Q4 2019 Earnings Call

And with that, I'll turn the call over to CEO Richard.

Thanks, Dave. Good morning everyone and thank you for joining us today for a fourth-quarter earnings call with me this morning or Jamie Moses our CFO chaundrea President George our chief credit officer and George Michael rufo our commercial leader begin to call with a high-level overview of the quarter and then turn it over to Jamie to go deeper into our numbers off end of the year on a very strong note. We delivered $0.70 in core EPS a core profitability metrics were the highest of the year or gaap EPS came in at $0.51 including merger and other identified non-core charges. We completed the systems integration of Connecticut and Rhode Island operations from the SI Financial acquisition on time and on budget and our integrated teams are working very well together.

Made further progress with the four initiatives from our strategic review. We set out earlier this year. We completed the sale of approximately eighty million dollars of acquired non-relationship commercial fifty million of which were aircraft booked. We continue to receive expressions of interest and the remaining balance of the aircraft portfolio, which was moved from home or help for sale back into our C&I portfolio. We released three hundred million less strategic Investments and loans and we use the proceeds to reduce higher-cost wholesale funding which is down $900 from the beginning of the year our efficiency project reduced core expense by 3% compared to the third quarter and we repurchased 815000 shares keeping us on track with the utilization of our 2.4 million share buyback authors.

Measures of capital liquidity improved steadily throughout the year our year and asked quality numbers remained strong and we believe that our asset quality is solid and properly Diversified our business focus is based on relationships risk and return reduction in total loans is consistent with our strategy and will well place to serve existing and prospective relationships in our markets going forward. We promoted eight of our high-level officers to the new position of regional president to serve our eight regional market.

These proven leaders will drive our Market positioning enhance our performance and maintain active Community leadership roles reporting to bank president Shawn gray box rolls. They will engage with Community stakeholders and Lead our top priority efforts around our be first values and our commitment to being a 21st century Community Bank off with that. I like Jamie to take us through some of the numbers Jamie thanks Richard are $0.70 is for EPS was up quarter-over-quarter and year-over-year. We had 19,000 non-core charges for the quarter resulting in $0.51 of gaap eps. I'll discuss the major non-core items later in my comments.

arcore

He reached a hundred basis points in the fourth quarter and our core return on tangible. Common Equity was a little over 13% the Gap borrow a was 78 basis points and GAP was around 6% off. We accomplished our goal to offset the operating EPS impact of lower purchase accounting accretion. We did this despite the unanticipated impact from three fed funds interest rate Cuts. We've been mod back to the SS sensitive and Si Financial was also asset-sensitive. I'll address the margin impact shortly, but just to note here that this has been another headwind that we faced in boosting our operating profitability through the years.

Moving to the balance sheet our assets declined in the fourth quarter as we pursued our strategic initiatives and reduced wholesale funding our original objective was to reduce footings by a little more than a billion dollars over the long term by releasing Investments and loans with less strategic value. We estimate that we've accomplished about seven hundred million of that asset reduction in 2019, including three hundred million in the fourth quarter off. These are assets with less relationship and return benefit and we expect to see continued reduction towards our Target in twenty twenties retail time deposits decreased and Leslie in the fourth quarter wage rates declined we're focused on managing our deposit costs and we won't retain access deposits if they become uneconomic due to competitive factors,

retargeting modest

Retail deposit growth in 2020, excluding fluctuating payroll balances year-end 2019 payroll balances totaled $744 million dollars much of which was held overnight in a short-term Investments.

We reduced our average funding costs by 9 basis points in the fourth quarter, including a 7 basis-point reduction in deposit costs. Wholesale funds will reduce by more than four hundred million during the quarter and bikes around $900 million for the year. We expect to further reduce our wholesale funding this year.

Our Capital metrics continue to improve even as we repurchased around eight hundred fifteen thousand shares in the fourth quarter, which brings our total BuyBacks to 1.7 million shares for the year at your end. We had an additional 700,000 shared remaining in our buyback authorization which expires on March 31st.

On January second half of the outstanding preferred shares were converted to about $540,000, and chairs based on the two-for-one formula in the shareholder agreement. This will have no impact on EPs and we'll slightly boost book value per common share moving on to the income statement.

The accretion benefits EPS was equal to $0.07 in the most recent quarter unchanged from the linked quarter and down from $0.13 on a year-over-year basis. We expect this benefit to decrease wage as we move through 2020.

