Enterprise Financial Services Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

There are 9 speakers on the call.

Operator

And welcome to the Enterprise Financial Services Corp. 2nd Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I will now turn the conference over to Jim Lally, President and CEO.

Operator

Please go ahead.

Speaker 1

Thank you, JL, and good morning. Thank you all very much for joining us this morning, and welcome to our 2023 Second Quarter Earnings Call. Joining me this morning is Keene Turner, EFSC'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 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 8 ks yesterday.

Speaker 1

Please refer to Slide 2 of the presentation titled Forward Looking Statements And our most recent 10 ks and 10 Q for reasons why actual results may vary from any forward looking statements that we make today. In mid March, we made a strategic decision to continue our growth trajectory for 2023, supporting the needs of our clients In addition to onboarding several new relationships from competitors who are inwardly focused. Much of this growth focused on C and I relationships, Typically coming with a floating rate loan structure and full treasury management products and deposits. As you can see from our growth in the quarter, This decision paid off well for us. As part of our efforts to support clients and enhance long term shareholder and franchise value, We also saw some significant deposit wins in the quarter from our Regions and Specialty Deposit businesses that we'll fund over the remainder of this year.

Speaker 1

Scott will provide much more color on these topics in his comments. I spent the month of June visiting several of our markets and had a chance to visit with over 100 clients and prospects. For the most part, these companies continue to perform well and are optimistic about the remainder of this year and next, despite the increased costs throughout their businesses, Inclusive of debt service. Orders remain strong, supply chain issues have improved, labor costs and availability have not worsened And earnings remain good. What they heard from me was that we would be there to support them through this time of opportunity, just like we promised when we brought them on to our platform.

Speaker 1

Despite this relatively optimistic viewpoint, I do see loan growth for us moderating in the second half of this year and settling back into the mid to high single digit range For enterprise, this is reflective of the fact that we're seeing payoff activity moderate, which we feel is an opportunity to garner more holistic customer relationships and situations where we are lending. Additionally, with moderating payoffs, we believe this presents an opportunity We continue to apply pricing discipline and focus on elevating our spreads in certain business lines. As some competitors back away from certain sectors, We see this as an opportunity to earn more by doing slightly less. This will drive loan origination and growth into certain business lines naturally like C and I and may cause some moderation in certain real estate situations as well as other lower margin business lines. Our financial scorecard can be found on Slides 34.

Speaker 1

Our strong financial performance continued during the Q2. As expected, Most earnings related measurements declined when compared to the Q1. Nonetheless, I believe that we continue to operate from a position of strength due to our diversified revenue base and strong balance sheet. For the quarter, we earned net income of $49,100,000 Or $1.29 per diluted share as we produced an ROAA of 1.44 percent And a PP and RROAA of 2.02%. Our focus on growing operating revenue continued in the quarter As net interest income grew by $1,200,000 to $140,700,000 supported by a strong net interest margin of 4.49%.

Speaker 1

While remixing of deposits continued during the quarter, We also saw our commercial clients in some instances utilizing cash for asset purchases instead of borrowing are putting much more cash into M and A and real estate projects than what we had traditionally experienced. Entering the quarter, we were confident that we would be able to combat the earnings pressure created by the expected deposit remixing. Loan growth in the quarter was just over $500,000,000 and represented growth from all geographic areas and businesses. Our variable rate bias and C and I focus drove overall loan yields to 6.64%, an increase of 31 basis points from the previous quarter. While this growth was ahead of expectations, it helped us weather the pressure from changes to deposit pricing and composition, and we believe that it's helped us set up to have Chance for stable quarterly NII for the remainder of the year.

Speaker 1

We utilized brokered CDs Provide stable funding to support the growth in the Q2. This strategy helped to preserve our wholesale borrowing capacity and liquidity measures, while weathering typical seasonal liquidity tightness in our customer base. This helped us maintain a stable loan to deposit ratio of 90% during the quarter, While uninsured deposits declined modestly due to continued shift in the deposit base. Stable and strong is how I would characterize both our capital and credit ratios. At quarter end, our tangible common equity to total assets came in at 8.65 percent and we grew our tangible book value per common share From $30.55 to $31.23 this represents over a 17% increase from where we were just a year ago.

