Community Bank System Inc
NYSE:CBU
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Community Bank System Inc
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Welcome to the Community Bank System Fourth Quarter 2018 Earnings Conference Call.
Please note that this presentation contains forward-looking statements within the provisions of the Private Security Litigation Reform Act of 1995, that are based on current expectations, estimates and projections about the industry, markets and economic environment in which the company operates. Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the company's annual report and Form 10-K filed with the Securities and Exchange Commission.
Today's call presenters are Mark Tryniski, President and Chief Executive Officer; and Joseph Sutaris, Executive Vice President and Chief Financial Officer.
Gentlemen, you may begin.
Thank you, Aaron. Good morning, everyone, and thank you all for joining our fourth quarter conference call. I'll start with a comment on Q4 and then comment on 2018 as a whole and our transaction announcement yesterday. Fourth quarter earnings were about as we expected, but down from Q3, which is typically the case. Operating expenses were $0.02 higher, including $0.01 of severance and $0.01 related to an extra payroll day. Our insurance business also came in $0.01 below a very strong third quarter.
We were pleased with the modest margin lift as new loan originations are going on at higher rates than overall portfolio yields. Loan and deposit balances were slightly down, also typical in Q4 for us.
Operating EPS for the full year was up 22%, which excludes the impact of acquisition expenses and the deferred tax benefit in Q4 of last year. That 22% growth includes $0.11 per share hit from Durbin in 2018. So overall, it was another very strong year for our shareholders, and our 9th consecutive year of improvement in operating EPS. Loan growth across the year was more volatile between quarters than usual due to record originations offset by record payoffs in the commercial book, but our mortgage and auto lending portfolio has performed as planned.
There are three observations I would like to highlight related to 2018. First, I think our retail team did a superb job of managing funding costs throughout the year, which has clearly been beneficial to margin performance. Second, our noninterest revenues were up 11% over 2017 and that includes the impact of the $7 million Durbin hit. Banking fee revenue was up 3% reported and would've been up 12% without Durbin. Our wealth management and insurance businesses were up 16% and our benefits business is up 14%.
Third, in my view most important for our future, as we announced in May, we made some significant senior leadership changes to our organization, including appointing Scott Kingsley as Executive Vice President and Chief Operating Officer; Joe Sutaris as Executive Vice President and Chief Financial Officer; and Joe Serbun as Executive Vice President and Chief Credit Officer. Transition was extremely smooth and effective in enhancing the talent of our senior leadership team. It has already begun to make a meaningful difference across the company that I believe will become clearly apparent into the future.
Lastly, we announced yesterday the acquisition of Kinderhook Bank, headquartered in the Albany region of New York state. Kinderhook is a solid performing $640 million asset commercial bank with 11 branches across five counties. In addition to its performance and asset quality, Kinderhook is highly additive to our franchise, both strategically and geographically. We started up a business banking office in Albany in 2018, with Jeff Levy providing leadership, who's one of the most respected and experienced bankers in the market. He put together a very strong team, who had a very strong inaugural year, and this transaction further enhances our opportunity for continued growth and investment in this market. It's an all-cash deal, so we think it's a very productive low-risk, high-value deployment of capital.
Looking ahead to 2019, we have strong operating momentum across all our businesses. We're hopeful that margin tailwinds continue to blow modestly. We expect the Kinderhook acquisition to be solidly additive, and we have and continue to generate considerable capital that can be deployed in a patient and disciplined manner for the ongoing benefit of our shareholders. Joe?
Thank you, Mark, and good morning, everyone. I'll first provide commentary around our full year and fourth quarter earnings results followed by some additional information regarding our pending merger with Kinderhook Bank Corp. As Mark noted, 2018 was a very good year for the company. We established a new record for full year earnings and benefited from the full integration of our 2017 acquisitions of Merchants Bancorp and Northeast Retirement Services.
The company recorded a full year GAAP net income of $168.6 million and earnings per share of $3.24. This compares to net income of $150.7 million and $3.03 in earnings per share for the full year of 2017, which include a $38 million or $0.74 per share of onetime income tax benefit due to the revaluation of the company's deferred tax position after the passage of the Tax Cuts and Jobs Act in the fourth quarter. Excluding this onetime income tax benefit and acquisition-related expenses, net of tax effect, full year 2017 operating earnings were $2.64 per share. This compares to $3.23 of operating earnings per share for the full year of 2018, a $0.59 per share or 22.3% improvement year-over-year.
These results were achieved in spite of the company becoming subject to the Durbin-related debit card interchange price restrictions in the second half of the year, which negatively impacted 2018 earnings per share by $0.11. Full year 2018 return on assets and return on tangible equity were 1.58% and 19.1%, respectively. I'll now make a few comments about our balance sheet before discussing quarterly earnings results. We closed the fourth quarter of 2018 with total assets of $10.61 billion, this is down $51.2 million or 0.5% from the end of the third quarter of 2018 and $137.8 million or 1.3% from the end of 2017.
