ENTERPRISE FINL SERVICES CP EFSG
March 16, 2014 - 1:17pm EST by
david101
2014 2015
Price: 6.00 EPS $0.00 $0.00
Shares Out. (in M): 1 P/E 0.0x 0.0x
Market Cap (in $M): 5 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • Community Bank
  • Discount to Tangible Book

Description

Enterprise Financial Services Group is a profitable bank trading at 38% of TBV. It has some issues with its loan book and will need to restructure its balance sheet but I believe that the current price offers investors decent risk/reward. I think this will eventually trade in the 0.7X to 1.0X TBV range.

 

Background: The bank was formed in 1998 to focus on commercial lending, particularly to start-up and small companies. The bank did an IPO but has always been dark. It operates through a single office in Western Pennsylvania, relying on brokered deposits, as well as having a van fleet for gathering deposits. The bank took part in the Treasury’s Capital Purchase Program in 2009, which was rolled into Small Business Lending Facility in 2010. If you read the 2012 Annual Report, it will tell you of the bank’s plans to double in size in five years. The 2013 AR said that those plans are on hold, which I view as a good sign, as management is being realistic.

 

The bank’s Tier 1 Capital ratio to average assets was 7.84% as of 9/30/2013. Given the riskier loans, that $5 million of its $18.7 million in total shareholder equity is SBLF preferreds, and that an equity raise at the current price is not very palatable, the bank realizes a different strategy is needed. The dividend has been suspended, salaries have been frozen for 2014, and growth has been curtailed. Management believes that this will put them in a better financial position in two years. 

 

Financials: Although the bank is dark, it does provide some information on its web site:

 

https://www.enterprisebankpgh.com/financial-info.htm

 

Once you become a shareholder, you will receive quarterly info by mail, ahead of everyone else. Here are the 1st Qtr 2014 financials ending 12/31/2013:

 

 

Income Statement

12/31/2013

Interest and fees on loans

   2,973,982

Interest on Fed. Reserve balance

         14,281

Other interest & div. income

           2,751

Total Interest Income

   2,991,014

 

 

Interest on deposits

       540,671

Interest on borrowings

         58,477

Net Interest Income

   2,391,866

 

 

Provision for loan losses

         85,507

NII after loan losses

   2,306,359

Fee Income

       506,130

Gain/(Loss) on Valuation of OREO

         21,427

Gain/(Loss) on Sale of OREO

         29,786

Total Non-Interet Income

       557,343

 

 

Salaries and employee benefits

       819,875

Relationship Manager Expenses

       382,209

Occupancy expense

         66,292

Equipment expense

       182,767

Other operating expense

       933,497

Total Noninterest Expense

   2,384,640

 

 

Total Operating Income

       479,062

Income taxes

       170,976

Net Income

       308,086

Estimated Preferred Dividends

         60,372

Net Income - After Preferred Div.

       247,714

Average Shares Outstanding

       854,187

Earnings Per Share

 $          0.29

 

 

Balance Sheet

12/31/2013

Cash and due from banks

       363,332

Cash on deposit with Fed. Reserve

 24,773,002

Interest bearing deposits with banks

       168,136

Loans

219,305,639

Less allowance for loan losses

 (2,472,708)

Net Loans

216,832,931

Accrued interest receivable

       786,830

Premises and equipment, net

  10,139,788

Other real estate owned

    4,770,617

Restricted investments  in Bank stock

       876,500

Other assets

    2,833,264

Total Assets

261,544,400

 

 

Deposits - Noninterest bearing

  30,429,847

Deposits - Interest bearing

196,878,677

Total Deposits

227,308,524

Borrowings

  12,412,492

Junior Subordinated Debentures

    2,050,000

Accrued interest payable

       121,850

Other liabilities

       987,255

Total Liabilities

242,880,121

 

 

Preferred Stock

    5,000,000

Common Stock

       478,893

Additional paid in capital

    9,805,048

Retained Earnings

    4,364,258

Treasury stock, cost

     (568,428)

