OceanFirst Financial Corp. (OCFC) Q4 2020 Earnings Report, Transcript and Summary

Good day and welcome to the OceanFirst Financial Corp. Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Jill Hewitt. Please go ahead.

Thanks, Tom. Good morning and thank you all for joining us. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer at OceanFirst Financial Corp. We will begin this morning's call with our forward-looking statement disclosure. Please remember that many of our remarks today contain forward-looking statements based on current expectations. Refer to our press release and other public filings, including the risk factors in our 10-K, where you will find factors that could cause actual results to differ materially from these forward-looking statements.

Thank you, Jill, and good morning to all, who've been able to join our fourth quarter 2020 earnings conference call today. This morning, I'm joined by our President, Joe Lebel; Chief Risk Officer, Grace Vallacchi; and Chief Financial Officer, Mike Fitzpatrick. As always, we appreciate your interest in our performance and are pleased to be able to discuss our operating results with you. This morning we will cover our financial and operating performance for the quarter and provide some color regarding our priorities for 2021. Please note that our earnings release was accompanied by a set of supplemental slides that are available on the company's website. We may refer to those slides during this call. After our discussion, we look forward to taking your questions. In terms of financial results for the fourth quarter, GAAP diluted earnings per share were $0.54, a significant improvement as compared to the third quarter, and an all time record results. GAAP earnings reflect the strong recovery as credit costs moderated. Reported earnings were impacted by a variety of items, as we positioned the balance sheet for 2021. As a result, we pegged the core results for the quarter to be $23.2 million or $0.39 per share. Regarding capital management, the Board declared a quarterly cash dividend $0.17 per common share and approximately $0.44 per depository share of preferred stock. Common share dividend represents the company's 96th consecutive quarterly cash dividend, a 24-year uninterrupted chain of performance. The $0.17 common share dividend represents just 32% of GAAP earnings, allowing us to build tangible book value per share by 2.7% as compared to the prior quarter. There are no plans to reduce or eliminate our common dividends at the present time. Capital levels also improved to tangible stockholders' equity to tangible assets increasing 38 basis points to 8.79%. Please note that our balance sheet remains inflated, as we carried $1.3 billion of cash at year-end and averaged over $1.2 billion of cash on-hand during the quarter. As a result, asset-based ratios, including capital levels, return on assets and margins continue to be a bit distorted. As you may recall, the company suspended the share repurchase activities in February of last year in recognition of the unusual risks presented by a global pandemic. Having completed our stress test process and having observed significantly improved asset quality measures this quarter, the company plans to recommend share repurchases immediately following the opening of our trading window next week.

Thanks, Chris. I'll start with the net interest margin, which was unchanged quarter-over-quarter at 2.97%. As Chris noted, we have over $1.2 billion in cash we need to deploy, which we expect to do over the next five to six quarters. We estimate excess liquidity of $1.17 billion, which has a drag on NIM of 36 basis points. The NIM also includes 24 basis points of purchase accounting accretion, up seven basis points quarter-over-quarter, while prepayment fees were minor in both quarters, leaving the core NIM down eight basis points. It should be the trough in the NIM, which primarily remains impacted by our large cash balances. Paying off the federal home loan bank advances in Q4 should benefit us to the tune of 10 basis points in 2021. And we continue to work down the brokered CDs we raised early in the pandemic. At the end of Q3, we had about $275 million in brokered CDs and ran off of $108 million in Q4. In Q1 and Q2 we will see another $156 million with a weighted average rate of 1.14% leave the balance sheet. Excluding the brokered CDs, I expect another $493 million in CDs, with a weighted average of 1.6, 6%, either renew at a much lower average rate or also exit the balance sheet. For the year, organic deposit growth of $1.51 billion included several wins of high profile nine figure corporate treasury accounts, reflecting the maturity of the treasury area we began just a few years ago. Our team and product set rival any competitor and will allow us to continue to be aggressive in reducing rates on CDs and other rate sensitive accounts with maturing rate guarantees in 2021. While we reduced the posit cost from 49 to 45 basis points in the quarter, we expect to continue to improve markedly in the coming year. Loan origination set an all time high excluding PPP loans, while commercial activity was muted in the second half of the year after a strong start due largely to the pandemic. Residential lending remained a bright spot with record highs in originations.

