Home BancShares Inc (HOMB) 2018 Q4 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home Bancshares, Inc. Fourth Quarter 2018 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks, then entertain questions. (Operator Instructions) .

The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on Page 3 of their Form 10-K filed with the SEC in February 2018. (Operator Instructions) 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 Year-End Conference Call. It's hard to believe that another one has passed, 2018. And 2018, also was the 20th year for our company, 20-year anniversary. Congratulations, all. 2017 was a great year, resulting in about $200 million in income, and now 2018 has come and results 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 to an end. With me today is Randy Sims, Tracy French, Donna Townsell, Brian Davis, Stephen Tipton, Kevin Hester and Jennifer Floyd. At will be available for Q&A and -- after the presentation ends. Chris Poulton, Donna Townsell and myself traveled extensively during the last 6 months of 2018, trying to understand investor sentiment towards bank stocks. We were told that the Boogeyman was under everyone's house, that there was a Russian behind every tree that there was imminent recession that the fat monster had returned. And my friend, [Vince], after several whiskeys, by the way, said he thought it may be the effects of killing Osama Bin Laden. Actually, they were all wrong. The reality was that Peter Pan can no longer fly. Minnie Mouse left Mickey for Goofy and the Ghostbusters and the man with 2 brains had flown in a Piper Cub with Frankenstein piloting to take over the banking industry. Nevertheless, we sent Batman, Superman and Nancy Pelosi to save the day, and they'll be able wall around the airport and saved us all. At least, we finally got it figured out.

Let's get to some real facts. Our -- the quarter was actually pretty good, as adjusted numbers were EPS $0.44, net income $75.819 million. It's not too bad. Return on assets, 38.30%. Expenses were basically flat, ex hurricane and merger expense. Organic loan growth stuck its head up a little bit at $239 million of loan growth. I don't know if that was really -- I guess, part of it was the fact that the payoffs slowed down somewhat. Asset quality remains strong. We have one acquired Stonegate credit of about $8 million. It did not sell this quarter. The loan -- 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 is about $8 million, we hope to get rid of it next quarter.

Noninterest 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 book and New York generated $86 million. Florida and Alabama were basically flat through the quarter.

The company had record originations of $1.1 billion. If you remember, that's kind of been teeing up. It was $940 million, $970 million and now $1.1 billion. So that's $1.1 billion at an average rate of 6.07%. That's up to 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 repurchase business. We repurchased 5,308,000 shares in 2018 with 3,444,000 of those shares coming in the fourth quarter, while they were killing bank stocks. We'll continue to be active in 2019.

Let's talk about CCFGs performance. CCFG is presently 10% of our assets with about $1.5 billion in loans. And of that, about 1/3 of their book is construction. CCFG has made pretax pre-provision income for 2018 was approximately $75 million -- little above $75 million. I don't think it's fair that the Street gives this segment of our business, a much lower P/E multiple, which impacts our overall P/E by dragging down the Community Bank P/E. I don't agree with this because CCFG is a minor part of our assets and is extremely profitable. At the end of the day, they created $75-plus million dollars of pretax pre-provision income, and that increased the shareholder value and EPS. Say what you want to say, that's real train riding money.

Thank you all, our loyal 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 did our IPO in '06. 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 bank 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 drag those down. I've bought more bank stocks personally in the last 2 to 3 weeks than I've bought in many, many years. It's not a fact -- it's almost a dart board that you could draw one out of a bow.

I want to reiterate something that I said to Ken, looking at my notes from last year, I think the first quarter last year. And as we were talking about bank stocks and I said, "Obviously, someone liked it, like their bank stock. Forbes ranked Home Bancshares, the Best Bank in America of all banks from 8.8 billion to 2.7 trillion. What an amazing honor that was for our people. I want to thank the Home team for a job well done, and I said, "Let's do it again for '19. " The ball is certainly teed up perfectly for a great year in '18.

Randy, I am looking forward to another the powerful year. These were the comments I made in January of last year and I said, "Randy, I'm going to turn it over to you." so I'm going to turn it over to you right now, Randy, before we go to Q&A.

Thank you, Johnny. Well another great fourth quarter to complement another great year. Congratulations to all our employees and directors for a very successful 2018. You all have made a difference in our continued success.

Now normally, I lead-off by highlighting the number of record quarters in profitability. Like for the 31st time that our fourth quarter income exceeded the fourth quarter in 2017, 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 a 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. John 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 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 3 months. There were 386 stock certificates in our first issuance, a 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 on that one.

Right.

