Enterprise Financial Services Corporation

Hello and welcome to the Enterprise Financial Services Corp second quarter 2023 earnings 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 1 on your telephone keypad. If you would like to withdraw your question, again, press star 1. We'll now turn the conference over to Jim Lally, President and CEO. Please go ahead.

Thank you, JL, and good morning. Thank you all very much for joining us this morning, and welcome to our 2023 Second Quarter Earnings Call. Joining me this morning is Keen Turner, EFSC'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 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. In mid-March, we made a strategic decision to continue our growth trajectory for 2023, supporting the needs of our clients in addition to onboarding several new relationships from competitors who are inwardly focused. Much of this growth focused on C&I relationships, typically coming with a floating rate loan structure and full treasury management products and deposits. As you can see from our growth in the quarter, this decision paid off well for us. As part of our effort to support clients and enhance long-term shareholder and franchise value, we also saw some significant deposit wins in the quarter from our regions and specialty deposit businesses that we'll fund over the remainder of this year. Scott will provide much more color on these topics in his comments. I spent the month of June visiting several of our markets and had a chance to visit with over 100 clients and prospects. For the most part, these companies continue to perform well and are optimistic about the remainder of this year and next, despite the increased costs throughout their businesses, inclusive of debt service. Orders remain strong, supply chain issues have improved, labor costs and availability have not worsened, and earnings remain good. What they heard from me was that we would be there to support them through this time of opportunity, just like we promised when we brought them onto our platform. Despite this relatively optimistic viewpoint, I do see loan growth for us moderating in the second half of this year and settling back into the mid to high single digit range for 2024. For enterprise, this is reflective of the fact that we're seeing payoff activity moderate, which we feel is an opportunity to garner more holistic customer relationships in situations where we are lending. Additionally, with moderating payoffs, we believe this presents an opportunity to continue to apply pricing discipline and focus on elevating our spreads in certain business lines. As some competitors back away from certain sectors, we see this as an opportunity to earn more by doing slightly less. This will drive loan origination and growth into certain business lines, naturally like C&I, and may cause some moderation in certain real estate situations, as well as other lower margin business lines. Our financial scorecard can be found on slides three and four. Our strong financial performance continued during the second quarter. As expected, most earnings-related measurements declined when compared to the first quarter. Nonetheless, I believe that we continue to operate from a position of strength due to our diversified revenue base and strong balance sheet. For the quarter, we earned net income of $49.1 million, or $1.29 per diluted share, as we produced an ROAA of 1.44%, and a PPNROAA of 2.02%. Our focus on growing operating revenue continued in the quarter as net interest income grew by $1.2 million to $140.7 million, supported by a strong net interest margin of 4.49%. While remixing of deposits continued during the quarter, we also saw our commercial clients, in some instances, Utilizing cash for asset purchases instead of borrowing are putting much more cash into M&A and real estate projects than what we had traditionally experienced. Entering the quarter, we were confident that we would be able to combat the earnings pressure created by the expected deposit remixing. Loan growth in the quarter was just over $500 million and represented growth from all geographic areas and businesses. Our variable rate bias and CNI focus drove overall loan yields to 6.64%, an increase of 31 basis points from the previous quarter. While this growth was ahead of expectations, it helped us weather the pressure from changes to deposit pricing and composition, and we believe it's helped us set up to have a chance for stable quarterly NII for the remainder of the year. We utilized brokered CDs to provide stable funding to support the growth in the second quarter. This strategy helped to preserve our wholesale borrowing capacity and liquidity measures. while weathering typical seasonal liquidity tightness in our customer base. This helped us maintain a stable loan to deposit ratio of 90% during the quarter, while uninsured deposits declined modestly due to continued shift in the deposit base. Stable and strong is how I would characterize both our capital and credit ratios. At quarter end, our tangible common equity to total assets came in at 8.65%, and we grew our tangible book value per common share from $30.55 to $31.23. This represents over a 17% increase from what we were just a year ago. Our credit statistics too remain strong as both non-performing loans to total loans and non-performing assets to total assets remain low and relatively unchanged when compared to the previous quarter and the second quarter of 2022. Consistent reviews of the portfolios and early identification of potential issues It's how we've managed and continue to manage the portfolios. This includes targeted reviews utilizing both internal and external resources and expertise. Slide five reflects our focus for the foreseeable future. Funding our future loan growth from core client relationships remains our biggest opportunity going forward. We have invested in and grown several markets and businesses that provide us the opportunity to do just that. Our asset growth will moderate back to the mid to high single digit range focus on expanding our credit spreads and continued discipline credit structures. This will allow us to maintain an incredibly strong balance sheet and continue to produce the best-in-class earnings profile that we all have become accustomed to. With that, I would like to turn the call over to Scott Goodman for much more insight and details on our markets and our businesses. Scott?

