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Enterprise Financial Services Corp (EFSC 3.93%)
Q4 2018 Earnings Conference Call
Jan. 22, 2019, 3:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
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.
James B. Lally -- President and Chief Executive Officer
Well, thank you, Ashley. I welcome everyone to our fourth quarter earnings call and appreciate all of 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 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.
Our financial scorecard would be found on slide three. 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, the 1st, 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 for well-priced deposits to fund our growth, an expanded wealth business, and a new market to introduce our commercial and business banking model.
Slide four 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 allowed us to post the results that we highlighted throughout the remainder of this call.
Slide five shows where we're 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've 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.
Scott R. Goodman -- President
Thank you, Jim. Relative to loan growth, which is outlined on slide number six, 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 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 number seven shows, our focus on C&I business remain strong, with 11% year-over-year loan growth in this category and 17% annualized growth continuing in Q4.
Turning to slide number eight. 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 a 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 sheet, using non-bank 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 number nine, all loan portfolios posted growth for 2018. For Q4, specialized lending had a particularly strong quarter, aided by the aforementioned seasonality in life insurance and EVL, as well as 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 sponsor 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 advisory 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 lower origination activity in this quarter. As we have throughout the year, our KC team continues to have success in targeting relationships from disruptive competitors in the market.
During Q4, this included moving two 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, both in 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 number 10, was 10% year-over-year, bolstered by a strong Q4 in which balances grew by $378 million. While it is difficult 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 one-third 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. Non-interest 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.
Keene S. Turner -- Executive Vice President and Chief Financial Officer
Thank you, Scott.
Let's 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 favor of reported earnings per share. We did so because we expect the non-core 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 will 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 helped 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 non-core acquired book 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 non-core 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 costs with favorable trends for 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 expectations.
On slide 12, we reported $1.02 per share of earnings 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 pre-tax income for the linked quarter.
Revenues for the quarter increased $0.18 per share. Non-interest income was affected by seasonal tax credit sales, which drove most of the $0.09 per share linked quarter increase in fee. 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 non-core acquired portfolio and we do not expect those to reoccur 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've managed to hold core net interest income and net interest margin stable for the last six or seven 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've 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 loan.
Loans remain a consistent percentage of earning assets, while the portfolio loan mix within continued a steady trend toward floating rate, 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 drives these favorable trends and continues to perform well for us in the current interest rate environment.
Deposits 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 was most prominent in the mix of deposits and FHLB borrowing.
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, while 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-digit and a 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 non-core 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 the 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, non-interest income increased $2.3 million, principally due to sales tax -- state tax credit sales, my apologies, of $2.3 million, along with the $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 of 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, as restated and tracks our quarterly EPS progression, five-year compound growth of 42% and a 467% 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.
Questions and Answers:
Operator
Thank you. (Operator Instructions) We will now take our first question from Andrew Liesch of Sandler O'Neill. Please go ahead.
Andrew Liesch -- Sandler O'Neill -- Analyst
Good afternoon, guys.
James B. Lally -- President and Chief Executive Officer
Andrew, how are you?
Andrew Liesch -- Sandler O'Neill -- Analyst
Good. Thank you. Just question on the deposit inflows and some of the balance sheet composition here. So, sounds like you use some of these, the 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?
Keene S. Turner -- Executive Vice President and Chief Financial Officer
Yeah. Well, from an investment security perspective, it's just more of the same. We know we have some proactive investment we could take care of for paydowns and normal cash flows off of the portfolio that we would experienced 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 shift in strategy. It's really just managing the timing as we had excess cash at lower rates. And then with Trinity, that'll blend closer to 20% and then we'll redeploy that over a period of time.
Andrew Liesch -- Sandler O'Neill -- Analyst
Got you. Okay. So from this -- including the -- some of the short-term investments that you have with limited Fed funds, like $920 million or so, 17% on average earning assets can leave around that level before the deal close?
