Provident Financial Services Inc (PFS) Q4 2017 Earnings Conference Call Transcript

Provident Financial Services, Inc. (PFS 0.95%)
Q4 2017 Earnings Conference Call
Jan. 26, 2018, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Provident Financial Services, Inc. Fourth Quarter Year-End Earnings Conference Call. All participants will be on listen only mode. Should you need assistance, please signal a conference specialist by pressing the * key, followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press *, then 1 on your touchtone phone. To withdraw your question, please press *, then 2. Please note that this event is being recorded. I would now like to turn the conference over to Len Gleason, Investor Relations Officer. Please go ahead.

Len Gleason -- Investor Relations Officer

Thank you, Andrea. Good morning, ladies and gentlemen. Thank you for joining us today. The presenters for our Fourth Quarter Earnings Call are Chris Martin, Chairman, President and CEO, and Tom Lyons, Executive Vice President and Chief Financial Officer.

Before beginning their review of our financial results, we ask that you please take note of our standard caution as to any forward-looking statements that may be made during today's call. Our full disclaimer can be found in this morning's earnings release, which has been posted to the Investor Relations page on our website, provident.bank. Now, I'm pleased to introduce Chris Martin, who will offer his perspective on our Fourth Quarter and Full Year results. Chris?

Chris Martin -- Chairman and Chief Executive Officer

Thanks, Len. And good morning, everyone. Provident finished the year with its best quarterly performance for 2017 in terms of loan volume and non-interest bearing deposit growth. Our operating results for the year reflected record revenues, record net income, and record earnings per share. Assets totaled $9.8 billion at year-end, driven by annual loan growth of 4.6%. Fourth quarter lending activity was particularly strong, with an annualized loan growth rate of 17%. And our core deposit growth during the fourth quarter was also robust, and core deposits totaled 91% of total deposits at December 31, 2017.

Our net interest income expanded and our loan pipeline remained strong. However, loan structure and pricing pressures continued as competition remains aggressive on rate and loan terms. On the deposit side, we are beginning to see modest and selective increases in deposit rates in our markets. Our deposit beta modeling is very conservative, and we continue to proactively evaluate and manage our cost of funds and client relationships.

Profitability metrics for the quarter included a return on average assets, adjusted for the Tax Act, of 97 basis points, an adjusted return on average tangible equity of 10.45%, and an efficiency ratio of 56.5%. Non-interest income was down somewhat for the quarter, primarily due to reductions in less predictable and seasonable -- seasonal items.

Operating expenses increased modestly during the quarter, as compensation and benefit costs were impacted by higher incentive accruals and our ESOP expense. Costs also increased on technology spending and related consulting fees in connection with growth and risk management enhancement initiatives.

We are positive on the outlook for 2018, despite the partisan politics in Washington and the change in leadership in New Jersey. And expect above trend growth due to tax reform, reduction in regulation for community banks, strong fundamentals, and increased consumer confidence. And the shape of the yield curve continues to flatten. And we still anticipate three increases -- three rate increases in 2018.

With the Dow breaking through 26,000 on the day we celebrated our 15th anniversary of listing on the New York Stock Exchange, we are proud of what has been accomplished and the value returned to our stockholders.

I'll turn it over to Tom now, who will provide some more specific details on our Fourth Quarter. Tom?

Tom Lyons -- Executive Vice President and Chief Financial Officer

Thank you, Chris. And good morning, everyone. Reported net income was $19.5 million for the fourth quarter of 2017 or $0.30 per share, compared to $26.6 million or $0.41 per share for the trailing quarter. Fourth quarter results reflected $4 million or $0.06 per share in additional tax expense, related to the enactment of the 2017 Tax Cuts and Jobs Act. As a result, our effective tax rate increased to 45% for the fourth quarter, up from 31% in the trailing quarter. We are currently projecting an effective tax rate of approximately 20% for 2018.

