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Enterprise Financial Services Corp (NASDAQ:EFSC)
Q3 2019 Earnings Call
Oct 22, 2019, 3:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 President and CEO, Jim Lally. Please go ahead, sir.

James B. Lally -- President and Chief Executive Officer

Thank you, Cory, and thank you all very much for joining us. And welcome to our Third 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. Presentation and earnings release were furnished on SEC Form 8-K yesterday. Please refer to Slide 2 of the presentation titled Forward-Looking Statements, and our most recent 10-K and 10-Q, for reasons why actual results may vary from any forward-looking statements that we make today.

Overall, I'm very pleased with our results for the third quarter. Scott and Keene will discuss the specifics of our results, but overall, the quarter showed the strength of our company as we displayed our ability to organically grow the core business, further integrate Trinity into our culture, improve an already solid credit profile, efficiently operate the business, and prudently manage a growing capital base.

For the quarter, EFSC earned $1.08 per share on a fully diluted basis. This was a record for our company. Year-to-date, we have earned $2.45, inclusive of $0.54 per share of expenses related to Trinity. ROA for the quarter and year-to-date was 1.60% and 1.26% respectively.

I would now like to turn your attention to our financial scorecard that can be found on Slide 3. When comparing our third quarter performance in 2019 to how we performed in 2018, many things stand out. First of all, we were able to increase our earnings per share by 11%, and drove net interest growth in dollars by 31% when compared to a year ago. Certainly, the successful integration of Trinity had a positive impact, but our ability to continue to grow our loan portfolio through quality relationships played a significant part in this success.

Secondly, we defended margin well. You are all very familiar with what this current interest rate environment has done to the earnings of many financial institutions. So to see our -- net interest margin only decrease by 5 basis points over the last 12 months speaks to the quality of our franchise and the great relationships of which it is comprised.

Our credit statistics remain solid. Our non-performing loans, total loans decreased by 10 basis points compared to last year. Keene will speak to the specifics, but by all measures, our credit quality compares very well to our peers. The bottom line is that we are not willing to sacrifice quality for growth. I do find it somewhat ironic that we improved our core operating leverage by 1% when compared to a year ago. At enterprise, we preach to our associates, that they should try to improve what they do every day by 1%. This mindset has become a way of life for us.

Finally, the ability to add to an already strong deposit base is an everyday focus for our company. Certainly, integrating Trinity into our company played a significant part in the 34% increase, but this was aided by the 5% annual increase that we experienced in our organic deposit base. Scott will provide some pertinent details around this growth.

Slide 4 shows where we remain focused. As it relates to the ongoing integration of Trinity, I can only tell you that I'm extremely pleased with how these two companies have come together. We are four months post system conversion and our teams in New Mexico have done an amazing job getting themselves and our client base well acclimated to the Enterprise way. We will now begin to focus on the opportunities that we have to grow these markets.

As it relates to our other market and specialty businesses, I can assure you that the leaders of these businesses are keenly focused on running through the tape and achieving our organic loan and deposit goals for 2019. Scott will give you details, but you can see from our numbers how well these businesses continue to perform.

I mentioned earlier in my comments our focus on continuous improvement. This is a way of life for our teams, and continued improvement in our sales and operational processes is what is expected. For details on our lines of businesses in our regions, I would now like to turn the call over to Scott Goodman.

Scott Goodman -- President Of Enterprise Bank & Trust

Thank you, Jim, and good afternoon, everyone. As you'll see on Slide number 5, following on a strong second quarter, we continued to generate solid loan activity in Q3, with growth of $79 million. Year-over-year, the loan portfolio is up 23%, inclusive of the Trinity acquisition. Organic growth as of Q3 is solid for the same period, at 7%.

C&I increases outlined on Slide number 6 represent nearly half of total growth in the quarter at double-digit pace, net of the Trinity portfolio impact. As we continue our plans to integrate the Trinity client base, I'm pleased with the overall stability of the book. The minor loan run-off, roughly $20 million, is mainly related to successful work out of some PCI loans and residential mortgage payoffs, which are shifting from a legacy portfolio approach at Trinity to our preferred secondary market strategy. In general, origination volume increased in the quarter and our sales activity across the markets and within the specialized units is producing consistent new opportunities. I remain confident that our diversified origination strategy will continue to produce loan growth in a range of 6% to 8%.

