Q4 2019 Earnings Call
[noise], ladies and gentlemen, thank you for standing by and welcome to the and then T. Bancorp fourth quarter 2019 earnings Conference call.
At this time, all participants happen place and they listen only mode and the floor will be opened for your questions. Following the presentation.
She would like to ask a question at that time. Please press star one on your Touchtone phone if at any point. Your question has been answered email or move yourself from the Q by pressing the pound Dickey, yeah, well posing your question that you. Please pick up your handset to allow optimal sound quality lastly, if you should require operator assistance. Please.
Press Star Zero I'll now turn the call over to Don Macleod director of Investor Relations to begin.
Thank you Laurie and good morning, I'd like to thank everyone for participating MTGE fourth quarter and full year 2019 earnings conference call, both by telephone and webcast.
Not read the earnings release, we issued this morning, you may access access it along some financial tables and schedules from our website www dot MTV dot com and by clicking on the Investor Relations link and then on the events and presentations link.
So before we start I'd like to mention that comments made during this call might contain forward looking statements relating to the banking industry and to empty Bank Corporation and then he encourages participants to refer to our SEC filings, including those found on forms 8-K, 10-K, and 10- Q4 complete discussion of forward looking statements.
Now I'd like to introduce our Chief Financial Officer Guaran King.
Thank you Don and good morning, everyone.
As noted in this mornings release empties results for the fourth quarter closed out a year of solid performance, which included.
8% growth in earnings per common share.
11% growth in noninterest revenues with mortgage banking and trust fees leading improvement.
A stable year over year net interest margin notwithstanding the interest rate volatility we experienced in 2019.
A credit environment remains favorable, which although non accrual loans increased slightly reflected the sixth consecutive year of credit losses below 20 basis points and industry, leading returns on shareholder capital with return on equity for the year improved slightly to 12.87% and return on cans.
Well common equity exceeding 19% for the second consecutive year.
We will review the numbers for the full year in a moment, but first let's turn our attention to the results of for the fourth quarter.
Diluted GAAP earnings per common share for $3.60 for the fourth quarter of 2019.
Compared with $3.47 per share in the third quarter of 2019 and $3.76 per share in the fourth quarter of 2018.
Net income for the quarter was $493 million compared with $480 million and the linked quarter and $546 million in the year ago quarter.
On a GAAP basis empties fourth quarter results produced an annualized rate of return on average assets of 1.6% in an annualized return on average common equity of 12.95%.
This compares with rates of 1.58% and 12.73% respectively in the previous quarter.
Included in GAAP results in the recent quarter. We're after tax expenses from the amortization of intangible assets amounting to $3 million or two cents per common share.
Down slightly from $4 million.03 per common share in the prior quarter.
Consistent with our long term practice empty provide supplemental reporting of its results on a net operating or tangible basis from which we have only ever excluded the after tax effect of amortization of intangible assets as well as any gains our expenses associated with mergers and acquisitions when they occur.
MTS net operating income for the fourth quarter, which excludes intangible amortization was $496 million.
Compared with $484 million in the linked quarter and $550 million in 2018 fourth quarter.
Diluted net operating earnings per common share were $3.62 for the recent quarter compared with $3 on 50 cents in 2019 third quarter and $3.79 in the fourth quarter 2018.
Net operating income yielded annualized rates of return on average tangible assets in average tangible common shareholders' equity of 1.67% and 19.08% in the recent quarter.
The comp the comparable returns were 1.66% and 18.85% in the third quarter of 2019.
In accordance with the SEC guidelines. This mornings press release contains a taboola reconciliation of GAAP and non-GAAP results, including tangible assets and equity.
As a reminder, both GAAP and net operating earnings in the fourth quarter of 2018 were impacted by certain noteworthy items.
Included in the fourth quarter 2018 results was a 20 million dollar contribution to the Mt Charitable Foundation.
That amounted to $15 million after tax effect or 11 cents per common share.
Also included in 2018 fourth quarter was a $15 million reduction in inventories provision for income taxes arising from an IRS approved change in the tax treatment certain loan fees, which was retroactive to 2017.
This also amounted to 11 cents per common share.
Turning to the balance sheet and income statement.
Taxable equivalent net interest income was $1.01 billion in the fourth quarter of 2019.
Down $21 million from $1.04 billion in the linked quarter.
The net interest margin declined to 3.64%.
Down 14 basis points from three point, 70% in the linked quarter.
A higher average balance of funds placed on deposit with the fed had an estimated four basis points dilutive effect on the margin.
The higher cash balances were a result of elevated escrow deposits seasonally high commercial deposits and increased trust demand deposit.
We estimate that the lower short term interest rates on the Feds July September and October rate actions pressured the margin by as much as 10 basis points.
The linked quarter 38 basis point decline in one month LIBOR was another factor in the decline.
