Second Quarter Results

Net income of $45.1 million, $1.19 per diluted common share

Net interest margin (tax equivalent) of 3.55%

Pre-provision return on average assets¹ of 1.73%

Total loans² of $9.2 billion, a quarterly increase of $298.0 million, or 13% annualized

Increased quarterly dividend 5% to $0.23 per common share for the third quarter

Repurchased 349,383 shares at an average price of $45.65 per share

Jim Lally, President and Chief Executive Officer of Enterprise Financial Services Corp (NASDAQ:EFSC) (the "Company" or "EFSC"), said today upon the release of EFSC's second quarter earnings, "Our execution propelled double-digit loan growth on an annualized basis, building on the strong foundation that was established in the first quarter. Loan growth was diversified across our business lines and reflects the strength of the targeted investments we have made. Our organic growth, coupled with our well-positioned balance sheet, accelerated operating revenue which resulted in a nearly 18% return on average tangible common equity³ for the quarter. I am proud of what we have accomplished so far this year, as it demonstrates the power of the franchise we have built and expanded upon in recent years."

Highlights

Comparisons to the prior year are impacted by the acquisition of First Choice Bancorp ("First Choice" or "FCBP") in the third quarter of 2021.

Earnings - Net income in the second quarter 2022 was $45.1 million, a decrease of $2.5 million, compared to the linked quarter and an increase of $6.7 million from the prior year quarter. Earnings per share ("EPS") was $1.19 per diluted common share for the second quarter 2022, compared to $1.23 per diluted common share for both the linked and prior year quarters, respectively.

Pre-provision net revenue¹ ("PPNR") - PPNR of $58.4 million in the second quarter 2022 increased $1.4 million and $10.9 million from the linked and prior year quarters, respectively. The increase from the linked quarter was primarily due to an increase in net interest income, partially offset by a decline in noninterest income and an increase in noninterest expense, as further discussed in the following sections. The increase from the prior year quarter was primarily due to the positive contribution from the First Choice acquisition and expansion in net interest income from organic loan and deposit growth.

Net interest income and net interest margin ("NIM") - Net interest income of $109.6 million for the second quarter 2022 increased $8.4 million and $27.9 million from the linked and prior year quarters, respectively. NIM was 3.55% for the second quarter 2022, compared to 3.28% and 3.46% for the linked quarter and prior year quarter, respectively. Net interest income and NIM benefited from organic loan growth, a reallocation of excess liquidity into the investment portfolio and an increase in market interest rates.

¹ Pre-provision return on average assets is a non-GAAP measure. Refer to discussion and reconciliation of these measures in the accompanying financial tables.

²Excludes PPP loans, which totaled $49.2 million at June 30, 2022.

³ Return on average tangible common equity is a non-GAAP measure. Refer to discussion and reconciliation of these measures in the accompanying financial tables.

Noninterest income - Noninterest income of $14.2 million for the second quarter 2022 decreased $4.4 million and $2.0 million from the linked and prior year quarters, respectively. A decline in tax credit income from a seasonally strong first quarter and a decline in other income were the primary drivers of the linked quarter decrease. The decrease from the prior year quarter was primarily due to lower transactional income from private equity investments, a decrease in mortgage banking income and a decrease in gains on the sale of other real estate owned. These decreases were partially offset by deposit service charge income from the First Choice acquisition.

Loans - Total loans increased $213.1 million from the linked quarter to $9.3 billion as of June 30, 2022. PPP loans declined $84.9 million to $49.2 million. Excluding PPP loans, loans grew $298.0 million, or 13%, on an annualized basis from the linked quarter. Loan growth in the quarter was well distributed across geographic markets and the specialty lending niches. Average loans totaled $9.1 billion for the quarter ended June 30, 2022, compared to $9.0 billion and $7.3 billion for the linked and prior year quarters, respectively.

Asset quality - The allowance for credit losses to total loans was 1.52% at June 30, 2022, compared to 1.54% at March 31, 2022 and 1.77% at June 30, 2021. Nonperforming assets to total assets was 0.16% at June 30, 2022, compared to 0.17% and 0.44% at March 31, 2022 and June 30, 2021, respectively. A provision for credit losses of $0.7 million was recorded in the second quarter 2022 due to loan growth and changes in the macroeconomic forecasts, partially offset by an improvement in credit quality. Provision benefits of $4.1 million and $2.7 million were recorded in the linked and prior year quarters, respectively, primarily due to improvements in the macroeconomic forecasts.

