Enterprise Financial Services Corp. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Enterprise Financial Services Corp. is a bank holding company operating Enterprise Bank & Trust, providing banking and wealth-management services primarily in Missouri, Kansas, Arizona, and New Mexico.
Business context and material developments
- On March 8, 2019, the company acquired Trinity Capital Corporation and Los Alamos National Bank for approximately $209.2 million, including about 4.0 million EFSC shares and $37.3 million in cash. The acquired business contributed $682 million of loans at acquisition and expanded the company’s New Mexico presence.
- Trinity-related merger expenses were $18.0 million pretax in 2019. The acquisition added approximately $93.0 million of goodwill; year-end goodwill was $210.3 million. The annual impairment test found no impairment.
- At year-end, the company operated 34 banking locations and three limited-service facilities and had approximately 805 full-time-equivalent employees.
Financial performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net interest income | $238.7 million | $191.9 million |
| Noninterest income | $49.2 million | $38.3 million |
| Total revenue (net interest income plus noninterest income) | $287.9 million | $230.3 million |
| Provision for loan losses | $6.4 million | $6.6 million |
| Noninterest expense | $165.5 million | $119.0 million |
| Net income | $92.7 million | $89.2 million |
| Diluted EPS | $3.55 | $3.83 |
| Net interest margin, fully tax-equivalent | 3.80% | 3.82% |
| Efficiency ratio | 57.48% | 51.70% |
| Return on average assets | 1.35% | 1.64% |
Net interest income rose 24%, primarily from the acquisition and organic growth. Noninterest income increased 28%, with growth in card services, wealth management, deposit charges, and tax-credit income. Noninterest expense increased 39%, reflecting Trinity’s operating costs and merger charges; excluding specified items, the core efficiency ratio was 52.36%, versus 52.04%.
Net income increased 4% while diluted EPS declined, reflecting the larger share count following the stock-funded acquisition. The 2019 effective tax rate was 20.1%, compared with 14.7% in 2018; the prior-year rate benefited from a $2.7 million tax-planning election and $1.6 million of excess stock-award tax benefits.
Fourth quarter: Net income was $29.1 million and diluted EPS was $1.09, versus $23.5 million and $1.02 in fourth-quarter 2018. Fourth-quarter 2019 net interest income was $61.6 million; provision was $1.3 million; noninterest income was $14.4 million; and noninterest expense was $38.4 million.
Balance sheet, credit, cash flow, and capital
- Scale and growth: Year-end assets were $7.33 billion, up 30%; loans were $5.31 billion, up 22%; deposits were $5.77 billion, up 26%. Growth reflects the Trinity acquisition as well as organic activity.
- Funding and liquidity: Core deposits were $4.94 billion. Cash and cash equivalents were $167.3 million, down from $196.6 million. The company reported $92.5 million of operating cash flow, $378.5 million used in investing activities, and $256.8 million provided by financing activities. The bank had $742 million of additional FHLB borrowing capacity, $1.1 billion available from the Federal Reserve, and $90 million of correspondent-bank lines.
- Debt and borrowings: Year-end balances included $141.3 million of subordinated debentures and notes, $222.4 million of FHLB advances, $230.9 million of securities sold under repurchase agreements, and $34.3 million outstanding on the term loan used principally to fund the Trinity acquisition. The $25 million revolving credit line had no year-end balance.
- Asset quality: Nonperforming loans rose 58% to $26.4 million, or 0.50% of loans, from $16.7 million, or 0.38%. Nonperforming assets were $32.8 million, or 0.45% of assets. Net charge-offs were $6.4 million, or 0.13% of average loans. The allowance was $43.3 million, equal to 0.81% of loans, versus 1.00% a year earlier.
- A $13 million C&I loan added in the fourth quarter represented 49% of nonperforming loans; the company recorded a specific reserve of approximately 10% for potential collateral shortfall. Classified assets increased to $85.9 million from $70.1 million.
- Capital: The bank was categorized as well-capitalized. Its total risk-based capital ratio was 12.40%, CET1 ratio 11.69%, and leverage ratio 10.31%. The company’s tangible common equity ratio was 8.89%, a non-GAAP measure.
- Shareholder returns: The company paid $0.62 per share in dividends during 2019 and repurchased 396,737 shares for $15.5 million. The board increased the first-quarter 2020 dividend to $0.18 per share from $0.17.
Outlook, risks, and unusual items
- The filing gives no specific earnings, growth, or margin guidance. Management expects continued investment in revenue-producing employees and supporting infrastructure. It noted competitive deposit pricing, interest-rate conditions, and possible downward rate movements could pressure margins.
- Management expected adoption of CECL on January 1, 2020 to increase the allowance for credit losses by 50%–65%, plus an additional $1 million–$3 million reserve for unfunded commitments. The filing cautions that the final impact could differ; the company planned to use the available three-year regulatory-capital transition relief.
- Interest-rate sensitivity modeling estimated net interest income would rise 2.3% under a +100-basis-point shock and decline 3.6% under a −100-basis-point shock. The company had substantial LIBOR exposure, including $2.6 billion of loans, $166.3 million of deposits and borrowings, and $811.8 million in derivative notional amount, and had not identified a replacement index as of year-end.
- Other key risks include borrower and collateral deterioration, commercial real estate and specialized-lending exposures, local economic conditions, deposit competition and brokered-deposit dependence, acquisition integration, regulatory requirements, cybersecurity and third-party service disruptions, and potential goodwill impairment. The company also disclosed indemnity exposure related to New Markets Tax Credit transactions.
- The company said pending or threatened ordinary-course litigation was not expected to have a material adverse effect. A lawsuit inherited with Trinity was settled in January 2020; proceeds were received and the proceedings were dismissed on January 31, 2020. The settlement amount is not stated in the supplied filing text.
- The financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting. The auditor identified the allowance’s qualitative adjustment, Trinity acquired-loan valuation, and CECL adoption disclosure as critical audit matters.
Important facts for investors to verify
- How Trinity integration, acquired-loan performance, and merger-cost savings affect recurring earnings and efficiency.
- Whether the rise in nonperforming loans and classified assets—particularly the $13 million C&I exposure—leads to additional losses or provisioning.
- The actual CECL adoption increase in reserves, including the reserve for unfunded commitments and regulatory-capital effect.
- Deposit mix, funding costs, brokered-deposit use, and liquidity capacity as loan growth and commitments evolve.
- Progress on LIBOR contract remediation and the eventual benchmark replacement, including effects on loans, debt, and derivatives.
- Whether margin performance, credit quality, and capital remain consistent with the company’s stated strategy and dividend policy.