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Date

Tuesday, July 29, 2025, at 11 a.m. ET

Call participants

  • President & CEO — Jim Lally
  • Chief Financial Officer and Chief Operating Officer — Keene Turner
  • President, Enterprise Bank & Trust — Scott Goodman
  • Chief Credit Officer, Enterprise Bank & Trust — Doug Bauche

For analyst quotes, email [email protected]

Risks

  • Nonperforming assets concentration: Keene Turner said, "the largest component of our non-performing assets is concentrated in two commercial banking relationships that went into bankruptcy due to a business dispute between the partners." These two relationships represented 60% of total non-performing assets as of Q2 2025.
  • Elevated legal and foreclosure expenses: Loan-related legal and other expenses rose by $1.1 million in Q2 2025, driven by workouts and foreclosures on non-performing loans, with no expectation of near-term reduction.
  • Potential net interest margin pressure: Keene Turner noted that net interest margin may experience slight pressure in Q3 2025, based on comments from the Q2 2025 earnings call, partially due to floating-rate sub debt costs and the impact of securities portfolio growth funded by brokered CDs in Q2 2025.

Takeaways

  • Earnings per share: $1.36 for Q2 2025 and $1.19 per diluted share in Q2 2024.
  • Adjusted return on assets: Adjusted return on assets reached 1.31% for Q2 2025.
  • Pre-provision return on average assets: Pre-provision return on average assets (ROAA) was 1.72% in Q2 2025.
  • Net interest income: Net interest income increased by $5.2 million sequentially to $153 million in Q2 2025, marking the fifth consecutive quarterly increase.
  • Net interest margin: Net interest margin rose by six basis points sequentially to 4.21% in Q2 2025.
  • Loan growth: Loans grew by $110 million in Q2 2025 (4% annualized), with all regions contributing.
  • New loan originations: New loan originations rose 23% year-over-year in the second quarter of 2025. They also increased 26% from the previous quarter.
  • Average yield on new loans: The average yield on new loans was 7.26%, an improvement of 14 basis points sequentially in Q2 2025.
  • Sale of SBA loans: Approximately $25 million in SBA loans were sold in Q2 2025, generating $1.2 million in fee income.
  • Deposits: Deposits grew by $73 million in Q2 2025, net of brokered deposits; the core deposit base increased by $778 million year-over-year (excluding $210 million in brokered CDs).
  • Specialty deposit verticals: Specialty deposit verticals increased by $63 million in Q2 2025 and by $552 million (18%) year-over-year in the second quarter of 2025.
  • DDA to total deposits ratio: The DDA to total deposits ratio remained above 30% in Q2 2025.
  • Loan to deposit ratio: The loan to deposit ratio was 86% in Q2 2025.
  • Tangible common equity to tangible assets ratio: Tangible common equity to tangible assets ended Q2 2025 at 9.42%.
  • Return on tangible common equity: Return on tangible common equity was 13.96% for Q2 2025.
  • Tangible book value per common share: Tangible book value per common share rose to $40.02 in Q2 2025, an annualized quarterly increase of 15%.
  • Dividend increase: Quarterly dividend raised by $0.01 to $0.31 per share for Q3 2025.
  • Allowance for credit losses: Allowance for credit losses was 1.27% of total loans in Q2 2025 or 1.38% adjusted for government guarantees.
  • Net charge-offs: Net charge-offs were under $1 million in Q2 2025; benefiting from a $3 million recovery on a previous charge-off.
  • Non-interest expense: Non-interest expense increased by $5.9 million sequentially to $105.7 million in Q2 2025 including $500,000 in branch acquisition costs.
  • Efficiency ratio: The efficiency ratio remained stable at 59% for Q2 2025.
  • Common equity tier 1 ratio: The common equity tier 1 ratio stood at 11.9% for Q2 2025 up nearly 30 basis points year-over-year.
  • Branch acquisition: Expected to close in Q4 2025, bringing approximately $700 million in low-cost deposits from the branch purchase expected to close later in 2025 and leveraging approximately 100 basis points of capital in connection with the branch acquisition.
  • Specialty lending - life insurance premium finance: Life insurance premium finance balances were flat sequentially in Q2 2025. They were up $160 million (16%) year-over-year in the second quarter of 2025.
  • Tax credit lending: Tax credit lending balances grew by $30 million in Q2 2025 due to affordable housing project fundings.
  • Growth in revolving credit lines: Average balances of revolving credit lines increased by over 3% from the first quarter to the second quarter of 2025.
  • Geographic & segment diversity: Loan and deposit growth occurred across all regions and verticals in Q2 2025.

