OceanFirst Financial Corp. (OCFC) Q4 2018 Earnings Report, Transcript and Summary

Good day and welcome to the OceanFirst Financial Corp Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Jill Hewitt, Senior Vice President. Please go ahead, ma’am.

Thank you, Cole. Good morning and thank you all for joining us. I am Jill Hewitt, Senior Vice President and Investor Relations Officer at OceanFirst Financial Corp. We will begin this morning’s call with our forward-looking statement disclosure. Please remember that many of our remarks today contain forward-looking statements based on current expectations. Refer to our press release and other public filings, including the risk factors in our 10-K, where you will find factors that could cause actual results to differ materially from these forward-looking statements. Thank you. And now, I will turn the call over to our host, Chairman and Chief Executive Officer, Christopher Maher.

Thank you, Jill and good morning to all who have been able to join our fourth quarter 2018 earnings conference call today. This morning, I am joined by our Chief Operating Officer, Joe Lebel and Chief Financial Officer, Mike Fitzpatrick. As always, we appreciate your interest in our performance and are pleased to be able to discuss our operating results with you. As has been our practice, we will highlight a few key items and add some color to the results posted for the quarter and then we look forward to taking your questions. In terms of financial results for the fourth quarter, diluted earnings per share were $0.55. Quarterly reported earnings were impacted by merger-related expenses, branch consolidation charges and a non-core favorable income tax item. These items net of tax benefit, provides $696,000 of non-core net income, representing about $0.01 a share. Excluding those amounts, core earnings per share were $0.54, a respectable 20% increase over the fourth quarter of 2017. Regarding capital management for the quarter, the board declared a quarterly cash dividend of $0.17, the company’s 88th consecutive quarterly cash dividend. The $0.17 dividend represents a 31% payout of core earnings, which will allow us to build capital levels as we pursue a variety of opportunities to deploy that capital in growth initiatives. The volatility in equity markets provide the opportunity to repurchase shares. During the quarter, the company repurchased 459,251 shares at a weighted average price of $23.60 per share. There were 1.3 million shares remaining under the existing repurchase program. At current prices, you could expect the company to be an active repurchaser of shares in the coming months. Performance metrics for the quarter reflect the progress made over the past year. From a profitability perspective, the company achieved record core earnings of $94.1 million or $1.98 per share the best in our history. Our fourth quarter run-rate evidenced a core return on assets of 1.38% and a core return on tangible common equity of 15.19%, which reflects the work we have done to improve relative profitability. We achieved these results by managing our margins, which expanded over the year and by aggressively reducing operating expenses as we integrated the Sun Bank operation and consolidated 17 retail branches over the course of the year. From a balance sheet perspective, we strengthened the company’s risk profile by several key measures. The company maintained a prudent interest rate risk position as evidenced by our 3.68% net interest rate margin for the fourth quarter, preserved a strong liquidity position with a loan to deposit ratio of 96%, build tangible book value per share, which increased 5%, increased the tangible common equity ratio by 113 basis points to 9.55% and reduced total non-performing assets to just $18.8 million or 25 basis points of total assets, less than half the level of year end 2017. Collectively, these efforts have been engineered to prepare our balance sheet to weather a wide variety of risks that may develop in the quarters and years ahead. While developing our core business, we have continued to take advantage of opportunities as they arise, including the recent agreement to acquire Capital Bank. The Capital acquisition is proceeding smoothly with regulatory approval secured on December 19, just 27 business days following our application. Earlier this week, Capital shareholders approved the transaction, which is now expected to close on January 31, 2019. The Capital integration and accompanying branch consolidation is scheduled to be completed late in the second quarter of this year. Capital improves our deposit market share in Cumberland and Atlantic counties to 33% and 24% respectively. It will positively impact earnings in the second half of the year. Capital has maintained an asset-sensitive, commercial bank balance sheet with a conservative loan-to-deposit ratio of 67%, modest 51 basis point cost of deposits and a standalone ROA of over 1.25%. Not only does the franchise nicely complement existing OceanFirst business, but their financial performance will improve our performance metrics, especially after the integration is completed. Bear in mind however that the additional shares to be issued in connection with the Capital Bank transaction closing may provide a core EPS headwind of about $0.01 to $0.02 per quarter until the full integration in June of this year. Also, the Board of Directors announced their decision to appoint Grace Vallacchi, Executive Vice President and Chief Risk Officer of the company and the bank to the Boards of Directors of both the company and the bank effective immediately. Grace will retain her Executive Vice President and Chief Risk Officer positions as well as her role in the executive management team and report directly to me. Grace joined OceanFirst in September of 2017 and was previously an Associate Deputy Comptroller in the Northeastern district of the Office of the Comptroller of the Currency. With her experience and insight, Grace has made a positive impact on our company and I know her contributions as a director will be a valuable addition to our board. As we look towards performance throughout 2019, we are squarely focused on two important initiatives. The first will be efforts to further improve efficiencies through the deployment of technology and the consolidation of at least 4 additional legacy OceanFirst branches. The second will be an effort to improve the consistency of our loan growth. As major integrations are behind us, the recruitment of seasoned commercial bankers will become a primary objective as we expand our commercial lending presence into both the New York and Philadelphia metropolitan areas. Joe Lebel will walk you through some additional detail regarding our performance for the quarter and his plans to build out the business throughout 2019. At this point, I will turn the call over to Joe. After Joe’s discussion, we will be happy to take your questions.