We concentrated 1 year on an efficiency project that changed the way we operate, resulting in a model of management and a leap in profitability, and we have stuck to those principles today. We became a publicly traded company in July of 2006. We thrived during the recession. We raised capital in 2 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 have 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, 0. 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 on 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 the 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're in an economy and the 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 trading today around $18, give or take. The last time we saw that price was the second quarter of 2015, and our EPS that quarter was $0.25. Try comparing that to our EPS for the fourth quarter of 2018 at $0.44 adjusted. Now talk about crazy. I think that is a world record of not making any sense. I don't remember if we were too high then, we are certainly too low now. 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 21st 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-press -- hot off the press item. There is pure evidence of what I've been discussing, preaching or whatever you want to call it. I am so proud to be able to announce today that Forbes, for the second consecutive year, has named us the Best Bank in America. What an absolute honor. Thank you, Johnny, for a allowing me to make that announcement. 20 years, and it just keeps getting better. How about a round of applause on that one.

We should have had the kazoos here.

Well, we should had a band. But with that, I will turn it back over to you.

Thank you. That's quite an honor. I looked to my phone this morning, and I was working on my speech at home and I said where Donna Townsell called me 3 times in about 30 minutes. And I thought, something must be up. She never calls 3 times in 30 minutes, and she gave me the news. Funny story was, she was telling marketing and sent information about 2, 3 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 I said how do you know we're not going to get it again. I said that they liked us last year, they'll love us this year. And out of -- I don't know why this felt that way and then bam, we get it, she tells me this morning that we won the Forbes award for the second time, 2 times in a row. So that makes me pretty happy, pretty proud. So...

Incredible honor.

Yes, congratulations to everyone, and I found my info, what I read awhile ago, was info I had, a year ago when we were having our conference call and there it is. And I said if -- let's do it again in '19 and damn if we didn't so, congratulations to everyone.

Sean, we're pretty happy around here. Are you ready for Q&A?

(Operator Instructions)

Sean, this is John Allison. I have one -- we don't have kazoos this time and we don't have any hand clappers. But I've got something to celebrate this Forbes second time around, it's appropriate to Arkansas. So I'll blow it for all our friends. That's an Arkansas duck call. So I don't if you all have heard that before us, it's pretty appropriate. You can go to number one if you want to, Sean.

Our first question comes from Matt Olney with Stephens.

Congrats on the Forbes news and, Johnny, I like that duck calls out there.

Well, we -- I thought we'd do something with the kazoos, ask them if they had them, they didn't know where they were, so now we've got some hand clappers. They didn't work very well. So I just got a duck call blew it. So thanks, Matt.

So I want to start on the core margin in the fourth quarter. It seems like all during 2018, the core margin was pretty flat, but it dips pretty hard in the fourth quarter. Help me understand the dynamic of what happened in 4Q? And then what's the outlook for the core margin in 2019?

I'll let Stephen and Brian cover that, and maybe Chris jump in a little bit on that after that. But actually, what you will see is the margin is pretty flat. What you saw big drop was -- is all explainable. And, which one of you all want to go first with that, Brian or Steve?

I'll give a little color and then I'll pass it off to Steve sitting here 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 some minimum interest and default interest on 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 a $1.3 million in accretion decline and that's a little over 3 basis points. So between the decline and accretion and the decline from New York for what I'll call maybe not necessarily non-reoccurring, that pretty much explains the entire decline in the margin.

That's fair. Matt, this is Stephen. I'll take a little bit that too. I think what we saw obviously, in Q4 from a payoff perspective, those numbers softened quite a bit. Payoffs in Q4 were about $540 million. They were $330 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 2. So those bounce around and are hard -- certainly hard to predict, and what we ended up seeing in Q4 was quite a bit lower level of payoffs, which had some impact on the NIM.

Chris, you will comment?

Yes. This is Chris. Probably the only thing I'd add is we had about 3x the amount of payoffs in Q3 as we did Q4. But in addition to that, most of our payoffs in Q4 were paid off at maturity. And when you pay off the maturity, there is very little income acceleration. In Q3, most of the payoffs were early payoffs, and those have income acceleration, including the minimum interest. So it wasn't just the volume, but I would also say the type of payoffs, where when you pay off the maturity, there is less acceleration.

Matt, does that answer your question? Any other questions about the comments?

Yes, I guess, I wanted to 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 was pretty light, is it more normalized level of those minimum interest payments similar in between? Or how I think about a normalized level of payments for them?

