Business context and reporting period
Enterprise Financial Services Corp is a financial holding company providing banking and wealth-management services in Arizona, Kansas, Missouri, and New Mexico. This unaudited Form 10-Q covers the three months ended March 31, 2019; amounts below are in millions unless stated otherwise. Results include Trinity Capital Corporation (Trinity) only from its March 8, 2019 acquisition date, limiting direct comparisons with 2018.
Key financial results and position
| Metric | Q1 2019 | Q1 2018 or prior date |
|---|---|---|
| Net interest income | $52.3 | $46.2 |
| Provision for loan losses | $1.5 | $1.9 |
| Noninterest income | $9.2 | $9.5 |
| Noninterest expense | $39.8 | $29.1 |
| Net income | $16.2 | $20.9 |
| Diluted EPS | $0.67 | $0.90 |
| Net interest margin, tax-equivalent | 3.87% | 3.80% |
| Core net interest margin, non-GAAP | 3.79% | 3.74% |
| Efficiency ratio | 64.70% | 52.31% |
| Core efficiency ratio, non-GAAP | 54.06% | 54.02% |
Net income fell 23% year over year, primarily reflecting $7.3 million of Trinity merger-related costs, which management estimated reduced after-tax earnings by $5.7 million, or $0.24 per diluted share. Excluding those costs, management reported adjusted net income of $21.9 million and adjusted diluted EPS is not clearly stated in the filing text.
Total assets were $6.93 billion at March 31, up 22.8% from year-end 2018. Loans were $5.02 billion, up $667 million, primarily due to Trinity and growth in certain commercial and real-estate categories. Deposits were $5.54 billion, up $949 million, also primarily due to Trinity. Cash and cash equivalents were $221.5 million, versus $196.6 million at December 31.
Cash from operating activities was $15.7 million; investing activities provided $53.2 million, including securities sales and maturities; financing activities used $44.0 million. The allowance for loan losses was $43.1 million, or 0.86% of total loans. Nonperforming loans were $9.6 million (0.19% of loans), down from $16.7 million (0.38%) at year-end. Net charge-offs were $1.8 million, an annualized 0.16% of average loans.
Reported debt and borrowing balances included $140.7 million of subordinated debentures and notes, $180.5 million of Federal Home Loan Bank advances, $172.2 million of other borrowings, and $40.0 million of notes payable. The Bank reported March 31 capital ratios of 12.75% total risk-based capital, 12.00% Tier 1 risk-based capital, 12.00% common equity Tier 1, and 12.01% Tier 1 leverage; it met the well-capitalized standard.
Material changes versus comparable periods
- Trinity was acquired for total consideration of $209.2 million, comprising $37.3 million cash and $171.9 million in EFSC shares. The acquisition added approximately $1.24 billion of assets and $1.12 billion of liabilities; preliminary goodwill was $90.3 million. Purchase accounting remains provisional and could change materially.
- Net interest income increased 13% year over year. Management attributed growth to loan growth, higher rates, and approximately $3.0 million of Trinity contribution. Deposit and borrowing costs also rose: the average cost of interest-bearing liabilities increased to 1.49% from 0.99%.
- Noninterest expense rose 37%, reflecting merger costs and higher post-acquisition operating expenses, notably compensation and data processing. Noninterest income declined 3%, as lower wealth-management and non-core acquired-asset income partly offset card-services growth and Trinity contributions.
- Loans grew 15.3% and deposits 20.7% from December 31, 2018, largely reflecting the acquisition. Shareholders’ equity increased $194.0 million, including the stock issued for Trinity and $10.8 million of other comprehensive income, principally securities valuation changes.
Outlook, risks, contingencies, and unusual items
- Management expected high-single-digit loan growth in 2019 excluding acquired loans, and high-single-digit noninterest-income growth excluding Trinity. It expected core net interest margin to be maintained over coming quarters, while warning that funding-cost pressure could offset favorable trends.
- Management expected elevated acquisition-related operating costs through Q2 while LANB systems were converted, with efficiency improvements in the second half of 2019. It projected expense growth at 35%–45% of projected 2019 revenue growth and an effective tax rate of approximately 18%–20% for the rest of 2019.
- Interest-rate sensitivity modeling estimated next-12-month net interest income changes of +7.5% for a +300-basis-point shock, +2.6% for +100 basis points, and -4.7% for -100 basis points. The filing notes that funding costs and changing rates may affect results.
- The Company disclosed $1.412 billion of commitments to extend credit and $53.6 million of letters of credit. These contractual amounts are not necessarily expected cash requirements; actual drawdowns may vary. The Bank also reported substantial contingent borrowing capacity and unpledged securities available for liquidity.
- The acquired Trinity/LANB litigation concerns disputed insurance coverage and related former-officer claims. A summary-judgment ruling favored Trinity/LANB, but the insurer sought reconsideration; the outcome, timing, and any recovery remain uncertain. Management stated other proceedings were not expected to have a material adverse effect.
- Management identified acquisition integration and customer retention, credit and real-estate collateral risk, local economic conditions, interest-rate changes, competition, regulatory matters, and other disclosed factors as risks. The Company was monitoring the proposed transition from LIBOR to SOFR for material LIBOR-linked contracts.
Important facts for investors to verify
- Track Trinity integration, customer retention, systems-conversion costs, and whether anticipated second-half efficiency gains materialize.
- Assess earnings excluding merger-related items alongside GAAP results, and note that core performance measures are non-GAAP.
- Review loan growth and credit quality, including the acquired portfolio’s preliminary credit marks, allowance coverage, past-due loans, and rising other real estate owned.
- Monitor deposit pricing, funding mix, liquidity needs, and the capacity to meet potential draws on off-balance-sheet commitments.
- Follow final purchase-accounting adjustments, the Trinity-related litigation, and the Company’s implementation of the expected-credit-loss accounting standard.
- Confirm the stated outlook and assumptions against subsequent filings; the Company cautioned that interim results are not necessarily indicative of full-year results.