Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2024.
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission file number 001-15373
ENTERPRISE FINANCIAL SERVICES CORP
Incorporated in the State of Delaware
I.R.S. Employer Identification # 43-1706259
Address: 150 North Meramec
Clayton, MO63105
Telephone: (314) 725-5500
___________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
EFSC
Nasdaq Global Select Market
Depositary Shares, each representing a 1/40th interest in a share of 5.00% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A
EFSCP
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ☐ No ☒
As of April 24, 2024, the Registrant had 37,491,713 shares of outstanding common stock, $0.01 par value per share.
This document is also available through our website at http://www.enterprisebank.com.
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
The acronyms and abbreviations identified below are used in various sections of this Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Item 2 and the Condensed Consolidated Financial Statements and the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
ACL
Allowance for Credit Losses
Federal Reserve
Federal Reserve Board
ASC
Accounting Standards Codification
FHLB
Federal Home Loan Bank
ASU
Accounting Standards Update
GAAP
Generally Accepted Accounting Principles (United States)
Bank
Enterprise Bank & Trust
GDP
Gross Domestic Product
C&I
Commercial and Industrial
ICE
The Intercontinental Exchange
CCB
Capital Conservation Buffer
LIBOR
London Interbank Offered Rate
CECL
Current Expected Credit Loss
NIM
Net Interest Margin
Company
Enterprise Financial Services Corp and Subsidiaries
NM
Not meaningful
CRE
Commercial Real Estate
PPP
Paycheck Protection Program
EFSC
Enterprise Financial Services Corp and Subsidiaries
SBA
Small Business Administration
Enterprise
Enterprise Financial Services Corp and Subsidiaries
SEC
Securities and Exchange Commission
FASB
Financial Accounting Standards Board
SOFR
Secured Overnight Financing Rate
FDIC
Federal Deposit Insurance Corporation
We, Us, Our
Enterprise Financial Services Corp and Subsidiaries
PART I - ITEM 1 - FINANCIAL STATEMENTS
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
($ in thousands, except share data)
March 31, 2024
December 31, 2023
Assets
Cash and due from banks
$
157,697
$
193,275
Federal funds sold
1,045
2,880
Interest-earning deposits
210,678
236,874
Total cash and cash equivalents
369,420
433,029
Interest-earning deposits greater than 90 days
4,228
3,856
Securities available-for-sale
1,611,883
1,618,273
Securities held-to-maturity, net
758,017
750,434
Loans held-for-sale
610
359
Loans
11,028,492
10,884,118
Allowance for credit losses on loans
(135,498)
(134,771)
Total loans, net
10,892,994
10,749,347
Other investments
74,077
66,195
Fixed assets, net
44,382
42,681
Goodwill
365,164
365,164
Intangible assets, net
11,271
12,318
Other assets
481,292
476,934
Total assets
$
14,613,338
$
14,518,590
Liabilities and Shareholders' Equity
Noninterest-bearing demand accounts
$
3,805,334
$
3,958,743
Interest-bearing demand accounts
2,956,282
2,950,259
Money market accounts
3,430,454
3,399,280
Savings accounts
576,248
595,175
Certificates of deposit:
Brokered
659,005
482,759
Customer
826,378
790,155
Total deposits
12,253,701
12,176,371
Subordinated debentures and notes
156,124
155,984
FHLB advances
125,000
—
Other borrowings
195,246
297,829
Other liabilities
151,542
172,338
Total liabilities
$
12,881,613
$
12,802,522
Commitments and contingent liabilities (Note 5)
Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 75,000 shares issued and outstanding, respectively ($1,000 per share liquidation preference)
71,988
71,988
Common stock, $0.01 par value; 75,000,000 shares authorized; 37,515,186 and 37,416,028 shares issued and outstanding, respectively
375
374
Additional paid in capital
995,969
995,208
Retained earnings
778,784
749,513
Accumulated other comprehensive loss, net
(115,391)
(101,015)
Total shareholders' equity
1,731,725
1,716,068
Total liabilities and shareholders' equity
$
14,613,338
$
14,518,590
The accompanying notes are an integral part of these Consolidated Financial Statements.
1
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
Three months ended March 31,
($ in thousands, except per share data)
2024
2023
Interest income:
Loans
$
186,564
$
152,606
Debt securities:
Taxable
11,419
9,286
Nontaxable
5,765
5,597
Interest-earning deposits
3,569
1,195
Dividends on equity securities
406
349
Total interest income
207,723
169,033
Interest expense:
Deposits
64,473
24,661
Subordinated debentures and notes
2,484
2,409
FHLB advances
1,029
1,332
Other borrowings
2,009
1,102
Total interest expense
69,995
29,504
Net interest income
137,728
139,529
Provision for credit losses
5,756
4,183
Net interest income after provision for credit losses
131,972
135,346
Noninterest income:
Deposit service charges
4,423
4,128
Wealth management revenue
2,544
2,516
Card services revenue
2,412
2,338
Tax credit income (loss)
(2,190)
1,813
Other income
4,969
6,103
Total noninterest income
12,158
16,898
Noninterest expense:
Employee compensation and benefits
45,262
42,503
Deposit costs
20,277
12,720
Occupancy
4,326
4,061
Data processing
4,339
3,710
Professional fees
1,435
1,631
Other expense
17,862
16,358
Total noninterest expense
93,501
80,983
Income before income tax expense
50,629
71,261
Income tax expense
10,228
15,523
Net income
$
40,401
$
55,738
Dividends on preferred stock
938
938
Net income available to common shareholders
$
39,463
$
54,800
Earnings per common share
Basic
$
1.05
$
1.47
Diluted
1.05
1.46
The accompanying notes are an integral part of these Consolidated Financial Statements.
2
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Three months ended March 31,
($ in thousands)
2024
2023
Net income
$
40,401
$
55,738
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on available-for-sale securities
(11,073)
23,978
Reclassification of gain on the sale of available-for-sale securities
—
(285)
Reclassification of gain on held-to-maturity securities
(626)
(638)
Change in unrealized gain (loss) on cash flow hedges
(2,942)
1,275
Reclassification of loss on cash flow hedges
265
27
Total other comprehensive income (loss), net of tax
(14,376)
24,357
Total comprehensive income
$
26,025
$
80,095
The accompanying notes are an integral part of these Consolidated Financial Statements.
3
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
Three months ended March 31, 2024
Preferred Stock
Common Stock
($ in thousands, except per share data)
Shares
Amount
Shares
Amount
Additional Paid in Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Total Shareholders’ Equity
Balance at December 31, 2023
75
$
71,988
37,416
$
374
$
995,208
$
749,513
$
(101,015)
$
1,716,068
Net income
—
—
—
—
—
40,401
—
40,401
Other comprehensive loss
—
—
—
—
—
—
(14,376)
(14,376)
Common stock dividends ($0.25 per share)
—
—
—
—
—
(9,378)
—
(9,378)
Preferred stock dividends ($12.50 per share)
—
—
—
—
—
(938)
—
(938)
Issuance under equity compensation plans, net
—
—
99
1
(1,614)
(814)
—
(2,427)
Share-based compensation
—
—
—
—
2,375
—
—
2,375
Balance at March 31, 2024
75
$
71,988
37,515
$
375
$
995,969
$
778,784
$
(115,391)
$
1,731,725
Three months ended March 31, 2023
Preferred
Common
($ in thousands, except per share data)
Shares
Amount
Shares
Amount
Additional Paid in Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Total Shareholders’ Equity
Balance at December 31, 2022
75
$
71,988
37,253
$
373
982,660
597,574
(130,332)
1,522,263
Net income
—
—
—
—
—
55,738
—
55,738
Other comprehensive income
—
—
—
—
—
—
24,357
24,357
Common stock dividends ($0.25 per share)
—
—
—
—
—
(9,328)
—
(9,328)
Preferred stock dividends ($12.50 per share)
—
—
—
—
—
(938)
—
(938)
Issuance under equity compensation plans, net
—
—
58
—
(848)
(893)
—
(1,741)
Share-based compensation
—
—
—
—
2,469
—
—
2,469
Balance at March 31, 2023
75
$
71,988
37,311
$
373
$
984,281
$
642,153
$
(105,975)
$
1,592,820
The accompanying notes are an integral part of these Consolidated Financial Statements.
4
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31,
($ in thousands)
2024
2023
Cash flows from operating activities:
Net income
$
40,401
$
55,738
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation
1,253
1,274
Provision for credit losses
5,756
4,183
Deferred income taxes
1,234
2,517
Net amortization of discount/premiums on debt securities
1,027
1,070
Net amortization on loan discount/premiums
822
1,606
Amortization of intangible assets
1,047
1,239
Amortization of servicing assets
316
493
Mortgage loans originated-for-sale
(7,035)
(2,918)
Proceeds from mortgage loans sold
6,818
3,884
Loss (gain) on:
Sale of investment securities
—
(381)
Sale of SBA loans
(1,394)
(501)
Sale of other real estate
2
(90)
Sale of state tax credits
(363)
(91)
Share-based compensation
2,375
2,469
Net change in other assets and liabilities
(22,370)
(1,316)
Net cash provided by operating activities
29,889
69,176
Cash flows from investing activities:
Net increase in loans
(177,362)
(285,158)
Proceeds received from:
Sale of debt securities, available-for-sale
—
28,741
Paydown or maturity of debt securities, available-for-sale
70,141
65,725
Paydown or maturity of debt securities, held-to-maturity
1,483
2,037
Redemption of other investments
26,409
41,109
Sale of SBA loans
24,650
9,502
Sale of state tax credits held for sale
2,031
504
Sale of other real estate
207
360
Sale of fixed assets
—
43
Payments for the purchase of:
Available-for-sale debt securities
(78,702)
(86,737)
Held-to-maturity debt securities
(10,265)
(14,602)
Other investments
(35,870)
(39,123)
State tax credits held for sale
(270)
(21)
Fixed assets
(2,954)
(681)
Net cash used in investing activities
(180,502)
(278,301)
5
Three months ended March 31,
($ in thousands)
2024
2023
Cash flows from financing activities:
Net decrease in noninterest-bearing deposit accounts
(153,409)
(450,209)
Net increase in interest-bearing deposit accounts
230,739
775,695
Net increase in FHLB advances
125,000
—
Repayments of notes payable
(11,429)
(1,429)
Net decrease in other borrowings
(91,154)
(109,201)
Cash dividends paid on common stock
(9,378)
(9,328)
Cash dividends paid on preferred stock
(938)
(938)
Other
(2,427)
(1,741)
Net cash provided by financing activities
87,004
202,849
Net decrease in cash and cash equivalents
(63,609)
(6,276)
Cash and cash equivalents, beginning of period
433,029
291,359
Cash and cash equivalents, end of period
$
369,420
$
285,083
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
70,796
$
27,486
Income taxes
22
—
Noncash investing and financing transactions:
Transfer to other bank owned assets
2,939
—
Right-of-use assets obtained in exchange for lease obligations
985
564
The accompanying notes are an integral part of these Consolidated Financial Statements.
6
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used by the Company in the preparation of the condensed consolidated financial statements are summarized below:
Business and Consolidation
Enterprise is a financial holding company that provides a full range of banking and wealth management services to individuals and corporate customers primarily located in Arizona, California, Florida, Kansas, Missouri, Nevada, and New Mexico through its banking subsidiary, Enterprise Bank & Trust.
Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2024. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC.
Basis of Financial Statement Presentation
The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. Except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated.
In the opinion of management, the consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of the statements of financial position, results of operations, and cash flow for the interim periods.
Recent Accounting Pronouncements
FASB ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.ASU 2022-03 was issued in June 2022 to (1) clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) amend a related illustrative example, and (3) introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The adoption of ASU 2022-03 did not have a material effect on the consolidated financial statements.
FASB ASU 2023-02, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU 2023-02 was issued in March 2023 to allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits. If certain conditions are met, a reporting entity may elect to account for its tax equity investments by using the proportional amortization method regardless of the program from which it receives income tax credits, instead of only low-income-housing tax credit (“LIHTC”) structures. This amendment also eliminates certain LIHTC-specific guidance
7
aligning the accounting with other equity investments in tax credit structures. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The adoption of ASU 2023-02 did not have a material effect on the consolidated financial statements.
FASB ASU 2023-07, Improvements to Reportable Segment Disclosures. ASU 2023-07 was issued in November 2023 to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment disclosures. The amendments in this update require annual and interim disclosures on significant segment expenses that are regularly provided to the chief operating decision maker and require annual and interim disclosures on “other segment items” that comprise the difference between segment revenue less segment expense compared to the reported measure of segment profit or loss. In addition, the amendments will require all annual disclosures that are currently required to be reported on an interim basis and requires disclosure of the title and position of the chief operating decision maker and how that position uses the information to assess segment performance and the allocation of resources. ASU 2023-07 also requires entities that have a single reportable segment, such as the Company, to provide all disclosures required in this update and the existing segment disclosures in Topic 280. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is evaluating the accounting and disclosure requirements of ASU 2023-07 and does not expect them to have a material effect on the consolidated financial statements.
FASB ASU 2023-09, Income Tax Disclosures. ASU 2023-09 was issued in December 2023 to require annual disclosures on specific categories in the income tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. Annual disclosures are required on income taxes paid, including the amounts paid for federal, state and foreign taxes and the amount paid in individual jurisdictions if the amount is equal to or greater than 5% of total income taxes paid (net of refunds received). Additional annual disclosures are required on pre-tax income from continuing operations and income tax expense, disaggregated by domestic and foreign amounts. The amendments in this update are effective for fiscal years beginning after December 15, 2024. The Company is evaluating the accounting and disclosure requirements of ASU 2023-09 and does not expect them to have a material effect on the consolidated financial statements.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share data is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method.
The following table presents a summary of per common share data and amounts for the periods indicated.
Three months ended March 31,
(in thousands, except per share data)
2024
2023
Net income available to common shareholders
$
39,463
$
54,800
Weighted average common shares outstanding
37,490
37,305
Additional dilutive common stock equivalents
107
182
Weighted average diluted common shares outstanding
37,597
37,487
Basic earnings per common share:
$
1.05
$
1.47
Diluted earnings per common share:
1.05
1.46
For the three months ended March 31, 2024 and 2023, common stock equivalents of approximately 581,000 and 311,000, respectively, were excluded from the earnings per share calculations because their effect would have been anti-dilutive.
