Enterprise Financial Services Group Q4 2025 Enterprise Financial Services Group Inc Earnings Call | AllMind AI Earnings | AllMind AI
Q4 2025 Enterprise Financial Services Group Inc Earnings Call
Speaker #1: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad.
Speaker #1: To withdraw your question, press star one again. I would now like to turn the conference over to Jim Lally, President and CEO. Please go
Speaker #1: ahead. Good
Jim Lally: Good morning, and thank you all very much for joining us, and welcome to our 2025 fourth quarter earnings call. Joining me this morning is Keene Turner, EFSC's Chief Financial Officer and Chief Operating Officer, and Doug Bauche, Chief Banking 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 titled Forward-Looking Statements, and for 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 financial highlights begin on slide 3. I am pleased with our results for the fourth quarter and for all of 2025.
Speaker #2: Good morning, and thank you all very much for joining us, and welcome to our 2025 fourth quarter earnings call. Joining me this morning is Keen Turner, EFSC's Chief Financial Officer and Chief Operating Officer, and Doug Bauke, Chief Banking Officer of Enterprise Bank & Trust.
Speaker #2: Before we begin, I would like to remind everybody in the call that a copy of the release and accompanying presentation can be found on our website.
Speaker #2: 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 to our most recent 10-K and 10-Q for reasons why actual results may vary from any forward-looking statements that we make today.
Speaker #2: Our financial highlights begin on slide three. I am pleased with our results for the fourth quarter and for all of 2025. For the quarter, we earned $1.45 per diluted share, which compares favorably to the $1.19 that we earned in the linked quarter and $1.28 in the fourth quarter of 2024.
Jim Lally: For the quarter, we earned $1.45 per diluted share, which compares favorably to the $1.19 that we earned in the linked quarter and $1.28 in the fourth quarter of 2024. These results produced a return on average assets of 1.27% and a pre-provision return on average assets of 1.74%. We discussed in our last earnings call. We closed on the branch purchase in Arizona and Kansas early in the fourth quarter. Earnings from this complemented our relationship-oriented business model, helping drive expansion of net interest income for the quarter to $168 million, which was a quarterly increase of $10 million when compared to the linked quarter, and $22 million compared to the fourth quarter of 2024.
Q4 2025 Enterprise Financial Services Group Inc Earnings Call
Speaker #2: These results produced a return on average assets of 1.27% and a pre-provision return on average assets of 1.74%. As discussed in our last earnings call, we closed on the branch purchase in Arizona and Kansas early in the fourth quarter.
Speaker #2: Earnings from this complemented our relationship-oriented business model helping drive expansion of net interest income for the quarter to $168 million, which was a quarterly increase of $10 million when compared to the link quarter and $22 million compared to the fourth quarter of 2024.
Speaker #2: Margin two improved slightly to 4.26%, driven by a disciplined loan and deposit pricing throughout both books of business. Our ability to hold our margin at this level illustrates the quality of our deposit base and the relationship-oriented loan portfolio.
Jim Lally: Margin too improved slightly to 4.26%, driven by a disciplined loan and deposit pricing throughout both books of business. Our ability to hold our margin at this level illustrates the quality of our deposit base and the relationship-oriented loan portfolio. The ability to continue to expand our net interest income, along with widening our net interest margin to the extent that we have, reflects the strength of the franchise we are building, and we remain positioned to produce high-quality earnings for years to come. As important, the branch purchase accelerated our strategy in two of our higher growth markets by several years. Since the closing, I've spent time with our new team and our new clients and feel even better about how this fits into our overall strategy and the impact that this expansion will have on our long-term performance.
Speaker #2: expand our net interest The ability to continue to income along with widening our net interest margin to the extent that we have reflects the strength of the franchise we are building and will remain positioned to produce high-quality earnings for years to come.
Speaker #2: As important the branch purchase accelerated our strategy in two of our higher growth markets by several years. Since the closing has spent time with our new team and our new clients and feel even better about how this fits into our overall strategy, and the impact that this expansion will have in our long-term performance.
Speaker #2: The strength of our company is our well-positioned balance sheet which provides for great flexibility when it comes to capital management. We came into 2025 with a goal of growing our balance sheet at a mid to high single-digit pace.
Jim Lally: A strength of our company is our well-positioned balance sheet, which provides for great flexibility when it comes to capital management. We came into 2025 with a goal of growing our balance sheet at a mid- to high single-digit pace. With our organic growth complemented by the aforementioned branch purchase, we're able to exceed this goal, growing our balance sheet by 11%. Capital levels at quarter end were stable and strong, with our tangible common equity to tangible assets ratio at 9.07%. As impressive was our 14.02% return on tangible common equity for the Q4. Because of the branch purchase, we expected some dilution to tangible book value, but due to our strong earnings during the quarter, tangible book value per share was relatively stable at $41.37.
Speaker #2: With our organic growth complemented by the aforementioned branch purchase, we were able to exceed this goal, growing our balance sheet by 11%. Capital levels at quarter end were stable and strong, with our tangible common equity to tangible assets ratio at 14.02% and return on tangible common equity for the fourth quarter.
Speaker #2: Because of the branch purchase, we expected some dilution to tangible book value, but due to our strong earnings during the quarter, tangible book value per share was relatively stable at $41.37.
Speaker #2: This represents an 11% increase in tangible book value per share growth for the year. Because of our confidence to continue to produce high-quality earnings at the pace that we are, we increased our dividends by $0.01 per share to $0.32 for the fourth quarter and repurchased 67,000 shares at an average price of $52.64.
Jim Lally: This represents an 11% increase in tangible book value per share growth for the year. Because of our confidence to continue to produce high-quality earnings at the pace that we are, we increased our dividend by $0.01 per share to $0.32 for Q4 and repurchased 67,000 shares at an average price of $52.64. Loan growth for the quarter was $217 million and was largely attributed to the acquired loans that came with the branch acquisition. Further reducing our loan balances in the quarter was the movement of approximately $70 million of Southern California commercial real estate loans into OREO. I will provide an update on our progress with these properties later in my comments. Deposit growth and the quality of the deposit base continues to be a significant differentiator for our company.
Speaker #2: Loan growth for the quarter was $217 million, and was largely attributed to the acquired loans that came with the branch acquisition. Further reducing our loan balances in the quarter was the movement of approximately $70 million of Southern California commercial real estate loans into OREO.
Speaker #2: I will provide an update on our progress with these properties later in my comments. Deposit growth in the quality of the deposit base continues to be a significant differentiator for our company.
Speaker #2: In the fourth quarter, we saw deposits grow by $1 billion, $400 million of which came from new and existing clients, with the remaining approximately $600 million coming from the branch purchase.
Jim Lally: In Q4, we saw deposits grow by $1 billion, $400 million of which came from new and existing clients, with the remaining approximately $600 million coming from the branch purchase. The cost and composition of the deposit base continues to improve and has aided in the consistency of earnings and profitability. The quarterly cost of deposits decreased to 1.64%, and our level of DDA to total deposits improved to 33.4%. It should be noted that we have maintained our DDAs at over 30% of total deposits for the last 4 years. Finally, liquidity remains strong, as evidenced by our loan-to-deposit ratio of 81%. There were several moving parts with respect to credit in the quarter.
Speaker #2: The cost and composition of the deposit base continues to improve, and has aided in the consistency of earnings and profitability. The quarterly cost of deposits decreased to 1.64%, and our level of DDA to total deposits improved to 33.4%.
Speaker #2: It should be noted that we have maintained our DDAs at over 30% of total deposits for the last four years. Finally, liquidity remained strong, as evidenced by our loan-to-deposit ratio of 81%.
Speaker #2: There were several moving parts with respect to credit in the quarter. The most important movement occurred with the real estate associated with the seven real estate loans in Southern California that we discussed on last quarter's earnings call.
Jim Lally: The most important movement occurred with the real estate associated with the 7 real estate loans in Southern California that we discussed on last quarter's earnings call. With a favorable verdict handed down by the bankruptcy courts during the quarter, we were able to take 6 of these properties into OREO, with the seventh to follow shortly. Like we assumed, interest in these properties has been high, with purchase and sale agreements on several of the properties expected to be received in the very near future. Further improvement to our overall credit metrics is a high priority. I can see a clear path for the elevated level of NPAs and OREO to reduce significantly in the next couple of quarters to more historical levels. Doug will comment on the specifics related to all of this in his comments. Slide 5 summarizes our performance for all of 2025.
Speaker #2: With a favorable verdict handed down by the bankruptcy courts during the quarter, we were able to take six of these properties into OREO, with a seventh to follow shortly.
Speaker #2: Like we assumed, interest in these properties has been high, with purchase and sale agreements on several of the properties expected to be received in the very near future.
Speaker #2: Further improvement to our overall credit metrics is a high priority. I can see a clear path for the elevated level of NPAs and OREO to reduce significantly in the next couple of quarters to more historical levels.
Speaker #2: Doug will comment on the specifics related to all of this in his comments. Slide five summarizes our performance for all of 2025. For the year, we earned $201 million of net income or $5.31 of diluted earnings per common share.
Jim Lally: For the year, we earned $201 million in net income, or $5.31 of diluted earnings per common share. We leveraged capital advantageously to expand in two key markets while growing tangible book value per share by 11%. Other uses of capital included an increase in our annual dividend by $0.16 per share to $1.22, and repurchasing just over 258,000 shares at an average price of $54.60. You will hear much more about these and other financial highlights in Keene's comments. Slide 6 illustrates where we are focused as we turn the page into a new year. Like I stated previously, I can see a clear path to improved credit statistics in the next quarter or two. Nonetheless, this is a keen focus for us in 2026.
