U.S. Markets open in 6 hrs 28 mins

Edited Transcript of EFSC earnings conference call or presentation 23-Apr-19 7:30pm GMT

Q1 2019 Enterprise Financial Services Corp Earnings Call

Clayton Jun 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Enterprise Financial Services Corp earnings conference call or presentation Tuesday, April 23, 2019 at 7:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* James Brian Lally

Enterprise Financial Services Corp - President, CEO & Director

* Keene S. Turner

Enterprise Financial Services Corp - Executive VP & CFO

* Scott R. Goodman

Enterprise Bank & Trust, Inc. - President

================================================================================

Conference Call Participants

================================================================================

* Andrew Brian Liesch

Sandler O'Neill + Partners, L.P., Research Division - MD

* Brian Joseph Martin

FIG Partners, LLC, Research Division - VP & Research Analyst

* Jeffrey Allen Rulis

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Michael Perito

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Nathan James Race

Piper Jaffray Companies, Research Division - VP & Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the EFSC earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jim Lally. Please go ahead, sir.

--------------------------------------------------------------------------------

James Brian Lally, Enterprise Financial Services Corp - President, CEO & Director [2]

--------------------------------------------------------------------------------

Ryan, thank you, and good afternoon and thank you all very much for joining us. I would like to welcome you to our 2019 first quarter earnings call. Joining me this afternoon is Keene Turner, our company's Chief Financial Officer and Chief Operating Officer; and Scott Goodman, President of Enterprise Bank & Trust.

Before we begin, I would like to remind everyone 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. We've had a very solid first quarter highlighted by the completion of the merger with Trinity Capital Corporation and its wholly-owned subsidiary, Los Alamos National Bank.

As we discussed on previous calls, this market gives us the opportunity to further build out our South Western presence while adding a significant valuable core deposit base.

If you would please turn to Slide 3 where you'll find our financial scorecard. You will notice that our earnings per share declined by 26% from the $0.90 that we posted 1 year ago. Keene will get into the details related to this but the majority of this decline had to do with merger-related expenses that we incurred during the quarter.

Drilling deeper into the details of the quarter, net income growth in dollars improved by 13% year-over-year due to the quality loan growth and improvement of our net interest margin. We are especially pleased with our ability to expand core net interest margin despite continued rate pressure on deposit that exists within the industry. Scott will provide more granular detail about our loan and deposit results in the first quarter along with our confidence in meeting our growth numbers for the remainder of the year.

Our diversified loan portfolio, both in terms of geography and types of loans, has produced a very enviable quality. Compared to a year ago, we were able to reduce our nonperforming loans by 18 basis points. Furthermore, we stack up very well when comparing our credit statistics to our peers.

As previously mentioned, we closed on the merger with LANB, the impact of which increased our deposit levels by 29% year-over-year.

Slide 4 lists our focus for the remainder of 2019. At the top of the list is the integration of LANB into Enterprise. Much of the cultural integration began at announcement and will continue for the foreseeable future. The system integration is scheduled for later this quarter, and we're confident in our ability to accomplish this in a seamless, client-focused manner.

Second on the list is our focus on achieving our organic loan and deposit growth goals. Despite the lack of growth in Q1, we feel good about our ability to achieve our targets for the remainder of the year. Finally, we will remain focused on doing the right things each and every day to improve our sales and operational processes. This culture of continuous improvement has taken hold throughout our company, and it is a significant reason why we have achieved the result that we have. I would now like to turn the call over to Scott Goodman, who will provide more color on our markets and lines of business.

--------------------------------------------------------------------------------

Scott R. Goodman, Enterprise Bank & Trust, Inc. - President [3]

--------------------------------------------------------------------------------

Thank you, Jim. As shown on Slide #5, the addition of the Trinity portfolio contributes $682 million of loans to the book pushing loan growth to 20% year-over-year, net of the acquired loans, the organic portfolio is basically level for the quarter.

Slide #6 illustrates continued momentum in C&I lending with 9% annual growth in the organic portfolio and 12% with the addition of Trinity. For the quarter, we experienced solid C&I growth within the geographic markets. However, this was offset by larger pay downs in the commercial real estate portfolio along with seasonality and event-driven reductions in the specialty loan segment.