8
NOTE 3 - INVESTMENTS
The following tables present the amortized cost, gross unrealized gains and losses, allowance for credit losses and fair value of securities available for sale and held to maturity:
March 31, 2024
($ in thousands)
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Available-for-sale securities:
Obligations of U.S. Government-sponsored enterprises
$
316,638
$
146
$
(20,982)
$
295,802
Obligations of states and political subdivisions
500,206
41
(77,268)
422,979
Agency mortgage-backed securities
767,508
393
(63,710)
704,191
U.S. Treasury bills
184,367
8
(3,275)
181,100
Corporate debt securities
8,750
—
(939)
7,811
Total securities available for sale
$
1,777,469
$
588
$
(166,174)
$
1,611,883
Held-to-maturity securities:
Obligations of states and political subdivisions
$
583,972
$
5,039
$
(53,410)
$
535,601
Agency mortgage-backed securities
51,276
—
(5,779)
45,497
Corporate debt securities
123,119
230
(9,673)
113,676
Total securities held-to-maturity
$
758,367
$
5,269
$
(68,862)
$
694,774
Allowance for credit losses
(350)
Total securities held-to-maturity, net
$
758,017
December 31, 2023
($ in thousands)
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Available-for-sale securities:
Obligations of U.S. Government-sponsored enterprises
$
316,511
$
303
$
(20,368)
$
296,446
Obligations of states and political subdivisions
500,881
57
(68,767)
432,171
Agency mortgage-backed securities
758,283
1,181
(59,083)
700,381
U.S. Treasury Bills
184,709
62
(3,070)
181,701
Corporate debt securities
8,750
—
(1,176)
7,574
Total securities available for sale
$
1,769,134
$
1,603
$
(152,464)
$
1,618,273
Held-to-maturity securities:
Obligations of states and political subdivisions
$
575,699
$
7,078
$
(47,461)
$
535,316
Agency mortgage-backed securities
52,100
—
(5,424)
46,676
Corporate debt securities
123,420
216
(8,981)
114,655
Total securities held to maturity
$
751,219
$
7,294
$
(61,866)
$
696,647
Allowance for credit losses
(785)
Total securities held-to-maturity, net
$
750,434
The balance of held-to-maturity securities in the “Amortized Cost” column in the table above includes a cumulative net unamortized unrealized gain of $13.3 million and $14.1 million at March 31, 2024 and December 31, 2023, respectively. Such amounts are amortized over the remaining life of the securities.
9
At March 31, 2024 and December 31, 2023, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government agencies and sponsored enterprises. Securities of $1.2 billion and $1.6 billion at March 31, 2024 and December 31, 2023, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions, in addition to collateral securing borrowing bases with the FHLB and the Federal Reserve.
The amortized cost and estimated fair value of debt securities at March 31, 2024, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately five years.
Available for sale
Held to maturity
($ in thousands)
Amortized Cost
Estimated Fair Value
Amortized Cost
Estimated Fair Value
Due in one year or less
$
163,297
$
161,711
$
785
$
783
Due after one year through five years
303,371
284,316
103,383
96,428
Due after five years through ten years
160,265
141,132
176,180
169,432
Due after ten years
383,028
320,533
426,743
382,634
Agency mortgage-backed securities
767,508
704,191
51,276
45,497
$
1,777,469
$
1,611,883
$
758,367
$
694,774
The following tables presents a summary of available-for-sale investment securities in an unrealized loss position:
March 31, 2024
Less than 12 months
12 months or more
Total
($ in thousands)
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Obligations of U.S. Government-sponsored enterprises
$
22,611
$
72
$
251,397
$
20,910
$
274,008
$
20,982
Obligations of states and political subdivisions
479
2
420,164
77,266
420,643
77,268
Agency mortgage-backed securities
125,634
1,240
531,490
62,470
657,124
63,710
U.S. Treasury bills
59,562
109
109,451
3,166
169,013
3,275
Corporate debt securities
—
—
7,811
939
7,811
939
$
208,286
$
1,423
$
1,320,313
$
164,751
$
1,528,599
$
166,174
December 31, 2023
Less than 12 months
12 months or more
Total
($ in thousands)
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Obligations of U.S. Government-sponsored enterprises
$
25,886
$
85
$
247,027
$
20,283
$
272,913
$
20,368
Obligations of states and political subdivisions
1,168
163
428,171
68,604
429,339
68,767
Agency mortgage-backed securities
58,249
417
540,032
58,666
598,281
59,083
U.S. Treasury bills
41,857
49
103,588
3,021
145,445
3,070
Corporate debt securities
—
—
7,574
1,176
7,574
1,176
$
127,160
$
714
$
1,326,392
$
151,750
$
1,453,552
$
152,464
The unrealized losses at both March 31, 2024 and December 31, 2023 were attributable primarily to changes in market interest rates after the securities were purchased. At each of March 31, 2024 and December 31, 2023, the Company did not have an allowance for credit losses on available-for-sale securities.
10
Accrued interest on held-to-maturity debt securities totaled $7.1 million and $6.5 million at March 31, 2024 and December 31, 2023, respectively, and is excluded from the estimate of expected credit losses. The estimate of expected credit losses considers historical credit loss information adjusted for current conditions and reasonable and supportable forecasts. The ACL on held-to-maturity securities was $0.4 million at March 31, 2024 and $0.8 million at December 31, 2023.
There were no sales of available-for-sale securities during the three months ended March 31, 2024. The Company sold $28.4 million of available-for-sale securities during the three months ended March 31, 2023 for a gain of $0.4 million.
Other Investments
At March 31, 2024 and December 31, 2023, other investments totaled $74.1 million and $66.2 million, respectively. As a member of the FHLB system administered by the Federal Housing Finance Agency, the Bank is required to maintain a minimum investment in capital stock with the FHLB consisting of membership stock and activity-based stock. The FHLB capital stock of $14.3 million at March 31, 2024 and $7.8 million at December 31, 2023 is recorded at cost, which represents redemption value, and is included in other investments in the consolidated balance sheets. The remaining amounts in other investments primarily include investments in Small Business Investment Companies, Community Development Financial Institutions, private equity investments, and the Company’s investment in unconsolidated trusts used to issue trust preferred securities to third parties.
11
NOTE 4 - LOANS
The following table presents a summary of loans by category:
($ in thousands)
March 31, 2024
December 31, 2023
Commercial and industrial
$
4,768,777
$
4,674,056
Real estate:
Commercial - investor owned
2,448,674
2,452,402
Commercial - owner occupied
2,349,292
2,344,117
Construction and land development
820,249
760,122
Residential
366,934
371,995
Total real estate loans
5,985,149
5,928,636
Other
278,611
285,653
Loans, before unearned loan fees
11,032,537
10,888,345
Unearned loan fees, net
(4,045)
(4,227)
Loans, including unearned loan fees
$
11,028,492
$
10,884,118
The loan balance includes a net premium on acquired loans of $9.0 million and $9.6 million at March 31, 2024 and December 31, 2023, respectively. At March 31, 2024 and December 31, 2023, loans and securities of $5.4 billion and $4.8 billion, respectively, were pledged to FHLB and the Federal Reserve Bank.
Accrued interest totaled $71.2 million and $66.7 million at March 31, 2024 and December 31, 2023, respectively, and was reported in “Other Assets” on the consolidated balance sheets.
SBA 7(a) guaranteed loans sold during the three months ended March 31, 2024 totaled $23.1 million, resulting in a gain on sale of $1.4 million. SBA 7(a) guaranteed loans sold during the three months ended March 31, 2023 totaled $8.8 million, resulting in a gain on sale of $0.5 million.
No consumer mortgage loans secured by residential real estate were in the process of foreclosure at March 31, 2024, compared to $1.0 million at December 31, 2023.
A summary of the activity, by loan category, in the ACL on loans for the three months ended March 31, 2024 and 2023 is as follows:
($ in thousands)
Commercial and industrial
CRE - investor owned
CRE - owner occupied
Construction and land development
Residential real estate
Other
Total
Allowance for credit losses on loans:
Balance at December 31, 2023
$
58,886
$
31,280
$
23,405
$
10,198
$
6,142
$
4,860
$
134,771
Provision (benefit) for credit losses
4,978
140
1,500
(379)
406
(54)
6,591
Charge-offs
(5,353)
(305)
(112)
—
(497)
(383)
(6,650)
Recoveries
203
81
14
6
428
54
786
Balance at March 31, 2024
$
58,714
$
31,196
$
24,807
$
9,825
$
6,479
$
4,477
$
135,498
($ in thousands)
Commercial and industrial
CRE - investor owned
CRE - owner occupied
Construction and land development
Residential real estate
Other
Total
Allowance for credit losses on loans:
Balance at December 31, 2022
$
53,835
$
36,191
$
22,752
$
11,444
$
7,928
$
4,782
$
136,932
Provision (benefit) for credit losses
5,083
222
(440)
(2,578)
(1,151)
(37)
1,099
Charge-offs
(707)
(170)
—
(9)
(102)
(192)
(1,180)
Recoveries
938
23
16
32
322
113
1,444
Balance at March 31, 2023
$
59,149
$
36,266
$
22,328
$
8,889
$
6,997
$
4,666
$
138,295
12
The ACL on sponsor finance loans, which is included in the categories above, represented $22.7 million and $23.0 million, respectively, as of March 31, 2024 and December 31, 2023.
The CECL methodology incorporates various economic scenarios. The Company utilizes three forecasts in the model: Moody’s baseline, a stronger near-term growth upside and a moderate recession downside forecast. The Company weights these scenarios at 40%, 30%, and 30%, respectively, which added approximately $12.8 million to the ACL on loans over the baseline model at March 31, 2024. The baseline forecast incorporates an expectation that the federal funds rate has peaked at the range of 5.25% to 5.50% and will begin falling in the latter half of 2024. It is also assumed that the bank failures in early 2023 were not an indication of a broader problem in the industry. The Company has also recognized various risks posed by loans in certain segments, including the commercial office and agricultural sectors, by allocating additional reserves to those segments. Some of the key risks to the forecasts that could result in future provision for credit losses are market reactions to the Federal Reserve policy actions that could push the economy into a recession, persistently higher inflation, tightening in the credit markets, and further weakness in the financial system.
In addition to the CECL methodology, the Company incorporates qualitative adjustments into the ACL on loans to capture credit risks inherent within the loan portfolio that are not captured in the CECL model. Included in these risks are 1) changes in lending policies and procedures, 2) actual and expected changes in business and economic conditions, 3) changes in the nature and volume of the portfolio, 4) changes in lending management, 5) changes in volume and the severity of past due loans, 6) changes in the quality of the loan review system, 7) changes in the value of underlying collateral, 8) the existence and effect of concentrations of credit and 9) other factors such as the regulatory, legal and competitive environments and events such as natural disasters and pandemics. At March 31, 2024, the ACL on loans included a qualitative adjustment of approximately $40.3 million. Of this amount, approximately $14.4 million was allocated to Sponsor Finance loans due to their mostly unsecured nature.
The current year-to-date gross charge-offs by loan class and year of origination is presented in the following tables:
March 31, 2024
Term Loans by Origination Year
($ in thousands)
2023
2022
2021
2020
Prior
Revolving Loans Converted to Term Loans
Revolving Loans
Total
Commercial and industrial
$
1
$
1,413
$
—
$
54
$
244
$
—
$
3,544
$
5,256
Real estate:
Commercial - investor owned
—
—
160
—
145
—
—
305
Commercial - owner occupied
—
—
—
10
102
—
—
112
Residential
—
94
—
—
382
—
21
497
Other
—
—
58
—
80
2
100
240
Total charge-offs by origination year
$
1
$
1,507
$
218
$
64
$
953
$
2
$
3,665
$
6,410
Total gross charge-offs by performing status
240
Total gross charge-offs
$
6,650
13
December 31, 2023
Term Loans by Origination Year
($ in thousands)
2023
2022
2021
2020
2019
Prior
Revolving Loans Converted to Term Loans
Revolving Loans
Total
Commercial and industrial
$
600
$
2,999
$
1,940
$
2,539
$
—
$
—
$
12,533
$
15,178
$
35,789
Real estate:
Commercial - investor owned
—
—
170
—
4,692
7
—
—
4,869
Construction and land development
—
—
—
—
—
9
—
—
9
Residential
—
—
—
—
—
480
176
—
656
Other
—
3
459
—
—
319
12
—
793
Total charge-offs by origination year
$
600
$
3,002
$
2,569
$
2,539
$
4,692
$
815
$
12,721
$
15,178
$
42,116
Total gross charge-offs by performing status
1,099
Total gross charge-offs
$
43,215
The following tables present the recorded investment in nonperforming loans by category, excluding government guaranteed balances:
March 31, 2024
($ in thousands)
Nonaccrual
Loans over 90 days past due and still accruing interest
Total nonperforming loans
Nonaccrual loans with no allowance
Commercial and industrial
$
2,435
$
115
$
2,550
$
2,315
Real estate:
Commercial - investor owned
19,380
—
19,380
16,240
Commercial - owner occupied
12,481
—
12,481
8,333
Construction and land development
1,205
—
1,205
463
Other
—
26
26
—
Total
$
35,501
$
141
$
35,642
$
27,351
December 31, 2023
($ in thousands)
Nonaccrual
Loans over 90 days past due and still accruing interest
Total nonperforming loans
Nonaccrual loans with no allowance
Commercial and industrial
$
7,641
$
115
$
7,756
$
6,179
Real estate:
Commercial - investor owned
20,404
—
20,404
19,466
Commercial - owner occupied
12,972
363
13,335
9,010
Construction and land development
1,205
64
1,269
464
Residential
959
—
959
959
Other
—
5
5
—
Total
$
43,181
$
547
$
43,728
$
36,078
14
The nonperforming loan balances at March 31, 2024 and December 31, 2023 exclude government guaranteed balances of $9.6 million and $10.7 million, respectively.
Interest income recognized on nonaccrual loans was immaterial during the three months ended March 31, 2024 and 2023.
