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spk00: All lines have been placed on you to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Jim Lally, President and CEO. Please go ahead.
spk06: Thank you, Kat, and good morning, everyone, and thank you very much for joining us this morning. and welcome to our 2024 first quarter earnings call. Joining me this morning is Keen 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. 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. Please refer to slide two of the presentation titled Forward-Looking Statements and our most recent 10-K and 10-Q for reasons why actual results may vary from any forward-looking statements that we make today. The first quarter represents fundamentally sound performance amid a higher for longer economic and interest rate environment. Our business model, associate base, and management team has been constructed to perform during all economic environments. However, the current pivot in the interest rate policy from year end will further assist us in stabilizing our margins and therefore our profitability in the upcoming quarters. Like we've stated during previous earnings calls and investor meetings over the last several years, we have worked diligently to diversify our business model such that we do not have to depend on any one business, market, or asset class to produce high quality and predictable earnings. Our first quarter financial performance has resulted in this focused strategy, and I'm confident that we can continue to perform at this level or better for the remainder of 2024. Our financial scorecard begins on slide three. For the quarter, we earned net income of $40.4 million, or $1.05 per diluted share, and we produced an adjusted ROAA of 1.14% and a PPNROA of 1.58%. These results are representative of our typical first quarter trends and bode well for delivering upon our expectations and goals for 2024. Keene will provide much more detail on this in his comments. Our net interest income is essentially flat compared to the lean quarter when considering day count at just under $140 million. Looking back over the last five quarters, we've been able to hold this number at or around $140 million despite challenging competitive and interest rate conditions. This reflects the strength of the franchise we've built and we remain positioned to produce high-quality earnings that consistently improves shareholder value through deep-rooted client relationships. Our stable net interest income was aided by the defense and resilience of our net interest margin at 4.13%. This is a direct result of our appropriately priced, stable deposit base and our ability to originate commensurate to the needs of our clients, but priced well amid the current interest rate environment. As we thought would happen, loan growth moderated in the quarter, largely due to lower demand in investor-owned CRE and a few of our specialty lending businesses. However, we remained on pace to deliver mid-single loan growth for the year, growing loans by $144 million to $11 billion, led by growth in CNI, LIPF, and construction lending. Scott will provide much more detail on our markets and businesses in his comments. Like we did in 2023, we were committed to funding our full year's loan growth with our client deposits. During the first quarter, we experienced our typical seasonal deposit outflow as our business clients used their cash for bonus payments and tax distributions. We buffered this with a slight increase in brokered CDs, resulting in total deposits remaining flat compared to the linked quarter at $12.3 billion. Our loan-to-deposit ratio increased slightly to 90%, while our DDA level remained in excess of 30% of total deposits. Our balance sheet remains well positioned for our planned growth. Capital levels at quarter end remain stable and strong, with our TCE to TA ratio of 9.01%, and adjusted return on average tangible common equity of 12.53%. Tangible book value per common share was $34.21, an annualized increase of 4%. Given the strength of our earnings and our confidence in our continued execution, we increased the dividend by one cent per share in the second quarter of 2024 and have begun modest common stock repurchases to manage growth of excess capital. Before discussing areas of focus in 2024, I would like to provide an update on credit. Last quarter, I characterized our charge-off levels as extraordinary and uncharacteristic. Asset quality stabilized as expected in quarter one as classified loan levels were flat, NPAs declined 11%, and charge-offs netted out to roughly five basis points in the quarter. It is also worth mentioning that the large majority of the amounts charged off during this quarter were residual loan amounts from two relationships that were charged down in the fourth quarter of 2023. Both of these relationships have now been fully charged off. Finally, we did complete our internal review of the agricultural portfolio, inclusive of site visits and found no surprises and feel that the portfolio is in sound condition. We've engaged a third party to validate our findings, and we'll have this report delivered in the next few weeks. We are seeing some of these clients refinance their debt with other institutions, and we'll likely see this $200 million portfolio reduced by at least 50% between now and year end. Slide five shows where we are focused for the foreseeable future. Just like we did for all of 2023, we will continue to be focused on funding future loan growth with client deposits. This will be accomplished by sticking to our relationship-oriented sales approach and capitalizing on our continued success in our community associations, property management, and third-party escrow and trust services deposit businesses. Additionally, I'm confident that we can continue to improve shareholder value through the execution of our strategy. Our focus combined with continued improvement in all business lines, markets, and credit along with steadfast expense management, should consistently produce strong earnings amid the current economic and rate environment that we are in. Our clients remain largely optimistic, too. For the most