Q4 2020 FIRST BANK (Hamilton) Earnings Call
Good day and welcome to the first Bank F. R. B E fourth quarter, 'twenty and 'twenty earnings Conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on attached on phone to withdraw your question. Please press Star then two please.
Please note this event is being recorded.
I would now like to turn the conference over to Patrick Ryan.
Please go ahead.
Thank you I'd like to welcome everyone today to first bank's fourth quarter and for full year, 'twenty and 'twenty earnings call I'm joined today by Steve Carman, Our Chief Financial Officer, Peter Cahill, Our Chief lending Officer, and Emilio Cooper, our Chief deposits officer before we begin however, evil read the safe Harbor state.
And.
Okay.
The following discussion contains forward looking statements concerning the financial condition results of operations and business the first bank.
We caution that such statements are subject to a number of uncertainties and actual results could differ materially and therefore, you should not place undue reliance on any forward looking statements we make.
We may not update any forward looking statements, we make today for future events or developments.
Information about risks and uncertainties are described under item one a risk factors and our annual report on form 10-K for the year ended December 31, 2019 filed with the FDIC.
And that back to you.
Yeah.
Patrick are you muted.
Yes, hi, thanks, sorry.
Hi.
So since were at year end I'd like to take a couple of minutes to expand the lens a bit and focus on the bigger picture.
It takes time to build a great bank thankfully and when we got started a dozen years ago, we started off having a great base of contacts and potential customers for several years, we focused primarily on growing the business both organically and through acquisition.
Understandably that focus put pressure on our funding sources than heading into 'twenty and 'twenty on the heels of completing our fourth acquisition and five years, we began to shift our mindset from and early stage company focused on customer acquisition growth and scale to a more mature model with greater focus on bottom line results.
To achieve that goal, we laid out a plan that included solid but more moderate loan growth.
Even sharper and expense control and major funding cost and mix improvement initiatives.
I'm pleased to report that despite the operational challenges and credit uncertainty from the pandemic, we were able to deliver strong results consistent with those strategic priorities, while also contributing meaningful dollars to our allowance for loan losses.
The most important foundational change during the year came and the funding side of our business, we wanted to significantly lower our funding costs relative to peers and improve our mix. We did both our cost of deposits dropped to 0.50% noninterest bearing deposits now.
I'll make up over 22% of our total deposit base up from 16, 8% at the start of the year and C. D's now account for just 27 percentage of total deposits down from 40%.
So I'd like to talk a little bit about results for the year as many have seen our earnings release, no. We had excellent revenue growth and a difficult rate environment.
Our net interest income for the year was up almost 20%.
And we got there and interesting way our interest income benefit from loan growth was basically offset by the declining earning asset yields as a result of the lowering rate environment.
But the major reduction and improved deposit mix drove our overall deposit costs down and significantly which led to that almost 20% increase and net interest income.
We were also able to realize significant growth in non interest income that category was up almost 60% in 2020 compared to 2019.
Loans swap income and game from recovery of acquired loans helped drive that outperformance.
We also stuck with our trend of strong expense control during the year overall noninterest expense was up only two six per cent compared to the prior year.
That growth rate increases closer to 13% if you back out and merger related costs from 2019, but obviously that 13% expense growth is well below the revenue growth of 20%.
We did see elevated provisioning in 'twenty and 'twenty to help build a pandemic quote unquote rainy day fund.
Total provisions and the year were $9 5 million, which is up about five and a half million from the prior year or an increase of 140%.
As a result of that added provisioning.
Our allowance to nonperforming loan ratio actually increased to 243% by year end.
Also during the year, we had P. P. P fee income and amortization of $3 3 million, which helped to partially offset the increase and the loan loss provisioning and reserves during the course of the year.
Regarding the quarterly results I'll, let Steve Peter and Emilio dive into the details a little bit I'd, just like to make a couple of quick comments I'd ask I would mention that even though there were a lot of different unusual one time items during the quarter, both from a revenue and an expense side. The actual results came in and I think fairly close.
To what we would consider to be a core number specifically I'd like to highlight what we saw and the margin. Obviously, our stated margin increased significantly from the third quarter, where our margin was 3.23 per cent and our margin and the fourth quarter was $3 five six per cent.
Those numbers are obviously impacted to some degree by P. P. P interest income and PPP fees.
I'd like to share a couple of rough calculations that we did where when we looked at the third quarter. If you actually adjusted for P. P. P. We think our margin our quote unquote core margin and the third quarter was probably closer to 3.3 per cent and if you do that same calculation, what you see and the four.
First quarter, because we had and acceleration of fee income amortization and with significant loan forgiveness that happened during the quarter that core margin was probably closer to $3 40 to $3 45, but still significant 10 to 15 basis point core improvement and the margin during a difficult.
The operating environment and something we're quite proud of.
And we also think and <unk>.