Collateral-dependent nonperforming loans by class of loan is presented as of the dates indicated:
March 31, 2024
Type of Collateral
($ in thousands)
Commercial Real Estate
Residential Real Estate
Blanket Lien
Other
Commercial and industrial
$
350
$
1,864
$
94
$
—
Real estate:
Commercial - investor owned
18,443
—
—
—
Commercial - owner occupied
3,973
1,518
5,793
—
Construction and land development
—
742
—
—
Total
$
22,766
$
4,124
$
5,887
$
—
December 31, 2023
Type of Collateral
($ in thousands)
Commercial Real Estate
Residential Real Estate
Blanket Lien
Other
Commercial and industrial
$
527
$
1,864
$
344
$
3,445
Real estate:
Commercial - investor owned
19,467
—
—
—
Commercial - owner occupied
5,904
1,638
1,831
—
Construction and land development
528
741
—
—
Residential
—
959
—
—
Total
$
26,426
$
5,202
$
2,175
$
3,445
The aging of the recorded investment in past due loans by class and category is presented as of the dates indicated.
March 31, 2024
($ in thousands)
30-89 Days Past Due
90 or More Days Past Due
Total Past Due
Current
Total
Commercial and industrial
$
20,996
$
4,131
$
25,127
$
4,743,650
$
4,768,777
Real estate:
Commercial - investor owned
1,657
18,395
20,052
2,428,622
2,448,674
Commercial - owner occupied
14,844
14,648
29,492
2,319,800
2,349,292
Construction and land development
973
1,675
2,648
817,601
820,249
Residential
1,112
—
1,112
365,822
366,934
Other
21
26
47
278,564
278,611
Loans, before unearned loan fees
$
39,603
$
38,875
$
78,478
$
10,954,059
$
11,032,537
Unearned loan fees, net
(4,045)
Total
$
11,028,492
15
December 31, 2023
($ in thousands)
30-89 Days Past Due
90 or More Days Past Due
Total Past Due
Current
Total
Commercial and industrial
$
3,445
$
9,037
$
12,482
$
4,661,574
$
4,674,056
Real estate:
Commercial - investor owned
1,905
18,395
20,300
2,432,102
2,452,402
Commercial - owner occupied
8,409
14,142
22,551
2,321,566
2,344,117
Construction and land development
770
1,908
2,678
757,444
760,122
Residential
1,620
959
2,579
369,416
371,995
Other
82
4
86
285,567
285,653
Loans, before unearned loan fees
$
16,231
$
44,445
$
60,676
$
10,827,669
$
10,888,345
Unearned loan fees, net
(4,227)
Total
$
10,884,118
The allowance for credit losses on loans incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination or acquisition. The starting point for the estimate of the allowance for credit losses on loans is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default and loss given default model to determine the allowance for credit losses on loans.
An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. The effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses on loans because of the measurement methodologies used to estimate the allowance.
The most common concession the Company provides to borrowers experiencing financial difficulty is a term extension. In limited circumstances, the Company may modify loans by providing principal forgiveness or an interest rate reduction. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses on loans. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses on loans.
In some cases, the Company will modify a loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as an interest rate reduction or principal forgiveness, may be granted.
The following tables show the recorded investment at the end of the reporting period for loans modified to borrowers experiencing financial difficulty, disaggregated by loan class and type of concession granted:
Term Extension
Payment Delay
Total
Three months ended
Three months ended
Three months ended
($ in thousands)
March 31, 2024
Percent of Total Loan Class
March 31, 2024
Percent of Total Loan Class
March 31, 2024
Percent of Total Loan Class
Commercial and industrial
$
44,641
0.94
%
$
567
0.01
%
$
45,208
0.95
%
Real estate:
Commercial - investor owned
8,409
0.34
%
—
—
%
8,409
0.34
%
Commercial - owner occupied
94
NM
—
—
%
94
NM
Residential
7,644
2.08
%
—
—
%
7,644
2.08
%
Total
$
60,788
$
567
$
61,355
16
Term Extension
Three months ended
($ in thousands)
March 31, 2023
Percent of Total Loan Class
Commercial and industrial
$
22,818
0.57
%
Real estate:
Construction and land development
1,201
0.18
%
Total
$
24,019
The following table summarizes the financial impacts of loan modifications made to borrowers experiencing financial difficulty and outstanding at the date indicated:
Weighted Average Term Extension (in months)
Payment Delay
Weighted Average Term Extension (in months)
Three months ended
Three months ended
($ in thousands)
March 31, 2024
March 31, 2023
Commercial and industrial
4
$
85
7
Real estate:
Commercial - investor owned
3
—
—
Commercial - owner occupied
3
—
—
Construction and land development
—
—
9
Residential
12
—
—
The following table shows the aging of the recorded investment in modified loans in the last 12 months by class at the date indicated:
March 31, 2024
($ in thousands)
Current
30-89 Days Past Due
90 or More Days Past Due
Total
Commercial and industrial
$
28,512
$
—
$
—
$
28,512
Real estate:
Commercial - investor owned
8,409
—
—
8,409
Commercial - owner occupied
94
—
—
94
Construction and land development
—
741
—
741
Residential
7,669
—
—
7,669
Other
—
—
—
—
Total
$
44,684
$
741
$
—
$
45,425
For the three months ended March 31, 2023, all loans were current under the modified terms.
17
The following table summarizes loans that experienced a default during the three months ended March 31, 2024, subsequent to being granted a modification in the preceding twelve months. All of these loans have been charged off during the current period. Default is defined as movement to nonperforming status, foreclosure or charge-off. Loans noted in the following table are categorized by type of original modification.
Term Extension
Three months ended
($ in thousands)
March 31, 2024
Percent of Total Loan Class
Commercial and industrial
$
1,000
0.02
%
Real estate:
Construction and land development
1,748
0.21
%
Other
4
NM
Total
$
2,752
During the three months ended March 31, 2023, no loans experienced a default subsequent to being granted a modification in the prior twelve months.
As of March 31, 2024, the Company allocated an immaterial amount in specific reserves to loans that have been restructured.
18
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, payment experience, credit documentation, and current economic factors among other factors. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
•Grades 1, 2, and 3 – Includes loans to borrowers with a continuous record of strong earnings, sound balance sheet condition and capitalization, ample liquidity with solid cash flow, and whose management team has experience and depth within their industry.
•Grade 4 – Includes loans to borrowers with positive trends in profitability, satisfactory capitalization and balance sheet condition, and sufficient liquidity and cash flow.
•Grade 5 – Includes loans to borrowers that may display fluctuating trends in sales, profitability, capitalization, liquidity, and cash flow.
•Grade 6 – Includes loans to borrowers where an adverse change or perceived weakness has occurred, but may be correctable in the near future. Alternatively, this rating category may also include circumstances where the borrower is starting to reverse a negative trend or condition, or has recently been upgraded from a 7, 8, or 9 rating.
•Grade 7 – Special Mention credits are borrowers that have experienced financial setback of a nature that is not determined to be severe or influence ‘ongoing concern’ expectations. Although possible, no loss is anticipated, due to strong collateral and/or guarantor support.
•Grade 8 – Substandard credits include those borrowers characterized by significant losses and sustained downward trends in balance sheet condition, liquidity, and cash flow. Repayment reliance may have shifted to secondary sources. Collateral exposure may exist and additional reserves may be warranted.
•Grade 9 – Doubtful credits include borrowers that may show deteriorating trends that are unlikely to be corrected. Collateral values may appear insufficient for full recovery, therefore requiring a partial charge-off, or debt renegotiation with the borrower. The borrower may have declared bankruptcy or bankruptcy is likely in the near term. All doubtful rated credits will be on non-accrual.
19
The recorded investment by risk category of the loans by class and year of origination is presented in the following tables as of the dates indicated:
March 31, 2024
Term Loans by Origination Year
($ in thousands)
2024
2023
2022
2021
2020
Prior
Revolving Loans Converted to Term Loans
Revolving Loans
Total
Commercial and industrial
Pass (1-6)
$
354,420
$
1,516,552
$
875,052
$
293,729
$
172,943
$
149,101
$
21,206
$
1,151,591
$
4,534,594
Special Mention (7)
14,069
41,417
5,911
1,876
370
874
4,320
17,911
86,748
Classified (8-9)
8,631
7,779
11,908
8,334
86
916
127
45,053
82,834
Total Commercial and industrial
$
377,120
$
1,565,748
$
892,871
$
303,939
$
173,399
$
150,891
$
25,653
$
1,214,555
$
4,704,176
Commercial real estate-investor owned
Pass (1-6)
$
96,302
$
455,256
$
543,177
$
482,141
$
296,298
$
373,990
$
6,905
$
52,655
$
2,306,724
Special Mention (7)
731
3,282
22,332
51,595
3,544
9,167
—
—
90,651
Classified (8-9)
8,409
—
937
42
16,912
6,771
—
—
33,071
Total Commercial real estate-investor owned
$
105,442
$
458,538
$
566,446
$
533,778
$
316,754
$
389,928
$
6,905
$
52,655
$
2,430,446
Commercial real estate-owner occupied
Pass (1-6)
$
81,541
$
398,179
$
465,440
$
482,241
$
294,024
$
464,931
$
4,619
$
31,104
$
2,222,079
Special Mention (7)
—
14,108
4,514
5,299
9,992
21,545
—
1,427
56,885
Classified (8-9)
1,189
2,924
3,741
1,128
3,055
32,475
5,057
—
49,569
Total Commercial real estate-owner occupied
$
82,730
$
415,211
$
473,695
$
488,668
$
307,071
$
518,951
$
9,676
$
32,531
$
2,328,533
Construction real estate
Pass (1-6)
$
76,195
$
290,998
$
317,302
$
90,908
$
31,100
$
4,581
$
9
$
4,458
$
815,551
Special Mention (7)
—
40
1,647
1,155
—
227
—
—
3,069
Classified (8-9)
—
741
580
—
—
475
—
—
1,796
Total Construction real estate
$
76,195
$
291,779
$
319,529
$
92,063
$
31,100
$
5,283
$
9
$
4,458
$
820,416
Residential real estate
Pass (1-6)
$
8,364
$
56,614
$
38,611
$
49,586
$
30,020
$
91,308
$
1,334
$
77,773
$
353,610
Special Mention (7)
—
335
586
214
69
1,709
—
583
3,496
Classified (8-9)
—
196
113
—
—
1,526
72
7,501
9,408
Total residential real estate
$
8,364
$
57,145
$
39,310
$
49,800
$
30,089
$
94,543
$
1,406
$
85,857
$
366,514
Other
Pass (1-6)
$
570
$
7,804
$
55,465
$
64,294
$
51,992
$
29,604
$
—
$
32,225
$
241,954
Special Mention (7)
—
4,418
—
10,000
—
—
—
9,712
24,130
Classified (8-9)
—
—
—
—
—
6
—
—
6
Total Other
$
570
$
12,222
$
55,465
$
74,294
$
51,992
$
29,610
$
—
$
41,937
$
266,090
Total loans classified by risk category
$
650,421
$
2,800,643
$
2,347,316
$
1,542,542
$
910,405
$
1,189,206
$
43,649
$
1,431,993
$
10,916,175
Total loans classified by performing status
112,317
Total loans
$
11,028,492
20
December 31, 2023
Term Loans by Origination Year
($ in thousands)
2023
2022
2021
2020
2019
Prior
Revolving Loans Converted to Term Loans
Revolving Loans
Total
Commercial and industrial
Pass (1-6)
$
1,567,738
$
1,052,462
$
345,292
$
194,972
$
123,425
$
71,205
$
12,163
$
1,108,233
$
4,475,490
Special Mention (7)
52,523
6,845
8,597
544
453
242
272
19,590
89,066
Classified (8-9)
12,824
19,306
1,833
812
339
363
508
45,830
81,815
Total Commercial and industrial
$
1,633,085
$
1,078,613
$
355,722
$
196,328
$
124,217
$
71,810
$
12,943
$
1,173,653
$
4,646,371
Commercial real estate-investor owned
Pass (1-6)
$
495,131
$
544,223
$
492,974
$
323,175
$
165,343
$
236,914
$
5,222
$
51,413
$
2,314,395
Special Mention (7)
3,626
22,725
51,851
1,657
164
5,526
—
—
85,549
Classified (8-9)
9,411
1,034
43
15,838
2,831
4,919
48
—
34,124
Total Commercial real estate-investor owned
$
508,168
$
567,982
$
544,868
$
340,670
$
168,338
$
247,359
$
5,270
$
51,413
$
2,434,068
Commercial real estate-owner occupied
Pass (1-6)
$
407,901
$
486,701
$
489,589
$
301,399
$
183,872
$
313,474
$
5,083
$
30,036
$
2,218,055
Special Mention (7)
13,739
2,521
4,652
10,492
5,439
15,833
—
1,493
54,169
Classified (8-9)
3,389
3,413
2,247
3,181
8,878
24,857
5,056
—
51,021
Total Commercial real estate-owner occupied
$
425,029
$
492,635
$
496,488
$
315,072
$
198,189
$
354,164
$
10,139
$
31,529
$
2,323,245
Construction real estate
Pass (1-6)
$
292,689
$
325,010
$
96,426
$
30,956
$
1,413
$
3,408
$
10
$
3,700
$
753,612
Special Mention (7)
42
2,958
1,046
210
123
114
—
—
4,493
Classified (8-9)
1,137
704
—
—
13
466
—
—
2,320
Total Construction real estate
$
293,868
$
328,672
$
97,472
$
31,166
$
1,549
$
3,988
$
10
$
3,700
$
760,425
Residential real estate
Pass (1-6)
$
59,259
$
41,956
$
51,436
$
30,713
$
17,793
$
77,327
$
1,464
$
78,351
$
358,299
Special Mention (7)
322
—
—
—
75
1,801
—
614
2,812
Classified (8-9)
127
1,073
69
—
30
1,492
74
7,500
10,365
Total residential real estate
$
59,708
$
43,029
$
51,505
$
30,713
$
17,898
$
80,620
$
1,538
$
86,465
$
371,476
Other
Pass (1-6)
$
10,071
$
55,923
$
67,766
$
53,569
$
9,382
$
19,657
$
7
$
28,464
$
244,839
Special Mention (7)
—
—
14,472
—
—
—
—
11,645
26,117
Classified (8-9)
—
—
—
—
—
8
—
—
8
Total Other
$
10,071
$
55,923
$
82,238
$
53,569
$
9,382
$
19,665
$
7
$
40,109
$
270,964
Total loans classified by risk category
$
2,929,929
$
2,566,854
$
1,628,293
$
967,518
$
519,573
$
777,606
$
29,907
$
1,386,869
$
10,806,549
Total loans classified by performing status
77,569
Total loans
$
10,884,118
21
In the tables above, loan originations in 2024 and 2023 with a classification of “special mention” or “classified” primarily represent renewals or modifications initially underwritten and originated in prior years.
