Q4 2019 Earnings Call
And year ended December 31, 2019, I am Andrei Henderson director of marketing for bank of Moran.
During the presentation, all participants will be in a listen only mode. After the call. We will conduct a question and answer session.
At that time, if you have questions. Please press one followed by four on your telephone if at any time during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded on January 27 2020.
Joining us on the call today, our rest Colombo, President and CEO and tiny Girton Executive Vice President and Chief Financial Officer.
Our earnings press release, which we issued this morning can be found on our website at bank of Moran Dotcom.
Where this call is also being webcast.
Before we get started I want to emphasize that discussion on this call is based on information as we know as of today January 27 2020.
And may contain forward looking statements that involve risks and uncertainties.
Actual results may differ materially from those set forth in such statements.
For a discussion of these risks and uncertainties. Please review the forward looking statements disclosure in our earnings press release as well as our SEC filings.
Following our prepared remarks rest and Tony will be available to answer your question and now I'd like to turn the call over to wrap Colombo.
Thank you Andrew.
Good morning welcome.
Welcome to the goal.
Bigger more in full year 29 getting results reflect the successful execution of our Bruce proven relationship banking model.
We continue to deliver consistent loan growth a low cost deposit base, an exceptional credit quality.
Let's start with our 29 GE highlights.
Net income for the full year was a record $34.2 million, which represented a return on assets of 1.34%.
Return on equity of 10.49%.
Diluted earnings per share with $2.48 up.
6.4%.
We grew our loans by $79.4 million or 4.5% based on a record year of originations with crunch contributions across our footprint.
Deposits grew over 161.7 million for the year to 2.3 billion.
Noninterest bearing deposits increased 62.8 million in 2019 and comprised 48% of total deposits by year end.
For the year, our cost of deposits remained very low at 20 basis points.
Non accrual loans represented just 0.01% of total loans at year end, reflecting our unwavering focus on credit quality.
In 2019, we successfully executed on the or get a growth initiatives that we discussed at the started the year.
We opened a new loan production office in Walnut Creek, and strengthen our presence in San Francisco by bringing in well established commercial banking lenders.
We made significant progress in staffing across our markets that should position us well for continued loan growth in market share gains in 2020.
With favorable outlook on top of our strong 2019 performance our board of directors declared a cash dividend of 23 cents per share on January 24 2020.
An increase of two cents per share.
This represents the 59 consecutive quarterly dividend paid by bank of Marine Bancorp.
Our $25 million stock repurchase program expires February 28 2020.
We repurchased 42349 shares totaling 1.9 million in the fourth quarter, and 356000 shares totaling $15 million over the year 2019.
With the courage share repurchase programs nearing expiration bancorp.
Board of directors approved a new repurchase program on January 24th of up to $25 million and bank worth common stock.
The new program will expire February 28 2022.
Now, let me turn it over to today for additional insight on our financial results.
Thank you very good morning, everyone.
As rent stated, we built solid momentum through 2019, producing net income of $34.2 million for the year.
This marked a 5% increase over 2018 and continued bancomer ends long term upward earnings trend.
Over the past five years lead produced an average earnings growth rate of more than 10% due to the successful execution of our two pronged growth strategy.
First and foremost is consistent organic growth.
We amplify that growth by effectively integrating and building on strategic acquisitions as we have done with the charter of bank bank of Alameda and bank of Napa acquisitions.
Year over year, net interest income grew $4.2 million or 4.5% driven by higher loan balances and yield.
The impact of higher interest bearing deposit balances and rate was mitigated by the early redemption of subordinated debt in 2018.
Non interest income declined $1 million from 2018.
Which included a $956000 gain on the sale of visa class B shares and higher fees on deposit sold to third party networks in 2018.
In 2019 of 562000 payment on bank owned life insurance policies was partially offset by expenses on new policies purchased.
Notably noninterest expense of $58 million was down from 2018.
While salaries increased 7.5% year over year, primarily driven by hiring for our commercial banking offices, our data processing professional services and health insurance costs declined due to the renegotiation of contracts.
We are no acquisition related expenses in 2019, and FDIC insurance premium payments were not required in the last two quarters of the year as the deposit insurance fund exceeded its billing threshold.
The full year 2019 efficiency ratio of 55.3% declined from 57.3% in 2018.
Demonstrating our commitment to careful expense management that is balanced with strategic investments in talent and technology.
Now turning to our fourth quarter results.
Net income was $9.1 million in the quarter compared to 9.4 million in the third quarter.
Were three events in the third quarter that led to higher net income of $388000 interest recovery on a land development loan of 562000 benefit on bank owned life insurance and a 327000 tax adjustment related to the true up of our deferred tax liability.
