Q4 2024 Enterprise Financial Services Corp Earnings Call
Speaker Change: I'd now like to hand the call over to James Lally, President and CEO. Please go ahead.
Well, thank you, Ellie, and good morning.
Speaker Change: Thank you all very much for joining us this morning and welcome to our 2024 fourth quarter earnings call. Joining me this morning is Keene Turner, EFSC's Chief Financial Officer and Chief Operating Officer, Scott Goodman, President of Enterprise Bank and Trust, and Doug Bauke, Chief Credit Officer of Enterprise Bank and Trust.
Speaker Change: Before we begin, I would like to remind everybody on the call that a copy of the release and accompanying presentation can be found on our website. The presentation and earnings release were furnished on SEC Form 8K yesterday.
Speaker Change: Please refer to Slide 2 of the presentation titled Forward-Looking Statements for our most recent 10-K and 10-Q for reasons why actual results may vary from any forward-looking statements that we make today.
Our financial scorecard begins on slide 3.
Speaker Change: I'm very pleased with our results for the fourth quarter and for all of 2024.
Speaker Change: Our strong financial performance continued in the fourth quarter, where we earned $1.28 per dividend share.
Speaker Change: which compares to $1.32 in the link quarter and $1.16 in the fourth quarter of 2023. We produce an adjusted return on assets of 1.31% and a pre-provision return on assets of 1.80%.
Speaker Change: Our diversified business model drove an expansion in net interest income, while defending net interest margin, which was essentially flat when compared to the late quarter, and remained above 4%.
Speaker Change: The talent investment and relationship managers that we made in late 2023 and throughout 2024 is beginning to pay off.
Speaker Change: These new associates have a pedigree in C&I banking and deposit generation. Their efforts contributed to the outstanding growth in client deposits that we experienced in the fourth quarter.
Speaker Change: Our ability to hold our margin at this level illustrates the quality of our deposit base and relationship-oriented loan portfolio.
Speaker Change: This reflects the strength of the franchise we have built, and we remain positioned to produce high-quality earnings that consistently improves shareholder value with a client-oriented model.
Speaker Change: We entered 2024 focused on continuing a cadence of consistency that we had established a few years ago. We accomplished this in the fourth quarter and are positioned well for another strong year in 2025.
Speaker Change: I would like to remind you that our strategy is focused on diversification, and for us this means growth and revenue from several different markets and businesses.
Speaker Change: We're not relying on any one market, business line, or economic trend for our success.
Speaker Change: We lean into our client-centric, team-oriented approach, focused on listening well and providing holistic solutions that guide our clients to their defined success.
Speaker Change: We will continue to refine and improve this strategy for quarters and years to come.
Speaker Change: For the last few quarters, I discussed the wait-and-see mindset of most of our client base with respect to significant financial moves.
Speaker Change: Since the presidential election, I can say that this mindset has changed, but has yet to translate into significant loan demand.
Speaker Change: Like we thought would happen though, loan demand did tick up in the quarter as evidenced by our growth of $140 million or 5% on an annualized basis. This includes a $27 million decline in our agricultural portfolio that continues to wind down.
Speaker Change: I do think that we should see loan demand elevate slightly from here, but we will not force this by changing the credit and pricing disciplines that have long been a characteristic of our company.
Speaker Change: Deposit growth and the quality of the deposit bases become a significant differentiator for our company. In the quarter we saw client deposits increased by six hundred and seventy seven million dollars making this the fifth quarter in the last six that we saw client deposits grow.
Speaker Change: As impressive was the fact that we had just about equal contribution from our national deposit verticals and our geographic markets. The cost and composition of the deposit base improved and has significantly aided in the consistency of our earnings and profitability.
Speaker Change: The quarterly cost of deposits declined to 2%, and our level of DDA to total deposits increased to over 34%. We have maintained our DDAs at over 31% of total deposits since the end of 2020.
Speaker Change: I remain confident that we will grow our balance sheet in 2025 at a mid to high single-digit pace. Our teams, both established and new, have done a good job building loan and deposit pipelines.
Speaker Change: The mix, too, is encouraging. With ample room to grow CRE, we are seeing really good opportunities here that complements our C&I bias. You will hear much more about our markets and businesses during Scott's comments.
Speaker Change: Another strength of our company is our well-positioned balance sheet, which provides for great flexibility with respect to capital planning.
Speaker Change: Capital levels at quarter end remain stable and strong, with our Tangible Common Equity to Tangible Assets ratio at 9.05%. As impressive was our 14.05% adjusted return on Tangible Common Equity for the fourth quarter.
Tangible book value for common share was $37.27.