Similarly, average earning assets for the fourth quarter of 2018 of $9.31 billion were down $26.2 million or 0.3% when compared to the linked third quarter and $66.9 million or 0.7% from the fourth quarter of 2017. Ending loans at December 31, 2018, were down $19.8 million or 0.3% from the end of the third quarter and up $24.4 million or 0.4% over the full year period. As Mark mentioned, although the company's business lending originations were strong in 2018, higher levels of unscheduled payoffs resulted in a $27.2 million or 1.1% decrease in outstanding balances. This decrease was offset by net growth totaling $51.6 million or 1.3% in our consumer loan portfolios.
On balance sheet, deposits decreased to $141.5 million or 1.7% on a linked-quarter basis and $122 million or 1.4% on a full year basis. During 2018, certain large commercial deposits opted to utilize an off-balance sheet suite vehicle we offered with third-party arrangement. These off-balance sheet arrangements increased $163.2 million between December 2017 and December 2018. Checking and savings accounts represent 68.3% of our total deposits at December 31, 2018, which is a solid increase from 65.7% one year prior. As of December 31, our investment portfolio stood at $2.98 billion. The portfolio is largely comprised of treasury securities, agency mortgage-backed securities and municipal securities. The effective duration of the portfolio was 3.3 years at December 31, 2018.
The fourth quarter 2018 tax equivalent yield on the investment portfolio, including cash equivalents was 2.61%. Flexible cash flows from existing investment securities -- from the existing investment securities portfolio are expected to total approximately $200 million for 2019 and $780 million in 2020. We anticipate reinvesting and potentially preinvesting a portion of these anticipated cash flows in similar type of securities during 2019 but at higher deals. In the fourth quarter of 2018, the company reported $40.8 million of net income and $0.78 per share in earnings. This compares to net income of $72 million or $1.40 in GAAP earnings per share in the fourth quarter of 2017 exclusive of the onetime income tax benefit, acquisition-related expenses and unrealized gain on equity securities. Operating earnings per share was $0.78 in the fourth quarter of 2018 as compared to $0.67 for the fourth quarter of 2017. The $0.11 per share or 16.4% improvement in operating earnings per share was driven by increases in net interest income and noninterest revenues, a lower provision for loan losses and a decrease in income taxes, excluding the onetime tax benefit, offset in part by higher operating expenses and increase in fully diluted average shares outstanding.
Compared to the fourth quarter of 2017, net interest income was up 10 basis -- was up due to a 10 basis point increase in earning asset yields, offset in part by a 7 basis point increase in the cost of funds at a $66.9 million or 0.7% decrease in average earning assets. Net interest margin on a fully tax equivalent basis decreased 3 basis points between comparable annual quarters from 3.74% in the fourth quarter of 2017 to 3.77% in the fourth quarter of 2018.
Noninterest revenues in the nonbanking businesses were up $2.5 million or 7.3%, but were offset by a $2.2 million or 11.2% decrease in banking-related noninterest revenues due to a decrease in debt interchange fees in connection with the company being subject to the Durbin amendment beginning July 1, 2018. Despite the Durbin reduction, noninterest revenues contributed 39.5% of the company's total operating revenues during 2018. Compared to the prior fourth quarter, total operating expenses, excluding acquisition expenses were up $1.5 million or 1.7%. Increases in salaries and employee benefits, occupancy and equipment expenses and other expenses totaling $2.1 million were offset in part by $0.6 million decrease in the amortization of intangible assets. The $2.9 million decrease in the provision for loan losses was primarily due to lower net charge-offs in the business lending portfolio. In the fourth quarter of 2017, the company charge-off $3.1 million on loans to a single borrower.
Moving to the linked quarter. Consistent with historical trends, fourth quarter operating earnings were modestly below on a linked third quarter results. The company reported total operating expenses of $87.6 million in the fourth quarter compared to $85.2 million of total operating expenses in the linked third quarter, a $2.4 million increase which included an additional day of payroll and benefit cost. Net interest income was up $1.2 million or 1.4% on a linked-quarter basis. This is reflective of higher core net interest margin and the receipt of the Federal Reserve Bank semiannual dividend in the amount of $0.4 million. Net interest margin increased 6 basis points on a linked-quarter basis to 3.77%, 4 basis points of which were attributable to the core net interest margin, rate and volume factors and 2 basis points attributable to the FRB dividend.
