Home BancShares Inc (HOMB) 2015 Q3 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares, Inc. third-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'll find this note on page 3 from their Form 10-K filed with the SEC in February of 2015. At this time, all participants are in a listen-only mode and this conference is being recorded.

(Operator Instructions)

It is now my pleasure to turn the call over to our first presenter, Mr. Allison. Please go ahead, sir.

Thank you, Dan. Welcome everyone to Home BancShares' third-quarter 2015 earnings release and conference call. I have pretty much the same crew with me today -- Randy Sims, Tracy French, Donna Townsell, Kevin Hester, Brian Davis and Jennifer Floyd. You'll be hearing from all of them today as they report.

Great quarter. I hope you've seen the press release. Looks to me like it's time to raise the performance bar to new levels again. Loan growth, efficiency, revenue, EPS earnings, margin, all contributed to a great quarter.

I can't say record because one of our large investors recently said -- you get on the phone it's record, record, record, record, record. Well, that's what we do every quarter. We try to have a record, record, record every quarter. So, we're going to do our best today to go through this process without saying record.

Powerful revenue growth coupled with controlled expenses was the key to the income increase. I'd like to welcome Bay Cities. It's a smart group of people. We look forward to working with them. We'll be there next week, I think, going for a meet and greet and to meet their customers and more of their people.

M&A is both busy and frustrating. It's frustrating from the point that the process works like this -- a guy comes in with no skin in the game and parachutes into Florida and pays some price that is exorbitant and creates dilution to the shareholders, and he really doesn't care because it's not his money. Then everyone thinks their baby is prettier than the next one and they expect that same crazy prize on the next deal and they want more for the baby.

I don't mean to be getting on the bankers. The bankers are brainwashed A lot of these sellers with these stupid prices put them in their head. When we present a realistic price they think we're trying to steal their baby. That's one thing on the bankers.

Sometimes it's not always the bankers, it's the CEO. Recently we had one come to Conway to make a deal. By the way, he's doing a 0.6 ROA. His questions were -- what about me, can I keep my car, do I have a car allowance, can I keep my country club, do I still get six weeks of vacation, will you give me and six of my people a contract. It just goes on and on. We don't do that because if you locked in that culture, there has to be change to move it from a 0.6 ROA. So you have to change the culture or you just lock in the same culture.

Another one, the banker started with an unrealistic price and then added warrants and options on top of the purchase price. I said -- why did you do that? He said -- because the seller didn't want to pay him. And I thought -- well, okay, we didn't issue those, that's an expense. I mean, wow.

We're inundated with good opportunities because we're very disciplined with our M&A approach, with compound annual returns since 1999, including the startup of this Company, and the worst number is 17.3%. The problem is, if we pay too much, [they answer tomorrow]. Someone wants to get a stupid price and then expects returns, the same kind of returns in the future. Ha ha, that's pretty funny.

Most investment bankers -- most investment bankers -- don't care about the deal. They've been paid and they're off to the next deal. Instead of tell me how many deals they've done, let's look one year later at the deal and see how they worked out for both the seller and the buyer. It has to work for both properties.

As we continue on the M&As process, we're probably going to not be the highest price, but there's only a handful of really good M&A acquirers in the country and we're considered one of those. American Bankers recently, in a new recent article about surprises, investors becoming surprised later in the deals. Investors are becoming more weathered. Great. Finally. Because some of these deals where they're announced they're a little misleading.

It's a line of business and you better know what you're doing. If you're not doing a 1.5 or 1.6 ROA you probably need to fix yourself first. If you're doing a 0.4 or 0.5, these guys probably need to fix themselves first because two wounded birds don't make an eagle. Randy, we're going to go to you for the numbers.

Thank you, Johnny. It's a pleasure to be able to report good results and, as you stated, another really good quarter. Let me just give you a few details on Bay Cities, as Johnny mentioned.

First, as you're probably aware, in June we announced the signing of the definitive agreement and a plan of merger for Home to acquire Florida Business BancGroup, the parent company of Bay Cities Bank, headquartered in Tampa, Florida. Florida Business BancGroup operates six branches and a loan production office in the Tampa Bay area and in Sarasota, Florida.

As of closing FBBI had approximately $542.4 million in total assets, $415.8 million in loans, and $471.5 million in deposits. I am pleased to announce that Bay Cities Bank is now a part of Centennial Bank with the closing of this acquisition on October 1. Next comes the conversion of systems in early November and that is a very important thing for us.

So let's get into some numbers. There was some exciting progress made in several areas that our team will talk about. I will start with net income.

