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spk01: and welcome to the EFSC 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. Please go ahead.
spk08: Thank you, Christina, and good morning, and welcome to our first quarter earnings call. I appreciate all of you taking time to listen in. Joining me this morning is King Turner, our company's Chief Financial and Chief Operating Officer. and Scott Goodman, President of Enterprise Bank and Trust. Before we begin, I would like to remind everyone 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 10K and 10Q for reasons why actual results may vary from any forward looking statements that we make this morning. Please turn to slide three for our financial highlights for the first quarter. On our fourth quarter earnings call, I commented that the expected momentum we had leaving 2021 would continue to 2022. Our results for the first quarter of 2022 show this to be true. For the quarter, EFSC earned $48 million, or $1.23 per diluted share. This compared to $1.33 and 96 cents per diluted share for the linked and prior year quarters respectively. This level of performance produced a return on average assets of 1.42%, just slightly less than the 1.52% that we posted for the fourth quarter of 2021. As you know, the fourth quarter typically has the benefit of the peak of non-interest revenue and 2021 was no different. On a pre-provision basis, we earned $57 million for the quarter yielding a robust PPNR ROAA of 1.7% and a ROATCE of 17.5%. EFSC posted another solid growth quarter for both loans and deposits. Net of PPP loans grew at an annualized rate of 8%. Scott will provide much more detail about where we saw opportunities and where we experienced headwinds, but I will comment that we remain disciplined with respect to pricing and credit, likely to the detriment of a few additional basis points of growth in the quarter. Nonetheless, I'm confident about our ability to improve on this level of performance as we progress through the remainder of 2022. The quarter also provided continued significant deposit growth for our company. We are becoming increasingly comfortable with the diversified channels of deposit generation that we have added to our company over the last five years. Just in the last year, we have been able to grow our overall deposit base by 40% through organic growth and M&A while both improving our DDA to total deposit ratio to 42% and lowering our overall cost of deposits to 10 basis points. This combination of an asset base that is interest rate sensitive combined with a diversified well-priced deposit base will bode well over the next several quarters given the expected interest rate environment. Credit quality remained very solid as evidenced by the statistics on this page. As I've mentioned in the past, we do not take this for granted and have worked incredibly hard to build a more diverse and resilient portfolio. Due to the improvement in our credit quality and macroeconomic forecasts, a provision benefit of $4 million was recorded in the first quarter of 2022. Our capital position remains strong. At 3-31-22, we had total shareholders' equity of $1.5 billion and the TCE to total assets ratio of 7.6% compared to 8.1% at 12-31-21. During the quarter, we repurchased 351,000 shares and increased the quarterly dividend 5% to 22 cents per share. Stepping back and looking at the last several quarters, you begin to see the cadence of consistency that we've worked hard to establish. This includes solid loan growth in the high single digits, confidence in our multifaceted reliable and low-cost deposit generation capabilities, a top quartile return profile, a high-quality diversified loan portfolio, and a flexible and efficient capital base. Moving on to slide four, you will see where we remain focused for the remainder of 2022. As we progress to the second quarter, we have our teams keenly focused on their loan, deposit, and net new relationship goals for 2022. We designed the business in a diversified way to rely on multiple markets and businesses such that we can focus our efforts on the families and businesses that truly value our relationship and solution-oriented model versus garnering growth at any cost. like with past new markets tax credit allocations we are leveraging this to garner new relationships we have found this especially true when we enter new markets where the use of the program is not as prolific or to differentiate ourselves in a very crowded commercial real estate business i'm excited to share with you that i'm already seeing new opportunities added to our pipeline using this tool as it relates to our affordable housing business we are seeing growth and existing in new markets that should build on our 2021 performance which was a record year in terms of closings. We have made significant progress in expanding our profile to attract new talent. We've invested more heavily in talent for current and new specialty businesses, along with bolstering our teams in higher growth markets. Our recent recruiting efforts in the Orange County and LA markets complement our existing team and will introduce us to more middle market operating businesses. The four most recent hires came from four different organizations, and have hit the ground running. In his comments, Scott will provide a little more detail around the most recent trends we are seeing in these markets. However, the progress in early signs are positive, and I'm excited to continue to expand our profile throughout Southern California and the Southwest. Additionally, in the fourth quarter of 2021, we were able to onboard a professional practice finance team. With a national focus, this group has come out of the gates very well in 2022, meeting the shared high expectations. We have also bolstered our already high-performing Phoenix team with three new ads, each coming out of different organizations. Finally, we recently announced the opening of a new commercial office in North Texas. We were able to land a proven leader and will build around his 30-year career in this very attractive market. We are eager to make these investments and we are confident that these new associates and teams will add to our current and expected level of growth. With that, I will now turn the call over to Scott Goodman. Scott?
