Q1 2021 Enterprise Financial Services Corp Earnings and Acquisition of First Choice Bancorp Call
Good day and welcome to the E. S. S. C earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Jim Lally. Please go ahead Sir.
Got it thank you and good morning.
I welcome everyone's war call I appreciate all of you taking time to listen and joining me. This morning is Keene Turner, our company's Chief Financial Officer, and Chief Operating Officer, Scott Goodman, President of Enterprise Bank and Trust and book.
About the Chief Credit Officer.
Yesterday, we issued a press release announcing the acquisition of first choice Bank Corp on.
On the calls a day will briefly comment on our first quarter earnings and then discuss the acquisition announcement.
Before we begin I would like to remind everyone on the call that a copy of the releases and the accompanying presentations can be found on our website and were furnished on F. C. C forms 8-K yesterday. Please refer to slide two of the presentation titled forward looking statements and on.
Most recent 10-K 10-Q for reasons why actual results may vary from any forward looking statements that we make this morning.
The first quarter of 2021 was a very solid quarter for our company from an earnings perspective, we made.
$30 million or <unk> 96 per share. This compares favorably to both the linked quarter and the first quarter of 2020, we earned $1 48 per share respectively.
From a return perspective, we earned one point to 2% on average assets at 166% on P. P. R. R O.
During the quarter, we successfully completed the core system conversion for seacoast.
We're well on our way to achieving the resulting operating leverage as we sit here today.
Other highlights for the quarter included the issuance of our inaugural environmental social and governance report and the continued execution of the Triple T program for the benefit of our customers. This success continues to create some headwinds relative to organic growth on commercial markets.
Scott will touch on some of this in his comments.
In addition to all this last evening, we announced the merger of first choice Bank Corp into E FSC, creating a $12 7 billion dollar commercial bank.
The opportunity to pursue this transaction developed quickly because of the strong cultural fit between the two organizations and alignment of business schools.
We feel that first choice is the perfect partner for us as we can continue our southwest expansion due to their pure play commercial banking heritage strong earnings profile and depth of knowledge from Southern California business James's Peter.
Peter Hawaii its share.
Chairman and his management team have built a first class organization and it's incredible and diversity that will flourish on the combined platform.
We share similar core values and commitments to our stakeholders. Both companies had been recognized as the best place to work in recent years. The combination of our two cultures will produce a strong company. We will continue our focus on local decision, making access to senior leaders on our high touch service model.
We were pleased that Peter and first choice for open to an opportunity for all with a likeminded successful company that shifted its focus values and commitment to clients associates and communities. This is the perfect size company terrestrial acquire as we crossed the $10 billion threshold.
He will run through many of the financial details of this transaction, but I have to say that I'm extremely excited about our future as we can.
On another very strong catalysts for continued earnings and balance sheet growth.
Our economy continues to steadily recover.
Is on the verge of what I believe from what we believe is a period of sustained expansion.
I would now like to hand, the call over to Scott Goodman, who will provide some color on the performance of our various business lines during the first quarter Scott.
Thank you Jim and good morning, everybody.
You'll see total loans that are outlined on slide seven grew by $64 million on the first quarter.
This modest level of loan growth really reflect some continued headwinds for the regional portfolios due to the excessive liquidity within the financial system and a cautious approach to new capital spending by businesses.
We did participate in round two of the P. P. P program with over 300 million of new originations.
And resulting in a net increase of $39 million of Triple P. Outstandings at quarter end.
We continue to see business is using triple P funds and reserve cash buildup to further reduce revolving lines of credit.
Construction loans and other short term borrowings.
In other cases clients are choosing to use cash for capex and project financing rather than borrow.
However, I will say, we are experiencing stronger performance in several other sectors of our loan portfolio, including Investor CRE.
SBA lending life.
Life insurance premium finance and affordable housing.
The diversity and balance that we've intentionally developed within our business model are enabling us to lean into these specialty areas that are insulated from the liquidity headwinds or like SBA lending.
Have benefited from the current economic uncertainty and stimulus programs.
Within the business units that are outlined on slide eight.
St Louis and Kansas City represent our largest concentrations of general C&I operating businesses and they have been most heavily impacted by the aforementioned pressures.
That said, we continue to onboard new relationships in these markets and.
And we see momentum on the production of new loan commitments in both markets.
St. Louis for example, we've seen increased originations in each of the last two consecutive quarters.
Arizona continues its strong performance with 15% year over year growth.
And reflecting one of the fastest growing economies in the country.
Commercial real estate market remains active.
To support the growing infrastructure and demand for industrial and commercial users.
