Q4 2019 Earnings Call
19 earnings conference call.
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No it and the conference over to your Speaker today, Mr., Tim Hicks Chief administrative officer. Please go ahead Sir.
Good morning, Champix, Chief administrative officer, and executive director of Investor Relations for Banco ZK.
Thank you for joining our call this morning and participating in our question and answer session in today's Q and a discussion we may make forward looking statements about our expectations estimates and outlook for the future. Please refer to our earnings release management comments and other public filings for more information on the various factors and risks.
That may cause actual results or outcomes.
The varied from those projected Dan or implied by such forward looking statements.
Joining me on the call to take your questions or George Gleason, Chairman, and CEO , and Greg Mckinley Chief Financial Officer.
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Our first question comes from lineup, Ken Zerbe with Morgan Stanley . Your line is now open.
Great. Thanks, good morning.
I guess, maybe we can start off in terms of that substandard credit that was formerly watch list you just have a size the potential losses on dot and also the timing of any potential resolution around that thanks.
Good question, Ken. Thank you you know, we do not have any.
Thoughts on what I lost my they obviously the alone is still.
Performing as an accruing loans.
The fact that its are performing accruing loans as a result of our analysis, but.
You know projects, our future Oh gosh flows interest French ball refinements in so Paulo home alone and Oh Wow the margins are very thin.
We currently project that there will be enough cash flow from the project to repay all of the principal on all of the interest on our alone and of course, we're projecting interest into the future all might use in a forward yield curve as a as a proxy for what interest rates will bring in the future.
So based on buy out there is no present lost in it now if you look at the appraised value and our bubble chart.
And our management comments, it is more than 100% loan to value, but obviously the appraisal uses a higher discount right then the effective right on our loan. So if you use the effect of right on our loan on a forward yoker. There is no present loss exposure.
What would calls there to be loss exposure and would cost us credit to move from substandard growing to a non accrual status.
I would be I.
Change in sales process projected sales velocity interest rates that in some combination of those calls but forward a projection of net present value to become negative instead of a positive differential.
Over the long Myles. So you know, it's it's certainly sensors no PRASM evidence that the loan is empire.
It's premature to talk about what they got lost they.
The timing for resolution your other question.
No I think this loan will be with us quite a while.
They are sponsors are working the project very effectively and.
Wow their fourth quarter sales and signing of sales contracts were a little bit below.
What we would hope for which caused the or contributed to the downgrade.
The Oh.
Reality is there still selling townhomes and selling lots there still starting new town homes and.
Oh working toward development of a an additional small size of lots.
So I think the expectation we have as can be a long term Dale and.
They're going to continue to work at hopefully successfully.
And hopefully their sales process and sells velocities will.
Hey, stable to improving and that will lead the they.
Profile of this credit.
To improve a if their sales velocity and sells prices decline that late they like the profile of this credit to decline. So that's about all I can say better.
Not yet, but I guess I guess in the release you talked about you know sort of the reason why it was downgrade. It was because projects are being delayed or canceled, which I guess I kind of think about as being synonymous with sort of deterioration that sort of the cash flow outlook. I mean is at the right way of interpreting it that that there was a deterioration in this credit which led to to be down.
Great or.
It was a downgrade for some other region.
Now you're exactly right. We had several are they had the sponsor had several contracts fall out Oh some of those for for a lot some poor townhomes and and they were either fell out or delayed.
And closing and that.
Resulted in several million dollars less and sales and Q4 of them we.
Had previously expected and we mentioned in our management comments that the Oh sales volume of lots under contract that you know would have near term closings was was very low I think there was one it they ended the year and I think I've signed up one cents. They ended the year on the lot.
Outside of town home sales or or.
Better than lot sales.
So that having a few contract fall out in Q4 lowered the a receipt of cash supplier.
And.
Pushed out the timeframe for the.
Development sales and and.
The margins got then or.
The margin for error got 10, or as a result of that elongation of Oh, the sell out Oh expectations. So you're exactly right. It's a cash flow issue.
Got it Okay, and then maybe switching gears just a little bit in terms of a the our SG portfolio. So I noticed that you did say the both payoffs and origination should be little bit higher in 2020.
It seems that net net you should still have positive growth in our U.S.T., but just kind of wanted to get a sense like is it possible that these balances could be either relatively flat or even down for the on the on sort of on a on a point to point basis in 2020 given payoffs.
Hey, Ken This is Tim I think I'll point, you to figure eight and our Oh management comments, which is on page nine.
There we show the trends of of our originations by year end, the and the trends of the.
Remaining loans outstanding by year. So you can see in 2016 originations, we had $8 billion.
Of loans originated 2016 2.8 billion are still outstanding and then you can see in 2017, we had $9.1 billion originations.
Where at the end of year, we had 6.06 billion of a of those balances are remaining a those you know as we've talked about before our construction loans typically averaged about three years and in life somewhere two to four years is this band typically with averages around around three years.
If you look at our 2017 origination volume.
