Q4 2019 Earnings Call
Thank you, Jason. Good morning, everyone. I appreciate you joining us today. As you are all aware earlier this morning. We released our earnings report for the fourth quarter of 2019. I'll walk through some of the notable items run Nicholas or CFO will review a few of the financial details and then we'll open up the call to questions. I noted in our earnings release. We have the Safe Harbor statement relative to the forward-looking comments and I would encourage all of you to read through those.
We delivered another solid quarter of operating results to end the year what continuing to demonstrate that we can generate strong profitability without having to reach for loan growth at home. I'm in the economic cycle where we believe restraint is warranted. Our team's ability to execute on our strategic priorities Sound Capital management office core deposit growth discipline cost controls and proactive credit risk management has proven to be a successful formula for increasing shareholder value age.
During 2019. We grew our tangible book value per share by 11% while returning $154 million dollars in capital to shareholders who are quarterly cash dividends and stock repurchase program.
2019 was a record year for the company as we generated $160 billion dollars in net income and 603 million dollars of organic growth in non maturity deposits.
2019 was our first year in almost a decade without an acquisition. This allowed our teams to complete a number of key projects that we expect will drive further improve in our operating metrics while increasing franchise value and future periods.
In terms of our fourth quarter performance. We generated a return on average assets of 1.42% and a return on average tangible common Equity of 15.9%
Or solid profitability has enabled us to increase our quarterly cash dividend by 14% to $0.25 per share increasing the amount of capital gains. We are returning to shareholders. Once again, one of the highlights of the quarter was our ability to generate core deposit growth by bringing in new customer account rep and building upon existing client relationships. We are seeing significant contributions to deposit growth from all areas of the bank our relationship managers HOA bankers and Specialty deposit group continued to enhance and refine their skills with the technology and tools we have provided them to attract and manage client relationships.
compared to the
Third-quarter our non-interest bearing deposits increased by $234 million dollars.
Our interest checking account balance has increased by $57 billion and our money market and savings accounts increased by $45 million dollars.
This strong inflow of core deposits enabled us to favorably reposition our deposit portfolio and runoff higher-cost deposits namely brokered CDs wage as a result. We saw a nice reduction in our cost of deposits which declined to a spot rate of 53 basis points at year end off the effective management of our deposit portfolio helped us to mitigate the impact on our net interest margin from the reductions in the FED funds rate that occurred in September and October during the fourth quarter. We saw just a 3 basis-point decline in our net interest margin.
The environment for loan growth remained fairly consistent with what we experienced throughout the year. We continue to see a high level of payoffs which are being driven by aggressive price and structures being offered by both bank and non-bank lenders.
Our discipline around credit is a fundamental underpinning of the bank and is ingrained in our culture as such it has resulted in us passing on some loans that do not meet in a requirement for acceptable risk-adjusted returns.
That being said our relationship managers are doing an excellent job of generating new loan opportunities across the spectrum of small to middle-market businesses because of our consistent Business Development approach. We saw a nice increase in Loan Production during the fourth quarter. We generated $556 billion dollars in new loan commitments up from $537 million in the third quarter.
Order Loan Production was well Diversified and included $259 million dollars in c n i e r e business loans $77 and investor-owned cre seventy million dollars in multifamily fifty six million in franchise $49 million of construction loans and twenty eight million dollars of SBA Loans the loan portfolio continues to exhibit solid credit metrics owing to our consistent approach to credit risk management.
As we start 2020 we will execute on the same strategic priorities that served us well and enhancing shareholder value in the past.
Despite a challenging lending environment. We intend to remain disciplined in our approach to pricing and structuring new Loan Production.
We expect our performance this year will be positively impacted by further leveraging the Investments. We have made in technology. We continue to expand in customize. Are you a sales force across the company to improve Business Development client relationship management and data analytics. We utilize API banking to develop our date of all product used in our HOA business and we see other areas where that technology could be applicable and help to expand business and we continue to grow the sophistication and product offerings of our treasury Management Group to ensure that we have the capabilities to meet the needs of a broad range of commercial clients off.
when we looked
Back on 2019. We view it as an important year in optimizing the operations of the company following several years of strong growth.