San Diego data that you see on this slide represents the general commercial banking portfolio a portion of the legacy Seacoast book.
And it's made up mainly of investor and owner occupied CRE loans.
Similar to Phoenix, the southern California economy shows a higher level of growth and we're excited to add the talent of the first choice team and the dynamics of this market to our successful client focused growth model.
Turning now to slide number nine.
We've also integrated the specialty deposit verticals of the legacy seacoast operation into our specialized banking unit now representing a combined $1 3 billion in deposits.
These specialties provide an attractive low cost sticky.
And continually expanding portion of our funding base, representing nearly 15% of total deposits.
With elevated technological and operational capabilities on a combined basis, we've already seen new opportunities and accelerated growth in these business lines.
Lastly, I'd like to highlight the continued strength of our loan portfolio.
Asset quality remained solid with reductions in nonperforming loans and classifieds from prior quarter.
Nonperforming loans are modest at 50 basis points.
And the allowance represents strong coverage at 1.8 per cent of the total loan portfolio.
The majority of the charge off dollars for this quarter are concentrated in two loans.
One is the hotel loans and St. Louis, which was acquired through an acquisition and which has been mentioned previously by us in prior quarters.
And the other is a partial charge relating to a modest seven figure loan to a retail service business, which has also been in our watch and workout process in prior quarters and with the remaining balance fully reserved.
Now at this point I'd like to hand, it over to Keith for his comments.
Thanks, Scott and good morning.
We completed the first quarter with net income of $30 million or <unk> 96 per share, which compares to $1 per share in the fourth quarter performance for the first quarter with seasonally better than we expected on several fronts and included the successful integration of seacoast mid quarter.
Net interest income increased modestly as we demonstrated a full quarter combined with the coast, which helped to more than offset lower P. P. P interest income from a lower level of forgiveness in the first quarter compared to the fourth quarter.
Expenses reflect the larger company as well as $3 1 million of merger related expenses to seacoast and at $52 9 million inclusive of the merger charges. We're pleased to start 2021 at a lower run rate than we anticipated, we expect that to bode well for our 2021 financial performance.
Provision for credit losses was muted in the quarter and it was consistent with the fourth quarter when excluding the seasonal day to double count from the merger I'll comment further on credit results and expectations in a minute.
Noted on slide 10.
It's hard for me to say that fees were disappointing because the sequential reduction relative to our expectations was isolated to the tax credit line item. This business experienced a modest timing delays in the first quarter as well as some downward valuation on credit that we carry at fair value we.
We expect our tax credit business to deliver the same overall performance for 2021 as we did when we closed out last year. However, the first quarter expense of $1 million was approximately $2 million behind our normal expectations.
With that said, we expect the business to recover in the second quarter and to gain momentum throughout 2021.
On all other fronts. We are pleased with the stable linked quarter trends to begin 2021 from a fee income perspective.
Let me just spend a couple minutes on net interest income and margin as well as asset quality details.
Referring to slide 11, net interest income was $79 $1 million compared to $77 $4 million in the fourth quarter, which is a $1 $7 million increased full.
For quarter sequential impact of seacoast is approximately $5 $5 million, which is offsetting the $1 $8 million decrease in PPP net interest income.
However, we're also experiencing declines in other portfolio loan balances in the form of elevated payoffs that have resulted from liquidity that PPP and other stimulus programs have provided to our customers.
Net interest margin was 3.50% compared to $3 six 6% in the fourth quarter and held up to our expectations adjusting for additional first quarter liquidity build net interest margin would have been 3.63% comparably, which indicates 13 basis points of the reported net interest margin decline.
Was it related to the continued liquidity build.
Beyond that P. P. P trend decreased net interest margin 11 basis points, while a full quarter of seacoast added approximately eight basis points.
Stepping back we guided to three point for zero to 345% net interest margin ex P. P. P and on a run rate is 339%, including the 13 basis point impact of liquidity belt, so 339% with the extra unplanned liquidity or comparably adjusted 352% is a good.
Start for the full year.
On slide 12 asset quality has continued to be stable, particularly when you consider the allowance for credit losses to loans and nonperforming levels.
We did resolve some credit in the first quarter that had been previously discussed and resulted in $6 5 million of gross charge offs.
The majority of those reserves had been previously provided for the coverage levels declined slightly from year end, notwithstanding we determined that it continues to be appropriate to generally maintain our reserve level in the current quarter.
State overall improvements in the economic forecast, we continue to see elevated unemployment and certain winning sectors, making up for losses in sectors and businesses that could be hard hit by restrictions and slower economic activity.
