Enterprise Financial Services Q1 2025 Earnings Call Transcript

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April 29, 2025

There are 10 speakers on the call.

Operator

Thank you. I would now like to turn the conference over to Jim Lalli, President and CEO. You may begin.

Speaker 1

Well, thank you, Pam, and good morning, everybody. You all very much for joining us this morning, and welcome to our twenty twenty five first quarter earnings call. Joining me this morning is Keane 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 eight ks yesterday in addition to two other press releases that we'll be referencing in our remarks this morning.

Speaker 1

Please refer to Slide two of the presentation titled Forward Looking Statements and our most recent 10 ks and 10 Q for reasons why actual results may vary from any forward looking statements that we make this morning. Our financial scorecard begins on slide three. 20 20 five is off to an exciting start for our company. In addition to strong financial results for the first quarter, yesterday we announced the acquisition of 12 branches from First Interstate Bank, ten of which are in our Arizona market, complementing very well the focused commercial bank we have built over the last fifteen years. The strong financial performance that we have generated for the past several years continued into the first quarter of twenty twenty five.

Speaker 1

For the quarter, we earned $1.31 per diluted share, which compares favorably to the seasonally strong $1.28 that we earned in the linked quarter and the $1.05 that we earned in the first quarter of twenty twenty four. This level of performance produced an adjusted return on assets of 1.29% and a pre provision ROAA of 1.71. I would characterize our performance in the quarter as strong and consistent. Net interest income and net interest margin both saw expansion in the quarter. NII came in at $1,100,000 better than the previous quarter despite two fewer days in the quarter and represented the fourth consecutive quarter where we saw NII expansion.

Speaker 1

This reflects both better seasonal performance in our deposit balances and net interest margin expansion resulting from our relationship oriented deposit base and our team's ability to provide value added service to our customers that is well worth the extra few basis points when it comes to loan and deposit pricing. Loan growth in the quarter was 3% or $78,000,000 with active production across all of our markets and businesses. However, net growth was somewhat muted by two factors. The first was a sale of $30,000,000 of SBA loans and the second was the seasonal decline due to sales in loans in our tax credit business that totaled approximately $75,000,000 Our diversified deposit base remains a differentiator for us. Typically in the first quarter, shows significant outflows due to the heavy concentration of commercial oriented accounts.

Speaker 1

This year, absent a municipal relationship that we knew was exiting, our deposit flows were stable overall. We worked extremely hard to blunt this trend through growth of our national deposit verticals as well as through market and business diversification within both the commercial bank and our more granular business banking and consumer relationships. The composition of deposits and stable.

Speaker 2

Market for medical office, self storage and automotive services. Our Western market of Southern California also had a strong quarter with $60,000,000 or 13% annualized loan growth. New business included loans to refinance fully occupied medical and mixed use properties in San Diego as well as a new relationship with a specialty finance company. Moving on to deposits on Slides eight and nine. Changes in the quarter within the core geographic portfolio reflect the typical seasonal decline in client balances of $3.00 $3,000,000 mainly associated with distributions, bonuses and tax payments.

Speaker 2

Material portion of this reduction was offset by continued growth within the national deposit verticals, which grew $134,000,000 or roughly 16% annualized in Q1. On a year over year basis, total client deposits excluding brokered funds are up 7.7%. In general, the largest C and I portfolios within the Midwest and Western markets are most heavily impacted by the seasonal reductions, which typically then rebuild throughout the remainder of the year. We continue to perform well relative to retention of existing clients as well as adding new C and I relationships even

Speaker 3

as

Speaker 2

we proactively focus on gaining incremental margin in the pricing of loans and deposits. Our commercial teams are well versed in reinforcing our key value drivers, particularly as we assist clients with strategic capital needs or target disrupted competitors. The national deposit verticals profiled on Slide 10 continue to provide differentiated low cost funding, while also diversifying our overall deposit base and somewhat softening the seasonality of our other channels. HOA had a particularly strong growth quarter associated with onboarding a significant number of new account relationships. Lastly, Slide 11 profiles the mix of our core deposit base, which continues to be well diversified and highly relationship oriented, with roughly one third of these accounts being non interest bearing and 90% of them using some form of treasury management or online banking, they provide strong continuity and a solid base from which to expand other fee generating revenue stream.

