Enterprise Financial Services Corp (EFSC) 2020 Q4 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, President and CEO. Please go ahead.

Well, thank you, Shelby, and good morning, and welcome to our fourth quarter earnings call. 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 & Trust; and Doug Bauche, Chief Credit Officer.

Before we begin, I would like to remind everyone on the call that a copy of the release and accompanying presentation can be found on our website. The presentation and earnings release were furnished on SEC Form 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.

We are very excited to present the results of a very fulfilling year for our company. Slide 3 provides the financial highlights for the quarter. As we reflect on the year and what we face with respect to the COVID-19 pandemic, we were certainly forced to alter our plan, but our company never lost its focus. We achieved several critical milestones that positively impacted our company.

Just in the fourth quarter, we closed on the acquisition of Seacoast, adding to our arsenal, a preeminent SBA lender and specialty deposit generator to further diversify our funding base and enhance our earnings profile. We supported our customers in navigating the PPP forgiveness process, and we continue to effectively operate and communicate with our associates in a virtual environment.

For the quarter, EFSC earned $28.9 million, which was an increase of $11 million compared to our 2020 third quarter and in line with what we reported for the fourth quarter of 2019. On a fully diluted basis, we earned $1 per share for the fourth quarter compared to $0.68 and $1.09 for the linked and prior year quarters, respectively.

Pre-provision net revenue of $47.5 million for the quarter represented a return of 2.07% on average assets. That same metric was also nearly 2% for all of 2020, an accomplishment of which we are very proud. Keene will provide much more granular details of our financial performance for both the fourth quarter and all of 2020.

The composition and diversification of our loans and deposits exhibit the ongoing transformation of our balance sheet that started with the acquisition of JCB in early 2017, continued with the combination with Trinity in 2019, and most recently, the addition of Seacoast during the fourth quarter of 2020. These strategic additions, combined with the continued growth within our markets and our specialty businesses, represents a business model that produces higher quality earnings, while at the same time, reducing the risk related to concentration of a particular market or asset class.

Amidst growing and expanding the earnings profile, we have strategically built a more durable, diverse deposit base that we expect will support our ability to continue these positive trends in the years to come. We believe that with total deposits at nearly -- at December 31 of $8 billion, of which 34% is noninterest-bearing, the resulting 90% loan-to-deposit ratio affords us ample runway to continue to expand and grow the balance sheet, earnings per share and profitability for the foreseeable future. Scott's comments will provide much more color on how we performed in our businesses and where we see great opportunities in 2021.

Asset quality has held up nicely. Compared to the end of the third quarter, we saw improvement to the ratios of both nonperforming assets to total assets and nonperforming loans to total loans. Our allowance coverage ratio remained strong at 2.31% of unguaranteed loans. Doug will spend a little more time on this in his comments, but I just want to say that we are encouraged by what we are seeing, but believe that we want to see how the latest round of fiscal stimulus impacts asset classes related to travel and hospitality before we declare that we are totally through the impact of the pandemic.

Capital management was a key focus for us in 2020. Our sub debt raised earlier in the year, combined with our strong earnings, allowed us to continue paying our $0.18 per share quarterly dividend, while growing TCE and tangible book value per share throughout the year. Our capital posture, combined with our earnings profile, provided the confidence for us to be able to add Seacoast during 2020.

Now when speaking of Seacoast, the integration is going extremely well. And as I stated before, it is an even better company than we initially thought when we engaged them earlier in 2020.

The calendar has turned, and our teams are aggressively working their plans to accomplish our 2021 goals. I am optimistic about the prospects for the year. As the success of the vaccine rollout and additional fiscal stimulus should provide for economic stability and growth towards the second half of the year.

Turning to Slide 4, you can see that our focus will be integrating Seacoast into enterprise; executing our asset growth objectives, both in terms of amounts and quality; executing well on the current round of PPP, not only to expand the relationships of our client base, but to use this to acquire new clients and to seek ways to permanently change how we operate to deliver superior client experience, while improving our overall efficiency.

I would now like to turn the call over to Scott, who will provide much more color on our markets and specialty businesses. Scott?

Thank you, Jim. Good morning, everybody. Loans at year-end are highlighted on Slide #5, and totaled $7.2 billion, representing a 36% increase from the prior year. Growth of $1.1 billion in the quarter is most heavily impacted by the addition of the Seacoast book, combined with a reduction of $206 million in PPP balances and organic growth of $81 million.