For certain loans, the Company evaluates credit quality based on the aging status.
The following tables present the recorded investment on loans based on payment activity as of the dates indicated:
March 31, 2024
($ in thousands)
Performing
Non Performing
Total
Commercial and industrial
$
62,094
$
40
$
62,134
Real estate:
Commercial - investor owned
17,707
—
17,707
Commercial - owner occupied
28,117
—
28,117
Residential
704
—
704
Other
3,629
26
3,655
Total
$
112,251
$
66
$
112,317
December 31, 2023
($ in thousands)
Performing
Non Performing
Total
Commercial and industrial
$
26,076
$
112
$
26,188
Real estate:
Commercial - investor owned
17,885
—
17,885
Commercial - owner occupied
28,373
—
28,373
Residential
712
—
712
Other
4,406
5
4,411
Total
$
77,452
$
117
$
77,569
22
NOTE 5 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company issues financial instruments in the normal course of its business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
The Company’s extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is not more than the contractual amount of these instruments.
The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets.
The contractual amounts of off-balance-sheet financial instruments are as follows:
($ in thousands)
March 31, 2024
December 31, 2023
Commitments to extend credit
$
2,817,323
$
2,937,760
Letters of credit
121,183
107,082
Off-Balance Sheet Credit Risk
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments usually have fixed expiration dates or other termination clauses, may have significant usage restrictions, and may require payment of a fee. Of the total commitments to extend credit at March 31, 2024 and December 31, 2023, $184.5 million and $191.6 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon or may be revoked, the total commitment amounts do not necessarily represent future cash obligations. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate. Other liabilities includes $6.1 million and $6.6 million for estimated losses attributable to the unadvanced commitments at March 31, 2024 and December 31, 2023, respectively.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These letters of credit are issued to support contractual obligations of the Company’s customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. As of March 31, 2024, the approximate remaining terms of standby letters of credit range from 1 month to 9 years.
Contingencies
The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes there are no such proceedings pending or threatened against the Company or its subsidiaries which, if determined adversely, would have a material adverse effect on the business, consolidated financial condition, results of operations or cash flows of the Company or any of its subsidiaries.
NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management
23
of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loans and borrowings. The Company does not enter into derivative financial instruments for trading purposes.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy.
For hedges of the Company’s variable-rate loans, interest rate swaps designated as cash flow hedges involve the receipt of fixed amounts and the Company making variable rate payments. The Company has executed cash flow hedges to reduce a portion of variability in cash flows on the Company’s prime based loan portfolio. Select terms of the hedges are as follows:
($ in thousands)
Notional
Fixed Rate
Effective Date
Maturity Date
$
50,000
6.56
%
January 25, 2023
February 1, 2027
$
100,000
6.63
%
December 20, 2022
January 1, 2028
$
100,000
6.66
%
April 1, 2025
April 1, 2030
In addition, the Company has a prime based interest rate collar with a notional amount of $100.0 million. The collar includes a cap of 8.14% and a floor of 5.25%. This transaction, commonly referred to as a zero cost collar, involves the Company selling an interest rate cap where payments will be made when the index exceeds the cap rate, and the purchase of a floor where payments will be received if the index falls below the floor. The collar became effective on October 27, 2022 and matures on October 1, 2029.
For hedges of the variable-rate liabilities, interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company has executed a series of cash flow hedges to fix the effective interest rate for payments due on $32.1 million of junior subordinated debentures to a weighted-average-fixed rate of 2.64%.
Select terms of the hedges are as follows:
($ in thousands)
Notional
Fixed Rate
Maturity Date
$
18,558
2.64
%
March 15, 2026
$
13,506
2.64
%
March 17, 2026
The gain or loss on derivatives designated and qualified as cash flow hedges of interest rate risk are recorded in accumulated other comprehensive income and subsequently reclassified into interest income or expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income or expense as interest payments are paid on the Company’s variable-rate loans and debt. During the next twelve months, the Company estimates an additional $0.8 million will be reclassified as a decrease to interest expense and $2.1 million will be reclassified as a decrease to interest income.
24
Non-designated Hedges
Derivatives not designated as hedges are not considered speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings as a component of other noninterest income.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet:
Notional Amount
Derivative Assets
Derivative Liabilities
($ in thousands)
March 31, 2024
December 31, 2023
March 31, 2024
December 31, 2023
March 31, 2024
December 31, 2023
Derivatives designated as hedging instruments
Interest rate swaps
$
282,064
$
211,962
$
1,277
$
1,389
$
2,700
$
233
Interest rate collar
100,000
100,000
—
514
467
—
Total
$
382,064
$
311,962
$
1,277
$
1,903
$
3,167
$
233
Derivatives not designated as hedging instruments
Interest rate swaps
$
771,936
$
779,152
$
17,287
$
15,886
$
17,288
$
15,951
Total
$
17,287
$
15,886
$
17,288
$
15,951
Derivative assets are classified on the balance sheet in other assets. Derivative liabilities are classified on the balance sheet in other liabilities.
25
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s financial instruments subject to offsetting. The gross amounts of assets or liabilities can be reconciled to the tabular disclosure of fair value. The fair value table above provides the location of financial assets and liabilities presented on the Balance Sheet.
As of March 31, 2024
Gross Amounts Not Offset in the Statement of Financial Position
($ in thousands)
Gross Amounts Recognized
Gross Amounts Offset in the Statement of Financial Position
Net Amounts of Assets presented in the Statement of Financial Position
Financial Instruments
Fair Value Collateral Posted
Net Amount
Assets:
Interest rate swaps
$
18,564
$
—
$
18,564
$
3,209
$
15,355
$
—
Liabilities:
Interest rate swaps
$
19,988
$
—
$
19,988
$
3,209
$
—
$
16,779
Interest rate collar
467
—
467
—
—
467
Securities sold under agreements to repurchase
159,043
—
159,043
—
159,043
—
As of December 31, 2023
Gross Amounts Not Offset in the Statement of Financial Position
($ in thousands)
Gross Amounts Recognized
Gross Amounts Offset in the Statement of Financial Position
Net Amounts of Assets presented in the Statement of Financial Position
Financial Instruments
Fair Value Collateral Posted
Net Amount
Assets:
Interest rate swaps
$
17,275
$
—
$
17,275
$
1,105
$
16,170
$
—
Interest rate collar
514
—
514
—
—
514
Liabilities:
Interest rate swaps
$
16,184
$
—
$
16,184
$
1,105
$
—
$
15,079
Securities sold under agreements to repurchase
250,197
—
250,197
—
250,197
—
As of March 31, 2024, the fair value of derivatives in a net liability position, which includes accrued interest, was $18.0 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and posts collateral related to derivatives in a net liability position. The Company has received cash collateral from derivative counterparties on contracts in a net asset position as noted in the tables above.
26
NOTE 7 - FAIR VALUE MEASUREMENTS
The following table summarizes financial instruments measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
March 31, 2024
($ in thousands)
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Total Fair Value
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises
$
—
$
295,802
$
—
$
295,802
Obligations of states and political subdivisions
—
422,979
—
422,979
Agency mortgage-backed securities
—
704,191
—
704,191
Corporate debt securities
—
181,100
—
181,100
U.S. Treasury bills
—
7,811
7,811
Total securities available for sale
—
1,611,883
—
1,611,883
Other investments
—
2,928
—
2,928
Derivatives
—
18,564
—
18,564
Total assets
$
—
$
1,633,375
$
—
$
1,633,375
Liabilities
Derivatives
$
—
$
20,455
$
—
$
20,455
Total liabilities
$
—
$
20,455
$
—
$
20,455
December 31, 2023
($ in thousands)
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Total Fair Value
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises
$
—
$
296,446
$
—
$
296,446
Obligations of states and political subdivisions
—
432,171
—
432,171
Agency mortgage-backed securities
—
700,381
—
700,381
Corporate debt securities
—
181,701
—
181,701
U.S. Treasury bills
—
7,574
—
7,574
Total securities available-for-sale
—
1,618,273
—
1,618,273
Other investments
—
2,941
—
2,941
Derivative financial instruments
—
17,789
—
17,789
Total assets
$
—
$
1,639,003
$
—
$
1,639,003
Liabilities
Derivatives
$
—
$
16,184
$
—
$
16,184
Total liabilities
$
—
$
16,184
$
—
$
16,184
27
From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets measured at the lower of cost or fair value that were recognized at fair value below cost at the end of the period. The amounts reported in the following tables include balances measured at fair value during the reporting period and still held as of the reporting date.
March 31, 2024
($ in thousands)
Total Fair Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Individually-evaluated loans
$
80
$
—
$
—
$
80
Other real estate
2,939
—
—
2,939
Total
$
3,019
$
—
$
—
$
3,019
December 31, 2023
($ in thousands)
Total Fair Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Individually-evaluated loans
$
5,138
$
—
$
—
$
5,138
Other real estate
5,736
—
—
5,736
Total
$
10,874
$
—
$
—
$
10,874
Following is a summary of the carrying amounts and fair values of certain financial instruments:
March 31, 2024
December 31, 2023
($ in thousands)
Carrying Amount
Estimated fair value
Level
Carrying Amount
Estimated fair value
Level
Balance sheet assets
Securities held-to-maturity, net
$
758,017
$
694,774
Level 2
$
750,434
$
696,647
Level 2
Other investments
71,149
71,149
Level 2
63,255
63,255
Level 2
Loans held-for-sale
610
610
Level 2
359
359
Level 2
Loans, net
10,892,994
$
10,603,064
Level 3
10,749,347
10,392,551
Level 3
State tax credits, held-for-sale
20,547
22,102
Level 3
22,115
23,897
Level 3
Servicing asset
3,031
4,157
Level 2
2,861
3,799
Level 2
Balance sheet liabilities
Certificates of deposit
$
1,485,383
$
1,479,274
Level 3
$
1,272,914
$
1,265,905
Level 3
Subordinated debentures and notes
156,124
154,738
Level 2
155,984
154,354
Level 2
FHLB advances
125,000
125,000
Level 2
—
—
Level 2
Other borrowings
195,246
175,915
Level 2
297,829
274,658
Level 2
For information regarding the methods and assumptions used to estimate the fair value of each class of financial instruments refer to Note 18 – Fair Value Measurements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC.
28
NOTE 8 - SHAREHOLDERS’ EQUITY
Shareholders’ Equity
Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in accumulated other comprehensive income (loss) after-tax by component:
Three months ended
($ in thousands)
Net Unrealized Loss on Available-for-Sale Securities
Unamortized Gain on Held-to-Maturity Securities
Net Unrealized Gain (Loss) on Cash Flow Hedges
Total
Balance, December 31, 2023
$
(112,844)
$
10,580
$
1,249
$
(101,015)
Net change
(11,073)
(626)
(2,677)
(14,376)
Balance, March 31, 2024
$
(123,917)
$
9,954
$
(1,428)
$
(115,391)
Balance, December 31, 2022
$
(144,549)
$
13,185
$
1,032
$
(130,332)
Net change
23,693
(638)
1,302
24,357
Balance, March 31, 2023
$
(120,856)
$
12,547
$
2,334
$
(105,975)
The following table presents the pre-tax and after-tax changes in the components of other comprehensive income (loss):
Three months ended March 31,
2024
2023
($ in thousands)
Pre-tax
Tax effect
After-tax
Pre-tax
Tax effect
After-tax
Change in unrealized gain (loss) on available-for-sale securities
$
(14,725)
$
(3,652)
$
(11,073)
$
32,056
$
8,078
$
23,978
Reclassification of gain on sale of available-for-sale securities(a)
—
—
—
(381)
(96)
(285)
Reclassification of gain on held-to-maturity securities(a)
(832)
(206)
(626)
(852)
(214)
(638)
Change in unrealized gain (loss) on cash flow hedges
(3,912)
(970)
(2,942)
1,705
430
1,275
Reclassification of loss on cash flow hedges(b)
353
88
265
36
9
27
Total other comprehensive income (loss)
$
(19,116)
$
(4,740)
$
(14,376)
$
32,564
$
8,207
$
24,357
(a)The pre-tax amount is reported in noninterest income/expense in the Consolidated Statements of Income.
(b)The pre-tax amount is reported in interest income/expense in the Consolidated Statements of Income.
29
NOTE 9 - SUPPLEMENTAL FINANCIAL INFORMATION
The following table presents other income and other expense components that primarily exceed one percent of the aggregate of total interest income and noninterest income in one or more of the periods indicated:
Three months ended March 31,
($ in thousands)
2024
2023
Other income:
Bank-owned life insurance
$
864
$
791
Community development fees
585
595
Gain on SBA loan sales
1,415
501
Other income
2,105
4,216
Total other noninterest income
$
4,969
$
6,103
Other expense:
Amortization of intangibles
$
1,047
$
1,239
Banking expenses
1,806
1,848
FDIC and other insurance
3,607
2,572
Loan, legal expenses
2,108
1,904
Outside services
1,664
1,545
Other expenses
7,630
7,250
Total other noninterest expenses
$
17,862
$
16,358
30
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
This Quarterly Report on Form 10-Q contains information and statements that are considered “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company, and include, without limitation, statements about the Company’s plans, strategies, goals, objectives, expectations, or consequences of statements about the future performance, operations, products and services of the Company and its subsidiaries, as well as statements about the Company’s expectations regarding revenue and asset growth, financial performance and profitability, loan and deposit growth, yields and returns, loan diversification and credit management, products and services, shareholder value creation and the impact of acquisitions. Forward-looking statements are typically identified with the use of terms such as “may,” “might,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “could,” “continue,” “intend,” and the negative and other variations of these terms and similar words and expressions, although some forward-looking statements may be expressed differently. Forward-looking statements are inherently subject to risks and uncertainties and our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. You should be aware that our actual results could differ materially from those contained in the forward-looking statements.
