Wintrust Financial Corporation (WTFC) Q4 2019 Earnings Report, Transcript and Summary

Welcome to Wintrust Financial Corporation's Fourth Quarter and Year-to-Date 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [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's 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 in the 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, are Dave Dykstra, our Chief Operating Officer; Kate Boege, our General Counsel; and Dave Stoehr, our CFO. We will go through the same format as usual, I'm going to give some general comments regarding our results, turn over to Dave for 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 to go walk down memory lane. As we enter the roaring 20s, I like to think to call 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 analysts are concentrating on the last quarter, looking at entire body and work over that longer term. I can actually say with confidence that our franchises really never ever been in better position or more valuable.Over that 10 year period, net income grew from $73 million in 2009 to $356 million in 2019, and 17% compound annual growth rate. Nine out of the 10 years were record earnings with only 2010 now achieving record status. Earnings per share tripled during that period of time, from a little over $2 now over $6 resulting in 11% CAGR.Tangible book value grew at 8% CAGR from $23 in 2009 from almost $50 in 2019. And deposits have growth of 12% compound annual growth rate. Assets 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 and 2019.Nonperforming assets, as a percent of assets, have come down every year since 2009, and then that this year the low of 30.26% total assets. Given our $6 run rate in EPS and our track record, consistent growth and all the fundamental financial results, I 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 to sit through good growth in all major statistics by material future decreases, material decreases of rates, its historic material run rate tend to line in the sand for us and the basis for growth -- our future growth aspirations.Now onto the quarter. Fourth quarter net income, all-in-all some of it is a bit reasonable considering the 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. Again, I don't really know that the new normal is anymore, but it makes it 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 didn't fell 20 basis points to 319 as earning asset yields fell 28 basis points net interest expense, so increase in basis points. Net free funds ratio was down by 3 basis points. All these differences are direct result of the LIBOR market and the yield curve, probably there's some material changes, which 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. The drop in liquidity management yield was due to $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 -- our liquidity management duration staying relatively constant for about four years. Investing in these assets should be securities -- longer-term securities should assist as part of the margin contribution going forward.Our goal is to maintain an approximate six year duration of liquidity management assets we have some opportunity there. Our loan to deposit ratio, maybe at the high end of our estimate of 85% to 90% range, ended the quarter at 89%, down from 90% of the overall previous quarter end.On the interest expense front, deposit expanse decreased 30 basis points in the quarter, the decreased deposit rates and we are actively and aggressively working to decrease the cost of funds at our deposit base. So there's opportunity here also. Overall cost of funds and total interest rate bearing liabilities was also down 11 basis points. On the net interest income front, we reported decrease of about 3 million bucks and the margin decrease was the primary decrease, and it was mitigated by our overall asset growth. For full year basis net interest income was up approximately $100 million.Going forward, depending on the rate environment for the rate that's 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 the aggressive deposit cutting cost -- cost cutting where we can. We know LIBOR is again down this quarter. We think we've been aggressive and hopefully our plan is to have our decrease in -- any future decrease in assets offset by liabilities and the cost of liabilities going to down. So again, we think we're kind of in a good point here, barring an overall shift-down materially in the -- 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%] percent should be based on of which we can build and grow, especially if we can maintain our historical asset growth rates in 2020. I'm going to cover another expense table. We'll be reviewing these in detail a bit later, but some high level remarks. Net overhead ratios for the 1.53 for the quarter and 1.57 for the year. If one were to eliminate the MSR valuation adjustments and acquisition related were to be a bit below our 1.5% goal as an organization. If we were to eliminate the negative MSR valuations for the year, we were to achieve approximately 7% earnings growth for the year.On to the balance sheet where assets grew $5.4 billion over the year and $1.7 billion over September, and earning assets of both $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. I'm going to describe to you a little bit of a head start with almost $800 million of average assets -- and 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. For the quarter included approximately $582 million of acquired loans, real estate loans, commercial and residential grew $707 million and total and premium finance loans life and P&C grew $271 million and commercial loans increased by $90 million.Our loan pipelines continue to remain strong across the board. We expect to continue growing loans in high single-digits as it -- consistent with prior periods. Deposit front was another deposit growth quarter for us of $4.4 billion that's after returning $200 million. Acquisitions accounted for approximately half of this net growth in deposits. Core deposits non-broker comprise 97% of total deposits. I think we have the best core franchise in our market continued good growth is at the heart of our planning through 2020 and beyond.The credit fund, as mentioned, credit metrics returned to historical norms. Nonperforming loans stayed constant and total about 44% outstanding. This has largely been in areas in time of the past same could be said for nonperforming assets. So as I said earlier, it's decreased from 0.36% of assets. Net chart-off were $12.7 million, including $5.3 million in charges to the previously reserved for. Despite our second quarter blip, net charge-offs for the year totaled just around 20 basis points, so good number in anyone's measure and more in line with what you would expect from us. We continue to work 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 moving them 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. But he convoluted, I thought that convoluted. Dave, go ahead.

