Home BancShares Inc (HOMB) 2016 Q2 法說會逐字稿

Greetings ladies and gentlemen. Welcome to the Home BancShares, Incorporated second-quarter 2016 earnings call. The purpose of this call is to the discuss the information and data provided in the quarterly earnings release issued this morning. The Company presenters will begin with prepared remarks and 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 2016.

(Operator instructions)

This conference is being recorded.

(Operator Instructions)

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

Thank you, William. Welcome to the second quarter 2016 earnings release and conference call. The regular team is with me today. Randy, Tracy, Brian, Kevin, Donna and Jennifer. And you will hear from each one of those people in a few minutes.

Not to get sentimental, but it's been 10 years since we rang the bell on the NASDAQ the first time and had our first quarterly report to the public. Time has passed in a hurry, but there's been several highlights that have occurred over time. First, I would like to thank the investment community for believing in our vision. Many of you have been with us since our initial public offering. Look at our institutional ownership. They are the best bank investors in the country. And most of us have been with us since day one or a long time.

I want to thank you for your loyalty, friendship and support for our company. But most of all, I want to thank you for your trust. There is no substitute for trust. We understand how important trust is. If trust is lost, it's very tough to get it back. We have not always been perfect, but our commitment to the bank's success has always been there. Our commitment to be the best bank in the country and drive powerful returns.

I don't have to tell you this, but you've invested in a management and Board that interests are aligned with the shareholders. Because we are all in. We get it. The importance of that cannot be overstated. As a businessman, founder and largest shareholder of Home, I want to thank those of you who have helped us along the way. You've made better bankers out of all of us. We understand how important it is to prioritize. [Move what and who] is important to the top of the list and don't forget it or they will or it will forget you.

Some interesting numbers that have happened over the past 10 years that I want to share with you. Home ranked number 68 [in] return over the last 10 years of all Russell 2000 stocks. Pretty impressive for [folks] from Arkansas. Up 458%. Home is presently the highest priced bank stock in the country at 3.6 times tangible book. Home was ranked number two in the nation by S&L last year. Up from number three. Home has never done a diluted deal. Not one day. We don't do dumb deals.

Home is reporting its 21st record quarter in a row. Home was the fastest growing bank in the US since 1996. And we didn't open until 1999. We went from $25 million to $9.6 billion. Home's compound annual return, since its IPO has been north of 20%. Since the IPO, Home has grown its assets from $2 million to $9.6 billion. And Home has grown its earnings from $15.9 million to $160 million plus. If we're not in the best we're certainly in the top three in the country of all 8000 banks. And I want to thank you again for your support.

As you can see, it's not over. Another record quarter. There are several highlights from the most recent quarter let's talk about. Actually there's a bunch of great numbers in this quarter, but the one I think is most impressive in this environment is margin. We increased margin by two basis points for the quarter, not an easy task to accomplish in this environment. I thought it was coming because I had seen our team working putting such effort into this. I thought we would get it last quarter and we didn't but we got it this quarter. We went from a gross margin of [4.81 to 4.83] and net of accretion to [4.22 to 4.24]. Pretty powerful numbers.

Return on assets just keeps moving up. It just keeps getting better. 1.83% ROA, the bar continues to move in a positive direction. On efficiency side, it continues to improve. To a record core 36.84% efficiency. That's a new record for us as we strive for a new goal of a 35%. If we get 35, Brian, we're going to bring the horns back. Record earnings of $0.31 EPS or $43.5 million controlled loan growth of $175 million, continued expense control and strong asset quality.

On the M&A side, having the highest bank stock in the country is both good and bad. The good side as we can use our currency to do smart accretive deals and grow the company. The down side is that nearly all the high-performing banks but Home have lost their [premium] because they paid too much for deals and the Street has taken their pants off. I hope we can announce a deal to close in 2017. We will still stay under $10 billion this year, but if not we will just continue to improve our performance toward our new goals of a 35% efficiency and a 2% ROA.

I visited with a banker recently who wanted to visit about selling his bank; he had a nice bank. And he handed me a list of 17 banks that had traded at two times tangible book. He said that's what I needed to pay him for the bank. He said I was a good salesman and I could sell that to the Street, I said why should I do that? And he said because his baby was prettier than the last one. I told him it was far bigger than him and his baby. After analyzing the list of over payers, only two of the 17 were trading above the [deal price].

There's a lesson to learn from this for those who want to use their currency like Monopoly money. The lesson is, there is a day of reckoning. Once you lose the premium, it can take years to get it back at best. Maybe. I can assure you Home will not do that. We would like to do a deal, but at a price that works for both the buyer and seller and allow us the opportunity for an increase in stock price.

Most sellers just don't get it. To think Home would do a deal that would damage our currency is not going to happen. The lowest compound annual return on any of the 17 deals since 1998 is 18%. I don't know anybody else in the country that can keep up with that. We get it. And understand the advantage that stock gives Home in the market. We'll protect it. And it is not an accident that Home trades where it is.

