Good morning. My name is Rex and I will be your conference operator today. At this time, I would like to welcome everyone to the Enterprise Financial Services Corp Q2 Earnings Conference Call. Thank you. At this time, I would like to turn the conference over to Jim Lally, President and CEO. You may begin your conference.

and welcome everyone to our second quarter earnings call. I appreciate all of you taking time to listen in. Joining me this morning is Keene Turner, our company's Chief Financial 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. The presentation and earnings release 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. Please turn to Slide 3 for our financial highlights of the second quarter. We’re very pleased with the results of the second quarter. Our cadence of consistency that we spoke of in previous quarters has continued. Our highly Our highly consultative relationship approach works well in times of uncertainty as clients and prospects took guidance. Our client base is in the best financial shape that we've seen in a very long time and are seeking opportunities to grow their businesses. Yet the economic suggest that we may have a slowdown in the horizon, while the interest rate environment creates additional challenges for our clients. I am confident that the consistency of our model has and will continue to positively impact our results. Over the last five years, we have focused on diversifying our revenue through geographic and business expansion. We've improved our funding by way of M&A and we have bolstered our balance sheet and capital position with a strong reserve and well executed capital management. The bottom line is that we have built the company for times just like this and are excited…

Thank you, Jim, and good morning, everybody. Focusing first on the loan book, which is referenced on Slide 5, we posted strong performance in core loans, net of PPP, growing by 298 million in the quarter or 13.4% annualized, and this compares with 176 million in the prior quarter. The loan details by segment are outlined on Slide 6 and 7. On a trailing 12-month basis, backing out the addition of the First Choice portfolio and the impact of PPP, from an organic standpoint, we've grown by 733 million or 10.7%. And as Jim mentioned, we're seeing contributions from nearly all markets and business units, providing a nice level of balance and diversity in our sources of growth. For the quarter, we experienced solid C&I growth coming from our regional banking markets and specialties with less impact from commercial real estate. Overall, the increase in C&I was a result of our continued success in bringing on new operating company relationships, as well as elevated usage on existing client facilities and revolving lines of credit. Average usage on revolving lines was up over 3% from the prior quarter. Commercial real estate originations were down modestly in the quarter, and while we do see existing construction loans continuing to fund, new deals have slowed as developers their projects for higher rates and material costs. Fewer new commercial real estate closings also reflect our disciplined approach as we hold the consistent underwriting and pricing guidelines in the shifting rate environment. As we've discussed in prior calls, we employ a spread based pricing philosophy for the term fixed rate portion of our business. We believe this provides a more easily managed and transparent approach for our banking teams and clients, as well as a more consistent profitability profile for our company. With rates rising…

Thanks, Scott, and good morning, everybody. Turning to Slide 10, we reported earnings per share of $1.19 on net income of $45 million in the second quarter, compared to $1.23 in the first quarter. Operating revenue increased in the linked quarter driven my strong organic loan growth and expanded net interest margin, which more than set the decline in PPP and non-interest income in the quarter. We continue to show strong credit metrics in all areas, both loan growth, and changes to the economic forecast resulted in a provision expense, compared to a provision benefit in the first quarter. Non-interest expense increased on a linked quarter basis due to higher compensation and namely deposit service charges costs. This was in-line with our expectations and the guidance I provided last quarter. And finally, our earnings per share benefited from a lower share count due to repurchases in both the first and second quarter. Turning to Slide 11, net interest income was $110 million, compared to $101 million in the first quarter and an increase of $9 million, which was favorably impacted by higher average loan and investment balances along with the benefit of rising interest rates driving net interest margin higher. The increase in net interest income was primarily driven by a $6 million increase in loan income, despite a $1.3 million reduction in PPP income. With the current composition of our balance sheet as of June 30, another 75 basis point increase in interest rate will result in an additional $6 million to $7 million in quarterly net interest income. This is in addition to the full impact of the existing interest rate increases, which will also add another $3.5 million to $4 million to quarterly net interest income. As noted in the earnings release, approximately 20% of the variable…

Your first question comes from the line of Jeffrey Rulis. Jeffrey, your line is open.

Thanks. Good morning. Good morning. Just a question on the fee income components in terms of – well, the community development pretty volatile, is there any way to sort of model that in a more consistent manner? Any idea there?

