Q4 2019 Earnings Call
Time, all participant lines are in listen only mode.
After the speakers presentation, there will be a question answer session to asked the question. During the session you will need to press Star then one on your telephone keypad.
Please be advised to today's conference maybe recorded.
If you require any further assistance. Please press star then zero to reach an operator.
I'd now like to introduce your host for today's call. This isn't Greenfield corporate Secretary. Please go ahead.
Thank you Liz good morning, and thank you for joining us today on our fourth quarter in fiscal year 2019 earnings Conference call.
On the call. This morning, Iraq thing, our chairman President and CEO , let's leave the NACHER Chief Financial Officer, Tom Cornish, Our Chief operating officer before we start I'd like to remind everyone that this call contains forward looking statements within the meaning of the U.S. Securities law.
Forward looking statements are subject to risks uncertainties assumptions.
Actual results may vary materially from those indicated in these statements.
Additional information concerning factors that could cause actual results could differ materially from those indicated by the forward looking statements.
Found in our earnings release, and our FCC filing we did not undertake any obligation to update or revise any such forward looking statements now word anytime in the future with that I'd like to turn the call operative braasch.
Thank you Susan a welcome everyone to learning school. Thank you for Don again, giving us getting us your time.
We're coming to you and beautiful Miami, where it's a beautiful day and ER and it's even more beautiful because you're earning [laughter] Oh, we close the year ended the quarter on a very very strong though.
For the year 2019 that income came in at just a little over $313 million.
$303.13 per share.
I think that makes this a from an EPS perspective, our highest bps year, excluding or you know there's been no tax benefit that we got a few years ago. So we're very happy with the performance remember this is just.
This is our first here without Walker.
And we're hitting a record EPS number so we're very happy about that.
Let me do good comparison to the prior year or the party or on earnings were 325 million or so I need to get some 2.99 to nine like that included last year. So even with the fact that inspired lost share I'm getting to a threeq or do you need yes from to 19.
During the year is about 5% growth.
If you were to actually just look at non loss your earnings in 18 and compare them to this years earnings.
Yes through I think about 33%.
Ottaway came in at 95 basis points and are we came out.
1.6 person.
For the quarter.
Reported net income of 89, and a half million dollars for 91 cents per share.
This is the time of the year, when we give you guidance, which we rolled in a in a second but before we talk about Oh, we're looking forward, let me just recap.
I think the earnings release in first quarter of 2019 was also under 20 sort of January so exactly a year ago. We said to you that we think loans will grow mid single digits deposits will grow mid single digits.
That time 2.0 efforts were not finalized we said earnings to grow.
No single digits later on we said they would actually shrink.
Sorry expenses.
And Oh, we gave you some guidance around margin, which is always the hardest seem to do but he said, we'll probably be into 250 to 60 range.
And I think we never talk about EPS guidance, but you all obviously or put out as targets I think this time last year.
Your expectation collectively was about mid to late either three or so I could be a little off on that number but ER. If you compare that to where we came out I think loans grew by 5% into your deposits grew about 4% not only to deposits grew 4%, 73% on the deposit growth was DTA, which we have.
Okay very proud off.
And expenses actually shrank by 4.5%.
You know in large part to the efforts all bank 2.0.
And and all of that Salt Lake City.
The $3 and Perkins and yes, a which is a nicely better than would be expectation was 12 months ago. So you know all in all the very happy with house hasn't banking.
Mouth, Andy, but even more happy and excited about where we think we will.
We're headed in 2020.
So.
Just a few quick.
More detailed numbers on on this quarter and this year the biggest news in two houses in the fourth quarter of 2019 was that deposit costs came down by 19 basis points from 167 in the third quarter to 148 in the fourth quarter. We had said that you know you set the expectation.
Last earnings call that you should expect a meaningfully growing [laughter] and here it is 19 basis points.
Largely through that.
We've been able to hold our NIM flat I think the guidance. We gave a third quarter earnings was that you maybe down a couple of big says when would we actually did a little better and we came in Florida to 41.
Nothing we've got to do more detail behind that media growth for the fourth quarter of so a week route DTA by 168 million and total deposits grew by 438 million.