Further while positive for overall credit losses, PPP and other government efforts to lessen the extent of related impacts have also created additional uncertainty in our ability to determine one way or another the ultimate outcome and loss content for certain portions of our portfolios. Thus, we feel comfortable generally maintaining reserve levels.
Until those measures are exhausted and we are able to evaluate the financial performance of each of our borrowers under current and future conditions.
I'll wrap up my quarter comment with a high level view.
When I look at 96 cents per share of EPS.
For an adjusted for merger charges and tax credit income that wasn't realized a $2 million. The first quarter EPS would have been around 12 per share higher.
My view that as all things considered the strong base on which we can build 2021.
We continue to have momentum in certain areas of our business and we are optimistic that the disruption from defensive stimulus measures turns positive we can resume growth and momentum in all our markets and specialty lines.
Stepping back we are seeing deposits continued to inflate the balance sheet and meet return levels. However, we're redoubling our efforts to continue to add to the earnings profile of our organization and the announcement of the first choice merger is one reflection of those such efforts after several years of Derisking and fortifying the deposit portion of our business.
And then pivoting to enhance both specialty loan and deposit growth engines, we're adding to our core competency of commercial banking and three dynamic markets, San Diego, Los Angeles, and Orange County, California.
Our teams have demonstrated a successful track record for integrating people systems and overall organizations over the last several years given that current economic conditions have muted certain aspects of our organic business. We believe that rapid in rapid succession in the integration of seacoast and now. The addition of first choice we continue to cement the foundation.
For continued strong organic earnings growth in the quarters and years to come.
Referring to slide 13, and as it relates to first choice. Let me present, a few financial highlights for the merger and then turn it over to Jim to wrap up with some comments on organizational fit and mutual excitement in our company share.
This merger was struck to result in pro forma ownership for first choice shareholders at 20%.
The overall economics for enterprise and the combined shareholder base are compelling and are driven by a combination of two high performing growth oriented companies.
Additionally, I'm pleased to demonstrate a high single digit EPS accretion of approximately 8% that earns back to 7% tangible book value dilution in under three years.
This is achieved while immediately scaling us $2 5 billion above 10 billion concurrently with the quarter that we crossed while generating a 21% internal rate of return.
We've been actively preparing to cross $10 billion on assets for several years and this trend that transaction sufficiently scales, our balance sheet to offset the cost of crossing.
It also provides additional operational resources from the associate the first choice and the compliance and risk functions.
I'd also like to highlight that the announced metrics include the impact of the interchange penalty. However, given the consensus Street estimate upon with which these metrics are based and our internal view of those estimates it is more than reasonable to assume that street estimates allow for both durbin fee income reduction and cost of crossing $10 billion in 2022.
If we assume that to be the case earned backdrops to below two five years with EPS accretion improving nearly 9%.
Yeah.
On slide 14, I'll wrap up and I'll also point out that our detailed due diligence process results in a high degree of comfort in our deal assumptions such as the transaction costs and achievement of a minimum of 25 per cent estimated cost savings.
Additionally, our view of credit reflects not only the underlying high quality lending strategy of first choice, but also a pragmatic lens that no. One has 100 per cent clarity on how the current economic events will ultimately affect the individual borrowers.
With that we feel very good about the standalone and pro forma balance sheet quality.
In addition, the 100% stock fixed exchange ratio reflects the conservative view that continued balance sheet strength cannot be sacrificed for the sake of earnings generation for this transaction. They are not mutually exclusive with that said pre and post closing, we expect to maintain a high capital retention rate, which affords us.
The luxury of continued capital flexibility in the quarters and years to come.
Our goal is to continue to deliver mid to high teens return on tangible common equity, we believe that being able to utilize our M&A proficiency for combining with both seacoast and first choice amid a challenging earnings growth environment for banks will help us drive superior returns to shareholders over the intermediate and long term.
Additionally, our actions during this time have not only been focused on growth on our earnings power, but also maintaining a strong yet efficient capital structure, we believe that our performance in recent years and especially during the past year has poised us to capitalize on not only on future economic growth, but also maintain a growth posture amid current headwinds.
I appreciate you guys joining the call today, and I'm going to hand, it back to Jim to provide some closing comments on first choice and the overall opportunity.
Thank you and before we open up for questions I wanted to make a few more comments regarding what we were looking for and why first choice was the perfect partner.
From our first from that Peter Hawaii, It was evident that our corporate philosophy for almost identical in how we take care of clients for me.
All of our associates and support our communities.
Alignment of our corporate philosophies and strategic goals was a big reason why.
