Enterprise Financial Services Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 23, 2024

There are 9 speakers on the call.

Operator

Thank you for standing by, Welcome to the Enterprise Financial Services Corp. 4th Quarter 2023 Earnings Conference Call. I would now like to welcome Jim Lalley, President and CEO to begin the call.

Operator

Jim, over to you.

Speaker 1

Well, thank you, Mandeep, and thank you all very much for joining us morning and welcome to our 2023 4th quarter earnings call. Today is January 23, 2024 And joining me this morning is Keene Turner, EFSC's Chief Financial Officer and Chief Operating Officer Scott Goodman, President of Enterprise Bank and Trust and Doug Bialke, Chief Credit Officer 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. 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.

Speaker 1

The 4th quarter once again showed the strong earnings power of our company despite the manifestation of a few credit challenges that we experienced. Diluted earnings per share for the quarter was $1.16 versus $1.17 in the 3rd quarter and $1.58 in the Q4 of 2022. Before I get into some of the highlights of a very strong quarter year, I would like to briefly address the elevated level of charge offs that we experienced during the quarter. 2 relationships that we charged off during the quarter could be described as extraordinary an uncharacteristic. The first such credit was an agricultural loan, which we believe was an isolated incident That was not directly related to our credit underwriting.

Speaker 1

There were irregularities in the financial information provided by the borrower that masked the challenges it was facing and ultimately covered up a $13,000,000 collateral shortfall. In the Q4, we placed a full $16,000,000 relationship on non performing status and correspondingly charged off the $13,000,000 shortfall. Additionally, we are taking the appropriate actions and utilizing all available resources to recover what we can remaining $3,000,000 outstanding. We have stopped originating new credit relationships in the agricultural space And we'll wind down this approximately $200,000,000 portfolio over the next few years. We have our team engaged We are actively conducting thorough reviews of each relationship including physical farm inspections and even more extensive collateral field audits to reinforce our confidence in the balance of the portfolio.

Speaker 1

We'll be engaging a third party to validate these findings to ensure We do not have any other similar situations to this one. Our initial review provides comfort with respect to the health of the remainder of the portfolio. The other major loss that we experienced in the quarter was related to a $10,000,000 unsecured credit exposure that was part of a First Choice Legacy relationship to a Southern California commercial real estate investor. After several unsuccessful attempts to find suitable collateral to shore up this credit And the borrower's inability to keep payments current, we took this unfortunate but appropriate action to charge off this credit. $3,000,000 of this was identified and reserved for in the 3rd quarter with the remaining $7,000,000 reserved in the 4th quarter.

Speaker 1

We ultimately charged off the full $10,000,000 unsecured portion. We will continue to pursue all remedies for any sort of recovery. The remainder of our loan portfolio has performed as we anticipated. Overall, classified loans remained stable in the quarter NPLs declined over 10% to $43,000,000 while classified loans to capital held steady at 10% at year end. Delinquencies were well controlled at year end at only 15 basis points.

Speaker 1

Entering 2024, I'm confident in our ability to deliver asset quality results that are in line with our historically strong performance. Despite this unusual level of charge offs and appropriate increase to our provision expense, Our company delivered very strong financial results for both the Q4 and the entirety of 2023. The summary of this begins on Slide 3. Keane will provide much more detail on our quarterly and full year financial performance in his comments, but ahead of these, I would like to provide a few highlights. Our strong financial performance continued during the Q4.

Speaker 1

We earned net income of $44,500,000 or 1 point $1.16 per diluted share and we produced a ROAA of 1.28 percent and a PPNR ROA of 2.10%. ROTCE2 improved when compared to the 3rd quarter, increasing to 14.98% compared to 14.49%. These results reflect a robust earnings profile that allowed us to absorb some deterioration in credit during the quarter. Combined with our strong reserves and balance sheet, we remain positioned to operate As we have in the past, this means both delivering returns to shareholders while also supporting the needs of existing and new clients. The ability to continue to fulfill the loan needs of these clients and prospects continues to open up channels of deposit growth as well.

