Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the bank financial fourth quarter and year to date 2019 review at this time all participants are not listen only mode. After the speakers presentation. There will be a question and answer session to asking question during the session you'll need to press star one on your telephone answer.
Today's program is being recorded I would now like to introduce your host for today's program Morgan <unk> Chairman and CEO. Please go ahead Sir.
Good morning, and walk them through our first quarter 2020 conference call to discuss fourth quarter 2019 results at this time it like are forward looking statement right.
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We do not undertake any obligation to update any forward looking statement in the future and now I'll turn the call over to chairman and CEO of Morgan Gauger.
Thank you Oh, we have filed our earnings press release and or five quarter financial supplement.
We also released some company news last week.
Concerning bank financial equipment financing commercial estate capital markets, So with that information available we're ready for questions.
Certainly and as a reminder, ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the Q. Please press the pound G.
Our first question comes on line of Brian Martin from Janney Montgomery Your question. Please.
Hey, good morning, happy New year Morgan.
Everybody or Brian.
Hey, I wanted to just start with your comments about cut the new initiatives that you guys put in place and just maybe if you could just walk through a little bit more detail on that and just you know how you're thinking about Oh, you know the impact that has.
And your outlook for loan growth and fee income growth and 2020.
Sure, Thanks, well, let's start with equipment finance.
The equipment Finance area, which you know is as a broader initiative for us in 2020 and going forward. We added three a expanded three expanded to three new components. So total for.
So there is government leasing.
Middle market leasing.
Small ticket leasing and of course, the standard corporate leasing that we had before.
So for 2020, what we're trying to do.
His is grow each of those segments.
And governments or target for the year for the remainder of the year and 2020 is to do about $40 million of originations and we have a very good start on that.
Middle market is just getting started it'll be up and running a in March or new leader Mercy Slagle is now on board and getting her team organized a world <unk> for that segment to do about 40 million for the year.
And small ticket that's our leader Stephanie hole.
She is onboard and her team is actually getting in place as we speak a we expect them to be up and running a next month.
But given the smaller nature of those credits and the need to be cautious in this environment, we're only really expecting that to do about 20 million for the year.
So that's 100 million yeah, new originations capacity that we did not have in 29 team.
And the average yield for those three categories is in the mid fours right around 440 or so.
Obviously that will vary based on what happens with the swap index I'm, all those credits or price to like term swaps. So that will depend on what happens with swaps and you can expect that to work off of you know about before your average Oh for your swap average.
That area will also generate a modest amount of non interest income from syndications or the volume, particularly in the small ticket space. The volume that we wouldn't normally put in the portfolio will be syndicated.
We would not expect that to have much of an impact in 2020, a it'll probably have more of an impact the 20 twond as we get going because again, our focus is to put our excess liquidity to work, but if we do come across transactions that make sense for the market under syndication, we'll do that.
Open to it will so those channels up but given that we're gonna start carefully on that I would not expected to be a material financial impact for 2020.
Moving on to commercial real estate.
That is an expansion of what we've been doing before what we did in the latter half of 2018 and 20 in early 2020 is we have focused on adding bankers and in some cases, replacing bankers.
That have more of a capital markets mortgage banking focus so the people we've added in a variety of context, where either doing a capital markets originations in previous lives working through for example, a DUS lender working through an independent mortgage banking firm.
If they have bank experience they were doing the significant participations into the market and in that context. The capital markets operation is a much better opportunity because there is a much broader oh placement ability for almost 80 type of credit so.
What we see it looking for their as we're hoping to see about five to 600000 of noninterest income coming out of capital markets. This year compared to what we did in 2019 were really just getting started.
And then we're hoping to see the multifamily commercial real estate portfolio itself grow about 30 million.
We expect to see the is it the payoffs continue in 2020 or it's just the nature of that market, but we're in a better place now to capture those opportunities.
If we can quite often the payoffs result from sales, we do our best to get ourselves in that.
