Q4 2020 Enterprise Financial Services Corp Earnings Call
[music].
Good day and welcome to the E. S. S. C 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. Please go ahead.
Well, thank you Shelby and good morning, and walk them through our fourth quarter earnings call I.
I appreciate all of you taking time to listen in and joining me. This morning is Keene Turner, our company's Chief Financial Officer, and Chief Operating Officer, Scott Goodman, President of Enterprise Bank, and Trust and Doug Bowers Chief Credit Officer.
Before we begin I would like to remind everyone on the call and a copy of the release and accompanying presentation can be found on our website.
And patient and earnings released from furnished on SEC form 8-K yesterday.
Please refer to slide two on 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 this morning.
We're very excited to present the results of a very fulfilling year for our company.
Slide three provides the financial highlights from the quarter and.
And as I reflect on the year and what we face with respect to the COVID-19 pandemic, we're certainly forced to alter our plans, but our company never walk and focus we achieved several critical milestones that positively impacted our company.
Just in the fourth quarter, we closed on the acquisition and sea coast, adding to our Arsenal and pre <unk>.
Imminent SBA lender and specialty deposit generator to further diversify our funding base and enhance our earnings profile.
We supported our customers and navigating the P. P. P forgiveness process and we continue to effectively operate and communicate with our associates and a virtual environment.
For the quarter FSC earned $28 9 million.
Which was an increase of $11 million compared to our 'twenty and 'twenty third quarter and in line with what we reported for the fourth quarter of 2019.
On a fully diluted basis, we earned $1 per share for the fourth quarter compared to 68 and.
And $1.09 per week and prior year quarters, respectively.
Pre provision net revenue of $47 5 million for the quarter represented a return of 2.07% on average assets.
And that same metric was also nearly 2% for all of 'twenty, and 'twenty and accomplishment and accomplishment of which we are very proud.
Jim will provide much more granular details of our financial performance for both the fourth quarter and all of 2020.
The composition and diversification of our loans and deposits exhibits the ongoing transformation of our balance sheet debt.
Starting with the acquisition of JCB and early 2017.
Continued with the combination with Trinity and 2019 and most recently the addition of seacoast during the fourth quarter of 2020.
And these strategic additions combined with the continued growth within our markets and our specialty businesses represented and business model that produces higher quality earnings while at the same time, reducing the risk related to concentration of a particular market or asset class.
And with growing and expanding the earnings profile, we have strategically built even more durable diverse deposit base that we expect will support our ability to continue these positive trends and the years to come.
We believe that with total deposits deposits at Neely at December 31 of <unk>, 8 billion of which 34% and non interest bearing the resulting 90% loan to deposit ratio affords us ample runway to continue to expand and grow the balance sheet earnings per share and profitability.
For the foreseeable future.
Scott's comments will provide much more color on how we performed and our businesses and where we see great opportunities in 'twenty and 'twenty one.
Asset quality has held up nicely compared to the end of the third quarter and we saw improvements to the ratios on both nonperforming assets to total assets and nonperforming loans to total loans, our allowance coverage ratio remained strong at $2 three 1% of on guaranteed loans.
But we'll spend a little more time on this and his comments, but I just wanted to say that we're encouraged by what we're seeing but believe that we want to see how the latest round of fiscal stimulus impacts asset class that's related to travel and hospitality before we declare that we are told them through and the impact of the pandemic.
Capital Management was a key focus for us and 2020 or sub debt raised earlier and the year combined with our strong earnings allowed us to continue paying our <unk> 18 cents per share quarterly dividend on.
<unk> T C U E and tangible book value per share throughout the year.
Our capital posture combined with our earnings profile provided the confidence for us.
At Seacoast during 2020.
Now and speaking of seacoast, the integration is going extremely well and as I stated before and it's even better company than we initially thought and we engage them earlier in 'twenty and 'twenty.
The calendar is turned and our teams are aggressively work and their plans to accomplish our 2021 goals.
And I'm optimistic about the prospects for the year and the success of the vaccine rollout and additional fiscal stimulus should provide for economic stability and growth towards the second half of the year.
Turning to slide four you can see that our focus will be integrating seacoast and to enterprise.
Executing our asset growth objectives, both in terms of amounts and quality executing.
We're executing well on the current round of PPP not only to expand the relationships of our client base, but to users to acquire new clients and to seek ways to permanently change how we operate to deliver superior client experience.
Improving.
Our overall efficiency.
I'd now like to turn the call over to Scott, who will provide much more color on our markets and specialty businesses Scott.
Thank you Jim and good morning, everybody.
Our loans at year end are highlighted on slide number five and totaled $7 2 billion.
Representing a 36 per cent increase from the prior year.
