Q4 2019 Earnings Call

And gentlemen, thank you for joining us for our fourth quarter earnings call today as presenters are Chris Martin chairman president and CEO and Tom Lyons senior Executive Vice President and Chief Financial Officer before beginning their review of our financial results. We ask that you please take note of our standard caution as to any forward-looking statement that may be made during the course of today's call over full disclaimer is contained in this morning's earnings release, which has been posted to the investor relations page on our website Providence. Bank now, please introduce Chris Martin who will offer his perspective or the fourth floor Chris.

Good morning.

Thank you. My name good morning. Everybody problems quarter earnings of $0.43 per share were impacted by continued margin compression albeit flight and interest increase the wage is primarily from Consulting fees related to Cecil modeling and implementation. Our core return on average assets is 1.13% and core return on average tangible Equity was $11,000 for the quarter.

. It's only two basis points of margin compression in Q4 and forecasted being relatively neutral in 2020 the repricing of deposit relationships that had discretionary rates positively impacted overall deposits for us competitive deposit pricing has become more rational and our markets, which is a welcome respite for our funding costs.

This affords us an opportunity to reduce the rates on our CD book, although not a large portion of our overall deposits.

You to Our Success will be our ability to continue to grow our non-interest bearing in core deposits. We believe we have reached an inflection point in loan pricing and predict lower single-digit growth in the loan portfolio which continues to be bombarded by payoff and refinances away from us.

Probably too cute to variable-rate products and we continue to swap out longer-term fixed-rate loans.

Has become more competitive of late but we are winning our share of quality loans and relationships the Middle Market space has faced headwinds relating to the origination of loans at levels that are already over hurdles.

We take all commercial.

The expectations to the level of GDP growth. So low single-digit growth is what we expect to see in 2020.

Residential lending has picked up a plate and we continue to be selective in our credit decisioning and leave the aggressive lending to competition for head outside. No targets to bolster their margins.

Further we are seeing more and more interest only. Extended and longer terms than we have a low while emanating from the agencies in life companies.

On the matter of Cecil implementation, we expect incremental volatility since Reserve levels will be very dependent on a macro economic forecasting. This could affect loan pricing in the future wage also.

Elevated this quarter versus the same quarter last year as we continue to conservatively evaluate our classified credits. We have emphasized our exposure and concentration in certain industries while also stay away from Leverage lending. We believe the current economic backdrop supports a relatively stable credit Outlook and our net charges for the year. We're slightly higher but still in line with.

speculation about a potential

Reception has been on our and other Bankers Minds over the last couple of years, but it is not have any yet, and we try to spot the potholes beforehand.

The income continued it's improving Trend with wealth management leading the way along with low-level swap income and loan prepayment fees the additional valuation adjustment to the transaction is proof that this acquisition is is exceeding our initial estimates.

Expenses were higher in the quarter with the majority being in compensation and the non-cash contingent liability for the acquisition resulted in technology expenses continue to increase as I prepared for Cecil regulatory costs for being ten billion and Technology Investments to remain relevant in the new digital banking paradigm.

We continue to balanced expenses with investments in the customer platform and product sets.

Our techs spend is in body of work consumer-centric efficient and agile decision in for our clients to enhance their relationship with us information compiled in our data warehouse and our use of data a x will be key to understanding our clients needs.

the lights on

I will likely expand the years ahead especially in the payment channels and we're also investing in the Universal Banker model better recruiting processes and onboarding orientation and constantly evaluating our Branch dead.

That's for m&a. We expended a fair amount of time and energy in 2019 and assessing potential Acquisitions and continue to have more than enough Capital to achieve better returns for our stockholders and hold Bank transactions off or eight purchases. We can find our organic growth and support a solid and consistently above-average cash dividend with a with only a 54% payout ratio and supported by back when they meet our total return criteria.

The consumer segment appears to be in good shape for both the credit and spending perspective and the labor market may be the best that we have seen in the generation that interest rate policy is expected to be on home a while with geopolitical issues and Democrats and the presidential election grabbing the headlines. We believe the economy will continue to grow despite of these distractions.

Would that alter?

Over to Tom for his comments. Thank you Chris and good morning. Everyone. Our net income is $26 or $0.40 per diluted share compared with thirty five point eight million or fifteen cents per diluted share for the fourth quarter of 2018 and 31.4 million or $0.49 per diluted share in the trailing quarter.

