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MidWestOne Financial Group Inc (MOFG 1.72%)
Q4 2018 Earnings Conference Call
Jan. 25, 2019, 12:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Good day everyone and welcome to the MidWestOne Financial Group Incorporated Fourth Quarter 2018 Earnings Conference Call. All participants today will be in a listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note that today's event is being recorded.
And with that I'd like to turn the conference over to Mr. Charlie Funk, President and CEO, please go ahead.
Charles Funk -- President and Chief Executive Officer
Thank you very much Brian and welcome to everyone this morning from chilly Iowa city, where as we speak the temperature is one degree below zero. We're hoping to make it into positive territory today. Let me begin with the forward-looking statements, that simply says this presentation contains forward-looking statements relating to the financial condition results of operations and business of MidWestOne Financial Group Inc.
Forward-looking statements generally include words such as believes, expects, anticipates and other similar expressions. Actual results could differ materially from those indicated. Among the important factors that could cause actual results to differ materially are interest rates, the changes in the mix of the company's business, competitive pressures, general economic conditions and the risk factors detailed in the company's periodic reports and registration statements filed with the SEC. MOFG undertakes no obligation to publicly revise or update these forward-looking statements to reflect the events or circumstances after the date of this presentation.
And with that, thank you again for joining us on the call this morning. We have a lot to discuss, I'll move through this relatively quickly to get to the Q&A. The first thing I think that should be noted is that 2018 was the highest earnings per share and net income in the history of MidWestOne Financial Group and we think a lot more went right than wrong in 2018. Ex merger-related charges, we calculate $2.54 a share, a return on tangible equity of 12.1%. But that said, we're not satisfied and we expect and plan for improvement in 2019, and I think we'll be able to do that.
To the quarter, just talking about the balance sheet for a minute, loan growth slowed slightly and especially the last 10 days of the year, we spent most of December over $2.4 billion in loans at a few pay downs late in the month and that took us just under $2.4 billion for the year, on a point-to-point basis. We had a good start in January, our pipeline looks decent for the first quarter. We would look at maybe 1% to 2% growth, non-annualized growth in the first quarter. Paydowns of course always being the wild card.
For the year, we guided last year 4% to 6% and we were right in the middle of that. We calculate, point-to-point was 4.9% loan growth. Interestingly, and now if you look at average balance 2017 versus average balance 2018, our loan portfolio was up just short of 7%. So we think we did a good job on loan growth for 2018, and I would have the same guidance for you for 2019 of 4% to 6%, maybe toward the high end of that, but 4% to 6% is a good range.
On deposits, a little bit of a story. I think we made a lot of progress in our deposit raising culture in our company and our average balances were up for the year between 2017 and 2018, 4.4% which we consider to be a success. However at the end of 2017, we had a lot of large temporary deposits in the bank that left shortly after the calendar turned to 2018. We had the reverse happen in 2018 and we had money, leave the bank at the end of the year. So the point-to-point is relatively flat. Much of that was in public funds, our public funds balances were just over $25 million lower at the end of 2018 compared with the third quarter, end of the third quarter. So that we do have work to do as most banks do in terms of deposits. Deposit competition is keen, it's interesting. We have -- we see a lot of our bank competitors now above the FHLB rate in terms of some of the CD offerings that they are putting out there. So it's clearly expensive to generate deposits in this environment.
So as I said we're guiding 4% to 6% on loans. Our guidance on deposits would be 4% to 5% for the year. I think deposits based on what we see now will be a much bigger challenge than loans. That said, I think we do have plans to continue to increase our deposits to fund our loans. In terms of net interest margin, I think there is a success story there, just for information we still face headwinds from reduced accretion. Accretion added 17 basis points to our margin in 2017, it added 9 basis points to our margin in 2018.
