Enterprise Financial Services Corp. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in millions unless stated otherwise. Enterprise is a financial holding company providing banking and wealth management services through Enterprise Bank & Trust across several U.S. states. First Choice Bancorp (FCBP), acquired in July 2021, is included in results from the acquisition date.
Financial performance and condition
| Metric | Q2 2022 | Comparable period / change |
|---|---|---|
| Net interest income | $109.6 | $81.7 in Q2 2021; up $8.4 from Q1 2022 |
| Provision for credit losses | $0.7 expense | $2.7 benefit in Q2 2021; $4.1 benefit in Q1 2022 |
| Noninterest income | $14.2 | $16.2 in Q2 2021; down $4.4 from Q1 |
| Noninterest expense | $65.4 | $52.5 in Q2 2021; up $2.6 from Q1 |
| Net income | $45.1 | $38.4 in Q2 2021 |
| Net income available to common shareholders | $44.2 | $38.4 in Q2 2021 |
| Diluted EPS | $1.19 | $1.23 in Q2 2021 |
| Net interest margin, tax-equivalent | 3.55% | 3.46% in Q2 2021; 3.28% in Q1 2022 |
For the first six months, net income was $92.8 versus $68.3 a year earlier; net interest income was $210.8 versus $160.9. The six-month tax-equivalent net interest margin was 3.41%, down from 3.48%. Earnings growth reflected the FCBP acquisition, higher market rates, and loan and investment growth, partly offset by lower PPP income. Q2 diluted EPS declined year over year despite higher common income, with a larger weighted-average share count following the acquisition.
At June 30, total assets were $13.08 billion, down from $13.54 billion at year-end 2021. Loans were $9.27 billion, up $251.5 million; excluding PPP loans, growth was $474.3 million, or 11% annualized. Deposits were $11.09 billion, down $251.2 million. Cash and cash equivalents declined to $944.8 million from $2.02 billion, as liquidity was deployed into loans and securities and deposits declined. The loan-to-deposit ratio was 83.6%; noninterest-bearing deposits were 42.8% of deposits.
Six-month operating cash flow was $114.7 million; investing cash flow was negative $762.2 million and financing cash flow was negative $429.4 million. Cash and cash equivalents decreased $1.08 billion over the period. Subordinated debentures and notes were $155.2 million, FHLB advances $50.0 million, and other borrowings $226.7 million at quarter-end.
Shareholders’ equity was $1.45 billion, down $81.7 million from year-end. Tangible common equity to tangible assets was 7.80%, versus 8.13%. The decline principally reflected a $127.3 million after-tax reduction in accumulated other comprehensive income, primarily from lower available-for-sale securities values. The AFS portfolio had $165.3 million of gross unrealized losses at June 30. Company and Bank regulatory capital ratios remained above well-capitalized thresholds; Company CET1 was 10.9% and Bank CET1 was 12.0%.
Material changes and management commentary
- Interest-rate increases and asset sensitivity lifted Q2 net interest income and margin sequentially. Management reported that the Federal Reserve raised the federal funds target by 125 basis points during Q2; the company’s sensitivity model estimated net interest income would rise 5.8% under a +100-basis-point shock and fall 8.4% under a -100-basis-point shock.
- Noninterest income fell sequentially, mainly from seasonal declines in tax credit income and lower other income. Noninterest expense rose sequentially, including higher deposit costs and loan and legal expenses.
- PPP loans declined to $49.2 million from $272.0 million at year-end as loans were forgiven. PPP income was $1.6 million in Q2 versus $2.9 million in Q1, and $4.4 million for the first half versus $16.4 million a year earlier.
- Credit indicators improved: nonperforming loans were $19.6 million, or 0.21% of loans, versus $28.0 million, or 0.31%, at year-end. The loan ACL was $140.5 million, 1.52% of loans versus 1.61%; the first-half provision was a net benefit of $3.4 million. Management attributed the lower coverage ratio to loan growth and the provision benefit.
- The company repurchased 700,473 shares for $32.9 million in the first half, completing its prior authorization. A new authorization permits repurchases of up to 2 million shares; none had been repurchased under the new plan as of the filing. The Board approved a Q3 common dividend of $0.23 per share.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management’s commentary identifies potential benefits from higher rates to an asset-sensitive balance sheet, while noting that future results depend on rates, loan and deposit trends, and economic conditions. The company expects to select a replacement index and notify customers ahead of the scheduled June 2023 cessation of key U.S. dollar LIBOR settings. At June 30, LIBOR-linked exposures included $1.9 billion of loans, $119 million of borrowings, and $768 million of derivatives notional.
Key risks cited include inflation, labor and supply-chain pressures, changing interest rates and funding costs, economic slowdown, credit deterioration, real-estate collateral values, COVID-19 impacts, geopolitical developments including the Russia-Ukraine conflict, acquisition integration, regulation, and LIBOR transition. CECL forecasts included baseline, upside, and downside scenarios; management said the downside-only scenario would increase the loan allowance by $48.4 million relative to the reported estimate.
Off-balance-sheet commitments included $2.62 billion to extend credit and $66.7 million of letters of credit. Management noted that commitments may expire undrawn and that aggregate funding is considered unlikely, but draws could create liquidity needs. Available contingent borrowing included $778 million from the FHLB, $1.4 billion from the Federal Reserve under pledged collateral, and $90 million in correspondent-bank federal funds lines. Management stated that pending or threatened legal proceedings were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether higher market rates continue to support asset yields as deposit balances shift or reprice and funding costs rise.
- How unrealized securities losses, AOCI, and the reduced tangible common equity ratio evolve; distinguish mark-to-market effects from realized losses.
- Whether loan growth, economic forecasts, and credit performance warrant changes to the allowance, particularly in sponsor finance and real-estate-related exposures.
- Whether deposit outflows, credit-line utilization, or other funding needs pressure liquidity or lead to greater reliance on borrowings.
- Progress on LIBOR contract remediation and the effects of the transition on loans, borrowings, derivatives, and tax-credit valuations.
- Execution of the new share-repurchase authorization and the effect of dividends and repurchases on capital.