Enterprise Financial Services Corp (EFSC) 2017 Q2 法說會逐字稿

Good day, and welcome to the Enterprise Financial Services Corp.

Second Quarter Earnings Call.

Today's conference is being recorded.

I'd now like to turn the conference over to Jim Lally, President and CEO.

Please go ahead, sir.

Thank you, and thank you very much, and welcome to our second quarter call.

We appreciate all of you taking time to listen in.

Joining me this afternoon is Scott Goodman, President of our bank; and Keene Turner, our company's Chief Financial Officer.

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 earlier today.

Please refer to Slide 2 of the presentation entitled Forward-Looking Statements and our most recent 10-K and 10-Q for reasons why actual results may vary from any forward-looking statement that we make today.

Please turn to Slide 3. On a reported basis, diluted earnings per share of $0.50 represented a very strong quarter for our company when adjusted for the conversion of JCB.

From just about every perspective, this integration was near flawless and demonstrates the considerable depth of talent that we have in our organization.

We are pleased with the associate engagement and performance thus far, and we are increasingly excited about the future of our combined companies.

Welcoming more than 35,000 clients into our Enterprise Bank & Trust family is no small feat.

By all accounts, our team and key partners exhibited superior execution and attention to detail during this process.

Nonetheless, our continued focus remains sustained core growth trends in all of our markets.

Our growth in Kansas City, Arizona and specialty lending contributed to C&I growth in the quarter, and our pipelines are poised to deliver a strong 2017.

However, a slow first half and a higher provision in the quarter has not dampened our financial performance, which delivered strong returns in the quarter and year-to-date.

Our financial scorecard is on Slide 4. As shown here, the improved core EPS of 14% over 2016 is a direct result of our ability to continue to drive core results and further leverage our strengths through M&A with the JCB acquisition.

Additionally, I believe our core net interest margin performance speaks for itself.

24 basis points of expansion compared to the prior year is a validation of our business model, our lending preferences in C&I and the reason we bank high-quality relationships that contribute funding and demand deposits.

Additionally, the credit profile at June 30 is also reflective of our preference for character and relationship lending as nonperforming loan levels declined 10 basis points from a year ago.

We have consistently highlighted deposit funding as a primary objective, so this is never complete.

The growth and resiliency of the funding we've added over the last 12 months has meaningfully contributed to our financial success.

In addition to the acquisition of JCB, we were able to grow our core deposits by $120 million over the last 12 months.

Combined, this represents nearly a 30% increase year-over-year.

I would now like to hand it over to Scott Goodman, President of our bank, who'll provide more detail on our loan and deposit growth and give you a flavor of what we're seeing in our markets.

Scott?

Thank you, Jim.

In characterizing our loan activity for the quarter, we were focused on a few primary objectives.

One, successfully integrate and protect the newly acquired JCB relationships; two, remain strategic and disciplined in the face of elevated competitive pressures when evaluating new and existing loan requests; and three, continue to develop a pipeline of opportunities consistent with these objectives and our growth trajectory.

In aggregate, while loan balances were essentially flat for the quarter as shown on Slide #5, we do feel very good about our execution of these key priorities.

Addressing our first priority.

We have fully integrated the JCB branch, business banking and commercial associates into our sales channels.

Not surprisingly, pressure from local competitors for the JCB client base have ramped up significantly since our announcement.

However, our marketing and sales teams have been extremely focused on our well-designed program with communications and client-retention activities, which have enabled us to maintain steady loan and deposit balances from the JCB portfolio to date.

Moving to Slide #6.

C&I loans were up slightly for the quarter, and our trailing 4-quarter growth rate remains solid at 17%.

There were contributions from all specialty lines as well as general C&I and CRE as outlined on Slide #7.

Following a very strong first quarter in enterprise value lending, origination activity was lower in Q2 as sponsors digested some of these new platform companies.

We also saw a higher number of portfolio companies sales this quarter, which is a normal but somewhat lumpy part of this business.

Overall, we continue to expand our base of sponsored relationships in new and existing markets.

More of our sponsor partners are currently active in raising new funds as well, which will provide ongoing senior debt opportunities for us.

Life insurance premium finance grew modestly in the quarter with expected growth coming from premium fundings on existing client policies.

New originations were lighter in Q2, and we are seeing aggressive pricing competition in the niche coming out of a few larger banks.