All right. Thanks Ed. As normal, I'll briefly touch on the other non-interest income and non-interest expense sections, as well as the comp diluted CECL standard that Ed referred to. On the non-interest 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 was a strong 98% from the $24.2 million recorded in the fourth quarter of last year.The decrease in this category of revenue from the prior quarter resulted primarily from seasonally lower levels of loans originated and then sold during the quarter from basically lower purchase 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 increased during the quarter and acted to mitigate the seasonally lower purchase home activity.Table 16 of our earnings release provide the detailed comp [Technical Difficulty] of the components of origination volumes by delivery channel and also the mortgage banking revenue including production revenue MSR capitalizations and the sort of 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 originators are expected to be less than the fourth quarter, so somewhere between first quarter of last year and fourth quarter of last year is where we currently expect the volumes to be.Other non-interest 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 and partnerships. These investment partnerships are primarily related to FDIC investments to support our CRA goals. This category of revenue generally fluctuates as a result of the two revenue sources I just talked about, and has averaged about $14.6 million over the past five quarters. So despite falling from a very good third quarter level, and the current quarter is roughly on average with the last five quarters.Turning to noninterest expense categories. Noninterest expenses 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 process and 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 expense was related to the STC and Countryside Bank acquisitions were incurred during the quarter, and we would expect that this amount would reduce overtime as we continue to integrate these acquisitions into our infrastructure.Costs associated with terminating two 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 it. There was $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, you may have to record additional expense. I think it was worse that could come in this income, given the stronger mortgage market when we recorded. And accruals were $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 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 costs 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 benefit expense was approximately $159,000 higher in the current quarter than the prior quarter, and this was really all due to the $487,000 costs associated with terminating the two 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 two acquisitions closed during the quarter, and the increased software depreciation and licensing as we continue to invest in information technology, information security and the newly implemented Bank Secrecy Act software, 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. Data processing expense increased approximately $1 million in 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 cost of data processing related to the two 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 reached 1.38%, the FDIC would automatically apply small bank credits to reduce small banks' 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 1.40 on June 30th and stayed above the required threshold on September 30th. 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 credit of approximately $2.8 million in the fourth quarter, which was approximately $1.1 million plus and $3.9 million of credits received in the prior quarter, and it accounts for basically all of the currently increase in the expense. We believe we have about $200,000 of additional assessment credits that could be applied in the future, and 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 expense accrued as the contingent purchase price payments on the mortgage acquisitions that I discussed, and this category also negatively impacted by approximately $1.4 million of temporarily increased telecommunication charges as we are 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 when we kind of got overlap on the two providers as we are converting.Other than expenses categories I 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 of 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 forecast that'll be used to record the transition amount. Approximately 80% of the estimated increase is related to additions to existing reserves for unfunded lending commitments through 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 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 stay stable with our current assumptions and if we have loan growth similar to prior quarters and charge-offs remain low, and 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 non-performing 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. There's a 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.

Welcome Ed.

