Greetings, ladies and gentlemen. Welcome to the Home Bancshares, Inc. fourth quarter 2018 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. 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 that 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 will find this note on page three of their Form 10-K filed with the SEC in February 2018. At this time, all participants are in a listen-only mode, and 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 Mr. Allison.
Thank you, Sean. Welcome to Home Bancshares' fourth quarter, year-end conference call. It is hard to believe that another one has passed in 2018, and 2018 also was the 20th year for our company, 20-year anniversary. Congratulations, all. 2017 was a great year, resulting in about $200 million in income, and now 2018 has come and resulted in about $300 million in income for our company. That is a 50% increase. That is not too bad when the world was supposed to be coming to an end. With me today is Randy Sims, Tracy French, Donna Townsell, Brian Davis, Stephen Tipton, Kevin Hester, Jennifer Floyd. I will be available for Q&A after the presentation ends. Chris Poulton, Donna Townsell, and myself traveled extensively during the last six months of 2018, trying to understand investor sentiment towards bank stocks.
We were told that the boogeyman was under everyone's house, that there was a Russian behind every tree, that there was an imminent recession, that the flat monster had returned, and my friend Vince, after several whiskeys, by the way, said he thought it may be the effects of killing Osama bin Laden. Actually, they were all wrong. The reality was that Peter Pan could no longer fly, Minnie Mouse left Mickey for Goofy, and the Ghostbusters and the man with two brains had flown in a Piper Cub with Frankenstein piloting to take over the banking industry. Nevertheless, we sent Batman, Superman, and Nancy Pelosi to save the day, and they built a wall around the airport and saved us all. At least we finally got it figured out. Let us go to some real facts. The quarter was actually pretty good.
The as-adjusted numbers were EPS $0.44, net income $75,819. It's not too bad. Return on assets, 38.30%. Expenses were basically flat, ex the hurricane and merger expense. Organic loan growth stuck its head up a little bit at $239 million in loan growth. I guess part of it was the fact that the payoffs slowed down somewhat. Asset quality remains strong. We have one acquired Stonegate Bank credit of about $8 million that did not sell this quarter. We thought we had it sold. The loan is both classified and specifically reserved, and the company does not anticipate any loss in that one. It's about $8 million. We hope to get rid of that next quarter. Non-interest expense was flat to down, ex merger expense. Of the $239 million in loan growth, $37 million came from Shore Premier Finance. $116 million of that came from the Arkansas Legacy book.
New York generated $86 million. Florida and Alabama were basically flat for the quarter. The company had record originations of $1.1 billion. If you remember, that's kind of been teeing up. It was $940 million, $970 million, and now $1.1 billion. That's $1.1 billion at an average rate of 6.07%. That's up 57 basis points. Legacy generated $759 million of that at 5.87%. Shore Premier Finance generated $82 million of that at 5.45%, and New York generated $295 million at 6.74%. We continued to be in the repurchase business. We repurchased 5,308,000 shares in 2018, with 3,444,000 of those shares coming in the fourth quarter while they were killing bank stocks. We'll continue to be active in 2019. Let's talk about CCFG's performance. CCFG is presently 10% of our assets, with about $1.5 billion in loans. Of that, about one-third of their book is construction.
CCFG has made pretax, preprovision income for 2018 was approximately a little above $75 million. I don't think it's fair that The Street gives this segment of our business a much lower P/E multiple, which impacts our overall P/E by dragging down the community bank P/E. I don't agree with this because CCFG is a minor part of our assets and is extremely profitable. At the end of the day, they created $75-plus million in pretax, preprovision income, and that increases shareholder value and EPS. Say what you want to say, that's real train-riding money. Thank you all, our loyal supporters who've been with us for many years, and the hell with the naysayers. This has been a wonderful 20 years, and many have been with us since we started, and others have been with us since we did our IPO in 2006. Thank you for your support.
We're extremely loyal to our shareholders, and we'll continue to run this great company the way we have in the past. 2019 should be interesting for all of us, as the pendulum swings too far in both directions. The market has been so crazy that the piling on effect has driven down bank stocks to the lows of the early mid-1980s. Great time to pick bank stocks, because the good ones have been treated worse than the bad ones because they had more room to drive those down. I've bought more bank stocks personally in the last two to three weeks than I've bought in many years. It's almost a dartboard, you could draw one out of a bowl. I want to reiterate something that I said too, kind of looking at my notes from back last year.
I think it was the first quarter of last year. We were talking about bank stocks, and I said, "Obviously, someone liked it, liked our bank stock." Forbes ranked Home Bancshares the best bank in America of all banks from $8.8 billion to $2.7 trillion. What an amazing honor that was for our people. I want to thank the home team for a job well done. I said, "Let's do it again for 2019." The ball is certainly teed up perfectly for a great year in 2018. Randy, I am looking forward to another powerful year. This is the comments I made January of last year, and I said, "Randy, I am going to turn it over to you." I am just going to turn it over to you right now, Randy, before we go to Q&A.
Thank you, Johnny. Well, another great fourth quarter to complement another great year. Congratulations to all our employees and directors for a very successful 2018. You all have made a difference in our continued success. Normally, I lead off by highlighting the number of record quarters and profitability. Like for the 31st time that our fourth quarter income exceeded the fourth quarter in 2017, and by the way, over $47 million. Instead, allow me just a few minutes to talk about something even better, and that is the last 20 years of record growth and profitability. We have now completed 20 years as a banking organization since we opened up here in Conway, Arkansas. As an aside, I might add that I have survived, I mean, completed 34 years of working for Mr. Johnny Allison.