The business segment changes are itemized on Slide #7 along with a breakdown showing how the Trinity loan portfolio folds into the legacy book. As we have previously discussed, Trinity's loan strategy was primarily focused on commercial and residential real estate along with some general C&I lending to private businesses within their footprint. Within our specialty business segments, life insurance premium finance posted solid growth as momentum from Q4 carried over through the increased policies and several new opportunities to refinance deals, which were referred from our existing client base.

The EVL, or Enterprise Value Lending book, declined by $26 million from the sale of several portfolio companies combined with a slow quarter for new originations. Following a busy Q4, many of the sponsors were active rebuilding deal pipelines while others were finalizing their next round of capital.

In general, activity in this sector remained solid, and we're seeing a good flow of new opportunities already in Q2. Within the tax credit portfolio, the decline there was mainly the result of a pool of credits in a leveraged fund, which were sold to investors during the quarter, and this is typical in life cycle of certain tax credit funds. Our pipeline of other tax credit opportunities within the affordable housing and new market programs is solid and should result in continued growth in this sector as we move through the year.

Along with specialized lending, the geographic business units are broken out on Slide #8. St. Louis had decent origination activity in the quarter but was most heavily impacted by higher-than-average levels of loan payoffs and pay downs related to the sale of real estate, the sale of several operating businesses as well as the successful resolution of some problem C&I loans. In Kansas City, we experienced growth in both new C&I loans as well as investor real estate. New relationships include M&A financing for a larger contractor and the refi of seasoned multifamily complex as well as a large new multiuse construction project for existing clients.

Arizona grew its C&I portfolio through a number of new relationships in the service, fabrication and entertainment industries. However, this was mostly offset by 2 large payoffs relating to the sale of property and a permanent market takeout. In general, while the lack of organic growth in the quarter is a bit disappointing, I am encouraged by the outlook for the remainder of 2019. Our refreshed sales process focused on higher levels of C&I calling continues to onboard new relationships and grow the existing book. Credit quality and loan yields are solid as we remain disciplined relative to loan pricing and structure particularly in the more competitive and transactional investor CRE categories. And loan activity and pipelines heading into Q2 are strengthening across the board.

Deposit growth is profiled on Slide #9 and shows the impact of the Trinity acquisition, pushing total deposits to over $5.5 billion mark. The additional acquired deposits are beneficial to the overall mix and cost of the legacy portfolio with DDA and low-cost savings accounts comprising nearly 90% of the total. Organic deposits were up roughly 4% over the same period last year. Balances declined seasonally from the prior quarter but fundamentals remain solid. The trend in new account -- net new account activity continues in a positive direction as inflows in the new accounts was nearly double that of closed accounts in the quarter. As rates have risen over the past year, we have seen depositors in the organic portfolio transition more dollars into interest-bearing accounts. We have been able to retain a significant amount of these deposits at acceptable rates, and more importantly, we continue to expand our base of deposit relationships overall. Now I'd like to turn it over to Keene for a review of our financial results.

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Thanks, Scott. We reported net income of $16.2 million or $0.67 per share on revenue of $61.6 million for the first quarter. The return on average assets was 1.1% and the return on average tangible common equity was 13%. The completion of Trinity acquisition in the quarter added $7.3 million of pretax merger expenses and contributed to the linked quarter decline in earnings per share and returns.

In addition, since the acquisition closed March 8, less than a month of earnings benefit is included this quarter, according to Scott, the specific drivers of the quarterly changes in EPS momentarily. Additionally, we previously communicated that we estimated 8% earnings accretion in 2020 from Trinity with a tangible book value earnback of approximately 3 years using both crossover and simple methods. As we update our model post-acquisition, we continue to feel comfortable with the original guidance. We also believe that the fourth quarter of 2019 will generally reflect fully phased-in cost savings.

While the first quarter was seasonally softer and fees and expenses were encouraged by the fundamentals of the business, especially with stable core net interest margin, efficiency and credit metrics all under the microscope.

The breakdown of change in earnings per share for the first quarter compared to the linked fourth quarter is presented on Slide 10. The largest impact of the quarter was $0.24 in merger-related expenses that reduced EPS by $0.20 per share compared to the linked quarter. Additionally, the shares issued as consideration for Trinity affected the diluted share count by over 1 million shares in the first quarter or around $0.04 on earnings per share.

And the income tax rate was impacted by several items including nondeductible merger expenses that I'll detail further.

