Prepared remarks
Thank you for standing by. My name is Jordan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Enterprise Financial Services Corp. Second Quarter of 2025 Earnings Conference Call. I would now like to turn the call over to Jim Lally, President and CEO. Please go ahead.
Good morning, and thank you all very much for joining us for our 2025 second quarter earnings call. Joining me this morning is Keene Turner, EFSC's Chief Financial Officer and Chief Operating Officer; Scott Goodman, President of Enterprise Bank & Trust; and Doug Bauche, Chief Credit Officer 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 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 statements that we make today. Our second quarter performance is a continuation of our multiyear trend of very strong consistent results. This is a product of a very intentional strategy that leans into our diversified business model that capitalizes on a number of higher growth markets, complemented by several high-performing national loan and depository businesses.
Our relationship approach with a C&I bias allows us to capitalize on a greater share of additional opportunities and the tenure of these relationships somewhat mutes the payoff headwinds that a much higher CRE-focused portfolio presents. Establishing a cadence of consistency and a top quartile level of performance has been our focus, and this is once again achieved in the second quarter. For the quarter, we earned $1.36 per diluted share compared to $1.31 in the linked quarter and $1.19 in the second quarter of 2024. This level of performance produced an adjusted return on assets of 1.31% and a pre-provision ROAA of 1.72%. Needless to say, we are very pleased with these results. Net interest income and net interest margin both saw expansion in the quarter. Net interest income came in $5.2 million better than the previous quarter, and net interest margin expanded by 6 basis points to 4.21%.
This was the fifth consecutive quarter that we saw net interest income growth. This reflects pricing discipline on both sides of the balance sheet, combined with a client-centric relationship-oriented approach. Some of the uncertainties that our current economic times present remind our clients who operate companies, develop projects or seek sound financial advice that a few extra basis points are well worth the consistent, reliable approach that our teams provide. On an annualized basis, loan growth in the quarter was 4% or $110 million, with contributions coming from just about all areas of our company. Our diversified model emphasizes finding the best growth as opposed to any growth. You will notice that all of our geographic markets showed loan growth in the quarter despite the fact that we decided to exchange a little bit of loan volume to preserve our robust net interest margin. We were able to originate loans in the quarter at a yield of 7.26%, an improvement of 14 basis points from the previous quarter.
Because of our confidence to continue to produce loans at a mid-single-digit growth rate for the remainder of 2025, we decided to sell approximately $25 million of SBA loans in the quarter, which contributed $1.2 million of fee income. Further SBA loan sales will be evaluated on a quarterly basis depending on production and pending loan pipelines. Deposits were stable to slightly higher in the quarter, growing $73 million net of broker deposits. Year-over-year, we have seen our core deposit base grow by almost $800 million, while keeping our percentage of DDA to total deposits north of 30% and our total loan-to-deposit ratio at 86%. Our deposit base continues to be a differentiator for us. And with approximately $700 million of very well-priced deposits coming from the closing of our branch purchase later this year, we find ourselves in a very strong liquidity position to capitalize on the growth opportunities that I believe the second half of 2025 and 2026 will provide for our company.
Our well-positioned balance sheet continues to be a strength for our company. Capital levels at quarter end remained stable and strong, with our tangible common equity to tangible assets ratio of 9.42%. Despite having a TCE level above 9%, we still delivered a 13.96% return on tangible common equity for the second quarter. Our strong return profile aided the continued expansion of tangible book value per common share to $40.02, an annualized quarterly increase of 15%. Given the strength of our earnings and our confidence in our continued execution, we increased the dividend by $0.01 per share for the third quarter of 2025 to $0.31 per share. Our asset quality statistics remained stable when compared to the linked quarter as nonperforming assets to total assets and to total loans decreased slightly. It should be noted that net charge-offs in the quarter were negligible and aided by a nearly $3 million recovery on a loan that had been charged off several years ago.
When I look at the back half of 2025, our company will remain focused on achieving our loan and deposit goals, balancing quality and pricing amid our relationship orientation. Furthermore, we look forward to closing on our branch acquisition from First Interstate Bank and welcoming our new clients and associates to our platform. Before I hand the call over to Scott, I would like to share with you what we are hearing from our clients and how we will use this information to continue to execute at a very high level. First and foremost, the large majority of our clients continue to perform well. Sales and profits are in line with 2024 and demand and backlogs generally show that the remainder of 2025 and the first quarter of 2026 should continue to be solid. Although there continues to be some slight hesitancy to move major projects or acquisitions forward, the passing of the one critical bill checks a very important box that should spur more economic activity.