For the year DB a growth came in at 674 million and total deposit growth was 920 million. So 73% off at 920 wouldn't media growth, which is I think the thing that were most problem.
Loans or for the quarter, two or 300 million or so and for the year like 1.2 billion. So that's been a 5% growth rate for the year as I said, a few minutes ago and Tom we've got into more detailed around with that growth given from it was pretty widespread.
Let me give you.
My take on on credit Npls increased to 88 basis points from 60 basis points.
Last quarter and that increase as we have talked as a last quarter was largely attributed to one loan in the cnine portfolio in the Florida region.
And we've been working on that and we've taken especially after version for that loans this quarter.
So to total and he has increased by 600 million 41 of that was that one particular loan. The rest is largely our computer to that's we had loans that we put on non accruals, which are guaranteed. So that's about 13 million. So between those two things that makes up a vast majority now you will notice.
While npls have gone up.
Our criticized and classified loans are actually down a couple of basis. One so within that category. What has happened is stuff that was criticized and classified but accruing last quarter. We made the 67 million gold non intralinks, that's moving from that bucket to the other overall bucket of loans that for you.
If I may close eye on actually went down by two basis points from 190 to 190.
Net charge offs.
For the year came in at five basis points. This compares to a 10 basis points or so a previous year. Excluding tax. These include taxi. It was even higher was 28 basis points, but ex taxi, we were running about 10 basis points in 18, and five basis points in 2000.
So progress over there.
In terms of systemic risk in the portfolio.
It is still we are only seeing the only place where we've seen systemix concerns R&D restaurant franchise finance space, which is about a 360 million or so.
Size portfolio for us that's what we're keeping a very close eye on and and other than that we don't see any any systemic issues on credit anywhere in the portfolio.
Quickly talking about background to find though we're kind of halfway at the halfway point in terms of this two year effort, we're very happy with the progress that we've made.
Like I said last quarter I commend the cost side were little further ahead would be coffee would be.
The revenue side, we're a little further behind that but because this is not in terms of numbers numbers were still very comfortable with what we gave you which is about $60 million total benefit 40 input cost and plenty effect and revenue I'm, referring to is the timing so on the cost side the timing.
Hey, Mike better than we had expected end of the revenue a little worse, but in terms of achieving both those numbers were feel very confident that we will achieve them easily.
In fact, you know the success that you see this year. If we just look at our expense line down 4.5% from last year.
That a lot of that goes too.
The progress.
2.0.
Guidance quickly for next year I would say they similar to what we gave you last year mid single digits loan growth mid single digits.
Deposit drove our focus within deposits will continue to be DTA.
2019 was 674 million the year before that was 550 million, India growth I would love for the number could be even higher this year.
Its inventory if that number could predict but we still think it'll be similar.
Good last year.
We also on expenses, we think will be flat. This year, if you do nothing with the expenses.
Tend to grow three 4% I think what it's going to be done in 2.0 will help us keep expenses.
Basically about flat.
Share buyback, we are under the $150 million buyback program.
We did about 4 million of that this quarter and we'll continue to execute on that opportunistically over the course of this fall.
And from there on.
With that let me turn over to Tom It'll give you a little color on.
On the numbers, Thanks Raj as Roger mentioned earlier growth for the quarter from a loan portfolio perspective was $301 million was solid quarter for us we're really.
So happy to see that we had broad growth across really many of our key business lines within the company or see though I book grew by $130 million.
In commercial real estate, excluding multifamily we grew by 230 million for the quarter and it had growth in both markets residential business grew by $90 million, we had just over $30 million of growth.
And the bridge funding group.
So it's really a broad spread.
Nice quarter across all lines of business.
So we were happy to see that multifamily portfolio for the quarter started comment on that just a little bit remained relatively flat, we had 53 million.
Growth in Florida, which was offset by a declined to 57 million within the New York multifamily portfolio for the year, The New York multifamily portfolio decline by just under $350 million.
Which was kind of inline with our expectation.
Mortgage warehouse business, one of our newer faster growing businesses was actually down a bit seasonally.
Q4 was down 537 million kind of reflective of normal seasonality and lighter utilization that we tend to see at that time in the quarter, but overall commitments.
