Delaware | 001-15373 | 43-1706259 |
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
150 N. Meramec, St. Louis, Missouri (Address of principal executive offices) | 63105 (Zip Code) |
Registrant's telephone number, including area code |
(314) 725-5500 |
Not applicable |
(Former name or former address, if changed since last report) |
Item 2.02. | Results of Operations and Financial Condition. |
ENTERPRISE FINANCIAL SERVICES CORP | ||||
Date: | May 4, 2012 | By: | /s/ Deborah N. Barstow | |
Deborah N. Barstow | ||||
Senior Vice President and Controller | ||||
Operator: | Good afternoon. My name is Stephanie, and I will be your conference operator today. |
Peter Benoist: | Thank you, Stephanie, and thank all of you for taking the time to join our call this afternoon. I have with me Frank Sanfilippo, our chief financial officer, and Steve Marsh, who is president of our bank and our chief credit officer. As is our custom, we'll make some prepared remarks and then turn the session over to you for question-and-answer. |
Frank Sanfilippo: | Thank you, Peter. Good afternoon. |
Steve Marsh: | Thank you, Frank. |
Peter Benoist: | (Stephanie), I think we're ready to entertain questions. |
Operator: | At this time, I would like to remind everyone, in order to ask a question, please press star, one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And, again, if you would like to ask a question, please press star, one on your telephone keypad. |
(Daniel Cardenes): | Afternoon, guys. |
Male: | Hi, (Dan). |
Male: | Hi, (Dan). |
(Daniel Cardenes): | So what are you seeing out there that's giving you confidence that you can grow your portfolio 7 percent for 2012? |
Male: | Well, I know the first quarter numbers would add some caution to that, but, you know, we did grow loans strongly last year. Loan pipelines remain strong, and the portfolios of the people that we brought over continue to be robust. You know, we're talking to people. I think people are convinced that the model that we have is a model that they can - that they're looking for. |
(Daniel Cardenes): | All right. And do you think this is more just a market share grab, not necessarily customers feeling better about the economy and coming out and actually tapping lines and... |
Male: | Yes, line usage remains very soft. One source - we talked about the niches, and the merger and acquisition business has picked up in the last year to year-and-a-half, so that's been a major |
(Daniel Cardenes): | OK. And then just kind of a quick question on the TARP retirement. Are you guys looking to do that with internal funds? Or is that something that maybe you would consider going to the capital markets? |
Male: | Yes, I think as I indicated in my remarks, that's the discussion we're going to have tomorrow at the board meeting. So I really can't answer your question any further. |
(Daniel Cardenes): | OK. Fair enough. All right. Thank you. |
Male: | Thanks, (Dan). |
Operator: | Your next question comes from the line of (Chris McGrady). Your line is open. |
(John Barber): | Good afternoon. It's (John Barber) filling in for (Chris). |
Male: | Hi, (John). |
Male: | Hi, (John). |
(John Barber): | How are you? Maybe I'll ask the TARP repay question a little differently. How much cash do you have at the holding company right now? |
Male: | About $18 million, (John). |
(John Barber): | And your ability to upstream? Can you talk about that? |
Male: | There we do, you know - if we have regulatory approval, we do have the ability to upstream necessary funds from the bank. |
(John Barber): | OK. And just your peers are at probably (a TC ratio) above seven, tier one common, around 9 percent. Kind of, when's the reasonable period when you expect it to get there? |
Peter Benoist: | To get to 9 percent? Is that your question? |
(John Barber): | Sorry, I missed that, Peter. What'd you say? |
Peter Benoist: | To get to 9 percent? Is that your question? |
(John Barber): | Just a (TC ratio) of 7 percent and a tier one common of 9 percent. |
Male: | Yes, we're saying (TCE) at about the end of '14. |
Male: | Right. |
(John Barber): | OK. All right, we talked about the increase in non-performing loans. It was primarily contained to three relationships. Are those coming from any particular markets? |
Male: | They were primarily St. Louis. |
(John Barber): | OK. |
Male: | There were three relationships. Two were St. Louis, one was Kansas City, so - but primarily St. Louis. |
(John Barber): | All right. And how should we think about the overall size of the balance sheet going forward? |
Male: | You know, I think of it as stable. Frank indicated in his remarks, we think we have some re-pricing room on the liability side yet, but in that context we've given you an indication in terms of our loan growth estimates. We are not looking at, obviously, any acquisition opportunities at all. So I'd say stable. |
