Good day, and welcome to the Enterprise Financial Services Corp. Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Peter Benoist. Please go ahead. .

Thank you, Kevin, and good afternoon, everyone. And welcome to the Enterprise Financial first quarter earnings call. I'd like to remind all listeners that during this call, we'll be making forward-looking statements.

Actual results may differ materially from results contemplated in our forward-looking statements as a result of various important factors including those described in our 2013 Annual Report on Form 10-K and in subsequent filings with the SEC.

Forward-looking statements speak only to as of today, Thursday, April 24, 2014, and the company undertakes no obligation to update them in light of new information or future events..

I'd also like to remind you that you can find a copy of our first quarter press release, which includes reconciliations of non-GAAP financial measures referred to in this conference call, in the Investor Relations section of our website..

I am joined today by Steve Marsh, Chairman and Chief Credit Officer of our bank; Scott Goodman, the President and CEO of our bank; and Keene Turner, our Chief Financial Officer..

If you had a chance to review our release you saw that we reported $0.30 in fully diluted earnings per share for the quarter, characterized by solid loan growth, which as Scott will detail, emanated from all 3 of our markets and will somewhat back ended in the quarter has continued and bodes well for the second quarter..

We had another strong quarter in terms of asset quality, with a 26% linked quarter decrease in nonperforming loans to 71 basis points of portfolio loans, and nonperforming assets declining to 81 basis points of total assets..

Reserve coverage on nonperforming loans increased to a healthy 180%, and charge-offs for the quarter were a modest 8 basis points..

On a linked quarter and year-over-year basis though, we did see declines in both net interest margin and net interest income..

On a linked quarter basis core margin, net of the impacts of PCI loans and the high level of prepayment fees experienced in the fourth quarter of last year, remains relatively flat..

Year-over-year, core margin tends to reflect the impact of a lower level of interest rates on newly originated loans..

While, Keene will give more detail on the trends and net interest income and net interest margins, suffice it to say, that we'll continue to expect some modest margin compression, resulting from intense price competition in all of our markets.

Our core pretax earnings nearly doubled from the prior fourth quarter, but declined 13% from the year-ago quarter, as a result of compressed margins and modest loan growth in the first half of the year as we've avoided taking substantial loan pricing and duration risk, principally in the commercial real estate segment of our portfolio..

Since June 30 of last year, the commercial real estate and construction segments of our loan portfolios have stabilized, and commercial and industrial loans have shown an annualized growth rate of 13.5%, and represent 49% of total portfolio loans.

We believe these trends bode well for long growth prospects in future quarters, as well as driving a more asset sensitive balance sheet..

I'd like to ask Scott Goodman to take a moment and characterize the nature of our loan activity during the quarter, to give you some color on our markets and to comment on our key businesses.

Scott?.

Thank you, Peter. In general, growth for the quarter was driven by continued success in C&I focused relationships, with some elevated emphasis on select commercial real estate opportunity, and aided by continued downward trend on commercial real estate payoffs.

Growth in the C&I sector, includes success in expanding our initial lines of business, as well as traction on new relationship poll[ph] .Organic loan demand from existing clients remain modest and line usage also remains stagnant compared to last quarter..

On a market level, we experienced a good growth in both the St. Louis and Arizona markets, offset by a slight decline in Kansas City. A majority of the St. Louis growth was attributable to new C&I originations, with some contributions from commercial real estate..

We continue to see momentum around our niche lending areas, principally life insurance premium financed, up 10% on an annualized basis and enterprise value lending or EVL, which was up 30% annualized for the quarter..

M&A seems to be driving a lot of activity, primarily within our EVL niche, but also in connection with portfolio center strategic acquisitions and succession planning..

We also experienced some growth in commercial real estate, resulting from targeted calling on existing relationships..

This commercial activity was complemented by decent growth in our consumer and residential portfolio product sets, as we began to get some traction on our cross-selling efforts..

