Good day and welcome to the Enterprise Financial Services Corp. Earnings 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, sir..

Good afternoon everybody and thank you for taking the time to join our call. I'd like to remind everybody on this call that a copy of the release and accompanying presentation can be found on our website. The presentation and earnings release were furnished on SEC Form 8-K late yesterday.

Please refer to Slide 2 of the presentation titled forward-looking statement and our most recent 10-K and 10-Q for reasons why actual results may vary from any forward-looking statements we would make today.

I'm joined on the call today by Jim Lally, President of Enterprise Financial Services; Scott Goodman, President of our Enterprise Bank & Trust, and Keene Turner, our Chief Financial Officer. Our core objectives are outlined on Slide 3 and we continue to execute well on each of them during the quarter.

Third quarter reported earnings were strong with diluted earnings per share of $0.59, increasing 23% over the prior year period and resulting in a return on average assets of 1.23% and a return on common equity of 12.5%. Core earnings per share of $0.49 for the quarter matched record earnings for the prior quarter and wrap 11% over the prior year.

Growth in the quarter was solid with core loans and deposits, both increasing over 5% in the quarter or 21% on an annualized basis leading to strong top line revenue contribution. The quarter showed a standard contribution from our fee businesses and expenses were well maintained.

Additionally, we were pleased to announce the agreement to acquire Jefferson County Bank Shares and its wholly owned subsidiary, Eagle Bank and Trust. This $1 billion asset bank will additional scale and operating leverage in our primary market of St. Louis. And we're delighted to welcome Eagle CEO, Mike Walsh and his team to the enterprise family.

I'd like to turn it over now to Jim Lally, and the executive team to give you more specific details on our results for the quarter.

Jim?.

Thanks, Peter. Our financial scorecards presented on Slide 4, looks back one year from the current quarter. As you can see we've grown our core EPS by 11%.

With 16% growth in net interest income through continued portfolio loan growth and net interest margins defense and the score card shows we relinquished some progress on levels of non-performers from previous periods. Unfortunately we were starting from a position of extreme strength.

We believe that we continue to have an appropriate focus on credit management and prudently provide for events that may occur. Our expense disciplined has helped translate our success into core EPS probe. This has manifested itself and our core efficiency ratio declined 6% from a year ago.

Finally, we're most proud of the fact that we have funded the balance sheet successfully with double-digit deposit growth maintaining a high proportion of DDA which has contributed to a stable funding cost. That trend continued for the current quarter despite extremely healthy loan growth that topped $155 million.

Turning to Slide 5, you can see that our loan growth was 70% over the last 12 months. The third quarter was especially strong growing at an annual rate of over 20%. Growth through the first three quarters of 2016 is unplanned, largely due to our continued focus on our sales process and refinement of our targeting strategies.

Slide 6 shows our strong and steady C&I growth over the last 12 months. This category has grown 17% year-over-year. The third quarter saw an improvement compared to the late quarter growing $58 million compared to a slight dip in the second quarter.

Competition for these clients is fierce but despite this we were able to onboard several new clients, as well as support expansion of several others.

Slide 7 illustrates that over 50% of our growth from the last 12 months has come from C&I, half of which came from our EVL business and the remainder split between life insurance premium finance and general C&I. Our commitment to a disciplined approach to commercial real estate is paying off.

As you know, we came with a targeted list of top developers in our markets and have benefited from an improved CRE market, especially in Kansas City and Phoenix. Over the last 12 months, our CRE portfolio has grown by $143 million or 12%; 50% of this occurred in the third quarter.

I would now like to turn it over to Scott Goodman who will provide more color as it relates to our markets, as well as deposits and non-interest income growth..

Thank you, Jim. Addressing our business units which are summarized on Slide number 8, we have been able to post growth year-to-date consistently across all markets. In more stable market of St. Louis and Kansas City, we've been able to comfortably outpace economic growth through a successful market share strategy. St.

Louis has grown nearly 11% or $143 million year-over-year with 50% of its growth coming from the C&I sector while Kansas City has grown $45 million or roughly 8.5%. The Arizona market share is better economic momentum and we've been able to grow that loan portfolio over the past year by $54 million to a total of $218 million.

