Good day, ladies and gentlemen, and welcome to the Bank OZK fourth quarter 2018 earnings conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require operator assistance, please press star then zero on your touch-tone telephone. 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 Bank OZK. Thank you for joining our call this morning and participating in our Q&A discussion. In today's Q&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 Gleason, 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 fourth quarter results, and we'll begin by opening up the lines for your questions.
Let me ask our operator, Sonia, to remind our listeners how to queue in for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Ken Zerbe of Morgan Stanley. Your line is now open.
Great. Thanks. Good morning, everyone.
Morning, Ken.
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 there was a few of the repayments that were, I guess, technically supposed to be in fourth quarter 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. Can you just elaborate on that a little bit more? How can we be comfortable with the, I think it was 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 third quarter, the likelihood appeared that some of those loans might move into December, as prepayments. 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. 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, they'll move around a few months to and fro.
We were pleased that some of those prepayments slid into 2019, because that gave us, obviously, another month or two or three of earnings on those loans, which we're very glad to have. None of the prepayments that slid are a result of any quality issues or concerns. It's all upside in 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. Both those comments were considered and evaluated in connection with each other.
Got you. Okay. All right. That helps. Then, can you give us any update in terms of your deposit strategies? I saw you just hired someone there. Certainly, the deposit costs have been going up less, I guess, last quarter than they did in the prior couple quarters. 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. As our management commentary stated, we have been focused on improving our deposit betas. Over the last couple quarters, we've been enhancing our data and analytical capabilities around deposits. 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. We had some good success also in Q4 in lowering our beta on certain large commercial and public fund customers. For competitive reasons, I won't go a lot further there.
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 deposit 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. 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. We feel good about where we are. There's still more work to be done. As you noted, probably in our recent press release, we did add a new position of Chief Deposit Officer, Ottie Kerley, 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 billion consumer deposit portfolio. As you saw in the press release, he's going to be reporting to Cindy Wolfe, our Chief Banking Officer, who's really doing an outstanding job in our branch banking area. Our strong balance sheet growth requires us to focus on optimizing our funding profile further. One of the primary ways that we do that is deposit strategy. We feel like Ottie's expertise will just continue to enhance our existing deposit acquisition capability.
Okay, perfect. Just last question I had for you. In terms of expenses, it looks like the expenses in the fourth quarter were probably a little bit higher than what we were looking for. Certainly, I guess, highest of the year, I guess, technically. Is that sustainable? Is there something unusual in there? There wasn't a lot of commentary in the management commentary around expenses. Should we expect that to continue into 2019?
Hey, Ken, this is Greg McKinney. Let me take that if I can. There's a lot of moving parts that hit those non-interest expenses. We had some, what I would probably call some unusual debits and unusual credits coming through in the fourth quarter. I think those kind of, for the most part, generally offset each other on the impact of the fourth quarter. I think that the fourth quarter results are, at least in the aggregate, a fairly clean run rate to start thinking about 2019. I think that when we move into 2019, some of the results, we may see some movement between categories of non-interest expense. 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. 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 fourth quarter. A quick question. As you've seen more angst in the equity markets, 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. 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. That hasn't seemed to adversely impact our sales or leasing or anything else at this point. We continue to be pretty positive about the projects that we've got.
Great. Can you just talk about your net interest margin outlook for 2019 with or without rate hikes?
Tim, you want to take that one?
Yeah, 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 one-month LIBOR. They have a high correlation of.
Rising. We saw the benefit of that in the fourth quarter as one-month LIBOR rose throughout the quarter. We'll get the full benefit in the first quarter of one-month LIBOR being at an elevated level for the full quarter. That will obviously depend on 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 fourth quarter, and purchase loans was at 6.48% for the quarter. 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 two are getting closer and closer in yield makes that impact of that runoff less significant really in 2019 than it was in 2018. 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. Our next question comes from Stephen Scouten of Sandler O’Neill . Your line is now open.
Hey, guys. Good morning.
Hey, Stephen.
I'm curious for you all on the-- I know the first question kind of was around some of the paydowns, payoffs in RESG were slightly higher than originations for the year, 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, paydowns may still exceed actual new originations?
Tim, you want to jump in, or I'll take that? Yeah. Go ahead, Tim.
As you pointed out, Stephen, in 2018, at RESG, as you can see on Figure 6 in the management comments, we had $5.7 billion of fundings, and that does come out of the unfunded balance. Then we had $4.8 billion of repayments as well. We've talked about our repayments being elevated in 2019 as well, we've also given you the guidance of low to mid-teens non-purchase loan growth. Based on our projections, we feel good about where we are from that. On the unfunded balance, you did see that go down to $1.8 billion for 2018. You can see that on Figure 10 in the management comments.