Stock buybacks were zero for the quarter. Home went on sale during the month of June but we're in a self-imposed blackout period. I hate to miss this opportunity when Home was on sale to buy back Company stock. I will and have been with our attorney and to discuss it with our Board of Directors to do away with the blackout period for the Company. Not for officers and directors but only for the Company to buy back stock. The market took bank stocks down for some unknown reason. And we couldn't play. I hope to change that.

I was so frustrated that I bought another bank's stock that for no reason the market had taken down. And made a great trade. I made almost 20% in two weeks. These opportunities to get Home on sale come few and far between. And I don't like missing the sale. A loss share we have agreed in principle with the FDIC on loss share buy out probably expect if it goes to fruition, a press release in the next two or three weeks. Randy I will take it to you for a better explanation on the numbers.

Thank you, Johnny. The first quarter of 2016 produced great results, and it did not change in the second quarter. It got better. As Johnny detailed we had a very good second quarter and, combined with the first quarter, we are very proud of our numbers and position as we move into the second half of the year. We have a great team on hand today to tell you about the second quarter so let's get into the numbers.

I will start with net income. Net income for June 30, 2016 was $43.5 million compared to $33.9 million for the second quarter of 2015 for a 28.3% increase or $9.6 million. Diluted earnings per share for this quarter were $0.31 per share compared to $0.25 per share. And of course this was split adjusted for the same period 2015. Combined with the first quarter we're at $0.60 diluted earnings per share for the first half of the year.

We were very pleased with our net income for the quarter as we continued the momentum from the first quarter. Which leads me to my favorite part of the report. That is now 21 consecutive quarters of record income for Home BancShares. Our $43.5 million this quarter is a $2.1 million or 5% increase compared to our previously reported first quarter of 2016. As of June 30, the Corporation is sitting a little less than $9.6 billion in assets.

Deposits ended the quarter at $6.71 billion. Timed deposits represented 20.7% of total deposits. Our return on average assets for the second quarter was 1.83% compared to 1.72% for the second quarter of 2015. As Johnny stated earlier, we are pleased to have crossed another milestone with an ROA in excess of 1.80% and it keeps growing. In fact, our six month ending for 2016, the two quarters together, was an ROA of 1.81%. All regions continue to improve with few exceptions. Congratulations to our entire group of bankers.

Our core return on average assets that excludes intangibles, provisions, merger expenses and taxes was 3.33% for the quarter as compared to 3.2% for the same period in 2015. Our return on average TCE excluding intangible amortization for the quarter was 21.01%. These are strong numbers.

If you look at the last four or five quarters, our total revenue continues to climb upward as a result of strong organic loan growth, and a consistent and disciplined margin that Johnny highlighted excluding accretion yield on purchase loans. Then combined with control of our expense and you get an outstanding efficiency ratio with a result of record income. Our success continues to be our progress and improvement in these key components, which will now be discussed in more detail by our management team. So I would like to turn it over to Centennial CEO Tracy French to give us additional color and his comments on the performance.

Thank you, Randy, and Johnny those are pretty phenomenal numbers. It really goes back to our presidents and group of talented bankers and the ability to execute in the second quarter of 2016 has proven to be the best yet. This group is the ones that make it happen. Hats off to them. They continue to focus on growth in loans, improving asset quality, developing low cost core deposits, and with increasing revenue from additional sources like mortgage lending, just to name one. With this focus it has improved our net interest margin and made an impressive impact on net income.

A few highlights which I would like to touch on. Loan originations, and those Kevin will cover in just a moment. Increase over the second quarter, from the first quarter with our Arkansas footprint generating over half of that volume. Our deposit gathering efforts continue to pay off.

We saw an increase in our core demand accounts over the first half of the year. We would like to say congratulations to a couple regions. That's the Northeast Arkansas region, the North Florida region, and the Alabama region for leading the charge. Also like to thanks Chris and the CFG team had a solid quarter of originations. We are pleased to see their loan book mature and realize a few payoffs like we had discussed what happened last year. Our mortgage company has done a fantastic job implementing a sales plan over the past year. And those numbers are really paying off today.

I guess I get to say a little bit about the margin too as Johnny and Randy have both said that it's phenomenal when you can grow loans like we have, grow deposits like we have while remaining disciplined on our loan underwriting and deposit pricing. So hats off again to that group that I mentioned while ago. I've heard Johnny say it a couple times. It's great to see a plan along with hard work come together for shareholders of Home BancShares.

Thank you, Tracy. So the total number of active Centennial branches is 141 with 77 in Arkansas, 58 in Florida, and six along the Alabama coastline. In addition to that don't forget about our New York office. But here to tell you more about branches and of course that strong efficiency ratio which we have a new goal of 35%, is Donna Townsell.

Thank you, Randy. I am proud to report our efficiency ratio continues to remain strong. And our team continues to set records with a new low efficiency ratio of 36.84%. I know you heard that but I wanted to say it one more time. In the branch network, we recognized the sale of the Clermont branch in the second quarter. And on the other side, we took some writedowns on previously closed branches to clean that up.