Speaker 2

Now

Speaker 4

I would like to hand

Speaker 2

the call over to Keane Turner for his comments. Keane?

Speaker 5

Thanks Scott and good morning everyone. Turning to slide 12, we reported earnings per share of $1.31 in the first quarter on net income of $50,000,000 That's a $03 increase over the linked quarter for which earnings per share was $1.28 On an adjusted basis, earnings per share was relatively stable at $1.31 in the current quarter. Adjusted EPS excludes the impact of core conversion related expenses and gains and losses on the sale of OREO and securities. One of the highlights of the quarter was the increase in net interest income. Our disciplined pricing of loans and deposits benefited net interest income along with growth in average loans and securities.

Speaker 5

These actions more than offset the impact of fewer days in the quarter and the repricing of variable rate loans. Non interest income was also strong to start the year although it did decline from the fourth quarter which is typically the highest quarter of the year. The provision for credit losses decreased from the linked quarter due to lower growth and a net recovery on loans. As Jim noted, while non performing loans have increased due to the relationships and bankruptcy, we did not reserve for those loans as we fully expect to collect related balances. Non interest expense was slightly higher in the quarter as a seasonal increase in compensation and benefits was mostly offset with a decrease in conversion costs related to the core system migration in the fourth quarter.

Speaker 5

Turning to Slide 13 with more details to follow on 14. To me the highlight of the first quarter is how well we were able to manage net interest income. First and foremost, we were able to mitigate two fewer days in the quarter. There isn't one single factor that led to this performance. However, we were able to largely replace seasonal deposit outflows to maintain the size of the balance sheet.

Speaker 5

For the last several quarters, the investment rate for securities has been favorable and we've been adding to those balances in order to strengthen our earnings profile. Also from a business perspective, we've had success in repricing loans better than we had anticipated while also improving the pricing on our deposit balances. The origination rate for new loans was 7.12% in the quarter and we were able to drive deposit rates down another 10 basis points to 1.82% at the end of the first quarter. The combination of those factors has led to better than planned net interest margin in this first quarter. Starting off the year with a 4.15% net interest margin has set the stage for slightly stronger net interest income performance for 2025.

Speaker 5

With that said, we do expect to see modest erosion of margin during this year. With recent variability in interest rates in recent weeks, it's difficult to assume that we would face the same strength in reinvestment rates throughout 2025. However, we will continue our efforts to mitigate expected pressure on net interest margin with continued discipline on pricing performance on both sides of the balance sheet. As for net interest income dollars, day count is now in our favor for the remainder of 2025. Slide 15 reflects our credit trends.

Speaker 5

We had a net recovery of $1,100,000 compared to net charge offs of $7,100,000 in the linked quarter. The provision for credit losses declined to $5,200,000 in the period compared to $6,800,000 in the linked quarter due to changes in loan growth and the net recovery. Non performing assets were 72 basis points of total assets compared to 30 basis points at the end of the year. The temporary increase in the non performing asset ratio was primarily related to two relationships with common general partners that went into bankruptcy due to a business dispute. We are well secured with collateral and individual guarantees and fully expect to collect each of the underlying loans and we expect NPAs to return to normalized level in the next couple of quarters.

Speaker 5

Slide 16 presents the allowance for credit losses. The allowance for credit losses represents 1.27% of total loans or 1.38% when adjusting for government guaranteed loans. Of note, we moved allowance to total loan coverage up slightly to further reflect potential for erosion of economic conditions. On slide seventeen, first quarter non interest income of $18,000,000 included a $1,900,000 gain on the sale of SBA loans. This helped partially offset the decrease in tax credit income from a seasonally high fourth quarter.