The business segment changes are outlined on Slide number 7, entitled Loan Details. Growth in general C&I, investor-owned CRE, and construction reflects my prior comment on solid origination activity within the geographic markets. And I'll touch on this in more detail later. Within the enterprise value lending, or EVL portfolio, performance reflects both environmental challenges and internal discipline on credit structures in this space. As we've experienced for the past few quarters, payoffs and paydowns are elevated, as our private equity partners take advantage of robust capital markets and high valuations to opportunistically exit portfolio investments.

Additionally, competition, including non-bank sources, are, in some cases, pushing credit parameters beyond our risk appetite. I discussed this a bit last quarter, but it's mainly around total leverage and extended amortization of unsecured exposures. That said, we do continue to see steady deal flow from our partner relationships, and origination activity was up quarter over quarter. I expect new deal opportunities to continue, with some seasonal upswing in Q4. We also continue to expand our base of relationships, and we will selectively add sponsors to extend our brand and further increase deal flow.

Life insurance premium finance has experienced strong growth over the past 12 months. Q3 reflects typical volumes on originations and advances for premiums on existing policies financed. A couple of larger payoffs muted quarterly growth, as we walked away from some price-driven competition which was well below our threshold. But despite these specific deals, there has been a general moderation of the payoff activity, and the outlook is for typical seasonal increases heading into Q4.

The reductions in the residential real estate portfolio of $23 million in the quarter reflect my prior comments regarding the Trinity book, and is also impacted by some increased mortgage activity in general, with the falling rate environment.

Within our business units, on Slide number 8, specialized lending mainly reflects the impact of the changes in EVL, with some modest growth in aircraft finance and agricultural portfolios. Regionally, St. Louis posted solid growth of $81 million in Q3, driven by a strong uptick in origination. A highlight in the quarter was providing the senior debt on the purchase of a high profile commercial real estate portfolio in Western St. Louis County, with one of the premier investor groups in the metro area. C&I activity also included equipment financing for a transportation company, and acquisition and recapitalization for a financial services company.

Arizona also had a particularly solid quarter, up $31 million, and growing roughly 12% year over year. Growth is coming from a number of sources, including fundings on construction loans originated over the course of the year, as well as new loans for investor real estate clients in hospitality and mixed-use categories.

We also continue to see more C&I opportunities, including new loans with companies in the electric contracting, medical services, and storage industries. I'm encouraged by the momentum we are seeing in this market, driven by our robust economy, as well as our ability to attract new talent from competitive disruption. Phoenix is frequently cited among the best economies in the nation, leading most cities in GDP performance, job creation, and population growth. And while this is attracting the attention of new bank entrants to the market, our experienced local bankers and our long-term presence here is resonating with the business community to produce an expanding pipeline of new opportunities.

From an overall perspective, early in Q4, the near-term loan pipeline looks solid, with the mix of new C&I relationships, CRE across all geographies, and seasonal upticks in specialized lending.

Turning now to deposits on Slide number 9, balances were up by $65 million in the quarter and show a solid growth of 8% year over year, excluding the impact of Trinity. Growth is being driven by new commercial and business banking deposits through an execution of a consistent sales process which incentivizes new relationships and client consolidation of balances to Enterprise. This is also positively impacting the mix, as DDA rose 23% of total balances.

The growth in Q3 was also encouraging, particularly considering we saw some of the larger, more concentrated and higher cost commercial balances which had provided growth to us in prior quarters, move down this quarter. We also continue to see depositor behavior pushing to move idle balances to higher-yielding alternatives. Our sales teams have been able to execute well to retain relationships, while allowing the higher rate transactional deposit balances to move. Overall, this strategy is producing good results. During Q3, we are consolidating and originating more new balances at better terms than what it would have taken to retain what is leaving. We also continue to originate net new deposits, with new balances totaling nearly three times that of closed accounts.

