Q4 2019 Earnings Call
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Welcome home your question, please press * then two. If at any time during the call you require assistance, please press the star key followed by zero and an operator will be happy to assist you. As a reminder. This conference call is being recorded. I would now like to turn the conference over to Barbara Callahan head of investor relations, please go ahead.
Thank you, Alyssa. Good morning, and welcome to the fourth quarter 2019 earnings conference call our call today will be hosted by Ellen Alemany chairwoman and CEO and John Fawcett our CFO during this call. We will be referencing a presentation that is available on the investor relations section of our website at CIT our phone no statement disclosures and non-GAAP reconciliations are included in today's earnings materials and within our SEC filings these cover our presentation materials prepared comments and the Boston and answer segment of today's call. Thank you, and I'll now turn the call over to Ellen Alemany. Thank you farmer. Good morning everyone and thank you for joining the call.
2019
As a pivotal year for CIT, we made Solid progress on our strategic plan and we began to lay the foundation for future value creation through the acquisition of Mutual of Omaha Bank, June 1st. Let me touch on our performance for the year. We reported net income available to Common shareholders of 511 million or $5.27 per diluted share wage earnings per share was $5.06 excluding noteworthy items, which is a 28% increase over last year.
Received a Rhodes Target for 2019 with core average loans and leases up 7% We exceeded our operating expense Target and achieved our full million. Mm 20-goal a year early.
We continue to optimize our funding mix and gruyere direct Bank customer base by 45%
We improved their credit profile and received an investment-grade rating from Fitch. We further strengthened our risk profile bringing are criticized loans down 28% completed the acquisition of Mutual of Omaha Bank on an accelerated Pace 54 days for regulatory approval and 140 days from signing to closing as a result. We will recognize a full quarter of earnings from Mutual of Omaha Bank in quarter. One of our Capital ratio was 12% a little higher than planned for the year and that is due to the reduction and share repurchase is as we made the decision to acquire Mutual of Omaha Bank as previously discussed. We've returned 6 and 1/2 billion to shareholders over the last five years and we believe the investing in this acquisition will help us create longer-term sustainable value.
a return
Tangible Equity was 9.8% for the year when normalized for the preferred dividend and was 10.6% on a pro-forma basis excluding the actions. We took related to the off position. Well, this is a bit lower than our original Target. It does include three rate cuts that were not part of the original plan at the start of 2019 overall. It was a solid year that has allowed us to enter 2020 as a stronger company. In fact, just last week CIT was added to the S&P midcap 400 index which is another Testament to our progress and transforming the company and delivering steady results for shareholders.
John will provide financial performance for the quarter. But first I'll touch on a few highlights. We posted net income available to come and shareholders of 121 million or a dollar $27 per diluted share in the commercial banking segment. We saw strong origination activity as we continue to prioritize direct originations and Prime Bank relationships average loans and leases were up 4% year-over-year in the segment and we continue to take a disciplined approach to acid growth and balance risk-adjusted returns.
capital
Market fees were up 20% and we let about ninety-four deals and 2019 with 78 of those being left lead or so lead.
Keith where we have leadership positions, we were number four and Healthcare sponsored deals and number three and power and renewable deals wage 2019. In addition. We moved up 10 spots in middle-market sponsored deals to number fourteen. We doubled our assets under management to about $340 a month. It will take some time for these vehicles to begin to meaningfully contribute to earnings, but the growth trajectory is gaining momentum pipelines are strong and we're seeing good opportunities and not technology and Aerospace and defense verticals as well as our asset-backed businesses.
We've added origination capacity in these areas to further enhance our presence in these markets.
We continue to manage through the cycle in the rail business and we expect the trade agreement to be beneficial to this industry or high-capacity Fleet remains ready to respond to any increase needs an hour improvements and maintenance costs have helped to offset some of the softness in renewal rates.
In the consumer banking segment, we continue to optimize deposit costs by improving our mix and delivering Innovative products to customers looking for digital banking experience. Our deposit costs decreased 14 basis points compared to the prior quarter Arn on maturity deposits increased to about 70% of total deposits, which had aided our optimization efforts in this part of the cycle. We have adjusted pricing and some of our leading direct Bank products and continue to see strong retention levels. We launched new each checking product at the direct bank, which is a fully digital account that can offer customers and other ways to expand their relationship with CIT Bank.
As I mentioned earlier, we completed the acquisition of Mutual of Omaha Bank at the start of the year and our integration work is well underway to fully unlock the value in these new franchises off the deal brings largely complimentary businesses to CIT. Chief among them is the Community Association banking business. This is a new lower-cost deposit channel for us and one that we intend to significantly grow in the coming years. Our goal is to double the deposits in this business in the next five years.
creating this kind of
Funding Improvement will increase our competitiveness and addressable market and create a more sustainable and profitable model for CIT going forward. In addition. We took Market banking Bankers across the country is part of the deal and that team is focused on Regional relationship business that will deliver more primary Bank business this month also allow us to expand our deposit growth increase our fee income and create a more holistic and profitable relationships to complement more of the transactional and project deals that we have done historically month. We believe these divisions along with the efforts. We already have underway and expanding our Commercial Banking capability will help to accelerate our goals and enable us to build sustainable momentum long time.
To fully realize these goals. We need to continue to drive towards improved operational efficiency. Some of that will happen through the integration process, but we believe there's an opportunity to do more to that end. We plan to reduce operating expenses by an additional fifty million in 2021 and John will share more details on this shortly after we believe this along with our other business goals will bring us more in line with peers.