Most of those loans or come.
We'll come to completion, a this year and as we've seen in many of our our yes. She loans is once the project is complete we get paid off pretty soon after completion. So it's just a cycle of Ah Ah.
Of origination volume that we had for three years ago coming through but that the ER total funded balance will move up we may have a quarter or two throughout the year, where it's it's like it was in in Q4, which one it was down in Q4 in there.
It will be quarter, where it is but you know I think are good origination volume that we saw in 2018 and are expected.
Good origination volume that we're expecting and 2020 should should help alleviate some of those pay offs that are coming from our.
Previous origination years.
Got it okay, alright, thank you very much.
Our next question comes from Stephen Scouten with Piper Sandler Your line is now open.
Good morning, everyone.
Morning stable right.
So appreciate obviously all the detail you guys given figure eight it's kind of where I wanted to focus as well, it's kind of I'm thinking about the forward growth and I get why pay downs would be higher with the 16 and 17 originations, but it seems like those pay downs would start to abate in the back half a 2020 as we move further through that.
Pipeline is that at all possible when do you think theres.
Some likely that you could see growth in our yes, you pick up in the back half, a 2020 or 2021 or or is that just too early to say.
Hi, Stephen I would I would add a little additional color and again I think Tim I took a the last question to the right figure, which was figure right. You know the majority of probably the remaining originations from 26 time, a large percentage of that will pay off I I bet.
Chonko, although we wouldn't expect near all of the 2017 originations to payoff and 2020, and then we'll level a little bit of the 18 originations that are paid off one of those loans is already bite off so.
You know, you'll say <unk> Ah you Ah you will see a high level of payoffs.
We expect.
In 2020, and those results will be fairly variable from quarter to quarter. If you look at the first quarter of this year I. Thank our U.S.G. at net funded growth of about.
If I'm right 442 million.
But it shrunk in Q2 228 million it had been a growth in Q3 of 256 million, but shrunk in Q4, roughly 157 million. So we had.
Two quarters of.
ER positive growth two quarters of negative growth for the year, our yesterday's funded balances grew about 314.
In dollars.
You know, it's a kind of go back on Kens question. It it is Ah.
You could you could paint a scenario, where we would have negative ariyoshi growth for the year, We don't think that's.
Necessarily.
The likely scenario you could also pine scenarios, where we had a better growth in our industry and 2020 than we did and 29 chain but.
You know I think the.
Kinda center line of that grow because probably somewhere plus or minus not terribly bar from what were you saw in a 29 team because again, we're gonna have a big wife payoffs and.
We should have better originations and 2020, but we're also expecting bigger payoff. So it's it probably pretty much offsetting.
Okay very helpful color and then on on the NIM commentary I guess from page 15, I was a little bit surprised.
To see that it sounds like even in a unchanged rate environment that you'd see.
Additional downside to the NIM, just maybe not the same magnitude. So can you help me with that and are you guys given any kind of numerical guidance around what you think the magnitude of the incremental compression could be even in a flat rate environment.
You want to take that Hey, Steven we gave you some comments around or Ah Ah expected increase in deposit cost.
You know on on our commentary you had referenced page 15 forces. Good good reference as well on page 17, we talked about a cost of interest bearing deposits you know it was down 12 basis points.
In Q4, which followed US six basis point decline in.
In Q3, we did indicate that we didn't think Q1 decline would be as great as the Q4 decline.
But we do expect it to decline in in Q1, so that the on the deposit funding side that will that will help no will continue to work on.
Our deposit mix and hopefully continue to improve our deposit costs as we go throughout the throughout the year.
On the loan side.
Obviously, if the fed or does it move rates in 2020 and live or stays fairly stable.
The impact that we'd be dealing with on the on the loan yield side would come from competitive factors and obviously, we're in a very competitive environment for loans right now so the competitive factors for loans and then a slight you know change in mix, obviously, our ariyoshi loan yields are higher than the average in our community banking in it.
Direct lending or loan yields or or or below the average. So yeah. I think that's what we're dealing with on the loan yield side, but yeah, mostly on from competitive factors from from that perspective.
Okay helpful. And then one last clarifier for me you know this sub standard obviously you gave good color at feels pretty well contained I'm wondering if you could give any insights into any new credit migration. If there is any like where do you guys list you know the moderate bucket maybe in your 10-Q can you give us any visibility into any early stage migrations that.
May or may not be occurring.
I'm not aware, Steve I'm, not aware of any other than our watch credit category went down by a comparable amount that our substandard category, where Oh. So you know that that will show a positive migration and what I mean, a decline in that balance I'm not sure of any any.
Major changes between or other categories moderate category or or any of our other categories.
Okay perfect very helpful. Thanks for the time Guy.
Our next question comes from the line of Daniel Mannix with Raymond James Your line is now open.
Yeah, Hey, guys good morning.
Good morning.