spk04: Thank you, Jim, and good morning, everybody. As Jim had mentioned, we're out of the gates well in 2022 with loan growth for the quarter of 176 million net at triple P, or 8% annualized, as represented on slide number five. In general, the specialty business units continue to perform well with additional growth contributed from the commercial real estate activity in the southwestern region driven in large part by Arizona. The loan details by segment are outlined on slides number six and seven. On a TTM basis, organic loan growth net of triple P and net of the recent first choice acquisition is 770 million or 12%. with nearly all key areas of the loan portfolio showing increases. As you heard from Jim, we've remained disciplined in our pricing philosophies relating to the fixed rate portion of our business, as competitive pressures push spreads well below our targets. And while this did dampen some growth in the investor CRE book over the past year, we see longer-term value in maintaining consistency and transparency in our loan process, both with clients and with our sales teams. That said, we've been able to lean into other channels that were more immune to the environmental headwinds and competitive pressures to provide the growth and improve returns, proving the fundamental benefit of our diversified revenue model. In recent calls, I've talked about the robust activity in our sponsor finance business being driven by a strong M&A market and the deep relationships that we've nurtured with our private equity partners through the years in this line of business. As a result, Sponsor Finance posted record growth of $133 million in the quarter. This does not signal any changes to our strategy as our approach to credit structure, to pricing with our targeted sponsors remains consistent. Although the net growth may vary quarter to quarter based on seasonality and the timing of portfolio company sales, the production activity remains strong in this business. Solid growth in life insurance premium finance mainly reflects several new clients as well as seasonal premium payments on existing policies. As the aggregate portfolio has steadily built a funding tail on its annual premiums, that naturally adds elevated quarterly growth momentum. The tax credit business also continues to perform well with new fundings related to the expansion of affordable housing programs across multiple states. In the SBA business, production remains solid and consistent with prior Q1 levels, but payoffs and paydowns have risen somewhat due to competitive pressures from non-SBA lenders. We're executing plans to proactively address improved retention of the well-seasoned loans, as well as continuing to recruit new originators to boost production in higher growth markets. Aggregate portfolio trends in specialty lending along with the local markets are outlined on slide number eight. In addition to the aforementioned specialties, we've also added a small experience team of experts located in California dedicated to the professional practice space. This group focuses on lending to dental, veterinary, and small medical practices and is off to a nice start, adding 18 million of growth in the quarter. The Southwest region, which includes Arizona and Las Vegas, continues to post strong growth in Q1 of 70 million and has grown 182 million or 42% year over year. Larger originations during the quarter have been composed of new CRE acquisition and development deals for existing relationships for which we can leverage our proven ability to perform and obtain targeted yields. In St. Louis, the portfolio is up approximately 2% yearly year, but declined slightly during the quarter. St. Louis includes a large base of C&I clients whose working capital borrowing needs have been suppressed by the larger cash balances and continued supply chain obstacles. After a slight uptick at fiscal year end, average line usage leveled off during Q1 at around 40% of total commitments. Fundamental sales indicators, though, remain positive, with healthy new origination levels, additional new relationships, and a four-quarter low in terms of payoffs. And I expect that as liquidity continues to work its way through the system, that these activities will ultimately result in better net growth in the market. Kansas City loans were up $21 million in the quarter, or 10.8% annualized, with a balanced mix of new CNI, and CRE loans into various industries, including logistics, food service, broadcasting, and metal fabrication. In general, the Kansas City team is producing steady originations. In New Mexico, we've experienced a decline in loan balances over the past year. As a reminder, we entered New Mexico market through the LANB acquisition into three primary submarkets of Los Alamos, Santa Fe and Albuquerque. The primary value driver was and continues to be the low-cost and well-diversified deposit book, which is primarily concentrated in Los Alamos and Santa Fe. We've successfully grown this deposit base while maintaining its low-cost profile, as well as developed some nice commercial relationships in these communities. Albuquerque, however, makes up the predominant share of loan balances for New Mexico and with a heavy commercial real estate portfolio. Our goal in Albuquerque has been to maximize retention of loans that fit the enterprise bank and trust client profile while developing a CNI strategy similar to our other markets. Certainly the COVID and related economic factors have impacted our ability to achieve these goals as quickly as expected, but we also felt that a leadership change was necessary here to better position us going forward. This change was made during the quarter with the promotion of an existing high performer as well as repositioning this region under the leadership of our senior team in Arizona. Our expectation here is to slow the runoff near term and build a well-balanced relationship-based loan portfolio with modest but steady growth potential over time. We continue to execute our integration plans for the legacy first choice and Seacoast Commerce local commercial loan books in Southern California. As I discussed last quarter, the