Enterprise Financial Services Corp. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The company provides banking and wealth-management services in the St. Louis, Kansas City and Phoenix markets. Unless otherwise noted, amounts below are in millions of dollars.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $32.6 | $37.5 | $102.8 | $102.2 |
| Net income | $8.4 | $7.9 | $29.5 | $22.9 |
| Diluted EPS | $0.44 | $0.39 | $1.55 | $1.14 |
| Noninterest income | $3.7 | $7.8 | $5.0 | $12.7 |
| Noninterest expense | $21.2 | $21.3 | $63.1 | $64.1 |
- Q3 net interest margin was 4.71%, down from 5.21% a year earlier; core margin was 3.54% versus 3.57%. Nine-month reported margin rose to 4.86% from 4.79%, while core margin was 3.55% versus 3.59%. Core margin excludes incremental accretion on acquired FDIC-covered loans.
- Q3 provision expense was $2.2 million net, reflecting a $2.8 million covered-loan provision partly offset by a $0.7 million benefit on noncovered loans. For the nine months, total provision was a $0.3 million benefit.
- The Q3 efficiency ratio was 58.5%, versus 47.0% a year earlier; the nine-month ratio was 58.6%, versus 55.8%. Management attributed the increase primarily to lower FDIC-related revenue.
- Other comprehensive loss was $9.8 million for the nine months, largely reflecting investment-security valuation changes. Total comprehensive income was $19.7 million, versus $28.7 million in 2012.
Financial position, liquidity and capital
- At September 30, total assets were $3.11 billion, down from $3.33 billion at December 31, 2012. Total deposits were $2.45 billion, down from $2.66 billion. Net portfolio loans were $2.23 billion, versus $2.26 billion; available-for-sale securities were $453.0 million, versus $640.2 million.
- Cash and cash equivalents were $101.2 million. Shareholders’ equity was $277.7 million, up from $235.7 million at year-end. Subordinated debentures were $63.1 million; FHLB advances were $120.0 million; other borrowings were $167.4 million; and notes payable were $10.8 million.
- For the nine months, operating cash flow was $12.0 million, investing cash flow was $214.0 million, and financing cash flow used $241.1 million. Cash and equivalents decreased $15.1 million.
- Management reported the company and bank met applicable capital requirements and the bank was “well-capitalized.” Company ratios at September 30 included Tier 1 capital to risk-weighted assets of 12.29%, total capital of 13.57%, Tier 1 leverage of 10.06%, and tangible common equity to tangible assets of 7.85%.
- The bank reported additional borrowing availability of $155.5 million from the FHLB, $612.8 million from the Federal Reserve, and $45.0 million in correspondent-bank federal funds lines. Of $453.0 million of securities, $227.5 million was pledged.
Material changes and asset quality
- Net income increased year over year, while Q3 net interest income and noninterest income declined. The nine-month earnings improvement included lower loan-loss provisions; noninterest income was substantially lower, chiefly reflecting changes in the FDIC loss-share receivable and lower gains on other real estate sales.
- Noncovered loans were $2.11 billion, slightly above year-end; commercial and industrial loans grew while real estate balances, particularly construction and land development, declined. Management expected 2–3% loan growth over December 2012 by year-end.
- Nonperforming noncovered loans were $24.2 million, down from $38.7 million at year-end and $32.1 million a year earlier. Nonperforming assets were $34.4 million, or 1.11% of total assets, versus $48.1 million and 1.44% at year-end. Noncovered allowance was $26.6 million, or 1.26% of noncovered loans; management considered it adequate.
- Other real estate totaled $28.1 million, including $17.8 million covered by FDIC loss-share agreements. Noncovered loans past due 90 days or more totaled $10.9 million; covered loans past due 90 days or more totaled $21.1 million. The filing notes covered-loan pools are treated as performing for nonperforming-loan reporting.
- Trust preferred securities with $20.0 million principal and a 9% rate were converted to common stock in August, reducing debt and adding about 1.2 million shares. A $443,000 one-time, noncash inducement expense was recorded. The company also repurchased Treasury-issued warrants for approximately $1.0 million.
Outlook, risks and unusual items
- Management expected core net interest margin to be slightly lower over the next two quarters, citing continued loan-yield pressure and liquidity needs. It projected average covered loans of $153.4 million in 2013 and $115.3 million in 2014.
- The company expected its 2013 effective tax rate to be slightly below the nine-month rate of 34.3%, due to state tax legislation. No broader earnings or EPS guidance is provided.
- Two Kansas City branches were under agreement for sale, including approximately $81.3 million of deposits and $7.7 million of loans. Regulatory approval was obtained; closing and a related deposit-premium gain were expected in Q4 2013.
- A lawsuit relating to Distinctive Notes, in which plaintiffs had sought damages exceeding $44 million, was confidentially settled on September 24, 2013. The company said the settlement had no material financial-statement impact.
- Management cited credit and real-estate valuation risk, local economic conditions, interest-rate movements, competition, regulatory changes, and litigation/contingencies as risks. The company said rising rates were expected to benefit net interest income under its September 30 simulation, but results remain subject to assumptions and actual conditions.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan growth and deposit funding develop as management projected, given year-to-date deposit runoff and stated liquidity pressures.
- How much of earnings depends on FDIC-covered loan accretion, loss-share receivable remeasurement, and other nonrecurring items; monitor core margin separately from reported margin.
- Trends in covered and noncovered delinquencies, nonperforming loans, charge-offs, collateral values, and the adequacy of loan-loss reserves.
- Completion and final economics of the Kansas City branch sale, including the deposit premium and any resulting balance-sheet effects.
- The future effect of Basel III capital rules and the company’s continuing ability to meet capital, liquidity, and debt-covenant requirements.