In terms of openings and closings, we have one new branch slated to open in the third quarter. On the expense side of things, we continue to hold fairly level. We did see a small bump in bonus accruals for the second quarter. But that's a result of increased earnings. Which is a good situation to be in.

Efficiency is an ongoing project at Home BancShares [as you hear each] quarter. We continue to evaluate ourselves to see where we can make improvements. We're currently reviewing all expense categories through the first six months to see what we might be leaving on the table. For example, we just renegotiated our Arkansas janitorial contract and we expect a meaningful savings from that line item. We will continue to look at all categories for other improvements. We still have our eye on the prize, that 35% you've heard about, and I have a feeling that this team will get there. Randy?

Thanks, Donna. Net interest income, revenue, margins, non interest expense and anything else you want to talk about will now be covered by our CFO, Brian Davis. After that Brian will pass it to Jennifer Floyd, our Chief Accounting Officer to give us information on our capital numbers. Brian?

Thanks to Randy. The second quarter was another impressive quarter for Home BancShares. Once again, we were able to report significant earnings improvements. During the second quarter of 2016 we increased net income $2.1 million, from $41.4 million in Q1 to $43.5 million in Q2 for an annualized increase of 20%.

Net interest income increased $3 million to $101 million in Q2 versus $98 million in Q1. Yield on loans increased slightly from 5.80 to 5.81 on a linked quarter basis, while cost of funds experienced a slight increase from 44 basis points in Q1 to 45 basis points for Q2. As a result, net interest margin on a fully taxable equivalent basis increased to 4.83% for Q2 compared to 4.81 % for Q1.

Because of the Company's significant number of historical acquisitions our net interest margin was impacted by $11.0 million of accretion income for the fair value adjustments recorded in purchase accounting during Q2 compared to $10.7 million during Q1. Excluding the accretion income and the associated loan discounts, the Company's net interest margin for Q2 2016 was 4.24% on a non-GAAP basis compared to 4.22% in Q1 2016, while the Company's yield on loans for Q2, 2016 improved by two basis points to 5.09% on a non-GAAP basis, compared to 5.07% in Q1 2016.

Non-interest income was up $2.3 million in Q2 2016, compared to Q1 2016. In the second quarter of 2016 there was a gain of $738,000 on the sale of our Clermont, Florida branch location. And $102,000 gain on the sale of a piece of software acquired during our most recent acquisition. It was also another record quarter for our mortgage lending income with a $618,000 increase from Q1 to Q2. Additionally, the second quarter included a $925,000 recovery on other historic losses.

Non-interest expense was up $1.9 million in Q2 of 2016 compared to Q1 of 2016. The second quarter of 2016 does include $1.2 million of reevaluation expense from our closed branches as we update the appraisals on a few of these facilities. Currently, we have 14 vacant properties we are marketing with a book value $7.7 million. Also, as we approach the $10 billion asset mark, we're now incurring cost in preparation for DFAST, which were about $231,000 in Q1 and Q2 this year. With that said I'll turn the call over to Jennifer.

Thanks, Brian. Now let's take a look at our second quarter capital results. As of June 30, 2016, we ended the quarter with $1.3 billion of capital and $57 million of cash at the parent company. During the second quarter of 2016, we paid out shareholder dividends of $12.3 million and completed a two-for-one stock split while growing retained earnings by $31.2 million.

For the second quarter 2016, our common equity tier 1 capital was $864.7 million. Total tier 1 capital was $923.7 million. Total risk-based capital was $998.1 million. And risk-weighted assets were approximately $8.2 billion. As a result, our common equity tier 1 capital was 10.6% compared to 10.4% at March 31. Our leverage ratio was 10.1% compared to 10.0% at March 31. Tier 1 capital was 11.3% compared to 11.1% at March 31. And total risk-based capital was 12.2% compared to 12.1% at March 31.

Some additional second quarter capital ratios include, book value per common share which was $9.01 compared to $8.75 at March 31. Tangible book value per common share was $6.18 compared to $5.91 at March 31 and $5.71 at December 31. This represents an annualized increase of 16.55% after paying dividends. And finally, our tangible common equity ratio was 9.4% compared to 9.2% at March 31. Randy?

Thank you, Jennifer. I know everyone wants to hear about loans, and I think we've got some pretty good results for the quarter. So let's turn it over to our chief lender Kevin Hester.

Thanks, Randy. Our results in the second quarter included organic loan growth of $173 million which represents an annualized growth rate of 10.2%. The Community Bank Group in Florida, Arkansas and Alabama contributed 77% of this total, with positive numbers being contributed by each geography. The two biggest contributors to this growth were CRE and C&I at roughly $90 million and $60 million, respectively. Indications for third quarter growth are good and should be in the general area of the quarter just ended.

