Home BancShares Inc (HOMB) 2016 Q3 法說會逐字稿

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

(Operator Instructions)

The Company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page 3 of their Form 10-K filed with the SEC in February 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, Rocco. Welcome, everyone. Welcome to Home BancShares third-quarter conference call and earnings release.

In attendance today is Randy Sims, Tracy French, Kevin Hester, Brian Davis, Jennifer Floyd, and we have a new member of our group, Stephen Tipton. So he's kind of a newbie. He's the Chief Operating Officer, and I want you all to ask him lots of questions. And we'll see how he handles the pressure.

You need to go back to the first quarter of 2011 to see where this run started. 22 record quarters in a row. Nice run for our Company and a powerful return for our shareholders.

Home BancShares compound annual return is about 20% since the Company plunged in to the public arena in June of 2006. And I looked a while ago, and that's while earning $14 million a year. I think we were proud of it then. We are proud of what we are earning today. Many of you have been with us since 2006, and I want to thank you for your loyal support.

Let me take this opportunity to clear the air of my recent stock sale. My wife, children and I own about 11 million shares of Home BancShares, and after the sale we still owned over 8 million shares and it's still my largest asset. This sale was a one and done with the sole purpose of estate planning and liquidity for my family.

You know I tell it like it is. When I stepped down as CEO and Randy Sims took over back many years ago, I said I would not become a spectator and I have not done that. And I don't intend to become one now. I am not sick, I am not tired, I am not leaving. And my enthusiasm for this Company has never been stronger, as well as the performance of this Company has never been better.

As a businessman looking at it, if something happened to me, there would be a cloud of 11 million shares hanging over the market and for certain my family would be forced to sell the stock. That is off the table now. I did it, a fully transparent public offering with full disclosure and incurred all expenses of the offering myself. Enough is said about this and hopefully this is put to bed.

The real numbers that are important are 22, 43.6, 33, 36.51, 1.90 and 4.25. Those are really the numbers that make sense: 22% increase in earnings; $43.6 million in quarterly earnings; $0.33 per share, [ex allowed] share; efficiency ratio of 36.51%; a 1.9% ROA versus a 1.83% that we were bragging on last quarter, with a goal of 2%. Sustained organic growth, good asset quality. I think our non-performers, Kevin, did they tick up a little bit? Just a tick?

Just a little.

Just a little, but we added the loss share, the ones on the loss share to it, so it's just a tick on that side. I think Kevin will cover more about that today. Strong margin of 4.25%. I probably should've started with that. We were 4.24% at the last quarter, and 4.25% this quarter.

On the M&A side, we have not been aggressive. We've not had our foot on the accelerator in 2016 because of the $10 billion mark.

We are continuing to proceed in a positive direction on a Florida transaction that we've mentioned in earlier conference calls. We will be more active in 2017 and 2018 after crossing the $10 billion mark.

I have watched some of our friends leap over the mark, and recently I thought that was what would be in the best interest of Home BancShares, to leap over the $10 billion. We were in total agreement with that strategy. However, we have changed our mind, and decided to crawl over, because the DFAST is already pretty much cooked into our run rate and all we lack is the cost of the Durbin, which is $6.6 million to $9 million depending on which month you annualize.

There are plenty of opportunities in the marketplace. There are $2 billion, $5 billion and $8 billion banks, and lots of $300 millions, $400 millions, and $500 millions banks. We're just looking for the one that moves the needle.

I can assure you we will remain extremely disciplined on M&A, as we are on all aspects of this Company including loan and loan pricing. I am pleased with the quarter and I hope you all are as well.

I would be remiss if I did not thank Donna Townsell for her years of committed and tireless efforts to the efficiency ratio of this Company. She noted to me that working on the efficiency ratio of this Company and working with the investment community has by far been the highlight of her career so far. All of us will miss her; however, taking with her the knowledge of the executive branch of this Company, merger and acquisitions, operations, efficiency, technology, and DFAST, coupled with a marketing major, I am confident she will continue to excel in her new responsibility as Head of Marketing for the Corporation, as she has met her challenges of the past.

Operating inside this executive bubble of this Company is really like getting a PhD in business anyway. Good luck to you, Donna. And Mr. Sims?

Thank you, Johnny. As Johnny detailed, we had a very good third quarter, and on a year-to-date basis it looks like we are in a very good position entering the fourth quarter to achieve our goals for 2016.

I know Johnny discussed many of the numbers today. But we have a great team on hand to tell you about the third quarter and give you a little more color. Let's get into the numbers.