Speaker #2: We leveraged capital advantageously to expand in two key markets while growing tangible book value per share by 11%. Other uses of capital included increasing our annual dividend by 16 cents per share to $1.22 and repurchasing just over 258,000 shares at an average price of $54.60.
Speaker #2: You will hear much more about these and other financial highlights in Keen's comments. Slide six illustrates where we are focused as we turn the page into a new year.
Speaker #2: Like I stated previously, I can see a clear path to improve credit statistics in the next quarter or two. Nonetheless, this is a keen focus for us in 2026.
Speaker #2: The level of NPAs is not compatible with the quality company we built, and improvement to more historical levels will be accomplished. At the same time, we will continue to grow the balance sheet with a quality and consistency that we've displayed for many years, serving our existing clients' needs while adding new ones that appreciate our concentrated approach and are willing to give up a few basis points on both loans and deposits to experience this.
Jim Lally: The level of NPAs is not compatible with the quality company we've built, and improvement to more historical levels will be accomplished. At the same time, we will continue to grow the balance sheet with the quality and consistency that we've displayed for many years, serving our existing clients' needs while adding new ones that appreciate our consultative approach and willing to give up a few basis points on both loans and deposits to experience this. And finally, like many of our clients, we will continue to find more ways to automate mundane, non-value-added tasks, utilizing the investments we have made in technology over the last few years in order to enhance productivity and efficiency within our business. Before handing the call over to Doug, I would like to share with you what I'm hearing from our clients throughout our markets and national business lines.
Speaker #2: And finally, like many of our clients, we will continue to find more ways to automate mundane, non-value-added tasks utilizing the investments we have made in technology over the last few years, in order to enhance productivity and efficiency within our business.
Speaker #2: Before handing the call over to Doug, I would like to share with you what I'm hearing from our clients throughout our markets and national business lines.
Speaker #2: For the most part, our clients remain optimistic about the economy and how their businesses will perform in 2026. In particular, clients that are developers, contractors, subcontractors, and suppliers to companies in and around power generation and the data center industries are expecting particularly good and long runs ahead.
Jim Lally: For the most part, our clients remain optimistic about the economy and how their businesses will perform in 2026. In particular, clients that are developers, contractors, subcontractors, and suppliers to companies in and around power generation and the data center industries are expecting particularly good and long runs ahead... This obviously trickles down to manufacturers and service businesses, too, that support these industries. Industries and companies that serve infrastructure improvements throughout our markets, too, should see many opportunities. This includes water projects, utility work, and highway and road construction. Furthermore, there is a keen focus by our client base to further improve productivity and efficiencies. I cannot help thinking that this will come with investments in technology, robotics, and other machine learning capabilities, the expense of which will be partially offset by the favorable tax treatment that such investments now receive.
Speaker #2: This obviously trickles down to manufacturers and service businesses too that support these industries. Industries and companies that serve infrastructure improvements throughout our markets too should see many opportunities.
Speaker #2: This includes water projects, utility work, and highway and road construction. Furthermore, there is a keen focus by our client base to further improve productivity and efficiencies.
Speaker #2: I cannot help thinking that this will come with investments in technology, robotics, and other machine learning capabilities. The expense of which will be partially offset by the favorable tax treatment that such investments now receive.
Speaker #2: The agility and resilience that our client base continues to show has been quite remarkable. I would expect this to continue in 2026 and beyond.
Jim Lally: The agility and resilience that our client base continues to show has been quite remarkable. I would expect this to continue in 2026 and beyond. We are pleased with the results for Q4 and the entirety of 2025, and look forward to what lies ahead in 2026. Our company's positioned extremely well to continue to execute on our strategic plan and drive long-term shareholder value. Our diversified, relationship-oriented model has compounded tangible book value per share at a rate of over 11% for the last 14 years, and I see this continuing for many years to come. With that, I would like to turn the call over to Doug Bauche. Doug?
Speaker #2: We are pleased with the results for the fourth quarter and the entirety of 2025 and look forward to what lies ahead in 2026. Our company's positioned extremely well to continue to execute on our strategic plan and drive long-term shareholder value.
Speaker #2: Our diversified, relationship-oriented model has compounded tangible book value per share at a rate of over 11% for the last 14 years, and I see this continuing for many years to come.
Speaker #2: With that, I would like to turn the call over to Doug Bauke. Doug? Thank you, Jim, and good morning, everyone. The fourth quarter, as Jim just described, was full of activity.
Doug Bauche: Thank you, Jim, and good morning, everyone. The Q4, as Jim just described, was full of activity. The completion of our branch acquisition and onboarding of new clients and associates has gone exceptionally well. The feedback that I continue to receive from our new partners has been overwhelmingly positive. We also successfully completed foreclosure of the previously highlighted Southern California real estate portfolio and are now one very important step closer to substantially reducing our non-performing assets. Certainly not to be overlooked, we continued to expand the balance sheet through the attraction of new organic commercial relationships and are positioned with momentum heading into the new year. Slide 7 demonstrates the diversity and growth of our loan portfolio across all asset classes.
Speaker #2: The completion of our new clients and associates has gone exceptionally well. The feedback that I continue to receive from our new partners has been overwhelmingly positive.
Speaker #2: We also successfully completed foreclosure of the previously highlighted Southern California real estate portfolio and are now one very important step closer to substantially reducing our non-performing assets.
Speaker #2: And certainly not to be overlooked, we continue to expand the balance sheet through the
Speaker #1: The attraction of new organic commercial relationships and are positioned with momentum heading into the new year . demonstrates Slide seven the slide seven demonstrates the diversity and of our loan portfolio growth asset classes across .
Doug Bauche: Asset categories representing credit to commercial and industrial businesses, including C&I, CRE owner-occupied, SBA, and sponsor finance, combined are just over 50% of our portfolio, while investor-owned CRE, life insurance, and tax credit lending largely round out the balance of the portfolio at 24%, 10%, and 7%, respectively. Loans grew $217 million in the quarter and $580 million for the year. Organic growth in the quarter and LTM from our C&I, investor-owned CRE, and life insurance premium finance lines were offset by contraction in our sponsor finance and construction and land development segments, as sponsors monetized portfolio companies and developers completed and sold a number of industrial and mixed-use construction projects.
Speaker #1: Asset categories all credit to representing commercial and industrial businesses CNI , including , CRE owner occupied SBA sponsor and finance combined are just over 50% of our while portfolio , investor owned CRE Life Insurance and tax credit lending largely the round out balance of the portfolio at 24% , 10% and 7% respectively , loans grew $217 million in the quarter and $580 million for the year .
Speaker #1: Organic growth in the quarter and LTM from our CNI investor-owned CRE and life insurance premium finance lines were offset by contraction in our sponsor finance and land construction development segments.
Speaker #1: As sponsors monetize portfolio companies and developers completed and sold an industrial number of and mixed-use construction projects. Additionally, organic reported growth at $288 million for the year was muted by our sale of $78 million SBA in guaranteed.
Doug Bauche: Additionally, reported organic growth at $288 million for the year was muted by our sale of $78 million in SBA-guaranteed debt, the movement of the aforementioned $70 million in real estate loans to OREO, and our election to exit several loan participations that no longer met our return thresholds. Adjusted for those three items alone, organic loan growth for 2025 was in line with our mid-single-digit expectations. Slide 8 displays our loan portfolio balances and growth across our geographic footprint and specialty lines. Specialty lending and all three of our geographic markets contributed to positive loan growth during the year, and our portfolio remains favorably balanced.
Speaker #1: The movement of debt the aforementioned $70 million in real estate loans to Oreo and our election to exit several loan participations that no longer met our return thresholds , adjusted for those three items alone , organic loan growth for 2025 was in line with our mid-single digit expectations .
Speaker #1: Slide displays our loan eight portfolio balances and growth across our geographic footprint and specialty lines. Specialty lending and all three of our geographic markets contributed to positive loan growth during the year.
Speaker #1: And our portfolio remains favorably balanced within these specialty lending business lines. Our SBA 7(a) owner-occupied CRE production topped $250 million in originations for the year, and is poised to expand as we continue to head into a more favorable interest rate environment in 2026.
Doug Bauche: Within the specialty lending business lines, our SBA 7(a) owner-occupied CRE production topped $250 million in originations for the year and is poised to expand as we continue to head into a more favorable interest rate environment in 2026. Additionally, growth in other low credit risk categories of life insurance premium finance and tax credit finance outpaced contraction in sponsor finance. Our momentum in the Southwest continues. Growth in the Southwest outpaced all other markets and was driven by expansion of quality C&I and CRE relationships throughout Arizona, New Mexico, Northern Texas, and Southern Nevada, including the relationships added in the branch acquisition.
Speaker #1: Additionally , in growth other low credit risk categories life premium insurance of finance and tax credit finance outpaced contraction in finance . Our momentum in the southwest continues growth in the southwest outpaced all other markets and was driven by expansion of quality , CNI and CRE relationships throughout Arizona , New Mexico , northern Texas and southern Nevada , including the relationships added in the branch acquisition .
