Peter Benoist - President and Chief Executive Officer Scott Goodman - President, Enterprise Bank and Trust Keene Turner - Executive Vice President and Chief Financial Officer.

Jeff Rulis - D.A. Davidson Chris McGratty - KBW Andrew Liesch - Sandler O'Neill Brian Martin - FIG Partners.

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

to drive quality loan growth; to grow core net interest income, to defend core net interest margins; to maintain high credit quality performance; and to improve operating leverage. While loan volume in the first quarter was stable, it's consistent with first quarter seasonal trends and prior years and year-over-year portfolio loan growth was 12%.

Scott Goodman will give you much more detail on the core loan book, but suffice it to say that originations and fundings were strong in the quarter, and we're maintaining our current portfolio loan growth guidance at or above 10% this year. While core net interest income was flat during the quarter, it's up 8% year-over-year.

Continued improvement here is based on our ability to deliver solid core loan growth. And while first quarter net volumes were stable, we're confident that our credit origination strategies will allow us to meet our growth expectations this year. We expanded core net interest margins modestly in both the linked quarter and year-over-year.

Competition for loans remains intense in all of our markets, as banks struggle to generate loan volume. We believe that pricing discipline is critical to building long-term shareholder value. And while we saw a modest 4 basis points of compression in our loan yields during the quarter, we continue to remain focused on defending core margins.

Asset quality was another good story this quarter, as we saw linked quarter declines in core non-performing loans and classified asset levels. Net charge offs were up in the quarter from low levels last year, as we continue to address any asset quality issues aggressively.

Given the nature of the loan book, non-performing loan levels can by lumpy on a quarterly basis, but our overall trend in already excellent asset quality metrics is expected to continue.

Operating leverage improved again on a linked quarter and a year-over-year basis, as operating expenses showed a 5.7% reduction from the prior quarter and a 6.8% reduction from the prior year. Finally, I would comment that that capital levels continue to build as a result of strong earnings.

Our tangible common equity exceeds 9%, and we expect to continue to examine long-term capital management strategies, given the continued capital build. Let me now turn it over to Scott Goodman for his comments.

Scott?.

Thank you, Peter. Referring to Slide number 3, as Peter mentioned, loan balances were leveled from 2014 yearend. The activity behind these balances, however, indicates good origination volumes offset by some niche-related seasonality and transactional paydowns.

The commercial real estate segment of our portfolio posted growth for the quarter, with the seasonality and paydowns mainly relating to the C&I category.

As illustrated on Slide number 4, C&I was slightly down point-to-point on the heels of a very robust Q4, reflecting relatively slower organic activity by C&I businesses, combined with paydowns from asset sales and timing issues in the tax credit niche.

Overall, origination activity was consistent with historical first quarter levels, and our annual C&I growth trend was solid at nearly 20%. Now, going to a bit more detail on some of this, as Slide number 5 examines the loan portfolio by segment for the quarter.

Seasonality issues mainly impact our enterprise value lending and tax credit niches, with some additional modest impact in the life insurance premium finance book. As a reminder, enterprise value lending or EVL is our senior debt product structured to private equity relationships in the M&A space.

It's common to see a quieter first quarter for M&A, following typical acceleration of deals at the prior yearend. Our activity with existing sponsors and the expansion of this niche in the other markets is tracking nicely.

While competition for M&A transactions by PE sponsors is intense, our reputation for execution is earning us more opportunities, and is allowing us to leverage this reputation into new private equity firm relationships. In addition to St.

Louis, Kansas City, Indianapolis and Minneapolis, we are now actively looking at new opportunities in Charlotte, Nashville, Cleveland, Denver and Dallas. In our fourth quarter call, I discussed some expected timing issues relating to tax credit funds, which by regulatory requirements had to close by yearend.

This moved the loan funding into Q4 of 2014, with proceeds then deployed in Q1 of 2015. In addition, the wind down of another tax credit fund resulted in a large payoff in Q1. The timing of new allocations tends to push more activity towards the second half of the year.

We do have some capacity in our federal new market tax credit program to deploy funds into qualified derivatives, and we were also fortunate to have been awarded an additional $5 million of state new market tax credits in the Illinois program in Q1. This comes on the heels of our $35 million federal allocation during 2014.

