ENTERPRISE FINANCIAL SERVICES CORP Forward Looking Statements
This Quarterly Report on Form 10-Q contains information and statements that are considered "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on management's current expectations and beliefs concerning future developments and their potential effects on the Company, and include, without limitation, statements about the Company's plans, strategies, goals, objectives, expectations, or consequences of statements about the future performance, operations, products and services of the Company and its subsidiaries, as well as statements about the Company's expectations regarding revenue and asset growth, financial performance and profitability, loan and deposit growth, yields and returns, loan diversification and credit management, products and services, shareholder value creation and the impact of the SCBH acquisition and other acquisitions. Forward-looking statements are typically identified with the use of terms such as "may," "might," "will," "would," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "could," "continue," "intend," and the negative and other variations of these terms and similar words and expressions, although some forward-looking statements may be expressed differently. Forward-looking statements are inherently subject to risks and uncertainties and 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. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to: our ability to efficiently integrate acquisitions, including the SCBH acquisition, into our operations, retain the customers of these businesses and grow the acquired operations; credit risk; changes in the appraised valuation of real estate securing impaired loans; our ability to recover our investment in loans; fluctuations in the fair value of collateral underlying 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; changes in business prospects that could impact goodwill estimates and assumptions; 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 policies and practices or accounting standards, including ASU 2016-13 (Topic 326), "Measurement of Credit Losses on Financial Instruments," commonly referenced as CECL model, which has changed how we estimate credit losses; uncertainty regarding the future of LIBOR; natural disasters, war or terrorist activities, or pandemics, or the outbreak of COVID-19 or similar outbreaks, and their effects on economic and business environments in which we operate; increased unemployment rates and defaults as a result of the economic disruptions caused by COVID-19; the impact of governmental orders issued in response to COVID-19; and other risks discussed under the caption "Risk Factors" under Part 1, Item 1A of our 2019 Annual Report on Form 10-K and Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarters endedMarch 31, 2020 andJune 30, 2020 , and other reports filed with theSEC , 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 28 --------------------------------------------------------------------------------
identify all risk factors. Readers should carefully review all disclosures we
file from time to time with the
Introduction
The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first nine months of 2020 compared to the financial condition as ofDecember 31, 2019 . 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 endedSeptember 30, 2020 , compared to the same periods in 2019. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
COVID-19 Pandemic
OnJanuary 31, 2020 , the Secretary ofHealth and Human Services declared a public health emergency due to the global outbreak of a new strain of coronavirus (COVID-19). OnMarch 13, 2020 , the President ofthe United States proclaimed the COVID-19 as a national emergency, following theWorld Health Organization's categorization of the outbreak as a pandemic. COVID-19 continues to aggressively spread globally, including throughoutthe United States . The pandemic and resulting travel bans, closure of non-essential businesses, social distancing measures and government responses across the country have had a profound impact on the global economy, financial markets and how business has been conducted across all industries and have affected many of the Company's customers and clients. To the extent the economic impacts of the pandemic continue for a prolonged period and conditions stagnate or worsen, our provision for credit losses, noninterest income, and profitability may be adversely affected. The Company has taken proactive and disciplined steps to promote the safety and overall wellbeing of its associates, customers and stakeholders, as well as to manage its financial performance. Steps taken include activation of the Company's business continuity plan, formation of a communication and action task force, cost containment measures, restrictions on business travel, conversion of in-person meetings to virtual or with restrictions in certain markets, a work-from-home mandate, branch lobby access restrictions, and multiple safety and social distancing protocols. The Company has also worked with its customers to implement appropriate loan deferral strategies in certain circumstances. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. The CARES Act contains provisions to assist individuals and businesses, including the SBA's Paycheck Protection Program ("PPP"). The PPP provided$349 billion in guaranteed loans that are forgivable if certain requirements are met. OnApril 24, 2020 , an additional$310 billion was added to the PPP program. The CARES Act included a provision that allowed depository institutions the option to defer adoption of the CECL standard to the earlier of (1) the end of the COVID-19 national emergency or (2)December 31, 2020 . The Company did not elect the deferral option. OnApril 7, 2020 , theU.S. banking agencies issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised). The statement describes accounting for COVID-19-related loan modifications, including clarifying the interaction between current accounting rules and the temporary relief provided by the CARES Act. The statement also encourages institutions to work constructively with borrowers affected by COVID-19 and states the agencies will not criticize supervised institutions for prudent loan modifications. Both the CARES Act and the interagency statement provide relief from the accounting and reporting implications of troubled debt restructurings. The Company has implemented short-term deferral programs allowing customers to primarily defer payments for up to 90 days. As ofSeptember 30, 2020 , loans of$139.4 million were in a deferral status of which$86.1 million represent second round deferrals. The deferral period expires in the fourth quarter 2020 for approximately 99% of loans in a deferral status. 29 --------------------------------------------------------------------------------
Critical Accounting Policies
The following accounting policies are considered most critical to the understanding of the Company's financial condition and results of operations. These critical accounting policies require management's most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experience. If different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The impact and any associated risks related to our critical accounting policies on our business operations are discussed throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations," where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . The Company has prepared the consolidated financial information in this report in accordance with GAAP. The Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions used in the calculation of income taxes, among others. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using loss experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. The three and nine months endedSeptember 30, 2020 were characterized by heightened uncertainty due to the COVID-19 pandemic which could impact estimates and assumptions made by management. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statement in future periods. There can be no assurances that actual results will not differ from those estimates.
