The financial landscape in the first quarter of 2026 saw a slight decrease in certain areas, but there were also positive indicators that point towards future growth and stability. Three main factors contributed to the decrease in financial numbers during this period.
Firstly, several significant closings that were expected to take place in the first quarter were postponed to the second quarter. These closings are now anticipated to occur in the coming weeks, which will likely have a positive impact on financial outcomes in the near future.
Secondly, there was a $100 million pay down in the low-income housing tax credit portfolio. These paydowns are a regular occurrence and stem from successful sales that occurred in the previous quarter. The majority of these loans were originated in 2021 and 2022, and the fixed rates earned on these loans are lower than what can currently be earned on this cash in the investment portfolio.
The final contributor to the slight decrease in financial numbers was the sale of $25 million of SBA loans in the quarter, which resulted in a gain of $1.4 million. Despite these decreases, there are positive trends that indicate future growth and stability in the financial landscape.
The diversified deposit base of the company continues to be a key strength, although there were typical first-quarter deposit outflows due to a concentration of commercial-oriented accounts. Efforts have been made to counteract this trend through growth in national deposit verticals and diversification within the Commercial Bank and business banking and consumer relationships.
The composition of deposits remained stable, with the percentage of [indiscernible] to total deposits remaining at 33%. There was also a reduction in the overall cost of deposits to 1.52%, a 12 basis point drop in the quarter.
Progress has been made on dealing with the 7 Southern California properties that are currently in OREO, with 4 of these properties under contract representing total OREO balances of $46 million. Efforts are ongoing to resolve the remaining properties, and positive progress is expected in future quarters.
Looking ahead to the rest of 2026, the company has outlined its priorities, which include asset quality improvement and overall mid-single-digit balance sheet growth. The ability to produce well-priced diversified deposits remains a strength, although uncertainties related to global conflicts may impact future loan growth.
Efficiency gains through automation and technology expansion are also key focus areas for the company, as it aims to continue growing tangible book value per share annually. Overall, the company is positioned well for future growth and stability, with strong markets, a growing diversified deposit base, and a solid balance sheet. The first quarter of 2026 may have seen some challenges, but the company remains optimistic about its prospects moving forward. In a recent update on our loan funding pipeline, we are pleased with the mix and breadth of opportunities we have in store. Despite some potential challenges such as geopolitical risks and market complexities, we remain cautiously optimistic about our ability to achieve our loan growth objectives for the year.
One key highlight is the strong diversity of our loan portfolio showcased across various geographic markets and specialty business lines. The Specialty Lending portfolio, which includes tax credit lending, sponsor finance, SBA, and life insurance premium finance, has remained relatively stable year-over-year at just over $4 billion. However, our core markets in the Midwest and Southwest have shown impressive growth rates of 6% and 25% year-over-year, respectively. This growth also includes loans acquired in a recent branch acquisition that closed in the fourth quarter.
In the West region, our investments in new talent in Southern California are starting to pay off, with a growing pipeline of quality CRE and C&I holistic relationship opportunities on the horizon. This momentum is expected to translate into solid organic growth throughout the year.
In terms of deposits, there have been reductions within the core geographic portfolio due to seasonal outflows and client balances associated with distributions, bonuses, and tax payments. However, this reduction was partially offset by continued growth within our national deposit verticals, which saw a $187 million increase or roughly 20% annualized in the first quarter. Overall, total client deposits, excluding brokered funds, have increased by 10% year-over-year.
Our national deposit verticals, which include property management, community association, and legal and escrow businesses, continue to provide attractive sources of funding, diversifying our overall deposit base. With over $4 billion in deposits, the average earnings credit stands at an appealing 2.59%, considering no incremental expenses in branches or branch personnel.
Lastly, the mix of our core deposit base remains well diversified and highly relationship-oriented, with over 33% of accounts being noninterest-bearing. These accounts, coupled with a high percentage utilizing treasury management and online banking services, provide operational stability and a solid base for expanding other fee-generating revenue streams.
Overall, despite potential challenges ahead, we are confident in our ability to navigate through them and continue on a path of sustainable growth. With a strong loan funding pipeline and a strategic focus on diversifying and expanding our deposit base, we are well-positioned for success in the coming quarters. Net interest income for the company remained slightly asset sensitive, with a reduction of $1 million to $2 million per quarter or a couple of basis points of net interest margin with each 0.25 point cut in rates. Including deposit-related noninterest expense in the analysis, it was modeled that the company is effectively neutral to modestly liability sensitive due to the success in growing deposit balances. The recent steepening of the yield curve is expected to have a favorable impact on pricing for fixed rate loans and reinvestment of cash flows in the investment portfolio. With the Federal Reserve seemingly on hold, the company anticipates its net interest margin to remain in the low to mid 4.2%. As the company executes its growth plans for 2026 and remains committed to disciplined pricing on loans and deposits, it looks for net interest margin to remain stable in this range with consistent growth in net interest income over the next few quarters.
