Press Release

Enterprise Financial Reports First Quarter 2020 Results

Company Release - 4/20/2020 4:02 PM ET

First Quarter Results

Net income of $12.9 million, $0.48 per diluted share, including the impact of provision for credit losses of $0.63 per share
Net interest margin (tax equivalent) of 3.79%
Return on average assets of 0.70%
Loans increased $143.2 million, or 11% annualized
Deposits increased $218.9 million, or 15% annualized

ST. LOUIS--(BUSINESS WIRE)-- Enterprise Financial Services Corp(Nasdaq: EFSC) (the “Company” or “EFSC”) reported net income of $12.9 million for the first quarter 2020, a decrease of $16.2 million compared to the linked fourth quarter (“linked quarter”) and a decrease of $3.3 million from the prior year quarter. Earnings per diluted share (“EPS”) was $0.48 for the first quarter 2020, compared to $1.09 and $0.67 for the linked and prior year quarters, respectively. Net income and EPS in the current quarter declined from the linked quarter and prior year quarter primarily due to an increase in provision for credit losses, described in more detail below. Merger-related expenses also impacted the results in the prior year quarter.

In the first quarter of 2020, the Company adopted the new accounting standard, commonly referred to as CECL, to estimate credit losses. Due to current economic conditions, the provision for credit losses was $22.3 million for the first quarter 2020, compared to $1.3 million for the linked quarter and $1.5 million for the first quarter 2019. CECL requires economic forecasts to be factored into determining estimated losses. As a result, CECL will typically require a higher level of provision at the start of an economic downturn.

Jim Lally, EFSC’s President and Chief Executive Officer, commented, “Currently, we are faced with unprecedented and rapidly evolving global challenges presented by the COVID-19 pandemic. Our sympathy goes out to everyone who has been impacted, and we are thankful for all the healthcare workers and other essential business employees who continue to keep us safe. The pandemic and resulting social distancing measures across the country have had a profound impact on how business has been conducted across all industries. Considering these challenges, it has been extremely encouraging to see how our associates have risen to the task of working remotely while continuing to serve our customers. We are actively working with our customers to provide support for all their financial needs. Our associates worked around the clock to put an operational framework in place for the rollout of the SBA’s Paycheck Protection Program. I am proud to say that we have processed over 1,500 applications and have received approval from the SBA to fund more than $680 million of loans to our customers, providing much needed relief to over 67,000 employees within our communities.”

Lally continued, “Despite the challenges of the COVID-19 pandemic and the substantial decrease in short-term interest rates, we had a strong first quarter. We had record operating revenue of $76.8 million, an expanded net interest margin and a stable efficiency ratio. While our provision for credit losses increased under CECL, we believe our asset quality is strong, and our loan portfolio continues to grow. Our focus on continuous improvement, which has been a cornerstone of our strategic plan, has served us well in this environment. We have taken proactive and disciplined steps to ensure the safety of our employees and customers as well as to manage our financial performance. We believe our liquidity, strong balance sheet and capital levels will aid us in navigating these uncertain times and position us to continue to serve our customers and communities.”

Highlights

The Company closed its acquisition of Trinity Capital Corporation (“Trinity”) on March 8, 2019. The results of operations of Trinity are included in our results from this date forward, which may affect certain comparisons to the first quarter of 2019.

Earnings - Net income in the first quarter 2020 was $12.9 million and EPS was $0.48. Pre-tax pre-provision income¹ (“PTPP”) of $38.1 million in the first quarter 2020, increased $0.4 million and $16.4 million from the linked-quarter and first quarter 2019, respectively.

Net interest income and net interest margin - Net interest income of $63.4 million for the first quarter 2020, increased $1.8 million and $11.0 million, from the linked quarter and first quarter 2019. The net interest margin (“NIM”) was 3.79% for the first quarter 2020, compared to 3.68% and 3.87% for the linked quarter and first quarter 2019, respectively.

