Q4 2020 OceanFirst Financial Corp Earnings Call
Good day and welcome to the Ocean first financial Corp earnings.
Conference call.
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I would now like to turn the conference over to Jill Hewitt. Please go ahead.
Thanks, Tom Good morning, and thank you all for joining us I'm Jill Hewitt Senior Vice President and then just on Relations Officer first financial Corp. We will begin this morning's call with our forward looking statement disclosure.
Please remember that many of our remarks today contain forward looking statements based on current expectations refer to our press release and other public filings, including the risk factors on our 10-K, where you will find factors that could cause actual results to differ materially from these forward looking statements. Thank.
Thank you now I'll turn the call over to our host this morning, Chairman and Chief Executive Officer, Christopher Maher Grace.
Thank you Jill and good morning to all who've been able to join our fourth quarter 2020 earnings conference call today.
This morning, I'm joined by our President, Joe Labelle, Chief Risk officer, graceful watching and Chief Financial Officer, Mike Fitzpatrick.
As always we appreciate your interest in our performance.
Pleased to be able to discuss our operating results with you.
This morning, we will cover our financial and operating performance for the quarter and provide some color regarding our priorities for 2021.
Please note that our earnings release was accompanied by a set of supplemental slides that are available on the company's website. We may refer to those slides during this call.
After our discussion we look forward to taking your questions.
In terms of financial results for the fourth quarter GAAP diluted earnings per share were <unk> 54 cents, a significant improvement as compared to the third quarter is at all time record result.
GAAP earnings reflect a strong recovery as credit costs moderated.
Reported earnings were impacted by a variety of items as we positioned the balance sheet for 2021.
As a result, we paid the core results for the quarter to be $23 2 million or 39 cents per share.
Regarding capital management, the board declared a quarterly cash dividend 17 cents per common share at approximately 44 cents per depository share of preferred stock.
Common share dividend represents it represents the company's 96th consecutive quarterly cash dividend, a 24 year uninterrupted chain of performance.
The 17th sent common share dividend represents just 32% of kept earnings, allowing us to build tangible book value per share by two 7% as compared to the prior quarter.
There are no plans to reduce or eliminate our common dividend at the present time.
Capital levels also improved tangible stockholders' equity to tangible assets, increasing 38 basis points to 879%.
Please note that our balance sheet remains inflated as we carried $1.3 billion of cash at year end and averaged over $1 $2 billion of cash on hand during the quarter.
As a result asset based ratios, including capital levels return on assets and margins continue to be a bit distorted.
As you May recall the company suspended its share repurchase activities in February of last year and.
In recognition of the unusual risks presented by a global pandemic.
Having completed our stress test process and having observed significantly improved asset quality measures. This quarter. The company plans to recommence share repurchases immediately following the opening of our trading window next week.
The company is slightly more than 2 million shares remaining in the current share repurchase program.
Should our level of surplus capital support a larger repurchase program the board.
Well, considering an expansion to the current authorization.
Before we discuss the outlook for our business I'd like to spend a minute reviewing market conditions in our area of operation.
The pandemic continues to present, the primary economic issue in our markets and around the country.
While COVID-19 cases elevated in our markets following the Thanksgiving holiday. They appear to have peaked and are now on another downward trend.
During this way to search the vast majority of our clients were far better positioned to navigate public health restrictions. Most continues to operate well observing state and local health protocols.
Our core markets continue to benefit from migration from the urban centers in New York and Philadelphia.
Local real estate markets are strong and seasonal business is expect to experience a robust summer season in 2021.
Of course, the ultimate course of the pandemic will be determined by the pace and the efficacy of the vaccination effort.
Oh vaccination efforts have been far less than ideal momentum is building and the traditional summer season is concentrated in July August and September.
We remain hopeful that the combination of our customers' innovation.
Strong public health protocols warmer weather and some progress on the vaccine front will provide a summer season that should be at least as positive as the 2020 summer season.
Advanced bookings along the New York, New Jersey shore are quite healthy and supports this outlook.
Turning to the bank I'd like to review asset quality metrics, which are evidenced seeing strength at year end.
The forbearance loans processes largely concluded.
With just $31 million of loans on their full payment forbearance or less than four tenths of 1%.
Included in our supplemental slides as a breakout of loan portfolio by payment structure that details at approximately 97, 1% of the entire loan portfolio is paid current and in full compliance with their pre COVID-19 payment terms.
Delinquencies remain low but increased slightly during the quarter since year end more than half of reported delinquencies were $17 $9 billion of loans resolved and are now paid current.