Speaker 1

Like in years past, we experienced our typical 4th quarter strength in loan growth. For the quarter, loans increased $267,000,000 or 10% annualized. As important, we again were able to fund this growth with our client deposits, which increased by $479,000,000 in the quarter after netting out the reduction in brokered CDs. We finished the year with a loan to deposit ratio of 89.4% And our ratio of DDA to total deposits

Speaker 2

came in at

Speaker 1

32.5%. A couple of things worth mentioning regarding these results. First, we are seeing all markets and businesses contributing to these numbers. Unlike in years past, we are not relying on any 1 or 2 markets or businesses to achieve. This diversification both in terms of geography and revenue has been intentional and the fruits of these investments continue to manifest themselves our financial results.

Speaker 1

Secondly, post the March banking crisis, we set a goal to fund our second half loan growth of client deposits. Not only did we do this, we just about funded the entire year's loan growth with our second half success. We also set a goal to keep the percentage of DDA to total deposits north of 30%, and we accomplished this too. Finally, we believe that we have relatively stabilized NII, which means that our daily net interest income has remained stable the last several months. Scott will give much more color on the markets and the businesses We saw continued success, but I'm encouraged that we will be able to fund our mid single digit loan growth in 2024 with well priced relationship oriented client deposits.

Speaker 1

Moving on to capital. Our balance sheet remains strong and positioned for continued growth. Capital levels at quarter end remained stable and strong with our TCE to TA ratio at 8.96%. Tangible book value per common share at year end was $33.85 This is an increase of 18% in 2023 and is due to our strong earnings and return profile. Before I move on to where we will be focused in 2024, I want to reiterate The strength of our earnings profile generates pre provision earnings that have averaged over $70,000,000 per quarter this year.

Speaker 1

This provides a significant buffer to absorb credit issues before ever touching our loan loss reserves or capital that are also very strong levels, particularly when considering the short duration of our loan portfolio. Slide 5 shows where we are focused for the foreseeable future. Just like we've done in the second half of twenty twenty three, We will continue to be focused on funding future loan growth with client deposits. Additionally, I'm confident that we can continue to improve shareholder value through the execution of our strategy. We will stay focused on continually improving our performance in all our business lines and markets.

Speaker 1

This combined with improved credit performance continued steadfast expense management should consistently produce strong earnings amid the current economic and rate environment that we are in. My optimism for our prospects stems both from my confidence in our business model, careful review of our loan portfolio and the optimism that I continue to hear from our clients. One final note, throughout 2024, we'll be working on a core system conversion. After 35 years on the same system, this upgrade will further improve our efficiency in many areas while also improving the quality and accessibility our data. With that, I would like to turn the call over to Scott Goodman.

Speaker 1

Scott?

Speaker 3

Thank you, Jim, and good morning, everyone. As you heard from Jim, Q4 loan and deposit growth was strong, pushing us to double digit annual growth for both categories in 2023. These results are significant not just based on the magnitude of the growth, but also when considering that they're fully organic and highly diversified across geographic markets and specialty business lines. Loans which are highlighted on Slides 89 were up $1,150,000,000 or 12% for the year with most major categories of the portfolio contributing materially to this growth. For the quarter, broken out on Slide 9, loans rose $267,000,000 contributing 23% of our growth for the year and up 157% from the prior quarter, displaying the traditional seasonal lift, which is characteristic of our portfolio.

Speaker 3

C and I was a standout this quarter benefiting from several significant new client relationships and elevated usage on revolving lines of credit. Specialized loan growth was helped by strong seasonal performance in the life insurance premium finance and tax credit lines of business. In premium finance, we continue to originate steady closings on new policy loans from our referral network and experienced the typical Q4 uptick in premium payments due for the existing policies. Advances on affordable housing projects in process accounted for the majority of the increase in the tax credit portfolio. For Q4, SBA came in somewhat below expectations, down $27,000,000 due mainly to slower execution of the pipeline and elevated prepayments.