part, the operating companies with whom we partner produce very good results for 2023, and our budgeting for 2024 to be flat is slightly down from these results. Cash conversion cycles continue to elongate, requiring higher use of lines of credit, and capital expenditures will be lower than previous years, as companies curb spending to defend sales levels or to increase production for known increase to sales. Supply chains have improved, the war on talent has not worsened, and the impact of higher rates on debt service has been absorbed in their monthly cash flow. The impact of onshoring is beginning to show residual opportunities in the trades and corresponding suppliers that support this. In my opinion, this will only improve the economic prospects of a portion of our client base. Our CRE clients are seeing opportunities in most asset classes, but the elevated interest rates are keeping many of these projects on the drawing board for now. I really believe that a slight decrease in short-term interest rates will be the psychological impetus for some of these projects to move to the next level, even though the return related to 25 or 50 basis point decrease is largely negligible. We enjoy great reputation and corresponding market share of middle market businesses in our mature geographies, and specialized lending businesses. As such, I am confident that we will continue to get more than our fair share of corresponding opportunities. Our newer markets and higher growth areas will provide similar levels of opportunities while we continue to build our reputation in these markets. This blend is what gives me high confidence that we will continue to grow and earn at a predictable rate while continuing to compound tangible book value at a higher level than our peers over the foreseeable future. With that, I would like to turn the call over to Scott Goodman. Scott?
spk01: Thank you, Jim, and good morning, everyone. I'd like to turn to slide six. Loan growth of $144 million in the quarter pushed us past the $11 billion mark and represents just over 10% growth year-over-year. To illustrate Jim's comments on diversification, the breakdown of this year-over-year growth by sector on slide seven shows that 25% roughly is within the general CNI category, represents a diverse list of business types throughout our geographic markets, with the remainder well-balanced across the other major segments of our business. For the quarter, loan growth was recognized most prominently in the CNI and owner-occupied real estate space, as well as life insurance premium finance and construction development categories. Within our commercial banking metro markets, we continue to have success attracting and onboarding new relationships, while existing client operating businesses are generally doing well and, despite higher rates, remain willing to actively support growth. Borrowing here represents a variety of capital investment activities by these businesses and increased working capital facilities, with revolving line usage up roughly 5.5% in the quarter. Construction projects and process continue to move forward, providing an increase in related loan balances for the quarter. And while new construction requests have slowed overall, we did originate new project loans for a few current clients for the expansion and renovation of existing properties. Investor CRE origination has slowed somewhat, impacted more heavily by the higher rate environment, and reacting with more caution, particularly in sectors such as multifamily, office, and retail. Within the specialized banking sectors, life insurance premium finance posted solid growth with strong new origination volumes and a seasonal uptick from premium advances on existing policy loans. Tax credit loans moved slightly lower in the quarter, but consistent with the typical Q1 seasonal pay down that we see on project loans from the proceeds of the sale of 2023 tax credits. SBA results were generally in line with expectations, as originations kept pace with recent quarters. Pre-payments, which have stressed the portfolio due to rising rates, did continue to trend positively, moving lower during the quarter. However, net growth for the period was impacted by our decision to generate liquidity and income through the sale of a $23 million pool of guaranteed loans in March, which Keane will touch on further in his comments. Sponsor finance. Origination activity continued to moderate in Q1, consistent with a more restrained and patient posture by private equity sponsors. Payoffs associated with the sale of portfolio companies have begun to move toward a more normalized level, following a pause in this activity for most of 2023. While we do expect growth in this sector for the year, our approach will remain disciplined as it relates to credit structures. and originations will be focused primarily on well-known and top-tier sponsor relationships. Regionally, we did experience growth across our commercial banking footprint in all major regions as displayed on slide eight. In the Midwest markets of St. Louis and Kansas City, loans rose 74 million or 8.9 percent annualized. Significant new originations include equipment loans for a civil general contractor a new relationship with a long-standing automotive dealership, and recapitalization of a construction supply company. These markets, which have deeper CNI portfolios, also experienced increases related to heavier working capital line usage. Our southwest region loan portfolio rose $40 million in the quarter and is up 21% year-over-year. Larger new loans included an ESOP conversion for a long-standing food services client in Arizona, construction of a medical facility for a New Mexico client, as well as new relationships with a metal fabricator and a specialty contractor with an owner-occupied construction project in Las Vegas. In our western region of Southern California, loans rose by $20 million in the quarter and 10.2% year-over-year. We successfully onboarded several new private lender finance relationships, as well as a variety of smaller CNI loans to new relationships in the lighting, medical services, and specialty stainless steel equipment