Additionally, when there is further clarity with respect to U.S. trade policy, especially with a few key trading partners and some downward movement in short-term interest rates, we believe that there's enough pent-up demand such that loan growth exceeds what we have experienced in the first half of 2025. We are prepared to continue to guide our clients through these times while taking advantage of the disruption caused by the pickup in M&A that continues to play out in our markets. The combination of our business model, improved economy, and ongoing disruption from M&A should make for a very strong financial performance for our company for several quarters and years to come. With that, I would like to hand the call over to Scott Goodman.
Thank you, Jim, and good morning, everyone. As Jim mentioned, loans for the quarter grew by $110 million, which is broken down on Slide 5. The largest portion of this increase came from C&I loan types, further complemented by increases in investor-owned commercial real estate and the tax credit business. Year-over-year, loans have grown $409 million or roughly 4% with balanced contributions from C&I, investor CRE and continued steady growth of the life insurance premium finance book. In general, client discussions and sales activity related to loan opportunities are solid, albeit with a slower pace of conversion due to some of the hesitancy Jim described. That said, loan production is steady and trending well with new loan originations up 23% from the same quarter last year and 26% from the prior quarter. A portion of the growth in the investor CRE category and likewise, the reduction in construction and land development loans represents the successful completion of various commercial projects.
The flow of larger new construction projects has slowed somewhat with ongoing economic uncertainty, but we are seeing opportunities to retain the term debt on completed projects as well as refinance some real estate debt coming out of the secondary market structures. We also saw a slight uptick in usage on revolving lines of credit during the quarter with average balances over 3% higher than Q1. While some of this may relate to companies building inventories to front-run potential tariff increases, usage is trending up month-over-month with outstanding balances running closer to historical averages. Within the specialty lending business lines, SBA production was stable with the prior quarter and in line with seasonal expectations. The net decline in balances primarily relates to our decision to generate fee income from the sale of $25 million of loans in this quarter. Application activity is solid, particularly around industrial property types and refinance requests.
Sponsor finance balances were down slightly in Q2, reflecting fewer originations of new loans this quarter as private equity sponsors are more cautious around companies that could be more materially impacted by tariffs or trade restrictions. We, too, are taking a fewer but better approach to this segment of our business, spending time with proven sponsors and staying particularly disciplined on structure and pricing. Life insurance premium finance balances were basically flat in a seasonally soft quarter for this business, but are up $160 million or 16% year-over-year. This business continues to perform well and grow at a steady clip, being a bit more insulated from general economic factors. Tax credit balances were up $30 million, reflecting continued fundings related to affordable housing projects in process. Moving to the geographic markets shown on Slide 6. We posted growth across the footprint in all major regions.
Within the Midwestern markets of St. Louis and Kansas City, some of the lift came from higher balances on lines of credit, given their higher mix of C&I clients as well as several new commercial real estate loans with established developers for the acquisition and refinance of industrial and multifamily projects. Within the Southwest region, growth highlights for the quarter included a number of new relationships, including a large masonry contractor in Arizona as well as the major industrial utilities firm and a well-known commercial real estate investor in Dallas. We were also able to onboard the lift-out of an experienced commercial team from a competitor in the Mid-Cities area of Texas, which is a growing region between Dallas and Fort Worth. This team focuses on small to midsized C&I businesses and will provide a nice complement to our existing team in the Dallas market. In our Western region of Southern California, growth is coming mainly from numerous new relationships originated by the talent we've recruited onto our platform over the past 24 months.
Larger new relationships this quarter include several new private lender firms, a specialty machine shop, an IT services company, and a veteran-focused not-for-profit. Turning to deposits, which are detailed on Slide 7. Excluding the addition of $210 million of brokered CDs, client deposits grew by $73 million in the quarter and are up $778 million or roughly 7% year-over-year. Within the geographic markets shown on Slide 8, we are posting growth on a year-over-year basis across the footprint in all regions. Growth has mainly been a function of our holistic approach to new business development, which supports and incentivizes our bankers to hunt for full banking relationships rather than transactional lending or high-cost idle cash balances. Additionally, we have been proactive to monitor and communicate frequently with our existing clients, enabling us to retain or expand these balances while also adjusting our cost of funds to protect margins.
