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spk02: Good morning. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Enterprise Financial Services Corp Q1 2023 Earnings Conference Call. Today's conference is being recorded. 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'd like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad. If you'd like to withdraw your question, press star 1 once again. Thank you, Jim Lally, President and CEO. You may begin your conference.
spk04: Well, thank you, David, and thank you all very much for joining us this morning, and welcome to our 2023 First Quarter Earnings Call. Joining me this morning is Keen Turner, EFSC's Chief Financial and Chief Operating Officer, and Scott Goodman, President of Enterprise Bank & 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 10K and 10Q for reasons why actual results may vary from any forward-looking statements that we make today. Our company entered 2023 with a great deal of momentum. Loan pipelines were good. Our newer markets and businesses were contributing as expected. Credit was in great shape, and clients were doing very well. Along the way, the industry disruption experienced in early March tested our relationship model and the results from our first quarter, in particular, how we ended the quarter with respect to deposit growth, liquidity, cost of deposits, borrowing capacity, and capital ratios show that we passed this test with flying colors. During our fourth quarter call, I spoke about the relationship aspect of our depository businesses. We knew that 2023 would be a year that would require us to find the appropriate balance between retaining and growing the space while being mindful of competition and rising rates. What we did not know is that this would be put to the test in a matter of days and weeks in early March. I was impressed but certainly not surprised by two things. First, our team's commitment and ability to reach out to our clients to explain what was happening and to reinforce our strength and differentiation versus those who were experiencing issues. And secondly, the incredible confidence that our client base had in our company. Since then, we have been working with these clients to remix their deposits, seeking the appropriate balance between yield and safety. using all products and resources available to them. Scott and Keene will provide much more details on this in their comments. The financial highlights for the first quarter can be found on slide three. While we can't entirely control how events impact us, I do like our position. We start from a position of strength, both from an earnings and balance sheet perspective. First, net income was $56 million, or $1.46 per diluted share for the quarter. and we produced a return on assets of 1.72% and return on tangible common equity of 20%. Our profitability is supported and aided by our short-duration asset-sensitive balance sheet that is a result of the execution of our business model. Despite intense deposit competition and pressure in the first quarter, we were able to expand our net interest margin by five basis points to 4.71%. And with two fewer days in the first quarter, net interest income grew to $139 million. While deposit remixing and repricing the quarter was intense, our total cost of deposits for the month of March was just over 1%. This again reflects the strength and position of our balance sheet and my confidence in our ability to continue to generate superior asset yields and growth to mitigate pricing pressure on funding and deposits. Earnings combined with our strong asset position in addition to a well-managed investment portfolio resulted in the tangible common equity to tangible assets ratio expanding during the quarter to 8.81%. Additionally, our earnings helped to contribute to just under $2 per share to our tangible book value during the first quarter, which closed at $30.55. Turning to slide four, you can see that our loan growth remained strong during the quarter as it increased $275 million. This represented an annualized growth rate of 11%, and like in previous quarters, this growth emanated from just about all of our businesses and regions with a focus on quality and a full relationship. We were able to fund this growth with our deposit growth as this grew by $325 million during the quarter, and included the use of brokered CDs. At quarter end, our loan-to-deposit ratio stood at 90%, and due to the aforementioned remixing of our deposits, DDA percentage of deposits to total reduced to 38%. We recognize that the ability to fund our expected loan growth with core deposits will be our greatest challenge for the remainder of the year. We are seeing all the great work we have done over the past several years diversifying our deposit base and geographies paying off. We are prepared to defend our deposit base and know that deposit costs will continue to rise. However, our CNI focused variable rate weighted loan portfolio should provide a good buffer to defend our NIM. Credit quality remained pristine with continued low charge off activity and low level of non-performing assets and a healthy allowance level. Slide five shows where we will be focused for the remainder of the year. I would expect that the momentum with which we enter the year will continue for the foreseeable future. Those of you who know us well know that we typically perform extremely well when there's a bit of uncertainty. We grew well coming out of the Great Recession. We acquired two companies during the COVID pandemic, and I'm confident that we will do what it takes to defend well what we have while having an eye towards taking advantage of what our markets will give us to acquire new clients, new teams, and possibly new businesses. With that, I would like to turn the call to Scott Goodman, who will provide much more details about our markets and our businesses.