Setting aside the impact of accretion the net interest margin tightened by 12 basis points quarter-over-quarter and by 17 basis points year-over-year, the majority of the years compression was due to the impact of lower rate on our asset-sensitive balance sheet along with the impact of competitive market pricing conditions based on the current forward curve. We expect the margin before accretion to stabilize around current levels and expect from there as we continue to execute on our balance sheet strategies in 2020 due to our asset reduction strategies. We expect the quarterly net interest income run-rate to decrease in the low single-digits compared to Q4 results.

Vie income benefited from a strong quarter from RSV a lending team, which had a record year for sale premiums separately. We also recorded gains on the sale of a portion of our aircraft portfolio page as well as an acquired commercial portfolio from SI Financial looking forward. We expect fee income to increase modestly in the back half of the year.

Into the provision as Richard noted, the loan portfolios condition is sound the major item for 2020 is the new Cecil accounting standard now like most bags we anticipate that the allowance for our performs loans will increase under this new standard under the new life of loan methodology with an offset to equity but little regulatory Capital impact as you know, due to our Acquisitions and taking into consideration are required taxi Medallion loans. We have a comparatively large discount on purchase credit impaired loans, we expect that the gross loan balance will increase due to the removal of this discount off with an initial offsetting increase in the allowance. This transfer may impact metrics related to revenue margins efficiency loan risk classifications loan charge-offs and Regulatory wage.

Purchase loan recoveries that are presently posted to net interest income will be posted to the allowance and generally are expected to reduce provision expense with little net impacts to the bottom line.

That they have more guidance on these impacts after we complete our financial statements.

Moving on to non-interest expense we brought in further targeted costs days and Q4 and we reduced total non for expense by 3% quarter of a quarter year-over-year fourth-quarter correspondence with a fairly flat despite our acquisition of a one point seven billion dollar bank, which previously had a ten million dollar quarterly expense run rate.

Our efficiency ratio came in a little under 54% and we expect to see some expense growth in 2020 as we invest in our team and franchise and the FDIC Insurance rebates that showed up in the back half of 619 will not continue. We therefore expect the annualized Run rate of expenses to increase over fourth quarter levels, and we expect a tax rate in the area of 20% in 2020 compared to 18% tax rate in Q4.

Looking forward r Q2 0 p s is expected to be down seasonally compared to our fourth-quarter run rate which includes the impact of payroll taxes and higher winter occupancy costs Additionally the benefit from the FDIC rebates and Loans sale gains are not expected to repeat our first quarter 2024 EPS may be flat or slightly down from last year's first quarter and then we'll look for Thursday. It's going forward from there are core. Roa was 93 basis points in 2019 will improve on this in 2020 with most of the pickup anticipated in the back half of the year.

our

Little Mortgage Banking operations, which are held for sale are classified as discontinued operations in the financial statements. We continue to actively pursue sale options these operations generated a game in the fourth quarter, which is a seasonally lower quarter for Residential Mortgage volume.

Moving to murder charges. These were related to the SI Financial acquisition and our complete these charges came in within our original estimate. The restructuring charges were mostly related to the Strategic initiatives that we pursued this year. We Consolidated Branch offices during the year, including two in the fourth quarter. We don't anticipate that there will be non-core related items going forward aside from discontinued operations until the sale is complete.

Opposed by summarizing that our profitability and conditions have improved following the first quarter and rending the your position in line with the guidance and plans that we set out at the start of the year are strategies have generated higher quality more sustainable earnings streams this year and will continue to do so with that. I'll turn the call back over to Richard. Thanks, Jamie. I'll talk to you in a couple more topics to conclude our prepared remarks with our company earned two, very significant recognitions recently and I'm very proud of one. We received a US Chamber of Commerce award for top corporate stewardship and Thursday. We were also added to the Bloomberg equality index which tracks companies committed to supporting gender equality. We also opened up our first reflex lapse co-working space which we located in the Roxbury neighborhood of Boston and be gradually expanding the X labs in other Urban markets with underbanked minority communities. We believe that birth

actions distinguish our team and Enterprise that our communities valuable partner committed to building a just and

Prosperous future based on our values of diversity and inclusion. Lastly. I'm pleased to note that our shareholders received a 26% total stock returns in 2019. We increased our dividend by 5% in 2019 and are announcing now a four percent increase in two thousand to one month. We repurchased shares to return access Equity to our owners. We're gratified by these returns and will continue to focus on strengthening our franchise and building a 21st century Commercial Bank. Would that focus on Purpose Driven performance without I'll ask the operator to open up the lines for any questions.

We will now begin the question-and-answer session to ask a question. You may press * then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys off to withdraw your question. You can press * then two.

Our first question comes from Mark Fitzgibbon with Piper Sandler.