The most important item, a 30.6% increase in third-quarter earnings to $35.7 million or $0.52 diluted earnings per share, compared to $27.4 million or $0.41 diluted earnings per share for the same quarter in 2014. Excluding the $474,000 of merger expenses associated with the acquisition of Bay Cities Bank, our diluted earnings per share for the third quarter of 2015 was $0.53 per share. So, that is now 18 consecutive quarters of record income for Home BancShares.

Our $35.7 million this quarter can be compared to our previously reported profit of $33.9 million last quarter. Diluted earnings per share excluding intangible amortization for the third quarter was $0.53 per share compared to $0.42 diluted earnings per share excluding intangible amortization for the same period in 2014.

The components that helped us to get to this record income was strong loan growth, strong revenue, a continued strong margin, as well as great efficiencies. When you make progress in your key components, the results should be greater net income. And that is exactly what continues to happen to us.

So, I would like to turn it over to Centennial's CEO, Tracy French, at this time, to give us a little additional color on our performance this quarter. Tracy?

Thank you, Randy. It's nice to hear those third-quarter strong financial results. Our Company is performing well in all areas of our key performance ratios that others will share with you later on today. Our motto we started at the first of the year was just get better every day. That was our goal and it's certainly been fulfilled for the first three quarters.

While we have been busy maintaining our profitable and growth momentum I would like to share with you a few items of our focus. The main focus this year was the revenue production. This certainly has been accomplished by the numbers you just spoke about and shown in the results today.

The reason of all of this is all across the bank, when you look at our loans, you look at our loan fees, you look at our mortgage, you look at our deposits, you look at all areas of the bank. It's coming from the excellent bankers that we have and they performed to the levels of our expectation. I will leave the big number of the efficiency later for Donna to discuss.

In reviewing the regions that we manage today, it's pretty simple and it makes you very proud. One month, one region will be the leader in our performance levels and the next month another region steps up and takes the charge. All of our shareholders should be proud of this group, as we are.

One item that comes to my mind on a regular basis is return on assets. The Arkansas region's just continued to run at 2-plus ROA. While our Florida margins have made improvements every quarter, I'm not calling it a trend yet, Johnny, but the Florida markets combined in September did a 1.6 ROA.

It certainly is in the results of the central Florida and the north Florida efforts and the southern parts of Florida that our loan growth has done very well. The pipelines of the unfunded loans that I see Kevin will provide later has grown significantly in the central part and in the Panhandle. And I'm looking forward to the Tampa markets as we welcome our Bay City bank acquisition to our team.

The other item that's working very well is our New York operation. It's certainly on course and the expectations that we planned when we met our group about this time last year. And it's nice to see what they're arranging for the year 2016 later on.

As Johnny mentioned earlier, our due diligence team is active and we have several conversations ongoing with possible M&A opportunities. The shareholders can rest assured that our leadership is staying very disciplined with all the looks we are getting. Our goal and focus is to continue the double-digit annualized returns to the shareholders, to provide this return not only to our older shareholders, but our new ones and also to the future ones that we acquire. Randy, I would just like to end by telling our entire staff thank you for making the first three quarters a winner.

Well said, Tracy. Thank you. Now let's get to a few more numbers. I will go through these quickly, adding just a little more color.

As of September 30, the Corporation is sitting at just a little over $8.5 billion in total assets. Our return on average assets for the third quarter was 1.72%, as compared to 1.56% for the third quarter 2014. It is important to note this increase comes even though we have added acquisitions with much lower ROAs.

Our return on average assets excluding intangible amortization was 1.83%. Our core return on average assets that excludes intangibles, provision, merger expenses and taxes was 3.24% for the quarter. Our return on average TCE excluding intangible amortization for the quarter was 19.76%.

The total number of active Centennial branches is 144, with 80 in Arkansas, 58 in Florida, and 6 along the Alabama coastline, plus our loan production office in New York City. We continue to close inefficient branches across the footprint.

But who better to tell you more about that and some exciting news but Donna Townsell. Donna, let me turn it over to you.

Thank you, Randy. Well, we did it. You heard for several quarters Johnny saying he wanted to see a 3 in front of the efficiency ratio. And I am very pleased today that I can announce we met the challenge and delivered a 39.30% core efficiency ratio for the third quarter.

(horns blowing)

Wow -- I didn't expect such fanfare. Our focus on efficiency began in 2008 when we started our Metavante process. We had a list of 240 initiatives and spent 18 months implementing them.

Since then, tracking expenses has become part of the culture at Home BancShares. In seven years we have dropped our core efficiency from 59% to 39% while also acquiring 15 banks in that same time period.

