EFSC - NASDAQ

Hello, and welcome to the Enterprise Financial Services Corp. Second Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the conference over to Jim Lally, President and CEO. Please go ahead.

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, natural like 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 remixing of deposits continued during the quarter, we also saw our commercial clients in some instances, utilizing cash for asset purchases instead of borrowing are 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 focus 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. Scott?

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's 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 set 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 account open in consumer and specialty channels, while the reduction in the number of counts 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. Now, I'd like to turn the call over to Keene Turner for his comments. Keene?

Thanks, Scott, and good morning, everyone. Turning to slide 15, we reported earnings per share of $1.29 in the second quarter on net income of $49 million. Our net interest income expanded from the linked quarter, which combined with growth in earning assets helped to outpace expected compression in net interest margin. Additionally, fee income declined modestly, which is in line with seasonal expectations. The provision for credit losses was more significant this quarter driven by loan growth. And finally, non-interest expense was higher in the current quarter with continued growth in deposit costs to support our expanding specialized deposit business. All things considered, we're pleased with the performance of net interest income, loan growth and overall profitability. Our return profile remains robust and supports our strategy for continued growth. Turning to Slide 16. Net interest income for the quarter expanded by $1.2 million to $141 million. Net interest margin of 4.49% is a 22 basis point reduction from the linked quarter. As expected, rising deposit and funding costs led to margin compression. However, we were able to defend net interest income through relationship-based loan growth. More details follow on Slide 17. On the asset side of the balance sheet, a combination of carrying higher cash mid-quarter and portfolio loan growth drove $567 million of average earning asset growth. Yield on earning assets improved by 28 basis points led by the 31 basis point increase in total loan yield. In support of that trend, new loan originations were the largest driver of the change with new loans booked at an average interest rate of 7.6%. This was supported most substantially by origination of C&I loans at 7.9% and SBA loans at 8.75% during the second quarter. I mentioned cash balances were higher in the second quarter, as we elected to carry more on-balance sheet liquidity in light of the debt ceiling issues we navigated mid-quarter. While this decision was largely neutral to earnings, it was a couple of basis points dilutive to net interest margin in the period. Total average deposit balances grew $474 million in the quarter, including average increase of $431 million in brokered CDs and $43 million in customer deposits. We've utilized brokered CDs because it adds stability and predictability to our funding base, along with reasonable flexibility moving forward to support our asset growth, all while navigating typical midyear seasonality of deposit outflows. Our cost of deposits increased during the quarter, as we continue to experience deposit remixing and repricing. This was driven by a combination of interest rate, economic and industry-based factors. While our average cost of deposits -- interest-bearing deposits rose 70 basis points from the prior period, our cumulative deposit beta for the rate cycle is in line with our historical level and reflects the diversified deposit base that's been enhanced since the last cycle. The use of brokered CDs has been an intentional strategy that has provided maximum flexibility on our liquidity position. However, this has increased our total cost of deposits and our total deposit beta. Excluding brokered, our deposit beta for the quarter would have been 30% lower, and our total cost of deposits would have been 18 basis points lower. We are pleased with the cost of deposits, all things considered, given the current Fed funds target rate at over 5%, while our total cost of deposits was 1.46%. Despite the remixing, our demand deposits to total deposits is above 33% and reflects some of the business model advantage that we have in funding the balance sheet. Based on our second quarter performance, we believe we have the ability to outpace expected net interest margin compression in the upcoming quarters with a posture of balance sheet growth. Compared with the second quarter performance, we have the opportunity to expand loan pricing, moderate loan growth levels and achieve a greater contribution to the funding through our growth in customer deposits. That means we generally expect to see stable net interest income moving forward, while net interest margin drift downward approximately 10 to 15 basis points per quarter. We're not immune to the remixing and increased competition. However, our business model helps drive the asset side of our balance sheet to mostly absorb those costs. With that, we'll move on to Slide 18, where we demonstrate our credit trends. Annualized net charge-offs were 12 basis points in the period compared to a modest recovery in the first quarter. Overall credit losses continue to be to trend below historical levels and asset quality metrics remain strong. The provision for credit losses of $6.3 million during the second quarter largely reflects our strong loan growth along with deterioration in projected economic factors. Slide 19 presents the allowance for credit losses. The allowance for credit losses increased $3 million in the quarter and represents 1.34% of total loans or 1.48% of unguaranteed loans. We continue to use several economic forecasts in the allowance model with a weighted bias toward a downside scenario and a higher reserve focus on certain segments such as office commercial real estate. This is reflected with qualitative reserves totaling approximately 30% of total allowance. On Slide 30 [ph], second quarter fee income of $14 million was a decrease of $3 million from the first quarter. This was primarily due to lower tax credit income, and the first quarter included gains on both sale of investment securities and SBA loans. Tax credit income has some seasonal volatility and is typically strongest at the end of each year. We expect fee income to moderate to roughly $12 million to $13 million in the third quarter as we do not anticipate similar levels of community development-related income to repeat. However, we do expect typical seasonal strength in fee income to round out 2023. Turning to Slide 21. Second quarter noninterest expense was $86 million, an increase of $5 million compared to the first quarter. Deposit service expense as well as other expenses were higher compared to the linked quarter, which was partially mitigated by a sequential decline in employee compensation and benefits. Deposit servicing expense grew roughly $4 million in the quarter due to both rate and volume on certain specialized deposits. As a reminder, the first quarter deposit servicing expenses were lower due to the expiration of certain earnings credits that were forfeited. We expect this line item to continue to expand with both continued growth in balances as well as higher interest rates. Other expenses grew by roughly $2 million in the quarter, driven primarily by the impact of a credit card event that resulted in elevated losses on both company cards and including outstanding in for customer-related losses and certain operational expenses. Compensation and benefits was lower in the quarter, primarily due to seasonality. This was partially offset by a reduction in open positions as well as a full period of annual merit increases. Overall, we expect noninterest expense to increase to $87 million to $89 million in the third quarter, reflecting an increase in deposit service expense. Also based on the FDIC rule making, we expect the impact of the special assessment to be approximately $2 million once it's finalized. The second quarter's core efficiency ratio was 54% and an increase of 350 basis points compared to the first quarter, driven primarily by both a rise in interest and non-interest expense in the quarter. With some moderation in our net interest margin and net interest income expectations, we do expect core efficiency to move up slightly for the coming quarters. However, this is a function of our expectation for expanding our market share in the specialized deposit business. For other expenses, we expect to prudently manage cost controls which are part of our daily discipline. That can be borne out in the underlying operating expense trends from the first to the second quarter. Our capital metrics are shown on Slide 22. Strong quarter earnings offset a decline in accumulated other comprehensive income from the value of securities and derivatives portfolios. This resulted in an expansion of tangible book value per share to $31.23 at the end of June, which is a 9% increase so far this year. The strength of our earnings profile and a high capital retention rate supported our customers and resulted in a balance sheet expansion in the quarter. We have managed our capital and the balance sheet to provide a foundation for continued growth. This is reflected in our tangible common equity ratio of nearly 9% and our common equity Tier 1 ratio of 11.1%. On an adjusted basis, the after-tax unrealized losses on held to maturity securities is approximately 40 basis points of tangible common equity and total combined available for sale and held to maturity losses are approximately 140 basis points of tangible common equity. When including available for sale and held to maturity losses, adjusted common equity Tier 1 capital is 9.5%, well in excess of the minimum well-capitalized limit of 6.5%. With that said, we are very pleased with our financial results in the second quarter and the first half of 2023. While the current interest rate and economic environment pose challenges, there are also opportunities for us to continue gathering market share in our regions and improving the overall value of our business. We believe that our diversified platform is positioned to produce strong operating performance relative to the environment in which we operate. With that, I appreciate your attention today, and we're now going to open the line for analyst questions.

