Community Bank System Inc
NYSE:CBU
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Community Bank System Inc
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Welcome to Community Bank System Fourth Quarter 2019 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 Joe Sutaris, Executive Vice President and Chief Financial Officer.
Gentlemen, you may begin.
Thank you, Tina. 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 2019 as a whole. Fourth quarter earnings were about as we expected. They were up nicely over 2018, but down from Q3, which was the same dynamic in the earnings flow as last year and is seasonally typical.
One of the brighter spots in the quarter for me was organic consumer loan growth and non-municipal deposit growth. We had very good core business execution in Q4, which follows on the heels of strong organic loan growth across the Board in Q3 as well, so a good performance by all our teams in the second half of the year.
For full-year of 2019, EPS excluding acquisition expenses and securities gains was up marginally over 2018, but that includes a $7 million-plus Durbin impact in 2019. Coming into the year, our goal was to grow earnings despite the Durbin hit, which we were able to achieve.
So our reported earnings showed a modest improvement, but it was a very strong operating year. We had good loan growth with organic commercial and residential mortgage, both up 4%. Good deposit growth, almost $200 million for the year. Good improvement in our financial services businesses, particularly our insurance business, which delivered earnings improvement of 40%.
We successfully integrated the Kinderhook transaction, announced the Steuben transaction, which we expect to close in May, and raised our dividend for the 27th consecutive year. In summary, it was a busy and productive year for Community Bank System and our shareholders.
Looking ahead to 2020, we have strong operating momentum across all our businesses. We will do our best to manage margin pressures. We expect the Steuben acquisition to be solidly additive, and we have and continued 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. As Mark noted, 2019 was a very productive year for the company. We generated a $0.06 improvement in operating earnings per share despite an $0.11 Durbin headwind and the company's performance metrics around asset quality funding costs, net interest margin and efficiency remain stable.
Before reviewing the fourth quarter and full-year earnings results, I'd like to make a few remarks about the company's balance sheet. We closed the fourth quarter of 2019 with total assets of $11.4 billion. This was up $803 million or 7.6% from the end of 2018, but down $187 million or 1.6% from the end of the third quarter of 2019 due primarily to a seasonal decrease in deposits during December.
Average earning assets for the fourth quarter of 2019 of $10 billion were up $233.3 million or 2.4% when compared to the linked quarter and up $733 million or 7.9% when compared to the fourth quarter of 2018 due to both Kinderhook transaction and organic growth.
Average loans in the fourth quarter of 2019 were up $122.2 million or 1.8% when compared to the linked third quarter of 2019 and up $581.7 million or 9.3% when compared to the fourth quarter of 2018.
During the fourth quarter, the average outstanding balances in all categories of loans are up, including $56.9 million or 2.1% in the business lending portfolio, $46.7 million or 2% in the consumer mortgage portfolio, $12.1 million or 1.1% in the consumer indirect portfolio, $2.9 million or 1.5% in the consumer direct portfolio, and $3.6 million or 0.9% in the home equity portfolio.
Ending loan balances were also up on a linked quarter comparative basis, $37.4 million or 0.5%. Exclusive of loan acquired in the Kinderhook transaction, ending total loans outstanding increased to $159.7 million or 2.5% on a full-year basis.
During the fourth quarter, the company purchased $724.1 million in investment securities and reported a $738.5 million net decrease in cash equivalents. These actions were taken to reduce the company's exposure to a rate-down scenario and to spread out the reinvestment risk associated with an additional $840.3 million of anticipated investment security principal cash flows in 2020. The effective duration of the company's investment securities portfolio was 4.3 years at December 31, 2019. This compares to an effective duration of 2.5 years at the end of the third quarter.
The weighted-average tax equivalent book yield on the fourth quarter investment securities purchases was 2.12%. The overall fourth quarter book yield on a company's investment securities and cash equivalents portfolios were 2.54% on a tax equivalent basis.
Average total deposits were up $745.2 million or 8.9% from the same quarter last year, and up $180.7 million or 2% on a linked quarter basis. This included the assumption of $568.1 million of deposit liabilities in the third quarter due to the Kinderhook transaction. 68% of the company's total deposits at the end of the quarter were comprised of checking and savings accounts.
