Enterprise Financial Services Corp Q2 FY2025 earnings call

The company has a diversified business model. Earnings per diluted share were $1.36 for the quarter, with an adjusted return on assets of 1.31% and pre-provision ROAA of 1.72%. Loan growth came from C&I loans, investor-owned commercial real estate, and tax credit business. Geographic markets showed growth across all regions. Deposit base is diversified, with specialty deposit verticals growing. Capital levels remained stable, with a tangible common equity to tangible assets ratio of 9.42%, and dividend was increased.

Net interest income grew by $5.2 million compared to the previous quarter, and the net interest margin expanded by 6 basis points to 4.21%. Annualized loan growth in the quarter was 4% or $110 million, with contributions from various areas. Deposits were stable to slightly higher, growing $73 million net of broker deposits. Core deposit base grew by nearly $800 million year-over-year, and the total loan-to-deposit ratio was 86%.

The company will focus on achieving loan and deposit goals in the second half of 2025, balancing quality and pricing. Anticipates closing the branch acquisition. Increased dividend by $0.01 per share for the third quarter of 2025 to $0.31 per share.

Economic uncertainties may affect client project advancement. Trade policy uncertainties impact certain business lines. Interest rate changes may affect net interest margin. Risks from large non-performing loan relationships.

Q: Just a couple of questions. Maybe just some line item detail. You guys usually provide pretty good color. So I'm going to go granular on the fee income and I heard you on the BOLI much of which is new policy. I guess there's a number of line items in kind of other that a little higher on a run rate. I'm hoping 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?

A: Yes, Jeff, this is Keene. I mean I think when I look at it in total, the first quarter overall is kind of a good proxy maybe with some changes in the line items. I do think that SBA sales will be on the table again. Obviously, about $1.1 million of the BOLI will continue to recur each quarter. And then there are some line items like CDE and private equity that are difficult to predict, but we've had some contribution from them of $0.01 or $0.02 in each of the quarters. And so that's essentially what I would expect. And then 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 that's sort of how we have it pegged in terms of what we're thinking.

Q: Got you. No, helpful. That was exactly what I was looking for. And maybe the same question on the expense side. I felt like that merit increase was a little higher year-over-year than the jump 1Q to 2Q, the prior year. I don't know if there was a change calendar-wise, but that's kind of 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 $100 million run rate? Or is this the new level we should grow off of?

A: Yes, 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 onetime bonuses for new hires in the second quarter. You heard Scott mention that we added to the Texas market. So that's a little bit there. One more workday in the quarter, which is about $0.5 million. And then our performance year-to-date has been really strong, and so we needed to add to incentives. So you're seeing a few things together that maybe just show up as merit, but I think there's a little bit of stacking on top on the comp line item. And then the deposit verticals continue to grow well. And I think in the back half of our forecast, as we started the year, we had some more rate cuts, and we're not getting those. And so those are accruing to our benefit in the net interest income line item. But as the deposit verticals grow, we expect that, that line item will step up another $1.1 million to $1.5 million 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 nonperformers that we have. Obviously, we got some positive news there, but I don't know that those -- we have any expectation that those fees will drop off. But there are an opportunity moving forward when we work our way past those items.

Q: Okay. That last bit, that was tied to the Southern California credits...

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

Q: Got it. And I had one last one, if I could. Either Jim or Keene, on the capital level. I think Keene you mentioned the branch deal will kind of ease into the -- you are higher on capital levels, kind of exceeding kind of your targets, but did the branch deal sort of normalize that -- those capital levels? And just any update on the capital kind of priorities from here?

A: Let me handle the priorities, Keene, and you can get into the details on the branch acquisition. Our priorities remain, Jeff, really just to support our growth, and we think we're going to have some nice growth in the back half of the year. We'll continue evaluating our dividend policy going forward. And then obviously, the branch acquisition is the next key there. And Keene, do you want to talk about that a little bit?

Q: Damon Paul DelMonte: Keene, can you just kind of talk a little bit more about the margin and the outlook? It sounded like you were kind of hopeful you could kind of keep it pretty steady from this level kind of in the back half of the year. Is that a good way to characterize it?

A: Yes. I would say the most near-term pressure on margin we see, 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 and margin in July was in good shape, that may cause net interest margin just to have a little bit of pressure. And then the sub debt that I mentioned moves to floating rate for the quarter, and that's a 5% essentially pick up in the rate there adverse to us. So those couple of things are going to move it around a little bit. I think dollars are going to be in good shape with where we sit and with the balance sheet expansion that we've had. And then I think I'm more confident that margin, let's say, without rate cuts is stable and potentially growing for the next 4 quarters. If we get rate cuts, that will pressure margin by a few basis points each time there's a cut. It will take us a little bit to get the deposit pricing out of it. But we're assuming a beta on cuts that's worse than our current performance from the last 100 basis points. So I think we're a little bit conservative there. And then we also -- we get a favorable offset from the noninterest expense line item for the deposit costs. But everything I'm looking at across my page suggests growth in net interest income dollars for sort of the foreseeable 4 quarters on the existing balance sheet. And then the branch transaction obviously comes in and significantly improves the earnings level, and we expect at least in the initial year, mid-single-digit EPS accretion, if not a little bit better.

Q: Okay. Great. That's helpful. And then with regards to the outlook for loan growth, I think the first 2 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 kind of keep it at least at this pace? Or do you expect it to maybe pick up a little bit in the back half?