Our other results declined seasonally by $0.07 per share net, principally within fee income, as the fourth quarter of 2018 included $2 million more of state tax credit sales than the current quarter. We'll dig into the remainder of the first quarter as we proceed through the detailed components.

On Slide 11, we present our net interest income and core net interest margin trends. Over the past year, core net interest income has expanded by 13% to $51.2 million and the core net interest margin expanded 5 basis points. On a linked quarter basis, core net interest income increased $2.7 million and the core net interest margin increased 2 basis points. Reported net interest margin was 3.87% and reflects the trend in our core net interest margin along with more stable accretion from non-core acquired assets, which was $1 million higher in the linked fourth quarter.

The linked quarter increase in net interest income was driven by the addition of Trinity, which added approximately $3 million while net interest income from legacy Enterprise declined modestly as our fourth quarter growth was unable to outpace 2 fewer days along with net interest margin expansion. One day represents approximately $0.5 million, and by our estimate, core net interest income declined by less than that amount premerger. As Scott mentioned, in addition to $680 million of loans added from Trinity, we had continued success in C&I lending. We also grew the life insurance premium finance portfolio, which totaled 9% of the loan portfolio.

While the growth in these areas was offset by a decrease, principally in real estate-related categories, we still feel confident about our opportunities for the remainder of the year. We had a strong fourth quarter and when that happens, it is typical for us to see a slower start to the next period as the pipeline is restored. The yield on the loan portfolio expanded to 5.50% and despite the acquisition, variable rate and C&I loans of total loans only decreased modestly. We're still finalizing our purchase accounting evaluation and we've recorded preliminary fair value marks during the quarter. This added 2 basis points to the loan yield and 1 basis point to overall net interest margin.

The impact of Trinity on net interest margin, as we previously stated, is generally neutral due to the higher mix of investment securities offset by Trinity's stable low-cost deposit base. Maybe said differently, we're also pleased that despite the lower loan-to-deposit ratio, our core margin held steady. Remixing between investments and loans moving forward provides the opportunity to maintain stable net interest margins despite current interest rate conditions. I probably can't emphasize enough how pleased we are with the last several quarters' net interest margin performance and where we are positioned today. We remain focused on enhancing our earnings by defending net interest margin while growing loans and deposits in the upcoming quarters.

Slide 12 highlights our credit quality trends. Nonperforming loans declined in both dollars and as a proportion of the balance sheet to 0.19% of total loans from 0.38% at the end of December. Several relationships had principal reductions in the quarter and one loan charge off of $1.8 million that was fully reserved in prior period that was charged off. It's worth noting that most of the movement into OREO in the first quarter was merger-related. Provision expense was $1.5 million in the quarter compared to $2.1 million in the fourth quarter. That was primarily a function of the balance sheet trends in the legacy Enterprise portfolio and the decline in nonperforming loans.

Let's turn to noninterest income on Slide 13. Noninterest income declined $1.5 million from the linked quarter primarily from lower state tax credit activity, which is seasonally strongest in the fourth quarter. We also experienced some seasonal weakness reflective of underlying transaction volumes and day counts in some of our typically more stable businesses. These trends were outpaced by approximately $600,000 in noninterest income from Trinity in the quarter. Nonetheless, we continue to expect high single-digit growth in 2019 fee income from legacy Enterprise due to -- primarily due to opportunities in state tax credits and card services. In addition, Trinity's current fee income stream will help strengthen and diversify us in this area, and we expect our card services and treasury platforms will be beneficial to the client base over the long term.

Turning to Slide 14. Noninterest expenses were $39.8 million including $7.3 million in merger-related expenses. As we continue to work through contract terminations, we expect that our announced onetime estimate is accurate. Approximately, $2 million of the operating expenses in the first quarter were run rate Trinity expenses since March 8.

Employee compensation and benefits increased $2.7 million from the linked quarter, which includes $1.2 million from Trinity. Stepping back, legacy expenses would've declined below $30 million in the quarter before Trinity and $1 million of seasonal payroll taxes.

This is principally due to some of the timing of runout of amortization on tax credit investments, which we see in the effective tax rate. Despite the higher relative Trinity operating expenses, the efficiency ratio was comparable to the prior year quarter at 54%. We expect expenses will continue to be an elevated amount until after the conversion of Trinity systems, which is currently planned for the second quarter.

After conversion, the full run rate of efficiencies including elimination of duplicate system costs will begin to be realized and we will expect further leveraging of our expenses and improvement in the efficiency ratio.

