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EFSC > SEC Filings for EFSC > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for ENTERPRISE FINANCIAL SERVICES CORP

Form 10-Q for ENTERPRISE FINANCIAL SERVICES CORP


2-Aug-2013

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Some of the information in this report contains "forward-looking statements" within the meaning of and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified with use of terms such as "may," "might," "will, "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "could," "continue" and the negative of these terms and similar words, although some forward-looking statements are expressed differently. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including, but not limited to: credit risk; changes in the appraised valuation of real estate securing impaired loans; outcomes of litigation and other contingencies; exposure to general and local economic conditions; risks associated with rapid increases or decreases in prevailing interest rates; consolidation within the banking industry; competition from banks and other financial institutions; our ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state regulation; changes in regulatory requirements; changes in accounting regulation or standards applicable to banks; and other risks discussed under the caption "Risk Factors" of our most recently filed Form 10-K and within this Form 10-Q, all of which could cause the Company's actual results to differ from those set forth in the forward-looking statements.

Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management's analysis and expectations only as of the date of such statements. Forward-looking statements speak only as of the date they are made, and the Company does not intend, and undertakes no obligation, to publicly revise or update forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise, except as required by federal securities law. You should understand that it is not possible to predict or identify all risk factors. Readers should carefully review all disclosures we file from time to time with the Securities and Exchange Commission which are available on our website at www.enterprisebank.com.

Introduction

The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first six months of 2013 compared to the financial condition as of December 31, 2012. In addition, this discussion summarizes the significant factors affecting the results of operations, liquidity and cash flows of the Company for the three and six months ended June 30, 2013, compared to the same period in 2012. This discussion should be read in conjunction with the accompanying consolidated financial statements included in this report and our Annual Report on Form 10-K for the year ended December 31, 2012.

Executive Summary

The Company reported net income of $11.0 million for the three months ended June 30, 2013, compared to net income of $8.8 million for the same period in 2012. The Company reported diluted earnings per share of $0.58, compared to $0.44 for the prior year period.

Net income for the six months ended June 30, 2013 was $21.1 million compared to net income of $15.0 million for the same period in 2012. The Company reported diluted earnings per share of $1.11, compared to $0.75 for the prior year period.

Below are highlights of our Banking and Wealth Management segments. For more information on our segments, see Note 9 -Segment Reporting.


Banking Segment
Loans - Portfolio loans totaled $2.2 billion at June 30, 2013, flat with March 31, 2013 and up $56.9 million, or 3% from June 30, 2012. The Company expects to show 3-4% loan growth over December 31, 2012 by the end of 2013. Loans covered under FDIC shared loss agreements ("Covered loans") were $169.9 million at June 30, 2013, a decrease of $13.0 million or 7% from March 31, 2013 and a decrease of $72.6 million or 30% from June 30, 2012.

Portfolio loans excluding covered loans ("Noncovered loans") were relatively flat with March 31, 2013 amounts. Commercial & Industrial loans increased $13.7 million or 1% and Construction Real Estate loans decreased $8.3 million or 5%, while Residential Real Estate loans increased $2.9 million or 2%. Noncovered loans increased $129.6 million or 7%, from June 30, 2012. Commercial and Industrial loans increased $121.5 million or 14% while Residential and Construction Real Estate loans increased $7.1 million or 2%.
See Note 4 - Portfolio Loans Not Covered by Loss Share and Note 5 - Portfolio Loans Covered by Loss Share for more information.
Deposits - Total deposits at June 30, 2013 were $2.4 billion, a decrease of $126.6 million, or 5%, and $236.0 million, or 9%, from March 31, 2013 and June 30, 2012, respectively. The decrease in deposits from the linked quarter applied primarily to our money market and interest bearing transaction deposit categories and was primarily due to seasonality. The year over year decrease in deposits was mainly due to a decline in certificates of deposits as the Company continues to force a decline through lower cost pricing. Demand deposits increased $12.7 million or 2% from March 31, 2013 and decreased $5.7 million or 1% from June 30, 2012 while interest bearing transaction accounts decreased $165.1 million or 12% from March 31, 2013 and $109.7 million or 8% from June 30, 2012. The decrease in the demand and interest bearing deposits from the prior year is mainly due to the expiration of the FDIC's Transaction Account Guarantee ("TAG") program, as well an intentional 18% reduction in higher cost certificates of deposit as the Company continues to manage down its cost of funds.