And I were both ex sign for this transaction.
As you know cultural integration typically makes or breaks these deals. So I feel very confident that culture will not be an issue.
In addition, we're excited to welcome Peter to walk through the FSC Board for the transaction closes.
Not always leadership and partnership.
Other companies together, but also his knowledge and desires to continue further expansion in southern California.
We were looking for a premier commercial banks feel on investments in southern California, We believe that we found in other high performing first choice. We were very excited to see how we can accelerate on first choices already strong track record of growth.
The combination of a wider array of products and services, coupled with a significantly larger balance sheet should provide the perfect complement to the seasoned banking team that we inherit first choice.
We believe that our Treasury management platform and commercial card programs will allow us to deepen the already strong relationships that currently exist.
Furthermore, with this acquisition, we now have over $3 billion on business loans and deposits in southern California. This gives us ample size and scale can be a meaningful business partner for the significant number of family owned businesses that call. This part of the country home.
The merger of first choice in D. C continues the transformation of our company that began in 2017.
On the last five years, we have significantly grown.
Diversified manner, we have improved our funding profile, both in terms of cost and the ability to grow.
Built book and growing businesses and markets that set us up for success in the years to come.
With that Todd I'd like to open the lineup for for questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach on equipment.
Again press Star one to ask a question for <unk>.
Pause for just a moment to allow everyone an opportunity to signal for questions.
We'll take our first question.
It comes from Jeff <unk> with D. A davidson.
Thanks, Good morning.
Good morning, Joe.
Wanted to maybe tackle expenses first just to get an idea of timing here. So.
I guess ex merger costs, you get a quarterly run rate back towards 50 million could you confirm if there's any additional cost saves anticipated with sea coast and then I.
As we roll forward into if you could comment on deal timing of the close in the third quarter. If you think.
You know is that early mid or late and then and then kind of a follow on is the I.
I guess the expected conversion by the end of the year, if you could kind of just.
A high level walk us through the expense run rate. Thanks.
Let me see if I can remember all those Jeff So just from a you know the.
The 50 million quarterly expense run rate.
That's a pretty good number there may be some opportunity to improve on that sequentially from <unk> to <unk>, you know I think there's a little bit more cost.
Cost savings for seacoast that'll come out of the run rate you know, we really had no cash.
Call. It two thirds of a quarter before you know the full effect of the systems conversion here in the first quarter and then.
Seasonal payroll.
You know taxes.
In the first quarter, but it'll be.
Little bit mitigated by by normal Merit, but I do think high 40, <unk> low 50 here in the near term.
Is is achievable for us on on the base.
Run rate here in 2021, and then separately you know what I'll say is where we're you know we always work efficiently and to try to get transactions closed I think our expectation would be clothing mid to late third quarter, and then I would expect.
You know mid fourth quarter conversion is is what we're planning for so you know I think hopefully that helps you from a from a timing perspective, but you should largely be able to have if that timing works out should largely be able to have what I'm going to call. It clean.
First quarter of 'twenty two.
Yep.
Thanks Kim.
<unk>.
And I guess you.
You talked about the capital.
Flexibility and.
You did mentioned the buyback.
Just as that being available.
I guess, if you take us through that deal and what you mean by that flexibility is it.
Our further deals still being discussed.
Can you use the buyback enduring.
We're ahead of the close of this next transaction, maybe just flush out the capital usage priorities. Thanks.
Sure Jeff. So obviously you know capital on this deal is is fairly level. I mean, we're just you know low 8% TCE, just just quick and dirty So you know.
It's not we don't have a bunch of access that's burning a hole in our pocket, but with that said.
As we start to get the for the full impact of Seacoast and now we've got another high single digit accretive EPS deal. That's just going to help us further drive performance and so you know the dividend posture has been.
Fairly conservative and I think that speaks to opportunity.
To manage.
Buybacks and share count and so what I will say is that for a period of time, we're likely.
Until F for get file things like that we're not going to be able to execute on on buybacks, but I would anticipate that once all of that information is publicized then we'll be able to maybe start working back into the market and and repurchasing shares if especially if there's you know.
Any continued weakness.
And then you asked about more more M&A I think via these two deals were closed in succession, we want to make sure that we digest them.
Lee and that we do them in a high quality way.
You know seacoast was executed extremely well.
And so I have no concerns about no debt following on closely but I also want to make sure that you know we're going to continue to look and be discerning about future opportunities, but I wouldn't I wouldn't expect something to be as quick in terms of timing is as these two were together necessarily.
Thanks, Kim I'll step back.
