Enterprise Financial Services Corporation 2026 Q3 Earnings Call

Earnings call. Joining me this morning is Keene Turner, EFSC's Chief Financial Officer and Chief Operating Officer, and Doug Bauche, Chief Banking Officer of Enterprise Bank & 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 8-K yesterday. Please refer to slide 2 of the presentation titled Forward Looking Statements and our most recent 10-K for reasons why actual results may vary from any forward-looking statements that we make today. Our financial scorecard begins on slide 3. For the quarter, we earned $42 million, or $1.14 per diluted share. This compared to the $1.09 that we earned in the second quarter of this year and $1.19 that we earned during the third quarter of 2025.

This level of performance produced a return on average assets of 95 basis points and a pre-provision ROAA of 1.67%. While our pre-provision earnings improved from the linked quarter, a larger-than-expected provision expense impacted the operating results for the period. Net interest income expanded by $5.9 million to $175 million, and net interest margin remained stable at 4.30% when compared to the linked quarter. Higher loan and investment balances, coupled with a steeper yield curve and relatively stable deposit costs, contributed to these results. Given the increasingly competitive environment that we find ourselves in, I am pleased with how we were able to grow net interest income through a combination of relationship-driven loan and deposit growth, coupled with net interest margin defense. Our well-positioned balance sheet continues to be a strength for our company as it continues to provide great flexibility with respect to capital planning.

Capital levels at quarter end moved into our target range as our tangible common equity to tangible assets ratio came in at 8.13%. Return on tangible common equity for the quarter was 10.74%, a slight improvement to the 10.39% that we reported in the linked quarter. Capital management actions in the quarter included the repurchase of over 525,000 shares totaling $34 million, and increasing our quarterly dividend by one cent to $0.36 per common share for the fourth quarter. Turning to slide 4, you will see that the momentum in loan and deposit growth continued in the third quarter. Building off solid growth in the second quarter, loan balances grew by $452 million in the quarter. Doug will get into the specifics of where we saw this growth and other nuances related to our markets and businesses, but I appreciate the diversity of where we experienced this growth.

Our pipelines would suggest that we'll continue to see mid to high single-digit growth for the remainder of 2026, with this normalizing back to the mid-single digit growth for the first part of 2027. Our diversified deposit base continues to be a differentiator for us. Total deposits exceeded $15 billion at quarter end, with growth in the quarter coming in at $624 million. As expected, our geographic markets began to see the normal second half of the year growth, producing 80% of this quarter's production. DDA to total deposits came in at 33%, and our loan-to-deposit ratio is 82%. Our teams have worked extremely hard for many years to garner full relationships, the results of which are the combination of larger, more sophisticated commercial relationships, granular business banking and consumer accounts, and the expanding national deposit verticals. Our credit statistics remained elevated in the quarter.

While we continue to make progress on the Southern California OREO properties that we've discussed for over a year, improvement in loan credit quality is a top priority. The $18 million in provision expense for the quarter was largely driven by loan growth and $11 million in net charge-offs. During our second quarter call, we discussed that our expectation for the remainder of 2026 was that our charge-off level would return to a 15 to 20 basis point annual run rate. This obviously did not occur, as the results for the third quarter were higher than this, coming in at 36 basis points annualized. During the quarter, we experienced a $7 million charge related to a loan to a private club in the St. Louis market that abruptly ceased operations in August. We've also set aside reserves for the remaining balance of the loan.

The other larger charge in the quarter represented the write-down of a flagged hotel in Southern California that we took into OREO in the quarter. This totaled approximately $2.6 million. Looking closer at our non-performing assets, $150 million of the $183 million net of government guarantees are real estate secured. Because these properties have mostly undergone recent appraisals, we have strong tangible collateral backing these positions. Turning to slide 5, you will see our priorities for the remainder of the year. While credit is not where it needs to be, we have a structured path to get it back to historical levels over the next few quarters. I have great confidence that we'll continue to expand pre-provision returns, and you can also see that the normalization of credits is slightly above industry expectations produces a significant improvement to the return levels that we've reported over the last two quarters.

Specifically, a normalization of credit expense and tax credit income would have added 10 to 15 basis points to our PPNR ROA this quarter. Along the way, we will continue our automation journey using the existing technology framework that we've invested in, focusing on integrating manual procedures into automated workflow processes. We are already seeing strong adoption of various automation tools throughout our company, the benefits of which will produce better overall associate and client experience. In my most recent travels and discussions with clients throughout our footprint, it's encouraging to hear the continued optimism that they have despite some headwinds related to higher interest rates, increased energy costs, and other inflationary factors that are present in our economy. Companies in and around the data center ecosystem, power generation, defense, and aerospace continue to have a clear and robust run ahead of them.

