Enterprise Financial Services Corporation

All lines have been placed on you 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, press star one again. Thank you. I would now like to turn the call over to Jim Lally, President and CEO. Please go ahead.

Thank you, Kat, and good morning, everyone, and thank you very much for joining us this morning. and welcome to our 2024 first quarter earnings call. Joining me this morning is Keen Turner, EFSC's Chief Financial Officer and Chief Operating Officer, Scott Goodman, President of Enterprise Bank and Trust, and Doug Bauke, Chief Credit Officer 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 10-K and 10-Q for reasons why actual results may vary from any forward-looking statements that we make today. The first quarter represents fundamentally sound performance amid a higher for longer economic and interest rate environment. Our business model, associate base, and management team has been constructed to perform during all economic environments. However, the current pivot in the interest rate policy from year end will further assist us in stabilizing our margins and therefore our profitability in the upcoming quarters. Like we've stated during previous earnings calls and investor meetings 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 first quarter financial performance has resulted in this focused strategy, and I'm confident that we can continue to perform at this level or better for the remainder of 2024. Our financial scorecard begins on slide three. For the quarter, we earned net income of $40.4 million, or $1.05 per diluted share, and we produced an adjusted ROAA of 1.14% and a PPNROA of 1.58%. These results are representative of our typical first quarter trends and bode well for delivering upon our expectations and goals for 2024. Keene will provide much more detail on this in his comments. Our net interest income is essentially flat compared to the lean quarter when considering day count at just under $140 million. Looking back over the last five quarters, we've been able to hold this number at or around $140 million despite challenging competitive and interest rate conditions. This reflects the strength of the franchise we've built and we remain positioned to produce high-quality earnings that consistently improves shareholder value through deep-rooted client relationships. Our stable net interest income was aided by the defense and resilience of our net interest margin at 4.13%. 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, loan growth moderated in the quarter, largely due to lower demand in investor-owned CRE and a few of our specialty lending businesses. However, we remained on pace to deliver mid-single loan growth for the year, growing loans by $144 million to $11 billion, led by growth in CNI, LIPF, and construction lending. Scott will provide much more detail on our markets and businesses in his comments. Like we did in 2023, we were committed to funding our full year's loan growth with our client deposits. During the first quarter, we experienced our typical seasonal deposit outflow as our business clients used their cash for bonus payments and tax distributions. We buffered this with a slight increase in brokered CDs, resulting in total deposits remaining flat compared to the linked quarter at $12.3 billion. Our loan-to-deposit ratio increased slightly to 90%, while our DDA level remained in excess of 30% of total deposits. Our balance sheet remains well positioned for our planned growth. Capital levels at quarter end remain stable and strong, with our TCE to TA ratio of 9.01%, and adjusted return on average tangible common equity of 12.53%. Tangible book value per common share was $34.21, an annualized increase of 4%. Given the strength of our earnings and our confidence in our continued execution, we increased the dividend by one cent per share in the second quarter of 2024 and have begun modest common stock repurchases to manage growth of excess capital. Before discussing areas of focus in 2024, I would like to provide an update on credit. Last quarter, I characterized our charge-off levels as extraordinary and uncharacteristic. Asset quality stabilized as expected in quarter one as classified loan levels were flat, NPAs declined 11%, and charge-offs netted out to roughly five basis points in the quarter. It is also worth mentioning that the large majority of the amounts charged off during this quarter were residual loan amounts from two relationships that were charged down in the fourth quarter of 2023. Both of these relationships have now been fully charged off. Finally, we did complete our internal review of the agricultural portfolio, inclusive of site visits and found no surprises and feel that the portfolio is in sound condition. We've engaged a third party to validate our findings, and we'll have this report delivered in the next few weeks. We are seeing some of these clients refinance their debt with other institutions, and we'll likely see this $200 million portfolio reduced by at least 50% between now and year end. Slide five shows where we are focused for the foreseeable future. Just like we did for all of 2023, we will continue to be focused on funding future loan growth with client deposits. This will be accomplished by sticking to our relationship-oriented sales approach and capitalizing on our continued success in our community associations, property management, and third-party escrow and trust services deposit businesses. Additionally, I'm confident that we can continue to improve shareholder value through the execution of our strategy. Our focus combined with continued improvement in all business lines, markets, and credit along with steadfast expense management, should consistently produce strong earnings amid the current economic and rate environment that we are in. Our clients remain largely optimistic, too. For the most part, the operating companies with whom we partner produce very good results for 2023, and our budgeting for 2024 to be flat is slightly down from these results. Cash conversion cycles continue to elongate, requiring higher use of lines of credit, and capital expenditures will be lower than previous years, as companies curb spending to defend sales levels or to increase production for known increase to sales. Supply chains have improved, the war on talent has not worsened, and the impact of higher rates on debt service has been absorbed in their monthly cash flow. The impact of onshoring is beginning to show residual opportunities in the trades and corresponding suppliers that support this. In my opinion, this will only improve the economic prospects of a portion of our client base. Our CRE clients are seeing opportunities in most asset classes, but the elevated interest rates are keeping many of these projects on the drawing board for now. I really believe that a slight decrease in short-term interest rates will be the psychological impetus for some of these projects to move to the next level, even though the return related to 25 or 50 basis point decrease is largely negligible. We enjoy great reputation and corresponding market share of middle market businesses in our mature geographies, and specialized lending businesses. As such, I am confident that we will continue to get more than our fair share of corresponding opportunities. Our newer markets and higher growth areas will provide similar levels of opportunities while we continue to build our reputation in these markets. This blend is what gives me high confidence that we will continue to grow and earn at a predictable rate while continuing to compound tangible book value at a higher level than our peers over the foreseeable future. With that, I would like to turn the call over to Scott Goodman. Scott?