Speaker 4

Prepayments continue

Speaker 3

to be stressed by the higher rate environment and we remain committed to our high credit standards and focus on owner occupied real estate secured loans. Much of the lag to pipeline is expected to push into Q1 And gross production remains relatively consistent. The paydowns continue to be a headwind. The sponsor finance book posted a modest decline in the quarter as actively slowed in general in this space activity slowed in general in this space during Q4. Following robust activity in the first half of the year, private equity has slowed their pace of acquisition to digest this activity and to consider the impact and direction of the interest rate environment on their pipeline opportunities.

Speaker 3

We're also taking a disciplined approach to sponsors and to credit structures in this segment and we would expect these factors to moderate the growth rate in the coming year. Moving to Slide 10. Loan portfolios posted growth across all major regions for the year and in the current quarter. Specialty lending was up modestly for the quarter related to the aforementioned niche business lines, as well as continued growth in the practice finance vertical, which was up $12,000,000 in Q4 $81,000,000 for the full year of 2023. In the Midwest, St.

Speaker 3

Louis and Kansas City portfolios were up $78,000,000 or nearly 10% annualized, showing balanced growth between increased line usage, fundings on construction in process and new loan originations. Notable deals this quarter include a new relationship with a middle construction materials provider and 2 new loan facilities with long time relationships in the hospitality and business finance industries. In the Southwest, the combined markets grew $102,000,000 in Q4 and 26% for the full year of 2023. Results for the quarter were bolstered by elevated new originations as well as additional fundings on existing construction projects in process. Significant new loans include new relationships with a premier middle market electric contractor and a specialty precision parts manufacturer in Phoenix, as well as large well established general contractor in Las Vegas.

Speaker 3

In our Western region of Southern California, loan balances were up by $58,000,000 in Q4 to round out a year in which we grew this portfolio by 9.5%. The increase this quarter is primarily related to success by our recent talent additions, onboarding a number of new relationships, including companies in the specialty food production business, financial services and manufacturing spaces. We also continue to expand legacy relationships in this book with new loans to top tier clients in the franchise and commercial real estate sectors. Moving now to deposits on Slides 1112. Total deposit balances were up $266,000,000 for the quarter and $1,300,000,000 or 12.4 percent year over year.

Speaker 3

Breaking this down, non interest bearing DDA accounts were down year over year by $684,000,000 With interest bearing DDA accounts up by a similar amount due mainly to the remixing behavior of depositors precipitated by accelerated rate increases throughout 2023. In the quarter, however, non interest bearing DDA balances grew by $107,000,000 relating to success of onboarding new C and banking relationships, increased property management and third party escrow accounts, as well as some seasonal cash build. Deposit growth by region is broken out on Slide 13. We grew client balances Net of specialty deposits and brokered CDs in the quarter by $394,000,000 with growth being spread throughout the geographic footprint and across all regions. Higher growth was experienced in the Midwest, mainly relating to the larger C and I books in our Kansas City and St.

Speaker 3

Louis markets, but highlighted as well by several large new C and I deposit relationships. In the West and Southwest regions, higher balances reflect the impacts of new relationships as well as a focused effort to attract new funds through the consolidation of balances from our existing clients. Specialty deposits grew $85,000,000 in the quarter and are broken out in more detail on Slide 14. The increases this quarter were mainly within the property management and third party escrow segments As we continue to expand these lines of business with new accounts and new relationships, Q4 is typically a seasonally softer growth in the community association line as expenses are paid and new accounts begin to be opened, which will then fund up as assessments are collected during Q1. Additional detail on the core funding mix and the account activity is shown on Slide 15.

Speaker 3

Majority of our growth this quarter has been with the commercial account base, which generally represents relationship based balances, 80% of which are treasury management clients. And while we have seen the aforementioned mix shift from DDA into interest bearing options, The pace of this activity has slowed. 37% of our total balances still reside in non interest bearing accounts. The underlying account activity also continues to trend favorably and reflect our intentional and elevated efforts toward emphasizing core deposits. With new accounts open exceeding closed accounts and net balance increases when comparing new accounts to closed accounts across all channels.

Speaker 3

Now I'd like to turn the call over to Keane Turner for his comments. Keane?

