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 sir well thank you todd and good morning everyone i welcome you to our 2021 third quarter earnings call joining me this morning is keen turner our company's chief financial officer and chief operating officer and scott goodman president of enterprise bank and trust We sincerely appreciate you taking time to listen in. Before we begin, I would like to remind everyone on the call that a copy of the release and accompanying presentation can be found on our website and 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 for reasons why actual results may vary from any forward-looking statements that we may make this morning. Please turn to slide three for the financial highlights of the third quarter. Kenan Scott will provide much more details in their comments, but I wanted to call your attention to a few items at a very high level. The third quarter was another outstanding quarter for EFSC. Reported net income for the quarter and earnings per share were $13.9 million and 38 cents respectively, or $1.27 per share on an adjusted basis, building on the very strong performance that we posted during the second quarter of $1.23. These results compare very favorably with our performance of the third quarter, 2020, where we earned 68 cents per share. Included in our results this quarter was a $3.8 million impairment charge for the closure of five branch locations. Three of these locations are in California and were part of our acquisition plan for First Choice. The other two branches are in St. Louis, and where we had other locations in close proximity. We continuously evaluate our operating structure and industry trends and make adjustments when necessary. The branch closures will be completed at the start of 2022, and we anticipate annual cost savings of approximately $2 million. I'm extremely pleased with the strength, consistency, and diversification that these earnings represent. Digging a little deeper, you will see that we earned pre-provisioned net revenue of $56.1 million. This was a record for our company and produced PP&R return on average assets of 1.81% and adjusted ROTCE of 18.15%, consistent to what we produced in the linked quarter and during the third quarter of 2020. The third quarter saw continued growth in both loans and deposits. Although our organic loan growth did not match our second quarter performance, it did display the value of the intentionality that we have had in building a multifaceted loan portfolio. Loan production from our C&I teams, our SBA business, and a few other specialty verticals combated some headwinds that we saw in our CRE investor portfolio. The first choice portfolio also positively contributed to the loan growth in the quarter, growing loans over $70 million from the date of the acquisition. With results from the Southern California region and our SVA specialty, we remain optimistic that these areas will continue to enhance our loan generation capabilities. Our focus on quality was exhibited through our stable yield on our loan portfolio and very solid credit statistics. All deposits grew to $10.8 billion And with the addition of the commercially oriented deposit base that FCB brought us and the continued outstanding performance of our special deposit team, our DDA percentage to total deposits rose to 40%. This is a level that our company had never achieved. The strength of these operating fundamentals supported an increase of our fourth quarter dividend by 5% to 20 cents and the repurchase of approximately 470,000 shares of stock at an average price of $45.15 per share during the quarter. On last quarter's call, I commented that we had just closed on the FCB acquisition, so our third quarter results only include a partial quarter contribution from this acquisition. The Southern California market is now our second largest market, and our progress there continues with our systems integration occurring this past week and our cultural integration ongoing. I'm happy to report that both have gone extremely well. With every visit to this market and time spent with our new partners, I am more confident now about what we can do in this very attractive market amid ongoing economic expansion and ongoing market disruptions. Looking forward, our focus remains on flawless execution. Organic loan growth and pipeline expansion remains a priority. We have great markets and businesses on which to build. We will leverage our position as a top 10 SBA 7a lender to continue to recruit and grow this business We will continue to recruit in our higher growth markets and specialty businesses to continue the growth that you've seen over the last several quarters. With our recent award of $60 million in new markets tax credits, we will continue to grow our very attractive tax credit business. Amid all of this, we will find ways to use the changing environment of how we work to our advantage to combat the workforce challenges that all businesses are facing. With that, I would like to turn the call over to Scott Goodman for much more details about our markets and our businesses. Scott?

