Good day, ladies and gentlemen, and welcome to the Bank OZK Fourth Quarter 2018 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to turn the conference over to Tim Hicks. You may begin.
Good morning. I'm Tim Hicks, Chief Administrative Officer and Executive Director of Investor Relations for Bancozk. Thank you for joining our call this morning and participating in our question and answer session. In today's Q and A discussion, we may make forward looking statements about our expectations, estimates and outlook for the future. Please refer to our earnings release, management comments and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward looking statements.
Joining us on the call from another line is George Gleeson, Chairman and CEO. Joining me here in our office is Greg McKinney, Chief Financial Officer and Chief Accounting Officer and Tyler Vance, Chief Operating Officer. We're very pleased to report our excellent 4th quarter results, and we'll begin by opening up the lines for your questions. Let me ask our operator, Sonya, remind our listeners how to queue in for
questions. Thank
I was kind of wondering if we can just at least start off with the concept of the repayments or prepays on some of, obviously your larger loans. It sounded like in the prepared remarks that those that there was a few of the repayments that were, I guess, technically supposed to be in Q4 that got pushed off to 2019. It did seem that you were a little more cautious on the repays or that they were going to be higher in 2019 than in 2018. But can you just elaborate on that a little bit more? Like how can we if how can we be comfortable with the I think it was like the low to mid single or double digit loan growth combined with a high level of repayments?
Any clarity would be helpful. Thanks.
Tim, you want me to take that one?
Yes.
All
right. Ken, first, on the timing of those prepays, earlier in the year, when we were giving guidance on our loan growth for the year and through the middle of the year, the expectation was that most of those loans that slid into 2019 would have been in 2019. As we got through the Q3, the likelihood appeared that some of those loans might move into December as prepayments. And accordingly, we gave fairly cautious guidance on our Q4 growth in the October call in anticipation that those prepays might occur in December. Some moved back into 2019.
So these are complex transactions with multiple parties involved. If it's a purchase situation, sometimes in the capital stack and equity raises and they're complex transactions. So they'll move around a few months to and fro. So we were pleased that some of those prepayments slid into 2019 because that gave us obviously another month or 2 or 3 of earnings on those loans, which we're very, very glad to have. None of the prepayments that slid are a result of any quality issues or concerns.
So it's all upside and that it gives us an opportunity to earn more income. The guidance that we gave on loan growth in the management comments documents for next year, which was non purchased loan growth in the low to mid teens takes into account what we described in the management comments as a likelihood of a higher level of prepayments in 2019 than 2018. So those were both those comments were considered and evaluated in connection with each other.
Got you. Okay. All right. That helps. And then can you give us any update in terms of your deposit strategies?
So you just hired someone there, but certainly the deposit costs have been going up less, I guess, last quarter than they did the prior couple of quarters. But what are you doing differently? How should we think about or how do you guys think about deposit costs going forward to help fund that mid teen loan growth?
Tyler, you want to take that?
Yes, I can. Hey, Ken. Tyler Vance here. Obviously, we're pleased with our 14 basis points of increased deposit cost in Q4, which you noted was down from Q2 and Q3. And as our management commentary stated, we have been focused on improving our deposit betas.
Over the last couple of quarters, we've been enhancing our data and analytical capabilities around deposits. And those additional deposit analytics have given us improved visibility in various markets and market segments in terms of geography, product and various competitors. We do have some other analytical and modeling enhancements underway and planned for 2019. And we had some good success also in Q4 and lowering our beta on certain large commercial and public fund customers. And for competitive reasons, I won't go a lot further there.
But as we said in our management commentary, while our results may vary from quarter to quarter, we believe that our increase in cost of interest bearing deposits for the full year of 2019 will be less than 2018, although we believe those improvements will likely be more evident in the second half of the year. And obviously, that level of improvement depends on a number of factors, including any Fed actions that may or may not take place, competitor activity and then certainly the volume of deposit growth required to fund our balance sheet growth in 2019. So we feel good about where we are. There's still more work to be done. And as you noted probably in our recent press release, we did add a new position of Chief Deposit Officer, Adi Kirley, another good evolution in our senior management team.
He has over a decade of experience in deposit pricing most recently at SunTrust Bank where he led deposit pricing for around $110,000,000,000 consumer deposit portfolio. As you saw in the press release, he's going to be reporting to Cindy Wolf, our Chief Banking Officer, who's really doing an outstanding job in our branch banking area. So our strong balance sheet growth requires us to focus on optimizing our funding profile further. And one of the primary ways that we do that is deposit strategy. So we feel like Adi's expertise will just continue to enhance our existing deposit acquisition capability.
Okay, perfect. And then just last question I had for you. In terms of expenses, it looks like the expenses in the Q4 were probably a little bit higher than what we were looking for. Certainly I guess the highest of the year, I guess technically. Is that sustainable?
I mean is there something unusual in there? There wasn't a lot of commentary in the management commentary around expenses. Like how should we like is that something yes, should we expect that to continue into 2019?