For both, Kansas City and Arizona, the growth this period has been weighted towards the commercial real estate space as we've capitalized on a more active development climate and better CRE opportunities in those markets. Commercial office, industrial and senior housing represents a large portion of our activity there.

Jim touched on the drivers of our specialized lending portfolio which represents roughly 45% of our growth year-over-year. Following our particularly strong third quarter, pipelines overall look solid heading into year-end.

So we've likely borrowed some CRE activity from the fourth quarter, we remain confident in our ability to meet or slightly exceed our double-digit growth target.

Competition remains steadily intense, although we are still seeing some banks with low spreads, longer term fixed rates on CRE, pricing is really a secondary concern relative to credit structure. Common issues include soft covenant structures, limited or no recourse, and limited down payments or extended interest only period on real estate.

We're starting to see some pull back by mid-sized banks, particularly in Arizona relating to their regulatory bucket limitations with commercial real estate. This is creating a window of opportunity for us with selective investor groups.

We have also seen and testified competition deposits in recent quarters, but more frequent rate specials and more focused efforts by commercial bankers on deposit businesses. Production-oriented banking talent also remains in high demand.

Smaller banks in particular seem to be willing to pay over market to full talent out of larger banks to get the moderate level of experience. We continue to look opportunistically for successful bankers cultivating talent pipelines in all of our markets.

During the quarter we on boarded a number of new associates, including a Treasury Management specialist, three business banker, a C&I relationship manager in Arizona and a team of three experienced mortgage lenders in Arizona as well.

Credit quality remains solid and continues to be the foundation on which we've positioned all of our loan growth strategies. Non-performing loans did expand by $7.1 million in the quarter, due mainly to the addition of one particular $10 million C&I relationship with a professional services company.

We're confident in the plan that has been developed to work through this credit and are adequately reserved for it. In general, we feel good about the overall fundamentals of the portfolio which Keene will review in more detail. And we do not see any overarching trends that jeopardize our continued strong credit performance.

Shifting to deposit growth which is outlined on Slide number 9; as you heard from Jim, we've been able to complement our robust loan growth but a strong fourth running profile. Our position and deposit is that there are no silver bullets.

We continue to methodically reinforce our deposit culture with existent messaging, dedicated talent and targeted incentives. Double-digit growth is largely attributable to the relationship based approach we've used for the track operating businesses in our markets.

We've also targeted upper and middle market and larger corporations in our geography; specifically as it relates to excess cash balances which have been harder for these companies to maintain with larger institutions due to the penalizing capital, as we look forward to key a strategic priorities.

We're also focused on continuing to develop niche sales transition and specialty business lines which are dedicated to deposit gathering. Turning to Slide number 10, core fee income expanded to $6.8 million providing 12% growth in the linked quarter.

These results are due to progress we've made in expanding the sales focus and capabilities of our card services and mortgage businesses, along with increased customer demand for interest rate swaps.

Our tax credit and CDE business continues to be meaningful contributors as well, and we are extremely pleased with the progress we continue to make on further expanding complementary sources of revenue with our client base. Now I'll hand it up to Keene Turner for more detailed review of financial performance..

Thank you, Scott. Our third quarter results were once again strong as we continue to successfully execute and advance the strength of our core earnings power. Turing to Slide 11, we reconcile reported support earnings, reported earnings was $0.59 per share for the current quarter, $0.49 of that was core.

Contribution from purchase credit impaired or PCI loans was robust, $0.11 per diluted share, while we incurred a penny of non-core non-interest expense related to the announcement of the definitive agreement to acquire Jefferson County bank shares or JCB.

Once again, the contribution from PCI is principally economic resulting from cash collections and recovery related to the carrying value of those assets.

For 2016, we delivered a return on average assets over 1.25% and a 14% return on tangible common equity due to elevated contribution from PCI loans, combined with continued positive progression of our core earnings.

Turning to Slide 12, we further demonstrate those advances in the strength of our core earnings power as core EPS again till $0.49 for the third quarter with a return on average assets of 1.04%.

We again demonstrated further growth in net interest income of $0.04 per share, as we continue to drive fundamental earnings power on the revenue side of our business, while controlling expenses which notably declined by a $0.01 a share in the late quarter.