manufacturing industries. Overall, growth was somewhat moderated this quarter by timing issues related to larger paydowns on revolving lines with a few of our finance and private lending clients. Moving on to deposits, on slide nine, Total deposit balances were up $78 million for the quarter and $1.1 billion, or roughly 9% year-over-year. Breaking this down, non-interest-bearing DDA accounts were down by $387 million, attributable to the remixing of idle balances and interest-bearing alternatives. Our lower-yielding savings accounts also declined for similar reasons. In aggregate, however, we've been able to successfully grow client deposits, by $810 million, or 7.5% over the past 12 months. For the quarter, similar activity continued, but growth was slowed by the typical seasonal first quarter outflows related to distributions, bonuses, and tax payments. Regionally, year over year, growth has been fairly well balanced between the specialty deposit verticals and other geographic markets and lending businesses, as shown on slide 10. For the quarter, client balances were down 98 million, or less than 1%, with the seasonal outflows most heavily impacting the St. Louis and California markets. On a combined basis, year over year, non-specialty customer deposits within our geographic regions are up 340 million, or over 4%. This has been the result of focused development of sales campaigns and product enhancements directed at client outreach. expansion of existing relationships, and targeting of specific business types and competitors. Specialty deposit businesses were up $123 million for the quarter and have grown year-over-year at 19.3%. These business lines are highlighted in more detail on slide 11. Community association balances rose by $69 million and typically experienced seasonal increases in Q1 as HOA assessments are billed and paid. The property management segment also grew in the quarter, $119 million, as we continue to fund and open new accounts for our best relationships. Third-party escrow balances are down slightly, but mainly relate to some planned larger 1031 and class action account disbursements. Overall, key relationships are intact, and we continue to expand these deposit-focused lines of business with new accounts and new relationships. Additional detail on the core funding mix and account activity is shown on slide 12. Diversification of these balances by channel remains fairly consistent with the prior period, with, as you heard from Jim, roughly 31 percent of total deposits being on interest-bearing. The pace and magnitude of the aforementioned remixing continues to slow, and we remain focused on building and retaining stable, relationship-based funding. The underlying account activity also continues to trend favorably and reflect our intentional efforts toward emphasizing a granular and diversified core deposit base, with new accounts opened exceeding closed accounts, and net balance increases when comparing new accounts to closed accounts across all channels. With that, I'd like to turn the call over to Keane Turner for his comments. Keane?
spk07: Thanks, Scott, and good morning, everyone. Turning to slide 13, we reported earnings per share of $1.05 in the first quarter on net income of $40 million. Reported earnings included the impact of an additional FDIC special assessment and expenses related to our core conversion project. Excluding these items, EPS was $1.07 per share. Net interest income declined $3 million from the linked quarter, mainly due to day count and higher purchase accounting premium amortization. Earning asset growth and improved yields were enough to offset the increase in interest expense in the quarter caused by marginally higher deposit costs and seasonal changes in funding mix. The income declined from the fourth quarter, mainly due to tax credit income that's typically highest at the end of each year. The provision for credit losses decreased from prior quarters as non-performing loans have stabilized is largely reflective of net charge-offs, loan growth, and adjustments to qualitative factors. Non-interest expense was higher in the current quarter, primarily due to a seasonal increase in compensation and benefits, partially offset by a decrease in deposit servicing costs. Turning to slide 14, net interest income for the first quarter of 2024 was $138 million, which was a decrease of $3 million compared to the late quarter. Interest income increased $0.7 million during the first quarter of 2024, driven mainly by higher earning asset balances and improved rates on the loan and investment portfolios. Loan income grew $1.7 million from the linked period, as higher balances and yields resulted in a $3.5 million increase in interest income, which was partially offset by $1.1 million decline in purchase accounting amortization and $0.7 million of reduced net loan fees. The average loan origination rate in the first quarter was 7.84%. which is accreted to the overall portfolio yield of 6.87% in the quarter. Income from the investment portfolio grew by nearly $1 million as the portfolio continues to benefit from higher rates on cash flow reinvestment with an average yield of 5.21% on purchases within the quarter. Average cash levels declined in the first quarter as we redeployed funds into other earning assets, reducing interest income by nearly $2.1 million. More details follow on slide 15. Interest expense grew $3.6 million in the quarter due to a higher cost of funds from expected unfavorable changes in our funding mix. Interest paid on interest-bearing deposits, excluding brokered CDs, was $2.8 million higher as a result of balance growth and higher rates. Interest on borrowed funds increased $1.5 million in the quarter due to seasonally higher customer repo balances and elevated levels of FHLB advances. This was partially offset by lower expense on brokered time deposits. The resulting net interest margin for the first quarter was 4.13%, a decrease of 10 basis points for the linked quarter. I would note that the negative change in loan purchase accounting, combined with a $62 million improvement in unrealized losses on the investment portfolio, reduced margin by