Enterprise Financial Services Corp (EFSCP) 2022 Q2 法說會逐字稿

Good morning. My name is Rex, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enterprise Financial Services Corp. Q2 Earnings Conference Call. (Operator Instructions)

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

Well, thank you, Rex, and good morning, and welcome, everyone, to our second quarter earnings call. I appreciate all of you taking time to listen in. Joining me this morning is Keene Turner, our company's Chief Financial Officer and Chief Operating Officer; and Scott Goodman, President of Enterprise Bank & Trust.

Before we begin, I would like to remind everyone 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 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 statements that we make this morning.

Please turn to Slide 3 for our financial highlights of the second quarter. We are very pleased with the results of the second quarter. Our cadence of consistency that we spoke of in previous quarters has continued. Our highly consultative relationship approach works well in times of uncertainty that clients and prospects to get advice and guidance. Our client base is in the best financial shape that we've seen in a very long time, and are seeking opportunities to grow their businesses. Yet, the economic tea leaves suggest that we may have a slowdown in the horizon while the interest rate environment creates additional challenges for our clients. I am confident that the consistency of our model has and will continue to positively impact our results.

Over the last 5 years, we have focused on diversifying our revenue through geographic and business expansion. We've improved our funding by way of M&A and we have bolstered our balance sheet and capital position with a strong reserve and well-executed capital management. The bottom line is that we have built the company for times just like this and are excited to share with you our results.

For the quarter, EFSC earned $1.19 per diluted share. Our second quarter performance reflects the power of all our lending businesses, combined with the revamped deposit composition that we have assimilated, starting with Trinity, and most recently with First Choice. Loan balances expanded at a 13% annualized rate with contributions from nearly every business line of geography. Given the variable rate nature of many of those lending segments, our earnings power through existing and new loan production bolstered net interest income and outstripped declines from success in PPP as well as seasonal trends and noninterest income.

Net interest margin income and operating revenue all expanded substantially from the first to the second quarter. Deposit levels remained above $11 billion at June 30, and the shift during the quarter reflects our approach to focus on supporting customer relationships rather than transactions. Our action is to exit high interest-rate sensitive balances speaks to our confidence in our ability to continue to grow our relationship-driven deposit base in our core and specialty deposit businesses.

At quarter end, our loan-to-deposit ratio was just under 84% with DDA representing 43% of total deposits. In addition to our success in expanding customer relationships and growing loan outstandings, treasury management and our commercial card businesses remain strong, poised for continued growth during the year.

Additionally, we expect the tax credit business will rebound in the third and fourth quarters based on the high project volume and activity. These underlying business trends are reflected in the expansion of our pre-provision net revenue, which grew at an annualized 10% rate to $58.4 million for the quarter. Our return profile to remain strong, ROAA and PPNR ROAA, were 1.34% and 1.73%, respectively. These are right in line with the levels that we achieved in the previous 2 quarters, but we believe our current performance is more reflective of a repeatable run rate.

Our integration of our Southern California market has positively impacted our financial performance since we acquired FCB. But now we are beginning to see the returns from the influence of our sales model and supplemental talent adds.

Acquisitions of new clients and the ability to grow with the clients we inherited has positively impacted loan growth in this market during the quarter. With the combination of ongoing industry growth in Southern California, the momentum that we have across all of our markets and national specialty businesses, gives me confidence in our ability to maintain this level of performance before the remainder of this year and into 2023. Additionally, we have begun to see the momentum in some of our newer markets like Texas and Nevada as well as practice finance. I expect we will have success over time attracting talent and further scaling these businesses in the years to come.

Our consultative model shines during uncertain economic times where we remain consistent and build the frames of long-term relationships that span decades. Additionally, I also believe that we will continue to benefit from disruption created by market consolidation in several of our markets. Our approach to lending and asset quality has not changed, and it remains uncompromised to achieve the growth we experienced.

