Q3 2024 Enterprise Financial Services Corp Earnings Call
Hello, and welcome to the Enterprise Financial Services Corporation third quarter 2024 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'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
I would like to withdraw your question again, just press star followed by the number one.
Speaker Change: I would now like to turn the call over to Jim Lally, President and CEO you may begin.
Jim Lally: Well, thank you Jeremy and thank you all very much for joining us This morning, and welcome to our 2024 third 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 <unk> Trust.
Jim Lally: 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. The presentation and earnings release were furnished on SEC form 8-K yesterday. Thank.
Jim Lally: 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 today.
Speaker Change: Our strong financial performance continued in the third quarter, our diversified business model delivered EPS of $1 32.
Speaker Change: Which compares favorably to the $1 19 in the linked quarter and $1 17 in the third quarter of 2023.
Speaker Change: As important we experienced a stable net interest margin.
Speaker Change: <unk> expansion of net interest income at 25% annualized increase to our tangible book value per share from the linked quarter.
Speaker Change: Just to say I am very pleased with these results as they set us up well to finish this year very strong and enter 2025 with a great deal of momentum.
Speaker Change: Like we've stated during previous earnings calls and Investor meetings over the last several years, we've 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 earnings our third quarter financial performance as a result of this strategy and we will continue to be.
Speaker Change: Refine and improve on this strategy for quarters and years to come.
Speaker Change: Our financial scorecard begin on slide three.
Speaker Change: For the quarter, we earned net income of $56 million.
Speaker Change: For one $1 32 per diluted share and we produced an adjusted return on assets of 132% and a pre provision return on assets of 174%.
Speaker Change: This was an improvement over our very strong results for the first two quarters.
Speaker Change: Our net interest income increased $2 9 million to $143 5 million looking back over the last two years, we've been able to hold this number at or around $140 million.
Speaker Change: Spite challenging competitive and interest rate conditions. This reflects the strength of the franchise that we've built and we remain positioned to produce high quality earnings consistently improved shareholder value through deep rooted client relationships.
Speaker Change: Our stable net interest income was aided by the defense of our net interest margin at four 7%. This is a direct result of our appropriately priced 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: Ken will provide much more detail on these results in his comments along with our strategy as to how we plan to defend this amid a declining interest rate environment that we expect to continue over the next several quarters.
Speaker Change: Last quarter I discussed the wait and see mindset most of our client base with respect to significant financial moves. This continues to have an impact on our loan growth.
Speaker Change: Water, we saw loans grow by $80 million or 3% on an annualized basis.
Speaker Change: This includes a $46 million decline in our agricultural portfolio, which we continue to wind down.
Speaker Change: Based on the conversations that we're having with our clients I believe is a bit of pent up demand I am confident that we will get back to a mid single digit growth in the quarters ahead in the meantime, we will maintain our credit and pricing discipline, while we continue to sell with our value added approach.
Speaker Change: Deposit growth continues to be a bright spot for our company for the.
Speaker Change: Second quarter in a row, we were able to grow customer deposits close to $200 million.
Speaker Change: In fact, we expanded customer deposit balances and for the last five quarters.
Speaker Change: Due to our continued strong performance in our national deposit verticals, we experienced solid growth in our geographic markets to the cost and composition of the deposit base remains stable and has significantly aided in the continued growth in our earnings and profitability.
Speaker Change: Quarterly cost of deposits was $2, one 8% and our level of DDA to total deposits remained flat at 32% a level we've maintained for the last five quarters.
Speaker Change: Last quarter I spoke to my confidence in our ability to grow our balance sheet at a mid to high single digit pace with a caveat that loan growth will likely follow.
Speaker Change: Black can follow in the mid to late fourth quarter, and maybe even into 2025.
Speaker Change: 90 days later I am so confident in this growth rate both pipelines are building and these should only continue to grow with the additions of new R&M and teams you'll hear much more about where we are seeing opportunities and Scott's comments.
Speaker Change: Another strength of our companies are well positioned balance sheet, which provides us great flexibility with respect to capital planning capital levels at quarter end remained stable and strong with our tangible common equity to tangible assets ratio at nine 5%.
Speaker Change: As impressive was our 14th one 6% adjusted return on tangible common equity while growing our ratio of tangible common equity to total assets by close to 1% over last year.
Annual book value for common share was $37 26.
Speaker Change: 25% annualized increase for the quarter.
Given the strength of our earnings our confidence in our continued execution, we increased the dividend by <unk> <unk> per share in the fourth quarter of 2024 to 28 per share and will return an additional $9 $7 million to shareholders during the quarter through common stock repurchases.
Speaker Change: I would characterize the credit quality of our portfolio of strong and stable.
Speaker Change: Nonperforming assets decreased $15 2 million when compared to the linked quarter. This sizeable decrease was primarily attributable to the sale of our largest piece of Oreo and which we required a gain in excess of $3 million.
