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, President and CEO. Sir, you may begin.

Thanks, Jonathan, and thank you all very much for joining us, and welcome to our second quarter 2019 earnings call. Joining me this afternoon is Scott Goodman, President of Enterprise Bank & Trust; and Keene Turner, EFSC's Chief Financial Officer and Chief Operating Officer. Before we begin, I would like to remind everybody on the call that a copy of the release and accompanying presentation can be found on our website. The presentation and earnings release were furnished on SEC Form 8-K yesterday. Please refer to Slide 2 of this presentation, titled Forward-looking Statements, and our most recent 10-K and 10-Q for reasons why actual results may vary from any forward-looking statements that we make today.I am very pleased with our second quarter results, and 2019 is shaping up to be a very good year for Enterprise Financial Services Corp. On a diluted basis, we earned $0.68 for the quarter, returning 1.05% on our expanded asset base. Excluding the expenses for the conversion of Trinity during the quarter, we earned $0.98 per diluted share and our ROAA was 1.50%.We converted the Trinity Corp operating system back in May and furthered our cultural integration of these two companies. And from my seat, these two companies have come together very well, and every day, we learn more about the future growth opportunities that Northern New Mexico provides for our company. Scott will provide much more in the way of details on this region as well as others, and Keene will provide granular financial data on our very solid quarter.If you turn to Slide 3, you will see our financial scorecard. Netting the expenses related to Trinity, our EPS grew by 3% when compared to the same quarter a year ago. As important, we are able to increase net interest income dollars by…

Thank you, Jim. Loans, which are displayed on Slide 5, grew by $132 million in the quarter or 10.6% annualized, reflecting successful execution of the building pipelines that we discussed last quarter. We experienced growth in most categories, including C&I, commercial real estate, construction development and consumer. And inclusive of the Trinity loan book, total loans grew by 20% year-over-year.Moving on to Slide 6. C&I loans were up $38 million in Q2 with growth spread across all business units. The increase reflects steady execution in the specialized banking units and a rebound in demand for working capital from commercial clients.Loan details on Slide 7 breaks this down by the changes in the business segments. The largest increases in Q2 are reflected within the investor CRE, construction and life insurance premium categories. Investor CRE and construction represent deepening of larger investor relationships as well as opportunities to finance owner-occupied expansions and participate in the urban core redevelopment within Kansas City and St. Louis.Life insurance premium finance had a better than typical Q2 with several new originations and some moderating payoffs. This business remains well positioned for additional growth approaching the more seasonally strong second half. The results are roughly $23 million of internal classification changes which inflated the tax credit growth and, alternatively, negatively impacted the general C&I category simply from a reporting standpoint.Moving to the business units on Slide 8. Specialized lending, which represents EVL, life insurance premium and aircraft finance, did experience growth in what is typically a seasonally slow quarter. In addition to the previously mentioned strong quarter for life insurance, EVL was up modestly with new originations and increases in existing senior debt outpacing payoffs from the sale of portfolio companies. We remain disciplined on credit structures in this specialty. We have senior leverage generally around a…

Thanks, Scott, and good afternoon, everyone. My comments begin on Slide 10, where we have an earnings per share roll forward from the linked quarter. The roll is pretty extensive given that the first -- this is the first full quarter we have Trinity. We had 1/3 of a quarter in the first quarter, and clearly, Trinity impacts the comparability of the results. Nonetheless, we continue to produce organic growth, as Scott mentioned, that has also positively benefited our financial results, and overall fundamentals are stable and improving.Net income was $18.4 million in the second quarter, and that was $0.68 per diluted share, and that resulted in a return on assets of 1.05%. Capital is strong at 8.4% tangible common equity, and we did our fifth consecutive dividend increase to $0.16. We remain positioned given the capital levels for continued capital flexibility to support both our organic growth plans as well as opportunistically manage capital through additional M&A or via share repurchases.Merger-related expenses of $10.3 million or $0.30 a share were recognized in the second quarter. Year-to-date, total merger expenses are just under $18 million. These expenses, while planned, have obviously impacted our reported results. And the rest of my comments, we'll try to sanitize the results a little bit so we can share the underlying fundamentals.With the majority of the merger expenses behind us and the core system integration complete, we will begin to realize the full benefit of the cost synergies from Trinity beginning in the third quarter, and that's sooner than we had previously communicated. Excluding the impacts during the quarter, the second quarter return on average assets was 1.50%, and return on tangible common equity was nearly 19%.More specifically in the quarter, revenue was $74 million, and that's an increase of $12 million from the first…