Our specialty deposit verticals also continued to grow, up $63 million for the quarter and $552 million or 18% year-over-year. These are broken out in more detail on Slide 9, which provides an overview of the mix by line of business. A majority of these deposits reside within the community association and property management verticals, both of which show solid quarterly growth trends. Legal industry and escrow are a bit more lumpy, but continue to be a material source of low-cost, noninterest-bearing deposits. These businesses provide a diverse growing and low-cost source of funding, which complements our geographic base. Furthermore, this enables our market-based teams to stay focused on their relationship strategy and remain disciplined and consistent in their approach to pricing. Our client deposit base remains steady and well balanced across the primary banking channels. Commercial balances are stable comprised of 32% DDA with accounts generally anchored by lending relationships and treasury management services.
Business banking and consumer channels both posted deposit growth for the quarter while also lowering the overall average cost of funds for these accounts. Now I'll turn the call over to Keene Turner for his comments.
Thanks, Scott, and good morning. Turning to Slide 11. We reported earnings per share of $1.36 in the second quarter on net income of $51 million. That's a $0.05 increase over the linked quarter earnings per share of $1.31. On an adjusted basis, earnings per share was $1.37 in the current quarter. Adjusted earnings per share excludes the impact of acquisition costs and gains and losses on the sale of other real estate owned and securities. Our second quarter results were driven by the strength of our diversified business model. Net interest income and margins both showed strong expansion in the quarter and are a direct result of our active management of balance sheet growth, along with our disciplined pricing of loans and deposits. Noninterest income increased over the linked quarter and was aided by the additional bank-owned life insurance policies that were purchased at the end of the first quarter.
The provision for credit losses decreased from the linked quarter, primarily due to a nearly $3 million recovery on a relationship that was charged off in 2018. Noninterest expense was higher in the quarter due to the full impact of merit increases that were effective at the beginning of March, an increase in deposit costs from continued growth in the deposit verticals and acquisition costs related to the previously announced branch acquisition that we expect to close in the fourth quarter. Turning to Slide 12 with more details to follow on 13, net interest income in the second quarter increased by $5.2 million to $153 million and reflected solid asset growth and pricing discipline on both sides of the balance sheet. Loan interest increased $6 million on higher average balances and yields, including approximately $0.6 million of interest recaptured in the tax credit portfolio on the refinancing of loans.
Average balances were $117 million higher in the quarter, while loan yields improved by 7 basis points compared to the linked quarter. The average rate on loans booked in the second quarter was 7.26% and continue to move the average loan yield higher. Interest on investment securities grew by $2.8 million in the quarter, both on higher average balances and improved yields. The investment portfolio yield improved by 11 basis points over the linked quarter, with the average tax-equivalent purchase yield at 5.3%. Interest on cash and short-term investments declined $1.8 million on lower average balances. Interest expense increased $2 million compared to the linked quarter. Deposit expense increased by $0.7 million due to higher average balances and was partially offset by better average rates. Interest expense on borrowings increased $1.2 million with higher average balances on short-term FHLB advances.
As a result, our net interest margin was 4.21% for the second quarter, an increase of 6 basis points over the linked period. The earning asset yield improved by 7 basis points, driven by enhanced yields on loans and investments. This included 2 basis points from the loan interest recapture previously mentioned that we do not expect to repeat. We also improved the earning asset mix by deploying excess cash and leveraging brokered deposits to support loan growth and fund additional investment portfolio purchases, both at attractive yields relative to the existing portfolio. Our cost of funds declined by 3 basis points, mainly as a result of a 7 basis point decrease in deposit expense and partially offset by a less favorable funding mix. We believe our balance sheet is well positioned for the current rate environment and expect net interest margin to be relatively stable moving forward. Slide 14 reflects our credit trends.
We had net charge-offs of under $1 million compared to a net recovery of $1.1 million in the linked quarter. Our consistent credit culture and management of nonperforming loans is reflected in our net recoveries of 1 basis point of average loans so far this year. Provision for credit losses was $3.5 million in the period compared to $5.2 million in the linked quarter. The provision for credit losses benefited from $3.2 million in recoveries during the quarter, which partially offset the impact of loan growth and a worsening economic forecast. Nonperforming assets were stable with the linked quarter at 71 basis points of total assets. As disclosed last quarter, the largest component of our nonperforming assets is concentrated in two commercial banking relationships that went into bankruptcy due to a business dispute between the partners. These relationships represent 60% of our total nonperforming asset balance.