Our quarterly pretax numbers that we achieved in the fourth quarter should be similar or consistent and what we think we can do heading into the first and second quarter of next year. So looking forward to 'twenty 'twenty, one and have a couple of brief comments, obviously COVID-19 remains a big and.
Known but the downside risk today and look quite manageable compared to some early stress test scenarios that were run.
Our lower funding cost should continue to offset lower earning asset yields and.
And if it materializes, a steeper yield curve could actually help drive some margin expansion during the year.
P. P. P income and expense management will go a long way towards offsetting the potential impact of any higher credit costs that could materialize as we continue to work through the impact of the pandemic.
As we look into next share we still have about 3 million of unamortized T. P. P fees from the initial round of funding that happened in the spring.
We're also estimating at this point that as we worked through applications. During the first quarter of this year with the new round of PPP and we could generate up to an additional $3 million in fees based on the demand we're seeing from the current program.
Now not all of that 3 million might get recognized in 2021 based on the timing of the amortization and forgiveness.
We believe that we will have opportunities to revisit the overall level of the allowance is if a strong economic rebound and materializes and we've also taken steps to make sure that our expenses remained under control we announced the closure of two branches late last year and we've also recently terminated.
Lease that came due for back office space here, and our hometown and Hamilton, New Jersey as a result of all that we do believe that overall EPS growth for the year could come in and 20% to 25% higher than what we realized in 2019.
At this time I'd like to turn it over to Steve Carman, and our CFO to discuss the financial results and a little more detail.
Thanks Pat.
And as we entered 'twenty and 'twenty, we had several key financial objectives, which included enhancing net net interest income and core profitability through.
Through the continued generation of quality commercial loans, while lowering our cost of funds by growing noninterest bearing deposits and lower cost commercial deposits and.
Effective expense control was also a priority.
As reflected in our full year 2020, and fourth quarter results.
We were able to achieve these objectives and a much different business environment than we originally projected.
Net income for 'twenty, and 'twenty was $19 4 million or 97 cents per diluted share compared to $13 4 million or <unk> 69 cents per diluted share for 2019.
The increase in earnings of $6 million, excluding the impact of merger related expenses associated with the Grand Bank acquisition, which closed on September 32019 was primarily due to net interest income growth of $11 2 million or 19, 2% and higher noninterest income.
Average loan growth for 'twenty and 'twenty of $336 1 million was the primary contributor to the final $5 million increase in interest income.
Lower interest expense of $6 2 million was driven by a 62 basis point decline and the cost of interest bearing liabilities principally interest bearing deposits.
First she partially offsetting this higher net revenue was a higher provision for loan losses and higher non interest expense due in part to the pool and full year impact of certain Grand Bank expenses.
Our higher provision for loan losses of $5 $6 million for the comparative period was due to the uncertainty created by the pandemic.
That said our asset quality metrics remained strong and stable at December 31st 2020.
We finished 2020 on a strong note with net income of $6 2 million or 31 cents per diluted share for the fourth quarter, 'twenty and 'twenty compared to $5 2 million or 25 cents per diluted share for the same 2019 quarter.
The primary driver of Q4 results was net interest income of $19 7 million.
For that fourth quarter and increase of $3 5 million or 21 eight per cent compared to $16 2 million for Q4 2019 2019.
Lower interest expense on deposits was the principal driver for the growth and net interest income per the comparative period.
Our cost of deposits for Q4, 'twenty and 'twenty was 50 basis points.
Which is now in line with our peers, which is a reduction of 89 basis points from a cost of deposits of $1 three nine per cent for Q4 2019.
Our net interest income has been supported by a stronger net interest margin.
Our margin has steadily improved since a significant lowering of interest rates in March.
Our tax equivalent margin for the fourth quarter of 2020 was $3 five to six per cent compared to $3. Three four per cent for Q4, 2019 and increase of 22 basis points and.
Improvement and the margin was primarily due to a 103 basis point decrease and the cost of interest bearing deposits.
Partially offset by a 58 basis point reduction and earning asset yields, particularly loans and and notably different and much lower interest rate environment.
On a linked quarter basis, our tax equivalent margin for the three months ended December 31st 2020 was 33 basis points higher than our margin for the three months ended September 30th 'twenty and 'twenty.
The improvement and the margin was primarily due to both an increase and our loan yield due principally to PPP loan fee amortization and a further drop and the cost of interest bearing deposits, which declined to 65 basis points and the fourth quarter, a decline of 26 basis points from Q3.
We are projecting and modestly declining cost of funds over the next several months based on the current interest rate environment, which we believe should translate to a modestly improving margin as we move into 'twenty and 'twenty one.
Okay.
Throughout 'twenty and 'twenty, we've taken actions to effectively manage the level of non interest.
Expense growth during 2020, we manage the timing of new and replacement hires which resulted in a slower growth rate and salaries and employee benefits our largest component of noninterest expense.
The current business environment has trend translate it also to lower marketing and travel and entertainment and cost.