Current quarter earnings will adversely impacted by a two million dollar or $0.03 for basic and diluted share net of tax expense increase in the estimated fair value of the contingent consideration liability related vehicle first. 99 acquisition of New York city-based are a church well and lovely as previously disclosed the urine out of the condition consideration is based upon achieving certain Revenue growth and retention. It's over three year period from the date of acquisition based upon seeing those recent positive operating performance and improved projections for the remaining measurement. An increase to the estimated fair value of contingent consideration was warranty.

at December 31st 2019

The contingent liability was nine point four million dollars with maximum potential future payments, totaling $11 million, excluding this charge. The company would have reported net income of 27.9 months or $0.43 for basic and diluted share and net income of 114.6 million or $2.70 for basic and diluted share for the quarter and year ended December 31st, 2019 respectively off on that interest margin contracted to basis points for the transporter and 23 basis points versus the same period last year to combat March of Oppression and continue to replace downward deposit accounts with negotiate. It accelerates this deposit rate management coupled with an eighty million dollar or 21% annualized increase in average non-interest-bearing deposits resulting in a 3 basis-point decrease in the total cost of deposit this quarter to sixty five basis points off.

Not interest bearing deposits service, 1.6 billion or 23% of average total deposits for the Border. We will continue to thoughtfully manage liability costs as the rate environment is all involved.

Order and Loan totals increased $66 or 3.6% annualized from September 30th as growth in cre construction and Residential Mortgage Loans was partially offset by net reduction cancion night multi family and Consumer loans loan origination is excluding line of credit Advance has reached their best levels of the year a hundred six million or 30% versus the trailing quarter to four hundred sixty-six million bucks a office remained elevated up forty six million or 18% versus the trailing quarter to 298 million.

The pipeline is December 31st decreased to 9 or 5 million from 1.1 billion at the trail and Porter ran reflecting strong year-end closing activity. The pipeline rate has decreased for this point since last order to 3.97% at December 31st. The lower pipeline rate reflects current market conditions in a decline in interest rates.

A provision for loan losses was 2.9 Million dollars for the current quarter compared with half a million in the trail and quarter. Our annualized net charge-offs is the percentage of average loans for twenty six basis points for the quarter and 18 points for the whole year overall credit metrics remain stable this border with non-performing assets, totaling 55 basis points of total assets at quarter-end allowance for loan losses. The total loans decrease the 76 basis points from 79 basis points in the trailing quarter largely as a result of improvement in qualitative allowance factors.

Income decreased slightly versus the trailing quarter to seven point seven million dollars as low as swapping income offset increased bank-owned life insurance benefits and loan prepayment fees.

Excluding the increase in the fair value of the contingent consideration liability related to the acquisition not interest expenses were an annualized 2.05% of average assets for the quarter for expenses increased 5.2 million versus the travel border with consultancy an audit costs related to Cecil implementation additional examination and consultancies the total of 1.4 million driving the increase we did once again this quarter from an FBI and see Insurance small Bank assessment credit of $758,000 and our total remaining FDIC credit potentially realizable in future quarters is 1 million.

Effective tax rate decrease to 23.6% from 24% for the trailing quarter and we are currently projecting an effective tax rate of approximately 24% for 2028 is our prepared remarks would be happy to respond to questions.

We now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. You're using a speakerphone. Please pick up your handset before pressing the keys off to withdraw your question, please press * then two.

This time will pose Mama momentarily to assemble our roster.

First question comes from Mark Fitzgibbons Piper Sandler, please. Go ahead.

Hey guys, good morning. Just curious if you guys have been holding the balance sheet under $10 billion for a while here. Should we assume that you know absent any Acquisitions you'll grow through that a billion organically sometime, you know within the next couple of quarters.

Yes, this is Chris absolutely mark. It was just the last quarter and there was no real reason and Initiative for us to go through after the acquisition. So we anticipate probably again a subjective payoff and other things that may happen that it would be happening in the middle of the year.

Okay.

And then, you know wondered if you could share with us would total assets under management are today and and specifically at church wall Laurie.

Total assets under management or a 3.4 billion TL is about 922 million.

Okay, and then I'm curious of the four point seven million in net charge-offs that you had this quarter. Where did those come from? What was kind of the the breakdown primarily to see and I category about four four bars and make up the bulk of that diverse industry is no pattern to it really nothing. Nothing notable in terms of that end in divorce or any future deterioration.

Okay, and then I wondered if you could just share with us any guidance on the margin and expenses for for $20. Martin looks pretty stable for us, you know, give us a plus or minus 2 basis points. Let's say but we expect a hold around these levels, you know, we continue to see downward pressure on the asset you'll side of things but we think we're able to manage the liability cost effectively making money.

in terms of

And probably in the fifty one and half million kind of range of quarter. We got about two hundred and seven million roughly for the full year expected 900 expenses.

Okay, and then lastly Cecil implications any updates there?