When you consider our non-interest expense was just $1.8 million higher than the third quarter of last year, and that's really just due to setting up shop in New York and a decision to pay off the Federal Home Loan Borrowings and our new accrual for DFAST, then we're really basically running pretty flat on expenses. And that further shows our discipline has just become second nature. This team of bankers worked really hard to make this happen. And while they love a good challenge, it is possible that I will faint if Johnny requests a 2 during this call.

We continue to evaluate brick and mortar like the rest of the industry. In Q3 we closed five branches, and four branches are scheduled for the fourth quarter. We are providing our market leaders with more analytical data than we have in the past to assist in analyzing market needs.

I'd like to close by just saying congratulations to the whole Home BancShares family on this accomplishment. I actually think Johnny said we can celebrate today which you heard we started already. He did say we cannot afford to buy cake and tomorrow it's back to work. Randy?

Good job, Donna.

Great job. Congratulations on that good news. You have been preaching that for a long time to our staff and we finally did it. In fact, I could blow it again. I think I will.

We better get back to the numbers. Let's switch to deposits. We ended the quarter at $5.95 billion. Time deposits represented 22% of total deposits.

And now, let's look at net interest income, margin, non-interest expense. All will be covered by our CFO, Brian Davis. And after that, Brian will pass it to Jennifer Floyd, our Chief Accounting Officer, to give us more information on our capital numbers. Brian?

Thanks, Randy. Thanks for saying a few numbers so I didn't have to follow directly behind Donna, first of all, because I don't know if I'll get a bunch of horns blown for mine.

Momentum from Q2 carried over to Q3 which allowed the Company to report impressive results for the third quarter of 2015. The net interest margin on our fully taxable equivalent basis was 5.03% for Q3, compared to 5.0% for Q2 2015. The yield on loans improved slightly from 6.01% to 6.08% on a linked-quarter basis.

The effective yield on non-covered loans was 5.77% in Q3 versus 5.63% in Q2; whereas, the effective yield on covered loans was 19.04% in Q3 versus 18.4% in Q2. The cost of funds did experience a slight increase from 36 basis points to 39 basis points for Q3 2015 as a result of our increased use of FHLB borrowings.

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 reported in purchase accounting. Excluding these adjustments, the Company's margin for Q3 2014 was 4.24% on a non-GAAP basis. Provision for loan loss was 7.1% in Q3 2015 compared to $5.4 million in Q2 2015. While asset quality has remained stable since year end, this increase is primarily related to the organic growth in our loans during the third quarter of 2015.

Non-interest income was down $482,000 in Q3 2015 compared to Q2. This decrease is primarily associated with a significant decrease in our trust fees. The decrease in the trust fees is the result of a one-time receipt of $788,000 during Q2 related to 12b-1 fees that were reported in our trust department.

For the quarter, we did experience an increase of $339,000 in service charges. And we also experienced another record of an increase in $177,000 increase in mortgage lending income. Excluding merger expenses, non interest expense was up $869,000 in Q3 2015 compared to Q2. The primary increase was related to a strategic decision to pay off a few of our higher-priced FHLB advances, plus we are now incurring new costs in preparation of DFAST.

With that said, I will turn the call over to Jennifer.

Thank you, Brian. Now I'd like to briefly review the third-quarter capital results. As of September 30, 2015, our Company ended the quarter with $1.091 billion of capital and $67 million of cash at the Parent Company. During the third quarter of 2015, we paid out shareholder dividends of $10.2 million, and grew retained earnings by $25.6 million.

For the third quarter 2015, our common equity tier 1 capital was $753.2 million, total tier 1 capital was $812.2 million, and total risk-based capital was $875.9 million. As a result, our leverage ratios was 10.3% compared to 10.4% at June 30. Additional third-quarter capital ratios include book value per common share, which was $16.05 compared to $15.67 at June 30, tangible book value per common share was $11.03 compared to $10.61 at June 30, and, finally, our tangible common equity ratio was 9.2% compared to 9.3% at June 30. Randy?

Thank you, Jennifer. We've talked about the key components to our net income numbers and certainly our loan growth has been so strong this year. Combined, was equally strong asset quality numbers. So, let's switch to our Chief Lender, Kevin Hester, who will give us more detail. Kevin?

Thanks, Randy. 90 days ago we were discussing the strongest loan growth quarter since the downturn with legacy loan growth of $280 million. That translated to about 23% increase on an annualized basis. This quarter we were able to improve on those gaudy numbers with organic loan growth of $351 million.

(horns blowing)

Thank you so much for that celebration. (laughter) This growth was almost equally divided between the community bank footprint and CCFG. We continue to see a number of very good lending opportunities throughout our group and that should increase with the addition of Bay Cities Bank from the Tampa/St. Pete area, which is one of the nation's strongest MSAs.

