Enterprise Financial Reports Fourth Quarter and Full 2018 Year Results

Enterprise Financial Services Corp (NASDAQ: EFSC) (the Company or EFSC) reported net income of $89.2 million, or $3.83 per diluted share, for the year ended December 31, 2018, an increase of $41.0 million, or 85%, compared to $48.2 million, or $2.07 per diluted share for the prior year period. Growth in net interest income, maintaining net interest margin, and fee income expansion drove the pre-tax earnings increase over the prior year. Additionally, the Company benefited from a reduction in income tax expense as a result of H.R.1, formerly known as Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, as well as the Companys tax planning initiatives. The Company also experienced a reduction in income tax expense due to the deferred tax asset revaluation charge of $12.1 million incurred in 2017 resulting from the Tax Cuts and Jobs Act.

The Company recorded net income of $23.5 million, or $1.02 per diluted share, for the quarter ended December 31, 2018, an increase of $1.0 million, or 4%, compared to $22.5 million, or $0.97 per diluted share, for the linked third quarter. An increase in net interest income driven by loan growth and a higher average loan yield, and seasonally strong sales of tax credits contributed to the increase over the linked quarter. Fourth quarter included $1.3 million pretax, or $0.04 per diluted share, of merger related expenses. Non-core acquired asset contribution was $3.2 million pretax, or $0.10 per diluted share.

On November 1, 2018, the Company and its wholly-owned subsidiary bank, Enterprise Bank & Trust, entered into a definitive agreement with Trinity Capital Corporation (Trinity) and its wholly-owned bank subsidiary, Los Alamos National Bank (LANB), pursuant to which the Company will acquire Trinity and LANB. Pursuant to the terms of the definitive agreement, upon consummation of the proposed transaction, Trinity shareholders will receive 0.1972 shares of EFSC common stock and $1.84 in cash for each share of Trinity common stock they hold. Headquartered in Los Alamos, New Mexico, LANB has approximately $1.3 billion in total assets and serves businesses and residents in Northern New Mexico and the Albuquerque metro area through its six full-service locations. The proposed transaction has been approved by the Federal Deposit Insurance Corporation, and remains subject to the approval of Trinitys shareholders. The Company expects to consummate the proposed transaction in early 2019.

The Companys Board of Directors approved the Companys quarterly dividend of $0.14 per common share for the first quarter of 2019, an increase from $0.13 for the fourth quarter of 2018, payable on March 29, 2019 to shareholders of record as of March 15, 2019.

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Jim Lally, EFSCs President and Chief Executive Officer, commented, 2018 and fourth quarter net earnings are both record highs for our Company. Our C&I business model continues to perform well in the current interest rate environment. Our results are also bolstered by prudent growth, as well as our continued operating leverage and capital management activities.

Lally added, We enter 2019 with earnings momentum, a strong balance sheet, and low levels of nonperforming assets; as well as the prospect of further, quality diversification of our business model with the pending acquisition of Trinity and LANB.

Net Interest Income

Net interest income for the year ended December 31, 2018 totaled $191.9 million, an increase of $14.6 million, or 8%, compared to $177.3 million for the prior year. Net interest margin, on a fully tax equivalent basis, was 3.82% for 2018 compared to 3.88% for the prior year. Core net interest income1 growth of $18.6 million was due to organic growth in portfolio loan balances funded principally by core deposits, and a three basis point expansion of core net interest margin1 discussed below. Additionally, non-core acquired assets1 contributed $3.7 million to net interest income during 2018, but continued declining balances in this portfolio led to a $4.0 million decline in net interest income from 2017 levels.

Net interest income for the fourth quarter of 2018 totaled $50.6 million, an increase of $2.5 million, from the third quarter of 2018. Core net interest income1 expanded by $0.9 million due to an increase in average earning assets of $46 million in the quarter, driven by portfolio loan growth trends and a higher average loan yield. Additionally, incremental accretion income on non-core acquired assets1 increased to $2.1 million from $0.5 million, due primarily to a $1.6 million cash recovery.

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

 
      For the Quarter ended     For the Year ended
($ in thousands)       December 31, 2018     September 30, 2018     December 31, 2017 December 31, 2018     December 31, 2017
Net interest income $ 50,593 $ 48,093 $ 47,404 $ 191,905 $ 177,304
Less: Incremental accretion income $ 2,109   $ 535   $ 2,503   $ 3,701   $ 7,718  
Core net interest income1 $ 48,484   $ 47,558   $ 44,901   $ 188,204   $ 169,586  
 
Net interest margin (fully tax equivalent) 3.94 % 3.78 % 3.93 % 3.82 % 3.88 %
Core net interest margin1 (fully tax equivalent)       3.77 %     3.74 %     3.73 %     3.75 %     3.72 %
 

Average Balance Sheet

The following tables present, 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.

