* Company reports third quarter fully diluted earnings per share of $0.10 after goodwill impairment charge of $5.9 million related to Millennium Brokerage Group, its wholesale life insurance brokerage subsidiary * Enterprise Financial's Board authorizes up to $62 million in additional capital to increase already "well-capitalized" position * The Company's principal subsidiary, Enterprise Bank & Trust, earns $4.7 million in third quarter and $13.1 million year-to-date, essentially equal to both prior year quarter and year-to-date results, driven by continuing strong loan growth
ST. LOUIS, Oct. 23, 2008 (GLOBE NEWSWIRE) -- Enterprise Financial Services Corp (Nasdaq:EFSC) reported third quarter net income of $1.3 million, or $0.10 per fully diluted share, after giving effect to a $5.9 million non-cash goodwill impairment charge associated with Millennium Brokerage Group (MBG), its wholesale insurance brokerage subsidiary, which represented $0.29 per fully diluted share. Prior year third quarter earnings were $5.0 million, or $0.40 per fully diluted share. Year-to-date net income was $8.4 million, or $0.66 per fully diluted share, compared to $12.7 million, or $1.01 per fully diluted share, for the prior year period.
The goodwill impairment charge is a non-cash accounting adjustment that does not reduce the Company's regulatory capital, cash flow or liquidity.
Peter Benoist, Enterprise Financial President and CEO, commented, "The impairment charge recorded this quarter reflects our assessment that the margins and earnings in our wholesale life insurance brokerage business have been, and will continue to be, pressured. MBG needs increased scale to strengthen its competitive position in the face of a consolidating insurance industry and the effects of tighter underwriting standards among the major life insurance carriers. We are working with MBG management on strategic alternatives to accomplish that."
Benoist concluded, "Our core banking business continues to perform well in light of the unprecedented turmoil in the financial markets and the continued deterioration of the housing market. Our principal subsidiary, Enterprise Bank & Trust, earned $4.7 million and $13.1 million for the quarter and year-to-date periods, equaling the earnings levels for both the prior year quarter and year-to-date."
Enterprise also announced that its Board of Directors has authorized the addition of up to $62 million in regulatory capital to support the Company's continued growth. EFSC is already considered "well-capitalized" by regulatory standards. The additional capital may be raised in the form of senior preferred stock purchased by the U.S. Treasury Department, convertible trust preferred securities or a combination of both.
"In these uncertain economic times we believe that positioning the Company with excess capital is not only prudent, but also allows us to take advantage of opportunities that may present themselves in the future," Benoist noted. "The financial industry is transforming right before our eyes, and it's clear to me that highly focused, well-capitalized commercial banking organizations in attractive markets will be the ultimate winners when the dust settles."
The Company reported the completion of the previously announced sale of its Great American Bank charter and related De Soto, Kansas branch location to First Financial Bancshares, Inc. based in Lawrence, Kansas. The charter and branch were not strategic to the Company's plans for the Kansas City market. The sale generated an after-tax gain of $1.5 million, or $0.12 per fully diluted share.
Absent the impairment charge and the gain on sale of the branch/charter, the Company's earnings for the third quarter were $0.27 per fully diluted share, equal to the second quarter of 2008. The decrease in operating earnings per share from the prior year third quarter is due primarily to increased provision for loan losses, increased costs associated with the collection of problem loans, and a decline in revenues from the Company's Wealth Management business.
Banking Line of Business
Net interest income increased 4% in the third quarter compared to the prior year period, largely as a result of loan growth. Total loans at quarter end increased $384 million to $1.94 billion, a 25% increase over one year ago. On a linked quarter basis, loans increased $93 million, or 5%, driven primarily by strong commercial and industrial loan growth.
Since December 31, 2007, loans have increased $301 million, or 18%. As previously noted, strong loan growth is attributable in part to a more favorable competitive environment, resulting in both increased volumes and more favorable pricing. Almost two-thirds of the $301 million loan growth this year has been produced from commercial and industrial businesses, as shown in the table below.
