Enterprise Financial Services Corp Aktie

Hello, everyone. Thank you for joining us, and welcome to the Enterprise Financial Services Corp Third Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Jame Lally, President and CEO. Please go ahead.

Thank you all very much for joining us this morning, and welcome to our 2026 third quarter 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 2 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 3. 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 $0.01 to $0.36 per common share for the fourth quarter.

Turning to Slide 4, 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'll 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 second half of the year growth, producing 80% of this quarter's production. DDA to total deposits came in at 33%, and our loan-to-deposit ratio was 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 property that we've 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 second quarter 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 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 flag hotel in Southern California that we took into OREO in the quarter. This totaled approximately $2.6 million.

Looking closer at our nonperforming 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. I have great confidence that we'll continue to expand pre-provision returns, and you could also see that the normalization of credit is slightly above industry expectations produces a significant improvement to the return levels that we've reported over the last 2 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.

In my most recent travels and discussions with clients throughout our footprint, it's 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 garnering 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 6. total loans reached $12.3 billion at quarter end, representing a net quarterly expansion of $453 million or nearly 4% sequentially. The -- 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. 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 $538 million during the quarter to just over $3 billion. Similar to what we highlighted in Q2, new investor CRE fundings were centered on more 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 portfolios 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 7(a) 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 7 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 represents $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 8 and 9. 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% to $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. Noninterest-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 3 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% utilized 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 cost 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 nonrecurring 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, noninterest 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 linked quarter increase in the provision for credit losses was primarily due to the net charge-offs on 2 relationships, gym detail along with reserves for the increase in nonperforming loans and $453 million of loan growth in the period. Turning to Slide 13 with more details to follow on a 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%. The 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 million to $2 million per quarter or a couple of 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 noninterest expense in this analysis, we modeled that we are effectively neutral. However, for the most recent increase -- we have largely held noncontractual 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 of basis points higher in the fourth quarter. 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. Net charge-offs totaled $11 million in the third quarter, 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 nonperforming 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 and $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 nonperforming 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% and when adjusting for government-guaranteed loans, the ratio increases to 1.27% of total loans.

On Slide 17, third quarter noninterest 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 noninterest 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 cost 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 linked quarter, largely due to the expansion of net interest income. Our capital metrics are shown on Slide 19. The -- 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 -- 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 $0.01 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 nonperforming 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 nonperforming 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.

We will now begin the question-and-answer session. If you would like to retrain. [Operator Instructions] Your first question comes from the line of Jeff Rulis with D.A. Davidson. Jeff.

Keene and other 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 ORO. Any update on those have been contracted for sale. Just wanted to get an update on those. .

Yes, sure. So as we sit here today, we're 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 that 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 PSA's 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.

So if that's ongoing, I guess, just kind of narrowing the next couple of quarters is kind of vague and understanding that's 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's imminent, but yet, it's not real tangible. Any other detail you could offer there.

Yes. Jeff, it's Doug. And Jim made the point that relative to the large proportionate share of our nonperforming assets, it is the Laguna portfolio. And we are making good progress there. We don't obviously control the court's timing. But we are optimistic that we're 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 at about 6.3%, consistent really with the prior 2 quarters, but elevated and we would expect, based upon the progress that we're making to see those numbers come down in crit-class more to our normal historical operating percentages of 4.5% to 5%. And we'll see that through a combination of payoffs and upgrades as well as some of these credits that have been downgraded to showing improving operating trends.

So through the combination of payoffs and upgrades, we should see crit-class return back to that 4.5% to 5% range. And as we get through the Laguna portfolio, obviously, we'll see our nonperforming assets return back to a much more normalized level of closer to 45 to 50 basis points. We did have, Jeff, as you heard, Jim and Keene's comments, we did have a hotel project in Southern California, 284-room flagged hotel that we took into OREO in the quarter, and we did take it to $2.5 million write-down on that asset.

If I could hop to the noninterest income just the expectations for maybe a normalized level there, if we -- maybe an update on the tax credit line as well as the Well, just sort of expectations, May, just cleanly speaking, the fee income line run rate we could expect? .

Yes, Jeff, this is Ken. We had roughly $7 million of negative impact there, mostly in the tax credit line item. We're working diligently to try to eliminate that from the income statement. Even if just rates come down and really don't do much, that line item won't have an impact. And to the extent the ORE was a technical timing issue -- but I think to Jim and Doug's comments, the overall for the total work out, I think, remains positive and optimistic. But I think 4Q, we look at the 13% and had 7 back, and that's a good run rate for us. And if we can just continue to repeat that for the next several quarters, we'll be happy. .

Your next question comes from the line of Daniel Tamayo with Raymond James.

I got a few more on credit, if you don't mind. But I guess, first, the increase in NPAs, you called out a few different categories there, including several million of ag credits. Just curious if you could give us a little color around what was driving the ag in particular. .

Yes, Dan, -- so overall, the ag portfolio for us is down to less than $50 million today. And there was 2 credits in that portfolio that we took in the NPAs. And we did looking at the collateral that we have, which is largely equipment and farmland and actually some crops in the ground. And 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 1 was a distributor. So it really wasn't even in the farming business, if you will. And that, too, we believe, through a refinance will be taken care of here in the fourth quarter.

Doug, any more there?

No, I wouldn't -- Jim pointed out, it's 2 credits. One is really a road crop farmer, and it is largely secured. It's $13 million largely secured by farm ground. And the other one, as Jim pointed out, was really a company that's a distributor of seed and fertilizers and chemicals used in farming operations and it's today, $4.5 million, and we would expect to exit that credit quickly.

So other movements, though, Daniel, that you're mentioning $7 million into nonperforming 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. and the other 1 in materiality, about a $5 million C&I credit to a metal fabrication and installation company in Southern Nevada.

That's helpful. Also takes me into my next question, which is the SBA portion of your balance sheet. Curious how you're seeing that react to higher rates and how you're thinking about if we do get rates higher, either with just 1 more hike in summer or further certainly some folks have been talking about having some concern with SBA overall and you guys are forgetting in there...

We would share that concern in terms of defaults in the portfolio, Daniel. It's not only higher rates, but overall higher inflationary pressures are causing challenges for some of the smaller, less capitalized businesses. So 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. So average loan sizes in our book, about $1.2 million, $1.3 million. Keene show me $1.5 million average loan size. So these are owner-occupied commercial real estate buildings and while defaults will be up loss given default should be minimal as we go forward.

And then lastly, just wanted to come back to the previous question around your comment on kind of what core normalized profitability would be without the noise. And just kind of 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're talking about?

Yes. I'm maybe going to stay a step back from timing, but I'm happy to talk about the level. So in the quarter, if you normalize out, really, the noninterest income stuff and maybe some of the carrying costs for the ORE properties, your PPNR is about 180 basis points. And just from a range perspective, if you get even net charge-offs down from the current level to around 25 basis points, you're knocking down at 130 ROA. So 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 out of the run rate.

But I think the underlying fundamentals, the PPNR is growing, and it would have been even with the credit where it is it would have been a pretty good quarter if you didn't have the noninterest income hits in and of itself. So we're obviously not happy with that, but I think it's -- we're happy with the trajectory of the profitability and I think we feel like in the next few quarters, we're going to see some progress here, and we're going to return to a level that we're proud of.

Our next question comes from the line of Brandon Rud with Stephens Inc.

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'm just curious, is that have an impact on your expectations for buybacks near term? So should we anticipate that those may moderate a bit?

So I would say that while we're at the bottom of our range, I think we continue to be optimistic, and we continue to expect and plan that we're going to net accreted capital. We had a pretty good growth quarter this quarter. I think we expect that will continue. But I think we'll be -- we'll continue to be active in the buyback, maybe not quite as quite as assertive as when we were at 913, being down at 813, but I think we'll still see some buyback activity here in 4Q. .

And then maybe 1 on expenses. I said there are some moving parts in there. So 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?

Yes. So I would expect that x deposit costs, 4Q run rate is relatively level to where 3Q is -- and then I expect that deposit ECR line item with growth and what happened with the Fed fund hike and what was contractually tied to subfunds we expect that line to move up $1.5 million to $2 million sequentially. .

And I guess if I could squeeze 1 more in on that topic. Should we think about the deposit cost line in noninterest 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.

Well, I don't know that there's necessarily acceleration there. I think it's fairly linear on that book. There is a 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 cropped up on us a little bit over the last couple of years. And with some of the liquidity stress in the industry, and we're working diligently to try to improve upon that. And I think that's sort of baked into the third quarter results here, and I think we expect that, that will continue, but we're still expecting growth in those balances to continue to help fund the loan growth that Jim and Doug both talked about. .

Your next question comes from the line of Damon DelMonte with KBW.

You're all doing well. First question, Keene, on the margin, I heard the commentary you expect a couple of basis point increase probably here in the fourth quarter. Just kind of curious how you're thinking about '27, if we do have additional rate hikes or if we don't, do you still feel like there's just an upward bias kind of a grind higher just given the optimism on loan growth and ongoing efforts to control deposit costs.

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 4Q here with call it, mid-30s 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.

Great. And then with regards to like provisioning and kind of ballparking, how we think about that, obviously, the last 2 quarters were pretty elevated. -- if you go back to the first quarter of this year and kind of the back half of last year, is that -- I think the average, is that a reasonable expectation for the forthcoming quarters?

Yes, I would say nothing has really changed in terms of provisioning for new loan growth. I think we're emphasizing businesses that have a lower risk profile. We had very good life insurance growth this quarter. SBA has been good. Both of those are low provision requirements and have had really tremendous loss history and performance. And then -- so we're 100 basis points, 115 basis points kind of on new growth and then we tend to think about net charge-offs as a spectrum. We're at the high end of that right now. The 25 basis points isn't where we necessarily want to land. But given where we've been, that would feel like a victory in the short term. So that's how we're thinking about it. And we need to deliver it, not just say it, but that's how we're thinking about provisioning. .

Your next question comes from the line of Nathan Race with Piper Sandler. .

Keene, I think in your comments, you mentioned you're 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 in the next quarter two.

I would say, yes, the next quarter 2 is a reasonable expectation for how we're working it. We've been working on it for a long time. And I would say that we're not exiting the business. We're just changing the way we participate in it. We're going to continue to be an active lender in that business. That's what we do best. We don't -- 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're looking to make some steps there. And ideally exit that, it's already market fair value every month, every quarter. So we're hopeful that we can get that moved out. .

I'll add to that. We've also looked at other businesses in our company in areas and markets and that were subscale, and we've already taken that out of our run rate of expenses. If you think about what we call business banking, we're 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 where our brand for granular micro businesses isn't as great. We've exited that in those markets -- we also recently announced that we don't -- we're inviting 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.

Got it. That's helpful. And I don't think there's any correlation, Key. But as you get out of the state tax rate business, is there any impact on the go-forward tax rate in terms of what you're expecting there?

No. The tax rate will continue to be sort of in line with where it is today, roughly 22% is the number that's top of mind for me. And we will use some of those in the planning, but we'll still have access to it. It's not like we were stacking that up and we were really using it to drive down the tax rate. So we use it in kits and NAS, but it's not really going to have a big impact there. .

Okay. Great. And then just 1 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're 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'm just trying to get a sense of kind of what incremental growth on both sides of the balance sheet suggested for the margin. .

Yes. Let me start with just maybe the overall outlook in tenure within the markets, and then we can talk about where we're 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's going to be mid- to higher single digits, and I believe in that whole art as I look at the pipeline. As we turn the corner in the '27, it feels that we'll settle in that mid-single. And -- but remember, as you build the plant, it starts off in the first quarter. It's a little bit slower for us and it picks up throughout the year just due to some idiosyncrasies of our portfolio. But 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. Certainly, there are some segments that aren't as bullish, if 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's remarkable and very optimistic in terms of what our clients are thinking and doing. But Doug, maybe you can talk about how we're originating and rates and things of that nature.

Well, Jim mentioned too, obviously, it's highly competitive out there, and we do see some compression in terms of credit spreads. But that's why discipline on the liability side of the balance sheet is so important for us as well. And we've done a good job of controlling those deposit costs to combat the compression of spreads on the origination side. But Listen, we priced for a holistic relationship. And 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're originating now is probably lower risk categories, we saw great production in the life insurance premium finance space were $100 million in the quarter, up $150 million year-to-date. And that typically is a back-ended growth business as well. And so we'll see contribution from that in the fourth quarter.

But listen, we were down 100 in Q1. We were up 200 in Q2, and we had 450 here in Q3. We're 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 Ken pointed out earlier, we'll have adequate deposit growth as well to fund that. So I think that's kind of the outlook. And we just feel good about the diversification. It's coming from all of our geographic markets. We've got good momentum in North Texas and Southern Nevada and Arizona will contribute significantly here in the fourth quarter.

And Doug, you bring a good point. 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 1 market. right? We've got 7 great markets and many national businesses to find the growth. So the charge to the team is bringing the very best and then we'll continue to do that.

Your next question comes from the line of Andrew Liesch with Stone Financial.

Just following up on a comment you just made, Jim, on loan growth for next year. You mentioned mid-single digit. I guess what's going to it seems like you're going exceed that this year. So what would cause growth to slow down? I mean a lot of your products aren't 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? It's hearing really positive momentum commentary.

Yes. So Andrew, I would look at it this way. As Doug mentioned, the first quarter we were flat to negative and then we picked up growth. Really, we're running at that run rate now for a full year at that mid-single-digit pace okay? So to me, we don't want to run the machine too hot. Additionally, going back to our credit discussion, we're very focused on making sure that we resolve the NBA as well. We resolved those that are also on the criticized list well. And so that will level us out. That will require us if we're going to grow in that 6%, 5% to 6% range we're going to have to be close to $900 billion to $1 billion net in order to achieve that rate. And I'm confident we can do it in a balanced way without any type of ridiculous focus and our concentration to any 1 market or business to do so.

Your last question comes from the line of Brian Martin with Brean Capital.

Just 1 or 2 for me. Just Ken, 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're more neutral now, and you've given some commentary on the next quarter kind of the next couple of quarters, but just remind us on the hikes, what that does now with kind of the change in the neutrality.

Yes. So it's $1 million to $2 million if all of our betas come through. But we're pretty focused on the deposit pricing front, and we've done a good job. So my expectation is that will be slightly better there. .

Okay. And the deposit betas, I guess, you're anticipating similar to kind of last cycle or just broadly today?

Yes. We've modeled 55%. But Again, we expect to perform better than that. .

And just your comment, Keene, earlier on the kind of the ins and outs on fees this quarter. Obviously, the -- you mentioned 7% is kind of the noncore. Just the $5 million was a tax credit. What reconciled that $7 million, just high level, what was the ins and outs to get to that 7.

It's mostly the loss on ORE and then there's a couple of miscellaneous line items, but you got $1.5 million on ORE and then there's an other item of $0.5 million. So yes. .

That gets you there. Okay. And then just on -- maybe for Doug, I think, Doug, you mentioned I guess broadly, it seems as though the California credit resolution is maybe more of a first quarter or more so in the first quarter. Doug, I thought you mentioned there was something that could come -- credit you're going to exit quickly. I didn't know if that meant -- just in terms of the progression of improvement in credit, what might be possible in the fourth quarter, if that was your mention.

Yes. No, I think the one, Brian, that I had mentioned that I expected to exit more so in the fourth quarter would be 1 of the ag credits that we had as well as a nonperforming 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 the fourth quarter. The timing of the Laguna portfolio trust me, there's no 1 more anxious to exit that than I. But we just don't control all of that. But I would just reiterate, 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'll get there. It's just a matter of timing with the courts. But I think realistically, we're saying that's Q1 of next year before we really start seeing the monetization of sales occur in that Laguna portfolio.

Yes. No, and I appreciate all the transparency and the thoughtful comments this morning. It's helpful. It's frustrating, I understand. So -- and maybe just the last 1 for me, just on the efficiency and kind of operating leverage as we step into fourth quarter and first quarter. Can you just give some thoughts on kind of where you -- in terms of -- are we expecting positive operating leverage as you move into '27 kind of from this 59% type of level. And that's my last question.

