Enterprise Financial Services Corp. — 2015 Form 10-K
Business context and reporting period
Enterprise Financial Services Corp is a financial holding company whose sole reportable segment is banking and wealth management through Enterprise Bank & Trust. It primarily serves businesses, individuals and wealth-management clients in the St. Louis, Kansas City and Phoenix markets. This filing covers the fiscal year ended December 31, 2015; quarterly figures below include the fourth quarter.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Net interest income | $120.4 million | $117.4 million |
| Net income | $38.5 million | $27.2 million |
| Diluted earnings per share | $1.89 | $1.35 |
| Return on average assets | 1.14% | 0.86% |
| Net interest margin, fully tax-equivalent | 3.86% | 4.07% |
| Efficiency ratio | 58.28% | 65.27% |
Fourth-quarter 2015 net income was $10.7 million and diluted EPS was $0.52. At year-end, assets were $3.61 billion, portfolio loans were $2.75 billion (up 13.0%), deposits were $2.78 billion (up 11.8%), and shareholders’ equity was $350.8 million. The allowance for portfolio loan losses was $33.4 million, or 1.22% of portfolio loans.
Operating cash flow was $47.2 million; investing cash flow was negative $337.3 million and financing cash flow was positive $283.5 million. Cash and cash equivalents declined $6.5 million to $94.2 million. Year-end debt included $56.8 million of subordinated debentures, $110.0 million of FHLB advances and $270.3 million of other borrowings. The Bank had $239.6 million of additional FHLB borrowing capacity, $815.6 million available under its Federal Reserve line and $60 million in correspondent-bank federal funds lines. The Bank was categorized as well capitalized; its total risk-based capital ratio was 10.98% and leverage ratio was 9.84%.
Material changes versus 2014
- Net income rose 41.5%; management attributed the increase principally to a larger reversal of provision on purchased credit-impaired (PCI) loans, higher noninterest income and lower expenses.
- Core net income, a non-GAAP measure, increased to $33.8 million from $26.0 million; core EPS was $1.66 versus $1.29. Core net interest income increased 9%, while core net interest margin rose to 3.46% from 3.42%.
- Reported net interest margin fell 21 basis points, largely because accelerated accretion income from PCI loans declined. Portfolio loan growth and lower funding costs supported net interest income.
- Nonperforming loans fell to $9.1 million from $22.2 million, and net charge-offs were $1.6 million. Nonperforming assets were $17.5 million; the year-over-year comparison includes $5.1 million of acquired other real estate newly classified as nonperforming after FDIC loss-share termination.
- Noninterest expense declined to $82.2 million from $87.5 million. The 2014 period included a $2.9 million FHLB prepayment penalty and a $1.0 million facilities disposal charge.
Outlook, commentary, risks and unusual items
- Management expected total portfolio loan growth of 10% or more in 2016 and quarterly noninterest expense of $19–$21 million. It expected to maintain or improve core net interest margin, while warning that funding-cost pressure and declining PCI balances could offset improvement.
- In December 2015, the Company terminated all FDIC loss-share agreements. It recorded a $2.4 million pretax charge, received a net $1.3 million payment, and removed a $7.2 million receivable and $3.5 million clawback liability. Management expected the charge to be earned back within 12 months and future earnings to benefit, but the FDIC will no longer share future losses, expenses or recoveries on these assets.
- Management cited credit quality, local economic conditions, commercial real estate and specialty-lending exposures, interest-rate sensitivity, deposit competition, regulatory costs, cybersecurity and third-party service-provider risks. $1.14 billion of commitments to extend credit and $54.6 million of standby letters of credit were outstanding; commitments may not all be drawn.
- The Company authorized repurchases of up to 2 million shares but made no program repurchases in 2015. The quarterly dividend increased to $0.08 per share in Q4. In February 2016, it entered a $20 million revolving credit facility, maturing February 23, 2017, at one-month LIBOR plus 2.25%; no balance was outstanding as of February 26, 2016. The agreement includes financial covenants.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Important facts for investors to verify
- How much of 2015 earnings and the reported margin depended on PCI accretion, reversals and other nonrecurring FDIC-related items; review GAAP results alongside the Company’s non-GAAP core measures.
- Whether rapid commercial and specialty-loan growth is accompanied by sustained underwriting quality, adequate allowance coverage and manageable concentrations, including the potential problem-loan balance of $50.3 million.
- Whether deposit growth and funding mix can support loan growth without higher funding costs or further margin compression; assess liquidity against the $1.14 billion in credit commitments.
- The post-termination performance and recoveries of former FDIC-covered assets, now borne entirely by the Company, and whether the $2.4 million charge is recovered as management expected.
- Compliance with the new revolving facility’s capital, asset-quality and debt-service covenants, as well as the sustainability of dividend increases and any future share repurchases.