We plan to apply again for additional allocation in the federal new market program during the second quarter, having received awards in three out of the last four years. This program has enabled us to assist businesses in low-income census tracts, but much needed growth capital are generating both new relationships and fee income for the bank.

The life insurance premium business is operating according to plan, both in terms of new originations and existing premium fundings. Net growth should accelerate somewhat, as the timing of renewal premiums in our book are weighted more heavily towards the second half of the year.

General C&I declined slightly, reflecting some softening of capital demand from existing clients and sale of businesses and assets. Regional performance is highlighted on Slide number 6. St. Louis growth was bolstered by the life insurance premium book as well as several new C&I relationships.

Kansas City also landed several large new C&I relationships and EVL deals. On a net basis, however, this was muted by two significant paydowns relating to a large project based line reduction, and the sales our healthcare business.

The former client is already actively engaged in replacement projects, and we have also been successful in landing new business with the acquirer of the healthcare company. In Arizona, we continue to leverage our commercial real estate expertise through steady originations with a select set of proven clients and top-tier investors.

Payoffs were consistent with the last several quarters and continue to be related mainly to the sale of assets, businesses and the execution of watch credit strategy. Outside of one larger payoff in Arizona in Q1, we continue to grow our number of relationships overall.

As I discussed last quarter, we have elevated our sales activities relating to core funding. As Slide number 7 shows, deposits grew nicely in the quarter. While somewhat seasonal, the magnitude of the growth reflects execution of more focused calling programs.

We've had good results with an industry-focus calling and have rolled out new deposit bundles in Q1, designed to attract net depositors. The competitive environment, not much different than last quarter, meaning that it remain intense and crowded.

Outside of the niches, both larger and smaller banks are marketing heavily and pricing remains aggressive. Within the niches, we do see a bit more breathing room, but there is some pressure from non-bank lenders relating to EVL. Structure is a challenge, particularly around guarantees, leverage points and amortization.

Competition for talent is also intense, with longer lead times and elevating cost factors for experienced bankers. We continue to pursue new talent in all of our markets with an active process and ongoing discussions. The fee businesses were generally stable for the quarter.

As a reminder, the gains related to the sale of state tax credits typically occur in the first and the fourth quarters. This business is steady and demand is strong and we expect to sell through our full inventory again during 2015.

Credit quality, overall, remains sound, with continued decline of 62 basis points in non-performing loans during the quarter. The $9.8 million of additions to non-performers are diverse in nature, and we see no material loss exposure in that regard.

One larger credit represented a majority of this amount and is under an asset based and closely monitored structure. Trends are positive as represented by non-performing loans, delinquency levels, risk rating migration and declines in OREO. At this point, I'd like to hand if off to our CFO, Keene Turner, for a financial review..

net interest income dollars was essentially flat, despite two less days in the quarter; stable loan balances and net charge-off levels led to a lower provision for loan losses on portfolio loans and improved EPS by $0.01; seasonally lower fee income decreased EPS by $0.02; and improvement in operating expenses increased EPS by $0.03 per share.

Core performance resulted in a return on average assets at almost 90 basis points, which is a marked improvement from less than 75 basis points for the first quarter of 2014. Additionally, return on average tangible common equity for the current quarter was above 10%, and again in my view a very solid start to 2015.

Scott discussed portfolio loan and deposit trends during his comments, and despite the stable loan portfolio balances during the quarter, net interest income dollars continued the strong growth trend we initiated during 2014. Slide 10 depicts the five quarter trend.

The impact in magnitude of portfolio loan growth was demonstrated with relatively stable core net interest income in the linked quarter. Core net interest income declined only $100,000 during the quarter, despite two fewer days.

The impact of two day is approximately $600,000 and was offset by earnings on $58 million of higher average portfolio loan balances. The resulting core net interest income for the first quarter was $25.6 million with net interest margin expanding 1 basis point to 3.46%.

The stability of net interest margin was aided by the debt extinguishment we completed during the previous quarter, which improved core margin by 5 basis points. This improvement offset a headwind of 5 basis points from accelerations affecting contractual cash flows on purchase credit impaired loss.