Gross of $1 1 billion and the quarter is most heavily impacted by the addition of the Chico's book.
Bind with a reduction of $206 million and triple P balances and organic growth of $81 million.
Focusing my comments on the legacy core business net growth in the quarter underscores a healthy base of diverse business units.
And that continuous solid level of gross production held back mainly by the ongoing external headwinds.
That will be carried forward the momentum and production that I described last quarter with total originations more than double Q3, and 50% above the same quarter a year ago.
The impact of this production continues to be needed by excess liquidity being used to further reduce working capital lines and short term borrowings.
As well as reductions in commercial real estate related to the sale of properties and refinancings into the permanent market.
Slide six breaks out the loan book by business line.
And the changes in the quarter and highlighting the impact of seacoast, which now adds further diversity to the mix.
Aside from the sea coast impact.
And despite the headwinds we were able to achieve net growth in most categories with stronger performance in the investor CRE and <unk>.
<unk> finance, formerly known as <unk>.
Life insurance premium finance and tax credit business lines.
Within our business units that are highlighted on slide seven and specialty lending now represents $1 9 billion of our total loans or roughly 30% of the non triple pillow and book.
And in addition to the SBA loans from Seacoast, we saw the typical seasonal uptick and life insurance premium volumes as well as elevated closings and the sponsor finance area.
This production has resulted from a ramp up and capital deployment by our sponsor partners and additional opportunities that we earn through our support of their portfolio of companies via the Triple T and the mainstreet stimulus programs.
It's worth noting that we were able to successfully close on roughly $250 million of main street lending program loans in Q4, resulting in $2 $5 million of origination fees and over 100 million of noninterest bearing deposits.
And although most of the loan Outstandings are participated out to the fed and under this program. We were able to use this to reduce our risk on several existing credits.
And as a conduit to establish new C&I relationships that will provide longer revenue streams.
With a number of desirable companies and our existing markets.
The life insurance premium finance and tax credit businesses have shown resilience and the current environment with steady production and growth throughout the year.
With roughly $30 million of growth and Q4, and these businesses continue to perform well with a stable outlook.
Looking forward, adding a high performing SBA platform into our current mix of successful specialty loan verticals further bolster our specialized lending as a significant contributor to our growth engine with a favorable risk return profile.
Within our geographic markets St. Louis growth this quarter benefited from expanded relationships with several significant clients.
Clients and the construction equipment financing mortgage and tax credit businesses.
Arizona closed a number of new commercial real estate deals for acquisition and refinancing, including several with new investor relationships.
And in New Mexico, we are beginning to see some early signs of traction with our business model as we on boarded a couple of new midsized C&I businesses and the construction and remodeling industries.
Overall general C&I and monthly production within the geographies and it's continuing to trend up.
And our conversation with business owners reflect general optimism and willingness to invest and their businesses.
The triple Pilon and portfolio, which is profiled on slide number eight.
Of 699 million includes the combination of seacoast Triple T with the legacy enterprise Triple P loans.
Quarter over quarter, the legacy enterprise Triple pay balances have declined by $206 million as we began moving through the forgiveness process mid quarter.
So far and general we're seeing most of these applications successfully 100 per cent forgiving.
With an immaterial dollar amount a partial on forgiving balances remaining.
No applications over 2 million have yet been decision by the S. P. A.
We continue to elaborate here efforts and originating triple P for over 700, and new clients across our footprint and.
And have been able to successfully cross sell at least three new products two thirds of these new companies.
We are not participating in the next round up Triple P to further support our existing business clients and to continue to use this proactively to find new client opportunities.
The deposit base shown on slide nine.
Expanded by nearly $1 1 billion and the quarter with the addition of seacoast.
This also includes roughly $250 million of organic growth from the legacy E B and T portfolio.
The addition of a specialized sticky and low cost deposit portfolio from sea coast and allowed us to be more proactive with the legacy book.
Thing out higher cost funds or lowering rates on non relationship balances.
We also continue to have success on boarding new business operating accounts and expanding existing relationships with noninterest bearing accounts now increased to 34% of total balances.
So with that and now I'd like to hand, it over to our Chief Credit Officer, Dunbar and <unk> for his discussion on credit and Doug.
Yeah. Thanks, Scott.
I'm pleased to review Q4 and fiscal year end 2020 asset quality as we finished the year with some very strong credit results.
Net recoveries of $612000 and the fourth quarter resulted in total net charge offs, just three basis points from $190 million from the fiscal year 2020.
Total classifieds increased by $39 million from the prior quarter to $124 million largely due to the downgrade of two hospitality loans and the legacy enterprise portfolio and the addition of $29 million and classified loans acquired D. A C coast.