I noted earlier, but we included an exhibit on the income tax rate compared to prior periods.

This is on next Slide 15. The current quarter effective tax rate was 21% including 130 basis points due to nondeductible merger expenses. Excess tax benefits were similar to full year 2018 but were unfavorable to the prior year quarter, which included a fairly significant tax rate benefit. Our effective tax rate for the first quarter, after those 2 items, is at the top end of our projections due to timing of tax credit investments, which I noted in my expense comments. In 2018, we had been amortizing and recognizing benefits for historic tax credit and other tax credit investments, and we expect those items will positively benefit 2019 at some point.

However, the timing of our investments has caused some noise in each of these line items, particularly in this quarter, as we are currently evaluating investment opportunities. When we do execute on those investments, we expect that both noninterest expenses and income taxes will both be proportionately affected with a modest benefit to net income. I apologize that there is such a deep dive here but I wanted to make sure that the noise in those lines didn't overshadow the strong start to the year. Overall, we're extremely pleased with the direction of the company and the outlook on our financial results. We expect the trend that we had mapped out to this point on Slide 16 will resume due to our demonstrated ability to integrate previous acquisition as well as achieve further operating leverage from the expansion in New Mexico. We're also confident that we're doing the right things in our core business and that our organic growth for 2019 will deliver further balance sheet growth while keeping a prudent credit and interest rate risk profile. We appreciate your continued support and for your time today. And now we'll take questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question today will come from Michael Perito with KBW.

--------------------------------------------------------------------------------

Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [2]

--------------------------------------------------------------------------------

I wanted to hit on a few things. I just want to start with a more factual question. Keene, what -- the go-forward merger charges, what else can we expect in future quarters and I guess there's still be some next quarter with the conversion. Is there anything expected after that?

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [3]

--------------------------------------------------------------------------------

There may be a little bit that trickles into Q3. I think we're -- we've got a little bit more than half to go yet in terms of charges simply because most of the items relate to duplicate systems that we have to buy out the contracts for. But much of the employee-related and severance items have been accounted for as well as the legal and advisory fees. So I think most of that you'll see in the second quarter. There may be a little bit of it that bleeds into the third quarter. But we'll obviously highlight that and back it out as we move forward. And we'll have a much clear sense of that if there's going to be anything in the third quarter when we report next quarter.

--------------------------------------------------------------------------------

Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [4]

--------------------------------------------------------------------------------

All right. So there will probably be another $7 million to $8 million in the second quarter and then a chance for a small amount in addition to -- in the third quarter, give or take?

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [5]

--------------------------------------------------------------------------------

Yes. Yes. I would say that's our best guess in terms of timing and amount at this point.

--------------------------------------------------------------------------------

Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [6]

--------------------------------------------------------------------------------

Okay. And then if we take that out of the equation for a second here, can you give us may be a little bit more thoughts and/or color on the trajectory of the expense from right this year? I mean so you're at $32.5 million give or take if we back out the merger charges in the quarter. Obviously, that doesn't incorporate a full quarter's worth of Trinity. Can you -- I guess, can you just confirm a few numbers? I mean, the Trinity running about $9.5 million on a quarterly basis and will that pretty much fully flow-in in the second quarter before seeing that step down for the 36% cost saves over the back half of the year?

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [7]

--------------------------------------------------------------------------------

Yes. I don't think you're going to see that full $9.5 million. I think you'll see -- we've done a little bit of room in our number because of the employer payroll taxes that are essentially exhausted. So that run rate has got a little bit of room so that probably accounts for normal growth. Trinity at $9.5 million is probably pretty full. Most of the senior team has left and so we get a little bit of that. But the rest of it is pretty duplicative. So I'm going to call that minus $1 million and then fully phased-in cost savings are $3 million, so I think you'll get that in the fourth quarter. And then offsetting those items is intangible amortization, which is about $1 million a quarter. So just -- I'm going to walk you through it real quick. So $30 million -- just call our current run rate $30 million, plus $9 million for Trinity, minus $3 million for cost savings, so you're at $36 million and then whatever growth is, plus intangible amortization of $1 million. So $37 million, $38 million later in the year.

