Enterprise Financial Services Corporation

Good morning. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Enterprise Financial Services Corp Q1 2023 Earnings Conference Call. Today's conference is being recorded. 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'd like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad. If you'd like to withdraw your question, press star 1 once again. Thank you, Jim Lally, President and CEO. You may begin your conference.

Well, thank you, David, and thank you all very much for joining us this morning, and welcome to our 2023 First Quarter Earnings Call. Joining me this morning is Keen Turner, EFSC's Chief Financial and Chief Operating Officer, and Scott Goodman, President of Enterprise Bank & Trust. 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 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 today. Our company entered 2023 with a great deal of momentum. Loan pipelines were good. Our newer markets and businesses were contributing as expected. Credit was in great shape, and clients were doing very well. Along the way, the industry disruption experienced in early March tested our relationship model and the results from our first quarter, in particular, how we ended the quarter with respect to deposit growth, liquidity, cost of deposits, borrowing capacity, and capital ratios show that we passed this test with flying colors. During our fourth quarter call, I spoke about the relationship aspect of our depository businesses. We knew that 2023 would be a year that would require us to find the appropriate balance between retaining and growing the space while being mindful of competition and rising rates. What we did not know is that this would be put to the test in a matter of days and weeks in early March. I was impressed but certainly not surprised by two things. First, our team's commitment and ability to reach out to our clients to explain what was happening and to reinforce our strength and differentiation versus those who were experiencing issues. And secondly, the incredible confidence that our client base had in our company. Since then, we have been working with these clients to remix their deposits, seeking the appropriate balance between yield and safety. using all products and resources available to them. Scott and Keene will provide much more details on this in their comments. The financial highlights for the first quarter can be found on slide three. While we can't entirely control how events impact us, I do like our position. We start from a position of strength, both from an earnings and balance sheet perspective. First, net income was $56 million, or $1.46 per diluted share for the quarter. and we produced a return on assets of 1.72% and return on tangible common equity of 20%. Our profitability is supported and aided by our short-duration asset-sensitive balance sheet that is a result of the execution of our business model. Despite intense deposit competition and pressure in the first quarter, we were able to expand our net interest margin by five basis points to 4.71%. And with two fewer days in the first quarter, net interest income grew to $139 million. While deposit remixing and repricing the quarter was intense, our total cost of deposits for the month of March was just over 1%. This again reflects the strength and position of our balance sheet and my confidence in our ability to continue to generate superior asset yields and growth to mitigate pricing pressure on funding and deposits. Earnings combined with our strong asset position in addition to a well-managed investment portfolio resulted in the tangible common equity to tangible assets ratio expanding during the quarter to 8.81%. Additionally, our earnings helped to contribute to just under $2 per share to our tangible book value during the first quarter, which closed at $30.55. Turning to slide four, you can see that our loan growth remained strong during the quarter as it increased $275 million. This represented an annualized growth rate of 11%, and like in previous quarters, this growth emanated from just about all of our businesses and regions with a focus on quality and a full relationship. We were able to fund this growth with our deposit growth as this grew by $325 million during the quarter, and included the use of brokered CDs. At quarter end, our loan-to-deposit ratio stood at 90%, and due to the aforementioned remixing of our deposits, DDA percentage of deposits to total reduced to 38%. We recognize that the ability to fund our expected loan growth with core deposits will be our greatest challenge for the remainder of the year. We are seeing all the great work we have done over the past several years diversifying our deposit base and geographies paying off. We are prepared to defend our deposit base and know that deposit costs will continue to rise. However, our CNI focused variable rate weighted loan portfolio should provide a good buffer to defend our NIM. Credit quality remained pristine with continued low charge off activity and low level of non-performing assets and a healthy allowance level. Slide five shows where we will be focused for the remainder of the year. I would expect that the momentum with which we enter the year will continue for the foreseeable future. Those of you who know us well know that we typically perform extremely well when there's a bit of uncertainty. We grew well coming out of the Great Recession. We acquired two companies during the COVID pandemic, and I'm confident that we will do what it takes to defend well what we have while having an eye towards taking advantage of what our markets will give us to acquire new clients, new teams, and possibly new businesses. With that, I would like to turn the call to Scott Goodman, who will provide much more details about our markets and our businesses.

Scott? Thank you, Jim, and good morning, everybody. Pew 1 was a quarter defined by follow-through on a steady and well-balanced loan pipeline. and active outreach to our client base for consultation, defense, and exploration of new opportunities around deposit relationships. While the events of March certainly ramped up the volume of client touches, in many ways this activity was not a departure from the advisory-based approach and consultative sale processes that we have traditionally driven our business model through the years. In that regard, our ability to deploy specific event-driven talking points, content, and product sets into our existing marketing, CRM, and sales management systems resulted in rapid, transparent, and productive client engagement. I'm very proud of how our client-facing and operational teams across the company responded to these circumstances, put our clients at ease, and have created many new opportunities as a result. Turning to loans, summarized on slides six through eight, Growth in the quarter was $275 million or 11.4% annualized and 12.2% year-over-year net of Triple P. Over the past year, we've experienced growth across all major categories of the business as we continue to prioritize the diversification of our production and the resulting loan portfolios. For Q1, broken out on slide eight, seasonally typical levels of origination were complemented by slightly lower payoff activity and a modest increase in revolving line usage to produce these results. Growth in CNI reflects success in onboarding new regional commercial banking relationships, as well as the aforementioned uptick in revolving line usage. Growth in commercial real estate and construction development are reflective of new asset acquisition and investment opportunities with larger existing relationships as well as draws on fixed lines representing progress on construction loans closed in prior quarters. In our specialty loan categories, sponsor finance posted solid growth of $43 million in Q1, as we saw a number of closings get pushed from a typically strong fiscal Q4 into the first quarter. Sponsors continue to deploy a strong base of capital in their existing funds, albeit with some patience and discipline around purchase multiples. Life insurance premium finance also experienced growth of $43 million in the quarter, with steady new originations and a typical seasonal uptick in advances for premiums paid on existing deals. Following strong growth in Q4, SBA was essentially flat for the quarter. Origination activity was consistent with typical Q1 levels. However, elevated payoff activity muted net growth. Competitive pressures from traditional banks and lower fixed rates have been a headwind to retention of existing loans. We are defending solid credit profile loans in this book with alternative rate structures, and we continue to execute well on the production side of the business. We also expect this channel to be well positioned to take advantage of any potential credit tightening or liquidity restraints that may affect the loan appetite from traditional bank lenders. Tax credits. posted a modest reduction in outstandings, reflecting pay down activity from the sale of tax credit inventory, which is typical of the first quarter in this business. There has also been some delay in the closings of new projects due to higher interest and construction costs as developers source additional funding. Overall, though, we expect originations to ramp back up and also anticipate activity from newer state affordable housing programs to add some additional new opportunities going forward. Regionally, we posted growth across our footprint as reflected on slide nine. The Southwest posted strong results, totaling 85 million of increased loans in the quarter. The region benefited from continued traction from our newest team in Texas as they onboarded new business, including several significant new relationships with food distribution, industrial storage, and medical service companies. Arizona also closed larger loans for new asset acquisitions with existing clients in the storage and hospitality industries. In the Midwest region, the Kansas City and St. Louis teams produced solid origination activity, including funding of a new industrial development with a large existing engineering client and acquisition of equipment with a new transportation company relationship. This region also benefited most from the elevated revolving line activity given the heavier CNI makeup of those portfolios. And in our West region of Southern California, the portfolio edged up modestly in the quarter, adding to annual growth year over year of 75 million or 4.7%. We began to gain traction in the second half of 2022 as we cultivate an expansion of strategy in this market, having added new CNI talent to the acquired base of commercial real estate originators in our LA and Orange County markets. Pay-off and pay-down activity is moderated from the levels experienced earlier last year, and the CNI pipeline activity has been building. We also successfully expanded some key legacy relationships in this portfolio during Q1, including new closings for hospitality, investor retail, and industrial clients. Turning to deposits, which are broken out for the last 12 months and a quarter on slides 10 and 11, I'll provide some high-level commentary and color around what we're seeing from clients, and then Keane will provide more detail on funding costs and category movements in his comments. Year over year, deposits are down $540 million, or 4.7%. The largest area of decline is non-interest-bearing accounts, with nearly two-thirds of that occurring during Q1 of 2023. Offsetting a material portion of this decline has been strong growth from our specialty deposit businesses, including 307 million of growth in Q1, as shown on slide 11. During the first quarter, we grew deposits overall by $326 million. Historically, Q1 has been a seasonally soft quarter for deposit growth in our company, with outflows from tax, dividend, and bonus payments. This year, net of brokered CDs, we grew overall customer deposits by $75 million. We did see significant remixing of balances, particularly during the month of March, spurred early on by the publicity of bank failures driving depositors towards perceived risk-free alternatives, and more lately, due to elevated focus on deposit rates. Consequently, declines in non-interest-bearing accounts have been shifted mostly to the categories of money market, interest bearing demand, and time deposits. Slide 12 shows the regional breakout of deposit portfolios. Net of broker deposits, which are reflected within the Midwest balances, core client balances in the geographic markets declined modestly during Q1. Aside from typical seasonal declines related to bonus and tax payments, We did see some consumer clients moving concentrated balances to larger banks, as well as larger commercial clients investing some excess balances in higher yielding accounts and U.S. Treasuries. In general, though, we are not losing core relationships, and we have been successful in using FDIC-insured options, such as ICS and CEDARS, to hold on to larger balance commercial accounts. We have also selectively structured a variety of pricing options to retain high-valued relationships. Our specialized deposit channels, which are broken out on slide 13, continue to perform well and are contributing strong growth in a turbulent market for deposits. These business lines comprised of community associations, property management, and third-party escrow accounts provide a steady source of new accounts with somewhat limited competition. Other specialty balances are inclusive of sponsor finance and declined in the quarter. A majority of the lost balances in this category, totaling roughly $30 million, were associated with companies that had been sold by our fund sponsor clients, but which had retained their accounts in enterprise. Generally, these tend to leave over time as the new ownership groups consolidate with their existing banking relationships. However, we saw this behavior accelerate in March due mainly to the fallout from the bank failures. Finally, we provided additional detail on our core funding mix and account activity for the quarter on slide 14. This data further supports both the diversity and the relationship anchored orientation of our funding base. Balances are spread across four main channels with 38% of total funding and non-interest bearing accounts. During Q1, Our sales process continued to generate positive results with net increases in new account balances versus closed accounts across all major channels. The net reduction in number of commercial and business banking accounts is primarily due to consolidation and account closures associated with the remixing of account types and the movement of some balances to treasuries and non-bank alternatives. There is also granularity to these portfolios, as you can see from the average account sizes. Our practice is to require the operating accounts for all CNI loan clients, and 80% of all commercial balances are tied to treasury management or online banking products, which adds traction to these relationship deposits. We've also seen a significant improvement in our insured deposits. We spent time confirming account titling and other similar attributes with clients during the latter part of March. This is most prolific in our specialized deposit areas as we view account titling as a competitive advantage in both HOA and property management. We ended the first quarter with approximately 70% of the deposit portfolio insured or collateralized. With that, now I'd like to turn the call over to Keane Turner for his comments. Keane?