Shareholder's equity was up $141.5 million or 8.3% from one-year prior due primarily to an $87.3 million increase in retained earnings and the $35.1 million increase in accumulated other comprehensive income.
The company's Tier 1 leverage ratio was 10.80% at the end of the fourth quarter over 2x the well-capitalized regulatory standard. Tangible equity to net tangible assets ended the quarter at a solid 10.01%. This is up from 9.68% at the end of the third quarter and coincidentally 9.68% at the end of last year.
Moving to earnings, the company reported full-year 2019 GAAP net income of $169.1 million and fully diluted earnings per share of $3.23. This compares to $168.6 million of GAAP net income and fully diluted earnings per share of $3.24 in 2018.
Fully diluted operating earnings per share, which excludes acquisition expenses, net gain on sale of investments, unrealized losses and gains on equity securities and loss on debt extinguishment all net of tax effect were up $0.06 to $3.29 in 2019 as compared to $3.23 in 2018. These results were achieved despite an estimated $0.11 per share headwind related to reduction in debit interchange revenues due to the Durbin amendment.
For the fourth quarter of 2019, the company reported GAAP net income of $42.9 million and fully diluted earnings per share of $0.82. This represents a $2.1 million or 5% increase in net income and a $0.04 increase in earnings per share over the fourth quarter of 2018, and a $3.7 million or 9.3% increase in net income and a $0.07 increase in earnings per share on a linked third quarter results.
Operating diluted earnings per share, which exclude acquisition expenses net of tax effect, were $0.83 for the fourth quarter of 2019. This compares to the operating diluted earnings per share of $0.78 in the fourth quarter of 2018. The $0.05 or 6.4% increase in operating diluted earnings per share between comparable annual quarters was driven by an increase in net interest income, an increase in non-interest revenues, a decrease in income tax was offset in part by an increase in the provision for loan losses, higher operating expenses and an increase in fully diluted shares outstanding.
On a linked quarter basis, operating earnings per share decreased $0.01 from $0.84 per share in the third quarter of 2019 to $0.83 per share in the fourth quarter. Exclusive of $4.9 million of realized gains on the sale of investments securities reported in the second quarter of 2019 and loss on debt extinguishment reported in 2018, the company's total revenues increased $16.1 million or 2.8% on a full-year basis, from $568.8 million in 2018 to $584.9 million from 2019. This was driven by an increase in banking-related revenues of $9.3 million or 2.2% despite Durbin as well as revenue growth in our non-banking businesses totaling $6.9 million or 4.6%.
Total revenues were also up $8.3 million or 5.8% compared to the fourth quarter of 2018. This included a $5.4 million or 6.1% increase in net interest income and a $2.9 million or 5.4% increase in non-interest revenues. The increase in net interest income was driven by an increase in earnings assets due to both Kinderhook acquisition and organic growth, offset in part by a 6 basis point decrease in net interest margin from 3.77% in the fourth quarter of 2018 to 3.71% in the fourth quarter of 2019. The increase in non-interest revenues was driven by a $1.9 million or 5.2% increase in non-banking, non-interest revenues as well as $1 billion or 5.8% increase in banking non-interest revenues.
Total revenues increased $1.5 million or 1% on a linked quarter basis. This include a $1.5 million increase in net interest income and $0.2 million increase in banking revenues partially offset by $0.2 million decrease in non-banking financial services revenues.
The Company's net interest margin was down 2 basis points in the fourth quarter as compared to the linked quarter from 3.73% to 3.71%. The Company's tax equivalent yield on loans decreased 5 basis points to 4.67% in the fourth quarter due primarily to a 25 basis point decrease in the prime lending rate, while the tax equivalent yield on the Company's investment portfolio, including cash equivalents was up 2 basis points and 2.54%, which included a $1 million Federal Reserve Bank semi-annual dividend payment.
The cost of deposits was flat at 26 basis points in the quarter, while the total cost of funds which includes Forex decreased 1 basis point to 0.31% or 31 basis points. The company's total cost of deposits remains well below peer and industry averages for the third quarter at 26 basis points, which is reflective of the company's very solid base of core deposits.
During 2019, the Company's employee benefit services revenues increased $4.9 million or 5.3% to $97.2 million, while the wealth management insurance services revenues increased $2 million or 3.5% to $58.1 million.