All right. Thanks, Joe. At this point, we'll turn to the Q&A portion of the call.

We will now begin the question-and-answer session. The first question comes from Russell Gunther with D.A. Davidson. Please go ahead.

Hey, good morning guys.

Good morning, Russell.

Just a follow-up on Joe's comments regarding the LPOs and team lift outs. Understand, we'll get more of an update next quarter. But was curious on two fronts, one, I think you mentioned contiguous markets. And so, curious as to what that means from a geographic perspective? And then, two, do you have a kind of loan growth target in mind for the back half of the year?

So, I think, Russell, for us, we've always described our adjacent -- contiguous markets as places that we can drive in a day. So, I think the approach I'd take is that we are adding -- we added three additional lenders in the fourth quarter in existing markets, including two in the Newton, North Jersey LPO, which is just gotten its office space and should be up and running. And we expect that we'll continue to add in the existing markets. And we're just looking for vibrant markets as we've done. We focus on acquiring the talent first and the talent sort of dictates to a certain extent where we go. So, we're pretty bullish upon that. And I can give you any other feedback if you'd like. And then on the second piece, I think you're right. The second half of the year, I expect that we should be able to drive nine figure growth every quarter in portfolio. I think early in the year, we want to make sure that we focus on what we've done most recently, which is identifying the credits appropriately in the acquired banks, making sure that we support all of our clients that we've done through the referral progress or process in the PPP loans and making sure that we get through the pandemic the way we want, but we're bullish on the second half of the year in terms of loan growth.

That's great. Thanks, Joe. And then, switching gears to the margin. Looking at the deck that you guys put out with earnings, a very helpful glide path in terms of what happened this quarter. Hoping you could extend that into 2021 and talk about how the average earning asset remix you plan to undertake will play out from a margin perspective.

I think there's kind of two keys to the margin story for us. The first as Joe mentioned we have a lot of deposits repricing, especially early in the year. So we have lagged many of our peers in the speed with which our deposit rates have come down. You'll see us catch-up in that I think early in the year, but that'll be helpful on margin. It's going to be more of a funding story than an asset yield story in the beginning of the year. The other thing is the FHLB advances were paid off mid quarter. So we'll get a full quarters worth of benefit as we go into next year. I think as the year develops and the story is going to shift more to an asset base story where you see that cash deployed. All of that cash is currently at the Federal Reserve. So you're earning somewhere in the range of 10 basis points on that. So, I can't give you a specific Glide path or we don't provide guidance on future margins. But I do think to echo Joe's comments, we believe that Q4 was the trough and that margin expands from here.

Thank you, Chris. And then last question for me is on the expense side of things. So, I've got the expectation around the incremental branch reductions. I think the system conversion for Country Bank is in the first quarter. Could you talk about your expectations for core expenses over the next few quarters and the ability to target and achieve positive operating leverage for 2021?

Okay. So a couple of things there. The -- as we go into 2021, we made a comment that we had a couple of unusual items in Q4, things like our FDIC assessment were elevated. And that was just a reflection of -- if you recall, in Q3, we'd moved a significant portfolio of loans to held-for-sale and downgraded them to non-performing at the time, that drove a technical ratio on non-performing assets up and increased our FDIC assessments with the numbers at year-end that'll reverse completely as we go into next year. So there was a -- we pegged it probably about $1.03 million in total of expenses in Q4 that were unusual in nature. So Q4 was a little higher than it should have looked. As we go into next year into 2021 or this year, I'm sorry, we are running about $1.25 million in COVID expenses. We expect that will moderate. That'll be helpful. The second thing is the branch reductions. So, the four branch reductions that we have -- there's a regulatory requirement around notice from -- based on our national bank charter. So we'll get those closed in early April. So those kinds of things you're going to see as we kind of move through the first half of the year. I would see our overall expense horizon being relatively flattish. But if you went back and looked to your comment about operating leverage, if you looked at our core revenue and core expenses, over the last four quarters we have improved operating leverage, which has been mashed a little bit by the NIM compression. So, I think you'll see it continue. We're going to continue to look at our branch network, but we're going to balance that off against the talent Joe is able to hire. So, I think what we've got the full headcount in composition of the adds to the commercial bank, that we'll be able to share with you in April. We could probably give better guidance around the full year outlook for expenses. But for the first quarter, I think you're going to see flattish and we might have a little bit of a tailwind.