Both the non-covered, non-performing loan and asset ratios increased by about 10 basis points this quarter, but virtually all of that increase was due to non-performing covered loans reaching the end of their loss share agreement and becoming non-covered loans for us. It is possible we will experience this at the end of the fourth quarter with the remainder of our failed bank DNAs reaching the end of their five-year commercial loss share agreement. As a result, the A-LLL coverage of non-performing non-covered loans decreased but it's still solid at 124%.

Both net charge-offs and past dues remained low at 24 basis points and 1.09%, respectively. The allowance for loan losses as a percentage of non-covered loans increased 1 basis point in the third quarter from 1.02% to 1.03%. However, if you added all the acquisition discounts to the allowance for loan losses the combined figure would be 2.84%. Non-covered real estate owned increased $1.7 million on a linked-quarter basis due to the covered to non-covered reclassification noted above.

The mortgage area continues to improve profitability significantly quarter over quarter due to a combination of increased volume and improved margin. The focus on adding experienced producers in good purchase markets has allowed us to increase volume at a time when refinances have declined due to the extended period of low mortgage rates. We continue to evaluate opportunities to expand our lending operations from both a product type and geographic perspective as we approach $10 billion in assets.

I'm glad to report it was a great quarter. With that, Randy, I'll turn it back over to you.

Than you, Kevin. Of all the conference calls I've been on I'm going to have to say this was the most fun. And we want to thank you for allowing us to have a little bit of fun in our celebration of three very good quarters for the first half of 2015.

But let's put together what has happened this quarter real quick -- another acquisition that adds to our Tampa bay market closed and a part of Centennial Bank, record earnings for the 18th consecutive quarter, record revenue, good non-interest income, a consistent and strong efficiency ratio -- and with a 3 in front of it -- a powerful margin, strong legacy loan growth, and great asset-quality metrics. Consistent improvements in all the major components that has resulted in our consistent record earnings. And that is what makes for another great quarter.

With that, I will now turn it back over to our Chairman, Mr. Allison.

Great quarter by all. That's a really good report. Makes me very proud. I'm going to have to call the name of the large investor who didn't want us to use -- record. I noticed you used record, Randy, there a few times. But, Brian, you can call me after this meeting and tell me whether you'd rather have the horns or whether you would rather have records. We'll do whatever you wish in the future. I think maybe record's better than the horns.

But, anyway, Dan, I think we're ready for Q&A. So if you've got some people teed up, let's go to it.

Thank you.

(Operator Instructions)

Dan, this is John Allison. Can you hear me?

Yes, I can, sir.

Am I live? I've got one more comment I meant to make earlier. Can I go with it now?

Please.

Okay. I just want to comment on the efficiency deal. Efficiency is simply a ratio of revenue and expenses. And basically it's an offensive team and a defensive team and we need both.

I want to congratulate the offense -- the lenders, the loan assistants and the back office for a strong interest margin, strong loan growth, creating powerful revenue improvements over last year. On the defensive side, we've lowered the efficiency ratio over the last seven and-a-half years from 59-and-change to 39-and-change. Great job. And while we did that, we added 15 banks.

Interesting number that Brian did for me. Assuming that 50% of the kick was from revenue and 50% was from controlling expenses, the combined additional income is almost $100 million to Home BancShares annually. That gives you a perspective of what that means to this Corporation.

And you think about it, Donna and Brian both touched on it in expenses, expenses for the third quarter of 2014 versus third quarter of 2015, with the adjustments Brian talked about, were flat. And think about that. We added our New York office with 30 new people. Good job by everybody. The goal of the sub-40 efficiency was very aggressive but I felt that our team could get it done. It's a huge accomplishment for Home BancShares.

As a result of the tremendous effort on the defensive side I'm promoting our efficiency expert, Donna Townsell, to Senior Executive Vice President of both the Bank and the Holding Company as of today. Donna, congratulations on a good job -- and don't let up. She didn't know this. I won't ask you for -- is she going to blow the horn. (laughter) I won't ask you for a 2 in front of it but 35 sure would look good. Dan, we're ready now.

Thank you. Our first question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.

Thanks. I vote for record over the horns.

(laughter)

Just got my hearing back. The commercial finance group obviously had another good quarter. Maybe you guys could just give us an idea of the types of deals you're approving and if you have any new thoughts on maximum potential size of that group now that we're a couple quarters into it.

John, this is Kevin. We're doing really the same kinds of deals we've talked about on the previous calls. The bridge type financing, both in New York and outside of New York, and then the lines of credit to hedge funds and equity funds to buy distressed assets. So, it's a lot of the same stuff that we've been doing that we've seen them do in the past.

