Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to stand I. Thank you for your patience.
Welcome to Wintrust financial Corporation's fourth quarter and year to date 2019 earnings conference call.
At this time, all participant lines I'm going to listen only mode.
If you acquire any assistance during the call. Please press Star then zero to reach an operator.
Following a review of the results by Edward Wehmer, Chief Executive Officer, and President and David Dykstra Senior Executive Vice President Chief Operating officer, there will be a formal question answer session.
During the course of today's call Wintrust management may make statements that constitute projections expectations beliefs or similar forward looking statements.
Actual results could differ materially from the results anticipated or projected in any forward looking statements.
The company's forward looking assumptions that could cause the actual results to differ materially from me information discussed during this call are detailed in our earnings press release and into companies. Most recent Form 10-K , and any subsequent filings on file with the FCC.
Also our remarks may reference certain non-GAAP financial measures.
Earnings Press release and slide presentation include reconciliation of the non-GAAP financial measure to Paris comparable GAAP financial measure.
As a reminder, this conference call is being recorded.
I'll now turn the conference call over to Mr. Edward Wehmer.
Thanks, very much every new everybody and welcome door fourth quarter earnings call me as always you Dave Dykstra.
Dykstra.
Our chief operating officer capable of your General Counsel and Dave Star I'd Love what are your shuffle pretty.
Well go through the same form and as usual I'm going to give some general comments regarding a result through the day for more detailed analysis Oh, that's up other expenses in taxes correct me if for some summary comments it talks about the future enough time for questions.
I'd like to first to go walk down memory Lane Sars matters, a boring twentys I like to think through.
As we call Nowadays I think it's appropriate to take a second to look at our accomplishments.
Last decade.
As we've always been a company that managers for the long term.
I find refreshing not always the concentrate on the last quarter look the entire body of work over that longer term.
I can I can actually say the confidence.
Our franchise is really never ever been a better position or.
More valuable.
Good day and over that 10 year period net income grew from 73 million in 2009 to 356 million in 2019, the 17% in cap on energy needs right now.
I know that 10 years were record earnings was only two 2010.
Achieving record status.
Well that's for sure triple during that period of time.
A little over $2 to over $6, resulting in 1% Cagar.
Scheduled failure grew at 8% bigger from $43 in 2009, almost $50 in 2019.
The answer to the positive both going to 12% copper down growth rate as a triple during that timeframe from 4.2 billion to 36.6 billion as the deposits from $10 billion to $30 billion loans grew from 8.4 billion to 26.8 billion midyear in 2009 to 2019.
Non performing assets as a percent of batches are come down every year since 2009 and ended this year to along with 3.36% total assets.
Given our $6 run rightly P.S. and our track record consistent growth and all the fund them and all fundamental financial results.
And I did just trying to be nuts to look at a discount that we traded build into the market.
Well for 2020 M.B. I just to continue this is true good growth.
All major statistics barring the true future decreases material decreases of rates. Good six star for sure run right. It's kinda line in the San for Us.
The basis for growth or our future growth aspirations no one for the quarter.
Oh for core net income on all somewhat as one of the reasonable considering a written interest rate environment headwinds that we experienced.
I I actually think since 911 before he had a period of what I consider a normal you'll hear from maybe an aggregate of 10 to 12 months.
I don't really know the normal lives anymore, but it makes it a little bit hard to manage YOD manage your balance sheet, well I think we've done a pretty good job almost 10 years.
Net interest income and net interest margin Juno, then fell 20 basis points for the three Nike.
As Chris is earning asset yields fell 28 basis points and interest expense for 11 phase one basis points. It's free funds ratio was down by three basis points.
These differences are directors over LIBOR market yields are probably this material changes, we should be a good basis for us going forward.
Loan yields fell 24 basis points won't sell for selling fell 30 basis points below could it be management deals fell 23 basis points dropping liquidity management, you always do that show hundred 47 million dollar increase in average liquidity management assets.
The growth during the quarter.
This increase is yet to be investment into longer term securities as evidenced by our liquidity management <unk>.
Management.
For the management duration, staying well do consonant rub 40 years.
That's seen these assets longer should be securities longer term securities.
It is just as part of the margin contribution going forward.
Our goal is to maintain an approximate six your duration of liquidity management has.
Oh, great demands when assets, we have some opportunity there.
I want to deposit ratio ended the high end of our estimated 85, 90% range in the quarter at 89% 19, 90% do you have lived previous quarter right.
Non interest expense growth deposit expense decreased 10 basis points in the quarter generally takes time to decrease deposit rich.
And we are actively and aggressively working to decrease the cost of funds or deposit base. So there's opportunity here also.
Overall cost of funds on total interested bird bring liabilities was also down 11 basis points.
I mean that interest serco, probably recorded a decrease of about 3 million Bucks.