Speaker Change: Given the strength of our earnings and our confidence in our continued execution, we increased the dividend by $0.01 per share for the first quarter of 2025 to $0.29 per share. And we returned an additional $11 million to shareholders during the quarter through common stock repurchases.
Speaker Change: In 2024, the industry attempted to define what a normalized credit profile would look like for each institution. I would characterize the credit quality and profile of our portfolio as strong and stable.
Speaker Change: NPLs to loans, NPAs to total assets showed a slight increase compared to the third quarter but remained at very modest levels. We've been able to achieve this while maintaining a strong allowance for credit losses of 1.34% of unguaranteed total loans.
Speaker Change: Slide 5 provides a recap of our financial highlights for the full year 2024.
Speaker Change: We reported $185.3 million of net income, or $4.83 of diluted earnings per common share.
Speaker Change: We invested heavily into the company in 2024 in terms of both technology and talent, while generating over $255 million in pre-provisioned net revenue.
Speaker Change: This resulted in a pre-provision ROA of 1.72% and an adjusted return on average tangible common equity of 37.71%.
Speaker Change: Keene will provide much more detail on these results in his comments, along with our strategy to defend margin given the expected interest rate environment.
Slide six shows we're focused for the foreseeable future.
Speaker Change: As we enter our 37th year in business, our focus remains the same. We will continue to focus our time on taking care of the great clients that we've accumulated while adding those family-owned businesses that shares high-touch consultative relationships.
Speaker Change: Doing this day in and day out will lead to several more quarters of really strong performance and the continued building of franchise value.
Speaker Change: 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.
Speaker Change: We will continue to take advantage of the disruption caused by M&A in just about all of our markets. As you know, over the past several quarters, we've been adding talent from these disruptive situations.
Speaker Change: While the pace of talent acquisitions will likely moderate, we are confident that these investments will add many new relationships and subsequent growth and profitability from just about every corner of our company.
Speaker Change: Before handing 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.
Scott Goodman: For the most part, our clients performed well in 2024. They have readied their balance sheets for anticipated opportunities that should manifest in 2025 and beyond.
Scott Goodman: From large general and subcontractors to mid-market manufacturers and distributors, 2025 should continue the encouraging momentum that we've seen in the fourth quarter.
Scott Goodman: Our teams continue to have many strategic conversations about expansion, succession, and acquisitions. We're also starting to see the positive impact of investments that companies are making for reshoring, infrastructure development, and power generation.
Scott Goodman: My expectation for sound C&I growth in 2025 should blend well with the continued success that we've experienced with our CRE clients.
Scott Goodman: Our conservative approach towards CRE earlier this decade gives us plenty of capacity to grow this part of our business, while our competitors remain restricted due to their 100-300 limitations.
Scott Goodman: Overall, I like the tempo that we are seeing in our business and feel good about our team's ability to consistently produce quality opportunities that will ultimately lead to consistent sound balance sheet growth.
Scott Goodman: We enjoy a great reputation and corresponding market share of middle market businesses in our mature geographies and specialized lending and deposit businesses. As such, I am confident that we will continue to get more than our fair share of corresponding opportunities.
Scott Goodman: Our newer markets and higher growth areas will provide similar levels of opportunities while we continue to build our reputation in these markets.
Scott Goodman: 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.
Speaker Change: With that I'd like to turn the call over to Scott Goodman. Scott.
Thank you, Jim, and good morning, everyone.
Speaker Change: As you heard from Jim, and as we're showing on slides 7 and 8, we ended the year with overall loan growth around 3%, including growth in Q4 of $140 million or 5% annualized.
Speaker Change: Production levels were solid with total originations trending up roughly 20% from the prior quarter.
Speaker Change: Increases were most prevalent in the general C&I, construction, and life insurance premium finance segments.
Speaker Change: However, net growth within the generalized CNI categories, while improved from the prior quarter, has been somewhat muted by operating businesses using lines of credit more sparingly, and in many cases opting to use cash reserves to fund working capital needs.
Speaker Change: Average usage on revolving lines declined about two and a half percent in the course with outstanding balances down 135 million from September 30th.
Thank you.
Speaker Change: Construction loan outstandings continue to fund on existing projects with additional new project opportunities starting to come back online following a pause during the rising rates environment last year.
Speaker Change: Within the specialty lending verticals, life insurance, premium finance, and tax credits, posted seasonally strong quarters, growing 84 million and 36 million respectively.
Speaker Change: For the year, life insurance premium grew $158 million, or 16.5%, showing continued momentum from premium fundings on existing policies and bolstered by new opportunities from a growing base of referral partners.
Speaker Change: This business has proven over the years to be a steady and consistent source of growth with a certain level of immunity to overall economic headwinds, while adding some balance and diversity to complement our other lines of business.