Ken, this is Greg McKinney. Let me take that if I can. There's a lot of moving parts that hit those noninterest expenses. We had some, what I would probably call, some unusual debit and unusual credit coming through in the Q4. I think those kind of for the most part generally offset each other on the impact of the Q4.
So I think that the Q4 results are, at least in the aggregate, a fairly clean run rate, start thinking about 2019. I think that when we move into 2019, some of the results, we may see some movement between categories of noninterest expense, but I think that's, at least in an aggregate standpoint, Ken, a pretty good starting point to base your 2019 models off of.
All right, perfect. All right, thank you very much.
Thank you. And our next question comes from Jennifer Demba of SunTrust. Your line is now open.
Thank you. Good morning. Glad to see the asset quality normalized more in the Q4. A quick question. As you've seen more angst in the equity markets and what have you seen in terms of sales trends for your higher price point commercial real estate projects or your commercial real estate projects in aggregate?
Jennifer, let me take that one, Tim. Jennifer, in general, I would tell you we've not seen any significant erosion in price or sales velocity on any projects that's caused us any concern at all. So we've been watching for that because obviously it's been a very turbulent market environment with a lot of geopolitical and economic and domestic political themes and things going on, but that hasn't seemed to adversely impact our sales or leasing or anything else at this point. So we continue to be pretty positive about the projects that we've got.
Great. And can you just talk about your net interest margin outlook for 2019 with or without rate hikes?
Tim, you want to take that one?
Yes, I'll do that. Jennifer, it's Tim. We haven't given any specific margin guidance because of those various factors of how many rate hikes, if any, that we'll get, competitive dynamics between loan and deposit pricing. Tyler gave you some good information on our deposit pricing. I will note that our non purchase loans, 76% of those are variable.
A large percentage of those, actually 77% of those loans are variable off of 1 month LIBOR. So they have a high correlation of rising and we saw the benefit of that in the Q4 as 1 month LIBOR rose throughout the quarter. We'll get the full benefit in the Q1 of 1 month LIBOR being at an elevated level for the full quarter. And that will obviously depend how non purchase loan yields will depend on various factors like Fed funds move and LIBOR move throughout the year. We've talked about our purchase loans.
Our purchase loans and non purchase loans are getting close to converging in their rates. I think non purchase loans was at 6 34% yield for the 4th quarter and purchase loans was at 6.48 percent for the quarter. So those are really close. While purchase loans is a higher yielding portfolio and is declining on a quarter over quarter basis, the fact that those 2 are getting closer and closer in yield makes that impact of that runoff less significant really in 2019 than it was in 2018. So I'll give you those comments around the margin, and we've not given specific guidance on margin, like I said, just given the various factors that really are outside of our control that impact margin.
Thank you.
Thank you. And our next question comes from Stephen Scouten of Sandler O'Neill. Your line is now open.
Hey guys, good morning.
Hey Stephen. Curious for you
all on the I know the
first question kind of was around some of the pay downs, but obviously payoffs in RESG were slightly higher than originations for the year, but growth kind of came as the unfunded book funded throughout the year. Is that a similar dynamic that we should expect to see here in 2019? Would you estimate that net loan growth largely comes from the shrinking of the unfunded book, but paydowns may still exceed actual new originations?
Tim, do you want to jump or I'll take that? Go ahead, Tim.
Yes, as you pointed out, Stephen, we had in 2018 at RESG, we had as you can see on Figure 6 in the management comments, we had $5,700,000,000 of fundings and that does come out of the unfunded balance. And then we had $4,800,000 of repayments as well. We've talked about our repayments being elevated in 2019 as well, but we've also given you the guidance of low to mid teens non purchase loan growth. So based on our projections, we feel good about where we are from that. On the unfunded balance, you did see that go down 1 $800,000,000 for 2018, and you can see that on Figure 10 in the management comments, at $4,700,000,000 of originations, we've given you comments that we think we'll be either at that number or exceed that number in 2019 on originations at RESG.
And then the fundings comes down, reduces that unfunded balance. So there's a lot of moving parts in both the funded and unfunded balance. All of that was considered in the context of the guidance we gave in non purchased loan growth.
Okay. And maybe on the move up that you saw in loan yields specifically, obviously, up 27 basis points this quarter, down 1 basis point last quarter. I know you guys mentioned in the release it helped by 4 basis points on the fees, but I'm still having a hard time seeing why such a big differential on the magnitude even given some of the movement within the timing of the LIBOR increases. Is there anything else there besides the timing of LIBOR and those fee differentials that drove such a big delta quarter over quarter there?
Well, Stephen, this is Tim. I'll remind you, we listed about 5 or 6 bullet points in Q3 of things that moved against us. Each of those were worth 1 to 3 basis points. And so we had a lot of things moving against us, including minimum interest and the level of minimum interest and prepayment penalties. A lot of those moved in our favor.
As you mentioned, we had 4 basis points of yield on non purchase loans that was in excess of our average from repayments and minimum interest. LIBOR didn't move much at all during Q3, started moving really after Labor Day, but really that started moving throughout September and really started strong in October and continued throughout the quarter. So we got the benefit of that as well. And you may mention that we talked about a third of the loans at RESG actually have a monthly reset as opposed to a daily reset. The other 2 thirds of the RESG loans reset daily.
