Q4 2019 Earnings Call
To non-GAAP operating measures can be found on page.
13 of today's slide presentation now, I would like to turn the call over to my price. Hey, thanks Ryan, Jim morowski. Our CFO will provide some detail around fourth quarter earnings in a moment. But first I'd like to reflect on our progress in 2019 is a company 2019 marked the seventh straight year of growth and earnings per share since the current off the team came together. We ended 2019 with core earnings per share of $1.10 which represents 16% compound annual growth from mm a 2012 starting point of forty cents per share in corning's in 2019. We produced 108 million dollars of coordinate income and net interest margin of three seventy-five an Decor efficiency ratio of 56.9% the earnings capacity of First Commonwealth continues to grow adjusted for security job.
Ends in 2018.
Earnings per share grew by 6.8% in 2019 driven by year over year growth of Seventeen point four million dollars and spread income and four point seven million dollars in income or our momentum as we enter 2012 twenty is good and I would highlight the following loan growth of 7% in 2019 or 6% without the acquired loads associated with the 14 Branch Acquisitions. We got from San Tan bear and deposit growth of 13% help stabilize the margin at 3.73% in the fourth quarter and continued the meaningfully and granularly grow our company corporate banking mortgage an indirect lending led the way with loan growth total deposits grew to 6.7 billion with an average cost of 56 basis points. Our deposit base is dead.
comprised of
He's five percent non interest-bearing accounts in another twenty 1% and checking now Accounts at a relatively low cost of funds. So three billion dollars or 48% of the deposit total is in transaction accounts of which 56% our business accounts. The culture of the positive Gathering is strong as an aside. I require we acquired roughly $470 in deposit balances in early September following the acquisition of the Central PA branches from Santander Bank, and as of December 31st, 2019 had grown those deposits by 22 million dollars.
Despite the quarter-over-quarter uptick in our provision expense our credit metrics continue to strengthen as does the credit culture of our company several Key Credit indicators were sick either were either at or near historic lows for our company, for example, net charge-offs of 18 basis points non-performing loans, two loans and 52 basis points off and non-performing assets to loan at 57 basis points with criticized loans also at an historic low for our company the sharp decrease in special mention loans at Forty-Eight million dollars in the fourth quarter is particularly encouraging our ongoing focus on improving granularity maintaining concentration discipline increasing increasing Geographic diversity leaves the bank well positioned at this stage in the economic cycle are not interest income of 85.5 million month.
Also was in historic.
Hi for a company and now comprises roughly 25% of our total revenue interchange income and deposit fee income set internal records for our company in the fourth quarter wage, excluding security gains are average quarterly non-interest income was 21.4 million and 2019 up from 19.9 million per quarter in 2018 in an average of only sixteen million dollars per quarter in 2016 moreover our mortgage wealth corporate Banking and SDA and insurance business office had become a meaningful part of our non-interest income momentum additional e r v Acquisitions over the last four years and added precious new checking households core efficiency of 56.9% in a 2019 improved year-over-year despite the integration of the Sun Sunday our Branch acquisition.
And as the interest rate environment pressured margin that being said were ever mindful of the importance of operating leverage not only in our forecast and budgets but also in our actual results and we pay close attention to that in short. The bank has a broader base of feed businesses in our tukey businesses retail and corporate banking are getting better each year and not growing across geographies the same businesses are led by strong line of Business Leaders and coordinated through Regional presidents who are focused on winning and fulfilling our mission in their respective communities. Our credit metrics and balance sheet are stronger, even as we experience the tougher external environment in 2019. And with that I will turn it over to Jim recipe for our fourth quarter of detail and other insights Jim things like
Quarter earnings per share came in at $0.27 per share the return on the core return average assets and the co efficiency ratio for 1.29% and 57.23% respectively major fourth-quarter headwinds compared to the prior quarter include an additional two point two million dollars in provision expense worrying provision of four point nine million dollars and an additional two point 1 million dollars and not interest expense bringing on interest expense to 53.3 million dollars provision expenses impacted by strong loan growth, which had a low point two million dollars in provision expense compared to last quarter now an interest expense remained well controlled over all those impacted by one-time professional fees elevated hospitalization expense and a full quarter of expenses associated with required something their branches.