Speaker 1

Our credit statistics too remain strong as both non performing loans to total loans and non performing assets to total assets remain low and relatively unchanged when compared to the previous quarter and the Q2 of 2022. Consistent reviews of the portfolios and early of potential issues is how we've managed and continue to manage the portfolios. This includes targeted reviews, utilizing both internal and external resources and expertise. Slide 5 reflects our focus for the foreseeable future. Funding our future loan growth from core client This remains our biggest opportunity going forward.

Speaker 1

We have invested in and grown several markets and businesses that provide us the opportunity to do just that. Our asset growth will moderate back to the mid to high single digit range, focused on expanding our credit spreads and continued disciplined credit structures. This will allow us to maintain an incredibly strong balance sheet and continue to produce the best in class earnings profile that we all have become accustomed to. With that, I would like to turn the call over to Scott Fieldman for much more insight and details on our markets and our businesses. Scott?

Speaker 2

Thank you, Jim, and good morning, everyone. Moving on to Slide 6, as you heard from Jim, we posted robust loan growth for the quarter totaling 501,000,000 Adding to a pace which results in a 12 month increase of over 13%. Growth over this timeframe is broken out on Slide 7 and has come from all Primary categories well balanced between the metro markets and specialty verticals. Accelerated growth In Q2, details on Slide 8 was primarily the result of strong pull through of opportunities from the pipeline, with originations up 13% from the prior quarter. In addition, net growth was aided by reduced payoff activity and a modest increase in usage on revolving lines of credit.

Speaker 2

Within the specialty channels, sponsor finance experienced strong growth this quarter through both higher originations and lower churn in the portfolio. Following a brief pause earlier in the year to digest the impacts of rising rates and some shifting economic factors, Sponsors restarted their process during the quarter, with closings in Q2 double that of Q1 levels. We remain disciplined in this channel, underwriting to proven and consistent credit structures, focusing on well known sponsor relationships and opportunistically elevating spreads to boost our return. Life Insurance Premium Finance posted a relatively strong growth quarter with slightly higher payoffs more than offset by new policy financings and increased advances on existing policy loans. We continue to see a steady pipeline of new opportunities from an expanding referral network as well as a larger funding tail on a growing book of commitments.

Speaker 2

Following a seasonally softer Q1 in the tax credit lending business, activity ramped up this quarter. Closings and advances on existing loans increased as well as affordable housing projects accelerating from Q1 levels following some re budgeting and capital raising associated with the higher cost environment. SBA posted $12,000,000 of growth in the quarter with steady originations and modestly improved paydown impacts, reflecting our proactive defense of the existing portfolio. Our sales channel remains active and is well positioned to take advantage Elevated demand that could result from any potential credit tightening or liquidity constraints that affect the loan appetite of traditional bank lenders. Within the geographic markets displayed on Slide 9, we posted solid loan growth for the quarter across the footprint and continue to steadily grow these portfolios through a consistent value added and relationship based sales process.

Speaker 2

In the Midwest, We've grown 9.5% year over year, including $53,000,000 of growth in Q2, which included several Prized new middle market relationships in St. Louis, acquisition financing for existing relationships, as well as some modest growth on lines of credit from working capital revolvers and construction loan projects and process. Our Southwestern region had a particularly successful quarter with loans up by $88,000,000 placing year over year growth at roughly 24%. This level of growth is reflective of the strong economic profiles in these markets and our team's ability to develop deep relationships with businesses that are well positioned to benefit. The Texas team, Which has been on board now just over a year has gained traction quickly and continues to bring on new relationships in the quarter, both C and I operating businesses and commercial real estate.

Speaker 2

Arizona and Las Vegas' new originations in Q2 We're mainly focused around commercial real estate, including projects in the industrial, student housing, medical, office And grocery anchored retail space. We have positioned our CRE strategy around experienced proven developers and investors where we are not a transactional lender, but can go deep and gain a meaningful relationship on both sides of the balance sheet. In our Western region of Southern California, we have focused our energy on expanding the diversity and the growth profile of the legacy acquired portfolios by deepening existing loan and deposit relationships and adding resources to a C and I channel consistent with our other markets. This work has gained traction in the market with year over year loan growth of nearly 8%, including $80,000,000 in the 2nd quarter. Near term new originations consist mainly of new C and I relationships across a range of industries, including distribution, Construction, Manufacturing and Transportation.

