Enterprise Financial Services Corp
NASDAQ:EFSC
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Enterprise Financial Services Corp
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Good day and welcome to the Enterprise Financial Services Corp second quarter earnings call. Today's conference is being recorded.
I would now like to turn the call over to Mr. Jim Lally. Sir, you may begin.
Chantal, thank you very much. And thank you all very much for joining us this afternoon and welcome you to our second quarter 2018 earnings call. Joining me this afternoon is Scott Goodman, President of Enterprise Bank & Trust and Keene Turner, EFSC's CFO and COO.
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-K yesterday. Please refer to slide two of the presentation, titled Forward-Looking Statements and our most recent 10-K and 10-Q, for reasons why actual results may vary from any forward-looking statements that we make today.
We are very pleased with our second quarter results. On a fully diluted basis, we earned $0.95 per share with core result of $0.86 per share. These are record performance levels for our company and are a product of our focus on a well executed business plan. Scott and Keene will provide much more detail of these results later in the call.
Our financial score card is found on slide three. Our earnings per share improved by 54% compared to the second quarter of 2017. We have obviously positively benefited from the changes in the corporate tax rate while other key factors continued to carry the day. Dollars in net interest income grew by 9% year-over-year, despite the fact that net interest margin was basically flat. We have been successful in growing our loan portfolio to plan without compromising the quality of the portfolio. Nonperforming loans remained relatively stable at very low levels.
In previous quarters, we spoke about our ability to drive efficiency through investment in systems and people. This continued during the second quarter as we were able to further drive improvement in our operating leverage by 2%. Finally and maybe most important, we continue to see positive results related to deposit growth. As you have heard from before, there is no silver bullet for us. Rather, it is a combination of an ardent sales effort, coupled with the continued emergence of new deposit niches that led to an 8% growth when compared to second quarter of 2017.
As we turn the corner for the second half of the year, we remain focused on what we set to accomplish at the beginning. As a reminder, our areas of focus can be found on slide four. We will continue to strive to achieve organic loan and deposit growth, continue to focus on long-term strategic development and further improve our sales culture as we work to improve our sales process and external messaging.
I would now like to hand the call over to Scott Goodman who will provide much more detail our continued growth in our core banking business.
Thank you Jim. We continue to execute successfully on the growth strategies across our platform, expanding relationships with our existing clients and attracting new clients through a targeted sales process. Loans reflected on slide number five grew by $90 million in the quarter and 10% on a trailing 12-month basis.
Moving to slide number six. C&I activity remains strong with C&I loans representing 62% of the growth in Q2 and growing by 13% over the past year. The increase reflects steadily growing demand for working capital and other investment activity from businesses within our footprint.
Slide number seven further breaks down changes in the loan portfolio. The largest increases in Q2 were reflected within the general C&I and owner occupied CRE categories. Activity was particularly strong in St. Louis and in Kansas City with new originations resulting from equipment and M&A opportunities from existing clients and increased usage on lines of credit. We also onboarded several significant new relationships in the quarter. Additional growth resulted from financing with several key existing partners in the tax credit business to support succession planning as well as their continued growth around the new market tax credit and low income housing tax credit programs.
Moving to the business units on slide number eight. Growth was most prominent in our regional geographies this quarter. Specialized lending, which represents enterprise value lending, life insurance premium finance and aircraft finance, were flat in the quarter. Following robust Q1, EVL growth moderated somewhat. Originations were steady, slightly outpacing the paydowns as private equity partners remained opportunistic to realize returns on portfolio company sales in an active market. Life insurance premium finance was down slightly in the quarter, due mainly to several larger payoffs.
We continue to see elevated competition and pricing pressure in this sector on a few large regional and specialty lenders. Our position in this business is to remain competitive, but disciplined on pricing and a focus on growing strategic relationships with key advisor who value our expertise, longevity, consistency and responsive business model. As we approach the second half of the year, we expect to see seasonal growth in this business, as well as new policy financing opportunities from a steady pipeline.