While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation: our ability to efficiently integrate acquisitions into our operations, retain the customers of these businesses and grow the acquired operations; credit risk; changes in the appraised valuation of real estate securing impaired loans; our ability to recover our investment in loans; fluctuations in the fair value of collateral underlying loans; outcomes of litigation and other contingencies; exposure to general and local economic and market conditions, including risk of recession, high unemployment rates, higher inflation and its impacts (including U.S. federal government measures to address higher inflation), U.S. fiscal debt, budget and tax matters, and any slowdown in global economic growth; risks associated with rapid increases or decreases in prevailing interest rates; changes in business prospects that could impact goodwill estimates and assumptions; consolidation within the banking industry; competition from banks and other financial institutions; the ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state regulation; changes in legislative or regulatory requirements, as well as current, pending or future legislation or regulation that could have a negative effect on our revenue and business, including rules and regulations relating to bank products and financial services; changes in accounting policies and practices or accounting standards; natural disasters; terrorist activities, war and geopolitical matters (including the war in Israel and potential for a broader regional conflict and the war in Ukraine and the imposition of additional sanctions and export controls in connection therewith), or pandemics, or other health emergencies and their effects on economic and business environments in which we operate, including the related disruption to the financial market and other economic activity; and other risks discussed under the caption “Risk Factors” under Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, and other reports filed with the SEC, all of which could cause the Company’s actual results to differ from those set forth in the forward-looking statements. The Company cautions that the preceding list is not exhaustive of all possible risk factors and other factors could also adversely affect the Company’s results.
Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management’s analysis and expectations only as of the date of such statements. Forward-looking statements speak only as of the date they are made, and the Company does not intend, and undertakes no obligation, to publicly revise or update forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise, except as required by federal securities law. You should understand that it is not possible to predict or identify all risk factors. Readers should carefully review all disclosures we file from time to time with the SEC which are available on our website at www.enterprisebank.com under “Investor Relations.”
31
Introduction
The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first three months of 2024 compared to the financial condition as of December 31, 2023. In addition, this discussion summarizes the significant factors affecting the results of operations of the Company for the three months ended March 31, 2024, compared to the linked fourth quarter of 2023 (“linked quarter”) and the results of operations, liquidity and cash flows for the three months ended March 31, 2024 compared to the same period in 2023 (“prior year quarter”). In light of the nature of the Company’s business, the Company’s management believes that the comparison to the linked quarter is the most relevant to understand the financial results from management’s perspective. For purposes of the Quarterly Report on Form 10-Q, the Company is presenting a comparison to the corresponding year-to-date period in 2023. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Critical Accounting Policies and Estimates
The Company’s critical accounting policies are considered important to the understanding of the Company’s financial condition and results of operations. These accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experience. If different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected.
A full description of our critical accounting policies and the impact and any associated risks related to those policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
The Company has prepared all of the consolidated financial information in this report in accordance with GAAP. The Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions used in the calculation of income taxes, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using loss experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statement in future periods. There can be no assurances that actual results will not differ from those estimates.
32
Allowance for Credit Losses on Loans
The Company maintains separate allowances for funded loans, unfunded loans, and held-to-maturity securities, collectively referred to as the ACL. The ACL is a valuation account to adjust the cost basis to the amount expected to be collected, based on management’s experience, current conditions, and reasonable and supportable forecasts. For purposes of determining the allowance for funded and unfunded loans, the portfolios are segregated into pools that share similar risk characteristics and are then further segregated by credit grades. Loans that do not share similar risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. The Company estimates the amount of the allowance based on loan loss experience, adjusted for current and forecasted economic conditions, including unemployment, changes in GDP, and commercial and residential real estate prices. The Company’s forecast of economic conditions uses internal and external information and considers a weighted average of a baseline, upside, and downside scenarios. Because economic conditions can change and are difficult to predict, the anticipated amount of estimated loan defaults and losses, and therefore the adequacy of the allowance, could change significantly and have a direct impact on the Company’s credit costs. The Company’s allowance for credit losses on loans was $135.5 million at March 31, 2024 based on the weighting of the different economic scenarios. As a hypothetical example, if the Company had only used the upside scenario, the allowance would have decreased $27.7 million. Conversely, the allowance would have increased $44.8 million using only the downside scenario.
33
Executive Summary
Below are highlights of the Company’s financial performance for the periods indicated.
($ in thousands, except per share data)
Three months ended
March 31, 2024
December 31, 2023
March 31, 2023
EARNINGS
Total interest income
$
207,723
$
207,083
$
169,033
Total interest expense
69,995
66,351
29,504
Net interest income
137,728
140,732
139,529
Provision for credit losses
5,756
18,053
4,183
Net interest income after provision for credit losses
131,972
122,679
135,346
Total noninterest income
12,158
25,452
16,898
Total noninterest expense
93,501
92,603
80,983
Income before income tax expense
50,629
55,528
71,261
Income tax expense
10,228
10,999
15,523
Net income
$
40,401
$
44,529
$
55,738
Preferred dividends
938
937
938
Net income available to common shareholders
$
39,463
$
43,592
$
54,800
Basic earnings per share
$
1.05
$
1.16
$
1.47
Diluted earnings per share
$
1.05
$
1.16
$
1.46
Return on average assets
1.12
%
1.23
%
1.72
%
Adjusted return on average assets1
1.14
%
1.28
%
1.72
%
Return on average common equity
9.52
%
10.94
%
14.85
%
Adjusted return on average common equity1
9.70
%
11.40
%
14.85
%
Return on average tangible common equity1
12.31
%
14.38
%
19.93
%
Adjusted return on average tangible common equity1
12.53
%
14.98
%
19.93
%
Net interest margin (tax equivalent)
4.13
%
4.23
%
4.71
%
Efficiency ratio
62.38
%
55.72
%
51.77
%
Core efficiency ratio1
60.21
%
53.06
%
50.47
%
Book value per common share
$
44.24
$
43.94
$
40.76
Tangible book value per common share1
$
34.21
$
33.85
$
30.55
ASSET QUALITY
Net charge-offs (recoveries)
$
5,864
$
28,479
$
(264)
Nonperforming loans
35,642
43,728
11,972
Nonaccrual loans
35,501
43,181
11,887
Classified assets
185,150
185,389
110,384
Total assets
14,613,338
14,518,590
13,325,982
Total loans
11,028,492
10,884,118
10,011,918
Classified assets to total assets
1.27
%
1.28
%
0.83
%
Nonperforming loans to total loans
0.32
%
0.40
%
0.12
%
Nonperforming assets to total assets
0.30
%
0.34
%
0.09
%
ACL on loans to total loans
1.23
%
1.24
%
1.38
%
Net charge-offs (recoveries) to average loans (annualized)
0.22
%
1.06
%
(0.01)
%
1 A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”
34
Financial results and other notable items include:
•PPNR1 of $57.4 million for the first quarter 2024 decreased $18.4 million from the linked quarter PPNR of $75.8 million and decreased $17.6 million from the prior year quarter PPNR of $75.0 million. The decrease from the linked quarter was primarily due to a decrease in net interest income due to one less day in the current quarter, higher interest expense, a decrease in tax credit income that is typically highest in the fourth quarter of each year, and an increase in compensation and benefits from annual payroll taxes and vacation along with merit increases. The decrease compared to the prior year quarter was primarily due to the higher interest rate environment that increased deposit interest expense and the cost of variable deposit services charges, which are influenced by current market rates.
•Net interest income of $137.7 million for the first quarter 2024 decreased $3.0 million and decreased $1.8 million from the linked and prior year-to-date period, respectively. Compared to the linked quarter, net interest income declined due to one less day in the current quarter and higher deposit interest expense, partially offset by higher average loan and investment balances. The decrease from the prior year quarter reflects higher interest expense on the deposit portfolio, as lagged deposit rates have increased, partially offset by the benefit of higher market interest rates on interest earning assets and organic growth. The NIM was 4.13% for the first quarter 2024, compared to 4.23% and 4.71% for the linked and prior year-to-date period, respectively.
•Noninterest income of $12.2 million for the first quarter 2024 decreased $13.3 million from the linked quarter and decreased $4.7 million from the prior year-to-date period. The decline from the linked and prior year quarters was primarily due to a decrease in tax credit income of $11.9 million and $4.0 million, respectively, on lower activity and an increase in market interest rates that reduced the fair value of certain tax credits.
•Noninterest expense of $93.5 million for the first quarter 2024 increased $0.9 million and increased $12.5 million from the linked quarter and prior year-to-date period, respectively. The increase from the linked quarter was primarily driven by employee compensation ($5.6 million), partially offset by a decrease in the FDIC special assessment ($1.8 million) and variable deposit servicing costs ($1.3 million). The increase from the prior year quarter was primarily due to variable deposit servicing costs ($7.6 million) and employee compensation ($2.8 million).
Balance sheet highlights:
•Loans – Total loans increased $144.4 million, or 1%, to $11.0 billion at March 31, 2024, compared to $10.9 billion at December 31, 2023. Average loans totaled $10.9 billion for the three months ended March 31, 2024 compared to $10.7 billion for the three months ended December 31, 2023.
•Deposits – Total deposits increased $77.3 million, to $12.3 billion at March 31, 2024 from $12.2 billion at December 31, 2023. Total estimated insured deposits1, which includes collateralized deposits, reciprocal deposits and accounts that qualify for pass through insurance, totaled $8.7 billion at March 31, 2024, compared to $8.3 billion at December 31, 2023. Average deposits totaled $12.2 billion for both the quarter ended March 31, 2024 and the linked quarter. Noninterest deposit accounts represented 31.1% of total deposits and the loan to deposit ratio was 90.0% at March 31, 2024, compared to 33% and 89.39%, respectively, at December 31, 2023.
•Asset quality – The allowance for credit losses on loans to total loans was 1.23% at March 31, 2024, compared to 1.24% at December 31, 2023. The ratio of nonperforming assets to total assets was 0.30% at March 31, 2024 compared to 0.34% at December 31, 2023. A provision for credit losses of $5.8 million was recorded in the first quarter of 2024 compared to $18.1 million in the linked quarter and $4.2 million in the prior year quarter.
1PPNR and total estimated insured deposits are non-GAAP measures. Refer to discussion and reconciliation of these measures in the accompanying financial tables.
35
•Shareholders’ equity – Total shareholders’ equity was $1.73 billion at March 31, 2024, compared to $1.72 billion at December 31, 2023, and the tangible common equity to tangible assets ratio2 was 9.01% at March 31, 2024 compared to 8.96% at December 31, 2023. The Company and the Bank’s regulatory capital ratios exceeded the “well-capitalized” level at March 31, 2024.
The Company’s board of directors approved a quarterly dividend of $0.26 per common share, payable on June 28, 2024 to shareholders of record as of June 14, 2024. The board of directors also declared a cash dividend of $12.50 per share of Series A Preferred Stock (or $0.3125 per depositary share) representing a 5% per annum rate for the period commencing (and including) March 15, 2024 to (but excluding) June 15, 2024. The dividend will be payable on June 15, 2024 and will be paid on June 17, 2024 to holders of record of Series A Preferred Stock as of June 3, 2024.
2Tangible common equity to tangible assets ratio is a non-GAAP measure. Refer to discussion and reconciliation of these measures in the accompanying financial tables.
36
RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
Average Balance Sheet
The following tables present, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing liabilities, as well as the corresponding interest rates earned and paid, all on a tax equivalent basis.
Three months ended March 31,
Three months ended December 31,
Three months ended March 31,
2024
2023
2023
($ in thousands)
Average Balance
Interest Income/Expense
Average Yield/ Rate
Average Balance
Interest Income/Expense
Average Yield/ Rate
Average Balance
Interest Income/Expense
Average Yield/ Rate
Assets
Interest-earning assets:
Loans1, 2
$
10,927,932
$
186,703
6.87
%
$
10,685,961
$
184,982
6.87
%
$
9,795,045
$
152,762
6.33
%
Taxable securities
1,423,795
11,825
3.34
1,300,099
10,845
3.31
1,322,978
9,635
2.95
Non-taxable securities2
976,776
7,666
3.16
976,816
7,540
3.06
965,473
7,482
3.14
Total securities
2,400,571
19,491
3.27
2,276,915
18,385
3.20
2,288,451
17,117
3.03
Interest-earning deposits
268,068
3,569
5.35
420,762
5,631
5.31
106,254
1,195
4.56
Total interest-earning assets
13,596,571
209,763
6.20
13,383,638
208,998
6.20
12,189,750
171,074
5.69
Noninterest-earning assets
959,548
949,166
941,445
Total assets
$
14,556,119
$
14,332,804
$
13,131,195
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand accounts
$
2,924,276
$
18,612
2.56
%
$
2,844,847
$
17,248
2.41
%
$
2,201,910
$
5,907
1.09
%
Money market accounts
3,401,802
31,357
3.71
3,342,979
30,579
3.63
2,826,836
15,471
2.22
Savings accounts
587,113
303
0.21
609,645
268
0.17
732,256
230
0.13
Certificates of deposit
1,341,990
14,201
4.26
1,373,808
14,241
4.11
670,521
3,053
1.85
Total interest-bearing deposits
8,255,181
64,473
3.14
8,171,279
62,336
3.03
6,431,523
24,661
1.56
Subordinated debentures and notes
156,046
2,484
6.40
155,907
2,475
6.30
155,497
2,409
6.28
FHLB advances
73,791
1,029
5.61
—
—
—
110,928
1,332
4.87
Securities sold under agreements to repurchase
204,898
1,804
3.54
150,827
1,226
3.22
215,604
749
1.41
Other borrowings
42,736
205
1.93
49,013
314
2.54
53,885
353
2.66
Total interest-bearing liabilities
8,732,652
69,995
3.22
8,527,026
66,351
3.09
6,967,437
29,504
1.72
Noninterest bearing liabilities:
Demand deposits
3,925,522
3,992,067
4,481,966
Other liabilities
159,247
160,829
113,341
Total liabilities
12,817,421
12,679,922
11,562,744
Shareholders' equity
1,738,698
1,652,882
1,568,451
Total liabilities & shareholders' equity
$
14,556,119
$
14,332,804
$
13,131,195
Net interest income
$
139,768
$
142,647
$
141,570
Net interest spread
2.98
%
3.11
%
3.97
%
Net interest margin
4.13
%
4.23
%
4.71
%
1 Average balances include nonaccrual loans. Interest income includes loan fees of $2.4 million, $3.1 million, and $3.7 million for the three months ended March 31, 2024, December 31, 2023, and March 31, 2023, respectively.