Summary

Enterprise Financial Services (EFSC -1.33%) reported earnings of $1.36 per diluted share in Q2 2025, driven by higher net interest income and disciplined balance sheet management. The loan portfolio expanded, with notable contributions from C&I, CRE, and tax credit businesses, while deposit growth was supported across all markets and verticals. Asset quality remained stable, with low net charge-offs, and the company reinforced its strategic outlook with an upcoming branch acquisition and ongoing capital optimization activities.

  • Management expects net interest margin to be "relatively stable moving forward" as of Q2 2025, but acknowledges slight pressure in Q3 2025 due to sub debt and securities funding dynamics.
  • Loan growth is expected to accelerate in the second half of 2025. Jim Lally stated, "I see us ticking up to 5, 6, 7% for the back half of the year."
  • Regarding capital deployment, Keene Turner explained that the branch acquisition will leverage roughly a hundred basis points of capital across the board, and the planned sub debt call will further affect the capital stack in Q3.
  • Management characterized the SBA loan sale approach as experimental in 2025, with the intent to "see how that plays out" before regularizing future activity.
  • Staffing expansion in Texas is expected to generate incremental business immediately, as the new team has already begun producing and building a pipeline, as onboarding was not subject to noncompete restrictions.

Industry glossary

  • BOLI (Bank-Owned Life Insurance): Life insurance policies purchased by banks to insure executives, with earnings recognized as non-interest income.
  • TCE (Tangible Common Equity): Ratio measuring common equity relative to tangible assets as an indicator of capital strength.
  • CET 1 (Common Equity Tier 1): Regulatory capital ratio assessing a bank’s core equity capital as a share of its risk-weighted assets.
  • SBA loan: Small Business Administration–backed loan product originated and sometimes sold by banks.
  • DDA (Demand Deposit Account): Non-interest-bearing account, typically used for checking.
  • FHLB advances: Short-term borrowings obtained from the Federal Home Loan Bank by member institutions.
  • CRE (Commercial Real Estate): Loans backed by income-producing commercial properties.
  • Tax credit lending: Financing provided for development projects qualifying for state or federal tax credits, including affordable housing.

Full Conference Call Transcript

Jim Lally: Joining me this morning is Keene Turner, EFC's Chief Financial Officer and Chief Operating Officer, Scott Goodman, president of Enterprise Bank and Trust, and Doug Bauche, chief credit officer of Enterprise Bank and Trust. Before we begin, I would like to remind everybody on the call that a copy of the release which and accompanying presentation can be found on our website. The presentation and earnings release were furnished on SEC form 8-K yesterday. Please refer to slide two of the presentation titled Forward Looking Statements and our most recent 10-Ks and 10-Q for reasons why actual results may vary from any forward-looking statements that we make today.

Our second quarter performance is a continuation of our multiyear trend of very strong consistent results. This is a product of a very intentional strategy that leans into our diversified business model that capitalizes on a number of higher growth markets complemented by several high performing national loan and depository businesses. Our relationship approach with C and I bias allows us to capitalize on a greater share of additional opportunities and the tenure of these relationships somewhat mutes the payoff headwind that a much higher CRE focused portfolio presents. Establishing a cadence of consistency at a top quartile level of performance has been our focus. And this is once again achieved in the second quarter.

For the quarter, we earned $1.36 per diluted share compared to $1.31 in the linked quarter and $1.19 in the second quarter of 2024. This level of performance produced an adjusted return on assets of 1.31% and a pre-provision ROAA of 1.72%. Needless to say, we're very pleased with these results. Net interest income and net interest margin both saw expansion in the quarter. Net interest income came in $5.2 million better than the previous quarter and net interest margin expanded by six basis points to 4.21%. This was the fifth consecutive quarter that we saw net interest income growth. This reflects pricing discipline on both sides of the balance sheet combined with a client-centric relationship-oriented approach.

Some of the uncertainties that our current economic times present reminds our clients who operate companies, develop projects, or seek sound financial advice that a few extra basis points are well worth the consistent reliable approach our teams provide. On an annualized basis, loan growth in the quarter was 4% or $110 million with contributions coming from just about all areas of our company. Our diversified model emphasizes finding the best growth as opposed to any growth. You will notice that all of our geographic markets showed loan growth in the quarter despite the fact that we decided to exchange a little bit of loan volume to preserve our robust net interest margin.