St. Louis growth includes solid activity in both the agricultural lending and correspondent banking areas. The ag team selectively targets experience in well-capitalized operators and successfully onboard several to our platform in the quarter. Other notable loans in this region includes several bank stock loans to well-known institutions in the region as well as expansion financing to an institutional food service company and an industrial controls manufacturer.
Kansas City had a particularly strong quarter, growing $35 million or 20% on an annualized basis. The growth included several new office and multiuse property acquisitions with new commercial real estate investors and a large new financial services relationship with which we expect to develop sizable loan and deposit opportunities. Kansas City market remains active with solid economic growth, creating organic development and the new relationships this quarter reflect traction that we are now seeing from the addition of new talent over the past 18 months.
Arizona posted another solid quarter growing loans $20 million and showing trailing 12-month growth of nearly 30%. Several of the larger new loans this quarter included the financing of a newly developed medical office complex near one of the largest hospitals in Phoenix as well as an M&A transaction for an existing environmental services company relationship. We continue a well-balanced approach in this market with both CRE and C&I and sales strategy has its focus on targeting small and midsized businesses currently with the national bank players in this market.
Turning now to slide number nine. Typical seasonal patterns and timing on funds movement by a few larger depositors had quarter ending balances off slightly from the prior quarter. However, average deposit balances grew by $106 million in the period and growth is in excess of 8% over the past year. As you will hear from Keene, we remain highly focused on retaining existing balances, attracting new deposit relationships and managing overall funding costs. We continue to build our account base with net new accounts opened across each of our major channels, consumer business banking and commercial year-to-date. We are closely monitoring the behavior of our depositors as well.
We have certainly increased awareness of how excess funds are positioned with some movement by depositors from DDA into interest-bearing accounts. The improved optimism by businesses has also resulted in higher usage of their excess cash balances. We are proactively working with our depositors to engage strategies that address their concerns for idle cash management, retain these balances on a more favorable basis and head off their out of the bank or into competitive bid situations. While funding costs are rising, we expect this proactive approach with top deposit clients combined with the continued focus on C&I lending and floating rate loan structures to keep net interest margin well-positioned.
Our targeted deposit strategies are beginning to roll out and initial activity is encouraging. We have added new deposit accounts from these efforts related to nonprofit associations, financial services companies and professional services firms in the quarter. We expect these niches to provide incremental stable low cost funding to the balance sheet over time to complement the traditional regional banking channels.
Now I would like to hand it over to Keene Turner for a review of our financial results. Keene?
Great. Thanks Scott. The second quarter and year-to-date results were sound and I am proud to review them with you today. Our core growth has led to a strong start for the year and our underlying fundamentals remain in line with our high expectations.
One slide 10, we reported $0.95 per share of earnings with core contributing $0.86 per share. Non-core acquired asset contribution at $0.08 per share is worth noting this quarter as continued better than expected credit performance on these assets drove the expanded contribution. Although our emphasis continues to be on core resolve, the non-core acquired assets requires further explanation for the quarter.
First, the accretion number was lower linked-quarter. In the second quarter, we received a large recovery but the pool in which the exit occurred had some remaining allowance for loan loss. Net allowance was reversed first and it basically represented the entire game in our results. Second, there was a little over $2 million of allowance remaining in total for these assets, thus we expect some reversion of the accretion to prior quarter levels. And finally, despite the large gain in corresponding reduction in remaining balances this quarter, we still expect quarterly incremental accretion to contribute at least $0.5 million, or about $0.02 per share with opportunity for upside. Thus, we are forecasting that quarterly incremental accretion will be $0.02 to $0.03 per share for the next six to eight quarters. Sorry for the deep dive on that but I felt the trend and discussions were worth clarifying.
I don't want that discussion to overshadow the stellar core results, which are summarized on slide 11. Core EPS expanded $0.02 linked-quarter and to $0.86 per share reflecting strong fundamental profitability. Revenue expanded by $0.07 per share with $0.05 in net interest income and $0.02 from fee income growth. We recorded $0.02 per share more provision for loan loss as modest net recoveries flipped to modest net charge-offs and income tax expense was $0.03 per share higher than first quarter reflecting a more normalized rate and expansion of pretax income.
