Enterprise Financial Services Corp. — Q3 2016 Form 10-Q
Business and period: Enterprise is a financial holding company providing banking and wealth-management services in the St. Louis, Kansas City and Phoenix markets. This unaudited filing covers the quarter and nine months ended September 30, 2016; balance-sheet comparisons are to December 31, 2015.
Financial performance and condition
| Metric | Q3 2016 | Nine months 2016 |
|---|---|---|
| Net interest income | $33.8 million | $100.0 million |
| Net income | $11.8 million | $35.2 million |
| Diluted EPS | $0.59 | $1.74 |
| Net interest margin, fully tax-equivalent | 3.80% | 3.87% |
| Efficiency ratio | 51.01% | 52.41% |
- Compared with the same 2015 periods, Q3 net income rose 22% and nine-month net income rose 27%. Nine-month revenue and expenses included effects from the termination of FDIC loss-share agreements; management also reported core nine-month net income of $29.3 million, up from $23.7 million. Core measures are non-GAAP.
- At September 30, total assets were $3.91 billion, up 8% from year-end; portfolio loans were $3.04 billion, up 10%; and deposits were $3.12 billion, up 12%. Core deposits increased $208.6 million, while brokered certificates of deposit increased $98.0 million to $137.6 million.
- Cash and cash equivalents were $118.5 million. Nine-month cash flow was $28.1 million from operations, negative $270.9 million from investing and positive $267.1 million from financing. Net cash increased $24.3 million.
- Shareholders’ equity was $381.1 million. Regulatory capital ratios included total risk-based capital of 12.01%, common equity tier 1 of 9.33%, and Tier 1 leverage of 10.58%. The Bank met the filing’s “well-capitalized” definition.
- Period-end debt included $56.8 million of subordinated debentures, $129.0 million of Federal Home Loan Bank advances and $190.0 million of other borrowings. Other borrowings declined $80.3 million from year-end.
Changes, outlook and risks
- Growth in portfolio loans drove the increase in net interest income. The fully tax-equivalent nine-month margin rose to 3.87% from 3.84% in 2015; management cited loan growth, improved earning-asset mix and lower funding costs. It expected to maintain core margin, while warning that funding-cost pressure and runoff of acquired credit-impaired (PCI) loans could offset improvement.
- Asset quality weakened from year-end: nonperforming loans rose to $19.9 million from $9.1 million, or 0.66% of portfolio loans versus 0.33%. Management attributed much of the increase to one $10.8 million C&I relationship. There were no portfolio loans over 90 days past due and still accruing. The allowance was 1.23% of portfolio loans; Q3 net charge-offs were $1.0 million.
- PCI loans declined to $47.4 million from $74.8 million. Management estimated 2016 incremental PCI accretion income of $10–$12 million; $8.7 million had been recorded in the first nine months.
- Management expected continued loan growth in Q4 2016 and, excluding the proposed JCB acquisition, loan growth at or above 10% in 2017. It forecast Q4 noninterest expense of $19.5–$21.5 million.
- On October 10, 2016, the company agreed to acquire Jefferson County Bancshares for estimated consideration of $130.6 million, including approximately 3.3 million EFSC shares and $26.6 million cash. Closing was anticipated in early 2017, subject to regulatory and shareholder approvals. JCB reported approximately $935 million in assets, $670 million in loans and $763 million in deposits as of June 30, 2016.
- Liquidity sources include deposits, securities, FHLB and Federal Reserve borrowing capacity, and correspondent-bank lines. At quarter-end, disclosed additional capacity included $293.8 million from the FHLB, $878.2 million from the Federal Reserve and $60.0 million in unsecured federal-funds lines. The Bank also had $1.2 billion in unused credit commitments; aggregate simultaneous drawdown was considered unlikely.
- Key exposures include borrower credit quality and real-estate collateral values, local economic conditions, interest-rate movements, competition, regulation, and the execution and integration of acquisitions. Management reported no material litigation expected to adversely affect the company and no material change in previously disclosed risk factors. Interest-rate modeling estimated next-12-month net interest income sensitivity of +7.8% under a +300 bp shock and -5.0% under a -100 bp shock.
Important facts for investors to verify
- Whether the rise in nonperforming loans and classified assets persists, particularly the large C&I relationship, and how it affects provisions and charge-offs.
- Deposit mix and funding costs, including continued use of brokered deposits, as loan growth continues.
- The realization and timing of PCI accretion income and the remaining acquired-loan balance.
- JCB transaction approvals, final consideration, closing timing, integration costs and expected benefits.
- Management’s stated loan-growth, margin and expense outlook against subsequent reported results; core metrics are non-GAAP and should be assessed alongside GAAP results.
- Funding availability under stress and the potential liquidity effect of draws against off-balance-sheet commitments.