Q4 2019 Earnings Call
Ladies and gentlemen, good day and thank you all for joining us for this asante fourth quarter 2019 earnings call. As a reminder, all phone participants are in a listen only mode. But later you will have the opportunity to ask questions.
As <unk> as a reminder, today's meeting is being recorded amount to get started with opening remarks and introductions I'm pleased to turn the floor over to our host Mr. Mark go too far welcome Mark.
Thank you very much good afternoon, everyone and thank you for participating in todays conference call.
Getting the presentation I want to take time to refer you to our statement about forward looking statements and risk factors, but should be on the screen in front of you. The statement provides the cautionary language required by the Securities Exchange Commission for forward looking statements that may be included in this presentation.
A copy of the fourth quarter and full year 2019 earnings release can be obtained by clicking on the press release link on your screen or by visiting our Investor Relations website at <unk> T Bancorp dotcom.
I'd now like to introduce Todd Brice, Deputy Chief Executive Officer, who provide an overview of absentees result.
Thank you Mark and good afternoon, everybody I'm very pleased to announce it our fourth quarter results were strong and capped off a very successful 2019.
The quarter, we reported net income of $22.3 million were 62.
Okay.
Its core EPS was 85 cents per share, which compares favorably to 77 cents per share in the fourth quarter of last year and 80 cents per share in the third quarter 2019.
Core performance metrics were very solid with a return on asset a 1.53% return on equity of 11.38% and a return on tangible common equity was 16.46% for the full year. We recorded net income of $98.2 million or $2, an 82 cents per share, which includes $11.4 million or more.
As it related expenses.
Worry P.S. for 2019 were $3, a nine cents versus $3, a one cents per share in 2018 and for the full year core our away or are we in our TC were 1.4 or 510.92 and 15.76, respectively.
2019 was a busy here as we made significant investments throughout our footprint to position ourselves for future growth.
All while maintaining our fishy efficiency ratio, 51.39% for the full year or the Big news was a consummation of our merger with Dnbi financial in Eastern P. Eight which closed on November thirtyth.
We added 14 branches in a proxy $1.1 billion in assets in markets with very favorable demographics in significant growth opportunities.
Well they either integration is still ongoing early results are very promising as overall client retention all lines of business amid prop positive and our commercial banking division, we've been able to expand customer relations ships through additional lending limits Treasury and swap products also wealth management insurance capabilities. We're extremely excited about the prospects in our busy.
As banking division and that pipeline is growing nicely and also resale mortgage activity has picked up and the average loan size is almost double what we're seeing in or a western PA markets.
S. T signage will go up on February 10th when the systems conversion is complete and we look forward to extending the S&P brand is one organization in these new markets up post conversion.
The individual market based structure that we introduced at the beginning 2019 is coming together very nicely won't continue to drive growth throughout our footprint.
Under the leadership of our five market Presidents, we are seeing enhanced collaboration across lines of business and are able to tailor products and services specific do each market to improve our client experience. We've also made investments in our commercial banking division to expand our international banking capabilities and asset based lending platform to broaden their products and services to meet client needs.
And a recently onboard our first two asset based lending customers retail division expanding the footprint last year with new offices in Columbus, Ohio, Okay. The falls, which now have $78 million, an $18 million into pauses, respectively. These markets are developed to developing nice business banking mortgage and consumer banking opportunities as well we.
Also up until that loan production offices, one in Buffalo and my burst County that will focus on commercial and business banking activities.
And also over the course of 2019 investments have been made in production talent.
Commercial banking well welcome five new members their team our mortgage banking division added five a mortgage loan officers in the business banking group increased by four officers and our wealth management Division, we recruited a new sales director of the there was an extensive and proven track record in that space and in a short period of time, he was able to bring on a U.S. season investment advisor.
Her to his team as well.
Spanning our digital marketing platform is another area that we're investing to extend our brand enhance our customer experience a we've made investments in talent and advisors to improve capabilities in this important space and redesign of our Citibank Dot Com website is in process. It will be rolled out at the end of Q2. So in summary, we're very pleased about the investments that we made in 2000.
19 to position our company for future growth and we've been able to do well maintaining our low efficiency ratio, which is very important to us. We're excited about our prospects for 2020 and look forward to expanding our franchise and rewarding our shareholders and I'm going to turn the program merger, our president Dave Antolik.
Thanks, and good afternoon, everyone a as I complete my first full year as president of essence, He bank I cannot be more enthusiastic about the progress we have made under our market base growth platform and the opportunities that lie ahead 2019 saw record years for production in commercial banking in business banking, where we saw a 20% increase in total originations.