Unallocated ESOP Shares

     (412,492)

Total Equity

  18,667,279

 

 

Loans: EFSG was a significant SBA lender over the past three years. I estimate that 40% of their gross loans are SBA related. The bank does not provide exact figures, but there is a way to estimate a ballpark figure. From 2013 AR, p.24, there are two government programs involved. For the first one, the government guaranteed portion of loans was $50.0 million. Generally, that program was 75% government-backed, so total loan book is about $66.7 million. The 504 financing is usually 50% lender/40% government guaranteed, so multiplying $15.8 million by 5/4 equals $19.8 million. Add the two together and you have $86.5 million in SBA loans.

 

Taking out the government guaranteed portions leaves net exposure of $144.0 million in loans and $5.7 million in non-accruals. That 4% non-performing loan (NPL) ratio is higher than most banks but commercial banks tend to have higher NPL rates and lag the residential market (non-accruals peaked in 2011). Overall, not too bad and it’s trending down. The interesting part is the total impaired loans in Note 5 on p.31 of the 2013 AR.

 

When it comes to government loans, the guaranteed principal is excluded from non-accruals but included in total impaired loans (TIL). Whereas net non-accruals were $5.7 million, TIL was $22.1 million. I am not sure how to reconcile the two numbers exactly, but my thought is that the difference between the two figures, $16.4 million, should be the total amount of impaired SBA loans. Maybe that’s too high. Let’s say the true figure is half that $16.4 million. The SBA NPL ratio would still be almost 10%. Yikes! I have to admit that the impairment figure spooked me at first glance. The government guaranty is good for the bank, but sucks for us tax-payers.

 

Management: The key person in the bank is the CEO & CoB Chuck Leyh. For a small bank, there is some decent info about him:

Leyh, a 1980 IUP graduate, is one of the founders of Enterprise Bank, a commercial niche bank that assists small to mid-sized businesses and specializes in helping startups and distressed companies. In addition to serving as chairman of the board and president, Leyh serves on the bank’s Senior Loan and Finance committees.

Leyh is a certified public accountant and partner in the public accounting firm of Kinol, Sharie, Leyh & Associates. At the firm, Leyh’s focus is on small to mid-sized businesses, with an emphasis on tax accounting, business analysis, and valuations. He has more than thirty years of experience in public accounting.

Leyh also is active in professional organizations. He is the treasurer of the Pennsylvania Association of Community Bankers and holds memberships in the American Institute of Certified Public Accountants, the Tax Division of the American Institute of Certified Public Accountants, and the Pennsylvania Institute of Certified Public Accountants. He previously served as a board member of the Atlantic Central Bankers Bank and as chairman of the Audit Committee.

He is a board member and serves as chairman of the Finance Committee and treasurer of the YMCA of Greater Pittsburgh.

In addition to his IUP degree, Leyh earned a Master of Science in taxation from Robert Morris University in 1988.

 

From the Pittsburgh Business Journal (gotta love a lawn-mowing CEO!):

Enterprise Bank CEO Chuck Leyh practices a hands-on approach to lending.

By Patty Tascarella

His official biography lists Chuck Leyh as president and CEO of Enterprise Bank, which was started almost 12 years ago to assist small companies, particularly start-ups and distressed businesses.

It was an unfulfilled niche in the local market particularly suited to a community-minded accountant like Leyh.

But that just scratches the surface of his story.

To his alma mater, Indiana University of Pennsylvania, Leyh is the architect of a scholarship program.

To his colleagues at the Pennsylvania Association of Community Bankers, he’s a change agent capable of drafting a plan to fix the banking sector — and sending it off to the White House.

And to those driving through Allison Park just after sunrise most summer weekends, he might easily be mistaken for the gardener.

“It’s hard to tell the president of the bank you’re not going to do something when you know he was there at 6:30 Sunday morning, mowing the grass himself,” said Greg Pearson, a lawyer at Buchanan Ingersoll & Rooney PC and an Enterprise director. “There’s not a job that’s too difficult or too low for him to do.”

