Enterprise Financial Reports Second Quarter 2018 Results

Enterprise Financial Services Corp (NASDAQ: EFSC) (the “Company” or "EFSC") reported net income of $22.3 million for the quarter ended June 30, 2018, an increase of $1.3 million, and $10.3 million as compared to the linked first quarter and prior year quarter, respectively. Net income per diluted share was $0.95 for the quarter ended June 30, 2018, an increase of 5% and 90%, compared to $0.90 and $0.50 per diluted share for the linked first quarter and prior year period, respectively.

The increase in net income and earnings per share compared to the linked first quarter was primarily due to increased earnings on non-core acquired assets, partially offset by an increase in income tax expense, as the linked first quarter had a lower tax rate due to additional tax benefits from the vesting of employee stock awards.

Core Results¹

On a core basis¹, net income totaled $20.0 million, or $0.86 per diluted share, for the quarter ended June 30, 2018, compared to $19.6 million, or $0.84 per diluted share, in the linked first quarter primarily due to an increase in earning assets, a stable net interest margin, and an increase in fee income. Second quarter 2018 diluted core earnings per share¹ grew 54% from $0.56 for the prior year period. The Company's core earnings per share¹ increase of $0.30 per share over the prior year continues to be driven by revenue growth, which expanded $4.8 million, or 9% while discipline limited expense growth to 5%. Thus, marginal efficiency was 29%. Additionally, the provision for loan losses declined by $1.2 million due to favorable credit trends. The income tax rate declined to 17% from 32% due to the combination of 2017 federal income tax reform and the Company's tax planning initiatives. The Company's core efficiency ratio¹ improved to 52.4% for the quarter ended June 30, 2018, compared to 54.5% for the prior year period.

The Company's Board of Directors approved an additional one cent per common share increase in the Company’s quarterly dividend to $0.12 per common share from $0.11 for the third quarter of 2018, payable on September 28, 2018, to shareholders of record as of September 14, 2018.

Jim Lally, EFSC’s President and Chief Executive Officer, commented, “Second quarter results reflect the continued momentum we have established in our business. Portfolio loan growth of 9% was diversified across geographic markets as well as our specialty lending products. At the same time, profitability levels remained at a high level with return on average assets of 1.65% and return on tangible equity exceeding 20%.”

Lally added, “Our confidence in our performance and outlook allows us to increase our dividend to 12 cents per share, as we remain proactive in managing capital levels to support both growth and returns. As we move to the second half of the year, we remain focused on continued growth in both loans and core deposits.”

Net Interest Income

Net interest income for the second quarter increased to $47.0 million from the linked first quarter of $46.2 million, and increased $1.4 million from the prior year period. Net interest margin, on a fully tax equivalent basis, was 3.77% for the second quarter, compared to 3.80% in the linked first quarter, and 3.98% in the second quarter of 2017.

Core net interest income¹ expanded by $1.4 million during the linked quarter due to an increase in average earning assets totaling $75 million, driven by portfolio loan growth. The earnings from asset growth combined with a relatively stable core net interest margin¹ increased core net interest income¹ for the quarter.

Core net interest margin¹, excludes incremental accretion on non-core acquired loans. See the table below for a quarterly comparison.

Core net interest margin¹ remained relatively stable at 3.75% from the prior year quarter and linked quarter. Specifically, the yield on portfolio loans increased 36 basis points to 4.99% from 4.63% due to increasing interest rates on the existing variable-rate loan portfolio and higher rates on newly originated loans. The cost of total deposits increased 32 basis points from the prior year quarter and was 0.73% for the quarter ended June 30, 2018. The increase in the interest rate paid on deposits reflects market interest rate trends, as the Company continues to defend and attract new core deposit relationships. Additionally, the cost of total interest-bearing liabilities increased 47 basis points to 1.16% from 0.69% in the second quarter of 2017.

The Company continues to manage its balance sheet to grow core net interest income¹ and expects to maintain core net interest margin¹ over the coming quarters as growth in loan yields balance rising deposit prices. However, pressure on funding costs could hinder the expected trends in core net interest margin¹.

Portfolio Loans

The following table presents portfolio loans with selected specialized lending detail for the most recent five quarters:

Portfolio loans were $4.3 billion at June 30, 2018, increasing $90 million, or 9% annualized, when compared to the linked quarter. On a year-over-year basis, portfolio loans increased $393 million, or 10%. Given performance through June 30, 2018, we expect total 2018 portfolio loan growth to be a high single digit percentage.