I will start with net income. But I'd like to remind everyone that we did have a $3.8 million FDIC loss share buy-out expense. We are very pleased to get this completed with the FDIC.

With that said, net income for September 30 was $43.6 million compared to $35.7 million for the third quarter of 2015, for a 22% increase or $7.9 million. Diluted earnings per share for this quarter were $0.31 per share compared to $0.26 per share split adjusted for the same period in 2015.

Those are great numbers. But if you exclude the FDIC loss share buyout, diluted earnings per share for the third quarter of 2016 were $0.33, as Johnny detailed. We are very pleased with our net income for this quarter as we continue the momentum of growth in EPS.

If you look back over the year, our Company continues to search for opportunities to maximize those metrics that increase earnings for the benefit of the shareholder, which leads me to my favorite part of the report. Even though Johnny said it, I want to say it again; that is now 22 consecutive quarters of record income for Home BancShares.

Now, let's just savor that a little bit. Pause, and I'll say it one more time. That is now 22 consecutive quarters of record income for Home BancShares, enough said.

So as of September 30, the Corporation is sitting a little less than $9.8 billion. Deposits ended the quarter at $6.8 billion with growth of over $127 million for the quarter. Time deposits represent 19.4% of total deposits.

Our return on the average assets for the third quarter was 1.9% excluding the FDIC loss share buyout. That is another milestone for our Company. And again, it's evidence of the overall improvement each and every quarter. We are getting closer to that 2% that our Chairman would love to see.

All regions continued to improve, with few exceptions. Congratulations to our entire group of bankers.

Our core return on average assets, excluding intangible amortization, provision for loan losses, merger expenses, gains on acquisitions, the loss on the FDIC loss share buyout, and income taxes, and that's a mouthful, was 3.43% for the quarter as compared to 3.24% for the same period in 2015, and as compared to last quarter of 3.33%. Our return on average TCE, excluding intangible amortization, for the quarter was 20.01%.

These are all strong numbers. In fact, if you look at the last four or five quarters, our total revenue continues to climb upward as the result of strong organic loan growth, and a consistent and disciplined margin, excluding accretion yield on purchased loans. Then combine the control of expense and you get an outstanding efficiency ratio with the 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's CEO, Tracy French, to give additional color and his comments on our performance.

Thank you, Randy. Another solid quarter for our Company -- I could not be more proud of our talented and hard-working bankers for making our 2016 third quarter the best one yet.

As the numbers show, the efforts of all of our groups are rewarding. The regional networks along with other profit centers just simply get better and better. And with those results, it's good for our shareholders.

Our lending groups remain focused on underwriting for strong credits and have been booking volume across all regions. While we see payoffs through normal commerce and completed projects, Kevin Hester and all of our regional Chief Lending Officers' pipeline looks to keep them very busy.

When looking at the performance numbers, Johnny, I did see two important ones that have decreased: over-efficiency and past-due loans. My guess is you're probably okay with that.

While we have been a little quiet on M&A activity this year, our due diligence teams are busy working with some nice banks, but more importantly, good bankers. We have stayed the course from growing and maintaining our capital, growing our revenue, holding our net interest margin strong, managing our risk while implementing services and technology to enhance our customer relationships that will deliver short- and long-term shareholder value. We look forward to a solid finish in 2016, and look forward to the opportunities that 2017 will create. Randy?

Well said, Tracy. Thank you. The total number of active Centennial branches is 143, with 77 in Arkansas, 59 in Florida, and 6 along the beautiful Alabama coastline. In addition to that is our New York office.

I would now like to turn it over to Stephen Tipton, our Chief Operating Officer, and new to the group, who will fill you in on some of our income efforts, efficiency, and key operational matters. Stephen, welcome.

Thank you, Randy. Thank you, Mr. Allison. It's an honor to be part of this group.

As has been said, congratulations to our team of bankers and department managers on the continued improvement in all of the operating metrics of this Company. I am pleased to report a core efficiency ratio for the third quarter of 36.51%. On a link-quarter basis, all components of the ratio improved. Most impressively we saw a total non-interest expense, excluding the loss share buyout, improve by $410,000, an impressive number seeing the growth that we've seen this quarter.

We continue to focus on opportunities for additional revenue that will further improve our efficiency ratio. This quarter we were pleased to see the SBA department contribute, along with Michael [Powell] and his mortgage team, who had another strong quarter.

