Enterprise Financial Services Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Enterprise Financial Services Corp. is a financial holding company providing banking and wealth-management services through Enterprise Bank & Trust, primarily across six western and central U.S. states. The results include First Choice Bancorp (FCBP) from its July 2021 acquisition date, affecting year-over-year comparisons.
Key financial metrics
Amounts below are in millions, except per-share data and ratios.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $124.3 | $97.3 | $335.1 | $258.1 |
| Provision (benefit) for credit losses | $0.7 | $19.7 | ($2.7) | $17.0 |
| Noninterest income | $9.5 | $17.6 | $42.3 | $45.1 |
| Noninterest expense | $68.8 | $76.9 | $197.1 | $182.2 |
| Net income | $50.2 | $13.9 | $143.0 | $82.2 |
| Diluted EPS | $1.32 | $0.38 | $3.73 | $2.48 |
| Net interest margin, tax-equivalent | 4.10% | 3.40% | 3.64% | 3.45% |
Q3 return on average assets was 1.51%; return on average common equity was 13.74%; and the efficiency ratio was 51.47%. Nine-month operating cash flow was $187.9 million. Investing activities used $912.1 million and financing activities used $552.5 million, producing a $1.277 billion decrease in cash and cash equivalents.
At September 30, total assets were $13.0 billion, loans $9.35 billion, deposits $11.06 billion, and shareholders’ equity $1.45 billion. Cash and cash equivalents were $744.9 million. The company had no FHLB advances outstanding, $155.3 million of subordinated debentures and notes, and $197.4 million of other borrowings. Loan-to-deposit ratio was 84.6%. Regulatory capital ratios exceeded well-capitalized thresholds: company CET1 11.0%, Tier 1 12.6%, total risk-based capital 14.2%, and leverage 10.4%.
Material changes and management commentary
- Q3 net interest income rose $14.7 million from Q2 and tax-equivalent NIM increased 55 basis points to 4.10%. Management attributed the improvement to higher asset yields, loan and investment growth, and repricing of variable-rate assets; higher deposit costs partly offset it.
- Average loan yield increased to 5.10% from 4.51% in Q2. The company noted that about 20% of variable-rate loans reprice on the first day of each quarter, with some benefit from rate increases expected to flow through in Q4.
- Noninterest income fell $4.7 million from Q2, including a $4.8 million decline in tax-credit income. Higher market rates reduced fair values of tax-credit projects. The Durbin Amendment debit-card interchange cap reduced Q3 card-services revenue by approximately $1.0 million.
- Loans increased $337.3 million from year-end; excluding PPP loans, growth was $596.1 million, or 7%. PPP balances declined to $13.2 million. Deposits decreased $286.2 million, with managed outflows concentrated in certain interest-sensitive, non-relationship accounts; noninterest-bearing deposits were 42% of deposits.
- Nonperforming loans declined to $18.2 million from $28.0 million at year-end; nonperforming assets were 0.14% of assets. The allowance for credit losses was $140.6 million, or 1.50% of loans. Nine-month net charge-offs were $1.8 million, versus $8.4 million in the prior-year period.
- Shareholders’ equity declined $82.9 million from year-end, principally reflecting a $172.0 million after-tax decline in accumulated other comprehensive income, mainly from lower available-for-sale securities values. Tangible common equity to tangible assets was 7.86%, down from 8.13%.
Outlook, risks and contingencies
- The filing provides no specific quantitative earnings or full-year financial guidance. Management describes sensitivity to interest rates: modeled 12-month net interest income changes were +13.5% for a +300-basis-point shock, +4.4% for +100 basis points, and -5.7% for -100 basis points. These are model estimates, not forecasts.
- Management’s credit-loss estimates incorporate baseline, upside and recession scenarios. It identifies risks including overly aggressive monetary tightening, recession, persistent inflation, labor or supply-chain disruption, and borrower stress; worsening forecasts could increase future credit-loss provisions.
- Available-for-sale securities had a net unrealized loss of $168.8 million at September 30, primarily attributed to market interest-rate changes. The company transferred $116.9 million of securities from available-for-sale to held-to-maturity during the first nine months.
- Liquidity resources include $832 million of additional FHLB borrowing capacity, $1.4 billion available from the Federal Reserve under pledged-loan arrangements, $90 million of correspondent-bank lines, and an undrawn $25 million holding-company revolver. These resources should be considered alongside $2.9 billion of commitments to extend credit; management states aggregate simultaneous funding is unlikely.
- LIBOR-linked contracts include $1.6 billion in loans, $118 million in borrowings and $660.9 million in derivative notional. LIBOR settings were expected to cease after June 30, 2023; contract amendments, replacement-index selection and required counterparty consent remain transition considerations.
- The company reported no legal proceedings expected to have a material adverse effect and no material change to previously disclosed risk factors. It reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit balances, deposit pricing and deposit mix remain consistent with management’s relationship-deposit strategy as rates change.
- Whether NIM expansion and loan repricing continue, and how quickly deposit costs rise relative to asset yields.
- Fair-value sensitivity of tax-credit investments and securities, and the implications of the securities portfolio’s unrealized losses and held-to-maturity classification.
- Credit trends, especially the commercial and industrial portfolio, sponsor finance exposure, criticized loans, and the adequacy of the allowance under changing economic forecasts.
- Liquidity and capital resilience under deposit outflows and potential commitment drawdowns; confirm regulatory capital remains above required thresholds.
- Execution of LIBOR contract conversions, and the effect of the new share-repurchase authorization and declared dividends on capital and liquidity.