We were able to originate loans in the quarter at a yield of 7.26%, an improvement of 14 basis points from the previous quarter. Because of our confidence to continue to produce loans at a mid-single-digit growth rate, the remainder of 2025 we decided to sell approximately $25 million of SBA loans in the quarter which contributed $1.2 million of fee income. Further SBA loan sales will be evaluated on a quarterly basis depending on production, and pending loan pipelines. Deposits were stable to slightly higher in the quarter growing $73 million net of broker deposits.

Year over year, we have seen our core deposit base grow by almost $800 million while keeping our percentage of DDA to total deposits north of 30% and our total loan to deposit ratio at 86%. Our deposit base continues to be a differentiator for us and with approximately $700 million of very well-priced deposits coming from the closing of our branch purchase later this year, we find ourselves in a very strong liquidity position to capitalize on the growth opportunities that I believe the second half of 2025 and 2026 will provide for our company. Our well-positioned balance sheet continues to be a strength for our company.

Capital levels at quarter-end remained stable and strong, with our tangible common equity to tangible assets ratio of 9.42%. Despite having a TCE level above 9%, we still delivered a 13.96% return on tangible common equity for the second quarter. Our strong return profile in a continued expansion of tangible book value per common share to $40.02, an annualized quarterly increase of 15%. Given the strength of our earnings and our confidence in our continued execution, we increased the dividend by $0.01 per share for the third quarter of 2025. Our asset quality statistics remained stable when compared to the linked quarter, as non-performing assets to total assets and to total loans decreased slightly.

It should be noted that net charge-offs in the quarter were negligible and aided by a nearly $3 million recovery on a loan that had been charged off several years ago. When I look at the back half of 2025, our company will remain focused on achieving our loan and deposit goals, balancing quality and pricing amid our relationship orientation. Furthermore, we look forward to closing on our branch acquisition from First Interstate Bank and welcoming our new clients and associates to our platform. Before I hand the call over to Scott, I would like to share with you what we are hearing from our clients and how we will use this information to continue to very high level.

First and foremost, the large majority of our clients continue to perform well. Sales and profits are in line with 2024 and demand and backlogs generally show that the remainder of 2025 and the first part of 2026 should continue to be solid. Although there continues to be some slight hesitancy to move major projects or acquisitions forward, but passing the one big beautiful bill checks a very important box that should spur more economic activity.

Additionally, there is further clarity with respect to US trade policy, especially with a few key trading partners, some downward movement in short-term interest rates we believe that there's enough pent-up demand such as loan growth exceed what we've experienced in the first half of 2025. We are prepared to continue to guide our clients through these times while taking advantage of the disruption caused by the pickup in M and A that continues to play out in our markets. The combination of our business model and improved economy and ongoing disruption from M and A should make for a very strong financial performance for our company for several quarters and years to come.

With that, I would like to hand the call over to Scott Goodman. Scott?

Scott Goodman: Thank you, Jim, and good morning, everyone. As Jim mentioned, loans for the quarter grew by $110 million, which is broken down on slide five. The largest portion of this increase came from C and I loan types, further complemented by increases in investor-owned commercial real estate, and the tax credit business. Year over year, loans have grown $409 million or roughly 4% with balanced contributions from C and I, investor CRE, and continued steady growth of the life insurance premium finance book. In general, client discussions and sales activity related to loan opportunities is solid. Albeit with a slower pace of conversion due to some of the hesitancy Jim described.

That said, loan production is steady and trending well, with new loan originations up 23% from the same quarter last year and 26% from the prior quarter. A portion of the growth in the investor CRE category and likewise the reduction in construction and land development loans represents the successful completion of various commercial projects. The flow of larger new construction projects has slowed somewhat, with ongoing economic uncertainty. But we are seeing opportunities to retain the term debt on completed projects as well as refinance some real estate debt coming out of the secondary market structures. Also saw a slight uptick in usage on revolving lines of credit during the quarter, with average balances over 3% higher than Q1.

While some of this may relate to companies building inventories to front-run potential tariff increases, usage is trending up month over month. With outstanding balances running closer to historical averages. Within the specialty lending business lines, SBA production was stable with the prior quarter and in line with seasonal expectations. The net decline in balances primarily relates to our decision to generate fee income from the sale of $25 million of loans in this quarter. Application activity is solid particularly around industrial property types and refinance requests. Sponsor finance balances were down slightly in Q2. Reflecting fewer originations of new loans this quarter, as private equity sponsors are more cautious around companies that could be more materially impacted by tariffs, or trade restrictions. We too are taking a fewer but better approach this segment of our business. Spending time with proven sponsors, and staying particularly disciplined on structure and pricing.