Additionally as Scott discussed, non-interest income contributed additional $0.02 during the quarter and further bolster our revenue gains. The advances in these areas allowed us to deliver consistent returns despite the $0.07 linked quarter increases in the business to low masses.

To reiterate, we provided an 11.5% core return on tangible common equity during the quarter and nearly 12% year-to-date. Slide 13 of the five-quarter trend of core net interest income and margin. Linked quarter net interest income dollars expanded 4% to $31.5 million and continued the growth trajectory of 16% from the prior year.

We regained two basis points of core net interest margin which totaled 3.54% for the third quarter and combined with stronger balance growth further expanded core net interest income dollars. Our optimism regarding our ability to defend net interest margin continues to increase and the underlying fundamentals remain solid.

The yield on portfolio loans improved five basis points to 4.25%, and we not only have robust growth of loans but that growth was successfully deposit funded while the cost of those deposits remained in check at 37 basis points.

We consider our net interest margin management efforts to be successful in recent years, particularly because we have -- we continue to be focused on growing net interest income dollars above all.

We've done so in the context of maintaining a high quality balance sheet, with a modestly asset sensitive interest rate risk profile and our variable rate loans were again 64% of the total.

Our outlook is for generally stable core net interest margin and we're confident that we will continue to drive growth in net interest income dollars as soon as we execute our business plan in order to continue to drive further expansion of our earnings. On that note, we also issued 2017 loan growth targets at/or above 10% for portfolio loan.

Scott covered both fee income and credit but I'll provide some additional details on the composition of the provision for loan losses for the quarter, in addition to his comments, which is on Slide 14. Credit quality metrics remain favorable and are still essential for our current and future success.

We reported a $3 million provision for loan losses during the third quarter of which approximately $2 million was attributable to the $150 million plus of portfolio loan growth. However, we did experience 14 basis points in net charge-offs during the third quarter following four quarters of negligible net charge-offs, or net recoveries.

Nevertheless, we've replenished the related reserves and maintained a stable level allowance to portfolio loan at 1.23%. Additionally, in our view, allowance to NPAs and coverage of non-performing loans is still strong and we always remain vigilant to preserve the high quality of our balance sheet while driving quality core earnings growth.

On Slide 15, core operating expenses totaled $20.2 million for the third quarter, a modest decline in salaries and benefits drove the linked quarter changes. And combined with robust revenue growth, the core efficiency ratio improved to 53% for the third quarter.

Additionally, we continue to target total quarterly expenses to be between $19.5 million and $21.5 million, exclusive of the JCB acquisition.

To that end, our growth in the quarter drove tangible common equity to tangible assets down slightly to 9% and we're further excited that we had the opportunity to manage capital, not only through organic activity but through M&A with the announcement of our agreement to acquire JCB.

Given that we held our fourth quarter dividend stable at $0.11 per common share, recognizing it made sense to maintain a status quo dividend in light of a material open acquisition. Nonetheless, capital management remains of the utmost importance to us and we continue to drive continued momentum in our business.

On Slide 16, we depict our continued progress in growing core earnings power. Over the last several years core EPS has extended by more than 15% annually and we've demonstrated stable and increasing core earnings which totaled $0.49 per share for the third quarter.

From the first quarter of 2014, core EPS has advanced 75% from a 74 basis point return-on-return average assets to consistently over 1% during the last five quarters. We continue to prove that we not only serve customers in a superior way but that we continue to drive earnings and value for our shareholders as we further position EFSC for the future.

We thank you for your interest in our company and for joining us today. And at this time we will open the line for questions..

Thank you. [Operator Instructions] We'll take our first question from Jeff Rulis with D.A. Davidson. Please go ahead, your line is open..

Thanks. Good afternoon.

Maybe a question on or just an update on the Jefferson County acquisition, just some early comments about how that ahead of -- ahead of close how that's going? And then maybe the update on the timing within Q1 went kind of early midway timeframe?.

Jeff this is Jim, I'll handle the first part, and hand it over to Keene on the timing.

As it relates to early part of integration, it's going very well; we've had several meetings with Mike and his team, and have plans in place relative to both the front-end of the business and the back-end of the business, very detailed robust plan put in place that we rolled out earlier this week.

That group meets weekly as it relates to the intentions of conversion and what have you. So as it relates to how is it going, it is going very well this point in time. I'll turn it to Keene related to timing of it..