With regard to our core business, net interest income reached a new quarterly high of $72 million, as average loans increased $135 million or 7.7% annualized and our net interest margin expanded three basis points versus the trailing quarter of 3.25%. The margin benefited from stable funding costs, favorable repricing of variable rate assets, and higher new loan origination rates.

Loan growth was largely funded by increased deposits, which grew by $121 million or 7.4% annualized on average. Average non-interest bearing deposits increased $86 million, or an annualized 25% during the quarter, with non-interest bearing deposits representing 22% of average total deposits for the quarter.

Looking ahead, the loan pipeline stands at $1.1 billion. And the pipeline rate has increased 28 basis points since last quarter, exceeding the loan portfolio rate at 4.49%. Based on our strong loan pipeline, core and non-interest bearing deposit funding, and the variable rate nature of many of our assets, we anticipate a strength in the economy. And additional fed rate increases will contribute to further expansion of our net interest margin throughout 2018.

As a result of loan growth, we provided $1.9 million for loan losses this quarter, an increase from $500,000.00 in the prior quarter. Net charge offs decreased to $2 million or an annualized 11 basis points of average loans and asset quality metrics, including non-accruing loans, delinquencies, and criticized and classified loans, all further improved. As a result, the required allowance for loan losses to total loans fell to 82 basis points from 86 basis points at September 30.

Non-interest income was $1.8 million less than in the trailing quarter, as decreases in low prepayment fees, tax preparation fees, gains on sale of real estate owned, and swap fees more than offset increases in gains on loan sales and deposit fees. Non-interest expenses remained well controlled at 1.98% of average assets, contributing to a 56% efficiency ratio for the quarter. Expenses increased by $1.8 million to $48.1 million versus the trailing quarter, primarily as a result of increased incentive accruals and ESOP expense, data processing, advertising, and consulting costs.

...

That concludes our prepared remarks. We'd be happy to respond to questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. To ask a question, you may press *, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press *, then 2. At this time, we will pause momentarily to assemble our roster.

Our first question comes from Mark Fitzgibbon of Sandler O'Neill. Please go ahead.

Mark Fitzgibbon -- Sandler O'Neill -- Analyst

Hey, guys. Good morning.

Chris Martin -- Chairman and Chief Executive Officer

Good morning, Mark.

Mark Fitzgibbon -- Sandler O'Neill -- Analyst

How much would you use -- how much do you think you spend incrementally on preparing across the $10 billion threshold during the fourth quarter?

Tom Lyons -- Executive Vice President and Chief Financial Officer

Fourth quarter was about $200,000.00, Mark. Relatively light, still. We are going to see those pick up in '18.

Mark Fitzgibbon -- Sandler O'Neill -- Analyst

Okay. So, as you look at sort of operating expenses for, maybe the first couple quarters of '18, does it gradually build? Does it all start to come in at some point? Or how do you envision that playing out?

Tom Lyons -- Executive Vice President and Chief Financial Officer

It actually winds up keeping the expense base fairly stable because we have some regular, normal higher expenses in the first quarters that will offset the lower -- the ramp up of the growth initiative expenses -- meaning additional payroll taxes, seasonal pay -- expenses that usually occur in the first quarter. So, I think we're going to be about $49 million, $49.5 million for the first couple of quarters. And then hopefully trail down a little bit, in terms of total non-interest expense.

Mark Fitzgibbon -- Sandler O'Neill -- Analyst

Okay. And then secondly, I was surprised wealth management fees were down 7% in quarter, given the strong equity markets. Anything unusual there? Any client losses? Or what's driving that?

Tom Lyons -- Executive Vice President and Chief Financial Officer

Yeah, mostly seasonal stuff from tax preparation fees, Mark. The -- Q2 and Q3 are the strongest quarters for tax prep fees. And then, it drops off in Q4.

Mark Fitzgibbon -- Sandler O'Neill -- Analyst

Okay. And there was also a drop like 9 basis points in loan yields on the commercial book this quarter. Why was that? Was there some prepayment penalty income in last quarter's numbers? Or was there something else?

Tom Lyons -- Executive Vice President and Chief Financial Officer

No. We report core margin, Mark. We put our prepayment income in other non-interest income. I think it's just the mix, largely. We've got a significant pickup in variable rate products over the last couple of quarters, which is good from an interest rate management perspective. But it's lowered the yield a bit.

Mark Fitzgibbon -- Sandler O'Neill -- Analyst

Okay. And then, I don't know if you guys had seen, but there's a bill floating around the Senate in New Jersey to start a New Jersey-owned bank that would take all the municipal deposits. What do you guys think about the probability of that happening? And how might it affect your municipal business?

Chris Martin -- Chairman and Chief Executive Officer

Well, the first part of that has been put forth to the Senate. Still to be determined. We read the legislation, and there's a lot of open holes in it. And things that we don't understand. I think the initial impetus was the money that the state has, not necessarily the municipalities. And so, there'll be a question of how much of that does go into that state bank. But I think the state's money's in -- in being the largest money center bank, might be repatriated to the state bank. The other side of that is we have relationships with the municipalities that don't just include rate. A lot of times we've secured a longer term on that. And we also provide services to the municipalities, be -- maybe payables help or payroll, some other services with lock box. So, those they won't get from a state bank. So, there'll be a different kind of context of where they put this money. And is the state going to pay them the return that they want. So, the jury's out on a lot of this. There's a lot of things that have not been documented and explained. But as we go, we're watching it very carefully. And so is the lobbying group for the New Jersey bankers.

Mark Fitzgibbon -- Sandler O'Neill -- Analyst

But you're under -- you don't think the local municipal deposits that you have would be at risk of leaving and going into this new entity?

Chris Martin -- Chairman and Chief Executive Officer

Jury's out, Mark. I think -- I don't think everybody wants to run to this program. I think that they know that we provide a good rate and good service, what we do. So, the municipality would have to be mandated for -- and that's not in the legislation. And I -- from what we had heard from the governor elect at the time was that that was not the intent. But you can imagine the groundswell from the industry if that's what they plan to do.

Mark Fitzgibbon -- Sandler O'Neill -- Analyst

Okay. And then, obviously excess capital's been building, despite -- you did have some good balance sheet growth this quarter, but your capital ratios are certainly well above peers. Could you talk about plans for deploying that? And timing of deploying it? And are buybacks part of that?

Chris Martin -- Chairman and Chief Executive Officer

Well, I'll first start and then Tom will follow up on the buyback conversation. But we continue to see the fact that we did have that extra dividend in the fourth quarter. But we also see the growth aspects of the business, especially in the commercial lending space, continuing to do well. And we think we're going to be able to make a little bit better headway out in the Lehigh Valley and in Pennsylvania markets a little bit. So, we still think we have a lot of impetus going forward to really be growing the balance sheet at that mid-single digit level. And Tom can speak to the buyback.

Tom Lyons -- Executive Vice President and Chief Financial Officer

Yes, I agree with Chris. I mean, I think our focus is on levering that capital through growth, profitable growth. We do have some expenses -- that you touched on earlier -- coming up related to those growth initiatives, whether it be enhanced risk management, stress testing requirements, or internal desire to improve our data analytics capabilities. There's a number of things that we think we can make good profitable investments on. And keep pace with the expectations of the regulators for our risk management practices. That said, we continue to review our quarterly dividend each quarter. We did the special dividend, as Chris I think mentioned, just last quarter. That's always an option. Dividend increases are an option. Buybacks are a little bit tough, given valuation. We don't think that's the best course of action, so right now that falls down in the priority order. So yeah, again, primarily look to invest in profitable expansion.

Chris Martin -- Chairman and Chief Executive Officer

And touching on -- Mark, this is Chris again -- touching on M&A, we'd certainly -- we continue to cultivate relationships with bankers, with wealth management firms and our investment banking brethren to make sure that we can look at something that would certainly be accretive on all fronts. And certainly not dilutive on an earn-back basis, that would be something we would go outside of our parameters.