The largest portion of the professional fee expense was associated with Consulting fees surrounding the renegotiation of a third party contract that is expected to result in significant expense savings for the bank off at the I see Insurance expense was unchanged from last quarter because we used a $616,000 credit in the fourth quarter. We have $723,000 in credit remaining 4:20, which we expect to use up in the first half of the year.
Fourth-quarter positives included the net interest margin of 3.73% which when coupled with our loan growth of 5.6% annualized produced growth in net interest income to $69 million dollars despite a challenging interest rate environment additionally non-interest income excluding Securities gains recorded a quarterly all-time high of twenty two point five million dollars off a 1.3 million dollar improve it in swap the income more than offset a seasonal $900,000 decrease in mortgage fee income.
Interchange income of 5.9 million dollars and deposit service charges of 5.1 million dollars both grew due to the 10% growth in our total customer base as a result of the successful completion of the acquisition of a Santander branches.
For guidance remained essentially unchanged we continue to expect mid-single-digit loan growth in 2019 with deposit growth lagging slightly behind as a newly acquired deposits allow us to maintain discipline deposit pricing. The margin is expected to compress it alone 360 over the course of year consistent with our past guidance. Our effective tax rate for the fourth quarter was 19.50% off it was that will take any questions you may have
Ladies and gentlemen at this time. If you would like to ask a question, please press star and then one to withdraw your questions, you may press star and two if you are using a speakerphone, we do ask that you please pick up the handset before pressing the keys to ensure the best sound quality. Once again, in order to ask a question. That is star and one our first question today comes from Steve Moss from bareilly F. Please. Go ahead with your question a good afternoon guys. Good afternoon. I wanted to start on expenses here. Wondering how we think about, you know, the professional line items will that remain elevated for a quarter to as the renegotiating the contract goes on and you know, perhaps any color around potential cause saves you expect to see total expenses overall 4 p.m. You're sure yeah, the the professional fee line item probably should come down a little bit but the overall to give you more explicit Guidance the overall fee.
Sure for next year will probably be fairly.
similar to the fourth quarter hovering between 53 and 54 million dollars Court
Okay, and in terms of the potential cost savings that you could realize would that be a 2020 event or would that be a little further out the cost of the renovation contractor were already experienced and I am in the fourth quarter results, but the number I gave you reflects those expected costs. Okay Gaya and then in terms of the you know on loan growth here, that's a good quarter just you know, wondering any color around the pipeline and where you're seeing loan demand these days it really two fronts on the commercial side commercial Solutions are lower end of corporate banking private Equity space is pretty active. We feel like we've weathered the storm of payoffs and the commercial real estate side. And at least for now in the fourth quarter production is outpacing payoffs and also the real story in 2019 was the consumer side of the business. We had almost 1.2 billion of origination dead.
with mortgage
Indirect really leading the way they're in our Branch production was up markedly as well.
Okay, that's helpful. And then just on the on the margin guidance here, you know as we think about the the margin pressing down to the mid 360s wage that include any rate cuts and you know any you know, how should we think about funding costs versus loan yields? Yeah sure and are planning. We assume no rate cut since birth twenty we've assumed that the 10-year yield is right around 1.75% for the full year, but no wait. No wait Cuts contemplating are planning. If they are recuts we would obviously off update that guidance pretty much the bulk of the margin compression. It's fair to assume will be just earning after you'll be coming down relative funding costs. That's exactly right. That's exactly right. We said we didn't raise deposit cost very much through all the rate increases. So there's some benefit will get from lowering deposit costs and obviously with the influx of new deposits that gives us some pricing power on that side.
I'm supposed to pause.
Should come down a little bit but most of the compression is going to come from negative replacement yields a new loan originations compared to the rates on the loans that are running off.
All right. Thank you very much. Mike and Jim.
Thanks, Steve. Our next question comes from Russell Gunther from d a Davidson, please go ahead with your question.
Hey, good afternoon, guys, good afternoon.