Continued to grow in that area looking ahead in 2020, we still continue to see obviously good overall economic conditions in the markets that we operate in we're seeing growth opportunities in our corporate and commercial banking lines and in both Florida, New York or specialty finance businesses, Florida commercial.
Real estate lending, we continue to expect to see.
Quality growth overall growth from the commercial real estate portfolio non.
Multifamily focused.
Expect good growth in the small business lending area and continued growth in the in the residential portfolio.
Well, there's certainly opportunities into into New York commercial real estate world runoff of the multifamily portfolio will likely continue to offset the overall growth in the New York real estate portfolio.
In 2020, as we have a fairly large group of maturities in 2020, So we expect to see that runoff in that area.
As Roger mentioned on the deposit side.
Also as similar story to good growth across virtually all of our major operating lines, which again is encouraging to see.
$438 million of grow 38% of that as Roger mentioned, we're not interested EA and we continue to invest a substantial amounts of time and energy.
Effort in increasing anniversary management business fee based business and operating accounts.
Across all of our business lines. So overall from a loan to deposit a quarter I think a very solid quarter four so with that I'll turn it over to Leslie.
Okay. Thank you Tom.
Getting into a little bit more detail on some of the quarterly results talking first about yields in the net interest margin net interest income was essentially flat quarter over quarter, but declined by $110 million compared to the fourth quarter to prior year. Obviously as you all know that was primarily due to the $170 million reduction in interest income.
On the formerly covered loans.
The NIM remain flat quarter over quarter to 41 down from four one for the fourth quarter of 2018 again, primarily due to the declining kind of high yielding.
Covered loan.
Those decreases were expected given the termination at a loss share agreement and the final portfolio sale of covered loans in the towards the end of last year.
The overall yield on loans with for 27 this quarter down from 443 for the immediately preceding quarter. The decline mainly due to coupon resets on floating rate loans and pay off as loans at higher rates in some of the new originations coming on.
Build on loans for the fourth quarter. The prior year was 635 again the decline attributable to the demise of the loss here portfolio.
The carrying value because I know you guys are going to ask me. This the current carrying value of formerly covered loans at December 31st It was $158 million at the yield on those loans with 30 491 for the quarter.
And we expect the yield on those loans to be between 34, and 35% going forward in the balance to continue to decline at a fairly consistent rate and hopefully in talking about those for the last time.
On the investment portfolio was down to 318 for the fourth quarter of 2019 compared to 340 for the immediately preceding quarter and 359 for the fourth quarter of 2018 decline was primarily the coupon we said.
Low reinvestment rates and higher prepayment speeds on security found at a premium that accounted for six basis points of the quarter over quarter decline. This year duration the portfolio remains low at 1.3.
As Roger mentioned previously the total cost of deposits was down 19 basis points linked quarter to 148.
The cost of interest bearing deposits with 181, this quarter compared to two or one for the preceding quarter and compares to 180, so relatively flat to the fourth quarter 2018.
Non interest bearing demand deposits were 17.6% of ending deposits and 16.7% of average deposits for the year compared to just over 15% for both for the prior year for the fourth quarter 2019 average non interest bearing deposits were 18.1% of average total deposits. So.
Great progress there.
NIM.
First our NIM guidance going forward is based on an assumption that there'll be one fed rate cut in the back half back half of 2020, we do expect pressure on asset yields both loans and securities.
Coupon resets continue and assets come on at a little bit tighter spreads and some of the assets that are running off.
However, we also expect the cost of deposits to continue to decline, particularly in the CD book. So there may be fewer catalyst for reducing deposit costs in 2020, if the fed almost halfway slot on balance I think as Rob said, we're projecting the NIM for 2020 to be pretty much flat to the fourth quarter of 2019.
Turning a little bit to the reserves and reserve in the provision.
Provision for the quarter was actually a little lower than we initially expected in part because we had recoveries this quarter of about $4.2 million that we weren't necessarily anticipating at the time of last quarter's call and that's partially offset the provisioning we did related TV at $41 million commercial relationship that that Raj mentioned.
Within buried in the provision, there's an increase of 10 and a half million dollars in specific reserves.