Male: | Yes, I would just add, (John), I mean, we're basically funding most of our loan growth through the cash - either the excess cash we have on the balance sheet or just cash flows from the mortgage-backed securities and such. That's also helping fund our - the CD run-off, which we continue to do and we've stated in our releases to try to lower the cost of funds (inaudible) rollout. |
(John Barber): | Thanks, Frank. Just building on that, I guess, what's the level of cash that you're comfortable kind of running with? I mean, it's about - over 5 percent of assets... |
Male: | (Inaudible) |
(John Barber): | Just at the bank. |
Male: | Oh, OK. Well, it probably - I'll tell you what. Let me just check one thing. I'm sorry. I don't have a - I don't think of it that way at the bank. I really look at, you know, the - we target things. So investment portfolio at 15 percent to 20 percent of assets. And then our current levels of earning assets to assets are probably about right, because we have the FDIC indemnification asset that's rather large, but I'll be coming down, so I guess - I would think it'd be less than 5 percent, just straight cash. |
(John Barber): | All right. Thanks for taking my questions. |
Male: | No problem. |
Male: | Thank you, (John). |
Operator: | Your next question comes from the line of (Brian Martin). Your line is open. |
(Brian Martin): | Hi, guys. |
Male: | Hello, (Brian). |
Male: | Hi, (Brian). |
(Brian Martin): | Say, Steve, just the number you gave on the classifieds in the quarter, that - can you just run back over that? Was that - does that include the substandard in (down flow)? What was the number you quoted? I guess I just didn't catch that. |
Male: | Oh, yes. That would be substandard and doubtful, yes. The $130 million to $102 million is classified credits, so that can be a predictor of non-performers. It's not perfect, but it can be a predictor of that. |
(Brian Martin): | OK, and that does not include OREO, correct? |
Male: | Correct. |
Male: | That is correct. |
(Brian Martin): | OK. And then, you know, I guess, can you guys just - Peter, you talked a little bit about the TARP. As far as your willingness to, be in a position to bid on that, should it - should it come up for auction, is that something you guys are thinking about? I guess I understand the strategic, you know, I guess, meeting you guys are having tomorrow, but, you know, I guess, is that something that you guys would consider doing? I guess, is that on the table? And would you need (inaudible) |
Male: | I think we have - (Brian), I think we'll have all the options on the table, but I can't give you any indication one way or the other. |
(Brian Martin): | Do you need permission to - to do that? And if so, I guess have you guys - I mean, when would you or could you get permission, if you haven't already? What is that contingent upon? |
Male: | We do need regulatory approval. And I think as I indicated, we've not made any formal application to do anything, but we'd expect to do it following our safety and soundness exam, which is next month. |
(Brian Martin): | OK, so it's next month. OK. And as far as just the margin, you touched on it a little bit, Frank. You know, what - I guess maybe I just didn't catch all of it. The core margin, obviously, went up. And when you guys think about the performance and the loan pools going forward, if they hold stable, I guess, what was your - you know, what was your thought on the margin, as you look forward here? |
Male: | I just said that - I didn't give an exact number or range on that, (Brian). |
(Brian Martin): | Right. |
Male: | I just listed out the various factors. So while you have some pressure on - while we were expecting loan growth, and hopeful overall that's better earning asset mix, right... |
(Brian Martin): | Right. |
Male: | ... and we - we had a little bit of room still on the deposit side from a deposit cost perspective. |
(Brian Martin): | OK. |
Male: | Obviously, investment yields on reinvestment are getting pressured, unless we choose to extend, which generally we wouldn't that much or that long. And so those I leave it to your predictive abilities there. |
(Brian Martin): | OK. All right. And then... |
Male: | We do make the forward-looking statement that overall the margin for the company will be north of 4 percent. We do state that specifically. But I'm not making any - we're not making any projection on the core margin. |
(Brian Martin): | Right, OK. All right, and maybe just... |
Male: | (Inaudible) |
(Brian Martin): | And then maybe just back to credit for one minute, and that was the - (the addition to non-accrual up a bit this quarter), as well as the, you know, (the 30 to 89 day). You know, I guess, can you just talk a little bit about what - what was driving that? Or is that - you know, I guess - you know, I realize the (inaudible) are still at a low level and (the additions to non-accrual) are |
