Enterprise Financial Services Corp. — Q2 2023 Form 10-Q
Business context and reporting period. Enterprise Financial Services Corp. is a financial holding company providing banking and wealth management services through Enterprise Bank & Trust, primarily across seven U.S. states. This unaudited report covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are to December 31, 2022.
Key financial results
| Metric | Q2 2023 | Comparable period / change |
|---|---|---|
| Net interest income | $140.7 million | Up $31.1 million year over year; up $1.2 million from Q1 |
| Net income | $49.1 million | Up from $45.1 million in Q2 2022; down from $55.7 million in Q1 |
| Net income available to common shareholders | $48.2 million | Q2 2022: $44.2 million |
| Diluted earnings per share | $1.29 | Q2 2022: $1.19; Q1 2023: $1.46 |
| Net interest margin, tax-equivalent | 4.49% | Q1 2023: 4.71%; Q2 2022: 3.55% |
| Noninterest income / expense | $14.3 million / $86.0 million | Expense increased $20.5 million year over year |
| Provision for credit losses | $6.3 million | Q1: $4.2 million; Q2 2022: $0.7 million |
For the six months, net income was $104.9 million, compared with $92.8 million in 2022; diluted EPS was $2.75 versus $2.41. Net interest income was $280.2 million versus $210.8 million, while noninterest income was $31.2 million versus $32.8 million and noninterest expense was $166.9 million versus $128.2 million. Management reported six-month pre-provision net revenue of $143.9 million, up $28.4 million year over year (non-GAAP).
Financial position, cash flow, and liquidity
- Balance sheet: Total assets were $13.87 billion, up 6% from year-end. Loans were $10.51 billion, up $775.5 million (8%); deposits were $11.62 billion, up $790.7 million (7%).
- Funding and borrowings: Noninterest-bearing deposits fell to $3.88 billion from $4.64 billion; brokered CDs rose to $893.8 million from $119.0 million. Estimated uninsured/uncollateralized deposits were $3.3 billion, or 28% of deposits, versus $5.9 billion, or 55%, at year-end. Subordinated debt and notes were $155.7 million, FHLB advances $150.0 million, and other borrowings $199.4 million.
- Liquidity: Cash and cash equivalents were $322.0 million. Management reported $4.51 billion in available on- and off-balance-sheet liquidity sources, including Federal Reserve and FHLB capacity, unpledged securities, correspondent lines, cash, and the holding-company credit line. The loan-to-deposit ratio was 90.5%.
- Cash flows, first six months: Operating activities provided $139.8 million; investing activities used $804.2 million, principally reflecting $789.4 million of net loan growth; financing activities provided $695.1 million. Cash and cash equivalents increased $30.7 million to $322.0 million.
- Equity and capital: Shareholders’ equity was $1.62 billion, up $96.0 million. Tangible common equity to tangible assets was 8.65% (non-GAAP). Company and bank regulatory capital ratios exceeded well-capitalized thresholds; bank CET1 was 12.0% and total capital was 13.0%.
Material changes and credit quality
- Higher market rates and loan growth lifted asset yields and net interest income, but deposit costs rose sharply. Q2 interest expense was $47.2 million versus $6.5 million a year earlier; the average cost of interest-bearing deposits reached 2.26%, up 70 basis points from Q1. Total deposit cost was 1.46% in Q2.
- Q2 noninterest expense rose 6% sequentially, primarily due to higher deposit costs and operational losses. Six-month expense increased 30% year over year, driven by deposit costs, compensation, FDIC assessments, and other expenses.
- Nonperforming loans increased to $16.1 million from $10.0 million at year-end; nonperforming assets were 0.12% of total assets versus 0.08%. Net charge-offs were $2.7 million for the first six months, compared with $1.3 million in 2022. The loan allowance was $141.3 million, or 1.34% of loans, versus 1.41% at year-end.
- Available-for-sale and held-to-maturity securities had net unrealized losses of approximately $179.9 million and $71.7 million, respectively, at June 30. Management attributed most unrealized losses to interest-rate changes.
Outlook, risks, and unusual items
- The filing provides no specific earnings or growth guidance. Management noted that results for the interim period are not necessarily indicative of full-year results.
- Management’s credit-loss forecasts use baseline, upside, and recession-downside scenarios weighted 40%, 30%, and 30%. At June 30, the allowance included approximately $14.3 million above the baseline model and a $39.7 million qualitative adjustment. Identified risks include recession, persistent inflation, tighter credit markets, financial-system weakness, and commercial-office exposure.
- Q2 provision included ongoing loan-related credit costs; the six-month provision also reflected a $5.0 million loss allowance and subsequent charge-off for a debt security issued by a bank that failed in 2023.
- The FDIC proposed a special assessment to recover costs associated with protecting uninsured depositors at failed banks. The company estimated a potential impact of approximately $2.2 million if finalized; the charge had not yet been recognized.
- Management identifies deposit outflows and repricing, competition for deposits, rapid interest-rate changes, recession and credit deterioration, real-estate collateral values, and regional-bank confidence concerns as risks. The company estimates that a +300 bp rate shock would increase next-12-month net interest income by 7.0%, while a −300 bp shock would reduce it by 9.6%.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. No material adverse effect from pending or threatened legal proceedings was expected. On August 4, 2023, the company amended employment agreements for five senior executives, including revised severance and change-in-control provisions.
Important facts for investors to verify
- Whether deposit pricing, brokered-CD reliance, and the mix of noninterest-bearing deposits continue to pressure funding costs and margins.
- Whether the reported liquidity sources remain accessible under stress and how uninsured-deposit estimates and commitments to extend credit evolve.
- Whether nonperforming loans, charge-offs, commercial-office exposure, and allowance assumptions change as economic conditions develop.
- How unrealized securities losses, interest-rate exposure, and the FDIC special assessment affect future earnings, capital, and liquidity.
- The potential financial implications of the executive agreement amendments and any future severance or change-in-control payments.