Doug Bauche: Turning your attention to slide nine, deposits grew $1 billion in the quarter and approximately 11%, or $1.5 billion, year-over-year, inclusive of the $609 million in branch-acquired deposits in our Arizona and Kansas City markets. Organically generated deposit growth for the year was right in line with our expectations at 6.5%, or $854 million. For the quarter, organic deposit growth was seasonally strong at $432 million, with non-interest-bearing deposits representing 63%, or $274 million, of growth during the period. Similar to our legacy deposit portfolio, the $609 million in acquired branch deposits are favorably mixed, with nearly 35%, or $213 million, in non-interest-bearing commercial transaction accounts.
Speaker #1: Turning your attention to slide nine . Deposits grew $1 billion in the quarter , and approximately 11% , or 1.5 billion year over year , inclusive of the acquired deposits in our Arizona and Kansas City markets .
Speaker #1: Organically generated deposit growth for the year was right in line with our expectations . At 6.5% , or $854 million for the quarter , organic deposit growth was seasonally strong at $432 million , with noninterest bearing deposits representing 63% , or 274 million of growth .
Speaker #1: During the period . Similar to our legacy deposit portfolio , the $609 million in acquired branch deposits favorably mixed , with nearly 35% , or $213 million in noninterest bearing commercial transaction accounts .
Doug Bauche: Strong deposit generation and favorable mix provide us opportunity to control the cost of interest-bearing deposits and defend our net interest margin in this down rate environment. Slide 10 depicts the dispersion of our deposit base across the Midwest, Southwest, West, and our deposit verticals. A core strength of our business model continues to be our ability to execute our deposit strategies with balanced growth coming from new relationships, deepening of wallet share with existing clients, acquisition of attractive deposit franchises, and leveraging our differentiated deposit verticals. In our Midwest region, in particular, deposit balances have grown steadily and are approaching $7 billion in aggregate. As our average client relationship duration continues to lengthen, we find we are regularly rewarded with greater share of wallet and ancillary products, including private banking, commercial card, and merchant services. The breakdown of our deposit verticals is reflected on Slide 11.
Speaker #1: Strong deposit generation and favorable mix provide us the opportunity to control the cost of interest-bearing deposits and defend our net interest margin in this down-rate environment.
Speaker #1: Slide ten depicts the dispersion of our deposit base across the Midwest , southwest , West , and our deposit verticals . A core strength of our business model continues to be our ability to execute our deposit strategies with balanced growth coming from new relationships , deepening of wallet share with existing clients , acquisition of attractive deposit franchises , and leveraging our differentiated deposit verticals our in Midwest region .
Speaker #1: In particular , deposit balances have grown steadily and are approaching $7 billion in aggregate as our average client relationship duration continues to lengthen , we find we are regularly rewarded with greater share of wallet and ancillary products , including private banking , commercial card and merchant services .
Speaker #1: The breakdown of our deposit verticals is reflected on slide 11 . Community association and property management largely contributed to our deposit vertical growth in 2025 .
Doug Bauche: Community association and property management largely contributed to our deposit vertical growth in 2025, while we exited higher-yielding deposits within our legal industry and escrow services segments. We've redirected our efforts in the legal industry and escrow services area, and our pipeline of more favorably mixed and priced deposits is gaining traction. These three businesses continue to provide a diverse, growing, and overall favorable cost-adjusted source of funding that complements our geographic base. Turning to slide 12, you'll see that our deposit base is intentionally well-balanced across our core commercial, business, and consumer banking, and specialty deposit channels. With a recent branch acquisition, our core commercial, business, and consumer banking, and specialty deposits are 39%, 33%, and 28% of total customer deposits, respectively. I'd also like to provide some commentary on asset quality.
Speaker #1: While we exited higher-yielding deposits within our legal industry and escrow segment services, we've redirected our efforts in the legal industry and escrow services area, and our pipeline of more favorably mixed and price-gaining deposits is gaining traction.
Speaker #1: These three businesses continue to provide a diverse, growing, and overall favorable cost-adjusted source of funding that complements our geographic base.
Speaker #1: Turning to slide 12. You'll see that our deposit base is intentionally well-balanced across our core commercial, business, and consumer banking.
Speaker #1: And specialty deposit channels with a recent branch acquisition , our core commercial business and consumer banking and specialty deposits are 39% , 33% , and 28% of total customer deposits , respectively .
Speaker #1: I'd also like to provide some commentary on assets. As Quality Jim noted earlier, we see a clear path to reducing our elevated nonperforming assets of 95 basis points to our more historically normalized level of 35 to 40 basis points next quarter, over the quarter or two.
Doug Bauche: As Jim noted earlier, we see a clear path to reducing our elevated nonperforming assets of 95 basis points to our more historically normalized level of 35 to 40 basis points over the next quarter or two. To bridge that path, let me say that we are actively negotiating PSAs on 5 of the 6 properties in Southern California that we moved into OREO in December. With final execution of these PSAs and sale of the related OREO assets, we would realize proceeds at or above our carrying value. Furthermore, we continue to chip away and make good progress on a number of other specific nonperforming loans. The combination of these successful resolutions alone will reduce NPAs in half without charge or write-down.
Speaker #1: To bridge that path , let say that we are me actively negotiating saw five of on six properties in southern the California that into we moved Oreo in December with final execution of these bsas and sale of the related Oreo assets .
Speaker #1: We would realize our proceeds at above our carrying value. Furthermore, we continue to chip away and make good progress on a number of specific nonperforming loans.
Speaker #1: The combination of these successful resolutions alone will reduce NPAs in half without charge , or write down . King will discuss some of our asset quality metrics , but it is worth noting that our reported 21 basis points charge the offs for full year includes three basis points .
Doug Bauche: Keene will discuss some of our asset quality metrics, but it is worth noting that our reported 21 basis points of net charge-offs for the full year includes 3 basis points related to two of the loans in the Southern California relationship. On a net basis, we did not take a loss on the foreclosure of the six properties that we took possession of in Q4. Excluding those loans for that reason, our adjusted net charge-offs were 18 basis points for 2025. Now, I'll turn the call over to Keene Turner for his comments.
Speaker #1: Related to two of the loans in the Southern California relationship . On a net basis , we did not take a loss on the foreclosure of the six properties that we took possession of in the excluding fourth quarter , those loans .
Speaker #1: For reason , adjusted net charge offs were 18 basis that our points for 2025 . Now , I'll turn the call over to Ken Turner for his comments .
Keene Turner: Thanks, Doug, and good morning, everyone. Turning to slide 13, we reported earnings per share of $1.45 in Q4 on net income of $55 million. Excluding certain non-recurring items, earnings per share on an adjusted basis was $1.36, a 16-cent increase from the Q3 adjusted earnings per share of $1.20. Pre-provision earnings increased over $9 million from the linked quarter to $75 million, primarily due to continued expansion in net interest income and the seasonal Q4 increase in tax credit income. The branch acquisition that closed on 10 October increased our liquidity and earning assets while also adding to the bottom line. Earnings also benefited from a gain on other real estate owned that is not included in our pre-provision earnings.
Speaker #2: Thanks , Doug , and good morning , everyone . Turning to slide 13 , we reported earnings per share of $1.45 in the fourth quarter .
Speaker #2: On net income of $55 million , excluding certain non-recurring items , earnings per share on an adjusted basis was $1.36 , a 16 cent increase from the third quarter .
Speaker #2: Adjusted earnings per share of $1.20 . Pre-provision earnings increased over $9 million from the linked quarter to $75 million , primarily due to continued expansion in net interest income and the seasonal increase fourth quarter in tax credit income .
Speaker #2: The branch acquisition that closed on October 10th increased our liquidity and earning assets, while also adding to the bottom line. Earnings also benefited from a gain realized on other real estate owned that is not included in our pre-provision earnings.
Keene Turner: The provision for credit losses increased from the linked quarter and was primarily driven by net charge-offs and a change in the mix of nonperforming loans. The increase in non-interest expense in the quarter was mainly due to the addition of the run rate expenses from the branch acquisition, and one-time acquisition costs related to the transaction. In conjunction with the finalization of our tax return, we have updated our state tax apportionment and effective tax rate, which resulted in a slightly higher tax rate in the fourth quarter. Turning to slide 14, and with more details to follow on 15, net interest income was $168 million in the fourth quarter, an increase of $10 million from the prior period, inclusive of the branch acquisition.
Speaker #2: The provision for credit losses increased from the linked quarter and was primarily driven by net charge-offs and a change in the mix of nonperforming loans.
Speaker #2: The increase in non-interest expense in the quarter was mainly due to the addition of the run-rate expenses from the branch acquisition, and one-time acquisition costs related to the transaction.
Speaker #2: In conjunction with the finalization of our tax return, we have updated our state tax apportionment and effective tax rate, which resulted in a slightly higher tax rate in the fourth quarter.
Speaker #2: Turning to slide 14, and with more details to follow on 15. Net interest income was $168 million in the fourth quarter, an increase of $10 million from the prior period, inclusive of the branch acquisition.
Keene Turner: Net interest income growth resulted from a combination of strong deposit growth, higher investment balances, and a favorable spread on acquired loans and deposits, partially offset by lower interest rates paid on interest earning assets. Interest income increased $7 million from the prior period, mainly due to higher earning asset balances. Loan interest increased $2 million, including $4.4 million from acquired branches, as average loan balances increased $340 million compared to the linked period and was partially offset by lower interest rates. The rate on loans booked in the quarter was 6.75% and remained accretive to the overall portfolio yield. Interest on investments was $3.2 million higher compared to the linked period, with average balances increasing $270 million and the portfolio yield improving by 9 basis points....