We remain vigilant around credit, but we are prudently reserved with our allowance for credit losses to total loans at June 30, virtually unchanged from the previous quarter at 1.52%. That being said, we've been consistent in our view of the economy as seen by our hesitancy to release more of our reserves than we have. Our teams are working hard reviewing portfolios and performing special loan reviews, but to date, we have seen no signs of weakness.

Our capital position remains strong. At June 30, TCE to total assets expanded to 7.8%, while we returned $24 million to common shareholders through a blend of share repurchases and increased common stock dividends. We also announced another increase in our third quarter dividend to $0.23 per common share, reflecting both our commitment to shareholder returns as well as our confidence in further expanding our earnings profile.

The second quarter of 2022 represents the third full quarter since the acquisition of First Choice Bank. Over this time, we've established a predictable pattern of performance that is characterized by a strong return profile on both assets and TCE, strong organic diversified loan growth, a DDA percentage of total deposits greater than 40%, pristine asset quality, flexible capital management and steadfast expense controls. Despite this level of performance, we know that there's still room for improvement.

With that in mind, our focus for the remainder of the year can be found on Slide 4. You can see we have accomplished a few of the goals that we set for ourselves at the end of 2021. For the remainder of the year, we will focus on the basics, guiding our clients through whatever economic climate that lies ahead, and improve an already strong pipeline with solid new relationship opportunities, paying close attention to the trends related to our very attractive diversified deposit base and continue to monitor the loan portfolio for any early indicators of weakness.

With that, I would like to turn the call over to Scott Goodman, who will provide much more color on our businesses and markets. Scott?

Thank you, Jim, and good morning, everybody. Focusing first on the loan book, which is referenced on Slide 5. We posted strong performance in core loans, net of PPP, growing by $298 million in the quarter or 13.4% annualized. And this compares with $176 million in the prior quarter. The loan details by segment are outlined on Slide 6 and 7.

On a trailing 12-month basis, backing out the addition of the First Choice portfolio and the impact of PPP, from an organic standpoint, we've grown by $733 million or 10.7%. And as Jim mentioned, we're seeing contributions from nearly all markets and business units, providing a nice level of balance and diversity in our sources of growth. For the quarter, we experienced solid C&I growth coming from our regional banking markets and specialties with less impact from commercial real estate.

Overall, the increase in C&I was a result of our continued success in bringing on new operating company relationships as well as elevated usage on existing client facilities and revolving lines of credit. Average usage on revolving lines was up over 3% from the prior quarter. Commercial real estate originations were down modestly in the quarter.

And while we do see existing construction loans continuing to fund, new deals have slowed as developers repencil their projects for higher rates and material costs. Fewer new commercial real estate closings also reflect our disciplined approach as we hold the consistent underwriting and pricing guidelines in the shifting rate environment.

As we've discussed in prior calls, we employ a spread-based pricing philosophy for the term fixed rate portion of our business. We believe this provides a more easily managed and transparent approach for our banking teams and clients as well as a more consistent profitability profile for our company. With rates rising and competitive pressures at times pushing spreads below our thresholds, we've recently walked away from some deals.

Turning to our specialty lending segments. SBA, life insurance premium and tax credits, all continued to perform well in the quarter.

In the SBA business, I spoke last quarter about some competitive pressures in this space from non-SBA lenders on the existing book and our plans to proactively incorporate retention strategies. In Q2, we were successful in slowing early payoffs while also increasing new originations to post net growth of $34 million. We also continue to recruit new originators, particularly in our higher economic growth markets.

The life insurance premium finance team has successfully developed several new referral partner relationships in 2022 due to introductions from our existing client base as well as our entrance into the California market. Outsized growth of $52 million in what is typically a slower time of the year for this vertical as a result of originations from these newer partners as well as continued fundings from the commitment base of the existing book.