We calculate that our core margin, absent accretion was 3.53% for the fourth quarter of 2018. And it's interesting, if you look at our core margin and compare the end of 2017 with what happened in 2018, if you adjust for accretion and tax reform, we calculate our margin was relatively flat. Our core margin was relatively flat during 2018, and we think that's very good performance in this environment, especially with the flat yield curve in the deposit competition.
In terms of non-interest income, I think a decent year. Wealth management was hampered, of course by the decline in the financial markets and that hurt fourth quarter fees. I would highlight that our Trust Department, especially showed higher revenues during the year and the prospects in trust especially for 2019 are very, very good.
Much progress in our mortgage unit was masked a little bit by the weaker mortgage markets that we saw in 2018. If you compare our mortgage unit to 2 years ago, it's night and day difference, we've significantly reduced the time to close and we have better pricing, more competitive pricing and profitability and we're building a nice servicing portfolio that adds to our income. Our servicing portfolio at the end of 2018 was $477 million which is up significantly from a year or two ago. Interestingly enough, when we bring American Trust fund, which I'll talk about in a few minutes. We will more than double that servicing portfolio, again which we think will provide a nice annuity, so to speak for fee income.
Swap income from our Commercial Banking unit was a little disappointing in the fourth quarter. We do think that 2019, with the flat yield curve especially that there is potential and we do plan for more swap income in 2019. A little bit of a shout out to our SBA unit, they had a very good quarter in the fourth quarter. We think they have more to come in 2019 as a contributor. And I will also say that, hiring a -- hiring an SBA banker in Denver has really been beneficial to our company and to the SBA unit. The gentleman we have in Denver is doing an outstanding job.
So overall, for non-interest income it's hard to predict what the mortgage market will be and the financial markets will be in 2019. All other things being equal, 2019 should be a better year than 2018, and we thought 2018 was pretty good. In terms of non-interest expense, there is progress, reducing our run-rate on non-interest expense. We did make some progress during the fourth quarter. We plan for more progress in 2019, and we would just say that, if you look at the legacy MidWestOne. MidWestOne as it exists right now, our goal is for a $21 million run-rate for non-interest expense in the fourth quarter of 2019. And that's a goal that's front and center with our management team and many of our senior officers.
In terms of asset quality, the large commercial loan that we charged-off in the fourth quarter of 2017, had been moving toward resolution in bankruptcy court, and there was an auction that took place in the middle part of December. We had always planned for it to have a charge-off of up to $3.5 million in the fourth quarter of 2018, and we were reserved for that. And throughout 2018 we continue to test that $3.5 million amount, as to adequacy and our internal and external analysis was that this was a sufficient amount. Unfortunately, when the auction occurred, the reserved amount had to increase by -- we felt -- we proved to be $1.5 million short. So it was a complete surprise to everyone involved and we've had very little inclination that we would be short this amount. So $1.5 million of the provision was due to this shortfall. And fortunately we have that behind us and we'll settle on this transaction on February 1st. We don't expect any further negative impact from this transaction of this loan.
We also had one commercial loan in the Waterloo Cedar Falls market that required roughly $1 million provision, and that was simply a loan that had significantly deteriorating business conditions and we felt compelled to move in that direction. As we've said on past calls, there has been a significant amount of time spent analyzing our loan portfolios throughout the company. I will say that during the fourth quarter, we had two external loan reviews done in addition to our internal loan reviews and really found good news in terms of -- there were no ratings disagreements. So the external and internal analysis in terms of loan reviews agreed with our analysis done by our bankers. So we think we are headed in the right direction and continued significant resources will be applied to this area.
In terms of guidance for a provision in 2019, the guidance is $4 million to $6 million. And I also want to give an ag update because ag always comes up when we're talking about MidWestOne. The 20,000 foot view on ag would be slight deterioration, no cause for panic in line with the ag economy. By the numbers about 7.7% of our portfolio -- of our loan portfolio is ag related, direct ag exposure, that's a $185.6 million. If you compare the end of 2017 to the end of 2018, at the end of 2017, we had 18.8% of the portfolio rated watch or substandard. The end of -- that was the end of 2017. At the end of 2018, it was 20.9%, so a slight increase in terms of watch and substandard ratings in the ag portfolio.