You guys good morning. Hey, Mark. How you doing? Good. Thanks. One question Jamie that one point three five million dollar gain on business operations. Was that related to the commercial aircraft of business or something else? I know that's that that's the that's the eighty million dollars in commercial sales that Richard spoke about fifty million of which was the commercial aircraft. Okay, gotcha and then down on expense growth. I know you said you expected expenses to grow a bit in 2020 as you invest in the franchise. Can you give us some sense of the magnitude of that growth? Is it, you know to 3 ish kind of percent. I you know, I think I think that's probably a good starting Place Mark. I think I think that's probably in the area where we might be. Okay, and I I guess it looked like headcount was down about 12% year-over-year. Are we at the bottom and and when do you think restructuring charges in sort of noise related to the restructuring is likely to be completed? Yes. Yep.

at the bottom of that and

The restructuring noise, um, you know, especially in the lines there that you see on F nine and ten. That's that's done. Fourth-quarter is the last time we'll have that the only the only non-core things that we'll see in the future or are you know, the the discontinued operations that we have on the balance sheet and is as soon as the actual sale is complete and the sels employees are are you know are gone off the books then we'll have, you know, just sort of a a very clean, um, you know, clean financials at that point. Okay, and I know Jamie you said that you're going to give more color after the you know, the filings come out, but I'm just wondering if you can help us think about the provisioning line for this year any guidance at all. You could provide would be really helpful. Yeah. So I mean, I guess I I guess I kind of suck it this way. We've been running like a four to a five million roughly ugh quarterly run rate in the provision. I expect that the provision line to go down.

around around two million or so a quarter maybe even just a little bit less than that, but that's going to be

Due to the fact that accretion in recovery income that we've gotten in the past that showed up in net interest income goes directly to the allowance now and and so those will be our setting off setting things in in the future.

Great. Thank you.

Our next question comes from Dave Bishop who is D A Davidson?

Hey, good morning. Gentlemen, how are you? How you doing? Hey, Richard. Good quick question from a holistic basis the the promotions you noted there. How should we think about that in terms of maybe just the overall, you know operating strategy there is that sort of a revamp focus on some of the sort of the community banking efforts and it does that sort of change your view in terms of the the types of loans and not positive relationships are going after moving forward is that I don't I don't think I could have answered that question better than you just you kind of alluded to I think it's it's it's getting back to the Community Bank routing and so with the regional presidents and dealing with the the stakeholders within the community. It's really going to drive less closer to the to to the communities and that will in itself start to move into business banking and two deposits and those kind of items so it gets us more entrenched in our communities.

Got it. And as we think about just overall balance sheet growth. I think Jamie you said probably have some additional runoff in the the first quarter or so. Do you think we see growth in that buildings? And in terms of laws by the end of the year? I think we you know, I think that's possible Dave, you know, that's going to be determined on you know on how how will we can gather em, you know core deposits, um, you know, as as we've said, you know, our you know, our core deposit growth is going to be sort of the governor on our on our loan growth. And so, you know, depending on how how that goes. Well will depend on the size of the balance sheet, really.

Got it. I think I heard you say Jamie that the current authorization expires the end of March all the dividend increase. Do you think there's a a good likelihood that you re-upped the the share repurchase program? I think you know guys are looking at me. I'm probably not supposed to say this to you. I think that we I think there is a good chance, you know, depending on conditions, you know that we would actually pursue a further share buyback authorization.

Got it. Thank you for the color.

Our next question comes from calling Gilbert with KBW. Thanks. Good morning. Gentlemen, Jamie if we could start with the Nim. I just want to make sure I'm understanding this all correctly. So if you if we exclude accretion income this quarter, it was like two hundred ninety-one and when you're giving your name guidance for relative stabilization, it's off that 291 base, correct? So we we have it as 294 execration and Collins, but but but yes that that is the guidance office off of that number. Okay. So just curious as you and you would in fact, you know that you thought maybe in the back half of the year that that could start to expand. Can you just talk a little bit about some of the Dynamics that you're seeing there? I know there's a lot of movement which I don't know if I should ask my loan growth Dynamic question first or the new month, but and then you know kind of yeah, so where you're seeing some of the asset yields settling out now that we back out the the full effect of the accretion in those yields and then kind of the trajectory wage.