Included in that 10 basis point impact of lower rates was a decline in the overall cost of interest bearing deposits the cost of which declined by nine basis points compared with the linked quarter.
Which provided a benefit to the margin of about two basis points.
Average loans increased $167 million compared with the previous quarter.
The ongoing and planned runoff of residential real estate loans, primarily acquired Hudson City mortgage loans was more than offset by growth in other loan categories, which increased in total by $509 million or seven tenths of 1% from the third quarter.
Looking at the loans by category on an average basis compared with the linked quarter.
Commercial and industrial loans were about 1% higher than in the prior quarter.
This included $110 million seasonal increase.
In loans to vehicle dealers to finance their inventories combined with an almost equal increased and other cnine loans.
Commercial real estate loans were down less than 1% compared with the third quarter, reflecting payoffs as well as completed construction loans, which did not rollover into permanent financing.
And a lower level of commercial mortgage loans held for sale.
Residential real estate loans, approximately half of which were acquired in the Hudson City transaction continued the expected pace of Paydowns.
And that portfolio declined by about 2% or $342 million.
Consumer loans were up 3% with growth in recreation finance loans and to a lesser extent indirect auto loans outpacing further declines in home equity lines in loans.
On an end of period basis loan growth was stronger in the commercial portfolios with commercial and industrial loans about 3% higher than at the end of the prior quarter.
While commercial real estate loans were up about 2%.
There were no particular regions or industries that stood out in terms of loan growth during the fourth quarter.
Average consumer deposits, which exclude deposits received at empties Cayman Islands office as well as Cds over $250000, we're up about 3% compared with the third quarter.
As noted earlier elevated escrow deposits seasonally high commercial deposits.
At higher levels of trust demand deposits were the drivers of that increase.
Turning to noninterest income.
Okay.
Net income totaled $521 million in the fourth quarter compared with $528 million in the prior quarter.
The quarter's results included a 6 million dollar or included $6 million of securities valuation losses on our remaining portfolio of GFC preferred stock compared with a $4 million gain in the third quarter.
Mortgage banking revenues were $118 million in the recent quarter compared with $137 million in the linked quarter.
Residential mortgage loans originated for sale were $697 million in the quarter down about 16% compared with the third quarter.
Nonetheless origination revenues improved by $3 million total of $26 million as a result of higher gain on sale margin.
Residential servicing revenues were little changed from the previous quarter.
Total residential mortgage banking revenues, including both origination and servicing activities were $91 million compared with $88 million in the prior quarter.
Commercial mortgage banking revenues were $27 million in the fourth quarter compared with what was a record $49 million in the linked quarter.
Trust income was $152 million in the recent quarter improved from $144 million in the previous quarter and up 12% from $135 million in 2018 fourth quarter.
New business generation continues to be strong while the strength in equity markets has been a modest tailwind.
Service charges on deposit accounts were $111 million essentially unchanged from prior quarter.
Trading and FX gains were $17 million improved from $16 million in the previous quarter, primarily reflecting customer interest rate swap activity done on behalf of commercial customers in connection with loan originations during the quarter.
Turning to expenses.
Operating expenses for the fourth quarter, which excludes the amortization of intangible assets were $819 million down from $873 million in the third quarter.
Salaries and benefits declined by $8 million to $469 million from the prior quarter, reflecting the lower headcount and seasonally lower benefit costs.
Other cost of operation for the recent quarter reflect a 16 million dollar reduction in the valuation allowance on our mortgage servicing rights.
Recall that there was a $14 million addition to the allowance in the third quarter.
Excluding the changes in the valuation allowance other cost of operations declined by $825 million driven largely by lower professional services expense.
The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator was 53.1% in the recent quarter.
Improved from 55.9% in the previous quarter.
Next let's turn to credit.
Our credit quality continues to be pretty much in line with the trends we've been seeing for quite awhile.
Annualized net charge off as a percentage of total loans.
We are 18 basis points in the fourth quarter of 2019, compared with 16 basis points in the third quarter.
The provision for credit losses was $54 million in the recent quarter exceeding net charge offs by $13 million.
The excess provision primarily reflects loan growth.
The allowance for credit losses was $1.05 billion at the end of December .
The ratio of the allowance to total loans was 1.16% at the end of 2019.
Unchanged from the end of the third quarter and up one basis point from the end of 2018.
Non accrual loans declined by $42 million at December 30, Onest compared with the prior quarter end.
The ratio of nonaccrual loans to total loans fell six basis points to end the quarter at 1.06%.
Loans 90 days past due on which we continue to accrue interest excluding acquired loans that had been marked to fair value discounted acquisition were $519 million at the end of the quarter.
Of those loans 480 million or 93% are guaranteed by government related entities.
We will address Cecil in a few moments during the discussion of our outlook for 2020.