These banks tend to be in and out of the market sporadically, and we expect they will act similarly again this time as well.

We continue to experience the solid pipeline of new deal flow coming from our existing referral partners and are using these opportunities to reinforce our value-added model of consistency, reliability and execution with these advisers.

The decline on the residential portfolio on Slide #7 reflects a slight but intentional shift in some of the JCB residential lending from a portfolio strategy toward a more diverse secondary market product set.

The change in consumer and other category was related to some JCB loan cleanup as well as refinancing of a large revenue bond.

Slide #8 breaks out the regional portfolios.

As I mentioned earlier, much of the St.

Louis team has been focused on the JCB integration, and level loan balances for the quarter reflect this priority.

Loans were flat in KC for the quarter as well but are up year-to-date and have grown 10.5% year-over-year.

Real estate development and investment activity in Kansas City has increased as economic growth has spurred activity in the urban core and industrial markets.

We closed on a number of new projects, which we'll more fully fund over the coming periods.

However, there were also several larger payoffs in the quarter due to sale of properties and secondary market refinancings.

We did successfully recruit one new Senior VP, who's been the C&I market leader for a large competitor.

He complements several other experienced talent additions from larger competitors to our KC team from earlier in the year.

Given the economic momentum building in the Metro Kansas City area, our expanded and experienced pool of talent and a solid base of over $600 million, I'm very enthusiastic about the KC team and our opportunities for growth in that market.

Arizona had a solid quarter with growth of $15 million or 25% annualized.

The growth came from a balanced mix of new C&I clients along with several new commercial real estate opportunities from existing investor relationships.

The Phoenix market also continues to experience solid economic growth in the commercial real estate, business and consumer services and light manufacturing sectors.

And our expanded team is well positioned to leverage this momentum.

From a competitive standpoint, the marketplace team is as intense as I can remember.

In general, C&I businesses are not expanding or investing aggressively, taking a more defensive approach relative to the political and economic climate.

Several regular competitors have been very aggressive early in the year with longer-term fixed rate offerings, particularly around CRE.

This is an addition to the aforementioned targeted JCB and life insurance premium finance competition.

We have been disciplined but opportunistic in our approach to address this.

Generally, we have not used price to compete for or retain transactional business.

It has cost us some short-term volumes.

That will protect our credibility and reinforce our value proposition in the market overall.

Alternatively, we have been aggressive to retain or attract new high-quality relationships.

The result has been consistent to slightly upward trending net interest margin and a solid pipeline of new opportunities across all markets, which should keep us on pace relative to historical growth trends through the rest of 2017.

Deposits, shown on Slide #9, are up $890 million or 29% from the comparative quarter last year due to the JCB acquisition as well as continued organic growth.

Timing issues relating to movement from a couple large depositors were primarily responsible for the slight decline in balances in the quarter.

These are ongoing relationships that are in and out of short-term interest-bearing accounts on a regular basis.

Mix remains solid with DDA representing 26% total balances.

As has been the case for some time now, we're focused on executing strategies designed specifically to improve both cost and levels of overall core funding.

Our largest new account increases in the first half of the year are attributable to proposals designed to attract new commercial relationships from competitors, utilizing our specialized lending strategies.

We added new balances from existing clients using our relationship-based pricing approach and a focused industry niche calling effort.

At this point, I'll hand it off to our CFO, Keene Turner, for his comments.

Thanks, Scott.

Second quarter results were seasonally strong and reflective of our enhanced earnings power, in addition to the quality of our balance sheet.

Slide #10 reconciles $0.50 of reported earnings per share to $0.56 of core earnings per share.

Overall, we had a solid quarter, and results were slightly positive to where we expected to be both on a reported and core basis.

We had $0.12 per share of merger charges, which were mitigated slightly by a strong contribution from noncore acquired assets of $0.07 per share.

Core net interest income and margin expanded nicely, weathered a credit blip, still delivering a stronger core return on average assets of 1.06%, and we achieved some modest gains in core efficiency and operating leverage.

Slide 11 depicts the changes in our core earnings per share from the linked quarter.

As noted, the higher provision for loan losses was $0.05 per share.

The income tax difference of $0.04 per share was a linked-quarter headwind with Q1 having stronger benefit from the new accounting standard.

Noninterest expense increased $0.03 per share, but we experienced $0.09 per share of revenue expansion, split between $0.01 of noninterest income and $0.08 of net interest income in the linked quarter, which I'll walk through on Slide 12.