Let's take a little deeper into loan dynamics, specifically on originations I have you seen any change in the approval rate on your loan pipeline recently I think it's been about 5% in the past just just trying to get a better sense on whether or not now you're passing on more loans due to competition or maybe some other factors.
Yeah.
Daniel I don't we don't track that the same way we used to in regard to a flow coming down. So I can't really addressed that percentage number you know I would tell you we are as Tim alluded to earlier in a very competitive environment and that seems to be true.
For all types of loans or our yes, GE loans and direct loans community banking loans of various types. It's just a it's an environment out there where.
Volume as a.
Desired by a lot of lenders were saying a lot of lenders.
Got it very aggressive on credit and very aggressive on on right.
To get that volume as we have commented repeatedly and consistently.
Where non negotiable on our credit standards will give a certain degree on right, but not beyond a point.
So our giving somewhat on right has contributed to a declining loan yields or are not giving it all on credit not giving.
Beyond a certain point on right has contributed to our declining loan volume. We continue to believe that that this plan is definitely the right approach, we're not gonna waiver from that discipline.
And we think we'll get rewarded for Bob when.
Economic conditions reach a point, where guys who are being too aggressive get punished for it we think will be on a great position to ER.
Shine and and grow and amazing for white at that point in time [noise].
Got it thanks, George so in terms of loan demand.
You've guided to slightly stronger originations in 2020, but still off from peak levels from a few years ago can you tell us what's driving that is it.
Increased loan demand and major metro's or is this a case of gaining share the smaller pie if you will.
I would tell you that we're saying less origination volume and certain markets, where you've got a.
An adequate amount of supply in New York would be the poster child for that probably the New York market. There's just there's a need for less new product favorable calls her spend a lot of product belt and.
Tax and other issues there have been.
You know diminished the need for a lot of new product.
We continue to originate some new volume in New York, but our total commitments in New York at the end of the quarter. Just ended were the lowest that they've been since the Oh.
First quarter of 28 chain, so lowest in eight quarters and I would expect that.
Our our total commitments funded and unfunded to New York will continue to decline not because we wouldn't originate good new loans. They are we will but our payoffs player will exceed originations so in the in the.
Quarter. Just ended you know we originated loans and a lot of markets.
Boston.
Do you see area.
And they were.
[noise] markets, such as Dallas was I think our second largest volume of originations in the quarter just ended up Boston.
Was the largest Chicago was Bard San Francisco was for Atlanta was there.
You know you get down and you've got Sacramento, Phoenix, Savannah, Philadelphia, and the top 10 and.
Markets that we got a lot of volume man and the 16 17 timeframe Miami and New York.
You know farther farther down less so you've got to go to the markets, where the supply demand metrics, Mike slabs and their projects that are getting done that makes sense. So that is.
And in a lot of cases more.
Secondary markets or at least not sure you know your traditional kind of top five markets in some cases, so where we're finding the by a mock my complements to our loan type.
For the what I think is incredible work that they are dead and 2019 originating or you know $6.48 billion of loan originations and.
Our U.S.J.
Up a you know about a billion and a three quarters from the prior year and still holding very steadfast to our disciplined and pricing standards and to accomplish that they had to or they have to burn a lot of shoe leather and Michael lot of car.
Sales and a really study and explore and understand a lot of markets.
That Oh, we got some volume out of that was very helpful to us high quality good yielding volume. So it's I it started.
You know it's a good outcome when you look at the results that our teams achieved and the context of the competitive ER.
Environment in which we're operating in fact that some of the major markets where weve.
In recent years gotten a lot of volume just didn't have as as much new development that created new demand.
Great color. Thanks, George that's it for me gentlemen.
Thank you.
Our next question comes from Catherine Mealor with KBW. Your line is now open.
Thanks, Good morning.
Hi, good morning.
And if we could circle back to loan yields and can you provide us just generally where current loan yields are in the community banking segment and then the indirect.
R&D in marine assets, we can think about how that mix, even if we're in a flat rate environment, how just that mix change may impact loan yields this year.
Well you know in the community banking environment, we've got so many different verticals fire.
And community banking, so many different types of loans and specialty types of loans, we do those yields tend to be all over the board depending on that.
That that type of loan.
I would comment in the indirect area that you guys noted I'm sure that are our volume of growth in indirect.
Was was probably a lowest and they got quarter. Just ended that is probably band in a number of quarters.
And that reflects the fact that.
That market has gotten very competitive you know if you follow the.
During an RV manufacturers at all.
You'll get the impression that.
A lot of those manufacturers are shipping less product, because there's less product being sold at retail.
So the fact that there's a less consumer piper being originated on fewer marine and RV sales and there were a year ago.
His is resulting in less paper for lenders to the retail customers such as us and a host of competitors.
In some of our competitors got pretty a pretty aggressive on both credit and right.
And once again, we're having bayberry discipline on the credit to make sure we get what we want and we're having to give a little ground on right to stay in the game. So.
That is an area where competition has hurt.
Our margins.