 
    For the Quarter ended
December 31, 2018   September 30, 2018   December 31, 2017
($ in thousands) Average Balance   Interest Income/ Expense  

Average

Yield/

Rate

Average Balance   Interest Income/ Expense  

Average

Yield/

Rate

Average Balance   Interest Income/ Expense  

Average

Yield/

Rate

Assets
Interest-earning assets:
Loans, excluding incremental accretion* $ 4,272,132 $ 56,431 5.24 % $ 4,252,525 $ 54,968 5.13 % $ 4,025,789 $ 47,929 4.72 %
Investments in debt and equity securities* 769,461 5,291 2.73 755,129 5,154 2.71

708,481

4,505 2.37
Short-term investments 76,726 364 1.88 64,919 306 1.87 92,001 267 1.15
Total earning assets 5,118,319 62,086 4.81 5,072,573 60,428 4.73

4,826,271

52,701 4.29
 
Noninterest-earning assets 400,421 398,931 399,912
 
Total assets $ 5,518,740 $ 5,471,504 $

5,226,183

 
Liabilities and Shareholders Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 864,175 $ 1,221 0.56 % $ 758,621 $ 799 0.42 % $ 850,612 $ 474 0.22 %
Money market accounts 1,541,832 6,140 1.58 1,523,822 5,423 1.41 1,327,914 2,867 0.86
Savings 206,503 168 0.32 208,057 157 0.30 202,269 127 0.25
Certificates of deposit 696,803 3,053 1.74 678,214 2,878 1.68 613,442 1,757 1.14
Total interest-bearing deposits 3,309,313 10,582 1.27 3,168,714 9,257 1.16 2,994,237 5,225 0.69
Subordinated debentures 118,146 1,493 5.01 118,134 1,483 4.98 118,098 1,327 4.46
FHLB advances 178,185 1,121 2.50 311,522 1,729 2.20 191,978 672 1.39
Other borrowed funds 152,422 213 0.55 160,151 195 0.48 201,740 161 0.32
Total interest-bearing liabilities 3,758,066 13,409 1.42 3,758,521 12,664 1.34 3,506,053 7,385 0.84
 
Noninterest-bearing liabilities:
Demand deposits 1,125,321 1,086,809 1,121,140
Other liabilities 37,489 39,409 42,996
Total liabilities 4,920,876 4,884,739 4,670,189
Shareholders’ equity 597,864 586,765 555,994
Total liabilities and shareholders’ equity $ 5,518,740 $ 5,471,504 $ 5,226,183
 
Core net interest income1 48,677 47,764 45,316
Core net interest margin1 3.77 % 3.74 % 3.69 %
 
Incremental accretion on non-core acquired loans 2,109 535 2,503
 
Total net interest income $ 50,786 $ 48,299 $ 47,819
Net interest margin             3.94 %           3.78 %           3.89 %
* Non-taxable income is presented on a fully tax-equivalent basis using a 24.7% and 38.0% tax rate in 2018 and 2017, respectively. The tax-equivalent adjustments were $0.2 million for the three months ended December 31, 2018, and September 30, 2018, respectively, and $0.4 million for the three months ended December 31, 2017.
 
 
 
 
    For the Year ended
December 31, 2018   December 31, 2017
($ in thousands) Average Balance   Interest Income/ Expense  

Average

Yield/

Rate

Average Balance   Interest Income/ Expense  

Average

Yield/

Rate

Assets
Interest-earning assets:
Loans, excluding incremental accretion* $ 4,222,359 $ 213,980 5.07 % $ 3,850,879 $ 178,749 4.64 %
Investments in debt and equity securities* 752,265 19,801 2.63 681,414 17,078 2.51
Short-term investments 66,771 1,141 1.71 79,377 804 1.01
Total earning assets 5,041,395 234,922 4.66 4,611,670 196,631 4.26
 
Noninterest-earning assets 395,568 368,559
 
Total assets $ 5,436,963 $ 4,980,229
 
Liabilities and Shareholders Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 827,155 $ 3,643 0.44 % $ 802,993 $ 2,195 0.27 %
Money market accounts 1,488,238 19,361 1.30 1,286,796 8,708 0.68
Savings 206,286 597 0.29 189,516 459 0.24
Certificates of deposit 653,486 10,168 1.56 586,115 5,838 1.00
Total interest-bearing deposits 3,175,165 33,769 1.06 2,865,420 17,200 0.60
Subordinated debentures 118,129

 

5,798 4.91 116,707

 

5,095 4.37
FHLB advances 271,493 5,556 2.05 192,489 2,356 1.22
Other borrowed funds 171,736 774 0.45 221,766 584 0.26
Total interest-bearing liabilities 3,736,523 45,897 1.23 3,396,382 25,235 0.74
 
Noninterest-bearing liabilities:
Demand deposits 1,086,863 1,017,660
Other liabilities 36,617 33,881
Total liabilities 4,860,003 4,447,923
Shareholders equity 576,960 532,306
Total liabilities and shareholders equity $ 5,436,963 $ 4,980,229
 
Core net interest income1 189,025 171,396
Core net interest margin1 3.75 % 3.72 %
 
Incremental accretion on non-core acquired loans 3,700 7,718
 
Total net interest income $ 192,725 $ 179,114
Net interest margin             3.82 %           3.88 %
* Non-taxable income is presented on a fully tax-equivalent basis using a 24.7% and 38.0% tax rate in 2018 and 2017, respectively. The tax-equivalent adjustments were $0.8 million, and $1.8 million for the years ended December 31, 2018, and 2017, respectively.
 
 

Core net interest margin1 increased three basis points to 3.75% during 2018. This increase was primarily due to the impact of interest rate increases on the Company’s asset sensitive balance sheet. Specifically, the yield on loans, excluding incremental accretion on non-core acquired loans, increased 43 basis points to 5.07% from 4.64% due to the effect of increasing interest rates on the existing variable-rate loan portfolio and higher rates on newly originated loans. The cost of total deposits also increased 46 basis points from the prior year period to 1.06% for the year ended December 31, 2018. The increase in the interest rate paid on deposits reflects market interest rate trends, as the Company continues to defend existing and attract new core deposit relationships. Additionally, the cost of total interest-bearing liabilities increased 49 basis points to 1.23% for the year ended December 31, 2018 from 0.74% for the prior year period.

