Enterprise Financial Services Corp. — Q1 2022 Form 10-Q
Business context and reporting period
Enterprise Financial Services Corp. is a financial holding company providing banking and wealth-management services primarily in Arizona, California, Kansas, Missouri, Nevada and New Mexico. This unaudited report covers the three months ended March 31, 2022. First Choice Bancorp (FCBP), acquired in July 2021, is included in current results but not in the comparable 2021 quarter, limiting year-over-year comparability.
Financial results and position
| Metric | Q1 2022 | Comparison |
|---|---|---|
| Net interest income | $101.2 million | Down $0.9 million from Q4 2021; up $22.0 million year over year |
| Net interest margin, tax-equivalent | 3.28% | 3.32% in Q4 2021; 3.50% in Q1 2021 |
| Provision for credit losses | $4.1 million benefit | $3.7 million benefit in Q4 2021; $0.05 million provision in Q1 2021 |
| Noninterest income / expense | $18.6 million / $62.8 million | Income up $7.4 million and expense up $9.9 million year over year |
| Net income | $47.7 million; $46.5 million available to common shareholders | $29.9 million net income in Q1 2021 |
| EPS, basic and diluted | $1.23 | $0.96 in Q1 2021; $1.33 in Q4 2021 |
| Returns and efficiency | ROAA 1.42%; return on average common equity 12.87%; efficiency ratio 52.42% | ROAA 1.22% and efficiency ratio 58.49% in Q1 2021 |
| Operating cash flow | $49.9 million provided | $3.7 million used in Q1 2021 |
At March 31, 2022, total assets were $13.71 billion, loans $9.06 billion, deposits $11.70 billion and shareholders’ equity $1.47 billion. Cash and cash equivalents were $1.98 billion. Subordinated debentures and notes totaled $155.0 million, FHLB advances $50.0 million and other borrowings $228.8 million. The loan-to-deposit ratio was 77.4%; noninterest-bearing accounts were 41.7% of deposits.
Quarterly cash flows included $298.3 million of net cash used in investing activities and $208.0 million provided by financing activities; cash and cash equivalents declined $40.4 million. The allowance for credit losses on loans was $139.2 million, or 1.54% of loans. Nonperforming loans were $21.2 million and nonperforming assets were 0.17% of total assets. Regulatory capital ratios exceeded well-capitalized thresholds; the company’s CET1 ratio was 11.0% and the bank’s was 12.2%.
Material changes versus comparable periods
- Year-over-year net interest income growth reflected the FCBP acquisition, organic loan growth and a larger investment portfolio; PPP income declined as forgiveness reduced outstanding balances.
- Loans increased $38.4 million from year-end, but excluding PPP loans grew $176.3 million, or 8% annualized. Deposits increased $360.3 million. PPP loans declined $137.9 million.
- Credit quality improved from year-end: nonperforming loans declined from $28.0 million to $21.2 million, and the allowance ratio fell from 1.61% to 1.54%. Management recorded a credit-loss benefit, citing improved credit metrics and economic forecasts.
- Shareholders’ equity declined $55.9 million, primarily reflecting a $78.0 million after-tax other comprehensive loss driven by falling available-for-sale securities values, plus share repurchases and dividends. The tangible common equity-to-tangible-assets ratio fell to 7.62% from 8.13%.
- The company repurchased 351,090 shares for $17.0 million at an average $48.35 per share. It announced a subsequent common dividend of $0.22 per share, up 5% from Q1’s $0.21.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management described the balance sheet as asset-sensitive and said rising rates generally benefit net interest income; modeled 12-month NII sensitivity was +7.1% under a +100-basis-point shock, +15.8% at +200 basis points and +24.5% at +300 basis points. These are model scenarios, not forecasts.
- Management cited risks including COVID-19 and economic uncertainty, inflation and rate movements, supply-chain disruption and labor shortages, the Russia-Ukraine conflict, credit deterioration, real-estate collateral values, competition, regulation, and acquisition integration and retention.
- Credit-loss estimates use baseline, upside and downside economic scenarios weighted 40%, 30% and 30%. Management noted that using only the downside scenario would increase the allowance by $48.4 million versus the reported estimate; weaker conditions could therefore require higher provisions.
- Q1 included a $4.1 million provision benefit. Noninterest income fell sequentially partly because tax-credit income and community-development income were lower than in a seasonally strong Q4; management noted future rate increases may reduce tax-credit investment fair values. No First Choice merger expenses were recorded in Q1; management said related costs were completed in 2021.
- Available-for-sale securities had a $99.3 million net unrealized loss at quarter-end, largely from rising market rates; after-tax OCI loss was $78.0 million. The company transferred $116.9 million of securities from available-for-sale to held-to-maturity during the quarter.
- Off-balance-sheet commitments to extend credit were $2.71 billion and letters of credit $78.6 million. Management said aggregate funding of commitments at one time is unlikely. It reported no pending or threatened legal proceedings expected to have a material adverse effect and no material changes to the risk factors disclosed in its 2021 Form 10-K.
- LIBOR-related exposures included $2.3 billion of loans, $121 million of borrowings and $905 million notional of derivatives. The company had begun issuing SOFR-based loans and was working to transition affected contracts ahead of LIBOR cessation.
Important facts for investors to verify
- Whether loan and deposit growth, excluding runoff of PPP balances and acquired FCBP balances, continues and supports earnings.
- How quickly deposit costs rise as rates increase, and whether actual NIM and NII performance aligns with management’s asset-sensitivity modeling.
- Whether the large securities-related unrealized loss, AOCI decline and reduced tangible common equity ratio stabilize or worsen with further rate changes.
- Whether credit quality and the allowance remain adequate if economic conditions deteriorate, especially in sponsor finance, hospitality and real-estate exposures.
- The funding implications of $2.71 billion in lending commitments, access to contingent liquidity, and successful conversion of LIBOR-linked contracts.
- How much reported year-over-year growth reflects the FCBP acquisition, and whether the acquired business delivers expected integration and operating benefits.