I am and is it fair to assume that the indirect RV in marine growth will kind of remain around the level you saw this quarter and and it's so it's community bank. He mentioned enough to offset that so there's two pieces there kinda offsetting.
That's that's a really good question Catherine in it it's a number one we do expect a our community banking or units to.
They are a bit of strength to us in origination volumes hubs guys seem to be gaining traction and it's it's been slow.
Elevation of their production, but they seem to be continuing that trend.
The indirect marine and RV space is very competitive.
Now one thing that we're doing is you know we have in conjunction with Cecil.
Implementation, which of course occurred on January one and this year.
We have built out a a series of scorecards over the last couple of years for all of our different loan types.
And you know, where we used to have a dozen or fewer risk writings for loans, we now 72 risk ratings for loans and Oh all that.
It is being implemented in connection with Cecil so it it lets us a great and.
Refine our credit assessments of loans much more precisely them, we have with our our models and tools and past.
And then in addition to that we've been building up a large pools of data that we're using and those are loan risk ratings and grading assessments and we're beginning to use a lot of that enhanced data that we've built over the last couple of.
Beers and particularly the last year.
In two of our credit analysis.
In our indirect lending and I think that a as well as other other categories are blending but.
I think that a part of our.
Growth equation for indirect lending for 2020 will depend on how effective we are and utilizing our enhanced data and modeling and analytics capabilities in that area, which we we had a lot of died already and we used a lot of analytics player.
Previously, but we've refined and enhanced all bad.
And I, thank our ability to grow that unit.
Equal to or slightly more slightly less than.
Last year will depend on a combination of one competitive conditions and to our ability to use these a enhanced tools to be a little more surgical emperor slas and our pricing and a approval of credit.
So we're we're doing things.
That we think will help us continue to keep the volume up without sacrificing quality at all and without sacrificing our a yield on those loans.
Very much at all.
Great and you mentioned fees, if I could just add one more on fee. So is there any thought that you can give us and how you're thinking about what the potential impact impeded the provision. This year I appreciate it'll it'll be volatile and you mentioned that in your prepared remarks, but.
Anything that we should be thinking about remodeled the provision and it takes diesel wells.
Well of course, a sense your reserving for life of loans and and for commitments.
Which you previously not provided for and passed in the form commitments.
When you have large origination quarters, you'll have a disproportionately hit the income from Cecil So.
Well I'll be saying her right away a we originated lot of loans in this quarter and and well be crying or about the fact that it it harmed earnings because if you put up a big provision and then in quarters, where you have lower originations.
You know you will have the opposite impact so yes provision expenses will be up with say sole book college he'll be providing for unfunded commitments and to the extent those grow that were acquire more provision and you'll be providing for life of loan estimated losses.
Not just incurred losses as a existed in 2019 him before.
Great Great great. Thank you for all the color.
Our next question comes from line of Timur Braziler with Wells Fargo Securities. Your line is now open.
Hi, good morning, Thank you.
If we can circle back to the substandard loans can you provide an update on the outstanding balance and what the current reserve level is.
Yeah, Tim here. This is Tim I'm on the outstanding balance is the total commitment at 57 and a half million at year end I think is pretty close to that I mean with it within each quarter it goes up and down.
But its some quarter ends its been a 50 or 52, but throughout the quarter. It will go up and down in it it's fairly close to that 57, and a half million at year end with the migration from watch us status to substandard accrual status. It does have a five.
Or set a reserve associated with that which is greater than the 2.5% we had allocated to it under under the watch rating.
Okay. Thank you and then maybe just circling back to some of the Georges recent commentary and the indirect portfolio can you provide an example of what some of the competition is doing and being aggressive on the structuring of these credits.
You know I'm always reluctant to talk about our competitors, but again, we we've seen some competitors get.
Very aggressive on price, which is forced us to adjust our pricing to a degree.
And we've seen some competitors get a you know very aggressive on on credit, which we've not responded to it at all.
And.
You know typically a and and business your your credit which is really driven by your credit.
Your your borrower combined with how much you're you're willing to.
To a loan against that and.
I think in recent quarters our average.
The weighted average loan has been somewhere from about 99, 204% of dealer wholesale invoice price, which means our customers our borrowers the consumers have a a fair amount of a down payment either from cash or try to.
In or some combination of those and the transaction that provides us.
Some protection and assurance of their commitment to the a tip credit.
We've seen.
Some of our competitors being much more aggressive in that regard and allowing a lot of back in and solve costs to be financed and and the and alone. So you know there their widen differences and how you approach credit.
Quality in that space and and we've always been on the very conservative or end of the spectrum buyer.
Okay, maybe switching gears the cash position continues to grow billion and have here at year end.
It sounds like loan growth is gonna be a little bit slower and 2020 than 2019, how should we think about the cash position.
Is there any willingness to to.
Park, some of that and the securities portfolio or is the shape of the yield curve, so prohibitive in that front.
Well, it's there's there's not a lot and the securities World, but is is very exciting right now I'd.