[Operator Instructions] Your first question comes from the line of Jeff Rulis of D.A. Davidson. Please go ahead.

Thanks. Good morning. A couple of questions on the expense line, if I could. Just -- Keene, on the $87 million to $89 million, is that inclusive of a $2 million special assessment assumption in that figure?

No, that's -- Jeff, 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. And pricing is competitive, but we're gaining market share and then the $2 million would be in addition, when it occurs.

Okay, okay. Were there -- the operational losses or the credit card event, what would you -- in the second quarter, would you put as anything one-time there that would likely fall off? I mean, it sounds like the deposit cost is going to outstrip some of that. But just wanted to carve out what was -- what would be one-time in the second quarter, if at all?

Yes. $1.3 million of that is we expect to be one-time, and we think that's kind of a one and done estimate. And then there'll be -- just based on the way the accrual works, we needed to accrue that and take it currently, but we have service providers that are involved in helping us with that business, and we'll get some relationship credits moving forward, but it won't be anything meaningful or acute in any one period. So net-net, the economic impact for us will be fairly limited. But in the run rate is 1.3 that really we didn't expect to be there and I think maybe pushed the expenses a little higher than our guide 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. I will just say, listen, so our growth, obviously, in the second quarter leaned into the brokerage side, which push that down a little bit. Our goal going forward, obviously, would be to fund it with our base of customer deposits. I would hope that, that comes with a significant amount of DDAs from the specialized as well as just the geographic businesses. So I would say holding firm that 30% to 33% range seems fair to us. The goal, obviously, is to get it in as most efficiently as we can. And -- but obviously, the business model we have pushes towards a little bit more DDA than 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 ABL-type aftermarket, automotive parts manufacturer, and they've just had some lagging issues dealing with shipping and labor and supply chain disruption, 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, thanks. Just had a follow-up on the omni expense line as -- Keene, as you were outlining. So if that was 86 reported non-interest expense, if we back out the a little over $1 million onetime gets you below -- well, let's just call it 85. I guess the jump there as you talk about that deposit cost increase, it had already been up linked quarter. So I'm trying to get a sense for the pace of that deposit cost increase that's flowing through noninterest expense. Is that going to be a couple of million a quarter or more leak quarter as long as you got to lean into that piece? Just I don't know the run rate of noninterest expense, and that seems like an item that's growing rather quickly?