The biggest change now however was more loans were subs -- were deemed to be substandard than watch and that's due to two factors which we've talked about before. Number one, there is a deterioration in some of our borrowers balance sheets in the ag sector, that's obvious. But I also think it's fair to say that we're doing a better job of accurately rating our loans internally perhaps than we were a year ago.
A breakdown of the 20.9% loans that are rated watch or substandard in the ag portfolio, 9.6% is watch, a 11.3% is substandard. We continue to forecast very low charge-offs in the ag sector. We had one charge-off and that was in the third quarter of 2018, that you could call large in terms of ag and we expect some recovery on that loan in 2019. Not assured, but we do think there is a good high likelihood that we will have some recovery on that loan.
In terms of land prices, we get asked about that a lot. And let me be very specific to the MidWestOne footprint in Iowa. In our footprint, we estimate that land prices were down 3% to 6% during 2018. And I can report that our collateral margins were still good on most of the credits that we have in our ag loan portfolio. It's interesting we have and this is always a hard thing to do. We have declined to renew a few operating loans to some of our more troubled borrowers during this renewal season. Again that's a tough thing for both the customer and for our employees when that happens. I also think it's very important to say on this call, that many of our ag customers that had decent crop yields in 2018 reported a profit, not a loss. They reported a profit. If they had reasonable debt loads and they had good crop yields, these borrowers may not have made as much money as in past years, but they did show net operating income. So despite the elevated provision during the fourth quarter, we do see light at the end of the tunnel on credit. We have Gary Sims, our Chief Credit Officer in the room and we'll be happy to discuss that during the Q&A.
In terms of American Trust, ATBancorp, we have all regulatory approvals. As many of you know, that merger -- the closing of that merger is contingent on the sale of their retirement business. That's taking a little bit longer than we had anticipated, but ATBancorp does have a bonafide buyer and we still hope to close late in the first quarter. That's not assured, but our expectation is sometime in March that we can get that transaction closed. In terms of modeling, what that means for our Company in 2019, it's hard to do simply because we don't know the exact date of the close. But we still feel very, very good about the cost saves that we had projected. As I indicated on the last earnings call that we had, we'll probably have to move a few of those costs saves to 2020. But we still believe the earnings per share accretion numbers that we laid out in August whenever we announced the transaction are relevant and good.
The culture fit as we continue to get to know the folks in Dubuque and Wisconsin and other places in their footprint. The culture fit we think is very good. The asset quality at ATBancorp continues to be excellent by any measure. Their NPAs have been relatively low than their past dues, a little higher than our past dues in the 30 to 89 day bucket, but still very, very good by any historical measure. When we do know that the definite close of the transaction, we'll be able to be a little more transparent in terms of 2019 projections, as well, as breaking out the cost saves between 2019 and 2020.
Finally, I'd talk for a minute or two about our capital position. We feel fine, we feel comfortable with the capital position where it is right now. It's hard to know what the purchase accounting adjustments will be on AT, but we still project between 7.5% and 7.8% TCE whenever that transaction closes. We did increase the dividend a few weeks ago. That dividend was less than we might have anticipated 90 days ago, but we felt that, that our stock price represented probably a more attractive use of our capital in terms of share repurchase than a bigger dividend increase. And you will see from the earnings release, we did buyback our stock -- some of our stock in the fourth quarter and we will continue to analyze that as we go forward. We think at this point in time, that's the best way to reward our shareholders.
So, in summary, the increased provision put a little bit of a damper on the fourth quarter. But, we're very excited and we're very optimistic about 2019. We see a lot of ways that we can improve our financial performance. We think that the AT transaction will be very, very good for our shareholders. And in general, we're happy with the progress we've made, but we expect to make more in 2019.
