Q2 2019 Earnings Call
Good day and welcome to the U.S.U.S.C. earnings Conference call.
Today's conference is being recorded at this time I would like to turn the conference over to Jim Lally, President and CEO , Sir you may begin.
Thanks, Jonathan and thank you all very much for joining us and welcome to our second quarter 2019 earnings call.
Joining me this afternoon, Scott Goodman, President of Enterprise Bank and Trust and Keene Turner, He sees Chief Financial Officer, Chief Operating Officer.
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 FCC form 8-K yesterday.
Please refer to slide two of this presentation titled forward looking statements in our most recent 10-K and 10-Q for reasons why actual results may vary from any forward looking statements that we make today.
I'm very pleased with our second quarter results in 2019 is shaping up to be a very good year for enterprise financial services Corp.
On a diluted basis, we earned 68 cents for the quarter, returning 1.05% and our expanded asset base.
Excluding the expenses for the conversion of Trinity during the quarter, we earned 98 cents per diluted share and our <unk> was 1.50%.
We converted the Trinity core operating system back in May and furthered our cultural integration of these two companies and from my seat. These two companies have come together very well and everyday we learn more about the future growth opportunities that northern New Mexico provides for our company.
Scott will provide much more in the way of details on this region as well as others and Keene will provide granular financial data on a very solid quarter.
If you turn to slide three you will see our financial scorecard.
Netting the expenses related to Trinity, our EPS grew by 3% when compared to the same quarter a year ago as important we were able to increase net interest income dollars by 31% when compared to a year ago.
Our expanded balance sheet, coupled with our ability to defend and grow our net interest margin contributed to this.
As I stated in our press release, we have been preparing ourselves to thrive in various interest rate interest rate environments. Our diversified business model combined with superior balance sheet management AIDS greatly in achieving this result.
Our stable net interest margin over the last several quarters is evidence of this hard work and I expect this will continue due to the strength of our relationship managers are disciplined credit culture, and our geographic and business diversification.
Kim will provide more detailed details later in the call, but we did see a very minor uptick in our npls in the quarter, but I'm not alarmed or worried that this is the start of a trend the related credits are either well secured or had been resolved as we sit here today.
We continue to see further improvement in our operating leverage we continue to drive revenue growth and reinvest in our businesses. Additionally, we will be opportunistic in improving our team wherever we can.
Finally, but most important we saw our deposit base expand by 31% since last year. Much of this is due to the closing a trendy, but none of this we did see this grow by 5% on an organic basis.
Slide four lists where we are focused as I stated earlier I'm very pleased with the integration of Trinity, but know that this continues far past the systems. We remain diligent in humble about this work and know that it happens every day with each client and associate encounter.
Organic growth has been the hallmark of our company for our entire 31 years I'm pleased with the growth that we saw during the quarter and feel confident about the guidance. We have provided for the rest of the year. This is due to our further refinement of our sales process and keen focus what makes a successful.
As it relates to our operational excellence is about being better tomorrow than we are today, we have made the necessary investments in systems and people to do so.
I would now like to turn the call over to Scott Goodman, who provide much more detail about our businesses and our regions.
Thank you Jim.
<unk> loans, which are displayed on slide number five grew by $132 million in the quarter or 10.6% annualized.
Reflecting successful execution of the building pipelines that we discussed last quarter.
We experienced growth in most categories, including Cnine commercial real estate construction development and consumer.
Inclusive of the Trinity loan book total loans grew by 20% year over year.
Moving on to slide number six.
You know I loans were up $38 million in Q2 with growth spread across all business units.
The increase reflects steady execution in the specialized banking units and a rebound in demand for working capital from commercial clients.
Loan details on slide number seven break this down by the changes in the business segments.
The largest increases in Q2 are reflected within the investor CRT construction and life insurance premium categories.
Investor theory, and construction represent deepening of larger investor relationships as well as opportunities to finance owner occupied expansions and participate in the urban core redevelopment within Kansas City in St. Louis.
Life insurance premium finance had a better than typical Q2.
With several new originations and some moderating pay off.
This business remains well positioned for additional growth approaching a more seasonally strong second half.
There was also roughly 23 million of internal classification changes, which inflated the tax credit growth.
And alternatively negatively impacted the general see an eye category simply from a reporting standpoint.
Moving to the business units on slide number eight.
Specialized lending, which represents NPL life insurance premium and aircraft finance.
Did experience growth in what is typically a seasonally slow quarter.
In addition to the previously mentioned strong quarter for life insurance.
EMEA was up modestly with new originations and increases in existing senior debt outpacing payouts from the sale of portfolio companies.
We remain disciplined on credit structures in this specialty.
With senior leverage generally around a two and a half times or lower.
And pricing tied to risk on a grid basis with premiums of 1% to 2% over what we see in general Cnine.
