Enterprise Financial Services Corp. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; comparisons are primarily with 2011. Enterprise Financial Services Corp. is a bank holding company operating Enterprise Bank & Trust and wealth management businesses in the St. Louis, Kansas City and Phoenix markets.
Financial performance and condition
| Metric | 2012 | 2011 |
|---|---|---|
| Net interest income | $142.3 million | $112.7 million |
| Net interest margin, fully tax-equivalent | 4.94% | 4.12% |
| Noninterest income | $9.1 million | $18.5 million |
| Noninterest expense | $86.7 million | $77.7 million |
| Provision for loan losses | $22.8 million | $16.1 million |
| Net income | $28.3 million | $25.4 million |
| Net income available to common shareholders | $25.1 million | $22.9 million |
| Diluted earnings per common share | $1.37 | $1.34 |
| Return on average assets | 0.78% | 0.74% |
| Efficiency ratio | 57.26% | 59.24% |
- Net cash provided by operating activities was $37.4 million; investing activities used $6.3 million and financing activities used $102.9 million. Cash and cash equivalents ended the year at $116.4 million.
- Year-end assets were $3.33 billion, deposits $2.66 billion, and shareholders’ equity $235.7 million. Outstanding subordinated debentures were $85.1 million; FHLB advances were $80.0 million, other borrowings $233.4 million, and notes payable $11.7 million.
- Total portfolio loans were $2.31 billion, including $201.1 million of FDIC-covered loans. Noncovered loans increased 11% to $2.11 billion, led by 26% growth in commercial and industrial lending. Deposits fell 5%, reflecting the planned reduction of higher-cost certificates of deposit; noninterest-bearing demand deposits increased 17%.
- Nonperforming loans were $38.7 million, or 1.84% of noncovered loans, versus $41.6 million and 2.19% a year earlier. Nonperforming assets were $48.1 million, down from $58.8 million. The noncovered allowance was $34.3 million, 1.63% of noncovered loans. Net charge-offs were $12.4 million, or 0.64% of average noncovered loans.
- At year-end, the Company’s Tier 1 risk-based capital ratio was 10.88%, total risk-based capital ratio 12.30%, and leverage ratio 8.36%. The Bank met the regulatory definition of “well capitalized.”
Material changes versus 2011
- Net income increased 11%, supported by higher net interest income as earning assets grew and funding costs declined. The tax-equivalent net interest margin rose to 4.94% from 4.12%.
- Noninterest income fell 51%, mainly because the reduction in the FDIC loss-share receivable was $14.9 million, compared with $3.5 million in 2011. This was partly offset by higher wealth management revenue, service fees and gains on sales of other real estate.
- Provision expense increased to $22.8 million from $16.1 million, primarily reflecting a rise in provisions on FDIC-covered loans to $14.0 million from $2.8 million; the provision on noncovered loans declined to $8.8 million from $13.3 million.
- Noninterest expense rose 12%, including increased compensation, professional and legal costs, and intangible amortization. The efficiency ratio nevertheless improved.
- The Company repurchased its $35.0 million Series A preferred stock from the U.S. Treasury for approximately $35.4 million in November 2012, funded in part by a new $12.0 million term loan. It repurchased the related Treasury warrants for approximately $1.0 million in January 2013, completing its exit from TARP.
- Noncovered other real estate declined to $26.5 million from $53.7 million, reflecting sales and other activity; the Company sold $48.8 million of such property during 2012.
Quarterly and other notable items
- Fourth-quarter 2012 net income was $5.4 million, compared with $7.2 million in fourth-quarter 2011; diluted EPS was $0.23 versus $0.36. Fourth-quarter 2012 noninterest income was negative $3.6 million, reflecting the significant FDIC loss-share receivable adjustment.
- Management expected average FDIC-covered loan balances of approximately $163 million in 2013, $118 million in 2014 and $60 million in 2015. Management also said longer-term asset-quality trends were favorable and expected nonaccrual loans and net charge-off percentages to be lower in 2013, while noting increased fourth-quarter additions to nonaccrual loans.
- The Company announced plans to close one Phoenix branch in March 2013. It reported no formal earnings or financial guidance in the supplied filing text.
- Management identified a material weakness in controls over accounting for acquired FDIC-assisted loans in 2011 and said remediation was completed in the second quarter of 2012. Management and Deloitte concluded internal control over financial reporting was effective at year-end 2012; the auditor issued unqualified opinions on the financial statements and internal controls.
- Two lawsuits concern investments in Distinctive Properties notes. Plaintiffs in one case seek more than $44 million, plus costs and potential trebled damages; another seeks approximately $800,000 plus other relief. The Company says it cannot reasonably estimate potential losses and is defending the matters. A separate securities class action alleges improper accounting for FDIC-covered loans; the Company also says it cannot estimate a reasonably possible loss.
- Proposed Basel III and other regulatory capital requirements remained unsettled. The Company was assessing possible effects, including potential pressure to retain or raise capital and constraints on dividends or share repurchases.
Most important facts for investors to verify
- Review the FDIC loss-share receivable, its $14.9 million negative 2012 income effect, covered-loan cash-flow estimates and the recorded $575,000 potential FDIC clawback liability.
- Examine fourth-quarter nonaccrual additions and the commercial real estate and commercial and industrial exposures, alongside the allowance methodology and management’s 2013 asset-quality expectations.
- Assess deposit attrition and funding composition, including the rise in repurchase-agreement borrowings, the $764.9 million of unused commitments, and available contingent liquidity sources.
- Track the outcome and potential financial or reputational effects of the Distinctive Notes litigation and securities class action, for which loss estimates were not available.
- Confirm the implementation and impact of proposed capital rules, and review the terms and covenants of the new term loan and subordinated debt.
- Consider the effect of the 2012 financial-statement restatement and the durability of the reported control remediation.