Life insurance premium finance balances were basically flat a seasonally soft quarter for this business. But are up $160 million or 16% year over year. This business continues to perform well and grow at a steady clip. Being a bit more insulated from general economic factors. Tax credit balances were up $30 million reflecting continued fundings related to affordable housing projects in process. Moving to the geographic markets shown on slide six. We posted growth across the footprint in all major regions. Within the Midwestern markets of St. Louis and Kansas City, some of the lift came from higher balances on lines of credit given their higher mix of C and I clients.

As well as several new commercial real estate loans with established developers for the acquisition and refinance of industrial and multifamily projects. Within the Southwest region, growth highlights for the quarter included a number of new relationships including a large masonry contractor in Arizona, as well as a major industrial utilities firm, and a well-known commercial real estate investor in Dallas. We were also able to onboard the lift out of an experienced commercial team from a competitor in the mid-cities area of Texas to the growing region between Dallas and Fort Worth. This team focuses on small to midsize C and I businesses and will provide a nice complement to our existing team in the Dallas market.

In our western region of Southern California, growth is coming mainly from numerous new relationships originated by the talent we've recruited onto our platform over the past 24 months. Larger new relationships this quarter include several new private lender firms a specialty machine shop, an IT services company, and a veteran-focused not-for-profit. Turning to deposits, which are detailed on slide seven. Excluding the addition of $210 million of brokered CDs, client deposits grew by $73 million in the quarter, and are up $778 million or roughly 7% year over year. Within the geographic markets, shown on slide eight, we're posting growth on a year-over-year basis across the footprint in all regions.

Growth has mainly been a function of our holistic approach to new business development. Which supports and incentivizes our bankers to hunt for full banking relationships rather than transactional lending or high-cost idle cash balances. Additionally, we've been proactive to monitor and communicate frequently with our existing clients enabling us to retain or expand these balances while also adjusting our cost of funds to protect margins. Our specialty deposit verticals also continue to grow up $63 million for the quarter. And $552 million or 18% year over year. These are broken out in more detail on slide nine, which provides an overview of the mix by line of business.

A majority of these deposits reside within the community association and property management verticals. Both of which show solid quarterly growth trends. Legal industry and escrow is a bit more lumpy but continues to be a material source of low-cost non-interest-bearing deposits. These businesses provide a diverse growing, and low-cost source of funding which complements our geographic base. Furthermore, this enables our market-based teams to stay focused on the relationship strategy and remain disciplined and consistent in their approach to pricing. This mix is broken out on slide ten. Our client deposit base remains steady well balanced across the primary banking channels.

Commercial balances are stable comprised of 32% DDA with accounts generally anchored by lending relationships and treasury management services. Business banking and consumer channels both posted deposit growth for the quarter, while also lowering the overall average cost of funds for these accounts. Now I'll turn the call over to Keene Turner for his comments. Thanks, Scott, and good morning. Turning to slide eleven, we reported earnings per share of $1.36 in the second quarter. That's a $0.05 increase over the linked quarter earnings per share of $1.31. On an adjusted basis, earnings per share was $1.37 in the current quarter. Adjusted earnings per share excludes the impact of acquisition costs and gains and losses on the sale of other real estate owned and securities. Our second quarter results were driven by the strength of our diversified business model. Net interest income and margin both showed strong expansion in the quarter, and are a direct result of our active management of balance sheet growth along with our disciplined pricing of loans and deposits.

Non-interest income increased over the linked quarter and was aided by the additional bank-owned life insurance policies that were purchased at the end of the first quarter. The provision for credit losses decreased from the linked quarter primarily due to a nearly $3 million recovery on a relationship that was charged off in 2018. Non-interest expense was higher in the quarter due to the full impact of merit increases that were affected at the beginning of March, an increase in deposit costs, continued growth in the deposit vertical, and acquisition costs related to the previously announced branch acquisition that we expect to close in the fourth quarter.

Turning to slide twelve with more details to follow on thirteen, net interest income in the second quarter increased by $5.2 million to $153 million and reflected solid asset growth, and pricing discipline on both sides of the balance sheet. Loan interest increased $6 million on higher average balances and yields including approximately $0.6 million of interest recaptured the tax credit portfolio on the refinancing of loans. Average balances were $117 million higher in the quarter while loan yields improved by seven basis points compared to the linked quarter. The average rate on loans booked in the second quarter was 7.26% and continued to move the average loan yield higher.

