Enterprise Financial Reports Fourth Quarter 2014 and Year End Results

Reported Highlights

• 2014 net income of $27.2 million, or $1.35 per diluted share
• Fourth quarter net income of $6.0 million or $0.30 per diluted share ($0.42 per diluted share excluding certain items)
• Commercial and Industrial ("C&I") loans grow 22% during 2014 and total portfolio loans grow 14%

Core Highlights¹

• 2014 core net income of $26.0 million, or $1.29 per diluted share
• Fourth quarter core net income of $6.7 million, or $0.33 per diluted share
• Fourth quarter core net interest income of $25.7 million, up 13% annualized from the linked quarter

ST. LOUIS, Jan. 22, 2015 (GLOBE NEWSWIRE) -- Enterprise Financial Services Corp (Nasdaq:EFSC) (the "Company") reported net income of $27.2 million for the year ended December 31, 2014, a decrease of $5.9 million or 18% as compared to the prior year. Net income per diluted share was $1.35 for the year ended December 31, 2014, a decrease of 21% compared to $1.73 per diluted share for the prior year. The Company recorded net income of $6.0 million for the quarter ended December 31, 2014, an increase of 65% compared to net income of $3.6 million for the prior year period. Net income per diluted share was $0.30 for the fourth quarter of 2014, an increase of 67% compared to $0.18 per diluted share for the fourth quarter of 2013. Fourth quarter 2014 net income was impacted by a $2.9 million ($0.09 per diluted share) penalty on the early pay-off of $50.0 million of debt with the Federal Home Loan Bank of Des Moines ("FHLB") and $1.0 million ($0.03 per diluted share) of facilities charges to dispose of office property. Exclusive of these items, fourth quarter 2014 earnings per diluted share would have increased to $0.42 per common share.

On a core basis¹, the Company reported net income of $26.0 million, or $1.29 per diluted share for the year ended December 31, 2014 compared to $29.0 million, or $1.47 per diluted share in 2013. The decrease was due to a benefit for provision for loan losses recorded in the prior year, offset by increases in revenue and reduced noninterest expenses. Core net earnings for the fourth quarter of 2014 were $6.7 million, or $0.33 per diluted share, compared to $5.5 million, or $0.28 per diluted share in the prior year period. The increase was primarily due to increases in net interest income and lower provision for loan loss and noninterest expenses.

Peter Benoist, President and CEO, commented, "We're entering the new year with strong momentum, following robust loan production and net interest income growth in the fourth quarter. Portfolio loans increased at a 24% annualized rate in the quarter, and 14% for the year, with material gains in all three markets and particularly strong growth in our niche lending segments. At the same time, our credit quality measures remain favorable, as nonperforming assets declined 22% in 2014."

"We took several actions impacting fourth quarter reported earnings that will produce future benefits for Enterprise. By prepaying higher rate FHLB advances, we'll reduce overall funding costs. The facilities charge is connected to the relocation of our wealth management group into recently available space at our corporate headquarters, which will not only reduce operating expenses, but also promote closer interaction with the banking division," said Benoist.

"Enterprise's core earnings power continues to climb," Benoist noted. "With strong loan production, careful management of our margins and rising productivity, we drove increases in core net interest income in each quarter of 2014. We look forward to continuing progress in 2015."

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

Banking Segment

Net Interest Income

Net interest income in the fourth quarter increased $3.4 million from the linked third quarter due to growth in average portfolio loan balances, margin expansion including the effect of higher prepayment and other loan fees, and higher accelerated cash flows from PCI loans. The net interest margin was 4.13% for the fourth quarter, compared to 3.75% in the linked third quarter.

Net interest income decreased $1.6 million from the prior year period due to lower balances of PCI loans, lower accelerated cash flows on PCI loans, and lower interest rates on newly originated loans. These items were partially offset by lower interest expense primarily related to the payoff of debt with higher interest rates. The net interest margin decreased 42 basis points from 4.55% in the fourth quarter of 2013, however core net interest income increased modestly compared to the prior year quarter, as portfolio loan growth of 14% and lower costs of interest bearing liabilities outweighed lower loan yields on portfolio loans.

In the fourth quarter of 2014, the yield on PCI loans was 26.47%, as compared to 14.67% in the linked quarter and 25.66% in the prior year period. Excluding the accelerated cash flow impacts, the yield on PCI loans was 13.9% in the fourth quarter of 2014 compared to 13.4% in the linked quarter and 15.8% in the prior year period.