The margin decrease was the primary resolve this decrease.
Then it was mitigated by overall asset growth the full year basis net interest income was approximately $100 million.
Going forward, depending on the rate environment for the rate cuts are actually not going to be appreciated. We expect the margin to be able to decrease pressure due to our ability to deploy liquid management assets into higher yielding securities and the broad aggressive deposit cutting costs.
Cost kind of where we can.
We know a LIBOR or is it getting down this quarter, we think we've been aggressive hopefully our.
Our plan is to have a.
And our decrease in.
Any future decrease in house, it's offset by liabilities and.
Cost of liabilities going down so again, we think we're kinda and good point your borrowing it'll roll shift down materially in the a quick ship down materially in the market.
Yeah that is true net interest income should rules results of the above <unk> plus additional again a franchise growth.
Sure I believe the current threefold, one anchor centric view baseline of which we can build and grow, especially we could make Jane I was struck a will ask the growth rates and 2020.
Well there are couple had another expense down there to be ready needs a detailed a bit later, but some high level remarks.
No overhead ratio sort of 153 for the quarter 157 for the year. If one were to eliminate the MSR valuation adjustments and acquisition related expenses would it be a bit below a 150% one what happens that goal as an organization.
If we were at all met the negative MSR valuations for the year were achieved approximately 7% earnings growth for the year.
I know the balance sheet, where assets grew.
$5.4 billion over the year $1.7 billion over September .
And maturing assets or 4 billion 41 billion 541 quarter and $4.8 billion, but here I'm all drop a billion dollars.
For the quarter in $3 billion for the year. So good loan growth across the board would have started here or there was a little bit of the had.
A little bit of a a head start with almost $800 million of average assets.
[noise] average assets being below quarter end asset so that's a good thing.
So the won't let of loans held for sales were 1.1 billion or 16, 20% for the quarter at approximately 3 billion of 12.5 or set for the year fourth quarter cooler approximately $582 million on acquired loans.
Lets say loans commercial and residential grew 707 million and total pre made absolute premium finance loans.
A life and P. achievement $271 a million dollars the commercial loans increased by $90 million.
I like pipelines would continue to remain strong across the board.
We expect to continue growing loans in high single digits. There's.
Consistent with prior periods.
Deposit from is another great deposit growth quarter for all 4.4 billion. That's after returning 200 million though.
Acquisition is kind of approximately half of the schedule to deposit.
Core deposits non brokered comprise 97% of total deposits.
We are the best poor financial Corp. friendship core franchise in those in our market.
Ah continued good growth at the heart of our plans for 2020 beyond the pros partners mention credit metrics restart return to historical norms.
Performing alone stayed constant and totaled <unk>, 0.44% outstanding which as long as they've been a read some kind of the past seemed to be set for nonperforming assets severance people would say said earlier, which decreased 2.36% of assets.
They're charge offs were 12.7 million, including 5.3 million the charges to the previously reserved for despite our second quarter blip.
Net charge offs for the your total just around 20 basis points, a good number in anyone's measure and more and I really do what you would expect from us of wood.
We continue to work coal the portfolio for problem assets.
Hi leverage deals are not welcome here anymore, and we are moving them out as we can.
But we want to find them before they become problems moving about and move them out an expeditious basis.
The turnover, Dave will provide some additional details of our.
Then come back scratched. He will also give you details on the long awaited Cecil.
Well the convoluted I called the time to loaded.
I'll tell you when when it comes out that go ahead.
All right. Thanks Evan.
As normal I'll briefly touch on the other noninterest income and non interest expense reductions as well as the cost a little bit Cecil a standard that had referred to.
On the non interest income section, our wealth management revenue increased $1 million to record $25 million on the fourth quarter.
Compared to $24 million on the third quarter, this year and up 10% from the $22.7 million recorded in the year ago quarter.
Overall, we believe the fourth quarter of 2019 was another solid quarter for wealth management segment benefiting from good customer growth on a strong equity market.
Mortgage banking revenue declined by 6% or $3 million to $47.9 million in the fourth quarter from $50.9 million recorded in the prior quarter well, it's up a strong 98% from the $24.2 million recorded in the fourth quarter of last year.
The decrease in this category as revenue from the prior quarter resulted primarily from seasonally lower levels of loans originated and sold during the quarter.
From.
From <unk> basically lower purchased at home activity offset somewhat by an MSR adjustment during the fourth quarter, which was positive versus a negative fair value adjustment recognized on MSR is in the prior quarter.
The company originated approximately $1.2 billion of mortgage loans for sale in the fourth quarter. This compares to $1.4 billion of originations in the third quarter of this year and $928 million in the fourth quarter of last year.
The mix along volumes originated for sale was related that was related to refinance activity was approximately 60% compared to 52% in prior quarter. So the reason finance volume increased during the quarter and acted to mitigate the seasonally lower purchase home activity.