Return on average assets and tangible common equity were 1.65% and 20%, respectively, while core returns for both were stable at 1.48% and 18.2%. With that, I will expand on core net interest income trends on slide 12. Core net interest income increased by $1.4 million to $46.8 million for the second quarter. Core net interest income dollars expanded sequentially due to one additional day, strong first half growth and stable core net interest margin. At 3.75%, core net interest margin was pretty clean and the first quarter had some isolated items in it. We are pleased with solid defensive margin given the interest rate environment and we are particularly encouraged by the performance on left side of the balance sheet which we have used to defend and grow the right side, ideally with core deposits.
Portfolio loan yield increased 12 basis points to 4.99%. We are seeing net new loans as well as existing variable-rate loans are contributing to the yield expansion. Loans remained a consistent percentage of earning assets while portfolio loan mix within continues to steadily trend toward floating rates, now at 60%. Adding to the positive trends, the average rate on variable loans exceeds the average fixed rate. Our C&I relationship focus drives these favorable trends and should bode well for us in the current interest rate environment.
On the other side of the balance sheet, deposit and funding costs have behaved as we expected them to. We continue to deploy improving asset yields to defend and grow deposits. Thus increases in deposit and funding costs have been steady while seasonally high level of wholesale and broker funds absorb the expansion of yields on the asset side. We remain aggressive in targeting new deposits, as you heard from Scott, while being cautious not to unnecessarily reprice existing balances. Competition for deposits is robust and thus the cost of deposits increased by 12 basis points to 0.73%.
Defending core net interest income and net interest margin is a priority for us and we are careful to balance margin defense with continued growth of net interest income dollars. We have great flexibility with the duration and interest rate profile of the loan portfolio. We have used this strength along with the continued shift of more loans to variable rate to attract net deposit accounts. Our number of accounts is growing but we believe the seasonal liquidity trend for our clients is at a low point and will build as 2018 progresses. We expect 2018 portfolio loan growth will be high single digits, given our year-to-date results. We are pleased that the growth has been steady thus far for 2018 and it aids our growth in net interest income dollars.
With that, we will turn to slide 13, which is credit trends. Net recoveries turned a modest charge-off of six basis points in the linked-quarter, $90 million of portfolio loan growth, along with other factors resulted in a $2.4 million provision for loan losses. Meanwhile, levels of nonperforming loans and assets were essentially stable and we believe 1% coverage for the allowance to loans and related provisioning remains prudent given trends in portfolio performance.
On slide 14, noninterest income increased $0.5 million, principally due to $0.3 million of customer swap fees and a bank-owned life insurance gain. Recurring fees were stable with both deposit service charges and card services growing slightly in the linked-quarter and we are poised to deliver on mid-single digit fee income growth for 2018.
Operating expenses on slide 15 totaled $29.2 million in the quarter, which is essentially stable in the linked-quarter. Merit increases, personnel investments and the like replaced seasonal payroll taxes from the first quarter. 3.5% linked-quarter revenue growth on top of stable expenses improved the core efficiency ratio to 52%. Consistent with year-over-year and quarterly trends, we still expect that marginal efficiency will range from 35% to 45% of revenue growth.
To wrap up my comments, I will ask you to reference slide 16 where we track our quarterly EPS progression. Full-year compound growth of nearly 30% and 177% improvement in quarterly run-rate demonstrates that our focus on incremental progress is resulting in achievements. Our strategy support continued growth in core EPS and returns from already high level. With the first half of 2018 behind us, we are off to a great start and we are excited about the rest of years and the years to come.
That concludes the prepared remarks we have. We sincerely appreciate your continued interest in our company and for joining us. And at this time, we will open the line for analysts.
[Operator Instructions]. Our first question will come from Andrew Liesch, Sandler O'Neill.
Hi guys.
Andrew, how are you?
Good. Thanks. Keene, just back to your comments, did you mention something about like a seasonal increase in borrowings or something related to that?
