- Net Income: $45.4 million, $1.19 per diluted share.
- Adjusted Return on Assets: 1.27%.
- Pre-Provision Return on Assets: 1.74%.
- Net Interest Income: $140.5 million, increased by $2.8 million.
- Net Interest Margin: 4.19%.
- Loan Growth: Moderated due to lower line usage, higher paydowns, and planned rundown of the agricultural portfolio.
- Deposit Growth: $192 million increase in client deposits.
- Cost of Deposits: Increased by three basis points to 2.16%.
- Loan and Deposit Ratio: 90%.
- Tangible Common Equity Ratio: 9.18%.
- Adjusted Return on Average Tangible Common Equity: 14.06%.
- Tangible Book Value per Common Share: $35.2, a 10% annualized increase.
- Dividend Increase: $0.01 per share to $0.27 per share.
- Common Stock Repurchases: $8.5 million returned to shareholders.
- Classified Assets: Decreased by 8% or $15 million.
- Net Charge-Offs: Less than $1 million.
- Allowance for Credit Losses: 1.27% of total loans, $140 million total.
- Fee Income: $15 million, a $3 million increase from the first quarter.
- Noninterest Expense: $94 million, up from the first quarter.
- Core Efficiency Ratio: 58%, improved from 60% in the first quarter.
- Share Repurchases: 225,000 shares at an average price of $38.7, approximately $9 million.
- Adjusted EPS: $1.21 per share, a $0.14 increase over the first quarter.
Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Enterprise Financial Services Corp (EFSC, Financial) reported a net income of $45.4 million, or $1.19 per diluted share, for the second quarter.
- Net interest income increased by $2.8 million to $140.5 million, reflecting strong performance despite challenging conditions.
- Deposit growth was impressive, with client deposits increasing by $192 million in the second quarter.
- The company maintained a strong balance sheet with a tangible common equity ratio of 9.18% and an adjusted return on average tangible common equity of 14.06%.
- Asset quality improved, with classified assets decreasing by 8% and net charge-offs remaining nominal at less than $1 million.
Negative Points
- Loan growth moderated due to lower line usage, higher paydowns, and the planned rundown of the agricultural portfolio.
- Nonperforming assets increased slightly to 33 basis points of total assets from 30 basis points at the end of March.
- The company faces potential margin compression with anticipated rate cuts, which could impact net interest income.
- There were some migrations of relationships from pass rating into special mention, indicating temporary impairments in cash flow or liquidity.
- Core conversion-related expenses were $1.3 million in the second quarter, with additional costs expected in the third and fourth quarters.
Q & A Highlights
Q: Can you provide an update on some of the larger non-accruals, particularly the St. Louis office loan?
A: The St. Louis office CRE building is under contract and has passed all due diligence periods. We expect to close on the sale of that asset in the third quarter. Additionally, two agricultural relationships totaling $8.5 million have seen significant progress, with one being paid off in full and the other receiving a 20% principal curtailment. (Douglas Bauche, Chief Credit Officer)
Q: How do you see the margin evolving in the second half of the year, especially considering potential rate cuts?
A: We expect the margin to be stable, with less than five basis points of compression per quarter. The strong DDA growth in the second quarter has helped abate repricing pressure earlier than expected. While we anticipate some interest-bearing growth, the overall sentiment has improved, and deposit generation feels normal again. (Keene Turner, Chief Financial Officer)
Q: What is the timeline and cost outlook for the core conversion?
A: We expect to incur similar core conversion-related expenses in the third quarter, around $1.3 million, with some additional costs in the fourth quarter. The total expected cost is between $4 million to $5 million. The early incurrence of these costs indicates that we are ahead of schedule and well-prepared. (Keene Turner, Chief Financial Officer)
Q: Can you provide more details on the loan growth and payoffs in the last quarter?
A: Payoffs were driven by three main factors: self-managed reductions in the agricultural book, rebalancing in the life insurance premium finance due to higher rates, and normal course of business payoffs. We expect production to outpace these payoffs going forward, and we are confident in achieving mid to high single-digit balance sheet growth. (Scott Goodman, President of Enterprise Bank & Trust)
Q: What is the outlook for fee income, particularly the tax credit income?
A: We expect the tax credit income to be around $10 million annually, with potential for slight improvement. The second quarter results were strong, and we feel good about the setup for the third and fourth quarters. (Keene Turner, Chief Financial Officer)
Q: How do you view the overall health of the C&I portfolio?
A: We saw some migration of relationships from pass rating to special mention, but there are no significant trends or concerns. The impairments are temporary, and we have appropriate plans in place to see improvements in the coming quarters. (Douglas Bauche, Chief Credit Officer)
Q: What is the expected impact of potential rate cuts on the margin?
A: Each quarter-point reduction in Fed funds is expected to result in 5 to 10 basis points of margin loss or $2 million to $3 million of quarterly net interest income. However, the impact will moderate with additional cuts, and we expect less net interest margin compression after the initial one or two cuts. (Keene Turner, Chief Financial Officer)
Q: How do you see the runoff of the agricultural portfolio progressing?
A: We have had good success early on, with $40 million to $50 million expected to run off in the next couple of quarters. Some portions of the portfolio may take longer to exit, but we are confident in managing this transition effectively. (Scott Goodman, President of Enterprise Bank & Trust)
Q: What is the outlook for non-interest expenses in the second half of the year?
A: We expect a sequential increase of $2 million to $3 million in non-interest expenses from Q2 to Q3, driven by additional investments in people and growth in deposit verticals. The overall expense levels are manageable and aligned with our growth strategies. (Keene Turner, Chief Financial Officer)
Q: How do you view the current level of the reserve coverage?
A: The reserve coverage is sustainable at the current level, given the strong profitability and capital levels. We are being prudent in maintaining a well-covered position, especially considering the higher rate environment. (Keene Turner, Chief Financial Officer)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