Within New Mexico, as expected, the local banks and credit unions are aggressively courting our bankers and our clients. We have been executing a strategy to introduce our brand by highlighting the retention of local talent, defending the relationships we've acquired, as well as continuing and increasing the community support and partnerships for which Trinity was known. So far, we've been successful in minimizing run off, as well as turnover, and feel good about our ability to retain the low cost, well-diversified nature of this book.

Now, I'd like to hand it over to Keene Turner for review of our financial results.

Keene S. Turner -- Executive Vice President and Chief Financial Officer

Thanks, Scott and good afternoon, everyone. The third quarter results were strong and demonstrated our stable balance sheet and continued execution on all fronts. Revenue was a highlight of the third quarter at $76.6 million, and was a 4% increase from the linked quarter that was driven from both net interest income and fee income growth.

We reported $29.1 million of net income, or $1.08 per diluted share for the third quarter, and that produced a return on assets of 1.60%, and a return on tangible common equity of 19%. Our earnings continue to build our capital position, increasing the tangible common equity ratio to 8.5%. The strength of these returns allowed us to return excess capital through repurchase of approximately 300,000 shares at an average price of $39.03 during the third quarter. We believe that this activity is an important way we can continue to return value to our shareholders, in addition to driving earnings and continued dividend increases.

I'll begin on Slide 10 where we roll forward EPS from the second quarter. Obviously, the largest linked quarter driver from the second quarter to the third quarter is $0.30 of merger-related charges that improved EPS. Generally, we feel like the Trinity expenses are mostly behind us, and we incurred about $400,000 in the third quarter. We had a good quarter in non-interest income, primarily tax credit income. We also realized some security gains and the proceeds of which were reinvested in new securities at higher yields. We also had additional income from loan work-out activities that benefited the quarter, and we had a 5% improvement from the linked second quarter. Other items, non-interest expense, incremental accretion, and the change in our shares and tax rate combined to increase EPS by $0.05 per share. The increase in incremental accretion was from the successful resolution of several non-core acquired loans.

We'll move on to net interest income on Slide 11. The current interest rate environment impacted our core net interest margin in the quarter. Nonetheless, our efforts to grow the balance sheet contributed to modest growth in core net interest income, compared to the second quarter. To that end, we were able to grow both loans and deposits in the quarter and bolster the investment portfolio. This did require the use of some funding from the FHLB and other wholesale sources, and some of these actions negatively impacted the linked quarter trend in the core net interest margin, which declined to 3.69%.

However, given the 70 basis point plus decline in one month LIBOR, which weighed heavily on our asset yields, we were able to mitigate much of the trend through assertive, not aggressive, deposit repricing, balance sheet growth, and most importantly, growth of new and existing customer relationships. It's worth noting the overall cost of deposits was stable at 94 basis points for both the third and second quarters, and we were able to begin decreasing pricing within the managed and indexed money market account. There continues to be some opportunity there, as clearly there is some lag in deposit pricing, and thus we have not yet seen the full benefit of actions taken in the quarter to reduce our deposit costs, and we're careful to protect and manage relationships along the way, the primary goal of being fair to both customers and shareholders. Generally, we believe that we're well positioned as we begin the fourth quarter and look forward to the upcoming year. Our liquidity is strong and we work to continue to further improve all of our liquidity measures. We believe this helps to position us to deliver consistent, strong financial performance as we navigate through the current environment.

Our expectation is to generally defend core net interest margin from here and to the extent the current interest rate environment behaves as we plan, that is not to say that we don't have any major, rapid shifts that we've had the last several quarters. I'll just reiterate that our expectation and our goal continues to be to grow core net interest income and defend net interest margin as we did during the third quarter.

Turning to Slide 12 and our credit trends, loan growth of $80 million and 8 basis points of net charge-offs resulted in a $1.8 million provision for loan losses. Our nonperforming loan levels improved during the quarter, as the two loans that we previously noted were administratively past due were positively resolved. Credit metrics remain strong and continue to compare favorably to all of our peers.