And Brian, with that, I will send it back to you for Q&A. Before I do that, we have, as I said, Gary Sims, our Chief Credit Officer in the room. Barry Ray, our Chief Financial Officer; Jim Cantrell, our Chief Investment Officer and Treasurer and Kevin Kramer, our Chief Operating Officer. And with that, back to you, Brian.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. (Operator Instructions) It looks like today's first question will be from Jeff Rulis with D.A. Davidson. Please go ahead.
Jeffrey Rulis -- D.A. Davidson -- Analyst
Thanks. Good morning.
Charles Funk -- President and Chief Executive Officer
Good morning.
Barry Ray -- Chief Financial Officer
Good morning.
Jeffrey Rulis -- D.A. Davidson -- Analyst
Charlie, I wanted to follow up on that expense comment about a goal of $21 million by quarter end. Clearly, a MidwestOne only run rate, is that excluding ATB?
Charles Funk -- President and Chief Executive Officer
Yes.
Jeffrey Rulis -- D.A. Davidson -- Analyst
Okay. And you know, I guess we're just south of $20 million in Q4. So, just some modest growth is kind of the expectation throughout the year on the legacy platform?
Barry Ray -- Chief Financial Officer
Jeff, this is Barry. Yes, that correction -- modest growth from what you saw in 2018. Some additional investment in technology, driving some of that as well.
Jeffrey Rulis -- D.A. Davidson -- Analyst
Okay. And then Charlie you also touched on your SBA group, interested in a good quarter from your standpoint, and given the government shutdown. Is that groups seeing any headwinds on impact to the business?
Charles Funk -- President and Chief Executive Officer
Well, there will be headwinds every week that goes by, I give the leader of our SBA, a lot of credit because he was very proactive during December, and even before December anticipating this. So I think we did a lot of things to -- we sped up a lot of processes in late November and December before the shutdown. And so I think to date, I can't say that things have slowed down much but every week that goes by, I'll be less confident making that statement, I think that would be the best way to answer that Jeff.
Jeffrey Rulis -- D.A. Davidson -- Analyst
Okay. And then lastly just on the margin, kind of an outlook there. You walk through a little bit of the puts and takes, but where do you think margin settles in over the next year?
James Cantrell -- Chief Investment Officer and Treasurer
This is Jim. And I guess, I will take that. We do focus on the core margin, so I'm going to talk to core margin, by that, I mean we're backing out potentially the purchase accounting adjustments. And as Charlie referred, we were flat year-over-year fourth quarter 2017 to fourth quarter of 2018, when we adjusted for taxes and for the purchase accounting. On a go forward basis, it'll be interesting to see if the Fed makes -- and that was a period where we got four rate hikes in four quarters. So we were able to essentially track our loan yields moving higher with what our deposit costs were moving higher. And it'll be a function of whether or not we get another Fed increase. My guess is we're going to be in short for some more pretty flat margin.
I think last year we indicated, we thought we'd see some compression. I think we were pleasantly surprised by the margin maintenance, the core margin maintenance, that we were able to achieve. But I do think there are funding pressures and to give you a -- I can -- give me a chance to talk a little bit about the competition we are seeing. But for larger deposits probably fund deposits, the market has changed pretty dramatically in the last 18 months. So that's where we're going to see some pressure. And I do think though that we'll see some increases on the loan side. So, my long-winded answer to say I think we're going to be pretty flat on the margin going forward. That would be my best guess.
Charles Funk -- President and Chief Executive Officer
And I would add to that, Jeff that we've probably given up a little bit of growth to maintain the margin, and we were happy with our loan growth. We could have had more loan growth but we're willing to cut prices and I think the same, increasingly could be said on the deposit side. And when I talked about in my opening comments being above the Home Loan Bank curve in some of our markets now. We won't hesitate to go to the Home Loan Bank, we have a lot of capacity there, should that be a better deal than deposit dollars. But I concur with what Jim said, but I think it is fair to say that when we maintain our margin we probably giving up a little bit of growth as well.