In addition to those recoveries, we had an offsetting reduction in reserves on the past portfolio as the historical loss ratios that drive that continue to come down.
[noise] talking for a moment to Cecil our current estimate of the initial adjustment to the reserve on adoption is an increase of $25 million to $30 million in the in the reserve that will bring that to a ratio of somewhere between 58, 61% of total loans compared to the current 47 basis points.
We also expect to $5 million to $6 million, increasing our reserve for unfunded commitments upon adoption.
The Cecil provision I'll be honest with you is pretty challenging to forecast because you find yourself trying to forecast a change in your economic forecast, which is pretty much impossible to do so so it is a challenging thing to forecast that we do obviously back and increasing the level of provisioning in 2020.
Just due to providing for those lifetime losses versus incurred losses, and currently I would say, we expect that Cecil reserve to remain around that initial range of 50 to 61 basis points. Throughout 2020, However, I emphasize that that can be volatile and it will be impacted by changes in things such as our economic forecast.
Yes, and prepayments fees and portfolio mix.
Okay.
Okay My comments on Cecil.
I want to briefly comment on the securities gains that you saw this quarter $5.7 million of those gains related to opportunistic sales of securities. We were still holdings from way back.
In all our acquisition of the failed bank in 2009. Most of those were related rated continue to be rated below investment grade and we just took the opportunity to to kind of cleanup that segment of the portfolio and Thats what the majority of the gains we recorded this quarter related.
Okay.
Bid on expenses non interest expense for the year ended December 30, Onest included $14.8 million of cost specifically related to bank United to point now.
For the fourth quarter, those costs were pretty insignificant only about $300000.
As Raj I alluded to for the full year 2019 compared to 2018, if you just do nothing.
And let things run your expenses are going to go up 3% to 4% of year, just as you give people their normal merit increases and and whatnot because of the impact of bank United to point, how we do you think those expenses.
I will remain flat year over year in total.
Say that.
The one line item I think you will see some increase in that you'll probably notice as we move through 2020 is the technology expense line as we start to see some of the impact of some of the technology investments that we've been making begin to hit the PNM and that's in part the reason that that we think those benches in the aggregate will be flat next year instead of down.
Income taxes, let me comment on that for a few minutes. Obviously, the MTR was very low this quarter at 14.4 all of that really was the result of the fact that we filed all our state returns in the fourth quarter and we fine tune dollar apportionment factors and.
Estimates, we have made about around with apportionment factors came down and we realized the benefit of that this quarter. We will continue to see that benefit reflected in a lower MTR going forward I expect to MTR for next year to be between 22, and a half in 23%, which is consistent with where we landed for the year for 2018.
The other thing that happened as Florida actually reduced corporate tax rate.
But as a percentage point.
In the fourth quarter. So that also gave some benefit.
With that I'll turn it back over to rush for any closing remarks, yes, the only thing I would add which I forgot to just generally talk about the environment.
Florida, and New York, our primary markets, both continue to do extremely well.
We don't see signs of an aging business cycle I know when we all look at our Bloomberg screen for this lease at least as we were looking at them couple of months ago. It was a different story.
But on main street, we don't see that and.
We are happy where it's something we don't control, but obviously you have impacts our numbers so as far as we can see.
The view on lean through this is very good.
With that we'll turn it over to you guys for you and I.
As a reminder to ask a question you will need to press Star then one on your telephone keypad to withdraw your question press the pound Keith.
Please standby only compiled acuity roster.
Our first question comes from the line of Brady Gailey with KBW. Your line is now open.
Hey, Thank you good morning, guys.
Good morning Rudy.
So raj buybacks have really slowed in the back half a 19 to you only repurchased.
Not even half of 1% of the company.
You look at the first half of the year, you repurchased 4% of the company last year ago earned 2018 is about 8%.
You know how is the buyback pretty much over or do you think in 2020, you will step back up and get more aggressive repurchasing stock when stock still relatively cheap at 115 times tangible.
Yeah, I mean Brady we don't.
If you go back and see when the buyback was authorized literally the day or when we were having those discussions the board rule. The stock was very low at that time or maybe just a day or two before that.
And we said you know sort of some parameters if you get to our brokers.
