Home BancShares Inc
NYSE:HOMB
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Home BancShares Inc
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Greetings, ladies and gentlemen. Welcome to the Home Bancshares, Inc. Fourth Quarter 2019 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks then entertain questions. [Operator Instructions].
The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You'll find this note on Page 3 of their Form 10-K filed with the SEC in February 2019. [Operator Instructions].
It is now my pleasure to turn the call over to Donna Townsell, Director of Investor Relations.
Thank you, Ali. Welcome, everyone, to the Home BancShares 2019 Fourth Quarter Earnings Release and Year-End Conference call. I'm Donna Townsell, Director of Investor Relations. And on behalf of the Home team, I would like to thank you for your continued support and interest in our company.
Today, you will hear from Brian Davis, our Chief Financial Officer; Chris Poulton, President of CCFG; John Marshall, President of Shore Premier Finance; Tracy French, our President and CEO of Centennial Bank; Stephen Tipton, our Chief Operating Officer of Centennial Bank; and wrapping up the comments will be our Founder and Chairman, John Allison. Also with us today is Kevin Hester, our Chief Lending Officer; and Jennifer Floyd.
Home BancShares' fourth quarter was the best of the year. It was the fourth consecutive quarter of earnings improvement for the year, a beat on both EPS and revenue. Coupled with the best-in-class asset quality, it resulted in $167.8 million in revenue, a 1.94% ROA and $0.44 EPS. What a great way to end a decade.
With that opening headline, I'd now like to turn the call over to Brian Davis to share some information with you about our NIM.
Thanks, Donna. The fourth quarter was another solid quarter for our net interest income and net interest margin. On a tax equivalent basis, we recorded net interest income of $141.1 million for Q4 2019 compared to $144.2 million for Q3 2019. The fourth quarter net interest margin was 4.24% compared to 4.32% for the third quarter.
Next, I want to give you some color on the 8 basis point decline in margin. First, during 2019, the interest rate environment began to decline. This decline has increased the prepayment space on our investment security portfolio. As a result, during the fourth quarter, we experienced an increase in investment premium amortization of $468,000 or 1.4 basis point decline in margin from Q3.
Second, in the third quarter of 2019, we had several interest income events primarily related to large payoffs. These events totaled $2.8 million of interest income and increased the net interest margin by 8.4 basis points for the third quarter of 2019. During the fourth quarter, interest -- event interest income was $549,000 and increased the NIM by 1.7 basis points. The lower event interest income from Q3 to Q4 resulted in a 6.7 basis point decline for the margin.
Third, the accretion income for the fair value adjustments recorded in purchase accounting was $9.1 million during Q4 compared to $8.5 million during Q3 for an increase of $670,000. This increased our NIM by 2 basis points.
To wrap it up in conclusion, the 1.4 basis point decline for increased premium amortization for investments, plus the 6.7 basis point decline, lower interest events, offset by the 2 basis point improvement from accretion, totaled a margin decline of 6.1 basis points. With that said, net interest margin is only down 2 basis points on an apples-to-apples comparison.
Finally, I'd like to switch over from the quarter to the year. Our net interest margin for 2018 was 4.42% versus 4.29% for 2019 for a decline of 13 basis points. During 2019, we experienced a decline in our event income of $3.9 million, a decline in our accretion income of $5.6 million, and an increase in our investment premium amortization of $2 million. The total of these 3 items was $11.4 million or 9 basis points of the 13-basis-point decline in net interest margin.
Donna, I'm turning the call back over to you.
Thank you, Brian, and apples-to-apples comparison on the NIM is very helpful. Now, we will hear from Chris Poulton about our CCFG division.
Thank you, Donna, and good afternoon. During the fourth quarter, we closed out a strong production year at CCFG. Over this past year, I highlighted our healthy pipeline, which resulted in record new loan originations of approximately $1.1 billion for 2019. For the fourth quarter, we originated $384 million in new loans, while payoffs in the commercial real estate book slowed a bit, resulting in overall net loan growth of about $95 million. Our LA production office continues to be a significant contributor, accounting for approximately 40% of production this quarter and just over 35% for the full year. Over time, we expect this region to account for approximately 35% of the overall CRE portfolio. In addition, we saw increased draws from facilities and other prior commitments as the higher originations of prior 4 quarters has started to show up in our net loan balances.
We continue to see good demand in our loan pipeline. And looking ahead, net loan growth will continue to depend on these new originations, plus increased draws on existing commitments, currently standing at about $1 billion of future potential funding and a continued stabilized level of payoffs.
Thank you, Donna. That concludes my remarks from CCFG.
Thank you, Chris. Now, we will go from land to sea, and we will turn the call over to John Marshall to hear about Shore Premier.
Thanks, Donna, and good afternoon. I always look forward to providing a quarterly update for Shore Premier Finance. The fourth quarter was good for marine and good for the bank. To place our performance in proper perspective, let's take a macro look at boat sales, which drive our business. Business Wire reports, according to the National Marine Manufacturers Association, 2019 sales equaled the record results of 2018, which were the highest performance in the past 12 years. The 2020 outlook for power boats is sales up by 2%; and regional growth, which is important to our business, is forecast to grow between 5% and 8% from New York to California to Florida. Probably a good time to be invested in the marine finance space.