The cost of interest-bearing deposits was 0.56% in the fourth quarter of 2014, declining 2 basis points from the linked third quarter and 1 basis point lower than the fourth quarter of 2013 primarily from lower time deposit balances. The cost of interest-bearing liabilities was 0.63% in the quarter, declining 1 basis point from the linked quarter and 10 basis points from the fourth quarter of 2013. The reduction from the prior year period was primarily due to initiatives in the second half of 2013 and into 2014 to lower the cost of funds. These actions include the prepayment of $30.0 FHLB borrowings in December 2013 combined with the conversion of $25.0 million 9% trust preferred securities to common equity.

Additionally, in the fourth quarter of 2014, the Company prepaid an additional $50.0 million of FHLB advances with a weighted average interest rate of 4.17%, a maturity of 3 years and incurred a prepayment penalty of $2.9 million (pre-tax). The penalty was recorded as a component of noninterest expenses. The refinancing of these borrowings was executed for asset-liability management purposes and is also expected to further reduce the Company's cost of interest bearing liabilities and will help to mitigate net interest margin compression.

Core net interest margin, defined as the net interest margin (fully tax equivalent), including contractual interest on PCI loans but excluding the incremental accretion on these loans, was as follows:

Core net interest income¹ increased 13% on an annualized basis compared to the linked third quarter as our loan portfolio grew 24% on an annualized basis while our deposit cost declined 1 basis point. Core net interest margin increased 4 basis points when compared to the linked quarter, primarily due to fees on loans which was offset by lower balances of PCI loans. 

Core net interest margin declined 9 basis points from the prior year quarter primarily due to an 8 basis point decline from lower balances of PCI loans. Pressure on loan yields and continued reductions in PCI loan balances could lead to a further decline in core net interest margin in 2015.

Portfolio loans

Portfolio loans totaled $2.4 billion at December 31, 2014, increasing $139 million , or 24% annualized, compared to the linked quarter. On a year over year basis, portfolio loans increased $297 million, or 14%.

Commercial and Industrial ("C&I") loans increased $98.2 million during the fourth quarter of 2014 compared to the linked third quarter of 2014. C&I loans represented 52% of the Company's loan portfolio at December 31, 2014, increased slightly from 51% reported at September 30, 2014. C&I loans grew $229 million, or 22%, since December 31, 2013. During 2014, the Company also grew loans in the Construction real estate, Residential real estate, and Consumer and other categories with a modest $8 million decline in Commercial real estate. The Company continues to focus on originating high-quality C&I relationships as they typically have variable interest rates and allow for cross selling opportunities involving other banking products. Our specialized market segments, particularly life insurance premium finance, and enterprise value lending have contributed to the growth in the C&I category. C&I loan growth also supports our efforts to maintain the Company's asset sensitive interest rate risk position. At December 31, 2014, 64% of our portfolio loans had variable interest rates. The Company experienced strong loan growth during 2014 and expects to achieve a 10% or above portfolio loan growth rate for 2015.

Purchase credit impaired ("PCI") loans and other real estate covered under FDIC loss share agreements

PCI loans totaled $99 million at December 31, 2014, a decrease of $14.8 million, or 13%, from the linked third quarter, and $41.4 million, or 29% from the prior year, primarily as a result of principal paydowns and accelerated loan payoffs.

Other real estate covered under FDIC loss share agreements at December 31, 2014 was $5.9 million, a 33% decrease from $8.8 million at September 30, 2014. During the fourth quarter of 2014, the Company sold $3.2 million of other real estate, resulting in a net gain of $0.2 million.

The Company remeasures contractual and expected cash flows on PCI loans on a periodic basis. When the remeasurement process results in a decrease in expected cash flows due to an increase in expected credit losses, impairment is recorded through the provision for loan losses. Similarly, when expected credit losses decrease in the remeasurement process, prior recorded impairment is reversed before the yield is increased prospectively. Concurrently, the FDIC loss share receivable is adjusted to reflect anticipated future cash to be received from the FDIC. In the fourth quarter of 2014 additional provision expense of $0.1 million was recorded for certain loan pools. The provision expense was approximately 80% offset through noninterest income by an increase in the FDIC loss share receivable.

