Greetings, ladies and gentlemen. Welcome to the Home Bancshares Incorporated 4th Quarter 2019 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks then entertain questions. Regarding forward looking statements.
You'll find this note on Page 3 of the Form 10 ks filed with the SEC in February 2019. At this time, all participants are in a listen only mode and this conference is being recorded. It is now my pleasure to turn the call over to Donna Townsville, Director of Investor Relations.
Thank you, Eileen. Welcome everyone to the Home Bancshares 2019 Q4 earnings release and year end conference call. I'm Donna Townsheil, Director of Investor Relations. And on behalf of the Holmes team, I would like to thank you for your continued support and interest in our company. Today, you will hear from Brian Davis, our Chief Financial Officer Chris Fulton, President of CPFG John Marshall, President of Shore Premier Finance Tracy French, our President and CEO of Centennial Bank Stephen Simpson, our Chief Operating Officer of Centennial Bank and wrapping up the comments will be our Founder and Chairman, John Allison.
Also with us today is Kevin Hester, our Chief Lending Officer and Jennifer Floyd. Home Bancshares 4th quarter was the best of the year. It was the 4th consecutive quarter of earnings improvement for the year, a beat on both EPS and revenue. Coupled with the best in class asset quality, it resulted in $167,800,000 in revenue, a 1.94% ROA and $0.44 EPS. What a great way to end a decade.
With that opening headline, I'd now like to turn the call over to Brian Davis to share some information with you about our NIM.
Thanks, Donna. The Q4 was another solid quarter for our net interest income and net interest margin. On a tax equivalent basis, we recorded net interest income of $141,100,000 for Q4 2019 compared to $144,200,000 for Q3 2019. The 4th quarter net interest margin was 4.24% compared to 4.32% for the 3rd quarter.
Next, I want to give
you some color on the 8 basis point decline in margin. First, during 2019, the interest rate environment began to decline. This decline has increased the prepayment fees on our investment security portfolio. As a result, during the Q4, we experienced an increase in investment premium amortization of 460 $8,000 or 1.4 basis point decline in margin from Q3. 2nd, the Q3 of 2019, we had several interest income events primarily related to large payoffs.
These events totaled $2,800,000 of interest income and decreased the net interest margin by 8.4 basis points for the Q3 of 2019. During the Q4, interest interest income was $549,000 and increased NIM by 1.7 basis points. The lower event interest income from Q3 and Q4 resulted in a 6.7 basis point decline for the margin. 3rd, the accretion income for the fair value adjustments recorded in purchase accounting was $9,100,000 during Q4 compared to $8,500,000 during Q3 for an increase of $670,000 This increased our NIM by 2 basis points. To wrap it up in conclusion, the 1.4 basis point decline for increased premium amortization for investments plus the 6.7 basis point decline for lower interest events offset by the 2 basis point improvement from accretion totaled a margin decline of 6.1 basis points.
With that said, net interest margin is only down 2 basis points on an apples to apples comparison. Finally, I'd like to switch over from the quarter to the year. Our net interest margin for 2018 was 4.42 percent versus 4.29 percent for 2019 for a decline of 13 basis points. During 2019, we experienced a decline in our event income of $3,900,000 a decline in our accretion income of $5,600,000 and an increase in our investment premium amortizations of $2,000,000 The total of these three items was $11,400,000 or 9 basis points of a 13 basis point decline in net interest margin. Donna, I'm going to turn the call back over to you.
Thank you, Brian. And apples to apples comparison on the NIM is very helpful. Now we will hear from Chris Colton about our CCSG division.
Thank you, Donna, and good afternoon. During the Q4, we closed out a strong production year at CCFG. Over this past year, I highlighted our healthy pipeline, which resulted in record new loan originations of approximately $1,100,000,000 for 2019. For the Q4, we originated $384,000,000 in new loans, while payoffs in the commercial real estate book slowed a bit, resulting in overall net loan growth of about $95,000,000 Our LA production office continues to be a significant contributor, accounting for approximately 40% of production this quarter and just over 35% for the full year. Over time, we expect this region to account for approximately 35% of the overall CRE portfolio.
In addition, we saw increased draws from facilities and other prior commitments as the higher originations over the prior four quarters have started to show up in our net loan balances. We continue to see good demand in our loan pipeline. And looking ahead, net loan growth will continue to bend on these new originations, plus increased draws on existing commitments currently standing at about $1,000,000,000 of future potential fundings and a continued stabilized level of payoffs. Thank you, Donna. That concludes my remarks from CCFG.
Thank you, Chris. Now we will go from land to sea, and we will turn the call over to John Marshall to hear about Shore Premier.
Thank you, Donna, and good afternoon. I always look forward to providing a quarterly update for Shore Premier Finance. The Q4 was good for Marine and good for the bank. To place our performance in proper perspective, let's take a macro look at boat sales, which drive our business. Business Wire reports according to the National Marine Manufacturers Association, 2019 sales equaled the record results of 2018, which were the highest performance in the past 12 years.
