Enterprise Financial Services Corporation

Good morning. My name is Rex, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enterprise Financial Services Corp Q2 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. At this time, I would like to turn the conference over to Jim O'Lally, President and CEO. You may begin your conference.

Welcome everyone to our second quarter earnings call. I appreciate all of you taking time to listen in. Joining me this morning is King Turner, our company's Chief Financial Officer and Chief Operating Officer, and Scott Goodman, President of Enterprise Bank and 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 second quarter. We're very pleased with the results of the second quarter. Our cadence of consistency that we spoke of in previous quarters has continued. Our highly consultative relationship approach works well in times of uncertainty as clients and prospects seek advice and guidance. Our client base is in the best financial shape that we've seen in a very long time and are seeking opportunities to grow their businesses. Yet the economic tea leaves suggest that we may have a slowdown on the horizon while the interest rate environment creates additional challenges for our clients. I am confident that the consistency of our model has and will continue to positively impact our results. Over the last five years, we have focused on diversifying our revenue through geographic and business expansion. We've improved our funding by way of M&A, and we have bolstered our balance sheet and capital position with a strong reserve and well-executed capital management. The bottom line is that we have built the company for times just like this and are excited to share with you our results. For the quarter, EFSC earned $1.19 per diluted share. Our second quarter performance reflects the power of all our lending businesses combined with the revamped deposit composition that we have assimilated starting with Trinity and most recently with First Choice. Loan balance has expanded at a 13% annualized rate with contributions from nearly every business line in geography. Given the variable rate nature of many of those lending segments of earnings power through existing and new loan production bolstered net interest income and outstripped declines from success in PPP, as well as seasonal trends and non-interest income. Net interest margin income and operating revenue all expanded substantially from the first to the second quarter. Deposit levels remained above $11 billion at June 30th, and the shift during the quarter reflects our approach to focus on supporting customer relationships rather than transactions. Our actions to exit highly rate-sensitive balances speaks to our confidence and our ability to continue to grow our relationship-driven deposit base in our core and specialty deposit businesses. At quarter end, our loan-to-deposit ratio is 84%, with DDA representing 43% of total deposits. In addition to our success in expanding customer relationships and growing loan outstandings, Treasury management and our commercial card businesses remain strong and poised for continued growth during the year. Additionally, we expect the tax credit business will rebound in the third and fourth quarters based on the high project volume and activity. These underlying business trends are reflected in the expansion of our free provision net revenue, which grew at an annualized 10% rate to $58.4 million for the quarter. Our return profile to remain strong ROAA and PPNR ROAA were 1.34% and 1.73% respectively. These are right in line with the levels that we achieved in the previous two quarters, but we believe our current performance is more reflective of a repeatable run rate. Our integration of our Southern California market has positively impacted our financial performance since we acquired FCB, but now we are beginning to see the returns from the influence of our sales model and supplemental talent ads. Acquisitions of new clients and the ability to grow with the clients we inherited has positively impacted loan growth in this market during the quarter. With the combination of ongoing industry growth in Southern California, the momentum that we have across all of our markets and national specialty businesses gives me confidence in our ability to maintain this level of performance for the remainder of this year and into 2023. Additionally, we have begun to see the momentum in some of our newer markets, like Texas and Nevada, as well as practice finance. I expect we will have success over time, attracting talent and further scaling these businesses in the years to come. Our consultative model shines during uncertain economic times, where we remain consistent and build the flings of long-term relationships that span decades. Additionally, I also believe that we will continue to benefit from disruption created by market consolidation in several of our markets. Our approach to lending and asset quality has not changed, and it remains uncompromised to achieve the growth we experience. We remain vigilant around credit, but we are prudently reserved with our allowance for credit losses to total loans at June 30th, virtually unchanged from the previous quarter at 1.52%. That