ENTERPRISE FINANCIAL SERVICES CORP

Previous wording

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.

Current wording

The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first six 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 June 30, 2024, compared to the linked first quarter of 2024 (“linked quarter”) and the results of operations, liquidity and cash flows for the six months ended June 30, 2024 compared to the same period in 2023 (“prior year-to-date period”). 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 prior year-to-date period. 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.

Previous wording

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.

Current wording

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 $139.5 million at June 30, 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 $27.8 million. Conversely, the allowance would have increased $47.3 million using only the downside scenario.

Previous wording

•PPNR 1 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.

Current wording

•PPNR 1 of $63.3 million for the second quarter 2024 and $120.6 million for the six months ended June 30, 2024 increased $5.9 million and decreased $23.3 million from the linked quarter and prior year-to-date period, respectively. The increase from the linked quarter was primarily due to higher noninterest income, primarily tax credit income, and higher net interest income that benefited from higher average loan balances and expanding yields on earning assets. These increases were partially offset by an increase in deposit interest expense. The decrease compared to the prior year-to-date period 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.

Previous wording

•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.

Current wording

•Net interest income of $140.5 million for the second quarter 2024 and $278.3 million for the six months ended June 30, 2024 increased $2.8 million and decreased $2.0 million from the linked and prior year-to-date period, respectively. The NIM was 4.19% for the second quarter 2024 and 4.16% for the six months ended June 30, 2024, compared to 4.13% and 4.60% for the linked and prior year-to-date period, respectively. Compared to the linked quarter, net interest income increased due to higher average loan and interest-earning asset balances, along with an increase in the earning-asset yield that expanded more than the cost of interest-bearing liabilities. The decrease from the prior year-to-date period 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.

Previous wording

•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).

Current wording

•Noninterest expense of $94.0 million for the second quarter 2024 and $187.5 million for the six months ended June 30, 2024 increased $0.5 million and increased $20.6 million from the linked quarter and prior year-to-date period, respectively. The increase from the linked quarter was primarily driven by higher variable deposit costs ($1.4 million) and expenses related to the core system conversion ($0.9 million), partially offset by a decrease in employee compensation ($0.7 million) and the FDIC special assessment ($0.6 million). The increase from the prior year-to-date period was primarily due to variable deposit servicing costs ($12.3 million) and employee compensation ($5.6 million).

Previous wording

•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.

Current wording

•Loans – Total loans increased $115.9 million, or 1.06%, to $11.0 billion at June 30, 2024, compared to $10.9 billion at December 31, 2023. Average loans totaled $10.9 billion for the six months ended June 30, 2024 compared to $10.0 billion for the six months ended June 30, 2023.

Previous wording

•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 deposits 1, 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.

Current wording

•Deposits – Total deposits increased $106.0 million, to $12.3 billion at June 30, 2024 from $12.2 billion at December 31, 2023. Total estimated insured deposits 1, which includes collateralized deposits, reciprocal deposits and accounts that qualify for pass through insurance, totaled $8.7 billion at June 30, 2024, compared to $8.3 billion at December 31, 2023. Average deposits totaled $12.3 billion for the six months ended June 30, 2024 compared to $11.2 billion for the prior year-to-date period. Noninterest-bearing deposit accounts represented 32.0% of total deposits and the loan to deposit ratio was 89.6% at June 30, 2024, compared to 32.5% and 89.4%, respectively, at December 31, 2023.

Previous wording

•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.

Current wording

•Asset quality – The allowance for credit losses on loans to total loans was 1.27% at June 30, 2024, compared to 1.24% at December 31, 2023 The ratio of nonperforming assets to total assets was 0.33% at June 30, 2024 compared to 0.34% at December 31, 2023. A provision for credit losses of $4.8 million and $10.6 million was recorded in the second quarter of 2024 and the six months ended June 30, 2024, respectively. This compares to $5.8 million in the linked quarter and $10.5 million in the prior year-to-date period.

Previous wording

•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 ratio 2 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.

Current wording

•Shareholders’ equity– Total shareholders’ equity was $1.76 billion at June 30, 2024, compared to $1.72 billion at December 31, 2023, and the tangible common equity to tangible assets ratio 2 was 9.18% at June 30, 2024 compared to 8.96% at December 31, 2023. The Company and the Bank’s regulatory capital ratios exceeded the “well-capitalized” levels at June 30, 2024.

Previous wording

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.

Current wording

The Company’s board of directors approved a quarterly dividend of $0.27 per common share, payable on September 30, 2024 to shareholders of record as of September 16, 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) June 15, 2024 to (but excluding) September 15, 2024. The dividend will be payable on September 15, 2024 and will be paid on September 16, 2024 to holders of record of Series A Preferred Stock as of August 30, 2024.

