Q4 2019 Earnings Call
Friends calls.
Mine has been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session. If he would like you asked a question during that time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question press the pound T. I would now like to turn the call over Q Darlene persons director of Investor Relations Ma'am you may begin.
Thanks for Dana Good morning, and welcome to Americans fourth quarter 2019 earnings conference call participating on this call will be our president and CEO current farmer interim Chief Financial Officer, Jim Herzog, Chief Credit Officer, Pete Gilfoyle Executive director of the business banking or something.
This presentation, where were Frank as life, which provides additional detail presentation slides and appropriately are available on the Fccs website as well as an investor Relations section of our website America Dot Com. This conference call contain forward looking statements and in that regard should be mindful of the risks and uncertainties that can cause actual results could differ materially varied from experts.
Patients.
Forward looking statements speak only as of the data. This presentation that we undertake no obligation to update any forward looking statements.
Please refer to the Safe Harbor statement in today's release insight to which incorporate into was called as well as our 60 filings factors that can cause actual results to differ.
Also this conference call me reference non-GAAP measures in that regard I direct you to the reconciliation of these measures within the presentation now I'll turn the call over to hurt will begin on slide three.
Good morning, everyone. Today, we reported full year 2019 earnings per share.
Soundgarden 87 cents non percent increase over 2018.
Colleagues for the year included driving strong group, which of course, it allows us to a record level.
Continuing to serve our relationship oriented deposit base.
Also was a benefit of higher fee income revenue reached an all time gone.
This growth along with careful expense control resulted in an efficiency ratio under 52% in addition.
Our goal here remain solid and we meaningfully reduced excess capital.
Book value grew 10%, we raised our dividend 46%.
Oh through or how are we increased to about 16%.
Slide four provides details on our 2019 result.
Average loans increased 4%, including strong growth the first three quarters of the year.
Deposit trends picked up significantly in the second half the year, resulting in relatively stable balances year over year.
As far as net interest income the benefit from library and the net impact from higher rate was offset by an increase in interest bearing deposits as well as wholesale funding.
The provision increase was very low level in 2018. It reflected continued solid credit quality were 21 basis points of net charge offs were only four basis points excluding energy.
We repurchased 18.6 million shares during the year, reducing or at what share count by 11%.
And together with an increasing our dividend returned $1.8 billion to shareholder.
In summary, we achieved record earnings per share they continue to enhance shareholder value.
Turning to slide.
Fourth quarter earnings were 269 million or dollar 85 per share.
These results demonstrate our ability to drive solid returns nor are we have nearly 15% and then our way of 1.5% despite declines in interest rates.
Broad based apologising noninterest income growth.
Strong credit quality continued active capital management were positive contributors to our performance.
Compared to the third quarter average loans remained relatively steady at expected.
Mortgage banker continued to benefit from robust refi activity.
I'll say commercial real estate and environmental services maintain their growth for friends.
This was offset by declines in general middle market as well as national dealer, which was partly due to lower inventory levels.
The tone of recent conversations I've had with customers and colleagues across our markets is optimistic we continue to see slow and steady economic expansion.
We are focused on employing new customer acquisition cross sell and retention strategies that we have launched over the past year, we continue to make the customer experience a corporate priority as we seek to raising expectations or what are they can be.
Well over a relatively slow deposit growth was robust increasing 1.5 billion relative to the third quarter with almost every business line contributing.
The mix of the growth was favorable with over 40% coming from non interest bearing deposits.
In conjunction with this growth we have reduced higher cost broker deposits by nearly 700 million dollarss.
Our interest bearing deposit cost declined seven basis points to 92 basis points in the fourth quarter.
We are closely monitor the competition and where the recent fed rate cost, we have taken action to adjust deposit pricing.
Hi, carefully managing our deposit rates, we're attracting and retaining relationships.
Our strategy is working and it's clearly demonstrated by our deposit growth.
The increase the relationship deposits allowed us to reduce higher called toll self bonding and help reduce our loan total funding cost to 71 basis points also our loan to deposit ratio decreased to 88%.
Of note if you ask Treasury recently announced that we will continue to be the exclusive financial intermediary for the direct express government benefits card program for another five years.
Economic this program include attractive retail deposits the should continue to grow and our ability to leverage a third party platform for processing in servicing.
As far as net interest income over 80% of our loans are floating rate and primarily tied to Thursday lots of work, which on average decline 39 basis points during the quarter.
Lower rates were the primary driver for our net interest income declined to $544 million, resulting in a net interest margin of 3.2%.
We added $750 million swap in October and an additional $1 billion in early January .
Our strategy is to continue to build our hedging program over time.
Mostly monitoring the markets into taking advantage of opportunities as they arise.
Credit quality remained strong in the fourth quarter with net charge offs of only 16 basis points.
Charge offs continued its primarily consist of valuation impairments on select energy credits as capital markets for this sector remains salt.
Excluding energy net charge off for only $2 million.