CIT is in one of the strongest positions it has been for some time. We have the team and the tools to be one of the top commercial banks in the country are excited about the opportunities ahead and our focus on continuing to deliver for our customers and shareholders with that. Let me turn it to John . Thank you Ellen. Good morning everyone. We reported another song quarter and a strong finish to the year as we continue to deliver on our strategic priorities including closing Mutual of Omaha Bank acquisition on January 1st, and is Ellen mentioned just walk in 40 days from when we signed the deal is Ellen indicated. We grew average loans and leases in our core portfolios 1% over last quarter and 7% for the year.
Or credit provisioning metrics continue to reflect the stable credit environment and it improved risk profile and continued underwriting discipline this quarter. We issued subordinated debt and offered stock to fund a portion of the Mutual of Omaha Bank acquisition both very attractive levels. And we also received an investment-grade rating from Fitch.
The average deposit rate felt 14 basis points as we continue to focus on optimizing costs by balancing pricing strategies and funding needs we reduce 2009 operating expenses by $52 after adjusting for noteworthy items lease accounting changes and cost associated with Mutual of Omaha Bank, exceeding our fifty million dollar expenditure reduction Target a full year ahead of schedule. We grew earnings per share 46% for the full year 2018 and excluding noteworthy items it grew back twenty 8% to $5.06. We grew tangible book value per share 11% this year to $56.77 and she continued to improve our return on tangible common equity in the fourth quarter. We posted a return on tangible common Equity just under 10% after normalizing for the semi-annual dead.
series a preferred dividend
If you also adjust for the additional cost incurred and the build-up of capital and support of the Mutual of Omaha Bank acquisition. Our fourth-quarter return on tangible common. Equity would have been 10.6% while short of our original 11% Target reflecting the impact of three on budget cuts in 2018 it highlights continued improvement over the 10.1% We took in the fourth quarter of last year excluding noteworthy items.
I will now discuss the fourth quarter results. There were no know where the items this quarter. However, I will refer to our comparative results excluding noteworthy items in Prior. Unless otherwise known no turning to slide eight of the presentation net Finance Revenue declined modestly from the prior quarter primarily driven by lower interest income from lower Market rates on our floating wreckage loans interest-bearing cash and investment Securities net operating lease revenues benefited from higher rental income and lower maintenance costs this quarter while interest costs to climb reflecting lower deposit costs and lower borrowing costs.
Floyd 9 is our net financing.
Large and walk next Finance margin was 3.01% in the quarter while down five basis points from the prior quarter reflecting the trans. I just mentioned it came in slightly better than our fourth quarter guidance. We remain laser focused on optimizing our deposit costs in the margin benefited from a 14 basis-point decline in deposit cost this quarter. We reduced our Savory build a rate by 35 basis points in the fourth quarter and another five basis points in January 1st for a total of 65 basis points, since we began reducing rates last May
CDs also repriced down reflecting the current rate environment.
We expect deposit cost to decline further next quarter as we continue to manage our mix and execute on our Target marketing and pricing strategies borrowing costs also declined revolting lower average balances as we reduced our federal Home Loan Bank, nabl facility balance is temporarily with liquidity raised to fund the Mutual of Omaha Bank acquisition higher premium payments and interest recoveries in Commercial Banking more than offset lower purchase accounting accretion disc order.
I would also mention that are.
Real business at a basis point to margin from lower maintenance costs and three million dollars in excess mileage charges which are generally non-recurring and difficult to predict.
Her name is like ten other non-interest income improved $10 compared to the prior quarter reflecting a $9 game on about $50 off a book value of mortgages sold from the Legacy consumer mortgage portfolio. These loans were performing but many had been modified and had lower FICO scores. We will continue to look up to selectively prove the Legacy consumer mortgage portfolio and generate similar results across twenty-twenty as poor as part of our portfolio risk management activities wage compared to the year ago quarter the increase of $19 also reflects higher Capital markets fees. We have several initiatives to improve our non-interest income in 2018 black crew gross revenues from our Capital markets and customer derivatives activities like 20% and we expect to continue to grow these fees in 2020 including providing solutions to our new dog.
Loma Bank clients
Turning to slide eleven operating expenses, excluding intangible asset amortization decreased eight million dollars from the prior quarter driven mostly by lower advertising and marketing costs related to our deposit Gathering activities. The current quarter also included $7 in merger and integration costs related to the Mutual of Omaha Bank acquisition for a total of $17 in 2019. We ended 2019 with total operating expenses, excluding intangible asset amortization of 1.04 dollars billion dollars unchanged from 2018.
Operating expenses this year included $35 in costs related to Lisa County changes and $17 of merger integration costs related to the Mutual of Omaha Bank interaction excluding these items. We reduced our cost base by $52 compared to 2018 to $994 exceeds or 20/20 cost reduction Target one year at a time.
Committed to continuous Improvement and is Ellen just indicated? We have announced an additional fifty million dollars in cost reductions in 2021. This is in addition to the cost synergies. We will achieve with the majority of them are Bank acquisition. We've included a couple of slides in the appendix of the presentation to illustrate our progress.
Flight from the prior quarter reflecting 1% growth in core loans and leases and modest growth in interest-bearing cash and Investments offset by the continued run off in sale of loans for the Legacy consumer mortgage portfolio to limit negative carry from the pre-funding of the Mutual of Omaha Bank acquisition. We temporarily reduced are secured facilities during the quarter. Our year-end cash balance was elevated by eight hundred and fifty million dollars in held in restricted cash and had of the traction close.