Loans - Total loans grew $143.2 million, or 10.8% annualized, to $5.5 billion as of March 31, 2020. Year-over-year, loans grew $440.4 million, or 8.8%, from $5.0 billion as of March 31, 2019. Growth in the loan portfolio was broad-based across most lending categories.

Deposits - Total deposits grew $218.9 million, or 15.3% annualized, to $6.0 billion as of March 31, 2020. Year-over-year, deposits grew $452.8 million, or 8.2%, from $5.5 billion as of March 31, 2019. Noninterest deposit accounts represented 22.6% of total deposits at March 31, 2020, and the loan to deposit ratio was 91.1%.

Asset quality - The allowance for loan losses to total loans increased to 1.69% at March 31, 2020 from 0.81% and 0.86% at December 31, and March 31, 2019, respectively. The adoption of the CECL accounting standard on January 1, 2020 increased the allowance by $28.4 million and the allowance coverage ratio by 0.53% of total loans. The provision for credit losses on loans for the first quarter 2020 increased the allowance by $21.7 million.

Capital - Total shareholders’ equity was $846.4 million and the tangible common equity to tangible assets ratio was 8.42% at March 31, 2020. Regulatory capital ratios remain “well-capitalized”, with a common equity tier 1 ratio of 9.58% and a total risk-based capital ratio of 12.85%.

In the first quarter 2020, the Company repurchased 456,251 shares at an average price of $33.64 prior to suspending its repurchase of shares through the share repurchase plan in March. There are 95,907 shares available for repurchase under the existing authorization.

The Company’s Board of Directors approved a quarterly dividend of $0.18 per common share, payable on June 30, 2020 to shareholders of record as of June 15, 2020.

Liquidity - The Company maintains a high level of both on-balance-sheet and off-balance-sheet liquidity. At March 31, 2020, on-balance-sheet liquidity consisted of cash and unpledged investment securities of $1.1 billion. Off-balance-sheet liquidity totaled $1.8 billion through the Federal Home Loan Bank, Federal Reserve and correspondent bank lines. The Company also has an unused $25 million revolving line of credit and maintains a shelf registration allowing for the issuance of various forms of equity and debt securities.

¹ PTPP is a non-GAAP measure. Refer to discussion and reconciliation of these measures in the accompanying financial tables.

Net Interest Income

Net interest income for the first quarter increased $1.8 million to $63.4 million from $61.6 million in the linked quarter, and increased $11.0 million from the prior year period. The increase from the linked quarter was primarily due to growth in the average loan portfolio while the increase from the prior year period was primarily due to the Trinity acquisition and organic growth. NIM, on a tax equivalent basis, was 3.79% for the first quarter, compared to 3.68% in the linked quarter, and 3.87% in the first quarter of 2019.

Core net interest income and core net interest margin noted in the table below exclude incremental accretion on non-core acquired loans.

	Quarter ended
($ in thousands)	March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			March 31, 2019
Net interest income	$	63,368		$	61,613		$	63,046		$	61,715		$	52,343
Less: Incremental accretion income²	1,273			576			2,140			910			1,157
Core net interest income³	$	62,095		$	61,037		$	60,906		$	60,805		$	51,186

Net interest margin (tax equivalent)	3.79		%	3.68		%	3.81		%	3.86		%	3.87		%
Core net interest margin³ (tax equivalent)	3.71			3.64			3.69			3.80			3.79

²Represents incremental accretion income on non-core acquired loans which were acquired from the FDIC and previously covered by shared-loss agreements.

³Core net interest income and core net interest margin are non-GAAP measures. Refer to discussion and reconciliation of these measures in the accompanying financial tables.

Average Balance Sheets

The following table presents, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing liabilities, as well as, the corresponding interest rates earned and paid, all on a tax-equivalent basis.