I can still remember in late 1998 asking Johnny what his real expectations were for the new bank. He replied, "Well, I would be satisfied if we just had a good community banking organization and grew it to about $250 million." Well, we finished this past year at over $15 billion. 20 years. It has been a wild and crazy ride, has it not?
Absolutely.
Here are just a few highlights. We started in a trailer with 10 employees growing to $100 million in three months. There were 386 stock certificates in our first issuance of stock to local shareholders. We placed an emphasis on customer service. That has never changed. I remember the fun of cooking cheeseburgers and hot dogs at football games, plus a host of other great fun community events over the years. That has not changed either. We placed an emphasis on innovative products for our customers. That has never changed. It has been copied often. We survived the craziness of the year 2000 with the regulators. We are still trying to survive the craziness of the regulators today. I should get an amen on that one.
Amen.
We concentrated one year on an efficiency project that changed the way we operate, resulting in a model of management and a leap in profitability, and we have stuck to those principles today. We became a publicly traded company in July of 2006. We thrived during the recession. We raised capital in two days and bought failed banks over a period of several years. It changed our corporation forever. We bought the Liberty Bancshares, Inc. in Arkansas, expanding our footprint throughout the state of Arkansas, doubled their profits in less than a year, in the best deal we've ever completed. We bought and bought banks in Florida and now cover the entire state. Some were good, and we fixed the poor performers. The result is great profitability today. We opened an operation in New York. Regulators, analysts, and just about everyone continues to question that, even today.
Our New York office simply continues year after year to make more profit than any other region, and with pristine asset quality. The cost of that particular acquisition, deal, or whatever you want to call it, zero. The last 20 years has been nothing but consistent and growing profitability, just like the ROA of over 2% for this past year. I could keep going on, but I'm to the point it sounds like I'm lost in a Billy Joel song, and I would continue to repeat myself. What is that? That is the fact that since our inception, and then as we became a public company, I can proudly say our corporation has performed through good times and bad. If the economy is bad, we have capitalized on opportunity. If the economy is good, we have capitalized on opportunity.
We've seen a few bumps in the road over the last 20 years, but outside of that, nothing but success. To the craziness of today. We have an economy and a political environment that we have never seen before.
Our markets continue to see good times. Nothing to scare us. A pretty good economy as far as we're concerned, but maybe not so much on the political side. Consider this, we are trading today around $18, give or take. The last time we saw that price was the second quarter of 2015, and our EPS that quarter was $0.25. Try comparing that to our EPS for the fourth quarter of 2018 at $0.44 adjusted. Talk about crazy. I think that is a world record of not making any sense.
Wait a minute. I don't know if we were too high then, we're certainly too low now, so.
Makes no sense. When I consider some of the things over our past 20 years, I realize we'll get past this, the politics, everything else, and make the most of our opportunities as we look forward to our 21st, and another successful year in 2019. I will end my comments, and I appreciate the little time and the editorial that I've been allowed, with this off the press, hot off the press item that is pure evidence of what I've been discussing, preaching, or whatever you want to call it. I am so proud to be able to announce today that Forbes, for the second consecutive year, has named us the best bank in America. What an absolute honor. Thank you, Johnny, for allowing me to make that announcement. 20 years, and it just keeps getting better. How about a round of applause on that one?
Yeah. We should have had the kazoos here.
We should have had a band.
Yeah.
We should have had a band. With that, I will turn it back over to you.
Thank you. That's quite an honor. I looked at my phone this morning, and I was working on my speech at home, and I saw where Donna Townsell called me three times in about 30 minutes, and I thought, "Something must be up. She never calls three times in 30 minutes." She gave me the news. Funny story was, she was telling marketing and sending information out about two or three weeks ago, said we can't use the Forbes stuff anymore.
We used it last year, and we could say that we were in that year, but I said, "How do you know we're not going to get it again?" I said, "If they liked us last year, they ought to love us this year." I don't know why I just felt that way, then bam, she tells me this morning, that we've won the Forbes Award for the second time, two times in a row. That makes me pretty happy, pretty proud.
Incredible honor.
Yeah, congratulations to everyone. I found my info. What I read a while ago was the info I had a year ago when we were having our conference call, and there it is. I said, "Let's do it again in 2019," and damn if we didn't.
How about that?
Congratulations, everyone. Sean, we're pretty happy around here. Are you ready for Q&A?
We will now begin the question and answer session. To ask a question, you may press star one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star two. At this time, we will pause momentarily to assemble our roster. Our first.
Sean, I have-
Oh, yes. Go ahead.
Are you with me, Sean? This is John Allison. I have one. We don't have any kazoos this time, and we don't have any hand clappers, but I've got something to celebrate this Forbes second time around. It's appropriate to Arkansas. I'll blow it for all our friends. That's an Arkansas duck call. All of y'all have heard that before. I thought that was pretty appropriate. You can go to number one if you want to, Sean.
Sounds great, Mr. Allison. Our first question comes from Matt Olney with Stephens. Please go ahead.
Hey, thanks, guys. Congrats on the Forbes news. Johnny, I like the duck calls out there.
Well, I thought we'd do something other than kazoos. I asked them if they had them. They said they didn't know where they were. Donna got some hand clappers, but they didn't work very well, I just got a duck call, blew it. Thanks, Matt.
Wanted to start on the core margin in the fourth quarter. It seems like all during 2018, the core margin was pretty flat, but it dips pretty hard in the fourth quarter. Help me understand the dynamic of what happened in 4Q, what's the outlook for the core margin in 2019?
Okay. I'll let Stephen and Brian cover that, maybe Chris jump in a little bit on that after that. Actually, what you're going to see is the margin's pretty flat. What you saw a big drop is all explainable, I don't know which one of y'all want to go first with that, Brian or Stephen?
