Enterprise Financial Reports Second Quarter 2011 Results

• Second quarter net income of $9.9 million or $0.52 per fully diluted share
• Core deposits increase 32% over prior year
• Commercial & Industrial loans grow 12% over linked quarter and 26% over prior year period
• Nonperforming assets decrease 19% from one year ago
• Completed $35.0 million public common stock offering, increasing Tangible Common Equity ratio to 6.77%

ST. LOUIS, July 28, 2011 (GLOBE NEWSWIRE) -- St. Louis, July 28, 2011. Enterprise Financial Services Corp (Nasdaq:EFSC) (the "Company") reported record net income of $9.9 million for the quarter ended June 30, 2011 compared to net income of $737,000 for the prior year period. After deducting dividends on preferred stock, the Company reported net income of $0.52 per fully diluted share for the second quarter of 2011 compared to net income of $0.01 per fully diluted share for the second quarter of 2010.  

Peter Benoist, President and CEO, commented, "Second quarter net income rose 40% over the first quarter and our earnings per share were 24% higher, taking into account the additional shares issued for our successful common equity raise in May. This continues the trend of consecutive quarterly increases in earnings per share for the Company."
 
"While improving asset quality and moderating provision expense are contributing to increased earnings," continued Benoist, "the Company's underlying earning power also continues to climb.   Pre-tax, pre-provision operating earnings for the second quarter were more than double the comparable figure from a year ago, fueled by a combination of strong returns on our Arizona covered loan portfolio and substantial organic growth in commercial and industrial loans. Additionally, we've been systematically reducing funding costs by lowering deposit rates and increasing non interest-bearing demand deposits, which have now grown to 20% of total deposits."
 
Benoist added, "The strong growth in commercial loan fundings and commercial demand deposits result from our continued focus on privately held businesses and success in recruiting accomplished commercial bankers to the Enterprise platform in all three of our markets." 

On a pre-tax, pre-provision basis, the Company's operating income was $21.2 million in the second quarter of 2011, a 50% increase from the linked quarter and a 119% increase from the prior year period.

Pre-tax, pre-provision income, which is a non-GAAP (Generally Accepted Accounting Principles) financial measure, is presented because the Company believes adjusting its results to exclude loan loss provision expense, sales and fair value writedowns of other real estate, and sales of securities provides shareholders with a more comparable basis for evaluating period-to-period operating results. A schedule reconciling GAAP pre-tax income (loss) to pre-tax, pre-provision income is provided in the attached tables.

Banking Segment
 
Deposits

Total deposits at June 30, 2011 were $2.4 billion, flat with March 31, 2011 and $589.5 million, or 32%, higher than June 30, 2010.   Core deposits, which exclude brokered certificates of deposit and include reciprocal CDARS deposits, represented 94% of total deposits at June 30, 2011, unchanged from the linked and prior year period. Core deposits decreased $9.1 million, or 0.40%, in the second quarter of 2011 compared to the first quarter of 2011. The Company continued to improve its core deposit mix with a $25.7 million increase in demand deposits, and a $21.6 million increase in money market accounts and other interest-bearing deposit accounts. The Company lowered its reliance on certificates of deposit by reducing non-CDARS certificates by $16.9 million and reciprocal CDARS certificates by $39.5 million. Reciprocal CDARS certificates were $35.3 million at June 30, 2011 compared to $74.8 million at March 31, 2011 and $157.5 million at June 30, 2010.  

Noninterest-bearing demand deposits rose $180.1 million, or 61%, compared to June 30, 2010 and increased to 20% of total deposits at June 30, 2011 from 18% at March 31, 2011 and 16% at June 30, 2010.   Year-over-year growth in noninterest-bearing demand deposits was bolstered by three client relationships totaling $72.6 million. Absent those relationships, demand deposits increased 37% from June 30, 2010 to June 30, 2011. Demand deposit growth is attributable to intensified sales efforts and continuing emphasis on liquidity and safety among commercial clients.

Loans

Portfolio loans totaled $2.0 billion at June 30, 2011, including $180.3 million of loans covered under FDIC loss share agreements.   Portfolio loans covered under FDIC loss share agreements decreased $11.2 million, or 6%, in the second quarter, primarily as a result of loan payoffs and transfers to Other Real Estate.   Excluding the loans covered under loss share, total portfolio loans increased $65.2 million, or 4%, in the second quarter of 2011. 