spk07: Scott? Thank you, Jim, and good morning, everybody. Pew 1 was a quarter defined by follow-through on a steady and well-balanced loan pipeline. and active outreach to our client base for consultation, defense, and exploration of new opportunities around deposit relationships. While the events of March certainly ramped up the volume of client touches, in many ways this activity was not a departure from the advisory-based approach and consultative sale processes that we have traditionally driven our business model through the years. In that regard, our ability to deploy specific event-driven talking points, content, and product sets into our existing marketing, CRM, and sales management systems resulted in rapid, transparent, and productive client engagement. I'm very proud of how our client-facing and operational teams across the company responded to these circumstances, put our clients at ease, and have created many new opportunities as a result. Turning to loans, summarized on slides six through eight, Growth in the quarter was $275 million or 11.4% annualized and 12.2% year-over-year net of Triple P. Over the past year, we've experienced growth across all major categories of the business as we continue to prioritize the diversification of our production and the resulting loan portfolios. For Q1, broken out on slide eight, seasonally typical levels of origination were complemented by slightly lower payoff activity and a modest increase in revolving line usage to produce these results. Growth in CNI reflects success in onboarding new regional commercial banking relationships, as well as the aforementioned uptick in revolving line usage. Growth in commercial real estate and construction development are reflective of new asset acquisition and investment opportunities with larger existing relationships as well as draws on fixed lines representing progress on construction loans closed in prior quarters. In our specialty loan categories, sponsor finance posted solid growth of $43 million in Q1, as we saw a number of closings get pushed from a typically strong fiscal Q4 into the first quarter. Sponsors continue to deploy a strong base of capital in their existing funds, albeit with some patience and discipline around purchase multiples. Life insurance premium finance also experienced growth of $43 million in the quarter, with steady new originations and a typical seasonal uptick in advances for premiums paid on existing deals. Following strong growth in Q4, SBA was essentially flat for the quarter. Origination activity was consistent with typical Q1 levels. However, elevated payoff activity muted net growth. Competitive pressures from traditional banks and lower fixed rates have been a headwind to retention of existing loans. We are defending solid credit profile loans in this book with alternative rate structures, and we continue to execute well on the production side of the business. We also expect this channel to be well positioned to take advantage of any potential credit tightening or liquidity restraints that may affect the loan appetite from traditional bank lenders. Tax credits. posted a modest reduction in outstandings, reflecting pay down activity from the sale of tax credit inventory, which is typical of the first quarter in this business. There has also been some delay in the closings of new projects due to higher interest and construction costs as developers source additional funding. Overall, though, we expect originations to ramp back up and also anticipate activity from newer state affordable housing programs to add some additional new opportunities going forward. Regionally, we posted growth across our footprint as reflected on slide nine. The Southwest posted strong results, totaling 85 million of increased loans in the quarter. The region benefited from continued traction from our newest team in Texas as they onboarded new business, including several significant new relationships with food distribution, industrial storage, and medical service companies. Arizona also closed larger loans for new asset acquisitions with existing clients in the storage and hospitality industries. In the Midwest region, the Kansas City and St. Louis teams produced solid origination activity, including funding of a new industrial development with a large existing engineering client and acquisition of equipment with a new transportation company relationship. This region also benefited most from the elevated revolving line activity given the heavier CNI makeup of those portfolios. And in our West region of Southern California, the portfolio edged up modestly in the quarter, adding to annual growth year over year of 75 million or 4.7%. We began to gain traction in the second half of 2022 as we cultivate an expansion of strategy in this market, having added new CNI talent to the acquired base of commercial real estate originators in our LA and Orange County markets. Pay-off and pay-down activity is moderated from the levels experienced earlier last year, and the CNI pipeline activity has been building. We also successfully expanded some key legacy relationships in this portfolio during Q1, including new closings for hospitality, investor retail, and industrial clients. Turning to deposits, which are broken out for the last 12 months and a quarter on slides 10 and 11, I'll provide some high-level commentary and color around what we're seeing from clients, and then Keane will provide more detail on funding costs and category movements in his comments. Year over year, deposits are down $540 million, or 4.7%. The largest area of decline is non-interest-bearing accounts, with nearly two-thirds of that occurring during Q1 of 2023. Offsetting a material portion of this decline has been strong growth from our specialty deposit businesses, including 307 million of growth in Q1, as shown on slide 11. During the first quarter, we grew deposits overall by $326 million. Historically, Q1 has been a seasonally soft quarter for deposit growth in our company, with outflows from tax, dividend, and bonus payments. This year, net of brokered CDs, we grew overall customer deposits by $75 million. We did see significant remixing of balances, particularly during the month of March, spurred early on by the publicity of bank failures driving depositors towards perceived risk-free alternatives, and more lately, due to elevated focus on deposit rates. Consequently, declines in non-interest-bearing accounts have been shifted mostly to the categories of money market, interest bearing demand, and time deposits. Slide 12 shows the regional breakout of deposit portfolios. Net of broker deposits, which are reflected within the Midwest balances, core client balances in the geographic markets declined modestly during Q1. Aside from typical seasonal declines related to bonus and tax payments, We did see some consumer clients moving concentrated balances to larger banks, as well as larger commercial clients investing some excess balances in higher yielding accounts and U.S. Treasuries. In general, though, we are not losing core relationships, and we have been successful in using FDIC-insured options, such as ICS and CEDARS, to hold on to larger balance commercial accounts. We have also selectively structured a variety of pricing options to retain high-valued relationships. Our specialized deposit channels, which are broken out on slide 13, continue to perform well and are contributing strong growth in a turbulent market for deposits. These business lines comprised of community associations, property management, and third-party escrow accounts provide a steady source of new accounts with somewhat limited competition. Other specialty balances are inclusive of sponsor finance and declined in the quarter. A majority of the lost balances in this category, totaling roughly $30 million, were associated with companies that had been sold by our fund sponsor clients, but which had retained their accounts in enterprise. Generally, these tend to leave over time as the new ownership groups consolidate with their existing banking relationships. However, we saw this behavior accelerate in March due mainly to the fallout from the bank failures. Finally, we provided additional detail on our core funding mix and account activity for the quarter on slide 14. This data further supports both the diversity and the relationship anchored orientation of our funding base. Balances are spread across four main channels with 38% of total funding and non-interest bearing accounts. During Q1, Our sales process continued to generate positive results with net increases in new account balances versus closed accounts across all major channels. The net reduction in number of commercial and business banking accounts is primarily due to consolidation and account closures associated with the remixing of account types and the movement of some balances to treasuries and non-bank alternatives. There is also granularity to these portfolios, as you can see from the average account sizes. Our practice is to require the operating accounts for all CNI loan clients, and 80% of all commercial balances are tied to treasury management or online banking products, which adds traction to these relationship deposits. We've also seen a significant improvement in our insured deposits. We spent time confirming account titling and other similar attributes with clients during the latter part of March. This is most prolific in our specialized deposit areas as we view account titling as a competitive advantage in both HOA and property management. We ended the first quarter with approximately 70% of the deposit portfolio insured or collateralized. With that, now I'd like to turn the call over to Keane Turner for his comments. Keane?