Nonperforming assets declined I never only 43 basis points of total loans and the provision decreased to $80 million.
Hey, $10 million increase a non interest income helped offset the more challenging rate environment, we had strong growth in customer derivative income as well the gain from the sale of our health care savings were H, a business along with incremental growth in several other categories.
<unk> expenses increased as expected primarily related to higher compensation outside processing and seasonal occupancy.
This is in line with the outlook, we provided for for your expenses to remained flat excluding 2018 restructuring costs.
We maintained our targeted 10% to 81 target, we returned $246 million in capital to shareholders through our dividend, which currently provides almost a 4% return and by repurchasing 2.1 million shares under our share buyback program.
And now we'll turn the call over to Jim.
Thanks, Curt and good morning, everyone.
Turning to slide six that's hurting indicated average loans were stable in the fourth quarter with increases in commercial real estate mortgage banker and environmental services offset by decreases in general middle market and asked them dealer.
Relative to the fourth quarter last year average loans were up 1.7 billion.
Total commitments as of quarter end were stable compared to the third quarter with growth in commercial real estate equity Fund services, you us banking and general middle market offset by reductions in energy dealer and technology and life Sciences, our pipeline remains solid.
Our loan yields were 4.43% a decrease of 40 basis points from the third quarter. This was the result of lower interest rates, primarily one month LIBOR. In addition to a 3 million dollar decline to nonaccrual interest from an elevated third quarter level.
Slide seven provides details on deposits.
Average balances increased 1.5 billion with growth across all three of our markets.
Noninterest bearing deposits increased over 600 billion, while customer interest bearing balances increased 1.4 or 5 billion.
We managed our higher costs broker deposits down about 700 million.
As far as deposit costs with the decline of interest rates, we adjusted deposit pay rates throughout the quarter.
Whether it was a decline in broker deposits, we achieved a seven basis point decrease at our interest bearing deposit costs.
This is at the high end of the guidance we've previously provided.
As you can see on slide eight RMB as portfolio stable and the yield on the portfolio held steady.
Yields on recent purchases have been around 2.4%.
We have got a modest increase in prepays in the back half of the year. So this has not had a significant impact on our duration for the unamortized premium which remains relatively small.
Turning to slide nine net interest income was $544 million and the net interest margins 3.2%.
Loans had a negative impact of $55 million or 31 basis points to the margin.
The major factor was lower interest rates, which had a 46 million dollar impact and 28 basis points on the margin.
Also contributing to the decrease were lower balances decline in nonaccrual interest from elevated levels and to a lesser extent other portfolio dynamics, including lower loan fees.
Set deposits added $3 million, but had a seven basis point negative impact to the margin.
Higher balances at $7 million resulted in the five basis point drag on the margin.
The lower fed rate had an impact of $4 billion or two basis points.
Lower rates improved deposit cost by $3 million or two basis points on the margin and reduce wholesale funding costs by $7 million, adding four basis points to the margin.
In summary, given the nature of our portfolio our loans reprice very quickly.
Therefore, the net impact of lower rates, including a full quarter impacted the July and September rate cuts along with October's was the primary driver Arbor net interest income in the fourth quarter.
Assuming rates remain steady going forward, we believe the bulk of impact from lower rates is behind us.
Credit quality was strong as shown on slide 10.
Our net charge offs were $21 billion or 16 basis points.
Excluding energy net charge offs were only $2 million.
Total nonperforming assets declined to 43 basis points, one of the lowest levels since 2006 and criticized loans comprised only 4% of total loans as of quarter end.
As far as energy our charge offs were lower in the fourth quarter than the previous two quarters. We continue to see impairment of select energy loans with valuations of the few liquidating energy assets impacted by volatile oil and gas prices as whilst we capital markets.
Energy non accrual loans decreased $31 billion. However, we have seen a moderate amount of negative migration as criticized energy loans increased $146 million.
Therefore, we increased our reserve for energy, which remains at a very healthy level.
Our reserve ratio for total loans held steady at 1.27% and resulted in a provision of $8 million a decline of 27 million from the third quarter.
As far as our adoption of seasonal as of January one our implementation process, it's been successful and it's virtually complete.
Given the relatively short duration of our commercially weighted portfolio, an expectation of a fairly benign economic environment.
We expect to change reserve will be a decrease of zero to 5% and therefore will have little impact on our capital ratios.
Noninterest income increased $10 billion as shown on slide 11.
Customer derivative income increased $7 billion, including the rate impact on the credit valuation adjustment.
Commercial lending fees increased 2 million with robust syndication activity.
We also at small increases in several other categories, including investment banking brokerage fees and securities trading.
This was partly offset by a $5 million decrease in card fees as a result of a mix shift in the transaction volumes of government cards as well as two fewer business days in the quarter impact in corporate and merchant card volumes.
Also fiduciary income decreased 1 million, mainly due to tax preparation fees received in the third quarter.
During the quarter, we sought our HSC business for a gain of $6 million.