Thanks, Chris. Commercial loan originations were strong in the quarter as expected with closings in excess of $151 million. Overall loan production of $260 million represented a very solid quarter. More importantly, yields on the new originations exceeded 5% with improvements in all lending areas. Overall loan growth was muted, but positive at $36.6 million as new loan originations and the purchase of a $49.5 million pool of student loans similar to earlier purchases this year offset several payoffs from credits not meeting our credit disciplines or pricing guidelines. Since the Sun acquisition is nearing its 1 year anniversary, we have touched many of the credits in some fashion and fully expect attrition from our review to abate similar to other acquisitions we have made. I would like to update you on the talent acquisition strategies. As the successful integration of Sun is behind us, we focused our efforts on the continued expansion of our commercial banking business by identifying senior leadership in geographic markets and building lending teams around them. We have added several new lenders in Philadelphia in the past few months and expect to expand our presence in New York City in the first quarter as well. We have also created a syndication desk to focus on the purchase of loans that meet our conservative credit appetite. While we have not changed our credit disciplines, we believe our increased scale can lead to thoughtful conservative balance sheet growth in existing and adjacent markets without undue risk. While these transactions maybe at thinner overall margins, the value and consistent loan growth with reasonable expense levels provides a modest complement to our core lending business and will have a positive effect on overall profitability. Turning to the interest margin, our NIM of 3.68% represents a 4 basis point increase quarter-to-quarter largely attributable to better execution on originations. Purchase accounting in the margin declined 1 basis point from 24 basis points to 23 basis points during the quarter. The resulting core NIM increased to 3.45%, up 5 basis points. Yield on earning assets improved by 9 basis points to 4.31%. Our expectation on the NIM remains at or close to current levels with any impact from deposit re-pricing and reduction from purchase accounting offset by continued modest gains in the loan portfolio. Looking at the positive trends, we saw a decrease of approximately $40 million due to seasonal government attrition and tempered seasonal business activity. Further attrition from acquired banks’ CD and money market accounts is slowing as expected and we expect first quarter government balances to increase due to their quarterly tax collections. Deposit retention for the acquired banks has exceeded our expectations despite the fierce competition for deposits in our markets. In that vein, our cost of deposits rose to 48 basis points from 39 basis points as we proactively re-price selected corporate cash management client accounts. While costs will increase from these proactive actions in Q1, we don’t expect significant re-pricing to occur. The quarterly deposit beta was 36% and the year ended at 16% as our funding profile continues as one of the best in our state. A brief comment on expenses for the quarter. While we held the line on operating expenses, we did not achieve our internal targets and remain committed to continued progress, our goal of achieving an efficiency ratio nearing 50% by fiscal year end 2019 remains in place. As Chris noted, continued branch rationalization and consolidation will occur outside the Capital Bank acquisition. These actions to proactively manage operating expenses in combination with the loan growth initiatives I outlined earlier are targeted to both further improve our efficiency ratio and contribute to EPS growth throughout the year. With that, we will move on to the Q&A part of the call.

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Frank Schiraldi with Sandler O’Neill. Please go ahead with your question.

Good morning.

Good morning, Frank.