Allowance for Credit Losses
OnJanuary 1, 2020 , the Company adopted Accounting Standard Update 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This standard, referred to as CECL, requires an estimate of lifetime expected credit losses on certain financial assets measured at amortized cost. The Company maintains separate allowances for funded loans, unfunded loans, and held-to-maturity securities, collectively the ACL. The ACL is a valuation account to adjust the cost basis to the amount expected to be collected, based on management's estimate of experience, current conditions, and reasonable and supportable forecasts. For purposes of determining the allowance for funded and unfunded loans, the portfolios are segregated into pools that share similar risk characteristics that are then further segregated by credit grades. Loans that do not share similar risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. The Company estimates the amount of the allowance based on loan loss experience, adjusted for current and forecasted economic conditions, including unemployment, changes in GDP, and commercial and residential real estate prices. The Company's forecast of economic conditions uses internal and external information and considers a weighted average of a baseline, upside, and downside scenarios. Because economic conditions can change and are difficult to predict, the anticipated amount of estimated loan defaults and losses, and therefore the adequacy of the allowance, could change significantly and have a direct impact on the Company's credit costs.
The Company completes a goodwill impairment test in the fourth quarter each year
or whenever events or changes in circumstances indicate the Company may not be
able to recover the goodwill, or intangible assets, respective carrying amount.
The impairment test involves the use of various estimates and assumptions.
Management believes the estimates and assumptions utilized are reasonable.
30
--------------------------------------------------------------------------------
Goodwill is evaluated for impairment at the reporting unit level. Reporting
units are defined as the same level as, or one level below, an operating
segment. An operating segment is a component of a business for which separate
financial information is available that management regularly evaluates in
deciding how to allocate resources and assess performance. The Company has one
reporting unit and one operating segment.
Potential impairments to goodwill must first be identified by performing a
qualitative assessment that evaluates relevant events or circumstances to
determine whether it is more likely than not the fair value of a reporting unit
is less than its carrying amount. If this test indicates it is more likely than
not that goodwill has been impaired, then a quantitative impairment test is
completed. The quantitative impairment test calculates the fair value of the
reporting unit and compares it with its carrying amount, including goodwill. If
the carrying amount of goodwill exceeds its implied fair market value, an
impairment loss is recognized. That loss is equal to the carrying amount of
goodwill that is in excess of its implied fair market value.
Intangible assets other than goodwill, such as core deposit intangibles,
determined to have finite lives are amortized over their estimated remaining
useful lives. These assets are reviewed for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
As of September 30, 2020 , while the Company has not recognized an impairment,
there can be no assurance that prolonged market volatility resulting from the
COVID-19 pandemic will not result in impairments to goodwill or other
intangibles in future periods.
31
--------------------------------------------------------------------------------Executive Summary
The Company closed its acquisition of Trinity onMarch 8, 2019 . The results of operations of Trinity are included in our results from this date forward, which may affect certain comparisons to the nine months endedSeptember 30, 2019 .