Core net interest income increased to $43 million for the second quarter.

Compared to the linked first quarter, that's a $5.4 million increase, of which the full quarter impact of the JCB acquisition was approximately $4.5 million.

Of that amount, $0.2 million was from purchase accounting finalization, which will not recur in future quarters.

I don't want the dollar volume of growth from the acquisition to overshadow the strength of the performance of the balance sheet, of which we were optimistic and performed even better than we anticipated.

First, the interest rate increase in March positively impacted our portfolio loan yields by 18 basis points sequentially.

That did have a couple of basis points from the purchase accounting finalization that I referenced.

Additionally, within the loan portfolio, there was a subset of JCB loans totaling approximately $50 million that we evaluated as being higher risk and were adjusted to have a higher average yield of approximately 7.5%.

That's also helping the core net interest margins sequentially but only modestly.

Both of those helped to lever the portfolio loan yield expanded materially with and without JCB impact, similar to the first quarter trends.

Additionally, deposit and funding costs were well contained in relation to asset yield, increasing only 2 and 4 basis points, respectively.

With all that said, core net interest margin increased another 13 basis points in the linked quarter to 3.76% for Q2.

For the second quarter in a row, the balance sheet performed exceptionally from the impact of recent interest rate increases.

Going forward, and despite the impact of purchase accounting that I referenced, we expect core net interest margin to be stable to slightly positive, and we remain focused on growing core net interest income dollars.

That's also in the context of closing the gap on our 2017 10% portfolio loan growth target.

The first half was softer than we'd like to see, but it's not an unusual start for the first half of the year for Enterprise.

As you heard from Scott, we think we've weathered a competitive storm in St.

Louis with our KC, Arizona and other verticals, and we think we're poised for both growth in balances and net interest income dollars in the second half of 2017.

From a timing perspective, the interest rate environment was well timed to aid growth of high-quality earnings and core net interest income.

The positioning and strength of the balance sheet drove core net interest income and margin expansion, with 32 basis points improvement versus the fourth quarter of last year.

We're both excited and optimistic about our ability to grow from a strong, well-managed balance sheet for the remainder of 2017 and beyond.

That said, on Slide 13, credit trends were mixed in the quarter with a large charge-off of nearly $6 million on the storied credit we've been talking about for the last year.

We'd heavily reserve that loan in prior quarters.

So we charged it off and even added to that reserve during the second quarter.

Thus, it drove provision for portfolio loans to $3.6 million but, at the same time, nonperforming loans, assets decreased and coverages all remained strong.

However, the 64 basis points of annualized net charge-offs despite the elevated provision did result in a decrease in the allowance to portfolio loans to 0.96%, which is still in line with peers.

The remaining asset quality statistics are superior, and pro forma for the credit mark on JCB's loan portfolio, allowance to portfolio loans was still 1.51%.

Our posture is to continue to provide for credit losses that may be inherent in the portfolio.

We proved that some of those losses do exist.

However, stepping back, we still had a nice core earnings quarter and strong returns while weathering a nearly $4 million provision.

On Slide 14, noninterest income for the quarter totaled $7.9 million.

Our underlying fee businesses performed well, including growth from varied sources, treasury management, swaps, cards and wealth in addition to the full quarter impact from JCB adding $0.8 million.

We're quite pleased with the balance growth, the impact of the acquisition driving growth in noninterest income and overcoming seasonally light tax credit revenues for both brokerage and the CDs.

I'll wrap up my comments with operating expenses on Slide 15.

These expenses already exclude merger charges of $4.5 million for the quarter and $0.4 million of facilities-related disposals that we also exclude from our operating expenses.

At $27.8 million for the second quarter, we're just inside the $28 million that we projected as this is essentially a full quarter of both EFSC and JCB expenses.

It's worth noting on the slide that other expenses increased $1.9 million and is a broad-based increase in the number of categories.

Most notably, the following categories each increased approximately $0.3 million compared to the prior quarter.

Core deposit intangible amortization, professional fees, loan legal and seasonal client development expenses.

Going forward, core deposit intangible amortization is estimated to be approximately $0.7 million per quarter.

Beginning in the third and by the fourth quarter this year, we look to realize the quarterly cost savings from JCB of approximately $2 million.

Those savings will likely be offset by some modest underlying expense growth as we continue to invest in our business.

