Enterprise Financial Services Corporation

Hello everyone, thank you for joining us and welcome to the Enterprise Financial Services Corp 2026 Earnings Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Jim Lally, President and CEO. Please go ahead.

Thank you all very much for joining us this morning and welcome to our 2026 second quarter 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 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 SCC form 8K yesterday. Please refer to slide two of the presentation titled, Forward Looking Statements, and our most recent 10K for reasons why actual results may vary from any forward-looking statements that we make today. Our financial scorecard begins on slide three. For the quarter, we earned $41 million or $1.09 per diluted share. This compared to the $1.30 that we earned in the first quarter this year and the $1.36 that we earned during the second quarter of 2025. This level of performance produced a return on average assets of 95 basis points and a pre-provision ROAA of 1.58%. While our core operating performance remained stable, a larger than expected provision expense impacted the operating results for the period. During the quarter, we took the opportunity to reposition our securities portfolio by selling investments with tax equivalent yields in the low threes and reinvesting the proceeds into securities with tax equivalent yields in the low fives, resulting in an additional $3.5 million and net interest income annually. Pulling this lever resulted in a current period pre-tax loss of approximately $6 million that was mostly offset by over $4 million in pre-tax gains on the sale of Visa Class B common stock and the sale of a piece of land. Net interest income expanded by $2.6 million to $169 million and net interest margin expanded two basis points to 4.30% when compared to the linked quarter. Higher loan and investment balances coupled with higher rates and stable deposit costs contributed to these results. Given the increasingly competitive environment that we find ourselves in, I'm pleased with how we were able to defend margin with our relationship-oriented business model. 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 remain stable and strong, with total stockholders' equity at $2 billion and the tangible common equity to tangible assets ratio of 9.04%. Additionally, our tangible book value per share increased to $42.30. Other balance sheet activity during the quarter included the repurchase of 382,000 shares, the aforementioned balance sheet restructure, and the issuance of $175 million of 6.25% fixed to floating rate subordinated notes. All three of these tactics put us in great shape for the growth and expanded profitability for quarters to come. Keene will discuss all three of these strategies in his comments. Turning to slide four, you will see that loan balances grew as we expected by $200 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 and would expect similar activity for the remainder of the year. Our diversified deposit base continues to be a differentiator for us. While overall deposit growth was flat for the quarter, we did see a positive remixing that resulted in DDA growing modestly to 34% of total deposits and overall cost of deposits remaining flat at 1.53%. We are working on several exciting opportunities in this area, and when combined with our normal back of the year swell, should produce a similar level of deposit growth that we have achieved in the years past. 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. In my opening comments, I mentioned a higher provision expense in the quarter than we expected. Late in the quarter, we experienced approximately $14 million in charge-offs related to two commercial accounts. The first of these was a Texas-based C&I relationship that failed on the integration of an expansion strategy and subsequently had to be liquidated. The second of these was an entity within our sponsor finance group whose healthcare consulting business model was severely disrupted when the Centers for Medicare and Medicaid announced on May 13th a six-month moratorium on all new hospices and home health agencies. With this change, ownership concluded that there was not an opportunity to rehabilitate the business given this nationwide regulatory action. Through the first quarter of 2026, this company was generating positive cash flow and was current on all debt, but things obviously deteriorated quickly and the business ceased operations abruptly in early June. With the charges taken in Q2, our net charge-offs year-to-date are 31 basis points annualized and we expect to have better results in the back half of the year. all other credit statistics were relatively stable in the quarter. On our first quarter earnings call, I reported that we had four of the seven Southern California OREO properties under contract. Since then, a party has filed an appeal to the bankruptcy court's ruling, which challenges title to one of the properties that is not under contract. This appeal has delayed our ability to close on those that are contracted for sale. The buyers of these properties remain committed and we fully expect to resolve this and execute on the disposition. There's a table in our press release that provides some insight and further clarity with respect to our NPAs. You can see that $135 million of the $160 million of non-performing assets net of government guarantees are secured by real estate that mostly has been recently appraised. These values support our comfortability and we expect to resolve these with little or no loss. I would characterize the remaining $25 million or 14 basis points as normal for our company. Turning to slide five, you will see our priorities for the remainder of the year. I realize that credit is not where it needs to be and we are focused to have a path to materially improve this over the next few quarters. The momentum we have in the business is solid and adding core relationships and reaching our mid single digit growth for the year is another key focus and certainly attainable. Along the way, we will continue our automation journey using the existing technology framework that we have 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 provide a better overall associate and client experience. In my most recent travels and discussions with clients throughout our footprint, It is encouraging to hear the optimism that they have despite some headwinds related to 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 have a clear and robust run ahead of them. We're also still seeing pockets of industrial and retail demand and faster growing markets in the Southwest. However, increased costs related to new construction could pose a challenge for some projects to reach desired return levels and subsequently could push back the commencements of these projects until later in 2026 or early 2027. Competition for new clients is fierce, but we've worked extremely hard on our funding base and our consistent model of delivery such that we should continue to garner our fair share of the market and all of our geographies and businesses for the foreseeable future. With that, I would like to turn the call to Doug Bauche. Doug?