The yield on earnings assets increased 8 basis points from 3.91% in the third quarter to 3.99% in the fourth quarter. This increase was partially offset by a 2 basis point increase in the cost of funds between the linked quarters. The company's average cost of deposits for the fourth quarter remained low at 16 basis points. This compares to an average cost of deposits of 13 basis points during the third quarter. Noninterest revenues were down $1.6 million on a linked-quarter basis. This was attributable to a $1 million seasonal decline in the insurance revenues from a very strong third quarter, a $0.5 million decrease in revenues from mortgage and other banking services.
During the third quarter, the company's insurance services revenues were up as compared to linked second and fourth quarters due to higher levels of new policy sales and renewals. Excluding the $0.8 million acquisition-related recovery reported in the third quarter, total operating expenses increased $1.6 million or 1.8% on a linked-quarter basis. Salaries and employee benefits, occupancy and equipment and other expenses were up in the quarter. It is not atypical for the company to experience modestly higher operating expenses in the fourth quarter as compared to the third quarter.
Our asset quality remained strong at the end of the fourth quarter of 2018. Nonperforming loans comprised of both legacy and acquired loans totaled $25 million or 0.4% of total loans. This is the same ratio reported at the end of the linked third quarter of 2018 and 4 basis points lower than the ratio reported at the end of the fourth quarter of 2017. Our reserves for loan losses represent 0.78% of total loans outstanding and 0.93% of legacy loans outstanding.
Our reserves remain adequate and exceed the most recent trailing 4 quarters of charge-offs by a multiple of 5. The allowance for loan losses to nonperforming loans was 197% at December 31, 2018. This compares to 201% at the end of the linked third quarter and 173% at the end of 2017. We recorded net charge-offs of $3.3 million or 21 basis points annualized on the loan portfolio during the fourth quarter of 2018 and $9.1 million or 15 basis points on a full year basis. This was down from 18 basis points on a full year basis in 2017. We do not currently have any commercial OREO properties, and the internal loan risk ratings portend stable asset quality. From an asset quality perspective, we do not see any major headwinds on the horizon.
Shareholders' equity increased $79.5 million or 4.9% on a full year basis due largely to an increase in retained earnings. Our capital ratio has also remained strong in the fourth quarter, and company's Tier 1 leverage ratio was 11.09% at the end of the quarter, over 2x the well-capitalized regulatory standard. Tangible equity to net tangible assets ended the quarter with a solid 9.69%. This was up from 9.13% at the end of the third quarter of 2018 and 8.61% at the end of 2017.
Looking ahead, we anticipate 2019 net interest margin to be similar to the second half of 2018 in the mid-3.70s. Although we anticipate continued lift in loan deals, we also expect to face repricing pressure on our nonmaturity deposit portfolios and overnight repurchase agreement issuance. Since the Durbin restrictions do not become effective until the second half of 2018, we also expect that full year 2019 earnings per share will be unfavorably impacted by an additional $0.11 per share. In summary, we believe the company remains very well positioned to effectively integrate the Kinderhook Bancorp merger in the second quarter of 2019 and improve upon its organic results in the quarters ahead.
Now I would like to briefly comment on the operating and deal metrics regarding Kinderhook. As noted in yesterday's press release, Kinderhook is an 11-branch franchise operating in the Greater Capital District of New York. The geography in which Kinderhook operates is contiguous to our core geography, but provides better banking opportunities from a demographic perspective in most regions with our existing footprint. We believe that Kinderhook franchise fills a hole in our geography, significantly augments our presence in the Greater Capital District region of New York. At the end of the third quarter, the Kinderhook Bank had total assets of $636 million, including total loans of $491 million and $560 million in total deposits. Kinderhook's loan portfolio is largely a commercial book with $257 million or 52% of its total loan portfolio in commercial real estate and $45 million or 9% in commercial and industrial and other loans.
Kinderhook also has approximately $180 million or 37% of its total loan portfolio in 1-to-4 family residential real estate loans, including approximately $17 million in home equity loans. There is also a very small consumer direct loan book totaling approximately $9 million. Approximately 75% of Kinderhook's total deposits are in checking, savings and money market deposits, with the remaining 25% in time deposits. Kinderhook's third quarter fully tax equivalent net interest margin was 3.55%. Total earning assets were 4.33%, including a 4.84% yield on loans and a 2.25% yield on its investment portfolio. Kinderhook Bank's deposit funding costs for the third quarter was 61 basis points or 0.61%, but total funding cost for Kinderhook Bank Corp were 0.77%, inclusive of interest expense and approximately $15 million of sub debt and TruPS.