Fundings in the tax credit portfolio reflect a consistent pipeline of new affordable housing projects and steady draws on the existing projects within this portfolio. These specialties in particular, have historically shown their steady performance and resilience in the face of shifting economic pressures, and we expect this to be the case moving forward.

Sponsored finance posted softer growth this quarter, but is up $183 million or 39% year-over-year. While this can be a slower time of the year seasonally for this business, it also reflects a slight pause by many of our sponsor partners who revisited acquisition pipelines in the light of rising rates, continued supply chain and other economic impacts. We also saw some additional pay downs due to the normal churn from the sale of portfolio companies in the quarter. As we head into Q3 and Q4, sponsors seem to have restarted their processes, and the origination pipeline opportunities are starting to refill.

Moving to the business units, profiled on Slide 8. The $152 million or 20% annualized increase in specialty lending, reflects my prior comments on these niche segments. Additionally, the professional practice finance team, which was added late in 2021 is off to a strong start, adding $29 million of growth in this quarter and $48 million year-to-date.

St. Louis carries the largest C&I portfolio of our geographic markets and benefited from some higher usage on revolving lines of credit as well as elevated borrowing activity from existing clients in the private investment tax credit and packaging spaces. New business activity was also up with double-digit increase in new originations from last quarter and several new relationships added.

Kansas City shows continued steady growth, up nearly $50 million or 6.3% year-over-year and 8.9% annualized growth for the quarter. This market has a relatively balanced portfolio and also benefited from improved borrowing from C&I clients. New originations included refinancings of several commercial real estate developments and new project and M&A-based financing to expand existing C&I relationships.

The Southwest region, which includes Arizona and Las Vegas, posted strong results again this quarter, adding $43 million of growth in Q2, resulting in a 37% increase in the loan portfolio year-over-year. As we've developed strong relationships with top-tier real estate companies in Arizona over the past 15 years, the economic growth and expansion in Arizona continues to provide opportunities to assist these relationship-based clients with solid acquisition, development and refinancing. The quarter included several new deals as well as fundings on existing construction lines.

Last quarter, I discussed the change in leadership for the Albuquerque team within New Mexico, which represents the predominant share of loan outstandings for the market as part of a plan to address the declining loan balances there. As this change takes hold the remainder of the year, I expect to see improved trends and ultimately, growth in this portfolio. In the meantime, New Mexico, which, in addition to Albuquerque, also includes the submarkets of Los Alamos and San Jose, remains an important and growing base of well-diversified and low-cost deposits.

In Southern California, for Q2, I'm pleased to report that our loan portfolio here grew by $29 million in the quarter and represents a third consecutive quarter of positive momentum in net loans resulting from both higher originations and lower payoffs compared to the previous quarter. The improvements come as we continue to see competitive pressures on the real estate heavy book, particularly in the area of high-end residential remodel and fix and flip.

However, we are intentionally emphasizing a strategy to deepen relationships with clients that are balanced and mutually beneficial while also adding new relationships with C&I-operating companies through the addition of new talent to our platform. We're already seeing traction on these goals, financing over $70 million in new projects with existing clients and adding new C&I relationships in metal fabrication and healthcare basis during the quarter.

The new team in North Texas, now composed of 3 experienced local bankers, is onboarding smoothly and quickly developing a qualified pipeline of new opportunities. I would expect to see these begin to transition to closings during the next quarter.

Lastly, I'll touch briefly on deposits, which are beginning to elevate within our client conversations with the recent rate increases. The decline in total deposits within the quarter of $611 million was largely the result of managed decisions relating to a handful of rate-sensitive, interest-bearing specialty deposit accounts. You'll see this evidenced on Slide #9 within the third-party escrow portion of the chart.

Q2 also typically sees a seasonal rundown of deposits in the commercial book, which also impacted balances to a lesser degree. All in all, the diversification of our deposit book by geographic market and the continued growth in lower-cost specialty deposits provides confidence in our ability to walk away from these larger concentrations of higher cost, more transactional balances. Activity for the quarter shows that new account openings continue to outpace closed accounts, and at an average rate below our peer group. The focus on new relationships also is helping drive deposits with new depository relationship balances for the quarter, exceeding balances and closed accounts by nearly 3:1.

