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spk08: Good morning. My name is Rex, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enterprise Financial Services Corp Q2 earnings conference call. All lines have been placed on mute 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, again, press star one. Thank you. At this time, I would like to turn the conference over to Jim O'Lally, President and CEO. You may begin your conference.
spk06: Welcome everyone to our second 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 Officer 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 of the second quarter. We're very pleased with the results of the second quarter. Our cadence of consistency that we spoke of in previous quarters has continued. Our highly consultative relationship approach works well in times of uncertainty as clients and prospects seek advice and guidance. Our client base is in the best financial shape that we've seen in a very long time and are seeking opportunities to grow their businesses. Yet the economic tea leaves suggest that we may have a slowdown on the horizon while the interest rate environment creates additional challenges for our clients. I am confident that the consistency of our model has and will continue to positively impact our results. Over the last five years, we have focused on diversifying our revenue through geographic and business expansion. We've improved our funding by way of M&A, and we have bolstered our balance sheet and capital position with a strong reserve and well-executed capital management. The bottom line is that we have built the company for times just like this and are excited to share with you our results. For the quarter, EFSC earned $1.19 per diluted share. Our second quarter performance reflects the power of all our lending businesses combined with the revamped deposit composition that we have assimilated starting with Trinity and most recently with First Choice. Loan balance has expanded at a 13% annualized rate with contributions from nearly every business line in geography. Given the variable rate nature of many of those lending segments of earnings power through existing and new loan production bolstered net interest income and outstripped declines from success in PPP, as well as seasonal trends and non-interest income. Net interest margin income and operating revenue all expanded substantially from the first to the second quarter. Deposit levels remained above $11 billion at June 30th, and the shift during the quarter reflects our approach to focus on supporting customer relationships rather than transactions. Our actions to exit highly rate-sensitive balances speaks to our confidence and our ability to continue to grow our relationship-driven deposit base in our core and specialty deposit businesses. At quarter end, our loan-to-deposit ratio is 84%, with DDA representing 43% of total deposits. In addition to our success in expanding customer relationships and growing loan outstandings, Treasury management and our commercial card businesses remain strong and poised for continued growth during the year. Additionally, we expect the tax credit business will rebound in the third and fourth quarters based on the high project volume and activity. These underlying business trends are reflected in the expansion of our free provision net revenue, which grew at an annualized 10% rate to $58.4 million for the quarter. Our return profile to remain strong ROAA and PPNR ROAA were 1.34% and 1.73% respectively. These are right in line with the levels that we achieved in the previous two quarters, but we believe our current performance is more reflective of a repeatable run rate. Our integration of our Southern California market has positively impacted our financial performance since we acquired FCB, but now we are beginning to see the returns from the influence of our sales model and supplemental talent ads. Acquisitions of new clients and the ability to grow with the clients we inherited has positively impacted loan growth in this market during the quarter. With the combination of ongoing industry growth in Southern California, the momentum that we have across all of our markets and national specialty businesses gives me confidence in our ability to maintain this level of performance for the remainder of this year and into 2023. Additionally, we have begun to see the momentum in some of our newer markets, like Texas and Nevada, as well as practice finance. I expect we will have success over time, attracting talent and further scaling these businesses in the years to come. Our consultative model shines during uncertain economic times, where we remain consistent and build the flings of long-term relationships that span decades. Additionally, I also believe that we will continue to benefit from disruption created by market consolidation in several of our markets. Our approach to lending and asset quality has not changed, and it remains uncompromised to achieve the growth we experience. We remain vigilant around credit, but we are prudently reserved with our allowance for credit losses to total loans at June 30th, virtually unchanged from the previous quarter at 1.52%. That being said, we've been consistent in our view of the economy, as seen by our hesitancy to release more of our reserves than we have. Our teams are working hard reviewing portfolios and performing special loan reviews, but to date we've seen no signs of weakness. Our capital position remains strong. At June 30th, TCE to total assets expanded to 7.8%, while we returned 24 million to common shareholders through a blend of share repurchases and increased common stock dividends. We also announced another increase in our third quarter dividend to 23 cents per common share, reflecting both our commitment to shareholder returns as well as our confidence in further expanding our earnings profile. The second quarter of 2022 represents the third full quarter since the acquisition of First Choice Bank. Over this time, we've established a predictable pattern of performance that is characterized by a strong return profile on both assets and TCE, strong organic diversified loan growth, a DDA percentage to total deposits greater than 40%, pristine asset quality, flexible capital management, and steadfast expense controls. Despite this level of performance, we know that there's still room for improvement. With that in mind, our focus for the remainder of the year can be found on slide four. You can see we've accomplished a few of the goals that we set for ourselves at the end of 2021. For the remainder of the year, we will focus on the basics, guiding our clients through whatever economic climate that lies ahead, improving an already strong pipeline with solid new relationship opportunities. paying close attention to the trends related to our very attractive diversified deposit base, and continue to monitor the loan portfolio for any early indicators of weakness. With that, I would like to turn the call over to Scott Goodman, who will provide much more color on our businesses and markets. Scott?