Great. Thanks, Chris. That's it for me guys. I appreciate it.

Thanks Russell.

The next question comes from Matthew Breese with Stephens. Please go ahead.

Good morning.

Hi, Matt.

Hey, I got to go back to the NIM. I understand there's a 36 basis point drag from liquidity, and you're attempting to put that to work over the next five or six quarters. What is on the low end? How much of that can you recapture over the next, call it five, six quarters. If you had to give yourself a A grade, a B grade, a C grade, how much of that do you think you could recapture through deployment?

I think when we're finished deployment, we wind up -- or in our historical range, we would have been in the low 320s to 340s, right? So, I think when you're done, that's about where you get to. And at this point, I would say it'd be a pretty smooth transition over the next four quarters or so depending on events, right? You may see a little bit better pickup in Q1 because of the funding issues I mentioned. And again, remember the -- Joe talked about the brokered CDs and all of that, they rolled off -- some rolled off in the fourth quarter. We'll get a full quarter benefit on those in Q1. The ones that roll off in Q1, we'll get a full quarter benefit in Q2. So, it's really more on the funding side. But I think we believe that over the next four to six quarters, you should be stabilizing margins back to where we used to be in the low 320s to 340 range.

Okay. Great. And then, more so than your peers with the proactive actions on deferrals. To me it feels like you probably have a better outlook for the overall profitability of the Bank. If we assume that we're in this interest rate environment for a while, let's just say through 2022, maybe into 2023, in terms of ROA and return on tangible goals, could you just share with us, what your outlook is and what you hope to achieve there?

Yeah. A couple of things. I mean, the -- let me say, I would draw a distinction on is what we're calling internally referred to as the iceberg issue. And the iceberg issue is this, because of the CARES Act, it was perfectly appropriate. You can restructure loans and not designate them as TDRs and all that. It makes it very difficult to understand the residual credit risk that's in any of our books. That was what kind of drove us to make sure we were disclosing that very high level, 97.1% of loans that are paying on their pre-COVID terms. So, we've not given them any concessions. They're not getting any special deals. So, we really do feel that we've got a very strong assessment of where our credit risk is. If you look at last quarter, fourth quarter -- I'm sorry -- most of the charge-offs were related to the sale of the residual forbearance residential loans. So as we finished the consumer residential forbearance periods, we identified the high-risk stuff, and we sold that off. If you take that out, the net charge-offs were actually extraordinarily low. So as we go into 2021, the other comment I'd make about kind of credit is that the forecast that we used that were put together in the fourth quarter, did not account for the change in the makeup of the Senate and the potential for additional fiscal stimulus, which could be material. So, as CECL works, those economic factors are big leverage and it's possible that that would be a tailwind going forward. And then even if you look within our reserve, we still have -- a significant amount of our reserve is qualitative, not quantitative. So, your first -- you kind of questioned about profitability metrics and where we're going. We're not -- the pandemic's not over. We still have to work through the special mention substandard books, but we feel we've got a very strong handle on them. In fact, in that book, 84% of that book is paid current. So these are not people that are having a payment issues. I think that's the first component, what is going to overshadow profitability in terms of provision requirements as we go forward. So, we're feeling like that's not going to be an overhang. It's going to hold us back. The set -- the real second component is what happens with the yield curve as we deploy this cash. And initially this is not unusual. Even though we saw the yield curve start at the long end, start to move up, loan rates had not really budged, right? So competitive loan rates of the markets were not moving. We think that the glide path that we're talking about in margin is it could be accomplished in the current interest rate environment. If you get any significant movement in the yield curve, it could be far better. So, in that environment, we think we can build our earnings back to more than a one ROA, and given our leverage position, we think that's -- there'll be a pretty good return on equity.

Okay. Great. And then my last one, in just regards to M&A, curious how conversations have gone this year, or over the past few months, if things has -- deferrals have kind of gone down for the industry? And your expectations, do you feel like this year, assuming there's been more chatter that you might participate in M&A again?