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

Thanks, Scott, and good morning, everybody. Turning to Slide 10. We reported earnings per share of $1.19 on net income of $45 million in the second quarter compared to $1.23 in the first quarter. Operating revenue increased in the linked quarter driven by strong organic loan growth and expanded net interest margin, which more than offset the decline in PPP and noninterest income in the quarter.

We continue to show strong credit metrics in all areas, but loan growth and changes to the economic forecast resulted in a provision expense compared to a provision benefit in the first quarter. Noninterest expense increased on a linked quarter basis due to higher compensation, and namely deposit service charges costs. This was in line with our expectations and the guidance I provided last quarter. And finally, our earnings per share benefited from a lower share count due to repurchases in both the first and second quarter.

Turning to Slide 11. Net interest income was $110 million compared to $101 million in the first quarter, an increase of $9 million, which was favorably impacted by higher average loan and investment balances along with the benefit of rising interest rates driving net interest margin higher. The increase in net interest income was primarily driven by a $6 million increase in loan income despite a $1.3 million reduction in PPP income.

With the current composition of our balance sheet as of June 30, another 75 basis point increase in interest rates will result in an additional $6 million to $7 million in quarterly net interest income. This is in addition to the full impact of the existing interest rate increases, which will also add another $3.5 million to $4 million to quarterly net interest income. As noted in the earnings release, approximately 20% of the variable rate loan portfolio grew prices on the first day of each quarter and did not benefit from the second quarter interest rate increases.

Moving on to Slide 12. Net interest margin on a tax equivalent basis was 3.55%, an increase of 27 basis points from the linked quarter. Our asset-sensitive balance sheet benefit is increase in interest rates. As a result, asset yields improved 31 basis points, which included 17 basis points of loan yield improvement, and the investment yield improved 20 basis points.

Additionally, the increase in the Fed funds rate led to improved earnings on our interest-bearing cash balances. Net interest margin was also aided by an enhanced asset mix as we continue to fund growth in loans and the investment portfolio while reducing excess cash. The cost of interest-bearing liabilities increased 7 basis points from the prior period driven mainly by variable rate borrowings as our cost of deposits increased only 3 basis points.

The loan portfolio is our largest driver of asset sensitivity as 64% of the loans are variable rate, nearly 60% of those have interest rate floors and approximately 90% of those with floors are currently priced at or above the floor. Nearly all of the remaining loans with floors are within 50 basis points of the floor. We ended the quarter with nearly $1 billion of cash on the balance sheet, which affords us the opportunity for favorable asset remixing in upcoming quarters.

Our deposit portfolio remains more than 40% noninterest-bearing balances, and we have less than $500 million of total transaction accounts formerly tied to an index. Our interest-bearing deposit beta during the last rate cycle was 32%. With ample liquidity, our expanded footprint and strong low-cost deposit generation through our specialty vertical, we believe our ability to control deposit costs as rates rise is greatly enhanced versus that cycle.

Moving on to Slide 13. It reflects our credit trends. We continue to have strong asset quality metrics and have not observed any weakness in our loan portfolio segments. We had a net recovery of 1 basis point during the quarter, and our nonperforming assets declined $2.1 million or 9% from the first quarter. Nonperforming assets are only 16 basis points of total assets and nonperforming loans are only 21 basis points of total loans.

Now let's look at the allowance on Slide 14. Loan growth and deterioration in the economic factors used in our CECL model resulted in provision expense of approximately $1 million in the quarter. This reverses the trend of reserve releases that we have got over the last 4 quarters, excluding acquisitions.

