Q2 2024 Enterprise Financial Services Corp Earnings Call
Hello, and thank you for standing by at this time I would like to welcome you.
To the Enterprise financial Services Corp, second quarter 'twenty four earnings conference call.
Speaker Change: All lines have been placed on mute to prevent background noise.
Should you require any assistance. Please press star zero on your telephone keypad.
And an operator will come on line.
I would now like to turn the conference over to Jim Lally, President and CEO. Please go ahead.
Well, thank you <unk> and thank you all very much for joining us This morning, and welcome to our 2024 second quarter earnings call. Joining me. This morning is Keene Turner <unk>, Chief Financial Officer, and Chief Operating Officer, Scott Goodman, President of Enterprise Bank and Trust and Doug <unk>, Chief Credit Officer of Enterprise Bank and Trust.
Before we begin I would like to remind everybody on the call and a copy of the release and accompanying presentation can be found on our website.
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-Q3 reasons why actual results may vary from any forward looking statements that we make today.
I'm very pleased with our second quarter results, our business model Associate base and management team has been constructed to perform well in any economic environment.
Speaker Change: Also the second quarter are a product of the great work is done for the last several years in the quarter, we were able to expand margin grow net interest income experienced positive operating leverage and continued to significantly compound tangible book value per share.
Like we've stated during previous earnings calls and Investor meetings over the last several years, we have worked diligently to diversify our business model such that we do not have to depend on any one business market or asset class to produce high quality and predictable earnings.
Our second quarter financial performance as a result of this strategy and I'm confident that we can continue to perform at this level or better for the remainder of 2024.
Our financial Scorecard begins on slide three.
For the quarter, we earned net income of $45 4 million or $1 19 per diluted share and we produced an adjusted return on assets of one 2% to 7% and a pre provision return on assets of 174%.
These results improved over a fundamentally sound first quarter.
Our net interest income increased $2 8 million to $145 million looking back over the last six quarters, we've been able to hold this number at or around $140 million, despite challenging competitive and interest rate conditions. This reflects the strength of the franchise rebuilt remained <unk>.
<unk> produced high quality earnings that consistently improve shareholder value through deep rooted client relationships.
Our stable net interest income was aided by the defense and growth of our net interest margin to $4 109%.
Speaker Change: This is a direct result of our appropriately price stable deposit base and our ability to originate commensurate to the needs of our clients, but priced well amid the current interest rate environment.
Speaker Change: Jean will provide much more detail these results in his comments.
As we thought would happen loan growth moderated in the quarter largely due to lower line usage higher paydown and payoffs in the quarter and the planned rundown of the agricultural portfolio.
Our second quarter saw strong loan origination activity as you will hear from Scott and I am confident that we will see our normal second half strength in loan originations.
Deposit growth continued to be a bright spot for our company after experiencing our typical first quarter seasonal outflows. The second quarter saw us grow client deposits by an impressive $192 million our confidence in the continued growth in our national deposit verticals allows us to be disciplined with respect to deposit pricing and our geographic.
Markets. This is evidenced by the fact that our overall cost of deposits increased only three basis points to two 6% in the quarter at quarter end, our loan to deposit ratio remained at 90%, while our DDA level improved to 32% of total deposits.
Speaker Change: With the overall business generation strong I remain optimistic that our high single digit balance sheet growth is achievable.
We're starting to see backlogs grow in our life insurance premium finance business and our geographic markets at some recent discussions intensify for new C&I and CRE opportunities the timing on actual fundings will likely be mid to late fourth quarter with some of those leaking into 2025, the bottom lines that we'll have opportunities to deploy deposit.
Speaker Change: Growth in either loans or securities both of which we view as favorable long term value and profit drivers.
Scott will provide much more detail on our markets and businesses in his comments.
Our balance sheet remains well positioned to provide for great flexibility with respect to capital planning.
Scott: Capital levels at quarter end remained stable and strong with our tangible common equity ratio at nine 8% and an adjusted return on average tangible common equity of 14.0% to 6%.
Tangible book value per common share was $35.
A 10% annualized increase for the quarter.
Given the strength of our earnings and our confidence in our continued execution, we increased the dividend by <unk> <unk> per share in the third quarter of 2024 to <unk> 27 per share and we returned an additional $8 $5 million to shareholders during the quarter through common stock repurchases.
Before discussing our areas of focus for the remainder of the year I would like to provide an update on credit.
