Enterprise Financial Reports 2010 Fourth Quarter and Year End Results

• 2010 earnings increase to $9.1 million, or $0.45 per fully diluted share
• Core deposits increase $356 million, or 20%, over December 31, 2009
• Nonperforming loans reduced 11% in the fourth quarter to 2.45% of loans
• Enterprise Bank & Trust acquires Legacy Bank in third FDIC-assisted Arizona transaction

ST. LOUIS, Jan. 25, 2011 (GLOBE NEWSWIRE) -- Enterprise Financial Services Corp (Nasdaq:EFSC) (the "Company") reported net income of $9.1 million for the year ended December 31, 2010 compared to a net loss of $48.0 million for the prior year. The net loss for 2009 was primarily attributable to a $45.4 million non-cash accounting charge to eliminate goodwill related to the Company's banking segment. After deducting dividends on preferred stock, the Company reported net income of $0.45 per fully diluted share for 2010 compared to a net loss of $3.92 per fully diluted share for 2009.

For the fourth quarter of 2010, the Company reported net income of $6.4 million compared to a net loss of $854,000 for the prior year period. After deducting dividends on preferred stock, the Company reported net income of $0.38 per diluted share for the fourth quarter of 2010 compared to a net loss of $0.12 per diluted share for the fourth quarter of 2009.

In addition, on January 7, 2011, Enterprise Bank & Trust ("Enterprise"), the Company's banking subsidiary, entered into a loss sharing agreement with the FDIC and acquired certain assets and assumed certain liabilities of Legacy Bank of Scottsdale, Arizona ("Legacy"). The acquisition consisted of assets of approximately $131.9 million and total deposits of approximately $113.7 million, including approximately $70.2 million of brokered and CDARS time deposits. Approximately $43.5 million of the deposits were assumed at a premium of 1%. The assets were purchased at a 7.6% discount to their historic book value. As part of the transaction, Enterprise and the FDIC have entered into a loss sharing agreement whereby the FDIC will reimburse Enterprise for 80% of losses incurred on certain loans and other real estate ("covered assets"). In addition, Enterprise also acquired approximately $55.6 million of discretionary and $13.6 million of non-discretionary trust assets. This transaction will not materially change the Company's regulatory capital ratios and is anticipated to add approximately $0.15 to $0.20 to Enterprise's 2011 earnings per share, subject to the underlying assumptions and final valuations of the assets.

Peter Benoist, President and Chief Executive Officer, commented, "Enterprise's fourth quarter results represent a continuing trend in increased quarterly earnings per share and improved operating fundamentals. Asset quality trends, including fewer risk rating downgrades and reduced nonperforming loan totals, are encouraging. Disciplined pricing on both loans and deposits coupled with the strong yields on covered loans acquired in our July 2010 FDIC-assisted acquisition of certain assets of Home National have allowed us to maintain solid net interest margins as we continue to position for improvement in the overall economy. While the Company experienced a modest decline in net loans outstanding during the quarter, our loan pipelines remain strong particularly in the Commercial & Industrial category."   

Benoist continued, "Solid core deposit growth, particularly in the fourth quarter, double digit increases in Wealth Management revenues, and a strong emphasis on expense management have all contributed to strengthening our operating results." 

On a pre-tax, pre-provision basis, the Company's operating income from continuing operations was $13.6 million in the fourth quarter of 2010, an 81% increase from the prior year period of $7.5 million. On a linked quarter basis, pre-tax, pre-provision operating income declined $2.8 million, or 17%, primarily due to $900,000 in lower net gains on sales of tax credits, a $750,000 accrual against a potential fraud loss on a depository account and approximately $1.2 million of various expenses related to covered assets, variable compensation, and reserves related to unfunded commitments.

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, 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.

Banking Segment

Deposits

Core deposits grew significantly in the fourth quarter of 2010. These deposits, which exclude brokered CDs and include reciprocal CDARS deposits, increased $319.2 million, or 18%, from September 30, 2010. The increase was due to a $61.9 million increase in demand deposits, a $168.5 million increase in money market accounts and other interest-bearing deposit accounts and a $99.8 million increase in non-CDARS certificates of deposit. Reciprocal CDARS deposits decreased by $11.0 million in the fourth quarter of 2010.  