Across credit metrics, our consumer and commercial portfolios have exceeded my expectations in the fourth quarter. Let's take a look first at asset quality and a closer look at the numbers. At year-end 2019, nonperforming retail loans improved to their best position from year-end 2018, dropping from peak nonperforming assets of $4 million down to $1.7 million, which equals a drop from 98 basis points to 34 basis points. 30-plus day retail delinquency improved from $6 million to less than $900,000, again equal to 148-point basis points dropping to 17 basis points from year-end '18 to year-end '19. We have no commercial delinquencies or defaults.
The asset quality metrics were favorable to expectations at year-end. And just as a harbinger of future portfolio performance, average origination FICO scores during full year 2018 were 770. That improved to 778 in full year 2019, but I'm satisfied that we're well positioned to absorb an economic pullback whenever it might strike.
In terms of profitability, Shore Premier’s contribution to Centennial Bank's bottom line eclipsed $1 million in December for the first time, attributable to a combination of higher interest earning assets in our disciplined expense foster. Our efficiency ratio was 21% in December, 22% in the quarter and averaged 26% for the full year. We saw continued pressure on NIM in the quarter due to funding of loans in the third quarter when 5-year treasury dropped below 1.4%. Separately, we also experienced, as expected, a seasonal refresh of commercial inventories that reflect less risk but also a lower margin spread above the LIBOR index. Near term, we expect bottom line contribution to grow and average rates to rebound. Even with that backdrop, 4Q NIM improved 11 basis points over 3Q and 74 basis points over 4Q '18. Our return on assets was 2.5% in the month and 1.93% for the year.
Finally, retail loan originations managed to prevail over persistent prepayment rates, and seasonal commercial inventory reduction delivered $14 million in net growth for the month, $40 million net growth in the quarter, $71 million for the year, and $127 million in growth since acquisition by Centennial in July 2018. The introduction this month of prepayment penalties and the initial 12 months of all retail loans should favorably impact growth and profitability by extending the duration and income-generating lives of these retail assets.
Commercial lending commitments grew by 150% in 2019 as well. The onboarding of several new boat builders and their attendant distribution networks in North America will also enhance loan growth and margins in 2020. And just separately, an ancillary benefit of this commercial growth is the gathering of deposits, which increased from $490,000 at the beginning of the year to nearly $5.4 million to close out the year.
So Donna, on that optimistic note, let me conclude my remarks on NIM and return the conversation back to you.
Thank you, John, and congratulations on a great quarter and a great year. Now to hear more, from a Centennial Bank level is Tracy French and Stephen Tipton. Tracy?
Thank you, Donna. I'm again pleased to report consistent strong performance for Centennial Bank in the fourth quarter of 2019. For the fourth quarter, Centennial Bank had a return on assets of 2.11, an efficiency ratio of 39% and consistent revenue in excess of over $170 million. Our Northwest Arkansas, Conway, Alabama had strong results, while our North Florida region ran the best results. These numbers, along with our best yet nonperforming ones, made the fourth quarter an outstanding one.
You have heard from Chris and John on their strong performance for the quarter and this year. Our community bank footprint, I'm proud to report that for the full year, our Alabama region and 4 of our 5 Arkansas regions produced over a 2% return on assets. With 2 of our regions in Arkansas and our Cabot region in Northwest Arkansas producing more income than their share of assets. The Florida regions provided solid return bolstered by our North Florida region with nearly a 2.5% return on assets, while all others were all around 2% more.
2019 certainly was a unique year for all of us in the banking industry. No one knew our interest rates were going. Competition diving to sub-4 interest rates on loans while continuing to pay 2% on accounts. We are optimistic these institutions will return more rational ways of thinking and operating their banks.
John and I, along with others from the bank, made several on-site calls with customers over the past quarter. The consensus of all the businesses, they all had a good year and agreed that 2020 look to be a healthy -- for a healthy one. We like the way our customers run their operations. And we, financial companies, must hold to sound underwriting and monitoring.
With that said, I'll now turn it over to Stephen Tipton to give more detail on the loans and deposits for Centennial Bank.
Thank you, Tracy. I will give some color on productions, payoffs and balance sheet changes for the quarter. Community Bank loan production in the fourth quarter of 2019 was strong at $735 million, highlighted by nearly $400 million from our Arkansas region and $64 million in production from Shore Premier Finance. While the yields were off slightly in October, our regions closed out the year strong and again, have the message to hold their discipline on pricing.
As Chris and John have mentioned, CCFG ensures our solid growth over the course of the year and in the fourth quarter, and we're excited about the opportunities in 2020 for everyone. Payout remained elevated in Q4 at $708 million, but as Brian mentioned, provided income to the bottom line due to proper structure. Payoff activity in the Community Bank footprint was again elevated and related development projects that stabilized and moved to the permanent marketplace.