I'll give a little color, then I'll pass it off to Stephen. He's sitting here on my right. What we had, for the most part, for the core margin, there was $3.8 million from New York that came in from some minimum interest and default interest on a few loans that they had that paid off in the third quarter. The third quarter was a little bit inflated by this $3.8 million. That's about 12 basis points overall. If you're looking at our 16 basis point decline in margins, we had a $1.3 million in accretion decline, and that's a little over three basis points. Between the decline in accretion and the decline from New York for what I'll call maybe not necessarily non-recurring, that pretty much explains the entire decline in the margin.
That's fair. Matt, this is Stephen. I can take a little bit of that too. I think what we saw, obviously, in Q4 from a payoff perspective, those numbers softened quite a bit. Payoffs in Q4 were about $540 million. They were $330, 40 million less than what we saw last quarter and maybe more of a normal quarter compared to Q1 and Q2. Those bounce around and are certainly hard to predict. What we ended up seeing in Q4 was quite a bit lower level of payoffs, which has some impact on the NIM.
Chris, you want to comment?
Yeah. This is Chris. Probably the only thing I'd add is we had about three times the amount of payoffs in Q3 as we did Q4. In addition to that, most of our payoffs in Q4 were paid off at maturity. When you pay off at maturity, there's very little income acceleration. In Q3, most of the payoffs were early payoffs, and those have income acceleration, including the minimum interest. It wasn't just the volume, but I would also say the type of payoffs, where when you pay off the maturity, there's less acceleration.
Does that answer it, Matt? That answer your question? Any other questions about that? Comments?
Yeah. I guess I'm not sure I fully appreciate this. If the third quarter was pretty heavy in terms of the minimum interest payments and the fourth quarter is pretty light, is a more normalized level of those minimum interest payments somewhere in between? How do I think about a normalized level of payments for that?
Chris?
I think it's hard to do it on a quarter-to-quarter basis. What I would tell you is that on a year-to-year basis, over the course of a year, we generally do get acceleration. I would say this past year, we probably had a little higher than a normal year. In any given year, we are going to get that. I would tell you quarter-to-quarter, if you averaged it out, you would expect it to probably be in between there. I can't tell you that in the first quarter it'll be an average quarter, the second quarter it'll be an average quarter. We look at it more on a year-over-year basis. In the third quarter, a lot of those happened at the end of the quarter. We had thought they might slip over into Q4, it would've looked fairly flat.
Okay. A related topic, I think, was some of the fees from the third quarter in fee income, I believe, were also associated with some of the pay downs from CCFG. Can you kind of quantify what that was in the third quarter, what do we see in the fourth quarter from that?
I can take a little bit of this. Chris, you might want to chime in. For the other service charges and fees, we're down $1.4 million, and approximately a little over $1 million of that is coming from CCFG, because once again, you had less exit fees, et cetera, from the payoffs.
Just wrapping this up, how do we think about the core margin dynamics from here, understanding there could be some volatility from some of these minimum interest payments that Chris was talking about?
We started January 1 with about a 407, and we bought Shore, which diluted down five or six or seven basis points. Probably think about four. That's kind of where we're hanging in. We originated $1.1 billion this quarter, record quarter originations, and those are up 50 basis points. That's pretty impressive numbers on that. As you know, we've set that trend. We're turning the boat, we're turning that big portfolio around over a period of time and increasing those rates. I'm pretty pleased with that. If, in fact, the Fed is going to sit still for a little bit, that's pretty positive for us. We won't have those immediate impact of that billion one that are tied, basically, to whatever the Fed does. We've changed our program a little bit here. We grew deposits about $270 million. Isn't that right? $270 for the quarter.
Change is going to put more emphasis on the cost of funds rather than the deposit growth. We had it on cost of funds and deposit growth. We'll be focusing strictly on the winners of those groups will be on the cost of funds. I'm actually optimistic that we continue at the rate. They're going to all roll their eyes here because I think that the margin ought to be increasing at least flat. Stephen's rolling his eyes, I'll let Stephen take it from there.
That's fair. As Charles mentioned, the production this past quarter, when we talk about the payoffs, all areas of the bank have done a great job in being able to increase rate quarter-over-quarter production for Q4 which is committed balances. A good portion of that has not yet funded. The combined production of $1.1 billion for the quarter was at $607 million. Payoffs rolled off at $550 million. I think the combination of an increase in production rates and as those balances pull up, relative to what pays down, gives us comfort in seeing that happen going forward.
I think the margin really, even though it looks like it has jumped around, you'll see a little jumping around of it, has really, since the first year after you merged Shore in, has remained fairly stable. I think we have a shot at maybe moving that up. If our team continues to ride where they're riding, 6.07%, 6.10%, they continue to move those rates up, I think we got a shot at moving margins up. Overall, it's been a pretty good margin year. We really had what looks like a big drop, really was not a big drop. It's kind of a one-time event. I think, Chris, some of those loans that left during the third quarter, would I say, Chris, you were encouraging some of that?
I think that's right. We look at it towards the beginning of the year, in the second quarter, identified a few that we thought over the course of maybe 12 months or so, we'd probably encourage them to go find financing elsewhere. I thought it would take nine to 12 months, six to 12 months to get those out. It took about three months, which I think speaks to the strength of the secondary market during the summer. I think we got all the ones we identified are moved on, and they moved on a lot faster than we anticipated. I might have overshot that a little bit, but I think I'm still happier that we executed.
Okay, guys. That's great color. I appreciate it. I'll hop back in the queue. Congrats on the last 20 years.
