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Howard Bancorp (NASDAQ:HBMD)
Q4 2019 Earnings Call
Jan 23, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Howard Bancorp, Inc. Fourth Quarter and Full Year 2019 Financial Results Conference Call. My name is Jessie and I will be your operator for today. Please note this conference call is being recorded. There will be a question-and-answer session after the presentation.

[Operator Instructions]

I will now turn the call over to George Coffman, Executive Vice President and Chief Financial Officer of Howard Bancorp. Mr. Coffman, you may begin.

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

Thank you, Jessie. I would like to begin this morning by thanking everyone joining the call this morning. As Jessie noted, my name is George Coffman, I'm the CFO for Howard Bancorp. Before we begin the presentation, I'd like to remind everyone that some of the comments made during this call may be considered forward-looking statements. Our Form 10-K for the fiscal year 2018 and our quarterly reports on forms 10-Q, as well as our current reports on Form 8-K, all identify certain factors that could cause the Company's actual results to differ materially from those projected in any forward-looking statements made this morning. The Company does not undertake the process to update any forward-looking statements as a result of new information or future events and recent developments. Our periodic reports are available from the Company, either online via the Company's website or at the SEC's website. I would like to remind everyone that while we think our prospects for continued growth and performance are good, it is our policy not to establish with the markets any earnings, margin or balance sheet guidance.

With that said, now I would like to introduce Mary Ann Scully, the Chair and CEO of Howard Bancorp.

Mary Ann Scully -- Chairman and Chief Executive Officer

Good morning everybody. I'd like to add my thanks to George. I'd also like to begin the morning's call by addressing the decision earlier this week to release our earnings two days earlier than it was originally announced. The context for that decision was the commitment that Howard Bank makes to ensure that non-public information is never selectively available. And over the course of a long bank holiday weekend this past weekend, multiple emails between a number of individuals were exchanged in the normal course of release preparation. And we became aware that there was one email that was missent. We made an immediate decision with the concurrence of outside counsel to take an abundance of caution approach and release early. However, recognizing that our investors and research analysts have very full calendars at this time of year, we maintain to the conference call as scheduled.

With that, I'll go into the presentation that you've all received, that was released with the 8-K and we start as always with the overview of what we believe to be an exceptionally well positioned franchise. It is a singularly focused commercial bank and we'll talk later about the exit of the mortgage operation which emphasizes that singular and sustainable focus.

We saw annual growth of net portfolio loans in the mid-single-digit range, $95.8 million for the year with portfolio loans increasing at a slightly lower quarterly rate period to period during the fourth quarter due to one large pay-off and two loan closings that shifted into January and both of which have at this point already occurred. It was average total C&I loan growth however, in that fourth quarter of $9.7 million, 10% annualized, so at the high end of the mid-single to low double-digit range, and average total C&I loan growth for the fourth quarter of '19 versus the linked fourth quarter of '18 of 8%.

Transaction deposits increased by $34.4 million during the fourth quarter and we'll note fully funded the net loan growth and we'll talk about the momentum on the transaction deposit side and the concurrent impact on interest expense a little later in the presentation. But we do highlight here that the cost of funds decreased by 12 basis points for the fourth quarter to 1.07%. The industrywide net margin pressure that we've all seen and that's recurred in many of our co-reporting industry colleagues was mitigated in our case by both the loan portfolio mix and most notably by that funding mix. We're also seeing the impact of the delivery changes, the branch optimization that we began talking about in the second quarter of 2019 and the processing contract negotiations beginning to be realized but have noted they will not be fully realized until the first quarter of next year. We've also continued to focus on capital management. It resulted in an accelerated pace of buybacks, 14,000 shares repurchased in December, 49,000 shares repurchased month-to-date in January of 2020. And as we'll discuss later, are very optimistic about the impact on Howard Bank that the market consolidation disruption that we've been talking about which with legal closings and scheduled conversion gates is closer to realization, that has had an impact already on our recruitment and retention of top talent. And we believe that that recruitment and retention of top talent from competitor banks is probably one of the strongest statements that we make in this quarterly announcement, although that's also an impact that won't be shown until the first quarter of 2020.