The funding pick-up or improvements so the forward curve right now. We're anticipating the way we're thinking about it is there's you know, no rate increases more cup. Yeah expected over this year. And so

The real dynamics that drive a uh, an accretive name are are simply the strategy that we've laid out over the past year now, which is to you know, check it out of less strategic and non-relationship, uh assets that are on our books and and by and by doing that we also decreased our Reliance on Wholesale Club. So, you know, I think as we're you know, as we're thinking about those things that's really going to be the the driver of the accretion to the name in the in the back half the year. I also think that you know, first quarter alluded to it a little bit but I think first quarter is going to stabilize right around where we're at today and then we should expand going forward, you know, as we trim, you know, lower-yielding less relationship assets and and pay down the wholesale funding. Okay. So you're anticipating a benefit on both the asset and funding side going forward.

Yeah, I guess I would say, you know, I guess it's mostly on the funding side of things right rates are.

Rates are lower. So I'm I'm not sure that we're going to see an expansion of asset yields. Um, but I think that on the, you know, the the reduction of the reduction of those assets should give us our funding costs which which will be The Driver of the The Mindy. Okay? And before I moved to the growth Dynamic, let me just and in terms of the the the results this quarter I think back on the corn info a little bit short of where your guidance was was there just curious it was it was it the timing on the funding side or what what caused sort of that variance from what you guys were thinking going into the quarter off the main variance between what we thought we were going to be in we were at is we have a we have an increase a substantial increase in short-term Investments That is Jake driven by a change in the way of the liquidity dynamics that we're employing as part of the payroll of deposits and so yep.

Instead instead of taking instead of taking down funding. We're actually funding short-term short-term balance.

It says in the Investment Portfolio, which had essentially no effect on EPS, but did hurt the nymph by about four basis points. So we expect that. I don't expect there to be a uh a change in that going forward. So, um that reduction of four basis points sort of holds into this quarter and then we'll expect to expand based on our strategies. Okay? Okay, that's helpful and then just on the loan side, so it looks like you know held-for-sale went down but did you put down you sold 80 million did you was there moving that came back into the balance sheet and maybe just if we could give a little bit of color as kind of when you talk about expectation for a loan growth off of what phone number or what base? Yeah, exactly. So the aircraft portfolio back into the commercial line from the help for sale buck.

We are not we are not actively marketing that portfolio.

At this moment from time to time, you know is Richard noted in his comments. We still received expressions of interest from people on that. And so we are still open to selling portions of or the entire aircraft portfolio. But again, that will be economic driven versus, you know, just just to say we're out of that business kind of thing. So, you know, we'll make sure that we would we would expect to get a gain on anything that happened in that portfolio in terms of a sale. Okay, and then your expectation for absolute growth going forward is what on the loan side.

Well, you know, like I said, you know, I think yeah, I I think we're still in a little bit of flat to down a little bit this year, you know as we're you know, we're trying to trim our wholesale funding, you know work down to just about just a little over two billion in wholesale funding right now goal is to minimize our wholesale funding as much as possible. And you know, I think I think as I look at it big-picture really continues to be a function of our ability to gather cord deposits on whether or not the day the loan portfolio can expand. Yeah, this is Richard it it really is a product of not having a robust pipeline or our folks not having the connection to the community. It's really a function of us being more picky and choosy to get the wholesale funding of piece of it down as as you said before Jamie said before it's really the wholesale funding that's really gotta move and stabilized and that okay, ma'am.

Thank you for that. And then just on Jamie. I appreciate kind of.

The guidance are but I just was curious about some of the moving parts of that. So this quarter it looked like occupancy shot up quite a bit. And I know that usually first quarter is seasonally higher with that line. So just trying to understand the dynamic there and then marketing expense to it seemed like that was a pretty big Delta but just curious as to what you know may have impacted those the quarter results on those two lines or so. So what you see in the occupancy in equipment line going up that much. Um, that was we had actually a reclassification quarter-over-quarter of some technology expenses off in the in the four to five hundred thousand range. So that that's really you know, that's the large majority of that drive up in in occupancy in addition to the office, you know, just occupancy just costs a little bit more in the in the winter months. We had made some investments in technology in the in the fourth quarter.

so, you know, that's that's where you're seeing the

You know, that's where you're seeing that the occupancy and Equipment line going up like that and you I'm sorry you had there were other line marketing. I was just curious about marketing.

Expensing like that. There was a Delta there and just the outlook on that line. Yeah. I mean, I think that that you know that that marketing line is should be relatively stable maybe up a little bit in q1, but I think that should be relatively stable going forward the occupancy expense in q1 will be a slightly higher seasonally at as well. So just wanted to mention to you to okay and then just lastly on the The First Choice sale. Do you have a sense of timing on that page? It's a great question. I don't think I can really give any more guidance than I have on that at this moment other than to say that should continue to be engaged with with potential Partners in our attempts to you know.