Asset quality - Nonperforming loans were $25.9 million at June 30, 2013, compared to $32.2 million at March 31, 2013 and $40.6 million at June 30, 2012. Nonperforming loans represented 1.25% of total Noncovered loans at June 30, 2013 versus 1.54% at March 31, 2013 and 2.08% at June 30, 2012. Excluding non-accrual loans and Covered loans, portfolio loans that were 30-89 days delinquent at June 30, 2013 remained at very low levels, representing 0.27% of the portfolio compared to 0.12% at March 31, 2013 and 0.13% at June 30, 2012.

Provision for loan losses not covered under FDIC loss share was a benefit of $4.3 million in the second quarter of 2013, compared to expense of $1.9 million in the linked quarter and $75,000 in the second quarter of 2012. See Note 4 - Portfolio Loans Not Covered by Loss Share and Provision and Allowance for Loan Losses and Nonperforming Assets in this section for more information.
Interest rate margin - The net interest rate margin was 4.75% for the second quarter of 2013, compared to 5.10% for the first quarter of 2013 and 4.81% in the second quarter of 2012. See Net Interest Income in this section for more information.


Covered loans and other assets covered under FDIC shared loss agreements - The following table illustrates the net revenue contribution of covered assets for the most recent five quarters.

                                                                  For the Quarter ended
(in thousands)               June 30, 2013     March 31, 2013     December 31, 2012     September 30, 2012      June 30, 2012
Accretion income            $       6,623     $       7,112      $           7,442     $           7,995       $       7,155
Accelerated cash flows              4,689             7,209                  9,778                 7,446               5,315
Other                                  59               324                    419                   103                 106
Total interest income              11,371            14,645                 17,639                15,544              12,576
Provision for loan losses           2,278            (2,256 )                 (653 )             (10,889 )              (206 )
Gain on sale of other real
estate                                116               689                    105                    34                 769
Change in FDIC loss share
receivable                         (6,713 )          (4,085 )               (8,131 )               1,912              (5,694 )
Change in FDIC clawback
liability                            (449 )            (304 )                 (575 )                   -                   -
Pre-tax net revenue         $       6,603     $       8,689      $           8,385     $           6,601       $       7,445

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 $1.8 million in the second quarter of 2013, a decrease of $165,000, or 8%, over the linked first quarter and a decrease of $213,000, or 11%, over the period ended June 30, 2012. See Noninterest Income in this section for more information.

Net Interest Income

Three months ended June 30, 2013 and 2012

Net interest income (on a tax equivalent basis) was $33.8 million for the three months ended June 30, 2013 compared to $34.5 million for the same period of 2012, a decrease of $631,000, or 2%. Total interest income decreased $1.8 million and total interest expense decreased $1.1 million.

Average interest-earning assets decreased $23.2 million, or 1%, to $2.9 billion for the quarter ended June 30, 2013 from $2.9 billion for the quarter ended June 30, 2012. Average loans increased $81.2 million, or 4%, to $2.3 billion for the quarter ended June 30, 2013, from $2.2 billion for the quarter ended June 30, 2012. Noncovered loans increased $158.4 million while Covered loans decreased $77.2 million. Average securities decreased $74.6 million or 13%, while short-term investments decreased $29.8 million or 26% from the second quarter of 2012. Interest income on earning assets decreased $2.6 million from a volume perspective primarily due to lower volume on Covered loans and increased $0.9 million from a rate perspective primarily due to higher rates on Covered loans of $3.2 million, for a net decrease of $1.8 million versus the second quarter of 2012. Refer to Rate/Volume section for more information regarding our net interest income.