The Company continues to manage its balance sheet to grow net interest income and expects to maintain core net interest margin1 over the coming quarters; however, pressure on funding costs could negate 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.

 
    At the Quarter ended
($ in thousands)    

Dec 31,

2018

   

Sept 30,

2018

   

June 30,

2018

   

March 31,

2018

   

Dec 31,

2017

C&I – general $ 994,057 $ 967,525 $ 990,153 $ 945,682 $ 936,588
CRE investor owned – general 857,428 841,310 836,516 836,499 801,156
CRE owner occupied – general 494,630 480,106 493,589 471,417 468,151
Enterprise value lendinga 465,992 442,439 442,877 439,352 407,644
Life insurance premium financinga 417,950 378,826 358,787 365,377 364,876
Residential real estate – general 299,518 309,053 318,841 328,966 342,140
Construction and land development – general 308,086 309,879 286,482 293,938 294,123
Tax creditsa 262,735 256,666 260,595 244,088 234,835
Agriculture 135,849 137,760 127,849 118,862 91,031
Consumer and other – general 96,880   126,194   136,647   117,901   126,115  
Portfolio loans 4,333,125 4,249,758 4,252,336 4,162,082 4,066,659
Non-core acquired 16,876   17,672   23,425   28,763   30,391  
Total Loans $ 4,350,001   $ 4,267,430   $ 4,275,761   $ 4,190,845   $ 4,097,050  
 
Portfolio loan yield 5.23 % 5.12 % 4.99 % 4.87 % 4.71 %
Total loan yield 5.44 % 5.18 % 5.04 % 4.96 % 4.97 %
Total C&I loans to total loans 49 % 48 % 48 % 48 % 47 %
Variable interest rate loans to total loans     62 %     62 %     60 %     59 %     58 %
 
aSpecialized categories may include a mix of C&I, CRE, Construction and land development, or Consumer and other loans.
 
 

Portfolio loans totaled $4.3 billion at December 31, 2018, increasing $83 million, or 8% annualized, compared to the linked quarter. On a year-over-year basis, portfolio loans increased $266 million, or 7%. We expect continued loan growth in 2019 to be a high single digit percentage, exclusive of the impact of the pending acquisition of Trinity and LANB.

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 $202 million, or 11%, since December 31, 2017, of which $88 million occurred during the fourth quarter of 2018. The increase in C&I loans for the quarter was due primarily to seasonally strong growth in life insurance premium finance loans, which added $39 million, while general C&I loans increased $27 million from continued successful business development. Additionally, within the C&I category, Enterprise Value Lending (EVL) loans grew $24 million, and tax credits increased $6 million.

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. At December 31, 2018 the remaining accretable yield on non-core acquired assets was estimated to be $9 million, and the non-accretable difference was approximately $7 million.

Asset Quality

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

 
      For the Quarter ended
($ in thousands)       December 31, 2018     September 30, 2018     June 30, 2018     March 31, 2018     December 31, 2017
Nonperforming loans $ 16,745 $ 17,044 $ 14,801 $ 15,582 $ 15,687
Other real estate 469   408   454   455   498  
Nonperforming assets $ 17,214   $ 17,452   $ 15,255   $ 16,037   $ 16,185  
 
Nonperforming loans to total loans 0.38 % 0.40 % 0.35 % 0.37 % 0.38 %
Nonperforming assets to total assets 0.30 % 0.32 % 0.28 % 0.30 % 0.31 %
Allowance for loan losses to total loans 1.00 % 1.04 % 1.04 % 1.07 % 1.04 %
Net charge-offs (recoveries)       $ 2,822       $ 2,447       $ 641       $ (226 )     $ 3,313  
 
 

For the year ended December 31, 2018, the Company recorded a net provision for loan losses of $6.6 million, compared to $10.1 million for the prior year. The current year included a provision reversal on PCI loans of $3.2 million compared to a provision reversal of $0.6 million for the prior year. Net charge-offs to average loans totaled 0.14% for 2018 compared to 0.27% in 2017. For the quarter ended December 31, 2018, the Company reported a provision for loan losses of $2.1 million, compared to $2.3 million in the linked quarter. The current quarter included a provision reversal on PCI loans of $1.1 million compared to a provision reversal of $0.1 million for the linked quarter. The provision is reflective of charge-offs, continued improvement in cash flow expectations for the PCI portfolio, as well as growth in portfolio loans.

Deposits

The following table presents deposits broken out by type for the most recent five quarters.

 
      At the Quarter Ended
               
($ in thousands)      

December 31,

2018

September 30,

2018

June 30,

2018

March 31,

2018

December 31,

2017

Noninterest-bearing accounts $ 1,100,718 $ 1,062,126 $ 1,050,969 $ 1,101,705 $ 1,123,907
Interest-bearing transaction accounts 1,037,684 743,351 754,819 875,880 915,653
Money market and savings accounts 1,765,154 1,730,762 1,768,793 1,655,488 1,538,081
Brokered certificates of deposit 198,981 202,323 224,192 201,082 115,306
Other certificates of deposit 485,448   471,914   449,139   447,222   463,467  
Total deposit portfolio $ 4,587,985   $ 4,210,476   $ 4,247,912   $ 4,281,377   $ 4,156,414  
Noninterest-bearing deposits to total deposits       24 %     25 %     25 %     26 %     27 %
 
 

Total deposits at December 31, 2018 were $4.6 billion, an increase of $378 million, or 36% annualized, from September 30, 2018, and an increase of $432 million, or 10%, from December 31, 2017.