spk03: Thank you, Jim. Good morning, everybody. Focusing first on the loan book, which is referenced on slide five, we posted strong performance in core loans, net of Triple P, growing by $298 million in the quarter or 13.4% annualized. And this compares with $176 million in the prior quarter. The loan details by segment are outlined on slide six and seven. On a trailing 12-month basis, backing out the addition of the first choice portfolio and the impact of Triple P From an organic standpoint, we've grown by 733 million, or 10.7%. And as Jim mentioned, we're seeing contributions from nearly all markets and business units, providing a nice level of balance and diversity in our sources of growth. For the quarter, we experienced solid C&I growth coming from our regional banking markets and specialties, with less impact from commercial real estate. Overall, the increase in CNI was a result of our continued success in bringing on new operating company relationships, as well as elevated usage on existing client facilities and revolving lines of credit. Average usage on revolving lines was up over 3% from the prior quarter. Commercial real estate originations were down modestly in the quarter. And while we do see existing construction loans continuing to fund, New deals have slowed as developers re-pencil their projects for higher rates and material costs. Fewer new commercial real estate closings also reflect our disciplined approach as we hold the consistent underwriting and pricing guidelines in a shifting rate environment. As we've discussed in prior calls, we employ a spread-based pricing philosophy for the term fixed rate portion of our business. We believe this provides a more easily managed and transparent approach for our banking teams and clients, as well as a more consistent profitability profile for our company. With rates rising and competitive pressures at times pushing spread below our thresholds, we've recently walked away from some deals. Turning to our specialty lending segments, SBA, life insurance premium, and tax credits all continue to perform well in the quarter. In the SBA business, I spoke last quarter about some competitive pressures in this space from non-SBA lenders on the existing book and our plans to proactively incorporate retention strategies. In Q2, we were successful in slowing early payoffs while also increasing new originations to post net growth of $34 million. We also continue to recruit new originators, particularly in our higher economic growth markets. The life insurance premium finance team has successfully developed several new referral partner relationships in 2022 due to introductions from our existing client base, as well as our entrance into the California market. Outsized growth of $52 million in what is typically a slower time of year for this vertical is a result of originations from these newer partners, as well as continued fundings from the commitment base of the existing book. Fundings in the tax credit portfolio reflect a consistent pipeline of new affordable housing projects and steady draws on the existing projects within this portfolio. These specialties in particular have historically shown their steady performance and resilience in the face of shifting economic pressures, and we expect this to be the case moving forward. Sponsor Finance posted software growth this quarter but it's up 183 million or 39% year over year. While this can be a slower time of the year seasonally for this business, it also reflects a slight pause by many of our sponsor partners who revisited acquisition pipelines in the light of rising rates, continued supply chain and other economic impacts. We also saw some additional pay downs due to the normal churn from the sale of portfolio companies in the quarter. As we head into Q3 and Q4, sponsors seem to have restarted their processes and the origination pipeline opportunities are starting to refill. Moving to the business units profiled on slide eight, the 152 million or 20% annualized increase in specialty lending reflects my prior comments on these niche segments. Additionally, The professional practice finance team, which was added late in 2021, is off to a strong start, adding $29 million of growth in this quarter and $48 million year-to-date. St. Louis carries