If we go into the fourth quarter highlights, net income for the quarter was $5.9 million, that was $0.31 of EPS. There were infrequent items that we talk about and fourth quarter net income was therefore $5.1 million. So core EPS of $0.27. Our net interest income was up modestly from the third quarter. There was a reduction in gross interest income due to a combination of mix and spreads, but that was more than offset by the reduction in interest expense factor the comments that I've made about the importance of transaction, deposits and the realization of some progress on that front.

Non-interest expenses were down from the third quarter. There were infrequent items in both quarters. And if you look at infrequent expenses, core non-interest expense was $14.7 million for the third quarter and $14.7 million for the fourth quarter. Loan originations were strong. We continue to see some pay-off and pay down activity, which means that there has to be an accelerated level of originations to offset that in order to see the mid digit growth that we've been talking about and loan originations in the fourth quarter were $94.8 million with $70 million of that being the focus on commercial loan originations. Transaction account balances represented 38% of our deposits. They increased by 22% in the fourth quarter. And the NIM was down 8 basis points. That's despite three decreases in the prime rate and of course, our C&I portfolio and our ADC portfolio in particular are going to reflect those kinds of decreases in prime rate and LIBOR. Excluding fair market value adjustments, the NIM was 3.31%. Book value continues to increase to $16.48 at the end of the fourth quarter from $16.18 at the end of the third quarter and certainly that TBV does reflect the impact of the buyback as well.

Since the fourth quarter gives us an opportunity to reflect on the full-year results, we do that as well. Net income for the full year at $16.9 million, earnings per share of $0.89, excluding infrequent items, earnings per share of $1.01. Net interest income up 4% over the full year of 2018 primarily due to increased earnings on higher average balance of interest earning assets. And 2019 total reported non-interest expenses of $64 million, down $3.5 million from the $67.6 million. I note here as we've noted in a footnote that the 2018 expenses and the 2018 net interest income are both reflective of 10 months of the combined operations of the bank and so the comparisons should consider those.

Loan originations remained strong and totaled $360 million in 2019. So the $94 million that we saw in the fourth quarter continues that strong pace of originations, that is more than offsetting pay downs. The NIM was down 28 basis points. Core NIM was 3.42% for 2019, down from 3.65% and we'll talk a little bit later again about the push back against a reducing NIM, which is the lower net interest expenses. The mortgage transition is something that we've been signaling for some period of time. I think everybody will remember that in August of 2017, when we announced the merger with First Mariner, we indicated that we would downsize the mortgage operation. We began moving beyond just a downsizing in the second quarter of 2019 with the exit from a consumer direct business that we were in and we've continued to look at the profitability of that business as well as the distraction provided by a volatile retail based business compared to the core commercial business. We wanted to, if at all possible, reduce any sort of impact on the capital levels of the Company as we looked at how to reduce that distraction and through a series of negotiations in the third and the fourth quarter of 2019, we're able to formally step away from the residential mortgage business. This allows us to focus. It allows us to reduce some of the volatility in our earnings and as we note on Page 8 of the presentation, it allows us to address the fact that with mortgage division efficiency rate of 80% compared to core bank or a total bank ratio in the 65% that we should start to see the efficiency ratio more dramatically come down.

We will, we note still maintain residential mortgages in the loan portfolio for loan mix diversification. So our portfolio will still include residential mortgages and we will attempt to offset normal pay-down in the residential mortgage portfolio with investor activity with a select group of mortgage originators. But we have totally exited as of this point in time the mortgage origination business and we're able to do that with $750,000 profit in pre-tax earnings and that has been recognized in the fourth quarter.