Core deposits, defined as total deposits excluding time deposits, were $3.9 billion at December 31, 2018, an increase of $367 million, or 41% on an annualized basis, from the linked quarter, and an increase of $326 million, or 9%, from the prior year period. Along with normal seasonal deposit growth, the Company continues to strengthen and diversify the funding base across all regions.

Noninterest-bearing deposits increased $39 million compared to September 30, 2018, and decreased $23 million compared to December 31, 2017. The total cost of deposits increased nine basis points to 0.95% at December 31, 2018 compared to 0.86% at September 30, 2018, and also increased 45 basis points from 0.50% at December 31, 2017. The cost of deposits reflects interest rate conditions for existing clients as well as rates for new customers.

Noninterest Income

Total noninterest income for the year was $38.3 million, an increase of $4.0 million, or 11% from 2017. This improvement was primarily due to higher income from deposit service charges, card services, and other miscellaneous income from non-core acquired assets and the sale of an equity partnership.

For the full year:

  • Deposit service charges increased $0.7 million or 6%
  • Income from card services increased $1.3 million or 23%
  • Other income increased $1.7 million or 24%

For the quarter ended December 31, 2018, total noninterest income was $10.7 million, an increase of $2.3 million, or 27%, from the linked quarter. Gains from tax credit brokerage activities, net of fair value market adjustments, were $2.3 million for the fourth quarter of 2018, compared to $0.2 million for the linked third quarter. Sales of 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.

The Company expects growth in noninterest income of a high single digit percentage for 2019 over 2018 levels, exclusive of the impact of the pending acquisition of Trinity and LANB.

Noninterest Expenses

Noninterest expenses for the year were $119.0 million, an increase of $4.0 million, or 3% from 2017. Increases in employee compensation and benefits and other miscellaneous expenses primarily consisting of tax credit investment amortization expense were partially offset by a reduction in merger related expenses. The Companys efficiency ratio was 51.70% for 2018, compared to 54.35% for the prior year. The Companys core efficiency ratio1 was 52.04% for 2018, compared to 52.93% for the prior year.

For the quarter ended December 31, 2018, noninterest expenses were $30.7 million, an increase of $0.8 million, or 3% from the linked quarter. Included in the fourth quarter expenses were merger related expenses totaling $1.3 million. The fourth quarters resulting efficiency ratio was 50.16%, compared to 52.96% for the linked quarter. The Companys core efficiency ratio1 was 49.77% for the fourth quarter compared to 52.23% for the linked quarter. The decrease from the linked quarter is reflective of higher income, including seasonal tax credit activity, 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 2019, resulting in continued improvements to the Companys efficiency ratio, exclusive of the impact of the pending acquisition of Trinity and LANB.

Income Taxes

The Companys effective tax rate was 14.7% for the year ended December 31, 2018 compared to 44.3% for the prior year. The lower corporate federal tax rate for 2018 and other tax planning activities reduced income tax expense. Additionally, as a result of changes to U.S. corporate tax laws in 2017, a revaluation of the Companys deferred tax assets resulted in a $12.1 million charge in the prior year period.

The Company expects its effective tax rate for 2019 to be approximately 18% – 20%.

Capital

 
      At the Quarter ended
Percent      

December 31,

2018

   

September 30,

2018

   

June 30,

2018

   

March 31,

2018

   

December 31,

2017

Total risk-based capital to risk-weighted assets 13.02 % 12.94 % 12.60 % 12.41 % 12.21 %
Common equity tier 1 capital to risk-weighted assets 9.79 % 9.66 % 9.32 % 9.07 % 8.88 %
Tangible common equity to tangible assets1       8.66 %     8.54 %     8.30 %     8.13 %     8.14 %
 
 

In the fourth quarter of 2018, as part of its capital management efforts, the Company repurchased 299,510 shares of its common stock for $12.5 million pursuant to its publicly announced share repurchase program.

Capital ratios for the current quarter are based on the Basel III regulatory capital framework as applied to the Companys current businesses and operations, and are subject to, among other things, completion and filing of the Companys 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 Companys 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 net interest margin, efficiency ratios, 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 companys 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. Commencing in the fourth quarter of 2018, due to declining balances in the non-core acquired loan portfolio, the Company determined to no longer report core earnings, which is a non-GAAP measure, on a full income statement presentation basis as the variance to the most directly comparable GAAP measure is now insignificant and to avoid any suggestion that such non-GAAP presentation exhibits prominence over the most directly comparable GAAP measure.

The Company considers its core net interest margin and core efficiency ratio, collectively 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 Companys 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 Companys 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 Companys 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 Companys performance and capital strength. The Companys management uses, and believes that investors benefit from referring to, these non-GAAP measures and ratios in assessing the Companys 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, January 22, 2019. During the call, management will review the fourth quarter and full year of 2018 results and related matters. This press release as well as a related slide presentation will be accessible on the Companys 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 1-888-394-8218 (Conference ID #2572790). A recorded replay of the conference call will be available on the website two hours after the calls completion. Visit http://bit.ly/EFSC4Q2018earnings 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 Companys plans, expectations, and projections of future financial and operating results, as well as statements regarding the Companys 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 release 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 Companys 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 Companys 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 Companys 2017 Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission (the SEC). 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.

No Offer or Solicitation

This communication relates to a proposed merger and business combination transaction (the Merger) between the Company and Trinity. This communication is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to buy any new securities or a solicitation of any vote or approval, in any jurisdiction, pursuant to the Merger or otherwise, nor shall there be any sale, issuance, exchange or transfer of the securities referred to in this document in any jurisdiction in contravention of applicable law. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act.