--------------------------------------------------------------------------------

Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [8]

--------------------------------------------------------------------------------

Extremely helpful. And then just lastly, maybe for Jim or Scott, just on the growth side. I think I -- obviously, with the strong fourth quarter and I think seasonally, you guys are a bit stronger in the back half of the year anyway. But just more curious how Trinity impacts the overall growth trajectory of the company? It doesn't seem like it was necessarily a big asset growth story when brought on. I think that's an opportunity you guys see. But can you guys provide any thoughts about how near-term maybe the growth impact from Trinity will look like? And then longer term, what you hope it could become once you kind of build-out the team over there a little bit further?

--------------------------------------------------------------------------------

James Brian Lally, Enterprise Financial Services Corp - President, CEO & Director [9]

--------------------------------------------------------------------------------

Sure, Mike. This is Jim. I'll handle that. So I would say, in the near term, we hadn't budgeted much growth, if at all, from Trinity. Longer term, now that we're spending more time in the markets, especially Albuquerque, we believe there's a significant hole in the market that we can fill relative to development and some C&I in the marketplace. But we're still devising that plan before we can put a number out there. But I feel confident that it will be part of our growth story in the future.

--------------------------------------------------------------------------------

Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [10]

--------------------------------------------------------------------------------

Okay. And then from a personnel standpoint, I mean what do you guys think needs to be done over there? Is it upgrading talent or is just adding more people? What are your thoughts there on the lending side, to be specific?

--------------------------------------------------------------------------------

James Brian Lally, Enterprise Financial Services Corp - President, CEO & Director [11]

--------------------------------------------------------------------------------

I'm very pleased with our leadership -- current leadership that we inherited in the market. And they've jumped in with both feet and are working very well with the legacy company. As we grow and as we look into the market, I'm sure there's some talent that fits into us, but we really like the team that we've put in place down there.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

(Operator Instructions) We'll take our next question from Nathan Race with Piper Jaffray.

--------------------------------------------------------------------------------

Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [13]

--------------------------------------------------------------------------------

I wanted to start on fee income. Starting in the same quarter, I think Trinity was running somewhere between $2 million to $2.5 million per quarter and you guys are just a shade under $9 million. So is this just as simple as kind of -- thinking the -- maybe just a little north of $10 million going forward on a quarterly basis and obviously, 4Q will be impacted from the seasonal tax credit increase. So I just want to make sure we're kind of thinking about the run rate accurately.

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [14]

--------------------------------------------------------------------------------

Yes. I think that's fair, Nate. I mean, I think it really is just adding the two together. I do think, relative to the current quarter, we're optimistic that the tax credit line has a little bit of upside to it over the next several quarters in addition to the strong fourth quarter. But we owe that to you to prove that out, so more to come on that. But we expect the second quarter from a tax credit perspective will look a little bit more robust.

--------------------------------------------------------------------------------

Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [15]

--------------------------------------------------------------------------------

Okay. Got it. That's helpful. And just perhaps thinking about credit costs going forward. Charge-offs were fairly well-behaved compared to what we saw in the last couple of quarters of 2018. So just curious with the larger balance sheet and may be given some churn within the acquired book as those loans renew, just how we should think about maybe the online provision over the next few quarters?

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [16]

--------------------------------------------------------------------------------

Yes. I guess, Nate, we've been I think fairly prudent in terms of making sure that we provide for growth and then items that migrate and are ultimately charged-off, we provide for that as well. So even when you step back outside of purchase accounting, coverage is around 1% given the nature of the portfolio. So I would expect on legacy and growth, it varies by segment. But you'd at least be able to kind of maintain that coverage moving forward. And if there's churn out of any acquired books, you're going to have some items that come through net interest income but then you'll get an offset in the provision. So those should be balancing if there's any payoffs and relative accretion from a credit perspective there.

--------------------------------------------------------------------------------

Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [17]

--------------------------------------------------------------------------------

Okay. Got it. And then if could just ask one more along those lines in terms of your last comment in terms of accretion income going forward. I know it's tough to predict just given unpredictability around payoffs and so forth, but just any thoughts on what we can expect in terms of the quarterly accretion income for the...

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [18]

--------------------------------------------------------------------------------

Yes. I think -- yes, the current quarter was pretty good in terms of what we thought. So I think that was a little over $1.5 million. So that's $0.03 or $0.04. And I think that level we expect is fairly stable. So from the non-core acquired book, I think we've seen some stability. So $1.1 million, $1.2 million. We had that big -- I'll say that larger item in the fourth quarter where you had about $2 million of accretion and that was allowance reversal and there's only about $1 million of that allowance that can get reversed. So the rest of it is going to come through we would expect much more smoothly. Now I know as soon as I say that I'm going to be wrong but that's what our predict -- that's what our estimate is.