Just as you guys talk about Philly and New York as you talk about New York, is that sort of the – could you give little more color there? Is that sort of the outer boroughs, what sort of lending are you looking at and is the idea to open an LPO with something that might eventually lead to branches just some further color there? Thanks.

Sure. We have limited coverage in New York already. We have one commercial lender located in Manhattan. They came to us through Sun. So, it’s not a new market for us per se. It’s also a market that I have the significant background in as does Joe Lebel. So we have been watching and waiting for the right opportunity to start adding resources up there. So I would characterize this we have identified a couple of hires that we intend to make. Hopefully, that would be concluded by the end of the first quarter. And these are seasoned folks that are well-known to us that we think can be pretty productive. In terms of what we are looking at there, it would be throughout the boroughs and as well as Manhattan and it would be a mix of C&I and CRE. But to be realistic, the C&I – making progress in C&I takes a longer period of time. So, I would expect that we are going to see relationship real estate lending meaning some owner-occupied properties, some investor properties we have been waiting for the right opportunity to use some of our capacity in the balance sheet to add some of those properties. We have looked at loan pools over the past probably couple of years and decided that we would rather go in and do it through a direct origination platform. So it will be a commercial loan origination office. It will be several people. There will be known producers and we look forward to giving you more color on that. So that’s in progress. I think we will have that in the first half of the year established and then grow it from that point. So similar situation in Philadelphia, although we are a little bit earlier in the process in Philadelphia, so we have been covering that market more thoroughly probably starting in the second half of 2018 and have made a number of recent hires and we have a number of folks in the pipeline for that. So in both places, we are hiring the teams first and then we will establish a physical location. But I think in both areas we see an opportunity now. As Joe mentioned, the loans that are going into the book today are yielding over 5%. So, we think the pricing is back where it should be and we think by entering those markets, we can get selective relationship transactions that will be added to the balance sheet, so. I am going to ask Joe to just make a comment or two about the hires he has made to-date and what he has been selected.

Frank, its continued path down the road of seasoned lenders from national, regional banks that have been through cycles that have big followings in books of business and we have continued that. We had the loan production offices in Newtown Square and now we have hired two more folks that will be in Central Philadelphia and hopefully on our way for a third and continue to recruit in this space.

As you think about growth into Philly and New York, just curious how are you thinking about net loan growth – net organic growth in general and what are you thinking about in terms of net growth in New Jersey at this point?

Sure. So if you think about how we have guided in the past saying that we would like to have say somewhere in the range of $50 million to $100 million of loan growth, number one, we would like to be much more consistent about that. We recognized over the last couple of quarters albeit due to pay-offs and things like that, we have had less consistency in the net growth number. So we want to be more consistent. So I think we need to supplement what we are doing in New Jersey. And then the second thing is I would look at this as being largely a second half of the year event. You will see maybe some impacts in the first or second quarter, but it’s really going to be a second half event. I think that we could be then at that point have the productive capacity to be looking more towards the higher end of that range. So maybe we can begin to target more of the $100 million plus per quarter in loan growth. So this is not something that will change overnight, but we were waiting. We did not want to enter either of these markets in a small way or kind of as a hobby. We wanted to make sure we are getting high quality staff, that staff as it comes with – it’s expensive staff appropriately so, but we think it’s the right time. The last thing I would say about that is to be credible to the folks that you are hiring in those markets. You want to make sure you have got everything aligned internally. So having finished, we wanted to get through the Sun transition, we had to be able to demonstrate that, we have got all engines firing with a great support team that we would be able to support from a credit infrastructure perspective adding those kinds of producers.

Okay. And then just finally if I could I mean obviously you talked – Joe you talked about the expenses and the expense base is a bit higher I think than people were looking for. It sounds to me like these weren’t sort of – you called out a few categories in the release, but is it fair to say these weren’t sort of one-off, this is sort of the operating expense base and then to get to your goals you are looking for further branch rationalization to get there. Is that fair?

