Good day, and welcome to the EFSC Earnings Call. At this time, I would like to turn the call over to President and CEO, Mr. Jim Lally. Please go ahead..

Thank you, Victoria, and good morning, and welcome to our second quarter earnings call. I appreciate all of you taking time listening. And joining me this morning is Keene Turner, our company's Chief Financial Officer and Chief Operating Officer; and Scott Goodman, President of Enterprise Bank & Trust.

Before we begin, I would like to remind everyone on the call that a copy of the release and accompanying presentation can be found on our website and were furnished on SEC Form 8-K yesterday.

Please refer to Slide 2 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 this morning..

Thank you, Jim, and good morning, everybody. If you turn to Slide #5, as you heard from Jim, we posted solid organic loan growth of $278 million in the quarter or 17% annualized net of the activity on PPP.

Overall, this reflects successful execution of a growing pipeline that had been building steadily this fiscal year across numerous different business units and specialty channels. This detail is further broken out on Slide #6 and 7. But overall, our business owner clients are generally optimistic and actively positioning their companies for growth.

And while some headwinds still exist and fully translating this activity to loan growth in all areas, our business model is now allowing us to lean into geographies and specialty lines that are benefiting from improved economic activity.

Following a prolonged period of successive quarterly declines in balances on lines of credit, average usage on these lines leveled out in Q2. With PPP forgiveness well underway and the COVID-related obstacles diminishing, businesses are more actively utilizing their buildup of cash reserves for working capital and investment purposes.

And this behavior should eventually move us closer to a more normalized loan demand in the general C&I book. Our specialty business lines of SBA lending and sponsor finance, both performed exceedingly well in the quarter.

The SBA business continued the momentum it had carried through from last year, up $70 million in the quarter and on an annualized growth pace of over 25% year-to-date. The favorable programs and increased awareness of the benefits of SBA loans are creating more activity from referral sources and better opportunities with business owners.

Sponsor finance activity is extremely robust with deal flow already outpacing that of the full year of 2020. Capital inflows to the private equity markets, elevated purchase multiples and a growing number of willing sellers are creating higher volumes of senior loan requests from our sponsor network.

Consistent relationship-based approach with our sponsor base has positioned us well to be the bank of choice for many of these deals, and resulting in $70 million of growth in this business during the quarter.

Both tax credit lending and life insurance premium finance also continued to post steady growth and performance as these businesses have proven to be somewhat immune to the COVID and economically induced obstacles that impact some of the other areas..

Thanks, Scott, and good morning. My comments begin on Slide 9 and it shows our earnings per share trend for the quarter. We reported second quarter net income of $38 million compared to $30 million in the first quarter. We increased earnings from $0.96 per diluted share to $1.23 in the second quarter, which is a record level for the company.

The increased earnings per share were driven by higher net operating revenue, which represented $0.18 per share, predominantly through an increase in revenue as well as contributed to moderately lower credit costs..

. Our first question comes from Jeff Rulis with D.A. Davidson..

My name is Clark, and I'm filling in for Jeff Rulis.

I was just wondering if you could provide some more color on what the loan yields were on new production versus the existing portfolio? How does this going to look like for the total portfolio because it looks like yields are flat with new production in it, but it is holding up well?.

Yes. This is Keene, and I appreciate the question. The new loan yields are actually helping us to maintain a stable yield. So they're actually slightly above. Now I'll caveat that by saying when you look at the categories in which we had growth in the second quarter, namely SBA and sponsor finance, those are typically higher yielding segments.

So at least as it relates to the current quarter and if we continue to see production heavily weighted that way, I would expect that we'll continue to be able to modestly expand loan yield moving forward with those categories.

The caveat would be if we start to see additional production proportionately in life insurance and other areas that have a slightly lower loan yield that can bounce around a little bit, we are also seeing a modest benefit in continued improvement in the cost of deposits as we shift more heavily to DDA with growth in the specialties.

So I don't expect anything trending either way, but some of that ability to defend the loan yield does depend on what categories it's in..

And then just for clarification, what is the typical yield for the SBA portfolio currently?.

Sorry, I was muted. I was actually looking for that. We'll have to circle back with you on that. I'm going to say it's over 4% at this point..

Our next question comes from Damon DelMonte with KBW..

So my first question is just given that the First Choice deal closed, at least to my model earlier than I had expected, I thought it would be later in the third quarter, can you give a little perspective, Keene, on what we could look for a quarterly expense rate?.

Yes. Good question, Damon. So the forecast for First Choice expenses is around $13 million in 2021, and then it's about $14 million in 2022 pre cost savings. So you're going to get almost a full quarter of that $13 million, obviously, here in the third quarter and then fourth quarter. With that said, we will start taking costs out.

So first quarter '22 run rate is just going to be over a little bit over $10 million and some of that phasing in. So I don't have exact color on how much cost savings we'll get this quarter versus next. But I expect that it will be enough to offset the normal growth rate you would expect in the underlying Enterprise $50 million expense base..

