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Home BancShares Inc
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Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated Fourth Quarter 2018 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks, then entertain questions. [Operator Instructions]
The company has also asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on Page 3 of their Form 10-K filed with the SEC in February 2018. At this time, all participants are in a listen-only mode and this conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Allison.
Thank you, Sean. Welcome to Home BancShares fourth quarter earnings year-end conference call. It’s hard to believe another one has passed the 2018 and 2018 also was the 20th year for our company, 20-year anniversary. Congratulations, all.
2017 was a great year result and about $200 million of income and now 2018 has come and result in about $300 million in income for our company, that’s a 50% increase. That's not too bad when the world was supposed to be coming down with me.
With me today is Randy Sims, Tracy French, Donna Townsell, Brian Davis, Stephen Tipton, Kevin Hester, Jennifer Floyd. I will be available for Q&A and after the presentation ends. Chris Poulton, Donna Townsell, and myself travelled extensively during the last six months of 2018 trying to understand investor sentiment towards banks stocks.
We were told that the boogeyman was able to order [ph] everyone’s house that there was a rush in behind a victory, that there was an imminent recession that the path monster had returned and my friend Vince after several whiskeys by the way, said he thought it might be the effects of killing Osama bin Laden.
Actually they were all wrong. The reality was if Peter Pan can no longer fly, Minnie Mouse left Mickey for Goofy and the Ghostbusters and the man with two brides and flown in a paprika with Frankenstein piloting to take over the banking industry. Nevertheless, we set Batman, Superman and Nancy Pelosi to save the day, and they built a wall around the airport and saved us all.
At least, we at least we finally got it figured out. Let’s go to some real facts. The quarter was actually pretty good. The adjusted numbers were EPS $0.44, net income $75.18 [ph] it’s not too bad. Return on assets $38.30.
Expenses were basically flat ex the hurricane and merger expense. Organic loan growth stuck its head up a little bit at $239 million in loan growth. I don’t know if that was really -- I guess part of it was the fact it was the payoff slowed down somewhat.
Asset quality remains strong. We have one, acquired Stonegate credit of about $8 million it did not sell this quarter. The loneliest we thought we had it sold, the loan is both classified and specifically reserved and the company does not anticipate any loss and that one’s about $8 million we hope to get rid of that next quarter.
Non-interest expense was flat to down, ex-merger expense. Of the $239 million in loan growth, $37 million came from Shore. $116 million of that came from the Arkansas legacy port [ph] book and New York generated $86 million. Florida and Alabama were basically flat for the quarter.
The company had record originations of $1.1 billion. If you remember that’s kind of been taken up. It was $940, $970 and then now $1.1 billion. So that’s $1.1 billion at an average rate of $6.07. That’s up 57 basis points.
Legacy generated $759 million of that at 5.87. Shore generated $82 million of that at $5.45 and New York generated $295 million at $6.74. We continued to be in the repurchased business. We repurchased 5 million three hundred and eight thousand shares in 2018 with three million four and forty four thousand of those shares coming in the fourth quarter, while they were killing bank stocks.
We’ll continue to be active in 2019. Let’s talk about CCFG’s performance. CCFG is presently 10% of our assets with about $1.5 billion in loans and of that about one third of their book is construction.
CCFG has made pre-tax pre provision income for 2018 was approximately 75, a little above $75 million. I don’t think its fair the district gives this segment of our business a much lower PE multiple, which impacts our overall PE by dragging down the community bank PE. I don’t agree with this because CCFG is a minor part of our assets and is extremely profitable. At the end of the day, they created $75 plus million in pre-tax, pre-provision income and that increase in shareholder value and EPS say what you want to say, that’s real cream regarding money.
Thank you all, are all supporters who have been with us for many years and to hell with the naysayers. This has been a wonderful 20 years and many have been with us since we started and others have been with us since we began our IPO in 2006. Thank you for your support. We’re extremely loyal to our shareholders and will continue to run this great company the way we have in the past. 2019 should be interesting for all of us, as the pendulum swings too far in both directions. The market has been so crazy that the piling on effect has driven down my stocks to the lows of the early mid-80s. Great time to pick bank stocks, because they’ve been treated, the good ones have been treated worse than the bad ones because they had more room to drab those down. I’ve brought more bank stocks personally in the last two to three weeks than I’ve brought in many, many years. It’s not a fact, it’s almost a dart board, you could draw one out of a bowl.
I want to reiterate something that I said to kind of look at my notes from back last year, I think it was the first quarter last year. And as we were talking about bank stocks, and I said obviously someone locked it. Locked their bank stock. Forbes ranked Home BancShares the best bank in America of all banks from $8.8 billion to $2.73. What an amazing hour that was for our people. I want to thank the home team for a job well done. And I’ve said let’s do it again for that team.
The ball is certainly keyed up perfectly for a great year in 2018. Randy, I’m looking forward to another powerful year. These are -- this is the comments I made January of last year, and I said Randy, I’m going to turn it over to you. So I’m just going to turn it over to you right now Randy before we go to Q&A.
Thank you Johnny. Well, another great fourth quarter to compliment another great year. Congratulations to all our employees and directors for a very successful 2018. You all have made a difference in our continued success.
Now normally, I’ll lead off by highlighting the number of record quarters in profitability. You know like, for the thirty first time that our fourth quarter income exceeded the fourth quarter in 2007 and by the way, over $47 million, but instead, allow me just a few minutes to talk about something even better, and that is the last 20 years of record growth and profitability.