Yes. So Andrew, typically if you look at enterprise and it really relates the underlying customer base, we tend to build liquidity in the deposit area in the second half the year and then it tends to bleed out between tax season and June 30. So we are essentially at a low, what we believe is a low, for deposit funding and we expect it will get some natural build as the year goes on. But my comments reflected the fact that we are still accumulating net new accounts, including both commercial, business banking and retail and we expect that that will bode well for growth in the second half and really over the longer term.
Got you. So even with the normal with your existing clients as deposits flow in, the use of borrowings should be lessened here in the second half of the year. So that would also then be somewhat helpful for the margin and NII. Is that right?
Yes. That would be the opportunity, right, to the extent that we can bring in deposit balances and they have a rate depending we are below either marginal FHLB or any broker funding we have on the balance sheet. Given what's been happening with the loan side of the balance sheet, that's an opportunity for either attracting new client deposit accounts or maybe a little bit of modest margin expansion. But our outlook is, we are hopeful to defend and keep it flat and if there is any modest improvement that will be a bonus for us.
Okay. And then just on capital, I saw the increased dividend, but with the TCE ratio where it is, is there thoughts on why it couldn't be more? Or you are planning to retain capital to support growth or M&A? Just kind of what are your thoughts there?
Yes. No, I am just kidding. We are thoughtful about capital management. I think we pulled capital levels down pretty heavily from almost 9% starting June 30 and really third quarter of last year and when you combine our tax reform, I think that's been helpful. I think our view over the longer term is that somewhere between 8% and 9% is good. And we are not going to panic and go buy a bunch of shares back or do something with it, but we are more intentional about the dividend. We have had strong growth. So we are getting as much capital build as you might think and it gives us some opportunities and flexibility if M&A comes to fruition. But we have got a number of shares still authorized. If there becomes a more immediate need to buy it back and obviously there is opportunities to continue to expand the dividend payout, we will do it.
Okay. Thank you for taking my questions. Thanks guys.
Thank you.
Thank you. Our next question will come from Michael Perito, KBW. Michael, go ahead.
Yes, sorry. Good afternoon guys.
Hi Mike.
Two questions for me. It's not really a question on the results, just more of a kind of high-level thought question. But it seems like the core earnings at this point is most of the earnings. And I am just curious if you guys started to have any internal discussions about not necessarily stripping the core earnings out and just, I mean internally are you guys trying to view, especially after a quarter like this where it seems like you have pushed through a decent more some of PCI noise, just start viewing the whole bank earnings profile as one? Or do you guys foresee still kind of stripping and viewing the non-core piece at this point?
Yes. It's a good question, Mike. We talk about it a lot. The reality is that, as I indicated, you still have $0.02 to $0.03 a quarter and there is still a little bit of potential upside there. So you have got $42 million of contractual cash flows in the non-core acquired portfolio and it's carried at about $21 million. And within that, you have got $11 million of accretable and about $2.5 million of allowance. So depending on how quickly any of that will come back in or if the non-accretable piece, which is $10 million flips to accretable, it can still pretty materially impact a quarter or a year, anything like that. But I think we feel better about the stability of it. But we just haven't changed our presentation yet and I think we will have that discussion in a more robust way as we move over year-ends and start the year as fresh. So we will probably revisit that again at the end of the year, but we think it helps provide some clarity if we give you guys contribution numbers in that portfolio and then really guide the rest of the balance sheet.
No, that makes sense. I was just curious if that was something you guys have started discussing yet. And then just to clarify, it was $0.5 million quarterly for the next six to eight quarters, obviously give or take. But did I interpret those comments correctly?
That was correct. And as we work through and continue to progress, we will keep updating that. So I think if you rewind to my comments two or three years ago, for sitting here today we would have thought there would be no contribution from non-core acquired assets, but we continue to work those loans out better and they continue to keep performing and we continue to have a fairly risk-averse profile as it relates to reversals and working them out. So it speaks to the high quality of the team that continues to mange those, but they are a part of the earnings stream, albeit to your point, fairly modest and the good news is that the core is performing extremely well at 150 basis points ROI.
Right. And then actually a question on that. You guys, obviously I know you don't potentially provide guidance on that number but it seems like, given all your guidance, you are pretty firmly at this point north of 150 ROA, certainly above peer level. Curious how you guys think about that as it relates to investing in this franchise, post tax reform? And I guess in the context of post-tax reform, right, you guys have clearly shown that the ROA is probably going to stay at that level. As we think about you guys moving forward here though, has there been any increased discussion on maybe accelerating some things on the investment side and try and especially as it relates to maybe deposit initiatives or things like that now that you have a little extra retained earnings to play with and can still achieved that above-average ROA? Or is the goal to still try and push that up, do some positive operating leverage? Any updated thoughts you can give us on that dynamic?
Yes. Mike, this is Jim. I think what we said regarding the operating leverage, we will continue to invest in the business like we have in the past, people, systems and what have you. But I think our process is more rigorous today to make sure that it doesn't stall the returns. And so as it looks to people to grow the business or systems to make us more efficient, we are always evaluating that.
Okay. But nothing, I guess at this point nothing on the horizon that would be considered kind of an acceleration or bringing stuff forward and investing maybe sooner than you would have planned six months ago at this point?
Not at this time.
Okay. All right. And then just one last question for me, just on the competition which you guys made some comments on in the release. But you guys provide the loan growth outlook for the back half of the year, so obviously there are still some opportunities out there. But I guess does it seem at all like you are approaching a point where it would make sense to maybe grow mid-single digits versus upper as we move into 2019 and beyond? Or is that on your radar at all? Or is kind of the structure term or pricing, everything you are seeing out there still good enough where there is enough opportunities and you still feel comfortable with growing at that rate?
This is Scott. I think our mindset is that we will be thoughtful when it comes to growth. I think I mentioned favoring floating rate structures. I think there, if you look at some of the niches, life insurance we are seeing some pricing that doesn't make sense. We are not stretching growth there. EVL is another good example where we are making sure that we grow at partners that we know well, where we can get paid for the risk we are taking. So CRE is another good example. There are certainly some crazy pricing out there in terms on the CRE market. We don't have to stretch. We go deep with investors that we know well where we can get paid for the relationship. So I don't sense that we feel like we are stretching or really need to stretch to retain the pace of growth that we are on right now.
Have you guys noticed -- sorry. Go ahead, Keene.
If you want to look at that empirically, I think you look at their growth by region and I think you can seem right, dollars are pretty evenly distributed. But the St. Louis region, from a growth percentage perspective, is fairly modest. You see it making bigger market share gains than Kansas City. And in Arizona, specialties were fairly level with some repositioning of the portfolios within it, given competition. So I think the strength of the business model dictates that and I think your question strategically in longer-term, the only thing we will keep chasing, so to speak, the growth because at the right credit profile, it just becomes a question of, at what cost do we fund it and what type of funding is there. And so the flexibility of the balance sheet is an advantage right now and we are going to continue to use it to collect relationships.
No, that make sense. Thank you guys. I appreciate all the color and thoughts.
Sure. Thanks for your questions, Mike.
Thank you. Our next question will come from Jeff Rulis, D.A. Davidson.
Thanks. Good afternoon.
Hi Jeff.
Well, a little bit kind of in the same extension and maybe for Scott, I am kind of more interested in the pricing in and maybe touch of funding of the deposit side for market specific. So Keene, I think you just closed with the last statement on the loan side but maybe how is the deposit competition looking in each of your three markets?
Yes. Well, I mean it's certainly accelerated and more robust than it was six months ago. I think the competition on deposit probably looks similar in St. Louis and Kansas City. Arizona has always been, I think, a hotly contested deposit market. And so you are not going to see us hunting for a lot of interest-bearing deposits in Arizona. It's more of a relationship play there. I think in St. Louis and Kansas City, we see the smaller banks, maybe the midsized banks being much more aggressive with quote specials and using rates to attract deposit.