Thanks, Matt.
Our next question comes from Brady Gailey with KBW. Please go ahead.
Hey, good afternoon, guys.
Hey, Brady.
4% core margin, what about accretable yield? I think last year, y'all did a little over $41 million of yield accretion. Where do you think that shakes out in 2019?
I'll take that one. We did $9.4 million in accretable yield in the fourth quarter. As a general rule of thumb, you kind of expect that that might go down from the baseline about a half a million dollars. I mean, it's hard to project out too far in advance, but if you were to ask me where I think it'll be for Q1, would probably be around $9 million or just slightly under $9 million. Part of the decline that we had in the accretion yield for this quarter was the fact that $800,000 of it was a decline in payoff accretion, too.
Okay. Then, you mentioned having a lesser amount of loan payoffs that resulted in loan growth of 9% linked quarter annualized, which is a lot higher than kind of where you guys have been running. How are you all thinking about loan growth in 2019? Do you think we could keep this kind of mid to upper single-digit growth level this year?
Kevin, you want to take a shot? You want to throw a dart at the board?
Well, growth, it was a combination of, as Stephen said, record production for the quarter and a more normalized level of payoffs. Will that level stay at the fourth quarter level of payoffs? There's no way to know that today. I think we started the quarter not looking at that strong of a book. Between the payoffs being more normalized and really hitting the fourth quarter hard, I think it was a really great quarter, but I wouldn't push for that, expect that in 2019.
We had-
High single digits would be tough, I think.
Yeah. Actually, the forecast for the fourth quarter, Tracy, was down, what? 100, or Stephen, 140?
Early in the quarter, it was down 100. Early in the quarter, it was 150.
Yeah, 150 showed we'd be That's a greased pig. I mean, it's hard to get your arms around that deal because you never know what people are doing out there, and forecasting more payoffs than we thought would come in, and didn't anticipate as much loan growth being closed as we got closed. We were forecasting it down, and it ended up being up $239 million. It's presently forecasting the first quarter to be down, that could change in a week or three days, and that happens. All of a sudden, something doesn't pay off, something else comes on, and you just start building your loan volume again.
I think the average over the years, Stephen mentioned, the production's always been really good. I think Johnny and I hit the road last year, we had indicated we thought the pipeline was really strong early in the quarter, we've asked our team to be much more conservative on the projections and as we do quarter to quarter. The activity that we see out there in the pipeline that doesn't show up on the pipeline seems to be pretty steady. We'll keep our fingers crossed. If payoffs slow down a little, that'd be great, one quarter is probably not a rule to go by, the production side, we hope is.
We didn't let Johnny predict loan volume all quarter long, we ended up having a $239 million quarter.
Yeah. Yeah. If you remember, I do not project loan volume anymore since I got egg on my face after the first quarter. I thought it was going to be good, but I did not want to say that. I spelled it one day.
I heard Johnny say that in a board meeting. He said, "Well, I do not want to say L-O-A-N.
Yeah, I spelled loan growth out because I thought we were going to have it. I did not want to say the word.
All right. Finally for me, just on M&A, you all saw a deal there in Arkansas yesterday. I know it is tougher with the currency trading where it is at, but Johnny, how are you feeling about the likelihood of you all doing M&A in 2019?
We're not adverse to doing M&A. We're looking around, see what makes sense. We're actually feeling pretty good. The boogeyman didn't get us. I'm actually feeling pretty good. Asset quality's remained good. We're pushing up rates, growing deposits, growing loans. I don't know what else. I'm pretty happy. It's been a tough year, though, with all the pessimism out there. It's really been a tough year. Overall, it's been a good year, and I suspect that the next year, so it's flat and we only make $305 million next year, it's still best in class from $310. Or maybe make $290. The company, when the opportunities are there, Home Bancshares will darn sure get their fair piece of the market. We'll get our fair share of the market when it's there.
We won't do anything stupid in the meantime, and we won't give stuff away. We'll just remain disciplined as we always have, and when it gets real good, we'll be there to play. If it gets real bad, we'll be there to play. I really like our position. I like where the company's sitting right now.
All right. Got it. Thanks, guys.
Thank you.
Our next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead, Jon.
Thanks. Good afternoon.
Hi, Jon.
Congrats on 20 years.
Well, thank you. Doesn't seem like 20 years, but time flies, doesn't it?
Yeah, it does.
When you're having fun.
When you're having fun. Just a different way of asking Brady's question. How do you feel about repurchase appetite at this point? You were active, but obviously you're not as satisfied with the stock price, just curious what you're thinking on that.
Well, we're going to continue to buy the stock. We have requested the regulators allow us to buy just short of $200 million worth of stock if we choose to. We're in the game. We're in the market. I remember back in the mid-1980s, early 1980s, when bank stocks were selling at book, or book and a quarter. I remember those days, that kind of reminds me of that right now. That's why I've been buying these bank stocks. You don't really have to be real smart to buy bank stocks now. You can almost throw a dart, particularly if you buy the good ones. I'm pretty comfortable.
Okay, good. What does your crystal ball say about the Home $2 run rate?
Well, I think it may have pushed out a little bit. I think it may have pushed out a little bit, but not far, not too far out. I think maybe another six to 12 months, what we kind of thought around here that we might push it out. That's really because I mean, when you look at a billion and one in originations the fourth quarter, we're doing lots of business. That deal could turn on a dime, and you could end up with an $800 million plus quarter or $600 million. If you look at the steam of this deal, it's kind of pretty consistent. I think it was 950, Stephen, 975, now a billion and one in originations. It's actually happening every quarter.