Speaker Change: SBA also posted a strong quarter growing 25 million or 7.9% annualized.
Speaker Change: Trends in this business are tracking well with production up materially in the quarter.
Speaker Change: and payoffs continuing to moderate due to the lower interest rate environment.
Overall payoffs were down 26% in 2024 compared to 2023.
Speaker Change: For the sponsor finance business, 2024 was a year characterized by slowed originations and a bubble of payoff activity, resulting in a net reduction in the loan portfolio of roughly 10%.
Speaker Change: Having been in this specialty now for nearly 20 years, we do understand it can be a more cyclical business, and we're prepared to exercise discipline in our origination process to protect the credit quality of our portfolio, as well as the reputation we've built with our sponsor base.
Speaker Change: Deal flow has picked up a bit in the latter part of the year and the pipeline is active.
Speaker Change: Over time, the book has grown nicely and provided solid risk-adjusted returns with a three-year compounded growth rate of 15%.
Moving on to the geographic regions on slide 9.
Speaker Change: The Midwest region of St. Louis and Kansas City grew modestly in Q4 to 3.2 billion with the aforementioned revolving line paydowns and sale of some commercial properties muting solid production of new CNI relationships.
Speaker Change: In St. Louis, we expanded relationships through equipment financing for a regional transportation client, as well as funded a new facility for a long-term client in the diversified energy services business.
Speaker Change: In Kansas City, we help several companies with acquisition and recapitalization credit facilities.
Speaker Change: As more and more companies face the issue of succession, we are seeing opportunities to assist with this process, and our team has developed a strong understanding of how to put these deals together to differentiate from other competitors and bring relevant advice and resources to the table for these clients.
Thank you.
Speaker Change: Growth was particularly strong in our southwestern markets of Arizona, Las Vegas, New Mexico, and Texas. The Q4 balance is growing 104 million.
Speaker Change: For the full year of 2024, this region posted loan growth of $218 million, an increase of 13.9%.
Speaker Change: In addition to a strong base of fundings on existing construction projects, we are seeing a higher level of new construction and commercial real estate opportunities in this region, particularly in the Arizona and Las Vegas markets.
Speaker Change: Larger deals this quarter included fundings for a large pre-leased industrial building, an equipment loan for a private tour operator, and several mixed-use investments by commercial real estate clients.
Speaker Change: In California, representing our West region, loan balances slipped $85 million during the quarter.
Speaker Change: mostly attributable to timing on some larger line paydowns and proactive management of several weaker credits out of the bank.
Speaker Change: These were legacy clients of the acquired portfolio tied to undersecured or non-cash flowing commercial real estate collateral.
Speaker Change: with steady new production coming from our core team in this market and success in attracting new seasoned talent to our platform, we feel confident in the near and long-term prospects for growth in California.
Speaker Change: We continue to target disrupted competitors in this market and move new banking relationships to enterprise including this quarter clients in the professional, medical, industrial, chemical, and digital media business lines.
Speaker Change: Deposits are profiled beginning on slide 10, which shows strong growth of 681 million in Q4 and year-over-year growth of 970 million or 8 percent.
Speaker Change: It is notable that this growth is almost entirely attributable to core client deposits with no material change in brokered balances.
Speaker Change: The growth in Q4 was also heavily concentrated within non-interest bearing categories, with contributions coming from both our commercial markets and the national deposit verticals.
Speaker Change: With rates beginning to fall during the quarter, our teams also did a nice job of retaining relationship-based interest-bearing balances while supporting an effective rate reduction plan which effectively lowered our overall funding costs.
Keene will have more on this in his comments.
Speaker Change: Within our geographic markets, commercial deposits were up 382 million in a seasonally strong fourth quarter, but also reflects our success in onboarding new relationships.
as outlined on slide 11.
Speaker Change: Deposit costs rose in all regions, I'm sorry, deposits rose in all regions during the quarter as well as within our deposit verticals.
Speaker Change: The geographies contributed roughly 56% of the increase, with the largest increases coming from the heavier C&I markets of St. Louis and California.
Speaker Change: Midwest region balances are up 3.4 percent year-over-year, including 228 million or 14.6 percent annualized in the quarter.
Speaker Change: Growth within the Southwest markets continue at a steady pace, up 12.5% year-over-year.
Speaker Change: Balances in Q4 are up $86 million, including several new deposit-heavy commercial relationships with a large electrical contractor and an industrial warehousing company.
Speaker Change: West region balances also show strong seasonal growth in the quarters as well as the benefits of new CNI relationships with construction, private lending, and dispersing companies.
