Enterprise Financial(EFSC) - 2021 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Total assets grew to $10.19 billion by March 31, 2021, with Q1 2021 net income significantly increasing to $29.9 million due to reduced credit loss provisions Condensed Consolidated Balance Sheets Total assets reached $10.19 billion as of March 31, 2021, primarily fueled by increased deposits and a modest rise in net loans Condensed Consolidated Balance Sheet Highlights (Unaudited) | (in thousands) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $10,190,699 | $9,751,571 | | Total cash and cash equivalents | $883,815 | $537,703 | | Total loans, net | $7,157,254 | $7,088,264 | | Total Liabilities | $9,098,202 | $8,672,596 | | Total deposits | $8,515,444 | $7,985,389 | | Total Shareholders' Equity | $1,092,497 | $1,078,975 | Condensed Consolidated Statements of Operations Net income for Q1 2021 more than doubled to $29.9 million, driven by a significant reduction in credit loss provisions and increased net interest income Q1 2021 vs. Q1 2020 Statement of Operations (Unaudited) | (in thousands, except per share data) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | | :--- | :--- | :--- | | Net Interest Income | $79,123 | $63,368 | | Provision for credit losses | $46 | $22,264 | | Total Noninterest Income | $11,290 | $13,408 | | Total Noninterest Expense | $52,884 | $38,673 | | Net Income | $29,926 | $12,868 | | Diluted Earnings Per Share | $0.96 | $0.48 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities shifted to an outflow in Q1 2021, while financing activities provided a strong inflow, resulting in a $346.1 million increase in cash Cash Flow Summary for Three Months Ended March 31 (Unaudited) | (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(3,675) | $32,562 | | Net cash used in investing activities | $(101,840) | $(153,652) | | Net cash provided by financing activities | $451,627 | $137,517 | | Net increase in cash and cash equivalents | $346,112 | $16,427 | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, loan portfolio composition, and highlight the significant April 2021 merger agreement with First Choice Bancorp - As of March 31, 2021, loans remaining in COVID-19 related deferral status totaled $21.1 million[57] - The company entered into a definitive merger agreement with First Choice Bancorp on April 26, 2021, with the all-stock transaction valued at approximately $397.7 million and creating a combined company with approximately $12.7 billion in assets[103] Loan Composition (in thousands of dollars) | Loan Category | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Commercial and industrial | $3,096,319 | $3,100,299 | | Real estate - Commercial investor owned | $1,669,215 | $1,589,419 | | Real estate - Commercial owner occupied | $1,517,755 | $1,498,408 | | Real estate - Construction and land development | $510,501 | $546,686 | | Real estate - Residential | $303,047 | $319,179 | | Other | $212,068 | $187,083 | | Total Loans | $7,288,781 | $7,224,935 | Allowance for Credit Losses (ACL) on Loans Activity (in thousands of dollars) | | Three months ended March 31, 2021 | | :--- | :--- | | Balance at December 31, 2020 | $136,671 | | Provision for credit losses | $503 | | Charge-offs | $(6,474) | | Recoveries | $827 | | Balance at March 31, 2021 | $131,527 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q1 2021 performance to increased net interest income and minimal credit loss provisions, while maintaining robust capital and announcing a new share repurchase program Executive Summary Q1 2021 net income reached $29.9 million, driven by lower credit loss provisions and higher net interest income, with loans growing to $7.3 billion and deposits to $8.5 billion Key Financial Highlights | Metric | Q1 2021 | Q4 2020 | Q1 2020 | | :--- | :--- | :--- | :--- | | Net Income (in thousands) | $29,926 | $28,931 | $12,868 | | Diluted EPS | $0.96 | $1.00 | $0.48 | | Return on average assets | 1.22% | 1.26% | 0.70% | | Net interest margin (tax equivalent) | 3.50% | 3.66% | 3.79% | | Nonperforming loans to total loans | 0.50% | 0.53% | 0.68% | - The company's participation in the Paycheck Protection Program (PPP) continued, with $737.7 million in net PPP loans outstanding at quarter-end, contributing $8.5 million in interest and fee income during Q1 2021[120] Results of Operations Net interest income reached $79.1 million in Q1 2021, though net interest margin compressed to 3.50% due to higher cash and reduced PPP fee income, while noninterest expense increased from acquisition costs - Net interest margin (NIM) was 3.50% for Q1 2021, a decrease of 16 basis points from the linked quarter (3.66%) and 29 basis points from the prior year quarter (3.79%)[123][142] - The decrease in NIM from the linked quarter was primarily driven by a 21 basis point decrease in earning asset yields, impacted by higher cash levels (13 bps), reduced income from PPP forgiveness (11 bps), and lower purchase accounting income (5 bps)[142] - Noninterest income decreased by $7.2 million from the linked quarter, largely due to a $5.1 million decline in tax credit income (expense), as several tax credit projects expected to close in Q1 were delayed[124][145] - Noninterest expense increased to $52.9 million, which included a full quarter of Seacoast operations ($10.2 million) and $3.1 million in merger-related expenses[149] Financial Condition The company's balance sheet showed continued growth and strong credit quality, with total loans reaching $7.3 billion and deposits increasing to $8.5 billion, while nonperforming loans decreased - Total loans increased by $63.8 million (3.6% annualized) from the linked quarter to $7.3 billion, with growth led by Commercial Real Estate (CRE) despite declining line of credit utilization at 37.6%[155] - The provision for credit losses was minimal at $46 thousand for Q1 2021, a significant reduction from $22.3 million in Q1 2020, due to an improved economic forecast offsetting specific loan charge-offs[164][165] - Nonperforming loans decreased by $1.8 million from the linked quarter to $36.7 million, representing 0.50% of total loans[168] - Total deposits increased by $530.1 million from the linked quarter to $8.5 billion, driven by a $558.8 million growth in core deposits, with noninterest-bearing deposits constituting 34.2% of the total[176][177] Liquidity and Capital Resources The company maintained strong liquidity with $883.8 million in cash and robust capital levels well above regulatory requirements, including a Common Equity Tier 1 ratio of 11.0% - Liquidity is strong with $883.8 million in cash and cash equivalents, and an additional $819 million in borrowing capacity from the FHLB and $923 million from the Federal Reserve Bank[183][186] EFSC Capital Ratios | Ratio | March 31, 2021 | Minimum Requirement (incl. buffer) | | :--- | :--- | :--- | | Common equity tier 1 capital | 11.0% | 7.0% | | Tier 1 capital | 12.3% | 8.5% | | Total capital | 15.1% | 10.5% | | Leverage ratio | 9.5% | 4.0% | - The company's banking subsidiary, Enterprise Bank & Trust, met the definition of 'well-capitalized' with a Common Equity Tier 1 ratio of 12.4% and a Total Capital ratio of 13.6%[194][197] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with simulations indicating asset sensitivity where a 100 basis point rate increase could boost net interest income by 2.3% Interest Rate Shock Impact on Net Interest Income | Rate Shock | Change in Net Interest Income | | :--- | :--- | | +300 bp | 12.2% | | +200 bp | 7.1% | | +100 bp | 2.3% | - As of March 31, 2021, the company had $4.1 billion in variable rate loans, of which $2.4 billion were based on LIBOR, with approximately 92% of the $1.7 billion in loans with rate floors already priced at their floor[215] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2021, with no material changes to internal controls over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2021[218] - No changes in internal controls over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, those controls[219] PART II - OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, none of which are expected to have a material adverse effect on its financial condition or operations - Management believes there are no pending or threatened legal proceedings that would have a material adverse effect on the business, financial condition, or results of operations[221] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 - No material changes have been made to the risk factors described in the Annual Report on Form 10-K for the year ended December 31, 2020[223] Other Information The Board of Directors approved a new share repurchase program on April 29, 2021, authorizing the repurchase of up to 2,000,000 shares of common stock - A new share repurchase program was approved on April 29, 2021, authorizing the repurchase of up to 2,000,000 shares of common stock[231]