Interest on investment securities grew by $2.8 million in the quarter both on higher average balances and improved yields. The investment portfolio yield improved by 11 basis points over the linked quarter with the average tax equivalent purchase yield at 5.3%. Interest on cash and short-term investments declined $1.8 million on lower average balances. Interest expense increased $2 million compared to the linked quarter, Deposit expense increased by $0.7 million due to higher average balances and was partially offset by better average rates. Interest expense on borrowings increased $1.2 million with higher average balances on short-term FHLB advances.

As a result, our net interest margin was 4.21% for the second quarter, an increase of six basis points over the linked period. The earning asset yield improved by seven basis points driven by enhanced yields on loans and investments. This included two basis points from the loan interest recapture previously mentioned we do not expect to repeat. We also improved the earning asset mix by deploying excess cash and leveraging brokered deposits to support loan growth and fund additional investment portfolio purchases both at attractive yields relative to the existing portfolio. Our cost of funds declined by three basis points mainly as a result of a seven basis point decrease deposit expense and partially offset by a less favorable funding mix. We believe our balance sheet is well positioned for the current rate environment and expect net interest margin to be relatively stable moving forward. Slide fourteen reflects our credit trends. We had net charge-offs of under $1 million compared to a net recovery of $1.1 million in the linked quarter. Our consistent credit culture and management of nonperforming loans is reflected in our net recoveries of one basis point of average loans so far this year.

Provision for credit losses was $3.5 million in the period compared to $5.2 million in the linked quarter. The provision for credit losses benefited from $3.2 million in recoveries during the quarter, which partially offset the impact of loan growth, a worsening economic forecast. Nonperforming assets were stable with the linked. As disclosed last quarter, the largest component of our non-performing assets is concentrated in two commercial banking relationships that went into bankruptcy due to a business dispute between the partners. These relationships represent 60% of our total non-performing asset balance. We believe we are well secured with collateral and individual guarantees and fully expect to collect each of the underlying loans. We continue to make progress on these relationships.

And we recently were granted relief from bankruptcy stay which will allow us to actively pursue enforcement of our rights and remedies. Slide fifteen shows the allowance for credit losses. We continue to be well reserved with an allowance for credit losses of 1.27% of total loans or 1.38% when adjusting for government guarantees. On slide sixteen, second quarter non-interest income of $21 million was a $2.1 million increase from the linked quarter driven largely by bank-owned life insurance and community development income. Partially offset by lower tax credit income and gains on the sale of SBA loans.

The increase in BOLI income was primarily due to the purchase of additional policies in the first quarter and to a lesser extent the payout of a policy in the second quarter. Depending on levels of planned growth and activity in the SBA space, we may take the opportunity to sell more SBA loans as the year progresses. Turning to slide seventeen, non-interest expense of $105.7 million increased $5.9 million from the first quarter including $500,000 of branch acquisition costs. Compensation and benefits increased $2 million largely due to a full quarter of merit increases that went into effect March first higher incentive compensation accruals, and an additional working day in the quarter.

Deposit costs increased roughly $1 million from the linked quarter primarily due to a $62 million increase in average deposit balances.

Loan-related legal and other expenses increased $1.1 million during the quarter due to loan workouts and the foreclosure of certain properties, related to non-performing loans. The core efficiency ratio was stable at 59%. Our capital metrics are shown on slide eighteen. We grew tangible book value by 4% in the quarter and over 14% in the last year. Our tangible common equity ratio 9.4% up from 9.3% in the linked quarter. While our TCE ratio is higher than our targeted level of 8% to 9%, the branch acquisition that is expected to close in the fourth quarter will leverage our access capital position.

We also ended the quarter with a strong common equity tier one ratio of 11.9% and that has increased nearly 30 basis points over the last year. Our strong capital position and earnings profile allowed us to increase our quarterly dividend by $0.01 to $0.31 per share for the third quarter of 2025.

We a strong start to 2025, believe the momentum will carry us to the latter part of the year. Our earnings profile and balance sheet are strong. The strategic branch acquisition that is expected to close in the fourth quarter will help us continue to deliver top-tier financial performance. I appreciate your attention today, and we'll now open the line for questions.

Operator: At this time, I'd like to remind everyone in order to ask a question, Your first question comes from the line of Jeff Rulis from DA Davidson. Your line is live. Thanks. Good morning.

