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.

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 today 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 southwestern presence, while adding a significant valuable core deposit base. If you would please turn to slide three, 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 one 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 of 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 deposits that exist within the industry. Scott, will provide more granular…

Thank you, Jim. As shown on slide number five, 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 number six 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 paydowns 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 number seven, 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 was - 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 remains solid, and we're seeing a good flow of new opportunities already in Q2. Within the tax credit portfolio, the decline there was mainly as a result of a pool of credits in a leveraged fund, which were sold to investors during the quarter. This is typical in…

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 pre-tax merger expenses and contributed to the linked quarter decline in earnings per share and return. 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 EPS momentarily. Additionally, we previously communicated that we estimated 8% earnings accretion in 2020 from Trinity with a tangible book value earned back of approximately three 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 linked quarter. Additionally, the shares issue 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 non deductable merger expenses, which I'll detail further. Our other results declined seasonally by $0.07 per share net, principally within…

Thank you. [Operator Instructions] Our first question today will come from Michael Perito with KBW. Please go ahead.

Hey. Good afternoon, guys.

How are you doing, Mike?

Good, thank you. One hit on a few things. I just want to start with a more factual question. Keene, what the go-forward murder charge is? What else can we expect in future quarters? My guess is there will be some next quarter with the conversion. Is there anything expected after that?

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 contract for, but much of the employee related and severance items has 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 leads into the third quarter, but we'll obviously highlight that and back it out as we move forward, and we'll have a much clearer sense of that if there's going to be anything in the third quarter when we report next quarter.

All right. So probably another $7 million to $8 million in the second quarter and then transfer a small amount in addition to the end of third quarter give or take?

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

Okay, thank you. And then, if we take that out of the equation for a second here, can you give us maybe a little bit more thoughts and/or color on the trajectory of the expense run rate 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, as 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 from the 36% cost saves over the back half of the year?

Yes, I don't think you're going to see that full $9.5 million. I think you'll see - we've got a little bit of room in our number because of the employer payroll taxes that are essentially exhausted. So, that run rate 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's 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 real quick. 30 - 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.

Extremely helpful. Thank you.

You’re welcome.

And then just lastly, maybe for Jim or Scott, just on the growth side, I think 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 could 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 can become once you kind of build out the team over there a little bit further?

Hi, Mike, this is Jim. I'll handle that. So, I would say this, in the near term, we hadn't budgeted much growth if at all from Trinity. Longer term, now we're spending more time in the markets, especially Albuquerque. We believe there is 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 I'll be part of our growth story in the future.

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

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.

Okay. Helpful guys. Thank you for taking my questions. Appreciate it.

Thank you. [Operator Instructions] We'll take our next question from Nathan Race with Piper Jaffray. Please go ahead.

Hi, guys. Good afternoon.

Good afternoon, Nathan.

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

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.

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 maybe 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?

Yes. Nate, we've been, I think, fairly prudent in terms of making sure that we provide for growth and then items that migrate and ultimately charged off, we provide for that as well. So maybe 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.

Okay, got it. And if I 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?

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 to $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, 1.2. We have 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. 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.

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

Trinity will continue to be maybe a basis point or two, 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 price, 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 a basis point this quarter. I'd expect that to be similar and core margin trend from here.

Right. Got it. I'll step back for now. I appreciate the color.

Thanks, Nate.

Thank you. We will take our next question from Jeff Rulis with D.A. Davidson. Please go ahead.

Thanks. Good afternoon.

Hi, Jeff.

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 tailwind to 2020, but just wanted to confirm that once we hit Q4, no additional cost saves in 2020.

Yes. I'm not going to say no, we're 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 worked through. But I don't expect that or anticipate that that will deliver any meaningful run rate changes for purposes of Enterprises earnings either in 4Q '19 or 1Q 2020.

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

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 there's a lot of discount there still. So, I think those numbers will be relatively stable, call it for lack of a better rounding number a $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% and 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.

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

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 has a strong history in working those out dating back to the FDIC deal. 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 slip out of the portfolio loan book that need, our resolution group's attention we want them to have the time and energy and effort to stand there. So certainly anything that we think is not a viable long-term client will work to resolve fairly quickly.

And Jeff, maybe I could just add. Given the types of properties, 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 any - these acting any differently than anything in our other portfolios.

Okay, thanks. That's it.

Thank you. [Operator Instructions] And we'll take our next question from Andrew Liesch with Sandler O'Neill. Please go ahead.

Hey, guys. 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 sale that you're expecting to have that book and have reinvested it into your own securities or is there still more of that, that's expected?

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 - it's a much less simple process and then we think - you think it is. But the majority of that's already been redeployed and so you're seeing those result in our run rate from a repositioning and from a yield perspective. There's a, I'll say a handful, more to do, but those will offer some modest yield improvement moving forward. But it's nothing that is inevitable. So - or is inevitable. 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.

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

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. We’ll - 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 -- keep that portfolio a little bit bigger because of that.

Okay. That's very helpful. Thanks.

Thanks, Andrew.

Next question will come from Brian Martin with FIG Partners. Please go ahead.

Hey, guys. I guess Keene just one - just a follow up on the last question on securities. 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?

Yes, I would tell you I sleep a lot better at night with that at 18% and 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 had strong loan demand. But if there's 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 an investment portfolio over the last two to three years. So, I know that's not an answer that you're looking for. You're looking for a percentage, so I'm going to say, it's going to be somewhere between 17% and 19% profitability [ph] for 2019.

Okay. All right. That's helpful. Thanks, Keene. And just the comment you made about the tax credits and that impact and fees being maybe 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 just as it kind of flow to different quarters or is it just a pickup in these quarters and still expect to kind of the strength in the fourth quarter we typically see?

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%.

Right.

So you're 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, right, in prior year, we have seen that number to be zero or $50,000 [ph] or something like that.

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

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 March 8. So, if there was a theory that was yielding [indiscernible] and we were able to redeploy - sell it and redeploy it at 3.18% [ph] 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.

Okay…

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.

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 just going to be lumpy and we’ll just kind of wait and see?

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 tax investment, it's probably a penny a quarter net, but you really see it coming through the rate. So that might be the difference - two points of difference in the effective tax rate, but you're also going to get the offsetting amortization in expenses. So, when that happens, very likely depending on whether you model it and/or model it out, you'll have a $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 first quarter, I'd say that that's more likely a second half item that we would avail ourselves versus the second quarter item.

Okay. And the kind of - there has been the rates, kind of to think about it from an effective standpoint for 2Q, it's more than this 18% type of range, is that kind of what you said maybe?

Our rate for the year we said was 18% to 20%. We're a little outside of that because of the non-deductible 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.

I got you. Okay, that's all I had. I appreciate it, guys. Thanks.

Thanks, Brian.

Thank you. Our next question will come from Eric Grubelich, who is a Private Investor.

Hi, good afternoon. 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 that, I think you quoted a number of about 4%, I don't have 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 know, your guests are just showing up. But can you give us a little bit of a sense of where some of that growth is coming from?

Yes, sure. 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 or about double you know 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 a relationship.

Okay. Thanks. Thanks for the color. Appreciate it.

Thank you. Our next question will come from Nathan Race with Piper Jaffray. Please go ahead.

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

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

Got it. And can you just remind us what the remaining authorizations that's out there, if you have it handy?

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

That's helpful. Thanks again, guys.

Welcome. Thanks, Nate.

Thank you. [Operator Instructions] It appears there are no more questions at this time. I will turn the conference back over to our speakers.

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.

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.