Speaker 2

Thanks, Scott, and good morning, everyone. My comments begin on Slide 16, where we reported earnings per share of $1.16 in the 4th quarter on net income of $45,000,000 Excluding the impact of the FDIC special assessment, EPS was $1.21 per share, an increase from the 3rd quarter. Net interest income in the quarter was relatively stable. Earning asset growth and disciplined pricing on loans and deposits mostly offset the increase in interest expense in the quarter due to the deposit remixing and rate changes. Fee income was seasonally higher, which is in the Q4 and was the primary driver of the increase in operating revenue.

Speaker 2

The provision for credit losses increased for the quarter, as Jim discussed, driven by net charge offs and loan growth. And non interest expense was higher in the current quarter, mostly due to the FDIC special assessment. Overall, pre provision net revenue of $76,000,000 for the quarter increased $11,000,000 or 16% from the 3rd quarter. For the full year, pre provision net revenue was $285,000,000 an increase of 10% from 2022. Pre provision net revenue was up 12% in 2023.

Speaker 2

And when you consider that pre provision net revenue in 2022 included $5,000,000 of PPP income that did not repeat this year. This continues to reflect the strength of our earnings profile and our ability to generate capital to support balance sheet growth. Turning to Slide 17, Net interest income for the Q4 of 2023 was $141,000,000 which was a decrease of less than $1,000,000 compared to the linked quarter. Interest income increased $6,200,000 in the 4th quarter, driven mainly by continued loan growth and higher rates on portfolio loans. Cash levels also increased modestly as a result of strong customer funding and added $1,000,000 to interest income.

Speaker 2

Loan yields increased 7 basis points, while average balances were higher by more than $160,000,000 The average interest rate on new loan originations in the Q4 of 2023 was 7.95 percent, In the most recent month, loan yield is just under 7% overall. More details follow on Slide 18. Interest expense growth slightly outpaced growth in interest income in the quarter. Customer deposit balances increased nearly $480,000,000 in the quarter. This additional funding allowed us to reduce broker deposits by $213,000,000 The balance growth was coupled with a 19 basis point increase in the cost of deposits, which was half the increase we observed in the previous quarter.

Speaker 2

With that said, the total cost of deposits was 2.03% in the 4th quarter and only slightly higher at 2.07% in the most recent month. The deposit pricing performance is aided by overall DDA percentage remaining at approximately 33%. The resulting net interest margin was 4.23% in the Q4 of 2023, a decrease of 10 basis points from the linked quarter and represents the 5 basis point drift from where net interest margin was in the month of September. We're encouraged by recent results that demonstrate deposit pricing has begun to further stabilize and margin pressure, while still present, continues to level off. Looking forward, while interest rates remain at current levels or higher for longer, we expect that overall funding costs will continue to move slightly higher over the next couple of quarters, and we will see margin drift of around 5 basis points per quarter on the existing balance sheet.

Speaker 2

Current asset growth at current spreads should allow us to defend net interest income dollars, albeit somewhat with lower margin overall. With the prospect of rate cuts on the table, we anticipate each quarter point reduction in the Fed funds rate equates to an additional 6 to 8 basis points of margin loss initially or $2,000,000 to $2,500,000 of quarterly net interest income. Our expectation is that deposit rates will be more stable initially. In order to remain competitive, we may need to be cautious in reducing those rates. With additional Fed cuts, we will be more methodical in moving deposit rates down just as we were when we were increasing them.

Speaker 2

And while not a component of net interest income, reduction in interest rates would positively impact deposit related non interest expense trends as more than half of the underlying balances are indexed to the Fed Funds rate. Each 25 basis points in debt funds equates to approximately $4,000,000 of annual expense on this line item. With that, we'll move on to our credit trends on Slide 19. Net charge offs were $28,000,000 for the quarter $38,000,000 for the year, representing 37 basis points of average loans in 2023. The majority of the charge offs in the quarter relate to the 2 relationships that Jim discussed, the real estate developer in California and the agricultural loan that arose unexpectedly late in Q4.

Speaker 2

These charge offs coupled with the charge off on the investor owned office loan that moved into other real estate in the Q3 make up the majority for the year. Non performing assets were 34 basis points of total assets compared to 40 basis points at the end of September. There were $32,000,000 of loans that moved into non performing status in the 4th quarter, of which $24,000,000 were charged off. An additional $4,000,000 of non performing loans were charged offs that were outstanding at the end of September. Between gross charge offs, recoveries and pay downs, non performing assets decreased $6,400,000 from the 3rd quarter.

