Enterprise Financial Services Corporation

Hello and welcome to the Enterprise Financial Service Corporation third quarter 2024 earnings conference 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 followed by the number one on your telephone keypad. If you would like to withdraw your question again, just press star followed by the number one. I would now like to turn the call over to Jim Lally, President and CEO. You may begin.

Well, thank you, Jeremy, and thank you all very much for joining us this morning, and welcome to our 2024 Third Quarter Earnings Call. Joining me this morning is King Turner, EFSC's Chief Financial Officer and Chief Operating Officer, Scott Goodman, President of Enterprise Bank and Trust, and Doug Bowie, 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. Our strong financial performance continued in the third quarter. Our diversified business model delivered EPS of $1.32, which compares favorably to the $1.19 in the late quarter and $1.17 in the third quarter of 2023. As important, we experienced a stable net interest margin, continued expansion of net interest income, and a 25% annualized increase to our tangible book value per share from the linked quarter. Needless to say, I'm very pleased with these results as they set us up well to finish this year very strong and enter 2025 with a great deal of momentum. Like we've stated during previous earnings calls and investor meetings over the last several years, We've worked diligently to diversify our business models such that we do not have to depend on any one business, market, or asset class to produce high-quality earnings. Our third quarter financial performance is a result of this strategy, and we will continue to refine and improve on this strategy for quarters and years to come. Our financial scorecard begins on slide three. For the quarter, we earned net income of $50.6 million for... $1.32 per diluted share, and we produced an adjusted return on assets of 1.32% and a pre-provision return on assets of 1.74%. This was an improvement over a very strong result for the first two quarters. Our net interest income increased $2.9 million to $143.5 million. Looking back over the last two years, have been able to hold this number at or around $140 million despite challenging competitive and industry conditions. This reflects the strength of the franchise that we've built and we remain positioned 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 of our net interest margin at 4.17%. 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. Cain will provide much more detail on these results in his comments, along with our strategy as to how we plan to defend this amid a declining interest rate environment that we expect to continue over the next several quarters. Last quarter, I discussed the wait-and-see mindset of most of This continues to have an impact on our loan growth. For the quarter, we saw loans grow by $80 million, or 3% on an annualized basis. This includes a $46 million decline in our agricultural portfolio, which we continue to wind down. Based on the conversations that we were having with our clients, what I believe is a bit of pent-up demand, I'm confident that we will get back to our mid-single-digit growth in the quarters ahead. In the meantime, we'll maintain our credit and pricing discipline while we continue to sell with our value-added approach. Deposit growth continues to be a bright spot for our company. For the second quarter in a row, we were able to grow customer deposits close to $200 million. In fact, we've expanded customer deposit balances in four of the last five quarters. In addition to our continued strong performance in our national deposit verticals, we experienced solid growth in our geographic markets, too. The cost and composition of the deposit base remained stable and had significantly aided in the continued growth in our earnings and profitability. The quarterly cost of deposits was 2.18%, and our level of DDA to total deposits remained right at 32%, a level we've maintained for the last five quarters. Last quarter, I spoke to my confidence in our ability to grow our balance sheet at a mid-to-high single-digit pace with a caveat that loan growth would likely follow, the black and foul in the mid to late fourth quarter, and maybe even into 2025. 90 days later, I am still confident in this growth rate. Loan pipelines are building, and these should only continue to grow with the additions of new RMs and teams. You'll hear much more about where we are seeing opportunities in Scott's comments. Another strength of our company is our well-positioned balance sheet, which provides for great flexibility with respect to capital planning. Capital levels at quarter end remain stable and strong, with our tangible common equity to tangible assets ratio at 9.5%. As impressive was our 14.16% adjusted return on tangible common equity, while growing our ratio of tangible common equity to total assets by close to 1% over the last year. Tangible book value for common share was $37.26, a 25% annualized increase for the quarter. Given the strength of our earnings and our confidence in our continued execution, we increased the dividend by $0.01 per share in the fourth quarter of 2024 to $0.28 per share and will return an additional $9.7 million to shareholders during the quarter through common stock repurchases. I would characterize the credit quality of our portfolio as strong and stable. Non-performing assets decreased $15.2 million when compared to the linked quarter. This