If we can get the pay downs to slow down, as I said earlier on the phone, people have said, "Boy, Home took off. They grew $450 or $500,000,000 this quarter." It's not the fact that we're generating, we're originating the loans, it's just that we're getting the payoffs. You can see our revenue was down a little bit in this quarter, but all it's got booked last. If you look at the average loans on the books, it was minus $20 million for the quarter. The revenue will start rolling in off of those. I can look at the daily report and see the difference already.
Yep. I was going to ask about that, just the period end versus averages as well. Does it feel like payoffs are easing and originations are up, or what is the relationship there?
I actually am optimistic that payoffs are easing, and they certainly did. We look back to fourth quarter last year, and they slowed down fourth quarter last year. Correct, guys?
That's right.
Yeah, they slowed down a little bit. Randy, do you have a comment?
Well, I was just going to say, if you heard also, Florida was flat. They got hurt a little bit by the hurricanes, and as they come back, I'm already getting emails on where I live in the Panhandle of some sales that are going on of houses and everything. As that comes back, that's just going to add to it. We've had last quarter's success really without the kick of Florida, and that usually we see in the numbers. I'm pretty optimistic like Johnny, because you're going to see that come back as it gets closer and closer to spring.
Yeah. Lion's Share Origination came out of the legacy Arkansas footprint, which is pretty good. Glad to see that. Good numbers, good rates on those, too.
Yep. Okay. Then just one more on the margin. I know there's been a lot of questions there, when you look at accretion and fees, Q3 versus Q4, would you say Q4 is depressed and Q3 was, obviously, you said a little bit elevated, would you view Q4 as a depressed number relative to where you'd normally expect it to be?
Yeah, I would because we sometimes talk about the additional interest income that comes from New York, and it sometimes is fairly lumpy. We've had some lumps along the way. It's just that one lump is a little bit bigger than the next, and then all of a sudden, it just kind of fell off this quarter. They didn't really have anything of significance to provide any additional juice to the margin this quarter, so it would be kind of depressed, yes.
Okay. All right. Thanks a lot.
Hey, John.
Yep.
Did the duck call sound good to you?
Yeah. Is it a mallard call?
Well, of course.
I appreciated the grease pig reference more than the mallard call. All right, thanks.
You're welcome.
Our next question comes from Stephen Scouten with Sandler O'Neill & Partners. Please go ahead.
Hey, everyone. How you doing?
Hi, Stephen. How are you?
I'm doing all right. Guys, I know, Johnny, you just said you got maybe $200 million you're requesting to buy back additional stock. Is that kind of what you think is the best use for your earnings today? You all are obviously still making a bunch of money, is that what you see today with where the stock is the best use of that growing capital base?
It is to me. We'll probably do a little more for our shareholders at some point in time, maybe another little dividend increase. Overall, I think it's a place. As Stephen said, if we liked it at 23 and 24, we'll love it at 18. And we do. You can see, obviously, we've stepped up the repurchase to about almost 3.5 million shares the fourth quarter because they were throwing the baby out with the bathwater, so we just bought it. We just kept buying it.
Yeah. No, definitely. When you think about capital, would you take TCE down to maybe 9% to continue to buy back shares if it's here? How do you guys think about how much of that capital you would use?
Maybe. We might do that, Brian.
Well, really what we're doing right now is, if you look at his $200 million that he talked about, that's really the free capital that we raised through retained earnings.
Yep. Makes sense. Okay.
At those levels, we wouldn't get to those numbers is what I'm trying to say.
Yeah. No, understood. Yeah, I was wondering if there'd be incremental beyond that if the market stays depressed where it's been.
I don't know. We looked at that. We looked at doing an offering, what'd they call it? A convertible. We looked at that. We looked at two or three different things. To me, that stuff looked good, but I'm glad we didn't do it at that time. Stock was about $22, and I didn't ever imagine that the stock would go to $17, $18. That never crossed my mind.
Yeah.
That's pretty enticing to me at those levels, to step up and buy an 18-wheeler load of it. When they take bank stocks, as the world has, take bank stocks to where they've been in the past, and if experience and what happened in the past is any likelihood of what's going to happen in the future, that's what's got Johnny tweaked on buying the bank stocks, and you buy the good ones that you know. You could actually throw a dart and hit any of them. They're probably all going to go up.
Yeah. No, fair enough. On the originations that you guys had, the $1.1 billion, can you talk a little bit about how much of those originations were funded versus what's still unfunded, and what segments of the portfolio are driving most of that growth?
Sure. Hey, Stephen, this is Stephen Tipton. I would say all in, a little over half of what was committed in Q4 funded. We had a little over $800 million in non-CFG production and $400 of that funded, the typical funding percentage of what we see out of Chris's CCFG office is in the 50% range. I'd say that's a good gauge to use. I guess with the production that we've seen from Shore, that's a nice C&I/consumer component there. I would just say, otherwise, generally kind of a mixed bag of CRE and construction and improved CRE.
By the way, Shore had a little jump in past dues. That was not really Shore. At least we're not accepting that as Shore's past dues up. We did a pretty poor job here of passing the baton from one runner to the other runner, and about three-fourths of that or half of it's already current and paid as agreed. That little spike there, we think was mostly our fault. At least we're taking the blame for it right now, and we'll see in the next two or three quarters.
Okay. Fair enough. Maybe one last question from me, just as we think about the efficiency ratio. Obviously, it remains impressive, still under 40%. Are there any major expense initiatives that you have to undertake, or regulators making you invest anywhere that you wouldn't have otherwise, or anything that will drive that incrementally higher from here?