As well as retail mortgage and consumer where we experienced 56% and 48% increases respectively.
This robust activity offset by increased payoffs resulted in full year long read the 5%, we're very pleased with the diversification of this growth.
By category and geography, 40 year organic growth in commercial banking was 4% business banking, 6.5% retail market mortgage 13% in consumer 3.5%. Additionally, each of our five markets all positive loan growth demonstrating the advantages over operating model and the value of our mark.
Good expansion. This is further illustrated by higher percentage loan growth in northeast, Ohio, Central Ohio in Upstate New York, We believe that eastern Pennsylvania and provide similar opportunities.
For the quarter loan growth was challenged by the highest quarterly pay offs experienced in 2019 total payoffs in Q4 increased by nearly 100% every Q3 and exceeded each of the previous four quarters by over $100 million in total organic longer for the quarter was $42.1 million or to pay.
7% annualize Q4 growth was driven primarily by business banking retail mortgage and consumer lending activities with commercial banking remaining flat revolving CNR utilization rates decreased slightly from 42% to 41% in Q4, However, new customer acquisition activity and the resulting increase in total.
Commitments offset this utilization decline and result in a balance increase of $5 million looking forward, our pipelines remain solid with both commercial and business banking showing year over year growth of 30% and retail mortgage up by 20%.
We have also seen an increase it unfunded construction commitments of $110 million year over year, pointing towards a steady growth in commercial construction outstandings. During 2020 after bottoming in the second quarter of 29 team in total we anticipate mid single digit loan growth for 2020.
Deposit growth for 2019 was strong at $372 million were 6.6%, excluding the dnbi merger for the year organic demand deposit growth exceeded $100 million and the overwhelming majority of the remaining deposit balance growth was driven by money market similar to our experience with loans all deposit gathering mark.
Good saw positive growth.
Improvement in non interest income for the quarter was mainly the result of higher commercial loan swap fees a $900000. It for the year total commercial loan swap fees exceeded five and a half million dollars and now Mark will provide you with additional details on our financial results. Thanks, David and with the closing of the Dnbi merger on November Thirtyth, we have one month.
Of activity in the fourth quarter numbers, along with the onetime expenses that Todd discussed the net interest income improvement of 3.2 million compared to the third quarter was primarily related to the merger and average balance growth. Excluding the merger was 116 and a half million that was offset by a lower net interest margin rate of about seven days.
His point.
Margin compression was in line with our expectation as we had the effect of impact quarter over quarter of almost two fed rate declines.
Included in net interest income in the fourth quarter is approximately $360000 or about two basis points of purchase accounting accretion for the Merck for the Dnbi transaction, we expect the NIM to be relatively stable in 2020 in that 3.55% area, assuming no further rate changes.
This includes about five basis points to benefit from purchase accounting, which of course could fluctuate quarter to quarter, depending on prepayment activity.
Non interest income was strong in the fourth quarter, particularly in commercial swapped eases, Dave talked about this is likely to moderate some as we move into 2020 addictive is driven by the shape of the yield curve and we work through refi opportunities on loans that are already on the books.
Fee income from the acquisition and growth in other areas will offset some of this normalization swap fees bring us to a run rate of about 13, and a half to 14 asked million dollars per quarter.
Systems conversion Todd mentioned will result in the last of our merger related expenses here in the first quarter of 20, we expect a little bit less than $2 million, we should see the expense synergies really starting in the second quarter factoring out some unusual items that helped us in 2019, including FDIC credit in the third.
Were 19 that totaled about $1.8 million.
Also as sales a state sales tax adjustment of 2.3 million here in the fourth quarter net of all that we expect our expense run rate to be in that 40 $546 million rate quarter in 2020.
We expect the tax rate in 2020 to be a little bit higher around 18%.
Then we experienced in 28 team that was due to higher pretax income and exploration some tax credits.
Our capital ratios, all improved compared to third quarter due to modest point to point legacy SSG asset growth and relatively neutral capital impact of the merger.
We are in the final stages, the validation or view of Stifel.
We expect the day when impact on the legacy equity portfolio to be between seven and a half and $9 million, that's about 12% to 14%.
The acquired loans from Dean from the Dnbi merger carry no reserve as a 12 30 119 net accounts for our loan loss reserve dropping from 1% in the third quarter, 2.87% in the fourth quarter. The day when impact of the acquired portfolio is expected to add an additional nine and a half to 11 million. So combine the reserve.
