Sunday, April 10, 2011
Some thoughts on Enterprise Financial
Currently, the whole team is working on the analysis reports of six banks across different market cap sizes. I am in charge of analyzing Enterprise Financial Services Corp. (EFSC).
Enterprise is a small regional bank, which only operates in the St. Louis, Kansas City and Phoenix metropolitan areas. Interest and fees on loans is its primary source of revenues, which are $114,041K, $112,548K, and $121,467K in 2010, 2009, and 2008 respectively. The Wealth Management segment includes the state tax credit brokerage activities and the Trust division of the Bank (providing estate planning, investment management, trust administration, and retirement planning as well as consulting on management compensation, strategic planning and management succession issues). However, when comparing to its interest revenue, its Wealth Management revenue is quite a small portion, which is $6,414K, $4,524K, and $5,916 in 2010, 2009, and 2008 respectively.
Net interest income is the primary source of the Company’s revenue. Net interest income is the difference between interest income on earning assets, such as loans and securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest earning and other assets. The amount of net interest income is affected by changes in interest rates and by the amount and composition of interest-earning assets and interest-bearing liabilities. Net interest income increased $19.2 million, or 27%, from $71.4 million for 2009 to $90.7 million for 2010. Total interest income increased $2.8 million while total interest expense decreased $16.4 million.
Based on the SWOT framework and its MD&A, so far I notice advantages and potential risks for EFCS below:
The growth strategy for EFSC is largely client relationship driven. Those relationships are maintained, cultivated and expanded over time by banking officers who generally are highly experienced. Besides, comparing with other regional banks, its technological capabilities are also viewed as a competitive advantage (have a systems provide Internet banking, expanded treasury management products, check and document imaging, as well as a 24-hour voice response system).
Various factors may cause EFSC allowance for loan losses to increase: it may need be increased if economic conditions continue to deteriorate, or by bank regulatory agencies’ requirement based on a different judgments from those of its management. In addition, if charge-offs in future periods exceed the allowance for loan losses, EFSC will need additional loan loss provisions to increase the allowance for loan losses. (Additional provisions to increase the allowance for loan losses, should they become necessary, would result in a decrease in net income or an increase in net loss and a reduction in capital, and may have a material adverse effect on its financial condition and results of operations.)
The loan portfolio of EFSC is concentrated in certain markets (the St. Louis, Kansas City, and Phoenix metropolitan areas.) which could result in increased credit risk: The regional economic conditions in those areas have an impact on the demand for its products and services as well as the ability of its customers to repay loans, the value of the collateral securing loans and the stability of its deposit funding sources.
The portfolio mix of EFSC, which has a concentration of loans secured by real estate, could result in increased credit risk: A significant portion of its portfolio is secured by real estate and thus EFSC have a high degree of risk from a downturn in the real estate markets. If real estate values continue to decline further in the markets, the value of real estate collateral securing loans could be significantly reduced.