--------------------------------------------------------------------------------

Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [19]

--------------------------------------------------------------------------------

And that does not include the impact of Trinity going forward, I suppose?

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [20]

--------------------------------------------------------------------------------

No. Trinity will continue to be may be 1 basis point or 2 as we see it on a quarterly run rate. I think when we announced, we had a fairly low interest rate mark. The book was fairly well priced, rates have moved around quite a bit. But much of the margin improvement at Trinity was coming from the investment portfolio sales. So that's already been achieved. And then the remainder, we're finalizing the purchase marks but you had 1 basis point this quarter, I'd expect it to be similar in core margin trend from here.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

We will take our next question from Jeff Rulis with D.A. Davidson.

--------------------------------------------------------------------------------

Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [22]

--------------------------------------------------------------------------------

A question on the -- I guess, Keene, you mentioned that you'd expect most of the cost saves or all cost saves to be achieved by Q4. Is that a change? I can't remember if there was a tail into 2020 but just wanted to confirm that once we hit Q4, no additional cost saves in 2020?

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [23]

--------------------------------------------------------------------------------

Yes. I'm not going to say no or absolutely none but Q4 should be fairly reflective of the run rate, give or take. So there's still some things that system-wise ancillary systems and really that can be ongoing that get work through. But I don't expect that or anticipate that, that will deliver any meaningful run rate changes for purposes of Enterprise's earnings either in 4Q '19 or 1Q 2020.

--------------------------------------------------------------------------------

Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [24]

--------------------------------------------------------------------------------

And then -- sorry to -- on the margin, I think pretty clear on the core, it's 3.79% and talking about maintaining some stability there, but then the accretion. So what I gathered was the full quarter Trinity's rounding error on the added basis points you had, what, 8 basis points, in total on accretion. You expect that figure that add to margin to be roughly similar or drifting down over time?

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [25]

--------------------------------------------------------------------------------

I think we expect it to be fairly similar at least, call it, for the remainder of the year. That's a pretty heavily marked portfolio and that a lot of discounts there still. So I think those numbers will be relatively stable, call it, for lack of a better rounding number, $1 million. And I think that when you bake that in, you have like 2% in terms of net interest income. As you bring Trinity in there, you're talking about less than 2%, 1%, 1.5%. So it's getting down to be a fairly insignificant number but it is adding 5, 6, 7 basis points between reported and core margin.

--------------------------------------------------------------------------------

Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [26]

--------------------------------------------------------------------------------

Okay. All right. That's great. And maybe, I don't know, one for, maybe, Scott. Just on the credit side, the properties brought over in the acquisition. Do you expect -- any comment on those. And would you see a resolution in relative quick order on those? Or how is it positioning there?

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [27]

--------------------------------------------------------------------------------

Yes. I think certainly from a, I don't want to use the sort of distressed real estate or problem credit -- purchase credit impaired loans, our team have a strong history in working those out dating back to the FDIC deals. Our diligence teams are very good at understanding and marking those credits and we're already seeing those credits move in the second quarter. So I don't know that it's a fire sale, but we certainly have a mark to a point where we think we can exit them and that the -- really the important piece in moving forward is that if there are credits that flip out of the portfolio loan book that need our resolution group's attention, we want them to have a time and energy and effort to spend there. So certainly anything that we think is not a viable long term, client will work to resolve fairly quickly.

--------------------------------------------------------------------------------

Scott R. Goodman, Enterprise Bank & Trust, Inc. - President [28]

--------------------------------------------------------------------------------

And Jeff, maybe I can just add. Given the types of properties they are, they're not going to act any differently than properties that we would have worked out of in other markets as well. And I think we're seeing the current environment pretty conducive to working out of loans a little faster. So I wouldn't see these acting any differently than anything in our other portfolios.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

(Operator Instructions) And we'll take our next question from Andrew Liesch with Sandler O'Neill.

--------------------------------------------------------------------------------

Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [30]

--------------------------------------------------------------------------------

Just a follow-up question for me, just on the securities book from Trinity. Has there been any repositioning of that? Have you completed the sales that you were expecting to of that book and reinvested it into your own securities? Or is there still more of that that's expected?