Enterprise might have just one branch, but it leads the region in Small Business Administration loans in terms of dollars, with $13.8 million last year in 29 loans. PNC Financial Services Group Inc., Pittsburgh’s largest bank, ranked second at $5.5 million.

“Enterprise actually works with the company if it starts to have problems,” said Carl Knoblock, director of the SBA Pittsburgh district office.

“They help put mechanisms in place if they need technology or accounting assistance.”

That doesn’t mean he’s an easy touch. “A lot of people believe going into business is an instant win,” Leyh said. “I tell them, ‘Can you handle going to bed without enough money in your checking account to make payroll, hoping that tomorrow’s mail brings the check to cover it?’ Not everyone can handle that kind of pressure.”

Leyh also is a leader among bankers. He is vice chairman of the Pennsylvania Association of Community Bankers, and will assume the top post in 2012.

“He’s been involved in everything,” PACB Chairman Frank Pinto said. “After the economic downturn, Chuck became the Thomas Jefferson of the community banking industry. He wrote a white paper that was sent to the president lamenting the economic woes and giving a series of suggestions that could help get us out of the downturn.

“Not only was it warmly received, but Congress is looking to implement a number of the observations Chuck made.”

 

Non-bank Subsidiaries: The bank offers ancillary services for its clients, including accounting, insurance, construction, as well as operating a real estate company. The latter two subs have been utilized for OREO, to help maximize returns. As an outsider, it is hard to assess the value of these businesses. I will be agnostic and assume that they neither add nor subtract value.

 

Insider Holdings: I would love to know how much insiders own but dark companies do not have to disclose. Given that the market cap is half of paid in capital, I am assuming that there is still significant insider holdings. Sink or swim, these investors seem to be in for the long-haul.

 

Risks: Extremely illiquid. May not be able to repay the SBLF preferreds in a timely manner.

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Old-fashioned, paint-drying value.
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    Description

    Enterprise Financial Services Group is a profitable bank trading at 38% of TBV. It has some issues with its loan book and will need to restructure its balance sheet but I believe that the current price offers investors decent risk/reward. I think this will eventually trade in the 0.7X to 1.0X TBV range.

     

    Background: The bank was formed in 1998 to focus on commercial lending, particularly to start-up and small companies. The bank did an IPO but has always been dark. It operates through a single office in Western Pennsylvania, relying on brokered deposits, as well as having a van fleet for gathering deposits. The bank took part in the Treasury’s Capital Purchase Program in 2009, which was rolled into Small Business Lending Facility in 2010. If you read the 2012 Annual Report, it will tell you of the bank’s plans to double in size in five years. The 2013 AR said that those plans are on hold, which I view as a good sign, as management is being realistic.

     

    The bank’s Tier 1 Capital ratio to average assets was 7.84% as of 9/30/2013. Given the riskier loans, that $5 million of its $18.7 million in total shareholder equity is SBLF preferreds, and that an equity raise at the current price is not very palatable, the bank realizes a different strategy is needed. The dividend has been suspended, salaries have been frozen for 2014, and growth has been curtailed. Management believes that this will put them in a better financial position in two years. 

     

    Financials: Although the bank is dark, it does provide some information on its web site:

     

    https://www.enterprisebankpgh.com/financial-info.htm

     

    Once you become a shareholder, you will receive quarterly info by mail, ahead of everyone else. Here are the 1st Qtr 2014 financials ending 12/31/2013:

     

     

    Income Statement

    12/31/2013

    Interest and fees on loans

       2,973,982

    Interest on Fed. Reserve balance

             14,281

    Other interest & div. income

               2,751

    Total Interest Income

       2,991,014

     

     

    Interest on deposits

           540,671

    Interest on borrowings

             58,477

    Net Interest Income

       2,391,866

     

     