Male: | Yes, they - I think they will bounce around. The economy remains weak in all our markets. As I mentioned, they weren't construction development-related. They were operating companies. There was really no common tie to the larger ones that came on, and, you know, I'd point out that it's relatively small increase spread over - there's more than three companies, but three major ones. |
Male: | (Inaudible) there were no surprises as it relates to that, and I think in the context of our overall statement, we do think it'll bounce around, but on average, things are going to remain pretty stable in terms of the asset quality metrics. |
(Brian Martin): | OK. And nothing concerning in the - I mean, the C&I, you know, there's a little bit of weakness in the C&I non-performings. I mean, that seems to have been at a - you know, a sub-1 percent delinquency type of number. It flipped up a little bit above that. Is there anything that's going on there that causes you any concern? |
Male: | No, nothing - nothing serious. |
(Brian Martin): | OK. And, Frank, maybe just - the line on the table, the disclosure you guys gave on that, the change in the FDIC loss share receivable line... |
Male: | Yes. |
(Brian Martin): | Can you just walk through the math on - you know, I guess that line item in particular, and just kind of the inflows and outflows and how to think about that, you know, as we go forward? I know you talked about it being a - your expectation is it being a negative, you know, as you - as you go throughout the year, but I just - just to get some understanding of, you know, how to think about that number would be helpful. |
Male: | Well, we can - we can certainly talk one-on-one with that more. But I guess for the benefit of the group, just to keep it simple and short, I think in general, (Brian), that FDIC loss share receivable obviously relates to the estimated losses that we have baked into our fair values on the assets, OK? |
(Brian Martin): | OK. |
Male: | And then - and so as those estimated losses come down, we have to lower that asset, and that asset gets lowered by a reduction in that fee income line. That's where it gets recognized. You |
(Brian Martin): | OK, so (inaudible) |
Male: | Hopefully that helps. We can talk more about that, you know, if you want to call me. |
(Brian Martin): | Yes, that helps. And just the - just two other things. The level of decline in the loss share or the loss - the FDIC loans this quarter, is that - was there something unusual about that? I mean, because it seemed like it was a little bit greater than the normal. Anything there? Was that... |
Male: | Nothing - nothing in particular. It's really just - it's pay-downs, you know, liquidation... |
Male: | Pay-downs. |
Male: | (Inaudible) |
Male: | (Inaudible) fair value adjustments, you know, as part of the recasting process affect the fair value, but as far as the big decreases, would be just, you know, payoffs or principal reductions. |
Male: | OK. And lastly, just anything - from a staffing - you know, you talked about, you know, the top people being - you not being there a couple years ago. Are there plans to add more people at this point, Peter? I guess, are you feeling like the lenders you have are - you know, are what you need? Or are you still actively looking to add people and expect to add people this year? |
Peter Benoist: | Yes, I would say, no, we're not actively out seeking additional talent at this point. I think we've always indicated we'll be opportunistic when the opportunity comes along. But we feel very good about our team, and I think our execution rate is good. The pipelines that Steve mentioned really continue to impress us in terms of what we see coming down the pike. So I think we feel pretty good about where we are right now, (Brian). |
(Brian Martin): | OK, I appreciate it. Thanks, guys. |
Male: | Thank you. |
Operator: | Your next question comes from the line of (Steven Guyan). Your line is open. |
(Steven Guyan): | Hey, good afternoon, guys. |
Male: | Hi, (Steve). |
Male: | Hi, (Steven). |
(Steven Guyan): | Maybe just a question on the guidance for provision of net charge-offs. I was just wondering, is that a gross number that you're including or that - so does it include the covered and the non-covered loans? |
Male: | No, the - that is just on the non-covered loans, (Steven). |
(Steven Guyan): | OK. |
Male: | And charge-offs would just be on the non-covered loan, right? |
(Steven Guyan): | Got it, OK. And last question. What drove the accelerated accretion in the first quarter and the fourth quarter? Was it mostly FNBO? Or was there some benefit from Legacy and Valley? |
Male: | Yes, I would say, in general, it was mostly Home National), (Steven). But we are seeing a little bit in the other portfolios. I mean, none of the portfolios are immune from that. |
