Enterprise Financial Services Corp (EFSC) 2018 Q4 法說會逐字稿

Good day, and welcome to the EFSC Earnings Conference Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to President and CEO, Jim Lally.

Please go ahead, sir.

Well, thank you, Ashley.

I welcome everyone to our fourth quarter earnings call and appreciate all you taking time to listen in.

Joining me this afternoon is Scott Goodman, President of Enterprise Bank & Trust; and Keene Turner, our Company's Chief Financial Officer and Chief Operating Officer.

Before we begin, I would like to remind everyone on our call today 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 this morning.

Please refer to Slide 2 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 statement that we make today.

Our financial scorecard can be found on Slide 3. 2018 was an outstanding year for our company.

Earnings per diluted share for the year of $3.83 and for the fourth quarter of $1.02, represented record performance.

As you will hear from Scott, our loan and deposit growth rebounded nicely from the third quarter.

Compared to the previous year, we were able to grow loans by 7% and deposits by 10%.

And we did this while expanding margins, improving our expense efficiency and keeping our credit statistics at enviable levels when compared to our peers.

In addition to all of this, on November 1, we announced a definitive agreement to merge with Trinity Capital Corporation.

This combination, scheduled to close during the first quarter of 2019, provides for significant upside to our company.

It gives us an expanded Western presence, another source of -- for well-priced deposits to fund our growth and expanded wealth business and a new market to introduce our commercial and business banking model.

Slide 4 is a reminder of where we spent our time in 2018.

As in previous years, we were intentionally focused on a few but vitally important areas.

This level of focus and equally high level of accountability by our leadership team allow us to post the results that we highlighted throughout the remainder of this call.

Slide 5 shows where we are focused in 2019.

I cannot help but be excited about the opportunities that this new year brings us.

First and foremost, we need to be excellent in integrating TCC into our company.

In doing so, we cannot be distracted in order to achieve the lofty organic growth targets that we have set for ourselves.

And finally, we will continue to be better, albeit incrementally.

We are committed to you and to one another to make Enterprise better every day.

I would now like to turn the call over to Scott Goodman, President of Enterprise Bank & Trust, who'll provide more color on our growth and specifics about our markets and our businesses.

Thank you, Jim.

Relative to loan growth which is outlined on Slide #6, we experienced a strong fourth quarter, resulting in a 7% increase in the overall portfolio for fiscal 2018.

Loan balances were up $83 million or 8% annualized for Q4.

The improvement versus Q3 is mainly attributable to a strong increase in originations across the portfolio, offsetting a modest decline in line usage and continued pressure from payoffs in commercial real estate and enterprise value lending, or EVL.

As Slide #7 shows, our focus on C&I business remained strong, with 11% year-over-year loan growth in this category and 17% annualized growth continuing in Q4.

Turning to Slide #8.

Growth for the year was well balanced throughout the portfolio, and we continue to place strategic emphasis on developing new C&I relationships where we can offer a broader product set as well as specialty businesses where our expertise offers better competitive dynamics and a more attractive risk-return profile.

For the quarter, we saw typical seasonal upswings in the life insurance premium finance and EVL businesses as well as success in moving some general C&I relationships from competitors in our regional markets.

The reduction in the consumer and other category which includes financial service businesses is mainly due to a desire by several of these clients to restructure balance sheets using nonbank sources to take advantage of low long-term fixed rates, as well as some seasonal trends in our underlying businesses.

Within our business units, which is shown on Slide #9, all loan portfolios supposed to grow for 2018.

For Q4, specialized lending had a particularly strong quarter, aided by the aforementioned seasonality in life insurance and EVL as well an increase in the aircraft finance portfolio.

Our EVL business grew by $24 million in the quarter, reflecting robust new deal origination activity.

As we've mentioned in recent calls, attractive valuation multiples for portfolio companies is causing a higher level of sale activity by our private equity client base.

On the flip side, this is creating strong returns for their investors which are generally eager to reinvest these proceeds as they go into new rounds of funds.

We also continue to selectively expand our base of sponsored clients through business development in existing markets and through referral activity.

As a result, originations well-outpaced payoffs in Q4 and deal flow in this sector looks good heading into 2019.