The allowance for credit losses increased to $141 million from 131 -- $139 million at the end of March and represents 1.52% of total loans. When adjusting for government guaranteed loans, the allowance to total loans was 1.69% at June 30. While there have been no signs of credit stress that indicate a trend within our customer base, we continue to believe that the potential risk to the economy warrant the current level of our allowance coverage.

On Slide 15, fee income for the second quarter was $14.2 million. This was a decline of $4.4 million compared to the first quarter results. The decline was led primarily by reduced fees from community development investments, reduced tax credit income, and that was consistent with our expectations as well as lower swap revenue as activity levels were not as strong during the second quarter.

Deposit service charges and card services revenue increased in the second quarter compared to the first quarter as volumes expanded in these areas. While tax credit income will continue to be seasonal, our momentum in this business line continues.

Turning to Slide 16. Second quarter noninterest expense was $65.4 million compared to $62.8 million in the first quarter, a $2.6 million increase. The driver of this increase was primarily a $1.6 million increase in deposit servicing expenses and a $0.8 million increase in loan related and legal due to growth.

Compensation and benefits increased $200,000 in the quarter, principally from new hiring and a full quarter of merit increases and an increase in performance-based incentive accruals, which were partially offset by seasonally higher payroll taxes and 401(k) met for the first quarter. The second quarter's efficiency ratio was 52.8%, and expenses for 2022 have performed as expected with our revisions for the revised interest rate environment.

Additionally, stronger-than-planned momentum in the specialty deposit areas as well as forecasted interest rate trends has and will drive related servicing expenses. As a result of higher-than-planned Fed funds increases, it appears the current quarterly run rate will step up in the next 2 quarters from roughly $65 million to $67 million to possibly $69 million for the remaining 2 quarters of 2022. To reiterate, these trends will obviously be more than offset by net interest margin trends, but more importantly, we think these investments and continued growth will allow for stronger revenue growth longer term.

On Slide 17, we display our capital metrics, and the rise in interest rates continue to impact the market value of available-for-sale investments which impacted -- accumulated other comprehensive income by $49 million in the period. Despite that, we expanded tangible common equity to 7.8% with our strong earnings and mitigated the negative impact on tangible book value per share to 1.6%. Our strong capital position gives us flexibility to actively manage our balance sheet. During the quarter, we utilized our capital to redeploy excess cash to the loan and investment portfolios, helping drive our capital ratios closer to our optimal targets.

As Jim noted, we also returned nearly $25 million to shareholders. We carried the momentum from the first 3 months of the year into this quarter, and we continue to grow customer relationships while maintaining a focus on pricing both sides of the balance sheet in order to drive shareholder value. We began to see the acceleration of our operating revenue due to growth trends and a balance sheet that's well positioned to benefit from rising interest rates.

For the quarter, we delivered a 17% return on average tangible common equity through a combination of strong earnings and continued capital optimization. We also believe that with the strength of our earnings, capital, liquidity and allowance coverage, we are well prepared to address any potential economic challenges that may arise.

Thanks for joining the call today, and we're going to now open the line for analyst questions.

(Operator Instructions) Your first question comes from the line of Jeffrey Rulis.

Just a question on the fee income components in terms of -- well, the community development, pretty volatile. Is there any way to sort of model that in a more consistent manner? Any idea there?

Jeff, the answer is not really. I think we -- the comparison to the first quarter, we -- just was pretty tough because it was so robust. I do think that there'll be some level of income here in the next couple of quarters, and we'll get some rebound, but we sort of had the kind of worse kind of comparison where we had strong community development and swap and tax credit revenue in the first quarter, and then they all kind of went away here in the second.

So I think that we expect some level of that in the third and the fourth quarter, but it probably isn't as substantial as the amount was in the first quarter in each individual quarter. So hopefully, that provides a little bit of help. But kind of $2 million maybe in total and depending on how you model it, kind of 1 per -- or 2 in the fourth is the way I think about it.

Got you. And then just the Durbin hit, can we model that at about $1 million a quarter run rate?