A table 16 of our earnings release provides a detailed composition.
Elation of other components of origination volumes by delivery channel.
And also the mortgage banking revenue, including production revenue MSR Capitalizations, MSR fair value gains and servicing income.
We currently expect originations on them first quarter of 2020 to be stronger than the first quarter of 2019, given the continuation of the refinance activity.
But the originations are expected to be less than the fourth quarter. So somewhere between first quarter last a year in fourth quarter Blasters, where we currently expect though binds to be.
Other noninterest income totaled 14 million in the fourth quarter down approximately three and a half million from the 17.6 million recorded in the third quarter. This year.
The primary reasons for the lower revenue in this category includes 2.6 million dollar so lower swap fee revenue.
And $2.6 million less of income from investments in partnerships. These investment in partnerships are primarily related to yes, b. I see investments to support our sea Ray goals. This category revenue generally fluctuate as a result in the two revenue sources I just talked about and has averaged about 14.6 million.
And over the past five quarters, so despite falling from a very good third quarter level and the current quarter is roughly on average with the last five quarters.
Turning to non interest expense categories.
Noninterest expenses totaled $249.6 million in the fourth quarter up approximately $15 million or 6% from the prior quarter.
A number of factors contributed to the increase.
The first severance payments professional fees and data processing conversion charges related to the recent acquisitions totaled approximately $2.4 million during the fourth quarter compared to $1.3 million in the third quarter.
Approximately $2.8 million.
Other normal operating expenses related to the FTC and countryside bank acquisitions were incurred during the quarter and we would expect that this amount would reduced overtime as we continue to integrate these acquisitions into our infrastructure.
Costs associated with terminating too small pension plans that we inherited with prior acquisitions totaled $487000 and that should be the end of any costs associated with pension plans as we no longer have any.
There was a 750000 dollar increase and legal settlement charges.
In the fourth quarter compared to the third quarter as management deemed it more cost effective to settle certain litigation matters, then to enter into potentially linked the court proceedings.
$1.7 million of additional expense was accrued as additional contingent purchase price payments related to prior mortgage operation acquisitions.
We we have contingent consideration on our mortgage acquisitions, and we have to make our best guess upfront and the mortgage.
Market as better you may have to recorded additional expense of income was worse could come in as income.
Given that stronger mortgage market we recorded.
An accrual for $1.7 million for what we think would be additional contingent purchase price payments on those mortgage operations.
And we also had $1.1 million over the last rebates on FDIC insurance assessments this quarter compared to the prior quarter.
I will talk more significant Kim the more significant categories now or the salaries employee benefit category increased approximately $4.9 million on the fourth quarter from the third quarter. This year salary expenses accounted for almost all the increase was approximately $4.8 million resolving was up about.
Approximately $4.8 million, resulting from approximately $1.4 million, so staffing costs related.
The FCC capital Bank and countryside Bank acquisitions completed during the fourth quarter, plus an additional $1.4 million the severance accruals.
And then also normal growth as a company accounted for the the growth in that category.
Additionally, employee benefits expense was approximately $159000 higher in the current quarter than the prior quarter.
This was really all due to the $487000 costs associated with terminating the to pension plans.
[noise] equipment expense totaled $14.5 million in the fourth quarter, an increase of $1.2 million as compared to the third quarter. The increasing the current quarter relates primarily to expenses associated with two acquisitions closed during the quarter and to increase software depreciation and licensing as we continue invest in information technology.
The information security and the newly implemented Bank secrecy Act suffer which was which enhances our ability to monitor for B S say related activities as we continue to grow.
Occupancy expense totaled $17.1 million on the fourth quarter, increasing $2.1 million from the prior quarter. The increase was due to the costs associated with new locations of the acquired institutions.
New branch locations and increased real estate tax assessments.
No data processing expense increased approximately $1 million from the fourth quarter compared to the prior quarter due primarily to approximately $558000 of conversion charges related to the FCC capital banking system conversion and additional operating cost of data processing related to the two acquisitions or that we close.
During the quarter and just general growth.
Franchise during the quarter.
FDIC insurance expense was up $1.2 million on the fourth quarter compared to the prior quarter.
As you know the FDIC insurance assessment regulations provided that after the reserve ratio reached 1.38%. The FDIC would automatically apply small bank credits to reduce small bags regulatory irregular deposit insurance assessments up to the full amount of their assessments or to the full amount of their credits whichever as well.
Yes.
The reserve ratio reached 1.4 O on June Thirtyth than stayed above the required threshold on September thirtyth and some feature of our subsidiary banks are less than $10 billion on assets each of them qualified for the credits there for Wintrust banks received credits of approximately $2.8 million from the fourth quarter, which was approximately 1.1 million.
Dollars plus $3.9 million of credits received in the prior quarter.