Speaker #2: interest income Net growth resulted from a combination of strong deposit growth , higher investment balances , and a favorable spread on acquired loans and deposits , partially offset by interest rates paid on interest earning assets .
Speaker #2: Interest income increased $7 million from the period , mainly due to prior higher earning asset balances . Loan interest increased $2 million , including $4.4 million from acquired branches as average loan balances increased $340 million compared to the linked period , and was offset by partially lower interest rates .
Speaker #2: The rate on loans booked in the quarter was 6.75% , and remained accretive to the overall portfolio yield . Interest on investments was $3.2 million , higher compared to the linked period , with average balances increasing $270 million , and the portfolio yield improving by nine basis points .
Keene Turner: The average tax equivalent purchase yield in the fourth quarter was 4.61%. Interest on excess cash balances increased $1.8 million in the fourth quarter, mainly as a result of seasonally higher deposit balances. Interest expense declined $3 million compared to the linked quarter, and included $1.7 million in interest expense from deposits at acquired branches. Total deposit expense decreased $1.4 million as a result of lower interest rates, partially offset by higher average balances. Interest expense on borrowings decreased $1.6 million, mainly due to lower balances on short-term advances, along with lower interest rates. Interest expense also reflected the redemption of our subordinated debt in September, that was replaced with a new floating rate senior note at a lower interest rate.
Speaker #2: Average tax equivalent purchase yield in the fourth quarter was 4.61%. Interest on excess cash balances increased $1.8 million in the fourth quarter, mainly as a result of seasonally higher deposit balances.
Speaker #2: Interest expense declined $3 million compared to the linked quarter , and included $1.7 million in interest expense from deposits at acquired branches . Total deposit expense decreased $1.4 million as a lower interest rates , partially offset by higher average balances .
Speaker #2: Interest expense on borrowings decreased $1.6 million , mainly due to lower balances on short term advances , along with lower interest rates . Interest expense also reflected the redemption of our subordinated debt in September , that was replaced with a new floating rate senior note at a lower interest rate .
Keene Turner: Our resulting net interest margin for Q4 was 4.26% on a tax equivalent basis, an increase of 3 basis points over the linked period. The earning asset yield declined 13 basis points, driven mainly by lower rates on variable loans and short-term assets. Our cost of interest-bearing liabilities declined 25 basis points, led by lower interest rates on deposits and borrowings, including a lower average interest rate on the acquired deposit portfolio, along with a more favorable shift in the funding mix. Moving into 2026, we expect net interest margin run rate to be roughly 4.2%. Compared to Q4, we will have some additional loan repricing based on periodic and longer-term resets, and would expect to see some additional attrition of deposit balances during Q1.
Speaker #2: Our resulting net interest margin for the fourth quarter was 4.26% . On a tax equivalent basis , an increase of three basis points over the linked period .
Speaker #2: The earning asset yield declined 13 basis driven points , mainly by lower rates on variable loans and short term assets . Our cost of interest bearing liabilities declined 25 basis points , led by lower interest rates on deposits and borrowings a , including lower average interest rate on the acquired deposit portfolio , along with a more favorable shift in the funding mix .
Speaker #2: Moving into 2026 , we expect net interest margin , run rate to be roughly 4.2% fourth compared to the quarter . We will have some additional loan repricing based on periodic and longer term resets , and would expect to see some additional attrition of deposit balances during the first quarter .
Keene Turner: We believe our balance sheet composition and funding mix have us well positioned to limit the overall impact of interest rates to net interest margin, as we have demonstrated with recent cuts. We will continue to respond to interest rate changes by appropriately managing pricing on both sides of the balance sheet. We believe that by executing our plans to grow the balance sheet funded by core deposits, we will continue to see positive momentum and net interest income growth. Slide 16 reflects our credit trends. We had net charge-offs of $20.7 million in Q4, compared to $4.1 million in the linked quarter. As Jim and Doug discussed, we made significant progress in Q4 toward resolving our largest non-performing relationship, that consists of seven different properties.
Speaker #2: We believe our balance sheet composition and funding mix have us well positioned to limit the overall impact of interest rates to net interest margin, as we have demonstrated with recent cuts.
Speaker #2: We will continue to respond to appropriately interest by rate pricing on both managing changes balance sheet. We believe that by executing our plans to grow the balance sheet funded by core deposits, we will continue to see positive momentum and net interest income growth.
Speaker #2: Slide 16 reflects our credit trends . We had net charge offs of $20.7 million in the fourth quarter , compared to $4.1 million in the linked quarter , as Jim and Doug discussed , we made significant progress in the fourth quarter toward resolving our largest non-performing relationship that consists of seven different properties in the process of foreclosing on the real estate collateral in this relationship , we had a charge off on a few properties and a gain on others .
Keene Turner: In the process of foreclosing on the real estate collateral in this relationship, we had a charge-off on a few properties and a gain on others. While the impact of these items is reported on different line items, we recognize a net gain in earnings related to the foreclosures. This is consistent with what we had expected and previously disclosed. Other than this relationship, we had a loss on a California C&I loan and also charged off several loans that had been reserved in prior periods. Net charge-offs for the year were 21 basis points of average loans, compared to 16 basis points last year. The provision for credit losses was $9.2 million in the period, compared to $8.4 million in the linked quarter. The increase in provision was mainly due to net charge-offs in the quarter.
Speaker #2: While the impact of these items is reported on different line items, we recognized a net gain in earnings related to the foreclosures.
Speaker #2: This is consistent with what we had expected and previously disclosed. Other than this relationship, we had a loss on a California CNI loan, charged off several loans that had been reserved, and also in prior periods.
Speaker #2: offs for Net charge the year were 21 basis points of average loans , compared to 16 basis points last year . The provision for credit losses was $9.2 million in the period , compared to $8.4 million in the linked quarter .
Speaker #2: The provision was increased in Q4, due mainly to net charge-offs in the quarter. Non-performing assets increased $29 million to 95 basis points of total assets, compared to 83 basis points in the linked quarter.
Keene Turner: Non-performing assets increased $29 million to 95 basis points of total assets, compared to 83 basis points in the linked quarter. Doug discussed the components of the movement within our non-performing assets and the progress and expectations we have for reduced levels in 2026. Slide 17 shows the allowance for credit losses. We continue to be well reserved, with an allowance for credit losses of 1.19% of total loans, or 1.29% when adjusting for government-guaranteed loans. We adopted the new CECL accounting standard for purchase loans that was issued in November. This eliminated the CECL double count that would have been recognized on the acquired loan portfolio, and the $3.3 million credit mark on these loans was added to the allowance for credit losses and purchase accounting.
Speaker #2: Doug discussed the components of the movement within our non-performing assets, and the progress and expectations we have for reduced levels in 2026. Slide 17 shows the allowance for credit losses.
Speaker #2: We continue to be well preserved, with an allowance for credit losses of 1.19% of total loans, or 1.29% when adjusting for government-guaranteed loans.
Speaker #2: We adopted the new CECL accounting standard for purchase loans that was issued in November. This CECL double count that would have been recognized on the acquired loan portfolio and eliminated the $3.3 million credit mark on these loans was added to the allowance for credit losses in purchase accounting, as shown on slide 18.
Keene Turner: On slide 18, Q4 non-interest income of $25.4 million decreased $23.2 million from the linked quarter. However, if you exclude the impact of the tax credit recapture in the linked quarter, non-interest income increased $9 million. The increase was primarily due to the other real estate owned gains, and seasonally stronger tax credit income. This was partially offset by lower gains on SBA loan sales, as we did not sell any production in the Q4. Depending on the levels of planned growth and activity in the SBA space, we may take the opportunity to continue to sell SBA loans in coming quarters. Turning to slide 19, Q4 non-interest expense of $115 million increased $4.7 million from the linked quarter.
Speaker #2: Fourth quarter noninterest income of $25.4 million decreased $23.2 million from the linked quarter . However , if you exclude the impact of the tax credit recapture in the linked quarter , non-interest income increased $9 million .
Speaker #2: The increase was primarily due to the other real estate owned gains, and seasonally stronger tax credit income. This was partially offset by lower gains on SBA loan sales, as we did not sell any production in the fourth quarter.
Speaker #2: Depending on the levels of planned growth and activity in the SBA space, we may take the opportunity to continue to sell SBA loans in coming quarters.
Speaker #2: Turning to slide 19 . Fourth quarter non-interest expense of $115 million increased $4.7 million from the linked quarter . One time branch acquisition costs were $2.5 million in the quarter , which is an increase of $1.9 million from the linked quarter .
Keene Turner: One-time branch acquisition costs were $2.5 million in the quarter, which is an increase of $1.9 million from the linked quarter. The impact of incremental operating expenses of the expanded branch footprint totaled $4.2 million in the quarter, and were partially offset by seasonally lower employee benefit items and the reversal of a portion of the FDIC special assessment that was recorded in prior years. The resulting core efficiency ratio was 58.3% for the quarter. Our capital metrics are shown on slide 20. Tangible book value per share of $41.37 was relatively stable with the linked quarter. We leveraged our excess capital in the period to support the branch acquisition, which was modestly dilutive on a per-share basis.
Speaker #2: The impact of incremental operating expenses of the expanded branch footprint totaled $4.2 million in the quarter and partially were offset by seasonally lower employee benefit items and the reversal of a portion of the FDIC special assessment that was recorded in prior years .
