Enterprise Financial Services Corporation

Welcome to the EFSC Earnings Conference Call. Today's conference is being recorded, and at this time, I'd like to turn the conference over to Jim Lally, President and CEO. Please go ahead, sir.

Well, thank you, Catherine, and good morning. I welcome everyone to our fourth quarter earnings call. I appreciate all of you taking time to listen in. Joining me this morning is Keen Turner, our company's Chief Financial and Chief Operating Officer, and Scott Goodman, President of Enterprise Bank & Trust. 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. The presentation and earnings 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 for reasons why actual results may vary from any forward looking statements that we make this morning. Please turn to slide three for our financial highlights of the fourth quarter. 2021 was another outstanding year for EFSC. We were especially proud of our fourth quarter performance where we earned netting income of $51 million or $1.33 per diluted share. This compared favorably to our earnings per share for the linked and prior year quarters on both the reported and as adjusted for merger and impairment charges. Our return metrics were equally impressive as we posted return on average assets of 1.52% and pre-provision net revenue of 1.89%. Our pre-provision net revenue set a quarterly record at $63 million, increasing $7 million from the third quarter. I would expect this momentum to continue into 2022 as our variable rate loan portfolio and strong non-interest bearing deposit base have us well positioned should we experience the expected interest rate increases. This coupled with our solid loan production momentum that we've experienced for the last several quarters should provide for continued strong performance. Keene will provide much more details on these results in addition to our results for all of 2021. How these results came about is what I'd like to call your attention to. Over the last several years, we have intentionally focused on building a diversified revenue stream oriented towards our commercial banking heritage. Our strategy has been to diversify through both geography and types of businesses. The acquisitions of Seacoast in 2020 and First Choice in 2021 further illustrates this as we added several new national business lines along with growing markets of Los Angeles, Orange County, and San Diego, complementing the more established markets in St. Louis, Kansas City, and Phoenix. One final comment I would like to make relative to how we are doing this relates to our branch light model. At year end, our average deposit per our 50 branches was over $200 million. This will continue to serve us well amid wage and other inflationary trends. With First Choice fully integrated, we now have a balance sheet that bolsters total loans of $9 billion and total deposits of $11.3 billion. yielding a loan-to-deposit ratio of 80%. More importantly, though, when you dig into this further, approximately 50% of our loan portfolio is oriented towards either our C&I, owner-occupied CRE, and specialty businesses, while our non-interest-bearing deposits, total deposits, remained at 40% when compared to the linked quarter. This illustrates the value of the differentiated model that we continue to build. Furthermore, When you look back five years, when our loan-to-deposit ratio was close to 100%, our return on tangible common equity was closer to 12%. At 12-31-21, we have significantly improved our return on tangible common equity while also significantly enhancing our funding profile with a loan-to-deposit ratio of 80%. What we continue to build represents a company which is a much stronger earner than we previously were while at the same time lowering our overall risk profile. Scott will provide much more detail on the various regions, businesses, and product lines, and the production and subsequent growth that we are seeing. Our focus is on the long term. We teach and reward a consultative sales process that is simple and repeatable, and our relationship managers and sales leaders know that the greatest success comes from relationships that choose us for our expertise and quick, consistent responses. We are focused on the right businesses for us, not just any business. Credit quality remains strong as evidenced by the statistics listed on this page, but please know that we do not take this for granted. Our teams have used the current credit environment to improve on already very sound credit metrics. Efficient capital management is our goal. Keen will spend more time on the many positive moves that we made in this area during the quarter. I will just comment that this part of our balance sheet is situated extremely well and has us well positioned for the growth that we expect in the years to come, whether from organic or through acquisitions. We are positioned well for both. During the fourth quarter, we successfully completed our core systems integration of first choice and have made significant progress in our cultural and sales process integration as well. We have been successful in newer markets when we combine talent from legacy markets with our new associates and merge the enterprise how-to with local market know-how. I'm very excited about what we can do in these markets in 2022 with results of this integration likely to show up in our numbers in the second half of the year. This acquisition has provided us with significant financial benefit as we cross the $10 billion mark. It has given us wonderful opportunities A wonderful platform in terrific markets and further diversifies our revenue base. Moving on to slide four, you will see the list of items that we are particularly focused on in 2022. We have our teams keenly focused on their loan, deposit, and net new relationship goals for 2022. As Scott will comment, our production throughout the company has been solid and we expect this to continue. Our SBA team had a record production year in 2021. We expect this level of achievement to continue, but expect some pressure with respect to refinancing of the existing portfolio. We have the team additionally focused on stemming this tide by preemptively addressing this where it makes sense. We will continue to invest in talent for current and new specialty businesses, along with bolstering our teams in higher growth markets. Like with past new markets tax credit allocations, we will leverage this to garner new relationships. We have found this especially true when we enter new markets where use of this program is not as prolific. This is a significant differentiator for us. We should also see new market penetration for our affordable housing business as well. Finally, Omicron has delayed our fully implemented hybrid strategy, but we look forward to rolling this out later in the first quarter or early second. With that, I will now turn the call over to Scott Goodman. Scott?