As a percentage of capital however, classified loan levels remained relatively stable and approximately 10% from both the current and prior quarter.
Nonperforming assets declined to 0.4, and 5% of total assets from 0.53% the prior quarter and 30 day delinquencies were well managed and 12 and a half million dollars or 17 basis points of total loans.
Turning your attention to slide 11.
Loan deferral activity has continued to decline as anticipated.
Loans remaining and deferral status at year end declined to $63 million or 1% of total loans, excluding PPP compared to $139 million or 3% the prior quarter.
86 per cent of the remaining deferrals are scheduled to expire by the end of Q1 'twenty one.
You'll see on slide 12, the allowance coverage for the broader portfolios of C&I.
CRE construction and rest of the real estate.
While credit metrics remained favorable our total allowance for credit losses increased 11% from the prior quarter to $137 million at year end.
The reserve now provides a 355 per cent coverage of nonperforming loans.
2.31% of total loans, excluding PPP and SBA, seven and eight guaranteed portions and one eight and 9% of all loan exposure.
Provisioning of $9 $4 million and the fourth quarter was largely related to the day one six of reserves on the acquired sea coast non PCB portfolio.
And with that I'll turn it over to Keene Turner.
Yes.
Thanks, Doug and good morning, My comments begin on slide 13, and will address the full year 2020, we reported net income of $74 $4 million or $2 76 per share.
Our successful execution on PPP and our diversified fee income sources were differentiators that helped us to offset low interest rates as well as fee income.
Income trends from Covid related restrictions and behaviors.
We increased our pre provision net revenue by 15% in 2000 $20 million to $162 million or $1, 96% of average assets.
We ended the year on a high note closing the acquisition of Sea coast, while also increasing net income during each quarter of 2020.
Compared to full year 2019, we increased net interest income by 80 cents per share plus another 16 cents per share per on each of PPP forgiveness and fee income growth and that growth was most notably due to strength and mortgage and our tax credit business lines.
We also increased the allowance for credit losses inclusive of the seafood seasonal day to double count for seacoast for and impact on $1.80 on earnings per share for the full year.
Yeah.
On slide 14 of the presentation, we walk through the changes and earnings per share for the linked quarter.
Certainly it was a busy quarter and we closed the fourth quarter with net income of nearly $29 million or $1 per share compared to 68 per share and the third quarter.
Net interest income aided by sea coast and accelerated fee income on PPP forgiveness added a combined 43 per share.
Excluding seacoast the provision for credit losses decreased from the prior quarter and improved EPS by <unk> 40 per share.
Separately as Doug noted day, two seasonal reserve on seacoast acquired loans reduced earnings by 26 cents per share.
We increased fee income by 18 per share as total fee income hit a record high this quarter, primarily due to higher tax credit earnings.
On the expense side, and we had a partial quarter of Cecos operating expenses that drove the 22 cents per share decrease and earnings from expenses.
Merchant related expenses also increased in the quarter and reduced earnings by <unk> comparatively and we incurred a swap termination charge that reduced earnings per share by approximately <unk> 10 cents.
And lastly, the share issuance for the seacoast acquisition reduced earnings by approximately <unk> 10 cents a share.
And.
We'll turn to slide 15, where we address net interest income trends.
Net interest income was $77 $4 million for the fourth quarter and it was an increase of $14 million from the linked third quarter net interest margin was 366% an increase from 37 basis points from the third quarter.
The primary drivers of this increase were PPP loan forgiveness, and the addition of seacoast assets.
We recognized $10 3 million of total interest income on PPP loans during the fourth quarter, including $5 $1 million from acceleration of deferred fees on $206 million of loan payoffs compared to $5 3 million and the prior quarter.
P. P. P activity is contributing approximately 15 basis points to the fourth quarter net interest margin.
Additionally, seacoast added $680 million on average, earning assets and the fourth quarter and approximately $8 million of net interest income. It also resulted in a nine basis point improvement to the fourth quarter net interest margin.
Average loan balances adjusted for PPP, and seacoast activity, So enterprise core loans increased approximately $70 million and the quarter.
It's important to note the yield on the loans held up well with only a three basis point decline compared to the linked third quarter.
We expect that trend to continue as we originate volume at current market rates, but we're encouraged by both the portfolio growth and the relative yields defense quarter to quarter.
Our cost of liabilities declined seven basis points and the quarter, mainly driven by lower cost on time and <unk> borrowings along with the addition of low cost deposits from seacoast.
We did terminate or cash flow hedges totaling $200 million of notional value related to FHA Ob borrowings, which we expect will result, and a reduction of our excess balance sheet liquidity as well as a corresponding reduction to cost of funds.
Deposits, excluding seacoast grew approximately $250 million and the quarter with $115 million and noninterest bearing DDA.