Jeff Rulis: Hey, Jeff. Just a couple of questions. Maybe just some line item detail guys usually provide pretty good color, so I'd gonna go granular on the on the fee income end. Heard you on the BOLI, you know, much of which is new policy. I guess there's a number of line items in kinda other that a little higher on a on a run rate. To maybe get a sense for outside of state tax credit activity, kind of your expectations for fee income kind of the second half of the year?

Keene Turner: Yeah. Yeah. This is this is Keene. I mean, I think when I look at it in total, you know, the first quarter overall is kind of a good maybe with some changes in the line items. I do think that SBA sales will be on the table again. You know, obviously, about a million won of the boe. It will continue to recur each quarter. And then, you know, there's some line items like CDE and private equity that are difficult to predict, but we've had some contribution from them of a penny or two. In each of the quarters. And so that's essentially what I would expect.

And then we're we're optimistic or hopeful that the JV, on the tax credit line item, will be kind of neutral to third quarter earnings and then we'll resume some seasonal strength in the fourth quarter. Obviously, fair value moves around in that line item, but I think you know, that's sort of how we have it pegged in terms of what we're thinking.

Jeff Rulis: Gotcha. No. Helpful. I was ex exactly what I was looking for. The and maybe the same question on the expense side. You know, I felt like that merit increase was a was a little higher year over year than the jump one q to two q prior year. I don't know if there was a change calendar wise, but that it's kind of a part a of the question, and then the legal running a little high. I guess a similar question of can we get closer to that hundred billion run rate or is this the new level we should grow off of? Thanks.

Keene Turner: Yeah. Jeff, I think the overall level grows off of where we are today, and I'll give you some color on why that is. So what you're seeing a little bit in the comp and benefits is some one-time bonuses for new hires in the second quarter. You know, you heard Scott mention that we added to the Texas market. So that's know, that's a little bit there. One more work day in the quarter, which is about a half a million dollars. And then know, our performance year to date has been really strong, and so we needed to add to incentives. So a little bit of stacking on top you know, the deposit verticals continue to grow well.

And I think in the back half of our forecast, you know, as we started the year, we had, you know, some more rate cuts, and we're not getting those. And so those are the deposit verticals grow, we expect that line item will step up you know, another know, you know, million one to million five sequentially as we get expansion there in the next quarter. And then on the loan legal, some of that's just a function of where we are with the large non-performers that we have. Obviously, we got some know, some positive news there, but I don't know that those we have any expectation that those fees will drop off.

But they are an opportunity moving forward when we when we work our way past those items.

Jeff Rulis: Oh, okay. That last bit of that was tied to the Southern California credits on the

Keene Turner: There's yeah. I don't I'm not sitting here looking at the detail of it, but certainly that has an impact know, significantly. That's something that we've had to pay very close attention to. And we've we've devoted a lot of time and resources to.

Jeff Rulis: Got it. And I and I had one last one if I could, either I Jim or Keene. You know, on the capital level, I think Keene, you mentioned the branch deal will kinda you kinda ease into them. You are higher on capital levels kind of exceeding kinda your targets, but does the branch deals sort of normalize that those capital levels? And just any update on that capital kind of priorities from here. Thanks.

Jim Lally: Well, let me handle the priorities, Keene. You give the details on the on the branch acquisition. Our priorities remain, Jeff, really just support our growth, and we think we're gonna have some nice growth in the back half of the year. We'll continue evaluating our dividend policy going forward. And then, obviously, know, the branch acquisition is the next key there. And can you talk about that a little bit? Yeah. Jeff, that's roughly a hundred basis points of capital across the board gets leveraged there. So you go you took nine and a half and you go down to eight and a half. So it's right in the middle of our target.

And then we do anticipate calling the sub debt in the second call period here. So that would really affect the third quarter. We got liquidity lined up to replace that, but, obviously, that's a capital instrument that comes out of the tier two stack. So we're comfortable there running with a little bit higher TCE or CET one as we evaluate options to you know, modify the capital stack moving forward. But we're gonna be patient with that latter activity.

Jim Lally: Appreciate it. Thank you.

Operator: Your next question comes from the line of Damon DelMonte from KBW. Your line is live.

Damon DelMonte: Hey, good morning, guys. Thanks for taking my questions. Can you just kind of talk a little bit more about the margin and the outlook It sounded like you were kinda hopeful you could kinda keep it pretty steady from this level kind of in the back half of the year. Is that good way to characterize it?

Keene Turner: Yeah. I would say the most near-term pressure on March Damon is really here in the second quarter. So we expanded the size of the securities portfolio in the second quarter. To really make sure that we secure the economics from the excess liquidity of the branch transaction. So that was really funded with some of the brokered CDs, and, obviously, incremental margin there was a little bit lower.