Thanks, Jeff.
Yeah.
Thank you we'll take our next question from Andrew Leisch with Piper Sandler.
Hey, good morning, everyone.
Hum.
A question Tim It sounds like you guys have been looking and letting her comments to expand on southern California, or where there other potential banks that you looked at considering to acquire there.
Well, Andrew you know you know my job, we're always talking to companies about opportunities, but when I'm on.
Peter I think it was clear that.
This is what is the target we really wanted to go after.
And so we've focused on is when he in IMAX. So.
But certainly whether it's southern California or other geographies is always several on the prospect list.
Got it.
Is there any like just.
Just thinking about your last couple of deals.
The Mexico deal added a great deposit base, the CECO steel editor unique lending niche and our nationwide deposit franchise is there anything.
Is there any sort of specialty nits that are this transaction adds or is there something else that that makes it especially attracted to you guys.
So.
Characteristically, they're a pure play commercial bank, but they have a very nice entrepreneurial strength to it in from the fact that they cure.
In the specialized deposit business certainly not as robustly as the C code, but they do have a nice client base there.
Very strong SBA lender, but more geographically focused in California.
And they do a really good job on the local developer.
<unk> developed for CRE market, there too so but much.
Good day notice is very much more like a pure play commercial bank that focuses on are doing well on the communities that they serve.
Got it Okay and then just one last question just on the deposit inflows and the liquidity.
Some pressure here in the first quarter, what have you seen so far this quarter is that trend continuing or are there opportunities to to invest that into higher yielding assets or yeah. What's a one time anything so far on the liquidity from.
Andrew Thanks, Thanks for that question.
So.
If you'd asked me that question two weeks ago I would've told you we continue to see it build a.
A little bit post tax season, we've seen some moderation of the inflow. So you know probably you know sitting here today, we're fairly level to where we were at the end of the quarter.
From an overall deposit level, we are working very hard to deploy.
Principally in loans, obviously, you know you got indicated there there are some headwinds there, but there are some bright spots in certain pieces of the business and I do think that you know.
S P a and some of the other businesses, where you know first quarter was actually a little bit flow because of the timing of when the stimulus program rolled out. So we do expect a robot second quarter, there and we did deploy some additional liquidity into the investment portfolio and we're being cautious.
About how quickly we rotate in there.
On to get paid anything that is worthwhile you do have to move.
Out on the curve a little bit from a duration perspective, we're mindful of where interest rates are and you know what that could do from a you know impact on TCE and economic value of equity, but we're also.
Looking to make sure that we maintain the earnings stream. So that's a long winded way of saying we're trying to do.
Everything incrementally and intentionally in the longer the liquidity sits here on the balance sheet and the bigger accounts will continue to work some of that cash into the market.
Got it.
That's really helpful Yep long winded, but certainly detailed I appreciate that.
I will step back thank you. Thanks.
Thanks, Andrew.
Thank you we'll take our next question from Damon Delmonte with K B W.
Hey, good morning, guys hope everybody's doing well today. So my first question just wondering Keene, you know with regards to the tax credit outlook.
You know last year, you guys put up a little bit over $6 million in fees for that line item.
Haas in the hall here on the first quarter, how do you kind of look at the full year outlook for 2021.
Damien Thanks for the question I think we are what we guided is that we thought that that business was going to be you know, it's still a double digit grower from the 2020 level. So you know we do think that it'll make up for the negative here in the first quarter. So I think second quarter will be stronger than we would have otherwise.
<unk>. So we might have thought the second quarter and third quarter. We're like you know half a million for a $1 million of tax credit activities that we do think for second quarter will be you know a little bit more full you know called out a couple couple of million dollars and then it'll you know the fourth quarter, we expect to close.
Closed strong is it as we always do.
Am I, the only caveat would be notwithstanding there are some some credit for good or fair value didn't and we use on a little bit longer term LIBOR. So that was part of the headwind, but it really was timing on project called net closings where.
We incurred some expenses that we recorded but we didn't get the revenue associated with it and that will come in in the next quarter hopefully that's a complete answer for you.
A very complete great color. Thank you and then with regards to the outlook for for provision expense. I think you had said you were going to kind of keep the reserve at this elevated level until they're just kind of greater clarity you know broadly speaking on the economy. I guess a is that is that accurate and b. How do we think about the provision expense on the upcoming quarters.
Yeah I think.
Our posture is that we're well positioned either if things get a lot better we don't think it's that over reserved.
Certainly the reserve will come down.
But you know when when you look at where we were for initial.