Turning to capital.
Empties common equity tier one ratio was an estimated 9.72% at the end of 2019 compared with 9.81% at the end of the third quarter.
The decline reflects earnings retention during the quarter share repurchases and the impact of loan growth.
Which in turn led to slightly higher end of period risk weighted assets.
Empty repurchased 1.7 million shares of is common stock during this past quarter costing in aggregate $282 million.
Next I'd like to take a moment to cover the key highlights of 20 Nineteens full year results.
GAAP based diluted earnings per common share were $13 in 75 cents up 8% from $12.74 in 2018.
Net income was $1.93 billion improved from $1.92 billion in the prior year.
These results produced returns on average assets and average common equity of 1.61% and 12.87% respectively.
Net operating income, which excludes intangible amortization was 1.94 billion up slightly from the prior year.
Net operating income for 2019 expressed as a rate of return on average tangible assets and average tangible common shareholders' equity was 1.69% and 19.08% respectively.
Average diluted common shares declined by 7% as it rolls result of repurchase activity.
While the total payout ratio, including common stock dividends was 102%.
Tangible book value per share grew to $75.44 at the end of 2019 up 9% from the into 2018.
As we reflect on our 2019 performance through the lens of relative performance against our peer group of large regional banks were particularly gratified by our growth in earnings per common share our return on tangible common equity.
And the absolute level of our net interest margin rich remains at or near the top of the peers.
Yes.
Tony just back check backtracked second for a minute Darren.
Going back to the other cost of operations. During the spokesman said there was a client decline of $825 million. It is 25 million.
Thank you Don I'm not sure what I was looking at on a red depth, but thank you for the clarification.
Okay.
So, let's turn to the outlook.
Looking forward into 2020, our outlook was fairly consistent with what we shared on the call last January .
As well as with the trends, we've been seeing over the past quarter.
While GDP growth may slow from the piece seen in 2019, we still expected to be to level consistent with the average annual rate of growth seen since the last recession ended.
Unemployment remains very low.
And both consumer and commercial customers financial positions are healthy.
Consumer confidence remains relatively high.
Although commercial customers have remained cautious as ongoing and unpredictable global events, including disagreements over tariffs have led to sustained levels of uncertainty.
We were pleased to see progress toward the tailoring of capital and liquidity regulations for regional banks based on systemic risk to the us economy.
We are awaiting final approval for the capital regulations, including the stress capital buffer for banks in the Feds category for like inventory.
It's still unclear whether those rules will be in place for the 2020 see CCAR process.
However, with the usual caveat that events never unfold entirely in the manners Youd expect here are a few thoughts for the coming year.
As we share outlook on the net on net interest income and the net interest margin will start with the caveat that one unfolds will likely be impacted by actions taken by the federal reserve as to short term interest rates.
After a year of volatility, including three rate cuts over the course of 2019 the markets of comp someone.
The markets currently are signaling an additional rate cut in 2020 towards the end of the year.
The fourth quarter net interest margin of 3.64% is a good starting point to think about where we're headed for 2020.
We expect a lower combination of cash at the fed and investment securities as we enter the first quarter and for that lower level to persist over the course of the year.
This reflects a decline in escrow commercial and trust demand deposits from seasonal highs in the fourth quarter.
As well as a further repositioning of our portfolio liquid assets as the feds tailoring rule for liquidity becomes effective.
The result will be a beneficial impact on the reported margin compared with the fourth quarter, which could be as much as 10 basis points.
Loans outstanding grew 2.4% on a full year average basis in 2019 and were up a similar 2.8% on a year end basis.
As as being the case for the past few years. This reflected a 9.1% decline in residential mortgage loans on a full year average basis.
Offset by 5.4% aggregate growth and other loan portfolios.
Lending activity in the commercial bank in 2019, both commercial and industrial and commercial real estate was characterized by better originations and a reduced level of payoffs and paydowns than was the case in 2018.
We expect those trends to continue in 2020.
As has been the case for the past several years, we will continue to allow the residential real estate portfolio to run off.
As we reposition the balance sheet to higher returning assets.
However, the rate of decline on both the percentage in absolute dollar basis will slow compared to prior years as the portfolio loans acquired with Hudson City becomes a smaller percentage of the total.
Given these factors our expectation for 2020 is that average total loans will grow on a full year basis at a low single digit pace in line with or perhaps a little better than what we saw in 2019.
Taken in aggregate.
Our outlook for 2020 reflects a lower level of earning assets, but with a higher proportion of loans than in 2019.
Which improves our return profile.
Combined with some improvement in the margin from what we reported in the fourth quarter and a flat rate scenario.
We expect low a low single digit decline in net interest income on a year over year basis.
We entered 2020 with a higher run rate in residential mortgage servicing revenues following the additions to our servicing and sub servicing portfolios in 2019.
