Wintrust Financial Corp (WTFC) 2019 Q4 法說會逐字稿

Welcome to Wintrust Financial Corporation's Fourth Quarter and Year-To-Date 2019 Earnings Conference call.

(Operator Instructions) Following a review of the results by Edward Wehmer, Chief Executive Officer and President; and David Dykstra, Senior Executive Vice President and Chief Operating Officer; there will be a formal question-and-answer session.

During the course of today's call, Wintrust management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements.

Actual results could differ materially from the results anticipated or projected in any forward-looking statements.

The company's forward-looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent Form 10-K and any subsequent filings on file with the SEC.

Also, our remarks may reference certain non-GAAP financial measures.

Our earnings press release and slide presentation include a reconciliation of the non-GAAP financial measure to the nearest comparable GAAP financial measure.

As a reminder, this conference call is being recorded.

I will now turn the conference call over to Mr. Edward Wehmer.

Thanks very much.

Happy New Year, everybody, and welcome to our fourth quarter earnings call.

With me as always is Dave Dykstra, our Chief Operating Officer; Kate Boege, our General Counsel; and Dave Stoehr, our -- what are you -- our CFO today.

Well, we'll go through the same format as usual.

I'm going to give some general comments regarding our results; turn over to Dave for a more detailed analysis of other income, other expenses and taxes; back to me for some summary comments and thoughts about the future and then time for questions.

I'd like to first take a little walk down memory lane.

As we enter the roaring '20s, I'd like to think, as we call them now, I think it's appropriate to take a second to look at our accomplishments over the last decade.

As we have always been a company that manages for the long term, I find it refreshing, not only as we concentrate on the last quarter, look at the entire body of work over that longer term.

I can actually say with confidence that our franchises really never ever have been in a better position or more valuable.

Over that 10-year period, net income grew from $73 million in 2009 to $356 million in 2019, a 17% compound annual growth rate.

9 out of 10 years of a record earnings with only 2010 not achieving record status.

Earnings per share tripled during that period of time from a little over $2 to now over $6, resulting in 11% CAGR.

Tangible book value grew at an 8% CAGR from $23 in 2009 to almost $50 in 2019.

Assets and deposits have both grown at 12% compound annual growth rate as it tripled during that time frame from $12.2 billion to $36.6 billion and the deposits from $10 billion to $30 billion.

Loans grew from $8.4 billion to $26.8 billion from year-end 2009 to 2019.

Nonperforming assets as a percent of assets have come down every year since 2009 and ended this year at a low 30 -- 0.36% of total assets.

Given our $6 run rate in EPS and our track record, consistent growth and all fundamental financial results, it just drives me nuts to look at the discount that we trade at relative to the market.

Our goal for 2020 and beyond is to continue this history of good growth in all major statistics, barring material future decreases -- material decreases in rates, this $6 per share run rate is kind of the line in the sand for us and the basis for growth -- our future growth aspirations.

Now on to the quarter.

Fourth quarter net income, all in all is somewhat disappointing but reasonable, considering interest rate environment headwinds that we experienced.

I actually think since 9/11, we've only had a period of what I consider a normal yield curve for maybe an aggregate of 10 to 12 months.

I don't really know what the new normal is anymore, but it makes it a little bit hard to manage your balance sheet.

But I think we've done a pretty good job over those 10 years.

Net interest income and net interest margin, as you know, they then fell 20 basis points to 3.19% as earning asset yields fell 28 basis points and interest expense fell 11 basis points and net free funds ratio was down by 3 basis points.

All these differences were a direct result of the LIBOR market and the yield curve, probably there's some material changes, this should be a good basis for us going forward.

Loan yields fell 24 basis points.

Loans held for sale fell 30 basis points, while liquidity management yields fell 23 basis points.

Drop in liquidity management yield was due to the $747 million increase in average liquidity management assets due to our good growth during the quarter.

This increase is yet to be invested in the longer-term securities as evidenced by our liquidity management portfolio.

Management -- our liquidity management duration staying relatively constant at a little -- about 4 years.

Investing in these assets on securities -- longer-term securities should assist as part of the margin contribution going forward.

Our goal is to maintain an approximately 6-year duration of liquidity management assets, we have some opportunity there.

Our loan-to-deposit ratio remained at the high end of our estimated 85% to 90% range, in the quarter at 89%, down from 90% in the previous quarter end.

On the interest expense front, deposit expense decreased 10 basis points in the quarter.

You know it takes time to decrease deposit rates, and we are actively and aggressively working to decrease the cost of funds on our deposit base.

So there's opportunity here also.

Overall, cost of funds and total interest-bearing liabilities was also down 11 basis points.

On the net interest income front, we recorded a decrease of about $3 million.