Initial day, one diesel adoption at around 130 basis points and you know where we are today, there's there's some room to kind of grow into that and then separately.
If things were to get worse. If if you were to start to see charge offs, where you know we're positioned well for.
To add to it if necessary, but I think to your point I think we expect that.
To hold serve from here and just look at each quarter as as the information we get and then make a determination, but I think we're fairly comfortable and I think that that that means that.
If nothing changes from here on out I don't expect provisioning in 2021 to be heavy.
And then I would just say separately just keep in mind that the third quarter. We'll have you know the FIFA on day, two double count if we close for.
For first choice, which is 20 million Bucks.
Right got it Okay, and then just lastly on maybe for Jim.
Could you maybe talk a little bit about like retention efforts for the first choice management team and in some of those commercial lenders.
It was there.
Any other thing in place to kind of make sure that the team that you're acquiring stays in place. Once the deal is complete to kind of help give you more confidence or to support your confidence that this is gonna be a good fit for you guys culturally.
Yeah, David Thank you certainly in these transactions as key to keep the talent and so on.
Those efforts are ongoing and we're confident that.
The team worked here you will be there.
You know going forward and so there was some stickiness in place already from what we inherited but that will add to it relative to some of the key performers.
Okay excellent. Thanks for the color today guys appreciate it.
You bet. Thank you.
Thank you for we'll take our next question from Wayne, our Tambo with monarch partners.
Hi, Thank you.
I just wanted to I'm trying to understand the.
The purchase process was this an auction on what was.
What was what was behind that.
Well so was it an auction as well here's a thing when we go out we talk to companies a lot and so we are.
At times finding good good.
Partner and we are negotiating.
The opportunities and certainly there is a contemplation on what the market would provide in that effort.
So certainly.
Were careful as it relates to who we target and how we go about it.
But certainly we don't comment necessarily about how this came to be.
So explicitly because there's something we've been working on for a while on in terms of our overall expansion in that area. We looked at a lot of different companies and this one just felt right.
I only bring it up because of the price you're paying at least on a.
Based on the.
Per cent over the close yesterday it seemed like a big premium to me and if it's not on auction.
Why do you think such a big premium.
If it's a negotiation.
One on one.
Puzzled me.
Yeah, Yeah, we looked at.
This is key in what I would say as you know.
There's only so much you know what the information that happens in the market, obviously first choices not a highly liquid dark and it.
Is a strong earner and performer I think you know when you look at you know price to earnings and some of those.
Those metrics.
Yeah Theres only so far you can you can push some of those things. So I think overall when you look at the pricing metrics and really just the overall deal metrics for both shareholders. You know I think we feel good about you know what that is and you know on.
Our currency.
Strong and you know, sometimes dictates you know a little bit higher purchase price to protect for for some of that downside per seller. So we feel good about the process and understand the comment but you know I think we feel we feel like we're excited about debt just from an overall net.
<unk> perspective, and an overall performance perspective.
Just lastly was the seacoast steel comparable comparable premium for this deal.
Yeah.
Well they were in two very different market you know in terms of where bank valuations were in are our valuation is I think when you look at <unk>.
Both transactions today.
I think that they are you know we feel confident about them and they were you know I think you'd think about both were high single digit EPS accretion they were both.
Very favorable price to earnings multiple and you know, we think that from an overall shareholder.
Value on pro forma base, both for enterprise and selling shareholders. It benefit for all constituents. So again I think you did.
Different market a year ago than it is today you know clearly you know, both with where enterprise trades and the overall market. So it's hard to definitely compare them, but you know I think we feel good about our M&A process and I think we've been you know.
Been able to be appropriately.
Discipline and also make sure that we get the right value out of these franchises you know once we joined them together.
Mhm, Okay very good thank you.
For the questions.
Thank you we'll take our next question from Erik <unk> Investor.
Yes, hi, good morning.
I than.
Then on Investor and first choice for a long time and are you getting a great franchise and more importantly, really quality people, that's great, but along those lines.
Obviously, you have to retain people and I I wanted to talk to you a little bit about or maybe you can answer some questions about sort of the credit culture. How are you.
Are you I guess, maybe you could provide a little bit of color in terms of.
What are you going to try to integrate in terms of an enterprise overview on first choice and.
As opposed to sort of letting them continue to do what they do.
And how does that factor into what you've just done with sea coast.
The overlap or you're going to have to change things again on the credit side could you provide a little bit more color on that.
Sure.
So as we did our diligence obviously there's.
Process in a way that every company goes about the credit and we appreciate that and certainly will value. It because you think about the fact that they are able to.
Respond appropriately.