Diluted earnings per share were 66 cents in the fourth quarter compared to 69 cents in both the prior quarter end the same quarter a year ago. After adjusting for the November 27, 2018 stock split.
Our return on assets was 1.37% and return on equity was 10.75%.
Net interest income was fairly stable quarter over quarter as growing loan balances, mostly offset declines in yields related to federal reserve interest rate reductions and the third quarter interest recovery.
In line with strong loan growth, we recorded a $500000 loan loss provision in the fourth quarter compared to 400000 in the third quarter of 2019 and no provision in the fourth quarter of 2018.
Non interest expense of $13.3 million in the fourth quarter of 2019 was down from 14.2 million in the prior quarter and 13.7 million in the same quarter a year ago.
The decline from the third quarter was mostly due to an incentive bonus adjustment and higher deferred loan origination costs related to a higher volume of new loans.
Most of the decline from the fourth quarter of 2018 was due to lower data processing costs and the absence of FDIC insurance premium payments.
Disciplined expense control enabled the bank to reduce its an efficiency ratio to 50.8% in the fourth quarter of 2019 from 52.8% in prior quarter and 51.3% in the fourth quarter last year.
I'd now like to discuss the new accounting standard related to credit losses, commonly known as diesel.
This went into effect on January Onest, 2020, and had no impact on our 2019 results.
Our primary credit loss methodology will utilize a discounted cash flow approach that considers the probability of default and loss given default.
Parallel testing occurred throughout 2019, and we estimate that our implementation of diesel will result in an increase of 5% to 15% of our December 31, 2019 allowance for loan losses, which will reduce retained earnings net of tax.
In closing, we're very pleased with our 2019 results and all of the work accomplished during the year that positions our teams to build off this great success as we move forward in 2020.
Now rest, we'd like to share some closing comments. Thank you Johnny.
The big celebrated its thirtyth anniversary on January 20, Threerd, we're very proud of the progress we've made in the success we've had over the last three decades.
We have built one of the strongest in lowest cost deposit franchises in the countries with close to 50% of funds in demand deposit accounts.
As a result of a true commitment to our relationship banking model.
Our focus on sound underwriting in comprehensive understanding of our clients end markets produces a high quality loan portfolio.
With industry, leading credit metrics rarely having to deal with problem loans allows us to focus on attracting and serving customers.
Our steady and save loan growth paired with our low cost deposit base drives continued growth in the earnings per share.
With that Fisher with an efficiency ratio of 55.3% for the year, it's clear that we manage expenses exceptionally well.
We spent wisely when it can help us provide more services to our customers and grow our market share.
This is evidenced by the recent hires I noted in Walnut Creek in San Francisco.
We are always mindful of expenses for example, we review all contracts and leases upon renewal and often find opportunities to drive efficiencies and reduce costs.
Looking ahead, we believe we are well positioned for growth in 2020.
We serve one of the most economically vibrant regions in the country.
We have a strong technology sector as a foundation in the Bay area is growing and economically diverse.
Unemployment across our markets is very low.
Sure and Marine County, it's just about 2%, which is basically full employment.
This drives on growth going economic activity and opportunities for loan growth.
There are substantial momentum.
For local businesses in for the bank.
And we're confident we can further we can further build on this in 2020.
We also feel we are well positioned to grow our presence in our existing markets and to consider expansion into new markets with the no off denovo offices or acquisitions.
Our consistent strong performance.
Coupled with our proven history.
Give us a strong position to acquire other community banks.
While acquisitions are very important part of our long term strategy, we take a disciplined and selective approach to evaluating opportunities.
All in all I'm very excited about the future. This bank in 2020 and across the next 30 years.
Thank you for your time this morning, and now we will open it up to answer your questions.
Thank you, ladies and gentlemen, if you would like to register for question. Please press the one publicly the floor on your telephone.
Here three Tom Tom Technology request, if your question how to an uncertainty we'd like to withdraw the registration. Please press the one followed by three.
Question can be submitted via the webcast page by clicking the ask a question tough and typing your question into the boxes that appears below the top.
Once again on the Hoenlein team and press one four to ask a question.
And we do have questions into Q.
Our first question from the line of Jeff Rulis with D.A. Davidson. Please go ahead. Your line is open.
Hi, good morning.
Good morning, Jeff morning.
The first one is on on expenses and.
Yes, he had a a year over year decline.
Got it kind of outlined a bunch of the some of the levers to pull you had some contract negotiations obviously, the FDIC expense line item, but at a true up off of salaries in the fourth quarter. So.
Declined year over year moderately I guess expectations as you invested with business.
20.
Okay.
First question is.