And so that having that starting in October and then again in November, all of those things work in our favor. So the things that really worked against us in Q3 kind of turned around and worked in our favor in Q4. Okay.
That's helpful. And maybe one last thing for me. With the 2019 outlook on your core spread, you guys do a really good job of focusing, I think, on that core spread. And obviously, it was down about, I think, 9 basis points for the full year in 2018. So if we were to get no additional rate hikes as the forward curve is suggesting today, would that 9 basis points of course spread compression theoretically increase in 2019 or the deposit initiatives kind of minimize that?
Stephen, this is George. I think there are too many moving parts for us to give guidance on that. Our core spread was up 2 quarters in 2018 and was down 2 quarters in 2018. We were disappointed that the net number for the year was down and that was a little more adverse than what we would have expected at the beginning of the year. And that's just really a result of all the moving parts there.
So we've given cautionary guidance on that that we could have quarters in 2019 where the core spread is down. I think there are too many moving parts for us to try to give a definitive range or guidance on that. I will tell you it's a keen focus of ours and we're going to work hard to minimize deposit cost and maximize loan yields, but there are a lot of variables going into 2019, including whether the Fed moves 0 times or 4 times and in between. So it's hard to know.
But I guess not comfortable with kind of giving a range on what your current modeling says in respect to that for the year?
I think there are too many variables.
Okay. Thanks guys. I appreciate the time.
Thank you.
Thank you. And our next question comes from Arren Cyganovich of Citi. Your line is now open.
Thanks. If you could just talk about the competitive environment for RESG, are you seeing any intensifying or lessening of the competition there? Originations have been on the lower end from the past few years, but it's kind of consistent with what you've been saying. Has there been any change as credit spreads have widened out in the broader markets in your construction lending or CRE business?
We would hope to see that. We haven't seen that yet. And I think there's a lot of money in the coffers of a lot of debt funds that are real estate centric and their focus that are still maintaining fairly aggressive standards on credit and pricing. Clearly, I think the important thing for our shareholders is to know that we're very committed 1st and foremost to maintaining credit quality and second, we're willing to be competitive, but not to the point it impairs our ability to achieve our minimum target return on equity on transactions and growth is going to be affected by that positively or negatively as it was negatively last year. Our non purchased loan growth or RESG loan originations last year, RESG loan originations were $4,740,000,000 down about 4 point almost $4,400,000,000 from the previous year.
And that was just because we held to our credit discipline, we held to our return on equity discipline and we let the growth be the variable that moved and we're optimistic we'll do somewhat better on the origination side in 2019, but we're going to hold to the same principles and standards as we did in 2018.
Okay, thanks. And I guess back to the comment in the prepared remarks about the core spread potential decreases in a couple quarters in 2019 or some quarters. Do you feel that that's coming more so from the loan yields as you're adding on new loans in the book? Or is that coming more from pressure from deposits? Or how do you think about that?
Well, of course, it's a combination since the spread is the difference between those. But again, we're not going to get aggressive enough on loan pricing that it impairs our ability to achieve our ROE. Clearly, we're in a very competitive market for loans. Clearly, we're in a very competitive market for deposits as we were on both throughout 2018. So we're going to work them both as hard as we can as I told Stephen and do the best we can, but it's hard to give particular guidance on that given the uncertainty about Fed action and other variables.
Okay. Thank you.
Thank you. And our next question comes from Michael Rose of Raymond James. Your line is now open.
Hey, good morning guys. Thanks for taking my questions. Just wanted to start off on the non RESG side. So you guys have done a really good job working to diversify the portfolio. I know in the past, especially in the marine and RV and some of the other sectors that you've talked about, you've talked about some greater levels of clearly of some credit risk as we move forward.
At this point in the cycle, based on what you see, how willing are you to continue to grow those other portfolios as strongly as you did this past year? And is there anything on the credit front or just on environmental that would make you want to ratchet that level of growth down? Thanks.
That's a good question, Michael. Clearly, we continue to feel very good about the marine and RV business. That credit quality has held up really well and we like the profile of what we're putting on there really well and we continue to analyze that pretty keenly because we're doing
a lot of that business
and we want to make sure that what we're doing there is meeting our expectations and going to achieve our goals for credit quality. And we feel good about that, feel like it will. Likewise, I think we're being very disciplined as we have historically been in recent years in the community banking side of things. So we feel pretty good about that. The Corporate Loan Specialties Group, that's a SNC portfolio, you might have noticed that that contracted in the 4th quarter.
We looked at that very early in the quarter and thought that the continued repricing to lower spreads on a lot of those deals just was reaching a sort of toppy point from a price perspective. So we made a decision to shrink that portfolio a little bit in the quarter and we pulled about 130, 140, Tim has the exact number there of those loans and just sold them. And that was a very good decision in retrospect. Obviously, it's been alluded to earlier that the debt markets got very turbulent and the markets for those credits dropped a lot as far as the trading prices. So we trimmed that portfolio down and that was a in part primarily a pricing call.