[Operator Instructions]. We'll take our first question from Jeff Rulis of D.A. Davidson & Co.

So on the cost savings, it sounds like we've kind of accelerated a little bit on the original assumption on cost saves and amount. And Keene, could you just kind of remind us, I guess, will all of these largely be collected in Q3? And if not, kind of lay out what's sort of changed on that front.

Yes. I think we gave essentially level guidance in expense guidance that's really down from, call it, $39 million here in the second quarter. So I think we expect that we'll have a fairly clean fourth quarter run rate. So the guidance we gave of $37 million to $39 million has a little bit of an intersection of continuing cost decreases and run rate decreases from Trinity, offset by additional investments that we have planned in the business and people as we grow the business. And I would say that, that -- if you draw a straight line through that, that's similar to the second quarter. So not as much run rate investment 2Q to 3Q, but there's a little bit of cost savings coming out. I would maybe just characterize it and say that, generally, June for us was a pretty clean quarter, and we could identify the things that we know are coming out here in the next couple of months, and we feel pretty good about it. So I think we're ahead in terms of timing, which means that we're a little bit ahead in terms of what I think the phase and efficiency ratio will be and where we'll end up the year.

Got it. And then just I guess the margin guidance, I wanted to make sure I caught you on where we're discussing -- you mentioned only modest headwinds in a down rate environment. Could you kind of range bound it for -- I don't know if that is inclusive of your budget in terms of what you assume for rate cuts and I guess yield curve expectations, but if you could just walk us through in a little bit more detail on the margin discussion.

Yes. So we've synthesized a number of yield curve scenarios. So all of this has a variety of fed cuts and changes to, call it, the 5 and 10 year Treasury rate. But within a relative sensitivity, our -- we're -- our expectation and our characterization of modest is that on a static basis over the next 12 months, it's an estimate of about a 1% headwind in terms of net interest income. So if our expectation is to grow high single digits and we're not able to be effective on any of these additional opportunities for rate cuts on the deposit side that we talked about, we expect about a 1% headwind which is around 5 basis points of margin. So I think we feel pretty good about that, and I also think we feel pretty good about the opportunities that we outlined in terms of what we know is going to move if the fed moves and what we know is moving along with LIBOR and other indices, but then also what we can do on the deposit front given really how much commercial deposits we have and how we've managed those as rates have risen.

And maybe one last one for Jim. Just given the added visibility in the Southwest footprint, have you seen any increase in the inbound sort of potential M&A partners in that region? I guess that's question one. And question two would be just be broad-based, footprint-wide M&A discussions.

Yes. Jeff, so I would tell you that over the last couple of years, we haven't waned in terms of our efforts to meet with companies both in our current markets and certainly in the Southwest. I think the challenge we come about is the fact that there still is a little bit of a mismatch relative to expectations between what's reasonable in the buyers versus sellers side, but I think that's coming closer together. You know the market as well as anybody, there are a few really good organizations out there that would fit, and we're interested in several, but we have to make sure it's the right fit. But I think it's safe to say in our current markets and toward the Southwest, we're interested.

Got it. And that sort of doubles for the conversation that -- I guess I know where you're leaning, but KC, St. Louis, if you found something in market there, those discussions still ongoing?

Yes.

We'll take our next question from Andrew Liesch of Sandler O'Neill.