So I thirteen provides more detail on average loans and leases by division. We continue to see good origination activity across our businesses and pipelines are strong in Commercial Banking bought a new business volume increased 9% over the prior quarter, although Market liquidity and refinancing activity drove. The highest prepayment levels. We have seen in the last four years. We are obtaining a disciplined approach to asset growth balancing risk-based margins and fee income opportunities as we continue to recycle Capital away from lower returning nanak creative relationships into growth areas The Leverage our expertise
Commercial Finance average loans and leases were relatively flat this quarter and up 7% from the year-ago quarter while risk-adjusted spreads have remained relatively stable reduction of portfolio yields. This quarter reflects the decline in libel rates in our ongoing efforts to improve our risk profile.
In business capital is flat this quarter it up 6% from the year-ago quarter as we continue to outpace the insurance industry while repositioning away from lower risk-adjusted returning sector wage.
New business shields in certain areas continue to be pressured from low swap rates and the competitive environment.
Our advantage and Technology helps us remain competitive in the current environment real estate Finance declined modestly this quarter and 3% from a year ago reflecting disciplined originations in elevated levels of prepayments portfolio yields declined this quarter as a result of lower Libor levels.
A real portfolio grew this quarter is new deliveries more than offset depreciation and asset sales real loadings in most industrial sectors remain under pressure and excess capacity in the North American Fleet industry continue to increase to 24% at the end of the year up from 18% at the beginning of the year.
despite
The persistent weak Market environment or real team has been able to manage Fleet utilization to 94% at your end and our efforts to reduce maintenance costs have offset some pricing weakness lease renewals repriced down 24% this quarter reflecting the mix of cars renewing for the full year lease renewals repriced down 17% slightly above our guidance range of 10 to 15%
We continue to see strength in car lease rates while Saint cars continue to show the most weakness within the Freight Market. We expect to lease renewals on the total Fleet to reprice down to 15% in 2020. But we expect this to vary quarter-to-quarter depending upon the number and type of cars renewing
we expect the average utilization 20/20 to be in ninety-five percent area dipping a little in the first quarter and then improving over the rest of the year quality of our young diverse Fleet off our strong Market position in management team as well as our customer service positions as well to navigate the current environment.
we were
Vigilant on asset Readiness and is Ellen indicated we expect the phase one trade agreement to be beneficial to this industry and to the extent. We see increased demand. We will be ready to meet that Demand with Redbox load cars average loans were flat reflecting growth in the core business of offset by the sale of loans and continued run off of the Legacy consumer mortgage portfolio slide 14 highlights our average funding mix.
The reduction in funding costs reflects lower deposit costs and lower borrowing costs. The lower borrowing cost reflects primarily reflects lower average balances in our federal Home Loan Bank and structured borrowings particularly offset by higher unsecured borrowings. The increase in unsecured borrowings includes a full quarter impact of the $550 in Bank. They'll Trace at the end of September at $296 and a partial quarter of $100 of sub debt at 4 and 1/8 to fund a Mutual of Omaha Bank acquisition.
as I mentioned earlier
We deployed excess liquidity raised ahead of the acquisition and reduced our federal Home Loan Bank instruction facilities to limit the negative carry.
Slide fifteen illustrates the deposit mix by type in Channel overall deposit rates declined 14 basis points reflecting a reduction in rates in our non-majority deposits and down wage repricing.
With the closing of the Mutual of Omaha Bank transaction, we acquired approximately 4 and 1/2 billion dollars of stable HOA deposits in 2 and 1/2 billion dollars of commercial and Retail deposits off the Blended rate of the Mutual of Omaha Bank deposits will immediately reduce our current deposit costs by approximately 16 basis points as Ellen indicated. We have a number of gross issues in place to meet our commitment to double the HOA deposits over the next five years such as expanding into new markets as well as increasing our share of wallet with existing relationships month starting in the first quarter. We will add another reported deposit Channel called HOA to the bottom of the chart. We will be able to clearly be able to see our progress month.
Journey the capital on slides
Our common Equity Tier 1 ratio grew to 12% at the end of the year reflecting the retention of quarterly earnings and the suspension of share repurchase activity, which essentially anything at the end of the second quarter due to the pending Mutual of Omaha Bank acquisition.
In addition this quarter. We raised $200 of Tier 1 qualifying preferred stock and $100 a subject which is included in tier 2 Capital both to partially fund Mutual of Omaha Bank transaction.
Pro forma for the closing of the acquisition including the impact of Cecil are common Equity Tier 1 ratio is approximately 10% the lower end of our target range of ten thousand percent Our intention is to remain out of the market for common shares in order to increase our common Equity Tier 1 ratio to 10:00 and half percent the middle of our target range and continue to pay our common dividend at the current level until that time as well. We estimate that it will take approximately four quarters to reach a common Equity tier one level of 10.5% off at which time we will re-evaluate our Target levels as well as our share repurchase and dividend payout levels.
Flight 17 highlights. Our credit Trends the credit provision. This quarter was twenty-three million dollars below our guidance range of $25 to $35 billion dollars and that charges for $32 or forty basis points the midpoint of our guidance of 35 to 45 basis points.
That charge will continue to be primarily driven by commercial finance and pockets of transportation-related Landing in Small Business Solutions within business Capital non-accrual Loans increased by Twenty million dollars and was mostly driven by a few unrelated loans in commercial Finance.