Speaker #2: The resulting core efficiency ratio was 58.3% for the quarter. Our capital metrics are shown on slide 20. Tangible book value per share of $41.37 was stable with the relatively linked quarter.
Speaker #2: We leveraged our excess capital in the period to support the branch acquisition , which was modestly dilutive on a per share basis . This dilution was offset by our strong earnings performance and the favorable improvement in the fair value of the securities portfolio in the quarter .
Keene Turner: This dilution was offset by our strong earnings performance and the favorable improvement in the fair value of the securities portfolio in the quarter. Our tangible common equity was 9.1%, compared to 9.6% in the linked quarter, and our common equity Tier 1 ratio was 11.6%. In addition to absorbing the branch acquisition, the strength of our capital position allowed us to repurchase $3.5 million of common stock and to increase our quarterly dividend by $0.01 to $0.33 per share for Q1 2026. This was another solid quarter of financial performance, with a 1.3% return on average assets and a 14% return on average tangible common equity.
Speaker #2: tangible Our common equity was 9.1% , compared to 9.6% in the linked quarter . And our common equity tier one ratio was 11.6% .
Speaker #2: In addition to absorbing the branch acquisition, the strength of our capital position allowed us to repurchase $3.5 million of common stock and to increase our quarterly dividend by $0.01 to $0.33 per share for the first quarter of 2026.
Speaker #2: This was another solid quarter of financial performance, with a 1.3% return on average assets and a 14% return on average tangible common equity.
Keene Turner: As it relates to capital, we have a history of driving shareholder value by managing our capital position and compounding tangible book value. 2025 marks the 14th consecutive year that we have increased tangible book value per share with an 11% compound annual growth rate over that period. Since we started increasing our common stock dividend in 2015, we have increased the dividend by a 17% compound annual growth rate over the past 11 years. We are well-positioned with a strong balance sheet and capital position to continue this trend and to execute our strategic initiatives in 2026. I appreciate your attention today, and I will now open the line for questions.
Speaker #2: As it relates to capital , we have a history of driving shareholder value by our managing capital position and compounding tangible book value .
Speaker #2: 2025 marks the 14th consecutive year that we have increased tangible book value per share, with an 11% compound annual growth rate over that period.
Speaker #2: Since we started increasing our common stock dividend in 2015 , we have increased the dividend by a growth the past 11 years . are 17% compound annual rate We well over positioned with a strong balance sheet and capital position to continue this trend and to execute our strategic initiatives in 2026 , I appreciate your attention and I will now open the line for questions .
Operator: We will now begin the question-and-answer session. In order to ask a question, simply press star, followed by the number one on your telephone keypad. Our first question will come from the line of Jeff Rulis with D.A. Davidson. Please go ahead.
Speaker #3: We will now begin the question and answer session in order to ask a question , simply press followed by the star , number one on your telephone keypad .
Speaker #3: Our first question will come from the line of Jeff Ruelas with D.A. Davidson. Please go ahead.
Jeff Rulis: Thanks. Good morning.
Keene Turner: Morning, Jeff.
Speaker #4: Thanks . Good morning . Good morning , Jeff . Wanted to check in on the on the foreclosed properties . Appreciate the detail .
Jeff Rulis: Wanted to check in on the foreclosed properties. Appreciate the detail. I was hoping to get maybe a little bit more. The timing of when you took control of those in the fourth quarter and, I guess, you know, it sounds like you expect the reduction in NPAs and OREO, you know, 1 to 2 quarters. So my guess is you're anticipating sales early part of this year as that plays out. Just wanted to check in a little more if we have exact timing.
Speaker #4: Hoping to get maybe a little bit more . The timing of when you took control of those in the fourth quarter . And and I guess , you know , it sounds like you expect the reduction in NPAs and Oreo or , you know , 1 to 2 quarters .
Speaker #4: So my guess is you're anticipating sales early part of this year as that plays out. Just wanted to check in a little more.
Speaker #4: have If we exact timing .
Doug Bauche: Yeah, Jeff, it's Doug. Just to remind you on the timing of this, we cried the original foreclosures on these properties back in October, and then a bankruptcy filing was posted by the debtors. So that delayed our process, and it was in the middle of December that we received a favorable ruling from the bankruptcy court that recognized our 15 October foreclosure process as a legitimate process. So in the middle of December, we were able to take six of the seven properties into OREO. The seventh property, the reason it didn't come into OREO is because back in October, there was an unrelated third party that had outbid us on that particular property. So that will have to be recried here in the first week of February.
Speaker #1: Jeff, yeah, it's Doug. Just to remind you on the timing of this, we cried the original foreclosures on these properties back in October.
Speaker #1: And then a bankruptcy filing was posted by the debtors. So that delayed our process. And it was in the middle of December that we received the favorable ruling from the bankruptcy court that recognized our October 15th foreclosure process as a legitimate process.
Speaker #1: So in the middle of December , we were able to take six of the seven properties into Oreo . The seventh property , the reason it didn't come into Oreo is because back in October , there was a unrelated third party us outbid that had particular property .
Speaker #1: So that will have to be recorded here in the first week of February . So having control now of six of the seven properties , as we mentioned , we are actively engaged with parties on sale agreements at this point in time , we feel that the valuations per these negotiations continue to reaffirm our positive outlook on a resolution of these properties .
Doug Bauche: So having control now of 6 of the 7 properties, as we mentioned, we are actively engaged with parties on sale agreements at this point in time. We feel that the valuations per these negotiations continue to reaffirm our positive outlook on the resolution of these properties. As you noted, we took a gain on the OREO here in Q4, and we feel good about how we're positioned. Timing of it, Jeff, is always a bit hard to predict, but we've got good momentum, good progress here, and we're optimistic that by the end of Q2, we're going to see some, some resolution.
Speaker #1: As you noted , we took a gain on the Oreo here in the fourth quarter , and we feel good about how we're positioned .
Speaker #1: Timing of it . It's always a bit hard to predict , but we've got good momentum , good progress here , and we're that optimistic by the end of the second quarter , we're going to see some some resolution
Jeff Rulis: Doug, is it safe to say... I mean, the litigation process has been an issue. I, you know, I don't know how you're able to to market those properties. I mean, in terms of some interested parties, I mean, for the balance of $25, probably knew that these may be coming to a sale. Do you glean any momentum that maybe conversations have predated, you know, taking control of those properties? Or is that truly you really couldn't discuss those until you got legal ownership of that?
Speaker #4: say it safe to I mean , the process has been an issue . You know , I don't know how you're able to to market those properties .
Speaker #4: I mean , in terms of some interested parties , I mean , for the balance of 25 , probably knew that these may be coming to a sale .
Speaker #4: Is do you have gleaned any momentum that maybe conversations have predated , you know , taking control of those properties ? Or is that truly you really couldn't discuss those until you got legal ownership of that ?
Doug Bauche: Yeah, it was a very public, Jeff, as you know, right? It was a very public litigation that was going on, just not only for the 7 properties that we were a direct lender on, but other properties that these parties were engaged in. So it was well known. There were a lot of parties reaching out to us before we had control of the properties and were able to even speak of the situation. So now that we've taken control and ownership, fee simple ownership, it really clears the path now for us to move forward in contract negotiations and the monetization of the assets.
Speaker #1: Yeah , that was a very public , Jeff , as you know . Right . It was a public litigation that was going on , just not for the seven properties that we were a direct lender on , but other properties that these parties were engaged in .
Speaker #1: So it was well known there were a lot of parties reaching out to us before we had control of the properties and were able to even speak of the situation.
Speaker #1: So now that we've taken control and ownership fee , simple ownership , it really clears the path . Now for move us to forward and contract negotiations and the monetization of the assets .
Jeff Rulis: Appreciate it, Doug. Thanks for the detail.
Doug Bauche: You bet.
Speaker #4: Appreciate it, Doug. Thanks for the detail. Just hopping over to maybe keen in on the sort of moving pieces on the fee and income noninterest expense lines.
Jeff Rulis: Just hopping over to maybe Keene on the sort of some moving pieces on the fee income and non-interest expense lines. I don't know if you could reorient us on a run rate and/or kind of growth expectations on both.
Speaker #4: I don't know if you could reorient us on a run rate and, or kind of growth expectations on both.
Keene Turner: Yeah. So, you know, when I think about the, you know, 2025, you know, fee income run rate, you know, you got to take out the, the gain on the OREO, and then you're getting, which you really didn't see here in the quarter, you get about $2 million from the branches we acquired. And then, you know, other than the tax credit line item, which I think about as being relatively flat, we've got fees growing at about 5% year-over-year on a recurring basis... and then from an expense perspective, you know, I've got, if you call the run rate for 2025, $423 million of expenses, and you've got $18 million, that's a full year for the branches. We think expenses grow around 5%.
Speaker #5: Yeah . So you know , when , when I , when I think about the , you know , 20 , 25 , you know , fee income , run rate , you know , you got to take out the gain on the aura and then you're getting what you really didn't see here in the quarter .
Speaker #5: You get about $2 million from the branches . We acquired . And then , you know , other than the tax credit line item , which I think about as being relatively flat , we've got fees growing at about 5% year over year on a recurring basis .
Speaker #5: from an And then expense perspective , you know , I've got if you call the run rate for 20 , 25 , $423 million of expenses , and you've got 18 that that's a full year for the branches .