We believe we are well secured with collateral and individual guarantees and fully expect to collect each of the underlying loans. We continue to make progress on these relationships, and we recently were granted relief from bankruptcy stay, which will allow us to actively pursue enforcement of our rights and remedies. Slide 15 shows the allowance for credit losses. We continue to be well reserved with an allowance for credit losses of 1.27% of total loans or 1.38% when adjusting for government guarantees. On Slide 16, second quarter noninterest income of $21 million was a $2.1 million increase from the linked quarter, driven largely by bank-owned life insurance and community development income, partially offset by lower tax credit income and gains on the sale of SBA loans. The increase in BOLI income was primarily due to the purchase of additional policies in the first quarter and to a lesser extent, the payout of a policy in the second quarter.
Depending on levels of planned growth and activity in the SBA space, we may take the opportunity to sell more SBA loans as the year progresses. Turning to Slide 17. Noninterest expense of $105.7 million increased $5.9 million from the first quarter, including $500,000 of branch acquisition costs. Compensation and benefits increased $2 million, largely due to a full quarter of merit increases that went into effect March 1, higher incentive compensation accruals, and an additional working day in the quarter. Deposit costs increased roughly $1 million from the linked quarter, primarily due to a $62 million increase in average deposit balances. Loan related legal and other expenses increased $1.1 million during the quarter due to loan workouts and the foreclosure of certain properties related to nonperforming loans. The core efficiency ratio was stable at 59% for the quarter. Our capital metrics are shown on Slide 18.
We grew tangible book value by 4% in the quarter and over 14% in the last year. Our tangible common equity ratio was 9.4%, up from 9.3% in the linked quarter. While our TCE ratio is higher than our targeted level of 8% to 9%, the branch acquisition that is expected to close in the fourth quarter will leverage our excess capital position. We also ended the quarter with a strong common equity Tier 1 ratio of 11.9%, which has increased nearly 30 basis points over the last year. Our strong capital position and earnings profile allowed us to increase our quarterly dividend by $0.01 to $0.31 per share for the third quarter of 2025. We had a strong start to 2025 and believe the momentum will carry us to the latter part of the year. Our earnings profile and balance sheet are strong. The strategic branch acquisition that is expected to close in the fourth quarter will help us continue to deliver top-tier financial performance. I appreciate your attention today, and we'll now open the line for questions.
Questions and answers
Your first question comes from the line of Jeff Rulis from D.A. Davidson.
Just a couple of questions. Maybe just some line item detail. You guys usually provide pretty good color. So I'm going to go granular on the fee income and I heard you on the BOLI, much of which is new policy. I guess there's a number of line items in kind of other that are a little higher on a run rate. I'm hoping to maybe get a sense for outside of state tax credit activity, kind of your expectations for fee income kind of the second half of the year?
Yes, Jeff, this is Keene. I mean I think when I look at it in total, the first quarter overall is kind of a good proxy maybe with some changes in the line items. I do think that SBA sales will be on the table again. Obviously, about $1.1 million of the BOLI will continue to recur each quarter. And then there are some line items like CDE and private equity that are difficult to predict, but we've had some contribution from them of $0.01 or $0.02 in each of the quarters. And so that's essentially what I would expect. And then we're optimistic or hopeful that the JV on the tax credit line item will be kind of neutral to third quarter earnings and then we'll resume some seasonal strength in the fourth quarter. Obviously, fair value moves around in that line item, but I think that's sort of how we have it pegged in terms of what we're thinking.
Got you. No, helpful. That was exactly what I was looking for. And maybe the same question on the expense side. I felt like that merit increase was a little higher year-over-year than the jump 1Q to 2Q, the prior year. I don't know if there was a change calendar-wise, but that's kind of part A of the question, and then the legal running a little high. I guess a similar question is, can we get closer to that $100 million run rate? Or is this the new level we should grow off of?
Yes, Jeff, I believe the overall level will increase from where we are today, and I can explain why. What you're noticing in the compensation and benefits category includes some one-time bonuses for new hires in the second quarter. We added to the Texas market, which contributes to this. Additionally, there was one more workday in the quarter, accounting for about $0.5 million. Our performance so far this year has been really strong, necessitating an increase in incentives. So, several factors are contributing to what may appear as merit, but there's some additional complexity in the compensation line item. The deposit verticals are also performing well. In the latter half of our forecast, we anticipated more rate cuts, which have not materialized, benefiting us in the net interest income area. As the deposit verticals grow, we expect that line item to increase by another $1.1 million to $1.5 million sequentially in the next quarter. Regarding loan legal fees, some of that is linked to the large nonperformers we're dealing with. While we've received some positive updates, we don't expect those fees to decrease, but there will be opportunities to address these issues as we move forward.
Okay. That last bit, that was tied to the Southern California credits...
