Enterprise Financial Services Corp. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The company provides banking and wealth management services through Enterprise Bank & Trust. Unless otherwise noted, figures below are in U.S. dollars.
Financial results and key metrics
| Metric | Q3 2023 | Comparison |
|---|---|---|
| Net interest income | $141.6 million | Up from $124.3 million in Q3 2022; up $0.9 million from Q2 2023 |
| Net interest margin, tax-equivalent | 4.33% | 4.10% in Q3 2022; down from 4.49% in Q2 2023 |
| Provision for credit losses | $8.0 million | $0.7 million in Q3 2022; $6.3 million in Q2 2023 |
| Noninterest income / expense | $12.1 million / $88.6 million | Income down $2.2 million and expense up $2.7 million from Q2 2023 |
| Net income | $44.7 million | Down from $50.2 million in Q3 2022 and $49.1 million in Q2 2023 |
| Diluted EPS | $1.17 | $1.32 in Q3 2022; $1.29 in Q2 2023 |
| Return on average assets / common equity | 1.26% / 11.00% | 1.51% / 13.74% in Q3 2022 |
| Efficiency ratio | 57.66% | 51.47% in Q3 2022; 55.46% in Q2 2023 |
For the first nine months, net income was $149.5 million versus $143.0 million in 2022, and diluted EPS was $3.91 versus $3.73. Net interest income rose to $421.9 million from $335.1 million; tax-equivalent NIM was 4.50%, up from 3.64%.
Balance sheet, liquidity, and capital
- At September 30, total assets were $14.0 billion, up 7% from year-end 2022. Loans were $10.6 billion, up 9%, while deposits were $11.9 billion, up 10%.
- Cash and cash equivalents were $370.7 million. Deposits shifted toward interest-bearing accounts; noninterest-bearing accounts were 32% of deposits, versus 43% at December 31, 2022. Brokered CDs totaled $695.6 million.
- Estimated uninsured or uncollateralized deposits were $3.4 billion, or 29% of deposits, down from $5.9 billion, or 55%, at year-end. Management attributed the reduction largely to reciprocal deposits and accounts qualifying for pass-through insurance.
- The loan-to-deposit ratio was 89.1%. Management reported $4.7 billion of available on- and off-balance-sheet liquidity sources, including borrowing capacity, unpledged securities, cash, and credit lines.
- FHLB advances were zero at quarter-end, compared with $100.0 million at December 31, 2022. Subordinated debentures and notes were $155.8 million; other borrowings were $182.4 million.
- Shareholders’ equity was $1.61 billion. Tangible common equity to tangible assets was 8.51%. Company and bank regulatory capital ratios exceeded well-capitalized requirements; company CET1 and total capital ratios were 11.2% and 14.1%, respectively.
- Nine-month operating cash flow was $189.3 million; investing activities used $918.7 million and financing activities provided $808.8 million.
Material changes and asset quality
- Higher market rates and loan growth lifted interest income, but higher deposit pricing raised funding costs. Q3 interest-bearing deposit cost increased to 2.77% from 2.26% in Q2; total deposit cost rose to 1.84% from 1.46%.
- Nonperforming loans increased to $48.9 million, or 0.46% of loans, from $10.0 million, or 0.10%, at year-end 2022. Nonperforming assets were $55.9 million, or 0.40% of assets. Commercial real estate was a substantial portion of nonperforming loans.
- The allowance for credit losses on loans was $142.1 million, or 1.34% of loans, versus $136.9 million, or 1.41%, at year-end. Nine-month net charge-offs were $9.6 million, compared with $1.8 million in the prior-year period.
- Available-for-sale securities had $235.0 million of net unrealized losses; held-to-maturity securities had $108.8 million. Accumulated other comprehensive loss was $167.8 million. Management said securities losses were primarily due to market interest rates.
- Nine-month noninterest expense increased 30% to $255.6 million, notably reflecting higher deposit costs and employee compensation. Nine-month noninterest income increased 2% to $43.3 million, including SBA loan-sale gains; deposit service charges and card revenue declined.
Management commentary, outlook, and risks
The filing provides no formal earnings or financial guidance. Management said loan growth, higher asset yields, and higher deposit expense shaped results. Its credit-loss forecasts used baseline, upside, and downside economic scenarios; model assumptions included a federal funds rate peak of 5.25%–5.50% and declines beginning in the latter half of 2024. Management cautioned that recession risk, persistent inflation, tighter credit, and financial-system weakness could increase future credit-loss provisions.
The company recorded a $5.0 million provision and subsequent charge-off related to a subordinated debt security of a bank that failed in 2023. The FDIC had proposed a special assessment; the company estimated an impact of approximately $2.2 million, to be recognized if and when the rule is finalized. Management identified regional-bank confidence and deposit outflows, funding costs, interest-rate changes, credit quality, real estate values, and broader economic conditions as material risks. It reported no legal proceedings expected to have a material adverse effect.
The board approved a $0.25 quarterly common dividend, payable December 29, 2023, and declared the quarterly Series A preferred dividend. Disclosure controls were deemed effective, with no material change in internal controls reported.
Important facts for investors to verify
- Whether elevated nonperforming loans, charge-offs, and commercial real estate exposures continue to rise, and how loss reserves respond.
- Whether deposit mix and funding costs stabilize, including reliance on brokered CDs and the level of uninsured or uncollateralized deposits.
- Whether NIM and earnings hold up as deposit rates reprice and market-rate conditions change.
- The duration and potential accounting or capital effects of unrealized securities losses, alongside available liquidity and borrowing capacity.
- The final FDIC assessment amount and timing, and any further unusual credit or operating charges.