Q4 2019 Earnings Call
Well I mean, some trisystems cautionary 29 <unk> earnings Conference call. Please note that this presentation contains forward looking statements within decisions of the private Securities Litigation Reform Act of 1995.
Based on current expectations.
Actually I think industry markets and economic environment in which the company operates.
Well, it's all three [laughter] plus actually was like was it for me can you maybe somebody comes disconcerting.
Chris I detailed in the company's on your reports on Form 10-K filed with Securities and Exchange Commission save cost presenters I'm actually ski President and Chief Executive Officer, and Joseph <unk> Executive Vice President and Chief Financial Officer thoughts and then you may begin.
Thanks.
Good morning, everyone and thanks for joining our work on this call.
Well sure to comment on Q4, and then comment on 2019 as a whole.
Fourth quarter earnings were about as expected they were up nicely over 2018, but down from Q3, which are the same dynamics in the earnings slowest last year and the seasonally typical.
One of the bright spots in the quarter for me was argues consumer loan growth not municipal deposit growth. Good very good core business execution in Q4, which falls on the heels a strong organic loan growth across the board Q3 as well so good performance by all our teams in second half year.
For full year 2019 bps, excluding acquisition expenses and securities gains was up marginally more 2018.
Was the $7 million plus durbin impact in 2019.
Coming into the year, our goal was to grow earnings despite the Durbin hit, which we were able to achieve.
So our reported earnings showed modest improvement, but it was a very strong operating here, we had good loan growth with organic commercial and residential mortgage both up 4%.
Deposit growth almost 200 million for the year good improvements in our financial services businesses, particularly our insurance business, which delivered earnings approach at a 40%.
Successfully integrate into Kinderhook transaction announced the student transactions, which we expect to close in May and raises our dividends for the 27 consecutive year.
It was a busy and productive year for community banking system and our shareholders.
Looking at the 2020, we have strong operating momentum across all our businesses, we'll do our best managed market pressures, we expect Mr. Ben acquisition solidly additive and we haven't continued to generate considerable capital that can be deployed in the patient and disciplined manner for the ongoing benefit our shareholders Joe.
Okay.
Thank you Mark and good morning, everyone. As Mark noted in 2019 was a very productive year for the company regenerate generally 6% improvement operating earnings per share. Despite an 11 cents Durban headwinds and the company's performance metrics around asset quality funding costs net interest margin efficiency remains stable.
During the fourth quarter and full year earnings results I'd like to make a few remarks about the company's balance sheet.
We closed the fourth quarter 2019, the total assets of $11.4 billion. This was up $803 million or 7.6% from the end of 2018 went down $187 million at 1.6% when the third quarter 2019, due primarily to a seasonal decrease in deposits in the late December average or.
Yes, it's for the fourth quarter 2019 of $10 billion were up $233.3 million for 2.4% in comparison linked quarter and up $733 million or 7.9% when compared to the fourth quarter 2018, due to bulk kinderhawk transaction and organic growth.
Average malls in the fourth quarter, 2019 broke $122.2 million or 1.8% in compared to linked third quarter of 2019.
$581.7 million or 9.3% compared to the fourth quarter 2018.
The fourth quarterly average outstanding balances in all categories of malls are up including $56.9 billion or 2.1% in the business lending portfolio $46.7 million or 2% into consumer mortgage portfolio $12.1 million or 1.1% in the consumer indirect portfolio too.
Point $9 million and 1.5% to consumer direct portfolio of $3.6 million more 0.9% home equity portfolio.
Thank you all balances are also on a linked quarter comparative basis $37.4 million or half a percent explosive all acquired in the Kinderhook transaction, ending total loans outstanding increased $159.7 million or two and a half person full year basis.
During the fourth quarter and company purposes, $724.1 million investment Securities and recorded a $730.5 billion net decrease in cash equivalents. These actions were taken to reduce the company's exposure to a range down scenario and just spread out the reinvestment risk associated with an additional $840.3 billion at his.
Investment security.
First of all cash flows in 2020.
The duration of the company's investment Securities portfolio was 4.3 years at December 31, 2019. This comparison effective duration of 2.5 years at the end of the third quarter the weighted average tax equivalent book.
The fourth quarter investment Securities purchases was 2.12% the overall fourth quarter book yield on the company's investment securities and cash equivalents portfolios for 2.54% tax equivalent basis.