Yes. It's about $1 million that gets you to where you need to be, I think. And that's in line with where we were previously. I think for better or for worse, we've grown that interchange a little bit since -- preparing across $10 billion, and so we'll lose just a mid more, but 1 million should cover it.

Okay. And Scott, one other one. Just on the deposit management. It sounds like focusing on kind of core depositors. Do you get the sense that this was sort of the lion's share of that, the rate chasers or hot money that kind of flushed out? Or could we see more balances kind of come out of that -- from that group?

Yes, Jeff. If you look at the $600 million decline, I think it's a handful of accounts, I'd say 6 maybe. Three of those were the lion's share of that more interest rate sensitive specialty in -- and I would say those aren't lost relationships either. There are some specialty clients that are a little more interest rate sensitive than others.

And I think with this one in particular, that was in the top 10 at the time. I think they were our largest third-party escrow balance. We kind of went in eyes open on this, knowing that it was a little bit more interest rate sensitive, but knowing we could have some flexibility to walk away if we needed to -- not particularly that concentrated. I think there's only one other third-party escrow account in our top 10 and maybe 2 in our top 50.

So I think that was a little bit of an anomaly. And then I commented on this, but we do typically see kind of net outflows from existing commercial clients this time of year anyway for bonuses and distributions and personal taxes. So I don't think you're going to see any single depositor of this level that would move going forward.

Your next question comes from the line of Andrew Liesch.

You've actually covered a lot of my questions that I've had, but just curious on the buyback, what are the thoughts around that and tap into the new authorization?

Andrew, this is Keene. What I'll say is we completed the prior authorization for the new one. And then I think you saw us kind of sit tight here on the $2 million, I think the continued pressure in AOCI. I think we just don't want to get caught behind that too far if longer-term rates continue to move up.

So I think what you'll see is TCE will be a little bit of the guide there. And the good news is we're getting really good loan growth, and I'm optimistic that in the coming quarters, we'll get deposit expansion here and overall balance sheet growth, particularly as we hit late in the third and fourth quarter where we typically see some strength. So I think you'll see us be patient there, and we'll probably use TCE as a guide.

I think we've been pretty articulate on this point. We don't love -- or I don't love TCE below 8%. We're okay with it where it is given cash balances and the strong earnings profile, but I think you're going to see us let it rebuild somewhat in the upcoming quarters and weeks, and we may decide to be opportunistic if we continue to get an unfavorable [tape]. But I don't think the dollar amount of anything we would do there would be substantial. Because over the last year, we did repurchase 2 million shares. And we think we did so favorably and opportunistically, but most of the pieces of the capital stack are kind of right at the optimal targets. So right now, and I think we just need to be mindful of potential impact on AOCI moving forward.

(Operator Instructions) Your next question comes from Brian Martin.

Sorry, I joined late. So Keene, if you covered some of this, maybe just let me know, and I'll go back and listen. Just kind of wanted to get your thoughts regarding kind of margin and repricing and just kind of how we think about that in kind of the deposit beta. So if you covered that, I'm happy to go back and listen. If you provide a little insight on that, that would be helpful.

Yes. I'll give you -- I'm not going to give you a margin. I'm going to give you Fed funds moves and what we think it happens in annualized run. So I think 75 basis points moving forward would equate to roughly 5% on the current run rate of net interest income, so that's a little bit north of $20 million.

And our modeling -- we're using just under a 50% beta, which is a little bit more conservative than what we experienced before. And I think in my comments, we indicated that we expected with the composition of the deposits, the beta to be better. And I think you can see that just based on the outflows we had in the quarter and our posture there, our behavior has changed as well to a degree, and we let some of those more sensitive accounts that existed previously go. And then also, we let the specialty DDA go that you'd say, well, how is that rate sensitive, but it was on an earnings credit or a deposit rebate program that's consistent with that industry.