We focused our time and resources on completing a number of important internal projects that helped us to expand our capabilities and Hanson efficiencies and strengthen risk management.
As a result of these Investments, we have a strong infrastructure in place to support a much larger financial institution as we continue to execute on our organic and acquisitive strategies in the future with that. I'm going to turn the call over to Ron to provide a little more detail on our fourth-quarter results.
Thanks, Steve and good morning everyone as in the past. I will be reviewing some of the more significant items in the quarter focusing primarily on the linked quarter comparison overall is highlighted in our earnings release. We reported net income of 41.1 million dollars for the quarter and earned $0.69 per diluted share compared with net income of 41.4 million dollars and sixty nine cents per diluted share in the third quarter month.
total revenue
122.7 million dollars for the quarter compared with 123.8 million dollars in the prior quarter as higher net interest income was offset wage lower non-interest income. We finished the quarter at eleven point eight billion dollars in assets and just over two billion dollars in equity.
Are tangible book value per share grew to $18.84 and 11% increase from 12:31 to 2018.
Taking a closer look at the income statement not interest income of 112.9 million dollars increased approximately $600,000 from the prior quarter as lower interest income was offset by lower interest expense our net interest margin decreased three basis points to 4.33%
appreciate income equaled 5.8 million dollars for the quarter compared with six million dollars in the prior quarter.
excluding
The impact of accretion income our coordinators margin decreased two basis points to 4.10% the slight decrease in our core margin reflects lower loan yields a slightly lower loan fees offset by lower cost of deposits and lower overall funding costs.
Loan yields, excluding accretion felt 14 basis points on average for the quarter reflecting the impact of the federal reserve's 75 basis-point decrease in the FED funds rate during 2019.
Lower interest expense of 16.9 million dollars which driven primarily by lower deposit and wholesale funding costs which offset the drop in our loan portfolio yield during a quarter. We benefited by lower deposit pricing along with an enhanced deposit mix which resulted in a 13 basis-point drop in our deposit costs, 2.58% and a 50 basis-point drop in our overall cost of funds.
We expect our core net interest margin to be in the range of 3.95 to 4.05% in the first quarter of 2020.
The company recorded provision for credit losses of 2.3 million dollars in the quarter compared to one point six million dollars in the prior quarter. The increase is primarily attributable to not charge off of 2.3 million dollars for the quarter are full year net charge-off rate for 2019 was 0% or 9 basis points.
Non-interest income of 9.8 million dollars decreased 1.6 million dollars from the prior quarter primarily as a result of lower sales of investment Securities and lower gains on the sale of loans compared with the prior quarter.
During the quarter the company sold 24 million dollars in SBA USDA loans for a gain of two point 1 million dollars compared with twenty six million dollars sold for a gain of two point three thousand dollars in the prior quarter.
in addition
The company took the opportunity to strategically sell eight point four million dollars of non SBA Loans for a loss of $400,000
company also sold $129 in Securities in the fourth quarter resulting in a gain of three point six million dollars compared with the sale of $187 and Security package for eight of four point three million dollars in the prior quarter.
We expect our quarterly non-interest income to be in the range of 6.5 to 7 million dollars based upon recurring income and normal business activities, which also excludes the gains on the same securities.
Not interest expense was 66.2 million dollars compared with sixty five point three million dollars in the prior quarter as the company incurred higher deposit costs incurred by the strong deposit growth in the quarter and partially offset by the small institution FDIC assessment credit.
Personnel costs increased primarily as a result of higher incentive costs as Staffing finished flat with the prior quarter at 998 employees.
In addition, we encourage slightly lower costs and marketing CR a activities and charitable contributions.
We anticipate our first quarter expense run rate to be in the range of $65 to $66 billion dollars.
Our fourth-quarter income tax rate came in at 24.2% compared with 27.2% for the third quarter for a full year effective tax rate of 26.7 per month the company benefited from a lower state tax rate and the tax benefit of stock-based compensation settlements in the quarter. We expect our full-year 2020 income tax rate to be in the 26th to 28% range.
