Enterprise Financial(EFSC) - 2021 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Unaudited statements show significant growth in assets, loans, and deposits, driven by the First Choice Bancorp (FCBP) acquisition Condensed Consolidated Balance Sheets Total assets grew 32% to $12.89 billion, driven by increases in loans and deposits from the FCBP acquisition | Financial Metric | September 30, 2021 (in thousands) | December 31, 2020 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $12,888,016 | $9,751,571 | +32.2% | | Total Loans, net | $8,964,487 | $7,088,264 | +26.5% | | Goodwill | $365,415 | $260,567 | +40.2% | | Total Deposits | $10,827,775 | $7,985,389 | +35.6% | | Total Liabilities | $11,448,381 | $8,672,596 | +32.0% | | Total Shareholders' Equity | $1,439,635 | $1,078,975 | +33.4% | Condensed Consolidated Statements of Operations Net income for the nine months rose to $82.2 million, though Q3 results were impacted by merger-related expenses | Metric (in thousands) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net Interest Income | $258,134 | $192,555 | | Provision for Credit Losses | $17,045 | $55,935 | | Noninterest Income | $45,113 | $35,997 | | Noninterest Expense | $182,225 | $116,109 | | Net Income | $82,244 | $45,453 | | Diluted EPS | $2.48 | $1.73 | - Third quarter 2021 net income was impacted by $14.7 million in merger-related expenses and a $3.4 million charge for branch closures[14] Notes to Condensed Consolidated Financial Statements Notes detail the FCBP acquisition accounting, loan portfolio composition, credit loss allowance, and goodwill - The financial statements have been prepared in accordance with GAAP for interim financial information and include all adjustments considered necessary for fair presentation[28][29] - The company is evaluating the impact of reference rate reform (Topic 848) as it works to amend contracts referencing LIBOR, with the guidance effective through December 31, 2022[30] NOTE 2 - ACQUISITION The acquisition of First Choice Bancorp (FCBP) for ~$346 million resulted in $104.8 million of goodwill - The acquisition of FCBP closed on July 21, 2021, adding eight full-service branches in California[35] | Metric | Value (in millions) | | :--- | :--- | | Transaction Consideration | ~$346 | | EFSC Shares Issued | ~7.8 | | Goodwill Recognized | $104.8 | | Merger-Related Costs (YTD) | $16.6 | - For the nine months ended September 30, 2021, unaudited pro forma results, assuming the acquisition occurred on January 1, 2020, show total revenues of $363.4 million and net income of $135.9 million[41][42] NOTE 5 - LOANS Total loans increased to $9.12 billion driven by the FCBP acquisition, with the Allowance for Credit Losses (ACL) on loans at 1.67% | Loan Category (in thousands) | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Commercial and industrial | $3,386,599 | $3,100,299 | | Total real estate loans | $5,470,160 | $3,953,692 | | Total Loans | $9,116,583 | $7,224,935 | - The Allowance for Credit Losses (ACL) on loans increased to $152.1 million at September 30, 2021, from $136.7 million at December 31, 2020[62] - Total nonperforming loans were $41.6 million at September 30, 2021, compared to $38.5 million at December 31, 2020[66] NOTE 6 - BRANCH CLOSURE The company initiated the closure of five branches, recognizing a total of $3.8 million in impairment charges - The company is closing five branches, three from the First Choice acquisition and two in St. Louis, to consolidate operations[87] - A total of $3.8 million in impairment charges were recognized in Q3 2021 related to the branch closures[87] NOTE 10 - GOODWILL AND INTANGIBLE ASSETS Goodwill increased by $104.8 million to $365.4 million due to the FCBP acquisition - Goodwill increased from $260.6 million at year-end 2020 to $365.4 million at September 30, 2021, with the $104.8 million increase attributed entirely to the FCBP acquisition[116] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The FCBP acquisition significantly boosted net interest income, assets, and deposits, while asset quality remains strong Executive Summary The third quarter was defined by the FCBP acquisition, strong loan and deposit growth, and a dividend increase - The acquisition of First Choice Bancorp (FCBP) closed on July 21, 2021, significantly impacting financial results from that date forward[143] - Paycheck Protection Program (PPP) loans outstanding