Greetings, ladies and gentlemen. Welcome to the Home Bancshares Incorporated fourth 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, entertain questions. Please note that if you would like to ask a question during the question and answer session, please press star then one on a touch-tone phone. If you decide you want to withdraw your question, please press star then two to remove yourself from the list. The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You'll find this note on page three of their Form 10-K filed with the SEC in February 2019. At this time, all participants are in a listen-only mode, this conference is being recorded.
If you need operator assistance during the conference, please press star then zero. It is now my pleasure to turn the call over to Donna Townsell, Director of Investor Relations.
Thank you, Ailey. Welcome everyone to the Home Bancshares 2019 fourth quarter earnings release and year-end conference call. I am Donna Townsell, Director of Investor Relations, and on behalf of the Home 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 Poulton, President of CCFG, John Marshall, President of Shore Premier Finance, Tracy French, our President and CEO of Centennial Bank, Stephen Tipton, 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' fourth quarter was the best of the year. It was the fourth 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 $167.8 million 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 fourth quarter was another solid quarter for our net interest income and net interest margin. On a tax-equivalent basis, we recorded net interest income of $141.1 million for Q4 2019, compared to $144.2 million for Q3 2019. The fourth quarter net interest margin was 4.24%, compared to 4.32% for the third quarter. Next, I want to give you some color on the eight basis point decline in margin. First, during 2019, the interest rate environment began to decline. This decline has increased the prepayment speeds on our investment security portfolio. As a result, during the fourth quarter, we experienced an increase in investment premium amortization of $468,000, or 1.4 basis point decline in margin from Q3. Second, the third quarter of 2019, we had several interest income events primarily related to large payoffs.
These events total $2.8 million of interest income and decreased the net interest margin by 8.4 basis points for the third quarter of 2019. During the fourth quarter, event interest income was $549,000 and increased the 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. Third, the accretion income for the fair value adjustments recorded in purchase accounting was $9.1 million during Q4, compared to $8.5 million during Q3, for an increase of $670,000. This increased our NIM by two 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 two basis point improvement from accretion totaled a margin decline of 6.1 basis points.
Well, with that said, net interest margin is only down two 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% versus 4.29% for 2019, for a decline of 13 basis points. During 2019, we experienced a decline in our event income of $3.9 million, a decline in our accretion income of $5.6 million, and an increase in our investment premium amortizations of $2 million. The total of these three items was $11.4 million, or nine basis points of the 13 basis point decline in net interest margin. Donna, I'll turn the call back over to you.
Thank you, Brian. The apples-to-apples comparison on the NIM is very helpful. Now we will hear from Christopher Poulton about our CCFG division.
Thank you, Donna. Good afternoon. During the fourth quarter, 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 $1.1 billion for 2019. For the fourth quarter, we originated $384 million in new loans, while payoffs in the commercial real estate book slowed a bit, resulting in overall net loan growth of about $95 million. Our L.A. 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 depend on these new originations, plus increased draws on existing commitments, currently standing at about $1 billion 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. Good afternoon. I always look forward to providing a quarterly update for Shore Premier Finance. The fourth quarter 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% and 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 fourth quarter.
Let's take a look first at asset quality and a closer look at the numbers. At year-end 2019, non-performing retail loans improved to their best position from year-end 2018, dropping from a peak non-performing assets of $4 million down to $1.7 million, which equals a drop from 98 basis points to 34 basis points. Thirty-plus day retail delinquency improved from $6 million 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 have no commercial delinquencies or defaults. Both asset quality metrics were favorable to expectations at year-end. 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. I'm satisfied that we're well positioned to absorb any economic pullback whenever it might strike.
In terms of profitability, Shore Premier contributions to Centennial Bank's bottom line eclipsed $1 million 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 NIM in the quarter due to funding of loans in the third quarter when five-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.
Retail loan originations managed to prevail over persistent prepayment rates and seasonal commercial inventory reductions, delivering $14 million in net growth for the month, $40 million net growth in the quarter, $71 million for the year, and $127 million 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. 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 $5.4 million to close out the year.