Speaker 5

Depending on levels of planned growth and activity in the SBA space, we may take the opportunity to sell more SBA loans as the year progresses. Turning to slide 18, non interest expense of $99,800,000 increased less than $1,000,000 from the fourth quarter. The increase was primarily in compensation and benefits due to seasonal payroll tax impacts and merit increases that went into effect March 1. These increases were offset by the $1,900,000 costs in the fourth quarter that did not reoccur. Deposit costs were relatively stable as well reflecting the strength of the average balances offsetting improvement in the earnings credit rate.

Speaker 5

Core efficiency improved to 58.8% compared to 57.1% for the linked quarter sorry efficiency increase not improved. Our capital metrics are shown on slide 19. We are executing our disciplined capital allocation strategy evaluating various opportunities including share repurchases and M and A with focus on creating shareholder value. We repurchased 192,000 shares at an average price of $55.28 for approximately $11,000,000 of capital return. We have approximately 1,200,000.0 shares remaining outstanding under our current repurchase plan.

Speaker 5

Our tangible common equity ratio was 9.3% up from 9.1% in the linked quarter. On a per share basis tangible book value was up by 14% on an annualized basis to $38.54 We also increased our quarterly dividend by $01 to $0.30 per share for the second quarter of twenty twenty five. I'll echo Jim's comments. We started the year with a lot of momentum. Our earnings profile is strong, the balance sheet is strong and we're adding further to our earnings and growth profile with the strategic brands acquisition that Jim outlined.

Speaker 5

We believe that combined with our differentiated commercial relationship model we will continue to deliver top tier financial performance for the foreseeable future. I appreciate your attention today and I'll turn it back to Jim before we open the line for QMAC.

Speaker 1

Thank you, Keene. In addition to the announcement regarding our Arizona and Kansas City expansion, yesterday we also announced that Scott Goodman has decided to transition to a part time non managerial role as part of our orderly succession planning process and thus will step down from his position as President of Enterprise Bank and Trust later this year. Thankfully, Scott has decided to stay with the company as a strategic advisor to me, while also working with our teams and our most important clients. Subsequently, Doug Bialke will be promoted to the newly created role of Chief Banking Officer, where he will lead all of our commercial specialty and business banking businesses. Kevin Hanley, a thirty year industry veteran, the last seven with enterprise will succeed Doug as our company's Chief Credit Officer.

Speaker 1

These moves will all be effective later this year and we are well positioned with our succession planning preparation to ensure a smooth transition. I would like to publicly acknowledge and thank Scott for his tremendous contributions that he's made to our company over the last twenty three years, the last twelve as President of Enterprise Bank and Trust. We would not be the successful organization that we are without his great leadership and strategic guidance. I also like to congratulate Doug and Kevin on their promotions and look forward to working closely with them in their new roles. Lastly, I would like to thank all of our enterprise associates for their hard work and dedication to serving our clients every day.

Speaker 1

With that, I would now like to open the line for questions.

Operator

Thank you. We will now begin the question and answer session. You. And your first question comes from the line of Jeff Rulis with D. A.

Operator

Davidson. Please go ahead.

Speaker 6

Thanks.

Speaker 7

Thanks. Good morning.

Speaker 1

Good morning, Jeff.

Speaker 7

Any of the terms of the branch deal that you're willing to disclose? Was this cash? Just trying to get a sense for the purchase price.

Speaker 5

Yes, Jeff. It's an assumption right. So we're bringing on roughly net $450,000,000 of cash that largely after the loans we'll invest in securities at call it a 5% rate. So all in all I think we expect the deal pro form a comes on at a similar to slightly improved margin. It will further the balance sheet at this point is pretty neutral when you factor in ECR and tax credit.

Speaker 5

So we'll have a chance that if we would like to making net interest income more neutral or the balance sheet slightly liability sensitive overall. And then expenses kind of come in from a run rate perspective in the low 50%. So call that 52% to 54%. So modeled pretty conservatively in terms of what we announced for the accretion and you sort of start with mid single digit EPS accretion and that improves as you assume you lend out some of the securities over time.