Mark Fitzgibbon -- Sandler O'Neill -- Analyst

Thank you.

Operator

Our next question comes from Russell Gunther of D.A. Davidson. Please go ahead.

Russell Gunther -- D.A. Davidson -- Analyst

Good morning, guys.

Chris Martin -- Chairman and Chief Executive Officer

Good morning.

Russell Gunther -- D.A. Davidson -- Analyst

Just a quick follow-up on the margin commentary. You guys had remarked last quarter and a bit this morning, just the increased pressure on deposits, some promotional activity in New Jersey. So, I guess your comments around incremental margin expansion going forward -- should we get the three hikes -- would imply that you don't think you'd hit your kind of terminal deposit beta in the high 40s. Is that fair, despite all the increased competition?

Tom Lyons -- Executive Vice President and Chief Financial Officer

That's correct.

Russell Gunther -- D.A. Davidson -- Analyst

Okay.

Tom Lyons -- Executive Vice President and Chief Financial Officer

Yeah, I mean, they're like 20% non-interest bearing. And even on the interest bearing debate, I think that's a good core solid operating deposit base that's not as susceptible to interest rate risk.

Russell Gunther -- D.A. Davidson -- Analyst

And then, I think last quarter you remarked that a lot of the pressure on pricing was a bit more of the big boys versus some of your smaller regional peers. Is that still the case? Or are you seeing that dynamic shift at all?

Chris Martin -- Chairman and Chief Executive Officer

Well, there have been, I guess, some mid-tier companies that have put out some specials out there, like a 2% rate. There are some high, high CD rates at 1.7%, 1.8%. We haven't seen many materially large, large banks do that. There are -- I guess we -- so that J.P. Morgan Chase is going to be opening up a lot of branches in certain markets, not necessarily -- they already have a presence in our markets now. But we've not seen the big guys continuing to run up that rate at all.

Tom Lyons -- Executive Vice President and Chief Financial Officer

Yeah, I think the smaller banks have come in more on the loan pricing side of things than on the deposit side, in terms of competitive pressure.

Russell Gunther -- D.A. Davidson -- Analyst

Got it. Okay. Thanks for that. And then, just -- ticky-tacky question here -- on the fee income side, the other income line -- I think that's mostly SWATH and SBA gain on sale. I know that can be volatile. But could you maybe parse some of the movements, quarter on quarter, and what your outlook for those line items would be?

Tom Lyons -- Executive Vice President and Chief Financial Officer

Sure. Gains on sale for Q4 was $686,000.00 versus $414,000.00 in the trailing quarter. SWATH profit was $452,000.00 versus $661,000.00 in the trailing quarter. And then, gains on sale of REO were $52,000.00 in Q4 versus $276,000.00 in Q3. So, those are the big items that had fluctuations. From an outlook, the pipeline's not super strong on the SBA gain sale -- gain on sale pipeline right now. I don't have a number for you. But I think -- I expect a smaller number than we saw in Q4. Swap profit, kind of volatile there too, right? This is the challenge we always have in trying to predict quarter-to-quarter. Don't have much in the way of pipeline right now there, either.

Russell Gunther -- D.A. Davidson -- Analyst

Okay. Thanks, guys. That's all I have.

Chris Martin -- Chairman and Chief Executive Officer

Thank you.

Tom Lyons -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Our next question comes from Chris O'Connell of KBW. Please go ahead.

Chris O'Connell -- KBW -- Analyst

Hey guys, this is Chris filling in for Colin.

Chris Martin -- Chairman and Chief Executive Officer

Hey, Chris. How are you?

Chris O'Connell -- KBW -- Analyst

Good. So, I was wondering if you guys could just expand a little bit on the loan growth commentary. Obviously you guys had a record pipeline last quarter, and this quarter is very strong, but maybe looking into 2018, do you think you could get up to the high-single-digit range, breaking out of kind of the mid-single-digits? And the timing maybe on the loan growth? You made a comment on -- that the tax might be -- a tax rate reduction might be kind of a tailwind for demand?