Donna, on that optimistic note, let me conclude my remarks on Marine 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 strong performance for Centennial Bank in the fourth quarter of 2019. For the fourth quarter, Centennial Bank had a return on assets of 2.11, an efficiency ratio of 39%, and consistent revenue in excess of over $170 million. 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 fourth 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 for the full year, our Alabama region and four of our five Arkansas regions produced over a 2% return on assets, with two of our regions of 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 diving to sub-4 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 for a healthy one. We like the way our customers run their operations. 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 will give some color on production, payoffs, and balance sheet changes for the quarter. Community Bank loan production in the fourth quarter of 2019 was strong at $735 million, highlighted by nearly $400 million from our Arkansas regions and $64 million in production from Shore Premier Finance. While the yields were off slightly in October, our regions closed out the year strong and again had the message to hold their discipline on pricing. As Chris and John have mentioned, CCFG and Shore saw solid growth over the course of the year and in the fourth quarter, and we're excited about the opportunities in 2020 for everyone. Payoffs remained elevated in Q4 at $708 million, but as Brian mentioned, provided income to the bottom line due to proper structure.
Payoff activity in the community bank footprint was again elevated and related to development projects that stabilized and moved to the permanent market. On the deposit side, we were pleased to see balances rebound in Q4 after the seasonal decline we saw last quarter. Total deposits increased in Q4 by $231 million, split fairly evenly between the Arkansas and Florida regions. I would like to highlight our South Florida region, which had nearly $130 million in growth in the fourth 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 Stephen. Great reports for the quarter and 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 billion in the revenue redemptions 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.
That's about $7-plus million, I would assume. What is that number, Brian? You got a
It's about $1 million a month.
About $1 million a month.
Yeah.
Okay. That was a little, about $6 million 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'd get it right. Actually, I thought there was a better possibility that California Congressman Adam Schiff would be picked as Trump's running mate than the Fed get the job done. The Fed did a great job this time, and it's given the economy what appears to be a stable and solid outlook. 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 billion.
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 third quarter, we only originated about $710 million. We hoped it wasn't a slowdown. We weren't sure whether it was or whether it wasn't. 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 million 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's here if you want to ask him some questions about it. It's about as good as it can get. Non-performing loans were 0.50%.
Non-performing assets loan was 0.43%, and past due loans were 0.49%. Kevin, when's the last time we had a 0.49% past due loan?
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 ROA for the quarter was a 194. However, in December, it was a 212. We likened what we got for 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, and we're solidly back on target again.
December was a surprisingly strong month, and I'd 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 one of three reasons, maybe a downturn, use in a transaction, or to reduce debt. We have added about $30 million to our reserve this year, and we hope to add about $60 million or $5 million a month over the next 12 months in 2020. I predict that Home will be back in the M&A business either later this year or next year. We opened three branches during the quarter, Lake Nona, Florida, Hialeah, Florida, and a new one in Russellville, Arkansas.
In the last two years, as 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 million, maintained superb asset quality, performed best in class in all performance metrics. We repurchased 9,849,911 shares for $188,920,000. We paid a solid dividend to our shareholders over the last two years for $165,495,000, all while maintaining average return on tangible common equity of 21.9% and an ROA 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 may be the only one on it. When the multiples 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've fought the expenses of most of the regulatory in 2019. I don't see a lot of increases in expenses on the regulatory side. We ought to be teed up for a pretty good 2020. John, Eileen. Ailey, is that it? Ailey?
Yes.
I think we're ready for Q&A. That's all I have. A good job by all for the quarter. Thanks for the reports. We're ready for Q&A.
Mr. Chairman, this is John at Shore Premier. Before moving into Q&A, it occurs to me after listening to your comments and Tracy's, I should probably clarify my own regarding ROA. The numbers I cited were correct, 2.5% for the month of December, 1.93% for the year, but those were pre-tax 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, Ailey, we're ready.
Okay, we will now begin the question and answer session.
Thanks for the little remark, John. Sorry, Ailey.
No problem. To ask your question, you can press star and then one on your touchtone phone. If you're using a speakerphone, we do ask that you pick up your handset before you press the keys. To withdraw your question, you can press star, then two. Our first question today will come from Brady Gailey with KBW.
Hey, good afternoon, guys.
Hey, Brady.
John, 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. Did we have some event income, Brian?
We did. 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. As you can see, our year-to-date profits were down from 2018 to 2019, and we had about a $1.5 million reversal for incentives to true it up for year-end.