Deposits - Total deposits decreased $611.5 million from the linked quarter to $11.1 billion as of June 30, 2022. The decline in deposits was concentrated in interest-bearing demand and money market accounts that were not relationship-based and reflects a shift in our deposit mix aligned with our disciplined focus on relationship-based, lower-cost deposits. Average deposits totaled $11.5 billion for both quarters ended June 30, 2022 and March 31, 2022, compared to $8.6 billion for the prior year quarter. Noninterest-bearing deposit accounts represented 42.8% of total deposits, and the loan to deposit ratio was 83.6% at June 30, 2022.

Capital - Total shareholders' equity was $1.4 billion and the tangible common equity to tangible assets ratio⁴ was 7.8% at June 30, 2022, compared to 7.6% at March 31, 2022. Tangible common equity declined $24.4 million in the second quarter 2022, primarily due to a $49.2 million decrease in accumulated other comprehensive income driven mainly from a decrease in the fair value of the available-for-sale investment portfolio. The decrease in accumulated other comprehensive income was partially offset by the undistributed earnings in the second quarter 2022. Enterprise Bank & Trust remains "well-capitalized," with a common equity tier 1 ratio of 12.0% and a total risk-based capital ratio of 13.1% as of June 30, 2022. The Company's common equity tier 1 ratio and total risk-based capital ratio was 10.9% and 14.2%, respectively, at June 30, 2022.

The Company repurchased 349,383 shares totaling $15.9 million in the second quarter 2022 for an average price of $45.65 per share. The shares acquired in the second quarter 2022 complete the share repurchase plan authorized by the Board of Directors on April 29, 2021. On May 4, 2022, the Board of Directors approved a new plan that authorized the repurchase of up to 2,000,000 shares of common stock. No shares have been repurchased under the recently-approved plan. In June 2022, the Company retired 1,980,093 shares of treasury stock and returned them to authorized and unissued shares.

⁴Tangible common equity to tangible assets ratio is a non-GAAP measure. Refer to discussion and reconciliation of this measure in the accompanying financial tables.

The Company's Board of Directors approved a quarterly dividend of $0.23 per common share, payable on September 30, 2022 to shareholders of record as of September 15, 2022, an increase of $0.01, or 5%, compared to the second quarter 2022. 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) June 15, 2022 to (but excluding) September 15, 2022. The dividend will be payable on September 15, 2022 to shareholders of record on August 31, 2022.

Net Interest Income

Average Balance Sheets

The following table presents, 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.

	Quarter ended
	June 30, 2022						March 31, 2022						June 30, 2021
($ 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:
Loans*	$	9,109,131	$	102,328	4.51	%	$	9,005,875	$	96,301	4.34	%	$	7,306,471	$	79,162	4.35	%
Securities*		2,068,119		12,944	2.51			1,923,969		10,969	2.31			1,502,582		9,226	2.46
Interest-earning deposits		1,401,961		2,496	0.71			1,781,272		817	0.19			806,928		237	0.12
Total interest-earning assets		12,579,211		117,768	3.76			12,711,116		108,087	3.45			9,615,981		88,625	3.70

Noninterest-earning assets		949,263						902,887						665,363

Total assets	$	13,528,474					$	13,614,003					$	10,281,344

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand accounts	$	2,329,431	$	659	0.11	%	$	2,505,319	$	536	0.09	%	$	1,985,811	$	336	0.07	%
Money market accounts		2,767,595		2,270	0.33			2,872,302		1,460	0.21			2,344,871		988	0.17
Savings		854,860		70	0.03			817,431		66	0.03			718,193		52	0.03
Certificates of deposit		591,091		851	0.58			607,133		797	0.53			522,633		1,091	0.84
Total interest-bearing deposits		6,542,977		3,850	0.24			6,802,185		2,859	0.17			5,571,508		2,467	0.18
Subordinated debentures		155,092		2,257	5.84			154,959		2,220	5.81			203,849		2,847	5.60
FHLB advances		50,000		197	1.58			50,000		195	1.58			50,000		197	1.58
Securities sold under agreements to repurchase		202,536		41	0.08			262,252		60	0.09			209,062		58	0.11
Other borrowings		21,414		111	2.08			22,841		82	1.46			27,147		94	1.39
Total interest-bearing liabilities		6,972,019		6,456	0.37			7,292,237		5,416	0.30			6,061,566		5,663	0.37

