Enterprise Financial Services Corporation

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 SEC 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 $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 36 cents per common share for the fourth quarter. Turning to slide four, 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 will 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 a 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% 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 our 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 five, 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 credit to 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. My most recent travels and discussions with clients throughout our footprint is 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 garning 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 will 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 continue to successfully win high-quality business clients, expand existing credit and treasury management relationships, and leverage our differentiated platform to drive sustainable profitability. Turning to slide six, 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 CNI, 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 CNI 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, CNI 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 7A owner occupied real estate financing remained stable, ending the quarter at $1.25 billion. maintaining our position as a leading SBA originator nationally. Sponsored 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 seven 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 eight and nine, 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, not interest bearing Demand accounts totaled $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. Demonstrating the operational integration of these corporate clients, approximately 80% utilize our treasury management platform and 60% maintain an active lending relationship with us. This commercial base is complemented by $4.6 billion in highly granular business banking and consumer deposits, contributing average account sizes of $79,000 and $23,000 with attractive weighted average funding costs of 1.17% and 1.46% respectively. Through proactive pricing discipline across all client channels, our total cost of deposits remained well controlled at 1.54% for the third quarter. In summary, it was a very solid and well-balanced growth quarter on both sides of the balance sheet, and our current pipeline suggests this momentum should continue well into the next quarter. Thank you for your time, and with that, I'll turn the call over to Keene Turner for his comments.

Thanks, Doug, and good morning, everyone. Turning to slide 12, we reported earnings per share of $1.14 in the third quarter, on net income of $42 million. Excluding certain non-recurring items, earnings per share on an adjusted basis was $1.17 compared to $1.13 in the linked quarter. Pre-provision earnings totaled $75 million, a $6 million increase from the linked quarter, primarily due to higher net interest income. On the cost side, Non-interest expense decreased compared to the second quarter, primarily driven by a reduction in accrued bonus compensation and efforts to improve pricing in certain deposit verticals. The link quarter increase in the provision for credit losses was primarily due to the net charge-offs on two relationships Jim detailed, along with reserves for the increase in non-performing loans and $453 million of loan growth in the period. Turning to slide 13, with more details to follow on 14, Net interest income in the third quarter was $175 million, an increase of $6 million or 14% annualized from the second quarter, resulting mainly from higher average loan balances and enhanced investment returns resulting from the investment portfolio restructure in the prior quarter. The total cost of deposits was managed at a stable level, but balanced growth combined with the first full quarter of the $175 million sub-debt issuance increased interest expense. Interest income increased $9 million in the quarter, including $7 million on increased loan balances and $2 million from cash and investment securities. Interest expense increased $3 million compared to the linked quarter, including an increase of $2 million in deposit expense and $2 million in additional expense related to our most recent sub-debt issuance. These were partially offset by reduced expense on short-term FHLB advances and retired term debt at the holding company. Our net interest margin for the third quarter was stable from the linked period at 4.30%. Earning asset yields expanded two basis points, mainly due to the securities repositioning trade and an improved earning asset mix. The rate on loans booked in the quarter was 6.61%, and the average tax equivalent purchase yield on investments was 4.74%, both of which improved the yield on those assets. The cost of interest bearing liabilities increased three basis points, mainly attributable to the additional sub debt along with a two basis point increase in the cost of interest bearing deposits. Net interest income remains modestly asset sensitive under parallel interest rate shock simulations with each quarter point change in rates affecting net interest income one to two million dollars per quarter or a couple basis points in net interest margin. Recent steepening of the yield curve should reinforce beneficial pricing on loans and investment purchases and the September federal funds rate increase should prove accretive to net interest income. Including deposit-related non-interest expense in this analysis, we model that we are effectively neutral. However, for the most recent increase, we have largely held non-contractual rates stable in order to regain some profitability in those businesses. We also added $150 million in additional loan hedges during the third quarter to further stabilize our interest rate risk profile. With the last Fed increase, we anticipate margins to move a couple basis points higher in the fourth quarter. Discipline, pricing, and cost of funds management will continue to drive expansion of net interest income. While changes in the yield curve have been favorable, spreads have compressed as the market adjusts. Deposit balances should reflect normal seasonal growth. Slide 15 reflects our credit trends. That charge-off totaled $11 million in the third quarter, down from $13.6 million in the link quarter. the charge-offs primarily related to a C&I credit in the St. Louis region and a California hotel that we took possession of in the quarter. The ratio of non-performing assets to total assets increased by 11 basis points compared to the linked quarter, primarily due to the addition of $18 million in agricultural loans, an $8 million commercial real estate relationship, and a $4 million C&I relationship. Net charge-offs totaled 36 basis points of average loans compared to 46 basis points for the second quarter of 2026. The provision for credit losses was $18.1 million compared to $14.2 million in the linked quarter. The provision was attributable to net charge-offs, the increase in non-performing loans, and loan growth. Slide 16 shows the allowance for credit losses. The ratio of allowance to total loans was stable with the linked quarter at 1.17%. When adjusting for government-guaranteed loans, the ratio increases to 1.27% of total loans. on slide 17, third quarter non-interest income was $13 million, relatively stable with the linked quarter. A notable item includes lower tax credit income from a decline in projects carried at fair value. Turning to slide 18, third quarter non-interest expense of $115 million was approximately $1 million lower than the linked quarter. Employee compensation and benefits declined by $2.5 million, largely due to lower short-term incentive expense in the quarter. In addition, we have begun refocusing and streamlining operations, which are anticipated to incrementally improve the prospective expense run rate and efficiency ratio. Deposit costs decreased $0.4 million quarter over quarter as we actively manage this line item, but could face rate pressure in the near term. Other expenses increased by $1.8 million from the linked quarter, primarily from operating expenses related to OREO properties. The core efficiency was 58.9% for the quarter compared to 61.1% in the link quarter, largely due to the expansion of net interest income. Our capital metrics are shown on slide 19. Compared to the link quarter, tangible book value per share decreased to $39.45 from $42.30, and our tangible common equity ratio decreased to 8.13% from 9.04%. The decrease in tangible common equity was primarily due to a reduction in the fair value of securities and cash flow hedges that was caused by the change in interest rates. Our capital management actions in the quarter also included the repurchase of 526,000 shares of common stock for approximately $34 million and an increase to the quarterly dividend of one cent per share. Year to date, we returned approximately $122 million to shareholders through common stock repurchases and common stock dividends. Our operating results drove a 1% return on average assets and an 11% return on average tangible common equity. Our return metrics this year have been impacted by elevated charge-offs and non-performing asset levels. As Jim discussed, we are highly focused on improving asset qualities. The opportunity for earnings improvement from credit losses returning to historical norms and the redeployment of non-performing assets into earning assets is significant. We have also taken steps to optimize certain parts of our business that will further benefit our earnings run rate. The combination of these items on year-to-date results puts our return on average assets in line with both the prior year and our expectations. While there is still work to do, we firmly believe that the core business fundamentals remain strong. I appreciate your time today and we will now open the floor to answer analyst questions.