Speaker 2

We proactively worked through a number of problem credits over the last two quarters so that these issues were not carried forward into the current year. The provision for credit losses of $18,000,000 during the 4th quarter largely reflects the impact of net charge offs and loan growth, partially offset by modest improvement in the economic forecast. Included in the provision for credit losses is $3,200,000 benefit from the reduction of the reserve for unfunded commitments. This benefit primarily relates to reduction in commitments on non performing loans and a general reduction in commitments due to the higher advance rate at the end of the quarter. Slide 20 represents the allowance for credit losses.

Speaker 2

Allowance for credit losses represents 1.24 percent of total loans or 1.35 percent when adjusting for government guaranteed loans. On Slide 21, 4th quarter fee income of $25,000,000 was an increase of $13,000,000 from the 3rd quarter, driven primarily by tax credit income, which is typically strongest in the 4th quarter. In addition to the seasonality, an 80 basis point decrease in the 10 year SOFR rate in the quarter positively impact credits carried at fair value, driving approximately half of the quarterly profit. Link quarter increases related to Community Development, Private Equity Distribution and BOLI helped to offset the gain on SBA loan sales from the 3rd quarter. As a reminder, along with the seasonal tax credit income, Community Development and Private Equity distributions will fluctuate from period to period.

Speaker 2

Turning to Slide 22, 4th quarter non interest expense was $93,000,000 an increase of $4,000,000 compared to the 3rd quarter. Included in the current quarter was the FDIC special assessment of $2,400,000 Deposit service expenses were higher to the linked quarter primarily due to growth in average balances, as Scott mentioned. We do expect specialized deposits to continue to be a a significant contributor to overall growth, which will continue to drive this expense line item higher. Other expenses increased from the linked quarter but were partially offset by lower compensation and benefits expense related to lower performance based incentive accruals and a reduction in accrued paid time off. The 4th quarter's core efficiency was 53.1%, a decrease of 312 basis points compared to the 3rd quarter, driven primarily by the increase in fee income.

Speaker 2

With some moderation of our net interest margin and net interest income expectations, In addition to the seasonally strong fee income, we do expect core efficiency to move up in the coming quarters. For all other expense categories, We expect to prudently maintain cost controls. Our capital metrics are shown on Slide 23 and our tangible common equity was 9% at the end of the 3rd quarter, up from 8.5% in the linked quarter. The strength of our earnings profile and a rebound in the fair value of Securities and derivatives drove the expansion in the quarter. On a per share basis, tangible book value increased to $33.85 which is a 9% increase over the Q3.

Speaker 2

For the full year, tangible book value per share increased $5.18 or 18%. And looking back over a longer time frame, we have successfully compounded tangible book value per share by 10% annually over the last 5 years. With our capital, balance sheet and liquidity in strong positions, we're operating with a strong foundation as we look into 2024. And while there was significant turmoil in industry to start the year, we had great success in expanding our client base and generating returns. We delivered a 16% return on average tangible common equity with average tangible common equity for the year at 8.7% and delivered a 1.4% return on average assets.

Speaker 2

With that, I'll conclude my comments and I appreciate your attention.

Operator

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

Speaker 5

Thanks. Good morning. Good morning, Jeff. On the credit side, some pretty good detail on the charge offs. I guess, Maybe a follow on is classified assets linked quarter were flat despite those larger charge offs.

Speaker 5

I guess what segments kind of filled in or rotated in to kind of into the classified balance to keep it flat rather than improving with the charge offs?

Speaker 1

I think Jeff, this is Jim. I think relative to the stabilization of the classifieds And those maintained that were there is the rapidity with which these loans that rolled through and charged off didn't necessarily sit long enough in those areas such that it cleaned it out.

Speaker 5

Okay. So maybe put another way, Where you saw rotation into classifieds, is there some other than the credits that you identified where there's some increases That you could point to segment wise or fairly granular?