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 the year, we generally do get acceleration. I would say that 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, it's probably be in between there. But I can't tell you that in the first quarter it will be an average quarter, the second quarter will 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 they were to look -- they would look 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 do we see in the fourth quarter from that?

I mean, I can take a little bit of this. Chris, you might want to chime in, but like with the other service charges and fees were down, $1.4 million, and approximately little over $1 million of that is coming from CFG, because once again, you have less exit fees, et cetera, from the payoffs.

Okay. So just wrapping this up, how do we think about the core margin dynamics from here, understanding there could be some volatility from some of these minimum interest payments that Chris was talking about?

We started January 1 was about a 4.07% and we have -- we bought Shore, which diluted down 5 or 6 or 7 basis points. So probably thinking about 4, that's kind of where we're hanging in. We originated $1.1 billion this quarter, record quarter originations. And those were 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 returning that big portfolio around over a period of time and increasing those rates. So I'm pretty pleased with that. If, in fact, the Fed has -- is going to sit still for a little bit, that's pretty positive for us. We won't have those immediate impact of that $1.1 billion that they're tied to, basically to the whatever Fed does. So we've changed our program a little bit here. We grew deposits about $270 million (inaudible) $270 million through the quarter. Changes will put more emphasis on the cost of funds rather than the deposit growth. We had it on the cost of funds and deposit growth. We'll be focusing strictly on the winners of those groups be on the cost of funds. So I am actually optimistic that we continue to -- rates, they're going to all roll their eyes here, because I think that the margin will be increasing, at least staying, at least flat. Stephen rolled his eyes. So I'll let Stephen take it from there.

That's fair. I mean you -- as John also mentioned that the production -- this past quarter, we talked about the payoffs, I mean all areas of the bank have done a great job in being able to increase rate quarter-over-quarter production for Q4, which is committed balance. So a good portion of that has not yet funded, but the combined production of $1.1 billion for the quarter was at 6.07%, payoffs rolled off at 5.50%. 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 it's being that happen going forward.

I think the margin, really, even though it looks like it has jumped around, you'll see a little jumping around that's really since the first year after we merged Shore and it has remained fairly stable. I think we have a shot, at maybe, moving that up. We continued -- our team continues to write, whether they write on 6.07% to 6.10%. They continue to move those up, those rates up. I think we've a shot at moving margin up. So overall, it's been a pretty good margin year. We really had what looks like a big drop, really was not a big drop. Just kind of a onetime event. I think Chris, kind of -- some of those loans that left during the third quarter, I think Chris was -- what I say, Chris, you would -- you're encouraging some of that?

I think that's right. We look at it towards the beginning of the year and the 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 9 to 12 months, 6 to 12 months to get those out. It took about 3 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 are -- 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.

And congrats on the last 20 years.

Thanks, Matt.

Our next question comes from Brady Gailey with KBW.

So a 4% core margin, what about accretive yield? I think, last year, you all did a little over $41 million of yield accretion. Where do you think that shakes out in 2019?

I'll take that one. We did $9.4 million in accretable yield in the fourth quarter. As a general rule of thumb, we kind of expect that, that might go down from the baseline about $0.5 million. So I mean it's hard to project out too far in advance. But if you were kind of 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 it was a decline in payoff accretion too.

And then you mentioned having a lesser amount of loan payoffs that resulted in loan growth of 9% linked-quarter annualized, which is a lot higher than kind of where you guys have been running. How are you all thinking about loan growth in 2019? Do you think we could keep this kind of mid- to upper-single digit growth level this year?

Kevin, you want take a shot?

(inaudible) I mean, growth was -- it was a combination of -- as Stephen said record production for the quarter and a more normalized level of payoffs. Will that level stay at the fourth quarter level of payoffs, you really can't -- no way to know that today. I think -- we started the quarter not looking at that strong of a book. So between the payoffs being more normalized and really hitting the fourth quarter hard, I think, it is a really great quarter, but I wouldn't push for that -- expect that in 2019. High single digits would be tough, I think.

We -- actually, the forecast for the fourth quarter, Tracy, was down around 100 -- or Stephen?

For the fourth quarter, it was down -- early in the quarter it was 150.

Yes, 150 showed we've -- that's a grease pig. I mean, it's hard to get your arms around it, therefore you never know what people are doing out there. And forecasting more payoffs than we thought would come in and didn't anticipate as much loan growth closed as we got close. So we were forecasting down and it ended up being up $239 million. It's presently forecasted the first quarter will be down, but that can change in a week or 3 days and that happens. All of a sudden some doesn't pay off and something else comes on, and you just start building your loan volume again.

