Q4 2019 Earnings Call

The last.

Welcome to the fourth quarter 2019 earnings Conference call. My name is choppy operator for today's call. At this time all participants are in listen only mode.

We will conduct a question and answer session.

During the question and answer session. If you do other question Press Star then one on your Touchtone phone.

Please note that this conference is being recorded no one I'll turn the call over to burn in Hell.

Yes, Andy Bogart, President and Chief operating Officer, Harry Madonna, President and CEO , and finally vertical chairman of the board.

Thank you all are dialing into the call the press releases out I like the.

Items in the Uh huh.

Released and I will talk about whatever you would like we had another great quarter of so gross.

The positive year over year has gone up 600 million.

Our new stores are growing at 30 million a year and all other stores kind of you almost about at 22.

We have two stores in New York open they're doing very well the third one about the start well was also grew very very well they grew 22%.

And they're growing in every market. This was a third quarter I believe though the second quarter, where we have a small loss, but I think I just mentioned that the last quarter. We had unusual set of facts, where we had the expenses, particularly of New York, but the a flat to in order to yield curve compressing our margin we're talking about the things we are about.

To do a rush started to do a tells a margin improves.

Oh.

Again, the margins the problem you have a flatter inverted curve one of the ways where for their margin as I want to deposit ratio will be going off on page two of everybody asked about tech I'm pleased to announce that we have brought on board.

[noise], how certain who.

Who works for me a commerce is a cheap tackle offers or something like 91 to 2000 exam and he helped lead the tech transformation branch transformation of Commerce doing all the better here.

And he is already approved not only our back office, but the delivery express to our clients Republic is about the integrated delivery experience of in store mobile online.

And as you know our theories about building fans.

You can see the growth an asset performance in deposits. So like the deposit goes to the fourth quarter was what her.

Mr quarter.

29, so yeah, approximately $200 million for the third quarter alone.

Fourth quarter, sorry fourth quarter.

Nonperforming assets went down declined 2.42%, our largest oh sorry, yeah.

Asset was sold off in the fourth quarter.

With that residential mortgage business is doing fine for the year and SBH Adam.

Pork.

Capital, it's still fine, but it seems growth rates.

Well at these rates, we said, we expect to raise capital in some form of later this year, we all have a date.

Uh huh.

So we've also announced that day in response to the margin, we introduce which has become already dramatic reduction in expenses and expense growth is bright watch your best with yes. So that the first item on our list is just slow the store openings, we've announced previously that we expected.

Q4 stores this year most of the more already under construction or far along in development, where we found a need to continue with them.

But that'll that'll certainly help us control the expense.

Growth.

We're looking at the controls new hires as well as other variable costs things like marketing maintenance and professional fees one of the things we've done in this new world to tap, we've actually reduce the hours outlet stores, which I've never done in my life I don't think it's still very long hours the best in the market, but the week.

We've reduced some of the week the night the weekday nine hours and some other hours, we've got some real cost saves there right.

We've taken a very close look it all high cost deposit relationships to attack in an attempt to drive down the cost of funds.

Acts as Marty mentioned, we hire Jack Allison as our Chief Technology Officer, we will use Jack to optimize the use of all technology resources.

We're assessing the size of future stores, we'll we'll try and optimizing and limit any any color cost or expenditures. There. In addition, we've taken a close look at it at management salaries as well as board fees and the bonus pool.

Then we accrue for 2019, so all those initiatives together most will take effect in the first quarter 2020, but if you look at the earnings release, you can always also already see the stabilization of non interest expenses non interest expense actually declined slightly during the fourth quarter of 20 twice.

I think everything else is covered in the press release any online release, we'd be happy to open the floor now than what you would like to ask.

Thank you hire way.

Thank you and I'll begin the question and answer session. If you do have a question.

Star then one on your Touchtone phone.

Once again, if you do have a question press Star then one on your Touchtone phone.

[noise] anybody there and our first question comes from Frank Schiraldi from Piper Sandler.

Good morning.

Hi, I'm working right what their views with your new name [laughter] confusing I know, it's a different but not much else has changed resides in them. So that's good.

But I wanted to start Vernon with actually Frank I think you might have just mentioned I might just mr. <unk> I thought you guys have talked about the number branches next year you were looking to open was four and that I'm not sure. If you updated that I'm on the call here. This morning.

No we said.

At this time for the target for this year, what already opened in January Theres. Another one under construction that will open late second quarter and two more that are far local or long enough in the development process that doesn't make sense to slow them down at this but Frank that is slower than we had our plan last year, we tend to build more new stores.

In both markets, we've deliberately slowed down these store openings.

Go ahead, Okay right now now I understand okay. So so for for 2020 and then.

Vernon you mentioned the loan to deposit ratio should be going up Frank you talked about.