Chris Martin -- Chairman and Chief Executive Officer

Yeah, I think mid-single-digit growth is where we're comfortable. The ebb and flow -- the fourth quarter was surprising that we had that much pull-through, and obviously the pipeline is very strong, but obviously some of the growth in that timeframe came through the fourth quarter. We still see the first quarter as fairly strong also. I think it's also about mix and competition. We are seeing a lot of some of the smaller institutions doing some non-recourse lending that they shouldn't be. Anything that we would look at as being B or B minus paper, they're putting on at A levels. So, I think that we're continuing to do what we normally do. We, again, it's tough to estimate where payoffs are coming in but they will still come in over time and the normal amortization of the portfolio. Our construction portfolio has grown a bit, very well heeled individuals with good projects, so we're comfortable with what we've done in that space. I don't -- I think that anything of high-single-digits would be only a quarter that might just be an aberration. We still think mid-single-digits is where we should be. I don't know if Tom wants to add any more color on that?

Tom Lyons -- Executive Vice President and Chief Financial Officer

No, I agree. But given the updates, I just wanted to follow up on actually a question that Russell asked that I'm sure is of interest you to as well, Chris. I was given the bottle changes in the other non-interest income line, but in the fee income line also the big mover would be prepayment fee income, which was only $185,000.00 contributing to that strong loan growth we saw in Q4 versus $1,000,726.00 in Q3. So, a big decrease in prepayment fee income. And then, Mark had touched earlier on wealth management income decreasing by $301,000.00. Again, tax prep fees driving a lot of that decrease.

Chris O'Connell -- KBW -- Analyst

Got it. Thank you. And then so, in the outlook currently, I guess, for 1Q on the loan growth, is it still mostly concentrated in commercial mortgage multifamily CRE?

Tom Lyons -- Executive Vice President and Chief Financial Officer

I think we're going to see more C&I and construction lending throughout 2018.

Chris Martin -- Chairman and Chief Executive Officer

Yes, multifamily we've pulled back a little bit. We still get involved, but we have definitely pulled back a little on it. Not because we're anti the -- some of the structure that we're seeing out there, and the terms don't match up to what we would expect. And we always look at all of our exposures in every area that we consider, whether it be industrial office, retail. We look at all those in the way of not necessarily buckets, but how do we price those? And what is the term? And certainly the structure of the deal. So, we're a little discerning when it comes to our loan growth.

Chris O'Connell -- KBW -- Analyst

Got it. And we've heard, I think from some peers of yours, that at least in the brokered market that the multifamily pricing has come in quite a bit over the last couple of quarters. Has that translated as well to kind of your non-brokered multifamily market?

Chris Martin -- Chairman and Chief Executive Officer

No, it really hasn't. I think every deal stands on its own. I think when some of the larger participants over the last year or two pulled back a little because of their CRE exposure, that opened up a little bit more opportunity to have better pricing. So, I think everybody is starting to be a little more rational as they price the deals.

Chris O'Connell -- KBW -- Analyst

Got it. And then finally, just on the core fee income. I knot that there is the one-time items to take into account and kind of the more volatile items, but in terms of your outlook kind of going forward -- I mean the last couple years have been kind of minimal -- lower growth maybe than previously. Do you see that changing at all or kind of low-single-digit growth with upside coming from potential volatile -- volatile items?

Tom Lyons -- Executive Vice President and Chief Financial Officer

Yes, I think what you just described is probably what we're going to see, Chris. There's no real catalyst for an outsized growth there. So, it's probably going to be very fairly stable with potential upside from volatile items.

Chris O'Connell -- KBW -- Analyst

Got it. Alright. Well, thank you. I'll hop out.

Tom Lyons -- Executive Vice President and Chief Financial Officer

Thank you.

Chris Martin -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Matthew Breese of Piper Jaffray. Please go ahead.

Matthew Breese -- Piper Jaffray -- Analyst

Good morning, everybody.