Yes, they are mostly – Frank, it’s Mike. It’s primarily recurring expenses although I can see equipment for example is higher than we expected, we are holding a dozen properties for sale. So, those correspond – while we wrote those properties down to market value, the operating cost associated with taxes and maintenance are recurring expense. So, we have an opportunity to exit those 12 branches and reduce expenses that way. That’s taken a little bit longer than we had thought and some of the professional fees are up a little bit, that tended to be a little bit lumpy. We did have higher legal and consulting and accounting professionals in the fourth quarter, especially with all the tax issues that’s going on in New Jersey, with the New Jersey and the federal taxation. So, just a little bit of lumpiness in that line that might not recur. But yes, we would – and going forward, we will see when we start with the New Year now we do have compensation increases for our staff that takes effect at the beginning of the year. So we will grow into that over the course of the year. So looking forward, we will see the expenses rise a little bit above these levels.

Alright. Thank you.

Thanks, Frank.

And the next question comes from David Bishop with FIG Partners. Please go ahead with your question.

Hey, good morning, guys.

Good morning, David.

Good morning.

Chris, you spoke about some of the headwinds in terms of the originations, but may have been impacted by continued pay-off of some loans you’re looking to exit. Just curious, I don’t know if you have the number in front of you, but do you have a sense what the exit of those credits, how much of a headwind that was in aggregate for the year and what gives you confidence or do you have confidence that the majority of that is behind you as you enter into 2019?

I’d give you an order of magnitude and then Joe may have some comments on the types of things that we allowed to kind of move on. There was about, just in December, we had about $47 million worth of pay-offs, but much of that was the kind of stuff you would expect to pay off. Joe can walk you through a couple of examples. I think what we’re recognizing is that on the size of this balance sheet now, we need to have a little more productive capacity and we wanted to be careful not to try and draw that out of the core markets that we feel we’ve already got covered pretty well. So I’ll just say we win every deal in our market, but I think we are winning a lot of the deals, who want to be in our market. So stretching the markets a little bit provides us a vast pool both in Philly and New York. So to just put on a little bit of production in each one of those and make sure that these pay-offs, which are probably a way of life for the next year or 2, that we can overcome them and still continue – still find a way to do very consistent loan growth. So Joe, maybe a little color on the loans that we kind of let go, we could have in some cases stayed in.

I think it’s a couple of things, Dave. One is, we’ve gone through this before, where we tend to take a fairly strict approach to the acquired banks’ loans and make decisions on credit and structure and pricing. So we do have some of that runoff. I think we mentioned this in the third quarter, it was like $75 million. And I don’t know what the actual number related just the Sun would have been in the fourth quarter, but as Chris mentioned, about $47 million in payoffs just in December, but three of those loans were the type of loans that should pay off when they come due, $9 million construction loan that’s converting to an insurance company-led permanent, and $11 million land loan that was on the books for 2 years as agreed and paid off from construction refinance. So those types of things are expected along with on occasion the acquired bank portfolios. But typically, we’ve seen the acquired bank portfolios runoff be exacerbated in year 1 as we touch these credits and make decisions and then slowdown in years 2 and 3 as the folks that remain are acclimated to us and we are comfortable with them. So I expect some of that run-off to abate in 2019.

Just curious as sort of like putting the crystal ball, I had to look back in terms of the Sun acquisition in terms of the way these loans have trended and paid down. Any surprises from that perspective or does this change how you maybe approach, how you’re handling the Capital Bank portfolio versus the future acquisitions and scrubbing their loan portfolio?

Yes, it’s a good question. So there are few factors here. The first is that the Sun loans had – on average had a larger average balance. So what we might have I think maybe modeled better is that in larger dollar loans as they come up for renewal, the competition is more heated. And in many cases, it was a competitive decision, where there were elements like – structural elements like more cash-out, where we had a relationship because stayed in the loan, but the guy can get a lot more dollars than we’d be willing to do somewhere else, and that’s going to happen if you got a $15 million, $20 million, $30 million loan. So I think we’ve been thoughtful about that. Overall, we’re very pleased with where Sun is tracking. We’ve got some other positives in things like the cost of deposits and the operating expenses kind of played out well. As we then translate that into Capital to answer the second part of your question, Capital is a much more granular portfolio, so a lot smaller average loan balance. And I think that we’re going to have less of an issue related to the prepaid levels on a percentage basis. And then of course, Capital is much smaller than Sun, Sun was about $1.8 billion portfolio, actually $1.6 billion portfolio, sorry. And we’ve got a fraction of that in Capital, so it really won’t present the headwind.