Previous wording

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

Current wording

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

Previous wording

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.

Current wording

Net interest income on a tax equivalent basis of $142.6 million for the quarter ended June 30, 2024 and $282.3 million for the six months ended June 30, 2024, increased $2.8 million and decreased $2.0 million from the linked and prior year-to-date period, respectively. The decrease from the linked quarter was primarily due to an expansion of the loan portfolio and securities yields, and to a lesser extent, an increase in average earning assets. This increase was partially offset by an increase in cost and average interest-bearing deposit balances. The decrease from the prior year-to-date period reflects higher interest expense on the deposit portfolio, as lagged deposit rates have increased. The effective federal funds rate for both the linked and current quarter was 5.33%. The effective federal funds rate for the first six months of 2024 was 5.33%, an increase of 57 basis points compared to the prior year-to-date period.

Previous wording

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%.

Current wording

Compared to the linked quarter, tax equivalent interest income increased $3.9 million primarily due to a $34.6 million increase in average loan balances, as well as an 8 basis point increase in yield. The average interest rate of new loan originations in the second quarter 2024 was 8.07%, an increase of 23 basis points from the linked quarter. Interest on cash accounts increased $0.8 million from the linked quarter due to a $57.4 million increase in average balances, and interest on securities increased $0.5 million due to an 8 basis point increase in yield.

Previous wording

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.

Current wording

NIM, on a tax equivalent basis, was 4.19% in the second quarter 2024 and 4.16% for the first six months of 2024, an increase of 6 basis points and a decrease of 44 basis points from the linked and prior year-to-date period, respectively.

Previous wording

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.

Current wording

Total noninterest income for the second quarter 2024 was $15.5 million, an increase of $3.3 million from the linked quarter primarily due to an increase 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 quarter was primarily driven by gains on the sale of SBA loans that were recognized in the linked quarter.

Previous wording

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.

Current wording

Noninterest expense was $94.0 million for the second quarter 2024, an increase of $0.5 million from $93.5 million in the linked quarter. Employee compensation and benefits decreased $0.7 million from the linked quarter primarily due to employer payroll taxes that are seasonally higher in the first quarter each year and a decline in self-insured medical claims. 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 increased $1.4 million from the linked quarter primarily due to the expiration of unused allowances that reduced expense in the first quarter and growth in deposits. Expenses related to the core system conversion increased $0.9 million from the linked quarter due to the continued progress on the project and are included in the data processing line item.

Previous wording

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.

Current wording

Total noninterest expense of $187.5 million for the first six months of 2024 increased $20.6 million from the prior year-to-date period, primarily due to an increase in the associate base, merit increases throughout 2023 and 2024, and a $12.3 million increase in variable deposit costs due to higher earnings credit rates and average balances.

Previous wording

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.

Current wording

The Company’s effective tax rate was 20.5% for the second quarter 2024 and 20.4% for the six months ended June 30, 2024. This compares to the linked quarter and prior year-to-date effective tax rate of 20.2% and 21.7%, respectively. The decrease from the prior year-to-date effective tax rate was driven by tax credit opportunities the Company has deployed as part of its tax planning strategy.

Previous wording

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.

Current wording

Total assets were $14.6 billion at June 30, 2024, an increase of $97.1 million from December 31, 2023 primarily due to a $115.9 million increase in loans. Total liabilities of $12.9 billion increased $57.9 million from December 31, 2023 primarily due to a $106.0 million increase in deposits.

Previous wording

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.

Current wording

Investment securities were $2.4 billion, or 16% of total assets, at both June 30, 2024 and December 31, 2023. The portfolio is comprised of both available-for-sale and held-to-maturity securities.

Previous wording

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.

Current wording

Investment purchases in the second quarter 2024 had a weighted average, tax equivalent yield of 5.43%. The average duration of the investment portfolio was 5.1 years at June 30, 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 $375.3 million.

Previous wording

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.

Current wording

Loans totaled $11.0 billion at June 30, 2024 compared to $10.9 billion at December 31, 2023. The increase was primarily due to an increase of $133.2 million in construction loans, offset by a decrease in C&I loans of $53.1 million. Average revolving line draw utilization was 46% for the second quarter 2024, compared to 43% for the year ended December 31, 2023.

Previous wording

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.

Current wording

Specialty lending products, including sponsor finance, life insurance premium financing, and tax credits, consist primarily of C&I loans. Sponsor finance and life insurance premium financing loans are sourced through relationships developed with private equity funds and estate planning firms 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.

Previous wording

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.