And they have transaction, we have some inbuilt inside the ability. For example, you don't have to do title work, but most borrowers are going to look for a lower rate than the original financing.
We need a new appraisal if they're buying it for a greater amount of money. So there are not as many economies of scale and cost saves opportunities that would be otherwise and also the capital markets solutions, often have non recourse and that is not something we're offering the market. So that's why we don't expect and that's consistent.
What we thought 2019, we really don't expect a lot of growth in that portfolio will have some originations are coming in but you know if it keeps its head above water from the payoffs to about 30 million, that's what we'd expect to see.
And then finally and see anything that is.
That is the next priority for us to continue to enhance we have some thoughts on do that were actually having some early discussions along those lines.
Right now, we're expecting that to grow about 25 or 30 million.
Equipment finance will provide some new opportunities as we work with as we work with new less source in these different segments. They themselves will need additional financing that we can work with them on the the reduction in fourth quarter and seen I.
Was in part seasonal or less stores.
Throughout the bridge and warehouse lines at the ended the year and so they have generate cash and then the cash because in the checking account in the checking account than pays down the lights.
But then they start all over again in the late first quarter in second quarter. So again, we tend to enjoy that income during the course of the year, but it is cyclical leased at the ended the year of sometimes a couple of times a year as they cycle transactions into the market.
We'll see a couple of payoffs in the healthcare space, we know of coming at us.
So all told 25 to 30 million of seeing <unk> growth.
That will yield approximately five and a quarter might do a little bit better, but obviously nobody is expecting it but there could be a fed rate cut down the third year I wouldn't necessarily be surprised about that so we think five and a quarter's reasonable rate for now.
Just to go back and second multifamily commercial real estate.
We have seen yields you know is lowest three and an eighth in the market for multifamily loans.
Recently, we saw commercial real estate loan competitor that was alleged to have quoted a three in a quarter rate.
$30 billion company headquartered in Chicago for those keeping score.
But if you look at it portfolio wide, both inside of Chicago and outside of Chicago, I know, the 375 range seems a little bit better for us.
Outside of Chicago is still north of four of Chicago in Denver are under four and sometimes decidedly under it. So the average average average we think 375 seems like a safe place to be.
So if you take those various initiatives, we're looking to get back to our 2018 loan portfolio of around 1 million 3 billion 325.
Commercial would be approximately.
Almost all of it 97% of at just under a billion three.
So that's about 166 million to loan growth to get there.
At roughly an average of a little bit over four.
That is a better place for us to be from an asset liability perspective.
You know, it's very uncertain, where we're headed next in the rate environment, you know were down a quarter pointer. So from where we started the year, there's a presidential election coming up there's issues overseas.
In addition to Europe, and Japan, Japan negative yields, but Theres also kuroda virus and some other impacts so we like to the move into equipment finance because it gives us.
A better yield was still a reasonable risk return on the portfolio. It gives us flexibility in how we allocate capital to risk and it gives us a little bit more predictable cash flows if the economy picks up in rates pick up we have cash flows to redeploy if the economy fades weekend take the cash.
Pick income do other things, we can change the risk profile of the portfolio going forward. If we had to for example move more into investment grade not our priority right now, but we could.
So we just like that environment plus it gives us the opportunity for non interest income plus it gives us the opportunity for see an eye and we're also working on some deposit treasury initiatives for later this year that increase both core deposits and non interest income on the deposit say even further so all in all its it was the right.
Move for Us, it's a big move for US and now we have four ways to go to the market as opposed to one and as we add these additional capabilities on the Cninety deposit Treasury side, we'll have even more opportunities to generate business.
Got you and the number of people kind of you've added Morgan I guess, just kind of putting in context, I mean, how many folks the added in kind of eat it two units I mean, the real estate in the equipment finance area system.
We've done some substitution so I think I'll, just say that we have our.
Existing staff in the.
Equipment leasing.
Presence legal replace President Doidge, Mr. Grabner has been here for 17 years, and executive Vice President Hall as new.
And on the.
Commercial real estate side, we've added three or four new people.