Yes, so Jeff, I know that whatever I tell you I'm bound to be wrong here but obviously we'll like to get it closed sooner than later and so to the extent that we can get it closed early and in the first quarter, I think that will be helpful, but there are a number of things that need to be done between now and then, and there's holidays in the middle on JCB side.

So, it will probably take us a little bit of time and requires regulatory approval, as well as shareholder approval on their side. So those things have to get done and we're working diligently to make sure we get it closed as quickly as we can..

Okay. And Keene, I think you've broken out the expected accelerated cash flows another creation for '16, kind of net $10 million to $12 million range.

Any early indication for '17 -- I guess exclusive of the deal, is that possible to have that number?.

Yes, so we think that number is probably declining and as a rate between where we are the level for this year and maybe a three-year period for what's left on that. $16 million of accretible [ph] yield, so last this year that than -- I'm sorry, last next year then this year and continuing to decline sort of three years out.

We haven't put specific ring events, guidance around it and only the for the fourth quarter but I would expect it to be slightly last but we would expect to also make some of that up with enhanced growth and contribution from core..

And then maybe let one last one on the state tax credit revenues; any early indications in Q4 as far as generally a higher quarter for that revenue stream, anything that to speak off so far in the quarter that indications are that's going to come in, maybe previous to historical Q4's?.

It will be similar -- the level for Q4/Q1 will be similar to what's been historically and I won't at this point expect any difference in terms of split, something that's mostly customer driven verses enterprise driven, and so it just depends on how the paperwork gets filled out and when they write checks and how it gets closed.

Well, duty rates sort of down to the end that Q4/Q1 and some of them split but are generally expected at the same level as we had fourth quarter of '15 and first quarter of '16..

Okay. Thank you..

Thank you, Jeff..

Thank you. And we'll take our next question from Michael Perito with KBW. Please go ahead, your line is open..

Good afternoon guys. Question -- maybe couple questions actually revolving around Scotts comment. So it seems like you guys added quite a few revenue producers in the quarter on the mortgage side, and then also on the business banking side.

I know the overall expense guidance is unchanged but as we kind of look at the -- call it 20.5, the mid-point about it in the third quarter here, I mean how much of that kind of expense run rate associated with that, is it that number and were there any other offsets or things you guys did to kind of reduce some of the net growth of those additions?.

I would not see those types of talent additions as changing kind of our operating expense run rate. I think most of those folks are self-supporting, particularly business banking and mortgage. So I would not see that as a fundamental change in the operating structure..

I mean are you talking from -- like obviously, revenue per expense standpoint but I guess just on the absolute expense number like if I look at the $12.1 million of compensation benefits in the quarter; does that include the additions that you guys added?.

Yes Mike, I'd say generally, it does include some level of that but I don't think -- to Scott's point you're not going to see meaningful acceleration, we feel pretty good about that the level we're operating at and the guidance we gave and we bumped that up a little bit.

I think last quarter we revised the guidance, so if we saw that creep in and moving up, I think we'd give you that number but to Scott's point we hired in business banking and mortgage, those are business case self-supporting but we didn't feel like any of those hires was required to give you any advantage or any revised guidance in terms of that expense run rate..

Okay, got it.

And Scott, maybe -- do you have any comments on kind of the mortgage opportunity in Arizona? And maybe any kind early indications of what type of origination capacity you think that three person team could have?.

Yes, it's the team actually that came out of the larger competitor, that had experienced and brought some pipelines; so we feel good about the opportunity to head particularly in that market, I think residential is fairly strong in Phoenix.

We also think it gives us additional branding capacity by elevating our profile there and works well with on a referral basis with the existing portfolio we have out there..

Okay. And then maybe one more question from me for Keene, just on the kind of the core net interest margin outlook.

Am I correct to assume that the near-term outlook from your standpoint; are you guys I guess assuming any movement in interest rates and that kind of stable core outlook? And I guess if not, can you maybe remind us what you'd expect the margin to do over the next quarter or two if we did get up 25 basis point move in December?.

Mike, that's a good question. Generally we don't forecast rates when we give margin guidance, so its X-rate movement. I think generally we feel pretty optimistic about margin being stable, sort of with and without interest rates; we've got a fair amount of portfolio to keep 4%, that's variable rate.