The margin decrease was the primary result of this decrease, and it was mitigated by overall asset growth.

On a full year basis, net interest income was approximately $100 million.

Going forward, depending on the rate environment, further rate cuts are actually not going to be appreciated, we expect the margin to be under decreased pressure due to our ability to deploy liquid management assets in the higher-yielding securities, and aggressive deposit cutting costs -- cost-cutting where we can.

We know LIBOR is, again, down this quarter.

I would say we've been aggressive.

And hopefully, our plan is to have a decrease in -- any future decrease in assets offset by liabilities, and the cost of liability is going down.

So again, we think we're kind of at a good point here, barring an overall shift down materially in -- a quick shift down materially in the market.

Net interest income should grow as a result of the above and plus additional organic franchise growth.

[Shortly], the current 3.19% should be a baseline of which we can build and grow, especially if we can maintain our historical growth -- asset growth rates in 2020.

I'll next cover another expense table.

We'll review these in detail a bit later but some high-level remarks.

Net overhead ratio, sort of, 1.53% to the quarter, 1.57% for the year.

If one were to eliminate the MSR valuation adjustments and acquisition-related expenses, we would be a bit below our 1.50% -- 1.5% goal as an organization.

If we were to omit the negative MSR valuations for the year, we would achieve approximately 7% earnings growth for the year.

On to the balance sheet, where assets grew $5.4 billion over the year, $1.7 billion over September and average earning assets about $1.41 billion -- $1.541 billion for the quarter and $4.8 billion for the year.

And loans were up $1 billion for the quarter and $3 billion for the year.

So good loan growth across the board.

We'll start the year with a little bit of a head start with almost $800 million of average assets, the average assets being below quarter end assets.

So that's a good thing.

So the loans net of loans held for sale grew $1.1 billion or 16.8% for the quarter and approximately $3 billion or 12.5% for the year.

Fourth quarter included approximately $582 million of acquired loans.

Real estate loans, commercial and residential grew $707 million in total.

Premium finance loans, life and P&C grew $271 million.

The commercial loans increased by $90 million.

Our loan pipelines continue to remain strong across the board.

We expect to continue growing loans at high single digits as it -- consistent with prior periods.

Deposit front, is another great deposit growth quarter for us, $1.4 billion.

That's after returning $200 million

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acquisition accounted for approximately half of this net growth in deposits.

Core deposits nonbrokered comprised 97% of total deposits.

I think we have the best core franchise in our market.

Continued good growth at the heart of our plans for 2020 and beyond.

The credit fund, as mentioned, credit metrics returned to historical norms.

Nonperforming loans stayed constant and totaled about 0.44% outstanding.

This is the lowest they've been at any recent time in the past.

Same can be said for nonperforming assets.

As I said earlier, it's decreased into the 0.36% of assets.

Net charge-offs were $12.7 million, including $5.3 million in charges that they previously reserved for.

Despite our second quarter blip, net charge-offs for the year totaled just around 20 basis points, a good number in anyone's measure and more in line with what you would expect from us at Wintrust.

We continue to look -- call the portfolio for prime assets.

High-leverage deals are not welcome here anymore, and we are moving them out as we can.

But we want to find them before they become problems, moving them out -- and move them out on an expeditious basis.

I'm going to turn it over to Dave, who will provide some additional detail on other income and expense.

He will also give you detail on the long-awaited CECL or the convoluted, I call it the convoluted -- I'll tell you later in the call.

Yes, Dave, go ahead.

All right.

Thanks, Ed.

As normal, I'll briefly touch on the other noninterest income and noninterest expense sections as well as the convoluted CECL standard that Ed referred to.

In the noninterest income section, our wealth management revenue increased $1 million to a record $25 million in the fourth quarter compared to $24 million in the third quarter of this year and up 10% from the $22.7 million recorded in the year-ago quarter.

Overall, we believe the fourth quarter of 2019 was another solid quarter for wealth management segment, benefiting from good customer growth and a strong equity market.

Mortgage banking revenue declined by 6% or $3 million to $47.9 million in the fourth quarter from $50.9 million recorded in the prior quarter and was up a strong 98% from the $24.2 million recorded in the fourth quarter of last year.

The decrease in this category's revenue from the prior quarter resulted primarily from seasonally lower levels of loans originated and sold during the quarter from basically lower purchased home activity, offset somewhat by an MSR adjustment during the fourth quarter, which was positive versus a negative fair value adjustment recognized on MSRs in the prior quarter.

The company originated approximately $1.2 billion of mortgage loans for sale in the fourth quarter.

This compares to $1.4 billion of originations in the third quarter of this year and $928 million in the fourth quarter of last year.

The mix of loan volumes originated for sale was related -- that was related to refinance activity was approximately 60% compared to 52% in our prior quarter.

