Business context and reporting period
Enterprise Financial Services Corp (EFSC), a financial holding company headquartered in Missouri, provides commercial and personal banking and wealth management through Enterprise Bank & Trust, primarily across Arizona, California, Kansas, Missouri, Nevada and New Mexico. This Form 10-K covers the fiscal year ended December 31, 2021; comparisons below are principally with 2020.
Growth included the July 2021 acquisition of First Choice Bancorp, adding approximately $2.3 billion in assets, following the November 2020 acquisition of Seacoast. First Choice was funded primarily with EFSC common stock; transaction consideration was approximately $346 million.
Financial performance and condition
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Net interest income | $360.2 million | $270.0 million | Up 33%; growth reflected acquisitions, loan growth and PPP income |
| Noninterest income | $67.7 million | $54.5 million | Up 24% |
| Net income | $133.1 million | $74.4 million | Up 79% |
| Diluted EPS | $3.86 | $2.76 | Up 40% |
| Net interest margin, fully tax-equivalent | 3.41% | 3.56% | Down 15 basis points |
| Efficiency ratio | 57.47% | 51.51% | Worsened; core ratio was 51.61% versus 50.96% |
| Provision for credit losses | $13.4 million | $65.4 million | Lower with improved economic forecasts; includes acquisition-related provision |
Loans grew 24.8% to $9.02 billion, deposits grew 42.1% to $11.34 billion, and total assets rose 38.8% to $13.54 billion. Cash and cash equivalents were $2.02 billion, securities were approximately $1.80 billion, and shareholders’ equity was $1.53 billion at year-end. Noninterest-bearing deposits were 40% of deposits, versus 34% a year earlier.
Operating cash flow was $160.6 million, compared with $135.5 million in 2020. Investing activities used $23.1 million, versus $702.8 million used in 2020; financing activities provided $1.35 billion, including deposit growth and preferred stock proceeds. Year-end subordinated debentures and notes were $154.9 million, FHLB advances $50.0 million, and other borrowings $353.9 million.
Credit metrics improved in some respects: nonperforming loans fell to $28.0 million (0.31% of loans) from $38.5 million (0.53%); nonperforming assets were 0.23% of assets versus 0.45%. However, net charge-offs increased to $11.6 million from $1.9 million. The allowance for credit losses was $145.0 million, or 1.61% of loans, compared with 1.89% in 2020.
EFSC and the Bank remained above applicable capital requirements. At year-end, EFSC’s CET1, total risk-based capital and leverage ratios were 11.3%, 14.7% and 9.7%; the Bank’s were 12.5%, 13.5% and 9.3%, respectively. The Bank was classified as well-capitalized. Reported liquidity resources included $709 million of additional FHLB borrowing capacity, $1.1 billion available through a Federal Reserve line, and $90 million in correspondent-bank lines; these facilities are subject to collateral and other conditions.
Material changes versus the prior comparable period
- Net income increased substantially, helped by a $52.0 million year-over-year reduction in provision expense, acquisition contributions and higher net interest income. The lower provision followed pandemic-era reserve building and improved forecast assumptions; acquisition-related provision was $25.4 million in 2021.
- Net interest income increased, while margin contracted as deposit growth raised low-yielding cash balances and the low-rate environment reduced asset yields. Average interest-bearing cash was $1.1 billion at a 0.14% yield in 2021, versus $228.8 million at 0.27% in 2020.
- Noninterest expense rose 47% to $245.9 million, reflecting acquired operations, $22.1 million of merger-related costs and branch-closure charges. The GAAP efficiency ratio increased, while the non-GAAP core ratio was comparatively stable.
- First Choice added $104.6 million of goodwill; total goodwill reached $365.2 million. Shareholders’ equity increased 41.7%, including acquisition-related common stock issuance and $72.0 million of net preferred-stock proceeds.
- The Company redeemed $50.0 million of 4.75% subordinated notes, issued $72.0 million net from Series A preferred stock, repurchased 1.30 million common shares for $60.6 million, and paid common dividends of $0.75 per share versus $0.72 in 2020.
Outlook, risks and unusual items
The filing does not provide specific earnings, revenue or balance-sheet guidance. Management anticipated comparable common dividends, subject to Board discretion and regulatory and financial constraints; expected no further merger expenses for First Choice or Seacoast; and forecast approximately $2.3 million in annual savings from branch closures. Management also expected continued investment in staff and infrastructure and noted that inflation, low unemployment and hybrid work arrangements could increase expenses. First Choice would contribute a full year of operations in 2022, unlike 2021.
Key risks include COVID-19 and economic uncertainty; credit losses and real-estate or commercial-lending concentrations; interest-rate and funding risks; acquisition integration and goodwill impairment; regulatory and PPP/SBA compliance; cybersecurity and third-party service disruptions; and climate-related physical and transition risks. LIBOR-linked exposure remained material at year-end: $2.8 billion of loans, $125.3 million of borrowings and $889.0 million notional of derivatives. EFSC had begun originating SOFR-based loans, but had not yet selected a replacement index for all affected contracts.
Other notable items: five branches were slated for closure, with related impairment and closure costs; the ACL was sensitive to economic scenarios (management estimated it would be $20.5 million lower using only the upside scenario or $43.9 million higher using only the downside scenario). Auditors issued unqualified opinions on the financial statements and internal controls; the ACL estimate and First Choice acquired-loan valuation were identified as critical audit matters. Management reported no ordinary-course litigation expected to have a material adverse effect.
Important facts for investors to verify
- How much of the earnings improvement reflects recurring organic performance versus acquisition contributions, PPP income and lower credit provisions?
- Whether integration of First Choice is on track, including the realization of branch-related savings and the expected full-year expense base.
- Credit quality trends, particularly charge-offs, classified assets, commercial real-estate exposures and the adequacy of the CECL allowance under changing forecasts.
- Deposit stability and funding costs, including uninsured deposits, brokered deposits and the availability of pledged-collateral borrowing capacity.
- Net interest margin sensitivity to rate changes and the execution of the LIBOR-to-SOFR transition across loans, debt and derivatives.
- Capital and shareholder-return capacity after acquisitions, buybacks, preferred dividends and regulatory constraints on Bank-to-parent distributions.