Net charge offs were also modest at $2 9 million with almost 80% of charge offs related to the sale of higher risk residential and consumer loans.
Considering our decision to accelerate the resolution of high risk loans the loan sales in 2020.
Net charge offs totaled a modest $18 $9 million or 23 basis points for the entire year.
Bear in mind that our accelerated resolution strategy selling higher risk loans accounted for $16 5 million or 87% of net charge offs for 2020.
Having worked aggressively to resolve our forbearance loans portfolio. We are pleased nonperforming loans at year end totaled just 47 basis points of total loans.
Nonperforming assets totaled just 32 basis points of total assets.
Just one last note regarding asset quality.
The bank proactively managing credit risk and as always promptly identified loan pools for additional monetary.
From time to time. This results in addition to our special mention and sub standard loan portfolios.
Proactive management, often reduces credit losses, and we're not concerned about the slight elevation. These portfolios as we work through the remaining portion of the pandemic.
By comparison in the Cape Bank, and Sun National Bank acquisitions, we downgraded over $100 million worth of loans in the first year following the acquisition.
By working our progress the vast majority of the downgraded cadence on loans recovered or paid off without loss to the bank.
In fact gross charge offs for commercial loans related to both of these acquisitions totaled just $3 $6 million over the following several years.
With forbearance behind us the Covid driven special mention in sub standard portfolio should moderate overtime.
In terms of the income statement for the quarter core earnings recovered nicely as credit provisions normalized.
GAAP earnings included the costs associated with retiring all of our remaining federal home loan bank borrowings as well as gains related to the sale of P. P P loans and investment gains and a dividend focused equity portfolio.
I would like to call attention to our comments in the earnings release, which note we opted to realize our gains in net equity portfolio by liquidating. It in early January.
In addition to the gains recognized in the fourth quarter, we expect to report an additional $8 $1 million in gains from this portfolio in the first quarter of 2021.
We have now completely exited these positions.
Expenses during the fourth quarter were elevated due to a combination of unusual factors, which added $1 $3 billion to operating expenses.
We continue to focus on the absolute and relative level of operating expenses with core operating expenses, having decreased by 25 basis points over the past four quarters to one 8% of total assets.
Our efficiency ratio has crept up but the driving force behind that is the flat yield curve compressed margins and pressure on the revenue side.
Regardless, we continue to sharpen our focus on operating leverage net of announced another four Bret for branch consolidations, which will be completed in early April following the required customer notification time line.
That will bring our branch consolidation count to 57% since we began this program.
Should drive average deposits per branch to more than $160 million.
Going forward the path to building earnings momentum is squarely focused on deploying the $1 $2 billion of cash to improve both margins and aggregate net interest income.
The mix shift, which will take several quarters to complete can make a material difference with ample capital levels, our loan to deposit ratio of just 82%.
And no S. Hlv advances on the balance sheet, we have the fuel to drive earnings improvements overtime.
At this point I'll ask Joe to walk you through our plans to deploy cash and improve margins.
Thanks, Chris.
I'll start with the net interest margin, which was unchanged quarter over quarter at $2 97 per cent.
As Chris noted, we have over $1 2 billion in cash we need to deploy which we expect to do over the next five to six quarters.
We estimate excess liquidity of 1.17 billion, which has a drag on NIM up 36 basis points.
<unk> also includes 24 basis points of purchase accounting accretion of.
Up seven basis points quarter over quarter.
While prepayment fees were minor in both quarters, leaving the core NIM down eight basis points.
This should be the trough on the NIM, which primarily remains impacted by our large cash balances.
Hang off the federal home loan bank advances in Q4 should benefit us to the tune of 10 basis points in 2021.
And we continue to work down the brokerage Cds, we raised early in the pandemic.
At the end of Q3, we had about 275 million in brokerage Cds and ran off $108 million in Q4.
In Q1, and Q2, we can see another $156 million.
With a weighted average rate of $1 one 4%.
We have the balance sheet.
Excluding the brokerage Cds I expect another $493 million in Cds.
With a weighted average of $1 six 6%.
Renew at a much lower average rate or also exit the balance sheet.
For the year organic deposit growth of 1.51 billion included several wins of high profile nine figure corporate treasury accounts, reflecting the maturity of the Treasury area. We began just a few years ago.
Our team and product set rival any competitor and will allow us to continue to be aggressive in reducing rates on Cds and other rate sensitive accounts with maturing rate guarantees 2021.
While we reduced deposit cost from 49% to 45 basis points in the quarter.
We expect to continue to improve markedly in the coming year.
Loan origination set an all time high excluding PPP loans.
