Q4 2019 Earnings Call

good morning, and Welcome to our

Joining me this morning are Vince Calabrese our Chief Financial Officer in Gary Gary. Our chief credit Officer. Gary will discuss asset-quality and Vince will review the financials off today. I'll touch on our 2019 financial highlights review last year's accomplishments and wrap up with the discussion about our strategic objectives for 2020. We will then open the call up for questions.

First I'd like to highlight some key metrics from 2019. We are very pleased with record. Net income of $386 million and record operating EPS of a dollar a pack these profitability levels resulted in positive operating leverage and strong internal Capital generation driving higher Capital ratios and increasing tangible book value per share by 13% We are pleased with this growth is our full-year dividend payout ratio, totaled 41% as we return nearly a hundred and sixty million in cash dividends to our shareholders.

FNB

Forwarded total revenue of 1.2 billion the midst of volatile interest rate environment in 2019 our portfolios continue to expand with average loan and deposit growth of wage and 6% respectively.

This loan origination and deposit production came from across the footprint with strong contributions from our Legacy markets and growing success in fmb's Mid-Atlantic and Southeast expansion markets are fee-based businesses had an outstanding year with operating non-interest income up 10% and many units selling setting of all time records for Revenue.

For example Capital markets increased 56% Mortgage Banking income increased 44% and wealth management and insurance revenues grew a combined 6% off in the capital markets businesses. We are realizing benefits from our investments in personnel and products fuelled by our Geographic expansion strategies as well as solid execution across the footprint looking historically a 2019. I want to spend a few minutes discussing the progress. We've made towards the key initiatives previously outlined in a 2018 annual report letter. We set out to deliver Superior. Leading Returns on tangible common equity and drive internal Capital generation and growth in tanjung book value per share are 2019 return on average tangible common Equity of 17% was again. Leading and 13% growth in tangible Book value continue age.

to track above others in the

Industry this further supports our long-standing commitment to deliver value to our shareholders in 2019 are strong financial performance is translated to a total shareholder return of 35% placing FMB in the top quartile relative to peers.

In tandem with delivering Superior returns, we set out to protect our attractive dividend and return Capital to shareholders. We've accomplished this goal as tangible common Equity reached its highest level of 6.58% and nearly two decades at the end of December looking ahead. We've now surpassed our stated targets and have added flexibility to optimize Capital deployment in a post Cecil environment.

These stated objectives support the overarching goal of our organization to grow Revenue by prudently increasing our loan and deposit portfolios all while maintaining our Superior Credit quality and risk management culture.

with

Mid single-digit loan growth and deposit growth and further Improvement and many asset quality metrics. We had another strong year while also improving our funding mix as a proof point on interest-bearing deposits grew nearly four hundred million more than 6% as this remains a critical Focus across the company. Additionally, we have focused on new household acquisition and deepening existing relationships for the year. We had strong total deposit growth of 6% And when excluding a plan decline in broker time deposit $600 million total deposits increased nearly $2 billion or more than 8%

Next we set out to diversify and grow our fee based businesses namely Capital markets Mortgage Banking wealth management and insurance and 2019 took the unit exceeded our expectations with capital markets and Mortgage Banking income both up over 40% which directly supported total non-interest income increasing 10% off or 25 million to a record $300 million.

additional

We aspired to continually evolve towards becoming a data-driven bank and continue to optimize the branch delivery Channel. We have focused on technology and risk management infrastructure diligently investing in upgrading Platforms in the retail bank and improving efficiency as well as the customer experience throughout 2019. We close 25 branches off and we continue to execute are established ready program earlier in the year. We announced plans to develop de novo locations in the DC Metro Area Northern Virginia and in Charleston South Carolina our expansion plans in the Strategic Geographic locations further enhance our retail strategy and corporate banking efforts in a variety of attractive markets off.

As evidence of successful execution of our growth strategy. We are firmly established with top-10 deposit market share in five out of the seven major markets with a population greater than 1 million.

last

We we strive to continue to improve efficiency and manage costs. This is evidenced by our efficiency ratio improving Thirty basis points to 54.5% from 2018 to 2019 despite pressure on interest rates and a challenging rate environment and significant ongoing capital investment in technology.

Our strategy is proven through various Cycles as evidenced by the solid performance and continued focus on Improvement in many key asset quality metrics that Gary will discuss further with all these accomplishments led to a very successful 2019 and we will build upon the strong momentum in 2020 with that. I'll ask Gary to comment on credit quality Gary.

Thank You Vince and good morning everyone, we had a solid fourth-quarter to close out 2019 with key credit metrics remaining at favorable levels that are tracking consistent with our expectations and remain very pleased with the current position of our portfolio as we move into 2020.

Where the new accounting standard for current expected credit losses became effective on January 12020 which not only brings changes to reserve methodology under standard, but also marks the end of the prior methodology to account for loans acquired in a business combination.