Commercial and industrial businesses 64%
Commercial real estate 17%
Residential construction 7%
Subcontractors (Residential and Commercial) 6%
Commercial construction 5%
Loans to individuals 1%
----
100%
====
Total deposits at September 30, 2008 were $1.69 billion, up $242 million, or 17%, from a year ago. During the third quarter, deposits grew $18 million, or 4%, on an annualized basis. Excluding brokered certificates of deposit, "core" deposits grew $48 million, or 4%, from a year ago, and declined $71 million, or 5%, during the quarter. Approximately $30 million of the third quarter decrease in core deposits was attributable to the sale of the DeSoto KS branch in the quarter. For the third quarter of 2008, brokered certificates of deposit represented 17% of average total deposits.
Linked quarter net interest rate margin declined 22 basis points to 3.34%, compared to 3.56% for the second quarter and 3.87% for the prior year period. The margin has been compressed as a result of sharply reduced short term rates from a year ago, increased volumes of wholesale funding to support loan growth, as well as elevated levels of nonperforming assets.
Asset Quality
Nonperforming loans were $23.5 million, or 1.21%, of total loans, a net increase of $10.4 million from June 30, 2008. Three relationships -- a $2.5 million loan from a Kansas City-based financial services company, a $3.5 million loan secured by a residential land development in Northwest Arkansas and a $4.8 million loan secured by a medical office building in the Kansas City area -- represented most of the increase.
Nonperforming loans at September 30, 2008 by industry segment were as follows:
Commercial Real Estate 61%
Residential Construction/Land Acquisition Development 26%
Commercial & Industrial 9%
Other 4%
----
100%
====
Nonperforming assets rose to 1.56% of total assets for the third quarter compared to 1.02% in the second quarter and 0.51% for the third quarter of 2007. Net charge-offs during the quarter of $1.1 million declined to 0.24% of average loans from 0.32% in the second quarter. Third quarter 2007 net charge-offs were 0.14% of average loans. For the nine months ended September 30, 2008 annualized net charge-offs were 0.32% of average loans.
Other real estate owned totaled $11.3 million at September 30, 2008, compared to $9.3 million as of June 30, 2008. The increase in the quarter related to the foreclosure of a 43 lot residential subdivision in St. Louis, which is currently under a letter of intent for sale.
Provision for loan losses in the third quarter of 2008 was $2.8 million compared to $600,000 in the prior year period and $3.2 million in the second quarter of 2008. Provision expense covered net charge-offs 2.5 times for the quarter.
The allowance for loan losses rose slightly to 1.32% of total loans compared to 1.30% at June 30, 2008 and 1.27% at September 30, 2007. The allowance for loan losses at September 30, 2008 was equal to 109% of nonperforming loans.
Steve Marsh, Chairman and CEO of Enterprise Bank & Trust, said, "The increase in non-performing assets remains in line with our expectations as certain sectors of the real estate industry remain challenged in this environment. While our credit issues had been largely concentrated in the residential category, we are now also seeing some stress in certain commercial real estate projects. However, most other industry segments represented in our portfolios continue to perform well at this point." Marsh continued, "I expect nonperforming asset levels to remain elevated through the balance of this year and continuing into much of next year."
Wealth Management Line of Business
Fee income from the Wealth Management line of business, including income from state tax credit brokerage activities, totaled $3.2 million for the third quarter 2008, a 9% decline from the third quarter of 2007. For the nine months ended September 30, 2008, Wealth Management fee income totaled $9.5 million, down $479,000 or 4%.
Trust revenues for the third quarter and year-to-date periods continue to be negatively impacted by declining market values of assets under management and client attrition related to advisor turnover in the first quarter. Fiduciary revenues continue to grow modestly as new business volumes have been steady.