Looking forward, we expect the <unk> acquisition to provide additional margin accretion on over a full quarter of around five basis points, considering liquidity, but excluding P. P. P.
That would leave net interest margin at approximately 3.40% to 345%.
And a level, which we can reasonably defend and 2021.
To the extent and we can continue to experience quality loan growth the ability to redeploy excess cash into higher yielding assets will also create incremental income and improvement and margin over the coming periods.
And the timing of PPP forgiveness, which on average has been approximately $20 million per week and the potential for additional economic stimulus measures. In addition to customer cash usage trends could also have material impact on net interest margin in future periods with that said our focus remains on growing net interest income dollars to <unk>.
And drive EPS expansion.
Turning now to slide 16 asset quality has held up well during 2020 and the fourth quarter was no exception.
As Doug noted we ended the year with a modest net recovery position and modest net charge offs, because we felt it was appropriate to maintain our reserve and the fourth quarter. We ended the year with an allowance for credit losses, representing 231% of loans, excluding PPP and guaranteed loans.
With non performers at similar levels to December 31, 2019 coverage of those same loans increased dramatically and we believe we're well positioned from what could arise in terms of credit losses.
Thus the provision for credit losses of $9 $5 million recorded for the fourth quarter was principally the result of purchase accounting from seacoast and what is commonly referred to as day to double count, which is $8 $6 million and total.
It is clearly demonstrated on slide 17 of the presentation.
$8 6 million provision on the non PCB portfolio reflect the duplication of the credit discount also applied and purchase accounting and also another $3 $5 million on allowance on the sea coast PCB portfolio, both of which are recorded on the opening balance sheet not run through provision expense like the day to double count.
The purchase accounting and the allowance for credit losses are now on line with what was announced and as a result, we do not anticipate material provisions related to sea coast and the upcoming quarters. The remaining $1 3 million debt. We recorded on the allowance for credit losses, principally where stuff and where flex changes the unfunded commitments and other similar items during the fourth.
Quarter.
Stepping back and as Jim noted, it's clear that the stimulus is already and will continue to positively impact many of our borrowers and will ultimately help eliminate or mitigate credit stress that would have otherwise occurred.
With that said these efforts and increased the uncertainty and likely the time period during which we would ordinarily expect loss recognition to occur.
So we essentially maintained our reserve level as a result until there are more clear indicators and either direction as to what the ultimate impact would be to our customers.
With the current level of the reserve, we believe that we're well positioned for potential credit losses and to the extent that there are no further downward trends and economic and asset quality factors charge offs may exceed the provision in 2021.
Fee income demonstrated on slide 18 came in at $18 $5 million for the fourth quarter, which was an increase of $5 $9 million from the $12 6 million, we recorded and the third quarter seasonally robust tax credit activities drove $3 3 million and quarterly increase while fees.
Weighted to community development projects accounted for an additional $1 $9 million of the quarterly increase.
Mortgage again expanded from the prior quarter by approximately zero point $2 million Wow, the 0.4 million gain on sale of securities and the third quarter was not repeated.
<unk> contributed <unk> 8 million of fee income and the quarter, consisting primarily of SBA servicing fees and deposit service charges.
Expenses on slide 19 were $51 million for the quarter compared to $39 6 million and the third quarter merger expenses and the fourth quarter were $2 $6 million compared to $1 6 million and in the third quarter, and we estimate that approximately $3 $1 million.
<unk> remained for the first quarter of 2021 due to the closing and seacoast.
The fourth quarter also reflects reflects $6 million of Cecos operating expenses, representing a half a quarter of operations and $3 $2 million and swap termination expenses.
The remaining increases and fourth quarter were across a variety of categories and reflect the underlying trends and our operation of the business.
Despite a challenging year.
Core efficiency came in and consistently at 51% and feels like and accomplishment with the challenges we have faced in 2020.
We will pay the seasonally higher expenses and the first quarter and expect a full quarter of seacoast run rate before we achieve the remaining synergies post systems conversion.
So combined we expect about $52 million of first quarter expenses from <unk>.
<unk> merger charges, and then improving to around $50 million by the second or third quarter is roughly what we would expect it's possible that with successful execution of another round of PPP and continued progress on expanding the loan portfolio. We can continue to demonstrate that thing and glass efficiency.
I'll conclude my remarks on our final slide number 20.
We continue to build capital on the quarter and really throughout the year as a result of our strong earnings profile and while we also increased the allowance for credit losses by $93 million to $137 million or two three per cent of on guaranteed loans.
We also further improve the risk profile of our balance sheet through the seacoast acquisition, adding approximately $600 million of guaranteed loans and representing nearly 50% of their assets and because we structured the acquisition of C code to be all stock that was slightly accretive capital based on their metrics and deal impacts.