Speaker Change: Balances there were up 72 million in the quarter or 24% annualized.
Speaker Change: The positive verticals contributed $295 million of the increased balances for the quarter and continue a steady pace providing year-over-year growth of $610 million or 22%.
Thank you.
Speaker Change: More detail is shown on slide 12 which illustrate the portfolio that's well balanced between the three main verticals.
Speaker Change: Q4 produced increases in each business line at an average cost of 2.72% or a reduction of 20 basis points from the prior quarter.
Speaker Change: Growth in property management in Q4 and previous quarters follows a consistent pattern of continuing to onboard new relationships and expand account balances with existing clients.
Speaker Change: Community associations had a strong Q4, mainly attributable to new relationships which began funding during the quarter and which should add solid momentum to this business into the first part of 2025.
Legal and escrow also posted robust growth in Q4.
Speaker Change: And while this can be a bit lumpy quarter to quarters, we have grown the balances and diversity in this channel year over year as we build our reputation in this space and extend this expertise into our existing geographic markets with our established clients and COIs.
Lastly, core funding mix is outlined on slide 13.
Speaker Change: and shows an overall profile of the deposit portfolio by channel and mix within each.
Generally speaking, our strategies have
Speaker Change: and highly weighted and lower cost account types. I continue to be encouraged by our ability to lean into a value-added model to proactively manage deposit costs down while retaining our relationship base and competing effectively for new clients across all of our major channels.
Speaker Change: Now, I'll hand the call over to Keene for the financial colleague. Keene.
Keene Turner: Thanks Scott and good morning. My comments begin on slide 14 where we reported earnings per share of $1.28 for the fourth quarter on net income of $49 million.
Keene Turner: Adjusted EPS excludes the impact of core conversion related expenses, gains and losses on the sale of other real estate, and FDIC special assessment charges.
[inaudible]
Keene Turner: Operating revenue contributed an increase to EPS again this period as net interest income expanded for the third consecutive quarter.
Keene Turner: Strong client-to-profit growth improved overall liquidity and drove an increase in the securities portfolio, cash balances, and related interest income.
Keene Turner: We proactively managed deposit rates with a decrease in the Fed Funds target rate so that the decline in loan income was offset by a corresponding decrease in deposit interest expense.
Keene Turner: The provision for credit loss has increased from the prior quarter as total loans expanded and net charge-offs increased. Overall asset quality remained sound and net charge-offs were 16 basis points for the full year.
Keene Turner: Non-interest expense increased in the quarter primarily due to higher compensation from medical costs and variable incentives.
Keene Turner: The increase in compensation was partially offset by a decrease in variable deposit servicing costs due to a managed decline in the earnings credit rate.
Turning to slide 15.
Keene Turner: Net interest income was $146.4 million in the fourth quarter, an increase of $2.9 million compared to the link quarter.
Keene Turner: Interest income decreased $0.9 million during the quarter. Loan income declined $3.9 million from the linked period as lower Fed funds, prime and SOFR rates drove a reduction in earnings on $5.5 billion of variable rate loans.
This was partially offset by growth in average balances.
Keene Turner: Earnings on investment securities grew $2.7 million from the late quarter on higher average balances and higher portfolio yields.
Keene Turner: Strong deposit growth in the quarter allowed us to fund $200 million in new investment purchases in addition to the investment growth from the third quarter.
Keene Turner: Yields remain favorable for new purchases and reinvestment of cash flows with the Treasury curve moving 70 to 80 basis points higher during the quarter.
Keene Turner: The average tax equivalent yield on purchases in the quarter was 5.10%.
More details follow on slide 16.
Keene Turner: Interest expense declined by $3.8 million in the quarter, with nearly all of the reduction attributable to lower interest rate on deposit balances.
Keene Turner: Average interest bearing deposits grew $236 million compared to the link period, mainly in interest checking accounts.
Keene Turner: The average interest bearing deposit rate declined 26 basis points, and interest on other borrowed funds declined in the quarter as well as the result of lower variable rates.
[inaudible]
Keene Turner: The resulting net interest margin for the quarter was 4.13%, a decrease of only four basis points from the linked quarter.
Keene Turner: Earning asset yields declined by 22 basis points driven mainly by lower yields on variable rate loans and interest earning cash balances.
Keene Turner: This was partially offset by improvement in investment yield and growth in earning asset balances.
Keene Turner: Are cost of liabilities decreased by 26 basis points compared to the length period resulting from active rate reductions and growth that was skewed toward non-interest bearing and lower interest rate checking accounts?
Keene Turner: The total cost of deposits for the month of December was 1.91%, which is nine basis points lower than the 4Q average.