Jeffrey Rulis -- D.A. Davidson -- Analyst
Right. Jim you mentioned the core margin, I think it was 3.53% for the quarter. What was that sequentially? And I guess the relative accretion benefit.
James Cantrell -- Chief Investment Officer and Treasurer
Yeah. I show it, 3.48% in the third quarter but I'm going to put a big caveat, the 3.48% in the third quarter compared to 3.53% in the fourth would indicate 5 basis points of expansion. In the third quarter you should know we had a fairly significant reversal of it of loan interest. When you back that out, you're basically right, you're basically flat, core margins third quarter to fourth quarter. So therein lies my expectation going forward that would be flat. So that's an important piece of information to have, if you're just looking at core margin third quarter to fourth quarter.
Jeffrey Rulis -- D.A. Davidson -- Analyst
And sequential accretion benefit was similar?
Barry Ray -- Chief Financial Officer
Jeff, this is Barry, we are articulated in the earnings release that the benefit from discount accretion was 6 basis points to the NIM in the current quarter and 8 basis points in the linked quarter.
Jeffrey Rulis -- D.A. Davidson -- Analyst
Right. Sorry, I missed that. Thanks, that was it.
Charles Funk -- President and Chief Executive Officer
No worries, just pointing out.
Operator
Today's next question will be from Nathan Race with Piper Jaffray. Please go ahead.
Nathan Race -- Piper Jaffray -- Analyst
Hey, good morning, everyone.
Charles Funk -- President and Chief Executive Officer
Hi, Nath.
Nathan Race -- Piper Jaffray -- Analyst
Just wanted to start on deposits. When should you get kind of thoughts on -- we've seen deposit costs increase 8 basis point to 9 basis points last couple of quarters, and I imagine policies we'll probably see similar increase in the first quarter of this year. But assuming the Fed's on hold for the rest of 2019, how do you guys think deposit costs will behave in 2Q and in the back half of 2019 as well?
James Cantrell -- Chief Investment Officer and Treasurer
Yeah, this is Jim. I will take my best shot at that one and I would divide it up a couple of ways. First let's look the CD book which is relatively short, little over $700 million. That has been from last year repricing up at a rate of roughly 4 basis points, maybe a little more per month, somewhere in the neighborhood of 12 basis point or 13 basis points a quarter. That's not going to stop increasing if the Fed stops, so that's for the first half of the year, I think we'll still see 4 plus basis points per month. And then if rates do stay here in the second half of the year that'll taper of some.
I will say on the core deposit, on the core deposit part of the question, I expect we're going to see a continued increase in that book as well. And again we have some money market specials that are -- that we have run this year, that are coming on at rates that are on average above our current book market. So that's going to add some costs. And we are pursuing just the larger deposits -- depositors are tend to be high data. And so we're playing a little defense in some of our markets where we're having move rates up, simply to maintain and I don't expect that, it's going to change either so.
The higher balance depositor is a pretty savvy depositor, at this point it's been our experience and so we'll see continued increases on both sides of the core and the CD book, both increased.
Nathan Race -- Piper Jaffray -- Analyst
(multiple speakers) And then kind of along those lines we've seen non-interest bearing deposit balances come down over the last few quarters on an average basis. And I didn't know you guys are working hard on raising core deposits across some of the markets that you're in and so forth with some of the hires as well of late. So just curious if we should expect that dynamic with non-interest bearing deposits to continue to come down in 2019 as well?
Charles Funk -- President and Chief Executive Officer
I'd say that's anybody's guess. On the other hand if you just look at what's happening around the United States I don't know why we would be any different. I think probably we'll continue to see contraction there.
Nathan Race -- Piper Jaffray -- Analyst
Okay. Got it. And then if I could just lastly, the credit that you guys took the greater charge-off in the fourth quarter here. If I remember correctly it's unlike there was a possibility that you guys could come out on the gains, as that credit moved through the process over the course of the back half of last year. So just curious if there was something that changed over the course of last couple of quarters that maybe caused that assets not be as worth as much as perhaps you thought a couple of quarters ago?
Gary Sims -- Chief Credit Officer
Nath, this is Gary Sims. I don't think anything on a external basis changed about the asset. We did get to the point in the fourth quarter in December as Charlie alluded to, where we got to the auction and the results of the auction just did not meet our expectations relative to what we believed we would be able to get for that asset. Not a lot of color beyond that, it just -- the auction just did not turn out the way we had expected it to.
Nathan Race -- Piper Jaffray -- Analyst
Understood. I appreciate all the color guys. Thank you.
Charles Funk -- President and Chief Executive Officer
Thank you.
Operator
Next question will be from Damon DelMonte with KBW. Please go ahead.
Damon DelMonte -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Hey, good morning guys. How is it going today?
Charles Funk -- President and Chief Executive Officer
Good morning.
Barry Ray -- Chief Financial Officer
Good morning.
James Cantrell -- Chief Investment Officer and Treasurer
Good morning, Damon.
Damon DelMonte -- Keefe, Bruyette, & Woods, Inc. -- Analyst
So just a first question, just to kind of circle back on the impact of the government. Have you noticed any change in sentiment from your ag borrowers because of the tariffs? Now that we've had them in place for whatever might be 6 months, 5 months?
Gary Sims -- Chief Credit Officer
So this is Gary Sims, I'll take a start at answering that. We've heard from I mean really the vast majority of our ag borrowers on the government assistance that was put in place in the fourth quarter. We've been able to quantify that and for the most part they've gotten that money in. I will tell you that Charlie alluded to earlier that most of our borrowers had good yields in 2018. And when they had good balance sheets going into the harvest, they were able to either break even or make money for the 2018 crop year. And I will tell you that the government assistance probably was marginally helpful for most of those farmers in achieving those results.
Damon DelMonte -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Got you. Okay. And then is there any concern going forward that you know their credit worthiness may be compromised because of the ongoing issue with the tariff?
Charles Funk -- President and Chief Executive Officer
We're in the middle of our renewal season as most ag banks are at this point in time and what we're seeing for the 2019 crop year is that essentially what farmers are having to do is adjust their expense bases to a new reality around prices and we don't see just a sharp drop-off in terms of performance for 2019 crop year relative to the tariffs. Now, don't get me wrong, I think everybody is pointed toward getting this resolved and we'll be in a better place when it doesn't get resolved. But for the most part, our borrowers are positioned to be able to live with the tariff as they exist right now, on a go forward basis.
Damon DelMonte -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Got it. That's great color. Thank you. And then I guess with respect to the outlook for non-interest income if you take out the impact from the ATBancorp, I think Charlie said you expected to be better in 2019 than it was 2018, are we talking kind of like mid-single digit growth you think or can I put some parameters around that?
Charles Funk -- President and Chief Executive Officer
Well, I'm looking at our CFO on that, when we talk about percentage growth.
Barry Ray -- Chief Financial Officer
Damon, this is Barry. With respect to growth in fee income, do you say mid single-digits that we said?
Damon DelMonte -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Yes.
Barry Ray -- Chief Financial Officer
I think that's it. That's a good marker, Damon, yes.
Charles Funk -- President and Chief Executive Officer
Yeah, I think that's -- I would just add to that. I think critical to that will be the ability of our SBA bankers to continue to improve as well as book some commercial swap transactions. Because as I said in my opening comments, Damon, the thing that's really hard to predict is you don't know where the mortgage market is, and you don't know where the financial markets is, which affects our wealth management. So, all other things being equal, that would seem to be a reasonable estimate for non-interest income.
Damon DelMonte -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Okay, great. And then, my last question, just given you know where the shares trade today. And I say you guys bought back a little bit of stock during the quarter. What are your thoughts on maybe becoming a little more aggressive or just maintaining some sort of activity going into 2019 with the buyback?