The effective management of expenses has contributed to our lower efficiency ratio.
Our efficiency ratio of 52.54% for Q4, 'twenty and 'twenty compares to $5 to six 4% for Q4 2019.
For the entire year the efficiency ratio was $53 two 1% compared to 57.28 per cent for 2019.
Looking to 2021, we expect continued effective expense management with projected quarterly run rate of about $10 5 million for noninterest expenses.
We are well positioned to build upon in 'twenty and 'twenty results as we enter 2021, we expect continued strong net interest income growth based on projected loan growth and and modestly higher margin driven by lower interest expense.
Combined with strong asset quality metrics and ongoing expense control, we expect to move performance metrics higher during 2021.
Next to discuss lending results is Peter Cahill, our chief lending Officer Peter.
Okay.
Thank you Steve.
As outlined in the earnings release total loans and 2020 reached 2.05 billion, obviously assisted by a $190 million and P. P. P loans, which we began funding and the first quarter.
And which stood a year and after some forgiveness by the SBA at a $137 million.
I think the major story and the numbers for Lynn lending area was our growth in the fourth quarter exclusive of the impact of P. P. P forgiveness.
You might recall that last year, our fourth quarter growth.
It was a negative number declining a bit due to large payoffs and our commercial real estate portfolio.
This quarter, however was the opposite.
After growing our portfolio of approximately $50 million and the third quarter, we followed that up with growth of almost $97 million exclusive of the P. P. P forgiveness.
That's a big quarter for us.
He came from a combination of C&I loans and Investor real estate loans.
If you strip out the impact of P. P. P. Altogether in 2020 loans grew by $187 million well above our growth goal for the year.
That $187 million. If my calculations are correct represents growth outside of the P. P P and excess of 10 per cent for the year.
I think time and did help us a bit.
And 'twenty and 'twenty, we had a number of loan pre payments scheduled for December that did not take place those prepayments have been pushed to the first quarter of 'twenty 'twenty one.
So we will see some prepayments are you know as we head into 'twenty 'twenty, one offset by normal World generation plus. The addition of new P. P. P loans and so we have and process.
And then he event if we do experienced some slower net loan growth initially I'm confident that with our backlog will make up for that as we move further into the year.
Regarding our backlog for new business right now and as you could probably guess we're in the middle of the second generation. The P. P P loans and that's keeping us busy.
Our estimate at the moment, our freedom P. P. P loans as Pat alluded to it was around 102 hundred $10 million and we feel pretty certain that we're going to reach that level.
Outside of the P. P P. We'd have.
Call, our normal business and our pipeline for these non P. P P loans.
And use to be in good shape.
At year end adjusted for probability pipeline stood at $142 million, that's down a bit from the previous month's understandable due to the large number of loans booked and removed and the pipeline and December and.
And the level of $142 million in the pipeline is still in line with the 12 month average during through 2020 of around $154 million.
Another item on the pipeline and it's worth mentioning is the level of C&I business and comparison to Investor real estate.
Like many community banks much of our portfolio was tied to real estate lending, including Investor Real estate.
We've been working hard and finding new C&I relationships, which will help us drive deposits and as well as loans and as such we set a target a while ago to get investor real estate and are under 50% of our pipeline.
And at year end and actually for each of each month during the fourth quarter Investor real estate loans have trended down.
And just under 50% and the 40 to 49 per cent range.
And can also come in and asset quality briefly there's a lot of good data and the earnings release, and Pat and Steve Both mentioned it.
I'll just reiterate the things are looking pretty good non.
Performing loans are down charge offs for the year were up only slightly basically in line with 2019.
Past due loans at your and were down due in part to loans and.
Taxes by the COVID-19, pandemic, where we've agreed to defer loan payments.
The allowance for loan losses exclusive the P. P P, which began the year around 1% ended up at 1.25% unchanged from the third quarter.
Oh deferred loans related to COVID-19 are outlined in the release as well from our high point earlier in the year with deferred loans approximated <unk> 25 per cent of the two.
Total loan portfolio, the first loans, a year and dropped to $37 million were 1.8 per cent and the portfolio.
We're and continual contact with this diversified group of customers and we're very optimistic that as things improve deferred loans will continue to shrink.
All in all compared to where we thought we might be six to nine months ago.
We're very pleased with where things are as it relates to the impact of COVID-19.
As we always said, we continue to monitor the portfolio closely our underwriting standard pet standards have tightened a bit.
Obviously the impact of the pandemic has created the need to not only review our customers did historically.
We'll also focus on how they're doing right now and couple that with what they think is going to happen and as we move forward.
So in summary, I think lending had a very good year and 'twenty and 'twenty all things considered we learned to deal with the challenges of being out of the office and working remotely, but still getting jobs done.
We assisted many small businesses with P. P P loans and payment deferrals related to the pandemic and we stayed on top of credit administration and order to keep up to speed and the quality of the loan portfolio.
