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First Interstate Bancsystem Inc (NASDAQ:FIBK)
Q4 2019 Earnings Call
Jan 30, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the First Interstate BancSystem Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]

At this time, I'd like to turn the conference call over to Ms. Lisa Slyter-Bray. Ma'am, please go ahead.

Lisa Slyter-Bray -- Executive Assistant

Thanks, Jamie. Good morning. Thank you for joining us for our fourth quarter earnings conference call. As we begin, please note that the information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those expressed by those statements. I'd like to direct all listeners to read the cautionary note regarding forward-looking statements in factors that could affect future results contained in our most recent annual report and on Form 10-K filed with the SEC and in our earnings release, as well as the risk factors identified in the annual report and our more recent periodic reports filed with the SEC.

Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filings. The company does not undertake to update any of the forward-looking statements made today. A copy of our earnings release, which contains non-GAAP financial measures is available on our website at fibk.com. Information regarding our use of non-GAAP financial measures may be found in the body of the earnings release and a reconciliation to their most directly comparable GAAP financial measures is included at the end of the earnings release for your reference.

Joining us from management this morning are Kevin Riley, our Chief Executive Officer; and Marcy Mutch, our Chief Financial Officer, along with other members of our management team.

At this time, I'll turn the call over to Kevin Reilly. Kevin?

Kevin P. Riley -- President and Chief Executive Officer

Thanks, Lisa. Good morning, and thanks again to all of you for joining us on our call today. I'm going to start today by providing an overview of the major highlights of the quarter, and then I'll turn the call over to Marcy to provide more details around our financials. We ended 2019 with another strong quarter. We were facing a number of significant headwinds in the quarter, most notably, challenging environment for generating quality loan growth, the seasonally low mortgage period, and the impact of recent reductions in short-term interest rates.

Despite all these challenges, we were still able to deliver sequential quarter improvement in our core earnings, as well as key performance metrics including our efficiency ratio, our return on average assets and our return on average common equity. We believe this reflects the strength of the diverse business model we've built. The effectiveness of our balance sheet, management strategies and our continued focus on enhancing efficiencies throughout the organization. On a GAAP basis, we generated $52.4 million in net income in the fourth quarter, or $0.80 per share. Merger related expenses decreased earnings per share by $0.01.

On an operating basis the merger related expenses are excluded in all the periods. Our fourth quarter earnings per share was up $0.01 from the prior quarter and up $0.05 or 6.6% from the fourth quarter of 2018. For full-year, we believe we delivered a strong year of value creation. Despite the impact of two acquisitions, we increased our tangible book value per share approximately 14%, while returning $79.2 million in capital to our shareholders through our normal quarterly dividend.

Looking at our key trends in the fourth quarter. We are particularly pleased with the success in protecting our net interest margin against the impact of 50 basis point reduction in the Fed funds rate that occurred in September and October. Excluding the impact of interest recovery in loan accretion income on our operating net interest margin, we saw a decrease of about 3 basis points this quarter. A relative stability was attributed to the discipline we have maintained in new loan pricing, as well as our ability to offset pressures on earning asset yields by continuing to pass-through reductions on our deposit rates. During the fourth quarter, we reduce our overall cost of funds by 14 basis points.

As we've indicated a number of times, while interest rates were rising, we passed along rate increases to our depositors, even though we were not under any competitive pressure to do so. We felt it was the right thing to do for our customers. Even though our deposit base is not particularly price sensitive. As a result of this approach, we were in a good position to pass-through rate cuts to our deposit when rates declined, which has helped defend our net interest margin. We've actually seen a higher beta are passing through the rate cuts that we saw when rates were rising. On a cumulative basis our deposit beta over the last three rate cuts, has been about 47%, compared to the beta about 19% during the period of rising rates.

Looking at the particular deposit categories, our average rate on savings deposits declined 31 basis points for the fourth quarter, while average rate on demand deposits declined 12 basis points. And in other -- in both categories, were able to lower rates, while seeing increases in average balances, which speaks to the quality of our client service and the stickiness of our deposit base. We were able to keep our margin relatively stable despite continuing to hold excess liquidity as we saw lower levels of loan production during the fourth quarter. We continue to believe that we are best served by maintaining our credited disciplines and not chasing loans that don't meet the requirements for risk adjusted returns.