The majority of the non-accrual portfolio continues to be current and we are not experiencing any notable Trends in any specific industry or geographic area do business origination to reflect on continued efforts to enhance our risk profile and as a result continue to come in at better risk ratings than the overall risk rating of the Performing portfolio.
our Reserves
Remain stable and strong at 1.56% of total loans and 1.89% for Commercial Banking and reflects about four times the last 12 months net charge-offs month. We had a six point three billion dollars of loans from Mutual of Omaha Bank and a part from approximately eighty million dollars of energy loans that are heavily marked and classified as PCB. We expect the portfolio to perform well,
We adopted Cecil at the beginning of 2020. We estimate the day one impact on tangible Book value from see from cits portfolio at 75 to $100 a month based on that range. The ProForm impact to our cet1 ratio would be fifteen to twenty one basis points on a fully phased-in basis. Although we intend to adopt the three-year phase-in. Forgive or three purposes.
We're in the process of reviewing Mutual of Omaha's loan portfolio and currently estimate the capital impact of Cecil adoption to be forty to sixty million dollars representing the reserves on the nine P C D Loans, which will flow through p&l as credit provision and reduce Capital. It's reserved build essentially represents a double counting of credit risk in both the purchase price and the allowance build because the acquisition closed in January 1st, we will incur the full impact from the Mutual of Omaha Bank portfolio and Regulatory capital in the first quarter wage with no opportunity to phase-in
we currently
Estimate the total Reserve increase in CIT portfolio to be $225 billion to $275 billion dollars and a Mutual of Omaha Bank portfolio to be an increase in incremental seventy-five to one hundred million dollars, which is flat to a modest increase when compared to the Reserve balance at your end the difference when compared to the capital impact reflects the reserve on the p c d loan which will be offset by an increase in the loan balance. The PTP CD loan reserve on Cat books are related to Legacy consumer mortgages former cold PCI loans where the PCD Reserve in the Mutual of Omaha Bank portfolio primarily relates to their energy portfolio.
Our current estimates assume moderate economic growth continued low levels of unemployment and a stable credit environment. There is a slide near appendix that illustrates our latest thoughts thoughts slide eighteen highlights our key performance metrics reflecting the trends. We just discussed. Our effective tax rate was 27% and was negatively impacted by $3000000 in discrete items this quarter primarily driven by true up state and local taxes.
Page nineteen and twenty highlights our outlook for 2020 unless otherwise noted my commentary will focus on full year 2020 targets when compared to full year 2019 excluding over the items and actual results may vary by quarter.
Our Outlook assumes One Rate cut in late 2020 GDP growth declining from current levels at the end of twenty-twenty stable unemployment and stable credit Thursday. It's
The Mutual of Omaha Bank acquisition. Will they at six point three billion dollars of loans, which includes two point 1 billion dollars in middle-market C&I loans and 2.3 billion dollars in commercial real estate loans to Commercial Banking and one point nine billion dollars in Commercial Banking loans, which are primarily corresponding consumer mortgages.
For average loans and leases after including the six point three billion dollars of Mutual of Omaha loans are expected to grow in the mid single-digit area, which will be slightly offset by LCM loan same and portfolio right off.
Best Finance margin is expected to be 292 305 this range reflects continued pressure on real repricing and while maintenance costs were down this year reflecting or productivity initiatives. We expect it to be two to three percent higher in 2020 given the number of cars going on and off lease which the industry calls portfolio turn.
Oil is together. We currently estimate a five to ten basis points rig on the margin from rail. However, while uncertainty remains there could be a pick-up in renewal rates if there is a positive impact from The Phase One Trade Agreement.
On the asset disposition side as we manage our Fleet we expect to continue to sell rail cars outside the bank.
We expect these actions to reduce funding cost over time and provide an extra an additional five to ten million dollars of gain-on-sale Revenue in 2020.
Excluding the impact from rail that Finance margin should remain relatively constant with a number of puts and takes the acquisition of Mutual of Omaha Bank immediately benefits off by about three basis points. We also expect continued downward repricing of cits deposit base reflecting a full quarter benefit of the fourth quarter in January 1st reductions off as well as a downward CD repricing
Well shutting me.
Is impacts the benefits of these impacts of the 2019 rate cuts on loan yields?
In addition, we expect our continued portfolio management activities designed to improve our risk profile to modestly negatively impact margin with offsetting benefits in other am interesting.
We expect the first quarter margin to be in the low-to-mid area of our guidance reflecting lower net operating lease Revenue in rail from lower repricing levels and higher maintenance package that I just mentioned as well as the absence of excess mileage charge that benefited the fourth quarter. We expect a reduction in loan yields from the full quarter impact the October rate cut as well as lower paa from the sale of the LCM loans to be offset by a benefit from the Mutual of Omaha Bank portfolio and lower repricing benefit package from the online Channel.
operating expenses
And tangible amortization and merger and integration costs is expected to be 1210000000 dollars this reflects the addition of the Mutual Omaha Banks operating expenses costs energy is $16 and the absence of $17 of expenses. We incurred in 2019 associated with the acquisition.
In addition to this core operating expense space we expect to incur $80 of merger and acquisition costs, which we will highlight is noteworthy items in each quarter.
Intangible asset amortization is expected to increase to approximately ten million dollars per quarter as I mentioned before we are committed to continuous Improvement and are targeting an additional fifty million dollars or expense reductions in 2020 over and above the net cost synergies already planned.
Slides 32 and 33 in the appendix illustrate these changes and the impact of the synergies and merger-related and integrated merger and integration costs.
For the 1st.
First quarter operating expenses are expected to increase when compared to the fourth quarter of 2018 with the addition of Mutual of Omaha Bank and seasonal benefit restarts.
The net efficiency ratio excluding noteworthy items is expected to remain in the mid fifty percent area for twenty twenty although similar to last year. We expect it to increase to the 60% off in the first quarter reflecting the elevated benefit restarts.
