ENTERPRISE FINANCIAL SERVICES CORP Q1 FY2025 earnings call

• Announced the acquisition of 12 branches from First Interstate Bank, 10 in Arizona. - Earned $1.31 per diluted share, with an adjusted return on assets of 1.29% and pre-provision ROAA of 1.71%. - Net interest income and margin expanded, with NII up despite fewer days in the quarter. - Loan growth of 3% ($78 million), but muted by SBA loan sale and tax credit business seasonal decline. - Diversified deposit base remained stable, with deposit costs reduced. - Balance sheet strong, with tangible common equity to tangible assets ratio at 9.30%. - Increased dividend by $0.01 per share to $0.30 per share for the second quarter of 2025 and repurchased $11 million of common shares. - Scott Goodman to transition to part-time non-managerial role, Doug Bauche promoted to Chief Banking Officer, Kevin Handley to succeed Doug as Chief Credit Officer.

For the first quarter of 2025, Enterprise Financial Services Corp earned $1.31 per diluted share. Net interest income saw expansion, coming in $1.1 million better than the previous quarter, representing the fourth consecutive quarter of NII expansion. Loan growth was 3% or $78 million, though muted by the sale of $30 million of SBA loans and a seasonal decline in the tax credit business totaling approximately $75 million. The diversified deposit base remained a differentiator, with stable deposit flows overall and a reduction in the cost of deposits to 1.83%. Capital levels were stable and strong, with a tangible common equity to tangible assets ratio of 9.30%.

• Anticipate closing and converting the branch acquisition by early fourth quarter of 2025. - Expect the branch deal to pro forma come on at a similar to slightly improved margin. - Margin likely to trend lower in the second quarter but stable thereafter even with 75 basis points of fed funds cuts. - Loan growth expected to be mid-single-digit, with potential lift in the second half of 2025 and into 2026. - Tax credit business expected to grow throughout 2025.

• Increase in NPAs related to loans linked through common ownership in Southern California market, but confident in full repayment. - Uncertainty regarding timing of resolution of non-performing loans due to bankruptcy, but confident in favorable outcome. - Impact of tariffs on private equity activity and potential effect on loan growth.

Q: Any of the terms of the branch deal that you're willing to disclose? Was this cash?

A: Yes, it's an assumption, bringing on roughly net $450 million of cash, with expectation the deal pro forma comes on at a similar to slightly improved margin.

Q: Maybe just to follow on the expectation for pro forma capital levels post close and then does that alter, I guess, in the interim or even after kind of the buyback or other M&A appetite, just more on the capital side?

A: Pro forma capital is right at targets, can continue to be modestly offensive with share repurchases in the next couple of quarters given the risk-weighted asset profile.

Q: I believe the Arizona piece of that, what was the old Great Western had some dairy exposure. Any comments on maybe that's runoff?

A: We had the opportunity to really look at what's attractive to us and so we're not picking up any dairy exposure in the transaction.

Q: 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 to come, how quickly you can earn that back?

A: Relative risk reward, some of it depends on how quickly we lend it out, assumptions are fairly conservative, closer to 3 years than 5 years in terms of earning back book value dilution.

Q: 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?

A: Expect margin to potentially step down maybe 5 basis points sequentially in the quarter, but margin stable in a five quarter look with 75 basis points of fed funds cuts, and net interest income dollars grows quarterly whether we grow the balance sheet a whole lot or not.

Q: Could you just kind of help us think about like the quarterly cadence for expenses?

A: Deposit costs will probably grow in line, expect fairly immaterial transaction-related expense on legal and those types of things in the coming quarters.

Q: Keene, you mentioned 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?

A: Yes, generally, with good success in repricing deposits, early beta fairly in line with results and slightly better than modeled, and proactive steps to boost investment portfolio size helping to stabilize margin.

Q: On the credit side of things, Keene, I think you called these new non-performing loans temporary. What is the timing of the process to exit these credits or what's your best guess on how that plays out to exit those without any losses?

A: Due to the bankruptcy, difficult to predict specific timing, but reiterate position on loan-to-values and recourse to sponsors, confident in favorable outcome as properties are occupied and well-positioned.

Q: 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 maybe a couple cuts here and the margin still well above 4% in terms of -- even longer term than kind of the near term comments you've made. Is that -- does that seem fair based on the positioning of the balance sheet and kind of your rate outlook today?

A: That is accurate.

Q: Just in terms of the pro forma cap, I think you said, with the transaction, where's your expectation in terms of where the TCE lands in the fourth quarter?

A: It's going to be dependent on how much we're after the common stock, but sort of 8.5% is where we think it leverages TCE roughly 100 basis points and other capital ratio around the same amount.

Q: I guess -- okay. So that's just the normal course of business. The timing was -- A: In normal course of business what happens, there's 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 just part of the seasonal flow of the business.

Q: Keene, I don't know, maybe 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你talked about this quarter. But just trying to understand what was driving the reserve build this quarter and thinking about that.

A: Tariffs very clearly happened in the second quarter, and we're more weighted toward the downside in our qualitative reserves, so built reserves as a conservative measure, will continue to evaluate at end of second and third quarters.