As a result, we saw a slight decline in loan balances during the quarter, most notably in our commercial portfolio, which in large part was due to pay offs and pay downs of criticized assets. We also saw seasonal declines in indirect, ag and held for sell portfolios. While we did have growth in commercial real estate and our construction portfolios, our organic loan growth wasn't enough to offset the seasonal declines in our other portfolios. We saw $45 million increase in commercial construction portfolio during the quarter. Some of our clients have become more confident in the economic outlook and have started moving forward with their projects. We're optimistic that the increase confidence will lead to increase in line utilization, and stronger loan production.

Another key to our strong results this quarter was our success in controlling our expenses. Excluding merger-related expenses our total non-interest expense declined by $3 million from the prior quarter. Entering the year, we put greater emphasis on maintaining expense discipline across the company. As we have added scale and controlled expenses, we've been very pleased with the improved operating leverage, we have been able to realize in the business. As a result, our efficiency ratio improved to 54.3% in the fourth quarter, down from 57.9% in the prior quarter. And if you take out the gains recorded under disposition of other real estate, our quarterly efficiency ratio would have been 55.32%. For 2020, we believe we can bring our annual efficiency ratio in and around 57%.

So with those comments, I'd like to turn the call over to Marcy for a little more detail behind the numbers. Go ahead, Marcy.

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

Thanks, Kevin and good morning, everyone. As I walk through our financial results unless otherwise noted, all of the prior period comparisons will be with the third quarter of 2019 and I'll begin with our income statement. Our net interest income increased $2.7 million from the prior quarter, partially due to a $1.2 million increase in accretion income. On a reported basis, our net interest margin increased 1 basis point to 3.94% in the fourth quarter, excluding the impact of interest recoveries and loan accretion, our operating net interest margin decreased 3 basis points this quarter to 3.77%.

The decline in operating net interest margin was primarily due to a reduction in operating loan yields, which exclude the impact of interest recoveries and accretion of 9 basis points. This negatively impacted our margin by 2 basis points. The remaining 1 basis point margin decline was due to continued high levels of excess liquidity, which we held in overnight funding, and was a lingering result of our strong deposit growth late in the third quarter. These factors were partially offset by a 14 basis point reduction in our cost of funds to 37 basis points.

As we pass-through the Fed rate cuts to our depositors, we saw steady decline in our cost of interest bearing liabilities throughout the fourth quarter. At this point, we do not plan to make any meaningful additional changes to our deposit rates. With a lower starting point for our cost of deposits as we enter the year, we're focused on the opportunities we have to reinvest our excess liquidity in higher yielding assets. We believe we can offset the continued pressure on our earning asset yields and keep our net interest margin relatively stable for the foreseeable future.

Moving to non-interest income, we saw a decrease at $3.1 million quarter-over-quarter to $37.2 million, the decrease was almost entirely due to lower mortgage banking revenue, reflecting the seasonal decline we see in the fourth quarter. All of our other major fee generating areas were relatively consistent with the prior quarter. Mortgage banking revenues decreased $1.9 million from the prior quarter, but was up 45% from the fourth quarter of last year. This reflects the increased production we're getting from our newer markets in the West, as well as increased refinance activity as a result of lower interest rates. In the fourth quarter of 2019, loans originated for home purchases accounted for 55% of total production, or refinancing activity accounted for 45%. Our new digital mortgage application portal continues to gain traction, and we closed $16 million of loans originating to this channel in 2019.

Moving to total non-interest expense, we incurred approximately $700,000 in acquisition related expenses this quarter. Excluding acquisition related expense, our non-interest expense came in at $92 million, or with $3 million lower than the prior quarter. The primary driver of the decline was lower professional fees as we completed a number of the technology initiatives we executed on earlier in 2019. We also recognizes a $1.3 million credit from the FDIC that reduced our assessment expenses once again this quarter, and that wraps up the benefit we expect to see there. We were able to keep our other major expense areas relatively consistent with the prior quarter as we continue to focus on closely monitoring our expense levels.

In total, looking at our Q4 operating expenses of $92.7 million, if you back out the acquisition expenses and adjust for the OREO gains, the FDIC credit and a little noise we had related to deferred costs on mortgages, our normalized run rate would have been about $95.7 million achieving the guidance we previously provided of $96 million post integration of our recent acquisitions. Going forward, we expect our run rate for operating expenses in 2020, to be in the range of $97 million to $98 million on average. This is about a 1.6% increase and as we've guided you in the past, we're able to keep our total operating expense growth in 2020, between 1.5% to 2% level.