the largest C&I portfolio of our geographic markets and benefited from some higher usage on revolving lines of credit, as well as elevated borrowing activity from existing clients in the private investment, tax credit, and packaging spaces. New business activity was also up with double digit increase in new originations from last quarter and several new relationships added. Kansas City shows continued steady growth up nearly 50 million or 6.3% year over year and 8.9% annualized growth for the quarter. This market has a relatively balanced portfolio and also benefited from improved borrowing from CNI clients. New originations included refinancings of several commercial real estate developments and new project and M&A-based financing to expand existing C&I relationships. The Southwest region, which includes Arizona and Las Vegas, posted strong results again this quarter, adding $43 million of growth in Q2, resulting in a 37% increase in the loan portfolio year over year. As we've developed strong relationships with top-tier real estate companies in Arizona over the past 15 years, the economic growth and expansion in Arizona continues to provide opportunities to assist these relationship-based clients with solid acquisition, development, and refinancing. The quarter included several new deals as well as funding on existing construction lines. Last quarter, I discussed the change in leadership for the Albuquerque team within New Mexico, which represents the predominant share of loan outstandings for the market. That's part of a plan to address the declining loan balances there. As this change takes hold the remainder of the year, I expect to see improved trends and ultimately growth in this portfolio. In the meantime, New Mexico, which in addition to Albuquerque also includes the sub markets of Los Alamos and San Jose, remains an important and growing base of well-diversified and low-cost deposits. In Southern California for Q2, I'm pleased to report that our loan portfolio here grew by $29 million in the quarter and represents a third consecutive quarter of positive momentum in net loans resulting from both higher originations and lower payoffs compared to the previous quarter. The improvements come as we continue to see competitive pressures on the real estate heavy book, particularly in the area of high-end residential remodel and fix and flip. However, we are intentionally emphasizing a strategy to deepen relationships with clients that are balanced and mutually beneficial, while also adding new relationships with C&I operating companies through the addition of new talent to our platform. We're already seeing traction on these goals, financing over 70 million in new projects with existing clients, and adding new C&I relationships in metal fabrication and healthcare spaces during the quarter. The new team in North Texas, now composed of three experienced local bankers, is onboarding smoothly and quickly developing a qualified pipeline of new opportunities. I would expect to see these begin to transition to closings during the next quarter. Lastly, I'll touch briefly on deposits, which are beginning to elevate within our client conversations with the recent rate increases. The decline in total deposits within the quarter of $611 million was largely the result of managed decisions relating to a handful of rate-sensitive, interest-bearing specialty deposit accounts. You'll see this evidenced on slide number nine within the third-party escrow portion of the chart. Q2 also typically sees a seasonal rundown of deposits in the commercial book, which also impacted balances to a lesser degree. All in all, the diversification of our deposit book by geographic market and the continued growth in lower cost specialty deposits provides confidence in our ability to walk away from these larger concentrations of higher cost, more transactional balances. Activity for the quarter shows that new account openings continue to outpace closed accounts. and at an average rate below our peer group. The focus on new relationships also is helping drive deposits, with new depository relationship balances for the quarter exceeding balances in closed accounts by nearly three to one. Now I'd like to turn the call over to Keane Turner for his comments on the quarter. Keane.