That charge also expected to remain between 35 and 45 basis points as higher risk assets are expected to continue to cycle through the portfolio.
We anticipate that the provisional will be more volatile than 20/20 with the adoption of Cecil is the day to impact will be driven by many factors for now. We estimate the provision will increase the average of 35 to 45 million dollars per quarter post Cecil implementation compared to our more most recent guidance of twenty-five to thirty-five million dollars per quarter.
Effective tax rate is expected to remain between $25 and 26% excluding discrete items. We are targeting the cet1 ratio for the fourth quarter to be 10.5% as I indicated earlier. We are targeting the return on tangible common Equity excluding noteworthy items in normalizing for the semi and preferred dividends to be at least 11% at the end of 2020 and Cucina focus on Opera opportunities to improve further with that. It will turn the call back over to Ellen.
Thanks, John . We started the year with strong momentum and we look forward to this next phase of the plan. We're poised to achieve and 11% return on tangible common equity in the fourth quarter of this year and we're focused on further closing the profitability Gap with our peer group with the acquisition the Investments we've made in the front end of the business and the additional cost targets. We have set we believe we can achieve a return on tangible common Equity of Thirteen to fourteen percent in the medium-term the Improvement and profitability over the medium-term mainly from lower deposit costs additional Capital optimization improved operating efficiency funding more of our business in the bank and additional opportunities for fee income. We will continue to provide updates on our progress as we go through this next stage of the plan and with that. We're happy to take your questions.
Thank you.
We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to Worcester your question, please press * then two at this time. We will pause momentarily to assemble our roster.
And the first question today comes from Ken's of Morgan Stanley , please go ahead right. Thanks. Good morning. Maybe just starting off an interest expenses. I just want to make sure I heard the numbers right? Cuz I think I heard the additional fifty million dollars it cost both in 2021 and 2020. I want to make sure I got the right year there, but also want to make sure cuz I think you said that's in addition to the Mutual of Omaha Bank cost savings. So I'm just trying to figure out what is when we think about the the core expenses the amortization off in 20 and 21. Like what is the right number that we should be targeting? Yes. So tennis is John . So obviously there's two elements to this. The first is the $54 which is consistent with what wage guided when we announced a deal on August 13th. So that's fifty-four million dollars and that'll be realized over the course of a couple of years and there's a slide actually in the back of the Dead.
I'm not exactly sure what page it is, but
I'm thirty-two and thirty-three that articulates that motion. So the $54 is phased over three years the expectation is that more of that will come in faster. So that's the bit that relates to age twenty twenty and that's the cost synergies to come from Mutual of Omaha Bank apart from that. We've embarked on a separate program to look at larger synergies that once we actually run the place and get the whole thing together. There's another fifty million dollars that we're signing up for and I would say it's still early days but fifty million dollars as we said last year at least fifty million dollars will come into twenty Twenty-One. So those are the two discrete buckets. Now that said, those aren't bright necessarily bright lines in the sand as as we've done and demonstrated we will attempt to over-index off the fifty Four and Twenty twenty and we will continue to over-index on the 50 in 2021.
Okay, so so just to be clear though, the including all these items X murder charges, of course. Yeah, like the core expenses are 120 days are 1.21 billion and 2020 and then 1.6 billion. And is that the right way of thinking or 1.16 billion and twenty twenty-one?
And those are all in numbers like so you took twenty twenty core operating expenses of a billion to 10. You'd expect the expenses to minimally be $50 lower than that. Should be the one one six zero got it. Okay, that is actually very helpful. And then just it really quick on in terms of the provision expense. Just want to make sure I get this right. I thought I heard $5 of Mutual of Omaha Bank provision expense due to the Cecil impact and first quarter want to verify that number but also when you think about no, sorry, go ahead. Yeah, so it's it was it was a mistake in my script and so it's twenty to forty million dollars, which is consistent with
Whatever the page is in the in the back in terms of the Cecil guidance page thirty-four, so it's twenty to forty million not forty to sixty million.
Of it. I've just Mutual not provision. Correct. Take the midpoint of and then you add it to roughly or $34 million of normal provision. So we should be looking like a seventy-something provision first quarter then dropping down going forward.
Well, the is that the right way of thinking about it? Well, the provision is going to come through in the first quarter is going to be noteworthy. And so that's going to be a one time to kind of catch up. I think a guidance that we've given for the full year is is
it's 35 to 45 million dollars per quarter including Mutual of Omaha Bank.
But not the noteworthy item but not too noteworthy. Right which comes through in the first quarter. So
Had we acquired this in the first in the fourth quarter. I think that would have been able to pass through Equity by virtue of closing on and off January 1st. It's a little kludgy because it's actually going to pass through the p&l.
Understood. Okay. I very helpful. Thank you. All right. Thank you. Next question today comes from Russia or in bulk of Credit Suisse, please. Go ahead great. Thanks God and you talked a lot about the margin kind of walk, you know into q1, I guess maybe when when you think about the the the margin Mutual volt said it would it would help by 3 basis points. Is that kind of consistent with what you thought before or their changes because of purchase accounting and like how does that you know as we go forward does that number grow? Like, you know, can you can you flush that out a little bit Yeah. So the purchase accounting motion was still working through and so by the time we filed a k that should all be kind of reflected in there, but it is still moving pieces off terms of ultimately what the parts that can increase is going to be I think one of the things that's happened from the time that we announce the deal in August , you know, their cost of deposits has moved.