Thank you, Jim, and good morning, everyone. I'd like to turn to slide six. Loan growth of $144 million in the quarter pushed us past the $11 billion mark and represents just over 10% growth year-over-year. To illustrate Jim's comments on diversification, the breakdown of this year-over-year growth by sector on slide seven shows that 25% roughly is within the general CNI category, represents a diverse list of business types throughout our geographic markets, with the remainder well-balanced across the other major segments of our business. For the quarter, loan growth was recognized most prominently in the CNI and owner-occupied real estate space, as well as life insurance premium finance and construction development categories. Within our commercial banking metro markets, we continue to have success attracting and onboarding new relationships, while existing client operating businesses are generally doing well and, despite higher rates, remain willing to actively support growth. Borrowing here represents a variety of capital investment activities by these businesses and increased working capital facilities, with revolving line usage up roughly 5.5% in the quarter. Construction projects and process continue to move forward, providing an increase in related loan balances for the quarter. And while new construction requests have slowed overall, we did originate new project loans for a few current clients for the expansion and renovation of existing properties. Investor CRE origination has slowed somewhat, impacted more heavily by the higher rate environment, and reacting with more caution, particularly in sectors such as multifamily, office, and retail. Within the specialized banking sectors, life insurance premium finance posted solid growth with strong new origination volumes and a seasonal uptick from premium advances on existing policy loans. Tax credit loans moved slightly lower in the quarter, but consistent with the typical Q1 seasonal pay down that we see on project loans from the proceeds of the sale of 2023 tax credits. SBA results were generally in line with expectations, as originations kept pace with recent quarters. Pre-payments, which have stressed the portfolio due to rising rates, did continue to trend positively, moving lower during the quarter. However, net growth for the period was impacted by our decision to generate liquidity and income through the sale of a $23 million pool of guaranteed loans in March, which Keane will touch on further in his comments. Sponsor finance. Origination activity continued to moderate in Q1, consistent with a more restrained and patient posture by private equity sponsors. Payoffs associated with the sale of portfolio companies have begun to move toward a more normalized level, following a pause in this activity for most of 2023. While we do expect growth in this sector for the year, our approach will remain disciplined as it relates to credit structures. and originations will be focused primarily on well-known and top-tier sponsor relationships. Regionally, we did experience growth across our commercial banking footprint in all major regions as displayed on slide eight. In the Midwest markets of St. Louis and Kansas City, loans rose 74 million or 8.9 percent annualized. Significant new originations include equipment loans for a civil general contractor a new relationship with a long-standing automotive dealership, and recapitalization of a construction supply company. These markets, which have deeper CNI portfolios, also experienced increases related to heavier working capital line usage. Our southwest region loan portfolio rose $40 million in the quarter and is up 21% year-over-year. Larger new loans included an ESOP conversion for a long-standing food services client in Arizona, construction of a medical facility for a New Mexico client, as well as new relationships with a metal fabricator and a specialty contractor with an owner-occupied construction project in Las Vegas. In our western region of Southern California, loans rose by $20 million in the quarter and 10.2% year-over-year. We successfully onboarded several new private lender finance relationships, as well as a variety of smaller CNI loans to new relationships in the lighting, medical services, and specialty stainless steel equipment manufacturing industries. Overall, growth was somewhat moderated this quarter by timing issues related to larger paydowns on revolving lines with a few of our finance and private lending clients. Moving on to deposits, on slide nine, Total deposit balances were up $78 million for the quarter and $1.1 billion, or roughly 9% year-over-year. Breaking this down, non-interest-bearing DDA accounts were down by $387 million, attributable to the remixing of idle balances and interest-bearing alternatives. Our lower-yielding savings accounts also declined for similar reasons. In aggregate, however, we've been able to successfully grow client deposits, by $810 million, or 7.5% over the past 12 months. For the quarter, similar activity continued, but growth was slowed by the typical seasonal first quarter outflows related to distributions, bonuses, and tax payments. Regionally, year over year, growth has been fairly well balanced between the specialty deposit verticals and other geographic markets and lending businesses, as shown on slide 10. For the quarter, client balances were down 98 million, or less than 1%, with the seasonal outflows most heavily impacting the St. Louis and California markets. On a combined basis, year over year, non-specialty customer deposits within our geographic regions are up 340 million, or over 4%. This has been the result of focused development of sales campaigns and product enhancements directed at client outreach. expansion of existing relationships, and targeting of specific business types and competitors. Specialty deposit businesses were up $123 million for the quarter and have grown year-over-year at 19.3%. These business lines are highlighted in more detail on slide 11. Community association balances rose by $69 million and typically experienced seasonal increases in Q1 as HOA assessments are billed and paid. The property management segment also grew in the quarter, $119 million, as we continue to fund and open new accounts for our best relationships. Third-party escrow balances are down slightly, but mainly relate to some planned larger 1031 and class action account disbursements. Overall, key relationships are intact, and we continue to expand these deposit-focused lines of business with new accounts and new relationships. Additional detail on the core funding mix and account activity is shown on slide 12. Diversification of these balances by channel remains fairly consistent with the prior period, with, as you heard from Jim, roughly 31 percent of total deposits being on interest-bearing. The pace and magnitude of the aforementioned remixing continues to slow, and we remain focused on building and retaining stable, relationship-based funding. The underlying account activity also continues to trend favorably and reflect our intentional efforts toward emphasizing a granular and diversified core deposit base, with new accounts opened exceeding closed accounts, and net balance increases when comparing new accounts to closed accounts across all channels. With that, I'd like to turn the call over to Keane Turner for his comments. Keane?