Aircraft finance balances were down in the quarter, mainly due to the timing of equipment sales by our dealer clients.
The pipeline for new aircraft financing is steady.
Fee income generated from this dealer financing continues to grow.
Focusing now on the geographic markets.
Loan growth was most prominent in Saint Louis and Kansas City this quarter.
Saint Louis growth was primarily centered around new theory, and improve usage of lines by existing clients.
Notable originations include repositioning of an office building in downtown St. Louis for a large national professional services company.
Financing of land for a new mixed use development within the central corridor.
And a number of single use their credit tenant properties.
We also saw modest growth from the life that loan portfolio.
And we expect to see a continued ramp up in this activity as we move through the year.
The AG book also grew by mid seven figures.
Given some of the market swings and weather related stress, we are taking a measured by opportunistic approach to the growth in this sector.
Our experienced team has targeted historically successful and well capitalized farm operators.
With robust risk management frameworks.
We are taking a proactive approach to monitoring this book, but so far seen no material signs of weakness.
Kansas City had a particularly strong quarter growing $53 million or roughly 29% on an annualized basis.
The growth included several large new office industrial and multi use property acquisitions with existing commercial real estate clients.
These opportunities were developed by taking a very targeted approach overtime on key investors and developers.
And then being positioned as a strategic partner as these projects came online.
There was also a decent season activity in KC during the quarter with higher overall line usage as well as some new equipment purchase financing.
Arizona growth for the second quarter was $5 million, which fell short of our high expectations there.
Originations show a good mix of Cnine, CRT and residential but were offset by a few larger pay downs related to the sale of financed properties by investors.
We remain optimistic with sales activity and solid economic growth in this market.
As well as the potential to pick up new talent and new clients from some competitive disruption occurring there.
In new Mexico, we focus so far on evaluating the current book.
And maintaining existing relationships, which are consistent with our overall approach.
We are actively meeting with key clients and also believe there are some attractive opportunities to expand existing relationships with our now larger loan capacity.
Longer term Albuquerque represents a market in which our cnine capabilities can be leveraged to attract a new and expanded client base.
Loan pipelines overall in the book are solid and we remain confident that we are on a pace that is consistent with high single digit loan growth.
Turning now to slide number nine on deposit trend.
Typical seasonal runoff patterns by commercial clients were more than offset by inflows from new and existing relationships as we grew overall deposits modestly in the quarter.
Overall deposits are up 31% from the prior year.
And 5% organically, excluding the impact of Trinity.
During Q2, we typically see heavier usage uses of cash by businesses for things like tax payments and bonuses.
However, as we continue to prioritize deposits within our sales process.
As well as expand consumer accounts through M&A.
We have been able to offset some of this impact.
And so during Q2, we brought on some large new balances from existing commercial clients.
And on boarded a number of new professional service company relationships with attractive non interest bearing balances.
The legal service specialty deposit business is also building successfully.
And we have added new accounts in this niche as well.
In new Mexico during the quarter as you heard from Jim We successfully integrated the Trinity systems with our existing platform.
And our associates have done a tremendous job, but the operational and client service aspects of this event.
The branch teams and the commercial personnel are stable.
And we continue to see normal activity flow and new business opportunities.
Deposit balances there remain intact.
And beyond the aforementioned seasonality, we're very pleased with the behavior of the portfolio.
Now I'd like to turn things over to Keene Turner for a review of our financial results.
Thanks, Scott and good afternoon, everyone.
My comments will be on slide 10, where we have an earnings per share a roll forward from the linked quarter.
The rolls pretty extensive given that the first four this is the first full quarter, we have Trinity and we had a third of the quarter and the first quarter and clearly Trinity impacts the comparability of results.
Nonetheless, we continue to produce organic growth as Scott mentioned that was also positively benefited our financial results and overall fundamentals are stable and improving.
Net income was $18.4 million in the second quarter and that was 68 cents per diluted share.
And that resulted in a return on assets of 1.05% capital strong at 8.4% tangible common equity.
And we did our fifth consecutive dividend increase to 16 cents.
We remain position.
Given the capital levels for continued capital flexibility to support both our organic growth plans as well as opportunistically manage capital through additional M&A or via share repurchases.
Merger related expenses of $10.3 million or 30 cents a share were recognized in the second quarter year to date total merger expenses were just under $18 million.
These expenses, while plans have obviously impacted our reported results and the rest of my comments will try to.
Sanitize the results a little bit so we can share the underlying fundamentals.
With the majority of the merger expenses behind Us and the core system integration complete we will begin to realize the full benefit of the cost synergies from Trinity beginning in the third quarter and that sooner than we had previously communicated.
Excluding the impact during the quarter the second quarter return on average assets was 1.50%.
And return on tangible common equity was nearly 19%.
