Enterprise Financial Services Corporation

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. Jim Lally, President and CEO, Enterprise Financial Corp. You may begin your conference.

Well, thank you. And thank you all very much for joining us this morning. Welcome to our 2023 third quarter earnings call. Joining me this morning is King 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, so 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. The third quarter represents a strong performance during a series of rapid changes affecting the economic and therefore banking landscape. Our business model, associate base, and management team has been constructed to perform during times of challenge. Our teams are adept at navigating difficult circumstances and using them to differentiate our strengths as a banking partner. Over the last several years, we have worked diligently to diversify our business model such that we do not have to depend on any one business, market, or asset class to produce high quality and predictable earnings. Our third quarter financial results and momentum that we've displayed on both sides of the balance sheet during all of 2023 are the results of this focused strategy. The business model delivered well again in the third quarter of 2023. Our financial scorecard begins on slide three. Our strong financial performance continued during the third quarter. We earned net income of $44.7 million, or $1.17 per diluted share, and we produced an ROAA of 1.26% and a PPNR ROA of 1.84%. These results reflect a robust earnings profile that easily allowed us to absorb some deterioration in credit during the third quarter. Combined with our already strong reserves and balance sheet, we remain positioned to operate from a position of strength. This means both delivering returns to shareholders while also supporting the needs of existing and new clients. The ability to continue to fulfill the loan needs of these clients and prospects have opened up channels of deposit growth as well. Our net interest income increased over $900,000 in the quarter, a trend that has continued each quarter since the beginning of 2022. This result, despite challenging competitive and interest rate conditions, reflects the strength of the franchise we have built. We remain positioned to produce a high-quality earning stream that consistently improves shareholder value through deep-rooted client relationships. Growth of net interest income was aided by the defense and resilience of our net interest margin at 4.33%. This is a direct result of our appropriately priced, stable deposit base and our ability to originate commensurate to the needs of our clients, but priced well amid the current interest rate environment. As we thought would happen, loans moderated in the quarter largely through lower line utilization and a focus on higher valued segments. This resulted in loan growth during the quarter of $104 million and total outstanding loans at the end of the quarter of $10.6 billion. We also committed to funding our second half growth with client deposits, an area where we made significant progress in the current period. For the quarter, we grew net deposits $290 million. Netting out the reduction in brokered CVs, client deposits grew by $488 million in the quarter. Equally impressive is the fact that the DDA as a percentage of total deposits remained strong at 32%, and our loan-to-deposit ratio at quarter end was 89%. Scott will give much more color on the markets and businesses where we saw continued success. but we are encouraged that we have a significant amount of runway to continue growing throughout the remainder of 2023 and into 2024. Our balance sheet remains strong in position for continued growth. Capital levels at quarter end remain stable and strong with our TCE to TA ratio of 8.51%. Tangible book value per common share was $31.06, an increase of over 8% this year due to our strong earnings that has more than offset the impact securities portfolio in AOCI. During the quarter, we did see credit begin to normalize. However, the results I noted both on the income statement and the balance sheet reflect that we both anticipated and are positioned well to deal with these changes. I did want to provide a little color around one commercial office loan that moved into OREO during the quarter. This was a St. Louis-based borrower that had a single-tenant midtown office building where the tenant defaulted on its lease. After paydowns related to the personal guarantees and lease termination penalties, we charged off approximately $4.7 million of an approximately $16 million loan balance. This loan represented our only single tenant office CRE loan in our portfolio. Additionally, we saw non-performing loans edge up in the quarter. It's important to reiterate that the strength of our earnings profile generates pre-provision earnings that have averaged nearly $70 million a quarter this year. This provides a significant buffer to absorb credit issues before ever touching our loan loss reserves or capital. There are also very strong levels, particularly when considering the short duration of our loan portfolio. Slide five shows where we are focused for the foreseeable future. Just like we've done so far this year, in the second half of 2023, we will continue to be focused on