spk05: Thanks, Scott, and good morning, everyone. I'm going to start with my typical comments on the quarterly financial results, and then I'll address the supplemental information that we provided. During the slide 15, we reported earnings per share of $1.46 in the first quarter on net income of $56 million. Our net interest margin expanded from the linked quarter, which combined with growth in earning assets, helped to modestly expand net interest income. Additionally, fee income was comparable to a seasonally strong fourth quarter, leading to modest expansion of operating revenue in the first quarter. The provision for credit losses was more significant for the first quarter, but not driven by adverse loan trends, and non-interest expense was seasonally higher in the current quarter. All things considered, we're pleased with the performance of net interest margin, loan growth, and funding. Our return profile thus far reflects a strong base on which to build the remainder of 2023. Turning to slide 16, net interest income for the quarter was $139.5 million compared to $138.8 million in the linked quarter, an increase of $0.7 million despite two fewer days. Net interest margin expanded five basis points in the first quarter to 4.71% on a tax-equivalent basis. The margin performance reflects the expected result from fourth and first quarter increases to the Fed funds rate combined with continued growth, albeit at a more modest rate than we had forecasted. More details follow on slide 17. Earning assets grew $194 million on average in the first quarter and yields increased 44 basis points compared to the link quarter. Investment balances were higher by $84 million on average, reflecting purchase activity in the prior quarter combined with an increase in the fair value of the available for sale portion of our portfolio. The yields improved 12 basis points over the fourth quarter due to the full quarter impact of the securities we purchased last quarter. We already elected to pause additional portfolio investment in the first quarter, and we subsequently halted reinvestment of the majority of cash flows during the recent market upheaval. Portfolio loans grew $275 million in the first quarter, and when combined with strong growth in December of 2022, were higher by $371 million on average compared to the prior period. The total loan yield improved by 46 basis points in the first quarter, which includes a five basis point negative impact from purchase accounting amortization and an additional one basis point reduction for received fixed swaps. New loans were booked at a yield of 6.53% in the first quarter. Interest-bearing liabilities increased $355 million on average, and the cost increased 65 basis points from the prior quarter. Average deposit balances declined $89 million in the quarter, including $282 million decrease in average non-interest-bearing balances. The decrease in non-interest-bearing accounts was driven by two distinct factors. First, a combination of customer deployment and rate focus early in the quarter resulted in modest net declines and remixing of balances into higher-rate money market and CB accounts. And second and most materially, a flight to safety late in the quarter resulted in balances moving into reciprocal accounts or to other institutions for diversification of risk. Of the $450 million decline in non-interest bearing balances during the quarter, approximately 350 million of that occurred in the last three weeks of March. Interest bearing checking and money market balances grew 90 million on average, but increased $445 million within the quarter. As noted, This was primarily a result of funds moving from non-interest-bearing accounts to higher-yielding products or into FDIC-insured reciprocal products. We also made the intentional decision to bring in additional balances, often at higher interest rates, to support balance sheet liquidity during the last few weeks of the quarter. These actions helped to defend against net reduction in balances that occurred as a result of industry stress late in the first quarter. Time deposits increased $145 million on average, including $71 million of brokered funds. Total brokered time deposits grew $251 million within the quarter as we elected to add term funding and avoid reliance on our borrowing lines. Brokered funding adds an element of stability to the overall funding base while we work through a combination of industry challenges and typical seasonality. FHLB advances were higher by $102 million on average as we utilized short-term debt as a bridge funding alternative during the quarter until brokered CDs and other deposit strategies could be completed. In total, the ending FHLB balance was unchanged from the end of the fourth quarter to the end of the first. Maybe noteworthy here is that we do expect to see FHLB as a part of the funding stack moving forward as it provides flexibility for certain of our specialized deposit categories. These categories collect balances early in the month and then deploy them after the first couple of weeks. Our cost of deposits increased during the quarter as we continue to experience some of the pricing lag we expected from last year. Additionally, a combination of competitive, economic, and industry-based factors pushed rates higher, and the change in our deposit mix caused additional increases in our deposit costs beyond what we'd anticipated. Our average cost of interest-bearing deposits increased 62 basis points from the prior period which equates to a 72% beta compared to the Fed Fund's effective rate. With that said, our cumulative interest-bearing deposit beta for this rate cycle stands at 32%, which is in line with our historical level and is only 18% for total deposits. With that said, we are pleased that the cost of deposits in the quarter was less than 1%, given where the Fed Fund's target is, and we are sitting here today with a total cost of deposits at an estimated 1.25%. With all that said, we see a path from first to second quarter to maintain a stable to slightly increasing level of net interest income, albeit that comes with some level of net interest margin compression. We believe that we will continue to see remixing and increased competition. However, the asset side of our balance sheet allows us to mostly absorb those costs. Assuming we can weather the repricing and remixing war in the second quarter, there is an opportunity for us to expand net interest income dollars thereafter. Slide 18 shows our credit trends. We experienced modest net recoveries in the first quarter, and the overall asset quality remains stable. Non-performing assets remain less than 10 basis points of total assets. We recorded a $4.2 million provision for credit losses during the first quarter that was primarily related to an investment in signature bank subordinated debt. Our total investment was $5 million and was equivalent to the largest individual portion of sub-debt or loan we would hold. Slide 19 presents the allowance for credit losses. The allowance for credit losses increased by $1.4 million in the quarter to cover loan growth. The allowance for credit losses represents 1.38% of total loans compared to 1.41% at the end of the year. When adjusting for government guarantees, the allowance to total loans was 1.53%. On slide 20, first quarter fee income of $17 million was stable with the fourth quarter although the composition of fee income did change slightly between certain categories. Overall, fee income remained at a consistent percentage of operating revenue in the first quarter. Turning to slide 21, first quarter non-interest expense was $81 million, an increase of $4 million compared to $77 million for the fourth quarter. Compensation and benefits was the main driver of this increase, primarily from seasonally higher payroll taxes and 401k match. Also, the run rate is a reflection of continued resource investment in the associate base, both in the form of net hiring activity as well as a partial period impact of merit increases. Deposit service expenses declined from the link quarter. We did expect this line item to expand sequentially, and we are pleased that it did not. However, it requires some further explanation. First is a reminder that the fourth quarter included the cumulative impact of the competitive decisions we made in that quarter of roughly $1 million to maintain certain client relationships. And second, we were accruing the line item to reflect that clients would be able to largely have expenses to offset against their earned credit. However, this ended up not being the case, and some of that expiration occurred in the first quarter. Thus, the run rate for the first quarter, we estimate, was around $14 million, and we expect that to expand from the first to the second quarter by $1 to $2 million, reflecting both continued growth in balances and rates. Overall, we expect non-interest expense to increase to $83 to $85 million in the second quarter, reflecting both an increase in deposit service expense and anticipated higher commissions. The first quarter's core efficiency ratio was 50.5%, an increase of 240 basis points compared to the fourth quarter, driven primarily by a rise in both interest and non-interest expenses in the quarter. With some moderation of our net interest margin and net interest income expectations, We do expect core efficiency to move up slightly in the coming quarters to be roughly 52% to 53%, barring better fees or that we are too conservative on net interest income. Our capital metrics are shown on slide 22. Strong first quarter earnings and a $24 million improvement in accumulated other comprehensive income resulted in nearly 7% expansion of tangible book value per share to $30.55. Right now, our earnings profile and high capital retention rate are supporting our flexibility in being defensive from a capital accretion perspective while we are also comfortable building the franchise with existing and new client growth. We have always been thoughtful about our capital actions and how we manage the balance sheet, not doing too much of any one thing. This is reflected in our tangible common equity ratio nearing 9% and our common equity tier one ratio over 11%. While we look at the investment portfolio on slide 23, you can see that we apply the same principles and philosophy managing here. So while we used held to maturity to help manage volatility and tangible common equity and accumulated other comprehensive income, we did so at a measured level. Thus, after-tax unrealized losses on held to maturity are approximately 40 basis points of tangible common equity and total available for sale and held to maturity losses are approximately 150 basis points on common equity Tier 1. So roughly 9.7% common equity Tier 1 capital, including all unrealized securities losses. Separately, we use the investment portfolio for two purposes. We have a shorter term component, which is roughly 60% of the portfolio for liquidity, cash flow, and municipal deposit pledging purposes. This would represent agency mortgage backed and CMOs T-bills and other government sponsored securities. The remaining 40%, we invest in 10 to 15 year new issue municipal securities. We utilize this portion of the portfolio to stabilize our extreme asset sensitivity because our loan portfolio is short duration with a two and a half year weighted average life. And we have a portfolio of mostly saleable variable rate SBA loans. In the first quarter, We sold $8.8 million of SBA loans and recognized a half a million dollar gain on the sale. The SBA sale was a practice for contingency planning as we had not executed any sales since acquiring Seacoast in 2020. Also in January, we sold roughly $30 million of lower yielding securities at a gain and reinvested the proceeds at a higher yield. I think it's worth reiterating here that the loan portfolio is almost 65% variable rate So while our six-year investment portfolio duration may seem long on the surface, we use it purposely, and we kept it proportionate in size to our long-term balance sheet target, despite having billions in excess cash in 2020 and 2021. We slow played investing that cash to be cautious of its resiliency, and that strategy, along with investing methodically over numerous quarters, supports our current capital position, profitability, and flexibility moving forward. And finally, on slide 24, we provided some additional context on liquidity. I'll first start by saying that roughly 70% of our deposits are insured or otherwise collateralized, reflecting collateral pledged to municipalities, use of CEDARs, account titling for trustees and custodians, and in some cases, surety bonds for our specialized deposit businesses. That means that the remaining 31% is above insurance limits and is within the available $4 billion of liquidity that we now have. You might expect we spent a good portion of March pledging additional collateral in case we needed to be defensive given the turmoil that occurred in banking. Finally, and worth noting, many of the balances that are greater than the insurance limits are with longtime clients who have full banking relationships here and have grown with us over decades. With that, we feel our prospects are sound to fund the balance sheet with deposit growth in 2023, and our position in the profile, particularly in specialty deposit, lends itself well to support that growth even in the face of an environment focused on deposit insurance. Additionally, while the cost of deposits has increased, we believe our lending businesses are adequately positioned to continue to deflect and absorb some of those costs. While returns may decline modestly, they are doing so from a high starting point, and our earnings profile remains differentiated and robust. With that, I appreciate your attention today, and we're now going to open the line for analyst questions.
spk02: Thank you. At this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. We'll take our first question from Jeff Rulis with DA Davidson. Your line's open.
spk01: Thanks. Good morning. Good morning, Jeff. I don't know if I missed it from Scott or Kane. Just the outlook on the loan growth and pipelines sounded optimistic in some seasonal trends.
spk07: items that that could come in but just wanted to kind of understand what what your outlook there is on on net growth uh for the remainder of the year sure jeff i can give you some color um i think you know maybe on the specialty side of the business those continue to be very steady performers um i think maybe the only outlier was tax which you know we've seen as i mentioned uh seasonal decline related to tax payments and some of the construction projects just kind of waiting to re-bid. I think we're seeing that. We fully expect that niche to perform as expected for the remainder of the year. The rest of those businesses continue to plug along. I think we've seen that in prior quarters, very steady businesses. I think within the regions, we're seeing good opportunities, solid pipelines. Overall, we're seeing maybe some stressed competitors back away from the market slightly, and I think we're going to get opportunities to look at higher quality loans, number one, and I think also prioritizing strong pricing there as well. So I think we feel very good about the opportunities that we're leaning into, and I think it bodes well for the pipeline for the rest of the year.
spk01: To put a number to that, Scott, I mean, you had low double-digit growth this quarter. It sounds positive, but high single-digit.
spk04: Yeah, Jeff, this is Jim. Let me handle that one. So I would say we're still confident in that mid to high single digits for the year, and I think being a little more judicious relative to pricing and what have you will call some of it. One thing Scott mentioned in his comments, we're not seeing the payoff activity as much, and what we're not going to do is if we can acquire great families and great businesses in terms of bringing on new relationships, we're going to do it because that really enhances the value long term for the company.
spk01: Great. Thanks, Jim. Let's see. Just wanted to maybe hop over to maybe, well, I got you, Jim. Just on capital as it climbs, I know you've been, you were conservative through the pandemic and, you know, we've got more clouds forming, but as that capital does climb, Thoughts on, you know, you've been quick on the buyback, but any thought there or preserving or kind of eyeing acquisition opportunities to come? Just any thoughts on the capital side?
spk04: Yeah, Jeff, I think our posture is this, is that first and foremost, the capital we can use for our growth objectives. You know, we've got a sound credit quality right now. I think there's a bit of slight recessionary times that we'll all have to combat through all this. So we're going to basically stay put relative to buybacks at this time. On acquisitions, that's a long-term view. We're always interested. We have to figure out when the dust settles, what can we use acquisitions for to enhance the value of the company? But that's something that's a little bit longer term for us at this point.
spk01: Okay. And the last one, maybe for Scott, I'd love to just kind of hear just from a high level, as you look at the specialty loan breakout, just wanted to, in a more stressed environment, as you look at, and I appreciate the breakout of the office detail, that was great. But within the specialty loan book, kind of your highest and lowest credit risk, as you see it in those portfolios across SBA, sponsor, life insurance, tax credit, what areas are a higher or lower on the risk profile from your perspective?
spk07: Yeah, I think if you look at the two ends of the spectrum there, life insurance, premium finance, just given the liquid collateral behind those loans, you know, that's the lower risk end of the profile where we have to watch that portfolio is yield. And, you know, we've been, you know, pretty steady in terms of our expectations there, and we've been able to get the growth we're looking for But that's certainly something we can turn off and on a little bit easier. I think on the sponsor finance side, probably not surprisingly, the other end of the spectrum, just given the nature of that book is cash flow based with a little higher leverage profile. That said, you know, we look really hard at that portfolio. We review every loan in detail quarterly. And right now we're really pleased with the performance of that book. You know, the leverage is typically in the three times and under range, and coverage is strong. So, but that would probably be the one, you know, that we're continuing to watch closely given the economic environment.