The life insurance premium finance business had a particularly strong quarter, growing by roughly $39 million in Q4 and posting 15% overall growth for the year.

Performance reflects timing issues related to elevated year-end policy renewals and premium payments as well as an increase in new policies financed.

We were also able to leverage our partner-adviser relationships to consolidate and refinance several policies from other lenders as we continue to emphasize our experience, our consistency and our ease of doing business.

The St.

Louis market grew by $79 million or roughly 4% for the year, including $12 million in the quarter.

Q4 origination activity was strong and balanced between C&I and CRE opportunities with new and existing clients.

However, St.

Louis has also been most heavily impacted by payoffs.

In Q3, this related to several larger payoffs associated with relationships involving classified loans or competitive situations where we opted to back away from unacceptable structural pricing.

In Q4, St.

Louis was impacted by the aforementioned recap activity by financial service firms as well as construction and commercial real estate transitioning to the permanent market.

Kansas City loans grew by $32 million or 5% year-over-year.

Q4 was flat mainly due to low origination activity in this quarter.

As we have throughout the year, our KC team continues to have success in targeting relationships from some disrupted competitors in the market.

During Q4, this included moving 2 large new C&I relationships, which provided net new deposit growth.

Heading into the new year, the pipeline for both C&I and CRE remains solid, and the healthy economic growth in Kansas City and traction on our brand in this market position us well for 2019.

Arizona had a very strong year in 2018, posting loan growth of $46 million, or nearly 16%, including an increase of $6 million in Q4.

The commercial real estate market in Arizona is quite attractive as expansion and construction opportunities support a higher growth economic environment.

We have been successful in leveraging this through cultivation of fewer but deeper relationships with selective developers and investors.

And while CRE is an important component of our strategy here, we also intentionally prioritize C&I balance in the portfolio.

During Q4, this included new C&I loans within the medical, aviation and professional service industries.

Deposit growth, as summarized on Slide #10, was 10% year-over-year, bolstered by a strong Q4 in which balances grew by $378 million.

While it is typical to see some seasonal uptick in growth during the fourth quarter, this increase was exceptional.

This level of growth is attributable to a number of factors.

First, we've made a concerted effort through our sales process to focus on targeting current relationships to consolidate their excess balances from other institutions.

This resulted in higher balance growth from existing commercial depositors, generally within interest-bearing account types.

Included within this was one particularly large commercial client, which accounted for roughly 1/3 of the quarterly growth in Q4.

Aside from this, the remaining increases were well diversified.

Second, we continue to gain traction with focus on targeting deposit-rich new relationships, both within general C&I as well as the specialized deposit initiatives.

Noninterest-bearing balances were up $39 million or 14% annualized compared to prior quarter.

Overall our new account base across the company continues to grow.

Specifically, accounts opened in the specialized initiatives, which include legal, financial services and association-based offerings, increased over 30% in the quarter.

At this point, now I'd like to hand it off to our CFO, Keene Turner for his comments

Thank you, Scott.

Just take a minute to note that we changed the presentation of our results in the quarter, namely the core earnings per share presentation was removed in the favor of reported earnings per share.

We did so because we expect noncore acquired asset accretion to be fairly stable at $0.02 or $0.03 a quarter moving forward, and we expect the opportunity for provision reversal to be fairly insignificant given about $1 million of allowance remaining in that portfolio.

So on a transitional basis, we continue to measure certain of the core metrics like net interest margin, and we'll continue to update those metrics as they emerge and move forward in the quarters for 2019.

Fourth quarter and full year results, were strong both in terms of earnings and returns.

Return on average assets was in excess of 1.6% for both periods.

We continue our capital management activities, repurchasing $12 million of common stock during the fourth quarter and increasing the first quarter 2019 dividend by another $0.01 per share.

Combined with our strong earnings profile, our capital management activities help sustain our 20% return on tangible common equity for the fourth quarter and full year 2018.

Our full year earnings per share comparison is presented on Slide 11.

We reported earnings per share of $3.83 for 2018, which included $1.11 per share improvement from a lower federal income tax rate, various planning initiatives as well as the deferred tax asset writedown at the end of 2017.