Yeah. I would told you -- earlier last year, obviously we were -- we've taken ourselves -- almost everybody's in right taking ourselves out of the market. While we assess them, the first thing is you have to know your own balance sheet, right? You can't get involved in that kind of discussion if you don't think you've gotten everything kind of cleaned up at home. That was one of the reasons that we took such aggressive action to make sure that we were keeping our balance sheet in the position we wanted. And we feel highly confident that we've got a very accurate picture of where our credit risk lies and where the balance sheet is. So the first condition to even consider M&A is I think met. Second condition would be, can you get a handle on other people's businesses? And as we watch the earning season, I think you're seeing a lot of us have performed really well. Forbearances are in the right direction. I think we're at a point where you really could have visibility into balance sheets and credit quality. So I think that second condition is met. So then -- now it comes down to, are there things to do that are both smart and actionable and that's always a much more random event. And it depends a lot on different organizations, timing and all that. We expect that folks will be looking hard at strategic alternatives, probably in the first half of this year. We expect to be doing that as well. If we can find something that adds value for our shareholders, there's nothing stopping us from doing something immediately. That said, we have $1 billion worth of cash to deploy. We can lever earnings. We don't need an acquisition to help drive efficiencies or earnings. So, we don't feel pressure to do it. But I think that as an industry, we've got the conditions to consider that now.

Great. I appreciate it. And that's all I had. Thank you very much.

Thanks, Matt.

Our next question comes from Christopher Marinac with FIG Partners. Please go ahead.

Hey, thanks. Good morning, Chris and team. I know it's been almost a year since the pandemic started and you were one of the first banks to recognize the risk. So just kind of want to circle back on, what has to happen to reverse some of the criticized and classified loans. Do you think some of that might start happening this quarter, or will it take longer for that to unwind and therefore influence reserves as you were talking about earlier?

Yeah. So, I mean, the first is, we don't feel that there's going to be a lot of pressure on reserves there based on our assessment of things like LTVs and the payment currency and all that. I think it's going to be a methodical process where you'll see it come down a little bit in each quarter. And then, if you fast forward a few quarters, it'll become much less significant. These are really pandemic-driven decisions where people are okay. We can see that they have a source of payment for us, but they were weakened, right? I mean, if you don't think that people would be weakened after a pandemic, you're probably in the wrong business. But Grace, I know you've got some very good kind of granular data around LTVs and segments. So maybe you could just share that with Chris.

Sure. So, in the special mention and substandard book, the special mention portfolio as LTV is less than 60% and in substandard, it's around 50%. And as Chris mentioned earlier, 84% of those loans are performing as agreed with pre-COVID terms. Said differently, only 16% are past due on non-accrual or our PCD loans. So, I think the point there being that, that demonstrates that we're pretty rigorous and evaluating the risk in our credits. It doesn't necessarily mean that they can't pay us. It's just that there's an indication of some sort of weakness, some impact from COVID.

I think if you think about the loss, given default in those segments, given where the LTVs are and given our execution, even on loan sales, which we think -- it was certainly liquidity discounts that you had this year trying to sell loans during a pandemic. We don't think there's one of most content there. And the reserve would -- the reserve already accounts for this migration.

Got it. That's helpful background. Thank you, both. And Chris, just big picture follow-up. As you've built a digital bank for OceanFirst the last several years, what have you not done just in terms of functionality? Is there anything that you haven't yet accomplished on that, or do you feel like you are where you want to be with the digital processes?