More specifically in the quarter revenue was $74 million and that's an increase of $12 million from the first quarter. It's about 41 cents a share on the revenue line and expenses are up about 21 cents a share linked quarter. So that the largest impact is 32 cents increase from growth in net interest income having brought Trinity is earning assets and low cost deposit base for the full quarter contributed a large part of this increase.
And as Scott noted, we had a good quarter for loan generation that also benefited net interest income and.
Most importantly at this point net interest margin, but stable.
The increase in noninterest expense and merger costs reduced EPS by 31 cents per share in the quarter.
The majority of the merger expenses are behind us and so the impact to earnings in the upcoming quarter should be around a million dollars.
Tax rate impact with similar to last quarter and again, we had some merger related items that kept the top end of our range and the 4 million shares issued for Trinity affected the diluted share count in the second quarter compared to the first.
Incremental accretion with slightly lower and we provided for additional loan growth in each of those was about a penny per share of impact.
And turning to slide 11, we we essentially have the same changes and the same trend from the prior year to date period.
Given the overwhelming impacts are Trinity related.
It's worth reiterating here that we are generally ahead of schedule and therefore ahead of plan as it relates to Trinity in a phase in in the scaling that we expect to achieve through the transaction.
We will dig into the remainder of the second quarter as we proceed through the detailed components that follow.
Our net interest income and core net interest margin is presented on or are presented on slide 12.
We were pleased to see that core margin expanded slightly to 3.80% from 3.79% in the first quarter, particularly given what happened to the library during the latter half of the quarter.
Over the past year core net interest income has expanded by 30% to about $61 million.
And core net interest margin is up five basis points in that period.
Reported margin was 3.86% and that was only off a basis point from the first quarter.
The linked quarter increase in the net interest income is driven by having a full corner turning these operations and that added approximately $10 million in the second quarter and that was about a $7 million increase compared to the first quarter.
Net interest income also benefited from the additional day count.
And as previously noted. The addition of Trinity was essentially neutral the core net interest margin.
We added approximately $600 million of fixed rate loans $400 million of investment securities.
And $1 billion of low cost granular funding.
Prior to closing trend on the net interest margin was around 3.5%.
Within the new Mexico loan portfolio, there is approximately $70 million of purchase credit impaired loans that are yielding 6.75%. These loans did not materially impact the first quarter, but they did contribute approximately two basis points to second quarter margin on loan yields.
Additionally, there is another one to two basis points, a purchase accounting finalization that we recorded in the current quarter that won't continue.
In addition loan growth in the quarter increased average loans in the period to 5.1 billion, which as you heard from Scott was balanced across a variety of businesses and loan categories.
The yield on the loan portfolio expanded modestly to 5.42%.
On the larger larger average size of the portfolio an increase in fixed rate loans, mostly from Trinity helped stabilize the impact of decrease in LIBOR during the quarter.
It's worth noting that the yield on the loan portfolio acquired was around 5.05%.
New loan originations were slightly lower than existing portfolio yield at just under 5.10% and.
With fixed rate loans coming in lower than variable rate loans of which is what we typically see.
On the funding side the cost of deposits decreased to 94 basis points from 102 basis points in the linked quarter. This reflects the full quarter effect from the impressive cost of funds that.
With that joined us from Trinity.
With the potential for reductions in the federal funds rate in the near term. We believe the actions we've taken to position our balance sheet over the last few years will will benefit us.
In addition, with the acquisition of Trinity This year, and Jefferson County, Bancshares, two years ago, we have diversifies, our arda posit base and increased our level of fixed rate loans.
The expansion of both the size and duration of the investment portfolio will also be beneficial in a declining rate environment.
Given the interest rate environment. We're also prepared a rapidly responded with pricing adjustments in our deposit portfolio, we have nearly $3 billion and average money market and interest bearing deposit accounts that have increasing yield over the past several quarters as rates have risen.
[noise] within that we have approximately $600 million directly index. The fed funds that will move in conjunction with any fed.
Rate changes.
We have another estimated $800 million of deposits that are exception price directly managed foreign premium commercial interest bearing accounts that we intend to continue to manage for changes in interest rates.
In addition, there are other wholesale than brokered funds that have and will continue to move along with the fed funds rate and other indices.
We are comfortable that weve positioned ourselves well to manage and defend that interest margin for the interest rate environment.
As we sit today, our modeling suggests falling rates would create only a modest headwind as we translate our loan and balance sheet growth in earnings per share.
That means that we still expect a generally benefit from the forecasted mid to thing mid to high single digit loan growth.
That said enhancing our earnings by growing net interest income dollars remains our priority.
Our continued focus on expanding in generating new client relationships I believe all that is supported by a well positioned balance sheet.
Sorry for the deep dive there I just thought that was pertinent for the quarter and we'll wrap up briefly with comments on the rest of the income statement.
