Enterprise Financial Services Corp. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Enterprise is a financial holding company providing banking and wealth management services in the St. Louis, Kansas City and Phoenix markets.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $33.8 million | $29.3 million | $66.2 million | $58.3 million |
| Net income | $12.4 million | $8.7 million | $23.4 million | $18.1 million |
| Diluted earnings per share | $0.61 | $0.43 | $1.16 | $0.90 |
| Fully tax-equivalent net interest margin | 3.93% | 3.85% | 3.90% | 3.88% |
- For the first six months, net income increased 29%; management attributed growth primarily to higher net interest income and noninterest income. Core net income, a non-GAAP measure, was $19.4 million versus $14.8 million.
- Six-month noninterest income rose 39% to $13.1 million, substantially reflecting the absence of prior-year FDIC loss-share receivable reductions after termination of the loss-share agreements. Core noninterest income declined 4% to $12.1 million.
- Six-month noninterest expense increased 7% to $42.1 million, including $0.3 million of executive severance and $0.3 million of other non-core expense. The GAAP efficiency ratio improved to 53.13% from 58.20%.
- Net cash provided by operating activities was $7.7 million for the six months, compared with $18.5 million in 2015. Investing activities used $123.7 million; financing activities provided $132.2 million. Cash and cash equivalents ended the period at $110.3 million.
Financial position, credit and liquidity
- Total assets were $3.76 billion at June 30, up 4.2% from year-end 2015. Portfolio loans grew 4.8% to $2.88 billion; total loans, including purchased credit-impaired (PCI) loans, were $2.94 billion.
- Deposits rose 8.7% to $3.03 billion. Brokered certificates of deposit increased $126.9 million to $166.5 million, partly to fund loan growth. FHLB advances fell to $78.0 million from $110.0 million, and other borrowings declined to $200.4 million from $270.3 million.
- Shareholders’ equity was $371.6 million. The company reported a 9.38% common equity Tier 1 ratio and a 10.53% Tier 1 leverage ratio; the Bank met the filing’s “well-capitalized” definition. Tangible common equity to tangible assets was 9.08%.
- The allowance for portfolio loan losses was $35.5 million, or 1.23% of portfolio loans. Six-month portfolio-loan net recoveries were $0.5 million; provision expense was $1.5 million, compared with $3.7 million in the prior-year period.
- Nonperforming loans increased to $12.8 million from $9.1 million at year-end, or 0.44% of portfolio loans versus 0.33%. The increase was primarily associated with one tax-credit relationship. No portfolio loans were over 90 days past due and still accruing. Classified assets rose to $87.5 million from $73.2 million.
- Contractual commitments to extend credit were $1.07 billion and standby letters of credit were $82.6 million. Management noted that aggregate funding of commitments at one time was considered unlikely. Available Bank borrowing capacity included $310.7 million at the FHLB, $889.9 million at the Federal Reserve, and $60.0 million in correspondent-bank lines.
Outlook, commentary and risks
- Management expected 2016 loan growth at or above 10% and quarterly noninterest expense of $19.5 million to $21.5 million. It expected core net interest margin to be maintained over coming quarters, while cautioning that funding-cost pressure and continued runoff of PCI loans could offset favorable trends.
- For 2016, management estimated average PCI loan balances of approximately $60 million and incremental accretion income of $9 million to $11 million, absent cash-flow accelerations or pool impairment. Remaining accretable yield was estimated at $18 million at June 30.
- The Board approved a quarterly dividend increase to $0.11 per share for Q3 2016. The company repurchased 179,018 shares for $4.7 million in the first half under a program authorizing repurchases of up to two million shares.
- Interest-rate simulations estimated next-12-month net interest income changes of +3.0% for a 100-basis-point increase and -3.4% for a 100-basis-point decrease; larger upward shocks produced gains, while the filing did not present 200- or 300-basis-point downward scenarios due to the prevailing rate level.
- Key stated risks include credit and real-estate collateral valuation, local economic conditions, interest-rate changes, competition, regulation, litigation and the ability to retain key personnel. Management reported no material change to the prior Form 10-K risk factors and no known legal proceeding expected to have a material adverse effect.
- The filing identifies $0.7 million of Q2 gains on sales of other real estate and $0.3 million of executive severance. Management reported effective disclosure controls and no material change to internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth and deposit funding—particularly the increase in brokered deposits—remain consistent with management’s targets and funding-cost assumptions.
- Subsequent performance of the tax-credit relationship contributing to higher nonperforming loans, and changes in classified assets, charge-offs and allowance coverage.
- Whether core earnings and margin trends persist after separating PCI accretion, FDIC-related comparisons and other non-core items; core measures are non-GAAP.
- Progress against the stated expense range and loan-growth outlook, and the actual PCI runoff and accretion relative to management’s estimates.
- Liquidity capacity under stress, including potential draws on off-balance-sheet commitments, and capital ratios relative to regulatory requirements.