The large banks, still other than maybe from consumer specials here and there, seem they have excess deposits particularly from commercial clients. So I think that's really where we are targeting some of the larger banks and going after clients who may be either undervalued or may be pay less attention to at those larger institutions. It's really where some of the specialties that Jim talked about, that I have talked about in the past where we are targeting businesses that have excess cash, many of whom are attracted to the large institutions. Those are where we are really finding some success.
Hopefully that answers your question.
Yes. And maybe take that to another level on credit quality, just in your appetite. Are you seeing much differentiation between the three markets and where this market looks a little more cautious here than one or the other area?
Yes. I would say, it's particularly on the CRE side. I think we are seeing Arizona has become a market where there is nonrecourse financing but expected higher levels of equity and deals. I think there's probably where lessons learned in the last downturn, which was banks weren't really able to go back and realize guarantees from commercial borrowers. So now they are basically saying, well, that's fine but we want equity in aggressive structures from a covenant standpoint there. Kansas City, I think there's a little bit more robust development and construction environment there. We are finding a little bit more speck on the office and industrial side in Kansas City than we are in St. Louis. St. Louis, I think we are certainly seeing across all markets still the stretch for long-term fixed rates. With the flat yield curve, I think borrowers generally are trying to go out as long as they can go and we still some banks that are willing to the extend on low fixed rates with very little structure and those are the transactions that we are backing away from.
Got it. Thanks Scott. That's good color. And one just follow-up. Keene, you said the variable rate loan percentage, did you say 60%?
60%, yes.
Okay. Thank you.
You are welcome.
Thank you. Our next question will come from Nathan Race, Piper Jaffray.
Hi guys. Good afternoon.
Good afternoon. How are you?
I am doing well. Thanks Jim. Keene, jus to clarify, going back to the purchase accounting discussion, I appreciate your guidance in terms of the amount you expect to accrete to income over back half of this year. Could you just help us thinking about 2019? I think you mentioned you have about $11 million in accretable yield remaining at the end of 2Q here. So just help me thinking about the purchase accounting accrete into income in 2019?
Yes. I think what we said is for the six to eight quarters, that's about $0.5 million of incremental accretion per quarter. So that's about $0.02 to $0.3 a share. So six quarters would cover all of 2019 and eight would take you into 2020.
Okay. Got you. And then just thinking about expenses near-term. Just to clarify, you kind of expect this run-rate to hold near-term around 29% and 30%? Or do you expect that to come down a little bit based on some factors?
To the earlier questions, I don't think there is any expectation that expenses would decline from the current level. I think the expectation is we will continue our steady investment in the business and that there is going to be continued revenue growth. I think that the trend for improvement that you will see is with the relative level of revenue expansion and investment in the business, we will continue to see core efficiency trends towards 50%.
Okay. Got it. All my other questions have been answered. Thanks for the color, guys.
Thanks Nathan.
[Operator Instructions]. Our next question will come from Brian Martin, FIG Partners.
Hi. Good afternoon.
Hi Brian.
Maybe just one follow-up on the M&A and the capital discussion earlier. I guess, any change in discussions or just opportunities on the M&A side that you guys are seeing? It seems like it's a good opportunity from where we sit today with the capital levels at management-wise. But any change as far as St. Louis being the primary focus and more the deposit partner is kind what you are thinking about, if there were an opportunity? Is those are the way to think about it?
Yes. Brian, this is Jim. Yes, I think as it relates to whom are we talking or to whom would we be interested, it would be a deposit focus company. I would tell you that we would prefer to stay close to St. Louis, but given the currency that we have, we have opportunities to think about Arizona and Kansas a little bit more. And so we have broadened that net just a little bit in terms of our interest. But we are going to be picky. We have built a great company and so we want to make sure that whomever we would ask to join would have similar cultures and integrity and opportunities like we have today.
Okay. Since you have broadened, I guess, the net a little bit, Jim, I guess any thought on changing the size parameters? Still kind of $1 billion and north is kind of how to think about it? Or would it stretch down a little bit lower as well?
Yes. I think it's got to be for it to be meaningful. It's got to be in the same category you just described, same size.
