Q1 2021 Enterprise Financial Services Corp Earnings and Acquisition of First Choice Bancorp Call
Yes.
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.
Thank you and good morning.
I welcome everyone's where 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.
Got Goodman, President of Enterprise Bank and trust and know about the Chief Credit Officer.
Yesterday, we issued a press release announcing the acquisition of first choice Bank Corp.
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 SEC form 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 'twenty 'twenty four 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 O.
During the quarter, we successfully completed the core systems conversion for seacoast.
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.
Marshall markets, Scott will touch on some of this in his comments.
In addition to all of this last evening, we announced the merger of first choice Bank Corp into E. S. S C, creating a $12 70 billion dollar commercial bank.
The opportunity to pursue this transaction developed quickly because of the strong cultural fit between the two organizations and aligning the business goals.
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 Gnc's Peter.
Peter Hawaii its share.
Chairman and his management team have built a first class organization and its incredible on 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. We are open to an opportunity to grow with a likeminded successful company that shifted its focus values and commitment to clients associates and communities. This is the perfect size company terrestrial acquirer as you cross 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.
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 from 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 businesses 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.
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 classified 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 a hotel loan in 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 sea coast 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 were 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 some modest timing delays in the first quarter as well as some downward valuation on credits that we carry at fair value, 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 quarter sequential impact of seacoast is approximately $5 $5 million, which is offsetting the $1.8 million decrease in P. P. P. 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 six per cent in the fourth quarter and held up to our expectations adjusting for additional first quarter liquidity build net interest margin would have been $3 six 3% 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 3.40% to 345% net interest margin ex P. P. P and our run rate is 3.39%, including the 13 basis point impacted liquidity belt, so 3.39% with the extra unplanned liquidity or comparably adjusted 352 per cent 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 loan and nonperforming levels.
We did resolve some credits 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.
But 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 per share of EPS.
And 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 line.
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 Tim.
Getting 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 had 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.
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 to 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 <unk> transaction sufficiently scales, our balance sheet to offset the cost of crossing.
It also provides additional operational resources from the associates of 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 estimates 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 back drops 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 at first choice, but also a pragmatic line that no. One has 100 per cent clarity on how the current economic events will ultimately affect into visual 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 a 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 comments regarding what we were looking for and why first choice was the perfect partner.
I first met Pieter Hawaii, It was evident that our corporate philosophies were almost identical on how we take care of clients from them.
All of our associates and support our communities.
Alignment of our corporate philosophies its strategic goals was a big reason why.
We're both excited with 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 when the transaction closes.
Not always leadership and partnership.
There are companies together, but also his knowledge and desire is 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 another high performer and first choice. We're very excited to see how we can accelerate on first choice is 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 <unk>.
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 in business loans and deposits in southern California.
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've improved our funding profile, both in terms of cost and the ability to grow.
Built bok 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 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 our equipment.
Again press Star one to ask a question.
Pause for just a moment to allow everyone an opportunity to signal for questions.
We will take our first question.
It comes from Jeff Fruitless 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 cost you.
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 guess as we roll forward into if you could comment on deal timing of the close in the third quarter. If you think.
What was that early mid or late and then and then kind of a follow on is the.
I guess the expected conversion by the end of the year, if you could kind of interest.
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 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 a cost savings for seacoast that'll come out of the run rate you know, we really had no.
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 a.
A 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.
Is is what we're we're planning for so I think hopefully that helps you from from a timing perspective, but.
Should largely be able to have if that timing works out should largely be able to have what I'm gonna call is a clean first quarter of 22.
Oh that's helpful. Thanks.
And I guess, you talked about the the capital flexibility and.
You did mention that the buyback.
Just as that being available I guess as you take us through the deal and what you mean by that flexibility is it.
Are further deals still being discussed.
Can you use the buyback enduring or ahead of the close of of this next transaction, maybe just flush out the capital usage priorities ex.
Sure Jeff So obviously capital on this deal is is fairly level. I mean, we're just you know low eight per cent 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 on our pocket, but with that said as we start to to get the the full impact of sea coast and now we've got another high single digit accretive EPS deal. That's just gonna help us further drive performance and so you know the dividend posture has been.
Fairly conservative and I think that speaks to opportunity to to to manage buybacks in and share count and so what I will say is that for a period of time are likely until F. Forget file things like that we're not gonna be able to execute on on buybacks, but I would anticipate.
State that wants to 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 any continued weakness.
And then 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 appropriately and that we do them in a high quality way.
Sea Coast was executed extremely well and so I have no concerns about the following on closely but I also want to make sure that 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.
As as these two were together necessarily.
Next step.
Step back thanks.
Thanks, Jeff.