Average total deposits were up $745.2 million or 8.9% from the same quarter last year.
$180.7 billion for 2% linked quarter basis.
This concludes the assumption of $568.1 billion at the positive liabilities in the third quarter do indicator of transaction.
68% of the company's tall positive the ended the quarter were comprised of checking and savings accounts.
Shareholders' equity was up $141.5 billion, 40.3% from one year prior due primarily to an $87.3 billion decreasing retained earnings and the $35.1 billion increasing accumulated other comprehensive income.
The company's tier one leverage ratio was 10.80% at the end of the fourth quarter over two times, the well capitalized regulatory standard tangible equity to net tangible assets ended the quarter solid 10.1%. This is up from 9.68% in third quarter and Coincidently, 9.68% in the last year.
Moving to earnings the company reported full year 2019, a GAAP net income of $169.1 billion and fully diluted earnings per share $3.23.
This compares to $168.6 million of GAAP net income and fully diluted earnings per share of 3024 cents in 2018.
Fully diluted operating earnings per share, which excludes acquisition expenses net gain on sale investments unrealized losses and gains on equity securities and loss on debt extinguishment. All in effects. In fact were up six cents to 3029 cents in 2019 as compared to $3 in 23 cents.
2018.
These results were achieved despite an estimate 11 cents per share headwind related to reduction debit interchange revenue due to the Durbin Amendment.
For the fourth quarter 2019, the company reported GAAP net income of $42.9 billion and fully diluted earnings per share of 82 cents.
Represents a 2.1 billion dollar or 5% increase net income.
Percent increased earnings per share over the fourth quarter, 2018, and a $3.7 million or 9.3% increase net income a 7% increase in earnings per share holder late third quarter results.
Operating diluted earnings per share, which exclude acquisition expenses net of tax effect or 83 cents for the fourth quarter 2019. This compares to operating diluted earnings per share of 78 cents in the fourth quarter of 2018.
Five cents for 6.4% increase in operating diluted earnings per share between comparable annual quarters was driven by increasing net interest income an increase in noninterest revenues. The decrease in income tax, but was offset impart by an increase in the provision for loan losses higher operating expenses and an increase to fully diluted shares outstanding linked.
400 basis operating earnings per share decreased 1% from 84 cents per share in the third quarter 2019, 83 cents per share in the fourth quarter.
Exclusive $4.9 million unrealized gains on sale investment Securities reported in the second quarter 2019.
And loss on debt extinguishment reported 2018 companies total revenues increased $16.1 billion or 2.8% on a full year basis from $568.8 million in 2000 $18 billion to $584.9 billion in 2019.
This was driven by an increase in banking related revenues of $9.3 million for 2.2%, despite durban as well as revenue growth or non banking businesses totaling $6.9 million or 4.6%.
Total revenues were also up $8.3 billion or 5.8% compared to the fourth quarter of 2018.
This included a $5.4 billion, 6.1% increase in net interest income and a $2.9 million were 5.4% increase in non interest revenues. The increase in net interest income was driven by an increase in earning assets due to both the kinderhook acquisition and organic growth.
Offset impart by six basis point decrease in net interest margin from 3.77% in the fourth quarter of 2018.
3.71% in the fourth quarter of 2019.
Increase in noninterest revenues was driven by a $1.9 million, 5.2% increase in non banking noninterest revenues as well the $1 billion or 5.8% increase in banking non interest revenues.
Total revenues increased $1.5 billion or 1% on a linked quarter basis. This includes a $1.5 million increase in net interest income is 0.2 million dollar decrease in banking revenue revenues, partially offset by zero point $2 million decrease in non banking financial service revenues.
The company's net interest margin was down two basis points in the fourth quarter as compared to linked quarter from 3.73% to 3.71%.
The company's tax equivalent yield on loans decreased five basis points of 4.67% in the fourth quarter due primarily to a 25 basis point decrease in the prime lending rate, while the tax equivalent yield on the company's investment portfolio, including cash equivalents was up two basis points in 2.54%, which included a $1 million better Reserve Bank 78.
Dividend payments.
The cost of deposits was flat at 26 basis points for the quarter of the total cost upon which includes borrowings decreased one basis 0.0, 0.31% were 31 basis points.
The company's total cost of deposits remain well below peer industry averages for the third quarter at 26 basis points, which is reflective of the company's very solid based 40 pounds.