Expectations for broader expenses with 20 EBIT, Tony if you could provide detail on the FDIC expense early part of the year before expected normalize those going forward. Thanks.
Sure just to clarify I think you mentioned a true up on salaries, there wasn't really a true up on salaries, we just.
Brought in some new hires in our commercial banking area, which is what.
Drove our salary lines up a little bit.
And in terms of.
Going forward I think we continue to look at any contracts that come up for renegotiation and to the extent to the extent that.
We had vacancies in 2019, a lot of those vacancies have been filled and so.
If we have a lower vacancy rate in 2019, I mean in 2020 than we did in 2019, plus with our new hires you could see a lift.
In salary expense again, that's consistent with the fourth quarter levels.
And then finally on the FDIC premium as long as that.
The insurance fund rate remains above its threshold.
We won't have to pay those insurance premiums and it has been it has been trending up so our expectation is that it is likely that at least for the first quarter or too we may not have to pay that but there is theres no telling because there are a lot of bank results that go into producing that number and if something happens.
And then obviously all bets are off so.
But we have had two quarters and we do notice that the insurance fund is increasing in.
Values. So that if that trend continues then we will probably continue to get relief.
Okay.
I get to circle back then on the call point that really does seem to be.
It was pretty front end loaded.
2019, I assume on spot hires.
Has that sort of transition lower throughout the year.
So if I if I read your right. It I mean, you will continue invest in finding new folks but is there.
You were kind of 1 million and a half range on that salaries and benefits.
Is there a quarterly number that you think maybe for Q does that seem artificially low thats seven eight.
Any further color there.
No I don't think so because we.
We actually our staffing levels were pretty good in the fourth quarter and what happened in 2003 is that we had a severance payment.
And that bump to salaries up in the third quarter.
Okay. Okay.
Okay last one is just a question broader Ron on growth.
And a half percent loan growth seven.
And our off roughly on deposits.
Looking at payoff activity.
Overall environment for us sounds like you're pretty positive on.
Origination activity respects on 20, good general is there anything that could be changing what you're hearing out at the market from a demand side.
No, it's pretty consistent and the good news for US is that we have stepped up these offices and we're really pretty much full employment I think we maybe one opening and all of commercial banking right now, which is fantastic and that.
When you when you hire there's a little bit of Allied period, but you should see better.
Greater production going forward, we have great production in.
In 2019, and I'm very confident about 2020 Im one of the things I would just wanted to mention to the the salaries in the fourth.
You said that so you've got the salaries are frontloaded, they're more they were more backloaded frankly, because we hired.
A lot of those people kind of near the end of year.
And the fourth quarter typically we have an accrual of bonuses that goes on through the year and if we think we're going to be over crude than we do riverstone and so there was some accrual reversal in the fourth quarter, which happens every year. So.
That fourth quarter is kind of a weird number probably got most of the salaries, but it does have an accrual reversals future.
Thanks.
Anyway as I look forward to the next year I'm pretty feel pretty.
Pretty good about the opportunities for growth.
In commercial banking.
Okay. Thank you.
Thank you.
I have another question from the line of Matthew Clark with Piper Sandler Guide Your line is open.
Hi, good morning.
Good morning.
On the on the comp line.
Can you.
Maybe quantify how much the lower accrual was and how much Fas 91 impacted that 7.8 million.
Fas 91, I'll have to dig a little bit for the bonus accrual was about 500000 reduction.
Okay.
Okay and then.
On the.
Pipeline can you speak to how that pipeline looks.
Going into one Q here, maybe a year over year, just to give us a sense for.
How how that may have changed.
Okay.
Yes.
There's two components to that Theres existing staff one of the people that we brought in and so.
We feel pretty good about it we are obviously when you have a really good fourth quarter will all of the were a lot of the work that you've been doing the during the year translates into business and so then you do have a reduction in your pipeline first quarter and so that takes time to build out backout. So while I don't think it's it's a big impact.
It's probably off a little bit just because we booked everything that we're working on so.
That being said I'm very confident about the people that we have and now with our with our we've we've stepped up to San Francisco and Santa Rosa and.
Well the creek and so I feel pretty good about the opportunities for growth.
Our commercial portfolio.
Okay, and then just on loan yields they were down a little bit here I know part of that was from the recoveries. So difficult comparison also the third quarter, but still even adjusting for that there was still some pressure can you give us a sense for where kind of new money yields are.
Moving on the books and what might be running off in terms of yield.
Yeah.
Okay.
View.
Yes, so the new new.
The new.
Loans that are coming on.
Around the average ports on those new loans is about 434.3%, whereas the existing portfolio is probably at four eight or nine so you're seeing definitely a lots of pressure coming down on the on the loan yields.