(Steven Guyan): | OK, got it. All right. Thanks for your time. |
Male: | Thank you. |
Male: | No problem. |
Operator: | Your next question comes from the line of (Chris McGrady). Your line is open. |
Male: | Hello, (Chris). |
Male: | Is that (Chris) or (John)? Neither. |
Male: | Hello? |
Operator: | And he's out of the queue. We have (Tim Wooten) in the queue. Your line is open. |
(Tim Wooten): | Yes, hello, gentlemen. Hi. One technical question, and then - did you - just going back to the provision, you would - so that was a non-covered charge-off rate of - what was the expectation for this year, I'm sorry? |
Male: | We said that the non-covered net charge-offs would be similar to 2011, and so I believe they were $11 million in 2011, so you're in a range - you know, maybe 15 to 20. |
(Tim Wooten): | ... 15 to 20, OK. |
Male: | Of net charge-offs on the non-covered loans. |
(Tim Wooten): | Right, and a similar amount on the provision line? Is that what you said, as well? |
Male: | We said on the provision that we'd expect it to be flat, and this is once again, on the non-covered loans, the provision would be flat or similar to 2011, where it was $13,300,000. |
(Tim Wooten): | OK, right. Interesting. And then coming back just to the - I'm just trying to get a sense of the duration of the income from the four FDIC deals and the accounting. And I was looking at that table, which was very helpful. But the confusing part in that table was the one piece that I think was discussed, and that was the change in the FDIC loss share receivable. |
Male: | No, that's a good question. The piece that you're missing - and maybe I wasn't clear - you highlighted two of the things that affect the change in FDIC loss share. The other piece that I tried to explain was the fact that when we do this quarterly re-measurement process, to the extent that there is lower losses relative to - you know, in other words, increased cash flows, what happens is that the accretion income over the life of the loans gets higher. But then there's... |
(Tim Wooten): | (Inaudible) |
Male: | ... (inaudible) offset in that change in FDIC. |
(Tim Wooten): | Got it. And the gain on sale on other real estate, does that effect it, as well, or not? |
Male: | It did not. |
Male: | Did not. |
(Tim Wooten): | It does not. OK, fine. So then effectively, you've increased the - based on what you just said, you believe that the cash flow, they're going to accelerate greater than the last quarter's expectation level? (inaudible) accelerated cash flows are increased. Therefore, the receivables would be decreased greater than what I just said. |
Male: | It's possible. |
(Tim Wooten): | OK. |
Male: | Yes, it's possible, because the - the cash flows on the - as the cash flows grow up in your re-measurement process, those get spread prospectively over the life of those loans or those loan pools you're looking at. |
(Tim Wooten): | Right. |
Male: | And so those could be - those are generally longer than the - any adjustment to your indemnification asset, which may only have three years left on it. |
(Tim Wooten): | Hmm, OK. |
Male: | So that's what I mean, is that you have a - you know, you can have a more compact acceleration of the FDIC - or reversal of the FDIC indemnification asset versus what the yield, you know, benefits - the higher yield benefits that you're going to see. And that's the (inaudible) on that. It's just it can be timing - you know, timing. |
(Tim Wooten): | And then I guess I had one other question, and that was, you guys readjusted the goodwill associated with your acquisitions this year, and it went down $17 million, which is actually a pretty big - wasn't it $17 million - I'm looking for the number (inaudible) |
Male: | Yes, I believe you're right. |
Male: | That's right. |
Male: | I believe you're right. |
Male: | (Inaudible) number. |
(Tim Wooten): | ... $17 million off of a base that was pretty high, too. What's the factors that actually go into re-establishing, I guess, the final establishment of the goodwill in your particular case? What went on? |
Male: | Yes, well, in general, you know, they are provisional numbers, the way the accounting works, and so you do your best to estimate the fair value at day one or acquisition date. And then to the extent - up to a year after that acquisition date, if information becomes available that you didn't have at the time you set those initial estimates, and you can support that that - you should have known or that - that that value adjustment or new information existed at the acquisition date, you're allowed to recast goodwill. |
(Tim Wooten): | Perfect. All right. |
Male: | And those two factors drove most of the adjusting - adjustment in goodwill. |