Keene S. Turner -- Executive Vice President and Chief Financial Officer
Yeah. I think you are just going to see some of that normal run-off. 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-earning cash that ended up being in 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 months and will be right around that 14%, 15%.
Andrew Liesch -- Sandler O'Neill -- Analyst
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 seem probably not likely to be repeatable. But just how our -- what does it look like as far as new accounts coming in so far this quarter?
Scott R. Goodman -- President
Yeah. I'll take that one. This is Scott. It is steady. I think we've 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 go by deposits, doing it through relationships and through product. So, I see continued --
Andrew Liesch -- Sandler O'Neill -- Analyst
Great. Thank you, guys, have covered my questions. Thanks.
James B. Lally -- President and Chief Executive Officer
Thanks, Andrew.
Operator
We will now take our next question from Jeff Rulis of D.A. Davidson. Please go ahead.
Jeff Rulis -- D.A. Davidson & Co. -- Analyst
Thanks. Good afternoon.
James B. Lally -- President and Chief Executive Officer
Hey, Jeff.
Scott R. Goodman -- President
Hi, Jeff.
Jeff Rulis -- D.A. Davidson & Co. -- Analyst
Question on the loan portfolio, some good steady growth in there. And I guess, I wanted to circle back to Scott's comment on the -- in the consumer portfolio. I think you mentioned sort of customer behavior has led to some of that run-off. 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?
Scott R. Goodman -- President
So within that consumer and other, really most of the shrinkage is in the other category. Some of the correspondent banks and financial service companies that we work with are categorized there and that was my comment about.
We saw several of them going out for the long-term market and locking in fixed rates with non-bank product, which resulted in some paydowns. And then just, there is some seasonality, obviously, in the financial services sector in the fourth quarter. So, that's really what it was, not consumer portfolio, per se.
Jeff Rulis -- D.A. Davidson & Co. -- Analyst
Yeah. So, on the correspondent credits, that's something that you're willing to just by walk, given that doesn't fit your profile of?
Scott R. Goodman -- President
Well, it was apples and oranges. I mean, in some cases, they're going up. As you know, 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'll -- we didn't lose relationships, it was just the transaction.
Jeff Rulis -- D.A. Davidson & Co. -- Analyst
Got it. Okay. Thanks. And then just on, maybe the M&A side, Trinity sounds like, word that it's sort of an M&A close or you expect this within a few weeks?
James B. Lally -- President and Chief Executive Officer
Jeff, this is Jim. So, we've received approval from both the FDIC and the Missouri Division of Finance and then we'll take it from here. Things are going well relative to our prospects in closing that in the first quarter and we're very confident in that regard.
Jeff Rulis -- D.A. Davidson & Co. -- Analyst
And then the timing expected on conversion?
James B. Lally -- President and Chief Executive Officer
So, we're looking to convert mid to late second quarter for that.
Jeff Rulis -- D.A. Davidson & Co. -- Analyst
And last one, just I guess, additional. You are 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's that additional M&A shaping up?
James B. Lally -- President and Chief Executive Officer
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 target. But given our capital position and our continued growth aspirations, it's part of what we do everyday.
Jeff Rulis -- D.A. Davidson & Co. -- Analyst
Got it. Okay. Thanks, Jim
Operator
We will now take our next question from Michael Perito of KBW. Please go ahead.
Michael Perito -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Hey. Good afternoon, guys.
James B. Lally -- President and Chief Executive Officer
Hey, Mike.
Michael Perito -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Few questions. On the -- maybe my first question is for Scott on the EVL portfolio. You had some nice growth in the quarter. I know it's kind of little choppy for you guys in the recent past year. But I'm just curious. Can you remind us, maybe a little bit 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?
Scott R. Goodman -- President
Sure. Yeah, happy to do it. Generally, our client is a private equity sponsor that's going after lower-middle market credits. So, EBITDA companies and 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 the single credit profile.