The yield on portfolio loans declined 4 basis points this quarter to 4.15%. When we look at the dollar contribution to net interest margin for the first quarter, the contribution of portfolio loans was stable versus the linked quarter, due to strong trends in the average balances.

Also, deposit growth we experienced during the quarter continue to help us defend our core net interest margin and also enhance some of our balance sheet liquidity measures.

Earning assets continue to expand, and therefore contributed to strong growth in the run rate of core net interest income and our continued progress for improving our core earnings power.

The current quarter daily run rate of core net interest income compared to the prior year quarter is $21,000 higher, which equates to approximately $0.24 per diluted share on an annual basis. We remain focused on maximizing current and future net income, while maintaining a modestly asset sensitive interest rate risk profile.

Slide 11, the fixed credit trends during the quarter. Charge-offs were slightly elevated compared to our recent experience at $1.5 million or 25 basis points of average portfolio loans for the quarter.

However, we were able to meaningfully reduce the level of both non-performing loans and assets to 0.62% and 0.52% of portfolio loans and total assets respectively.

Given our strong coverage of the allowance for loan losses of non-performing loans at 200%, we believe that not only how we positioned ourselves through positive credit experience going forward, but we will continue that favorable levels of non-performing loans and assets versus our peers.

We reported $1.6 million of provision for loan losses for portfolio loans for the quarter, and the resulting allowance of the portfolio loan, which is steady at 1.24%, and I will point out is now in line with that of our peer group.

On the next slide, we demonstrated our five quarter trends in operating expenses, which declined by $1.1 million to $19.1 million for the quarter. The improvement was driven largely by reductions in professional fees and loan legal expenses, which were seasonally higher at yearend.

Our first quarter operating expenses reflect the effort we have put into managing expenses, while also building our core revenue stream.

For the first quarter, our core efficiency ratio declined to 61%, and we encouraged that our expectations for revenue growth combined with our expense run rate allow for opportunities to make further progress in efficiency and operating leverage.

To that end, we expect to continue to maintain this trend during 2015, as we target quarterly expenses to be between $19 million and $21 million for quarter. All these items have combined to deliver a steady improvement and core earnings per share.

Slide 13 reflects the progress we have made each quarter, and consistently growing earnings power and core EPS. Specifically, when compared to the first quarter of 2014, we have grown core EPS by 25%. We're pleased with that progress, but nonetheless it remains our primary goal. On Slide 14, we summarize our financial priority, which are unchanged.

In addition to the growth in core earnings per share, we have improved each one of these points over the past year by making incremental progress each period. As we have previously stated, growing net interest income dollars has been maintained, had been and remains our top priority.

Our efforts have expanded core net interest income by 8% from the prior year, and we were able to enhance core net interest margin despite continued headwinds from PCI loans and a challenging interest rate environment.

Our expectations for growth and portfolio loans of at least 10% also remains unchanged, and is expected to drive a continued increase in net interest income dollars.

As always, we intend to continue to take care of the balance sheet by maintaining our credit standard, as we continue to reduce non-performing loans and assets over the past year, while enhancing allowance coverage levels, preserving an asset-sensitive interest rate risk profile, as we have increased both the amount of net interest income we expect to earn over the next 12 to 24 months, and the amount we will earn if interest rates increase.

Continuing to execute and further develop deposit gathering strategy, while managing capital over the longer-term. With that in mind, tangible common equity to tangible assets did increase to 9% at March 31, and we believe we have sufficient capital to support robust organic growth and seize other opportunities that may arise.

As Peter mentioned, as we have approached, and now having surpassed 9% TCE we have become even more focused on our capital build and longer-term capital management effort. I'd be remiss if I didn't mention the impact that Basel III had on our risk based capital ratio during the quarter.

In particular, commercial commitments with maturities less than one year led to an increase in our risk-weighted assets and resulted in a decrease in capital ratios from December 31.

Despite the decline, our ratios remain in excess of regulatory requirements and are also well above, what we say is in requirement, inclusive of capital conservation buffers.

To be even clear, Basel III requirements have been contemplated in our capital management considerations and potential opportunities we might have for managing capital to enhance shareholder return. To that end, 2015 is off to a solid start and we look to continue to grow profitably by staying focused on what we do well.