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [31]

--------------------------------------------------------------------------------

The answer is yes and yes. So we've repositioned most of it. There are a couple of securities that are being unwound from pledging arrangements and things like that. So that's a -- it's a much less simple process than we think -- than you think it is. But the majority of that's already been redeployed. And so you're seeing those results in our run rate from a reposition and from a perspective. There's a, I'd say, a handful more to do but those will offer modest yield improvement moving forward. But it's nothing that is immeasurable. So -- or is immeasurable. So we'll -- we generally achieve the income targets that we were expecting from that redeployment and that we announced but it was more of a challenge to do so given what happened with rates.

--------------------------------------------------------------------------------

Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [32]

--------------------------------------------------------------------------------

Okay. And then just the securities book, in general, just the size of it, would you expect it to stay near this level or drift lower as you deploy cash flows into loans?

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [33]

--------------------------------------------------------------------------------

Yes. I think some of that really depends on what happens with deposits. So we don't typically gross up the balance sheet for securities but we certainly like our newly found loan-to-deposit ratio. And I think we would look given that there are times when it's more difficult to find securities that we like and the yields that we like and the structure we like, it'll probably be more lumpy. Moving forward, we'll invest when we have opportunity because we know it might get away from us. So I think, generally, the same size, maybe a little bit bigger just because I think there's still some stuff tied up in cash now. But then over time, certainly, the deal model was to allow the portfolio to shrink. But I'm optimistic that we're going to have success growing deposits and that we'll be able to keep that portfolio a little bit bigger because of that.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Next question will come from Brian Martin with FIG Partners.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [35]

--------------------------------------------------------------------------------

I guess, Keene, just one -- just a follow-up on the last question on securities that I wanted to ask the same thing. But just the size of that portfolio relative to assets over time given where you've historically run, I mean, where do you expect to run that over time as you kind of, I guess go, forward?

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [36]

--------------------------------------------------------------------------------

Yes. I would tell you I sleep a lot better at night with that at 18% than 14%. It makes life a little bit easier. I do think it depends on what is available from an investment perspective and what excess liquidity we have. So right now, the investment environment is not outstanding. And so we probably would let it shrink if we have strong loan demand. But if there are some things that we think that we like in the portfolio and we have the liquidity to do it, we probably would add those because we know that the market has been fairly turbulent from investing in investment portfolio over the last 2 to 3 years. So I know that that's not an answer that you're looking for. You're looking for a percentage. So I'm going to tell you it's going to be somewhere between 7% and 9% -- 17% and 19% probably for 2019.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [37]

--------------------------------------------------------------------------------

Okay. All right. That's helpful, Keene. And just the comment you made about the tax credits and that impact on fees being may be a little bit more robust in the second quarter. I guess, does that take away from kind of when you look at the historic trends in the fourth quarter being what they typically are, I mean -- I guess, this -- does it kind of flow to different quarters? Or this -- is it just a pickup in these quarters and still expect to kind of that -- the strength in the fourth quarter we typically see?

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [38]

--------------------------------------------------------------------------------

Yes. I think what we said on the fourth quarter call, Brian, is that we expected the tax credit business to expand for us by about 25%. So you are still going to have -- so we're going to be fourth quarter weighted, particularly this year, but we expect that you'll get some second and third quarter activity that is stronger than what we saw in the first quarter. In prior year, you would have seen that number to be $0 or $50,000 or something like that.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [39]

--------------------------------------------------------------------------------

Okay. Got you. That's helpful. And just the last 2 things, Keene, just on the remixing here and just kind of the I guess how much of that was in -- within the securities portfolio, I guess, a lot of that's not in the margin given the timing of when the changes you made, the sales post-Trinity as far as...

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [40]

--------------------------------------------------------------------------------

Yes. I would say it is in the margin because even if we weren't able to sell the security right away, it got revalued to the current yield at market. So if there was a theory that was yielding 3.10% and we were able to redeploy -- sell it and redeploy it at 3.18%, you might have 15 days of that instead of 21 days or whatever the time period was. But I don't anticipate that there's a material change from the portfolio moving forward, particularly when you look at the total net interest income dollars that you'll get on a full run rate with Trinity and Enterprise, like in 2Q or 3Q.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [41]

--------------------------------------------------------------------------------

Yes. Okay. That's helpful. And just the last one was just on the tax. I think you talked about, in your prepared remarks, some tax things you're thinking about doing. Can you just -- can you give any color on what you're thinking about on the tax side? Or how we think about that over the balance of the year? I guess is there -- or is it just going to be lumpy and we'll just kind of wait to see?