Oh, no deferred comp asset returns, which were offset in noninterest expenses were $3 million the same levels the third quarter.
Turning to expenses on slide 12.
Salaries and benefits increased $4 million.
This was the result of higher incentive compensation conditions tied to performance as well as seasonal healthcare expense.
In addition outside processing increased 4 million due to a vendor transition fee and seasonality drove a $2 million increase in occupancy expenses as well several other categories.
We continue to carefully managed costs as we invest for the future as evidenced by our efficiency ratio of 55%, which was well below the third quarter per average.
In the fourth quarter, we repurchased $150 million or 2.1 million shares under our share repurchase program as shown on slide 13.
Together with dividends, we returned $246 million to shareholders.
Our goal is continue to return excess capital back to shareholders and maintain our cetone ratio at approximately 10%.
Turning to the rate environment on slide 14.
Assuming interest rates remain at the current levels. The net impact from grades is estimated to be $10 million to $15 million on our first quarter net interest income relative to the fourth quarter.
This concludes the full quarter affected the recent fed cuts combined with the actions we've taken to lower deposit rates.
Of course actual results will vary depending on a variety of factors such as slide word movements.
As far as the remaining three quarters of 2020, if rates hold study, we expect to see a relatively smaller residual effect from rates as longer dated assets and liabilities reprice.
In addition continued hedging activity could have a modest negative impact.
We continue to work to gradually moderate our asset sensitivity.
We added $750 million to our hedging portfolio on October 1 billion in early January .
We currently have about $5.5 billion and interest rate swaps with an average remaining center of about three years and are currently in the money.
Overall, we remain positive constructive on the us economy, and we plan to make steady progress in building our hedging portfolio over time.
Slide 15 provides our outlook for 2020, which assumes a continuation of the current rate in economic environment.
We expect average loans to grow approximately 2% to 3% in 2020 relative to 2019.
We anticipate continued slow steady economic expansion yielding growth in most business lines.
This is expected to be partly offset by decline in mortgage banker from elevated levels as refi volumes normalize at a modest reduction in national dealer services, driven by a projected reduction in auto sales.
As far as the first quarter, we expect loan growth for most business lines will be mostly offset by a decline in mortgage banker due to seasonality combined with the slowdown in re by activity.
We expect average deposit growth of 1% to 2%.
We believe we will have the normal seasonality through the year, including the typical first quarter decline.
Our goal is continue to attract and retain long term customer relationships by offering superior products and services along with the appropriate pricing.
As I discussed in the previous slide the rate impact on net interest income is expected to be mostly absorbed in the first quarter with an additional modest effect for the remainder of the year.
Also the full your expense of higher wholesale funding will have an impact.
In addition, we expect the $6 million to $8 million decrease in nonaccrual interest recoveries from the elevated level, we saw in 2019.
Loan growth is expected to provide a partial offset.
We believe were portfolio will continue to perform well, resulting in net charge offs similar to 2019 in the 15 to 25 basis point range.
Given the new Cecil accounting standards, which became effective January onest and assuming the current economic backdrop, we expect provision should be slightly above net charge offs after taking into consideration or loan growth outlook.
No that this new standard may cause greater volatility in our provision.
As far as noninterest income, we expect growth of about 1% led by card and fiduciary fees.
Our expectation includes declines in certain categories that had strong growth in 2019, such as customer derivatives and warrant income.
Also deferred comp, which totaled $9 million in 2019 as hard to predict and it's not assumed to repeat.
As far as the first quarter keep in mind at the fourth quarter included the gain on sale of HSH business.
In addition, we had strong derivative income in syndication fees as well as deferred comp of $3 million, all which are dependent on market conditions and therefore may not continue at these levels.
Expenses are expected to increase approximately 3% year over year.
We expect to see arrived and outside processing type of fee income growth and increasing technology investments as we execute on revenue and efficiency related projects that are in flight.
In addition, we expect inflationary pressures on items, such as annual Merit staff insurance and marketing.
As a result of lower discount rate pension expenses, increasing about $7 million.
Also recall the first quarter includes elevated salaries and benefits expense due to share annual share compensation and associated higher payroll taxes, which are expected to be mostly offset by seasonally lower marketing and occupancy expenses.
Our effective tax rate was expected to be approximately 23%.
And as far as capital, we expect to maintain our CP one target of approximately 10%.
Now I'll turn the call back her.
Thank you Jim.
Unless we have provided reflects our expectations for continued moderate growth expansion through 2020.
Hey, cooler global economy, and the strong values. The dollar remains a headwind for you it's trade.
However, many sources of uncertainty that accumulated through 2019, such as China, Mexico and Canadian trade agreements.
I've been or May soon be resolved.
The interest rate environment looks stable for the year ahead as a labor market in the US remained strong and we'll continue to support the consumer sector.
We believe this backdrop should benefit us and our customers as the year progresses.