We are encouraged that our positive financial trends have validated our strategies, and we will hone and focus them even more in the upcoming year. Our strategies have resulted in meaningful growth in core EPS and our necessary foundation for increasing long-term shareholder return. We are committed to building both one step at a time.

We will focus on enhancing the value of our franchise and business model. We thank you for your interest in our company and for joining us today. And at this time, we'll open the line for any questions..

[Operator Instructions] And we do have our first question from Jeff Rulis with D.A. Davidson..

A question on, Keene, I think you talked about on the core margin benefiting 5 basis points from the debt extinguishment. Maybe you could talk about just kind of core outlook, and I guess what that means kind of going forward all things considered..

I think we still expect there to be general headwinds and compression and core margin work harder this quarter to try to mitigate that to the extent possible. We have seen the yield on new loans stabilized somewhat.

Peter mentioned, our discipline on both sides of the balance sheet, but we still have that headwind in particular in the contractual cash flows of the PCI loan book too. So any quarter we can keep it flat, we're pretty happy, but we generally expect it to be down over the course of the year..

Maybe we're talking about core..

Core..

And then maybe just an update on the interest rate sensitivity you guys talked about a little bit in the release, and the focus on C&I and variable rate, but I guess anything specific as to kind of your progress as to maybe less or more asset sensitive than you were a year ago or a quarter ago and just kind of where you'd intend to head?.

Well, when we did the restructure on the liability side it made us slightly less asset sensitive. That was the reason we did it. Also when you take that and combine it with our significant loan growth, we did increase the base expectation to what our net interest income will be.

So on a percentage basis, we are about the same as we were at yearend, and slightly less than we were in the second and third quarter of last year. But generally with rates stable or rates up slightly, we expect to earn a substantial of more money in both scenarios.

So we're modestly asset sensitive and we like that given how short the balance sheet is..

Our next question is from Chris McGratty with KBW..

Keene, maybe a question for you, tough question, but I'll ask it any way. The spread between your reported and core margin has gone essentially from 150 basis points over the past couple of years.

Given the outlook you talked about and expected contribution from PCI, can you talk about conversions and expectation for timing of kind of conversions between the two margins?.

That is a really tough question. I would tell you, we really don't think about that given that we're really tremendously focused on what we're doing on the core and that PCI or the additional accretion tends to bounce around on top of that, depending on what happened with the actual loan, so that one is really tough to predict.

Out two to three years that's going to be mitigated somewhat, but it's going to decline at a decelerating rate. I don't have a lot more color on it than that..

The other question kind of with the noise in the reporting numbers is kind of what's going through fee income line. Your other income is modest, but there is a couple of million dollar drag from kind of FDIC adjustments.

Can you talk about given the structure of these contracts how we should be thinking about? I know you gave expense guidance, but the fee income is a little bit more challenging to kind of decide.

So can you maybe shed a little bit of a light on kind of how we should be predicting fees income for the next couple of years?.

I mean, I think the guidance we've given in the past on that is that there is $1 million to $2 million of amortization on about $11 million of FDIC receivable that is going to -- that we do on an accelerated basis, and so that's there, and going to decline over time.

I think that number in the first was a $1.9 million if my memory serves me correctly. We'll pull that number out quickly for you. But that number should decline between a $1.9 million and zero overtime and the amount of that is really dictated by the amount of the FDIC receivable.

We've been collecting that and that will go through I think the last -- or non-single family is third quarter of next year, which is the biggest piece of it, so that will be mitigating over time. It was $2.3 million in the quarter, my apologies..

There is some attention from some of your peers, the mid-cap peers about kind of terminating lost shares.

Can you talk about the thought behind that? Is it applied to you guys and would you do it, because we've kind of heard it, just kind of the analyst community, that FDIC maybe a little bit more receptive to kind of plain ball?.

Yes, it's certainly on our radar, and we're looking at it. Obviously, the economics vary either between getting out of all that, and so we take that into consideration when we work the FDIC on any of those things, but it's certainly something that we're aware of and is of interest to us, if we could execute it in terms that are benefit to us..

Our next question comes from Andrew Liesch with Sandler O'Neill..

Couple of credit related question. I'm just curious, if the charge-offs that you had this quarter, were they related to any of the new non-accruals that bounced overall non-performer higher last quarter..