The remaining $0.65 of annual earnings improvement can be attributed to mostly organic positive operating leverage.

We expanded revenue by approximately $0.66 per share despite a $4 million reduction of contribution from the noncore acquired books, and we invested $0.33 per share in expenses, achieving the marginal efficiency we forecasted on a core basis, albeit at the higher end of our guidance.

Provision for loan losses was better by $0.13 per share, which is mostly reversals in the noncore book.

And the timing of merger expenses, JCB versus Trinity, was $0.19 per share favorable comparison.

In summary, we grew the balance sheet, expanded net interest income dollars and core net interest margin.

We also maintained our expense rate and credit cost with favorable trends to portfolio loan.

The resulting performance was strong returns and earnings leaves us well positioned as we move into 2019.

That said, fourth quarter financial results were seasonally strong and capped off 2018 earnings.

As you heard from Scott and Jim, core growth resumed and our underlying fundamentals are stable and remain in line with our lofty expectation.

On Slide 12 we reported $1.02 per share of earnings for the first -- for the fourth quarter compared to $0.97 per share for the third quarter.

There were a couple of noisy items in the quarter.

First, merger expenses for Trinity totaled $0.04 per share.

Income tax expense was $0.10 per share higher than the linked quarter.

You remember $0.08 of that was attributable to a tax planning item in the third quarter and the remainder was due to an increase in pretax income for the linked quarter.

Revenues for the quarter increased $0.18 per share.

Noninterest income was affected by seasonal tax credit sales, which drove most of the $0.09 per share linked quarter increase in fees.

Net interest income also expanded $0.09 per share compared to the third quarter.

I'll cover the moving pieces of this momentarily, however, both net interest income and provision for loan losses included $0.05 and $0.03 per share, respectively, for transactions that occurred in the noncore acquired portfolio.

And we do not expect those to recur in the future periods.

With that, let's turn to core net interest income trends on Slide 13.

From my perspective, we're executing the business model well and managing the flexibility of the balance sheet appropriately.

We had managed to hold core net interest income and net interest margin stable for the last 6 or 7 quarters.

Fourth quarter net interest margin expanded to 3.77% due principally to changes in how growth was able to be funded.

Our margin expansion, coupled with higher average earning assets increased core net interest income by nearly $1 million in the linked quarter.

Net interest margin performance demonstrates that we have been -- what we've been stating over the past several quarters, we've used the flexibility and high quality of the left side of the balance sheet in order to defend and grow the right side.

Portfolio loan yields again increased 11 basis points to 5.23% for the quarter.

We continue to see new loans as well as existing variable rate loans are contributing to the yield expansion.

New loans in the quarter were originated with a weighted average yield of approximately 5.60%, notably variable rate C&I loans.

Loans remain a consistent percentage of earning assets, while the portfolio loan mix within continued steady trend towards floating rates, now at 62% of the total.

Adding to the positive trends, the average rate on variable loans exceeds the average fixed rate.

Our C&I relationship focus drive these favorable trends and continues to perform well for us in the current interest rate environment.

Deposit and funding costs behaved as we expected them to.

We continue to deploy improving asset yields to defend and grow deposits, and we experienced significant seasonal expansion and deposit growth during the fourth quarter.

This allowed us to materially reduce higher cost wholesale funding sources and expand net interest margin, albeit modestly.

This is most prominent in the mix of deposits and FHLB borrowings.

We reduced the average borrowings more than $130 million in the fourth quarter and replaced them with deposits priced 150 basis points lower on average.

While this improvement is driven by seasonal trends, and we expect some reversion as customers deploy these excess funds, we continue to pursue new core deposits whilst defending existing customer balances.

Defending net interest margin continues to be a priority for us as we strive to grow revenue via net interest income dollars.

We believe the balance sheet is well positioned to continue to withstand and absorb the interest rate environment we are facing, with the goal of preserving a similarly stable core net interest margin in upcoming quarters.

For 2019, we expect legacy portfolio loan growth will be high single digits and our long-term growth rate of 7% to 9% is appropriate, given our diversified business model and significant investment in business development.

With that, we'll turn to Slide 14 for credit trends.

Provision for the fourth quarter was essentially flat at $2.1 million.