Got it. And then one follow-up in terms of the quarterly losses, in terms of the – your favorite banquet hall facility that’s now in the past, should we expect that drag in terms of the fee income line, the $837,000 loss on real estate operations to basically go away or just be immaterial amount?

That is correct. This is the primary motivations. We never wanted to be in that business and we’re glad to be out of it. But I will say I’m glad that we handled that the way we did. It was a significant employer in a local community where we do a lot of business. We bank the municipality. We bank a lot of people in that area. And we were able to make a difference at – not a big financial impact to us.

And Dave, out of that $800,000, $600,000 was directly related to the property that we sold. So there’s always going to be a little bit of recurring cost for other REO that comes on and off our books.

Got it. Thanks Mike.

And the next question comes from Russell Gunther with Davidson. Please go ahead with your question.

Hey, good morning, guys.

Good morning, Russell.

I wanted to circle back to the loan growth conversation. Appreciate the color about your plans for ‘19 and the strategy there. As we think about the back half of the year in that $100 million target, how should we think about the mix of that growth. Consumer and resi re has been pretty strong of late. But as we look towards the back half of last year with the commercial initiatives you talked about, how would that mix change if at all?

Yes, I think that you should think about our residential and consumer line at a very slow trend like it has been in the past, it will not accelerate. We’re not looking to put a lot more in the balance sheet there. That’s a nice risk mitigant for us. It’s a great product for our customers and it is a product that we find to be profitable in our model that we’ve funded with long-term core deposits. So the incremental growth to the extent we’re able to do it would be in the commercial lines and it would be a combination of investor CRE, owner-occupied CRE and C&I with the waiting in the real estate categories. The – we love C&I. We’re trying to push that all the time, but we also recognize that there is a lot of appetite for C&I out there, and it’s probably one of those asset classes you got to be most careful about now, because new entries are coming into the market that may not have the historical context, the credit discipline to – in some cases it’s pricing, in some cases it’s structure, but there is some C&I relationships out there that while we love to have them, but we can’t have them on the terms that they’re available to us.

Got it. Okay, great. And then just circling back to the margin comment, expecting the margin to remain in a range around current levels, are you thinking about that relative to the 3.68% this quarter? And if you could share with us what you’re baking in there from any expectations for the Fed to raise rates? And also if you could comment what you’d expect from the margin, where the Fed to be on pause going forward?

Sure. So we have a relatively balanced position from an interest rate risk standpoint. The 3.68% is kind of where we say we’ll bounce around that number going forward. We continue to have – and the rate of balance sheet is growing today, which is not much. The rotation of Fed increases get passed through to our floating rate loans and they impact our deposits a little bit and the net is, we’re a little better off at the end of the day. So the accretion is related to purchase accounting is rolling off and the natural NIM is coming up. In the event in the back half of the year, we were able to significantly increase the growth rate and hit those $100 million numbers. That’s an opportunity potentially to drive the margin a little better, because we still think funding is in very good shape. We’re not seeing – we don’t have any concerns about our funding base. So we’re able to hold funding where it is. We have a little bit of excess deposit capacity in the balance sheet today. As we fold Capital in, their loan-to-deposit ratio of 67% gives us more capacity, and then of course, we think we can actually grow deposits if we need to, if we’ve got good loans to put them in. So back half of the year, if loan growth picks up, I think you could see a little upside in the NIM, but absent that, I think we’re pretty steady. And the situation doesn’t change much whether there is Fed hikes or not. If the Fed hikes come, we pass them through on our floating rate loans, our deposits go up a little bit and it’s about neutral. And if the Fed rate doesn’t come and both of those things don’t happen and wind up, again pretty neutral.

Got it. Okay, great color there. Thank you. And then last one for me would be any update, Mike, on the tax rate outlook for ‘19 and ‘20?

It would be, as we’ve said in the past, about 19% would be our expected rate.

Thanks, guys for taking my questions.

Alright. Thanks, Russell.

And the next question comes from Collyn Gilbert with KBW. Please go ahead with your question.

Thanks. Good morning, guys.

Good morning.

Just curious, Joe, how many commercial lenders do you guys currently have?

We’re over 20 at the moment. And every day it seems that I’m adding lenders. And of course, so I think that’s a great thing for us and as we expand the geography further into Philadelphia and then eventually in New York City, I expect that number to continue to rise every quarter.