	Quarter ended
	March 31, 2020						December 31, 2019						March 31, 2019
($ in thousands)	Average Balance		Interest Income/ Expense		Average Yield/ Rate		Average Balance		Interest Income/ Expense		Average Yield/ Rate		Average Balance		Interest Income/ Expense		Average Yield/ Rate
Assets
Interest-earning assets:
Loans, excluding incremental accretion*	$	5,352,243	$	66,017	4.96	%	$	5,279,500	$	67,085	5.04	%	$	4,511,387	$	59,973	5.39	%
Debt and equity investments*	1,346,968		9,708		2.90		1,322,017		9,699		2.92		896,936		6,292		2.84
Short-term investments	92,248		300		1.31		102,989		406		1.56		102,166		447		1.77
Total earning assets	6,791,459		76,025		4.50		6,704,506		77,190		4.57		5,510,489		66,712		4.91

Noninterest-earning assets	572,146						617,990						445,597

Total assets	$	7,363,605					$	7,322,496					$	5,956,086

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	1,375,154	$	1,338	0.39	%	$	1,325,363	$	1,620	0.48	%	$	1,077,289	$	1,790	0.67	%
Money market accounts	1,811,090		4,740		1.05		1,693,357		5,797		1.36		1,521,878		6,515		1.74
Savings	542,993		143		0.11		543,571		195		0.14		299,731		183		0.25
Certificates of deposit	793,213		3,667		1.86		846,253		4,096		1.92		712,269		3,332		1.90
Total interest-bearing deposits	4,522,450		9,888		0.88		4,408,544		11,708		1.05		3,611,167		11,820		1.33
Subordinated debentures	141,295		1,919		5.46		141,217		1,945		5.46		124,154		1,648		5.38
FHLB advances	220,453		895		1.63		291,057		1,371		1.87		215,420		1,398		2.63
Securities sold under agreements to repurchase	201,887		343		0.68		170,481		308		0.72		187,297		274		0.59
Other borrowings	34,270		275		3.23		36,220		293		3.21		14,900		134		3.65
Total interest-bearing liabilities	5,120,355		13,320		1.05		5,047,519		15,625		1.23		4,152,938		15,274		1.49

Noninterest-bearing liabilities:
Demand deposits	1,315,267						1,347,748						1,088,323
Other liabilities	62,948						67,555						52,371
Total liabilities	6,498,570						6,462,822						5,293,632
Shareholders' equity	865,035						859,674						662,454
Total liabilities and shareholders' equity	$	7,363,605					$	7,322,496					$	5,956,086

Core net interest income³			62,705						61,565						51,438
Core net interest margin³					3.71	%					3.64	%					3.79	%

Incremental accretion on non-core acquired loans			1,273						576						1,157

Total net interest income			$	63,978					$	62,141					$	52,595
Net interest margin					3.79	%					3.68	%					3.87	%
* Non-taxable income is presented on a tax-equivalent basis using a 24.7% tax rate. The tax-equivalent adjustments were $0.6 million for the three months ended March 31, 2020, $0.5 million for the three months ended December 31, 2019, and $0.3 million for the three months ended March 31, 2019.
³Core net interest income and core net interest margin are non-GAAP measures. Refer to discussion and reconciliation of these measures in the accompanying financial tables.

NIM increased 11 basis points from the linked quarter to 3.79% during the current quarter primarily due to an 18 basis point decrease in the cost of funds partially offset by lower loan yields. Significant reductions in interest rates, including one-month LIBOR, continue to impact the Company’s variable-rate loans. The Company responded to interest rate trends by reducing the cost of certain managed money market and interest-bearing transaction accounts. This effort improved the cost of money market accounts by 31 basis points compared to the linked quarter. Additionally, the Company entered into interest rate swap transactions to hedge its exposure to variability on a portion of the Company’s floating-rate debt.

The Company manages its balance sheet to defend against pressures on core net interest margin, which could be negatively impacted by continued competition for deposits, current interest rate conditions, and downward movement in short-term rates.