And in spite of these challenges we grew up with the portfolio and a very good rate.
As we look forward into 'twenty and 'twenty, one we believe we're starting the year with good asset quality.
We're prepared to help our customers with a second round of PPP loans, and we intend to grow as we have and the past.
That's it for my fourth quarter lending reported I'll now turn it over to Emilio Cooper to discuss deposits and you will.
Thanks Peter.
We entered 2020 with this set of ambitious goals to accomplish on the deposit side of our business. Our objectives were as follows reduce cost of funds to get it and in line with our peers grow noninterest bearing commercial and money market balances improved deposit mix increased fee income.
And create efficiencies, while improving execution and our branch network.
We entered the challenges presented by the pandemic made tactical adjustments and in the and exceeded our objectives.
Total cost of deposits was reduced to 50 basis points as of 12 31.
This brings us in line with our peers.
It's important to note we track closely our performance versus our peers and this is the best performance relative to our peer group.
We have had in the past six years, which represents.
The work, we did in 'twenty and 'twenty to accelerate.
And then our peers the rate of the reduction.
It represents a reduction of 89 basis points from Q4 2019, when our cost of deposits was 139 basis points.
We utilized the opportunity provided to us through our strong growth and noninterest bearing savings and money market balances to aggressively reduce pricing on Cds and liquid accounts over the course of several months.
Our team played a huge role in managing expectations with customers as we worked rates downward.
And as a result, we were able to mostly limit attrition by design to our CD portfolio.
As Steve indicated we expect to see additional reductions in our cost of deposits through the first half of the year as Cds reprice, lower and we continue to execute on our strategy to grow noninterest bearing and low cost core deposits.
As highlighted in our release, we grew noninterest bearing balances by over 50% money market and savings combined were up 45% total deposits grew by 16%.
This strong performance led to a significant improvement and our deposit mix non interest bearing accounts went from comprising 16, 8% of total deposits up to over 22% by year end.
Deposits were reduced from comprising 41% of total deposits down to 28% for the same period.
Gross and commercial deposits was well timed we were able to leverage the enhancements to our cash management platform to establish primary operating account relationships. This helped to boost our service fees collected on deposit accounts by over 20 per cent for the year.
We restructured our retail leadership team coming into 'twenty, and 'twenty, which powered our performance on a number of key initiatives.
The major benefit of this change was the improvement and our ability to execute quickly and effectively with skilled leaders who were embedded in our branches and each of our key markets and.
In Q4, we announced the permanent closure of two of our branches located in the Hamilton market.
Customers of these branches have been being serviced since April of last year at our other two locations that are equipped with drive throughs located just minutes away from each of these locations we.
We do not expect any material attrition due to these closures for those reasons.
As I've shared on previous calls, we made strategic investments and added resources to our business banking and cash management teams. In 2019. These investments returned huge dividends for us and 2020.
Primarily it enabled us to capitalize on the new customer acquisition opportunity that was presented when we stepped up and fill the need for many commercial prospects, who had grown frustrated with their existing bank relationships. During the first round of P. P. P lending.
Our team was prepared and worked collaboratively to capture this business, which accelerated our acquisition of core operating accounts.
I applaud our deposit and lending teams for working so strongly together in 2022 jointly accomplished these fantastic results. Our team does an incredible job engaging with our customers actively managing their relationships and providing superior customer service, they persevered and the face of adversity and emerged Victor.
Yes.
First of all we go into 'twenty, and 'twenty, one stronger than ever and poised for our performance.
Back to you Pat.
Thank you Emilio at this point I'd like to turn it back to the operator to open up for the question and answer session.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
And if you're using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Nick and true surely with Piper Sandler. Please go ahead.
Good morning, guys hope, you're all doing well.
Hey, good morning, Nick.
So I wanted to start with expenses. It looks like you had some performance related compensation as before first bright and throughout the year is that tenant and a half million quarterly run rate and level you could get in the first quarter.
Border or you feel like work down to that one.
Yeah. That's it that's a good question, Nick I think it's important to clarify that day.
The increase in expenses and the fourth quarter really was more of an accrual catch up when we saw some of the potential downside scenarios early in the year related to the pandemic, we took action at that time to adjust.
Just back our accruals and try.
Try to you.
And our lineup our expenses with more of a downside scenario and so by virtue of doing lower accruals early in the year and ultimately you know, finishing the year at a level that we believe turned out to be pretty strong we had some catch up to do and the fourth quarter. So that's why.
You see sort of an outsized number on and noninterest expense basis compare to why are we better and the past and was partly related to the reductions that we had made earlier and the year when things were a little more uncertain.
Okay great.
I appreciate the loan growth commentary I'd love your thoughts on the mix you know given the opportunity isn't likely for the growth this year to diversify more out of commercial real estate or is that what the market's giving your interest.
Well I'll give you my two cents and non let Peter add but.
And at the end of the day and given our current size.