Got it. Okay. And then just kind of a technical question. I think you had mentioned that there was like a PE distribution that was recorded this quarter.

Was that in other noninterest income? And if so, how much was that?.

That's correct. And I think that was around $1.5 million. We typically have some of that, that was a little bit larger one at one point in time, but that's something that over the course of the year, we would expect that level to occur in one or more quarters.

So it certainly contributed to a strong fee income for the second quarter here along with a rebound in the tax credit revenue..

Our next question comes from David Long with Raymond James..

I wanted to talk a little bit more just about your traditional commercial and industrial line there.

And can you talk about the competitive dynamics as you see them in that? Are you seeing increasing pricing pressures as a lot of banks are struggling to grow loans right now? And how are you reacting to that?.

This is Scott. I can take that one. I think it's been competitive in the C&I sector. And so I don't know that I would say it's more competitive, but it is extremely competitive. St. Louis and Kansas City, in particular, deep markets for C&I growth is typically moving relationships when there's an event. And I think we've seen some opportunities there.

We've grown net new relationships pretty consistently. I think PPP in particular helped introduce us to some other operating businesses that -- now that forgiveness is behind a good number of those clients, some of those opportunities, I think, are more in front of us. I think your question was more on pricing.

I think we're seeing pricing is about as low as I've seen it. I don't know that there's much lower to go. We take a relationship-based approach, though.

So we'll provide the working capital lines and the term debt, but we're also going to get the fee business, the long-term deposit business that over time we can produce a profitable and sticky relationships. So I'm not sure if that exactly answers your question, but that's kind of what we're seeing..

No, that's what I was looking for, just to get some additional color there on that part, so -- okay. And then I want to shift gears and talk about M&A for just a second.

With the First Choice deal now, closed an integration ahead of you, the -- how soon can you be back in the M&A market? And maybe talk about what would be the ideal acquisition candidate now? And maybe even by geography, where do you feel like you'd like to add the critical mass?.

Dave, this is Jim. Like I said, certainly, our focus near term is really getting First Choice integrated well. We've done a good job with Seacoast this year. We're seeing the benefits of doing something well. So that will be our focus.

That being said, there are a select few companies that we would certainly take keen interest to the extent that there was an opportunity. And as I've said in previous calls, we approach it like we approach our sales process, which is a process is building relationships and understanding timing and things of that nature.

And there are a select few that we would say, okay, let's stop and take a closer look. As it relates to geography, I think what we said is, closer to our current markets always makes sense. And so to the extent that we can build out from there, certainly, we would look.

And -- but really, it's finding the best fit to continue growing the businesses and the culture that we've started. So we've shown that we can go to a new market if we need to, but certainly makes sense to build on what we have..

We'll take our next question from Brian Martin with Janney Montgomery..

Maybe, Jim, I don't know if you could talk a little bit about just the lift out of the Las Vegas team you talked about give a little bit of color on there or maybe Keene, whoever, Scott?.

Scott, handle that one, Scott, if you would..

Yes, sure. Hi, Brian. This is a team that we reached out to via a connection from Seacoast to their market leader. And I think as Jim mentioned, we hired a team of 3 pretty seasoned commercial bankers from a regional competitor, someone that we overlap with in our Southwestern markets.

Their focus is very similar to ours on private business, local commercial real estate, experience range of between 10 and 20 years for all 3. And they really just -- they liked our model. They watched what we did with Seacoast and First Choice and it was very attractive to look up with us and grow.

And the profile of Vegas and what we see there, we think it's a really good growth market for both C&I and CRE. So we're excited about it..

Got you. Okay. And then maybe one more, Scott, just you mentioned, I think, on the utilization that it kind of sounds like it stabilized here, I guess, is your expectation that can pick up a bit in the second half? It sounds like that's the case? Or you see much change there in the near term..

Yes, Brian, I guess I just looked at it as a positive signal after so many successive quarters of declines on the lines of credit at pretty much leveled out. And I think -- You combine that with, again, forgiveness on PPP. And I think we're seeing especially larger companies start to use their cash balances.

So that tells me eventually liquidity is going to run through the system and should result in continued loan demand. I think there's certainly optimism there from business owners about the economy. I think the headwinds are labor and supply chain, which should be shorter term.

So it was just a signal to me that C&I will be headed in the right direction..

Got you. Okay. No, that's helpful. And then maybe just 1 or 2 for Keene. Keene, just the core margin in the quarter, I think you said things were pretty much as expected this quarter.

Just how are you thinking about that over the next couple of quarters with the transaction closing and just kind of your commentary about loan yields kind of hopefully holding up on that front?.

Yes. I think the underlying part of my comment there was absent any growth margin would theoretically drift lower a couple of basis points a quarter. I think there's certainly optimism that we're going to continue to get some core growth. And there were SBA and other specialties look like they'll continue to be strong.

So I think that bodes well for stable underlying core NIM. And then First Choice, when we announced and we still believed the pro forma impact on margin is 10 basis points to 15 basis points.