Page 13 highlights our credit quality trends.
Non performers were up to $19.8 million or 39 basis points of total loans in the quarter and that was from 0.19% at the end of March the majority of the increase was related to two non accrual loans that were well secured and we didnt provide any additional specific reserves on those during the quarter given our comfort level. We also had two loans that were 90 days past due and accruing interest that were included the nonperforming loans.
Both those long relationships have been resolved already as we sit here today in the third quarter and those total about $4 million.
The increase in Oreo in the quarter was related to a PC I loan that was part of the African Jefferson County, Bancshares acquisition in 2017.
The addition of this property was partially offset by a few sales that occurred in the quarter and there was no additional allowance or charge on that loan as it was Walmart originally in purchase accounting.
Provision expense was $1.7 million in the quarter and that's up $200000 from the first quarter. The increase in the quarter was due to loan growth and the level of our allowance.
Continues to reflect stable asset quality across all of our lending platforms.
On the next slide which is number 14 noninterest income increased $2.7 million in the linked quarter, primarily from a full quarter of Trinity and that's really driven by wealth and card services income tax credit as activity. As we had indicated has begun to gain some trent some traction as we as we spoke about in the last couple of quarters and it added about a half a million dollars to fee income during the second quarter, our pipeline of tax credit activity is strong and we expect to achieve a 25% growth in this area over 2018 levels.
Overall, we continue to expect the high single digits fee income growth in 2019 pre Trinity.
Due primarily to the opportunities as we've talked about and state tax credits as well as card services.
Turning to slide 15, noninterest expenses were $49 million in the quarter and that included $10.3 million in merger related expenses.
The majority of the merger related expenses in the quarter were termination.
Charges related to core operating systems.
Approximately $8 million or the operating expenses in the second quarter were run rate Trinity, including $1 million of amortization from core deposit intangibles.
The core efficiency ratio was 53% and improved a point in the linked quarter and as up a point from the prior year.
Now the Trinity conversion is complete we expect further leveraging of our expenses and improvement in the efficiency ratio and looking forward ahead are ahead to the third and fourth quarters, we expect noninterest expenses will range from 37 or $39 million.
This level of noninterest expenses in line with our original forecast of cost savings inclusive of Trinity.
Moving to slide 16 in the current quarter and year to date effective tax rate was 20%, including approximately 1% added from non deductible merger related items, we're still estimating the top end of the.
Full tax year rate will be approximately 20% with the opportunity to reduce it further with some tax credit investments were reviewing.
That's the case, you'll get a lower tax rate and the low end of that range for the year will be 18%.
But that'll have a corresponding increase in noninterest expenses towards the top end or maybe just slightly outside of the 37 or $39 million.
In summary, we our results for the second quarter reflect another successful quarter for the company. We continue to strive to perform at a high level and drive long term value creation by focusing on customer relationships associates shareholders and prudent financial decisions.
This quarter is the combination of both organic and M&A efforts and we appreciate your continued support and for joining us today.
And we'll take questions from analysts at this time.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speakerphone. Please make sure your mute function is turned off to allow your signal to reach or equipment.
Again press Star one to ask a question.
We'll pause for just a moment I'll, let everyone an opportunity to signal for questions.
Well take our first question from Jeff Rulis of D.A. Davidson and company.
Thanks, Good afternoon.
Hey, Jeff how are you.
Oh good thank you show on the.
The cost savings from it sounds like we've we've kind of accelerated a little bit on the original assumption on a cost saves in amount Keene could you just kind of remind us I guess, we'll all these largely be collected in a in Q3 and.
And <unk>, if not kind of lay out what what sort of changed on that front.
Yeah, I think we gave essentially level guidance and Ah expense guidance, that's really down from call. It 39 million here in the second quarter. So I think we expect that.
Well have a.
A fairly clean fourth quarter run rates. So the guidance, we gave a 37 to 39.
You know has a little bit of an intersection of continuing cost decreases and run rate decreases from Trinity were offset by a additional investment that we had planned in the business and people.
You know as we as we grow the business and I would say that that you know if you draw a straight line through that that's similar for the second quarter. So not as much run rate investment Twoq to Threeq, you, but you know, there's a little bit of cost savings coming out I would maybe just characterize it and say that generally June for us was a pretty.
Pretty clean quarter, and we could identify the things that we know are coming out here and in the next couple.
A couple of months and we feel pretty good about it so I think.
You know I think.
We're ahead in terms of timing.
Which means that were a little bit ahead in terms of what I think the <unk>.
Phase inefficiency ratio will be in.
And where it will end up the year.
Got it.
And then just the I guess the margin.
Guidance I wanted to make sure I caught you on.
Where we're discussing you've mentioned only modest headwinds in it in a down rate environment could you kind of range bound if we're.