Below are highlights of our financial performance for the three and nine months
ended
At or for the three months ended At or for the nine months ended
September 30, September 30, September 30, September 30,
(in thousands, except per share data) 2020 2019 2020 2019
EARNINGS
Total interest income $ 70,787 $ 81,078 $ 220,666 $ 227,896
Total interest expense 7,433 18,032 28,111 50,792
Net interest income 63,354 63,046 192,555 177,104
Provision for credit losses 14,080 1,833 55,935 5,031
Net interest income after provision for
credit losses 49,274 61,213 136,620 172,073
Total noninterest income 12,629 13,564 35,997 34,758
Total noninterest expense 39,524 38,239 116,109 127,131
Income before income tax expense 22,379 36,538 56,508 79,700
Income tax expense 4,428 7,469 11,055 16,051
Net income $ 17,951 $ 29,069 $ 45,453 $ 63,649
Basic earnings per share $ 0.68 $ 1.09 $ 1.73 $ 2.46
Diluted earnings per share $ 0.68 $ 1.08 $ 1.73 $ 2.45
Return on average assets 0.86 % 1.60 % 0.76 % 1.26 %
Return on average common equity 8.06 % 13.66 % 6.96 % 11.00 %
Return on average tangible common equity1 10.94 % 19.08 % 9.51 % 15.16 %
Net interest margin (tax equivalent) 3.29 % 3.81 % 3.52 % 3.85 %
Core net interest margin1 3.22 % 3.69 % 3.47 % 3.76 %
Efficiency ratio 52.02 % 49.91 % 50.80 % 60.01 %
Core efficiency ratio1 51.04 % 51.73 % 50.97 % 52.96 %
Book value per common share $ 33.66 $ 31.79
Tangible book value per common share1 $ 24.80 $ 22.82
ASSET QUALITY
Net charge-offs $ 1,027 $ 1,070 $ 2,518 $ 3,866
Nonperforming loans 39,623 15,569
Classified assets 84,710 93,984
Nonperforming loans to total loans 0.65 % 0.30 %
Nonperforming assets to total assets 0.53 % 0.33 %
ACLL to total loans 2.01 % 0.85 %
Net charge-offs to average loans
(annualized) 0.07 % 0.08 % 0.06 % 0.11 %
(1) A non-GAAP measure. A reconciliation has been included in this section under the caption "Use of Non-GAAP Financial Measures."
32
--------------------------------------------------------------------------------
For the three and nine months ended
•The Company was active in supporting its customers in the PPP. Details of the PPP loans are noted in the following table:
Quarter ended
(in thousands) September 30, 2020
PPP loans outstanding, net of unearned fees $ 819,100
Average PPP loans outstanding, net 813,244
PPP average loan size 216
PPP interest and fee income 5,226
PPP unearned fees 19,522
PPP average yield 2.56 %
Participation in the PPP has impacted the Company's financial metrics in the
three and nine months ended September 30, 2020 . Loan and deposit growth,
earnings per share, and return on assets all increased due to the PPP.
Conversely, net interest margin, the allowance coverage ratio, the leverage
ratio and the ratio of tangible common equity to tangible assets all decreased.
Since the PPP loans are guaranteed by the SBA, CET1, Tier 1 and total risk-based
capital are not impacted by the PPP loan balances.
•For the three and nine months ended September 30, 2020 , the Company had net
income of $18.0 million and $45.5 million , respectively, compared to $29.1
million and $63.6 million , respectively, for the prior year periods. Earnings
per diluted share for the three and nine months ended September 30, 2020 was
$0.68 and $1.73 , respectively, and $1.08 and $2.45 , for the same respective
periods in 2019. Net income and earnings per share for the three and nine months
ended September 30, 2020 were impacted from $14.1 million and $55.9 million ,
respectively, on a pretax basis ($10.6 million and $42.1 million , respectively,
after tax), of provision for credit losses. The increase in the provision for
credit losses for the three months ending September 30, 2020 was primarily due
to an increase in individual reserves and qualitative reserves established for
certain higher risk areas, including hospitality and loans that have received
principal and interest deferrals partially offset by improvements in economic
forecasts. Deterioration in the economic forecasts during the first two quarters
of 2020 primarily contributed to the increase for the nine months ended
September 30, 2020 . Net income and earnings per share for the three months ended
September 30, 2020 and 2019 were impacted by $1.6 million and $0.4 million ,
respectively, on a pretax basis ($1.2 million and $0.3 million , respectively,
after tax), of merger-related expenses. For the nine months ended September 30,
2020 and 2019 net income and earnings per share were impacted by $1.6 million
and $18.0 million , respectively, on a pretax basis ($1.2 million and $14.0
million , respectively, after tax), of merger-related expenses.