During 2019, the company's employee benefit services revenues increased $4.9 million from 5.3% to $97.2 million, while the wealth management insurance services revenues increased $2 million or 3.5% to $58.1 million.
Excluding $4.9 million gains on investments Securities noninterest revenues contributed 30.7% of companies total operating revenues during 2019.
Excluding zero point $8 million of acquisition related expenses, the company reported $94.5 million of operating expenses of fourth quarter 2019.
This was up $6.9 million to 7.8% over the fourth quarter of 2018. The increase included a $4.4 billion or 8.5% decrease in salaries employee benefits, including a $1.1 million or 36.6% increase in medical benefit expenses.
And $1.3 million 13, 13.5% decrease in data processing communications expense and a $1.5 million, 7.1% increase and other expenses.
These increases were partially offset by 0.4 by $4 million decrease in the amortization of intangible assets. The increase in operating expenses was largely driven by higher expenses associated with the expanded operations subsequent to the kindergarten transaction.
As well as entry in mid level wage pressures and significantly higher medical benefit costs.
Excluding $6.1 million of acquisition related expenses incurred during the third quarter total operating expenses increased $3.6 billion were 3.9% during the fourth quarter from 90.9 million in the third quarter to $94.5 million in the fourth quarter.
The increase in operating expenses was driven by zero point $4 million your 0.7% decrease in salaries and employee benefits and 0.3 million dollar 2.4% increase in data processing communication costs as your point $3 million were 3.5% increase in occupancy and equipment expense and a $22.6 million 2000.
4% increase and other expenses the increase in other expenses was reflective of higher business development of marketing legal professional fees in the other administrative expenses the company historically incurred higher operating expenses in the fourth quarters compared to the third quarter.
On a full year basis total operating expenses exclusive of acquisition related expenses decreased $17.4 million or 5%.
We expect operating expenses exclusive of acquisitions to trend upward in 2020 and line, but long term operating trends of 2% to 4%.
The company reported a $2.9 million provision for loan losses in the fourth quarter 2019. This is up from 2.5 million recorded the fourth quarter 2018, and $1.8 billion recorded in the link third quarter.
In fact of tax rate for the fourth quarter 2019 was 17.1%. This compares to an effective tax rate of 20.7% in the fourth quarter 2018.
The decrease in the effective tax rate was attributable to an increase in income tax benefits associated with equity based compensation activities and a reduction in certain activity based state income tax expenses.
Excluding the income tax benefits associated with equity based compensation deep companies effective tax rate for the full year 2019 was 20.9%.
The company's asset quality remained strong at the end of the fourth quarter of 2019 nonperforming loans comprised of on legacy in acquired loans totaled $24.3 million were 0.35% of total loans.
This compares to $25 million and nonperforming loans at December 31, 2000, $18 million to $28.7 million at September 32019.
We reported net charge off of $2.4 million or 14 basis points annualized loan portfolio during the fourth quarter 2019.
This compares to net charge offs about $3.3 million or 21 basis points during the fourth quarter 2018.
Your basis, the company reported $7.8 million for 12 basis points net charge offs. In 2019. This compares to $9.1 billion or 15 basis points of net charge offs in 2018.
During the third quarter 2019, we calls our acquisition of Tinder Bancorp as a reminder, we acquired Interlocken an off track all cash transaction per $93.4 million in connection with the transaction, we acquired $479.9 million in loans in $568.1 million in total deposits. We are pleased.
With the performance to date remain excited about our opportunities in the greater all the markets.
Mr. Ben integration is proceeding on schedule than anticipated closing in the second quarter 2020.
As a reminder, Steuben trust as a 15 branch franchise operating in six counted region Western New York.
Community Bank currently service for the counties within Steve as current footprint and the other tumor contiguous to our markets. The demographics are consistent with a bunch of our current year see footprint, but also increase our presence in the greater bought while not just in the markets. So best total assets of approximately $560 million, including total loss of approximately 340 million to.
Others and $460 million in total pilots. So that is trailing 12 month return on average assets through the end of the third quarter is 1.25%.
We expect the transaction the nine cents GAAP accretive on a first full year basis and nine to 10 cents.
On a cash EPS basis. The transaction is also expected to be tangible book value accretive.
Pro forma consolidated balance sheets estimate to increase communion banks total assets approximately $12 billion.