Speaker 2

Moving now to deposits, which are outlined for the last 12 months And for the quarter on Slides 1011, total deposit balances grew by $465,000,000 in Q2. Overall client deposit balances were relatively stable, with most of the category changes attributable to the remixing of DDA to interest bearing account types and an increase in the broker deposits used in conjunction with loan growth for the quarter. Within the regions shown on Slide 12, client deposit balances did grow across a majority of our major markets In Southern California are consistent with stronger reactions of depositors to the bank failures located in that geography. As we continue to build our brand and gain traction with our new talent, consistent with our loan trends here, we expect core deposit growth to follow. While mid year is typically a softer period of seasonal growth in the commercial book, our commercial and business banking teams are squarely focused on deposit retention and growth with specifically regionally focused plans.

Speaker 2

We've armed these teams with competitive And flexible product set designed to convert a solid pipeline of qualified opportunities to both recapture excess cash balances from existing clients and attract new accounts. Following strong growth in the Q1, the specialty deposit businesses posted more modest growth of $30,000,000 in Q2, reflective of a typical seasonal slowdown midyear. Year to date, these low cost channels Have grown $458,000,000 or 19 percent and now represent 25% of total deposits as you'll see broken out on Slide 13. We continue to see inflows from our existing clients in this space as well as a steady stream of new opportunities originating from property management relationships within our commercial base and the competitive disruption from a few larger players in these lines of business. Slide 14 shows some additional detail on our core funding mix and account activity for the quarter.

Speaker 2

Deposits are well diversified among our 4 main channels and remain anchored to well rounded client relationships across a diverse set of industries, Households and Markets. Within the commercial base, 80% of these clients are using treasury management products And 90% of checking and savings clients are using online banking, which elevates the stability of these balances and reflects the relationship orientation of our base. Our sales process continues to produce positive results, Generating net new account balances across all channels. We've also seen steady net new account open in consumer and specialty channels, While the reduction in the number of accounts year to date in the commercial and business banking space primarily reflects the consolidation of balances and the closure of certain account types associated with remixing to the interest bearing and time deposit products. Now I'd like to turn the call over to Keane Turner for his comments.

Speaker 2

Keane?

Speaker 3

Thanks, Scott, and good morning, everyone. Turning to Slide 15, we reported earnings per share of $1.29 in the 2nd quarter on net income of $49,000,000 Our net interest income expanded from the linked quarter, which combined with growth in earning assets, helped to outpace expected compression in net interest margin. Additionally, fee income declined modestly, which is in line with seasonal expectations. The provision for credit losses was more Significant this quarter driven by loan growth. And finally, non interest expense was higher in the current quarter with continued growth in deposit costs This is for our expanding specialized deposit business.

Speaker 3

All things considered, we're pleased with the performance of net interest income, Loan growth and overall profitability. Our return profile remains robust and supports our strategy for continued growth. Turning to Slide 16, net interest income for the quarter expanded by $1,200,000 to $141,000,000 Net interest margin of 4.49 percent is a 22 basis point reduction from the linked quarter. As expected, rising deposit and funding costs Led to margin compression. However, we were able to defend net interest income through relationship based loan growth.

Speaker 3

More details follow on Slide 17. On the asset side of the balance sheet, a combination of carrying higher cash mid quarter And portfolio loan growth drove $567,000,000 of average earning asset growth. Yield on earning assets improved by 28 basis points, led by the 31 basis point increase in total loan yield. In support of that trend, new loan originations were the largest driver of the change, With new loans booked at an average interest rate of 7.6%. This was supported most substantially by origination of C and I loans at 7.9% and SBA loans at 8.75% during the Q2.

Speaker 3

I mentioned cash balances were higher in the 2nd quarter As we elected to carry more on balance sheet liquidity in light of the debt ceiling issues we navigated mid quarter. While this decision was largely neutral to earnings, It was a couple of basis points dilutive to net interest margin in the period. Total average deposit balances grew $474,000,000 in the quarter, including average increase of $431,000,000 in brokered CDs and $43,000,000 in customer deposits. We've utilized brokered CDs because it adds stability and predictability to our funding base, along with reasonable flexibility moving forward to support our asset growth, all while navigating typical mid year seasonality of deposit outflows. Our cost of deposits increased during the quarter as we continue to Experience deposit remixing and repricing.

