Enterprise Financial Services Corp (EFSC) 2015 Q3 法說會逐字稿

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.

Good afternoon, and thank you for joining our Q3 conference call. I would like to remind all of our listeners that are webcast slides are available through our corporate website and accompany the earnings release, which was furnished on SEC Form 8-K earlier today. Please refer to slide number 1 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 may make today.

Our approach of continual improvement in core fundamentals resulted in strong performance in the third quarter period. Earnings of $0.48 per diluted share were 12% higher than the prior quarter, and 17% higher year over year. More importantly, core results not including the effects of the PCI portfolio, equaled $0.44 per diluted share, or 92% of reported earnings. They were 16% higher than our prior quarter results, and 19% greater year-over-year.

Return on average asset and return on average tangible common equity measures were both strong for the quarter at 1.13% and 12.65% respectively and compare favorably to our return on assets of [102%], and a return on tangible common equity of 11.98% in the year-ago period.

Core returns of 103% on average assets and 11.56% on average tangible common equity were also quite strong for the quarter. On a core basis, solid loan growth of 9% annualized, coupled with effective margin management, resulted in an increase of 3% in pre-provision net interest income compared to the linked quarter and a 9% year-over-year growth rate.

Loan pricing disciplines remained intact as portfolio loan yields declined to modest 1 basis point from the linked quarter in spite of continued strong competitive pressures in all asset classes and across all of our markets. We were particularly pleased with the strong growth in the CNI loan growth category, up 11% annualized as this loan category represents the strength of our relationship-based delivery model, which is designed to acquire and grow long-term relationships and as our primary focus and strategy.

The strategy is reflected in the 5% linked quarter, or 20% annualized growth in noninterest-bearing deposits as we continue to gain market share in both the commercial and business banking segments of our business. From a capital perspective, we are comfortable with current levels as they position us to support not only current, but also expected future strong earning asset growth rates.

Finally, I'd note that the Board approved an additional $0.01 per common share increase in the Company's quarterly dividend to $0.08 a share as an indication of its continuing confidence in the Company's ability to execute at a high level in a still difficult banking environment.

I would like now like to ask Scott Goodman to give you a deeper understanding of third-quarter results in the context of the current environment and market conditions. Scott?

Thank you, Peter. We continued to build the loan account during third quarter, posting net growth of $59 million. As reflected on slide number 3, we remained on a steady annualized pace from last quarter with a trailing 12 month growth rate of 13%. The growth emanated primarily from the St. Louis and Phoenix markets and reflected the mix of general, specialized and piloted net strategies.

Moving to slide number 4, the CNI segment of the portfolio continues its strong growth trajectory. Up 17% over a year ago, and contributing $36 million, or 60% of the growth for the quarter. A breakdown of overall loan growth is outlined in the segment chart on slide number 5.

We continue to move CNI relationships into the bank through a steady and disciplined calling process. Our focus has been consistent messaging to small and midmarket businesses that tend to fall below the radar of the larger banks, resulting in nice growth in the general CNI category for the quarter.

The niche lines of business remained active as well, with good deal flow across the board. The life insurance premium business posted $9 million of growth for the quarter, reflecting a seasonal uptick relating to premiums paid from the existing policy book, which is weighted somewhat toward the second half of the year.

In the tax credit business, it was an active quarter as we won several pieces of new business utilizing our new market tax credit expertise. These leveraged loans were used to facilitate capital projects in several low to moderate income communities, creating sustainable jobs and differentiating the enterprise bank offerings. As a result, we were able to pull a coveted long-term relationship away from a major competitor in St. Louis, and significantly enhance several other existing relationships.

Growth for the quarter also includes acquisition of roughly $26 million in large ticket specialty consumer term debt which is included in the other categories on page number 5 chart. We continue to explore expansion of niche lending strategy as a means to enhance returns and compliment our core market-based business. Consistent with the development of our current specialty businesses, we made a modest investment that will allow us to evaluate the longer-term merits of this particular niche as we study the market and monitor performance of the newly required acquired portfolio.

The enterprise value lending business continues to be busy with our teams in St. Louis and Kansas City seeing additional deal flow resulting from expansion of sponsor relationships into other markets. Following a robust second-quarter, new M&A closings declined slightly in Q3 and some churn in the portfolio resulted in a modest reduction to the book. Overall, however, this niche is up nearly 22% year to date, and the pipeline of deal activity indicates continuing momentum.