For the quarter ended June 30, 2013, average interest-bearing liabilities decreased $120.3 million, or 5%, to $2.2 billion compared to $2.3 billion for the quarter ended June 30, 2012. The decrease resulted from a $245.1 million decrease in average interest-bearing deposits, partially offset by a $124.9 million increase in borrowed funds from customer repurchase agreements and Federal Home Loan Bank (FHLB) advances. The decrease in average interest-bearing deposits is due to a $146.0 million decrease in certificates of deposit, a $79.1 million decrease in average money market accounts and savings accounts, and a $20.0 million decrease in interest-bearing transaction accounts. For the second quarter of 2013, interest expense on interest-bearing liabilities decreased $1.0 million due to declining rates and $187,000 due to the impact of lower volumes, for a total decrease of $1.1 million versus the second quarter of 2012.


The tax-equivalent net interest rate margin was 4.75% for the second quarter of 2013, compared to 5.10% for the first quarter of 2013 and 4.81% in the second quarter of 2012. In the second quarter of 2013, Covered loans yielded 26.24% primarily due to cash flows on paid off loans that exceeded expectations.

The Core net interest margin, defined as the Net interest margin (fully tax equivalent), including contractual interest on Covered loans, but excluding the incremental accretion on these loans, for the quarters ended June 30, 2013 and 2012 is as follows:

Three months ended June 30, 2013 2012 Core net interest margin 3.56 % 3.62 %

The Core net interest margin decline was due to lower loan yields partially offset by an improved earning asset mix and lower deposit costs. Continued pressure on loan yields and liquidity is expected to result in a slightly lower Core net interest margin the rest of 2013. Included in this MD&A is a reconciliation of net interest margin to Core net interest margin. The Average Balance Sheet and Rate/Volume sections following contain additional information regarding our net interest income.

Six months ended June 30, 2013 and 2012

Net interest income (on a tax equivalent basis) was $71.3 million for the six months ended June 30, 2013 compared to $65.4 million for the same period of 2012, an increase of $5.8 million, or 9%. Total interest income increased $3.1 million and total interest expense decreased $2.7 million.

Average interest-earning assets increased $37.5 million, or 1%, to $2.9 billion for the six months ended June 30, 2013 from $2.9 billion for the six months ended June 30, 2012. Average loans increased $100.3 million, or 5%, to $2.3 billion for the six months ended June 30, 2013, from $2.2 billion for the six months ended June 30, 2012. Noncovered loans increased $184.1 million while Covered loans decreased $83.9 million. Average securities decreased $28.7 million or 5%, while short-term investments decreased $34.0 million or 28% from the same period of 2012. Interest income on earning assets decreased $4.1 million primarily due to lower volume on Covered loans and increased $7.2 million primarily due to higher yields on Covered loans, for a net increase of $3.1 million versus the same period of 2012. See Rate/Volume section for more information regarding our net interest income.

For the six months ended June 30, 2013, average interest-bearing liabilities decreased $107.7 million, or 4%, to $2.3 billion compared to $2.4 billion for the six months ended June 30, 2012. The decrease resulted from a $237.9 million decrease in average interest-bearing deposits, partially offset by a $130.2 million increase in borrowed funds from customer repurchase agreements and FHLB advances. The decrease in average interest-bearing deposits is primarily due to a $179.8 million decrease in certificates of deposit, and a $56.2 million decrease in average money market accounts and savings accounts. For the six months ended June 30, 2013, interest expense on interest-bearing liabilities decreased $2.2 million due to declining rates and $539,000 due to the impact of lower volumes, for a total decrease of $2.7 million versus the same period of 2012.

The tax-equivalent net interest rate margin was 4.93% for the six months ended June 30, 2013, compared to 4.57% in the same period of 2012.