We look forward to moving to moving forward with best team on integration efforts over the coming months as well as increasing or service capacity in the western European markets.
In summary, we believe the company remains very well positioned for the future because these strong asset quality capital reserves liquidity or funding base and strong strong non banking business revenues provides a solid foundation for continued growth in dividend capacity.
I'll now turn it back into line for questions.
Okay.
Thank you if you would like to ask a question. Please disconnect. Thank you.
Just how do.
Thank you.
Sure.
Sounds good thanks sensors and Kevin.
Again, Please press star one to ask your question. Please and I think our first question from Onyx Cradles comes from from Sandler. Please go ahead.
Hey, good morning, guys.
Good morning.
Just first off wanted to start with with the margin.
Seemingly on pause now for the foreseeable future and just kind of given no real change the rate environment.
You expected margin to be stable over the next couple of quarters I think.
Last quarter, you kind of guided to a little bit of additional pressure, but that is assumed potentially another rate cut.
Maybe you can just sort of the core margin exclusively repeat purchase accounting accretion and the federal reserve dividend and then just kind of remind us how between those two items might that layer on top of the core margin.
At 2020 starts out here.
Yes, Alex.
Kind of.
Sort of break that down 40 or so.
The accretion.
Expectations for for next year are somewhere between four and $7 million.
How quickly those acquired portfolios.
Okay, but we kind of have a baseline expectation of about four but typically we see some prepayments of that decreases that levels, one to 10 billion dollar.
Earning asset base Thats about that's about five basis points of.
Yes.
And with respect to the Federal Reserve Bank dividend I know that last call. We indicated meeting our expectations were about a 300000 dollar dividend.
As it turns out actually Weaver.
Combined with kindred healthcare bulk is sort of small banks for the second half of the year, even though.
Together considered a large banks so we don't really trip over into the large bank category until 2020. So we do expect the federal Reserve bank dividend to decrease in the June into December periods to something between three or $400000. So yelled at the Delta there is about I mean, you too.
Over over the course of the year, so low margin I guess a basis point or so on the margin so with that said kind of our printed.
Hosted margin.
Is it is we're anticipating something kind of in the mid to high three sixties, assuming there there are no more than rate cuts.
Of course, we got out we've got over $800 million of investment securities, which the.
Basically there.
Maturing really latter half the year, so we take some actions to sort of reinvest those.
That would impact the margin margin of debt.
We do anticipate.
Rates kind of stay where they are we do anticipate deposit costs kind of trickling down a little bit during the year, although it's unlikely we are going to get back to the.
The 10 basis point level, we were sort of before.
For the Thats sort of increasing in late 2015, but expectations are that we will be able continued deposit costs.
If rates stay stay where they are.
I think will be good shape on asset the other side too is are we had some loan growth.
Yes.
In between the third in the fourth quarters, you'll get to pipeline looks reasonable.
Continue to hang out.
Loan growth into 2020, we construct climbed the latter with.
And earning asset perspective by moving some of our.
Investment securities as they mature into into.
So we're sort of.
On the on the posted margin.
Kind of looking somewhere in that kind of that Nisthree hundred sixtys too.
Hi, three sixties range.
At some good color and then just remind as they get the last pieces. This do benbow as that layers on and I guess Thats is at midnight Pacific expected to close.
Well that had an effect on the margin as well.
Yes. So so expectations are kind of mid may type type timeframe. If everything goes according to plan, which we anticipate will have we hope that will.
That said the margin forced to ban is very similar to ours.
You know kind of on long term basis. So we don't think that will be.
Particularly affect the consolidated margin by very much.
Okay and then just one other question for me on the tax rate the.
The equity based comp activity, that's something that generally hits in the first quarter, if I'm not mistaken. So was it something acquisition related thats kind of caused supporting 19 for unique or is the timing is now going to be less predictable than it had been the bad.
You know Alex.
Good question it is difficult to predict that the timing of that.
No its assets.
It was dependent upon the those holders of the options.
And you know and I guess, the their cash fees or expectations around valuation.
So it is really difficult to kind of predict those and is not necessarily trended in that particular particular quarter. Although we have seen some quarters that are higher than others.
Okay.
From I am sorry, Alex just to continue that thought.
If you kind of pull away all the equity based.
Benefits tax benefits are kind of consolidated run rate the effective tax rate was very close to 21% I think it's 20.9% so I.
I think it's it's.