While the Company historically experiences large increases in fourth quarter core deposits (followed by first quarter reductions), the fourth quarter 2010 growth was exceptional. Approximately $34.0 million of the money market growth and $73.0 million of the certificate of deposit growth was related to our new Enterprise Advisory Services initiative, a proprietary deposit platform marketed to registered investment advisory firms.  

Core deposits increased $355.8 million, or 20%, to $2.1 billion from December 31, 2009. Noninterest-bearing demand deposits increased $76.4 million, or 26%, in 2010 and represented 16% of total deposits at December 31, 2010, up from 15% at December 31, 2009. Management believes a portion of the growth in noninterest-bearing demand deposits is the result of the FDIC deposit guarantee and relatively low rates on non-guaranteed accounts.

Total deposits at December 31, 2010 were $2.3 billion, an increase of $356.3 million, or 18%, over December 31, 2009 and $257.9 million, or 13%, higher than September 30, 2010. The Company has maintained a favorable deposit mix, with core deposits representing 93% of total deposits at December 31, 2010, unchanged from the prior year period. CDARS deposits totaled $160.5 million at December 31, 2010 compared to $134.8 million at December 31, 2009.

Loans

Portfolio loans totaled $1.9 billion at December 31, 2010, including $127 million of loans covered under FDIC loss share agreements. While loan pipelines continue to strengthen, particularly in the St. Louis market, payoffs and paydowns more than offset the new loans generated in the quarter. Excluding the loans covered under loss share, in the fourth quarter of 2010, portfolio loans decreased $30.3 million, or 1.7%, from September 30, 2010 as the Company continued to decrease its exposure to investor owned commercial real estate credits. For the full year, net loans declined $52.1 million, or 2.9%. Excluding the loans covered under loss share, Commercial & Industrial loans increased 7.2% during the year and represent more than 30% of the Company's loan portfolio at December 31, 2010. 

Asset quality

Nonperforming loans, including troubled debt restructurings of $7.9 million, were $46.4 million at December 31, 2010 compared to $51.9 million for the linked third quarter and $38.5 million at December 31, 2009. During the quarter ended December 31, 2010, there were $19.7 million of additions, $7.9 million of chargeoffs, other principal reductions of $7.3 million, and $8.7 million of assets transferred to other real estate. Of the $19.7 million in new nonperforming loans, three relationships comprise over $14.1 million, or 72% of the total. Nonperforming loans represented 2.45% of total loans at December 31, 2010 versus 2.69% at September 30, 2010 and 2.10% at December 31, 2009. 

Nonperforming loans by segment at December 31, 2010 were as follows (in millions):

Loans that were 30-89 days delinquent at December 31, 2010 represented 0.13% of the portfolio compared with 0.09% at September 30, 2010.

Other real estate at December 31, 2010 was $36.2 million, compared to $34.7 million at September 30, 2010 and $25.1 million at December 31, 2009. Other real estate covered by FDIC loss share agreements increased by $3.1 million. Approximately 30% of total other real estate, or $10.8 million, is covered by two FDIC loss share agreements. Other real estate not covered by an FDIC loss share agreement totaled $25.4 million at December 31, 2010, a decrease of $1.6 million from September 30, 2010. 

During the fourth quarter, the Company sold $9.7 million in other real estate, recording a loss of $355,000. During 2010, the Company sold $26.0 million in other real estate at a net gain of $79,000.

Net charge-offs in the fourth quarter of 2010 were $7.6 million, or 1.57% of average loans. By comparison, net charge-offs were $5.9 million, or 1.23% of average loans, in the linked third quarter. For the year, net charge-offs were $34.0 million, or 1.83% of average loans.

Provision for loan losses was $3.3 million in the fourth quarter of 2010 compared to $7.7 million in the third quarter of 2010 and $8.4 million in the fourth quarter of 2009. The decrease in provision for loan losses in the fourth quarter was primarily due to lower levels of risk rating downgrades. Excluding the loans under FDIC loss share agreements, the Company's watch list credits as a percentage of total loans have declined slightly since year end 2009.