Focusing my comments on the legacy core business, net growth in the quarter underscores a healthy base of diverse business units that continue a solid level of gross production, held back mainly by the ongoing external headwinds. We carried forward the momentum in production that I described last quarter, with total originations more than double Q3 and 50% above the same quarter a year ago. The impact of this production continues to be muted by excess liquidity being used to further reduce working capital lines and short-term borrowings as well as reductions in commercial real estate related to the sale of properties and refinancings into the permanent market.

Slide 6 breaks out the loan book by business line, showing the changes in the quarter and highlighting the impact of Seacoast which now adds further diversity to the mix. Aside from the Seacoast impact and despite the headwinds, we were able to achieve net growth in most categories, with stronger performance in the investor CRE; sponsor finance, formerly known as EVL; life insurance premium finance; and tax credit business lines.

Within our business units that are highlighted on Slide 7, specialty lending now represents $1.9 billion of our total loans, or roughly 30% of the non-PPP loan book. In addition to the SBA loans from Seacoast, we saw the typical seasonal uptick in life insurance premium volumes as well as elevated closings in the sponsor finance area. This production has resulted from a ramp up in capital deployment by our sponsor partners and additional opportunities that we earn through our support of their portfolio companies via the PPP and the Main Street stimulus programs.

It's worth noting that we were able to successfully close on roughly $250 million of Main Street Lending program loans in Q4, resulting in $2.5 million of origination fees and over $100 million of noninterest-bearing deposits. And although most of the loan outstandings are participated out to the set under this program, we were able to use this to reduce our risk on several existing credits and as a conduit to establish new C&I relationships that will provide longer revenue streams with a number of desirable companies in our existing markets.

The life insurance premium finance and tax credit businesses have shown resilience in the current environment with steady production and growth throughout the year. With roughly $30 million of growth in Q4, these businesses continue to perform well with a stable outlook.

Looking forward, adding a high-performing SBA platform into our current mix of successful specialty loan verticals further bolsters specialized lending as a significant contributor to our growth engine with a favorable risk return profile.

Within our geographic markets, St. Louis growth this quarter benefited from expanded relationships with several significant clients in the construction, equipment financing, mortgage and tax credit businesses. Arizona closed a number of new commercial real estate deals for acquisition and refinancing, including several with new investor relationships. And in New Mexico, we are beginning to see some early signs of traction with our business model as we onboarded a couple of new midsized C&I businesses in the construction and remodeling industries.

Overall, general C&I and monthly production within the geographies is continuing to trend up. And our conversation with business owners reflect general optimism and willingness to invest in our businesses.

The PPP loan portfolio, which is profiled on Slide #8, of $699 million, includes the combination of Seacoast PPP with the legacy enterprise PPP loans. Quarter-over-quarter, the legacy enterprise PPP balances have declined by $206 million as we began moving through the forgiveness process mid-quarter.

So far, in general, we're seeing most of these applications successfully 100% forgiven, with an immaterial dollar amount of partial unforgiving balances remaining. No applications over 2 million have yet been decisioned by the SBA.

We continue to leverage our efforts in originating PPP for over 700 new clients across our footprint, and have been able to successfully cross-sell at least 3 new products to 2/3 of these new companies. We are now participating in the next round of PPP to further support our existing business clients and to continue to use this proactively to find new client opportunities.

The deposit base, shown on Slide 9, expanded by nearly $1.1 billion in the quarter with the addition of Seacoast. This also includes roughly $250 million of organic growth from the legacy EB&T portfolio. The addition of a specialized, sticky and low-cost deposit portfolio from Seacoast allowed us to be more proactive with the legacy book, moving out higher cost funds or lowering rates on non-relationship balances.

We also continue to have success onboarding new business operating accounts and expanding existing relationships, with noninterest-bearing accounts now increased to 34% of total balances.

With that, now I'd like to hand it over to our Chief Credit Officer, Doug Bauche, for his discussion on credits. Doug?

Yes. Thanks, Scott. I'm pleased to review Q4 and fiscal year-end 2020 asset quality.

As we finished the year with some very strong credit results, net recoveries of $612,000 in the fourth quarter resulted in total net charge-offs of just 3 basis points of $1.9 million for the fiscal year 2020.

Total classifieds increased by $39 million from the prior quarter to $124 million, largely due to the downgrade of 2 hospitality loans in the legacy enterprise portfolio and the addition of $29 million in classified loans acquired via Seacoast.

As a percentage of capital, however, classified loan levels remained relatively stable at approximately 10% for both the current and prior quarter. Nonperforming assets declined to 0.45% of total assets from 0.53% to prior quarter, and 30-day delinquencies were well managed at $12.5 million or 17 basis points of total loans.

Turning your attention to Slide 11. Loan deferral activity has continued to decline as anticipated. Loans remaining in deferral status at year-end declined to $63 million or 1% of total loans, excluding PPP, compared to $139 million or 3% the prior quarter. 86% of the remaining deferrals are scheduled to expire by the end of Q1 '21.

You'll see on Slide 12, the allowance coverage for the broader portfolios of C&I, CRE, construction and resi real estate. While credit metrics remained favorable, our total allowance for credit losses increased 11% from the prior quarter to $137 million at year-end. The reserve now provides a 355% coverage of nonperforming loans, 2.31% of total loans, excluding PPP and SBA 7(a) guaranteed portions and 1.89% of all loan exposure. Provisioning of $9.4 million in the fourth quarter was largely related to the day 1 CECL reserve on the acquired Seacoast non-PCD portfolio.

And with that, I'll turn it over to Keene Turner.

Thanks, Doug, and good morning. My comments begin on Slide 13 and will address the full year 2020.

We reported net income of $74.4 million or $2.76 per share. Our successful execution on PPP and our diversified fee income sources were differentiators that helped us to offset low interest rates as well as fee income trends from COVID-related restrictions and behaviors.

We increased our pre-provision net revenue by 15% in 2020 to $162 million or 1.96% of average assets. We ended the year on a high note closing the acquisition of Seacoast, while also increasing net income during each quarter of 2020.

Compared to full year 2019, we increased net interest income by $0.80 per share, plus another $0.16 per share for each of PPP forgiveness and fee income growth. And that growth was most notably due to strength in mortgage and our tax credit business lines. We also increased the allowance for credit losses, inclusive of the CECL day 2 double count for Seacoast, for an impact of $1.80 on earnings per share for the full year.

On Slide 14 of the presentation, we walked through the changes in earnings per share for the linked quarter. Certainly, it was a busy quarter, and we closed the fourth quarter with net income of nearly $29 million or $1 per share compared to $0.68 per share in the third quarter.

Net interest income, aided by Seacoast and accelerated fee income on PPP forgiveness, added a combined $0.43 per share. Excluding Seacoast, the provision for credit losses decreased from the prior quarter and improved EPS by $0.40 per share. Separately, as Doug noted, day 2 CECL reserve on Seacoast-acquired loans reduced earnings by $0.26 per share. We increased fee income by $0.18 per share as total fee income hit a record high this quarter, primarily due to higher tax credit earnings.

On the expense side, we had a partial quarter of Seacoast operating expenses that drove the $0.22 per share decrease in earnings from expenses. Merger-related expenses also increased in the quarter and reduced earnings by $0.03 comparatively, and we incurred a swap termination charge that reduced earnings per share by approximately $0.10. And lastly, the share issuance for the Seacoast acquisition reduced earnings by approximately $0.10 a share.

We'll turn to Slide 15, where we address net interest income trends. Net interest income was $77.4 million for the fourth quarter and was an increase of $14 million from the linked third quarter. Net interest margin was 3.66%, an increase of 37 basis points from the third quarter. The primary drivers of this increase were PPP loan forgiveness and the addition of Seacoast assets.

We recognized $10.3 million of total interest income on PPP loans during the fourth quarter, including $5.1 million from acceleration of deferred fees on $206 million of loan payoffs compared to $5.3 million in the prior quarter. PPP activity is contributing approximately 15 basis points to the fourth quarter net interest margin.

Additionally, Seacoast added $680 million of average earning assets in the fourth quarter and approximately $8 million of net interest income. It also resulted in a 9-basis-point improvement to the fourth quarter net interest margin.

Average loan balances adjusted for PPP and Seacoast activity, so enterprise core loans, increased approximately $70 million in the quarter. It's important to note that yields on these loans held up well with only a 3-basis-point decline compared to the linked third quarter. We expect that trend to continue as we originate volume at current market rates, but we're encouraged by both the portfolio growth and the relative yield defense quarter-to-quarter.

Our cost of liabilities declined 7 basis points in the quarter, mainly driven by lower cost on time and FHLB borrowings, along with the addition of low-cost deposits from Seacoast. We did terminate cash flow hedges totaling $200 million of notional value related to FHLB borrowings, which we expect will result in a reduction of our excess balance sheet liquidity as well as a corresponding reduction to cost of funds. Total deposits, excluding Seacoast grew approximately $250 million in the quarter, with $115 million in noninterest-bearing DDA.

Looking forward, we expect the Seacoast acquisition to provide additional margin accretion over a full quarter of around 5 basis points. Considering liquidity, but excluding PPP, that would leave net interest margin at approximately 3.40% to 3.45%, a level which we can reasonably defend in 2021.

To the extent that we can continue to experience quality loan growth, the ability to redeploy excess cash into higher-yielding assets will also create incremental income and improvement in margin over the coming periods. The timing of PPP forgiveness, which, on average, has been approximately $20 million per week, and the potential for additional economic stimulus measures, in addition to customer cash usage trends, could also have material impacts on net interest margin in future periods. With that said, our focus remains on growing net interest income dollars to help drive EPS expansion.

Turning now to Slide 16. Asset quality has held up well during 2020, and the fourth quarter was no exception. As Doug noted, we ended the year with a modest net recovery position and modest net charge-offs. Because we felt it was appropriate to maintain our reserve in the fourth quarter, we ended the year with an allowance for credit losses representing 2.31% of loans, excluding PPP and guaranteed loans.

With nonperformers at similar levels to December 31, 2019, coverage of those same loans increased dramatically, and we believe we're well positioned for what could arise in terms of credit losses. Thus, the provision for credit losses of $9.5 million recorded for the fourth quarter was principally the result of purchase accounting from Seacoast and what is commonly referred to as day 2 double count, which is $8.6 million in total.

That's more clearly demonstrated on Slide 17 of the presentation. $8.6 million provision on the non-PCD portfolio reflects a duplication of the credit discount also applied in purchase accounting, and also another $3.5 million of allowance on the Seacoast PCD portfolio, both of which are recorded on the opening balance sheet, not run through provision expense like the day 2 double count.

The purchase accounting, the allowance for credit losses are now in line with what was announced. And as a result, we do not anticipate material provisions related to Seacoast in the upcoming quarters. The remaining $1.3 million that we recorded on the allowance for credit losses principally reflects changes to unfunded commitments and other similar items during the fourth quarter.

Stepping back, and as Jim noted, it's clear that the stimulus is already and will continue to positively impact many of our borrowers and will ultimately help eliminate or mitigate credit stress that would have otherwise occurred. With that said, these efforts have increased the uncertainty, and likely, the time period during which we would ordinarily expect loss recognition to occur. Thus, we essentially maintain our reserve level as a result until there are more clear indicators in either direction as to what the ultimate impact would be to our customers. With the current level of reserve, we believe that we're well positioned for potential credit losses. And to the extent that there are no further downward trends in economic and asset quality factors, charge-offs may exceed the provision in 2021.

Fee income, demonstrated on Slide 18, came in at $18.5 million for the fourth quarter, which was an increase of $5.9 million from the $12.6 million we recorded in the third quarter. Seasonally robust tax credit activities drove $3.3 million of the quarterly increase, while fees related to community development projects, accounted for an additional $1.9 million of the quarterly increase. Mortgage again expanded from the prior quarter by approximately $0.2 million, while the $0.4 million gain on sale of securities in the third quarter was not repeated.

Seacoast contributed $0.8 million of fee income in the quarter, consisting primarily of SBA servicing fees and deposit service charges.

Expenses on Slide 19 were $51 million for the quarter compared to $39.6 million in the third quarter. Merger expenses in the fourth quarter were $2.6 million compared to $1.6 million in the third quarter, and we estimate that approximately $3.1 million will remain for the first quarter of 2021 due to the closing of Seacoast.

The fourth quarter also reflects $6 million of Seacoast operating expenses, representing 0.5 quarter of operations and $3.2 million of swap termination expenses. The remaining increases in fourth quarter were across a variety of categories and reflect the underlying trends in our operation of the business.

Despite a challenging year, core efficiency came in consistently at 51% and feels like an accomplishment with the challenges we have faced in 2020. We will pivot to seasonally higher expenses in the first quarter and expect a full quarter of Seacoast run rate before we achieve the remaining synergies post systems conversion.

So combined, we expect about $52 million of first quarter expenses before merger charges, and then improving to around $50 million by the second or third quarter, is roughly what we would expect. It's possible that with successful execution of another round of PPP and continued progress in expanding the loan portfolio, we can continue to demonstrate best-in-class efficiency.

I'll conclude my remarks on our final slide, #20. We continue to build capital in the quarter and really throughout the year as a result of our strong earnings profile. And while we also increased the allowance for credit losses by $93 million to $137 million or 2.3% of unguaranteed loans, we also further improved the risk profile of our balance sheet through the Seacoast acquisition, adding approximately $600 million of guaranteed loans and representing nearly 50% of their assets. And because we structured the acquisition of Seacoast to be all stock, that was slightly accretive to capital based on their metrics and deal impacts.

In 2020, we returned dividends to shareholders of $0.72 per share, a 16% increase over 2019, and we executed on some common stock repurchases in early 2020. As a result, tangible book value increased to $25.48 on a per share basis, representing an increase of 7% from the end of 2019. With some momentum in the fourth quarter on organic growth and with Seacoast representing an engine to further aid EPS growth, we believe we're well positioned to continue to have a variety of options to build our franchise and exercise our capital flexibility in the upcoming periods.

Worth noting, we had 96,000 shares remaining in our current share repurchase program. While we believe it's still too early in the cycle to begin buying back shares, we continually evaluate our capital position and will be opportunistic in our deployment in support of organic growth, dividends, M&A and share repurchases.

Before we open the line for questions, I wanted to reflect on our recent acquisition history. The acquisition of Seacoast represents our third acquisition in the last 4 years. Through these transactions, we have improved our cost of funding, liquidity and earnings profile, while diversifying our geographic footprint.

When we work through the various moving pieces of 2020, we believe that, fundamentally, we continue to earn strong returns, certainly noted by 2% PPNR for 2020. With the added earnings power from Seacoast continued organic growth, our expectation for additional earnings and capital build from the next round of PPP, we feel good about our ability to continue this progress for 2021 and beyond.

I appreciate those who've taken the time to listen to the call today. And with that, we'll open the line for analyst questions.

(Operator Instructions) We'll take our first question from Michael Schiavone with KBW.

So my first question, you guys saw some pretty good organic commercial growth in the quarter. Can you just talk about the state of those pipelines and the overall loan growth expectations for 2021?

Yes. Michael, this is Scott. I can kind of handle that. I think to reinforce what I said, I focused a lot on gross production, particularly over the last few quarters because I think a lot of the headwinds are external. And obviously, there's a lot of that, that looks like there's light at the end of the tunnel there.

So the specialty businesses have been pretty steady producers throughout the year. Life insurance had its typical fourth quarter uptick. We saw volumes elevated with sponsor finance, which we didn't necessarily see last fourth quarter, but now see it. And then in the markets, I think it's -- the production is steadily ramping up. We're seeing things like M&A activity, recapitalizations. I think we had 2 of our long-term clients to ESOPs in the quarter, which is becoming a more popular form of succession. And then steady investor CRE volumes.

So I feel good about continuing the level of production that we've seen looking forward, and pipelines are pretty consistent with that right now.

And can you guys also just talk about what you're expecting for fee growth in 2021? And where do you think the biggest opportunities are here, especially as it relates to cross-selling to Seacoast and PPP clients?

Yes, maybe we'll team up on -- go ahead on cross-sell, Scott, and then I can provide a little bit higher level guidance, if you'd like.

Yes. Great. That's what I was going to say. Yes. So we -- and I think we've talked about this, we've focused on PPP as an opportunity to originate new relationships from the 700-plus new businesses, but also cross-selling into existing relationships as we really set up a lot of those conversations on walking them through the PPP and forgiveness process.

And we've got a pretty robust sales force dashboard and sales process activity that we monitor. And I think the opportunities there are businesses like treasury management, which we continue to invest in, and I think continues to be a growth area for us.

Cards. I think we look at how businesses are using cards for payment services correlates well with some of our treasury management products. That's an area we're focusing on. And then I think we're always looking to sell into the families and business owners of the companies that we serve. So private banking and wealth, I think, is another area that we'll continue to focus on.

Yes. And Michael, this is Keene. I would say, normally, we expect the banking-related service charges to basically be mid-single-digit growers. Kind of that's the, I would say, it's across the board.

Expectation. I think the wildcard that you have is what are the headwinds as it relates to potential additional shutdowns or measures in market, and some of these are just behavior-driven. The credit card business, for example, we're starting to see some positive improvement there, but we have some muted volumes because businesses aren't traveling and spending as much. So those are difficult to predict, but I think we expect some more resumption, particularly in the back half of 2021.

And then I think for our drivers of those line items, I think it's more of the same. I think we expect, basically, tax credit to be another 10% grower. And I think there are some opportunities to -- throughout 2021 to have some more success with our CDE similar to what you saw in the fourth quarter, but that's a little bit of a tough one to predict. We think it's coming, but the timing of that could be a little bit uncertain.

But to me, I think those are the places where you can see some outsized strength, we'll say, in terms of driving the fee income line item.

We'll take our next question from Jeff Rulis with D.A. Davidson.

Maybe a question for Doug. Just trying to -- given some of the noise with the deal, interested in the credit migration and the legacy portfolio. Kind of what's maybe coming in or out. So that's kind of, I guess, 1a. And then 1b, just if you could, the type of what you brought on from Seacoast on the nonaccrual front?

Yes, Jeff. I think maybe just in reverse order. What we brought on from Seacoast in terms of nonaccrual nonperforming loans was about $6 million. It's only about $1 million or $1.5 million of that being unguaranteed portions.

Seacoast has very little, if any, loans in deferral. Largely, SBA lending and borrowers have benefited from the stimulus payments the government's making on all SBA loans. And certainly, that another round here will further benefit from those payment activities.

In the legacy portfolio, it's remained really quite stable in terms of classified assets. We saw very little change. We've successfully worked through a number of credits. We did downgrade, Jeff. Any remaining lodging or hospitality loans that received a second deferral, we downgraded in the fourth quarter. We continue kind of to allocate reserves to that COVID-impacted portfolio. But as we sit today, I think we feel that our reserves are well positioned and strong. So hopefully, that provided color to your question.

I appreciate it. And then just fine-tuning on Seacoast impact on a couple of fronts. The margin, can appreciate the number you called out on contribution or improvement and then the guidance. But more interested in just how Seacoast changed the sensitivity of the combined franchise? Understanding there's still some kind of liquidity that maybe you move around. But just in general, maybe day 1, how did it affect sensitivity?

Yes. Jeff, I would say we didn't see a big movement in the asset sensitivity. I think up 100 basis points, we're still 2% asset-sensitive. I think to the extent that rates rise more dramatically than that, I think that's where the asset sensitivity maybe topped, maybe 1.5%, 2% in those plus 2 and plus 3 scenarios. Unfortunately, I don't think those were likely. And so we'll just kind of continue to monitor the balance sheet and see what's there. But also to your point, that asset sensitivity is going to be reflective of $0.5 billion of cash on the end of the balance sheet at the end of the year as well. So both of those are factual.

But I think, number one, lower, more stable cost of funds on a combined basis. And I think when you look at what we've done with now Trinity, Seacoast, the funding base is, I think, materially different than it was 4, 5 years ago. And then I think we feel like the Seacoast SBA engine, particularly now during more challenging economic times, will provide a nice addition for some predictable growth for 2021 and beyond. So we're excited about that.

Got it. And then the other Seacoast related was on the expenses. You talked about $52 million in the first quarter run rate, and then a step down. The conversion for Seacoast, I forget when that was set?

Yes. We're converting core -- call it, core banking systems, mid first quarter, but there'll be some other conversions that have already taken place and some that are following. So I think of most conversion being completed as of the end of the first quarter. So I'm not sure if you're going to get a fully clean second quarter, but certainly, by the third quarter, we expect the synergies to be out of it and the 25% cost save assumption to be there.

Okay. So that was the $2 million step down depending on timing of if it's fully clean in the second quarter?

Yes, it's really $3 million of synergies. And then as you know, I think our first quarter is usually a little bit heavy with payroll taxes. We expect that to kind of level out in the second quarter, and then you get some normal additions, we'll say, for growth and adds to staff and continued lending.

So my 52 sort of blended a little bit of investment in the business in there. But I think of kind of core enterprise as $40 million, $41 million, and then the Seacoast is 12 pre-synergies and 9 post-synergies.

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

Just one question on loan yields. You referenced that they're holding up well here, I guess, 3 basis point decline linked quarter like you said.

Is the improvement in the yield curve helped at all? Or do you just expect any improvement that could occur to just basically be competed away just given the liquidity in the system?