In various locations will probably we're looking at least one or two more but there may also maybe some changes there too. So it's really not as much of a big AD is it is I mean, there's certainly certain new people in certain places, but we've also done some substitution is during the course of the year.
Gotcha. Okay. So then the overall loan growth I guess, if you're thinking about it for for 2020 is probably in the low.
Low double digit rains, 10% to 12%.
The net growth in that I guess that one factor in some some continued level of payoffs or I guess I'm not sure how you're thinking about pass, but just to make sure I've got at least double I would say.
We finished up the year at approximately 1.171 billion of loans and we are shooting to finish up 2020 at 1 billion 325.
Of which commercial would be approximately 1 billion to 85.
So that's a lot of loan growth and we're absolutely clear that this is a show me environment.
Okay and this is a I guess for the most part the.
These initiatives will I guess, you've got factored into the year growth outlook. The continued level of payoffs or what are the is what are you assuming on the payoffs that have been elevated in reais.
There are so many moving parts. So thats why im trying to get you focused on just looking at the balance sheet changes.
In the beginning in any of the portfolio, obviously, the new initiatives and commercial finance and equipment finance government middle and small have no pay offs are very little because the brand new initiatives. That's also why corporate is only going to grow about $10 million because it has considerable amount of cash flow coming from it and we're not really focused on doing investment grade.
So we'll see some run off in that as well multifamily. The reason thats going to grow about 30 million is we expect continue pay offs.
And there are still.
Intense competition for the originations so thats why that's a pretty modest goal.
To be hard to be.
More confident about it if it starts doing better than that's good news, but right now given the the elevated pay offs and really just the the smaller number of opportunities in the market both of those factors.
Combined to a relatively small growth target there and see an eye is an area, where you see a lot of volatility in usage for one we know we're going to have a couple of exits during the year borrowers want to do some things that we're not interested in following them on we have some things in the pipeline to replace that but as I said.
Now that we have equipment finance moving forward and multifamily commercial estates in the right place, we're going to be focusing a little bit more on see an eye and so thats way of $25 million net goal for CN and I seems reasonable we hope to improve on that during the course of the year, but I don't think we have the horses in place right now to predict anything better.
Yeah, Okay, all right and just the.
Just one last thing on the growth Morgan Justine seasonality or just as you kind of get some of these units up and running and get that people get the right people in there is it more.
Beginning second quarter I guess it sounds like there's a couple of payoffs coming from what you indicated just kind of as we think about getting to where you're at finish line. How does it play out in your mind.
Today, the seems like a good time to tell you that we're going to do our next conference call. After the second quarter close.
As you point out we have a lot of work to get up and running so we'll obviously put our quarterly results out but in terms of discussing trends and activity, we feel would be better place to do it in the latter July early August timeframe.
In terms of getting these units spun up.
As I said, we've made some good progress and equipment finance on the government and the corporate side.
Middle and upper middle market, and small small ticket will get up and running in the second quarter, but it's just too early to talk about quarterly results I would say, though that it given the timing where we are in the time of the year and where we are the better the better volume growth will be in the second half of the year.
To the extent, we get some early opportunities and do better than that that'd be great.
But we won't know till we get there. So I think it's better to assume that the bulk of the growth is going to be in the second half of the year.
Okay. That's helpful. Thanks, and then just the overall if you talk about loan growth versus balance sheet growth in the liquidity you guys have I guess the fair to assume that the balance sheet is not going that the overall balance sheet is not going to grow much. It's just going to be more of our remix as you you fund most of the growth there are lot of the growth from the the excess liquidity that's there.
To that yet I, absolutely think thats, a fair assumption and probably the most probable scenario.
Obviously, one if we get lucky and we really get to do a group on some of this asset generation.
Particularly towards the end of the year than we'd be looking to do net growth.
And then actually might be a quite favorable environment. If the cost of funds continues to decline.
Secondly, we have a couple of smaller M&A opportunities in the pipeline one is more of a process situation. The other two or discussion type situations.