up in terms of the
Kab deposits and so when I think when we guided originally we said that the benefit to deposit cost would be 20 basis points. It turns out at 16 basis points all of their money lending activities are essentially floating-rate and so as Libor goes so goes that book of business and similarly, you know, we were adversely impacted a little bit by increasing rates on on their portfolio. I think on a go-forward basis looking at this there's a few moving pieces. I think the big ones are going to be around black Rail and what happens there and apart from
Rail just pure banking. We would expect that our net interest. Margin would be pretty Range band right around 3% and not move a lot. But wage is going to create at least we're we're looking at it right now 5 to 10 basis-point drag and that's more or less We Believe kind of a worst-case scenario, if the trade phase one of the trade deal actually manifests into something we potentially believe there's some opportunity there to kind of clawback. I think the other instance that really important here is that we're going to continue to manage down our online cost and so in the script, we saved or down sixty five basis points against seventy five basis points of fed Cuts, you know, we did another five in January first, you know, the expectation is we'll do a little bit more wage.
into the second quarter and we'll
To the first quarter and will continue to tease this out. The most important thing about that is is that notwithstanding the fact that we've so aggressively reduced our deposit cost in on maturity deposits this particular issue and the online we haven't seen any meaningful levels of attrition in relationships. And so that's kind of all holding on and again that goes back to the way we've remixed off the mix of depositors transitioning from Baby Boomers to Generation X Y and Z and then apart from that the only other thing that's kind of out there that is at the margin and I done two of these LCM trades already and we continue to look to opportunistically manage the risk profile of of the business office to the extent that we sell these assets. They're relatively high-yielding assets. You're going to see a reduction in dead.
Finance margin or net interest margin
And and offsetting increase one-time gain, that'll flow-through non-interest income. And so we're kind of mindful of that and that could at the margin impact off the amount of quarter-to-quarter basis, but I I just also want to add that the the benefit of the lower deposit cost savings that we're going to get for Mutual of Omaha Bank is really nice to have an impact on helping us expand our commercial lending address of market and you know that combined with the 34 relationship managers that we're adding Etc is really going to help our addressable market and business volume and and I guess the last thing in in terms of opportunities, you know, we've still got the billion eight and correspondent mortgages. They're they probably have like a handle on it if we're actually able to kind of recycle correspondent lending into higher, you know higher growth shields on Commercial log.
that also presents an opportunity that we would Avail ourselves of
Right and kind of following up on on those points. When you think about kind of overall kind of earning asset growth against which you know, that margin is is kind of calculated. You talked a lot off a bit about the loan growth assumptions. I mean any sense as to whether you'll be you know, kind of increasing or decreasing the other assets and maybe kind of as a corollary of that much of those kinds of loans sales. You might be seeing during 2020. Yeah. No, I just I mean just in general our guidance is low single-digit quarterly growth long. We've been really pivoting our whole Commercial Banking business under Provino's leadership with really a focus on driving growth efficiency profitability and returns home business. And one of the things we've been doing is we've been recycling Capital away from lower-yielding credit only relationships. We're continuing to redo age
criticized assets and in fact
In the fourth quarter, we were at 2.2 billion which is roughly around 7% of our commercial loans and leases. It's kind of our lowest level of criticized assets. Um, you know, there's definitely been a shift in focusing on deepening customer relationships through consultative selling and investing in new client channels month. We've added seven bankers and capital markets. We had a really strong, you know, finish of the year in capital markets in the business office job growth of about twenty percent we
We had leaked table improvements in the business and we hired new Bankers. We've been investing in some of the new interest industry verticals in Commercial Banking and we've had some good momentum there in in business Capital we added about fourteen thousand people there. So we we have a lot of good front-end momentum in the business emotional just to add a couple of things. The only thing that we're I think we're consistently looking at in terms of opportunistic life alone sales out of Legacy consumer mortgage portfolio, you know, as we continue to look at Capital of risk-weighted assets. I think we could potentially be opportunistic in other places, but just to follow on and one of the points that Ellen made a change to our pipelines remain very strong across all of The Suite of businesses are fourth-quarter origination were our second strongest quarter in 16 quarters dead.
only beaten by the 4th
Quarter of last year, so, you know origination activity remains at pretty elevated level, but, you know, one of the challenges we continue to face. I think everything is the level of prepayment. So while the fourth quarter was our second strongest quarter out of 16 quarters, the fourth quarter of of nineteen was the highest level of chrome payments that we'd seen in 16 quarters, and so there's still tons of liquidity in the market. Got it. Thank you.
What's the next question today comes from Eric Wasserstrom of UBS, please go ahead.
Thanks very much. So John I hate to do this, but just looking at at slide thirty-four on the on the Cecil discussion. Yep. Yep. I just want to make sure I understand the the capital impact component in terms of the Mutual of Omaha contribution. I guess in terms of the phase-in. Is it is it correct that the the CIT portion in that upper part of the slide is used in but the Mutual of Omaha portion is direct to to Capital in the first quarter. Is that is that correct? Yes, that's correct. So two seventy-five to one hundred million, you see related to cits based over three years on a regulatory basis in the twenty to forty million dollars below related to Mutual of Omaha Bank is going to run through our p&l. Okay, and the phone number
and we'll and we'll present that presumably as no war the
Got it. Got it. Okay, and then just on the on the lease renewal rates that that you talked about, you know, it seemed as if there was some sort of slowing in the in the compression of natural rates, but this guy didn't suggest perhaps some summary acceleration or maybe that's just my impression but I guess the the core of my question is is it is that it seemed to be improving and as that is that changed in some way?
Well, so I would say that in business Capital we reflect for the quarter but really 6% year-over-year. Are you talking about business capital or the rail business? I I was I was sorry. I was guessing that the rail.