Yes. I would say, Andrew, I don't think that we're expecting positive news either in the investment portfolio or the loan yields. I think we're working pretty hard to stay level. But I think the trends have been stable for a few quarters. And I think we feel good that if we can get some net production and we can get some -- we continue to essentially get our relationship-based pricing, that we should be able to kind of hang in there with yields. But yes, I don't think we're expecting any yield curve improvement in the information that I provided on margin guidance.

Got it. And just hearing some optimism around loan growth, which maybe -- core loan growth, which maybe you didn't really have a couple of quarters ago. I think you referenced maybe you're on mid-single digits. I mean, when do you think you could see -- and maybe it's too premature to discuss it now, but an improvement just in earning asset mix and just the margin expansion that way.

I recognize that you're focusing on NII dollars over than margin, but just trying to figure out the trajectory here.

Yes. Look, I think the big question comes down to, from my perspective, how much more does another round of PPP pressure line of credit usage and things like that. I mean, I think we're down -- on the slides that we have, line usage is down 8 percentage points from a year ago. And so normally, we're sweating over a couple of basis points of line usage that could mute or make the quarter look robust from a growth perspective. So I think it's a tough question.

But I think what you heard from Scott is that he's focused on gross production. And I think that bodes well. And I think that we're optimistic that at least in some combination of bringing Seacoast on a little bit of momentum in the base enterprise pipeline and business development that's not completely washed away by line usage and things like that, paydowns, we'll get a little bit of that in 2021. But's it's hard for me to say you're going to see that in the second quarter or the third quarter. I think a lot depends on what happens over the next few months in the economy and getting people kind of back and operating in a more normal fashion.

And Andrew, this is Jim. I'll just add to it that this whole balance between growth and yield are intertwined, and we've worked hard culturally not to have to do the last deal in the market to get to growth. And as soon as you waver from that, it's a slippery slope.

And I credit Scott and Doug for the discipline that the teams have. And the fact that -- what we've also do, we've built this diversified engine. So we don't have to lean into any one class, and we can uphold our pricing and what have you and still get the growth that's acceptable.

But it's a really slippery slope that we have to be careful about during these times that we'll just take anything for growth or hold back and not get growth. And it's the day-to-day battle, which is exciting, frankly.

We'll take our next question from David Long with Raymond James.

As it relates to M&A, just can you talk maybe a little bit about the pipeline? Now we've seen a few deals in the industry get announced, and I think buyers are getting a little bit more comfortable with potential sellers loan portfolios. Can you maybe talk about the pipeline and then any discussions you've had? How has the seller reception been? And how have price expectations changed over the last few months?

This is Jim. I'll just say this. So we have a lot of great momentum in the business right now. And so number one, we have to make sure that any target or any discussions only adds to it and doesn't become a distraction.

And we don't openly discuss our pipeline per se. Just know that it's a consistent process. Conversations are ongoing. We don't fall in love with anything. I think we just look for the right partners, with the right business model that can accelerate our long-term strategic plan.

Okay. Okay. And then...

I think I'll add to this. We've been very disciplined in pricing, right? So we -- and I think there's -- we look at it this way that we have to remained discipline. But we're also inviting a new set of shareholders into our vision as well, right? So there's a great balance, and our team does an exceptional job making sure we keep that balance.

Okay. And absent M&A, what can you do? Or how are you managing the asset level so you don't go over the $10 billion level in an inefficient manner?

Yes. What I would say is you saw us make that pivot away from wholesale funding at the end of the year that, obviously, that $200 million helped us stay below $10 billion. Also provide some earnings growth for '21 and '22 that we wouldn't have otherwise had just eliminating that expense.

But our view is this: that to the extent that there's the cash that's on the balance sheet is not relationship money, we're looking at those places. But we're not going to push out good borrowing relationships for the long-term detriment of the business because we're worried about tripping over $10 billion a little bit. We've got some time if we don't do it via M&A that until all of the impacts become affected. And I think Jim indicated, we're kind of always looking for M&A.

So my expectation is that this next round of PPP is going to make it really difficult for us to limbo under 10. And I think that's just sort of an industry issue. And we're going to do our best just to earn through it to the extent possible.

(Operator Instructions) We'll take our next question from Brian Martin with Janney Montgomery.

Keene, one follow-up on the last question. That impact, if you do cross $10 billion, do you have an indication of how much that is? What that cost you?

Yes. On the expense side, it's a couple of million dollars. And on the fee side, it's a few million dollars. So you're about $5 million pretax. It's kind of the total impact once it's phased in.