Taking a hard look at some higher cost deposits. So you know is this something that we should expect you know just just stronger loan growth throughout the year than deposit growth or is there you know something in the first quarter, where we could see some some attrition and the deposit levels.

Just write off the back to kind of reduce some of those higher I guess cost deposits.

Oh I loan to deposit ratio is definitely going up the New York expansion has really helped as I've found when we went to Congress to New York as more commercial loan demand and the rates are higher in the euro surprising so.

We grew up we had a big we had a bit in fourth quarter, what was the loan growth in fourth quarter for loan growth in the fourth quarter was $175 million on that a lot of happens in the back ended the quarter how's that compared to third quarter. So the first nine months. All together was only 130 million. So we grew more than the fourth quarter in loans than we did all three of the first quarters it's come.

From every market, but as I said right I was really surprised with commerce went into your there's more loans in our segment and the price expire so pretty confident the loan to deposit numbers going to keep going off which the margin will get helped of course.

Okay. So it sounds like it's more a case of just tremendous long growth as opposed to trying to a coal part of the deposit franchise.

I wouldn't say, we're trying to colder deposit flanker brand franchise.

As always it out lot lot lie on an outlier he can dial up dial back to their deposit growth is so strong now that we can be less aggressive on certain types of products and rates.

We have the deposit growth slowing.

That business, you're fine no, but we have loan growth accelerating.

Further than we've had investors.

Okay, Alright got you and then just just on the capital front.

You know I, you mentioned Vernon I think you'd have to address some form of capital just given the way you're growing at some point later this year I believe so just.

If that's you know the case than.

It doesn't sound like you're you're looking to do something immediate but just kind of curious if you could give us a little bit of detail on your thinking on common levels because to me. It seems like you're going to you know just given this growth rate you have to raise common at some point I'm. Just curious if you could tell us what you what sort of levels on a T C.

Ratio, you guys target and and how low do you think you can go on on a Tc ratio at at the Holdco.

Before you need more common.

Right.

We were thinking about doing something a second to third quarter were not committed to that we do need common in some form you've heard me talk before flank I've done converse several times a possibility to do some kind of convert.

Whether it's a preferred or debt.

Generally my experience. So what we've had every public is we raise capital and we sort of work at downsized the gross or net we raise subs are more we're not ready to say what the amount is but it's not a giant number that we need.

Okay. I mean do you think you go back about I mean.

Any any sort of color or guidance and give us I'm, just where you think you guys need to get on a Tc ratio in order to you know once you raise some money that you don't need to raise again for another you know 18 24 months something like that where do you think you need to get to on a Tc ratio.

There were certainly going to keep the above 7%, we're not specific about how much we want to get above that number in the next raised so.

As we see our first quarter, but we'll get back to the market and talk about the range that we expect later this year.

Alright, great bags.

Thank you Frank.

Our next question comes from Michael Credo from KBW.

Hi, Michael.

Hey, good morning burned how are you.

Thank you.

A couple follow up question. So as we think about how would you saw Franks capital question, but as we think about the overall kind of asset growth for 2020 with the four stores do you guys have any initial thoughts on kind of what what your expectations are there, especially with kind of.

The revised up loan growth expectations that they you discussed earlier on the call.

Do we have any expectations about what the overall asset quality of we're trying to think about the size of the balance sheet. Just as we're trying to think about capital and then lever in capital well you can look at our deposit growth per store.

For 2019, and we're pretty optimistic continue in that area, but remember when you talk about new store openings.

You have to count amongst several but not the years I just came and for the stores and multiply that number.

But generally it will be in this area per store.

Our and then on the expense kind of actions that you guys are or how it sounds like have already started to take.

Frank I was wondering if you could give us a little bit more details about how you kind of expect that to impact the near term expense run rate and I guess just more specifically do you think you'll by the second quarter of next year with the actions you're taking that you guys should be able to kind of return to a positive earnings run rate here or do you think you'll take shorter or longer than that.

Now that that's our expectation.

A lot of these initiatives were set up to start with the beginning of the new year.

You can already see the stabilization so you've got some impacts that are taking effect in the fourth quarter, but.

That's clearly our but it's a priority for US right now I still remember, Mike that the new store openings or decreasing percentage of the total store base.

So the new stores have a less negative in impact was there a lower percentage, but we definitely expect to scale back on course.

And do so just the expense does it actually stepped down or or do you think it's more of a stabilization with with the loan growth and had the I benefit on on top of that.

If it's a combination of too so the initiatives or a combination of both some of them are reductions at some of them are controlling with the future growth. Obviously, we hope we continued to grow the balance sheet at the same rate.

Managing expenses to be limited is is really priority and should show that benefit you also get some top line improvement as the margin improves and we're very optimistic about loan growth, which is going to increase the margin in the top line. So that's sort of both working together we held okay.