We just thought that the values on those things have gotten so high that we ought to lighten our exposure to it. We don't feel badly about any of the credit we've got in that portfolio. We actually feel pretty good about the credit in that portfolio, but I am glad we lightened it up for pricing. So I think for us to get any meaningful growth out of that portfolio in the next year, the pricing would have to come back even a little more toward us for us to feel good about that from a price perspective. And I don't know whether we'll get that or not.
The pricing there has actually improved a little bit the last week or so, but it may be beginning to rebound from that sell off to some degree. And that will determine whether or not that portfolio grows or shrinks this year.
Okay, that's helpful. And then maybe just one question on the securities book. In the prepared comments, you talked about being opportunistic there. How should we perhaps think about that? What would drive you to be more opportunistic versus less?
And do you have a targeted size for the securities portfolio? Thanks.
We're happy with the size of the securities portfolio now. If we found a good buying opportunity, we would certainly add to the portfolio. Clearly, now is not a good buying opportunity. As flat as the yield curve is and as tight as the spreads are on the high quality stuff, short duration stuff that we're looking at, there's not a compelling reason to buy right now. We do want to increase our liquidity position.
And if we don't buy securities, the way to do that is to pledge less of our existing securities. We use a portion of our existing securities portfolio to pledge for public funds and others. And one of the objectives that we have this year is to just continue to systematically in a very orderly manner work down the portion of that portfolio that's pledged so that the portfolio provides more free liquidity to us to improve our liquidity ratios even further than we already did last year. So we will buy securities if it is advantageous to do so. And if it's not, we won't.
And today, it's certainly not a good day to buy.
Understood. Maybe one more for me for you, George. Just broadly, you've talked about many of the metro markets across the U. S. Being much more balanced in terms of supply and demand.
So maybe a little bit in your crystal ball, but how do you see the real estate markets and supply and demand dynamics playing out over the next year or 2, just broadly? Thanks.
Michael, my view on the fact that conditions there are relatively solid and benign has not changed at all. We continue to be very cautious about the new product we're doing, but we're still finding a lot of things that make a lot of sense. We had a decent closing quarter of RESG originations in Q4. It wasn't great, but it was decent. And we think we'll have a good closing quarter this quarter.
And in talking with the guys early on, they're continuing to find things that make sense that we're signing up that would be future quarter closing. So I think there's good business to be done if you're careful and pay close attention.
Appreciate all the color. Thanks guys.
Thank you.
Thank you. And our next question comes from Matt Olney of Stephens. Your line is now open.
Hey, thanks. Good morning guys.
Good morning, Matt. Good morning.
I want to go back to the Marine and RV segment. It sounds like you continue to like that business a lot. I think you bought that in 2016. You ramped that up pretty nicely in 2017. I think it ramped again in 2018 over $1,000,000,000 of growth.
Is that business still ramping from here? And can we see something above $1,000,000,000 growth? Or will the dollar amount growth slow down in 2019?
Matt, I would expect the dollar growth net net in 2019 to be more or less in line with 2018. I think there's a slight bias to the upside there. But I don't think it's going to move in a huge way one way or the other from what we saw as the growth in that portfolio in 2018. Tim, may want to comment on that, but that's my expectation. Tim, do you have any different thoughts on that?
No, I would agree, George. And obviously, you said that said earlier that we're very positive about the asset quality that those business lines are bringing, the RV and marine space. We've said in the management comments and other times that we're focused really on super prime and high prime customers. Our average credit score is 790. The guys there do a great job of daily monitoring of a lot of different metrics that they're able to look at the asset quality that we're bringing on, on a daily basis and make adjustments as necessary.
It's well diversified by loan size, around $90,000 is the average loan size in that book of business. And the delinquency rate, the 30 day plus is 8 basis points. And actually, the net charge offs for 2018 in that unit were roughly around 8 basis points. So feel great about that opportunity, feel great about the credit quality, what they're able to bring on the books too.
And Tim, as a follow-up, as far as the yield on that book, help me out in terms of kind of what the newer production yields have been in RV and Marine more recently?
They are fixed rate. However, they are that's the pressure point that we continue to put. And George and I and John Carter, our Chief Credit Officer, are continuing to have discussions really on a weekly basis with that team to continue to push that rate as much as they can. And so the new volume, as the prime rate goes up, we're constantly increasing the rates that we bring on and we try to lead that. Prime is going to move in late December, then we're going to try to start that process in late November or early December and with the pricing.
So George, I don't know if you've got any other comments on the pricing that you want to add.
No, right. It is it's a competitive business, but we're getting yields and the high fives that over the life of the loan should with premiums being paid yield sort of mid fives on new origination type business and maybe a little higher. So we feel like we're getting given the high prime, super prime quality of that, we feel like we're getting a good risk adjusted return on those assets.
Okay. Thanks for taking my question.
Thank you.
Thank you. And our next question comes from Catherine Mealor of KBW. Your line is now open.
Thanks. Good morning.
Good morning,
Catherine. Good morning, Catherine.
Is there just back on the loan yields, is there a way for you to dissect within RESG just so we can kind of take out the impact of the marine business, the average rate of loans that you saw paying off this quarter versus the average rate of loans that you originated? And how that spread has changed or migrated over the course of the year?