This is likely to be equity based compensation benefits in 2022 at what level of magnitude I think it's it is difficult to predict but kind of the core run rate for last year was about 21%.
Great. Thanks for taking my questions.
Thanks.
The next question comes.
From Boenning and Scattergood. Please go ahead.
Good morning, everyone. Good morning.
Good morning.
As you mentioned looking at the organic loan growth for 2019, if we strip out Tinder box. So it's about 2.2% for the year you mentioned just.
Last remarks that the loan pipeline looks reasonable heading into 2020.
So with that indicate that we're looking at potentially something similar to 2019 or based on what you're seeing the pipeline could that potentially be a little bit stronger.
Going forward.
I think if you guys made this comment.
Maybe last quarter I think if you looked at our ability to execute organically. It has improved substantially over the last.
12 months.
And you can see that.
And the execution this year and the pipeline as it stands right now and that's not.
That that's the ability to execute better organically is not a function of credit policy at all.
Function substantial improvements made in blocking and tackling and.
What we do on the ground everyday by our credit teams. So we've put a lot of effort into making those improvements.
As you can see if we had better organic execution this year.
Just to give some color on the pipelines.
Our commercial pipeline right now is up 61%.
Where it was.
At the end of 2018.
Our mortgage pipeline is up 38% over where it was in 2018, so I just our organic ability to execute better on the ground is just improve that I think thats going to serve us well and.
And to mix in 2020.
Okay great.
Helpful color, if I can turn to the expenses.
If we look at the fourth quarter of 19, the core run rate was about 94.5 million as we look to start 2020 is that a good run rate to build from are there additional kinderhook cost saves the tail into those still coming out and then just regarding the imports you is typically kind of seasonally strong because any.
Is that kind of back down to start 2020, just trying to think about that the starting point for the kind of 2% to 4%.
Upward trends, excluding the stupid coming into the back half a year.
Yes, Eric our expectations I think I mentioned this on the second quarter earnings call host Kinderhawk the expectations for that Opex.
Excluding acquisition expenses was supposed to be kind of in that in the $93 million to $94 million range. There is some volatility from quarter to quarter.
Typically the fourth quarters, a little little bit higher for various various reasons. So we kind of think it's not a reasonable it's kind of take the third quarter fourth quarter kind of average those and then sort of built upon that we typically.
We typically incur a little higher expense levels in the first quarter as compared to the second to third quarter.
Forbidding including.
Payroll type, Texas kick in that.
Full force in the first quarter and then some of those sort of go down later and later quarters. So I think that 93 to take kind of $94 billion range is reasonable before the spin transaction.
Still bands kind of annual run rate for Opex was about 50 15 million excuse me $50 million.
With expected cost saves of about 30%. So during the second part of the year things sort of take that 93 94 in.
The kind of bake in some some additional costs, Florida for this event transaction.
Thanks, So just one final one for me just thinking about the loan loss provisioning and 2020, what's the best way to think about that you have kind of targeted range or how many kind of basis points are setting aside for expected mix for every dollar loan originated today.
Yes, we don't expect the provisioning to change radically.
What kind of a pretty seasonal to the post Cecil world.
Relative to seasonal I think theres kind of market sentiment that they are potentially is a little bit more volatility from quarter to quarter.
I think over time, we'll be able to determine whether that you whether that's true or not we certainly have.
Built our models to try to reflect what we expect.
In credit losses, and we're hoping theres no unnecessary or when appropriate volatility in that in that Parisian going forward, but but I don't think the expectations are not really radically different than the nose under the incurred loss model.
Okay, Thanks, and kind of relative to that 8.4 million that was provided in 2018 sounds like maybe just a little bit higher given the organic gross.
But not a large increases at the right way that kind of interpret those comments.
I think thats, a fair way to look at it Eric.
Great. Thank you for taking my questions.
You're welcome thanks.
Your next question comes from Blossoms gone from Davidson.
Right.
Hey, good morning, guys.
Good morning also warning Russell.
I wanted to I appreciate your comments on the.
Magnitude of growth that you're expecting.
I was hoping you could comment in terms of from an asset class perspective, what's the mix might look like as well as.
From a geographic contribution as well.
Sure.
The majority of the growth came on the.
Organically came on to the business lending side.
As I said, excluding the impact of.
Tinder book It was about 4%.
And with consumer mortgage up 4%.
Home equities were actually down a little bit year over year, but thats kind.