Well, you're always good at being convoluted and should be. Talk of future although, the rate environment provides a plethora of challenges, we believe we will 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.Decrease in 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 the rates on our commercial premium finance business and our leasing business. So it should hold them well. Applying our liquidity management assets into longer term better earning assets is part what we're doing, as I mentioned, taking our duration from four to six 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 -- I actually want to do is lock in this 3.19 to 3.20 margin we want to build off of that, but we're going to manage the downside risk little bit more actively than we have in the past. Credit though always a big 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 SBC transaction and the Countryside transaction in the fourth quarter. Together these deals will add -- added close to $100 million in total assets. Significant cost-outs will happen, but they're going to take few quarters to achieve. We have converted STC and we're starting to -- we'll close three branches there over a period of time, possibly four. That should start happening in the first and second quarter. We will be converting Countryside in the second quarter. There will be some expenses associated with that conversion, but now we can start really taking the costs out of that too.So we should have elevated costs from them in the first two quarter, but that should be decreasing. We're not on the loss for future acquisition opportunities as the pipeline remains relatively full. You may -- I'd like to advise that maybe some larger transactions and those we have historically been involved with are now more of a possibility. So we get bigger. I think we can look at bigger deals. And I think the pricing on the bigger deals make more sense.We're seeing smaller deals being priced relatively high right now. I don't know whether it's credit unions has been involved but we've walked away from two or three in the past three weeks or quarter as a result of pricing being going up by then, or it could just be two drums holding each other. 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 share to 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. Your line is now open.

Ed, you had some tongue twisters in the script. So we're going to get you off script now. But the mark -- and 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 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 to 3.20 number? Because things look good except for the fact that just that net interest income number didn't draw during the quarter.

Yes, I can understand that. But, know we have about $700 million carry over into this quarter. So on average basis, we went up that much. So that's some of the issue there. So you will see that. I think the -- with capital we can grow net interest income next year, if we can maintain our steady growth rates. As to deposit, I think you got LIBOR down 10 or 13 basis points earlier this quarter, but we've been actively cutting expenses, so our interest expense. So 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 recent portfolio continues to maintain the rates. And putting the liquidity work, we hope that this is the base we can work off, that's what our numbers show us. It's a gradual improvement but it keeps going down. I mean, it's hard to catch up, eventually we will. But right now it appears if it just stays right where it is or drops 10 or 12 basis points a quarter, we can handle them and use this, relatively speaking, as our benchmark to move forward. Dave, you got any comment?

The key is I think going to be the 30-day LIBOR rate and whether that stabilizes or not. And the Fed rate as they hold the stable. If those two hold stable then I think we can hold and we got a good baseline and the growth of great growth and net interest income. So let's hope the yield curve steepens and 30 day LIBOR anchors out here.

And then the other obviously bigger line item, you talk about a lot is mortgage and you had a good mortgage quarter and this kind of 2x, which you did a year ago. Sounds like you're still reasonably optimistic, even though I think we all expect Q1 to be down a bit. 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 costs down if we do see the seasonal slowdown and also some slowdown in the refi?

Well, as I said in my comments I think the mortgage production right now make some what we're seeing and then you don't have full visibility for the quarter, because the loans close sort of in that 30 to 40 day period. So not sure what the end of quarter is going to look like, and where rates will go in the next few weeks. But based upon the application and the 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 of last year, we did $772 million -- $678 million worth of production and we did $1.2 billion this quarter. My guess it it's somewhere in that $900 million plus or minus range, but that's our best estimate right now. It could change if rates fall and that refinance activity picks up even more, but my guess is it's somewhere in that range.

And then the efficiency pieces of it?

We continue to work on that. We have, as we've talked before, we have off-shored some of the activities that are non-customer facings that are more unit priced. And so we've turned that more in the 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 is not going to be one big quarter where expenses drop or just getting better and better and better each quarter. So we should see some continued improvement there.

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 consider an MOE? Do you mean just bigger than these sub billion dollar transaction you've historically done with? Just what do you mean by those comments? Thanks.

Well, obviously, we've got through the banks under $1 billion and we'll continue to look at that. But looking at banks over a billion dollars made some sense for us also right now, given many of them are having kind of same issues we are. On the MOE standpoint, there's lots of opportunity but we don't generally comment on them. Anything particular going on in the discussions, there are going on and not going on. But you can imagine that in a year like this, everybody kind of going through the same sort of margin compression issues that that some things may make some sense. But things we never looked at before, I was just saying that. But who knows.

Our next question comes from Terry McEvoy with Stephens. Your line is now open.

I'll 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? Well, some of those expenses kind of disappear and -- but you also have some seasonality that typically shows up in the first quarter as well?