spk01: Okay. And you'd put SBA and maybe with the government backing and tax credit, you'd put those kind of in the middle in terms of risk profile of those four categories?
spk07: Yeah, I would say it's closer to life insurance, right, than sponsor. You know, as I mentioned, you know, we'll continue to be bullish on origination activity there. What we've had to do in terms of holding some of the book, though, is shift a little bit to a fixed structure, which holds some of those loans on the books, but does affect the ability to sell those loans in the market. And, you know, we'll just continue to evaluate that risk versus reward as we move forward. But I think, you know, That sector, certainly as we see banks pull back from traditional lending, maybe as the yield curve normalizes and if the economy does soften, that's a counter-cyclical niche that should do well for us over time. Great.
spk01: Thanks, Scott.
spk02: Next, we'll go to Andrew Leach with Piper Sandler. Your line's open.
spk03: Hey, good morning, guys. Thanks for taking the question. You know, just the funding of the loan growth, recognizing that reinvesting in the securities portfolio doesn't sound like that's going to be a priority anymore. So I'm just curious, what are the cash flows coming off that? And then is that going to be sufficient to fund loan growth? It sounds like you're going to be bringing on some FHLB and keeping some of those in the funding mix. Just kind of curious, the outlook of funding to loan growth.
spk05: Yeah, Andrew, thanks for the question because I think maybe my comments misled a little bit of where we are. So we do not anticipate long-term remixing out of the investment portfolio in the loans. I think we haven't really remixed anything already. We have an investment subsidiary and that cash that we didn't reinvest is just kind of sitting there. We wanted to get through the next 90 days, so to speak, 60 days, whatever it is, and you know, then I think resume balance sheet management as normal. And in our view, the balance sheet has the right size and it has a target for the investment portfolio and where we were at the end of the year largely reflects that. So our assumption when we model out net interest income and margin is that we're going to keep the investment portfolio relatively the same size. Obviously, fair value moves that around a little bit, but reinvest the roughly $250 million of cash flows that we expect this year. And we think that's a sound approach from an interest rate risk management perspective. And then I think based on my comments, although maybe the timing of this is uncertain, I think there is a path to generally customer funding the growth that we expect for this year. I think enterprise has historically struggled to grow deposits in the first half of the year with the commercial base. We've got a lot of tax payments and after year end bonuses that come out of the system and then certainly what happened in March caused some additional pressure there and maybe put us on our back foot a little bit in terms of use of broker versus overall flows. But I think our path would be forward that particularly as we ramp up the effort in recent weeks and then as we move into the second quarter and the remainder of the year that we're able to grow customer funding, we'll have some stabilization of the competition and the remixing in the industry. And while we'll use FHLB to manage the ups and downs of the specialized businesses, we expect that we're going to get growth overall and we'll generally, you know, have some reasonable path to core funding the balance sheet, you know, in the second half. So I think that's our expectation. I think that drives, continued opportunity to defend the level of earnings per share and the operating revenue. And we don't see it remixing, albeit it might be slightly more profitable in the short term. It creates, I think, some longer-term challenges and it concentrates interest rate risk in an environment where I think we're more exposed to down rates than then we probably want to be. So I think it's, as Jim said, continuing to build the franchise and moving forward with acquisition of relationships and really trying to find the funding along the way.
spk03: Got it. You know, you've covered all the other questions I had. I will step back. Great. Thanks, Andrew.
spk02: And I'd like to remind everyone, if you have a question, it's star one on your telephone keypad. Next, we'll go to Damon Del Monte with KBW. Your line's open.
spk06: Hey, good morning, guys. Hope everybody's doing well. And thanks for taking my questions. I joined kind of late, so I apologize if this was covered. But when you look at the deposit mix, you know, the non-interest bearing are down to 38% of total deposits from 43 last quarter. Can you just give a little perspective as to kind of where you see the ultimate remixing kind of landing for the non-interest bearing deposits?
spk05: I would say we don't necessarily have a hard and fast percentage that we've looked at. We are down subsequent to March 31, and that's primarily business flows and tax payments. And a lot of that, as you would expect, comes out of DDA. We are seeing some remixing still in the CDs and theaters, shockingly. But, you know, we also saw some good activity in the specialized space that made up for that in the first half of March. So we know it's down, and I think our forecast suggests that there's further remixing, whether that settles in at 35 or 31 or some other – magical percentage. I really can't forecast that. I think we generally, to some of Scott's comments, have identified and are tracking vigorously the deposit flows more so than we ever have. And we're just making sure that if something left, we're at the table to follow up and see what we can do to get that back structurally. So I think our overall expectation is that certainly deposit costs are going to rise, I'll say, significantly from where they were from the first to the second quarter, but maybe not so materially from the 125 basis points that I indicated we were at in March. And, you know, that does assume some level of remixing. And I think that overall, when we look at the overall cost of the deposit base and how it's behaved relative to where Fed Funds is, and then when we look back historically to where it, you know, how it behaved in the overall cost, where it was like in 2019, We're at a similar level of cost for the deposit base today with almost twice the Fed funds rate. So we feel pretty good about that, and we've got a little bit of room to give there on the DDA percentage while still maintaining that interest income and profitability. So I know you wanted a number, but I don't have a good one there, but that's how we're looking at it and how we're thinking about it.