I don't know what that is inclusive of your budget in terms of what you assume for rate cuts and and this yield curve expectations, but.
It could you just walk us through a little more detail on the margin discussion.
Yeah. So we've we've said we think the ties a number of yield curve scenario sub so all of those have you know a variety of fed cuts and.
Changes to.
Call it the the the five and 10 year Treasury rate, but you know within a relative sensitivity are where our expectation and our characterization of modest is that on a.
Static basis over the next 12 months, it's an estimate of about a 1% headwind.
In terms of net interest income so if our expectation is to grow high single digits, and we're not able to be effective on any of the additional opportunities for rate cuts on the deposit side that we talked about we expect.
About a 1% headwind, which is around five basis points of margin.
So I think we feel pretty good about that and I also think we feel pretty good about the opportunities that we outlined in terms of what we know is going to move if if the fed moves and what we know is moving along with LIBOR and other indices, but then also what we can do on the deposit front given.
Really how much commercial deposits, we have and how weve managed those as rates have risen.
And maybe one last one for for Jim just.
Given the added visibility in the southwest footprint he seen any increase in.
And maybe inbound or sort of potential M&A partners in that region is that I guess that's question one and question two would just be broad based footprint wide M&A discussions. Thanks.
Yeah, Jeff So I would tell you that over the last couple of years, we havent waned in terms of our efforts to meet with companies both in our current markets and certainly in the southwest.
I think challenge we would come about is the fact that there's still a little bit of a mismatch relative to expectations.
Between what's reasonable and the buyers or sellers side, but I think thats coming closer together.
You know the market will they buy there are few really good organizations out there that would fit and.
We're interested in several but we have to make sure it's the right fit.
But I think it's safe to say in our current markets and towards the southwest where we're interested.
Got it and that sort of.
Doubles for the conversations you know I guess, I know, where you're leaning but.
Casey Saint Louis if you found something in market there.
Those discussions still ongoing.
Yes.
All right. Thank you.
You bet. Thank you.
Thank you.
Well take our next question from Andrew Liesch of Sandler O'neill.
Hey, guys good afternoon.
Hi, Andrew.
Hi, I guess talk a little bit about the repricing dynamics of the variable rate loans looks like about 60% of the loan portfolio. How much that is tied to LIBOR or how much is three month LIBOR one month LIBOR I'm, just trying to get a sense of that repricing.
Yes.
We've got.
About the $3 billion about two and a half of that LIBOR about 400 million Prime and then you have another 200 million of of other.
And then within live or most of that's going to be a one month LIBOR.
And then there there might be a little bit that.
Three month LIBOR.
But but.
Yes, most of it tighter shorter duration LIBOR indices. So hopefully that's helpful.
Okay. So it was sort of duration on then.
I mean, our other floors, there or I'm trying to get a sense.
Yes.
So I would say we have a very large number of floors, but those tend to be with smaller borrowers. So you've got close to $600 million of that book with floors.
There's about 200 assets on the floor.
And you know that it's across a variety of indices.
And then for the ones that are above the floor.
You know that that that relative Delta is 50 to 100 basis points.
Okay.
And I would just add Keith.
You know from a process standpoint, as we go through anything that's being renewed or extended if it does not have a floor we're implementing for.
Just as a purchase standpoint.
Yeah.
And then on the enterprise value.
Lending product Im just kind of curious like what years, what are you seeing that from an underwriting standpoint or are there any weakening out there given where we are in the in the cycle from some other competitors to win deals.
Yes. Thank you.
Yeah. So it is competitive we are seeing competition from say non bank unit tranche would probably be the most aggressive lenders.
Sometimes you get a local bank because tried to jump in and with an aggressive structure out there but.
As you can see from the way we are growing even though we're not putting the pedal down we're remaining disciplined on structure.
You know, we're staying in that two and a half times or so senior.
And we're putting it on pricing grid, so that as it is leverage were getting paid for the risk.
We're seeing still seeing a lot of portfolio companies sell.
And.
Yeah, I think was.
That group sees a large very large number of deals across the desk and says no to many many more than they say you asked it so.
Probably the best way I can just say that we're still.
Bullish on the sector, but we're growing it just within our own credit parameters.
Gotcha, Okay. That's it. Thank you that's that's all very helpful I'll step back.
Thanks, Andrew.
Thank you we'll take our next question from Nathan race of Piper Jaffray.
Hey, guys.
Good afternoon, Hey.
Good afternoon.
Wanted to maybe start on capital.
I think as the I appreciate that you guys raised the dividend for Threeq you. So just curious on what the uptake for.
Share repurchases are through the back half of this year and I guess based on Jim's commentary around that.
Pricing disparity between buyers and sellers still at this point just curious on how you guys see capital in creating over the.
Hi, Jeff this year and into 2020 I think.