So.
Accounts were basically all of the quarterly increase in the expense.
I believe we have about $200000 of additional assessment credits that could be applied in the future. We expect those to come in the first quarter generally right at the reserve ratio remains above their required threshold.
The miscellaneous expense category totaled $26.7 million on the fourth quarter compared to $21.1 million in the third quarter, an increase of approximately $5.6 million.
Increase was impacted by the aforementioned legal settlement charge and $1.7 million of expense accrued adds a contingent purchase price payments on the mortgage acquisitions that are discussed in this category is also.
Negatively impacted by approximately $1.4 million of temporarily increased telecommunication charges as we're converting and upgrading our system wide telecommunication infrastructure and data network infrastructure. So as we get off of one provider and go to another provider and invested in that system Weve.
Kind of got the overlap on on the two providers as we are converting.
Other than the expenses categories, just discuss all the other expense categories were down on an aggregate basis by just over a million dollars from the third quarter of 29 team.
The net overhead ratio for the fourth quarter stood at 1.53% without the acquisition related and other uncommon charges mentioned at the beginning in my comments. The net overhead ratio would have been below 1.5% and we expect it to be below 1.5 per cent for the year at 2020.
And before I turn it back over to add I'll briefly comment on the implementation of Cecil our estimated increase from the allowance for credit losses as a result of the implementation, let's see so then the 30% to 50% range. This range reflects the uncertainty of economic forecasts of used to record the transition a mile.
Approximately 80% of the estimated increases related to additions to the existing reserves for unfunded lending commitments through the consideration under Cecil of expected utilization by the company's borrowers over the life of those commitments as well as for acquired loans, which previously considered credit discounts.
We expect relatively modest increases in reserves on the remaining legacy book.
That's a future provisioning that we'll continue to be impacted by charge offs loan growth the mix of loan growth the macroeconomic environment and many other factors if the macroeconomic environment stays stable with our current assumptions and if we have loan growth similar to prior quarters on charge offs remain low and I expect our quarterly provision for credit losses to be in that.
$10 million to $15 million range, but I caution that Cecil accounting sand or may cause significant volatility in the future and that estimate maybe higher law.
My thoughts or that investors should focus on trends in nonperforming loans, the net charge offs rather than provision expense.
Under Cecil the provision expense will be sensitive to economic forecast that may or may not ultimately have a significant impact on the performance of the company's loan portfolio.
So as you may imagine I'm not a big fan of the new Cecil accounting standard as a cost benefit aspect of it in my opinion is way out of whack and I believe it will create a fair amount of volatility going forward, but we've got a great team Thats worked hard on implementing the new accounting standard and we are ready to go.
So with that I will conclude my comments on throw back over there.
Thanks for the convoluted comments there is.
Welcome, Matt will hear them, you're always going to be in kind of alluded and shifting.
Thoughts about the future.
Although the rate environment provides a plethora of challenges we believe we'll be able to navigate to the storms we have in the past.
Overall organic growth and access to <unk>.
Acquisitive growth a will be important is we need to grow this period of oh challenging rate environment.
Decreasing our cost of funds is obviously a priority and we're all over non pipelines remain strong interest thinking about that we've been able to hold rates and our commercial payer finance business and our leasing business, so featured holes and well and playing out with our liquidity management assets into a longer term, but earning assets is up.
So what we're doing as I mentioned, taking our duration from four to six years will be helpful. There.
We have your expectation of a continued strong mortgage market.
We will be maintained a positive gap.
It was to knock in we don't I actually wanted to lock in a this threenineteen. The 320 margin we want to build off of that but we're going to manage that downside risk little bit more actively than we have in the past.
Credit the always a big question looks pretty good right now, but you never know.
We will never kicked the can down the road comes a credit.
So again continued good core franchise growth will be the key.
We will close the SPC transaction and the countryside transaction in the fourth quarter. Together. These deals led added close to 800 million total assets.
Significant cost outs will happen, but they're going to take few quarters, who achieved a we have converted STC and we're starting to.
We closed three branches there over a period of time, possibly for that should start happening in the first and second quarter will be converting countryside in the second quarter there'll be some expenses associated with that conversion, but then we can start really taking costs out of that too.
So we should have elevated costs from them in the first two quarters, but that should be decreasing.
We're not at a loss for future acquisition opportunities as the pipeline remains relatively full.
You may I'd like to advice with maybe some larger transactions and I'll give historically been involved with them are now more of a possibility. So we get bigger I think we can look at bigger deals and I think the pricing on the bigger deals may make more sense, we're seeing smaller deals being priced relatively high right now I know its credit.
And is being involved but we we've.
Walked away from two or three in the past three weeks or.
Quarter as result of pricing being going up by them.
Or there could just be two drugs holding each other up I don't know, what's going on but we'll find out on the long term.