Could you just talk a little bit about the repricing dynamics of the variable-rate loans? It looks like about 60% of the loan portfolio. How much of that is tied to LIBOR, how much is 3-month LIBOR, 1-month LIBOR? Just trying to get a sense of that repricing.

Yes. We've got about -- of the $3 billion, about $2.5 billion of that is LIBOR, about $400 million prime and then you have another $200 million of other. And then within LIBOR, most of that is going to be 1-month LIBOR, and then there might be a little bit that's 3-month LIBOR. But you have most of it tied to shorter duration LIBOR indices. So hopefully, that's helpful.

Okay. Shorter duration on that. I mean, are there floors there or -- I'm just trying to get a sense.

Yes. So I would say we have a very large number of floors, but those tend to be with smaller borrowers. So you've got close to $600 million of that book with floors. There's about $200 million of that, that's on the floor. And it's across a variety of indices. And then for the ones that are above the floor, that relative delta is 50 to 100 basis points.

And I would just add, Keene, that from a process standpoint, as we go through anything that's either renewed or extended, and if it's a time to have a floor, we're implementing floors, just as a process standpoint.

Yes. And then on the enterprise value lending product, I'm just kind of curious, what are you seeing in that from an underwriting standpoint? Is there any weakening out there, given where we are in the cycle, from some other competitors to win deals?

Yes. So it is competitive. We are seeing competition from, say, nonbanking, the tranche would probably be the most aggressive lenders. Sometimes you get a local bank that kind of tries to jump in and put an aggressive structure out there. But as you can see from the way we are growing EVL, we're not putting the pedal down. We're remaining disciplined on structure. We are staying in that 2.5x or so senior, and we're putting it on pricing grids so that as it is leveraged, we're getting paid for the risk. We're seeing -- still seeing a lot of portfolio companies sell. And I think that group sees a very large number of deals across its desk and says no to many, many more than they say yes to. So probably the best way I can just say that we're still bullish on the sector, but we're growing it just within our own credit parameters.

We'll take our next question from Nathan Race of Piper Jaffray.

I want to maybe start on capital. I think as the -- I appreciate that you guys raised the dividend for 3Q. So just curious on what the appetite for share repurchases are through the back half of this year. And I guess based on Jim's commentary around the pricing disparity between buyers and sellers still at this point, just curious on how you guys see capital accreting over the back half of this year and into 2020. I think given where the dividend stands today, I think capital levels on a TCE basis would exceed your 8% to 9% target maybe as we move through 2020.

Yes. Nate, this is Jim. So it's a balancing act, for sure. And so as we've said in the past, the priority would be to support growth and then obviously tick down through M&A, and then you see our dividend strategy and then the share repurchases. And so it's a matter of balancing it throughout on a continuing basis and know if you have something on the hook relative to M&As so you can keep some powder dry. And it's something certainly that Keene and the team look at often and check in frequently to make sure that we're not committed to one strategy to a point that we paint ourselves into a corner.

Understood. And perhaps, Keene, could you speak to just the appetite on share repurchases in 3Q and 4Q of this year?

Yes. I guess I would even just characterize I think sort of post end of the second quarter, up until today, I think we bought back about 30,000 shares under some plans we have in place. So there's an appetite there, and we've got some price parameters. And obviously, there's a variety of factors that affect what we can do and when we can do it. But that's just something that we can -- we have in place all the time. And I think we'll look at -- I think as Jim mentioned, we'll look at our potential M&A prospects, and then I think we have to look at ourselves and say, "Do we want to take the shares out if some of that doesn't look like it's coming to fruition?" And as we get closer to 9%, then I think that reflects what we've done historically. So that is our appetite, and I think it is our desire not to go over 9%.I'm going to add one caveat, that with a much larger investment portfolio and yields and rates moving around, the portfolio does have an impact on the level of TCE on a quarterly basis, as you saw this quarter. So that's something that, depending on what happens close to a quarter end or whatever, we try to look at all that stuff, but it may slip around a little bit more than normal.