Thus year over year growth sort of vacant.
The outlook for residential originations is less clear with long term rates above the low point seen this past summer.
The commercial mortgage banking business had a record year for both volumes and revenues in 2019.
Matching or beating that will be difficult, but thats our goal for 2020.
The outlook for the remaining fee businesses remains consistent with our experienced in 2019 with growth in the low single digit range with the exception of trust revenues, which have been growing at a solid mid single digit pace.
The fourth quarters operating expenses, excluding the reduction in the MSR valuation allowance are a good indication starting run rate for modeling 2020.
Last year's GAAP results included approximately $100 million of items, we do not expect to recur in 2020.
The write down of our investment in the asset manager and the settlement of the Aesop litigation.
That implies a total expenses on a GAAP basis should be down year over year.
The capabilities, we added to arrive division over the course of 2019.
Should enable us to continue to reduce professional services in the coming year as well.
Other than normal wage grows we don't foresee the need to accelerate expenses beyond the current run rate.
We remind you that we expect our usual seasonal increase in salaries and benefits costs in the first quarter 2020.
Which primarily reflects annual equity incentive compensation as well as a handful of other items.
Last year that increase was approximately $60 million.
Based on the proceeding we expect to be able to produce neutral to slightly positive operating leverage for the year.
Our outlook for credit remains balanced.
Just as we completed our six consecutive year of net charge off experienced below 20 points are both excuse me below 20 basis points.
At the risk of sounding like a broken record I will caution you again that this trend can continue and net losses will eventually tick upward.
There continue to be some modest pressures on nonperforming and criticized loans, but there are no apparent weaknesses in any particular industries or geographies.
Our adoption of the new loan loss accounting standard noticed Cecil.
It was effective January Onest 2020.
Our expectation based on forecasted economic conditions and portfolio balances.
As of December 31, 2019.
Is that the adoption will result in an overall increase of approximately $140 million or 13% to our reserves.
With total commercial reserves being down slightly reflecting shorter contractual maturities and residential mortgage and consumer reserves, increasing substantially due to their long dated maturities.
For regulatory capital purposes, we have elected to phase in the Cecil transitional amount over a three year period.
Therefore, the effect of the adoption on the capital ratios will be recognized in uniform manner, resulting in a reduction to the CE T. One ratio by approximately three basis points over each of those three years.
Cecil also impacts the accounting for loans previously acquired at a discount that are on our balance sheet.
Acquired impaired loans will transition from 90 days past due and accruing to their current performance status, whether accrual or non accrual.
Approximately $170 million of the acquired impaired loans will transition to nonaccrual status.
The income from these loans will only be recognized on an as cash is received basis consistent with originated non accrual loans.
Lastly in the future our loss provision will reflect expected net charge off activity plus Cecil reserves for loan growth by category.
Plus or minus changes in our reasonable and supportable forecasts.
We don't see anything meaningful on the horizon that would lead us to belief that the tax rate for 2020 will be significantly different from what it was in 2019 in the area of 25%.
As to capital, we will continue to execute our 2019 capital plan through the end of this years second quarter.
Our capital allocation philosophy remains unchanged with investments in our business at high returns being our first priority.
While paying a dividend that sustainable through economic cycles.
After that we seek but don't reach for acquisitions that makes sense and add value to our shareholders our customers in our communities.
When those aren't forthcoming we returned capital to shareholders.
We have little appetite for warehousing capital over and Indeterminant timeframe until those opportunities present themselves.
Of course, as Youre aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth changes in interest rates political events and other macroeconomic factors, which may differ materially from what actually unfolds in the future.
Yeah.
Now, let's open up the call to questions before which Lori will briefly review the instructions.
Thank you at this time I would like to remind everyone would like to ask your question. Please press Star then the number one onwards telephone keypad with your question asked and answered you wish to remove yourself from make you press the pound key our first question comes from the line that can usten of Jefferies.
Hey, Thanks, Good morning, guys, Hey, Darren just on the expense front Im wondering if you can just.
Clarify a little bit on the point that GAAP expenses, you expect to be down because they had that 100 million and you mentioned that the core you don't see it really changing from what the growth rate is so the core can you just help us understand without having to accelerate investments. What you see is the core underlying growth rate of expenses that you should expect.
Sure. So I guess, if you look at the full year expenses on a GAAP basis, you've got a $100 million of.
One times in the Litigation addition to the addition of litigation reserve as well as the write down on the asset manager and then when you look at that number and you look at where we grow from there.
1% or less.
Got it and then can you talk about the puts and takes just in that 1% or last so you are making some investments that you've talked about in the last couple of where you're getting the saves out of and not confidence that you can keep at 1% or last relative to the growth that we've seen in the last couple of years. Thanks, Yes.