On the deposit side, we were pleased to see balances rebound in Q4 after the seasonal decline we saw last quarter. Total deposits increased in Q4 by $231 million, split fairly evenly between the Arkansas and Florida regions. I would like to highlight our South Florida region, which had nearly $130 million in growth in the fourth quarter alone and a 20% growth in balances for the full year of 2019.
Fair business development efforts, along with the continued strengthening economy, give us optimism for 2020. Congratulations to our South Florida group.
With that said, I'll turn it back over to you, Donna.
Thank you, Tracy and Stephen. Great reports for the quarter and the year. I like that deposit growth. Well, now, without further ado, to wrap up our prepared remarks is our Chairman, John Allison.
Thanks, Donna. I hope all of you are pleased with the quarter and the year. Actually, I have been concerned all year with the additional expenses of going over $10 billion and the revenue reducers like Durbin hotels. This was our first full year of Durbin. We had a half a year brand last year. Is that right?
That's correct.
So that's about $7-plus million, I would assume. What is that number? Brian, you got at least...
It's about $1 million a month.
It's about $1 million a month?
Yes.
Okay. That was a little -- it's about $6 million impact on us. You add that with the unstable interest rate, and everyone thinks that we were about to go into a recession, that, that was imminent. It was kind of a strange time. The Fed missed it so far in 2018 that I really had no confidence this time that they'd get it right. Actually, I thought there was a better possibility that California Congressman, Adam Schiff, will be picked as Trump's running mate than the Fed gets the job done. But the Fed did a great job this time, and it's given the economy what appears to be a stable and solid outlook. And now with the signing of the first phase of the agreement with China, looks like we could have a good year.
Let me talk about the highlights, both good and bad. Originations were $1.148 billion. That's the good news. Bad news is they were at 5.37. That really resulted from a low rate October loan [indiscernible]. However, we came back in December strong at 5.73.
If you remember in the third quarter, we only originated about $710 million, and we hoped it was a slowdown. We weren't sure whether it was or whether it wasn't. But obviously, it was just a hiccup, a time not to panic, but to remain disciplined and hold the course as we have for 21 years. Good news is we grew about $100 million in loans for the quarter. The bad news was that the average was down for the quarter.
When you go to asset quality, I don't know what to say. Kevin Hester is here if you want to ask him some questions about it, but it's about as good as it can get. Nonperforming loans were 0.50, nonperforming assets loans were 0.43, and past due loans were 0.49.
Kevin, when was the last time we had a 0.49 past due loan?
I don't remember it.
He's been here since we started. Anyway, that's pretty good stuff. Donna talked about the revenue. And also, Brian talked about revenue, and those are good numbers. Good job on controlling expenses. They're flat. I don't like where they are. They're higher than they used to be, but they're flat. We had a 15.5% per share return on tangible common equity. The ROA for the quarter was a 1.94%. However, in December, it was a 2.12%. We like what we got in December. Efficiency ratio for the quarter was 41.14%. However, in December, it was 38.3%. Return on tangible common equity for the quarter was 19.51%. However, December was 21.64%. It appears we've got a little off our game. We made the corrections necessary, and we're solidly back on target again.
December was a surprisingly strong month, and I'd take every month like December. During the quarter, we repurchased 510,500 shares for $9,488,168 or $18.58 per share. We're continuing to be active on the stock repurchase side, but we're also building additional capital. The capital is being built from 1 of 3 reasons, maybe a downturn, use in a transaction or to reduce debt. We have added about $30 million to our reserve this year, and we hope to add about $60 million or $5 million a month over the next 12 months in 2020.
I predicted Home will be back in the M&A business either later this year or next year. We opened 3 new branches during the quarter: Lake Nona, Florida; Hialeah, Florida; and a new one in Russellville, Arkansas. In the last two years, as bank pessimism has run at the highest level of my business career and bank multiples hit a 20-year low, Home has earned almost $600 million, maintained superb asset quality, performed best-in-class in all performance metrics. We repurchased 9,849,911 shares for $188,920,000. We paid a solid dividend to our shareholders over the last 2 years with $165,495,000, all while maintaining average return on tangible common equity of 21.9% and ROA of 2%, best-in-class numbers.
I'd like to see a list of the companies that performed at that level. I think it'd be a short list, and we might be the only one on it. When the multiples come back, and they will, I think our shareholders will be rewarded. I think 2020, we're teed up for a good year in 2020, and we fought the expenses of most of the regulatory in '19. I don't see a lot of increases in expenses on the regulatory side, and we ought to be teed up for a pretty good 2020.
Donna, Ali. Ali? Is that it, Ali?
Yes.
I think we're ready for Q&A. That's all I have. A good job by all for the quarter, and thanks for your reports, and we're ready for Q&A.