being said, we've been consistent in our view of the economy, as seen by our hesitancy to release more of our reserves than we have. Our teams are working hard reviewing portfolios and performing special loan reviews, but to date we've seen no signs of weakness. Our capital position remains strong. At June 30th, TCE to total assets expanded to 7.8%, while we returned 24 million to common shareholders through a blend of share repurchases and increased common stock dividends. We also announced another increase in our third quarter dividend to 23 cents per common share, reflecting both our commitment to shareholder returns as well as our confidence in further expanding our earnings profile. The second quarter of 2022 represents the third full quarter since the acquisition of First Choice Bank. Over this time, we've established a predictable pattern of performance that is characterized by a strong return profile on both assets and TCE, strong organic diversified loan growth, a DDA percentage to total deposits greater than 40%, pristine asset quality, flexible capital management, and steadfast expense controls. Despite this level of performance, we know that there's still room for improvement. With that in mind, our focus for the remainder of the year can be found on slide four. You can see we've accomplished a few of the goals that we set for ourselves at the end of 2021. For the remainder of the year, we will focus on the basics, guiding our clients through whatever economic climate that lies ahead, improving an already strong pipeline with solid new relationship opportunities. paying close attention to the trends related to our very attractive diversified deposit base, and continue to monitor the loan portfolio for any early indicators of weakness. With that, I would like to turn the call over to Scott Goodman, who will provide much more color on our businesses and markets. Scott?

Thank you, Jim. Good morning, everybody. Focusing first on the loan book, which is referenced on slide five, we posted strong performance in core loans, net of Triple P, growing by $298 million in the quarter or 13.4% annualized. And this compares with $176 million in the prior quarter. The loan details by segment are outlined on slide six and seven. On a trailing 12-month basis, backing out the addition of the first choice portfolio and the impact of Triple P From an organic standpoint, we've grown by 733 million, or 10.7%. And as Jim mentioned, we're seeing contributions from nearly all markets and business units, providing a nice level of balance and diversity in our sources of growth. For the quarter, we experienced solid C&I growth coming from our regional banking markets and specialties, with less impact from commercial real estate. Overall, the increase in CNI was a result of our continued success in bringing on new operating company relationships, as well as elevated usage on existing client facilities and revolving lines of credit. Average usage on revolving lines was up over 3% from the prior quarter. Commercial real estate originations were down modestly in the quarter. And while we do see existing construction loans continuing to fund, New deals have slowed as developers re-pencil their projects for higher rates and material costs. Fewer new commercial real estate closings also reflect our disciplined approach as we hold the consistent underwriting and pricing guidelines in a shifting rate environment. As we've discussed in prior calls, we employ a spread-based pricing philosophy for the term fixed rate portion of our business. We believe this provides a more easily managed and transparent approach for our banking teams and clients, as well as a more consistent profitability profile for our company. With rates rising and competitive pressures at times pushing spread below our thresholds, we've recently walked away from some deals. Turning to our specialty lending segments, SBA, life insurance premium, and tax credits all continue to perform well in the quarter. In the SBA business, I spoke last quarter about some competitive pressures in this space from non-SBA lenders on the existing book and our plans to proactively incorporate retention strategies. In Q2, we were successful in slowing early payoffs while also increasing new originations to post net growth of $34 million. We also continue to recruit new originators, particularly in our higher economic growth markets. The life insurance premium finance team has successfully developed several new referral partner relationships in 2022 due to introductions from our existing client base, as well as our entrance into the California market. Outsized growth of $52 million in what is typically a slower time of year for this vertical is a result of originations from these newer partners, as well as continued fundings from the commitment base of the existing book. Fundings in the tax credit portfolio reflect a consistent pipeline of new affordable housing projects and steady draws on the existing projects within this portfolio. These specialties in particular have historically shown their steady performance and resilience in the face of shifting economic pressures, and we expect this to be the case moving forward. Sponsor Finance posted software