Enterprise Financial Services Corp. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Enterprise is a financial holding company providing banking and wealth-management services through Enterprise Bank & Trust, primarily across seven U.S. states.
Financial performance and position
- Earnings: Net income was $40.4 million and diluted EPS was $1.05, versus $55.7 million and $1.46 in Q1 2023. Net income available to common shareholders was $39.5 million.
- Revenue and margins: Net interest income was $137.7 million, down 1% year over year; noninterest income was $12.2 million, down 28%. Together, these totaled $149.9 million, versus $156.4 million a year earlier. Tax-equivalent net interest margin was 4.13%, versus 4.71% a year earlier and 4.23% in Q4 2023. The efficiency ratio was 62.38%, compared with 51.77% a year earlier.
- Costs and credit: Provision for credit losses was $5.8 million, versus $4.2 million in Q1 2023 and $18.1 million in Q4 2023. Noninterest expense rose 15% year over year to $93.5 million. Pre-provision net revenue, a non-GAAP measure, was $57.4 million, down from $75.0 million.
- Loans and asset quality: Loans were $11.03 billion, up $144.4 million (1%) from year-end. The allowance for loan losses was $135.5 million, or 1.23% of loans. Net charge-offs were $5.9 million (0.22% annualized). Nonperforming loans were $35.6 million, or 0.32% of loans, down from $43.7 million at year-end but up from $12.0 million a year earlier.
- Deposits and liquidity: Deposits totaled $12.25 billion, up $77.3 million from year-end. Brokered CDs increased $176.2 million to $659.0 million; noninterest-bearing deposits declined $153.4 million. Estimated uninsured or uncollateralized deposits were $3.5 billion, or 29% of deposits. Cash and cash equivalents were $369.4 million. The company reported $5.55 billion of available liquidity sources, including borrowing capacity, unpledged securities, lines and cash.
- Debt and capital: At quarter-end, subordinated debentures and notes were $156.1 million, FHLB advances $125.0 million, and other borrowings $195.2 million. Total shareholders’ equity was $1.73 billion; tangible common equity to tangible assets was 9.01%. The company and bank exceeded regulatory well-capitalized thresholds.
- Cash flow: Operating cash flow was $29.9 million, versus $69.2 million in Q1 2023; investing cash outflow was $180.5 million and financing cash inflow was $87.0 million. Cash and equivalents declined $63.6 million during the quarter, primarily as cash funded loan growth.
Changes and management commentary
- Year-over-year earnings were pressured by higher deposit interest costs and deposit-related servicing costs. Higher yields on loans and investments and organic balance-sheet growth partly offset funding-cost increases.
- Noninterest income fell chiefly because tax-credit income declined to a $2.2 million loss, from $1.8 million of income a year earlier. Management noted that tax-credit income varies with activity and fair-value changes and is typically strongest in Q4.
- Compared with Q4 2023, net interest income declined $3.0 million and noninterest income declined $13.3 million, while provision expense fell $12.3 million. Management attributed quarterly expense pressure in part to annual payroll-tax resets, vacation accruals and merit increases.
- Available-for-sale and held-to-maturity securities had net unrealized losses of $165.6 million and $63.6 million, respectively, at quarter-end, primarily associated with market interest-rate changes. Accumulated other comprehensive loss increased to $115.4 million from $101.0 million at year-end.
Outlook, risks and contingencies
- The filing provides no specific company earnings or growth guidance. The CECL baseline scenario assumes the federal funds rate has peaked and begins to decline in the second half of 2024; this is a credit-model assumption, not formal company guidance.
- Management identifies recession risk, persistently high inflation, tighter credit markets and further financial-system weakness as factors that could increase credit losses. Additional reserves were allocated to certain commercial office and agricultural exposures; the allowance also included qualitative adjustments, including for sponsor-finance loans.
- Interest-rate sensitivity modeling estimated next-12-month net interest income would rise 3.3% under a +100-basis-point shock and fall 3.4% under a −100-basis-point shock. The securities portfolio remains exposed to rate-driven fair-value changes.
- Commitments to extend credit were $2.82 billion and letters of credit were $121.2 million. Management stated that no pending or threatened legal proceedings were expected to have a material adverse effect. The filing reported no material change to the risk factors in the 2023 Form 10-K.
- The board approved a $0.26-per-common-share quarterly dividend, payable June 28, 2024, and declared the Series A preferred dividend. Disclosure controls were deemed effective; no material internal-control changes were reported.
Important facts for investors to verify
- Whether deposit pricing and mix stabilize, particularly given higher interest-bearing deposit costs and increased brokered CDs.
- Whether loan growth, especially in commercial real estate, construction, office and agricultural exposures, affects future delinquencies, charge-offs or provision needs.
- How tax-credit income and securities fair values evolve, including the effect of interest rates on earnings and accumulated other comprehensive loss.
- Whether reported liquidity capacity remains accessible and sufficient under stress, considering uninsured deposits, commitments and the end of the Bank Term Funding Program.
- How earnings, net interest margin and efficiency develop relative to Q1’s weaker year-over-year results; the filing provides no formal earnings guidance.