We made some equity investments several years ago, and those equity investments have done very well for this company. Going forward, we expect even better returns, particularly in the first and second quarter with our equity investments. Also, we're anticipating some pretty large recoveries in the first six months of the year. You'll see some of that. It's going to carry forward into next year.
All right. That's helpful. Then on a linked quarter basis, there's about a $2 million increase in other service charges and fees, down in the non-interest income. Was there anything of note that drove that off-tick? It went from, I think about $8.5 million to about $10.5 million on a linked quarter basis.
Yeah. It all has come from CFG, and it's up. You're right, it is up $1.9 million. What I'd like to do is get Chris Poulton to give a little bit of color on that $1.9 million increase because it all came from CFG.
Yeah, sure Brian, this is Chris. Yeah, we had a couple of instances on 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. Again, we always think about it as, it's hard to know when that's going to come in, but every year it comes in.
Yeah. I think you had one instance there, Chris, that was like $1.4 million just from one borrower. Correct?
Yeah, that's correct.
Okay.
All right. That's all for me. I was going to say finally for me, just on M&A, I know last quarter, Johnny, you were a little more upbeat on M&A, saying the conversations had kind of picked up and maybe sellers' expectations had been reset a little lower. 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&A for Home Bancshares?
Well, we're looking. We'll probably announce some kind of transaction in the next 30 days here, one 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. I can't say anything else anymore about it. As I always tell you all, everything's going on. I had it in my prepared remarks, but they made me take it out. Anyway, we haven't closed the transaction, but we anticipate closing the transaction. There's M&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's it going?
We're good, Stephen. How are you?
Doing well. We got a new name. We're ready to go.
There you go. Okay, good.
Yep. Maybe following up on Brady's question on M&A there, I'm curious if you guys are looking at any non-bank M&A as well as whole bank. 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 weight your time towards maybe sub $2 billion acquisitions or, then north of that, if you could give it the feel.
I just really think we haven't done a deal in a while as we've digested Stonegate over the period of time. I would suspect we'll be active this year, but I think we'll start smaller. 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. Looks like the trades that have been done recently have been in the 150-160 range. If those kind of hold with us selling at 210 or 220, I think we can make something work.
It just hadn't been feasible in the past when, as I said before, you got a weak sister out there that's trading at $190, and we're trading at 2x tangible book, and something had to give. They either got to go down, or we got to go up. I think it's a good time. I'm hearing lots of people talk about bank stocks now, possibly, and I hadn't heard that in the past. I think that we'll be rewarded for the stability of this corporation and the price of our stock will go up, give us an opportunity to get back in the M&A business.
Makes sense. 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 TCE nearing 11% here today?
We're going to sit on that capital a little bit right now. Brian Davis talks to me every month about buying back stock and how dilutive it is, and he's even put an amount of money that it cost us. He said it cost us $2 million last year as an expense to buy back stock. That makes sense when he puts a number on the dollars that we spent. 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 million debt that's due. We're continuing to build this capital. It'll put us in a good position. I don't see a downturn at all. 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 40s fixed for seven and 10 years, and these are competitors that historically have not acted that way. I don't know if they're just building their balance sheet to sell it. That's what it looks like, just kind of packing it up. 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 seven, 10, 15 years on a loan, you got it. It's with you for a long time, and you got to pay the piper when you sell it or in earnings over a period of time. It's disappointing to see some of these people that know better loaning money at these low rates. I don't know about where you went, but that's just something I wanted to talk about.
Yep. Definitely. Maybe just last thing for me. Curious if you guys are looking at the hiring of any new teams to drive loan growth. It feels like that's an even more prevalent phenomenon right now for a lot of your competitors. Everybody's looking at acquiring talent from the large regional banks and using that for growth. I'm curious if that's an endeavor you guys are pursuing at all, or are you going to stick with your team and leverage it via M&A longer term?
Well, Johnny's been a proponent that we stay in our lane. You've seen us be consistent about where we look at M&A. We'd probably be consistent about where we look at teams as well. There are some geographies outside of our footprint geography that we like that we could do something like that, if it made sense. That's not been our nature to this point. We're not saying we wouldn't do it. It's not something that we push heavily at this point.
Okay, great.
I think Chris has got something to say. If they get the right people, and when we did that in Pensacola, and you see we're North Florida's top region in the company, and we've got John, that was really a team, and I thought what we did there, and Chris and his group, same thing.