•Net interest income for the three and nine months ended September 30, 2020
increased $0.3 million and $15.5 million , respectively, over the prior year
periods primarily from reductions in rates on interest-bearing liabilities.
Higher loan volumes, due to PPP loans in the three and nine month comparisons,
and due to the Trinity acquisition in the nine month comparison, were offset by
reductions in loan yields of 139 basis points and 102 basis points for the three
and nine month comparisons, respectively.
The tax-equivalent net interest margin was 3.29% and 3.52% for the three and
nine months ended September 30, 2020 , respectively, compared to 3.81% and 3.85%
in the prior year periods, respectively. The net interest margin was impacted by
the decline in short-term rates as approximately 60% of the Company's loan
portfolio (excluding PPP) has variable rates, with most indexed to one-month
LIBOR that has declined significantly over the past year. Average one-month
LIBOR was 0.16% and 0.64% in the three and nine months ended September 30, 2020 ,
respectively, compared to 2.18% and 2.37% in the comparable prior year periods,
respectively.
33
--------------------------------------------------------------------------------
•Noninterest income for the three and nine months ended September 30, 2020
decreased $0.9 million and increased $1.2 million , respectively, compared to the
prior year periods. For the third quarter 2020, the increase in deposit balances
provided more earnings credits to business customers on analysis, resulting in
lower service charge income compared to the prior year periods. The increase in
noninterest income for the nine months ended September 30, 2020 compared to the
prior year period was primarily due to the acquisition of Trinity in March 2019 .
•Noninterest expense increased $1.3 million , or 3%, for the third quarter 2020,
compared to the same period in 2019. The increase was primarily due to
merger-related expenses. For the nine months ended September 30, 2020 ,
noninterest expense decreased $11.0 million , or 9%, from the prior year period
primarily due to higher merger-related expenses in the prior year period,
partially offset by an increase in employee compensation from merit increases
and the acquisition of Trinity.
Balance sheet highlights:
•Loans - Total loans grew$812.0 million fromDecember 31, 2019 , or 15.3%, to$6.1 billion as ofSeptember 30, 2020 . Growth in the loan portfolio was primarily driven by PPP loans. •Deposits - Total deposits grew$905.2 million , or 15.7%, to$6.7 billion as ofSeptember 30, 2020 primarily due to PPP related deposits, government stimulus checks and organic growth. Noninterest deposit accounts represented 28.9% of total deposits atSeptember 30, 2020 , and the loan to deposit ratio was 91.8%. •Asset quality - The allowance for credit losses on loans to total loans increased to 2.01% atSeptember 30, 2020 from 0.81% atDecember 31, 2019 . Nonperforming assets to total assets was 0.53% atSeptember 30, 2020 compared to 0.45% atDecember 31, 2019 . •Subordinated notes - In the second quarter 2020, EFSC issued$63.3 million of 5.75% fixed-to-floating rate subordinated notes due in 2030. The notes are callable beginning in 2025 and are included in tier 2 capital. •Shareholders' equity - Total shareholders' equity was$882.3 million and the tangible common equity to tangible assets ratio1 was 7.99% atSeptember 30, 2020 compared to 8.89% atDecember 31, 2019 . Balance sheet growth from the PPP was the primary cause of the decline in the tangible common equity to tangible assets ratio. Bank regulatory capital ratios remain "well-capitalized," with a common equity tier 1 ratio of 12.0% and a total risk-based capital ratio of 13.3%. 1A non-GAAP measure. A reconciliation has been included in this section under the caption "Use of Non-GAAP Financial Measures." 34 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net Interest Income Average Balance Sheet The following tables present, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing liabilities, as well as the corresponding interest rates earned and paid, all on a tax equivalent basis. Non-core acquired loans noted in the table below were acquired from theFDIC and were previously covered by shared-loss agreements. Three months ended September 30, 2020 2019 Average Average Interest Yield/ Interest Yield/ (in thousands) Average Balance Income/Expense Rate Average Balance Income/Expense Rate Assets Interest-earning assets: Taxable loans (1)$ 6,066,992 $ 60,951 4.00 %$ 5,140,946 $ 68,309 5.27 % Tax-exempt loans (2) 35,934 415 4.59 26,364 482 