Home BancShares Inc (HOMB) 2015 Q2 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares, Inc second-quarter 2015 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 2015.

(Operator Instructions)

This conference is being recorded.

(Operator Instructions)

It is now my pleasure to turn the call over to your first presenter, Mr. John Allison.

Thanks, Chad, and welcome, everyone, to Home BancShares' second-quarter earnings release and conference call. Looks like another one for the record books, a pretty good quarter. Before I start, I want to send a special thanks out to Tom Eck with Cortina. If you remember, last conference call, Tracy was what we called under the weather and Tom Eck started a fund, Help the Tracy Fund, or Help Tracy Get Well Fund, and I wanted to let you know, I thank you for your donations and we were able to cure him, so he'll be on the call today. Again, Tom, thanks.

Reporting today will be Randy Sims, Home's CEO; and the healthy Tracy French, CEO of Centennial Bank; Brian Davis, CFO; Kevin Hester, CLO; Donna Townsell, Vice President of Corporate Efficiencies; and Jennifer Floyd, Chief Accounting Officer. It's all smiles around the room today. Everybody's pretty happy that the quarter's over and it turned out to be a good one, and congratulations to all our employees for another record quarter.

Let me go. I always have the pleasure about talking about the records so let me go to the record book. It was record earnings. It was record earnings per share. It was record revenue. It was record efficiencies. It was record loans for the quarter and it was record organic loan growth. It was record core ROA, and we accomplished all of these records while still putting $5.4 million into loan loss reserve. The margin remains strong, slightly improving asset quality, and we made an acquisition of Bay Cities during the quarter. We lapped that acquisition. It's a very good Management team, very astute investor group, and very strategic for the Company. It's good timing for them, as well as for us. Things are going well at the Company. We look forward to getting them folded in.

There was really lots of competition on the deal. It's the most competition I've seen on any deal that we've run up against. However, we ran up against the same cast of characters that you can imagine that we've seen in the past, those that either don't know how to do a deal or don't care about their shareholders. They continue, the same bunch continue to dilute themselves into infinity. But in this case, they ran into a real astute investor group that recognized the value of Home BancShares' currency, and we appreciate that. We look forward to working with them in the future. We're continuing our efforts on branch consolidation and we're looking strong at the $10 billion process. We continue to work on M&A and we're busy on that side. One key item I want to announce and I think I mentioned it last conference call is we finalized our new goals of [Home 250]. That execution is beginning either in late August or early September, so you'll hear more about that and our plan to get to $2.50 a share.

In summary, the Company was hitting on all [legs] and the team executed almost flawlessly. We want to wish Randy Mayor many years of happy retirement. Randy was an outstanding leader and very instrumental in building this Company. We wish him the best. After saying all of that, Mr. Sims, I'm going to turn it over to you for a little more specifics and you can turn it over to the rest of them for more specifics.

Thank you very much, Johnny. Yes, another great, great quarter. As Johnny said, it was the most profitable quarter in the history of our Company. Now how many times have we said that in a row? I love saying it. It's my favorite thing to say. Well, that is now 17 consecutive quarters of record income for Home BancShares.

Every time we have a great quarter, and especially one like this one, I wonder, can we do it again? But we've been doing it for over four years and that is just a great, great path of record earnings. A $2.8 million, or 9% increase over our previously reported record profit last quarter and we finally hit $0.50 diluted earnings per share for the quarter, another milestone in our history. The diluted earnings per share, excluding intangible amortization for the second quarter, was $0.51 per share.

And on top of the record income, it was a very active quarter for us, so I will mention just a few things that went on. First of all, in June, we announced the signing of a definitive agreement and plan merger for Home to acquire Florida Business BancGroup, parent company of Bay Cities Banks, headquartered in Tampa, Florida. Under the terms of this agreement, FBBI will merge into Home and Bay Cities will merge into Centennial. Florida Business BancGroup currently operates six branch locations and a loan production office in the Tampa Bay area and in Sarasota, Florida. As of March 31, FBBI had approximately $540 million in total assets, $392 million in loans, and $461 million in deposits. We are really looking forward to closing this transaction as soon as regulatory approvals are completed and we welcome them to the Centennial Bank and Home BancShares family. It is really going to help our footprint in the Tampa Bay area.

Also, as you are aware, we acquired the Doral Florida Panhandle operations in an FDIC failed bank transaction that added to our already strong presence in Panama City, as well as giving us a good increase in market share in Pensacola. I am pleased to announce on July 15, just a few days ago, we completed the systems conversion. All five of their branches will soon be consolidated into existing Centennial branches and closed as regulatory approvals are obtained.

Our organic loan growth in the second quarter was approximately $279.9 million. In my book, that's $280 million. Of that amount, $56.2 million was associated with our Centennial Commercial Finance Group in New York City, and we continue to entertain strategic opportunities with potential acquisitions, organic growth opportunities, and working to improve our own existing markets.

So I would like to turn it over to Centennial CEO Tracy French to give us an update on these items and to give us just a little additional color on our performance this quarter.

You bet, Randy. Would be glad to. Nice to hear all of those R words which you all are talking about out there. We'll start setting the bar with those Rs and maybe make you put a W in front of that, call it a world record down the line. But [having met] the Centennial bankers that we have, it really proud to sit in a seat today and tell you that all the areas that you all are speaking about, we either met or beat our internal goals that we do there. That covers from regions to divisions to other non-interest income areas that we've developed throughout the Company over the past six months and a year. You talk about how did we compare quarter to quarter. Well, the second quarter really was a nice complement to our first quarter that we started out at the beginning of the year. You all each mentioned some of these, but I'll just follow up on some of those.