Kind of trend for the last several years for some reasons because E. Com is doing better people are paying down.
But we did yes.
Modest decline about 60 million home equity loans.
Indirect portfolio, mostly auto lending was up a little bit I think 3% for the year, but that portfolio that you could give you a freeing up 38 can be down through your dollarsthirty, that's really a kind of a function of the but you know the market up with that portfolio, we bet pursuing more.
Margin.
As opposed to volume in that portfolio.
But.
Our satisfied with the growth if we can kind of it the yields in returns.
Capital that we want that portfolio. So yes. It was there was there was pretty good execution really across the board.
I think geographically.
It was it was a little bit everywhere.
We were up at our kind of Northern New York markets. We are up substantially all we call the south market, which is really kind of.
The central and Western New York.
That particular market actually was up.
11% over.
Over the course of the past year, Pennsylvania was was about flat in terms of business lending, but no. We drew mortgage is there a 9% last year. So we had an extremely good year cuts made again thats part of the.
Focused snapper improved execution.
On the ground.
So that that kind of new England in new England was new England market was off a little bit gaming business lending.
But less than the prior year a lot less.
It actually had some growth in some of the consumer consumer segments, there as well so.
Decent year in the doing with market. So it was it was a little bit everywhere.
There was a little bit of commercial it was little bit of mortgage.
And.
The auto book was up a little bit as well so I am cautiously optimistic for 2020, just given the improvement in our.
Core ability in capacity in resources to execute on the ground in our markets is approved.
Visibly hit so yes, I think the current pipeline numbers, but bear that out and get our would be cautiously optimistic that we will have a.
The good year end 2020 in terms of organic execution and growth.
Thats great color Mark Thank you for that.
I only have a question was a follow up you guys alluded to.
Your thoughts on the provision in a pre and post c. So world and.
I don't think I I missed it but if they did I apologize have you disclosed you're seeing so with that.
And if if not just a sense for one that is coming.
Yes, so we have disclosed the range of Russell and the in third quarter Q.
Well no range of $50 million to $60 million based on where we were in September .
From a from a modeling standpoint, obviously, thats, where we weren't as a seasonal were also that miss that was kind of kind of the range.
We're actually in the process of.
During the full year 2019 loan losses and continue to evaluate the other inputs and.
Yes, the qualitative factors and so we're still kind of on the you on the preliminary phases of kind of rolling that whole model model for the right now.
Peers that are the range is going to move down at the top end in the bottom into the range a few million Bucks, though probably four or 5 million bucks on both sides of that.
That we provided I will provide more color.
And our 10-K disclosure about half, but we are in the process of just kind of pulling through all the 2019 results.
Okay, great. Thank for the update I appreciate it guys.
Yes, just to be just to make sure I clear on that through Russell just so it's not misinterpreted. So our current reserve is at $50 million So our incremental.
Yes increase wasn't expected to increase by more than say $5 million.
We when we post our see some reserve, which basically is extremely material to the company's tier one leverage ratio.
All of our regulatory ratios.
Yes, okay, great. Thank you.
Thanks Russell.
The next question comes from Collyn Gilbert from KBW. Please go ahead.
Thanks, Good morning, guys.
Yes.
Start on the balance sheet lives that you took this quarter.
Sort of extend duration can you just talk about sort of how you're thinking broadly about the structure the balance sheet, where you're taking.
Your your opting to take interest rate risk I know you, obviously extended duration on the on the securities, but but just trying to think that through as to the timing now of the design of loading up on the security and how you're thinking about it.
Probably yes.
Very good that's a very fair question.
Historically, we've maintained a.
Securities portfolio that has a little longer duration than some of our peer institutions.
I'll call. It we had a luxury of of do we had over the years.
The other side of that is our loan growth hasn't been that double digits or eight or nine or 10% a year. So we can kind of although longer.
On on the curve than than others, because you know from a liquidity perspective, we didnt, we don't necessarily need that with that said our preference would that to be have a 3 billion dollar investment securities portfolio, we prefer to have more earning assets in the loan book.
But our markets only allow certain balance of organic growth. So we can go a little bit little bit longer there as we look ahead with the additional 800 plus million that's debts.
On the Horizon, which my recollection book yield is kind of in the in the low to mid twos.
Right now if we were to simply to just push that out a little bit on the curve, it's going to be.
Effectively.