Keene Turner: While net interest margin did drift lower, the impact of rate changes was less than we'd anticipated in the quarter. We successfully managed our cost of deposits through recent Fed cuts.
Keene Turner: and deposit growth in the quarter outperformed in terms of both volume and composition.
Keene Turner: We have leveraged several quarters of strong deposit momentum to bolster the investment portfolio, adding durable earnings at favorable yields.
Keene Turner: The steepening of the yield curve compared to the end of the third quarter, with higher rates on terms two years and beyond, should result in improved pricing on fixed-rate loan originations and renewals.
Keene Turner: For some color, loans originated in the fourth quarter had an average interest rate of 7.10%, which is above the average portfolio rate.
The End of the World
Keene Turner: Our deposit mix continues to be a strength. Non-interest bearing balances accounted for more than half of total deposit growth during 2024, and we remain focused on managing our deposit costs appropriately as rates change.
Keene Turner: Finally, interest rate swaths and collars provide protection against more severe downward movement and rates.
Keene Turner: That being said, we expect that further rate cuts will continue to put some pressure on net interest margins.
Keene Turner: Our modeling shows that each 25 basis point change in rates equates to approximately 5 basis points of margin, or $1.5 to $2 million of net interest income per quarter, based on the existing balance sheet.
Keene Turner: Consistent with the prior period, we expect deposit-related non-interest expense to move in the opposite direction, with each quarter point cut resulting in approximately $1 million of reduced non-interest expense.
Keene Turner: So all in, the total impact of each 25 basis points of Fed cuts is around $1 million or less of pre-tax income.
Keene Turner: To summarize all that, we look for net interest margin to be relatively stable once the balance sheet resets to start the year, somewhere around 4.10%.
Keene Turner: Net interest income dollars will face a headwind with lower day count in the first quarter.
Keene Turner: But we believe our planned growth is sufficient to overcome those setbacks and will result in higher net interest income during the year.
Keene Turner: Slide 17 reflects our credit terms. Net charge-offs were $7.1 million for the quarter and $17 million for the year or 16 basis points of average loans in 2024.
Keene Turner: This is an improvement from charge-offs of 37 basis points in 2023 and is a positive reversion toward our expected longer-term trend.
Keene Turner: Non-performing assets were 30 basis points of total assets compared to 22 basis points at the end of September. The eight basis point increase in non-performing asset ratio was primarily related to two relationships that are being actively managed and are adequately reserved.
Keene Turner: Our credit metrics have been relatively stable all year and reflect the underlying strength of our diversified loan portfolio.
Keene Turner: The increase in net charge offs and loan growth resulted in a provision for credit losses of $6.8 million in the quarter, an increase of $2.7 million compared to the third quarter.
Slide 18 presents the allowance for credit losses.
Keene Turner: The allowance for credit losses represents 1.23% of total loans, or 1.34% when adjusting for government-guaranteed loans. The weighted economic forecast used in the allowance calculation leans more toward a downside scenario for the next 12 months.
Keene Turner: On slide 19, fourth quarter fee income of $21 million was essentially flat with the linked quarter as growth in tax credit income offset the gain on sale of other real estate that was recognized in the third quarter. Tax credit income was better than expected as sales activity outpaced fair value pressure from the increase in 10-year SOFR.
Turning to slide 20.
Keene Turner: Non-interest expense of $99.5 million was an increase of $1.5 million from the third quarter.
Keene Turner: driven primarily from compensation and benefits, seasonally higher charitable giving levels, and core conversion expenses, which were partially offset by lower deposit servicing expenses.
Keene Turner: Poor conversion expenses were $1.9 million in the current quarter compared to $1.4 million in the prior quarter.
Keene Turner: Deposit servicing expenses were 0.9 million dollars lower compared to the link quarter despite average balance growth in the deposit verticals of roughly 12% annualized as related earnings credit percentage were managed lower during the quarter following recent Fed funds interest rate reductions.
Keene Turner: The fourth quarter's co-efficiency ratio improved 130 basis points to 57.1%, driven by higher operating revenue, compared to 58.4% for the link quarter.
Keene Turner: Our capital metrics are shown on slide 21. We continue to manage our excess capital and repurchase 206,000 shares at an average price of $54.01 for approximately 11 million dollars.
Keene Turner: We have approximately 1.4 million shares remaining under our repurchase plan.
Keene Turner: Our tangible common equity ratio was 9.05 percent at the end of the fourth quarter, down from 9.5 percent in the link quarter. The decrease was primarily due to strong balance sheet growth and a decline in the overall fair value of the available for sale securities portfolio.
Keene Turner: We will continue to monitor our capital levels and manage some of our access position with share repurchases.