Well, the FDIC credits of $2.8 million are now going down to $200,000, so there will 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 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. So I mean those were the big items that I don't think should recur going forward.Also note that on the non-interest income side, there's $2.6 million swing between third quarter and fourth quarter on swap fees that fluctuates quarter-to-quarter, we had our abnormally good third quarter and that dropped a little bit in the fourth quarter given the rate environment and the likes, but that very well could get better. And then the partnership investment, certainly, those are positive. We had a couple of these FDIC investment firms have rolled 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 $2.6 million swing.So there's between those two lines, there was $5.2 million swing that we don't expect to happen again sort of in the non-interest 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 that the commission's expense, we're less in mortgage origination, 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 just to follow-up on the M&A question. At 1.35 times tangible book is, is M&A really an option at all, given call it the currency be it the small banks or larger banks?

I just have to look at what the prices on their side and some of these small deals or even larger deals, if you can get enough costs out of them and if you look at the relative price and the cost savings, you can make some of them potentially make sense.

Yes, as you know, we're pretty good stewards of tangible book value. We don't give away the house and it's like a 10-year earn back or something. Hopefully, it won't be at 135 with tangible book when you guys do you job out there, just kidding. But I think at 6 bucks, I mean 6 bucks is a run rate per share, the average 12 and we should be trading at 75 bucks. And then we get this quarter we need your reaction that everybody thinks the world is coming to an end, nobody likes banks, reality worms but we think the market is pretty good. With this great 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's right now, and you look at that 97% core deposits and a great customer base growth at some, we feel pretty good about that aspect of it. So yes, you never know, but you don't know. Done work is done work. But everybody else is in the same boat in terms of book value numbers and earnings numbers were only really not where which were in '11, won't have turns off the market that we 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 you never know if it doesn't work, but just saying that the adds I've been looking at larger deals might make more sense in some of the smaller deals for the reason I discussed earlier.

Our next question comes from Chris McGratty with KBW.

Ed, you've talked about this $6 number a couple 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, borrowing 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. I think, we can continue to grow at the rate we've been grown at, we drew $4.5 billion organically and $1 billion through acquisition last year. We've just grown $3 billion, will be a good number for us and hopefully, we can beat that. And the R&D earnings on that, if we can hold our margin steady and keep the cost down that had a commensurate increase in expenses, which we would expect to have when we get our net overhead ratio in the 140s consistently, it will be okay.

And maybe I missed it. I think you talked about your margin. Was the comment that the rate of compression will abate from this quarter or that 319 will hold kind of from here?

Well, both. We both -- it just depends on where LIBOR continues to take. It'll be hard to hold it. But I think that way the compression should slow down either it does go down more than we expect. But 10 to 13 basis points, which isn't a holdback just through extending our maturities out our liquidity management portfolio, and continuing to cut our costs of funds. But any -- like a quarter sudden drop in 35 basis point, sudden drop would have a negative effect on us…

But as it stands today with LIBOR down what 10 basis points a quarter, you think you'll be in that ballpark of 319 for the first quarter if everything stays the same?

Yes, sir, and build off of that going…

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?

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 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 give us, the market give it is good organic growth right now, some good momentum in our markets, good growth in our markets. If I can continue to grow the franchise and keep that overhead ratio in the 140s, the margin will come around eventually. I mean, it will steady and solidify at some point, we can't cut out forever, maybe we would go up someday. But I've given up on interest rates, and I don't think I've ever seen a period of time where full employment and 2.5%, 3% GDP growth and absolutely no inflationary pressures, it's how can -- I just -- maybe you can explain to me some day, Chris.But I do know that I do not want to -- I do want to maintain a positive gap. And I want to stay interest rate sensitive, maybe not as much as we were we've been little in that back a little. But -- because I don't want to walk in 320 margin for the next five years, that doesn't make sense to me. So see where it goes. Dave, you got anything?

Our next question comes from Brock Vandervliet with UBS. Your line is now open.

So as I look at your loan growth in the past, the acquisitions have always played a part of that. As you look at organic loan growth in 2020. What does that look like? Is that mid single-digits higher than that?

