Enterprise Financial Services Corp Q2 FY2023 Earnings Call

Hello, and welcome to the Enterprise Financial Services Corp. Second Quarter 2023 Earnings Call. All lines have been muted to avoid background noise. After the remarks from the speakers, there will be a question-and-answer session. I will now turn the conference over to Jim Lally, President and CEO. Please proceed.

Thank you, Jay, and good morning. Thank you all very much for joining us this morning and welcome to our 2023 second quarter earnings call. Joining me this morning is Keene Turner, EFSC's Chief Financial Officer and Chief Operating Officer; and Scott Goodman, President of Enterprise Bank & Trust. Before we begin, I would like to remind everybody on the call that a copy of the release and accompanying presentation can be found on our website. The presentation and earnings release were furnished on SEC Form 8-K yesterday. Please refer to slide 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. In mid-March, we made a strategic decision to continue our growth trajectory for 2023, supporting the needs of our clients in addition to onboarding several new relationships from competitors who are inwardly focused. Much of this growth focused on C&I relationships, typically coming with a floating rate loan structure and full treasury management products and deposits. As you can see from our growth in the quarter, this decision paid off well for us. As part of our efforts to support clients and enhance long-term shareholder and franchise value, we also saw some significant deposit wins in the quarter from our regions and specialty deposit businesses that will fund over the remainder of this year. Scott will provide much more color on these topics in his comments. I spent the month of June visiting several of our markets and had a chance to visit with over 100 clients and prospects. For the most part, these companies continue to perform well and are optimistic about the remainder of this year and next, despite the increased costs throughout their businesses, inclusive of debt service. Orders remain strong; supply chain issues have improved; labor cost and availability have not worsened; and earnings remain good. What they heard from me was that we would be there to support them through this time of opportunity, just like we promised when we brought them on to our platform. Despite this relatively optimistic viewpoint, I do see loan growth for us moderating in the second half of this year and settling back into the mid to high single-digit range for 2024. For Enterprise, this is reflective of the fact that we're seeing payoff activity moderate, which we feel is an opportunity to garner more holistic customer relationships in situations where we are lending. Additionally, with moderating payoffs, we believe this presents an opportunity to continue to apply pricing discipline and focus on elevating our spreads in certain business lines. As some competitors back away from certain sectors, we see this as an opportunity to earn more by doing slightly less. This will drive loan origination and growth into certain business lines, particularly C&I, and may cause some moderation in certain real estate situations as well as other lower-margin business lines. Our financial scorecard can be found on slides three and four. Our strong financial performance continued during the second quarter. As expected, most earnings-related measurements declined when compared to the first quarter. Nonetheless, I believe that we continue to operate from a position of strength due to our diversified revenue base and strong balance sheet. For the quarter, we earned net income of $49.1 million or $1.29 per diluted share as we produced an ROAA of 1.44% and a PPNR ROAA of 2.02%. Our focus on growing operating revenue continued in the quarter as net interest income grew by $1.2 million to $140.7 million, supported by a strong net interest margin of 4.49%. While the remixing of deposits continued during the quarter, we also saw our commercial clients, in some instances, utilizing cash for asset purchases instead of borrowing or putting much more cash into M&A and real estate projects than what we had traditionally experienced. Entering the quarter, we were confident that we would be able to combat the earnings pressure created by the expected deposit remixing. Loan growth in the quarter was just over $500 million and represented growth from all geographic areas and businesses. Our variable rate bias and C&I focus drove overall loan yields to 6.64%, an increase of 31 basis points from the previous quarter. While this growth was ahead of expectations, it helped us weather the pressure from changes to deposit pricing and composition, and we believe that it's helped us set up to have a chance for stable quarterly NII for the remainder of the year. We utilized brokered CDs to provide stable funding to support the growth in the second quarter. This strategy helped to preserve our wholesale borrowing capacity and liquidity measures while weathering typical seasonal liquidity tightness in our customer base. This helped us maintain a stable loan-to-deposit ratio of 90% during the quarter, while uninsured deposits declined modestly due to a continued shift in the deposit base. Stable and strong is how I would characterize both our capital and credit ratios. At quarter end, our tangible common equity to total assets came in at 8.65%, and we grew our tangible book value per common share from $30.55 to $31.23. This represents over a 17% increase from where we were just a year ago. Our credit statistics too remain strong as both nonperforming loans to total loans and nonperforming assets to total assets remain low and relatively unchanged when compared to the previous quarter and the second quarter of 2022. Consistent reviews of the portfolios and early identification of potential issues is how we've managed and continue to manage the portfolios. This includes targeted reviews utilizing both internal and external resources and expertise. Slide 5 reflects our focus for the foreseeable future. Funding our future loan growth from core client relationships remains our biggest opportunity going forward. We have invested in and grown several markets and businesses that provide us the opportunity to do just that. Our asset growth will moderate back to the mid-to-high single-digit range focused on expanding our credit spreads and continued disciplined credit structures. This will allow us to maintain an incredibly strong balance sheet and continue to produce the best-in-class earnings profile that we all have become accustomed to. With that, I would like to turn the call over to Scott Goodman for much more insight and details on our markets and our businesses.