We believe that high asset quality is the key to long-term financial success. To that and we have sought to maintain a high level of asset quality. And moderate credit risk by applying underwriting standards which we believe are conservative. We are seeing the fruits of this approach in the measurement we use surrounding asset quality. Both the non-covered, non-performing loan and asset ratios decreased by 2 and 3 basis points respectively this quarter. As a result of the slight percentage improvement, the ALLL coverage of nonperforming non-covered loans increased slightly to 128%. Our non-performing balances are still a bit elevated due to the level of problem loans acquired in the most recent acquisition. But all are being worked aggressively. Past dues improved 11 basis points to 1.03%. And net charge offs of 21 basis points were very close to the recent historical average.

Allowance for loan losses as a percentage of non-covered loans remained at 1.03%. However if you added all the acquisition discounts to the allowance for loan losses, the combined figure would be 2.56%, which continues to drop as we amortize the acquisition discounts. Congratulations to [Michael Pyle] and his mortgage group as they continue to produce improvements in both yield and volume, with three consecutive months of record closing volume and our first-ever $70 million [lock] month. Year to date closing volume was up 29% over last year. Randy, with that I will turn it back over to you.

Thank you, Kevin. Well that wraps up another good quarter and a very good first half of the year. To recap really quick, record earnings for the 21st consecutive quarter ending, a strong core efficiency ratio of 36.8%, a powerful margin, very good non-interest income, strong loan growth of $172 million and great asset quality metrics.

Consistent improvement in our major components in metrics. That's what we are all about. And we look forward to continued improvements for the second half of the year. That is what we will be working on. And with that I will now turn it back over to our Chairman, Mr. Allison.

Thank you, guys. Thank everybody for the report. It was actually again a record quarter for us. Kind of a bucket quarter too because we cleaned up some OREO stuff we had and some fixed assets at the holding company. We had some branches in that were a little high and we cleaned that up so that was really pretty positive. We could have blown the horns this quarter for a 1.83% return on asset, a margin increase, a great performance of our mortgage department and our record efficiency ratio.

Efficiency is going a little bit too far around here though. I broke my phone and went down to AT&T to get me a new phone, and they brought me one out and then they told me that I was not an authorized signer for Centennial or Home BancShares. (Laughter) so I told Donna this thing gone a little bit over the top when I can't buy myself a -- I've got a new phone, by the way. I blew everybody up until I got one.

William, I think we're ready for questions and if you are ready we are ready.

(Operator instructions)

Brady Gailey, KBW

Hey, good afternoon.

You all mentioned the termination of the loss share agreement. I think we've chatted about this before. That doesn't move the -- I know it makes it a lot more simple for you to work out those assets. But that doesn't really move the earnings needle very much, right? It's less than a handful of pennies?

What will happen is we will no longer have to amortize the indemnification assets. And we should pick up about $1.5 million of pretax income on an annualized basis between now and 2020. The bigger income impact might be, when we have a loan recovery we no longer will have to share that with the FDIC. They've been getting 80% of those recoveries. If we have a large loan recovery out there we will have a much larger one-time income pickup.

The flip side of that is it's a one-time payment. If we close in the third quarter, which we anticipate at this point, we will have a one-time payment.

It is projected to be about $3.7 million at this point in time.

Okay. I think in your all's K you mentioned 7.5% to 12% so that's decently below the level, which is good. And then CFG, I noticed that didn't grow at the level it's been growing in the last year or so. I hear you all talking about pay downs, but can we get a little bit more color on the slower growth within CFG?

Yes, this is Kevin. We did have a couple pay downs in the second quarter that were expected. We anticipate them 90 days ago. Production was still good, maybe a little bit less than you probably saw third or fourth quarter of last year, but certainly still good production. Just a couple payoffs that we were anticipating happening.

They had stiff-armed some of the really good customers because they were concerned about [Noral's] balance sheet. So those customers came back in a hurry, so that's what ramped it up quite a bit but they're still doing fine. Things are good there.

Okay. And lastly I know you talked about core margin being stable from here on out. Is that still the right way to look at that?

Brian will tell you, it's going down because Randy Mayor told everybody it was going down and then it goes up. Actually, I think our management team has really worked very diligently on this margin from renewables to originations. And [I thought] we would see it last quarter. As I said, we didn't get it last quarter, but we got it this quarter. We're doing an excellent job and I think we will maintain that margin.

Okay. Thanks for the color and congratulations on the 1.8% ROI. Very impressive.

1.83 now. Don't miss those three basis points.

Michael Rose, Raymond James

Hey, good afternoon. How are you?

Great, Mike. How are you doing?

Good. Hey, just wanted to discuss more generally the CRE. The construction guidelines and just maybe where you stood at the end of the quarter? And how you feel about maybe increasing those numbers if you're hearing any regulatory pressure, things like that? Thanks.

This is Kevin again. Yes. They actually went down a few basis points. Or a few percent in each of those categories this quarter. I think 116 and 359 were the actual numbers. We fully intend to keep doing what we're doing. We are doing everything that we can to continue to show the examiners that we understand our risks and our exposures. I'm not anticipating any difficulty there.

Okay.

We're going to keep on keeping on.