Yes. I'm not sitting here looking at the detail of it, but certainly, that has an impact significantly. That's something that we've had to pay very close attention to, and we've devoted a lot of time and resources to.
Got it. I have one last question. Either Jim or Keene, regarding the capital level. Keene, you mentioned that the branch deal will help ease into your higher capital levels, which have exceeded your targets. Did the branch deal help normalize those capital levels? Also, could you provide any updates on the capital priorities moving forward?
Let me handle the priorities, Keene, and you can get into the details on the branch acquisition. Our priorities remain, Jeff, really just to support our growth, and we think we're going to have some nice growth in the back half of the year. We'll continue evaluating our dividend policy going forward. And then obviously, the branch acquisition is the next key there. And Keene, do you want to talk about that a little bit?
Yes. Jeff, that's roughly 100 basis points of capital across the board gets leverage there. So you took 9.5% and you get down to 8.5%, so that's right in the middle of our target. And then we do anticipate calling the sub debt in the second call period here. So that would really affect the third quarter. We've got liquidity lined up to replace that. But obviously, that's a capital instrument that comes out of the Tier 2 stack. So we're comfortable there running with a little bit higher TCE or CET1 as we evaluate options to modify the capital stack moving forward, but we're going to be patient with that latter activity.
Your next question comes from the line of Damon DelMonte from KBW.
Keene, can you just kind of talk a little bit more about the margin and the outlook? It sounded like you were kind of hopeful you could kind of keep it pretty steady from this level kind of in the back half of the year. Is that a good way to characterize it?
Yes, the most immediate pressure on margins we anticipate is primarily in the second quarter. We increased the size of our securities portfolio during this time to secure the financial benefits from the excess liquidity generated by the branch transaction. This was funded through some brokered CDs, which led to a slightly lower incremental margin. Although most of that was absorbed and July's margin looks solid, we might see a slight pressure on the net interest margin moving forward. Additionally, the subordinated debt I mentioned will transition to a floating rate this quarter, resulting in a 5% increase in the rate that negatively affects us. These factors will slightly adjust the margins. However, I believe our dollar figures will remain strong, and with our balance sheet expansion, margins should stabilize and potentially grow over the next four quarters without rate cuts. If rate cuts occur, we expect a minor decline in margins with each cut, and it will take some time to adjust deposit pricing.
We anticipate a more conservative estimate regarding the effects of cuts compared to our recent performance after the last 100 basis points. Moreover, we will experience a favorable offset in noninterest expenses associated with deposit costs. Overall, everything I see indicates growth in net interest income dollars over the next four quarters based on our existing balance sheet. The branch transaction is also expected to significantly boost our earnings, with an estimate of mid-single-digit EPS growth in the first year, if not slightly better.
Okay. Great. That's helpful. And then with regards to the outlook for loan growth, I think the first two quarters were like 3% and 4% on a linked quarter annualized basis, respectively. Based on what you're seeing with pipelines and investor sentiment, do you feel like you could kind of keep it at least at this pace? Or do you expect it to maybe pick up a little bit in the back half?
Yes, Damon, this is Jim. I believe there will be an increase for the reasons I mentioned earlier, such as significant pent-up demand and ongoing discussions. Our pipelines look promising, and there’s a sense of certainty now. The tax bill provides the first bit of that certainty, along with updates on trade policies with various countries. The important factor isn’t just the specific number, but the fact that there is one. There is clarity now, which allows for planning and progress. The impact of interest rate cuts is less significant compared to the first two factors. People are managing well without any rate changes, but any movement in rates would be beneficial. I expect that these initial factors will significantly impact us, leading to an increase from the current rate of 4% to possibly 5%, 6%, or even 7% in the latter half of the year.
Your final question comes from the line of Brian Martin from Janney.
Keene, I was wondering if you could provide an estimate of where the margin finished the quarter, considering the securities purchases. Also, could you share your thoughts on whether the margin is likely to be slightly lower in the third quarter? It seems like it might increase afterward unless there are potential rate cuts. I'm trying to understand the range for the expected decline next quarter based on the subordinated debt and securities you mentioned.
Yes, Brian, we've mentioned this for the past few quarters. It will depend somewhat on growth levels. As Jim mentioned, we are cautiously optimistic about growth. This suggests that we might see a slight decrease in our margin. Currently, it's at 4.21%. When excluding some nonrecurring items, it adjusts to 4.19%, and we may experience a minor decline from there. I want to clarify that I'm discussing small changes here. There are a few factors that could influence it, but with slight improvements in growth margin, we still expect solid dollar performance sequentially. I believe we're looking at high teens to low 20s for growth in that context. Our outlook isn't as pessimistic as it was between the first and second quarters, as we've successfully managed multiple quarters on the deposit side, loan side, and our securities deployment has exceeded expectations. I think this positive trend will continue into the third quarter.