Usually, we are structuring these deals on a senior basis with leverage anywhere from 2.5 times up to maybe 3 or 3.25 on the high side. And then, they're layering in a 2.5(ph)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 up market to do leverage profiles above the 3, 3.5 times because they want to get their product (Technical Difficulty).
That said, I mean, we're seeing more competition there. We are 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?
Michael Perito -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Yeah. Very helpful. Thanks, Scott. And then maybe switching gears, a question for you, Keene. As we think about the unchanged, kind of expense guidance of 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?
Keene S. Turner -- Executive Vice President and Chief Financial Officer
Yeah. So, I would say, we are going to talk about full phased-in run rate, right. So, let's say, at the earliest Q4 '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, intangible 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 are fully phased in Trinity, from an M&A perspective, it isn't going to move the needle. I think we achieved the cost savings or we will achieve the cost savings we will 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 a slightly new market and slightly expansionary.
Michael Perito -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Okay. So, I mean, is it fair to summarize -- I mean, you still though 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 by the end of the year modestly lower than where you were in the third quarter.
Keene S. Turner -- Executive Vice President and Chief Financial Officer
Yeah. And also to -- 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 cost out post conversion.
Michael Perito -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Okay. Helpful. And then just one last question for me for Jim. On the capital side, asking it all differently, as we -- I feel like at this point, most -- I would assume most models, including your internal model there have the upper single digit organic loan growth baked in, which is probably the top priority from a capital deployment 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 north of nine 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?
Keene S. Turner -- Executive Vice President and Chief Financial Officer
So, I think you captured our strategy well in your question, that we'll continue to seek ways to manage it through all four avenues. But the level that you mentioned seems to be the right target level for us.
Michael Perito -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Okay. So, I mean, it is fair to say, obviously, quarter-to-quarter, it could vary but longer term, you'd like to see the TCE ratio not much above 9%?
James B. Lally -- President and Chief Executive Officer
That's correct.
Michael Perito -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Okay. Great. This is all very helpful. Thank you, guys. Appreciate it.
James B. Lally -- President and Chief Executive Officer
Thanks, Mike.
Operator
We will now take our next question from Nathan Race of Piper Jaffray. Please go ahead.
Nathan Race -- Piper Jaffray -- Analyst
Hey, guys. Good afternoon.
James B. Lally -- President and Chief Executive Officer
Hey, Nate. How are you?
Nathan Race -- Piper Jaffray -- Analyst
Good. Thank you. Keene, on deposit costs, the increase that we saw this quarter moderated relative 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 I'll say is a great deposit base as well?
James B. Lally -- President and Chief Executive Officer
Yeah. So, I think we'll drive in reverse order. So. I think Trinity brings our cost of deposits down by about 12 basis points. So, that's just sort of pro forma at closing. From a behavior perspective, I think we look at it as margin rate. So, 3.77% margins, 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 trends you saw from an agent(ph)perspective, there is also some mix as well. But we expect that similar to prior interest rate environment, the right and left side of the balance sheet will move consistently.
So, 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 that we have over the past six or seven quarters. So, that's the way we think about it.
Much of that, it tends to follow LIBOR. What happens from a competitive perspective, it's 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 and deposit repricing upfront. And so, I think that bodes well for us if rates stay unchanged.
Nathan Race -- Piper Jaffray -- Analyst
Absolutely. That's great color. And maybe just thinking about the left side of balance sheet in terms of new loan pricing. If you kind of peel back the accretion, looks like the core yields are at about 5.24%. So, just curious, kind of where you are putting new loans on the books. I know a lot of the production in the quarter came from EVL, which can carry some higher yield delegates. So, just curious kind of how loans are coming on the books relative to that kind of core portfolio yield.