And I think the average over the years, as Stephen mentioned, the production has always been really good. And I think Johnny and I hit the road last year, and we had indicated we thought the pipeline was 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 doesn't show up on the pipeline, seems to be pretty steady. So we'll keep our finger crossed. If payoffs slow down a little, that would be great. And one quarter is probably not a rule to go by in the production side, we hope is.

We did not let Johnny predict loan volume all the quarter long and we ended up having $239 million in the quarter.

Yes. If you remember, we did -- I do not predict loan volume anymore so as I got egg on my face what I said for the first quarter. I thought it is going to be good, but I didn't want to say that, but I spelled it one day.

I heard Johnny stood in the board meeting, he said I don't want to say L-O-A-N.

I spelled loan growth after that. I thought we're going to have it, so I didn't want to say the word.

Okay. And then finally for me, just on M&A, we saw -- you all saw 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 '19?

We're not averse to doing M&A. We're looking around, see what makes sense. We just -- we're feeling -- actually feeling pretty good. I mean the Boogeyman did not get us. I'm actually feeling pretty good. Asset quality has remain good. We're pushing up rates, growing deposits, growing loans. I don't know what else. I mean, 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 million. So only make $290 million. The company -- when the opportunities are there, Home BancShares will get their fair piece of the market. We'll get our fair share of the market when it's there. We won't really think stupid in the meantime, and we won't give stuff away. And we 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 -- I like our position. I like where the company is sitting right now.

Our next question comes from Jon Arfstrom with RBC Capital Markets.

Congrats on 20 years.

Well, thanks. You doesn't seem like 20 years, but time flies, doesn't it?

Yes, it does.

When you are having fun.

Just a different way of asking Brady's question. How do you feel about repurchase appetite at this point? You're active, but obviously, you're not as satisfied with the stock prices. Just curious what you're thinking on that?

We're going to continue to buy the stock. I mean, we have requested the regulators to allow us to buy just short of $200 million worth of stock, if we chose to. So we're in the game. We're in the market, and I remember back in mid-80s -- early 80s when bank stocks were selling at book and -- or a book and a quarter, I remember those days. And that, kind of, reminds me and that's why I have been buying these bank stocks. You don't really have to be very smart to buy back stocks. It almost throw a dart particularly, if you buy the good ones. So I'm pretty comfortable.

Good. What did your crystal ball say about the HOMB $2.00 run rate?

Well, I think it may have pushed out a little bit, but not far, not too far out. I think maybe another 6 to 12 months, but we've, 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 lots of business. So that deal could turn on a $0.10 and you could end up with a $800 million-plus quarter, or $600 million. If you look at the theme of this deal, it's, kind of, pretty consistent. I think it was $950 million, Stephen, $975 million and now $1.1 billion in originations. So it's not a flash in the pan, it's actually happening every quarter. And if we can get the paydowns to slow down, as I have said earlier on the phone, people said, boy, Home took off, they grew $450 billion or $500 billion this quarter. It's not the fact that we're generating -- we're originating the loans, it's just that we're getting the payoffs. And you can say our revenue was down a little bit in this quarter. But always got book left. If you look at the average loans on the books, it was minus $20 million for the quarter. So the revenue will start rolling in off of those, look at the data report and see the difference already.

I'm going to ask about just the period-end versus averages as well. Does it feel like payoffs are easing and originations are up? Or what is the relationship there?

I actually am optimistic that payoffs are easing and they certainly did. But when we look back to fourth quarter last year, and they slowed down fourth quarter last year. Correct, guys? They slowed down a little bit. Randy, do you have a comment?

Well, I was just going to say, if you heard also, Florida was flat. So they got hurt a little bit by the hurricanes. And as they come back, I'm already getting e-mails on where I live in the Panhandle of some sales that are going on of houses and everything. So as that comes back, that's just going to add to it. So -- I mean, we've had last quarter's success really without the kick in Florida and that usually we see in the numbers. So I'm pretty optimistic, like Johnny. Because you're going to see that come back as it gets closer and closer to spring. Loan share origination came out with the legacy Arkansas footprint, which is pretty good, glad to see that and good numbers -- good rates on those too.

Yes. Okay. And then just one more on the margin, I know there has been a lot of questions there, but when you look at accretion in fees Q3 versus Q4, would you say Q4 is depressed and Q3 was, obviously, you said a little bit elevated, but would you view Q4 as a depressed number relative to where you normally expect it to be?