Speaker Change: As you can see from the data presented our ratios of Npls to total loans and NPA to total assets are at the lowest levels in the last year.
Speaker Change: We've been able to achieve this while maintain strong allowance for credit losses of $1 two 6% of total loans.
Speaker Change: Slide five shows what we are focused on a foreseeable future.
Speaker Change: Our focus remains on taking care of the great clients, we have accumulated over our 36 year history, while adding those family owned businesses that cherished high touch consultative consultative relationships doing this day in and data out will lead to several more quarters of really strong performance and the continued building of franchise value.
We will not alter our credit discipline to chase growth.
Speaker Change: We'll be cognizant of current market pricing trends to make sure we continue to protect and grow our client base.
Speaker Change: Two weeks ago, we executed on our core conversion careful planning and execution of this plan by our team facilitated a smooth transition to our new system.
Speaker Change: While the core project was a singularly long extensive project for US our culture is one of continuous improvement and process innovation.
Speaker Change: While we are pleased to have completed this milestone we will jump back into an array of projects and opportunities that improve the client experience and make us more efficient.
Speaker Change: The fruits of our recruiting efforts, especially in our higher growth markets and higher profit specializes businesses are beginning to pay off we continue to onboard several new RMS and full teams in our western markets and we will continue to capitalize on disruption caused by M&A and all of our markets Zimmer.
Speaker Change: Similarly, we are being very strategic with our adds to our specialized lending teams and our national deposit verticals focusing 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 to the business in total.
Speaker Change: We will aggressively pursue more of these opportunities for the remainder of 2024 and into 2025.
Speaker Change: Before I hand, the call to Scott I would like to provide a little perspective on how our clients are performing and provide a view of the overall economy from their vantage point.
Speaker Change: The most part our clients continue to do well from large general and sub contractors to Midmarket manufacturers and distributors 2024 will be another solid year for most.
Speaker Change: What has changed in the last 90 days, we are having many more strategic conversations about expansion succession and acquisitions and we had in the previous two quarters. This informs us the opportunities exist.
Speaker Change: At these two companies will flex their approach to these opportunities once they understand whether or not the upcoming elections has any impact on that.
Speaker Change: Last quarter, I mentioned that our CRE clients were anxious to get new projects underway and take a longer viewpoint now near term rates have begun to decline. This.
Speaker Change: This is this is manifesting itself with several new wins throughout our footprint in most asset classes. Besides office CRE.
Speaker Change: Overall I liked the tempo that we're seeing in our business and feel good about our team's ability to consistently produce quality opportunities that will ultimately lead to consistent solid balance sheet growth.
Speaker Change: We enjoy a great reputation and corresponding market share of middle market businesses in our mature geographies in specialized lending businesses as such I am confident that we will continue to get more than our fair share of corresponding opportunities.
Speaker Change: 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 a 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.
Speaker Change: That I would like to turn the call over to Scott Scott.
Scott Goodman: Thank you Jim and good morning, everyone.
Scott: Starting with Lowes as you heard we posted net growth of $80 million in Q3.
Scott: This growth, which is outlined on slide six and seven was relatively well balanced between C&I and commercial real estate within our major metro markets This quarter.
Scott: At a high level of gross new loan production continued at a healthy pace, but net growth was muted somewhat by the planned runoff of our AG portfolio and several expected larger paydowns this quarter associated with opportunities to exit marginal credits.
Speaker Change: As Jim outlined new C&I lending opportunities centered heavily around businesses transitioning ownership or investing for growth through acquisition that expansion.
Speaker Change: While balances on revolving lines of credit were relatively flat from the prior quarter.
Speaker Change: With interest rates moving down we're also seeing the resurgence of some commercial real estate projects that were previously in a holding pattern, particularly within our higher growth western markets.
Speaker Change: Turning to the specialty lending verticals life insurance premium finance had a strong quarter growing $34 million.
Speaker Change: In addition to scheduled premium fundings on the existing book. We also originated several large new loans from our established base of referral partners.
Speaker Change: Despite elevated competitive pressures from the larger regional banks.
Speaker Change: Competing on price in this space, our model of consistent execution and speed of delivery, which was built over several decades.
Speaker Change: He has to deliver a steady pipeline of new opportunities and consistent growth.
Speaker Change: The sponsor finance portfolio declined by $47 million in the quarter.
Speaker Change: As I've mentioned in prior quarters. This year growth in this space has been dampened by a number of competitive and environmental factors.
Speaker Change: Namely private equity sponsors have exploited the sale of portfolio companies in 2024, following the previous year of 2023 in which we saw almost no churn in the existing book.
Speaker Change: Additionally, elevated short term rates, which are predominantly used in this space.