Pardon me? The regulators don't like our 38% efficiency ratio, I don't think. That'd be my opinion. They'd like for us to hire. We got 1,800 people. They'd like for us to hire at least another 1,700. We are hiring, but we're maintaining our efficiency thus far. I think I told someone that hopefully we'd cap it at 40 or below.
That sounds good. Well, congrats on the 20 years, guys, Johnny, I think you got about 10 days left to use that duck call, get after it.
Yeah. I have the meeting today, I have our board meeting tomorrow, it'll be a live duck call in the woods, Stephen.
There you go. The question is, which is easier, shooting ducks right now or picking bank stocks on that dartboard? That's the real question.
Let me tell you this, it's easier to pick bank stocks than it is to shoot a duck.
Yeah.
I've got tens of thousands of ducks, if that'll tell you anything.
Thanks, Johnny. Appreciate it.
Thanks. You bet.
Our next question comes from Brett Rabatin with Piper Jaffray. Please go ahead.
Hey, guys. Good afternoon.
Good afternoon.
I'm kicking myself for not bringing my duck call to the office today.
Well, just fly to Arkansas and you listen to me blow mine live.
Wanted to ask, you commented about the negativity or the skepticism in the market, and I'm just curious, are the plans for 2019 any different for CCFG or Shore Premier Finance? Maybe give us any color you can on how we should think about the profitability of those two areas in 2019 versus 2018, maybe.
Well, I suspect that I would be pleased if we had similar profitability out of Shore and actually a little more out of Shore and a little more out of CCFG. I'd be happy with that. I think overall that it should be a pretty good year if something doesn't blow up somewhere, and I don't see anything to blow up. There is lots of pessimism, lots of fear and pessimism, we've seen that before. We've seen that in the market in different spaces of the market, it just so happens right now. They've taken a lot of different markets down, they've taken banks down substantially. I don't know if that answers your question.
I guess I'm just trying to figure out if you view the current market as an opportunity to do more things, particularly in CCFG, or if you view that as you'll just keep doing what you're doing and maybe you're a little more careful or watch it a little more. I guess I'm just trying to understand your mindset on that in particular given that environment out there where people are worried about-
Go, Kevin, you go.
credit in general.
I'll answer it. For Shore, we're ramping up the commercial side, what they do. That had pretty much, with their previous operation, had wound down just because of the way it worked out, and that growth, a lot of that in the fourth quarter was that commercial side that's ramping up. We see it particularly for Shore as an opportunity, and I think we think that's going to be a good year for them.
Brett Rabatin, on New York's operation, if you know, we just opened up our office in Dallas two months ago, that should ramp up some opportunity there. That office also is working with our community banks too. That will give us some avenues that we haven't had in the past. I think with what Kevin Hester said on Shore Premier Finance and what Christopher Poulton is doing in Dallas, along with the community banks here, that certainly opens some opportunities for us there.
2019 is just like any other year. Mr. Allison expects record-breaking quarters and that has not changed. Everybody's got to make more money.
New York's about $1.5 billion. They can go to $2.1 billion. We're kind of capping them at $2.1 billion, unless we did about 15% assets. You can extend that out if you want to, what New York looks. If in fact New York gets there by the fourth quarter of next year, I'm not saying they will because those numbers, they don't have to do that. They take what someone gives them. You look at New York adding to when they ramp up to $2.1 billion and Shore Premier Finance is growing. I think Shore Premier Finance originated, got $86 million worth of growth. They booked 40, about half of that or 30. What'd they book?
We had about $80 million in production from Shore Premier Finance in the quarter and a little shy of $40 million in net growth. I think they're doing as we thought or a little better.
I guess the proof's in the pudding. You got $1.1 billion in originations for our company, which is record originations at record rates at 607 or 608. That's encouraging to me. Can we outrun the cost of funds, and can we outrun the expense side? I think we can. You pull out merger and acquisitions for this quarter and hurricane losses, you see flat to down on the expense side. Other than some regulatory stuff and hiring some people there, we got some expense going up. We can keep pushing rates up. Hopefully, we can continue to get better on the cost of funds side. If we can do that, I think we can increase our spreads, with or without loan growth. With or without loan growth, I think we're going to make more money.
The Panhandle, as you know, just went through the hurricane not too long ago, and one of our good producers down there, Johnny, and I just spent some time with one of North Florida's larger customers, and it appears that there's more opportunity there. South Florida is beginning to kick in. I just think it opens up pretty good. The Dallas office, if the community bank does have a little stale, they can pick some up there and vice versa. I think the opportunities are several different directions.
It's all good. It's all good. Depends on what the economy does, depends on investor attitude out there, developer attitude and what they want to do, what the business world wants to do.
As Stephen reported, North Arkansas was one of the heavy hitters this past quarter.
Yeah. We're seeing it in Arkansas, too.
Okay.
Construction and remodeling from the bridge of Panama City Beach on all the way to almost Carrabelle is going to be, in Florida, is going to be record all time.
Yeah.
It's going to be rocking and rolling next year.
We're the 500-pound gorilla in there.
That's right.
We got major presence there, great people on the ground, Jim Haynes and his team.
Okay. That's right color on that. I just want to make sure I'm clear on, there's a lot of commentary on fees and discount accretion and whatnot, but I want to make sure I understood on the cost of deposit side. It sounds like you're saying you do think that you're over more of the hump than less of the hump in terms of deposit betas. You're expecting deposit betas to be a lot more reasonable relative to where they have been the past few quarters in the next one or two especially.