growth this quarter but it's up 183 million or 39% year over year. While this can be a slower time of the year seasonally for this business, it also reflects a slight pause by many of our sponsor partners who revisited acquisition pipelines in the light of rising rates, continued supply chain and other economic impacts. We also saw some additional pay downs due to the normal churn from the sale of portfolio companies in the quarter. As we head into Q3 and Q4, sponsors seem to have restarted their processes and the origination pipeline opportunities are starting to refill. Moving to the business units profiled on slide eight, the 152 million or 20% annualized increase in specialty lending reflects my prior comments on these niche segments. Additionally, The professional practice finance team, which was added late in 2021, is off to a strong start, adding $29 million of growth in this quarter and $48 million year-to-date. St. Louis carries the largest C&I portfolio of our geographic markets and benefited from some higher usage on revolving lines of credit, as well as elevated borrowing activity from existing clients in the private investment, tax credit, and packaging spaces. New business activity was also up with double digit increase in new originations from last quarter and several new relationships added. Kansas City shows continued steady growth up nearly 50 million or 6.3% year over year and 8.9% annualized growth for the quarter. This market has a relatively balanced portfolio and also benefited from improved borrowing from CNI clients. New originations included refinancings of several commercial real estate developments and new project and M&A-based financing to expand existing C&I relationships. The Southwest region, which includes Arizona and Las Vegas, posted strong results again this quarter, adding $43 million of growth in Q2, resulting in a 37% increase in the loan portfolio year over year. As we've developed strong relationships with top-tier real estate companies in Arizona over the past 15 years, the economic growth and expansion in Arizona continues to provide opportunities to assist these relationship-based clients with solid acquisition, development, and refinancing. The quarter included several new deals as well as funding on existing construction lines. Last quarter, I discussed the change in leadership for the Albuquerque team within New Mexico, which represents the predominant share of loan outstandings for the market. That's part of a plan to address the declining loan balances there. As this change takes hold the remainder of the year, I expect to see improved trends and ultimately growth in this portfolio. In the meantime, New Mexico, which in addition to Albuquerque also includes the sub markets of Los Alamos and San Jose, remains an important and growing base of well-diversified and low-cost deposits. In Southern California for Q2, I'm pleased to report that our loan portfolio here grew by $29 million in the quarter and represents a third consecutive quarter of positive momentum in net loans resulting from both higher originations and lower payoffs compared to the previous quarter. The improvements come as we continue to see competitive pressures on the real estate heavy book, particularly in the area of high-end residential remodel and fix and flip. However, we are intentionally emphasizing a strategy to deepen relationships with clients that are balanced and mutually beneficial, while also adding new relationships with C&I operating companies through the addition of new talent to our platform. We're already seeing traction on these goals, financing over 70 million in new projects with existing clients, and adding new C&I relationships in metal fabrication and healthcare spaces during the quarter. The new team in North Texas, now composed of three experienced local bankers, is onboarding smoothly and quickly developing a qualified pipeline of new opportunities. I would expect to see these begin to transition to closings during the next quarter. Lastly, I'll touch briefly on deposits, which are beginning to elevate within our client conversations with the recent rate increases. The decline in total deposits within the quarter of $611 million was largely the result of managed decisions relating to a handful of rate-sensitive, interest-bearing specialty deposit accounts. You'll see this evidenced on slide number nine within the third-party escrow portion of the chart. Q2 also typically sees a seasonal rundown of deposits in the commercial book, which also impacted balances to a lesser degree. All in all, the diversification of our deposit book by geographic market and the continued growth in lower cost specialty deposits provides confidence in our ability to walk away from these larger concentrations of higher cost, more transactional balances. Activity for the quarter shows that new account openings continue to outpace closed accounts. and at an average rate below our peer group. The focus on new relationships also is helping drive deposits, with new depository relationship balances for the quarter exceeding balances in closed accounts by nearly three to one. Now I'd like to turn the call over to Keane Turner for his comments on the quarter. Keane.