Enterprise Financial Services targets 6% annualized loan growth and expands Arizona, Kansas presence amid deposit surge

Earnings Call Insights: Enterprise Financial Services Corp (EFSC) Q3 2025

MANAGEMENT VIEW

* James Lally, President, CEO & Director, stated that "the third quarter was another very solid quarter for our company," highlighting a return to 6% annualized loan growth and deposit growth exceeding this rate. Lally emphasized the strategic focus on diversified geography and national businesses, allowing the company to "focus on the business that fits us the best versus settling for transactional business that achieves certain growth targets."
* Lally announced the recent closing and systems conversion for the acquisition of 10 branches in Arizona and 2 in the Kansas City area, adding approximately $650 million of well-priced deposits and $300 million in loans, strengthening the company's presence in those markets.
* Lally noted an increase in provision for loan losses, primarily due to a $22 million rise in nonperforming assets and net charge-offs, but expressed confidence in resolving these issues and returning NPAs to historical levels.
* Lally reported earnings of $1.19 per diluted share for the quarter and a return on average assets of 1.11%. Net interest income grew by $5.5 million over the previous quarter, with net interest margin increasing by 2 basis points to 4.23%.
* Lally stated, "On an annualized basis, loan growth in the quarter was 6% or $174 million net of $22 million of guaranteed loans that were sold during the quarter." Deposit growth was described as "exceptional," with $240 million in deposit growth and DDA remaining at 32%.
* Lally highlighted that the tangible common equity to tangible assets ratio stood at 9.60%, and tangible book value per common share increased over 15% on an annualized quarterly basis.
* Lally also announced an increase in the quarterly dividend by $0.01 to $0.32 per share for Q4 2025.
* Lally emphasized, "We have never had any exposure to the private lending business identified in regulatory filings by two other regional lenders."
* Douglas Bauche, Senior EVP & Chief Banking Officer, noted that "our brand continues to gain traction in our newer markets of North Texas and Southern Nevada" and that the Southwest region was experiencing strong economic growth. Bauche detailed a 12% year-over-year growth rate in the LIPF sector.
* Keene Turner, Senior EVP, CFO & COO, explained, "We reported earnings per share of $1.19 in the third quarter on net income of $45 million. Excluding acquisition costs, EPS on an adjusted basis was $1.20."

OUTLOOK

* Management expects onboarding of new clients and loan production to maintain or potentially accelerate, supported by "onboarding of new clients and loan production maintaining its current level or possibly accelerating slightly from here," according to Lally.
* The company anticipates most of the recent rate cut will be mitigated in Q4, with the branch acquisition expected to be accretive to net interest margin by 5 basis points.
* Turner stated, "If we execute on our mid-single-digit loan and deposit growth for next year, we're growing pretax income and essentially defending or growing net interest income because of the branch deal."
* Turner added, "We generally expect to defend net interest margin. It might drift a little bit, but you're still flirting with a 4.20-ish margin for most of '26 at least as we see it right now."

FINANCIAL RESULTS

* Net interest income for the quarter was $158 million, up $5.5 million from the prior period.
* Loan interest increased by $3.6 million, with average balances growing $96 million compared to the linked period and a 6.98% rate on loans booked in the quarter.
* Noninterest income, excluding anticipated insurance recovery, decreased $4.1 million from the linked quarter to $17 million, primarily due to lower tax credit and community development income and the nonreoccurrence of a BOLI policy payout.
* Net charge-offs for the quarter were $4.1 million compared to $1 million in the linked quarter, and the provision for credit losses was $8.4 million.
* Nonperforming assets increased by $22 million to 83 basis points of total assets.
* Noninterest expense was $109.8 million, up $4.1 million from the second quarter, with deposit costs rising $2.4 million and legal and professional expenses also increasing.
* The tangible common equity ratio was 9.6%, up from 9.4% in the linked quarter, and the CET1 ratio reached 12%.