I apologize to our shareholders. So that earlier in the year late last year out fail to recognize that the tenure at 194 was the screen by.
That wasn't immediately obvious to me, but you know it's just it's hard to get a excited about a much in the securities World and Oh, we have had a big focus over the last year of.
Increasing liquidity as measured by various right shows and keeping more cash on balance sheet that cash position will vary from.
Quarter quarter, but I think in general.
We would expect you know over the next four quarters to say our liquidity ratios continue to improve and our cash position B b, a strong stronger in some quarter ends and others, but but generally strong.
You know are a.
Philosophy as band to.
Grow capital and increase liquidity and get ourselves in a position too.
Take advantage of opportunities calls by.
Economic turbulence dislocations or whatever.
When and if those situations rises so I think we're continuing to pursue that philosophy.
Okay and one last one for me just speaking of capital or the TC here in north of 15% I guess, what's the main prohibiting factor from starting or at least announcing a buyback or you are you waiting to see the impact of Cecil is there something else coming down the pipe that we might not be like.
Aware of here I guess, what's the internal conversation, so why not at least announced a buyback here.
Well I think we've given them a patent estimates on Cecil and those are included in our management comments and obviously you have.
You know there is extra provision an extra reserve cost associated with say, so but those are.
Very manageable, a cost and probably not outside of Anybodys expectations for a bank of.
Our size with our level of unfunded commitments and.
Those.
Our our estimated.
One impact of social actually came down from the earlier guidance, we've given up a quarter ago. So that's not an issue and there are no things that I think to use your.
Term or paraphrase your term that we're aware of that.
I would cause us to have more capital. It's simply a reflects the fact that we believe and the long term ability of our company to grow organically and and as Rod time through acquisitions.
We believe that that capital will be a very useful and important to us and achieving those longer term objectives and.
Weve for those reasons, because we believe in our business model.
Elected to not pursue a share repurchase.
Up to this point.
That will be something that our board will continue to monitor.
But we've not pursued it up to this park.
Understood. Thank you.
Yeah.
Our next question comes from a line of errands again image with Citi. Your line is now open.
Thanks, with the the topline growth somewhat challenged it sounds like in 2020, you still have operating expenses guided to the high single digits or are there any levers that you can pull from your expense side to better match. The the topline growth you have for 20, Tony and maybe going forward as well.
Aaron there there are a lot of levers that we could pull.
But.
Our our focus is on really improving our company and preparing for the future.
So you know we could do what a lot of banks have done and we'll do in these situations and passed and that's why awful lot of Paypal and cut cost and just hunker down.
We are very forward thinking and we really believe.
Intensely and the future prospect and.
Power of our our business model and the various business units we belt.
So we're continuing to.
Invest significant sums we're trying to do it as as prudently as we can but we're continuing to invest significant sums to build our human infrastructure, our technology, our our risk systems on all of the other systems controls and things.
That that you need to grow and be a larger buying and we are today and to.
Really deploy and.
Optimize our experience for our customers as well as our results for our shareholders.
Now we could be very short term oriented and say Wow you know.
Hyper focused on.
Driving every penny of the S. I can and 2020 and I'm kinda cut a bunch cost and I'm gonna be very stingy and and tying our people even the high performers on risk, losing some of those sable and whatever.
Or you can take the approach that we're taking and we believe that when we get pass us wipe of payoffs and and get a lot of this infrastructure built really finalized and 2020, there will be in a very strong position to grow and advance our company and 2021 and 2022 and 2020.
Three.
And we can spend some money investing a now so that we've got the people in the processes and the customer relationship and all the things that we need to do.
Due to grow in and those years and do it in a very meaningful and favorable way for shareholders.
We feel like we're very much in a short term versus long term decision.
Mode here and.
So I certainly want our 2020 results to be good.
But frankly I'm much more concerned about building the infrastructure and improving our company. So that in 21 and 22 and 23, we can do great.
Great. Thanks, So that's the a focus.
No in 2019 I've visited every office in our company.
And spent 45 minutes to three and a half hours with every team and our company.
And I asked two questions repeatedly and every meeting and those questions or what can we do to improve the experience for our customers every day every y.
And what can we do to improve.
Our efficiency and and your work environment and make you more efficient more productive and and as an employee of our company have a more enjoyable.
Work experience because apart.
Staff is a feeling good about our company and highly motivated that comes across to our customers and in fact comes across to our customers. We have more success growing our business and.
Expanding and bill in the kind of profitable relationships with customers that we want to have so we got.
Literally hundreds and hundreds or I think over 1100 recommendations for improvement far staff that we.
Have elected to adopt we've already implemented or.
Somewhere close to seven or 800 of those improvements over the course of this year. We spent some money doing that and we'll continue to spend some money doing that in the next year.
But we think in the world of banking.
Where they're gonna be fewer banks every year. The banks that are gonna be successful five years 10 years in 15 years from now and they're not going to be nearly as many of them. We think that those banks are going to be banks that build exceptional experiences for their customers from we're working really hard on doing that so.