Speaker 1

I think it's very granular. Looking at the list and I studied it, it's Widespread through various markets and types. So there's no fiends, if you will, relative to what's in that list. And I think the other good news is it's relatively small dollars per credit as well.

Speaker 5

Okay. Just the last one on credit. I guess the criticized balances last quarter, I think they were down a decent amount. I think they were down maybe $60,000,000 linked quarter. What were those balances in the 4th quarter relative to the 3rd quarter?

Speaker 4

Why don't

Speaker 1

I have Doug Bialke comment on that. Doug?

Speaker 6

Yes. Thanks, Jeff. Really 2 relationships So that we're downgraded from a Monitor 6 to a special mention rating, one that would be related to the mortgage industry, A company that has performed well, but in a down cycle right now is experiencing just some compressed cash flows. So the risk rating on that relationship was downgraded, as Spenshall mentioned. The other one would be a diverse Mix of commercial real estate, largely 1 to 4 family Real estate loans in the California market, again performing well under the current interest rate environment, but looking forward at some of the repricing risk On that portfolio, a downgrade to special mention was taken there as well.

Speaker 6

Good recourse, Good long term relationship and the bar is taking appropriate actions to monetize a few of the properties, curtail the debt and We feel confident in their ability to continue to perform.

Speaker 5

Got it. So overall criticized balances lifted linked quarter, is that? Correct. Okay. And any range of size, if you were down $60,000,000 in the prior quarter, what did you increase This quarter?

Speaker 6

Yes, similar back up probably, Jeff. We'll probably back up the $60,000,000 that we saw a reduction in the prior quarter.

Speaker 5

Fair enough. Okay. Just hopping over to the real quick on the margin discussion sounds I think Keene, you said 5 basis points drift per quarter as we sit here and then maybe accelerate a bit With rate cuts, any thoughts on the trajectory of NII? And I guess that would loop in your expectations for loan growth as well, but if you could kind of are we approaching a bottom on NII even given that margin backdrop?

Speaker 2

Yes, Jeff. I think we're generally expecting a mid single digit growth rate for both sides of the balance sheet. The five basis points is really static. And then I think dollars of growth depending on how it occurs, will be helpful to that. I think in the Q1, it's going to be difficult to overcome the day count from 4Q to 1Q even with the extra day this year.

Speaker 2

But it looks as though somewhere in the middle of the year, We'll start to see a pickup with dollars of net interest income. And some of that could be ruined depending if we get cuts On the back half, it'll that may be a little bit challenging, and we may be treading water a little bit more than we would have otherwise. But absent rate changes, I still think we feel pretty good about increasing net interest income dollars on the back half, albeit with some continued drift of net interest margin.

Speaker 5

Got it. Thank you. I'll step back.

Speaker 2

Thanks, Jeff.

Operator

Our next question comes from the line of Damon DelMonte with KBW. Please go ahead.

Speaker 7

Hey, good morning guys. Hope everybody is doing well. Thanks for taking my question. Just wanted to ask on the Spence front here. I think you mentioned, you're working on a systems upgrade during the course of this year.

Speaker 7

How should we think about kind of a quarterly cadence for operating expenses outside of the specialty deposit cost line, that could be related to this system upgrade?

Speaker 2

Damon, this is Keene. I don't anticipate that you'll have I mean, there's going to be some payroll and other things for staffing up, but I think our, you know, we can absorb that generally. I think there there's some expenses for The implementation that may come through during the year and we'll point those out, that could be up to $4,000,000 or $5,000,000 depending on what's capitalized versus what needs to come through the P and L. And I would say that those are going to occur sort of mid to late in the year, generally. So we'll continue to point those out.

Speaker 2

But I think The run rate from here for the Q1 is obviously going to step up probably 93% to 95% is what we're expecting. Comp and benefits was a little bit better in the Q4 and then you've got the seasonality to it in the Q1. So that's what we're thinking and that's also inclusive of specialty deposits and then again maybe later in the year we get some of those core related expenses and we'll have a better sense for what those numbers are in the upcoming quarters.

Speaker 7

Got you. Okay. And then did you say that for a 25 basis point cut In rates, that's about a $4,000,000 positive impact on the specialty deposit expenses?