Okay. And then just going back to your comments, Keene I missed some of what you said on the margin and just kind of the -- I think you talked about some hedges and some cash flow hedges and the impact on the margin. Can you just run back through that, if you could?

Yes. So Brian, the easiest way to think about the impact, at least in terms of dollars, is the charge that we took in the quarter being $3 million quick and dirty, that comes back in essentially evenly as avoided interest expense in '21 and '22 because there were 2 years remaining on that. So $1.5 million on the total margin. So you have 2, 3 basis points.

Got you. Okay. All right. That's helpful. And the...

So that will likely get soaked up by excess liquidity, and you'll never see it.

Okay. Yes, I was going to say, and just the overall size of the balance sheet, you talked about the excess liquidity, and kind of to your last point, Keene, about the -- how -- to the last question about managing to the $10 billion. How do you -- I guess, if you look at the balance sheet over the course of the year, what -- I guess how do you expect it to unfold as far as the -- with the PPP, and I guess, I don't know, the timing of what you guys are expecting? I think you said how much it was going a month. But the reduction in the PPP and just the overall size of the balance sheet as you go throughout the year.

Well, so what we're seeing right now is that we're getting about $20 million a week of PPP forgiveness. But we -- it's not -- that doesn't correspond to a reduction in the balance sheet. Those are typically customers, and much of that is staying on the balance sheet, and we saw that in 2020.

So my expectation is that whatever success we have with PPP, we did $800-plus million in the first round. And with Seacoast, you're at almost $900 million that we did. Even if you do half or 2/3 of that, you're going to be $400 million, $500 million over $10 billion at that point in time. And I just -- with the trends that we saw in the first round, I just don't expect that liquidity to move off the balance sheet anytime soon.

So from my perspective, I think we avoided going over at December 31, 2020, but I don't know that there's an avenue for trying to move that kind of liquidity off the balance sheet to stay under. And I don't think that, that is going to be the right feeling from a customer perspective.

So I think we're going to have to -- PPP is going to provide nice income lift for us on another round. And I think we're just going to have to use that. And we're ready in terms of our plan for crossing $10 billion from a people and a systems perspective. And I think we just have to keep executing and try to grow the loan portfolio and try to potentially find another deal to help scale through that.

Got you. Okay. That's helpful. And just maybe last 2. Just when you think about -- I appreciate the comments on the outlook for the reserve and whatnot. But as you get beyond, if the economic conditions do improve and the credit quality continues to hold as it sounds like it could, can you talk about where the post-COVID reserve level, kind of where you think it trends to over time?

Yes. Brian, if -- on CECL adoption, we were at, let's call it, anywhere between 115 and 125 basis points of total loans. And that was pre-COVID. And today, we're 100 basis points north of that.

I think you're going to -- the low watermark is probably that level of adoption. And you're probably going to have, in my view, some sort of additional permanent risk, so to speak, of an event like this occurring that -- or a worse economic environment that isn't maybe necessarily forecasted well in advance. It just sort of hit abruptly. So I'm going to say it's probably at the top of that range, but it's not 230 basis points. So I think there's some room for relief there.

I think also the ultimate resolution and loss rate on certain asset classes is to be determined, so we'll have to take that into advisement as well. But assuming you go back and you have no losses, I think you just -- you essentially end up unwinding much of what you did in 2020, or most of what we did in 2020.

Okay. And is your expectation, I guess, it sounds like you kind of grow into that? Or there -- could there be actually releases in a given quarter?

Yes. Brian, I think it's really hard for me right now to envision doing anything quickly. I think CECL, to me, suggests you build quickly when you see the evidence. We did that. But I just think with how elongated the loss emergence period is, I think it's difficult to reduce in material chunks. So I think you're going to end up with some sort of some sort of growing into it, so to speak, simply because you're going to always be worried that maybe you didn't fully incur losses or there's more impairment in certain asset classes that just is out there.

Now something swiftly or abruptly is done to allay those concerns, then clearly, we would need to evaluate that in terms of the reserve. But my view is that at least for the foreseeable future, that unless you get evidence one way or another, your actions are going to be less material when you're provisioning than more material.

That concludes today's question-and-answer session. At this time, I will turn the conference back to Jim Lally, President and CEO, for any additional or closing remarks.

Thank you, Shelby. And thank you all again for joining us this morning, and certainly for your interest in our company. We look forward to speaking with you again following the first quarter. Have a great day.

This concludes today's call. Thank you for your participation. You may now disconnect.