We have now completed 20 years as the banking organization since we opened up here in Conway Arkansas. And, as an aside, I might add that I have survived. I mean completed 34 years of working for Mr. Johnny Allison. I can still remember in late 1998 asking Johnny what his real expectations were for the new bank. He replied, well I would be satisfied if we just had a good community banking organization and grew it to about $250 million.
Well, we finished this past year at over $15 billion. 20 years, it has been a wild and crazy ride, has it not? Absolutely. Here are just a few highlights. We started in a trailer, with 10 employees growing to $100 million in three months. There were 386 stock certificates in our first issuance of stock to local shareholders. We placed an emphasis on customer service and that has never changed.
I remember the fun of cooking cheeseburgers and hotdogs at football games, plus a host of other great fun, community events over the years. And that has not changed, either. We placed an emphasis on innovative products for our customers, and that has never changed, but it’s been copied often. We survived the craziness of the year 2000 with the regulators, and we are still trying to survive the craziness of the regulators today. I should get an amen [ph] on that one night.
We concentrated one year on an efficiency project that changed the way we operate, resulting in a model of management and a leap in profitability, and we have stuck to those principles today. We became a publicly traded company in July 2006. We thrived during the recession. We raised capital in two days and bought failed banks over a period of several years. It changed our corporation forever.
We bought the Liberty Banking Corporation in Arkansas, expanding our footprint throughout the state of Arkansas, doubled their profits in less than a year in the best deal we’ve ever completed. We bought and bought banks in Florida, and now cover the entire state. Some were good, and we fixed the poor performers. The result is great profitability today.
We opened an operation in New York, regulators, analysts, and just about everyone continues to question that. Even today, our New York office simply continues year after year to make more profit than any other region, and with pristine asset quality. The cost of that particular acquisition deal or whatever you want to call it, zero. The last 20 years has been nothing, but consistent, and growing profitability. Just like the ROA of over 2% for this past year.
Now I could keep going on, but I’m to the point it sounds like I’m lost in a Billy Joel song. So and I would continue to repeat myself, and what is that? That is the fact that since our inception and then as we became a public company, I can proudly say, our corporation has performed through good times and bad. If the economy is bad, we have capitalized on opportunity. If the economy is good, we have capitalized on opportunity. We’ve seen a few bumps in the road over the last 20 years, but outside of that, nothing, but success.
Now to the craziness of today. We haven’t an economy and a political environment that we have never seen before. Our markets continue to see good times. Nothing to scare us. So a pretty good economy as far as we’re concerned, but maybe not so much on the political side. But consider this; we are trade trading today around $18 give or take. The last time we saw that price was the second quarter of 2015 and our EPS that quarter was $0.25.
Track comparing that to our EPS for the fourth quarter of 2018 at $0.44 adjusted. Now talk about crazy. I think that is the world record of not making any sense. I don’t know [indiscernible] now it makes no sense. But then when I consider some of the things over our past 20 years, I realize we’ll get past this. The politics, everything else, and make the most of our opportunities as we look forward to our twenty first and another successful year in 2019.
Now I will end my comments, and I appreciate the little time and the editorial that I’ve been allowed with this off the press, hot off the press item. This is pure evidence of what I’ve been discussing, preaching or whatever you want to call it. I’m so proud to be able to announce today that Forbes for the second consecutive year has named us the best bank in America. What an absolute honor. Thank you Johnny for allowing me to make that announcement, 20 years and it just keeps getting better. How about a round of applause now.
I wish, I had it because is here. Well we should have had a band. We should have had a band. But with that, I will turn it back over to you.
Thank you. That’s quite an honor. I looked at my phone this morning, and I was working on my speech at home, and so what Donna Townsell, she called me three times in about 30 minutes and I thought something must be up, she never calls three times in 30 minutes, and she gave me the news. Funny story was, she was telling marketing and send information out about three week, two, three weeks ago. Said we can’t use the Forbes stuff anymore. We used it last year. We could say that we were in that year, but asking how do you know we’re not going to get it again. I said, if they lacked this last year, they are going to love this year. And I don’t know why it is felt that way. And then bam, we get it, she tells me this morning that we – we’ve won the Forbes award for the second time, two times in a row. So that’s pretty, it makes me pretty happy, pretty proud. So incredible honor. Yeah, congratulations to every -- everyone and I found my info what I read a while ago, was the info I had a year ago, when -- when we’re having our conference calls and there it is. My city. Let’s do it again in that team and then we did it so. Congratulation everyone.
Sean, we’re pretty happy around here. Are you ready for Q&A?
Sean, this is John Allison. I have one, we don’t have any because of this time, and we don’t have the hand clappers, but I’ve got something to celebrate this Forbes second time around. It’s appropriate to Arkansas. So I got it for all of her friends. That’s the Arkansas best goal. So we all have heard that before, I think it’s pretty appropriate. You can go at number one if you want to take a chance.
Sounds great, Mr. Allison. Our first question comes from Matt Olney with Stephens. Please go ahead.
Hey thanks guys. Congrats on the Forbes news. And Johnny, I like the duck calls out there.
Well, we, I thought we do stuff is asking we had them later. They said they didn't know where they were. So now we got some hand clipper, and they are doing very well by the standards that go blew it. So thanks Matt.
So wanted to start on the core margin in the fourth quarter. It seems like all during 2018, the core margin was pretty flat, but it gets pretty hard in the fourth quarter. Help me understand the dynamic of what happened in 4Q. And then what’s the outlook for the core margin in 2019?
Okay, I’ll let Stephen and Brian cover that. And maybe Chris jump in a little bit on that, after that. But actually, what you going to see is a margin pretty plant. What you saw big drop was -- is always explainable. And which one of you’ll want to go first with that, Brian or Steve?