Thank you, Jim, and good morning, everybody. As you'll see on slide five, loans at the end of the year totaled just over $9 billion, representing a 24.8% increase from the prior year. The growth was most heavily impacted by the addition of the Legacy First Choice book in Q3, as well as well-diversified organic growth across core business lines, net of a reduction in PPP balances. Slide six reflects the full year performance of the Legacy core books. for which we posted annual growth of $554 million, or 8.5%. Most notably, we experienced strong performance across the board in our specialty lines, while the CNI business was bolstered through the addition of new relationships and a modest rebound in usage of revolving lines. For the quarter, which is detailed on slide number seven, we achieved net growth of $68 million before the impact of Triple P balances. Our focused sales process continues to produce healthy deal flow, with total originations up over 30% from the prior quarter. B&I balances grew as we onboarded new clients, as well as saw businesses more actively using revolving lines of credit. While still below pre-pandemic levels, the line draws rose steadily throughout the quarter, with an average usage up roughly 2%. The specialized lending units had another robust quarter growing by $143 million or 22% annualized. Sponsor Finance had a record quarter closing over $100 million in new commitments with 20 different companies and posting net growth of $53 million. As I've mentioned in prior calls this year, the deal flow in this unit is at an all-time high. Despite elevated competition, Our long tenure in this sector and deep sponsor relationships have allowed us to take advantage of the active private equity markets while also remaining selective to maintain our return and our quality standards. The SBA team has also continued its stellar performance in Q4 as a top 10 SBA originator with growth of 41 million or 13.6% annualized. Despite some elevated payoffs, from a more active conventional loan competition. Deal flow is solid, and we also remain active in recruiting new talent. Rounding out the specialties for Q4, both life insurance premium finance and tax credit teams continued their steady growth trajectories. Life insurance premium posted a seasonally strong $21 million increase, resulting in 60 million or 11.2% growth for the year. Tax credit also executed well with 25 million of quarterly growth and pushing the total to 104 million or 27.2% for the year. The popularity of affordable housing and the continued adoption of these programs by more states will provide a solid pipeline in this business looking forward. Commercial real estate originations remain strong. With the net growth in the category moderated by the impact of payoffs and paydowns, generally from refis into permanent market structures and the sale of assets. Disbursements in the construction portfolio on existing projects were improved as supply chain issues eased somewhat, but the net decline in these categories was more materially impacted by a decision to reduce certain loan types within the California market, which I'll touch on in more detail. Turning now to the markets, which is on slide number eight, and breaks out the portfolio's five business units. St. Louis represents the largest CNI book and was the beneficiary of the improved line usage, as well as generating significant new loan originations in the quarter. New commitments were more than double the prior quarter and included several new relationships, asset purchases, and new real estate acquisition and tax credit-based fund lines. Arizona and Kansas City loan books also grew in the quarter as construction fundings ramped up, and new commercial real estate opportunities were originated. Examples of new deals in these markets include the acquisition and development of new multi-family projects, expanded owner-occupied real estate for a large car dealership, and acquisition of new Class A office and industrial properties under long-term leases. The reduction in the New Mexico loan book mainly reflects the runoff of some of the legacy commercial real estate transactions which were part of the LANB acquired book and a slower ramp-up of newer commercial real estate and C&I relationship-based originations, which will be more consistent with our organic growth model. We have successfully transitioned a significant portion of this portfolio over to our business banking team, which enables us to better service and cross-sell these smaller businesses with a more efficient cost base. Also important to note within this market and a key driver of our entrance into New Mexico through the LAND deal, we continue to nurture a large low-cost and well-diversified deposit base here, which has performed well and is growing, evidenced by more than $50 million of increased savings balances during Q4. In California, during the fourth quarter, as you heard from Jim, our sales team has been primarily focused on supporting a smooth conversion process, including frequent communication with the client base and thorough training on our workflow and sales systems. In the loan book, C&I Balance's net of triple fee were up over $50 million and a quarter. The net decline is primarily attributable to the construction and residential real estate categories, as we have opted to de-emphasize the speculative construction and residential fix and flip type loans. Generally, these loans have a shorter duration and a higher risk profile, while also requiring higher administrative and support costs. There are, however, strong opportunities for us to further leverage the existing client base through deepening credit relationships with larger borrowers and by offering more medium-term credit structures to extend the bridge in commercial construction loans, which was something generally not offered by First Choice. Looking ahead, our focus is also on expanding the talent base in this market. We recently announced the promotion of an experienced commercial leader and long-term employee of our company who will relocate to lead the commercial teams in Orange County and LA. Additionally, we're transplanting product and client service expertise into the market through the assignment of enterprise experienced treasury management officers. Externally, Our early recruiting efforts are also promising with recent new hires of a SVP CNI producer, a CNI portfolio manager, and a treasury management sales associate. Moving now to deposits, accounts continue to grow in a quarter with ending balances of $516 million or 4.77%, 19% annualized. Quarterly average core balances were up across the board in all of our geographic markets with the largest growth in low-cost checking and transaction account types. Most notably, within the California market, average deposit balances were up nearly 20% in the quarter. Specialty deposits, which are highlighted on slide number nine, also performed well in the quarter with growth across each of the primary verticals. These balances, which are generally comprised of non-interest bearing accounts, now represent 20% of the overall deposit portfolio. Account activity also remains well positioned with new accounts, outpacing closed accounts, and at a lower average cost. Now I'd like to turn the call over to Keane Turner. Keane?