Commercial activity was muted in the second half of the year. After a strong start due largely to the pandemic Reza.
Residential lending remains a bright spot with record highs on originations.
As we head into 2021, the overall pipeline for the bank remains largely unchanged from Q3, but importantly commercial activities begin to increase.
All regions of the Bank, New Jersey, New York Metro and Philadelphia are seeing pipeline improvements anecdotal bullish news from clients.
Competition is fierce and rates are squeezed due to the liquidity on many bank balance sheets as lenders rush to deploy their cash.
Our residential business remains brisk, even in this typically seasonal time and.
And we expect continued near record volume in 2021.
We also expect to sell a significant amount of 30 year conforming originations take advantage of the robust secondary market.
While we hold to the credit standards and appetite we have long set for the bank.
Also continuing our recruiting efforts by adding several commercial bankers in Q4, and currently recruiting aggressively in our core and adjacent markets.
There's no shortage of opportunity for talent and we.
Significant hires at the beginning of Q2 and cute and through Q3.
We are recruiting team lift outs and individual bankruptcy and vibrant markets as we have done successfully in New York and Philadelphia.
And are also adding to existing teams.
I will provide you with an update on our progress next quarter.
Outside of the proactive stance on the sale of high risk underperforming loans.
But sales of recently originated residential loans.
We've seen little Paydowns outside normal amortization.
Credits that we've acquired where it didn't meet our standards.
It's hard to derive any trends from the acquired banks other than the impact from the pandemic as a possible cost lower churn.
However, given the recent return of aggressive pricing and terms from competitors in the market needs.
We need to be diligent and remain focused on our client relationships.
Before I turn this back to Christopher some Q&A I'll note that we remain focused on our ability to deploy our excess cash on the coming quarters and grow the loan portfolio diligently.
Short term.
Headwinds will include the sale of our newly originated residential loans and normal amortization of that book.
We've looked at loan pools to buy as we've done occasionally.
But price for pools lately has been very aggressive.
So much so that pursuing very low returns longer duration risk given the fluctuating long term yield curve.
What's undue pressure on the balance sheet.
But we remain upbeat.
Increased commercial activity on our recruiting efforts for lenders.
With that I'll turn it back to Chris.
Alright, Thanks, Joe at this point, we'll turn to the Q&A portion of the call.
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The first question comes from Russell Gunther with D. A Davidson. Please go ahead.
Hey, good morning, guys. Good morning Russell.
Just a follow up on on Joe's comments regarding the.
The <unk> team lift outs understandable, we'll get more of an update next quarter.
Was curious on two fronts. One I think you mentioned contiguous markets and so I'm curious as to what that means from a geographic perspective and then.
Two do you have a kind of loan growth target in mind.
For the back half of the year.
So I think Russell for US we've always described our.
Jason contiguous markets.
Places that we can drive in a day.
I think the approach I've taken is that we are adding we added three additional lenders in the fourth quarter in existing markets, including Q.
On the new North Jersey L. P O which is just.
Just got in its office space and should be up and running.
We expect that we will continue to add in the existing markets and one less looking for vibrant markets as we've done we focus on acquiring the talent first.
And the talent sort of dictates to a certain extent, where we go.
So we're pretty bullish upon that and I can give you any other feedback if you'd like and then on the second piece I think you're right the second half of the year.
I expect that we should be able to drive nine figure growth every quarter.
And portfolio I think early in the year, we want to make sure that we focus on.
What we've done most recently which is.
Identifying the credits appropriately in the acquired banks, making sure that.
We support all of our clients that we've done through the deferral progress or process in the PPP loans and making sure that we get through the pandemic the way we want but we're bullish on the second half of the year.
In terms of loan growth.
Great. Thanks, Joe and then switching gears to the margin.
Looking at the deck that you guys put out with their earnings are very helpful. Glide path in terms of what happened this quarter.
Hoping you could extend that into 2021 talk about.
How the average earning asset remix you plan to undertake will play out from a margin perspective.
I think there's kind of two keys to the margin story for us.
First as Joe mentioned, we have a lot of deposits repricing, especially early in the year. So we have lagged many of our peers and the speed with which our deposit rates have come down you'll see us catch up and that I think early in the year, but that'll be helpful. On margin, it's going to be more of a funding story than an asset yield story in the beginning.
Of the year.
The other thing is the FHL.
Advances were paid off mid quarter, So we'll get a full quarters worth of benefit as we go into next year.
I think I see your develops and the story is going to shift more to an asset based story.
Where you see that cash deployed all of that cash is currently at the federal reserve.