Yes, so on on the real business are you know, I think we've been messaging for a couple of quarters that well tanks continue to improve, you know, there's been some softness in the freight marketing kind of see that needle has a long as it's kind of come down. You know, the messaging is is I think fairly consistent with what it was last year or ten ten to fifteen percent. But you know, I think I think that there's a silver lining here. It's it's it's the benefit of the trade deal but I mean in general the rail Fleet utilization and wage rates are pressured as we're heading into the year and the industrial production sector is continuing to slow and we've had negative momentum in 2019. One of the things that I like to take a look at every review is rail cars and storage and rail cars and storage is about 24% So we are expecting declines wage.
No, the the renewals are being.
And in most segments in rail, but I think that we're doing a lot to manage that and I think that the China Phase One Trade Agreement. I could potentially be beneficial to the business. I think the second thing about our management team is that we're really being vigilant on asset Readiness and we had started this ready to load program with our covered Hopper cars to allow us to take some incremental deal deal Vol last year. I think it's some of our cars we're shortening up the lease rates and we're making a lot of operational improvements in the business and we're continuing to drive down maintenance costs. So despite the slow down. I think the team is doing all the right things to mitigate slow down in the business.
Yeah, I I couldn't agree more. I mean the reality is this is a very long live useful life on these assets and you know, it goes through pretty long Cycles. I mean, I think as we've said many times before it's a young Fleet an average life of thirteen years. It's a diversified Fleet that serves dozens of Industries. It's a well-maintained flea. It has a higher concentration of larger 286000 pounds. You are all cars 90% of our fleet cars that and so to the extent that PSR is around efficiency. You can put more stuff in a in a in a larger car and it's a very efficient operation with a strong management team that is very service oriented. So, you know, we feel good about the business on but it it's it's a long cycle business and you just need to go with the Ebbs and flows.
Great.
And if I may sneak in one last question just with respect to the c21 guidance that you provided, you know, 10 and 1/2 by the end of of this year twenty-twenty wage. Just trying to to Think Through the you know, maybe the the contributing factors to to that cuz obviously that suggests a you know, an accretion that about you know, twelve and 1/2 basis points of quarter, which is a bit less than a than what it's been in in the past. And so I just want to make sure I understand the puts and takes through the the CT one math over the next four four quarters.
Yes, so it it look it's going to be principally driven by earnings, but don't forget. You know, we're going to have eighty million dollars of integration charges. They're going to go through that are going to be in the real p&l. You know, I I think of you the way we model this out I think you know end of the fourth quarter but probably even a little bit sooner than that and it could be sooner than that, but I think we're supposed to be mindful that we don't over-promise and under-deliver. So, you know, we got it to the fourth quarter, but we feel pretty good about that. And and I think the other point that we don't have perfect visibility on is that you know, you have to be very mindful that as we close this transaction and actually delivers a hundred and fifty million dollars in equity to the new age of Omaha parent that we had a hard floor at 10% CT one that we had committed to to our regular wage.
the fed me OCC
And so we're very mindful of that and you know, as you're trying to manage risk-weighted assets through the fourth quarter, you know, divining originations and prepayments wage. Nobody's really good at we might wind up a little bit long that ten point that ten point ten point zero CET one ratio. So if I thought we could finish at ten point one ish even so it it it's it's going to depend a lot on the starting point and and as well as not just as well as the engine 10.1, you know for up for Jan one you're saying well 10.1 at the end of the first quarter the end of the first okay? Yeah. Yeah. Okay. All right. Thank you for the explanation. Thanks, sir.
Okay. Next question today comes from Chris kotowski of Oppenheimer, please. Go ahead. Yeah, good morning. I'm looking at page thirty-six in your life. And then also at the page fourteen from your August presentation where you were looking at the you know, tangible Book value dilution and and took a just as a coincidence you had in August projected year-end tangible book at $56.77, which to the penny turned out to be what it was. But anyway back in August .
you had
Said that the dilution to tangible book would be $3.14. And then when I look at page thirty-six, I see Goodwill of a hundred and ten thousand. So should we we we we should assume it's an extra fifty cents of of intangibles. So the chef right? I'm just checking back into what what roughly a pro forma tangible book is and then and then I figure that we also need to take out about a buck for your own seasonal charge and you know Thirty forty cents for for the Mutual of Omaha Cecil charge. So I end up getting a tangible book just under fifteen to something like that. Am I thinking about that correctly? Well, I wouldn't do it just quite yet. I look I think there are still some moving Parts. We're still working through the fair valuation work and we'll have that wage.
to be available for when we submit the
Okay, so I wouldn't get too far ahead of myself. But I mean the logic of your arithmetic is right. It's just a question of what the starting points are in terms of numbers. I think the other thing is that the difference between the Goodwill estimate on the page and I don't obviously you have the page that you have going back to August 13th, but the difference between the hundred and ten and the 57 that you're seeing is largely around what we had divined that the time Cecil impact would be so that's the big difference between the hundred thousand and fifty-seven. We didn't have perfect visibility into it. And as we live with it, we're getting we're as we live with Cecil and we live with their portfolio. We're obviously getting better visibility into it off. Okay, and then next on the additional, you know, the ten million higher loan-loss provision with with Mutual of Omaha in it off.
Can you break it out between like what is the Mutual of Omaha add to it? And what is the kind of ongoing Cecil impact to it? Because it just seems to me like if if historically I would have say had a you know Reserve addition of percent and a half to the loan loss allowance, uh, you know for you know for a hundred million dollars of loan growth you'd have, you know walk in and half of of of of Reserve additions now will be too is that the main impact?