Well, not really providing guidance on the impact of Cecil yet. We're on target with ours are planning cross-functional planning the governor to control Frameworks in place. We're fine-tuning including validation of the month. So we expect will be in position to disclose those results in the 10-K filing difficult to project future provisioning though given that the volatility associated with the economic forecasting model variables. So one more to come in and just one final question for you Chris, you know, I'm curious as to your thoughts on the m&a environment and if if there's a if you know bankruptcy or a higher priority or asset manager deals or a higher priority for you all.

Well with our Capital levels, we consider those.

Opportunities for us to ground or obviously less and less available as the Market's pretty hot in the New Jersey and Pennsylvania. So we continue to see that as an opportunity for them grow and leverage. It's a little continue to do that as we will do it the same discipline matter that we do with every investment and utilizing our Capital. So yeah, I would think yes, it's always been on the 4th. I think it just even more so now as we, you know go through ten million.

In in in which is the priority would you say bank or asset manager deals?

The answer is the both the creative. Definitely if we can expand our deposit base an opportunity and lower-cost. I think a whole bag acquisition would be preferable. But in the long we think that the wealth management space probably going to have a lot more opportunities being just the numbers game.

Thank you.

Like what?

Hello.

sisters liquor you there

Hey, yes, good morning. Can you guys hear me?

Okay, great. Thanks morning. I guess the first starting with with the loans, you know to the pipeline is down goes down year-over-year in quarter-over-quarter. I'm curious what's serving that and whether it's a function of market demand or your appetite for loans given the the interest rate environment or potentially some other Factor.

I think the seasonality in terms of the quarter over trailing quarter a lot of strong closing activity. And still pretty stable levels or you know close to a billion dollars nine hundred and six million five hundred six million the end of the. I think the man remains pretty consistent. You're not really seeing a big trial Walter. This is Chris. The first quarter we're seeing is definitely some money coming in at a decent level of product. We like I think the full through is only about 55% of deal sheets versus getting to the finalized certainly in the commercial also has been pretty healthy. So we're looking forward to the first quarter being a little bit better than last year.

Got it. And then just looking at the balances of multifamily loans. They decline throughout the year about two hundred million year-over-year was that declined conscious on your part? I'm wondering if it's related to to pricing or structure you're seeing in a market concentration perhaps or or maybe some other something else.

Well, it certainly has been a lot of people getting taking permanent loans out. The agencies are offering a lot of interest only periods longer than we would ever anticipate for a very stabilized properties. So that is definitely hurt the multifamily space and Lending Act of high leverage levels that we just would not do and so when people want to take out if she needs to take it back up to 80% we don't think that's a prudent to a process for us, so they do move on.

Appreciate the color then one last one for me. You bought that stock stock. I think in the first three quarters of the year. It doesn't look like you bought any in the fourth quarter curious kind of what drove that decision to step back. And how are you thinking about the opportunity to repurchase in 2020 versus the other uses of capital? And I know you kind of talked about m&a already a little bit.

yellow

And as always profitable growth would be number one for us that includes m&a as well as organic growth. We would like to real ever the balance sheet Mark asked earlier about the the dropping, you know, trying to ensure we stay below 10 billion quickly. We think we can get up ahead of that. We see steepness in the Curve will put some Securities on and liver that portfolio up a little bit and hopefully then remix it to more profitable loans over time.

But after growth and certainly BuyBacks and dividends the regular dividend of probably remain fairly consistent given the the economic Outlook, but we have plenty of capital available will do BuyBacks at the pricing in the marketplace makes sense.

Great. Thank you for taking my questions. Thank you.

Next question comes from Brussels Gunther d a Davidson, please. Go ahead. Hey, good morning guys. Wanted to follow up on your comments about the Office Outlook. Appreciate the low single-digit guide. I'm curious for your thoughts on kind of what the loan Mix Drivers of that would be and then Christmas any further, You could provide me what you think is driving the increased competition and see and I in particular.

thinking of the first one

We see you again the commercial real estate having a lot of opportunities obviously get size and scale in our market and contiguous. We definitely you know, still involved in some of the country with very well-known principles that we've been doing for a lot of years. So there's opportunities in that space in the cni side, you know, I think a lot of people by their balance sheet. So the competition is definitely there and it's across industry sectors. We do like to do owner-occupied properties for the most part. Obviously, we like them to Collateral like those along with the c like credit and the relationships that come with that. So there's no real industry code or anything that we we look at. I know that we've in the past the emphasized a couple three sectors and we just you know, you have to be cognizant of what's going on in the business Market to say, what do you think is going to be the area that will continue to have a positive growth and the Good Financial results

Okay, very good. Thanks. And then last question would be on the expense side of things, you know understand the guide of around.