And the mix doesn't shift drastically and any given quarter or quite frankly in any given year. I think we will continue to be busy with new commercial real estate opportunities. I think will also continue to see some and some paydowns and payoffs in that category. So I think we will.
Probably have a similar year, although it might end up being a little bit backend weighted in terms of new production given the strong finish we had in Q4 of 'twenty and some some payoffs and we know that are coming in Q1.
But I'm also optimistic that we will have strong growth in and C&I and owner occupied so hopefully, we'll see a little bit of a maneuvering of and the mix towards C&I and owner occupied but I don't know that it would be a huge difference certainly the relationships and connections we've developed through PPP should help.
Accelerate that a little bit, but it's also important to note that C&I and.
Tends to be smaller low and tends to be lines of credit that arent always fully drawn so youre not going to you're not going to see massive shifts and that portfolio overnight, but peter and wanting to jump in and and add anything you think would be relevant here.
Yeah, I mean, you've covered it pretty well, but for Nick but yeah I mean.
And I say C and I really think see C&I kind of your classic CNI loans or credit term loans, but also.
Owner occupied real estate.
It's like you know.
Basically I view, the business as being Investor real estate and see.
And I and then you know 10 per cent or less for our system and consumer we pointed our ends.
A couple of years ago now and.
Two goals and objectives and are much more focused on C&I business and then we'd have a separate group.
Apollo's Investor real estate.
And I think that's kind of paid off were.
And the RMS are out there focusing on C&I related stuff. So we're always going to be doing investor real estate, it's always going to likely be 45 to 55 per cent of our business and any part of the year, but.
You know that's basically it.
Okay, and then swap fees took a breather after being elevated and the middle of the year and I know it can be difficult to predict but given what youre seeing is your expectation and outlines strength and softer fourth quarter level.
Yeah, I mean, I would say you probably get a bounce back but it certainly.
It's a lumpy in terms of one or two sizable deals could generate significant fee income I don't know if Peter from the pipeline is there any visibility you have there at least and the first half of the year.
I don't have it in terms of dollars, but I do sense out like you like I think you were suggesting and pass it I know in recent weeks. We've approved a few deals that are tied you know a price inside through a swap. So yes, it's lumpy, it's going to be our <unk>.
To be the larger.
Real estate deals.
A better ones and Oh no they.
They don't always flow through and there's even a pattern as we'd like so you know.
I think there will be back for sure.
Okay, and then lastly, just given where cash balances are at the end of the year can you give us some color on how you're thinking about your liquidity position.
Potential timing of deployment.
Dave you want to take that one sure.
I think net because we take a look at it we've been kind of managing.
You know to a level of somewhere and $60 million to $65 million and excess liquidity to make sure. We have adequate liquidity. Obviously, we as we look at PPP loan forgiveness that has an impact.
On exactly how that affects excess liquidity, but what we've been doing over the last several months and.
And so as we've had some excess liquidity. We've retired some more expensive federal home loan bank advances for example, or broker deposits that we've had at higher rates. So we.
We continue to monitor that.
Based on our loan growth projections.
That's a good sign for us obviously, because it's a very much of a challenge for them and invest investment standpoint. So I think we're growth good from a liquidity standpoint, and we manage that very actively.
Thank you for taking my question.
That's it.
Thank you Nick.
The next question comes from Christopher <unk> with D. A Davidson. Please go ahead.
Good morning, gentlemen, how are you.
Good good how are you Chris.
Good good.
So I think I'd like to just dig a little bit.
The loan growth.
We've had some good news over the last couple of months vaccine.
And some stimulus.
And when do you think that kind of translate.
Back into pre pandemic growth.
Well I mean, it's hard to say and add a market level I, you know I'm not sure how much.
Demand right now is being cut back based on uncertainty and other things certainly in general the capital markets have been pretty pretty active and pretty strong.
More specifically the first bank I think you know, we haven't necessarily seen a big big drop off and activity and our markets.
There are certainly sectors of commercial real estate, where they're.
There is significant uncertainty, but there's other areas that are very robust in terms of their development. So you know, we really havent seen a drop off and activity.
And.
I don't know that.
Yeah, we're obviously hopeful like everybody else that the vaccine distribution and starts to pick back up and that you know we're looking at are a much better situation from a health perspective six months from now, but I don't know that that's going to necessarily translate to you know a significant change in loan demand and.
And our market and you know where we're busy and we think we can hit our goals based on current levels of demand. So.
Got it got it thanks, and and then I guess just book.
And at the deposit composition.
Time deposits do you feel that you have more room to move down and.
Either that the absolute balance or the cost of deposits deposits.
Yeah, I mean, Emilio kit can answer better, but I think the answer is we probably.
I have seen most of the mix shifts that we're going to see maybe a little bit more but we continue to reprice our R. C D and the lower and you know during the early part of the year and the price reduction was drastic and we saw some run off that.
And that seems to be stabilizing, but Amelia Warner and jump in and add a little color on that.