Charge-offs on an existing specific reserve on one credit for $3 million, in addition to a noncore acquired provision reversal of $1.1 million drove the allowance trend.

As fourth quarter loan growth resumed at around $80 million, we provided for new growth as well.

Coverage for the allowance, given overall credit trends and portfolio composition remains robust, and we continue to prudently provide for growth and what we believe are inherent losses in the portfolio.

On Slide 15, noninterest income increased $2.3 million, principally due to sales tax -- state tax credit sales, my apologies, of $2.3 million, along with a $0.2 million improvement in sales of customer swaps.

In that regard, we continue to expect high single-digit growth in 2019 fee income due to continued trends in cards and our other fee businesses as well as an increase from expansion of our tax credit business that we discussed last quarter.

Operating expenses on Slide 16 for the fourth quarter totaled nearly $31 million, inclusive of $1.3 million of merger-related expenses.

Run rate expenses of $29.4 million resulted in a core efficiency ratio just under 50% when combined with the seasonal revenue trends.

Consistent with year-over-year and quarterly trends, we still expect that marginal efficiency will range from 35% to 45% of revenue growth.

And as in the past, most of the expense growth will be continued investment in personnel and other revenue drivers.

Slide 17, is restated and tracks our quarterly EPS progression, 5-year compound growth of 42% and a 467% improvement in the quarterly run rate, demonstrates that our focus on incremental progress has been successful.

We sustained a high return profile over the last several years, and growth from M&A and organic business development continue to drive EPS expansion.

We're pleased with the 2018 results, and more importantly, we're positioned for both near and long-term growth.

That concludes our prepared remarks, and we appreciate your interest in our company and for being on the call today.

At this time, we'll open the line for questions.

(Operator Instructions) We will now take our first question from Andrew Liesch of Sandler O'Neill.

Just question on the deposit inflows and some of the balance sheet composition here.

So it sounds like you used some of these -- this fresh liquidity to pay down some borrowings, but also looks like you bought some securities with it as well.

Can you just talk about what you guys acquired this quarter?

Yes.

Well, from an investment security perspective, it's just more of the same.

We know we had some proactive investment we could take care for pay downs and normal cash flows off of the portfolio that we would experience in '19.

And with more liquidity coming in on the deposit front, it made sense for us to pull the trigger on some of that, but sort of pre-Trinity closing, we expect 14% to 15% of the total balance sheet to be the investment portfolio.

So that's not a relative shipment strategy.

It's really just managing the timing as we had excess cash at lower rates.

And then with Trinity that will blend closer to 20% and then we'll redeploy that over a period of time.

Got you.

Okay.

So from this -- including some of the short-term investments that you have has been the fed funds like $920 million or so, 17% on average of earning assets kind of leave it around that level before the deal closes?

Yes.

I think you're just going to see some of that normal runoff.

I mean I think from an investment portfolio perspective, we bought less than $50 million in the quarter.

So maybe what you're seeing is really just interest earnings cash that ended up being excess at the end of the year.

But within the portfolio, I don't think that we did anything quite at that level.

And then that cash flow will come off the portfolio in the next couple of months, and we'll be right around that 14%, 15%.

Okay.

And then just on the deposit growth.

I mean, certainly, some strong growth here in the quarter.

But how does the pipeline look for this quarter, for this year with new deposit relationships?

I mean, 9% or so seen, probably not likely to be repeatable.

But just how are -- just what does it look like as far as new accounts coming in so far this quarter?

I'll take that one.

This is Scott.

It is steady.

I think we have gotten our commercial bankers focused on widening existing relationships and going after new relationships and deposits is really a lead for that.

So I don't see any reason why we can't continue to do what we have been doing.

And while it's competitive in the market, I think we focused on staying disciplined and not having to buy deposits, doing it through relationship and through product.

So I'd say continuation...

We will now take our next question from Jeff Rulis of D.A. Davidson.

Question on the loan portfolio.

Some good steady growth in there.

And I guess I wanted to circle back to Scott's comment on that in a consumer portfolio.

I think he mentioned sort of customer behavior has led to some of that runoff.

But I guess, strategically, is there anything happening in the consumer book that -- I mean are you I guess, focused elsewhere on the C&I side?