five basis points in the quarter. The remaining change in net interest margin was generally in line with our expectations. our outlook on margin remains unchanged. While interest rates remain at current levels, higher for longer, we expect that overall funding costs will continue to move slightly higher over the next couple of quarters, and we will see margin drift of around five basis points per quarter on the existing balance sheet. Asset growth funded with core deposits at reasonable spreads should allow us to defend or even add to net interest income dollars over the next couple of quarters, albeit at a somewhat lower marginal cost overall. Without rate cuts, we would see margin level out somewhere around 4% by year end. When we do begin to see rate cuts, we anticipate each quarter point reduction in Fed funds equates to an additional six to eight basis points of margin loss, initially two to two and a half million of quarterly net interest income. Our expectation is that deposit rates will be more resistant to repricing initially, in order to remain competitive. With additional Fed funds cut, we will be more deliberate in moving deposit rates, just as we were when rates were increasing. And while not a component of net interest income, reductions in interest rates would positively impact deposit-related non-interest expense trends, as more than half of the underlying balances are indexed to the federal funds rate. Each 25 basis points in Fed funds equates to approximately $1 million in quarterly expense. The net, we expect pre-tax income to decline by $1 to $1.5 million for every 25 basis points of Fed funds each quarter. At that level, we estimate that mid-to-high single-digit loan growth will replace lost earnings from interest rate cuts as long as they are limited to 25 basis points at a time. Slide 16 shows our credit trends. Credit trends are stable or improving from last quarter. Net charge-offs were $5.9 million for the quarter or 22 basis points of average loans. The majority of charge-offs in the quarter were related to loans that went into non-performing status in the fourth quarter. This included a charge-off of the remaining balance of the agricultural loan that was previously disclosed. Non-performing assets were 30 basis points of total assets compared to 34 basis points at the end of December. The provision for credit losses was $5.8 million during the first quarter and reflects the impact of net charge-offs, loan growth, improvement in economic forecasts and additional qualitative reserve build on our agricultural and office CRE portfolios. Slide 17 presents the allowance for credit losses. The allowance for credit losses represents 1.23% of loans or 1.34% when adjusting for government guaranteed loans. Our reserve reflects the weighted economic forecast that leans more toward a downside scenario than we believe is appropriate in this environment. On slide 18, first quarter fee income of $12 million with a decrease of $13 million from the fourth quarter and primarily in the tax credit income line item, which is seasonally strongest in the fourth quarter. In addition to the seasonality, credits that are carried at fair value are impacted by movements in 10-year SOFA rate, which increased roughly 35 basis points in the quarter. Link quarter decreases related to community development, private equity distributions, Foley and servicing fees were partially mitigated by a gain on sale of $23 million in SBA loans. As a reminder, community development and private equity distributions will fluctuate from period to period. Turning to slide 19, first quarter non-interest expense was $94 million, an increase of $1 million compared to the fourth quarter. Included in the current quarter was $0.6 million of additional FDIC special assessment expense, related to updated loss estimates in the deposit insurance funds, and $0.4 million of core conversion-related expenses. Compensation and benefits were higher compared to the linked quarter, primarily due to the annual reset of payroll tax limits, accrued PTO, in addition to a month's worth of annual merit increase. Deposit service expenses were lower compared to the linked quarter, despite growth in average balances, as certain allowances expired unused in the first quarter. We would expect this line item to grow off of the fourth quarter as we expect continued specialized deposit growth to be a significant contributor to overall growth as planned. Other expenses decreased in the quarter due to a combination of lower OREO and loan workout expenses and evidence of prudent cost controls affecting travel and entertainment expenses. The first quarter's core efficiency ratio was 62% compared to 53.1% for the linked quarter, with the decrease being primarily attributable to the decline in fee income. We expect core expenses to expand sequentially due to normalization of deposit service targets. Our capital metrics are shown on slide 20. Our tangible common equity ratio was 9% at the end of the first quarter, up slightly from the end of the year. Our strong earnings profile and our manageable dividend payout continues to build capital and offset the impact of ARCI. AOCI losses increased in the quarter and reduced our tangible common equity ratio by 81 basis points at quarter end. On a per share basis, tangible book value increased to $34.21 per share, a 4% annualized increase over the fourth quarter. With the strength of our earnings in our current capital position, we have put a repurchase plan in place to acquire shares at a price that's attractive, based on the value of our company, in addition to the previously announced $0.01 per common share increase to the quarterly dividend. The first quarter was a solid start to the year for us and was generally in line with our expectations. We an adjusted return on average tangible common equity of 12.5% and a 1.14% adjusted return on average assets. We feel good about our growth prospects on both loans and deposits, and we believe we'll continue to grow both tangible book value and shareholder value in the coming quarters. I appreciate your attention today, and we're now going to open the line for analyst questions.