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [42]

--------------------------------------------------------------------------------

Yes. I would tell you that the number -- the impact on net income is negligible, right? So we think about it as even if we are able to be highly successful executing on the tax investment, it's probably $0.01 a quarter net. But you really see it coming through the rate. So that might be the difference -- 2 points of difference in the effective tax rate. But you're also going to get the offsetting amortization and expenses. So when that happens, you know very likely depending on whether you model it in or model it out, you'll have $0.5 million miss but you'll make it back up in income tax expense and we'll point that out. But given we don't have anything that we've executed on in the first quarter, I'd say that that's more likely a second half item that we would avail ourselves of versus a second quarter item.

--------------------------------------------------------------------------------

Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [43]

--------------------------------------------------------------------------------

Okay. And then kind of just in the rates kind of to think about it from an effective standpoint for 2Q is more in this 18% type of range. Is that kind of what you said, maybe?

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [44]

--------------------------------------------------------------------------------

Our rate for the year, we said was 18% to 20%. We're a little outside of that because of the nondeductible expenses but the other thing that's having a fee at the top end of that range is the tax credit investment. We're getting currently like a 1% benefit from the tax credit investments we have and you saw last year, we had about 450 basis point benefit. So there's some room in the middle of that for us to improve the rate.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

Our next question will come from Eric Grubelich with -- who's a private investor.

--------------------------------------------------------------------------------

Unidentified Participant, [46]

--------------------------------------------------------------------------------

I just want to follow up about a comment you made about the loan growth -- excuse me, the deposit growth. I just wanted to get a sense I think you quoted a number of about 4%, I don't have the slide deck open in front of me, but can you give us a little bit of color as to that growth. Is it more of like customer acquisition in the last 12 months? Is it more like a legacy base? I mean, obviously, some of it's probably just ordinary interest accrual that you guess are just showing up, but can you give us a little bit of sense of where the -- where some of that growth is coming from?

--------------------------------------------------------------------------------

Scott R. Goodman, Enterprise Bank & Trust, Inc. - President [47]

--------------------------------------------------------------------------------

Yes. Sure, Eric. This is Scott. Most of the growth is coming from new relationships and some additions to existing clients. As I mentioned, just if you look at dollars flowing into new accounts versus dollars flowing out of closed accounts, we're about double flowing into new accounts versus going out. The only thing that's muting that is just we see some balances from existing accounts moving to higher rate options, we're retaining that when it works for our rate structure and we're letting some of it go to higher rate options but the key there is we're keeping the relationship.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

Our next question will come from Nathan Race with Piper Jaffray.

--------------------------------------------------------------------------------

Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [49]

--------------------------------------------------------------------------------

Just a follow-up question on capital. And just curious about the appetite to continue to have the share buyback that's out there at this point over the next couple of quarters?

--------------------------------------------------------------------------------

James Brian Lally, Enterprise Financial Services Corp - President, CEO & Director [50]

--------------------------------------------------------------------------------

Yes. Nate, this is Jim. I think, we've been balanced in the previous year to 18 months and utilizing our internal growth and M&A and we've increased our dividend and as well as continued buyback. So what we'll do is continue looking at all 4 avenues to appropriately utilize the capital that we're building. So the share price that we have opted or the share repurchase program either will stay intact and if it makes sense, we'll act upon it.

--------------------------------------------------------------------------------

Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [51]

--------------------------------------------------------------------------------

And Keene, can you just remind us what the remaining authorization is that's out there, if you have it handy?

--------------------------------------------------------------------------------

Keene S. Turner, Enterprise Financial Services Corp - Executive VP & CFO [52]

--------------------------------------------------------------------------------

I think we've just under 1 million shares still available.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

(Operator Instructions) It appears there are no more questions at this time. I will turn the conference back over to our speakers.

--------------------------------------------------------------------------------

James Brian Lally, Enterprise Financial Services Corp - President, CEO & Director [54]

--------------------------------------------------------------------------------

Ryan, thanks again. And thank you all for joining us this afternoon. We appreciate your interest in our company and look forward to speaking to all of you again next quarter. Have a great day.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for joining today's conference call. The call has now concluded. Please disconnect your lines and have a great day.