I’ll give a little color, then I’ll pass it off to Stephen on my right. I mean, what we had, for the most part, for the core margin, there was $3.8 million from New York that came in from a minimum interest and default interest on a few loans that they had that paid off in the third quarter. So the third quarter was a little bit inflated by this $3.8 million. That’s about 12 basis points overall and if you’re looking at our 16 basis point decline in margin, we had $1.3 million in accretion decline, and that’s a little over 3 basis points. So between the decline and accretion and that decline from New York for what I’ll call maybe not necessarily non-recurring, that pretty much explains the entire decline in the margin.
That’s fair. Matt, this is Stephen. I’ll take a little bit of that too. Yeah, I think what we saw obviously in Q4 from a payoff perspective; those numbers soften quite a bit. Pay-offs in Q4 were about $540 million. There were $330 million, $340 million less than what we saw last quarter and maybe more of a little more of a normal quarter compared to Q1 and Q2. So, you know this does bounce around and are hard to -- certainly hard to predict. And what we ended up seeing in Q4 was -- was quite a bit lower level of pay-offs, which -- which has some impact on the NIM.
Chris, you want to comment.
Yes. This is Chris. Probably the other thing I’d add is we had about three times the amount of pay-offs in Q3 as we did Q4. But in addition to that, most of our pay-offs in Q4 were paid off at maturity. And when you pay out the maturity, there’s very little income acceleration in Q3, most of the pay-offs were early pay-offs and those have income acceleration including the minimum interest.
So it wasn’t just the volume, but I would also say the type of pay-offs where when you pay off the maturity, there’s less accretion – there was less acceleration.
Matt, did that answer your question, any other questions about that comments?
Yes, I guess I’ll make sure I fully appreciate this. So if the third quarter was pretty heavy in terms of the NIM interest payments and the fourth quarter is pretty light, is a more normalized level of those minimum interest payments somewhere in between. Or how I think about a normalized level of payments for that?
Chris.
I think it’s hard to do it on a quarter-to-quarter basis. What I would tell you is that on a year to year basis, over the course of a year, we generally do get acceleration. I would say this past year we probably had a little higher than a normal year. But in any given year, we are going to get that. I would tell you, quarter-to-quarter. If you averaged it out, yes, you would expect it to probably be in between there. But, but I can’t tell you that in the first quarter, it will be an average quarter at the second quarter be an average quarter. It’s really, we look at it more on a year-over-year basis.
In the third quarter, a lot of those happened at the end of the quarter. We had thought they might slip over into Q4 and then it would have looked -- that would have looked fairly flat.
Okay. And then a related topic I think was some of the fees in the third quarter in fee income, I believe were also associated with some of the pay downs from CFG. Can you quantify what that was in the third quarter and then what we see in the fourth quarter from that?
I mean, I can take a little bit of this, Chris, you might want to kind of chime in, but like for the other service charges and fees were down 1.4 million and approximately a little over one million that is coming from CFG, because once again, you had less exit fees etcetera from the pay-offs.
Okay, so just wrapping this up, how do we think about the core margin dynamics from here? Understand there could be some volatility from some of these minimum interest payments that Chris is talking about.
We started, January 1 with about a 407. And we have -- we not sure which diluted down five or six or seven basis points. So probably think about four, that’s kind of where we’re hanging in. We originated $1.1 billion this quarter, record quarter originations and those are up 50 basis points. That’s pretty impressive numbers on that. So as you know we’ve set that trend. We’re turning the boat. We’re turning that big portfolio around over a period of time and increasing those rates. So I’m pretty – I’m pretty pleased with that. If in fact the Fed has as set it’s going to sit still for a little back a little bit that’s pretty positive for us. We will have those immediate impact that maybe in one and in that they’re tied to basically to the whatever the Fed does. So we’ve changed our program a little bit here, we grew deposits about 270 million, net roughly 70 for the quarter, changes don’t put more emphasis on the cost of funds rather than the deposit growth. We had a no cost to fund to end deposit growth. We’ll be [indiscernible] own that. The winners of those groups will be on the cost of funds.
So I’m actually optimistic that we continue to write, they are going to all roll their eyes here because I think the margin all will be increasing at least staying, at least flat. Stephens rolled his eyes, so I’ll let Stephen take it from here.
That’s fair. As trials [ph] I mean you also mentioned that the production this past quarter we talked about the pay-offs, I mean that you know all areas of the bank have done a great job in being able to increase rate quarter-over-quarter production for Q4, which has committed balances. So a good portion of that has not yet funded, but the combined production of a $1.1billion for the quarter was 607, pay-offs rolled off at 550. So I think the combination of an increase in production rates and as those balances pull up relative to what pays down. Yes, that’s comforting and seeing that happen going forward.
I think, the margin really even though it looks like it has jumped around, you’ll see it see a little jump around, it has really since the first year after it merged short and has remained fairly stable. I think we have a shot at maybe moving that up. We continue, but our team continues to rise, -- rise in 607, 610. They continue and move those rates up. I think we got a shot at moving margins up.
So overall, it’s been a pretty good margin year. We really had what looks like a big drop – was not a big drop, it’s kind of a one-time event. I like -- Chris kind of some of those loans that left during the third quarter, I think Chris was, what I’d say Chris, you would were encouraging some of that?