Yes, I would because we sometimes talk about the additional interest income that comes from New York and it's sometimes fairly lumpy. But we've had some lumps along the way, it's just that one lump is a little bit bigger than the next and then all of a sudden, it just kind of fell off this quarter. 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.

Our next question comes from Stephen Scouten with Sandler O'Neill and Partners.

So guys, I know, Johnny, you just said you've got maybe $200 million. You're requesting to buy back additional stock. But is that, kind of, what you think is the best use for your earnings today? I mean, you all are, obviously, still making a bunch of money. So is that what you see 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 little dividend increase. But overall, I think it's basically, as Steven said, if we liked it at $23 and $24, I would love it, I think, so and we do. So we -- you can say, obviously, we stepped up the repurchase to about almost 3.5 million shares in the fourth quarter. It was just -- they were throwing the baby out with the bathwater, so we just bought it, we just kept buying it.

Yes. No, definitely. And when you think about capital, would you take TCE down to maybe 9% to continue to buy back shares of it here? Or how do you guys think about how much of that capital you would use?

Maybe, we might do that. Brian, what do you think?

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 retained earnings. So I mean, at those levels, we wouldn't get to those numbers, that's what I'm trying to say.

Understood, yes. I was wondering if there would be incremental beyond that if the market stays depressed where it's been?

I don't know. We looked at that. We look at doing an offering, what they call it, the convertible. And we look at that. We look at 2 or 3 different things. I just didn't -- to me, that stuff looked good, but it didn't. I'm glad we didn't do it at that time. Stock was about $22, and I didn't ever imagine that the stock would go to $17, $18. That never crossed my mind. And it -- that's pretty enticing to me at those levels to step up and buy an 18-wheeler load of it. I mean, it's -- when they take bank stocks, as the world has, take bank stocks to where they've been in the past and have experienced, and what happened in the past is any likelihood of what's going to happen in the future, that's what's got, Johnny, tweak on buying the bank stocks and you buy the good ones that you know, but you could actually throw a dart and hit any of them. They'll probably all going to go up.

Yes. No, fair enough. And on the originations that you guys had, the $1.1 billion, can you talk a little bit about how much of those originations were funded versus what's still unfunded? And kind of what segments of the portfolio are driving most of that growth?

Sure. Hey, Stephen, this is Stephen Tipton. On the, I would say, all in, a little over half of what was committed and Q4 funded, that we had about $800 million, a little over $800 million in production, non-CFG production. And $400 million of that funded, and then the typical funding percentage of what we see out of Chris' CCFG offices is in the 50% range. So I'd say that's a good gauge to use. And I guess with the production that we've seen from Shore, that's a nice C&I/consumer component there. And then I would just say, otherwise, generally kind of the mixed bag of CRE in construction and improved CRE.

Sounded like Shore had a little jump in past dues. That was not really Shore. At least, we're not accepting that as Shore's past dues. We did a pretty poor job here of passing the baton from one runner to the other runner, and about 3/4 of that or half of that is already current and paid, paid as agreed. It wasn't -- the old spack there, we think, was mostly our fault. At least, we're taking the blame for it right now, and we'll see in the next 2 or 3 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%. I mean, are there any major expense initiatives that you have to undertake or regulators making you invest anywhere that you wouldn't have otherwise or anything that will drive that incrementally higher from here?

Pardon me? I mean, the regulators don't like our 38% efficiency ratio. I don't think. That would be my opinion, and they like us to hire another -- we've got 1,800 people. They like us to hire at least another 1,700. But we are hiring. We are hiring, but we're maintaining our efficiency thus far. I think I told someone that hopefully we kept it at 40% or below.

That sounds good. That sounds good. Well, congrats on the 20 years, guys. And John, I think you've got about 10 days left to use that duck call, so good effort.

I have the meeting today, and then I have the -- I have our board meeting tomorrow, and then it'll be a live duck call in the woods, Stephen.

There you go. The question is, which is easier, shooting ducks right or picking bank stocks on that dartboard? That's the real question.

I'm going to tell you this, it's easier to pick bank stocks than it is to shoot a duck, and I've got tens of thousands of ducks, if that will tell you.

Our next question comes from Brett Rabatin with Piper Jaffray.

Wanted to ask, you commented about the negativity or the skepticism in the market. I'm just curious, are the plans for '19 any different for CFG or Shore Premier? And then maybe give us any color you can on how we should think about the profitability of those 2 areas in '19 versus '18 maybe?