2 Non-taxable income is presented on a fully tax-equivalent basis using a tax rate of approximately 25%. The tax-equivalent adjustments were $2.0 million, $1.9 million, and $2.0 million for the three months ended March 31, 2024, December 31, 2023, and March 31, 2023, respectively.
37
Rate/Volume
The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume.
Three months ended March 31, 2024
Three months ended March 31, 2024
compared to
compared to
Three months ended December 31, 2023
Three months ended March 31, 2023
Increase (decrease) due to
Increase (decrease) due to
($ in thousands)
Volume1
Rate2
Net
Volume1
Rate2
Net
Interest earned on:
Loans
$
1,734
$
(13)
$
1,721
19,455
14,486
33,941
Taxable securities
410
570
980
800
1,390
2,190
Non-taxable securities3
—
126
126
119
65
184
Interest-earning deposits
(2,514)
452
(2,062)
2,131
243
2,374
Total interest-earning assets
$
(370)
$
1,135
$
765
$
22,505
$
16,184
$
38,689
Interest paid on:
Interest-bearing demand accounts
$
28
$
1,336
$
1,364
$
2,486
$
10,219
$
12,705
Money market accounts
20
758
778
3,695
12,191
15,886
Savings accounts
(11)
46
35
(53)
126
73
Certificates of deposit
(288)
248
(40)
4,845
6,303
11,148
Subordinated debentures and notes
—
9
9
12
63
75
FHLB advances
1,029
—
1,029
(76)
(227)
(303)
Securities sold under agreements to repurchase
111
467
578
(40)
1,095
1,055
Other borrowed funds
(35)
(74)
(109)
(64)
(84)
(148)
Total interest-bearing liabilities
854
2,790
3,644
10,805
29,686
40,491
Net interest income
$
(1,224)
$
(1,655)
$
(2,879)
$
11,700
$
(13,502)
$
(1,802)
1 Change in volume multiplied by yield/rate of prior period.
2 Change in yield/rate multiplied by volume of prior period.
3 Nontaxable income is presented on a tax equivalent basis.
NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Net interest income on a tax equivalent basis for the first quarter 2024 was $139.8 million, a decrease of $2.9 million and a decrease of $1.8 million compared to the linked quarter and prior year quarter, respectively. The decrease from the linked quarter was primarily due to the impact of competitive pricing, continued remixing into higher cost deposit categories and an increase in wholesale borrowings. The decrease from the prior year quarter reflects higher interest expense on the deposit portfolio, as lagged deposit rates have increased, partially offset by the benefit of higher market interest rates on interest earning assets and organic growth. The effective federal funds rate for the first three months of 2024 was 5.33%, an increase of 81 basis points compared to the first three months of 2023.
Total tax equivalent interest income increased $0.8 million from the linked quarter primarily due to an increase of $242.0 million in average loans, an increase of $123.7 million in investments, and a 7 basis point increase in the average investment yield. These increases were partially offset by a decrease in interest on cash accounts due to a decline in average balances. The average interest rate of new loan originations in the first quarter 2024 was 7.84%.
Interest expense increased $3.6 million from the linked quarter primarily due to a $2.1 million increase in deposit interest expense and a $1.5 million increase in interest expense on borrowings. The increase in deposit interest expense reflects a shift in the deposit mix from demand deposits to interest-bearing deposits, particularly money market accounts and interest-bearing demand accounts, as well as higher rates paid on deposits. The average cost of interest-bearing deposits was 3.14%, an increase of 11 basis points compared to the linked quarter. The total cost of
38
deposits, including noninterest-bearing demand accounts, was 2.13% during the first quarter 2024, compared to 2.03% in the linked quarter. The increase in interest expense on other borrowings was primarily due to higher average borrowings to fund net loan growth.
NIM, on a tax equivalent basis, was 4.13% in the first quarter 2024, a decrease of 10 basis points and 58 basis points from the linked and prior year quarters, respectively.
Noninterest Income
The following table presents a comparative summary of the major components of noninterest income for the periods indicated.
Linked quarter comparison
Prior year comparison
Quarter ended
Quarter ended
($ in thousands)
March 31, 2024
December 31, 2023
Increase (decrease)
March 31, 2023
Increase (decrease)
Service charges on deposit accounts
$
4,423
$
4,334
$
89
2
%
$
4,128
$
295
7
%
Wealth management revenue
2,544
2,428
116
5
%
2,516
28
1
%
Card services revenue
2,412
2,666
(254)
(10)
%
2,338
74
3
%
Tax credit income (loss)
(2,190)
9,688
(11,878)
(123)
%
1,813
(4,003)
(221)
%
Other income
4,969
6,336
(1,367)
(22)
%
6,103
(1,134)
(19)
%
Total noninterest income
$
12,158
$
25,452
$
(13,294)
(52)
%
$
16,898
$
(4,740)
(28)
%
Total noninterest income for the first quarter 2024 was $12.2 million, a decrease of $13.3 million from the linked quarter and a decrease of $4.7 million from the prior year quarter. The decrease from the linked and prior year quarters was primarily due to a decrease in tax credit income. Tax credit income is typically highest in the fourth quarter of each year and will vary in other periods based on transaction volumes and fair value changes on credits carried at fair value. The decrease in other income from the linked and prior year quarters was primarily driven by lower community development and private equity distributions, and servicing fees. Community development and private equity distributions are not consistent sources of income and fluctuate based on distributions from the underlying funds. Servicing fee income fluctuates based on prepayment experience and changes to the discount rate used in the valuation of the servicing rights. These decreases were partially offset by a $1.4 million gain on the sale of SBA loans in the first quarter 2024.
39
Noninterest Expense
The following table presents a comparative summary of the major components of noninterest expense for the periods indicated.
Linked quarter comparison
Prior year comparison
Quarter ended
Quarter ended
($ in thousands)
March 31, 2024
December 31, 2023
Increase (decrease)
March 31, 2023
Increase (decrease)
Employee compensation and benefits
$
45,262
$
39,651
$
5,611
14
%
$
42,503
$
2,759
6
%
Deposit costs
20,277
21,606
(1,329)
(6)
%
12,720
7,557
59
%
Occupancy
4,326
4,313
13
—
%
4,061
265
7
%
Data processing
4,339
3,995
344
9
%
3,710
629
17
%
Professional fees
1,435
1,115
320
29
%
1,631
(196)
(12)
%
Other expense
17,862
21,923
(4,061)
(19)
%
16,358
1,504
9
%
Total noninterest expense
$
93,501
$
92,603
$
898
1
%
$
80,983
$
12,518
15
%
Efficiency ratio
62.38
%
55.72
%
6.66
%
51.77
%
10.61
%
Core efficiency ratio3
60.21
%
53.06
%
7.15
%
50.47
%
9.74
%
Noninterest expense was $93.5 million for the first quarter 2024, an increase of $0.9 million from $92.6 million in the linked quarter and an increase of $12.5 million from $81.0 million in the prior year quarter. Employee compensation and benefits increased $5.6 million from the linked quarter primarily due to the annual reset of payroll taxes and vacation, along with annual merit increases that became effective March 1, 2024. The FDIC special assessment of $0.6 million and $2.4 million in the current and linked quarters, respectively, is an assessment from the FDIC to recover estimated losses in the Deposit Insurance Fund related to bank failures in 2023. The assessment may change in future periods as the FDIC updates its loss estimates. Deposit costs relate to certain specialized deposit businesses that receive an earnings credit allowance for deposit related expenses that are impacted by interest rates and average balances. Deposit costs decreased $1.3 million from the linked quarter primarily due to the expiration of certain allowances that were not used.
The increase in noninterest expense of $12.5 million from the prior year quarter was primarily due to an increase in the associate base, merit increases throughout 2023 and 2024, and an increase in variable deposit costs due to higher earnings credit rates and average balances.
Income Taxes
The Company’s effective tax rate was 20.2% for the first quarter 2024, compared to 19.8% and 21.8% for the linked quarter and prior year-to-date period, respectively. The increase in the effective tax rate from the linked quarter was driven by a state apportionment adjustment that lowered the effective tax rate in that period, while the decrease from the prior year quarter was driven by tax credit opportunities the Company has deployed as part of its tax planning strategy.
3Core efficiency ratio is a non-GAAP measure. Refer to discussion and reconciliation of this measure in the accompanying financial tables.
40
Summary Balance Sheet
($ in thousands)
March 31, 2024
December 31, 2023
Increase (decrease)
Total cash and cash equivalents
$
369,420
$
433,029
$
(63,609)
(15)
%
Securities, net
2,369,900
2,368,707
1,193
NM
Total loans
11,028,492
10,884,118
144,374
1
%
Total assets
14,613,338
14,518,590
94,748
1
%
Deposits
12,253,701
12,176,371
77,330
1
%
Total liabilities
12,881,613
12,802,522
79,091
1
%
Total shareholders’ equity
1,731,725
1,716,068
15,657
1
%
Total assets were $14.6 billion at March 31, 2024, an increase of $94.7 million from December 31, 2023. Cash and cash equivalents decreased primarily due to funding loan growth in the first quarter. Total liabilities of $12.9 billion, increased $79.1 million from December 31, 2023 primarily due to a $77.3 million increase in deposits.
Investment Securities
At March 31, 2024, investment securities were $2.4 billion, or 16%, of total assets, compared to $2.4 billion, or 16%, of total assets as of December 31, 2023. The portfolio is comprised of both available-for-sale and held-to-maturity securities.
The table below sets forth the carrying value of investment securities, excluding the allowance for credit losses:
March 31, 2024
December 31, 2023
($ in thousands)
Amount
%
Amount
%
Obligations of U.S. Government sponsored enterprises
$
295,802
12.5
%
$
296,446
12.5
%
Obligations of states and political subdivisions
1,006,952
42.5
%
1,007,870
42.5
%
Agency mortgage-backed securities
755,467
31.9
%
752,481
31.8
%
U.S. Treasury Bills
181,099
7.6
%
181,701
7.7
%
Corporate debt securities
130,930
5.5
%
130,994
5.5
%
Total
$
2,370,250
100.0
%
$
2,369,492
100.0
%
Net Unrealized Losses
($ in thousands)
March 31, 2024
December 31, 2023
Available-for-sale securities
$
(165,586)
$
(150,861)
Held-to-maturity securities
(63,593)
(54,572)
Total
$
(229,179)
$
(205,433)
Investment securities increased $1.2 million from the prior year end, primarily due to a reinvestment of cash flows, partially offset by decrease in the fair value of the available-for-sale securities. Investment purchases in the first quarter 2024 had a weighted average, tax equivalent yield of 5.21%.
The average duration of the investment portfolio was 5.7 years at March 31, 2024. The Company leverages the investment portfolio to lengthen the overall duration of the balance sheet, primarily using high-quality municipal securities. The expected cash flow from pay downs, maturities and interest over the next 12 months is approximately $341 million.
41
Loans by Type
The Company has a diversified loan portfolio, with no particular concentration of credit in any one economic sector; however, a substantial portion of the portfolio, including the C&I category, is secured by real estate. The ability of the Company’s borrowers to honor their contractual obligations is partially dependent upon the local economy and its effect on the real estate market.
The following table sets forth the composition of the loan portfolio by type of loans
($ in thousands)
March 31, 2024
December 31, 2023
Increase (decrease)
Commercial and industrial
$
4,766,310
$
4,672,559
$
93,751
2
%
Commercial real estate - investor owned
2,448,153
2,451,953
(3,800)
NM
Commercial real estate - owner occupied
2,356,650
2,351,618
5,032
NM
Construction and land development
820,416
760,425
59,991
8
%
Residential real estate
367,218
372,188
(4,970)
(1)
%
Other
269,745
275,375
(5,630)
(2)
%
Total loans
$
11,028,492
$
10,884,118
$
144,374
1
%
The following table provides additional information on certain categories of specialty loans that are included in total loans above:
($ in thousands)
March 31, 2024
December 31, 2023
Increase (decrease)
SBA Loans
1,274,780
1,281,632
(6,852)
(1)
%
Sponsor finance
865,180
872,264
(7,084)
(1)
%
Life insurance premium financing
1,003,597
956,162
47,435
5
%
Tax credits
718,383
734,594
(16,211)
(2)
%
Loans totaled $11.0 billion at March 31, 2024 compared to $10.9 billion at December 31, 2023. In the first quarter 2024, C&I loans increased $77.6 million, construction loans increased $56.2 million and specialty loans increased $17.3 million, primarily due to growth in life insurance premium financing loans. Loan sales of $23.1 million mitigated growth in the SBA category during the current quarter. Average line draw utilization was 44% for the first three months of 2024, compared to 43% for the full year of 2023.
Specialty lending products, including sponsor finance, life insurance premium financing, and tax credits, consist primarily of C&I loans. These loans are sourced through relationships developed with estate planning firms and private equity funds and are not bound geographically by our markets. These specialized loan products offer opportunities to expand and diversify geographically by entering new markets. The Company continues to focus on originating high-quality C&I relationships, as they typically have variable interest rates and allow for cross selling opportunities involving other banking products. Life insurance premium financing and tax credits are typically lower risk products due to the high collateral value securing the loans.
SBA loans are also generated on a national basis, and primarily consist of loans collateralized by first lien, owner-occupied real estate properties. These loans predominantly have a 75% guarantee from the SBA. The Company may sell the guaranteed portion of the loan and retain servicing rights, and in the first quarter 2024, SBA loans totaling $23.1 million were sold.