funding future loan growth with client deposits. Additionally, I am confident that we can continue to improve shareholder value through the execution of our strategy. Our focus, combined with modest improvement in certain business lines and markets, along with continued steadfast expense management, should consistently produce strong earnings amid the current economic and rate environment that we are in. My optimism for our prospects stems from both my confidence in our existing performance, but also my conversations I'm having with our clients. Our manufacturing and distribution clients continue to have good backlogs and consistent sales volumes. Margins are compressing slightly due to increased labor and interest expense, causing overall profitability to decline, but not to a point where debt service has been compromised. Advising and helping clients navigate through times like these is a specialty of our teams. Past turbulent times have shown that these conversations will solidify the relationships that we currently have and invite several more companies to come our way. Our CRE clients predict a much slower 2024. Current projects will be completed, but new opportunities will be challenged with higher costs, particularly interest expense. I believe that higher demand asset classes such as industrial and housing will find return equilibrium such that we will see projects and corresponding loan demand come to life late in 2024. I do believe that this bit of optimism will manifest itself in our higher growth markets like Phoenix, Dallas, and Southern California. With all that said, I feel strongly that our multiple business lines and geographies will be robust enough to produce loan volumes in the mid-single-digit range over the next several quarters, funded by our continued success in generating well-priced, relationship-oriented client deposits. Before turning the call over to Scott, another piece of good news I would like to share is that we were recently awarded a $60 million New Markets Tax Credit allocation by the Community Development Financial Institutions Fund or the CDFI, a bureau within the United States Department of the Treasury. This will serve us well over the next 12 to 18 months to attract new clients and projects that qualify for these credits. With that, I would like to turn the call over to Scott Goodman. Scott?

Thank you, Jim, and good morning, everyone. As you heard from Jim, and as we show on slide number six, loans grew by $104 million in the quarter and results in year-over-year growth of 13.5%. Components of the growth for the last 12 months are broken out on slide number seven and reflect the prior comments regarding balance and diversification with increases across all major categories and proportionate between our metro markets and the specialized lines of business. For the quarter shown on slide number eight, we saw the most lift in the owner-occupied commercial real estate, tax credit, and construction categories. It's also worth noting that revolving line of credit usage declined in the quarter as operating companies managed their working capital more efficiently in response to higher rates and a more risk-off approach to their businesses. Outstanding balances on lines declined by $100 million in the quarter. So, while the C&I loan portfolio was down by $9 million, net of line reductions, this book actually grew $91 million. This CNI list, as well as the owner-occupied commercial real estate growth, reflects continued success in attracting new operating company relationships and expanding business with our existing clients. The construction category rose in conjunction with improved momentum of projects following the COVID and supply chain-induced construction lags that we saw last year and earlier this year. And while we're certainly seeing new development loan requests slow significantly, The existing projects closed over the past 12 to 18 months are continuing to move forward. This portfolio overall is well diversified, with the majority of the book fairly well balanced within the multifamily, residential, industrial, and mixed-use projects. Investor-owned CRE office represents less than 5% of this total construction book. Within the specialized business units, Tax credit lending had a strong quarter, reflecting continued momentum in the funding of existing affordable housing projects on the books. Jim also mentioned our recent award of $60 million in new market tax credit allocation by the U.S. Treasury Department. As we have with prior awards, these credits will serve as a catalyst to facilitate much needed projects within under-invested areas in our metro markets. But these credits will also allow our bankers to bring a differentiated solution to the table, to attract new banking relationships and can provide a source of fee income, which is typically 7% to 8% of the allocation earned over seven years. Life insurance premium finance grew modestly this quarter with some seasonally slower premium fundings on existing policies, but has grown nearly 19% year over year and continues to build a solid pipeline of new opportunities. Sponsor finance also had a modest growth quarter, reflecting some seasonal softness on origination volume, but also an uptick in paydowns related to the sale of portfolio companies by our private