Following growth in Q4 of 2013, KC originations slip modestly in the current quarter. On a positive note, paydowns moderated as well. And origination activity trended up throughout the quarter. We're also getting traction on the expansion of our EVL niche to the Kansas City market..

The positive trends resulted in net loan growth in the month of March, and the short-term pipelines, particularly strong in Kansas City, with a good mix of commercial real estate and C&I opportunities..

The Arizona growth was stranded around originations of several significant new C&I relationships and was assisted by a moderating payoffs with commercial real estate loans..

Momentum in the quarter improved toward the latter half and fundings were backend loaded. In that regard, the 90-day pipeline, which show us carrying this momentum forward in C&I, highlighted by continued niche lending expansion and some elevated commercial real estate volume.

We're seeing some opportunities to obtain fixed rate yield under 5 years by expanding our relationships with seasoned developers and investors, including some multifamily, healthcare and low income housing projects..

The competitive environment remain elevated in all of our markets, with continued emphasis on low rates, but also more widespread use of aggressive credit terms. These include issues such as extended amortizations, reduced or eliminated personal guarantees and higher collateral advanced rates.

Overall, competition is more intense around the middle market C&I and larger commercial real estate deals..

As the large and superregional banks remain down market with aggressive pricing. On the fee side of our business, we're experiencing positive trends and wealth management, resulting from new advisory relationships and some improvement on the transactional side of the business..

The decline in service charge revenue, mainly reflects some seasonality, but is overall better than expected due to cross sell of new C&I relationships and continued focus on reducing fee waivers..

The quarterly decline in the state tax credits business is purely seasonal and has continues to be a steady and profitable niche on an annual basis. .

Lastly, we experienced a modest decline from fourth quarter in mortgage originations, consistent with the environment. Although, pre-approval applications and internal referrals are up year-to-date, these have not yet translated into closings, as buyers struggle to find inventory in our markets.

We continue to adjust our expense base in relation to demand..

Now I'll pass it over to Keene Turner for the financial discussion. .

Thanks, Scott, and good afternoon. As you heard from Peter. We reported $0.30 of earnings per diluted common share for the first quarter. First quarter results were solid and there were several highlights, which I believe, provide the momentum on which to build for the remainder of 2014.

The first quarter marks the third consecutive quarter of mid-single digit annualized growth in our portfolio loans. At 7% or $37 million, we followed a fourth quarter loan growth of 5% or $27 million and 6% or $32 million for the third quarter of 2013..

Asset quality continues to further improve, and annualized net charge-offs for the first quarter, or 8 basis points compared to 33 basis points for the fourth quarter. As a point of reference, net charge-offs for the year ended 2013 were 30 basis points..

During the first quarter of 2014, nonperforming loans declined to 0.71% of total loans and nonperforming assets declined to 0.81% of total asset. The allowance for loan loss coverage of our nonperforming loans, increased to 180% at March 31..

Finally, noninterest expense return to pre-fourth quarter levels at $21 million for the first quarter 2014..

Net interest income on a core basis was $24.1 million and the resulting net interest margin was 3.44%. Both measures declined from the fourth quarter levels due primarily to $600,000 less on a fully tax equivalent basis of loan prepayment penalties on the linked quarter basis..

The reduced level of prepayment income impacted net interest margin by 9 basis points. Additionally, exclusive of the impact of fluctuations of loan prepayments fees from the fourth quarter to the current quarter, net interest margin results met our expectations..

Assuming at similar level of prepayments, net interest margins would have been relatively constant, as the reduced interest expense from the fourth quarter, Federal Home Loan Bank prepayments, offset some modest compression in core loan yields..

The core loan yields performance is inclusive of approximately 5 basis points of net interest margin compression that results from continued runoff and higher yielding PCI loan each quarter, as the contractual interest income on those loans is included when we present our core net interest margin..