So if we look at Page 9, we can see the steady progression in core earnings. And I will draw everybody's attention to the core as opposed to the reported, given the one-time and infrequent charges that we've taken as we continue to improve our delivery infrastructure as we renegotiate core processing contracts and as we make changes like the exit of the mortgage business. So, core net income has increased from the fourth quarter of 2018 from $4 million to $5.1 million, EPS from $0.21 steadily progressing to $0.27 for the last two quarters. The core efficiency ratio, and again I note that this would all include a higher expense ratio mortgage operation from 73% to 66%, a return on average common equity from 5.47% to 6.57% and a return on average assets coming to 0.88% and we do try to make everybody aware of the impact that the CDI expense has on our return on assets since that's not a number present in all of our peers, which gets us to a 0.98% level in the fourth quarter of 2019.

Page 10 is just another way of telling the loan growth story. The net loans increasing and the commercial loan originations continuing to be strong with $252 million in commercial loan originations for the full-year. Organic loan growth for us tends to continue to focus on long-term profitable client relationships and I note a couple of the CAGR slides that show a 22% increase in Howard Bank's portfolio over a 16% increase in the organic commercial C&I and CRE.

Our regulatory capital ratios are strong. Risk-based capital is the core regulatory ratio for Howard Bank, given the mix of our earning assets and it increased to 13% from 12.87% in the third quarter, all driven by strong earnings. I would note that given these strong capital ratios, we purchased 14,000 shares during the fourth quarter and again have purchased almost another 50,000 shares in the first three weeks of 2020. I would also note on Page 12 is we look at tangible common equity that the strength of those ratios allowed us to raise $25 million in subordinated debt in the fourth quarter of 2018 that provides us with the flexibility that we need to manage that capital with the buybacks.

And then finally, we look at the tangible book value per share growth of 8.9% CAGR since 3/31/2018, again the legal day effective for the merger with First Mariner was 3/1/2018. Our net interest margin has shown a decline. Net interest margin was 3.38%. Primary driver was the impact of the decreases in prime rate and the impact that has on much of the C&I portfolio and all of the ADC portfolio. It reflects certainly very competitive markets. Our net interest margin is not despite our acquisition activity over time dramatically impacted by fair market value accretion component, but we do show the impact of that on page 14.

We also note, as we did in the third quarter that the fixed-rate loan assets that we have in the commercial real estate portfolio, the residential mortgage portfolio, provides us with some additional protection against any further declining rate environments. Asset quality is another positive story. It's continued to improve since the merger in 2018. You can see a drop in non-performing assets to total assets from 1.28% in the fourth quarter of 2018 to under 1% today. The charge-off activity has been much more modest since the first quarter charge-off of one loan and we point out on the reserves and the mark-to-market adjustment for loans in the bottom left-hand chart shown on Page 15 what the impact of those mark-to-market adjustments is for comparison purposes to non-acquired and are comfortable with our reserve level. The loan mix talks about the emphasis on the commercial portfolio, and again, this emphasis and differentiation that we provide especially in C&I loans and you'll note the combination of the C&I at $373 million with the owner occupied CRE at $243 million makes that our largest asset class and there's where our focus is on and drives a good deal of the differentiation on the funding mix. So turning to the funding mix, the overall cost of deposits was 0.9%, a decrease of 6 basis points. So about a half of the decrease in funding cost transaction accounts now represent 38% of total deposits. We have a very competitive treasury management product set added to that group of individuals in the second quarter of 2019 and have recently taken advantage of the disruption in our market by adding three additional deposit gatherers, mostly on the small business and business banking side as well as one very senior CRE executive in the local market.

The opportunity that all of this, this historical strength in commercial loan origination, this historical strength in funding ourselves with transaction deposits not only mitigate the downward pressures of a low interest rate environment on our net interest margin, but provides us with the growth opportunities that we signal. And if you look at the end market deposit disruption on Page 18, we've added to this chart that was shown in the third quarter presentation, the legal day and the conversion days. So you can see that we've got some significant conversions that are coming up shortly. Those provide us with the greatest opportunity to pick up additional transaction deposits. We have a number of marketing efforts and obviously one-on-one business development efforts and those business development efforts have recently been enhanced by the addition of the three deposit gatherers.

So in summary, a franchise that's focused on commercial banking after exiting the residential mortgage origination business. Fourth quarter average balance of loans, year-end period of loans discussed, fourth quarter average balance of C&I loans grew at an annualized rate of 10.4%. Year-over-year end-of-period C&I loan balance is 10.7%. So that high-end of our growth range is being shown in the all important C&I loan category. We decreased our cost of funds by 12 basis points. Half of that cost of funds decrease was related to a drop in our cost of deposits and many of the cost savings initiatives that we've instituted in 2019 are beginning to show. Branch network downsized is almost complete. But we do still have one new branch to open late in the first quarter of 2020. And until that one consolidated branch opens, we are still operating with two old branches that are increasing our costs. And the core processor cost savings only started to be realized in the last six weeks of the year. So we should see the full impact for that in the first quarter of 2020. And looking forward, as we always do, we're taking advantage of the opportunities created by industry consolidation, see that industry consolidation coming to fruition with both legal closes and conversions scheduled and have already seen that enhancing our recruitment and retention efforts which should allow us to continue to grow the portfolio.

So with that I'm going to open it up for any questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session.

[Operator Closing Remarks]

Thank you. Our first question comes from William Wallace with Raymond James. Please proceed with your question.

William Wallace -- Raymond James -- Analyst

Thanks. Good morning Mary Ann, George. How are you?

Mary Ann Scully -- Chairman and Chief Executive Officer

Good morning.

William Wallace -- Raymond James -- Analyst

Maybe you can start off with commentary on an outlook for net interest margin. You're able to reduce your deposit costs in the fourth quarter, will have some lingering effect of the October Fed cut. What do you think are your opportunities on the deposit side? How might we expect to see margin trend in the first quarter and then more importantly through 2020?

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

This is George. On the deposit side, a large number of CDs that are going to hit their maturity dates and we have the ability to reprice. We expect that we'll be able to reprice those at lower rates than where they are today. So we think we're going to see some continued increases [Phonetic] in the cost of deposits. We have a very short borrowings portfolio. So most of the savings there are already baked in. There is not much that's still scheduled to mature that we expect will roll over at similar rates. So most of the borrowing benefit is already there. The biggest piece that we expect to see is on the term deposit side depending on how successful we are at retaining those and at what rates. It's hard to quantify what the reduction [Technical Issues] expense side. On the earnings side, I think Mary Ann talked about it, the impact of both LIBOR and prime rate changes have pretty much all been now baked in. The last Fed move was in October if I remember it was in mid-October. So most of the fourth quarter already had the impact of that. So we don't think we're going to see anything dramatic on the loan yield side as far as any downward movement. We hope to see just the opposite, the downward movement in the cost of deposits, which overall will basically keep our margin stable. I don't know that it's going to increase dramatically, but we're kind of looking to have it just be stable for the next three to six months.

William Wallace -- Raymond James -- Analyst

Can you -- how much in CDs are maturing and what's the cost?

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

Give me one second and I can tell you, we have in total about $400 million that's scheduled to mature in 2020. So for the full year, and the weighted average rate on those maturities are 1.88%. We're expecting that we will be able, again, depending on the timing. But we're looking at a replacement rate probably in the 1.50%, 1.60% range. So we'll be able to get the benefit of that.

William Wallace -- Raymond James -- Analyst

And is that -- are those maturing? Is there a cadence to when they mature or is it kind of spread evenly throughout the four quarters or is it weighted toward the back?

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

About $265 million of that is in the first quarter and then the remainder is pretty evenly spread over quarters two, three and four. In the first quarter, $265 million is at a 1.92% weighted average rate. So higher than even the total.

William Wallace -- Raymond James -- Analyst

Okay. I'm surprised we wouldn't see margin expand in the second quarter if you got a potential 30 basis point or 40 basis point pick up on a good chunk of deposits...

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

[Indecipherable] but we've been adding to our securities portfolio. So having the increase in the average lower yield will drive that down a little bit. That's why we're saying we expect stable margin because we expect the benefit of the deposit cost to be offset by the lower yields on a higher securities portfolio.

William Wallace -- Raymond James -- Analyst

Okay, all right. Okay, thank you. Moving on to understanding some of the moving parts around transferring all the mortgage operations to the -- to management of that division, I think, in one of the slides, you said it's an 80% efficiency ratio. Is that what the efficiency ratio was in the fourth quarter and are you going to be able to transfer all of those costs that you used to calculate that efficiency ratio?

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

The short answer is yes. There's actually a much more intricate answer to that and that is that the cost that we talk about on the mortgage side is what I would refer to as just the direct cost that we have there. There is an additional benefit and that we didn't do cost allocations of expenses from the bank to the mortgage company. For example I always use this one because it's a simple one, about a third of our employees are Companywide mortgage-related, but we didn't charge any of our HR department cost to the mortgage company that was all absorbed on the bank side. So there is that what I would refer to as the direct elimination but then there's also the efficiency side, one of the shared services where the bank had been absorbing.

Mary Ann Scully -- Chairman and Chief Executive Officer

Wally, I think directly, it's important to note that that 80% efficiency ratio was all direct cost, no allocated costs and therefore all of the cost in the mortgage company were essentially eliminated with the sale. There aren't allocated costs included in that number.

William Wallace -- Raymond James -- Analyst

Right, that's helpful. And then what was the revenue in the fourth quarter. I know you have the $2.7 million broken out, but there is also, I assume some net interest income associated with the loans held for sale, that also goes away. I'm just, maybe you can help us just back into what the impact's going to be.

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

I'll even give you kind of the bottom line [Speech Overlap]. If you look at the $0.27 core earnings, when you take away those one-time pieces, the mortgage company was $0.03 of that $0.27. Of that $0.03, just under a penny of that was driven by the spread income. So, and again, just to give you the full numbers for the total year of what we refer to as the $1.01 in core EPS for the year, the mortgage division added $0.09 to that. So $0.92 for the core bank, $0.09 for the mortgage and annually of that $0.09, $0.03 of those $0.09 came from the spread side of the mortgage revenues. So overall, if you look at it and you take away the spread side of the mortgage revenues, they added $0.09. $0.03 of that, like I said was spread, so it was $0.06 and that was $0.06 not including any expenses that were borne on the bank side. So, all in, it was not adding a whole lot to the overall results of the Company.

William Wallace -- Raymond James -- Analyst

Okay. And then how much improvement -- additional improvement in expenses do you anticipate in the first quarter, maybe even in the second quarter when you are able to close that last branch related to the initiatives that you underwent early in 2019? So how much is left to capture outside of mortgage?

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

The biggest -- most of the branch pieces we've already recognized. So there is very little there. The biggest thing we would expect to see is the full quarter benefit of the renegotiated core processing contract. Mary Ann said we only got a little bit of that, maybe half of the benefit in the fourth quarter. And again, we projected that our annual savings would be in the $750 million range. So you take a full quarter's worth of that compared to say a half of a quarter's worth for the fourth quarter, that's the only thing you're going to see on the bank side. But to answer your direct question, fourth quarter direct expenses of the mortgage division were about $2.1 million.

William Wallace -- Raymond James -- Analyst

Okay. And then I thought in the prepared remarks, Mary Ann you said that there was also one branch that wouldn't close until the end of the first quarter.

Mary Ann Scully -- Chairman and Chief Executive Officer

There is, I mean it's a small amount. You're not talking about more than $100,000 there. But there is still that additional branch.

William Wallace -- Raymond James -- Analyst

Okay, thank you very much. I'll step out and let somebody else ask you question.

Operator

Thank you. Our next question comes from Stuart Lotz with KBW. Please proceed with your question.

Stuart Lotz -- KBW -- Analyst

Hey guys, good morning.

Mary Ann Scully -- Chairman and Chief Executive Officer

Good morning.

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

Good morning.

Stuart Lotz -- KBW -- Analyst

Following up on Wally's question on the expense side, I'm just trying to kind of narrow in on a core run rate as we get into 1Q. I know this quarter you still had some of the FDIC rebate, obviously you have what the $2.1 million coming out -- sorry $2.1 million of salary coming out from the mortgage sale and then also --

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

That was total expenses, not just the salary side.