primary objectives were to retain and deepen key client relationships, maintain a steady production process, and expand our talent base to support the expansion of our C&I strategy into this market. In Q4, I also set the expectation that near-term we would see some pressure on net growth extending from a portion of the legacy bank book, which was focused on shorter duration CRE bridge lending and residential fix and flip loans. We did continue to experience this pressure in Q1. However, we are getting traction on our longer term objectives and the quarterly trends are positive. Relative to the loan portfolio here, originations were up in Southern California by 25% over Q4. while payoffs declined by 46% over the same period. Our loan pipeline has also been building nicely, including both opportunities to expand exposure with legacy clients, as well as new CRE and CNI relationships. On the talent front, we are also making solid progress. In addition to the relocation of a long-term proven senior leader within the enterprise organization to integrate the commercial team in LA and Orange County, We've also recruited four new CNI-focused relationship managers from several in-market competitors. We expect these experienced bankers to help expand our reach into the networks and the COIs necessary to introduce CNI growth into the region. Expanding a bit on Jim's remarks, in a challenging environment for talent, our new ads in the existing markets of Southern California and Phoenix, as well as the new team in North Texas provide solid opportunities to leverage the higher economic growth profile of these metro areas and support the attractiveness of our business model to these experienced commercial bankers. Finally, touching on deposits from slide number nine, total deposit balances ending Q1 were up $360 million from Q4, to $11.7 billion, driven by ongoing liquidity within our commercial client base. Steady consumer savings levels also continued, particularly in New Mexico, and continued growth of specialty deposit lines. The specialized deposit teams for community associations and the third-party escrow business also produced steady new accounts for key existing relationships, as well as onboarded several new relationships in the court. In general, new accounts continue to outpace closed accounts, and we're well prepared to maintain a disciplined approach to pricing both new and existing balances. For now, we have not experienced significant attrition of balances due to rate for our relationships, but we continue to watch this closely through further Fed interest rate moves, albeit with a disciplined and relationship-focused approach. Now I'd like to turn the call over to Kane Turner for further comments.
spk09: Kane? Thanks, Scott, and good morning, everyone. My comments begin on slide 10, where we reported earnings per share of $1.23 on net income of $48 million in the first quarter, compared to $1.33 in the fourth quarter. The loan and deposit growth that Scott discussed benefited net interest income and helped offset the impact of the decrease in PPP earnings and the two fewer days in the quarter. Non-interest income is typically highest in the fourth quarter of each year, and we experienced the expected seasonal decline in the first quarter. We also declared and paid our first dividend on our preferred stock this quarter, and that reduced earnings per share by three cents in the period. And lastly, our continued management of capital through share purchases added approximately one cent to earnings per share in the quarter. During the slide 11, net interest income was $101 million compared to $102 million in the prior quarter. The decrease was primarily driven by a $2 million reduction in PPP-related income along with the two fewer days in the period. Despite the sequential decline, we continue to build repeatable net interest income with strong organic loan growth, higher earnings in the investment portfolio, and stable net interest margin. Moving on to slide 12, Net interest margin on a tax equivalent basis declined four basis points in the first quarter to 3.28%. This was mainly the result of higher average balances on interest-bearing cash stemming from the strong deposit growth in both current period and the prior quarter. Loan yields were higher by two basis points despite a $170 million reduction in average PPP balances, and we continued to add to the investment portfolio at a measured pace to deploy excess cash and take advantage of higher available yields. Funding costs were stable as our total cost of deposits remained at just 10 basis points. We anticipate that net interest margin and net interest income will expand now that rates are moving higher. Our balance sheet remains asset sensitive, and we expect that each 50 basis point increase in interest rates will result in an additional 3% to 4% increase in net interest income dollars on an annual basis which is approximately 8 to 12 basis points of net interest margin based on 331 asset composition. The loan portfolios are largest driver of asset sensitivity at 63% of loans or variable rate. Nearly 60% of those have rate floors and approximately 40% with floors are currently priced at or above the floor. The additional 20% are within 50 basis points of the floor. The high level of cash on the balance sheet and continued deployment with investment yields up helps us to mitigate the impact of those floors and make the lift off the low interest rates more meaningful. Our deposit portfolio remains more than 40% non-interest-bearing balances, and we have less than $500 million of total transaction accounts formally tied to an index. With ample liquidity, our expanded footprint, and strong low-cost deposit generation through our specialty verticals, We believe our ability to control deposit costs as rates rise is greatly enhanced versus prior tightening cycles. Slide 13 depicts our asset quality, which showed continued improvement on already strong position. Non-performing assets were 23 million, or 17 basis points of total assets. Net charge-offs were $1.5 million, or seven basis points annualized, compared to 14 basis points in the fourth