So the refinance volume increase during the quarter enacted to mitigate the seasonally lower purchased home activity.

On Table 16 of our earnings release provides a detailed compilation of the components of origination volumes by delivery channel and also the mortgage banking revenue, including production revenue, MSR capitalizations, MSR fair value and servicing income.

We currently expect originations in the first quarter of 2020 to be stronger than the first quarter of 2019, given the continuation of the refinance activity.

But the originations are expected to be less than the fourth quarter.

So somewhere between first quarter last year and fourth quarter last year is where we currently expect the volumes to be.

Other noninterest income totaled $14 million in the fourth quarter, down approximately $3.5 million from the $17.6 million recorded in the third quarter of this year.

The primary reasons for the lower revenue in this category include $2.6 million of lower swap fee revenue and $2.6 million less of income from investments in partnerships.

These investments in partnerships are primarily related to SBIC investments that support our CRA goals.

This category revenue generally fluctuates as a result of the 2 revenue sources I just talked about and has averaged about $14.6 million over the past 5 quarters.

So despite falling from a very good third quarter level, the current quarter is roughly on average with the last 5 quarters.

Turning to noninterest expense categories.

Noninterest expense totaled $249.6 million in the fourth quarter, up approximately $15 million or 6% from the prior quarter.

A number of factors contributed to the increase.

The first, severance payments, professional fees and data processing conversion charges related to the recent acquisitions totaled approximately $2.4 million during the fourth quarter compared to $1.3 million in the third quarter.

Approximately $2.8 million of other normal operating expenses related to the STC and Countryside Bank acquisitions were incurred during the quarter.

And we would expect that this amount would be reduced over time as we continue to integrate these acquisitions into our infrastructure.

Costs associated with terminating 2 small pension plans that we inherited with prior acquisitions totaled $487,000, and that should be the end of any costs associated with pension plans as we no longer have any.

There was a $750,000 increase in legal settlement charges in the fourth quarter compared to the third quarter as management deemed it more cost-effective to settle certain litigation matters than to enter into potentially lengthy court proceedings.

$1.7 million of additional expense was accrued as additional contingent purchase price payments related to prior mortgage operation acquisitions.

We have contingent consideration on our mortgage acquisitions, and we have to make our best guess upfront.

And if the mortgage market is better, we may have to record additional expense.

If it was worse, it could come in as income.

Given the stronger mortgage market, we recorded an accrual for $1.7 million for what we think would be additional contingent purchase price payments on those mortgage operations.

And we also had $1.1 million of less rebates on FDIC insurance assessments this quarter compared to the prior quarter.

I'll talk more significant -- the more significant categories now.

The salaries and employee benefit category increased approximately $4.9 million in the fourth quarter from the third quarter of this year.

Salary expenses accounted for almost all the increase, was approximately $4.8 million, resulting -- was up approximately $4.8 million, resulting from approximately $1.4 million of staffing cost related to the STC Capital Bank and Countryside Bank acquisitions completed during the fourth quarter, plus an additional $1.4 million of severance accruals.

And then also normal growth of the company accounted for the growth in that category.

Additionally, employee benefits expense was approximately $159,000 higher in the current quarter than the prior quarter.

And this is really all due to the $487,000 cost associated with terminating the 2 pension plans.

Equipment expense totaled $14.5 million in the fourth quarter, an increase of $1.2 million as compared to the third quarter.

The increase in the current quarter relates primarily to expenses associated with 2 acquisitions closed during the quarter and the increased software depreciation and licensing as we continue to invest in information technology, information security and a newly implemented Bank Secrecy Act software, which is -- which enhances our ability to monitor for BSA-related activities as we continue to grow.

Occupancy expense totaled $17.1 million in the fourth quarter, increasing $2.1 million from the prior quarter.

The increase was due to the costs associated with new locations of the acquired institutions, new branch locations and increased real estate tax assessments.

Now data processing expense increased approximately $1 million from the fourth quarter compared to the prior quarter, due primarily to approximately $558,000 of conversion charges related to the STC Capital Bank system conversion and additional operating costs of data processing related to the 2 acquisitions that we closed during the quarter and just general growth of the franchise during the quarter.

FDIC insurance expense was up $1.2 million in the fourth quarter compared to the prior quarter.

As you know, the FDIC insurance assessment regulations provided that after the reserve ratio reach 1.38%, the FDIC would automatically apply small bank credits to reduce small banks' regulatory -- regular deposit insurance assessments up to the full amount of their assessments or to the full amount of their credits, whichever is less.

The reserve ratio reached 1.401% in June 30 and stayed above the required threshold on September 30.

And since each of our subsidiary banks are less than $10 billion in assets, each of them are qualified for the credits.