Speaker 3

This was driven by a combination of interest rate, economic and industry based factors. While our average cost of deposit interest bearing deposits rose 70 basis points from the prior period, our cumulative deposit data for the rate cycle In line with our historical level and reflects the diversified deposit base that's been enhanced since the last cycle. The use of brokered CDs Has been an intentional strategy that has provided maximum flexibility on our liquidity position. However, this has increased our total cost of deposits and our total deposit beta. Excluding brokered, our deposit beta for the quarter would have been 30% lower and our total cost of deposits would have been 18 basis points lower.

Speaker 3

We are pleased with the cost of deposits, all things considered, given the current Fed funds target rated over 5%, while our total cost of deposits was 1.46%. Despite the remixing, our demand deposits to total deposits is above 30 3% and reflects some of the business model advantage that we have in funding the balance sheet. Based on our 2nd quarter performance, we believe we have the ability to outpace expected net interest margin compression in the upcoming quarters with a posture of balance sheet growth. Compared with the Q2 performance, we have the opportunity to expand loan pricing, moderate loan growth levels and achieve a greater contribution to the funding through our growth in customer deposits. That means we generally expect to see stable Net interest income moving forward, while net interest margin drifts downward approximately 10 to 15 basis points per quarter.

Speaker 3

We're not immune to the remixing and increased competition. However, our business model helps drive the asset side of our balance sheet to mostly absorb those costs. With that, we'll move on to Slide 18, where we demonstrate our credit trends. Annualized net charge offs were 12 basis points in the period compared to a modest recovery in the Quarter. Overall credit losses continue to be to trend below historical levels and asset quality metrics remain strong.

Speaker 3

The provision for credit losses of $6,300,000 during the Q2 largely reflects our strong loan growth along with deterioration in projected economic factors. Slide 19 presents the allowance for credit losses. The allowance for credit losses increased $3,000,000 in the quarter and represents 1.34 percent of total loans or 1.48 percent of We continue to use several economic forecasts in the allowance model with a weighted bias toward a downside scenario And a higher reserve focus on certain segments such as office commercial real estate. This is reflected with qualitative reserves totaling approximately 30% of total allowance. On Slide 30, 2nd quarter fee income of $14,000,000 With a decrease of $3,000,000 from the Q1, this was primarily due to lower tax credit income and the Q1 included gains on both Sale of investment securities and SBA loans.

Speaker 3

Tax credit income has some seasonal volatility and is typically strongest at the end of each year. We expect fee income to moderate to roughly $12,000,000 to $13,000,000 in the 3rd quarter as we do not anticipate similar levels of community development related income to repeat. However, we do expect typical seasonal strength in fee income to round out 2023. Turning to Slide 21, 2nd quarter non interest expense was $86,000,000 an increase of $5,000,000 compared to the Q1. Deposit service expense as well as other expenses were higher compared to the linked quarter, which was partially mitigated by a sequential decline in employee compensation and benefits.

Speaker 3

Deposit servicing expense grew roughly $4,000,000 in the quarter due to both rate and volume on certain specialized deposits. As a reminder, the 1st quarter deposit servicing expenses We're lower due to the expiration of certain earnings credits that were forfeited. We expect this line item to continue to expand with both continued growth in balances as well as higher interest rates. Other expenses grew by roughly $2,000,000 in the quarter, driven primarily by the impact of a Credit card event that resulted in elevated losses on both company cards and including outstanding in for customer related losses and certain operational expenses. Compensation and benefits was lower in the quarter, primarily due to seasonality.

Speaker 3

This was partially offset by a reduction in open positions as well as a full period of annual merit increases. Overall, we expect non interest expense to increase to $87,000,000 to $89,000,000 in the 3rd quarter, reflecting an increase in deposit service expense. Also based on the FDIC rulemaking, we expect the impact of the The 2nd quarter's core efficiency ratio was 54%, An increase of 3.50 basis points compared to the Q1, driven primarily by both a rise in interest and non interest expense in the quarter. With some moderation in our net interest margin and net interest income expectations, we do expect core efficiency to move up slightly for the coming quarters. However, this is a function of our expectation for expanding our market share in specialized deposit business.

Speaker 3

For other expenses, We expect the prudently managed cost controls, which are part of our daily discipline. That can be borne out in the underlying operating expense trends from the 1st to the 2nd quarter. Our capital metrics are shown on Slide 22. Strong quarter earnings offset a decline in accumulated other comprehensive income from the value of This resulted in an expansion of tangible book value per share to $31.23 at the end of June, which is a 9% increase so far this year. The strength of our earnings profile and a high capital retention rate supported our customers and resulted in balance sheet expansion in We have managed our capital and the balance sheet to provide a foundation for continued growth.