    Provision for loan losses

             85,507

    NII after loan losses

       2,306,359

    Fee Income

           506,130

    Gain/(Loss) on Valuation of OREO

             21,427

    Gain/(Loss) on Sale of OREO

             29,786

    Total Non-Interet Income

           557,343

     

     

    Salaries and employee benefits

           819,875

    Relationship Manager Expenses

           382,209

    Occupancy expense

             66,292

    Equipment expense

           182,767

    Other operating expense

           933,497

    Total Noninterest Expense

       2,384,640

     

     

    Total Operating Income

           479,062

    Income taxes

           170,976

    Net Income

           308,086

    Estimated Preferred Dividends

             60,372

    Net Income - After Preferred Div.

           247,714

    Average Shares Outstanding

           854,187

    Earnings Per Share

     $          0.29

     

     

    Balance Sheet

    12/31/2013

    Cash and due from banks

           363,332

    Cash on deposit with Fed. Reserve

     24,773,002

    Interest bearing deposits with banks

           168,136

    Loans

    219,305,639

    Less allowance for loan losses

     (2,472,708)

    Net Loans

    216,832,931

    Accrued interest receivable

           786,830

    Premises and equipment, net

      10,139,788

    Other real estate owned

        4,770,617

    Restricted investments  in Bank stock

           876,500

    Other assets

        2,833,264

    Total Assets

    261,544,400

     

     

    Deposits - Noninterest bearing

      30,429,847

    Deposits - Interest bearing

    196,878,677

    Total Deposits

    227,308,524

    Borrowings

      12,412,492

    Junior Subordinated Debentures

        2,050,000

    Accrued interest payable

           121,850

    Other liabilities

           987,255

    Total Liabilities

    242,880,121

     

     

    Preferred Stock

        5,000,000

    Common Stock

           478,893

    Additional paid in capital

        9,805,048

    Retained Earnings

        4,364,258

    Treasury stock, cost

         (568,428)

    Unallocated ESOP Shares

         (412,492)

    Total Equity

      18,667,279

     

     

    Loans: EFSG was a significant SBA lender over the past three years. I estimate that 40% of their gross loans are SBA related. The bank does not provide exact figures, but there is a way to estimate a ballpark figure. From 2013 AR, p.24, there are two government programs involved. For the first one, the government guaranteed portion of loans was $50.0 million. Generally, that program was 75% government-backed, so total loan book is about $66.7 million. The 504 financing is usually 50% lender/40% government guaranteed, so multiplying $15.8 million by 5/4 equals $19.8 million. Add the two together and you have $86.5 million in SBA loans.

     

    Taking out the government guaranteed portions leaves net exposure of $144.0 million in loans and $5.7 million in non-accruals. That 4% non-performing loan (NPL) ratio is higher than most banks but commercial banks tend to have higher NPL rates and lag the residential market (non-accruals peaked in 2011). Overall, not too bad and it’s trending down. The interesting part is the total impaired loans in Note 5 on p.31 of the 2013 AR.

     

    When it comes to government loans, the guaranteed principal is excluded from non-accruals but included in total impaired loans (TIL). Whereas net non-accruals were $5.7 million, TIL was $22.1 million. I am not sure how to reconcile the two numbers exactly, but my thought is that the difference between the two figures, $16.4 million, should be the total amount of impaired SBA loans. Maybe that’s too high. Let’s say the true figure is half that $16.4 million. The SBA NPL ratio would still be almost 10%. Yikes! I have to admit that the impairment figure spooked me at first glance. The government guaranty is good for the bank, but sucks for us tax-payers.

     

    Management: The key person in the bank is the CEO & CoB Chuck Leyh. For a small bank, there is some decent info about him:

    Leyh, a 1980 IUP graduate, is one of the founders of Enterprise Bank, a commercial niche bank that assists small to mid-sized businesses and specializes in helping startups and distressed companies. In addition to serving as chairman of the board and president, Leyh serves on the bank’s Senior Loan and Finance committees.

