ENTERPRISE FINL(EFSCP) - 2024 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Total assets increased driven by net loan growth, while net income for the six months ended June 30, 2024, decreased primarily due to rising interest expense Condensed Consolidated Balance Sheets Total assets grew to $14.62 billion driven by a $111.2 million increase in net loans, with deposits and shareholders' equity also rising Condensed Consolidated Balance Sheet Highlights ($ in thousands) | Balance Sheet Item | June 30, 2024 | December 31, 2023 | Change | | :--- | :--- | :--- | :--- | | Total Loans, Net | $10,860,543 | $10,749,347 | ▲ $111,196 | | Total Assets | $14,615,666 | $14,518,590 | ▲ $97,076 | | Total Deposits | $12,282,383 | $12,176,371 | ▲ $106,012 | | Total Liabilities | $12,860,393 | $12,802,522 | ▲ $57,871 | | Total Shareholders' Equity | $1,755,273 | $1,716,068 | ▲ $39,205 | Condensed Consolidated Statements of Income Net income for Q2 2024 was $45.4 million, while the six-month net income decreased to $85.8 million due to a significant rise in interest expense Key Income Statement Data ($ in thousands, except per share data) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $140,529 | $140,692 | $278,257 | $280,221 | | Provision for Credit Losses | $4,819 | $6,339 | $10,575 | $10,522 | | Noninterest Income | $15,494 | $14,290 | $27,652 | $31,188 | | Noninterest Expense | $94,017 | $85,956 | $187,518 | $166,939 | | Net Income | $45,446 | $49,127 | $85,847 | $104,865 | | Diluted EPS | $1.19 | $1.29 | $2.24 | $2.75 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities decreased to $106.4 million, while investing activities used $180.6 million, resulting in an overall $40.3 million decrease in cash Net Cash Flow Summary - Six Months Ended June 30 ($ in thousands) | Cash Flow Category | 2024 | 2023 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $106,397 | $139,786 | | Net Cash from Investing Activities | ($180,571) | ($804,207) | | Net Cash from Financing Activities | $33,920 | $695,085 | | Net (Decrease) Increase in Cash | ($40,254) | $30,664 | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, investment portfolio unrealized losses, stable loan portfolio credit quality, and derivative usage for hedging - The company is a financial holding company providing banking and wealth management services primarily in Arizona, California, Florida, Kansas, Missouri, Nevada, and New Mexico[24] - The company adopted ASU 2022-03 and ASU 2023-02, which did not have a material effect on the consolidated financial statements. The company is still evaluating the impact of ASUs 2023-07 and 2023-09 related to segment and income tax disclosures[28][30][31] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management reports stable financial condition with $14.6 billion in assets, strong asset quality, robust liquidity, and capital ratios exceeding 'well-capitalized' levels, despite net interest margin compression from rising deposit costs Executive Summary Q2 2024 net income was $45.4 million with a 4.19% net interest margin, while loans and deposits grew, and asset quality and capital ratios remained strong Q2 2024 Performance Highlights | Metric | Q2 2024 | Q1 2024 | Q2 2023 | | :--- | :--- | :--- | :--- | | Diluted EPS | $1.19 | $1.05 | $1.29 | | Net Interest Margin (tax equivalent) | 4.19% | 4.13% | 4.49% | | Return on Average Assets | 1.25% | 1.12% | 1.44% | | Nonperforming Loans to Total Loans | 0.36% | 0.32% | 0.15% | - Total loans increased by 1.06% to $11.0 billion at June 30, 2024, from December 31, 2023[110] - Total deposits increased by $106.0 million to $12.3 billion. Noninterest-bearing deposits constituted 32.0% of total deposits[112] - The tangible common equity to tangible assets ratio was 9.18% at June 30, 2024, up from 8.96% at December 31, 2023[112] Results of Operations Q2 2024 net interest income was $140.5 million with a 4.19% net interest margin, impacted by higher deposit costs, while noninterest income increased and noninterest expense remained stable - Net interest margin (NIM) was 4.19% in Q2 2024, an increase of 6 basis points from the linked quarter, but a decrease of 44 basis points from the prior year-to-date period, reflecting pressure from higher deposit costs[124] - Noninterest income for Q2 2024 increased by $3.3 million from the linked quarter, primarily due to a $4.1 million increase in tax credit income[126] - Noninterest expense for the first six months of 2024 increased by $20.6 million from the prior year, mainly due to a $12.3 million increase in variable deposit costs and a $5.6 million