Yes. Catherine, all of the loans in the RESG portfolio are variable rate loans with the exception, I think there's one really small loan and it may have paid off. So they're either all or all but one little one variable rate loans in that portfolio. As Tim mentioned, the vast majority of them, if not all of them are tied to LIBOR, most of them 1 month LIBOR, a few to 3 or 6 months LIBOR. And the rates, the coupon rates on the loans being paid off are not materially different than the coupon rates we're putting on today.
There may be some modest difference in spread 25 basis points or 50 basis points, but we've been pretty disciplined about our pricing. We did have a period of time in 'sixteen and we talked about it at the time where we're in early 'seventeen, probably the first half of 'seventeen where the market was not as competitive and we were able to get probably 50, 25, 75 basis points higher spread. Some of those loans are just now funding, some of those loans were shorter duration that are just paying off. So it's the generation of loans. The loans that are paying off from before that 2015, 2014 timeframe are very much probably in line with margins we're getting today.
And some of those loans when we were getting a little higher spreads are paying off, some are just funding. So it's not a material item. If we could extract that information and give it to you, I think it would be pretty ho
Okay. That's really helpful. Thank you.
And then, lastly, we talked
a lot about the 2 credits that you had charge offs on. I guess, one, any change or update on those? But then also, we didn't spend a lot of time last quarter talking about the new larger credit. That I think is about $558,000,000 that you show on Page 29. Can you talk a little bit about this credit to the extent that you're able, how much is funded, the LTV on the project, just any color on the project and then your appetite for doing other credits this large moving forward?
Thanks.
Yes. We continue to do a lot of large credits and obviously if you're going to do a really large credit, you want to make sure that it's an exceptionally good quality credit. And we feel certainly that way about that credit. That credit is done at essentially a 50% loan cost and about a 45% loan to value ratio and you can see that data in the far in that right hand that far right hand bar on Figure 38 in the management comments. It is a Miami condo project that is top of the line and top level of sponsorship.
We had originally there are 2 towers in this project and we had originally worked for about 13 months putting together the financing on the first tower, which is actually the 3rd building. There are 2 existing buildings at the project that are highly successful. But we worked for about 13 months putting together and we're almost to the point of closing the 3rd tower, but their sales velocity on that tower was so good and the amenities and common areas associated with that tower also serve the next phase, which would be the 4th building on the project that we ended up offering and recommending to the customer that we include both buildings in the loan, which upsized the loan considerably. But the reality is First Tower is doing so well that it struck us as imminently clear that the sponsor was going to want to continue selling and go into the second tower. I'm not going to give sales data or price points or sales velocity for the sponsor, that's his business to give.
But I would tell you in the last quarter, the sales velocity has met or exceeded our underwriting and the price points had met or exceeded our underwriting. So that project is in our view is going very well and we're very excited about it. It is the largest credit we've ever done and if we had it to do over again today, I'd do it again. And if another one came along just like it, I would do another one because it's great sponsorship, great location, acceptance from a sales velocity and a price point on it. So it's everything we're looking for, so we really like it.
Great. Thank you for that color. And maybe one last one
for me. Any updated thoughts on potential buybacks?
Tim, I'll let you take that one.
Okay.
Catherine, you've noticed probably, I'm sure that we had comments in our management comments around that. I mean, our Board does discuss it on a quarterly basis. We do monitor the adequacy of our capital position, at least quarterly, if not more often, and have thorough discussions with our Board. And obviously, they're aware of the competing priorities between having more EPS and more return on equity or having the robust capital position to support our growth and future opportunities. And we've just had a tremendous track record of being able to use over our 21 year plus history of a public company.
We've not done a buyback and have a tremendous track record of being able to capitalize on opportunities when they present themselves. So the Board will continue to weigh that at each of their meetings and try to weigh those 2 competing priorities. And certainly, they understand our shareholders' view and they understand our strategic planning and management's view as well. So I'll leave it with that and then the comments we have in our management comment document.
That's great. Thank you very much.
Catherine, I'll circle back. I didn't answer your question and I didn't mean to skip it. I just forgot it. I apologize about the 2 loans we had charge offs on last quarter. We're actively with the sponsors on each of those, we've been operating this last quarter under a series of short term forbearance agreements on each one wherein we've been working with the sponsors and looking at other opportunities and strategies to liquidate those in the most cost effective manner and the most beneficial manner possible.
You may note if you looked at that bubble chart in really fine detail that those two loans both were at 80% loan to value last quarter based on us writing them down to 80% of the updated appraisals. You may know that one of those went down in loan to value on the property in South Carolina that's an operating income producing shopping mall. We are sweeping the cash flow on that and that loan was not past due at 9:30, but it matured in early October and we didn't renew it. So it is in this quarter's past due and for those of you that noticed an uptick in our past due numbers of a modest amount, that was that loan that was non accrual at ninethirty is of course non accrual at year end, but was not past due at ninethirty and went past due because we didn't renew it during Q4. And we're sweeping the cash flow on that and since they're not payments, we had about a $450,000 principal pay down on that from free cash flow.