spk06: That's okay. That's good color. Thank you. And then did you say that the loss on the sub-debt security was $5 million?
spk05: Yeah, when there was no loan growth during the pandemic and PPP, obviously a lot of banks were issuing sub-debt. We participated to a modest degree in both the investment and loan portfolio. Signature was one of very few $5 million positions. Most were you know, our $1 million to $3 million positions. And, you know, Signature at the time had a better credit rating than we did and, you know, was issuing at a nice coupon. And so we bought a small piece of that. So, again, not ideal, but we did like we do with everything. We deploy cautiously and we try not to get drunk on anything. And so we're happy we kept that parameter to $5 million. Okay.
spk06: Okay, so if we back out that $5 million from the loan loss provision this quarter, it kind of leaves you with not much of a provision for this quarter. So how do we kind of think about the provision in the coming quarters?
spk05: Yeah, so what's interesting is that the underlying economic data, unemployment and GDP in our model actually improved from the fourth quarter. And I think if you roll back the calendar here, for the prior six or eight quarters. I mean, we tried to be conservative because we kept feeling like the economy was going to have a more negative sentiment. And we built a lot of those things into our qualitative factors. And the good news is that credit quality and asset quality continues to be stellar. And with the passage of time, what happens is that the key factors that we have get more and more baked into the forecast. And so we have to you know, be mindful of that and rotate out of that and be intellectually honest with what's going on. So that's really what's driving that overall composition. And then obviously also it's just, you know, certain places where the growth, you know, how the growth formulates in the quarter and, you know, where we get the origination activity. So it's really a combination of those three factors in addition to, A, sequential reduction in the level and the reserve for unfunded commitments from 4Q to 1Q that really drove that. So I think you've got a modest provision for new loan growth, but then underlying that there's some favorable remixing as well as composition between allowance for loan losses and unfunded commitments that's kind of baked net into that provision number. Got it.
spk06: Okay. That's all that I had for now. Thank you. You're welcome. Thanks, Damon.
spk02: Okay. Okay, next we'll go to Brian Martin with Jenny. Your line's open.
spk08: Hey, good morning, guys. Hey, Brian. Hey, Keane, just going back, maybe I missed it because I joined as late a little bit as well. Just on kind of your margin commentary, just can you talk about just where the March margin was? I think you gave the spot rate for the funding, but just where the March margin was and just kind of how you're thinking about NII or margin prospectively, and I apologize if you already covered that.
spk05: No, I didn't give an actual number. So obviously first quarter margin was 471. March was 464. And then our spot margin right now is just under 4.6. You know, loan yield is roughly 6.4%. And then as I indicated, we've got about a 1.25% rate that we're assuming on deposits. And, you know, we triple checked that this morning through the first 24 days of March. And that data is still holding up. So all else equals, as long as we've got some level of degradation of funding costs in there for the remainder of April and then May and June, but when we look at that combined with the growth that Scott and Jim talked about, that's what gets us to the second quarter net interest income dollars potentially being level here to the first quarter.
spk08: Okay. And then as far as kind of balance of the year, it sounded like I thought your comment was it was your hope was to see that dollars of NII sequentially going up in the back half of the year. Is that?
spk05: Yeah. I mean, I think, Brian, the way we're thinking about this is the level of competition intensity and remixing is still there, but it's lessening. And I think all of the big major moves and all the massive shifts out of DDA into CEDARS or a CD or just playing out of the bank and having to replace those with incremental funding, I think our sense is that the chunkiness of that is slowing. And we'll continue to experience some of that in the second quarter, but if we can really get much of that remixing behind us, We have the benefit of day count moving forward. And our asset origination is, you know, we're being as thoughtful as we can about where to allocate that and as disciplined as we can, especially with Scott's comments about others potentially pulling back. So there is a path to that. Now, that's really dependent on the second quarter kind of being the final remixing quarter, so to speak. And being able to get back to some semblance of business, albeit with higher deposit costs across the industry and for ourselves. So, I mean, I think there's a path. I think for me to say that I can really predict two quarters out from here is extremely challenging. We don't control the environment, but I mean, I think that's how we're thinking about the rest of the year. But even if it's worse than we anticipated and we generally defend the net interest income dollars that we have, I think that still potentially shapes up to be pretty good and pretty strong for us to build on for the upcoming years.
spk08: Gotcha. Perfect. And I think you talked about also lessening some of the asset sensitivity, I guess. How are you thinking about potential rate cuts and just kind of managing the balance sheet there, if you do see that?
spk05: Yeah, so we have done some swaps, so some receipts swaps principally on variable rate loans. We had set out to do a decent portion of that. We've only executed a modest percentage at this point, so if we're going to try to do $500 million to $1 billion, we're at half to 25% of that level, so we're doing something. We'll continue to play that out as the interest rate environment shapes up. We certainly want to do, I think, a little bit more of that to protect the downside. And that is, we did see that ETA basis point here and some margin in the quarter, so it is having some effect. Really, the investment portfolio, too, also helps that. And we're just trying to sit tight and see what happens in terms of pressures to, you know, accumulate cash and shrink funding, which creates additional asset sensitivity. And, you know, then going and putting on a receipt-stick swap. So I think what we're trying to do is resume business as usual and then use the swaps opportunistically to maybe change the the downside, you know, minus 100, minus 200, a couple basis points here and there if there's an opportunity. So that's how we're thinking about it.