At this point, I'd like to get my annual reminder of the seasonal impact we expect to see on various income statement items. In the fourth quarter our non-interesting -- in the first quarter our non-interest come typically trends lower due to lower transaction volumes, which impacts our payment services and mortgage revenues. And at the same time our non-interest expense trend higher due to the restart of payroll taxes. Okay, I'll move on to the balance sheet. Our total loans decreased $70 million from the end of the prior quarter. This was driven by payoffs and pay downs in the commercial and consumer portfolios, along with seasonal declines in the indirect and ag portfolios.

Within the commercial portfolio $6.8 million of shared national credits also paid off in the quarter. The SNC portfolio is now down to less than $15 million. The declines in these portfolios were partially offset by a $45 million increase in commercial construction loans. Our total deposits decreased to $136 million from the end of the prior quarter. Most of the decline came in our non-interest bearing deposits, which was largely due to seasonal outflow from commercial depositors for year-end items like bonuses and tax payments. Overall, we are pleased with our organic growth for the year of 2.6%.

Looking at asset quality, we saw positive trends in most of our key metrics. We had an $18 million decline in non-performing assets. This was due to the disposition of four other real estate properties, which represented about half of our OREO. For the quarter, we recognized $1.7 million in OREO related income resulting from the sale of these four properties. The other contributor to the decrease in non-performing assets was a decline in non-accrual loans of $7.2 million.

As a percentage of total assets our non-performing assets declined to 39 basis points from 51 basis points at the end of the prior quarter. Outside of the non-performing asset category, we saw a nice improvement in the rest of the portfolio. Our criticized loans decrease $29 million as we had higher levels of pay down to pay off this quarter. As we worked hard to resolve a number of issues before year ends. We had $5.8 million in net charge-offs during the quarter or 25 basis points of average loans on an annualized basis.

Our net charge-off this quarter were impacted by a $2.3 million charge-off related to commercial loans, which had a specific reserve of $1.4 million established against it. We also saw higher levels of consumer loan charge-offs, which is typical in the fourth quarter. Consumer loan charge-off this quarter were 12 basis points, which is in line with our historical fourth quarter trends. We recorded $3.8 million in provision expense. A portion of our provision expense continues to be related to the acquired portfolios that refinance and migrate over to our originated portfolio. These reserves required against these loans accounted for approximately $1.5 million of the provision expense this quarter.

Our allowance for loan losses declined by 1 basis point from the end of the prior quarter to 81 basis points of total loans, while our coverage of non-performing loans increased to 150%. As you know, the allowance does not take acquired loans into consideration, but the combination of the allowance with remaining loan discount on the acquired portfolios represents 1.2% of total loans. That said, the new accounting standard related to current expected credit losses or CECL was effective January 1. We expect the implementation of CECL to result in a 35% to 45% increase to our allowance for loan losses.

In terms of the impact to our quarterly provision expense, there are obviously many variables that will ultimately determine our 2020 provision requirement. At this point for 2020, we believe that the implementation of CECL along with lower levels of expected recoveries will likely result in an increase to our normalized provision of approximately $4.25 million per quarter.

And with that, I'll turn it back over to Kevin. Kevin?

Kevin P. Riley -- President and Chief Executive Officer

Thanks, Marcy. I'm going to wrap up with a few comments about our outlook. During 2018, we executed well on our strategy for strengthening our franchise. We completed two acquisitions that increased our presence in faster-growing markets. And in 2019, we had muted organic loan growth of approximately 1.3% for the year with the faster growing West Division market comprising a larger percentage of overall footprint and higher levels of business and consumer confidence, we believe we can generate quality loan growth in the low to mid-single digits this year, as well as continue to generate increases in our fee revenue.

We also completed major technology initiatives that expanded our products and services, improved our digital banking capabilities and streamlined our work process flows. As a result of these investments, we entered 2020 with improved digital mortgage application portal, a new digital consumer and business credit card application portal, all of which should enhance our business development capabilities this year. One of our key initiatives this year was to focus on -- is to focus on training of our employees on these new products so that we can effectively leverage the investment we have made to improve our client engagement.

