Enterprise Financial Services Corporation

and an operator will come on the line to assist you. I would now like to turn the conference over to Jim Lally, President and CEO. Please, go ahead.

Well, thank you, Jericho, and thank you all very much for joining us this morning, and welcome to our 2024 Second 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 10K and 10Q for reasons why actual results may vary from any forward-looking statements that we make today. I'm very pleased with our second quarter results. Our business model, associate base, and management team has been constructed to perform well in any economic environment, and the results of the second quarter are a product of the great work that has been done for the last several years. In the quarter, we were able to expand margin, grow net interest income, experience positive operating leverage, and continue to significantly compound tangible book value per share. 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 anyone's business, market, or asset class to produce high quality and predictable earnings. Our second quarter financial performance is a result of this 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 $45.4 million, or $1.19 per diluted share, and we produced an adjusted return on assets of 1.27% and a pre-provisioned return on assets of 1.74%. These results improved over a fundamentally sound first quarter. Our net interest income increased $2.8 million to $140.5 million. Looking back over the last six 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. We remain in position to produce high-quality earnings that consistently improve shareholder value through deep-rooted client relationships. Our stable net interest income was aided by the defense and growth of our net interest margin to 4.19%. 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. Keane will provide much more detail on these results in his comments. As we thought would happen, loan growth moderated in the quarter, largely due to lower line usage, higher paydown and payoffs in the quarter, and the planned rundown of the agricultural portfolio. Our second quarter saw strong loan origination activity, as you will hear from Scott, and I'm confident that we will see our normal second half strength in loan originations. Deposit growth continues to be a bright spot for our company. After experiencing our typical first quarter seasonal outflows, the second quarter saw us grow client deposits by an impressive $192 million. Our confidence in the continued growth in our national deposit verticals allows us to be disciplined with respect to deposit pricing in our geographic markets. This is evidenced by the fact that our overall cost of deposits increased only three basis points to 2.16% in the quarter. At quarter end, our loan to deposit ratio remained at 90%, while our DDA level improved to 32% of total deposits. With the overall business generation strong, I remain optimistic that our high single-digit balance sheet growth is achievable. We are starting to see backlogs grow in our life insurance pre-finance business. Our geographic markets have seen recent discussions intensify for new CNI and CRE opportunities. But timing on actual fundings will likely be mid to late fourth quarter, with some of this leaking into 2025. The bottom line is that we'll have opportunities to deploy deposit growth in either loans or securities, both of which review as favorable long-term value and profit drivers. Scott will provide much more detail on our markets and businesses in his comments. Our balance sheet remains well positioned and provides for great flexibility with respect to capital planning. Capital levels at quarter end remain stable and strong with our tangible common equity ratio at 9.18% and an adjusted return on average tangible common equity of 14.06%. Tangible book value per common share was $35.02. a 10% annualized increase for the quarter. Given the strength of our earnings and our confidence in our continued execution, we increased the dividend by one cent per share in the third quarter of 2024 to 27 cents per share. And we returned an additional $8.5 million to shareholders during the quarter through common stock repurchases. Before discussing our areas of focus for the remainder of the year, I would like to provide an update on credit. I'm pleased with the progress that we continue to make As expected, asset quality continued to improve as classified assets decreased by 8% or $15 million. NPAs were well managed and net charge-offs were nominal at less than $1 million. We did receive the results of the third-party loan review of our agricultural portfolio. This report did not surface any abnormalities that we had not already identified by our internal review. That said, the overall sector is showing some signs of weakness And our efforts to reduce our exposure, as well as our allowance bill, represents our posture towards the industry. We're making good progress in reducing our exposure as a portfolio reduced by just under $40 million during the quarter and stood at about $194 million a quarter end, with further reductions expected throughout the remainder of the year. Slide 5 shows where we are focused for the foreseeable future. Our focus remains in taking care of the great clients that we've accumulated over our 36-year history, while adding