You asked about the growth potential there. I think we have about 29 people now, Tracy, isn't that about right?

That's correct.

We've got about 29. We'll probably be adding a couple more maybe. But we think, and Chris' team can take it now, to $800 million or $900 million over the next period of time. So, I think we're pretty staffed up. There might be a little incremental increase but pretty well staffed up and ready to go.

We're on the 23rd floor. I think they're building out the 28th floor for us. And I think some utility deals or something. That's about all we lack in getting everything in for the last month.

Okay. And that sits at about $500 million today -- is my math right?

$527 million.

By the way, we improved 100 yesterday for them, so it's pretty impressive.

Okay, good. And then I asked about this a couple quarters ago, but maybe give us an update on your thinking on funding some of the growth. And I don't mean just Commercial Finance but also the rest of the footprint. Your loan to deposit ratio's up a little bit. You've talked a little bit about Home Loan Bank borrowings. But give us a little idea of what you're thinking for the next couple quarters in terms of funding the growth.

Funding's become an important issue for Home BancShares. We actually set up a little funding meeting. We meet every day to talk about funding. We're trying to pull all the levers and be a little bit diversified.

We are partial to doing FHLB advances because that's the cheapest source of funds. As of today, we have $650 million available but we also have about $250 million that will become available on FHLB lines, taking it to $900 million. That's a product of our $350 million loan growth, plus the $400 million worth of loans that we acquired on 10/1 through our Bay Cities acquisition. So, that will go up to $900 million.

We have been a little more aggressive in bidding on some public funds in Florida. We typically had really stayed with Arkansas but during Q3 we did bid on $100 million worth of public funds in Florida which has a low pledging rate compared to Arkansas, and we won that. There's another $100 million coming out for bid later this month that we'll take a strong look at.

We have ample room to do brokered deposits. We only have $55 million of brokered deposits which is about 1% of our deposits. We met with our regulators just this week and asked them how they felt about that and they said they didn't have any problem with us going to 15%, 20%. Not that we're fixing to do that but it gives us a lot of room to get some deposits there. That's pretty much what we have in our bucket at this point in time.

Okay. Good. And then I guess Tracy or Randy or Johnny, just on acquisition pricing, what do you think changes the acquisition pricing environment, if anything?

This is my hot button, but if they understand that the stock that they're taking is a $10 bill and it's really worth $9 because they dilute themselves, once the sellers figure that out -- I'm doing my best to educate them -- but once the sellers figure that out then I think they'll reduce some of these dilutions. They'll say they're going to have an earn back to tangible book in four and-a-half years. Can you imagine the real truth of that deal if they're publishing four and-a-half years? That's probably infinity.

I think I told you on the call last time, Brian Davis, I said if X pays this amount for Y, when do they get the return. Brian came back and he said I don't have enough columns. He said I ran it as far as I could run it and it never comes back to them. That's what we sell.

One thing we have is a stock that is consistently powerful and a consistent Company. We didn't hit this performance levels overnight. That's what we sell. And we show charts. We have a great chart. We show it. It's all the competitors that bid against us versus Home BancShares over the last eight years. Depending on which one you buy, Home's up 400% and the next one to us is up 110%, and most of them are still down. That's the most powerful thing we sell.

We also show them a chart, Jon, that shows inside ownership, market cap. And you can look, you can track the inside ownership on these deals and see that our value of the Company is far higher than those others. We show return on assets, return on equity. We give them all this chart and it really tells the tale. We have to sell our story and that's what we do.

Bay Cities had a very astute group of investors. They had some funds in there. Plus they had some very sharp directors that understood the value of Home BancShares stock. We may not have been the highest but we got that bid. I think they'll be happy with us.

And when I said that the lowest compound annual return was 17.3%, I sell that pretty hard. That's from 1999, those of us who got in early. That's how I sell it. I think those that are real sharp investors understand that and we have the ability to sell that. But if they're not sophisticated enough, they think they're getting $10 from ABC. I know I went off on a tirade on that, but anyway.

Okay. Good. All right, thanks for the help.

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

Good afternoon. Thanks for taking my questions here. A question for you on the expense front. Congratulations on the achievement. That's very impressive.

I know, Johnny, you said you'd like to see it at 35 here one day. But what's the headwind as it pertains to the issue of crossing $10 billion in assets as it comes to increased regulatory expenses? And then also on the Durbin front, have you guys gotten any further around the math there and what the effect might be?