On Slide 13, non-interest income increased $1.6 million in the quarter, principally due to an increase in tax credit income and other income from loan workouts. We're on target and continue to expect high single-digit growth in 2019 fee income before Trinity, due primarily to opportunity in tax credits and card services.

Operating expenses on Slide 14 were $38.2 million, and reflect our execution on the integration of Trinity. At this point, most of the cost savings of the transaction have been realized. We incurred under $0.5 million in merger expenses in the quarter compared to $10.3 million in the second quarter. A similarly modest amount of merger charges could be incurred in the fourth quarter, but our efforts for the integration are largely behind us. The core efficiency ratio was 51.7%, down nearly 2% from the linked quarter and 50 basis points from the prior year. Operating expenses were in line with our forecast between $37 million and $39 million for the second half of the year, and we continue to forecast this level for the fourth quarter.

To wrap up on Slide 15, through a measured combination of organic loan and deposit growth, as well as M&A, we've consistently grown the balance sheet and improved the overall quality and risk profile of the company. We're well positioned with a strong liquidity and stable credit quality. We expect to continue to utilize operating leverage to drive stable returns and consistent earnings. We continue to plan and execute in multiple facets of the business where we've been successful in growing our earnings power. We are pleased with the current performance and we have high expectations of ourselves and our teams for the future. We appreciate your continued support and for your time, and we'll now open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We'll take our first question from Jeff Rulis with DA Davidson.

Jeff Rulis -- DA Davidson -- Analyst

Thanks, good afternoon.

James B. Lally -- President and Chief Executive Officer

Hi, Jeff, how are you?

Jeff Rulis -- DA Davidson -- Analyst

Good, thanks. I wanted to follow up on Scott's comments regarding kind of the competition in your markets. It makes sense that New Mexico is a bit unique, given the transaction, but I was wondering if kind of broad-based, the rest of the footprint, are there areas of particular heavier competition, both loans and deposits, and maybe some areas where they maybe seem more rational? Thanks.

Scott Goodman -- President Of Enterprise Bank & Trust

Sure, thanks. And this is Scott. Yeah, I think generally we're seeing, I'll maybe take loans first. On the loans side and some of the other markets, generally local banks continue to extend term offerings in the 7 to 10 year range on balance sheet. I think we've been seeing that for a while, maybe fixed rates. I think we tend to see it on pricing on a coupon basis, and in many cases, sub 4%. So I think that's kind of the factor we're continuing to see. We continue to stay disciplined. In some cases, if we're going to extend term, we're using a swap or a floating rate, but that tends to be, on the loan side, what we're seeing a lot of it, I think credit structures may be seeing a little bit more limited or non-recourse.

 And we've seen that on the CRE side for a while, but it's kind of emerging in the lower end of the C&I markets, again, usually from a local or a smaller bank. And then on the deposit side, I think what we tend to see is more rational pricing from the regionals than nationals. The locals, in many times are trying to index the Fed funds or above Fed funds. And I think some of the balances that I alluded to that we're letting walk away that are transactional, that's kind of where they're going, and that's fine. That's probably what we're seeing that I would call a little bit crazy on the deposit side.

I think the other factor I would just add, we're seeing a lot more non-bank competition, credit unions on the commercial side, particularly on the C&I business. And then for idle cash balances, I think obviously we're competing against what we're seeing from the Schwab's and Fidelity's that are going after that idle cash. Our posture is we want to retain relationships, and in many cases, do what we need to there, but if we want to let idle cash go, that's kind of where it's going.

Jeff Rulis -- DA Davidson -- Analyst

Right, okay. Thanks, Scott. Switching gears on just capital, and I guess anyone can address this, but the buyback appetite, your average price of the buyback this last quarter was about -- well, you're about 10% above that or more today. I guess you can touch on anything, M&A and/or buyback, just the current update on capital use.