In 2020, we're also investing in a new teller system that will enhance efficiency in our branch network and improve experience for our customers. Over the past few years, we have talked a lot about First Interstate, how First Interstate's evolved from a community bank to a regional bank capable of serving a broader array of clients with a diverse range of products and services. We continue to evolve and we have made adjustments to our executive ranks to strengthen our commitment to remaining at the forefront of innovation in the banking industry. We recently created a new position called Chief Strategy Officer and appointed Renee Newman, our former Chief Banking Officer, to the position. As Chief Strategy Officer, Renee is focused on ensuring that we're well-positioned to meet the rapidly changing needs of our clients and deliver a satisfying experience across the growing number of banking channels that we offer.

Russ Lee, who was the President and CEO of Inland North Bank -- Northwest Bank, which we acquired back in 2018, is now our Chief Banking Officer with the responsibility for overseeing our retail, commercial and wealth management teams. While Renee focuses on the future of banking, Russ ensures that we maintain the rigor across our traditional branch network that led to our decades of success. By separating these two functions we believe we will be better positioned to continue innovating without losing focus on the basic blocking and tackling needed to maintain our strong and consistent performance.

As we grow the First Interstate franchise, we will continue to be a leader in our communities and fulfill our mission to be a responsible corporate citizen. With this in mind, we are raising our minimum wage for employees to $15 an hour. This will impact us an after-tax basis of about $250,000 per quarter and is included in a run rate of the expenses that Marcy has already articulated. We believe this move will well position us -- will positively impact us -- sorry positively impact our employee engagement and retention, leading to higher client satisfaction, which ultimately results in higher returns for our shareholders.

As we have a philosophy on raising deposit rates when we didn't have to, we believe this is the right thing to do for our employees, our clients and our shareholders. To wrap up, we feel good about how we're positioned to start 2020. We believe we have good opportunities to generate revenue growth and we'll continue to focus on expense management. We should realize more operating leverage and deliver a solid year of earnings growth for our shareholders. And from a long-term perspective, we will continue to leverage the foundation we have built to add scale, enhance efficiency, capitalize on our growing footprint in faster-growing markets and to continue increase the value of our franchise in the coming years.

So with that, I'd like to open the call up for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question today comes from Jared Shaw from Wells Fargo. Please go ahead with your question.

Jared Shaw -- Wells Fargo -- Analyst

Hi, thanks. Good morning, everybody.

Kevin P. Riley -- President and Chief Executive Officer

Good morning, Jared.

Jared Shaw -- Wells Fargo -- Analyst

Kevin, maybe just starting with your comment at the beginning of the call, just talking about the challenging environment for loan growth and the net loan growth you saw for the whole year, and then tying that to your expectation for low to mid-single-digit loan growth in 2020. I guess what was most challenging as you look at 2019? And then how do you see that changing? Was it more pressure on pay downs or was it more self-imposed as you were trying to change the credit dynamics and move some of those weaker loans out? I guess, what's sort of the dynamic there and what's changed?

Kevin P. Riley -- President and Chief Executive Officer

And we kind of hit a lot of the points, Jared. Nice job. The thing is that, you know, as -- this year was a strange year. I think that with interest rate cuts, inverted yield curves, the whole trade war, I think, confidence in the -- with the business community is all kind of weighed on the actual growth in our markets. Also in Wyoming coal has not -- that continues to fall out of favor so that puts some pressure on Wyoming. So I think the thing is that that's kind of behind us. The trade war is kind of behind us. The inverted yield curve is behind us.

Our asset quality we have -- I think we've cleaned up effectively and that's kind of behind us. Our stick portfolio runoff, that's behind us. We're down under $50 million, so that won't have any more headwinds with us. So I think that a lot of the headwinds that we had back in 2019 have gone away. I think that we're seeing a little bit more confidence with our business partners out there, because some of these things are behind them and they're starting to move forward on project. If you go back to our earnings call; last quarter, I talked about how some of that -- we had funded a lot of projects, but the people weren't moving forward, because they lack confidence in where the economy is going. I think some of that has improved. And I think we're moving forward nicely.

So I just feel that the environment is better. If we can continue to move forward and we don't have any kind of -- this pandemic virus doesn't continue to explode, I think, 2020 will be a good year for our market. So I think all the headwinds are kind of behind us and the future looks a lot brighter.