Got you. No, that's helpful, Keene. And then just the outlook after you kind of get through this quarter is if we don't see rate cuts is more of a modest upward bias or stable rather than lower is fair?
Yes. We certainly feel and what we show here is that there's an upward opportunity on the static balance sheet. And then the branches that we're acquiring, we expect to come in at a slightly better margin than where legacy margin is, and so that will buoy it a little bit in fourth for most of the quarter, and then first for a full quarter. So I think those are all positive attributes barring anything substantial on the interest rate side.
Got you. Okay. Appreciate the color there. And then maybe just on the team that you brought on in Texas, can you give any color on that team in terms of size? Do they have noncompetes? Or should they begin to kind of hit the ground running right away?
Brian, it's Scott. I can answer that one. Yes. This is a team we have been really talking to for maybe over a year. They're on board. They've hit the ground. They don't have restrictions regarding noncompetes. So we're already seeing new business; we're already seeing a pipeline. They really focus on what I'll call the low to midsized C&I businesses, which I think fits in well with what we're doing in Dallas, which is more of a CRE and larger C&I strategy. So, so far, so good with them. And it's a team of three, by the way, three that I've been together for quite some time and really are from that area.
Got you. Okay. I understand that there was a discussion about possibly not increasing loans as much as you could have this quarter in order to protect the margin. Is that the outlook going forward, suggesting potentially slower growth? I know Jim expressed optimism about certain items, but I'm trying to grasp the growth opportunities in relation to maintaining that margin.
So I look at it this way, Brian, that the pie is going to expand a little bit in the back half of this year. And what we saw was, especially on transactional type of things, real estate and what have you that we could have jumped in for a greater share of it, but we'd have had to really compromise the discipline that we've had in place regarding pricing; we just chose not to. And was it 2 percentage points? No, but it was decent numbers for sure. And so we want to make sure we're disciplined. I just think the pie is going to be bigger such that we can maintain our discipline, but also grow because there's going to be more opportunities in the back half of this year into '26.
Got you. Okay. And then just last one for me. Keene, you mentioned the SBA, just kind of your commentary about being opportunistic there. Is that more of a near-term event? Or is that more consistent over time that maybe you think about selling more of the SBA where it's part of a regular consistent approach?
Yes. I would say we're trying out new strategies this year more than in previous years, and we're observing the outcomes. Jim's comments will impact all of our businesses, including SBA, and increased production may lead us to pursue more loan sales. It's a liquid variable rate asset that we can trade in small amounts to buy fixed-rate securities, which would help further balance our portfolio. This approach is also indicative of some growth we've experienced from an M&A transaction. We're testing these strategies this year, and we believe they will strengthen our fee income. Being cautious about rates and growth certainly benefits us as well. Therefore, I expect to see some SBA gains in the third quarter, although possibly at a lower level, and in the fourth quarter, I think the tax credit will be significant.
Yes, and one last thing I wanted to ask about is the overall industry experiencing a bit of an increase in mergers and acquisitions. You have the branch deal and a lot going on with your new team and growth opportunities. Could you provide any update on your thoughts regarding regular bank mergers and acquisitions? It doesn't seem to be a major focus, but I'm just trying to confirm that.
Well, Brian, you hit the nail there. The first priority really is to make sure that we onboard our new clients and associates well here in the back half of this year. Like many institutions, we have ongoing conversations with plenty of companies, and I think we can think about getting more serious. But we really have to look and make sure that it enhances the strategy. I mean if you look at the growth that we have, the compounded tangible book value and things of that nature that's going on, we want to make sure that it doesn't slow down what we get going organically. So it really has to enhance the strategy that we're undertaking. The other thing too is just because we're not participating in the M&A happening in our markets, we are benefiting from it. And that benefit occurs ongoing. This is not immediate. It goes on and on and on. And think about what's happening in Dallas and Southern California and certainly out in our Western markets. There's plenty of opportunity for us to participate in other M&A, and we're doing so very well.
There are no further questions. I'll now turn the call back over to Jim Lally for closing remarks.
Thank you, Jordan, and thank you all for joining us this morning and for your interest and support of our company. Have a great day, and we'll talk to you next quarter.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.