Keene S. Turner -- Executive Vice President and Chief Financial Officer

Yeah, Jeff, this is Keene. I don't think our priorities have changed. I think, one, if we can achieve organic growth, that's first and foremost. I think we're earning at a high level with strong balance sheet return, so M&A is obviously a priority. If we can continue to leverage our talent there for integrations and bringing companies together, I think that will be second. And then obviously, we've just continued to maintain the dividend as part of growing the earnings power. Certainly the share repurchase is a stop gap. I mean, in the third quarter, I think it was nice to take advantage of some of the volatility there and maybe a little bit of what was weakness in the shares, but to the extent that we continue to have strong stock price performance, I think we view it as a capital management activity and not necessarily something that is market driven. And as long as we feel like we're not paying too much for the shares, we will continue to manage incurring the capital levels as we move between 8.5% and 9%.

As we really don't want to get too out of line, I think we view and respect the capital that our shareholders have given us, and we certainly don't want to sit on too much excess capital for too long. So we get a little bit more aggressive and have a stronger appetite between here and 9%.

Jeff Rulis -- DA Davidson -- Analyst

Keene, were you going to offer any CECL guidance in coming quarters?

Keene S. Turner -- Executive Vice President and Chief Financial Officer

We expect we're not going to lead that effort out in terms of the peer group, but we're going to put CECL guidance out in conjunction with our fourth quarter. So, I guess I can tell you that we're well down the path and working on final validations in various scenarios, planning for our models. And certainly from a directional impact, I would say two things. One, the PCI portfolio and the credit discount there is obviously going to add to the absolute allowance, and you'll be able to get that specific number when we file the third quarter Q. And then, I would also just say maybe on the but for side [Phonetic] of that, when you're seeing maybe some of the larger institutions report where they think their increases are going to be, the loan portfolio is short here in duration compared to what most others look like, particularly given the C&I nature of what we've booked in most recent years. And so, I think that will mitigate the increase, but I think our general posture is to always be prudent and on the conservative side of prudent as we look toward allowance and provisioning.

Jeff Rulis -- DA Davidson -- Analyst

Great, thank you.

James B. Lally -- President and Chief Executive Officer

You're welcome. Thank you, Jeff.

Operator

Thank you. We will take our next question from Andrew Liesch with Sandler O'Neill.

Andrew Liesch -- Sandler O'Neill -- Analyst

Hi guys.

James B. Lally -- President and Chief Executive Officer

Hi, Andrew.

Andrew Liesch -- Sandler O'Neill -- Analyst

I just wanted to touch on the margin here briefly. I mean, on a core basis down 11 basis points, but it didn't look like you had too many opportunities. You weren't as aggressive lowering deposit costs as maybe you suggested a quarter ago. But yet LIBOR continues to come in, and more prospects for rate cuts. I mean, how should we look about this going forward here? Maybe if you are able to lower your offer deposit rates this quarter, and lower the rates in some of the exception accounts, that could be a benefit, but still having earning asset yields come in, it's maybe not as much a compression as last quarter, recognizing you are trying to defend the core margin?

James B. Lally -- President and Chief Executive Officer

Yeah. Andrew, I think what we said last quarter has really come to fruition, which is I think we gave a longer-term view of what we thought the overall change was. It certainly, I think the environment maybe got a little bit more dramatic than we were expecting at that point, I think. It seems like, as we sit here today, there is a little bit more clarity on what is the most likely outcome here. So, I think we feel a little bit better about our forecast than we did last quarter.

Let me just say very quickly that we were at 3.80% last quarter and that included 2 basis points of purchase accounting that was not a repeatable. So we’re down 9 basis points from there, and we let the investment portfolio grow a little bit and we knew that the deposit repricing was lagged. So we haven't taken our eye off the ball on the deposit pricing, particularly the managed money that we were talking about, and the indexed stuff was obviously moving. It's just that you had LIBOR fall 70 bps from the start of the year, and you've had Fed funds down 50 bps, and hopefully another 25 bps.