Yes. I mean it's going to be a daily fight. And -- but 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're attacking it on both fronts. So the -- being in the 60% -- below 60% efficiency is great. And again, if you just have kind of a normal quarter on fees, that gets a little bit better. So we are optimistic that we're going to make some progress there. And I think it's pretty clear we're focused on it, and we're focused on returns and all of those fronts. So again, nothing happens quickly. We're methodical, we're deliberate and we're going to continue to make progress. .

There are no further questions at this time. I will now turn the call back to Jim Lally, President and CEO, for closing remarks.

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'll speak to you again at the end of the fourth quarter, if not sooner. Take care.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone. Thank you for joining us, and welcome to the Enterprise Financial Services Corp. 2026 Earnings Conference Call. [Operator Instructions]

I will now hand the conference over to Jim Lally, President and CEO. Please go ahead.

Thank you all very much for joining us this morning, and welcome to our 2026 second quarter 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 2 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 3. For the quarter, we earned $41 million or $1.09 per diluted share. This compared to the $1.30 that we earned in the first quarter of this year and the $1.36 that we earned during the second quarter of 2025. This level of performance produced a return on average assets of 95 basis points and a pre-provision ROAA of 1.58%.

While our core operating performance remained stable, a larger-than-expected provision expense impacted the operating results for the period. During the quarter, we took the opportunity to reposition our securities portfolio by selling investments with tax equivalent yields in the low 3s and reinvesting the proceeds into securities with tax equivalent yields in the low 5s, resulting in an additional $3.5 million in net interest income annually.

Pulling this lever resulted in a current period pretax loss of approximately $6 million that was mostly offset by over $4 million in pretax gains on the sale of Visa Class B common stock and the sale of a piece of land. Net interest income expanded by $2.6 million to $169 million, and net interest margin expanded 2 basis points to 4.30% when compared to the linked quarter.

Higher loan and investment balances, coupled with higher rates and stable deposit costs contributed to these results. Given the increasingly competitive environment that we find ourselves in, I'm pleased with how we were able to defend margin with our relationship-oriented business model. 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 remained stable and strong, with total stockholders' equity at $2 billion and the tangible common equity to tangible assets ratio of 9.04%. Additionally, our tangible book value per share increased to $42.30. Other balance sheet activity during the quarter included the repurchase of 382,000 shares, the aforementioned balance sheet restructure and the issuance of $175 million of 6.25% fixed to floating rate subordinated notes. All 3 of these tactics put us in great shape for the growth and expanded profitability for quarters to come.

Keene will discuss all 3 of these strategies in his comments. Turning to Slide 4, you will see that loan balances grew as we expected by $200 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, and we expect similar activity for the remainder of the year.

Our diversified deposit base continues to be a differentiator for us. While overall deposit growth was flat for the quarter, we did see a positive remixing that resulted in DDA growing modestly to 34% of total deposits and overall cost of deposits remaining flat at 1.53%. We are working on several exciting opportunities in this area and when combined with our normal back of the year swell, should produce a similar level of deposit growth that we have achieved in the years past.

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. In my opening comments, I mentioned a higher provision expense in the quarter than we expected. Late in the quarter, we experienced approximately $14 million in charge-offs related to 2 commercial accounts. The first of these was a Texas-based C&I relationship that failed on the integration of an expansion strategy and subsequently had to be liquidated.

The second of these was an entity within our sponsor finance group whose health care consulting business model was severely disrupted when the Centers for Medicare and Medicaid announced on May 13, a 6-month moratorium on all new hospices and home health agencies. With this change, ownership concluded that there was not an opportunity to rehabilitate the business given this nationwide regulatory action. Through the first quarter of 2026, this company was generating positive cash flow and was current on all of debt, but things obviously deteriorated quickly and the business ceased operations abruptly in early June.

With the charges taken in Q2, our net charge-offs year-to-date are 31 basis points annualized, and we expect to have better results in the back half of the year. All other credit statistics were relatively stable in the quarter. On our first quarter earnings call, I reported that we had 4 of the 7 Southern California OREO properties under contract. Since then, a party has filed an appeal to the bankruptcy court's ruling, which challenges title to one of the properties that is not under contract.

This appeal has delayed our ability to close on those that are contracted for sale. The buyers of these properties remain committed, and we fully expect to resolve this and execute on the disposition. There's a table in our press release that provides some insight and further clarity with respect to our NPAs. You can see that $135 million of the $160 million of nonperforming assets, net of government guarantees are secured by real estate that mostly has been recently appraised.

These values support our comfortability and we expect to resolve these with little or no loss. I would characterize the remaining $25 million or 14 basis points as normal for our company. Turning to Slide 5. You will see our priorities for the remainder of the year. I realize that credit is not where it needs to be, and we are focused to have a path to materially improve this over the next few quarters. The momentum we have in the business is solid and adding core relationships and reaching our mid-single-digit growth for the year is another key focus and certainly attainable.

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 provide a better overall associate and client experience.

In my most recent travels and discussions with clients throughout our footprint, it is encouraging to hear the optimism that they have despite some headwinds related to 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 have a clear and robust run ahead of them. We're also still seeing pockets of industrial and retail demand in faster-growing markets in the Southwest.

However, increased costs related to new construction could pose a challenge for some projects to reach desired return levels and subsequently could push back the commencements of these projects until later in 2026 or early 2027. Competition for new clients is fierce, but we work extremely hard on our funding base and our consistent model of delivery such that we should continue to garner our fair share of the market in all of our geographies and businesses for the foreseeable future.

With that, I would like to turn the call over to Doug Bauche. Doug?

Thank you, Jim, and good morning, everyone. Consistent with our expectations, our teams executed well on the developing pipeline of quality CRE and C&I opportunities, leading to $200 million in organic loan growth in the quarter. Turning to Page 6, you'll see that the loan growth occurred in our investor-owned CRE secured portfolio and our C&I book, inclusive of our specialty lending niches of life insurance premium finance, tax credit, sponsor finance and SBA. Gross loan originations were particularly strong in the quarter, up 32% and 48% over the prior year and linked quarters, respectively.

Growth in our investor-owned CRE portfolio was balanced between Kansas City, Phoenix, Dallas, Southern Nevada and Southern California. New CRE funded projects in the quarter were largely centered around pre-leased and stabilized industrial and retail projects as we expanded relationships with existing clients and onboarded new high-quality developers and investors in our markets. Examples of traditional C&I originations in the quarter include working capital and owner-occupied real estate financing for a food distribution company in Arizona, a manufacturer of made-to-order stainless steel HVAC systems in Kansas City and a Southern California-based manufacturer of truck and van body equipment used in the utility, emergency and construction industries.

Within our specialty lending business lines, originations of SBA 7(a) owner-occupied real estate loans remained stable in the quarter with 32 new loans funded totaling $59 million, ranking us again in the top 25 SBA originators in the country. Additionally, we continue to capitalize on our strong brand and momentum in the life insurance premium finance market with strong originations leading to $42 million in quarterly net growth and 8% growth over the trailing 12 months.

Page 7 demonstrates the diversity of the loan portfolio across our geographic markets and our specialty lending divisions. Roughly $7.6 billion or 65% of total loans are attributed to our Midwest, Southwest and West region community banking markets, while $4.2 billion or 35% is from our specialty lending business lines. Previously discussed reductions in our low-income housing tax credit portfolio in Q1 2026 have muted the overall growth in our specialty lending lines to only 3% year-over-year, while our geographic markets have grown 8% or $570 million year-over-year, inclusive of the loans acquired in the First Interstate branch acquisition in Q4 of 2025.

Coming off a solid quarter of loan originations and net growth, I'm encouraged by the depth and diversity of our current pipeline of new opportunities yet to come. We are seeing resilient traction and growth, particularly from San Diego, Dallas and Southern Nevada, complementing our historic strongholds in St. Louis, Phoenix and Kansas City.

Turning to Slides 8 and 9. While total deposits remained relatively flat quarter-over-quarter, core deposits are up $1.2 billion year-over-year, inclusive of the branch acquired deposits in Q4 of '25. The mix of our deposit base remains favorable with 34% noninterest-bearing compared to 33% in the linked quarter. Traditional outflows in the front half of the year are normal for our deposit portfolio, with growth particularly from our geographic markets occurring in late Q3 and into Q4.

Specialty deposits grew $62 million in the quarter, which is consistent with the growth in the prior year quarter. The breakout of deposit mix and growth within the specialty channels is reflected on Slide 10. Property management deposits account for 42% of specialty deposits and 12% of total bank deposits, while community associations account for 39% of specialty deposits and 11% of total bank deposits.

As we've said during previous calls, the branch-light specialty deposit verticals provide us an attractive cost-adjusted source of funding that complements our community banking deposit base. With our favorable 82% loan-to-deposit ratio, we continue to execute disciplined pricing strategies to effectively manage our blended cost of deposits to protect net interest margin.

Continuing with deposits, Slide 11 reflects our deposit base across our commercial, business banking and consumer and specialty deposit channels. The strength of our commercial base with nearly $5 billion in deposits is well complemented by the granular and diverse nature of our business banking and consumer channels, contributing $4.5 billion in deposits with an attractive 1.25% weighted average cost of funds. The consistency, stability and balance of our deposit base across these business channels remains a core strength of our company.

And with that, I'll turn the call over to Keene.

Thanks, Doug, and good morning, everyone. Turning to Slide 12. We reported earnings per share of $1.09 in the second quarter on net income of $41 million. Excluding certain nonrecurring items, earnings per share on an adjusted basis was $1.13 compared to $1.31 in the linked quarter. Pre-provision earnings totaled $68 million, a $2 million decrease from the linked quarter. The primary driver of the decrease was lower fee income, which was partially mitigated by a continued expansion in net interest income.

On the cost side, noninterest expense was relatively stable compared to the first quarter. The linked quarter increase in the provision for credit losses was primarily due to the loan charge-offs from the 2 relationships Jim detailed, along with reserves for $200 million of loan growth in the period.

Turning to Slide 13 with more details to follow on 14. Net interest income in the second quarter was $169 million, an increase of $3 million from the first quarter, which was largely attributable to higher yields on earning assets and an additional day during the period. Interest income increased $4 million from the prior period, including $3 million of loan income and $2 million from investment securities, partially offset by lower earnings on cash balances.

Interest expense increased $2 million compared to the linked quarter, including $1 million in deposit interest expense, along with additional costs on short-term borrowings and our second quarter subordinated debt issuance. The net interest margin for the second quarter was 4.30%, an increase of 2 basis points from the linked period. Earning asset yields expanded by 5 basis points, led by a 5 basis point increase in loans, including some favorable discount accretion and an additional 8 basis points on securities.

The rate on loans booked in the quarter was 6.58% and the average tax equivalent purchase yield on investments was 5.03%, both of which improved the yield on each of those asset classes. The cost of interest-bearing liabilities increased 2 basis points, mainly due to higher interest-bearing deposit balances, short-term FHLB advances and the recent sub debt issuance. Net interest income remains slightly asset sensitive, primarily in parallel interest rate simulations with each 0.25 point cut in rates affecting net interest income $1 million to $2 million per quarter or a couple of basis points of net interest margin.

Including deposit-related noninterest expense in this analysis, we modeled that we are effectively neutral as we continue to have success growing the related deposit vertical balances. We also added $200 million in loan hedges over the last several months to further reduce sensitivity to interest rate movements. We completed a modest repositioning trade on $180 million in investment securities in the latter part of the quarter, realizing a net loss of $6 million and adding $3.5 million in annual earnings.

We offset the majority of this loss by selling Visa shares and a small parcel of land that generated a combined gain of $4.4 million. The trade added 10 basis points to the portfolio yield and approximately 2 basis points to margin without any material change in the overall duration of the portfolio. We anticipate margins to remain in the mid- to upper 420s in the current interest rate environment. While the yield on asset additions and resets has been accretive and the repositioning trade is beneficial, we also expect to see some modest pressure on funding costs with a full quarter of the sub debt issuance at 6.25% and rates on brokered and wholesale balances moving slightly higher.

Slide 15 reflects our credit trends. Net charge-offs totaled $13.6 million in the second quarter compared to $4.4 million in the linked quarter. As previously discussed, the charge-offs were primarily related to 2 credits that accelerated to a loss position at the end of the quarter. The ratio of nonperforming assets to total assets increased by 5 basis points compared to the linked quarter, primarily due to the addition of the $16 million loan secured by a flagged hotel in California.

Net charge-offs totaled 46 basis points of average loans compared to 15 basis points for the first quarter of 2026. The provision for credit losses was $14.2 million compared to $7.2 million in the linked quarter. The provision was mainly due to net charge-offs and to a lesser extent, loan growth. Slide 16 shows the allowance for credit losses. The ratio of allowance to total loans decreased to 1.17% compared to 1.21% at the end of the first quarter of 2026. When adjusting for government guaranteed loans, the ratio increases to 1.27% of total loans.

On Slide 17, second quarter noninterest income was $13.5 million, a $5.6 million decrease compared to the linked quarter. The decrease was primarily due to the net loss on the investment portfolio restructuring and lower tax credit income from a decline in projects carried at fair value. The benchmark interest rate used to value these projects increased in the quarter, driving the decline in fair value.

Noninterest income was also impacted by lower levels of private equity and community development distributions. We also elected not to sell SBA loans as we were evaluating the sale of certain OREO properties in the quarter that may have generated a potential gain. As Jim noted, recent developments on those properties have delayed the timing to a later date. We did, however, take the opportunity to sell a small parcel of land at a gain to also offset the investment portfolio restructure.

Turning to Slide 18. Second quarter noninterest expense of $116 million was relatively flat with the linked quarter with a few movements among various line items. Employee compensation and benefits declined by $2.6 million due to the seasonal impact on payroll taxes and certain benefits. Deposit costs increased $1.8 million quarter-over-quarter, largely driven by an additional day in the quarter and the expiration of certain unused allowances that reduced expenses in the first quarter. Other expenses increased by $1.4 million from the linked quarter, primarily due to the recovery of a credit card loss that reduced expenses in the first quarter.

The core efficiency ratio was 61.1% for the first quarter compared to 60.2% in the linked quarter. Our capital metrics are shown on Slide 19. Tangible book value per share increased approximately 9% on an annualized basis to $42.30, and our tangible common equity ratio of 9% was stable with the linked quarter. Our capital management actions in the quarter included the issuance of $175 million of subordinated debentures to bolster total risk-based capital, the repurchase of 382,000 shares of common stock for approximately $23 million and an increase to the quarterly dividend of $0.01 to $0.35 per share for the third quarter of 2026.

These actions have helped to reduce our weighted average cost of capital while ensuring that our regulatory capital levels remain a strong foundation to support the balance sheet. For the first half of the year, we have returned approximately $75 million to shareholders through common stock repurchases and dividends.

As of the end of the quarter, we have 249,000 shares remaining in our current repurchase plan. In July, the Board approved an additional 2 million shares to the plan. With that, we can continue to opportunistically manage our excess tangible common equity. Our operating results drove 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.

I appreciate your attention today, and we will now open the line for questions.

[Operator Instructions] Your first question comes from the line of Daniel Tamayo with Raymond James.

Yes. Maybe just if you could just frame the decline in the charge-off activity that you're expecting in the back half of the year for us. I think you said you expect that to come down and that kind of the underlying outside of these losses, the underlying loss rates remain solid at roughly 15 basis point range. But if you can kind of give us a thought on timing and size of the decline in the back half, that would be helpful.

Daniel, it's Doug. Listen, let me just kind of break it down in some buckets here. As we had pointed out, right, there's $160 million of nonperforming assets, $84 million of which are in other real estate owned today that we've largely discussed. It's the $77 million that makes up the Laguna, California portfolio that we're highly confident in our carry balances given our commercial buyers on 4 of the 7 properties and active interest on the remaining 3.

The rest of the OREO portfolio is largely made up of 2 SBA loans related to properties that we foreclosed on totaling $5 million, where we have the 75% SBA guarantee on any deficiency that's realized from the sale of that OREO, which we really expect to be minimal, if any. So that leaves nonperforming loans, which totaled $76 million or 64 basis points at the end of the quarter, which we believe will normalize to closer to 45 basis points over time.

And of that bucket, $76 million, roughly $50 million of that or 2/3 of nonperforming loans are secured by real estate and the balance or 1/3 or $25 million secured by C&I-related credits. So with that, I would expect our charge-offs going forward to normalize back to kind of our 10-year historical norms, which is 15 basis points. And I think that's the rate that we would expect against that level of nonperformers and the quality of the balance of our portfolio.

That's great color, Doug. I appreciate that. So just a follow-up on the credit side. The Medicare change that you described that impacted the -- one of the big charge-offs in the second quarter, -- anything else in the portfolio you think might be impacted by that? I'm not sure if you've done a kind of a deep dive yet on that, but...

We have. Yes, there's roughly -- in the entire portfolio is about close to $12 billion, it's about $150 million or so that involves payment through a Medicaid, Medicare process. But these are treatment centers and assisted living and traditional things of that nature with other assets behind it. So we've looked at it, and those loans are performing well and diversified throughout our footprint.

And Daniel, it's Doug. I just want to make a distinction because that moratorium from CMS was specific to new applicants for Medicare licensing, and that moratorium did not affect those that are already licensed and practicing and providing services for Medicare and Medicaid reimbursement. So this particular credit was unique and that it was a consulting business that was largely engaged in qualifying applicants for Medicare, Medicaid recipients.

Great. Alright. Well, thank you for all the color on the credit side. Appreciate it guys. I will step back.

Thank you.

Your next question comes from the line of Jeff Rulis with D.A. Davidson.

Keene, on the margin, I Just wanted to make sure I heard that right. It looks like the go forward is that maybe the tail of benefit from the restructure is muted by maybe the sub debt impact and then -- so kind of a wash and then just regular way kind of a core margin slight pressure is kind of where you get to the range. Do I have the pieces of that right that's maybe oversimplifying, but just checking.

No, I think that expresses the high level. And then I would say the upside case is to the extent that we continue to have strong loan growth in sequential quarters, we expect that, that will further strengthen net interest margin given where the loan to deposit is. So -- but yes, I think we feel pretty good about, absent any changes that margin is pretty stable.

Keene, do you have the June average on the margin? And do you think that's a fairly good read on the core as you came out of the quarter?

Yes. The 4.30% is really like 4.27%, 4.28%. We had some prepayment activity that benefited the total quarter in the period. So yes, I think that's a pretty good proxy for moving forward.

Okay. And Jim, I wanted to circle back on the -- just the puts and takes of the OREO. It sounded like you said maybe one of the properties not under contract appealed, which is holding up the sale of the 4 that other -- excuse me, that are under contract.

Yes. The fact of the matter is the order from the bankruptcy court that was dismissed was encompassing of all 7. And because there's an appeal on one, it creates a bit of a cloud for the entirety of the portfolio. And we're confident relative to what's in front of us. It's just a matter of time. We just need the attention of the courts to look at these last couple of appeals and put them aside so we can go ahead and move forward with what's planned.

And on the -- maybe the other properties that are not under contract, you said there's interest. Are those closer to being? Maybe it's interrelated with if there's bankruptcy issues or appeals, it holds it up. But is there a movement on that -- go ahead.

Yes, there's high interest. And based upon.

But no contract.

There's no contract in hand, no.

Okay. Got it.

I'll just say we have received contract offers on the other 3. The challenge, Jeff, is we can't go into a contract with new parties that require us to pass title to them within a specified period of time because this appeal is going to require the ruling from the appellate court. And we just, unfortunately, don't control that timing. We're highly confident in what the outcome will be. And in time, this will satisfactorily resolve itself. But suffice it to say, there's a high degree of interest, and we have had offers and offers pending right now in the other 3.

And I'll just finally add to this. The parties of interest of the 4 that we've talked about remain highly engaged. We talk to them often. I was just with one of them last week, and there's no, no trepidation or what have you. So we're very confident that they'll remain patient with us.

Okay. I appreciate the backdrop there. Maybe just one last one on the fee income side, certainly, the tax credit impact in the quarter, but kind of pretty low across the board on a number of fronts, even once you exclude the one-timers, just try to get a sense for the run rate on fee income. It seems like this is certainly a low watermark, but expectations on maybe the second half of -- in the overall noninterest income.

Yes. I think, Jeff, maybe if you look back to 1Q, I think that's a little bit more of what we would expect on a recurring basis. I do think that we expect the tax credit line to at least breakeven for the year. I know that that's not anything that's material, but we don't expect that to be a negative consistently moving forward that there will be activity or reversals of the fair value there. And then we do expect to resume our posture of selling SBA loans. So again, I think in my comments, we expected there to be maybe some more one-timers and you were kind of poking around at that.

And just given the timing of when everything came together, we're just -- we're a little light in that line item. We didn't sell SBA loans, but we'll earn interest income on those, and it will strengthen margin in other places of the business. So unfortunately, just a little bit of bad timing and PPNR fundamentals, I think, as I view them are strong and improving. So we feel good about it rolling forward.

Your next question comes from the line of Nathan Race with Piper Sandler.

This is Adam Kroll on for Nate Race. Yes. So maybe just starting on the loan growth guide for the mid-single-digit guidance. It imply a little pickup in growth in the back half of the year. So I guess I'd be curious if you could dive into where the pipeline stands today and sort of what segments you see driving that growth?

Yes. So this is Jim. I'll just say this that to me, it's very similar to what we saw in the first half. It's throughout the company. We've got great momentum here in the Midwest for sure. Strength of Arizona, and Doug had mentioned San Diego and Nevada will continue. And then the life insurance premium finance certainly is a bright point in our business. So it's really diversified throughout the portfolio and the markets, and that's really by design and how we built the company.

Got it. I appreciate the color there. And maybe for Doug or Jim, I was wondering if you could provide some color on what you're seeing from a pricing perspective. From your comments, it sounds like loan yields are still coming on above the portfolio, but would just be curious to hear what you're seeing in terms of competition there.

Yes, Adam, it's Doug. Listen, it's a highly competitive market. There's no question. There's pressure on loan yields today in terms of new originations. But I think, listen, we take a disciplined relationship pricing view on everything that we originate. And we're going to be competitive in the market to continue to grow and originate at the clips that we expect. But I think, listen, we're in that 6.25%, 6.5% type probably origination rates.

And then again, if you're not familiar, Adam, the duration of our portfolio is relatively short. Absent the SBA portfolio that originates with longer-term maturities and repricing, the balance of the portfolio is typically a 3- to 5-year type maturity. And again, I think we just exercised pretty good discipline in terms of both variable and fixed rate pricing, and we price to market to win and then complement that with the ancillary services that we sell through to those relationships.

Got it. And then last one for me, maybe for Keene. Just expense growth expectations for the back half of the year?

Yes. I think really the only material growth that we expect in the back half is maybe just a $1 million to $2 million per quarter step-up in deposit costs running through noninterest expense. I think we're looking to make sure we're being optimized and efficient and maybe we can continue to whittle away at some of the line items to mitigate that, but really modest quarterly step-up really driven by that line item and growth in that business is what we expect.

Your next question comes from the line of Damon DelMonte with KBW.

Keene, just to follow up on the last comment on the expenses. You said $1 million to $2 million step-up in deposit costs. Is that like per quarter? Or is that like kind of in aggregate off of second quarter numbers during the next 2 quarters?

Yes. I mean I think it goes up $1 million 2Q to 3Q. And then depending on strength of seasonality of balances in 4Q, maybe it's another $1 million to $2 million is sort of what I think given how averages tend to be a little heavier in the fourth quarter. Obviously, we earn on averages. So that comes with some stronger net interest income, albeit maybe at a lighter ROA and spread. But that's how we expect that line item and then that bucket to trend.

Got it. Okay. And then with regards to the fee income and the kind of like the outlook for the tax credit, I know it tends to be stronger in the back half of the year. I mean do you think that that's expected again this quarter or this go around, you could get some positive income in the third quarter and then a big step-up in the fourth?

Yes. I think third quarter would have to be some -- a little bit of rate-driven assistance there just because activity is not usually very strong in the third quarter. And then I would expect the fourth quarter will have some activity in it, which we think if we don't get any -- if rates are stable, makes up for maybe the negative 2% that we have with maybe a little bit of upside there possible. That book, depending on what sells, some of it's already at fair value, so that is affecting it.

We did expect a lighter contribution year-over-year. We didn't expect rates to be against us on that portfolio, but the advantage is that we're -- net interest income is strong. Deposits are -- continue to be well priced, and we're driving net interest income. So we'll -- I think we'll take that trade given the size of the contributions and the line items day in and day out.

Got it. Okay. And then just lastly, any updated thoughts on the buyback? You called out the announcement from last week. So fair to assume you guys will remain active kind of where the stock is currently trading?

Yes. I think you saw us do the capital markets work and bolstering the [indiscernible] liquidity and the total capital, total and TCE are roughly 100 basis points higher than where we'd like to see them. And I think the announcement of the additional 2 million shares and us continuing to be active reflects our posture on managing that capital to where we think it's optimized.

Okay. Great. Everything else is then asked and answered, so thank you very much.

Thank you, Damon.

Your next question comes from the line of Brian Martin with Green Capital.

So just maybe 1 or 2, I just -- I joined here late, but the -- team, just with the restructuring and whatnot, just -- and I appreciate the color on the margin outlook. In terms of where average earning assets kind of shake out into 3Q, given the restructuring and some of the other initiatives, can you just give us an idea of a landing spot and where -- how to think about average earning assets into 3Q and then to model it from there?

Yes. I mean the size of the earning asset base didn't really change with the restructure. So we had $180-plus million of proceeds, and it was all redeployed. So we didn't lever up or down the balance sheet in that process. We'll just start 3Q with a higher rate on the securities portfolio. And then as Jeff noted, we're a little bit behind in terms of what we did with the sub debt. But I think as we continue to manage share count, that should net-net kind of make up for it. So margin fortunately stays intact in the high 4.20s, and we should be able to get some EPS advantage here as we buy more stock.

Okay. Yes, I just want to make sure it was -- there was anything on that. I know you said you had done it late in the quarter. So that's helpful. And then just in terms of the strategic outlook, it sounds like the buyback is just kind of the best use and it's really an organic focus going forward. Right now, that's kind of the primary focus rather than anything strategic in terms of excess use of capital.

Brian, I think you hit the nail on the head. It's really about growth and buybacks and certainly keep looking to dividend.

Yes. Okay. And Jim, just the -- it sounds like just in general, the clients are optimistic on -- I mean, I guess I don't want to put words in your mouth, but listening to your commentary and visiting with them recently. I mean you're -- given the diversity of the loan book and just your segments, you still feel good about the growth and the clients are still relatively optimistic as you go into the back half and then into '27 on loan growth and sustaining that?

Yes, very much so. I think, too, it's -- entrepreneurs are amazing people. I mean they have great confidence in their own business. They have great confidence in the economy. And so Doug is out there with me and very bullish on the impact of manufacturing returning to the United States. Despite all the things that are going on in and around the world, we feel good about what we're hearing and what we're seeing and frankly, what we're experiencing in the growth of the pipeline.

Okay. And then just the last one for me. I appreciate the commentary about the credit quality and the expectations to get that better. I mean at the end of the day, if we're not -- if the loss content appears low, I mean, I guess the delay really, if anything, could be -- could these issues just extend out with the courts? I mean, I guess if you kind of frame up kind of the tail risk that it could just take longer than you thought even if there are limited losses, is that real? Or I guess do you -- it sounds like you expect to see a little bit of improvement sooner rather than later, but I don't want to frame that the wrong way.

Nothing exactly. So I would say that I think it's extended longer than I would have imagined. And could they continue putting roadblocks up? I don't know, maybe they could, but I doubt it. I think these last 2 are the ones that we're looking to get resolved and move forward. And so -- but Brian, I don't run the courts. So...

I got you. Okay. I mean, it seems like they're going in the right direction. It's just timing it.

Very much [indiscernible]. The [indiscernible] look good.

There are no further questions at this time. I will now turn the call back to Jim Lally, President and CEO, for closing remarks.

Kristen, thank you, and thank you all very much for joining us this morning and for your interest in our company. We look forward to speaking to you again at the end of the third quarter, if not sooner. Have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

Good day, everyone, and welcome to Enterprise Financial Services Corp First Quarter 2026 Earnings Conference Call. Please note that this call is being recorded. [Operator Instructions]. I'd now like to hand the call over to Jim Lally, President and CEO. Please go ahead.

Thank you all very much for joining us this morning, and welcome to our 2026 first quarter 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 2 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 3. The solid financial performance that we've generated over the past several years continued into the first quarter of 2026. For the quarter, we earned $1.30 per diluted share compared to a seasonally strong $1.45 in the linked quarter and $1.31 in the first quarter of 2025. This level of performance produced a return on assets of 1.16% and a pre-provision ROAA of 1.65%. I would characterize our performance in the quarter as solid and on plan. Net interest income was relatively stable when compared to the linked quarter at $166 million while net interest margin expanded 2 basis points to 4.28%. This reflects both better seasonal performance in our deposit balances and net interest margin expansion resulting from our relationship-oriented business model where our clients receive value-added service from our teams and returned for a few extra basis points when it comes to loan and deposit pricing.

Our well-positioned balance sheet continues to be the strength of our company, as it provides great flexibility with respect to capital planning. Capital levels at quarter end remained stable and strong, with total stockholders' equity at $2 billion and the tangible common equity tangible assets ratio of 9%. At this level of TCE, we were able to produce a return on tangible common equity of 12.53%. Our strong return profile allowed our tangible book value per share to remain level at $41.38 despite the fact that we utilized approximately $27 million of capital to repurchase 483,000 shares at an average price of $56.13.

In addition to this, given the strength of our earnings and our confidence in our continued execution, we increased the dividend by $0.01 per share for the second quarter of 2026 to $0.34 per share.

Turning to Slide 4, you will see that loans dipped slightly in the quarter. Three things led to the slight decrease, the first is that several significant closings that we expected to see in Q1 have slid into the second quarter and have closed or will close in the coming weeks. The second reason for this decline was a $100 million pay down in our low-income housing tax credit portfolio. These paydowns happen annually and are the proceeds from successful sales that occurred in the fourth quarter of 2025. Another positive from these payoffs is the fact that the majority of these loans were made in 2021 and 2022 and the fixed rates earned on these loans are lower than what we can earn on this cash in our investment portfolio today. The final contributor was the sale of $25 million of SBA loans in the quarter, which produced a gain of $1.4 million. Doug will provide much more color on the performance of our markets and businesses in his comments.

Our diversified deposit base continues to be a differentiator for us. We did experience a typical first quarter deposit outflows due to our heavy concentration of commercial-oriented accounts. We've worked extremely hard to blunt this trend through growth of our national deposit verticals as well as through market and business diversification within both the Commercial Bank and our more granular business banking and consumer relationships. The composition of deposits also remained stable as our percentage of [indiscernible] to total deposits remained at 33%. These trends were aided by a continued reduction in the overall cost of deposits to 1.52%, a 12 basis point drop in the quarter and 31 basis points when compared to the first quarter of 2025. It was on our 2025 first quarter earnings call that we first spoke with the 7 Southern California loans that ultimately landed in OREO. Our contention a year ago was that we would favorably work through these loans without a loss.

Today, I'm pleased to report that we continue to make progress on this and currently have 4 of these properties under contract, representing total OREO balances of $46 million, with great progress on the other 3 properties being made. I would expect to report positive further progress in the remaining quarters of 2026. Additionally, the remainder of the portfolio continues to perform as expected. Ken will make additional comments about asset quality and provision expense in his comments.

Turning to Slide 5. You will see our priorities for 2026. We made significant strides in asset quality improvement during the quarter and I'm confident that this will continue throughout 2026 highlighted by the expected sale of the 7 Southern California properties that are currently in OREO. I'm still bullish on overall mid-single-digit balance sheet growth for the year. Our ability to produce well-priced diversified deposits has been proven over the last several years, and I have a great degree of confidence that this will continue throughout 2026. However, the longer that uncertainty is the byproduct of the conflict in Iran, borrower sentiments may be cautious, which could impact future loan growth.