And I guess that was going to be my next question, kind of where do you see that your team of lenders sort of leveling out or how are you kind of thinking about the staffing outlook here?

We like to say internally that every year when we budget for staff that we have a budget for every position except for lenders, commercial lenders. So if we find good commercial lenders, we’ll hire them. What we’ve also done and we hold our folks accountable, we also look at those performance issues when we have them. And so we’re constantly calling through the staff and making sure that we’re optimally structured based on performance. So I don’t know Collyn, I would tell you that we tend to try to focus on hiring one to two strong lenders every quarter. I think we’ll probably – over the last 2 months we’ve hired a few, I think we’ll probably may outpace that in the first quarter of ‘19.

Okay. So I was just trying to gauge – so the comments with the focus on building out Philadelphia, as well as New York City, so it’s not like you’re going to meaningfully scale your team of lenders. It’s more just having your current folks, give them a little bit more latitude to start to grow their portfolios or just trying to think certain methods [ph]?

Yes, it’s a little bit more nuanced than that. In the past, I would tell you – as we’ve grown the company, we’ve tried to focus on adding a lender or two in geographies. We’ve gotten enough scale in certain geographies now, where the approach needs to be a little bit more top-down to try to hire us a team leader or someone of even higher significance, so the Regional President role comes to mind, because we’re geographically structured as a company. And then having those folks that are known in those markets, especially Philadelphia and New York drive the recruitment activity.

Okay. That’s helpful. And then just thinking about, Chris, the idea here that kind of expanding your wings a little bit into the New York City geographies or geographies maybe where there’s a little bit better growth prospects than your legacy market. How do you think about M&A? I mean, it seems like this would be a great opportunity for you to even accelerate M&A or even do larger deals or – I mean, you just seem to be in a pretty good spot from that standpoint. How are you thinking about that any differently as you move into these sort of higher growth markets?

We would look, I would use the, like the Capital example, where that might have been a little bit smaller than something we would like to find. It checked all boxes and I think we showed – we’ll close that, we’ll go from announcement to close in roughly 90 days on that. So I think we’ve gotten pretty good at taking the risk out of acquisitions, integrating them, hitting our expense targets, and then also adding both customer bases, as well as lenders as part of that. So we have our eyes open. I think we have the opportunity. We have – that’s one of the reasons that we are choosing to keep little more capital on the balance sheet, right. Letting our TCE ratio drift up gives us the opportunity if we wanted to find something interesting, we’d go ahead and do that. That said, it’s an interesting time in M&A, because you do have a few people that I think would be heavily interested in finding a partner, but typically, many of those have a balance sheet issue, right, it could be an interest rate issue, it could be something like that. And that doesn’t necessarily advance our business. So, although it may be viable, it may not advance the business. So it has to be the right thing. The other thing I think comes into M&A is the mentality around price expectations and it’s very hard probably for CEOs, but especially for Boards to say, hey, you know, I’m going to accept a price today that may be 20% lower than I was trading at 8 months ago, but the reality is, that’s probably the right price for the company today, but it’s a really hard thing for people emotionally to let go of what my value was four months or five months ago so I think we’ve got the capacity to do it I think we’ve got the team to do it I think we’re demonstrating that as we do things like Capital as quickly and efficiently as we have, but the circumstances have to be right, the right franchise and pricing has to be right if you think about our currency, our currency is not valued at what it was 60 days ago I know it’s an industry issue as well, but we have to be thoughtful about, if I’m going to print the share for something, I better print the share that’s really going to pay back my shareholders so I think we’re open to it, we love that opportunity, but we’re also realistic that if that doesn’t happen, we think we can make real progress organically and on the organic side I’d add, we’re making a small number of hires in Philadelphia and New York to establish our beachheads, to get comfortable with that these are markets that we both know from having worked in and in case of Philadelphia having studied pretty hard over the last couple of years we wanted to be thoughtful about when we enter we are seeing loan rates at a point where we think the incremental expansion of our balance sheet makes sense so Stage 1 is establishing our presence there one we have a presence there, as Joe pointed out, and this is, I think, really critical, we’re looking at this, saying, we want to attract the leaders in these geographies that will then do that additional hiring under their wing in 2019, I think we’ve been kind of reasonably conservative about what our expectations are if you play this forward into 2020 and 2021, each of those geographies individually have the opportunity to add a tremendous amount of growth to our balance sheet so I think we have access to markets that we’re going to start to take advantage of.