As Randy mentioned, the Doral deal, it seemed like it was not too long ago we were headed down to Puerto Rico and met up with a few banks down there. But that's been completed, and as you mentioned, the conversion was done this past weekend and Jim Haynes [from beta coverage] got that under control and moving forward, so nice quarter to the next. Another big area was our commercial finance group that you mentioned. That's one of the things we put together in the first quarter and worked -- [Jim actually] had a lot of our staff working on that, but Chris Poulton and his group are settled in now. The second quarter is behind us and they are beginning to make things and perform as we planned and we are still looking for good things out of that market.

Another thing we did is, you mentioned was the Bay Cities definitive agreement. We were working on a few banks, as Johnny mentioned in the first quarter, and we were very fortunate to have this relationship with Bay Cities, I'll call it. Some of the relationship started a few years ago when we met Mr. Bronson Thayer and kept following up that relationship and ended up with Mr. Christopher Lykes as the last chairman that we met. But Greg Bryant is our guy there. Greg and his outstanding team, we look forward, he's already challenge -- he is challenging the numbers that our Company meet and want to do, but he's got the right mindset and we're really anxious. And we welcome that entire outstanding banking group to our team.

Another movement that we're doing, Donna will speak on in just a little bit, is first quarter, we've been mentioning in some of our DFAST operation. We have formed that committee and it's in the second quarter. They are beginning to get active. I'm not saying I'm all excited about that part, because I hadn't heard them say anything that's going to be a money maker in that process, but we will do what we need to be doing there. But the point is strategically, looking forward, we're going to be ready for whatever opportunities Mr. Allison brings across the table.

So all in all, what a phenomenal quarter. I'm really pleased with that. And the most important thing that I've seen is we're just getting better every day, every month, every week, and my hat is off to the entire group, the Home BancShares and Centennial Bank. We'll get back to work.

Thank you, Tracy. That's a great report. Let's just get to a few numbers here. I'm going to go through them pretty quickly and then turn over some to other people to give you even more.

As of June 30, the Corporation is sitting at just over $8 billion in assets. Our quarterly profit was a record $33.9 million, or $0.50 diluted earnings per share compared with income of $28.4 million, or $0.43 diluted earnings per share the same quarter in 2014. That is an increase in income of $5.5 million, or 19.3%. Our return on average assets for the second quarter was a 1.72%. Good to see it over the 1.7%s, as compared to 1.67% for the first quarter of this year, 2015. Our return on average assets excluding intangible amortization was 1.84%. Our core return on average assets that excludes intangibles, provisions, merger expenses, and taxes, was 3.2% for the quarter.

Our return on average TCE excluding intangible amortization for the quarter was 19.69%. We ended the first quarter with a record 40.39% efficiency ratio as compared with the fourth quarter 2014 of 41.41%. Our core efficiency ratio was once again very close to getting a 3 in front of it, at 40.3% as compared with the first quarter of 40.84%. Consistency in this ratio will be a key to our success in the remainder of 2015. The total number of active Centennial branches is 148, excluding the recent Doral branches, with 82 in Arkansas, 59 in Florida, and 7 along the Alabama coastline. Plus, we also have our loan production office in New York City. We are continuing our efforts with the branch efficiency program, and who better to tell you a little more about that and our efforts to get to that 3 in efficiency, is our VP in charge of efficiency, Donna Townsell. Donna?

Thank you, Randy. 40% efficiency ratio. What a great accomplishment for our team. When we started tracking our efficiency ratio in September of 2008, we were running at 59%. Congratulations to our entire team for another great milestone.

Previously I reported that we were focusing on 8 locations in our branch study, the list has now grown to 11. We closed 1 branch in the second quarter and we have 5 scheduled to close during the third quarter, 4 more will close in the fourth quarter, with the 11th one closing in the first quarter of 2016. These branches were selected either due to underperformance or just close proximity to another location. We will continue to fine-tune our monitoring process to provide our market leaders with data to help them continue to make smart business decisions. We will continue to focus on this area to hopefully see that 3 in front of our efficiency ratio that our Chairman and all of us would really like to see.

The savings and efficiencies gained from these closures will help tee us up for the upcoming expenses that we expect to incur as we begin the planning for Dodd Frank stress testing requirements. With the power of the Home BancShares stock and the acquisitive nature of our Chairman, which you're all familiar with, it is pretty safe to assume that we will cross the $10 billion threshold. It's just a matter of when. So we have started the learning process, as Tracy mentioned, and we've learned just enough to know that this process could require us to engage anywhere from one to three vendors or hire additional staff. We just don't really know what all we're in store for yet. So what we're going to do is just focus in the meantime on growing revenue, watching expenses, and learning more about what it will be to be a DFAST bank in the probably near future. Randy?

Thanks, Donna. Switching to deposits, we ended the quarter at $5.87 billion compared to $5.42 billion at the end of the fourth quarter 2014. Time deposits represented 23%, staying under our 25% goal of total deposits. So net interest income, margin, and non-interest expense will all now be covered by our new Chief Financial Officer, Brian Davis. After that, Brian will introduce our new Chief Accounting Officer, Jennifer Floyd, to give us more information on our capital numbers. Congratulations on the promotion, Brian.

Thanks, Randy. It's exciting when our Company is able to report the strong numbers as we did in the second quarter of 2015. The net interest margin on a fully taxable equivalent basis was 5% for Q2 compared to 4.94% for Q1 2015. The yield on loans declined slightly from 6.05% to 6.01% on a linked-quarter basis. The effective yield on non-covered loans was 5.63% in Q2 versus 5.65% in Q1, whereas the effective yield on covered loans was 18.4% in Q2 versus 14.65% in Q1.