Commercial & Industrial loans increased $75.4 million, or 12%, during the quarter and represent one-third of the Company's loan portfolio at June 30, 2011. This growth represents the fourth consecutive quarter of increases in Commercial and Industrial loans as the Company continues to experience strong new business activity in this sector.   Construction and Residential Real Estate decreased $15.7 million as the Company continued to reduce its exposure to these sectors.   

On a year over year basis, total portfolio loans increased $234.2 million, or 13%. Excluding the loans covered under loss share, portfolio loans increased $65.8 million, or 4%. Commercial and Industrial loans have increased $143.2 million, or 26%, since June 30, 2010, while Construction and Residential Real Estate loans have decreased $68.7 million, or 17% over the same time frame.

We continue to expect low to mid single digit loan growth for 2011.

Asset quality

Nonperforming loans, including troubled debt restructurings of $11.4 million, were $43.1 million at June 30, 2011, compared to $43.5 million at March 31, 2011 and down from $46.6 million at June 30, 2010. During the quarter ended June 30, 2011, there were $9.5 million of additions to nonperforming loans, $5.7 million of charge-offs, $4.0 million of other principal reductions, and $159,000 of assets transferred to other real estate. The $9.5 million represents the lowest level of new nonperforming loan inflows in over two years. Six construction real estate loans representing three relationships comprised over $5.1 million, or 54% of the total new nonperforming loans, while three commercial real estate loans representing two relationships comprised $1.6 million, or 17% of the total.    

Nonperforming loans represented 2.15% of total loans at June 30, 2011 versus 2.23% of total loans at March 31, 2011 and 2.63% at June 30, 2010. 

Nonperforming loans by portfolio class at June 30, 2011 were as follows (in millions):

 

Excluding non-accrual loans and portfolio loans covered under FDIC loss share agreements, portfolio loans that were 30-89 days delinquent at June 30, 2011 remained at very low levels, representing 0.21% of the portfolio compared to 0.12% at March 31, 2011 and 0.86% of June 30, 2010. 

Other real estate at June 30, 2011 was $42.8 million, compared to $51.3 million at March 31, 2011 and $25.9 million at June 30, 2010. Approximately 51% of total other real estate, or $21.8 million, is covered by one of three FDIC loss share agreements.  

Other real estate not covered by an FDIC loss share agreement totaled $21.0 million at June 30, 2011, a decrease of $7.5 million from March 31, 2011. At June 30, 2010 other real estate not covered by FDIC loss share agreements totaled $23.6 million.

During the second quarter of 2011, the Company sold $9.0 million of other real estate, recording a gain of $99,000. Year-to-date, the Company has sold $13.1 million of other real estate at a net gain of $522,000.

Excluding assets covered under FDIC loss share, nonperforming assets as a percentage of total assets declined to 2.18% at June 30, 2011 from 2.48% at March 31, 2011 and 3.12% at June 30, 2010. 

Net charge-offs in the second quarter of 2011 were $5.2 million, representing an annual rate of 1.07% of average loans, compared to net charge-offs of $3.5 million, an annualized rate of 0.73%% of average loans, in the linked first quarter and $7.8 million, an annualized rate of 1.76% of average loans, in the second quarter of 2010. 

Provision for loan losses was $4.6 million in the second quarter of 2011, compared to $3.6 million in the first quarter of 2011 and significantly less than the $9.0 million recorded in the second quarter of 2010.   The increase in the provision for loan losses in the second quarter of 2011 was due to slightly higher levels of loan risk rating downgrades and loan growth in the quarter. 

The Company's allowance for loan losses was 2.10% of total loans at June 30, 2011, representing 98% of nonperforming loans. The loan loss allowance was 2.19% at March 31, 2011 representing 98% of nonperforming loans and 2.55% at June 30, 2010 representing 97% of nonperforming loans.
 

Net Interest Income

Net interest income for the banking segment increased $5.7 million, or 20%, in the second quarter of 2011 compared to the linked first quarter. On a year over year basis, net interest income increased $13.7 million, or 68%. Including the effect of parent company debt, the net interest rate margin was 4.95% for the second quarter of 2011, compared to 4.19% for the first quarter of 2011 and 3.46% in the second quarter of 2010.   In the second quarter of 2011, the loans covered under FDIC loss share yielded 27.05% primarily due to cash flows on paid off covered loans that exceeded expectations. Absent the FDIC loss share loans, the net interest rate margin was 3.45% for the second quarter of 2011 compared to 3.34% for the first quarter of 2011.   The increase in the net interest rate margin, excluding the effect of loans covered under FDIC loss share and the related funding costs, was primarily due to a more favorable earning asset mix and lower cost of funds.   The Company's liquidity position remains strong with cash and cash equivalents representing approximately 7% of the total assets at June 30, 2011.

