Enterprise Financial Services Corp. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted. EFSC provides banking and wealth-management services. It completed its acquisition of First Choice Bancorp (FCBP) on July 21, 2021; FCBP results are included from that date.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $97.3 | $63.4 | $258.1 | $192.6 |
| Provision for credit losses | $19.7 | $14.1 | $17.0 | $55.9 |
| Noninterest income | $17.6 | $12.6 | $45.1 | $36.0 |
| Noninterest expense | $76.9 | $39.5 | $182.2 | $116.1 |
| Net income | $13.9 | $18.0 | $82.2 | $45.5 |
| Diluted EPS | $0.38 | $0.68 | $2.48 | $1.73 |
- Q3 net interest margin was 3.40%, down from 3.46% in Q2 2021 and 3.29% in Q3 2020. The nine-month margin was 3.45%, versus 3.52% in the prior-year period.
- Q3 return on average assets was 0.45%; return on average common equity was 3.96%. Nine-month figures were 1.01% and 9.14%, respectively.
- Q3 efficiency ratio was 66.92%; the company-reported core efficiency ratio, a non-GAAP measure, was 51.30%. Nine-month ratios were 60.09% and 52.59%, respectively.
- Net cash from operating activities was $105.6 million for the first nine months, compared with $100.2 million in 2020. Investing activities provided $13.4 million, versus using $813.9 million; financing activities provided $732.5 million, versus $938.6 million. Cash and cash equivalents ended at $1.389 billion, up $851.6 million from year-end 2020.
Balance sheet, debt and liquidity
- Total assets were $12.888 billion at September 30, up 32% from December 31, 2020. Loans were $9.117 billion, up 26%; deposits were $10.828 billion, up 36%.
- FCBP added approximately $1.9 billion of loans and $1.8 billion of deposits. Excluding PPP, loans increased by $1.848 billion from year-end; PPP loans declined by $259.7 million to $439.0 million net of deferred fees.
- Noninterest-bearing deposits were $4.376 billion, or 40.4% of deposits. The loan-to-deposit ratio was 84.2%, and the reported total cost of deposits was 0.11% for Q3.
- Debt and borrowing balances included $204.1 million of subordinated debentures and notes, $50.0 million of FHLB advances, $219.5 million of other borrowings, and $24.3 million of notes payable. On November 1, 2021, EFSC redeemed $50.0 million of fixed-to-floating subordinated debentures.
- Liquidity included $1.389 billion of cash and cash equivalents and $1.7 billion of securities. The company reported additional borrowing capacity of $704 million from the FHLB and $1.1 billion from the Federal Reserve, plus $90 million of correspondent-bank lines. These sources are subject to conditions and availability.
- EFSC’s total capital, Tier 1, common equity Tier 1 and leverage ratios were 14.5%, 12.2%, 11.2% and 9.7%, respectively; the Bank’s were 13.4%, 12.3%, 12.3% and 9.8%. The company said both exceeded applicable well-capitalized thresholds.
Material changes and notable items
- Q3 net income decreased from the prior-year quarter despite higher net interest income and noninterest income. The increase in expenses, especially acquisition-related and branch-closure costs, was a major factor. Diluted EPS also reflects a larger share count following FCBP stock consideration.
- FCBP transaction consideration was approximately $345.8 million, including about $343.7 million in EFSC shares. EFSC recorded $14.7 million of merger-related expense in Q3 and $19.8 million for the nine-month period. Goodwill increased $104.8 million to $365.4 million due to the acquisition.
- The quarter included $23.9 million of day-two provision on acquired FCBP non-PCD loans and $1.6 million of provision for unfunded commitments. This was partly offset by provision benefits on the pre-existing portfolio; total Q3 provision was $19.7 million. The nine-month total was $17.0 million, compared with $55.9 million in 2020.
- EFSC began closing three California branches associated with FCBP and two St. Louis branches. It recorded a $3.4 million Q3 impairment charge for the St. Louis locations; management estimated annual savings of approximately $0.8 million from the California closures and $1.5 million from the St. Louis closures.
- Q3 net charge-offs were $1.9 million; nine-month net charge-offs were $8.4 million. Nonperforming loans were $41.6 million, or 0.46% of loans, and nonperforming assets were 0.35% of assets. The loan allowance was $152.1 million, or 1.67% of loans.
- Other comprehensive income was negative $8.4 million in Q3 and negative $17.2 million for the nine months, primarily reflecting changes in unrealized gains and losses on available-for-sale securities.
- The board approved a quarterly dividend of $0.20 per common share, payable December 31, 2021. EFSC repurchased $33.1 million of shares during the first nine months.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management cited expected annual savings from branch consolidations and continued integration of FCBP, but cautioned that acquisition integration, customer retention and realization of expected benefits are uncertain.
- Management identified COVID-19-related uncertainty and possible deterioration in economic conditions, unemployment, borrower performance and financial markets as risks. Credit-loss estimates are sensitive to forecast assumptions; management reported that using only its upside scenario would reduce the allowance by $22.3 million, while using only its downside scenario would increase it by $45.2 million.
- Other disclosed risks include real-estate collateral values, interest-rate changes, competition, regulation, LIBOR transition, and potential impairment of goodwill. Approximately 63% of the loan portfolio had variable rates; the company’s model estimated a 5.5% increase in next-12-month net interest income under a +100-basis-point rate shock.
- Commitments to extend credit were $2.422 billion and letters of credit were $67.1 million at September 30. Management said the full commitments are not expected to be funded at one time. Management reported no pending or threatened legal proceedings expected to have a material adverse effect and no material changes to the risk factors disclosed in its 2020 Form 10-K.
- Disclosure controls were assessed as effective as of September 30, 2021; the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How FCBP integration progresses, including customer retention, final purchase-accounting adjustments and actual cost savings from branch closures.
- Whether acquired-loan credit performance and the allowance remain appropriate as economic forecasts and credit conditions change.
- Core earnings and operating efficiency after excluding merger and branch-closure costs, alongside the GAAP results and the company’s non-GAAP reconciliations.
- Deposit growth, loan growth, PPP runoff, liquidity deployment and net interest margin trends, particularly given elevated cash balances and variable-rate exposure.
- The effect of the November 2021 debt redemption and the company’s capital, funding and dividend capacity after the transaction.