Over a 170 year history, we have managed through many economic and interest rate cycles with our efficiency ratio in the mid Fiftys and in our we have nearly 15% we're better positioned to weather changes in the economy for interest rate environment.
We remain focused on controlling the things we can control to maintain our solid performance.
Our 2019 results demonstrate our ability to grow revenue, while maintaining favorable credit metrics and well controlled expenses.
Our key straight provides a foundation to continue to enhance long term shareholder value specifically, our geographic footprint, which includes faster growing diverse markets combined with our relationship banking strategy is expected to result in growth of loans deposits in fee income.
We continue to maintain our proven expense discipline as we invest for the future.
Also our conservative consistent approach to banking, including credit and capital management has positioned us well.
Now we'd be happy to take your questions.
At this time, if you would like to ask a question press star and the number one on your telephone keypad, we'll pause for just a moment you compiled the Q1 day roster.
Our first question will come from the line of Ken Zerbe with Morgan Stanley .
Great. Thanks, good morning.
I guess why we started off in terms of the Eni outlook I just want to make sure I really understand what you're trying to say here.
The way I read it is that first quarters, obviously down $10 million to $15 million and then the rate impact is going to be negative on an ISO dollars go lower in each subsequent quarter throughout 2020.
But then you have presumably have the asset growth offset to that.
Are you trying to say that Eni from a dollar basis is going to be lower than first quarter throughout the year or.
How do you how do you see the net impact of all the different factors affecting Eni after first quarter. Thanks.
Sure Okay, Ken yes, thanks for the question.
We will see progressively lower impact from rates as we go through the year, I mentioned that $10 million to $15 million in the first quarter.
It will be a much smaller amount in the second quarter as of now might be pause the $5 billion to $7 billion range, then it becomes closer to a negligible number in the third and fourth quarter, even though we will see some impact.
All the way through the year.
First I'd mentioned to extent, we got hedges and depending on the rates. There that was obviously have an impact also.
Well, obviously pick up the volume into your goes on and you heard me mentioned to nonaccrual unpacked that.
Overall will be an impact on 2020 compared to 2019.
Sorry, I guess in because you I'm sure you guys do very detailed modeling for the year.
Is it right to assume that your Eni. If you look to see fourth quarter of 20 is that going to be lower or higher than first quarter of 20.
You should see volume over take rate once we get beyond the first quarter to answer your question. So most of that rate impact installed in the first quarter and then you are right volume does start to step up in the rate impacts starts declined. So you start to see a crossover once you get into the second and third quarters.
Gotcha, Okay, Alright, thats helpful I.
I guess, maybe just.
Second question in terms of fee income you mentioned in I guess in your guidance said that assumes Scott.
Thanks, essentially no.
Oh, what is the right were no returns on deferred compensation assets and that's that's part of the assumptions driving your 1% can you just explained that and is it possible that your fee growth is more than 1%. If you do get returns on those assets.
Well, obviously deferred comp as a bit of a wildcard depends on the market in the market returns on deferred comp. So they can actually be positive or negative so I'd be very hesitant to assume there since the beginning kind of.
Return there on in fact, it could go the other direction.
Got it understood. Okay, and then just sneak one last one in terms of your loan growth I'll say, two or 3% I think last quarter, you talked about something around nominal GDP and I I guess my interpretation nominal GDP was closer to 4% can you just comment are you seeing weakness or any kind of deterioration I mean, presumably you are seeing some weakness.
And your expectation for loan growth this quarter versus last quarter, and what's driving that thanks.
Again this is Peter I think the 2% to 3% that we've communicated we feel good about we have seen a little bit of a slowdown in the fourth quarter and I think we lifted the businesses that where we've seen that there's been some sort of interesting timing on what we've had and dealer and mortgage but going into 2020.
We feel good about our ability to accomplish the 2% to 3% that we've communicated.
Okay, all right great. Thank you.
Your next question comes from the line of John Pancari with Evercore ISI.
Well John Good morning warning.
And then also on the Eni topic.
So I guess this outlook implies probably that we got some incremental compression in the net interest margin in the fourth quarter.
And then.
Could you talk about how the margin should progress beyond that is it fair to assume stable were some incremental compression from there as we move through.
Second third and fourth quarter of 2020. Thanks.
Okay, Yeah happy to answer that.
Have a couple of factors that will be netting against each other we didnt know.
That we have about five bips of compression due at the higher balances. Thus the excess liquidity that you saw in the fourth quarter, you are going up and that against that the $10 million to $15 million guidance I offered in the first quarter and progressively smaller amounts after that and so I'll give the simple math on that it would imply a modest reduction.
From the current through 20, having said that we're always has been talking five NIM percentage guidance just because it is so impacted by excess liquidity, which based on our customer profile is very hard to predict.
Okay got it.
And then on the expense front.
You indicated your guidance that you.
Your expense outlook is impacted in part by higher outside processing expenses.