The Core net interest margin for the six months ended June 30, 2013 and 2012 is as follows:

Six months ended June 30, 2013 2012 Core net interest margin 3.55 % 3.60 %


The Core net interest margin decline was due to lower loan yields partially offset by an improved earning asset mix and lower deposit costs. The Average Balance Sheet and Rate/Volume sections following contain additional information regarding our net interest income.


Average Balance Sheet

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.
                                                                Three months ended June 30,
                                                 2013                                                 2012
                                                                    Average                                              Average
                                                   Interest         Yield/                              Interest         Yield/
(in thousands)             Average Balance      Income/Expense       Rate       Average Balance      Income/Expense       Rate
Assets
Interest-earning assets:
Taxable loans (1)         $      2,048,385     $        23,688        4.64 %   $      1,906,637     $        24,328        5.13 %
Tax-exempt loans (2)                47,469                 862        7.28               30,813                 575        7.51
Covered loans (3)                  173,794              11,371       26.24              250,965              12,576       20.15
              Total loans        2,269,648              35,921        6.35            2,188,415              37,479        6.89
Taxable investments in
debt and equity
securities                         459,910               2,126        1.85              547,059               2,456        1.81
Non-taxable investments
in debt and equity
securities (2)                      44,179                 501        4.55               31,655                 368        4.68
Short-term investments              84,964                  46        0.22              114,786                  65        0.23
     Total securities and
   short-term investments          589,053               2,673        1.82              693,500               2,889        1.68
   Total interest-earning
                   assets        2,858,701              38,594        5.42            2,881,915              40,368        5.63
Noninterest-earning
assets:
Cash and due from banks             17,517                                               15,370
Other assets                       266,707                                              356,794
Allowance for loan losses          (45,709 )                                            (40,066 )
             Total assets $      3,097,216                                     $      3,214,013

Liabilities and Shareholders' Equity
Interest-bearing
liabilities:
Interest-bearing
transaction accounts      $        246,136     $           123        0.20 %   $        266,132     $           193        0.29 %
Money market accounts              916,429                 752        0.33            1,018,418               1,240        0.49
Savings                             90,927                  56        0.25               67,998                  72        0.43
Certificates of deposit            552,263               1,889        1.37              698,284               2,536        1.46
   Total interest-bearing
                 deposits        1,805,755               2,820        0.63            2,050,832               4,041        0.79
Subordinated debentures             84,949                 949        4.48               85,081                 980        4.63
Borrowed funds                     331,367                 984        1.19              206,442                 875        1.70
   Total interest-bearing
              liabilities        2,222,071               4,753        0.86            2,342,355               5,896        1.01
Noninterest bearing
liabilities:
Demand deposits                    613,390                                              617,596
Other liabilities                   12,546                                                2,571
        Total liabilities        2,848,007                                            2,962,522
Shareholders' equity               249,209                                              251,491
      Total liabilities &
     shareholders' equity $      3,097,216                                     $      3,214,013
      Net interest income                      $        33,841                                      $        34,472
      Net interest spread                                             4.56 %                                               4.62 %
 Net interest rate margin
                      (4)                                             4.75                                                 4.81

(1) Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $368,000 and $382,000 for the three months ended June 30, 2013 and 2012, respectively.


(2) Non-taxable income is presented on a fully tax-equivalent basis using a 39% tax rate in 2013 and 36% tax rate in 2012. The tax-equivalent adjustments were $533,000 and $339,000 for the three months ended June 30, 2013 and 2012, respectively.

(3) Covered loans are loans covered under FDIC shared-loss agreements.

(4) Net interest income divided by average total interest-earning assets.