There's a couple of different parts of that. I think, in digital products to support our customers, we feel -- we've got a very competitive and highly effective suite. So our customers can do anything they can do with most -- any bank, including the major banks in the country. I think now from this point forward, the investments are going to be focused in two areas that may be less apparent or less obvious. First is a business process automation. And so that provides efficiencies to the bank. So what can we do to help our employees be far more effective and efficient, that may not be as apparent on the outside, but that's important in terms of the way the customers look at the world, as well. And then the second thing is I think many banks, including us, are grappling with in the digital future. How do you attract net new customers into your bank? And one of those last bastions of value we have in our branch network is that it brings us new customers each and every day. So, we've been working on digital distribution that kind of sales side, and it's more than having online account opening. We have a great online account opening product set. You can open an account six minutes and plenty of people do. We've got significant increase in those numbers over the past year. However, there's still a lot of folks who would go first into a bank branch. And I think that that's the last horizon. So I think in terms of maturity, we think feature functionality for our customers is terrific. And on par, we need to match that kind of capability for our internal customers, our employees, so they can do things faster, more effectively. And we have to crack the code and it's more of a marketing or a marketing scale issue than a digital issue. It's how do we get customers to come to OceanFirst and open their account just over a mobile device and those kinds of things.

That's great. Thanks for sharing your thoughts on that. I appreciate all the information today.

All right. Thanks, Chris.

The next question comes from Frank Schiraldi with Piper Sandler. Please go ahead.

Good morning.

Hi, Frank.

Just -- I will have to follow up on M&A. What is the wishlist in terms of what makes the most sense what is most attractive? Is it potential MOE in New Jersey? Is it an add on deal? And if so, what geography?

So, yes. Good morning, Frank. After we -- after each acquisition, we do a post acquisition review about a year after the acquisition, where we kind of sit with the Board and we talked through what went well, what went according to expectation, what didn't. And having now, seven of them under our belt, we can tell you a few things that are probably obvious. But first, anything you do in market is the best thing you can do. So building your own market share. The second thing is anything you can do with a company that has a pre-deal competitive performance ratios, good margins return on assets, credit expenses, the better -- the businesses before you do anything with it, the better it's going to be afterwards. It's not rocket science. So, we have a hierarchy. We have -- it's a whole strategy laid out if can do an in-market, commercial bank combination with a company that has -- is like-minded in the kinds of customers we're going after that has good margins and good earnings, and when you take the combined operating expense out, it's a home run. And whether that's an acquisition or a merger or an MOE, that's the best thing you can do. And then, add to that in terms of scale, obviously the larger -- the scale of that opportunity usually correlates with the bigger opportunity to provide earnings per share increases for your shareholders. And then you start to -- it's like peeling the layers of the onion, right? As you go out from that -- contiguous markets are okay, but they're a little -- not as many expense saves. If the business model wasn't exactly like ours, then maybe you have to do some work around whether it's funding or lending. So as you start to drift away from that, things get to be less appealing. But we think about them in terms of those things, what are the performance characteristics of the combined entities, whether that's a merger or an acquisition. What are your ROAs? What are your margins? What are your ROEs? We look at the earnings lift, the raw EPS increase for our shareholders. We look at the price earnings after cost saves. And those are the most important things we look at. There's a lot of talk about in the industry over the last few years over earn backs and all that. Earn back is important to us. It is a guideline that we want to stay within or a guide rail, but it doesn't drive what we want to do. What we want to do is find like-minded businesses in the same market or overlapping or contiguous markets. And we think that provides the best benefit. So -- and we've always been very tolerant of looking at a wide variety of options. So, we keep that scan open. We cast a wide net. And if the opportunity comes up, we'd feel comfortable moving forward.

Okay. Well, thanks for all that. And then, I guess, same sort of question on the organic side is to think about loan growth coming back, particularly in the back half of 2021. Where's the most interest? I mean, is it just primarily in C&I? Is there areas of CRE, that are particularly interesting, given maybe rates are going to be low for a while and you can lock-in some spread. What's of most interest here in this environment?

I think for us, Frank, we're amenable to pretty much any kind of growth. I know that sounds a little open-ended, but I'll phrase it like this. I think there are many banks that have CRE concentration concerns. We don't have any of those. I do think that there are pockets that everybody's identified already, the industrial, the warehouse that last mile logistics type of CRE that has value to many folks. It's a very competitive market and arena, refrigerated storage, things like that, that we all like, that we don't have any restrictions on chasing. So CRE on an overall basis. There's nothing holding us back from doing any of that. And with the swap product that we've been very competitive with in the last two years, it takes some of that long-term vanilla fixed rate duration risk off the balance sheet. So you do get a little bit possibly in the lower spread of origination of loans, but you're getting that swap the income early in the process, which is good. And I do think that we'd like to do and recruit as much C&I lenders and do as much C&I business as we can, but we're also pragmatic. There are many of those lenders in the marketplace that are trying to do the same thing because they have CRE restrictions. So, it does give me the flexibility to go where the opportunities are. And I think as we recruit people and then lean on our existing teams, that will benefit on either venue. And I'm not restricted in either. What I'm looking for, duration, rates or terms, as long as we stick to our credit appetite. And I will mention, interestingly, you saw the announcement has -- the commercial pipes are shade over $200 million at the end of Q4, it is up markedly since then.