We're spending money on that on a lot of other infrastructure development I can pull back on that.
Improve vps, a penny or two a quarter, but I think that would be silly and foolish because I think the long term potential of what we can achieve if we really take advantage of this a slower growth period in which we find ourselves right now to really fun.
The mentally.
Enhance and build and improve the capabilities of our company in a in a significant why I think we get paid back for that massively in future years. So.
I'll I'll ask our shareholders to be a little bit patient. Thank long term as opposed to short term.
And I think if we do that we Oh, we get a good reward out by airport that patients.
Thank you very helpful.
Our next question comes from that only with Stephens. Your line is now open hey, Thanks, Good morning, guys.
Hi, good morning <unk>.
George I want to stick with this discussion on expenses and I. Appreciate the long term focused for shareholders and not looking for shortcuts with layoffs and it also sounds like you're you're working on ways to become more efficient future.
But I think we previously thought that the larger infrastructure build out what's going to wind down and slowed the first part of 2020 and now with the new guidance. It seems like the infrastructure build out will continue throughout the year. So I guess the question is that were wondering is what's changed over the last few months.
Well, Matt I'd tell you know we talked about you know early in the last year that that I was really hopeful that we could.
Get a lot of these consulting costs that we were playing out of the company and and we were building a lot of staff members in house to to do a lot of that work and that would allow us to get rid of the consultants.
You know with this loan score card risk writing projects they sold.
A lot of the data building initiatives that we have pursued to really.
Accumulate managing and Oh, I get a lot more control over data and.
Some further enhancements that we made two credit risk and analytics and modeling capabilities and.
Internal audit and so forth we we.
Continued to spend a little more money.
Probably every quarter than I expected to spend to get the what was I Oh fully developed in state of a lot of those initiatives and we've been slower to get rid of the a consulting cost.
Than.
Then I had hoped we would be.
We're taking another hard run at that and a 2020 I'm.
Cautiously optimistic that we will be much more successful than a.
Reducing a consulting cost and a 2020 than we were in 2019 back could help.
Helpless.
Time, some of that expense growth.
We also because Oh I visited every office and the company last year and didn't do that solo did that with a pretty sizable entourage of a community banking Paypal.
That went with me to really get a much better.
Grass roots view of what's going on in every market in the company and so forth.
We're trying to really mitigate travel expenses. This year, we not only that I got to those markets, but then after I went identified.
Specific issues and the markets and so forth.
We we had a lot of other people go back to work on improving enhancing whether it was technology processes procedures training whatever work on various things that we identified which improves so.
We hope to get some of those cost down but at the same time. We also realized we've got to continue to grow our pool of talented people and that includes people, who can originate and produced new business. So.
Where we are.
We are spending a little more money than <unk>.
Expected to spend or hopeless fan, but.
Sometimes things cost more to get.
To the end State then your originally expected. So we've continued to experience a little but after that we are trying to cut out.
Unproductive and inefficient expenditures and get more efficient and for example, doing things with our internal team, which we can do.
Less expensively them, we came with a consultant so we're we're working on it.
Okay, that's great commentary, thanks for that and switching gears on the deposit side.
Yeah pretty big shift a deposit mix at the last two quarters I think C. D NAV everything around 40% of overall deposits and it's trending higher should we expect an additional shift from here and if so what's driving that mix shift that deposit.
I think you're saying a couple of things there are number one is a you know when rights were very low.
A lot of people park munchkin money market accounts and savings accounts, because there was not much yield difference between money market in savings and say days and are you, saying I a steady migration that continues even now.
As rights went up and say do price caught hire people began to be a little more judicious about how they manage that money and we've seen a lot of that trend and we're saying that trend continue and then secondly, we had some wholesale sources of deposits that were in.
Market accounts or or other a non CD accounts, we are making a concerted effort to improve the quality of our deposit buys and this is part and part of our are a tour of all the branches and and so.
So for so in a lot of our rural markets.
One of the keys to attracting new deposits and new relationships and building core customers is.
Driven from the C.D. side.
The business, so, we're replacing and a lot of cases wholesale non CD deposits that were chunkier and and probably more volatile.
With a local market C.D. deposits that are much.
Much smaller more granular and a.
Much less volatile and have the.
Additional benefit of giving us cross sell opportunities for core account relationships and so for so this is a a conscious decision and while they you know you would you would normally look at it and say the mix from the shift in mix from non say D to C D.
It is an adverse shift we actually view that as a positive shift when you when you get down and you really drilling into.
The part of it that is due to wholesale non CD funding source has been reduced in their parents for preference for retail CD funding sources.
So there was a bigger strategy at work here, we think that strategy.
We'll be very beneficial to us longer term.
Thank you.
Thank you.
Our next question comes from Brock Vandervliet TBS. Your line is now open.
Okay, great. Thank you.
Yeah, Yeah. The problem a the downgraded credit this is the the Tahoe credits that we've talked about in the past yes.