Or is that -- anything strategic happening within your ranks on the consumer front that would drive some of that shrinking balance?

So within that consumer and other, really most of this shrinkage is in the other category.

Some of the corresponding banks and financial service companies that we work with are categorized there and that was my comment about.

We saw several of them going after the long-term market and locking in fixed rates with nonbank product, which resulted in some pay downs.

And then just, you know, there's some seasonality obviously in the financial services sector in the fourth quarter.

So that's really what it was, not consumer portfolio per se.

Got it.

So on the corresponding credits, is that something that you're willing to just walk given that doesn't fit your profile of...

Well, it was apples and oranges.

I mean, in some cases they're going off of refinancing into long term, in some cases subordinated debt, in some cases low long-term fixed rate debt which isn't a product that we would want to offer there.

So usually, they come back and replenish cash as they grow, and so we didn't lose relationships.

It was just a transaction.

Got it.

Okay.

And then just on maybe the M&A side, the Trinity sounds like, worded that its sort of an imminent close or you expect this within a few weeks?

So, Jeff, this is Jim.

So we've received approval from both the FDIC and Missouri Division of Finance.

And then we'll take it from here.

Things are going well relative to our prospects of closing that in the first quarter, and we're very confident in that regard.

And then the timing expected on conversion?

So we're looking to convert mid- to late second quarter for that.

And last one just, I guess, additional, you're concentrating on closing this and integrating, but any other opportunities or, I guess, detail on are you still out in the market, having conversation, how is that additional M&A shaping up?

As you know, it's a very active market, and certainly, we've been very active in terms of discussions and what have you, but certainly, we don't comment specific about targets.

But given our capital position and our continued growth aspirations, it's part of what we do every day.

We will now take our next question from Michael Perito of KBW.

Few questions.

On the -- maybe my first question for Scott, on the EVL portfolio.

Can -- you know, had some nice growth in the quarter.

I know this has kind of been a little choppy for you guys in the recent past year, but I'm just curious can you remind us maybe a little more about the credit profile of that portfolio what type of leverage you're underwriting to and the portfolio has today and the size of credits and things of that nature?

Sure.

Yes, happy to do it.

Generally, our client is a private equity sponsor that's going after lower middle-market credit.

So EBITDA companies in maybe the $2 million to $8 million range would kind of be the sweet spot.

We would typically see holds for those credits of anywhere from $5 million on the low side, up to $15 million on a single credit on the upside.

Now we'll do multiple deals for sponsors, but that's a single credit profile.

Usually, we're structuring these deals on a senior basis with leverage anywhere from 2.5x up to maybe 3x or 3.25x on the high side.

And then they're layering in 1 turn, 1.5 turns of mezzanine.

Many of our sponsors are SBICs which really use the sub-debt product and because their funds are sub-debt they're not really pushing us as you might see if you move upmarket to do leverage profiles above the 3x, 3.25x because they want to get their product in there.

That said, I mean, we're seeing more competition there.

We're seeing more churn of the portfolio because multiples are good and our sponsors are pretty disciplined.

I like to take advantage of that.

But we're also getting growth because we're expanding our sponsor base and many of them are rolling out new funds as I alluded to and so we're in the loop with most of them for new deals.

Is that helpful?

Yes, very helpful.

And then maybe switching gears question for you Keene.

As we think about the unchanged kind of expense guidance and marginal efficiency, 35% to 45%, but then you're laying in Trinity on top of that, with cost-saving targets there and you ticked under 50% on the efficiency ratio this quarter.

I'm just curious if you can give us any thoughts about how you see the consolidated efficiency ratio trending specifically post-Trinity or pro forma for Trinity close at this point?

Yes.

So I would say, we're going to talk about full phased-in run rate, right, so let's say at the early of Q4 of '19, the way cost saves work in Trinity, that's going to be somewhere in the 40% to 45% marginal efficiency, but that would be excluding about $1 million a quarter of core deposit and tangible amortization that we're going to get and that will run down over the period.

So fairly similar to where we're sitting today.

