Enterprise Financial(EFSC) - 2022 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements and accompanying notes for the specified periods Condensed Consolidated Balance Sheets As of September 30, 2022, total assets decreased to $13.0 billion from $13.5 billion at year-end 2021, primarily due to a $1.28 billion reduction in cash and cash equivalents Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $12,994,787 | $13,537,358 | | Total cash and cash equivalents | $744,876 | $2,021,689 | | Total loans, net | $9,214,415 | $8,872,601 | | Total Liabilities | $11,548,569 | $12,008,242 | | Total deposits | $11,057,594 | $11,343,799 | | Total Shareholders' Equity | $1,446,218 | $1,529,116 | Condensed Consolidated Statements of Operations For Q3 2022, net income surged to $50.2 million from $13.9 million in Q3 2021, driven by increased net interest income Key Operational Results (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $124,290 | $97,273 | $335,068 | $258,134 | | Provision (benefit) for credit losses | $676 | $19,668 | $(2,734) | $17,045 | | Total Noninterest Income | $9,454 | $17,619 | $42,289 | $45,113 | | Total Noninterest Expense | $68,843 | $76,885 | $197,067 | $182,225 | | Net Income | $50,200 | $13,913 | $143,042 | $82,244 | | Diluted EPS | $1.32 | $0.38 | $3.73 | $2.48 | Condensed Consolidated Statements of Comprehensive Income Comprehensive income for Q3 2022 was $5.5 million, nearly flat, while the nine-month period recorded a $28.9 million comprehensive loss Comprehensive Income (Loss) Summary (in thousands) | Period | Net Income | Total other comprehensive loss, after-tax | Comprehensive income (loss) | | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30, 2022 | $50,200 | $(44,710) | $5,490 | | Nine Months Ended Sep 30, 2022 | $143,042 | $(171,968) | $(28,926) | Condensed Consolidated Statements of Shareholders' Equity Total shareholders' equity decreased from $1.53 billion at year-end 2021 to $1.45 billion at September 30, 2022, primarily due to other comprehensive loss and stock repurchases - For the nine months ended September 30, 2022, total shareholders' equity decreased by $82.9 million. Key changes included +$143.0 million from net income, -$172.0 million from other comprehensive loss, -$32.9 million from stock repurchases, and -$27.8 million from dividends[19][207] - In the second quarter of 2022, the company retired 1,980,093 shares of treasury stock, which reduced additional paid-in capital by $27.7 million and retained earnings by $45.8 million[122] Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, cash and cash equivalents decreased by $1.28 billion due to investing and financing activities Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Category | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $187,857 | $105,630 | | Net cash (used in) provided by investing activities | $(912,124) | $13,432 | | Net cash (used in) provided by financing activities | $(552,546) | $732,522 | | Net (decrease) increase in cash and cash equivalents | $(1,276,813) | $851,584 | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, loan portfolio composition, and credit loss allowances, with nonperforming loans significantly decreasing Loan Portfolio Composition (in thousands) | Loan Category | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Commercial and industrial | $3,710,012 | $3,396,590 | | Commercial real estate - investor owned | $2,286,458 | $2,141,143 | | Commercial real estate - owner occupied | $2,152,189 | $2,035,785 | | Construction and land development | $583,649 | $734,073 | | Total Loans | $9,354,987 | $9,017,642 | - The Allowance for Credit Losses (ACL) on loans was $140.6 million at September 30, 2022, down from $145.0 million at December 31, 2021, including a $40.8 million qualitative adjustment[59][62] - Nonperforming loans decreased to $18.2 million at September 30, 2022, from $28.0 million at December 31, 2021[64] - Off-balance-sheet commitments to extend credit increased to $2.91 billion at September 30, 2022, from $2.48 billion at year-end 2021[91] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and results, highlighting loan growth, deposit management, improved credit quality, and the impact of acquisitions Executive Summary The company reported strong Q3 2022 earnings with $50.2 million net income, expanded net interest margin, and improved asset quality Q3 2022 Financial Highlights | Metric | Q3 