Yes, yes near Tahoe, it's in the near Truckee.
Got it.
<unk> <unk> at this point are are all the proceeds from from a lot and home sales.
Those going directly to repay the.
Repays alone or pay the interest on alone or is only a portion of that.
Rock there, there's a revolver in that facility for home construction in a revolver in the facility for a lot of elements. So the the proceeds.
Basically come and pay the loan down and then you know they're building new townhomes developing new lots.
From that so these are revolving principally revolving facilities that.
The money does come in and pay it down but it gets redeployed build.
The next phase of Oh, the project or the next units and the project.
Has there been discussion I'm just.
Just locking down.
The principles in terms of Hey, guys, let's let's not pursue the next phase lets you know wrap it up.
And Uh huh take or lumps and move on.
I think the a much more prudent approach is to these guys have ah.
You know they sent to a good sales velocity and pricing momentum I think that much more prudent course.
Brock is too.
As long as they are having good success doing it let them continue to.
Develop this thing out you know this a very nice project.
And it's a very viable project they the simple reality as this project started.
Right before the great recession.
It got severely revalued.
As a result of the Greg recession and never.
As you know never gotten I agree much higher valuation somewhat higher but not not fully recovered.
What were the original expectations on it as a result, you just got too much debt. So you have an over leveraged project is clearly evident from the loan to value on it and and it's our excellent.
Real estate asset that is being well received by consumers and.
[noise] townhomes or selling.
Lots were selling homes are being built on many of the lots that are selling so as you know it's a very viable project a it just has too much debt in it and we think the white to maximize.
Our.
Credit and hopefully avoid any loss and the credit is to continue to let these guys execute business plan and.
Get this thing worked through now there will reach a point.
And a couple of years, where you know they there will be no more lots to develop they'll be now more or fewer townhomes to build and they loan will begin to amortize.
As a result of that and the revolvers will go down because you're not replacing existing product with new products. So.
It's it's I, it's a working project.
[noise], how well how far away a week from that point, where it's just paying now would you say.
A couple of years into the future. It I don't know the exact date Brock, but you know, it's that's going to be here for a while.
Got it okay. Thanks George.
Our next question comes from Jennifer Demba with Suntrust. Your line is now open.
Thank you good morning, good morning.
A question about deposit she brought in a chief deposit officer about a year ago, you talked a little bit about a few minutes ago about.
Cds and getting some more see retail Cds versus wholesale what other strategies have been implemented or or do you plan to implement in terms of.
Gathering or improving the funding mix.
You know an excellent excellent question, we're approaching that from all sorts of Ah Ah different.
Directions, and and I think making some progress, but you know, we're clearly I'm looking at our our deposit products that.
And we are the process of.
Redesigning all of that deposit products that and we will roll those products out probably a in the second quarter. This year, there's possibility we might roll those out some of them like first quarter, but I think more likely it's a second quarter 2020 rollout at that.
Point the.
Most of the existing deposit products will become back book products.
And we'll be selling a totally new products that we think that is going to end.
Include a number of features.
That will will be very.
Much desired and appreciate your by our customers that will.
You know have sent a situation, where we're selling our products based on the.
The quality and convenience and the philosophy of those products as opposed to.
Solely on price. So we think that helps us both in customer acquisition and.
And cost of funds.
We are also working to make sure that.
Our commercial products or.
Much more desirable and where are much more effective competitor for that we will be rolling out.
Tentatively scheduled for April and major revamp of bar.
Marshall products and how our customers interact with I'm, sorry August I said April August the other items.
And.
That.
As a very technology based evolution.
Of our commercial products, we think that will again be be very well received we're working on an evolution of our technology for our customers interact with us on wire transfers, we will roll out in early 2021.
We are.
Working on a.
A a and if implemented really a total redesign of our retail banking staff as a result of having visited every office and the company.
Our chief banking officer and Chief.
Retail.
Banking officer.
Job descriptions.
That.
They had and our former legacy Bancos Ek world, but didn't necessarily match up with the cultures and.
Staffing of some of the.
Thanks, We acquired and as we visited every office Sandy Wolf and Carmen Mclennan send he's our chief banking officer, and complements our head of retail banking chief retail banking officer and.
Alan Jesup, who is our head of community banking on the lending side and all of our specialty lending verticals and community banking.
Realize that we really had a lot of people somewhat miss cast and more not maximizing the potential. So after going through every branch investing every branch and really understanding at a very detail level, what's going on in the branches.
The four of us and several other people went through every single employee and the company.
And I've talked about those employees with their supervisors managers and their managers managers and supervisors.
And reassigned job descriptions and titles for every person on the retail side of the company that we think will allow us to.
Maximize the individual potential to contribute to our success in our customers.
And the company.
We're also revamped our and the process of revamping our call Center digital services, we've revamped over the last year marketing and we've revamped what used to be training, which is now organizational learning and development.