Keene Turner: On a per share basis tangible book value of $37.27 was stable with the link order and increased 10% for the full year. This is in line with our 10 year compound growth rate for tangible book value per share of just over 10%.
Keene Turner: For 2024, the common dividend per share was $1.06, a 6% increase from 2023. We also increased our dividend by $0.01 per share to $0.29 for the first quarter of 2025.
Keene Turner: In summary, our 2024 financial results reflect the strength of our diversified business and we close the year demonstrating the high quality of our deposit base.
Keene Turner: For the second consecutive year, we significantly grew core deposits while expanding operating revenue supported by solid credit and managed expense levels.
Keene Turner: We also invested in a new core system and recruited new talent in our higher growth markets in support of our expectation for continued growth.
Keene Turner: We consistently posted strong profitability and returns throughout the year, and we closed the year with a strong fourth quarter performance.
Keene Turner: This is reflected in a 1.30% adjusted return on assets and a 14% return on tangible common equity.
Keene Turner: I appreciate your questions and attention today, and will now open the line for analysts.
[inaudible]
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Speaker Change: We are now opening the floor for question and answer session. If you'd like to ask a question, please press star followed by 1 on your telephone keypad. Your first question comes from Jeff Rollis from D.A. Davidson's. Your line is now open.
Thanks. Good morning. Good morning, Jeff.
Jeff Rollis: I wanted to check in on the margin, you know, Keene, thanks again for the...
kind of per cut
Speaker Change: impact to the margin and the ECR cost. It seems like reality is a bit better than what you've previously framed up, as you mentioned, this steeper curve and good deposit success. So the 410 expectation, that's in a…
Speaker Change: does not include a rate cut in that expectation or does?
[inaudible]
Speaker Change: Jeff, I would say 410 includes the reset predominantly of the SBA portfolio that that didn't occur until January 1st so there's a little bit of pressure to come.
Speaker Change: You know, so there's no cut and then I would also say it allows us a little bit of reversion on the mix of deposits. Deposits have held, you know, close to a strong in the fourth quarter and deposits have held well since then, but we do expect a little bit of remixing in the early part of the year as we typically get commercial
Speaker Change: EDA balances some deployment with tax payments and bonuses on the underlying clients that experience some run-up throughout the year. So those are a couple things that we see that are sort of baked into that. And then, you know, I would say we maybe have a little bit of
[inaudible]
Speaker Change: a little bit of pessimism in there that the curve doesn't remain optimally upward sloping for that period of time. I mean, I think you can see with what happened in the fourth quarter, we managed to positive cost way better, and we're trying to continue to do that. But certainly, the shape of the curve helped, and we've got a little bit of estimation error built in there if the curve isn't quite as
Robust on the long end, as it is right now.
Speaker Change: Very helpful. Okay, we'll just apply that math on margin with potential rate cuts, I guess.
Speaker Change: safe to say, I mean, the odds to prove that a 4% plus, I don't want to put words in your mouth, but that has framed up firmer than expectations of a sub 4 being likely, it's
You think I guess the core the base
Speaker Change: it around for even with cuts is still potential to hold above that level.
Speaker Change: Yeah, I mean, I think that unless we get a material degradation in the slope of the curve or something unexpected or we're not able to
Speaker Change: to manage deposit costs as well as we would anticipate or we really have mixed going against us. I don't expect any of those, all three of those to occur at the same time. I do think that we can hold margin, you know, call it at four plus even with a couple cuts here this year.
Thank you for watching!
My other question was on just expenses and post-conversion.
expectations on cost would be great.
Speaker Change: Sure thing, Jeff. So, this is the last quarter you should see core conversion-related expenses. If there's anything that trickles, we likely will just have it in the run rates.
Speaker Change: There's really no material change that we can see to run rate on, you know, data processing from from that project. And I would say from a
Speaker Change: Recurring expense basis, I think of the quarter as roughly 98 million if you strip that out. And I think that there were some seasonally high items in there that'll be replaced by some seasonal first quarter items. And with...
Speaker Change: I see expenses, you know, roughly level to modestly growing throughout 2025. And then I just, whatever you feel like is going to happen from a rate environment perspective, obviously, we gave that sensitivity on the expense line item. But if we get, you know, two reductions with
Speaker Change: You know, some of the seasonality working out, it's plausible that we'd have, you know, essentially flat, you know, roughly, you know, 97, 98, 99 million a quarter of non-interest expense for the year.
Okay, pretty clear. Thanks, Keene.
Thanks, Jeff.
Speaker Change: Your next question comes from David Long from Raymond James. Your line is now open.
Thank you for watching.