Thank you, Jim, and good morning, everyone. Moving on to slide 6, as you heard from Jim, we posted robust loan growth for the quarter totaling $501 million, adding to a pace which results in a 12-month increase of over 13%. Growth over this timeframe is broken out on slide 7 and has come from all primary categories, well balanced between the metro markets and specialty verticals. Accelerated growth in Q2 detailed on slide 8 was primarily the result of strong pull-through of opportunities from the pipeline with originations up 13% from the prior quarter. In addition, net growth was aided by reduced payoff activity and a modest increase in usage on revolving lines of credit. Within the specialty channels, Sponsor Finance experienced strong growth this quarter through both higher originations and lower churn in the portfolio. Following a brief pause earlier in the year to digest the impacts of rising rates and some shifting economic factors, sponsors restarted their process during the quarter, with closings in Q2 double that of Q1 levels. We remain disciplined in this channel, underwriting to proven and consistent credit structures, focusing on well-known sponsor relationships and opportunistically elevating spreads to boost our return. Life insurance premium finance posted a relatively strong growth quarter with slightly higher payoffs more than offset by new policy financings and increased advances on existing policy loans. We continue to see a steady pipeline of new opportunities from an expanding referral network as well as a larger funding tail on a growing book of commitments. Following a seasonally softer Q1 in the tax credit lending business, activity ramped up this quarter. Closings and advances on existing loans increased as well as affordable housing projects accelerating from Q1 levels, following some re-budgeting and capital raising associated with the higher cost environment. SBA posted $12 million of growth in the quarter, with steady originations and modestly improved paydown impacts, reflecting our proactive defense of the existing portfolio. Our sales channel remains active and is well positioned to take advantage of elevated demand that could result from any potential credit tightening or liquidity constraints that affect the loan appetite of traditional bank lenders. Within the geographic markets, displayed on Slide 9, we posted solid loan growth for the quarter across the footprint and continue to steadily grow these portfolios through a consistent value-added and relationship-based sales process. In the Midwest, we've grown 9.5% year-over-year, including $53 million of growth in Q2, which included several prized new middle-market relationships in St. Louis, acquisition financing for existing relationships, as well as some modest growth on lines of credit from working capital revolvers and construction loan projects in process. Our Southwestern region had a particularly successful quarter with loans up by $88 million, placing year-over-year growth at roughly 24%. This level of growth is reflective of the strong economic profiles in these markets and our team's ability to develop deep relationships with businesses that are well-positioned to benefit. The Texas team, which has been on board now just over a year, has gained traction quickly and continues to bring on new relationships in the quarter, both C&I operating businesses and commercial real estate. Arizona and Las Vegas new originations in Q2 were mainly focused around commercial real estate, including projects in the industrial, student housing, medical office, and grocery-anchored retail space. We have positioned our CRE strategy around experienced, proven developers and investors where we are not a transactional lender, but can go deep and gain a meaningful relationship on both sides of the balance sheet. In our Western region of Southern California, we have focused our energy on expanding the diversity and the growth profile of the legacy acquired portfolios by deepening existing loan and deposit relationships and adding resources to a C&I channel consistent with our other markets. This work has gained traction in the market with year-over-year loan growth of nearly 8%, including $80 million in the second quarter. Near term, new originations consist mainly of new C&I relationships across a range of industries, including distribution, construction, manufacturing, and transportation. Moving now to deposits, which are outlined for the last 12 months and for the quarter on slides 10 and 11. Total deposit balances grew by $465 million in Q2. Overall, client deposit balances were relatively stable, with most of the category changes attributable to the remixing of DDA to interest-bearing account types and an increase in the broker deposits used in conjunction with loan growth for the quarter. Within the regions, shown on slide 12, client deposit balances did grow across a majority of our major markets and the specialty channels, with the West region experiencing a modest decline. The larger reductions in Southern California are consistent with stronger reactions of depositors to the bank failures located in that geography. As we continue to build our brand and gain traction with our new talent, consistent with our loan trends here, we expect core deposit growth to follow. While midyear is typically a softer period of seasonal growth in the commercial book, our commercial and business banking teams are squarely focused on deposit retention and growth with specifically regionally focused plans. We have armed these teams with competitive and flexible product sets designed to convert a solid pipeline of qualified opportunities to both recapture excess cash balances from existing clients and attract new accounts. Following strong growth in the first quarter, the specialty deposit businesses posted more modest growth of $30 million in Q2, reflective of a typical seasonal slowdown in midyear. Year-to-date, these low-cost channels have grown $458 million or 19%, and now represent 25% of total deposits, as you'll see broken out on Slide 13. We continue to see inflows from our existing clients in this space as well as a steady stream of new opportunities originating from property management relationships within our commercial base and the competitive disruption from a few larger players in these lines of business. Slide 14 shows some additional detail on our core funding mix and account activity for the quarter. Deposits are well diversified among our four main channels and remain anchored to well-rounded client relationships across a diverse set of industries, households, and markets. Within the commercial base, 80% of these clients are using treasury management products and 90% of checking and savings clients are using online banking, which elevates the stability of these balances and reflects the relationship orientation of our base. Our sales process continues to produce positive results, generating net new account balances across all channels. We've also seen steady net new accounts opened in consumer and specialty channels, while the reduction in the number of accounts year-to-date in the commercial and business banking space primarily reflects the consolidation of balances and the closure of certain account types associated with remixing to the interest-bearing and time deposit products.

Thanks, Scott, and good morning, everyone. On slide 15, we reported earnings per share of $1.29 for the second quarter, resulting in a net income of $49 million. Our net interest income grew compared to the previous quarter, and along with an increase in earning assets, helped mitigate the anticipated decline in net interest margin. Furthermore, fee income saw a slight decline, which aligns with seasonal trends. The provision for credit losses was notably higher this quarter due to loan growth. Additionally, non-interest expenses increased this quarter primarily because of rising deposit costs to support our growing specialized deposit business. Overall, we are satisfied with our net interest income, loan growth, and profitability. Our return profile remains strong, supporting our ongoing growth strategy. On Slide 16, net interest income for the quarter increased by $1.2 million to $141 million. The net interest margin of 4.49% decreased by 22 basis points from the previous quarter, primarily due to rising deposit and funding costs. However, we were able to maintain our net interest income through growth in relationship-based loans. More information can be found on Slide 17. On the asset side of our balance sheet, a combination of maintaining higher cash mid-quarter and loan growth resulted in an average earning asset growth of $567 million. The yield on earning assets rose by 28 basis points, largely due to a 31 basis point increase in the total loan yield. New loan originations were a significant contributor to this increase, with new loans booked at an average interest rate of 7.6%, notably supported by C&I loans at 7.9% and SBA loans at 8.75% during the second quarter. Cash balances were higher in the second quarter as we opted to maintain more on-balance sheet liquidity due to the debt ceiling challenges we faced mid-quarter. While this decision had minimal impact on earnings, it slightly diluted our net interest margin for the period. Total average deposit balances increased by $474 million during the quarter, including a rise of $431 million in brokered CDs and $43 million in customer deposits. We have used brokered CDs as they provide stability and predictability to our funding base while allowing us flexibility to support asset growth, while also managing the typical midyear seasonality of deposit outflows. Our deposit costs rose during the quarter as we continue to see remixing and repricing. This change was influenced by interest rates, economic conditions, and industry factors. While our average cost of interest-bearing deposits increased by 70 basis points from the previous period, our cumulative deposit beta remains aligned with historical levels and reflects an enhanced diversified deposit base since the last cycle. The use of brokered CDs has been a deliberate strategy to allow maximum liquidity flexibility. However, this has raised our total cost of deposits and deposit beta. If we exclude brokered deposits, our deposit beta for the quarter would have been 30% lower, and the total cost of deposits would have been 18 basis points lower. Considering the current Fed funds target rate over 5%, we are content with our deposit costs, as our total cost of deposits was 1.46%. Despite remixing, our demand deposits to total deposits ratio exceeds 33%, highlighting the advantages of our business model in funding the balance sheet. Based on our second quarter results, we believe we can surpass expected net interest margin compression in the upcoming quarters with a focus on balance sheet growth. Compared to the second quarter, we have the opportunity to enhance loan pricing, moderate loan growth, and contribute more to funding through increased customer deposits. We generally anticipate stable net interest income moving forward, while net interest margin may decline by about 10 to 15 basis points each quarter. Although we are not impervious to remixing and heightened competition, our business model effectively manages the asset side of our balance sheet to mostly absorb those costs. Moving to Slide 18, we show our credit trends. Annualized net charge-offs were 12 basis points during the period, indicating a modest recovery compared to the first quarter. Overall credit losses continue to remain below historical averages, and our asset quality metrics appear strong. The provision for credit losses was $6.3 million in the second quarter, primarily reflecting our robust loan growth alongside a downturn in projected economic factors. Slide 19 details the allowance for credit losses, which increased by $3 million in the quarter and represents 1.34% of total loans or 1.48% of unguaranteed loans. We continue to employ various economic forecasts in our allowance model, with a bias toward a downside scenario and a heightened reserve focus on specific segments, such as office commercial real estate. This is evidenced by qualitative reserves making up about 30% of our total allowance. On Slide 30, second quarter fee income of $14 million decreased by $3 million from the first quarter, primarily due to lower tax credit income, as the first quarter had gains from the sale of investment securities and SBA loans. Tax credit income tends to be seasonally volatile and peaks at year-end. We anticipate fee income to decrease to roughly $12 million to $13 million in the third quarter, as we do not foresee similar levels of community development-related income repeating. However, we do expect typical seasonal strength in fee income towards the end of 2023. Turning to Slide 21, second quarter noninterest expense was $86 million, an increase of $5 million from the first quarter. Deposit service expenses and other costs rose compared to the previous quarter, although this was partially offset by a decrease in employee compensation and benefits. Deposit servicing expenses increased approximately $4 million in the quarter, influenced by both rates and volumes of certain specialized deposits. The first quarter's expenses were lower due to the expiration of certain earnings credits. We expect this expense to continue rising with both balance growth and higher interest rates. Other expenses rose by around $2 million during the quarter, mainly due to losses from a credit card incident affecting both company cards and customer-related losses. Compensation and benefits were lower this quarter due to seasonality, offset by a reduction in open positions and a full cycle of annual merit increases. We now anticipate noninterest expenses to rise to between $87 million and $89 million in the third quarter, reflecting an increase in deposit service expenses. Additionally, per FDIC rulemaking, we expect the impact of the special assessment to be about $2 million once finalized. The second quarter's core efficiency ratio was 54%, an increase of 350 basis points from the first quarter, mainly due to rises in both interest and non-interest expenses. With the expected moderation in our net interest margin and net interest income, we project a slight increase in core efficiency in the upcoming quarters. However, this will depend on our efforts to expand market share in the specialized deposit business. For other expenses, we plan to manage costs prudently, which is part of our routine discipline, as shown by the trends from the first to the second quarter. Our capital metrics are presented on Slide 22. Strong quarterly earnings offset a decline in accumulated comprehensive income from securities and derivatives, leading to an increase in tangible book value per share to $31.23 at the end of June, a 9% rise this year. The strength of our earnings and high capital retention have supported our clients and contributed to balance sheet expansion for the quarter. We have strategically managed our capital and balance sheet to lay the groundwork for continued growth, as reflected in our tangible common equity ratio of nearly 9% and our common equity Tier 1 ratio of 11.1%. From an adjusted perspective, the after-tax unrealized losses on held to maturity securities account for about 40 basis points of tangible common equity, and combined losses on available for sale and held to maturity securities are roughly 140 basis points. Overall, we are delighted with our financial results for the second quarter and the first half of 2023. While the present interest rate and economic challenges pose difficulties, we also see opportunities to further increase our market share in our regions and enhance the overall value of our business. We believe our diversified platform is well-positioned to deliver strong operating performance relative to the current environment. Thank you for your attention today; we will now open the line for analyst questions.

Your first question comes from Jeff Rulis of D.A. Davidson. Please go ahead.

Thanks. Good morning. I have a couple of questions about the expense line. Keene, regarding the $87 million to $89 million, does that figure include a $2 million special assessment assumption?

No, that's just run rate, and that's really reflecting growth in the deposit business. I think we expect those balances to continue to expand. Competitive pricing is present, but we're gaining market share, and the $2 million would be in addition when it occurs.

Were there operational losses or the credit card event in the second quarter that you would consider one-time? It seems like the deposit cost will exceed some of that. I'm just trying to identify what would be one-time in the second quarter, if anything.

Yes. We expect that $1.3 million to be a one-time occurrence and believe this estimate will only be applicable once. Due to the nature of our accrual process, we needed to account for this currently. We have service providers assisting us in this business, and we anticipate receiving some relationship credits moving forward, although these will not be substantial or significant in any particular period. Overall, the economic impact for us will be quite limited. However, the $1.3 million in the run rate was unexpected and may have led to slightly higher expenses than we projected last quarter.

Thank you. And your next question comes from the line of Damon DelMonte of KBW. Please go ahead.

Hey, good morning. Hope everybody is doing well today. Just wanted to look for a little bit more color on the deposit outlook. The non-interest-bearing deposits continue to kind of shift lower. And I think you noted it's around 33% of total deposits. Do you have an idea of where that kind of bottoms? Do you think you can kind of hold it at this level, or do you expect there to be more migration?

Hey, Damon, it's Jim. Our growth in the second quarter was primarily driven by the brokerage side, which caused a slight dip. Moving forward, we aim to support it with our customer deposits. I hope to see significant amounts of DDAs from both specialized and geographic businesses. I believe maintaining the 30% to 33% range seems reasonable. Our goal is to achieve this as efficiently as possible, though our business model requires a bit more DDA compared to others.

Got it. Okay. And then as far as the outlook for loan growth, I believe the commentary was that it's going to kind of moderate here in the back half of the year. So should we kind of be thinking about like low single-digits for the next couple of quarters before it begins to normalize?

I think I look at it this way, Damon. I think it's getting back to that run rate of that mid to high single-digit and really focusing on those areas where we can garner share of market as well as improved pricing. And there are some nice pockets given the different businesses and markets that we operate in.

Thank you. And your next question comes from the line of Andrew Liesch of Piper Sandler. Please go ahead.

Hey, good morning. Just a quick question, if you can provide any color on the loan that migrated to non-accrual in the quarter that was charged off. What sector might be in, or if there's any other loans similar to this that might be giving you some concern?

Yeah, Andrew, it's Scott. I'll handle that one. It's really one credit. It's an ABL-type aftermarket automotive parts manufacturer, and they've just had some lagging issues dealing with shipping and labor and supply chain disruptions, which they just weren't able to overcome. They're undercapitalized and really unable to continue operating. So from that standpoint, I don't see that as a trend. I don't see that as part of the niche or sector. It's pretty much a one-off. And I think we've charged it down and we think we have the balance under control.

You have covered all my other questions already, so I'll step back. Thanks.

Thanks, Andrew.

Thank you. And your next question comes from the line of Jeff Rulis of D.A. Davidson. Please go ahead.

Hi, thank you. I wanted to follow up on the omni expense line, as Keene mentioned. We reported non-interest expense at 86, and if we exclude a little over $1 million in one-time expenses, it brings us down to about 85. Regarding the rise in deposit costs, I noticed it had already increased in the last quarter. I'm trying to understand how quickly that deposit cost increase is impacting non-interest expense. Should we expect it to be a couple of million per quarter going forward, or more, as long as this trend continues? I'm uncertain about the run rate of non-interest expense, and it appears to be rising quite rapidly.

Yeah. And Jeff, that number, it's not going to grow sequentially as much as the first quarter. We had that expiration of credits in the first quarter. So that normalized number in the first quarter was like $14 million. I think the number in the second quarter is like $16 million. So that $2 million to $3 million depending on collected balances and how much we're growing that there. I think that's generally what we're expecting to see as long as that continues to perform in line with where we've been and pricing continues to be competitive there.

Thank you. And your next question comes from the line of Brian Martin of Janney. Please go ahead.

Hey, good morning guys.

Hi, Brian.

Great quarter. I have a question for Keene regarding the margin. I appreciate the insights you provided. With the margin trending downward but the net interest income stabilizing, what is your outlook on rates? Additionally, when do you anticipate the margin might stabilize? Also, if we experience some rate cuts next year, could you remind us how you expect the margin to react in that situation?

Let me address your comments first. We're projecting over the next couple of quarters and have a forecast for the next 12 months. However, it's still early for an accurate prediction given the fluctuations we've seen in the first and second quarters. Our general outlook suggests that if you consider the current margin around 4.45, we anticipate a decline of about 20 basis points by the end of the year. Even with one or two 25 basis point rate hikes, we expect those to be largely absorbed by competitive deposit pressures. I would consider this outlook somewhat conservative, as we have factored in costs related to interest expense and some continued degradation of beta. We feel confident about achieving $140 million in net interest income over the next few quarters, in line with the growth Jim mentioned, with margins expected to settle around 4.25 to 4.20 by year-end. We are closely monitoring the Fed, which indicates a prolonged period of higher rates. We don't foresee immediate pressure to transition from what seems like an interest rate increase in July to multiple cuts next year. We believe rates will remain fairly stable in the first half of next year. Additionally, while we are asset sensitive, we're becoming slightly less so due to changes from DDA and the use of brokered CDs. If rate cuts do occur, they may provide some opportunities, but we will likely face margin compression. We'll file our Q soon and provide more details on what that compression may look like. As an asset-sensitive company, any decline in rates will likely impact our margins, depending on the speed and aggressiveness of the cuts and how deposit competition and flows evolve.

Got you. Okay. As for the loan areas you're focusing on, perhaps with an emphasis on yield, where do you anticipate growth might come from in the second half of the year, especially in the near term?

Hey, Brian, this is Scott. I would say, I think we're taking an opportunity to push spreads really across the portfolio, but particularly in areas that would be fixed rate or where I think the competition or supply-demand dynamics are advantageous. So I think CRE is one of those areas where we're being judicious on how we approach the market. We're supporting clients. We're lending into new relationships that can bring significant deposit opportunities. Property management would be a good example of how we're leveraging our specialty to lend into commercial real estate. But I think you saw a lot of our growth with new relationships in C&I particularly in our newer markets. And I think that's where you'd see us being more aggressive because those are sticky relationships that bring deposits and bring fee income that don't use the full commitment typically. And then in the specialty areas, you heard my comments on sponsor. I think that moderates a bit in the second half, whereas I think we're seeing opportunities in areas like life insurance premium where some of our competition has vacated to markets, and we can actually push pricing a little bit and get high-quality loans there.

Thank you. Your next question comes from the line of Eric Grubelich, Private Investor.

Hi. Good morning. Question for Keene. Two things related to the interest rate sensitivity and the margin. So to what extent with like the new loans that you're booking at variable rates are you utilizing floors on that production that may help you if rates do drop a couple of quarters from now?

Yeah. So Eric, thanks for your question. We're able to get floors into most new loans. I think the nuance on that is the floors on most of what we have is relatively low. And I don't know that I looked at it and said, hey, here's where the floors are and the stuff we booked this last quarter. But the loans that do have floors are, call it, 2.5% to 3% above the floor, and the proportions are sort of pretty commensurate with what they've been historically. So you've got roughly 63% variable rate, and you've got about a third with no floor and then two-thirds with the floor. But as you might expect, there's also a good portion of that book that's not new and really rose off of the floor that helped us just two years ago. So I don't have good information for you on that, but we are getting floors on whatever competitive terms we can get in the current environment.

Okay. I'm trying to understand the significant growth in broker deposits this quarter. I assume that the rates for those are likely over 5%. How does that compare to what you're offering in your money market and interest-bearing accounts? Is there a possibility to increase rates slightly on those core customer accounts, or is there a reason why you wouldn't want to do that?

I think we're focusing on timing. Typically, deposit levels peak in the fourth quarter and start to decline in the first half of the year, with June 30 often being a low point for deposits. However, we've seen some signs of recovery just 25 days into the third quarter, with positive growth in DDA and other areas, which is encouraging. We need to find the right balance in paying for new and increasing balances. When we analyze the pricing strategy to achieve an additional $10 billion at a 5% rate, it becomes clear that we need to maintain a blended rate significantly lower than that. The brokered CDs give us an advantage in that we don't need to rush to compete for deposits right now, as we have sufficient broker and wholesale capacity. This approach allows us to take a longer-term view, enhancing the quality of our funded balance sheet and improving profitability over several quarters rather than seeking immediate growth at any cost. We're focused on profitability over a two-year horizon, managing current sentiment while leveraging our strong liquidity and balance sheet to take a more patient approach.

Thank you. As there are no further questions at this time, I would like to turn the call back to Jim Lally for closing remarks. Please go ahead, sir.

Jay, thank you, and thank you all for joining us this morning. And thank you for your interest in our company. Look forward to talking to you again after the third quarter, if not sooner. Have a great day.

And this concludes today's conference call. You may now disconnect.