Well, I suspect that I would be pleased if we had similar profitability out of Shore and -- actually, a little more out of Shore and a little more out of CCFG, I'd be happy with that. I think overall that it should be a pretty good year if something doesn't blow up somewhere, and I don't see a thing to blow up. There is a lot 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 right now -- we had lots of different -- they've taken lots of different markets down, but they've taken banks 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 CCFG? Or if you view that as just keep doing what you're doing and maybe a little more careful or watch it 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 credit in general?

Well, I'll answer it for Shore. I mean, we're ramping up the commercial side of what they do. That had pretty much with their previous operation, had wound down just because of the way it worked out. And that growth, a lot of that in the fourth quarter was that commercial side that's ramping up. So we see it particularly for Shore as an opportunity in '19. We think that's going to be a good year for them.

And Brett, on New York's operation, if you know, we just opened up our office in Dallas this past -- 2 months ago, and so that should ramp up some opportunity there. And that office is also working with our community banks too, that will give us some avenues that we haven't had in the past. So I think with Kevin -- what Kevin said with Shore and what Chris is doing in Dallas along with the community banks here, that certainly opens some opportunities for us there.

2019 is just like any other year. Mr. Allison expects record-breaking quarters, and that has not changed. So everybody has got to make more money.

Well, New York's about $1.5 billion. They can go to $2.1 billion. We kind of cap them at $2.1 billion unless we did -- they're about 15% assets. So you can kind of extend that out if you want to, what New York looks. If in fact, New York gets there by the fourth quarter next year, and I'm not saying they will because those -- they don't have to do that. They take what someone gives them. But you look at New York, and when they ramp up to $2.1 billion and Shore is growing -- I think Shore originated $86 million worth of growth, they booked like $40 million, like about half of that or $30 million, what did they book?

Yes. We had about $80 million in production from Shore in the quarter and a little shy of $40 million in net growth. So I think they're doing as we thought or a little better.

You've got New York. I mean, you got -- I guess the proof is in the pudding. You've got $1.1 billion in originations from our company, which is record originations, at record rates, at 6.07 or 6.08. So that's encouraging to me. Can we outrun the cost of funds? And can we outrun the expense side? I think we can. You pull out merger and acquisitions from 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've got some expense going up. We can keep pushing rates up. Hoping we can continue to get better on the cost of funds side. If we can do that, I think we can increase our spreads, and with or without loan growth, with or without loan growth, I think we're going to make more money.

And the Panhandle, as you know, just went to the FERC not too long ago, and they're one of our good producers down there. Johnny and I just spent some time with one of North Florida's larger customers. And it appears that there's more opportunity there. South Florida is beginning to kick in. So we -- I just think it's -- opens up pretty good. And then the Dallas office, if the community bank does have a lot of stale, they can pick some up there and vice-versa. So it's -- I think the opportunities are several different directions.

Yes, it's all good. It's all good, depends on what the economy does and depends on investor attitude out there, developer attitude and what they want to do, what the business world wants to do.

Stephen reported North Arkansas. It was one of the heavy hitters this past quarter.

Yes, so we're seeing it in Arkansas, too. I mean construction and remodeling from the bridge of Panama City Beach on, all the way to almost Carrabelle is going to be -- in Florida, it's going to be record all-time. I mean, it's going to be rocking and rolling next year. And we're the 500-pound gorilla in there. So we've got major presence there, great people on the ground, with 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 a lot of commentary on fees and discount accretion and whatnot. But I want to make sure I understood on the cost of deposit side. It sounds like you're saying you do think that you're over more of the hump than less of the hump in terms of deposit betas. Are you expecting deposit betas to be a lot more reasonable relative to where they have in the past few quarters, in the next 1 or 2 especially?

I think that's correct. And we're going to put emphasis on the cost of funds, which we really haven't been doing. We've put an emphasis on growing deposits, but I think where we're going to put emphasis on, that we have as of yesterday, the day before, emphasis on cost of funds. And I think we had like 15 basis points increase and 15 basis points increase, and we had 16 last quarter basis points increase. We're going to see if we can get that down a little bit. Actually, margin would have been -- margin was kind of flat to up. You really dig into it for the quarter. So we're still hanging around that 4% margin, maybe 3.97, 4.02. I think that's where we're going to be. And maybe be able to spread that up a little more, maybe improve that somewhat in the next couple of quarters. If we can control -- if we can slow the cost of funds down, we're going to grow the margin because we're not pushing up rates on the loan side.

Our next question comes from Brian Martin with FIG Partners.

Johnny, just on your last comment about the deposit strategy. I mean what in particular are you guys doing? Have you changed on the funding side? I guess, are you saying you're more focused on the cost versus the growth? Or I guess is there something to it, I guess?