Turning now to the balance sheet.
Don't help her investment ended at eight point seven billion dollars essentially flat to the prior quarter as higher prepayments and lower purchases offset higher line, utilization rates and low wage and Sundays.
Recorder we originated $556 billion in new loan commitments at a weighted average rate of 4.77% compared with $537 at a weighted average rate of 5.28% in the prior quarter. Approximately one-third of the drop in our new origination rate is related to the increase in multi-family and Commercial Real Estate as a percentage of the total commitments originated.
Our Investment Portfolio finished the quarter at one point four billion dollars an increase of $109 compared to the prior quarter during the fourth quarter. We sold approximately 130 million dollars of existing Securities at a yield of 2.85% and purchased approximately 284 million dollars of new Securities at a yield of 2.73% of our quarter also included a $12 million-dollar mark-to-market fair value decrease as well as $33 in payments amortization and redemptions month.
we expect
Investment Portfolio to remain at approximately 12% of total assets in the overall yield should be at Blended average rate of 2.7 to 2.8%
Total deposits finish the quarter at eight point nine billion dollars an increase of approximately forty million dollars to the prior quarter with non maturity deposit growth increasing by $335 million dollars off and higher cost retail and broker CDs declining by 296 million dollars overall are non maturity deposit screw it to 88% of total deposits from 85% in the prior quarter and enabled the Comedy Company to run off more expensive CDs.
Non-interest bearing demand deposits grew 234 million for the quarter to three point eight six billion dollars increasing to 43% of total deposits.
Our total loan deposit ratio finished quarter at 98% down slightly from the prior quarter of 98.9%
Shareholders Equity end of the quarter at 2 billion dollars during the quarter. The company did not purchase any shares but did redeem 3.1 million dollars in kobol subject with an interest rate in excess of 5% at time of redemption and also redeemed twenty-six million dollars of higher rate fhlb term advances acquire through prior Bank Acquisitions off the company's tangible Book value end of the year at $18.84 and the tangible common equity ratio finished at 10.3% both the company and the bank would remain well capitalized across all regulatory risk-based measures.
Finally taking a look at the Quality.
Non-performing assets of 9.1 million represented 8 basis points of total assets in total delinquency was to 2% at quarter-end are allowed for lunch. Yes ended the quarter at thirty five point seven million dollars and represented 413% of total non-performing loans and for 1% of total loans held for investment.
Lastly the company continues to progress on the implementation of Cecil and anticipate that will be in full compliance with the new accounting rule. We are expecting an increase in the allowance for a loss of between 45 and sixty million dollars.
Although the company expects its loan credit loss Provisions will increase under Cecil. It is difficult to project at this time. The anticipated increase in provisioning given the multiple factors that impact the allowance under Cecil.
With that we would be happy to answer any questions you may have operator. Please open up the call for questions.
We will now begin the question-and-answer session. Ask a question. You may press * then 1 on your touchtone phone for using a speaker phone. Please pick up your handset before pressing the keys to withdraw your question, please press star then to our first caller is Tyler Stafford from Stevens?
Hey, good morning, guys. Thanks for taking the questions. Sure. Good morning. Hey Ron. I wanted to start on the expense guidance that you gave how much in that age sixty-five to sixty-six million expense guidance in the first quarter. Are you assuming for the FDIC insurance premium given that was a a net-positive this quarter off. Yeah that that should be zero in effect or or you know, just a few hundred thousand dollars at at most okay got it. So so then that that does imply a you know, a nice step down in the expense run-rate come normalizing for that. Can you guys just talk about the the areas where you're focused on reducing expenses and how you see the exhibition space trending, you know throughout the year. Yeah. That's that's predominantly that the step down from the fourth quarter to the first quarter Tyler that you've highlighted. There is predominantly driven by incentive Club.
both the the you know, the business as it builds throughout the year the incentives grow when we start
Throughout the year. It's a little a little bit lighter there. So that's the primary driver of the the expense step down it that you're referencing. Okay, good. All right, and and then just on one question on my credit there. There are two Banks this morning that either reported, you know, sizable losses out of their restaurant franchise portfolio or commented around, you know, pretty material deterioration. You guys have obviously not been in a camp. It's it's uh, the portfolio is performed well for you guys so far. Can you just kind of update us on on what you're seeing there and and and credit Trends you're seeing out of that portfolio.