I think that’s right. We look at it and towards the beginning of the year and second quarter identified a few that we thought over the course of maybe 12 months or so, we probably encouraged them to go find financing elsewhere. I thought it would take nine to 12 months, six to 12 months to get those out. It took about three months, which I think speaks to the strength of the secondary market during the summer. But I think we got all the ones we identified or moved on and they moved on a lot faster than we anticipated. So I might overshot that a little bit. But I think I’m still happier that we executed.
Okay guys. That’s great color. I appreciate it. I’ll hop back in the queue and congrats on the last 20 years.
Thanks Matt.
Our next question comes from Brady Gailey with KBW. Please go ahead.
Hey good afternoon guys.
Hey Brady.
So a 4% core margin, what about accretive yield. Well, I think last year you yielded a little over 41 million of yield accretion, where do you think that shakes out in 2019?
I’ll take that one. We did 9.4 million in a accretive yield in the fourth quarter. As a general rule of thumb, you kind of expect that, that might go down from the baseline about a half a million dollars. So I mean, it’s hard to project out too far in advance, but if you were kind of to ask me, where I think it will be, for Q1 would probably be around 9 million or just slightly under 9 million. Part of the decline that we had in the accretion yield for this quarter was the fact that 800,000 of that was a decline in pay-off accretion too.
Okay. And then you mentioned having a lesser amount of loan pay-offs that resulted in loan growth of 9% length quarter, which is a lot higher than kind of where you guys have been running. How are you all thinking about loan growth in 2019? Do you think we could keep this kind of mid to upper single digit growth level this year?
Kevin, you want to take a shot.
Well I mean, growth was you know it was a combination of as Stephen said record production for the quarter and a more normalized level of pay-off. Well that level say at the fourth quarter level of -- you really can’t no way to know that today. I think if we started the quarter and I’m looking at that strong of a book. So between the pay-offs being more normalized, and really hitting in the fourth quarter hard, I think is a really great quarter. But I wouldn’t push for that fourth, expect that in 2019. We had -- high single digits would be tough I think.
Actually the forecast for the fourth quarter Tracy was down, 100 or Stephen…
Early in the quarter is 150.
Yeah, 150 showed would be as a good spread. I mean it’s hard to get your arms around that. They’ll never know what people are doing out there and forecasts more pay-offs than we thought would come in, and didn’t anticipate as much loan growth being closed as we got close. So we were forecasting it down, and it ended up being up 239 million. It’s presently forecasted in the fourth quarter to be down. But, that could change, that can change in a week or three days, and if that happens all of a sudden something doesn’t pay-off and something else comes down and you just start building your [indiscernible]. I think the average over the year Stephen mentioned that the production has always been really good. I think Johnny and I hit the road last year, and we had indicated we thought the pipeline wasn’t really strong early in the quarter, so we’ve asked our team to be much more conservative on the projections and as we do quarter-to-quarter, but the activity that we see out there in the pipeline that didn’t show up on the pipeline seems to be pretty steady. So we’ll keep our fingers crossed, and if it slows down a little, it will be great. And one quarter are not. Not a rule to go down, but the production side we hope is.
We didn’t let Johnny predict loan volume, or quarter loan and we ended up having 230 [ph] million in the quarter.
Yes. If you remember, we did add and I do not forget loan volume maybe more since I got egg on my face after the first quarters. I thought it was going to be good. But I didn’t want to say that, but I spelled it one day.
I heard Johnny say that in the board, maybe so I don’t want to say you know…
Yes, I felt loan growth, half of that thought we’re going to have it. So I didn’t want to say the word.
And then finally for me just on M&A you know, we saw a deal there in Arkansas yesterday. I know it’s tougher with the currency trading where it’s at, but Johnny, how are you feeling about the likelihood of you all doing M&A in 2019?
Oh we may, we’re not adverse to doing M&A. We’re looking around to see what makes sense. We’re – we’re feeling actually feeling pretty good. I mean the boogey man didn’t get us. I’m actually feeling pretty good, asset quality remain good. We’re pushing up rate, growing deposits, growing loans, I don’t know what else. I mean, I’m pretty happy. I’m pretty happy. I mean, it’s been a tough year though with all the pessimism out there. It’s really been a tough year, but overall it’s been a good year. And I suspect that the next year, so it’s flat and we only make 305 million next year. It’s still best in class or 310. So we only made 290. You know what, the company when the opportunities are there, Home BancShares or dollar [ph] Shore get their fair piece of -- piece of the market. We’ll get our fair share of the market when it’s there, we won’t do anything stupid in the meantime and we won’t give stuff away, and we’ll just remain disciplined as we always have and when it gets real good, we’ll be there to play if it gets real bad. We’ll be there to play.
So I really like our -- I like our position, I like where the company is sitting right now.
All right. Got it. Thanks guys.
Thank you.
Our next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead, John.
Thanks. Good afternoon.
Hi, Jon.
Congrats on 20 years.
Well thank you. Didn’t seem like 20 years, but time flies, doesn’t it?
Yes, it does.
When you’re having fun.
Just a different way of asking Brady’s question, how do you feel about repurchase appetite at this point. You were active, but obviously you’re not as satisfied with the stock price. Is just curious what you’re thinking on that?
Well we’re going to continue to buy the stock. I mean, we have we have requested the regulators to allow us to buy just short of $200 million worth of stock if we choose to. So we’re in the game. We’re in the market and I remember, I remember back in the mid-80s, early 80s when bank stocks were selling book and/or book in the quarter, I remember those days. And that’s kind of reminds me that, where I’ve been buying these bank stocks. We don’t really have to be real smart to buy bank stocks. It almost through a dart, particularly if you buy the good ones, so I’m perhaps pretty comfortable.
Okay. What is your crystal ball say about the Home to dollar run rate?