Therefore, Wintrust banks received credits of approximately $2.8 million in the fourth quarter, which was approximately $1.1 million less than the $3.9 million of credits received in the prior quarter.

It accounts for basically all of the quarterly increase in the expense.

We believe we have about $200,000 of additional assessment credits that could be applied in the future.

We expect those to come in the first quarter, generally, if the reserve ratio remains above the required threshold.

Miscellaneous expense category totaled $26.7 million in the fourth quarter compared to $21.1 million in the third quarter, an increase of approximately $5.6 million.

The increase was impacted by the aforementioned legal settlement charge and $1.7 million of the expense accrued as a contingent purchase price payments on the mortgage acquisitions that I discussed.

And this category was also negatively impacted by approximately $1.4 million of temporarily increased telecommunication charges as we're converting and upgrading our system-wide telecommunication infrastructure and data network infrastructure.

So as we get off of one provider and go to another provider and invest in that system, we've kind of got the overlap on the 2 providers as we are converting.

Other than the expenses categories just discussed, all the other expense categories were down on an aggregate basis by just over $1 million from the third quarter of 2019.

The net overhead ratio for the fourth quarter stood at 1.53%.

Without the acquisition-related and other uncommon charges mentioned at the beginning of my comments, the net overhead ratio would have been below 1.5%.

And we expect it to be below 1.5% for the year 2020.

And before I turn it back over to Ed, I'll briefly comment on the implementation of CECL.

Our estimated increase in the allowance for credit losses as a result of the implementation of CECL is in the 30% to 50% range.

This range reflects the uncertainty of economic forecasts that'll be used to record the transition amount.

Approximately 80% of the estimated increase is related to additions to the existing reserves for unfunded lending commitments due to the consideration under CECL of expected utilization by the company's borrowers over the life of those commitments as well as for acquired loans, which are previously considered credit discounts.

We expect relatively modest increases in reserves on the remaining legacy book.

As to future provisioning, it will continue to be impacted by charge-offs, loan growth, the mix of loan growth, the macroeconomic environment and many other factors.

If the macroeconomic environment stays stable with our current assumptions, and if we have loan growth similar to prior quarters and charge-offs remain low, then I expect our quarterly provision for credit losses to be in the $10 million to $15 million range.

But I caution that CECL accounting standard may cause significant volatility in the future, and that estimate may be high or low.

My thoughts are that investors should focus on trends in nonperforming loans and net charge-offs rather than provision expense.

Under CECL, the provision expense will be sensitive to economic forecasts that may or may not ultimately have a significant impact on the performance of the company's loan portfolio.

So as you may imagine, I'm not a big fan of the new CECL accounting standard as the cost benefit aspect of it, in my opinion, is way out of whack, and I believe it will create a fair amount of volatility going forward.

But we've got a great team that's worked hard on implementing the new accounting standard, and we are ready to go.

So with that, I will conclude my comments and throw it back over to Ed.

Thanks for the convoluted comments, Dave.

You're welcome, Ed.

Well, you're always good at being convoluted and should be.

Talk about the future.

Although the rate environment provides a plethora of challenges, we believe we'll be able to navigate through the storm as we have in the past.

Overall organic growth and acquisitive growth will be important as we need to grow this period of challenging rate environment.

Decreasing our cost of funds is obviously a priority, and we're all over it.

Loan pipelines remain strong.

Interesting to note that we've been able to hold rates at our commercial premium finance business and our leasing business.

So they should hold then well.

Applying our liquidity management assets into longer-term, better-earning assets is part of what we're doing.

As I mentioned, taking our duration from 4 to 6 years will be helpful there.

We have the expectation of continued strong mortgage market.

We will be maintaining a positive gap, so as to knock in -- we don't -- last thing I want to do is lock in this 3.19% or 3.20% margin, we want to build off of that.

But we're going to manage the downside risk a little bit more actively than we have in the past.

Credit, though, always a good question looks pretty good right now.

But you never know.

We will never kick the can down the road when it comes to credit.

So again, continued good core franchise growth will be the key.

We have closed the STC transaction and the Countryside transaction in the fourth quarter.

Together, these deals will add -- added close to $800 million in total assets.

Significant cost-outs will happen, but they're going to take a few quarters to achieve.

We have converted STC, and we're starting to -- we'll close 3 branches there over a period of time, possibly 4. That should start happening in the first and second quarter.

We'll be converting Countryside in the second quarter.

There'll be some expenses associated with that conversion.

But then we can start really taking the cost out of that, too.

So we should have elevated costs from them in the first 2 quarters, but that should be decreasing.

We're not on a loss for future acquisition opportunities as the pipeline remains relatively full.

You may -- I'd like to advise that maybe some larger transactions than those we've historically been involved with are now more of a possibility.

As we get bigger, I think we can look at bigger deals.