increase in employee compensation[129][130] - The effective tax rate for the first six months of 2024 was 20.4%, down from 21.7% in the prior year-to-date period, driven by tax credit opportunities[131] Financial Condition Total assets were $14.6 billion with loan portfolio growth to $11.0 billion, while asset quality remained strong despite $242.2 million in investment portfolio unrealized losses Loan Portfolio Composition ($ in thousands) | Loan Type | June 30, 2024 | Dec 31, 2023 | Change | | :--- | :--- | :--- | :--- | | Commercial and industrial | $4,619,448 | $4,672,559 | ▼ (1)% | | Commercial real estate - investor owned | $2,468,241 | $2,451,953 | ▲ 1% | | Commercial real estate - owner occupied | $2,388,510 | $2,351,618 | ▲ 2% | | Construction and land development | $893,672 | $760,425 | ▲ 18% | | Total Loans | $11,000,007 | $10,884,118 | ▲ 1% | Asset Quality Metrics | Metric | June 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Nonperforming Loans ($ in thousands) | $39,384 | $43,728 | | Nonperforming Assets to Total Assets | 0.33% | 0.34% | | ACL on Loans to Total Loans | 1.27% | 1.24% | - Deposits from specialty verticals (property management, community associations, escrow) grew to $3.0 billion from $2.8 billion at year-end 2023[151] - Estimated uninsured/uncollateralized deposits totaled $3.6 billion, or 29% of total deposits, down from 31% at year-end 2023[153] Liquidity and Capital Resources The company maintains a strong liquidity position with $5.6 billion in available sources and robust capital ratios exceeding 'well-capitalized' regulatory requirements Available Liquidity Sources (June 30, 2024, $ in thousands) | Source | Amount | | :--- | :--- | | Federal Reserve Bank borrowing capacity | $2,610,652 | | FHLB borrowing capacity | $1,230,978 | | Unpledged securities | $1,162,838 | | Federal funds lines | $140,000 | | Cash and interest-bearing deposits | $392,775 | | Total | $5,562,243 | Regulatory Capital Ratios (EFSC) | Ratio | June 30, 2024 | Minimum with CCB | | :--- | :--- | :--- | | Common Equity Tier 1 | 11.7% | 7.0% | | Tier 1 Capital | 13.0% | 8.5% | | Total Capital | 14.6% | 10.5% | | Leverage Ratio | 11.1% | N/A | - The company has $2.8 billion in unused commitments to extend credit as of June 30, 2024[161] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk, showing asset sensitivity where a 100 basis point rate increase boosts net interest income by 3.8%, while actively transitioning variable-rate loans from LIBOR to SOFR Net Interest Income Sensitivity (at June 30, 2024) | Rate Shock | Annual % Change in Net Interest Income | | :--- | :--- | | +300 bp | 11.1% | | +100 bp | 3.8% | | -100 bp | (3.9)% | | -300 bp | (12.4)% | - The company has ceased using LIBOR in new contracts and selected SOFR as the replacement index for the majority of its variable rate loans[185] - At June 30, 2024, the company had $6.7 billion in variable rate loans, of which $3.1 billion were indexed to SOFR and $2.8 billion to the prime rate[186] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal controls over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2024[190] - No changes were made during the quarter that materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting[191] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, none of which are expected to have a material adverse effect on its financial condition or operations - Management believes there are no pending or threatened legal proceedings that would have a material adverse effect on the business, financial condition, or results of operations[193][194] Item 1A. Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 - There have been no material changes to the risk factors described in the Company's Annual Report on Form 10-K for the year ended December 31, 2023[196] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2024, the company repurchased 225,135 common shares at a weighted-average price of $38.07, with 1,774,865 shares remaining for repurchase Issuer Purchases of Equity Securities (Q2 2024) | Period | Total Shares Purchased | Weighted-Average Price Paid | Shares Remaining in Plan | | :--- | :--- | :--- | :--- | | April 2024 | 36,214 | $37.89 | 1,963,786 | | May 2024 | 29,323 | $38.00 | 1,934,463 | | June 2024 | 159,598 | $38.13 | 1,774,865 | | Total | 225,135 | $38.07 | 1,774,865 | Item 5. Other Information No officer or director adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2024 - No officer or director adopted or terminated a Rule 10b5-1 trading plan or other non-Rule 10b5-1 trading arrangement during the quarter[203]