We expect the typical seasonal pickup into the fourth quarter with firms managed closing to year-end deadlines. Origination of new investor real estate slowed slightly in the quarter, and we did experience some sales of property and refinancing into permanent debt markets, resulting in a slight reduction to the CRE portfolio.

We are still seeing a steady flow of acquisition in development opportunities, particularly in the Arizona and Kansas City markets. The commercial real estate markets remain very competitive, and our growth here has been consistently focused on investors where we can develop a comprehensive relationship, more projects where we can offer unique solutions and get paid accordingly.

On a regional basis, slide number 6 shows that third-quarter growth was centered around the St. Louis and Arizona markets. The St. Louis originations were bolstered by the new CNI life insurance premium and tax credit business, as well as the aforementioned consumer portfolio acquisition.

Arizona posted a balanced mix of both new CNI relationships and several investment real estate deals. Kansas City was active in growing its EBL book and originating several new relationships, but experienced some larger payoffs from the sale of properties, businesses, and secondary market refinancings to offset this production for the quarter. Year to date, Kansas City has experienced double-digit annualized growth.

The competitive environment is steady and remains robust, both in terms of competition for new clients and new banking talent. We continue to recruit opportunistically in all markets with experienced bankers that can move relationships, or build teams. During the quarter we added one experienced RM in the St. Louis market and also recruited a sales manager to support the growth and continued expansion of our business banking channel.

Relative to funding, our focus has been on growing core deposits and managing the overall cost of funds. Deposits, shown on slide number 7, are up for the quarter, and have increased over 12% from one year ago. Growth has come from moving new relationships into the bank, as well as a focused strategy targeting several deposit-rich industry segments. While VDA as a percentage of total deposits remained relatively consistent with the prior quarter, our cost of funds has declined by 9 basis points from this time a year ago.

The fee businesses show steady growth. Deposit service charges are up nearly 13% from prior year based by traction on cross-selling initiatives, as well as net new CNI relationships. State tax credit brokerage revenue was up nearly 24% year to date for 2015 compared to the similar period in 2014.

The timing of revenues in this business is somewhat lumpy, and weighted towards the later months. But overall, we expected to fully sell our available inventory of low-income housing tax credits again in 2015. Wealth management revenue was stable, with fees from new relationships offset by the market impact of lower asset values.

Now I will turn it over to our CFO Keene Turner for a financial commentary.

Thank you, Scott. Third-quarter results continue to reflect a steady progression of high quality core earnings. Our 2015 return on average assets is 1.11%, up 20 basis points from the prior-year period and our return on average tangible common equity was 12.5%.

Results for the quarter were favorable, both unreported and core basis. You heard from Peter, and I can't reiterate enough, that both measures delivered returns in excess of 1% on assets.

Slide 8 outlines the components of diluted earnings per share. Reported EPS was $0.48 per share, core EPS was $0.44, with a difference being purchased credit impaired loans contributing another $0.04 per share to overall EPS.

Slide number 9 summarizes the changes in our core earnings per share in the linked quarter. Net interest income dollars grew and contributed an additional $0.03 per share, while reduced provision for loan losses contributed $0.05 per share.

We also recognized the state income tax true-up in the quarter, which added an additional $0.02 per share to core EPS. Offsetting the increases was a modest decline in noninterest income of $0.03 per share, and expenses were $0.01 higher than the second quarter.

Slide 10 demonstrates the impact that continued portfolio loan growth and net interest margin management that had on that net interest income dollars. Net interest income totaled $27.1 million for the third quarter, and grew $0.8 million in the linked quarter, and $2.2 million compared to the prior-year quarter.

The growth in net interest income can be attributed to 13% portfolio loan growth over the last 12 months with annualized growth of 9% for the year to date period. The portfolio loan growth has increased our earnings power by approximately $0.27 per common share on an annual basis over the prior-year period.

Core net interest margins was 3.41% for the third quarter, a decrease of 5 basis points compared to the second quarter. Despite the decline of core net interest margin, we are encouraged by the underlying strength of the components as the decrease was primarily due to increased liquidity from successful deposit gathering efforts throughout the third quarter.