And if we get lucky with one or one of those three we would see some growth out of that operate that operate those opportunities.
And we're prepared to do more than one if those opportunities present themselves.
So between those two I would say the most probable scenario is relatively stable balance sheet, we might get lucky with some growth towards the end of the year. If we had one or one or two smaller acquisition opportunities again, those would likely close towards the end of the year anyways.
But that would give us a really good start into 2021.
Okay, and yes, I think about the loan to deposit ratio in the goal is to remain.
I guess is our target on that loan deposit ratio being below 100, or I guess, what's your what's your thought on that issue.
Who works pretty well.
If it's at are at or around the 100, Merck usually slightly above is fine again this portfolio throws off so much cash.
With that liquidity is rarely a chat rarely a an issue for us.
And as you've noted previously we continue to reduce wholesale deposit exposures. So we're really funding primarily almost exclusively off of core funding and especially as we have excess liquidity in the early part of 2020 that will continue so that's loan deposit ratio is a huge.
Full measure and I think it really kind of looks at how we're deploying.
The balance sheet, but the liquidity posture of the company plus the the dominance of core funding.
We're not is focused on managing to that number is we are just looking how what the composition us.
Gotcha, Okay, and how about just your thought on.
With all the moving parts far more work on the margin just the funding costs seem like they.
Ticked down nicely this quarter it sounds like the.
We don't I guess, maybe your outlook just with the growth you're going to put on different buckets and.
The how you're thinking about the rate environment.
Hello.
It's really tough to make those predictions I think though if you look at it and say that the average yield of the portfolio that growth is going to be somewhere little bit north of 4%.
That is going to grow revenues around 7 million or so maybe a little bit better.
We get non interest income growth and then we'll have some reduction in cost of funds, but we will also have some portfolio repricing and it's just difficult to know how those portfolios are going to reprice.
Yes customers, if there ought to prepay.
They are going to more trade in and want to do a renewal or a reset of their rate. We have programs available to do it and I would expect that to continue so in the very short run in the first half of the year. It wouldn't surprise us to see a certain amount of net interest margin compression, but that should reverse itself into the second half of the.
Here and we might actually sees a little bit of net interest margin expansion in the third and especially in the fourth quarter. So that's.
Think thats, just a nature of of the environment right now.
You are going to have a considerable amount of resetting on assets, whether it's due to rate resets on loans that already exist in our resetting or customers looking to do a refinance.
That will probably be a slightly greater order of magnitude on the asset side than it will be on the funding side in the short term.
But if we can turn that cash around it to the extent of produces additional cash and really execute on our asset generation goals, we will be able to overcome those impacts.
I got you and your your thought I guess in previous calls you kind of talked about getting to that 50 to 53 million peppa level and net interest income I guess is that still a fair the goal as far as what you are targeting that's exactly right because what we did in to this point in doing what we're doing is.
Despite the fact that the rate environment is compressed considerably and the cost of funds is not coming down as much as you as fast as you would like.
We executed this change at this realignment to to get us to get us in a position to achieve those goals and still take the least amount of credit risk, we absolutely need to take to get there.
The environmental and made a little bit harder.
But in each of these segments, particularly in the governmental segment. It gives us some good clear opportunities for for a modest increase in credit risk, but still a good risk return overall and that facilitates getting to that 50 to 53 million or better as we start to get to the end of the years. So if you then add share repurchase.
As onto it during the course of the year.
What we're really trying to do is get get us back to our 25 cents a quarter earnings per share run rate by fourth quarter and headed into 2021 and thats without any M&A activity. So.
Yes, So limited harder in the last six to nine months, but the goals haven't changed still try to get the balance sheet to 105 110 or better.
Return on average assets and keep doing what we said we wanted to do.
Okay and they the fee income, Oregon, I know you talked about maybe not having much of a I guess I think you talked about maybe half a million dollars.