sizable decrease was primarily attributable to the sale of our largest piece of OREO, in which we recorded a gain in excess of $3 million. As you can see from the data presented, our ratios of NPLs to total loans and NPAs to total assets are at the lowest levels in the last year. We've been able to achieve this while maintaining strong allowance for credit losses of 1.26% of total loans. Slide 5 shows where we are focused for the foreseeable future. Our focus remains on taking care of the great clients we've accumulated over our 36-year history while adding those family-owned businesses that cherish high-touch consultative relationships. Doing this day in and day out will lead to several more quarters of really strong performance and the continued building of franchise value. We will not alter our credit discipline to chase growth and will be cognizant of current market pricing trends to make sure we continue to protect and grow our client base. Two weeks ago, we executed on our core conversion. Careful planning and execution of this plan by our team facilitated a smooth transition to our new system. While the core project was a singularly long, extensive project for us, our culture is one of continuous improvement and process innovation. And while we are pleased to have completed this milestone, we will jump back into an array of projects and opportunities that improve the client experience and make us more efficient. The fruits of our recruiting efforts, especially in our higher growth markets and higher profit specialized businesses, are beginning to pay off. We continue to onboard several new RMs and full teams in our Western markets and will continue to capitalize on disruption caused by M&A in all of our markets. Similarly, we are being very strategic with our ads to our specialized lending teams and our national deposit verticals, focusing 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 for the remainder of 2024 and into 2025. Before I need to call to Scott, I would like to provide a little perspective on how our clients are performing and provide a view of the overall economy from their vantage point. For the most part, our clients continue to do well. From large general and subcontractors to mid-market manufacturers and distributors, 2024 will be another solid year for most. What has changed in the last 90 days is that we are having many more strategic conversations about expansion, succession, and acquisitions than we had in the previous two quarters. This informs us that opportunities exist and that these companies will flex their approach to these opportunities once they understand whether or not the upcoming elections have any impact on them. Last quarter, I mentioned that our CRE clients were anxious to get new projects underway and take a longer viewpoint now that near-term rates have begun to decline. This has manifested itself with several new wins throughout our footprint and most asset classes besides office CRE. I like the tempo that we are seeing in our business and feel good about our team's ability to consistently produce quality opportunities that will ultimately lead to consistent, sound balance sheet growth. We enjoy a 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. Starting with loans, as you heard, we posted net growth of $80 million in Q3. This growth, which is outlined on slide 6 and 7, was relatively well balanced between CNI and commercial real estate with our major metro markets this quarter. At a high level, gross new loan production continued at a healthy pace, but net growth was muted somewhat by the planned runoff of our ag portfolio and several expected larger paydowns this quarter associated with opportunities to exit marginal credits. As Jim outlined, new C&I lending opportunities center heavily around businesses transitioning ownership or investing for growth through acquisition and expansion, while balances on revolving lines of credit were relatively flat from the prior quarter. With interest rates moving down, we're also seeing the resurgence of some commercial real estate projects that were previously in a holding pattern, particularly within our higher growth western markets. Turning to the specialty lending verticals, life insurance premium finance had a strong quarter, growing $34 million. In addition to scheduled premium fundings on the existing book, we also originated several large new loans from our established base of referral partners. Despite elevated competitive pressures from the larger regional banks, typically competing on price in this space, our model of consistent execution and speed of delivery, which we've built over several decades, continues to deliver a steady pipeline of new opportunities and consistent growth. The sponsor finance portfolio declined by $47 million in the quarter. As I've mentioned in prior quarters this year, growth in this space has been dampened by a number of competitive and environmental factors. Namely, private equity sponsors have accelerated the sale of portfolio companies in 2024, following the previous year of 2023 in which we saw almost no churn in the existing book. Additionally, elevated short-term rates, which are predominantly used in this space, squeezed the price differentiation between the subordinated and senior lenders, leading to higher usage of Unitranche and other mezzanine sources in the capital stack. These factors also created more competition amongst senior lenders, and in some cases have led to credit structures and pricing that are beyond