Noninterest-bearing liabilities:
Demand deposits		4,987,455						4,692,027						3,008,703
Other liabilities		94,733						93,518						94,106
Total liabilities		12,054,207						12,077,782						9,164,375
Shareholders' equity		1,474,267						1,536,221						1,116,969
Total liabilities and shareholders' equity	$	13,528,474					$	13,614,003					$	10,281,344

Total net interest income			$	111,312					$	102,671					$	82,962
Net interest margin					3.55	%					3.28	%					3.46	%

* Non-taxable income is presented on a fully tax-equivalent basis using a 25.2% tax rate. The tax-equivalent adjustments were $1.7 million, $1.5 million, and $1.2 million for the three months ended June 30, 2022, March 31, 2022, and June 30, 2021, respectively.

NIM, on a tax equivalent basis, was 3.55% in the second quarter 2022, an increase of 27 basis points from the linked quarter and an increase of nine basis points from the prior year quarter. The increase in NIM from the linked quarter was primarily due to higher yields on loans, investments and interest-earning deposits due to an increase in market interest rates, including a 125 basis point increase in the federal funds rate. The average loan yield was 4.51% in the second quarter 2022, an increase of 17 basis points from the linked quarter. The average loan yield increased due to the repricing of variable-rate loans and the origination of new loans at an average rate of 4.71% (as of June 30, 2022). Approximately 20% of the variable-rate loan portfolio reprices on the first day of each quarter and did not increase with the current quarter's rate movement, but these loan rates will reset early in the third quarter. The average investment yield was 2.51%, an increase of 20 basis points from the linked quarter. The investment yield increased due to the purchase of new investments at higher yields due to the expansion of the investment portfolio and the reinvestment of cash flows. Investments purchased in the second quarter 2022 had a tax equivalent average yield of 2.99%.

The effective federal funds rate for the second quarter 2022 was 76 basis points, an increase of 64 basis points, compared to the linked quarter and a 69 basis point increase over the prior year quarter. Concurrently, the Company's earning asset yield increased 31 basis points, while the interest-bearing liability yield increased seven basis points, compared to the linked quarter. The total cost of deposits, including noninterest-bearing demand accounts, increased three basis points during the second quarter 2022.

Net interest income for the second quarter was $109.6 million, an increase of $8.4 million from the linked quarter, and an increase of $27.9 million from the prior year period. The increase in net interest income from the linked quarter was primarily due to an increase in the earning asset yield due to an increase in interest rates that was further enhanced by a stronger earning asset mix. The Company continued to redeploy part of its excess liquidity into the investment portfolio during the second quarter, increasing investments $244.2 million, when excluding mark-to-market fluctuations. Net interest income was also impacted by a decline in PPP income, a decline in interest-earning deposit accounts and the related interest income, and an increase in interest expense.

Loans

The following table presents total loans for the most recent five quarters:

	Quarter ended
										September 30, 2021
($ in thousands)	June 30, 2022			March 31, 2022			December 31, 2021			FCBP^a		Legacy EFSC^a		Consolidated			June 30, 2021
C&I	$	1,702,081		$	1,498,151		$	1,538,155		$	242,740	$	1,215,338	$	1,458,078		$	1,116,229
CRE investor owned		1,977,806			1,982,645			1,955,087			553,490		1,381,794		1,935,284			1,467,243
CRE owner occupied		1,118,895			1,138,106			1,112,463			301,929		861,307		1,163,236			789,220
SBA loans*		1,284,279			1,249,929			1,241,449			160,833		1,038,925		1,199,758			1,010,727
Sponsor finance*		647,180			641,476			508,469			—		454,431		454,431			463,744
Life insurance premium financing*		688,035			636,096			593,562			—		572,492		572,492			564,366
Tax credits*		550,662			518,020			486,881			—		462,168		462,168			423,258
SBA PPP loans		49,175			134,084			271,958			206,284		232,675		438,959			396,660
Residential real estate		391,867			410,173			430,985			226,321		293,538		519,859			302,007
Construction and land development		626,577			610,830			625,526			219,600		432,627		652,227			467,586
Other		232,619			236,563			253,107			32,547		227,544		260,091			225,227
Total loans	$	9,269,176		$	9,056,073		$	9,017,642		$	1,943,744	$	7,172,839	$	9,116,583		$	7,226,267