7.25 Non-core acquired loans - contractual 9,789 150 6.10 10,699 402 14.91 Non-core acquired loans - incremental accretion 1,235 50.19 2,140 79.36 Total loans 6,112,715 62,751 4.08 5,178,009 71,333 5.47 Taxable debt and equity investments 987,263 5,785 2.33 1,169,753 8,323 2.82 Non-taxable debt and equity investments (2) 374,252 2,976 3.16 143,107 1,287 3.57 Short-term investments 295,854 113 0.15 113,214 572 2.00 Total securities and short-term investments 1,657,369 8,874 2.13 1,426,074 10,182 2.83 Total interest-earning assets 7,770,084 71,625 3.67 6,604,083 81,515 4.90 Noninterest-earning assets 571,884 618,274 Total assets$ 8,341,968 $ 7,222,357 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing transaction accounts$ 1,529,097 $ 255 0.07 %$ 1,356,328 $ 2,048 0.60 % Money market accounts 1,981,026 1,003 0.20 1,639,603 6,959 1.68 Savings 605,475 45 0.03 548,109 232 0.17 Certificates of deposit 630,076 2,409 1.52 820,943 3,970 1.92 Total interest-bearing deposits 4,745,674 3,712 0.31 4,364,983 13,209 1.20 Subordinated debentures 203,438 2,826 5.53 141,136 1,956 5.50 FHLB advances 250,000 720 1.15 378,207 2,203 2.31 Securities sold under agreements to repurchase 199,308 59 0.12 155,238 327 0.84 Other borrowed funds 31,413 116 1.48 37,817 337 3.54 Total interest-bearing liabilities 5,429,833 7,433 0.54 5,077,381 18,032 1.41 Noninterest bearing liabilities: Demand deposits 1,920,694 1,232,360 Other liabilities 105,945 68,642 Total liabilities 7,456,472 6,378,383 Shareholders' equity 885,496 843,974
Total liabilities & shareholders' equity
$ 7,222,357 Net interest income$ 64,192 $ 63,483 Net interest spread 3.13 % 3.49 % Net interest margin 3.29 % 3.81 % Core net interest margin (3) 3.22 % 3.69 % (1)Average balances include nonaccrual loans. Interest income includes loan fees of$4.1 million and$1.3 million for the three months endedSeptember 30, 2020 and 2019 respectively. (2)Interest income and yields have been adjusted to reflect a tax-equivalent basis. (3)A non-GAAP measure. A reconciliation has been included in this section under the caption "Use of Non-GAAP Financial measures." 35 --------------------------------------------------------------------------------
Nine months ended September 30,
2020 2019
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) $ 5,784,018 $ 189,521 4.38 % $ 4,890,974 $ 195,628 5.35 %
Tax-exempt loans (2) 36,655 1,353 4.93 27,063 1,359 6.71
Non-core acquired loans - contractual 12,695 529 5.57 12,598 1,009 10.71
Non-core acquired loans - incremental accretion 3,227 33.96 4,207 44.66
Total loans 5,833,368 194,630 4.46 4,930,635 202,203 5.48
Taxable debt and equity investments 1,059,957 20,329 2.56 1,041,874 22,030 2.83
Non-taxable debt and equity investments (2) 296,839 7,359 3.31 111,758 3,025 3.62
Short-term investments 188,849 500 0.35 108,930 1,722 2.11
Total securities and short-term investments 1,545,645 28,188 2.44 1,262,562 26,777 2.84
Total interest-earning assets 7,379,013 222,818 4.03 6,193,197 228,980 4.94
Noninterest-earning assets 576,993 556,791
Total assets $ 7,956,006 $ 6,749,988
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 1,464,144 $ 1,836 0.17 % $ 1,273,591 $ 5,972 0.63 %
Money market accounts 1,911,584 6,738 0.47 1,579,702 20,470 1.73
Savings 579,619 233 0.05 471,024 646 0.18
Certificates of deposit 713,633 9,176 1.72 783,182 11,060 1.89
Total interest-bearing deposits 4,668,980 17,983 0.51 4,107,499 38,148 1.24
Subordinated debentures 171,465 7,061 5.50 135,512 5,562 5.49
FHLB advances 240,596 2,070 1.15 286,267 5,297 2.47
Securities sold under agreements to repurchase 197,776 479 0.32 168,740 939 0.74
Other borrowed funds 32,836 518 2.11 31,102 846 3.64
Total interest-bearing liabilities 5,311,653 28,111 0.71 4,729,120 50,792 1.44
Noninterest bearing liabilities:
Demand deposits 1,684,107 1,188,758
Other liabilities 87,302 58,267
Total liabilities 7,083,062 5,976,145
Shareholders' equity 872,944 773,843
Total liabilities & shareholders' equity
$ 6,749,988 Net interest income$ 194,707 $ 178,188 Net interest spread 3.32 % 3.50 % Net interest margin 3.52 % 3.85 % Core net interest margin (3) 3.47 % 3.76 % (1)Average balances include non-accrual loans. Interest income includes loan fees of$8.9 million and$3.4 million for the nine months endedSeptember 30, 2020 and 2019 respectively. (2)Interest income and yields have been adjusted to reflect a tax-equivalent basis. (3)A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial measures." 36 --------------------------------------------------------------------------------
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.