We're also still seeing pockets of industrial and retail demand in faster-growing markets throughout our footprint. Competition for new clients is fierce, but I'm confident that the value-added relationship model that has been our hallmark for our company since our founding will continue to be a differentiator for us in garnering new relationships while defending our current book. Our third quarter produced exceptional loan and deposit growth amid disciplined pricing and controlled expenses. Overall earnings were compressed due to elevated credit costs that will reduce as our credit statistics normalize over the next few quarters. The earnings power that exists in this company is strong, and I'm confident that we'll see improved results in 2027 and beyond. With that, I would like to turn the call over to Doug Bauche.

Doug? Thank you, Jim, and good morning, everyone.

Our banking teams performed well in the third quarter, delivering robust organic loan and deposit growth while maintaining disciplined pricing and underwriting standards across all of our geographic markets and specialty verticals. Building on the positive momentum we discussed in the prior quarter, we continued to successfully win high-quality business clients, expand existing credit and treasury management relationships, leverage our differentiated platform to drive sustainable profitability. Turning to Slide 6, total loans reached $12.3 billion at quarter end, representing a net quarterly expansion of $453 million, or nearly 4% sequentially. Gross loan originations and advances were particularly strong during the quarter of $1.3 billion, outpacing repayment activity of $800 million. Over the last 12 months, total loan outstandings increased $762 million, or 6.6%, largely driven by expansion of our C&I, CRE owner-occupied, CRE investor-owned, and life insurance premium finance portfolios.

Core commercial and industrial lending expanded by $79 million quarter-over-quarter to $2.7 billion. New C&I production was broad-based, spanning equipment financing and working capital lines to mid-market, privately held manufacturing, wholesale distribution, and specialized commercial service providers across our geographic markets. On a trailing 12-month basis, C&I balances have expanded by $386 million or 17%. Our CRE investor-owned real estate portfolio increased by $138 million during the quarter to just over $3 billion. Similar to what we highlighted in Q2, new investor CRE fundings were centered on well-capitalized, experienced developers and sponsor groups. Projects funded in Q3 included industrial centers, multi-tenant neighborhood retail complexes, and stabilized logistics assets across our key growth markets, including Phoenix, Dallas, Kansas City, San Diego, and Southern Nevada. Our life insurance premium finance business delivered $100 million in net quarterly growth and 8% sequential expansion, bringing the portfolio's balance to $1.4 billion.

We continued to capitalize on our strong national brand recognition, deep partnerships, and high net worth client acquisition network in this low risk, highly collateralized asset class. Within our specialized business channels, SBA 7 owner-occupied real estate financing remained stable, ending the quarter at $1.25 billion, maintaining our position as a leading SBA originator nationally. Sponsor finance balances held steady at $714 million while tax credit lending increased slightly to $750 million due to modest advances on new markets and low-income housing tax credit projects. Overall line of credit utilization remained steady and controlled at 46.6% compared to 46.7% in the linked quarter. Slide 7 illustrates the continued balance and diversification of our portfolio across geographic markets and specialty lending divisions.

Our primary geographic community banking regions in the Midwest, Southwest, and West represent $7.9 billion or roughly 64% of total loans, while our diverse national lending verticals account for $4.4 billion or 36% of the total book. Moving to deposits on Slide 8 and 9, total deposits increased by $624 million, or 4.3% in the linked quarter, and by $1.5 billion, or 11.5% over the last 12 months, climbing to $15.1 billion. Consistent with our historic seasonal patterns, deposit inflows accelerated during Q3 across both our community banking footprint and our specialized channels, fully recovering the typical tax and distribution-related outflows experienced earlier in the year. Deposits from our specialty verticals contributed 20%, or $123 million of quarterly growth, with our core community banking markets driving 80%, or $500 million of growth in the quarter. The overall deposit mix remains high quality, sticky, and relationship driven.

Non-interest-bearing demand accounts total $5 billion, representing a consistent 33% of total bank deposits. Slide 10 provides additional detail on our differentiated deposit verticals, including property management, community associations, and legal and escrow services, which represented a combined $4.2 billion or 28% of total bank deposits at quarter end. Our property management division includes $1.8 billion of deposits, roughly 43% of total vertical deposits. Our recently announced partnership and investment in technology will enhance system integration and automation and improve efficiency and overall experience for our valued property management firm clients across the country. Through disciplined pricing and earnings credit optimizations, the average cost of funds across these three deposit verticals improved by 17 basis points to 2.52% from 2.69% in the linked quarter. Finally, slide 11 details our core funding composition. Core commercial deposits account for $5.4 billion of our total deposit base.