A: Yes, Damon, this is Jim. I expect it to pick up for all the reasons I discussed in my comments that there's plenty of pent-up demand, plenty of discussions happening. Pipelines are good. And I think there's just been some certainty. I think the tax bill is the first piece of certainty. And then some of the news we're getting from 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 3 really is interest rate cuts. So people are doing fine without rates moving, and if they do move, all the better. But I think those first 2 things will really move the needle for us such that if we're at 4% now, I'd see it ticking up to 5%, 6%, 7% for the back half of the year.

Q: Brian Joseph Martin: Keene, I was wondering, could you give us where the -- a ballpark of where the margin exited the quarter given kind of the securities purchases? And then maybe just, can you put any sense around -- it sounds like the margin is potentially just a bit lower here in 3Q? And then maybe it's up thereafter, absent the rate -- potential rate cuts is fair?

A: Yes. I mean, Brian, I think we've said this for the last couple of quarters. It's going to depend a little bit on where growth is. So as you heard from Jim, we're a little bit bullish on growth. I think that, that means that we're down a few basis points on margin. We're at 4.21%. If you sort out some of the nonrecurring stuff, you're at 4.19% and maybe you're down slightly from there. And I will always caveat that I'm talking about literally the basis points here. So I don't -- I think there's a couple of things that could affect it. But if you get the growth margin a little bit, we're still going to have good dollars performance sequentially. So I think it's still high teens, low 20s in that range that we're talking about here. We're not quite as pessimistic as we were 1Q to 2Q because we've been able to do such a good job in multiple successive quarters, both on the deposit side, on the loan side and then also securities deployment has been -- continued to be stronger than we planned. And so we're -- I think that playbook will continue here in the third quarter.

Q: Got you. No, that's helpful, Keene. And then just the outlook after you kind of get through this quarter is if we don't see rate cuts is more of a modest upward bias or stable rather than lower is fair?

A: Yes. We certainly feel and what we show here is that there's an upward opportunity on the static balance sheet. And then the branches that we're acquiring, we expect will come in at a slightly better margin than where legacy margin is, and so that will buoy it a little bit in fourth for most of the quarter and then first for full quarter. So I think those are all positive attributes barring anything substantial on the interest rate side.

Q: Got you. 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? Or should they begin to kind of hit the ground running right away?

A: Brian, it's Scott. I can answer that one. Yes. This is a team we have been really talking to for maybe over a year there. They're on board. They've hit the ground. They don't have restrictions regarding noncompetes. So we're already seeing new business, we're already seeing a pipeline. They really focus on what I'll call the low to midsized C&I businesses, which I think fits in well with what we're doing in Dallas, which is more of a CRE and larger C&I strategy. So, so far, so good with them. And it's a team of 3, by the way, 3 that I've been together for quite some time and really are from that area.

Q: Got you. Okay. And then I guess, you guys talked about -- someone mentioned earlier, just the -- maybe you didn't grow loans quite as much as you could have this quarter, just kind of protecting the margin. Is that kind of the outlook going forward in terms of maybe a little bit less growth? I know Jim talked about the optimism on the items you talked about, but just trying to understand the growth opportunities relative to kind of protecting that margin?

A: So I look at it this way, Brian, that the pie is going to expand a little bit 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 have jumped in for a greater share of it, but we'd have had to really compromise the discipline that we've had in place regarding pricing, we just chose not to. And was it 2 percentage points? No, but it was decent numbers for sure. And so we want to make sure we're disciplined. I just think the pie is going to be bigger such that we can maintain our discipline, but also grow because there's going to be more opportunities in the back half of this year into '26.

Q: Got you. Okay. And then just last one for me. Keene, you mentioned the SBA, just kind of your commentary about being opportunistic there. Is that more of a near-term event? Or is that more consistent over time that maybe you think about selling more of the SBA where it's part of a regular consistent approach?

A: Yes. I would say we're dipping our toe in this year more than we have in the past, and we're going to 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 -- it's a liquid variable rate asset that, in theory, in small doses, we can use to trade and go buy securities that are fixed rate and further neutralize the balance sheet. So that's part of that strategy. It's also a little bit reflective of having some balance sheet growth here with an M&A transaction. So we're experimenting this year. I think we like it to help solidify the fee income line item. And when we're a little bit more defensive from a rate and growth perspective, it certainly helps us. So I think third quarter, I would anticipate having some level of SBA gain, albeit maybe at a diminishing level and then fourth quarter,我think the tax credit line item would carry the day there.

Q: Yes. Okay. And then just one last thing, if I can ask, was just on -- just the industry in general is seeing a bit of a pickup in M&A. Obviously, you guys have the branch deal and a lot on your plate with the team you brought on and the growth opportunities. Is -- I guess, any different -- or can you give any update on just how you're thinking about regular bank M&A in terms of -- it doesn't seem like it's a priority, but just trying to kind of confirm that.

A: Well, Brian,你hit the nail there. 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 if you look at the growth that we have, the compounded tangible book value and things of that nature that's going on, we want to make sure that it doesn't slow down what we get going organically. So it really has to enhance the strategy that we're undertaking. The other thing too is just because we're not participating in the M&A 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 and Southern California and certainly out在our Western markets. There's plenty of opportunity for us to participate in other M&A, and we're doing so very well.