Adding income from I think it was their real estate initiative. I guess is is that did I hear that right I guess I don't know it sounds like there was minimal benefit in 19, and maybe that benefit you're expecting in 2020 is that half million dollar level in that grows as you get into 2021.
Yes, we would hope so as I said the the change in the focus of bringing on people who have capital markets experience a mortgage banking experience is just different than commercial bankers and they are more customer that environment. They understand the products.
We have spent a considerable amount of time in the last four to six months, adding different sources for placement. So as an example, one of the bankers has done quite a bit of construction lending.
Previous life, we do not support that product in the portfolio, but we have added two or three different sources of construction lending in the capital market side with loan amounts as low as a million dollars and they have different focuses of there's one capital markets source that we just recently developed that in the hospitality.
Space, They will do a 100% advance.
And that is just you know, it's actually a sovereign wealth funds that that backs that operation.
That is obviously nothing that we would ever get near the loan portfolio.
But thats whats available in the market. So if you take that type of product availability to.
Customers that are typically in we're engaged in commercial banking transactions that opens up a whole new world of opportunities to the prospect and for US. So that's where we're aiming those people. We think the half a million is a reasonable number for 2020, we obviously hope to improve on it but given these folks are relatively new and they're just getting.
There.
It seems a safe safe number to work with.
And it's also the case that this is both time time sensitive in some cases and things change at the last minute I can't tell you. How many times, we have seen transactions thought they were going to close than they did in closed on the seller chain something then something else happened.
It just is up there.
Very much more of a process than an event. So we felt comfortable with those estimates, we obviously hope to exceed them, but it seems like a reasonable estimate for the time being.
Okay, and just just cycle back to the the margin and just kind of the net interest income outlook I guess just in some in summary, it sounds like the margin percentage goes a bit lower but given the added volume you're putting on that's going to drive the.
Dollars if growth to the same target youre looking for and on that on the margin percentage.
The asset yields are more likely to be a little bit under pressure as there's not a lot of room to further lower the funding costs. There's some some room to lower funding costs, but not a ton more more pressure on the asset side, which is why the margin trying to lower the percentage margin trends I would say that's absolutely the case with the existing loan portfolio, especially in the real estate.
Polio.
And that and that's why we're looking at these new initiatives to offset that impact.
Gotcha, Okay. That's perfect and then just maybe on the expense as I think you talked about in a little bit net in the the tax to the narrative of their release about 80 expenses being a little bit up to fund. Some of these initiatives just he can give some thought on how you're thinking about expenses.
Yes.
Theres four big components to it the first one is.
Based comp will go up a little bit.
Less than $1 million to some of this.
Maybe a touch more if we add more people than the to the to the mix and especially in equipment finance.
I think real estates pretty well built out right now, but equipment finance may add some people.
The real variable there will be incentive comp.
So these are eat what you kill people they get paid if they if we produce.
And so but the good news is we have at that point revenue and expense matching so that's why it's a little bit hard to look at comp in a vacuum the base comp is pretty well accounted for.
Variable is the incentive comp and if we get into this asset generation mode and you see the growth in the assets and you see the growth in the income beginning you will also be paying people to generate those assets.
So those are the two big factors based comp and incentive comp.
Next big figure is going to be marketing.
We have a variety of new people doing a variety of new things and especially with the with the brand new initiatives in government middle and small.
We need to get to know new people. So we had spent some money on establishing an awareness and a presence we have a very good start on that we're opening event next week and there is a pretty heavy schedule going forward.
None of these dollars are significant by themselves, but given the breadth of what we're doing they will end up for a couple of hundred thousand I would say pretty easily last year.
We've spent almost nothing on lease marketing and it showed.
So.
That will level off in 2021, but this is the year to do it it's the right time with the right people.
To get this goal.
Real estate, we'll also continue to do about what they were doing.
The new people in capital markets will also be establishing new context.
That's on two fronts.
Going out to conferences and making sure people know we're out there and then it's just pure on the ground direct marketing to investors and we have a broader pool of investors to market too.