Literally within a day or two even before the buyback.
Technically start stocks on it to go up and we kind of kept chasing that and never really caught it's a good problem to have.
Wishes.
Even bigger problem.
No. There's no there's no other magic to it we don't sit here and try and predict we don't trade. This copper anything like that we give directions once or twice a quarter.
Then just let it be so we were just always a little a couple of bucks behind and Thats why you can see as much of a buyback.
We still low our stock.
As a great investment at whether it is today and you will see more buybacks going forward. There has been a lot of volatility in the marketplace right.
Last year, a stock was up and down a lot and not for fundamental reasons, but just with the market is doing so.
We also saw Brexit coming in December and because that would create a lot of noise and have be an opportunity. So for us to buy stock back cheap, but I would never happen.
Like I said I'm happy with with that.
But it obviously reduces the buyback, but yeah, we'll continue to buy back there is not a.
Discontinuation of the buyback strategy, we will we will do this buyback and then when it's done we'll go back of the board and we'll look at our capital position again.
One thing and I also forgot to mention let me to say that out is at the February Board meeting.
We are going to look at our dividend policy as well. So what comes off effect will will be published only when that meeting happens, but that is on the agenda for for the February Board meeting.
But it has been at 21 cents a quarter four of a long time and.
And the board is going to look at it in February .
The only other thing I would add to that Brady is that we haven't changed anything about the capital targets that weve disclosed to you in the past.
Alright, Thats helpful. And then on the 41 million dollar, Florida seeing high credit I remember youre mentioning that briefly last quarter any other color as far as.
What what is happening what that credit and then I know you said.
You took a provision on it and the fourth quarter, how what's the mark on that loan as of now.
It's about a little less than $10 million.
Is the is it religion that we've taken.
And that we feel very comfortable with that number.
All of this quarter to two point the number.
Come up with what we think is a very safe number.
It's going to be at work off for a while the situation is not one of liquidation in bankruptcy kind of thing where we can say.
Three or four months will liquidate everything so it's an ongoing concern and.
So this loan will be in work for awhile, but we think we're adequately reserved with this.
Right and a half million that we've just taken I would.
My CEO sit here so if he hits me.
Retracts I'm about to say, but I think undersea sell the reserve for that long, it's going to be unchanged, we feel like that's an appropriate.
Yes.
[laughter].
And then finally from me.
As you mentioned last quarter of about hiring a cup and maybe a tumor too and Atlanta on the commercial front end any update on.
Kind of how you're thinking about Atlanta, and the investment you're going to make there.
Yes. So the team is here they are off the races.
I would say that you know these proceeds were selling.
In a new market, it's not going to have an impact that will drive your investment analysis over the next 12 months.
But the the seeds, we so for three and four years later.
And if it actually works out today, we think that will be material in three or four years down the road, but not in the next year too. So we're happy with the team.
The progress has been made and of the first few weeks.
Recent pipeline and but I think the numbers will be small.
Early on.
Got it thanks for the color guys.
Yes.
Our next question comes from Ebrahim Poonawala with Bank of America. Your line is now open.
Good morning.
Oh, just one quick clarification literally on the expense side, when we think about flat expenses.
Just wanted to make sure.
Looking at that number it's about 420 million adjusted for Beacon, you Dewpoint go and the amortization and depreciation expense saves fourtwenty that I need to think about it and then that sounds right that yeah. It's just the total minus the 14.8 impede 2.0 cost and then to your point depreciation of offer.
At least equipment, which will fluctuate with the portfolio and we've been watching one no cost timing that we should expect going 20 ready.
The only thing I think of significance that you'll see going forward, maybe some costs associated with some of the branch closures and as we incur those if there are significant we'll disclose them, but there'll be some of that and probably some technology investments that will be making in some of the platforms that were put in place to generate the revenue. So those would be the two categories, where I think as well.
Something going forward.
Got it.
Trip Bakken.
Rod you feel good BK 2.0, and what gets accomplished looking Algonquin btwenty beyond 2020 like if you could just talk to like what it has gone means we see the obvious declining or keeping expenses flat or the savings, but beyond that on the expense flash efficiency side.