Speaker Change: We used the price differentiation between the subordinated debt senior lenders, leading to higher usage of unit tranche and other mezzanine sources in the capital stack.
Speaker Change: These factors also created more competition amongst senior lenders and in some cases have led to credit structures and pricing that are beyond our risk tolerance.
Speaker Change: Overtime. This specialty has and will provide growth consistent with our global targets. However.
Speaker Change: However, given our nearly 20 years of experience in this space. We understand this can be a cyclical business.
Speaker Change: And we're prepared to exercise appropriate discipline to protect the credit quality of our book and maintain the consistency that valued by our sponsor partners.
Speaker Change: The tax credit portfolio was down modestly due to scheduled paydowns on project loans as expected.
Speaker Change: Really soft quarter, but is positioned to show some growth as is traditional heading into Q4.
Speaker Change: Looking at growth by region on slide eight.
Speaker Change: Midwestern markets were most heavily impacted by the aforementioned planned reduction in our AG portfolio and the other anticipated paydowns.
Speaker Change: Aside from these factors production was solid with the originations trending up from the prior quarters. This year.
Speaker Change: Highlights for Q3 include the acquisition financing for our construction materials client and.
Speaker Change: And refinancing of our season CRE projects coming out of the secondary market structure in Kansas City as.
Speaker Change: As well as in Aesop conversion for a long time C&I specialty manufacturing client in St. Louis.
Speaker Change: Growth in our southwestern markets continues at a solid base with loans up $31 million or seven 5% annualized in Q3.
Speaker Change: And posting growth of 14, 8% on a year over year basis.
Speaker Change: Generally speaking this region continues to benefit from the higher level of economic growth.
The Phoenix, Dallas, and Las Vegas Metro market.
Speaker Change: Growth also include the continuing tale of construction fundings on commercial real estate projects, which we've originated over the past 12 months to 18 months.
Speaker Change: In addition, we originated new loans were established Phoenix clients, and the Carwash multifamily and health care businesses this quarter.
Speaker Change: Our western region, Southern California posted solid growth of $96 million in Q3, and is up $185 million or 10, 5% year over year.
Speaker Change: Growth in this market has steadily increased as we are now seeing traction.
From larger legacy acquired clients as well as relationships originated by the new talent that Jim mentioned Theres been added over the prior two years.
Growth in commercial real estate this quarter is coming from fundings on commercial construction loans originated in prior quarters.
Speaker Change: As well as additional capacity for new real estate opportunities such as loans season operators that multifamily senior living and industrial storage.
Speaker Change: Alternatively newer talent is predominantly C&I focus on boarding new relationships during Q3, and the private lending aerospace manufacturing and commercial electric spaces.
Speaker Change: Deposits are profiled on slide nine.
Which shows growth of $183 million or 6% annualized for the quarter.
Speaker Change: Focusing on core growth exclusive of brokered funds customer deposits are up $770 million or six 9% year over year.
Speaker Change: Balances were stable and the lower cost noninterest DDA and savings account types, while growth was most prominent in interest bearing DDA and money market accounts.
Speaker Change: This growth has not come at the expense of an inflated rate or hot money strategy, but rather from continued efforts to add new clients and a value added sales process to expand our existing account relationships.
Speaker Change: You'll hear more from Keith and his comments on our progress and continuing efforts to control deposit costs.
Speaker Change: Another highlight this quarter is the performance of our geographic regions, which contributed nearly 70% of the growth this period.
Speaker Change: This is broken out on slide 10.
Speaker Change: And then western markets increased deposit balances $94 million in Q3 and have now grown deposits, 2% year over year.
Speaker Change: In addition to several significant new commercial deposit relationships.
Having focused and intentional discussions with our top clients.
Speaker Change: Aggregate their excess funds with our bank and educate them on the overall rate environment to protect our existing balances as rates fall.
Speaker Change: Balances also grew in our western region of southern California, increasing $42 million or 14% annualized.
Speaker Change: Generally growth came from the Onboarding of new commercial and private banking relationships as well as the stabilization of existing accounts that had run down early in the year from clients deploying excess cash for working capital.
The deposit verticals contributed $60 million of growth for the quarter, primarily due to increased balances within the property management segment.
Speaker Change: These verticals are further broken out on slide 11.
Speaker Change: So that overall portfolio that is well balanced between the three major lines of business.
Speaker Change: Growth in Q3, followed the strong performance trend within the property management segment as we attract new accounts to our existing management company relationships.
Speaker Change: We continue to also benefit from traction relating to the Florida branch, which was opened in 2023, allowing us now to bring on new accounts, both with existing and new clients operating in that state.
Yes.
Speaker Change: Lastly, I'll comment on the funding mix, which is profiled on slide 12 and.
Speaker Change: And highlights both the diversification and steady DDA component of our major client channels, representing 32% of the total.