Total loan yield		4.51	%		4.34	%		4.32	%						4.32	%		4.35	%
Variable interest rate loans to total loans		64	%		63	%		63	%						63	%		60	%

*Specialty loan category

^aAmounts reported are as of September 30, 2021 and are separately shown attributable to the FCBP loan portfolio acquired on July 21, 2021, and the Company's pre-FCBP acquisition loan portfolio.

Loans totaled $9.3 billion at June 30, 2022, increasing $213.1 million, compared to the linked quarter. PPP loans declined $84.9 million in the second quarter 2022 to $49.2 million from continued loan forgiveness by the Small Business Administration ("SBA"). Excluding PPP loans, loans grew $298.0 million, or 13% on an annualized basis, from the linked quarter. The increase was driven by the specialty lending categories noted in the table above, increasing $124.6 million, as well as growth in nearly all geographic markets in the second quarter 2022. Average line utilization was approximately 44% for the quarter ended June 30, 2022, compared to 40% and 39% for the linked and prior year quarters, respectively. This trend added approximately $152 million to loans outstanding during the current quarter.

Asset Quality

The following table presents the categories of nonperforming assets and related ratios for the most recent five quarters:

	Quarter ended
($ in thousands)	June 30, 2022			March 31, 2022			December 31, 2021			September 30, 2021			June 30, 2021
Nonperforming loans*	$	19,560		$	21,160		$	28,024		$	41,554		$	42,252
Other real estate		955			1,459			3,493			3,493			3,612
Nonperforming assets*	$	20,515		$	22,619		$	31,517		$	45,047		$	45,864

Nonperforming loans to total loans		0.21	%		0.23	%		0.31	%		0.46	%		0.58	%
Nonperforming assets to total assets		0.16	%		0.17	%		0.23	%		0.35	%		0.44	%
Allowance for credit losses to total loans		1.52	%		1.54	%		1.61	%		1.67	%		1.77	%
Net charge-offs (recoveries)	$	(175	)	$	1,521		$	3,263		$	1,850		$	869

*Guaranteed balances excluded	$	6,063		$	3,954		$	6,481		$	5,109		$	3,930

Nonperforming assets declined $2.1 million during the second quarter 2022 and $25.3 million from the prior year quarter. During the second quarter the Company experienced one basis point of net recoveries relative to average loans, compared to seven basis points of net charge-offs in the linked quarter and five basis points of net charge-offs in the prior year quarter. The Company recorded a provision for credit losses of $0.7 million for the second quarter 2022, compared to a benefit of $4.1 million for the linked quarter and a benefit of $2.7 million for the prior year quarter. Allowance for credit losses to total loans was 1.52% at June 30, 2022, a decrease of two basis points from the linked quarter. This trend was due to continued improvement in asset quality and net recovery activity, while loan growth and a decline in forecasted macroeconomic factors warranted additions to the allowance for credit losses.

Deposits

The following table presents deposits broken out by type for the most recent five quarters:

	Quarter ended
							September 30, 2021
($ in thousands)	June 30, 2022		March 31, 2022		December 31, 2021		FCBP^a		Legacy EFSC^a		Consolidated		June 30, 2021
Noninterest-bearing demand accounts	$	4,746,478	$	4,881,043	$	4,578,436	$	1,041,622	$	3,334,091	$	4,375,713	$	3,111,581
Interest-bearing demand accounts		2,197,957		2,547,482		2,465,884		317,301

Enterprise Financial Reports Second Quarter 2022 Results