Mr. Chairman, this is John at Shore Premier. Before moving into Q&A, it occurs me after listening to your comments and Tracy's, I should probably clarify my own regarding ROA. The numbers I cited were correct, 2.5% for the month of December, 1.93% for the year, but those were pretax core ROA numbers. I should have provided net ROA numbers of 1.57% for December and 1.31% for the year for a truer apples-to-apples comparisons with the other references. Sorry about that.
I guess, Ali, we're ready.
[Operator Instructions]
Thanks for those remarks, John. Sorry, Ali.
[Operator Instructions]. Our first question today will come from Brady Gailey with KBW.
So John, you talked about the increased profitability in the month of December and increased performance metrics. What drove the step up in the ROA in December relative to the rest of the quarter?
It was just a pretty good solid month. December was just a pretty exceptional month for us. We had some -- did we have some bad income, Brian?
We did. I mean for the month itself, we’ve had a little bit of other service charges and fees. We had the item that we talked about where we had some additional income from our equity investments. And then we had some reduces -- reductions in salary and employee benefits. During the month of December, we trued up the incentive accrual that we've been making for the year. And as you can see, our year-to-date profits were down from 2018 to 2019, and we had about a $1.5 million reversal for incentives to true it up for year-end.
We've made some equity investments several years ago, and those equity investments have done very well for this company. And going forward, we expect even better returns, particularly in the first and second quarter with our equity investments. And also, we're anticipating some pretty large recoveries in the first 6 months of the year. So you'll see some of that. It's going to carry forward into next year.
All right. That's helpful. And then on a linked-quarter basis, there's about a $2 million increase in other service charges and fees, down in the noninterest income. Was there anything of note that drove that object? It went from, I think, about $8.5 million to about $10.5 million on a linked-quarter basis?
Yes. It all has come from CFG, and it's up -- you're right, it is up $1.9 million. And what I'd like to do is get Chris Poulton to give a little bit of color on that $1.9 million increase because it all came from CFG.
Yes, sure, Brian, this is Chris. Yes, we had a couple of influence in loans, where we were able to collect some fee income. I think, as you know, that happens from time to time. And fairly regularly, we had a little more of it this quarter than we had in the -- in some of the prior quarters. But again, we always think about it. It's hard to know when that's going to come in, but every year, it comes in.
Yes. And I think you have one instance there, Chris, that it was like $1.4 million just from one borrower, correct?
Yes, that's correct. That's correct.
Okay.
All right. And then finally for me -- I was just saying finally for me just on M&A. I know last quarter, Johnny, you're a little more upbeat on M&A saying the conversations have kind of picked up and maybe sellers' expectations had been reset a little lower, and you know . And we've seen some activity this quarter. We saw a couple of big MOEs kind of in and around your neck of woods. What's the latest on M&A for Home Banc?
We're looking. We will probably announce some kind of transaction in the next 30 days here when we bid on, and we would hope to be successful in the transaction. It's not a big transaction, but it is a transaction. That gives a little kick to EPS, and we like the business, and we like the transaction. So, I can't say anything else any more about it.
As I always tell you, everything is going on. I added it in my prepared remarks, but they made me take it out. So, we haven't closed the transaction, but we anticipate closing the transaction. And additional M&A out there, we think it might be a good time to be in the market.
Next question comes from Stephen Scouten with Piper Sandler.
Guys, how's it going?
We're good. Stephen, how are you?
Doing well. Doing well. We got a new name. We got a new name. We're ready to go.
There you go.
Okay. Good.
Yes. Yes. So maybe following up on Brady's question on M&A there. I'm curious if you guys are looking at any non-bank M&A as well as whole bank. And then on the whole bank side, if you could give an idea. You mentioned what you're looking at now is not a big transaction, but kind of how you would weight your time towards maybe sub-$2 billion acquisition and then north of that, if you can give us a feel.
I just really think we hadn't done a deal in a while as we've digested Stonegate over the period of time, and I would suspect we will be active this year. But I think we'll start smaller, unless a great -- unless a really good MOE comes around. We haven't seen a really good MOE yet that makes sense for us. Maybe we're not talking to the people, but maybe if a good MOE comes around, we probably would be interested in that.
I think it's time for us to get back in the business. If we found a trade -- I mean we did pretty good. There -- looks like the trades have been done -- recently done in the 150, 160 range. And if those kind of hold with us selling it 210 or 220, I think we can make something work. It just hadn't been feasible in the past when, as I have said before, you got a weak sister out there that's trading at 190, and we're trading at 2x tangible book, and something had to give. They either got to go down and we got to go up, and I think it's a good time. I'm hearing lots of people talking about bank stocks now possibly, and I hadn't heard that in the past. And I think that we'll be rewarded for the stability of this corporation and the price on our stock will go up, give us the opportunity to get back in the M&A business.
Makes sense. And just as you continue to build capital pretty rapidly, you noted the share buybacks you've done over the last couple of years, how do you think about that moving forward, especially with TCE nearing 11% here today?
Well, we're going – we’re going to settle that capital a little bit right now. Brian Davis talks to me every month about buying back stock and how dilutive it is, and he's even put an amount of money that it costs. He said it cost us $2 million last year as an expense to buy back stock. And again, that makes sense when we puts some number on the dollars that we spend. So, we will continue to buy back stock. We also are continuing to build capital.