Speaker Change: Growth for the year has been weighted in lower cost account types.
Speaker Change: And we see we continue to see a slowdown in the shifting our balances to higher yielding products.
Speaker Change: I am encouraged by the proactive conversations we're having with clients around the shifting interest rate environment and early behavior has been positive with respect to retention and new opportunities to grow these deposits.
Speaker Change: Now I'd like to turn the call over to Keene Turner for the financial highlights key thanks, Scott and good morning, everyone.
Keene Turner: Turning to slide 13, we reported earnings per share of $1 32 in the second and the third quarter on net income of $51 million reported earnings included the impact of core conversion related expenses of $1 $4 million as well as a $3 million gain on sale of <unk> property.
Keene Turner: Excluding these items adjusted earnings per share was $1 29 per share an eight <unk> increase from the second quarter.
Keene Turner: Operating revenues contributed a meaningful increase to EPS in the quarter driven from our continued success in deposit generation and expanded net interest income and an increase in noninterest income.
Keene Turner: Similar to last quarter, our strong client deposit growth allowed us to model modestly decreased usage of wholesale borrowings and to invest excess liquidity in the securities portfolio.
Keene Turner: The provision for credit losses decreased from the prior quarter as total loans have remained relatively stable and nonperforming loan balances have declined.
Keene Turner: Noninterest expense increased in the quarter due to higher compensation expense and an increase in variable deposit servicing costs during.
Keene Turner: During the third quarter, we had more working days, we were active in recruiting relationship managers and we expanded average balances within the national deposit vertical.
Keene Turner: Turning to slide 14.
Keene Turner: Net interest income was $143 5 million in the third quarter, an increase of $3 million compared to the linked quarter.
Keene Turner: Interest income increased $4 $7 million during the quarter as a result of growth in average, earning assets and improvement in asset yields.
Keene Turner: Loan income grew $2 $3 million from the linked period, mainly due to higher average balances and additional day of earnings.
Keene Turner: This was inclusive of approximately half a million dollars of an unfavorable change in amortization of purchase accounting marks.
Keene Turner: The average interest rate on loans originated in the third quarter was 784% and continues to add to the overall loan yield of 695% for the quarter.
Keene Turner: Earnings on Securities grew $1 $4 million from the linked period on higher average balances and improved yield we.
Keene Turner: We continue to invest additional funds during the third quarter, while the portfolio yield also continued to benefit from higher rates on cash flow reinvestment.
Keene Turner: The average tax equivalent yield on purchases in the quarter was $4, 97% the.
Keene Turner: The increase in average cash balances generated an additional $1 million and interest during the period.
Keene Turner: More detail follow on slide 15.
Keene Turner: Interest expense grew only $1 $7 million in the quarter, primarily as a result of higher average deposit balances.
Keene Turner: Positive expense increased $2 4 million led by higher average balances and a slight uptick in rate on interest bearing checking and money market accounts.
Keene Turner: The overall cost of interest bearing deposits was up three basis points from the linked period.
Keene Turner: The total cost of deposits increased by two basis points.
Keene Turner: Interest and other borrowed funds decreased nearly $1 million in the quarter as a result of lower balances in both customer repo and short term <unk> debt.
The resulting net interest margin for the quarter with $4, one 7% a decrease of only two basis points from the linked quarter.
Keene Turner: Turning asset yield declined by two basis points, mainly due to the change in the earning asset mix from higher cash and investment balance.
Keene Turner: A two basis point improvement in loan yields was offset by the negative change in purchase accounting.
Keene Turner: Our cost of liabilities increased by two basis points compared to the linked period as deposit growth was more concentrated in higher cost interest bearing checking and money market accounts.
Keene Turner: As note.
Keene Turner: Isolate purchase accounting impact NIM was stable quarter over quarter.
Keene Turner: The federal reserve reduced the fed funds rate by 50 basis points since September beginning what is expected to be a series of interest rate cuts.
Keene Turner: We observed minimal impact in the third quarter result, we do expect to see modest net interest margin compression moving forward.
Keene Turner: Also worth noting that we have some hedges and other structural factors in place that will further delay or mitigate the perceived sensitivity at a 61% variable rate loan portfolio.
Keene Turner: At a high level, we have hedged a part of the portfolio, we have embedded loan floors and a portion of the variable rate portfolio has longer term reset base.
Keene Turner: Adjusting for those items in our investment portfolio, we have approximately $5 4 billion of interest, earning assets compared to $8 8 billion of interest bearing liabilities would have the ability to be repriced in under one year.
Keene Turner: As we have as we discussed in our last call each quarter point reduction in the fed funds rate exposes us to five to 10 basis points of net interest margin model or $2 million to $3 million of quarterly net interest income on the existing balance sheet. However.
