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EFSC > SEC Filings for EFSC > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for ENTERPRISE FINANCIAL SERVICES CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ENTERPRISE FINANCIAL SERVICES CORP


12-Nov-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 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 nine 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 nine months ended September 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 $8.4 million for the three months ended September 30, 2013, compared to net income of $7.9 million for the same period in 2012. The Company reported diluted earnings per share of $0.44, compared to $0.39 for the prior year period.

Net income for the nine months ended September 30, 2013 was $29.5 million compared to net income of $22.9 million for the same period in 2012. The Company reported diluted earnings per share of $1.55, compared to $1.14 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 $2.3 billion at September 30, 2013, up $21.2 million, or 1% when compared to June 30, 2013 and up $61.0 million, or 3% from September 30, 2012. The Company expects to show 2-3% loan growth over December 31, 2012 by the end of 2013. Loans covered under FDIC shared loss agreements ("Covered loans") were $158.8 million at September 30, 2013, a decrease of $11.1 million or 7% from June 30, 2013 and a decrease of $62.6 million or 28% from September 30, 2012.

Portfolio loans excluding covered loans ("Noncovered loans") were up slightly when compared to June 30, 2013 amounts. The increase was primarily due to Commercial & Industrial loans, which increased $44.5 million or 5%, offset by Construction Real Estate loans which decreased $33.3 million or 23%. Noncovered loans increased $123.7 million or 6%, from September 30, 2012. Commercial and Industrial loans drove the increase and were up $127.0 million or 14%. 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 September 30, 2013 were $2.4 billion, an increase of $79.7 million, or 3% from June 30, 2013 and a decrease of $103.0 million, or 4%, from September 30, 2012. The increase in deposits from the linked quarter applied primarily to our certificates of deposits as the Company sought incremental liquidity at relatively low interest rates. The year over year decrease in deposits was largely comprised of reductions in interest-bearing and money market deposits as the Company continued to manage down its cost of funds and focus on retention of noninterest-bearing accounts.

Asset quality - Nonperforming loans were $24.2 million at September 30, 2013, compared to $25.9 million at June 30, 2013 and $32.1 million at September 30, 2012. Nonperforming loans represented 1.14% of total Noncovered loans at September 30, 2013 versus 1.25% at June 30, 2013 and 1.61% at September 30, 2012. Excluding non-accrual loans and Covered loans, portfolio loans that were 30-89 days delinquent at September 30, 2013 remained at very low levels, representing 0.09% of the portfolio compared to 0.27% at June 30, 2013 and 0.07% at September 30, 2012.

Provision for loan losses not covered under FDIC loss share was a benefit of $0.7 million in the third quarter of 2013, compared to a benefit of $4.3 million in the linked quarter and an expense of $1.0 million in the third 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 4.71% for the third quarter of 2013, compared to 4.75% for the second quarter of 2013 and 5.21% in the third 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)              September 30, 2013      June 30, 2013     March 31, 2013     December 31, 2012     September 30, 2012
Accretion income           $           6,252       $       6,623     $       7,112      $           7,442     $           7,995
Accelerated cash flows                 4,309               4,689             7,209                  9,778                 7,446
Other                                    219                  59               324                    419                   103
Total interest income                 10,780              11,371            14,645                 17,639                15,544
Provision for loan losses             (2,811 )             2,278            (2,256 )                 (653 )             (10,889 )
Gain on sale of other real
estate                                   168                 116               689                    105                    34
Change in FDIC loss share
receivable                            (2,849 )            (6,713 )          (4,085 )               (8,131 )               1,912
Change in FDIC clawback
liability                                (62 )              (449 )            (304 )                 (575 )                   -
Pre-tax net revenue        $           5,226       $       6,603     $       8,689      $           8,385     $           6,601

Our current projection of average Covered loans is $153.4 million and $115.3 million for the years ended December 31, 2013 and 2014, respectively.

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 $1.7 million in the third quarter of 2013, a decrease of $80,000, or 4%, over the linked second quarter and a decrease of $127,000, or 7%, over the period ended September 30, 2012. See Noninterest Income in this section for more information.

Net Interest Income

Three months ended September 30, 2013 and 2012

Net interest income (on a tax equivalent basis) was $33.1 million for the three months ended September 30, 2013 compared to $37.9 million for the same period of 2012, a decrease of $4.8 million, or 13%. Total interest income decreased $5.9 million and total interest expense decreased $1.1 million.

Average interest-earning assets decreased $100.7 million, or 3%, to $2.8 billion for the quarter ended September 30, 2013 from $2.9 billion for the quarter ended September 30, 2012. Average loans increased $57.2 million, or 3%, to $2.25 billion for the quarter ended September 30, 2013, from $2.19 billion for the quarter ended September 30, 2012. Noncovered loans increased $127.9 million while Covered loans decreased $70.7 million. Average securities decreased $140.3 million or 23%, while short-term investments decreased $17.6 million or 19% from the third quarter of 2012. Interest income on earning assets decreased $3.7 million from a volume perspective primarily due to lower volume on Covered loans and decreased $2.2 million from a rate perspective primarily due to lower rates on Noncovered loans for a net decrease of $5.9 million versus the third quarter of 2012. Refer to Rate/Volume section for more information regarding our net interest income.