(Tim Wooten): | Got it. OK, fine. And then lastly, you said that basically the variability is very difficult on the FDIC revenue side, I think you said. |
Male: | It is. |
(Tim Wooten): | But it should over time decline, I guess, theoretically. |
Male: | Yes. Yes. |
(Tim Wooten): | So is the - do you have an estimate of what the average life remaining on that stream of |
Male: | You know, I would - I would say it is certainly greater than three, and it may even be closer to five. But the - that's based on just the - you know, the maturity dates of the loans. Obviously, how some - you know, how the borrowers that are performing in those pools, how they react, whether they refinance or not, I mean, that can effect that. But, yes, it's probably, you know, three to five years, is where I'd put it. |
(Tim Wooten): | OK. Because I know - just one thing that caught my eye in that, is that you're - the indemnification receivable now being $172 million versus the actual portfolio loans of 266, I would presume that that's a pretty high ratio. And I would - theoretically, if you can't refinance, those things should stay out there for a little bit. |
Male: | Yes, and you've also got to throw the OREO in there, as well. |
(Tim Wooten): | Uh-huh. OK. |
Male: | Because we get reimbursed for those losses, as well. |
(Tim Wooten): | Uh-huh. |
Male: | And then there's also expenses that are - you know, that come through unrelated to the balance sheet accounts that also go into - you know, you can go into that claim receivable. So... |
(Tim Wooten): | Right. So that - so the decline this quarter, which I think you talked about, which was pretty significant - actually, on a sequential annual rate, it was like 40 percent - that shouldn't be something that we should expect, from fourth quarter to... |
Male: | Yes, the $298 million down to $266 million. |
(Tim Wooten): | Yes, that's a huge drop, 10 percent. And on obviously an annualized basis, that would be 40, so that's why I was asking the years. So... |
Male: | Yes, I just can't comment on that. |
(Tim Wooten): | OK, great. Thank you very much. |
Male: | Thank you, (Tim). |
Male: | Thank you, (Tim). |
Operator: | Your next question comes from the line of (John Stewart). Your line is open. |
(John Stewart): | Hey, good afternoon, guys. |
Male: | Hi, (John). |
Male: | Hi, (John). |
(John Stewart): | I just want to try one more time on the loss share receivable through fee income. So clearly we understand that the accelerated pay-downs have an affect on that number, as well as the provision, both of which occurred this quarter. But - and I realize that you test the cash flows every - every quarter end, but can you just kind of tell us what you think the normal accretion level is, if you kind of adjust for the cash flows and - the accelerated cash flows and the provision, kind of strip that noise out? What is the normal run rate of that negative accretion? |
Male: | You know, I can't say what's normal, because it could change again on the re-measurement next quarter. |
(John Stewart): | No, I understand that, but just - but what would it have been normally, if you kind of back out some of that noise? |
Male: | Yes. |
(John Stewart): | For this quarter? |
Male: | Yes, I don't - I don't have that number to give you, (John). I'll tell you what. We're - obviously, trying this out just to see how you guys and others react to it, relative to its usefulness. , We'll use, obviously, this call and other feedback that I get to see if maybe we can give a little bit more information maybe next quarter. |
(John Stewart): | Yes, because, I mean, I guess you should - yes, well, it is. It just adds a lot of noise in the numbers. But you should get that accretion number adjusted up by roughly 80 percent of the provision you're taking. |
Male: | Generally that's true. That's correct. |
(John Stewart): | Yes, but we just - I guess I just don't know how to do that math against the accelerated cash flows. You're going to have normal cash flows, but the accelerated pay-downs, how that would change that, too, because I guess it depends on what the - what the loss share is against those assets, the impaired or not. |
Male: | Exactly. Exactly. So you're understanding it, but it's - I understand you can't - you can't |
(John Stewart): | OK. Yes, I mean, however you could help us with that going forward would be great. |
Male: | OK. |
Male: | OK. |
Male: | Thanks, (John). |
(John Stewart): | Thank you. |
Operator: | And there are no questions in queue at this time. I'll turn the call back over to the presenters. |
Peter Benoist: | Great. Thank you, (Stephanie). Just a general comment. A lot of our discussion has been around the variability of the covered book. We are trying to do additional disclosure there, in the context of working through the accounting issues. |
Operator: | This concludes today's conference call. You may now disconnect. |