And and God willing we look forward to reported record results in 2020, Joe as you can mature to our best efforts in that regard now we can open for questions.
Ladies and gentlemen to ask a question you wanting to press Star then one on your telephone keypad to withdraw your question press the pound tea.
Please standby all we compile the Q and a roster.
Our first question comes for lineup, Jon Arfstrom with RBC capital markets. Your line is now open.
Thanks, Good morning.
No what are.
Good how do you had some tongue twister is in the script. So we're going to get you off script, no [laughter], but the mark the Martin your favorite topic.
Percentage margin I guess I was surprised to see the billion one on loan growth and noninterest income down a bit.
And I'm just curious if anything surprised you guys in that percentage margin print and can you talk a little bit more about your confidence and seeing that margins stabilize at the Threenineteen 320 number because.
Things look good except for the fact that you know just the non interest income number didn't grow during the quarter.
Yeah, I got I understand that but knowing about 700 million carry over into this quarter. So on average basis, we weren't up that much.
So that's some of the of the issue there.
So you'll see that I think the.
We're confident we can grow net interest income next year.
If we could you know steady growth rate.
Has to deposits I think.
On LIBOR down 10, or 12 baby 13 basis points raise this quarter, but weve, they're slow reacted with cutting.
Expenses so.
Our interest expense. So we can bring that down by the same level, knowing that our premium finance loans on the commercial side and our billion three leasing portfolio continues to maintain rates.
And putting liquidity to work we hope to the this is a base we could work often that's sort of number show us like to see gradual improvement.
Keeps going down you at all I mean, it's hard to catch up will eventually we will but right now to fears of it just stays right, where it is or drops 10, or 12 basis points a quarter weekend, we can handle that and uses it relatively speaking as our benchmark to go forward days you got to comment yes, no I just the keys Guy I think going to be the 30 day LIBOR rate.
And one of the that stabilizes or not.
And and and and the Feds rate it said that they hold stable opposed to hold stable. Then I think we can hold and we got a good baseline the growth will create growth and net interest income.
So, let's let's hope to yield curve Steepens, I'm 30 day, LIBOR or it anchors out here.
Okay, Alright, and then the other obviously big bigger line item you talked about was mortgage and you had a good mortgage quarter in this kind of two X, which you did a year ago or it sounds like you're still reasonably optimistic even like we all expect Q1 to be down a bit can but talk a little bit about what's your thinking about Q1.
And then your ability you know you've talked about the efficiency efforts in mortgage and your ability to get cost down.
If we do see the seasonal slowdown and also some float on the refund.
Yeah, well I mean.
Instead of my comments, the I think the mortgage production right now based.
On what we're seeing them you know you don't have full full visibility for the quarter because the loans close you know sort of in that 30 to 40 day period. So I'm not sure. What the ended the quarter is going to look like and where rates will go on the next few weeks, but.
Based upon the application pipelines, we haven't I am not forecasts, but that we have.
We think the production will be somewhere between what we did in the.
First quarter of last year, and what we what we did.
In the fourth quarter, So first quarter last year, we did 772.
$772 million or I'm, sorry, $678 million worth production and we did $1.2 billion. This core my guess is that somewhere in that 900 million plus or minus range, but but that's our best estimate right now as it could change of if the rates fall in that refinance activity.
Next up even even more but my guess is at somewhere in that range, Okay, and then deficiency piece of it.
Yeah, well, we continue to work on that we have as we've talked before we have offshore and some of the activities.
That are non customer facing that are more unit priced.
And so weve turned that more into the variable versus fixed rate and we continue investing the technology. So I look at this is just an evolving.
Improvement in the expense line items as we continue to get better there's not going to be one big quarter, where expenses drop, we're just getting better and better and better each quarter. So we should see some continued improvement there.
Okay.
And then just one more and I'll step back just just the comment about the bigger deals had.
What do you mean, but do you mean, you consider an M or we do you mean, just bigger than these 7 billion dollar transaction do you start you've you've historically done what just what do you mean, but those comments. Thanks.
Well.
I would just movies that we have catch rate of banks under $1 billion and well continue to look at that but looking at banks over $1 billion.
Makes some sense horse also right now given many of them or haven't.
On the same issues, we are on the I'm always standpoint, you know there's lots of opportunity, but we don't have generally comment on heading.
In particular going on there discussions are going on are not going on but you can.
You can imagine that.
In the year like this everybody kind of going through this big through the same.
Sort of margin compression issues that.
I'll, let some things might make some sense, but things we never looked at before I've, just I'd, just say on that but who knows.
Okay. Thanks.
Yeah.
Our next question comes from carry back away with Stephens. Your line is now open.
Hi.
Thanks for taking my questions I'm, sorry for the question on the expenses.
Dave you ran through a lot of the fourth quarter puts and takes to the expenses could you just provide some thoughts on the first quarter.
