Enterprise Financial Services (NASDAQ:EFSC) reported lower second-quarter earnings as higher credit costs offset stable core operating performance, while management said loan growth, net interest income and capital levels remained solid.
President and CEO Jim Lally said the company earned $41 million, or $1.09 per diluted share, in the second quarter of 2026. That compared with $1.30 per diluted share in the first quarter of 2026 and $1.36 per diluted share in the second quarter of 2025. The results produced a return on average assets of 0.95% and a pre-provision return on average assets of 1.58%.
Net Interest Income Rises as Margin Expands
Lally said net interest income increased $2.6 million to $169 million, while net interest margin expanded two basis points from the linked quarter to 4.30%. He attributed the improvement to higher loan and investment balances, higher rates and stable deposit costs.
Chief Financial Officer and Chief Operating Officer Keene Turner said net interest income increased $3 million from the first quarter, largely due to higher earning asset yields and an additional day in the period. Interest income rose $4 million, including $3 million from loans and $2 million from investment securities, partially offset by lower earnings on cash balances. Interest expense increased $2 million, reflecting higher deposit interest expense, short-term borrowings and the company’s second-quarter subordinated debt issuance.
Turner said the company expects net interest margin to remain in the “mid to upper 4.20s” in the current interest rate environment. He said the second-quarter margin included some benefit from prepayment activity and that a “pretty good proxy” for the margin exiting the quarter was about 4.27% to 4.28%.
During the quarter, the company repositioned part of its securities portfolio, selling $180 million of investments with tax-equivalent yields in the low 3% range and reinvesting the proceeds into securities with tax-equivalent yields in the low 5% range. Lally said the transaction is expected to add $3.5 million in annual net interest income. Turner said the company realized a net loss of $6 million on the trade, which was mostly offset by $4.4 million in gains from the sale of Visa Class B common stock and a small parcel of land.
Credit Costs Increase on Two Commercial Charge-Offs
Credit quality was the central pressure point in the quarter. Lally said the company recorded approximately $14 million in charge-offs late in the period tied to two commercial accounts.
The first was a Texas-based commercial and industrial relationship that “failed on the integration of an expansion strategy” and had to be liquidated, Lally said. The second was an entity in the company’s sponsored finance group whose healthcare consulting business was disrupted after the Centers for Medicare and Medicaid announced a six-month moratorium on all new hospices and home health agencies.
Lally said the company had been generating positive cash flow and was current on all debt through the first quarter, but “things obviously deteriorated quickly” and the business ceased operations in early June. He said year-to-date net charge-offs stood at 31 basis points annualized and that management expects better results in the second half.
Turner said second-quarter net charge-offs totaled $13.6 million, up from $4.4 million in the linked quarter. Net charge-offs were 46 basis points of average loans, compared with 15 basis points in the first quarter. The provision for credit losses was $14.2 million, compared with $7.2 million in the prior quarter, mainly due to net charge-offs and loan growth.
Chief Banking Officer Doug Bauche said during the question-and-answer session that management expects charge-offs to normalize back toward the company’s 10-year historical norm of about 15 basis points. He said non-performing loans totaled $76 million, or 64 basis points, at quarter-end, and management believes that figure will normalize closer to 45 basis points over time.
Bauche also said the company reviewed other healthcare-related exposure following the CMS action. He said about $150 million of the nearly $12 billion portfolio involves payment through a Medicaid or Medicare process, but those loans are performing and diversified across the company’s footprint. Lally added that the moratorium was specific to new applicants for Medicare licensing and did not affect already licensed providers.
Loan Growth Meets Expectations
Loan balances increased by $200 million in the quarter, which Lally said was in line with expectations. Bauche said organic loan growth was driven by investor-owned commercial real estate and the commercial and industrial portfolio, including specialty lending niches such as life insurance premium finance, tax credit, sponsor finance and SBA lending.
Gross loan originations were up 32% from the prior-year quarter and 48% from the linked quarter, Bauche said. Commercial real estate growth was balanced across Kansas City, Phoenix, Dallas, Southern Nevada and Southern California, with new funded projects largely focused on pre-leased and stabilized industrial and retail properties.
Bauche cited examples of traditional C&I originations, including financing for a food distribution company in Arizona, a Kansas City manufacturer of made-to-order stainless steel HVAC systems and a Southern California manufacturer of truck and van body equipment used in utility, emergency and construction industries.
Within specialty lending, Bauche said SBA 7 owner-occupied real estate originations remained stable, with 32 new loans totaling $59 million. He said the company again ranked in the top 25 SBA originators in the country. Life insurance premium finance also remained a source of growth, with $42 million in quarterly net growth and 8% growth over the trailing 12 months.
Lally said the company remains focused on achieving mid-single-digit loan growth for the year. In response to analyst questions, he said growth prospects remain diversified across the company, including the Midwest, Arizona, San Diego, Nevada and life insurance premium finance.
Deposits Remain Stable as Mix Improves
Total deposits were flat for the quarter, but Lally said the mix improved as non-interest-bearing demand deposits increased modestly to 34% of total deposits. Overall deposit costs remained flat at 1.53%.
Bauche said core deposits increased $1.2 billion year over year, including deposits acquired in the First Interstate branch acquisition in the fourth quarter of 2025. He said traditional deposit outflows in the first half of the year are normal, with growth from geographic markets typically occurring late in the third quarter and into the fourth quarter.
Specialty deposits increased $62 million in the quarter. Bauche said property management deposits represented 42% of specialty deposits and 12% of total bank deposits, while community association deposits represented 39% of specialty deposits and 11% of total bank deposits.
With an 82% loan-to-deposit ratio, Bauche said the company continues to use disciplined pricing strategies to manage its blended deposit costs and protect net interest margin.
Capital Actions Include Buybacks, Subordinated Debt and Dividend Increase
Lally said capital remained “stable and strong” at quarter-end, with total stockholders’ equity of $2 billion and a tangible common equity to tangible assets ratio of 9.04%. Tangible book value per share increased to $42.30.
Turner said the company issued $175 million of 6.25% fixed-to-floating rate subordinated notes during the quarter, repurchased 382,000 shares for approximately $23 million and increased its quarterly dividend by $0.01 to $0.35 per share for the third quarter of 2026.
For the first half of the year, Turner said Enterprise returned about $75 million to shareholders through common stock repurchases and dividends. At quarter-end, the company had 249,000 shares remaining under its repurchase plan, and in July the board approved an additional 2 million shares.
Turner said the company’s operating results produced a 1% return on average assets and a 10% return on average tangible common equity. “While these results are below our expectations, our core business remains sound, and we expect to return to the level of profitability that is more in line with our standards,” he said.
About Enterprise Financial Services (NASDAQ:EFSC)
Enterprise Financial Services Corp. (NASDAQ: EFSC) is a bank holding company headquartered in Clayton, Missouri, operating through its primary subsidiary, Enterprise Bank & Trust. The company provides a comprehensive range of banking and financial services to individuals, small- and mid-sized businesses, and institutional clients. Its capabilities encompass deposit products, lending solutions, mortgage banking, and treasury management, supported by a full suite of digital banking tools and personalized client service.
In its commercial banking segment, Enterprise Bank & Trust offers lines of credit, equipment financing, commercial real estate loans, construction lending and agriculture lending.