Speaker #5: We think expenses grow around 5% . So , you know , that gets you . That'll get you in the ballpark . And I'd back up for a second and just let just highlight one assumption .
Keene Turner: So, you know, that gets you, that'll get you in the ballpark. And I'd like to back up for a second and just highlight one assumption that's there. So we've got three Fed funds cuts in that projection, which predominantly affects the deposit costs. So year-over-year, we're accounting for that expense guide. We're accounting for deposit costs on a run rate basis to be relatively flat. And I'll say significantly, but, you know, down from fourth quarter annualized run rate. And that's inclusive of the growth that we're expecting in those three businesses.
Speaker #5: That's what we've got there. So, we've got three Fed funds cuts in that projection, which predominantly affects the deposit costs. So, year over year, we're accounting for that expense guide.
Speaker #5: We're accounting for deposit costs on a run rate basis to be to be relatively flat . And it and I'll say significantly . But you know down from fourth quarter annualized run rate .
Speaker #5: And that's inclusive of of the growth that we're expecting in in in those three businesses .
Jeff Rulis: Thanks, Keene. Just to, just to recap that, so I got it. On the expense side, you're talking about a $423 core plus $18 annual on the acquired branches, so kind of growing 5% off of $441. Is that?
Speaker #4: Thanks . just recap that . just to So Can you I got it on the side . expense You're talking about a 423 core plus 18 annual on the acquired branches .
Speaker #4: So kind of growing 5% off of 441 . Is that . Yep . Correct number to use . Okay . Yep . I mean thank you .
Keene Turner: Yep.
Jeff Rulis: Correct number to use? Okay.
Keene Turner: Yep. I mean, that-
Jeff Rulis: Appreciate it. Thank you.
Keene Turner: Range, range of reasonableness on both sides of that, but that's, that's how I'm thinking about it and how we've built it.
Speaker #4: .
Speaker #5: Range of reasonableness on both sides of that. But that's— that's how I'm thinking about it and how we've built it.
Jeff Rulis: Great. Thank you.
Keene Turner: You're welcome.
Speaker #4: Great . Thank you .
Operator: Our next question comes from the line of Nathan Race with Piper Sandler. Please go ahead.
Speaker #5: You're welcome .
Speaker #3: Our next question comes from the line of Nathan Rees with Piper Sandler . Please go ahead .
Nathan Race: Hey, guys. Good morning. Thanks for taking the questions. I was wondering if you could just shed some additional color on the 2 loans totaling $28 million that migrates to nonaccrual in Q4, in terms of what type of impairment was taken in the quarter, and then also what the timing for resolution is. I appreciate that you guys are pretty well secured here, so, just curious on some of the background there and any color on just the timing.
Speaker #6: Hey, guys. Good morning. Thanks for taking the questions. I was wondering if you could just shed some additional color on the two loans totaling $28 million that migrated to non-accrual in Q4, in terms of what type of impairment was taken in the quarter?
Speaker #6: And then also, what is the timing for resolution? I appreciate that you guys are pretty well secured here, so just curious on some of the background there and any color on the timing.
Doug Bauche: Yeah, sure. This is Doug. I'll just comment again. So these particular assets, one is a retail center in Riverside, California, approximately $22 or 23 million in debt. Valuations that we have on current appraisals would suggest we're at a very good loan-to-value, and I'll comment that we're actively negotiating the exit of that credit. The second loan that came in was a $6 million loan that's secured by a residential property in San Diego. Again, I think from a valuation perspective, we're somewhere in the neighborhood of 60 to 65% of appraised value, and we feel good about our position. Timing on that one is not as clear for me in terms of the exit, may take a little bit longer, but from a valuation perspective, we feel good and loss content.
Speaker #1: sure . This Yeah , is Doug . I'll just again . So these particular assets one is a retail center in Riverside , California , approximately 22 or $23 million in debt valuations that we have on current appraisals would suggest we're at a very good loan to value .
Speaker #1: And I'll comment that we're actively negotiating the exit of that credit. The second loan that came in was a $6 million loan.
Speaker #1: That's by a secured residential property in San Diego. Again, I think from a valuation somewhere in the neighborhood of 60 to 65% of appraised value, and we feel our position.
Speaker #1: On that timing, one is not as clear for me in terms of the exit. May take a little bit longer, but from a valuation perspective, we feel good and lost content.
Doug Bauche: I believe there to be very little loss content in either one of those assets.
Speaker #1: I believe that to be very little lost content in either one of those assets .
Nathan Race: Okay, that's really helpful. Thanks for that, Doug. And then, Keene, I'd be curious to get your thoughts on... I appreciate the broader income comments earlier, but just in terms of SBA gain on sale revenue, obviously, the government shutdown had an impact in the fourth quarter, but just any expectations for that revenue line to grow this year?
Speaker #6: that's really Okay , helpful . Thanks for that , Doug . And then , Keith , I'd be curious to get your thoughts on I appreciate the broader comments earlier , but just in terms of SBA gain on sale revenue , obviously the government shut down had an impact on the fourth quarter , but just any expectations for that revenue line to grow this year ?
Keene Turner: Yeah, I think, you know, that, Nate, we, we did not take gains on SBA loan sales in the quarter. I'm not sure with the tax credit strength, we would have done that anyway, but the shutdown did tie our hands a little bit. We had a good quarter there, but it was all, you know, second half of December weighted. For 2026, I would expect, you know, the SBA gain on sale to grow modestly from the 2025 levels in that 5%. But we do have that as part of our, our plan, coming out of the gate here in 2026.
Speaker #5: Yeah , I think , you know that , Nate , we we did not take gains on SBA loan sales in the quarter .
Speaker #5: I’m not sure with the tax credit strength—we would have done that anyway. But the shutdown did tie our hands a little bit.
Speaker #5: We had a good quarter there . But it was all , you know , second half of December waited for 2026 . I would expect , you know , the SBA gain on sale to to grow modestly from the 2025 levels in that 5% .
Speaker #5: But we do have that as part of our plan coming out of the gate here in '26.
Nathan Race: Okay, great. And I just want to clarify on the tax credit revenue. You obviously had some noise in that number in Q3, so I think your expect- or your comment was kind of flat. Was that flat versus just under $8 million in 2025?
Speaker #6: Okay , great . And I just want to clarify on the tax credit revenue , you had some noise in that number in the third quarter .
Speaker #6: So I think your year-over-year was flat. Was that flat, or was it just under, like $8 million in 2025?
Keene Turner: Yeah, like 7.5. 7 to 7.5 is what we're thinking. I mean, obviously, that line's fairly volatile given rates and the performance of that business, but we think it, it repeats, you know, by and large in, in 2026. But to your point, there might be some puts and takes, depending on how the year and the, the rate cycle plays out.
Speaker #5: Yeah, like seven and a half, 7 to 7 and a half is what we're thinking. I mean, obviously that line is fairly volatile.
Speaker #5: It's given rates and the performance of that business . But we think it it repeats , you know , by and large in 2026 .
Speaker #5: But to your point, there might be some puts and takes depending on how the year and the rate cycle plays out.
Nathan Race: Okay, great. And then I appreciate the commentary around kind of mid-single-digit loan growth for this year. Is the expectation that, you know, deposit gathering should largely keep pace, just based on some momentum you're having with share gains and just with some of the hires continuing to ramp up? I would just be curious also within that context, what your spot rate of deposit costs were, coming out of the quarter.
Speaker #6: Okay . Great . And then appreciate I commentary around kind of mid single digit loan the growth for this year is the expectation that , you know , deposit gathering should largely keep pace just based on some momentum you're having with share gains .
Speaker #6: And just with some of the hires continuing to ramp up . And we'll just be curious also within that context , what your spot rate of deposit costs were coming out of the quarter ?
Jeff Rulis: Yeah, I'll take the first part of that, Nate. This is Jim. On the overall balance sheet growth, we're looking at 6 to 8%, and to your point, loans at about mid-single digit, but certainly the deposit gathering rate and pace will exceed the loan growth pace. Relative to the spot rate on deposits in Q4, Keene, do you have that one?
Speaker #7: Yeah , I'll take the first part of that . Nate , this is Jim . On the overall balance sheet growth . We're looking at 6 to 8% .
Speaker #7: And to your point loans at about mid-single certainly the gathering rate and pace will digit . exceed the deposit loan . But Loan growth pace to the relative spot rate on deposits in the fourth quarter .
Keene Turner: Yes, it's 1.6% coming out of December.
Speaker #7: Can you have that one .
Speaker #5: Yes . It's 1.6% coming out of December .
Nathan Race: Okay, great. I appreciate all the color. Thanks, guys.
Speaker #6: Okay , great . I appreciate all the color . Thanks ,
Jeff Rulis: Thanks.
Doug Bauche: Thanks, Nate.
Jeff Rulis: Yeah, thanks.
Speaker #6: guys . Thanks .
Speaker #7: Thanks .
Operator: Our next question comes from the line of Damon Del Monte with KBW. Please go ahead.
Speaker #5: Thanks , Nate .
Speaker #3: Our next question comes from the line of Damon Delmonte with CCB . Please go ahead .
Damon Del Monte: Hey, good morning, guys. Hope everybody's doing well, and thanks for taking my questions. Just wanted to circle back on the margin, Keene. I think you had kind of guided to like a 4.20 for the year in 2026. Just kind of curious on the cadence of kind of how you're seeing that play out. We have a bit of a step down here in Q1 with some seasonality and then kind of, you know, just stay flat or, you know, what are some of the dynamics you're thinking about?