Stuart Lotz -- KBW -- Analyst

Okay. $2.1 million total expenses. And that also just the core processor optimization that flowing through in 1Q, George, just what do you see as your core run rate in 1Q and then as we get into 2Q and you have that branch finally closed, what we can expect for a run rate for the rest of the year?

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

Let's look at it this way. The core combined expenses taking away those one-time items for Q4 was $14.7 million. Let's say that we incrementally were going to pick up about another $100,000 on the core processing side as a reduction. You're also going to see the [Technical Issues] consolidated number. So the $2.1 million on the mortgage side. What you're going to see though is that the first quarter is when you tend to see a slight increase in comp related expenses because things like FICA caps reset, 401(k) caps reset, merit increases kick in. So you're going to see a little bit of just a seasonal increase in expenses that we've always experienced in the first quarter due to those types of issues. So overall I would say that that -- the $14.7 million minus the $2.1 million which is mortgage is pretty easy to identify, the $100,000 core processor benefit is probably going to be more than eaten up by increased salary and comp related expenses.

Stuart Lotz -- KBW -- Analyst

Got it. And then on the FDIC insurance side, you've had the rebate the last two quarters. Is it going to return to kind of that first and second quarter, $280,000 a quarter. We expect that to I guess reset in the first quarter this year?

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

Yes. Unfortunately, we at the end of the fourth quarter, we utilized all of the credits that we had. So there won't be any carryover credits going forward.

Stuart Lotz -- KBW -- Analyst

Okay. So putting that all together, I'm at like a $12.9 million run rate, does that seem pretty accurate?

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

We're hoping to have that come in a little less, but with what we know right now, $12.7 million to $12.9 million.

Stuart Lotz -- KBW -- Analyst

Got it. Thanks for the color there. And turning to the buyback, obviously activity has picked up so far this year. What is your outlook for the buyback the rest of this quarter and how much of that is price sensitivity given your stock has seen a nice sort of run this week. Just curious if there is -- how you guys look at it from a price standpoint.

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

Well, I can tell you, I mean I think in the deck Mary Ann mentioned that through the end of the year, we only bought back just under 15 million, but we bought 50 million so far through the first 17 days of January. So that obviously the activity, the repurchase activity has increased pretty dramatically. There is a limit on how much we can buy back every day. And for the last or at least for most of the trading days in 2020, we've been buying back at that maximum amount. And it changes every week, but it's roughly about a $5,000 a day cap is what we're up against today, but we've been, like I said, buying back pretty much at that cap for the rest of the days. So assuming that continues, that acceleration of repurchase activities will keep going. We don't see any reason why that would change.

Stuart Lotz -- KBW -- Analyst

Okay. So you think that 50,000 so far this month is good run rate for the rest of this quarter and then kind of what's your target for the full year?

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

Well, if you take the total $7 million, we've spent about $1.3 million of that so far. Quite honestly, I haven't done the math, but I think that the total would be about 400,000 shares that we would be able to repurchase. If that 50,000 through half of January kept moving, we would be able to have a large portion of the total bought back by the end of the first quarter and then hopefully by the end of the second quarter have hit the max.

Stuart Lotz -- KBW -- Analyst

Okay. Got it. And then last one from me. Obviously a lot of disruption in your markets with the two pending deals. So, curious as to what you expect from a loan growth standpoint this year, it sounds like Mary Ann, you're pretty optimistic that you'll be able to capitalize on that disruption and post [Phonetic] some relationships. So just curious what your kind of a core growth rate from loans you expect this year. I think you've been in that 6% to 8% range, is that -- you feel pretty comfortable with that?

Mary Ann Scully -- Chairman and Chief Executive Officer

Yes, we're still saying that mid-to-high single digit range and that presumes working with the existing complement of staff that we have. We've talked in the past about discussions that we're having on small team lift-outs, both on the Baltimore middle-market side as well as the DC side. So clearly, anything like that would at least by the third or fourth quarter accelerate, but we're not trying to bake that into any of the expectations that we're setting. So absent those, we're still looking at something in that 6% to 8% range.