Yes, we do. We're estimating that the Durbin Amendment will cost us $1 million per $1 billion. So if we just were to grow over organically, that piece alone would cost us $10 million. Currently we're also estimating that the DFAST component of it will be about $2 million. We have begun spending a little bit of money on that. We have $150,000 in Q3 that we spent this quarter.

Plus as of yesterday we have our very first employee dedicated to DFAST. He's someone that came from a holding company that was already over $10 billion and had exposure to it. So, between him and the consulting firm that we've already signed up with that we spent $150,000 with so far, that's how we're going to get started on the DFAST.

And are you concerned that will take the efficiency ratio back up above 40% or is that unlikely to happen given the continued revenue growth you expect?

It depends on the next deal we do, if we get some scale in the next trade that we do. One other thing, on the $10 billion, the Durbin Amendment doesn't kick in day one that you go over $10 billion. So, if we were to grow over it, and let's say we just grew over it next year without an acquisition, that means it wouldn't kick in until July 1 of 2017. And the way I look at it is if we could just grow to $11 billion, that extra $1 [million], we're running a 1.70-plus ROA, and that would more than cover the lost revenue of the Durbin and the DFAST.

Okay. Yes, that makes sense. And thinking a little bit more about the CFG Group there -- I know this was covered somewhat in the first question there -- but in terms of still the potential of that group for growth, is this level of growth that you saw this quarter, would you expect it to be that or higher moving forward? Or is there a governor you're going to put on that growth at all at any point in time?

I don't think there's particularly a governor. Our charge to them was good credits. We want to see really good credits. And as long as those are out there, and that's what we're seeing, I don't think there's a governor. We've talked about $1 billion. They're halfway to that. So you can see that over the next year or so.

I think when we met with these group, met with a year ago that we set out a plan and that plan's been delivered right on track so far. Stephen, we'll stay at a good pace for the Company and the group there's anxious to see what they can do.

They did a budget and they've hit the budget right on the budget so far. So, so far, so good. We're very pleased. They're really bright people and doing a good job, so we're excited to have them in the family. There's tremendous oversight on the credits that are coming before us. A lot of study, a lot of committees, so we feel pretty good about that.

Are any of those these EB5 credits? Is any of that bridge financing these EB5 loans?

There is a little bit there but we've seen more of that in our own footprint than we have through the New York group.

Okay. And then one last one, if I could. On the level of provisioning, it seems maybe a little higher than I was expecting. Is that just due to the higher accretion that you had from the loan pools and that's just more elevated due to the elevation there in the accretion? Or is that more of a run rate type of number that we'd expect to see?

I don't think it's a run rate number. We just had tremendous loan growth and we felt it was probably prudent to do that. I like a 150 reserve. We're not there yet. I just like a 150 reserve. I know Kevin says we don't need a 150 reserve, I just like a 150 reserve. Anyway, when they turn around I try to put some more in there.

(laughter) Fair enough. Okay, good stuff, guys. I appreciate it. Congrats on a great quarter.

And our next question comes from Michael Rose of Raymond James. Please go ahead.

Hey, good afternoon, guys. How are you? Johnny, I appreciate the comments on M&A on the front end. But I think we all know that Tracy's per diem can't support a country club membership or a car. (laughter)

That's correct. To get to a 35 we're going to cut that per diem back.

And I'm going to go on the record, like Arfstrom and others -- no more horns, please. (laughter)

Did you hear that, Brian? Brian is one of our investors, he said that, so you hear that.

On the serious side, saw another Florida deal today. I obviously appreciate your comments on the front end, in all seriousness. Just what are you seeing out there in terms of what does your pipeline look for acquisitions at this point? Obviously pricing is maybe getting a little frothy.

And then outside of M&A, just in Florida as well, what are you seeing from the environment? Every bank that I talk to is seeing really excellent growth. And when I start to see that and then other banks from out of state coming in and doing an acquisition, it really points to me that we could be nearing an inflection point in the economy. Any comments?

I'll give you some comments. We had a loan committee meeting the other day and it lasted four hours. It wasn't that they were big loans. I didn't like the loans. It took a committee a long time to say yes or no on those loans. They just weren't the quality that we've seen in the past. So, Tracy sent out to our people we're not going to be interested in those kind of credits.

Anyway, the last meetings was good credits again. But you're seeing a little of that. I think some people are buying some of those really poor credits. I think they're trying to get competitive on the rates on stuff that you don't even want on your books. So that's a little frustrating. Your other question was M&A, is that right?

Yes, both on M&A and then just the operating environment and what you're seeing in terms of new credits.