Excluding $4.9 million of gains on investment securities, non-interest revenues contributed 38.7% of the Company's total operating revenues during 2019. Excluding $0.8 million of acquisition-related expenses, the Company recorded $94.5 million of operating expenses in the fourth quarter of 2019. This was up $6.9 million to 7.8% over the fourth quarter of 2018.
The increase included a $4.4 million or 8.5% increase in salaries and employee benefits, including a $1.1 million or 36.6% increase in medical benefit expenses and $1.3 million, or 13.5% increase in data processing and communication, and a $1.5 million, or 7.1% increase in other expenses. These increases were partially offset by $0.4 million decrease in the amortization of intangible assets.
The increase in operating expenses was largely driven by higher expenses associated with the expanded operations subsequent to the Kinderhook transaction as well as entry and mid-level wage pressures and significantly higher medical benefit costs.
Excluding $6.1 million of acquisition related expenses incurred during the third quarter, total operating expenses increased $3.6 million or 3.9% during the fourth quarter from $90.9 million in the third quarter to $94.5 million in the fourth quarter.
The increase in operating expenses was driven by a $0.4 million, or 0.7% increase in salaries and employee benefits and $0.3 million, or 2.4% increase in data processing and communication costs, a $0.3 million, or 3.5%, increase in occupancy and equipment expense, and a $2.6 million, or 24% increase in other expenses.
The increase in other expenses was reflective of higher business development and marketing, legal and professional fees, and other administrative expenses. The company historically incurs higher operating expenses in the fourth quarter compared to the third quarter.
On a full-year basis, total operating expenses exclusive of acquisition-related expenses increased $17.4 million or 5%. We expect operating expenses exclusive of acquisitions to trend upward in 2020 in line with long-term operating trends of 2% to 4%. The company recorded a $2.9 million provision for loan losses in the fourth quarter for 2019. This is up $2.5 million recorded in the fourth quarter of 2018 and $1.8 million recorded in the linked third quarter.
The effective tax rate for the fourth quarter of 2019 was 17.1%. This compares to an effective tax rate of 20.7% in the fourth quarter of 2018. The decrease in the effective tax rate was attributable to an increase in income tax benefits associated with equity-based compensation activities and a reduction in certain activity-based state income tax expenses. Excluding income tax benefits associated with equity-based compensation, the company’s effective tax rate for the full-year of 2019 was 20.9%.
The company’s asset quality remained strong at the end of the fourth quarter of 2019. Non-performing loans comprised of both legacy and acquired loans, totaled $24.3 million or 0.35% of total loans. This compares to $25 million of non-performing loans at December 31, 2018 and $28.7 million at September 30, 2019.
The reported net charge-offs of $1.6 million or 10 basis points annualized on the loan portfolio during the third quarter of 2019. The reported net charge-offs of $2.4 million or 14 basis points annualized on the loan portfolio during the fourth quarter of 2019. This compares to net charge-offs of $3.3 million or 21 basis points during the fourth quarter of 2018. On a full-year basis, the company reported $7.8 million and 12 basis points with net charge-offs in 2019. This compares to $9.1 million or 15 basis points of net charge-offs in 2018.
During the third quarter 2019, we closed down our acquisition at Kinderhook Bank Corp. As a reminder, we acquired Kinderhook in an all-cash transaction for $93.4 million. In connection with the transaction, we acquired $479.9 million in loans and $568.1 million in total deposits. We are pleased with the performance to date, remain excited about our opportunities in the greater Albany markets.
The Steuben integration is proceeding on schedule then anticipated closing in the second quarter of 2020. As a reminder, Steuben Trust is a 15-branch franchise, operating in a six-County region in Western New York. Community Bank currently serves four of the counties within Steuben's current footprint and the other two are contiguous to our markets. The demographics are consistent with much of our current New York state footprint, but also increase our presence in the greater Buffalo and Rochester, New York markets.
Steuben's total assets of approximately $560 million including total loans of approximately $340 million and $460 million in total deposits. Steuben's trailing 12-month return on average assets through the end of the third quarter is 1.25%. We expect the transaction to be $0.08 to $0.09 GAAP accretive on a first full-year basis and $0.09 to $0.10 on a cash EPS basis.