I believe that mid single-digit be a good number, 6% to 9% somewhere in that number, right on that…

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

And separately on expenses, everyone has kind of taken shots at this question. And we're still going through the adjustments. But is a low 240s 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 component and the noninterest expense component that are related to those. So our goal in 2019 was sort of 155-ish range for the full year.As Ed had mentioned previously, we expect to get that down into the 140. So it certainly should -- it will be below 150 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 is probably a little higher than 140. But if you take that some of the expenses we have this time and 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 the low 240 but it really sort of depends on the mortgage market and what that does. And so it's hard -- I hesitate to give the number because it fluctuates based upon what we're doing on 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 less than 150 in the 140s.

And appreciate the guide on provisioning going forward, 10 to 15 a quarter. How does that post CECL guide square with the 7.8, call it 8 million in Q4?

Q4, you have to remember, we had a charge-off that took way of specific reserve of $5 million. So that was a big part of the drop as we just didn't have that reserve for that one loan.

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 or his hemorrhoids jacked up, he could think the banking business down, because everybody's using basically Moody's baseline is their basis for this. So I think you got to concentrate on net charge-offs and chases 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 win.

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 319 level by extending the duration from four years to six 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 Fannie rate is out in the marketplace. So Ginnie's and Fannie's are in the mid 2s right and the overnight rates are 1, mid-1, so maybe you pickup 100 or so basis points. If you get some agency, if you could get closer to 3%, if you have call agency, so you do some mix there. But certainly you pick up over 100 basis points but it wasn't just that having said that plus the lowering of deposit costs is what depend the margin.

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

Well, the liquidity management includes the overnight funds.

You have to look at, if you look in our balance sheet, we've got interest bearing deposits with banks of $2 million, of the $3.1 billion of available for sales and the $1.1 billion of held to maturity, I mean, that's already invested. So we've got -- we need to get 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.

The whole industry environment is good about little over 1% after tax and then the spread we picked up. I mean, that's what we're looking at. Why we hesitate a little in the past, but 1% after-tax would be by 1.25, 1.33 tax should, but my goal is anyhow, that's a goal.

And that's why you haven't seen us put a ton of money into it yet, because the long and just hasn't provided that type of return. And we're hesitant to put $2 billion to work at the spreads less than that all at once. And I've always said the day we do that as the days of long and all shoot to the moon. So we'll leg into this thing unless the long and really costs up dramatically.

And then shifting to the loan growth and you mentioned about the mid to high-single-digit 6% to 9%. I was curious just how your borrower, your commercial borrowers feeling nowadays? Do they feel in your discussions with them that 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 good. I mean, there's not a day that goes by, they're reasonably privately owned middle market company those who could offer hell of a lot of money. Basically, our C&I portfolio was stagnant for the year and that didn't mean -- we booked over a billion dollars worth of loans but they're much in pay offs through some de-risking. But 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 may not be running that $40 million backlog that they have but they're all doing pretty well right now, and they feel pretty good. But they're all, with the money that's flying around out there right now from PE firms and fintech companies, we're seeing lot of pay downs. 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 I'd say the fintech it's over the long. So we got to be careful though because I had a company that's kind of legs up against the wall in terms of leverage. So it's a tough market from a lender standpoint, from the borrower standpoint, they're all feeling pretty good, I would say.

Our next question comes from Michael Young with SunTrust.

I 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 today. 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 dilute -- as I said 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 haven't done anything to-date, but we will continue to evaluate it versus the acquisitions. But we just compare the two and maybe that's why we're losing some of the deals out there. As I've said, some of them are recently have had very high price expectations, and we're very judicious on what we do. We don't need to do 2, 3, 4 or 5 or a billion dollar bank if the cost too much, there's just no reason to overpay. We're looking at it for the long-term value of the shareholder. So if those don't pan out then you would probably see us look a little harder at the stock buyback.

It's just the matter, it's just numbers as David said it. The deals we're looking vis-à-vis the capital and where multiples are, I said we're at 66 bucks a share, returning 11 times and 12.5 times multiples situation. So we were always good stewards of capital, and we use it accordingly. But it comes a time where buying it back is obviously better than buy the bank. So it's all just comes out of the [indiscernible] titled basic finance book.

And just as a follow-up, Dave, with the limiting capital ratio at this point would 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.