And even play on the on the reinvestment.
Well be looking at the opportunities as the yield curve changes I mean, we sort of have we do have.
This year to evaluate that.
In the perfect World, we'd have to more smaller than the yield curve and have an opportunity to redeploy that something north of two and a half but based on where we are today, we would expect that the if rates stay where they are that we deploy that kind of at par relative to the to the maturing levels.
Okay, maybe okay alright.
Callidus Petsmart I would just say we have we've had a growing exposure to it falling right.
Overtime.
Still clearly within our reasonable policy guidelines, but I think there's two things one is we had a slightly asymmetric.
Margin profile, if rates go up versus rates down wanted to provides protection against that rates down risk by extending the duration little bit. So that the you know the securities that we kind of sold when we have the opportunity in the market. We recognize the game we didn't really care about that was about the gain was really about repositioning the duration is it.
Portfolio to improve that rates down risk.
And we're looking at kind of doing the same thing for some securities that.
That will be maturing.
And in the fourth quarter of this year to try to further improve.
Our rate profile.
Decreasing environment, you look at what's going on in Europe , It's improved slightly over the last couple months, which is good news.
You know to the extent that there is a.
Any downturn in GDP in economic growth and the fed and other central banks globally react to that what that does in terms of the.
Interest rate environment, and so we're just kind of protecting against.
That that potential turning racing.
Doesn't come that's okay, because the purpose there was really to better match our.
Our or better reduce that mismatch, let's say the asymmetry between rates going up in rates going down so thats really what the focus of that exercise is all about.
Okay. Okay. That's very helpful. Thank you for that and then just taking into some of the movement on some of the operating metric.
I appreciate that some of the guidance you guys gave going forward, but just wondering make sure I understand what happened in the fourth quarter. So first on the fee side. So you you opted it looks like to tick from a reporting standpoint, the phone mortgage banking in the service charges on deposits.
Is that.
Again, what kind of what the motivation there does that mean that you're gonna have less and less emphasis on.
On mortgage sales going forward.
So just that the first part of that question.
Yes.
So our mortgage banking activities are pretty minimal in the Grand scheme of our bar.
Income.
Our non operating or excuse me, our operating income and non interest income. So so we havent felt the need to breakout mortgage.
All that.
We can sort of put those together with other because it's a pretty small part of our business.
At the present time, if we expand and begin to sell more mortgages in the secondary market, we could break that out in the future, but but it's not it it's not very significant component of.
Of our operating income it was really just got presentation as a small number it's probably always going to be generally small I was just kind of annoying to happen there by itself reported separately. So we folded.
Got it okay. Okay. That's helpful and then just.
What are the on the other expense line was that's a bit and the fourth quarter. Just curious if there was anything non recurring there I would imagine there was given the fact that you're kind of looking for core expenses, starting at 93 94, but just curious what that was.
Yes, I mean, there's theres several items that affect effect that are that moved from quarter to quarter. One of the light I pointed out was just kind of the costs around medical benefit costs, we have a self insurance plan and so you have occasional.
Changes in that net expense, so we were up a bit.
They're in the fourth quarter.
We also had.
Just higher sort of marketing expenses, we typically we do an acquisition, we kind of love the flood the new markets with a little more advertising and so some of that kicked in.
In the fourth quarter, we did have some incremental.
Professional fees sort of around Kinderhawk transaction as well as around kind of our activities on seasonal and other matters. So some of that.
That.
Would not happen again, if you will in the first quarter.
We have we played a lot of snow in the fourth and the fourth quarter because of our geography.
Property related write downs in foreclosure sort of these pre foreclosure expenses, there are a little bit volatile from quarter to quarter and so we sort of have a little modest increase there nothing all at significant.
Sort of adds up with with everything else and and also we had a fair amount of travel and.
Employee related expenses, it's the holidays, we typically.
Curse of cost there. So it's a combination of those of those things, but I think in the you in the 2020 period I think we have a pretty good control handle on.
On those costs going forward.
Okay, and then that kind of feeds into my next question just how.
How are you guys thinking about.
Operating leverage and.
The potential there to see operating leverage in 2020 and beyond in kind of where do you see the drivers does that.
Coming in.
Thanks.
Slow will continue I think to get to gain more efficiencies.
Certainly in the under banking side of the of the house overtime as we do acquisitions inevitably we just we ultimately.