For the quarter ended September 30, 2013, average interest-bearing liabilities decreased $100.3 million, or 4%, to $2.2 billion compared to $2.3 billion for the quarter ended September 30, 2012. The decrease resulted from a $182.7 million decrease in average interest-bearing deposits, partially offset by a $94.5 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 $59.5 million decrease in certificates of deposit, a $73.1 million decrease in average money market accounts and savings accounts, and a $50.1 million decrease in interest-bearing transaction accounts. For the


third quarter of 2013, interest expense on interest-bearing liabilities decreased $1.0 million due to declining rates and $119,000 due to the impact of lower volumes, for a total decrease of $1.1 million versus the third quarter of 2012.

The tax-equivalent net interest rate margin was 4.71% for the third quarter of 2013, compared to 4.75% for the second quarter of 2013 and 5.21% in the third quarter of 2012. Covered loans yielded 26.31% in the third quarter of 2013, compared to 26.51% in the third quarter of 2012.

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 September 30, 2013 and 2012 is as follows:

Three months ended September 30, 2013 2012 Core net interest margin 3.54 % 3.57 %

The Core net interest margin decline was due to lower loan yields partially offset by an improved earning asset mix and lower deposit and overall funding costs. Continued pressure on loan yields and liquidity is expected to result in a slightly lower Core net interest margin over the next two quarters. Included in this MD&A under the caption "Use of Non-GAAP Financial Measures" 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.

Nine months ended September 30, 2013 and 2012

Net interest income (on a tax equivalent basis) was $104.4 million for the nine months ended September 30, 2013 compared to $103.3 million for the same period of 2012, an increase of $1.0 million, or 1%. Total interest income decreased $2.8 million and total interest expense decreased $3.8 million.

Average interest-earning assets decreased $9.1 million, relatively flat when compared to the nine months ended September 30, 2012. Average loans increased $85.7 million, or 4%, to $2.3 billion for the nine months ended September 30, 2013, from $2.2 billion for the nine months ended September 30, 2012. Noncovered loans increased $165.2 million while Covered loans decreased $79.5 million. Average securities decreased $66.3 million or 11%, while short-term investments decreased $28.5 million or 26% from the same period of 2012. Interest income on earning assets decreased $8.4 million primarily due to lower volume on Covered loans and increased $5.7 million primarily due to higher yields on Covered loans, for a net increase of $2.8 million versus the same period of 2012. See Rate/Volume section below for more information regarding our net interest income.

For the nine months ended September 30, 2013, average interest-bearing liabilities decreased $105.4 million, or 4%, to $2.2 billion compared to $2.4 billion for the nine months ended September 30, 2012. The decrease resulted from a $219.4 million decrease in average interest-bearing deposits, partially offset by a $118.2 million increase in borrowed funds from customer repurchase agreements and FHLB advances. The decrease in average interest-bearing deposits is primarily due to a $139.4 million decrease in certificates of deposit, and a $62.0 million decrease in average money market accounts and savings accounts. For the nine months ended September 30, 2013, interest expense on interest-bearing liabilities decreased $3.1 million due to declining rates and $650,000 due to the impact of lower volumes, for a total decrease of $3.8 million versus the same period of 2012.

The tax-equivalent net interest rate margin was 4.86% for the nine months ended September 30, 2013, compared to 4.79% in the same period of 2012. Covered loans yielded 28.10% for the nine months ended September 30, 2013, compared to 19.95% in the same period 2012.


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

Nine months ended September 30, 2013 2012 Core net interest margin 3.55 % 3.59 %

The Core net interest margin decline was due to lower loan yields partially offset by an improved earning asset mix and lower deposit and overall funding costs. Included in this MD&A under the caption "Use of Non-GAAP Financial Measures" 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.


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 September 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)         $      2,036,572     $        23,092        4.50 %   $      1,918,419     $        23,907        4.96 %
Tax-exempt loans (2)                46,846                 857        7.26               37,138                 680        7.28
Covered loans (3)                  162,569              10,781       26.31              233,272              15,544       26.51
              Total loans        2,245,987              34,730        6.13            2,188,829              40,131        7.29
Taxable investments in
debt and equity
securities                         425,983               2,149        2.00              574,968               2,671        1.85
Non-taxable investments
in debt and equity
securities (2)                      44,605                 493        4.38               35,874                 412        4.57
Short-term investments              72,739                  37        0.20               90,297                  53        0.23
     Total securities and
   short-term investments          543,327               2,679        1.96              701,139               3,136        1.78
   Total interest-earning
                   assets        2,789,314              37,409        5.32            2,889,968              43,267        5.96
Noninterest-earning
assets:
Cash and due from banks             16,897                                               17,435
Other assets                       284,413                                              318,400
Allowance for loan losses          (39,065 )                                            (37,804 )
             Total assets $      3,051,559                                     $      3,187,999