Keene S. Turner -- Executive Vice President and Chief Financial Officer
Yeah. So, new loan yields as I indicated in my comments was 5.60% and then the total blended yield was 5.23%. EVL can drive that up, but also much of the production we had in the portfolio in the quarter was LIPF(ph). 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(ph)loans come with a slightly lower initial provision and longer-term provision given the low loss profile of those loans. So we -- both those trends are actually really strong forth and maybe there is some upside going forward on the left side of the balance sheet, if we have 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.
Nathan Race -- Piper Jaffray -- Analyst
Okay. Got it. And I apologize that I missed those comments in your prepared remarks. Just lastly, on Trinity, I'm 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's your outlook in terms of attrition or kind of growth with that loan portfolio as 2019 progresses?
Keene S. Turner -- Executive Vice President and Chief Financial Officer
I would just say, everything is going, as we would expect and we have fairly low net growth expected for that loan portfolio, There is a couple portfolios they have strategically that they haven't been -- they are 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.
Nathan Race -- Piper Jaffray -- Analyst
Okay. Got it. I appreciate the color, guys.
James B. Lally -- President and Chief Executive Officer
No problem. Thanks, Nathan.
Operator
We will now take our next question from Brian Martin of FIG Partners. Please go ahead.
Brian Martin -- FIG Partners -- Analyst
Hey, guys.
James B. Lally -- President and Chief Executive Officer
Hey, Brian. How are you?
Brian Martin -- FIG Partners -- Analyst
Good. Thanks. Some of my stuff has 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?
Keene S. Turner -- Executive Vice President and Chief Financial Officer
Sure. Yeah. 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 credits in the EVL book, which was the consumer products business, with the couple maybe -- four others, they were all under six figures. But I don't see any overall systemic issues or trends. I think classified as capital continues to decline. Our NPAs 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.
Brian Martin -- FIG Partners -- Analyst
Okay. So, one credit was a big piece in there. And then just on that -- maybe for Keene on the tax credit business. And I think, when we look at that business, you guys made some comments about things you were doing on that front.
The annual income from that business this year, I guess, when you think about it in '19, the changes you have made, can you give any thoughts just on that piece of the fee income, Keene, outside of the other piece so just how to think about that or anything has changed since your last kind of commentary on that?
Keene S. Turner -- Executive Vice President and Chief Financial Officer
Nothing has really changed on that. It's still for us -- yet to realize the business that requires us to make investments and then harvest and sell those credits. So, it's in sort of the 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, just $0.02 of quarter that you didn't have. First quarter will just be to trickle out of the tax credit business that we normally have. So, a $0.01 or $0.02 there and then, I think what we're hopeful that will be is a steady contribution from there on out and a steady and increasing 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 expectation as it relates to 2019 with the tax credit business.
Brian Martin -- FIG Partners -- Analyst
Okay. So, more spread evenly as opposed to just Q1 and Q4?
Keene S. Turner -- Executive Vice President and Chief Financial Officer
Yeah, no, 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 $0.02 a share moving forward.
Brian Martin -- FIG Partners -- Analyst
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 missed that?
Keene S. Turner -- Executive Vice President and Chief Financial Officer
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 drawn underlying 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 in the fourth quarter and then deployed early in 2019. So, we've got to -- we are going to make a little bit of that up, what we're doing so from a nice run rate here on a margin perspective.
Brian Martin -- FIG Partners -- Analyst
Okay. All right. That's all I had, guys. I appreciate it. Thanks.
Operator
(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.
James B. Lally -- President and Chief Executive Officer
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 want to thank you for your interest in our company. Have a great day.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Duration: 42 minutes
Call participants:
James B. Lally -- President and Chief Executive Officer
Scott R. Goodman -- President
Keene S. Turner -- Executive Vice President and Chief Financial Officer
Andrew Liesch -- Sandler O'Neill -- Analyst
Jeff Rulis -- D.A. Davidson & Co. -- Analyst
Michael Perito -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Nathan Race -- Piper Jaffray -- Analyst
Brian Martin -- FIG Partners -- Analyst
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