You know when we look at the trajectory we've been on.
Remember that have a big portion of last year's growth that expenses was related to the mortgage business and the servicing.
That we that we both acquired and took on in the form of sub servicing as we had that expense to support that revenue.
And then the rest of what was happening was this transition of our IC capabilities.
From professional services the salary benefits and we started to see those professional services come down in the fourth quarter, which we expected and we expect that trend to continue into 2020, and so as we go forward the gains and efficiency that we will get.
<unk> expenses from reducing professional services will offset salaries and benefits as that cycle continues itself. So we think we're at a point, where we're self funded and that's why we feel feel confident that the the run rate that we're at now.
We can we can basically run it that ex.
Normal increases that happened in salaries and benefits as you go from year to year.
Scott It thanks Darren.
Your next question comes from the line of John Inquiry of Evercore.
Good morning.
On that same line of questioning so your.
Operating leverage comment.
You expect positive operating leverage that's on a GAAP basis, just confirmed correct that is correct.
Okay. So and then looking at it from what you would just walk through in terms of core that would imply modest negative on a core base system.
On a core basis that would yep.
Okay and the.
And then in terms of you were.
Ongoing.
In franchise investments I know you had indicated last quarter that the are largely complete is that still how you're viewing used or any change to the ongoing infrastructure investments that you're making.
Well, we have we're continuing on the transition that we've talked about.
And that really is building up our internal capability and we had the uptick in 2019 that got that process started but from where we end the year. We're now in a place where we're seeing.
Professional services come down that offset.
The salaries and benefits cost that were adding.
It was we're making those conversions and the place that we're at now as we think that those investments are kind of self funding and so that we the expense base that we're at now we can continue that transition without having to have meaningful growth.
As we get to the other end of it obviously is our expectation that.
We will continue to use those internal team members.
To improve the expense run rate in into 2021 and 2022, but obviously, we'll we'll give you more details on that when we get there but for the purposes of 2020.
We think we're at a place where we can operate basically at the level that we're at now with with with some modest growth from here.
Okay got it thank you.
Your next question comes from the line that you're at that Najarian of Bank of America.
Hi, good morning, good morning Erica.
I wanted to inquire a little bit more about the potential for the margin beyond the first quarter argue loud and clear your balance sheet action is going to be quite accretive in the first quarter.
If the curve stays or the current forecast stays a static how should we think about the net interest margin trajectory.
Beyond the first quarter and also as we think of earning asset growth should we expect earning asset growth to be flat relative to the actions that you're taking or should we expect some balance sheet shrinkage.
Sure.
So in the in the first quarter, we expect the net interest margin to increase the lease with the printed margin is.
Because of the change that you'll see in cash and investment securities.
And kind of see that at the end of period and those lower levels, we expect to persist throughout the year. So when you get to the first quarter margin and assuming as you pointed out a fairly stable rate environment. We would expect that margin. The end due in the first quarter with to be fairly consistent throughout the year.
Assuming that that forward curve in fact occurs on maybe plus or minus a couple of basis points along the way.
But but relatively stable.
We anticipate that the average earning assets will start the year lower.
And then come up as the year goes on as we see the.
Low growth that we talked about.
In the forecasted overall, it's kind of low single digits in along the lines of what we saw in.
In 2019, as we go through 2020.
Okay got it and my follow up question and I apologize that you're probably going to get the thousand expense questions that we just wanted to make sure I am we're getting it right. So as we think about the run rate for 2020.
We take a 100 million out of gap that 3.368 billion and you're seeing growth of 1% or less that includes any nominal increase in salaries and benefit. So in total core should go up.
1% or last from that 3.368 billion dollar base.
That's right Yep perfect. Thank you.
Your next question comes from the line of Peter Winter of Wedbush Securities.
Good morning.
Good morning, Peter I was just curious on the capital.
The ended the year at 9.72% Im just wondering where you think it's going to end.
In 2020.
And then secondly.
How much is last in your stock buyback authorization.
So where where we'll end.
2020 is a little bit tough to predict.
Just depending on what happens with.
The tailoring rules and FCB is as we go into seeker. This year, which will have an impact obviously on the on where we make during the capital ratios too and then the other thing that we're paying attention to is just the pace of loan growth and in particular risk weighted assets.
But if you look at where we've been over the course of the last actually kind of five or six quarters, it's been coming down around nine to 10 basis points at quarter end, we continue a measure movement down towards the low end of the peer group and over the course of the last year I believe we've gone from being slightly above our peer median and term.
As of our Cetone ratio to slightly below the median.
And we will continue a measured and thoughtful moved down towards the range that we've we've discussed for sometime now.
Obviously paying attention to what's going on in the macro environment and what's happening with loan growth.
And if you look at whats left.
Outstanding.
In the.
In the capital plan that we discussed.
