Enterprise Financial Services Corp. — Q2 2018 Form 10-Q
Business context and reporting period. Enterprise Financial Services Corp is a financial holding company providing banking and wealth-management services, principally in the St. Louis, Kansas City and Phoenix markets. This unaudited report covers the quarter and six months ended June 30, 2018. Comparisons with 2017 are affected by the February 2017 acquisition of Jefferson County Bancshares (JCB), whose results were included only after the acquisition closed.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $47.0 million | $45.6 million | $93.2 million | $84.3 million |
| Net income | $22.3 million | $12.0 million | $43.2 million | $24.3 million |
| Diluted EPS | $0.95 | $0.50 | $1.85 | $1.06 |
| Net interest margin, fully tax-equivalent | 3.77% | 3.98% | 3.79% | 3.86% |
For the six-month period, total noninterest income was $19.2 million, up 29%, and noninterest expense was $58.4 million, down 2%. The reported efficiency ratio was 51.9% for the six months, versus 59.9% in 2017; the company’s non-GAAP core efficiency ratio was 53.2%, versus 55.2%. Core net income, a non-GAAP measure, was $39.6 million, up 50%.
Six-month net cash from operating activities was $51.9 million, compared with cash used of $7.6 million in 2017. Investing activities used $210.6 million and financing activities provided $182.7 million. Cash and cash equivalents ended the period at $177.3 million, up $23.9 million from year-end 2017.
Financial position and material changes
- Total assets were $5.51 billion, up $220.7 million, or 4.2%, from December 31, 2017. Portfolio loans were $4.25 billion, up $185.7 million, or 4.6%; total loans including purchased credit-impaired loans were $4.28 billion.
- Deposits were $4.25 billion, up $91.5 million, or 2.2%. Growth in money-market balances and brokered certificates of deposit partly offset declines in demand and interest-bearing transaction accounts. Brokered CDs rose to $224.2 million from $115.3 million.
- Federal Home Loan Bank advances increased to $361.5 million from $172.7 million; other borrowings declined to $167.2 million from $253.7 million. Subordinated debt and notes were $118.1 million. Total liabilities were $4.94 billion.
- Shareholders’ equity was $574.1 million, up $25.5 million. Six-month net income was partly offset by a $7.9 million after-tax decline in other comprehensive income, principally reflecting unrealized securities losses, $5.1 million in dividends and $3.1 million in share repurchases.
- Nonperforming loans were $14.8 million, or 0.35% of portfolio loans, versus $15.7 million and 0.39% at year-end. The portfolio allowance was $42.0 million, or 1.00% of portfolio loans. Net charge-offs were $0.4 million for the first half, compared with $6.0 million in 2017.
Management commentary, outlook and risks
- Management attributed earnings growth to loan and deposit growth, fee income and federal tax reform. Six-month net interest income increased 11%, but reported net interest margin narrowed as funding costs rose and income from acquired loans ran off. Core margin, excluding incremental acquired-loan accretion, improved to 3.74% from 3.70%.
- Management expected high-single-digit portfolio loan growth for 2018 and fee-income growth of 5%–7%. It expected expense growth at 35%–45% of projected revenue growth, with continued efficiency-ratio improvement. These are forward-looking expectations, not guarantees.
- Management estimated 2018 full-year effective tax rate of 17%–19% and a rate of approximately 18%–20% for the remainder of the year. Incremental accretion on non-core acquired loans was estimated at $2–$3 million for 2018.
- Reported earnings included a $2.0 million reversal of the provision for purchased credit-impaired loan losses in the quarter and first half. Six-month noninterest income also included a $0.6 million gain on sale of an equity partnership and $1.0 million of income from non-core acquired assets. The prior-year six-month expense comparison benefited from $6.1 million of JCB merger expenses in 2017.
- At June 30, unused commitments to extend credit were $1.27 billion and letters of credit were $54.6 million. Management noted that aggregate drawdown of commitments was considered unlikely, but could consume much of current liquidity. Available funding included $313 million of FHLB capacity, $1.0 billion of Federal Reserve capacity, and additional correspondent and other lines.
- The Bank met the regulatory definition of well-capitalized. Company ratios included 12.60% total risk-based capital, 10.68% Tier 1 risk-based capital, 9.32% common equity Tier 1 and 9.99% leverage. The interest-rate model estimated net interest income changes of +1.7% for a +100-basis-point shock and −3.9% for a −100-basis-point shock.
- Key stated risks include credit quality and collateral values, local economic conditions, changing rates and deposit pricing, acquisition integration, competition, regulation and litigation. Management reported no legal proceedings expected to have a material adverse effect, no material change to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether loan growth and asset quality remain consistent with the outlook, including the trend in watch-rated and past-due loans; $4.1 million of loans were over 90 days past due and still accruing at June 30.
- Whether deposit pricing, brokered funding and higher FHLB advances pressure margins or liquidity as rates change.
- The sustainability of earnings after the PCI provision reversal, acquired-loan accretion and identified nonrecurring income; distinguish GAAP results from management’s non-GAAP core measures.
- The timing and effects of the expected 2018 loan, fee-income, expense and tax-rate outcomes, and the eventual impact of the expected-credit-loss accounting standard, whose effect the company had not yet determined.