And I think the pricing on the bigger deals may make more sense.

We're seeing smaller deals being priced relatively high right now.

I don't know whether it's credit unions being involved, but we've walked away from 2 or 3 in the past 3 weeks of the quarter as a result of pricing being -- going up by then.

Or they could just be 2 drums holding each other up.

I don't know what's going on, but we'll find out in the long term.

And God willing, we look forward to reporting record results in 2020.

As always, you can be assured of our best efforts in that regard.

Now we can open up for questions.

(Operator Instructions) Our first question comes from the line of Jon Arfstrom with RBC Capital Markets.

Ed, you had some tongue twisters in the script.

So we're going to get you off script now.

But the market -- your favorite topic, the percentage margin.

I guess I was surprised to see the $1.1 billion in loan growth and net interest income down a bit.

And I'm just curious if anything surprised you guys in that percentage margin print.

And can you talk a little bit more about your confidence in seeing that margin stabilize at the 3.19%, 3.20% number because things look good, except for the fact that just that net interest income number didn't grow during the quarter.

Yes.

I can understand that.

But now we got about $700 million carryover into this quarter.

So on an average basis, we weren't up that much.

So that's some of the issue there.

So you'll see that -- I think the -- with capital, we can grow our net interest income next year.

If we can -- and our steady growth rates.

As to deposits, I think you got LIBOR down 10 or 12 -- maybe 13 basis points really this quarter, but we've been -- so we're actively cutting expenses.

So our interest expense, so if we can bring that down by the same level, knowing that our premium finance loans on the commercial side and our $1.3 billion leasing portfolio continues to maintain rates and putting the liquidity work, we hope that this is the base we could work off of.

That's what our numbers show us.

I can see gradual improvement.

It keeps going down.

I mean it's hard to catch up.

Eventually, we will, but right now, it appears that if this stays right where it is or drops 10 or 12 basis points a quarter, we can handle that and use this, relatively speaking, as our benchmark to go forward.

Dave, you've got a comment?

Yes.

No, I just -- the key is going -- I think, going to be the 30-day LIBOR rate and whether that stabilizes or not and the Fed rate, if they hold stable.

If those 2 hold stable, then I think we can hold, and we got a good baseline, and the growth will create growth in net interest income.

So let's hope the yield curve steepens and 30-day LIBOR anchors out here.

Okay.

All right.

And then the other, obviously, bigger line item, you talk about a lot is mortgage.

And you had a good mortgage quarter in this kind of 2x which you did a year ago.

It sounds like you're still reasonably optimistic, even though I think we all expect Q1 to be down a bit and -- but talk a little bit about what you're thinking about Q1 and then your ability -- you've talked about the efficiency efforts in mortgage and your ability to get cost down if we do see the seasonal slowdown and also some float on the refi.

Yes.

Well, as I said in my comments that I think the mortgage production right now, based on what we're seeing and -- you don't have full visibility for the quarter because the loans close sort of in that 30- to 40-day period.

So I'm not sure what the end of the quarter is going to look like and where rates will go in the next few weeks.

But based upon the application pipelines we have and the forecast that we have, we think the production will be somewhere between what we did in the first quarter of last year and what we did in the fourth quarter.

So first quarter last year, we did $772 million -- or I'm sorry, $678 million worth of production.

And we did $1.2 billion this quarter.

My guess is it's somewhere in that $900 million plus or minus range, but that's our best estimate right now.

It could change if the rates fall and that refinance activity picks up even more.

But my guess is it's somewhere in that range.

Okay.

And then the efficiency piece of it?

Yes.

Well, we continue to work on that.

We have -- as we've talked before, we have offshored some of the activities that are noncustomer-facing, that are more unit priced.

And so we've turned that more into variable versus fixed rate, and we continue to invest in the technology.

So I look at this as just an evolving improvement in the expense line items.

As we continue to get better, there's not going to be 1 big quarter where expenses drop.

We're just getting better and better and better each quarter.

So we should see some continued improvement there.

Yes.

Okay.

And then just one more and I'll step back.

Just the comment about bigger deals, Ed.

What do you mean by that?

Do you mean you'd consider an MOE?

Do you mean just bigger than these sub billion-dollar transaction -- do you start -- you've historically done with?

Just what do you mean by those comments?

Well, obviously, we've gone through the banks under $1 billion.

We'll continue to look at that.

But looking at banks over $1 billion makes some sense for us also right now, given many of them are having kind of the same issues we are.

On the MOE standpoint, there's lots of opportunities, but we don't generally comment on anything particular going on, the discussions that are going on are actual or not going on, but you can imagine that in a year like this, everybody kind of going through this -- through the same sort of margin compression issues that some things might make some sense -- but things we never looked at before.

I am just saying that, but who knows.