Over the last few weeks, I have had the opportunity to visit with many clients representing the first array of businesses and industries. They continue to perform well, but their confidence to make large investments in capital expenditures or to think about any type of strategic hires or M&A is truly day-to-day. Like I stated on previous calls, entrepreneurs need to be able to see 90 to 120 days into the future to confidently make these strategic decisions and the recent volatility in the current environment could have an impact. Obviously, a quick resolution or stabilization of the current state changes this immediately.

Finally, like many of our clients, we too are focused on efficiency gains through automation and expansion of our existing technology framework. This is a daily opportunity for our company, and we are excited about the progress we are making. Overall, I'm very pleased with our results for the first quarter of 2026. We are positioned extremely well for just about any environment. We have wonderful markets of growing diversified deposit base and an extremely strong balance sheet. We have used these tools to grow tangible book value per share over 10% annually for the last 14 years, and are in great shape to accomplish this again in 2026. With that, I would like to turn the call over to Doug Bauche. Doug?

Thank you, Jim, and good morning, everyone. Turning to Slide 6, you'll see the breakdown of our loan portfolio by asset class. Successful attraction and on-boarding of new clients across our footprint drove $97 million in Q1 loan growth and our core C&I and owner occupied real estate portfolios and $21 million in loan growth from our Life Insurance Premium Finance division. Those advancements, however, were largely offset by the anticipated $101 million reduction in our low-income housing tax credit portfolio via the successful completion of affordable housing projects and sale of state tax credits. The weighted average fixed coupon on the $101 million in tax credit loans paid off in the quarter was 3.29%, providing us the opportunity for redeployment of that capital at higher earning yields in the current environment.

Furthermore, as Jim mentioned, we executed on the sale of $25 million of SBA guaranteed loans in the quarter. The Sponsor Finance portfolio declined $33 million in the quarter as payoffs from the sale of sponsor-owned portfolio companies exceeded new originations. Overall, I am pleased with the mix and breadth of our loan funding pipeline, and I remain cautiously optimistic about our ability to achieve our loan growth objectives for the year. The elevated geopolitical risks Iran conflict and market complexities may, however, result in our organic growth being more uneven over the next couple of quarters.

Slide 7 demonstrates the continued strong diversity of our loan portfolio across our geographic markets and specialty business lines. The Specialty Lending portfolio at just over $4 billion inclusive of tax credit lending, sponsor finance, SBA and life insurance premium finance has remained relatively flat year-over-year. However, our core geographic markets in the Midwest and Southwest have delivered 6% and 25% year-over-year growth rates, respectively, which includes loans acquired in the branch acquisition that closed in the fourth quarter.

In the West region, our investments in new talent in 2025 in Southern California are showing positive momentum. Leveraging market disruption, we are experiencing a growing pipeline of quality CRE and C&I holistic relationship opportunities that will translate to solid organic growth during the year. Turning to deposits on Slides 8 and 9. Reductions in the quarter within the core geographic portfolio reflect anticipated seasonal outflows and client balances of $272 million mainly associated with distributions, bonuses and tax payments. A material portion of this reduction was offset by continued growth within the national deposit verticals which grew by $187 million or roughly 20% annualized in Q1. On a year-over-year basis, total client deposits, excluding brokered funds, are up 10%.

The national deposit verticals profiled on Slide 10 continue to provide differentiated and attractive sources of funding, while also diversifying our overall deposit base and somewhat softening the seasonality of our other channels with over $4 billion in deposits across our property management, community association and legal and escrow businesses, the average earnings credit is an attractive 2.59%, considering no incremental expenses in branches or branch personnel.

Lastly, Slide 11 profiles the mix of our core deposit base which continues to be well diversified and highly relationship-oriented with just over 33% of these accounts being noninterest-bearing and 80% of them using some form of treasury management [indiscernible] online banking they offer operational stability and a solid base from which to expand other fee-generating revenue streams, including card and merchant services. Now 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 $1.30 in the first quarter on net income of $49 million. Excluding certain nonrecurring items, earnings per share on an adjusted basis was $1.31 compared to adjusted earnings per share of $1.36 in the linked quarter. Pre-provision earnings were $70 million, a decline of $4 million from the linked quarter. The $0.05 decrease in adjusted earnings per share and the $4 million decrease in pre-provision earnings was primarily due to lower tax credit income and the impact of 2 fewer days on net interest income. The decline in tax credit income was expected as it is typically highest in the fourth quarter of the year.

The provision for credit losses decreased from the linked quarter due to the decline in both net charge-offs and total loans. The primary driver of the provision this quarter was a qualitative factor that was added to recognize the potential impact on credit losses from the conflict in Iran. The increase in noninterest expense in the period was mainly due to typical seasonal increase in compensation and benefits and to a lesser extent, the first full quarter of run rate expenses from the branch acquisition that closed last October. These increases were partially offset by a decline in onetime acquisition costs related to the acquisition.

Turning to Slide 13 and with more details to follow on Slide 14. Net interest income for the first quarter was $166 million, a decrease of $2 million from the fourth quarter, which was largely attributable to fewer days in the first quarter. Interest income declined $7 million from the prior period. The largest contributor was an $8 million decrease in loan interest as our yields fell 13 basis points on variable rate resets amidst Fed easing, along with a $17 million decline in average loan balances. This was partially offset by $1.9 million of additional earnings in the investment portfolio with average balances higher by $159 million and an 11 basis point improvement in the securities yield. The rate on loans booked in the quarter was 6.58%, and the average tax equivalent purchase yield on investment was 4.51%, both of which are additive to their respective portfolio.

Interest expense declined $5 million compared to the linked quarter as a result of lower funding costs. Interest expense on deposits decreased by $5.5 million as average interest-bearing balances declined $89 million, and the rate on interest-bearing deposits moved 15 basis points lower. This was partially offset by higher interest expense on customer repo accounts due to seasonally higher balances.

Our net interest margin for the first quarter was 4.28% and an increase of 2 basis points in the quarter. Our cost of interest-bearing liabilities declined 15 basis points led by lower rates on non-maturity deposits and borrowings, which more than offset the 9 basis point reduction in yield on earning assets. Net interest income remained slightly asset sensitive, primarily in parallel interest rate simulation with each 0.25 point cut in rates, reducing net interest income $1 million to $2 million per quarter or a couple of basis points of net interest margin. Including deposit-related noninterest expense in this analysis, we modeled that we are effectively neutral to modestly liability sensitive as we continue to have success growing the related deposit balances. We anticipate the recent steepening of the yield curve will favorably impact pricing on fixed rate loans and the reinvestment of cash flows in the investment portfolio. With the Fed seemingly on hold, we expect our net interest margin to remain in the low to mid 4.2%.

As we execute on our growth plans for 2026 and remain committed to disciplined pricing on both loans and deposits, we look for net interest margin to be stable in this range with consistent growth in net interest income over the next few quarters. Slide 15 reflects our credit trends. Net charge-offs totaled $4.4 million in the first quarter compared to $20.7 million in the linked quarter. We made progress in the quarter reducing nonperforming assets with the full repayment of 2 loans and total principal repayments of $21 million on nonaccrual loans. We also foreclosed on the last property related to our largest nonperforming relationship and are actively working out these properties.

As Jim noted, 4 of the 7 properties in this relationship are under contract, and we expect contracts for the other 3 properties in the near future. Net charge-offs totaled 15 basis points of average loans compared to 21 basis points for 2025. The provision for credit losses was $7.2 million in the period compared to $9.2 million in the linked quarter. The provision in the quarter was mainly due to net charge-offs and a qualitative adjustment to the allowance for potential impact of the Iran conflict. While we have not seen a direct impact on credit quality from the conflict that started at the end of February, we have recognized the impact that oil prices and market uncertainty can have on economic factors used to forecast losses in the loan portfolio.

Slide 16 shows the allowance for credit losses. The ratio of allowance to total loans increased to 1.21% compared to 1.19% at the end of 2025. When adjusting for government guaranteed loans, the ratio increases to 1.32% of total loans, which shows the strength of our reserve coverage. On Slide 17, first quarter noninterest income was $19.1 million. This was a $6.3 million reduction compared to the linked quarter. The decrease was primarily due to other real estate owned gains and seasonally strong tax credit income during the fourth quarter of 2025. The first quarter included two mitigants from higher income from private equity fund distributions and a gain on the sale of guaranteed SBA loans.

Turning to Slide 18. First quarter noninterest expense of $115 million was relatively comparable to the linked quarter as it included a full quarter of operating expenses related to the branch acquisition that closed in the fourth quarter. Noninterest expense in the fourth quarter included $2.5 million of onetime branch acquisition costs and a reversal of accrued FDIC special assessments. Excluding the impact of these nonrecurring items, noninterest expenses were $2.5 million higher than the linked quarter, which includes the first full quarter run rate of expenses from the acquisition. First quarter noninterest expense included seasonal impacts in compensation and benefits. Deposit costs were lower than the linked quarter by $1.5 million, which was largely driven by the expiration of certain allowances that were not utilized.

Other expenses decreased from the linked quarter, primarily due to a recovery of a credit card loss event that was incurred in the fourth quarter. The core efficiency ratio was 60.2% for the quarter compared to 58.3% in the linked quarter. Our capital metrics are shown on Slide 19. The tangible book value per share of $41.38 was relatively stable with the linked quarter. Strong first quarter earnings effectively offset the fair value reduction from the impact of higher interest rates on our available for sale securities portfolio. We continue to proactively manage excess capital, repurchasing 483,000 shares of common stock for approximately $27 million. At an average price of $56.13 per share, this was an attractive multiple of tangible book value. Our tangible common equity ratio was 9%, stable with the linked quarter. The quarterly dividend was increased by $0.01 to $0.34 per share for the second quarter of 2026 continuing our record of increasing the dividend 9 consecutive quarters.

This was a strong start to the year to 1.2% return on average assets and a 13% return on average tangible common equity. We're well positioned with a strong earnings profile, balance sheet and capital position to support further organic growth across our markets. I appreciate your attention today, and we'll now open the line for questions.

[Operator Instructions] Our first question comes from the line of Jeff Rulis of D.A. Davidson.

I'll tread lightly on the credit side. I know it's been exercising patients, but just to kind of go along the 4 properties that are under contract. I guess if you could touch on potential timing for sale. And then as we recall, I think those were pretty attractive. The real estate was really never a question on the valuation. It's just a fight to get to them. And I guess, so the question that second piece is any anticipated gains with those sales?

Yes, I'll take that one, Jim. Jeff. So 3 of the 4 should transact yet here in the second quarter and the fourth one later this year. And as it relates to the contracts we have in hand, they support how we've identified them in our financial statements.

Okay. And gains or losses, a little early to kind of...

It is early, but we feel confident about how we recognize things in the fourth quarter of last year, and how the things should settle out.

And on the other 3 properties you sounded optimistic on those as well. Any sort of differences in those? Or it's just sort of, again, its timing of the contracts and potential sales there's nothing, I guess, different from 4 versus the 3 still to may be dealt with?

It's timing. You're right. It's timing. You remember, one, we had a little while to get our hands on, which we have now. I've identified several different potential buyers. So now it's a bit of a -- let them fight that out to get the best outcome we can.

Got it. And then hopping over to the margin, Keene, I think our prior conversations were more of a margin to step down to 4.20%, I think as the rate environment has altered and it sounds like you've got some pretty good earning asset repricing opportunities within the book, but you pointed to the yield curve as well. Just want to check on the low to mid-4.20%. What's kind of the time line of that? Is that just through the end of the year? And I don't know if you've talked about your positioning thereafter -- any additional color on the margin?

Yes. Jeff, margin in March was a little bit of a step down from the -- what we reported here in the first quarter. So our guide is I would say today's run rate, and I think we see it holding stable through the end of the year. I think we had a little bit of balance sheet contraction here in the first quarter. And then with the shorter days, you get a little bit of a false positive in terms of margin popping. But we feel good about day count in our favor now. Really how the shape of the curve and where intermediate term rates are for reinvestment, both on the loan and securities portfolio and I think any amount of growth from a loan perspective that we can get an overall balance sheet growth, which we anticipate will happen here starting in the second quarter.

I think we feel really, really good and optimistic. And I think we see margins being reasonably stable for that time frame. So we're positioned to defend it if necessary. We've been able to reprice deposits extremely well when the short end of the curve has come down. I think we continue to feel good about that if that's the case. But right now, it's status quo. And what I would say is historically status quo is good for us because it allows us to just go play offense bring clients on, expand the balance sheet and not to worry about doing as much repricing activity when that arises. So it's business as usual from a growth perspective.

Got it. Yes, I heard your message of a stable margin, but consistent NII growth is probably more important.

Your next question comes from the line of Damon DelMonte of KBW.

I hope everybody is doing well. Keene, just looking for a little commentary around the outlook for expenses over the coming quarters here in '26. Do you expect much growth off of first quarter's level? And any insight in there would be great.

Yes. I think the first quarter is always seasonally heavy on compensation. We do expect that to alleviate slightly, albeit we will have a full run rate in the second quarter of merit that occurred in March and day count also moves against us there a little bit. So I think there's a little relief there sequentially, on the comp piece.

And then we did have a benefit on the deposit expense line item. So that we expect to step up back to more of that $27 million level. So the way I'm thinking about it is that from a pre-pre perspective with day count and that reversal, we're sort of on the same run rate here to start the second quarter. And then whatever growth and other items we can get will accrue to our benefit. But I think the sequential change in expenses will be paid for in net interest income, and then maybe some other items. So that's sort of how I'm thinking about the expenses here moving into the 2Q and beyond.

Got it. Okay. So a step up from this quarter's $115.1 million, but then that's kind of offset by NII growth, is that...

Yes. That's essentially how I think about it. I think this is like a very base kind of earnings quarter where we can have mostly positive progress here for second, third, fourth quarter as we get more days, more growth, maybe some more contribution from some of the episodic fee items, things like that.

Got it. Okay. Great. And then could you help us think a little bit about the provision going forward. Nice to see the NPLs come down this quarter. I'm assuming you're still making progress on the remaining ones and you're going to have some loan growth. So is the provision kind of going to be driven by a similar level of net charge-offs over this quarter and kind of maintaining the loan loss reserve in that north of 120 basis points?

Yes. I think charge-off wise, charge-offs are sort of on from a basis point perspective, what we'd think about on a recurring basis. And then we just -- we took the opportunity with some of the uncertainty that's around the economic forecast, but really wasn't in the base yet to provide some additional reserves for that uncertainty. So I think, again, back to my comments, I think that positions us well, both with some of the progress we're making on credit as well as just having some of the economic data, whether it was in the underlying forecast or whether we put it on top, just absorbed into what we're thinking here.

And then to the extent that we have growth and charge-offs, that will drive provisioning, but I think it can abate a little bit just given we took some of the bad news here in the first quarter and put it in a spot where it's there for reserves if we have businesses that are stressed by oil prices or whatever other items are caused by what's going on.

Okay. Great. And then I guess just one more quick one on capital and your view on capital management. Things are going well. strong capital levels bought back some stock this quarter. Can we assume that you guys will remain active in the market given the current levels of stock price?

David, this is Jim. Absolutely. We'll continue evaluating the merit of further repurchases and our other levers with respect to dividends, we'll continue to evaluate, but really, it's about growth. And as it relates to M&A, it still remains a low priority for us. So you're looking at repurchases and growth is the priorities for capital.

Your next question comes from the line of Nathan Race at Piper Sandler.

Maybe for Jim or, Doug, curious if you can just comment on what you're seeing from a pricing perspective on new loan production -- on a blended basis and if you've seen kind of new loan production kind of incremental deposit growth being margin accretive and relative to the overall loan portfolio yield as well.

Yes, Nathan, it's Doug here. Thanks for the question. We are clearly seeing competitive pressures, kind of squeezing spreads and credit across all of the footprint today. we look at loan yields, I think at the end of Q1, yields were 6.2%, 6.3%, somewhere in that range. And given the current environment, right, we think we can continue to originate credit and that low to mid-6% range. And as we talked about, just some redeployment of capital from payoffs in the [indiscernible] portfolio that provides us some real advantage there of really 200 to 300 basis points of additional margin on that $100 million portfolio that paid off. So it's tough out there, right?