Keene Turner: However, with the initial 50 basis point move already made we have worked hard to manage to a better impact in the upcoming quarter as the market adjusts to lower interest rates, we expect funding cost to be more responsive to additional fed moves.
Keene Turner: The declining fed funds rate will also lead to reductions in deposit related noninterest expenses approximately half of the underlying balances are indexed to the fed funds rate and each 25 basis points fed bump equates to approximately $1 million of quarterly expense, albeit with a one month lag.
Keene Turner: So net we expect pre tax income declined less than $1 million to $2 million for every 25 basis points of subsequent fed fund changes on a quarterly basis.
Keene Turner: At that level, we estimate that our planned balance sheet growth will replace loss earnings from interest rate reductions.
Keene Turner: With that in mind as we look over the course of 2025 and plan for additional multiple fed cuts within the next four quarters, we see net interest margin initially still above 4% and then drifting into the high 3% range. Thereafter, we also expect in that timeframe to improve the quarterly run rate of the positive.
Our deposit cost by more than $5 million to $7 million before any additional growth in balances.
Keene Turner: With that we'll move on to slide 16, which reflects our credit trends.
Keene Turner: Trends remained well managed and indicate the strength of our diversified loan portfolio net charge offs were $3 $9 million of 14 basis points of average loans for the quarter a level that's below our longer term average.
Keene Turner: Nonperforming assets improved to 22 basis points of total assets compared to 33 basis points at the end of June the improved asset quality trends, along with net charge offs and improvement in the economic outlook.
Keene Turner: <unk> provision for credit losses of $4 1 million a decline of $1 million from the prior quarter.
Keene Turner: Slide 17 presents the allowance for credit losses, the allowance for credit losses represented 126% alone for 138% when adjusting for government guaranteed SBA loans, we continue to use a weighted economic forecast that leans more toward a downside scenarios and we believe that's appropriate in this environment.
Keene Turner: On slide 18 third quarter fee income of $21 million was an increase of $6 million from the second quarter, driven primarily by tax credit income, which was higher from a decline in 10 year Sofer's impact on credits carried at fair value at $3 $2 million gain on the sale of other real estate.
Keene Turner: And higher community development income.
Keene Turner: Turning to slide 19, noninterest expense of $98 million was an increase of $4 million from the second quarter, driven primarily from compensation and benefits and deposit servicing expenses. Additionally included in the current quarter was $1 $4 million of core conversion related expenses compared to $1 $3 million.
Keene Turner: In the second quarter.
Deposit servicing expenses were $2 $1 million higher compared to the linked quarter due to $152 million of growth in average balances on the deposit vertical while the related earnings credit percentage with largely unchanged until the September fed funds interest rate reduction.
Keene Turner: Compensation and benefits was <unk> $8 million higher due to an increase in the number of working days in the quarter and further investment in the associate base.
Keene Turner: The third quarter's core efficiency ratio was relatively stable at 58, 4% compared to 58, 1% for the linked quarter.
Keene Turner: Our capital metrics are shown on slide 20, we continue to manage our excess capital and repurchased 195000 shares at an average price of $49 73.
Keene Turner: Or approximately $10 million in total.
Keene Turner: We have approximately $1 5 million shares remaining under our existing plan and we'll continue to monitor our level and manage some of our excess position.
Keene Turner: And by that I mean, the amount that is greater than 9% TCE through share repurchases.
Keene Turner: Yes.
Keene Turner: In summary, this was another strong quarter for the company client deposit generation was robust as planned and we have taken appropriate steps to partially mitigate the impact of declining rates on our earnings while expenses and credit remained well managed we have consistently posted strong profitability and this quarter was no exception, we had an adjusted <unk>.
Keene Turner: Churn on average tangible common equity of over 14%, a one 3% adjusted return on average assets and our pre provision earnings increased to over $65 million in the quarter or one 7% of average assets.
Keene Turner: I think it's also worth noting that the level of pre provision net revenue is consistent with the prior year quarter.
Keene Turner: Thanks for your attention today and with that we'll open the line for analyst questions.
Speaker Change: Alright, perfect and just as a reminder to ask a question today. Please press star followed by the number one.
Speaker Change: Our first question comes from the line of Jeff <unk> from da Davidson, Jeff. Please go ahead.
Speaker Change: Good morning, this is actually Ryan pain on for Jeff today.
Speaker Change: Hi, Brian going over Martin going over to the net charge offs at 14 basis points of average loans.
What was the makeup of those charge offs.
Speaker Change: Yes, Brian good morning, Doug balconies.
Speaker Change: The charge offs in the quarter were largely concentrated in one multi family acquired loan in Southern California, you might recall our relationship in the fourth quarter of 2023, we had some unsecured exposure to a developer. This was the residual commercial real estate secured debt.