So youre, earning somewhere in the range of 10 basis points on that so.
I can't give you a specific glide path.
We don't provide guidance on future margins, but I do think to Echo Joe's comments, we believe that Q4 was the trough and net margin expands from here.
Thank you Chris and then last question for me is on the expense side of things so.
I've got the expectation around the incremental <unk>.
Ranch reductions I think the system conversion for country banking in the first quarter.
Could you talk about your expectations for core expenses over the next few quarters and the ability to target and achieve positive operating leverage for 2021.
Okay. So a couple of things there as well.
Go into.
2021, we made a comment that we had a couple of unusual items in Q4 things like our FDIC assessment were elevated and that was just a reflection of if you recall in Q3, we had moved a significant portfolio of loans to held for sale.
And downgraded into nonperforming at the time that drove a technical ratio rent nonperforming assets up and increased our FDIC assessments with the numbers at year end net will reverse completely as we go into next year. So there was we peg it at probably about $1 three in total of expenses in Q4 that we're on.
Unusual in nature, So Q4 was a little higher than it should have looked.
As we go into next year into 2021, where this year I'm sorry, we are running about $1 million a quarter in COVID-19 expenses, we expect that will moderate.
That'll be helpful.
The second thing is the branch reductions. So there are four branch reductions that we have.
You know there is a regulatory requirement around notice from based on our National Bank charter. So we'll get those closed in early April so those kinds of things youre going to see as we kind of move through the first half of the year I would see.
Our overall expense horizon being relatively flattish.
But if you went back and looked at your comment about operating leverage if you looked at our core revenue and core expenses over the last four quarters. We have improved operating leverage interest has been masked a little bit by the by the NIM compression. So I think youll see it continue.
On a continued to look at our branch network, but we're going to balance that off against the talent chose April April to higher so I think when we've got the full head count.
And composition of the edge to the commercial bank.
That will be able to share with you in April we could probably give better guidance around the full year outlook for expenses, but for the first quarter I think youre going to see flattish and we might have a little bit of a tailwind.
Great. Thanks, Chris that's it for me guys I appreciate it thanks Russell.
The next question comes from Matthew Breese with Stephens. Please go ahead.
Morning, Matt.
Hey, I got to go back to the NIM.
Understand there is a 36 basis point drag from liquidity and you're attempting to put.
On that to work on the next five or six quarters, you know what.
It is what it is on the low end.
How much of that can you recapture over the next call. It five six quarters. If you had to give yourself and you're on a grade of B greatest heat rate.
You know how much of that do you think you can recapture through deployment.
But I think I think when we're finished deployment, we wind up or in our historical range would have been in the in the low $3 20 to $3 $40 right. So I think when you're done Thats about where you get to and at this point I would say it would be a pretty smooth transition over the next.
Four quarters or so.
Depending on events right you may see a little bit better pick up in Q1 because of the funding issues I mentioned.
And again remember the.
Joe talked about the brokerage Cds and all of that rolled off some rolled off in the fourth quarter, we will get a full quarter benefit on those in Q1, the ones that roll off in Q1, we will get a full quarter benefit in Q2, So it's really more on the funding side, but I think.
We believe that over the next four to six quarters, you should be stabilizing margins.
Back to where we used to be in the <unk>.
On the low $3 20 to $3 40 range.
Great.
And then more so than your peers with the proactive actions on deferrals.
To me it feels like you probably have a better outlook for the overall profitability of the bank. If we assume that we're in this interest rate environment for a while.
Let's just say through 2022, maybe into 2023 in terms of ROA and return on tangible goals could you just share with us what your outlook is and what you hope to achieve there.
Yes couple of things.
I think I would draw a distinction on is what we're calling internally referred to as the iceberg issue.
On the iceberg issue is this because of the cares act. It was perfectly appropriate you can restructure loans and not designate them as <unk> and all that.
It is very difficult to understand the residual credit risk that's in any of our books.
That was what kind of drove us to make sure. We are disclosing that very high level on the 97, 1% of loans that are paying on their pre COVID-19 terms. So we've not given them any concessions, they're not getting any special deals. So we really do feel that we've got a very strong assessment of where our credit risk is.
If you look at last quarter.
Fourth quarter I'm sorry.
Most of the charge offs were related to the sale of the residual forbearance residential loans. So as we finished the consumer residential forbearance periods, we identified the high risk stuff that we sold it off if you take that out the net charge offs were actually extraordinarily low.
We go into 'twenty, one the other comment I'd make about kind of credit.
Is that.
The forecast that we use that were put.
Put together in the fourth quarter did.