Margin discussions aside, we're focused on growth in dollars of net interest income. And it's important to note in that context, the majority of the loans booked in the first quarter were variable rate, as we continue to have success in acquiring new and growing with our commercial and Industrial customers..

Given where we are in the interest rate cycle, we believe, that our model provides the natural advantage over time in the quality of loans, we are banking, not only from a relationship and credit perspective, but also from an interest rate risk perspective.

Compared to one year ago, variable rate loans increased 9% and are now 62% of total loans and we continue to maintain an asset-sensitive interest rate risk profile.

On the liability side of the balance sheet, total deposit costs increased 2 basis points to 44 basis points for the first quarter, primarily due to shifts we experienced out of DDA and into money market accounts.

Deposit levels declined during the quarter from expected seasonality, consistent with what we have historically experienced in previous first quarters..

We believe, there our focused efforts together additional and diversified sources of deposits has helped this trend and is important for long-term success..

The overall cost of funding improved another 5 basis points to 68 basis points for the quarter and has been reduced 18 basis points from the prior year quarter.

This improvement demonstrates our efforts to continue to drive down our funding costs in order to mitigate declining asset yields, while balancing maintenance of sufficient liquidity to support our growth plan..

Purchased Credit Impaired or PCI loans contributed $8.7 million of interest income during the first quarter, but declined when compared to the fourth quarter of 2013. The yields on PCI loans remained stable on a linked quarter at 26%, but balances decline $15 million and sold at $110 million to end the quarter..

Additionally, accelerated cash flows were slightly lower at $3.9 million for the first quarter. Despite the continued runoff in PCI loan balances, the contribution from covered assets improved during the quarter to $1.9 million on a pretax basis compared to $1 million in the fourth quarter..

Driving this increase was a reduced level of change in the FDIC receivable of $2.1 million, which was offset by slightly higher provision on PCI loans of $1.1 million..

We expect the average balance of PCI loans to be $113 million for 2014, and highlight that the yield has been relatively constant at 26% for the last 4 quarters..

Additionally, it's important to note that we continue to meaningfully reduced the balance of the FDIC loss share receivables each quarter. The balance at March 31 was just under $30 million, a $4.5 million reduction during the first quarter and a $27 million reduction compared to March 31, 2013..

As our estimates of overall losses have declined, we write this receivable down to its expected value over the term of the loss share agreement.

However, we do expect some level of volatility in the provision for loan losses and the receivable balance going forward, but we think that the magnitude of the swings will abate slightly, beginning after the second quarter..

The carrying value of the PCI loans with $110 million at March 31, net of $42 million of accretable yield and $95 million of non-accretable difference.

As loans work out and cash flows occur over time, our positive experience with accelerated payoffs suggest, that there is a potential for a portion of non-accretable difference to result in additional income..

As we look forward, we continue to focus our efforts on improving the contribution of pretax earnings on a quarter basis. Reported pretax income was $8.9 million for the first quarter and results, excluding covered assets or core contribution was approximately 80% or $6.9 million..

This trend continued our progress toward driving earnings growth from our core business, while continuing to maximize the results of covered assets and PCI loans.

Core pretax income increased $3.4 million during the quarter and exclusive of items that were isolated to the fourth quarter, was relatively consistent performance except for reductions to the provisions for loan losses on the portfolio loans.

Continued asset quality improvement, mainly lower net charge-offs in the quarter, which were only $400,000 compared to $1.8 million during the fourth quarter, evidence to continue asset quality progress..

First quarter net charge-offs with 8 basis points were aided by $1 million of recovery. To the extent, we were able to maintain our solid asset quality metric and trends. We are optimistic that we will continue to be able to maintain a relatively low level of credit costs on our portfolio loans..

Our first quarter expenses return to our more normal run rate at $21 million compared to 3/4 quarter levels, compensation and benefit experience from seasonal increases from payroll taxes and related items, in addition to some investments made to bring several risk functions in half..