This is not entirely predictable and is varied over time, but our best estimate is a couple hundred thousand dollars per quarter on average.

As we indicated, we expect this is our highest quarter of both reported and operating expenses for 2017.

Nonetheless, strong revenue performance drove a sequential 150 basis point improvement in our efficiency ratio to 54.5% for the second quarter.

This trend was not entirely expected but is a favorable beginning, which we expect will be accelerated by JCB cost savings as well as our outlook for net interest and noninterest income growth for the remainder of the year.

Thus, we look to achieve a superior level of efficiency as we close 2017 and move into next year.

On Slide 16, we illustrated the quarterly EPS results over a longer time frame, and we just -- don't just show this slide when it's positive.

We did have a sequential decline from the first quarter of $0.03 per share.

So we're optimistic the isolated credit costs are behind us for the next several quarters, and we can continue to deliver overall superior results and improvement as we gain efficiency and continue to deliver revenue growth.

Our return on average assets was 1.11% for the first half of 2017, and our return on tangible common equity was 13.2%.

We demonstrated an ability to make steady progress over an extended period of time and grow the core earnings power of our company.

We are intently focused on driving profitable growth, and our achievement of results will continue to expand both earnings and value for shareholders.

Both of those are in the context of ensuring that we further position EFSC for the future and the long term.

The fundamental results and indications are strong.

The acquisition has been extremely well executed, and we are excited for the future.

Thank you for your interest in our company and for joining us today.

And at this time, we'll open the line for questions.

(Operator Instructions) And we will take our first question from Jeff Rulis with D.A. Davidson.

Follow-up on the, I guess, is it possible to back out any runoff that you had in the JCB portfolios, both loan and deposit in the quarter?

Was it -- is there a way to break that out, I guess, legacy business and JCB?

Jeff, this is Scott.

Yes, I alluded to it, but I think you can just -- you could assume both deposits and loan balances are level with first quarter.

Okay.

So the deposits on the -- were largely the legacy, tough to kind of -- it's a combined company, but I guess, it was really on the Enterprise legacy platform, if you will, off the deposits.

Right.

I mean, we've blended all those teams together.

So we're really looking at it as one sales team and one sales force, but I think just -- if you're looking at retention at this point, we retain both the deposit and the loan book.

And as you said, on deposit -- sorry, go ahead.

Yes.

No, both deposit and loans.

Got it.

Okay.

And then the -- so the deposit side you said largely timing based end-of-period stuff going on?

Yes, the quarter movement was really a couple of larger depositors from a timing perspective.

They move the large chunks of money in and out.

It's operating cash for them if they keep in short-term interest-bearing accounts, and it was really more of a timing issue.

They've been long-term clients.

And Scott, you mentioned the competition on the loan growth is or the loan side is pretty intense, I guess, maybe matching that with the sustained guidance of 10% largely going to come in the second half of the year.

I guess, what gives on that competition that makes you confident that growth, net gross can pickup here?

Well, I think competition really from a couple of perspectives.

One, it was really intense in St.

Louis around the JCB portfolio.

As you can imagine anytime you do an acquisition, you've got competition with a magnifying glass on all of the JCB competitors.

So I think we weathered a lot of that storm.

We circled around to all of those clients, and in many cases, more than once.

So I think we feel good about weathering that competitive storm.

I think more globally, we're still seeing long-term fixed rates, particularly from local and small banks on the CRE side.

As I said, I think we backed away from what I'll call some real estate transactions with long-term 7-, 10-year fixed rates, and we've really use that time to rebuild the pipeline with existing clients that are doing some new things.

EVL portfolio had a extremely strong first quarter.

So really, second quarter rebuilding the pipeline there, and I think we would expect a typical seasonal strong second half for both EVL and life insurance as well.

Got it.

And then maybe one last just a housekeeping item for maybe Keene.

Did something change in the tangible book value calculation quarter-to-quarter?

I couldn't quite get to the $18.01.

Is there anything artificially...

We had some -- we'll grab that answer.

I think just off the top of my head, we had a little bit of finalization for goodwill moves a little bit.

I'm not -- hopefully, we don't have any other slippage there, but we did finalize the purchase accounting in the second quarter and there were a couple of adjustments to goodwill in CDI.

So those may be driving it.

But we'll take a look through for you, Jeff, and will swing back with you on that.

We'll take our next question from Andrew Liesch from Sandler O'Neill.

Question on the margin of 3.98% reported.