those family-owned businesses to cherish high-touch consultative relationships. Doing this day in and day out will lead to several more quarters of really strong performance and continued building of franchise value. We will not alter our credit discipline to chase growth, and we'll be cognizant of the current market pricing trends to make sure we continue to protect and grow our client base. In addition to this, By our next earnings call, we will have converted to our new core system. To date, we are on time and on plan with respect to this conversion and look forward to the benefits that this will bring to the company for many years to come. The fruits of our recruiting efforts, especially in our higher growth markets and higher profit specialized businesses, are beginning to pay off. We've onboarded several new RMs in our western markets and will continue to capitalize on the disruption caused by M&A in these markets. Similarly, we are very excited We are being very strategic with our ads to our specialized lending teams and our national deposit verticals, focused on those areas that provide the greatest shareholder value, combined with the businesses that have been most disrupted due to M&A or where banks have decided to disinvest or disregard the business in total. We will aggressively pursue more of these opportunities throughout 2024 and 2025. Before handing the call to Scott, I would like to provide a little perspective on how our clients are seeing the world. The challenges related to loan growth are a product of the sentiment of many of our clients. When speaking to several of our C&I business owners, their posture on increasing leverage ahead of Fed cuts in the fall election was quite conservative. Unless there's a specific need for capital, like a new equipment line for newly awarded business or to close on a new acquisition, they are likely to stay on the sidelines and operate conservatively. On a somewhat positive note, supply chain issues for the most part are behind them. and the wage pressure that plagued many of these businesses just a few years ago have largely dissipated. These same clients remain very well capitalized and are eager to grow their businesses when they have better visibility to the economic and political climate ahead. Last quarter, I talked about the Fed's easing of rates as a psychological impetus for CRE projects to go from the drawing board to reality. With the likelihood of this rather imminent, we have seen the number of meetings in our higher growth CRE markets increase significantly. With that said, I'm confident we'll see these discussions turn into closings late in 2024 and into 2025. We enjoy a great reputation in corresponding market share of middle market businesses in our mature geographies and specialized lending businesses. As such, I'm 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 plan 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. Turning to loans, which begins on slide six, With a modest reduction of $28 million in the quarter, year-over-year loan growth is $487 million, or roughly 5%. Jim outlined the primary factors leading to the softened net growth this quarter. But breaking this down a bit further, there were certainly numerous positive factors which position us well and provide optimism moving forward. Foremost among these is that overall production is sound, with originations of new credit commitments up roughly $100 million from the Q1 levels. The loan details on slide number seven provide a helpful picture of where we are seeing near-term reductions versus growth for the quarter. The largest reductions were in the C&I categories, with roughly half of this change attributable to lower balances on revolving lines of credit. As the impact of higher short-term borrowing costs took hold, businesses tended to lean a bit more on cash to fund working capital and other short-term needs. Other reductions in the CNI category include the planned runoff of several agricultural loan relationships associated with our planned exit from this business line, as well as some expected payoffs and paydowns from commercial clients relating to the sale of assets and operating businesses. Commercial real estate posted net growth for the quarter, bolstered by some larger property acquisitions, refinancing, and facilities expansion in Dallas, Arizona, Orange County and Las Vegas. Activity seems to be ramping back up in this category, particularly in higher growth markets, as owners and developers are adjusting expectations and re-penciling deal structures around the current rate environment. Existing projects also continue to move forward, driving additional growth in construction and development loan balances, which were up $65 million and a quarter. We view our capacity for growth in these segments as a competitive advantage. as our overall commercial real estate, construction, and development levels remain well within regulatory limits and provide ample runway for additional opportunities. Loans by region are broken out on slide eight, showing net growth in specialty lending, southwest and western markets, with the quarterly decline attributable to our midwestern markets. Within the specialty lending business lines, life insurance premium finance posted a seasonally soft growth quarter, with lower originations offset by some paydowns