Speaker 7

And maybe just a follow on, expectation for pro form a capital levels post close and then does that would that alter, I guess, the interim or even after kind of the buyback or other M and A appetite just more on the capital side?

Speaker 5

Yes. I would say Jeff pro form a capital is right at our targets which is good. Of note we did not execute the call on our sub debt given equity market valuations. We've got a senior piece lined up if we want to replace that. So I think we can continue to be modestly offensive with share repurchases in these next couple of quarters here in addition to the transaction.

Speaker 5

Given the risk weighted asset profile, low risk weighted assets, we've got a lot of leverage ratio to give and it doesn't materially impact total capital ratios or risk based ratio. So I feel like there's an opportunity to continue to do a little bit of all of the above.

Speaker 7

Got it. And one final one if I could. I believe the Arizona piece of that, what was the old Great Western had some dairy exposure. Any comments on the maybe that's runoff and it's a pretty diminished amount on a relative sense. But just sector wise, was there any industry exposures from the loans brought over again?

Speaker 7

Yes.

Speaker 1

Jeff, this is Jim. We had the opportunity to really look at what's attractive to us. And so we're not picking up any dairy exposure in this transaction.

Speaker 7

Okay. Great. Thank you. I'll step back.

Operator

Your next question comes from the line of Andrew Liesch with Piper Sandler. Please go ahead.

Speaker 6

Good morning guys. Just kind of sticking with the theme of the deal here. Just curious if you kind of model out some of the book value dilution that's going come, how quickly you can earn that back?

Speaker 5

Yeah, Andrew. Relative risk reward, some of it depends on how quickly we lend it out. I think as I noted, our assumptions are fairly conservative both in the amount of employees that will stay on and will grow with us. And then we have also planned some additions to the market in the run rate there. So let's just say that if share repurchases are a five year earn back and the full bank M and A is three, it's way closer to the three than the five.

Speaker 6

Got it. Okay. That's helpful. And then just on organic loan growth, obviously, portfolios are little bit stronger here in the first quarter and some optimism for certain types as we move on through the year. But I mean how are you looking at loan growth for 2025 given that this rate wasn't all that strong in the first quarter overall?

Speaker 1

Yes. Andrew, I'll look at it this way. So we really focus on balance sheet growth first and foremost. I'm not going to shy away from that mid single digit growth for that. Given some of the uncertainty in the economy and what have you, we certainly have been out talking to our clients and they're not quite sitting in their hands, they are waiting and seeing what's going on out there.

Speaker 1

So we had thought maybe we'd see the lift in the second half of the year and that may bleed into 2026. But nonetheless, we're out attracting new relationships, growing the balance sheet, doing it the right way. And to the extent that something breaks free and relative to The U. S. Trade partners that then avails us to the appropriate loan growth, we'll seize it.

Speaker 6

Got it. Okay. That's helpful. I appreciate the commentary. I'll step back.

Speaker 5

Thank you.

Operator

Your next question comes from Damon DelMonte with KBW. Please go ahead.

Speaker 4

Hey, good morning guys. Hope everybody is doing well today. Just a question on the margin and the outlook, Keene. I think you noted that the margin is likely to trend lower here in the coming quarters. But can you kind of help us think about NII and the outlook there and your ability to kind of defend current levels even though the margin will be coming down?

Speaker 5

Yes. Damon, I would say the only thing that really changed with margin is my comments around the sub debt that flips the variable rate here in the quarter and has a pretty double digit or near double digit rate versus we were planning on replacing that with senior and I think that's a short term trade for long term capital management opportunity that exists. So I'd say that we expect margin to potentially step down maybe five basis points sequentially in the quarter. But all of my margin from here on out in a five quarter look is stable and that's got 75 basis points of Fed funds cuts in it. And absent the transition from 4Q to 1Q 'twenty six on day count, net interest income dollars grows quarterly whether we grow the balance sheet a whole lot or not.