Therefore I will be focusing on majority of my commentary today on our only end Gap credit results for the total loan portfolio. I'll also provide a brief update on the performance of our originated inquired portfolios to provide a few highlights of how these two books performed. Let's Now cover the total portfolio results.

the level of delinquency on a gaap basis and the December at 94 basis points up three bibs over the prior quarters historically low levels the long-term Trend continues to track in a positive manner as the current. Showed a 13 basis-point improvement over the prior-year

Npls in oreo trended similarly up a few bits over very good Q3 levels to stand at 55 basis points with year-over-year results improving by 6 basis points. These long-term positive Trends are the result of our continued focus on moving criticized assets off the books to better position the portfolio and we were very successful doing so in Q4, it's worth noting that beginning in Q1 2020 acquired loans will be reported as non-accrual when they no longer accrue interest as is consistent with the shift from the prior purchase accounting standard to Cecil.

A majority of these acquired credits are presently reported in the 90 Plus past due category regardless of the accounting treatment. We will continue to focus on our current strategy of attentive and proactive work out of these sub performing assets.

Relates to loan loss performance Gap net charge-offs remained at solid levels, totaling 5.3 million for the quarter or 9 basis points annualized to end the school year at twenty eight point three million dollars or twelve basis points the provision at seven point five million for the quarter and 44.6 million for the full years adequately cover charge offs and Loan growth for these periods. Vince Calabrese will provide some additional commentary on the reserve and Cecil during his prepared remarks.

Oh, no briefly touch on the originated and acquired portfolios to provide some comparative results against the prior quarter the level of delinquency for the originated book ended December 71 basis points up five bits linked quarter while npls in oreo increase three bits to stand at 59 basis points originated net charge-off levels for the first fourth-quarter. We're solid at 10 Bishop's annualized ending December at five point three million dollars with full year net charge-offs, totaling 20.7 million or 11 basis points.

or acquired

Portfolio also continues to perform in line with our expectations with contractual delinquency levels continuing to Trend favorably marked by a $47 reduction a year-over-year representing a 40% decrease.

Cuz we close out another successful year. We are pleased with the positioning of the portfolio and are solid and consistent credit results across all books of business.

The long-term consistency and stability in our portfolio are proof points of the disciplined approach. We take in our credit and lending decisioning processes. None of which would not be possible without our experienced team of Bankers across the entire footprint.

As we move ahead to the new year and the changes the Cecil accounting standard brings. We remain committed to maintaining our Core Credit principles to help balance growth objectives with our desire to asset mix and risk profile at this later stage of the economy.

looking back

We are very pleased with the performance of our portfolio throughout the whole year and are looking forward to the business opportunities ahead of us in 2020. I will now turn the call over to Joe Calabrese our Chief Financial Officer for his remarks. Thanks Gary. Good morning. Today. I would discuss our financial results for the fourth quarter and provide guidance for 20 28 on slide for fourth quarter operating EPS totaled $0.30 bringing full year 2019 operating EPS to a dollar 18 an increase of 4% over 2018 month as Vince previously mentioned the tce ratio is at 7.58 the highest level in nearly two decades.

Tangible book value per share is also at its highest level over the same period at $7.53 per share these numbers demonstrate our focus on providing meaningful shareholder value on maintaining favorable asset-quality. Let's start with a review of the balance sheet for the fourth quarter on slide, six linked quarter average loan growth total 504 million or 9% annualized attributable to commercial growth of 10% and consumer growth of 7%

focusing on

Spot here in balance is relative to 2018 total loans have increased over 1.1 billion dollars or 5%

Spa commercial growth of 7% was led by a $752 increase in CN I balances as commercial real estate also sell good activity on the origination side that was impacted by continued pay Downs in that space.

Consumer growth of 2% was driven by increases in Residential Mortgages of 8% and direct installment loans of 3% partially offset by decline in home equity line of credit balances.

Continue on slide six on a linked quarter basis average deposits grew 12% annualized the annualized growth in interest bearing deposits of 41% and non-interest bearing deposits of 8% was partially offset by the anticipated decline in time deposits with the nearly five hundred million dollar decline in brokered CD balances the shift from time to interest-bearing deposit allows more flexibility in managing costs in the changing rate environment.

turning to the

Income statement on slide seven net interest income total 226.4 million a decline of 1.5% from last quarter as the net interest margin narrow ten basis points to 3 a.m. Recognizing the interest rate environment impact is not unique to us the rate cut taking place early in the quarter clearly had an impact on variable-rate loan yields and the net interest margin.

Specifically with 1-month Libor down another 25 basis points in the fourth quarter the net interest margin declined slightly more than expected compared to the third quarter 1-month Libor of 23 basis points in October alone, which pressured asset yields from the beginning of the quarter. We were able to partially mitigate some of the decline as interest-bearing deposit cost improved basis points on an average basis and 11 basis points on a spot basis while we saw deposit costs lag to move down in Libor in October relative to variable rate loan yields are confident that our deposit rates at the end of December will help support the net interest margin as we move through 2020.

Furthermore we have consumed.

Promotional deposit repricing in February and the anticipated decline in interest-bearing deposit cost. We expect will support gradual net interest margin expansion. We expect at least able net interest margin next quarter and then expect gradual margin expansion throughout the rest of the year.