I think that's correct. We're going to put emphasis on the cost of funds, which we really hadn't been doing. We've been putting emphasis on growing deposits. We have, as of yesterday, the day before, emphasis on cost of funds. I think we had like 15 basis points increase and 15 basis points increase, and we had 16 last quarter basis points increase. We're going to see if we can get that down a little bit. Actually, margin would've been
Margin was kind of flat to up. You really dig into it for the quarter. We're still hanging around that 4% margin, maybe 397, 402. I think that's where we're going to be, and maybe be able to spread that up a little more, maybe improve that somewhat in the next couple of quarters. If we can slow the cost of funds down, we're going to grow the margin because we're not going to quit pushing up rates on the loan side. Do you agree with that?
I do.
Okay. I appreciate all the color. Thanks, guys.
Thank you.
Our next question comes from Brian Martin with FIG Partners. Please go ahead.
Hey, guys.
Hey, Brian. How are you?
Hey, not bad. Hey, Johnny, just on your last comment about the deposit strategy. What in particular are you guys doing, or have you changed on the funding side? I guess you're saying you're more focused on the cost versus the growth, or I guess, is there something to it?
That's correct. We've had a kind of a combination there of growth and cost of funds. I think we lost a little side of the cost of funds for the growth. We're going to try this a little bit and see how it works. I'll tell you in about two quarters from now how I think it works, or you'll see it. Actually, you'll see it. I won't have to tell you'll see it.
Okay. The-
We really want the Fed to quit raising. We really want the Fed to quit raising. If they pause, which I have a suspicion they're going to pause here for a little bit, I think that's positive. I think that's positive for us.
Okay. The biggest driver of the potential to raise the core margin is more on the funding side and managing that rather than I mean, it sounds like you're going to continue to get better loan yields or inch that up. If you get the margin moving higher, it's going to be more driven off of the funding side and kind of what you're doing there.
I think that's fair, maybe 60/40. Maybe 60/40 on the.
On both.
Maybe 50/50. That's probably a 50/50 number. That's probably 50/50. I mean, we're getting the yields. I mean, you see us getting 607, 608. We're not giving it away. Our people, it took a while. We had to since had to draw a six and send it out to them, Brian, and show them what a six looks like. A lot of them didn't even know what a six looked like. We drew pictures of sixes and emailed them out to all our lenders so they'd know what it looked like.
I gotcha. I appreciate it. Just maybe one question for Brian, just on the fees that were in the service charges, kind of the exit fees, Brian, how much specifically was in the fourth quarter? I guess, did you say there was a $1 million decline? I just didn't know how much was what was actually in the fourth quarter level.
It went from $2 million- $1 million.
Okay. $1 million.
To the third quarter. Yep.
I gotcha.
Million-dollar reduction from third to fourth.
Yeah.
That was Chris' payoffs.
Yeah.
Yep. Okay.
I mean, it's sweet when you get it, Brian, because it's real money. It comes in the door, and it's real money, but it hurts the next month.
It was down from $2 million- $1 million. From a theory standpoint, it could go to zero, but they seem to have some of it every quarter.
Yeah.
Okay. Similar to the other question earlier, I mean, this level is more normal, depressed, I guess, when you look at fourth quarter? I know you're saying you're getting some every quarter. Just trying to understand what this quarter looked like.
Let Chris run with that. He has most of the fees on that. Chris, you want to talk about?
Sure. Yeah. It was a little down. I would say it was a little depressed. Some of that being that some of what we would normally have expected to occur in the fourth quarter occurred in the third quarter. Some of the payoffs that would generally have occurred in the fourth quarter, maybe even the first quarter coming up, occurred in the third quarter, so you accelerated it. Most of this was money we were eventually going to get. It's just what period of time it comes in. I would say the fourth quarter fee income number was running lower than it ran in the last three quarters. Again, and year-over-year, we had a little more fee income this year than we had last year. We would expect the fee income to moderate over time.
Okay, perfect. Just the last two from me. Johnny, I guess just talking about expenses or kind of the efficiency ratio, I mean, do you guys expect to see positive operating leverage in 2019? Just kind of from an expense standpoint, it sounds like the current run rates are pretty good level, and it probably doesn't move a whole lot off of this level. You talked about hiring a few people and some regulatory stuff, but it doesn't sound like there's any major increase coming on the expenses from the current level.
I don't see it. Anybody see it just around the table here? Is there anything I'm missing? I don't want to commit something, but I don't see it. I think we're pretty flat on the expense side, though, than the regulatory side. No big expenditures to come in anywhere. Tracy French, you see anything?
No, I think we're managing that along the way. Naturally, as we go, we're $15 billion going forward, and we got the new Dallas operation coming, so you're going to have some things that we're preparing for. Hopefully, the revenue and the little bit of growth that we're seeing offsets some of that expense.
Yeah. Okay.
Our bonus program's been a little bit restructured that if you don't grow income, you don't grow bonuses. If you grow income, you can grow bonuses. If you reduce income, you reduce bonuses. That's kind of the new Came out of the comp committee this time that they didn't reduce bonuses this time. They left them where they were. If your region was down, we left them where they were. If your region was up, you could go up in bonuses. That's kind of the new unwritten rule around here.
Yeah. Okay, the last one, Johnny, was just on the reserve and kind of provisioning. It's been negligible with the credit performance thus far, and it doesn't sound like there's anything on the horizon that's giving you guys a lot of pause. I guess, assume it's going to stay at low levels. I don't know that it stays at zero indefinitely, kind of your outlook on credit and provisioning.
Yeah. Actually, we're really in pretty good shape. You want to run those numbers by, Stephen? It would do.