Related to revenue when you mentioned in your comments too it seems like maybe fee revenue can you talk about what that is and then separately can you talk about what expense levers you may have incrementally as you look at 2020, given the tougher revenue backdrop in any consideration for pulling back even harder on the expense side. Thanks.
Okay, and we will for yes, very specific to the the outside processing fees. So we also do have some good core growth or number of line items in 2021 of those as card income and of course, we have associated outside processing fees with that.
Now some of these strong core line item growth areas that we have won't be offset by some of the items that I mentioned the very strong here, we had in 2019 with syndications warrants derivatives and of course of deferred comp item that we talked about earlier.
But we do such a strong hard here and we will have some outside processing fees associated with that.
And regarding your second question on work, if we pull back.
We are always very focused on expense control I think we have to keep in mind that we're starting again from a very strong position, but 55% efficiency ratio, but we do feel it's important to make the proper investments in technology and make sure that were pushing forward in terms of movement, accompanied where it needs to be so we are going.
And to continue to invest in technology and don't anticipate pulling back on that at this point in time.
Okay got it thank you.
Your next question comes from the line of Steven Alexopoulos with JP Morgan.
Hey, good morning, everybody.
Receivables to follow first on John's question on expenses. So if we look at the 3% expected increase in 2020 is there anything unusual you would call out I mean pension sound like it was 7 million or do you think that's a good run rate for the company here.
As you continue to reinvest.
Yes pension would be the only real unusual item there I would say normal inflation, including merits would be the largest item.
So nothing to unique in terms of what makes up that expense base.
One forward I'd be hesitant to call that a run rate what we're really focused on is really operating leverage going forward.
We do have a bit about transition your some of the pension expense and some of these strong noninterest income headwinds that we talked about earlier, but we're really portfolio based on positive operating leverage and that's where we expect to get in the future.
Okay.
Helpful.
And just was looking for more color you guys put up really strong growth in deposits in the corner give more color on why were so strong.
Yes. It was a very strong quarter, we were very pleased with it.
We've talked about being up 1.5 billion, we keep in mind, we ran off about 700 billion of brokered Cds. So the way I look at it is we actually are up about 2.2 billion or selling deposits. So we're very pleased there.
It's a very concerted effort to go out and deposit gather I'll be priced appropriately where we needed to.
Yes. These are relationships that we poured into the bank. None of these were up Standalone deposits now I will say that probably at least half of this is seasonal and it's always hard to tell.
When this money Mike fleet out during the first quarter.
Approximately half maybe a little half from what I can tell seasonal but there is a strong component of it that I think this core and we'll stick with us through the year, even if we see a minor decline in the first quarter.
And this is good I might I might add.
Stephen that the relationship component to Jim talked about we've made a deliberate strategy not to try to chase sort of hot money or transactional deposits, but heavily leveraged our deposit pricing and programs that we've had in place like RCD program around new client acquisition and acquiring additional deposit.
It's from existing customers, which I think is the right strategy for us longer term and very consistent with our relationship based approach.
Okay.
That's helpful. Maybe just one final one per your comments recently about America potentially being an acquirer got quite a bit of attention. I'm curious are you actively having conversations with targets or is this something you're just thinking of really over the longer term. Thanks.
Yes, Steve or not I think maybe firstly I would say is that if you. If you read the text if anything that has been written know me. There is no change in any of our strategy. There were few headlines that maybe we're I think a little bit misleading and we are very focused on organic growth as we have been for a long time we've done.
Sure as in last 20 years, and what we said it would have said and Ralph before me is that if there is something that makes sense in Texas, and California that would be a good strategic fit and what were the major metropolitan areas and made the right economics for our company and for our shareholders. We take a look at it but that lenses fairly.
A fairly narrow and so it would a day to day out we continue to focus on organic growth.
Okay.
Perfect. Thanks for taking my questions.
Your next question comes from the line of Jennifer Demba with Suntrust.
Good morning, Jennifer.
Good morning Curt.
Question on asset quality it looks like on the increase in criticized loans was energy driven I'm. Just wondering if you guys think charge offs will be higher in that sector this year or lower.
And are you seeing any other underlying weakness in any other sector.
In your portfolio. Thanks.
Hey.
Jennifer So we're guide.
Tied to 225 basis points and charge offs and to take a look at 2019.
Only four basis points of ex energy charge offs, we don't think thats sustainable. So we would expect that ex energy, we would see slightly higher charge offs in what we saw in 2019 and we're hopeful that.
That could be offset fully or at least partially by lower energy charge offs. So that that remains to be seen but that's that's where we get the outlook.
Okay are you seeing any any weakness at all in any other sectors or geography speed at this point.
Now, we're really not four basis points of ex energy charge offs in 2019, when we 2 million and net charge offs ex energy in the fourth quarter are not ARPU levels are very low levels.
Hi, good energy, so we're seeing lots strength.
Particularly in a $48 billion as a portfolio that is ex energy.
Okay. One other question East we saw a major transaction announced in Texas recently.
Just wondering if you guys are expecting any merger disruption opportunities from that transaction banks.
