Enterprise Financial Services Corp (EFSC) 2011 Q2 法說會逐字稿

Good afternoon, my name is Matthew and I will be your conference operator today. At this time I would like to welcome everyone to the Enterprise Financial second-quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. President and CEO, Peter Benoist you may begin your conference.

Thank you, Matthew, and good afternoon, everyone. I'd like to welcome you to our second-quarter earnings call and to thank you for taking the time to join us this afternoon. I'm going to begin with a forward-looking information disclaimer and then we'll get down to business.

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 2010 annual report, Form 10-K and in subsequent filings with the SEC.

Forward-looking statements speak only as of today, July 28, 2011 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 on this conference call in the Investor Relations section of our website.

I'm joined here by Steve Marsh, who is President and Chief Credit Officer of Enterprise Bank & Trust, and Frank Sanfilippo, who is our Chief Financial Officer. I'd like to begin just with some general comments on the quarter which, by the way, we were quite pleased with. And then I'm going to ask Steve to comment briefly on asset quality trends and to give you some color on loan growth in the quarter and on our continued positive trends in core deposit growth and mix.

Frank then is going to follow Steve and I've asked him to spend some time giving you his commentary on net interest margins, our net interest revenue growth in the quarter, capital and non-fund expenses and then we'll open it up for questions.

We reported out the second quarter with second-quarter earnings of $0.52 per fully diluted share and a large component of the earning speed attributable to the better-than-expected performance -- was attributable to the better-than-expected performance of our covered asset portfolio in Arizona. A higher volume of payoffs coupled with more favorable timing accounts for the significant increase in covered asset portfolio yields.

I have asked Frank to comment in more detail on this activity in the quarter and to give you a little better guidance on the volatility of the acquired portfolio, which he'll do. The real story, however, in the quarter we think was the significant increase in C&I loan fundings which was up 12% unannualized in the quarter.

And we think this is an affirmation of our commercial banking model; we think it's an affirmation of our market position and our strategy of attracting significant commercial banking talent to our platform. We continue to focus on this strategy and we expect to be making more high-level additions to our commercial banking team over the next few months.

Steve will share with you the makeup and the character of the loan growth in the quarter. But suffice it to say that, while we don't expect this quarterly growth rate to continue at this pace, we are very comfortable with the forecasted mid-single-digit growth rates in the aggregate non-covered portfolio on a year-over-year basis. Loan pipelines continue to remain quite strong.

As noted in the release, we completed a $35 million public equity offering that takes our tangible common equity to 6.8% and our Tier 1 common ratio to 9.3%. The additional capital provides some dry powder in order for us to continue to remain opportunistic.

While we continue to track a limited number of targets in our markets from an FDIC assisted transaction perspective, we're also focused on the potential for acquisitions in our wealth management line of business. We announced the hiring of Mr. Joe Gazzoli as head of our Trust & Wealth Management Businesses.

Joe brings a significantly higher level of experience to us given his extensive background, most notably as the former head of the trust company for TIAA-CREF. While our wealth management strategy remains the same with a focus on privately held business owners and other success minded individuals, we believe Joe brings the requisite skill set to accelerate our growth on both an organic as well as an acquisition basis.

So we continue to be pleased with the positive trends on loan growth, core deposit growth and mix, core margin expansion and improved asset quality. Capitalizing on opportunities to expand our wealth management business with new leadership is and will continue to be a major focus for us going forward. I want to turn it over now to Steve Marsh so he can give you his perspective on the loan portfolio and deposit growth. Steve?

Thank you, Peter. I'd like to spend a little bit of time talking about -- especially talking about credit quality and loan growth. On credit quality overall I think the numbers for the quarter indicate a long, slow but steady improvement in our credit quality metrics.

At June, 30 as the report indicates, our non-performing loans were at $43 million, almost even from $43.5 million at the end of the first quarter. That apparent lack of change masks what really went on because there was more activity there than the numbers would indicate. We had new non-performers of about $9.5 million. We charged off about $5.7 million. We had pay downs of previously disclosed non-performers of $4 million and a couple hundred thousand dollars other real estate owned.

The $9.5 million of new non-performers is the lowest level of new NPAs, NPLs in the last two years. So again, I think that's a sign of some encouragement that the problems have been identified. Non-performing loans continue to be concentrated in the areas that you would expect, construction real estate, residential real estate and investment real estate.

Charge-offs in the second quarter were $5.2 million versus $3.5 million in the first quarter and versus $7.7 million at June 30 of 2000 -- in the second quarter of last year. The level of charge-offs for the quarter produced an annualized rate of about 1.07%.

Other real estate owned, at June 30 we had $42 million in other real estate owned. About half of that, $21 million, is organic other real estate owned and half is covered by FDIC loss share. Other real estate owned at the end of the first quarter was $51 million, so it's down slightly.

During the second quarter we sold $9 million of other real estate owned for a book gain of $99,000. Year to date we sold $13 million of other real estate owned for a book gain of $522,000. I indicate that to show evidence that we still have a commitment to moving the other real estate owned in spite of the fact that it's a soft real estate market. ALL at the end of the quarter was 2.1%, our ALL covers about 98% of our non-performing loans.

Real estate values -- real estate valuations continue to be -- create pressure for us, especially on the other real estate owned portfolios. We're bringing new appraisals but we're marking those down to market so that we continue to sell those properties.

On a more pleasant note, turning to new loans, the loan portfolio at June 30 was $2 billion, that includes $180 million of loans that are covered by loss share FDIC agreement. The organic portfolio grew $65 million driven largely by organic C&I loan growth which was up $75 million. Our loss share portfolio was down $11 million and our construction real estate portfolio was down $18 million. C&I loans were up $143 million versus last year at this time.

The growth is really coming as confirmation of a couple of our strategies -- one is recruiting top talent in our footprint. Another strategy is the niches, the life insurance premium financing; enterprise value lending, which is what we use to finance a lot of mergers and acquisitions and that activity has been quite strong. About 50% of the growth came from new relationships, new loan officers, new relationships, about 50% came from existing growth from existing relationships.

Insurance premium finance, enterprise value lending, SBA lending, healthcare were all successful -- healthcare especially in the ability to attract new deposits. DDA growth was up about $25 million in the quarter. Competition especially for C&I continues to be quite strong, that's why we were pleased that the loan pricing on organic portfolio was down just 10 basis points as the niches showed that we were able to compete on knowledge rather than price. So with that, Peter, I'll turn it over to Frank.

Thank you, Steve. First I wanted to comment on -- to expand a little bit on what Peter talked about from a capital perspective. Capital ratios have strengthened, as he said, during the quarter as a result of our favorable earnings and our public offering of stock that raised $32.6 million net of the discount and professional expenses. As Peter said, this offering was done for growth purposes as we do expect to see some FDIC-assisted transaction opportunities in our markets and possibly fee income opportunities which will probably be RIAs.

Absent any significant -- any of these significant growth opportunities materializing or a double dip recession, we would plan to redeem TARP in 2012 out of available cash and bank earnings. Given all of this, we did decide to pass on the SBLF opportunity for which we had been approved by the US Treasury.

Now on net interest income, that has significantly improved from a year ago, it's up 75% in the quarter. Likewise the net interest rate margin has improved; we reported 4.95% in the second quarter versus 3.46% a year ago. Clearly the yield on the covered loans at 27.05% in the second quarter is driving a large portion of this improvement. If these loans -- these covered loans perform as expected we would anticipate a yield of 14% to 15%.

The early payoffs on certain covered loans allowed us to accelerate our discount accretion which drove the higher yield in the second quarter. This yield differential represented about $5.7 million of additional interest income. The early payoffs where we also had less realized loss than estimated also require us to lower our expected indemnification asset by about $1.5 million during the quarter, as we noted, via negative other fee income.

So the $5.7 million of additional interest income less the $1.5 million roughly of less fee income related to these early payoffs on covered loans created roughly $0.15 of additional earnings per share in the second quarter.

As we have said before, given the estimates required in predicting how these covered loans, most of which are purchased impaired loans, pay down or pay off for fair value accounting purposes, there can be and will be volatility in the yield. If there are negative developments on these covered loans, for instance, where they miss our loss estimates on the high side, then our provision for loan losses will be impacted. So far we have had minimal provision impacts.

Absent the covered loan impact loan impact we estimate the net interest rate margin in the second quarter at 3.45% versus 3.34% in the linked first quarter. As we noted in our first-quarter earnings call, a combination of loan growth driving a better earning asset mix and continued declines in funding costs have and will produce more favorable margins.

For the full year of 2011 we still expect to see mid-single-digit growth in non-covered loans with an emphasis on C&I. This growth, along with lower deposit costs, should yield slightly higher core margins moving forward. Tempering this increase will be some pressure on the non-covered loan yields given the competition for growth that Steve made reference to.