And 2020, we return dividends to shareholders and 72 cents per share a 16% increase over 2019, and we executed on some common stock repurchases and early 2020.
As a result tangible book value increased to $25 48 on a per share basis, representing an increase of 7% from the end of 2019.
And with some momentum and the fourth quarter on organic growth and with seacoast, representing and engine to further aid EPS growth. We believe we are well positioned to continue to have a variety of options to build our franchise and exercised our capital flexibility and the upcoming periods.
Worth, noting we have 96000 shares remaining and our current share repurchase program.
While we believe it is still too early and the cycle to begin buying back shares we continually evaluate our capital position and will be opportunistic and our deployment and support organic growth dividends M&A and share repurchases.
Before we open the line for questions I wanted to reflect on our recent acquisition history.
And <unk> acquisition of <unk> represents our third acquisition and the last four years through these transactions, we have improved our cost of funding liquidity and earnings profile, while diversifying our geographic footprint.
And we worked through the various moving pieces of 2020, we believe that fundamentally we continue to earn strong returns certainly noted by 2% P. P and are for 2020.
With the added earnings power from Seacoast continued organic growth and our expectation for additional earnings and capital build from the next round of PPP, we feel good about our ability to continue this progress for 2021 and beyond.
I appreciate those who've taken the time to listen to the call today and with that we'll open the line for analyst questions.
Thank you and if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure your mute function is turned off to them.
Allow your signal to reach our equipment.
Press Star one to ask a question.
We'll pause for just a moment to allow everyone an opportunity to signal for questions.
We'll take our first question from Michael Schmidt bone with K B W.
Hi, good morning.
Good morning, Michael.
And so my first question you guys you guys saw some pretty good organic commercial growth and the card can you just talk about the standard those pipelines and the overall loan growth expectations for 2021.
Yeah, Hi, Michael This is Scott I can kind of handle that I think Peter.
Reinforce what I said and I have focused a lot on gross production, particularly over the last few quarters, because I think a lot of the headwinds are external.
And obviously, there's a lot of that that looks like there is a.
Light at the end of the tunnel there so.
You know the specialty businesses have been pretty steady producers throughout the year life insurance had its typical fourth quarter uptick.
Volumes elevated with sponsor finance, which we.
It didn't necessarily see last fourth quarter, but now see it.
And then and the markets I think it's the <unk>.
Production is steadily ramping up we're seeing things like M.
M&A activity.
Recapitalization and so I think we had two of our long term clients to aesop and the quarter, which is becoming a more popular.
Form a succession.
And and then steady our investor CRE volumes, so I feel good about.
Continuing the level of production that we've seen looking forward and you know pipelines are pretty consistent with that right now.
Great Thanks and.
And he can you guys also just talk about what you're expecting for fee growth and 2021, and where do you think the biggest opportunities are here, especially as it relates to cross selling to sea coast and TPP clients.
Yes, maybe we will team up on go ahead and go ahead on on cross sell Scott and then I can provide a little bit higher level guidance, if you'd like.
Yeah, Great. That's what I was gonna say, yeah. So we are and I think we've talked about this you know we focused on triple T. As an opportunity to originate new relationships from the 700, plus new businesses, but also cross selling into existing relationships as we really set up a lot of those conversations on walking.
And I'm through the Triple P and forgiveness process.
And we've got a pretty robust sales force.
Dashboard, and and and sales process activity that we monitor and I think you know the opportunities there are businesses like Treasury management, which we continue to invest in and I think continues to be a.
A growth area for us cards.
And I, we look at what how how businesses are using cards for payment services correlates well with some of our Treasury management products. That's an area. We're focusing on and then you know I think we're always looking to.
Sell in to the families and business owners.
The companies that we serve so private.
Private banking and wealth I think is another area that we'll continue to focus on.
Yeah, and and Michael This is Keene I would say, we normally we expect the banking related service charges to basically be mid single digit growers.
I would say it's across the board.
Our expectation I think the wildcard that you have is what are the headwinds as it relates to potential additional.
<unk> shut down their measures and market and some of these are just behavior driven.
Card business for example, we're starting to see some positive improvement there but.
We have some muted volumes because businesses aren't traveling and spending as much. So those are difficult to predict but I think we expect.
Some some more resumption and particularly in the back half of 2021 and then.
I think for our drivers of those line items I think it's more of the same.
We expect basic.
And basically tax credit to be.
And they're 10% grower and I think there are some opportunities to you know throughout 2000, and and 21 to have some more success with our Cte similar to what you saw in the fourth quarter, but that's a little bit of a tough one to predict we think it's coming but the timing of that.