MBG revenues are down approximately 30% from the prior year quarter and year-to-date due to lower levels of paid premium sales and slightly lower sales margins. Producer sales volumes and carrier commission payouts remain constrained due to continued consolidation of distributors in the industry, uncertainty in the financial markets and tougher underwriting for large insurance cases. Management continues to evaluate strategic options to improve MBG's competitive position.
Fee income from state tax credit brokerage activities during the third quarter was $593,000 and $1.6 million year-to-date, versus minimal amounts in 2007. $413,000 of the fee income recognized in the third quarter of 2008 relates to a fair value increase under FAS 159 on the $38 million in tax credits held for sale at September 30, 2008. The Company is considering the purchase of interest rate caps in the fourth quarter to minimize potential fair value reductions in the tax credit assets resulting from future increases in market interest rates.
Excluding the goodwill impairment charge for MBG, expenses in Wealth Management were $438,000 higher in the third quarter of 2008 versus the same period in 2007, and were $850,000 higher in the nine months ended September 30, 2008 than in the same period of 2007. These increases were due primarily to the restructuring of Millennium's compensation for principals as part of the buyout of the remaining minority interest on December 31, 2007.
Goodwill Impairment Charge
In accordance with generally accepted accounting principles, Enterprise evaluated MBG's intangible assets and goodwill for possible impairment during the third quarter. In connection with these tests, the Company determined that margin pressures reducing MBG revenues will continue to negatively affect operating performance, thereby reducing the fair value of its investment in MBG. As a result, the Company recorded a $5.9 million pre-tax goodwill impairment charge against third quarter earnings. The after-tax effect of the charge was $0.29 per fully diluted share.
Capital Adequacy
On September 30, 2008 EFSC's principal subsidiary, Enterprise Bank & Trust, completed a $2.5 million private placement of subordinated capital notes. The notes mature in 2018, are callable by Enterprise in 5 years, and pay a fixed interest rate of 10%. The subordinated debt qualifies as Tier II regulatory capital. The subsidiary bank's capital ratios exceeded the regulatory definition of well capitalized as of September 30.
EFSC intends to expand its regulatory capital position by up to $62 million. The Company is actively negotiating terms for an issue of Convertible Trust Preferred Securities that will also qualify as Tier II regulatory capital until they would convert to EFSC common stock. The Company also plans to participate in the U.S. Treasury Department's recently announced bank capital purchase program as an additional source of regulatory capital.
As of September 30, 2008 EFSC reported total capital to risk-weighted assets of 10.18%, exceeding the regulatory standard of "well-capitalized."
Other Business Results
The Company has applied for a new Arizona state bank charter with locations in central and west Phoenix. Conditions in the Arizona real estate market have slowed regulatory approvals for de novo charters. Timing on the decision regarding the charter application is uncertain at this time; however, Enterprise Bank & Trust continues to operate a successful loan production office in central Phoenix.
Net of the goodwill impairment charge and the charter/branch sale, the Company's efficiency ratio increased from 59.7% at September 30, 2007 to 61.9% in the current quarter. Noninterest expenses in the third quarter of 2008 increased $1.1 million, or 8%, excluding the goodwill impairment charge, due primarily to legal and operating costs associated with higher nonperforming asset levels, costs associated with our Phoenix initiatives, higher levels of corporate legal and professional expenses, and higher levels of benefit costs (primarily medical and the Long Term Incentive Plan.)
Enterprise Financial operates commercial banking and wealth management businesses in metropolitan St. Louis and Kansas City and a loan production office in Phoenix. Enterprise 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 2007 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.