Okay, that’s very helpful. And then just lastly on the buyback, what are some of the thresholds that will determine kind of how aggressive or not aggressive you’ll be on the buyback going forward?

So, we look at the buyback of our own shares a lot like we look at the - an acquisition or the purchase of somebody else’s company so tangible book dilution is really important to us and earn-back periods are important to us so if you were to look at, kind of, the earnings trajectory we’re on and the price of the stock today, and I would imagine, if a lot of smart people put their models together, their model would look a lot like ours in terms of earn-back horizons and we typically get pretty conservative as earn-backs at the five-year mark now, I would say as opposed to an acquisition where we look for earn-backs to be in the three-year mark, with us, we know we’re buying, we’re buying ourselves so we would stretch out a little bit further I would note that the buybacks that occurred in the fourth quarter were limited due to dependency of the Capital Bank shareholder vote, which prevented us from making additional share repurchases during that so as we go forward with that being behind us and we get into the further into the quarter and window opens up for us, we have the opportunity to maybe do some more meaningful buybacks.

Okay, that’s helpful. I’ll leave it there. Thanks, guys.

Thanks.

[Operator Instructions] And our next question comes from Erik Zwick with Boenning & Scattergood. Please go ahead with your question. Mr. Zwick, your line is live.

Can you hear me now?

Yes, we can sorry hi, Erik.

Great. Good morning, everyone. First, just a question about your comments about creating a loan syndication desk can you just provide a little color maybe on your decision to create this desk, maybe how many people it will involve and whether you’re sourcing them internally or externally?

Sure. So not surprising, given the growth of the company, our participations both bought and sold have tended to be an effort that’s risen out of our line commercial lenders and maybe peer-to-peer relationships we have with a couple of banks, but we didn’t have an established place in the bank it was the sole owner for all of this business and any decisions we would make so they’d run through the normal credit processes and go through credit committee and we’d kind of make a decision on a one-off basis our book is not giant today, it’s only a couple of hundred million we don’t think we’re going to change that dramatically, but we do think that given the number of participations we have and the way the process works for us, you would expect the more mature commercial bank to have a lead person in a process and a desk and everything flow through that so I think there’s the opportunity for a little bit of growth there, but I would be careful to signal this is not a giant effort and it’s not going to add a lot of dollars to the balance sheet so we have one professional, who’s got a deep background in this, who’s been doing this kind of work for 30 years he joined us just a couple of weeks ago and he will be able to both strengthen the existing participations function that we have today and allow us to do some business that as we’re better organized, we might be able to do more of so I wouldn’t look at this and say, it’s going to be a big component of the balance sheet it is not a high value business in and of itself but when you think about the excess deposits we have today, there are more effective ways that we could deploy those into commercial loans even on a short-term basis until we win them out in our relationship deals so it’s more of an institutionalization and upgrade to what we have, a little bit of growth on top of that, it’s not a giant effort, it’s not going to be a group of people.

That’s helpful. I appreciate the explanation. And then next on your comments that you expect the deposit beta to be lower going forward versus what you experienced in 4Q, I guess what gives you the confidence that you’ll be able to hold the line?

I’m going to be careful our forward visibility is fairly limited, right so I think we remain very close to our customers and we kind of get the ebb and flow of what they’re thinking about in terms of deposit rates and the needs to get a return on their money we have a very large commercial cash management portfolio, it’s about 40% of the Bank’s deposits and some of those deposits are held in significantly large relationships so what we opted to do after we had a couple of conversations in the last six months or so is work with a few of those customers who may have had excess cash positions that they were beginning to think about either taking out of the bank or optimizing and we were able to put together structures that said, look given the totality of the relationship, here’s how we’re going to price your relationship in a way that both makes you comfortable and in return, we’re getting longer-term commitments that they’re going to stay with us so we went through that process in the commercial cash management book over the last several months, but in earnest probably really in November and December and it was a defensive process to make sure that we were doing everything we can for our customers, we have gotten through the major customers in that process as of 12/31 so the cost of deposits is a little higher as of 12/31, that’ll carry-forward a little bit into the first quarter, but that’s what you saw little higher beta in the fourth quarter it was a little bit of a catch-up that is retrospective, not prospective and in fact, having negotiated a lot of that out with our clients, I think we’re in a good position at least for the next quarter or so that said, in this kind of environment you’ll be very careful about understanding what the price demands will be on your deposits I don’t think you can see much more than 90 days, 120 days.