The Company's allowance for loan losses was 2.26% of total loans at December 31, 2010, representing 92% of nonperforming loans. The loan loss allowance was 2.43% at September 30, 2010 representing 90% of nonperforming loans and 2.35% at December 31, 2009 representing 112% of nonperforming loans.

Net Interest Income

Net interest income for the banking segment increased $8.8 million, or 45%, in the fourth quarter of 2010 compared to the same period of 2009 and was $2.2 million, or 8.6%, higher than in the linked third quarter. For the full year, net interest income for the banking segment increased $18.5 million, or 25%, over 2009.

Loans covered under FDIC loss share yielded 20.6% in 2010. This yield benefited from cash flows on covered assets that exceeded expectations.

Including the effect of parent company debt, the net interest rate margin was 4.44% for the fourth quarter of 2010, compared to 4.31% for the third quarter of 2010 and 3.15% in the fourth quarter of 2009. Absent the purchased Home National loans, the fourth quarter net interest rate margin would have been 3.50%, a 0.17% decline from the linked third quarter due to a less favorable earning asset mix.

Wealth Management Segment

Fee income from the Wealth Management segment, including trust revenues and income from state tax credit brokerage activities, totaled $1.5 million in the fourth quarter of 2010, a 14.5% increase from the prior linked quarter, and 42% higher than the prior year period. For the year, fee income for the Wealth Management segment totaled $7.7 million, representing a 38% increase over 2009.

Trust

Trust revenues were $1.5 million in the fourth quarter of 2010, a 14% increase over the linked quarter and a 51% increase over the prior year period. For the year, trust revenues increased $919,000, or 20%, over 2009. 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 $1.5 billion at December 31, 2010, compared to $1.4 billion at September 30, 2010 and $1.3 billion at December 31, 2009.

State Tax Credit Brokerage

Including the impact of fair value marks on tax credit assets and related interest rate hedges, revenue from state tax credit brokerage activities was near breakeven for the fourth quarter of 2010, compared to $884,000 for the third quarter of 2010 and $62,000 in the fourth quarter of 2009. Tax credit sales in the fourth quarter of 2010 were lower than expected due to the timing of customer purchases. For the year, revenue from state tax credit brokerage activities was $2.3 million, a $1.2 million, or 117% increase over 2009.

Other Business Results

Total capital to risk-weighted assets was 14.30% at December 31, 2010 compared to 13.32% at December 31, 2009. The tangible common equity ratio was 5.26% at December 31, 2010 versus 5.44% at December 31, 2009. The decline in the tangible common equity ratio was primarily due to increased assets resulting from the $319 million increase in deposits. The effect of the anticipated asset increase of Legacy on our tangible common equity ratio is expected to be offset by our first quarter seasonal deposit runoff. 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. 

Other Income in 2010 was $3.1 million, or 220% higher than 2009. The increase in Other Income was due to $1.7 million of accretion on the FDIC indemnification asset, $776,000 of income on bank-owned life insurance policies and $524,000 related to two interest rate swaps terminated by the Company in 2009.

For the fourth quarter of 2010, noninterest expenses increased $4.9 million, or 36%, compared to the prior year period. The increase was primarily attributable to $900,000 in salaries and benefits, largely due to the recruitment of several senior bankers, higher variable compensation accruals, and staff additions to support our Arizona acquisition activity, $3.0 million in loan legal and other real estate expenses including $2.4 million of writedowns in other real estate, and the $750,000 accrual for a potential fraud loss on a depository account. Noninterest expenses were $3.2 million, or 20.8%, higher on a linked quarter basis. The increase primarily consists of various expenses including $1.6 million of loan legal and other real estate expenses, along with semi-annual director compensation payments, the fraud accrual and the reserve for unfunded commitments. Excluding the goodwill impairment charge in 2009, for the year, noninterest expenses increased $8.9 million, or 16.7% over 2009. Salaries and benefits rose $2.5 million, or 9.8%, year-over-year, while loan legal and other real estate expenses increased $5.2 million, year over year.

The Company's efficiency ratio was 61.6% for the quarter ended December 31, 2010 compared to 62.0% for the prior year period. Excluding the goodwill impairment charge in 2009, the Company's efficiency ratio for the full year of 2010 was 57.9%, compared to 59.3% in 2009.

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.