We could -- as we get another rate increase start to see some additional pressure on funding costs but we think that generally we'll be able to manage through that with the credit verticals and the pricing we get there, as well as the impact it will have on -- not only variable rates in our portfolio but hopefully with a little bit of re-investment rate advantage as well.

But again, I think we feel generally good about the way we're positioned, we're modestly asset sensitive with rising rates from -- and we're generally either stable or modestly assets sensitive with a number of flattening or steepening curves. So we feel pretty good about the way the balance sheet will perform in either situation..

Okay, thanks. And actually I'm going to stick one more if I can, just on the commercial real estate growth.

I mean if we look -- over the last couple years, I mean it looked like the portfolio was pretty much flat last year, this year it's on pace for how low double-digit growth; and then obviously you guys are bringing on JCB which had a bit more commercial real estate focus.

I guess as we kind of think about that asset class, I mean obviously you guys have your -- the C&I platform in your specialty niches where a lot of the incremental focus going forward going to be, I imagine but just how should we be thinking about how the growth rate for that asset class once the pro forma companies are combined?.

Yes, I think it it's not going to change the way we approach our business lines or our markets, or C&I orientation, I think when you lay JCB over our current book, I wouldn't expect the growth rates to change that percentage dramatically.

I think we've been optimistic about real estate as we've mentioned with some investor groups that we have targeted and I think some of the pressure as I mentioned on some of the larger banks allows us to be more selective in terms of real estate but other than that I wouldn't see it changing who we are, or really accelerating beyond that..

All right, thanks guys, I appreciate it..

[Operator Instructions] Our next question comes from Andrew Liesch from Sandler O'Neill. Please go ahead, your line is open..

Thanks. Just a question on the loan growth here and the coming -- in the fourth quarter. So I mean it sounds like some of the CRE may have been pulled forward but you guys usually have a pretty good quarter on the senior debt M&A niche to help loan growth to end the year.

So I am curious how that product is tracking? What are your thoughts are on growing that right down the fourth quarter?.

Yes, I think it's pretty much in line with what we've seen in the past, that niche usually accelerates with deal trying to be close by the end of the year, so I wouldn't expect the profile that segment particularly be any different.

The real estate, because we target certain investors and it takes people off the street when they try to get deals closed, that was my comment on target, maybe seeing a little on the fourth quarter there..

Got you.

And it didn't sound like there was really any concerns over general credit trends, I mean obviously it's unfortunate to see one loan pop-up but just did also classifieds so far in the last few quarters, I'm just kind of curious what's driving that and maybe why don't you have any concerns with that trend?.

Yes, I think from a percentage standpoint the recent increase is more a function of coming off historically clean balance sheet in a low level.

And the dollar amount of the increase is really related to just a couple of credits and when you look at them, and we have there are no trends, there's maybe three larger C&I tech credits, manufacturing company, a sales and service company, and an entertainment media-related company.

So overall we think the book is still fundamentally sound and when you look at 66 basis point of NPL, relative to peers, I think we're still performing very well..

Great, thanks for taking my questions..

Thank you. And our next question comes from Brian Martin with FIG Partners. Please go ahead, your line is open..

I was just wondering -- I guess I don't know who -- maybe Jim, if you just tackle -- we talked about the CRE concentration levels a little bit, just kind of -- in the opportunities where you guys are being somewhat selective; what level are you guys comfortable taking that to relatively regulatory guidelines, especially as it pertains to the acquisition here?.

Yes, I think it relates to the some of the company, how will we close, we keep it at the same level. We're still focused on the C&I side of our business, it is going to be opportunistic in our three markets relatively to the key developers..

And in what level is that -- I guess you guys have a level where that CRE concentration levels builds out with the transaction and kind of an estimate of where it is?.

Yes, I think it's about 200% Brian. CRE is our risk-based capital..

Okay perfect, all right..

And then acquisition and development is about 50%, so I don't -- I think that's still very C&I focused, very C&I happy bank..

Yes, absolutely. And then just couple of other things; on the fee income side, you guys talked about some swap income this quarter -- I guess just trying to get a sense for how sustainable that type of income is as I know it can be somewhat lumpy but it's not something I guess you guys have talked about in the past.