Okay. Thanks for that color. And then just last question. I thought it was pretty interesting the gains in the equity portfolio worked out well. Just wondering if given, where rates are and kind of the need for yield, if that's sort of a one and done, or if that's something you guys will look to as a way to deploy cash in the future. And then, I know -- it's not exactly the same thing, but just kind of how you weigh that against sort of an investment in yourself through buybacks.

I would consider that to be an unusual opportunity that is more of a one and done. And let me just give you some color around it. After we did our capital raise in the beginning of 2020, we've ended up with a very significant excess cash position in our holding company, and start to make some investments in firms, in -- started with subordinated debt and other things in firms that we felt highly comfortable with. We felt we understood, had a little better than market knowledge about credit discipline and underwriting and all that. Those worked out well. We had a significant number of gains around just the debt instruments. And as we were searching for yield, we pulled a playbook out of our -- out of our history. In 2008, we did a very similar thing. We identified a series of firms that had very high dividend yields, where dividend payout ratios were modest and where we felt we had a pretty good sense as to the strength of the balance sheet. And it was -- we entered into this to buy yield and that portfolio actually had a yield well north of 5%. We expect it to be in that portfolio is 5%-plus yield for quite some time. What happened thereafter was, the markets took off and the instruments that we chose appreciated in value very rapidly and very significantly. So what happened is they drove the effective yield of those securities down much lower than the original strategy. So, once the yield got low enough, you look at it and say, I don't want to have the volatility on my balance sheet. I bought this for yield. The yield is now low. We've got a gain position. Why don't we convert it into tangible book value, get it into the balance sheet, take the risk off, and we'll find other things. That said, Frank, we are looking at slightly wider variety of strategies to deploy our cash than we might have just a few years ago. We have a much more mature treasury group. And we're going to be methodical and thoughtful and conservative. But we are looking at other ways to deploy that cash, because we think it's going to be around for awhile, not just through the loan book. We focused a lot on the loan book today. But we're also looking at the investment portfolio. That said, we think that fixed income securities may not be the ideal place to be playing these days. So we're being very careful.

Okay. Got it. Makes sense. Thanks.

The next question comes from Erik Zwick with Boenning & Scattergood. Please go ahead.

Good morning.

Good morning, Erik.

I first wanted to start out -- I guess, I've got kind of two questions just on the new recruiting efforts. And Joe, you mentioned a little bit of this and maybe one of your prior answers. But I think in your opening remarks, you said you're aggressively recruiting today. If I imagine you have some sort of criteria that you're looking for. So, curious one, if you're targeting either certain individuals that you've known from the past, or maybe more generally just lenders with specialties in any particular asset classes. And then I guess, the second part of the question, are you finding any commonalities in the organizations that you're having success recruiting these individuals from?

Thanks for that, Erik. I've said this, much like we do -- we have a stable of candidates that we have on our radar that we've had for a period of time that we always talk to. And sometimes things are right for people and sometimes they're not. We've been fortunate in recent periods to recruit these folks. And I continue to see a significant interest in people that are -- even those that are not known to us well receptive to having conversations, which is really valuable. And I think that's part of what we built here. And I think that there are no restrictions. We -- as I mentioned earlier in terms of asset classes, I'm happy to recruit C&I or CRE lenders. There's nothing that I'm staying away from. I truly appreciate people have specialty niches. I always find that fascinating, especially in rate environment like this, that there's a way to differentiate ourselves without taking undue risk. I'm happy to do that. And I will say that we tended to recruit from larger organizations and largely because I find that those lenders -- historically, we tend to recruit seasoned lenders. And those lenders from larger companies tend to have not only the sales activities, but also the credit background and training. That's really valuable in a company like ours and the way we underwrite and the way we look at credit. So -- and that's been something where -- we're recruiting from larger companies typically, and I don't see any shortage of qualified talent. So that's a good problem to have.