Thank you, Jim, and good morning, everybody. I'll start with loan growth. Loan growth for the quarter, quarter over quarter, of $1.9 billion, shown on slide five, includes the addition of the FCB loan portfolio. Net of the FCB impact and excluding Triple P we posted last Q3 organic loan growth of $111 million or 6% on an annualized basis. Slide 6 and 7 break out the quarterly and the year-to-date changes by category and also provide some visibility on what's attributable to organic loan activity in existing markets versus the addition of the first-choice balances. And overall, the specialized businesses are tracking very well for steady production and solid growth. Within the geographic markets, there are some early signs that general C&I loan demand is starting to return, but net growth is still muted somewhat by continuing economic pressures and elevated payoffs on investor CRE. Within our specialized banking division, we posted strong loan growth in SBA and tax credit business lines with steady, albeit seasonally slower performance in life insurance premium and sponsor finance. SBA continues to perform well, taking advantage of attractive SBA program enhancements to position our product competitively in the marketplace. And we are beginning to see some elevated payoff activity this quarter with conventional lenders generally stretching for growth. However, we have been able to overcome this so far through steady production. And once again, for the first nine months, Enterprise Bank and Trust has placed in the top 10 SBA originators nationally in 2021. We're also actively expanding this business, both through the addition of new talent and geographic markets. The tax credit loan portfolio continued its strong performance as well, growing by a record $39 million and a quarter. As I've mentioned in prior reports, affordable housing programs have gained traction nationally in recent years, with many states now initiating new programs or expanding their existing ones. And our team is well aligned with partners that are recognized as experts in this specialty, working with the states to establish the frameworks, as well as to attract seasoned and qualified investors, developers, and management companies. This pipeline remains robust, and the growth outlook near term remains sound. Within our commercial geographies, which are outlined on slide number eight, loan growth is somewhat mixed. St. Louis rebounded nicely in Q3, posting an increase of $36 million or roughly 6.8% annualized growth. The deeper-seeing iBook in the St. Louis market benefited from the higher line usage on revolving lines and several large originations with new real estate and agricultural clients. The Arizona team continued its strong growth in 2021, posting another solid quarter. Over the past year, We have seen traction from the new talent that was added in this market growing by 127 million or nearly 32%. As the fifth most populous city, Phoenix is routinely recognized as a high performer for job growth, GDP performance, and personal income. And now having been in this market for 15 years and continuing to add experienced talent, we are very well positioned to take advantage of the economic momentum in this region. With reliance on CRE, larger reliance, both Kansas City and New Mexico posted modest declines in the quarter, mainly due to the aforementioned headwinds on payoffs. However, production activity and near-term pipelines, particularly in Kansas City, would point to a good volume of new opportunities that should be able to get us back on a growth trajectory here. As Jim mentioned, California now becomes our second largest market post-FCB, and a tremendous platform for additional growth. As we assess our opportunity, it's clear that many of the positive economic factors that we've seen in Phoenix are also present in Southern California. The competitive profiles vary somewhat in each of the metro markets here, but in general, they're heavily concentrated amongst the national banks, which we tend to compete effectively against for that private business segment. The FCB team continues to produce new opportunities even through the disruption of integration, adding loan growth of 72 million since the closing in July. I'm optimistic that these attributes will enable us to successfully execute our model over time in this region. Deposit balances rose 2.2 billion in the quarter, with the addition of FCB accounting for 1.9 billion of the increase. Organic core deposits also grew by 346 million most of which were DDA and transactional account types. New accounts continue to outpace closed accounts and at an average lower rate. Specialty deposit segments, which are outlined on slide nine, contributed roughly $270 million of this growth, excluding first choice, mainly across three primary verticals of community associations, commercial property management, and third-party escrow. And since the onboarding of these business loans, via the Seacoast merger last year, we have been able to expand existing relationships as well as add new clients, in part due to enhanced system integration capabilities developed by our team. Posit focus continues to be on new relationships and on lower-cost, sticky, and well-diversified sources of funding. Turning briefly to credit, we continue to experience stable performance in the legacy enterprise loan portfolio year-to-date. Now, combined with the addition of a strong-performing $1.9 billion FCB portfolio, the result is overall improved credit metrics in Q3. On a consolidated basis, total classifieds increased a modest $4 million to $104 million, but declined to 7 percent of capital from 9 percent of capital in the prior quarter. Total non-performing loans declined in the quarter to $41.5 million and as a percentage of total loans fell from 58 to 46 basis points. Gross charge-offs of $4.5 million in the quarter were largely related to a $2.5 million charge on a previously discussed and reserved for CNI loan. Also during the quarter, we were pleased to fully exit a defaulted hotel loan, which was previously written down and resulted in a recovery of nearly $1.5 million. Overall, net charge-offs of $1.85 million for the quarter, or eight basis points annualized, remain well managed. And with that, now I'd like to hand things over to Keane Turner for a detailed financial commentary. Keane?