The Company continues to focus on originating high-quality Commercial and Industrial ("C&I") relationships, as they typically have variable interest rates and allow for cross selling opportunities involving other banking products. C&I loans increased $56 million during the second quarter of 2018 from the linked first quarter and represented 48% of the Company's loan portfolio at June 30, 2018. C&I loan growth supports management's efforts to maintain the Company's asset sensitive interest rate risk position.

Non-Core Acquired Loans

Non-core acquired loans were those acquired from the FDIC and were previously covered by shared-loss agreements. These loans continue to be accounted for as Purchased Credit Impaired ("PCI") loans. Non-core acquired loans totaled $23.4 million at June 30, 2018, a decrease of $5.3 million, or 19% from the linked first quarter, and $12.4 million, or 35%, from the prior year period, primarily as a result of principal payments and loan payoffs. At June 30, 2018, the remaining accretable yield on the portfolio was estimated to be $11 million and the non-accretable difference was approximately $10 million.

The Company estimates 2018 pre-tax income from accelerated cash flows and other incremental accretion to be between $2 million and $3 million. Additionally, year-to-date pretax income from non-core acquired assets includes a $2.0 million provision for loan loss reversal as well as $1.0 million of other income from non-core acquired assets.

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

The Company recorded a provision for portfolio loan losses of $2.4 million compared to $1.9 million in the linked quarter and $3.6 million in the prior year period. The provision for the second quarter is reflective of the growth in portfolio loan balances and maintaining a prudent credit risk posture.

Deposits

The following table presents deposits broken out by type:

Total deposits at June 30, 2018 were $4.2 billion, a decrease of $33 million, or 3% annualized, from March 31, 2018, but an increase of $327 million from June 30, 2017. Average deposit balances for the quarter ended June 30, 2018, increased $106 million from the linked quarter and $321 million compared to the prior year period resulting in higher interest expense on deposits for the current quarter.

Core deposits, defined as total deposits excluding certificates of deposits, were $3.6 billion at June 30, 2018, a decrease of $58 million, or 6% annualized, from the linked quarter, but an increase of $246 million when compared to the prior year period. The Company continues to experience a shift in deposit behaviors as customers allocate more cash to higher rate accounts along with normal seasonal fluctuations with some of our corporate clients.

Noninterest-bearing deposits decreased $51 million compared to March 31, 2018, but increased $32 million compared to June 30, 2017. The total cost of deposits increased 12 basis points and totaled 0.73% compared to 0.61% at March 31, 2018, and also increased 32 basis points since June 30, 2017. As previously indicated, the cost of deposits reflects interest rate conditions for existing clients as well as rates for new customer acquisition.

Noninterest Income

Total noninterest income for the quarter ended June 30, 2018 was $9.7 million, an increase of $0.2 million, or 2% from the linked first quarter, and an increase of $1.8 million, or 22%, from the prior year quarter. The sequential change was driven by higher income from bank-owned life insurance proceeds, deposit service charges, and card services. Other income in the second quarter includes a $0.6 million gain from the sale of an equity partnership while the sequential first quarter included a $1.0 million gain from non-core acquired assets.

Core noninterest income¹ for the quarter ended June 30, 2018 was $9.0 million, an increase of $0.5 million, or 6% from the linked first quarter, primarily due to the aforementioned death benefit proceeds on an insurance policy and increases in card services revenue and deposit service charges.

The Company expects growth in core fee income of 5% - 7% for 2018 over 2017 levels.

Noninterest Expenses

Noninterest expenses were $29.2 million for the quarter ended June 30, 2018, compared to $29.1 million for the quarter ended March 31, 2018, and $32.7 million for the quarter ended June 30, 2017. Noninterest expenses for the quarter ended June 30, 2017 included $4.5 million of merger related expenses. Core noninterest expenses¹ were $29.2 million for the quarter ended June 30, 2018, compared to $29.1 million for the linked quarter, and $27.8 million for the prior year period. The increase from the linked quarter was due to continued hiring activity to support anticipated growth partially offset by seasonally lower payroll tax expenses. Core expenses¹ increased over the prior year period due to increases in Employee compensation and benefits from investments in revenue producing personnel and $0.8 million of tax credit amortization.

The Company's core efficiency ratio¹ was 52.4% for the quarter ended June 30, 2018, compared to 54.0% for the linked quarter and 54.5% for the prior year period. The decrease in the linked quarter is reflective of higher income and holding noninterest expense steady.