Speaker 5

So I think we feel pretty good about that. And just worth pointing out when we look at it inclusive of non interest expense we're pretty neutral to slightly positive. So it depends on how some of those balances and complexions move how the what part of the curve is moving. But I think we've done a pretty good job of neutralizing And I think when you look back 1Q twenty twenty four versus current quarter pre tax pre provision revenue contribution is fairly stable when you neutralize tax credit.

Speaker 5

So I think we feel pretty good about that. And obviously the branch transaction as we noted gives us a chance to further improve the balance sheet flexibility and net neutrality of it as we move forward.

Speaker 4

Got it. That's helpful. Thank you. And then could you just kind of help us think about like the quarterly cadence for expenses? I know obviously the branch transaction comes on in the fourth quarter, but if you look at the level of the first quarter kind of deposit costs were a little bit higher and comp and benefits were higher for the start of the year.

Speaker 4

But how do we kind of think about that quarterly cadence?

Speaker 5

Yes. I think we didn't have any rate moves here in the quarter. So the earnings credit rate improved but we continue to have good success in that business. So that the deposit costs will probably grow in line there and I expect we typically trade merit for seasonal payroll 1Q to 2Q maybe inclusive of some working day stuff. So I don't think I have a really assertive improvement in run rate but to the extent that we continue to grow the balances in the deposit verticals that will grow net interest income dollars and will largely offset or slightly improve profitability.

Speaker 5

So there's really no big move coming. We will have a what I'll say is fairly immaterial transaction related expense on legal and those types of things in the coming quarters, but we'll point those out. Those aren't a huge item here with the type of the transaction.

Speaker 4

Okay. And then did you say that the kind of efficiency ratio of the branch operations that you're taking out are like the 52% to 54% range? So if that we can kind of back into what the expense impact is?

Speaker 5

That's correct. There's a minimal amount of fees that are that we expect to recur with the branches. So it's largely margin and expenses. More in line with our traditional branch only core banking efficiency ratio and then obviously the deposit vertical that add to that a little bit. So yes, that's 52% to 54 depending on how everything settles out.

Speaker 4

Got it. Okay. That's all that I had. Thank you very much. Thanks Damon.

Operator

Your next question comes from David Long with Raymond James. Please go ahead.

Speaker 8

Good morning, everyone. Good morning, David. Can you that a little bit of pressure on the NIM here in the second quarter, but then thereafter, even with 75 basis points of rate cuts, did you say NIM still stable in that environment?

Speaker 5

Yes, I would say generally. We've had good success in repricing deposits here. The early data is fairly in line with what the results were and slightly better than we had modeled. And as the time passes, David, when we get repricing of CDs and things like that, we expect that that will improve to sort of the maximum beta that we have when rates were rising. So those things help to stabilize margin as do the proactive steps we took on boosting the size of the investment portfolio and getting some durable earnings there.

Speaker 5

So we feel pretty good about stable margin and I would say the margin declination that I referred to is self inflicted but an opportunity to manage the share count and equity part of the capital stack here in the coming couple of quarters.

Speaker 8

Got it. Great. No, I appreciate that color. Thank you. And then on the credit side of things, Keene, I think you called these new nonperforming loans temporary.

Speaker 8

What is the timing of the process to exit these credits? Or can you what's your best guess on how that plays out to exit those without any losses?

Speaker 9

Yes. Hey, David, it's Doug Balk. Yes, I'll comment on that. And listen, to the bankruptcy, I think it's difficult for us to predict the specific timing of the resolution of these particular loans. I think what we can just do is kind of reiterate, right, our position that we're in today relative to loan to values in recourse to these sponsors and our confidence to be able to collect.

Speaker 9

I can tell you, David, I went out personally visited each and every one of these properties. And then we've, of course, engaged independent third party appraisals that we just got here in March. So listen, absent a dispute, these properties, these loans would be well performing. They're occupied, they're well positioned, they're in a very attractive Laguna Beach market. So this dispute was unforeseen.

Speaker 9

It's unfortunate, but we'll have to let things play out here in the bankruptcy proceedings. And in due process due time, I think we're going to have a very favorable outcome.

Speaker 8

Great. Thanks for taking my questions, guys.