And it could be a little bit on certain but to me I think those are the places where you can see some some outsized strength will say in terms of driving the fee income line item.
Great. Thanks for taking my questions.
Thank you.
We'll take our next question from Jeff Lewis with D. A Davidson.
Thanks, Good morning.
Point, Jeff maybe a quick maybe a question for for Doug just.
Trying to given some of the noise with the deal.
<unk> and the credit migration and the legacy portfolio.
What's maybe coming in or out.
So that's kind of I guess, one day, and then would be just debt. If we could the type of what you brought on from from Sea coast on the on the non accrual front. Thanks.
Yeah, Jeff Good morning, I think maybe just from reverse order what we brought on from sea coast in terms of nonaccrual and nonperforming loans was about $6 million zone.
About a million and 1 billion and half of that and on guaranteed portions.
Seacoast has very little if any loans and deferral largely SBA lending their borrowers have benefited from the stimulus payments and governments, making on the whole SBA loans and.
And certainly with another round here and will further benefit from those.
And those payment activities.
And the legacy portfolio you know, it's it's remained really quite stable in terms of classified assets.
We saw very little change.
We have successfully worked through a number of credits we.
We did downgrade Jeff on these remaining.
Lodging or hospitality loans that received a second deferral was downgraded in the fourth quarter.
And we continue to kind of allocate reserves to that COVID-19 impacted portfolio, but as we sit today and I think we feel that our reserves are.
We're well positioned and stroke, so hopefully that provided color to your question.
And I appreciate it thanks, Doug.
And then just a.
Fine tuning on seacoast impact on a couple fronts the margin.
Key and appreciate the debt.
You called out on on contribution from <unk>.
<unk> and then the guidance, but more interested and just how sea coast change the sensitivity of the combined.
Franchise and understanding there's still some kind of liquidity debt, maybe you can move around but just in general.
And maybe day, one how did it affect <unk>.
Sensitivity.
Yeah, Jeff I would say we didn't see.
Big movement, and the asset sensitivity I think up 100 basis points, we're still.
Now, 2% asset sensitive I think to the extent debt rates rise more dramatically than that I think thats, where the assets sensitivity, maybe maybe path maybe 152%.
And those plus plus two and plus three scenarios are on.
Unfortunately, I don't think those are likely and.
And so we'll just kind of continue to monitor the balance sheet and and see whats there, but also to your point that asset sensitivity is going to be.
Reflective of.
Half a billion dollars of cash on the end of the balance sheet at the end of the year as well so.
Both of those are factual, but I think number one.
A lower and more stable cost of funds on a combined basis and I think when you look at what we've done with now Trinity Seacoast.
Funding basis, I think materially different than it was four or five years ago, and then I think we feel like the sea coast SBA engine, particularly now during more challenging economic times will provide.
And Nice addition for some predictable growth for 2021 and beyond so we're excited about that.
Got it and then the other.
Seacoast related which was on the expenses.
You talked about $52 million and the first quarter run rate and then the step down and the conversion for seacoast.
And when that was set.
Yes, we're converting core on core banking systems mid first quarter, but there'll be some other.
And other conversions that have already taken place and some that are following so I think of most conversion being completed as of the end of the first quarter or so.
And I'm not sure if youre going to get a fully clean second quarter, but certainly by the third quarter, we expect the synergies to be out of it and the 25% cost save assumption to be to be there.
Okay. So that was the 2 million stepped down and depending on timing of yet, but she and clean and the second quarter. Yeah. It's yeah, it's really $3 million on synergies and then you know as you know I think.
Our first quarter is usually a little bit heavy with payroll taxes, we expect that to kind of level out and the second quarter and then you get some normal additions will say for growth and adds to staff and continued.
Lending so my 52 sort of blended a little bit of investment and the business and there but.
I think of kind of core enterprise of $40 $41 million and then you know the CECO says.
12, 12, pre synergies and nine post synergies.
Very clear thank you.
Yeah.
We'll take our next question from Andrew Liesch with Piper Sandler.
Hey, everyone. Good morning.
Just one question on loan yield weapons.
Up well here I guess three basis point decline linked quarter, what you said.
The improvement and the yield curve helped at all or you just expect any.
And any improvement that can occur basically be competed away just given the liquidity and the system.
Yeah, I would say Andrew I don't I don't think that we're expecting.
Positive news either in the investment and portfolio or the loan yields I think we're working pretty hard to stay level, but I think the trends have been stable for a few quarters and I think we feel good that you know if we can get some net production.
And we can get some we continue to to SM.
Essentially get.
Get our relationship based pricing that we should be able to kind of hang in there with yields but yeah. I don't I don't think we're expecting any yield curve improvement and the information that I provided on margin guidance.