quarter. On slide 14, we reduced the allowance for credit losses with a $4 million provision benefit in the first quarter due to improvement in our credit quality metrics, forecasted macroeconomic factors, most notably unemployment rates and the commercial real estate price index. The allowance for credit losses totaled 139 million or 1.54% of total loans compared to 1.61 at the end of the year, excluding guaranteed loans The allowance in total loans was 1.73% at March 31st. While our forecast improved in the quarter, we do believe the existing level of allowance reflects heightened risk to the economy from inflation, rising interest rates, and continued disruptions in the supply chains that warrant ongoing consideration. On slide 15, the income for the first quarter started out strong at $19 million. This was a decline of $4 million compared to our seasonally high fourth quarter results of $23 million. The decline was led primarily by reduced fees earned on community development investments and reduced tax credit income that was consistent with our expectation. Card services revenue declined as debit card volumes decreased in the first quarter compared to fourth quarter levels. SWAP revenue was strong in the first quarter at $1 million. and deposit service charges rebounded in the first quarter as the fourth quarter included a fee holiday provided to First Choice customers during core system conversion. While tax credit income will continue to be seasonal, our momentum in this business line continues. However, rising interest rates do pressure this line item due to its impact on the inventory held at fair value. Also, fees earned on community development investments are not consistent sources of income quarterly, but we do expect continued contribution in the latter part of this year. Card services will face the Durbin impact headwind starting in the third quarter of around $750,000 per quarter. Turning to slide 16, first quarter total non-interest expense was $62.8 million, which was roughly $1 million lower than the fourth quarter, which included $2.3 million merger-related expenses. There were no merger-related expenses in the first quarter. Cooperating expenses were $1.4 million higher in the first quarter, at $62.8 million compared to $61.4 million in the fourth quarter. The driver of this increase was primarily seasonally higher payroll taxes and along with the 401 match. Expenses for 2022 have performed as expected and were encouraged by the numerous positive business trends to begin this year. As both Jim and Scott discussed, we continue to invest in our markets and have successfully recruited new production associates in both our commercial and specialty lines. These investments will allow us to build and strengthen our growth targets, but we do expect to see a sequential increase in our expense run rate from the first to the second quarter. Specifically, hires and commercial banking units will allow us to build upon the current growth rate for loans and more confidently maintain that rate of growth over a sustained period. Additionally, stronger-than-plan momentum in specialty deposit areas, as well as forecasted net interest rate trends, has and will drive continued servicing expenses. As a result, it appears that the current quarterly run rate will step up modestly from roughly $63 million per quarter to a range of $64 to $66 million for the remaining quarters in 2022. To reiterate, we expect these trends will be more than offset by net interest margin trends, but more importantly, we think these investments in continued growth will allow for stronger revenue trends longer term. Our capital metrics are demonstrated on slide 17. Our tangible book value per share was $27.06 and our tangible common equity to tangible assets ratio was 7.6%. This compares to $28.28 and 8.1% at the end of the year. The 4% link quarter decrease was primarily due to a decline in accumulated other comprehensive income due to the impact of rising interest rates on our available for sale investment portfolio. We currently have 28% of our investment portfolio and held the maturity, including more than $100 million we transferred early in the first quarter to protect tangible book value further from rising rates. It's important to note that the decrease in the fair value of the portfolio does not impact earnings or our regulatory capital ratios, where we continue to have excess capacity over well-capitalized limits. With a strong capital position and equity market trends, We repurchased over 350,000 common shares, totaling $17 million in the first quarter, and announced another increase to our quarterly dividend. We returned approximately $25 million to shareholders this quarter through repurchases and common dividends, while our earnings drove a 17% return on tangible common equity. We had a strong start to the year, and with solid loan and deposit growth, high-quality credit metrics, and continued deployment of excess liquidity. These highlights drove a 1.4% return on average assets and a pre-provision return on average assets of 1.7%. We believe we are well positioned for the remainder of 2022 and to continue to execute on our strategic initiatives. Thanks for joining the call today, and we're going to now open the line for analyst questions.
spk01: If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. Our first question from Jeff Rulis with DA Davidson.
spk02: Thanks. Good morning, all. Good morning, Jeff. Question on the expenses. I appreciate the guidance there. Just wanted to confirm the The cost saves on the deals, has that completely been captured at this point?
spk09: Yeah, Jeff, we have actually, and I would say on the first choice side, probably more so. And as you heard from Scott, some redeployment on that front as we move forward. But we feel like from a net run rate there, we're in good shape. And in fact, at the end of the year, We had a retirement and a planned transition of the SBA team from Dave Bartram to Rick Visser. And so that concluded the final cost saved as we see it from the Seacoast merger. So we're in good shape there. And I think it's clean run rate from here on out, so to speak.
