Enterprise Financial Services Corp. — Q1 2021 Form 10-Q
Business context and reporting period. The company is a financial holding company providing banking and wealth-management services through Enterprise Bank & Trust. This unaudited filing covers the quarter ended March 31, 2021. Seacoast Commerce Banc Holdings, acquired in November 2020, is included in current-period results but not the full prior-year comparison. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q1 2021 | Comparison |
|---|---|---|
| Total interest income | $85.0 million | $76.7 million in Q1 2020 |
| Net interest income | $79.1 million | $63.4 million in Q1 2020; $77.4 million in Q4 2020 |
| Net interest margin, tax-equivalent | 3.50% | 3.79% in Q1 2020; 3.66% in Q4 2020 |
| Provision for credit losses | $46,000 | $22.3 million in Q1 2020; $9.5 million in Q4 2020 |
| Noninterest income | $11.3 million | $13.4 million in Q1 2020; $18.5 million in Q4 2020 |
| Noninterest expense | $52.9 million | $38.7 million in Q1 2020; $51.1 million in Q4 2020 |
| Net income / diluted EPS | $29.9 million / $0.96 | $12.9 million / $0.48 in Q1 2020; $28.9 million / $1.00 in Q4 2020 |
| Efficiency ratio | 58.49% | 50.37% in Q1 2020; 53.20% in Q4 2020 |
| Operating cash flow | $(3.7) million | $32.6 million provided in Q1 2020 |
Balance sheet and liquidity. Total assets were $10.19 billion, up 5% from December 31, 2020. Loans were $7.29 billion, up $63.8 million during the quarter; deposits were $8.52 billion, up $530.1 million. The loan-to-deposit ratio was 85.6%. Cash and cash equivalents rose to $883.8 million from $537.7 million. The company reported $819 million of additional FHLB borrowing capacity, $923 million available from the Federal Reserve under a pledged-loan agreement, and $90 million in correspondent-bank lines. Total shareholders’ equity was $1.09 billion; tangible common equity to tangible assets was 8.2%.
Balance-sheet borrowings included $203.8 million of subordinated debentures and notes, $50.0 million of FHLB advances, $202.2 million of other borrowings, and $27.1 million of notes payable. The Bank reported a 12.4% common equity tier 1 ratio and a 13.6% total risk-based capital ratio and met the regulatory definition of “well-capitalized.”
Credit quality. The allowance for credit losses on loans was $131.5 million, or 1.80% of loans, versus 1.89% at year-end 2020. Nonperforming loans were $36.7 million (0.50% of loans), down from $38.5 million at year-end. Net charge-offs were $5.6 million, including a $2.3 million hotel-loan charge-off. COVID-related deferrals remaining at quarter-end totaled $21.1 million; $4.2 million of interest had been deferred.
Material changes and management commentary
- Compared with Q1 2020, net income increased $17.1 million, primarily reflecting lower credit-loss provision, Seacoast acquisition contributions, and PPP-related income. The prior-year quarter included a $22.3 million provision for credit losses.
- Net interest income increased year over year, but margin fell to 3.50%, reflecting lower market rates, PPP forgiveness and fees, and higher low-yielding cash balances. Approximately 60% of loans excluding PPP were variable-rate.
- Noninterest income declined year over year, primarily because tax-credit projects expected to close in Q1 were delayed and some project valuations fell. Noninterest expense increased, including $3.1 million in merger-related costs and $10.2 million of Seacoast operating expenses for the quarter. Management said it did not expect additional material expenses related to the Seacoast transaction.
- PPP loans, net of deferred fees, totaled $737.7 million at March 31, 2021. The filing says PPP participation increased loan and deposit growth and affected earnings and returns, while weighing on margin and certain capital and coverage ratios.
- Cash increased by $346.1 million during the quarter, while financing activities provided $451.6 million, mainly from deposit growth. Investing activities used $101.8 million, and operating activities used $3.7 million.
Outlook, risks and notable events
- The filing provides no specific earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management’s credit-loss estimates use baseline, upside, and downside economic forecasts weighted 70%, 5%, and 25%, respectively. It identifies renewed COVID disruption, slower vaccination, higher small-business bankruptcies, and rising unemployment as risks that could increase future credit costs.
- Other disclosed risks include acquisition integration and customer retention, real-estate collateral values, interest-rate movements, LIBOR transition, competition, regulation, and uncertain pandemic effects. Management reported no material change to the risk factors in its 2020 Form 10-K.
- On April 26, 2021, the company agreed to acquire First Choice Bancorp in an all-stock transaction valued at approximately $397.7 million, or $33.40 per share based on EFSC’s April 23 closing price. The stated pro forma combined-company assets were approximately $12.7 billion as of March 31, 2021.
- On April 29, 2021, the board approved a new authorization to repurchase up to 2 million shares, approximately 6% of shares outstanding at March 31. The board also approved a $0.18 quarterly dividend payable June 30, 2021.
- Management said pending or threatened legal proceedings were not expected to have a material adverse effect. Disclosure controls were reported effective as of March 31, 2021.
Important facts for investors to verify
- Whether the proposed First Choice Bancorp merger receives required approvals, closes on stated terms, and achieves expected integration and financial benefits.
- How the remaining PPP balance, forgiveness timing, and deposit-driven cash levels affect future loan growth, net interest margin, and earnings.
- Whether credit performance and the $131.5 million loan allowance remain appropriate as pandemic-related risks and economic forecasts evolve; monitor hospitality exposure and deferred loans.
- Whether delayed tax-credit projects close and how project valuations affect noninterest income.
- How interest-rate changes and the LIBOR transition affect the variable-rate portfolio, funding costs, and hedges.
- Cash-flow volatility: operating activities used $3.7 million in Q1 despite positive net income; review the drivers of changes in other assets and liabilities.