2020 compared to 2019
Nine months ended
Three months ended September 30, 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 $ 10,893 $ (18,251) $ (7,358) $ 32,588 $ (38,695) $ (6,107)
Tax-exempt loans (3) 142 (209) (67) 409 (415) (6)
Non-core acquired loans (202) (955) (1,157) 40 (1,500) (1,460)
Taxable debt and equity investments (1,201) (1,337) (2,538) 380 (2,081) (1,701)
Non-taxable debt and equity investments (3) 1,852 (163) 1,689 4,612 (278) 4,334 Short-term investments 377 (836) (459) 772 (1,994) (1,222) Total interest-earning assets$ 11,861 $ (21,751) $ (9,890) $ 38,801 $ (44,963) $ (6,162) Interest paid on: Interest-bearing transaction accounts$ 230 $ (2,023) $ (1,793) $ 784 $ (4,920) $ (4,136) Money market accounts 1,194 (7,150) (5,956) 3,607 (17,339) (13,732) Savings 23 (210) (187) 123 (536) (413) Certificates of deposit (823) (738) (1,561) (934) (950) (1,884) Subordinated debentures 859 11 870 1,486 13 1,499 FHLB advances (597) (886) (1,483) (741) (2,486) (3,227) Securities sold under agreements to repurchase 73 (341) (268) 141 (601) (460) Other borrowings (50) (171) (221) 45 (373) (328) Total interest-bearing liabilities 909 (11,508) (10,599) 4,511 (27,192) (22,681) Net interest income$ 10,952 $ (10,243) $ 709 $ 34,290 $ (17,771) $ 16,519 (1) Change in volume multiplied by yield/rate of prior period. (2) Change in yield/rate multiplied by volume of prior period. (3) Nontaxable income is presented on a tax equivalent basis. NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each. Net interest income (on a tax equivalent basis) for the three and nine months endedSeptember 30, 2020 increased 1% and 9%, respectively, over the prior year periods primarily from reductions in rates on interest-bearing liabilities offset by a decline in the yield on earning assets. Loan yields declined 139 basis points and 102 basis points for the three and nine months endedSeptember 30, 2020 , respectively, compared to the comparable prior year periods primarily due to LIBOR resets as well as lower rates on new and renewing loans in addition to a lower yield on PPP loans. Higher average loan balances from PPP loans and an increase in short-term investment balances also negatively impacted the yield on earning assets. The tax-equivalent net interest margin was 3.29% and 3.52% for the three and nine months endedSeptember 30, 2020 , respectively, compared to 3.81% and 3.85% in the prior year periods, respectively. The net interest margin was impacted by the decline in short-term rates as approximately 60% of the Company's loan portfolio (excluding PPP) has variable rates, with most indexed to one-month LIBOR that has declined significantly over the past year. Average one-month LIBOR was 0.16% and 0.64% in the three and nine months endedSeptember 30, 2020 , respectively, compared to 2.18% and 2.37% in the comparable prior year periods, respectively. 37 -------------------------------------------------------------------------------- The Company responded to interest rate trends by reducing the cost of certain managed money market and interest-bearing transaction accounts. Net interest income and margin both benefited from an 89 basis point decrease in the rate paid on interest-bearing deposits in the third quarter 2020 compared to the third quarter 2019. The rate on interest-bearing deposits for the nine months endedSeptember 30, 2020 declined 73 basis points compared to the prior-year period. In addition, EFSC's subordinated debt issuance in the second quarter of 2020 reduced net interest margin by two basis points for the nine months endedSeptember 30, 2020 . Noninterest Income
The following table presents a comparative summary of the major components of noninterest income for the periods indicated.