Operator

And our next question comes from Brian Martin with Janney. Please go ahead.

Speaker 3

Hey. Good morning, guys.

Speaker 1

Good morning, Brian.

Speaker 3

Hey, Keene, it sounds like just fair to say, given your the outlook on margin, just even into next year, we're kind of thinking about things where rates are and maybe a couple of cuts here and the margin is still well above 4% in terms of even longer term than kind of the near term comments you've made. Does that seem fair based on kind of the positioning of the balance sheet and kind of your rate outlook today?

Speaker 5

That is accurate.

Speaker 3

Got you. Okay. Perfect. And then just in terms of the pro form a cap, I think you said with the transaction, what is your expectation in terms of where TCE lands in the fourth quarter? I think I don't remember if you said what that was.

Speaker 5

Yes. Brian, it's going to be dependent on how much we're after the common stock, but sort of 8.5% is where we think. Leverages TCE roughly 100 basis points and the other capital ratios are around the same amount just slightly under. So we think it's a really nice way to right size capital and also strategically expand the business and add to EPS all that stuff. And that's in my opinion with where we're seeing pricing and opportunities gives us a chance to still manage some share count.

Speaker 3

Yes. Okay. Got you. And I think did you got you said you also sold some tax credit loans in the quarter? Was that

Speaker 1

No. Brian, let me explain this to Jim. In normal course of business, what happens is significant sales of the credits in the fourth quarter, which then comes in the cash comes to pay down the loans. And so that's part of the seasonal flow of the business.

Speaker 3

Okay. I guess, okay. So that's just the normal course of business? It is.

Speaker 1

Given the size of the portfolio and where many of these projects are in process, that will rebuild over the rest of this year. This is a seasonal decline. If we're rebuilding, as Scott mentioned in his comments, we'll see growth in that business throughout 2025.

Speaker 3

Got you. And then we seem to see a similar pattern next year maybe when you execute in the fourth quarter, we'll see a follow through in the first quarter with maybe a little bit of a drift down like we did this quarter?

Speaker 7

That is exactly right.

Speaker 3

Got you.

Operator

Okay. And I think, Keene, I

Speaker 3

don't know. I'm the I'm not sure who said it, but as far as building the reserve this quarter, that's just uncertainty with regard to the tariffs. I mean, it certainly wasn't the credits you talked about this quarter, but just trying to understand what was driving the reserve build this quarter and thinking about that.

Speaker 5

Yes. Well, tariffs very clearly happened in the second quarter. So I think there just started to be a lot of turbulence as we looked at the forecast and we're always more weighted toward the downside in our qualitative reserves. And so it just felt like overall from a trend perspective that we didn't want to miss an opportunity here with a strong earnings quarter to be a little bit more conservative in the overall reserve level. So we're we think that's the right position to be in here and we'll continue to evaluate it at the end of the second quarter, end of the third quarter and just make sure that with the balance sheet and the earnings profile we also are putting things away for reserves if the economy looks like it's starting to cloud up a little bit.

Speaker 3

Yeah. Okay. And and you did you give what the team the expense add from the branch deal? Or do you have a ballpark of what that is? If not, we can I'll take a look at what your comments were earlier.

Speaker 5

I didn't. I gave an efficiency ratio. I said it was like 52% to 54% marginal efficiency on the modeled net interest income and the margin on the assets coming over was roughly in line with expected margin at closing. So as we get closer here, I'll give you sort of line item details. But for right now, I think that should get you pretty close to the mid single digit 2026 accretion.

Speaker 5

And for the year you'll have a little bit of earnings in the fourth quarter from the opportunity but it and it probably out earns the one time cost modestly in 2025.

Speaker 3

Got you. Okay. That's helpful. Thanks for taking the questions.

Speaker 5

Thanks, Brian.

Operator

Are no more questions. I will now turn the conference back over to Jim for closing remarks.

Speaker 1

Thank you, Pam. And again, thank you for all of you joining the call this morning. Appreciate your interest in our company, and we'll talk with you at the end of the next quarter. Have a great day.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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