Appropriately in terms of time.
With their client base is something that we'll have to keep that as a special secret sauce relative to what they do.
But at the end of the day.
<unk> just you know.
Qual.
Quality character of the borrowers it requires a good capital on cash flow and that's exactly how they underwrite so we're very.
We're not going to squeeze the special secret sauce out of them, but what we can do is provide a little bit larger balance sheet to help them grow with for clients. What we can do is provide us a wider scope of products and services to deepen the relationships and Oh by the way. We also can accelerate the growth in that market with a different.
Level of client in terms of those that need a little bit more than what first choice could've had otherwise, but we're very cognizant of what made the company what it is and certainly know that if we go in and change it.
Fundamentally it.
It's not the right thing to do.
And Eric This is Keene, maybe I'll just take this opportunity to reflect on approach and so I think what we do during due diligence as we learn a lot of information and we think a lot about and reflect a lot about who we are and who the target company is but the details of how <unk> are really going to have.
Captain Tomorrow, and the next day and next week, when we start to really neat.
Throughout the organization and on a task and process basis, but to Jim's point, we have a strategy and I think we understand how first choice approaches the market and what is important to preserve their on also there probably are some lessons that we can learn throughout.
Enterprise that might help make us better we certainly know that that's the case I do want to give a little bit of perspective on on when you think about the FICO franchise number one you know the seacoast SBA shop is a well oiled machine you know we brought that you know sort of on and generally preserve it and plugged it in.
None of these decisions have been made yet, but I would anticipate that that a little bit of for surviving mechanism for producing or processing SBA loans and how we add people together there is to be determined but you know I would think with the relative size there that that's sort of the default and then separately.
San Diego operation that he got seacoast, where you know.
Small handful of of lenders that.
That we were seeing how it worked and so now we just have a bigger ecosystem. So there will be kind of a I'll say, a dual disruption or a dual integration there, but I think to Jim's point, it's only positive as it relates to what we can do.
And we're really providing a lot more.
Emphasis behind those lenders in the southern California market.
Yeah.
Okay. That's great just just one last thing with seacoast on a different like I T system, the first choice compared to yours.
Yeah, we are all three on different systems.
We just may be a little bit in the weeds. We did keep you know that the seacoast.
S P a sub system.
But on the core systems are different versions of the system first choice uses some of the same vendor subset that we do but it's a different platform.
To be determined on how exactly all the look and feel is on a on a combined basis, but you know we we believe our capabilities are appropriate for the client type Ben and complexity.
Okay, great. Thanks, Thanks for all that color that was really helpful. Appreciate it.
Thanks for your for Washington.
Once again, if he would like to ask a question. Please press star one we'll take our next question from Brian Martin with Janney.
Hey, good morning, guys.
Good morning, Brian.
Maybe just.
Just one thing on the or I guess, maybe for Scott just kind of a loan pipeline today. Megan if you talk about you know it sounds like the you know the.
P. P. P is kind of you know and the liquidity and factors, but kind of what what does the pipeline look like today, and just kind of how you're thinking about going forward kind of a core pipeline.
Hey, Brian It's Scott Yeah, Thanks for that question.
As I mentioned I think the bright spots are if you look at the underlying production. It's steadily up originations were higher in the fourth quarter than they were in the third and then up again in the first quarter.
I think the headwinds are just that the use of those commitments are down companies are using more cash.
In deals.
We're seeing you know as I said more pressure on the CNI portfolios.
And some of the Paydowns and payoffs were elevated with sale of assets.
We might see a commercial real estate deal that was a 80% loan to value that now.
50, or 60, because theyre just more cash going into these deals out there. So I think the short term headwinds, but I think underlying production and sales activity.
Inching up and I think the specialty businesses as I mentioned as Keene mentioned to you know SBA is well positioned right now life insurance premium and the tax credit business are just steady steady growers I don't see anything that's going to change that.
Sponsor finance activity actually was up in the first quarter. So you know.
You know I view it as the engine is working well, but the pavement fill a little slippery.
Gotcha, Okay. No. That's helpful. And then maybe just wanted to for Keane came on the the.
The timing of PPP I guess is your expectation most of that good.
Taken care of this year as you work through the forgiveness processors and I guess, maybe some tail and maybe it's a smaller tail going into 'twenty two.
I think.
That's an accurate assumption because even if it doesn't pay off or get forgiven. This year, the math behind that Brian would be that most of it most of the deferred fees are amortized through because a lot of that is like early 'twenty 'twenty origination. So the two year window would be would be up for.