Speaker Change: Exposure about $17 million that we charged down to $3 million of a receiver in place and are working through the process right now to control and monetize the assets dispose of them.
Speaker Change: Okay.
Speaker Change: Got it and.
Speaker Change: So with that.
Speaker Change: Actually that works.
Speaker Change: On the expense side.
Speaker Change: So will we see additional expenses from the conversion.
Speaker Change: And what would that 2025 outlook on run rate or year to year growth look like there.
Speaker Change: Yes so.
Speaker Change: We're at one three of core related expenses.
Speaker Change: In the quarter for call it roughly $1 million.
Speaker Change: And there's another $1 million of half coming in in the fourth quarter.
Speaker Change: Sequentially given the.
Speaker Change: Expected reduction in deposit service charges.
We expect.
Speaker Change: Noninterest expense to be level.
Speaker Change: And then I think depending on what you're thinking in terms of.
Speaker Change: Future cut every 25 basis points is going to be a $1 million improvement.
Speaker Change: The deposit service charge line item.
Speaker Change: So we actually think that that will ease.
Speaker Change: Keep expenses flat ish next year, depending on how many reductions you get or could actually lead to some some lower expenses overall, and then I think absent will get compensation.
Speaker Change: James is in some quarterly items in the first quarter that will be a little bit seasonal heavy but otherwise I think generally we expect the rest of the expenses to not move around a whole lot and be pretty well controlled.
Speaker Change: Got it thank you and.
Speaker Change: Lastly.
Speaker Change: How is that loan pipeline building quarter to quarter, and then what does that momentum look like going into 2025.
Speaker Change: Yes, Ryan this is Scott I can answer that.
Scott: As I made in my comments I feel very good about the production levels.
Speaker Change: Commitments.
Speaker Change: Those are solid I think they are in line with.
Speaker Change: What we would traditionally expect and that would traditional result in targeted net growth.
Speaker Change: Net of the offsetting factors that I mentioned right. So the AG portfolio, certainly as an offsetting factor I think.
Speaker Change: We're still not seeing businesses use revolving lines of credit at historical rates.
We would expect maybe change as rates come down.
Speaker Change: <unk> development has been slow and I mentioned.
Speaker Change: The issues in sponsor finance, so I think as all of that cycles back around to norm.
Speaker Change: We're currently producing at levels that would result in our targeted net growth expectations avid just add Brian to that.
Speaker Change: The composition of that is very evenly spread throughout the company and that's intentional.
Speaker Change: We're not leaning in any one market or asset classic I mentioned this is a.
Speaker Change: Plan in terms of our recruiting and where we're focused that there is a bit of a structure relative to that growth.
Speaker Change: Great Okay. Thank.
Thank you guys. That's all for me.
Speaker Change: Thank you Hi Ray.
Speaker Change: Our next question comes from the line of Andrew Liesch from Piper Sandler. Please go ahead.
Speaker Change: Hey, guys, sorry, if I missed this earlier, but did you say the balance of agricultural loans that are still left in the portfolio.
Yes.
Speaker Change: We've reduced it by about $50 million this quarter down to about $140 million in total.
Very helpful.
Speaker Change: The.
Speaker Change: It sounds like you've been active hiring some C&I commercial business lending teams I'm just curious what are there any regions that youre focusing more on are these concentrated in one area or is it across the franchise.
Scott: Hi, Andrew It's Scott.
Scott: Dominantly in our western markets.
Speaker Change: We added I believe 2014 client facing associates this quarter. Some of those did fill open positions, but I would say a majority of our opportunistic investments.
Speaker Change: California predominantly a couple in Arizona, a couple maybe in the specialties, but I think we just see tallo.
Speaker Change: Talent is in play, particularly when banks are going through M&A, our senior management turnover or in some cases stressed banks predominantly out west that are still dealing with liquidity or concentration issues.
Speaker Change: And it's just putting putting talents in play so physicians like commercial RMS some private bankers.
Speaker Change: Treasury management salespeople that support our C&I strategy and some business banking.
Speaker Change: Being able to add in all of those areas both from a team perspective as well as individual bankers. So.
Speaker Change: I think for for bankers coming out of those organizations our model really resonated at west.
And.
Speaker Change: I think the window is open now.
Speaker Change: It will be closed eventually so I think we're being opportunistic.
Speaker Change: Got it that's very helpful. Good to hear.
Speaker Change: And Jim you mentioned your commentary early in the call on <unk>.
Speaker Change: Clients looking to expand their businesses as they look into 'twenty five.
Speaker Change: Was that also comment on credit quality.
Speaker Change: If businesses and your clients are looking to expand does that mean, you feel pretty good about the credit outlook as well.
Jim Lally: Yes, I'm very bullish on our credit outlook.
Speaker Change: As it relates to this client base. We're talking about these are these are well.