At $4.7 billion 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. Then the fundings comes down, reduces that unfunded balance. 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-purchase loan growth.
Okay. Maybe on the move up that you saw in loan yield specifically, obviously up 27 basis points this quarter, down one basis point last quarter. I know you guys mentioned in the release it helped by four 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 five or six bullet points in Q3 of things that moved against us. Each of those were worth one to three basis points, 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 four 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.
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 two-thirds of the RESG loans reset daily. So having that starting in October and then again in November, all of those things worked in our favor. The things that really worked against us in Q3 kind of turned around and worked in our favor in Q4.
Okay, that's helpful. Maybe one last thing for me. With the 2019 outlook on your core spread, you guys do a really good job of focusing us in on that core spread, obviously it was down about, I think, nine basis points for the full year in 2018. If we were to get no additional rate hikes as the forward curve is suggesting today, would that nine basis points of core 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 two quarters in 2018 and was down two quarters in 2018. We were disappointed that the net number for the year was down, that was a little more adverse than what we would have expected at the beginning of the year. That's just really a result of all the moving parts there. We've given cautionary guidance on 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, we're going to work hard to minimize deposit cost and maximize loan yields.
There are a lot of variables going into 2019, including whether the Fed moves zero times or four times, and in between, it's hard to know.
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. Our next question comes from Arren Cyganovich of Citi. Your line is now open.
Thanks. Maybe just talk about the competitive environment for RESG. Are you seeing any intensifying or lessening of the competition there? Originations, it's 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. I think there's a lot of money in the coffers of a lot of debt funds that are real estate centric in 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, first 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. 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 $4.74 billion, down about almost $4.4 billion from the previous year.
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. We're optimistic we'll do somewhat better on the origination side in 2019. We're going to hold to the same principles and standards as we did in 2018.
Okay, thanks. I guess back to the comment in the prepared remarks about the core spread potential decreases in a couple of 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? Is that coming more from pressure from deposits? How do you think about that?
Well, of course, it's a combination since the core spread is the difference between those. 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. We're going to work them both as hard as we can, as I told Stephen, and do the best we can. It's hard to give particular guidance on that given the uncertainty about Fed action and other variables.
Okay. Thank you.
Thank you. 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. 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, 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? 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. We feel good about that and 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. 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 fourth 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 topping point from a price perspective. We made a decision to shrink that portfolio a little bit in the quarter, and we pulled about $130 million, $140. Tim has the exact number there of those loans and just sold them. 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. We trimmed that portfolio down, and that was primarily a pricing call. We just thought that the values on those things had 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. I am glad we lightened it up for pricing. 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. 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. That will determine whether or not that portfolio grows or shrinks this year.
Okay, that's helpful. 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? 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. 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. 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. We will buy securities if it is advantageous to do so. If it's not, we won't. 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. 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 two? 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. 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. We think we'll have a good closing quarter this quarter. 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. I think there's good business to be done, if you're careful and pay close attention.
Appreciate it. I'll call it. Thanks, guys.
Thank you.
Thank you. Our next question comes from Matt Olney of Stephens . Your line is now o pen.
Hey, thanks. Good morning, guys.
Morning, Matt.
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 billion of growth. Is that business still ramping from here? Can we see something above $1 billion growth? Will the dollar amount growth slow down in 2019?
Matt, I would expect the dollar growth net in 2019 to be more or less in line with 2018. I think there's a slight bias to the upside there. 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. Obviously you 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 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. The delinquency rate, the 30-day plus, is eight basis points. Actually, the net charge-offs for 2018 in that unit were roughly around eight basis points. Feel great about that opportunity.
Feel great about the credit quality of what they're able to bring on the books, too.
Tim, as a follow-up, as far as the yield on that book, help me out in terms of what the newer production yields have been in RV and Marine more recently.
They are fixed rate. However, that's the pressure point that we continue to put, 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. 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. If prime's going to move in late December, then we're going to try to start that process in late November or early December with the pricing. George, I don't know if you've got any other comments on the pricing that you want to add.
No. It's a competitive business, but we're getting yields in 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. 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. Our next question comes from Catherine Mealor of KBW. Your line is now open.
Thanks. Good morning.
Morning, Catherine.
Morning, Catherine.
Just back on the loan yields, is there a way for you to dissect within RESG, just so we can 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?
Yeah. 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 one-month LIBOR, a few to three or six-month LIBOR. 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 or 50 basis points, but we've been pretty disciplined about our pricing.