Okay. Understood. That's helpful. And just going back to the core NIM outlook, I appreciate your comments earlier, particularly in terms of what you guys have in terms of levers to pull on the deposit side of things with relationships that are more or less indexed to the short end of the curve. So I guess assuming we get a July rate cut, any sense or can you kind of frame up where you expect the core NIM to traject into 3Q at this point?

Yes. I think when -- our most near-term projection is probably that we'll lose the -- several basis points, and then we'll either be able to recover from there with deposit cuts or -- I'm not sure we're going to be able to time it in such a way that we head that off. Because right now, we've got LIBOR down, and actually, for us, a rate cut helps because it allows us to get some relief on the $600 million of index, and it also allows us a talking point to go to the other $800 million of exception price and go get some dollars there. So we're targeting to defend that 5 bps if that's what our forecast is from margin compression. I just don't know that we're going to capture it all here in the next quarter.So you might see a little bit of slippage before it stabilizes or gets better. I would say we're really happy, and we've been incredibly pleased with the way margins performed over the last year. We've got that 5 basis points in our pocket, and I think it's a victory, and we'll be earning at a really high level given where cost savings are going in the third and fourth quarter and into 2020 if we can pull all that off.

Understood. That's great to hear. And then maybe just lastly for Scott or Jim, just curious, maybe give some additional color on those four credits that moved to nonaccrual in the quarter, maybe by portfolio, geography and kind of what gives you the comfort that you guys don't see any losses within those four in particular?

Sure, sure. Well, the first two are easy. They were basically 90 days past dues, which sometimes -- and they're both in St. Louis. When you're in the middle of a restructure, you kind of use the maturity as a negotiating factor and those have cleared up shortly after the quarter end and are current. So the other two, which are about $8 million roughly total, one is a -- has been a classified credit for a while, kind of working through the negotiation process, it's a manufacturer service company. We're well secured with finished goods, receivables and equipment. And the other one is a single-family property in a very attractive area. So I think from a loss standpoint, we feel pretty secure with those.

We'll take our next question from Michael Perito of KBW.

I wanted to start on the wealth management. Can you just remind us, I think Trinity contributed about $600,000, $700,000 a quarter, is that a ballpark accurate figure for the Trinity wealth management fees that came over?

Yes. Let me dig through my notebook here. My apologies. Yes, that's a good number, and I think what you're maybe pointing to is we had a little bit of weakness in underlying enterprise wealth management fees that, that's outstripping. So we're actually seeing some good growth there on the Trinity side. Overall, the numbers are decent, but we had, had higher hopes for our own sort of wealth management revenue stream for the year. But fortunately, the combination of the two has been good for us.

Yes. I kind of want to just dig into that a little deeper, because obviously, in 2017, you had really strong wealth growth. It kind of flattened out a little bit over the last 4 or 5 quarters here. And I'm just curious, what kind of can get that moving again? Is it just opportunity on the Trinity side or are there other things that are being looked at on the legacy -- in the St. Louis and Kansas City markets where there are growth opportunities? Or just any color there will be helpful.

Yes. I think some of the decline had to do with the markets, obviously, but a more ardent focus on sales in that area. We did bring on a new head of private banking in the last quarter, and we believe that's a connector, if you will, between commercial and wealth. Mike, you know us well, it's one of the things that we focus on doing few things well. And we're getting to wealth now, and we'll certainly apply the same sales disciplines that have improved and grown the commercial bank there. We're putting some talent in place that will help us. And obviously, we're going to learn from our partners in New Mexico because they have been doing it well for a while.

Okay. And then switching gears a little bit. Keene, just on the liquidity position, as we think about kind of the cash and investment portfolio moving forward in our models, I mean, is it fair to -- as we look at them, I'm just pulling it up here again quickly, bear with me for a second, but I think the cash balances at the end of the second quarter settled in a little over $190 million and then the investment book a little over $1.3 billion. I mean, was there any movement post quarter or anything that inflated that into quarter end? Or are those decent numbers to use for the liquidity profile going forward, depending -- obviously depending on how strong growth is? Just what are your thoughts there?