There was maybe one midsized that bounced, but the rest of it really related to prior issues, ones that had been in our radar and work through..

And then it also look there were five unrelated accounts, about just under $10 million that were added to non-accrual this quarter, then again that the three for about $13 million last quarter.

Is that like normal amount that comes in every quarter or has it ticked up a little bit lately?.

Yes, I would say, there is nothing trend-wise that concerns us. There is nothing abnormal there. Overall, we really like the trends. I think I tried to point out some of the things that we really look at risk rating migration, but the ones that were added, there is really no trends, nothing that's concerning lot of smaller diverse kinds of businesses..

I'll just add to that. From a gross charge-off perspective, gross charge-offs in the quarter were not meaningfully from the fourth quarter. We just didn't have quite the recovery experience we did in some of the previous periods, that tends to be a little bit lumpy as well, so just if that gives you any additional perspectives..

And then what is the dollar allowance that is currently held against the purchase credit impaired loans..

$11 million..

Our next question is from Brian Martin with FIG Partners..

Can you maybe just spend more time this quarter talking about the capital build and just kind of the thoughts on that? Can you just give us some color as to how you guys are thinking about that, and kind of maybe the appropriate level you should be caring and maybe kind of how to reconcile that over time, what the thoughts are in priority terms?.

I would say that we don't necessarily have a target level. I think we look at it in terms of where our opportunities are and where our growth is. I think the other thing that we consider is how quickly it's building.

And I think, yes, you've seen us become more intentional about our capital management efforts, and that means that we're thinking more carefully about how quickly we're going to allow it to build. I would also say, too, we didn't see a lot of balance sheet growth in the quarter. We don't expect that trend to continue.

Obviously, we're planning for some growth. So it won't build on a percentage basis quite as quickly in upcoming quarters, if we perform as we expect to on the growth..

As far as M&A discussions, any change from kind of previous quarters or is it just kind of unchanged as part of the activity level?.

I would say the activity level continues to be about the same. I would say, our appetite continues to be about the same. We've outlined our financial priorities. And certainly any deal that are on a long-term basis really help us accelerate those, we would look at it very carefully.

But given last year our ability to grow and what we expect from ourselves this year, we also have to be careful that better transaction wouldn't derail that. So we look at it in both ways, and right now obviously there is nothing we can tell you about..

And then just the deposit initiative strengthened in this quarter. And I guess the impact on the cost of funds, I mean, I guess with the debt repayment we didn't really see much.

But I guess going forward, if you continue that effort, any positive debts that just continue to trending gradually higher on the on the funding cost?.

Well, actually, if you look at what our expectations are I think for funding cost that we see in the short-term, following any changes in interest rate, I think we'd expect that would blend down just slightly..

And then you talked about the efficiency ratio and kind of improving the operating leverage going forward. I guess, maybe kind of how are you guys thinking about the efficiency, there's kind of a level you can get that to.

And then is it more revenue driven or is it more on the expense side that you think can kind of get to the level?.

I would say we're not necessarily solving for a specific number. I'd say we're encouraged by the fact that we have improved it 7% from just a year ago. But going forward it's going to be more on the revenue side then on the expense side..

And the sub-60, 58 type of level, is that achievable or is that -- it sounded like that was kind of a case with expected continued improvement from where you're at today..

I think my comments were we expect to continue to grow core revenue, and we expect expenses to be right around where they are. So that would indicate that we expect it to be able to drive it down slowly, but I don't think we can make a 7% jump in another year.

But we're certainly staying focused on, and it's a lot of hard work to get it where it's been and to keep that trend going..

It looks like we have no further questions. So I'll turn the call back over to our speakers for any closing comments. End of Q&A.

Just a brief comment. I'd say, as Keene mentioned, we think we're off to a good start this year. We really are pleased with the continuation of the progress we're making. Our focus obviously for the balance of the year is going to continue to hone in on core execution. You'll hear it from every banker in the country. It's a tough banking environment.

There is no exception here. But we feel very good about the progress we are making and we'd expect it to continue. So with that, I'd just like to thank you again for your interest in Enterprise, and for joining us today. And if there are any follow-up questions, please don't hesitate to call anyone of us. Thank you very much..

And once again, that does conclude today's call. And we appreciate your participation..