How does that change bankunited and how should that impact like as we think about a more medium term outlook for the company.
I mean, I could talk about that AD nauseum.
You know I have here bullet point in front of many of which Leslie prepared.
Did that.
I think I'd say, there's no one particular thing that I could just point out its branch optimization this organizational optimization.
Net income of the creative process, it's a the digital bank investments that you've made theres a lot of little things its robotic process automation, we have 30, Boston production now and many more to go in.
All of these by themselves any one thing is not as exciting to talk about but when you put it all together it adds up to you know $40 million of expense a than men 20 million of revenue.
But it is really about shaking out or or retooling, the plumbing or the company. So that is remains nimble and efficient as we get to the next to the phase of growth. So we have not done. This major league pooling in 10 years, and 10 years ago viewer 10 15 billion.
The bank that Tredegar 35 billion. So this kind of major.
Retooling is needed.
For a company that grow as fast as we've grown.
I think in 10 years time, if we had 60 70 whatever billion dollar company will probably be needed again, because we will outgrow what we are doing today in terms of process season, and organizational design and so on so.
Yes, I'm happy to talk to you in a lot more detail if you on a call me, but it really isn't one thing that I can.
Point too.
Maybe the organization design will be the biggest thing biggest change.
The technology, yes, the technology investments.
That's why that if I go back off line and.
The other point just sit on technology investments I'm wondering if you can provide any color around just upgrading core system is there anything client facing revenue.
Given kind of investments that you undertaking that should show up maybe later this year next year.
So I would say the two big buckets are.
We're moving the bank complete due to the cloud and we are more than halfway through that journey.
Dirty will be complete by the end of this year. So thats one big thing with Risotto, obviously that was not even part of 2.0 recycling that the for 2.0.
And.
And that is coming to a head and that has.
That improves the infrastructure the bank.
In many ways. It's not just about cost is also about making the the infrastructure much more robust.
There are big investments that are happening in the digital space as well on customer facing technology.
Which also start to.
Go live with clients.
I think this quarter is a is that employee rollout and then starting next quarter.
It will be a bigger rollout for for the rest of the franchise. The right investments also being laid on the commercial payments side.
Early in that is actually that projects has kicked off this year and we'll take a couple of years. This this theres a lot of investment that is going in.
It's difficult for me to just say okay. This effort leads to this many dollars in revenue, but all these investments we're making you know are eventually.
Not because we just likely technology, but the country like more revenue.
So they're all driven to our assumptions of revenue some of that will pan out in the next year to some will take three or four years, but how big numbers.
There are also very impactful on the deposit side of the business, Yes, yes, probably more so right and then on the lending side on the lending side of the business, Yes, yes, what we are.
Yeah.
It's not not heard the word loan origination system.
All of these investments.
But its commercial payments whether it is digital.
And our infrastructure the cloud they are all geared more towards deposits and loans.
Okay, Alright, I look forward to seem to be can you add in the superbowl. Thanks for taking my question.
[laughter].
We are doing some real of marketing on that front as well by the way if you look for it and thats more going to be on social media.
Our next question comes from the line of Dave Bishop with da Davidson. Your line is open.
Yeah good morning.
Good morning.
A question circling back.
In terms of SDK, you 2.0, right that there are a little bit Hugh.
You said there is a little bit of a delay on the revenue side in terms of the BK you 2.0, just curious.
From the timing you still think Thats achieved by 2021, and just remind us in terms of some of the.
The products and new systems and products that are going to ramp up the revenue side.
Yes so.
The revenue bucket was again made up a number of things that added up to about 20 million.
Anything that have to do with existing products.
An existing platforms that were already on that we are on track and probably a little bit ahead of being on track anything that falls into the category of that we have develop a new product or new technology will have to hard new people would product expertise that has taken maybe a quarter longer than what we thought stuff because.
We were going on law launch in the second quarter of this year is now pushed out the third quarter.
So you know that's the delays so it's about three or four months worth of delay.
But on the expense side I will tell you that we up three or four months ahead of where we thought we were and expense bovies twice as big as the revenue movies. So overall for the program I feel that we are low but ahead, but if you just break it down between revenue expenses, that's where we all are the new products to your question you know a commercial card.