being driven by policy restructuring around higher interest rates. We're also seeing some heightened rate competition from a few select national and regional players that tend to ebb and flow in the space based on overall loan demand. In general, though, our pipeline of new opportunities is solid, including deals referred from several newer advisor relationships, and the growth outlook in this vertical is sound. SBA production remains steady in the quarter and generally in line with expectations. Growth in this business has been pressured for a while now by higher payoffs prompted by the higher rate environment, although this is trending down in 2024 versus the prior year. Application activity is increasing as borrowers become more comfortable with the current rate environment and ultimately a reduction in rates would have a positive impact on payoffs. The tax credit portfolio continues to perform well and grew by $20 million in the quarter as existing affordable housing projects moved through the construction phase. The sponsored finance book was essentially level in the quarter with healthy origination activity offset by payoffs stemming from the sale of portfolio companies by our private equity clients. New deal activity in this business continues to steadily ramp up in what is typically a busier second half of the year. Within the geographic regions, the St. Louis and Kansas City markets, which contain our largest base of general CNI businesses, were heavily impacted by the reduction in revolving line of credit balances. However, new origination activity was up in both markets over Q1, with significant fundings on acquisitions by existing clients, new relationships in the nonprofit and medical services industries, and improved activity in commercial real estate lending. The Southwest region posted 11% annualized growth in the quarter, and loan balances were up $234 million, or 16.5% year-over-year. This strong growth is representative of the higher levels of new development and generally more robust economic activity in these major metro markets, which include Dallas, Phoenix, and Las Vegas. Key drivers this quarter included fundings on development loans and process, as well as stronger new loan origination versus the prior quarter. Notable deals include new relationships in Las Vegas with an auto dealership and a metal fabricator, as well as owner-occupied commercial real estate expansion with an existing financial services client in Phoenix. In our west region of Southern California, loan balances were up modestly for the quarter and 5.8% year-over-year. This region was also impacted somewhat by lower usage on lines of credit. However, this was more than offset by several larger new loans in commercial development and hospitality, as well as continued onboarding of new C&I relationships. Talent that we've added in this market over the past 18 months or so has continued to gain some traction, with over 20 new commercial relationships added so far year to date. Moving to deposits on slide nine, We posted strong core growth with balances up 192 million in the quarter and 1.1 billion or 9.9% year over year. Balances were up in all the key categories, but most prominently in non-interest bearing DDA relating to a strong quarter in the property management deposit vertical, as well as our focus on new C&I operating accounts. In addition to growth, these strategies are helping to maintain our overall current cost of deposits, which Keene will expand upon, and positions us well moving forward. The breakout by region on slide 10 further illustrates this growth profile, with the increase for the quarter attributable to the deposit verticals and the southwestern markets. The same behaviors by operating businesses, which prompted reductions in revolving lines, also resulted in lower deposit balances in our Midwestern and Southern California portfolios. At present, these companies are opting to use excess cash for working capital and short-term needs rather than borrow. However, as cash builds heading into the second half of the year, and if companies become more confident that rates will come down in the future, we do expect this behavior to normalize. The deposit verticals are further broken out on slide 11, which shows the overall portfolio well-balanced between the three major lines of business. Growth in Q2 was particularly strong in the property management segment as we continue to add new accounts to our existing management company relationships. We're also seeing traction related to the Florida branch, which was opened in 2023, allowing us to bring on new accounts located in that state. These are coming both from our existing relationships as well as new management companies, which are now able to access our products and our expertise. Funding mix is profiled on slide 12, which highlights the strong DDA component of our major client channels. In addition to our growth for Q2 being weighted in low-cost account types, we continue to see moderation in both pricing and remixing to the higher interest rate products. Furthermore, we are producing higher average balances in accounts opened versus those closed across all channels, and we are having success in protecting and expanding our best relationships. Now, I'd like to turn the call over to Keane Turner for the financial highlights. Keane?