Did not account for the change in the makeup of the Senate and the potential for additional fiscal stimulus, which could be material. So it was seasonal works.
Those economic factors are big levers and it's possible that that would be a tailwind going forward and then even if you look within <unk>.
Our reserve, we still have a significant amount of our reserve is qualitative not quantitative so.
So your first your kind of cash.
About profitability metrics of where we're going.
We're not pandemic start over.
Still have to work through the special mentioned substandard books, but we feel we've got a very strong handle on them. In fact, the net book by 84% of that book is paid current so these are not people that are having a payment issues.
I think that that's the first component what is going to overshadow profitability in terms of provision requirement as we go forward. So we're feeling like that's not going to be an overhang hold.
Hold us back.
The real second component is what happens with the yield curve as we deploy this cash.
And initially this is not unusual even though we saw the yield curve start the long and start to move up.
Loan rates had not really budged right. So a competitive low rates of the markets were not moving.
Thanks.
The glide path, we're talking about in margin is it could be accomplished in the current interest rate environment. If you get any significant movement in the yield curve it could be far better. So in that environment. We think we can build our earnings back to more than one ROA.
Given our leverage position, we think that is.
There'll be a pretty good return on equity.
Yes.
Okay great.
And then my last one and just regards to M&A curious how conversations have gone this year or over the past few months, if things have deferrals of kind of.
Gone down for the industry and your expectations do you feel like this year.
Assuming theres been more chatter that you might participate in M&A again.
Yes, I would have told you earlier last year, obviously, we were we've taken ourselves as almost everybody that rate take ourselves out on the market.
While we assess the first thing is you have to know your own balance sheet right. You can't get involved in that kind of discussion. If you don't think you've gotten everything kind of cleaned up at home.
That was one of the reasons that we took such aggressive action to make sure that we were keeping our balance sheet in the position we wanted to.
We feel highly confident that we've got a very accurate picture of where our credit risk lies and where the balance sheet is so the first condition to even consider M&A is I think net <unk>.
Second condition would be can you get a handle on other people's businesses and as we watch the earning season I think youre seeing a lot of us have performed really well for variances are in the right direction I think we're at a point.
Where you really could have visibility into balance sheets and credit quality.
So I think that second condition is met so that now it comes down to are there things to do that are both smart.
And actionable and Thats always a much more random event and it depends a lot on different organizations timing and all that we.
We expect that folks will be looking hard at strategic alternatives, probably in the first half of this year, we expect to be doing that as well. If we can find something that adds value for our shareholders. There's nothing stopping us from doing something immediately.
That said.
We have we have a $1 billion worth of cash deployed we can lever earnings we don't need an acquisition to help drive efficiencies or earnings.
So we don't feel pressure to do it, but but I think that as an industry. We've got the conditions to consider that now.
Great.
I appreciate it that's all I had thank you very much thanks, Matt.
As a reminder, if you have a question. Please press star and then one to be joined into the queue.
Our next question comes from Christopher Merrimack with <unk> Partners. Please go ahead.
Hey, Thanks, Good morning, Chris and team I know, it's been almost a year since the pandemic started and we're one of the first banks to recognize the risks. So just kind of want to circle back on what has to happen to reverse some of the criticized and classified loans do you think some of that might start happening this quarter or will it take longer for that to unwind and therefore it influence reserves as you were.
Talking about earlier.
So firstly, we don't feel that there's going to be a lot of pressure on reserves. There based on our assessment of things like ltvs in the payment currency and all that.
I think it's going to be a methodical process, where you'll see it come down a little bit in each quarter and then.
You fast forward a few quarters it will become much less significant these are really pandemic driven decisions where people are okay. We can see that they have a source of payment for us, but they were weakened right.
If you don't think that people would be weakened after a pandemic you're probably in the wrong business, but grace I know you've got some very good kind of granular data around ltvs and segments. So maybe you could just share that with Chris.
Sure. So in the special mention and sub standard book on the special mention.
Portfolio has an LTV of less than 60%.
And then sub standard it's around 50%.
And as Chris mentioned earlier of 84%.
Loans are performing as agreed with pre Covid terms.
Said differently only 16% our past due on non accrual or on.
Our PCB loans.
I think the point there being that demonstrates that were pretty.
Big risks and evaluating the risk on our credit it doesn't necessarily mean that they can't pay offs assistant Linda.
Indication of some sort of weakness some impact from COVID-19.
If you think about the loss given default in those.
Segments, given where the ltvs are and given our execution even on loan sales, which.