Speaker #8: Hey, good morning, guys. Hope everybody's doing well, and thanks for taking my questions. Just wanted to circle back on the margin, keen.
Speaker #8: think you had I kind of guided to a for 20 for for the year in 2026 . Just kind of curious on the cadence of kind of how you're seeing that play out .
Speaker #8: We have a bit of a step down here in the first quarter with some with some seasonality , and then kind of , you know , just stays flat or , you know , what are some of the dynamics you're thinking about ?
Keene Turner: Yeah, I think I normalize out about 3 basis points in the quarter. We just didn't have any headwinds from prepayment of SBA loans that are acquired at a premium. So that was a few basis points. So we do see that 4.23, you know, stepping down to around 4.20. And then it just kind of hangs there, and that is pretty sticky whether we have, you know, no real rate changes or whether we actually have the 3 cuts that I mentioned in our forecast. You know, the dollars moves around a little bit, but we feel pretty comfortable that at least with the Fed funds rate coming down, but the shape of the curve remaining reasonably intact, that we're pretty well-positioned to defend margin in that environment.
Speaker #5: Yeah, I think I normalize out about three basis points in the quarter. We just—we didn't have any headwinds from prepayment of SBA loans that are acquired at a premium.
Speaker #5: So that that was a few points basis . So we do see that for 23 . You know , down to stepping around 420 .
Speaker #5: And then it just kind of hangs there . And that is pretty sticky . Whether we have , you know , no no real rate changes or whether we actually have the the three cuts that I mentioned in our forecast , you know , the dollars moves around a little bit , but we feel pretty comfortable that at least with the fed funds rate coming down .
Speaker #5: But the shape of the curve remaining reasonably intact , that we're we're pretty well positioned to defend margin in that environment . And I think we've you know , I highlighted in my comments that that we've done that successfully far with the prior fed cuts .
Keene Turner: I think we've, you know, I highlighted in my comments that we've done that successfully so far with the prior Fed cuts.
Damon Del Monte: Got it. That's a good color. Thank you. And then, you know, kind of along the lines of the credit outlook, you know, you guys seem pretty optimistic that, you know, you'll see some meaningful resolutions on some of these NPAs in the first half of the year. How do we think about provisioning going forward? Do you think you kind of go back to a more normalized level, you know, versus what we saw in the back half of the year? Or do you think it kind of stays a little bit elevated until you kind of completely come out of the woods?
Speaker #8: Got it . That's a good color . Thank you . And then , you know , kind of along the lines of the credit outlook .
Speaker #8: You know, you guys seem pretty optimistic that, you know, you'll see some meaningful resolutions on some of these NPAs in the first half of the year.
Speaker #8: How do we think about provisioning going forward? Do you think you kind of go back to a more normalized level, you know, versus what we saw in the back half of the year?
Speaker #8: Or do you think it kind of stays a little bit elevated until you kind of completely come out of the woods ?
Keene Turner: Yeah, I mean, Damon, based on where we sit today, everything that we know that's, you know, a nonperformer or that's a problem, has the appropriate reserve or fair value on it, whether it's in ORE or, you know, in the allowance. And so I think that we're approaching it like this, which is the allowance, because of the charge-offs and the activity; actually, the coverage came down. I think that reflects where we sit from a balance sheet perspective. And as long as we don't have unexpected migration, I think our expectation is that, you know, charge-offs move down from the level they were at in 2025, and then that'll alleviate some of the provisioning.
Speaker #5: Yeah , I mean , Damon , based on where we sit today , everything that we know , that's , you know , a non-performer or that's a problem has the appropriate reserve or fair value on it , whether it's in or or , you know , in , in the allowance and , and so I think that we're approaching it like this , which is the allowance because of the charge offs and the activity , actually the coverage came down .
Speaker #5: I think that reflects sit balance sheet And as long as we don't have unexpected migration , I perspective . from a where we think our expectation is that , you know , charge offs move down from from the level they were at in 2025 .
Speaker #5: And then that'll alleviate some of the provisioning. We do have, I think, aspirations to get a little bit more growth in the net portfolio this year.
Keene Turner: We do have, I think, aspirations to get a little bit more net growth in the portfolio this year, and so that'll be a counterbalance. But we'd rather provision, obviously, for growth than for charge-offs. So, I think that's the long, long way of saying we're optimistic, but we're also realistic about just, just having a little bit more crit class and ORE than we'd like.
Speaker #5: And so that'll that'll be a counterbalance . But we'd rather provision obviously for growth and for charge offs . So I think that's the long , long way of saying we're optimistic .
Speaker #5: But we're also realistic about just having a little bit more credit class and/or than we'd like.
Damon Del Monte: Got it. Okay. Great. And then just lastly, on capital management, you noted you guys, you know, did a little bit of buyback this quarter, or last quarter. I guess, how do you think about the buyback here as we go into 2026, and what is the remaining capacity?
Speaker #8: Got it . Okay , great . And then just lastly on capital management , you noted you guys did a little bit of buyback this quarter or last quarter , I guess .
Speaker #8: How do you think about the buyback here as we go into '26? And what is the remaining capacity?
Jeff Rulis: Yeah. So this is Jim again, Damon. We were-
Speaker #7: Yeah . So this is Jim again Damon . We very interested in terms of utilizing our capital for buybacks . We've got roughly we've got 150,000 shares or so .
Damon Del Monte: Hi, Jim
Jeff Rulis: ... very interested in terms of utilizing our capital for buybacks. We've got roughly 150,000 shares or so.
Keene Turner: There's a $1,000,001 that's still authorized.
Speaker #5: There's 1,000,000 million that's still authorized. There's about 100,000 that's covered by a plan right now.
Jeff Rulis: Right.
Keene Turner: There's $100,000 that's covered by a plan right now.
Jeff Rulis: Yeah. And then, obviously, growth is a big part of it for 2026, and then certainly, we'll continue relative to the increase of the dividend over time as well.
Speaker #7: Yeah, and then obviously growth is a big part of it for '26. And then certainly we'll continue relative to the increase in the dividend over time as well.
Keene Turner: And, and-
Damon Del Monte: Got it.
Keene Turner: I'll color that in a little bit, too. I mean, I think the question that we get is, you know, "You could have done more in 2025. Why didn't you?" You know, we wanted, we leveraged our capital through the branch acquisition. When you look at the stack, the total stack looks good, but we're a little inefficient on TCE. And so I think we've got a little bit of work to do when we come out of year-end here to work on the cap stack, and I think the environment's set up well for that. So, you know, more to come there, but that's on our radar as an early 2026 item.
Speaker #5: And and .
Speaker #8: .
Speaker #5: It Got . I'll color that in a little bit too . I mean I think the I think the question that we get is , you know , you could have done more in 2025 .
Speaker #5: Why didn't you . You know , we wanted we leveraged our capital through the branch acquisition . When you look at the stack , the total stack looks But we're a good .
Speaker #5: little inefficient on on TCE . And so I think we've got a little bit of work to do when we come out of year end here to , to work on the cap stack .
Speaker #5: think the And I environment is set up well for that . So , you know , more more to come there . But that's on radar as an our that's , early 2026 item .
Jeff Rulis: Damon, I'll just get ahead of the M&A question, which is a very low priority for us. It's about executing the plan. So we've got to getting our credit right, organic growth, making sure we're integrating well, what we did in 2025.
Speaker #7: And Damon , I'll just get ahead of the M&A question , is a which is very low priority for us . It's about executing the plan .
Speaker #7: We've got to get our credit right. Organic growth, making sure we're integrating well, what we did in 2025.
Damon Del Monte: Got it. Thanks for being preemptive with that. That's all that I had. Thank you very much.
Speaker #8: Got it. Thanks for being preemptive with that. That's all that I had. Thank you very much.
Jeff Rulis: You bet. Have a good day.
Speaker #7: You bet. Have a good day.
Operator: Our next question comes from the line of David Long with Raymond James. Please go ahead.
Speaker #3: Our next question comes from the line of David Long with Raymond James. Please go ahead.
David Long: Good morning, everyone.
Keene Turner: Good morning.
David Long: As it relates to your charge-offs for the quarter, I think the number was just a little over $20 million. You had a few million from the properties that you've been talking about, that's those 7 properties. It's still elevated when you take that out. I think you mentioned that you decided to move forward on some credits that you had built reserves for. Just curious, what drove that higher? And why make the decision now to move some of those and charge them off at this point?
Speaker #9: Good morning, everyone. As it relates to your charge-offs for the quarter, I think the number was just a little over $20 million.
Speaker #9: You had a few million from the properties that you've been talking about that those seven properties , there's a good it's still elevated when you take that out .
Speaker #9: I think you mentioned that you decided to move forward on some credits that you had built reserves for. Just curious, what drove that higher? Why?
Speaker #9: And why make the decision now to move some of those off them, and charge at this point?
Doug Bauche: Yeah, David, it's Doug Bauche here. Let me comment just on charge-offs. Again, Q4, $20 million thereabouts in charge-offs, net of the aforementioned OREO properties that Keene talked about, right? Where we had about $3 million of charges there. We're really talking about $18 million of commercial charges in the quarter. We had two sponsor finance credits totaling $3.5 million in aggregate that were previously recognized and reserved for. We had one multifamily project in LA County that was still back acquired asset, that we took a $3 million charge on. And then really what came up in Q4 was a C&I credit in our Southern California portfolio, a company that was engaged in kind of last mile logistics and delivery of e-commerce packaging, a company that really its growth rate outstripped its capital.