Speaker 2

Yes, that's correct. And I think The proportions there are roughly half of the compression you get on a quarterly basis in net interest income would be offset in that non interest expense line item. Some of that may be subject to timing, but once you run that out and flush it through, that's generally what we're expecting.

Speaker 7

Okay, got it. Great. Thank you. And then, just another question on the ag portfolio. I think, Jim, you said it's about $200,000,000 portfolio and you're going to look to wind that down.

Speaker 7

Given what happened with this one particular credit, are there any early signs that you could see Other areas of stress within that portfolio as you go through your review or is it still too early to tell? So Damon, our cursory review on top and we focused The problem we have was in the livestock area. So we focused initially in this area. And the The cursory review at the outset shows that we feel very good about where we stand. That being said, there's more work to do on it, not only by us, but we'll also bring in

Speaker 1

a 3rd party just to validate what we've seen. As it relates to the rest of the portfolio, Doug, maybe you can talk about What we see because this only livestock only represents about a third of the portfolio, correct?

Speaker 6

Yes, Damon, good morning. It's Doug. So you're right, dollars 200,000,000 portfolio spread across 40 or so relationships consisting of a pretty well balanced mix of agricultural real estate, row crop and livestock collateral to farm operations really throughout the Midwest here. Many of these have been long term, strong performing clients of our team. And listen, I want to make sure we reiterate, right?

Speaker 6

This is a Credit 2 that we were monitoring. We had good historical financial information. We were receiving Regular collateral and financial information and reports, it's just the irregularities as it relates to the information that was revealed and disclosed and information that we received in early December caused the problem here. So What we're doing now is simply just reaffirming our risk in the portfolio and intensifying The inspections and the collateral audits that we have historically done.

Speaker 7

Got it. Okay. Thank you. And then just lastly on the tax credit line item, Keen, obviously very strong Q4. As you kind of look at the full year of 2024, do you kind of have a targeted range of what we could expect knowing that the Q4 tends to be the strongest of them?

Speaker 2

Yes. Just a reminder, I think we were negative until year to date until we got here. So Q4 maybe even a little bit more robust. But I think net net, we're expecting a roughly $10,000,000 through that line item for next year. And I think we'll with What we're expecting on CDE and private equity will get almost back to the level of income, maybe slightly weaker through that line item.

Speaker 2

If we don't sell SBA loans and then an opportunity to get back there or exceed it if we decide to execute on any SBA loan sales like we did last year.

Speaker 7

Got it. Okay. That's all that

Speaker 2

I had for now. Thank you. Thanks, Damon.

Operator

Our next question comes from the line of Brian Martin with Janney. Please go ahead.

Speaker 4

Hey, guys. Good morning. Hey, Keene, just on that last question on the fee income line, outside of the tax Credit, I think the were you referring to the other line as far as what you said might you were trying to I just misunderstood what you're saying there as far as getting back to even or how you're thinking about that?

Speaker 2

Yes. I think in total, Brian, we're thinking about getting back to even. I guess if you stripped out the SBA loan sales And you have $10,000,000 of tax credit and the numbers on both CDE and PE going through other that I mentioned a couple of million each. I think that basically gets you back to comparable levels for 2023. And then if you sold SBA loans again, that would get you back to the full year level or exceed.

Speaker 4

Okay. You're talking total fee income, not just that total other line, Just to be clear.

Speaker 2

So, yes, I'm talking yes, both, correct.

Speaker 4

Okay. Got you. Okay. And just one question, the tax rate, I think you guys mentioned was a bit lower I guess going forward revert back to kind of low 20 I guess the 22% range, is that fair?

Speaker 2

We're actually right around that 21% effective tax rate for 24. You know that with some state planning and some other things that have worked through, there's a point lower for the upcoming year that we think will continue. So 21% is a good number for the year.

Speaker 4

Okay. And then just Back to the margin for just one minute, Keene, just your comments, I think I heard what you talked about on the asset sensitivity side with the rate cuts, what it does to The loan side, can you just walk back through what you said on the deposit side, what the offset is if rates are going lower?