spk00: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not in mute when asking your question. Again, press star one to join the queue. And your first question comes from the line of Jeff Ruiz with TA Davidson. Your line is open.
spk08: Thanks. Good morning. A couple questions on the loan growth front. Jim, I think you mentioned, I just want to confirm that the mid-single-digit loan growth guidance, does that include the anticipated runoff out of the YAG portfolio?
spk06: It does, Jeff, yes. We'll work on that with growth in other areas.
spk08: Okay. I think that balance was in the $200 million range, so you got about a $100 million runoff for a headwind. Is that what the balance is?
spk06: That's about right. That's what you'd expect. Between now and you're in, about a $100 million runoff.
spk08: Appreciate it. And maybe for Scott, just to Kind of seeing that uptick in line utilization, I may have missed it. Is there any commonality or is there any timing to that? Or could you read into that maybe an improvement in what you've seen?
spk01: Yeah, Jeff, I think, you know, again, I think we see our companies use cash in the first quarter with some of the outflow. I think you also see some of that on the lines. But I think it also reflects, as I said, I think companies are basically optimistic about their business. and they're willing to draw down working capital, whether it's, you know, hiring good people if they can find them or just opportunistically investing in the business. So I think it's a combination of those two things.
spk08: Do you, I know that the kind of hire for longer, the general story has been, you know, more sidelines sitting and waiting, you know, the longer we go with hire for longer, you know, is there any, you see any, expectation that borrowers say, look, this could take a while. I'm ready to get back into the pool. Or are you getting any indication that that may be playing out, that higher for longer is the reality and it's time to move on with projects?
spk01: Yeah, I think that's a good observation. I think what I would say is I'm encouraged by the activity and the pipeline on the loan side overall. But I think what we've seen now for some time is that the pace of those things move very slowly. And I think there has been a little bit of a wait and see, particularly when the expectations were maybe for lower rates earlier this year. But I think now with maybe the conclusion that it's going to be higher for longer, I think you may see some of this stuff start to move a little quicker because those decisions have been made. It's just a matter of when, not if.
spk08: Got it. And, Scott, while I have you, I just wanted to touch on the – it looks like deposit runoff in the West was a particular uh you know that was a bigger driver or more there was there anything specific to that outflow or do you have a greater percentage of attacks and bonus type activity that um occurred out west for any reason yeah i think the reasons are are similar um but i think that the dollar amounts were a little larger and i think if you dial into it you know it's
spk01: It's a group of our top-tier clients out there that are also some of our largest depositors and borrowers. So I think it is just a function of the same behavior that we've seen in other markets with taxes, distributions, dividends. And those relationships, for the most part, are all still intact and continue to be strong.
spk08: Great. And last one, I think you... all communicated there. The capital side, TCE, now above 9%. You get the little dividend bump here. But also, just wanted to see, you touched on the buyback authorization. Are those two exclusive of one another, or do you feel like you could pull off a dividend increase and be nimble with the buyback as well?
spk06: Yeah, Jeff, this is Jim. I would say this, that we can certainly dribble with both hands in this regard and do both. We've announced the dividend increase and will be opportunistic relative to the buyback.
spk08: Okay. And at this point, Jim, M&A, is that anywhere on the radar?
spk06: Not really. I think, you know, we just continue to create relationships, but given where the stock price is today and where we're focused, it just doesn't make sense at this point in time.
spk08: Great. Thank you.
spk00: And your next question comes from the line of Andrew Lish with Piper Sounder. Please go ahead.
spk05: Hey, guys. Good morning. Thanks for taking the questions. King, just on the margin, at least in the near term, I hear the five basis points, but you also had in this last quarter five basis points of maybe not one-time items, but not necessarily recurring items. So do you think maybe that five basis points off this last quarter's 4.13 may not be as drastic as 5?