The last part as technology two things there first off we'll obviously be continuing to spend money.
Cyber security and infrastructure.
I would computing as a reality we have meta early successful move into certain cloud applications that are hosted by.
Our vendors for example, Microsoft.
Officethree hundred 65 is now the E mails under and that is performing well. So we'll continue to work on that.
A variety of initiatives just given the risk environment, we've seen the other side of technology is going to be the customer development side.
Whether it is portals for customers to send financials in and interact with us.
Communications back to customers on whether alone statuses or providing real time information to them on their balance or activity through SMS or through the up.
Those are all initiatives that we're going to be working on this year, a brand new online business banking unit, but that actually will save us a certain amount of money compared to the other vendor.
As we had treasury services will spend more money there.
But will also earn some money there so net net zero. If you said everything up for incentive let's say the expenses are 39 million or so.
And then add incentive to that don't really want to quote that number until we see it but when we talk again, we'll have a better sense what it might be.
Okay. That's that's helpful and you mentioned Morgan just on the capital upfront. Some some dialogue on on M&A I guess would you say that that dialogue from these from recent quarters has a dialogue picked up at all and then just on the on the buyback.
Yes, I guess you I saw the extended the that plan I guess with the expectation be that you just.
Execute and complete that plan by.
The new debt in the new termination date.
I don't know, we'll get it all consumed by the termination date.
But I would tell you that as the quarters can accelerate through the year the share repurchase the share repurchases are likely to be the priority.
If we could purchase say 400000 shares during the course of the year on get US well under 15 million shares that obviously is a big health towards getting to our earnings per share target.
So that would be our focus on capital management on that side and on the M&A side.
It's just interesting I think with changes in the bank equity products.
The bank equity markets.
There are people thinking all sorts of things, it's hard to predict it I would say you know as I said, we have one one situation, where we were we had a short dialogue with somebody in the spring of of 19, then they went radio silent for the better part of nine months and then we get notified that theyre, starting a form of process.
Okay. So we'll participate in the process, what they decide to do and what the results of their process are.
So we'll we'll let you know if were successful in it but.
That's kind of a good indication of people.
Change in their mind as events unfold.
The other two situations are more discussions.
And we'll have to see where that goes again.
There are variety of voices in those in those rooms with different opinions of some people have priorities to stay some people our priorities to go some people are looking at.
Whether it's good to partner with us given the growth opportunities we have so again, it's it's.
If I could be more certain about things I absolutely would.
But these are very fluid situations.
I would say, though that with our capital position.
We are certainly interested in growing through a small M&A transaction or two it would just makes sense and enhances the core franchise and as long as we're not adding asset quality challenges to our world We're very interested.
If they have of one in particular has some interesting forms of asset generation that would be both different than we're doing but also complementary to what we're doing.
But we'll have to see if the ownership there actually gets to a point, where they want to do something but we are very interested in doing it if they are.
Okay, and just remind me Morgan is there a size that the I guess you wouldn't go below I wouldn't go above or just big picture. The how we think about it.
I think.
If it's.
Smaller institution with one brand 75 to 100 million would make sense below that it gets a little small.
On the flip side of that anything north of 500 million would probably take us out of the market of doing some smaller opportunities. So I think the 100 500 range is pretty good take a midpoint 150 to.
300 is a pretty good place for be because we could line up a couple of those transactions in a executing pretty efficiently.
And give us sell some better choices and better diversity.
Yes, if they were happy to be overlapping maybe from some better cost saves.
So we would prefer to stay more flexible and and stay in that 200 million 150 to 300 million sweet spot little bit bigger than three 400 as fine. If it was 80 million, but one good branch with great customers that would begin to.
Gotcha, Okay. That's helpful and just maybe.
Just touching on credit quality for a moment just.
Think about the growth you expect this year and I guess.
And the reserve levels and kind of provisioning in charge offs, I guess, just give us an update and it looks like credit quality can't get any better than is currently so just is there anything.