Part of that was generated in Q4. Part of that had been accumulated previously as we had swept surplus cash flow on that project for a long time. So that did result in a pay down and as long as that's under a forbearance agreement, we would expect it's still generating positive cash flow and while we wouldn't expect $450,000 a quarter, we would expect some pay down on that loan from the accumulated net cash flow each quarter. We're hopeful that we'll have both these loans out of non accrual status and back in some other status are fully liquidated this year, but that remains to be seen if we can accomplish that.
Great. Thank you for the color.
Thank you. And our next question comes from Matthew Breese of Piper Jaffray. Your line is now
open.
I know you didn't want to go too much into the presale activity of the loan down in Miami, but maybe we could focus on the Miami construction portfolio, the condo portfolio as a whole. And I was hoping for some color on how presale activity down there is going in light of growing luxury condo inventory?
Well, our pre sell activity on our projects is going very well and we continue to be very positive about all of our projects in the market. And to the point, if we had an identical number of projects to the ones that we've got today that came along with all the same metrics and performance track records of the projects we've got today, we would do that many more. Our performance on that portfolio has just been outstanding and continues to be. If you've got the right product with right sponsorship and the right location, we're not seeing a problem with selling the product down here.
Dave, if we could frame it another way, I think last quarter you said the largest loan presale was about 60% and that was pretty close to getting you if you had to be repaid on the loan. If you had to size up for the remainder of the Miami construction portfolio, how much is pre sold and how much is over or under that 60%? How would that look?
I don't have that data in front of me and I don't know that Tim has that data in front of me, but we did a concentration report for our loan committee 4, 5 months ago and we've originated one loan since then and it's the loan we talked about at length today and I've spoken very positively about that loan. But I think when we originate when we sent that report to committee, we looked at every loan down here and every project we had, had more than enough sales to fully repay our loan except for one project. And that project we had a very strong personal guarantee from a very strong individual that covered the entire gap between sales that were in place and sales that were required to pay project pay our loan off. So we're in the money on all, but the latest two projects having enough sales to fully repay the loan. And on those two projects, we have very strong guarantees that cover the gap.
So, Tim, I don't remember, I think at that time we had 11 or 12 projects that were still on the books that we had sales fully covered in. And I believe I'm speaking from memory here, but I believe our average percentage of units sold on those was approaching 80% on average across that portfolio. And it takes 40% or 50% in most cases to pay our loan off. So I mean and these are not just sales contracts. They're sales contracts with 30% to 50% non refundable deposits up.
So there are sales contracts that 99.9% of them you would expect to close.
George, yes, this is Tim. I don't have the report in front of me either, but my recollection is exactly as yours is, and I think 1 or of those have actually paid off in the second half of the year as well. So, yes, I agree with everything you said.
Got it. Okay. That's great color. Maybe switching to the deposit side of the equation. This year, if I look at what funded the balance sheet, it was really in the CD and time deposit categories.
And I know you have some new initiatives underway. But as we think about 2019 and how you're going to fund the loan growth, is it going to be as heavily weighted towards CDs or should we more closely consider what you'll do on the money market and non interest bearing side of things?
Well, we're very hopeful go ahead, Ted.
Okay.
I was going to say, obviously, deposit specials are a continuing part of our deposit acquisition strategy. And we expect to continue to offer various CD or other specials from time to time. Now some of those may be money market as you mentioned in certain pricing regions and offices. But our deposit team's prime focus is on increasing our volume of core deposit customers. So net checking, for instance, in the last year was an excellent 26,756 net new accounts.
So we're going to continue to focus on core deposits, but there is more yield to be had and we will use deposit specials to augment growth from
time to time.
Understood. Okay. That's all I had. I appreciate it. Thank you.
Thank you.
Thank you. And our next question comes from Brian Martin of FIG Partners. Your line is now open.
Hey guys.
Hi Brian.
Hey, just one thing back to the margin. I mean, it sounds like you guys have some initiatives on the deposit side. Just kind of talking and you've talked a little bit about George, the pricing on the loan side. I mean, if we don't get rate increases this year and LIBOR is not really moving, can you just talk about your ability to move up some of the pricing on loans? It sounds like maybe if I understood it right that there's not that much of a lift that comes from the loan yields today.
So I guess just trying to understand in the context of the margin, if we don't get the rate increases and you're successful, it sounds like maybe you'd be a little bit more pessimistic on the margin if you're not getting the benefit on the loan side. Am I reading that incorrectly?
Brian, I don't know that that's incorrect at all. There are various things that help our loan yields. 1 is a high percentage of our loans are variable rate. So obviously, if the Fed raises the Fed funds target rate and if LIBOR moves in tandem, that's not always assured, but you would expect to happen if there's high correlation there. Then that variable rate loan portfolio is going to go up.