2020 compared to 2019
Three months ended September 30, Nine months ended September 30,
(in thousands) 2020 2019 Increase (decrease) 2020 2019 Increase (decrease)
Service charges on deposit
accounts $ 2,798 $ 3,246 $ (448) (14) % $ 8,557 $ 9,547 $ (990) (10) %
Wealth management revenue 2,456 2,661 (205) (8) % 7,283 7,314 (31) - %
Card services revenue 2,498 2,494 4 - % 6,970 6,745 225 3 %
Tax credit income 748 1,238 (490) (40) % 2,563 1,968 595 30 %
Miscellaneous income 4,129 3,925 204 5 % 10,624 9,184 1,440 16 %
Total noninterest income $ 12,629 $ 13,564 $ (935) (7) % $ 35,997 $ 34,758 $ 1,239 4 %
Noninterest income decreased $0.9 million , or 7%, for the three months ended
September 30, 2020 , compared to the same period in 2019. The increase in deposit
account balances provided more earnings credits to business customers, resulting
in lower service charge income compared to the prior year quarter. The Company's
tax credit income decreased in the current quarter over the prior year period
primarily due to the timing on projects.
Noninterest income increased $1.2 million , or 4%, for the nine months ended
September 30, 2020 , compared to the same period in 2019. Tax credit income
increased partially due to fair value adjustments on tax credits. The fair value
of these projects increased due to a decline in the LIBOR component of the
discount rate. Miscellaneous income increased $1.4 million in 2020 over 2019 due
primarily to an increase in swap fee income and growth in mortgage revenue.
38
--------------------------------------------------------------------------------Noninterest Expense
The following table presents a comparative summary of the major components of noninterest expense for the periods indicated.
2020 compared to 2019
Three months ended September 30, Nine months ended September 30,
(in thousands) 2020 2019 Increase (decrease) 2020 2019 Increase (decrease)
Employee compensation and
benefits $ 22,040 $ 20,845 $ 1,195 6 % $ 66,114 $ 60,884 $ 5,230 9 %
Occupancy 3,408 3,179 229 7 % 9,940 9,004 936 10 %
Data processing 2,167 2,051 116 6 % 6,393 6,415 (22) - %
Professional fees 755 1,064 (309) (29) % 2,904 2,847 57 2 %
Merger-related expenses 1,563 393 1,170 298 % 1,563 17,969 (16,406) (91) %
Other 9,591 10,707 (1,116) (10) % 29,195 30,012 (817) (3) %Total noninterest expense$ 39,524 $ 38,239 $ 1,285 3 %$ 116,109 $ 127,131 $ (11,022) (9) % Efficiency ratio 52.02 % 49.91 % 2.11 % 50.80 % 60.01 % (9.21) % Core efficiency ratio1 51.04 % 51.73 % (0.69) % 50.97 % 52.96 %
(1.99) % 1A non-GAAP measure. A reconciliation has been included in this section under the caption "Use of Non-GAAP Financial Measures."
Noninterest expense increased$1.3 million , or 3%, for the third quarter 2020, compared to the same period in 2019. The increase from the prior year period was primarily impacted by merger-related expenses. For the nine months endedSeptember 30, 2020 , noninterest expense decreased$11.0 million , or 9%, from the prior year period primarily due to higher merger-related expenses in the prior year period, partially offset by an increase in employee compensation from merit increases and the acquisition of Trinity. Efficiency gains primarily from growth in net interest income and managed increases in noninterest expense have resulted in continued improvements to the Company's core efficiency ratio. The core efficiency ratio was 51.0% for the nine months endedSeptember 30, 2020 compared to 53.0% for the same period in 2019.
© Edgar Online, source