For most of that round one stuff. So our debt that is an accurate assumption, whether it's forgiven or just amortized cash.
Got you, Okay, and then remind us keen that you've talked about the durbin impact.
Yeah, that's a that's about a three and a $3 million pre tax number.
So we have that modeled into the earn back is announced and I I did sensitize that there you know our view just with where our internal forecasts on a relative to where street forecasts are that theoretically the street.
You would have had us crossing can and should have had that all there, but you know we just decided to be more conservative in the announcement, but certainly we think the deal metrics reflect very favorably on all of those things and you know I think it's important to note and Jim hit on this but it's a high quality earner, that's joining the organization.
Which really helps boost us through $10 billion with the scale you know you'll be almost 13 billion on a pro forma basis with a lot of a lot of dry powder on run runway to grow the loan book.
Yeah, Okay, and then last one was just on on the margin Keene I guess you just your sense I mean, you talked about the excess liquidity the liquidity.
Stabilizes as though it sounds like it's beginning to.
Quiddity build how do we think about the the margin prospectively now.
Prior to that.
Excluding the other transaction yeah.
Yeah, I think you know.
I'll say this I think you know pre pri.
Pre first choice I think if liquidity stabilizes I think margin outlook is stable I mean, I think that when you look at the fundamentals of net interest margin on on our balance sheet. You know I think when you adjust for the liquidity and you adjust for other moving pieces of PPP I think margin performed reasonably well on it performed according to what we.
Specced at I think were you know.
We certainly would like to see more portfolio loan growth I think we're optimistic and but we're going to continue to be disciplined and run a race from a credit perspective, and then on a pro forma basis, I think probably pretty similar impact to.
Margin from first choice as it was the coast you know call it roughly 10% to 15 basis points of margin expansion.
On a pro forma basis the thing that's pretty clear you know the first choice model had a very nice.
Loan yield based on the way they get to in service client and are able to get share of wallet and then certainly the high quality.
The amount of DDA and the deposit base is a very strong you know margin capability and then there'll be a modest premium that you saw that's put on that loan book in purchase accounting that you know that when you step back, but you know 10 to 15 basis points as we sit here today, assuming rates don't move around too much as what we think the debt.
Combined impact will be.
Okay, and then starting point of the base of stability, you're talking about for today at least in the near term it's kind of history.
For 340 level is that yeah, yeah that 339, I mean, I think Thats you know really.
I hate how comparably I thought it was the year end, yeah, that's actually better.
But that $3 39, $3 40, you know as long as we don't get too much more liquidity I think that that's a fairly decent level moving forward now on it as soon as I say that I know I'm gonna be wrong by five basis points, but.
But I think that the underlying funds that fundamentals of loan pricing deposit pricing.
Should should help support that.
Okay, and then just last strategically as you guys are looking.
Looking at that you're.
Doing this transaction with first choice here kind of leaving the Midwestern going to California, and as he calls it was kind of a I guess a platform for national lending just kind of wondering how the.
How that kind of fit into it it seems like I guess it would your intention be that you'd have to get you know if you're a smaller player out in a pretty larger market now I guess continue to get bigger out there is that kind of the plan longer term.
Kale up from where you are here with what you are picking up with.
You know first choice.
So Brian I was just wondering Oh, you for that one we're not leaving the Midwest. Okay. So we're not leave in the Midwest, We're complementing and bringing the enterprise weighted in good markets with good companies and we have done it all organically in Phoenix, certainly, we we did it well in northern New Mexico Sea Coast, obviously uses.
Specialized side of things, but as we look at good companies first would be the priority and then obviously there is a trajectory to the south southwest just because as Scott has pointed out in his comments there's just.
For positive business growth in those markets and our model has been accepted very well.
That way so we're confident about our ability to perform there, but we're not leaving the Midwest. The mid west is still a very strong anchor to our business and will continue to be.
Yeah, I didn't I didn't mean, it that way just more interested in the idea of how the expansion opportunities. We'd look out there do you have to do you think that you really want to get meaningfully bigger at this point over time is that kind of a plan longer term.
Well I think globally within the company so whether it would be geographically in any one of the markets that we're in whether we're looking at specialized businesses and things of that nature, but certainly we feel confident in our ability to continue to scale. The overall franchise with growth.
Yeah, Okay perfect. Thanks for taking the questions guys.
Thank you Brian.
Thank you at this time, we have no further questions in queue.
Yeah.
Great Todd Thank you and I will just wrap up this way we want to thank you all for your time the great questions today and your interest in our company and we look forward to talking to all of you at the end of the second quarter, if not sooner so have a great day.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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