Yes. I feel much more confident that the proportion of the assets, I like the size of the investment portfolio, I think there's some definite benefits there. I think the cash may be a tinge high. I think we're typically used to seeing that at $85 million, $90 million. Some of that just depends on how much cash kind of comes in the last day and maybe you're going to get a 1-day lag and sort of how you're managing that or what you might be projecting for that day.But that last comment isn't going to materially impact how you think about the liquidity position. I think we like the revised liquidity position of the company. I mean, I think I was looking back over some of the historical numbers and the net interest margin we're at, the ROA we're at, with 8 percentage points better, are lower on loan to deposit and bigger investment portfolio, for us, feels a lot better and gives us a lot of opportunity going forward. So we're proud of that and we like that.

So I guess just to summarize, I mean, the cash position is probably a little high, but the bond book, north of 1 point -- well, I guess, just the securities portfolio in general, north of $1.3 billion, it sounds like that's a decent number. If you hit the growth that you expect, like you don't expect much degradation in that figure?

Yes, I would think that like always, we're going to continue to reinvest and we'll just look at where it makes sense. It may ebb and flow quarter-to-quarter depending on what cash flows look like, but I would think that, that's a good number overall.

Okay. And then just lastly, Jim, you got the Trinity deal on board. Now I was wondering, just kind of a generic question, but I was wondering if you could just give us an update, now that you've seen a little bit more of the Trinity deal and how the two franchises kind of mixing together, what -- a couple of the biggest opportunities you are -- do you think are down there that could help you maybe exceed kind of the base case stuff that you communicated to us as it relates to the transaction?

I'd say this. A couple of things. One, Trinity was relatively young in regards to their penetration in Albuquerque, and they -- and a smaller balance sheet, obviously, and really catered mostly to the CRE market. And as Scott alluded to in his comments, we believe that there's an opportunity for our C&I platform to do particularly well, our treasury platform to do well in Albuquerque. I'd say this, too. The lab in Los Alamos continues to expand as well, and there's not enough housing either in Santa Fe or Los Alamos to accommodate the growing population there, because when people retire from the lab, they don't leave the market. They stay. And given our foothold relative to the community in that area, we feel good about continued growth, both in the mortgage side as well as acquiring household accounts with that. So I think those are the two spots we're focused, and certainly becoming a bigger part of overall communities, in the communities over there, with our focus on very influential community groups as well.

[Operator Instructions]. We'll take our next question from Brian Martin of Janney Montgomery Scott LLC.

Just a couple of things for me. Just the -- Keene, just -- maybe I missed some of it when you were talking about it, but on the deposit side, that the repricing opportunities on the deposit side, if rates decline, can you just run back through that? I think you said on the loan side, it was -- I thought it was $2.5 billion that were tied to LIBOR. Maybe I missed that, but just run back through the repricing on the loans and deposits.

Yes. We had about $3 billion of loans on -- that are flagged at variable rates. $2.5 billion are LIBOR-based, $400 million are prime and the delta from other indices across a variety. And then on the deposit side, there's $3 billion of money market and interest-bearing deposit accounts. $600 million of that is directly indexed to fed funds, and then another $800 million are exception priced, directly managed or in premium interest-bearing accounts that we are -- that we're attacking. And then there's some other sources that are more closely related to wholesale or brokered within that, that -- or have moved and will continue to move as those benchmark rates go down.

Okay. And with LIBOR, I mean, I guess, have you already been, I guess, active with calling some of these customers given what's already happened with LIBOR? Or is that something you're going to wait to address until, I guess, rates actually go down?