Got it.
And it used to hearing some optimism around loan growth, which maybe a core loan growth, which maybe we didn't really have a couple of quarters ago the growth.
And maybe around mid single digits when when when do you think you could see and maybe it's too premature to discuss it now, but and improvement just in the earning asset mix and the margin expansion that way and I recognize that you're focusing on NII dollars what are the low margin but.
Just trying to pick up and trajectory here.
Yeah look I think.
The Big question comes down to from from my perspective, how much more does another round of PPP pressure.
On pressure line of credit usage and things like that I mean, I think were down and you know on.
On the slide that we have line usage is down eight percentage points from a year ago and so normally we're sweating over a couple of basis points of line usage debt could mute or making quarter look robust from a growth perspective. So I think it's a tough question, but I think what you heard from Scott is that he is focused.
On gross production and.
I think that that bodes well and I think that we're optimistic that at least.
And some combination of bringing cecos on.
A little bit of momentum and the base enterprise pipeline and business development, that's not completely washed away by.
By line usage and things like that pay down that will get a little bit of that in 2000, and 'twenty 'twenty, one, but it's hard for me to say youre going to see that and the second quarter and the third quarter I think a lot depends on what.
What happens over the next few months and.
And the.
And the economy and and getting people.
Kind of back and operating and a more normal fashion.
And Andrew This is Jim I'll, just add to it that you know this whole.
A balance between growth and yield or interchange are intertwined and we've worked hard culturally not to have to be the last deal and the market to get the growth and as soon as you waiver from that.
It's a slippery slope.
And I credit Scott and Doug for the discipline that the teams have and the fact that we've also do we built this diversified.
Engine. So we don't have to lean into any one class and we can uphold our pricing and and what have you and still do.
The growth that's acceptable.
And it's a really slippery slope that we got to be careful about during these times. It will just take you know take anything for growth or hold back and not get growth and itself.
The day to day Battle, which is exciting and frankly.
Understood.
Thank you for taking the questions I'll step back.
We will take our next question from David long with Raymond James.
Good morning, everyone.
And from day relates to M&A.
Could you talk maybe a little bit about the pipeline now we've seen a few deals and the industry.
Get announced and I think buyers are getting a little bit more comfortable with potential sellers loan portfolios could you maybe talk about the pipeline and then any discussions you've had how has the seller reception been and.
How it price expectations changed over the last few months.
This is Jim I'll, just say this so.
We have a lot of great momentum and the business right now and so number one we have to make sure that any targets or any discussions.
<unk> only adds to it and doesn't become a distraction.
And we don't openly discuss a pipeline per se just know that it's a consistent process.
Conversations are ongoing we don't fall in love with anything I think we just look for the right partner with the right business model that can accelerate our long term strategic plan.
Okay, Okay, and then and I don't know.
Alright.
And we've been very disciplined and pricing right. So we.
And I think there is as we look at it this way that we have to remain disciplined but we're also inviting a new set of shareholders into our vision as well right so and theirs.
A great balance and our team does an exceptional job, making sure we keep that balance.
Okay.
And absent M&A.
What can you do or how are you managing the asset level. So you don't go over the $10 billion level.
And and inefficient manner.
Yeah.
I would say is you saw us make that.
Pivot away from wholesale funding at the end of the year that obviously that 200 million helped us stay below 10.
Also provide some earnings growth for 'twenty, one and 'twenty two that we wouldn't have otherwise had just eliminating that expense but.
Our view is this debt to the extent that there is the <unk>.
Cash and that's on the balance sheet does not relationship money.
We're looking at those places, but we're not going to push out.
Good borrowing relationships too.
Yeah.
And to the long term detriment on the business because we're worried about tripping over 10 billion and a little bit.
We've got some time, if we if we don't do it via M&A that until all of the.
And the impact and become affected and I think Jim indicated we're kind of always looking for M&A. So.
And my expectation is that this next round of PPP.
Is it going and make it really difficult for us to lend.
Limbo under 10 and I.
I think thats, just sort of an industry issue and we're going to do our best just to earn through it to the extent possible.
Yeah.
Got it and I appreciate the color guys. Thank you.
Thanks, David and.
And again to ask a question. Please press star one.
We'll take our next question from Brian Martin with Janney Montgomery.
Hey, good morning.
Good morning, Brian.
And it came one follow up on the last question that impact. If you do cross 10 do you have an indication of how much of that is what that cost you.
Yeah on.
And the expense side. It is a it's a couple of million dollars and on the on the.
Fee side, it's a few million dollars, so you're about $5 million pre tax.
The total impact once it's phased in.
Okay, and then just going back to your comments and I missed some of what you said on the margin and just kind of the I think he talked about some some hedges and.