And then obviously, our efficiency ratio will be difficult to maintain, given the -- call it $2 million of extra seasonal revenue we had here in the tax credit business, although we do expect as 2019 progresses that we'll get some additional tax credit sales that we didn't have in prior periods and that's how we guided to the high single digit.

So I don't think one way or the other, once we're fully phased in Trinity, from an M&A perspective isn't going to move the needle.

I think we achieved the cost savings -- or we will achieve the cost savings we'll need to, but it is also out of our market.

And so we want to be mindful of fact that we don't want to overcut there for an operation that's I think slightly new market and slightly expansionary.

Okay.

So I mean, is it fair to summarize, I mean, you -- there will probably be a jump up in the efficiency ratio in the first quarter as some of that seasonal tax revenue goes away, but then the hope would be to improve it to levels of, by the end of the year, modestly lower than where you were in the third quarter?

Yes.

And also to a -- it's actually the opposite as Trinity comes in with a fairly significant efficiency ratio up in the 60s and 70s, it's actually going to be a little bit negative on a consolidated basis until we actually get some of the costs out post-conversion.

Okay.

Helpful.

And then just one last question for me for Jim on the capital side, asking it a little differently.

I feel like at this point, most -- I would assume most models, including your internal model there are -- had the upper single-digit organic loan growth baked in which is probably the top priority from a capital deployment's perspective?

And obviously, M&A is nice but challenging to find the right deal.

As we think about your capital levels today and your appetite for dividend increases and share repurchases, I guess, what's the right thought process?

I mean, is it we don't want to see tangible levels get much more north of 9, and we'll use dividends and buybacks accordingly to keep that or is there another way we should be thinking about kind of your appetite for capital deployment as capital levels continue to build here?

So I think you captured our strategy well in your question that we'll continue to seek ways to manage it through all 4 avenues, but the level that you mentioned seems to be the right target level for us.

Okay.

So I mean, it's fair to say, I mean, obviously quarter-to-quarter it could vary but longer term, you like to see the TCE ratio not much above 9%?

That's correct.

We will now take our next question from Nathan Race of Piper Jaffray.

Keene, on deposit costs, the increase that we saw this quarter moderated relative to what we saw earlier this year, so just curious how we should think about upward pressure on deposit costs in 2019 if we do get a Fed that's on hold and obviously, within the context of Trinity coming on board, which obviously has a great deposit base as well.

Yes.

So I think we'll address, we'll go in reverse order.

So I think Trinity blends our costs of deposits down by about 12 basis points.

So that's just sort of pro forma at closing.

From a behavior perspective, we -- I think we look at it as margin, right.

So 3.77% margin maybe is fairly full and that will require us to maintain a lot of the liquidity that we had at year-end and in the deposit book.

And so the deposit cost trend you saw from a maintenance perspective is also some mix as well.

But we expect that similar to prior interest rate environments, the right and left side of the balance sheet will move consistently.

So if there's no movement, we don't -- we think that we've done enough on the deposit side from a repricing perspective to not have as much pressure and to generally maintain margin as we have over the past 6 or 7 quarters.

So that's the way we think about it.

Much of that tends to follow LIBOR, what happens from a competitive perspective is always difficult to predict, but I think generally, we feel like we're well positioned, and we don't have a lot of deferred maintenance on the deposit repricing front.

And so I think that bodes well for us if rates stay unchanged.

Absolutely, that's great color.

And maybe just thinking about the left side of the balance sheet in terms of new loan pricing.

If you kind of peel back the accretion it looks like the core yield is at about 5.24%.

So just curious kind of where you're putting new loans on the books.

I know lot of the production in the quarter came from EVL, which can carry some higher yields out of the gates.

So just curious kind of how loans are coming on the books relative to that kind of core portfolio yield?

Yes.

So new loan yield as I indicated in my comments was 5.60% and then the total blended yields was 5.23%.

EVL can drive that up, but also much of the production we had in the portfolio in the quarter was LIPF.

And so those trends are good, particularly, as it relates to putting on something that is that high of a credit quality.

So the LIPF loans come with a slightly lower initial provision and longer-term provision given the low loss profile of those loans.

So we -- both of those trends are actually really strong for us and maybe there's some upside going forward on the left side of the balance sheet if we get production on the sort of general C&I side and the EVL side as the volume we have in the fourth quarter is substituted by potentially higher yielding classes.