Speaker 3

This is reflected in our tangible common equity She was nearly 9% in our common equity Tier 1 ratio of 11.1%. On an adjusted basis, The after tax unrealized losses on held to maturity securities is approximately 40 basis points of tangible common equity In total, combined available for sale and held to maturity losses are approximately 140 basis points of tangible common equity. When including available for sale and held to maturity losses, adjusted common equity Tier 1 capital is 9.5%, Well in excess of the minimum well capitalized limit of 6.5%. With that said, we are very pleased with our financial results in the second quarter and 1st half of twenty twenty three. While the current interest rate and economic environment pose challenges, there are also opportunities We believe that our diversified platform is positioned To produce strong operating performance relative to the environment in which we operate.

Speaker 3

With that, I appreciate your attention today and we're now going to open the line for analyst questions.

Operator

Thank Your first question comes from the line of Jeff Rulis of D. A. Davidson. Please go ahead.

Speaker 4

Thanks. Good morning. A couple of questions on the expense line, if I could. Just keen on the $87,000,000 to $89,000,000 Is that inclusive of a $2,000,000 special assessment assumption in that figure?

Speaker 3

No, that's Jeff. That's just run rate and that's really reflecting growth in the deposit business. I think we expect those balances to continue to expand and Pricing that was competitive, but we're gaining market share and then the $2,000,000 would be in addition when it occurs.

Speaker 4

Okay. Okay. Were there so the operational losses or the credit card event, What would you in the Q2, would you put as anything one time there that would likely fall off? I mean, it sounds like the Deposit cost is going to outstrip some of that, but just wanted to carve out what was we would be one time In the Q2, if at all.

Speaker 3

Yes. 1.3 of that, we expect to be one time, and we think that's kind of a one and done estimate. And then There'll be just based on the way the accrual works, we needed to accrue that and take it currently. But We have service providers that are involved in helping us with that business and we'll get some relationship credits moving forward, but it won't be anything meaningful or acute in any one period. So net net, the economic impact for us will be fairly limited.

Speaker 3

But In the run rate, it's 1.3% that really we didn't expect to be there and I think maybe push the expenses a little higher than our guide last quarter.

Operator

Thank you. And your next question comes from the line of Damon DeMonte of KBW. Please go ahead.

Speaker 5

Hey, good morning guys. Hope everybody is doing well today. Just wanted to look for a little bit more color on the deposit outlook. The non interest bearing deposits continue to kind of shift lower and I think you noted it's around 33% of total deposits. Do you have an idea of where that kind of bottoms?

Speaker 5

Do you think you can kind of hold it at this level? Or do you expect there to be more migration?

Speaker 3

Hey Damon, it's Jim.

Speaker 1

Go ahead. Go ahead, Dean. I was just saying, listen, so our growth Obviously, in the Q2 leaned into the brokerage side, which pushed that down a little bit. Our goal going forward, obviously, would be to fund it with Our base of customer deposits, I would hope that they come with a significant amount of DDAs from the specialized as well as just The geographic businesses. So I would say holding firm in that 30% to 33% range seems fair to us.

Speaker 1

The goal obviously is to get it in as most efficiently as we can. And but obviously the business model we have pushes towards a little bit more DDA than others.

Speaker 5

Got it. Okay. And then as far as the outlook for loan growth, I believe the commentary was that it's going to kind of moderate here in the back half of the year. So So we kind of be thinking about like low single digits for the next couple of quarters before it begins

Speaker 6

to normalize?

Speaker 1

I think I look at this way, Damon. I think it's getting back to that run rate of that mid High single digit, and really focusing on those areas where we can garner share of market as well as improve pricing. And there are some nice pockets given the different businesses and markets that we operate in.

Operator

Thank you. And your next question comes from the line of Andrew Liesch of Piper Sandler. Please go ahead.

Speaker 7

Hey, good morning. Just Quick question, if you can provide any color on the loan that migrated to non accrual in the quarter that was charged off. What sector might be in or if there's any other loan similar to this that might be giving you some concern?