                                                                 Six months ended June 30,
                                                 2013                                                 2012
                                                                    Average                                              Average
                                                   Interest         Yield/                              Interest         Yield/
(in thousands)             Average Balance      Income/Expense       Rate       Average Balance      Income/Expense       Rate
Assets
Interest-earning assets:
Taxable loans (1)         $      2,054,567     $        47,870        4.70 %   $      1,886,898     $        48,412        5.16 %
Tax-exempt loans (2)                47,141               1,717        7.34               30,693               1,161        7.61
Covered loans (3)                  181,470              26,015       28.91              265,332              22,478       17.04
              Total loans        2,283,178              75,602        6.68            2,182,923              72,051        6.64
Taxable investments in
debt and equity
securities                         503,549               4,338        1.74              544,752               4,999        1.85
Non-taxable investments
in debt and equity
securities (2)                      43,866                 993        4.56               31,399                 733        4.69
Short-term investments              86,461                  93        0.22              120,508                 142        0.24
     Total securities and
   short-term investments          633,876               5,424        1.73              696,659               5,874        1.70
   Total interest-earning
                   assets        2,917,054              81,026        5.60            2,879,582              77,925        5.44
Noninterest-earning
assets:
Cash and due from banks             17,920                                               15,331
Other assets                       268,833                                              383,776
Allowance for loan losses          (45,895 )                                            (38,255 )
             Total assets $      3,157,912                                     $      3,240,434

Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
Interest-bearing
transaction accounts      $        253,141     $           261        0.21 %   $        254,996     $           384        0.30 %
Money market accounts              961,784               1,634        0.34            1,045,583               2,670        0.51
Savings                             89,638                 115        0.26               62,051                 141        0.46
Certificates of deposit            552,754               3,827        1.40              732,551               5,315        1.46
   Total interest-bearing
                 deposits        1,857,317               5,837        0.63            2,095,181               8,510        0.82
Subordinated debentures             85,015               1,901        4.51               85,081               2,129        5.03
Borrowed funds                     343,970               2,026        1.19              213,736               1,843        1.73
   Total interest-bearing
              liabilities        2,286,302               9,764        0.86            2,393,998              12,482        1.05
Noninterest bearing
liabilities:
Demand deposits                    612,743                                              592,553
Other liabilities                   13,858                                                5,665
        Total liabilities        2,912,903                                            2,992,216
Shareholders' equity               245,009                                              248,218
      Total liabilities &
     shareholders' equity $      3,157,912                                     $      3,240,434
      Net interest income                      $        71,262                                      $        65,443
      Net interest spread                                             4.74 %                                               4.39 %
 Net interest rate margin
                      (4)                                             4.93                                                 4.57

(1) Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $872,000 and $700,000 for the six months ended June 30, 2013 and 2012, respectively.


(2) Non-taxable income is presented on a fully tax-equivalent basis using a 39% tax rate in 2013 and 36% tax rate in 2012. The tax-equivalent adjustments were $1,055,000 and $681,000 for the six months ended June 30, 2013 and 2012, respectively.

(3) Covered loans are loans covered under FDIC shared-loss agreements.

(4) Net interest income divided by average total interest-earning assets.

Rate/Volume
The following table sets forth, on a tax-equivalent basis for the periods
indicated, a summary of the changes in interest income and interest expense
resulting from changes in yield/rates and volume.

                                                         2013 compared to 2012
                                  Three months ended June 30,              Six months ended June 30,
                                  Increase (decrease) due to              Increase (decrease) due to
(in thousands)                Volume(1)     Rate(2)        Net        Volume(1)     Rate(2)        Net
Interest earned on:
Taxable loans                $   1,767     $ (2,407 )   $   (640 )   $   4,032     $ (4,574 )   $   (542 )
Tax-exempt loans (3)               304          (17 )        287           597          (41 )        556
Covered loans                   (4,452 )      3,247       (1,205 )      (8,645 )     12,182        3,537
Taxable investments in debt
and equity securities             (395 )         65         (330 )        (372 )       (289 )       (661 )
Non-taxable investments in
debt and equity securities
(3)                                143          (10 )        133           281          (21 )        260
Short-term investments             (16 )         (3 )        (19 )         (38 )        (11 )        (49 )
Total interest-earning
assets                       $  (2,649 )   $    875     $ (1,774 )   $  (4,145 )   $  7,246     $  3,101

Interest paid on:
Interest-bearing transaction
. . .
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