Well some of those expenses are kinda disappear and but you also have some seasonality that typically shows up in the first quarter as well.
Yeah, well you know the FDIC credits of 2.8 million are going to go down to 200000, so they'll begin to there'll be a little headwind on that and certainly the legal settlements of you know roughly a million dollars. This quarter. We don't expect that happen again pension termination of half annoying, we don't expect to happen again the content.
A consideration on the mortgage purchase price estimate.
We think we've accrued that up so.
So we wouldn't expect that that happened again.
Acquisition related charges of $2.4 million.
Now as Ed said, the we don't expect much in the first quarter, but we will convert the countryside deal in the second quarter. So we'll have some additional.
Charges, then when the when that happens split but that should be mostly in the second quarter.
And so I mean, those were the big items that I don't think should recur going forward.
They also note that on the on the noninterest income side, you know there was a.
$2.6 million swing between third quarter and fourth quarter on swap fees that fluctuates quarter to quarter, we had over abnormally good third quarter and dropped a little bit in the fourth quarter, given the rate environment and the like but at that very well could get better and then the partnership investments generally though.
There are positive we had a couple of these SP I see investment firms that wrote off some.
Investments inside of their funds during the fourth quarter, which negatively impacted us I I don't expect that to happen again, but if that was a $2.6 million swings. So there was between those two line items, there was $5.2 million swing.
With that that we don't expect to happen again sort of in the non interest income side of equation, but those are volatile and we just have to see what the market value of those funds do and what the customer appetites are for.
Sure the capital markets swap.
Issues, but those those are those are the large items that I think you you could.
Sort of adjust for going forward.
I I do think been that [laughter] commissions expense if were less.
In mortgage originations as I spoke about in the first quarter, a little bit the commission expense line item will come down so that should help on the on the salary side too.
Thanks, and then Ed just a follow up on the M&A question. It at 1.35 times tangible book is is M&A really an option at all given called the currency being small banks are larger banks.
It's all relative.
[laughter].
Yeah, I just had to look at what the prices on their side and and as some of these small deals or even larger deals. If you can get enough cost dropped out of them then [laughter].
If you look at the relative price and cost savings you can make some of them potentially make sense. Yeah. You know were pretty good stewards of tangible book value. We don't we don't give away the house.
And I expect tenure earn back or something.
Hopefully it'll be at 135, a tangible book when you guys do your job out there.
Just kidding.
But do you think it six bucks I mean, six Bucks is a run rate per share. The average 12 or we should be trade at 75 Bucks I mean, we get this quarterly knee jerk reaction that.
The everybody thinks the world's coming due and nobody likes banks reality worms, but.
We take the market's pretty heavily this rate environment. I think we can you can hold pretty steady in and continue to grow as I said earlier I think I think our franchise.
Value has never been higher and is right now when you look at.
The 97% core deposits in our great customer base our growth in some we feel pretty good about that aspect of it.
So yeah, you never know but.
No one else.
Done work is done work, but everybody else is in the same both in terms of book value.
Book value numbers and earnings numbers were only really an hour.
Yes.
Slide 11 wouldn't have turns off the market.
Actually made up of lots of cost cuts to so <unk>.
You know, we can do acquisitions, when you're doing well, we're not going to writing stupid. So.
Not to worry go to work, but to saying that he adds are they looking at larger deals might make more sense in some of the smaller deals.
For the reasons I discussed earlier.
Thanks for your thoughts.
Our next question comes from Chris Mcgratty with KBW. Your line is now open.
Great. Thanks.
You've talked about the six dollar number a couple times in the call today I'm trying to get a sense as you know $6. In 2019 is your expectation that you'll do better than that in 2020 barring any changes by the fed is that is that the message you're trying to sound.
Yeah, I think it's a base we're going to build off if we I think you know we can continue to grow at the rate we've been growing up.
Drew four and a half billion dollars organically in a billion dollars through acquisition last year. You know, we've just grow on a $3 billion would be a good number for us and hopefully we can beat that.
I heard the earnings on that if we can hold our margins steady and keep the keep the cost down that has a commensurate increase in.
<unk> expenses, which we fully expect to happen, we'll get our net overhead ratio in the one fortys consistently.
Nick will be okay.
Okay, and then maybe I missed it you talked about your margin.
What was the comment that the rate of compression will will abate from this quarter or that Threenineteen will hold you know kind of from here.
Well I both [laughter], we've you know.
It just depends on where a lot of LIBOR continues the tank you know its it'll be hard to hold that but I think that rate a compression should slow down either does go down.
More than we expect but they'll tend to 13 basis points, but she was there a whole back just through the I threw a extending our maturities out our.
Liquidity management portfolio and continuing to cut.
Our cost of funds.