our risk tolerance. Over time, this specialty has and will provide growth consistent with our global targets. However, given our nearly 20 years of experience in this space, we understand this can be a cyclical business, and we're prepared to exercise appropriate discipline to protect the credit quality of our book and maintain the consistency that is valued by our sponsor partners. The tax credit portfolio is down modestly due to scheduled paydowns on project loans as expected in a seasonally soft quarter, but is positioned to show some growth as is traditional heading into Q4. Looking at growth by region on slide eight, Midwestern markets were most heavily impacted by the aforementioned plan reduction on our ag portfolio and the other anticipated paydowns. Aside from these factors, production was solid with originations trending up from the prior quarters this year. Highlights for Q3 include the acquisition financing for a construction materials client and refinancing of a seasoned CRE project coming out of a secondary market structure in Kansas City, as well as an ESOP conversion for a longtime CNI specialty manufacturing client in St. Louis. Growth in our southwestern markets continues at a solid pace loans up 31 million or seven and a half percent annualized in Q3 and posting growth of 14.8% on a year over year basis. Generally speaking, this region continues to benefit from the higher level of economic growth within the Phoenix, Dallas and Las Vegas metro markets. Growth also includes a continuing tail of construction funding on commercial real estate projects, which we've originated over the past 12 to 18 months. In addition, we originated new loans for established Phoenix clients in the car wash, multifamily, and healthcare businesses in this quarter. Our western region of Southern California posted solid growth of 96 million in Q3 and is up 185 million or 10.5% year over year. Growth in this market has steadily increased as we are now seeing traction both from larger legacy acquired clients as well as relationships originated by the new talent that Jim mentioned that's been added over the prior two years. Growth in commercial real estate this quarter is coming from fundings on commercial construction loans originated in prior quarters, as well as additional capacity for new real estate opportunities, such as loans to seasoned operators of multifamily, senior living, and industrial storage. Alternatively, newer talent is predominantly CNI-focused, onboarding new relationships during Q3 in the private lending, aerospace manufacturing, and commercial electric spaces. Deposits are profiled on slide nine, which shows growth of 183 million or 6% annualized for the quarter. Focusing on core growth, exclusive of brokered funds, customer deposits are up 770 million or 6.9% year over year. Balances were stable in the lower-cost, non-interest DDA and savings account types, while growth was most prominent in interest-bearing DDA and money market accounts. This growth has not come at the expense of an inflated rate or hot money strategy, but rather from continued efforts to add new clients and a value-added sales process to expand our existing account relationships. You'll hear more from Keen in his comments on our progress and continuing efforts to control deposit costs. Another highlight this quarter is the performance of our geographic regions, which contributed nearly 70% of the growth this period. This is broken out on slide 10. The Midwestern markets increased deposit balances $94 million in Q3 and have now grown deposits 2% year-over-year. In addition to several significant new commercial deposit relationships, We are having focused and intentional discussions with our top clients to aggregate their excess funds with our bank and educate them on the overall rate environment to protect our existing balances as rates fall. Balances also grew in our western region of Southern California, increasing 42 million or 14% annualized. Generally, growth came from the onboarding of new commercial and private banking relationships, as well as the stabilization of existing accounts that had run down early in the year from clients deploying excess cash for working capital. The deposit verticals contributed $60 million of growth per quarter, primarily due to increased balances within the property management segment. These verticals are further broken out on slide 11, which shows an overall portfolio that is well-balanced between the three major lines of business. Growth in Q3 follows a strong performance trend within the property management segment as we attract new accounts to our existing management company relationships. We continue to also benefit from traction relating to the Florida branch, which was opened in 2023, allowing us now to bring on new accounts both from existing and new clients operating in that state. Lastly, I'll comment on the funding mix, which is profiled in slide 12. and highlights both the diversification and steady DDA component of our major client channels, representing 32% of the total. Growth for the year has been weighted in lower cost account types, and we continue to see a slowdown in the shifting of balances to higher yielding products. I am encouraged by the proactive conversations we are having with clients around the shifting interest rate environment, and early behavior has been positive with respect to retention, and new opportunities to grow these deposits. Now I'd like to turn the call over to Keane Turner for the financial highlights. Keane?