Enterprise Financial Services Corp (EFSC) 2021 Q1 法說會逐字稿

Good day, and welcome to the EFSC 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.

Todd, thank you, and good morning. I welcome everyone to our call, and I appreciate all of you taking time to listen in. Joining me this morning is Keene Turner, our company's Chief Financial Officer and Chief Operating Officer; Scott Goodman, President of Enterprise Bank and Trust; and Doug Bauche, Chief Credit Officer.

Yesterday, we issued a press release announcing the acquisition of First Choice Bancorp. On the call today, we 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 Forms 8-K yesterday. Please refer to Slide 2 of the presentation titled forward-looking statements and our most recent 10-K and 10-Q for reasons why actual results may vary from any forward-looking statements that we make this morning.

The first quarter of 2021 was a very solid quarter for our company. From an earnings perspective, we made $30 million or $0.96 per share. This compares favorably to both the linked quarter and the first quarter of 2020, where we earned $1.48 per share, respectively. From a return perspective, we earned 1.22% on average assets and 1.66% on PPNR ROAA. During the quarter, we successfully completed the core systems conversion for Seacoast, and we are well on our way to achieving the resulting operating leverage, as we sit here today.

Other highlights for the quarter included -- include the issuance of our inaugural environmental, social and governance report, and the continued execution of the PPP program for the benefit of our customers. This success continues to create some headwinds relative to organic growth in our commercial 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 Bancorp into EFSC, creating a $12.7 billion commercial bank. The opportunity to pursue this transaction developed quickly because of the strong cultural fit between the 2 organizations and alignment of 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 of Southern California business communities.

Peter Hui, its Chairman, and his management team have built a first-class organization and an incredible and diverse team that will flourish on the combined platform. We share similar core values and commitments to our stakeholders. Both companies have been recognized as best place to work in recent years. The combination of our 2 cultures will produce a strong company, where we will continue our focus on local decision-making, access to senior leaders and our high-touch service model.

We are pleased that Peter and First Choice were open to an opportunity to grow with a like-minded, successful company that shares its focus, values and commitment to clients, associates and communities. This is the perfect size company for us to acquire as we cross the $10 billion threshold. Keene 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 had another very strong catalyst for our continued earnings and balance sheet growth while our economy continues to steadily recover and is on the verge of what I believe and 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 7 grew by $64 million in the first quarter. This modest level of loan growth really reflects 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 2 of the PPP program with over $300 million of new originations and resulting in a net increase of $39 million of PPP outstandings at the quarter end. We continue to see businesses using PPP 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 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 8, 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 we see momentum in the production of new loan commitments in both markets.

In St. Louis, for example, we've seen increased originations in each of the last 2 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.

The San Diego data that you see on this slide represents the general commercial banking portfolio 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 #9. We have 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 remains 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% of the total loan portfolio.

A majority of the charge-off dollars for this quarter are concentrated in 2 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 7-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 Keene for his comments. Keene?

Thanks, Scott, and good morning. We completed the first quarter with net income of $30 million or $0.96 per share, which compares to $1 per share in the fourth quarter. Performance for the first quarter was 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 Seacoast, which helped to more than offset lower PPP 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 those 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 CECL "Day Two" 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 in -- 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 of 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 increase. Full 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 3.66% 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 related to the continued liquidity build. Beyond that, PPP trends decreased net interest margin 11 basis points, while a full quarter of Seacoast added approximately 8 basis points.

Stepping back, we guided to 3.40% to 3.45% net interest margin ex PPP, and our run rate is 3.39%, including the 13 basis point impact of liquidity build. So 3.39% with the extra unplanned liquidity or comparably adjusted 3.52% 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. Because the majority of those reserves have 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.

Despite overall improvements in the economic forecast, we continue to see elevated unemployment in 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 comments with a high level view. When I look at $0.96 per share of EPS, and adjusted for merger charges and tax credit income that wasn't realized of $2 million, the first quarter EPS would have been around $0.12 per share higher. My view, that is, all things considered, is a strong base on which we can build 2021. We continue to have momentum in certain areas of our business and we are optimistic if the disruption from the extensive stimulus measures turns positive, we can resume growth and momentum in all our markets and specialty lines.

Stepping back, we are seeing deposits continue 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 in 3 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, 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 of the merger and then turn it over to Jim to wrap up with some comments on organizational fit and mutual excitement our companies 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 the combination of 2 high-performing, growth-oriented companies.

Additionally, I'm pleased to demonstrate a high single-digit EPS accretion of approximately 8% that earns back 2.7% tangible book value dilution in under 3 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 in assets for several years, and this transaction sufficiently scales our balance sheet to offset the cost of crossing. It also provides additional operational resources from the associates of First Choice in 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 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, earn back drops to below 2.5 years with EPS accretion improving to nearly 9%.

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% 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% clarity on how the current economic events will ultimately affect the individual borrowers.

With that, we feel very good about the stand-alone 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 in 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 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.

Keene, 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.

When I first met Peter Hui, it was evident that our corporate philosophies were almost identical in how we take care of clients, promote our associates and support our communities. The alignment of our corporate philosophies and strategic goals was a big reason why -- that Peter and I were both excited 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 our -- to the EFSC Board when the transaction closes. We value not only his leadership and partnership to bring our companies together, but also his knowledge and desires to continue further expansion in Southern California.

We were looking for a premier commercial bank to scale our investments in Southern California. We believe that we found another high performer in First Choice. We are very excited to see how we can accelerate on First Choice's 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 with 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. This gives us ample size and scale to 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 into EFSC continues the transformation of our company that began in 2017. Over the last 5 years, we have significantly grown in an intentionally diversified manner. We have improved our funding profile, both in terms of cost and the ability to grow, and have built, bought and grown businesses and markets that set us up for success in the years to come.

With that, Todd, I'd like to open the line up for questions.

(Operator Instructions) We'll take our first question that comes from Jeff Rulis with D.A. Davidson.

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 Seacoast? And then, I guess, as we roll forward into, if you could comment on deal timing at a close in the third quarter, if you think -- is that early, mid or late? And then kind of a follow-on is the, I guess, to expect a conversion by the end of the year, kind of just a high level, walk us through the expense run rate.

Let me see if I can remember all those, Jeff. So just from the $50 million quarterly expense run rate, I mean I think that, that's a pretty good number. There may be some opportunity to improve on that sequentially from 1Q to 2Q. I think there's a little bit more cost savings for Seacoast that will come out of the run rate. We really had, call it, 2/3 of a quarter before the full effect of the systems conversion here in the first quarter. And then seasonal payroll taxes affected the first quarter. But it will be a little bit mitigated by normal merit. But I do think high 40s to low 50s here in the near term is achievable for us on the base run rate here in 2021.

And then separately, what I'll say is we always work efficiently to try to get transactions closed. I think our expectation would be closing mid- to late third quarter. And I would expect mid-fourth quarter conversion is what we're planning for. So I think, hopefully, that helps you 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 going to call is a clean first quarter of '22.

That's helpful. And I guess you talked about the capital flexibility and you did mention the buyback just as that being available, I guess, if 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 during or ahead of the close of this next transaction? Maybe just flesh out the capital usage priorities?

Sure, Jeff. So obviously, capital in this deal is fairly level. I mean we're just low 8% TCE, just quick and dirty. So it's not -- we don't have a bunch of excess that's burning a hole in our pocket. But with that said, as we start to get 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 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 S-4 gets filed, things like that, we're not going to be able to execute 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 repurchasing shares, especially if there's any continued weakness.

And then you asked about more M&A. I think these 2 deals were close in succession. We want to make sure that we digest them appropriately and that we do them in a high-quality way. Seacoast was executed extremely well. And so I have no concerns about this 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 expect something to be as quick in terms of timing as these 2 were together necessarily.

We'll take our next question from Andrew Liesch with Piper Sandler.

Just a question. Jim, it sounds like you guys have been looking, that's in your comments, to expand in Southern California. Were there other potential banks that you looked at considering to acquire there?

Well, Andrew, my job, we're always talking to companies about opportunities. But when -- when I met Peter, I think it was clear that this was the target we really wanted to go after. And so we focused on it when he and I met. So -- but certainly, whether it's Southern California or other geographies, there's always several on the prospect list.

Got it. Is there any -- like -- just thinking about your last couple of deals, the Mexico deal added a great deposit base, the Seacoast deal added a unique lending niche and a nationwide deposit franchise. Is there anything -- is there any sort of specialty niche that this transaction adds? Or is there something else that makes it especially attractive to you guys?

So characteristically, they're a pure-play commercial bank. But they have a very nice entrepreneurial streak to it. And the fact that they too are in the specialized deposit business, certainly not as robustly as Seacoast, but they do have a nice client base there. They're a 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 -- but much -- when you get to know it, it is very much more like a pure-play commercial bank that focuses on doing well in the communities that they serve.

Got it. Okay. And then just one last question. Just on the deposit inflows and the liquidity. Obviously, some pressure here in the first quarter. What have you seen so far this quarter? Is that trend continuing? Or are there opportunities to invest that into higher yielding assets? Or what trend you're seeing so far on the liquidity front?

Andrew, thanks for that question. So if you'd asked me the question 2 weeks ago, I would have told you we continue to see it build a little bit post-tax season. We've seen some moderation 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, Scott indicated there are some headwinds there, but there are some bright spots in certain pieces of the business. And I do think that SBA 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 robust 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 could do from 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, and the longer the liquidity sits here on the balance sheet and the bigger it gets, we'll continue to work some of that cash into the market.

We'll take our next question from Damon DelMonte with KBW.

So my first question, just wondering, Keene, with regards to the tax credit outlook, last year, you guys put up a little bit over $6 million in fees for that line item. Starting off in the hole here in the first quarter, 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 business was going to be still a double-digit grower from the 2020 level. So we do think that it will 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 and third quarter were like $0.5 million to $1 million of tax credit activity. So we do think the second quarter will be a little bit more full, called out a couple of million dollars. And then it will -- the fourth quarter, we expect to close strong, as we always do.

The only caveat will be notwithstanding, there are some credits that are 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 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.

Very complete. Great color. And then with regards to the outlook for provision expense, I think you had said you were going to kind of keep the reserve at this elevated level until there's just kind of greater clarity, broadly speaking, on the economies. I guess, a, is that accurate? And, b, how do we think about the provision expense in the upcoming quarters?

Yes, I think -- our posture is that we're well positioned either if things get a lot better. We don't think it's that overreserved. Certainly, the reserve will come down. But when you look at where we were for -- initial Day One CECL adoption is around 130 basis points, and where we are today, there's some room to kind of grow into that.

And then separately, if things were to get worse, if you were to start to see charge-offs, we're positioned well to add to it, if necessary. But I think -- to your point, I think we expect to hold serve from here and just look at each quarter as the information we get and then make a determination. But I think we're fairly comfortable. And I think 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 CECL Day Two double count if we close for First Choice, which is $20.

Right. Got it. Okay. And then just lastly, maybe for Jim. Could you maybe talk a little bit about like retention efforts for the First Choice management team and some of those commercial lenders? Is there anything 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 going to be a good fit for you guys culturally?

Yes, Damon, thank you. Certainly, in these transactions, it is key to keep the talent. And so those efforts are ongoing, and we're confident that the team who were here will be there 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.

We'll take our next question from Wayne Archambo with Monarch Partners.

I just wanted to try to understand the purchase process, was this an auction? What was behind that?

Well, so was it an auction? Well, here's a thing. When we go out, we talk to companies a lot. And so we at times find a good partner and we negotiate the opportunities. And certainly, there's contemplation of what the market would provide in that effort. So certainly, we're 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 explicitly. This is something we've been working on for a while 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 the price you're paying, at least on a -- based on the percent over the close yesterday, it seemed like a big premium to me. And if it's not an auction, then why are you paying such a big premium, if it's a negotiation of one-on-one? This is what puzzled me.

Yes. We -- this is Keene. What I would say is there's only so much what the information that happens in the market. Obviously, First Choice is not a highly liquid stock, and it is a strong earner and performer. I think when you look at price to earnings and some of those metrics, there's only so far 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 to both shareholders, I think we feel good about what that is. And our currency is strong and sometimes dictates a little bit higher purchase price to protect for some of that downside for sellers. So we feel good about the process and understand the comment, but I think we feel -- we're excited about this, just from an overall metrics perspective and an overall performance perspective.

Lastly, was the Seacoast deal comparable premium to this deal?

Well, they were in 2 very different markets in terms of where bank valuations were and our valuation is. I think when you look at both transactions today, I think that they are -- we feel confident about them, and they were -- I think you think about both were high single-digit EPS accretion. They were both very favorable price to earnings multiples. And we think that from an overall shareholder on a value and pro forma base, both for enterprise and selling shareholders, it benefits all constituents.

So again, I think different market a year ago than it is today. Clearly, both with where enterprise trades and the overall market. So it's hard to definitely compare them, but I think we feel good about our M&A process, and I think we've been able to be appropriately disciplined and also make sure that we get the right value out of these franchises once we join them together.

We'll take our next question from [Eric Grubelich], investor.

I've been an investor in First Choice for a long time, and you're getting a great franchise. And more importantly, really quality people. That's -- it's great. But along those lines, obviously, you have to retain people. And 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 -- what 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 Seacoast in terms of overlap? Are you 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 a process in a way that every company goes about the credit. And we appreciate that, and certainly, we'll value it because if you think about the fact that they are able to respond appropriately in terms of time with their client base is something that we'll have to keep. That's a special secret sauce relative to what they do. But at the end of the day, it requires quality character of the borrowers. It requires good capital and cash flow, and that's exactly how they underwrite.

So we're very confident that 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 through clients. What we can do is provide a wider scope of products and services to deepen the relationships. And 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 have 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 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 is 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 going to happen tomorrow and the next day and next week, when we start to really meet throughout the organizations 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 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 when you think about the Seacoast franchise. Number one, the Seacoast SBA shop is a well-oiled machine. We brought that sort of on and generally preserved it and plugged it in. I -- none of these decisions have been made yet, but I would anticipate that, that a little bit is their surviving mechanism for producing or processing SBA loans and how we add people together there is to be determined. But I would think with the relative size there, that's sort of the default.

And then separately, the San Diego operations at Seacoast were a small handful of lenders that we were seeing how it worked. And so now we just have a bigger ecosystem. So there will be kind of, 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.

Okay. That's great. Just 1 last thing. Was Seacoast on a different like IT system than First Choice compared to yours?

Yes. We are all 3 on different systems. We -- just maybe a little bit in the weeds, we did keep the Seacoast SBA subsystem but all the core systems are different versions of systems. First Choice uses some of the same vendor subset that we do, but it's a different platform. So to be determined on how exactly all the look and feel is on a combined basis, but we believe our capabilities are appropriate for the client type and complexity.

(Operator Instructions) We will take our next question from Brian Martin with Janney.

Just maybe, Keene, just one thing on the -- or I guess, maybe for Scott, just kind of the loan pipeline today, and I guess, if you talk about -- it sounds like the PPP is kind of -- and the liquidity have been factors. But kind of what does the pipeline look like today? And just kind of how you're thinking about going forward, kind of the core pipeline?

Brian, it's Scott. Yes, thanks for that question. Yes, 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 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, as I said, more pressure on the C&I portfolios, and some of the paydowns and payoffs are elevated with sale of assets. And we might see a commercial real estate deal that was 80% loan-to-value that now is 50% or 60% because there's just more cash going into these deals out there.

So I think the short-term headwinds, but I think underlying production and sales activity is inching up. And I think the specialty businesses, as I mentioned, as Keene mentioned, too, 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 I think -- I view it as the engine is working well, but the pavement is still a little slippery.

Got you. Okay. No, that's helpful. And then maybe just one or two for Keene. Keene, the timing of PPP, I guess, is your expectation most of that gets kind of taken care of this year as you work through the forgiveness process? Or 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 get forgiven this year, the math behind that, Brian, would be that most of the deferred fees are amortized through because a lot of that is like early 2020 origination. So the 2-year window would be up for most of that round 1 stuff. So our -- that is an accurate assumption, whether it's forgiven or just amortized.

Got you. Okay. And then remind us, Keene, that you talked about the Durbin impact.

Yes. That's about a $3 million pretax number. So we have that modeled into the earn back as announced, and I did sensitize that there. Our view just with where our internal forecasts are relative to where Street forecasts are is that theoretically, The Street should have had us crossing $10 billion and should have had that all there, but we just decided to be more conservative in the announcement.

But certainly, we think that the deal metrics reflect very favorably on all of those things. And 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'll be almost $13 billion on a pro forma basis with a lot of dry powder and runway to grow the loan book.

Yes. Okay. And then last one is just on the margin, Keene, I guess, just your sense, I mean you talked about the excess liquidity. If the liquidity stabilizes, as though it sounds like it's beginning to, [at least just] the liquidity build. How do we think about the margin prospectively now prior to the -- or excluding the transaction?

Yes. I think -- I'll say this, I think pre First Choice, I think if liquidity stabilizes, I think margin outlook is stable. I mean I think when you look at the fundamentals of net interest margin on our balance sheet, I think when you adjust for the liquidity and you adjust for the moving pieces of PPP, I think margin performed reasonably well and it performed according to what we expected. I think we're -- 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 our rates 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 Seacoast, call it roughly 10 to 15 basis points of margin expansion on a pro forma basis. I think it's pretty clear, the First Choice model had a very nice loan yield based on the way they get to and service clients and are able to get share of wallet. And then certainly, the high quality, the amount of DDA in the deposit base is a very strong margin capability. And then there'll be a modest premium that you saw that's put on that loan book in purchase accounting that meets that 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 combined impact will be.

Okay. And the starting point of the basis stability you're talking about for today, at least in the near term, is kind of the 3 -- the 340 level, is that what you consider?

Yes. I would -- that 339, I mean I think that's really -- I hit how comparably I thought it was to year-end. That's 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 going to be wrong by 5 basis points, but I think the underlying fundamentals of loan pricing, deposit pricing should help support that.

Okay. And then just last, strategically, as you guys are, I guess, looking at doing this transaction with First Choice, and you're kind of leaving the Midwest and going to California. I mean Seacoast is kind of, I guess, a platform for national lending. Just kind of wondering how that kind of fit into it? It seems like, I guess, would your intention be that you'd have to get -- 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? Scale up from where you are here with what you're picking up with First Choice?

So Brian, I just want to -- I'll answer that one. We're not leaving the Midwest, okay? So we're not leaving the Midwest. We're complementing and bringing the Enterprise way to good markets with good companies, and we have done it organically in Phoenix. Certainly, we did it well in Northern New Mexico. Seacoast is, obviously, the 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 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 a very strong anchor to our business and will continue to be.

Yes, I didn't mean it that way. Just was more interested in the idea of how the expansion opportunities would look out there? Do you have to -- do you think you really want to get meaningfully bigger at this point over time? Is that kind of the plan longer term?

Well, I think globally within the company, so whether it 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.

At this time, we have no further questions in queue.

Great, Todd. Thank you. And we'll just wrap up this way. We want to thank you all for your time and 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.