But our team does a good job to price both to win and yet to work to protect our margin with every basis point that we can.

Okay. Got it. That's helpful. And then just the expectation that loan growth in the mid-single-digit range for this year is going to be funded by a deposit gathering or maybe can you just comment on kind of excess liquidity that you have come off the bond portfolio and just kind of other sources of funds to loan growth?

Yes, I think we expect to keep the the securities portfolio at a similar proportion. So I think our expectation is that will continue to grow it over the course of the year. That means that we're going to out fund loan growth with deposit growth, both in the commercial bank and the specialty and consumer bank. So that's our plan. I think that's the thing we're probably most confident about is our ability to grow deposits. We like the environment for deployment, whether that's in the securities or loans.

And I think you heard from Doug, we'll continue to be disciplined on loan side, both on credit and pricing. And I think we think that sets up for a good performance in 2026 and beyond. So that's the playbook we've been running for the last few years, and I think that's the playbook for '26.

Okay. Great. Maybe one last one for Jim. Just curious if you can comment on any M&A appetite these days. Obviously, you guys have a nice organic trajectory in front of you and some nice earnings tailwinds over the balance of this year. But just curious if there's any opportunities on the M&A front that are interesting for you guys these days? Or is just kind of the focus on organic growth, buying back the stock, just given where the current is today?

Yes, Nate, we're focused on is executing the plan. We've got some work to do relative to growth and certainly, we have to execute the plans relative to sales of these assets that we have and what have you. But it's a low priority, and we just got to keep focused on making sure that the plan we put forth is executed perfectly. And that's where our fourth tender associates are focused on today and tomorrow and into the future.

[Operator Instructions] We don't have any further questions in the conference line I would now like to hand the call back to Jim Lally, President and CEO, for closing remarks.

Thank you, Ellie, and thank you all for joining us this morning and for your continued interest in our company. We look forward to talking to you at the end of the second quarter, if not sooner. Have a great day.

Thank you for attending today's call. You may now disconnect. Goodbye.

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enterprise Financial Services Corporation Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Jim Lally, President and CEO. Please go ahead.

Good morning, and thank you all very much for joining us, and welcome to our 2025 Fourth Quarter 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 Banking 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 2 of the presentation entitled forward-looking statements and for our most recent 10-K and 10-Q for reasons why actual results may vary from any forward-looking statements that we make today.

Our financial highlights begin on Slide 3. I am pleased with our results for the fourth quarter and for all of 2025. For the quarter, we earned $1.45 per diluted share, which compares favorably to the $1.19 that we earned in the linked quarter and $1.28 in the fourth quarter of 2024. These results produced a return on average assets of 1.27% and a pre-provision return on average assets of 1.74%.

As we discussed in our last earnings call, we closed on the branch purchase in Arizona and Kansas early in the fourth quarter. Earnings from this complemented our relationship-oriented business model helping drive expansion of net interest income for the quarter to $168 million, which was a quarterly increase of $10 million when compared to the linked quarter and $22 million compared to the fourth quarter of 2024. Margin too improved slightly to 4.26%, driven by disciplined loan and deposit pricing throughout both books of business. Our ability to hold our margin at this level illustrates the quality of our deposit base and the relationship-oriented loan portfolio. The ability to continue to expand our net interest income, along with widening our net interest margin to the extent that we have reflects the strength of the franchise we are building and we remain positioned to produce high-quality earnings for years to come.

As important, the branch purchase accelerated our strategy in 2 of our higher growth markets by several years. Since the closing, I've spent time with our new team and our new clients and feel even better about how this fits into our overall strategy and the impact that this expansion will have on our long-term performance. The strength of our companies are well-positioned balance sheet, which provides for great flexibility when it comes to capital management.

We came into 2025 with a goal of growing our balance sheet at a mid- to high single-digit pace. With our organic growth complemented by the aforementioned branch purchase, we're able to exceed this goal of growing our balance sheet by 11%. Capital levels at quarter end were stable and strong with our tangible common equity to tangible assets ratio at 9.07%. As impressive was our 14.02% return on tangible common equity for the fourth quarter.

Because of the branch purchase, we expected some dilution to tangible book value, but due to our strong earnings during the quarter, tangible book value per share was relatively stable at $41.37. This represents an 11% increase in tangible book value per share growth for the year. Because of our confidence to continue to produce high-quality earnings at the pace that we are, we increased our dividend by $0.01 per share to $0.32 for the fourth quarter and repurchased 67,000 shares at an average price of $52.64.

Loan growth for the quarter was $217 million and was largely attributed to the acquired loans that came with the branch acquisition. Further reducing our loan balances in the quarter was the movement of approximately $70 million of Southern California commercial real estate loans into [ OREO ]. I will provide an update on our progress with these properties later in my comments.

Deposit growth and the quality of the deposit base continues to be a significant differentiator for our company. In the fourth quarter, we saw deposits grow by $1 billion, $400 million of which came from new and existing clients with the remaining approximately $600 million coming from the branch purchase. The cost and composition of the deposit base continues to improve and has aided in the consistency of earnings and profitability. The quarterly cost of deposits decreased to 1.64%, and our level of DDA to total deposits improved to 33.4%. It should be noted that we have maintained our DDAs at over 30% of total deposits for the last 4 years.

Finally, liquidity remains strong as evidenced by our loan-to-deposit ratio of 81%. There were several moving parts with respect to credit in the quarter. The most important movement occurred with the real estate associated with the 7 real estate loans in Southern California that we discussed on last quarter's earnings call. With a favorable verdict handed down by the bankruptcy courts during the quarter, we were able to take 6 of these properties into OREO with the seventh to follow shortly. Like we assumed, interest in these properties have been high with purchase sale agreements on several of the properties expected to be received in the very near future.

Further improvement to our overall credit metrics is a high priority. I can see a clear path for the elevated level of NPAs and OREO to reduce significantly in the next couple of quarters to more historical levels. Doug will comment on the specifics related to all of this in his comments.

Slide 5 summarizes our performance for all of 2025. For the year, we earned $201 million of net income or $5.31 of diluted earnings per common share. We leveraged capital advantageously to expand in 2 key markets while growing tangible book value per share by 11%. Other uses of capital included increasing our annual dividend by $0.16 per share to $1.22 and repurchasing just over 258,000 shares at an average price of $54.60. You will hear much more about these and other financial highlights in Keene's comments.

Slide 6 illustrates where we are focused as we turn the page into a new year. Like I stated previously, I can see a clear path to improve credit statistics in the next quarter or 2. Nonetheless, this is a key focus for us in 2026. The level of NPAs is not compatible with the quality company we've built and improvement to more historical levels will be accomplished. At the same time, we will continue to grow the balance sheet with the quality and consistency that we've displayed for many years, serving our existing clients' needs while adding new ones that appreciate our concentrative approach and willing to give up a few basis points on both loans and deposits to experience this.

And finally, like many of our clients, we will continue to find more ways to automate mundane nonvalue-added tasks utilizing the investments we have made in technology over the last few years in order to enhance productivity and efficiency within our business.

Before handing the call over to Doug, I would like to share with you what I'm hearing from our clients throughout our markets and national business lines. For the most part, our clients remain optimistic about the economy and how their businesses perform in 2026. In particular, clients that are developers, contractors, subcontractors and suppliers to companies in and around power generation and the data center industries are expecting particularly good and long runs ahead. This obviously trickles down to manufacturers and service businesses to that support these industries.

Industries and companies that serve infrastructure improvements throughout our markets, too, should see many opportunities. This includes water projects, utility work and highway and road construction. Furthermore, there is a keen focus by our client base to further improve productivity and efficiencies. I cannot help thinking that this will come with investments in technology, robotics, at other machine learning capabilities, the expense of which will be partially offset by the favorable tax treatment that such investments now receive.

The agility and resilience that our client base continues to show has been quite remarkable. I would expect this to continue in 2026 and beyond. We are pleased with the results for the fourth quarter and the entire year of 2025 and look forward to what lies ahead in 2026. Our company is positioned extremely well to continue to execute on our strategic plan and drive long-term shareholder value. Our diversified relationship-oriented model has compounded tangible book value per share at a rate of over 11% for the last 14 years, and I see this continuing for many years to come.

With that, I would like to turn the call over to Doug Bauche. Doug?

Thank you, Jim, and good morning, everyone. The fourth quarter, as Jim just described, was full of activity. The completion of our branch acquisition and onboarding of new clients and associates has gone exceptionally well. The feedback that I continue to receive from our new partners has been overwhelmingly positive.

We also successfully completed foreclosure of the previously highlighted Southern California real estate portfolio and are now one very important step closer to substantially reducing our nonperforming assets. And certainly not to be overlooked, we continue to expand the balance sheet through the attraction of new organic commercial relationships and are positioned with momentum heading into the new year.

Slide 7 demonstrates the diversity and growth of our loan portfolio across all asset classes. Asset categories representing credit to commercial and industrial businesses, including C&I, CRE owner-occupied, SBA and Sponsor Finance combined are just over 50% of our portfolio, while investor-owned CRE, life insurance and tax credit lending largely round out the balance of the portfolio at 24%, 10% and 7%, respectively. Loans grew $217 million in the quarter and $580 million for the year. Organic growth in the quarter and LTM from our C&I, investor-owned CRE and life insurance premium finance lines were offset by contraction in our Sponsor Finance and Construction and Land development segments as sponsors monetize portfolio companies and developers completed and sold a number of industrial and mixed-use construction projects.

Additionally, reported organic growth at $288 million for the year was muted by our sale of $78 million in SBA guaranteed debt the movement of the aforementioned $70 million in real estate loans to OREO and our election to exit several loan participations that no longer met our return thresholds. Adjusted for those 3 items alone, organic loan growth for 2025 was in line with our mid-single-digit expectations.

Slide 8 displays our loan portfolio balances and growth across our geographic footprint in specialty lines. Specialty lending and all 3 of our geographic markets contributed to positive loan growth during the year and our portfolio remains favorably balanced. Within the specialty lending business lines, our SBA 7(a) owner-occupied CRE production topped $250 million in originations for the year and is poised to expand as we continue to head into a more favorable interest rate environment in 2026.

Additionally, growth in other low credit risk categories of life insurance premium finance and tax credit finance outpaced contraction and sponsor finance. Our momentum in the Southwest continues. Growth in the Southwest outpaced all other markets and was driven by expansion of quality, C&I and CRE relationships throughout Arizona, New Mexico, Northern Texas and Southern Nevada, including the relationships added in the branch acquisition.

Turning your attention to Slide 9. Deposits grew $1 billion in the quarter and approximately 11% or $1.5 billion year-over-year, inclusive of the $609 million in branch acquired deposits in our Arizona and Kansas City markets. Organically generated deposit growth for the year was right in line with our expectations at 6.5% or $854 million. For the quarter, organic deposit growth was seasonally strong at $432 million with noninterest-bearing deposits representing 63% or $274 million of growth during the period.

Similar to our legacy deposit portfolio, the $609 million in acquired branch deposits are favorably mixed with nearly 35% or $213 million in noninterest-bearing commercial transaction accounts. Strong deposit generation and favorable mix provide us opportunity to control the cost of interest-bearing deposits and defend our net interest margin in this down rate environment.

Slide 10 depicts the dispersion of our deposit base across the Midwest, Southwest, West and our deposit verticals. A core strength of our business model continues to be our ability to execute our deposit strategies with balanced growth coming from new relationships, deepening of wallet share with existing clients acquisition of attractive deposit franchises and leveraging our differentiated deposit verticals.

In our Midwest region, in particular, deposit balances have grown steadily and are approaching $7 billion in aggregate. As our average client relationship duration continues to lengthen, we find we are regularly rewarded with greater share of wallet and ancillary products, including private banking, commercial card and merchant services. The breakdown of our deposit verticals is reflected on Slide 11. Community association and property management largely contributed to our deposit vertical growth in 2025, while we exited higher-yielding deposits within our legal industry and [ Escrow ] Services segment. We've redirected our efforts in the legal industry and [ escrow ] services area, and our pipeline of more favorable mix and price deposits is gaining traction. These 3 businesses continue to provide a diverse growing an overall favorable cost adjusted source of funding that complements our geographic base.

Turning to Slide 12. You'll see that our deposit base is intentionally well balanced across our core commercial business and consumer banking and specialty deposit channels. With the recent branch acquisition, our core commercial business and consumer banking and specialty deposits are 39%, 33% and 28% of total customer deposits, respectively.

I'd also like to provide some commentary on asset quality. As Jim noted earlier, we see a clear path to reducing our elevated nonperforming assets of 95 basis points to our more historically normalized level of 35 to 40 basis points over the next quarter or 2. To bridge that path, let me say that we are actively negotiating PSAs on 5 of the 6 properties in Southern California that we moved into OREO in December.

With the final execution of these PSAs and sale of the related OREO assets, we would realize proceeds at or above our carrying value. Furthermore, we continue to chip away and make good progress on a number of other specific nonperforming loans. The combination of these successful resolutions alone will reduce NPAs in half without charge or write-down.

Keene will discuss some of our asset quality metrics, but it is worth noting that our reported 21 basis points of net charge-offs for the full year includes 3 basis points related to 2 of the loans in the Southern California relationship. On a net basis, we did not take a loss on the foreclosure of the 6 properties that we took possession of in the fourth quarter. Excluding those loans for that reason, our adjusted net charge-offs were 18 basis points for 2025.

Now I'll turn the call over to Keene Turner for his comments.

Thanks, Doug, and good morning, everyone. Turning to Slide 13. We reported earnings per share of [ $1.45 ] in the fourth quarter on net income of $55 million. Excluding certain nonrecurring items, earnings per share on an adjusted basis was $1.36, a $0.16 increase from the third quarter adjusted earnings per share of $1.20. Pre-provision earnings increased over $9 million from the linked quarter to $75 million, primarily due to continued expansion in net interest income and the seasonal fourth quarter increase in tax credit income.

The branch acquisition that closed on October 10, increased our liquidity and earning assets while also adding to the bottom line. Earnings also benefited from a gain on other real estate owned that is not included in our pre-provision earnings. The provision for credit losses increased from the linked quarter and was primarily driven by net charge-offs and a change in the mix of nonperforming loans. The increase in noninterest expense in the quarter was mainly due to the addition of the run rate expenses from the branch acquisition and onetime acquisition costs related to the transaction. In conjunction with the finalization of our tax return we have updated our state tax apportionment and effective tax rate, which resulted in a slightly higher tax rate in the fourth quarter.

Turning to Slide 14 and with more details to follow on 15. Net interest income was $168 million in the fourth quarter, an increase of $10 million from the prior period, inclusive of the branch acquisition. Net interest income growth resulted from a combination of strong deposit growth, higher investment balances and a favorable spread on acquired loans and deposits, partially offset by lower interest rates paid on interest-earning assets.

Interest income increased $7 million from the prior period mainly due to higher earning asset balances. Loan interest increased $2 million, including $4.4 million from acquired branches as average loan balances increased $340 million compared to the linked period and was partially offset by lower interest rates. The rate on loans booked in the quarter was 6.75% remained accretive to the overall portfolio yield. Interest on investments was $3.2 million higher compared to the linked period with average balances increasing $270 million and the portfolio yield improving by 9 basis points. The average tax equivalent purchase yield in the fourth quarter was 4.61%. Interest on excess cash balances increased $1.8 million in the fourth quarter, mainly as a result of seasonally higher deposit balances.

Interest expense declined $3 million compared to the linked quarter and included $1.7 million in interest expense from deposits at acquired branches. Total deposit expense decreased $1.4 million as a result of lower interest rates, partially offset by higher average balances. Interest expense on borrowings decreased $1.6 million mainly due to lower balances on short-term advances along with lower interest rates. Interest expense also reflected the redemption of our subordinated debt in September that was replaced with a new floating rate senior note at a lower interest rate.

Our resulting net interest margin for the fourth quarter was 4.26% on a tax equivalent basis an increase of 3 basis points over the linked period. The earning asset yield declined 13 basis points, driven mainly by lower rates on variable loans and short-term assets. Our cost of interest-bearing liabilities declined 25 basis points, led by lower interest rates on deposits and borrowings, including a lower average interest rate on the acquired deposit portfolio along with a more favorable shift in the funding mix.