We did have a period of time in 2016, and we talked about it at the time, where we're in early 2017, probably the first half of 2017, 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. It's the generation of loans. The loans that are paying off from before that 2015, 2014 timeframe were very much probably in line with the margins we're getting today. Some of those loans, when we were getting a little higher spreads, are paying off. Some are just funding. It's not a material item. If we could extract that information and give it to you, I think it would be pretty ho-hum.
Okay. That's really helpful. Thank you. Last time, we talked a lot about the two credits that you had charge-offs on. I guess, one, any change or update on those? We didn't spend a lot of time last quarter talking about the new larger credit, that I think is about $558 million, that you show on page 29. Can you talk a little bit about this credit to the extent that you're able, how much it's 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, obviously, if you're going to do a really large credit, you want to make sure that it's an exceptionally good quality credit. 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 bar in 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, top level of sponsorship. There are two towers in this project, and we had originally, and worked for about 13 months, putting together the financing on the first tower, which is actually the third building. There are two existing buildings at the project that are highly successful.
We worked for about 13 months putting together, and we're almost to the point of closing the third 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 fourth 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. The reality is the 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.
I would tell you, in the last quarter, the sales velocity has met or exceeded our underwriting, and the price points have met or exceeded our underwriting. That project, 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. If another one came along just like it, I would do another one because it's great sponsorship, great location, absolutely preeminent property, low leverage, and you've got tremendous market acceptance from a sales velocity and a price point on it. It's everything we're looking for. We really like it.
Great. Thank you for that color. Maybe one last one from 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. 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. 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. 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. The board will continue to weigh that at each of their meetings and try to weigh those two competing priorities.
Certainly, they understand our shareholders' view, and they understand our strategic planning and management's view as well. I'll leave it with that and in 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 two loans we had charge-offs on last quarter.
Yes. Thank you.
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, in 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. It is in this quarter's past due.
For those of you that noticed an uptick in our past due numbers of a modest amount, that was that loan that was not accrual at 9/30. It's of course non-accrual at year-end, but was not past due at 9/30 and went past due because we didn't renew it during Q4. We're sweeping the cash flow on that, and since they're not making payments, we had about a $450,000 principal pay down on that from pre-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. 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.
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 or fully liquidated this year, but that remains to be seen if we can accomplish that.
Great. Thank you for the color.
Thank you. Our next question comes from Matthew Breese of Piper Jaffray. Your line is now open.
Good morning, everybody.
Good morning.
Hey, good morning, Matt.
I know you didn't want to go too much into the pre-sale activity of the loan down in Miami, maybe we could focus on the Miami construction portfolio, the condo portfolio as a whole. I was hoping for some color on how pre-sale activity down there is going in light of growing luxury condo inventory.
Well, our pre-sale activity on our projects is going very well, we continue to be very positive about all of our projects in the market. 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 the right sponsorship and the right location, we're not seeing a problem with selling the product down there.
Maybe if we could frame it another way. I think last quarter you said the largest loan pre-sale was about 60%, 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, I don't know that Tim has that data in front of me. We did a concentration report for our loan committee four or five months ago, we've originated one loan since then, it's the loan we've talked about at length today, I've spoken very positively about that loan. I think when we sent that report to committee, we looked at every loan down here, every project we had more than enough sales to fully repay our loan, except for one project. 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 our loan off.
We're in the money on all, but the latest two projects is having enough sales to fully repay the loan. On those two projects, we have very strong guarantees that cover the gap. 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 covering them. 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. It takes 40% or 50% in most cases to pay our loan off. These are not just sales contracts. They're sales contracts with 30%-50% non-refundable deposits up. They're sales contracts that 99.9% of them you would expect to close.
George, yeah, this is Tim. I don't have the report in front of me either, my recollection is exactly as yours is, and I think one or two of those have actually paid off in the second half of the year as well. Yeah, 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, I know you have some new initiatives underway. 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. Go ahead, Tim.
Okay. I was going to say, obviously, deposit specials are a continuing part of our deposit acquisition strategy. We expect to continue to offer various CD or other specials from time to time. Some of those may be money market, as you mentioned, in certain pricing regions and offices. Our deposit team's prime focus is on increasing our volume of core deposit customers. Net checking, for instance, in the last year was an excellent 26,756 net new accounts. We're going to continue to focus on core deposits, 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. 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. It sounds like you guys have some initiatives on the deposit side. Just kind of talking, and you've talked a little bit about this, George, the pricing on the loan side. If we don't get rate increases this year and LIBOR's 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. I guess just trying to understand the context of the margin. If we don't get the rate increases and you're successfully, 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. One is a high percentage of our loans are variable rate. 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 a high correlation there.
Yep.
That variable rate loan portfolio is going to go up. Going against us, you've got the fact that we're 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 yield. We're getting to a point where that switching of volume from purchase to non-purchase is less negatively impacting our margin than it has over the last couple of years. You have fixed rate loans that were done a year or two or three years ago, which was four to eight or nine 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.