Thank you, Jim, and good morning, everyone. Moving on to slide six, as you heard from Jim, we posted robust loan growth for the quarter, totaling $501 million, adding to a pace which results in a 12-month increase of over 13%. Growth over this timeframe is broken out on slide seven and has come from all primary categories, well-balanced between the metro markets and specialty verticals. Accelerated growth in Q2, detailed on slide 8, was primarily the result of strong pull-through of opportunities from the pipeline, with originations up 13% from the prior quarter. In addition, net growth was aided by reduced payoff activity and a modest increase in usage on revolving lines of credit. Within the specialty channels, sponsor finance experienced strong growth this quarter through both higher originations and lower churn in the portfolio. Following a brief pause earlier in the year to digest the impacts of rising rates and some shifting economic factors, sponsors restarted their process during the quarter, with closings in Q2 double that of Q1 levels. We remain disciplined in this channel, underwriting to proven and consistent credit structures, focusing on well-known sponsor relationships, and opportunistically elevating spreads to boost our returns. Life insurance premium finance posted a relatively strong growth quarter, with slightly higher payoffs more than offset by new policy financings and increased advances on existing policy loans. We continue to see a steady pipeline of new opportunities from an expanding referral network, as well as a larger funding tail on a growing book of commitments. Following a seasonally softer Q1 in the tax credit lending business, activity ramped up this quarter. Closings and advances on existing loans increased as well as affordable housing projects accelerating from Q1 levels following some rebudgeting and capital raising associated with the higher cost environment. SBA posted $12 million of growth in the quarter with steady originations and modestly improved pay down impacts reflecting our proactive defense of the existing portfolio. Our sales channel remains active and is well positioned to take advantage of elevated demand that could result from any potential credit tightening or liquidity constraints that affect the loan appetite of traditional bank lenders. Within the geographic markets displayed on slide nine, we posted solid loan growth for the quarter across the footprint and continue to steadily grow these portfolios through a consistent value added and relationship based sales process. In the Midwest, we've grown 9.5% year-over-year, including $53 million of growth in Q2, which included several prized new middle market relationships in St. Louis, acquisition financing for existing relationships, as well as some modest growth on lines of credit from working capital revolvers and construction loan projects in California. Our southwestern region had a particularly successful quarter with loans up by $88 million, placing year-over-year growth at roughly 24%. This level of growth is reflective of the strong economic profiles in these markets and our team's ability to develop deep relationships with businesses that are well-positioned to benefit. The Texas team, which has been on board now just over a year, has gained traction quickly and continues to bring on new relationships in the quarter, both C&I operating businesses and commercial real estate. Arizona and Las Vegas' new originations in Q2 were mainly focused around commercial real estate, including projects in the industrial, student housing, medical, office, and grocery-anchored retail space. We have positioned our CRE strategy around experienced, proven developers and investors where we are not a transactional lender, but can go deep and gain a meaningful relationship on both sides of the balance sheet. In our western region of Southern California, we have focused our energy on expanding the diversity and the growth profile of the legacy acquired portfolios by deepening existing loan and deposit relationships and adding resources to a CNI channel consistent with our other markets. This work has gained traction in the market, with year-over-year loan growth of nearly 8 percent, including $80 million in the second quarter. Near-term new originations consist mainly of new CNI relationships across a range of industries, including distribution, construction, manufacturing, and transportation. Moving now to deposits, which are outlined for the last 12 months and for the quarter on Slides 10 and 11. Total deposit balances grew by $465 million in Q2. Overall client deposit balances were relatively stable, with most of the category changes attributable to the remixing of DDA to interest-bearing account types and an increase in the broker deposits used in conjunction with loan growth for the quarter. Within the regions shown on slide 12, Client deposit balances did grow across a majority of our major markets and the specialty channels, with the West region experiencing a modest decline. The larger reductions in Southern California are consistent with stronger reactions of depositors to the bank failures located in that geography. As we continue to build our brand and gain traction with our new talent, consistent with our loan trends here, we expect core deposit growth to follow. While mid-year is typically a softer period of seasonal growth in the commercial book, our commercial and business banking teams are squarely focused on deposit retention and growth, with specifically regionally focused plans. We've armed these teams with competitive and flexible product sets designed to convert a solid pipeline of qualified opportunities to both recapture excess cash balances from existing clients and attract new accounts. Following strong growth in the first quarter, the specialty deposit businesses posted more modest growth of $30 million in Q2, reflective of a typical seasonal slowdown midyear. Year-to-date, these low-cost channels have grown $458 million, or 19%, and now represent 25% of total deposits, as you'll see broken out on slide 13. We continue to see inflows from our existing clients in this space, as well as a steady stream of new opportunities originating from property management relationships within our commercial base and the competitive disruption from a few larger players in these lines of business. Slide 14 shows some additional detail on our core funding mix and account activity for the quarter. Deposits are well diversified among our four main channels. and remain anchored to well-rounded client relationships across a diverse set of industries, households, and markets. Within the commercial base, 80% of these clients are using treasury management products, and 90% of checking and savings clients are using online banking, which elevates the stability of these balances and reflects the relationship orientation of our base. Our sales process continues to produce positive results, generating net new account balances across all channels. We've also seen steady net new account open in consumer and specialty channels, while the reduction in the number of accounts year-to-date in the commercial and business banking space primarily reflects the consolidation of balances and the closure of certain account types associated with remixing to the interest-bearing and time deposit products. Now I'd like to turn the call over to Keane Turner for his comments.