Five eight and nine provide details for non-interest income and expense there continues to be strong performance in Mortgage Banking Capital markets and Trust income and operating income as a whole is this noted earlier? We are extremely P pleased with our record fee-based result in 2019, which significantly exceeded our expectations off and importantly mitigated the interest rate movements. We experienced.

Looking at the fourth quarter non-interest income totaled $74 billion a 7% decrease from last quarter due mainly to the impact from service charge refunds called out on the side walk on an operating basis non-interest income was down 2% from a record level in third-quarter is we saw strong results from Capital markets and Mortgage Banking income offset by lower gains home of real estate and lower results on our investment.

turn it to

Nine nine interest expense remained relatively flat over the third quarter and a core basis when removing the 3.2 million dollar item related to the renewable energy investment tax credit from last quarter not interest expenses Rose 2% to hire outside professionals Services strategic technology investments in software and equipment in normal wage increases and incentive pay out accruals for the strong 2019 performance expense management remains a top priority and we are very pleased that we held core expenses relatively flat wage compared to 2018.

Lastly I'd like to reaffirm our previously disclosed expected Capital impact of the Cecil adoption for 2020 last quarter. We disclosed estimated day one increase to our allowance for credit off of 25 to 35% for the originated loan portfolio with the related Capital impacts expected to range from eleven to Fifteen basis points of tce and range from fourteen to twenty basis points of cet1 regulatory capital on a fully phased-in basis.

as a reminder

The Cecil transition on the acquired portfolio results in a balance sheet gross up of loans and allowance with no Capital impact. Once the day one Cecil allowance is established an inquiry portfolio the remaining credit and non-credit marks of 115 to $135 million on these loans are created into interest income prospectively over the remaining life of the portfolio wage. The recognition of this accretion is similar to our car process except that the remaining marks or discounts are maintained at the loan level as opposed to loan pools.

We expect the overall allowance coverage ratio to be 125 to 135 using 12:31 numbers.

Now I would like to provide guidance for 2020 mid-single-digit full-year Spot Loan and deposit growth.

I'll note our 2028 Outlook reflects the stable yield curve Outlook with no additional fed moves in twenty-twenty and for 1-month Libor rates to remain at the levels. They were at the end of December . All comparison is on a year-over-year basis compared to 2019 reported results for the base year.

that interesting

Not interesting come in on interest expense are all expected to increase in the low single-digits provision expense is expected to be in the $55 to $65 range which includes the impact of Cecil effective tax rate of 18 to 19% which includes some level of income tax credits. We've experienced over the last few years with that. I'll turn the call over to Vince.

Thanks, Vince last January . We covered major tenants of the long-term strategy and I want to provide an update throughout 2019. We continue to focus our efforts optimizing our online and physical delivery channels to improve the customer experience as well as investing in our infrastructure and Technology coming this quarter. We intend to deploy a new interactive website designed with enhanced functionality the launch of our new proprietary website creates a one-stop-shopping interactive digital experience. We were excited about the new features and a streamlined account opening process for our customers are ongoing Investments and Innovation or critical to our company's long-term objectives and ensure that our teams have the resources to exceed customer expectations and in turn support future Revenue growth.

over the past

Last few years we have successfully attracted high-quality Talent as we continue to elevate our profile especially in our North and South Carolina markets. We are pleased with the quality of our team on the field and the growing contributions from these regions.

Before turning the call over to the operator. I want to thank our entire team for all their hard work and dedication for a successful 2019. We are well-positioned wage for a great 2020 and will continue to serve our constituencies actively engage with the communities invest in our dedicated employees and deliver Grog shareholder value.

Thank you. We will now begin the question-and-answer session to ask a question. You may press the star than one on your touchtone phone. If you're using speaker phone, please pick up your handset before pressing the keys to try your question, please press * then two days time will pause momentarily to assemble the roster.

And the first question comes from Frank's Roddy Piper. Jaffray.

Morning, just wanted to start with the really strong growth in demand in the quarter. Could you guys talk a little bit about what allowed you I know you you know, the thinking wage reduce the plan reduction in The Brokerage C D levels, but you know what allows you to grow demand as you did was there some promotions in there and then you know, what are your thoughts for 2020. Do you think you'll continue to see the sort of mix shift and and twenty twenty and we you know, we've done a number of things to drive demand deposit growth, you know, I think we've talked about it in the past. I know each quarter of this year. We've had pretty decent increases, you know, we engage our team with incentive compensation directly geared towards driving home that category, you know, that's one of the primary categories in the consumer scorecard and it's based upon output not activity so growth and balance sheet. That's one thing that we do we support that activity.

See with data analytics and leads.

Um, you know, we have a pretty robust calling effort in the municipal space and with our corporate Bankers from a treasury management perspective. So we see good solid growth in the commercial demand deposit balances, simply because of being used to support services and we talked a lot about the other fee income categories, but we've had significant growth in treasury management fee income across the company and you know particularly in the Southeast in the Mid-Atlantic and you know the newer markets we've entered so that's all helped and you know, it continues to help and we've continued to see, you know, good solid growth and that was one of the pillars that we focused on to help mitigate margin compression this year, you know, we mentioned it called it out in the annual report letter and it was a folk of the company. So everybody did a great job of executing there, but there were a number of areas that we focused on to drive that Frank. It wasn't one silver bullet.

