ENTERPRISE FINANCIAL SERVICES CORP Q3 FY2024 earnings call

• Strong financial performance continued with EPS of $1.32, comparing favorably to prior periods. - Net interest income increased, and net interest margin was stable at 4.7% due to a stable deposit base and appropriate pricing. - Loan growth was $80 million, with pent-up demand expected in the future. - Deposit growth was a bright spot, with four of the last five quarters seeing expansion. - Credit quality was strong, with nonperforming assets decreasing. - Core conversion was completed, and recruiting efforts in higher growth markets were paying off. - Clients were showing more strategic conversations about expansion, succession, and acquisitions.

For the third quarter, Enterprise Financial Services Corporation earned net income of $50.6 million or $1.32 per diluted share. Net interest income increased $2.9 million to $143.5 million. Loans grew by $80 million or 3% on an annualized basis, with a $46 million decline in the agricultural portfolio. Deposit growth was strong, with customer deposits growing close to $200 million for the second quarter in a row. The net interest margin was stable at 4.7%. The adjusted return on assets was 1.32%, and pre-provision return on assets was 1.74%.

• Expect net interest margin compression moving forward, but plans to defend it. - Pretax income expected to decline less than $1 million to $2 million per 25 basis points of Fed fund changes. - Balance sheet growth to replace loss earnings from rate reductions. - In 2025, net interest margin initially above 4% then drifting into the high 3% range. - Deposit costs expected to improve by $5 million to $7 million before additional balance growth.

• Potential impact of declining interest rates on net interest margin. - Competitive pressures in specialty lending segments. - Cyclical nature of some specialty businesses (e.g., sponsored finance). - Impact of interest rate changes on fee income (e.g., tax credit income affected by SOFR movements).

Q: What was the makeup of the net charge-offs at 14 basis points of average loans?

A: The charge-offs were largely concentrated in one multifamily acquired loan in Southern California, a residual commercial real estate secured debt exposure of about $17 million charged down to $3 million.

Q: What is the balance of agricultural loans still left in the portfolio?

A: Reduced by about $50 million this quarter down to about $140 million in total.

Q: What is the outlook for net interest margin in the fourth quarter and beyond?

A: In the fourth quarter, margin may decline due to year-end seasonal deposit growth and remixing, with expectation to defend into the high 3.90%s with future rate cuts.

Q: What is the outlook for fee income, particularly tax credit income?

A: Tax credit income was $3.2 million this quarter, likely to be similar next quarter, short of the full year $10 million range due to SOFR movements.

Q: How is provisioning and reserve level expected to be maintained?

A: Expect to maintain a prudent reserve level, with provisioning being a function of loan growth and credit quality, aiming for 115 to 120 on new loans.