What is this circle back to Steve's line of questioning on the on the loan growth side and particularly my given your comments that it looks like you've weathered the payoff storm Thursday. We in infer from this that the 6% organic result that you guys put up for 2019 is is achievable again in 2020. Perhaps even bought some upside bias to it.
Well, our guidance is mid single-digits. I would say that compared to years past. We have more oars in the water and some of the de-risking we did with larger chunk. Your exposures is really behind us. And so and also why would just say my commercial real estate guidance was with the purview of the pipeline in the first quarter. So we'll see how that unfolds over the of the next three quarters but indeed at least in the first quarter, it looks better but I would say yes, but I think like this year we were very resilient. We had three choices like everybody else and we found a way to get to a number and still grow our earnings per share about 7% And I think we have to be equally resilient this year. If we get dealt with the cards or the structures get a lot more aggressive and we kind of choose to sit on the sidelines.
Okay, got it. No, that makes sense. And then and then how about
You know directly from within the loan portfolio be at Nick's or geography. You know, what the bias is to the production of the mid single-digit result. Yeah, that's a great question and I'll give you the same guidance. I did last quarter. We probably had about twenty-five percent of a repository in Ohio. And that is producing an outsize portion of the growth that being said, you know our markets in Pennsylvania or more mature. We have greater share and we really feel quite good about how we're doing a community Pennsylvania and up where we've done Acquisitions in central Pennsylvania time. They're in State College Williamsport and those small towns along I-80 so we can grow a little bit more there. But Ohio is indeed driving home outside portion of the growth. The other thing is the regional presidents model for us, which is really about two or three years old. It's really coordinating cross-functionally in you're seeing that in the bath.
Show up on the non-interest income side.
For cross-selling and better fee income and wealth Insurance in those businesses. So lots of good Synergy there. So we kind of feel like we're just hitting our stride.
That's good to hear. I appreciate the color Mike. And then last one from you guys would be on Capital deployment thoughts around putting the buy back to work here, but as well, it's just general comments on the m&a landscape. Your appetite would be very helpful. Thank you.
Sure, I'll start off on the buyback and turn it over to Mike for thoughts on m&a the we had a $25 buyback authorization last year. We had executed about five million that and then we spend it the rest of the buyback Authority in favor of deploying the capital on the branch acquisition. Now that the branch acquisition is behind us. We do expect to resume our share repurchases and probably will execute the remaining twenty million dollars over the course of hopefully over the course of the first half of this year's a little bit price dependent, but hopefully we'll execute that $20 remaining buyback authority over the first half of 2020 on the m&a side. We've seen a couple bit more dust kicked up and we're really looking at things in our footprint and contiguous to our footprint but as you know in the past we've maintained a lot of distance.
Jim and I have
In the past, we've looked at thirty plus things to look to get to five and so I suspect that could continue that being said if there's a lot more that's a little larger. We we would not shy away from that. We tend to fall a dollar short on those kinds of deals at least historically.
I appreciate your comments guys. Thanks for taking my questions. Thank you. Our next question comes from calling Gilbert from KBW, please go ahead with your question ma'am. Thanks. Good afternoon, guys, just maybe if we could Jim just on the Nim. So I think if I heard you correctly you had got it to kind of a mid 360 off. I'm sorry. Hello 364-2020 and I think before if if if I had it right in the last quarter. It was kind of a high 360 just curious to what the you know, the changing directory might be there. Is it more on the asset side? It's on the funding side or am I slicing hairs that are not necessarily needing to be sliced? No, no, no problem calling actually check if you're sensing a change in the guidance. That's just because I haven't been clear enough. It really is supposed to be the same guy. That's what I meant to say was we Cielo 360s by the end of next year. So drifting down over the course of the Dead.
Slowly mostly do the to those negative.
Two deals so you could see uh ending the fourth quarter of next year the low 360s the average for the year. We'll probably be in the mid 360s just cuz we're starting off now. That's what I meant. Okay? Okay. Okay that's helpful and then just on the guide so it seems as if you know, you guys are trending you're going to be trending higher iPhone on the percentages, but that's a bit higher in 2020 relative to what you've done in 2019. I know it's obviously the impact of the branches but just is there anything else within that that you know, that's going to be that's kind of a truck driver in that higher op-ex, especially Mike to your point on seeing some savings from some vendor negotiate renegotiations.