Additionally, we are pleased with our trend to stabilize portfolio loan yield. We started the year 4.15%, expanded to 4.17% in the second quarter, and the yield was 4.16% for the third. As a result, we are increasingly encouraged by the continued successful defense of portfolio loan yields and more generally, core net interest margin over the upcoming quarters. Nonetheless, we remain much more focused on growth and net interest income dollars than net interest margin percentage.

We maintained our modestly asset sensitive interest rate risk profile as 62% of our loans are variable rate and our average duration for the portfolio was unchanged. The loan to deposit ratio declined 3% to 95% on September 30, which provides some additional flexibility moving forward. I will also mention, with respect to the size of the investment portfolio, we were pre-purchased investment securities for both our planned fourth quarter purchase activity and expected cash flows in the interim because of the strong deposit generation.

Slide 11 depicts credit trends for the last five quarters. Net chargeoffs declined to 2 basis points for the third quarter. When we combine the low level of net chargeoffs with a 48% decrease in nonperforming loans, it drove a 1 basis point decline in the level of allowance to total portfolio loan, which stood at 1.24% at the end of the quarter.

The resulting provision for loan losses of $600,000 generally reflects loan growth during the third quarter. You can see that our levels of nonperforming loans and assets are less than half our peer group at around 30 basis points. We are always focused on maintaining strong credit quality metrics, and we continue to be pleased with how credit indicators compare to industry and peer levels.

The next slide shows are five quarter trend in operating expenses, which were essentially stable at $19.3 million for the quarter. Growing revenue for the quarter kept the core efficiency ratio below 60% for the second consecutive quarter.

Our continued performance of expenses toward the lower end of our guidance had been driven largely by controlling professional fees and loan legal expenses. We expect to continue to maintain this discipline during the remainder of the year and throughout 2015 as we target total quarterly expenses to be between $19 million and $21 million.

Slide 13 demonstrates the continued growth in our core EPS. It reflects a summary of all our efforts, and we continue to have it as a principal focus for driving returns and value for our shareholders. We have done so by staying true to our vision, and executing consistently on our strategy.

Slide 14 summarizes our progress on each of our financial priorities as compared to a year ago. 19% core EPS growth driven by sustained steady growth in net interest income has been, and remains, our top priority. Core net interest income dollars has increased by 9% from the prior year, and we have defended core net interest margins well, despite continued headwinds from the runoff of purchasing credit impaired loans and challenging interest rate and competitive conditions.

Our expectations for portfolio loans of at least 10% growth remains unchanged and is expected to drive consistent and favorable growth in net interest income dollars. Despite the growth, we have lost sight of maintaining the highest quality balance sheet by maintaining our credit standards as we have favorable levels of nonperforming loans and prudent allowance coverage levels, preserving an interest rate risk profile that is modestly asset sensitive.

We continue to grow the amount of net interest income we expect to earn of the next 12 months with or without interest rate changes. Continuing to execute and further develop deposit gathering strategies while managing capital levels prudently to support growth over the long term.

We are certainly proud of our demonstrated trends and increasing returns, and we are pleased to have eclipsed a 1% core return on average assets for the third quarter. Focus has been the key for us, as we have maintained high-level customer service, stay true to our business model, and translated both to growing our profit in return.

We are committed to building both profits and returns with incremental progress achieved each period to be aggregated of a longer-term horizon. We believe this focus further enhances the value of our franchise, validates the strength of our business model and will continue to drive shareholder value as we execute on our strategy.

Thank you for your interest in our Company and for joining our call today. At this time, we will open the line for questions.

Thank you.

(Operator Instructions)

We will take the first question from Chris McGratty with KBW.

Your line is open.

Good afternoon, everyone.

Hi, Chris.

Keene, I just want to clarify the comment you made on the securities book and the pre-purchase in the quarter. Should we be thinking, given that comment, that we should be at around a $500 million quarterly run rate in terms of the size of the book? Or is it likely to fall from the third quarter as cash flows come in?

We get about $25 million of cash flow on a quarterly basis. So we'd expect it to decline by that level and then stay relatively in proportion to earning assets as we move forward. We just have that access liquidity in the third quarter. And we chose to pre-purchase just to be able to put it to use and earn a little bit of net interest income on it.