Deferred as always disruptions that occur in markets for another transactions occur, but I would say in general are we there is nothing that strategically changes our focus as an organization and we are in some different segments and some different customer focused.
A number of those transactions that have occurred.
Okay. Thank you.
Your next question comes from the line of Mike Mayo with Wells Fargo Securities.
Good morning, Mike.
Mike you may be on mute.
Right.
Can you hear me.
Yes, we can.
Sorry about that.
So how much was your technology spending.
Last year, how much do you think it will increase and what are the areas.
Technology spending focus.
Yes, Jim you want to start on that and then I'll add in around some of the areas of focus yeah, Mike We don't quote a specific number and technology spending simply because it's so difficult challenging to get an apples and apples lots with other banks and defining exactly.
Falls in the technology bucket, but I will say, we have a as implied in the expense outlook for 2020, we do have a modest increase in Ics technology expense in 2020 over beyond the strong spend in 2019.
So it is something that we continue to invest and.
And I might just add to that Mike that.
We've talked before about the gear up initiative, having positioned us well from an overall technology spin we did a lot of work the last several years to rationalize on many of our applications is through raging platforms.
We've been a leader in terms of cloud migration, especially in non customer facing applications. They love. The work we have done around that has helped free up capacity for us for new new projects in the last 12 months that is included a new across the company.
Nation, and servicing platform and a new companywide CRM platform, a major investments and data analytics.
To help us and the marketing in servicing our clients major upgrades to our call Center technology that is for 2020, a number of key areas of focus and items that will be coming on line related to upgrades to our ATM. The major upgrades to our banking center infrastructure in.
Technology, including enabling all our employees in the banking center with tablets to make them more mobile and they're selling and servicing efforts a pretty major.
Upgrade to our Onboarding capabilities on the digital side for our consumer prospecting customers and then.
Fairly significant upgrades to our Treasury management platform and the payments area as well as a new portal.
For our wealth management clients. So we continue to be very focused on things that are put in a category of colleague and customer enable that.
Unlike most institutions, we have a longer term roadmap, we're working on but we feel like we are well positioned relative to.
Our competitors in providing.
It really good experience to our customers.
And then one follow up I assume you play many vendors to help you with this transformation.
What took place with the vendor transition cost I guess, you always have a balance of getting vendors to help you facilitate the transition on the other had there is always the risk of vendor lock in and during this quarter you had a vendor transition costs can you describe the analysis that goes into selecting vendors.
How are you.
Prepare against too much vendor lock in versus the goal of transforming the company faster.
I'd say that sort of second part of your question and then I'll turn to Jim for the more specifics around the expense in the quarter. We do have a number of key vendor relationships like most institutions to given.
The five organization, we are we try to write strike the right balance between proprietary capabilities and leveraging our third parties, where it makes us.
Those third parties go through the exact same oversight process that we do as if we were building something or sort of see something in house, including robust cyber.
Oversight and we believe we've got really good relationships that we can leverage and we try to get to a good point in terms of balance and turn to help concentration issues within any one senior unsecured vendor Jim you may want to talk about the specifics around the quarter.
Yeah, I would say that other than size there was actually nothing real unusual about this fender transition, we're always evaluating or vendors to do the right thing Boulder solid sand the customers. It's been unusual for us to have a vendor transition at this one was a little bit larger, but it's something that were.
Points evolving on in terms of looking at both quality and cost and capabilities and.
I would just say that this is a onetime costs that the larger than typical it's not unusual we have had vendor transitions.
Really every year and sometimes multiple times in a within a year. So.
No Thats I think there's probably not a lot more to that other than the size.
Okay. Thank you.
Thank you Mike.
Your next question comes from the line of can you can with Jefferies.
Good morning County, Hey, Thanks. Good morning question on the deposit cost side of things you. Just mentioned that you saw the seven basis point decline in costs and just wondering what happens from here in a stable rates environment. How much do you continue to have just natural resetting and deposit costs versus what else from here would have to be more.
Negotiated with the you know across the customer base as you've talked about in the past. Thanks.
Okay, Yeah happy to answer that we did reprice deposits throughout fourth quarters I've mentioned so.
No we saw the seven basis points decline in the fourth quarter.
Expect a continued decline in the first quarter just based off the efforts undertaken thus far the change in the first quarter will be.
Paul or now that the seven steps that we saw the fourth quarter I, probably characterize it based on actions taken to date.
As being kind of the lower single digits of Bips.
But we'll see where things play out there you know the two things that two or three things that could cause a further reduction one is we did see some mix shifts in the fourth quarter. All the actions that we actually took in the fourth quarter, probably would imply a little larger that production, but we did see some of our relationship.
Deposits grow relate to some of the higher priced accounts, so whether or not some of that mix shifts and wines remains to be seen but that could be a tailwind.
Then I would say it really depends on the competition or what happens in the competitive landscape I've seen a little bit of follow the leader out there in terms of deposit pricing and I think that in turn for the industry will be driven by loan growth in the demand for funding.