So -- and then, Brian, the other comment I did make is that just sitting here today, we're going to get roughly another $3.5 million to $4 million of NII boost in the third quarter because the SBA portfolio reprices the first day of each period. So that will be a benefit even if nothing happens here in July, which -- I think something is going to happen, but also just be mindful of that as you're looking to have the 75 basis points impact -- third quarter as there will be a delay on that SBA portfolio.

And then maybe just a little bit of additional color most of the loans here with this next rate increase 50, 75 or 100 regardless will be off of the floors. And so even with the slightly reduced cash balance, we still feel good about net interest income dollars growth with future increases. You will see deposit costs lag just slightly up here in the quarter, but the dollars of growth reflect all that.

So I think we feel really bullish about both growth and the overall loans, deposits and securities books, and we're getting good origination yields there and new originations are boosting yields across the board there. So again, I think we feel like we're well positioned. So hopefully, that's some color that's helpful to you.

Yes. No, it is. And just the -- I guess you said this came that the loans didn't have floors. I mean they're effectively -- will all be through -- in this next hike, the one we just had in June, are all the loans through the floor, so you guys are at about 60% variable rates. So are all those loans moving now? Or is it just not -- they will be on the next hike is that what you said?

Yes. I think what I was trying to make sure of is that this July hike if it's at least 50 basis points. You want us to think about floors anymore? And so I think that number is roughly $350 million to $400 million are still on a floor that's kind of, call it, 50 bps or more. And those will be lifted off here with another increase as long as it is in line with, I think, general expectations?

Your next question comes from the line of Damon DelMonte.

Similar to Brian, I was dancing between calls as well. So I did catch a little bit, Keene, of your commentary about expenses and kind of the forward look there. Could you just kind of repeat what you had said on that?

Yes. I think we're running right now at about $65 million a quarter. I think we think that that's going to step up pretty meaningfully. And it's really driven by the servicing expenses on the specialized deposits. So we think that stepping up in the third and into the fourth quarter that you're going to be somewhere about $67 million to $69 million, which is just slightly higher than what we had indicated last quarter. And the reason is that I think we got a little bit higher rate hike here in June, which is driving a little bit more on the ECR side.

And so with another July increase that going to be probably 75 to 100 basis points. I think we need to kind of push that quarterly run rate up because it does have an impact on the -- what we call the servicing expense related to those items.

Got it. Okay. That's helpful. And then with regards to the provision going forward, if you continued strong loan growth opportunities for you guys, how are you thinking about provision over the back half of the year?

Yes. So it's a really tough question to answer. I think I'll say a couple of things. First and foremost, we didn't reduce from the 2020 build as much as maybe others have in the industry, and really worked hard to hold that reserve in there. And we believe there was some uncertainty. We just didn't know where it was.

With the Moody's forecast continuing to reflect some of those factors, where we've moved some of the things that were previously qualitative into that forecast, but we still have about $40 million of qualitative. And I think the challenge or the confusing part here is that we've got such outstanding credit quality that it's hard to justify building additional allowance based on those factors, and the forecast continues to move around. And I think we have a lot of clamoring, but really no signs per se that, that credit is going to get worse.

So my view would be that at least for the next quarter and maybe even into the fourth quarter, unless we get a lot of additional clarity, we have the opportunity to let coverage maybe slide down just slightly for a combination of a worsening forecast, but still really strong credit and asset quality. And if we get any other indicators that are different than that might cause us to build the allowance more aggressively. But I wouldn't think we would bring it down or have any negatives moving forward, barring some substantial decline or some material recoveries that affect the allowance itself.

So hopefully, that's clear. And if not, please just push back with another question.

No. That's -- and it wasn't an easy question to answer.

(Operator Instructions) There are no further questions at this time. Mr. Lally, I turn the call back over to you.

Rex, thank you, and thank you to all of you for joining us today and for your interest in our company, and we look forward to speaking to you again at the end of the next quarter. Take care.

This concludes today's conference call. You may now disconnect.