Speaker 2

Yes, Andrew, it's Scott. I'll handle that one. It's really one credit. It's ABL type Aftermarket automotive parts manufacturer, and they've just had some lagging issues, dealing with shipping and labor and Supply chain disruption, which they just weren't able to overcome. They're undercapitalized and really unable to continue operating.

Speaker 2

So From that standpoint, I don't see that as a trend. I don't see that as part of a niche or a sector. It's pretty much a one off and I think We've charged it down and we think we have the balance under control.

Speaker 7

Got it. You have covered all my other questions already, so I'll step back.

Speaker 2

Thanks. Thanks, Andrew.

Operator

Thank you. And your next question comes from the line of Jeff Rulis of D. A. Davidson. Please go ahead.

Speaker 4

Thanks. Just had a follow-up on the expense line as keen as you were outlining. So If that was $86,000,000 reported non interest expense, if we back out the little over $1,000,000 one time, gets Below, let's just call it 85. I guess the jump there as you talk about that deposit cost increases, it had already been up linked quarter. So I'm trying to get a sense for the pace of that Deposit cost increase that's flowing through non interest expense, is that going to be a couple of million a quarter or more Lead quarter as long as you got to lean into that piece.

Speaker 4

Just, I don't know the run rate of non interest And that seems like an item that's growing rather quickly.

Speaker 3

Yes. Jeff, that number, it's not going to grow sequentially as much as 1st quarter, we had that expiration of credits in the Q1. So that normalized number in the Q1 was like $14,000,000 I think the number in the second quarter It's like $16,000,000 So that's kind of $2,000,000 to $3,000,000 depending on collected balances and how much we're growing that there. I think that's generally what we're expecting to see, as long as that continues to Form in line with where we've been and pricing continues to be competitive there.

Operator

Thank you. And your next question comes from the line of Brian Martin of Janney. Please go ahead.

Speaker 8

Hey, good morning guys.

Speaker 2

Hey, Brian.

Speaker 8

Hey, nice quarter. I'd say just a question maybe for Keene on the margin. Just Keene, I appreciate the commentary. Just As far as the margin trending down, but the NII stabilizing, kind of where do you what is kind of your rate outlook here kind of baked in there? And then just How are you thinking about when the margin might stabilize?

Speaker 8

And the second part of it is just if we do get some rate cuts next year, can you just remind us How you expect the margin to perform in that type of scenario?

Speaker 3

Yes. Let me try to tackle Your comments first. I mean, I think we're projecting out the next couple of quarters. Obviously, we've got a next 12 month projection, but I think the way we're thinking about that is that it's still extremely early in terms of Trying to get an accurate next 12 months prediction with how much the variables have been moving around 1st, 2nd quarter. Our general outlook is that if you call margin today roughly 4.45%, I think you drift 20 basis points to the end of the year is kind of what we're seeing.

Speaker 3

And even if we get 1 or 2, 25 basis point rate hikes I think we generally expect that maybe but for timing or lagging that those are going to get absorbed with competitive deposit pressures. Maybe I'd like to hope that that's a little bit conservative. We've got some costs baked in there in terms of The interest expense and continued degradation of beta and some of those things. But I think we feel good about sort of $140,000,000 of net interest income the next couple quarters with the growth that Jim talked about and then margin sort of drifting to call it 425, 420 by the end of the year. And then I think that generally our view is that we're trying to listen to the Fed and That's pretty clearly higher for longer.

Speaker 3

I don't know that we're thinking that there's any near term pressure to go from what looks like Interest rate increase here in July and then maybe one later this year to multiple cuts next year. So I think we think that That fund stays fairly stable for at least the first half of next year. And then obviously, we're asset sensitive. We're becoming a little bit less asset sensitive with Some of the remixing that's occurring from DDA and the use of brokered CDs. And so obviously those things to the extent We get some cuts will provide some opportunity, but we will experience margin compression.

Speaker 3

We'll file our Q here in the next We can get you some more sensitivities around what that compression looks like. But certainly, we're an asset sensitive Company and down rates depending on how that plays out, we'll certainly take some of that out. So it's going to depend on how quickly, how aggressively And how what does quite frankly deposit competition and flows look like if and when that starts to occur.

Speaker 8

Got you. Okay. And then just as far as the loan areas you're focused on with maybe focusing maybe a bit more on yield, I guess is it I guess, where do you expect the growth maybe more to come from

Speaker 2

in the second half of the

Speaker 8

year or just the near term?