As noted in our press release, aggregate consideration for Kinderhook is anticipated to be $93.4 million. This assumes full conversion of the company's convertible preferred shares into common shares prior to merger and a $62 purchase price for all common shares. The purchase multiples for the pending merger are 10.5x earnings with fully phased-in cost savings estimated at 30% and 1.93x tangible book value as of September 30, 2018. The transaction is expected to be $0.07 to $0.08 GAAP accretive on the first full year basis and $0.09 to $0.10 on a cash EPS basis. The pro forma consolidated balance sheet is estimated to increase Community Bank's total assets to over $11 billion, total loans to $6.8 billion and total deposits to $8.9 billion.
I'll now turn it back to Aaron to open the line for questions.
[Operator Instructions]. We'll go first to Alex Twerdahl with Sandler O'Neill.
I was just wondering if you can give us a little bit more commentary around your deposit strategies. Obviously, 16 basis point cost of deposits is fairly enviable, and while it's risen, it's certainly lagged the rest of the industry pretty dramatically. Do you foresee there being some catch-up in 2019 for those rates to go higher? Or do you think that a lot of that catch-up has already happened? Or maybe you can just sort of give us a little bit of color and thinking about kind of from where you're standing or sitting about those rates going forward?
Yes, I think fair question, Alex. It's Mark. I think we would love to be able to play more catch-up because that means that we need the funding for growing loan portfolio. As you know, in 2018, I would say, it was less than we expected in terms of lending performance. We have record -- as I previously mentioned, record levels of originations, but record levels of payoffs as well. And it was just kind of a volatile year in terms of both originations and payoffs. So I think we try to be disciplined in our deposit strategy around the balancing off the need for funding and the maintenance of that funding with the cost of that funding. And I think -- as I said in my comments, I think that would -- that I would suggest that one of the highlights for us for 2018 was the management by our retail team of that funding costs relative to what the funding needs were.
So I think we're going to continue to get upward pressure on those rates over time, as we've seen modestly in the last couple of quarters. I would suspect we'll still lag the market overall in terms of betas. I would love to be more aggressive on the deposit side to fund better loan growth. The other thing, I think, that's relevant, I think, Joe had mentioned this in his comments, almost 70% of our funding is checking and savings, not money markets. I mean, it's core checking and savings account, which actually grew last year, the same way they grow almost every year, which is something that we really focus a lot on in terms of our retail strategy. So I think that's a beneficial composition of our deposit funding. So 70% of that funding we are going to have to really manage -- just the -- it's the other 30% that we're going to have to manage. So to answer your question, yes, I would love to be -- have to be more aggressive in terms of deposit funding, and I hope we have that opportunity in 2019 because it means that we'll grow our loans better than what we did in 2018.
Okay. And then just kind of feeding off that question, you talked a little bit about the loan growth and the opportunities out there and how 2018, there's a lot of payoffs that kind of hampered the origination volumes that you did have. Do you foresee, and maybe with the addition of this new lending office in Albany area as well as the Kinderhook acquisition, some more opportunities in a slightly faster pace market to push that loan growth closer to at least the 3% that's kind of been the target over the last couple of years?
Yes, I think that's the hope. I think, we were -- we had a lot of payoffs -- unscheduled payoffs in the first half of the year. We were hoping that was going to moderate in the second half of the year, and it didn't really. And so that was a little disappointing. We hope again that, that it doesn't continue at the same pace into 2019. I think the Albany transaction is going to be very helpful. We have a very strong team there. Kinderhook has a very strong team, and it's a good market. We've been doing more in Buffalo as well. We've been doing a little more in Rochester. We've been kind of growing slowly and modestly in the Syracuse market now for a fair bit of time. So I think they're all steps that we take, Alex, to try to incrementally invest in the opportunities for that growth. And one of the challenges strategically for us is we do business in a lot of nonmetropolitan and rural markets. And when you have -- when you have $11 billion, to grow 3%, 4%, 5%, 2% is a big number, and it's difficult to accomplish in those smaller markets. So the core funding is very good in those markets, and the deposit retention is very good in those markets, but the growth is less. So there's a trade-off there. So we're trying to continue to invest in and maintain those nonmetropolitan markets, which is really our core banking strategy and supplement that with modest investments in some of the larger markets where we have the opportunity for more growth. And I think the Albany transaction just kind of highlights that evolution of our strategic thinking around how we continue to grow loans.
We'll go next to Russell Gunther with Davidson.
Just a quick follow-up on the margin commentary. I appreciate the color there, mid-3.70s. Could you just share with us what you're assuming, if anything, out of the Fed in 2019? And then whether that guidance, as well, includes assumptions around purchase accounting, both for past deals and the more recent deal?
Yes. Regarding the Fed, I mean, our sense of things is maybe two additional 25 basis point increases in the year. The timing of which, I think, we can all kind of speculate as to when those will come through. But we are anticipating just a little bit of the increase from the FOMC on the shorter-term rates. From a mid-3.70s perspective, we are anticipating some continued pickup in our loan yields, exclusive of any FOMC changes. Our new rates are -- new originations are going on at levels higher than our existing book yields. I think Mark had mentioned in the last earnings call that those were north of about 30 or 40 basis points north of the book yields.