We think it was certainly a liquidity discount that you had this year trying to sell loans. During a pandemic. We don't think Theres a line of loss content. There and then the reserve the reserve.
<unk> already accounts for this migration.
Got it that's helpful background. Thank you both and Chris just on.
Big picture Falloff as you build the digital bank for Ocean first the last several years what have you not done. This in terms of functionality is there anything that you haven't yet accomplished on that or do you feel like you are where you want to be with the digital processes.
There's a couple of different parts of that.
I think in digital products to support our customers. We feel we've got a very competitive and highly effective suite. So our customers can do any.
They can do it most any bank, including the major banks in the country.
I think now from this point forward the investments are going to be focused in two areas that may be less apparent or less obvious.
First as a business process automation.
And so that provides efficiencies to the bank. So what can we do to help our employees be far more effective and efficient that may not be as apparent on the outside but that's important in terms of.
You know the way the customers look at the world.
As well and then the second thing is I think many banks, including us are grappling with.
The digital future.
How do you attract net new customers into your bank and one of those last bastions of value. We have on our branch network is that it brings us new customers each and every day. So we've been working on digital distribution that kind of sales side.
And it's more than having online account opening we have a great online account opening product set you could open accounts six minutes and plenty of people. We've got significant increase in those numbers over the past year. However, there's still a lot of folks who would go first into a bank branch and I think that that's the last horizon. So I think in.
Terms of maturity, we think feature functionality for our customers is terrific and on par.
We need to match that kind of capability for our internal customers. Our employees. So they can do things faster and more effectively and we have to crack the code and it's more of a.
Marketing or marketing scale issue then.
Digital issue, it's how do we get customers to come to Ocean first and.
And opened their accounts just over a mobile device and those kinds of things.
That's great. Thanks for sharing your thoughts on that I appreciate all the information today alright.
Thanks, Chris.
The next question comes from Frank Schiraldi with Piper Sandler. Please go ahead.
Good morning.
Hi, Frank.
I wish I had a follow up on M&A.
What is the wish list.
In terms of what makes the most sense what is most attractive.
Is it a.
A potential MLP in New Jersey, as an add on deal and if so what geography.
Well, yes on the money frankly after we after each acquisition, we do a post acquisition review about a year after the acquisition.
We kind of sit with the board and we talked through what what went well and according to expectation, what didnt and having now seven of them under our belt. We can tell you a few things that are probably obvious but.
Anything you do in market is the best thing you can do so building your own market share.
The second thing is anything you can do with a company that has pre deal.
Competitive performance ratios good margin return on assets credit expenses, the better the business is before you do anything with it the better it's going to be afterwards to set the rocket science. So we have a hierarchy.
Strategy laid out if we can do an in market.
Commercial bank combination with a company that has this likeminded in the kinds of customers. We're going after that has good margins and good earnings and when you take the combined operating expense out its a homerun and whether that's an acquisition or a merger and MLR.
That's the best thing you can do and then I would just add to that in terms of scale.
Obviously, the larger the scale of that opportunity usually correlates with the bigger opportunity to provide earnings per share increases for you our shareholders.
And then you start to it's kind of peeling the layers of the onion rate as you go out from that.
You know contiguous markets are okay, but theyre not as many expense saves.
If the business model is and exactly like ours than maybe you have to do some work around whether it's funding or lending. So as you start to drift away from net things get to be less appealing, but we think about them in terms of those things what are the performance characteristics of the combined entities, whether that's a merger.
Or an acquisition what are your <unk> what are your margin what are your ROE vs.
We look at the earnings lift the raw EPS increase for our shareholders.
We look at the price earnings after cost saves.
And those are the most important things we look at.
There's a lot of talk about in the industry over the last few years over.
Earn backs and all that earn back is important to us. It is a guideline that we want to stay within or a guide rail, but it doesn't drive what we want to do what we want to do is find like minded businesses.
In the same market or overlapping or contiguous markets.
And we think that provides the best benefit so and we've always been.
Very tolerant of looking at a wide variety of options.
So we keep that that scan open we cast a wide net and if the opportunity comes up we would feel comfortable moving forward.
Okay. Thanks for all that and then.
I guess same sort of question on the organic side and think about loan growth coming back, particularly in the back half of 2021, whereas the most interest I mean is it just primarily in C&I is there areas.
Cree that are particularly interesting given maybe rates are going to be low for a while and then you can lock in some spread.
Whats the whats of Ma.
Most interest here in this environment.
I think for Us Frank.
We're amenable to pretty much any kind of growth I know that sounds a little open ended but I'll phrase it like this.
I think there are many banks that have Cree.