Given where the dividend stands today I think your capital levels on the Tc basis would exceed your 8% to 9% target.
Maybe as we move through 2020.
Yes Nate.
This is Jim so it's a balancing act for sure and so.
As we said in the past a priority would be to support growth.
And then obviously you took down through M&A and then.
Yes, you see you see your dividend strategy and then the share repurchases and so it's a matter of balancing it throughout.
On a continuing basis and know if you have something on the hook relative to M&A is doing keep some powder dry.
And it's something that certainly that keen in the team look at often.
And check in frequently to make sure that.
We're not committed to one strategy to a point that we put ourselves into a corner.
Understood and perhaps Kim could you speak to just the appetite on share repurchases import in Threeq and Fourq of this year.
Yeah, I guess I would I would even just characterize I think you know sort of.
Post end of the second quarter, but up until today.
Yeah, I think we bought back about 30000 shares under under some plants, we have in place. So yeah, there's an appetite there and and.
You know, we've got some price parameters and obviously with a variety of factors affect what we can do and when we can do it by that.
That's just something that that we can do we have in place all the time and you know I think we'll look at I think as Jim mentioned, we'll look at our.
Potential M&A prospects and then I think we have to look at.
You know ourselves and say that we want to.
Yeah, I'll take the shares out yeah, if some of that doesn't look like it's coming to fruition and as we get closer to 9% and I think that reflects what we've done historically so.
That that is our appetite and I think it is our desire not to go over.
9% I'm going to add one caveat that with.
A much larger investment portfolio and yields and rates moving around the portfolio does have an impact on.
The level of PC on a quarterly basis. So you saw this quarter. So that's something that depending on what happened close to a quarter round or wherever we.
You know we try to look at all that stuff, but it may it may flip around a little bit more than normal.
Okay understood that's helpful and just going back to the core NIM outlook I. Appreciate your comments earlier, particularly in terms of what you guys have in terms of levers to pull on the deposit side of things with us.
Relationships that are more or less index has shown another curve. So I guess, assuming we get a July rate cut.
Any.
Sensor can you kind of frame up where you expect the core NIM to traject.
Into Threed you at this point.
Yeah, I I think when our most.
Near term projection is probably that will lose the.
You know several basis points, and then we'll either be able to recover from there with deposit costs.
Or.
No I'm not sure we're going to be able to time it in such a way that that we had that off because right now we've got linerboard down and actually for US a rate cut help because it allows us.
You get some relief on the $600 million of indexing. It also allows us a talking point to go to the other 800 million that's exception price and go get some dollars. There. So we're targeting to defend that five yes.
If that's what our forecast is for margin compression I, just don't know that we're going to catch it all here in the next quarter. So.
You might see a little bit of slippage before it stabilizes or get better I would say, we're really happy and we've been incredibly pleased with the way margins performed over the last year we.
We've got that five basis points in our pocket and I think you you have to victory and we'll be earning at a really high level given a more cost savings are going.
In the third and fourth quarter and into 2020, if if we can pull all that off.
Understood.
Thats great to hear and then maybe just lastly for Scott or Jim I'm, just curious to maybe get some additional color on those four credits that moved to non accrual in the quarter.
Maybe by portfolio geography, it kind of what gives you the comfort that you guys see that you guys don't see any losses within those four in particular.
Sure sure well the first two are easy they were basically 90 day past dues, which sometimes they're both in St. Louis.
When you're in the middle of a restructure you kind of use a maturity as a negotiating factor in.
Those cleared up shortly after the quarter end and are current so the other two which are about 8 million roughly total.
One is a has been a classified credit for a while what kind of working through the negotiation process at the manufacturer service company.
We are well secured with finished goods receivables and equipment.
And the other ones.
Single family properties at very attractive area. So.
I think.
From a loss standpoint, we feel pretty secure with those.
Okay, Great I appreciate the color congrats on the great quarter guys.
Thank you.
Thank you we'll take our next question from Michael Perito of KBW.
Hey, good afternoon, guys. Thanks for taking my question.
You bet, Mike how are you.
I'm good how are you.
Thanks.
I wanted to start on it.
The.
Wealth management can you just remind us I think Trinity contributed about six 700000, a quarter is that a a ballpark accurate figure for the Trinity wealth management fees that came over.
Yeah, let me.
Dig through my notebook here, Mike My apologies.
Yeah, that's a.
That's a good number.
And I think what you're maybe point there was we had a little bit of weakness and underlying enterprise wealth management fees at that.
Outstripping, so we're actually seeing some good growth there on the Trinity side.
Overall the numbers are are are decent, but we had had higher hopes for.
Our own sort of wealth management revenue stream for the year, but unfortunately, the combination of the two it's been there's been good for us.