If you want a half million a quarter and you know what the franchise investment is and pressures. They're just curious if you think there's an opportunity, you know, whether it's Branch rationalization or or some other levers to pull the kind of help me to get that and maybe that's not you know, a full year twenty impact but just curious as to any any offsets to continue franchise Investments. Well, we certainly have always been evaluating the franchise with what we did a sale-leaseback of a lot of branches a couple years ago. We always evaluate the the profitability of that Network and the cost attached to it. So that's not something that's new to us. Obviously operating a cost as long gone over ten billion have you know, The Regulators in here on a full-time basis the risk characteristics of the the enhanced regulation have caused us to have to invest a little dog.

when that space obviously Cecil and all that with all the Consultants to make sure and the

Documentation that it just adds to the cost structure on the other hand always looking at, you know, nickels and dimes add up two dollars. And so we're always looking around the edges of how can we be more efficient technology at the end of the day, you know, we should be able to achieve operating efficiencies through some people counts. So we're really always trying to do that. I think just in this interim period with all the things going on between Regulatory and Cecil that just added to the Consultants expense that hopefully will go down a little bit over time.

Got it. All right understood. Thanks for taking my questions guys. Thank you.

A question comes from Steve.

Leave you there.

Hello.

Hello.

Can it be able question please? Press * then 1 on your touchtone phone.

Our next question is from calling Gilbert KBW, please go ahead wow gud morning guys own know edge of Technology. Okay, so let me start let me I think I don't even I still last question was on expenses, but I just I'm just curious to to dig into that a little bit more. So with the wage increase costs that you guys have had to carry with Cecil and Crossing 10:00 is the expectation then that those costs will not be able to reverse going forward that that some of these new Investments are not going to hold or is it is it thought that those you will reverse some of those but they'll be offset by other areas within the business. It's more I think certain things are changing but then other things are growing as we continue to expand in in the

And and build infrastructure. So the numbers are kind of threw out. What about 51 and 1/2?

Million a quarter of a $207 for the years what we're expecting for now success. Okay, and have you Quantified I know going into crossington. I think if I recall at your expense outlay seems fairly minimal. I don't remember the exact number but have you Quantified all in now what the cost has been for you guys to cross ten putting Dermot aside just on the expense side, you know, we got away from trying to even measure it because there was less specific to stress testing around. Frank access testing and rather just increases some kind of you to this more as as for calling capabilities, it commensurate with the sophistication in size of the organization. So we we don't really isolated so much anymore. Okay? Okay, and then Tom I just wanted to make sure did I hear you correctly that the pipeline yield you did you say 370?

397 397 okay. Okay. I mean that's still quite a bit lower. I guess than your portfolio yield but given the choice guide you still feel comfortable that even with the downward pressure there you can offset it on the funding side despite the fact that I feel like you're funding costs are still you're just so low already.

Yeah, we think.

Certainly, look at what's coming off in terms of maturities both on borrowings and and some of the time deposits there's opportunity there and we still have some info on pricing deposits that we can move down further. So we think we can match it a column. This is Chris and obviously we're seeing a bit of fixed-rate longer-term lending in the cni space in good competition. And we we tend to not win that business. So we don't think that that's the right place to be so we have obviously focused on variable-rate just sometimes in our expense, but certainly am always being prepared and trying to match on an estimate liability basis to be you know, pretty much match funded not being one way or the other whether it be liability or asset sensitive.

Okay, that's helpful. Thanks. And then just on the on the seaside just Tom. Can you kind of give your outlook there for fees obviously elevated this month for prepaid swaps. Maybe if you could break out what those specific numbers were in the quarter and then just yeah, we are not look over all four fees. Sure prepayment income that was a million seven that was up for a million five last quarter.

Just the other large wall riding the swaps that was a million 5 vs 2.7 million last quarter. So we did have a reduction in their thoughts kind of keeps me in range of like sixteen. I know it's pretty wide but sixteen to eighteen given the volatility in those two categories sort of would be Lance most quarters. Okay, and then the can you remind us off their seasonality right in the in the first quarter on service charges. It's jumped around a bit, but I just want to make sure that modeling that correctly.

See, I don't recall seasonality in service charges on the expense side of things lately. We always have a little bit of seasonality around, you know, payroll taxes and and typically utilities and snow removal. It has been a pretty mild year so far.

Okay, but nothing on the service charge. Okay, that might have just been some other other items. Okay. That was all I had. Thanks guys. Oh wait. No way. Actually I did have one more. Sorry dividend. Am I know you had indicated kind of you prioritize capital and how you want to spend which is very clear just curious about a special dividend.

Yeah, we've done.

I think three or four specials in history, I think maybe it's certainly something that would remain under consideration given that the high levels of capital that we hope and again as to whether I could we prefer special offers versus buyback really depends on the pricing that the BuyBacks are available at

okay. All right, I'll leave it there has to be something that would be part of our business model. That's not necessarily case. Got it. Okay. Thank you.

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