Got it. Okay.

And then maybe just switching to expenses for Donna. Outside of janitorial contracts in Arkansas, which I can't imagine costs that much, what other areas might you be targeting for potential experts reductions? Thanks.

You'd be surprised how much it costs to pay people to clean. It's very hot here.

It's hard to pay people not to clean. (laughter)

That's just to give you an example that every line item is something we take a look at. We've been able to see some savings this year so far from continued telecom cleanups. Just with so many acquisitions we've had. You can have things dangling out there and we continue to clean things up like that. Closing off phone lines no longer -- all the branches we've closed. A lot of things that you don't need there.

Also looking at other contracts. We have a lot of different things through FIS and our electronic banking world. So, there's just always room for improvement each time these contracts come up for renewal.

Actually expenses were pretty good if you really break them down. Because another expense we had a charge on vacant properties. We've had higher accruals, salary accruals, because mortgage is up. Mortgage is making a lot more money so they had to accrue that. And the Company is making more money and that was bonus accruals. So really if expenses were flat or down for the quarter, you just have those different one timers in there.

So nothing major structural changes? Just a lot of little things you continue to look at as you always do on an ongoing basis, correct?

Correct. And as you heard we limited Johnny's cell phone plan, so that ought to help too.

Did you get that? Were you there? I couldn't even buy my own cell phone, because I'm not an authorized signer. (laughter) I told Donna that's going a little bit too far.

And maybe just one more for Johnny. What was that bank stock about a couple weeks ago? Just curious? Just curious.

It was seven.

There we go.

They took it down for no reason.

(laughter) I couldn't by ours.

They would send me to jail.

All right guys, thanks for taking my questions.

Our next question today comes from Jon Arfstrom from RBC Capital Markets. Please go ahead.

Thanks. Good afternoon.

I have some cell phone questions for you, Johnny but I will take them off-line later. (laughter) Do you have another new number or were you able to keep the same number? Because I can't keep track.

It's the same number, Jon.

Okay, good. (laughter) can you give us the status of the New York deposit taking office? Where you are at on that?

We think we will be open in the third quarter. Our deposit lady so to speak has been at corporate and at some of our branches and we're getting ready for that. I think we are about ready. I'm not sure Chris is all excited about it in New York. But we anticipate $200 million to $300 million from our customers that will come in just from our customers now so we don't know where we are going. We'll just have to wait and see. That'll help us a little bit. That will help us a little bit; loan deposits increased about $104 million. Randy Simms is not happy with it. He wants $115 million. But anyway that will help a little bit with the loan to deposit ratio.

So it should be coming on. Anybody else got anything else? But we are all approved and ready to go there, so our making it happen is going to make it happen. Third quarter probably is the estimated date, but not anything we are rushing on.

Okay, good. Maybe Brian Davis. Remind us of your latest thinking on the revenue loss of going over $10 billion. I hear you will hold off through the end of the year. But maybe update us on that?

Yes. We are planning to go over $10 billion most likely in the first-quarter. So we will not have the Durbin loss until July 2018, which means that we will have about 17 months to ramp up the balance sheet to offset the Durbin money. We are anticipating that being about $6.5 million. We can grow the balance sheet easily enough to more than offset that. We are already incurring about $1 million of expense for DFAST. Under those dates we wouldn't have to do the DFAST report really until 2019. But when we get down to the latter years of 2019 we will probably have to double the amount of money we're spending on DFAST.

Okay.

That is, Jon, if we don't buy a deal. If we buy a deal and get a $150 million ROA $400 million to $500 million deal at a $150 ROA, that will lower our ROA a little bit Companywide.

But when you run a 1.83% ROA it doesn't take a lot of assets to cover the numbers I just went over. And just about $500 million in loan growth would cover all the expense that we are going over for DFAST and for Durbin and other items associated with that.

Yes okay. Seems like you need to get Donna something to work on.

(laughter) Get me on the list to buy a phone.

Are you optimistic on it, Johnny? You have vented various quarters about pricing and competition, but it does seem like some of the higher multiple stocks have come down and you've held yours. Are you more optimistic you can get something done?

We've had [11 -- 10 out of a] deal for some time and they've had situations on their side of the ball that created us not to be able to go forward. That has been resolved. So maybe that deal -- we're going down this month. We're going down on that one and two or three others. You saw one today get done at over two times tangible book. And they took the buyer down 10% or 12%, so it's just a typical story kind of set out there that the price is two times tangible book and it doesn't work. I mean the numbers are not working and everybody is getting killed. And the street's taking their pants off because get any -- it's not accretive accretive accretive.

It's maybe accretive in four years or four and a half years. Maybe based on some assumptions. So, we are going to remain extremely disciplined, and we know the power of our stock and what we can do with it. And we aren't going to do anything stupid with it. If it doesn't work, it doesn't work. We just move on. There are a lot of opportunities.