No Thats certainly true specific America, but I think larger picture it affects the entire industry, we're not immune from that so we'll continue to watch the competitive landscape and do the right thing for our customers and for our balance sheet.
Got it and one more question just on the mix of earning assets see with all this good deposit growth that you have a lot of it ended up just sitting in cash and unfortunately tenure still at 180 or so so how do you start to think about if this deposit growth continues or hangs around does it just stay in cash or given that you know not much of it.
Optionality versus securities book, or or do you start to flush it back into the securities book overtime.
Well, we do expect some of these deposits to leave in Q1 as you mentioned the seasonality factors both in Q4 and the Kipp typical Q1 seasonality so.
So how much liquidity in excess liquidity, we have remains to be seen.
To the extent, we do have excess liquidity I would say it really depends on.
The interest rate landscape in general we are happy with the size of our securities portfolio and the curve is flat enough. So there's not a lot of percentage and tying up that liquidity at this point in time.
Something we continue to monitor, but I would not anticipate growing our securities book in terms of size at this point in time.
All right great. Thanks, a lot.
Thank you Kim.
Your next question comes from the line of Erika Najarian with Bank of America.
Good morning America. Good morning, I, just wanted to follow up on to your response to.
Steve earlier question and operating leverage obviously in 20 given the.
For comparison to 19 Eni, that's obviously, it's quite difficult, but is the message that as we look out into 2021.
Theres more flexibility.
For the expense growth to be less than 3% or at least you have more leveraged to pull that lower than revenue growth.
So Eric this is Kurt I would say that when you look at the history of our company, especially the last year, we definitely have had a pretty good expense discipline you look at the performance metrics.
There really are the top of our peer group and we expect them to be to near the top your peer group once everybody reports and especially the efficiency ratio. So we know how to manage expenses. We've done a good job with that in our history. We remain very focused on expense management. There are a few dynamics in play in 2000.
And 20 that Jim Jim talked about and we are going to continue to strike the right balance between maybe expenses and investing to things that we need to invest in longer term to help our customers into serve our customers appropriately and to grow the institution, but you should expect growth longer term to remain focused on positive offer.
Any leverage and there's always additional levers that we could fall we don't believe strategically that sometimes there is with the right things to do and again striking the right balance between investing in technology and things of that nature and for the overall expense growth numbers.
Got it and my second question is.
You bought back almost $1.4 billion for this stock on which really helped in a year when and if I've got three times and with the CP one ratio just 14 basis points above target how should we think about buyback appetite in 2020.
Yeah, Yeah, we are.
That's a pretty simple.
Target in terms of were simply calibrating, what we need to support or loan growth and support our dividend and then calibrate how to concerns generation and the goal is simply to come as close to 10% as we can we've been in that ballpark. The last two quarters and I went to spacing unit plus or minus to that 10% throughout 2020.
Just as a follow up question I think I ask you. This every quarter, but can you read just remind us.
What what is your actual capital binding constraint because I'm sure a lot of p. or a lot of investors look at the CP one inch it's 150 basis points above the targets is a much larger regional banks, but if you could remind us what your actual binding constraint is on capital.
A couple ways of looking at that if you looked at from a pure stress testing standpoint, the binding constraint would be a tier one we obviously don't have refer in or stack.
There is another way of looking at other than that as we're always conscious of our constituents and rating agencies regulators customers and from that standpoint to see Q1 is very important ratio to so I'm not sure I'd say, there's one binding constraint depends on what perspective, you're looking at from.
Understood. Thank you.
Thanks, Eric.
Your next question comes from the line of Michael Rose with Raymond James.
Good morning, Michael Hey, Good morning, Hey, good morning, just the.
Just as we think about the deficiency and made the technology expenses going a lot of talk on this call is.
Is there any change to kind of the intermediate term.
Profitability, our or we are away expectation just given the frontloading some of the expenses in the the revenue environment. Thanks.
No I would've thought annunciated in the past that we expect to be in a low to mid our OE use we could drop to the.
For the low double digit I'm, sorry, just to clarify the low double digit mid double digit are are we and we expect to stay in that range in the foreseeable future.
Interest rates will be a significant impact and driver there. So we'll see where those go but we feel pretty good about the double digit or are we going forward at this point still.
Okay and then just one housekeeping question just when I look at the Npis, how much of that is actually energy versus not energy when I look at the the commercial bucket. Thanks.
Yeah, Mike I don't have the breakdown for you to I don't think.
Page.
Good day.
Hi, it's on page 10.
So all right 3 million energy hundred 56 million and.
Ex energy.
Okay.
Sorry, I missed that all right. Thanks for taking my questions.
It's Michael.
Your next question comes from the line of Gary Tenner with D.A. Davidson.
Well it Eric Good morning had a couple of questions. One on the energy book as you as you gave your guidance for loan growth in 2020, obviously, you highlighted dealer services in mortgage.