Okay, and then what do you think for 20/20 you continue to see?

That sort of trend we do we draw our growth and demand we do we're going to continue to focus on shifting that mix bringing the the deposit costs down to help offset off the margin impact. You know, Vince is Vince mentioned in the guidance, you know, we expect because of the stable and steeper yield curve. We expect margin to improve slightly over the course of the year off, you know, our our goal is to you know, hopefully do better than that by focusing on that mix within our funding base and you know, our people are very skilled it going after, you know those deposits and we use a variety of tools to help them gain that market share so that should be a focus and should continue to help us.

Okay, and then then just dump on operating leverage. I just want to make sure you know, I'm thinking about it. Correct when you guys obviously, you know gave guidance and and in a bunch of line items so we can plug that are models, but just wondering, you know as you think about in 2019 you saw positive operating leverage year-over-year. It seems to me just given where you ended the year where the margin was in for cue versus you know, the beginning of the year that's going to be a pretty tough ask for 20 22 to put up year-over-year positive operating leverage in 2020. So is dead, you know the thinking more so that you'll you know, you're just the goal is to move the efficiency ratio for 2020 down from you know, four Q levels. I think, you know, you can get a positive operating leverage again year-over-year the guidance definitely has positive operating leverage in it Frank for twenty twenties. I mean I would say is you age.

Expect it was more challenge.

Going to get there for twenty then nineteen just given the right environment that we've all experienced. But you know within our plan, you know, we don't we don't go to the board without it having positive operating leverage. So, you know revenues grow up faster than expenses. Maybe not by a lot but it's faster than expenses. And you know, we can manage the expense side of that as we do, you know, we had initiatives in nineteen to take out a significant chunk of life. And you know, we we just have that as part of running the company and we have similar efforts going on in 20 20 to ensure that we do have positive operating leverage, you know, and then if we get any surprises in yield curve as far as additional steepness that obviously helps the cause, you know beyond what we have baked into the plan, but, you know within our guidance is positive operating Leverage.

For year-over-year as long as well for the fourth quarter. Okay. Yeah. Thank you. Sure.

Thanks-thanks-thanks. Thank you. And the next question comes with Wells Fargo.

Good morning. How are you? Good. Thanks. Just if you start with the the margin, you know, I hear you saying that first quarter should be stable with gradual increase or after month and expecting year end or one month library to mimic year-end. But you know, we're already down 13 basis points from from your end on on 1 month. I guess. How does that impact the thoughts for first-quarter asset yields and then you know as we as we look out over the rest of the year, I you know, obviously hear what you're saying on the on the funding side, but you expect to see any benefit on asset yields from continued remix, or is it really you know, is is the gradual increase in margin really going to be funding driven?

No, I would say a few things, you know Libor if you look at the yield curve that's baked into our plan, you know has 1-month Libor at 175, you know at the end of the month and the June 30th, as you mentioned the rates lower than that today. So, you know, we do expect the first quarter to have some some slight pressure not the magnitude of what we saw in the fourth quarter and then kind of build up from there, you know, if you look at the ten-year rate that's in our plan. It's 2% by the end of the year. And again, this is largely using the Bloomberg Economist surveys, you know, if you got a two year around $169 at the end of the year, so I think that kind of gives you some indication of what's in there and you know, if Libor, you know moves back as you know, one month Libor is very volatile. It's been been up for quite a bit from here and then it's come back down. So, you know in in the short-term there's still some pressure there. But as I mentioned in my in my comments, you know, there's still opportunity on the interest-bearing deposit wage.

plus side

I mentioned the six basis points on average we came down on a spot basis. It's down 11:00. And when I look ahead to the first quarter, you know, we should have the average cost down another five to ten basis points in the first quarter. So that that obviously would help to support kind of the margin being relatively stable in the first quarter. You know, I think that the, you know, all the components feed into it is as you mentioned, you know, the commercial growth being the strongest component of our our growth, you know, those are loans that are tied to 1-month Libor largely and you know, you get the the benefit of the of rates as they came up there. So I mean all the moving parts are kind of what's baked in their given the the guidance that we have on the the loan and deposit growth. So but clearly with 1-month Libor where it is, it puts a little bit of pressure in that first quarter.

And then on what's the expectation for purchase Accounting accretion in 2020?

Well, it's that you know the range that we gave in October 1st.

Cecil 715 235 million dollars that will be created in you know kind of on a loan by loan basis going forward. So, you know, it's that over some average life. You know, whether it's three or four years, but it's really alone by loan. So it's prepayments come in you'll get you know benefits of at a faster accretion and prepayments or slower. You'll get slower. Krisha, but that's kind of the pool once we're in in Cecil mode that's going to get it created in overtime.