Okay. All right. I will leave.

Thanks guys.

Our next question comes from Lori hunsaker with compass points.

Yeah. Hi. Good morning. Just wanted to go back to I guess loan growth and low angles just to the extent that you can chat a little bit more about it. So, you know your game plans to sell the aircraft book. Basically, I just want to make sure I heard you right so the hundred ten million is back in the cni so you're not actively marketing now for sales, so.

So there there is nothing else to sell in the aircraft book. Is that correct? I wouldn't say it. That way. I would say that we were able to execute on a on a chunk of that page at the economics that we would require in order for that to happen. And from from time to time we have other folks interested in it. So I don't think we're I'm not counting on them telling the rest of that portfolio, but I wouldn't rule it out either. Okay, great. And then the the indirect can you just give us an update on where that balance is? And if I go if you have a great and I know you ceased originating it but how you're thinking about that book as we head into twenty. We're going to continue to run that balance down as we go forward to go ahead. Yeah, the current portfolio balance is $361 million. We saw her about 45 million in Q4 net runoff expect expect a month.

4 year

total runoff time frame

Okay, and your your FICO on that? It's in the low seventies. Is that right?

Yes, okay. And then the taxi, where where does that stand at the moment? I mean, I know it's small left last we heard it was around twenty four million. Do you have an update on that package store Jones taxi Medallion portfolio is about 22 and 1/2 million. So it's down another million and half from last quarter. Okay, great. And and are there any other loan categories that you're identifying when you think about you know loan growth as as being flat to down are there any other categories that that you're identifying is saying? Hey, we have to run this down or this is not a focus off.

How should we think about that?

Or maybe a different way, I guess what what categories are are we likely going to see growth in in twenty-twenty? Where is the focus back in business banking just by definition of how we're you know, approaching relationships and profitability. I think that would be the that would be the spot where you would see growth in 2028.

Okay, and

Do you have an update on the Firestone numbers with the balances what the origination is were with the charge-offs war and then maybe also generally you know with Cecil. Are you thinking about that loan know any differently Lord It's Georgia. Again. The outstanding is at the end of the quarter were 268 million Firestone had about forty three million and origination off the quarter and the net charge-offs for the quarter. We just a little over 300000.

Okay, great. And then do you have the the number of substandard?

Comparatively last quarter of your substandard loan stood at $166 million. I mean for the total lombok, not not for Firestone. Do you have a substandard number and then?

Yes, the the substandard at the end of the year was $162. Okay, that's great. Okay, and then just going back over to deposits. Um looks like your cost of core came down really nicely in the quarter as did your total. How how do we think about that in terms of money?

I guess both Frozen.

Then you know how you're thinking about where you can bring that and and I guess specifically your loan to deposit ratio is now sitting at 92% How how are you thinking about that?

Yeah, so I think that the cost of deposits can and will continue to come down, you know as as you know, it takes a little bit of time for the rate cuts to work through on the deposit side of things that specials roll off as time deposits roll off when rates come down. So, you know, I think you know, I think we can improve that subsist on the deposit side of things and then and again same same for total funding costs as well. I think that that that that comes down pretty good overtime and it was yep other question there like, I'm sorry. Yeah, I mean, I guess just how we should be thinking about.

The the growth in the deposit. I mean, I know you you said obviously the the growth in the loans is very tied to what you're doing in the deposits. I mean, I guess that's another way, you know for if we're looking at deposits. How how would we expect to see deposit growth play out in twenty.

You know, I think we're looking for you know modest modest core deposit growth in 2020. You know, I I think we're looking at you know one to 2% or so that's going to continue to be disciplined in our approach the same way. We are with the loan side and we're going to continue to work our Branch optimization strategies. So one of the things I think we should dwell on is enclosing a branch has to maintain 95 plus deposits really drove that expense number down for us allowed us to leverage our my bank or program which we feel we can continue to to

Okay, great. And then the last question I have is on expensive it just I just want to go back to the guide you gave around marks questions the the two to three percent that we're looking at 4,000 Spence expense growth in twenty-twenty. What is the base you're using?

That's off of that'd be off of the Q4 run-rate Laurie. So the Q4 core run, right? So in other words we're looking at basically a $6 million annualized. So, 241.

Plus

Plus the plus the Lefty I see is that how we're thinking about this the right way. I think that's right. Okay, great. Thanks. I'll leave it there. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Richard Morada for any closing remarks.

Thank you for joining us today. We look forward to speaking again in April to discuss our results for the first quarter of 2020.

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