So, I think that it's a timing issue. I think we generally feel pretty good about where margin is today within a few basis points, and we're optimistic that we can generally hold stable and use that as a basis for growing core net interest income from Q3 to Q4 and thereafter. So that's our hope, and we're trying to do the things that retain customers and balances over the longer term, and don't just simply become margin focused and sort of shrinking net interest income but for the sake of having margin optically look better. So, I would also just point out and then I'll wrap this up, that we were not aggressive with CD repricing whatsoever. I think you can see the balances might have even been slightly up in the quarter, and certainly the rate on that was a little bit higher with the vintage of what was coming off and coming on. And so we really wanted to -- that's a lever that we could pull there. But again, I don't know that there is any great urgency there, as long as we continue to get good balance sheet growth. And I think, really, the driver for the most near-term quarter will be what happens with DDA growth and our commercial accounts. And we typically expect there to be some strong, seasonal trends there that really should help us on the mix side.

Andrew Liesch -- Sandler O'Neill -- Analyst

Got you. Okay, yeah, that's really helpful. And then just to follow up, I think from earlier on M&A, with stock at 192 [Phonetic] intangible, I mean you guys have a better current season than some other folks out there right now. Recognizing that Trinity is still kind of fresh, but what's your appetite for acquisitions right now? I mean, how are conversations with prospective targets going?

James B. Lally -- President and Chief Executive Officer

Andrew, this is Jim. That process is always ongoing. So it doesn't necessarily speed up in one season or another. We've had active discussions with several companies, nothing that is obviously too far along to report on, but it's about making the franchise better. You've seen the last two opportunities, and what the makeup of those companies are, and that's where we're focused, is really improving the deposit base of our company like we have the last two times.

Andrew Liesch -- Sandler O'Neill -- Analyst

Got you. Thank you. That covers my questions.

Operator

Our next question comes from Nathan Race with Piper Jaffray.

Nathan Race -- Piper Jaffray -- Analyst

Hi guys, good afternoon.

James B. Lally -- President and Chief Executive Officer

Hi, Nathan.

Nathan Race -- Piper Jaffray -- Analyst

Going back to the discussion on the core NIM for the fourth quarter, can you just -- I'm curious to get an update on how you kind of see the core loan yield trajectory in the fourth quarter, down 11 bps or so here in the third quarter. You know, you've got the weighted average rate on new loan production in the quarter at 4.66%, so it would imply some further pressure, particularly on the heels of the September rate cut. But I imagine that 4.66% is partially a function of the composition of production this quarter. So just curious to get your thoughts on just kind of core loan yields in the fourth quarter?

Keene S. Turner -- Executive Vice President and Chief Financial Officer

Yeah, I guess maybe first and foremost, I think we felt like we saw the LIBOR rates move down when the third quarter rate cut became pretty apparent. So I think our view, or our optimism is that that won't be an underlying issue for the LIBOR-based loans. If that is, then what I'm about to say will get a little bit more severe and we'll have to defend it more aggressively.

But I would say secondly, the 4.66% I think was -- I don't want to call it a low point, but I think some of that just reflects when you look at the categories that those loans we’re in, and the types of borrowers that we bank, maybe a little bit of a low from where we'd expect to see it. So, when you start to segment that by what pure, variable C&I those rates are a little bit better, and then when you look at some of the more fixed rate CRE, those are fairly short term, but those are driving that rate down a little bit.

So, our expectation would be that maybe that doesn't get more severe, but as we see activity in certain pieces of the business contribute more like they have in the past, that that could help aid that yield that we've seen previously. So, I think our expectation is that it's maybe not quite as aggressive of a repricing or a downward pressure from Q3 to Q4, and that we can get a little bit more movement both in the mix and the overall rate on deposits at the same time.

 And again, not to tout the wholesale position, but wholesale funding has helped us and we'll have some brokered CDs and other items that are maturing in the fourth quarter that will also help provide a little bit of runway on the funding side.

Nathan Race -- Piper Jaffray -- Analyst

Yeah, and can you just remind us along those lines, I think it was like $1.4 billion in deposits that you had, either kind of hard or soft index distorting the curve. Is that accurate still?

Keene S. Turner -- Executive Vice President and Chief Financial Officer

Yeah, that number hasn't changed, so yes, it's $800 million and $600 million or vice versa, indexed and exception managed.