We have a lot of opportunities. Tracy and I were in Orlando -- well, let me say this, we were in Florida. We were in Florida with two banks 10 days ago, got another one teed up in Florida to visit with in the next 10 days. There's lots of deals -- lots and lots and lots of deals out there. You just have to move on. The expectations are sometimes what I think, not realistic. So, we have to move on. It's just next, next, next. You don't fall in love with one.

We remain extremely disciplined on the acquisition side. We're not going to do diluted deals. People come in and they'll pitch a price, the banker will give them a price, they come bring it to us and it's diluted. We don't play that game.

The other question was --?

Just the operating environment.

The operating environment's pretty good, actually. Other than that one week of trashy loans it's been good. Things are good just about everywhere. I really don't have a complaint. Tracy, Randy?

I just will add, Michael, to that, the loans that we're seeing and that our group, and we talked about it in the prepared remarks about across Florida, it's just we're getting the fruits from the effort that our team has been doing for the past several years. It's coming back to our newer acquisitions that we've had, the loans that they're able to do now. Our balance sheet allows them to go and extend different credits, larger credits or a little bit more to their existing customers that they've known in the past. It's happening in South Florida, it's happening in Southeast Florida and it's certainly happening in the Panhandle, which most of those were some challenged institutions during that time. The group there in the Panhandle has done really well in Alabama.

The credits that we're still seeing today is generally some relationships that this Company's had in the past. So, we feel pretty good on that. We hear from the competition or some of the things that whenever a customer comes to us a little bit thinner on credit underwriting, a little bit more loan to values potentially. We haven't changed our stance there. And our borrowers are still coming to us for the relationship that we've developed over the years.

I would just add, especially on the Florida front, what you're seeing is all those failed institutions that we've bought over the years were the ones that were struggling. They're maturing more and more each and every quarter. The bankers are out, our name is getting out. Our name is becoming the prevalent bank, the bank to go to. And we're seeing people coming into our banks in numbers that before was thin.

So I'm really proud of Florida and the maturing that it's doing. And you can say the same thing about Arkansas. We're not the same Arkansas bank we were three or four years ago. We are the Arkansas bank with the footprint that we now have due to the Liberty acquisition. The entire Corporation is maturing and you're seeing people come to Centennial because it is the place to bank. One more comment and then we'll move on is, you remember my comments when you all were concerned about our loan growth. I said you can't push a rope, you get yourself in trouble. And when it comes we'll get our fair share. Tracy's right, all the hard work, all the groundwork that's been done out there and here it comes. And we've got great loan growth.

All right. Just one more quick one for me, for Johnny. Have you guys been approached more recently by a larger bank? We've seen one or two deals more recently that maybe indicate that there could be some upstream movement in M&A. Thanks.

I think the question was have we been approached by a larger bank recently.

Correct.

The answer to that is yes. But we're not interested in that at this point in time.

Great. Thanks for taking my questions.

Let me say that we'll do what's in the best interest of shareholders but this one didn't appear to be the best interest of shareholders.

Thanks, guys.

Our next question comes from Brian Zabora of KBW. Please go ahead.

Thanks, good afternoon. A question on paydowns. Last conference call you talked about expecting some sizable or unusual paydowns in third quarter. Did you see that at the same level that you expected? And how do the paydowns look for fourth quarter?

No, we didn't see -- a couple of those large paydowns did not occur as we thought they would in the third quarter. Some of that was pushed out to fourth and beyond and some just will not happen. There will be some of that in the fourth quarter that we really thought would happen in the third.

Okay. And then on the FAC indemnification, I think, Brian, you talked about in previous calls that maybe that goes to $1 million in the fourth quarter. Is that essentially zero or close to zero in 2016?

No, because we'll still have about $10 million of that left or so when we get down to the end of the year. I'm estimating it's probably going to be about $2.3 million in amortization expense for all of 2016. So we'll take a major decline because what is happening is the five-year loss share is expiring for everything and so we still have Wakulla and Gulf to have some loss share amortization in Q4. But after that all the five-year loss share is done on all of our deals.

Great. Thanks for taking my questions and great quarter, guys.

And our next question comes from Matt Olney of Stephens. Please go ahead.

Thanks, guys, how are you? Congrats again on the quarter. Really impressive. As far as the margin, really great to see that maintain above 5%. I'm curious what the outlook on the margin is over the next few quarters.

Let me comment on that because Brian Davis followed the Randy Mayor philosophy. If the margin's going down, down, down and it went up, up, up. And if you recall Brian last time, he said he's going to follow that and he said it's going down and it went up. So, I'll let him answer from here. But I don't think you can put much credibility to it.

I agree with Mr. Allison. I'm going to follow the Randy Mayor philosophy and I'm going to tell you that it's going down. If you held everything constant, Matt, we are experiencing quite a bit of accretion income. And in this quarter we had $2.1 million of additional accretion income that came in as we did some impairment testing and found out that we had some excess credit mark left over from our Heritage acquisition and our Premier acquisition.