And while most of that was largely absorbed in, you know, margin and July was within good shape. It that may cause net interest margin just to have a little bit pressure. And then the sub debt that I mentioned moves floating rate for the quarter and that's a, you know, five percent essentially pickup in the rate there, you know, adverse to us. So those couple things are gonna move it around a little bit. I think dollars are gonna be in good shape. You know, with where we sit and with the balance sheet expansion that we've had.

And then I think I'm I'm more confident that margin know, let's say without rate cuts, you know, is stable and potentially growing you know, for the next four quarters. If we get rate cuts, you know, that'll pressure margin by, you know, a few basis points each time there's a cut. It'll take us a little bit to get the deposit pricing out of it, but, you know, we're assuming a beta on cuts that's worse than our current performance from the last hundred basis points.

So I think we're a little bit conservative there, and then we also we get a favorable offset from you know, the non-interest expense line item for the deposit costs But everything I'm looking at across my page is suggest growth in you know, net interest income dollars for you know, sort of the foreseeable four quarters on the existing balance sheet. And then the branch transaction obviously comes in and significantly improves the earnings level. And, you know, we expect at least in the initial year mid single digit EPS accretion, if not, a little bit better.

Damon DelMonte: Okay. Great. Thanks. That's helpful. And then with regards to the outlook for loan growth, you know, I think the first two quarters were, like, 3% and 4%. On a linked quarter annualized basis, respectively. Based on what you're seeing with pipelines and investor sentiment, do you feel like you could kinda keep it at least at this pace, or do you expect it to maybe pick up a little bit in the back half?

Jim Lally: Yeah. Damon, this is Jim. I would expect it to pick up for all the reasons I discussed in my comments that, you know, there's plenty of pent-up demand, plenty of discussions happening Pipelines are good. And I think there's just need some certainty. I think the tax bill is the first piece of certainty. And then some of the news we're getting from you know, the trade policy with the various countries and what have you. And it's not the number per se. It's just that there is a number. There's clarity. They can now plan and move forward. And I think less the least of the three really is interest rate cuts.

People are doing fine without rates moving, and if they do move all the better, but I think those first two things really move the needle for us such that, you know, we're at 4% now. I see us ticking up to 5, 6, 7% for the back half of the year.

Damon DelMonte: That's great. That's all that I had. Thanks so much for my taking my questions.

Jim Lally: You bet. Thank you.

Operator: Your final question comes from the line of Brian Martin from Chaney. Your line is live.

Brian Martin: Hey. Good morning, guys.

Jim Lally: Good morning, Brian. Good morning, Brian.

Brian Martin: Hey. Hey, Keenan. I was wondering, could you give us where the a ballpark of where the where the margin exited? The quarter given because the securities purchases and then maybe just can you put any sense around sounds like the margin, you know, potentially just a bit lower here in three q. And then you know, maybe it's up thereafter, you know, absent you know, the rate potential rate cuts, but just trying to put a fence around how you know, what's the delta that, you know, you expected could range from as far as being lower next quarter based on the sub debt and the securities you talked about.

Keene Turner: Yeah. I mean, Brian, I think we've said this for the last couple of quarters. It gonna depend a little bit on where growth is. So, you know, you heard from Jim, we're we're a little bit bullish on growth. I think that means that we're down a few basis points on margin. You know, we're at four twenty one. If you sort out some of the nonrecurring stuff, you know, you're at four nineteen and, you know, maybe you're down slightly from there. And I and I will always caveat that I'm talking about you know, literally basis points here So I don't, I think there's a couple things that could affect it. But if you get the growth, you and you erode margin a little bit, we're still gonna have you know, good dollars performance sequentially. So you know, I think it's still high teens, low twenties. Know, in that range that we're talking about here. We're not we're not quite as, pessimist because we were one q to two q. Because we've been able to do such a good job in multiple successive quarters you know, both on the deposit side on the loan side, and then also securities deployment has been you know, continued to be stronger than we planned. And so know, we're I think that playbook will continue here in the in the third quarter.

Brian Martin: Gotcha. No. That's helpful, Keane. And then just the outlook after you kinda get through this quarter is we don't see rate cut is more of an a modest upward bias or stable rather than you know, lower is fair.

Jim Lally: Yeah. We certainly feel margin than, you know, where legacy margin is And so that'll, you know, buoy it a little bit in, you know, fourth I think, you know, those are those are all positive attributes barring anything substantial on the interest rate side.

