Enterprise Bank & Trust writes off $23M in uncollectible business loans - Kansas City Business Journal (2024)

Enterprise Bank & Trust’s parent company wrote off $23 million in uncollectible debt late last year and is hiring a third party to determine if the bank has a similar problem with other loans.

The charge-offs involve an agricultural loan and a separate unsecured credit exposure that was part of a loan relationship with a southern California commercial real estate investor, said Jim Lally, CEO of Enterprise Financial Services Corp. (Nasdaq: EFSC). The bank did not identify the borrowers and Lally said the two credits charged off in the fourth quarter of 2023 "could be described as extraordinary and uncharacteristic."

In an earnings report call with financial analysts on Tuesday, Lally said the Clayton-based bank has stopped originating new credit relationships in the agricultural sector and will wind down its approximately $200 million agriculture portfolio over the next few years. Lally said Wednesday that the agriculture portfolio spans several states, mostly contiguous to the St. Louis region.

“The first such credit was an agricultural loan, which we believe was an isolated incident that was not directly related to our credit underwriting," Lally told the financial analysts. "There were irregularities in the financial information provided by the borrower that masked the challenges it was facing and ultimately covered up a $13 million collateral shortfall."

Enterprise Financial Services placed the full $16 million loan on a “non-performing status” and charged off a $13 million shortfall, Lally said. In response to a question during Tuesday's earnings report call, Lally said the problem was in the “livestock area,” which he said is about one-third of the bank's $200 million agricultural portfolio.

“Additionally, we are taking the appropriate actions and utilizing all available resources to recover what we can for the remaining $3 million outstanding,” he added. Asked what actions Enterprise Bank could take to recover the $3 million, Lally said in an email: "Due to the ongoing and sensitive nature of this matter and our desire to preserve all legal claims, we decline to comment further at this time."

Pulling out of ag lending

Doug Bauche, Enterprise Bank’s chief credit officer, said the portfolio is “spread across 40 or so relationships consisting of a pretty well-balanced mix of agricultural real estate, row crop and livestock collateral to farm operations really throughout the Midwest here. Many of these have been long-term strong performing clients of our team.”

Enterprise Bank is reviewing loans in the $200 million agricultural portfolio including physical farm inspections and “and even more extensive collateral field audits to reinforce our confidence in the balance of the portfolio.” Lally said the bank also is hiring a third party to validate its findings to ensure that “we do not have any other similar situations to this one.”

“Our initial review provides comfort with respect to the health of the remainder of the portfolio,” Lally added.

Asked why a single chargeoff would prompt Enterprise Bank to stop originating new loans in the agriculture sector and wind down its $200 million portfolio, Lally said Wednesday in an email: "This decision is more comprehensive than the result of the single borrower charge-off in the fourth quarter. We make these decisions very carefully, and we are using information gathered while operating this business for the last several years to form our conclusion."

Davin Althoff, director of marketing and commodities at the Missouri Farm Bureau, said it "sounded like a business decision" by Enterprise Bank.

"In the agriculture sector, we hate to see a financial institution pull out because it does take an option away from farmers and ranchers," he said.

The bank added that the $200 million agriculture portfolio is very small relative to the bank's $11 billion in loans. "We plan to continue to manage the portfolio in the ordinary course of business but we will not seek new relationships or growth in this space," Lally said in an email Wednesday. "We anticipate the portfolio will diminish due to paydowns and normal, expected activity over time."

Lally said the review by the third party is expected to be complete in the first three months of this year and information on the findings would be released during the bank's first quarter earnings call in April.

Strong, despite 'isolated' charge-offs

The second major loss in the fourth quarter of 2023 was related to a $10 million unsecured credit exposure with a southern California commercial real estate investor.

“After several unsuccessful attempts to find suitable collateral to shore up this credit and the borrowers' inability to keep payments current, we took this unfortunate but appropriate action to charge off this credit,” Lally said.

Lally said the bank charged off the full $10 million unsecured portion and “will continue to pursue all remedies for any sort of recovery.” Lally declined to say what those remedies would include.

The lending relationship was inherited from the acquisition of California-based First Choice Bancorp, Lally said. Enterprise Financial Services purchased First Choice in 2021 for $346 million, which opened the door to the Los Angeles and Orange County markets for Enterprise Bank.

“Entering 2024, I'm confident in our ability to deliver asset quality results that are in line with our historically strong performance," Lally told financial analysts during Tuesday's earnings report call. "Despite this unusual level of charge-offs, an appropriate increase to our provision expense, our company delivered very strong financial results for both the fourth quarter and the entirety of 2023."

Enterprise Financial Services reported 2023 net income of $194.1 million, down $9 million compared to $203 million in 2022. Net interest income totaled $562.6 million, an increase of $88.7 million from 2022. Loans totaled $10.9 billion in 2023, up $1.1 billion over last year and a 12% increase. Total deposits were $12.2 billion in 2023, up $1.3 billion — a 12% increase.

The stock of Enterprise Financial Services closed Monday at $44.09 per share after Enterprise Financial Services issued a press release about its fourth quarter 2023 and full-year financial performance. The price declined by 3.8% on Tuesday, to $42.43. At the market closing Wednesday, shares traded at $41.78, down 1.5%.The stock price 52-week high is $56.35 and the low is $32.97.

In a research note to investors, Jeff Rulis, managing director and senior research analyst for D.A. Davidson, wrote that the spike in net charge-offs "understandably stole the attention away from generally solid results" in the fourth quarter of 2023 and the entire year. He cited how the bank's management called the charge-offs "isolated and irregular." If the bank's overall asset quality trends improve, the focus will return to an upward earnings trajectory in the second half of 2024 and 2025, Rulis wrote, rating the shares of Enterprise Financial Services as "buy."

With about $14.5 billion in assets, Enterprise Financial Services is a Clayton-based financial holding company. Enterprise Bank & Trust, a Missouri state-chartered trust company with banking powers and a wholly-owned subsidiary of Enterprise Financial Services, operates branch offices in Arizona, California, Florida, Kansas, Missouri, Nevada, and New Mexico, and Small Business Administration loan and deposit production offices throughout the country.