42
Provision and Allowance for Credit Losses
The following table presents the components of the provision for credit losses:
Quarter ended
($ in thousands)
March 31, 2024
December 31, 2023
March 31, 2023
Provision for credit losses on loans
$
6,591
$
21,117
$
1,099
Provision (benefit) for available-for-sale securities
—
(795)
4,826
Benefit for off-balance sheet commitments
(507)
(3,164)
(1,914)
Provision (benefit) for held-to-maturity securities
(435)
—
137
Charge-offs of accrued interest
107
895
35
Provision for credit losses
$
5,756
$
18,053
$
4,183
The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL on loans at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. The Company also records reversals of interest on nonaccrual loans and interest recoveries directly through the provision of credit losses.
A provision for credit losses of $5.8 million was recognized for the first quarter 2024, compared to $18.1 million and $4.2 million in the linked and prior year quarters, respectively. The provision for credit losses in the first quarter 2024 was primarily related to net charge-offs, and updates to qualitative factors used in the allowance calculation. The decrease in the provision for credit losses from the linked quarter was primarily related to the higher level of net charge-offs in the linked quarter. The provision for credit losses in the prior year quarter was driven by the impairment of an available for sale investment security.
The following table summarizes the allocation of the ACL on loans:
March 31, 2024
December 31, 2023
($ in thousands)
Allowance
Percent of loans in each category to total loans
Allowance
Percent of loans in each category to total loans
Commercial and industrial
$
58,714
43.2
%
$
58,886
42.9
%
Real estate:
Commercial
56,003
43.6
%
54,685
44.1
%
Construction and land development
9,825
7.4
%
10,198
7.0
%
Residential
6,479
3.3
%
6,142
3.4
%
Other
4,477
2.5
%
4,860
2.6
%
Total
$135,498
100.0
%
$134,771
100.0
%
The ACL on loans was 1.23% of total loans at March 31, 2024, compared to 1.24% of loans at December 31, 2023. The decrease in the ratio of ACL on loans to total loans is primarily due to the charge-off of impaired loans and a decrease in reserves on impaired loans. Excluding guaranteed loans, the ACL on loans to total loans was 1.34%4 at March 31, 2024, compared to 1.35% at December 31, 2023.
4ACL on loans to total loans adjusted for guaranteed loans is a non-GAAP measure. Refer to discussion and reconciliation of this measure in the accompanying financial tables.
43
The following table is a summary of net charge-offs (recoveries) to average loans for the periods indicated:
Quarter ended
March 31, 2024
December 31, 2023
($ in thousands)
Net Charge-offs (Recoveries)
Average Loans(1)
Net Charge-offs (Recoveries)/Average Loans(2)
Net Charge-offs (Recoveries)
Average Loans(1)
Net Charge-offs (Recoveries)/Average Loans(2)
Commercial and industrial
$
5,150
$
4,707,968
0.44
%
$
29,044
$
4,526,787
2.55
%
Real estate:
Commercial
322
4,750,876
0.03
%
(219)
4,753,969
(0.02)
%
Construction and land development
(6)
797,669
NM
(9)
729,779
NM
Residential
69
370,438
0.07
%
(157)
375,637
(0.17)
%
Other
329
299,856
0.44
%
(180)
299,246
(0.24)
%
Total
$
5,864
$
10,926,807
0.22
%
$
28,479
$
10,685,418
1.06
%
(1) Excludes loans held for sale.
(2)Annualized.
To the extent the Company does not recognize charge-offs and economic forecasts improve in future periods, the Company could recognize provision reversals. Conversely, if economic conditions and the Company’s forecast worsens and charge-offs increase, the Company could recognize elevated levels of provision for credit losses. The provision is also reflective of charge-offs (recoveries) in the period.
Nonperforming assets
The following table presents the categories of nonperforming assets and other ratios, excluding government guaranteed portions, as of the dates indicated.
($ in thousands)
March 31, 2024
December 31, 2023
Nonaccrual loans
$
35,501
$
43,181
Loans past due 90 days or more and still accruing interest
141
547
Total nonperforming loans
35,642
43,728
Other real estate
8,466
5,736
Total nonperforming assets
$
44,108
$
49,464
Total assets
$
14,613,338
$
14,518,590
Total loans
11,028,492
10,884,118
Total ACL on loans
135,498
134,771
ACL on loans to nonaccrual loans
382
%
312
%
ACL on loans to nonperforming loans
380
%
308
%
ACL on loans to total loans
1.23
%
1.24
%
Nonaccrual loans to total loans
0.32
%
0.40
%
Nonperforming loans to total loans
0.32
%
0.40
%
Nonperforming assets to total assets
0.30
%
0.34
%
44
Nonperforming loans based on loan type were as follows:
($ in thousands)
March 31, 2024
December 31, 2023
Commercial and industrial
$
2,550
$
7,756
Commercial real estate
31,861
33,739
Construction and land development
1,205
1,269
Residential real estate
—
959
Other
26
5
Total
$
35,642
$
43,728
The following table summarizes the changes in nonperforming loans:
Three months ended
($ in thousands)
March 31, 2024
Nonperforming loans, beginning of period
$
43,728
Additions to nonaccrual loans
2,984
Charge-offs
(6,650)
Principal payments
(2,255)
Moved to other real estate and repossessed assets
(2,165)
Nonperforming loans, end of period
$
35,642
Nonperforming loans at March 31, 2024 decreased $8.1 million, or 18%, when compared to December 31, 2023. The decreased in nonperforming loans during the first quarter 2024 was primarily due to gross charge-offs of $6.7 million and principal payments of $2.3 million. The charge-offs of nonperforming loans included $4.8 million on two relationships that moved to nonperforming status in the fourth quarter 2023. Included in that amount, was $3.4 million related to the Agricultural relationship that was disclosed in the fourth quarter 2023, and has now been fully charged-off.
Other real estate
The following table summarizes the changes in other real estate:
Three months ended
($ in thousands)
March 31, 2024
Other real estate, beginning of period
$
5,736
Additions
2,939
Sales
(209)
Other real estate, end of period
$
8,466
45
Deposits
The following table shows the breakdown of deposits by type:
($ in thousands)
March 31, 2024
December 31, 2023
Increase (decrease)
Noninterest-bearing demand accounts
$
3,805,334
$
3,958,743
$
(153,409)
(4)
%
Interest-bearing demand accounts
2,956,282
2,950,259
6,023
—
%
Money market accounts
3,430,454
3,399,280
31,174
1
%
Savings accounts
576,248
595,175
(18,927)
(3)
%
Certificates of deposit:
Brokered
659,005
482,759
176,246
37
%
Customer
826,378
790,155
36,223
5
%
Total deposits
$
12,253,701
$
12,176,371
$
77,330
1
%
Demand deposits / total deposits
31
%
33
%
The following table shows the average balance and average rate of the Company’s deposits by type:
Quarter ended
March 31, 2024
December 31, 2023
March 31, 2023
($ in thousands)
Average Balance
Average Rate Paid
Average Balance
Average Rate Paid
Average Balance
Average Rate Paid
Noninterest-bearing deposit accounts
$
3,925,522
—
%
$
3,992,067
—
%
$
4,481,966
—
%
Interest-bearing demand accounts
2,924,276
2.56
2,844,847
2.41
2,201,910
1.09
Money market accounts
3,401,802
3.71
3,342,979
3.63
2,826,836
2.22
Savings accounts
587,113
0.21
609,645
0.17
732,256
0.13
Certificates of deposit
1,341,990
4.26
1,373,808
4.11
670,521
1.85
Total interest-bearing deposits
$
8,255,181
3.14
$
8,171,279
3.03
$
6,431,523
1.56
Total average deposits
$
12,180,703
2.13
$
12,163,346
2.03
$
10,913,489
0.92
Total deposits excluding brokered certificates of deposits, were $11.6 billion at March 31, 2024, a decrease of $98.9 million from December 31, 2023. The decrease in demand and money market accounts in the first quarter 2024 was primarily related to normal, seasonal deposit outflows. Brokered certificates of deposit at March 31, 2024 increased $176.2 million from December 31, 2023 to help support loan growth and seasonal deposit outflows in the first quarter 2024. The Company has a specialty deposit portfolio focusing on property management, community associations, and escrow industries, in addition to deposits related to its specialty lending products. These deposits totaled $2.9 billion at March 31, 2024 and $2.8 billion at December 31, 2023.
To provide customers a deposit product with enhanced FDIC insurance, the Company participates in several programs through third parties that provide full FDIC insurance on deposit amounts by exchanging or reciprocating larger depository relationships with other member banks. Total reciprocal deposits were $1.1 billion at March 31, 2024, compared to $1.2 billion at December 31, 2023. The Company considers reciprocal accounts as customer-related deposits due to the customer relationship that generated the transaction.
At March 31, 2024, estimated uninsured/uncollateralized deposits totaled $3.5 billion, or 29% of total deposits, compared to $3.8 billion, or 31% of total deposits, at December 31, 2023. The decrease in estimated uninsured deposits was the result of an increase in reciprocal deposits and accounts that qualify for pass-through insurance.
46
The total cost of deposits was 2.13% for the current quarter, compared to 2.03% for the linked quarter.
Shareholders’ Equity
Shareholders’ equity totaled $1.7 billion at March 31, 2024, an increase of $15.7 million from December 31, 2023. Significant activity during the first three months of 2024 was as follows:
•Increase from net income of $40.4 million,
•Decrease in fair value of securities and cash flow hedges of $14.4 million, and
•Decrease from dividends paid on common and preferred stock of $10.3 million.
Liquidity and Capital Resources
Liquidity
The objective of liquidity management is to ensure we have the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to meet our commitments as they become due. Typical demands on liquidity are changes in deposit levels, maturing time deposits which are not renewed, and fundings under credit commitments to customers. Funds are available from a number of sources, such as the core deposit base and loan and security repayments and maturities.
Additionally, liquidity is provided from lines of credit with the FHLB, the Federal Reserve, and correspondent banks; the ability to acquire large and brokered deposits, sales of the securities portfolio, and the ability to sell loans or loan participations to other banks. These alternatives are an important part of our liquidity plan and provide flexibility and efficient execution of the asset-liability management strategy.
The Company’s Asset-Liability Management Committee oversees our liquidity position, the parameters of which are approved by the Bank’s Board of Directors. Our liquidity position is monitored daily. Our liquidity management framework includes measurement of several key elements, such as the loan to deposit ratio, a liquidity ratio, and a dependency ratio. The Company’s liquidity framework also incorporates contingency planning to assess the nature and volatility of funding sources and to determine alternatives to these sources. While core deposits and loan and investment repayments are principal sources of liquidity, funding diversification is another key element of liquidity management and is achieved by strategically varying depositor types, terms, funding markets, and instruments.
Liquidity from assets is available primarily from cash balances and the investment portfolio. Cash and interest-bearing deposits with other banks totaled $369.4 million at March 31, 2024 and $433.0 million at December 31, 2023. Investment securities are another important tool in liquidity planning. Securities totaled $2.4 billion at both March 31, 2024 and December 31, 2023, and included $1.2 billion and $1.6 billion, respectively, pledged as collateral for deposits of public institutions, loan notes and other requirements. The unpledged portion of the securities portfolio could be pledged or sold to enhance liquidity, if necessary. The Company also has a portfolio of SBA guaranteed loans, a portion of which could be sold in the secondary market to generate earnings and liquidity. SBA loans totaling $23.1 million were sold during the first quarter 2024.
47
Available on- and off-balance sheet liquidity sources include the following items:
($ in thousands)
March 31, 2024
Federal Reserve Bank borrowing capacity
$
2,572,380
FHLB borrowing capacity
1,332,877
Unpledged securities
1,133,207
Federal funds lines (6 correspondent banks)
120,000
Cash and interest-bearing deposits
369,420
Holding Company line of credit
25,000
Total
$
5,552,884
Liability liquidity funding sources are available to increase financial flexibility. In addition to amounts borrowed at March 31, 2024, the Company could borrow an additional $1.3 billion from the FHLB of Des Moines under blanket loan pledges and has additional real estate loans that could be pledged. In the first quarter of 2024, the Company pledged an additional $495 million of loans to the FHLB to increase the borrowing capacity. The Company also has $2.6 billion available from the Federal Reserve Bank under a pledged loan agreement. In the first quarter 2024, the Federal Reserve Bank borrowing capacity declined due to the expiration of the Bank Term Funding Program. On January 24, 2024, the Federal Reserve announced that the program would cease making new loans on March 11, 2024. The Company also has unsecured federal funds lines with six correspondent banks totaling $120 million.
In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company has $2.9 billion in unused commitments to extend credit as of March 31, 2024. However, the nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.
At the holding company level, the primary funding sources are dividends and payments from the Bank and proceeds from the issuance of equity (i.e. stock option exercises, stock offerings) and debt instruments. The main use of this liquidity is to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries as necessary, and satisfy other operating requirements. The holding company maintains a revolving line of credit for an aggregate amount up to $25 million, all of which was available at March 31, 2024. The line of credit has a one-year term and was renewed in February 2024 for an additional one-year term. The proceeds can be used for general corporate purposes. In the first quarter 2024, the Company repaid an $11.4 million term note that matured.
The Company has an effective automatic shelf registration statement on Form S-3 allowing for the issuance of various forms of equity and debt securities. The Company’s ability to offer securities pursuant to the registration statement depends on market conditions and the Company’s continuing eligibility to use the Form S-3 under rules of the SEC.
Strong capital ratios, credit quality and core earnings are essential to retaining cost-effective access to the wholesale funding markets. Deterioration in any of these factors could have a negative impact on the Company’s ability to access these funding sources and, as a result, these factors are monitored on an ongoing basis as part of the liquidity management process. The Bank is subject to regulations and, among other things, may be limited in its ability to pay dividends or transfer funds to the parent company. Accordingly, consolidated cash flows as presented in the consolidated statements of cash flows may not represent cash immediately available for the payment of cash dividends to the Company’s shareholders or for other cash needs.
Through the normal course of operations, the Company has entered into certain contractual obligations and other commitments. Such obligations relate to funding operations through deposits or debt issuances, as well as leases for premises and equipment. As a financial services provider, the Company routinely enters into commitments to extend credit. While contractual obligations represent future cash requirements of the Company, a significant
48
portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by the Company. The Company also enters into derivative contracts under which the Company either receives cash from or pays cash to counterparties depending on changes in interest rates. Derivative contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. The fair value of these contracts changes daily as market interest rates change.