The 2020 outlook for powerboats is sales up by 2% and regional growth, which is important to our business, is forecast to grow between 5% 8% from New York to California to Florida, probably a good time to be invested in the marine finance space. Across credit metrics, our consumer and commercial portfolios have exceeded my expectations in the Q4. Let's take a look first at asset quality and a closer look at the numbers. At year end 2019, nonperforming retail loans improved to their best position from year end 2018, dropping from a peak nonperforming assets of $4,000,000 down to $1,700,000 which equals a drop from 98 basis points to 34 basis points. 30 plus day retail delinquency improved from $6,000,000 to less than $900,000 again, equal to 148 basis points, dropping to 17 basis points from year end 2018 to year end 2019.
We had no commercial delinquencies or defaults. Both asset quality metrics were favorable to expectations at year end. And just as a harbinger of future portfolio performance, average origination FICO scores during full year 2018 were 770. That improved to 778 in full year 2019. So I'm satisfied that we're well positioned to absorb any economic pullback whenever it might strike.
In terms of profitability, short term ERC's contribution to Centennial Bank's bottom line eclipsed $1,000,000 in December for the first time, attributable to a combination of higher interest earning assets and our disciplined expense posture. Our efficiency ratio was 21% in December, 22% in the quarter and averaged 26% for the full year. We saw continued pressure on them in the quarter due to funding loans in the 3rd quarter when 5 year treasury dropped below 1.4%. Separately, we also experienced, as expected, a seasonal refresh of commercial inventories that reflect less risk, but also a lower margin spread above the LIBOR index. Near term, we expect bottom line contribution to grow and average rates to rebound.
Even with that backdrop, 4Q NIM improved 11 basis points over 3Q and 74 basis points over 4Q 2018. Our return on assets was 2.5% in the month and 1.93% for the year. Finally, retail loan originations managed to prevail over persistent prepayment rates and seasonal commercial inventory reductions, delivering $14,000,000 in net growth for the month, $40,000,000 net growth in the quarter, dollars 71,000,000 for the year and $127,000,000 in growth since acquisition by Centennial in July 2018. The introduction this month of prepayment penalties in the initial 12 months of all retail loans should favorably impact growth and profitability by extending the duration and income generating lives of these retail assets. Commercial lending commitments grew by 150% in 2019 as well.
The onboarding of several new boat builders and their attendant distribution networks in North America will also enhance loan growth and margins in 2020. And just separately, an ancillary benefit of this commercial growth is the gathering of deposits, which increased from $490,000 at the beginning of the year to nearly $5,400,000 to close out the year. So Donna, on that optimistic note, let me conclude my remarks on Romine and return the conversation back to you.
Thank you, John, and congratulations on a great quarter and a great year. Now to hear more from a Centennial Bank level is Tracy French and Stephen Tipton. Tracy?
Thank you, Donna. I'm again pleased to report consistent and strong performance for Centennial Bank in the Q4 of 2019. For the Q4, Centennial Bank had a return on assets of 2.11, an efficiency ratio of 39% and consistent revenue in excess of over $170,000,000 Our Northwest Arkansas, Conway, Alabama had strong results where our North Florida region ran the best results. These numbers along with our best yet non performing ones made the 4th quarter an outstanding one. You have heard from Chris and John on their strong performance for the quarter and this year.
Our community bank footprint, I'm proud to report that the full year, our Alabama region and 4 of our 5 Arkansas regions produced over a 2% return on assets, with 2 of our regions in Arkansas, our Cabot region and Northwest Arkansas producing more income than their share of assets. The Florida regions provided solid return bolstered by our North Florida region with nearly a 2.5% return on assets, while all others were all around the 2% mark. 2019 certainly was a unique year for all of us in the banking industry. No one knew where interest rates were going. Competition died into sub-four interest rates on loans, while continuing to pay 2% on accounts.
We are optimistic these institutions will return more rational ways of thinking and operating their banks. Johnny and I, along with others from the bank, made several on-site calls with customers over the past quarter. The consensus of all the businesses, they all had a good year and agreed that 2020 looked to be a healthy for a healthy one. We like the way our customers run their operations, and we financial companies must hold to sound underwriting and monitoring. With that said, I'll now turn it over to Stephen Tipton to give more detail on the loans and deposits for Centennial Bank.
Thank you, Tracy. I'll give some color on production, payoffs and balance sheet changes for the quarter. Community Bank loan production in the Q4 of 2019 was strong at $735,000,000 highlighted by nearly $400,000,000 from our Arkansas region and $64,000,000 in production from short and rare finance. While the yields were off slightly in October, our regions closed up the year strong and again have the message to hold their discipline on pricing. As Chris and John have mentioned, CTFG Insure saw solid growth over the course of the year and in the Q4, and we're excited about the opportunities in 2020 for everyone.