Program that we are going to launch that that is on a three month delay we talked with lot launches in April but it is going to be more.
In August .
That team it took a while to hire the right team.
All the six little bit longer for negotiated with vendors and do the IP buildout. So that's where we are.
We're also making changes to small ticket underwriting call. It what's called a new product, but it is certainly a new process and were automating that and that is also in the three or four months delay. If you talk would launch it early this year. It will probably happen later this summer so things like that way, we would have to develop new things or.
Our higher new people or launch new products.
That ends up taking maybe three or four months for.
Got it and then maybe a quick update in terms of what you're seeing in that that franchise finance portfolio in the of the railcar portfolio.
The franchise.
Just a railcar or franchise.
Right and restaurant franchise.
Correct.
Okay. So let me first.
Talking about our franchise businesses give or take about 600 million off which the restaurant pieces about two thirds to business. So lets say about $360 million. So.
The non restaurant, which is the rest which is things like.
Fitness fitness and you know and other concepts are doing extremely well. So we're not concerned by that we're happy to actually grow that part of the business.
Restaurant, which is about 360 million is under stress.
For a number of reasons one is got to do with the unemployment rate be what it is putting a lot of pressure on labor costs.
Do I think changes in and customer behavior driven.
Mostly because of overreach and Grubhub adored action so on.
A customer behavior is changing in terms of.
Rather coming into a restaurant as it might delivering happening at when delivery happens.
Often the revenue model gets impacted because you're not ordering some of the higher priced stuff or higher margins up like drinks and desserts. So thats, putting pressure and that you know I can go on.
When you talk what pizza.
That used to be the primary delivery.
Product and now that product is getting challenge not everything is avail.
And so just the pizza concept is under pressure from from new competition. They only have to worry about the Chinese food delivery.
But now that are worried about everything from Starbucks too.
Mcdonald's and Wendy's and Panera everybody delivers so that change that is happening in the business model coupled with tight labor market is what is putting pressure on the financials of off our AR.
Borrowers.
I would add that some of these clients are are moving towards more automated methods, we happen to see one the other day where you're.
Instead of having labor producer Pizza, you have now pizza machine manufacturing. So the franchisees are working to adjust to new labor markets in new cost markets, but it's just going to take time and there are pressure on margins. While this is happening in the business. So it's an area on the food restaurant.
Side of our freight car Park franchise business, where we're just trying to be more cautious at this point.
Got it and is that any of that nonperforming or recurring SaaS classified.
Anyway, Im sorry, any of those loans in pleasantly yes. There are some yeah I don't have any debt number in front of me, but it'll be disclosed the 10-K.
[laughter] endless disclosing the last Q that there are some for sure.
Got it one final question the the $1.9 billion impairment charge I think you cited in the press release, maybe color on that.
Yeah, we had some equipment under lease it actually came back off lease and when we reevaluated the residual values in the market value that equipment. It actually wasn't railcars with other equipment in the portfolio interestingly enough.
We found that the current market value that equipment with a little lower than than our residual I don't think that's systemic I don't expect it to be pervasive throughout the portfolio and like I said it wasn't even railcar it was another form of equipment.
Got it thanks.
Our next question comes from the line of Tyler Stafford with Stephens. Your line is open.
Hey, good morning, guys and thanks for taking the question.
I just wanted to follow back up on expenses. So I appreciate the outlook for 2020.
With expenses to be flat, giving offsetting nature of the 2.0, but otherwise expense growth as you mentioned what have been a 3% to 4%. So just to confirm the expense reduction benefits of 2.0 will those be fully complete by the end of 2020, and then as we think about 2021, there would not be any lingering at 2.0.
Things is that right when you think about it.
Might be a little bit related to branch optimization Tyler that so Phil is happening after 20 tiny but the bulk of it certainly be done.
Okay.
And then just following up on on one of the prior questions that I don't think got asked what was it just around the railcar lease portfolio. So last week wells called out from elevated charge offs out of that portfolio I think it's around 200 million or so for BK. You. Just curious you comment on what you're seeing trends wise out.
That out of that portfolio.