spk02: Got it. And then moving to the funding side, and this is a little more maybe detailed. Trying to get the sense for the specialty funding versus your traditional funding sources, what is the typical betas or what would you broadly speaking view what betas, how that would translate to the specialty group versus the traditional or perhaps there's not much of a difference?
spk09: So, Jeff, in the guidance that I gave on the margin impact on the static balance sheet, we've essentially modeled on interest-bearing accounts, the same betas we had in the last cycle, which was around 75%. We think that with the deposit composition, I mean, we've more than doubled BDA with some of the transactions we've done. Um, and, and the specialty specifically, I think overall that'll help control deposit costs. And I think it'll help us control that non-interest, uh, or that interest bearing, uh, piece more favorably. And then in addition, the savings accounts and at particularly in New Mexico, uh, will also help drive that beta further down. So we think our guidance is fairly conservative there. And then there is an expense component to some of the specialty businesses. Um, in 2021, that was around $14 million of run rate expense. Um, in the first quarter, that's roughly four and a half million dollars, uh, that's running through other, uh, expenses. And we think that that steps up to around $5 million in the second quarter. And then from there on out, it's going to be a function of growth and some impact of rising interest rates on those balances. But we think, you know, that's about 20 to 30% in terms of, if you look at it from a beta perspective, on the overall balances. That's what we were seeing from, you know, prior research on the big players in those markets. And that's, you know, essentially what we're modeling and signaling to our teams in terms of our tolerance for moving forward. So I think we feel well positioned there. And again, I think our guidance in that, you know, three to 4% for 50 basis points is conservative to a degree. and we're going to manage that to be a little bit better than we've been in the past.
spk02: So, Keen, correct me if I'm wrong here. The kind of the betas on the specialty, you sort of diverted that to it's actually an operating expense type growth versus impact to kind of traditional margin betas. Did I hear that correctly?
spk09: Yeah, that's generally correct. So within my comments, there is some money market component and interest-bearing component that I've lumped into what I talked about in terms of the overall deposit betas. But then it's that high DDA that really is a pass-through and we're refunding and paying certain expenses for those accounts, but it's reflecting as DDA and we're also drawing fees on it. And so those dollars that I gave and the sensitivity that I gave really reflects those expenses and non-interest income and is also part of what's driving the slightly higher guide on the expense side.
spk02: Got it. Perfect. Thank you. Maybe last one. Just hitting back to the buyback, the pace this quarter, if you match that, I guess you'd almost be at the end of the authorization limit. Just if you comment on the appetite on buyback and, Jim, I guess any other – You could round that out with any kind of M&A discussions that the appetite there as well. Thanks.
spk08: Sure.
spk02: Ken, you want to touch on the buyback first?
spk09: Yeah, Jeff, I'd say that your comment about the assumption of that continuing to roll forward with market trends is fairly accurate and we're close to the end of the existing authorization. We're in the timeframe where we come out of year-end planning and we're working through our capital plan. And, you know, I would anticipate that, you know, barring M&A or outsized growth, our dividend posture sort of remains similar and we would use the share repurchase to fill in the gaps there. So, you know, from a capital management perspective, the only caveat is, you know, with rates continuing to trend a little bit higher, We're just going to be mindful of TCE levels and the impact of the available for sale portfolio on TCE levels. But we have that extra layer of tier one capital from the 2021 preferred issuance that gives us more confidence to run, you know, down at this level, we'll say, you know, slightly below 8% if necessary, given market weakness. So our posture in terms of capital management remains, you know, very much the same and we haven't pivoted.
spk08: And, Jeff, I always comment on M&A. We think about it in multiple ways. You know, we did a little bit relative to onboarding new teams and specialties. That's one way to look at it. From a whole bank perspective, as you know, it's a process, and we're focused on, you know, being able to fill in where we possibly have needs in certain markets and talent and things of that nature as we look at possible partners and things of that nature.
spk06: Thank you.
spk01: We'll take our next question from Andrew Leash with Piper Sandler.
spk07: Hey, good morning, everyone. Appreciate the commentary around the margin and obviously rates are moving higher. Can you give us a sense on what new loans are being added versus, I guess, last quarter and relative to the portfolio average?