Chris Martin -- Chairman and Chief Executive Officer

Good morning.

Matthew Breese -- Piper Jaffray -- Analyst

Just on the margin expectations on your end for three more hikes, and then the margin has shown some pretty nice improvements year-over-year, just wanted to get some sense for your expectations on the margin over the course of 2018?

Tom Lyons -- Executive Vice President and Chief Financial Officer

Yes, I think we could -- I'm reasonably comfortable saying about 8 basis points is what I'm seeing for the full-year, maybe a little potential for some upside there if deposit betas come in lower than expected. We generally model pretty conservatively, as Chris mentioned. I think we use about a 55% blended deposit beta for our base case, and that's still --

Matthew Breese -- Piper Jaffray -- Analyst

And that's on apples-to-apples basis, excluding any sort of changes to FTE? Is that the way to think about it?

Tom Lyons -- Executive Vice President and Chief Financial Officer

Meaning in terms of the growth that drives it you mean? I'm not sure if I'm following on the FTE side. Hopefully --

Matthew Breese -- Piper Jaffray -- Analyst

A lot, many of your peers just --

Tom Lyons -- Executive Vice President and Chief Financial Officer

Yes, that's apples-to-apples, so helping you report the movements on FTE, to tell you the truth.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. Okay. And then as we think about your outlook for strong loan growth and the size of the balance sheet, I would expect organically to cross $10 billion at some point in 2018. Is that the way to think about the potential for crossing, excluding any potential M&A that you would, in fact, cross organically?

Chris Martin -- Chairman and Chief Executive Officer

Yes. And again, I think, just a little bit, we never really were holding back on the range necessarily. But it didn't -- if we had to, we would have for the one period through March. But at this stage we had estimated we will probably get through it, and probably about second or third quarter of 2018. And we think obviously, there's legislation out there that would mitigate a couple of the issues that are out there. But the costs are still there to go through. We're still building the risk attributes that we're supposed to be having, even though the deepest may go away. We still have to do stress testing in some nature and other things that go through the cost. So, we are expecting to go through it organically. Obviously, the tax helps mitigate some of those costs, but there will still be other costs as you go forward -- and even including like CECL preparation and the like. But no, we'll go through in 2018. And if we have a good accretive deal, we would do that, so.

Matthew Breese -- Piper Jaffray -- Analyst

Got it. Okay. And then, on the municipal deposit discussion, maybe just looking for any other color you might have there. Are there other states that have these types of institutions? And have they managed to capture the entire municipal market? And then, part two to that would be what is your exposure, both in terms of local municipality deposit exposure and then is there any exposure to the state?

Chris Martin -- Chairman and Chief Executive Officer

Well, let me handle that in a few parts, and then Tom will dive in also. I know that North Dakota created one approximately 99 years ago. And I really couldn't tell you how that's working because it's North Dakota. I know that one other state has come across -- that they're looking at a state bank also as -- and including New Jersey. The legislation has just been put forth and there's a lot of discussion, there's a lot of people doing some guesswork of what that may mean. I think I mentioned before on the call, we have relationships with the municipalities. We have other services we provide them. And so -- and we also not just bank the municipal, we also bank the -- maybe the school board or the other authorities, so there's a full circle of the relationships. I don't know where this comes out, only would guess that there'll be pushback from a lot of people from what the legislation currently is. We will be -- we're keeping our finger on the pulse of it all the time and trying to have a conversation that's productive. We do not have any state money to speak of. That would be more the money center banks. Tom, could you tell you the levels, though.

Tom Lyons -- Executive Vice President and Chief Financial Officer

We do have local municipalities though, averages about a $1 billion a little bit over a $1 billion throughout 2017.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. Okay. That's all I had. I appreciate it. Thank you.

Tom Lyons -- Executive Vice President and Chief Financial Officer

Thank you.

Chris Martin -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Jake Civiello of RBC Capital Markets. Please go ahead.