Additional Information and Where to Find It

In connection with the proposed Merger, the Company has filed with the SEC on December 31, 2018 an amendment to the registration statement on Form S-4 (File No. 333-228751) that was originally filed on December 11, 2018 that includes a preliminary proxy statement/prospectus. The Company will also file other documents with the SEC regarding the Merger, including the definitive proxy statement/prospectus. The information in the preliminary proxy statement/prospectus is not complete and may be changed. The definitive proxy statement/prospectus will be sent to the shareholders of Trinity once the registration statement is declared effective by the SEC. This document is not a substitute for the registration statement and preliminary proxy statement/prospectus filed with the SEC, including any amendments or supplements thereto, or any other documents that the Company may file with the SEC or that the Company or Trinity may send to stockholders of the Company or shareholders of Trinity in connection with the Merger. INVESTORS AND SECURITY HOLDERS OF THE COMPANY AND TRINITY ARE URGED TO READ THE REGISTRATION STATEMENT, THE PRELIMINARY PROXY STATEMENT/PROSPECTUS, THE DEFINITIVE PROXY STATEMENT/PROSPECTUS WHEN IT BECOMES AVAILABLE, AND ALL OTHER RELEVANT DOCUMENTS THAT ARE FILED OR WILL BE FILED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THESE DOCUMENTS, CAREFULLY AND IN THEIR ENTIRETY, BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION ABOUT THE MERGER AND RELATED MATTERS. Investors and security holders are able to obtain free copies of the registration statement and the preliminary proxy statement/prospectus and all other documents filed or that will be filed with the SEC by the Company through the website maintained by the SEC at www.sec.gov.

Participants in Solicitation

The Company, Trinity and certain of their directors and executive officers may be deemed to be participants in the solicitation of proxies from the holders of Trinitys common stock in connection with the proposed Merger. Information about the directors and executive officers of the Company is set forth in the proxy statement for the Companys 2018 annual meeting of shareholders, as filed with the SEC on a Schedule 14A on March 14, 2018 and as amended by supplements to the proxy statement filed with the SEC on March 14, 2018, March 30, 2018, and April 19, 2018. Information about the directors and executive officers of Trinity is set forth in the proxy statement for Trinitys 2018 annual meeting of shareholders, as filed with the SEC on a Schedule 14A on April 20, 2018. Additional information regarding the interest of those participants and other persons who may be deemed participants in the Merger may be obtained by reading the preliminary proxy statement/prospectus, the definitive proxy statement/prospectus when it becomes available, and other relevant documents filed with the SEC regarding the Merger when they become available. Free copies of these documents may be obtained as described above.

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

 
 
 
 
 

ENTERPRISE FINANCIAL SERVICES CORP CONSOLIDATED FINANCIAL SUMMARY (unaudited)

 
      For the Quarter ended/At   For the Year ended
($ in thousands, except per share data)       Dec 31, 2018   Sep 30, 2018   Jun 30, 2018   Mar 31, 2018   Dec 31, 2017 Dec 31, 2018   Dec 31, 2017
EARNINGS SUMMARY
Net interest income $ 50,593 $ 48,093 $ 47,048 $ 46,171 $ 47,404 $ 191,905 $ 177,304
Provision for loan losses 2,120 2,263 390 1,871 2,907 6,644 10,130
Noninterest income 10,702 8,410 9,693 9,542 11,112 38,347 34,394
Noninterest expense 30,747   29,922   29,219   29,143   28,260   119,031   115,051  
Income before income tax expense 28,428 24,318 27,132 24,699 27,349 104,577 86,517
Income tax expense1 4,899   1,802   4,881   3,778   19,820   15,360   38,327  
Net income1 $ 23,529   $ 22,516   $ 22,251   $ 20,921   $ 7,529   $ 89,217   $ 48,190  
 
Diluted earnings per share $ 1.02 $ 0.97 $ 0.95 $ 0.90 $ 0.32 $ 3.83 $ 2.07
Return on average assets 1.69 % 1.63 % 1.65 % 1.59 % 0.57 % 1.64 % 0.97 %
Return on average common equity 15.61 15.22 15.70 15.31 5.37 15.46 9.05
Return on average tangible common equity 19.79 19.42 20.23 19.92 6.99 19.83 11.63
Net interest margin (fully tax equivalent) 3.94 3.78 3.77 3.80 3.93 3.82 3.88
Core net interest margin (fully tax equivalent)2 3.77 3.74 3.75 3.74 3.73 3.75 3.72
Efficiency ratio 50.16 52.96 51.50 52.31 48.29 51.70 54.35
Core efficiency ratio2 49.77 52.23 52.36 54.02 50.24 52.04 52.93
 
Total assets $ 5,645,662 $ 5,517,539 $ 5,509,924 $ 5,383,102 $ 5,289,225
Total average assets 5,518,740 5,471,504 5,415,151 5,340,112 5,226,183 $ 5,436,963 $ 4,980,229
Total deposits 4,587,985 4,210,476 4,247,912 4,281,377 4,156,414
Total average deposits 4,434,634 4,255,523 4,230,291 4,124,326 4,115,377 4,262,028 3,883,080
Period end common shares outstanding 22,812 23,092 23,141 23,111 23,089
Dividends per common share $ 0.13 $ 0.12 $ 0.11 $ 0.11 $ 0.11 $ 0.47 $ 0.44
Tangible book value per common share $ 20.95 $ 19.94 $ 19.32 $ 18.49 $ 18.20
Tangible common equity to tangible assets2 8.66 % 8.54 % 8.30 % 8.13 % 8.14 %
Total risk-based capital to risk-weighted assets 13.02 12.94 12.60 12.41 12.21
 
1Includes $12.1 million ($0.52) per diluted share) deferred tax asset revaluation charge for the quarter and year ended December 31, 2017 due to U.S. corporate income tax reform.
2Refer to Reconciliations of Non-GAAP Financial Measures table for a reconciliation of these measures to GAAP.
 
 
 
 
 
 

ENTERPRISE FINANCIAL SERVICES CORP CONSOLIDATED FINANCIAL SUMMARY (unaudited) (continued)

 
      For the Quarter ended     For the Year ended
($ in thousands, except per share data)       Dec 31, 2018     Sep 30, 2018     Jun 30, 2018     Mar 31, 2018     Dec 31, 2017 Dec 31, 2018     Dec 31, 2017
INCOME STATEMENTS
NET INTEREST INCOME
Total interest income $ 64,002 $ 60,757 $ 57,879 $ 55,164 $ 54,789 $ 237,802 $ 202,539
Total interest expense 13,409 12,664 10,831 8,993 7,385 45,897 25,235
Net interest income 50,593 48,093 47,048 46,171 47,404 191,905 177,304
Provision for loan losses 2,120 2,263 390 1,871 2,907 6,644 10,130
Net interest income after provision for loan losses 48,473 45,830 46,658 44,300 44,497 185,261 167,174
 
NONINTEREST INCOME
Deposit service charges 2,894 2,997 3,007 2,851 2,897 11,749 11,043
Wealth management revenue 1,974 2,012 2,141 2,114 2,153 8,241 8,102
Card services revenue 1,760 1,760 1,650 1,516 1,545 6,686 5,433
Tax credit activity, net 2,312 192 64 252 2,249 2,820 2,581
Gain (loss) on sale of other real estate 13 76 13 93
Gain on sale of investment securities 9 9 22
Other income 1,762 1,436 2,831 2,800 2,192 8,829 7,120
Total noninterest income 10,702 8,410 9,693 9,542 11,112 38,347 34,394
 
NONINTEREST EXPENSE
Employee compensation and benefits 16,669 16,297 16,582 16,491 15,292 66,039 61,388
Occupancy 2,408 2,394 2,342 2,406 2,429 9,550 9,057
Merger related expenses 1,271 1,271 6,462
Other 10,399 11,231 10,295 10,246 10,539 42,171 38,144
Total noninterest expenses 30,747 29,922 29,219 29,143 28,260 119,031 115,051
 
Income before income tax expense 28,428 24,318 27,132 24,699 27,349 104,577 86,517
Income tax expense 4,899 1,802 4,881 3,778 19,820 15,360 38,327
Net income $ 23,529 $ 22,516 $ 22,251 $ 20,921 $ 7,529 $ 89,217 $ 48,190
 
Basic earnings per share $ 1.02 $ 0.97 $ 0.96 $ 0.91 $ 0.33 $ 3.86 $ 2.10
Diluted earnings per share 1.02 0.97 0.95 0.90 0.32 3.83 2.07

 
 
 
 
 
 

ENTERPRISE FINANCIAL SERVICES CORP CONSOLIDATED FINANCIAL SUMMARY (unaudited) (continued)

 
      At the Quarter ended
($ in thousands)       Dec 31, 2018     Sep 30, 2018     Jun 30, 2018     Mar 31, 2018     Dec 31, 2017
BALANCE SHEETS
ASSETS
Cash and due from banks $ 91,511 $ 78,119 $ 91,851 $ 81,604 $ 91,084
Interest-earning deposits 108,226 81,351 87,586 63,897 64,884
Debt and equity investments 813,702 775,344 756,203 752,114 741,792
Loans held for sale 392 738 1,388 1,748 3,155
Loans 4,350,001 4,267,430 4,275,761 4,190,845 4,097,050
Less: Allowance for loan losses 43,476 44,186 44,370 44,650 42,577
Total loans, net 4,306,525 4,223,244 4,231,391 4,146,195 4,054,473
Other real estate 469 408 454 455 498
Fixed assets, net 32,109 32,354 32,814 32,127 32,618
Tax credits, held for sale 37,587 45,625 46,481 42,364 43,468
Goodwill 117,345 117,345 117,345 117,345 117,345
Intangible assets, net 8,553 9,148 9,768 10,399 11,056
Other assets 129,243 153,863 134,643 134,854 128,852
Total assets $ 5,645,662 $ 5,517,539 $ 5,509,924 $ 5,383,102 $ 5,289,225
 

LIABILITIES AND SHAREHOLDERS EQUITY

Noninterest-bearing deposits $ 1,100,718 $ 1,062,126 $ 1,050,969 $ 1,101,705 $ 1,123,907
Interest-bearing deposits 3,487,267 3,148,350 3,196,943 3,179,672 3,032,507
Total deposits 4,587,985 4,210,476 4,247,912 4,281,377 4,156,414
Subordinated debentures 118,156 118,144 118,131 118,118 118,105
Federal Home Loan Bank advances 70,000 401,000 361,534 224,624 172,743
Other borrowings 223,450 161,795 167,216 166,589 253,674
Other liabilities 42,267 39,287 41,047 37,379 39,716
Total liabilities 5,041,858 4,930,702 4,935,840 4,828,087 4,740,652
Shareholders equity 603,804 586,837 574,084 555,015 548,573
Total liabilities and shareholders equity $ 5,645,662 $ 5,517,539 $ 5,509,924 $ 5,383,102 $ 5,289,225
 
 
 
 
 
 

ENTERPRISE FINANCIAL SERVICES CORP CONSOLIDATED FINANCIAL SUMMARY (unaudited) (continued)

 
      For the Quarter ended
($ in thousands)       Dec 31, 2018     Sep 30, 2018     Jun 30, 2018     Mar 31, 2018     Dec 31, 2017
LOAN PORTFOLIO
Commercial and industrial $ 2,121,446 $ 2,033,278 $ 2,038,400 $ 1,982,086 $ 1,919,145
Commercial real estate 1,474,582 1,443,088 1,445,981 1,413,897 1,363,605
Construction real estate 331,899 329,288 302,514 309,227 305,468
Residential real estate 299,873 309,414 319,208 329,337 342,518
Consumer and other 105,325   134,690   146,233   127,535   135,923  
Total portfolio loans 4,333,125 4,249,758 4,252,336 4,162,082 4,066,659
Non-core acquired loans 16,876   17,672   23,425   28,763   30,391  
Total loans $ 4,350,001   $ 4,267,430   $ 4,275,761   $ 4,190,845   $ 4,097,050  
 
DEPOSIT PORTFOLIO
Noninterest-bearing accounts $ 1,100,718 $ 1,062,126 $ 1,050,969 $ 1,101,705 $ 1,123,907
Interest-bearing transaction accounts 1,037,684 743,351 754,819 875,880 915,653
Money market and savings accounts 1,765,154 1,730,762 1,768,793 1,655,488 1,538,081
Brokered certificates of deposit 198,981 202,323 224,192 201,082 115,306
Other certificates of deposit 485,448   471,914   449,139   447,222   463,467  
Total deposit portfolio $ 4,587,985   $ 4,210,476   $ 4,247,912   $ 4,281,377   $ 4,156,414  
 
AVERAGE BALANCES
Portfolio loans $ 4,254,180 $ 4,230,089 $ 4,196,875 $ 4,108,400 $ 3,990,233
Non-core acquired loans 17,396 21,891 26,179 29,125 31,957
Loans held for sale 556 544 962 1,445 3,599
Debt and equity investments 769,461 755,129 743,534 740,587 708,481
Interest-earning assets 5,118,319 5,072,573 5,023,607 4,948,875 4,826,271
Total assets 5,518,740 5,471,504 5,415,151 5,340,112 5,226,183
Deposits 4,434,634 4,255,523 4,230,291 4,124,326 4,115,377
Shareholders equity 597,864 586,765 568,555 554,066 555,994
Tangible common equity 471,678 459,975 441,136 426,006 427,258
 
YIELDS (fully tax equivalent)
Portfolio loans 5.23 % 5.12 % 4.99 % 4.87 % 4.71 %
Non-core acquired loans 55.99 16.93 12.37 16.60 37.53
Total loans 5.44 5.18 5.04 4.96 4.97
Debt and equity investments 2.73 2.71 2.58 2.50 2.52
Interest-earning assets 4.98 4.77 4.64 4.54 4.54
Interest-bearing deposits 1.27 1.16 0.98 0.82 0.69
Total deposits 0.95 0.86 0.73 0.61 0.50
Subordinated debentures 5.01 4.98 4.94 4.70 4.46
Borrowed funds 1.60 1.62 1.41 1.15 0.84
Cost of paying liabilities 1.42 1.34 1.16 0.99 0.84
Net interest margin 3.94 3.78 3.77 3.80 3.93
 
 
 
 
 
 

ENTERPRISE FINANCIAL SERVICES CORP CONSOLIDATED FINANCIAL SUMMARY (unaudited) (continued)

 
      For the Quarter ended
(in thousands, except per share data)       Dec 31, 2018     Sep 30, 2018     Jun 30, 2018     Mar 31, 2018     Dec 31, 2017
ASSET QUALITY
Net charge-offs (recoveries) $ 2,822 $ 2,447 $ 641 $ (226 ) $ 3,313
Nonperforming loans 16,745 17,044 14,801 15,582 15,687
Classified assets 70,126 73,704 74,001 77,195 73,239
Nonperforming loans to total loans 0.38 % 0.40 % 0.35 % 0.37 % 0.38 %
Nonperforming assets to total assets 0.30 0.32 0.28 0.30 0.31
Allowance for loan losses to total loans 1.00 1.04 1.04 1.07 1.04
Allowance for loan losses to nonperforming loans 259.6 259.3 299.8 281.7 271.4
Net charge-offs (recoveries) to average loans (annualized) 0.26 0.23 0.06 (0.02 ) 0.33
 
WEALTH MANAGEMENT
Trust assets under management $ 1,119,329 $ 1,174,798 $ 1,337,030 $ 1,319,259 $ 1,330,227
Trust assets under administration 1,811,512 1,984,859 2,165,870 2,151,697 2,169,946
 
MARKET DATA
Book value per common share $ 26.47 $ 25.41 $ 24.81 $ 24.02 $ 23.76
Tangible book value per common share 20.95 19.94 19.32 18.49 18.20
Market value per share 37.63 53.05 53.95 46.90 45.15
Period end common shares outstanding 22,812 23,092 23,141 23,111 23,089
Average basic common shares 23,014 23,148 23,124 23,115 23,069
Average diluted common shares 23,170 23,329 23,318 23,287 23,342
 
CAPITAL
Total risk-based capital to risk-weighted assets 13.02 % 12.94 % 12.60 % 12.41 % 12.21 %
Tier 1 capital to risk-weighted assets 11.14 11.03 10.68 10.46 10.29
Common equity tier 1 capital to risk-weighted assets 9.79 9.66 9.32 9.07 8.88
Tangible common equity to tangible assets1 8.66 8.54 8.30 8.13 8.14
 
1Refer to Reconciliations of Non-GAAP Financial Measures table for a reconciliation of these measures to GAAP.
 
 
 
 
 
 

ENTERPRISE FINANCIAL SERVICES CORP RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES

 
      For the Quarter ended     For the Year ended
($ in thousands, except per share data)       Dec 31, 2018     Sep 30, 2018     Jun 30, 2018     Mar 31, 2018     Dec 31, 2017 Dec 31, 2018     Dec 31, 2017
CORE PERFORMANCE MEASURES
Net interest income $ 50,593 $ 48,093 $ 47,048 $ 46,171 $ 47,404 $ 191,905 $ 177,304
Less: Incremental accretion income 2,109   535   291   766   2,503     3,701     7,718  
Core net interest income 48,484 47,558 46,757 45,405 44,901 188,204 169,586
 
Total noninterest income 10,702 8,410 9,693 9,542 11,112 38,347 34,394
Less: Other income from non-core acquired assets 10 7 18 1,013 (6 ) 1,048 (6 )
Less: Gain on sale of investment securities 9 9 22
Less: Other non-core income 26     649       675    
Core noninterest income 10,666 8,403 1 9,026 2 8,520 3 11,118 4 36,615 5 34,378
             
Total core revenue 59,150   55,961   55,783   53,925   56,019   224,819   203,964  
 
 
Total noninterest expense 30,747 29,922 29,219 29,143 28,260 119,031 115,051
Less: Other expenses related to non-core acquired loans 40 12 (229 ) 14 114 (163 ) 240
Less: Facilities disposal 239 239 389
Less: Merger related expenses 1,271 1,271 6,462
Less: Non-recurring excise tax   682         682    
Core noninterest expense 29,436 29,228 29,209 29,129 28,146 117,002 107,960
 
Core efficiency ratio 49.77 % 52.23 % 52.36 % 54.02 % 50.24 % 52.04 % 52.93 %
 
NET INTEREST MARGIN TO CORE NET INTEREST MARGIN (FULLY TAX EQUIVALENT)
Net interest income $ 50,786 $ 48,299 $ 47,254 $ 46,386 $ 47,824 $ 192,725 $ 179,114
Less: Incremental accretion income 2,109   535   291   766   2,503   3,701   7,718  
Core net interest income $ 48,677   $ 47,764   $ 46,963   $ 45,620   $ 45,321   $ 189,024   $ 171,396  
 
Average earning assets $ 5,118,319 $ 5,072,573 $ 5,023,607 $ 4,948,875 $ 4,826,271 $ 5,041,395 $ 4,611,671
Reported net interest margin 3.94 % 3.78 % 3.77 % 3.80 % 3.93 % 3.82 % 3.88 %
Core net interest margin 3.77 3.74 3.75 3.74 3.73 3.75 3.72
 
 
 
 
      At the Quarter ended
($ in thousands)       Dec 31, 2018     Sep 30, 2018     Jun 30, 2018     Mar 31, 2018     Dec 31, 2017
REGULATORY CAPITAL TO RISK-WEIGHTED ASSETS
Shareholders equity $ 603,804 $ 586,837 $ 574,084 $ 555,015 $ 548,573
Less: Goodwill 117,345 117,345 117,345 117,345 117,345
Less: Intangible assets, net of deferred tax liabilities 6,440 6,888 7,355 7,831 6,661
Less: Unrealized gains (losses) (9,282 ) (16,627 ) (12,580 ) (11,563 ) (3,818 )
Plus: Other         12  
Common equity tier 1 capital 489,301 479,231 461,964 441,402 428,397
Plus: Qualifying trust preferred securities 67,600 67,600 67,600 67,600 67,600
Plus: Other 57   60   60   60   48  
Tier 1 capital 556,958 546,891 529,624 509,062 496,045
Plus: Tier 2 capital 93,901   94,611   94,795   95,075   93,002  
Total risk-based capital $ 650,859   $ 641,502   $ 624,419   $ 604,137   $ 589,047  
 
Total risk-weighted assets $ 4,999,363 $ 4,958,999 $ 4,956,820 $ 4,867,491 $ 4,822,695
 
Common equity tier 1 capital to risk-weighted assets 9.79 % 9.66 % 9.32 % 9.07 % 8.88 %
Tier 1 capital to risk-weighted assets 11.14 11.03 10.68 10.46 10.29
Total risk-based capital to risk-weighted assets 13.02 12.94 12.60 12.41 12.21
 
SHAREHOLDERS EQUITY TO TANGIBLE COMMON EQUITY AND TOTAL ASSETS TO TANGIBLE ASSETS
Shareholders equity $ 603,804 $ 586,837 $ 574,084 $ 555,015 $ 548,573
Less: Goodwill 117,345 117,345 117,345 117,345 117,345
Less: Intangible assets 8,553   9,148   9,768   10,399   11,056  
Tangible common equity $ 477,906   $ 460,344   $ 446,971   $ 427,271   $ 420,172  
 
Total assets $ 5,645,662 $ 5,517,539 $ 5,509,924 $ 5,383,102 $ 5,289,225
Less: Goodwill 117,345 117,345 117,345 117,345 117,345
Less: Intangible assets 8,553   9,148   9,768   10,399   11,056  
Tangible assets $ 5,519,764   $ 5,391,046   $ 5,382,811   $ 5,255,358   $ 5,160,824  
 
Tangible common equity to tangible assets 8.66 % 8.54 % 8.30 % 8.13 % 8.14 %
 
 
 
 

Investor Relations: Keene Turner, Executive Vice President and CFO (314)
512-7233
Media: Karen Loiterstein, Senior Vice President (314)
512-7141