Well, I think it may push down a little bit. I think it may have push down a little bit, but not far – not too far out. I think maybe another six to 12 months what we kind of thought around here that we might push it out. But that’s really because – not really -- I mean, when you look at $1.1 billion in originations in the fourth quarter, and we’re doing a lot of business. So that deal could turn on a damp [ph] and you could end up with the $800 million plus quarter or $600 million. If you look at the scheme of this deal it’s kind of pretty consistent. I think it was 950, Steven, 975 and half billion one in origination. So it’s not a flash in the pan, it’s actually happening every quarter and if we can get the paydowns to slowdown, as I’ve said earlier on the phone, people have said, go Home took off figure 450 or $0.5 billion this quarter. It’s not the fact that we’re generating – we’re originating the loans, it just – we’re getting the payoff. And you can say, our revenue was down a little bit in this quarter, but always got book [Indiscernible] if you look at the average loans on the book it was minus 20 million for the quarter. So the revenue would start rolling in off of those. I’ve look [Indiscernible] the difference already.
I’m going to ask about just the period end versus averages as well. Does it feel like payoffs are easy and originations are up? Or what is the relationship there?
Actually, I’m optimistic that payoffs are easing and they certainly did. When we look back to fourth quarter last year and they slowdown fourth quarter last year, correct guys, at least slowdown a little bit. Randy, do you have a comment.
What I was just going to say if you heard also Florida was flat. So they got hurt little bit by the hurricanes and as they come back I’m already getting emails on where earlier in the Panhandle some sales that are going on houses and everything. So as that comes back that just going to add to it. So, we’ve had last quarter’s success really without kicking Florida and that usually we see in the number, so I’m pretty optimistic like Johnny, because you’re going to see that come back as it gets closer and closer to spring. Lion share [ph] origination came out with the legacy Arkansas footprint which pretty good legacy there and good numbers, good rates on those too.
Yes. Okay. And then just one more on the margin, I know there’s been lot of questions here, but is it – when you look at accretion in fees, Q3 versus Q4, would you say Q4 is depressed and Q4 was obviously you said a little bit elevated, but would you view Q4 as a depressed number relative to where you normally expected to be?
Yes. Because we sometimes talk about the additional interest income that comes from New York and sometimes its fairly lumpy. But we’ve had some lumps along the way that just one lump is little bit bigger than the next and then all of suddenly just kind of fell off this quarter. So I didn’t really have anything of significance to provide any additional juice to the margin this quarter, so it would be kind of depressed, yes.
Okay. All right. Thanks a lot.
Hey, John, Did you like to – did the duck call sound good to you?
Yes. Is it [Indiscernible] call?
Well, of course.
I appreciated the grace pig reference more than the…
Thanks.
All right. Thanks.
Our next question comes from Stephen Scouten with Sandler O’Neill and Partners. Please go ahead.
Hey, everyone. How you’re doing?
Fine. Stephen, how are you?
I’m doing all right – doing all right. So, guys – I know, Johnny, you just said, you got maybe 200 million. You are request to buy back additional stock. But is that kind of what you think is the best use for your earnings today? You are obviously still making a bunch of money. So is that what you sees today, where the stock is the best use of that growing capital base?
It is to me – we’ll probably do a little more for our shareholders at some point in time, maybe another dividend increase. But overall I think it’s basically, as Steven said, if we like the 23 and 24 and we love it, and I think so and we do. So, you can see obviously we stepped up to repurchase to about almost 3.5 million shares the fourth quarter. We call it we just [Indiscernible].
Yes. No, definitely. And when you think about capital would you take TCE down to maybe 9% to continue to buy back shares here or how do you guys think about how much of that capital you would…?
Maybe Brian can do that.
Well, I mean, really what we’re doing right now, if you look at this $200 million that he talked about, I mean that's really the free capital that we raised through retain earnings.
Yes. Okay.
Those levels – at those levels we wouldn’t get to those numbers.
Yes. Understood. Yes, I was wondering if there’ll be incremental beyond that if the market stays depressed where it’s been?
I don’t know. We look at doing an offering the core of the convertible. And we look at that. We look at two or three different things and to me that stuff look good but it didn’t. I’m glad we didn’t do at that time. Stock was about $22. I didn’t ever imagine that the stock would go to $17, $18. That never crossed my mind. But that’s pretty enticing to me at those levels to step up and buy -- load of it. I mean that’s – we then take bank stock, they take bank stocks before they’ve been in past and we’ve experienced and what have in the past is in the likelihood of what’s going to happen in the future that’s what Johnny tweak your buying to bank stock and you buy the good ones that you know, but you could actually through dart hit any of them probably all will go up.
Yes. Fair enough. And on the originations that you guys have the 1.1 billion. Can you talk a little bit about how much of that was originations were funded versus what still unfunded and kind of what segments of the portfolio are driving most of that growth?
Yes. Hi, Steven. Its Stephen Tipton. I would say, all in a little over half of what was committed in Q4 funded. We had about 800, little over 800 million in production non-CFG production and 400 of that funded, and then the typical funding percentage what we see out of Chris's CFG office is in the 50% range, so I’d say that’s a good gauge to use. I guess, what the production that we’ve seen from Shore, again that’s a nice C&I component – C&I/consumer component there and then I would just say otherwise general kind of mixed bag of PRE construction and improved CRE.
Sure, had a little jump in past news. That was not really Shore. At least we’re not accepting that is Shore’s past news. We did a pretty poor job here of passing the baton from one runner to the other runner and about three-fourth of that have level its already current paid as agreed. It wasn’t that old spark there. We think was mostly out of all. At least we’re taking the blindfold right now, we’ll see in the next two or three quarters.