That being said I think you'll see that across the industry.
Okay, and then just any update on M&A.
Terms of conversations are opportunities out there for you.
Okay.
Keep talking to people as the problem is I'd really say in a bank console, they're not bought there's not a lot of.
Of.
Thanks left from the Bay area.
So as I mentioned I think in my comments were looking on not only necessarily M&A in the Bay area, but we might look at continued contiguous markets.
There's nothing new to refer to this point.
My job is to talk to other banks in that continue targeting but nothing new at this point.
Okay. Thank you.
Matthew This is Tony I dug out that deferred loan origination costs for the fourth quarter that was roughly 900000 and that was up about 100000 from the third quarter.
Great. Thanks.
Thank you once again, ladies and gentlemen, the fall line team and press one four to ask a question.
Once again that is one for.
Our next questions from the line up and Jackie Bohlen with KBW. Please go ahead. Your line is open.
Hi, good morning.
Morning.
I would be remiss, if I hadn't started Bob at a compensation question.
Just one quick way.
Thank you May note that Dan payroll taxes usual in other seasonal items, usually increased compensation by about a million dollars between for Q1 Q is that still the run rate you're expecting.
It it might be a little bit higher just given the let the higher level of salaries in general.
But I think that we we do get a pretty big bump in payroll taxes as well as in.
Well one k.
Match in the first quarter. So those expenses will go up.
Okay. Thank you.
Right.
You talked about new new contiguous market from Bolsa de Novo at M&A perspective, and I have kind of a two pronged question here first off what we canceled.
There could be attracted continue at market and secondly.
M&A doesn't.
Happen in that way would you give me look to do de novo in those market.
So the contiguous markets certainly we're not in the South Bay were not without really other than we're not anything any farther south in Oakland Alameda in the East Bay. So there is theres mortgage there were really not I mean on the peninsula we have.
Off their fiscal we have nothing from San Francisco solved so theres a number of.
Continues market for you that we would consider if something came up for either M&A or.
Or for Denovo offices, and if we don't if theres not M&A than we will continue on the growth of.
Of.
Of just.
Organic growth.
And we've been able to see good we've been able to extract good people in all of our markets.
And that will translate into business and if we get if we don't buy anything then we'll we're doing just fine we're showing nice loan growth grew almost 5% than in the loan side.
7% on the deposit side those are good numbers and given the market I think that.
In our and our margins while they are down a little bit still continue to be good fun mum on pretty pretty confident about the future regardless of whether we have M&A or not.
Okay.
And given the high quality up your brands Theyll get.
Bankers are team the Baker from some of the markets you're looking at that inquire about coming to our creo.
Im not sure that people are just calling as to how the workforce. It's more outreach. We know we we have a program where we have identified at all of our markets.
It's really part of the grasp branch managers jobs as well as a regional manager in the commercial banking sides job to identify the top markets in their top.
Top bankers in their markets.
And so just like having a loan portfolio we have a a.
Baker portfolio Baker.
Equally.
And so we know we our job is to get to know those people and if there are opportunities and we know who to reach out to and and Thats.
When you haven't need.
It's better to be able to go to those people directly and that you've identified as good as opposed to clean up of a search firm to help us. So that's a that's a that's it's strategic initiative, we have just to make sure we know ever all the top bankers in every market we do business.
Okay. That's helpful. Thank you.
Just one last one for me you had really strong origination volume in the quarter end it accelerated throughout the year, most notably in the second half.
If that timing driven market driven is that part of the new hires you invested in add Walnut Creek in San Francisco, how would how would you characterize that.
Yes.
Our board will say its bonus driven.
Yes.
Okay.
You know it's.
It's just all over the all over the map I mean, I think that.
There is a push certainly by lenders as you get closer to the end of year to to to to meet their goal to meet their.
They are targets and as you get later in the year, they push gets harder and they really they really push hard so.
That being said I think theres, a lot of activities and Theres a lot of activity in the first in the fourth quarter. It tends to fall off a bit early in the year and then it picks up again as you get later in the spring and through the Summer then certainly near the end of year. So that's it is it's a it's a pattern that has.
Existed for a number of years here. This is not unusual and we keep thinking what we have great. If we get frontload more of that it just doesn't happen that way and.
It's.
I think that pattern will probably continue this year I mean, we had we had slow originations earlier in the year, but as you say it picked up in summer and then really picked up at the end of the year.
Alright. Thank you that's all I had.
Okay. Thanks.
Thank you and Im showing no further question on the phone lines.
Okay.
Okay. There is no other questions I want to thank everyone for joining us. This morning, and we will look forward to talking with you again next quarter. Thank you. Thank you. Thanks.