We've actually seen that increase a little bit in the fourth quarter to, in some cases, 50 to 60 basis points higher than the book yields. So we're anticipating some continued pickup there. We had maturities in repayments of loans totaling about $330 million in the fourth quarter. So there is that -- and that's been a fairly reasonable expectation on a quarterly basis. So we're anticipating, as those loans run off and we book no new loans, to pick up the yield on those new originations. From the deposit side, and I think Mark touched on this, we're in a position where we don't have to ratchet up our deposit rates as quickly as some of our competitors. We do, however, recognize that we do have or had, historically, very low deposit beta, and inevitably, there is some lag in the market even from a competitor standpoint, which will drive up our deposit rates. We do have some large depositors, which, in the fourth quarter, have asked for some improvements, and we've made those accommodations. So moving ahead, I think that 3.70s is -- mid-3.70s is reasonable. Regarding the purchase loan accretion, we would expect that to continue to trail off a bit with respect to the existing accretion to the tune of about a couple of hundred thousand dollars on a quarterly basis. Obviously, that's dependent on the payoff levels. But I think it's reasonable to expect that to drift down a bit on a quarterly basis.
All right. I appreciate the color there. And then just switching gears to fee income businesses here, if you have it handy, if you could break out for us the wealth and insurance revenues and then comment on your expectations for those fee verticals on an organic basis for 2019.
We've had, obviously, solid growth in our employee benefit services businesses and in our insurance businesses. Some of that's been acquired, some of that's been organic in nature. Those businesses continue to perform in kind of that mid-single-digit level from a revenue perspective. We anticipate those levels to be similar in 2019. On the banking fee side, as we mentioned, we have an additional Durbin hit for the full year another $0.11 there. So it's going to be difficult to move the banking fee line item up during 2019 because of the negative impact of Durbin. But on a quarter basis, excluding Durbin, 2% to 3% a year has been kind of our history. And on a core basis, we don't expect that to change considerably in 2019.
Okay. Got it. And then just last one for me, ticky-tacky question, but any initial thoughts on the tax rate for 2019?
So we came in all-in close to 21% this year. And the expectations for 2019 are similar, maybe slightly higher. We're going to have some continued amortization in our municipal securities portfolio, which will affect the -- the effective tax rate will potentially drive that up a little bit, but I think expectations for 2019 are similar to 2018.
We'll take our next question from Collyn Gilbert with KBW.
Maybe just first go back to Russell's question. On the purchase accretion, Joe, I know you just said expected to trail off $200,000 to $300,000 a quarter, but was it -- the balance this fourth quarter?
It was $1.8-and-change million, Collyn.
Okay. Comparable to the third quarter.
Right. Yes, $1.838 million.
Okay. Got it. And then just back to the loan growth, can you -- I know you touched a little bit on this, but just how you're thinking about kind of the mix perhaps of growth in '19? I know you guys have done a couple of things, obviously. You've sort of changed your pricing on indirect, but you're still seeing good demand. I'm curious if maybe some of that demand is starting to fall off a little bit. Also kind of your outlook for resi mortgages if you're still assuming really moderate growth there and then with just kind of how you're overlaying the commercial thought, I know paydowns is a big variable here, but just if we think about it more just from your origination initiatives, how we see that shaping for 2019?
Sure. I'll start with commercial, Collyn. I think, as I said, we had record originations last year. We had a lot of really strong organic business development success in 2018, which was unfortunately offset by a lot of -- and they were really lot of more larger payoffs, companies that were bought by some of our larger customers, bought by private equity, bought by Warren Buffet, bought by strategic buyers. So -- and that is difficult to predict. And as I said, I would hope we don't get the same outcome in 2019. I think if that's the case, I think 2019 will be a better year than 2018 was. As it relates to the mortgage business we have, that business always kind of moves up generally 2%, 3%, 4% a year. Sometimes we sell more into the secondary market to Fannie Mae than other times depending on what the yield curve looks like at the time, but generally, the originations are pretty consistent, and I would expect that we have relatively similar performance in 2019 on the mortgage business, up 3%.