Finally, on non-interest expenses, as we noted in our first-quarter earnings call, non-interest expenses were $18 million for the second quarter and we would expect this quarterly run rate for the remainder of 2011. For the six months ended June 30 non-interest expenses were up $7.7 million or 28% from the prior year period.

This increase was due to $3.3 million in salaries and benefits primarily due to -- one, higher variable compensation accruals; and two, staff additions to support the Arizona acquisition activity. And finally, $2.8 million in higher loan, legal and other real estate expense. Fortunately the revenue increases were much greater resulting in a lower efficiency ratio from 60% to 51% on the year-to-date periods. That's all I have, Peter.

Okay.

And, Peter, I just had one other comment on credit to circle back to credit. We -- the Bank did complete its annual safety and soundness and compliance exam and we continue to enjoy a good relationship with the bank examiners.

Thank you, Steve. Matthew, we can open it up for questions, if you would.

(Operator Instructions). Chris McGratty.

Good afternoon, guys. Just a quick question on the non-performers. Do you guys have an estimate of where you're carrying them at? If you include general reserves, (inaudible) reserves to those loans? And anything you may have previously charged off?

We're thinking through your question.

Yes.

Because we have looked at that. So the -- where we're carrying the non-performing relative to their original book or original --.

Correct, yes.

Net of reserves and charge-offs --.

I think when you throw in the 20% reserve that we keep on most of the -- on average on our non-performing loans with the charge-offs, I want to say it was about 70%.

Yes, 70% would be fair. 77% would be fair.

Okay. And then how about on the OREO is that -- how much have they been typically written down when you put it in OREO?

Yes, I'd say 40%.

Okay.

We're carrying it at 60.

Which is what allows us to sell them for a profit when we get to it.

Okay.

Chris, that would be on the non-covered stuff.

Correct.

And that's all organic on both sides of the question.

Okay. And then in terms of just the absolute level of non-performing loans, is there a circumstance where you would look to move a large piece of them at once or is this kind of a remediation process on a one-by-one basis?

Although -- we have a bias to sell and get through this process. We have talked to a couple institutions that could do bulk sales. And looking at the numbers that they talk about and talking to other bankers, we just feel it's in the best interest of the shareholders to do it on a case-by-case basis.

Okay. That's all I had. Thanks again.

(Operator Instructions). Daniel Cardenas.

Good afternoon, guys. Just going back to credit quality. Can you give us a sense how it breaks down geographically in terms of total NPAs?

Yes, we can. Nonaccrual loans would be about 60% Kansas City, about 40% in St. Louis. And again, this is just the organic portfolio, not covered.

Right, okay. And what kind of trends are you seeing -- economic trends are you seeing in the St. Louis market? I mean, is it stabilizing, showing signs of improvement, showing signs of weakness?

Yes, it's a good question. You have to separate real estate from the general economy. If you take real estate out we've seen some pretty good activity, as I mentioned, in mergers and acquisitions, manufacturing, healthcare are industries that we see our customers doing well and we see new loan requests.

The real estate side continues to be quite slow, no surprise especially when it comes to the more difficult pieces of land in subdivisions and things like that. But outside of real estate I'd say it's a slow process of improvement. Real estate continues to be quite slow.

Is that echoed in Kansas City?

Yes. And then just to kind of follow through with your question on other real estate owned, about 35% would be in St. Louis, about 14% would be in Kansas City and about 51% is covered OER, other real estate owned, which would be primarily in Arizona for other real estate owned.

Okay. And then (multiple speakers).

The first number I gave you are non-performer loans.

I'm sorry, could you repeat that?

The first percentages I gave you, the 40-60 was non-performing loans.

Okay, great. All right. And then looking at the loan growth experience this quarter, was that kind of across the footprint or was it --?

It actually was. It was strongest in St. Louis -- we're larger, we're older in St. Louis. But it actually was across the footprint as well.

I would say though I think, just as it relates to organic growth, it probably would be in the following order -- St. Louis, Kansas City, Phoenix.

Right.

Phoenix being weaker still. I think we're continuing to see weakness in Phoenix.

That's correct.

Okay. All right, great. I'll step back for right now see if there's any other questions.

Stephen Geyen.

Yes, just one clarification and another question. The first one to Steve. You had mentioned that the new loan credit pricing was down about 10 basis points and, just to clarify, is that from the 5.44 that--?

(technical difficulty). I think it was down in the quarter.

It was something like 5 in the quarter.

Loans not covered under FDIC (multiple speakers) -- from 5.49 to 5.44.

Yes, 5 bps.

Okay. So anything new that's coming on the books is coming in somewhere around the 5.40, 5.30, somewhere in there, is that fair?