Actual cash collections in excess of expected cash flows that represent accelerated loan payoffs result in the recognition of income, but also generally result in a decrease in the FDIC loss share receivable. These cash flows are, by their nature, unpredictable and can vary significantly period to period. Actual cash collections in excess of expected cash flows from loan payoffs and real estate sales in the fourth quarter resulted in accelerated discount income of $3.3 million, which was partially offset by a decrease in the FDIC loss share receivable.

The following table illustrates the financial contribution of PCI loans and other real estate covered under FDIC loss share agreements for the most recent five quarters:

At December 31, 2014 the remaining accretable yield on the portfolio was estimated to be $29 million and the non-accretable difference was approximately $65 million. Absent cash flow accelerations or pool impairment, the Company currently estimates average PCI loan balances to be approximately $80 million and income before tax expense on PCI assets will be approximately $6 million to $8 million in 2015.

Asset quality for portfolio loans and other real estate

Nonperforming loans were 0.91% of portfolio loans at December 31, 2014, versus 0.79% of portfolio loans at September 30, 2014, and 0.98% at December 31, 2013. The Company's allowance for loan losses was 1.24% of loans at December 31, 2014, representing 136% of nonperforming loans, as compared to 1.25% at September 30, 2014 representing 158% of nonperforming loans, and 1.28% at December 31, 2013, representing 131% of nonperforming loans.

Nonperforming loans were $22.2 million at December 31, 2014, a 22% increase from $18.2 million at September 30, 2014, and a 7% increase from $20.8 million at December 31, 2013. During the quarter ended December 31, 2014, there were $2.1 million of charge-offs, $3.4 million of other principal reductions, $0.6 million of assets transferred to other real estate, $2.6 million moved to performing loans, and $12.8 million of additions to nonperforming loans. The net additions to nonperforming loans were primarily related to three unrelated accounts.

Nonperforming loans, by portfolio class at December 31, 2014, were as follows:

Nonperforming assets as a percentage of total assets were 0.74% at December 31, 2014, compared to 0.64% at September 30, 2014 and 0.90% at December 31, 2013.

Other real estate totaled $1.9 million at December 31, 2014, a decrease of $0.4 million from September 30, 2014. At December 31, 2013, other real estate totaled $7.6 million. During the fourth quarter of 2014, the Company sold $2.5 million of other real estate, resulting in a pre-tax loss of $0.2 million.

Net charge-offs in the fourth quarter of 2014 were $0.6 million, representing an annualized rate of 0.10% of average loans, compared to net recoveries of $0.3 million in the linked third quarter. Net charge-offs were $1.8 million, an annualized rate of 0.33%, in the fourth quarter of 2013. For the year-ended 2014, the Company's net charge-offs declined significantly to $1.5 million, or 0.07% of average loans, as compared to $6.4 million, or 0.31% of average loans, in the prior year.

Provision for loan losses was $2.0 million in the fourth quarter of 2014 compared to a benefit of $0.1 million in the third quarter of 2014 and provision of $2.5 million in the fourth quarter of 2013. For the year-end 2014, provision for loan losses was an expense of $4.4 million as compared to a benefit of $0.6 million in the prior year.

Deposits

Total deposits at December 31, 2014 were $2.5 billion, a decrease of $18.3 million, or 1%, from September 30, 2014, and $43 million, or 2%, from December 31, 2013. The decrease in deposits from the linked quarter was due to withdrawal of a customer deposit resulting from a significant transaction that occurred in the third quarter offset by seasonal increases.

Noninterest-bearing deposits decreased $52.9 million compared to September 30, 2014 and decreased $10.8 million over the December 31, 2013. The composition of Noninterest-bearing deposits remained stable at 26% of total deposits at December 31, 2014, compared to December 31, 2013. The total cost of deposits has declined 1 basis point since December 31, 2013.

Wealth Management Segment

Fee income attributable to the Wealth Management segment includes Wealth Management revenue and income from state tax credit brokerage activities. Fourth quarter 2014 Wealth Management revenues of $1.8 million were flat when compared to the linked third quarter and $0.1 million, or 3%, higher than the prior year period.

Trust assets under management were $865 million at December 31, 2014, an increase of $8 million, or 1%, when compared to the linked period ended September 30, 2014, and an increase of $36 million, or 4%, when compared to the prior year period. The increase in Trust assets under management as compared to the linked quarter is due to the addition of new clients during the quarter as well as general market appreciation.