My hardest job, Jon, when I said in my earlier remarks that the lowest compound annual return in Home BancShares stock of any deal we've done has been 18% compound annual return. The sellers, if they don't want just cash, if they want to be part of something, and they want to joins with us, then that's how we run this Company. So that is difficult for me to sell. However, I think we're making some progress in selling.

Okay. All right. Thanks for the help.

Stephen Scouten, Sandler O'Neill

Good afternoon gentlemen and lady. I think you'd get that efficiency ratio lower, Johnny, if you just paid for the phone yourself. I think you can afford it. (laughter)

Let me tell you, it goes a little further than that. I gave him my corporate credit card after that, and they swiped it and said sorry sir, this card is no good. (laughter) and I said yes I can tell you that card is good. They swiped it again and it still didn't work. So I've not only got on the [Parkson] people, I'm finishing with the credit card people. (laughter) because I had to put it on my personal credit card.

There you go. I did want to follow-up on John's question on M&A. You mentioned the deal that was done today and you put that threshold out there maybe two times, above two times. You don't seem to have much interest. But would there ever be a deal you think, whether it's the footprint that it's in or just how profitable it is on a standalone basis, maybe with still elevated expenses were you can come in and layer your expense discipline on it and make some of that math work? Or is that just a hard and fast threshold you just don't want to cross?

It's really not a hard threshold. You look at everybody who has done a deal over two times tangible book and look what's happened to them. I am just not ready to take that risk. We will just continue to peck around.

Now, the real bribery is [EPS]. The rest of it is window dressing. I know it makes good sense to say we're in a new market and the trees are beautiful here and the water's gorgeous. But the real driver is return on Assets, efficiency, which rose to EPS.

I know tangible book is a multiple that people look at. But we just happen to get more out of our assets than anybody else gets out of them. So, we will continue to be cautious. Would we do a deal over that? If I thought it would damage the currency, we won't do a deal.

We take it deal by deal by deal. And we are going down to look at two deals, maybe three deals in a couple weeks. And if they damage the currency and they don't want to play, then we just move on. When you are running a 1.83%. And got a goal of a 2%, and we could continue to do the loan growth we are doing presently, I think we get to a 35% efficiency and 2% ROA and blow the horns again.

Unless we find a nice trade. If we find a nice trade, we will do it. Any other comment? Anybody else you all agree with that?

You said it all.

Very good. Do you think the mix of the loan growth you saw this quarter, that 75% 25%, and Kevin obviously can comment as well is something that will repeat, is the strength you are seeing in the legacy markets? Is that something you think will continue? And also what's the pricing looking like there that allowed you to maintain those average loan yields?

This is Kevin.

I think third quarter looks a lot like second quarter. New York probably moves closer to half of the increase from a pricing perspective. When things seem to have gotten flat again on the rate side we were seeing people doing some crazy stuff. Some [threes] for a long period of time. And we just still fight deal to deal and build relationships and we're still winning deals. We are not the lowest price in the deal but it takes the right people to want to work through that. So we work it deal by deal and officer to officer -- they are fighting hard every day to get those extra basis points.

Okay. And just as that translates into the NIM it sounds like you feel like you can keep the core NIM relatively stable for an extended period of time. But Brian, the trajectory of the accretion, if I am not mistaken should still be down noticeably the next 18 to 24 months. Is that correct? And so your gap NIM will still trend down, would that be a reasonable expectation?

That is a reasonable expectation.

We had $10.78 million in accretion income last quarter. And we wound up with $11 million, and I projected that it would go down and believed it would go down. But as we did some of our accredit impairment tests on our purchase credit impaired loans, we realized that some of that had improved. And we released about $2.5 million worth of what was non-accretible discounts over to the accretable bucket. And we had $505,000 of additional accretion income that came in. And it will hang around for about four or five more quarters for the $11 million that we had would've been $10.5 million. If everything had held status quo.

So there is about $77 million right now of accretable income that's on our books that we recognize over the remaining life of the loan. It can't stay at $11 million per quarter forever, so it should start trending down just because of the natural curve of it.

Back to the [May company, I just want to -- ] some of these deals you see the earn back, tangible book at 4 plus years based on a bunch of assumptions. That has to scare the street. That really has to scare the street. Thus far we haven't ever done a diluted deal, not one day and don't intend to. So you start looking at those deals that are way out -- we don't know what's going to happen to pricing or market in the next 4, 4.5 years. That's pretty hard to forecast. I don't want to be in that game.

I think a lot of the numbers get lost by the time that four or five year time period comes around. You never really know, to be honest with you.

That's right. It would be good to go back and evaluate those deals at one year, two years, three years, four years and see where they are.

The secret to our success historically has been that we go in and we do a deal and it's a good deal. And maybe our ROA drops down four or five basis points. Six whatever. But then it pops up, so if you go out there and you pay way too much, you're not going to have that pop back up with your ROA. It will take a lot longer to get you back up to where you were and that is the secret. If you go back and look at every one of ours, that has come true. And that's why we are at a 1.83% today, and that's where we want to stay.

That is not where we want to stay. (laughter) I meant we want to stay (multiple speakers) I understand the new goal. It's 2%. (laughter) There's always a new goal.