The End of the World
Speaker Change: Good morning, everyone. The non-interest bearing deposits, you talked a little bit about some of the moving parts there, but does it feel like that is temporary or permanent in the non-interest bearing side of the deposit growth?
Speaker Change: David, this is Jim. I would tell you that we saw, we typically in our business, what you see is a fourth quarter elevation and DDA is based upon the growth of service-oriented businesses. As Keene mentioned in the last question, that will dissipate somewhat in the first quarter.
Speaker Change: But nonetheless, our model is such that the C&I model, even the CRE business, we do demand full relationships.
Speaker Change: relative to onboarding clients and what have you. So I think, you know, our ability to grow deposits I'm confident in, and the mix being such that we'll still continue to have DDA in that low 30% range.
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Speaker Change: Got it. Thanks, Jim. And then switching to credit, you guys called out a couple relationships that are being actively monitored. Do these represent any early warning signs in any specific segments or anything like that in regard to your overall loan portfolio?
Yeah, thanks David. It's Doug Bauke.
Speaker Change: Listen, just to kind of level set, too, on where we end of the year, just keeping in mind net charge offs at 16 basis points and non-performers at 30 bips.
Speaker Change: Classified, as Keene pointed out, too, just really remained level. We're at about 11% of capital. So credit quality has simply just kind of returned as we expected to our longer-term historical norms.
Speaker Change: I'm pleased with the way the portfolio performs today. I think a couple of the material movements in the quarter.
Speaker Change: really were, one, it was a net charge-off largely related to a CNI chemical distribution company that invested heavily to vertically integrate into manufacturing and
Speaker Change: quite simply just failed to execute on the strategy, so our exposure remaining book balance to that credit is less than a million dollars.
Speaker Change: And then just relative to a couple of non-performers. You know, we saw non-performers just tick up in the fourth quarter, really concentrated to two relationships. One is a $9 million loan to a CNI company that's a medical management and consulting firm.
The company is seeking refinance opportunity right now.
Speaker Change: We feel cautiously optimistic that there's a path to exiting the credit in its entirety here in the coming quarter.
Speaker Change: And then smaller and less significant would be a $2 million owner-occupied real estate loan in our Kansas City market. So generally speaking, no, we feel really good about the performance of the portfolio and kind of back to historically normal levels.
Got it. Great. I appreciate the call everyone. Thank you.
Speaker Change: Your next question comes from Damon Delmonte from KBW. Your line is now open.
Damon Delmonte: Hey, good morning, guys. Hope everybody's doing well today. Just wanted to start off with...
Speaker Change: Some commentary on loan growth, you know, Jim, it sounded like
Speaker Change: Lots of opportunities for you guys to capitalize on market disruption and benefits from recent hiring efforts In recent quarters, but at the same time I think somewhat cautious not to you know push for growth
I do. I think the mid-single digits.
Speaker Change: is very achievable, and to the extent that some of the headwinds I referenced in my comments come to fruition, it might tick up slightly higher than that.
Speaker Change: But I do think those opportunities, Damon, allow us to, to Keene's point about margin is being selective, nonetheless, to make sure that we achieve the margin that we, we target.
Speaker Change: And again, it's full relationship oriented and really not doing transaction lending. We feel good about just the tempo that we're seeing with our teams and not just the ones that recently came on, our established teams as well.
Speaker Change: who are deeply rooted in those communities. So I do feel that mid-single digits are a very safe number.
Speaker Change: Okay, and then I was sort of curiosity, you know with your operations in the West Coast Where was the and were there any impacts to any of the businesses? Through the wildfires or you guys not really in those areas. Yeah, David. Thank you for bringing that forth First of all, we're pleased to report that you know, all of our associates are safe
Speaker Change: And then with respect to our client base, we did not suffer any type of collateral issues.
Speaker Change: based upon the loans we have out there. And then going forward, I think, you know, we'll just monitor the situation, certainly serve our communities well, serve our clients well in that regard. There's going to be a long rebuild in those communities and we'll be there to help.
Speaker Change: Okay, good to hear on that front. And then I guess just lastly, kind of circling back to the credit, you know, when you look at where the reserve level is now, you know, it seemed like you had a little bit of normalization in credit, our net charge-off trend, you know, this last quarter or so. Do you think you kind of keep the reserve here in this, you know, call it almost mid-120 range, or do you think you need to kind of add to that?
Keene Turner: Damon, this is Keene. I would say I think we feel good where we are. In my comments I mentioned that you know we've got a fairly decent
Keene Turner: pessimistic view in the qualitative with with some downside weighting and you know it's about a third of the the reserve so I think there's sufficient you know pessimism there and I think that you know as Doug mentioned to the extent that there's
Keene Turner: you know, a credit or two that has a reserve against it with a favorable resolution, you know, that's a reserve release or a reduction in the reserve.