So just -- can you give a little color on kind of was there anything unusual this quarter that drove that spike or is it -- just more the people you brought aboard and this kind of contributions they are making?.

Yes, I think it's a function of focus in our sales effort, and I think where the rate cycle is and how people are feeling about increasing rates moving forward. So I think we've tried to look at the opportunities to approach a lot of our borrowers with floating rate term loans, and with maturing term loans.

They really have a more concerted effort rather than offering long-term fixed rate which we've seen a lot of our competitors do, really the swap product as an advantage for our borrower, with some of more flexible structures where they may swap just a piece of their debt versus all the debt, really use it in an advisory capacity Brian, but obviously it generates some good fee income opportunities for us..

Yes, I mean -- I guess have you gotten through most of your lenders or is this kind of early on in that cycle at this point?.

I'll answer that Brian, it's been a theme for us in our credits -- in our sales culture for years to utilize the product.

I think now the markets have come more in line for the or seeing from our competition is more in line what the swap markets would give our clients, so therefore they are leaning towards using that product as opposed to a fixed rate product on balance sheet.

So it's nothing new as it relates to our sales culture, it's just now grabbing into the market little bit more..

Okay. All right, just two last things.

Just the -- you guys talked about not holding expenses, kind of even what the people you've added; can you talk a little bit about how much capacity you have to grow the bank without materially moving the expense base? I mean it sounds like there is still a fair amount of capacity to grow without any significant infrastructure costs; does that seems fair? Can you put a fence around it, just give [some data] and how much capacity there is?.

I would say that Brian, I think you're going to see as we've done in the past, continue to invest in the business, I'm not sure how much that we're sitting here saying there is a lot of expenses to take out.

I think Scott's point was the adds that we made in terms of run rate are relatively modest than when you get into some of the accounting for them, it doesn't really materially impact the run rate.

We will continue to make investments in the business, it's just -- we don't have -- I'll say delayed maintenance to our knowledge that there is any material investments, we're going to make some -- we will have our normal promotions and salary increases upcoming in the first quarter, we'll continue to guide you as far as we see expenses for next year as we get a little bit more clarity on it.

But right now our view is that the level that we're operating at and the continued gains that were going to make in revenue should keep our expense levels relatively similar on recurring similar revenues.

So that's what we were thinking about it and we'll come back with more guidance when we have it but we don't have any major strategies to go out on that millions of dollars and a new business line or things like that, the ads that we're making are incremental to support business, periodically and methodically overtime and that's why you've seen I think the run rate of expenses creep up and step-up steadily and hold for a while..

Okay.

I guess I was just looking for the capacity in loan growth you have to put on without adding much more [less] staff but if it doesn't sound like there is anything in the near-term, I mean throughout '17 right now at least based on the guidance you've giving today or the targets, you don't expect any significant cost debts to complete those objectives, I guess it's fair to say?.

Right, we're finalizing our 2017 plan sort of ex-JCB, and that will include as the staff from the run rate perspective, they will be staged in when portfolios gets to certain sizes within certain team, and we'll talk about that a little bit more openly in Q4 but right now I don't see the complexion of the bank materially different but for the acquisition next year..

Okay, perfect. And just the last thing, can you just run back through the folks that you hired because you went through them quickly but just -- quickly just re-mention those and then that's all I have..

Yes, we're working to pull that out, Brian..

The people that I've mentioned are treasury management specialist which supports our sales group; three business bankers, one C&I relationship manager in Arizona which was in ad, and then the team of mortgage lenders in Arizona that I mentioned as well..

Okay, that's helpful guys. Thanks for taking the questions..

Thank you. [Operator Instructions] Our next question comes from Peyton Green with Piper Jaffray. Please go ahead, your line is open..

Actually my questions have been asked and answered. Thank you very much, congratulations on a solid quarter..

Thank you [Operator Instructions] And speakers, it does appears we have no further questions at this time..

Let me just end by thanking all of you for your interest in Enterprise. I think we feel great about how the company is positioned right now, and we look forward to talking to you at our next quarterly call. Thanks very much..

And that does conclude today's program. We'd like to thank you for your participation. Have a wonderful day and you may disconnect at any time..