ENTERPRISE FINANCIAL SERVICES CORP
CONSOLIDATED FINANCIAL SUMMARY
(unaudited)
(In thousands, except per For the Quarter For the Nine
share data) Ended Months Ended
Sep 30, Sep 30, Sep 30, Sep 30,
INCOME STATEMENTS 2008 2007 2008 2007
-------- -------- -------- --------
Total interest income $ 29,289 $ 31,807 $ 88,818 $ 90,600
Total interest expense 12,705 16,002 39,293 45,750
-------- -------- -------- --------
Net interest income 16,584 15,805 49,525 44,850
Provision for loan losses 2,825 600 8,350 2,165
-------- -------- -------- --------
Net interest income after
provision for loan losses 13,759 15,205 41,175 42,685
NONINTEREST INCOME
Wealth Management revenue 2,640 3,495 7,905 9,916
Deposit service charges 1,102 839 3,241 2,302
Gain (loss) on sale of other
real estate 242 7 584 (5)
Gain on sale of state tax
credits 593 33 1,577 33
Gain on sale of securities -- -- 73 --
Gain on sales of branch/charter 2,840 -- 3,400 --
Other income 224 264 842 1,196
-------- -------- -------- --------
Total noninterest income 7,641 4,638 17,622 13,442
NONINTEREST EXPENSE
Salaries and benefits 7,792 7,523 23,706 21,972
Occupancy 1,100 995 3,160 2,898
Furniture and equipment 346 370 1,065 1,055
Goodwill impairment related to
Millennium Brokerage Group 5,900 -- 5,900 --
Other 3,995 3,314 11,858 10,508
-------- -------- -------- --------
Total noninterest expense 19,133 12,202 45,689 36,433
Income before income tax 2,267 7,641 13,108 19,694
Income taxes 948 2,642 4,726 7,022
-------- -------- -------- --------
Net income $ 1,319 $ 4,999 $ 8,382 $ 12,672
======== ======== ======== ========
Basic earnings per share $ 0.10 $ 0.40 $ 0.67 $ 1.04
Diluted earnings per share $ 0.10 $ 0.40 $ 0.66 $ 1.01
Return on average assets 0.24% 1.11% 0.54% 0.99%
Return on average equity 2.81% 11.85% 6.17% 10.75%
Efficiency ratio 78.98% 59.69% 68.04% 62.50%
Noninterest expense to average
assets 3.48% 2.72% 2.92% 2.84%
YIELDS (fully tax equivalent)
Loans 5.94% 7.96% 6.37% 7.96%
Securities 4.75% 4.67% 4.70% 4.49%
Federal funds sold 2.12% 5.48% 2.76% 5.49%
Yield on earning assets 5.86% 7.73% 6.25% 7.71%
Interest bearing deposits 2.72% 4.44% 2.97% 4.45%
Subordinated debt 5.63% 7.20% 6.00% 7.20%
Borrowed funds 2.98% 5.00% 3.36% 5.01%
Cost of paying liabilities 2.85% 4.59% 3.13% 4.59%
Net interest spread 3.01% 3.14% 3.12% 3.12%
Net interest rate margin 3.34% 3.87% 3.51% 3.85%
ENTERPRISE FINANCIAL SERVICES CORP
CONSOLIDATED FINANCIAL SUMMARY (cont.)
(unaudited)
(In thousands)
Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
BALANCE SHEETS 2008 2008 2008 2007 2007
---------- ---------- ---------- ---------- ----------
ASSETS
Cash and due
from banks $ 38,641 $ 67,661 $ 64,108 $ 76,265 $ 47,593
Federal funds
sold 1,718 15,630 954 75,665 2,585
Interest-
bearing
deposits 2,178 349 6,435 1,719 1,100
Debt and equity
investments 113,932 120,072 116,810 83,333 122,204
Loans held for
sale 520 1,666 3,422 3,420 1,117
Portfolio loans 1,942,600 1,849,415 1,726,455 1,641,432 1,558,885
Less allowance
for loan
losses 25,662 24,011 22,249 21,593 19,754
---------- ---------- ---------- ---------- ----------
Net loans 1,916,938 1,825,404 1,704,206 1,619,839 1,539,131
---------- ---------- ---------- ---------- ----------
Other real
estate 11,285 9,294 7,736 2,963 857
Premises and
equipment, net 25,166 25,238 24,775 22,223 22,487
State tax
credits, held
for sale 37,751 37,882 27,309 23,149 --
Goodwill 51,312 57,910 58,331 57,177 55,661
Core deposit
intangible 2,256 2,729 2,887 3,330 3,511
Other
amortizing
intangibles 2,090 2,301 2,512 2,723 2,952
Other assets 32,614 31,582 28,393 27,312 29,061
---------- ---------- ---------- ---------- ----------
Total assets $2,236,401 $2,197,718 $2,047,878 $1,999,118 $1,828,259
========== ========== ========== ========== ==========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Non-interest
bearing
deposits $ 225,013 $ 240,148 $ 232,121 $ 278,313 $ 212,903
Interest
bearing
deposits 1,463,040 1,429,598 1,358,588 1,306,699 1,233,532
---------- ---------- ---------- ---------- ----------
Total
deposits 1,688,053 1,669,746 1,590,709 1,585,012 1,446,435
Subordinated
debentures 59,307 56,807 56,807 56,807 56,807
FHLB advances 222,926 203,043 154,405 152,901 131,746
Federal funds
purchased 36,600 -- -- -- --
Other
borrowings 36,632 72,886 53,508 16,680 10,613
Other
liabilities 7,924 12,335 14,212 14,569 13,415
---------- ---------- ---------- ---------- ----------
Total
liabilities 2,051,442 2,014,817 1,869,641 1,825,969 1,659,016
Shareholders'
equity 184,959 182,901 178,237 173,149 169,243
---------- ---------- ---------- ---------- ----------
Total
liabilities
and
shareholders'
equity $2,236,401 $2,197,718 $2,047,878 $1,999,118 $1,828,259
========== ========== ========== ========== ==========
ENTERPRISE FINANCIAL SERVICES CORP
CONSOLIDATED FINANCIAL SUMMARY (cont.)
(unaudited)
(In thousands,
except per
share data) For the Quarter Ended
Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
2008 2008 2008 2007 2007
---------- ---------- ---------- ---------- ----------
EARNINGS
SUMMARY
Net interest
income $ 16,584 $ 16,802 $ 16,137 $ 16,203 $ 15,805
Provision for
loan losses 2,825 3,200 2,325 2,450 600
Wealth
Management
revenue 2,640 2,682 2,583 4,064 3,495
Noninterest
income 5,001 1,762 2,955 2,166 1,143
Noninterest
expense 19,133 12,723 13,832 13,083 12,202
Income before
income tax 2,267 5,323 5,518 6,900 7,641
Net income 1,319 3,500 3,563 4,906 4,999
Diluted
earnings per
share $ 0.10 $ 0.27 $ 0.28 $ 0.39 $ 0.40
Return on
average equity 2.81% 7.77% 8.13% 11.28% 11.85%
Net interest
rate margin
(fully tax
equivalized) 3.34% 3.56% 3.63% 3.80% 3.87%
Efficiency
ratio 78.98% 59.88% 63.82% 58.32% 59.69%
MARKET DATA
Book value per