On the indirect auto side, that's really a wildcard. I mean, we -- there's years where that portfolio runs off because auto sales fall off or they're very tightly tied kind of to the economics and the economy overall, unemployment and those kinds of things. So that one is really difficult to project. We do our own kind of internal budgets every year. In that business, it's usually a kind of 5 percentage-type budgetary expectations. Sometimes it comes in at 15%, and sometimes it comes in at minus 10%, so both of which are okay. If the opportunity is there to put those assets on the book to get the rates are attractive in our view, then we'll do that. And if the demand isn't out there or the spreads are too thin, which sometimes happens when the demand isn't there or the spreads get thinner because everybody is chasing less demand. So we tend to back off a little bit. So that one is tough to predict. I think I don't know if we put in the budget this year for that, but it's probably the usual kind of 3%, 4%, 5% in that business. But whatever it's going to be, it's going to be. So I mean, I would say, I think, circling back to the leadership transitions that we had in the middle of the year, I think that we've got some folks on the team who have different views on business generation, business development and how we go after different markets. So we started to see some of that success in the second half of 2018. I understand that it didn't hit the balance sheet, and I hope that we'll see the benefit of those leadership transitions in 2019.
Okay. That's helpful. And then just shifting gears to Kinderhook, just trying to understand, I think when we are kind of running the numbers, we're coming up with higher EPS accretion than what you guys are offering. Can you give us a little bit more of what's going into your assumptions, I guess, maybe beyond the 30% cost sales? And I know there's some volatility or variability there, just given that Kinderhook closed their own acquisition in the fourth quarter of '17. But just trying to kind of think through that a little bit more. I'm assuming that the Durbin impact is pretty nominal, given the commercial orientation of the company. But I don't know, Joe, if you could give us any more sort of assumptions going into those numbers?
Yes. As in most opportunities, we try to be conservative in our assumptions just to make sure that we're doing the right transactions. So we do assume some modest hit relative to Durbin, a few hundred thousand dollars on a full year basis. So there is a little bit of that. We also maintain margin expectations similar to current margins. There are some sub debt and some TruPS, which we're going to hold on to until we have the opportunity to pay those off. So we're keeping margin about the same. We always have a modest assumption around some runoff on loans and deposits just through the transition and then sort of pickup opportunities and growth going forward. So we have some of that baked in as well. And of course, because this is a cash transaction, we also have a use of cash or, I should say, a cost of cash comparable to the Fed funds rate. So we won't have the ability to utilize that $93 million on an overnight basis. So that also pulls back some of the accretive nature from a GAAP perspective.
Okay. That's helpful. And then just I guess, broadly, Mark, maybe thinking about M&A, I think you guys had said in the last quarter that as you're looking in M&A, you guys are in a tough spot because given your funding basis just so superb that anything you would acquire would likely dilute that. How are you -- and then Kinderhook comes along, obviously, you saw value there that would offset any potential balance sheet change that you're going to see. But how are you thinking about M&A going forward? I mean, it's -- you're sitting with a very healthy currency, certainly, relative to so many of your targets. If we are starting to enter into -- I mean, your growth has always been more moderate anyway, but more broadly, a slower economic environment, I mean, do we -- could we see an acceleration of M&A for you guys, maybe larger transactions or -- and then maybe also feed into what you're seeing on the non-bank side in terms of deal likelihood for '19? As you said, you've got plenty of capital to deploy.
Sure. Good question, Collyn. I think our strategy around M&A has not really changed a lot. It's really about risk/reward. It's about the -- our confidence and our ability to grow using M&A in a way that creates growing and sustainable cash flow per share for our shareholders, and that's the kind of the lens that we use to evaluate opportunities. And there was lot of elements that went back kind of risk/reward, and some of it's execution and integration risk. For example, if we were to do something in a geography, which is 2 states away, that creates an awful lot more risk which just requires that much more reward. So I mean, we spend a lot of time evaluating the risk/reward profile of opportunities, but always through that lens of, do we have confidence that this can create growing and sustainable cash flow per share for our shareholders. So we are in an enviable position in a sense. I would prefer to use the capital buildup and accumulated capital to fund organic growth. But that's never been a significant part of our model, it's certainly part of the model, and we have to pull a lot of levers.
One of them is organic growth. One of them is M&A. One of them is our nonbanking businesses. Another one is funding cost, asset quality. So we're pulling a lot of levers to try and create that double-digit return to shareholders over time, and M&A is not an unimportant part of that strategy. So the Kinderhook transaction, I think, as I said, is geographically and strategically very sound for us. It's not a large transaction, but it's a solid strategic transaction. And I think the economic benefit in terms of the accretion and cash flow generation per share is pretty good for a transaction this size for us. As you recall, the Merchants transaction that was about a couple of billion dollars or close to it in terms of assets that we did in 2017. That was the largest transaction we've ever done. We certainly have, particularly given the strength of our currency, the opportunity to do bigger things. But to do bigger things means we have to have more confidence on our ability to execute effectively and to create that growing and sustainable value for our shareholders. So I wouldn't count out a larger transaction. We look at a lot of things on an ongoing basis and some of them are larger than the Merchants transaction of $2 billion and some of them are smaller.