We're building capital for a rainy day, or we're building capital for an acquisition. Or 27 months from now, we got a $300 million debt that's due. So, we're building -- continuing to build this capital. It will put us in a good position. It will -- I don't see a downturn at all. I don't -- we just -- we haven't seen anything that shows a downturn, but it's a good time.
We're seeing competition in the marketplace, loan money in the 3, 6 or 7, 10 years, and these are big -- these are competitors that historically have not acted that way. I don't know if they're just building their balance sheet to sell it. That's what it looks like, just kind of packing it up. But we're not getting into that. That hurts us -- it hurts them long term, it hurts us, too.
You can't fix margin. Once you commit 7, 10, 15 years on the loan, you’ve got it. It's with you for a long time, and you got to pay the piper when you sell it or in earnings over a period of time. It's disappointing to see some of these people that know better loan and money at these low rates. I don't know much about where you went, but that's just something I want to talk to you about.
Yes, yes, yes. Definitely. And then maybe just last thing for me. Curious if you guys are looking at the hiring of any new teams to kind of drive loan growth. It feels like that's an even more prevalent phenomenon right now for a lot of your competitors. Everybody is looking at acquiring talent from the large regional banks and using that for growth. So I'm curious if that's an endeavor you guys are pursuing at all or are you going to kind of stick with your team and leverage it via M&A longer term.
Well, Johnny has been a proponent that we stay in our lane, and so we've -- you've seen us be consistent about where we look at M&A. We'd probably be consistent about where we look at teams as well. There are some geographies outside of our footprint, geography that we like that we -- if we could do something like that, it'd make sense. But that's not been our nature to this point. I'm not saying we wouldn't do it, but it's not something that we push heavily at this point.
Tracy, you got something to say?
Obviously, we get the right people. I mean we did that in Pensacola, and you can see where North Florida is the top region in the company. And we've got John and just -- that was really a team and overall we did there and Chris and his group, same thing. So there was always plenty of opportunities. Yes. I forget that John and his team and Chris and his team were -- I mean they were a team. In Pensacola, we did -- that worked really well for us.
Great. Well, congrats on the great quarter. I hope December -- duck hunting went as well as December went for the bank.
Well, there's the ducks at the tab.
Really...
I've got 6 out of 10 the other day. No, he didn't get any.
Just let you know.
He sell a lot of sales, he didn't get any. But I want you to know that I have only been about 5 days, and I normally go. It would have been all -- I've never missed, but they've had me hooked up this year. And they keep hooking me up, too, Stephen. So anyway.
That's good. Well done, guys.
Our next question comes from Matt Olney with Stephens.
Going back to the M&A discussion. I think, Johnny, you mentioned MOEs are a possibility. Can you talk more about your MOE priorities? And historically, I think the bank has been a discount buyer of banks that are more dent and scratch. I'm curious if this is still your view.
Say that one more time. The MOE -- you said that you're interested in MOEs and then your comment about banks, what?
Well, I guess, historically, going back several years, you purchased a number of banks that had some more [indiscernible] banks, dent and scratch, right. So I'm curious kind of what's your view of that is.
Well, we're not afraid of scratch and dent banks at all. I think it depends, right? I'm pretty selfish from my effect that I'm going to take my stock in Home Bancshares and put it in the hands of somebody else. I think if we do an MOE, we'll be the surviving corporation coming out of that. And I'm not -- unless we were to find somebody that does a better job than we do, that runs a better company than we do, we'd be open to looking at their management style and see if it makes sense.
But the ones that we've looked at through this period of time, Home has to be the survivor because they don't run the performance that this company runs. So I have no intention of -- and I don't think our Board has any intention of taking this company and put it at the hands of somebody who doesn't run at the level we run or doesn't -- is not interested in learning how we get to that level. So if they don't run what we run in -- they don't run what we run, then we'll be the survivor in the deal. There's always got to be a survivor, right? Somebody's going to buy somebody else. So we're open to that. I don't know that I'm open to MOE at this point in time where we're not the survivor. I don't know if I make any sense to you. But to find somebody who runs at the level this group runs, that is difficult.
Yes. No, understood. And it sounds like you've got something closer on the smaller bank M&A side. Does that prevent you from looking at other deals at this point?
No. No. No. No, no. I think we'll do some smaller transactions and kind of get our feet wet over a period of time and kind of get back in the mode. We've been out for a couple of years. I think the world thought we were just acquiring, acquiring, acquiring. But if you watch our -- we did acquire a lot of failed banks, but this company digests what they -- do a good job and take their time and digest -- Stonegate was a big one. That was $3 billion, and we want to be sure we got that properly digested.
So any comment from anybody else on the M&A side? We're open. I mean we have not been open in the past. We're open. I guess we've always been open, it's just that they didn't make any sense. And maybe non-premium deals now with a mindset that makes a little money. It has to do with the management to me. And that's not to be selfish and greedy that we got to run everything. I don't mind turning it over. If there's a better operator than us, then we'll let them run it, and we'll work with them. But there's not many of those out there.