Stuart Lotz -- KBW -- Analyst

Awesome. Well, thanks for taking my questions guys and congrats on the quarter.

Operator

Thank you. Our next question comes from Joe Gladue with Alden Securities. Please proceed with your question.

Joe Gladue -- Alden Securities -- Analyst

Hey, good morning.

Mary Ann Scully -- Chairman and Chief Executive Officer

Good morning, Joe.

Joe Gladue -- Alden Securities -- Analyst

Let me just, I guess ask on the loan growth side a little -- one other question. Can you give us the amount of the large payoffs that occurred during the quarter?

Mary Ann Scully -- Chairman and Chief Executive Officer

There was a $25 million payoff one customer. The customer had a need for a higher lending limit than we were able to provide, a long time customer and was just taken by a much larger bank in the market.

Joe Gladue -- Alden Securities -- Analyst

Okay. And on the mortgage portfolio, you said you're going to keep mortgages in the portfolio for diversification. Is there a sort of a target percentage you'd like to keep that as part of the portfolio?

Mary Ann Scully -- Chairman and Chief Executive Officer

We'd like to see residential mortgages decrease as a percentage of the portfolio. So while the rest of the portfolio is increasing at a 6% to 8%, we're trying to keep residential mortgages essentially flat. So that's a pretty good metric I think if those are going to be flat and everything else is growing at 6% to 8% then you will see a modestly declining percentage.

Joe Gladue -- Alden Securities -- Analyst

Okay. And just on the deposit side, nice to see that you've added some deposit generators and deposit growth was good during the fourth quarter. But over the course of the year, deposit growth wasn't -- didn't quite match loan growth. Just wondering if you think that with the new additions that you'll be able to fund ongoing loan growth with deposit generation?

Mary Ann Scully -- Chairman and Chief Executive Officer

I think our expectation Joe is that if you look at DDA and the interest-bearing checking and money market that it's probably going to cover about two-thirds of the expected loan growth. So it won't always be a quarter like the last quarter when we were fully funded the loan growth. But as we noted the fourth quarter loan growth in some categories wasn't as high as we would have liked because of those pay downs. So we think it will cover a significant percentage of it, but not all of it.

Joe Gladue -- Alden Securities -- Analyst

All right. That's all I had. Thank you.

Operator

Thank you. Our next question comes from Brody Preston with Stephens. Please proceed with your question.

Brody Preston -- Stephens Inc. -- Analyst

Good morning, everyone. How are you?

Mary Ann Scully -- Chairman and Chief Executive Officer

Hey Brody, how are you?

Brody Preston -- Stephens Inc. -- Analyst

Doing well, thank you. Most of my questions have been answered at this point. So I guess I'll focus may be a little bit on some bigger picture items. First on the balance sheet, Mary Ann, you guys have done a pretty good job levering the capital base over the last couple of years, but we're sort of reaching a point here and maybe this is part of why increasing the buyback along with the valuation, where capital at least on a TCE basis is starting to inflect flat as we get into the 2020 and grow from here, absent further buybacks beyond 2Q of this year. And so, just thinking about how you think about target levels for TCE and broader uses of capital beyond loan growth?

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

Obviously the loan growth is the focus, it's a minor use of capital. But looking at that increasing our securities portfolio. You're asking about anything external other than going out -- mentioned trying to bring in pools of talent on the business development side, there is nothing planned to utilize some of that TCE externally.

Mary Ann Scully -- Chairman and Chief Executive Officer

Yes, I mean our TCE, Brody, is certainly higher than we think it needs to be and we've signaled that with the buyback. We've always historically tried to make sure that organic loan growth allows us to bring that more into line with where we'd like it to be, whether that's the 9% range or the low end of the 10% range. There aren't any present plans today to do anything like an acquisition given where the currency is. That doesn't mean that we don't continuously talk to people in the market, entertain discussions and that's obviously historically another way that this bank has used any excess TCE that we have. So that's still part of the medium-term strategy, but it's not something that we have any immediate plans for until the currency improves unless there is some sort of an opportunity with an organization that sees either a longer term view or has some distress in their own portfolio.