Those accretion numbers continue on in future quarters but as the loan balances get smaller, the overall you accretion goes down unless there's another layer. If you add up all of our accretion income it should go down about $1.1 million for the next quarter. That's about 6 basis points. So, just from the accretion standpoint, I would be looking for it to be a little bit squeezed.

Plus during the quarter we layered about $300 million of FHLB borrowings. We didn't do it at the beginning of the quarter, did it at the end. And that's probably impacted our margin about $500,000 for this quarter and will probably impact it an additional $500,000 from where we had it in Q2 for about $1 million a quarter. That was $75 million layered four different ways at two-year, three-year, four-year and five-year money. We've had it in overnight floating.

Okay. Great color, Brian. Thank you. And then, Johnny, for you, I'm curious how you're thinking about capital right now. You still have the excess capital. You've worked through a portion of that via loan growth. How do you think about your excess capital today versus a few months ago when the organic loan growth just wasn't near as strong?

We traditionally run about 30% on the dividend on that handle. So, we're probably not going to pull that handle right now. We're working on some deals that may take some cash. But as long as we have our tangible common equity in the 9's, I'm happy as I can be.

Loan growth has pulled it down. I think Jennifer said we went from tangible common equity from 9.3% to 9.2%. That's just the loan growth outstripping the capital. You were running at 1.72% We may do better, though. If we can get it up to a 2% then we could run with that $380 million, $360 million worth of loans. (laughter)

So, we're just watching it. We're happy with the capital at this point in time. If we need capital at some point we'll do something to get it. But as of right now, everybody's trying to sell us a preferred or sub-debt and we don't know what we'd do with it, actually, at this point. So, probably just going to continue doing what we've been doing, Matt.

Okay. Great. Congrats again. Thank you.

Our next question comes from Brian Martin of FIG Partners. Please go ahead.

Hey, good afternoon. Just one question, maybe for Brian Davis, just talking about the importance of funding, just how you guys are thinking about the loan to deposit ratio as you go forward. Any color on that you can give?

We're at 100 now but I would be okay with going a little higher. I know Mr. CEO down there, Randy Sims, he would go super high to probably 120.

Absolutely. You got to get that engine going.

Does that answer.

Yes. And maybe I missed it, but just the loan pipeline, you talked about the New York operation. Just the legacy footprint, just where are you seeing strength there and what does that pipeline look like relative to last quarter, the last couple quarters?

It's probably more like second quarter than third. It's still strong and production is good, particularly in Florida, as you heard on the call. But I would say it's probably more like second quarter than it is third quarter.

However, third quarter started out a little slow too and it cranks up. When you look at the revenue that came in, average loans was $5.880 [million]. And I think we ended up close to $6 billion in loans at the end so we got a little kick. A lot of those closed late in the quarter.

Exactly. Okay. Just the last two things maybe for you, Johnny, about the M&A, any commentary on deal sizing. The people you guys are looking at today, are they on the larger side, on the smaller side? And then maybe just any commentary on your Home 250 target.

Okay. We're looking on the East Coast of Florida. We have David Drury who ran about $1.5 billion worth of assets for Home and actually ran the most profitable region that we had. He's moved to Fort Lauderdale.

So, we're looking for something in that area. We've got a $200 million bank but he can run $1 billion, $1.5 billion, maybe $2 billion. So we're looking in that market to see if we can find something that beats him up from a extra strategic point of view. Randy, you got any comments on that?

No, I just think that we still have some holes in Florida that need to be filled, and whether we buy it or we organically grow into it, those are our opportunities. So, we're still looking hard at Florida and Florida is the place to be for us.

Yes, we're trying to stay in our footprint as much as we can. We have talent on the ground in those markets. Jim Haynes in the Panhandle could take another $1 billion. I don't think there's any doubt about that. He could take it.

Theresa Condas that runs the Keys operations could take another $0.5 billion. David Drury could take $1 billion or so. We've got talent. Bud could take another $1 billion. So we've got talent on the ground. We're pretty comfortable with staying in that market. Tracy, you got --?

Well said by all.

We're busy, yes, that's right. What else, Brian?

That will do it. Thanks, guys.

Thank you. Brian, you still there? I wanted to vote on the horn. (inaudible) I didn't get a vote on the horn. Okay. Dan?

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

Thank you, Dan. We're not going to blow our horns here at the end. We're not going to horn up this afternoon. Anyway, I appreciate everyone's support and we'll talk to you in 90 days. Thanks.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.