Enterprise Financial Services Corp — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company provides banking and wealth-management services through Enterprise Bank & Trust in Arizona, Kansas, Missouri, and New Mexico. Comparisons are affected by the March 2019 acquisition of Trinity Capital Corporation, whose results were included from its acquisition date.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Total interest income | $76.7 million | $67.6 million in Q1 2019 |
| Net interest income | $63.4 million | $52.3 million in Q1 2019 |
| Provision for credit losses | $22.3 million | $1.5 million in Q1 2019 |
| Noninterest income | $13.4 million | $9.2 million in Q1 2019 |
| Noninterest expense | $38.7 million | $39.8 million in Q1 2019 |
| Net income | $12.9 million; diluted EPS $0.48 | $16.2 million; diluted EPS $0.67 in Q1 2019 |
| Net interest margin, tax-equivalent | 3.79% | 3.87% in Q1 2019 |
| Return on average assets | 0.70% | 1.10% in Q1 2019 |
| Total assets | $7.50 billion | $7.33 billion at December 31, 2019 |
| Loans | $5.46 billion | $5.31 billion at December 31, 2019 |
| Deposits | $5.99 billion | $5.77 billion at December 31, 2019 |
| Shareholders’ equity | $846.4 million | $867.2 million at December 31, 2019 |
Net interest income increased 21% year over year, supported by Trinity, loan growth, and a larger investment portfolio; lower asset yields partly offset lower funding costs. Noninterest income rose 45%, including Trinity-related wealth-management and card-services revenue, tax-credit income, swap fees, and a life-insurance claim. Noninterest expense declined 3%, primarily because Q1 2019 included $7.3 million of merger-related expense. The efficiency ratio was 50.37%, versus 64.70%; the core efficiency ratio, a non-GAAP measure, was 51.21%, versus 54.06%.
Cash flow: Operating activities provided $32.6 million, compared with $15.7 million in Q1 2019. Investing activities used $153.7 million, versus $53.2 million provided in Q1 2019, largely reflecting loan growth and investment purchases. Financing activities provided $137.5 million, versus $44.0 million used in Q1 2019. Cash and cash equivalents ended the quarter at $183.7 million, up from $167.3 million at year-end.
Credit quality: The allowance for credit losses on loans was $92.2 million, or 1.69% of loans, at March 31. Nonperforming loans were $37.2 million, 0.68% of loans, versus $26.4 million and 0.50% at December 31, 2019. Nonperforming assets were $42.3 million, or 0.56% of assets. Management attributed part of the increase in reported problem loans to CECL-related reclassification of previously pooled acquired loans.
Debt, liquidity, and capital: Balance-sheet funding included $141.3 million of subordinated debentures and notes, $222.0 million of FHLB advances, $173.1 million of other borrowings, and $32.9 million of notes payable. The company reported $14 million of cash at the holding company and said it expected available sources to cover projected holding-company cash needs for the rest of 2020. The Bank reported $591 million of FHLB borrowing capacity, $1.1 billion available from the Federal Reserve against pledged loans, and additional unsecured lines. The Bank met the regulatory definition of well-capitalized; its total risk-based capital ratio was 12.37% and its common equity tier 1 ratio was 11.33%.
Material changes and unusual items
- CECL adoption: Adopted January 1, 2020. The adoption increased the loan allowance by $28.4 million and the reserve for unfunded commitments by $2.4 million, and reduced retained earnings by $18.1 million after tax. The Q1 credit-loss provision also reflected a sharply worsened COVID-19 economic forecast and greater weighting of downside scenarios.
- COVID-19 credit response: As of April 30, $392.1 million of loans had entered short-term deferral programs, including $190.8 million of loans deferring interest payments totaling $2.2 million.
- PPP: The company reported $856.5 million of SBA-approved Paycheck Protection Program loans expected to be funded in Q2 2020. This is a stated expectation, not a reported completed funding amount.
- Capital returns: The company repurchased 456,251 shares in Q1 at an average price of $33.64 and temporarily suspended repurchases amid pandemic-related uncertainty. It paid $0.18 per share in dividends.
- Other notable expense: Other noninterest expense included a $0.8 million write-down of other real estate owned. The company reported no goodwill or intangible-asset impairment in Q1 despite a market capitalization decline below book value.
Outlook, commentary, and risks
The filing gives no full-year earnings or revenue guidance. Management warned that the pandemic’s duration and economic effects were uncertain and could adversely affect credit losses, noninterest income, profitability, asset values, funding availability, liquidity, and capital. The company’s Q1 credit-loss estimate used a one-year forecast with GDP growth assumptions ranging from negative 9.6% to positive 2.1% and unemployment assumptions of 6.0% to 13.0%; management said further economic deterioration could require elevated provisions.
Other risks include borrower defaults and collateral-value declines; disruptions to employees, vendors, and business continuity; PPP compliance, litigation, and possible SBA-guarantee disputes; interest-rate and LIBOR exposure; and the possibility of future goodwill or intangible impairment. The company reported that its disclosure controls were effective and that management was not aware of legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- How subsequent economic conditions, borrower performance, and updated CECL assumptions affect the allowance and future provisions.
- Repayment and credit performance of deferred loans, including the extent of continued interest deferrals.
- Actual PPP loan fundings, fee income, forgiveness processing, and any SBA or litigation-related exposure.
- Whether deposit growth and available borrowing capacity remain sufficient as customer funding needs and loan commitments evolve.
- Trends in net interest margin, given falling short-term rates and the company’s variable-rate loan exposure, and the effect of the $2.2 million estimated hedge-loss reclassification to interest expense over the next 12 months.
- Changes in nonperforming and classified assets, regulatory capital, and the suspended share-repurchase program.