Going against us, you've got the fact that we're getting continuing to get pay downs on our purchase loan portfolio that is somewhat higher yielding, but as the chart and the management comment shows, it's converging to very close to the non purchase loan yields. So we're getting to a point where that switching of volume from purchase to non purchased is less negatively impacting our margin than it has over the last couple of years. And then you have fixed rate loans that were done a year or 2 or 3 years ago, which was 4 to 8 or 9 Fed moves back that are rolling off and those typically if you renew them or if they pay off and you replace them, we ought to be getting a better yield on that fixed rate roll out of the portfolio. So even if the Fed doesn't move, if it just keeps Fed fund rate where it is, we would hope that we would have some slight upward bias in loan yields and it would be probably very slight from just the roll off of previous lower rate fixed rate loans into newer rate loans. And obviously, how much lift, if any, you get there is to be dependent on how competitive the environment is today.
The flip side Tyler has talked about it's a very aggressive deposit environment out there and we're working hard to control that cost. Obviously, if Fed was raising Fed funds target rate, we would expect pressure on deposit costs to moderate significantly. And you just have to wait and see how that plays out. So that's kind of the way we're looking at it. And there are a lot of variables.
I think our chances of having a better margin or less degradation in our margin are better if the Fed continues to raise rates 1 or 2 times this year as opposed if they don't. But there's still a lot of variables any way you cut it and how that plays out.
Got you. Okay, that's helpful. And just a follow-up for Tim, maybe just the pendulum last quarter, Tim, as you said, a lot of things went against you with that non purchase loan dropping and this quarter being up a lot higher. Where would you characterize this quarter as far as kind of where the pendulum was there as far as those handful of items you laid out in last quarter's comments? I mean, more average, more helping to the help side this quarter?
Well, Brian, you can see what in the comments that the one variable that we did point out that was a 4 basis point held for us was that we did have minimum interest and prepayment fees that were in excess of our average. So we will have quarters. We did mention that we're going to have expecting lot of payoffs in 2019. So we'll have quarters where we've got some above average health there and we may have quarter where we have below average. So there's going to be some variability to that component of it.
I think the rest of the components were probably more normal and the components in Q3 were more abnormal.
Okay, perfect. And just the last thing I'll jump in was the one for Greg. On the expenses you talked about this quarter being pretty normal, are there any expense initiatives, Greg, significantly that would affect the run rate going forward? I know you've done a lot of that heavy lifting recently in the last 12 months. But as far as looking forward, any initiatives that we should be aware of?
Brian, I would say that we're going to continue to build our infrastructure as we continue to grow and grow our business. So we'll have to continue to augment what we've done in the technology side and the compliance side, BSA, those whole host of areas that are critical to making sure that we've got a very strong, very well managed high performing bank. I do think that a lot of the adds to build a lot of infrastructure happened in 2017 2018. That's not to say that there will still be some incremental costs that continue to move in 2019 as we look to augment various areas of that and continue
to add
staff as we continue to grow. I think those adds though will be a little more muted versus what you would have seen in 2017 2018. And so I would not expect any significant continuation and ramp ups in most of those areas as we move through 2019. Obviously, we're continuing to look at our cost structure. We've given guidance on the fact that Q1 is a challenging quarter from an expense standpoint.
A lot of our raises across our staff kicking in, increased health insurance and just other factors have an impact Q1 that certainly you would likely see some element of that as we move into 2019. But from my earlier comment, we had some debits, some offsetting debits credits in our non interest expense in Q4. I do think that the Q4 though in the aggregate is a pretty good runway run rate on which to start thinking about 2019 expense rates.
Okay, perfect. And the last one was just on the credit quality. It sounds like things are very strong where they're at today. Just any should we just be thinking about the reserve kind of being in tandem with growth? Is that kind of the best way to think about it today?
There's nothing out there that's overly concerning or you guys are more cautious on today? And that's it. Thanks guys.
Yes, Brian. I would say as we've done in recent past years where we've had very good credit quality, you've seen the reserve outpaced charge offs to keep pace with the growth in our balance sheet. I think that is a good sort of if you look at past years is a good sort of continuation of that. We're not seeing anything emerging on the credit horizon now that would think we would have significant changes. Of course, we will adopt CECL a year from now and we're still working on whatever the impact of that will be and we won't know those numbers for a while or how if they'll affect us there.
But apart from the impact of CECL when it goes effective, I think the pass numbers and pattern is pretty good going forward. I would echo what Tim and Greg said about run rate of expenses and unusual items or not. I would caution you and other analysts who are doing your models to remember that we've got 90 days in Q1 and we had 92 days in Q4. And clearly, it's just working out that we're making about $0.01 EPS per day. So having 2 less days in Q1 starts us out at a $0.02 EPS hold compared to Q4.
And when you factor in cost increases or staff additions and salary additions, increases and health insurance that are all factored into Q1, Q1 is always a challenging quarter to get any lift in net income and we think that will be the case this year, but we're pretty optimistic for the full year of 2019 with that said.
Okay. Thanks for all the color guys.
Thanks, Brian.
Thank you. And our next question comes from Timur Braziler of Wells Fargo Securities. Your line is now open.
Hi, good morning. Thanks for the question. First looking at the build out of RV and Marine dealers, it looked like that kind of stabilized in the back end of the year, while balances continue to ramp higher. 2 part question. I guess, what's the capacity of the existing dealer footprint?