However, continued focus in other areas help maintain overall expense level. We remain focused on our expense run rate and any opportunities for improvement, and we continue to actively monitor and manage expenses, as we execute our growth strategy..

I will conclude my comments with a quick summary of our capital position. Tangible common equity to tangible assets increased above 8% to 8.25% at March 31. Our current capital level combined with the expected performance of our covered assets and our core bank, provide a solid base from which to grow.

Additionally, in line with tangible common equity trends, our regulatory ratio continue to be strong and positioned us well at the end of the first quarter..

This time, I thank you for joining us today, and we'll open the lines for any questions. .

[Operator Instructions] And our first question will come from Jeffrey Rulis with D.A. Davidson. .

TCE now above 8%, I guess is that prompted anymore M&A discussions internally or revisiting the dividends.

I'd guess is that led to more aggressive sort of capital usage discussions?.

Jeff, This is Peter. I think we communicated in prior calls, that on the M&A side, we are more intentional, we are having discussions. There's nothing active currently, but I'd say, we're putting more attention towards that given capital ratios and potential opportunities. We're looking in market. We're not looking out of market in that respect.

But we continue to focus on that subject. In terms of the dividend, no. We've not really formally addressed the question of the dividend at this point. .

And then maybe one for Keene on the noninterest expense that you guys mentioned kind of finding a base here. Does that suggest that we see modest growth from here, I mean the -- it sound like comp was up a bit in the first quarter, but add that $21 million base, I'd guess you have to see that. .

I think, we're comfortable with the $20 million to $22 million level that we've guided you before. My comments were really aimed at making sure that, we're clear on the components on how that's shifted over the last several quarters. .

Okay, and then maybe just one last one on the credit side. It seems like, you had some pretty good success reducing that NPA number.

I guess the makeup of the remaining NPAs, is it more granular in that it would be more difficult to kind of show the same pace of cleanup or how do you see that group of NPAs in terms of size and ability to produce the numbers here?.

So this is Steve Marsh. As we have talked about prior calls, we're a business oriented bank and so is kind of lumpy. I think, we're comfortable with the existing level. I wouldn't expect that we continue on the downward trend at the same rate that we've been going down. .

We go next to Chris McGratty with KBW. .

Peter, maybe I missed it on the growth, you talked about a lot of the growth in the quarter was at the end of the first quarter.

Is that you suggests that we should see an acceleration in the rate of loan growth of the balance there?.

Yes, I think we're implying that, Chris. It was back ended, Scott mentioned that, and I think, what was encouraging -- my comment, formally, they were seeing it in all 3 markets. And I think Scott also alluded to a particularly in the Kansas City market, where we're seeing some very good strength right now.

So, yes, I think, we're encouraged by the trend and would expect it to continue. .

Great. And a question on M&A, it seems like conversations are picking up. You guys do have some earnings pressure with the runoff portfolio, but you have built at C&I platform that I think a lot of banks would be interested in.

Peter, just for a second, say with the bank is running it, how do you think about long-term outlook for the company in terms of independence?.

Well, I think, we're running this obviously for the shareholder. And in that context, we're very aware of the fact that we are a public company and we're for sale everyday of the week, so in that respect both the management team and the board is very realistic about the environment.

Having said that, we built this model because we think, it can perform over the longer term. I spend a lot of time on this calls talking by the strategy in the context of where we see the potential for outperformance and that's where we're working on as a management team.

So I think in that respect our current view is, as long as we can continue to deliver from a shareholder perspective, that issue will take care of itself. If we can't do that then we maybe looking at other alternatives. .

[Operator Instructions] We go next to Andrew Liesch with Sandler O'Neill and Partners. .

So it looks like about 5 years ago at the end of this year, when the value capital deal took place.

Are there any loans left with the loss sharing agreement on that right now?.

We don't have, a -- there's very few. And I think, we are well reserved, well positioned for that. So that's really should be a nonevent for us. .

Okay, and then just based on your comments on like the dividend, it sounds like, I would imagine you haven't discussed the share repurchases either.

Is that correct?.

That is correct. .

Got you. .

[Operator Instructions] We go next to Brian Martin with FIG Partners. .

Peter, I guess maybe Steve, could you just talk about the strength you're seeing in Kansas City and is that tied to the market condition is getting better there? Or is it going to be people you hired and maybe just in that context, the C&I growth you guys have put up over the last year, you're looking at $110 million or so growth over the last 12 months.

What part of that is coming from Kansas City versus coming from St.

Louis?.

Brian, this is Scott. I'll take that one. On Kansas City, I would say, we did add talent as we said, at the end of last year. And I wouldn't say, I can directly attribute the lift to specific new RMs, but we're spreading out the portfolio, as a result of and improved productivity and increased market activity for the team overall.

And as I mentioned, the pipeline for Kansas City has really been building and I would say, a combination of both C&I and CRE. And that pipeline does include contributions from some of those new RMs. So I think, those things take time, but I think, we're seeing the activity build.

I think as we look forward, EVL is a strategy that we've had a good success in the spreading over to Kansas City. We have dedicated folks up there, that are focused on that niche, that are focused on their own markets and their own sponsors. So the growth there has been good. .

Okay, and then just with the growth over the last year. I mean, how much did you attribute to Kansas City versus kind of St.

Louis?.

I think on a waiting basis, more of the growth has been in St. Louis than in Kansas City, but as a reminder, last year, we spent a good portion of that year, recruiting and selling those open positions, shifting the management around.

So I feel good about the way we're able to preserve the portfolio in Kansas City and now we're in a position for growth there. .

Okay, all right.

And then just maybe from a margin standpoint, just kind of the -- as rates begin to rise I guess because your -- the amount of variable rate loans versus fixed-rate loans, you guys have and just kind of how you're thinking that impact will affect the [indiscernible] rates tends to move higher?.

Well, this is Keene. I mentioned in the comments, we're at 62% variable rate, we're very well positioned for rising interest rates. We have a fair degree of asset sensitivity, but we're cautious to be too assets sensitive given the kind of the give up in the short term.

So we're trying to balance that but certainly we're positioned for rising rates and we feel good about where we are, and as I reiterated, I think, we feel good about our models as well. With an expectation that rates will rise at some point. .

Okay. And the new loans you're putting out today, I mean, can the prepayments kind of affect this thing this quarter on the spending yield side.

What are new loans coming on the books that typically today in?.

Yes, Brian, I would say, it's obviously, extremely competitive. I think, we've been -- we've had a good a very effective holding of margin with the existing clients, and that particularly on loan relationships under that $1.5 million, $1 million threshold, which is a good portion of our portfolio.

And I guess, you move up into a larger middle-market, large commercial real estate deals. We are seeing, for example, fixed rates in the 5-year range in the mid-3s, which is aggressive. I think, if you look at larger C&I deals and the middle-market, you're seeing maybe mid-2 to low 2 spreads over LIBOR on floating rate deals. .

Okay. That's helpful. And then just on M&A perspective, how -- you kind of mention you're looking in market.

As far as the capacity to -- how much capacity, do you guys see yourselves as having a -- I guess, a lift, what are the typical size wise, what you're looking at?.

Yes, Brian, this is Peter. That's a little tough to answer.

I think, in this respect, we've indicated I think in the past that as we focus on the topic, we're primarily interested in trying to find organizations that I'm going to say are complementary to us in terms of our business model, which narrows the field and limits the options quite a bit to some degree.

And what falls out of that from a size perspective can vary, but generally would be certainly under $1 billion and I'd say over $250 million. .

[Operator Instructions] And there are no further --.

I was just going to say If that's -- if that's it for the Q&A, we just like to thank you, once again for your interest in EFSC and if you have any follow-up questions, please feel free to contact us individually, Keene, Benoist, Scott or Stephen. We thank you very much for joining the call. .

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation..