Jim Lally: Thank you all very much for joining us this morning, and welcome to our 2026 Q3 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 two 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 three. For the quarter, we earned $42 million, or $1.14 per diluted share.
Jim Lally: This compared to the $1.09 that we earned in the Q2 of this year and $1.19 that we earned during the Q3 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.
Jim Lally: 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 Asset 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 $0.01 to $0.36 per common share for Q4. Turning to slide four, you will see that the momentum in loan and deposit growth continued in Q3. Building off solid growth in Q2, loan balances grew by $452 million in the quarter.
Jim Lally: 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 at quarter end, with growth in the quarter coming in at $624 million. As expected, our geographic markets began to see the normal H2 growth, producing 80% of this quarter's production. DDA to total deposits came in at 33%, and our loan-to-deposit ratio is 82%.
Jim Lally: 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 have discussed for over a year, improvement in loan credit quality is a top priority. The $18 million of provision expense for the quarter was largely driven by loan growth and $11 million in net charge-offs. During our Q2 call, we discussed that our expectation for the remainder of 2026 was that our charge-off level will return to a 15 to 20 basis point annual run rate. This obviously did not occur, as the results for Q3 were higher than this, coming in at 36 basis points annualized.
Jim Lally: 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 have 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.
Jim Lally: I have great confidence that we will continue to expand pre-provision returns. You can also see that the normalization of credits is slightly above industry expectations, which produces a significant improvement to the return levels that we have 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 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 produce better overall associate and client experience.
Jim Lally: In my most recent travels and discussions with clients throughout our footprint, it 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 are also still seeing pockets of industrial and retail demand in faster-growing markets throughout our footprint. Competition for new clients is fierce, but I am 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 Q3 produced exceptional loan and deposit growth amid disciplined pricing and controlled expenses.
Jim Lally: 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 am 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?
Doug Bauche: Thank you, Jim, and good morning, everyone. Our banking teams performed well in Q3, 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, and 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.
Doug Bauche: 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, an 8% sequential expansion, bringing the portfolio's balance to $1.4 billion.
Doug Bauche: 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 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.
Doug Bauche: 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. Non-interest-bearing demand accounts total $5 billion, representing a consistent 33% of total bank deposits.
Doug Bauche: 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.
Doug Bauche: 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 Q3. 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. With that, I will turn the call over to Keene Turner for his comments.
Keene Turner: Thanks, Doug, and good morning, everyone. Turning to slide 12, we reported earnings per share of $1.14 in Q3 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 Q2, primarily driven by a reduction in accrued bonus compensation and efforts to improve pricing in certain deposit verticals. The linked quarter increase in the provision for credit losses was primarily due to the net charge-off 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.
Keene Turner: Net interest income in Q3 was $175 million, an increase of $6 million or 14% annualized from Q2, 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 balance 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.
Keene Turner: Our net interest margin for Q3 was stable from the linked period at 4.30%. Earning asset yields expanded 2 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 3 basis points, mainly attributable to the additional sub-debt, along with a 2-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 $1 to $2 million per quarter or a couple basis points in net interest margin.
Keene Turner: 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 Q3 to further stabilize our interest rate risk profile. With the last Fed increase, we anticipate margin to move a couple basis points higher in Q4. Disciplined 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.
Keene Turner: Net charge-offs totaled $11 million in Q3, down from $13.6 million in the linked 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 Q2 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.
Keene Turner: 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, Q3 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, Q3 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 managed this line item but could face rate pressure in the near term.
Keene Turner: 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 linked quarter, largely due to the expansion of net interest income. Our capital metrics are shown on slide 19. Compared to the linked 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.
Keene Turner: 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.
Keene Turner: 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.
Operator: We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Jeff Rulis with D.A. Davidson. Your line is open. Please go ahead.
Jeff Rulis: Thanks. Good morning.
Keene Turner: Morning, Jeff.
Jeff Rulis: Hi there. Jim and Keene, you guys, you talked about the expectation for credit to normalize in the next few quarters. Maybe a little more granular, starting with the California OREO. Any update on those that have been contracted for sale? Just wanted to get an update on those.
Jim Lally: Yeah, sure. As we sit here today, we are still working through a few things in the courts. We had some really positive progress in the quarter. You mentioned those properties being under contract. They represent well over half of the value related to those properties with the other ones with great interest and just waiting for a few things to clear up before those go under full PSAs. But progress was made, really good progress was made in the quarter, and we would think that further progress would be made later this quarter and into the first part of 2027.
Jeff Rulis: Okay. If that is ongoing, I guess just kind of narrowing the next couple quarters is kind of vague and understanding that that is going through the courts and otherwise. I guess, absent those properties, any other broad-based credit recovery? Just trying to get into that normalized comment. It sounds like it is imminent, but yet it is not real tangible. Any other detail you could offer of when we get there?
Doug Bauche: Yeah, Jeff, it is Doug. Jim made the point that relative to the large proportionate share of our non-performing assets, it is the Laguna portfolio, and we are making good progress there. We do not obviously control the courts' timing, but we are optimistic that we are going to be in a position to monetize some of these assets in Q1. As it relates to other normalization of credit, I think this, right. We see our criticized classified levels that are still elevated, about 6.3%, consistent really with the prior two quarters, but elevated. We would expect, based upon the progress that we are making, to see those numbers come down in crit class more to our normal historical operating percentages of 4.5% to 5%. We will see that through a combination of payoffs and upgrades as well as some of these credits that have been downgraded are showing improving operating trends.
Doug Bauche: Through the combination of payoffs and upgrades, we should see crit class return back to that 4.5% to 5% range. As we get through the Laguna portfolio, obviously we will see our non-performing assets return back to a much more normalized level of closer to 45 to 50 basis points. We did have, Jeff, as you heard in Jim and Keene's comments, we did have a hotel project in Southern California, a 284-room flagged hotel that we took into OREO in the quarter, and we did take a $2.5 million write-down on that asset.
Jeff Rulis: Okay. If I could hop to the non-interest income, just the expectations for maybe a normalized level there. Maybe an update on the state tax credit line as well as the, well, just sort of expectations, maybe just cleanly speaking, the fee income line run rate we could expect.
Keene Turner: Yeah, Jeff, this is Keene. We had roughly $7 million of negative impact there, mostly in the tax credit line item. We are working diligently to try to eliminate that from the income statement. Even if just rates calm down and really do not do much, that line item will not have an impact. To the extent, the ORE was a technical timing issue. But I think to Jim and Doug's comments, the overall for the total workout, I think remains positive and optimistic. But I think Q4, we look at the 13 and add seven back, and that is a good run rate for us. If we can just continue to repeat that for the next several quarters, we will be happy.
Jeff Rulis: Okay, thanks.
Operator: Your next question comes from the line of Daniel Tamayo with Raymond James. Your line is open. Please go ahead.
Daniel Tamayo: Thank you. Good morning, guys. Got a few more on credit, if you don't mind. First, the increase in NPAs, you called out a few different categories there, including the several million of ag credits. Just curious if you could give us a little color around what was driving the ag in particular.
Jim Lally: Yeah. Dan, good morning. Overall, the ag portfolio for us is down to less than $50 million today, and there was two credits in that portfolio that we took into NPAs. We did it looking at the collateral that we have, which is largely equipment and farmland and actually some crops in the ground. We look at it, and we feel as if what we have currently on the books, we should be in good shape relative to liquidation. The other one was a distributor, so it really wasn't even in the farming business, if you will. That too, we believe through a refinance, will be taken care of here in Q4.
Daniel Tamayo: Okay, thanks. That is helpful.
Jim Lally: Doug, anything you want to add there?
Doug Bauche: No, I would not. As Jim pointed out, it is two credits. One is really a row crop farmer, and it is largely secured. It is $13 million, largely secured by farm ground. The other one, as Jim pointed out, was really a company that is a distributor of seed, fertilizers, and chemicals used in farming operations. It is today, $4.5 million, and we would expect to exit that credit quickly. Other movements, though, Daniel, that you are mentioning, $7 million into non-performing loans in the quarter. One is an owner-occupied commercial industrial building in Southern California that was the front end of an SBA 504 structure. So extremely well-secured there. The other one, a materiality, about a $5 million C&I credit to a metal fabrication and installation company in Southern Nevada.
Daniel Tamayo: Okay. That is helpful. Also takes me to my next question, which is the SBA portion of your balance sheet. Curious how you are seeing that react to higher rates and how you are thinking about if we do get rates higher, either with just one more hike in December or further in 2027. Certainly, some folks have been talking about having some concern with SBA overall. I know you guys have some guarantees in there, but yeah.
Doug Bauche: We would share that concern in terms of defaults in the portfolio, Daniel. It's listen, not only higher rates, but overall higher inflationary pressures are causing challenges for some of the smaller, less capitalized businesses. We do experience defaults to increase in the SBA space. But as a reminder of our position and what we do there on the owner-occupied first mortgage real estate side, our history has been exceptionally low loss given defaults in the portfolio. Average loan sizes in our book are about $1.2 million, $1.3 million. Keene's showing me $1.5 million average loan size. These are owner-occupied commercial real estate buildings. And while defaults will be up, loss given default should be minimal as we go forward.
Daniel Tamayo: Okay. Thank you on that. Lastly, just wanted to come back to the previous question around your comment on what core normalized profitability would be without the noise. And just give you an opportunity if you want to take it in terms of when you think you might be able to get back to something that looks more like what you are talking about.
Keene Turner: Yeah. I am maybe going to stay a step back from timing, but I am happy to talk about the level. In the quarter, if you normalize out really the non-interest income stuff and maybe some of the carrying costs for the ORE properties, your PPNR is about 180 basis points. Just from a range perspective, if you get even net charge-offs down from the current level to around 25 basis points, you are knocking down a 1.30% ROA. I think timing on that, we need to get those ORE properties moved so that we can return those to earning assets and get the operating costs and legal expenses out of the run rate.
Keene Turner: But I think the underlying fundamentals, the PPNR is growing, and even with the credit where it is, it would have been a pretty good quarter if you did not have the non-interest income hits in and of itself. We are obviously not happy with that, but I think we are happy with the trajectory of the profitability, and I think we feel like in the next few quarters, we are going to see some progress here, and we are going to return to a level that we are proud of.
Daniel Tamayo: Okay. Thanks for the color, Keene. That is all I had.
Keene Turner: Thanks, Danny.
Operator: Your next question comes from the line of Brandon Rud with Stephens Inc. Your line is open. Please go ahead.
Brandon Rud: Morning. Thanks for taking my questions.
Keene Turner: Sure.
Brandon Rud: My first, maybe just on capital. With the change in AOCI, the TCE ratio is kind of more towards the bottom end of the target range now. I am just curious, does that have an impact on your expectations for buybacks near term? Should we anticipate that those may moderate a bit?
Keene Turner: I would say that while we are at the bottom of our range, I think we continue to be optimistic, and we continue to expect it and plan that we are going to net accrue capital. We had a pretty good growth quarter this quarter. I think we expect that will continue. But I think we will continue to be active in the buyback, maybe not quite as assertive as when we were at 9.13, being down at 8.13. But, I think we will still see some buyback activity here in Q4.
Brandon Rud: Okay. Thank you. Then maybe one on expenses. I think you said there were some moving parts in there. As you kind of look on a go-forward basis near term, I guess, what are your expectations really for the fourth quarter here in terms of go forward on expenses?
Keene Turner: Yeah. I would expect that, ex deposit costs, Q4 run rate is relatively level to where Q3 is. Then I expect that deposit ECR line item with growth and what happened with the Fed funds hike and what was contractually tied to Fed funds, we expect that line to move up $1.5 million to $2 million sequentially.
Brandon Rud: Okay, perfect. Thank you. I guess if I could squeeze one more in on that topic. Should we think about the deposit cost line in non-interest expenses similar to traditional deposit costs, where there may be some lag on the first hike, but then as you get later on in the cycle, there's some acceleration?
Keene Turner: Well, I don't know that there's necessarily acceleration there. I think it's fairly linear on that book. There is lag because of when the change goes into effect and how it goes through the statements. So there's really a month lag there. So you didn't really see much this quarter, but you'll see it more in the full quarter. We have been working hard to make sure that our pricing in the ones that are not contractual, that they're appropriate. That pricing has crept up on us a little bit over the last couple of years, and with some of the liquidity stress in the industry, we're working diligently to try to improve upon that. I think that's sort of baked into the Q3 results here, and I think we expect that that'll continue.
Keene Turner: But we're still expecting growth in those balances to continue to help fund the loan growth that Jim and Doug both talked about.
Brandon Rud: Got it. Okay. Thanks for taking my questions.
Keene Turner: Thanks, Brandon.
Operator: Your next question comes from the line of Damon Del Monte with KBW. Your line is open. Please go ahead.
Damon DelMonte: Hey, good morning, guys. Hope you're all doing well. First question, Keene, on the margin. Heard the commentary, you expect a couple basis point increase probably here in Q4. Just kind of curious how you're thinking about 2027. If we do have additional rate hikes, or if we don't, do you still feel like there's just a upward bias, kind of a grind higher, just given the optimism on loan growth and ongoing efforts to control deposit costs?
Keene Turner: Yes. I couldn't have said it better myself. September margin was up a handful of basis points over what the quarter was already. So we're working into Q4 here with call it a mid-430s margin. And we do expect that that's got some upward buoyancy and with additional rate improvement, so to speak, that would just add to that. But when we've got some growth going, the positive remixing helps as well. Just earning asset proportions are helping to drive that higher. So we're pretty bullish on net interest income growth and net interest margin growth over the next several quarters.
Damon DelMonte: Okay, great. Then with regards to provisioning and kind of ballparking how we think about that, obviously, the last two quarters were pretty elevated. If you go back to Q1 of this year and kind of the back half of last year, I think that average, is that a reasonable expectation for the forthcoming quarters?
Keene Turner: Yeah, I would say nothing has really changed in terms of provisioning for new loan growth. I think we are emphasizing businesses that have a lower risk profile. We had very good life insurance premium finance growth this quarter. SBA has been good. Both of those are low provision requirements and have had really tremendous loss history and performance. So we are 100 basis points to 115 basis points kind of on new growth. Then we tend to think about net charge-offs as a spectrum. We are at the high end of that right now. The 25 basis points is not where we necessarily want to land, but given where we have been, that would feel like a victory in the short term. So that is how we are thinking about it, and we need to deliver it, not just say it, but that is how we are thinking about provisioning.
Damon DelMonte: Got it. Okay. That is helpful. That is all that I had. Thank you.
Keene Turner: Great. Thanks, Damon.
Operator: Your next question comes from the line of Nathan Race with Piper Sandler. Your line is open. Please go ahead.
Nathan Race: Hey, guys. Thanks for taking the questions. Keene, I think in your comments, you mentioned you are working to just eliminate the state tax credit business from fee income. Going forward, just given some of the volatility in that line, can you kind of just speak to timing of that, and is that just like a vertical that you guys are essentially looking to exit at some point over the next quarter or two?
Keene Turner: I would say yes, the next quarter or two is a reasonable expectation for how we are working it. We have been working on it for a long time. I would say that we are not exiting the business, we are just changing the way we participate in it. We are going to continue to be an active lender in that business. That is what we do best. As a public company, this line item, while has life-to-date driven good economics, is just too volatile to live with. Given what it is, we spend way too much time talking to you all about it, and every investor we meet with, we talk about it. So we are looking to make some steps there and ideally exit that. It is already marked at fair value every month, every quarter. So we are hopeful that we can get that moved out.
Nathan Race: Okay, great.
Jim Lally: I'll add to that too.
Nathan Race: Sorry, shoot.
Jim Lally: I'll add to that we've also looked at other businesses in our company and areas and markets that were subscale. We've already taken that out of our run rate of expenses. If you think about what we call business banking, we're in it in our markets where we have great density and concentration, but in other markets where we're much more prolific commercial bank, if you think about our newer markets out west for our brand, for granular micro-businesses isn't as great. We've exited that in those markets. We also recently announced that we're exiting the mortgage business as it relates to an originator. So we're taking expenses out where we're not adding a great deal of value and really can scale.
Nathan Race: Got it. That's helpful. I don't think there's any correlation, Keene, but as you're getting out of the state tax credit business, is there any impact on the go-forward tax rate in terms of what you're expecting there?
Keene Turner: No, the tax rate will continue to be sort of in line with where it is today. Roughly 22% is the number that is top of mind for me. We will use some of those in the planning, but we will still have access to it. It is not like we were stacking that up and we were really using it to drive down the tax rate. So we use it in nits and nat, but it is not really going to have a big impact there.
Nathan Race: Okay, great. Then just one last one maybe for Jim and/or Doug. Just thinking about kind of incremental growth, obviously, really strong growth on both sides of the balance sheet this quarter. Just based on what you are seeing from a competitive perspective on new loan pricing and kind of incremental deposit growth these days, are you seeing that production on both sides of the balance sheet kind of be margin neutral or accretive? I am just trying to get a sense of kind of what incremental growth on both sides of the balance sheet.
Jim Lally: I will tell you what, Neil.
Nathan Race: Suggestion for the margin.
Jim Lally: Yeah, let me start with just maybe the overall outlook and tenor within the markets, then we can talk about what we are originating and things of that nature. Overall, we feel as if the end of the year will be strong. I said in my comments it is going to be mid to higher single digits, and I believe in that wholeheartedly as I look at the pipeline. As we turn the corner into 2027, it feels as if we will settle in in that mid-single. But remember, as you build the plan, it starts off in the Q1 is a little bit slower for us, and it picks up throughout the year, just due to some idiosyncrasies of our portfolio. Overall, as I go around and spend time with the teams and with clients, very bullish about their businesses and making the investments and things of that nature.
Jim Lally: Certainly, there are some segments that are not as bullish. You think about small trucking companies, which we have very little exposure to, and then those businesses in and around housing and things of that nature. But it is remarkable and very optimistic in terms of what our clients are thinking and doing. Doug, maybe you can talk about how we are originating and rates and things of that nature.
Doug Bauche: Well, Jim mentioned too, obviously, it is highly competitive out there, and we do see some compression in terms of credit spreads. That is why discipline on the liability side of the balance sheet is so important for us as well, and we have done a good job of controlling those deposit costs to combat the compression of spreads on the origination side. But listen, we price for a holistic relationship. As you can see in our margin, we continue to protect it and defend it well. Keene pointed out, too, I think just that where we are originating now is probably lower risk categories. We saw great production in the life insurance premium finance space. We are $100 million in the quarter, up $150 year to date. That typically is a back-ended growth business as well. We will see contribution from that in the Q4.
Doug Bauche: But listen, we were down $100 in Q1, we were up $200 in Q2, then we had $450 here in Q3. We are not going to continue that $450 growth rate, right. But even if we settle back in at that $200 to $250 growth rate per quarter on the loan side, as Keene pointed out earlier, we will have adequate deposit growth as well to fund that. So I think that is kind of the outlook, and we just feel good about the diversification. It is coming from all of our geographic markets, and we have got good momentum in North Texas and Southern Nevada and Arizona will contribute significantly here in the Q4.
Jim Lally: Doug, you bring up a good point. I think it really is the beauty of the strategy and the way we built the business is that it doesn't require us to get all the growth out of any one market. We've got seven great markets and many national businesses to find the growth. The charge to the team is bring in the very best, and then we'll continue to do that.
Nathan Race: Yeah, that's really helpful. I appreciate it, guys. Thank you.
Keene Turner: You bet. Have a great day.
Jim Lally: Thanks, Keene.
Operator: Your next question comes to the line of Andrew Liesch with StoneX Financial. Your line is open. Please go ahead.
Andrew Liesch: Hey, guys. Good morning.
Keene Turner: Good morning.
Andrew Liesch: Just following up on a comment you just made, Jim, on loan growth for next year. You mentioned mid-single digit. I guess what is going to cause growth to slow down? I mean, a lot of your products are not necessarily driven by the state of the economy or rates, they just have some natural demand built in them. So what would cause growth to be weaker next year than this year? Just hearing really positive momentum commentary.
Jim Lally: Yeah. Andrew, I would look at it this way. As Doug mentioned, Q1 we were flat to negative, and then we picked up growth. Really, we are running at that run rate now for a full year at that mid-single digit pace. To me, we do not want to run the machine too hot. Additionally, going back to our credit discussion, we are very focused on making sure that we resolve the NPAs well, we resolve those that are also on the criticized list well. That will level us out. That will require us, if we are going to grow in that 5% to 6% range, we are going to have to be close to $900 million to $1 billion net in order to achieve that rate.
Jim Lally: I am confident we can do it in a balanced way without any type of ridiculous focus and/or concentration in any one market or business to do so.
Andrew Liesch: Got it. Thanks. All my other questions have been asked and answered. I will step back.
