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

Thank you, Gwen, and good afternoon, everyone. Thank you for joining our Q2 conference call. 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 statements as a result of various important factors, including those described in our 2013 Annual Report on Form 10-K and in subsequent filings with the SEC. Forward-looking statements speak only as of today, Thursday, July 24, 2014, 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 second quarter press release, which includes reconciliations of non-GAAP financial measures referred to in this conference call, in the Investor Relations section of our website. I'd like to characterize second quarter results again as solid. We reported $7.2 million in net income or $0.36 for fully diluted shares. The per share increase was up 20% from the prior quarter. Our core pretax earnings increased 13% linked-quarter, fueled by strong loan growth, particularly in our St. Louis and Phoenix markets, and stable loan outstandings in the Kansas City market. Of particular note, Commercial and Industrial loan outstandings showed strong growth in St. Louis and Kansas City, with linked-quarter increases of 8% and 3%, respectively. We continue to focus on gaining share in the C&I markets due to the more favorable client risk profile, the asset sensitivity impact on our balance sheet, the multiple cross-sell opportunities at the relationship level and the long-term nature of these relationships. Scott Goodman will give you more color on loan volumes in the quarter and our take on the competitive level of the credit markets. Without stealing his thunder, however, I'd like to comment that loan pricing…

Thank you, Peter. Our growth in the quarter is attributable to solid increase in new loan originations, most notably in the Commercial and Industrial portfolio, as well as a modest uptick in line usage. Growth in the C&I sector represents a good mix of success in converting new client relationships, as well as continued growth from the niche lines of business. Commercial construction fundings and residential real estate originations also contributed to the growth to a lesser extent. Commercial real estate activity was down slightly from prior quarter, but the impact on the overall commercial real estate portfolio was softened somewhat by lower payoff. On a market level, St. Louis, in particular, had a strong quarter, representing $66 million of our $77 million in growth. The majority of the St. Louis growth was attributable to new C&I originations. We continue to see solid momentum around our niche lending areas, with both life insurance premium finance and Enterprise Value Lending posting above-average double-digit growth for the year. Arizona also had one of its best periods, growing over 10% in the quarter. The growth was spread across all areas of the portfolio, but a majority of the dollars in this quarter were deployed in the commercial real estate and jumbo portfolio mortgage areas. We continue to take a balanced approach overall relative to C&I and commercial real estate efforts in Arizona, but we have been opportunistic early in 2014 as the Arizona real estate market is rebounding to leverage our strategy to cultivate targeted relationships with top-tier investors there. Kansas City was flat for the quarter due mainly to several larger commercial real estate payoffs, resulting from our decision to back away from very aggressive competitive terms. The region has made progress in mitigating reliance on commercial real estate and was able…

Thank you, Scott. During the second quarter, our financial performance began to reflect the execution of our strategy as core pretax income increased an annualized 13% compared to the linked quarter to $7.8 million. I will highlight several of the items that are integral to our success and led to the growth in our core earnings. During the second quarter, loan growth accelerated, and we were able to increase portfolio loans by $77 million. For the first half of 2014, loan growth totaled $114 million or 11% on an annualized basis. Additionally, our loan growth over the last 4 quarters has resulted in modest core net interest income growth during the second quarter of 2014 despite continued pressure on net interest margin. Finally, fee income and expenses were both stable in the quarter, with fee income of $6.1 million and expenses improving slightly to just over $20 million for the quarter. We remain focused on our expense run rate, in particular, for any opportunities to achieve improvement. Net interest income on a core basis was $24.6 million, an increase of $500,000 from the first quarter. Net interest income grew at a 3% annualized rate, adjusting for day count. Net interest margin, however, declined by 5 basis points to 3.39% during the second quarter as we continue to experience pressure on portfolio loan yields from repricing and competition. Additionally, we continue to experience core net interest margin erosion from the contractual cash flows on purchase credit impaired loans that are included when we present core net interest margin. The yield on contractual cash flows from PCI loans is higher than portfolio loan yields, and it creates additional headwinds as balances decline and are replaced with portfolio loans. Nonetheless, we remain focused on growth of net interest income, and we're encouraged by…

[Operator Instructions] We'll take our first question from Jeff Rulis with D.A. Davidson.

I think you guys implied in the Q1 call that -- I think you've mentioned sort of high to -- or mid to high-single-digit loan growth for the full year. With that pace accelerating, I guess, now at 11% for the midway point, any chance you'd revise that higher? I mean, just in terms of commentary, feel good about the second half?

I'd say we feel good about the second half. I don't think we're going to revise our statement.