share $ 14.57 $ 14.45 $ 14.27 $ 13.96 $ 13.66
Tangible book
value per
share $ 10.19 $ 9.48 $ 9.17 $ 8.86 $ 8.65
Market value
per share $ 22.56 $ 18.85 $ 25.00 $ 23.81 $ 24.34
Period end
common shares
outstanding 12,694 12,654 12,487 12,406 12,388
Average basic
common shares 12,664 12,545 12,441 12,387 12,380
Average diluted
common shares 12,817 12,760 12,675 12,676 12,652
ASSET QUALITY
Net
charge-offs $ 1,123 $ 1,439 $ 1,668 $ 611 $ 549
Nonperforming
loans $ 23,546 $ 13,180 $ 9,307 $ 12,720 $ 8,542
Nonperforming
loans to total
loans 1.21% 0.71% 0.54% 0.77% 0.55%
Nonperforming
assets to
total assets 1.56% 1.02% 0.83% 0.78% 0.51%
Allowance for
loan losses to
total loans 1.32% 1.30% 1.29% 1.32% 1.27%
Net charge-offs
to average
loans
(annualized) 0.24% 0.32% 0.40% 0.15% 0.14%
CAPITAL
Average equity
to average
assets 8.55% 8.62% 8.92% 9.21% 9.40%
Tier 1 capital
to risk-
weighted
assets 8.83% 8.76% 9.15% 9.32% 9.85%
Total capital
to risk-
weighted
assets 10.18% 9.96% 10.36% 10.54% 11.05%
Tangible equity
to tangible
assets 5.93% 5.62% 5.77% 5.68% 6.07%
AVERAGE
BALANCES
Portfolio
loans $1,881,428 $1,790,491 $1,687,316 $1,583,325 $1,526,259
Earning assets 2,005,635 1,922,309 1,810,384 1,719,825 1,645,697
Total assets 2,184,804 2,102,582 1,974,590 1,873,915 1,780,239
Deposits 1,645,398 1,600,805 1,530,158 1,511,476 1,453,497
Shareholders'
equity 186,848 181,274 176,170 172,563 167,310
LOAN PORTFOLIO
Commercial and
industrial $ 539,924 $ 510,377 $ 487,289 $ 476,184 $ 416,715
Commercial real
estate 845,221 835,688 735,087 690,868 703,772
Construction
real estate 313,262 284,556 285,966 266,111 252,476
Residential
real estate 218,642 193,630 189,549 170,510 155,489
Consumer and
other 25,550 25,164 28,564 37,759 30,433
---------- ---------- ---------- ---------- ----------
Total loan
portfolio $1,942,599 $1,849,415 $1,726,455 $1,641,432 $1,558,885
DEPOSIT
PORTFOLIO
Noninterest-
bearing
accounts $ 225,013 $ 240,148 $ 232,121 $ 278,313 $ 212,903
Interest-
bearing
transaction
accounts 118,614 134,659 136,009 131,141 120,069
Money market
and savings
accounts 664,436 680,635 724,725 682,920 596,226
Certificates of
deposit 679,990 614,304 497,854 492,638 517,237
---------- ---------- ---------- ---------- ----------
Total deposit
portfolio $1,688,053 $1,669,746 $1,590,709 $1,585,012 $1,446,435
ENTERPRISE FINANCIAL SERVICES CORP
CONSOLIDATED FINANCIAL SUMMARY (cont.)
(unaudited)
(In thousands) For the Quarter Ended
Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
2008 2008 2008 2007 2007
---------- ---------- ---------- ---------- ----------
YIELDS (fully
tax equivalent)
Loans 5.94% 6.30% 6.93% 7.65% 7.96%
Securities 4.75% 4.60% 4.84% 4.87% 4.67%
Federal funds
sold 2.12% 1.85% 3.32% 4.23% 5.48%
Yield on
earning assets 5.86% 6.17% 6.77% 7.42% 7.73%
Interest
bearing
deposits 2.72% 2.78% 3.46% 4.10% 4.44%
Subordinated
debt 5.63% 5.66% 6.71% 7.24% 7.20%
Borrowed funds 2.98% 3.44% 3.82% 4.54% 5.00%
Cost of paying
liabilities 2.85% 2.97% 3.62% 4.26% 4.59%
Net interest
spread 3.01% 3.20% 3.15% 3.16% 3.14%
Net interest
rate margin 3.34% 3.56% 3.63% 3.80% 3.87%
WEALTH
MANAGEMENT
Trust Assets
under
management $ 930,100 $ 986,717 $1,046,390 $1,098,110 $1,106,214
Trust Assets
under
administration 1,453,476 1,532,559 1,633,195 1,696,303 1,734,761