I am pleased with the progress that we continue to make as expected asset quality continued to improve as classified assets decreased by 8% or $15 million Npa's were well managed and net charge offs were nominal at less than $1 million.
Scott: We did receive the results of the third party loan review of our agricultural portfolio. This report does not service any abnormalities that we had not already identified by our internal review that said the overall sector is showing some signs of weakness in our efforts to reduce our exposure as well as our allowance build represents our Pos.
Scott: Towards the industry, we're making good progress in reducing our exposure as a portfolio reduced by just under $40 million during the quarter and stood at about $194 million a quarter and with further reductions expected throughout the remainder of the year.
Slide five shows will be a focus for the foreseeable future.
Scott: Our focus remains on taking care of the great clients that we've accumulated over a 36 year history, while adding those family owned businesses to cherish high touch consultative relationships.
Doing this day in and day out will lead to several more quarters of really strong performance and continued building franchise value.
We will not alter our credit discipline to chase growth and will be cognizant of the current market pricing trends to make sure we continue to protect and grow our client base and.
In addition to this by our next earnings call. We will have converted to our new core system to date, we are on time and unplanned with respect to this conversion and look forward to the benefits that this will bring the company for many years to come.
The fruits of our recruiting efforts, especially in our higher growth markets and higher profit specialized businesses are beginning to pay off we've on boarded several new RMS in our western markets and we will continue to capitalize on the disruption caused by M&A in these markets.
Similarly, we are very we're being very strategic with our adds to our specialized lending teams and our national deposit verticals focus on those areas that provide the greatest shareholder value combined with the businesses that have been most disrupted due to M&A, our banks have decided to disinvest or disregard the business in total we will aggressively pursue more of these.
<unk> throughout 'twenty four 'twenty five.
Before I hand, the call to Scott I would like to provide a little perspective on how our clients are seeing the world.
The challenges related to loan growth our product to the sentiment of many of our clients and speaking to several of our C&I business owners their posture on increasing leverage ahead of fed cuts and the fall election was quite conservative.
Scott: There's a specific need for capital like any new equipment line for newly awarded business or close on a new acquisition. They are likely to stay on the sidelines and operate conservatively.
On a somewhat positive note supply chain issues for the most part are behind them and the wage pressure that flight. Many of these businesses just a few years ago have largely dissipated.
These same clients remain very well capitalized and are eager to grow their businesses. When we have better visibility to the economic and political climate ahead.
Last quarter I talked about the fed's easing of rates as a psychological impetus for CRE projects to go from the drawing board to reality.
We have this rather imminent we have seen the number of meetings and our higher growth CRA markets increased significantly with that said I am confident we will see these discussions during the closings late in 2024 and into 2025.
Scott: We enjoy a great reputation and corresponding market share of middle market businesses, and our mature geographies and specialized lending businesses as such I am confident that we will continue to get much more much get more than our fair share of corresponding opportunities.
Our newer markets and higher growth areas will provide similar levels of opportunities. While we continue to build our reputation in these markets. This blend is what gives me high confidence that we will continue to grow and earn at a predictable rate while continuing to compound tangible book value at a higher level than our peers over the foreseeable future.
With that I would like to turn the call over to Scott Goodman Scott.
Thank you Jim and good morning, everyone.
Turning to loans, which begins on slide six with a modest reduction of $28 million in the quarter year over year loan growth is $487 million or roughly 5%.
Jim outlines the primary factor leading to the softened net growth this quarter, but breaking this down a bit further there were certainly numerous positive factors, which position us well and provide optimism moving forward.
Foremost among these is that overall production is sound with originations of new credit commitments up roughly $100 million from the Q1 levels.
The loan details on slide number seven provide a helpful picture of where we are seeing near term reductions versus growth for the quarter.
Scott: The largest reductions were in the C&I categories with roughly half of this change attributable to lower balances on our revolving lines of credit.
As the impact of higher short term borrowing costs took hold business has tended to lean a bit more on cash to fund working capital and other short term needs.
Other reductions in the C&I category includes the planned runoff of several agricultural loan relationships associated with our planned exit from this business line.
As well as some expected payoffs and paydowns from commercial clients relating to the sale of assets and operating businesses.
Commercial real estate posted net growth for the quarter bolstered by some larger property acquisitions refinancing and facilities expansion in Dallas, Arizona Orange County in Las Vegas.
Activity seems to be ramping back up in this category, particularly in higher growth markets as owners and developers are adjusting expectations and re penciling deal structures around the current rate environment.