Dynamic on it. I think we have added a producer or to a high-end producer to and our mortgage business corporate banking business in elsewhere off that has maybe created some of the strain. I think you're seeing that in the production that flows through on the loan side, but nevertheless, I mean quarter-to-quarter, we understand exactly where we're at with operating leverage and then we need to grow the revenue of the company that interest income and non-interest income faster than the expenses and suck.
we we've we
Have been flowed there right now. We've you know the last year and half we've gotten in a little better stride on the revenue side and the growth side we feel good about that, but that's probably not selfish of me to be we're always renegotiating contracts this one. That's Jim alluded to we can't really share any details, but it's a big number. It's it's over seven figures, you know, if I could get a little more colorful that Colin the big picture mat reviews that we do see continued operating leverage in twenty-twenty in other words, even with a declining margin just do to increase volume through growth and read it out strip the golfing expense and the golfing expanse is mostly coming from the fact of the expanded our brains. Our customer base by about 10% with the with the branch requisition. We've been totally stripped out supposed to say to look at how much is our expense Iraq going expense base growing without the newly-acquired branches and it's less than 2% even with normal Merit increases for employees. So it's wage.
a relatively, that's why we're confident saying it's
So well controlled expenses the one Dynamic than expenses that we talked about from time to time that may be meaningful is hospitalization hospitalization expenses up significantly year-over-year, you know, we have. Tell you what we self-insure essentially and we have reinsurance when costs get to be too. I but the cost of that plan in 2019 was about two point three million dollars more than it costs in 2018. So very significant. We think over time that will revert to the mean that's his just due to some extreme experience in 2019. So we do think somatics wage come down. All of those Dynamics are all baked into the kind of guidance that gave a moment ago. Yeah after about three or four years with the same Health Care expense in the self-insured side last year was an outlier, but we you know, you have to watch a closely and and we'll see if that becomes a trend. It could be it could end up being a Tailwind this year. But but right now he's
We still have operated.
Leverage in our plan for this year with it at a higher number. So so we have some ways to be planned. Okay, that's really great color. Thank you very much on that and then I did you have you given guidance or on Cecil have can you offer any diesel? Yeah. No, I haven't given guidance in our earnings release. That one is call. I mean the guidance we should give is a more General nature. We are planning is on track. We have an input in place the proper governance structures. We've run parallel runs and we have faith it actually in the process of having external firm do a model validation for us because that process is not complete when I prepare them to call today to give an exact number we will however do so in a 10K worth publishing a few weeks.
Okay, that sounds good. All right, that's great. I will leave it there. Thanks guys. Thank you for calling once again. If you would like to ask a question, please press star and then one our next question comes from Steve and Dawn from RBC Capital markets, please go with your question. Hey, good afternoon guys. Good afternoon, Steve. Hey, so I just want to make sure I've heard the name guidance wage too low 360s. That was by the end of this year. Not next year. Is that correct? That guidance was for the End by the end of calendar year 2028. It okay great. Thank you. And you're not interest bearing DDA growth. Where did it come from this quarter? And what can we expect wage? Is that just a seasonal thing? And what can we expect going out into twenty-twenty? Where where would you expect that to come from?
Yeah, it's really.
And uh a lot of efforts across the board with small business calling we had to do a lot with Direct Mail both in the consumer and the small business side and just a culture and our pro events. I think it was on the line just good culture around deposit Gathering and really getting our commercial team and treasury management team focused on the positive growth and wage is just a good quarter there really wasn't anything in particular but just the culmination even some this is silly but I mean really getting escrow balances for mortgage clients. I mean, that's pretty tactical and granular but that's James you want to comment on this. I think you're on the phone.
Thank you, Mike. I would agree with everything that you said and I would add that. We also had a nice Tailwind in Q4 because that was the first full quarter of the Santander balances. And that was a home run for us. Nice. Nice depository.