Brody Preston -- Stephens Inc. -- Analyst

Okay. And I guess on the flip side of that equation, Mary Ann, when we're talking about M&A, just given where the stock is trading where it is, what are your thoughts around in terms of shareholder -- maximizing value for shareholders and if there is a potential partner there? Any thoughts around that?

Mary Ann Scully -- Chairman and Chief Executive Officer

Yes, the same thoughts that we've always had which is that our job is to maximize shareholder value in the long term. And so we look at both upstream and downstream partnerships, but the upstream has the same criteria that the downstream would be, and that that's -- the price reflects the long-term value of the Company as well as good multiples given the progress that we've made over the last two years in integrating a success -- a significant acquisition. I think we thought somebody moving above current multiples is probably not going to derive any sort of a long-term shareholder value maximization. But long-term shareholder value maximization has been, is and will remain the goal of the Company, the emphasis being on long-term shareholder value maximization.

Brody Preston -- Stephens Inc. -- Analyst

Okay, great. And then last one from me. You've spoken in the past about the credit environment and sort of some of the concerns you have around maybe pricing and structure of loans in the market. And so I wanted to get your updated thoughts, just given -- with the rates rates moving lower and the curve being flat to inverted in portions of last year and still very flat today, just wanted to get your thoughts around credit risk that people are taking on and if you still sort of have some of the same concerns or you will sort of step back and maybe have tightened underwriting a little bit?

Mary Ann Scully -- Chairman and Chief Executive Officer

Yeah, I'm going to let Rob Kunisch, our President, who manages all of our line areas answer that question. I mean we're clearly in an environment where we think there is a huge opportunity to take market share by the same token we think most of our opportunities are related to taking market share, it's not a rising tide kind of economy, but he can give you a good feel for how that impacts the pricing and structure and our ability to get these loans.

Robert D. Kunisch, Jr. -- President

Yes Brody, Rob Kunisch here. So as you mentioned, it is a highly competitive environment and it has competed in this market for close to 30 years and I'm seeing spreads, a lot of pressure on the spreads, as well as some deterioration in underwriting in my opinion. So it's a highly competitive market. We have to adjust accordingly. But at this time, we're not really willing to go out on the risk curve like we're seeing some of our competition do.

Brody Preston -- Stephens Inc. -- Analyst

All right, great. Thank you very much everyone.

Operator

Thank you.

[Operator Instructions]

Our next question is a follow-up from William Wallace with Raymond James. Please proceed with your question.

William Wallace -- Raymond James -- Analyst

Yes, thanks. Just briefly, in early December you guys announced that you had hired a commercial real estate team lead. Was that a new newly created position or were you replacing something? And are you anticipating building out the commercial real estate group specifically?

Robert D. Kunisch, Jr. -- President

Yes, we had an opportunity to hire a very seasoned, well known individual in our market and our goals here are always we will add to our lending team to the extent we can find proven producers. So it was a tremendous opportunity. He came out of another organization where he had been for most of his career. So very excited to get him. So it was an addition to our real estate team.

William Wallace -- Raymond James -- Analyst

Thanks, Rob. That's all I have.

Operator

Thank you. It appears we have no additional questions at this time. So I'd like to pass the floor back over to Mary Ann Scully for any additional concluding comments.

Mary Ann Scully -- Chairman and Chief Executive Officer

We'd like to just thank everybody again. We always appreciate the questions, we always hold ourselves available if you've got more detailed questions or want to drill down into any of the numbers. We're always available to all of our investors and prospective investors. But we are excited about the opportunities ahead of us and appreciate all of you who have supported those efforts and who are on the line right now trying to better understand the story. So thanks very much.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

George Coffman -- Chief Financial Officer & Chief Investment Officer, Executive Vice President

Mary Ann Scully -- Chairman and Chief Executive Officer

Robert D. Kunisch, Jr. -- President

William Wallace -- Raymond James -- Analyst

Stuart Lotz -- KBW -- Analyst

Joe Gladue -- Alden Securities -- Analyst

Brody Preston -- Stephens Inc. -- Analyst

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