Yeah, that's kind of what you're seeing in cielo deep, which obviously in 2017, you had really strong wells drilled it kind of flatten out a little bit over the last five or four or five quarters. Here I'm. Just curious you know what kind of can get that moving again is it is it just opportunity on the Trinity side or or are there other things that are being looked at on the legacy and the Saint Louis and Kansas City markets, where.
No there there are growth opportunities or just any color there would be helpful.
Yeah I think.
Some of the decline had to do with markets obviously, but.
You know, we get a more ardent focus on sales in that area. We did bring on a new head of private banking in the last quarter and we believe that's a connector if you will between commercial and wealth.
So Mike you know us well, it's one of the things that we focus on.
Doing a few things well and we're getting two wells now and we will certainly.
Apply the same sales disciplines that have improved in growing the commercial bank. There, we're putting some talent in place that will help us and obviously, we're going to learn from our partners in new Mexico, because they've been doing well for a while.
Mhm.
Okay.
And then switching gears, a little bit key interest on the liquidity position.
As we think about kind of that did the cash in investment portfolio.
Moving forward in our models I mean is it fair to you know as we look at I'm just pulling it up here again quickly bear with me for a second but.
Yes, I think the cash balances at the end of the second quarter sent a little a little over.
190 million and then the investment book a little over 1.3 billion. I mean was there any movement post quarter or anything that inflated that into quarter end are those decent number to use for the liquidity profile going forward, depending obviously, depending on how strong growth is just what are your thoughts there.
Yes, I think that I feel much more confident that you know as a proportion of the assets I like the size of the investment portfolio at pain.
There are some some definite benefits there I think the cash.
You know maybe at a tinge high.
I think you're we're typically used to seeing that you know 85 90 million that some of that just depends on how much cash kind of comes in the last day and they are usually a one day lag on sort of how you're managing that or what you might be projecting for that day. So.
But that that last comment isn't going to materially impact how you. How you think about the liquidity position I think we'd like the revised liquidity position of the company I mean, I think I was looking back over some of the historical numbers and could be at the net interest margin. We're at the ROI, we're at with eight percentage points better or lower on loan to deposit in a bigger investment portfolio for us the over a lot better and and gives US a lot of opportunity going forward. So we were proud of that and we like that.
Okay. So so I guess to.
Just to summarize I mean, the cash position is probably a little high but the the bond book beyond North of one point well I actually just the securities portfolio General North of 1.2 billion. It sounds like Thats a decent number if you hit the growth that you expect like you don't expect much.
Degradation and that figure.
Yeah I would.
I would think that like always were going to continue to reinvest and we'll just look at where it makes sense that it may ebb and flow quarter to quarter depending on.
What cash flows look like but I would say that that's a good number overall.
Okay. Thank you and then just lastly.
Jim you got the Trinity deal onboard now I was wondering just kind of a generic question I was wondering if you could just give us an update now that you've seen a little bit more of the Trinity deal and how the two franchise just kind of mixing together what a couple that the biggest opportunities. You are you think are down there that that could help you maybe exceed deal kind of the base case stuff that you've communicated to us as it relates to the transaction.
Yeah, I'd say this a couple of things one you know Trinity was relatively young in regards to their.
Penetration in Albuquerque, Oh, and they add a smaller balance sheet, obviously and really catered.
Mostly to the CRB market as Scott alluded to in his comments, we believe that there's an opportunity for our cnine platform to do extremely well our treasury platform to do well in Albuquerque as it is to the lab in Los Alamos continues to expand as well and there is a.
Not enough housing either in Santa Fe, or Los Alamos to accommodate the growing population that because when people retire from the way they don't leave the market they stayed.
And given our foothold relative to the community.
In that area, we feel good about continued growth both in the mortgage side as well as acquiring a household accounts with that so you know so I think those are two spots were focused and certainly becoming a bigger part of overall communities the communities over there with.
Our focus on a very influential community groups as well.
Okay perfect. Thank you guys for taking my questions appreciate it.
Thank you.
Thank you once again, ladies and gentlemen, if you would like to ask a question. Please press star one now.
We'll take our next question from Brian Martin of Janney Montgomery, Scott LLC.
Hey, guys.
Hi, Brian .
Hey, just a couple of things from me just the Keane just maybe I missed some of it when you were talking about the theme on the deposit side that the the repricing opportunities on the deposit side if rates decline can you just run back through that I think you said on the loan side it was.
That was 2.5 billion that were tied to LIBOR and maybe I missed that but just going back to the the repricing on the loans and deposits.
Yeah, We've got about 3 billion of loans on that are tied to variable rates two and a half billion are LIBOR based.
A $400 million are Uh huh.
Prime and.
The the Delta some other indices across a variety and then on the deposit side. There is 3 billion a money market and interest bearing deposit accounts.
The 600 or that is directly index the fed funds and then another 800.
Our exception unpriced directly managed or and premium interest bearing accounts that we are.