Okay, got it.

And I apologize that I missed those comments in your prepared remarks.

Just lastly, on Trinity, just curious to get an update, in your travels to and from that market how the retention is going so far to the extent you have that visibility and just kind of what your outlook in terms of attrition or kind of growth with that loan portfolio as 2019 progresses?

Yes, I would just say everything is going as we would expect, and we have fairly low net growth expected for that loan portfolio.

There's a couple of portfolios they have strategically that they haven't -- they're not part of their core business but their expectations for continued commercial loan growth in their markets is expected to generally replace that.

And so for the numbers that we presented for '19 and '20 on a pro forma basis for low single-digit growth on both sides of that balance sheet.

We will now take our next question from Brian Martin of FIG Partners.

Some of my stuffs been answered, but just a couple easy ones.

Just on the -- credit quality looks really strong and, I guess, it doesn't appear as though there's any big concerns out there, but I mean, the charge-offs this quarter, can you give a little color behind what was driving the charge-offs this quarter?

Sure.

Yes, and I think I will just say overall, I agree.

We think credit quality is in good shape.

The charge-offs this quarter was really related to primarily, to one larger C&I credit in the EVL book, which was the consumer products business.

There's a couple or maybe 4 others that were all under 6 figures, but I don't see any overall systemic issues or trends.

I think classifieds for capital continues to decline.

Our NPAs to average assets is half of what our peer levels are.

So reserves are in good shape.

Overall, I feel good about where we are there with credit.

Okay.

So one credit was a big piece in there.

And then just on the -- maybe for Keene on the tax credit business.

I think when we look at that business and you guys made some comments about things you were doing on that front in the -- the annual income from that business this year, I guess, when you think about it in '19, the changes you've made, can you give any just thoughts on that piece?

So the fee income, Keene, outside of the other pieces, just how to think about that or anything has changed since your last kind of commentary on that?

Nothing has really changed on that.

It's still for us yet to realize, right.

It's a business that requires us to make investments and then harvest and sell those credits.

So it's in sort of that first piece of that.

But we do expect some realization of revenue in 2019.

And I think we said we expect that business in and of itself to expand in the 20% to 25% range from where we were on an annual basis.

So it sounds like a big percentage and it obviously, is meaningful for us but that's in an environment where you got a little over $2 million in the current quarter.

It's a couple of cents a quarter that you didn't have.

First quarter will just be the trickle out of the tax credit business that we normally have.

So a penny or 2 there, and then I think what we're hopeful that we'll see is a steady contribution from there on out and the steady increase in contribution.

So maybe a little bit more to come here in the first quarter on that, but I think overall, and as a line item, we haven't changed our expectations as it relates to 2019 with the tax credit business.

Okay.

So more spread evenly as opposed to just Q1 and Q4?

Yes.

Until we sell the book that we own ourselves, Q4 will still be fairly heavy.

We think the rest of the quarters will start to become contributors at a couple of cents a share moving forward.

Okay.

All right.

That's fair enough.

And then just the last one.

Just the -- I think you said with the deposit growth this quarter that maybe you'd see some of that, I guess, fall out in the first quarter.

Is that what I heard, or I guess, maybe did I miss that?

No, you heard that correctly.

I mean, much of the deposit base is still commercial.

Customers gather, collect and accumulate cash at the end of the year, whether that's drawing on their lines or collecting from customers and then a lot of that gets paid out in bonuses and other things early in the year.

So particularly, with some of the larger professional services firms that we bank and things like that those DDA balances saved up the fourth quarter and then deployed early in 2019.

So we've got to make a little bit of that up, but we're doing so from a nice run rate here on margin perspective.

(Operator Instructions) It appears there are no further questions at this time.

I would like to turn the call back to our host for any additional or closing remarks.

Well, thank you, Ashley, and thank you, everybody, for joining us this afternoon.

We certainly look forward to visiting with you, again, at the end of the first quarter.

And I want to thank you for your interest in our company.

Have a great day.

Ladies and gentlemen, this concludes today's conference call.

Thank you for your participation.

You may now disconnect.