Even if the Fed doesn't move, if it just keeps the 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. Obviously, how much lift, if any, you get there is going to be dependent on how competitive the environment is today. The flip side Tyler's talked about, it's a very aggressive deposit environment out there, and we're working hard to control that cost. Obviously, if the Fed quits raising the fed funds target rate, we would expect pressure on deposit costs to moderate significantly. You just have to wait and see how that plays out. 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 one or two times this year as opposed to if they don't. There's still a lot of variables, any way you cut it, in how that plays out.
Got you. Okay, that's helpful. 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 where the pendulum was there as far as those handful of items you laid out in last quarter's comments? More average, more to the help side this quarter?
Well, Brian, you can see in the comments that the one variable that we did point out that was a four basis point help for us was that we did have minimum interest and prepayment fees that were in excess of our average.
We will have quarters. We did mention that we're expecting a lot of payoffs in 2019. We'll have quarters where we've got some above average health there, and we may have a quarter where we have below average. 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. 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. 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. We'll have to continue to augment what we've done in the technology side and the compliance side, BSA, those whole hosts 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 and 2018. That's not to say that there won't 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've seen in 2017 and 2018.
I would not expect any significant continuation in 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 kick in, increased health insurance, and just your other factors have an impact on Q1 that certainly you'd likely see some element of that as we move into 2019. To my earlier comment, we had some offsetting debits and credits in our non-interest expense in Q4. I do think that the Q4, though, in the aggregate, is a pretty good run rate on which to start thinking about 2019 expense rates, though.
Okay, perfect. The last one was just on the credit quality. It sounds like things are very strong where they're at today. 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? 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 outpace 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. Apart from the impact of CECL when it goes effective, I think the past numbers and kind of 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, remember that we've got 90 days in Q1, and we had 92 days in Q4. Clearly, it's just working out that we're making about a $0.01 EPS per day. Having two less days in Q1 starts us out at a $0.02 EPS hole compared to Q4. When you factor in cost increases for staff additions and salary additions increases, and health insurance that are all factored into Q1, first quarter's always a challenging quarter to get any lift in net income, and we think that will be the case this year. We're pretty optimistic for the full year of 2019 with that said.
Okay. Thanks for all the color, guys.
Thanks, Brian.
Thank you. 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 continued to ramp higher. A two-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. We didn't want the $1 billion growth this year to turn into $2 billion of growth, the $1 billion in 2018 to turn into $2 billion in 2019. We wanted to take a more measured pace to that growth. 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. One final one from me. Just looking at some of the strong growth in unfunded commitments that occurred in 2016 and 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. If that is the case, 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. Timur, we said 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. If our origination volumes are more than 2018, that's going to help drive up that unfunded balance. As we said, it's likely to decrease again in 2019, and we are expecting an elevated amount of prepayments, but that means we're also expecting an elevated amount of fundings as well.
Gotcha. Thank you.
Thank you. Our next question comes from Blair Brantley of Brean Capital. Your line is now open.
Good morning, everyone.
Good morning.
Morning.
Just a quick question. What is kind of the view on incremental operating leverage going off of some of your expense commentary, and also kind of where we are with the flatter yield curve and the uncertain view of rate increases?
Tim, do you want to take it or do you want me to take it?
Go ahead, George.
Well, Blair, we've talked a lot 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, but we need more growth probably to accomplish that. An achievement of a significantly better efficiency ratio 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. Switching gears, in terms of the non-purchased growth and more in the non-RESG side, 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. 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 ±250 offices starting December 1 of last year through December 1 of this year. I've been to 40 of our community banking offices so far on that tour, and have spent seven days in that process.
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. It's kind of an exhausting tour, but it is proving to be very profitable and very productive. We're just 40 offices into the 250 office tour. 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. Pretty positive about it. That's the key to achieving much more significant diversification in our balance sheet going forward, we're really focused on it in 2019.
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 the 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. Tim, you want to weigh in on the specific thoughts on RESG?
Yeah, I would agree, George. I think the mix, give or take, should be relatively consistent. I would remind you on community banking, our leasing portfolio is in that community banking number. We stopped originating loans out of that leasing portfolio. Community banking had about $45 million of headwind from leasing payoffs that occurred in 2018. That'll be less of a headwind for them. Obviously, George is focused on community banking as well as Alan Jessup's and Cindy Wolfe's and John Carter's renewed focus on it should help the community banking growth for 2019.
Okay, great. Thank you.
Thank you.
Thank you. Ladies and gentlemen, this does conclude our question-answer session. I would now like to turn the call back over to George Gleason 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 first quarter 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.