updated 10/19/2010 8:46:14 AM ET 2010-10-19T12:46:14

  • Third quarter pre-tax, pre-provision operating income up 70% over linked quarter, boosted by Arizona asset purchase
  • Net income of $5.0 million compared to $0.7 million in linked second quarter and $4.7 million one year ago.
  • Fully diluted earnings per share of $0.29 in third quarter compared to $0.01 in linked second quarter and $0.31 in prior year period
  • Third quarter organic loan growth of 8% annualized

ST. LOUIS, Oct. 19, 2010 (GLOBE NEWSWIRE) -- Enterprise Financial Services Corp (Nasdaq:EFSC) ("the Company") reported net income of $5.0 million for the quarter ended September 30, 2010 compared to net income of $4.7 million for the quarter ended September 30, 2009. After deducting dividends on preferred stock, the Company reported net income of $0.29 per fully diluted share for the third quarter of 2010 compared to $0.31 per fully diluted share for the third quarter of 2009.

Third quarter 2009 results included a $5.3 million pre-tax gain from the extinguishment of debt related to loan participation accounting adjustments.

On July 9, 2010, the Company acquired approximately $260 million in Arizona-originated assets from the FDIC in connection with the failure of Home National Bank ("HNB") of Blackwell, Oklahoma. The assets were purchased at a 12.5% discount and are covered by a loss share agreement with the FDIC. The asset purchase was the Company's second FDIC-assisted transaction in Arizona.

Pre-tax, pre-provision income from continuing operations was $16.4 million in the third quarter of 2010, nearly double the $8.6 million reported for the prior year period and 70% higher than the second quarter of 2010. The HNB asset purchase contributed approximately $5.8 million to third quarter pre-tax, pre-provision income.

Pre-tax, pre-provision income from continuing operations, which is a non-GAAP (Generally Accepted Accounting Principles) financial measure, is presented because the Company believes adjusting its results to exclude discontinued operations, loan loss provision expense, impairment charges, special FDIC assessments and unusual gains or losses 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 from continuing operations is provided in the attached tables.

Peter Benoist, President and Chief Executive Officer, commented, "For the third consecutive quarter, the Company has grown pre-tax, pre-provision operating earnings. Our Arizona asset purchase from the FDIC contributed substantially to our third quarter results. Absent that transaction, these core operating earnings were almost 10% higher than last quarter and 24% higher than a year ago. Our wealth management results continue to improve, with revenues growing steadily in each of the past four quarters."

"While these results are indeed encouraging and the early favorable results from our Arizona acquisitions bode well for future earnings, we do not yet see significant signs of recovery, particularly in the housing and commercial real estate markets," continued Benoist. "As a result, we expect nonperforming asset levels to remain elevated."

Banking Segment

Deposits

Total deposits at September 30, 2010 were $2.0 billion, 10% higher than September 30, 2009.  Core deposits, which exclude brokered CDs and include reciprocal CDARS deposits, increased 11% to $1.8 billion from September 30, 2009. The Company has maintained a favorable deposit mix, with core deposits representing 89% of total deposits at September 30, 2010 compared to 94% of total deposits at June 30, 2010.   The core deposit ratio declined due to the addition of $116 million in brokered CDs used to partially fund the HNB asset purchase.  The core deposit ratio for the third quarter of 2010 was unchanged from the prior year period. 

Brokered CDs represented $218 million, or 11% of total deposits, at September 30, 2010, a modest increase from $208 million at September 30, 2009. CDARS deposits totaled $172 million at September 30, 2010 compared to $133 million at September 30, 2009.

Noninterest bearing demand deposits represented 15% of total deposits at September 30, 2010, up slightly from 14% at September 30, 2009.

Loans

Portfolio loans totaled $1.9 billion at September 30, 2010, including $134 million of loans covered under FDIC loss share agreements. Excluding the loans covered under loss share, in the third quarter of 2010, portfolio loans increased $36 million, an annualized rate of 8%. This growth reversed the trend of net reductions in loans outstanding that the Company, and the banking industry as a whole, has experienced in the recent past. The growth was related to Commercial & Industrial loans.   Excluding the loans covered under loss share, more than 30% of the Company's loan portfolio consisted of Commercial & Industrial loans at September 30, 2010. 

Asset quality

Nonperforming loans, including troubled debt restructurings of $4.4 million, were $51.9 million at September 30, 2010 compared to $46.6 million for the linked second quarter and $47.0 million at September 30, 2009. During the quarter ended September 30, 2010, there were $21.5 million of additions, $9.1 million of chargeoffs and other principal reductions and $7.1 million of foreclosures. Of the $21.5 million in new nonperforming loans, three relationships comprise over $15.0 million, or 70% of the total. Nonperforming loans represented 2.69% of total loans at September 30, 2010 versus 2.63% at June 30, 2010 and 2.22% at September 30, 2009. 