So I would say the overall philosophy hasn't changed as much. And as you know, we've never been in a hurry. We've never been impatient. We are not going to grow for the sake of growing. That is something we're never going to do. It has to be -- I mean, we're not going to squander. Our shareholders have entrusted us with a strong currency. And we're not going to use this in a way that doesn't make sense for us and for our ability to continue to execute and create above-average returns. So we continue to be very judicious. I mean, the challenge, and you understand this, but when you have a valuation we have, everything we do is accretive, the question is what's the risk? How does it fit into our strategy? Is the risk/reward sufficient? Is there enough accretion? Because that's just about, is it accretive? Is it -- it's about is it accretive enough? So we frequently walk away from discussions around price. So we will continue to be very judicious in terms of how we use our capital and our currency, and we're always mindful of the confidence that our shareholders have placed in us relative to our -- to that valuation.
So we'll continue to be judicious. And if there's an acceleration of opportunity that fits the profile of our thinking around M&A, then we could accelerate. If that opportunity doesn't arise, then we will look to other opportunities in other of those levers that we pull. I think, Collyn, you asked -- the follow-up question was on the nonbanking opportunities. We did do a number of probably 4 or 5 smallish, very smallish, let's call it, adds to our insurance and wealth management business in 2018 that were pretty additive to those franchises, but really small. I think the benefits business now is by far the largest of our nonbanking businesses. We continue to have opportunities really across the country that we look at in terms of the benefits business. The challenge with that is that the private equity players become very involved in that space. And so some of the things that we've looked at have been priced accordingly. So that could be a potential headwind on benefits transactions, but we continue to have dialogue with some in the space that we know because we've been in the space a long time and people know who we are, we know who they are, and we continue to have conversations with sellers who want to sell to a strategic partner and not a fund.
So I think we'll continue to have those and look for those opportunities. It's difficult to predict the flow of those. And I think we'll probably continue to add some of these sensible smallish insurance and wealth management opportunities as they arise, and we'll keep looking in the benefit space as well and keep talking. And that -- we've always been able to grow that business pretty well organically. And so in between opportunities that are M&A related, we expect to continue to grow all those nonbanking businesses organically, but I would suggest the same discipline that I've discussed as it relates to the banks, but also apply to those businesses. In some of those spaces, the pricing is just -- it's not even believable. So it makes it a little bit more of a challenge. But I would say on the whole, similar M&A strategy to what we've had in the past has to be high-value opportunities, and we're going to be disciplined about how we execute on those opportunities.
We'll take our next question from Matthew Breese with Piper Jaffray.
Just a follow on the M&A question. As I think about Kinderhook in the long line of bank acquisitions, it makes a lot of sense and the markets you're going into fit in with, I think, a lot of the CBU markets that you play in now. I guess, my question is, if the loan growth doesn't materialize and payoffs continue at such a robust pace, might we see a change in strategy and acquisitions in perhaps more economically vibrant areas of the Northeast? And might we see you head more towards Boston or Philly?
I would say, as we get larger over time, I guess, we're not -- again, this is about growth. It's about growth or it's about discipline in controlled growth. It's not about using our currency just to get bigger and the shareholders don't benefit. The same way we had to move from some of these really kind of rural markets into Syracuse and Buffalo and Rochester, now Albany in terms of lending and less on a retail basis. Over time, if we get to be -- if we go from $11 billion to $15 billion or $20 billion, might we now need to start taking a look at, well, do we need to be in Boston or New York or Pittsburgh or Philadelphia or something, an actual larger urban city? I don't see that on the horizon, honestly in the near term. I think, there's a lot of opportunity for us in some of these upstate markets. I think there's opportunities in markets in Pennsylvania.
We have Vermont pretty much covered right now, and we've talked about our interest over time in Ohio, and we continue to have dialogue and try to understand that market a little bit better in terms of where opportunities are. So I think it would be part maybe well into the future of our strategy, but I don't think it's something that going into -- we don't know how to lend in Boston. I don't think we know anything about it, and we don't really think about New York City, and I think it's different. And I think we're comfortable with the kind of second-tier cities. I know we can lend in Buffalo and Syracuse and Rochester and Albany, in Burlington and Springfield, Massachusetts, and Scranton, Wilkes-Barre. I know we can lend there. We do lend there. I think we're good at lending there. And so expanding that into similar geographies, I think, makes sense. We probably do that on a continuous basis. We did -- as I said, we started up the Albany LPO last year in 2018. And I think, strategically, we will be looking to do something similar to that in 2019 in another region that affords us better growth opportunities. So I think it's all just part of a transition over time of our business model, but I would suggest it's been going on for 20 years and will probably go on for the next 20. So -- but we don't certainly have any near-term thoughts of being in Boston or New York.