Our next question comes from Terry McEvoy with Stephens.

Start off with a question on the expenses.

Dave, you ran through a lot of the fourth quarter puts and takes to the expenses.

Could you just provide some thoughts on the first quarter?

Will some of those expenses kind of disappear?

And -- but you also have some seasonality that typically shows up in the first quarter as well.

Yes.

Well, the FDIC credits of $2.8 million are going to go down to $200,000.

So there'll be a little headwind on that.

And certainly, the legal settlements of roughly $1 million this quarter, we don't expect that to happen again.

Pension termination of $0.5 million, we don't expect to happen again.

The contingent consideration on the mortgage purchase price estimate, we think we've accrued that up so we wouldn't expect that to happen again.

Acquisition-related charges of $2.4 million.

As Ed said, we don't expect much in the first quarter, but we will convert the Countryside deal in the second quarter so we'll have some additional charges then when that happens, but that should be mostly in the second quarter.

And so I mean those were the big items that I don't think should recur going forward.

Also note that on the noninterest income side, there's a $2.6 million swing between third quarter and fourth quarter on swap fees.

That fluctuates quarter to quarter.

We had abnormally good third quarter, and it dropped a little bit in the fourth quarter given the rate environment and the like.

But that very well could get better.

And then the partnership investments, generally, those are positive.

We had a couple of these SBIC investment firms that wrote off some investments inside of their funds during the fourth quarter, which negatively impacted us.

So I don't expect that to happen again, but that was a $2.6 million swing.

So there was -- between those 2 line items, there was $5.2 million swing that we don't expect to happen again sort of in the noninterest income side of the equation.

But those are volatile, and we just have to see what the market value of those funds do, and what the customer appetites are for sort of the capital market swap issues.

Those are the large items that I think you could sort of adjust for going forward.

I do think then that commissions expense if we're less in mortgage originations, as I spoke about in the first quarter a little bit, that the commission expense line item will come down.

So that should help on the salary side, too.

And then, Ed, just a follow-up on the M&A question.

At 1.35x tangible book, is M&A really an option at all given, call it, the currency, be it small banks or larger banks?

It's all relative.

Yes.

I just have to look at what the price is on their side.

And some of these small deals or even larger deals, if you can get enough cost up out of them, then -- if you look at the relative price and the cost savings, you can make some of them potentially make sense.

Yes.

We're pretty good stewards of tangible book value.

We don't give away the house and expect a 10-year earn-back or something.

But hopefully, it won't be 1.35x of tangible book when you guys do your job out there.

Just kidding.

But you think at $6, I mean $6 is a run rate per share, the average -- we should be trading at $75.

I mean we get this quarterly knee-jerk reaction that everybody thinks the world is coming to an end, nobody likes banks, we're all these worms.

But we think the market is pretty good.

With this rate environment, I think we can hold pretty steady and continue to grow.

As I said earlier, I think our franchise value has never been higher than it is right now.

When you look at the 97% core deposits and our great customer base, our growth at some -- we feel pretty good about that aspect of it.

So yes, you never know but -- you never know.

If it doesn't work, it doesn't work.

But everybody else is in the same boat in terms of book value numbers and earnings numbers, we're only -- really now we're -- it's -- plays at 11x, 1 1/2 turns off the market, equity made up with lots of cost cuts, too.

So we can do acquisitions.

We can do them well.

We're not going to do anything stupid.

So if it doesn't work, it doesn't work, but just saying that the odds are I've been looking at larger deals might make more sense than some of the smaller deals for the reasons I discussed earlier.

Our next question comes from Chris McGratty with KBW.

Ed, you've talked about this $6 number a couple of times on the call today.

I'm trying to get a sense of $6 in 2019.

Is your expectation that you'll do better than that in 2020, barring any changes by the Fed.

Is that the message you're trying to send?

Yes.

I think it's the base we're going to build off of.

We had -- we can continue to grow at the rate we've been growing at.

We grew $4.5 billion organically and $1 billion through acquisition last year.

We're just growing, $3 billion would be a good number for us.

And hopefully, we can beat that.

The earnings on that, if we can hold our margin steady and keep the cost down, that has a commensurate increase in expenses, which we would fully expect to happen.

We got our net overhead ratio in the 1.40s consistently, I think we'll be okay.

Okay.

And just -- maybe I missed it, a, you talked about your margin.

Was the comment that the rate of compression will abate from this quarter or that 3.19% will hold kind of from here?

Well, both.

We -- it just depends on where -- if LIBOR continues to tank, it'll be hard to hold it.

But I think that rate of compression should slow down, even it does go down more than we expect, but 10 to 13 basis points, which isn't a holdback just through extending our maturities on our liquidity management portfolio and continuing to cut our cost of funds, but any -- like a quarter sudden drop and 35 basis point sudden drop would have a negative effect on us.