Yeah. Hey, Brian, this is Stephen. We've talked about that a lot over the last couple of weeks. One, Kevin may give you some kind of commentary, what we're seeing from the hurricane reserve perspective and what we think we can do over the next couple of quarters. Looking at reserve coverage, non-performing NPLs gross dollars were $64 million or so, I think, at year-end, quarter end. There's about $22 million or $23 million of that number that are purchased, impaired, acquired loans. I think maybe differently than some of our other peers do, we give you the total gross dollar amount of non-performing. If you really look at what is non-performing that would technically be eligible to be covered by the reserve, we've got $108 million, $109 million in ALLL that covers $42 million, $43 million in true non-performing loans.
We still feel really good about, you are at two and a half times reserve to non-performing, kind of taking that analysis and feel really good about where we are there.
Kevin, any comment on this?
No. As to the hurricane, we are a year out from Irma, and we put aside $30 million a year ago. I think with Michael hitting the Panhandle, we are going to shift a significant portion of that $30 million over to a Michael event to look at for the coming year. There is probably some number, $5 million, $6 million, $7 million, somewhere in that number, that we internally think that goes back to the general reserve based on what has happened in Irma and what we think may happen in Michael going forward for this coming year.
Okay. I guess you have got some flexibility there to manage going forward. All right. Well, I appreciate the update, and congrats on 20 years, Johnny.
Hey, thanks. I appreciate it. It's been a hell of a run. It's been a lot of fun. We've ended up, these guys, not me, they've built a hell of a nice company. I see a reason why we'll continue doing what we're doing in the future what we've done in the past. Thanks for your support, Brian, a bunch.
Our final question comes from Michael Rose with Raymond James. Please go ahead.
Hey, guys. How you doing?
Fine. How are you?
Just a couple follow-up questions. Last quarter, you guys talked about potentially repurchasing some TRUPs. Obviously, I understand where the stock is, that that may be the better option, but wanted to see if you guys were kind of still looking at that. On the $200 million that you mentioned, I assume that's kind of incremental to what you already have out there. I think you have about 4.9 million shares left. What's the approval process for that, and how does that work? Thanks.
I'll take that. As far as paying off the TRUPs, even though we're over $15 billion, we still get to account for that as Tier 1 capital. It's not until we have an acquisition that's at the $15 billion or above that we lose the Tier 1 capital treatment. The way I look at it is it's still pretty cheap Tier 1 capital. When we have our next acquisition, I can see us really looking harder at paying off those TRUPs, but until then, I don't think that we'll actually do that. As far as the approval process goes for the repurchase, the regulators asked us to submit a plan at the end of the year to say how much stock we might need to repurchase, and they get the opportunity to at least approve or disapprove, and they have approved us for just under $200 million.
Okay. It's already been approved.
Kind of funny, the approval. I don't know if they approved it. They didn't disapprove it. It was an interesting way to read it. The regulators never commit too much out there. It was interesting reading that. I kind of chuckled.
They didn't say no. They didn't say yes. We moved forward. If you were also curious about how many shares that we could have authorized, the board is the one that actually sets the number of shares to be authorized to be repurchased. We also have to take the extra step and get the regulatory approval, too.
Got it.
Dollar.
Okay. Maybe just a follow-up question. Can you guys talk about it seemed like loans were flattish in Florida. How much is competition playing into that, and how much is just normal course of pay down activity?
I think it's just part of it. Arkansas was up $150 million-$170 million. That's kind of unusual for Arkansas to be up that strong. I kind of like the diversity of Florida and Arkansas and New York and Alabama. It just kind of went work. Alabama was flat. Florida was flat. Kevin?
The competition's the same. It shifted a little bit from. Rates are always an issue, right? It shifted a little bit more from rates to advance rates on collateral. You would think later in the cycle, you'd see people dial back a little bit, and we're seeing some people go the other direction and increase their advance rates. That's I think we fight that as much as anything.
We see a little bit of 80% advance rates and sub fives, or certainly sub six bids for five that you see some competitors doing that really doesn't make a lot of sense. Not a lot of it we run into, but some of what we run into is uncharacteristic for some of those companies. I guess they're trying to build their book or something. I don't know why they're doing it, but it's good companies that are uncharacteristically doing some of that. We'll match it. If it's hitting us, we'll match it if we have to. We don't want to. It doesn't make a lot of sense, but we'll match it if we have to.
Yeah, just to add, because obviously, the bank down there got acquired this quarter, and I've heard that there's been a little bit of a lessening of competition from that one particular institution.
I think you're exactly right. I'm glad that one's gone. I think that's good for us. I think that's good for Florida. I think it's particularly good for South Florida.
All right, guys. Well, thanks for taking my questions. Congrats on 20 years. I don't know what a duck call is. If you ever need any guns, we got plenty up here in Chicago. Thanks.
I thought y'all couldn't have guns in Chicago. I thought it was illegal to have guns in Chicago.
Good luck with that.
All right, thanks.
All right. This concludes our question and answer session. I would like to turn the call back over to Mr. Allison for any closing remarks.
I just want to say thank you, everyone, for joining us today. Great year. Great quarter. Hopefully 2019, I won't ask much more out of this bunch for 2019 other than just be the best bank in America again. Other than that, make $320 million-$330 million. I'll be happy with that, and keep our past dues and our asset quality where it is now. Other than that's a long way from that $250 million little community bank that you wanted, and you'd be happy the rest of your life. Yeah, I'd sell it. I was getting you hooked. Randy, you're making more in net income than you were supposed to do in asset. I know. Yeah. Hey, thanks everyone for your support. We enjoy the conference call, and I hope y'all enjoyed it too. Thanks.
Thank you so much for your time, everyone. The conference has now concluded, and you may now disconnect.