Jeff, the answer is not really. I think we – the comparison to the first quarter was pretty tough because it was so robust. I do think that there'll be some level of income here in the next couple quarters and we'll get some , but we sort of had the kind of worst kind of comparison where we had strong community development and swap, and tax credit revenue in the first quarter and then they all kind of went away here in the second. So, I think that we expect some level of that in the third and the fourth quarter, but it probably isn't as substantial as the amount was in the first quarter and each individual quarter. So, hopefully that provides a little bit of help, but kind of $2 million maybe in total and depending on how you model it kind of one per or two in the fourth is the way I think about it.

Got you. And then the, just the Durbin hit, can we model that at about a million a quarter run rate?

Yes. It's about a million that that gets you to where you need to be, I think. And that's in line with where we were previously. I think for better, for worse, we've grown that interchange a little bit since preparing to cross 10 billion and so we'll lose just a smidge more, but a million should cover it.

Okay. Thanks. And Scott, one other one, just on the deposit management, sounds like focusing on kind of core depositors you get the sense that this was sort of the lion's share of that, the rate chasers or hot money that kind of flushed out or could we see more balances kind of come out of that from that group?

Yes, Jeff. If you look at the 600 million decline, I think it's a handful of accounts. I'd say 6 maybe. Three of those were the lion's share of that, more interest rate sensitive specialty and I would say those aren't lost relationships either. You know, there are some specialty clients that are a little more interest rate sensitive than others. And I think with this one in particular, that was in the Top 10 at the time. I think they were our largest third party escrow balance. We kind of went in eyes open on this, knowing that it was a little bit more interest rate sensitive, but knowing we could have some flexibility to walk away if we needed to, to not typically that concentrated. I think there's only other one – one other third party escrow account in our Top 10 and maybe two in our Top 50. So, I think that was a little bit of an anomaly. And then, you know, I commented on this, but we do typically see, kind of net outflows from existing commercial clients this time of the year anyway for bonuses and distributions and personal taxes. So, no, I don't think you're going to see any single depositor of this level that would move going forward.

Okay. Thank you.

Your next question comes from the line of Andrew Liesch. Your line is open.

Hey, thanks guys. You've actually covered a lot of my questions that I've had, but just curious on the buyback, what are the thoughts around that and tapping the new authorization?

Hey, Andrew, this is Keene. What I'll say is, we completed the prior authorization before the new one. And then I think you saw kind of fit tight here on the 2 million. I think the continued pressure in AOCI, I think we just don't want to get caught behind that too far if longer-term rates continue to move up. So, I think what you'll see is, TCE will be a little bit of the guide there and the good news is we're getting really good loan growth. And I'm optimistic that in the coming quarters, we'll get some deposit expansion here and overall balance sheet growth, particularly as we hit late in the third and fourth quarter where we typically see some strength. So, I think you'll see us be patient there and we'll probably use TCE as a guide. I think we've been pretty articulate on this point. We don't love or I don't love TCE below 8%. We're okay with it where it is given cash balances and the strong earnings profile, but I think you're going to see us let it rebuild somewhat in the upcoming quarters and weeks and we may decide to be opportunistic if we continue to get an unfavorable tape, but I don't think the dollar amount of anything we would do there would be substantial because over the last year we did repurchase 2 million shares and we think we did so favorably and opportunistically, but most of the pieces of the capital stack are kind of right at the optimal targets right now. And I think we just need to be mindful of potential impacts on AOCI moving forward.

Got you. Yes, like I said, you've covered all my other questions, so thanks for taking that one. I'll step back.

Thanks, Andrew.

Your next question comes from Brian Martin. Your line is open.

Hey, good morning guys. Sorry, I joined late. So, Keene if you covered some of this, maybe just let me know and I'll go back and go back and listen. Just kind of wanted to get your thoughts regarding kind of, you know, margin or repricing and just kind of how we think about that and kind of the deposit betas? So, if you've covered that, I'm happy to go back and listen or if you provide a little insight on that, that'd be helpful.