But as it stands today with LIBOR down, what, 10 basis points to the quarter, you think you'll be in that ballpark of 3.19% for the first quarter, if everything stayed the same?

Yes, sir.

And build off of that going...

Okay.

Maybe the second question, we've seen a lot of banks, given the revenue pressures, kind of go to the expense well.

Obviously, you guys have a growth aspect to the story, but what are the thoughts of really ratcheting up the efforts to cut costs while the revenue pressures are there?

Well, we do that all the time.

And the efficiencies, we look for those all the time.

We have a whole process here we go through in terms of looking at process efficiencies, and a number of those are in the works right now.

We continue to go through that and work through it.

But we also have to make investments in IT and technology that we're doing and that's people.

So we look at it all the time.

I don't know exactly what we could do to really do a drastic cut in expenses right now and continue to grow the organization.

We have to take what the market gives us.

The market has given us good organic growth right now.

We've got good momentum in our markets, good growth in our markets.

I will -- if I can continue to grow the franchise and keep it on that overhead ratio in the 1.40s, the margin will come around eventually.

I mean it will steady and solidify at some point, can't get off river, maybe it'll go up someday.

But I've given up on interest rates.

I don't think I've ever seen a period of time where you have full employment and 2.5%, 3% GDP growth and absolutely no inflationary pressures.

It's -- how can -- I just -- maybe you can explain it to me someday, Chris, but I do know that I do not want to -- I do want to maintain a positive gap in interest -- I want to stay interest rate sensitive, maybe not as much as we were.

We've been whittling that back a little.

But because -- I don't want to lock in 3.20% margin for the next 5 years.

That doesn't make sense to me.

So see where it goes.

Dave, you got anything?

I guess not.

Our next question comes from Brock Vandervliet with UBS.

Great.

So as I look at your loan growth in the past, acquisitions have always played a part of that.

As you look at kind of organic loan growth in 2020, what does that look like?

Is that mid-single digits, higher than that?

I believe that the mid-single-digit would be a good number.

7 to -- 7, 8 -- 6% to 9%.

Somewhere in that number, right around there.

Sort of mid- to high single digits is sort of the phrase I would use, which would be 6% to 9%, yes.

Okay.

And separately, on expenses, everyone's kind of taken shots at this question.

Is a -- and we're still going through the adjustments, but is a low 2.40s per quarter base reasonable for expenses?

How should we think about that?

There are so many variables out there depending on the mortgage market and the like.

I think what we've tried to do, Brock, in the past is sort of focus on the net overhead ratio.

So you can take the noninterest income components and noninterest expense components that are related to those.

So our goal in 2019 was -- sort of 155-ish range for the full year.

Our -- as Ed has mentioned previously, we expect to get that down into the 1.40.

So I -- it certainly should -- it will be below 1.50 based on what we're looking at now.

So we're going to get expense leverage out of the system as we grow.

And that's how we look at it.

It's probably a little higher than the 1.40s.

If you take out some of the expenses we have this time, but add back in the FDIC credits, it's higher.

But you're going to come down on commissions in the first quarter.

So maybe you get below -- 2.40s, but it really sort of depends on the mortgage market and what that does.

And so it's hard -- I hesitate to give a number because it fluctuates based upon what we're doing in the revenue section on some of these commission-based businesses that we have.

So I would focus more on are you coming in with net overhead ratios for the year of less than 1.50, in the 1.40s.

Got you.

And I appreciate the guide on provisioning going forward, $10 million to $15 million a quarter.

How does that post-CECL guide square with the $7.8 million, call it $8 million in Q4?

In Q4, we -- you have to remember, we had a charge-off that took away a specific reserve of $5 million.

So that was a big part of the drop as we just didn't have that reserve for that 1 loan.

So...

Got it.

Okay.

Yes.

Going forward, we think, as Dave said earlier, looking at -- I mean CECL is going to be all over the board on this.

And if the guy at Moody's has a bad day or hangover, his hemorrhoids jacked up, he could take the banking business down because everybody is using basically Moody's baseline as their basis for this.

So I think you've got to concentrate on net charge-offs and changes in specific reserves.

That's what we're doing here in our -- when we evaluate people, because -- I mean this thing could go up and go down based on their whim, so...

Our next question comes from David Chiaverini with Wedbush Securities.

I wanted to follow up on the NIM discussion.

You mentioned about how you may be able to defend the net interest margin at the 3.19% level by extending the duration from 4 years to 6 years.

I was curious how much in yield pickup do you expect with extending the duration?

Well, I think you just have to look whatever the overnight rate is and compare that to what a Ginnie and a Fannie rate is out in the marketplace.

So Ginnies and Fannies are in the mid 2s right now.