Yeah, I would agree with Pat's comments and you know what we're seeing is we're being able to at our current price levels and retain of about 80% of our Cds that come due so we may see some continued slight reduction, but where we're back filling them strategically with <unk>.
Grid Cds that are way less expensive than what we're finding and the market, but the first half of the year, we have about $250 million.
Balancing that are coming to that are still price significantly higher than the.
And the rates that we're going to renew them at so that's.
And that's that that's what's that our comments relative to where we expect to see continued reduction in costs through the first half of the year.
Got it and so you've got 250 million and the first half of the year and you expect to retain around 80% of that.
Exactly.
Yes.
Got it got it. Thank you and then and then I guess.
Yeah.
Turn to the securities portfolio and follow up on that question.
Hum.
You know I'm not sure if youre finding.
<unk> breakup.
And and this environment, but but obviously anything is better than the the kind of 10 basis points at the fed so what what are your thoughts around continued.
And then you took the securities portfolio down and <unk>, but what are your thoughts around around that.
Well I did Chris it all centers around our liquidity position right. So we're you know we have no desire for liquidity position bumps up based on loan forgiveness.
And to say that that as you said the 10 basis points. However were very opportunistic we're generally buying mortgage backed securities where generic type of marketable.
Securities, where the yield is anywhere between I'll say 110, and $1 25, So we still like to take a look at that opportunity. So we kind of balance that with our liquidity position and if the opportunity presents itself, we'll probably be looking to get into the market.
Okay.
Got it that's great. Thanks for taking my questions.
Thank you and Chris.
The next question comes from price fairly well Heartbeat. Please go ahead.
Thanks, Good morning, guys.
Good morning.
Wanted to maybe drill down a little bit on the.
The cost of funds.
And really appreciate you you you're noting.
The $250 million coming due here over the next six months just curious.
And where those are price right now.
And then where are you where are you kind of see current current pricing for for that type of deposits.
Yeah. So the highest rate we're offering in the market is 50 basis points.
And on average those are going to be coming due.
Off the rates that are right around the 105 to 110 space.
Yes.
Okay.
Okay.
Helpful, and that's great and and and so.
And I think you mentioned.
Some potential upside here too to the NIM on a kind of on a core basis when you strip out.
Everything that's going on with with P. P P.
Just wanted.
Wanted to kind of get a feel for what what's behind that that expectation. I mean is it is at the core or the funding costs coming down.
And then what what are the expectations from a kind of a core loan pricing perspective, where are you originating loans today.
Yeah. So you know.
Just to be clear and we don't we don't have.
Oh enough visibility to know that the margin is absolutely moving higher but I think our view on the opportunity for margin enhancement heading into next year is better than it was for a couple of reasons. One we think will continue to see some benefit of some reduced funding costs.
And Whit.
We are stretching out and the yield curve, where we're hopeful that that will reduce some of the some of the pressure on the pricing for new loan production and then obviously if is that yield curve expansion and or the long and the curve starts to move even higher.
That said certainly mean, even better news from a margin standpoint. So at this point I think we feel like.
You know, there's there's a potential for upside and the margin and if you look at 340 being kind of a rough rough estimate of the core excluding PPP.
My expectation is that that number is going to move a lot higher and the next year, but I think if we can keep it at 340 <unk>.
Per to where we were earlier and a year.
And we're at a size now where you know every couple of basis points and margin.
Leads to meaningful bottom line improvement so you know I.
I don't suspect that we'll see huge margin expansion and I think we've.
Probably already seen more than I would've thought if you'd asked me six months ago, I was sort of hopeful that the margin would improve and you.
And if you'd asked me that and whether we would have gotten to $3 40 core and the fourth quarter and I said that sounds ambitious so I think and some ways. The good news is we've already.
We used a lot of the juice out of that Orange and has left us and a pretty good position as we're heading into 'twenty and 'twenty, one, but there are scenarios, where we could see it even improve a little bit more as we move forward.
Okay.
Okay. That's helpful and and then maybe Peter you can you can take.
A question about where where you're originating loans today and I also wanted to ask you.
Nice nice healthy loan growth from.
From a core perspective, and the back half of 2020 and.
And that's a bit counter too and I think what you might see from.
Most participants and in the industry, so and just kind of curious what the what's the source with the source of the all of the growth is in terms of market share takeaway newer and newer clients and know how and how how you're going about sort of sourcing.
Those are the there's there's new loans.
And what was sourcing and new loans is really bad and the same thing.
We've been doing all along it's really it's been a combination of.
Additional slash new business with existing.
Excuse me customers as well as a you know on the C&I side, a few new customers.
And we brought it and.
You know, we're sort of I don't know our average C&I loans again, including owner occupied real estate, and maybe you know less and less than a million Bucks 221.
$1 million you bring in a couple of $5 million to $6 million Eni.
The loans near the end of the year, that's going to help drive that number so.