Yeah. I'll give you – I'm not going to give you margin, I'm going to give you Fed funds moves and what we think it happens in annual . So, I think 75 basis points moving forward would equate to roughly 5% on the current run rate of net interest income. So that's a little bit north of $20 million, and our modeling, we're using just under a 50% beta, which is a little bit more conservative than what we experienced before. And I think in my comments, we indicated that we expected with the composition of the deposits, the beta to be better. And I think you can see that just based on the outflows we had in the quarter, and our posture there, our behavior has changed as well to a degree and we let some of those more sensitive accounts that existed previously go and then also we left the DDA, specialty DDA go that you'd say, well, how is that rate sense it, but it was on an earnings credit or a deposit rebate program that's consistent with that industry. So, and then Brian, the other comment I did make is that just sitting here today, we're going to get roughly another $3.5 million to $4 million of NII boost in the third quarter because the SBA portfolio reprices the first day of each period. So that will be a benefit even if nothing happens here in July, which I think something is going to happen, but also just be mindful of that as you're looking to how the 75 basis points impacts third and – third quarter as there'll be a delay on that SBA portfolio. And then maybe just a little bit of additional color, you know most of the loans here with this next rate increase, if it's 50, 75, or 100 regardless will be off of the floors. And so even with a slightly reduced cash balance, we still feel good about net interest income dollars growth with future increases, you know you will see deposit costs lag just slightly up here in the quarter, but the dollars of growth reflect all that. So, I think we feel really, really bullish about both growth and the overall loans, deposits, and securities books and we're getting good origination yields there and new originations are boosting yields across the board there. So, again, I think we feel like we're well positioned. So, hopefully that's some color that's helpful to you.

Yeah. No. It is. And just the – I guess, you said this came with the loans that have floors. I mean, they're effectively well, I'll be through, you know, in this next the, you know, the one we just had in June, are all the loans through their floors? You guys are, what, about, 60% variable rates. Are all those loans moving now or just not they will be on the next , because that's what you said?

Yeah. And I think what I was trying to make sure of is that, this July hike, if it's at least 50 basis point you want us to think about floors anymore.

Yes.

And so, I think that number is roughly 350 million to 400 million are still on a floor that's kind of call it 50 bps or more. And those will be lifted off here with another increase as long as it is in-line with, I think, general expectations.

Got you. Okay, perfect. That's all I wanted to cover. So I appreciate taking the question, Keene.

Great. Thanks, Brian.

Your next question comes from the line of Damon DelMonte. Your line is open.

Hey, good morning, guys. Similar to Brian, I was between calls as well. So, I did catch a little bit, Keene of your commentary about expenses and kind of the forward look there, could you just kind of repeat what you had said on that?

Yes. I think we're running right now at about $65 million a quarter. I think we think that that's going to step up pretty meaningfully and it's really driven by the servicing expenses on the specialized deposits. So, we think that stepping up in the third and into the fourth quarter that you're going to be somewhere about 67 million to 69 million, which is just slightly higher than what we had indicated last quarter. And the reason is that I think we got a little bit higher rate hike here in June, which is driving a little bit more on the ECR side. And so with another July increase that's going to be probably 75 basis points to 100 basis points, I think we need to kind of push that quarterly run rate up because it does have an impact on what we call the servicing expense related to those items.

Got it. Okay. That's helpful. And then, with regards to the provision going forward, if you continued strong loan growth opportunities for you guys, how do you think about provision over the back half of the year?

Yes. So, it's a really tough question to answer, I think. I'll say a couple of things. And first and foremost, we didn't reduce from the 2020 build as much as maybe others had in the industry and really worked hard to hold that reserve in there. And we believe there was some uncertainty. We just didn't know where it was. With the Moody's forecast continuing to reflect some of those factors where we moved some of the things that were previously qualitative into that forecast, but we still have about $40 million of qualitative, and I think the challenge or the confusing part here is that we've got such outstanding credit quality that it's hard to justify building additional allowance based on those factors and the forecast continues to move around and I think we have a lot of , but really no signs per se that that credit is going to get worse. So, my view would be that at least for the next quarter and maybe even into the fourth quarter unless we get a lot of additional clarity we have the opportunity to let coverage maybe slide down just slightly for a combination of a worsening forecast, but still really strong credit and asset quality. And if we get any other indicators that are different then that might cause us to build the allowance more aggressively. But I wouldn't think we would bring it down or have any negatives moving forward barring some substantial decline or some material recoveries that affect the allowance itself. So, hopefully that's clear and if not, please just push back with another question.

No. That’s – and it wasn't an easy question to answer. So, I appreciate the color and the commentary around that. Okay. That's all that I had, guys. Thank you very much. I appreciate it.

Thanks, Damon.

There are no further questions at this time. Mr. Lally, I turn the call back over to you.

Rex, thank you and thank you to all of you for joining us today and for your interest in our company. And we look forward to speaking to you again at the end of the next quarter. Take care.

This concludes today's conference call. You may now disconnect.