Correct. That's correct. That's correct. We've had kind of a combination there of growth and cost of funds. I think we lost a little sight of the cost of funds for the growth. And so we'll try this a little bit and see how it works. I'll tell you in about 2 quarters from now how I think it works, or you'll see it. Actually, you'll see it, and so you -- I don't have to tell you, you'll see it.

We need -- we really want cost -- want the Fed to quit raising. We really want the Fed to quit raising. We like. And if they pause, which I have a suspicion they're going to pause here for a little bit, I think that's positive. It gets positive for us.

Okay. And the biggest driver of the potential to raise the core margin is more on the funding side and managing that rather than -- I mean, it sounds like you're going to continue to get better loan yields or inch that up. But if you'd get the margin moving higher, it's going to be more driven off of the funding side and kind of what you're doing there?

I think that's fair, but maybe 60-40, maybe 60-40 on -- maybe 50-50. That's probably a 50-50 number. That's probably 50-50. I mean, we're getting the yields. I mean, you see us getting 6.07, 6.08. We're not giving the stuff -- we're not giving it away. And our people, it took a while since we had to draw 6 and send it out to them, Brian, and show them what a 6 looked like. A lot of them didn't even know what a 6 looked like. So we drew pictures of 6s and e-mailed them out to all our lenders, so they'll know what it looked like.

I got you. I appreciate it. And then 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 it was -- did you say there was $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 during the third quarter. $1 million reduction from third to fourth. That was Chris' payoffs. I mean, it's sweet when you hit it, Brian, because it's real money. It comes in the door. It's real money, but it hurts the next month.

Yes. But it was down from $2 million to $1 million, so from a theory standpoint, it could go to 0. But they seem to have some of it every quarter.

Okay. And then similar to the 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.

I'll let Chris run with that. He has most of the fees on that. Chris, do you want to talk about it?

Sure. Yes, yes. Those are a little down. I would say it was a little depressed, and some of that being that some of what we would normally have expected to occur in the fourth quarter occurred in the third quarter. So some of the payoffs that would generally have occurred in the fourth quarter, maybe even the first quarter that's coming up, occurred in the third quarter, so you accelerated it. These are all -- most of these was money we were eventually going to get. It's just what period of time it comes in. So I would say the fourth quarter fee income number was running lower than it ran in the last 3 quarters. And again -- but in year-over-year, we had a little more fee income this year than we had last year. But we would expect the fee income to moderate over time.

Okay. Perfect. And then just the last 2 for me, Johnny. I guess just talking about expenses or kind of the efficiency ratio, I mean, do you guys expect to see positive operating leverage in '19? And just kind of, from an expense standpoint, it sounds like the current run rate's a pretty good level, and it probably doesn't move a whole lot off of this level. You talked about hiring a few people and some regulatory stuff, but it doesn't sound like there's any major increase coming on the expenses from the current level.

I don't see it. Did anybody see it? Around the table here, is there anything I'm missing? I don't want to commit something. But I don't see it. I think we're pretty flat on the expense side though than the regulatory side. I don't -- no big expenditures to come in anywhere. Chris, do you see anything?

I think we're managing that along the way. Naturally, as we go with $15 billion going forward, we've got the new Dallas operation coming, so you're going to have some things that we're preparing for. But hopefully, the revenue and a little bit of growth that we're seeing offset some of that expense.

Our bonus program 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 you had -- if your region was down, we're 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.

Yes. Okay. And the last one, Johnny, was just on the reserve and kind of provisioning. It's been negligible with the credit performance thus far, and it doesn't sound like there's anything on the horizon that's giving you guys a lot of pause. I mean, I guess, is that -- assume that's going to stay at the low levels or kind of stays at 0 indefinitely. What is your outlook on credit and provisioning?

Yes. Actually, it's really in pretty good shape. If you would run those numbers by, Stephen, that would do.

Yes. Brian, this is Stephen. We've talked about that a lot over the last couple of weeks, and one -- Kevin might give you some kind of commentary what we're seeing from the hurricane reserve perspective and what we think we can do over the next couple of quarters. But looking at reserve coverage non to performing, NPLs were, gross dollars, were $64 million or so, I think, at year-end, quarter-end. There's about $22 million or $23 million of that number that are purchased impaired acquired loans. And I think maybe differently than some of our other peers do, we give you the total gross dollar amount on nonperforming. So if you really look at what is nonperforming that would technically be eligible to be covered by the reserve, we've got $108 million, $109 million in ALLL that covers $42 million, $43 million in true nonperforming loan. So we still feel really good about your 2.5x reserve to nonperforming kind of taking that analysis and feel really good about where we are there.