Jared Shaw -- Wells Fargo -- Analyst

Yes. Thanks for that color. And I guess on the expense side, Marcy, here your guidance for sure the efficiency ratio is most of that's going to -- when you talked about the professional fees down this quarter, should we expect to see that go back up as some of those tech initiatives that you mentioned on the teller system and some of the others roll in or where will that growth, sort of, come from or beyond just the raising of the minimum wage?

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

You know, I think -- we have increases in technology costs just kind of general contractual increases, which are driving some of the increase, but we've really managed our salary expenses to bring that over -- that increases their back down. We expect professional fees to stay kind of flat for this year. So again, I don't think we're going to see any real increases there. So just kind of normal salary increases. But managing the FTEs and then a little bit of increase on the technology costs.

Kevin P. Riley -- President and Chief Executive Officer

The thing is that overall technology costs come up a little bit like they normally do, but not -- but I -- on dealing with professional fees, we spent a lot in 2019. So we believe the spend in 2020 will be less than the 2019. You're about flat. It's not going to -- we don't see it increasing over the 2019 levels since we did invest a lot this year.

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

So again, I think, overall being able to hold our total expenses to 1.6% increase in light of having to give your employees raises and just normal merit raises is pretty good.

Jared Shaw -- Wells Fargo -- Analyst

Okay. Thanks. And then just finally for me, I guess, looking at mortgage banking and what's the seasonality going into the holidays and everything at the end of the year how's the pipeline looking going into first quarter?

Kevin P. Riley -- President and Chief Executive Officer

It's a little slow. First quarter is always will little slow. It's there. I would say that it's not going to be as robust that we see in the summer time, but it's -- with the rates the way they are, we're still seeing some activity with refinancing and some people move forward. But it's not going to be above the fourth quarter, so production in the first quarter.

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

And we are seeing some nice weather. If this keeps up, it could help a little bit. So again, we think overall, the mortgage banking revenue should be fairly flat next year compared to where it is this year.

Kevin P. Riley -- President and Chief Executive Officer

Yeah. 60 degrees in Montana in January is pretty nice.

Jared Shaw -- Wells Fargo -- Analyst

All right. Great. Thanks a lot for the color.

Operator

Our next question comes from Jeff Rulis from D.A. Davidson. Please go ahead with your question.

Jeff Rulis -- D.A. Davidson -- Analyst

Good morning.

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

Good morning, Jeff.

Kevin P. Riley -- President and Chief Executive Officer

Good morning, Jeff.

Jeff Rulis -- D.A. Davidson -- Analyst

Kevin, you mentioned -- appreciate the color on kind of the dynamics with loan growth challenges, but digging in a little deeper, if you could kind of characterize the demand and pricing dynamics given your large footprint kind of the Western versus the Montana markets. Just interested in, I'm assuming you're seeing more growth out west, but in terms of demand competition pricing, if you could just sort of touch on what you're seeing in that footprint, that'd be helpful.

Kevin P. Riley -- President and Chief Executive Officer

Loan pricing is kind of interesting. As you go to larger credits and better credits the pricing gets extremely tight. I think people are looking for big hits with nice credits and they're willing to take lower pricing. We will find where we get the best spread is when we keep on doing what we normally do. Is that small business, the small middle market and stay against that, but I would say the west on bigger deals, it's really tight.

But if we continue to look at just our core business, which is more or less businesses small-middle market, we can maintain those spreads. But we're looking at larger deals, but we just don't want to go in and do deals with spreads that just don't make any sense. But people are trying to put on loan volume. I think so many people wonder why their margins are eroding. When you're putting out spreads at 130 the cost of funds, there's no -- you don't need to use a lot of brainpower to figure out why your margin is eroding.

Jeff Rulis -- D.A. Davidson -- Analyst

Thanks. Marcy, on the -- I can't remember, maybe I missed it, the dynamic on the margin. If you look at kind of the 3.94% reported and 3.77% core, I guess that's 17 basis point number. If possible, could you break out the makeup of that 17 basis points and what was accretion and what was the interest recovery?

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

You bet. So we had 1 basis point charged up interest. We had 8 basis points related to early payoff and 8 basis points due to regular accretion.

Jeff Rulis -- D.A. Davidson -- Analyst

Got it. And then any, I guess, commentary on that 3.77% core as we get into 2020? Is it more of a, let's try to maintain kind of the outlook on margin from your perspective?