From cash flow hedges and the impact on margin can you just run back through that if you could.
Yes, so Brian the easiest way to think about the impact at least in terms of dollars as you know.
And the charge that we took in the quarter.
Being.
$3 million quick and Dirty that comes back in essentially evenly.
Net interest expense in 'twenty, one and 'twenty two because they were two years remaining on that.
So a million and a half on.
On the total on a total margin so you have two.
<unk> three basis points.
Gotcha, Okay, Alright, that's helpful and the that'll that'll likely get soaked up by excess liquidity and you'll never see it.
Okay, Yeah, I was going to say and.
And just the overall size of the balance sheet and you talked about the excess liquidity and kind of to your last point and keen about the.
How to the last question about managing to that $10 billion.
How do you I guess, if you look at the balance sheet over the course of the or what and I guess, how do you.
<unk> to unfold as far as the with the PPP and I guess that and what the timing and what you guys are expecting I think he said.
What's going on month that the reduction on the P. P. P and just the overall size of the balance and as you go throughout the year yeah.
So what we're seeing right now is that we're getting about $20 million a week of PPP forgiveness, but we it's not.
That doesn't correspond to a reduction and the balance sheet. Those are typically customers and much of that is staying on the balance sheet.
And we saw that in 2020, so my expectation is that whatever success, we have with PPP.
We did 800.
Plus million and the first round and with FICO share at almost.
$900 million that we did even if you do have.
And <unk> or two thirds of that you know youre going to be $4 $500 million over $10 billion.
And at that point and time and I just with the trends that we saw in the first round and I just don't expect that liquidity to move off the balance sheet anytime soon so from my perspective.
I think we avoided going over at December 31.
2020, but I don't know that Theres, a and avenue for.
Trying to move that kind of liquidity off the balance sheet to to stay on there and I don't think that that is going to be the right dealing from a customer perspective. So I think we're gonna have to PPP is going to provide nice income lift for us on another round and I think we're just gonna have to use that and and we are ready.
In terms of our plan for crossing 10 billion from AR.
From a from our people and our systems perspective, and I think we just have to keep executing and try to grow the loan portfolio and try to potentially find a another deal to help scale through that.
Got you Okay. That's helpful and just maybe the last two and just when you think about I. Appreciate the comments on the outlook for the reserve and whatnot, but it should get beyond it.
Economic conditions do improve and.
And the credit quality continues to hold is it sounds like it could and can you talk about where that the post <unk>.
Covid reserve level kind of where you think it trends to overtime.
Yes.
Brian.
On seafood and adoption, we were at let's call it anywhere between 115, and 125 basis points of total loans and.
That was pre Covid and today were a 100 basis points north of that.
I think youre going to the low watermark is probably that that level and adoption.
And you are probably going to have.
And my view, some sort of additional permanent risk so to speak on.
And event like this occurring that we're a worse economic environment that is and.
You know maybe necessarily.
Forecasted well in advance of just sort of hit the abruptly so.
And I'm going to say, it's probably at the top of that range, but it's not 230 basis points. So I think theres some room for <unk>.
Relief there.
I think also the.
On the <unk>.
Ultimate resolution and loss rate on certain asset classes is to be determined so.
We will have to take that into advising as well, but assuming you go back and you have no losses.
And can you just you you essentially end up unwinding much of what you did in 2020 are much of what we did in 2020.
Okay and is your expectation and I guess, it sounds like you kind of grow into that.
Or there could there be actually with releases on a given quarter.
Yes.
Ryan I think it's really hard for me right now to envision doing anything.
Quickly.
Thank you <unk>.
Seasonal to me suggests you build quickly when you see the evidence we did that but I just think with how elongated the loss emergence period is I think it's difficult to to reduce and material chunk. So I think youre going to end up with.
Some sort of.
Some sort of growing into it so to speak Simba.
Simply because you're going to always be worried that maybe you didn't fully incur losses or theres more impairment and certain asset classes that just.
Is out there now.
Swiftly or abruptly has done to allay those concerns and then clearly we would need to evaluate that in terms of the reserve, but my view is that at <unk>.
<unk> for the foreseeable future debt.
Unless you get evidence one way or another.
Our actions are going to be less material, when you're provisioning than more material.
Okay cool.
And I appreciate you taking the questions. Thanks, guys.
Thank you Brian.
That concludes today's question and answer session. At this time I will turn the conference back to Jim Lally, President and CEO for any additional or closing remarks.
Well, thank you Shelby and thank you all again for joining US this morning, and certainly for your interest in our company and we look forward to speaking with you again following the first quarter have a great day.
This concludes today's call. Thank you for your participation you may now disconnect.
Okay.
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