The cost of funds did experience a slight improvement from 37 basis points to 36 basis points for Q2 2015. Because of the Company's significant number of historical acquisitions, our net interest margin has been impacted by accretion income for the fair value adjustments according to purchase accounting. Excluding these adjustments, the Company's net interest margin for Q2 2015 was 4.27% on a non-GAAP basis. The non-covered provision for loan losses was $5.3 million in Q2 2015 compared to $2.9 million in Q1 2015. While asset quality has remained stable since year-end, this increase is primarily related to the growth in loans during the second quarter of 2015.

Non-interest income was up $2.4 million in Q2 2015 compared to Q1. The largest improvement was related to a $1.8 million reduction for the FDIC indemnification amortization. This improvement is primarily related to the ending of the five-year loss share for our Old Southern and Key West FDIC acquisitions from 2010.

Also, there was a significant increase in our mortgage income and trust fees. The increase in mortgage income was a reflection of three new monthly records in a row for volume at our mortgage department. The increase in trust fees includes a one-time receipt of $788,000 related to 12B-1 fees, which were recovered from our trust department. Non-interest expense was up $2.5 million in Q2 2015 compared to Q1. The primary increase was related to $2.3 million of new expenses related to the opening of our New York City loan production office in Q2 2015.

This quarter we have a new face to introduce to Home BancShares investors and the shareholder world. That is Jennifer Floyd. She is succeeding me as the Chief Accounting officer and Investor Relations officer of Home. Jennifer joined the Company in June after a 17-year career with Deloitte where she was a senior manager focusing on financial institutions. The timing of this hire was perfect. Deloitte was in the process of closing their Little Rock offices as of May 31, 2015. Thus we were able to keep her talents in the state of Arkansas. With that said, I'll turn the call over to Jennifer.

Thank you, Brian. I would first like to say that it's my honor and privilege to join the Home BancShares team. I look forward to working with all of you each quarter going forward.

Now for a brief overview of the second-quarter capital results. As of June 30, 2015, our Company ended the quarter with $1.062 billion of capital and $91 million of cash at the parent Company. During the second quarter of 2015, we paid out shareholder dividends of $8.5 million and grew retained earnings by $25.5 million. For the second quarter 2015, our common equity Tier 1 capital was $725.7 million. Total Tier 1 capital was $784.7 million. Total risk-based capital was $845 million and risk-weighted assets were approximately $6.8 billion. As a result, common equity Tier 1 capital was 10.7% compared to 11.4% at March 31, our leverage ratio was 10.4% compared to 10.5% at March 31, Tier 1 capital was 11.6% compared to 12.3% at March 31, and total risk-based capital was 12.5% compared to 13.2% at March 31.

The decline in our risk-based capital ratios is primarily attributable to the $569 million increase in the loan portfolio, of which $51.5 million is in the 150% risk-weighted category. Additional second-quarter capital ratios include book value per common share, which was $15.67 compared to $15.38 at March 31. Tangible book value per common share was $10.61 compared to $10.30 at March 31. And finally, our tangible common equity ratio was 9.3% compared to 9.7% at March 31. Randy?

Thank you, Jennifer, and welcome to the team. Let's turn to loans. As Johnny mentioned, our legacy loan growth was very, very strong for the second quarter. We've got a strong pipeline in the works for the third quarter and our already strong quality asset numbers continue to improve. Let's switch to our Chief Lender, Kevin Hester, who will give us more details. Kevin?

Thanks, Randy. We're halfway through 2015. It was a great quarter on the lending side of the house. As Randy mentioned, legacy loan growth was $280 million for the quarter, including $56 million from the New York LPO. This equates to a 23% increase on an annualized basis, which is the strongest legacy loan growth quarter, both in dollars and on a percentage basis since the downturn. The production pipeline is still very strong, but paydowns projected for the third quarter appear to be higher than normal. A slight improvement was shown on a linked quarter basis in each of the already strong asset quality ratios led by 4-basis point improvement in a non-covered, non-performing asset ratio from 0.75% to 0.71%. Likewise, the non-covered, non-performing loan ratio decreased by 3 basis points from 0.76% to 0.73%. When comparing these quarter-over-quarter, these ratios have been reduced by 32% and 30%, respectively.

The allowance for loan losses as a percentage of non-covered loans decreased slightly in the second quarter from 1.07% to 1.02%. However, if you added all the acquisition discounts to the allowance for loan losses, the combined figure would be 3.33%. Quarter-over-quarter, the allowance for loan loss coverage of non-performing, non-covered loans improved from 107% to 140%. Non-covered real estate-owned decreased $863,000 on a linked-quarter basis from $17.4 million to $16.5 million, which is the lowest balance since the Liberty Bank acquisition in the fourth quarter of 2013. Net charge-offs were 16 basis points in the second quarter, which is below the previous six-quarter average of 20 basis points. Early stage delinquencies remain low at 1.08%.

As Brian noted, the mortgage department had a world record quarter, with each month of the quarter setting a record for the highest closed volume in the Company's history. In addition, June set a record for the highest purchase volume ever and secondary market margins are up over 50 basis points from 2014. While we've been a preferred lender with the SBA since 1999, we have not made a concerted effort in this area for some time. As of this quarter, our government-guaranteed lending area is fully staffed and operational, and I expect the contribution from them in the last half of the year. By all measures, it was a great quarter. And with that, Randy, I'll turn back over to you.

Thank you, Kevin. Great report. Two very good quarters for the first half of 2015. Another definitive agreement signed for an acquisition that adds to our Tampa Bay market. Record earnings for the 17th consecutive quarter, a consistent and strong efficiency ratio, strong legacy loan growth, and great asset quality metrics. These are the type of quarters we really, really love. And as has been mentioned by our CEO Tracy French, it might have just actually been a world record quarter for us. So with that, I will turn it back over to our Chairman, Mr. Allison.

Thanks. Great report, everyone. That was really good. We were bragging on efficiencies, but I saw a 38.9% in June, by the way, Donna. We had a good quarter, ran a 40% and change, but we did show under 39% in June. So when you show it to me, we ought to be able to get it. I get spoiled with it.

One thing I left out was our New York operation. I apologize for that. We are really pleased with what's going on in New York at this point in time. To describe their pipeline, the words I would use would be unbelievably powerful pipeline. So pretty excited about -- we won't close all of that, but Chris and his team was out of the market with Doral for a period of time because customers weren't sure they could fund and those customers have come back to Chris and his team. It is pretty impressive and pretty unbelievable at this point in time. Congrats to them. So we'll see some good performances kicking in from New York over a period of time. We're up, Kevin -- what, $50 million this time, from where we were when we bought it? Anyway, I don't know what else to say. Congratulations to all. Great quarter. We'll open it up, Chad, for Q&A.

(Operator Instructions)

Our first question today comes from Michael Rose with Raymond James. Please go ahead.

Good afternoon, guys. How are you?

Hey, Michael, how are you? Are you getting any sleep?

I'm trying to get some sleep. It's pretty difficult around the Rose household these days, but hopefully it will get a little better over the next month or so.

Congratulations.

Thank you very much. Couple questions. Just wanted to dig into the New York group a little bit. Can you give us a sense for what you think the capacity could be for that team over a period of time? And then can you just remind us what the loan yields in that portfolio look like and where new loan production yields are from that group relative to other parts of the franchise? Thanks.

Well, the pool, we thought, was about 50% loan to value and 6% floating, LIBOR plus 6%. Isn't that right, Kevin? That's pretty much where we're continuing. We're not getting those rates anywhere else. That's the highest rates we're getting, is from Chris' operations. And we're still writing in the 4% here and some 5%. So that's -- Kevin, you got any comment on that? You want to take that question?

Well, as far as the capacity goes, it's a different structure and lending philosophy up there that we're, that they have been doing. It's a short-term bridge type structure. There's still a good market for that up there. As long as there is, we're going to continue that model. We think there's quite a bit of that left up there at that rate. As long as there is, we'll continue to do that. We haven't set a real hard number for them to get to.

We're not pushing them. They are taking their time. They were up $50 million for us this quarter. We approved yesterday about $40 million for them. Chris and his team ran $1 billion-plus all the time up there, so I would anticipate that, as they take their time, and if the niche that they have is still open, as Kevin says, that you'll see them at $1 billion-plus.

Okay. That's helpful. And then I'm sorry if I missed this, but the loan growth outside of the New York group, was most of it from Florida? And if so, in what markets? And how are the pipelines in Florida, how have they changed, maybe, quarter-to-quarter?

It was really pretty interesting. We had $280 million of organic loan growth. Arkansas was $92 million. Florida was $112 million. Alabama was $19 million. New York was $56 million. That's a total of the $280 million. So spread around really. Florida more. Florida, a little stronger than Arkansas, but Arkansas was good, so that's tells you where it's coming from.

Okay. Just one more for me. On the efficiency side, it looks like you guys are closing another five branches. Any other plans beyond that from maybe the most recent deal? And the then swapping out the CFO, is that going to bring you down into the [40%s]?

Well, we have--

Yes, we got Brian for $4 an hour (laughter) and I don't think he's overpriced. I'll let Donna take that.

That's where I was going with that one.

We've got 11 on our list now that we're working, Michael, that we'll have closed all of them by January. We'll continue to look at that, especially as we acquire -- as you know, sometimes we acquire in our footprint and it doesn't make sense, so when we closed the five Doral last weekend, we folded in one of our own that was also in that area. So we will continue to work on that.

Okay.

That's about $200,000. That was about $200,000 closing those Dorals in expenses.

Okay. That's all for me.

You were making comment to see if we'd change CFOs.

No, I do appreciate $1 per hour extra than I am getting (laughter).

We got it right.

Thanks a lot, guys. Congrats, Brian. Take care.

Our next question comes from Brian Zabora with KBW.

Thanks. Good afternoon.

Hey, Brian.

I have question. John, you mentioned Home 250. Can you give us some details on how you think you're going to get there?

Well, actually, if New York closed everything they had in their pipeline, we would be there. So I don't think it's a stretch for us. It will take a little while to get to that level, but I don't think it will happen overnight. If you remember, Brian, I don't know if you were an analyst with us then, but two years ago we had a goal of Home 250, and we split the stock two for one, and now we're back, so it tells you we got there pretty quick. We doubled our earnings pretty quick, or at least our goals pretty quick.

But you're going to see some pick-up on the expense side, if Donna continues. She's not through looking at the branch operation, and probably, there's probably another five or six out there that will probably close. If you recall, our numbers early on was about $2 million worth of savings on the first eight branches, and she's closing 11 now. But you'll see some savings coming in there. We got rid of the Doral. Obviously, the expenses of New York are pretty well ramped up. At least probably 90% of the expenses of Chris' operation were in this quarter, so we don't have any -- no significant increase in expenses there. If New York continues to operate the way they are operating and our loan demand continues, as Kevin said, we're just up just a little bit for this quarter, but we approved $168 million yesterday. It was the biggest day that the Company has ever had in one day of loan approvals.

So we're busy. Got a lot of stuff working. And we continue to grow our loans and Chris continues to maintain his operation. You'll see us getting to Home 250. I don't anticipate -- it will be next year before we hit the run rate quarter on the 250. Probably this time or later we should be hitting that. Did that answer your question?

Absolutely. And then just on OREO losses in the quarter, it's been a while since you've had one, was there just one sizable transaction? Can you give us any details on that loss on OREO?

We had some covered write-downs on some of the covered stuff in Florida that hit a year that we took some write-downs on. Most of that's going to get sold this quarter. Actually legacy was a little bit of a gain. That was it.

Great. Thanks for taking my questions.

The next question comes from Matt Olney with Stephens, Inc.

Hey, guys. How are you?

Fine, Matt. How are you?

Doing well. First off, congrats on the promotion for Brian and Jennifer. And also, congrats on the loan growth this quarter.

Thank you.

I want to circle back on the New York LPO. Can you give us an idea if this office was profitable in 2Q or will this take a few more quarters of loan growth to be accretive to numbers?

Well, it was profitable. They wouldn't have been profitable just based on their originations, but they are profitable because we bought their loan -- we bought $296 million of their loans. Have you got a run on it, Brian?

Yes, sir, I do. It was fairly profitable this quarter. It produced net income for the quarter of $1.6 million on a pretax basis. Just for a little highlights of it, if you want, we had $2.3 million of non-interest expense. We allocated $1.2 million of provision for loan loss to them, and for the net interest income, it was allocated at $5 million.

Okay. That's great detail. Thanks, Brian. And then Brian, as far as then the margin, looks like it stabilized a little bit in the second quarter. What's the outlook from here over the next few quarters on the margin?

Well, there's no way I can answer the question without saying that the margin is going to go down because Randy Mayor had a pretty successful career here and he never spent anything but the margin was going to go down. So I would like my first quarter to go ahead and be like Randy and go ahead and say that the margin is going to go down (laughter), so that I can have a nice career like he did.

But with that joke aside, I'm a little bit like him. I'm a little pessimistic that it will go down, is Brian's personal opinion. We did have quite a bit of purchase accounting marks for this quarter. We had $10.9 million of purchase accounting marks that came through the margin. That's actually up from $10.3 million last quarter. If you're wondering where the increase came from, it was the increase from the loans that we bought for Doral on April 1.

That's all good news. The bad news is that we have several of our covered FDIC transactions that are beginning to wind down because of the five-year FDIC loss share. And it's probably about $1 million there that we'll have a linked-quarter basis reduction. And our Liberty marks are beginning to decrease and we may even lose another $1 million there. Offsetting that is that we probably need to take a better look at our Premier and Heritage transactions, which were non-covered and maybe take another look at the Liberty marks and we're hopeful that we'll pick up about $1 million in new accretion income going forward. But right now, for the purchase accounting marks, it's probably going to be down about $1 million next quarter.

Okay. That's helpful, Brian. And then last question for me, Johnny, as the New York office gets more ramped up the next few quarters, what's your overall comfort level with the percent of loan growth that's going to come from that office versus the legacy markets?

I don't know that I've -- I don't know I've looked at it as percent of loan growth. I really look at it as Chris' team and what they have handled in the past and what they can handle in the future. They had to sell a lot of loans, but probably originated 5, 8, 9, maybe 10. I don't know what their total originations were there over the years, and they had to sell them, due to the parent.

So I would be comfortable with $1 billion, $1.5 billion of loans with Chris and his team and I suspect they will get there over the next year or two. I don't know what percentage that ends up being, but we look at it on an individual basis, isn't that right, Kevin? You have--?

Yes, I'm not really concerned about what percentage of the loan growth it is. They are going to do what they do and do well, and that's what we want them to do. Whatever percentage it comes out to is what it is.

Tracy, you have got any comment on -- do you have any notes?

No, sir, it's -- we all see the loan opportunities are there. I was just sitting here, just thinking of the other regions that we have throughout the Company and what they have done over the past six months, which has really been really, really good. The growth, we can measure that as long as they keep doing, as Kevin said, this might have been a focus as far as what -- they can do a lot.

They are doing it.

It's there. The important part is the way that they are handling those and they are very disciplined in what they are doing, and if they wanted to sneak out of some of that discipline, the sky could be the limit, but they know what they are doing and do it well.

No need to sneak out of it. No need to do that. Just stay where they are. They've got enough in their pipeline now, if they just continue doing what they are doing.

And in our own markets, we'll continue doing the same things we're doing. Hopefully that loan growth that we've had the last three or four quarters will stay there and we'll continue to show that if it does.

It was $168 million yesterday, of which about $40 million was New York. So $120 million-plus came out of our existing footprint. Pretty good day. Long day. Busy. Lots of loans. Lots to deal with, but it's certainly healthy.

Okay. Thanks, guys.

The next question comes from David Bishop of Drexel Hamilton.

Hey. Good afternoon, ladies and gents.

Hi, David.

Johnny, any potential for you guys to maybe bolt on additional stuff up in that New York Metro area with the CFG Group operating up there? Is that something you might look at, potentially look at a whole bank M&A up in the New York Metro region?

I don't know about a whole bank M&A. We might do a branch or two up there in the metropolitan area down the road. That's a little early for us to -- Chris and them, they had a couple branches up there before with the Doral deal and generated lots of deposits that supported Chris' Doral operation. So to say that we wouldn't do a branch in New York, I wouldn't say that. It's something that -- if you remember, David, we bid on the entire operation, which includes the branches up there and actually wanted those. So we would probably look at doing a branch in New York at some point in time. But outside of that, nothing else right now. Let's let them -- let Chris' team get up in the $1 billion range and we'll take a look at it then.

Got you. Then Donna, you said you're still early in the process regarding maybe looking at outside vendors as you approach the $10 billion market. Any sense what the potential expense drag could be as you move through that process?

It's really hard to tell right now, David. We're early in the space there and it depends what approach we take. We know enough to know they think you should hire somebody to hire somebody to audit each other and look over your shoulder and we're not sure what that circle looks like yet. I would imagine by next quarter, we might know a little bit more information on that process.

David, we've sat through webinars, and we've sat -- I went to New York for a class and we don't have anybody hired. So if anybody on the call knows of a DFAST manager, tell them to send their resume to me. But it will be several people or it will be just a couple of people and some outsourcing. I'll just go ahead and throw a number out there. It probably will be about $1 million a year in non-interest expense.

We're going, David, to visit a couple of our friends that have stepped over that line and this month and next month, and we'll know a lot more once we get back to actually see it in operation, what they are doing, the teams of people that they have, and very gracious of them to help us. We have interviewed three and we're going to go visit our friends and then we'll make a decision on who and what when we get back.

The problem is not only do you have to have a team that helps create the DFAST stress testing reports, but then you got to hire another team that comes back in and validates all of the reports. So it's -- do the numbers over here, and I check them over here, and the meter gets running on the expense, unfortunately.

Got it.

The truth is, we'll probably hire a couple teams.

Got it. Then one final question. You talked about New York, but how -- the pipeline in Florida, how's that shaping up heading into third quarter?

Well, actually, we were -- we had about -- Kevin's got about $250 million worth of new loans on the books. We've got about $200 million worth of payoffs, up till yesterday. Then we approved $168 million. I don't -- what do you think, Kevin? Where did that come from?

It's--

Mostly Florida, wasn't it?

It was mostly Florida yesterday. We've still got a strong production pipeline. Johnny said, and I said it in the remarks, we do have more paydowns than we project for this quarter than we did last quarter, but the production is still strong. Good strong pipeline both Arkansas and Florida, but I would say Florida is probably a little heavier weighted at this point.

Got it. Thank you, guys.

The next question is from Jon Arfstrom with RBC Capital Markets.

Good afternoon, everyone.

Hey, Jon. How are you?

Good, doing well. Couple questions, maybe for you, Kevin. How material are the payoffs? I know it's impacted growth in the past. It seems like the growth machine is on fire at this point, but how significant are we talking?

Well, it's early in the quarter so there's still -- you still got time for people to get things approved and on the pipeline and closed in the quarter, so I wouldn't say that I'm that concerned about it yet. But I do -- at this point, you wouldn't see $280 million worth of growth this quarter unless we really had some things get approved in the next month or so that could close.

Okay.

It's still -- we'll still show growth, but it wouldn't be as big a quarter.

I say that, except for the loan committee yesterday -- of course a lot of that, some of that's construction, but there was -- I don't know if you were on earlier, Jon, it $168 million approved yesterday. It was a pretty -- it's the biggest day ever. So I don't know if those days are going to continue or not, but it was a long, but impressive day.

You still -- is it still decaf only in those meetings (laughter)? Isn't that the rule?

That's the rule around here. You got to have decaf. Yes, that's exactly right. I get a little hyper when I get in that caffeine coffee, but there was enough loans to keep you awake, I could tell you for sure.

All right. Good, good. Philosophical question, maybe, and it's on acquisitions. You've been pretty vocal about your frustration with acquisition pricing, and I understand that. On the other hand, it seems like you've got close to $100 million from Arkansas last quarter in loan growth, $112 million in Florida, CFG is just starting to kick in. The question is how do you fund the growth longer term? Do you think you need to do a bigger deal? Do you think it's easier just to pay up for deposits? Seems like you may be heading to the opposite issue you had a couple years ago where you didn't have the loan growth and you had a bunch of deposits. How are you thinking through this?

This is Randy. I'll answer some of that and then see if Tracy wants to add anything. But to be completely honest, it's a great problem. We like it that way, opposite where we have loan growth and we are looking for deposits or maybe needing to fund a little bit more. But there are so many sources for funding out there. It's not a problem. We can turn the faucet back on. We can go out there and decide to go ahead and lock some money in.

Our internet and broker deposit ratio is so low, it's not even -- it's nominal. And while other banks have some pretty big ratios, we could add some there. So what will we do if we don't see good deposit growth? We will do a mixture and we'll look at it and make good decisions and do it where it's profitable to us and we're not increasing that side of the balance sheet to a great degree. So I like the problem. Finding the solutions is not that big a deal.

Jon, I'll give you a little bit of color on what Randy just said. At the Federal Home Loan Bank, as of today, we have about $800 million of additional borrowing capacity. That does not include the additional borrowing capacity that we will create once they analyze our June numbers. The borrowing capacity is a function of your loan balances so we'll probably pick up another $200 million in borrowing capacity at FHLB. Randy talked about our brokered and internet deposits. We only have about $50 million in brokered and we only have about $50 million in internet deposits, and we only have about $50 million in CDARS. As Randy says, they are pretty low. That's real low. We have some options just from your basic 101 toolbox to fund this.

Okay, good. And then Johnny or Randy or Tracy, have you given up on acquisitions, or do you still see things that could make sense?

No, sir, we haven't given up on acquisitions.

No, we're working on some deals right now. So we'll see if we can't turn some--

Jon, it's interesting. Even after you do announce a deal or work one, the phone really picks up a little bit stronger once those happen and some of these are old friends that we've talked to in the past so those conversations are steadily going on.

It's just difficult when you, and you've heard me fuss about the competition from time to time, that's life. But it is difficult to see -- we're very disciplined, as you know, acquirers, and we do deals it makes sense for our shareholders. We're not out here to dilute our shareholder and we don't do it for the sake of doing a deal. Tracy's not trying to grow $5 billion where he can get a bigger salary tomorrow.

And it is what it is. You see these guys that either don't know or don't care or both and they just dilute themselves into infinity. I don't get it. I really do not get it and don't understand it. It makes no sense for the shareholder. It may make some sense for management because they get a bigger salary because they are a bigger bank, but outside of that, there is no sound -- to me -- no sound reasoning, unless they are moving into a market that has tremendous growth or they can get higher rates.

Honestly, from a historical perspective, if you looked at what we have done over the last 10 years or so, we have bought banks under a very disciplined approach, banks that at the end of the day, that they are going to have to be real banks going forward that can contribute to the bottom line. That's why we're able to sit here, quarter after quarter, and announce record earnings, is because we buy banks that will contribute, have good management teams, are in strategic points where we can save on efficiencies and really come out to the plus.

So what we're seeing, when Johnny announced that breakdown of loans, what you're seeing is a bunch of failed banks that we've purchased, a bunch of banks that we bought at really good prices that, whose teams are really coming along and making good loans that add to our bottom line with outstanding asset quality metrics that is going to produce great results in the future, not only now, but down the road. And if we stay with that discipline of buying those type of banks and increasing the footprints that we have, along with the efficiency ratio that we're able to do through our operations, you're not going to see anything but great success for this institution and this holding Company.

Okay.

Well said, Randy. We are extremely disciplined on pricing and when we see people do silly things -- there's a day -- they can pay too much, but there's a quarter that comes around. When you issue too many shares for an acquisition, somebody's got to have an EPS for that. You've got to match that EPS. And you do that again and again and again, and it gets -- I saw one company last quarter didn't make a loan loss allocation. They grew their loans, but they didn't make a loan loss allocation because they could have missed. I'm anxious to see their quarter come out this time.

But we're going to remain disciplined and we're going to miss some deals and we'll move on with those deals. We like -- Jon, when we run into a group of astute investors as we did at Bay Cities, that board is astute and their owners are astute, when we run into those kind of people that understand what we're doing and the power of Home BancShares stock, then we make a deal. We run into unsophisticated investors, it's really difficult for us to sell that. That wraps it up.

Good. Okay. Thanks for the help.

Our next question comes from Stephen Scouten of Sandler O'Neill.

Hey, guys. Thanks for taking my call here.

You bet.

Question for you just to follow up on a comment made about your SBA team. I'm just curious if you can give any color about what the size of that opportunity might be as it regards to whether it's fee potential or loan growth potential?

It will be -- primarily the model is make them, sell them -- so it should be more fee income than anything else. I do think it's -- there's a real opportunity there. I don't know how big it is. We'll use our footprint to figure that out and refer stuff from within the footprint to them. It's five or six people. It's not a huge operation. So we'll do it like we do everything else. We'll do it right, start from scratch, and do it right.

Sounds good. Sounds good. Then on the expense side, with the jump that came in salaries and benefits, you mentioned in the release that most of that was from the CFG Group, but any surprises there or anything that was maybe unusual that took that line item up more than you expected on your end?

I don't think so.

There was nothing, as far as the New York operation. We've prepared our plan back when we first met, back at the first of the year. So that's held true to what we thought would happen there, Stephen. We didn't inch into that market. We went and allowed that group to go full steam compared to, say, Blaise Adams in Pensacola, where he bought a smaller group across and he's been successful and made that area -- has done very, very well. This group we allowed to go in with full steam ahead with the support that he had and we were fortunate to be able to get the purchase loans that we did that they made, so that's made the net income turn out to be very positive.

We ran about -- what did we run for quarter? Did we run about $14 million? Is that about right?

When you look at some of those costs that you're talking about, Stephen, our mortgage area has done really, really well. Some of those things have increased the cost to the Bank. I know I've got the efficiency guru sitting to my left. You can't see the ones on my left, but they wear us out on the efficiency ratio, but I told them sometimes we got to spend a little money to make a little money.

We ran about $14 million and change for the month -- in the quarter, was about $50 million-something, $52 million.

Yes, our monthly non-interest expense was $14.4 million for April and $14.8 million for May and then it did drop back down to about $14.1 million for June.

There wasn't really anything, Donna, that you saw extraordinary other than we had those?

I was going to say we'll start to see some savings now from Doral after that conversion falling out of that line item. I don't think there's anything unexpected.

We had projected New York at about $8 million per year. That appears about where it's going to be.

If anything, some of the regions are actually improving on the salary side and making good choices. And so that should help down the road, too.

Okay. Good stuff. Thanks for answering the questions. Congrats on a great quarter and the impressive growth.

The next question comes from Brian Martin with FIG Partners.

Hey, guys.

Hey, Brian.

Just one last follow-up on that expense line. The Doral savings, somebody mentioned what they were. Did I hear $200,000? Is that the savings coming out of Doral, the branch closings?

Yes, that was correct.

That's about right. It's probably be more than that.

That's at least.

We asked, we asked our Jim Haynes who runs that area, what was that savings, he said $200,000. He usually covers himself pretty good. It's probably $250,000 (laugher).

And then the -- expenses for the -- maybe a question for Donna -- just the expenses on the -- the expense savings from the branch closures, the non-Doral, but the others you announced last quarter, what -- the first quarter that you'll see the full impact of those savings, if you just go with the 11 that you're talking about now, are you thinking the early part of 2016 is when you'll see a full quarter of all the savings, the $2 million in savings you're talking about, that run rate?

Yes. That's a fair assumption the first quarter. As I said, the last one closes in January of 2016. So that should give us time to start seeing benefits, because they are going to trickle out through the next two quarters.

Okay, and then just the compliance and DFAST costs, I know you don't -- Brian mentioned a number to at least throw out there. When do you anticipate to start seeing some of that cost get in? Is that -- would that be this year or is that a 2016 event that you start seeing the impact of that?

Brian, this is Brian. I really think most of it will come in next year. I was joking, but was kind of serious when I said if somebody knows of somebody that would be a good DFAST manager, give me a call because if we found the right person, we would probably go ahead and hire them. We have -- I talked to one person the other day, but they weren't interested in moving to Conway. To make a long story short, what I would like to see us do -- our first mission probably will not be due until as of 12/31/2017 with a report date of July 2018. But what our Company probably needs to do is to go ahead and start ramping up some of those and do a practice run for the balance sheet of 12/31/2016. For us to do that, we'll probably need to start ramping up those expenses late in this half of the year or first part of next year.

Got you. Okay. That's helpful. And just going back to the M&A--?

Let me make one more comment. We don't get rid of all the Doral expenses. We carry them through all this and then they are gone.

Right. I got you. Understood. Maybe just one last question on the M&A outlook, Johnny. It sounds like obviously that you've talked ad nauseam about the pricing. Are you noticing -- do you think about looking at other markets outside of Florida? It sounds like, I don't want to put words in your mouth, that it's more the pricing in Florida that's a bit ridiculous, not that it's not high elsewhere, but do you get more interested in other markets potentially from an M&A standpoint if the pricing just stays at where the levels you're seeing it at in Florida?

Not yet. Not yet. We might. With the power of our stock, don't get me wrong, we make the deal. We make the deal. And there's four or five of us in the country that nobody can outbid if we really want to buy one. So we're so well-positioned in Florida, Brian, with the team of people that we have there and such good management on the ground in Florida and special assets people, I would hate to give up on Florida today and don't intend to, quite honestly.

We'll continue to inquire in that market and continue to utilize. A lot of them are like end-market mergers to us and can be really accretive down the road. So we'll continue to look now. Would we look outside of that? We've been invited to look at some pretty good sized operations lately, one in the $4 billion, one in the $5 billion and we might go kick the tires and I probably will. I probably will go kick the tires, but I don't know that we're ready -- I'm not ready to leave Florida yet. We've been working on one for about a year there, 1.5 years. We've had some problems. We've hired a New York law firm that's dealt with this kind of nasty problems. We've hired them. We'll be visiting back with them back probably next week about where we are on that. If we can get that resolved, it could be an extremely accretive deal if we could unwind their problems.

So one of the advantages that the Bay Cities Group brings to us is that they got put under BSA, regulatory action on BSA, I still don't understand how they got put under it. I still don't understand what they did. But anyway, they had -- their people worked diligently to get out from under that BSA. One of them we're looking at has got some BSA problems and we think their people in Tampa can assist us in working on coming out from under one of these deals we're looking at that's got some BSA problems.

I think we're going to stay hitched in there right now. We got -- David [Durrey], who is regional guy for us, has moved to Fort Lauderdale. He was running, I don't know, $1.5 billion worth of assets here. He's now in Fort Lauderdale. He can run $1.5 billion, $2 million worth of assets. You got Jim Haynes who can take on more in the middle. You've got Bud, who can take on more. You've got Teresa Condas who can take on more in the Keys. So you have got great management there that are successful, that are cranking out [$]150 [millions], [$]170 [millions], and 2% ROAs and know how to run the business and know our culture. I would be ashamed to walk away from Florida at this point in time with all that talent on the ground.

And don't count us out on popping into an area that we might not be in if we can find a really good team. As Tracy mentioned, what a success story of Pensacola. I recently spent a whole day there and just went around and what's going on there is exciting. I walk in and I see in less than a year they have grown their loans over $100 million in less than a year. So we hired a great team there. We've got -- we did this in Naples. That place is coming on pretty good. And so don't count us out for doing the same thing if we can find a good, strong team.

Okay. The other markets you looked at, Johnny, as far as if there's larger deals or whatnot, would they be new markets entirely, meaning new states, or do you stick with the Alabama, Arkansas, and you've talked about Texas a little bit in the past, but maybe it's still too early on that front, but is that -- think about those areas as where you're focused?

Well, a couple of these had ties to Florida, which interested me. They had some Florida operations also that they had in their bag. So they had those plus some other ones. It's not markets I wouldn't be opposed to be in. I just think we need to make hay when the sun shines and that's continuing to do M&A in the Florida market and grow the Florida market with all the talent we have.

We took a bit bat in Liberty. That was in Arkansas and that thing's doing extremely well. We've taken little bats pretty well other than that. [$]500 [million], [$]300 [million], [$]600 [millions]. We haven't taken big giant steps. And when you take a giant step of $4 billion or $5 billion, that's -- you really better, you better be buying, as Randy Sims talked about, a great management team on the ground there or we got to move someone. Don't get me wrong. We got talent in this Company. We can move them. But I just think we got talent on the ground in Florida and south Alabama. We got talent there. I keep thinking Randy's going to get us a mobile one of these days--

Working on it.

He's working on it. If he can find the right team in there, he'll do it. That's -- what you want me to do is tell you where that is and who it is, and I'm not going to do that.

Appreciate it. The color is helpful, Johnny. Maybe just the last housekeeping question for Brian, that was the core loan yield in the quarter, Brian, it was -- what was the linked quarter change? Last quarter it was around 5.04% when you--

That is correct. It was 5.04% last quarter. When you take out the purchase accounting, it's 5.08%.

5.08%. Okay. Thanks a lot. Thanks for taking the questions, guys.

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

Well, thank you for your interest in the Company. I'm proud of this team, what they did. I appreciate all the support of all our investors. We have a great investor group. I hope you're as happy with this quarter as I am, and I want to hear -- what I want to hear next quarter is Randy Sims say 18 in a row (laughter), world record, 18 quarters in a row with record earnings. Actually, I'm going to have him go back and look from day one. I know we had one quarter we took a hickey on, but I would imagine that other than that one hickey, he may have -- there may be stringed together a lot more than that, Randy.

That's a good idea. We'll have that number for you next quarter (laughter) so hold on to your seats.

Thanks. We'll talk to you in 90 days.

Thank you. The conference has now concluded. Thank you for attending. You may now disconnect.