spk10: Thanks, Scott, and good morning, everybody. Turning to slide 10, we reported earnings per share of $1.19 on net income of $45 million in the second quarter compared to $1.23 in the first quarter. Operating revenue increased in the linked quarter driven by strong organic loan growth and expanded net interest margin, which more than offset the decline in PPP and non-interest income in the quarter. We continue to show strong credit metrics in all areas, but loan growth and changes to the economic forecast resulted in a provision expense compared to a provision benefit in the first quarter. Non-interest expense increased on a linked quarter basis due to higher compensation and, namely, deposit service charges costs. This was in line with our expectations and the guidance I provided last quarter. And finally, our earnings per share benefited from a lower share count due to repurchases in both the first and second quarters. During the slide 11, net interest income was $110 million compared to $101 million in the first quarter, and an increase of $9 million, which was favorably impacted by higher average loan and investment balances, along with the benefit of rising interest rates driving net interest margin higher. The increase in net interest income was primarily driven by a $6 million increase in loan income, despite a $1.3 million reduction in PPP income. With the current composition of our balance sheet as of June 30th, another 75 basis point increase in interest rates will result in an additional $6 to $7 million in quarterly net interest income. This is in addition to the full impact of the existing interest rate increases, which will also add another $3.5 to $4 million to quarterly net interest income. As noted in the earnings release, approximately 20% of the variable rate loan portfolio reprices on the first day of each quarter and did not benefit from the second quarter interest rate increases. Moving on to slide 12, net interest margin on a taxable and basis was 3.55%, an increase of 27 basis points in the linked quarter. Our asset-sensitive balance sheet benefited from an increase in interest rates. As a result, asset yields improved 31 basis points, which included 17 basis points of loan yield improvement, and the investment yield improved 20 basis points. Additionally, the increase in the Fed funds rate led to improved earnings on our interest-bearing cash balances. Net interest margin was also aided by an enhanced asset mix as we continue to fund growth in loans and the investment portfolio while reducing excess cash. The cost of interest-bearing liabilities increased seven basis points from the prior period, driven mainly by variable rate borrowing, as our cost of deposits increased only three basis points. The loan portfolio is our largest driver of asset sensitivity, as 64% of loans are variable rate. Nearly 60% of those have interest rate floors, and approximately 90% of those with floors are currently priced at or above the floor. Nearly all of the remaining loans with floors are within 50 basis points of the floor. We ended the quarter with nearly $1 billion of cash on the balance sheet, which affords us the opportunity for favorable asset remixing in upcoming quarters. 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. Our interest-bearing deposit beta during the last rate cycle was 32%. 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 that cycle. Moving on to slide 13, it reflects our credit trends. We continue to have strong asset quality metrics and have not observed any weakness in our loan portfolio segments. We had a net recovery of one basis point during the quarter and our non-performing assets declined $2.1 million or 9% from the first quarter. Non-performing assets are only 16 basis points of total assets and non-performing loans are only 21 basis points of total loans. Now let's look at the allowance on slide 14. Loan growth and deterioration in the economic factors used in our CECL model resulted in provision expense of approximately $1 million in the quarter. This reverses the trend of reserve releases that we have had over the last four quarters, excluding acquisition. The allowance for credit losses increased to $141 million from $139 million at the end of March and represents 1.52% of total loans. When adjusting for government-guaranteed loans, The allowance to total loans was 1.69% at June 30th. While there have been no signs of credit stress that indicate a trend within our customer base, we continue to believe that the potential risks to the economy warrant the current level of our allowance coverage. Excuse me. On slide 15, fee income for the second quarter was $14.2 million. This was a decline of $4.4 million compared to the first quarter results. The decline was led primarily by reduced fees from community development investments, reduced tax credit income, and that was consistent with our expectations, as well as lower swap revenue as activity levels were not as strong during the second quarter. Deposit service charges and card services revenue increased in the second quarter compared to the first quarter as volumes expanded in these areas. While tax credit income will continue to be seasonal, our momentum in this business line continues. Turning to slide 16, second quarter non-interest expense was $65.4 million compared to $62.8 million in the first quarter, a $2.6 million increase. The driver of this increase was primarily a $1.6 million increase in deposit servicing expenses and $0.8 million increase in loan-related and legal due to growth. Compensation and benefits increased $200,000 in the quarter, principally from new hiring and a full quarter of merit increases and an increase in performance-based incentive