Moving into 2026, we expect net interest margin run rate to be roughly 4.2%. Compared to the fourth quarter, we will have some additional loan repricing based on periodic and longer-term resets and would expect to see some additional attrition of deposit balances during the first quarter. We believe our balance sheet composition and funding mix have us well positioned to limit the overall impact of interest rates to net interest margin as we have demonstrated with recent cuts. We will continue to respond to interest rate changes by appropriately managing pricing on both sides of the balance sheet. We believe that by executing our plans to grow the balance sheet funded by core deposits, we will continue to see positive momentum in net interest income growth.

Slide 16 reflects our credit trends. We had net charge-offs of $20.7 million in the fourth quarter compared to $4.1 million in the linked quarter. As Jim and Doug discussed, we made significant progress in the fourth quarter towards resolving our largest nonperforming relationship that consists of 7 different properties. In the process of foreclosing on the real estate collateral in this relationship, we had a charge-off on a few properties and gain on others. While the impact of these items is reported on different line items, we recognized a net gain in earnings related to the foreclosures. This is consistent with what we had expected and previously disclosed.

Other than this relationship, we had a loss on a California C&I loan and also charged off several loans that have been reserved in prior periods. Net charge-offs for the year were 21 basis points of average loans compared to 16 basis points last year. The provision for credit losses was $9.2 million in the period compared to $8.4 million in the linked quarter. The increase in provision was mainly due to net charge-offs in the quarter. Nonperforming assets increased $29 million to 95 basis points of total assets compared to 83 basis points in the linked quarter. Doug discussed the components of the movement within our nonperforming assets and the progress and expectations we have to reduce levels in 2026.

Slide 17 shows the allowance for credit losses. We continue to be well reserved with an allowance for credit losses of 1.19% of total loans or 1.29% when adjusting for government guaranteed loans. We adopted the new CECL accounting standard for purchase loans that was issued in November. This eliminated the CECL double count that would have been recognized on the acquired loan portfolio and the $3.3 million credit mark on these loans was added to the allowance for credit losses and purchase accounts.

On Slide 18, fourth quarter noninterest income of $25.4 million decreased $23.2 million from the linked quarter. However, if you exclude the impact of the tax credit recapture in the linked quarter, noninterest income increased $9 million. The increase was primarily due to the other real estate owned gains and seasonally stronger tax credit income. This was partially offset by lower gains on SBA loan sales as we did not sell any production in the fourth quarter. Depending on the levels of planned growth and activity in the SBA space, we may take the opportunity to continue to sell SBA loans in coming quarters.

Turning to Slide 19. Fourth quarter noninterest expense of $115 million increased $4.7 million from the linked quarter. Onetime branch acquisition costs were $2.5 million in the quarter, which is an increase of $1.9 million from the linked quarter. The impact of incremental operating expenses of the expanded branch footprint totaled $4.2 million in the quarter and were partially offset by seasonally lower employee benefit items and the reversal of a portion of the FDIC special assessment that was recorded in prior years. The resulting core efficiency ratio was 58.3% for the quarter.

Our capital metrics are shown on Slide 20. Tangible book value per share of $41.37 was relatively stable with the linked quarter. We leveraged our excess capital in the period to support the branch acquisition which was modestly dilutive on a per share basis. This dilution was offset by our strong earnings performance and the favorable improvement in the fair value of the securities portfolio in the quarter. Our tangible common equity was 9.1% compared to 9.6% in the linked quarter, and our common equity Tier 1 ratio was 11.6%.

In addition to absorbing the branch acquisition, the strength of our capital position allowed us to repurchase $3.5 million of common stock and to increase our quarterly dividend by $0.01 to $0.33 per share for the first quarter of 2026. This was another solid quarter of financial performance with a 1.3% return on average assets and a 14% return on average tangible common equity. As it relates to capital, we have a history of driving shareholder value by managing our capital position and compounding tangible book value. 2025 marks the 14th consecutive year that we have increased tangible book value per share with an 11% compound annual growth rate over that period.

Since we started increasing our common stock dividend in 2015, we have increased the dividend by a 17% compound annual growth rate over the past 11 years. We are well positioned with a strong balance sheet and capital position to continue this trend and to execute our strategic initiatives in 2026.

I appreciate your attention today, and I will now open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from the line of Jeff Rulis with D.A. Davidson.

Thanks. Good morning. Wanted to check in on the foreclosed properties. I appreciate the detail. I'm hoping to get maybe a little bit more the timing of when you took control of those in the fourth quarter and I guess, it sounds like you expect the reduction in NPAs and OREO 1 to 2 quarters. So my guess is you're anticipating sales early part of this year as that plays out. Just wanted to check in a little more if we have exact timing.

Yes, Jeff, it's Doug. Just to remind you on the timing of this, we cried the original foreclosures on these properties back in October. And then a bankruptcy filing was posted by the debtors so that delayed our process, and it was in the middle of December that we received the favorable ruling from the bankruptcy court that recognized our October 15 foreclosure process a legitimate process. So in the middle of December, we were able to take 6 of the 7 properties into OREO.

The seventh property, the reason it didn't come into OREO is because back in October, there was an unrelated third party that had outbid us on that particular property. So that will have to be recried here in the first week of February. So having control now of 6 of the 7 properties, as we mentioned, we are actively engaged with parties on sale agreements at this point in time. We feel that the valuations for these negotiations continue to reaffirm our positive outlook on the resolution of these properties. As you noted, we took the gain on the OREO here in the fourth quarter. We feel good about how we're positioned.

Timing of it, Jeff, is always a bit hard to predict, but we've got good momentum, good progress here, and we're optimistic that by the end of the second quarter, we're going to see some resolution.

Doug, is it safe to say, I mean, the litigation process has been an issue. I don't know how you're able to market those properties. I mean, in terms of some interested parties, I mean for the balance of '25, probably knew that these may be coming to a sale.

Do you glean any momentum that maybe conversations have predated taking control of those properties? Or is that truly you really couldn't discuss those until you've got legal ownership of that.

Yes. It was very public, Jeff, as you know, right? It was a very public litigation that was going on. Just not only for the 7 properties that we were a direct lender on, but other properties that these parties were engaged in.

So it was well known. There were a lot of parties reaching out to us before we had control of the properties, and we're able to even speak of the situation. So now that we've taken control and ownership, fee simple ownership it really clears the path now for us to move forward in contract negotiations and the monetization of the assets.

Appreciate it, Doug. Thanks for the detail. Just hopping over to the -- maybe Keene on the sort of the moving pieces on the fee income and noninterest expense lines. I don't know if you could reorients on a run rate and/or kind of growth expectations on both.

Yes. So when I think about the 2025 fee income run rate, you got to take out the gain on the [ OREO ]. And then you're getting -- which you really didn't see here in the quarter, you had about $2 million from the branches we acquired. And then other than the tax credit line item, which I think about as being relatively flat, we've got fees growing at about 5% year-over-year on a recurring basis.

And then from an expense perspective, I've got -- if you call the run rate for 2025, $423 million of expenses, and you've got 18 that the full year for the branches we think expenses grow around 5%. So that gets you -- that will get you in the ballpark. And I'd like to back up for a second and just highlight one assumption that's there.

So we've got 3 Fed fund cuts in that projection, which predominantly affects the deposit costs. So year-over-year, we're accounting for that expense guide, we're accounting for deposit costs on a run rate basis to be relatively flat. And I'll say significantly, but down from fourth quarter annualized run rate. And that's inclusive of the growth that we're expecting in those 3 businesses.

Thanks, Keene. Just to recap that. So I got it on the expense side. You're talking about a [ 423 ] core plus 18 annual on the acquired branches. So kind of growing 5% off of [ 441 ] is that correct number to use? Okay.

Yes. I mean range of reasonableness on both sides of that, but that's how I'm thinking about it and how we've built it.

Our next question comes from the line of Nathan Race with Piper Sandler.

Was wondering if you could just shed some additional color on the 2 loans totaling [ $20 ] million that migrates to nonaccrual in 4Q in terms of what type of impairment was taken in the quarter? And then also what the timing for resolution is? I appreciate that you guys are pretty well secured here. So just curious on some of the background there and any color on just the timing.

Yes, sure. This is Doug. I'll just comment again. So these particular assets, one is a retail center in Riverside, California, approximately $22 million or $23 million in debt. Valuations that we have on current appraisals would suggest we're at a very good loan to value and comment that we're actively negotiating the exit of that credit.

The second loan that came in was a $6 million loan that's secured by a residential property in San Diego. Again, I think from a valuation perspective, we're somewhere in the neighborhood of 60% to 65% of appraised value, and we feel good about our position. Timing on that one is not as clear for me in terms of the exit may take a little bit longer. But from a valuation perspective, we feel good and lost content. I believe there to be very little loss content in either one of those assets.

Okay. That's really helpful. And then, Keene, I'd be curious to get your thoughts on -- I appreciate the broader fee income comments earlier. But just in terms of SBA gain on sale revenue, obviously, the government shutdown had an impact in the fourth quarter, but just any expectations for that revenue line to grow this year?

Yes. I think that, Nate, we did not take gains on SBA loan sales in the quarter. I'm not sure with the tax credit strength, we would have done that anyway. But the shutdown did tie our hands a little bit. We had a good quarter there, but it was all half -- second half of December weighted.

For 2026, I would expect the SBA gain on sale to grow modestly from the 2025 levels in that 5%. But we do have that as part of our plan coming out of the gate here in '26.

Okay. Great. And I just want to clarify on the tax credit revenue. [indiscernible], you had some noise in that number in the third quarter. So I think your comment was kind of flat. Was that flat versus just under $8 million in 2025?

Yes, like 7.5%, 7% to 7.5% is what we're thinking. I mean, obviously, that line is fairly volatile given rates and the performance of that business, but we think it repeats by and large in 2026.

But to your point, there might be some puts and takes depending on how the year and the rate cycle plays out.

Okay. Great. And then I appreciate the commentary around kind of mid-single-digit loan growth for this year. Is the expectation that deposit gathering should largely keep pace just based on some momentum you're having with share gains and just with some of the hires continuing to ramp up. Would just be curious also within that context where your spot rate of deposit costs were coming out of the quarter?

Yes, I'll take the first part of that, Nate, this is Jim. On the overall balance sheet growth, we're looking at 6% to 8%. And to your point, loans at about mid-single digit. But certainly, the deposit gathering rate and pace will exceed the loan growth pace relative to the spot rate on deposits in the fourth quarter. Do you want to hand that one.

Yes, it's 1.6% coming out of the summer.

Our next question comes from the line of Damon DelMonte with KBW.

Hope everybody is doing well. Just wanted to circle back on the margin, Keene, I think you had kind of guided to like a [ 420 ] for the year in 2026. Just kind of curious on the cadence of kind of how you're seeing that play out. We have a bit of a step down here in the first quarter with some seasonality and then kind of just stay flat? Or what are some of the dynamics you're thinking about?

Yes. I think I normalize out about 3 basis points in the quarter. We didn't have any headwinds from prepayment of SBA loans that are acquired at a premium. So that was a few basis points. So we do see that [ 423 ] stepping down to around [ 420 ] and then it just kind of hangs there and that is pretty sticky whether we have no real rate changes or whether we actually have the 3 cuts that I mentioned in our forecast.

The dollars moves around a little bit, but we feel pretty comfortable that at least with the Fed funds rate coming down, but the shape of the curve remaining reasonably intact that we're pretty well positioned to defend margin in that environment. I think we've -- I highlighted in my comments that we've done that successfully so far with the prior Fed cuts.

Got it. That's good color. And then kind of along the lines of the credit outlook, you guys seem pretty optimistic that you'll see some meaningful resolutions on some of these NPAs in the first half of the year. How do we think about provisioning going forward? Do you think you kind of go back to a more normalized level versus what we saw in the back half of the year? Or do you think it kind of stays a little bit elevated until you kind of completely come out of the woods?

Yes. I mean, Damon, based on where we sit today, everything that we know that's a nonperformer or that's a problem have the appropriate reserve or fair value on it, whether it's in [ ORE ] or in the allowance. And so I think that we're approaching it like this, which is the allowance because of the charge-offs and the activity, actually, the coverage came down I think that reflects where we sit from a balance sheet perspective. And as long as we don't have unexpected migration, I think our expectation is that charge-offs moved down from the level they were at in 2025, and then that will alleviate some of the provisioning.

We do have, I think, aspirations to get a little bit more net growth in the portfolio this year. And so that will be a counterbalance, but we'd rather provision, obviously, for growth and for charge-offs. So I think that's a long way of saying we're optimistic, but we're also realistic about just having a little bit more crit-class and ORE than we'd like.

Got it. Okay. Great. And then just lastly, on capital management. You noted you guys did a little bit of buyback this quarter or last quarter. I guess how do you think about the buyback here as we go into '26? And what is the remaining capacity?

Yes. So this is Jim again, Damon. We would very tested in terms of utilizing our capital for buybacks. We've got roughly, we've got 150,000 shares or so.

There's $1.1 million that's still authorized. There's about $100,000 that's covered by a plan right now.

Yes. And then obviously, growth is a big part of it for '26 and then certainly, we'll continue relative to the increase of the dividend over time as well.

And I'll cover that in a little bit, too. I mean I think the question that we get is, you could have done more in 2025. Why didn't you? We wanted -- we leveraged our capital through the branch acquisition. When you look at the stack, the total stack looks good, but we're a little inefficient on TCE. And so I think we've got a little bit of work to do when we come out of year-end here to work on the cap stack, and I think the environment is set up well for that. So more to come there, but that's on our radar as an early 2026 item.

And Damon, I'll just get ahead of the M&A question, which is a very low priority for us. It's about executing the plan to [indiscernible] giving our credit right organic growth, making sure we're integrating well what we did in 2025.

Got it. Thanks for being preemptive with that.

That's all that I had. Thank you very much.

Our next question comes from the line of David Long with Raymond James.

As it relates to your charge-offs for the quarter, I think the number was a little over $20 million. You had a few million from the properties that you've been talking about those 7 properties. There's a good -- it's still elevated when you take that out. I think you mentioned that you decided to move forward on some credits that you had built reserves for. Just curious what drove that higher and why make the decision now to move some of those and charge them off at this point?

Yes. David, it's Doug Bauche here. Let me comment just on charge-offs. Again, fourth quarter, $20 million thereabouts in charge-offs. Net of the aforementioned OREO properties that Keene talked about, right, we had about $3 million of charges there. We're really talking about $18 million of commercial charges in the quarter.

We had 2 sponsored finance credits totaling $3.5 million in aggregate that were previously recognized in reserve for. We had one multifamily project in L.A. County that was still back acquired asset that we took a $3 million charge on. And then really, what came up in the fourth quarter was a C&I credit in our Southern California portfolio, a company that was engaged in kind of last mile logistics and delivery of e-commerce packaging a company that really -- its growth rate outstripped its capital. It was a $10 million credit. We took an $8.5 million charge on that. We continue to carry a $1.5 million balance that we feel we're well secured by the remaining assets of the company.

But I think we wanted just to recognize that fully and head into the 2026 year with a really clean slate and good position. So those were the primary drivers of charges in the quarter.

Okay. Great. No, I appreciate that color. And I think it goes without saying, but this is the fourth quarter aggregate here, net charge-offs is not reflective of anything that you expect going forward, correct?

No, it's not. And I'd just refer back, right? We look at it -- if you look at the year charges again, whether you look at it 18 basis points adjusted or 21 reported that's relatively in line, David, with what our 10-year average is, right? I think our 10-year average net charge-off rate is somewhere in that 15 to 16 basis points.

So I think it's largely in line with our historical performance and quite frankly, it's representative of who we are and the commercial credit that we originate and take. But I feel good about how we're positioned going into the new year.

[Operator Instructions] And our next question will come from the line of Brian Martin with Janney Montgomery.