Liabilities and Shareholders' Equity
Interest-bearing
liabilities:
Interest-bearing
transaction accounts      $        209,398     $            99        0.19 %   $        259,488     $           182        0.28 %
Money market accounts              894,552                 714        0.32              982,375               1,024        0.41
Savings                             89,715                  56        0.25               74,961                  68        0.36
Certificates of deposit            579,586               1,765        1.21              639,084               2,288        1.42
   Total interest-bearing
                 deposits        1,773,251               2,634        0.59            1,955,908               3,562        0.72
Subordinated debentures             72,864                 679        3.70               85,081                 982        4.59
Borrowed funds                     320,507                 995        1.23              225,963                 846        1.49
   Total interest-bearing
              liabilities        2,166,622               4,308        0.79            2,266,952               5,390        0.95
Noninterest bearing
liabilities:
Demand deposits                    607,257                                              642,598
Other liabilities                   14,889                                               15,086
        Total liabilities        2,788,768                                            2,924,636
Shareholders' equity               262,791                                              263,363
      Total liabilities &
     shareholders' equity $      3,051,559                                     $      3,187,999
      Net interest income                      $        33,101                                      $        37,877
      Net interest spread                                             4.53 %                                               5.01 %
 Net interest rate margin
                      (4)                                             4.71                                                 5.21

(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 $282,000 and $340,000 for the three months ended September 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 $527,000 and $393,000 for the three months ended September 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.

                                                                 Nine months ended September 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)          $      2,048,503     $         70,963         4.63 %   $      1,897,482     $         72,319         5.09 %
Tax-exempt loans (2)                 47,041                2,574         7.32               32,857                1,841         7.48
Covered loans (3)                   175,100               36,796        28.10              254,568               38,022        19.95
               Total loans        2,270,644              110,333         6.50            2,184,907              112,182         6.86
Taxable investments in
debt and equity securities          477,409                6,487         1.82              554,898                7,670         1.85
Non-taxable investments in
debt and equity securities
(2)                                  44,115                1,486         4.50               32,902                1,146         4.65
Short-term investments               81,836                  130         0.21              110,364                  195         0.24
      Total securities and
    short-term investments          603,360                8,103         1.80              698,164                9,011         1.72
    Total interest-earning
                    assets        2,874,004              118,436         5.51            2,883,071              121,193         5.62
Noninterest-earning
assets:
Cash and due from banks              17,575                                                 16,037
Other assets                        274,085                                                361,824
Allowance for loan losses           (43,593 )                                              (38,104 )
              Total assets $      3,122,071                                       $      3,222,828

Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
Interest-bearing
transaction accounts       $        238,400     $            360         0.20 %   $        256,505     $            566         0.29 %
Money market accounts               939,127                2,348         0.33            1,024,359                3,694         0.48
Savings                              89,664                  171         0.25               66,386                  209         0.42
Certificates of deposit             561,796                5,593         1.33              701,168                7,603         1.45
    Total interest-bearing
                  deposits        1,828,987                8,472         0.62            2,048,418               12,072         0.79
Subordinated debentures              80,920                2,580         4.26               85,081                3,111         4.88
Borrowed funds                      336,063                3,021         1.20              217,841                2,689         1.65
    Total interest-bearing
               liabilities        2,245,970               14,073         0.84            2,351,340               17,872         1.02
Noninterest bearing
liabilities:
Demand deposits                     610,894                                                609,357
Other liabilities                    14,205                                                  8,828
         Total liabilities        2,871,069                                              2,969,525
Shareholders' equity                251,002                                                253,303
       Total liabilities &
      shareholders' equity $      3,122,071                                       $      3,222,828
       Net interest income                      $        104,363                                       $        103,321
       Net interest spread                                               4.67 %                                                 4.60 %
  Net interest rate margin
                       (4)                                               4.86                                                   4.79

(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 $1,154,000 and $1,040,000 for the nine months ended September 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 $1,582,000 and $1,075,000 for the nine months ended September 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 September 30,             Nine months ended September 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                $     1,448       $  (2,263 )   $   (815 )   $     5,476       $ (6,832 )   $ (1,356 )
Tax-exempt loans (3)                 179              (2 )        177             775            (42 )        733
Covered loans                     (4,648 )          (115 )     (4,763 )       (13,971 )       12,745       (1,226 )
Taxable investments in debt
and equity securities               (732 )           210         (522 )        (1,061 )         (122 )     (1,183 )
Non-taxable investments in
debt and equity securities
. . .
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