Charles Funk -- President and Chief Executive Officer
Well, I think it's fair to say that we think the price of our stock is very attractive right now. And we will continue to analyze that, and we do have a repurchase program that we have a ways to go on, should we choose to do so. So, that's probably the best guidance I could give you.
Damon DelMonte -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Fair enough. Thank you very much for the color.
Charles Funk -- President and Chief Executive Officer
Thank you.
Operator
(Operator Instructions) Today's next question will be from Brian Martin with FIG Partners. Please go ahead.
Brian Martin -- FIG Partners -- Analyst
Hey, good morning.
Charles Funk -- President and Chief Executive Officer
Good morning, Brian.
Barry Ray -- Chief Financial Officer
Good morning, Brian.
Brian Martin -- FIG Partners -- Analyst
Maybe -- I've got a handful of questions. Maybe just start with Gary on credit and just maybe it sounds like from a Charlie's comments, you feel as good as you can about credit, it's good as you have been in a while on credit. Just kind of wanted to confirm that, and just get your perspective on, I mean doing a couple of reviews externally, one internally, you just kind of confirm that if you can or just any thoughts on just credit in general with all the work you guys have done?
Barry Ray -- Chief Financial Officer
Thanks Brian. And I will start the conversation with -- I believe that we've really hit a pretty material milestone in the auction -- the results of the auction on that one particular large credit taking that into account and actually writing that asset down to the actual auction results. And as Charlie alluded to, we should be able to get the proceeds, collect proceeds in the first quarter and that's going to be a pretty material development that we can put behind us. And so, what I see on a go forward basis, in the 2018, I think it was a transformative year in getting ourselves pointed in the right direction and recognizing problems on a timely basis and starting a process around working those assets out and that's what I see in 2019. Charlie alluded to a provision in the $46 million range. I feel comfortable that we can work within that parameter and make steady progress toward recovering our credit quality in 2019.
Brian Martin -- FIG Partners -- Analyst
Okay. That is very helpful and just a couple of other things for me was just, maybe one for Jim. Just on the core margin, I think you talked about kind of relative stability here. Maybe just as you layer in AT, just kind of anymore, now they've had a little bit more time to kind of look at things, just kind of the impact of AT as you -- maybe look at second quarter, I mean, I think it closes late this quarter. Just kind of that drag or that impact from AT, how that plays out in Q2?
James Cantrell -- Chief Investment Officer and Treasurer
Yeah, Brian, we have spent some time, it is reluctant to give you a whole lot of detail because the numbers are pretty squishy at this point. I guess what I would say is, as we've evaluated AT in the transaction, we have clearly noted and I think it's public, well it's available information that their margin is narrower than our margin. And so I think it's safe to say when we bring those two banks together, the combined -- the margin of the combined entity is going to be narrower than our current margin is today. And that's about as much as I feel comfortable giving you right now.
Charles Funk -- President and Chief Executive Officer
Yeah, I would add to that. Brian it's a good question. And I think what Jim says is exactly right. And what I would add to that, would be that the efficiency that we gain bringing AT into the company is significant. And I think that will more than make up for the narrower margin that we'll have. But I don't think there is any question we'll have a narrower margin because they've been operating on a margin for a while now in the low 3s and you put that with our 350 plus or minus core margin and you're going to get a little narrower margin.
Brian Martin -- FIG Partners -- Analyst
Yeah, OK. All right. And just as far as the closing of the transaction, I mean, when are you guys intending to -- if it does close later in the quarter, do the conversion? I mean, just trying to reconcile when -- yeah, just wonder the first linked quarter will be from an expense standpoint?
Charles Funk -- President and Chief Executive Officer
Well they have -- the -- we don't know, we hope to close it sometime in March. In terms of converting, their core systems to ours, the smaller of their two banks is scheduled for May 15th. And the larger I believe for July -- the middle part of July. So that's when we'll actually get conversion.