Yeah, you know the the cash flows on within that segment the cash flows of the borrowers have been fairly consistent with certainly that industry is being impacted by increasing labor costs. But frankly many of the small mid-sized businesses are are feeling the same thing owing in part to the increase in minimum wage that has been ongoing for a number of years, but I think the greater impact pressure certainly coming from the low unemployment rate that being said business owners are deploying technology strategically syrup franchisors who are developing that are are having an impact and and business owners is becoming
a little bit more
Creative to drive productivity in their business, you know, the performance of our portfolio though is opposed to a holistic approach of of what we do. We don't do syndications. We we originated the loans are ourselves. We manage them ourselves. We have a specific fairly narrow niche of about 19 to 20 franchisors that are typically large national players that are long-standing in the industry have the ability to innovate and support their franchisees and all of the franchisees that we Finance our experienced owner-operators and that has served us well over the years that being said,
we worry about
Every one of our portfolios on a regular basis and will continue to actively manage each one of those. Okay, very helpful. Thanks Steve. I appreciate it. Sure.
The next question comes from Matthew Clark from Piper Sandler you may go.
Matthew are you there?
Okay.
The next question comes from Gary tenor from d a Davidson Gary May begin.
Hi, good morning, guys. This is actually Jake Stern on for Gary Turner.
Hi, Jay real quick. I'm curious about the range of up to 15 15 basis-point additional core name compression given the amount of loan repricing that has already occurred. Can you tell them that would drive the corn him to the bottom end of the range?
The the range is you know, the the ranges what we expect for q1. I mean what would drive it towards the lower end. I mean any number of factors rate volume on the loan side rate volume on the deposit side. Those are all the factors that are going to impact it as I noted and has been ongoing there's certainly stiff competition on the loan side and we are we are seeing some banks reach on the yield may have been disciplined around that and will continue to be we also have actively moved down deposit costs and are benefiting to Fathom are very disciplined approach towards business develop and bringing in new client relationships building upon existing client relationships to build our knowledge.
preparing deposits and
And that it has also helped to offset some of the the macro environment that we're seeing around deposit and Loan competition.
Awesome. I appreciate that color. Just kind of the touch base on net loan growth is twenty-twenty or any any thoughts on resuming positive net loan growth or I guess service for 2020.
The Outlook is is we first and foremost focus on ensuring that the loans that we are putting on the books have the right risk-adjusted return characteristics. And if we can't get that, we're just not going to stretch whether it's pricing structure or credit quality historically, we haven't and we were very comfortable with in essence holding the loan portfolio relatively flat for the year off. I certainly don't see it Contracting in in 2020. We think there are maybe opportunities to grow some areas in the portfolio. In the multifamily the cre aspects and then other specialty lines will will continue to
to active
We pursue and work towards growing those but but doing so prudently.
Thank you for answering that and has the challenging Revenue environment changed the level of conversations. You're having with prospective m&a partners.
I wouldn't say it's it's changed. We we continue to actively seek out and engage targets that we think would make sense to the to partner with and to improve the franchise and that would drive shareholder value, but in fact in doing so just as we've been in the past, we're very disciplined on that approach around structure pricing and the like and ultimately it it's got to make sense for both sides.
Perfect. Just one more question. Then. I'll hop off here regarding the new stock buyback program your Shares are currently trading above the level you were buying the mat and 2019. Do you think of the New Jersey 100 million dollar authorization is offensive where you'd be buying up here or as defensive in the event of a sell-off?
I think we could utilize it for in in any realm there. It's just part of another arrow in our quiver as we looked dead effectively manage capital.
Wonderful. Thank you guys for answering my questions. Very good.
The next question comes from Jackie Bowen from KBW, please go ahead.