Got it, okay. And then a bit of a -- kind of a margin question. I guess on the new loan production, you mentioned the competition you're seeing. But how did new loan production sort of average yields compare to the legacy book? And is that difference compressing some?

We're seeing some variability in that. It kind of depends on what's coming off. It narrows certain months, and it expands certain months. It really is more a function of what's coming off versus what's going on. We're seeing that trend consistently as we put out in the loan yields on the portfolio loan book. You can see it's kind of coming down every month a little bit. So it really has more to do with what's coming off, and we are seeing some narrowing of that. But the other headwind we have on the core margin is the runoff of the covered loan book as well. So that's also creating an additional 2 to 5 basis points of headwind every quarter.

Got it, okay. And then maybe just the last one. You talked about managing expenses, but I wanted to see if you had any more luck on the loan officer hires. Are you actively looking, and have you found any new additional loan officers?

It's Scott Goodman. I'll take that one. I think if you looked -- in Kansas City, I had mentioned we hired several relationship managers at the end of last year. And I think if you look at the Kansas City pipeline now, you'd see some of those deals that have a high probability would be attributable to those relationship managers. We did also make some traction on hiring in Arizona with 1 relationship manager, so that's pretty much where we are.

Okay. But I mean, I think past discussions had been -- you felt like your platform is attractive to additional talent. And outside of the ones you announced, any traction going forward in terms of discussion?

Yes. We continue to be active in the market, particularly in St. Louis. We have ongoing discussions with several bankers who have experience in the market over a long period of time, so I think we will have some opportunity moving forward there. Kansas City, I think the team is pretty well rounded out. And in Arizona, we are continuing to have discussions as well. I think we're finding high interest from bankers that are at the larger banks that are really looking at Enterprise. Those discussions take some time to really establish who we are.

We'll go next to Michael Perito with KBW.

Peter, a quick question on your M&A comments in your prepared remarks. Can you just remind us geographically where you guys are comfortable looking for potential whole bank M&A? And also, has the board looked at any potential dividend raises recently?

On your first question, really, greater St. Louis and Kansas City SMAs. We're not that focused in Arizona at this point. As to your second question, no, they've not addressed it directly.

Okay. And any -- in terms of size or potential banks, I know you mentioned similar business models. Have you guys found that has limited your opportunities just given your unique business model to find potential suitors that kind of fit in?

Yes. We have indicated that it does limit the number of targets, and that's clearly true. Having said that, we've also said we don't believe in acquisitions as a strategy. We think they are a tactic. So, I'd say this, the question becomes, "Are there opportunities?" The answer is yes. As I indicated in my remarks, we are having some discussions in both markets. And in that respect, we'll see what happens, but there's nothing currently imminent.

Okay. And then just can you remind us what your Shared National Credit exposure is, if any? And were the credits that moved to nonperformer status in the quarter Shared National Credits?

No, the -- this is Steve Marsh. The credits that moved were not Shared National Credits. Shared Natural Credits are small percentage of our portfolio. And even then, we have some -- usually, we'll have some kind of relationship with the deal. So it technically qualifies as a Shared National Credit, but it would be a St. Louis company or a Kansas City company. It happens to be over $20 million, but it would be a club deal. We don't take part in true syndicated multibank deals.

The number would be de minimis.

Right. It would be -- right.

And we'll go next to Andrew Liesch with Sandler O'Neill + Partners.

I'm curious what, right now, if you look at your balance sheet, what concerns you the most with the potential for higher interest rates and rising rates.

Deposit gather would be where we're focused the most. Our customers look to deploy funds out of their accounts first and then borrow with higher interest rates looming. I mean, that's where we're focused, and that's what we need to do to fund the balance sheet longer term is accelerate our gathering of deposits and primarily, demand deposits.

Okay. And then just one other question for me because I know you guys have been focused on expense control, so it's nice to see some of those initiatives come to fruition this quarter. But just the other line item, I'm not sure if missed anything in the release, was there anything out of the ordinary in other expenses that had it below $7 million?

Not off the top of my head, Andrew. I don't think there was anything there that's significant.

So I mean, in that case, I mean, this could be a pretty decent run rate for that line item, would you expect?

I mean, we -- there's obviously a little bit of variability from quarter to quarter, but we are working to keep the expenses at the low end of our $20 million to $22 million range. And as Peter alluded to, we're working on -- if there's possibilities for a new range, we'd like to go there.

We'll go next to Brian Martin with FIG Partners.

Maybe one thing. Can you talk a little bit about the people you guys have hired in Kansas City and just -- it seems like there's been a continuous level of pay-offs there and really kind of no mention on the St. Louis market about the payoffs. I was just wondering, are the originations in St. Louis that much stronger that they're just overtaking the payoffs there and they're still there? Or is Kansas City kind of unusual there and just more of the commercial real estate and that's kind of the factor there? And just kind of your sense on how long -- how systemic these payoffs will be for the near term.