The transaction is also expected to be tangible book value accretive. The pro forma consolidated balance sheet is estimated to increase Community Bank's total assets to approximately $12 billion. We look forward to moving forward with Steuben team on integration efforts over the coming months, as well as increasing our service capacity in the Western New York markets.
In summary, we believe the Company remains very well positioned for the future. The Company's strong asset quality, capital reserves, liquidity, core funding base and strong non-banking business revenues provide a solid foundation for continued growth and dividend capacity.
Thank you. I will now turn it back to Tina to open the line for questions.
Thank you. [Operator Instructions] We would like to take our first question from Alex Twerdahl from Sandler O'Neill. Please go ahead.
Hey. Good morning, guys.
Good morning, Alex.
Good morning.
First off, I wanted to start with the margin, we suspect seemingly on pause now for the foreseeable future and just trying to give a no real change to the rate environment. Do you expect the margin to be stable over the next couple of quarters? I think, last quarter you'd kind of guided to a little bit of additional pressure, but that is assumed potentially another rate cut.
And maybe you can just start with sort of the core margin exclusive or the purchase accounting accretion purchase accounting accretion and the Federal Reserve dividend? And then just kind of remind us how those two items might layer on top of the core margin as 2020 starts out here?
Yes. Alex, I'll kind of sort of break that down for you. So the accretion expectations for next year are – in somewhere between $4 million and $7 million. It depends on how quickly those acquired portfolios repay, but we kind of have a baseline expectation of about $4 million, but typically we see some repayments and that increases that level. So, on a $10 billion earning asset base, that's about 5 basis points of NIM.
And with respect to the Federal Reserve Bank dividend, I know that on the last call, we indicated our expectations were about a $300,000 dividend. As it turns out, actually we were – we combined with Kinderhook, we were both considered small banks for the second half of the year. Even though when we put together, we're considered a large bank. So we don't really trip over into the large bank category until 2020.
So we do expect the Federal Reserve Bank dividend to decrease into June into December periods to something between $300,000 or $400,000. So the delta there is about $1.2 million over the course of the year. So a little more than I guess the basis point or so on the margin.
So with that said, kind of our printed posted margin is we're anticipating something kind of in the mid- to high 3.60%s, assuming there are no more Fed rate cuts. Of course, we have – we’ve got over $800 million of investment securities, which basically they're maturing really in the latter half of the year. So we take some actions to sort of reinvest those. That would impact the margin a bit.
We do anticipate – if the rates kind of stay where they are, we do anticipate deposit costs kind of trickling down a little bit during the year. Although it's unlikely, we're going to get back to the 10 basis point level, where we sort of before the Fed started increasing in late 2015, but our expectations are that we will be able to contain deposit costs if rates stay where they are, so I think we'll be in good shape on that.
But the other side, too, is our – we've had some loan growth between the third and the fourth quarters. The pipeline looks reasonable. If we continue to have some loan growth into 2020, we can sort of climb the ladder with – from an earning asset perspective by moving some of our investment securities as they mature into – so we're sort of on the posted margin, kind of looking somewhere in the kind of the mid 3.60%s to hopefully high 3.60%s range.
That's some good color. And then just remind us, I guess, the last piece is the Steuben deal as that layers on. And I guess that's – is that mid-May was that expected to close? Will that have much effect on the margin as well?
Yes, so expectations are kind of a mid-May-type time frame if everything goes according to plan, which we anticipate it will, and we hope they will. With that said, the margin for Steuben is very similar to ours kind of on a long-term basis. So we don't think that will be particularly affect the consolidated margin by very much.
Okay. And then just one other question for me on the tax rate. The equity-based comp activity, that’s something that generally hits in the first quarter, if I'm not mistaken. So was this something acquisition-related that kind of caused 4Q 2019 to be weak? Or is the timing of that now going to be less predictable than it had been in the past?
Alex, that's a good question. It is difficult for project the timing of that. It's dependent upon those holders of the options and, I guess either their cash needs or expectations around valuation. So it is really difficult to kind of predict those, and it's not necessarily trended into a particular quarter, although we have seen some quarters that are higher than others.
Okay.