Our next question comes from Jon Arfstrom with RBC Capital Markets.
A couple of things to clean up here, I guess, just in terms of the numbers. Johnny, you made a comment about some recoveries, but you also made a comment about adding $5 million a month of reserves. And I'm just -- I'm kind of curious what that means for the provision. You obviously had a very good year.
Well, I didn't mean loan loss. I'm sorry, I didn't mean loan loss. I didn't mean loan loss reserve. It's just kind of middle sinking fund that we've developed here, where we're just putting about $5 million a month into a middle sinking fund, building additional capital.
Cash.
Cash. That's not loan loss reserve.
I'll put in just a little more clarification. Starting in July, we took part of the cash dividend that we were getting from the bank and put it in a different bucket over here that has accumulated to $60 million -- I mean, $30 million for 2019 for 6 months, and that's where he was talking about the $5 million. And that money would be used to pay down sub debt if we don't spend it -- it's not restricted cash, it's just we're putting it in a different bucket. So we have a better use for it. We plan on paying down the sub debt.
Yes, we have $300 million in sub debt that's due in 27 months. So I mean they -- if you remember, they call it capital. I don't know how they do that. We call it debt. So we'd like to make a dent on that when it comes to revenue. We're just building the capital. And if there was a trade -- a deal that came up, we'd use it for that. Or if there was -- if we have a downturn, which I don't see, we'll use it during that cycle. So it's just a reserve on top of the reserve, I guess, but it's not a loan loss.
Okay. Got it. And then the recoveries, I guess, potentially, the message is more of the same on provision? I mean, you just...
These are recoveries -- these are some recoveries we've been after for a while. We really expect them in February. And Kevin said, "I wouldn't say that. We've been expecting them several months."
And just for clarification, Jon, these are recoveries from banks that we acquired, and so they weren't charged off through the ALLL. And so when we get those recoveries, they will show up as other income versus a recovery on ALLL because the ALLL was never brought over on those acquired transactions.
Okay. Good. Good. And then on the margin, Brian, your favorite topic, the margin outlook, but it looks like you guys had a nice step down in deposit pricing, and it sounds like you're feeling better about loan yields. Feels like a stable to maybe potentially better core margin environment. Am I thinking about that the right way?
I mean from a core margin, you're probably pretty close. I mean we will have -- I'll let Stephen kind of give a little more color on it, too. But we will have some accretion decline that -- we had $5.6 million of accretion decline in 2019. We worked on our budget for 2020. We've got another $5 million decline on top of that. I mean we have a total of $73 million of available accretion that's sitting on books. That's going to accrete in probably over the next 3.5 years. We had approximately a little over $9 million in accretion this quarter. It's probably projecting about $8.5 million. And that probably -- from an accretion standpoint, probably brings the margin about 2 basis points.
Investment premium amortizations, expect to stabilize. While they were up in Q4, $467,000. Mr. Allison talked about December being a great month. One of the other things that was good about December was that the amortization on the premium was lower in December. It was the lowest since we've had since July. So I'm anticipating that, that will not continue to increase. I'm going to let Stephen give a little color on the production and what he's seeing over there.
Sure. Jon, I think you're right. I think stable is the way we're trying to look at things today from a core standpoint. We actually -- the core NIM in December was up slightly. So deposit costs, I think, will continue to try to pressure down December and a little lower than what the quarterly average was. And then like you said, on the loan side, I think, potentially, yields will stabilize here. So I think in a flat rate environment, we think we can hold it where it's at. We're constantly going to try to improve on that, but I think it's the way to look at it.
December, as any indication, we may be able to increase it a little bit. And we're not saying we're going to increase it, but it's a good indication that we may be able to, at least, hold our own on the margin side. So it will be -- it'd be all efforts to do that. I don't see any reason why we can't do it. Particularly, unless the Fed starts again, if they start moving again, you just got to regroup. If they'll leave things alone right now, leave rates where they are, I think it's going to be a good run.
Our next question comes from Michael Rose with Raymond James.
So just wanted to circle back on some of the larger transactions that we've seen in and around your markets, particularly one that just happened here recently that had a big footprint in Florida. We had another bank today talked about some elevated costs that they're putting towards capturing some market share from the disruption. Do you guys have any plans to look at additional lender hires or commit capital to advertising or things like that? And should we think about that as a potential addition to the expense run rate as we move into the year?
I don't -- we don't plan on any marketing programs that worth's nothing.
Nothing that was created has a significant difference.
There may be some natural fallout from a people standpoint now from some of these transactions that occurs or the one you mentioned or some of the others and other areas that presents an opportunity.
Okay. So like no formal...
There will be a few of those fallouts. There always is.
Okay. And then maybe just looking at the loan generation as we move forward. I think if I exclude Chris' group this quarter, balance looked pretty flat. I understand the paydowns, looks like there's going to be some as we move into the first quarter. Can you just talk about the general environment for loan growth? I mean is it so competitive that the risk-adjusted returns just don't make sense and you guys are fine kind of growing on a gross basis kind of in a low to mid-single digit basis? Is that the way we should think about it? Or is the environment actually improving the outlook? I guess how should we think about as we move forward?
Michael, this is Kevin. Second quarter and fourth quarter were both strong. 2020 could be strong also, given the economic outlook that we're kind of thinking is out there. There are deals out there. The question is whether it's at the yield and the leverage that we're willing to do. I'm optimistic, based on 2 out of the last 3 quarters, that we're going to get our share of them, that they're there. But it is a crazy time. I mean the stuff that we're hearing both from a rate and a leverage standpoint at this point in the cycle doesn't make sense in a lot of cases. So we've got to pick and choose, and we're going to protect margin and protect asset quality. And if growth comes with it, then it does.
And we had a -- we were in Florida last week. We flew last with the customer and want to quote the customer and one of our competitors run in a 3 85, Kevin? 3 85 fixed for...
15.
Fixed for 15. 3 85 fixed for 15. A bank. So we're not going to do this. We'll just pass and let us move on. To me, when you slack, you don't think over the next 5 or 6 years, you could loan money higher than that right. So when that happens, we just pass. We're just not going to -- we're not going to be upset. We're not going to win the stupid award, right?
No doubt. And maybe just one more for me. Chris, we've seen some slowdown in some of the larger metro markets across the U.S. in terms of new construction formation. Can you just talk about the outlook for your group and your footprint whether it be the metro area in New York City or out in the West Coast? And how we should think about kind of the natural rate of growth as some of those metros have slowed?
Sure, no worries. So we did $1 billion, a little over $1 billion this year in volume. I don't see any reason why that wouldn't probably continue. That's up from where we were averaging probably $750 million. I would hope that we'll do something pretty similar to that this year.
And what we generally noticed is if you increase your production by a couple of hundred million dollars over a couple of years within about 18 months or so, your net growth starts to come in at about 50% of that. So if I do $200 million more for 2 years, I'd expect in 18 months that my net growth will be $100 million. That type of relationship usually exists even with payoffs.
We're seeing a little bit -- you talked about a slowdown in the metro market, that's a little true. I think there's caution in metro markets because I think there's a lot of things happening, right? Condo sales have -- prices have fallen a little bit. And if you were lending 70% on that, you'd have a real concern about that, which is why we've generally never lent that level. It has always been -- you ought to assume the price is going to come down a little bit. And so I don't know that changes necessarily our point of view on that, but it certainly gives some people some pause, and so we do see a little bit of that. So that generally actually helps our business a little bit because when other people have a little bit of reason to pause, that gives our product a little bit more competitiveness, I think, which actually led to some of our increase in lending over this past year.
But look, we're cautious about New York. I think the environment in New York is such that the city council and the government here is going to continue to press for higher taxes and changes around affordability, et cetera, that make it more expensive to develop here. And I would expect that, that will ultimately result in less development. I don't know that, that means they will do less because, again, our product may just get a little bit more competitive. But we like L.A., we like New York, we like San Francisco as well as some of the other metros. But we continue to be pretty optimistic about what we're seeing. And I think over time, our product gets more competitive.
Okay. One quick follow-up. What are the kind of the new production yields in your portfolio, Chris? And maybe where does it stand versus last quarter maybe a year ago?
Yes, I think quarter-over-quarter, it's been reasonably flat. We're still generally 4 over LIBOR, sometimes at 3.75, sometimes at 4.75. Five years ago, we were 6 over LIBOR, but LIBOR was effectively 0. And so with LIBOR at 1.75, we always kind of knew that as LIBOR went above 0, your margin would compress a little bit. I'd say, year-over-year, 25 points to 50 points. So let's call it 50. But again, it's also very dependent on the type of loan and the mix and things like that.
So I still think we get our price on our good core deals, and then we've seen a little bit more -- a little more competition. Our pricing is generally limited, not necessarily by what's going on in the bank side, but as nonbank lenders bring down their equity return requirement, that puts more of a ceiling on our price because they're typically lending more money at more expensive rates. But at some point, the math starts to work that we get a little bit of a cap on how much we can charge based on the nonbank lenders bringing their price in a little bit. But again, at the same time, as nonbank lenders do that, we also lend to those nonbank lenders, and so that creates opportunities for us as well. But I would say 25 to 50 points in kind of over the last couple of years.
Our next question comes from Brian Martin with Janney Montgomery.
I wondered if -- I don't know who wants to take it, but maybe just a little bit of color. Johnny, you talked about the expenses kind of being flat, but maybe a little bit higher than you thought or maybe I misunderstood that. But just kind of given with the true-up that Brian talked about in the fourth quarter, just kind of the current expense run rate as we look into 2020. If you can just give a little color on how you're thinking about things.
Yes, I was really -- Brian, do you want to take that?