It's expected to increase by between 17 and $20 million, that's about 27% to 32%.
This will put our reserve ratio between 1.11, and 1.15% we should see tangible book value dilution per share of between 34 and 40 cents.
Well less than 2%.
And we'll see reduction in the TC ratio 60 to 80 basis points.
The impact on regulatory capital ratios as needed by the three year phase in and the ability to include the reserve up to 1.25% in tier two capital.
These ranges are subject to revision as we complete our final reviews in purchase accounting work and will change when we report Q1 results pay on loan balances risk ratings and the economic outlook as a 331 2020.
Thanks, very much at this time I'd like to turn things back over to the operator will provide instructions for asking questions.
Thank you Sir.
Joining today on the phones, if you'd like to ask a life question. Please press Star then one on your telephone keypad pressing star one will place your line into a Q and a friendly reminder, that if you're joining us today on the speakerphone. Please return to your handset prior pressing star and wanted to be sure that your segment does return.
Again that is star in one ladies and gentlemen, if you'd like to ask your question.
Star then one will take just a moment to give everyone a chance to signal.
Well take our first question from Russell Gunther with D.A. Davidson.
Hi, Good afternoon, guys I must say rather than.
I appreciate your comments on the growth outlook and guidance mid single digits.
I was hoping to just parse that a bit and as you're looking out for 2020 get a sense for what the loan mix drivers of that growth would be.
Some commentary on kind of geographic contributions as well and would be particularly interested in how the newer markets with dnbi are our budgeted to track with 2020.
Yeah. So geographically Russell we are looking to these a central PA and southeastern Pennsylvania markets to have outsized growth, particularly in the business banking in retail mortgage categories.
We also expect the new AB l. platform and to continue.
To help us grow RC and I Outstandings see Ari growth has been muted by a payoff.
As I mentioned, we have a pretty significant increase year over year in construction commitments, which should help provide some stability in that category. You know, we see a less growth in western Pennsylvania, Although we do anticipate growth in 2020 in the new markets will continue to drive higher.
Our incremental volume.
Very good thanks James.
Mark following up on your expense side.
Just want to get a sense for how you would expect that to trend when should we kind of start higher and then and towards the 45 million ish range given the conversion.
Scheduled for earlier in the year or how do you anticipate the glide path.
Yes.
I will be a lot a little bit higher because of the a onetime but also the a lot of the synergies won't start until.
Q2 after conversion athletic conversion in mid February .
I think that though we typically don't do our salary increases and things like that until the start of the second quarter. So that helps to keep the first quarter or more in line. That's at excluding the onetime expenses that actually should be relatively consistent over the course of the year, but I you know our goal is.
Still to maintain that you know efficiency ratio to low fiftys as you know we have in the past.
That's great. That's very helpful. Thanks, Todd Thanks, Mark My last question guys would be.
With regard to capital and now with the deal now closed.
Thoughts on putting some excess to work to be as a buyback.
Right. So we still have a 50 million authorization from the board. It Doesnt expire until 2021, so depending on you know the that market outlook and the pricing and our own thoughts on growth.
We may pull that trigger we may get active in that in that space.
Very good guys. Thanks, so much that's it for me.
Thanks Russell.
Thank you Mr. got there.
As a reminder, try and stuff you're attempting to signal us today and your joining on the speakerphone. Please disengage your speaker phone function to make sure that your signal does recharge equipment.
Next to the line of Collyn Gilbert.
Thanks. Good morning, guys are afternoon, sorry, and along we just quickly on first question a follow up on marks to comment on on 'em. Ross's question about the buyback and you said you may pull that trigger what would be a circumstance that would cause you to to be more active in a buyback.
I think as long as the we felt good about our performance it'd be what our price.
But we saw some decline in in the probably far stuff that we didn't think was warranted specific to us or was more market driven market broadly market driven you know that would probably caused you more active.
Okay, Okay, and then just.
A question on the L.P.O. isn't you guys are your opening in Buffalo and Bucks County, Todd Love to hear just sort of well go that went into the did the a the strategy or what are you seeing in those markets I'm, either competitively or from an economic standpoint, that's that's causing you to set up lpos in each of those two markets. Yes. We had you know we haven't operation and help you over in Rochester.
You're calling that we've had since 15 and they were you know a serving the Buffalo marketing, we had some decent activity over there and we're able to kinda a land a as some pretty good bankers with some pretty good see an eye experience in a in those markets. So are they came on board. We also put a business back are in place in Buffalo and.