Trust assets under administration were $1.5 billion at December 31, 2014, an increase of $16 million, or 1%, when compared to the linked period ended September 30, 2014, and an increase of $41 million, or 3%, when compared to the prior year period ended December 31, 2013.

Gains from state tax credit brokerage activities, net of fair value marks on tax credit assets and related interest rate hedges, were $1.4 million for the fourth quarter of 2014, compared to $0.2 million for the linked third quarter and $1.3 million in the fourth quarter of 2013. Sales of state tax credits can vary by quarter, but generally occur in the first and fourth quarters of the year depending on client demand and availability of the tax credits.

Noninterest Expenses

Noninterest expenses were $24.8 million for the quarter ended December 31, 2014, compared to $21.1 million for the quarter ended September 30, 2014 and $28.2 million for the quarter ended December 31, 2013. Noninterest expenses for the fourth quarter of 2014 included a charge of $2.9 million for the aforementioned FHLB prepayment penalty and $1.0 million for costs associated with sale of company office property. The office property sale will result in lower occupancy expenses prospectively. Noninterest expenses for the fourth quarter of 2013 also included a $2.6 million FHLB prepayment penalty and $0.8 million for disposal of branch facilities. Core noninterest expenses¹, which exclude these items and expenses directly related to PCI loans and assets covered under loss share agreements were $20.2 million for the quarter ended December 31, 2014, compared to $19.3 million for the linked quarter and $23.5 million for the prior year period.

The Company's Core efficiency ratio¹ was 62.8% for the quarter ended December 31, 2014, compared to 62.8% for the linked quarter, and 70.4% for the prior year period, and reflects overall expense management and revenue growth trends. Core efficiency ratio is a non-GAAP measure. The attached tables contain a reconciliation of Core efficiency ratio.

The Company anticipates total noninterest expenses to be between $19 million and $21 million per quarter for 2015.

Other Business Results

The total risk based capital ratio was 13.42% at December 31, 2014 compared to 13.61% at September 30, 2014 and 13.78% at December 31, 2013. The tangible common equity ratio was 8.69% at December 31, 2014 versus 8.63% at September 30, 2014 and 7.78% at December 31, 2013. The Company's Tier 1 common equity ratio was 10.16% at December 31, 2014 compared to 10.29% at September 30, 2014 and 10.08% at December 31, 2013. The total risk based capital ratio, and Tier 1 common equity ratios declined slightly due to loan growth in the quarter as compared to the prior quarter. The slight increase in the tangible common equity ratio as compared to the prior quarter was due to unrealized gains in the investment portfolio and earnings, partially offset by an increase in assets. The attached tables contain a reconciliation of these ratios to U.S. GAAP financial measures.

The Company's effective tax rate was 32.0% for the quarter ended December 31, 2014 compared to 34.9% for the quarter ended September 30, 2014 and 28.0% for the prior year period. The Company's effective tax rate for the years ended December 31, 2014 and 2013 was 33.8% and 33.9%, respectively.

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 margin and other Core performance measures, tangible common equity ratio and Tier 1 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 PCI loans and related income and expenses, the impact of nonrecurring items, and the Company's operating performance on an ongoing basis. Core performance measures include contractual interest on PCI loans but exclude incremental accretion on these loans. Core performance measures also exclude the Change in FDIC receivable, Gain or loss of other real estate covered under FDIC loss share agreements and expenses directly related to the PCI loans and other assets covered under FDIC loss share agreements. Core performance measures also exclude certain other income and expense items 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 and the Tier 1 common equity ratios provide useful information to investors about the Company's capital strength even though they are considered to be non-GAAP financial measures and are 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 tables below, 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.

The Company will host a conference call and webcast at 2:30 p.m. Central time on Thursday, January 22, 2015. During the call, management will review the fourth quarter of 2014 results and related matters. The call and accompanying presentation will be accessible on Enterprise Financial Services Corp's home page, at www.enterprisebank.com under "Investor Relations" and the call at 1-800-533-7954 (Conference ID #9135935.) Recorded replays of the conference call will be available on the website beginning two hours after the call's completion. 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.

Readers should note that in addition to the historical information contained herein, this press release contains forward-looking statements, including but not limited to statements about the Company's plans, expectations and projections of future financial and operating results, 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, 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, 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, as well as other risk factors described in the Company's 2013 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.

CONTACT: Jerry Mueller, Senior Vice President (314) 512-7251
         Ann Marie Mayuga, AMM Communications (314) 485-9499