spk07: Yeah, Andrew, I guess when I think about going to 4%-ish by the end of the year with no rate cuts, I do think that the first and the second quarter in terms of margin compression is probably more similar to 4Q to 1Q trends. So 5 with maybe some some worseness and then we see more firming up. The reason would be, I think we expect continued seasonal pressure on deposits. I don't think we expect to see as much growth until the second half, similar to last year. And then with the agricultural headwind, we expect that to maybe be a little bit more near term than in the latter parts of the year. And also, I think we expect loan growth is is typically stronger for us and particular in the fourth quarter. So I think those things make me a little bit less optimistic of 1Q to 2Q than, you know, maybe it would seem. And, you know, those pieces aren't lost. So I appreciate you pointing those out where, you know, we've got a fairly significant premium still on SBA loans because of the weighted average life. It's roughly $24 million in total. So, you know, that prepayment activity there has been, you know, fairly robust and that can cause that interest income and margin to move around quite a bit on a quarterly basis. I don't know that we have done as good a job of shining a light on that, but you get some payoffs in that activity, and that can push the forecast around. But I think we think dollars are reasonably stable with some growth, you know, 1Q to 2Q, maybe a little bit of growth there, and then, you know, some growth in the second half on dollars.
spk05: Got it. All right. That's really helpful there. Thanks for the clarity. And then just on the expense front, pretty big increase in the seasonal bonus accruals, payroll taxes, what have you. How much of that do you expect to fall out of the run rate here in the second quarter?
spk07: Yeah, I think there's a little bit of a trade-off here because the deposit costs in the quarter normalized are roughly 22.5. The 20.2 had a reversal of two and a half in there. And I think those essentially trade off you know, some of the expenses that were in the run rate. So with a little bit of an additional uptick in core related expenses, I think for the second quarter, we think it's more like 94 to 96 of expenses. The higher end being, you know, with a little bit heavier core and sort of in the middle with a little bit of abatement of payroll tax and some of those seasonal items. But the specialized deposit costs are going to, snap back to the run rate. And then if we expect that there'll be some growth in those balances. So with the ECR running just over 3%, um, in, in terms of the accrual rate, that's going to be, you know, a sequential increase and, you know, push what is otherwise we think expense control, you know, into that, that range of 94 to 96. Got it. Um, uh,
spk05: Great. Helpful there. And then on the core conversion, any update or is it still early stages to provide any sort of financials around that?
spk07: Yeah, I guess what I would say, Andrew, is that we continue to make progress in making sure that dollars going out the door for, you know, those related expenses are well managed. I think some of it just depends on where it is in terms of what's coming through the P&L, but I still think $45 million in the year is likely to occur. We're getting a few more of those dollars here, you know, first quarter, second quarter. I thought they'd be maybe more third quarter, fourth quarter heavy, but we're getting some that are trickling through. And to the extent that we get any more updates there, we'll let you know. But things are going well and as planned. And, you know, those dollars, I think, are monies well spent to make sure that we have a smooth transition and we also have access to the information when we wake up on Monday and go to work.
spk05: Got it. Very helpful. All right. Thanks for taking the questions. We'll step back.
spk07: Thanks, Andrew.
spk00: And your next question comes from the line of Damon Del Monte with KBW. The line is open.
spk03: Hey, good morning, guys. Hope everybody's doing well today. So first question on the tax credit income line, Keen. I can understand and appreciate the impact with the moving rates. Of that loss that was reported this quarter, how much did the rate movement impact that?
spk07: Yeah, Damon, it's essentially all rate-related impact. It's maybe, there was some credits that offset that a little bit, but, you know, 10 basis points is roughly a million dollars, and SOFR was up 35, so it's largely driven by the
spk03: that you know negative in terms of what the rate movement was okay um so if you is there any it's such a big uh variable to uh to the bottom line there with the swings but um i mean do you absent any material move in rates here in the second quarter do you do you think that you know you go back to a like a one to two million dollar level or is it just impossible to gauge that
spk07: No, I think we do think that at least here in the second quarter, there's going to be some activity. And I think overall, we expect to overcome the negative on rate. So still like a plus 10 million for the year for 2024, as long as rates don't hurt us too much. So I think the fundamentals of that business and the activity there are still good. It's just a little bit tough to outrun some of those larger swings in the quarter.