Kevin, any comment on it?

No. As to the hurricane, we're a 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 the Michael event to look at for the coming year. And there is probably some number, $5 million, $6 million, $7 million, somewhere in that number that we internally think that goes back to the general reserve based on what's happened in Irma and what we think may happen in Michael going forward for this coming year.

Okay. So I guess you've got some flexibility there to manage going forward, so all right. Well, I appreciate the update, and congrats on 20 years, Johnny.

Thanks. I appreciate it. It's been a hell of run. It's been a lot of fun, and we've ended up, these guys, not me, they built a hell of a nice company. And I don't see any reason why we won't continue doing what we're doing in the future what we've done in the past. And thanks for your support, Brian, a bunch.

Our final question comes from Michael Rose with Raymond James.

Just a couple of quick follow-up questions. So last quarter, you guys talked about potentially repurchasing some TruPS. Obviously, I understand where the stock is, that, that may be the better option, but wondering to see if you guys were kind of still looking at that. And then, on the $200 million that you mentioned, I assume that's kind of incremental to what you already have out there. I think you have about 4.9 million shares left. What's the approval process for that? And how does that work?

I'll take that. As far as paying off the TruPS, I mean, even though we're over $15 billion, we still get to account for that as Tier 1 capital. It's not until we have an acquisition at $15 billion or above that we lose the Tier 1 capital treatment. So the way I look at it is it's still pretty cheap Tier 1 capital. So when we have our next acquisition, I can see us really looking harder at paying off those TruPS, but until then, I don't think that we'll actually do that. As far as the approval process goes for the repurchase, the regulators asked us to submit a plan at the end of the year to say how much stock we might need to repurchase. And they get the opportunity to at least approve or disapprove, and they have approved us for just under $200 million. It's kind of funny, they approved it. I don't know if they approved it. They didn't disapprove it. It was an interesting way to read it. The regulators never get themselves -- they never commit too much out there. It was interesting reading that. I kind of chuckled. So they didn't say no. They didn't say yes. So we moved forward. But if you are also curious about how many shares that we could have authorized, I mean, the board is the one that actually sets the number of shares to be authorized to be repurchased. But then we also have to take the extra step and get the regulatory approval, too.

Got it, okay. And then maybe just a follow-up question. Can you guys talk about -- it seemed like loans were flattish in Florida. How much is competition playing into that? And how much is just normal course of paydown activity?

I think it's just part of it. I don't -- I mean, Arkansas was up $150 million, $170 million. That's kind of unusual for Arkansas to be up that strong. And I think it's just -- I kind of like the diversity of Florida and Arkansas and New York and Alabama. It's just kind of what worked. I mean, Alabama was flat, Florida was flat, but, Kevin?

I think the competition is the same. I mean, it's shifted a 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 -- you would think later in the cycle, you'd see people dial back a little bit. And we're seeing some people go the other direction and increase their advanced rates. And that's -- I think we fight that as much as anything.

We see a little bit of 80% advance rates in the sub-5s or surface sub-6, fixed for 5, that you see some competitors doing that really doesn't make a lot of sense. Not a lot of that we run into, but some of what we run into is uncharacteristic for some of those companies. I guess they're trying to build their book or something. I don't know why they're doing it, but it's good companies that are uncharacteristically doing some of that. We'll match it. If it's hitting us, we'll match it if we have to. We don't want to, it doesn't make a lot of sense, but we'll match it if we have to.

Yes. Just asking because obviously another bank up -- down there got acquired this quarter. And I've heard that there's been a little bit of a lessening of competition from that one particular situation.

I think you're exactly right, and I'm glad that one is gone. I think that's good for us. I think that's good for Florida. It's particularly good for South Florida.

All right. This concludes our question-and-answer session. I would like to turn the call back over to Mr. Allison for any closing remarks.

I just want to say thank you, everyone, for joining us today. Great year, great quarter. Hopefully, '19, I won't ask much more out of this bunch for '19 other than just be the best bank in America again. Other than that, if we make $320 million to $330 million, I'll be happy with that and keep our past dues and our asset quality where it is now. And other than that, that's a long ways from that $250 million little community bank you wanted, you'd be happy the rest of your life.

Yes, I still am.

I'm getting you hooked.

You're making more net income than you were supposed to do in assets.

Thanks, everyone, for your support. We enjoyed the conference call, and I 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.