But any like a quarter sudden drop and 35 basis point sudden drop would have a negative effect on us, but as it but as it stands today with LIBOR down what 10 basis points to quarter, you think you'll be in that ballpark of 319 for the first quarter. If everything stayed the same.
Yes, Sir and build off of that going.
Okay.
Maybe the second question, we've seen a lot of banks given the revenue pressures it kind of go to the expense well.
As you guys have a growth aspect to the story, but what are the thoughts of really you know ratcheting up the efforts to cut costs, while the revenue pressures are there.
Well, we do that all the time anyway.
The efficiencies of we look for those all the time.
We have a whole process here, we go through in terms of looking at process efficiencies and number those are in the works right now we continue to go through that and and work through it but.
We also have to make investments in ice tea and technology that we're doing that its people. So.
We look at it all the time I don't I don't know exactly.
What we could do to really.
Do a drastic up expenses.
Right now and continue to grow the organization, we have take what the market gives us a markets given its good organic growth right now good momentum in our markets good growth in our markets.
I went back and continue to grow the franchise and keeping that overhead ratio what in the one fortys them because margins will come around eventually I mean, it will steady and solidify at some point kick it off river maybe to go up someday, but you know I've given up on interest and interest rates I, Yeah, I don't think I've ever seen a period of time, where.
Yeah, a full employment.
In March and two and a half 3% GDP growth and absolutely no inflationary pressures, it's how can I just.
Maybe you could explain to me someday, Chris but.
But I do know that I do not want to I do want to maintain a positive gap.
Andrew I want to stay interest rate sensitive.
Oh, maybe not as much as we were we've been could woodland that back a little but because.
I don't want to lock in a 320 margin for the next five years it doesn't make sense to me.
So.
Good day.
Dave you guys have everything.
Thanks.
Yes.
Our next question comes from Brock Vandervliet, but yes. Your line is now open.
Great. Thanks for taking my question so.
As I look at your loan growth.
The past acquisitions have always play played a part of that and you look at kind of organic loan growth in 2020, what.
What does that look like you know that mid mid single digits higher than that.
I believe that the mid single digit be a good number.
No seven, let's say, 6% to 9% somewhere in that number.
Right around there you sort of mid to high single digits was sort of the phrase I wouldn't use which would be 6% to 9% [laughter].
Okay and separately on expenses I, I know everyone's kind of taking shots at this at this question.
It is a and we're still going through the adjustments, but is a is a low two fortys per quarter base a reasonable for for expenses.
Yeah.
How should we think about that.
Right you know, there's so many variables out there depending on the mortgage.
Market and the like I I think what we've tried to do bracket in the past so sort of focus on the net overhead ratio. So you can take the non interest income components and on non interest expense components that are related to those.
So you know.
Our goal in 2019 was one just you know sort of 155 ish range for the full year.
In our <unk> as Ed mentioned previously we expect to get that down into the 140. So I would certainly shouldn't who will be below 150 based on what we're looking at now so we're going to get expense leverage out of the system as we grow and and that's how we look at it it's probably a little higher them off the one boy.
Warranties, if you take out some of the the the the expenses we have this time, but add back in the FDIC credits.
You know, it's higher but but you're gonna come down on commissions in the first quarter. So you don't maybe you're getting the low one or two fortys art and a two fortys, but it really sort of depends on the mortgage market and what that that does and so it's hard to i. I hesitate to give a number because it fluctuate based upon what we're doing.
On the revenue section on Somebody's Commission based businesses that we have so I would focus more on are you coming in with net overhead ratio was for the year of less than 150 in the one fortys.
Gotcha and appreciate the guide on provisioning going forward 10 to 15, a quarter, how does that push Cecil Guide square with the 7.7 0.8 call It 8 million and in Q4.
Okay Q4, we do you have to remember we up we had a a charge off that took a way of specific reserve of 5 million dollar. So that was a big part of the drop as we just didn't have that reserve for that that one that one long so I got it okay.
Now going forward.
We think as Dave said are looking at.
I mean, she's going to be all over the board on the since.
If the guy at Moody's has a bad day or hang over or is that more jacked up he could pick the banking business down.
Because everybody Susan basically Moody's a baseline is there is there a basis for the so.
He got to concentrate on net charge offs and changes in specific reserves. That's what we're doing here at our reevaluate people because I mean, it seemed to go up and go down or based on their web so.
Got it thank you.
Our next question comes from David Cameron Me with Wedbush Securities. Your line is now open.
Hi, Thanks, I wanted to follow up on the NIM discussion you mentioned about how you may be able to defend the net interest margin at the threenineteen level by extending the duration from four years to six years I was curious how much in yield pickup do you expect out with extending the duration.
Well I think you just have to look what it whatever the overnight rate is and compare that to what a ginnie and Fannie were a rate in south out on the marketplace. So do you need some danny's or in the mid twos right now and in all the overnight rates or.