Yes. Okay.
Yes. Brian, this is Keene. I might just add that I think we oversimplify what size, it's got to be earnings accretive enough to matter, right. And so that starts to dictate size, but it also is influenced by pricing and how well that underlying institutions fits and earns. So there's a other couple other factors that might cause you to go no up or down from there either way but to do a deal that have low EPS accretion and take that risk and spend all that time, just to get bigger doesn't make sense to us.
Right. And no change in the pace of discussions or opportunities, I guess maybe not discussion but opportunities. I guess is there is still a pretty good like that in the next 18 months. I guess your thought would be you can find something out that fits your parameters?
That would be our preference, yes.
Yes. Okay. All right. And then maybe just one other thing. Keene, I guess it seems like I guess we are hearing a lot from other banks just on the pressure on the funding side and it really hasn't seem to impact you guys with the variable rate loans. But as you look out, I guess, with the funding strategy, I guess is there is anything concern that a piece of your deposit portfolio maybe you haven't fully repriced that it could see some catch-up in a given quarter? Or I guess is it just simple, I guess it feels like there is a stabilizing front on the margin that you can manage both sides of it and keep it flattish, even with a couple more rate increases? Is that a fair assessment or hearing that right?
Yes. I think we expect that we would be able to keep it flat even at the current composition. I think if you improve the composition, you can improve margin maybe a little bit. But I don't think that's our expectation. I think we continue to expect it to be a difficult environment and depending on what happens next year, curve is even flatter and could invert, so that presents challenges it and of itself. So I think we are trying to stay realistic about what the environment is and will bring to us and what other, for example, what pressures that can create on reinvestment rates in the investment portfolio where we have had a little bit of opportunity in the last several quarters.
The only thing I would say is that at least on the deposit and the repricing front, basically starting a year ago we became a lot more deliberate and assertive about retaining and attracting deposits at with pricing and we started to feel more of the pressure as it related to interest rate increases. I am not saying that that's behind us, but we have been very responsive over the last 12 months and to the extent that any of that has built goodwill with our customers, we may get a little bit of easing at least at the rate of increase. But still bringing new and continues to drive up overall deposit cost. And again, our great advantage is that we have got the flexibility of that 60% variable loan portfolio helping to pay for it.
Yes. Okay. All right. And then just the last two for me. I am assuming no change at least on the midway through the year just thinking about the tax credits in the fourth quarter, kind of that normal seasonality. Is it fair to still think that's a good way to model things out at least on the fee income side, at least that component of it?
Yes.
Okay. And then just the last one was just on the hiring. You guys talked about bringing some people aboard. You have talked about the benefits of the Kansas City folks and delivering here over the last couple quarters. I understand you guys would certainly be opportunistic in hiring, but any areas that you guess you feel like you need to beef up at this point whether be the niches or in the urban markets in particular where maybe you have got more up interest in building a team, I mean other than I guess I understand, like I said, the opportunistic side?
Yes. Brian, I think opportunistic has always been our approach and I think that's how we found and onboarded the talent in Kansas City. I think we are going to closely watch those markets for further M&A because that tends to create the disruption. I think we would prioritize certainly deposit oriented commercial bankers and probably bankers that move within that lower middle-market.
Okay. But nothing intentional right now or specific that you are targeting, increasing the work capacity in Arizona over St. Louis today or Kansas City or whatever?
Yes. I would just say, we have been intentional about building a pipeline of talent across all markets so that we can be opportunistic. So we know who's out there. But we are not going, not necessarily looking to hire a new team specifically in the niche.
Okay. All right. That's perfect. I appreciate the color, guys. Nice quarter.
Thank you.
Thank you very much. [Operator Instructions]. Well, speakers, at this time it looks we have no further questions in the queue.
Okay. Chantal, thank you. And thank everybody for joining us this afternoon and most of all thank you for your interest in our company. We will talk to you next quarter.
Thank you very much. Ladies and gentlemen, at this time this now concludes the conference. You may disconnect your phone lines and have a great rest of the week. Thank you.