Yep
there's always those type of opportunities. Yeah, I forget that John and his team, and Chris and his team, they were a team. Pensacola, that 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.
Well, the ducks- I got six out of 10 the other day. No, he didn't get any, just to let you know. He shot a lot of shells. He didn't get any. I want you to know that I have only been about five days, and I normally would've been all. I've never missed, but they've had me hooked up this year. They keep hooking me up too, Stephen. Anyway.
That's good. Well done, guys.
Thanks.
Our next question comes from Matt Olney with Stephens.
Hey, guys. Good afternoon.
That's good, Matt.
Going back to the M&A discussion, I think, Johnny, you mentioned MOEs are a possibility. Can you talk more about your MOE priorities? Historically, I think the bank's been a discount buyer of banks that are more dent than scratch. I'm curious if this is still your view.
Say that one more time. You said that you're interested in MOEs, and then your comment about banks what?
Well, I guess historically, going back several years, you purchased a number of banks that had some more, hairy-
Scratch and dent?
Dent and scratch, right. I'm curious kind of what the view of that is?
Well, we're not afraid of scratch and dent banks at all. It depends. I'm pretty selfish from my aspect that I'm going to take my stock in Home Bancshares and put it in the hands of somebody else. I think if we do an MOE, we'll be the surviving corporation coming out of that. 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. The ones that we've looked at through this period of time, Home has to be the survivor because they don't run the performance that this company runs.
I have no intention of, and I don't think our board has any intention of taking this company and putting it in the hands of somebody who doesn't run at the level we run, or is not interested in learning how to get to that level. If they don't run what we run, then we'll be the survivor in the deal. There's always got to be a survivor, right? Somebody's got to buy somebody else. 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. I don't know if I'm making any sense to you, but to find somebody that runs at the level this group runs at is difficult.
Yeah, no, understood. It sounds like you've got something closer on the smaller bank M&A side. Does that prevent you from looking at other deals at this point?
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. If you watch, we did acquire a lot of failed banks, but this company digests. Do a good job and take their time and digest. Stonegate Bank was a big one. That was $3 billion, and we wanted to be sure we got that properly digested. Any comment from anybody else on the M&A side? We're open. 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. Maybe non-premium deals now with a bank that makes a little money.
It has to do with the management to me. That's not to be selfish and greedy that we got to run everything. I don't mind turning it over. If there's a better operator than us, then we'll let them run it, and we'll work with them. There's not many of those out there.
Agreed. Congrats on the quarter. It's all for me. Thank you.
You bet, thanks.
Our next question comes from Jon Arfstrom with RBC Capital Markets.
Thanks. Good afternoon, everyone.
Hi, John.
Hey. A couple of things to clean up here, I guess, just in terms of the numbers. John, you made a comment about some recoveries, but you also made a comment about adding $5 million a month of reserves. I'm kind of curious what that means for the provision. You obviously had a very good year.
I'm sorry. I didn't mean loan loss reserve. It's just kind of a mental sinking fund that we've developed here, where we're just putting about $5 million a month into a mental sinking fund, building additional capital. Cash.
I see.
Cash. Yeah.
Okay.
That's not loan loss reserve, John.
I'll put just 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 $30 million for 2019 for 6 months, and that's where he's talking about the $5 million, 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.
Yeah, we have $300 million in sub-debt that's due in 27 months. If you remember, they call it capital. I don't know how they do that. We call it debt. We'd like to make a dent in that when that comes around. We're just building the capital, and if there was a trade, a deal that came up, we'd use it for that, or if we're in a downturn, which I don't see, we'd use it during that cycle. It's just a reserve on top of reserve, I guess, but it's not a loan loss.
Okay, got it. The recoveries, I guess, potentially the message is more of the same on provision.
John, 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.
Just for clarification, John, these are recoveries from banks that we acquired, they weren't charged off through the ALLL. When we get those recoveries, they will show up as other income versus a recovery on the ALLL because the ALLL was never brought over on those acquired transactions.
Okay, good. Then on the margin, Brian, your favorite topic, the margin outlook. It looks like you guys had a nice step down in deposit pricing. It sounds like you're feeling better about loan yields. Feels like a stable to maybe potentially better core margin environment. Am I thinking about that the right way?
From a core margin, you're probably pretty close. I'll let Stephen kind of give a little more color on it, too, but we will have some accretion decline. We had $5.6 million of accretion decline in 2019. We worked on our budget for 2020. We've got another $5 million decline on top of that. We have a total of $73 million of available accretion that's sitting on the books that's going to accrete in probably over the next three and a half years. We had approximately a little over $9 million in accretion this quarter. It's probably projecting about $8.5 million. That probably, from an accretion standpoint, probably dings the margin about 2 basis points. Investment premium amortizations I expect to stabilize. While they were up in Q4, $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 since we'd had since July. I'm anticipating that that will not continue to increase. I may let Stephen give a little color on the production and what he's seeing over there.
Sure. Hey, Jon. I think you're right. I think stable is the way we're trying to look at things today from a core standpoint. Actually, the quarter end of December was up slightly. Deposit costs, I think we'll continue to try to pressure down. December ended a little lower than what the quarterly average was. Then, like you said, on the loan side, I think potentially yields will stabilize here. 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, but I think that's a fair way to look at it.
Yeah. December's any indication, we may be able to increase it a little bit. We're not saying we're going to increase it's a good indication that we may be able to at least hold our own on the margin side. It would be all efforts to do that. I don't see any reason why we can't do it. Particularly, unless the Fed starts again. If they start moving again, you just got to regroup. 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, Mike.
Hey. 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? Should we think about that as a potential addition to the expense run rate as we move into the year? Thanks.
We don't plan on any marketing programs. Nothing.
Nothing that would create a significant difference.
There may be some natural fallout from a people standpoint now from some of these transactions that occurred, the one you mentioned or some of the others in other areas that presents an opportunity.
Okay. Just four more.
There will be a few of those fallout. There always is.
Okay. Maybe just looking at the loan generation as we move forward. I think if I exclude Chris's group this quarter, balance looked pretty flat. I understand 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? Is it so competitive that the risk-adjusted returns just don't make sense and you guys are fine kind of growing on a growth 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? How should we think about as we move forward? Thanks.
Hey, Mike. Mike, it's Kevin. Second quarter, fourth 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 two out of the last three quarters that we're going to get our share of them, that they're there. It is a crazy time. I mean, the stuff that we're hearing, both from a rate and a leverage standpoint at this point in the cycle doesn't make sense in a lot of cases. 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.
We were in Florida last week before last, visiting with a big customer, and we're going to quote the customer, and one of our competitors came in at 385, Kevin? 385 fixed for 15. Fixed for 15. 385 fixed for 15, a bank. We're not going to do that. We'll just pass and let's move on. It's like you don't think over the next five or six years you could loan money higher than that rate. When that happens, we just pass. 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 billion, a little over $1 billion this year in volume. I don't see any reason why that wouldn't probably continue. That's up from where we were averaging probably $750 million prior. I would hope that we'll do something pretty similar to that this year. What we generally notice is if you increase your production by a couple hundred million dollars over a couple of years, within about 18 months or so, your net growth starts to come in at about 50% of that. If I do $200 million more for two years, I'd expect in 18 months that my net growth would be $100 million. That type of a relationship usually exists, even with payoffs. We're seeing a little bit. You talk 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 prices have fallen a little bit. 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. I don't know that that changes necessarily our point of view on that, but it certainly gives some people some pause, and so we do see a little bit of that. That generally actually helps 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.
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, et cetera, that make it more expensive to develop here. I would expect that that will ultimately result in less development. I don't know that that means it will be less, because again, our product may just get a little bit more competitive. We like L.A., we like New York, we like San Francisco, as well as some of the other metros. We continue to be pretty optimistic about what we're seeing. 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.
Yeah. I think quarter-over-quarter, it's been reasonably flat. We're still generally four over LIBOR. Sometimes that's 375, sometimes that's 475. Five years ago, we were six over LIBOR, but LIBOR was effectively zero.
Right.
With LIBOR at 175, we always kind of knew that as LIBOR went above zero, your margin would compress a little bit. Year-over-year, you're in a quarter point to 50 points, so let's so-call it 50. It's also very dependent on the type of loan and the mix and things like that. I still think we get our price on our good core deals. 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 more of a ceiling on our price because they're typically lending more money at more extensive rates.
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. Again, at the same time, as non-bank lenders do that, we also lend to those non-bank lenders, and so that creates opportunities for us as well. I would say, 25-50 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.