Thanks, Scott, and good morning. This is obviously a busy quarter for us with closing first choice acquisition and a start to the fourth quarter with the systems integration. I'm going to start my comments on slide 10, and it shows our earnings per share compared to the second quarter, and I'll run through the significant items. We reported net income of $14 million, and that includes the impact of merger expenses of around $0.31 per share, CECL double count of $0.51 per share, which is on the acquired first choice loan portfolio, and the charge on branch closures of $0.07 per share that Jim mentioned. We earned $0.38 per diluted share compared to $1.23 in the second quarter. We believe that the second and the third quarter EPS performance is relatively comparable, and that would have been around $1.27 in both quarters. Most importantly, we're seeing that PPP contribution continue or begin to decline, and more importantly, we're replacing those earnings through growth and the benefits of M&A. This level of EPS reflects a modest provision reversal on the legacy portfolio of $0.08, as well as the still continued strong contribution from PPP forgiveness of around $0.13. Nonetheless, our core fundamentals remain strong, with an increase in overall operating revenue during the quarter, both excluding and certainly including the first choice acquisition. Turning to slide 11, net interest income was $97.3 million compared to $81.7 million in the second quarter, which is a $15.6 million increase. This includes $16.7 million from first choice and partially offset by $2 million decrease in PPP income. Average earning assets increased $1.9 billion mostly from first choice as well as organic growth. Deposit generation has continued to be successful, particularly in our specialty areas, as Scott noted. In this succession, deposit generation, in addition to general business conditions, has resulted in continued cash build on the balance sheet, and it's compressed margin modestly, which was around 10 basis points this quarter. We believe these deposits are a valuable long-term funding source, and slide 12 further reflects these trends. We have steadily deployed access liquidity into the investment portfolio over the last few quarters, totaling around $240 million invested. We plan to continue investing approximately $30 million per month in the near term as we focus on growing net interest income dollars. However, we're balancing the desire to deploy our access liquidity while not stretching for yield. That will be detrimental when rates begin to rise, both for purposes of tangible common equity and our asset-sensitive balance sheets. As expected, first choices accreted the margin, adding 11 basis points sequentially. This was offset by the liquidity build and a lower yield principally due to support from income from PPP loans. The mix of deposits continued to improve with non-interest bearing now totaling over 40%. This helped drive cost of deposits down to 11 basis points for the third quarter. We still have an asset-sensitive balance sheet and we're well positioned to take advantage of higher interest rates in the future with approximately 63% of the loan portfolio invested in variable rate loans. On slide 12 and 13, we depict asset quality position at September 30th, which as Scott noted, improved during the quarter and continues to show an overall low level of non-performing loans and assets. The continued improvement in the macroeconomic forecast and stable credit performance resulted in a provision benefit of approximately $5 million in the third quarter. This was mitigated by the CECL Day 2 double count on first choice acquired loans of $24 million and another $1 million for unfunded loan commitments. As of September 30th, the allowance for credit losses totaled $152 million, or 1.67% of total loans, compared to 1.77% at the end of June. The contemplating the SBA guarantees, that's 1.94% at the end of the third quarter. A $31 million allowance for credit losses on the acquired first choice loan portfolio represented approximately 1.6% of the total loan, $7 million of which was recorded through purchase accounting on the PCD portfolio, which is purchase credit deteriorated. The provision benefit on the legacy enterprise portfolio combined with the allowance on the first choice portfolio resulted in the overall decrease in the allowance coverage. On slide 14, fee-based income grew $1.4 million. I'm sorry, on slide 15, fee-based income grew $1.4 million from Q2 levels as we reported $17.3 million in the third quarter compared to $16.2 million in the second quarter. led primarily by a partial quarter post-close of first choice fee income. Tax credit services momentum from the second quarter continued into the third and helped to mitigate the decline in other miscellaneous income. I'll mention that we're excited to see the SBA has ranked us again as one of the top 10 SBA 7a lenders in the nation for the fiscal year 2021. With the addition of First Choice and their SBA lending expertise, we expect solid SBA generation to continue. And with SBA loan premiums at attractive levels, it affords us the flexibility in the future to potentially use loan sales to further supplement our fee income. Turning to slide 16, excluding 14.7 million of merger costs and 3.4 million of branch impairment charges, operating expenses were higher in Q3 at $58.8 million compared to $50.5 million in the second quarter. Most of the increase was a result of the partial quarter of post-closed first choice operating expenses, which were $7 million in the third quarter, with the remainder of the increase primarily driven by an increase in compensation and benefits related to opportunistic hiring of targeted teams and continued investment in current associates. Other non-interest expense totaled $20.6 million in the third quarter, an increase of $1.7 million in the second quarter, and this increase was due partially to higher data processing and FDIC assessments related to the acquisition. Year-to-date other non-interest expenses totaled $55.8 million. The third quarter's resulting efficiency was 51.3, a roughly 60 basis point improvement from the second quarter. And for the fourth quarter, we expect to incur approximately $3 million of merger-related costs as we complete the first choice integration and the remainder of core systems conversion. Slide 17, our capital metrics are demonstrated. We start with an 18% return on tangible common equity that aided the sequential tangible book value per share increase of around 2%. significant return of capital of $21 million in the third quarter was through share buybacks, and then we also announced a dividend increase for the fourth quarter. Of note, we previously announced, too, that the pro forma tangible book value dilution of the first choice acquisition was expected to be 2.7%, and based on the financial performance between announcement and legal close and the final fair value adjustments to the closing balance sheet, The actual tangible book value dilution is only 1.8%, and that is expected to reduce our earn back under two years to 1.7 years. From a capital perspective, we expect to continue to opportunistically manage our capital position based on our financial performance and low risk profile, and we have started the redemption of our $50 million subordinated to ventures that was originally issued in 2016 and is callable on November 1st. We'll also continue executing on share purchases to deploy excess capital and manage to 8% to 9% tangible common equity ratio. We had a strong quarter across all fronts and we're seeing the benefits of our recent acquisitions and driving growth and earnings momentum. We expect that this will remain our near-term focus and that these efforts will help to differentiate us competitively for our shareholders. We appreciate you joining our call today, and we're now going to open the line for analyst questions.