Enterprise Financial Services Corp. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company is a financial holding company providing banking and wealth-management services in the St. Louis, Kansas City and Phoenix markets. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
- Q3: Net income was $9.7 million, or $0.48 diluted EPS, versus $8.2 million and $0.41 in Q3 2014. Net interest income was $30.0 million, up 9%; noninterest income was $4.7 million, up 6%; and noninterest expense was $19.9 million, down 6%.
- First nine months: Net income was $27.8 million, or $1.37 diluted EPS, versus $21.2 million and $1.07 a year earlier. Net interest income was $88.3 million, up 2%; noninterest income was $14.1 million, up 20%; and noninterest expense was $59.3 million, down 5%.
- Margins and returns: Q3 net interest margin was 3.77%, compared with 3.75% in Q3 2014 and 3.85% in Q2 2015. Nine-month margin was 3.84%, versus 4.05% in 2014. Nine-month return on average assets was 1.11%, versus 0.91%.
- Credit costs: Nine-month provision for portfolio loan losses was $4.3 million, versus $2.4 million in 2014. PCI loans generated a $3.5 million provision reversal, versus a $1.0 million provision in 2014.
- Cash flow, nine months: Operating activities provided $40.0 million, investing activities used $217.7 million, and financing activities provided $203.9 million. Cash and cash equivalents ended at $126.9 million, up $26.2 million from year-end 2014.
Financial position, liquidity and capital
- At September 30, total assets were $3.52 billion, up 7% from December 31, 2014. Portfolio loans were $2.60 billion, up 6.9%; total loans including PCI loans were $2.69 billion. Deposits were $2.81 billion, up 12.9%, with growth concentrated in money-market accounts.
- Shareholders’ equity was $343.6 million, up $27.3 million since year-end. The allowance for portfolio loan losses was $32.3 million, or 1.24% of portfolio loans.
- Reported borrowings included $56.8 million of subordinated debentures, $75.0 million of FHLB advances, $189.9 million of other borrowings and $4.8 million of notes payable. FHLB advances and other borrowings declined from year-end.
- The company reported a 10.77% Tier 1 leverage ratio, 12.55% total capital ratio, 9.59% common equity tier 1 ratio and 8.90% tangible common equity to tangible assets ratio. The Bank met the regulatory definition of well-capitalized.
- Available liquidity sources included $282.4 million of additional FHLB borrowing capacity, $746.2 million from the Federal Reserve under a pledged-loan agreement, and $45.0 million in correspondent-bank federal funds lines. The company also reported $1.10 billion in commitments to extend credit and $51.7 million in standby letters of credit; commitments may not all be drawn.
Material changes versus comparable periods
- Profitability improved year over year, supported by loan growth, lower funding costs, higher service-charge and fee income, and reduced expenses. Management attributed part of the increase in reported earnings to the PCI loan-loss reversal and lower problem-loan legal expenses.
- Portfolio loans grew $168.2 million from year-end, led by commercial and industrial lending; consumer and other loans also rose substantially. PCI balances declined $15.4 million to $83.7 million as loans paid down or paid off.
- Nonperforming loans fell to $9.1 million from $22.2 million at year-end 2014; nonperforming assets were $10.7 million. No portfolio loans were over 90 days past due and still accruing at September 30.
- Core measures are non-GAAP. Nine-month core net income was $23.7 million, versus $19.3 million in 2014; core diluted EPS was $1.17 versus $0.97. Core margin was 3.44%, compared with 3.42%.
Outlook, risks and notable items
- Management anticipated noninterest expense of $19–$21 million per quarter for the rest of 2015 and throughout 2016. It estimated 2015 PCI asset income before tax of $11–$13 million, assuming no cash-flow accelerations or pool impairment, and noted core margin could decline modestly in late 2015 and into 2016.
- The board increased the quarterly dividend from $0.07 to $0.08 per share for Q4 2015. It authorized repurchases of up to 2 million shares; none had been repurchased under the program by September 30.
- The company received a $65 million New Markets Tax Credits allocation, its fourth in five years, bringing cumulative allocations to $183 million.
- Interest-rate modeling indicated estimated 12-month net interest income would change by +1.4% under a +100 basis-point shock, +5.2% under +300 basis points, and −1.4% under −100 basis points. Management cited low rates, loan-yield pressure and runoff of higher-yielding PCI loans as margin risks.
- Other stated risks include credit and collateral valuation, local economic conditions, interest-rate movements, competition, regulation, litigation and contingencies. Management said no pending or threatened legal proceeding was expected to have a material adverse effect. Disclosure controls were deemed effective, with no material change in internal controls reported.
Important facts for investors to verify
- Whether loan growth and deposit gathering remain sustainable, and how growth affects funding costs and margins.
- Credit quality trends, including charge-offs, classified loans, the adequacy of the allowance and the assumptions behind PCI cash-flow estimates and reversals.
- How much of the $1.10 billion in credit commitments is likely to fund, and whether available borrowing and securities liquidity remain adequate under stress.
- The sensitivity of earnings to interest rates and the possible margin decline management identified for late 2015 and 2016.
- Execution and capital implications of the dividend increase, the authorized share repurchase, and the estimated PCI income and expense outlook.