Just curious if you know offhand what -- how much of that is just accretion from JCB.

Yes.

So Andrew, the way we're thinking about -- and so JCB then core and reported, but the way we're thinking about at least purchase accounting impacts, I mentioned that $50 million that's yielding 7.5%.

So if you assume that that's maybe like a 3% premium, so what a market rate loan yield would be, our portfolio loan yield like 3 -- 4.63%, something like that.

That's about $1.5 million a year.

So that's like 3 basis points.

And then you had the catch-up that I talked about from the last quarter when we finalized the purchase accounting.

That's another 2 bps.

So if you're looking at 13 basis points in margin expansion sequentially, you've got basically 8, what I would call, core, and then you've got JCB contributing essentially 5 basis points on top of that.

But that 3 basis points we expect to be repeatable, it's the duration of that more, that $50 million is longer than just 1 quarter, and that I'll keep pushing out for the next 6, 7, 8 quarters.

Okay.

And then just on the expense guidance, just thinking maybe it's cost of $28 million this quarter than as the cost saves come in decline a bit for the fourth quarter.

But then with some of this spending that you plan on doing the investing maybe doesn't get quite down to $25 million.

Is that how you guys are looking at it?

Yes.

I would say, well, it doesn't quite get down to $26 million.

So we're at $28 million minus $2 million.

So $26 million has gotten to be the floor and then a little bit of reinvestment from there.

So you're at, let's call, mid-26s.

That's pretty...

Okay.

And then one quick question on credit.

I just heard that classifieds were up.

Anything worth highlighting in there?

Anything of note that might be giving you any concern?

The addition to classified, nothing abnormal, several C&I credits, but I think overall classifieds to total loans are down.

We feel like the trends are pretty good if you look at with the wash through of large charge-off.

Nonperformers are down.

OREO's down.

Delinquencies, 5 basis points.

So I think overall, we feel pretty good about credit metrics in general.

(Operator Instructions) We'll take a question from Michael Perito with KBW.

A quick clarification question on the loan growth.

Are you guys saying that you still expect the -- because I thought I might have heard it both ways.

Are you saying you still expect kind of the full year organic growth rate to be about 10%?

Or are you saying that you expect to achieve that level just quarterly, plus or minus, in the back half of the year?

Yes.

I think what we're saying is our guidance was off of the December 31, '16 portfolio loan balances.

So we still expect that when you look at those underlying balances $3.1 billion that you're essentially at 10% growth by the end of 2017.

Okay.

That makes sense.

And then just on the noninterest income kind of go forward, any color you can provide kind of as we think about the growth rate there may be near term with some opportunities I would think may be to add some stuff on the JCB side and just maybe, obviously, still stuff on the legacy side that's growing.

Just any thoughts there, Keene, on what you guys are expecting.

Yes, I would say that when I look at the legacy growth underlying, I don't know that we've quite got our hands around what we think is the opportunity yet from JCB.

But when you look at the legacy Enterprise, you've had wealth management now, $100,000 of fee income growth sequentially each quarter.

Card services is putting in another $100,000.

Swaps are probably going to be a little bit unstable, but they've been a nice contributor over the last couple of quarters, another $100,000.

So you'd Enterprise legacy expand by about $0.5 million linked quarter because we overcame some of the seasonal declines in CDE and tax credit brokerage.

So even if you're able to get somewhere between $300,000 and $500,000 and repeat those efforts in card and wealth or among maybe those 5 businesses and have 3 out of the 5 of those hit, I think we'd be looking for strong year there.

I think that's what our plan would essentially call for, and then you'll add in some of the seasonal strength as we start selling tax credits here late in the third quarter and early fourth and into 2018.

So we're pretty optimistic.

And then at that point, I think we'll have a little bit more of a sense for what the opportunity with the JCB clients is.

Okay.

And then maybe just a couple credit questions just on -- in terms of the reserve, I mean, just on a dollar basis, I guess, Keene, do you kind of expect the reserve to build from these levels from going forward now?

And secondly, can you just maybe -- I know you mentioned it briefly, but can you just remind us maybe some -- as far as you can some of the specifics about that one C&I credit in the quarter that you guys charged off?

Yes.

So the quick roll forward of the allowance was $39.1 million.

We had a $3.6 million provision and then the $6 million of charge-off, so you're down at $36.7 million.