Okay, and what about just the just from the pure interest rate marks?

That's all in now. That's the way it's it's all in that number. So the total marks and remaining discounts are within that 115 to 135 pool. I got it took a little bit to the to the income side. Obviously great quarter for Mortgage Banking. What are your expectations for for that I guess in your 2020 Outlook. I mean, I'm guessing that that's going to pull back to see offset growth in in the other Lines continuing through the year.

Yeah, I would say a couple of things on on the non-interest income guidance. I mean the overall.

Single digits is based on you know lower games on sales, but real estate, you know, we had some games this year. We were able to move some properties off the balance sheet at a gain and then lower Capital markets near New coming off a record year in nineteen that benefited from the rate volatility helping the cause. So, you know that kind of two key components to that low single-digits and then the other components are kind of growing, you know, service charges in the low single-digits. The other categories are kind of mid-to-high, you know, some of our non-banking businesses are are in that right around double digits growth Mortgage Banking is kind of mid-single digits growth expected in 2020 versus 2019. So not not as strong as 19 verses eighteen, but still pretty good level in those mid single-digits.

Yeah, and then just finally for me, you know down in down in the Carolinas you starting to see any early opportunities from some of the larger deals that have taken place, you know, the SunTrust BB&T Bank as well as the first Verizon deal opportunities were additional hiring or or or you know customer acquisition. Well on the customer's side, we've certainly seen a change in Attitude by the customer. I mean we've we're getting opportunities to to have meetings and discuss opportunities. I think you know in the past some of these wage Prime borrowers would not open themselves up to that but I think the uncertainty has created opportunities to at least interface which is positive. I don't think you know with those two mergers were at a point yet where the customers are feeling pain because they haven't really finalized assignments. They haven't, you know Integrated Systems. They're still going through Thursday.

so we're still in a period of uncertainty, but

Of course, I think any any disruption that exists in the marketplace given that you know, we're fully staffed and you know, we've kind of we have our stake in this market and we're well established. I think we're going to see opportunities particularly with the quality of the people. We've been able to bring over on the employee side. We we've always had opportunities to hire people from larger institutions, you know, we've mentioned that repeatedly we we've done a pretty good job of changing out some of the bankers, you know in and really upgrading in certain circumstances with people who have long Tenors in the market who come from larger organizations that's going to continue to be the case irrespective of whether there's disruption, but certainly that gave us as well. You know, we'll see opportunities to meet and speak with people. We're we're nearly fully staffed. There's only a handful of positions open in the Southeast. But if the opportunity came up dead

hire a high-performing Banker we

Certainly move on that opportunity has been mentioned, you know those opportunities with with you know, that particular merger will will continue as as the combination gets integrated. We have seen over the last let's say, you know nine to twelve months new business opportunities that we've already put on the books from that transition as well. So we have we have generated some new customers that are already on the books, you know based on their concerns about, you know, the size of that and and who was going to handle their credit relationship. So, you know, we have seen positive benefit. We do expect to see more

Great. Thanks.

Thank you, and the next question comes from Michael Young with SunTrust.

Hey, thanks. Wanted to start on the Capitol Front the TC eat a t a ratio finally got about seven and half percent. I think you guys have been articulating the potential for some Capital returns potentially share buyback after we kind of get through with Cecil. Is that still the Outlook? And you know, what capital levels are you targeting in this sort of environment?

I would say, you know, as you guys know, we've been working really hard over many years to reach a point where the dividend payout ratio is an acceptable level and we we have enjoyed that nice build TC ratio and tangible value as we've gone through the year, you know regarding the share repurchase activity as you mentioned, you know, we'll see the full impact to Cecil by the end of the first quarter. So right now, you know purchase will kind of continue to be in that opportunistic mode, you know doing things like repurchasing shares for shares that you need for incentive plan purposes and and those types of things off the short-term and an opportunistic depending on stock price valuations, you know, as we've said before we're not going to just just build capital for the sake of building it and with the solid earnings out long. Do you think there will be a good opportunity to repurchase shares more programmatically, you know, the optimize the capital position as we get further in the year and get kind of past past Cecil on the books. Yep.

you know, we think the stock is well below intrinsic value and will closely monitor, you know the economics and earned back as we move through the year, so

You know, depending on where all that looks, you know, I would expect to see us, you know become a little more active once we're kind of threw that Cecil Cecil.

Okay, and is there a specific Capital ratio that you kind of watch as you're thinking a capital deployment?

No, I mean it's the TC ratio, you know is is a key ratio for us and you know getting north of of seven and half, you know, the 7 to 7 and 1/2 that we've talked about is an operating range and and being north of that is odd, but you know, there's not a set Target. We're not going to manage the right to 7 and half, you know on a quarter-by-quarter basis, but you know, we're we're comfortable with that level and then that gives us the ability to repurchase shares, you know when the opportunity to make sense to do it.

Okay, and I just wanted to clarify from the prior questions you had mentioned, you know, the the plan you delivered included positive operating leverage and even if you know kind of the macro environment or loan growth or something were to slow you all are committed to generating that on a year-over-year basis.