Most of mine were just covered there. But just one clarification, Keene, on the fee income side, just thinking about the base, I guess, I think you talked about mid-single-digit growth, maybe is that based around -- just given some of the noise throughout the quarters, around $75 million. Is that kind of the starting point that you're thinking about? Or is it different than that in terms of...

No, that's about right. I mean the biggest item in there is the fourth quarter gain on [ ORE ], there are a couple of BOLI payouts throughout the year, but nothing that accumulates to be material, and we'll have items like that. moving forward.

So yes, I'm really just stripping out the $6 million and then growing off of that and adding the $0.04 or $2 million for the branches that will start to earn some fees here in early 2026.

Yes. So how much of the -- I mean, that $2 million run rate in branches, was that in the fourth quarter number? Or that's I guess, fully in the number or not -- I guess, what part of that was in that...

If you think about the timing, I mean we typically put the holidays in place. So you wouldn't have charged fees in October and likely November. So you're not -- the number in and of itself, $2 million is not that large. And then if you have a little bit of run rate in December it's not meaningful. So really, you'll start to get that $500,000 a quarter year in 2026.

Got you. Okay. So it's roughly 75-ish, [ 5% ] and then add in the branches, and that's how we think about it. So that's helpful.

And then just the loan pipeline, I think you talked about or, I guess, the SBA being a bit -- maybe a bit stronger. And just wondering in terms of other areas or segments or markets that are stronger today that you're seeing? I know him comment about the infrastructure. But anything else in terms of where you're -- the growth outlook maybe a little bit better in 2026.

Yes, Brian, this is Jim. I'd say we look at it closely. We feel very good about where the pipeline sits today. The life insurance premium finance portfolio looks good. Portfolio -- or the pipeline. The pipeline down the Southwest looks really good. As Doug mentioned, there's great momentum down there. And it's really a nice mix between C&I and the CRE side. So we like the mix. We like the pace of play. We feel very comfortable about where we sit today and the projected growth for 2026.

Okay. And the projected growth is still consistent with what you -- consistent with this year's performance? Is that how to think about?

I think we said we're mid-single digits, net-net-net for 2026.

Yes. Got you. Okay. All right.

And that concludes our question-and-answer session. I'll hand the call back over to Jim for any closing comments.

Well, thank you, and thank you all very much for joining us this morning and for your interest in our company. We look forward to speaking with you again at the end of the first quarter, if not sooner. Have a great day.

This concludes today's call. Thank you all for joining. You may now disconnect.

Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enterprise Financial Services Corp. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Jim Lally, President and CEO. Please go ahead.

Good morning, and thank you all very much for joining us for our 2025 third quarter earnings call. Joining me this morning is Keene Turner, our company's Chief Financial Officer and Chief Operating Officer; and Doug Bauche, our company's Chief Banking Officer.

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 2 of the presentation titled Forward-Looking Statements and our most recent 10-K and 10-Q for reasons why actual results may vary from any forward-looking statements that we make today.

The third quarter was another very solid quarter for our company. As we expected, we saw loan growth return to an annualized level of 6% while deposit growth continued well above this level. This was a continuation of our intentional strategy to lean into our diversified geography and national businesses that allows for our team to focus on the business that fits us the best versus settling for transactional business that achieves certain growth targets. In addition to this, we spent considerable time on the recent closing and systems conversion for the acquisition of 10 branches in Arizona and 2 in the Kansas City area. As a reminder, this acquisition garnered us approximately $650 million of well-priced deposits and $300 million in loans but more importantly, enhances an already strong presence in two strong markets for us.

We did experience an increase in provision for loan losses in the quarter primarily due to a $22 million increase in nonperforming assets and net charge-offs. Doug will provide much more detail in his comments but I feel good about our ability to work through these issues and expect our NPAs to return to historical levels over the next few quarters.

The recapture of transferable solar tax credits in the quarter caused some noise in our income statement. This investment was a component of our income tax mitigation strategy and is not related to our tax credit loan and fee businesses. Keene will provide details on this and walk you through the accounting treatment in his comments. But I want to reiterate that this project is covered by insurance.

With that said, we earned $1.19 per diluted share in the quarter compared to $1.36 in the linked quarter and $1.32 in the third quarter of 2024. This level of performance produced a return on average assets of 1.11% in the current quarter and a pre-provision ROAA of 1.61%. Net interest income and net interest margin both saw expansion in the quarter. Net interest income improved by $5.5 million when compared to the previous quarter, and net interest margin improved by 2 basis points to 4.23%. This was the sixth consecutive quarter that we saw net interest income growth. These results reflect our continued focus on pricing discipline on both sides of the balance sheet, combined with overall steady growth.

We continue to improve on striking the correct balance of providing a strategic consultative experience for our clients with appropriate growth. I'm confident that this model will continue to provide for our ability to grow NII for the foreseeable future.

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, resulting in a gain of $1.1 million. We continue to see really good progress in our Southwest markets with high-quality growth coming from newer markets like Dallas and Las Vegas. Overall, we originated loans in the quarter at a rate of 6.98%, which continues to be accretive to the overall portfolio yield.

Deposit growth in the quarter was exceptional. Net of brokered CDs, we were able to grow deposits by $240 million as impressive was the fact that DDA remained at 32%. While our national verticals provided for much of this growth in the quarter, we have experienced deposit growth from all of our regions year-over-year and would expect to see our typical fourth quarter swell from these markets to finish the year strong. Our ability to continue to grow deposits gives us plenty of liquidity to fund future loan growth while keeping our loan-to-deposit ratio at an appropriate level for our company.

Our well-positioned balance sheet continues to be a strength for our company. Capital levels at quarter end remained stable and strong, with our tangible common equity to tangible assets ratio of 9.60%, yielding a return on tangible common equity of 11.56%. This return profile and the continued expansion of our tangible book value per common share, which increased over 15% on an annualized quarterly basis. This level of compounding of tangible book value per share far exceeds our 10-year CAGR of just over 10%. Given the strength of our earnings and our confidence in our ability to continue to perform at a high level, we increased the dividend by $0.01 per share for the fourth quarter of 2025 to $0.32 per share.

Our asset quality statistics moved slightly higher in the quarter when compared to the linked quarter. Nonperforming assets increased by $22 million, with the largest component of this being a $12 million life insurance premium loan that is adequately collateralized and just needs to work through the collection process to be resolved. I do not expect any loss of principal on this loan. When accounting for this and the previously disclosed 7 commercial real estate loans in Southern California, these two issues, both of which have high certainty of collection account for nearly 60% of our NPAs. This is why I'm confident that we will see the ratio of NPAs to total assets return to more historical levels in the quarters to come.

I want to be clear that we have never had any exposure to the private lending business identified in regulatory filings by two other regional lenders and articles in various publications. As stated in our October 16 8-K and previously discussed in our first quarter earnings call, the 7 real estate loans in Southern California totaling $68.4 million that are directly secured by priority first mortgages on the real properties owned by the single-purpose entity borrowers. We have commenced foreclosure proceedings with respect to the real property and expect to collect the full balance on these loans.

We will spend the remainder of the year focused on the cultural integration of our new associates who recently joined through our branch acquisition, along with our new clients acquired in the same deal. Additionally, we'll be focused on continuing the strong momentum we have in our regions and specialty verticals, making sure that we enter 2026 with a great deal of confidence and momentum.

Before turning the call over to Doug, I want to briefly comment on what we are hearing from our clients. Last quarter, I mentioned that the impetus for our clients' confidence was the passing of the One Big Beautiful Bill, the downward trajectory of short-term interest rates and further clarity of U.S. trade policy. With the September rate cut behind us and several more on the horizon, we are seeing our clients move forward with more confidence than what we had seen in several previous quarters despite continued uncertainty with some larger trading partners. With that said, I can see our onboarding of new clients and loan production maintaining its current level or possibly accelerating slightly from here.

We operate in very good markets, many of which continue to have disruption due to M&A. We've invested in many new associates who are embracing our value-added solutions-based approach, and our balance sheet and deposit generating capability has us positioned well to profitably fund the opportunities that will be presented. I'm excited for how 2025 will end and the momentum that we will carry into the new year. With that, I would like to turn the call over to Doug Bauche. Doug?

Thank you, Jim, and good morning, everyone. Over the past couple of months, I've spent considerable time in our major geographic markets, and I continue to be encouraged by both the quality and volume of new relationship opportunities we are seeing. Our brand continues to gain traction in our newer markets of North Texas and Southern Nevada, led by our bankers that are well entrenched and connected to those communities, and we continue to capitalize on the strong economic growth throughout our Southwest region.

As Jim mentioned, the September rate reduction and further forecasted easing has seemed to spur some cautious optimism among business owners and real estate investors. Discussions with architects, contractors and developers indicate that their new project pipelines are beginning to build momentum heading into 2026. While volatility continues around trade tariffs with China, our C&I clients have largely navigated this challenging period successfully by adjusting supply chains and pricing to maintain operating margins.

On the lending side, loans increased in the quarter, $174 million, net of $22 million in SBA loan sales. We continue to prioritize full relationship wins with disciplined structure and pricing. Sector growth in the quarter is broken down on Slide 5 and was well balanced between investor-owned CRE of $79 million, C&I of $31 million, including SBA owner-occupied commercial real estate and sponsor finance and $73 million in our tax credit lending niche. Growth in the tax credit sector was largely related to scheduled fundings on existing affordable housing tax credit bridge loans.

New C&I originations were solid and consistent with the linked quarter as we provided senior debt to both existing and new operating companies across our business lines. However, strong originations were somewhat muted by the exit of a quick service food franchise client in our Midwest region, $22 million in SBA loan sales and a reduction in commercial line of credit usage between the end of June and September. As it appears, our clients are working through some of the excess inventory purchases they made in prior periods when tariff and supply chain concerns were more pronounced.

Within the specialty lending business lines, SBA production was stable with the prior quarter and in line with expectations. Sponsor Finance originations slowed in the quarter as we continue our fewer but better approach, while we remain disciplined and committed to this space. Originations in this segment were equally offset by payoffs resulting from sponsors exiting portfolio company investments.

LIPF originations were seasonally modest with a strong pipeline of activity heading into the historically strong final quarter of the year. This sector continues to perform well on a risk-adjusted basis and has experienced a 12% year-over-year growth rate.

Moving to the geographic markets shown on Slide 6. We posted growth in our Midwest and Southwest regions, while we continue to hold serve in our California markets. Growth in our major geographies came from the funding of a market-leading employee-owned electrical contractor, a privately held distributor of high-voltage electrical components, a manufacturer of high-precision metal parts and several new commercial real estate loans with established developers for the acquisition or refinance of industrial and multifamily projects.

Turning to deposits on Slide 7. Excluding the addition of $10 million of brokered CDs, client deposit balances grew by $241 million in the linked quarter, and are up $822 million or roughly 7% year-over-year. Noninterest-bearing accounts increased $65 million in the quarter and represent just over 32% of total deposits.

Within the geographic markets shown on Slide 8, we are posting solid customer deposit growth on a year-over-year basis across all regions. Growth has continued to come from our holistic approach to new business development, which rewards full banking relationships rather than transactional lending or high-cost idle cash balances. Our specialty deposit verticals posted strong results, up $189 million for the quarter and $681 million or 22% year-over-year. Our specialty deposits consisting of property management, community associations and legal industry escrow and trust services are broken out on Slide 9.

Deposits in the community association and property management specialties totaled roughly $1.5 billion each, while deposits residing within the escrow division, reached $844 million. These businesses provide a diverse, growing and overall favorable cost adjusted source of funding that continues to complement our geographic base.

Turning to Slide 10. You'll see that our deposit base is intentionally well balanced across our core commercial, business and consumer banking and specialty deposit channels at 37%, 33% and 30% of total customer deposits, respectively. With deposit clients deeply rooted in treasury management and lending relationships, we're encouraged by our ability to rationally adjust pricing in the current rate environment, while continuing to grow balances across the channels.

I'd also like to provide some commentary on asset quality. As Jim noted earlier, nonperforming assets increased $22 million to 83 basis points from 71 basis points in the linked quarter. The increase in the quarter is largely centered around a $12 million life insurance premium finance loan that is 100% principal secured by cash value life insurance. We are in the process of liquidating the policy with the life insurance carrier, and we expect full principal collection.

Other notable additions to nonaccrual in the quarter included a $6.2 million sponsor finance credit which was charged down by $3.75 million in the quarter with the remaining $2.5 million book balance expected to be satisfied via the sale of business assets. A $2 million single-family residential real estate loan in Santa Monica and two smaller commercial real estate secured loans totaling $2.5 million in aggregate.

On October 16, we filed a Form 8-K, reiterating our position relative to the previously reported 7 commercial real estate secured nonperforming loans totaling $68.4 million in the aggregate to 7 special-purpose entities in Southern California. Our recent foreclosure attempt on October 15 was temporarily stalled due to a second bankruptcy filing. However, we remain confident in our security position and ability to collect the balance of these loans in full. With the satisfaction of the $12 million life insurance premium finance loan and $68 million in aforementioned 7 commercial real estate loans, we expect our nonperforming assets to return to our favorable historical norms in the coming quarter. Now I'll turn the call over to Keene Turner for his comments.

Thanks, Doug, and good morning, everyone. Turning to Slide 11. 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. As Jim noted, we had a recapture of $24 million on solar credits that were purchased as part of our tax planning strategies. Solar tax credits, like many other tax credit programs are subject to recapture from the IRS when certain events occur. Unfortunately, the seller of the tax credits went bankrupt and transferred the solar assets in a bankruptcy sale that triggered the recapture in the quarter. When we acquired the solar credits, we also purchased a tax credit insurance policy to mitigate the risk of loss.

The recognition of the tax credit recapture and the anticipated recovery from the insurance policy has created some noise in our financial statements. The recapture is recorded in tax expense, while the insurance recovery is included in noninterest income. When you account for the recapture plus the taxes on the anticipated insurance recovery, the gross up in noninterest income and income tax expense is $30.1 million during the quarter. Since there is no impact on net income for the third quarter, we have excluded these items from the earnings per share bridge on Slide 11.

Net interest income and margin both showed strong expansion again in the quarter, benefiting from the increase in both loans and securities. In anticipation of the liquidity from branch acquisition that closed in early October, we had increased our security purchases over the past 2 quarters. Excluding the anticipated insurance recovery, noninterest income decreased due to lower tax credit and community development income. The provision for credit losses increased from the linked quarter, primarily due to net charge-offs and an increase in nonperforming loans, along with loan growth. Noninterest expense was higher in the quarter due to an increase in deposit costs from continued growth in the deposit verticals and higher legal and other expenses associated with the increase in and level of problem loans.

Turning to Slide 12 with more details to follow on 13. Third quarter net interest income was $158 million, an increase of $5.5 million from the prior period, reflecting the trend of solid asset growth supported by a growing deposit base and disciplined pricing. Loan interest increased by $3.6 million on higher average balances and level yields. Average balances grew $96 million compared to the linked period and a 6.98% rate on loans booked in the quarter supported the overall portfolio yield. Interest on investments was $2.7 million higher compared to the linked period with average balances increasing more than $200 million and the portfolio yield was higher by 7 basis points. The average tax equivalent purchase yield in the third quarter was 4.99%.

Interest expense increased only $0.9 million compared to the linked quarter. Deposit expense increased by $1.6 million due to higher average balances, partially offset by lower rates on interest-bearing accounts. Interest expense on borrowings decreased $0.7 million, mainly due to lower Federal Home Loan Bank advances and customer repo balances, along with lower rates on both. Interest expense also reflected the redemption of our subordinated debt in September that was replaced with a new senior note at a 3% lower interest rate.

Our resulting net interest margin for the third quarter was 4.23%, an increase of 2 basis points over the linked period. The earning asset yield declined by 1 basis point, mainly due to the change in the overall asset mix from growth in the investment portfolio. Our cost of funds declined by 4 basis points, driven by lower deposit rates and lower cost of Federal Home Loan Bank advances and repo balances, partially offset by an increase in average brokered deposits.