That we're attacking and then there's some other sources that are more closely related to wholesale or brokered with within that that you know arm have moved and we'll continue to move is of those benchmark rates go down.
Okay, and with with Library, I mean, I guess, if you have already been I guess active with calling some of these customers given what's already happened with LIBOR or is that something you're going to wait to address until I guess rates actually go down.
Yeah, I would say that I think.
On the way up LIBOR wasn't the indicator that caused customers to have discussions with us. It was fed funds and that's what gets the headline and that's what business customers read and I think that the you know the catalyst for us being able to have that conversation back and so as much as we want to make those changes we're prepared and were ready, but we haven't been able to execute there. There is also a competitive set out there that you know that we can try to be ahead of the curve as much as we want but we want to do this in a way that also retain those deposits and has the customer you know it's still feeling good about their relationship with enterprise. So it's a delicate balance, but we're ready we've been getting ready, we're having all those discussions internally.
The names are on a sheet their assigned there they're all the things that you need to do and.
We're working on it and we have internal targets and you know I think as we indicated on one of the earlier responses. We know what we're trying to defend so we're ready, but it may be a timing issue and it shouldn't be that big of an issue.
Yeah I got you, Okay, and then just on the loan growth, maybe it's for Scott or whomever, but it just seemed like you feel very confident on the loan growth just kind of wondering if you can give a little bit more color behind that whether on the back half of the year, just kinda, whether it be geographically or by segment kind of where were seeing the best pipelines today or just kind of where the biggest opportunity is to capitalize.
Sure Yeah, I think as I said in the comments I think that what you saw in Q2 was what I had kind of telegraphed in Q1 relative to building pipelines.
I think now looking looking ahead the pipelines are still solid.
In many of the same ways that I think that you saw in Q2.
Kansas City, there's just there's a lot of.
Urban core development industrial multifamily.
Office is kind of coming back.
And then you've got some competitive changes in Kansas City.
As well as Arizona that are creating opportunities for CN I relationships I mean, that's that's when you can really go after seeing eye when something major changes with.
Account officers or management teams or sales of banks and I think thats what were seeing is those kinds of opportunities there.
And then on the.
Specialty side I think you know Q3 Q4 is typically a little stronger for both life insurance and Navy Ellen I don't see any reason at this point why we wouldn't.
See some of that same those same factors and.
Life insurance I think we've just seen fewer payoffs this year last year with the tax code changes we saw some early pay offs and we just haven't seen that repeat itself. This year. So.
I'm feeling I'm feeling good about.
The way things look from a loan standpoint right now.
Okay, and then new Mexico, the other flat or the modest decline this quarter I guess I guess, how do you see the that portfolio trending I guess, maybe I guess expect to see that resumed growth next quarter.
I would say Brian overall, we have we have pretty modest growth expectations in that portfolio. There was a number of loan categories that we would it not were considered by Trinity in run off mode and you know so no matter, we can originate pretty robustly and we have been but that those are just going to create some headwinds. So you may not see a lot of traction there on a net basis for a little while despite the fact that we continue to collect and gather new relationships, particularly in and fantastic Albuquerque.
And Brian I would just say, we're we're in evaluation mode out there we're meeting with clients and I think there will be some opportunities actually to probably grow because of the expanded checkbook with really good plant and then they're going to be some which maybe there were stretching for growth and don't necessarily fit. So as we went through that I think we'll get a better handle on what we can grow from the existing book.
Okay. Yeah. That's helpful. And then the last one for me was just on credit I know someone asked earlier, but just.
Outside of the four credits you already discussed and is there anything else that you I guess or any areas. You guys are staying away from or any other concerns just in general from a macro perspective that you would you would comment on or share or is it kind of similar to what you said last quarter, you just not seeing much out there still.
Yeah, I mean from a from our existing portfolio its monitoring heavily those spaces that we know arent stress I mean, we monitor the L. book.
Very closely on a monthly basis.
We're watching as I mentioned, the watching AG closer.
Yes, we think.
You know that that our structures have sheltered us so far but.
You know well see.
And then were staying away from.
Other areas that we think are probably overheated on the real estate side, I think multifamily overheated in some markets.
So we're just we're just trying to be.
Very selective in terms of how we approach certain segments and.
The portfolio right now I think.
Other than hopefully that explanation I gave on the on the few credits is in pretty good shape.
Okay.
All right. Thanks for taking the question guys.
You're welcome Thanks, Brian .
Thank you once again, ladies and gentlemen, if you would like to ask a question. Please press star one now.
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Well, Jonathan Thanks for hosting the call and thank you all for joining us in the support of our company.
Look forward to speaking to all of you again next quarter, if not sooner. So thanks and have a great day.
Thank you.
Ladies and gentlemen. This concludes today's teleconference. You may now disconnect.