accruals, which were partially offset by seasonally higher payroll taxes and 401k match for the first quarter. The second quarter's efficiency ratio was 52.8%, and expenses for 2022 have performed as expected with our revisions for the revised interest rate environment. Additionally, stronger-than-plan momentum in the specially deposit areas, as well as forecasted interest rate trends, has and will drive related servicing expenses. As a result of higher-than-planned Fed funds increases, it appears the current quarterly run rate will step up in the next two quarters from roughly $65 million to $67 million to possibly $69 million for the remaining two quarters of 2022. To reiterate, these trends will obviously be more than offset by net interest margin trends, but more importantly, we think these investments in continued growth will allow for stronger revenue growth longer term. On slide 17, we display our capital metrics, and the rise in interest rates continued to impact the market value of available for sale investments, which impacted accumulated other comprehensive income by $49 million in the period. Despite that, we expanded tangible common equity to 7.8% with our strong earnings and mitigated the negative impact on tangible book value per share to 1.6%. Our strong capital position gives us flexibility to actively manage our balance sheets. During the quarter, we utilized our capital to redeploy excess cash to the loan and investment portfolios, helping drive our capital ratios closer to our optimal targets. As Jim noted, we also returned nearly $25 million to shareholders. We carried the momentum from the first three months of the year into this quarter, and we continue to grow customer relationships while maintaining a focus on pricing both sides of the balance sheet in order to drive shareholder value. We began to see the acceleration of our operating revenue due to growth trends and a balance sheet that's well positioned to benefit from rising interest rates. For the quarter, we delivered a 17% return on average tangible common equity through a combination of strong earnings and continued capital optimization. We also believe that with the strength of our earnings, capital, liquidity, and allowance coverage, we are well prepared to address any potential economic challenges that may arise. Thanks for joining the call today, and we're going to now open the line for analyst questions.
spk08: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad.
spk04: We'll pause for just a moment for the Q&A roster. Your first question comes from the line of Jeffrey Rulis.
spk08: Jeffrey, your line is open.
spk07: Thanks. Good morning. Good morning. Just a question on the fee income components in terms of, well, the community development, pretty volatile. Is there any way to sort of model that in a more consistent manner? Any idea there?
spk09: Jeff, the answer is not really.
spk10: I think the comparison to the first quarter was pretty tough because it was so robust. I do think that there'll be some level of income here in the next couple of quarters and we'll get some rebound, but we sort of had the kind of worst kind of comparison where we had strong you know community development and swap and uh tax credit revenue in the first quarter and then they they all kind of went away here in the second so um i i i think that we expect some level of that in in the third and the fourth quarter um but it it probably isn't as substantial as the the amount was in the first quarter in each individual quarter so i hope hopefully that provides a little bit of help but you know kind of Two million dollars maybe in total. And, you know, depending on how you model it, kind of one per or two in the fourth is the way I think about it.
spk07: Gotcha. And then just the Durbin hit. Can we model that at about a million, a quarter run rate?
spk10: Yeah, it's about a million. That gets you to where you need to be, I think, and, you know, that's in line with where we were previously. I think, you know, for better or for worse, we've grown that interchange a little bit since, you know, preparing to cross $10 billion, and so we'll lose just a midge more, but a million should cover it.
spk07: Okay, thanks. And, Scott, one other one. Just on the the deposit management, um, you know, sounds like, you know, focusing on, on kind of core depositors, you get the sense that this was sort of the lion's share of, of that, the rate chasers or hot money that kind of flushed out or, or could we see more balances, um, kind of come out of that, uh, from that group?
spk03: Yeah, Jeff, I, you know, if you look at the 600 million decline, I think it's a handful of accounts, I'd say six maybe, um three of those were the lion's share of that more interest rate sensitive specialty and and i would say those aren't lost relationships either you know there are some specialty clients that are a little more interest rate sensitive than others and i think with this this one in particular um that was in the top 10 at the time i think they were our largest third party escrow balance We kind of went in eyes open on this, knowing that it was a little bit more interest rate sensitive, but knowing we could have some flexibility to walk away if we needed to. Not typically that concentrated. I think there's only one other third-party escrow account in our top 10 and maybe two in our top 50. So I think that was a little bit of an anomaly. And then, you know, I commented on this, but we do typically see kind of net outflows from existing clients. commercial clients this time of year anyway for bonuses and distributions and personal taxes. So, no, I don't think you're going to see any single depositor of this level that would move going forward.