I'm sorry Alex, just to continue that thought, if you kind of pull away all the equity-based benefits, tax benefits are kind of consolidated our run rate on – the effective tax rate was very close to 21%. I think it's 20.9%. So I think it's – there's likely to be equity-based compensation benefits in 2020. To what level of magnitude – it is difficult to predict, but kind of the core run rate for last year was about 21%.
Great. Thanks for taking my questions.
You're welcome.
Thanks, Alex.
The next question comes from Erik Zwick from Boenning & Scattergood. Please go ahead.
Good morning, everyone.
Good morning, Erik.
Hello Erik. Good morning.
As you mentioned, looking at the organic loan growth for 2019, if we strip out Kinderhook it was about 2.2% for the year. You mentioned just in the last remarks that the loan pipeline looks reasonable heading into 2020. So would that indicate that we're looking at potentially something similar to 2019, or based on what you're seeing in the pipeline, could that potentially be a little bit stronger going forward?
I think if you – I think I made this comment, maybe last quarter. I think if you look at our ability to execute organically, it has improved substantially over the last 12 months. And you can see that in the execution this year and in the pipeline as it stands right now. And that's not –that ability to execute better organically is not a function of the credit policy at all. It's a function of substantial improvements made in blocking and tackling, and what we do on the ground every day by our credit teams.
So we put a lot of effort into making those improvements, and you can see if we had better organic execution this year. Just to give some color on the pipelines, our commercial pipeline right now is up 61% over where it was in the end of 2018. Our mortgage pipeline is up 38% over where it was in 2018. So our organic ability to execute better on the ground has just improved and I think that's going to serve us well in 2020.
Okay, great. That's helpful color. If I can turn to the expenses. If we look at the fourth quarter of 2019, the core run rate was about that $94.5 million. As we look to start 2020, is that a good run rate to build from? Are there additional Kinderhook cost saves that the talent for those still coming out? And then just regarding the – 4Q is typically kind of seasonally strong, is any of that kind of backed down to start 2020? Just trying to think about that the starting point for the kind of 2% to 4% upward trends excluding the Steuben coming into the back half of the year?
Yes. Erik, our expectations and I think I mentioned this on the second quarter earnings call, post-Kinderhook, the expectations were that OpEx, excluding acquisition expenses was supposed to be kind of in that $93 million to $94 million range. There is some volatility from quarter-to-quarter. Typically the fourth quarter is a little bit higher for various reasons. So we kind of think it's not unreasonable, it's kind of take the third quarter, fourth quarter kind of I average those and then sort of build upon that.
We typically incur a little higher expense levels in the first quarter as compared to the second to third quarter including payroll-type taxes kick in at, in full force in the first quarter, and then some of those sort of go down in later quarters.
So I think that $93 million – kind of $94 million range is reasonable before the Steuben transaction. Steuben's kind of annual run rate for OpEx was about $15 million with expected cost saves of about 30%. So in the second part of the year, we sort of take that $93 million, $94 million and kind of making some additional costs for the Steuben transaction.
Excellent. Just one final for me. Just thinking about the loan loss provisioning in 2020, what's the best way to think about that? Do you have a kind of targeted range or how many kind of basis points you're setting aside for expected mix for every dollar of loan originated today?
Yes, we don't expect the provisioning to change radically from kind of the pre-CECL to the post-CECL world. Relative to CECL, I think there is kind of market sentiment that there potentially is a little bit more volatility from quarter-to-quarter. I think over time we'll be able to determine whether that's true or not, we certainly have built our models to try to reflect what we expect in credit losses. And we're hoping there's no unnecessary or inappropriate volatility in that provision going forward. But I don't think the expectations are not really radically different than those under the current loss model.
Okay. Thanks. And then kind of relative to that the $8.4 million that was – you provided in 2019, it sounds like maybe just a little bit higher given the organic growth, but not a large increase. Is that the right way to kind of interpret those comments?
Yes, I think that's a fair way to look at it, Erik.
Great. Thank you for taking my questions.
You're welcome.
Thanks, Erik.
The next question comes from Russell Gunther from Davidson. Please go ahead.
Hey. Good morning, guys.
Good morning, Russell.
Good morning, Russell.