Existing projects also continuing to move forward driving additional growth in construction and development loan balances, which were up $65 million in the quarter.
We view our capacity for growth in these segments as a competitive advantage.
As our overall commercial real estate construction and development levels remain well within regulatory limits and provide ample runway for additional opportunities.
Loans by region are broken out on slide eight showing net growth and specialty lending southwest and western markets with a quarterly decline attributable to our Midwestern markets.
Within the specialty lending business lines life insurance premium finance posted a seasonally soft growth quarter with lower originations offset by some paydowns being driven by policy of restructuring around higher interest rates.
We're also seeing some heightened rate competition from a few select national and regional players that tend to ebb and flow in this space based on overall loan demand.
In general, though our pipeline of new opportunities and solid including deals referred from several newer advisor relationships and the growth outlook in this vertical is sound.
SBA production remained steady in the quarter and generally in line with expectations.
Growth in this business has been pressured for awhile now by higher payoffs prompted by the higher rate environment. Although this trend. This is trending down in 2024 versus the prior year.
Application activity is increasing as borrowers become more comfortable with the current rate environment and ultimately a reduction in rates would have a positive impact on payoffs.
The tax credit portfolio continues to perform well and grew by $20 million in the quarter as existing affordable housing projects move through the construction phase.
The sponsor finance book was essentially level in the quarter with healthy origination activity offset by pay offs stemming from the sale of portfolio companies by our private equity clients.
Scott: <unk> new deal activity in this business continues to steadily ramp up in what is typically a busier second half of the year.
Within the geographic regions, the St Louis and Kansas City markets, which contain our largest base of general C&I businesses were heavily impacted by the reduction in revolving line of credit balances.
However, new origination activity was up in both markets over Q1 with.
With significant fundings on acquisitions by existing clients new relationships in the nonprofit and medical services industries and improved activity in commercial real estate lending.
The southwest region posted 11% annualized growth in the quarter and loan balances were up $234 million or 16, 5% year over year.
This strong growth is representative of the higher levels of new development and generally more robust economic activity in these major metro markets, which include Dallas, Phoenix and Las Vegas.
Key drivers this quarter included fundings on development loans in process as well as stronger new loan origination versus the prior quarter.
Scott: Notable deals include new relationships in Las Vegas, with an auto dealership and the metal fabricator as well as owner occupied commercial real estate expansion with an existing financial services client in Phoenix.
In our West region of Southern California loan balances were up modestly for the quarter and five 8% year over year.
This region was also impacted somewhat by lower usage on lines of credit. However, this was more than offset by several larger new loans and commercial development and hospitality as well as continued onboarding of new C&I relationships.
That we've added in this market over the past 18 months or so has continued to gain some traction with over 20, new commercial relationships added so far year to date.
Moving to deposits on slide nine.
We posted strong core growth with balances up $192 million in the quarter and $1 1 billion or 99, 9% year over year.
Balances were up in all the key categories, but most prominently in noninterest bearing DDA relating to a strong quarter in our property management deposit vertical as well as our focus on new C&I operating accounts.
And in addition to growth these strategies are helping to maintain our overall current cost of deposits, which keene will expand upon and positions us well moving forward.
Keene: The breakout by region on Slide 10 further illustrates this growth profile with the increase for the quarter attributable to the deposit verticals and the southwestern markets.
The same behaviors by operating businesses, which prompted reductions in revolving lines also resulted in lower deposit balances in our Midwestern and southern California portfolios.
At present these companies are opting to use excess cash for working capital and short term needs rather than borrow however, as cash builds heading into the second half of the year and as companies become more confident that rates will come down in the future. We do expect this behavior to normalize.
The deposit verticals are further broken out on slide 11, which shows the overall portfolio well balanced between the three major lines of business.
Growth in Q2 was particularly strong in the property management segment as we continue to add new accounts to our existing management company relationships.
Keene: We're also seeing traction related to the Florida branch, which was opened in 2023, allowing us to bring on new accounts located in that state.
These are coming both from our existing relationships as well as new management companies, which are now able to access our products and our expertise.
Funding mix is profiled on slide 12, which highlights the strong DDA component of our major client channels.
In addition to our growth for Q2, the weighted and low cost account types. We continue to see moderation in both pricing and remixing to the higher interest rate products.
Furthermore, we are producing higher average balances and accounts opened versus those close across all channels and we are having success in protecting and expanding our investor relationships.