I guess, giving you some pause on the horizon and secondly, just how we think about reserving for the this strong growth you're expecting this this year.
Well I think the first thing I'd say about credit quality as some of the payoffs that we encountered last year.
Particularly in the scene I portfolio were due to actions, we took and that as a consistent seem theme that you'll see from US we will take the cash pay off.
Or in the loan sale as it was appropriate and 19, because that's the right thing to do for the portfolio.
And the capital account.
So as I said in Cninety, we have two situations, we're expecting a payoff on.
Both of them other the healthcare space.
Both of them the customers want to do something that we are not able to support them on so were.
Parting friends as they say.
We were pleased with the results of the asset quality in the fourth quarter. These are the goals. These are the results we try to achieve every year.
I could get a tiny bit better I suppose.
But going forward.
Reserve levels, we will be provisioning more for the small ticket obviously, it's just an inherently higher risk asset.
Middle market is going to be closer to the same kind of reserve level that you would have for an S&P assays single B single B plus credit we're looking at those credits they're smaller companies, but you know in their own context, we want them to be strong and viable youre talking about a role was short duration term asset.
So the reserve level should again trend up a little bit as we grow reprovision the balance sheet, probably 75 points again seems like a reasonable place to be could be a little bit higher depending on the mix.
Obviously, the governmental leases are either are very strong credits.
Sometimes you'll see some volatility in payments.
Sometimes of a government agency will be 30, 60, sometimes the sometimes even 90 days past due because the the.
The agency itself is a very efficient, but theres no question, you're going to get paid.
Sometimes there's risks for termination for convenience or or even not appropriations risk, but one of the reasons. We looked at governmental at this time is.
State State Federal agency municipal budgets are all strong tax revenues continue to do pretty well nationwide, especially in markets that are growing.
So we don't really regard not appropriations risk as a material factor in asset quality termination for convenience is typically del by agreement and it can be analyzed to incorporate into the transaction.
So I would say the greatest sources of credit risk will be the small ticket portfolio than the middle market. There just inherently higher risk, but we're going to do our best to skew to the higher credit quality in both those categories and do our best to get the benefit of the higher yield.
And still enjoy the strongest asset quality we can.
Gotcha, Okay, and your sense Morgan just jumping back for a minute and the biggest risk to not achieving kind of the loan growth as you said earlier kind of as shown in the.
Situation, but I guess the biggest risk in your mind today than not achieving.
The loan growth kind of big picture, you've outlined at the roadmap is is what.
Just compressed earnings I mean, you will see a smaller net interest margin.
Obviously, we're starting with a strong asset quality position, so we're not expecting expenses or consequences from lab.
And we will continue to do our best on expenses, but this is just a function of adding incremental interest income and incremental.
Non interest income in the nice thing about the the equipment finance area is.
Typically it is not exclusively but it's often a function of price.
So again, if we see the right quality transactions, we can price to get those transactions. So we might Nick what get quite the same you'll be we're targeting but if we get hungry enough for volume than we can take the highest quality transactions price to get them and we'll get there.
Okay and year I guess, just as you kind of laid out the roadmap for the expectation of the hope would be that you get back to we think the earnings should get too you kind of getting back to that 1% level, even if it's not for the full year, it's kind of more later in the areas as a growth materializes and everything kind of comes to fruition as you'd expect yes.
I agree with that statement gotcha, Okay. All right look I appreciate the update congrats on on the new initiatives. They sound like there, they're going to go well and that will stay tuned for more color on so that's all I had.
Thanks, and we hope so too.
Thank you and once again, ladies and gentlemen, if you had a question at this time. Please press Star then one.
This does conclude the question and answer session of today's program I'd like to hand, the program back to last Morgan Geisha, Chairman and CEO for any further remarks.
Well, we thank everyone for their participation and fourth the opportunity presenter our views and vision for 2020 and getting into 2021, we wish everybody a good springing early summer and we will talk to you later this year.
Thank you ladies and gentlemen few participation in today's conference. This does conclude the program you may now disconnect good day.
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