Fine more efficiencies typically above and beyond.
The initial expense reductions just things get a little easier as you Digest, though so I think we'll continue to see see that we're not overspending.
On the technology front by by any means I know theres been a lot discussion of the market about.
What's technology spend look like I think we're being we are investing in digital technologies no question about it and we're utilizing our core provider to do some of that but we're not.
Over spending in that area. So we'll continue to probably get some.
Leverage of our.
Our technology.
Expenses overtime.
Okay. Okay, and then just lastly on capital.
Guys, obviously indicated capital building you've got a lot of capital can you just talk about maybe how youre thinking about prioritizing capital deployment for 2020 300, once you get Steven underneath your belt.
Sure.
Well I think if you look at our returns.
Relative to our organic growth, we clearly generate a lot more capital than we can use to grow organically. So historically, our model and strategy has been to deploy that capital into high value acquisition.
Opportunities.
The banking and the non banking side.
We'll continue to be the strategy.
We have raised as I said the dividend I think this is the 27th consecutive year.
There's less.
A few years, if you look back the history of the dividend increases that's pretty good.
I would expect that.
To be part of our.
Capital utilization strategy going forward as well.
The.
It's a good problem to have that our capital builds.
Again more rapidly clearly than we have the organic capacity to absorb in our markets. So we need to look to other capital deployment opportunities, which in some respects the best a blessing, but it's a challenge.
For us because M&A, whether it's the best space of the NASDAQ spaces.
Takes number is time consuming its higher risk.
All of those kinds of things I think we've got a fair job of reducing the risk.
Just given our experience and historical success asset that yet.
M&A in a disciplined way, but nonetheless, it does kind of put a burden on us to continue to deploy that capital and so it's a it's a good problem to have and one which we will continue to work out but I think its a.
It's just continues to create opportunity for us to deploy that capital for the benefit of shareholders and so that starts really really strong earnings because without strong earnings.
Can't build capital that you can use to do other things. So the earnings is extremely important and.
We expect to continue to raise the dividend do that you have to continue to grow the earnings.
So that's I think.
I would just say our capital deployment strategy is probably relatively unchanged at this point from our historical.
Perspective.
Okay. Okay, and then just it obviously recognizing M&A is an important part of that strategy, how do you see the M&A landscape.
Looking is again as you look out in 2020 do you think the pace of M&A can pick up are there that you know better opportunities are more unique opportunities that you're seeing along those lines.
I would say, it's generally unchanged since it's been.
In the same range.
To the last handful of years.
We don't you look at just the number of transactions a year or the number of banks in us and the decline in that it's a fairly steady state of decline. It what is it three or 4% a year. So.
So I would expect that probably continue the way it is I haven't certainly recently seen.
Any any greater.
Change of significance I think to be continued.
Pressure.
Because of of technology, one thing that I think it's going to play out slower than everybody else.
Believes that.
Well, it's interesting you look at JP Morgan for example, the announces not all the branches are opening everywhere. So if the branch banking is that nets out to get through time for a long long time.
Dan <unk>, along with that you need to invest in digital platforms, as Joe said, which we which which we're doing and improving our digital channels.
Our digital.
Passive capabilities that a lot of different ways.
So the.
I think this.
We'll continue to have those opportunities for for the foreseeable future I'm not concerned about that I think the one oh, let's say a struggling but I wish it was otherwise but on the non banking side, there's so much private equity money.
In those spaces that we that we operate in.
That you really compete against private equity they have a different model and I would say at the low end of private equity the smaller end theres lot of.
A lot of money chasing a lot of deals and so that makes it a little bit more of a challenge for us as a strategic buyer.
To compete with the financial buyers, but we've done okay. Today, just makes it a little more difficult.
Environment on the non banking side, but I think we'll continue to to look for those opportunities on both sides of the house I think we'll continue to have those opportunities overtime, we will execute on those.
You know.
Those high value.
Asymmetric risk kind of opportunities and disciplined fashion, Thats, where we do it and.
We'll continue to.
To execute on that strategy.
Okay, Alright, that's great I'll leave it there thanks guys.
Okay.
As there are no further questions. Thanks, and I was I now turn the call back to your home setting so actually come from.
Excellent. Thank you Tina Thank you all for joining our fourth quarter call and we will.
Talk to you again in April thank you.
That concludes today's call. Thank you participation, ladies and gentlemen, you may now disconnect.