We were disclosed in July .
It's around 750 $800 million.
Okay.
And just given.
You are doing some of the work on Remixing.
The balance sheet to help the margin I'm, just wondering any updated thoughts on on the hedging strategy.
Nothing that is.
Different from what we've talked about in the past.
So if you look at where we've been.
Our.
Our notional amount has grown but what's actually outstanding has been relatively consistent.
In terms of notional dollar versus.
14, $15 billion of cash flow hedges, plus another four or five of.
Debt.
And what we've been doing is just extending some of those out into into future years to to have that same.
Amount of protection in place for a little bit longer.
Okay. Thanks Darren.
Your next question comes from the line of fracture Aldi of Piper Sandler.
Morning.
Correct.
Just on the.
So just trying to ask the could the couple of question another way just curious.
I know you can see CCAR cycle coming up.
But given how little impactful little impact Cecil has too.
The regulatory capital levels here just curious.
Your thoughts on capital return overall for the back half the year.
Is it sort of the expectation or I don't know the wish list that you would continue to return a 100%.
Plus capital.
Earnings.
I I guess that we don't peg it is a payout ratio number that we're looking to achieve but more we're projecting forward. What we think our loan growth will be and what our risk weighted asset growth will be.
And looking at what capital, we think we need to fund.
To support that loan growth.
And make sure that we were running an organization that is very safe and sound.
We continue to believe that we can move the current ratio down.
And we'll continue to do it at the pace that we've been on hold for the last several quarters being consistent in terms of the with that decline as.
Any quarter, you might see some difference between.
What the changes in the ratio based on primarily asset growth in the quarter, but when you look over the long term over the last few quarters, we've been on a pretty steady pace.
I think one of the things that we're also going to be watching as we go through.
The first part at least of 2020 is just how the new Cecil.
Methodology impacts earnings on any given quarter, which will be impacted by the mix of loan growth in that quarter, and just making sure that.
We're we're thoughtful with with those capital returns but.
As you point out given where we are we were pleased that the impact on our capital ratios from Cecil was fairly nominal and so we can continue.
On the on the trajectory that we've been on.
Okay, and then just sort of a ticky tack question on the provision.
Given that if the environment if the credit environment stays as is for 2020, let's hope.
Given the day one seasonal adjustment is it is it and I know a lot more goes into the minutes, but is it sort of fair for just modeling to assume.
Provisioning goes up by sort of that 13% number.
All else equal.
I guess.
I haven't done that's the way the way I tend to think about it is.
You've got charge offs that will happen and then if you look at net growth in loans.
And look at the new allowance rate and multiply those two that probably gets you the excess provision.
And of course, you know if you look in any quarter the mix of loans the drive that shifted portfolio can move that around but if you look over the course of a full year.
We would anticipate any meaningful mixed shift in terms of.
Where the growth is coming from and a percentage basis, which would give you.
With that.
Allowance percentage as a reasonable starting point.
Is that it could move around a little bit within that quarter, but over the course of the year I would expect it to be.
Within a few basis points of that number.
Okay, Alright, great. Thanks Darren.
Sure. Thanks.
Your next question comes from the line of Steven Alexopoulos, So jpmorgan.
Hi, Darren has everything.
Good how are you Stephen good.
Started so Rick regarding the anticipated decline of liquidity Q1 20, we look at one Q1 9, you quarter over quarter down 1.4 billion.
Do you think youre going to have a similar decline of one Q2 0 reserve much larger that just given how much more deposit growth you've had recently.
It's probably going to be larger than that given.
The the trust demand business was probably the primary driver. If you look back in prior years, plus a little bit of the commercial commercial balances tend to move up.
In the fourth quarter and then these companies as they prepare to make their distributions to their owners.
Thats why you see them come down in the first quarter and so that's that's pretty typical.
I think businesses are still having a little bit more.
Of their cash sitting in operating accounts versus in interest bearing and then the other thing that's happened this year for US obviously as we've increased the.
Escrow balances and there is some seasonality to those so when you put all those factors together you'd probably get bigger decrease there.
And then we'll be.
Looking at at the Securities portfolio in the aggregate and that will probably come down a little bit too.
As we react to the the new changes and the LCR.
Okay.
And then on the the trust income, which came in much stronger than the original guidance calls for an it didn't sound like market appreciation was a big factor give more color and why why there was so strong this year.
So there's a couple of things that that happened there we have within there a business that is.
Holds retirement assets and when you add too when you add clients to that you can they can come in a big chunks and we had one big.
Retirement funds that came in during the course of the year that stuff's kind of hard to predict and that helped with some of the trust fees.
As well as in our what we call or institutional client services business, there seem to be a little bit more activity in that business is the as the back half of the year went on.
Which helped with the trust fees and and obviously when I talked about that retirement business. The assets that came on also grew because of the.