Nathan Race -- Piper Jaffray -- Analyst

Great, and then just changing gears a little bit and thinking about loan growth, maybe for Scott. I think you mentioned you had some intentional run off in New Mexico tied to some purchased credit-impaired loans, maybe. And I think you're also trying to remix that portfolio away from some single-family residential loans. So, just curious if there's anything left to do on that front? And, when do you maybe expect to see some growth out of that franchise, because it seems like you guys have been doing some hiring down there of late?

Scott Goodman -- President Of Enterprise Bank & Trust

Yeah, Nate, I think it's relative to more run off, a majority of that $20 million difference was on the PCI side. I think the mortgage impact was fairly small. I wouldn't expect that to be a significant headwind. It's not something that, when we looked at that opportunity at the beginning, we expected that we would grow. I think the opportunities for us exist in widening the relationships with existing clients. We’re bringing a bigger checkbook to the table, with more capabilities. And then I think Albuquerque presents, just given the metro market which we're familiar with, bringing some of our strategies that have worked in the other metros, like business banking and C&I, to the table. So that's really where the plan exists. And I think if you look at the pipeline, it continues to rise, so our opportunities are good near term with those existing clients. And I think our team out there is well positioned to execute a growth strategy in Albuquerque that will come over time.

Nathan Race -- Piper Jaffray -- Analyst

Okay, great. I appreciate guys taking the questions. Thank you.

Operator

Our next question comes from Brian Martin with Janney Montgomery.

Brian Martin -- Janney Montgomery -- Analyst

Hey, guys.

James B. Lally -- President and Chief Executive Officer

Hi, Brian, how are you?

Brian Martin -- Janney Montgomery -- Analyst

Good. Hey, Jim, just one question on M&A, and maybe you said, if I missed it, but just have you seen any pick up in discussions? I mean, I guess we've heard from some other banks that there has been more discussions, that they've noted a pick up. Have you guys seen any of that? I know you're looking at the strategy, but have you seen a pick up?

James B. Lally -- President and Chief Executive Officer

Well, you know, the answer is we have a very consistent pipeline. So I don't know from what level these other companies started, but I would say ours has been just consistent over the last several years. As it relates to pick up, I think banks in general, who are looking to partner, may feel some sense of urgency relative to some of the headwinds that all companies are going through, so maybe that's maybe what you're seeing out there.

Brian Martin -- Janney Montgomery -- Analyst

Yeah, okay. And then maybe one just back to the margin. Keene, I appreciate your comments on the margin. Just your outlook, I mean does your commentary change at all, if you think about the context of maybe having three rate increases here over the next couple of months? I mean, if you have an October, a December and a January cut, just kind of how you think about the margin under that type of scenario, versus kind of what you already outlined?

Keene S. Turner -- Executive Vice President and Chief Financial Officer

Yeah, I think we've done a number of things to attempt to stabilize the base earnings power, given a variety of scenarios. I guess I would say we certainly, I think we believe that we have worked through, call it the majority of that near term. And if we continue to get lagging, we're going to start to be able to at least hold margin where we are, because if you get another rate cut, or the idea of a rate cut and that affects LIBOR, we'll have the existing rate cut to help improve the deposit side. And I think, as I indicated in my comments, we haven't been aggressive. We've been fair to clients and fair to shareholders along the way, and we're hoping that that pays dividends not just in the next two to three quarters, but over a much longer-term horizon where we might get back to a scenario where we've got a high 90s or below 100% loan-to-deposit ratio. So, we're trying to be very, very thoughtful about what we do with clients and where they've come from, how long they've been with us and how long they maybe have had or have not had a rate increase. And I think you've seen us do some more things on the fee income side to try to help mitigate that and drive revenue growth. So I think you saw a good quarter on the tax credit side. I think we expect more of the same on the fees for sort of low or mid, mid-to-high single digits when you blend it all in with a full year of Trinity and continued progress on the tax credit front.