Thank you, Jim, and good morning, everyone. Consistent with our expectations, our teams executed well on developing pipeline of quality CRE and CNI opportunities leading to $200 million in organic loan growth in the quarter. Turning to page six, you'll see that the loan growth occurred in our investor-owned CRE secured portfolio and our CNI book, inclusive of our specialty lending niches of life insurance premium finance, tax credit, sponsor finance, and SBA. Gross loan originations were particularly strong in the quarter, up 32% and 48% over the prior year and linked quarters respectively. Growth in our investor-owned CRE portfolio is balanced between Kansas City, Phoenix, Dallas, Southern Nevada, and Southern California. New CRE-funded projects in the quarter were largely centered around pre-leased and stabilized industrial and retail projects as we expanded relationships with existing clients and onboarded new high-quality developers and investors in our markets. Examples of traditional CNI originations in the quarter include working capital and owner-occupied real estate financing for a food distribution company in Arizona, a manufacturer of made-to-order stainless steel HVAC systems in Kansas City, and a Southern California-based manufacturer of truck and van body equipment used in the utility, emergency and construction industries. Within our specialty lending business lines, originations of SBA 7A owner-occupied real estate loans remain stable in the quarter, with 32 new loans funded totaling $59 million, ranking us again in the top 25 SBA originators in the country. Additionally, we continue to capitalize on our strong brand and momentum in the life insurance premium finance market, with strong originations leading to $42 million in quarterly net growth and 8% growth over the trailing 12 months. Page seven demonstrates the diversity of the loan portfolio across our geographic markets and our specialty lending divisions. Roughly $7.6 billion or 65% of total loans are attributed to our Midwest, Southwest and West region community banking markets. While 4.2 billion or 35% is from our specialty lending business line. Previously discussed reductions in our low-income housing tax credit portfolio in Q1 2026 have muted the overall growth in our specialty lending lines to only 3% year-over-year, while our geographic markets have grown 8% or $570 million year-over-year, inclusive of the loans acquired in the first interstate branch acquisition in Q4 of 2025. Coming off a solid quarter of loan originations and net growth, I'm encouraged by the depth and diversity of our current pipeline of new opportunities yet to come. We are seeing resilient traction and growth, particularly from San Diego, Dallas and Southern Nevada, complementing our historic strongholds in St. Louis, Phoenix and Kansas City. Turning to slides eight and nine, while total deposits remain relatively flat quarter over quarter, core deposits are up $1.2 billion year over year, inclusive of the branch acquired deposits in Q4 of 25. The mix of our deposit base remains favorable, with 34% non-interest bearing compared to 33% in the linked quarter. Traditional outflows in the front half of the year are normal for our deposit portfolio, with growth particularly from our geographic markets occurring in late Q3 and into Q4. Specialty deposits grew $62 million in the quarter, which is consistent with the growth in the prior year quarter. The breakout of deposit mix and growth within the specialty channels is reflected on slide 10. Property management deposits account for 42% of specialty deposits and 12% of total bank deposits, while community associations account for 39% of specialty deposits and 11% of total bank deposits. As we've said during previous calls, the Branchlight specialty deposit verticals provide us an attractive, cost-adjusted source of funding that complements our community banking deposit base. With our favorable 82% loan-to-deposit ratio, we continue to execute disciplined pricing strategies to effectively manage our blended cost of deposits to protect net interest margin. Continuing with deposits, slide 11 reflects our deposit base across our commercial, business banking and consumer, and specialty deposit channels. The strength of our commercial base with nearly $5 billion in deposits is well complemented by the granular and diverse nature of our business banking and consumer channels contributing $4.5 billion in deposits with an attractive 1.25% weighted average cost of funds. The consistency, stability, and balance of our deposit base across these business channels remains a core strength of our company. And with that, I'll turn the call over to Keene.