Great. Thank you for taking my questions.

Thank you.

And the next question comes from Joe Gladue with Alden Securities. Please go ahead with your question.

Good morning.

Good morning.

Yes, pardon me if you covered this already; I missed it but just wondering on the service charges and fees last quarter, there was, I guess, some waivers to the Sun Bancorp customers just wondering if the full impact of those coming off was seen in the fourth quarter results are there still some additional upward bias to that figure going forward?

There’s not an upward bias I think it’s about where you would expect it to be, I would say, in the third quarter, we had some swap fee income that was a little higher than normal so there was a little bit extra in the third quarter and that will be a little lumpy we may have that on and off from quarter to quarter but from the deposit fee perspective, I think we’re at a steady state.

That’s it from me. Thank you.

Alright. Thank you, Joe.

[Operator Instructions] And the next question comes from Don Koch with Koch Investments. Please go ahead with your question.

Hi, guys. Congratulations on 22 years of consecutive quarterly cash dividend that’s a brilliant remark. I mean, that’s a hallmark that you should take an applause for so my question is?

It’s our entire life as a public company so, thank you.

Good. Well, we’ve been with you for at least more than that or anyhow, my basic questions are strategic not tactical so tactically you are doing a brilliant job of increasing your penetration and your sandbox my concern is the right side of the balance sheet and the strategic notion that you want to have a low decay rate and a very low cost by a good retail right side of the balance sheet and in that regard, the last time we had a conversation, you were talking about major investment into sort of some kind of digital system where you had 24-hour telephone tellers helping seniors do something in areas that you wanted to be both offensive and defensive and assumptions of my question is you’re playing brilliantly in the sandbox and you’re getting penetration but the sandbox is actually contracting, because you’re in major areas that are out migrating I mean, if you’d go forward 10 years, you’re seeing people go in different regions; Michigan lost 1 million people, California lost people, that’s basically high tax states and places like Florida are gaining 1,000 people a day have you ever thought about following your customer base? I know, we’ve had this discussion, but at least a beachhead to take all those wonderful people who are in both Philadelphia and New Jersey and Ocean and Whiting and who migrate, so you protect that and you keep that right side of the balance sheet with no decay rate at very low cost I mean, how are you addressing my worry is that in the next five to 10 years that right side of the balance sheet won’t be nearly as stable as you had hoped it would be, because you’re doing such a great job on the left side of the balance sheet so give me your thoughts on that, please.

Sure. The first is I would focus on your opening comments about digital. And you mentioned one or two of the technologies we offer but we made a significant investment in digital in things wide and far so the investment in digital, particularly in the consumer side is engineered to do a few things first, to retain the customers we have so we think it’s been a great job especially in the context of us having to consolidate as many branches as we have but we’ve consolidated 34 branches in the last couple of years and kept our customers so that was a tremendous value creator for the company and digital allows you to allows you to span more geographies so I think over time, once we feel we’ve got digital really strong in our core footprint, it would lend itself to expanding the market definition the second thing is, we talked a lot about the commercial lending beachheads in New York and Philadelphia, and we are acutely aware that you’ve got to be careful about geographies and to not have your business overly reliant on a single geography the first step in those metropolitan areas will be commercial loans but as we build out those areas, I expect we’ll do commercial cash management and then following commercial cash management, especially if we have digital capabilities, it will be easier to get a foothold in those markets and I would want to make sure that we’ve done the best we can – I’ll use your sandbox analogy we want to be really great in our sandbox I think we can push the borders of our sandbox across the Hudson River and across the Delaware River, and we’ll do that slowly, methodically and carefully but as much as we love our customers to spend some time in Florida or Arizona wherever they are, I think we’re going to preserve our capital and our investments to be closer to home for them.

Okay, thank you. That’s it.

Thank you.

And this concludes our question-and-answer session. I would like to turn the conference back over to Chris Maher for any closing remarks.

Alright. Thank you. I just want to thank everybody who participated in the call this morning. And I look forward to providing additional updates with you as the year progresses. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.