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

That's what we're working hard to maintain. We believe that, that core margin should be stable. It might bounce down 1 basis point or 2 basis point, but yeah, we think it's going to be relatively stable going into 2020.

Kevin P. Riley -- President and Chief Executive Officer

We have some pressures on the asset side a little bit maybe, but we also have some relief on our CD book, which is repricing at a great pace in the first quarter. So we believe that the margin might be impacted by 1 basis point maybe, but it should be pretty stable.

Jeff Rulis -- D.A. Davidson -- Analyst

Thank you.

Operator

Our next question comes from Matthew Clark from Piper Sandler. Please go ahead with your question.

Matthew Clark -- Piper Sandler -- Analyst

Hey. Good morning.

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

Good morning, Matt.

Kevin P. Riley -- President and Chief Executive Officer

Good morning, Matt.

Matthew Clark -- Piper Sandler -- Analyst

You mentioned deposit costs, the decline may start to slow here. Can you just give us the spot rate at the end of the year on interest-bearing deposit?

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

Yeah. On interest-bearing rate deposit is 48 basis points.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And then excess liquidity has continued to be more of a drag and I haven't run the math yet. I think it cost you 3 basis points last quarter. I assume it was a little more here this quarter.

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

So we're closing that on pushing that number down, lower because we're not seeing the loan growth and so we are very focused on pushing that down. The hard part is going to be -- today, we're adding securities on it 2%; 30 days ago, it was 2.30%. So we'll see what hiccup we can get there, but we will get some lift there. As Kevin just talked about with the CDs, about 31% of our time deposits are running off in the first quarter. So the average rate on those is 1.37%, if we maintain those deposits. Our current offering rate is 55 basis points. So again, we should be able to see some pick up there as well.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And then, I guess, what's your estimate for accretion this year?

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

So accretion should be about $2.4 million per quarter.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And then the efficiency guide of 57%, that's all in, that's not excluding CDI amortization?

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

It is excluding CDI amortization.

Matthew Clark -- Piper Sandler -- Analyst

It is, OK. That helps. Okay. Thank you.

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

You bet.

Operator

Our next question comes from Gordon McGuire from Stephens. Please go ahead with your question.

Gordon McGuire -- Stephens -- Analyst

Good morning.

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

Good morning, Gordon.

Kevin P. Riley -- President and Chief Executive Officer

Good morning, Gordon.

Gordon McGuire -- Stephens -- Analyst

So just following up a little bit on the efficiency. Marcy, last quarter you talked about the issues of efficiency maybe being on the lower end of 56% to 57%. But after Kevin's prepared remarks it sounds like it's closer to 57% this year. I'm just wondering, given a pretty similar expense guidance to what you've been talking about what's changed in the revenue side? And I know it's a small change, but any color you can give there?

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

Yeah. I think we're going to have another quarter of revenues from our two acquisitions. We are expecting some loan growth this year. We're expecting to do around mid-single digit growth in our non-interest income. So I think, we just get that operating leverage and that should help us on the efficiency ratio side.

Kevin P. Riley -- President and Chief Executive Officer

Just a little higher from that. At the point, we gave guidance of 56%, 57%, we hadn't completed kind of our budgeting work. We have now dug in deeply and everything and we feel like we have better. I guess, it's mine decide exactly what that number is going to be. So it's going to be right around there. I think the thing is that we continue to try and reduce our expense to asset ratio and we're looking to bring that down closer to our goal of 2.65%. We're starting to head toward that goal. So we're feeling good about our expense levels. Revenue headwinds are going to be there. We're going to do everything we possibly can to get the revenues but introduce operating leverage. But it's not really the expenses are increasing higher. Just really the headwinds might be ahead of us.

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

If you look at just the fourth quarter and back out the acquisition expenses, we got to our 57% efficiency ratio.

Gordon McGuire -- Stephens -- Analyst

Okay. Great. Marcy, the CECL discussion and the provisioning. Could you go back over that a little bit again? I think I may have misheard.

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

So we expect the increase in our allowance to be someplace between 35% and 45%, land in there. And then, in terms of our provision expense for this year, we expect lower levels of recoveries -- credit recoveries, and so we expect it to come in around $4.25 million each quarter.

Gordon McGuire -- Stephens -- Analyst

Okay. Sorry, I thought you had said an increase of $4.25 million. So it's absolute.