Brian Martin -- FIG Partners -- Analyst
Okay. All right. That's helpful and just on the -- I mean, I guess the expense guy Charlie, I mean, I guess if you kind of get things close in you, sounds like you could be running at a clean expense run rate with AT in the fourth quarter of this year of 2019. I mean, does that -- can you give any kind of thought as far as if you had a clean run rate from AT, where that expense number the $21 million number, where do those two numbers kind of connect? And is it kind of in the $28 million range with the cost savings taken out of AT or is that kind of in the range $28 million, $29 million?
Barry Ray -- Chief Financial Officer
Brian, this is Barry, yeah that would be a fair estimate of what the range would be, obviously excluding the merger related costs, but to your point on the clean run rate that would be a good estimate.
Brian Martin -- FIG Partners -- Analyst
Yeah. Okay. All right. And then the last two just kind of the operating leverage, I mean as you guys get AT and get the operating -- start to get some operating leverage. I guess when you get to fourth quarter of 2019 that's when we need to expect it. I mean Charlie you've talked about kind of your efficiency goals and what not if you kind of take a look at fourth quarter of 2019 being a clean quarter with the acquisition, can we talk about where you would expect to be with some noise in between? But just kind of when you get to that fourth quarter of 2019, at least kind of how you're thinking about it from an ROA and efficiency standpoint?
Charles Funk -- President and Chief Executive Officer
That's a good question and it's an appropriate question. And I think as we, we looked at 2019 as a company we realized that there was a lot of work to be done. And then you throw the merger in. And the fourth quarter does seem to be an appropriate time, where we could analyze, just what our earnings power is. And I think it's fair to say that our goal would be the, the fourth quarter absent merger related expenses somewhere in the neighborhood of a 120% ROA. And we clearly need to be below 60% in our efficiency ratio. As we look at our peers, 60%, does not seem to be a high hurdle to climb and we need to get it back down. We've been there before and we need to get back down to below 60%. So below 60% efficiency in 120% ROA fourth quarter, absent noise would be our -- where we hope to be.
Brian Martin -- FIG Partners -- Analyst
Okay. I appreciate that and you didn't mention Charlie, but just on the government shutdown on SBA, I know you're expecting SBA to be a bigger contributor. Any impact with the slowdown here? Maybe I missed if you said that earlier someone answered that question, but just any impact on, is it just more of a timing issue, still expect same amount of revenue maybe in 2019 or just how does that play out?
Charles Funk -- President and Chief Executive Officer
I think any impact is anecdotal right now. And I don't know that you could prove it in the numbers. I think the SBA would be a one place that you would look. We're still in this situation a month from today it's going to start to impact our ability to generate revenues in that area. But yeah, nobody likes the shutdown, but I would say that most of what we see now would be anecdotal and I don't know it is showing up in our numbers.
Brian Martin -- FIG Partners -- Analyst
Okay, all right. I appreciate all the color guys. Thank you.
Charles Funk -- President and Chief Executive Officer
Thank you, Brian.
Barry Ray -- Chief Financial Officer
Thank you, Brian.
Operator
At this time, this will conclude today's question-and-answer session. I'd like to turn the conference back over to Charlie Funk for any closing remarks.
Charles Funk -- President and Chief Executive Officer
Well, thank you everyone for joining us on the call this morning. And our guidance to everyone would be to stay warm over the next week to 10 days, and we wish you a good rest of this month. Thank you, again.
Operator
The conference is now concluded. We want to thank everyone for attending today's presentation. At this time you may now disconnect.
Duration: 41 minutes
Call participants:
Charles Funk -- President and Chief Executive Officer
Jeffrey Rulis -- D.A. Davidson -- Analyst
Barry Ray -- Chief Financial Officer
James Cantrell -- Chief Investment Officer and Treasurer
Nathan Race -- Piper Jaffray -- Analyst
Gary Sims -- Chief Credit Officer
Damon DelMonte -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Brian Martin -- FIG Partners -- Analyst
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