Yeah, that's part of how we run the company. Yep. Thank you very much. Thank you. Thanks Michael. Thank you. And the next question comes from Preston with Stevenson. Good morning everyone. How are you? Hey, bro, how are you? I'm going to touch base what person I'm sorry, if you have missed this, but what personal are tied to Libor and more specifically 1-month Libor sure. It's you know, eight billion dollars 34.3 a total loans is tied to one month Libor off and then there's another two point eight billion or 12.2% that's tied to Prime. So those are kind of the the two pools that move any time the FED moves.

Okay, great. Thank you for that.

And when does he typically reset is it every 30 days? Yeah, it's kind of throughout the month.

Most of them are on it most of them on a 1-month reset, right? Yeah. So various days through the yeah. Yeah.

Okay, I'm going to flip over to the average balance sheet. So you you know some some pretty strong average loan growth. I think it was, you know, plus 8% on only quarter annualized basis, but relative to the the. And that was on the on the for it looks like maybe there was some pay Downs towards the end of the quarter maybe consumer and indirect is that fair to say

An unusual. Yeah, nothing unusual Brody. I mean you you have some short-term tax instruments that come due at the end of the month. They do pay down right during the last week of the year. So you have some impact there. We did have one or two c r e transactions move into the secondary Market wage. So there was some slight impact there right at the end of the year. Okay? All right, but overall you feel pretty comfortable with that mid-single-digit balance sheet growth sort of Target. Yes. Yes. Okay. Just wanted to step back to the deposit strength, you know understand that, you know, the non-interest-bearing is sort of driven by a lot of different. I guess a lot of different items, but not just from a geographic perspective. Wondering if you could touch on sort of what drove the strength this quarter.

Well our Legacy markets continue to perform very well.

You know, we've had a number of wins across the footprint. So there were some significant wins in the Southeast in the Mid-Atlantic which really helped, you know from a commercial perspective treasury management customers, um, you know an overall I mean truthfully it's it's just a a very well-managed process from top to bottom and you know, I mentioned the investment in technology that we've made our mobile app is rated very highly by S&P Global. We've invested all along in the infrastructure to use digital analytics off and to help equip our sales teams with information. We have digital scorecards that we monitor daily that are offered to the retail folks the branch personnel and Commercial Bankers have scorecards as well. So we've spent a lot of time and energy making sure that you know, we're managing that process very effectively and we have products and services.

that are competitive and uh

You know stack up well against some of the largest competitors in the country. That's really why we've been able to drive that demand deposit growth and I know you know FMB doesn't sound like a technologically-advanced bank given the name but we've spent you know, quite a bit of expended quite a bit of our resources both from a personnel and capital expenditure standpoint down to providing are people with good products and services and the ability to compete and then measuring that performance has always been a key driver of our success or so.

In the markets we've entered there's a lot of operation in the markets. We've entered are are much more Dynamic than the markets were in. I mean, they they grow there's population growth. There's business formation. We we mentioned the thesis when we announced the acquisition, you know, we did a an extensive study of the markets that we moved into from an m&a perspective and we felt that we could compete effectively and I think life proving that over the last few years and we hope to continue to reap the benefits of our Geographic expansion. I think it creates a very positive operating environment for us as we move through the cycle. Okay, great. Just a couple more from me. Just wanted to touch on what what drove the service charge refund this quarter.

Well, we we went gone back and evaluated, you know, certain transactions related to pre nineteen customer activity and determined that we would refund certain service charges to customers package is just part of our overall product offerings. We're continually challenging ourselves internally, we analyzed customer activity and customer responses just to make sure we're taking kind of appropriate steps related to service charge. So it's it's really a one-time item, you know, it doesn't affect the run-rate going forward.

Okay, and then the south in the South Carolina markets, you know with with lens hiring, you know that the investor day you guys had some some pretty strong commentary around you off of the the initial success following his higher and just wanted to sort of touch on what the pipelines look there.

The pipeline is pipeline is very strong there. We've had you know, some really solid hires land and Elizabeth and the team down there have done a great job of attracting Talent off. So we we are very optimistic about Charleston moving into next year particularly because we're going to have a number of locations open and available to our clients by the middle of the year. It should be, you know, very positive for us and the commercial pipeline, you know is above a hundred million dollars and has been so we feel very good about them. Yeah. They hit the ground running really. They've really done a great job.

All right, then.

Or if I can just wanted to get a sense, you know, just sort of reiterate your thoughts around any potential m&a from here as we as we look forward to 20 2022 age. Yeah, I think as we look forward we're not again, we're still focused on you know, operating the company that we've established. I think we're in great markets. We're going to exploit wage position in those markets. There's a lot of disruption all around us. I think we have significant opportunities to grow organically, you know, I I think we've done a good job over the last few years of generating positive operating leverage and being very disciplined from an expense perspective, but still rooting out opportunities for growth and denovo expansion and investments in technology, and we're going to continue to do that and we we've made some great Investments. I I think the website is going to be rolled out and it will be very well received. We we shared a demo with a small group of you. I think that dead

Uh, you know, there's a lot of exciting things coming obviously the engine.