Thank you we will take our next question from Andrew lunch with Piper Sandler.
Hey, good morning, everyone.
Yeah, just a question Tim It sounds like you guys have been looking and that's in their comments.
To expand on southern California, where there are other potential banks that you looked at considering to acquire there.
Well actually you know.
On my job, we're always talking to companies about opportunities, but when.
Peter I think it was clear that this was a target we really wanted to go after and so we've focused on his.
When he and I'm ex so, but certainly whether it's southern California other geographies, there's always several on the prospect list.
Got it.
Is that right like total just thinking about your your last couple deals the new Mexico deal added a great deposit base. The the CECO steel added a unique lending niche on a nationwide deposit franchise is there anything is there any sort of specialty niche that this transaction ads on.
Or is there something else that that makes it especially attracted to guys.
So.
Characteristically, they're a pure play a commercial bank, but they have a very nice on narrow strict to it and from the fact that they cure in the specialized deposit business certain not as robustly as the sea coast, but they do have a nice client base. There there are very strong SBA lender, but more geographically focused in California.
And they do a really good job on the local developer CRE market, there too so uhm, but much.
When you get the notice it very much more like a pure play commercial bank that focuses on doing well on the Jews that they serve.
Got it Okay and then just one last question just on on the deposit inflows and the liquidity obviously some pressure here in the first quarter, what what have you seen so far this quarter that trend continuing are there opportunities to to invest that into higher yielding assets or you know what.
Were trying anything so far on the liquidity from.
Andrew Thanks, Thanks for that question so.
If you'd asked me the question two weeks ago I would've told you we continue to see it build.
A little bit post tax season, we've seen some moderation ah of of the inflow. So probably 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 Scott indicated there there are some headwinds there, but there are some bright spots in certain pieces of the business and I do think that SB.
S B, a and some of the other businesses were.
First quarter was actually a little bit slow 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.
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 what that can do from a <unk>.
Impact on TCE, an 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 and the longer the liquidity sits here on the balance sheet and the bigger it gets will continue to work some of that cash into the market.
Got it that that's really helpful Yep long winded, but but certainly detailed I appreciate that I will cut back. Thank you.
Thanks, Andrew.
Thank you we will take our next question from Diamond them on time with K B W.
And get a day morning, gossip everybody's doing well today. So my first question. Just wondering can you know with regards to the tax credit outlook. You know last day, you guys put up a little bit over $6 million in fees for that line item starting off in the whole here on the first quarter, how how do you kind of look at the full year.
Outlook for 2021.
Damon Thanks for the question I think we 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.
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 anticipated. So we might have thought the second quarter in third quarter, where like half a million to a million dollars a tax credit activity. So we do think the second quarter will be.
A little bit more full called.
Called out a couple a couple million dollars and then it'll the fourth quarter, we expect to.
Closed strong as it as we always do.
The only caveat will be notwithstanding there are some some credit to put our fair valued and we use a little bit longer term LIBOR. So that was part of the headwind, but it really was timing on project Conant closings, where.
We encouraged 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 Ya.
A very complete great color. Thank you and then with regards to the outlook for for provision expense. I think you said you were going to kind of keep the reserve access elevated level until there's just kind of greater clarity you know broadly speaking on the economies I guess a is that is that accurate and be how do we think about the provision expense in 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.
But you know when when you look at where we were for.
Initial day, one diesel adoption around 130 basis points and where we are today, there's there's some room to kind of grow into that and then separately.
If things work to get worse, if if you were to start to see charge offs, where we're positioned welter to add to it if necessary, but I think to your point I think we expect to 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 will have.
The feast all day to double count if we close.
Four first choice, which is 20 million Bucks.
Alright got it Okay and then just lastly, maybe for Jim could.
Could you maybe talk a little bit about like retention efforts for the the first choice management team and some of those commercial lenders. You know is there any anything in place that 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 from you guys.
Culturally.
Yeah Damn and thank you certainly in these transactions just keep the talon and so those efforts are ongoing and confidence debt. The team word here he will be there.
No going forward and so there was some stickiness in place already from what we inherited but good will add to it relative to some of the key performers.
Okay excellent. Thanks for the color today I appreciate it.
You bet. Thank you.
Thank you, we'll take our next question from a plane or timber with monarch partners.
Hi, Thank you.
I'm trying to understand the the purchase process was this an auction.
Oh, what was what was what was behind that.
Well so was it an auction as well here's the thing when we go out we talked to companies a lot and so we at times finding good good partner and we are negotiating.
Negotiate the opportunities and certainly there's contemplation of what the market would provide in that effort.
So certainly.
We're careful because 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.
Explicitly cause there's something we've been working on for awhile on <unk>.
Of our overall expansion on 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 are paying at least on a you know based on the.
Per cent over the clothes yesterday, so on like a big premium to me and if it's not an option then.
Why you think such a big premium.
If it's a negotiation of.
One on one.
Puzzled me.
Yeah, Yeah, we looked at.
This is keane what I would say is you know it's.
There's only so much you know what the information that happens in the market. Obviously first choice is not a highly liquid stock and it is.
Is a strong earner and performer I think you know when you look at price to earnings and some of those.
Those metrics.
Yeah, there's only so far you can you can put some of those things. So I think overall when you look at the pricing matrix and really just the overall deal metrics to both shareholders I think we feel good about what that is and.
Our our currency.
Strong and sometimes dictates you know a little bit higher purchase price to to protect for for some of that downside per cellar. So we feel good about the process and understand the comment but you know I think we feel we feel we're excited about this just from an overall.
Metrics perspective, and an overall performance perspective.
Mmm, just lastly was the seacoast steel comparable comparable premium to this deal.
Well they were in two very different market you know in terms of where bank valuations were in our our valuation is I think when you look at.
<unk> transactions today.
I think that they are 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 favorably price to earnings multiples and we think that from an overall shareholder value.
On pro forma base, both for enterprise and selling shareholders. It benefits all constituent so again I think <unk>.
Market a year ago than it is today, clearly, both with where enterprise trades and the overall market. So it's hard hard to definitely compare them, but I think we feel good about our M&A process and I think we've been.
Been able to be appropriately this'll.
Discipline and also make sure that we get the right value out of these franchises once we joined them together.
Mhm, Okay very good thank you.
The questions.
Thank you well, we'll take our next question from Eric Group Lick Investor.
Yeah, Hi, good morning I.
Then on an investor in first choice for a long time, and you're 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 ask you some questions about sort of the credit culture how are you.
What are you I guess, maybe you could provide a little bit of color in terms of.
What are you trying 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 you know in terms of 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 evaluate because you think about the fact that they're able to respond.
Respond.
Appropriately in terms of time.
With their client base is something that will have to keep that's a special secret sauce relative to what they do.
But at the end of the day.
Requires you know.
Polity character the borrowers it requires a good capital on cash flow and that's exactly how they underway. So we're very confident that we're not going to squeeze a special secret sauce out of them, but what we can do is provide a little bit larger balance sheet to help them grow with our clients. What we can do is provide a wider scope of <unk>.
And the services that deepened the relationships and Oh by the way. We also can accelerate the growth isn't that Margaret with a different level a 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 tremendously it's not the right thing to do.
And and Eric This is Keane, 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 are really.
Gonna happen Tomorrow, and the next day and next week, when we start to really neat.
<unk>, the organizations and and on a task and process basis, but to gyms point, we have a strategy and I think we understand how first choice approaches the market and what is important to preserve there and 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 seacoast franchise number one you know the.
Sea Coast SBA shop is a well oiled machine you know we brought that.
Sort of on and generally preserve it and plugged it in I. None of these decisions have been made yet, but I would anticipate that that a little bit of a 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 seat at Sea Coast, where Ah.
A small handful of of lenders that.
That we were seeing how it worked and so now we just have a bigger ego system. So there will be kind of a I'll say, a dual disruption or a dual integration there, but I think to gyms 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 Californian market.
Okay that that's great. Just just one last thing was sea coast on a different like I T system, the first choice compared to yours.
Yeah, we are all three on different systems.
We just maybe a little bit in the weeds. We did keep you know the the sea coast.
B a sub system.
But on the court systems are different versions of system first choice uses some of the same vendor subset that we do but it's a different platform. So you know to be determined on how exactly all the look and feel is on a on a combined basis, but.
We believe our capabilities are appropriate for the client type and and complexity.
Okay, great. Thanks, Thanks for all that color. It was really helpful. Appreciate it thanks.
Thanks for your question.
Once again, if you would like to ask a question. Please press star one we'll take our next question from Brian Martin with Jamie.
Hey, good morning, guys.
Gordon Brown.
Maybe.
This one thing on the or I guess, maybe for Scott just kind of alone pipeline today, maybe if you talk about it sounds like the.
P. P. P is kind of in the liquidity have been factors, but kind of what does the pipeline look like today and just kind of how are you thinking about going forward kind of the core pipeline.
Hey, Brian Scott Yeah, Thanks for that question.
Yeah, as I mentioned I think the bright spots or if you look at the underlying production. It's steadily up originations were higher than the fourth quarter. Then they were the third and then up again in in the first quarter.
I think the headwinds or just that the use of those commitments are down companies are using more cash.