Okay, so that 14% that you've been keeping it at is probably the way to think about it into next year?

Absolutely.

You briefly touched about capital, Peter. Obviously you've raised the dividend, and the growth is pretty good. What is the outlook for maybe accelerating capital return either through acquisitions or you still have the loss share? Could you use a portion of your capital to terminate that and clear up the visibility a bit, or is that not really being considered at this point?

Yes, I think we've indicated in the past and it is still true. Our current focus is on core fundamentals. We're showing good double-digit growth rates. Our expectation is that will continue. So that's our primary focus.

I think we've said in the past on the M&A side, if we can find opportunities that really speak to what I'd call enhancing our strategic strengths, we would be very opportunistic in that regard. But I think I've said before, I don't looking at M&A necessarily as a strategy but more as a tactic. So while we are doing some work around the M&A side, there is nothing in the offing currently. Although as it relates to our thinking, it's certainly a part of our thinking.

Okay, and then maybe on the loss share, if you don't mind?

I don't know that we look at loss share as -- maybe it's a timing issue as it relates to capital return or deployment. We certainly are entertaining that and know that is a viable option. But it has got to have an economic return to us or an economic benefit. So in that regard, it would just be a timing issue. We would hope that it will be capital accretive over the longer term, and we wouldn't do anything we didn't think was otherwise.

Thank you.

(Operator Instructions)

We will go next to Jeff Rulis with D.A. Davidson.

Please go ahead.

Thanks. Good afternoon.

Scott, you mentioned the deposit, a couple of comments there. Specifically, could you get into those programs that are in place that drove a lot of the strength? Perhaps was there some seasonality there?

I think it was more -- we've taken a much more prescriptive approach in the way we plan for and incent for deposit hunting in our sales process. I think what you're seeing there is growth related to the new relationships that we are bringing in, which are generally C&I. We've directed some bankers specifically to focus on deposits. And they are hunting in certain industries and niches that would tend to carry more deposits on their balance sheet. I think that's really what you're seeing.

Okay. So as you manage the balance sheet with that loan to deposit ratio bouncing around in the 90% range, is it a similar approach? Are you going to continue to stay on the C&I lenders to build that deposit? Or you've got a little more flexibility this quarter than you did?

Absolutely, it will remain a focus for us. I think certainly building our franchise value is connected very closely with the deposit base. And I think that C&I focus is going to continue to help us develop that. And we will continue to develop strategies that go after those low-cost deposits.

Great, and then maybe just one other on the loan growth outlook. You mentioned your expectations to close the year. I don't know if it's too early to roll that ahead to all of 2016, the way you see the environment shape up. Any early expectations for loan growth next year?

This is Keene, I think we expect to deliver on our guidance for loan growth with a strong fourth quarter. And I think we have a very similar outlook as well as into 2016. We have, as Scott mentioned, strong calling efforts in place. And I think we expect to continue that and compete very well for the growth.

Okay. Thank you.

(Operator Instructions)

We will go next to Andrew Liesch with Sandler O'Neill & Partners, your line is open.

Hello. Just one follow up for me.

Chris, if you could talk a little bit more on the consumer portfolio purchase -- like what sort of loans they are, yields, and then thoughts on how that idea came about.

Sure, I can tackle it. As I said, it is consumer paper; it is specialty niche, six-figure secured, both in our footprint and outside of our footprint. We are really looking at it as a way to evaluate that particular niche. We were taken there by an existing banker of ours, who underwrote loans in this particular niche. It is really an evaluation process that is similar to a way that we got into some of the other niches that we are currently in. I think if we decided that had legs and merit for expansion, we could go into more detail there. But it's certainly -- I would say it's expertise driven, which is consistent with what we do with some of the other niches.

Got it.

Andrew, this is Keene.

As it relates to the yield, the net purchase yield is about 3.5%. We paid a premium to get it, so it would be a little bit better yielding piece of paper once we would develop origination capabilities there.

Got you. Thank you.

With no questions remaining, I would like to turn the call back to management for any additional comments.

No real additional comments other than to say thank you for joining us on the call today and thanks for your interest in the Company. And we look forward to the fourth quarter call with you as well. Appreciate it. Thanks very much.

Ladies and gentlemen, that does conclude today's conference call; and we thank you for your participation.