It was a decent marketing on the part of our ends and and.
And and <unk>.
Working with existing customers, who are involved and new projects that kind of thing.
Uh huh.
From a pricing standpoint.
You know, we got most of our loans, if they're longer term real estate related or fixed or we try to fix the rate for five years will do.
Yeah, 15 to even 25 year am depending upon the asset.
Quality.
But.
And we're probably in the three and a half before and a half per set fixed rate.
Range right now floating would be different.
And I will put floors on those two so it come due and and <unk>.
Five years to get repriced.
And we won't get caught and the treasuries plus.
250 kind of a scenario like we make today.
Okay.
Okay. That's helpful.
Okay.
Let's see and then and wanted to ask about you know you guys have given some good good information and what you expect for this round three of or this next round of PPP.
Yeah in terms of kind of the pace of.
Forgiveness I mean, we're almost a month into the first quarter now just wondering if the pace of forgiveness has picked up relative to what you might've seen and the fourth quarter.
And then on that point.
What's still loans the balance of loans in the P. P. P bucket that are in excess of $2 million.
Well forgiveness.
Actually has slowed.
And with the.
With the onslaught of new applications, and this guy and the second round and I mean, I think the SBA came out do you have a day.
<unk> stated that they're not going to be addressed and forgiveness for awhile. So they keep process you know them.
First round two.
And get their hands around processing and the second round so.
Ah I see that slow and early on.
And.
As far as the amount.
It's funny the average size and the loans, we're looking at I think the first round our average loan size is around $178000.
This so far and the second round to 172000, and so it's amazingly ladies and.
And the similar.
But.
Yeah.
As far as over 2 million I don't have that we did we did have a handful and over $2 million.
I mean, less and less than five and the first round and I think we'd see one and the second round. So far I don't have that day in front of me.
And Peter and the reason I ask that is we've heard that and we know that the the SBA is.
Adding scrutiny in terms of.
And the forgiveness process for for those loans. So it may may take even longer.
With those with those loans and over $2 million. That's that's why I asked that.
But.
And I think you'd also asked about kind of where we are and the process and I think we've submitted.
Over 50% of those first round loans for forgiveness I don't know, Steve you might know, but how many of those we've actually gotten forgiven, but I think you know if we were at roughly 135 million at year end.
First the 190, that's about 55 out of the out of the 190, so yeah, a little over 25 per cent has already been forgiving and a 25% has already been submitted for forgiveness and you've got roughly half of that you know the.
Borrowers still need to complete their forgiveness applications.
Okay.
And and I would assume that that you guys are.
Yeah.
And we're reacting to those to those borrowers in terms of.
And completing those apps are and and getting getting the apps and to you all to start that process.
Yeah, I mean, we've we've streamlined and a fair bit I mean, the first time around and everything we're doing with sort of the old fashioned and manual paper based system and we.
We had some time and between the original application forgiveness to work with a technology company to get a portal and a website set up and so I think that part of it.
On the forgiveness side seems to be working fairly well, partly because the forgiveness process is just a lot more spread out right and you had you know we had over a thousand applications within a few week period on the front and whereas now the applications for forgiveness or coming in you know a few a week or what have you. So.
It's much easier to manage it.
Yes, okay.
Okay.
And I would add we're not seeing a lot of issues in terms of forgiveness applications getting kicked back are denied and so I think that's good yeah.
Yep Yep.
Yeah.
That makes sense.
Wanted to ask one more just on the the level of Deferments, obviously, you called out the deferments and the press release.
Was curious and nature of the deferments are they P&I or just interest only.
And then you know what.
And maybe what's the what's.
What's the outlook, there and if you get to a point that and he.
Can't you can't necessarily defer any more and do you see them moving into that PDR bucket.
Trying to get a gauge for what you know what.
Charge off activity or loss activity might be relative relative to this performance.
Yeah, I mean, it's hard to say, but what I would tell you sort of in general is for the most part anybody that's still on deferral is at least paying interest only and so kind of the natural evolution was folks got P&I for 90 days.
And some that needed another 90 days.
Some of them went to interest only some of them got another 90 days and P&I, but almost everybody went to paying something if they got a deferral that extended them into 2021.
So I think that's good news that folks have the capacity and wherewithal to at least resume making payments and in some fashion and.
And based on what we're looking at and hearing from our borrowers.
You know.
They all feel confident that once the vaccine is distributed and things return to somewhat normal that.
They believe their businesses will come back on track. So we don't have any situations, where we did a deferral, but we just know it's it's a dead end and it's not going anywhere and and I think every case the deferrals were granted because and we've got strong operators and great history.
And could personal strength and guarantees behind the deals and we felt comfortable that there was a very good business case for why this borrower would would be strong on the back end of it. So you know all of that being said I think that means we're optimistic we don't think theres and a big known issues where these companies.
And don't have a chance to come back, but obviously, there's uncertainty there. So we're gonna have to keep a close eye on that.