I wanted to – so I appreciate your comments on the magnitude of growth that you're expecting. I was hoping you could comment in terms of – from an asset class perspective, what's the mix might look like as well as from a geographic contribution as well?
Sure. The majority of the growth came on the – organically came on the business lending side. As I said, excluding the impact on the Kinderhook, it was about 4%. Same with consumer mortgage up 4%, home equities were actually down a little bit, year-over-year, but that's been a kind of a trend for the last several years for some results because the economy is doing better and people are paying down. But we did have a modest decline about $16 million home equity loans.
The indirect portfolio, mostly auto lending was up a little bit, I think 3% for the year, but debt portfolio, I mean it can be up 3%, it can be up 30, it can be down 3% or down 30. It's really a kind of a function of the – as you know the market.
With that portfolio, we've been pursuing more margin as opposed to volume in that portfolio, but are satisfied with the growth that we can get kind of the yields and returns on capital that we want in that portfolio. So it was pretty good execution really across the Board. I think geographically it was a little bit everywhere. We were up in our kind of Northern New York markets.
We were up substantially what we call the South market, which is really kind of Central and Western New York. That particular market actually was up 11% over the course of the past year. Pennsylvania was about flat in terms of business lending, but we grew mortgages there 9% last year. So we had an extremely good year in Pennsylvania. Again, that's part of the focused effort and improved execution out in the ground.
So that kind of – New England was – the New England market was up a little bit in business lending, but less than the prior year, a lot less. It actually had some growth in some of the consumer segments there as well. So decent year in the New England market. So it was a little bit everywhere, it was a little bit of commercial, it was a little bit of mortgage and the auto book was up a little bit as well.
So I'm cautiously optimistic for 2020 just given the improvement in our core ability and capacity and resources to execute on the ground in our markets has improved visibly. And so I think the current pipeline numbers would bear that out. And again, I would be cautiously optimistic that we will have a good year in 2020 in terms of organic execution and growth.
That's great color Mark. Thank you for that. My only other question was a follow-up. You guys alluded to your thoughts on the provision in a pre- and post-CECL world. And I don't think I missed it, but if I did, I apologize. Have you disclosed your CECL impact? And if not, just a sense for when that is coming?
Yes. So we have disclosed a range, Russell in the third quarter Q of about range of $52 million to $60 million based on where we were in September. From a modeling standpoint, obviously, that's we weren't in the CECL world, so that was kind of the range. We're actually in the process of taking the full-year 2019 loan losses and we're continuing to evaluate the other inputs and the qualitative factors.
And so we're still kind of on the preliminary phases of kind of rolling that whole model forward, but right now, it appears that our range is going to move down at the top end and the bottom end of the range a few million bucks, so probably $4 million or $5 million on both sides of that range that we provided. We are providing with more color in our 10-K disclosure about that, but we are in the process of just kind of pulling through all of the 2019 results.
Okay, great. Thanks for the update. I appreciate that.
Yes, just to make sure I'm clear on that too, Russell, just so it’s not misinterpreted. So our current reserve is that $50 million. So our incremental increase wasn't expected to increase by more than say, $5 million when we post our CECL reserve, which basically is extremely material to the Company's Tier 1 leverage ratio and all of our regulatory ratios.
Yep. Okay, great. Thank you.
Yep.
Thanks Russell.
The next question comes from Collyn Gilbert from KBW. Please go ahead.
Thanks. Good morning, guys.
Good morning.
I want to just start on the balance sheet moves that you took this quarter to sort of extend duration. Can you just talk about sort of how you're thinking broadly about the structure of the balance sheet, where you're taking – you're opting to take interest rate risk? I know you obviously extended duration on the securities book, but just trying to think that through as to the timing now of loading up on those securities and how you're thinking about it broadly?
Yes. It's a very fair question. Historically, we've maintained investment securities portfolio that has a little longer duration then some of our peer institutions, I’ll call it. We had the luxury of doing that over the years because the other side of that is our loan growth hasn't been at double-digits or 8% or 9% or 10% a year. So we can kind of go a little longer on the curve than others because from a liquidity perspective, we don't necessarily need that.
With that said our preference with that to be – to have a $3 billion investment securities portfolio. We prefer to have more of earning assets in the loan books. But our markets only allow a certain amount of organic growth. So we can go a little bit longer there.
As we look ahead with the additional $800 plus million, that's on the horizon, which my recollection of the book deal just kind of in the low to mid 2s. Right now if we were to simply just push that out a little bit on the curve, it's going to be effectively an even play on the reinvestment. But we'll be looking at the opportunities as the yield curve changes. I mean, we sort of have – we do have this year to evaluate that.
In the perfect world, we have a little more slope than the yield curve and have an opportunity to redeploy it something north of 2.5. But based on where we are today, we would expect that the – if rates stay where they are, that we deploy that kind of at par relative to the maturity levels.
Okay. All right.
Collyn, it's Mark. I would just say, we have – we had a growing exposure to falling rates over time and still clearly within our reasonable policy, guidelines that I think there's two things. One is we have a slightly asymmetric margin profile if rates go up versus rates down. We wanted to provide some protection against that rates down risk by extending the duration a little bit. So the securities that we kind of sold when we have the opportunity in the market.
We recognized the game. We didn't really care about that. It was about the game. It was really about repositioning the duration of the portfolio to improve that rates down risk. And we're looking at kind of doing the same things versus securities that will be maturing in the fourth quarter of this year to try to further improve our rates profile and decrease the environment.
If you look at what's going on in Europe, it's improved slightly over the last couple of months, which is good news. To the extent that there is any downturn in GDP and economic growth and the Fed and other central banks globally react to that and what that does in terms of the interest rate environment.
And so we're just kind of protecting against that potential churn rates. And if it doesn't come, that's okay because the purpose here is really to better match our – or better reduce that mismatch, let's say, the asymmetry between rates going up and rates going down. So that's really what the focus of that exercise is all about.
Okay. Okay, that's very helpful. Thank you for that. And then just digging into some of the movement on some of the operating metrics, I appreciate that some of the guidance you guys gave going forward. But just wanting to make sure I understand what happened in the fourth quarter?
So first on the feed side, so you opted, it looks like from a reporting standpoint to folding any mortgage banking in the service charges on deposits? Is that – again, what kind of – was the motivation there? Does that mean that you're going to have less than – less emphasis on mortgage sales going forward? So just – it's first part of that question.
Yes. Collyn, so our mortgage banking activities are pretty minimal in the grand scheme of our income in non-operating income and non-income. So we haven't felt the need to break out mortgage, all that. We can sort of put those together with other, because it's a pretty small part of the business at the present time. If we expand and begin to sell more mortgages into the secondary market, we could break that out with future, but it's not a very significant component of our operating income.
It was really just about presentation. It's a small number. It's probably always going to be generally small and just kind of annoying. They have it thereby itself, reported separately. So we sold as it is.
Yes.
Got it. Okay. Okay. That's helpful. And then just – on the other expense line that was up a bit on the fourth quarter. Just curious if there was anything non-recurring there? I would imagine there was given the fact that you're kind of looking for core expenses to start it at $93 million, $94 million, but just curious what that was?
Yes, I mean there's several items that affect that or that moved from quarter-to-quarter. One of them I pointed out was just kind of the costs around a medical benefit costs. We have a self insurance plan. And so you have occasional changes in that net expense.
So we were up a bit there in the fourth quarter. We also had just higher sort of marketing expenses. We typically – when we do an acquisition, we kind of want to let the new markets with a little more advertising, and so some of that kicked in the fourth quarter.
We did have some incremental professional fees sort of around the Kinderhook transaction as well as surround kind of our activities on CECL and other matters, so some of that would not happen again, if you will in the first quarter.
We plow a lot of snow in the fourth quarter because of our geography. Property related write-downs were sort of these pre-foreclosure expenses there. They're a little bit volatile from quarter-to-quarter. And so we sort of have a little modest increase there, nothing all that significant when it sort of adds up with everything else.
And also we had a fair amount of travel and employer related expenses. It's the holidays. We typically curse some costs there. So it's a combination of those things. But I think in the new of the 2020 period, I think we have a pretty good control handle on those costs going forward.
Okay. And then that kind of feeds into my next question, just how are you guys thinking about operating leverage and the potential there to see operating leverage in 2020 and beyond and kind of where do you see the drivers of that coming in?
So like we'll continue I think to get the gain more efficiencies certainly on the banking side of the house. Over time, as we do acquisitions inevitably we just – we hopefully find more efficiencies, typically above and beyond the initial expense reductions just, things get a little bit easier as you digest those.
So I think we'll continue to see that we're not overspending on the technology front by any means. So I know there's been a lot of discussion in the market about what's technology spend look like.
I think we're being we are investing in digital technologies, no question about it. And we're utilizing our core provider to do some of that, but we're not, overspending in that area. So I we'll continue to probably get some leverage of our technology expenses over time.
Okay. Okay. And then just lastly on capital that, you guys obviously indicated capital building, you've got a lot of capital. Can you just talk about maybe how you're thinking about prioritizing capital deployment for 2020 and beyond once you get Steuben underneath your belt?
Sure. Well I think, if you look at our returns relative to our organic growth, we clearly generate a lot more capital than we can use to grow organically. So historically our model and strategy is spend to deploy that capital into high value acquisition opportunities on both the banking and the non-banking side. And that will continue to be the strategy.
We have raised, as I said, the dividend. I think this is the 27th consecutive year. In the last few years if you look back the history of the dividend increases, that's pretty good. I would expect that to be a part of our capital utilization strategy going forward as well.
I mean, I think it's a good problem to have that our capital builds, again more rapidly, clearly and then we have the organic capacity to absorb in our markets. So we need to look to other capital deployment opportunities, which, in some respects, a blessing, but it's a challenge for us because M&A, whether it's the bank space or the non-bank spaces, it takes an effort. It's time consuming, it's higher risk, all of those kinds of things.
I think we've done a fair job of reducing the risk just given our experience and historical success at M&A in a disciplined way, but nonetheless, it does kind of put a burden on us to continue to deploy that capital.
And so it's a good problem to have and the one which we will continue to work on, but I think it just continues to create opportunity for us to deploy that capital for the benefit of shareholders. And so that starts really with really strong earnings because without strong earnings, you can't build the capital that you can use to do other things.
And so the earnings is extremely important and we expect to continue to raise the dividend to do that and you have to continue to grow the earnings and so that’s – I think, the comment I would just say our capital deployment strategy is probably relatively unchanged at this point from our historical perspective.
Okay. And then just obviously recognizing M&A is an important part of that strategy. How do you see the M&A landscape looking – again, as you look out in 2020? Do you think the pace of M&A can pick up? Are there better opportunities or more unique opportunities that you're seeing along those lines?
I would say it's generally unchanged. It's been in the same range for the last handful of years. If you look at just the number of transactions a year or the number of banks in the U.S. and the decline in that, it's a fairly steady state of decline at 3% or 4% a year. So I would expect that to probably continue the way it is. I haven't certainly recently seen any greater change of significance. I think it'd be continued pressure because of technology.
One thing that I think it’s going to play off slower than everybody else, believes that it will – it's interesting, you look at JPMorgan, for example, the announcement about all the branches are opening everywhere. So the branch banking is not that, I don't think it can tie for a long, long time. And along with that you need to invest in digital platforms as Joe said, which we're doing and improving our digital channels and our digital capacity and capabilities in a lot of different ways.
So I think this – we'll continue to have those opportunities for the foreseeable future. I'm not concerned about that. I think the one, I'll say it’s troubling, but I wish it was otherwise. But on the non-banking side, there's so much private equity money in those spaces that we operate in that you're really competing against private equity and they have a different model.
And I would say at the low end of private equity, the smaller end, there's a lot of money chasing a lot of deals. And so that makes it a little bit more of a challenge for us as a strategic buyer to compete with the financial buyers. But we've done okay to date. It just makes it a little more difficult of an environment on the non-banking side.
But I think we'll continue to look for those opportunities on both sides of the house and I think we'll continue to have those opportunities over time and we will execute out of those high value asymmetric risk kind of opportunities in a disciplined fashion. That's the way we do it. And we'll continue to execute on that strategy.
Okay. All right. That's great. I'll leave it there. Thanks guys.
As there are no further question signals, I'll now turn the call back to your host for any additional or closing remarks.
Excellent. Thank you, Tina. Thank you all for joining our fourth quarter call and we will talk to you again in April. Thank you.
That will conclude today's call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.