Straight environments not what we what we favor or predicted, you know, it's it's the opposite of what we predicted but we've always been able to to manage through those times a month and come out the other end with, you know, good credit quality and expansion and fee income and a shift and deposit mix which has helped us just like this year and we never would have expected to get where we are this year off without the margin help but we you know, we got together as a team and we cut expenses we focused on the income. We we managed the teams a little tighter in the field to make sure that they produce the demand deposit growth and we we came out the other end with a positive outcome. I expect that in 2020 as well.

All right. Thank you very much everyone. Thank you for yep. Thank you. Thank you have the next question, has gone through with d a Davidson.

Hey, good morning guys. Just trying to follow up on on your comments for growth. So one I wanted to confirm that the loan growth guide is off of an ended. Number and then to if you could just comment on sort of loan vertical that you'd expect to to be drivers of that growth as well. As you know, what markets maybe six sources of strength for you.

Well, I I'll let Vince answer you down on the guy. That's. And it is. Right. Yep. Okay, so I think from a growth perspective. There are a number of areas that we focused on where we've had great success particularly in the the DC area where you know, we're focusing on c n i in Maryland and you know, we've got good solid performance. They're moving the teams up markets and not necessarily need but focusing on larger opportunities where we can Garner additional business as you know, we've done extraordinarily well in that space this year with a significant increase in education fees derivative opportunities and treasury management fee income. I expect that to continue into next year. We've only scratched the surface, you know, if you look at the c r e space we have a number of projects that that were evaluating were very careful about what we go after because we still feel that you know credit quality is King and we need to stay focused on our own number.

Credit appetite not deviate not be tempted to deviate.

But I think those are two areas of focus, you know manufacturing is a little slower. It's a smaller portion of our portfolio than it has been historically but you know, I'm expecting that. I personally am expecting that to come back around in the latter half of this year principally because of the trade agreements that are being signed and you know some other positive indicators, but I I think that you know, there's certainly has been a slight contraction there. But those are the factors that will drive growth. I also believe that you know, we're doing a better job the new markets we've trained those people we spent a lot of money bringing everybody through credit training and bringing everybody through our foundations training and you know, those Bankers in particular are much more skills enabled a source small business opportunities. We expect us to do better this year. They have a significant pipeline. So, you know really that will be more of a game.

Income event, but still on the credit side. We also expect, you know, small business in general across the footprint to perform better. We made some changes their wage. Um, so there there are a number of areas where we can produce growth and if you remember we're one of the few Banks Regional banks are size that has the geographic dispersion wage the concentration in those attractive markets. So for us to be in Charlotte Raleigh the Piedmont Triad, you know, Baltimore Pittsburgh, Cleveland, Washington DC that that gives us the ability to go after a large number of prospects and Achieve our growth objectives without changing the our risk appetite. So there's plenty of opportunities for us to go after and there's a lot of disruption across that entire area

that's the

The strategy on the on the growth side from a loan perspective know that's great color Vince. I appreciate it. And my last question is as a follow-up guys would be I guess just sort of big picture of the growth Outlook contemplate a reduction in kind of elevated pay Downs that were a headwind 4:19 or 4 that environment to stay relatively the same would just be curious as to wage. Yes. It's 10:19, you know, it wasn't really pay off in nineteen. It was it was predetermined sales. We sold a large mortgage portfolio. I think it was four hundred million, right? So I thought there were some things that that we did that were intentional and you know made good Financial sense going into a Cecil environment. So we you know, we're staying disciplined and and focused on making good decisions. I I think if you look back at the prior-year, we sold a number of distressed assets that we had acquired we moved out over three hundred million and we sold Regency Finance job.

We we've created an invoice.

Apartment you saw the charge off this quarter. Our credit quality was pristine. So, you know, I think we're given how we're positioned going into the cycle. We should continue to benefit from good strong credit quality as well. But that's those were the the headwinds where there were self-imposed. And I you know, I I truly believe having been in this business for thirty years that we can't I reach for growth. We have to be disciplined, you know, that's the Trap that everybody falls in and and that's why we expanded so aggressively geographically so that we would have the opportunity to achieve our investment thesis without changing the risk profile. Anyway, so just want just one additional comment as it relates to see re we do expect secondary Market activity to continue throughout the year. It has slowed from you know, it's, you know, very strong Pace back in 2018 and early June

Teen but but that activity.

Continues and we expect it'll continue through 2020 as well.

Very good then scary. Thank you very much. That's all I have. Yep. Thanks Rose. Thank you. And the next question comes from call and Gilbert with them. I just wanted to call Quick last question just on the loan growth. I know Vince you had mentioned kind of the outlook for for Mortgage Banking in your fee commentary, but just curious how you're kind of thinking about the balance for Reggie mortgage growth in your outlook for 2020.

