Enterprise Financial Services Corporation

Good day, and welcome to the EFSC Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jim Lally, President and CEO. Please go ahead.

Well, thank you, Ryan, and thank you all very much for joining us this morning, and welcome to our 2020 Third Quarter Earnings Call. Joining me this morning is Keen Turner, EFSC's Chief Financial and Chief Operating Officer. Scott Goodman. President of Enterprise Bank and Trust, and Doug Bauke, our company's Chief Credit Officer. Before we begin, I would like to remind everybody on the call that a copy of the release and accompanying presentation can be found on our website. The presentation and earnings you release were furnished on SEC Form 8K yesterday. Please refer to slide two of the presentation titled Forward-Looking Statements and our most recent 10K and 10Q presentation for reasons why actual results may vary from any forward-looking statements that we make today. Overall, the third quarter represented another solid quarter for our company. On a fully diluted basis, EFSC earned 68 cents per share and reported the net income for the quarter $18 million. On a pre-tax, pre-provision basis, net income was $38 million, yielding a pre-tax provisioned ROA of 1.81%, which was relatively consistent with what we reported in the second quarter. These strong earnings allowed us to continue to build our capital position, even with the elevated provision for credit losses. At 9.30, the ratio of tangible common equity to tangible assets stood at 7.99%, and when adjusted for Triple P, this increased to 8.89%. Dean will get into the details around margin and our rationale for the provision expense, but I just wanted to comment that we are preparing the company for a prolonged low and flat interest rate environment. Scale and maximizing our returns, our investment in people and technology will be key. Furthermore, we believe that we are still in the early stages of this current credit cycle, and we will use our strong earnings profile to appropriately build our allowance for credit losses in light of this. This does not mean that growth is not a focus for us, because it is. It means that more than ever, we have to be consistent in our credit process in order to take advantage of others who will not be. We entered the quarter with three primary focuses. First, we wanted to continue working diligently on the loan portfolio to ensure that we focused on the high-risk industries and customers to mitigate the impact of further deterioration while identifying other potential issues on specific credits not within these industries. As you will hear from Doug, in evidence by our asset quality statistics, we feel very good about the current state of the portfolio. Secondly, we wanted to attend to the needs of our clients who are thriving and make sure that they have all the tools and capital to maximize the opportunities that lay ahead of them. This included working closely with the several hundred new clients acquired through Triple P Scott was going to spend some time in his comments on our process and successes that we are seeing. And finally, we wanted to heighten our focus on growth and reloading the loan pipeline. Obviously, the balance between credit quality and pricing needs to be struck with this desire to grow. But this is something we have managed well in our company over the years, so I feel very confident in our efforts. And you will hear some encouraging trends from Scott regarding this. In addition to all of this, we announced the acquisition of Seacoast Commerce Bank Holdings back in early August. As we discussed back then, this combination considerably improves both sides of our balance sheet, is better than 10% accretive to earnings in 2022, and further de-risks our company in a myriad of ways. We have received FDIC approval, a waiver from the Federal Reserve, and anticipate other necessary approvals shortly. and plan to proceed towards a close later in the fourth quarter. Having now worked more closely with the Seacoast team over the last month and a half preparing for our integration, I can tell you that the quality of the business and the upside of this combination is exactly what we thought it was when we last spoke to you about this. Before I hand the call off to Scott, I would like to call your attention to our areas of focus on slide four. Looks a little bit like more of the same, but the flawless execution of these areas will put us on solid footing to accomplish both our near and long-term goals. Furthermore, all of these areas play to the strength of our company, which gives me further confidence in our ability to succeed. I would now like to turn the call over to Scott Goodman. Scott?

Thank you, Jim, and good morning, everybody. The loan portfolio, which is highlighted on slide number six, was relatively stable in Q3, with balances posting a minor decline of less than 1% from the prior quarter. In general, relatively solid production was offset by continued declines in line of credit usage and some commercial real estate related payoffs. While loan demand from private business is somewhat soft given economic uncertainty, our team continues to drive consistent organic activity through stable demand in our specialized businesses and proactive calling on new relationships. Production in Q3 was roughly 85% of historical averages with an upward trend which saw September production above monthly averages. Payoffs in general are at levels below historical norms and are mainly concentrated in the CRE category relating to refinancing into long-term secondary market fixed rate structures. The behavior we witnessed during Q2, which resulted in a steep reduction to the line of credit usage, continued into Q3, with paydowns outpacing advances, as businesses continued to deleverage and build cash balances. Looking at the loan categories, which are outlined on slides 7 and 8, the change in the book net of Triple P represents loan activity most prevalent in the CNI, investor CRE, and tax credit businesses. However, the aforementioned payout activity stifled net growth in CRE for the quarter. As we discussed last quarter, our sales activities in 2020 have been focused on leveraging our outstanding results with the Triple P program, which is illustrated on slide number nine. Through an internally led process, we were able to fund over 3,800 companies across all of our markets, including all of our existing clients who fully applied, as well as over 700 non-clients. Contributing to our success in CNI this quarter, we have since developed a robust sales and marketing campaign, which has, to date, converted two-thirds of these new businesses to clients, including new loans, operating accounts, and six figures of new annuitized fee income. This same process also places higher focus on deepening relationships with existing clients in value-added areas such as treasury management, card programs, private banking, and wealth. And as we now progress into the forgiveness phase for Triple P, we continue to take an advisory-based approach to these conversations, arming our sales teams with continually updated program information, which enabled them to build trust and provide value-added consultation to our clients. Doug will touch further on the forgiveness process in his comments. The loan portfolio is further broken out by business unit, industry, and product type on Slides 10 and 11 and generally reflect my prior comments. The decline in specialized lending follows from seasonally slower activity in EVL originations and life insurance premium financing. as well as some additional line paydowns in the EVL sector. The Arizona portfolio posted a strong quarter, rising by 5%, and reflecting higher levels of economic activity in this market, including new CRE development and acquisition. This market has also been responsible for adding the most Triple T-based new relationships to the company. Looking ahead, the current loan pipeline is encouraging, and provide some reason for optimism that, barring further deterioration of external headwinds, growth is possible near term. High level, the current pipeline shows opportunities which can provide net growth in nearly all of our major business units. The largest unknown around this outlook, however, is timing, as we have seen loan requests and planned investment taking longer to close or being pushed out. Our approach to credit will continue to be consistent in supporting existing clients, opportunistic for new relationships, but disciplined relative to credit structure, despite growing competitive pressures. Our portfolio is performing well today, and you'll hear more on this from Doug in his comments. Overall, deposits remain in a healthy position, and our focus continues to be on building core relationship-based accounts and reducing costs. Portfolio changes are highlighted on slide number 12 and show a slight dip in the quarter, mainly reflecting continued proactive management to reduce higher cost, brokered, and non-relationship-based balances, as we discussed in detail last quarter. The reduction also reflects the deployment by our client base of some of their PPP-related funds. Sales efforts around PPP and the ongoing focus on new relationships is resulting in new average account balances that are trending larger and at a lower cost than those that are closing. And now I'd like to turn it over to our Chief Credit Officer, Doug Bauke, for further color on credit. Doug?