Enterprise Financial Services Corp Q2 FY2024 earnings call

• Jim Lally started by highlighting strong second quarter results, including expanded margin, growth in net interest income, positive operating leverage, and compounding tangible book value per share. - Discussed diversification of business model, with net interest income supported by a stable deposit base and appropriate loan origination. - Loan growth moderated but strong origination activity expected in the second half. Deposit growth of $192 million was a bright spot. - Balance sheet well positioned with stable capital levels. Credit quality improved with classified assets decreasing and net charge-offs nominal. - On track to convert to new core system, with recruiting efforts paying off in higher growth markets. - Client sentiment noted conservative posture regarding loan growth ahead of Fed cuts and election, but supply chain issues and wage pressure improved. - CRE discussions increasing in higher growth markets, expecting closings late 2024 and into 2025.

For the second quarter, Enterprise Financial Services Corp. earned net income of $45.4 million or $1.19 per diluted share. Net interest income increased $2.8 million to $140.5 million, with a net interest margin of 4.19%. Loan growth moderated in the quarter due to lower line usage, higher pay downs, and planned rundown of the agricultural portfolio. Deposit growth was a bright spot, with client deposits growing by $192 million. The loan to deposit ratio remained at 90% and DDA level improved to 32% of total deposits. Revenue contribution: Net interest income was a significant component, with deposit growth aiding the net interest margin.

• Confident in high single-digit balance sheet growth achievable. - Normal second half strength in loan originations expected. - Margin expected to be stable with potential slight drift, with pre-tax income expected to decline by $1 million to $2 million for every 25 basis point Fed fund change initially, but mid-to-high single-digit growth to replace lost earnings from rate cuts. - Expect deposit rates to be sticky initially with rate cuts, but more deliberate in adjusting deposit rates with additional cuts.

• Economic environment and interest rate changes could impact margin and earnings. - Continued moderation in loan growth due to client conservatism and potential payoffs. - Agricultural portfolio runoff could continue to impact loan growth if not managed properly. - Competition in certain business lines like Life Insurance Premium Finance could affect growth.

Q: Relates to credit side, any update on larger non-accruals?

A: Doug Bauche stated the St. Louis office CRE building is under contract and expected to close in third quarter. Non-performers at end of Q2 were two agricultural relationships, one $2.5 million paid in full and another $6 million with 20% principal curtailment.

Q: On margin, impact of rate cuts?

A: Keene Turner said initially each quarter point reduction in Fed funds generally results in 5 to 10 basis points margin loss or $2 million to $3 million net interest income loss quarterly. Expect deposit rates to be sticky initially, with less net interest margin compression with additional cuts.

Q: Loan growth payoffs, expected trend?

A: Scott Goodman said payoffs in three categories (self-managed ag book, expected payoffs in Life Insurance Premium, normal course of business) and not a long-term headwind, with production expected to outpace payoffs going forward.

Q: Expenses outlook for back half?

A: Keene Turner said second half reset with favorable run rate, additional working day in third quarter, investments in people, and deposit verticals growth leading to $2 million to $3 million increase sequentially from 2Q to 3Q.

Q: Fee income and credit health on C&I?

A: Keene Turner said second quarter fee income clean with modest tax credit contribution. Doug Bauche stated no real concerns in C&I portfolio, with migrations of relationships due to temporary cash flow or liquidity issues but appropriate plans in place to improve.