And the overnight rates are 1...

1s.

Mid-1s.

So maybe pickup 100 or so basis points.

If you gain some agencies, you could get closer to 3%.

If you have callable agencies, so you do some mix there, but certainly you pick up over 100 basis points.

But it wasn't just that.

And so that plus the lowering of the deposit cost is what defends the margin.

Great.

And you plan on extending that for the entire portfolio, like roughly the $6 billion on the securities.

Well, I think he said the liquidity management includes the overnight funds.

Yes.

You have to look -- if you look in our balance sheet, we've got interest-bearing deposits with banks of $2 million -- $3.1 billion of available for sales and $1.1 billion of held-to-maturity.

I mean that's already invested.

So we've got a little over $2 billion of overnight money that's available to be invested plus whatever you could get out of growth of the balance sheet on the deposit side.

And though industry environment get above a little over 1% after tax and any spread we picked up, I mean that's what we're looking at.

I would hesitate a little in the past, but 1% after tax would be good, then 1.25%, 1.30% pretax would be what my goal is anyhow.

That's a goal.

Yes.

And that's why you haven't seen us put a ton of money into it yet because the long end just hasn't provided that type of return, and we're hesitant to put $2 billion to work at the -- at spreads less than that all at once.

And I've always said that the day we do that is the day that the long end will shoot to the moon.

So we'll leg into this thing unless the long end really pops up dramatically.

Okay.

And then shifting to the loan growth, and you mentioned about the mid- to high single digits, 6% to 9%.

I was curious, just how are your borrower -- your commercial borrowers feeling nowadays?

Do they feel -- in your discussions with them, do they feel better about the economy, with the trade deal, the Phase 1 trade deal getting done.

I'm just curious as to what they're saying.

They're all feeling pretty good.

I mean there's not a day that goes by that a reasonably privately owned middle market company doesn't get offered a hell of a lot of money.

The -- basically, our C&I portfolio was stagnant for the year.

That didn't mean -- we booked over $1 billion worth of loans, but had them much in payoffs and through some de-risking of the portfolio.

We got rid of highly leveraged deals.

We're getting out of that business.

But they're all feeling pretty good about what they're doing, and they're all -- they may not be running at that $40 million backlog that they had.

But they're all doing pretty well now.

And they feel pretty good.

But they're all -- the money that's flying around out there right now from PE firms and fintech companies, we're seeing a lot of paydowns.

So we have to work really hard just to stay steady in that business.

Fortunately, if the fintech takes it over, we do maintain the deposit accounts.

So that's a good thing, so -- if the fintech takes over the loan.

So we've got to be careful, though, because I had a company that's got their legs up against the wall in terms of leverage.

So it's a tough market from a lender's standpoint.

From the borrower standpoint, they're all feeling pretty good, I would say.

Our next question comes from Michael Young with SunTrust.

Wanted to follow up on the share buyback that you announced and just kind of get your thoughts on how you are looking to deploy that.

Obviously, a lot of discussion of M&A as well.

But just kind of how you're comparing and contrasting buying back your own stock versus looking at acquisitions.

Well, we haven't bought any stock back to date.

We have the tool available to us.

And we just -- we really compare and contrast the deal flow and what sort of returns we think we can get off of those versus the buyback.

We're not big fans of diluting tangible book value.

So given the pipeline of deals we're looking at, we're going to see how some of those flow through.

And then we'll watch the stock price movement and compare them.

So we haven't done anything to date, but we'll continue to evaluate it versus the acquisitions.

But we just compare the 2. And maybe that's why we're losing some of the deals out there.

As Ed said, some of them recently have had very high price expectations, and we're very judicious in what we do.

We don't need to do $2 billion, $3 billion, $4 billion, $5 billion or $1 billion bank if they cost too much.

There's just no reason to overpay.

We're looking at it for the long-term value of the shareholders.

So if those don't pan out, then you would probably see us look a little harder at the stock buyback.

If the market -- it's just about -- it's just numbers, as Dave said, the deals we're looking at vis-à-vis capital.

And it -- where multiples are, I said we're at $66 a share, we're trading 11x -- 12.5x multiple situation.

So we were always good stewards of capital, we'll use it accordingly.

But there comes a time where buying it back is obviously better than buy a bank.

So it all just comes out of the ground, that old basic finance book.

And just as a follow up, Dave, would the limiting capital ratio at this point be the total capital ratio?

Is that what we should watch?

Yes, sir.

That's always been our limiting ratio.

I'm showing no further questions in queue at this time.

I'd like to turn the call back to Mr. Wehmer for closing remarks.

Thanks, everybody, for listening in.

Have a great first quarter.

And look forward to pitchers and catchers reporting.

Have a good month.

Bye.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating, you may now disconnect.