In terms of credit trends, net charge-offs totaled $4.4 million in the first quarter, a significant improvement from $20.7 million in the linked quarter. Progress was made in reducing nonperforming assets with the full repayment of 2 loans and total principal repayments of $21 million on nonaccrual loans. The company also foreclosed on the last property related to its largest nonperforming relationship and is actively working on resolving these properties. Net charge-offs totaled 15 basis points of average loans compared to 21 basis points in 2025.
The provision for credit losses was $7.2 million in the period, down from $9.2 million in the linked quarter. The provision was mainly due to net charge-offs and a qualitative adjustment to the allowance for potential impact of the Iran conflict. The allowance for credit losses ratio increased to 1.21% compared to 1.19% at the end of 2025. When adjusting for government guaranteed loans, the ratio increased to 1.32% of total loans, showing the strength of the reserve coverage.
Noninterest income in the first quarter was $19.1 million, 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. First quarter noninterest expense of $115 million was relatively comparable to the linked quarter, including a full quarter of operating expenses related to a branch acquisition that closed in the fourth quarter.
Deposit costs were lower than the linked quarter by $1.5 million, largely driven by the expiration of certain allowances that were not utilized. The core efficiency ratio was 60.2% for the quarter. The company continues to proactively manage excess capital, repurchasing shares of common stock and increasing the quarterly dividend. The company remains well positioned with a strong earnings profile, balance sheet, and capital position to support further organic growth across its markets. As the second quarter progresses, three out of the four properties are expected to transact, with the fourth one likely to follow later in the year. The contracts in hand support the financial statements, indicating a positive outlook for the company’s transactions.
During a recent discussion, Jeff Rulis and James Lally expressed confidence in the gains or losses related to these properties. James Lally mentioned that the timing of the contracts is crucial, and they have identified potential buyers for the properties. The company is focused on maximizing outcomes by allowing interested parties to compete for the best deal.
Shifting focus to margins, Keene Turner discussed the margin trends in the first quarter and the expected stability through the end of the year. Despite a slight step down in March, the company anticipates stable margins, supported by earning asset repricing opportunities and balance sheet growth. Keene mentioned the importance of the yield curve and reinvestment rates in maintaining stable margins.
Furthermore, Keene highlighted the company’s ability to reprice deposits effectively and its readiness to defend margins if necessary. The company aims to focus on growth and balance sheet expansion to drive consistent net interest income growth.
In terms of expenses, Keene Turner addressed the seasonally heavy compensation in the first quarter, expecting some relief in the second quarter. He mentioned a potential step up in deposit expenses but emphasized that any sequential changes in expenses would be offset by net interest income growth and other factors.
Looking ahead, the company anticipates positive progress in the second, third, and fourth quarters, with more days, growth, and contributions from episodic fee items. The provision for the future was also discussed, indicating a strategic approach to managing expenses and driving profitability in the coming quarters. The recent decrease in non-performing loans (NPLs) in the last quarter is a positive sign for the company. It indicates progress in managing credit risk and improving the overall health of the loan portfolio. The provision for loan losses, which is driven by factors like net charge-offs and maintaining the loan loss reserve, is expected to remain stable at above 120 basis points.
Keene Turner, in response to a question about charge-offs and provisioning, mentioned that charge-offs are in line with recurring levels, and the additional reserves were set aside to account for economic uncertainty. This proactive approach positions the company well to absorb any potential future losses due to factors like oil prices or other economic challenges.
When asked about capital management, James Lally emphasized the importance of growth and mentioned that repurchases and dividends are being evaluated as potential strategies. Mergers and acquisitions (M&A) remain a low priority for the company at the moment.
Douglas Bauche discussed the competitive pressures affecting loan pricing and mentioned that loan yields are in the low to mid-6% range. The company is focusing on protecting margins and pricing loans strategically to remain competitive in the market.
In terms of funding loan growth, Keene Turner highlighted the plan to outfund loan growth with deposit growth. The securities portfolio will be maintained at a similar proportion, with the expectation of continued deposit growth in both the commercial and consumer banks.
Looking ahead, the company is confident in its ability to grow deposits and deploy funds effectively in securities or loans. The focus remains on disciplined lending practices, credit quality, and pricing to ensure a strong performance in 2026 and beyond.
When asked about M&A appetite, James Lally reiterated the focus on executing the current growth plan and maximizing opportunities for organic growth. M&A remains a low priority, with the company concentrating on implementing and executing the existing strategic plan effectively. Our fourth tender associates are focused on today, tomorrow, and into the future, as mentioned in a recent conference call with Jim Lally, President and CEO of Enterprise Financial Services. The call, which concluded with closing remarks from Lally, highlighted the company’s ongoing commitment to growth and innovation.
During the call, the operator fielded questions from participants, with Lally providing insights into the company’s strategic direction and future plans. Lally expressed gratitude to all attendees for their interest in the company and encouraged them to stay tuned for updates at the end of the second quarter.
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For more insights into Enterprise Financial Services and other companies, individuals can access the full earnings transcript from the first quarter of 2026 on the Motley Fool website. The transcript provides a comprehensive overview of the company’s financial performance and strategic initiatives, offering valuable insights for investors and stakeholders.
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