I agree. Yes. Thanks for a great color there. And then just -- the last question I had today with regard, curious about your approach to the new round of PPP given that you sold substantial balances from the last ones. Is it safe to assume that any interest or getting from current customers, you maybe are referring to a third-party? Or just curious how you're approaching it at this point?

Actively lending to that group. So the customers that we have that have a need, we're certainly lending to. The folks that we sold in the last round, part of that sale was -- they will continue to service additional requests from those customers. So we have a little bit bifurcated. The ones that were sold are being handled by our third-party we sold those loans to. Anyone that we didn't sell, which was probably a little less than half of the book, those requests are coming directly to us. What we're seeing and what we're hearing from our peers is -- I think this is a good news item. The SBA put this new rule in saying have a 25% diminishment in revenue to qualify for the new round. And very few people are actually qualifying for that. And I'll turn that around and say, that's a great thing that we have fewer kind of desperate businesses out there that have had that kind of significant impact. So, we've got and we're processing -- it's a relatively smooth process at this point, straight in -- it’s automated into the SBA. I don't think it's going to be giant numbers for us. It may not be -- I think industry-wide is big -- anywhere near as big as the earlier rounds. So, it's going on and we're meeting the need, but it's not going to be a big number for you.

Great. Thanks for taking my questions.

Thanks, Erik.

The next question comes from William Wallace with Raymond James. Please go ahead.

Hi. Thanks, guys. Good morning.

Hey, Wally.

Just two quick kind of housekeeping questions, but as a quick follow-up on that PPP question. What are the balances left at the end of the year? And then also what was the NII and net interest margin impact from the PPP loans during the fourth quarter?

The balances at the end of the year below $100 million. And so the impact going forward would be relatively nominal. We fell in the deck that when we sold off the PPP loan, those were relatively low rate. So they created the NIM during the quarter by about nine basis points.

Okay. Yeah. Okay. Thank you. And then, do you guys have any determination as to whether you will be able to push off the impacts of the Durbin Amendment since you crossed $10 billion in 2020?

So, we're still awaiting kind of final guidance on that. If you read the interim guidance that's come out, there is a path where we might not be subject to Durbin, but there's also a interpretation that would allow the Federal Reserve to determine on a bank by bank basis, whether they want to impose that or not impose that. And we're -- as you can imagine, we're in contact with our regulators to try and understand what the final determination will be for us. We crossed $10 billion on, on January 1st. So, we're kind of an odd duck. And the interpretation says, if you were driven by the pandemic to cross $10 billion, while that wasn't the direct case for us, there is a secondary argument, which is absent the PPP loans in the pandemic we might have chosen to duck assets under $10 billion for year-end again and did not have the opportunity to do that because of the pandemic. So that's an ongoing conversation. I can't give you any better guidance than that.

I don't know if you guys are tracking it, but there was a bank in Tennessee that crossed over $10 billion due to an acquisition, and they announced on their earnings call yesterday. I believe it was yesterday, whatever -- everything blends together -- this week that, they were -- the regulators said they would give relief. If you're tracking that, did that give you guys hope that you'll qualify as well, or …?

I think hope is a good term. And one of the great aspects of our Federal Reserve system is it's a regional. The central bank, that's not a central bank, so it's made up of 12 different banks. And there are times when it's easy to get a consistent answer across all 12 banks and times you just have to work through the process. So -- but that did give us hope.

Okay. All right. That is fair answer. Thank you. Thank you, guys. That's all I had. I appreciate.

Wally, the PPP loans in the 1231 with $95 million on our balance sheet and that's been running down as -- they're forgiven.

Yeah. Okay. Thank you very much.

Thanks, Wally.

As we have no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to Christopher Maher for any closing remarks.

Thank you. With that, I'd like to thank everyone for their participation on the call this morning. We remain focused on building the business, deploying that cash and improving earnings. We look forward to discussing our first quarter results with you in April. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.