Yes, I'll take that one, Brian. It's Scott. A couple of comments. The Kansas City market has been more heavily commercial real estate-focused. So in that regard, in the competitive environment, which commercial real estate is certainly the most competitive, we're seeing more of that in Kansas City. St. Louis, obviously, we have a bigger team, so just by virtue of the bigger team, we're going to have higher originations in St. Louis. You asked about the talents that we brought on the platform at the end of the year last year. They are mixing in both C&I and CRE, sourcing a combination of those types of loans that are in the pipeline. I would also say that we're building traction in Kansas City on the Enterprise Value strategy as a way to diversify from the commercial real estate in the market. And that also gained traction in the quarter. Actually, several of our new deals that we did close up there were with new sponsors and new borrowers.

Okay, that's helpful. And then maybe one question for Keene just as it relates to the PCI loans and kind of the loss share stuff. I guess my sense was that after -- you kind of mentioned on last quarter's call that some of the volatility in the provision line could abate maybe after second quarter. And I guess is that still pretty consistent with kind of how you're thinking about things?

I think it's -- I think that's how we're thinking about it. I mean, we have a little bit of impairment reversal this quarter, but the movement kind of off of 0 isn't very much. So we're hopeful that it's a tighter band going forward given that we think we have those loans appropriately valued and conservatively valued. We hope that that pans out. And again, anything, at least on the remaining 3 deals that we have the loan with the loss share expiring at the end of the year, any impairment or reversal gets mitigated by the 80%.

Okay. And just maybe one kind of bigger picture question. The expense cuts you guys have had and kind of realized here, I guess maybe it seems more appropriate to be more aggressive on the -- given that the expense base is in pretty good shape, maybe more assertive on the hiring front and growing the revenue, kind of improve the operating leverage rather than kind of focus on the expense side, which seemed like they're in pretty good shape. I guess is that -- am I thinking about that wrong? Or is there just that much opportunity to further rationalize the expenses as you continue to see a pressure on the loan yields?

No, I don't think you're thinking about it wrong. And I think, as we indicated, we're focused on both. From a revenue perspective, Scott commented in terms of adding talent. Same would be true on the wealth platform in terms of the opportunity to bring production on. On the cost side, I mean, we sort of view this as a process, not an event. And you're right. I mean, if you look at our expenses in the aggregate for the last 10 quarters, they've basically been flat, and we feel pretty good about that. But I think we also have to understand that in this environment, we have to continue the process in terms of evaluating opportunities to continue to manage expenses at a more efficient level, and that's what we're doing.

Okay. I mean, I guess I just got the impression that there really wasn't anything in the hopper as far as looking to add talent in the near term of any significant consequence, so I guess that was kind of more the question that -- I guess I assume that was kind of the question before me that there really wasn't anything active in the near term as far as hiring people. Is that accurate?

Yes. I think we're always in the market looking for -- being opportunistic on talent. But there's no current lift-outs that are in progress.

In discussion, perhaps, not in progress.

Right.

Yes. Okay. And then, I guess, is it -- I guess in your sense, is it easier at this point in the cycle to kind of lift out some of that talents, or are you seeing more given some of the pricing on the M&A front? Or would you say the latter is more appealing? Is one or the other more appealing to you at this point?

I wouldn't say that. I don't think we think of it that way. I mean, I think we think of them as separate and related strategies but not either/or strategies.

[Operator Instructions] We'll go next to Daniel Cardenas with Raymond James.

Just a quick question. So kind of returning back to the expense side, as you guys look, perhaps, or examine to see if there's a new expense run rate, are you guys using an outside firm to help you do that? Or is that just through internal sources?

We are not using an outside firm.

And is there a level that, perhaps, you don't want to go below because it would impair your ability to grow as you look forward?

Yes. Well, I will tell you in absolute terms what that is. But absolutely, that's one of our concerns. The one thing we don't want to do is disrupt our momentum. I mean, I think we have good momentum in the business. I think the numbers reflect that. The shift now in core net interest income moving in the right direction in spite of margin pressure, we feel good about that. So in that respect, yes, I think we're being careful in terms of the subject but relentless in terms of the subject is sort of the way I'd describe it. Without impairing momentum and without impairing the revenue stream.

[Operator Instructions] And there are no other questions. I'd like to turn things back to our speakers for any closing remarks.

No real closing remarks other than to thank all of you for your interest in Enterprise, and we look forward to conversing with you at the end of this quarter. Thank you very much.

Thank you, everyone. That does conclude today's conference. We thank you for your participation.