We have focused for several quarters on creating an earnings profile that is less susceptible to changing interest rates, and we believe we have made significant strides. We are well positioned for the current rate environment to add profitable growth to enhance earnings. However, we are slightly asset sensitive, and we expect a 0.25 point reduction in the federal funds rate to reduce net interest margin by 3 to 5 basis points. That being said, we anticipate that most of the recent rate cut will largely be mitigated in the fourth quarter as the branch acquisition is expected to be 5 basis points accretive to our overall net interest margin.

And one last comment on margin. Despite the Fed reducing interest rates by over 100 basis points in the last year, we have managed to grow net interest margin over the last 4 quarters from 4.17% in the third quarter of 2024 to 4.23% in the most recent period. This speaks not only to a more favorable operating and interest rate environment, but also to the quality of our business model and the discipline in pricing and structure we have employed while achieving nearly 10% asset growth.

Slide 14 reflects our credit trends. We had net charge-offs of $4.1 million compared to $1 million in the linked quarter. But importantly, net charge-offs of 4 basis points for the first 9 months of this year continue to trend below our historical average. The provision for credit losses was $8.4 million in the period compared to $3.5 million in the linked quarter. The increase was mainly due to the increase in net charge-offs, a higher level of nonperforming loans and loan growth. Nonperforming assets increased $22 million to 83 basis points of total assets compared to 71 basis points in the linked quarter. Doug provided a lot of details on the movement within our nonperforming assets, but it's worth reiterating that the largest part of our nonperforming assets continues to be made up of two commercial banking relationships where we expect to be made whole. We reaffirmed this expectation in the Form 8-K that we filed a little over a week ago, stating that we expect to collect the balance of these loans because of our senior secured position.

Slide 15 shows the allowance for credit losses. We continue to be well reserved with an allowance of 1.29% of total loans or 1.4% when adjusting for government guaranteed loans.

On Slide 16, third quarter noninterest income of $47 million includes the previously mentioned $30 million of accrued insurance proceeds related to the recaptured tax credits. Excluding this, noninterest income decreased $4.1 million from the linked quarter to $17 million, primarily due to lower tax credit and community development income in addition to the nonreoccurrence of a BOLI policy payout received in the second quarter. We sold $22 million of SBA guaranteed loans that generated a gain of approximately $1.1 million in the current quarter. Depending on levels of planned growth and activity in the SBA space, we may take the opportunity to continue to sell SBA loans in the coming quarters.

Turning to Slide 17. Third quarter noninterest expense of $109.8 million increased $4.1 million from the second quarter. Deposit costs increased roughly $2.4 million from the linked quarter, primarily due to continued growth in the deposit vertical balances. Legal and professional expenses increased as well. Legal and loan expenses grew slightly and remain at elevated levels as we work through certain nonperforming asset relationships. The resulting core efficiency was 61% for the quarter.

Our capital metrics are shown on Slide 18. We grew tangible book value by 4% in the quarter and 12% in the past year. Our tangible common equity ratio was 9.6%, up from 9.4% in the linked quarter, while our strong CET1 ratio of 12% is at the highest level in our history. The strength of our capital position supported the branch acquisition that closed earlier this month and also allowed for the redemption of our subordinated debt that was included in total risk-based capital. We also increased our quarterly dividend by $0.01 to $0.32 per share for the fourth quarter of 2025.

This is another strong quarter of solid financial performance and we expect to close out the year from a position of strength. The strategic branch acquisition that closed this month will help drive this performance as we expand our footprint in important markets. I appreciate your attention today and we will now open the line for questions.

[Operator Instructions] Your first question comes from Jeff Rulis with D.A. Davidson.

Question on -- I guess, to get a little more specific on these credit relationships, just the workout process. I understand you try to give visibility on the Southern California credits. But the resolution that the life insurance loan and these, could you narrow that into -- I thought I heard a resolution in the coming quarter and quarters there was sort of some mixed terms there. Could you just sort of outline that again, how do you expect those to be resolved time line-wise?

Yes. Jeff, it's Doug. First of all, in relationship to the Southern California real estate loan, certainly, with the secondary bankruptcy filing that has been made, the timing of that is a little bit difficult to ascertain. We do feel comfortable that we're going to get some fairly quick remediation from the bankruptcy courts on this. But as we maybe indicated in prior periods, we started down the path of both the nonjudicial and judicial foreclosure process in California in anticipation of a potential block like this. So we're moving down the path as quickly as we can. But I wouldn't necessarily say it's going to be in the fourth quarter. I think it's more in the coming quarters that we'll get resolution on the real estate loans.

As it relates to the life insurance premium finance loan, I'd just reiterate, we've got a stellar 20-year track record lending in this space without principal loss. This is unfortunate timing, but a co-trustee of the $12 million life insurance policy filed suit against the insurance carrier. And the insurance carrier is simply delaying their recognition of our demand to honor the obligations to surrender the policy and send us proceeds to pay the loan off. So again, this looks like this may be heading through some litigation. And with that said, I think precise timing of the resolution of that case is a bit uncertain. But what is certain is full coverage of cash surrender value covering our principal balance and collectibility.

Appreciate it. And Doug, do you have NDFI exposure in the portfolio, just a figure of percent of loans overall?

Yes. Let me say this, Jeff. So as it relates to NBFIs, it's a very broad classification that includes credit exposure to bank holding companies, mortgage warehouse originators, capital call lines for private equity funds and a lot of different types of businesses, including those engaged in our state and new market tax credit lending programs. But I think specifically what you might be referring to is more exposure to private lenders. And I would say this, we have, for years, maintained some very favorable relationship with private lending entities where we take assignments of their notes, security instruments, and that's our primary collateral. Today, that portfolio consists of approximately $260 million or $270 million in balances across, I'll call it, 8 to -- 18 to 20 different relationships. So these private lenders specifically are largely engaged in providing first mortgage secured loans to investors in 1 to 4 family residential real estate. So our process here, Jeff, like everything else, right, these are deep relationships. They're highly experienced and quality leaders. We know them well, and we're very disciplined in our credit underwriting and monitoring process. So hopefully, that captures what you're looking for there in terms of exposures to the private lenders.

Sure. That helps, Doug. Keene, on the margin. Sounds like you're largely going to offset this most recent rate cut. And then if we carry forward that 3 to 5 basis points pressure per 25 basis point cut, then you detailed the history of the last year plus of really defending margin when you screen asset sensitive, but the reality is you've done much better than that. Is that still the case if we think about a flat margin into the fourth quarter with those cut versus the branch accretion? And then the go forward, is it -- would you say that the net of that is still some modest pressure, I hope to do better than the 3% to 5%? Any commentary on go-forward? .

Yes. Maybe just as I always think about it, when we talk about asset sensitivity, we're also talking about parallel shifts. And I don't think anybody is expecting a parallel shift. I think we're thinking the short end of the curve comes down. And in that case, that's been good for us, and we've been able to defend that fairly well. I think your comments are appropriate. I think that our view, once we get the branches on here, 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. So I think when you look at last year's year-to-date period, returns are roughly 125 basis points. We're on top of that in the current period with a little bit worse provision. And I think that our view is that -- if we assume that we rotate out of taking gains on SBA loans, that profile sort of remains the same and with the bigger balance sheet, you're growing earnings per share. So I think 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. And we've got -- we're using Moody's baseline, so that has Fed funds going to 3% in the third quarter of '26 and 50 basis points here in the fourth quarter. So I feel like that environment or that forecast also doesn't assume that we get better-than-expected loan growth, which I do think will occur if we start to get rates down to that degree.

Your next question comes from Damon DelMonte with KBW.

Keene, just a question for you on the expense outlook kind of here in the fourth quarter and how we think about going into '26. Can you give a little bit of guidance on the expectation from the branch deal and the integration of that?

Yes. So total reported expenses here in the quarter were $110 million. There's some run rate adjustment in there. So let's call the run rate here in the third quarter normalized without onetimers $107 million. And then I think in the fourth quarter, you're going to get roughly $4.5 million of expenses related to run rate on the branch acquisition. And then there's probably 2.5 of onetimers in there. And then I think when you think about full year branch acquisition expenses on a run rate basis, it's just under $18 million. So I think when you normalize through all of that and you take the historical enterprise base and you annualize the branch base, I think we think expenses year-to-year will be up roughly 3.5%. That's kind of what we're thinking. And that's got that Moody's interest rate reduction in that plan where the deposit costs essentially are level kind of year-to-year.

Got it. Okay. All right. That's helpful. And then on the fee income, obviously, some volatility in the tax credit income line this quarter. Fourth quarter typically is the strongest point of the year. So how do we kind of think about the rebound off of the modest loss this quarter? I mean maybe look at it on a full year basis?

Yes. I think that we kind of went from the maybe the best case scenario of fee income in the second quarter to, -- I don't want to say worst-case scenario, but certainly a baseline here in the third quarter. And I think the fourth quarter comes somewhere in between it. I will say that there is a -- with the shutdown that's occurred right now, the SBA sale is maybe off the table as a lever here in the fourth quarter, but we do expect the CDE to have a little bit better quarter. Private equity should be in there. And if the tax credit delivers any kind of profitability. I think the fourth quarter should be somewhere between where the second and third quarter were. And you will get a little bit of impact from the branch acquisitions. There's roughly $2 million annually of fees that come in. Now we give some fee income holidays around acquisitions. So you'd only maybe have like a month of that, but that will also provide some benefit there.

Okay. So the -- somewhere in between the second and the third quarter, that's on a total noninterest expense basis, not...

I think so. And I think that that's -- we're expecting 50 basis points of rate reductions that should help the tax credit line item in addition to activity. I just -- I don't know if there's going to be an opportunity to sell SBA loans, I think we're going to have -- we would have otherwise had a strong quarter. I'm just not sure if those can get funded and sold and all that stuff.

Your next question comes from Nathan Race with Piper Sandler.

Keene, just going back to your previous comments around noninterest expenses. Can you just remind us what your deposit beta assumptions are just in terms of the ECR costs running through expenses?

Yes, it's 40%, and that's been pretty consistent. So 25 is 10. And that's roughly $1 million quarterly for every 25 basis points.

Okay. Great. And then just turning to capital, and I would be curious to maybe get Jim's updated thoughts on management priorities. Obviously, you guys are in a good capital position, and that should continue to build absent any material deployment. So Jim, just curious to hear what you're thinking on the M&A front these days? And just what the appetite for share repurchases as well.

Yes, sure. Thanks, Nate. Our priority capital really is to continue to funding our growth and focused on the organic growth, given our markets and what have you. From an M&A perspective, as I talked about in my comments, it's about integration at this time. Systems are working great now. It's a cultural and client integration that we're focused on with our new markets and expansion of our markets in Arizona and Kansas. Relative to other M&A, certainly, like a lot of businesses, we talk to a lot of companies and what have you, but we're looking for the fit, if you will, that allows us to continue to improve the right side of our balance sheet, and certainly stay close to the markets that we're in. And to the extent that doesn't come to fruition, certainly, buybacks are on the table for sure.

Okay. Great. And maybe one last housekeeping question. I don't believe you guys disclosed kind of the core deposit intangible goodwill impact from the branch acquisition. Wondering if you could just update us on what we could be expecting there as we think about pro forma tangible book in the fourth quarter?

Yes. I would just say, high level, the dilution is 5%, Nate, and we expect that maybe that depending on how mark's work moves around a little bit, from where we estimated it, it's going to be roughly $70 million of intangibles.

Okay. Great. And that 5% dilution doesn't include kind of the retained earnings impact in the fourth quarter, I presume?

No, that's just sort of a hard line deal math. I think we'll obviously make some profitability. And depending on what happens with securities fair value may not even see a diminution of tangible book value in the fourth quarter.

[Operator Instructions] Your next question comes from Brian Martin with Janney.

Just Keene, one clarification on the expenses. I think if the -- is your suggestion on expenses, at least kind of a run rate to think about for fourth quarter around 112-ish, is that -- I missed the part about -- you said something about a nonrecurring piece. I know you said it was -- the baseline might be 107 and then you had about 4.5 of pickup from the branches, the kind of that 112-ish level is how we think about where you start for 4Q? Or did I miss something there?

No, that's about right. I mean, I think you got sort of 2.5 the 114 minus 2.5 of integration. So you're in that ballpark, like 111 and 113 is kind of where we're thinking.

Got you. Okay. That's helpful. And then just in general, if we think about the fee income line, Keene, I guess I don't know that the tax line is one item, but just in terms of fee income, kind of where you think -- if we just think bigger picture because there's a lot of moving parts and there are some variable pieces, if we think about it as a percentage of revenue, how you think about where that shakes out as you get into maybe next year on an annual basis? Is it kind of current level, is that how we should think about it? Or I guess is there a better way to think about it, given all the moving parts in there that swing around in a given quarter, but just bigger picture annually, the best way to think about it?

Yes. I think -- I'm not sure I think about it relative to percent of revenue necessarily, just -- it's 10%, 11%, but we're going to expect to grow net interest income and maybe falling on my sword a little bit, we're going to outstrip fee income growth because that's kind of a mid-single-digit grower. I think when I look year-to-year at fee income levels, I think we expect generally that if you stripped out gain on sale of SBA loans, the level is consistent and maybe growth just slightly between 2025 and 2026, and then there's an opportunity to sell SBA loans, call it, from $2.5 million to $5 million depending on what production is to solve for some greater profitability. So I think that's more likely. If I look out and say we're going to get Fed funds down to 3%, I think commercial loan growth is going to pick up. And I think SBA production is going to pick up. We've been on our heels a little bit there. We've been being disciplined on credit, and other factors in all spaces, but especially SBA. And I think with rates down, that will improve pricing on gain on sale as well as just the approval rate for borrowers. And so that will give us a greater opportunity, both for production and for sale. So that's an opportunity, but we're not factoring that into what we're thinking, and it's not reflected in my comments about stable ROA and ROATCE from '24 to '25 to '26.

Got it. Okay. And just big picture on the fees, would you expect fourth quarter to be a relatively -- typically, it's an outsized quarter on the tax credit activity mean not getting into the dollars, but still an outsized quarter in 4Q. Did you say that if you...

I didn't say that. Your comment is right. Typically, it's outsized. I think the tax credit line item with rates moving around and also with how we've repositioned that business to be more of a loan business than a fee business. It's gotten a little bit more volatile and a little bit less aggressive. So look, we could come back and have $5 million or $6 million in that line item. That's not what we're planning. We're hoping we get $1.5 million to $2 million. And so my comments, I think, earlier to Damon were that I thought the fourth quarter total fee income would be somewhere between where the second was, which was a high watermark and in the third quarter, which was sort of the baseline kind of clean quarter minimum from my perspective. So somewhere in the middle of that, I think it's a reasonable expectation for 4Q fee income.

Got you. Okay. Sorry about that. I missed that comment to Damon. So -- and then just one last one, maybe just for Jim, I guess, -- did I hear it right, Jim, in terms of -- it sounded as though on the capital front that the M&A might be more of an interest than the buyback in the short term depending on that? And if that was the case, let me ask that, and I can ask a follow-up if I can, Jim, but did I miss that or is that your priority?

Yes. I'd say this, that to me, the prioritization is growth, as I said, then we would look at buybacks. And if M&A came about. It was a good opportunity for us to improve the right side of the sheet, we'd certainly look at it. But we're certainly not chasing in that space right now.

Okay. So it's more organic and buyback rather than M&A. And if M&A is there, it seems like less of a priority in the short term. Okay. Got you. And then just the last thing for me, was just the strong growth that you guys have put up in the specialty deposits. Can you just give a sense of what's driving that? And just in terms of where that cost -- where those deposit costs typically are? It sounds like they're maybe on the lower side. But kind of how do those costs shake out relative to the total cost of funds? And just if you expect rapid growth to continue?

So the answer to that, Brian, is yes, we do. I think it's one of the things we've invested in people. We invested in systems, expertise and all three of those verticals is keeps driving it. So we look at it that it's a variable cost model for us, very profitable, but yet we're garnering share from others just by virtue of being in the market like we are in our other businesses and being present and being problem solvers. And we'll continue investing in that space with good producers.

There are no further questions at this time. I will now turn the call back over to Jim Lally for closing remarks.

Carly, thank you, and thank you all very much for joining us this morning and your interest in our company. And we look forward to speaking with you again in early 2026. Have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.