Yes. I would say that I think on the way up, LIBOR wasn't the indicator that caused customers to have discussions with us. It was fed funds and that's what gets the headlines and that's what business customers read, and I think that's the catalyst for us being able to have that conversation back. And so as much as we want to make those changes, we're prepared and we're ready, but we haven't been able to execute there. There's also a competitive set out there that we can try to be ahead of the curve as much as we want, but we want to do this in a way that also retains the deposits and has the customer still feeling good about their relationship with Enterprise. So it's a delicate balance, but we're ready. We've been getting ready. We've been having all those discussions internally. The names are on a sheet. They're assigned. They're all the things that you need to do. And we're working on it and we have internal targets. And I think as I indicated on one of the earlier responses, we know what we're trying to defend. So we're ready, but it may be a timing issue and it shouldn't be that big of an issue.

Yes. I got you. Okay. And then just on the loan growth, and maybe it's for Scott or whomever, but just it seems like you feel very confident on the loan growth. Just kind of wondering if you can give a little bit more color behind that, whether in the back half of the year, just kind of whether it be geographically or by segment, kind of where you're seeing the best pipelines today or just kind of where the biggest opportunity is to capitalize.

Sure. I think as I said in the comments, I think what you saw in Q2 was what I had kind of telegraphed in Q1 relative to building the pipelines. And I think now looking ahead, the pipelines are still solid in many of the same ways that I think that you saw in Q2. In Kansas City, there's a lot of urban core development, industrial, multifamily, offices kind of coming back. And then you've got some competitive changes in Kansas City as well as Arizona that are creating opportunities for C&I relationships. I mean, that's when you're going to go after C&I, when something major changes with account officers or management teams or sales of banks, and I think that's what we're seeing, is those kind of opportunities there.And then on the specialty side, I think Q3, Q4 is typically a little stronger for both life insurance and EVL, and I don't see any reason at this point why we wouldn't see some of that same -- those same factors. In life insurance, I think we've just seen fewer payoffs this year. Last year, with the tax code changes, we saw some early payoffs and we just haven't seen that repeat itself this year. So yes, I'm feeling good about the way things look from a loan standpoint right now.

Okay. And then New Mexico, the flatter or the smallest decline this quarter. I guess how do you see that portfolio trending? I guess maybe -- I guess do you expect to see that resume growth next quarter?

I would say, Brian, overall, we have pretty modest growth expectations in that portfolio. There was a number of loan categories that we would -- that were considered by Trinity in run-off mode and so no matter -- we can originate pretty robustly and we have been, but that -- those are just going to create some net headwinds. So you may not see a lot of traction there on a net basis for a little while despite the fact that we continue to collect and gather new relationships, particularly in Santa Fe and Albuquerque.

And Brian, I would just say we're in evaluation mode out there, right? We're meeting with clients. And I think there will be some opportunities actually to probably grow because of the expanded checkbook with really good clients. And then there are going to be some which maybe they were stretching for growth and don't necessarily fit. So as we wade through that, I think we'll get a better handle on what we can grow from the existing book.

Okay. Yes, it's helpful. And the last one for me, which is on credit. I know someone asked earlier, but just outside of the four credits you've already discussed, I mean, is there anything else that -- yes, I guess, is there any areas you guys are staying away from or any other concerns just in general from a macro perspective that you would comment on or share? Is it kind of similar to what you said last quarter, you're just not seeing much out there still?

Yes. I mean, from our existing portfolio, it's monitoring heavily those spaces that we know are in stress. I mean, we monitor the EVL book very closely on a monthly basis. We're watching -- as I mentioned, we're watching ag closer. We think that our structures have sheltered us so far, but we'll see. And then we're staying away from other areas that we think are probably overheated. On the real estate side, I think multifamily is overheated in some markets. So we're just trying to be very selective in terms of how we approach certain segments. And the portfolio right now, I think other than hopefully the explanation I gave on the few credits, is in pretty good shape.

[Operator Instructions]. At this time, there are no further questions in the queue.

Well, Jonathan, thanks for hosting the call, and thank you all for joining us in the support of our company. Look forward to speaking to all of you again next quarter, if not sooner. So thanks, and have a great day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.