equity sponsor companies. The SBA portfolio declined by $19 million in Q3, mainly due to the sale of $33 million in 7A loans. Payoffs continue to be somewhat of a headwind from certain borrowers that are now bank qualified, while origination volumes were stable and in line with expectations. We also remain focused on improving returns opportunistically within specialties or in loan categories where the supply-demand dynamics have shifted. Generally in these cases, and depending upon the loan type, we're targeting some combination of higher loan spreads or requiring associated compensating deposit balances. A regional breakdown of the loan trends are shown on slide number nine. Growth of the specialized businesses continues on a solid and steady pace, up 15% annualized for the quarter and 19% year-over-year. In addition to my prior comments on these specialized businesses, our practice finance unit also performed well in 2023, growing by roughly $70 million year-to-date, including $23 million of growth in Q3. This team, which has a long history and deep expertise in this niche, focuses mainly on banking dental and veterinary practices, which are generally viewed as stable and high credit quality business types. Within the Midwest region, reduction in revolving lines were a primary headwind of growth this quarter, offsetting some of the otherwise solid origination activity. New relationships were opened in Kansas City and St. Louis for reputable, longstanding companies in these markets, with businesses such as electrical contracting, hospitality, entertainment, and medical services. The southwest region of Arizona, New Mexico, Las Vegas, and Texas grew by 50 million in the quarter, posting year-over-year loan growth of 26%. and reflecting our team's successes in leveraging the above-average economic growth profile in these markets. Significant wins in Q3 included several new owner-operator and CNI deals with a large local not-for-profit, an automotive services business, a regional storage operator, and a commercial design company. In addition, these markets benefited from the elevated fundings under existing construction lines. In Southern California, which is our West region, we continue to show positive momentum, posting another quarter of growth. Year over year, this portfolio is up 9.3%, following an intentional shift during 2022 to move away from higher risk, large fix and flip resi real estate lending, and focus the legacy platform on a more balanced relationship-based TRE and CNI strategy, which is consistent with our other markets. New loans during Q3 included moderate to mid-sized seven-figure relationships with an apparel manufacturer, a hospitality business, transportation company, and specialty printing business. We've also continued to expand our talent base in this region, adding a new market leader in San Diego, as well as two experienced relationship managers and a treasury management officer in the LA Orange County market during the quarter. Moving now to deposits, which are broken out on slides number 10 and 11. Total balances grew by $290 million in the quarter after a reduction in higher cost broker deposits of $198 million. So net of brokered funds, client deposit balances are up $488 million, or 18% annualized in the quarter. The regional market client deposits rose $185 million, reflecting success in our sales plan to recapture excess funds from existing relationships that had moved to non-bank alternatives earlier in the year, as well as our ongoing focus on deposit-heavy new relationships. Specialized deposits rose by $303 million. This breakdown is highlighted on slide number 12. Within the geographies, we grew client deposits, net of brokered balances in each of our major markets, with the exception of New Mexico. This growth generally mirrors the concentration of our CNI client base and was most evident in the Midwest where client balances were up 125 million. In California, representing our west region, client deposits rose by roughly 46 million in the quarter. I think this is a particularly positive sign just given the sensitivity to stress banks in that market and also another indicator of our success in landing balanced new relationships there. The specialized deposit portfolio, which is broken out on slide 13, also continued its growth trajectory in Q3, now representing 27% of total deposits. There's good balance amongst the lines of business within this book, with property management and third-party escrow driving most of the growth this quarter. Property management continues to be a consolidating industry. which provides opportunity to expand the account base as our clients are generally the larger acquirers. Slide number 14 shows some additional detail on our core funding mix and account activity for the quarter. Deposits are generally balanced among our four main channels and anchored to client relationships that have an assigned team or a key point of contact within our company. These deposits are also well diversified by industry by household, and by geographic market. The underlying account activity also continues to trend favorably, with new accounts open exceeding closed accounts, and average balances stable to increasing across all channels. Now I'd like to turn the call over to Keane Turner for his comments. Keane?