Speaker 2

Yes. On that deposit service charge line item and 25 basis points, obviously affects the earnings credit rate, and that's about $4,000,000 annually or $1,000,000 a quarter for every quarter point cut. So, I think that proportion is roughly half of the compression on net interest income. So it doesn't totally mute it, but it makes it more manageable and gives us the opportunity to grow through it.

Speaker 4

Yes. Okay. And your commentary was that the I guess you think you can go through it grow through that or stabilize it Absent rate cuts otherwise, maybe it's a bit lower depending on the timing of the rate cuts or how many rate cuts?

Speaker 2

Correct. I think the view is that, I mean, we have continued status quo on deposit pricing in my comments of 5 basis points of drift and that rate of deposit repricing has been quarter are we're going to probably have some unfavorable DDA remixing just with seasonal trends at the Q4 and then the day count. So like I said, sometime Mid year, although we've got margin drift, and depending on how growth shapes up, there's a chance that we'll be able to start Stacking positive net interest income dollars on top of that, it's just a matter of how those factors interplay. But we've been pretty good with our ability to forecast Net interest income even as early as after the Q1 events of last year and we hit stable net interest income per dollars, I think we're still stable from here. It's just without with the day count disadvantage at this point, Q4 to Q1, you're going to reset a little bit lower and then we'll get back to more improvement.

Speaker 4

Got you. And the monthly margin in December, did you give what that was?

Speaker 2

I didn't give I might have given what it was, but it was 1.21. So it's only a few basis points lower than we were in the quarter and November December were right on top of each other. So from that perspective, we were in pretty good shape. And Margin in the Q4 was a little bit more diluted because of the positive experience we had with The inability to time out the brokered CDs or pay those down just in time. So I think margin in and of itself in the quarter was maybe a little bit more muted than we thought it would be and maybe that will shift a little bit with positive mix here in the Q1.

Speaker 4

Got you. Okay. And then last one for me was just on the capital levels and kind of the optionality you have there. Just how you're thinking about the capital utilization In 2024 as far as I think from a buyback perspective, M and A, just in general organic growth, kind of how you're thinking about that?

Speaker 1

Yes, this is Jim. I would say this that primarily it's going to be for growth. Right now, We've got a lot on our plate relative to continue growing our business. We've got the core conversion, what have you. So M and A, Certainly, we're talking we'll always talk, but certainly M and A has got further down the list.

Speaker 1

And I'm not sure The buybacks come into play or not this year, but really it's about focusing on our utilizing for our growth going forward.

Speaker 4

Got you. Okay, perfect. Thank you for taking the questions.

Speaker 1

You bet. Thanks, Brian.

Operator

Our next question comes from the line of Andrew Liesch with Piper Sandler. Please go ahead.

Speaker 8

Hey guys, good morning. Just a question on the growth in the specialty deposits. I guess, what's the outlook for that business? I know you guys have been spending a lot of money and investing in that. And it just seems is the growth going to be lumpy?

Speaker 8

Are there wins in 1 quarter or the next? Is there any seasonality there?

Speaker 6

I'm just curious how we should

Speaker 8

be looking at how those balances trend?

Speaker 3

Hey, Andrew, it's Scott. Good morning. I think the overall comment is yes, We do expect those to continue to grow, I think steady. The seasonality that exists amongst really the 3 main business lines, right? There's property management, party escrow and community associations, mainly in the community associations where those accounts generally Fund up early in the year and then they're depleted throughout the year as expenses are paid and then reopened again in the Q4.

Speaker 3

So That's the main seasonality. But I think if you look at that business over time, you'll see that it's also growing. So I think we view those very favorably from a cost and a relationship perspective and we'll continue to invest and grow.

Speaker 8

Got it. You've covered all my other questions. I'll step back. Thanks.

Operator

I would now like to turn the call over to Jim Malawi for closing remarks.

Speaker 1

Well, thank you very much and Thank you all for joining us this morning and for your interest in our company. And we look forward to speaking to you again after the Q1. Have a great day.

Powered by Quartr
Earnings Conference Call
Enterprise Financial Services Q4 2023
00:00 / 00:00