No one.
Well.
You know you know mid ones, so maybe pick up a 100 or so basis points or if you gave some agencies you can get closer to 3%. If you have callable agencies. So you do some mix there, but certainly you pick up over 100 basis points, but wasn't just that and said that plus the lowering of the positive cost is what the fans.
Margin.
Great. Thanks for that and down and you plan on extending that for the entire portfolio like roughly 6 billion.
On the securities.
[noise] plug into the liquidity management includes the overnight funds.
Yeah.
Yeah, you have to you have to look if you look in our balance sheet. We've got interest bearing deposits with banks of 2 million. The 3.1 billion of the 3.1 billion of available for sales in the 1.1 billion of held to maturity I mean, that's already investment. So we've got to you got a little over 2 billion.
Followers of overnight money that's available.
To be invested plus whatever you could get out of growth over the balance sheet on the deposit side.
Got whole industry environment, we've got about little over 1% after tax, but any spread we picked up I mean, that's where we're looking to have.
Well I would hesitate a little in the past but.
1% after tax would be good being by 125 130 pre tax would be but my goal is anyhow, that's a goal.
Yeah, and that's why you haven't seen us a put a ton of money into it yet because the long end just hasn't a provider of that type of return and we're hesitant to.
Put 2 billion to work at though and spreads less than that all at once and I've always said the day. We do that is today that the long end all shoot to the middle and so we'll lay get leg into this thing you know unless the long and really pops up dramatically.
Okay. Thanks for that and then shifting to.
The loan growth and you mentioned about the mid to high single digit 6% to 9% I was curious just how are your bar, where your commercial borrowers feeling.
Now a days do they feel in your discussions with them.
I feel better about the economy with the trade deal the phase one trade deals getting done I'm, just curious as to what they're saying.
Oh, they're all feeling pretty good I mean, there's not a data goes by their reasonably privately owned middle market company does it get offered a hell of a lot of money the.
He is basically or she and I portfolio was was stagnant for the year that could mean, we booked over $1 billion with alone but had them much in payoffs and through some de risking the portfolio. We got rid of highly leveraged deals were getting out of that business.
But they're all feeling pretty good about what they're doing and.
They are all the they may not be running that the that 40 million dollar backlog, if they had but they're all doing they're all doing pretty well right now and they feel pretty good but they're all the money that's flying around out there right now from P. firms and thin fintech companies.
We're seeing a lot of pay down so we have to work really hard just to stay steady of that business. Fortunately if the fintech takes it over we do maintain the deposit accounts. So that's a good thing so that they are the fintech takes over the wall. So we've got to be careful though because I got a company that got their legs up against the wall in terms of leverage.
So.
Yes, it's a tough market from a lender standpoint for the borrower standpoint, they're all feeling pretty good I would say.
Great. Thanks very much.
Our next question comes from Michael Young with Suntrust. Your line is now open.
Hey, Thanks for the question I wanted to follow up on the share buyback or that you announced and just kind of get your thoughts on how you were looking to deploy that I'm, obviously, a lot of discussion of M&A as well, but you know just kind of how you're comparing and contrasting buying back your own stock versus.
Looking at acquisitions.
Well, we have we havent bought any stock back today or we have the tool available to us and we just we really compare and contrast, the the deal flow and what sort of returns. We think we can get off of those versus the buyback.
Big fans of the dilute as it's a diluting tangible book value. So given the pipeline of deals were looking at you know we're going to see how some of those flow through and then we'll watch and on the stock price movement and compare compare them. So haven't done anything today, but Oh wow.
We'll continue to evaluate it versus acquisitions, but just compare the two and and and that and maybe that's why we're losing some of the deals out there as Ed said some of them are recently have had very high price expectations on the war very judicious in what we do we don't need to do.
To a 234 or $5 billion bank of the cost two months or just don't reason to overpay. We're looking at it for the long term value of the shareholder. So if those don't pan out than you would probably see us look a little harder at the at the stock buyback.
Okay.
The market.
Well, it's you know it's just a matter, it's just numbers as Dave said it.
The deals were looking at these are the capital and.
No it whereby where multiples are.
I said were.
66 Bucks a share between 11 times.
12, and a half times multiple situation. So we were always good stewards of capital will usually accordingly.
But becomes a time where buying it back is obviously better than.
By the bank. So it's all just comes out of the Graham Dod cattle basic finance book.
And just as a follow up Dave would the limiting capital ratio at this point get the total capital ratio. So we should watch.
Yes, Sir.
That's always been are limiting ratio.
Okay. Thank you.
I'm showing no further questions in queue at this time I'd like to turn the call back to Mr. winner for closing remarks.
Hi, Thanks, everybody for listening then have a great first quarter and look forward to pictures in catchers reporting.
Well good bye bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.