Enterprise Financial Services Corp. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Enterprise Financial Services Corp. is a financial holding company providing banking and wealth-management services through Enterprise Bank & Trust. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $81.7 | $65.8 | $160.9 | $129.2 |
| Provision (benefit) for credit losses | ($2.7) | $19.6 | ($2.6) | $41.9 |
| Noninterest income | $16.2 | $10.0 | $27.5 | $23.4 |
| Noninterest expense | $52.5 | $37.9 | $105.3 | $76.6 |
| Net income | $38.4 | $14.6 | $68.3 | $27.5 |
| Diluted earnings per share | $1.23 | $0.56 | $2.18 | $1.04 |
| Tax-equivalent net interest margin | 3.46% | 3.53% | 3.48% | 3.65% |
Q2 return on average assets was 1.50%, return on average common equity was 13.79%, and the efficiency ratio was 53.56%. Six-month operating cash flow was $65.0 million; investing cash flow was negative $158.3 million and financing cash flow was positive $564.6 million. Cash and cash equivalents increased $471.3 million to $1.009 billion.
Financial position and liquidity
- At June 30, total assets were $10.347 billion, loans were $7.226 billion, deposits were $8.640 billion, and shareholders’ equity was $1.118 billion.
- Total deposits increased $654.1 million, or 8.1%, from December 31, 2020. The loan-to-deposit ratio was 83.6%; noninterest-bearing deposits were 36.0% of deposits.
- Reported borrowings included $203.9 million of subordinated debentures and notes, $50.0 million of FHLB advances, $208.8 million of other borrowings, and $25.7 million of notes payable.
- Management reported $1.0 billion of additional FHLB borrowing capacity, $835 million available from the Federal Reserve under a pledged-loan agreement, and $90 million of unsecured correspondent-bank lines. The company also had a fully available $25 million parent-company revolver.
- EFSC’s total risk-based, Tier 1, common equity Tier 1 and leverage ratios were 14.9%, 12.3%, 11.1% and 9.4%, respectively. The Bank exceeded applicable well-capitalized thresholds.
Material changes and notable items
- Year-over-year earnings increased substantially, reflecting higher net interest income and a much lower credit-loss provision. The first-half comparison also reflects the November 2020 Seacoast acquisition; its results are included from the acquisition date onward.
- Q2 net interest income increased 3.3% from Q1, primarily on higher loan and investment volumes. The margin declined to 3.46% from 3.50% in Q1, partly because of higher cash balances and lower investment yields. Management attributed the year-over-year first-half margin decline to lower interest rates and increased low-yielding short-term investments.
- Q2 noninterest income increased $4.9 million from Q1, primarily on tax-credit activity and other income. Q2 expenses were slightly lower than Q1; lower compensation and merger expenses were partly offset by higher other expenses. First-half expenses rose year over year, mainly from Seacoast and merger-related costs.
- Total loans were broadly unchanged from year-end, but PPP loans fell $302.0 million to $396.7 million as forgiveness accelerated. Loans excluding PPP increased $278.5 million, with growth in specialty lending. Deposits rose $654.1 million, supported in part by PPP-related funds and customers’ elevated liquidity.
- The loan allowance was $128.2 million, or 1.77% of loans, down from 1.89% at year-end. Management cited improving credit metrics and economic forecasts. Nonperforming loans increased to $42.3 million from $38.5 million at year-end; nonperforming assets were 0.44% of assets.
- The company repurchased 251,637 shares for $11.8 million in the first half. The board approved a quarterly dividend of $0.19 per share, payable September 30, 2021.
Outlook, risks and contingencies
- The filing gives no specific earnings or financial guidance. Management cautions that results depend on economic conditions and are not necessarily indicative of full-year results.
- Management identified continuing uncertainty from COVID-19, including possible renewed disruption, unemployment, business failures and changes in credit conditions. Its credit-loss forecasts use baseline, upside and downside scenarios; the downside scenario could materially increase required reserves.
- Interest-rate risk is material: about $4.1 billion of loans were variable-rate, including $2.6 billion indexed to LIBOR. The company estimated that a 100-basis-point rate increase would raise modeled next-12-month net interest income by 3.0%; higher shocks showed larger modeled increases. LIBOR transition and rate changes remain risks.
- Off-balance-sheet commitments included $1.983 billion to extend credit and $55.6 million of letters of credit. Management said commitments may expire undrawn and are not necessarily future cash requirements. The filing reports no legal proceedings expected to have a material adverse effect.
- After quarter-end, on July 21, 2021, EFSC completed its merger with First Choice Bancorp. First Choice had approximately $2.4 billion in assets, $2.0 billion in loans and $1.9 billion in deposits as of June 30. EFSC issued approximately 7.8 million shares valued at about $346 million. Authorized common shares increased from 45 million to 75 million effective July 28.
Important facts for investors to verify
- How the First Choice merger integration, share issuance and acquired balance sheet affect future earnings, expenses, capital and tangible book value.
- Whether deposit growth and elevated cash balances persist, and how they affect funding costs, loan growth and net interest margin.
- Credit trends, including nonperforming loans, charge-offs, PPP forgiveness and the adequacy of the allowance under changing economic forecasts.
- Execution of LIBOR contract transitions and the sensitivity of earnings to actual rate movements versus the company’s modeled scenarios.
- The sustainability of noninterest income and cost levels, including tax-credit and private-equity income, merger expenses and servicing costs.