Keene S. Turner: Now I'd like to turn the call over to Keene Turner for the financial highlights scheme.
Thanks, Scott My comments begin on slide 13, where we reported earnings per share of $1 19 in the <unk>.
Quarter reported earnings included the impact of core conversion related expenses of $1 3 million.
Excluding this item adjusted EPS was $1 21 per share a 14% increase over the first quarter.
Operating revenue expanded nicely in the second quarter with both net interest income and noninterest income showing improvement.
Expanded earning asset base and a six basis point improvement in the net interest margin drove the net interest income increase while a rebound in tax credit income also benefited operating revenue.
The improvement in margin this quarter was driven by strong client deposit growth that allows us allowed us to decrease the usage of brokered Cds.
Also the provision for credit losses decreased from the prior quarter as total loans declined and net charge offs remained low.
Noninterest expense was incrementally higher than your first quarter, but lower than we had originally expected and the increase was mainly due to deposit costs.
Turning to slide 14, net interest income was $145 million in the second quarter, an increase of $2 $8 million compared to the linked quarter.
Interest income increased $3 9 million in the quarter as a result of growth in average, earning assets and improvement in yields.
Loan income grew $2 $6 million from the linked period with higher balances and improved yields, adding $1 9 million and an additional zero point $7 million coming from favorable movement in amortization of purchase accounting marks.
The average loan origination rate in the second quarter with 8.07% and continues to add to the overall loan yield of six 9% for the quarter.
Earnings on Securities grew zero point $4 million on improved yields as the portfolio continues to benefit from higher rates on cash flow reinvestment and from a growing portfolio balance.
The average tax equivalent yield on purchases in the quarter was 543%.
Keene S. Turner: An increase in average cash balances generating an additional zero point $8 million in period.
More details to follow on slide 15.
Interest expense grew $1 $1 million in the quarter and was well managed to the lower wholesale borrowing and a $48 million increase in average noninterest bearing demand accounts.
Deposit expense increased $1 9 million as a result of higher average balances and an increase in rate mainly in time deposits.
The overall cost of interest bearing deposits rose five basis points from the linked period, while the total cost of deposits increased by three basis points.
Interest on borrowed funds decreased $1 million in the quarter as customer repo balances declined from seasonal highs in the first quarter and.
And deposit growth reduced our reliance on other short term <unk> borrowings.
The resulting net interest margin for the first quarter was $4, one 9% an increase of six basis points from the linked quarter, earning.
Earning asset yields rose by eight basis points aided by higher loan origination rates as well as the positive change in purchase accounting.
Keene S. Turner: Our cost of liabilities increased by four basis points compared to the linked period as funding shifted towards lower cost core DDA and interest bearing deposits and away from higher cost brokered and wholesale funds.
Our expectation is that while interest rates remain at current levels.
Keene S. Turner: Asset yields will continue to improve as a result of the additive loan origination and renewal rates.
Along with the opportunity to improve yields in the investment portfolio through cash flow reinvestment.
On the funding side, we experienced an easing of rate pressure on deposits in the second quarter and expect interest bearing deposit costs to continue to rise at a moderate pace.
Loan growth funded with core deposits should allow us to add to net interest income dollars.
Keene S. Turner: When rate cuts begin we anticipate initially each quarter point reduction in fed funds will generally result in five to 10 basis points of margin loss or $2 million to $3 million of quarterly net interest income.
We expect deposit rates to be somewhat sticky at first and we may need to ease into rate reductions for the initial one or two fed moves with.
And with additional fed cuts, we will be more deliberate and moving deposit rates just as we were when rates were increasing we.
We expect this will result in less net interest margin compression and the initial one or two cuts.
And while not a component of net interest income reductions in interest rates would positively impact deposit related noninterest expense as more than half of the underlying balances there are indexed to the fed funds rate.
Each 25 basis point of Fed fund move equates to approximately $1 million of quarterly expense.
So net we expect pretax income to decline by $1 million to $2 million for every 25 basis point of Fed fund changes on a quarterly basis for the initial cuts with the impact moderating it further cuts followed.
At that level, we estimate that mid to high single digit growth will replace lost earnings from interest rate reductions.
Moving on to Slide 16, we show our credit trends.
Trends remain unchanged and are a reflection of strong performance our loan portfolio.
Net charge offs were less than $1 million or two basis points of average loans for the quarter.
Non performing assets were 33 basis points of total assets compared to 30 basis points at the end of March.