Brian Martin: Gotcha. Okay. Appreciate the color there. And then maybe just on the team that you brought on in Texas, can you give any color on that team in terms of size? Do they have noncompetes where or should they begin to kind of hit the ground running right away?

Scott Goodman: Hey, Brian. It's Scott. How are you? I can answer that one. Yeah. Is a team we've been really talking to from maybe over a year there. They're on board. They hit the ground. They don't have restrictions regarding noncompete So we're already seeing new business. We're already seeing a pipeline.

They're really focused on what I call the low to mid-sized C and I businesses, which think fits in well with what we're doing in Dallas, which is more of a CRE and larger c and I. Strategy. So far so good with them. Yeah. And it's a team of three, by the way. Three that have been together for quite some time and really are from that area. Gotcha. Okay. And then I guess you guys talked about someone mentioned earlier just the you know, that you maybe you didn't grow loans quite as much as you, you know, could have this quarter. Just kind of protecting the margin.

Brian Martin: Is that kind of the outlook going forward in terms of, you know, maybe a little bit less growth? I know, Jimmy, you talked about the optimism on items you talked about, but just trying to understand the growth relative opportunities relative to kind of protecting that margin.

Jim Lally: So I look at it this way, Brian, that the pie is gonna expand a little bit in the in the back half of this year. And what we saw was especially on transactional type of things, real estate, and what have you, that we could've jumped in for a greater share of it. But we've had to really compromise the discipline that we've had in place regarding price, and we just chose not to. And was it was it, you know, two percentage points? No. But it was know, decent numbers for sure. And we wanna make sure we're disciplined.

I just think the pie is gonna be bigger such that we can maintain our discipline but also grow because there should be more opportunities in the back half of this year in the twenty sixth.

Brian Martin: Got it. Okay. Then just the last one for me. Can you mention the FBA just kind of your commentary about being opportunistic there. Is that more of a near term event or is it more consistent over time that maybe you think about selling more of the ESPA where it's part of a regular and consistent approach?

Keene Turner: Yeah. I would say we're dipping our toe in this year more than we have in the past. And we're gonna see how that plays out. I think to the extent that Jim's comments affect all of the businesses, including SBA, Certainly, elevated production would cause us to continue to look at loan sales. There you know, it's a it's a liquid variable rate asset that in theory, in small doses, we can use to know, trade and go buy securities that are fixed rate and further neutralize the balance sheet. So you know, that's that's part of that strategy. It's it's also a little bit reflective of, you know, having some balance sheet growth here with a with an m and a transaction. So know, we're we're experimenting this year. I think we like it to help you know, solidify the fee income line item.

And, you know, when we're a little bit more defensive, you know, from a rate and growth perspective, it's it certainly helps us. So I think third quarter, I would anticipate having some level of SBA gain, I'll I'll be at maybe at a you know, diminishing level. And then fourth quarter, I think the tax credit line item you know, would carry the day there.

Brian Martin: Yeah. Okay. And then and then just one last thing if I can ask you is just on the end. Just the industry in general is seeing you know, a bit of a pickup in m and a. Obviously, you guys have the brands dealing a lot on your plate with the team you brought on and the growth opportunities. Is you know, I guess, any different? Or can you give any update on just how you're thinking about you know, regular bank M and A in terms of, you know Sure. Doesn't seem like it's a priority, but just trying to make just kinda confirm that.

Jim Lally: Well, Brian, you've done it. The first priority really is to make sure that we onboard our new clients and associates well here in the back half of this year. Like many institutions, we have ongoing conversations with plenty of companies. And I think we can think about getting more serious, but we really have to really look and make sure that it enhances the strategy. I mean, you look at the growth that we have, the compound intangible book value, and things of that nature that going on, we wanna make sure that, it doesn't slow down what we get going organically it really has to enhance the strategy that we're undertaking.

The other thing too is just because we're not participating and it's happening in our markets, we are benefiting from it. And that benefit occurs ongoing. This is not immediate. It goes on and on and on. And think about what's happening in Dallas, in Southern California, and certainly out in our western markets, there's plenty of opportunity for us to participate. In others' m and a, and we're doing so very well.

Brian Martin: Gotcha. I appreciate the update. Thanks for taking the questions, guys.

Jim Lally: You bet. Have a good day.

Operator: There are no further questions I'll now turn the call back over to Jim Lally for closing remarks. Thank you, Jordan, and thank you all

Jim Lally: for joining us this morning and for your interest and support of our company. Have a great day, and we'll talk to you next quarter.

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.