Yeah, a lot of it's probably something you'd better follow up with Barbra and I look I think I think Cecil remains kind of a little bit of a wild card while we've done an extensive bit of modeling around our Palm foleo. I think it's still very early days in terms of what it is that we're working through and Cecil as it relates to Mutual of Omaha. I think the other thing too is is that I think we're pretty much satisfied with all elements of what's kind of coming over with the portfolio from Mutual of Omaha Bank with the exception of some challenges that we face in the reserve based lending portfolio, which again, you know, it's well-marked. We understand it. It's nothing especially unique to Mutual of Omaha. It's just something that I think the Market's going off when you know to the extent that we're in the same space. We're seeing it in our book as well in a very modest way because we're not very much exposed to that but I more to follow
Okay. All right. That's it for me. Thank you.
Again, if you have a question, please press * then 1 hour. Next question today comes from a city. Please go ahead faith in mentioned that your medium-term target for tangible common Equity returned about thirteen to fourteen percent pretty big Improvement relative to where the target is for the end of June 2020. You mentioned some of the things would be driving that but is there anything in particular that would be you know more notable. Is it expected scale of the business growing the lounge more cost-efficient? See? I'm just trying to to see how we can get the, you know, two hundred to three hundred basis points and then you know, I guess what what do you refer to as medium-term have three years of that five years?
Yes, so we refer to medium-term as three years and I think one of the nice Parts about coming out with this new guidance is that it's just it's really weird. It's coming from all over the company. I think that's right now is the best positioned that we've ever been and and you know, we talked about the pivot we had been through a couple of years where we were just shrinking the company et cetera. And I think with the Mutual of Omaha transaction and a lot of the Investments we've made in the business. We we've pivoted on a leading Market positions in most of our core businesses and with the acquisition of mutual we're getting the number one HOA business. So we add another you know business to that chart. We have a strong balance sheet with improved risk profile or criticize or the lowest level. It's ever been at the company. We've got a great management team. We've added a lot of talent and Commercial Banking wage.
Test year and you know this team can execute.
We completed the deal and record time, you know, fifty three days regulatory approval. I don't think any deals been approved as quickly by The Regulators and 140 days from signing to closing. I mean, we still have a lot of work to do because don't forget that we have separate from the parents. So it's not just the normal deal where it's an acquisition. It's a separation and then it's an integration and wage, you know and and we're getting the 34 banking teams that really helps us expand our middle-market banking franchise. So we've got a lot of momentum that the company I think the key levers that we have to get to this medium-term target is reductions in op-ex. We you know, this was the first acquisition this management team is doing I think the team was very conservative and it's John said we're trying to expedite some of the the saves from the transaction. We're working on getting factoring and more Assets in, Georgia.
Bank, which will be funded more efficiently.
There's a lot of emphasis on fee income initiatives and this whole shift in primary Bank strategy leading Bank deals selling treasury management. We're recycling Capital away from lower-yielding relationships. We're continuing the work to optimize the private costs and now with the cab that's deposits. That's going to take some pressure away from home, even though the online banks can still stay our primary deposit channel. It's going to take away pressure from from from the online Channel and then lastly well-being that we're going to be able to lower our Capital rates from improvement in our risk profile at the company and then through you know share repurchase. So we're really odd mistake about the you know absent any major market conditions. We're very optimistic about our future.
Thank you.
Next question today comes from Brian Clark, please. Go ahead.
Hey, good morning. I'm going to John . Hey, Brian Brian . I'm wondering if I could just follow up a little bit on some of the guidance around average earning asset growth. I guess pro forma Dave guidance specifically around the core average loan growth and adding in you know, the acquired assets from Mutual Omaha, I think about should I think about I think it's starting point like, you know, like you had forty six point five billion of average earning assets in the fourth quarter and you had about what 8.1 billion of earning assets coming from Mutual of Omaha. And so it's off of 54.6. Should that be something that's like a low single-digit growth throughout the year cuz you got some of the runoff in the non-core portfolio.
Well, the guidance is made mid-single-digit. I think we're pretty comfortable with where we're at. I think as I said before, I think all the pipelines are strong. We've actually already started to see some synergies between a Mutual of Omaha Bank lending business and what we're doing here. So I you know and
From investment Securities. All your loan growth is the driving impact of it the LCM runoff drops it a little bit but it's not going to be significant. I mean a 2.2 billion dollar portfolio if we sell it in fifty or sixty or seventy million dollar trunks that'll modestly impact it and then we'll see if there's any moving pieces I think between our dog weighs between if we migrated away from the correspondent lending the 1.8 billion dollar and correspondent lending and can kind of recycle that into a higher wage growth Shield commercial lending that'll provide some increases while because you'll be going from presumably 50% risk way to 100% risk-weighted. So we feel pretty comfortable about the box that we've given in terms of average earning asset growth or what actually more particularly a loan growth.
Okay, that's a really I guess they the security portfolio probably remained relatively stable York or average loan growth the mid single-digits as they have read through all the way through the mm. Yeah, the Securities portfolios are going to appreciably change its hqla, you know, and and we're always looking for opportunities to be mindful of liquid. But at the same time, you know being efficient with the use of the balance sheet and and putting dollars where we can generate a more substantial return.
Got it.
Right, that's helpful. Thanks John . Thanks for choosing. Thanks Bruce.
Luther question and answer session. I would like to turn the conference back over to management for any closing remarks.
Great. Thank you everyone for joining this morning. If you have any follow-up questions, please feel free to contact the investor relations team. You can find our contact information along with other information on Thursday. Thank you again for your time and have a great day.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.