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

No, in total $4.25 million per quarter.

Gordon McGuire -- Stephens -- Analyst

Okay. Thank you. And then Kevin, just lastly, given the stock performance in the last couple months or so any thoughts on how the current valuation impacts your prospects for M&A this year, and whether it changes your thinking around repurchases since last quarter?

Kevin P. Riley -- President and Chief Executive Officer

Well, as you know, we have all the levels of -- leverage to pull regards to capital utilization. There's a lot of talk going on with regards to regards to virgin acquisitions and stuff. And I think the interesting thing is that, first of all, we're turning down a lot of them because it just don't fit what we want to be as we grow up, but there's a lot of conversations going on. And I think the conversations are actually, I think healthy, the conversations are less about premiums, and the more about, let's announce a deal that makes sense for both shareholders group going forward with a combine institutions. So, it's -- I think they're healthy discussions that are have being made and they're not focused about trying to have a big premium and along tangible book value to payback. So I think they are very productive and we'll see what happens. It's an interesting world but I would tell you that there's a lot more conversations happening then, was happening four months ago.

Gordon McGuire -- Stephens -- Analyst

All right. And then updated thoughts on repurchases?

Kevin P. Riley -- President and Chief Executive Officer

Repurchases, I don't -- the price of our stock right now is, it gives us what we see is more than a five year tangible book value return, so repurchases, we don't believe is the most effective use of our capital at this points for our shareholders. We try to limit repurchases until we have a payback less than five year at TAM book value dilution. So we at this juncture and we really hope our stock doesn't drop down to the levels that we need to buy it back. But there are other alternatives that we can use to return capitals to our shareholders and we're looking at all of our options.

Gordon McGuire -- Stephens -- Analyst

Okay. Great. Thank you.

Operator

Our next question comes from Jackie Bohlen from KBW. Please go ahead with your question.

Jackie Bohlen -- KBW -- Analyst

Hi. Good morning.

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

Good morning, Jack.

Jackie Bohlen -- KBW -- Analyst

I wanted to drill down into an non-interest income just a little bit. I know we talked about mortgage banking and that, we're going to see the expected seasonal slowdown just from volume in 1Q, but just looking at some of those other line items. I wondered, if you could go into your expectations from the -- for the year? And then also that other income line item was just a little bit on the lower side. I know that can be bumpy, but just what the impact was there in the quarter?

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

You bet. So, let's start with other income line. So that other income line does feel a little bit bumpy because it includes, if we have gains on a sale of a building or swap fee income varies from quarter-to-quarter, fully life insurance benefits, things like that, that's all kind of embedded in that line and it can be a little bit bumpy quarter-to-quarter. So that's what kind of drives that going up and down. In terms of the rest of our fee-based revenues, we really do believe that overall next year they'll be up about 5%.

Jackie Bohlen -- KBW -- Analyst

Okay. And that's inclusive of the roughly flat mortgage banking that you expect?

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

Yes.

Jackie Bohlen -- KBW -- Analyst

Okay. Thank you. And everything else I had is already been discussed. Thank you.

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

Thank you, Jack.

Kevin P. Riley -- President and Chief Executive Officer

Thanks, Jackie.

Operator

And our next question comes from Garrett Holland from Baird. Please go ahead with your question.

Garrett Holland -- Baird -- Analyst

Thanks, and good morning.

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

Good morning, Garrett.

Kevin P. Riley -- President and Chief Executive Officer

Good morning, Garrett.

Garrett Holland -- Baird -- Analyst

Just had a follow-up on spread income, would you expect earnings asset growth to trend in line with loan growth, or do you think the securities portfolio stabilizes here just trying to gauge your appetite for deploying liquidity and securities at these current rates?

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

It will all depend on loan growth.

Kevin P. Riley -- President and Chief Executive Officer

It will all depend on loan growth. We're hoping that we get to put lessons of securities in more loans. But we're being diligent to make sure that we're putting this excess liquidity to work. So our first order business is loan growth; second, quality loan growth; and then our second order, we put it in investment portfolio. Just hoping this virus disappears soon because they'll help us all.

Garrett Holland -- Baird -- Analyst

I was hoping you could maybe elaborate to a bit more on the growth opportunity you see in the Idaho market. It's clearly been a bright spot in the northwest and a bigger driver of your growth recently. I guess, what are your expectations for growth in that market in 2020?