Jake Civiello -- RBC Capital Markets -- Analyst

Hi, Chris. Hi, Tom.

Chris Martin -- Chairman and Chief Executive Officer

Hi.

Jake Civiello -- RBC Capital Markets -- Analyst

I mean, I know that the swap fee income is highly variable. And it might be easier or make more sense to look at it more on an annualized basis instead of quarterly. But with more of your growth coming in C&I and construction instead of the CRE and multifamily, could we infer that maybe swap fee income might be lower on an annual basis in 2018 versus 2017? Or is that taking it a step too far?

Tom Lyons -- Executive Vice President and Chief Financial Officer

No, I think that's a fair guess. I think that's what we've done in our own internal projections.

Jake Civiello -- RBC Capital Markets -- Analyst

Okay. And then, just one more question for me on the expense side. I know you did the sale leaseback transaction in the fourth quarter. Looking ahead into 2018, do you still see any opportunities for analysis to your branch network and any potential cost take-outs there?

Chris Martin -- Chairman and Chief Executive Officer

Well, as you know, Jake, we constantly do that. There are always leases coming due and there is opportunities to consolidate as we look forward and/or reposition branches from much larger footprints than to smaller ones if we're in good markets. Surprising that some of our brethren are still doing some building, and some are retrofitting theirs, and then some are closing. We believe the model works from a digital standpoint first, and then the physical branch augmenting that. And I think we'll always look at that opportunity to reduce the footprint, make it more amenable to everybody coming in as -- if they do show up, and make sure that we have a relationship that can grow because of those branches. But I'm sure there's a couple on our radar that we will be looking at to see if we could be either reposition or maybe consolidate the two.

Jake Civiello -- RBC Capital Markets -- Analyst

And have you provided an efficiency ratio kind of target or longer-term goal, not necessarily in 2018, but where you would like to get it to over time?

Chris Martin -- Chairman and Chief Executive Officer

Well, we could fight about that all day long. But the thing is you can only get so low with all the regulatory things with CECL, other $10 billion as we grow the compliance area. I don't think that any, many institutions could be below like a 55. Or if they went below 50, I would question what's going on from a risk standpoint. On the other hand, there are some institutions that have a lot more fee income that maybe make that ratio even better. I do not know. But I think we'd be -- we're comfortable kind of where we are. We always try to stay in that middle, which is that 55, 56 area. I think we look at operating expenses to average assets too, as we're a company that wants to be considered from good value, but make sure that we're covering all our bases and don't have any issues with the regulatory agencies. Tom, do you want to --

Tom Lyons -- Executive Vice President and Chief Financial Officer

Yeah, I think our longer-term average is around 57. We'd love to work that down. But with the investment spend that we see as we continue to grow, that's going to be bit challenging to get significantly lower than we are currently.

Chris Martin -- Chairman and Chief Executive Officer

And just finishing up -- Jake, it's Chris again -- is the investment and the technology to be able to deliver on the next gen of the business. How we can look at FinTech and how that can help us going forward. We're evaluating all the technology initiatives that we have, so there'll be a little bit of a spend in that area to get to a better profile. So then, the cost that we have in the back office won't be as large. So, I think that's paying for the future is something we look at.

Jake Civiello -- RBC Capital Markets -- Analyst

Sure. Okay. Thank you.

Chris Martin -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Chris Martin -- Chairman and Chief Executive Officer

Well thanks everyone for their participation this morning on the call. And we look forward to speaking to you again in April. Have a great day.

...

Operator

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

Duration: 32 minutes

Call participants:

Len Gleason -- Investor Relations Officer

Chris Martin -- Chairman and Chief Executive Officer

Tom Lyons -- Executive Vice President and Chief Financial Officer

Mark Fitzgibbon -- Sandler O'Neill -- Analyst

Russell Gunther -- D.A. Davidson -- Analyst

Chris O'Connell -- KBW -- Analyst

Matthew Breese -- Piper Jaffray -- Analyst

Jake Civiello -- RBC Capital Markets -- Analyst

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