Wealth Management Segment 

Fee income from the Wealth Management segment includes Wealth Management revenue and income from state tax credit brokerage activities.   Wealth Management revenue was $1.7 million in the second quarter of 2011, flat with the linked first quarter and an increase of $356,000, or 27%, compared to June 30, 2010.

Trust assets under administration were $1.6 billion at June 30, 2011, compared to $1.6 billion at March 31, 2011 and $1.2 billion at June 30, 2010.

State tax credit brokerage activities, net of fair value marks on tax credit assets and related interest rate hedges, was $1.0 million for the second quarter of 2011 compared to $155,000 for the linked quarter of 2011, and $851,000 in the second quarter of 2010. Tax credit sales increased in the second quarter as customers deferred their purchases from the normal first quarter timing.

On June 1, 2011, Joe Gazzoli joined the Company as the Chief Executive Officer of Enterprise Trust. Gazzoli is an experienced and highly regarded executive in the the wealth management industry, having held senior management roles at several leading firms. His breadth of experience with large and successful wealth management firms will add considerable strength to the Enterprise Wealth Management team. 

Other Business Results

In May, the Company completed a $35.0 million public offering of common equity.   The net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses were approximately $32.6 million.   The net proceeds from the offering will be used for general corporate purposes, which may include capital to support growth and acquisition opportunities. Total capital to risk-weighted assets was 15.98% at June 30, 2011 compared to 14.34% at March 31, 2011 and 14.41% at June 30, 2010. The tangible common equity ratio was 6.77% at June 30, 2011 versus 5.22% at March 31, 2011 and 6.22% at June 30, 2010.    The Company's Tier 1 common equity ratio was 9.30% at June 30, 2011 compared to 7.51% at March 31, 2011 and 7.22% at June 30, 2010.    The Company believes that the tangible common equity and the Tier 1 common equity ratios are important financial measures of capital strength even though they are considered to be non-GAAP measures and are not part of the regulatory capital requirements to which the Company is subject.   The attached tables contain a reconciliation of these ratios to U.S. GAAP.

Other income during the quarter ended June 30, 2011 includes $1.5 million of reduced accretion on the indemnification asset related to a large Covered Loan payoff.

Noninterest expenses were $18.0 million for the quarter ended June 30, 2011 compared to $17.5 million for the quarter ended March 31, 2011 and $14.1 million for the quarter ended June 30, 2010.   The increase over the prior year period is primarily due to $1.2 million of increases in salaries and benefits to support our Arizona acquisitions along with $1.6 million of higher loan legal and other real estate expenses.

The Company's efficiency ratio was 47.9% for the quarter ended June 30, 2011 compared to 55.1% for quarter ended March 31, 2011 and 59.8% for the prior year period. 

The Company will host a conference call at 2:30 p.m. CDT on Thursday, July 28, 2011. The call will be accessible on Enterprise Financial Services Corp's home page, at www.enterprisebank.com under "Investor Relations" and by telephone at 1-888-285-8004 (Conference ID #76933087.) Recorded replays of the conference call will be available on the website beginning two hours after the call's completion. The replay will be available for approximately two weeks following the conference call. 

Enterprise Financial Services Corp operates commercial banking and wealth management businesses in metropolitan St. Louis, Kansas City, and Phoenix. The Company is primarily focused on serving the needs of privately held businesses, their owner families, executives and professionals.  

Readers should note that in addition to the historical information contained herein, this press release contains forward-looking statements, which are inherently subject to risks and uncertainties that could cause actual results to differ materially from those contemplated from such statements. We use the words "expect" and "intend" and variations of such words and similar expressions in this communication to identify such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, burdens imposed by federal and state regulations of banks, credit risk, changes in the appraised valuation of real estate securing impaired loans, outcomes of litigation and other contingencies, exposure to local and national economic conditions, risks associated with rapid increase or decrease in prevailing interest rates, effects of mergers and acquisitions, effects of critical accounting policies and judgments, legal and regulatory developments and competition from banks and other financial institutions, as well as other risk factors described in the Company's 2010 Annual Report on Form 10-K. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update them in light of new information or future events unless required under the federal securities laws.