The markets and so there was some help from the markets to be sure.
But but the business.
Continues to add team members and add clients and has had a strong year.
That's helpful. Maybe just one final one on expenses I appreciate the color on the 1% expense growth in 2020, given the reinvestment some of the cost saves, but what is expense growth at Mt. Running at these days without cost saves, what's the natural organic growth rate of expenses. Thanks.
You know when I think about our natural organic growth rate and you look at us through time and you'll hold to the side. Some of the things that have happened was with various litigation expenses or.
Mortgage servicing rights or or the write off that we had we're kind of no low single digit grower and thats, mainly driven by compensation costs.
Year over year.
You know last year was just kind of outside because of the the mortgage growth in the mortgage servicing business and then step one in our.
Our transformation for technology, but.
Generally when you look at how we run the bank.
We pay a lot of attention to to our growth rate in expenses, because we know arena in a tough industry.
So we're always looking for ways to manage those and keep them in aggregate growing at low single digits.
And in making investments in finding offsets.
Cover the cost to keep it at that pace.
And that philosophy hasn't changed.
Okay.
Well, thanks for all the color.
Sure thing.
Your next question comes from the line of Gerard Cassidy of RBC.
Moving to learn how are you Gerard goodness.
Can you give us some color on that residential mortgage portfolio. You indicated there was down I think the run off that is down about 9% you expected to be less this year. It looks like you're raising mortgages at the end of the or just over 16 billion or 18% of total loans, what do you see that eventually bottoming out when.
It is the runoff from the.
The deal that you've done.
And we have a stabilized number from from that portfolio.
Sure. So it's a good question Gerard as we.
As we watch the portfolio residential mortgage loans when you look underneath there it's down to about half.
This is legacy Hudson city mortgages and half.
Legacy 70, plus.
New originations.
We're allowing that that Hudson city portfolio to run down and we'll continue to do just because of the return profile of mortgage business.
And the rate of growth or the rate of decline in aggregate in mortgage portfolio is slowing just because the Hudson city mortgages are becoming a smaller percentage.
But we'll continue to run those down.
We will probably you will see a little bit more growth in the legacy business, especially some of that comes from the servicing business, but you're not going to see it it hit a steady state likely in 2020.
The only thing that as we work through the new.
Liquidity rules after the tailoring. The we're contemplating is what role the mortgage portfolio plays in overall funding since the mortgages are flexible with the federal home loan bank.
For for funding on a short term basis. So there's a number of considerations that go into where that.
Where that portfolio ultimately ends, but we probably continue.
Seeing it moved down but in a smaller dollar amount over the course of 2020.
Very good and then.
I know the rules are not set yet on the FCB, but from what you understand today and assuming they don't vary dramatically from what we all understand do you expect any kind of meaningful impact come see car because of if they incorporate the SCB INSEEC or this year.
I guess, if they incorporate it.
It would be helpful.
Because the threshold that you have to meet would be lower and there will be some opportunity there.
Theres also been talking of not having to prefund, the dividend and not having an assumption of asset growth.
Under stress with which all of those things are positive.
The offset to that is.
You know what our loan growth assumptions look like in particular, what the mixes in terms of risk weighted assets that will be.
An offset but you know it's it's obviously remains to be seen how the this will be implemented.
By the fed given that there is unlikely to be in NPR before and it will all be handled through the rules in the in the assumptions that are provided to us.
Great. Thank you.
I.
Question comes from the line follow Martinez.
Hey, guys. Good morning, I guess, we have 10 more minutes.
A couple of questions one just a follow up on Cecil.
By my calculations here Hcl ratio goes roughly from about 115 to about 130 basis points.
As I think about the changes in your mix in the loss content on your net loan growth because there is obviously a lot going on there with resi coming down consumer.
Going up how do I think about the loss content the lifetime losses on your growth relative to your back book is the net growth in loans.
Those with loss like them lots of 100 above 130 basis points I know it didnt change in any given quarter all that much but should we think that hcl ratio naturally gravitate upwards over time as your balance sheet remixes.
I guess, if you if you're if your time horizon is 10 years, and we don't do anything to change, though the growth rates of the various portfolio that's probably true.
I think if you look in the short term in short term in this case would be like over the next 12 and 24 months you probably don't see.
Much change in that just because the start point on some of those other portfolios.
Meaning the there the other consumer is relatively small as a percentage compared to.
The red the mortgage the commercial real estate in the Cnine.
On.
That that assumes that.
We don't do anything to to look at those portfolios and look for alternatives.
I would like you've seen some of the.
Other organizations thinking about auto Securitizations for instance, we haven't done one of those in a while I'm not suggesting that we are going to do one but that would have an impact on obviously the portfolio.
In the allowance in there because if you did a securitization.
The that allowance would come off so.