Understood. And as we think about the paydowns and all the reasons behind the paydowns, is it mostly take-out driven? Or are there any common threads behind the customers that you can look to and make an educated guess as to whether or not the pace of paydowns could accelerate or decrease in the year ahead?
I mean, I would argue it's a little bit of everything. It's a little bit of everything. I think if you look at the big ones, it was private equity, it was Warren Buffett. It was much larger strategic buyers coming in looking to accelerate growth themselves and paying significant premiums. Some of the smaller stock was, "Gee, our business is doing really well and we can pay you down." So it was take-outs by other banks who were offering terms that we weren't prepared to match, just because of the economics. So it's a little bit of everything. The big ones were clearly take-outs, though.
Okay. And I guess, as a follow-up to that, if the loan growth does remain somewhat sluggish on a net basis and capital builds, are there other avenues we might see change in the year ahead, meaning do you increase the size of the securities portfolio? Do you do anything with the share buyback or continue to increase the dividend at a pace that's a little bit ahead of what we've seen in the recent years?
I think we, and Joe mentioned, referenced to may be preinvesting on some of the securities cash flows that mature in '19 and into '20. And so that's something that we've looked at as a way to utilize that capital. When you think about that, we have a couple of hundred million, maybe more, of capital really above and beyond what we need to really carry. Particularly if you look at the composition of our balance sheet and the loan risk composition of our balance sheet, while that's, one, we're disciplined in lending, but two, we're in good markets in terms of volatility in the history of losses. So we have low-risk balance sheet, and so we're clearly carrying capital that, in my view, our shareholders aren't getting a return on right now. So we looked at that in terms of the investment portfolio. There is actually some stocks in the market right now where it might make sense to do that.
There is things that are high-quality assets that are disconnected from the treasury yield curve that's very flat. And I've talked about things like agency-backed mortgages -- mortgage securities and things like that. So there are spots in the market where I think that -- we think and our Chief Investment Officer thinks would be deployable at this point. So Joe made reference to that. Whether that happens or not in 2019, I think this is a function of what happens in the markets, but that's something that we're looking at. And I think it's a reasonable deployment of capital for us and our shareholders. The stock buyback, we haven't bought back stock in a long, long time. I don't know -- that we just don't really love that as a strategy. It's kind of a onetime hit, and I would rather deploy capital into things that can, one, be more leveraged, for example, even in the securities market, or number two, invest in a business that has the capacity to grow over time. But just buying back your stock, I've never thought that was a fabulous strategy to create shareholder value. But I mean, I think, if there was a significant change in the market, then we'd probably consider that. But that's -- it's not first on our list in terms of capital deployment.
We're going next to Erik Zwick with Boenning and Scattergood.
Just a couple of quick ones from me. Most of my questions have been answered at this point. On Kinderhook, within the 8-K you filed yesterday, there was a comment about projected capital ratios remaining well above regulatory requirements. Can you provide any quantitative expectations for the impact to tangible book value and the capital ratios at closing?
Yes. We're anticipating about 100 basis point change in our tangible equity and net tangible assets ratio. We've finished Q4 '18 at 9.69%. So we would expect that. We're anticipating a tangible book value per share change of about -- a dilution of about 95 basis points. But all of the Tier 1 leverage ratios at the holding company level are going to remain well above -- above well-capitalized standards in the range of 10%. So from a capital perspective, it basically styles back the clock a couple of quarters.
That's helpful. And then just on the potential sources and timing of the projected cost savings?
Well, I think we anticipate the transaction closing in June -- at some point in June, and it's not a large transaction. So there may be more of those cost saves that you get more immediately than in other transactions. But I would suggest that it will be fully executed by the end of the year at the very latest. So let's just say, it's going to take a quarter or two to get everything in.
Okay. That's fair. And since you don't have much of a real estate presence in the Capital District area at this point, what is the -- so I assume maybe not closing too many branches, what are the potential -- I guess, what are the targeted sources for the savings?
It's mostly IT-related costs and other operating expenses. There will be, as there always is, redundancy of personnel in certain places. So it's going to be mostly just operating expenses. There is no overlap in facilities. Well, there's one. We have an office, a small office in Albany right now, and we'll probably consolidate that somewhere. But there's no meaningful real estate savings to speak of. It's mostly other operating expenses.
And with no further questions in queue, Mr. Tryniski, Mr. Sutaris, I'd like to turn it back to you gentlemen for any additional or closing remarks.
Excellent. Thank you, Aaron. Thank you, everyone, for joining the fourth quarter conference call, and we will talk to you again in April. Thank you.
Thank you.
Ladies and gentlemen, this concludes today's conference. We thank you for your participation. You may now disconnect.