Loans

The following table presents total loans for the most recent five quarters:

	Quarter ended
($ in thousands)	March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			March 31, 2019
C&I - general	$	1,186,240		$	1,186,667		$	1,174,569		$	1,103,908		$	1,128,755
CRE investor owned - general	1,319,316			1,290,258			1,281,332			1,235,596			1,183,471
CRE owner occupied - general	584,491			582,579			566,219			591,401			576,026
Enterprise value lending^a	440,764			428,896			417,521			445,981			439,500
Life insurance premium financing^a	496,471			472,822			468,051			465,777			440,693
Residential real estate - general	346,461			366,261			386,174			409,200			432,556
Construction and land development - general	445,909			428,681			403,590			376,597			345,207
Tax credits^a	354,046			294,210			265,626			268,405			235,454
Agriculture	168,237			139,873			136,249			131,671			126,088
Consumer and other - general	115,582			124,090			128,683			120,961			109,327
Total Loans	$	5,457,517		$	5,314,337		$	5,228,014		$	5,149,497		$	5,017,077

Total loan yield	5.06		%	5.08		%	5.47		%	5.49		%	5.50		%
Total C&I loans to total loans	45		%	44		%	44		%	44		%	44		%
Variable interest rate loans to total loans	60		%	59		%	60		%	60		%	60		%
Certain prior period amounts have been reclassified among the categories to conform to the current period presentation
^aSpecialized categories may include a mix of C&I, CRE, Construction and land development, or Consumer and other loans.

Loans totaled $5.5 billion at March 31, 2020, increasing $143.2 million, or 10.8% annualized, compared to the linked quarter. Year-over-year, loans increased $440.4 million, or 8.8%.

In the first quarter 2020, the Company implemented several loan programs to assist its customers impacted by the COVID-19 pandemic. These programs include consumer and business deferral programs and expanded small business lines of credit. In April 2020, the Company began offering loans through the SBA’s Paycheck Protection Program that was part of the CARES Act passed by Congress.

Asset Quality

On January 1, 2020, the Company adopted the new accounting standard, commonly referred to as CECL, to estimate credit losses. Prior to the adoption of CECL, purchased credit impaired (PCI) loans were accounted for in performing pools of loans and were not individually identified as nonaccrual or classified. Under the CECL accounting model, the Company elected not to maintain PCI pools for certain loans which are now accounted for individually. Thus they are now included in nonperforming and classified loans. PCI loans are referred to as purchased credit deteriorated (PCD) under CECL.

The adoption of CECL impacted certain financial metrics as noted in the following table:

($ in thousands)	Allowance for Loan Losses			Reserve for Unfunded Commitments		Nonperforming Loans			Classified Assets
Balance, 12/31/2019	$	43,288		$	430	$	26,425		$	85,897
CECL adoption⁴	28,387			2,413		8,462			25,819
PCD loans immediately charged-off⁵	(1,680		)	—		(1,680		)	(1,680		)
Balance, 1/1/2020	69,995			2,843		33,207			110,036
Provision for credit losses	21,695			849		—			—
Net recoveries	497			—		—			—
Net increase (decrease)	—			—		3,997			(5,282		)
Balance, 3/31/2020	$	92,187		$	3,692	$	37,204		$	104,754

⁴ Loan balances at March 31, 2020

⁵ Under the Company’s credit policy, nonaccrual loans less than $100,000 are immediately charged-off.

The following table presents the categories of nonperforming assets and related ratios for the most recent five quarters:

	Quarter ended
($ in thousands)	March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			March 31, 2019
Nonperforming loans	$	37,204		$	26,425		$	15,569		$	19,842		$	9,607
Other real estate	5,072			6,344			8,498			10,531			6,804
Nonperforming assets	$	42,276		$	32,769		$	24,067		$	30,373		$	16,411

Nonperforming loans to total loans	0.68		%	0.50		%	0.30		%	0.39		%	0.19		%
Nonperforming assets to total assets	0.56			0.45			0.33			0.42			0.24
Allowance for loan losses to total loans	1.69			0.81			0.85			0.85			0.86
Net charge-offs	$	1,183		$	2,544		$	1,070		$	970		$	1,826

Nonperforming loans increased $10.8 million to $37.2 million at March 31, 2020 from $26.4 million at December 31, 2019 primarily due to the adoption of CECL that added $6.8 million in PCD loans that were previously accounted for in an accruing pool of loans. In the first quarter 2020, the Company had net charge-offs of $1.2 million, primarily due to the administrative charge-off of nonaccrual loans less than $100,000 under the Company’s credit policy. Other real estate decreased during the first quarter 2020 due to write-downs of $0.8 million and sales of $0.5 million.