Q&A

* Jeff Rulis, D.A. Davidson: Asked about the timing and resolution of the Southern California credits and the life insurance premium loan. Bauche responded that resolution on the real estate loans is expected in the coming quarters due to ongoing foreclosure and bankruptcy proceedings, while the life insurance loan resolution is also uncertain but fully covered.
* Rulis queried about NBFI exposure. Bauche clarified the company has $260 million to $270 million in private lender relationships, primarily first mortgage secured loans, and described strong underwriting discipline.
* Rulis inquired about margin outlook with rate cuts. Turner answered, "We're pretty neutral. And when I start looking at both net interest margin and pretax income at risk, if we execute on our mid-single-digit loan and deposit growth for next year, we're growing pretax income and essentially defending or growing net interest income because of the branch deal."
* Damon Del Monte, KBW, asked about expense outlook and integration costs. Turner stated normalized Q3 expenses were $107 million, with $4.5 million added in Q4 for branch acquisition run rate and $2.5 million of one-timers.
* Del Monte asked about fee income volatility. Turner noted Q4 fee income should fall between Q2's high and Q3's baseline.
* Nathan Race, Piper Sandler: Asked about deposit beta assumptions and capital priorities. Turner said deposit beta is 40%, and Lally emphasized continued focus on organic growth and integration, with M&A and buybacks as secondary considerations.
* Brian Martin, Janney: Asked about expense run-rate and fee income contribution. Turner expected Q4 expenses in the $111 million to $113 million range and noted fee income as a consistent mid-single-digit grower, with potential upside from SBA loan sales depending on market conditions.
* Martin asked about specialty deposit growth drivers and costs. Lally attributed growth to investments in people, systems, and expertise, and expects continued rapid growth, describing the model as "very profitable."

SENTIMENT ANALYSIS

* Analysts posed probing questions on credit resolution, margin protection, and expense management, displaying a neutral to slightly cautious tone, especially regarding asset quality and nonperforming asset resolution timelines.
* Management maintained a confident but measured tone, particularly when discussing asset quality and strategic integration. Lally repeatedly expressed confidence in returning NPAs to historical levels and defended the company's underwriting and collection processes.
* Compared to the previous quarter, both analysts and management addressed similar themes, but this quarter saw more pointed questions on credit quality and integration costs, with management showing slightly heightened defensiveness on asset quality issues.

QUARTER-OVER-QUARTER COMPARISON

* Management shifted focus from loan volume preservation to reinvigorated growth, with loan growth accelerating from 4% in Q2 to 6% annualized in Q3.
* The branch acquisition closed in Q3, resulting in a significant deposit and loan increase, compared to Q2's anticipation of the deal.
* Asset quality concerns rose in Q3, with nonperforming assets increasing by $22 million, while Q2 saw stable asset quality.
* Dividend increased in both quarters, but Q3 highlighted tangible book value growth and capital ratios post-acquisition.
* Analysts in both quarters focused on margin, fee income, expense trends, and asset quality, but Q3 saw more questions on integration and credit resolution timelines.
* Management's confidence in credit resolution and integration was more defensive in Q3, while Q2 commentary was more optimistic on economic trends and margin stability.

RISKS AND CONCERNS

* Management cited an increase in nonperforming assets primarily related to a life insurance premium loan and seven Southern California CRE loans but reiterated strong collateral and expectation of full recovery.
* The provision for credit losses increased due to net charge-offs and higher nonperforming loans.
* Asset quality remains under scrutiny, with ongoing litigation and bankruptcy proceedings delaying credit resolution.
* Analysts highlighted concerns about fee income volatility, integration expenses, and ongoing legal costs associated with problem loans.

FINAL TAKEAWAY

Enterprise Financial Services Corp closed the third quarter with solid loan and deposit growth, successfully integrating newly acquired branches in Arizona and Kansas City. While nonperforming assets and provision for credit losses increased, management remains confident in the ultimate resolution of key problem credits and expects asset quality to return to historical levels. The company continues to defend its net interest margin and positions itself for ongoing growth, supported by a robust deposit base and a focus on disciplined pricing and relationship banking.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/efsc/earnings/transcripts]

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