spk03: Got it. Okay. And then as far as like the provision goes, you know, the reserves at 123, you know, you cleaned up a couple credits here this quarter. You know, how should we kind of think about the provision level over the upcoming quarters?
spk07: Yeah, I think that, you know, we think that with maybe some of the ag portfolio going away, we put some extra there. We're optimistic that we won't necessarily need that. And, you know, it's tough to say what's going to happen with the economic data. I mean, my expectation is that the rate forecast will, you know, probably put some negatives into the longer end economic data, but that net-net, you know, the economic assumptions underlying that will be unchanged. And some of it will just depend on, you know, how much, because we're a little bit more weighted toward the negative, just in terms of how the model works out, you know, how much the The revisions downward, you know, weigh on that. I think our goal is that we want investors and everyone to feel secure about that we've got sufficient reserves and we're going to continue to be, you know, maybe a little bit more on the conservative end. But I think without, you know, really degradation of credit or material growth, I think there is some opportunity for the provision level, particularly here in the next quarter, to move in our favor a little bit.
spk03: Got it. Okay. And then just lastly, if you look at the average earning asset yield, I think it was flat at 6.20% quarter over quarter. Are you surprised by that? Would you expect there to be some expansion still?
spk07: I think the purchase accounting weighed on that just a hair. So, you know, I think that fundamentally as we look out, you know, new loan originations are still helping us. Reinvestment is helping us. And I don't expect that we're going to really have the remixing that was negative in terms of the proportion of cash balances. I think we're, you know, we'll be similar cash balances. So I would expect the yield to be, you know, more positively trending in the upcoming quarter here, as long as, you know, some of those variables in terms of, you know, premium amortization and some of those things are generally in line or cooperate. But I think we kind of had a few factors going against us, but yeah, the fundamentals of loan yield and, you know, investment yield and those things, you know, remain favorable. So despite that we were a little off in terms of how we guided, you know, margin forecast, I feel like the pieces that we missed weren't really on, you know, recurring fundamental things that materially affect the run rate, you know, for 2Q, 3Q, et cetera.
spk03: Got it. Okay. That's all that I had. Thank you.
spk07: Thanks, Damon.
spk00: And your next question comes from the line of Brian Martin with Jani.
spk04: Hey, good morning, guys.
spk06: Hi, Brian.
spk04: Hey, Cain, maybe just one on just the margin. Just I guess I appreciate the commentary and just the outlook. If rates, if we do see some rate cuts, then that kind of 4%, you know, threshold or maybe target you're thinking about is lower depending on when we get those rate cuts. If we get some later this year, then that number, it drifts a bit lower based on your commentary about the impact. of cuts, Ferris?
spk07: Yeah, Brian, I think if we start seeing some cuts, I mean, I think we're starting to head south of 4%. You know, if you get one, you know, call it early to the second quarter, I'm sorry, third quarter, and then depending on how much you get by the end of the year or when they occur, you'll have some more of that impact in the fourth quarter, but really it'll start to impact, you know, first quarter of 25. But yeah, I think, you know, when I look at, you know, two or three rate cuts, you know, we start heading just south of 4% margin.
spk04: Yeah. Okay. Understood. And then just remind me, are there, you know, I guess the, as far as in terms of the fixed assets that we price or fixed rate loans that we price, I mean, Is that a meaningful number, I mean, in terms of what you guys have, or is that not a big number there as far as what might be repricing over the balance of the year or, you know, next 12 months, however you think about it?
spk07: I mean, it's a fairly decent amount. I mean, if you think about the weighted average life of the loan portfolio, you know, sort of SBA, you know, is, you know, three to four years. And then you look at the proportions. I mean, you get $500 million, $600 million of fixed rate loan repricing in the next 12 months. So it's significant and it's helpful. And I think that's part of the new loan origination yield that I indicated I think was a good fundamental. We had maybe a little bit more in the first quarter here in terms of some of the tax credit stuff that repriced with a little bit of a headwind. So origination yield wasn't quite as good. But moving forward, you know, X that, you know, the seasonality in those fundings occurs first half as well. I think, you know, we're optimistic about, you know, fixed rate repricing continuing to improve yields and just overall loan origination improving yields.
spk04: Yeah. And the pickup, I mean, if it's half, you know, 500, 600 million over the next 12 months, is that, what kind of yield is that coming off at versus what you mentioned as far as what the new origination yields are? Is that kind of in the four and a half range or, you know, I guess, to get an idea of how much pickup you get on that.