Capital Resources
The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its bank affiliate must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The banking affiliate’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1, and common equity tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. To be categorized as “well capitalized”, banks must maintain minimum total risk-based (10%), Tier 1 risk-based (8%), common equity tier 1 risk-based (6.5%), and Tier 1 leverage ratios (5%). In addition, the Company must maintain an additional CCB above the regulatory minimum ratio requirements. The CCB is designed to insulate banks from periods of stress and impose constraints on dividends, share repurchases and discretionary bonus payments when capital levels fall below prescribed levels. As of March 31, 2024, and December 31, 2023, the Company and the Bank met all capital adequacy requirements to which they are subject and exceeded the amounts required to be “well capitalized”.
The following table summarizes the Company’s various capital ratios:
March 31, 2024
December 31, 2023
($ in thousands)
EFSC
Bank
EFSC
Bank
To Be Well-Capitalized
Minimum Ratio with CCB
Common Equity Tier 1 Capital to Risk Weighted Assets
11.4
%
12.1
%
11.3
%
12.2
%
6.5
%
7.0
%
Tier 1 Capital to Risk Weighted Assets
12.8
%
12.1
%
12.7
%
12.2
%
8.0
%
8.5
%
Total Capital to Risk Weighted Assets
14.3
%
13.2
%
14.2
%
13.2
%
10.0
%
10.5
%
Leverage Ratio (Tier 1 Capital to Average Assets)
11.0
%
10.5
%
11.0
%
10.6
%
5.0
%
N/A
Tangible common equity to tangible assets1
9.01
%
8.96
%
1 Not a required regulatory capital ratio.
The Company believes the tangible common equity ratio is an important measure of capital strength, even though it is considered a non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”
49
Use of Non-GAAP Financial Measures:
The Company’s accounting and reporting policies conform to generally accepted accounting principles in the United States (“GAAP”) and the prevailing practices in the banking industry. However, the Company provides other financial measures, such as tangible common equity, adjusted ROAA, adjusted return on average common equity, ROATCE, adjusted ROATCE, ACL on loans to total loans adjusted for guaranteed loans, core efficiency ratio, PPNR, estimated insured deposits, tangible book value per common share and the tangible common equity ratio, in this report that are considered “non-GAAP financial measures.” Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position, or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP.
The Company considers its tangible common equity, adjusted ROAA, adjusted return on average common equity, ROATCE, adjusted ROATCE, ACL on loans to total loans adjusted for guaranteed loans, core efficiency ratio, PPNR, estimated insured deposits, tangible book value per common share and the tangible common equity ratio, collectively “core performance measures,” presented in this report and the included tables as important measures of financial performance, even though they are non-GAAP measures, as they provide supplemental information by which to evaluate the impact of certain non-comparable items, and the Company’s operating performance on an ongoing basis. Core performance measures exclude certain other income and expense items, such as merger-related expenses, facilities charges, and the gain or loss on sale of investment securities, that the Company believes to be not indicative of or useful to measure the Company’s operating performance on an ongoing basis. The attached tables contain a reconciliation of these core performance measures to the GAAP measures. The Company believes that the tangible common equity ratio provides useful information to investors about the Company’s capital strength even though it is considered to be a non-GAAP financial measure and is not part of the regulatory capital requirements to which the Company is subject.
The Company believes these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding the Company’s performance and capital strength. The Company’s management uses, and believes that investors benefit from referring to, these non-GAAP measures and ratios in assessing the Company’s operating results and related trends and when forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with GAAP. In the attached tables, the Company has provided a reconciliation of, where applicable, the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios, or a reconciliation of the non-GAAP calculation of the financial measures for the periods indicated.
50
Core Efficiency Ratio
Quarter ended
($ in thousands)
March 31, 2024
December 31, 2023
March 31, 2023
Net interest income (GAAP)
$
137,728
$
140,732
$
139,529
Tax-equivalent adjustment
2,040
1,915
2,041
Net interest income - FTE (non-GAAP)
$
139,768
$
142,647
$
141,570
Noninterest income (GAAP)
12,158
25,452
16,898
Less gain on sale of investment securities
—
220
381
Less gain (loss) on sale of other real estate owned
(2)
—
90
Core revenue (non-GAAP)
$
151,928
$
167,879
$
157,997
Noninterest expense (GAAP)
$
93,501
$
92,603
$
80,983
Less FDIC special assessment
625
2,412
—
Less core conversion expense
350
—
—
Less amortization on intangibles
1,047
1,108
1,239
Core noninterest expense (non-GAAP)
$
91,479
$
89,083
$
79,744
Core efficiency ratio (non-GAAP)
60.21
%
53.06
%
50.47
%
Tangible Common Equity, Tangible Book Value per Share, and Tangible Common Equity Ratio
(in thousands, except per share data)
March 31, 2024
December 31, 2023
Shareholders' equity (GAAP)
$
1,731,725
$
1,716,068
Less preferred stock
71,988
71,988
Less goodwill
365,164
365,164
Less intangible assets
11,271
12,318
Tangible common equity (non-GAAP)
$
1,283,302
$
1,266,598
Common shares outstanding
37,515
37,416
Tangible book value per share (non-GAAP)
$
34.21
$
33.85
Total assets (GAAP)
$
14,613,338
$
14,518,590
Less goodwill
365,164
365,164
Less intangible assets
11,271
12,318
Tangible assets (non-GAAP)
$
14,236,903
$
14,141,108
Tangible common equity to tangible assets (non-GAAP)
9.01
%
8.96
%
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Return on Average Common Equity and Return on Average Tangible Common Equity (ROATCE)
Quarter ended
($ in thousands)
March 31, 2024
December 31, 2023
March 31, 2023
Average shareholder’s equity (GAAP)
$
1,738,698
$
1,652,882
$
1,568,451
Less average preferred stock
71,988
71,988
71,988
Less average goodwill
365,164
365,164
365,164
Less average intangible assets
11,770
12,858
16,247
Average tangible common equity (non-GAAP)
$
1,289,776
$
1,202,872
$
1,115,052
Net income available to common shareholders (GAAP)
$
39,463
$
43,592
$
54,800
FDIC special assessment (after tax)
470
1,814
—
Core conversion expense (after tax)
263
—
—
Net income available to common shareholders adjusted (non-GAAP)
$
40,196
$
45,406
$
54,800
Return on average common equity (GAAP)
9.52
%
10.94
%
14.85
%
Adjusted return on average common equity (non-GAAP)
9.70
%
11.40
%
14.85
%
ROATCE (non-GAAP)
12.31
%
14.38
%
19.93
%
Adjusted ROATCE (non-GAAP)
12.53
%
14.98
%
19.93
%
Return on Average Assets (ROAA)
Quarter ended
($ in thousands)
March 31, 2024
December 31, 2023
March 31, 2023
Net income (GAAP)
$
40,401
$
44,529
$
55,738
FDIC special assessment (after tax)
470
1,814
—
Core conversion expense (after tax)
263
—
—
Net income adjusted (non-GAAP)
$
41,134
$
46,343
$
55,738
Average assets
$
14,556,119
$
14,332,804
$
13,131,195
ROAA (GAAP)
1.12
%
1.23
%
1.72
%
Adjusted ROAA (non-GAAP)
1.14
%
1.28
%
1.72
%
ACL on Loans to Total Loans Adjusted for Guaranteed Loans
Quarter ended
($ in thousands)
March 31, 2024
December 31, 2023
March 31, 2023
Total loans (GAAP)
$
11,028,492
$
10,884,118
$
10,011,918
Less: Guaranteed loans, net
924,633
932,118
963,311
Total adjusted loans (non-GAAP)
$
10,103,859
$
9,952,000
$
9,048,607
ACL on loans
$
135,498
$
134,771
$
138,295
ACL on loans to total loans
1.23
%
1.24
%
1.38
%
ACL on loans to total adjusted loans
1.34
%
1.35
%
1.53
%
52
Pre-Provision Net Revenue (PPNR)
Quarter ended
($ in thousands)
March 31, 2024
December 31, 2023
March 31, 2023
Net interest income
$
137,728
$
140,732
$
139,529
Noninterest income
12,158
25,452
16,898
FDIC special assessment
625
2,412
—
Core conversion expense
350
—
—
Less gain on sale of investment securities
—
220
381
Less gain (loss) on sale of other real estate owned
(2)
—
90
Less noninterest expense
93,501
92,603
80,983
PPNR (non-GAAP)
$
57,362
$
75,773
$
74,973
Calculation of Estimated Insured Deposits
Quarter ended
($ in thousands)
March 31, 2024
Estimated uninsured deposits per Call Report
$
4,062,505
Collateralized/affiliate deposits
(515,439)
Accrued interest on deposits
(5,542)
Adjusted uninsured/uncollateralized deposits
3,541,524
Estimated insured/collateralized deposits
8,712,177
Total deposits
$
12,253,701
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosures set forth in this item are qualified by the cautionary language regarding forward-looking statements in the introduction to Item 2 of Part I of this Quarterly Report on Form 10-Q and other cautionary statements set forth elsewhere in this report.
Interest Rate Risk
Our interest rate risk management practices are aimed at optimizing net interest income, while guarding against deterioration that could be caused by certain interest rate scenarios. Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. We attempt to maintain interest-earning assets, comprised primarily of both loans and investments, and interest-bearing liabilities, comprised primarily of deposits, maturing or repricing in similar time horizons in order to manage any impact from market interest rate changes according to our risk tolerances. The Company uses a simulation model to measure the sensitivity to changing rates on earnings.
The Company determines the sensitivity of its short-term future earnings to a hypothetical plus or minus 100 to 300 basis point parallel rate shock through the use of simulation modeling. The simulation includes the modeling of the balance sheet as an ongoing entity. Future business assumptions involving administered rate products, prepayments for future rate-sensitive balances, and the reinvestment of maturing assets and liabilities are included. These items are then modeled to project net interest income based on a hypothetical change in interest rates. The resulting net interest income for the next 12-month period is compared to the baseline amounts calculated using flat rates. The difference represents the Company’s sensitivity to a positive or negative 100 basis points parallel rate shock.
53
The following table summarizes the expected impact of interest rate shocks on net interest income at March 31, 2024:
Rate Shock
Annual % change in net interest income
+ 300 bp
9.7%
+ 200 bp
6.5%
+ 100 bp
3.3%
- 100 bp
(3.4)%
- 200 bp
(7.2)%
- 300 bp
(11.1)%
In addition to the rate shocks shown in the table above, the Company models net interest income under various dynamic interest rate scenarios. In general, changes in interest rates are positively correlated with changes in net interest income.
The Company occasionally uses interest rate derivative instruments as an asset/liability management tool to hedge mismatches in interest rate exposure indicated by the net interest income simulation described above. They are used to modify the Company’s exposures to interest rate fluctuations and provide more stable spreads between loan yields and the rate on their funding sources. At March 31, 2024, the Company had derivative contracts to manage interest rate risk, including $350.0 million in notional value on derivatives to hedge the cash flows on floating rate loans and $32.1 million in notional value on derivative on floating rate debt. Derivative financial instruments are also discussed in “Item 1. Note 6 – Derivative Financial Instruments.”
The Financial Conduct Authority has announced that the most common USD LIBOR settings (overnight, 1-month. 3-month, 6-month and 12-month) will cease publication after September 30, 2024. LIBOR was the most liquid and common interest rate index in the world and was commonly referenced in financial instruments. With the cessation of LIBOR, the Company has selected term SOFR as the replacement index for the majority of its variable rate loans and began providing customer notifications in early 2023. The Company ceased using LIBOR and ICE swap rates in new contracts and began issuing SOFR based loans in December 2021.
The Company had $6.8 billion in variable rate loans at March 31, 2024. Of these loans, $4.4 billion have an interest rate floor and nearly all of those loans were at or above the floor. Variable rate loans include $2.8 billion indexed to the prime rate, $2.8 billion indexed to SOFR, $294.9 million indexed to LIBOR, and $812.9 millionindexed to other rates.
At March 31, 2024, the Company’s available-for-sale and held-to-maturity investment securities totaled $1.6 billion and $758.0 million, respectively. These portfolios consist primarily of fixed-rate securities that are subject to changes in market value due to changes in interest rates. At March 31, 2024, net unrealized losses were $165.6 millionand $63.6 million on the available-for-sale and held-to-maturity investment portfolios, respectively.
54
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of March 31, 2024. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based on that evaluation, the CEO and CFO concluded the Company’s disclosure controls and procedures were effective as of March 31, 2024 to provide reasonable assurance of the achievement of the objectives described above.
Changes to Internal Controls
There were no changes during the period covered by this Quarterly Report on Form 10-Q in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, those controls.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes there are no such legal proceedings pending or threatened against the Company or its subsidiaries in the ordinary course of business, directly, indirectly, or in the aggregate that, if determined adversely, would have a material adverse effect on the business, consolidated financial condition, results of operations or cash flows of the Company or any of its subsidiaries.
ITEM 1A: RISK FACTORS
For information regarding risk factors affecting the Company, please see the cautionary language regarding forward-looking statements in the introduction to Item 2 of Part I of this Quarterly Report on Form 10-Q, and Part I, Item 1A of our 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.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
55
ITEM 5: OTHER INFORMATION
During the quarter ended March 31, 2024, no officer or director of the company adopted or terminated any contract, instruction, or written plan for the purchase or sale of securities of the company’s common stock that is intended to satisfy the affirmative defense conditions of Securities Exchange Act Rule 10b5-1(c) or any non-Rule 10b5-1 trading arrangement as defined in 17 CFR § 229.408(c).
4.1 Long-term borrowing instruments are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Company undertakes to furnish copies of such instruments to the Securities and Exchange Commission upon request.
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
104 The cover page of Enterprise Financial Services Corp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, formatted in Inline XBRL (contained in Exhibit 101).
* Filed herewith
** Furnished herewith. Notwithstanding any incorporation of this Quarterly Statement on Form 10-Q in any other filing by the Registrant, Exhibits furnished herewith and designated with two (**) shall not be deemed incorporated by reference to any other filing unless specifically otherwise set forth herein or therein.
57
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clayton, State of Missouri, on the day of April 26, 2024.