Speaker Change: Established businesses, who are looking at generational opportunities one generous index, whether these aesop.
Speaker Change: The result in one generation as an extra they use private equity these conversations are becoming.
Speaker Change: Two more prevalent day to day out in addition to that too I think.
Speaker Change: I think we're seeing opportunities also to attract new clients relative to our posture in that regard, we're not changing how we underwrite.
Speaker Change: It's just being out there ahead of the.
Speaker Change: A decision to do this as we talked about today around the room.
Speaker Change: <unk>.
Paul I'll call them. The best companies, you know add value along the way and we know that these opportunities eventually come about and we want to make sure. We're there with the best clients. So that credit isn't an issue and we're dealing with the best credit we can possibly getting all of our markets.
Speaker Change: Great.
Speaker Change: Got it. Thank you so much for taking the questions I'll step back.
Thanks, Andrew.
Speaker Change: And just as a reminder to ask a question. Please press star and the number one our next question comes from Damon Delmonte with <unk>. Please go ahead.
Speaker Change: Hey, Good morning, guys hope everybody is doing well today.
Just wanted to circle back on the margin commentary Keene could you just kind of go back over what you were saying so your expectation here for the fourth quarter do you think you could maintain a four handle on the on the margin and then what.
Speaker Change: The expectation that we're going to have a couple of cuts this quarter, and maybe 25 basis points in each quarter going through 'twenty five.
Speaker Change: And it'll have a drift downward into the did you say that the high 390 <unk> for the the high threes.
Keene Turner: Yes, that's accurate I would say that.
Keene Turner: The other factor to consider Damian in the fourth quarter is that we're going to probably get year end seasonal deposit growth and so that will also be some margin declination due to remixing. So on an all else equal margin down 5% to 10 basis points and then there might be some remixing in there and then yes.
Keene Turner: I think we expect to defend.
Keene Turner: Call it into the $390 with.
Keene Turner: Future cuts in.
Speaker Change: Looking at here is five but additionally from today, so I think that generally lined up with with what yours.
Speaker Change: You articulated in your question there.
Speaker Change: Okay, Great I appreciate that.
Speaker Change: And then with regards to the fee income.
Speaker Change: Do you still have kind of a full year outlook for the tax credit income to be kind of close to the $9 million to $10 million range.
Speaker Change: Yes.
Speaker Change: I would say Damon.
Speaker Change: At the very end of the quarter at $9 30, I would have said yes.
Speaker Change: Ted Your Sofa is moved 30 basis points against us and so that's going to.
Speaker Change: And so some of the fourth quarter income, we're going to see I'd say, we're in the $3 million range. This quarter and we're probably looking at a similar range for next quarter. So that it is going to be a little bit short. Unfortunately in that line item, but I think when.
Speaker Change: <unk> settled down I think that Ken is probably is still a good number overall and moving forward based on activity, but it looks like we're going to be short this year.
Speaker Change: Great.
Speaker Change: And then I guess lastly, with regards to kind of how we think about provisioning in the reserve level.
Speaker Change: You had a obviously a pretty sizeable.
Speaker Change: Up here on NPA and they are down too.
Speaker Change: Only 30 basis points of loans and Oreo do you still feel youre going to kind of maintain the mid 120 reserve level in.
Speaker Change: Do we kind of think about provision as just being more of a function of loan growth.
Speaker Change: Yes, I would say I think we feel good about credit quality and where it has been.
Speaker Change: I think we also want to be burdened with the level of reserve that we have so I don't see us letting reserves move down and benefiting from that through the P&L.
Speaker Change: Yes backing away from wanting to have a little bit well face conservatism built into the.
Speaker Change: The portfolio earnings are.
Speaker Change: Our good and we've got the ability to continue to provide and still drive strong earnings. So some of it's going to depend on just what categories. We have the growth in some areas like SBA.
And life insurance that drives it a little bit lighter reserve when there is growth there, but otherwise if you get a current blend of where we are today.
Speaker Change: I would imagine that.
With any without any deterioration youre going to put $1 15 to 120 on on new loans. So.
Speaker Change: That's how I would think about it.
Speaker Change: Okay. That's helpful. Alright, that's all that I had thank you very much I appreciate it.
Alright, Thanks Amy.
Speaker Change: Our next question comes from Brian Martin from Janney. Please go ahead.
Brian Martin: Hey, good morning, guys good.
Speaker Change: Good morning, Brian.
Brian: Hey, Hey, Keith maybe just on that deposit.
Brian: <unk> expense line item I guess, just just to be clear the 50 basis point reduction we saw in <unk>.
Brian: Rates last quarter is that in.
Brian: Current run rate on that on the deposit expenses is that inclusive of that reduction related to that and it's not fully in the number right now as you're kind of thinking about that line item.
Speaker Change: Yes, the third quarter number Brian wouldn't really reflect any reduction in that number.