Payoffs remained elevated in Q4 at $708,000,000 but as Brian mentioned, provided income to the bottom line due to proper structure. Payoff activity in the community based footprint was again elevated and related to development projects that stabilized and moved to the permanent market. On the deposit side, we are pleased to see balances rebound in Q4 after the seasonal decline we saw last quarter. Total deposits increased in Q4 by $231,000,000 split fairly evenly between the Arkansas and Florida regions. I would like to highlight our South Florida region, which had nearly $130,000,000 in growth in the 4th quarter alone and a 20% growth in balances for the full year of 2019.
Their business development efforts, along with the continued strengthening economy, give us optimism for 2020. Congratulations to our South Florida group. With that said, I'll turn it back over to you, Donna.
Thank you, Tracy and Steven. Great reports for the quarter the year. I like that deposit growth. Well, now without further ado, to wrap up our prepared remarks is our Chairman, John Allison.
Thanks, Donna. I hope all of you are pleased with the quarter and the year. Actually, I've been concerned all year with the additional expenses of going over $10,000,000,000 and the revenue reductions like Durbin because this was our first full year of Durbin. We had a half a year, Brian, last year. Is that right?
That's right. So that's about $7 plus 1,000,000 I would assume. What is that number, Brian? It's about $1,000,000
a month.
About $1,000,000 a month. Okay. That was a
little it's about $6,000,000 impact on us. You add that with the unstable interest rate and everyone thinks that we were about to go into a recession, that that was imminent. It was kind of a strange time. The Fed missed it so far in 2018 that I really had no confidence this time that they get it right. Actually, I felt there was a better possibility that California Congressman Adam Schiff will be picked as truck's running mate then the Fed gets the job done.
But the Fed did a great job this time and it's given the economy what appears to be a stable and solid outlook. And now with the signing of the first phase of the agreement with China, looks like we could have a good year. Let me talk about the highlights, both good and bad. Originations were $1,148,000,000 That's the good news. Bad news is they were at 5.37 That really resulted from a low rate October loan special.
However, we came back in December strong at 5.73. If you remember the Q3, we only originated about $710,000,000 and we hoped it wasn't a slowdown. We weren't sure whether it was or whether it wasn't. But obviously, it was just a hiccup, a time not to panic, but to remain disciplined and hold the course as we have for 21 years. Good news is we grew about $100,000,000 in loans for the quarter.
The bad news was that the average was down for the quarter. When you go to asset quality, I don't know what to say. Kevin Hester here, if you want to answer some questions about it, but it's about as good as it can get. Nonperforming loans were 0.50, nonperforming assets loan was 0.43 and past due loans were 0.49. Kevin, when's the last time we had a 0.49 pass through loan?
No, I don't remember it.
He's been here since we started. Anyway, that's pretty good stuff. Donna talked about the revenue and also Brian talked about revenue and those are good numbers. Good job on controlling expenses. They're flat.
I don't like where they are. They're higher than they used to be, but they're flat. We had a 15.5% per share return on tangible common equity. The ROI for the quarter was a 194. However, in December, it was a 212.
We liked what we got in December. Efficiency ratio for the quarter was 41.14. However, in December, it was 38.3. Return on tangible common equity for the quarter was 19.51. However, December was 21.64.
It appears we got a little off our game. We made the corrections necessary. We're solidly back on target again. December was a surprisingly strong month, and I take every month like December. During the quarter, we repurchased 510,500 shares for $9,488,168 or $18.58 per share.
We're continuing to be active on the stock repurchase side, but we're also building additional capital. The capital is being built for 1 of 3 reasons: maybe a downturn, use of the transaction or to reduce debt. We have added about $30,000,000 to our reserve this year, and we hope to add about $60,000,000 or $5,000,000 a month over the next 12 months in 2020. I predict that Home will be back in the M and A business either later this year or next year. We opened 3 new branches during the quarter, Lake Noma, Florida, Hialeah, Florida and a new one in Russell, Arkansas.
In the last 2 years, bank pessimism has run at the highest level of my business career and bank multiples hit a 20 year low, Home has earned almost $600,000,000 maintained superb asset quality, performed best in class in Home Performance Metrics. We repurchased 9,849,911 shares for $188,920,000 We paid a solid dividend to our shareholders over the last 2 years for $165,495,000 all while maintaining average return on tangible common equity of 21.9% and ROI of 2%. Best in class numbers. I'd like to see a list of the companies that perform at that level. I think it'd be a short list and we might be the only one on it.
When the Northlands come back and they will, I think our shareholders will be rewarded. I think 2020, we're teed up for a good year in 2020 as we expenses of most of the regulatory in 2019. I don't see a lot of increases in expenses on the regulatory side, and we ought to be teed up for a pretty good 2020. Eileen? Eileen?
Is that it? Eileen? Yes. I think we're ready for Q and A. That's all I have.
Good job by all for the quarter. And thanks for your efforts. And we're ready for Q and A.
Mr. Chairman, this is John at Shore Premier. Before moving into Q and A, it occurs to me after listening to your comments and Tracy's, I should probably clarify my own regarding ROE. The numbers I cited were correct, 2.5% for the month of December, 1.93% for the year, but those were pretax core ROA numbers. I should have provided net ROA numbers of 1.57 for December and 1.31 for the year for a truer apples to apples comparison with the other references.