Current wording

A provision for credit losses of $4.8 million for the second quarter 2024 and $10.6 million for the six months ended June 30, 2024, decreased $0.9 million and increased $0.1 million from the linked quarter and prior year-to-date period, respectively. The provision for credit losses in the second quarter 2024 was primarily related to an increase in reserves on individually evaluated loans, and updates to qualitative factors used in the allowance calculation. The provision for credit losses for the six months ended June 30, 2024 was stable with the prior year-to-date period. However, the provision for credit losses on loans in 2024 included an increase of $4.2 million due to higher charge-offs when compared to the prior year-to-date period. This was partially offset by a $5.1 million decrease in the provision for available-for-sale securities related to the impairment of an available-for-sale investment security in the prior year-to-date period.

Previous wording

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.

Current wording

The ACL on loans was 1.27% of total loans at June 30, 2024, compared to 1.24% of loans at December 31, 2023. The increase in the ratio of ACL on loans to total loans is primarily due to the increase in reserves on impaired loans. Excluding guaranteed loans, the ACL on loans to total loans was 1.38%4 at June 30, 2024, compared to 1.35% at December 31, 2023.

Previous wording

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.

Current wording

Nonperforming loans at June 30, 2024 decreased $4.3 million, or 10%, when compared to December 31, 2023. The decrease in nonperforming loans during the six months ended June 30, 2024 was primarily due to gross charge-offs of $9.4 million and principal payments of $6.2 million, offset by additions of $13.6 million.

Previous wording

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.

Current wording

Total deposits excluding brokered certificates of deposits, were $11.8 billion at June 30, 2024, an increase of $93.9 million from December 31, 2023. Brokered certificates of deposit at June 30, 2024 increased $12.1 million from December 31, 2023 and continue to be used as a stable funding source. The Company has deposit verticals focusing on property management, community associations, and escrow industries, in addition to deposits related to its specialty lending products. These deposits increased to $3.0 billion at June 30, 2024 from $2.8 billion at December 31, 2023 due to continued success at generating organic deposit growth.

Previous wording

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.

Current wording

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 $1.2 billion at both June 30, 2024 and December 31, 2023. The Company considers reciprocal accounts as customer-related deposits due to the customer relationship that generated the transaction.

Previous wording

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.

Current wording

At June 30, 2024, estimated uninsured/uncollateralized deposits totaled $3.6 billion, or 29% of total deposits, compared to $3.8 billion, or 31% of total deposits, at December 31, 2023.

Previous wording

The total cost of deposits was 2.13% for the current quarter, compared to 2.03% for the linked quarter.

Current wording

The total cost of deposits was 2.16% for the current quarter, compared to 2.13% for the linked quarter. For the six months ended June 30, 2024, the total cost of deposits was 2.15%, compared to 1.19% in the prior year-to-date period.

Previous wording

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:

Current wording

Shareholders’ equity totaled $1.8 billion at June 30, 2024, an increase of $39.2 million from December 31, 2023. Significant activity during the first six months of 2024 was as follows:

Previous wording

•Increase from net income of $40.4 million,

Current wording

•Increase from net income of $85.8 million,

Previous wording

•Decrease in fair value of securities and cash flow hedges of $14.4 million, and

Current wording

•Decrease in fair value of securities and cash flow hedges of $21.1 million, and

Previous wording

•Decrease from dividends paid on common and preferred stock of $10.3 million.

Current wording

•Decrease from dividends paid on common and preferred stock of $21.0 million.

Previous wording

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.

Current wording

Additionally, liquidity is provided from lines of credit with the FHLB, the Federal Reserve Bank, 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.

Previous wording

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.

Current wording

Liquidity from assets is available primarily from cash balances and the investment portfolio. Cash and interest-bearing deposits with other banks totaled $392.8 million at June 30, 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 June 30, 2024 and December 31, 2023, and included $1.2 billion and $1.6 billion at June 30, 2024 and December 31, 2023, 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.

Previous wording

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.

Current wording

Liability liquidity funding sources are available to increase financial flexibility. In addition to amounts borrowed at June 30, 2024, the Company could borrow an additional $1.2 billion from the FHLB of Des Moines under blanket loan pledges and has additional real estate loans that could be pledged. In the first half of 2024, the Company pledged additional loans to the FHLB to increase the borrowing capacity by $279.1 million. 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 March 11, 2024. The Company also has unsecured federal funds lines with seven correspondent banks totaling $140 million.

Previous wording

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.

Current wording

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 $2.8 billion in unused commitments to extend credit as of June 30, 2024. However, the nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.

Previous wording

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.

Current wording

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, repurchase common stock 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 June 30, 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.

Previous wording

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.

Current wording

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 additional 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.