By the way, we we grew the the Santander deposit and I think fourteen out of fourteen offices. So we're really bullish on it. Thanks God. That's that's great guys. So that that looks really good. And then I'm just getting back to the longer if you guys had a solid consumer off the consumer side this past year. Now, if you know rates don't get any lower. They stay the same. Are you still looking for, you know, a similar growth prospects, especially in the indirect and the the mortgage side or or maybe a little lighter.
and
but for now the demand seems to be there one Tailwind we had in the fourth quarter is
Excuse me, we portfolio a few more mortgages than the third quarter. So our gain on sale went down in the non-interest income side that that's probably a one difference maybe 10% more portfolio gym, but it was just good production across the board and really up year-over-year in retail and Commercial and with that what's your typical amount that you portfolio, you know going through the year. It's been running more like thirty-five to forty percent. And then this past quarter. It was a little over fifty. That sound right? That's right. That's right.
Got it.
Um, okay and let me see if there's anything else here. Oh and then just the the two commercial credits. Could you just give some color on that?
Yeah, we have Brian turbo Chief credit officer here. Brian previous service call. We announced some non-performing loans and we successfully resolved those two credits in the fourth quarter and there was some charge-off associated with the resolution that came in around five hundred thousand down.
Got it. That's it for me. Thank you. Once again, if you would like to ask a question, please press star and one our next question comes from Frank from Piper Sandler, please go ahead with your question.
Good afternoon, Frank thinking about it sounded like from your commentary like that, you know positive operating Leverage is important in in 2026 and just want to you know, so you guys it sounds like you anticipate delivering positive operating leverage and then to me then given your comments around margin and Loan growth and expense. It seems to me that that fee income growth is going to have to be quite sure what would need to be quite strong and in 2020, you know High single digits or so, so just just you know, it's not doable and and you know, just back on the positive operating Leverage. Is that important to deliver for 2020?
It's Jim alluded to that's in our plan. And I think the I think as we think about our plan, you know, similar trajectory, you know 6% or so. I am not interest income growth as part of that positive have a positive operating leverage. Okay, and then sorry, I'm sorry. I was only going to add I think that given the recent track record really kind of traction for getting in fee income growth recently. That seems really doable for us.
Okay, and then just just back to em, and they just one last one on how we think about your interest level in something along. I mean we've seen a number take place and and different markets across the country wondering just your thoughts there the potential in your markets and it's something that you guys would have interest if the uh, you know over the next call it the 12 to 24 months.
Yeah, I mean we in front of our board every July we have we talk about what we could sell the bank for Emily possibilities and who are potential buyers and we think about how we return create above-average returns for shareholders. And if you're putting two companies together and you're taking it out, you know, I talked to a hundred million dollars a cost X PE that's meaningful to shareholders. And so I think not just at this time. But at any time all things have to be kind of on the table and that just it keeps you honest on your organic growth and continuing to produce particularly in light of interest rate headwinds and flat long end of the yield curve and and we have to move our feet we all do.
Okay. All right. Great. Thanks.
And ladies and gentlemen at this time and showing the additional questions. I'd like to turn the floor back over to management for any closing remarks.
Yep.
There were a lot of good questions about the Nim and the one thing I would just give kudos to my finance team is it's like a nine-inning baseball game every wage earning every month every quarter Jim in the deposit team which includes jangra friends nor Montgomery. They tell us what replacement yields are if we get we get a birthday card on what's happening with margin every single month gyms looking at it right now. So there's discipline and focus on where we're at and we're we're going and what pressures are rising and just just what did they look like the last month or two? I'm just yeah, actually it was negative replacement heals really 9 basis points in the last quarter. So it was actually a little bit less than totally expected this this little if it's helpful for next year, but we it's something that you stay on top of yes. I just want you to know. I mean, we're holding the reins. We're we understand what's happening.
and the margin is
E and as is you know a Steve as in Frank as you took us to The Guidance with operating leverage. It has to be a tough budget. It has to be one that we're scratching to grow and indeed we've hit those kinds of budgets now six seven years in a row and we expect to do it again. He thank you for our interest your interest in our company. We appreciate it. Ladies and gentlemen with that will conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.