And deals.
We're seeing you know as I said more pressure on the TNI portfolios.
And some of the Paydowns on payoffs are elevated with sale of assets and.
You know we might see a commercial real estate deal that was 80 per cent loan to value that now is.
50, or 60, because they're just more cash flow enter these deals out there.
So I think the.
Short term headwinds, but I think underlying production and sales activity is is uhm inching up and I think the specialty businesses as I mentioned as Keene mentioned to you know S. B a 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 gonna change that sponsor finance activity actually was up in the first quarter. So.
No I think you know I view it as the engine is working well, but the pavement still a little slippery.
Gotcha, Okay. No. That's helpful. And then maybe just wanted to for keen keen on the the the.
The timing of P. P. P. I guess, he's your expectation most of that.
I have taken care of this year as you work through the forgiveness processors, I guess, maybe some tail and maybe just a smaller tail going into 22.
I think.
That's an accurate assumption because even if it doesn't pay off or.
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 2020 origination. So the two year window would be would be up for most of that round. One stuff. So are that that is an accurate assumption whether.
It's forgiven or just amortized.
Gotcha, Okay, and then the reminders keen that you talked about the Durbin impact.
Yeah, that's that's about a three or a $3 million pretax number.
So we have that modeled into the earned back is announced and I did sensitized that there you know our view just with where our internal forecasts are relative to where street forecasts are that theoretically the street should have had us crossing can and should have had that all there, but we just to.
<unk> it to be more conservative in the announcement, but certainly we think that the deal metrics reflect very favorably on all of those things and you know I think it's important to note on 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 this.
Scale, you'll be almost 13 billion on a pro forma basis with a lot of a lot of dry powder on run run way to grow the loan book.
Yeah, Okay and then the last one was just on on the margin King I guess, she just your sentence. You mean, you talked about the excess liquidity if the liquidity.
Cable is so it sounds like it's beginning to to.
Liquidity build how do we think about the the margin prospectively now.
Fire to that.
Excluding the transaction.
Yeah I think.
I'll say this I think you know pre pre.
Pre first choice.
I think if liquidity Stabilises 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.
I think when you adjust for the liquidity and you're just sort of moving pieces of Pvp I think margin performed reasonably well on it performed according to what we expected I think we're we certainly would like to see more portfolio alone growth I think we're optimistic and but we're going to continue to be disciplined and run a race from.
Credit perspective, and then on a pro forma basis, I think probably pretty similar impact.
Margin from first choice as it was sea coast call. It roughly 10 to 15 basis points of margin expansion on a pro forma basis to think it's pretty clear. The first choice model had a very nice.
Lone yield based on the way they get to an service client and are able to get share of wallet and then certainly the high quality.
The amount of D D a and the deposit base is a very strong no margin capability and then there'll be a modest premium that that you saw that's put on that loan book in purchase accounting that you know that needs to step back, but 10 to 15 basis points as we sit here today, assuming rates don't move around too much is what we think the the.
Combined impact will be.
Okay, and they starting point on that basis stability, you're talking about for today at least in the near term is kind of history.
340 level is at.
Yeah cause that 339, I mean, I think that's really.
I hate how comparably I thought it was the year and the other is actually better.
But that 339 340.
As long as we don't get too much more liquidity I think that that's a fairly decent level moving forward now 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 fundamentals of lone pricing deposit pricing.
Should should help support that.
Okay, and then just last strategically if you guys are good looking.
Looking at that you.
Doing this transaction with first choice you kind of leaving the Midwest and going to California, I mean sea coast was kind of a I guess a platform for national lending just kind of wondering how that how that kind of fit into it. It seems like I guess it was 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 a plan longer term scale up from where you are here with what you're picking up with first choice.
Surprise I, just Wanna, Oh, I used to that one we're not leaving the Midwest. Okay. So we're not leave it in the Midwest, where complimenting and bring in the enterprise way to good markets with good companies and we have done it organically in Phoenix, certainly, we we did it well in northern New Mexico Sea Coast, obviously the <unk>.
July 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 it's Scott has pointed out this comments, there's just more.
More 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 Midwest is still very strong anchor to our business and will continue to be.
Yeah, I didn't I didn't mean, it that way I just was more interested in the idea of how how the expansion on opportunities would look out there do you have to you know do you think you really Wanna 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 be Ah geographically in any one of the markets that were in whether we're looking at specialized businesses and things of that nature, but certainly we feel confident.
On our ability to continue to scale the overall franchise with growth.
Okay perfect. Thanks for taking the questions guys.
Oh, Thank you Brian.
Thank you at this time, we have no further questions on queue.
Yeah.
Great. Thank you and we'll 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 on 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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