On average.

Yes, on average.

On average, yes.

Okay, all right. And the second question -- I know the sensitivity of it, but just curious. Maybe a bit more color on some of the lenders that you're hoping to pick up over the next couple of quarters. Maybe the regions that they might be in and kind of the qualifications you're looking for?

Yes, it would be across all three regions. We would love to add experienced relationship managers in all three regions. The ideal characteristics would be somebody who's really smart, somebody who's been in the baking business for let's say seven to 15 years and has a book of relationships. Somebody who has a long-term view.

Is it -- I guess where I was going with this -- is it more private banking or is it street commercial or somebody with kind of a broad commercial (multiple speakers)?

I think the near-term opportunities are more commercial banking, Stephen. Predominantly St. Louis and Kansas City.

Okay, thanks.

They're talking about senior commercial baking talent.

Right.

Right.

(Operator Instructions). There are no further questions at this time. I turn the call back -- oh, we do have a question, sorry. Brian Martin.

Hi, guys, nice quarter. Steve, maybe I just wanted you to talk a little bit about the inflows and just kind of a sustainable level as you look in the out years. I mean that number that came down this quarter, I know it's going to probably bounce around a little bit, but can you just talk about what you think is a sustainable level or a more realistic number as we go forward?

Inflows of non-performers?

Yes.

Correct.

Yes, assuming that the economy stays at this level or we see some slight recovery, this is what we expect. The level of downgrades was moderate -- not only the level of non-performers that came in but the level of downgrades was moderate in this quarter as well. So that gives us some confidence that the trends -- the slow steady trends that we're talking about, slow steady improvements will continue. That's of course barring a turn down in the economy and a Treasury Department blow up and things like that.

Okay and maybe just a second one. Just on -- maybe if you could just talk about that FDIC deal activity you're seeing, if there's any change with that? And just your thought process on declining the SBLF?

Yes, Brian, this is Peter. No, I don't think our view's changed on the FDIC opportunities. Given what we said I think we've indicated we've been deliberate, we have a target list, we continue to track it. We suspect there will be some opportunities and we continue to be focused on them. So, our view hasn't changed there.

And are you seeing any more opportunities, Peter, I guess -- or do you -- it seems like there's been a little bit of a slowdown there. I guess I'm just curious of your take on what you're seeing there --?

I wouldn't say we're seeing accelerated opportunities, no.

Okay. And then just on the SBLF?

Yes, what's your question?

Just kind of your thought process as to why you but decline it just given it seems like it's a good fit for the organization given the growth you're seeing here and just the potential going forward to buy down the rate.

Yes, I guess our view is sort of twofold. One, if we think we are in a position to eventually redeem TARP next year, which Frank indicated we think on an organic basis we can do. When we look at the net benefit to the buy down and the coupon over that period of time versus what we were concerned about as it relates to what's sort of buried in the rules of the game, we just chose to pass. And that's really -- that was our decision.

Okay, all right. And then just lastly, maybe, Frank, you can just give a little comment or a little bit of color (technical difficulty) the core margin over time. Just outside of the loan yields, the covered loan yields, what -- at 3.45 and it seems like there's still significant room for upside there.

What is kind of a target level as you guys go forward and maybe move the cost of funds a little bit lower, just give some -- I guess looking at the pricing you're seeing on the new loan opportunities out there, if you can just give a little bit of thought there? And maybe just as far as further reducing the cost of funds, if you think there's more possibility there?

Yes, and as I commented, while it seems like we still do have some room on the deposit side we are anticipating still a little bit of growth in order to hit that 5%. The ability to manage liquidity, which is a -- it is a balancing piece. I mean you lower deposit rates and you still continue -- people had a lot of cash. And until things get better you still see that happening and being on the balance sheet.

So I think that and then the last thing I'd say is the competitive loan pricing which we do see an terms of trying to steal it from the other guys this week that it's going to temper it. But I could certainly see it getting into the 3.50's for sure. We jumped up about 10 basis points from the first quarter as far as the core without the covered into the 3.40's. And I could see it going in to the 3.50's if these trends continue.

Okay. All right (multiple speakers).

In the near-term, Brian.

In the next couple quarters.

Right, absolutely. Okay. All right, I appreciate it. Thanks, you guys.

There are no further questions at this time. I turn the call back over to the presenters.

Okay. I don't know if we have any other comments from our end here other than to say, again, thank you for your interest and your time and we appreciate it and we'll see you next quarter. Thank you.

And this concludes today's conference call. You may now disconnect.