And then with that charge-off, it drove additional about $2 million into the migration, and we had essentially factored that into the substantial build and what we consider to be the qualitative portion of the reserve because that came in a portfolio that has performed extremely well, but it experienced growth.

And so I think it speaks to how we've attempted to prudently provide over the last, let's call it, 2.5 or 3 years despite extremely strong credit performance.

When you look at the $6 million of charge-offs year-to-date and you look at other period of gross charge-offs, it's in line.

We just haven't had the recoveries.

Essentially, we're running out of recoveries from a credit perspective.

So I would say that going forward, I don't know that there is going to be a necessarily any reaction to just kind of knee-jerk and put additional reserves in there.

The portfolio is still relatively clean.

Our posture is still always to try to reserve what we think is prudent, and I think it shows that with the creditor that size and being able to deal with it, it was already mostly on the balance sheet despite sequential quarters of bad news.

And so it was a $9-ish million credit.

We had about 50% reserve at the end of the first quarter.

We charged off $5.6 million on that, and we're still sitting with a $0.5 million reserve.

So you've got it written down to about $3.5 million at this point.

So if it got any worse, it's not going to ruin a quarter again but, at the same time, I think we expected it's a credit that will work out over the longer term, but we couldn't sit here and just have it be grossed-up in reserve for a longer duration workout.

Okay.

And just what was the -- I guess, the type of credit like in terms of like the industry?

Or can you give us any details like that?

Or...

Yes, this is Scott.

I can maybe give a little more.

It is a credit that I talked about in the past.

It's a C&I credit.

It's in the digital marketing space.

It's handled out of our EVL group just due to the cash flow nature, but it actually originated through the acquisition of one of our C&I clients, whose owner then became the CEO of the combined entity, which was why we opted to stay in the credit.

The new ownership made some major changes in strategy and talent that did not work out and subsequently, large clients left.

Talent left.

And it turned down pretty quick.

The pipeline is rebuilding.

They've got new leadership.

EBITDA trends are positive, but just given the uncertain time line and wide range of valuation, I think, in this industry, we opted to take our lumps now.

Believe me, it's not the type of loss on a single credit that we are accustomed to, and we've done some -- a lot of soul-searching on this one.

And I would point out a couple of things.

One, with the participation in a large EVL deal, which we are not seeking out and we are not doing, again, it was a legacy client of ours, which we opted to stay in.

And two, it did not -- even though it was EVL in nature, it did not originate through our EVL channel.

So it's not typical of the other types of credits that we have in our EVL niche right now.

But certainly, lessons learned.

We'll next go to Peyton Green with Piper Jaffray.

Yes.

I was wondering maybe, Keene, if you could talk about or Jim, if you could talk a little bit about the competitive pressure in achieving 10% organic loan growth less the acquired loans.

What will that take in terms of new yields on loans of the margin for you over the second half of the year?

And are you in a position to get the volume that you want at the level that you want?

Yes, Peyton, it's Jim.

So certainly, we've looked at the near-term pipeline, and we feel comfortable that the volume and the pricing is commensurate to what we're used to.

Scott did mention that we do have some special pricing that we've utilized in some areas -- in some key areas to help out in that regard.

But nothing that's going to dash margin long term.

Yes, and I would just say, Peyton, that's part of the reason why we had such extensive growth in net interest income because of the margin expansion, but it's the reason why we're maybe a little bit more conservative in terms of what the expansion is going to be going forward.

We -- when you look at certain categories and loans, we -- new additions help the pricing, help the portfolio loan yields and there is others where it's more competitive and it's probably in the areas that you think when we study it.

So a little bit of our expectation has that growth built in and also the fact that we're going to need to develop some additional funding for those loans moving forward.

But we still feel good about where we're positioned, and it's gotten -- and Jim talked about the pipelines are strong, and our expectations have that essentially included from when we think about the margin outlook on a core basis.

I'll just add one last thing to it.

It's across sector, all geographies and specialties as well that we're seeing some nice growth opportunities.

Okay.

And then maybe just as a follow-up.

And thinking about really pushing about $250 million in loan growth over the back half of the year.

How lumpy would you expect it to be based on your pipeline?

Well, I think you're going to see the typical seasonality on EVL and life insurance, which is going to be weighted probably more towards Q4 than Q3.

I think the regional stuff is just harder to say.

The visibility is there, but the timing of closings is sometimes a moving target.