What's in that mid single-digits kind of probably mid-to-high single-digits. I would say is what's kind of baked into the overall mid single-digits and and we met, you know, do another sale in second half of the Year similar to what we did this year, you know for Cecil if you have you know, jumbo mortgage loans where there's you know, only a single product in the household and you know over a certain period of time, you know, if you're not able to expand that relationship, you know, we would consider doing something like that again later this year. So that's kind of baked into the the overall kind of mid single-digit guidance. Mm. Okay, and then just now that you're kind of in these these more robust markets. What's the what's the split that you're seeing between refi and purchase?

overall in the in the in your mortgage

Business, well, you know, it's it's very quite a bit this year as you would expect given, you know, the the interest rate movements, you know in the fourth quarter of 54% was purchased it with the quarter before so you had some kind of additional refi activity coming through just given where where rates were. So I mean, normally we're more in that, you know seventy to eighty percent kind of purchase activity and kind of a normal state.

Okay. Okay. That's all I had. Thanks guys. Thanks. Thank you. And next question comes from Brian Martin with Janney Montgomery.

Hey, good morning morning. It just two things for me and most have been covered. But just you know and baked into the loan growth pins. Just you know, the I know it's mid single-digits, you know, I guess when you look at the cni which is a component of of the margin, you know, the benefit does it the cni growth this year in your expectations grow a little bit more than that mid single-digit kind of help on the margin is that, I was thinking about it or is it fair to think that's just more single digits just in line with the you know, the actual guide I would say it's in line with the guide. Yeah. I don't know. Yeah, we and you know, our hope is that we beat the guide but you know, that's where our best estimate as we sit today is so, right? Okay, and the pipeline today events. You said Thursday you said as I missed it, but just kind of work that today the commercial pipeline. I didn't give I didn't give total pipeline information. I mentioned Charleston was still at or above a hundred million wage.

commercial pipe one still very small to give any any commentary on just either the, the only thing I will

Well, the only thing I will tell you is that in, you know production we talked about production but there's an unfunded component to our production calculation cuz we give people credit for commitments a certain percentage of credit. But when you look at the production coming out of the the south east, for example, I think it's up what 40% year-over-year events. Is that right? Yeah, that sounds right. So, you know, we've had some good song growth in terms of the number of transactions that we book now, there's things paying off and the portfolio is moving, but we had some very very solid activity in southeast this past year. We expect that to continue and the pipelines overall are pretty comparable to where they've been historically at this time. So we you know, that gives us the confidence to forecast mid single-digit growth.

Okay, that's helpful. And just the other only other thing for me was just on the on the expense guide. I guess have you guys can you comment on the on the just you know operation ready or just kind of like you guys have in there for you know Branch reduction this year I guess is there is there something baked in this year on the branch production side or how should we think about that? Yeah, I would say a couple of things. I mean our guidance of low single-digits for 2020, you know reflects kind of investments in several strategic initiatives that we've been talking about, you know, the club bricks scenario the website the VIN commented so we have continued investment as you know, that's part of running the company. We're always investing every year new Branch teller platform, you know denovo extension. So those those initiatives are all kind of baked into it on the kind of the increased expense side, and then we have continued discipline expense management to help fund those Investments and dead.

Deliver the positive operating leverage. And again, that's something that that we can control, you know, the cost management initiatives side.

Includes the the ready, you know continued looking at optimizing the retail Network, you know, including continuation of the normal kind of ready activities that we have each year continued vendor renegotiations facility optimization how we're managing cash in the vault and on and on I mean there's a long list of kind of initiatives that we have in in the company that we're that we're working on.

Okay, so there are some some in there just you know, I guess it's hard to think about it.

Yeah, no, there's definitely some some additional optimization opportunities in the branches for this year. Okay. All right. That's all I had guys. Thanks fine. Thank you, Thank you and next is another question from Michael Young with SunTrust.

Hey, thanks for the follow up Vince. See it. Just wanted to ask if you know we've kind of had a period of rising rates for people were locking in duration and extending duration on the funding side. And then we've kind of gone the same way obviously over the last year during this period of kind of more stable rates. Are you looking to make any shifts structurally within the balance sheet to maybe take advantage of and this month. Of hopeful stability, I guess. Well, I mean, we're always looking Michael. I mean we did opportunistically put some funding Zahn last year. It's a very good race, you know how long it made sense to do that and you know locked in some funding. So I mean our treasury function in our alcohol function. We're constantly looking at opportunities. I mean, we don't have any plans for any major shifts wage, you know will continue to look at the asset side of the balance sheet in a Cecil environment, you know, where there's opportunities to maybe create some more shelf space for the commercial loan growth, you know will continue to look at that, too.

So, I mean it's just part of kind of how we manage the balance sheet on going. So if there's if there's more good opportunities to do something on either side of the

Balance sheet, you know, we'll do it.

Okay. Thanks. Thank you. Thank you. Thank you and it has include the question and answer session. I would like to return to Florida management for any closing comments.

Well, thank you. Thanks for all the great questions and thanks for the support throughout the year from our shareholder. It's I think we had a terrific year and we're looking forward to 2020 and continuing that momentum. Thank you. Thank you. See conference says Al concluded thank you for attending. Today's presentation is going to Caroline's.