Speaker Change: We wouldn't have moved rates on that.
Speaker Change: Those customers until October.
Speaker Change: So you'll have that reduction coming I will say, though that if you look at what happened there is going to be some.
Overall average balanced growth here in the fourth quarter, So what would be a $2 million of quarterly expense savings on a same store basis is probably more like $1 five sequentially.
Speaker Change: Just because of the average balanced growth but that.
Speaker Change: For lack of a better term ECR rate will be coming down, particularly as we got about half of those accounts in it of themselves indexed to fed funds and we know those are going to move down.
Speaker Change: Gotcha.
Speaker Change: Out of that reduction came just as far as thinking about the net growth in <unk>.
Speaker Change: We factor in that.
Speaker Change: The reduction.
Speaker Change: Our rate outlook and on the deposit expenses, how much should the deposit expenses just organically grow on a year to kind of either offset or mitigate or however, you want to look at it kind of what we're going to factor in on the on the on the rate reduction side.
Speaker Change: Yes, Brian, it's probably $2 million to $3 million of.
Speaker Change: When we go a year out with some other growth rate if we have another year.
Speaker Change: Similar to what we've had this year.
Speaker Change: Youll get the adoption, but youll have effectively a couple of million dollars into that because you'll have new deposits that are earning albeit at a lower.
Speaker Change: A lower allowance, but still an allowance on those balances coupled.
Speaker Change: A couple of hundred million dollars two.
Speaker Change: $2 million to $300 million of annual production there is what we expect.
Speaker Change: Okay, and if you said earlier Keene, just if it all makes sense.
Speaker Change: $6 million to $7 million reduction from those.
Speaker Change: Because of the rate cuts and then offset by maybe two or three of our growth. So the net is the difference in those two is just big picture how to think about.
Speaker Change: Those deposit related expenses shake out.
Keene Turner: Yes, I mean, I think I think all else equal Brian If you don't if there was no balance sheet growth you'd be down something like 8 million bucks year over year.
Speaker Change: Yes.
Speaker Change: And I think that that.
Speaker Change: Fixed.
Speaker Change: Five to seven or midpoint of six is sort of where we've got some growth in it but you've got.
Speaker Change: But essentially five more cost.
Speaker Change: Kind of the baseline forecast for using.
Speaker Change: Just to characterize around that that number in our looking at it.
Speaker Change: Yep Gotcha, Okay. That's perfect I appreciate all the color that's helpful and then.
Speaker Change: In terms of just maybe you said this I didn't catch it but as far as kind of it's the dollars of NII in kind of the stability is seen as your expectation right now it sounds like maybe you said. This was at 25 is above 24 in terms of NII full year.
Speaker Change: But I think thats been a really.
Speaker Change: If let's say that so if you've got five cut.
And you have low single digit loan growth Youre, probably with with day count and some of the other factors you are probably going to have a little bit of declination call. It from the current level of net interest income on a quarterly basis, and it's going to maybe get back to level five.
Speaker Change: <unk> third quarter of next year, you've got a little bit more robust growth. There is a chance that you will grow that quarterly run rate starting in second and third quarter of next year.
Speaker Change: We don't fully outrun it but when you look at pre tax income.
Speaker Change: Depending on what level of growth is there you might be neutral to pre tax income with the two rates sensitive line items being net interest income and then the deposit noninterest expense.
Speaker Change: Got you Okay. That's helpful and maybe just one for Jim I guess or Scott just it sounds like the new hires.
Speaker Change: You bring it sounded as though Jim your comments at the customers you have or are I guess more.
Speaker Change: Looking optimistic about growth next year, and then given that all of the talent you guys articulated that you brought on board.
Is your expectation that can contribute to maybe a little bit greater growth rate than you think and Jim in terms of what youre seeing from your existing base, which already sounded like it was picking back up.
Speaker Change: So let's say it is better.
Speaker Change: Our expectation is better than the run rate, we see today Scott has talked about production is brought on plan.
Speaker Change: It's also slowed the mitigates to that production, but I do think given the talent that we're bringing on we should expect that mid single digit to return for 2025.
Speaker Change: Gotcha Okay.
Speaker Change: Alright.
Speaker Change: <unk> answered my.
Speaker Change: Questions I appreciate it guys, thanks, and nice quarter.
Speaker Change: Thanks, Brian.
Speaker Change: Alright that does conclude all the questions that we have in our queue. So I'll turn the call back over to Jim Lally and the team.
Thanks, Jeremy and thank all of you for joining us. This morning. Thank you for your interest in our company.
Speaker Change: We look forward to talking to you very soon if not before the end of the year was to talk to you. The first quarter of 2025, Thanks, again and have a great day.
Speaker Change: That does conclude today's call have a pleasant day everybody.
Okay.
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