Nonperforming loans by segment at September 30, 2010 were as follows (in millions):

Loans that were 31-90 days delinquent at September 30, 2010 represented 0.09% of the portfolio compared with 0.86% at June 30, 2010.

Other real estate at September 30, 2010 was $34.7 million, compared to $25.9 million at June 30, 2010 and $19.3 million at September 30, 2009. Approximately $5.5 million of the third quarter increase was related to the HNB asset purchase. Roughly 22% of total other real estate, or $7.7 million, is covered by two FDIC loss share agreements. Other real estate not covered by an FDIC loss share agreement totaled $27.0 million at September 30, 2010, an increase of $3.3 million from June 30, 2010. 

During the third quarter, the Company sold $2.0 million in other real estate, recording a gain of $144,000. Year to date, the Company has sold $16.3 million in other real estate at a net gain of $434,000.

Net charge-offs in the third quarter of 2010 were $5.9 million, or 1.23% of average loans. By comparison, net charge-offs were $7.8 million, or 1.76% of average loans, in the linked second quarter. In the third quarter of 2009, net charge-offs were $6.2 million, or 1.16% of average loans.

Provision for loan losses was $7.7 million in the third quarter of 2010 compared to $9.0 million in the second quarter of 2010 and $6.5 million in the third quarter of 2009. Excluding the loans under FDIC loss share agreements, the Company's watch list credits as a percentage of total loans have remained relatively flat since year end 2009.

The Company's allowance for loan losses was 2.43% of total loans at September 30, 2010, representing 90% of nonperforming loans. The loan loss allowance was 2.55% at June 30, 2010 and 2.13% at September 30, 2009.

Net Interest Income

Net interest income for the banking segment increased $7.0 million, or 37%, in the third quarter of 2010 compared to the same period of 2009 and was $5.7 million, or 29%, higher than in the linked second quarter. Approximately $4.8 million of the third quarter 2010 increase in net interest income was attributable to the HNB asset purchase.

Loans covered under FDIC loss share yielded 17.48% in the third quarter of 2010. This yield resulted from a substantial fair value adjustment on the loan balances as well as accretion of the discount on the purchased assets under the level yield method.

Including the effect of parent company debt, the net interest rate margin was 4.31% for the third quarter of 2010, compared to 3.46% for the second quarter of 2010. Third quarter net interest rate margin was favorably impacted by lower deposit costs and slightly improved earning asset mix, as well as by the net interest income generated by the loans acquired in the HNB asset purchase. Absent those purchased loans, the third quarter net interest rate margin would have been 3.67%, a 0.21% improvement over the linked second quarter.

Wealth Management Segment

Fee income from the Wealth Management segment, including trust revenues and income from state tax credit brokerage activities, totaled $2.2 million in the third quarter of 2010, 8% higher than the prior year period.

Trust

Trust revenues were $1.3 million in the third quarter of 2010, a 17% increase over the prior year period. The increase in revenue was attributable to higher account asset values, several estate planning-related insurance sales and generally improving sales momentum in the Trust organization.

Trust assets under administration were $1.4 billion at September 30, 2010, compared to $1.2 billion at September 30, 2009.

State Tax Credit Brokerage

For the third quarter of 2010, state tax credit brokerage activities generated $884,000 in revenues, compared to $911,000 in the third quarter of 2009. Third quarter 2010 revenues included $130,000 in gains from the sale of tax credits and $754,000 in net gains in the fair value of tax credit assets and related interest rate hedges.

Other Business Results

The Company continues to exceed regulatory standards for "well-capitalized" institutions. Total capital to risk-weighted assets was 14.19% at September 30, 2010 compared to 11.94% at September 30, 2009. The tangible common equity ratio was 5.79% at September 30, 2010 versus 5.14% at September 30, 2009. A reconciliation of shareholders' equity to tangible common equity and total assets to tangible assets is provided in the attached tables. The Company believes that the tangible common equity ratio is an important financial measure of capital strength even though it is considered to be a non-GAAP measure and is not part of the regulatory capital requirements to which the Company is subject. 

The increase in Other Income for the third quarter of 2010 compared to the prior year period was largely due to $1.1 million of accretion on the FDIC loss share receivable. 

For the third quarter of 2010, noninterest expenses increased $2.5 million, or 19%, compared to the prior year period. The increase was primarily attributable to $2.1 million in loan legal and other real estate expenses. Salaries and benefits rose $619,000, or 9%, year-over-year, largely due to recruitment of several senior bankers and higher variable compensation accruals.

The Company's efficiency ratio was 50.9% for the quarter ended September 30, 2010 compared to 49.0% for the prior year period.

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, 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 Enterprise Financial's 2009 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.

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