Okay. Fair enough. And maybe one last question from me. Just kind of as we think about the efficiency ratio, I mean, obviously it remains impressive still under 40%. Are there any major expense initiatives that you have to undertake or regulators maybe invest anywhere that you wouldn’t have otherwise or anything that will drive that incremental higher from here?
Pardon me. I mean, the regulators – the regulators don’t lack 38% efficiency rates, so I I don’t think, that’ll be my opinion. And they’d lack first to have another – we got hire at least another 1700, but we are hiring, we are hiring, but we’re maintaining our efficiency thus full up. I think I’ve told someone that helpful we’d kept it 40 or below.
That sounds good. Well, congrats on the 20 years guys and John I think you got about 10 days left to use that duck call. So good afternoon.
I have the meeting today and then I have our board meeting tomorrow and then it'll be a live duck call in the world, Steven.
The question is, which is easier; shooting ducks right now or picking bank stock on that dartboard that’s a real question.
Yes. Let me say that it’s easier to pick bank stock than it is to shoot as duck. And I’ve got tens of thousands of ducks, if I tell you.
Thanks, John. Appreciate it.
Thanks. You bet.
Our next question comes from Brett Rabatin with Piper Jaffray. Please go ahead.
Hi, guys. Good afternoon.
Good afternoon.
I’m taking myself for not bringing my duck call the office today.
[Indiscernible].
Wanted to ask, you commented about the negativity or the discrepancies in the market. And I’m just curious are the plans for 2019 any different for CFG or Shore Premier. And then maybe give us any color you can on how we should about profitability of those two areas in 2019 versus 2018 maybe?
Well, I suspect that I would be pleased if we had similar profitability at a Shore and – little more at Shore and little bit obviously CFG I’d be happy with that. I think overall that it should be a pretty good year, something that blow up somewhere and I don’t see thing to blow up there. There is lots of pessimism. Lots of fear and pessimism, but we’ve seen that before. I mean, we’ve seen that in the market in different spaces of the market and it just so happens – there were lots of different – lot of different markets down, but they’ve taken down substantially. So, I don’t know if that answers your question.
Well, I guess I’m just trying to figure out if you view the current market as an opportunity to do more things particularly in CFG or if you view that as – just keep doing what you’re doing and maybe you’re little more careful or watch a little more, I mean, I guess I’m just trying to understand your mindset on that in particular given that environment out there where people are worried about quite at a general?
I’ll answer. For sure, I mean, we’re ramping up the commercial side what they do, they have pretty much within previous operation had and going down just because of the way it worked out and that growth, a lot of that in fourth quarter was that commercial side just ramping up, so we see it particular for sure is an opportunity and I think -- we think that’s going to be a good year for them.
Brett, on New York’s operation if you know, we’ve just opened up our office in Dallas this past two months ago and so that should ramp up some opportunity there. And our office also was working with our community banks too that will give us some avenues that we haven’t had in the past. So, I think what Kevin said on Shore and what Chris has done in Dallas along with the community banks here that certainly open some opportunities for us there.
2019 is just like any other year, Mr. Allison expect, record breaking quarters, again, that has not changed. So, everybody is going to make more money. Well, New York about a billion five, they can go to 2.1 sort of kept them at 2.1 unless we did about 15% assets. So you kind of extend that out if you want to do New York, if in fact New York gets there about fourth quarter next year. I’m not saying they will, because those numbers – they don’t have to do that. They take what someone gives them. But you look at New York when they ramp up to 2.1 billion and Shore is growing, I think Shore originated $86 million worth of growth, they book 40 like about of that 30.
It’s about 80 million in production from store in the quarter and little short 40 million in net growth. So I think they are doing as we thought or little better.
You got New York, I mean, he got – I guess a person to put you’ve got 1.1 billion in originations for a company which is record originations at record rates at 6.07, 6.08, so that’s encouraging to me. Can we out run the cost of funds, can we out run the expense side. I think we can. You pull out margin acquisition for this quarter and hurricane losses and you see flat to down on the expense side, so other than some regulatory stuff and hiring some people there, we got some expense going up, we can keep pushing right stuff, hope we can continue to get better on the cost of fund side. If we can do that I think we can increase our spreads and with or with that loan growth. With or with that loan growth I think we’re going to make more money.
And in Panhandle as you know I just went through the hurricane not too long ago when one of our good producers that down there, Johnny and I just spend some time with North Florida’s larger customers and it appears that there's more opportunity there. The South Florida is beginning to kick and so I just think its opens up pretty good and then the Dallas office, if the community bank does have a lot of sale they can pick some up there and vice versa, so I think the opportunities are several different directions. It’s all good what the economy does, depends on investor attitude out there, developer attitude what they want to do, what the business world want to do.
And just Steven reported North Arkansas was one of the heavy hitter this past quarter.
Yes, we're seeing that in Arkansas too.
Okay.
I mean, construction and remodeling from the Bridge of Panama City Beach own all the way to almost [Indiscernible] is going to be and Florida is going to be record all time. I mean its going to rock 'n rolling next year. And we’re the [Indiscernible] so we got major presence there, great people on the ground, Jim Haynes, and his team.
Okay. That’s great color on that. And then, I just want to make sure I’m clear on, there’s lot of commentary on fees and just kind of accretion what not. But I want to make sure understood on the cost of deposit side, it sounds like you’re saying, you do think that your over more of the hump than less of the hump in terms of deposit betas. Are you expecting deposit betas to be a lot more reasonable relative to what they happened in the past few quarters in the next one, two especially?