So I think we're looking at that overall and saying, how do we drive respectable revenue growth, knowing that the interest rate environment is difficult? And then, just really be thoughtful about how we deploy expenses to make sure we're driving the kind of EPS and returns that we want. So, I mean, that's the formula. It's all very fluid. We're trying to do the best we can with the current environment, but we're also, just like I would say on efficiency ratio, we're not targeting an efficiency ratio. It's a byproduct of how we manage the business. I would say net interest margin is the same, and we're just trying to be really deliberate about the actions we take both and how that feels from an associate experience, from a client experience, and hopefully leverage challenging times into more prosperity and growth for Enterprise.

Brian Martin -- Janney Montgomery -- Analyst

Okay, that's helpful. Thanks. And just, remind me the amount of floors you guys have in the portfolio today, and kind of how many are at their floor?

Scott Goodman -- President Of Enterprise Bank & Trust

Yeah, let me dig that, I have that here. I just have to find the page. We don't have a lot that's currently on the floor, and I think we're seeing good progress in getting things on the floor. So we've got about $800 million in the portfolio that has a floor, and you've got about 25% of that that's on the floor. So there is a little bit of protection built in, to your point, if you get some more rate cuts, particularly once you start to get two more rate cuts, call it, that starts to really kick in.

Brian Martin -- Janney Montgomery -- Analyst

Okay, all right. And the last two for me was just the incremental accretion this quarter, that pick up. Keene, I guess should it be fair to say we should see a downtick there? Just kind of how to think about that level going forward?

Keene S. Turner -- Executive Vice President and Chief Financial Officer

Yeah, I think the way we think about it is, we've got whatever you're thinking about for core net interest income, and then you've got another penny or two per quarter of incremental accretion that we're thinking from the non-core acquired book.

Brian Martin -- Janney Montgomery -- Analyst

Okay, all right. And the last one was just on kind of how to think about the core efficiency as we go forward. I mean, I guess if you're under the environment we're in with this rates possibly going lower and impacting revenues, just as you guys think about, how do you think about driving the core efficiency ratio lower next year? Do you think that's doable with kind of the roadmap you've outlined of just the organic growth with defending the margins, where we can see the core efficiency improve a bit next year? Is it more likely to be kind of flattish or up a little bit?

Keene S. Turner -- Executive Vice President and Chief Financial Officer

Yeah, I would say, Brian, I think the efficiency ratio we expect to improve seasonally for the fourth quarter, and then we always get a little bit of a reset from Q4 to Q1 with the way tax credit revenues work in that time period, as well as the seasonality of expenses. But, you know, I think the level that we're operating at here in the low 50s feels like a level that we can achieve, and I think that our idea would be that if we can continue to execute on gaining new customer relationships and driving fees, we want to make sure that we're taking that and deploying that back in the business.

And so, maybe historically when you've had some margin expansion, that incremental efficiency has been more like 30% to 40%. If we think of it very simply as 50% on marginal efficiency, I think that reflects maybe some expectation of having rates be more of a headwind than a help or neutral, but also our ability to just manage expenses appropriately. You know, we're not going to not hire somebody who is good in the market just to manage efficiency ratio if it's the right thing to do long term, because that also gets to be a vicious cycle too. So, I mean I think that's generally what we're thinking, but if you start growing revenue quarterly and you have a margin of 50% efficiency ratio, you'll make a little bit of gains there, but you're not going to be knocking it down 1% or 2% a quarter.

Brian Martin -- Janney Montgomery -- Analyst

Got you, okay. I appreciate all the color. Thanks.

Scott Goodman -- President Of Enterprise Bank & Trust

Thanks for your question.

Operator

[Operator Instructions] There are currently no questioners in the queue, sir.

James B. Lally -- President and Chief Executive Officer

Well, again, thank you, Cory and thank you all for joining us. Thank you for your support of our company and we look forward to speaking to you all next quarter, if not sooner. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

James B. Lally -- President and Chief Executive Officer

Scott Goodman -- President Of Enterprise Bank & Trust

Keene S. Turner -- Executive Vice President and Chief Financial Officer

Jeff Rulis -- DA Davidson -- Analyst

Andrew Liesch -- Sandler O'Neill -- Analyst

Nathan Race -- Piper Jaffray -- Analyst

Brian Martin -- Janney Montgomery -- Analyst

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