I don't know if you guys can answer this but but just as we think about.

You know the margin it was to 67 in the fourth quarter you. Obviously, the New York market is a small relative peace at this point, but growing rapidly, but it sounds like the margin and the New York business is stronger than the rest of the the business at this point I was wondering if you could maybe just disclose where kind of the margins arranging <unk> on the New York business, just as we try to think.

About how you know the NIM could improve as that becomes a bigger piece of the overall company.

Historically that was my experience a congress to margins were better in New York, because the loan yields were higher in the cost of money was no higher it's too soon to tell on that might because stores open they have opening deals and working with a small number I think long run we think the margins are going to be about the same air.

But as you've heard me talk for 100 years, it's all about deposits per store and you're going to get much higher deposits per store that what you would happen momentum.

If your market and any suburban markets. So over time the earnings impact in New York is much better because the average deposits per store will be much higher.

Got it and then just one last quick one if I could think it Im just learning you mentioned that you are tremont store hours I'm. Just curious has that been communicated yet and has there been any kind of client feedback on that as as you sit here today. Thank you.

Andy.

Yes, it's been communicated out and knows that no feedback it's been installed its been stalls, yes sure dates right Mike.

I like these long hours and we have cut the hours about seven days a week, it's more the the fringe hours.

Could cut out seven days, a week, but it's obvious to everybody. The people don't use of stores as much as they did because of online and fintech. So.

We may remain savings, we haven't heard I haven't heard a thing back into view and no I got you have a responses.

So going away or.

Got it.

So that's good to hear that the feedback guys in deferred our stores are you able to spend very little on marketing our stores or our marketing and it's a it's.

The new world throughout the bright balance between stores and online it's been tech.

And these gross numbers for these stores that you all know that American bank branches, where one to 2 million.

Answers I knew what they're going 30 million a year guys.

Got it I will thank you for taking my questions I I appreciate it as always.

Thank you everybody else.

Our next question is from Brian Meissner private investor.

Hi, Thanks for taking my question.

Just looking at noninterest expense category and specifically the other operating expenses I was just wondering if you could maybe.

Breakout the the growth related expenses in that category that some of that you guys could do trying to get down to kind of like the profitability of.

Outside of the growth I'm trying to get like a run rate basically.

There will be more detail in the 10-K that we did we file in a few weeks.

Other operating expenses is really a catch all others TV and marketing advertising, it's a large bucket that we summarize for purposes of the earnings release, but we will provide more detail.

In the annual report when we're out on the road next time, when we do another costs will break out to store profitability model and then back office expense model will show you how it all works together you might I don't know you, Brian but the holdings of Commerce, we did profitability models by store in backlog office and we're prepared to do that again soon.

Okay great.

Thank you.

Sure.

And we have another question from Frank Schiraldi from Piper Sandler.

Brian you back again, just one follow up if I could.

First I just want to say I'd definitely if that would really be great. If you guys would provide that again sometime soon that would be really helpful. So look forward to that's release, we put out it's not silver. So we'll we'll come out some breakdowns of stores on the use of reported commerce the.

Right right breakeven level level generally.

And the flow through profit so we will report.

Some of that at the next report.

Recall that never had enough size and experience for the numbers to have a lot of meetings, but we're getting to that scale now.

Okay, and then just I just wanted to try and zero in on expense a little bit more just big picture for 2020, a you know Frank you talked about the fact that.

<unk> expenses stabilized in the fourth quarter, which they did they were down linked quarter with the growth you're looking for in 2020 with the four branch openings I'm, assuming you're still going to see some expense growth here. If you could just characterize for us is that some sort of normalized growth more in line with what we saw in.

2018, 10 percentage sort of growth from these levels or any sort of color you can go I'm just sort of.

When you talk about cost control measures.

How much is stabilization and how much is just control and grow from here no Frank maybe it'd be helpful to everyone. If he gave you some numbers about.

<unk> expense growth, excluding the new stores right the new stores out see if that helps and look we'll come out that we'll share with the market that will give you some more numbers to work with.

Okay.

Okay, but at this point, you're not prepare for you know to talk about I guess growth and expenses for 2020 year over year Frank.

We can only the slow so much frankly, adding four new stores is obviously going to drive more cost.

The other initiatives like managing raises and merit increases and advertising that will offset some of that growth. So.

You saw the percentage in the growth year over year in 2019 were clearly not going to reach those levels.

Hopefully, we'll be back closer to 2018 level that you referenced but.

Somewhere between is probably a reasonable assumption.

Okay, Great. That's helpful. Thank you.

Anybody else.

At this time I have no further questions. Thank you all call Paul Harry frankly product by everybody.

Thank you ladies and gentlemen, this concludes today's call. Thank you.

And then you may now disconnect.