spk04: Okay. Thank you. Your next question comes from the line of Andrew Leisch.
spk08: Your line is open.
spk05: Hey, thanks, guys. You know, you've actually covered a lot of my questions that I've had, but just curious on the buyback, what are the thoughts around that and tapping the new authorization?
spk09: Hey, Andrew, this is Keen.
spk10: What I'll say is, you know, we completed the prior authorization for the new one, and then I think you saw it kind of sit tight. Here on the 2M, I think the continued pressure in AOCI, I think we just don't want to get caught behind that too far if longer-term rates continue to move up. So I think what you'll see is TCE will be a little bit of the guide there, and the good news is we're getting really good you know, loan growth and I'm optimistic that in the coming quarters we'll get some deposit expansion here and overall balance sheet growth, particularly as we hit, you know, late in the third and fourth quarter where we typically see some strength. So I think you'll see us be patient there and we'll probably use TCE as a guide. I, you know, I think we've been pretty articulate on this point. We don't, we don't love, or I don't love TCE below 8%. We're okay with it where it is given cash balances and, strong earnings profile, but I think you're going to see us let it rebuild somewhat in the upcoming quarters and weeks. We may decide to be opportunistic if we continue to get an unfavorable tape, but I don't think the dollar amount of anything we would do there would be substantial because over the last year, we did repurchase 2 million shares, and we think we did so favorably and opportunistically, but most of the pieces of the capital stack are kind of right at the optimal targets for right now, and I think we just need to be mindful of potential impacts on AOCI moving forward.
spk05: Gotcha. Yeah, like I said, you've covered all my other questions, so thanks for taking that one.
spk04: I'll step back. Thanks, Andrew. Again, if you would like to ask a question, press the number one on your telephone keypad. Your next question comes from Brian Martin. Your line is open.
spk02: Hey, good morning, guys. Sorry I joined late. So, Keen, if you've covered some of this, maybe just let me know and I'll go back and listen. Just kind of wanted to get your thoughts regarding... kind of, you know, margin and repricing and just kind of how we think about that and, you know, kind of the deposit data. So if you've covered that, I'm happy to go back and listen. Or if you provide a little insight on that, that'd be helpful.
spk10: Yeah, I'll give you – I'm not going to give you margin. I'm going to give you – Fed funds moves and what we think it happens in annualized run. So, you know, I think, you know, 75 basis points moving forward would equate to, you know, roughly 5% on the current, you know, run rate of net interest income. So that's, you know, a little bit north of $20 million. And, you know, our, our modeling, we're using just under a 50% beta, which is, is a little bit more conservative than what we experienced before. And I think in my comments, we indicated that we expected with the composition of the deposits, the beta to be better. And I think you can see that just based on the outflows we had in the quarter, And our posture there, you know, our behavior has has changed as well to a degree. And we let some of those more sensitive accounts that existed previously go. And then also we we let the DDA specialty DDA go that you'd say, well, how is that rate sensitive? But it was it was on an earnings credit or a. deposit, you know, rebate program that's consistent with that industry. So, and then, Brian, the other comment I did make is that, you know, just sitting here today, we're going to get roughly another $3.5 to $4 million of the NII boost in the third quarter because the SBA portfolio reprices the first day of each period. So, that'll be a benefit even if nothing happens here in July, which, you know, I think something's going to happen. But also just be mindful of that as you're looking to how the 75 basis points impact, you know, third and third quarter is there'll be a delay on that SBA portfolio. And then maybe just a little bit of additional color. Most of the loans here with this next rate increase, if it's 50, 75, or 100, regardless, we'll be off of the floors. And so even with the slightly reduced cash balance, we still feel good about net interest income dollars growth with future increases. You will see deposits costs lag just slightly up here in the quarter, but the dollars of growth reflect all that. So I think we feel really, really bullish about both growth and the overall loans, deposits, and and securities books and we're getting good origination yields there and new originations are are boosting uh yields across the board there so again i think we we feel like we're well positioned so hopefully that's some color that's helpful to you yeah no it is and just the your i guess you said this came that the the loans that have floors
spk02: I mean, they're effectively, we'll all be through, you know, in this next hike or the, you know, the one we just had in June are all the loans through their floors. You guys are what about 60% variable rates are all those moving now or just not, they will be on the next hike. Is that what you said?