spk09: Yeah, so Andrew, for us it always depends on where the growth is. Growth this quarter was, you know, in particular in, you know, senior debt financing. So that helped drive, you know, rates up just slightly. So we're at, you know, 434 total loan yield at the end of the quarter. You know, those rates are going to be, you know, just modestly higher than that, you know, T.V. SBA similarly and then you know premium finance and some of the other more credit immune. T.V. disciplines are going to be below that. So it's a function of T.V. You know of T.V. Where that growth is coming and Scott or Jim can comment, but I think they made this comment that you know, our spread appetite hasn't changed and we're being disciplined in terms of how we're quoting loan rates. And so it's cut into growth a little bit because we feel like we've been better in terms of pricing on what is a moving interest rate curve and quoting spreads over the index versus, you know, generally a flat rate. So we're still trying to maintain our spreads in know variable rate loans and and keep that you know high variable composition so hopefully that's helpful we try not to give away too many direct secrets there but i it's safe to say i think the premiums above you know certain uh areas and and below for for credit characteristics you know generally remain intact and the growth in the quarter is really reflective of our continued pricing discipline you know that build on that andrew you know andrew we had opportunities
spk08: and you know the markets well, that there is demand out there for longer-term fixed-rate financing, especially tied to certain real estate markets, that we just chose that for the longer term. It's not what we wanted to do, right? And we feel that there's a bit of transactional and commodity related to some of those opportunities that they'll circle back, maybe a different name, maybe a different project, but they'll circle back certainly, and we'll capture it at a better rate yield for all of us.
spk07: Got it. So I guess reading through that, that's kind of what may have driven the decline in loans in St. Louis and maybe, I guess, floor pace of growth in other quarters in Kansas City? Well, in certain sectors, you're right.
spk08: Go ahead, Scott.
spk04: I was just going to say, I think St. Louis is more a factor of the CNI headwinds, although I would say just As Jim said, we did back away from CRE opportunities in all markets, probably a larger impact in the higher growth markets for CRE. I think St. Louis, maybe to a lesser extent Kansas City, still seeing some of the headwinds on the liquidity that's sitting on the balance sheets of our CNI borrowers. I think that was more the headwind there. Okay.
spk07: Got it. Thanks for taking the questions. I'll step back. Thanks, Andrew.
spk01: And if you would like to ask a question, please press star 1 at this time. And we'll take our next question from Damon Del Monte with KBW.
spk03: Hey, good morning, guys. Hope everybody's doing well today. First question, just regarding credit and kind of the outlook there when we think about the provision, do you guys feel like you have additional capacity to release reserves? Do you feel... Like given the, you know, the last couple quarters of releases, you've kind of right-sized or normalized the loan loss reserve.
spk08: Scott, you want to talk about credit?
spk09: Damon, I think our posture there is we feel like we've been appropriately slow in reducing coverage because of the uncertainty from quarter to quarter remains. It shifts in terms of what the topic is. And it's been moving fairly quickly. So, you know, based on Cecil and its forward look right now, you know, we think the allowance level is appropriate. You know, when we adopted Cecil, you know, we were at basically 1.3% of loans. Our view of that is probably a little bit more conservative as we sit here today and we've got all these economic factors that, you know, we probably weren't appropriately waiting in the initial adoption, so to speak. because they hadn't been prevalent for a number of years. Um, but with that said, um, credit quality continues to be, you know, on the upswing in terms of improvement from, from already high levels. And so there might be some, some work moving forward, uh, that it'll come down either as a function of growth, depending on where asset classes we originate in, you know, or continued behavior or movement of, you know, credits that are driving some of the heavier reserve, But generally, I think, you know, based on CISO, we feel like at 331, we have the appropriate allowance. And there's probably not what I would call a material move either way. You know, as we sat there, if there was, we would have had to recognize that in the first quarter.
spk03: Got it. Okay. So we should, it's probably fair then to start to, you know, expect some modest provisioning here in the upcoming quarters.
spk09: Yeah, I think all else being equal, it's probably going to drive some provision. Like I said, unless we see some movement in credits that are carrying stronger reserves or just shifts in asset classes. For example, growth in SBA offset by declination in you know, areas that we've got a little bit higher reserve would cause some mixing and shifting around. You know, life insurance premium finance is another allowance category that carries a fairly light reserve. So just in full disclosure there. Got it.
spk03: Okay. That's helpful. Thanks. And then could we just talk a little bit more about the sponsored finance growth this quarter and kind of, you know, it was pretty outside. So can you just talk a little bit about some of the characteristics that resulted in that growth during the quarter?
spk04: Sure, Damon, I can cover that. As I said, we've been in this business a long time now, and we've built some pretty deep relationships. I think even going back to Triple P, where we were able to help many of those sponsors because a large majority are formed under the SBIC program or the SBA, we just generated a lot of goodwill with those sponsors. And so if we weren't at the top of their list, we are now. And I think, you know, just the robust activity you're seeing in M&A and a lot of these funds, sponsors have raised new funds as well. So they're deploying capital. So I think it's just a function of a lot of things coming together, our longevity in the business. We have an active sponsor base. And, you know, we're just reaping the benefits of that right now. And, you know, we've been in the business a while. And so we've seen it. You know, it can ebb and flow with cycles, and we're taking advantage of it. We're not changing credit parameters. You know, we're being disciplined with our underwriting and with our pricing. So, you know, I feel good about the quality of what we've added, and, you know, we're just going to continue to take advantage of that opportunity while it exists. Got it. Okay. That's helpful.