spk08: Gotcha. Cool. Thank you. And then just it sounded like, Jim, I know you said that maybe kind of the same stance as last quarter on the buyback. I mean, I guess just wondering what it, you know, what kind of, you know, where is the point where maybe if you're building capital and business kind of goes back to usual, do you get back to looking at the buyback or is that something that just you think If the remainder of the year, much of it, it's probably just off the table just until some of the dust settles here.
spk04: I think that what you said is correct, Brian. Your lips to God's ears about getting back to normal, and when it does, we'll certainly reassess that.
spk08: Okay. Maybe just one for Scott. I guess just on the trends, I mean, credit quality is just very, very strong. Just on the trends in criticized this quarter, was there anything positive or negative on the criticized front trend-wise that you're seeing, that you're watching?
spk07: No major trends. It's pretty flat, Brian. As I said, we're looking hard. So we feel really good about the quality of the portfolio right now.
spk08: Okay, perfect. And just maybe the last one for me was just keen on some of the lumpiness within fee income. Just any thoughts on, I mean, A, the tax business, kind of back this quarter from what we saw last quarter, just How should we think about that or just kind of the bigger picture on fee income outside of kind of the lumpiness of the private equity and the CDE?
spk05: Yeah, I would say there's really no revelations on the change in the posture on fee income. I think as the environment pressures margin, I think that the tax credit business from a fair value perspective does hedge that slightly. And we saw that last year with some of the negatives last year with margin rapidly expanding. So this quarter was really a reflection of just a modest fair value change. And just even every quarter, even if rates don't change as we move forward, just present value of cash flows, you pick up a couple hundred thousand dollars just at fair value. And as the longer term 10-year SOFR rate moves down slightly, you know, obviously your discount rate declines and then you're going to pick some of that back up. So it's a little bit challenging to predict. The sensitivity hasn't changed about $800,000 for 10 basis points. And I think our expectation moving forward is that second and third quarter will be, you know, fairly light on the non-recurring items. And then we'll have, you know, seasonally strong fourth quarter on tax credit and you know, maybe we'll have some private equity or CDE hit along the way. But generally, our expectation is there are a couple million dollars for each in total.
spk08: Gotcha. Okay. That's all I had. Thanks for taking the questions. Thank you, Brian.
spk02: And we do have a follow-up question from Jeff Rulis with DA Davidson. Go ahead.
spk01: Gene, wanted to quickly follow up on the expense expectation to 83 to 85. A little surprised that we're legging up again, I guess, with the um you know the seasonal kind of payroll 401k step up in the first quarter i know you mentioned you're fortunate on the deposit costs and expect to step up in commissions but just trying to figure some of those comp costs in q1 figured they might roll over a bit uh trying to get to where you were in q1 to to continue to increase in in the second quarter
spk05: yeah jeff the way i think about the the transition from one queue to two queue is that i think generally comp tends to be level um so investments in the business and you know pick up in you know other items kind of tends to lag in maybe it's down a little bit but the commentary on commissions i think reflects you know more of the continued growth and progress that that scott noted And then really the big driver there is just, I think, the turnaround in the deposit cost. I mean, obviously we were down in the quarter in the first quarter, so that showed better than we anticipated. But let's say we're probably back to the level where if you followed it through and sequenced that, we were going to already be in the second quarter. So it didn't really totally step down. And that's a combination of two factors. The space continues to be competitive, and many of the banks that are struggling with funding are – larger and fierce competitors in that space, number one. And number two, we continue to grow that business, that underlying business, pretty substantially and at a healthy growth rate. And so that also contributes to that expense there. So I hear you on the comp and benefits, and maybe we're a tinge conservative there with expecting $2.5 million in the run rate, but we are continuing to add you know, two positions and strengthen the organization selectively. And so I just, I don't want to over-promise there, but really the biggest driver is on that deposit business.
spk01: I appreciate it. And I just wanted to confirm, is that 83 to 85? Is that good for the remainder of the year or is it just 2Q alone and then we'll rebuild it?
spk05: I think deposit service charges continue to move up throughout the year. I think we expect that business to continue to grow and expand. And then to the extent that there's any interest rate increases, you know, that moves up, you know, for 25 basis points, that moves up probably half a million a quarter just from a rate increase. So for what it's worth in terms of how to think about that and whatever you're putting in your models for, you know, said funds. Got it. Thank you. You're welcome. Thanks, Jeff.
spk02: Okay, and I'm sure that there are no further questions at this time. I'll now turn the call back over to Jim Lally, President and CEO, for any additional or closing remarks.
spk04: Thanks, David, and thank you again for joining us this morning and your continued interest in our company. Everyone have a great day, and we will talk again at the end of the second quarter. Thank you.
spk02: This does conclude today's conference call. You may now disconnect.
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