Got it that's helpful. I appreciate all your Oh, you're always comments, thanks a lot.
Great. Thank you Bryce.
And as a reminder, if you have a question. Please press star and wanted to be joined into the queue.
The next question comes from Eric Zwick, with Boenning and Scattergood. Please go ahead.
Good morning, guys.
Hey, good morning, Eric.
I apologize if any of my questions have been answered already been bouncing back and forth between a few calls this morning, I want to circle back on the expense discussion.
And I heard that you know the earlier comments about most of the fourth quarter increase.
And being due to the day comp line and the accrual of.
Some of the incentive comp and just curious as we move into 2021, when do you Award Merit increases and and just trying to figure out you know.
What's kind of a starting run rate for the expenses do we get back to that 10 million dollar level, where you had been running or is there some natural and inflationary pressures from for some other sources and there as well.
Yeah, I think you hit the nail on the head and there are definitely some natural inflationary pressures I mean at the moment and I don't think there is strong and they might be but you know it is it is pretty standard for us and February and March to make structural adjustments and or look at a pro.
Motions, where warranted et cetera, so we almost always see a little bit of a tick up in AR.
Not always fully reflected and the first quarter because of those changes get.
Finalized you know towards the end of the first quarter. So they tend to show up more in the second quarter, but we are factoring all that in and we sort of estimated that 10.5 was a it was a decent run rate for quarterly expenses.
Factoring in some of those adjustments, we just talked about.
Great. Thanks, Thanks, Pat there and.
And then turning back to the loans in terms of the 5% to 7% outlook that was mentioned in the press release is that inclusive or exclusive of the PPP I guess kind of outflows here at the beginning of our kind of inflows and outflows that will be yeah and that's it.
That's a good question important clarification that and sort of the way we think about it and you know Peter described quote our normal business. So the 5% to 7% is looking at our our loan portfolio exclusive of PPP, so sort of where that where that book of business was at the end of the year and then.
And what we think we can do in terms of net growth specifically related to that core basis. So actual loans, we don't really know right. I mean, some of the old Ptp's are gonna get forgiven or fun and some new ones and so I don't really know and we're not we're not modeling PTP impact and any of that with the exception of.
Understanding that there'll be some additional fee income so the 5% to 7% sort of just on the core business.
Great and then last quarter, you had mentioned some projects underway to increase deposit related fees. Just curious any update you can provide on those and and what type of.
Factor might be to the income statement that the fee income from from those efforts.
And I think it's sort of little things here and there. So I think you'll you'll see some some slight benefit but I'll, let emilio to talk more specifically and in some of the more you know the more critical initiatives, there I think they're going well.
Yeah. So we did launch because we talked about it.
Some initiatives related to increasing our our feet on.
And deposit accounts and we are seeing.
And a nice a nice boost but they were small.
One of the specific initiatives related to our remote deposit capture and.
And making sure that we were collecting fees appropriately and in line with the marketplace. So we executed on that towards and the third quarter.
And we're continuing to monitor the impact of that but that certainly drove some slight improvement and the fourth quarter. We also tightened up our rebate policy on overdrafts.
And you know that represented a nice book.
First.
And for us and some opportunity there as well as our check real.
Reordering policies and so we're continuing to review and <unk> and looked under every rock first opportunity relative to the competition, where we can enhance our ability to collect and what is fair and I would expect that we're going to continue to see modest improvement in our and our service fees, particularly as volume.
<unk> relative to what we had seen when the pandemic and hit so you know I would expect to see continued growth for this year and that category.
Thanks for the color there Amelia that was helpful. And then just last one for me just thinking about you.
<unk> of capital and 2021 sounds like you're fairly optimistic about the opportunities for organic loan growth.
And then looking for alternate uses such as buyback potential acquisitions, and then maybe even any.
And market expansion and if theres any markets that you're not in today that you've got your Io and just how youre thinking about that and the coming year.
Yeah, and I think certainly with with.
The planned growth and the improved profitability and I think our capital base right now is strong and with strong earnings we continue to replenish that capital base and.
We continue to think that opportunistic M&A can be a good way to use capital and drive earnings and drive value creation, but quite honestly as you know our current stock levels that makes it makes it more difficult. So I'd say our primary focus is just on and executing the buyback when we say.
And the the shares at these levels are very attractive and.
And I'd say, that's the primary and then as it relates to organic growth I mean, we're always on the lookout for good bankers, who can either open new markets for us or help us take share and and our existing markets. So.
I'd say, that's just kind of standard and it's not a special capital allocation class, it's and if we have good business opportunities that can generate a good return on investment we are constantly looking for those so.
Excellent. Thanks for taking my questions. This morning.
Great. Thank you.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Patrick Ryan for any closing remarks.
I'd just like to thank everybody for joining the call and thank all of the groups that are asked great questions and.
We will look forward to regrouping with everybody at the end of the first quarter. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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