spk03: Thank you. And then I guess just lastly, maybe, Keen, can you just kind of – um revisit your commentary on on uh non-interest income and the outlook going forward just given some of the um items that may or may not have influenced this quarter's results just kind of looking for a bit of a projection to expect over the next three quarters thank you yeah i i don't think you know i think we've got durbin impact nailed down i think we talked a little bit about the private equity i would say in total for 2022
spk09: We haven't really adjusted our expectations upward or downward. I think the quarters in which it's going to occur are different, particularly in tax credit. So we could see lighter than expected second and third quarter, more so due to remeasurement and evaluation. And it is possible that if the activity In that segment slows a little bit, we might even see a couple negatives in the upcoming quarters with rates up and having to value the tax credits lower. But we feel like with the first quarter performance and what we expect for third and fourth quarter, we'll be able to achieve the targets that we have pretty handily for the year and still meet the guide that was out there for that line item.
spk03: Okay, great. Thank you very much. You're welcome.
spk01: And again, if you would like to ask a question, please press star 1 at this time. And we'll take our next question from Brian Martin with Jannie Montgomery.
spk05: Hey, good morning, everyone. Good morning, Brian. Hey, just to follow up to the last question, just that tax credit guide, the initial guide for the year came, can you remind us what that was?
spk09: I think it was around $10 million. Let me just make sure that that's accurate in my notes. But I think we're expecting around 10 million in total for that, which is up, you know, 20-ish percent from 2021. Okay.
spk05: So 20% growth. Okay. And then just your outlook for, I guess, just kind of you guys think about it with kind of your rate outlook as you think about it. I guess, how are you thinking about the rate increases here?
spk09: Yeah, Brian, I mean, I think we're preparing for what we think is the most likely forecast that's out there, which is two near-term 50 basis point hikes. um i don't know that we're thinking about a heck of a lot after that because that's going to affect 23 more than it affects 22 from a you know earnings perspective it probably affects the way we manage and price deposits and gather them than it does you know the p l so to speak in the near term but i think that that's pretty much what we thought about in terms of how we prepared our guidance here and prepared our expense guidance from those revisions.
spk05: Gotcha. Okay. Maybe I missed what you said earlier on the deposit beta scheme, but I heard the part about what's going to flow through the expenses, but just as far as kind of a total beta, I guess, how do we think about a beta maybe on the first 100 versus maybe the second 100? Can you give any thought on how that progresses? I think you said last time you guys were, was it 70, a number you gave us 70, but maybe that was total, but just kind of how you progress here. for the immediate increases in the near term here?
spk09: Yeah, the 75% beta I gave was on just the interest-bearing piece. I think it's pretty clear that we're within that first 25 basis point hike, and we don't expect much movement there. So our view is from here on out. I think in terms of what we would expect, obviously we would expect deposits to react T. More slowly initially and then become more rate sensitive as rates move up, I think, embedded in our net interest income and margin commentary is the fact that T. You know, also we get off the floors. And so I think there's a variety of offsetting factors. T. So I think the the betas. early on are going to be, you know, lower. And then I think thereafter we'll track closer to that 75%. And then it's, you know, how aggressive do we get, uh, or not we, but does, does the rate, uh, do the rate increases get, um, but for us, it's, you know, we, we do expect that it's going to be more than paid for on the asset side with, with the sensitivity. So again, I, I gave betas because I knew, uh, you know, that that's a, fairly hot topic right now, but we also always try to guide people toward the net interest income and margin expansion because you know, the beta is not the single determinant for us of what profitability is going to be. It's really that asset sensitivity, the investment portfolio opportunities we have with the amount of cash that we have yet to deploy. So we look at all those factors and we think that that gives us confidence that, you know, we're three to four percent, you know, annual pickup in earnings for every 50 basis points. And we think that's consistent for you know, what I'll say is a foreseeable future until we, you know, speak again and, you know, have a couple more quarters under our belt.
spk05: Gotcha. No, that's helpful, Ken. I appreciate it. And just your comments about, you know, I guess maybe just, I don't know, I don't know for, you know, I guess who takes it, but just for Scott, just kind of the loan growth, you know, all the hires you guys kind of outlined here, maybe just talk about does that change, does that just kind of support your existing position growth outlook um is that and to your point keen i guess it doesn't sound like it sounds like it's from the efficiency standpoint um you're going to get the benefits so the efficiency ratio shouldn't see that much much change as a result of you know kind of the uh the talent you've added here brian's jim let me let me tackle that one i would tell you that the expectation given where we're making the investments in the entire growth markets will take us from talking about being
spk08: you know, mid to high singles to high singles to low doubles in terms of run rate growth, right? So you think about quarters further into 22, that would be our expectation.