The Company expects to continue to invest in revenue producing associates and other infrastructure that supports additional growth. These investments are expected to result in expense growth, at a rate of 35% - 45% of projected revenue growth for 2018, resulting in continued improvements to the Company's efficiency ratio.

Income Taxes

The Company's effective tax rate was 18% for the quarter ended June 30, 2018 compared to 15% for the quarter ended March 31, 2018, and 32% for the quarter ended June 30, 2017. The linked first quarter included additional tax benefits recognized from the vesting of employee stock awards.

The Company expects its effective tax rate for the remainder of 2018 to be approximately 18% - 20%.

Capital

The following table presents various capital ratios:

Capital ratios for the current quarter are based on the Basel III regulatory capital framework as applied to the Company’s current businesses and operations, and are subject to, among other things, completion and filing of the Company’s regulatory reports and ongoing regulatory review and implementation guidance. The attached tables contain a reconciliation of these ratios to U.S. GAAP financial measures.

Use of Non-GAAP Financial Measures¹

The Company's accounting and reporting policies conform to generally accepted accounting principles in the United States (“GAAP”) and the prevailing practices in the banking industry. However, the Company provides other financial measures, such as core net income and net interest margin, and other core performance measures, regulatory capital ratios, and the tangible common equity ratio, in this release that are considered “non-GAAP financial measures.” Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position, or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP.

The Company considers its core performance measures presented in this earnings release and the included tables as important measures of financial performance, even though they are non-GAAP measures, as they provide supplemental information by which to evaluate the impact of non-core acquired loans and related income and expenses, the impact of certain non-comparable items, and the Company's operating performance on an ongoing basis. Core performance measures include contractual interest on non-core acquired loans, but exclude incremental accretion on these loans. Core performance measures also exclude the gain or loss on sale of other real estate from non-core acquired loans, and expenses directly related to non-core acquired loans and other assets formerly covered under FDIC loss share agreements. Core performance measures also exclude certain other income and expense items, such as executive separation costs, merger related expenses, facilities charges, deferred tax asset revaluation, and the gain or loss on sale of investment securities, the Company believes to be not indicative of or useful to measure the Company's operating performance on an ongoing basis. The attached tables contain a reconciliation of these core performance measures to the GAAP measures. The Company believes that the tangible common equity ratio provides useful information to investors about the Company's capital strength even though it is considered to be a non-GAAP financial measure and is not part of the regulatory capital requirements to which the Company is subject.

The Company believes these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding the Company's performance and capital strength. The Company's management uses, and believes that investors benefit from referring to, these non-GAAP measures and ratios in assessing the Company's operating results and related trends and when forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with GAAP. In the attached tables, the Company has provided a reconciliation of, where applicable, the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios, or a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.

Conference Call and Webcast Information

The Company will host a conference call and webcast at 2:30 p.m. Central time on Tuesday, July 24, 2018. During the call, management will review the second quarter of 2018 results and related matters. This press release as well as a related slide presentation will be accessible on the Company's website at www.enterprisebank.com under “Investor Relations” beginning prior to the scheduled broadcast of the conference call. The call can be accessed via this same website page, or via telephone at 1-855-719-5007 (Conference ID #8099056.) A recorded replay of the conference call will be available on the website two hours after the call's completion. Visit http://bit.ly/EFSC2Q2018earnings and register to receive a dial in number, passcode, and pin number. The replay will be available for approximately two weeks following the conference call.

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.

Forward-looking Statements

Readers should note that, in addition to the historical information contained herein, this press release 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 include, but are not limited to, statements about the Company's plans, expectations, and projections of future financial and operating results, as well as statements regarding the Company's plans, objectives, expectations or consequences of announced transactions. The Company uses words such as "may," "might," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "could," "continue," and “intend”, and variations of such words and similar expressions, in this communication to identify such forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from those contemplated from such statements. Factors that could cause or contribute to such differences include, but are not limited to, the Company's ability to efficiently integrate acquisitions into its operations, retain the customers of these businesses and grow the acquired operations, as well as 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 in the banking industry, competition from banks and other financial institutions, the Company's 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, as well as other risk factors described in the Company's 2017 Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission. 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 unless required under the federal securities laws.

¹ A non-GAAP measure. Refer to discussion & reconciliation of these measures in the accompanying financial tables.

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Enterprise Financial Services Corp
Investor Relations:
Keene Turner, 314-512-7233
Executive Vice President and CFO
or
Media:
Karen Loiterstein, 314-512-7141
Senior Vice President