I know it's hot in Conway but if you need a new CFO now, you just let me know. (laughter) just kidding, Brian. Thank you. I appreciate it.

Peyton Green, Piper Jaffray.

Hi, good afternoon. Couple questions.

This is probably for Tracy and Kevin. In thinking about the overall growth of we will call it the footprint versus CFG, the loan growth rate improved to 9% in the second quarter versus 5% in the first and 3% in the fourth. What's the true capacity of the footprint going forward? I know you got it toward similar looking growth, but as that number keeps moving up it would seem to be a pretty powerful driver of volume.

I think that what you saw in second quarter is, it's reasonable to think that could occur from the footprint. Florida has really picked up in all of the markets. Arkansas still contributes, Alabama's contributing. It's coming out of all of the geographies. So I think we are beginning to see a lot of synergies with the group.

Central Florida has had a lot of movement within its people over the last year. But other than that we haven't had an acquisition in 12 months. And before that we really got a lot of people who have been with us a while. So we are beginning to build the cultures here. And I think you can really see what happened in the second quarter with the legacy footprint continuing.

Just to add to that. If you go back, we haven't done an acquisition over the past year or so. So our team members and our leaders have been out in the field asking for the business relationship. [David Curry's] been down in Southeast Florida now. And Bruce and his numbers as he continues to improve. Bud in central Florida has switched around some of the staff and (inaudible). Scott in Tampa is doing a really good job in the leadership that he's bringing. So the loans are beginning to show up there.

We are also getting some payoffs from some of the problem loans that were on there. And Jim has been in -- he's from Arkansas but is really from the Panhandle now so the teams have just been there established. We've asked for the business. I use the word hustle a couple years ago and we truly believe that's the difference in Centennial Bank today and the markets that are out there in what was there two years ago. The same with Alabama.

They are doing a good job of working the customer relationships there and with the support of Greg Santon, and that's really it. Just good old-fashioned hard work. As I've heard John say a bunch of times (inaudible) and our team is out working people today.

We have great potential in the market in our footprint, so I think we're extremely conservative. We could have written -- we've turned down lots and lots of loans. We see lots and lots of stuff. Turned down lots of stuff. Just the conservative nature of how we operate.

But Johnny, you don't see anything that suggests that is going to slowdown?

No, I don't see anything suggesting it's going to slowdown.

Johnny used the word the other day, we talked about loan growth. He talked about controlled growth. And what we're doing. There's no doubt our credit and underwriting that we are doing today is no different than we've always underwritten. Except requiring a little more money on the project and so forth. So there is a little bit of that controlled growth. I heard Johnny say that word the other day and I thought that was perfect. As far as the word. Because of the growth opportunities are there because of our lenders and the leaders we've got out there serving, hustling and bringing in opportunities.

We are missing deals, so we want more money in the deal. We've missed some deals because we're conservative, we're asking for more and more money in the deals and we will miss some deals as a result of that. (Inaudible). We don't write a 3%. We don't do 3%s.

If he thought about the loan yield in the Community Bank versus the CFG side -- I know the overall ex-accretion loan yield was basically flat, but what kind of loan yields are you seeing in the Community Bank?

We're writing in the 4% and 5% is where we're writing. There have been a handful of exceptions in the 3%s, but I don't know if we've done a 3% in six or seven months. They are in the 4% and 5%. That's lazy footprints in the 4% and the 5% and New York is in the 6%s. That's kind of how it shakes out.

So you can see where we are getting the margins. Stephen Tipton is pushing hard on renewals. Our team in the field is pushing hard on renewals to keep that up. We know the number is 4.25% or better. They're pushing hard on that side. And the origination is the same thought process. To go back and we still touch every loan one at a time.

Some of these meetings are long. Some of them start and last you'd think all day long but they're long. But we go back, we get an extra quarter of a point we push to get just a little bit more of each deal.

Great. And Brian, what was the accretion number in 2Q of 2015?

The accretion number in Q2.

15%. They are going to be looking for it. If that's your last question, they are looking. They will find it for you.

That's it. Take me out. (laughter)

We will give that number in a minute as soon as we get it. We'll just announce it over the next.

It was $11 million.

$11 million. Same as this quarter.

It was down about $40,000.

Joe Fenech, Hovde Group.

Good afternoon. Most of my questions were answered, but just one more on the ROA target, Johnny. If there aren't any more deals ever. Obviously, not likely. But just assuming for a second there aren't, if the reported margin eventually migrates down towards that core, is there another level of things you see that you can do within the company organically? Other levels you can pull? Either revenue or expense that would still enable you to keep that 2% ROA target over time? And if not, where do you think ROA settles in at over time without deals?

But I don't ever look for it going backwards. I think there's enough levers there. I don't see it going backwards. I wouldn't be a happy camper if it went backwards. If we continue to strive to improve here and there's --. I think 2% is a pretty powerful ROA. You can look back over several quarters and we were at 1.60%, 1.65%, 1.70%, 1.71%, 1.75% 1.81%, 1.83%. The Company just continues to leverage out. And, from the loan side, we continue to write loans the way we write them and do we are doing. I don't see the reason why we can't get there and can't stay there.