    Leyh is a certified public accountant and partner in the public accounting firm of Kinol, Sharie, Leyh & Associates. At the firm, Leyh’s focus is on small to mid-sized businesses, with an emphasis on tax accounting, business analysis, and valuations. He has more than thirty years of experience in public accounting.

    Leyh also is active in professional organizations. He is the treasurer of the Pennsylvania Association of Community Bankers and holds memberships in the American Institute of Certified Public Accountants, the Tax Division of the American Institute of Certified Public Accountants, and the Pennsylvania Institute of Certified Public Accountants. He previously served as a board member of the Atlantic Central Bankers Bank and as chairman of the Audit Committee.

    He is a board member and serves as chairman of the Finance Committee and treasurer of the YMCA of Greater Pittsburgh.

    In addition to his IUP degree, Leyh earned a Master of Science in taxation from Robert Morris University in 1988.

     

    From the Pittsburgh Business Journal (gotta love a lawn-mowing CEO!):

    Enterprise Bank CEO Chuck Leyh practices a hands-on approach to lending.

    By Patty Tascarella

    His official biography lists Chuck Leyh as president and CEO of Enterprise Bank, which was started almost 12 years ago to assist small companies, particularly start-ups and distressed businesses.

    It was an unfulfilled niche in the local market particularly suited to a community-minded accountant like Leyh.

    But that just scratches the surface of his story.

    To his alma mater, Indiana University of Pennsylvania, Leyh is the architect of a scholarship program.

    To his colleagues at the Pennsylvania Association of Community Bankers, he’s a change agent capable of drafting a plan to fix the banking sector — and sending it off to the White House.

    And to those driving through Allison Park just after sunrise most summer weekends, he might easily be mistaken for the gardener.

    “It’s hard to tell the president of the bank you’re not going to do something when you know he was there at 6:30 Sunday morning, mowing the grass himself,” said Greg Pearson, a lawyer at Buchanan Ingersoll & Rooney PC and an Enterprise director. “There’s not a job that’s too difficult or too low for him to do.”

    Enterprise might have just one branch, but it leads the region in Small Business Administration loans in terms of dollars, with $13.8 million last year in 29 loans. PNC Financial Services Group Inc., Pittsburgh’s largest bank, ranked second at $5.5 million.

    “Enterprise actually works with the company if it starts to have problems,” said Carl Knoblock, director of the SBA Pittsburgh district office.

    “They help put mechanisms in place if they need technology or accounting assistance.”

    That doesn’t mean he’s an easy touch. “A lot of people believe going into business is an instant win,” Leyh said. “I tell them, ‘Can you handle going to bed without enough money in your checking account to make payroll, hoping that tomorrow’s mail brings the check to cover it?’ Not everyone can handle that kind of pressure.”

    Leyh also is a leader among bankers. He is vice chairman of the Pennsylvania Association of Community Bankers, and will assume the top post in 2012.

    “He’s been involved in everything,” PACB Chairman Frank Pinto said. “After the economic downturn, Chuck became the Thomas Jefferson of the community banking industry. He wrote a white paper that was sent to the president lamenting the economic woes and giving a series of suggestions that could help get us out of the downturn.

    “Not only was it warmly received, but Congress is looking to implement a number of the observations Chuck made.”

     

    Non-bank Subsidiaries: The bank offers ancillary services for its clients, including accounting, insurance, construction, as well as operating a real estate company. The latter two subs have been utilized for OREO, to help maximize returns. As an outsider, it is hard to assess the value of these businesses. I will be agnostic and assume that they neither add nor subtract value.

     

    Insider Holdings: I would love to know how much insiders own but dark companies do not have to disclose. Given that the market cap is half of paid in capital, I am assuming that there is still significant insider holdings. Sink or swim, these investors seem to be in for the long-haul.

     

    Risks: Extremely illiquid. May not be able to repay the SBLF preferreds in a timely manner.

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Old-fashioned, paint-drying value.
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