So sequentially, high level, given when it's closing here early in the third quarter, when it's closed early in the third quarter, that's probably 10 basis points you'll see sequentially, and then it probably won't be a notable difference from 3Q to 4Q when you've got the full quarter. So that would generally be my expectation on margin.

And I do expect that we'll continue to be -- have solid defense of net interest margin despite whatever happens with overall excess cash moving forward just simply because the loan yield has been holding up, and we're really not seeing any pressure on the deposit side..

Okay.

And then the core loan yield that you build off of, I guess, just when you frame up the core loan yield Keene, what level are you considering core today that gets added with Seacoast?.

Yes. We -- the loan yield ex PPP is around 4.3%. So that's got 5 or so bps in it from PPP..

Got you. Okay. Okay. That's helpful. And just the last one for me, Keene was just on the fee income. Can you just -- I know you talked about the private equity distribution, but there's some other moving parts in there with mortgage. And I know you've got the CDE and then you've got swap fees.

But just did you frame up kind of what's a realistic level to think about with all the moving parts just in general? Can you give any color on how we should think about that, I mean maybe a little seasonality in 4Q with the taxes? But just do you consider this a reasonable level? Or is it an elevated level this quarter given you do expect some continuing private equity distributions and some of the other CDE stuff?.

Yes. I think the 16, at least as it relates to what I'll call a middle quarter is pretty strong. I would say it's probably a couple of million dollars heavy with particularly the private equity distribution that's in there. I think that's the way I would think about it in kind of 3Q.

And then 4Q, we would expect another strong performance from seasonal tax credit activity driving it a little bit up from that level. So that's generally the way I'm thinking about it.

Certainly, we're happy with the performance of the businesses that you mentioned that we're starting to see increased activity in and then some of the other businesses are a little bit episodic, so to speak, during the year..

We'll take our next question from Andrew Liesch with Piper Sandler..

One of the things I was encouraged about was the deposit growth this quarter, especially on the specialty side.

Anything you can point to specifically that drove that? And how does that pipeline look for more funding coming in?.

Andrew, this is Scott. I can take that one. I think we're really encouraged by what we've seen really since we integrated that business, it's been steady.

And if you look at what I'll call the 3 main business lines there, HOA, commercial property management and third-party escrow, we're seeing growth pretty consistently and equally from all those channels. So, there's obviously still a lot of cash in the system, and we have really good relationships with some of the larger HOA companies.

So we're continuing to get our fair share there. Third-party escrow, that was a fairly new business with Seacoast, really brand new when we brought them on board, and they've really been able to execute their business plan.

There is a couple of folks that have done that on other bank platforms that we're able to convert their relationships and bring in that business the way we plan. So to me, there's optimism there, there's no reason why that can't continue. The pipeline shows it's steady and fairly low cost of the fund. So I think we feel good about that long term..

Got it.

Is there any seasonality in any of these businesses?.

I would say there's minor seasonality in the HOA property management. And I would say it's just more related to summer just less activity, but nothing major in terms of swings..

Okay.

So I guess if growth can continue here if I look at the rest of the funding base, is there -- are there -- is there like any non-relationship funding that just could eventually replace these low-yielding accounts are going to improve the deposit mix over time? Like how are you looking at the holistic approach of funding here?.

Yes, I think Keene comment..

Yes. I would just say, certainly, the reliance on wholesale funding has become a lot lower. There's brokered sources that we're working on weaning ourselves off because they were -- some of that was contractual, certainly, brokered CDs, things like that.

So I think our view is that this can help stabilize the base and it will allow us to be much more disciplined and less aggressive with increasing deposit rates as rates increase.

So whereas we might have been more sensitive on the deposit pricing side because of a high loan to deposit, I think this gives us more confidence on a broader basis as we move forward and also more confidence in our ability just to generate enough deposit growth to keep up with what we expect to be robust loan growth as the economy improves..

. We'll take our next question from Jeff Rulis with D.A. Davidson..

Clark, again. I appreciate it. I was just wondering if you could provide any more detail on the nonperforming loan increases that happened this quarter. It looks like there was $6 million.

Were these pandemic related?.

Yes. Clark, this is Doug Bauche, Chief Credit Officer. I would tell you that a portion of the increase in nonperforming loans was related to a $2 million loan that rode 90 days past due and was included in the nonperforming bucket. That loan subsequently has been paid off in full and closed out here in early July.

Otherwise, there was just really a particular ag-related credit that we saw going to nonperforming status. And beyond that, there really wasn't much activity..

Awesome. Great to hear.

And then just my other thing that I had for you guys was, in terms of sort of the dollar amount on the other real estate gain, is that in miscellaneous income? Do you have that figure offhand?.

Yes. It's less than $1 million, I believe, so might be $0.01.

Thank you. That concludes today's question-and-answer session. I'll turn this back over to Mr. Jim Lally for any additional or closing remarks..

Thank you, Victoria, and thank you all for joining us today and your continued support of our company. I look forward to talking to all of you again at the end of the third quarter. Have a great day..

This concludes today's call. Thank you for your participation and you may now disconnect..