Kevin P. Riley -- President and Chief Executive Officer

The growth in those markets has been very strong. They're strong in '19 and look to be strong going into 2020. I would say that, it's the high-single digits or could get to double-digit, but it's going to be the high-single digits, of course, double-digits. Idaho is doing great. Oregon's doing great, and the Washington market is doing great. And being in Spokane, which is a growth city, which Coral Lane is right on the outskirts of that. Everything, we feel really good with our west expansion. Don't forget some of our legacy portfolios too, I mean legacy markets we have Rapid City in South Dakota that continues to grow probably in mid-single digits that's a nice growth area also. Bozeman is doing well. Sioux is doing well. Billings, we're hoping is a comeback.

We have a little bit of a drag when we look at Wyoming, but Wyoming is kind of going to be flat. Montana would be probably low-single digits, Montana, I mean the South Dakota, mid. And then we're looking for higher growth in the West. So it's really we continue to really grow in the West and not have a drag with regards to Wyoming and Montana. Our growth rate should be good because the West I mean, they grew in the upper-single digits of last year, it was just had the drag of Wyoming and not the real growth in Montana that pulled that down. So we feel strongly that the West will continue to grow and we can just get our legacy footprints come up a little bit that will have good loan growth.

Garrett Holland -- Baird -- Analyst

Thanks for that detail. And then quick one on the tax rate is a bit higher than expected here in Q4, I guess, what are your expectations for 2020?

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

We think that the tax rate for 2020 will be right around that 23% level. It's always kind of a little bit lower at the beginning of the year as people exercise options, and there's some benefits from investing there, but overall for the year about 23%.

Garrett Holland -- Baird -- Analyst

That's great. Thanks for taking the question.

Operator

And our next question is a follow-up from Matthew Clark from Piper Sandler. Please go ahead with your follow-up.

Matthew Clark -- Piper Sandler -- Analyst

Hey. Just two quick ones. One, just we never trade on new business relative to what paid off this quarter?

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

4.83% was the weighted average rate on the new business.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And then, nice improvement in credit quality this quarter, I guess when you look at the decline in criticized. I guess, how much of that was driven by upgrades how much of that was just you guys working out of stuff for potentially selling or resolving situation. I'm just trying to get a sense for the rate change here, but picked up?

Kevin P. Riley -- President and Chief Executive Officer

Yeah. Most of those, they saw the door. They were worked out and they weren't upgrades, say, are no longer with us, which is the way we like it.

Matthew Clark -- Piper Sandler -- Analyst

Did you sell any non-performers this quarter?

Kevin P. Riley -- President and Chief Executive Officer

I'm looking at my Chief Risk, I don't know, did we sell any non-performers?

Philip G. Gaglia -- Executive Vice President and Chief Risk Officer

No, we did not sell any non-performers. It was all working out strategies that were successful.

Matthew Clark -- Piper Sandler -- Analyst

Is that a trend or is that kind of the pace expected to continue or is that just more kind of year end?

Kevin P. Riley -- President and Chief Executive Officer

So you get lucky and I mean that. I don't know if we continue that pace. We don't have that much left. But we're going to continue working that down. The good news is that the inflows are not there. So we'll continue to have outflows, so they should continue to be at where they're at or less because the inflows are not there.

Matthew Clark -- Piper Sandler -- Analyst

Great. Thank you.

Operator

Ladies and gentlemen, with that we'll end today's question-and-answer session. At this point, I'd like to turn the conference call back over for any closing remarks.

Kevin P. Riley -- President and Chief Executive Officer

Thank you for your questions, guys and gals. As always, we welcome calls from our investors and analysts during or between investor calls. Please reach out to us, if you have any follow-up questions, and thanks for tuning in today. Goodbye.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Lisa Slyter-Bray -- Executive Assistant

Kevin P. Riley -- President and Chief Executive Officer

Marcy D. Mutch -- Executive Vice President and Chief Financial Officer

Philip G. Gaglia -- Executive Vice President and Chief Risk Officer

Jared Shaw -- Wells Fargo -- Analyst

Jeff Rulis -- D.A. Davidson -- Analyst

Matthew Clark -- Piper Sandler -- Analyst

Gordon McGuire -- Stephens -- Analyst

Jackie Bohlen -- KBW -- Analyst

Garrett Holland -- Baird -- Analyst

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