So the continuous improvement that you have been showing over the past several years keeps going, and you get to that target, you think you can get to that target regardless?

I do. And this bunch never quits. They never quit working on the revenue side or the efficiency side. Just never quits. It's become the culture, as you know. This Company it just never stops. Everybody's looking all the time for opportunities and options.

I think Tracy had pulled down the top 40 expenditures this month. To review all top 40 expenditures.

I was checking that phone bill out, and I made sure we went ahead and checked in everything else out. (Inaudible)

Cut my phone bill too.

The things that I feel comfortable about is when Johnny was preparing for the call yesterday when he made some 2% efficiencies, so I didn't sleep at all last night, but it wasn't because I was worrying. I was just thinking of opportunities we could do.

We've got bankers in our markets today that are in Arkansas, Alabama, Florida, not counting New York. [When it's Chris,] the opportunities are there to do several things if our Company is ready to do those. We've got bankers now reaching out to our leaders in those markets today that would bring in another network of customers potentially. If we can make them come into our credit quality culture and I think that's definitely there.

There are a few other line item type business managers. Another option that we've done really well with in the past on a small scale that Kevin is working with Matt [Neely] the to bring that to the surface. That can be a real line item just like mortgage has done for us this past year. So we certainly are checking the boxes of things that we know we can be good at that can make a line item to the Company. Same thing on the deposit side.

We've been asking for the business and I'd be durned, it has happened. It is coming in and now we've created some associated banking products that was working with today. So that will allow the deposit base to come out.

So good old-fashioned blocking and tackling banking. But with the right people in the right place and we are able expand to produce a different types of services. In case there's something a little different. (Inaudible).

I asked Trace, the deposits are growing pretty good. What are you doing? (laughter) He said, we ask for deposits.

Good stuff. Thanks.

Brian Martin, FIG Partners.

Most of my stuff has been answered. Just two things. Johnny, the deals you've seen recently -- I guess you sound a little bit more optimistic on them. Just any color on the sizing, they more the smaller variety, or are they more the larger variety? And then just a second question was just for Brian.

I think I missed the comment about the FDSC loss here, and the mechanics of how that impacts EPS and earnings going forward. If you could just run through that, that would be helpful. Thanks.

The deals we are looking at are small. I say small. I mean they're $400 million $500 million $600 million deals. One is about a $300 million deal. And then we are looking at one looking at one that's a larger transaction. So it's just a mixed bag. We need to fill out some areas and we are looking in those areas.

If it's a $200 million bank that's really -- Brian Davis doesn't want to do that and I can understand that. If it's $1 billion he'd look at it, but we will do a $300 million $400 million $500 million bank to get a foothold in the marketplace that we think is a good market and go from there. If you could see the P&A on that David Drury turned in for last month in a $200 million bank in Fort Lauderdale. I mean he's running 2% ROA -- we need to get him some more assets. If we give him some more assets, he is going to make money with those assets. That little bank is $200 million doing 2% ROA. You remember David ran a $1.5 million in Arkansas and was our highest return on assets. And the highest most profitable region that we had. So we need to get him more assets in that market and let him grow that. So whatever we've got to do to get him something to do.

You're asking about more color on the FDIC loss share early termination buyout. The mechanics of it is, that we will write the FDIC a check. And then we write off a $8.1 million of our indemnification assets along with a few other receivables that are buried in other assets. We've been accruing for the true up all along and we have $11.4 million of true up on our books. So when we net all that out we think that the answer on a pretax basis will be about a one-time loss of about $3.7 million.

That will be in Q3 as a one-time charge. But what will happen is over in the income statement in non-interest income we no longer have the FDIC amortization. And it was $410,000 this quarter. But it should be about $1.5 million. Because it ratchets down a little bit as you go along. It should about $1.5 million improvement on an annualized basis by not having that expense.

We could pick up even more income because we've been sharing all of the recoveries with the FDIC for the most part, 80/20, so if we were to have $1 million recovery, this wouldn't be something that we would be putting back into the ALLL. It would go into other income. Because it was a charge off prior to our acquisition. And so in that scenario instead of having a $200,000 other income line item it would have $1 million. But those would become on a one off basis. There's no guarantees we would get them but we believe there could be some out there. (Inaudible). But the run rate should improve $1.5 million on an annualized basis because of the amortization of the IEA.

I got you. Thanks and nice quarter.

Thank you.

Ladies and gentlemen this concludes the question-and-answer session. I would like to turn it back over to Mr. Allison for any closing remarks.

Thank you for your attendance today. Hopefully we will be blowing the horn next quarter.

I don't think we're quite ready for that so. We will visit with you in 90 days. Thank you.

Thank you sir and thank you for your time. Today's conference has now concluded. We thank you all for attending today's presentation. You may disconnect your lines.