Yes. I mean, Brian, I mentioned that we probably had a $1.5 million in trip in the salary and employee benefits. But there's a couple of other categories, other professional fees and other expenses that have also a little bit of noise. And then I may not get too much of the minutiae on it, but the other professional fees has this third party $631,000 that we talked about. There were some recruiting expenses, trying to get some additional people in here that we typically don't have. Mostly, it also came out of New York, and it was $272,000. So that's not necessarily going to be reoccurring.
There were some other special projects that weren't quite as expensive as the $631,000, but there was a $145,000 and $214,000. I don't really want to give you the names. There were some timing and other expenses. We were up $1.3 million there. We had some timing on some donation expense for $300,000. We had a couple of other items that totaled $243,000 that we're timing. So a little bit of that is going the other way.
So I don't know if I really answered your question. I was just trying to give you a little color on some of the changes that we had within our income statement and account statement.
Okay. So I mean this -- with all the noise, this level is not a bad level to think about as we head into next year. There's some puts and takes. But if anything, it shouldn't be growing much from the current level we're at as we, at least, start off for 1Q.
If we look at last quarter, we had $67.7 million, but we also had a $2.3 million refund on our FDIC assessments, too. So that's what prompted it to be down. So we're at $71 million. That's probably not a bad run rate.
I mean noninterest expense, October, November and December, it was 24, 23 8, 23 60. So that's when I said it was meant to be flat. It was flat across the noninterest expense.
Yes. Okay. Perfect. That's helpful. And then just, Johnny, I think you mentioned something about the equity investments and the benefit. I guess that -- is that -- maybe for Brian, does that appear in that other line? And I guess just this level maybe is somewhat sustainable for the next couple of quarters as you capture that benefit?
I mean if you're looking for the line item, it's in the dividends line item and noninterest income, and we got an extraordinary large amount of dividend from one of our equity investments, not all of them, just one of them. We said we estimated that it was up about $861,000. Do I think that, that is sustainable every quarter? No. Do I think that we might have that or maybe a little better next quarter? Maybe. I mean the -- there's the possibility that they may be able to reciprocate that in Q1, but I'm not heard that they can reciprocate that after Q1. And so you that's the -- a normal run rate on that might be $400,000, $500,000. And instead, we had $1.3 million for the quarter.
And it looks like the first quarter that they've hit a pretty nice one. So we're anticipating a big payday in the first quarter.
It's a little choppy. It has been fairly consistent for quite some time, and I'm pleased we got the level -- we get the income. But as a public company, it's like, okay, that's something I get to explain every quarter.
Right. Okay. That's helpful. And just the last 2 minor things. Johnny, I guess just as it relates to M&A, just if you remind us -- I mean the lowest -- the smallest type of deal that you would look at today versus talking about the MOEs and maybe the larger deals, if you had a range of how low you would go, given the impact it would have to Home, I guess do you have a size range in the top, on the bottom end of M&A?
I really don't have a size range. I wouldn't mind doing a -- probably wouldn't do a 20, but probably would do a 15. And probably, I would prefer warming ourselves back up with something in the $1 billion to $2 billion range to get warm back-up.
Got you. Okay. And the last one was just, maybe for Stephen, just on the margin, just the -- you talked about maybe seeing the core margin stabilize or improve a little bit. I mean, I guess, the outlook to see it go up a little -- what could lead you to see the margin actually -- the core margin actually expand a little bit as you think about going into 2020?
I mean a couple of things. And I think Brian mentioned just as interest rates stabilize, some of the investment portfolio impact minimizes, hopefully. And then I think it's just our ability to rightsize and lower deposit costs further from here relative to loan yields hanging in where they're at. And I think in December, I had our portfolio yields, kind of ex event, ex accretion income in the 5.5 range. So if we think about where we're collectively running loan yields between the Community Bank footprint and Chris' group for north of there, I think that we could potentially see improvement.
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Allison for any closing remarks.
Thanks, Ali. And thanks, everyone, for being with us today and for supporting our company. It was interest -- it's been 2 interesting years, and the company has continued to perform. We were down about $10 million this year over last year. We hit the EPS, same EPS number, but our actual income was down about 10.5. So about 5 out of New York, about 3 out of legacy and about -- as Brian puts it, too, for the cost of buying back the stock. So kind of gives you a perspective.
Last year, your four last, I guess, it is now 18, CCFG had some big windfalls in the fourth quarter that they didn't have this year, that took them down a little bit. And actually, legacy hung in pretty good. If they hadn't -- if we hadn't had a full year of Durbin, I'm not sure legacy wouldn't have been up.
So in spite of all the craziness that's going on this year and the political wounds and the interest rates and all the different facto-logies that are people trying to spread, it is -- this company has remained as solid as anybody in the country, and we'll continue to do that in the future.
So first, thanks for your support. Hopefully, we'll see some good windfalls in the first quarter or the first 6 months that will really give us a kickoff to the year. And hopefully, we get our transaction that I mentioned to you closed sometime in February or March and let that start accreting into income. So thank you for your support, and we'll talk to you in 90 days.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.