Sorry about that.
I guess, Ali, we're ready.
Okay. We will now begin the question and answer session. Our first question today will come from Brady Gailey with KBW.
Hey, good afternoon, guys. Hi, Brady. So, Johnny, you talked about the increased profitability in the month of December and increased performance metrics. What drove the step up in the ROA in December relative to the rest of the quarter?
It was just a pretty good solid month. December was just a pretty exceptional month for us. We had some did we have some event income, Brian? We did.
Mean, for the month itself, we had a little bit of other service charges and fees. We had the item that we've talked about where we had some additional income from our equity investments. And then we had some reductions in salary and employee benefits. During the month of December, we trued up the incentive accrual that we've been making for the year. And as you can see, our year to date profits were down from 2018 to 2019, and we had about a $1,500,000 reversal for incentives to true it up for year end.
We've made some equity investments several years ago and those equity investments have done very well for this company. And going forward, we expect even better returns, particularly in the 1st and second quarter with our equity investments. And also, we're anticipating some pretty large recoveries in the 1st 6 months of the year. So you'll see some of that. It's going to carry forward into the next year.
All right. That's helpful. And then on a linked quarter basis, there's about a $2,000,000 increase in other service charges and fees down in the non interest income. Was there anything of note that drove that uptick? It went from, I think, about $8,500,000 to about $10,500,000 on a linked quarter basis?
Yes. It all has come from CFG
and it's up you're right, it is up $1,900,000 And what I'd like to do is get Chris Poulton to give a little bit of color on that $1,900,000 increase because it all came from CFG.
Yes. Sure, Brian. This is Chris. Yes, we had
a couple of events on some loans where we were able to collect some fee income. I think as you know that happens from time to time and fairly regularly. We had a little more of it this quarter than we had in some of the prior quarters. But again, we always think about it, it's hard to know when that's going to come in, but every year it comes in. Yes.
And I think you had one incident there, Chris, that was like $1,400,000 just from 1 borrower, correct?
Yes, that's correct. That's correct.
Okay. All right. That's helpful then. I was going to say finally for me just on M and A. I know last quarter Johnny you were a little more upbeat on M and A saying the conversations have kind of picked up and maybe sellers' expectations had been reset a little lower.
And We've seen some activity this quarter. We saw a couple of big MOEs kind of in and around your neck of the woods. What's the latest on M and A for Hounde?
Well, we're looking. We'll probably announce some kind of transaction in the next 30 days here when we bid on, and we would hope to be successful in the transaction. It's not a big transaction, but it is a transaction that gives a little kick to EPS And we like the business and we like the transaction. So I can't say anything else anymore about it. As I always tell you, everything is going on.
I had it in my prepared remarks, but they made me take it out. So anyway, we haven't closed the transaction, but we anticipate closing the transaction. And additional M and A out there, we think it may be a good time to be in the market.
All right, great. Thanks for the color guys.
You bet.
Our next question comes from Stephen Scouten with Piper Sandler.
Hey, guys.
How is it going? Doing good, Stephen. How are you?
Doing well. Doing well. We got a new name. We got a new name. We're ready to go.
Good. There you go. Okay. Good. Yes.
So maybe following up on
Brady's question on M and A there. I'm curious if you guys are looking at any non bank M and A as well as whole bank. And then on the whole bank side, if you could give an idea, you mentioned what you're looking at now is not a big transaction, but kind of how you would wait your time towards maybe sub-two $1,000,000,000 acquisitions and then north of that, you could give us a feel?
I just really think we haven't done a deal in a while as we've digested Stonegate over the period of time. And I would suspect we would be active this year. But I think we'll start smaller unless a great unless a really good MOE comes around. We haven't seen a really good MOE yet that makes sense for us. Maybe we're not talking to the right people, but maybe if a good MOE comes around, we probably would be interested in that.
I think it's time for us to get back in the business. If we can find a trade, I mean, we did pretty good. There looks like the trades have been done recently, done in the $150,000,000 $160,000,000 range. And if those kind of hold with us selling at $210,000,000 or 220, I think we can make something work. It just hadn't been feasible in the past when, as I've said before, you got a weak sister out there that's trading at $1.90 and we're trading at 2 times tangible book.
And something had to give. They either got to go down or they got to go up. And I think it's a good time. I hear lots of people talking about bank stocks now possibly, and I haven't heard that in the past. I think that we'll be rewarding for the stability of this corporation and the price of our stock will go up, give us opportunity to get back in the M and A business.
Makes sense. And just as you continue to build business.
Makes sense. And just as you continue to build capital pretty rapidly, you noted the share buybacks you've done over the last couple of years. How do you think about that moving forward, especially with PCE nearing 11% here today?
Well, we're going to settle that capital a little bit right now. Brian Davis talks to me every month about buying back stock and how diluted it is. And he's even put an amount of money that it cost us. He said it cost us $2,000,000 last year as an expense to buy back stock. And I guess that makes sense when he puts a number on the dollars that we spent.
So we will continue to buy back stock. We also are continuing to build capital. We're building capital for a rainy day or we're building capital for an acquisition. Or 27 months from now, we got a $300,000,000 debt that's due. So we're building continuing to build this capital.
It'll put us in a good position. I don't see a downturn at all. I don't we haven't seen anything that shows a downturn. But it's a good time. We're seeing competition in the marketplace.
Loan money in the 3, spends for 7 to 10 years. And these are big these are competitors that historically have not acted that way. I don't know if they're just building the balance sheet to sell it. That's what it looks like. Just kind of packing it up, but we're not getting into that.
That hurts us. It hurts them long term. It hurts us too. You can't fix margin. Once you commit 7, 10, 15 years on the loan, you got it.
It's with you for a long time. And you got to pay the pipe when you sell it or in earnings over a period of time. It's disappointing to see some of these people that know that are loaning money at these low rates. I don't know that's about where you went, but that's just something I want to talk about.
Yes, definitely. And then
maybe just last thing for me. Curious if you guys are looking at the hiring of any new teams to kind of drive loan growth. It feels like that's an even more prevalent phenomenon right now for a lot of your competitors. Everybody is looking at acquiring talent from the large regional banks and using that for growth. So I'm curious if that's an endeavor you guys are pursuing at all or are you going to kind of stick with your team and leveraging it via M and A longer term?
Well, Johnny has been a proponent that we stay in our lane. And so we've you've seen us be consistent about where we look at M and A. We probably be consistent about where we look at teams as well. We like there are some geographies outside of our footprint geography that we like that we could do something like as it makes sense. But that's not been our nature to this point.
And we do it, but it's not something that we push heavily to this point.
Chris, you've got some just so you get the right people. And when we did that in Pensacola, you said we're North Florida's top region in the company. We've got John who just really a team, what we did there and Chris and his group, same thing. So there's always those type of opportunities. Yes.
I forget that John and his team and Chris and his team were I mean, they were a team. And that's how we did that. That's worked really well for us.
Great. Thanks, guys. Well, congrats on a great quarter. I hope December duck hunting went as well as December went for the bank.
I have only been about 5 days, and I normally go would have been all I've never missed. But they had me hooked up this year. And they keep hooking me up too, Stephen. So anyway
That's good. Well done, guys.
Thanks.
Our next question comes from Matt Olney with Stephens.
Hey, guys. Good afternoon.
Good, Matt.
Going back to the M and A discussion, I think, Johnny, you mentioned MOEs are a possibility. Can you talk more about your MOE priorities? And historically, I think the bank's been a discount buyer of banks that are more dent and scratch. I'm curious if this is still your view.
Say that one more time. In the MOE, you said that you're interested in MOEs and then your comment about banks what?
Well, I guess historically, going back several years, you've purchased a number of banks that had some more hairy things. Scratch and dent. It didn't scratch, right. So I'm curious kind of what the better view of that is.
Well, we're not afraid of extraction debt banks at all. It depends, right? I'm pretty selfish from my aspect that I'm going to take my stock in home Bancshares and put it in my hand to somebody else. I think if we do an MOE, we'll be the surviving corporation coming out of that. And I'm not unless we were to find somebody that does a better job than we do, that runs a better company than we do, we'd be open to looking at their management style and see if it made sense.
But the ones that we looked at through this period of time, home has to be the survivor because they don't run the performance that this company runs. So I have no intention of and I don't think this board has any intention of taking this company and putting it into hands of somebody who doesn't run at the level we run or doesn't is not interested in learning how to get to that level. So if they don't run what we run and they don't run what we run, we'll be the survivor in the deal. In other words, you got to be a survivor, right? Somebody's somebody got to buy somebody else.
So we're open to that. I don't know that I'm open to an MOE at this point in time where we're not the survivor. So I don't know if I'm making any sense to you, but to find somebody who runs at the level this group runs at is difficult.
Yes. No, understood. And it sounds like you've got something closer on the smaller bank M and A side. Does that prevent you from looking at other deals at this point?
No. No, no. No, no. I think we're doing some smaller transactions and kind of get our feet wet over a period of time and kind of get back in the mode. We've been out for a couple of years.
The world thought we were just acquiring, acquiring, acquiring. But if you watch our we did acquire a lot of failed banks, but this company digest what they do a good job and take their time and digest. And Starlight was a big one. That was $3,000,000,000 and we want to be sure we got that properly digested. So any comment from anybody else on the M and A side, we're open.
I mean, we have not been open in the past. We're open. I guess we've always been open. It's just that they didn't make any sense. And maybe non premium deals now with a bank that makes a little money.
It has to do with management to me. And that's not to be selfish and greedy that we got to run everything. I don't mind turning it over. There's a better operator than us, and we'll let them run it. And we'll work with them, but there's not many of those out there.
Agreed. Congrats on the quarter. That's all for me. Thank you.
You bet. Thanks.
Our next question comes from Jon Arshorn with RBC Capital Markets.
Thanks. Good afternoon, everyone.
Hi, Jon.
Hey. Couple of things to clean up here, I guess, just in terms of the numbers. Johnny, you made a comment about some recoveries, but you also made a comment about adding $5,000,000 a month for reserves. And I'm just I'm kind of curious what that means for the provision. You obviously had a very good dividend.
I'm sorry, I didn't mean low wealth reserve. It's just kind of a metal sinking fund that we developed here where we're just putting about $5,000,000 a month into a metal sinking fund building additional capital. Cash.
Cash, yes.
Okay. That's not loan losses there, Bill.
I'll put this a little more clarification. Starting in July, we took part of the cash dividend that we were getting from the bank and put it in a different bucket over here that has accumulated to $60,000,000 I mean $30,000,000 for 2019 for 6 months, and that's where he's talking about the 5,000,000 dollars And that money would be used to pay down sub debt if we don't spend it. It's not restricted cash. It's just we're putting it in a different bucket. So we have a better use for it.
We plan on paying down the sub debt. Yes.
We have $300,000,000 of sub debt that's due in 27 months. So I mean, they call it if you remember, they call it capital. I don't know how they do that. We call it debt. So we'd like to make a dent in that when it comes to rent.
We're just building the capital. And if there was a trade a deal that came up, we'd use for that or if there was a downturn, which I don't see, we used it during that cycle. So it's just reserve on top of reserve, I guess, but it's not one roof.
Okay. Got it. And then the recoveries, I guess, potentially the message is more on the same on provision. I mean
just Yes. These are some recoveries we've been after for a while. We really expect them in February. And Kevin said, I wouldn't say that because we've been expecting them for several months. But
And just for clarification, John, these are recoveries from banks that we acquired and so they weren't charged off through the ALLL. And so when we get those recoveries, they will show up as other income versus a recovery on ALLL because ALLL was never brought over on those acquired transactions.
Okay, good. Good. And then on the margin, Brian, your favorite topic, the margin outlook, but it looks like you guys had a nice step down on deposit pricing, and it sounds like you're feeling better about loan yields. It feels like a stable to maybe potentially better core margin environment. Am I thinking about that the right way?
I mean from a core margin, you're probably pretty close. I mean we will have I'll let Stephen kind of give a
little more color on it
too, but we will have some accretion decline, but we had $5,600,000 of accretion decline in 2019. We've worked on our budget for 2020. We've got another $5,000,000 decline on top of that. I mean, we have a total of $73,000,000 of available accretion that's sitting on the books that's going to accrete in probably over the next 3.5 years. We had approximately a little over $9,000,000 in accretion this quarter.
It's probably projecting about $8,500,000 That probably from accretion standpoint probably dings the margin about 2 basis points. Investment premium amortizations
expect to
stabilize while they were up in Q4, dollars 467,000 Mr. Allison talked about December being a great month. One of the other things that was good about December was that the amortization on the premiums was lower in December. It was the lowest we've had since July. So I'm anticipating that, that will not continue to increase.
I might let Stephen give a little color on the production and what he's seeing over there.
Sure. Hey, John. I think you're right.
I think stable is the way we're trying to look at things today from a core standpoint. We actually the core NIM in December was up slightly. So deposit costs, I think, will continue to try to pressure down December and a little lower than what the quarterly average was. And then like you said on the loan side, I think potentially yields will stabilize here. So I think in a flat rate environment, we think we can hold it where it's at.
We're constantly going to try to improve on that. I think it's fair to look at it.
Yes. December is any indication. We might be able to increase it a little bit. We're not saying we're going to increase it, but it's a good indication that we may be able to at least hold our own on the margin side. So it will be all efforts to do that.
I don't see the reason why we can't do that. Particularly, unless the Fed starts again, if they start moving again, you just got to regroup it. If they'll leave things alone right now, leave rates where they are, I think it's going to be a good run.
Okay. All right. Thanks for the help,
everyone. Thanks, John.
Our next question comes from Michael Rose with Raymond James.
Hey, guys. Good afternoon.
Good afternoon, Michael.
Just wanted to circle back on some of the larger transactions that we've seen in and around your market, particularly one that just happened here recently that had a big footprint in Florida. We had another bank today talk about some elevated costs that they're putting towards capturing some market share from the disruption. Do you guys have any plans to look at additional lender hires or commit capital to advertising or things like that? And should we think about that as a potential addition to the expense run rate as we move into the year? Thanks.
I don't we don't plan on any marketing programs. Nothing?
Nothing that would create a significant difference.
There might be some natural fallout from a people standpoint from some of these transactions that occurred, the one you mentioned or some of the others in other areas that presents an opportunity.
Okay. And then maybe just looking at loan the loan generation as we move forward, I think if I exclude Chris' group this quarter, your balance looked pretty flat. I understand that the pay down looks like there's going to be some as we move into the first quarter. Can you just talk about the general environment for loan growth? I mean, is it so competitive that the risk adjusted returns just don't make sense and you guys are fine kind of growing on a gross basis, kind of in a low to mid single digit basis.
Is that the way we should think about it? Or is the environment actually improving? Maybe outlook improving? I guess, how should we think about as we move forward? Thanks.
Hey, Michael, this is Kevin.
2nd quarter and 4th quarter were both strong. 2020
could be strong also given the economic outlook that we're kind of thinking is out there. There are deals out there. The question is whether it's at the yield and the leverage that we're willing to do. I'm optimistic based on 2 out of the last three quarters that we're going to get our share of them that they're there. But it is a crazy time.
I mean, the stuff that we're hearing, both from a rate and leverage standpoint at this point in the cycle, doesn't make sense in a lot of cases. So we got to pick and choose, and we're going to protect margin and protect asset quality and if growth comes with it, then it does.
And we had we
were in Florida last week, 3, 4 last business with a big customer and we'll quote the customer and one of our competitors went in at $385, Kevin, dollars 385,000,000 fixed for $15,000,000 dollars 6 for $15,000,000,000 $3.85,000,000,000,000 I think. So we're out of business. We'll just pass and let's move on. It'll be slightly don't think over the next 5% year, you could loan money higher than that rate. So when that happens, we just pass.
We're just not going to we're not going to get we're not going to win the stupid award, right?
No doubt. Maybe just one more for me. Chris, we've seen some slowdown in some of the larger metro markets across the U. S. In terms of new construction formation.
Can you just talk about the outlook for your group and your footprint, whether it be the metro area in New York City
or out
in the West Coast and how we should think about kind of the natural rate of growth as some of those metros have slowed? Thanks.
Sure. No worries. We did $1,000,000,000 a
little over $1,000,000,000 this year
in volume. I don't see any reason why that wouldn't probably continue. That's up from where we arrived in probably 7 $50,000,000 prior. I would hope that we'll do something pretty similar to that this year. And what we generally notice is if you increase your production by a couple of $100,000,000 over a couple of years within about 18 months or so, your net growth starts to come in at about 50% of that.
So if I do $200,000,000 more for 2 years, I'd expect in 18 months, my net growth would be $100,000,000 that type of a relationship usually exists even with payoffs. We're seeing a little bit you talked about a slowdown in the metro markets. That's a little true. I think there's caution in the metro markets because I think there's a lot of things happening, right? Condo sales has prices have fallen a little bit.
And if you were lending 70% on that, you'd have a real concern about that, which is why we've generally never lent that level. Our view has always been, you ought to assume the price is going to come down a little bit. And so I don't know that, that changes necessarily our point of view on that, but it certainly gives some people some pause. So we do see a little bit of that. So that generally actually helped our business a little bit because when other people have a little bit of reason to pause, that gives our product a little bit more competitiveness, I think, which actually led to some of our increase in lending over this past year.
But look, we're cautious about New York. I think the environment in New York is such that the city council and the government here is going to continue to press for higher taxes and changes around affordability, etcetera, that make it more expensive to develop here. And I would expect that, that will ultimately result in less development. I don't know that, that means that we'll do less, because again our product may just get a little bit more competitive. But we like LA, we like New York, we like San Francisco, as well as some of the other metros.
But we continue to be pretty optimistic about what we're seeing. And I think over time, our product gets more competitive.
Okay. One quick follow-up. Where are the kind of the new production yields in your portfolio, Chris, and maybe where does that stand versus last quarter and maybe a year ago? Thanks. Yes.
I think quarter over quarter, it's been reasonably flat.
We're still generally 4 over LIBOR, sometimes that's 3.75, sometimes that's 4.75. 5 years ago, we were 6 over LIBOR, but LIBOR was effectively 0. And so with LIBOR at 175, we always kind of knew that as LIBOR went above 0, your margin compressed a little bit. I'd say year over year, you're in a quarter point to 50 points, so let's call it 50. But again, it's also very dependent on the type of loan and the mix and things like that.
So I still think we get our price on our good core deals and then we've seen a little bit more competition. Our pricing is generally limited, not necessarily by what's going on in the bank side, but as non bank lenders bring down their equity return requirement, that puts a more of a ceiling on our price because they're typically lending more money at more expensive rates. But at some point, the math starts to work that we get a little bit of a cap on how much we can charge based on the non bank lenders bringing their price in a little bit. But again, at the same time, as non bank lenders do that, we also lend to those non bank lenders and so that creates opportunity for us as well. But I would say 25 to 50 points in kind of over the last couple of years.
Great. Hey, Chris, it's great color. Appreciate all the time guys. Thanks.
Our next question comes from Brian Martin with Janney Montgomery.
Hey, good afternoon. Hi, Brian.
Hey, I wonder if I don't know who wants
to take it, but maybe just a little bit of color. Johnny, you talked about the expenses kind of being flat, but maybe a little bit higher than you thought or maybe I misunderstood that. But just kind of given with the true up that Brian talked about in the Q4, just kind of the current expense run rate as we look into 2020, if you can just give a little color on how you're thinking about things?
Yes. I was really Brian, you will take that.
Yes. I mean, Brian, I mentioned that we probably had a $1,500,000 in true up in the salary employed benefits. But there's a couple of other categories, other professional fees and other expenses that have also a little bit of noise. And I may not get too much of the minutiae on it. But the other professional fees has this 3rd party, dollars 631,000 that we talked about.
There was some recruiting expenses, trying to get some additional people in here
that we typically don't have. Both of these also
came out of New York and it was $272,000 So that's not necessarily going to be reoccurring. There was some other special projects that weren't quite as expensive as the $631,000
but there was
a $145,000 and a $214,000 I don't really want to give you the name. There was some timing in other expenses. We were up $1,300,000 there. We had some timing on some donation expense for $300,000 We had a couple of other items that totaled $243,000 over timing. So a little bit of that is going the other way.
So I don't know if I really answered your question. I was just trying to give you a little color on some of the changes that we had within our income statement and external statement.
Okay. So I mean, with all the noise, this level is not a bad level to think about as we head into
next year. There's some puts and takes. But if anything,
it shouldn't be growing much from the current level where it's at as we start out for 1Q.
If you look at last quarter, we had $67,700,000 but we also had a $2,300,000 refund on our FDIC assessments too. So that's what prompted it to be down. So that $71,000,000 that's probably not a bad run rate.
I mean, you look at non interest expense October, November December, it's 24, 23.8, 23.360. So that's when I said it was likely flat. It was flat across there with no interest expense.
Yes. Okay. Perfect. That's helpful. And then just Johnny, I think you mentioned something about the equity investments and the benefit.
I guess that is that maybe for Brian, does that appear in that other line? And I guess just this level maybe is somewhat sustainable for the next couple of quarters as you capture that benefit?
I mean, if you look at the line item, it's in the dividends line item and non interest income. And we got an extraordinary large amount of dividend from one of our equity investments, not all of them, but just one of them.
We estimate that it was up about
$861,000
Do I think that is sustainable every quarter? No. I think that we might have that or maybe a little better next quarter? Maybe. I mean, there's the possibility that they may
be able to reciprocate that
in Q1, but I'm not heard that they can reciprocate that after Q1. And so a normal run rate on that might be $400,000 or $500,000 and instead we had 1,300,000 for the quarter.
Yes. And it looks like the Q1 that they've hit up pretty nicely. So we're anticipating a big payday in the Q1.
It's a little choppy. It has been very consistent for quite some time. And I think the guys will love to get the income, but as a public company, it's like, okay, there's something
I get to explain every quarter.
Right. Okay. That's helpful. And just the last two minor things. Johnny, I guess, just as it relates to M and A, just if you remind us, I mean, the lowest the smallest type of deal that you would look at today versus talking about the MOEs and maybe the larger deals, If you had a range of how low you would go given the impact it would have to Home, I guess, do you have a size range in the top on the bottom end of M and A?
I really don't have a size range. I wouldn't mind doing a probably wouldn't do a 20, but probably would do a 15. And probably would prefer warming ourselves back up with something in the $1,000,000 to $2,000,000,000 to $2,000,000,000 range to get warm back up.
Got you.
Okay. And the last one was just maybe for Stephen, just on the margin. Just the you talked about maybe seeing the core margin stabilize or improve a little bit. I mean, I guess, the outlook to see it go up a little bit, what could lead you to see the margin actually the core margin actually expand a little bit as you think about going into 2020?
I mean, a couple of things. And I think Brian mentioned just as interest rates stabilize, some of the investment portfolio impact minimizes hopefully. And then I think it's just our ability to right size and lower deposit costs further from here relative to loan yields kind of hanging in where they're at. And I think in December, I had our portfolio yield kind of ex event, ex accretion income in the 5.5% range. So if we think about where we're writing collectively writing loan yields between the community bank footprint and Chris' group, if we're north of there,
I think
that's where we could potentially see improvement.
Got you. Okay. Thanks, guys. I appreciate it.
You bet. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Mr. Allison for any closing remarks.
Thanks, Ali, and thanks, everyone, for being with us today and for supporting our company. It was interest it's been 2 interesting years, and the company is continuing to perform. We were down about $10,000,000 this year over last year. We hit the EPS, same EPS number, but actual income was down about 10.5 percent. It's about 5 percent out of New York, about 3 percent out of legacy and about, as Brian puts it, 2 percent for the cost of buying back the stock.
So kind of gives you a perspective. Last year year 4 or last, I guess it is now, 2018, CCFG had some big windfalls in the Q4, which they didn't have this year. It took them down a little bit. And actually, legacy hung in pretty good. If they hadn't if we hadn't had a full year of Durbin, I'm not sure legacy wouldn't have been up.
So in spite of all the craziness that's gone on this year and the political winds and the interest rates and all the different psychologies that are people trying to spread, And as this company has remained as solid as anybody in the country and we'll continue to do that in the future. So I appreciate your support. Hopefully, we'll see some good windfalls in the Q1 or the 1st 6 months that will really give us a kickoff to the year. And hopefully, we get our transaction that I mentioned to you closed sometime in February or March and let that start accretive in the income. So thank you for your support and we'll talk to you in 90 days.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.