That was probably a we'd do that earlier in a year I think in in the spring and then we Oh, we opened up one embarks and there was again, it's kind of a market extension from our central Pennsylvania, and Eastern Pennsylvania markets and again, it just comes down to add and I've been able to attract good people and yes.
I have some folks over there. We also I know we have a mortgage banker in the birds office and and again when we probably have a lot of works I know, it's about 50 million or so and it outstandings out of that at a market I'm not quite sure what the Buffalo is thought to kick off my head, but but again, we're seeing business banking and mortgage related activities and so were more opportunistic rather.
Saying, hey, we need to be in a market is if you know if the right now comes up we'll certainly consider it and that's where we made the investments in production across the you know the different business lines last year. So we think you know what those investments that we made will will carry into 2020 to drive some you drive growth.
Okay. That's helpful. And then Dave just maybe you could talk about or Todd either wanting just on the <unk> initiative [noise] sort of how you see that growing or how big as a a component of the overall business you expect it to be kind of in the near and long term and just kind of frame.
30, or just strategic outlook, there I bet.
Yeah, so caused Dave when we looked at the opportunity as we grew our C. N. I book, we're running into situation and potential clients, who needed that kind of service and we didnt have the internal expertise. So we went to the market. We are able to recruit a team of bankers who came to us.
And it's had done a startup baby L. In the past I'm. So it's about attracting new clients and also in a in a potentially difficult economy. You know gives us a soft landing spot for us some clients who might be struggling and need much closer monitoring from a risk perspective.
But we do think it's going to be incremental to our growth and provide a additional opportunities that come with no food.
Services Treasury services all of the banking services that we we offered in addition to just extending credit.
Okay. That's helpful. Thank you and then I'm Mark just on that the pickup in mpls in the quarter can you just give a little bit more color as to what was going on there and then also just kind of walk us through the the sort of the reserve methodology or just the fact that you know it was a lower provision despite the uptick.
There and those credits just to understand what's going on.
Thank you all in this is a this is bad so on the income improvement throughout the quarter, the NPL movement in and out a inflows and outflows was pretty fluid.
Obviously based on certain customer events.
And our active portfolio management.
I would tell you that all items and everything from from the the movement in or been.
And is reflected in our.
Isn't and in our reserve a we're addressing these situation.
Constantly continue to work with all parties that may be involved and I think we're just really taken taking these on a which is consistent with her best practices.
I can also starting to that you know obviously, our net charge offs were.
We're down considerably but are we at a pretty large and a decrease in our CMC portion of the portfolio as well. So you can see how fluid things are moving through their first quarter.
Okay. So the reduction and there was there was just a function of that whatever rolled off was maybe carrying a higher reserve than what.
Well, it's coming on.
Yes.
Okay, I don't know that some of that they go in and because of that a separate valuation he actually end up reserving potentially left for them.
Okay.
And then just broadly in the outlook for credit is there anything <unk> that you guys see on the horizon or areas that you're cautious on I mean, I think it seems like we get asked a question every quarter and everything's still seems really gotten so I'm asking again, you're probably get the same answer but just curious is your thoughts there.
Yeah, I mean, I always say today, but you know for you like as Pat indicated calling you know we did see some nice downward trends in our criticizing classified buckets, which is usually some you're leading indicators are.
They were down about eight or $23 million and and you know we we have a lot of discussions out with with clients and all of our markets in and you know that they still seem to be you know optimistic in you know.
We talked a little bit earlier when I'm in the.
We do you guys had exhibit the big constraint I think right now or in fact is workforce you know that customers are in I don't care, what industry, you're in or having a challenge finding qualified people to to be able to grow their business or serve their existing client base.
Okay, all right I will leave it there thanks, everyone.
Thanks, Tom.
Ladies and gentlemen, once again that is star and Wonder if you would like to ask a question or have a comment about having covered in today's remarks.
Will allow just a few more moments to give you our audience the chance to signal.
[noise] [noise] again, we did it we did get an online question that I'd like to take heart. Please go ahead.
So the question was or what would be a good diluted share count for the first quarter 20 to use in calculation as well we would expect that it would be in the in the range of what the shares outstanding were at the ended the period. So it's about 39.6 million right around there would probably be a good number.
Thanks, Jim but excellent. Thank you for that inside and at this time, we have no signals from the audience I'll turn it back to our leadership team for any additional or closing remarks.
Thank you, Jim and I just want to thank everybody for participating in today's call Mark Dave and I appreciate the opportunity to discuss this quarter's results and look forward to hearing from you and or next conference call. So I hope you'll have a good day.
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