Speaker 2

Hey, Brian. This is Scott. I would say, I think we're taking an opportunity to push spreads really across the portfolio, But particularly in areas that would be fixed rate or where I think the competition or supply demand dynamics are advantageous. So I think CRE is one of those areas where we're being judicious on how we approach the market. We're supporting clients.

Speaker 2

We're lending into new relationships that can bring significant deposit opportunities. Property management would be a good example of how we're leveraging our specialty to lend into commercial real estate. But I think you saw a lot of our growth with new relationships in C and I, particularly in our newer markets. And I think That's where you'd see us being more aggressive because those are sticky relationships that bring deposits, that bring fee income, They don't use the full commitment typically. And then in the specialty areas, you heard my comments on sponsor.

Speaker 2

I think that moderates a bit the second half, whereas I think we're seeing opportunities In areas like life insurance premium where some of our competition has vacated the markets and we can actually push Pricing a little bit and get high quality loans there.

Operator

Thank you. Your next question comes from the line of Eric Grubelich, Private Investor, please go ahead.

Speaker 6

Yes. Hi, good morning. A question for Keene. Two things related to the Interest rate sensitivity and the margin. So to what extent with like the new loans that are you're booking at variable rates Or are you utilizing floors on that production that may help you if rates do drop a couple of quarters from now?

Speaker 3

Yes. So Eric, thanks for your question. We're able to get floors into Most new loans, I think the nuance on That is the floors on most of what we have is relatively low. And I don't know that I've looked at it and said, hey, here's where the floors are and the stuff we This last quarter, but the loans that do have floors are, call it, 2.5% to 3% above the floor. And the proportions are sort of pretty commensurate with what they've been historically.

Speaker 3

Yes, you've got roughly 63% variable rate and you've got about a third with no floor and then 2 thirds with a floor. But As you might expect, there's also a good portion of that book that's not new and really rose off of a floor that helped us Just 2 years ago. So, don't have good information for you on that, but we are Getting floors on whatever competitive terms we can get in the current

Speaker 1

environment. Okay.

Speaker 6

And then just another thing that's kind of just trying to get my Head around, I saw the like everybody else did, the big growth in the broker deposits this quarter. I would imagine those that at the margin those rates are probably 5% plus, right? How does that compare to what you're paying in your money market and your interest bearing? I mean, is there A trade off there where you can ratchet it up a little bit more on those core customer accounts or is there a reason why you don't want to do that Versus buying corporate deposits, which are non relationship.

Speaker 3

Yes. I think the balance we're trying to strike is A little bit of timing. So number 1, if you look at it as a tide, the tide is the highest in the Q4 and then it starts to gradually go out in the first half of the year. And then June 30 for us is typically low tide for deposits and now you're starting to see it come back as we're only 25 days into the Q3 and we've got Sitting here with nice DDA and some other growth, and that's not a trend yet, but I think we're encouraged by that. And I think the art of it is to make sure that we're we've got to pay the right amount for new and Growing balances, but when you start to look at the math on certain pockets of pricing to drive up $10,000,000,000 of pricing to 5%, whereas the blended rate is quite a bit lower than that.

Speaker 3

We're just trying to strike that fine balance. So the brokered CDs allow us to maybe not be as frantic in terms of competing in the near term and we've got Plenty of broker capacity and wholesale capacity to move forward, but it allows us to play a little bit longer game of Leverage the sales cycle a little bit more and maybe overall, call it over the course of multiple quarters and even years, have a Better higher quality funded balance sheet and drive a little bit more profitability a couple of quarters out versus in the near term or Panic and try to drive a bunch of deposit growth, but at what cost? So, hopefully that gives you some color and some Thought about how we're thinking about it, but we always try to keep the profitability in 2 years on the horizon versus the profitability of The current quarter and we're trying to manage

Speaker 1

the little bit of

Speaker 3

the sentiment that's out there in the current environment, but utilize the strength of the liquidity profile and balance sheet,

Operator

Thank you. As there are no further questions at this time, I would like to turn the call back to Jim Lally for closing remarks. Please go ahead, sir.

Speaker 1

Kjell, thank you, and thank you all for joining us this morning, and Thank you for your interest in our company. Look forward to talking to you again after the Q3, if not sooner. Have a great day.

Operator

And this concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Enterprise Financial Services Q2 2023
00:00 / 00:00