2022 | Q2 2022 (Linked) | | :--- | :--- | :--- | | Net Income (in thousands) | $50,200 | $45,149 | | Diluted EPS | $1.32 | $1.19 | | Net Interest Margin | 4.10% | 3.55% | | Return on Average Assets | 1.51% | 1.34% | - Paycheck Protection Program (PPP) loans outstanding declined to $13.2 million at September 30, 2022, from $272.0 million at year-end 2021[148][188] - Excluding PPP loans, total loans grew by $596.1 million, or 7%, year-to-date from December 31, 2021[152] Results of Operations Net interest income for Q3 2022 was $124.3 million, driven by higher loan balances and expanding yields, while noninterest income decreased - Net interest margin (NIM) increased to 4.10% in Q3 2022 from 3.55% in the linked quarter, due to higher yields on loans and investments[170] - Noninterest income decreased by $4.7 million from the linked quarter, mainly due to a $4.8 million drop in tax credit income and a $0.9 million decline in card services revenue[173] - Noninterest expense increased by $3.4 million from the linked quarter, driven by higher employee compensation and $1.8 million in variable deposit costs[180] Financial Condition Total assets decreased to $13.0 billion as cash was deployed into loan growth, while deposits decreased due to strategic shifts Balance Sheet Changes (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $12,994,787 | $13,537,358 | $(542,571) | | Loans (excluding PPP) | $9,341,822 | $8,921,989 | $419,833 | | Deposits | $11,057,594 | $11,343,799 | $(286,205) | - Specialty loan categories, including sponsor finance and life insurance premium financing, saw significant growth of 28% and 21% respectively since year-end 2021[188] - Nonperforming assets decreased to $18.5 million from $31.5 million at year-end 2021, improving the ratio to total assets to 0.14% from 0.23%[155][200] Liquidity and Capital Resources The company maintains strong liquidity with substantial borrowing capacity, and all capital ratios exceed regulatory requirements - The company has substantial available liquidity, including an additional $832 million from the FHLB and $1.4 billion from the Federal Reserve Bank[213] Regulatory Capital Ratios (EFSC) | Ratio | September 30, 2022 | Well-Capitalized Minimum | | :--- | :--- | :--- | | Common Equity Tier 1 | 11.0% | 6.5% | | Tier 1 Capital | 12.6% | 8.0% | | Total Capital | 14.2% | 10.0% | | Leverage Ratio | 10.4% | 5.0% | - The tangible common equity to tangible assets ratio, a non-GAAP measure, was 7.86% at September 30, 2022, down from 8.13% at December 31, 2021, primarily due to a decrease in accumulated other comprehensive income[156][230] Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk using earnings simulations and is transitioning $1.6 billion in loans from LIBOR Interest Rate Shock Impact on Net Interest Income | Rate Shock | Annual % change in net interest income | | :--- | :--- | | +300 bp | 13.5% | | +200 bp | 9.0% | | +100 bp | 4.4% | | -100 bp | (5.7)% | | -200 bp | (13.9)% | - The company is managing its transition away from LIBOR, with $1.6 billion in loans, $118 million in borrowings, and $660.9 million (notional) in derivatives indexed to LIBOR[242] Controls and Procedures Management concluded that disclosure controls were effective, with no material changes to internal controls during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[248] - No material changes were made to internal controls over financial reporting during the quarter ended September 30, 2022[249] PART II - OTHER INFORMATION Legal Proceedings Management believes no pending legal proceedings would have a material adverse effect on the company's financial condition - Management believes there are no pending or threatened legal proceedings that would have a material adverse effect on the company's business, financial condition, or results of operations[251] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - There have been no material changes to the risk factors described in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021[253] Other Required Disclosures (Items 2, 3, 4, 5 & 6) This section covers standard disclosures, reporting no unregistered equity sales, defaults, or other material information - The company reported no unregistered sales of equity securities, defaults upon senior securities, or other material information for the period[254][255][259] - Mine safety disclosures are not applicable to the company[256][257]