spk09: Yeah.
spk10: And I think, um, What I was trying to make sure of is that this July hike, if it's at least 50 basis points, you won't have to think about floors anymore. Yeah, and so I think that number is roughly 350 to 400 million are still on a floor that's kind of caught 50 bps or more. And those will be lifted off here with another increase as long as it is in line with, I think, general expectations.
spk02: Gotcha. Okay. Perfect. That's all I wanted to cover. So I appreciate you taking the question, Keane.
spk01: Great. Thanks, Brian.
spk08: Next question comes from the line of Damon Del Monte. Your line is open.
spk11: Hey, good morning, guys. Similar to Brian, I was bouncing between calls as well. So I did catch a little bit, Keane, of your commentary about expenses and kind of the forward look there. Could you just kind of repeat what you had said on that?
spk10: Yeah, I think, you know, we're running right now at about $65 million a quarter. I think we think that that's going to step up pretty meaningfully. And it's really driven by, you know, the servicing expenses on the specialized deposit. So we think that, you know, stepping up in the third and into the fourth quarter that you're going to be somewhere about $67 to $69 million, which is just slightly higher than what we had indicated last quarter. And the reason is that I think, you know, we got, you know, a little bit higher rate hike here in June, which is driving a little bit more on the ECR side. And so, you know, with another July increase that's you know going to be you know probably 75 to 100 basis points i think we need to kind of push that quarterly run rate up because it does have a an impact on the what we call this servicing expense related to those those items got it okay that's helpful um and then you know with regards to the the provision going forward um you know if you continued strong loan growth opportunities for you guys how do you think about provision over the back half of the year yeah so
spk09: It's a really tough question to answer, I think.
spk10: I'll say a couple of things. First and foremost, we didn't reduce from the 2020 build as much as maybe others had in the industry and really worked hard to hold that reserve in there. And we believed there was some uncertainty. We just didn't know where it was. With the Moody's forecast continuing to reflect some of those factors, we've moved some of the things that were previously qualitative into that forecast, but we still have about $40 million of qualitative. And I think the challenge or the confusing part here is that we've got such outstanding credit quality that it's hard to justify building additional allowances. you know, based on those factors and, you know, the forecast continues to move around. And I think we have a lot of clamoring, but really no signs per se that that credit is going to get worse. So my view would be that at least for the next quarter, And, you know, maybe even into the fourth quarter, unless we get a lot of additional clarity, we have the opportunity to let coverage maybe slide down just slightly for a combination of a worsening forecast, but still really strong credit and asset quality. And if we get any other indicators that are different, then that might cause us to build, you know, the allowance more aggressively. But I wouldn't think we would bring it down or have any negatives moving forward, barring some substantial decline or some material recoveries that affect the allowance itself. So hopefully that's clear. And if not, please just push back with another question.
spk11: No, that's, it wasn't an easy question to answer. So I appreciate the color and the commentary around that. Okay, that's all that I had, guys. Thank you very much. I appreciate it.
spk01: Thanks, Damon.
spk04: Again, if you would like to ask a question, press star then the number one on your telephone keypad. There are no further questions at this time.
spk08: Mr. Lawley, I turn the call back over to you.
spk06: Rex, thank you. And thank you to all of you for joining us today and for your interest in our company. And we look forward to speaking to you again at the end of the next quarter. Take care.
spk08: This concludes today's conference call.
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