I think that’s correct. We don’t put emphasis on the cost of funds which we really hadn’t been doing. We put emphasis on growing deposit, but like we’re going to put emphasis that we have as yesterday before emphasis on cost of funds. I think we had like 15 basis points increase and 15 basis points increase and we had 16 last quarter basis points increase and we’ll see if we can get that down a little bit. Actually margin would have been -- margin was kind of flat to up. We really dig into it for the quarter. So we’re still hanging around that 4% margin maybe 3% [Indiscernible] I think that’s where we’re going to be and maybe we able to spread that up a little more, maybe improve that somewhat in the next couple of quarters. If we can just slow the cost of funds we’re going to grow margin, because we’re not pushing rates on the loan side.
Okay. Appreciate all the color. Thanks guys.
Thank you.
Our next question comes from Brian Martin with FIG Partners. Please go ahead.
Hey, guys.
Hi Brian, how are you?
Hey, not bad. Johnny, just on your last comment about the deposits strategy, I mean what in particular are you guys doing? Or have you changed on the funding side? I guess you’re saying you’re more focused on the cost versus the growth. Or is there something to it?
That’s correct. We've had kind of a combination there of growth in cost of funds. I think we lost little side of cost of funds for the growth. And so we don’t try this little bit, so I will tell you about two quarters from how I think it work. Are you’ll see it? Actually you will see it. So, I won’t have to tell you, you’ll see it.
Okay.
So we need – we really won’t cost – [Indiscernible]. We lack. And if they toss which I have a suspicion they’re going pause here for little bit.
Okay. And the biggest driver of the potential to raise the core margin is more on the funding side and managing that rather than something you’re going to continue to get better loan yields or inch that up, but if you get the margin moving higher its going to be more driven off of the funding side and kind of what you’re doing there?
I think that’s fair, but maybe 60/40, maybe 60/40 – maybe 50/50 that’s probably 50/50 number. That’s probably 50/50, but we’re getting the yields. I mean, you see us getting 607, 608, we’re not given the stuff, we’re not given it away. And our people -- it took a while when since we had to draw six and send it up to Brian and show how six look like. Lot of them they even know what six look like. So we drew pictures of sixes and email them up to all our lenders, so they know what it look like.
I got you. I appreciate it. And just maybe one question for Brian, just on the fees that were in the service charges, kind of the exit fees. Brian, how much was – how much specifically was in the fourth quarter? I guess is that, you said there was a $1 million decline. I just didn’t know how much was -- what was actually in the fourth quarter level?
It went from 2 million to 1 million.
Okay, 2 million to 1 million. I got you.
Million dollar reduction from third to fourth and that’s was Chris’s file [ph]. It’s sweet when you hit it Brian because its real money, it comes in the door and its real money, but its hurts next month.
Yes. But it was down from 2 million to 1 million, so from a third standpoint it could go to zero, but by seeing to have some of it every quarter.
Yes.
Okay. And similar to other question earlier, I mean, this level is more normal, depressed I guess when you look at fourth quarter, because I know you’re saying you’re getting some every quarter. Just trying to understand what this quarter look like?
Chris, run over that. He has most of fees on that. Chris, you want to talk about.
Yes. Sure. Those were little down. I would say, it was little depressed and some of that being that some of what we would normally have expected to occur in the fourth quarter than the third quarter. So you know some of the payoff that was generally have occurred in the fourth quarter maybe even in the first quarter that’s coming up occurred in the third quarter, so you accelerated that these are all -- most of this money we were eventually going to get is just what period of time it comes. So I would say the fourth quarter fee income number was running lower than it ran in the last three quarters. And again, but – and year-over-year we had a little more fee income this year than we had last year, but we would expect fee income to moderate over time.
Okay. And just the last two from me. John, I guess you talking about expenses or kind of the efficiency ratio, I mean, do you guys expect to see positive operating leverage in 2019? And just kind of from an expense standpoint it sounds like the current rates are pretty good level and probably doesn’t move a whole lot off this level. You talked about hiring a few people and some regulatory stuff, but it didn’t sound that there was any major increase coming on the expenses from the current level?
I don’t see it. Anybody see it, it’s around the table here or anything, I’m missing out I would like to come in some, but I don’t see it. I think we’re pretty – and we’re pretty flat on the expense side than the regulatory side. No big expenditures to come in anywhere price are you seeing there.
I think we’re managing that along the way. Naturally as we go we’re 15 billion going forward. We got the new Dallas operation coming, so you’re going to have something that we’re preparing for, but hopefully the revenue and little bit of growth that we’re seeing offset some of that expense.
Yes. Okay.
Our bonus problem has been a little bit restructured that if you don’t grow income you don’t grow bonuses. If you grow income you can grow bonuses and if you reduce income you reduce bonuses, so that’s kind of the new came out of the comp committee this time that they didn’t reduce bonuses this time. They left them where they were. But if your region was down they left them where they were, but if your region was up you could go up in bonuses, but that’s kind of the new unwritten rule around here.
Okay. And the last one, Johnny, just on the reserve and kind of provisioning, spends negligible with the credit performance thus far and it doesn’t sound like there’s anything on the horizon that giving you guys lot of pause. May I guess is that – I guess, it assume its going to stay at low levels or kind of it stays at zero [Indiscernible] outlook on credit provisioning?
Yes. Actually its really in pretty good shape. You would run those numbers by Steven.
