicing expenses were lower due to the expiration of certain earnings credits that were forfeited we.
We expect this line item to continue to expand with both continued growth and balances as well as higher interest rates.
Other expenses grew by roughly $2 million in the quarter, driven primarily by the impact of our credit card event that resulted in elevated losses on both company cards, and including outstanding and for customer related losses and certain operational expenses.
Compensation and benefits was lower in the quarter, primarily due to seasonality. This was partially offset by a reduction in open positions as well as a full period of annual merit increases.
Overall, we expect noninterest expense to increase to <unk> $87 million to $89 million in the third quarter, reflecting an increase in deposit service expense.
Also based on the FDIC rulemaking, we expect the impact of the special assessment to be approximately $2 million once it's finalized.
The second quarter's core efficiency ratio was 54% an increase of 350 basis points compared to the first quarter driven primarily by both the rise in interest and noninterest expense in the quarter.
With some moderation in our net interest margin and net interest income expectation expectations. We do expect core efficiency to move up slightly for the coming quarters. However, this is a function of our expectation for expanding our market share and specialized deposit business for other expenses, we expect to prudently manage cost controls, which are part of our <unk>.
Aly disciplines.
That can be borne out in the underlying operating expense trends from the first to the second quarter.
Our capital metrics are shown on slide 22.
<unk> quarter earnings offset a decline in accumulated other comprehensive income from the value of securities and derivatives portfolios. This year.
Resulted in expanded the tangible book value per share to $31 23 at the end of June which is a 9% increase so far this year the strength of our earnings profile and a high capital retention rate supported our customers and resulted in a balance sheet expansion in the quarter.
We have managed our capital and the balance sheet to provide a foundation for continued growth. This is reflected in our tangible common equity ratio of nearly 9% and our common equity tier one ratio of 11, 1% on an adjusted basis. The after tax unrealized losses on held to maturity securities is approximately 40 basis.
Once a tangible common equity and total combined available for sale and held to maturity losses are approximately 140 basis points of tangible common equity.
When including available for sale and held to maturity losses, adjusted common equity tier one capital is nine 5% well in excess of the minimum well capitalized limit of six 5%.
With that said, we are very pleased with our financial results in the second quarter and the first half of 2023, while the current interest rate and economic environment pose challenges. There are also opportunities for us to continue gathering market share in our regions and improving the overall value of our business we.
We believe that our diversified platform is positioned to produce strong operating performance relative to the environment in which we operate.
With that I appreciate your attention today, and we're now going to open the line for analysts questions.
Thank you if you have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue simply press Star One again one moment. Please for your first question.
Yeah.
Okay.
Your first question comes from the line of Jeff <unk> of D. A Davidson. Please go ahead.
Thanks, Good morning, a couple questions on the expense line, if I could just.
Keene on the 87 to 89.
Is that inclusive of a $2 million special assessment.
Yes.
Assumption in that figure.
No that's Jeff that's just run rate and Thats really reflecting growth in the deposit business I think we expect those balances to continue to expand in pricing those competitive, but we're gaining market share and then the $2 million would be.
In addition, when it occurs.
Okay. Okay.
We're there.
Operational losses or the credit card event.
What would you have in the second quarter would you could is there anything one time, there that would likely fall off I mean, it sounds like.
Deposit cost is going to outstrip some of that but just wanted to carve out what was what we would be one time in.
In the second quarter if at all.
Yes, one three of that we expect to be one time, and we think thats a kind of a one and done estimate and then you know that.
L B.
Just based on the way the accrual works, we needed to accrue that and take it currently but we have service providers that are involved in helping us with that business and we will get some relationship credits moving forward, but it wont be anything meaningful or acute in any one period. So.
Net net the economic impact for us will be fairly limited, but in the run rate is one three that really we didn't expect to be there and I think you know maybe push the expenses a little higher than our guide last quarter.
Okay.
Thank you and your next question comes from the line of Damon Delmonte of <unk>. Please go ahead.
Hey, good morning, guys hope everybody's doing well today.
Just wanted to.
Look for a little bit more color on the deposit outlook.
Noninterest bearing deposits continue to kind of.
Shift lower and I think you noted is around 33% of total deposits.
Do you have an idea of where that kind of bottoms. Do you think you can kind of hold at this level or do you expect it to be more in migration.
Hey, Dave and Jim Go ahead go ahead, Dean I would just say listen so so our growth obviously in the second quarter leaned into the brokerage side, which pushed that down a little bit our goal going forward, obviously would be to fund it with.
Our base of customer deposits I would I would hope that it comes with a significant amount of DDA from the specialized as well as just the geographic businesses. So I would say holding firm that 33% to 33% range seems fair to us.
The goal obviously is to get it as it is most efficiently as we can.
But obviously the business model, we have pushes towards a little bit more DDA than others.
Got it Okay, and then as far as the outlook for loan growth I believe the commentary was that its going to kind of moderate here in the back half of the year. So how should we kind of be thinking about like low single digits for the next couple of quarters before it began to normalize I think I'd look at it this way Dave I think it's getting back to that run rate of that mid to high single digit.
And really focusing on those areas, where we can garner.
Share of market as well as improved pricing and there are some nice pockets given the different businesses and markets that we operate in.
Thank you and your next question comes from the line of Andrew Liesch of Piper Sandler. Please go ahead.
Hey, Good morning, just a quick quick question. If you can provide any color on the on the loan that migrated to non accrual in the quarter that was charged off.
As with.
What sector it might be in or if theres any other loans similar to this that might be giving you some concern.
Yes, Andrew it's Scott I'll handle that one it's it's really one credit it's ABL ABL type.
Aftermarket automotive parts manufacturer.
And they've just had some lagging issues.
Dealing with shipping and labor and supply chain disruption, which they just weren't able to overcome there they're undercapitalized and really unable to continue operating so from that standpoint, I don't see that as a trend I don't see that as part of the nature of sector.
Pretty much a one off and I think.
We've charged it down and we think we have half the balance under control.
Got it you have covered all my other questions already so I'll step back thanks.
Thanks, Andrew.
Thank you and your next question comes from the line of Jeff <unk> of D. A Davidson. Please go ahead.
Hi, Thanks.
Had a follow up on the on the expense line is.
The keen as you were outlining so if that was 86 reported noninterest expense if we back out the <unk>.
A little over $1 million, one time gets you.
Hello.
Well, let's just call. It 85, I guess the jump there as you talk about that deposit cost increases had already been up linked quarter. So I'm trying to get a sense for that.
Peace of that deposit cost increase that's flowing through noninterest expense is that going to be.
A couple of million dollars a quarter or more.
Linked quarter as long as you've got to lean into that piece.
I don't know the run rate of noninterest expense and that seems like an item thats growing.
Other quickly.
Yes, Jeff that number it's not going to grow sequentially as much as the first quarter, we had that exploration of credits in the first quarter. So that normalized number in the first quarter was like $14 million I think the number in the second quarter is like 16, so that that kind of $2 million to $3 million, depending on collected balances and how much we're growing that.
There.
I think thats generally what were expecting to see.
As long as that continues to perform in line with with where we've been in and pricing continues to be competitive there.
Thank you and your next question comes from the line of Brian Martin of Janney. Please go ahead.
Hey, good morning, guys.
Hey, Brian Hey, nice quarter, I'd say, just a question maybe for Ken on the margin just keen I appreciate the commentary.
As far as the margin trending down, but the NII stabilizing.
And kind of where do you what is kind of your rate outlook here kind of baked in there and then just how are you thinking about when the margin might stabilize in the second part of it is just if we do get some rate cuts next year can you just remind us.
How do you expect that the margin has performed and that type of scenario.
Yeah, Let me, let me try to tackle your comments first I mean, I think we're projecting out in the next couple of quarters, obviously, we've got.
Our next 12 months projections, but I think.
The way, we're thinking about that is that.
It's still extremely early in terms of.
They're.
Trying to get a accurate next 12 months prediction with how much the variables have been moving around first second quarter. Our general outlook is that if you call margin today, roughly $4 45, I think you addressed 20 basis points to the end of the year is kind of what we're seeing.
And even if we get one or 225 basis point rate hikes here I think we generally expect that maybe but for timing or lagging that those are going to get absorbed with competitive deposit pressures. So.
Maybe.
To hope that that is a little bit conservative we've got some cost baked in there in terms of the.
And then the interest expense.
Continued.
Degradation of beta and some of those things but.
I think we feel good about sort of a $140 million of of net interest income in the next couple of quarters with the growth that Jim talked about and then margins sort of drifting to call. It $4 25 to 420 by the end of the year.
And then I think that generally our view is that we're trying to listen to the fed.
That's pretty clearly are higher for longer I don't know that we're thinking that there is any near term pressure to go from what looks like a interest rate increase here in July and then maybe one later this year to multiple cuts next year. So I think we think that fed funds stays fairly stable for at least the first half of next year.
And then obviously, we're asset sensitive, we're becoming a little bit less asset sensitive with.
Some of the Remixing, that's occurring from DDA and the use of of brokerage Cds and so obviously those things to the extent.
We get some cuts will provide some opportunity, but we will experience margin compression.
We will file our Q here in the next week and we'll get you some more sensitivities around what that compression looks like but.
We are an asset sensitive company and down rates, depending on how that plays out well, we will certainly take some of that out so it's going to depend on how quickly how aggressively.
And how at what quite frankly deposit competition and flows look like if and when that starts to occur.
Got you, Okay, and then just as.
As far as the loan areas you're focused on with.
Maybe focusing maybe a bit more on yield.
I guess, what do you expect that growth.
Maybe more to come from in the second half of the year just the near term.
Hey, Brian .
Scott.
I would say I think we're taken an opportunity to push spreads really across the portfolio.
But particularly in areas that would be fixed rate or where I think the competition or supply demand dynamics are advantageous.
So I think CRE is one of those areas, where we're being.
Judicious on how we approach the market, we're supporting clients, we're lending into new relationships that can bring significant deposit opportunities.
<unk> management would be a good example of how we're leveraging our specialty too.
To lend into commercial real estate, but I think you saw a lot of our growth was new relationships in C&I.
Particularly in our newer markets and I think that's that's where you'd see us being more aggressive because those are sticky relationships that bring deposits that bring fee income that don't use the full commitment typically.
And then in the specialty areas you heard my comments on sponsor and I think that moderates a bit the second half.
Whereas I think we are seeing opportunities.
In areas like life insurance premium, where some of our competition has vacated the markets and we can actually push pricing a little bit and get high quality loans there.
Yeah.
Thank you.
I have a question. Please press star one on your telephone Keypad. Your next question comes from the line of Eric <unk>.
Investor. Please go ahead.
Yes, hi, good morning a.
Question for Keene.
Two things related to the.
The interest rate sensitivity in the margin.
So to what extent with the new loans that you're booking at variable rates are they use a lot utilizing floors on that production that may help you.
Rates do drop Cup.
A couple of quarters from now.
Yes, so Eric.
Thanks for your question, we're able to get floors in most new loans.
The the the.
The nuance on on that is that the floors on most of what we have is relatively low.
Don't know.
Looked at it and said Hey, here's where the floors are on the stuff we booked this last quarter.
But but the loans that do have floors or call. It two 5% to 3% above the floor.
And the proportions are sort of.
Pretty commensurate with what they've been historically, so you've got roughly 63% variable rate and you've got about a third with no floor and then two thirds with a floor but.
As you might expect there is also a good portion of that book, that's not new and.
It really rolls off of a floor that helped us.
Just two years ago so.
Don't don't have good information for you on on that but we are getting floors on whatever competitive terms, we can get.
In the current environment.
Okay, and then just another thing.
Just trying to get my head around.
I mean I saw the like everybody else did the big growth in the <unk>.
Our broker deposits this quarter.
I would imagine those at the margin those rates are probably 5% plus right.
How does that compare to what you are paying.
Your money market in your interest bearing I mean is there a.
A trade off there where you can ratchet it up a little bit more on those core customer accounts or is there a reason why you don't want to do that.
Versus buying deposits, which are non-religious chip.
Yes.
The balance we're trying to strike is a little bit of timing so number one.
When you look at it as the tide.
<unk> is the highest in the fourth quarter and then it starts to gradually go out in the first half of the year.
Then June 30 for US is typically low tide for deposits and now you're starting to see it come back and we're only.
Only 25 days in the third quarter and we've got sitting.
Sitting here with nice DDA and some other other growth and thats not a trend.
Yet, but I think we're encouraged by that and I think the art of it is to make sure that we're.
We've got to pay the right amount for new and.
Growing balances, but when you start to look at the math on certain pockets of pricing to drive up $10 billion of pricing.
To 5%, whereas blended rate is quite a bit lower than that we're just trying to strike that fine balance. So the brokerage Cds allow us to maybe not be as frantic in terms of competing in the near term and we've got plenty of of brokered capacity and wholesale capacity to move forward, but it allows us.
The play a little bit longer game.
The leverage of the sales cycle, a little bit more.
And maybe overall call it over the course of multiple quarters, and even years have a better higher quality funded balance sheet and drive a little bit more profitability, a couple of quarters out versus in the near term or panic and try to drive a bunch of deposit growth, but at what cost.
Hopefully that gives you some color and some thought about how we're thinking about it but we always try to keep.
The profitability in two years on the horizon versus the profitability of the current quarter and we're trying to manage the debt.
There are a little bit of a sentiment that's out there in the current environment, but utilize the strength of the liquidity profile and balance sheet, we've got to to maybe be a little more patient in that way.
Okay.
Thank you as there are no further questions at this time I would like to turn the call back to Jim Lally for closing remarks. Please go ahead Sir.
Thank you and thank you all for joining US this morning, and thank you for your interest in our company and look forward to talking to you again after the third quarter, if not sooner and have a great day.
And this concludes today's conference call you may now disconnect.
Yeah.
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