Asset quality trends continue to be favorable with classified assets declining by more than 8% in the period.
Along with a reduction in past due accounts.
Keene S. Turner: These trends along with loan growth and qualitative adjustments.
Keene S. Turner: Resulted in a provision for credit losses of $4 8 million a.
Keene S. Turner: The decline of $1 million from the first quarter.
On slide 17, we demonstrate the allowance the allowance for credit losses represents 127% of total loans or 138% when adjusting for government guaranteed loans.
Keene S. Turner: Allowance totaled $140 million, which is up $4 million from the first quarter.
<unk> reflects a more pessimistic view of the economic forecast. In addition to specifics for the reserves offset by the decline in loan portfolio during the quarter.
We continue to use a weighted economic forecasts that means more toward a downside scenario that we continue to believe is appropriate for the environment.
Moving on to slide 18 second quarter fee income of $15 million was the $3 million increase from the first quarter and driven primarily in the tax credit line item, which was higher on increased activity during the quarter.
Keene S. Turner: Turning to slide 19, noninterest expense of $94 million was up from the first quarter, but expense levels reflected some improvement from what we planned essentially across the board.
Keene S. Turner: Additionally included in the quarter was $1 $3 million of core conversion related expenses compared to $400000 in the first quarter.
Keene S. Turner: Deposit servicing expenses were higher compared to the linked quarter due to growth in average balances.
Certain specialized deposits as well as the impact of allowances that expired unused during the first quarter.
With growth in property management deposits in the quarter, we were pleased with the sequential performance of those line items.
The second quarter's core efficiency ratio was 58% compared to 60% for the first quarter with improvement primarily related to the increase in operating revenue and better than anticipated expense growth.
Moving onto our capital metrics on slide 20.
Turning to our balance sheet and capital position, we repurchased 225000 shares at an average price of $38 seven.
For approximately $9 million, our strong earnings drove tangible common equity ratio to nine 8% up 17 basis points from the first quarter on.
On a per share basis tangible book value increased to $35 <unk>.
At 10% annualized increase from the first quarter.
We announced another <unk> <unk> increase to our quarterly dividend, which will now be 27 per share.
We continue to have a manageable dividend payout ratio that is less than 23% for the first half of 2024.
Regarding potential share repurchases, we have approximately one 7 million shares remaining under our approved repurchase plan and we expect to continue to manage our capital levels through share repurchases.
This second quarter was another fundamentally sound quarter client deposit generation with strong asset repricing continued to improve deposit pricing pressure has abated and expenses remain well managed.
Credit conditions have also stabilized and we continue to make investments in the business through technology with our core conversion later this year and also through new hires in both loan and deposit generating associates in our high growth markets and verticals.
Additionally, we continue to generate better than peer profitability results with an adjusted return on tangible common equity of over 14% and a one 3% adjusted return on average assets.
Our pre provision earnings topped $63 million in the quarter or one 7% of average assets.
These results are indicative of what we expect our company to deliver on an ongoing basis due to the strength of the business platform that has been strategically built over the last several years.
I appreciate your attention today, and we'll now open the line for analyst questions.
Speaker Change: Thank you and the fruition of all the great questions. So if you ask a question. This time, please press star and the number one on your telephone keypad.
For now we will just pause for a moment to compile the Q&A roster.
Jeffrey Allen Rulis: Your first question comes from the line of Jeff <unk> with D. A Davidson.
Please go ahead.
Thanks, Good morning.
Good morning, Jeff.
First question is relates to the credit side, it sort of the outperformers kind of treading water at a little bit here.
Speaker Change: I had thought over the course of the quarter that maybe there was potential for some movement of some of your larger credits, particularly maybe that St. Louis office loan any update on some of the larger.
Non accruals that may be in the bucket.
Any progress on those sure Jeff Let me bring on Doug here, you can address that.
Doug: Yeah. Good morning, Jeff as previously noted the St. Louis Office.
<unk> building is under contract.
Passed all of the due diligence periods and we expect to close on the sale of that asset here in the third quarter.
I guess I would just also know Jeff and non performers at the end of Q2 or Q agriculture relationships, one relationship totaling two $5 million, which has subsequently been paid off in full and another credit relation.
<unk> shift of about.
$6 million at solid 20% principal curtailments, so yes I think.
Route of the credit results at the end of the second quarter I think it's very stable and I think we are carrying some pretty good momentum into the back half of the year.
And Doug.
So on the AD those two credits one was the new one.