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.

Nice quarter. I'd say just a question to maybe for Keene on the margin. Just -- Keene, I appreciate the commentary. Just as far as the margin trending down, but the NII stabilizing, where do you -- what is your rate outlook here baked in there? And then just how are you thinking about when the margin might stabilize? And the second part of it is just if we do get some rate cuts next year, can you just remind us how you expect the margin to perform in that type of scenario?

Yeah. Let me try to tackle your comments first. I mean, I think we're projecting out in the next couple of quarters. Obviously, we've got a next 12 months projection. But I think the way we're thinking about that is that it's still extremely early in terms of the -- trying to get an accurate next 12 months prediction with how much the variables have been moving around first, second quarter. Our general outlook is that if you call margin today, roughly 4.45 [ph], I think you drift 20 basis points to the end of the year is kind of what we're seeing. And even if we get one or two 25 basis point rate hikes here, I think we generally expect that maybe but for timing or lagging that those are going to get absorbed with competitive deposit pressures. So maybe I'd like to hope that, that's a little bit conservative. We've got some costs baked in there in terms of the interest expense and continued degradation of beta and some of those things. But I think we feel good about $140 million of net interest income in the next couple of quarters with the growth that Jim talked about and then margins drifting to, call it, 4.25, 4.20 [ph] by the end of the year. And then I think that generally, our view is that we're trying to listen to the Fed, and that's pretty clearly higher for longer. I don't know that we're thinking that there's any near-term pressure to go from what looks like an interest rate increase here in July and then maybe one later this year to multiple cuts next year. So I think we think that, that fund stays fairly stable for at least the first half of next year. And then, obviously, we're asset sensitive. We're becoming a little bit less asset sensitive with some of the remixing that's occurring from DDA and the use of brokered CDs. And so, obviously, those things to the extent, we get some cuts, will provide some opportunity, but we will experience margin compression. We'll file our Q here in the next week, and we'll get you some more sensitivities around what that compression looks like. But certainly, we're an asset-sensitive company and down rates, depending on how that plays out, we'll certainly take some of that out. So it's going to depend on how quickly, how aggressively and how -- what is, quite frankly, deposit competition and flows look like if and when that starts to occur.

Got you. Okay. And then just as far as the loan areas you're focused on with maybe focusing maybe a bit more on yield. I guess, is it -- I guess, where do you expect the growth that maybe more to come from in the second half of the year, just 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 that 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 is vacated to markets, and we can actually push pricing a little bit and get high-quality loans there.

Thank you. [Operator Instructions] 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 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. And then just another thing that is kind of -- just trying to get my head around, I saw that -- like everybody else did, the big growth in the broker deposits this quarter. I would imagine those that at the margin, those rates are probably 5% plus, right? How does that compare to what you're paying in your money market and your interest bearing? I mean, is there a trade-off there where you can ratchet it up a little bit more on those core customer accounts, or is there a reason why you don't want to do that versus …

Yeah.

… buying core deposits, which are non-relationship.

Yeah. I think the balance we're trying to strike is a little bit of timing. So number one, if you look at it as a tide, the tide is the highest in the fourth quarter and then it starts to gradually go out in the first half of the year. And then, June 30 for us is typically low-tied for deposits, and now you're starting to see it come back. We're only 25 days into the third quarter, and we've got sitting here with nice DDA and some other growth. And that's not a trend yet, but I think we're encouraged by that. And I think the art of it is to make sure that we're -- we've got to pay the right amount for new and growing balances, but when you start to look at the math on certain pockets of pricing to drive up $10 billion of pricing to 5%, whereas the blended rate is quite a bit lower than that. We're just trying to strike that fine balance. So the brokered CDs allow us to maybe not be as frantic in terms of competing in the near-term, and we've got plenty of broker capacity and wholesale capacity to move forward, but it allows us to play a little bit longer game of leverage the sales cycle a little bit more and maybe overall, call it, over the course of multiple quarters and even years have a better, higher quality funded balance sheet and drive a little bit more profitability a couple of quarters out versus in the near-term or panic and try to drive a bunch of deposit growth, but at what cost? So hopefully, that gives you some color and some thought about how we're thinking about it, but we always try to keep the profitability in two years on the horizon versus the profitability of the current quarter. And we're trying to manage the little bit of the sentiment that's out there in the current environment but utilize the strength of the liquidity profile and balance sheet we've got to maybe be a little bit more patient in that way.

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.