And how should we be thinking about dealer growth as we head into 2019?
The dealer growth would have been more robust and would have continued to be more robust in 2019 had we not set some limits on how much growth that we wanted from that portfolio for a while. Clearly, we're growing that significantly. And as I mentioned, every metric we're looking at on that portfolio, we're feeling really good about.
But we didn't want
the $1,000,000,000 growth this year to turn into $2,000,000,000 growth, the $1,000,000,000 in 2018 to turn into $2,000,000,000 in 2019. We wanted to take a more measured pace to that growth. So there's been a little bit of a throttling down of our potential there. We think we can capture that potential later, but we just want to continue to do a lot of analytics and careful monitoring of that portfolio before we let it get a growth rate that's significantly more than it is now.
Okay. That's helpful. And then one final one for me. Just looking at some of the strong growth in unfunded commitments that occurred in 2016 2017 kind of stabilized in 2018. I'm assuming that some of that larger growth is now starting to fund up.
And I'm just wondering if you're expecting funding to continue to accelerate in 2019. And if that is the case, then kind of what's the outlook for unfunded commitments as we go through the year, where can that shake out?
Tim, you want to give that?
Yes. So I mean, we Tamir, we said in our guidance that we in our management comments that we would expect 2019 unfunded balance to decrease again as it did in 2018. There's a lot of variabilities on the amount of the decrease that would occur. It depends on origination. So if our origination volumes are more than 2018, then that's going to help drive up that unfunded balance.
But as we said, it's likely to decrease again in 2019 and we will we are expecting elevated amount of prepayments, but that means we're also expecting an elevated amount of funding as
well. Got you. Thank you.
Thank you. And our next question comes from Blair Brantley of Bryan Capital. Your line is now open.
Good morning, everyone. Good morning.
Good morning. Just a quick question. What is kind of the view on incremental operating leverage going off of some of your expense commentary and is also kind of where we are with the flatter yield curve and the uncertain view of rate increases?
You want to take or you want me to take it?
Go ahead, George.
All right. Well, Blair, we've talked a lot about in the past about the fact that we want to continue to increase our efficiency ratio with the big infrastructure build out that we've had over the last couple of years and the cost of that combined with slower balance sheet growth, particularly in 2018, we've pretty much been treading water more or less on that efficiency ratio. We still have a longer term goal of improving that ratio. I think that is possible for us to do So, but we need more growth probably to accomplish that. So that an achievement of a significantly better efficiency ratio may take us to may require that we get to a better growth and a better margin environment or at least one of those before we can meaningfully improve that ratio.
Okay.
And then switching gears on in terms of the non purchased growth and more in the non RESG side, I mean, George, I'm curious about your view in terms of the contribution of the community bank side of it. Is it exceeding expectations? Or how is it kind of shaping up to where you thought it would be at this point?
I think we've got a ton of potential there. And one of the things that I'm doing to just emphasize the importance of our community bank and to try to rally us to achieve more and more of the potential in it is I've started a program that I'm going to visit and spend time in every one of our 2 50 plus or minus offices starting December 1 last year through December 1 this year. So I've been to 40 of our community banking offices so far on that tour and have spent 7 days in that process. And it's a process to communicate and coach our community banking team, but more importantly to let our community banking team communicate with me and other senior officers that are traveling with me from the community banking world there to just identify things that we can improve and get better, so that we can deliver better service to our customers and harness more of that potential from our community bank. And it's kind of an exhausting tour, but it is proving to be very profitable and very productive.
And we're just 40 offices into the 250 office tour. So I'm very positive about the capacity and the potential that exists within our community banking organization. I think over the course of this year, we're going to achieve a lot of enhancements in what we're doing there that will let us just incrementally, hopefully each quarter harness more and more of that potential. So pretty positive about it. That's the key achieving much more significant diversification in our balance sheet going forward and we're really focused on it in 2019.
So is the expectation in terms of the mix of the non purchase growth to be similar to what we saw in 2018? Or do you think the RESG will be a bigger piece of that net growth for the year?
I'm hopeful that as I said that indirect RV and marine will be very similar plus or minus a little bit to what it was last year. I'm hopeful that community banking will contribute more to that. And Tim, you want to weigh in on the specific thoughts on RESG?
Yes. I would agree, George. I think the mix, give or take, should be relatively consistent. I would remind you on Community Banking, we did our leasing portfolio is in that community banking number. And we had we stopped originating loans out of that leasing portfolio.
So community banking had about $45,000,000 of headwind from leasing payoffs that occurred in 2018. That will be less of a headwind for them. And obviously, George's focus on community banking as well as Allen Jessup's and Cindy Wolf's, John Carter's focus, renewed focus on it should help the community banking growth for 2019.
Okay, great. Thank you. Thank you.
Thank you. And ladies and gentlemen, this does conclude our question and answer session. I would now like to turn the call back over to George Gleeson for any closing remarks.
Thank you very much for joining the call today. We greatly appreciate it. We look forward to talking with you in about 90 days more or less to report our Q1 results. That concludes our call. Have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect.