Enterprise Financial Services Corp Q2 FY2026 earnings call

• Financial and Balance Sheet Actions

  • Repositioned the $180 million investment securities portfolio: sold low-yield (low 3% tax equivalent) securities and reinvested in higher-yield (low 5% tax equivalent) securities, adding $3.5 million in annual net interest income, with a $6 million pre-tax current-period loss mostly offset by $4.4 million in pre-tax gains from selling Visa Class B common stock and a land parcel. The restructuring increased portfolio yield by 10 basis points without changing portfolio duration.
  • Issued $175 million of 6.25% fixed-to-floating rate subordinated notes to boost regulatory capital, repurchased 382,000 common shares for ~$23 million, and raised the quarterly dividend by 1 cent to 35 cents per share for Q3 2026. The board approved an additional 2 million shares for the repurchase program, leaving 2.25 million shares available for repurchase.
  • Tangible common equity to tangible assets ratio remained stable at 9.04%, tangible book value per share rose to $42.30, and total stockholders' equity was $2 billion. The bank maintains an 82% loan-to-deposit ratio.

• Loan Growth Originations

  • Organic loan growth hit $200 million in the quarter, in line with expectations. Gross loan originations rose 32% year-over-year and 48% linked quarter.
  • Growth was balanced across investor-owned commercial real estate (CRE) in Kansas City, Phoenix, Dallas, Southern Nevada, and Southern California, focused on pre-leased stabilized industrial and retail projects. Commercial and industrial (CNI) originations included working capital and owner-occupied real estate financing for multiple industrial and distribution clients across the footprint.
  • Specialty lending highlights: 32 new SBA 7A loans totaling $59 million funded, ranking the bank top 25 nationally for SBA originations; life insurance premium finance net growth hit $42 million in the quarter, for 8% 12-month trailing growth.

• Credit and Non-Performing Asset Update

  • Q2 net charge-offs totaled $13.6 million (46 basis points of average loans), driven by two large commercial charge-offs: a Texas C&I relationship that failed expansion integration, and a sponsor finance healthcare consulting business disrupted by a new CMS 6-month moratorium on new hospice and home health agency licensing. After these charges, year-to-date annualized net charge-offs are 31 basis points.
  • Non-performing assets total $160 million (net of government guarantees), 84% of which is secured by appraised real estate, with management expecting minimal losses from resolution. A bankruptcy appeal on one unsold Southern California OREO property has delayed closing on four contracted OREO sales, though buyers remain committed.

• Operational Priorities

  • Continue integrating manual processes into existing automated workflows to improve associate and client experiences, building on prior technology investments.
  • Maintain the bank's diversified relationship-oriented business model to defend net interest margin in a highly competitive market.

Total loans: $11.8 billion, with 65% ($7.6 billion) held in community banking segments across the Midwest, Southwest, and West regions, and 35% ($4.2 billion) held in specialty lending. Community banking lending grew 8% year-over-year ($570 million), including loans from the Q4 2025 interstate branch acquisition, while specialty lending grew 3% year-over-year (muted by prior low-income housing tax credit portfolio reductions).

Total deposits: ~$14.4 billion, with core deposits up $1.2 billion year-over-year (including Q4 2025 acquired branch deposits). Deposit mix by channel: commercial deposits ~$5 billion, business banking and consumer deposits $4.5 billion (with an attractive 1.25% weighted average cost of funds). Specialty deposits grew $62 million in the quarter; 42% of specialty deposits are property management deposits (12% of total bank deposits) and 39% are community association deposits (11% of total bank deposits). DDA deposits rose to 34% of total deposits, with non-interest bearing deposits at 34% (up from 33% linked quarter).

Net interest income: $169 million, up $2.6 million from the linked quarter, with a net interest margin of 4.30% (up 2 basis points linked quarter). Non-interest income: $13.5 million, down $5.6 million linked quarter, driven by the securities portfolio restructuring net loss, lower tax credit fair value income, and lower private equity distributions. Non-interest expense: $116 million, relatively flat linked quarter. Reported net income: $41 million, or $1.09 diluted earnings per share; adjusted EPS (excluding non-recurring items) was $1.13.

• Net interest margin is expected to remain in the mid to upper 420s (4.25% to 4.29%) in the current interest rate environment, with sub-debt costs offsetting the benefits of the securities portfolio restructuring, leaving overall margin broadly stable. Stronger-than-expected sequential loan growth would provide upside to margin.
• Net charge-offs are expected to normalize back to the bank's 10-year historical average of 15 basis points in the second half of 2026, after the elevated Q2 charge-offs from two one-off credits.
• Full-year loan growth is on track to hit the targeted mid single-digit percentage, with growth diversification across segments and regions matching the first half of the year.
• Non-interest income is expected to return to roughly Q1 2026 run-rate levels in the second half. The tax credit portfolio is expected to break even for the full year, and the bank will resume selling SBA loans, which will contribute to fee income.
• Non-interest expense is expected to see a modest 1 to 2 million per quarter step-up in deposit costs in the second half, with management targeting optimization of other expense lines to offset this increase.
• The bank will continue opportunistic share repurchases to optimize excess tangible common equity, as current capital levels are ~100 basis points above management's target range.

• Elevated construction costs may push project start dates to late 2026 or early 2027, as some projects cannot meet required return thresholds.
• Competition for new clients and loan yield pricing pressure is intense across all markets, requiring disciplined pricing to maintain margin and grow market share.
• The bankruptcy appeal on one Southern California OREO property has delayed the sale of all seven contracted OREO properties, and while management expects resolution, court timing is out of the bank's control and could extend the resolution process longer than expected.
• Fair value of the low-income housing tax credit portfolio is sensitive to rising benchmark interest rates, which reduced non-interest income in Q2.
• The CMS moratorium on new Medicare licensing for hospice and home health agencies created an abrupt unforeseen charge-off for one exposure, though only this specific business model (supporting new license applicants) was impacted.

Q: After Q2's elevated charge-offs, when should we expect charge-off activity to decline, what magnitude should we expect, and are there additional portfolio exposures to the CMS new licensing moratorium? / A: Management expects charge-offs to normalize back to the 15 basis points 10-year historical average in the second half. Of the $76 million in non-performing loans, two-thirds are secured by real estate, with most OREO already under contract or having active buyer interest, and SBA OREO has 75% government guarantees limiting losses. Only ~150 million of the $12 billion total portfolio has Medicare/Medicaid tied revenue, all are existing operating providers (not new license applicants) that are current on payments and performing well, so no additional broad exposure to the moratorium.

Q: Can you confirm the outlook for net interest margin after the securities restructuring and sub-debt issuance, and what is the run-rate for non-interest income after Q2's weak reading? / A: The net impact of restructuring benefits and higher sub-debt costs is broadly a wash, leaving margin stable in the expected range; strong loan growth would provide upside. Q1 2026 is a better benchmark for recurring non-interest income run-rate. The tax credit portfolio is expected to break even for the full year, and the bank will resume selling SBA loans in the second half, so fee income will rebound from Q2's low levels.

Q: Can you confirm the driver of expected expense growth in the second half, and what is the outlook for tax credit fee income, and what is the buyback strategy going forward? / A: Expense growth will be limited to a 1 to 2 million per quarter step up in deposit costs, with other expense lines optimized to offset this increase. Third quarter tax credit income will depend on rate moves, with larger activity and upside expected in the fourth quarter, enough to offset Q2's negative impact. Current total and tangible common equity are 100 basis points above target, so the bank will continue active opportunistic repurchases under the newly expanded 2 million share authorization to optimize capital levels.

Q: What is your outlook for loan growth and loan pricing competition in the back half, and where will growth come from? / A: Growth will remain diversified, matching the first half's profile, with continued strength in the Midwest, Arizona, Southern Nevada, San Diego, and life insurance premium finance. The market is highly competitive with downward pressure on new loan yields, but the bank maintains disciplined pricing targeting 6.25% to 6.5% origination yields, relying on relationship depth and ancillary services to win market share while protecting returns.