I'm curious with the pretty significant decline this quarter in MP and what seems to be up still kind of a challenging outlook for that segment with the appetite is for new new lending in that space and 23.
Peter get Gary This is Peter so I mean, our appetite is that we're still looking for opportunities, but I would tell you that they're more limited in this environment that we're in.
We're not seeing a whole lot of deal flow, you're seeing consolidation in the space not a lot of capital coming into it but we're continuing to be a very important energy lender in the space. We've got really good relationships, we're going to us or customers as the extent, there's new opportunities that make sense for us.
We are pursuing though.
Okay. Thanks, and then secondly on the HSH business I assume that there were some associated deposits with them on a business if so could you.
Just Holly what the mountains.
You know, though this is Jim those deposits were very negligible. They won't even go style whatsoever, that's a fairly small scale business for us.
Okay. Thank you.
Your next question comes from the line of Peter Winter with Wedbush Securities.
Good morning, what do you Peter.
It's just wondering I was looking at average loan growth that seem to have weakened a little bit from the mid quarter update and I'm just wondering.
What drove that what gives you the confidence of the 2% to 3%.
Loan growth in 2020, because first quarter is going to start off kind of flattish.
Thanks, Peter on that Ah, Yes, I would just remind you again for last year, we had 4% year over year loan growth. It felt really good it was across kind of most of our businesses in the first part of the year really saw good loan growth the middle market and I think as we got into second half a year, we saw a little bit.
Really in California in Michigan, where middle market slowed down a little bit, but nothing that overly conservative Texas continues to perform really well.
So as we go into next year, we feel like our pipelines in middle market and in those markets look really good and we feel good about our specialty businesses.
Again, we did see a little bit of dial back and dealer at the end of the quarter RFS business dial back a little bit, but we still feel really good about those going into 2020 and feel like we're going to be able to achieve that 2% to 3% we've communicated.
Okay, and then on a separate no just one housekeeping the the guidance for a net interest income.
In the in the first quarter of down to 10 to 15 million Dot Dot does not include.
One less day, count, which I think is about six to 7 million, it's not right.
That is frac, yeah, we were simply guiding on the rate impact and we mentioned that 10 to 15 million. So drastically right there will be the one day impact.
Got it okay. Thanks very much.
Thanks Peter.
Your next question comes from the line of London, Chen with BMO capital markets.
Good morning.
Good morning, I guess, a couple of cleanup question swine I'm on the fee income tied to expectations for routine 2020, some density Sri side, and we kind of flat in 2019, whats driving growth expectations in 2020.
Pretty good fiduciary specific wing.
Yeah, I think that will each I wonder is the drivers of the fee income growth in 2020 card and fiduciary.
Yeah, Yeah, I would say a couple of things related to fiduciary. Juan This is businesses that we've been in for a long time and a business in which we have scale. Both initially serving our existing clients were in the institutional trust business as well that we'd have a third party trust platform, where we provide.
Trust services for many of the larger a broker dealers and the U.S. and so we see growth opportunities kind of across all the various bucket.
The fiduciary is also one of those categories. It is impacted by market in so optimistic outlook on the equity and bond market for 2000 2020.
The flattish nature to 2019, nothing unusual there we did have some repositioning with a number of different customers that over time, that's a business that we have grown nicely and see what a normal growth in 2020.
Okay. Thank you and second question is can you remind me do you have a target dividend payout ratio.
We do not our goal to dividend is simply that make sure that is sustainable that's really where focuses and.
You know, obviously, you don't want a dividend payout ratio to get too high.
You have a what I'll call normal unconstrained, which we consider our constrained to be somewhat normal right now so simply sustainable and strong and we're comfortable with where it is right now.
Well I guess just to add to that.
Obviously, the last four or five years, we've had very nice growth and dividends were in return for shareholders. So we've been very focused on that and are you.
You should expect where the rate of growth for the dividends as starts slow route.
Okay. Thank you appreciate it.
Your next question comes from the line of Brock Vandervliet PBS.
Good morning Brock.
Hey, guys. This is the last thing Abraham for for Brock just just a quick question on a c. So if you guys could just give a little bit more color on a on the day to impact how you're thinking about that and maybe specifically as it relates to the energy portfolio. Thanks.
Yeah, so they basically impact.
For with regard to energy we have to look at a couple of different factors was not just our the economic forecasts, but how the economic forecast, we would impact energy specifically.
And so we would expect that there would be.
Modest growth in our reserves there.
The energy just like it would be.
Under the incurred model, but we don't expect piece of what impact that.
To any larger degree than.
What we see under the incurred.
Okay got it that's it for me thanks.
I'll now turn the call back over to current farmer, President and Chief Executive Officer for any further remarks.
As always we appreciate your questions. We appreciate your interest in our company and I want to thank you for joining the call today have a have a very good day. Thank you.
Ladies and gentlemen, this will conclude today's call. Thank you all for joining you may now disconnect.