Yes. Hi, Brian, this is Steven. We talked about a lot over the last couple of weeks and I want Kevin may give you some kind of commentary on what we’re seeing from the hurricane reserve perspective and what we think we can do over the next couple of quarters. But looking at reserve coverage non performing NPLs where gross dollars were $64 million or so, I think at year end, quarter end, there’s about 22 or 23 million of that number that are purchases impaired acquired loans and I think maybe differently than some of our other peers do. We give you the total gross dollar amount of non-performing. So if you really look at what is non-performing that would technically be eligible to be covered by the reserve, we got 108, 109 million in ALLL that covers $42 million, $43 million in true non-performing loan. So we still feel really good about your 2.5 times reserve in non-performing kind of taking that analysis, we feel really good about where we are there.
Kevin, can you comment on this?
No. As to the hurricane we’re year out from Irma and we put aside 30 million a year ago. I think with Michael, hitting the Panhandle we’re going to shift a significant portion of that 30 million over to Michael event to look at for the coming year. And there’s probably some number 5, 6, 7 million, somewhere in that number that we internally thing that goes back to the general reserve based on what’s happen in Irma, what we think may happen in Michael going forward for this coming year.
Okay. So I guess you got some flexibility there to manage going forward. So all right. Well, I appreciate the update and congrats on 20 years Johnny.
Hi, thanks. Appreciate. It’s been hell of a run. It’s been a lot of fun. And we’ve ended up these guys, they don’t have a nice company. And I see the reason why we are going to be doing what we’re doing in future, we done in the past. And thank you for your support, Brian, a bunch.
Our final question comes from Michael Rose with Raymond James. Please go ahead.
Hi, guys. How are doing?
Well, how are you?
Good. Just a couple of follow-up questions. So last quarter you guys talked about potentially repurchasing some trusts [ph], obviously understand where the stock is that that maybe the better option, but wonder if you guys still looking at that. And then on the 200 million that you mentioned, I assume that’s kind of incremental to what’s you already have out there to give about 4.9 million shares left. What’s the approval process for that? And how does that work? Thanks.
I’ll take that. As far as paying off the trust, I mean even though we were over 15 billion we still get to account for that is Tier 1 capital. It’s not until we have an acquisition that’s at 15 billion or above that we lose the Tier 1 capital treatment. So we all look at it. It’s still pretty cheap Tier 1 capital. So when we have our next acquisition I can see that’s really looking a harder at paying off those trusts, but until then I don’t think they will actually do that. As far as the approval process goes for the repurchase, the regulators asked us to submit our plan and at the end of the year to say how much stock we might need to repurchase and they get the opportunity to at least approve or disapprove and they have approve us for just under $200 million.
Okay.
I don’t know if they approved, they did just approved it. It was an interesting way to read. The regulators have did themselves. I never commit too much out there. It was interesting with the reading there I cannot check out. So they didn’t say, they didn’t say, yes, so we move forward. But we were also curious about her many shares that we could have authorize, I mean, the board is the one that actually assess the number of shares to be authorize, to being repurchase, but then we also have to take the extra steps and get the regulatory approval too.
Got it. Okay. And then maybe just a follow-up question. Can you talk about – it seem like loans were flattish in Florida. How much is competition playing into that and how much is just your normal course of pay down activity?
I think it just part of it. I mean, Arkansas was up 150 million, $170 million that’s kind of usually for Arkansas to be up that strong. Now I could just – I kind of like the diversity of Florida and Arkansas and New York and Alabama, just kind of it worked. I mean Alabama was flat, Florida was flat, but Kevin.
I think, competition is the same, I mean, it shifted little bit from – I mean, rates are always an issue, right, but it shifted a little bit more from rates to advanced rates on collateral and we see as we – take later in the cycle you’d see people down back a little bit and we’re seeing some people go the other direction and increase their advanced rate and that’s – I think we fight that as much as anything.
We see a little bit of 80% advanced rates in the sub-fives or surface sub-six, that you see some competitors doing really that make a lot of sense. Not lot of run into, but somewhat we run into is uncharacteristic for some of those companies. I guess, they’re trying to build their book or something. I don’t know why they’re doing it, but it’s good companies that are that are uncharacteristically doing some of that.
We’re mashed, if we’ll match it if we have to. We don’t want to. You didn’t make a lot of sense. But we’ll match it if we have to.
Yes, because obviously you know the bank up – you’re down there. You got acquired this quarter and I’ve been up. I’ve heard that there’s been a little bit of a lessening of competition from that one.
I think, I think you’re exactly right, and I’m glad that was gone. I think that’s I think, that’s good for us. I think it’s good for Florida. It’s good particularly good for South Florida.
All right guys. Well thanks for taking my questions. Congrats on 20 years. I don’t know what a duck call is, but if you ever need any guns we got plenty up here in Chicago.
Thanks. I could have done that. I thought it was illegal to have guns in Chicago.
Good luck with that.
All right. Thanks.
This concludes our question and answer session. I would like to turn the call back over to Mr. Allison for any closing remarks.
I just want to say thank you everyone for joining us today. Great year. Great quarter. Hopefully, Matt team, I won’t ask much more of this book from that day [indiscernible] just be the best buy for America again another night. We made 320, 330 million, I’ll be happy with that and keep our past news and asset quality where it is now and now the map, that’s a long ways from that $250 million little community bank that you’ve worn [ph] it, you’d be happy the rest of your life.
Yes well, as I said you’re making more net income than you were supposed to an asset. Hey thanks everyone for your support. We enjoyed it. We enjoy the conference call, and hope you all enjoyed it too. Thanks.
Thank you so much for your time everyone. The conference has now concluded. And you may now disconnect.