Hey, 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 what the true up that Brian talked about in the fourth quarter, 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.
Yeah, Brian, you want to take that?
Yeah. Brian, I mentioned that we probably had a $1.5 million in true-up in the salary employed benefits. There's a couple of other categories, other professional fees and other expenses that have also a little bit of noise in it. I may not get too in much into the minutia on it, but the other professional fees has this third party, 631,000 that we talked about.
Yep.
There was some recruiting expenses, trying to get some additional people in here that we typically don't have. Most of this also came out of New York. It was $272,000, that's not necessarily going to be recurring. There was some other special projects that weren't quite as expensive as the $631,000. There was a $145,000 and a $214,000. I don't really want to give you the names. There was some timing and other expenses. We were up $1.3 million there. We had some timing on some donation expense for $300,000. We had a couple other items that total $243,000 over timing. A little bit of that is going the other way. 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 expense statement.
With all the noise, this level's 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 $67.7 million, but we also had a $2.3 million refund on our FDIC assessments, too. That's what prompted it to be down. At $71 million, that's probably not a bad run rate.
You look at non-interest expense, October, November, December, it was $24, $23.8, $23.6. That's when I said it was basically flat. It was flat across there on non-interest expense.
Yep. Okay. Perfect. That's helpful. Then just, Johnny, I think you mentioned something about the equity investment and the benefit. I guess that's, maybe for Brian, does that appear in that other line? I guess just this level maybe is somewhat sustainable for the next couple of quarters as you capture that benefit.
If you're looking for the line item, it's in the dividends line item and non-interest income. We got an extraordinarily large amount of dividend from one of our equity investments, not all of them, but just one of them.
Okay.
We estimated that it was up about $861,000.
Yep.
Do I think that is sustainable every quarter? No. Do I think that we might have that or maybe a little better next quarter? Maybe. There's the possibility that they may be able to reciprocate that in Q1, but I've not heard that they can reciprocate that after Q1. You've got a normal run rate on that might be $400,000 or $500,000, and instead we had $1.3 million for the quarter.
Yep.
It looks like the first quarter that they've hit a pretty nice one. We're anticipating a big payday the first quarter.
Yeah, it's a little choppy.
Yeah.
It had been very consistent for quite some time, and I tease the guys, I'd love to get big income, but as a public company, it's like, okay, there's something I get to explain every quarter.
Just the last two minor things. Johnny, I guess just as it relates to M&A, just if you remind us, 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&A?
I really don't have a size range. I wouldn't mind doing. Probably wouldn't do a 20, but probably would do a 15. Probably would prefer warming ourselves back up with something in the $1 billion to $2 billion range to get warm back up.
Gotcha. Okay. The last one was just maybe for Stephen, just on the margin. You talked about maybe seeing the core margin stabilizer improve a little bit. I guess the outlook to see it go up a little bit, what could lead you to see the core margin actually expand a little bit as you think about going into 2020?
A couple things, and I think Brian mentioned, as interest rates stabilize, some of the investment portfolio impact minimizes, hopefully. 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. I think in December, I had our portfolio yield kind of ex event, ex accretion income in the 5.5 range. If we think about where we're collectively riding loan yields between the community bank footprint and Chris's group, if we're north of there, I think that's where we could potentially see improvement.
Gotcha. 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, Ailey. Thanks everyone for being with us today and for supporting our company. It's been two interesting years, and the company's continued to perform. We were down about $10 million this year over last year. We hit the same EPS number, but actual income was down about 10 and a half. It's about five out of New York, about three out of Legacy, and about, as Brian puts it, two for the cost of buying back the stock. Kind of gives you perspective. Last year before last, I guess it is now, 2018, CCFG had some big windfalls in the fourth quarter, which they didn't have this year. It took them down a little bit. Actually, Legacy hung in pretty good. If we hadn't had a full year of Durbin, I'm not sure Legacy wouldn't have been up.
In spite of all the craziness that's gone on this year and the political winds and interest rates and all the different psychologies that are people trying to spread, this company has remained as solid as anybody in the country and will continue to do that in the future. I appreciate your support. Hopefully, we'll see some good windfalls in the first quarter or the first six months that'll really give us a kickoff to the year. Hopefully we get our transaction that I mentioned to you closed sometime in February or March and let that start accreting in the income. 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.