The other one that one that came on in the fourth quarter.
One was a downgrade here in the second quarter, Jeff of about $6 million relationship. That's the one that we just got a $1 $2 million principal curtailment on in exchange for the execution of our forbearance agreements.
Another one at $2 $5 million it was painful.
Okay are they related and it's just I mean other than just the broader.
Now I'll close out with just in the agriculture relation in the <unk>.
Industry.
Got it.
Thank you.
Keene on the on the margin then.
Doug: I think.
Kind of coming into the second quarter, I think you framed it up as maybe some first half pressures we're talking.
Excluding kind of rate.
Doug: Boom, if you will but I think the idea was that some of the core pressures ease in the second half.
And I think we've kind of framed up maybe margin drifting back towards four I get them.
Rate cut sort of guidance or impact.
Can you help us on the margin now that seems like a little bit higher base.
Outside of that cut it sounds like the core.
Doug: A rate cut impact sounds like the core has some.
Maybe some tailwind is that fair to.
Okay on margins.
Doug: Yes, maybe Jeff I would say not so much tailwind, but the headwinds have subsided.
Speaker Change: I think.
We didn't necessarily plan for such strong DDA growth in the second quarter and we therefore, the abatement of repricing pressure.
It happened a quarter earlier and so while we were expecting down it improved.
I don't I think the asset repricing.
We certainly expect that to continue with rates where they are.
I do think that as we look at deposit growth. We expect good core deposit growth in the second half I don't know that we are so confident or.
Exuberant that we think is going to be all DDA, driven so I do think that as we get.
Speaker Change: Interest bearing growth as part of the overall deposit growth.
That makes net interest margin, maybe a little bit.
Speaker Change: Slightly down from where we are but certainly we think it's a reset.
The base at 419 here and.
It's hard for me to.
Guide less than five basis points, but as I look at margin performance over the next four quarters with rates where they are.
Thank you are less than five basis points of compression per quarter with with what we're planning and expecting so.
Speaker Change: I think that.
4% at the end of the year, we're going to be I think pretty significantly better than that probably 10 or so more basis points is as we see it some of that is just going to depend on the timing of you get deposit growth in advance of of asset growth or if you get any deposit pressure.
And have to rely on wholesale funding, but for right now that doesn't seem to be the case, we seem to really have good deposit generation and momentum and I think that gives us comfort that margin is stable ish, maybe maybe address a little bit.
But overall I think the sentiment has improved largely because.
Speaker Change: The pricing has stabilized and deposit generation I'd say it feels normal again.
And so I'll stop there for any follow ups.
Yes that was.
Really thorough thanks.
Ed just hop in.
One last thing on the on the core conversion.
Timeline of those costs that I think you had close to a couple of million dollars this quarter.
Can we think about.
Alright, guys Thats 1.3.
Speaker Change: Should we assume a few more in the third quarter, but then we're kind of done with that or.
Any any discussion of the.
The conversion timing.
And costs.
Yeah happy to just say, Jeff I think R. R.
Our third quarter will include a similar level.
Million and a half of of conversion related expenses.
And then there's probably going to be a little bit again in the fourth quarter to get to the total $4 million to $5 million that we expect to see.
So I think we had expected it to maybe happen a little bit later in the year in terms of when the expenses came through but it just shows that we're we're ahead, we're well prepared.
And the cost of getting incurred early so I think thats a positive sign.
Okay. Thank you.
Thanks, Jeff.
Speaker Change: Our next question comes from the line of Andrew Liesch with Piper Sandler. Please go ahead.
Good morning, guys.
Question on the loan growth or the Paydowns. This last quarter I guess, how much of the decline in.
In the past was expected and do you think thats going to continue here in the third quarter.
Speaker Change: I'm, just trying to get a sense of where payoffs could trend here.
Speaker Change: Before so a bit.
More demand because with lower rates.
Yes, Andrew this is Scott I can handle that.
If I look at it at a high level I put payoffs into maybe three categories self managed REIT.
Speaker Change: AG book, there are some sale of assets related to some classified credits that we kind of pushed and took advantage of.
Expected payoffs the life insurance premium.
Issues that I talked about with kind of rebalancing some of the coverage levels to a higher rate environment. Some of the larger competitors, which we kind of see ebb and flow and then.
The Kansas City clients that kind of cycle out and then back in with their real estate projects and then lastly, just normal course of business. So.
The way I would look at path is not a long term headwind.