spk05: Okay, perfect. And that's helpful. And just on the efficiency side, it seems like there shouldn't be much change there. It's going to get paid for with the additional growth you expect to put on.
spk09: Yeah, look, Brian, I think, you know, if you go from 63 to 64, you're talking about $2 million of revenue. I think just day count alone is going to give you that expense coverage back and then the 25 basis point hike that we already have that you didn't really see any through the P&L in the first quarter but is fully impacting the second quarter and a midstream hike here. Continued earning on the growth for the first quarter. I do think that efficiency generally improves from here but that doesn't mean it doesn't get a little bit lumpy or bouncy from, you know, first to second or third quarter with some of the tax credit trends that I talked about. But generally, I think your point is right. You know, from our perspective, low-rate environment, we've performed well, but this balance sheet's ready to move up, and we're happy for that, and that'll drive some, you know, optical gains in core efficiency ratio.
spk05: Yeah, gotcha. Okay, that's it for me. I appreciate you taking the questions, and congrats on the next quarter.
spk06: Thanks, Brian. We appreciate it.
spk01: And we'll take our next question from Daniel Cardenas with Benning and Scattergood.
spk04: Good morning, gentlemen. Good morning, Daniel. Just a couple quick questions here. What's the duration on the securities portfolio? And then as we think about growth, in the securities portfolio, is that going to be primarily in the health and maturity portfolio or the available for sale portfolio?
spk09: Hey, Dan, this is Keen. The portfolio is extended a little bit, and so it's actually pretty long. We've been heavily investing in munis over the last year, year and a half, so the duration is north of six years, but we did put the bulk of those securities in health and maturity. the duration on AFS is, you know, five and under, and based on what we're buying today and the complexion of what we're buying today, we're working on shortening that, uh, that duration back on the portfolio. But again, I think optically it sounds long, but the loan portfolio duration is under three years. Um, you know, as we sit here, so it's, it's, you know, an asset class decision with the munis, um, as well as an overall balance sheet, uh, discussion there in terms of the portfolio. And then please remind me what the second part of your question was.
spk04: Just in terms of kind of future expansion of the securities portfolio, is that going to be primarily done in the held to maturity or the available for sale portion?
spk09: I would say that the composition is going to continue to be about the same. We'll put municipal purchases probably generally in held to maturity as we make them. And that's about a third or less of the portfolio from a new purchase perspective. And then agency, you know, bullets and mortgage backs will go available for sale for obvious reasons. And that will be, you know, around two-thirds or more of purchases. So I think, you know, that's generally what we expect. And we expect that will help drive down some of the duration of AFS. in particular, and the portfolio overall with the short end of the curve coming up and being more cooperative in terms of reinvestment rates. Okay, good.
spk04: All right, got it. Thanks. And then just one quick question on the credit quality front. Your metrics are very strong, but just kind of given the backdrop of raising rates and inflationary pressures, are there any portions of your loan portfolio that cause you concern, you know, maybe two or three rate hikes from now? Dan, this is Scott. I can kind of address that. You know, I think we've been sensitizing our analysis on our deals on rates, certainly, as a general practice for a while now, originations, renewals, trying to incorporate that into our underwriting and our structures. I would say, you know, looking at the portfolio on the CNI side, the impact of higher prices, the scarcity maybe of some inventory and supply chain issues aren't really impacting CNI other than, you know, obviously access to credit or need for credit. But generally there's strong demand in these businesses and they've been able to pass along the rising costs so far or kind of lean into the liquidity they have. But I would say we've got a particular eye on a consumer discretionary Those are probably going to see impacts earlier, travel, leisure, luxury. Ag is another business that we're in. We've been able to see them pass along. I think the increased input costs right now, commodity prices are keeping up, but will they be able to maintain that pace? I think that's a question, and we're watching that. And then I think on the specialty side, you know, life insurance premium finance may slow a bit as rates rise if cash value, the policies don't quite keep up. I think those are the ones that are probably on the forefront now. Okay, great.
spk06: All right, that's it for me. Thanks, guys. Good quarter.
spk01: There are no further questions at this time. I'll turn the call back for any additional or closing remarks.
spk08: Thank you, Christina. That's really it for us today. I want to thank you for joining us this morning. Thanks for the great questions and your interest in our company and wish you the best for the remainder of this week and the remainder of the quarter. So we'll talk to you later. Thanks.
spk01: That concludes today's call. Thank you for your participation. You may now disconnect.
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