The number of moving factors, but but I guess the short answer to your question is.
Your your math is consistent with ours and I think it would take.
A couple of at least a couple of years.
Of of running at the rate that were at with no change.
To see that that number go up okay thats helpful.
All right I'll, let me just change gears a little bit.
At a conference in early November I think was about conference you highlighted.
Your your some of your key metrics versus their long term averages and your NIM I think you were at.
Substantially higher than what the premium up of your NIM. The delta between your NIM and appear at median substantially higher today than it has been historically.
I think it like 50 basis points or something like that and that historically, it's 20 or something at something in that neighborhood Im it seems like from your outlook.
You think that.
Elevate really elevated delta with your peer group should remain.
Not too far from where it is today and I think you were kind of Hanting at the conference that maybe that NIM.
That excess NIM versus your peers will gravitate down over time, I am I reading that right, having what's changed since since November and.
Other than obviously the rate outlook, but.
I am I reading that right that you think you will be able to maintain a premium NIM that is.
That is historically high.
I guess I'll break apart your statement into two pieces do.
Do we think we'll be able to maintain a premium NIM, yes, that's always been the nature of our portfolio.
Largely because of our funding mix, but also because of.
The pricing on on our loan book.
It's been a little higher than what we would normally expect.
And especially in this kind of time period, and you can see the gap between us and the next closest peer the median.
Has come down a little bit, but really when you look over the last couple of quarters. It's been it's been fairly consistent yes.
We would need to see rates come down.
A little bit further to see that delta.
Compressed but.
We expect overtime.
We try to run the bank to have.
Lately at lower cost of deposits in a slightly higher yield on our loans and manage our expenses, a little bit better and credit and it's not our objective to be outsized performance in any one of those categories, but a little bit better in each one and over long periods of time that adds up to.
Consistent.
Returns, which is really what what our objectivism some of them may move a little bit in any any one time period be that a quarter or a year, but over long periods of time.
Thats kind of how we try to run the bank to achieve the returns that we do so.
On.
We expect that.
The margin independent obviously given.
The earlier comments in a stable rate environment.
We expect the margin to be relatively stable. This year, given that we would expect to maintain.
Our premium over the our GAAP are positive GAAP compared to the next closest and the median.
But any movement down and probably a little bit of that erode, but we don't see ending up back at the median.
Right, so as long as the rate environment remains stable that historically high Delta the reason why they should.
Yes from what we can see we believe that that will that will persist.
Okay. All right that's really helpful. Thank you.
Sure.
But with your comment about 10 minutes I thought you were going to use all 10.
Your next question comes from the line of Brian Klock 50 for yet.
Good morning, Guarana, Don Hey, Hey, wait we're set up for again next year right.
We sure hope so no we're not planning upgrade yet, but we're certainly hopeful.
I mean.
Hope is though at spring.
Hope Springs, Eternal and Buffalo every year, so let's hope so.
Yes.
But I think I do have five minutes left in the morning, I think thats what follows referring to before I would say good afternoon, but I just had two or a quick follow up to how you. We've had all kinda questions today on both of these topics.
Just wanted to clarify a little bit on the margin guidance, a 10 basis points Darren.
Yes, now was that all liquidity, driven 10 basis points or I think you guys. Whether late December early January . Thank you redeemed some debt so that kind of factored into that sort of 10 basis point NIM improvement into the early part of 2020. It is its impact is in the Grand scheme of things relatively small on the on the NIM impact.
The main drivers are the the cash and securities.
Got it down it makes sense and.
And again on that expenses for the 2021 question, but like you mentioned here are the core expense run rate.
Less than 1% inflation.
In 2020 Anacor basis.
I would like with all those tax expenses kind of consolidated and coming out like that in recycling do you think 2020 wanted one of those word expenses are flat or they just maybe normal MLP expense inflation out into 2021.
A year year I'd, just recovering from doing the plan for 2020, let alone 2021 so.
Haven't quite look that far ahead, yet, but I guess I'll remind you of who we are and how we run the bank and that has to be very careful with with our expense growth and make sure that we see a path if we make those investments to to bring it back down or that Theres offsetting revenue.
Like we did with the mortgage business this year.
No it.
The the low single digit increase as I mentioned before is primarily the result of.
Salary inflation.
Who knows where wage inflation ends up through 2020 of unemployment rates stay this low who knows where we'll end up.
But we continue to believe that in the banking business efficiency matters and being cost effective manner. So we pay a lot of attention to that and then of course, if we can drive that.
Growth down.
To something less than 1% or even negative.
We will look to do that but too early for me to make comments really about where that will be in 22 anymore.
Thats fair I thought I'd ask anyway, so but I. Appreciate your time. Thanks, there was a good track.
Thank you I'll now turn the call Don Macleod for closing comments.
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