The Company recorded a provision for credit losses of $22.3 million for the first quarter 2020 compared to $1.3 million for the linked quarter and $1.5 million for the first quarter 2019, respectively. The increase in the provision for credit losses in the first quarter 2020 was primarily due to a change in economic forecasts, which worsened significantly in March due to the COVID-19 pandemic, the resulting slow-down of business activity and rise in unemployment. To the extent that the Company does not recognize charge-offs and economic forecasts improve in future periods, the Company could recognize a reversal of provision for credit losses. Conversely, if economic conditions and the Company’s forecast continue to worsen, the Company could recognize elevated levels of provision for credit losses.

Deposits

The following table presents deposits broken out by type for the most recent five quarters:

	Quarter ended
($ in thousands)	March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			March 31, 2019
Noninterest-bearing accounts	$	1,354,571		$	1,327,348		$	1,295,450		$	1,181,577		$	1,186,508
Interest-bearing transaction accounts	1,389,603			1,367,444			1,307,855			1,392,586			1,389,826
Money market and savings accounts	2,479,828			2,249,784			2,201,052			2,162,605			2,156,031
Brokered certificates of deposit	170,667			215,758			209,754			213,138			180,788
Other certificates of deposit	595,237			610,689			610,269			609,432			623,960
Total deposit portfolio	$	5,989,906		$	5,771,023		$	5,624,380		$	5,559,338		$	5,537,113

Noninterest-bearing deposits to total deposits	22.6		%	23.0		%	23.0		%	21.3		%	21.4		%

Total deposits at March 31, 2020 were $6.0 billion, an increase of $218.9 million from December 31, 2019, and an increase of $452.8 million from March 31, 2019.

Core deposits, defined as total deposits excluding certificates of deposits, were $5.2 billion at March 31, 2020, an increase of $279.4 million from the linked quarter. Noninterest-bearing deposits were $1.4 billion at March 31, 2020, an increase of $27.2 million compared to December 31, 2019, and an increase of $168.1 million compared to March 31, 2019. The total cost of deposits was 0.68% for the current quarter compared to 0.81% and 1.02% for the linked quarter and prior year quarter, respectively.

Noninterest Income

Total noninterest income for first quarter 2020 was $13.4 million, a decrease of $1.0 million from the linked quarter, and an increase of $4.2 million from the first quarter 2019. The decrease from the linked quarter is from lower tax credit income that typically peaks in the fourth quarter of the year. Income from the Company’s customer swap program continued to expand, totaling $1.1 million in the first quarter 2020, compared to $0.8 million in the linked quarter and $0.2 million in the first quarter 2019. The Company also recognized $0.7 million from a bank-owned life insurance claim in the first quarter 2020. The increase from the prior year quarter was driven by contributions from a full quarter of Trinity’s operations in 2020.

Noninterest Expenses

Noninterest expenses were $38.7 million for the first quarter 2020, compared to $38.4 million for the linked quarter, and $39.8 million for the first quarter 2019. The increase from the linked quarter is primarily due to merit increases and the reset of annual payroll tax limits, offset by a decrease in variable compensation. In the first quarter 2020, variable compensation accruals were decreased commensurate with the decrease in profitability. The decrease in noninterest expense from the first quarter 2019 was primarily due to a decline in merger-related expenses following the acquisition of Trinity, offset by a full quarter of Trinity’s operating expense in 2020.

The Company’s core efficiency ratio⁶ was 51.2% for the quarter ended March 31, 2020, compared to 50.7% for the linked quarter and 54.1% for the prior year period.

⁶Core efficiency ratio is a non-GAAP measure. Refer to discussion and reconciliation of this measure in the accompanying financial tables.

Income Taxes

The Company’s effective tax rate was 19% for the quarter ended March 31, 20