Many of them are happening for reasons that we fully expected certainly the AG book with something that is self managed and.
Feel really good about production.
And.
The ability for production to outpace those path going forward.
Speaker Change: Got it that sounds like.
We're just given where the pipeline stands from the commentary on on production I know, you'll have you'll get you'll get back to grow through this third quarter, but really it sounds like fourth quarter based on Jim's commentary earlier that that's really when you'll see growth accelerate with good momentum into <unk> 'twenty five is that a good way to think about it.
Andrew This is Jim I think that's exactly how I'd look at it.
Our origination and production is right we wanted to be.
Speaker Change: Sure.
Think to like I said the cusp.
Customers are waiting for.
The all clear sign.
So that will come later.
Here are some fed cuts as well as I think the results of the election and our focus really is just bringing in great relationships people, who companies that have.
Who fit well with our culture, who we know over the long haul we will invest in their businesses and global growth will emanate from that so overall balance sheet growth. We're confident that's going to grow mid to high single digits, and then loan growth will come from that on the right clients.
Speaker Change: Great.
You've covered all my other questions I'll step back thanks.
Thanks, Andrew.
Yes.
Our next question comes from the line of statement of money with Keith VW. Please go ahead.
Hey, good morning, everyone hope, you're all doing well and thanks for taking my questions here.
Wanted to follow up on expenses, and then kind of the outlook here.
In the back half of the year.
Keene or is that pretty pretty solid quarter came in below guidance could you give a little bit more color and perspective for the back half of the year.
Yeah, absolutely I think similar to net interest income and margin I think we reset.
The second half year with a little bit more favorable run rate. So we're pleased with that.
There is a.
Final working day in the third quarter.
And we have made some additional investments in people as you've heard from from Jim and Scott comment so.
That's going to drive a little bit higher on the comp and benefits line.
We do expect.
Vertical deposit verticals to continue to grow that's going to drive a little bit there. So sequentially. We're thinking from <unk> were up $2 million to $3 million between those line items.
And then obviously you get them for day count on the NII side, so pretty.
Pretty comparable I think generally paid for.
Speaker Change: Got it Okay. That's helpful. Thank you and then on the on the fee income side of things.
As you guys noted the tax credit income.
Turning to a positive this quarter, you're still kind of have that roughly $10 million annual level.
On what Youre seeing with deals that are scheduled to close.
We do and I think with the second quarter results here. It may it may even proved to be a little bit better but.
We don't control the fair value on rate impact there, but we were able to overcome an adverse rate move.
With the activity in the quarter. So we feel pretty good about where we're set up there for both the third and the fourth quarter.
Got it Okay and then just lastly, just to clarify on the margin commentary to Jeff's question.
So I think you had said that originally youre kind of looking at a 4% level by the end of the year could be upwards of 10 basis points better than that was that commentary, including a 25 basis point rate cut or was that commentary around rate cut the additional impact should that occur.
Yes.
That was not including a rate impact.
With with with a rate cut margin will decline a little bit, but youll get that offset in noninterest expense and then to the extent you get mulch.
Multiple rate cuts.
I think the the margin compression.
Isn't that significant.
Speaker Change: Call It third and fourth tied into this on the first and second.
Got it okay.
Helpful. Thank you very much.
Thank you.
Our next question comes from the line, Brian Martin with Janney. Please go ahead.
Brian Joseph Martin: Hey, good morning, guys.
Good morning, Brian.
Hey.
Jim or whomever may Scott just on the loan side that runoff on the AG portfolio. How are you thinking that progresses here.
In the back half of the year just in the next year kind of a timing as far as when you fully exit that business.
Yes, I can take that one Brian.
We've had some good success early on and there's probably maybe $40 million to $50 million that could run off.
And the next couple of quarters, there's going to be a portion of that portfolio, though that may take a little bit longer.
We're not going to just kick performing companies to the curve, but in the same light theyre going to go find a new home with a company that's probably in that business over time, but that I would say that maybe there's a little bit longer runway.
Gotcha, Okay helpful and then Keene just on that.
The fee income line that kind of those volatile lines. If you will kind of a <unk> in the.
Speaker Change: I think there's one other some other ones in there this quarter. It seemed like it didn't really have a lot of noise in there in terms of.
Unusual items.
That other line item per Se is this kind of a clean quarter and then there's just still going to be some bouncing around on those other more volatile line items, if you will.
Speaker Change: Yes, I would say this this is a pretty.