Concentration concerns we don't have any of those.
I do think that there are pockets that everybody's identified already on the industrial the warehouse that that last mile logistics type of Cree that has value.
Many folks is a very competitive market and arena refrigerated storage things like that.
That we all like that that we do.
Don't have any restrictions on chasing so crazy on an overall basis.
There is nothing holding us back on doing any of that and with the swap product that we've been very competitive with them. The last two years. It takes some of that long term vanilla fixed rate duration risk off the balance sheet. So you do get a little bit possibly in the lower spread of origination of loans, but youre getting that swap fee income early.
Early in the process, which is good and I do think that.
We'd like to do and recruit as much on C&I.
C&I lenders in.
On C&I business as we can but we're also pragmatic there are many of those lenders in the marketplace that are trying to do the same thing because they have created.
Credit restrictions. So it does give me the flexibility to go where the where the opportunity zone and I think as we recruit people and then lean on our existing teams.
But we will benefit on either venue and im not restricted in either what im looking for duration rates or terms of wants to stick to our credit appetite and I will mentioned interestingly you saw the.
We announced that it has.
<unk> shared over $200 million at the end of Q4. It is up markedly since then.
Okay. Thanks for that color and then just last question.
I thought it was pretty interesting the the gains in the equity portfolio it worked out well.
Just wondering if given you know.
Where rates are and kind of the.
On the need for yield.
If that sort of a one and done or if that's something you guys.
We'll look to.
Way to deploy cash in the future and then you know I know on exactly the same thing, but just kind of how you weigh that against sort of an investment in yourself through.
Buybacks.
Yes.
I would consider that to be a an unusual opportunity.
That is more of a one and done and let me just give you some color around it.
After we did our capital raise in the beginning of 2020, we wound up with a very significant excess cash position and our holding company and start to make some investments in firms started with subordinated debt and other things in firms that we felt highly comfortable with we felt we understood.
On a little better than market knowledge about credit discipline and underwriting at all that.
Those worked out well, we had a significant number of games around just the debt instruments.
And as we were searching for yield we pulled a playbook out of our.
Net of our history in 2008, we did a very similar thing we identified a series of firms that had very high dividend yields where dividend payout ratios were modest and where we felt we had a pretty good sense as to the strength of the balance sheet.
And it was we entered into this two by yield and net portfolio actually had a yield well north of 5%.
We expect it to be in that portfolio at a five plus percent yield for quite some time.
What happens thereafter was to look the markets took off and the instruments that we chose.
Appreciated in value very rapidly and very significantly. So what happened is they drove the effective yield of those securities down much lower than the original strategy. So once the yield got low enough you look at it and say I don't want to have the volatility on my balance sheet I bought this for yield the yield is now low we've got a gain position why don't we converted.
And the tangible book value.
Get it into the balance sheet take the risk off and we will find other things that said Frank we are looking at.
Slightly wider variety of strategies to deploy our cash than we might have just a few years ago, we have a much more mature treasury group.
And we're going to be methodical and thoughtful and conservative, but we are looking at other ways to deploy that cash because we think it can be around for a while not just through the loan book, we focused a lot on the loan book today.
But we're also looking at the investment portfolio.
It said, we think that fixed income securities.
Not be the ideal place to.
Playing these days so we're being very careful.
Okay got it makes sense. Thanks.
The next question comes from Erik Zwick with betting and Scattergood. Please go ahead.
Good morning, Good morning, Eric.
I first wanted to start out I guess I've got kind of two questions just on the new recruiting efforts and Joe you mentioned.
A little bit of actually maybe one of your prior answers, but I think in your opening remarks. You said you are aggressively recruiting today. So I imagine you have some sort of criteria.
That you are looking for so curious one if you're targeting either certain individuals.
<unk> known from the past or maybe more generally just lenders with specialties in any particular asset classes and then I guess the second part of the question are you finding any commonalities in the organizations that youre, having success recruiting these individuals' from.
So thanks Heather.
This much like we do we have a stable of candidates that we have on.
On our radar that we've had for a period of time that we always talk too.
And sometimes things are right for people on sometimes theyre not we've been fortunate.
And the recent.
Periods to recruit these folks.
I continue to see significant interest in people.
That are even those that are not known to us well receptive to having conversations which is really valuable on I think thats part of what we built here and I think that there are no restrictions.
As I mentioned earlier in terms of asset classes.
I'm happy to recruit C&I or CRE lenders theres, nothing that I am staying away from.
Truly appreciate people have specialty niches.
We find that fascinating, especially in a rate environment like this if there's a way to differentiate ourselves without taking undue risk I'm happy to do that.