So I'd say the regional stuff is more equally weighted and specialty niche is probably more towards the back half.

Okay.

And then you mentioned a prominent hire in Kansas City.

Maybe your outlook for the opportunity in Kansas City at the margin?

Yes.

He was the C&I leader for a larger bank team up there.

I think we're seeing certainly some disruption from a couple of the acquisitions that were announced over the last year or so and some client opportunities there.

We're also seeing opportunities from the 3 new talent additions that we've added this year from their prior portfolios at larger institutions.

And we kind of feel like some of the longtime local players up there who are expanding westward and maybe taking their eye off the ball in the local market a little bit, we're taking advantage of that as well.

(Operator Instructions) We'll take a question from Brian Martin with FIG Partners.

So I just wonder, can you -- is there any increase this quarter in payoffs in the loans?

I guess, was there anything unusual?

I guess, did that contribute at all?

I know, it sounded like there were payoffs in there.

So I just don't know if you'd characterize them as higher or lower than they have been in past quarters?

Yes, I would say it's just more typical.

There were payoffs.

We had payoffs that's mostly -- I would say, the larger payoffs were real estate related due to sales and secondary market.

Some that we lost to competition that were using the long-term fixed rate product, but I wouldn't say that was the major reason for level loan balances.

It was just more of the origination activity and the teams primarily in St.

Louis has been focused on retention of the JCB portfolios.

Okay.

That's helpful.

And then just, Keene, your comment -- maybe I didn't hear it correctly on the core margin.

What is the starting core margin?

I guess, is it -- I guess, what was it for the quarter?

Was there some adjustment you made?

I thought I heard something, but maybe I misheard it.

No, you didn't mishear as it wasn't overly dissected.

So the core margin was 3.76%.

I mean, the nonrecurring item, I'd drive that to 3.75% or 3.74%.

So we generally feel good about 3.75%, 3.76% being stable with potential upside going forward depending on where new loans come on and how much deposit gathering we are able to do.

Got you.

And just what have you seen in the way of funding cost pressures?

Have there been -- have you seen an uptick in that, I guess, just given kind of your outlook for the little bit stronger growth in the second half?

I guess, it sounds like that's baked in, but what type of trends are you seeing on people asking for better rates these days?

Has it increased?

Has it been about stable?

Yes.

Certainly, there's been more activity around it.

We certainly gotten more prescriptive and sensitive to particularly with our expectations for growth.

That being said, you see our ability to manage it within a couple of basis points over a shorter-term period, I think it's more about attracting the new business.

And when we start to see growth, those rates are going to have to be higher and those will blend into the existing base.

So really depends on where it is and the advantage we have is we've got at least 2 physical markets here in Kansas City where we have the opportunity to look at pricing and move where there is the lowest cost and opportunity there, and we manage it closely.

But certainly, there is a lot more dialogue around it, but we don't see the individual, the banks in the market with the big buying power moving just yet.

And so we feel at least comfortable that there is several more quarters for us to be able to continue to gather at essentially existing rates.

Okay.

And the -- and it sounds like the guys in St.

Louis are back to playing offense, if you will, versus defense that they were last quarter.

Is that fair as you kind of go into the third quarter?

That's well said, Brian.

Yes.

Okay.

All right.

And then maybe just on the fees, Keene.

I guess, just given you kind have a full quarter with the guys from JCB.

I mean, is there anything unusual in the fee line?

I guess, I think you called out a couple of items on the expense side, but just on the fee side and that other item, if you will, was there anything -- is that a pretty clean number to think about going forward?

Or is that -- does that get adjusted for anything?

To my knowledge, everything's pretty clean.

It doesn't -- I don't think it has any material other real estate gains in there.

So it's about as clean as it gets.

You've got $1.5 million of JCB on top of legacy Enterprise, which is growing slightly as I indicated.

So I think it's a pretty decent run rate moving forward.

Okay.

And then nothing, I mean, the tax credits being light this quarter doesn't, I guess, kind of change the normal trajectory of what we see in the back half, I guess, particularly fourth quarter?

No, I think you can look to history there to see what you might expect us to get over time.

That concludes today's question-and-answer session.

At this time, we'll turn the conference back to Jim Lally for closing remarks.

Thank you, and thank you, everybody, for joining us today and your interest in our company.

And we look forward to speaking with you all again at our third quarter call.

So have a great evening.

Thank you.

That concludes today's conference, and thank you for your participation.