Clean quarter in terms of the.
The baseline items were as expected and you had a modest contribution from the tax credit business.
With.
Yes, good deposit generation.
A little bit lower loan growth, we've elected to retain SBA loans, which obviously helped the origination rates.
The margin expansion. So I think if you could draw it up this way for.
The non the non seasonal quarters, I think thats, a pretty good quarter for fee income space.
Gotcha, Okay and then.
Maybe just one on the credit on the credit side as far as the overall health of the.
Had a couple questions of late about the C&I portfolio is that some of the banks and just.
Speaker Change: How the performance has been there just are you seeing any stress within that portfolio.
Can you just give any commentary on that it seems like credit is very healthy.
Kind of the commentary here, but just anything you're seeing on the C&I side or any concerns out there and within that portfolio.
Yes, Brian This is Doug I'll try to address that we saw in the second quarter in migration of about eight or 10 relationships from past rating into special mention.
No we'll commonality there, though we saw companies that range from.
Speaker Change: Commercial roofing contractors to health care service providers to importers of apparel.
But in the overall tonnage trends and no real concerns about really the overall health of the portfolio. So.
Speaker Change: These were migrations in risk ratings due to the collection of the fiscal year end 'twenty three numbers in <unk>.
First quarter, 2024 numbers, where theres, just some impairment and cash flow temporarily our liquidity, but I think appropriate plans in place.
We see this improve in the quarters to come so.
Okay. That's helpful. And then just the lessons Keene, maybe I missed what you said on the outlook for the expenses that was it just a couple of two to 3 million Bucks a quarter is kind of what youre thinking the increase may look like with the deposit expense I guess in there or is that yes, that's correct.
Speaker Change: Okay, That's correct Bryan and then eventually.
Once we're post core conversion, you'll have that sort of million five come in coming back in our favor.
Okay, and if I remember right the impact of the rate cuts.
Tenant broaden out a little bit I mean, the five to 10, it seems a little bit bigger than maybe what you had talked about in the past, but maybe thats more.
Earlier rate cuts versus later rate cut but just a.
The size of that impact on kind of the potential cut.
It sounds like it could be at the lower end of that range or even lower on the on the on the out cost if you will that yet.
Speaker Change: Yes, I would.
Say on the outcomes, we've had the passage of time.
And we've added to the investment portfolio, which has helped us to stabilize and further improve the net interest income stream.
I think.
If we put some hedges top caps collars in place and I think just.
Some what's happening on the origination side, we're getting a little bit less.
Speaker Change: Variable a little bit more fixed.
In this current environment. So all of those I think are contributing to.
Better than we had initially thought out rate guidance and I also don't think that we can.
Had really talked much about that previously we had we'd stayed back from that I think just because we were still seeing so much deposit pricing trickle through and now that that slowed and we're kind of back to what feels more like a normal the positive environment.
Speaker Change: I think that gives us comfort with the.
The initial cuts still being very similar but not.
Not as not as dramatic on third fourth et cetera.
Okay. That's super helpful and just the last one was on the reserve coverage.
<unk> picked up a bit here, but credit still sounds.
Pretty healthy I guess is the current level of the reserve or any kind of reserve coverage I feel like it's sustainable at this level and really no no.
Rice from Harris.
And I guess, how are you feeling about that.
Yes, I mean, obviously, a big portion of that Brian is what happens with the underlying forecast.
The forecast got better in the second quarter compared to the first but.
Qualitatively weighted more heavily to be pessimistic with.
Even with cuts looming it still feels like higher for longer and I think we want to make sure that we're just well covered given the profitability given the capital levels for.
Speaker Change: Any of those credits that randomly.
Experienced stress just because of higher rates for such an extended period of time so.
I think we're trying to be prudent I think.
It's sustainable to the X.
<unk> that we don't have material changes.
And any portion of the portfolio.
And we will continue to evaluate.
Weightings and whether we want to get more pessimistic than we are.
Gotcha, Okay, yes, it seems like with rate cuts potentially coming.
Okay.
Speaker Change: Positive for the borrowers, but I guess, so but for now the levels seems fine. So okay. I. Appreciate you guys taking my questions. Thank you.
Thanks, Brian.
It seems that there are no further questions. So I'll now turn the call back over to Jim lately.
Thank you Jerry and thank you all for joining us today and for your interest in our company have a great day and we'll talk to you later this year at the end of the third quarter take care now.
The meeting is now concluded.
You may now disconnect.