All with the goal of helping us the I'd much more potent force and retail banking and and deposit gathering so where we're taking a very broad and holistic approach to this as well as big an down into the details. It at every point of attack so.
I'm I'm very excited about where I believe our company is going to go and evolve to is bringing <unk> highly competitive retail buying.
We've also taken all of our online apps.
We went through a very significant conversion, which required us to ride a lot of.
Code to do it and got all of those consolidated into a single App that allows us the functionality and flexibility I had various features along the way without having to burden our customers with having.
You know five apps on their mobile device or seven apps on their mobile device. It at all integrates through one single App.
And you can move very fluid land very quickly from one function together this was a huge undertaking and.
Puts us in a good foundational position to really began rollout a much more effective and desirable mobile banking platform.
Going forward so.
We've been working on a lot of things and we spend a lot of money on these things but.
I am convinced there so great pay back that will ultimately come from this work.
Thanks George.
Thank you.
Our next question comes from buying Martin with Janney Montgomery Scott Your line is open.
Hey, good afternoon.
Hey, good afternoon, Brian . It's just one question George just I appreciate all the color on the infrastructure build just kind of thinking about kind of efficiency and how trends play out it sounds as though the expenses expense growth rate could moderate some in 2020 ones I guess way to think about it as he efficiency should.
Trend a bit higher as you continue to do continue to execute on what you've outlined and then maybe moderate some.
Back in 2021 is that kind of fair how to think about or how much impact efficiency could have.
This year with the with the change in kind of the build out.
Brian I think given the fact that we've got very a conservative growth expectations for 2020, given the payoffs that we've already talked about in the competitive environment I think you're probably thinking about that correctly that the the trend in the efficiency ratio in two.
2020 is probably up not down.
If we can begin to moderate that right of expense growth and 2021, and we can get a more.
In line with our historical growth rates in 2021, and 2022, then I think we began to begin to say that efficiency ratio get better so you're exactly right.
Okay, and then just one back to the the loan yields I think you talked about the community banking in the indirect but just on the R.E.S.G. are you seeing.
Yield there a new production kind of stabilizing is still feeling pressure to kind of give a little bit on the rate there for the right credit.
You are looking at.
Well I think you always in any environment you a.
Find yourself that for particular credit in particular relationship you give a little bit on on pricing.
No one of the challenges that we've had in our yes GE is.
In in 2016, and 27 team we were in a much less competitive environment.
For construction and development loan origination so we got wider margins and we talked about that.
In that period of time that you know a lot of bikes and pull back from the Spice and we were getting wider margins and then as the banks came back into this space those margins got back toward more normal margins and with the.
Trump a tax cuts you know we tried to hold of margins, but a lot of banks, just began and that funds and others began to sort of blade those margins lower taking advantage of the lower tax rates to get more competitive on the on the loan side.
I you know I don't think are.
Our margins are versus ly bore or.
Prime right I don't think we've seen much.
Degradation that our margins over the last year versus that but clearly the margins that we were working with and not saying were less than the margins. We were achieving in 16 and 17 so.
As those older loans have rolled off and the.
Newer loans have rolled down.
Well you we've.
Probably been replacing those at a lower margin.
But but I don't think that's particularly changed over the course of 19 I think it's more of a 19 bar, so 16 and 17.
The phenomenon than it is a Q1 hundred 19 versus Q4 19.
Okay. That's helpful and just last thing for me just going back to that figure eight when you talked about the outsized payoffs. This year I guess seems like the message is it at two to three year two to four your window on these loans.
Funding up I guess is that suggest that 2021 could could see a healthy decline in the pay offs given that normal cycle is that that the right way to think about it.
I I think that's the most a logical interpretation of the data you know a 28 Jane was four point.
Seven for.
The second interim rates. The nations that you know is gonna be up 2020, mostly 2021 lesser extent 2022.
Set of payoffs.
And you know that that compares to the.
2017, 9.1 billion. So you know when you when we originated the.
26, staying in 2017 large numbers, we knew they were going to pay off at some point in time and they they hope was we'd be able to continue to find you know an ever growing world of opportunities and keep out running that payoff wife.
And obviously when.
Construction and development activity slowed down and competition got very aggressive in 18 and way originated less volume. It you know.
We began understand as time has gone on but that.
The differential in originations payoff wise was going to create what happened to us and not teen and and we'll probably have been 20, and that's we'll have some pretty slow growth.
A years till we get through that so I do think you're right that we ought to have less payoff headwinds and.
And a 21 and 22 than we pad and 19 and 20.
Gotcha, Okay I appreciate all the color. Thanks.
Thank you.
Our next question comes from the line of Stephen Scouten with Piper Sandler Your line is now open.
I'm, sorry, I didn't have any further questions Paul.
Alright, thank you.
With that I'm showing no further questions in queue I'd like to turn the call back to Mr. leasing for closing remarks.
All right well. Thank you all very much for joining the call today, we greatly appreciate your time and attention we look forward to talking which again in about 90 days have great to first quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.