were $439.0 million net of fees at September 30, 2021, with PPP interest and fee income totaling $6.0 million for Q3 2021[146] - The company initiated the closure of five branches, recognizing a total impairment charge of $3.8 million in Q3 2021[151][153] - The Board of Directors approved a quarterly dividend of $0.20 per common share, an increase of $0.01 from the prior quarter[158] Results of Operations Q3 net interest income grew 19% from the linked quarter, while noninterest expense surged due to merger costs - Net interest income for Q3 2021 increased by $15.6 million over the linked quarter, mainly due to the addition of $1.7 billion in earning assets from the FCBP acquisition[166] - Net Interest Margin (NIM) decreased to 3.40% in Q3 2021 from 3.46% in the linked quarter, primarily due to higher levels of low-yielding cash and lower yields on investments and loans[168][169] - Noninterest expense increased to $76.9 million in Q3 2021, largely due to $14.7 million in merger-related expenses and $3.4 million in branch closure expenses[177] Financial Condition Total assets reached $12.9 billion and deposits surged to $10.8 billion, driven by the FCBP acquisition | Balance Sheet Item (in thousands) | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $12,888,016 | $9,751,571 | | Total Loans (excluding PPP) | $8,677,624 | $6,829,606 | | PPP Loans, net | $438,959 | $698,645 | | Total Deposits | $10,827,775 | $7,985,389 | - The provision for credit losses was $19.7 million for Q3 2021, primarily due to a $23.9 million ACL established for acquired FCBP non-PCD loans[193] - Nonperforming assets to total assets improved to 0.35% at September 30, 2021, from 0.45% at December 31, 2020[199] Liquidity and Capital Resources The company maintained a strong liquidity position and all regulatory capital ratios exceeded 'well-capitalized' levels - The company's liquidity position is strong, with cash and interest-bearing deposits totaling $1.4 billion at September 30, 2021[209] - Additional available liquidity includes $704 million from the FHLB and $1.1 billion from the Federal Reserve Bank[210] | EFSC Capital Ratios | September 30, 2021 | Minimum to be "Well Capitalized" | | :--- | :--- | :--- | | Common Equity Tier 1 | 11.2% | 7.0% | | Tier 1 Capital | 12.2% | 8.5% | | Total Capital | 14.5% | 10.5% | | Leverage Ratio | 9.7% | 4.0% | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is asset-sensitive, with a projected 5.5% increase in net interest income from a +100 bp rate shock | Rate Shock | Annual % Change in Net Interest Income | | :--- | :--- | | +300 bp | 22.5% | | +200 bp | 13.8% | | +100 bp | 5.5% | - At September 30, 2021, the Company had $5.7 billion in variable rate loans, of which $3.0 billion had a rate floor, with 94% of those loans priced at their floor[238] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of September 30, 2021[241] - No material changes were made to internal controls over financial reporting during the third quarter of 2021[242] PART II - OTHER INFORMATION Item 1. Legal Proceedings Management believes no current legal proceedings would have a material adverse effect on the company's financials - Management asserts that there are no pending or threatened legal proceedings that would have a material adverse effect on the Company's business or financial condition[244] Item 1A. Risk Factors No material changes have been made to the risk factors disclosed in the 2020 Annual Report on Form 10-K - No material changes to the risk factors described in the 2020 Annual Report on Form 10-K have occurred[246] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 470,412 shares in Q3 2021, with 1.3 million shares remaining under the repurchase plan | Period (2021) | Total Shares Purchased | Weighted-Average Price Paid | | :--- | :--- | :--- | | July | 145,926 | $45.79 | | August | 205,137 | $45.69 | | September | 119,349 | $43.43 | | Q3 Total | 470,412 | $45.15 | - At the end of the quarter, 1,277,951 shares were still available for repurchase under the existing program[247] Other Items (Items 3, 4, 5, 6) The report confirms no defaults on senior securities and lists exhibits filed, with other items being not applicable or having nothing to report - Item 3: No defaults upon senior securities were reported[249] - Item 4: Mine Safety Disclosures are not applicable to the Company[250] - Item 5: No other information was reported[251]