Speaker #1: Yeah . David , it's Doug here . Let me comment just on charge offs again . Fourth quarter 20 million thereabouts . And charge offs net of the aforementioned Oreo properties that Keane talked about .
Speaker #1: Right . We had about $3 million of charges there . We're really talking about $18 million of commercial charges in the quarter . We had two sponsor finance credits totaling $3.5 million in aggregate , that were previously recognized and reserved for .
Speaker #1: We had one multifamily project in LA County that was still back acquired asset that we took a $3 million charge on , and then really what came up in the fourth quarter was a CNI credit in our Southern California portfolio , a company that was engaged in kind of last mile logistics and delivery of e-commerce , packaging , a company that really its growth rate outstripped its capital .
Doug Bauche: It was a $10 million credit. We took an $8.5 million charge on that. We continue to carry a $1.5 million balance that we feel we're well secured by, by the remaining assets of the company. But I think we wanted just to recognize that fully and head into the 2026 year with a really clean slate and, and good position. So those were the primary drivers of charges in the quarter.
Speaker #1: It was a $10 million credit . We took a $8.5 million charge on that . We continue to carry a million and a half dollar balance that we feel were well by , by secured the remaining assets of the company .
Speaker #1: But I think we just wanted to recognize that fully and head into the 2026 year with a really clean slate and good position.
Speaker #1: So, those were the primary drivers of charges in the quarter.
David Long: Okay, great. No, I appreciate that color, and I think it goes without saying, but this is the Q4 aggregate here. Net charge-offs is not reflective of anything that you expect going forward, correct?
Speaker #9: Okay , great . No , I appreciate that color . And I think it goes without saying , but this is the fourth quarter aggregate here .
Speaker #9: Net charge-offs is not reflective of anything that you expect going forward. Correct.
Doug Bauche: No, it's not. I just refer back, right? We look at it, you know, if you look at the year charges again, whether you look at it 18 basis points adjusted or 21 reported, that's relatively in line, David, with what our 10-year average is, right? I think our 10-year average net charge-off rate is somewhere in that 15 to 16 basis points. So I think it's largely in line with our historical performance, and quite frankly, it's representative of who we are and the commercial credit that we originate and take. But I feel good about how we're positioned going into the new year.
Speaker #1: No it's not . And I just refer back . Right . We look at it . You know , if you look at the year charges again , whether you look at it 18 basis points adjusted or 21 reported , that's relatively in line , David , with what our ten year average is .
Speaker #1: Right. I think our ten-year average net charge-off rate is somewhere in, I think, it's 15 to 16 basis points. That's largely in line with our historical performance.
Speaker #1: And quite frankly, it's representative of who we are and the commercial credit that we originate and take. But I feel good about how we're positioned going into the new year.
David Long: Great. Appreciate the color, Doug. Thank you so much.
Speaker #9: Great. Appreciate the color, Doug. Thank you so much.
Doug Bauche: Thanks, David.
Operator: Again, for questions, press star one, and our next question will come from the line of Brian Martin with Janney Montgomery. Please go ahead.
Speaker #1: Thanks , David .
Speaker #3: Again, for questions, please press star one. And our next question will come from the line of Brian Martin with Jamie Montgomery. Please go ahead.
Brian Martin: Hey, guys. Good morning.
Speaker #10: Hey guys. Good morning.
Keene Turner: Good morning, Brian.
Brian Martin: I'd say most of mine were just covered there, but just one clarification, Keene, on the fee income side, just thinking about the base that I guess, I think you talked about mid-single-digit growth maybe. Is that base around, just given some of the noise throughout the quarters, around $75 million? Is that kind of the starting point that you're thinking about, or is it different than that in terms of-
Speaker #5: Morning , Brian .
Speaker #10: See, most of mine were just covered there. But just one clarification on Keen, on the fee income side. Just thinking about the— I guess I think you talked base that at about mid-single-digit growth.
Speaker #10: Maybe . Is that based around just given some of the noise throughout the quarters , around 75 million . Is that kind of the starting point that you're thinking about , or is it different than that in terms of .
Keene Turner: No, that's about right. I mean, the biggest item in there is the fourth quarter gain on-
Speaker #5: No , that's about right . I mean , the biggest item in there is fourth quarter gain on the there are a couple you no Boli , you know , payouts throughout the year .
Brian Martin: OREO.
Keene Turner: OREO. There are a couple, you know, fully, you know, payouts-
Brian Martin: Yeah
Keene Turner: Throughout the year, but nothing with, you know, that accumulates to be material, and we'll have items like that moving forward. So yeah, I'm really just stripping out the $6 million and then growing off of that and adding the, you know, $0.04 or $2 million for the branches that'll start to earn some fees here in early 2026.
Speaker #5: But but nothing , nothing . You know , that that accumulates to be material and we'll have items like that moving forward . So yeah I'm really just stripping out the 6 million and then growing off of that and adding the , you know , $0.04 or $2 million for the the branches that will start to earn some fees here in early 2026 .
Brian Martin: Yeah. So, how much of the, I mean, that $2 million run rate in branches, was that in the Q4 number, or that's, I guess, fully in the number or not? I guess, what part of that was in that current run?
Speaker #10: Yeah. So how much of that—I mean the $2 million run rate in branches—was that in the fourth quarter number, or is that, I guess, fully in the number or not?
Speaker #10: I guess, what part of that was in that, in that... Well.
Keene Turner: Well, if you think about the timing, I mean, we typically put fee holidays in place, so you wouldn't have charged fees in October and likely November. So you're not, you know, the number in and of itself, $2 million, is not that large, and then if you have a little bit of run rate in December,
Speaker #5: If you think about the timing, I mean, we typically put fee holidays in place. So you wouldn't have charged fees in October.
Speaker #5: And likely November . So you're not , you know , the number in and of itself , 2 million is not that large .
Speaker #5: And then if you have a little bit of run rate in December , you know , it's not it's not meaningful . So really you'll start to get that $500,000 a quarter
Brian Martin: Yeah
Keene Turner: ... you know, it's not, it's not meaningful. So really, you'll start to get that, you know, $500,000 a quarter year in 2026.
Brian Martin: Gotcha. Okay. So it's roughly 75-ish at 5% and then add in the branches, and that's how we think about it, so that's helpful. And then just the loan pipeline, I think you talked about or, you know, I guess, the SBA being a bit, maybe a bit stronger and just wondering if in terms of other areas or, you know, segments or markets that are stronger today that you're seeing. I know Jim commented about the infrastructure, but anything else in terms of where your, the growth outlook may be a little bit better in 2026?
Speaker #5: in 2026 . Gotcha .
Speaker #10: Okay . So it's roughly
Speaker #10: Seventy-five here is at 5%. And then branches. And that’s added in to how we think about it. So that’s helpful.
Speaker #10: And then just the the the loan pipeline I think you talked about or you know , I guess the SBA being a bit maybe a bit stronger and just wondering if in terms of other areas or segments or markets that are stronger today that you're seeing , I know Jim commented about the infrastructure , but anything else in terms of where you're the growth outlook may be a little bit better in 2026 .
Doug Bauche: Yeah, Brian, this is Jim. I'd say, you know, we look at it closely. We feel very good about where the pipeline sits today. The life insurance premium finance portfolio looks good. The pipeline down in the Southwest looks really good. As Doug mentioned, there's great momentum down there, and it's really a nice mix between C&I and the CRE side. So we like the mix, we like the pace of play, and feel very comfortable about where we sit today and the projected growth for 2026.
Speaker #7: Yeah . Brian's is Jim . I'd say , you know , we look at it closely . We feel very good about where the pipeline sits today .
Speaker #7: The life insurance premium finance portfolio looks good . Portfolio are the pipeline . The pipeline down the southwest looks really good . As Doug mentioned , there's great momentum down there .
Speaker #7: And it's really a nice mix between CNI and the CRE side . So we mix . We like the like the pace of play and feel very comfortable growth projected where we sit today and the about for 2026 .
Brian Martin: Okay. And the projected growth is still consistent with what you know, consistent with this year's performance? Is that how to think about-
Speaker #10: Okay. And the projected growth is still consistent with what you saw this year’s performance? Is that how to think about it?
Doug Bauche: Well, I think we said we're mid-single digits net for 2026.
Speaker #7: I think we said we’re mid-single digits, net net net, for 2026.
Brian Martin: Yeah, gotcha. Okay. All right, thank you for taking the question.
Speaker #10: Yeah . Gotcha . Okay . All right . Thank you for taking the questions .
Doug Bauche: Thank you.
Operator: That concludes our question and answer session. I'll hand the call back over to Jim for any closing comments.
Speaker #7: Thank you .
Speaker #3: And that concludes our question-and-answer session. I'll hand the call back over to Jim for any closing comments.
Keene Turner: Well, thank you. Thank you all very much for joining us this morning and for your interest in our company. We look forward to speaking with you again at the end of the first quarter, if not sooner. Have a great day.
Speaker #7: Well , thank you . And thank you all very much for joining us this morning and for your interest in our company . We look forward to speaking with you again at the end of the first quarter , if not sooner .
Speaker #7: Have a great day .
Operator: This concludes today's call. Thank you all for joining. You may now disconnect.