spk07: Yeah. I mean, we've been originating roughly, you know, at six and a half percent on fixed rate loans and, you know, we're probably picking up 200 basis points on that, uh, just sort of depending on, on when it was originated. So, um, you know, it's a, it's a fairly decent, uh, decent trade and then, you know, variable rate pricing, uh, you know, it's closer to 8.5% or 9% that helps drive up that overall origination rate.
spk04: Gotcha. Okay. I appreciate it. And how about just jump into credit for a moment, just on the classifieds, like they're down a touch in the quarter, just any commentary on just kind of criticized or just kind of a special mention loans, how they're trending here in, you know, in the quarter?
spk02: Yeah, Brian, it's Doug. You're right. Classifieds were flat, but criticized, loans were also flat in the quarter so really the combination criticized classifieds represent just about four percent of total loans and really as we expected just kind of returned to a more stabilized level here in the first quarter gotcha okay thanks doug and then um just on the uh you know maybe just one more on credit king you talked about the provision but just the higher for longer you know does that impact you know maybe thinking about you know just the incremental
spk04: impact on credit that that could have, you know, that maybe you take the reserve up a bit. Is that more kind of your commentary about being more cautious here? You know, I guess just trying to understand how you're thinking about that.
spk07: Yeah, I guess what I would say is in the quarter, you know, it's probably a little bit of our, we reflected it in the qualitative factors. And then my comments were just trying to get at the fact that I think, you know, we use Moody's as our you know, data source there. And we think that they'll contemplate that in some of the information. So I think what we've seen happening is the short term information in the model, you know, looks better, but the longer term information with, you know, rates higher for longer, you know, probably degrades a little bit. And so I think we're positioned to, to deal with that transition from a Q factor to the underlying data. Um, I don't know how much we'll, uh, you know, we'll lean on it or take a position one way or the other unless we see, you know, that affecting our own data. But, you know, we do rely on the forecast and, you know, we'll sort of be in the same boat as everyone else.
spk04: Yeah. Okay. And then the last one for me was just on the, you guys recognize some SBA gains in the quarter, just kind of wondering how you're thinking about that. And then just maybe kind of that, you know, the fee income line, maybe kind of asking your commentary about you know, the tax credit being somewhat volatile, I guess, in terms of how we think about that here in the coming quarters?
spk07: Yeah, I'll say on SBA gains, it's really a function of deposit growth and loan opportunities. I think you heard from Jim, we've got strong demand and Scott in a variety of areas. And so the SBA portfolio provides a nice relief valve for customers that don't typically bring you know, material funding to the bank. So, you know, when we look at selling a loan in SBA and then our ability to originate an additional one somewhere else, I think it's a good trade. And I think you'll see us continue to at least make that trade to the extent that we have, you know, sufficient origination activity that drives good yields in the upcoming quarters here, at least, you know, 2Q, and then we'll keep evaluating it. So I think it's a It's a part of the balance sheet management and also a tool we can use to help mitigate pressures from some of the deposit repricing. And then I think we had the loss of $2 million going through the tax credit line item with $3 billion of negative fair value. And I think my comment is we expect as long as we don't get rates moving around or against us too much, the activity in that business for the remainder of the year should you know, should sort of get us to the level that we saw in that net in total last year was just under $10 million. And I do think that some of that can occur here in the second quarter, but we also expect most of it will be fourth quarter weighted.
spk04: Okay. Yeah, I guess I was asking more about just the kind of the impact. If you think about the income, you know, the tax credit, you know, if you continue to pick up some more, you know, gains here on SBA, just kind of relative to how you were thinking about fee income last quarter versus going forward, if you have more gains, does that maybe boost your outlook on fee income ex-tax credit, or is it more just, you know, an offset to maybe some other, you know, areas being a little bit less or whatnot as we go forward?
spk07: Yeah, I mean, I think all else being equal, you know, last year we had, you know, unfortunately a bully death benefit included in the gains, but otherwise I think You know, we expect private equity, CDE, some of those things to be episodic and contribute similarly along with SBA gains. So the SBA, to your question, would be additive to our overall expectations.
spk04: Gotcha. Okay, perfect. I appreciate you guys taking the questions. Thanks.
spk05: Thanks, Brian.
spk00: Again, if you would like to ask a question, press star 1 on your telephone keypad. And there are no questions at this time. I will now turn the conference back to Jim Lally for closing remarks.
spk06: Kat, thank you. And thank you all for joining us this morning and for your interest in our company. And we certainly look forward to speaking to you again at the end of the second quarter. Have a great day.
spk00: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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