And I will say that we tended to.
Recruit from larger organizations and largely because I find that those lenders historically, we tend to recruit seasoned lenders and those lenders from larger companies tend to have.
Not only the sales activities, but also the credit background on training, that's really valuable on a company like ours and the way, we underwrite and the way we are.
The way, we look at credit so.
Thats been thats been something where we're recruiting from larger companies typically.
And I don't see any shortage of qualified talent. So that's a good problem to have.
I agree yes, thanks for the great color there and then just on the last question I had today.
Curious about your approach to the new round of PPP given that.
You sold substantial balances from from the last one is it safe to assume that any interest you're getting from current customers you may be on.
We're referring to a third party or just curious how you're approaching it at this point.
So we're actively lending to that group.
So the customers that we have that have a need we're certainly lending to the folks that we sold in the last round part of that sale was day will continue to service additional requests from those customers. So we have a little bit bifurcated the ones that were sold.
Are being handled by our third party, we sold those loans to any loans that we didn't sell which is probably a little less than half of the book.
Those requests are coming directly to us what we're seeing and what we're hearing from our peers is.
I think this is a good news item.
On the SBA.
Put this new rule in saying that you had to have a 25% diminishment in revenue to qualify for the new round.
And very few people are actually qualifying for that.
I'll turn that around and say that's a great thing.
We have fewer kind of desperate business is out there that that have had that kind of significant impact. So so we've got on where processing them.
Is it relatively smooth process at this point straight and automated into the SBA.
I don't think it's going to be giant numbers for us.
It may not be I think industry wide is anywhere near as big as the earlier round. So.
So what's going on and we're meeting the need but it's not going to be big number for us.
Great. Thanks for taking my questions. Thank you Sir.
The next question comes from William Wallace with Raymond James. Please go ahead.
Hi, Thanks, guys good morning, Hey, Wally.
Just two quick kind of housekeeping questions, but as a quick follow up on that PPP question. What what are the balances left at the end of the year and then also what was the NII and net interest margin impact.
From the PPP loans during the fourth quarter.
Yes.
On the.
The balances at the end of the year below $100 million.
And.
So the impact going forward would be relatively nominal.
Yes.
And the JAK that when we.
When we still go off the PPP loans that was a relatively low rate are they accretive.
On the NIM during the quarter by about.
Nine basis points.
Yeah.
Okay, Yeah, Okay. Thank you.
And then.
Do you guys have any determination as to whether you will be.
Able to push off the impacts of the Durbin Amendment since you cross $10 billion in 2020.
And so we're still awaiting final guidance on that if you if you read the interim guidance its come out.
There is a path, where we might not be subject to durbin.
But theres also a interpretation.
That would allow the federal reserve to determine on a bank by bank basis.
Whether they want to impose that are not impose that in.
As you can imagine.
We're in contact with our with our regulators to try and understand what the final determination will be for US We cross $10 billion on January 1st So we're kind of an odd duck.
And the interpretation says if you were driven by the pandemic to cross $10 billion.
That wasn't the direct case for US there is a secondary argument which is.
Absent the PPP loans in the pandemic, we might have chosen to duck assets under 10 billion for year end again.
It did not have the opportunity to do that because of the pandemic. So that's an ongoing conversation I can't give you any better guidance on net.
I don't know if you guys are tracking it but there was a bank in Tennessee that.
Crossed over 10, due to an acquisition and day announced on their earnings call yesterday.
Just yesterday night whenever.
England's together this week that that they were.
The regulator said they would give relief if you're tracking that did that give you guys.
Hope that you will qualify as well or do you think.
Hope is hope is a good term and one of the great aspects of our Federal Reserve system is it's a regional we have a central bank thats not a central bank. So.
It's made up of 12 different banks and there are times when it's easy to get a consistent answer across all 12 banks in times you just have to work through the process. So that it gives us hope.
Alright, that's fair answer. Thank you. Thank you guys. That's all I had I appreciate it Ryan wanted the PPP loans in the 12 31 with $95 million on our balance sheet and thats been running down as as they they're forgiven.
Okay. Thank you very much thanks quality.
As another reminder, if you have a question. Please press star and then one to be joined into the queue.
Yeah.
Yeah.
As we have no further questions. This concludes our question and answer session.
I would now like to turn the conference back over to Christopher Maher for any closing remarks.
Thank you, but then I'd like to thank everyone for their participation on the call. This morning, we remain focused on building the business deploying that cash and improving earnings we look forward to discussing our first quarter results with you in April Thank you.
Okay.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
Okay.
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