Hi, good morning morning Jackie. I wanted to touch on the net interest. Margin. Just one more time asking the question. Somebody had perhaps a different way than you talk about lowering deposit costs and all the proactive activities. You've been making to protect the margin, you know assuming there isn't any rate change the guidance that you gave still implies that there would be at best song Only You Know five basis points of compression. And so I'm curious what's the driver of moving that to 4:10 through 4. From 4:10 to 4:05 at the upper end of the range.
So it's it's combination of of what we saw as we moved through the fourth quarter as far as loan yields pay downs and the light bulb also again being selective in the loans that were are willing to put on the books. It's any number of those factors Jackie it's you know, a fairly Dynamic mix that has an impact and and we are very comfortable with the the range we've given at the same time. I think we've proven for a sustained period of time that we're able to effectively manage the spread in the business in any interest rate environment, whether we've got a a flat curve and invite a curve or a steep learning curve which would certainly benefit us, but
We are focused on managing it very tightly.
Okay, that's helpful. Thank you for the added color there. And then this one possibly for Ron looking at the cost of deposits and understanding that not not the cost of em, average balance sheet that the cost in non-interest expense but deposit expense was up quite a bit of quarter-on-quarter and I understand that it's balanced related. Is that a good for wage rate and to the extent you continue to, you know, grow some of your balances from there. Would that go up or were there some younique items in the quarter in that there really weren't any unique items Jackie in that number to the extent where this is our starting point and we grow we continue to grow, you know, our core deposit base as we've have yeah, that would be the starting point that said, you know, we'll see what happens with with deposit growth here in the first quarter.
But there was no unique items just to reiterate that. Okay, thank you. And then just one last one also on the topic of m&a see if would you say that, you know the 29th and I know that you're you know, you're always investing in the franchise and in you know, making yourself more efficient and ready to handle a larger institution, but you know from my perspective 2019 was a unique year for you. He's not, you know, you weren't doing an integration and you were able to focus more fully internally as well as externally, you know with that a function with the announcements. Was that more a function of your internal discipline on what you're looking to acquire or was it a function of fewer opportunities that you saw in the market. I think it's a combination of of all of those items, you know, there are a few targets out there that we are interested in in that we continue to have conversations with at the same time.
we got conversations with the
Number of folks for a long period of time and and so both myself the executive management team the board. We are very much focused in ensuring that any acquisition has really got a benefit the shareholders longer-term and and so through that process and that discipline just the combination of factors why we didn't get one done in 2019.
Okay, and so it my assumption is that the internal work you were able to do was just opportunistically taking advantage of you know, some extra capacity just not having a deal that it it didn't prevent you in any way from any sort of an announcement. That's correct.
Okay. Okay. That's all I had. Thank you very much.
Again, if you have any question, please press * then 1 the next question comes from Matthew Clark from Piper Sandler, please go ahead.
Okay. Thanks. Sorry I got stuck on another call. Can you quantify the amount of prepaid and payoffs you had in the quarter?
They were up from the third quarter. I don't have the number off the top of my head, but they were up slightly on a rate basis and a dollar basis Matthew month.
We can get you that number and then the loan purchases curious how much that was this quarter?
I believe it's in the running slowly trying to think off the top of my head. I want to say twenty twenty-two twenty-three twenty-six twenty-six thousand dollars in total purchases. May I help you?
Okay.
And then line utilization if you haven't had it already.
Line utilization was up again. I don't know. Yeah, I don't have that that number right at my fingertips here Matthew. Okay, and then just on the expense run rate.
In the range of 65 to 66 and the upcoming quarter. Can you just give us a sense for where that relief is going to come from and the upcoming quarter in what is you know, you would think would be easily hire? Yeah name is Ron mention the really from the as we look at it. It's the incentive piece of our our total compensation and that accrual and and typically Thursday the 4th quarter is higher in in typically the highest quarter during the year is as we true things up. Okay, that's it for me.
very good
This concludes our question-and-answer session. I would like to turn the conference back over to Steve Gardner for any closing remarks.
Thank you, Jason. And thank you everyone for joining us. Please do not hesitate to call either Ron or myself and we'd be happy to provide any additional color or answer any questions.
The conference has now concluded thank you for attending today's presentation. You may now disconnect right?
Thursday