We haven't obviously, we haven't taken any other impairment charges I just explained the one we took this quarter was not in the railcar portfolio. So and we've done a very thorough lab reappraisal and reevaluation of all those values in the fourth quarter and did not have any additional impairment charges to take them I would say.
$235 million is what we haven't railcar at December 30 Onest.
Sitting on the balance sheet.
And we continue to monitor it and be afraid values are coming in we took a deep deep look out go down in Q4, and we're satisfied with the results. Okay, alright, great Thats. It for me. Thanks.
Okay.
Our next question comes from the line of Stephens, along with RBC capital markets and your line is now open.
Hey, good morning, guys.
Morning Learning I'm wondering on your new your New York City multifamily do you expect it to.
Form similarly to what we saw this quarter essentially offset your Florida multifamily for the year.
No I would not say, so I would say the maturity level into Q4 in New York.
For that portfolio was relatively light there will be larger in 2020, there will be larger in the first quarter of 2020, so that level of maturity was a bit of an aberration in Q4.
2019.
Got it I appreciate that and then on your warehouse lending business you guys had solid growth this year.
The industry originations lets say say declined by 10% do you still think you can keep this book, where it is or or possibly grow it.
We have a pretty decent pipeline. So our expectation is we'll continue to grow commitments utilization will obviously.
Fluctuate based on the time of year, but also based on what happens with the mortgage market in general So third quarter was amazing.
Fourth quarter has slowed but more out of seasonality than anything else first quarter will slow even more generally we bottom out in February and then start to build balances up utilization up again in March.
And then it's ready in second and third quarter, where we.
You evolution gets up over 50%.
But in terms of <unk> I don't look at the Outstandings in that business as much that look of commitments.
The commitments are continuing to grow and the pipeline is decent so.
We're we're.
We're not concerned about growth that business I would add when volume is down you tend to see clients pare back.
Credit players that are less significant than their world than I think when we look at our relationships and the commitment levels that we have in the relationships, we're well positioned in our major relationships.
Just curious on that how how much have commitments changed and in the fourth quarter this year versus a year ago.
I don't have a year ago snowfall just give us a minute.
Yes.
Somebody is looking right now.
Sure Winter Jack that when we find it.
Okay Yep.
And then just moving on to your you're ready, but did you guys have any of those buyout loans this quarter.
Yeah.
More than 100% of the growth in resi that you see was from those loans.
Okay.
And can you remind us.
The current interest rate environment. It remains attractive support these loans is that correct, yes, yes, absolutely.
Okay great.
And then just might one last question.
Just going back to meet you talked about branch closures have you narrowed down what you're looking to do in terms of branches, so where where you're looking to close one maybe open another area or is that still a work in progress.
No for.
All the branch optimization decisions.
I have been made but the implementation of those decisions.
It's a two year process. So some we have already acted on in 19 and some we are willing to act on in 2020, but all the decisions have already been made.
Steven back to your question about mortgage warehouse commitments, there I'm, just a little shy 300 million hours year over year.
What about rate.
Great Awesome I really appreciate it thanks for the color.
Our next question comes from Sean Tobin with Janney. Your line is now open.
Good morning.
Good morning, John .
Just one clarification question on the margin.
You said that it's basically flat with EUR 2020 margin would be flat with the fourth quarter of my team.
That including one rig.
Including yes, you are for everyday.
Yes, okay.
Okay. Okay. That's helpful.
And then just one other interest rate related question do loan floors are they possible could get done today, that's something you're looking out at all for 2020 within your commercial contracts.
Yes, we are actively working on like more base floors.
Hi, I wouldn't say were successful 100% of the time, but.
We're successful a fair amount of the time in instituting a floating rate like workforce.
Okay. That's helpful.
Thanks for taking my questions.
I'm showing no further questions in queue at this time I'd like to turn the call back to Mr. same for closing remarks.
Thank you for joining us we're very happy with the progress. If you made in 2019 were happy where the numbers came out I think were most happy that deposits continue to grow and the quality of the deposit book continues to improve.
90 basis points reduction in cost of funds last I looked I think.
Was the industry leading number from.
Recent reports that I've read so far so we're happy about all that and we're optimistic as we head into 2020.
We'll talk to you have in three months. Thanks Bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.