Keene Turner: I feel like we're well-positioned and I wouldn't expect coverage to move up or down dramatically. And, you know, we're 135 on, you know, unguaranteed loans. So that feels pretty robust, I think, at this point on, you know, pure commercial.
Speaker Change: Got it. Okay, great. I appreciate all the color. Thank you.
Thank you.
Speaker Change: Next question comes from Andrew Leash from Piper Sandler. Your line is now open.
[inaudible]
Andrew Leash: Hey, guys. Thanks. You've covered nearly all my questions, but I just want to ask on capital. Regulatory ratios have been growing nicely. I mean, do you mind if there's a ratio that you specifically target over the long term?
Speaker Change: Yeah, Andrew, you know, our our capital targets are, you know, 10, 12, and 14 on CET1, tier 1 in total. You know, we're a little bit higher on
Speaker Change: the E.T. one right now and we've been managing there and you know I think the the rest of sort of grown correspondingly so you know we're trying to be steady with what we do on capital management obviously we had a really great quarter from growth perspective and we're still
Um...
Speaker Change: You know, we try to be below 9% TCE, but it doesn't feel like it's hurting us or anyone in the market that's a little bit higher. So, we'll continue to buy back, you know, smartly on the fringe, and, you know, we're trying to just make sure that we're being prudent, but we feel pretty good about what we've done over the course of the year with both buybacks, dividend policy, growth.
etc.
Speaker Change: Got it. And Jim, you mentioned many calls, don't want to disrupt organic momentum with the deal, but any commentary you may have on any sort of M&A outreach or inbound interest you've been getting?
Jim: Yeah, thank you, Andrew. I'll tell you this, we are keenly focused on this executing the organic plan and certainly my day-to-day...
Jim: is such that we do talk to companies and iBankers and what have you to the extent that something that's really allows us to accelerate what we're doing, not just to get bigger, but really accelerate what we're up to. We'll stop and take a look, but it's not a high priority in 2025.
Speaker Change: Got it. Thanks so much. You've covered all my other questions.
Thank you. Bye-bye.
Speaker Change: If you'd like to ask a question, please press star followed by one on your telephone keypad. That's star followed by one on your telephone keypad. Your next question comes from Eric Rublich, private investor. Your line is now open.
Eric Rublich: Hi, good morning. Thanks for taking the call from me. I just had a question on the deposit side. You had pretty good growth in the regions and the deposit verticals. I was just curious, on the deposit verticals, is there any
Eric Rublich: geography that is driving that besides I mean you break it down by you know homeowners association property management you know legal and escrow but is there a geography where that's coming from particularly on the community association and property management or not?
Scott Goodman: Good morning, Eric. This is Scott. I can take that one.
Scott Goodman: I think just by nature of some of those businesses, particularly HOAs, you know, you find it a little heavier in the southwestern and western states.
Scott Goodman: On the property management side, that's probably a little bit more well-dispersed.
Scott Goodman: There are some states in particular where you need to have a physical presence.
to actually have some of those accounts.
Scott Goodman: That's the branch that we opened in Florida that we talked about in the past. It was because of that. We have another one in Las Vegas because of that, but predominantly it's pretty well spread out.
Scott Goodman: When you talk about the property management accounts and then the escrows are.
really national in scope.
and not really geographically focused at all.
Scott Goodman: Sure. And just one last thing, you know, most analysts want to know, gee, you have a loan relationship, where's the deposit relationship, right? But the other way around on these community associations and the property management,
To what degree do those relationships
Scott Goodman: have a loan tag with them as well. Is it pretty small? I mean, Homeowners Association, maybe not so much there, but maybe I'm wrong. What kind of color can you provide on that?
Scott Goodman: We are focused on the deposit side. We don't really have a lending vertical focused on those things. We might have a small loan here and there, but it's not something we're focused on or not something that we really need to do in order to
Scott Goodman: I would just add on that, the hook there is the technology and the onboarding and the structuring. You know, it's specialized to those businesses and I think that's where we're differentiated.
Speaker Change: Oh yeah, no, I, you know, my background having been a board director at Metro Phoenix, that was a big business for the bank. No, I get it. That is super important for getting the customers in and keeping them on board. Yeah, no, I understand. Thanks very much, Keene.
Speaker Change: I'd now like to hand the call back to Jim Lally. Thank you. Thank you, Ellie, and thank you all for joining us this morning. And thank you for your interest in our company. We look forward to speaking with you at the end of the first quarter, if not sooner. Have a great day.
Speaker Change: Thank you for attending today's conference call. You may now disconnect. Have a wonderful day.