Jim Lally: Thank you.
Keene Turner: Thanks, Andrew.
Operator: Your last question comes from the line of Brian Martin with Brean Capital. Your line is open. Please go ahead.
Brian Martin: Hey, good morning, guys. Just one or two from me. Just, Keene, just going back to the margin. I appreciate the color on that and the hedges. Just remind us for each rate hike, how to think about the impact to the margin. I know you are more neutral now, and you have given some commentary on the next quarter, kind of next couple quarters, but just remind us on the hikes what that does now with kind of the change in the neutrality.
Keene Turner: Yeah. It is $1 million to $2 million if all of our betas come through. But we are pretty focused on the deposit pricing front, and we have done a good job. So my expectation is that we will be slightly better there.
Brian Martin: Yeah. Okay. The deposit betas, I guess you are anticipating similar to kind of last cycle or just broadly today?
Keene Turner: Yeah, we have modeled 55%, but again, we expect to perform better than that.
Brian Martin: Yeah. Okay. Just your comment, Keene, earlier on the kind of the ins and outs on fees this quarter. Obviously, the five. You mentioned seven is kind of the non-core. Just the $5 million was a tax credit. Reconcile me that $7 million, just high level, what was the ins and outs to get to that seven?
Keene Turner: It is mostly the loss on ORE, and then there is a couple miscellaneous line items. But you got $1.5 million on ORE.
Brian Martin: Yeah. Okay.
Keene Turner: There is an other, other item of half a million dollars.
Brian Martin: Yep.
Keene Turner: Yep.
Brian Martin: Okay. That gets you there. Okay. Then just on maybe for Doug. I think, Doug, you mentioned, broadly, it seems as though that the California, your credit resolution is maybe more of a Q1 or more so in the Q1. Doug, I thought you mentioned there was something that could come, a credit you were going to exit quickly. I did not know if that meant just in terms of the progression of improvement in credit, what might be possible in the Q4.
Doug Bauche: Yeah
Brian Martin: if that was what you were mentioning.
Doug Bauche: Yeah. I think the one, Brian, that I had mentioned that I expected to exit more so in Q4 would be one of the ag credits that we had, as well as a non-performing loan, the owner-occupied real estate loan, the front end of that 504. So $7 million real estate loan and a $5 million C&I credit, I think we would expect to probably exit here in Q4. The timing of the Laguna portfolio, trust me, there is no one more anxious to exit that than I, but we just do not control all of that.
Brian Martin: Yeah.
Doug Bauche: But Brian, we have reiterated, right, just kind of where we are in terms of our confidence with the market and our buyers that are lined up on this. We will get there. It is just a matter of timing with the courts. But I think realistically, we are saying that is Q1 of next year before we really start seeing the monetization of sales occur in that Laguna portfolio.
Brian Martin: Yeah. I appreciate all the transparency and the thoughtful comments this morning. It is helpful. It is frustrating, I understand. Maybe just the last one for me, just on the efficiency and kind of operating leverage as we step into Q4 and Q1, can you just give some thoughts on kind of where you. In terms of are we expecting positive operating leverage as you move into 2027, kind of from this 59% type of level. That is my last question. Thanks.
Keene Turner: Yeah. It is going to be a daily fight. I do think we are focused on the key drivers there. We have made some moves and again, with some more growth in the loan portfolio, we are attacking it on both fronts. Being below 60% efficiency is great and again, if you just have kind of a normal quarter on fees, that gets a little bit better. We are optimistic that we are going to make some progress there. I think it is pretty clear we are focused on it and we are focused on returns and all of those fronts. Again, nothing happens quickly. We are methodical, we are deliberate, and we are going to continue to make progress.
Brian Martin: Okay. Thank you for taking all the questions, guys.
Keene Turner: Yep. Thank you, Brian.
Operator: There are no further questions at this time. I will now turn the call back to Jim Lally, President and CEO, for closing remarks.
Jim Lally: Kristen, thank you, and thank you all very much for joining us this morning and your interest in our company. Have a great day, and we will speak to you again at the end of Q4, if not sooner. Take care.
Operator: This concludes today's call. Thank you for attending. You may now disconnect. This event has now concluded. Thank you for joining Enterprise Financial Services Corp Q3 2026 Earnings Conference Call. The line will disconnect automatically.