On the expense side, our teams continue to leverage their existing infrastructure and spend money wisely to support their communities and generate revenue. The branch activity continues as we evaluate our existing footprint and opportunities in other markets, we are excited about the new Davie location in Southeast Florida and the addition of deposit operations in our New York office.

On the deposit side, we continue to work at our mix and pleased to say we are now below 20% as a percentage of CDs to total deposits. And in addition, we continue to see very solid increases in non-interest-bearing and low-cost checking accounts.

We are very proud to see both sides of the balance sheet grow -- loans and deposits -- while continuing our discipline on pricing, focusing on cultivating relationships rather than buying the business. An improved core net interest margin is a direct result of the hard work of all of our talented bankers in our footprint. Thank you, Randy.

Net interest income, margin, and non-interest expense all 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 more information on our capital numbers. Brian?

Thanks, Randy. It's exciting when our Company is able to report the strong numbers, as we did in the third quarter of 2016. Excluding the FDIC loss share buy-out expense, we were able to report an impressive quarterly ROA of 1.9%. That is impressive.

During the third quarter of 2016, we increased net income, excluding loss share buy-out expense, by $2.5 million from $43.5 million in Q2 to $46 million in Q3 for an annualized increase of 22%. Net interest income increased $2.6 million to $103.7 million in Q3 versus $101 million in Q2.

The yield on loans increased slightly from 5.81% to 5.84% on a linked-quarter basis, while the cost of funds experienced a slight increase from 45 basis points in Q2 to 46 basis points in Q3. As a result, the net interest margin on a fully taxable equivalent basis increased slightly to 4.86% for Q3 compared to 4.83% for Q2.

Because of the Company's significant number of historical acquisitions, our net interest margin was impacted by $11.9 million of accretion income for the fair value adjustments recorded in purchase accounting during Q3 compared to $11 million during Q2. Excluding the accretion income and the associated loan discounts, the Company's net interest margin for Q3 2016 was 4.25% on a non-GAAP basis compared to 4.24% in Q2 2016, while the Company's yield on loans for Q3 2016 improved by 1 basis point to 5.1% on a non-GAAP basis compared to 5.09% in Q2 2016.

Non-interest income was up $242,000 in Q3 2016, compared to Q2 2016. It was another record quarter for our mortgage lending income with a $451,000 increase from Q2 to Q3. Excluding the FDIC loss share buy-out expense, non-interest expense was down $410,000 in Q3 compared to Q2.

As a reminder, the second quarter of 2016 included $1.2 million of revaluation expense from our closed branches as we updated the appraisal on a few of these facilities. During the third quarter of 2016, there was not any revaluation expense.

Currently we have 12 vacant properties we are marketing, with a book value of $5.4 million. Also, as we approach the $10 billion asset mark, we're now incurring cost in preparation for DFAST, which were $236,000 in Q3 and $233,000 in Q2. With that said, I will turn the call over to Jennifer.

Thank you, Brian. And now for our third-quarter capital results. As of September 30, 2016, we ended the quarter with $1.3 billion of capital and $57 million of cash at the Parent Company.

During the third quarter, we paid out shareholder dividends of $12.6 million, while growing retained earnings by $31 million. For the third quarter, our common equity tier 1 capital was $898.9 million, total tier 1 capital was $957.9 million, total risk-based capital was $1.03 billion, and risk weighted assets were approximately $8.2 billion.

As a result, our common equity tier 1 capital was 11% compared to 10.6% at June 30. Our leverage ratio was 10.4% compared to 10.1% at June 30. Our tier 1 capital was 11.7% compared to 11.3% at June 30. And our total risk based capital was 12.6% compared to 12.2% at June 30.

Additional third-quarter capital ratios include book value per common share, which was $9.22 compared to $9.01 at June 30. Tangible book value per common share was $6.40 compared to $6.18 at June 30, and $5.71 at December 31, which represents an annualized increase of 14.16% on a linked-quarter basis. And finally, our tangible common equity ratio was 9.6% compared to 9.4% at June 30. Randy?

Thank you, Jennifer. And with that, you have most of the numbers.

It is time to turn to loans. Let's switch to our Chief Lender, Kevin Hester, who will give us more details and color.

Thank you, Randy. As was previously mentioned, organic loan growth in the third quarter totaled $90 million, which represents an annualized growth rate of 5%. New York and Florida grew loans $72 million and $47 million, respectively.

Virtually all of this quarter's loan growth was in the C&I segment of the portfolio. Guidance for fourth-quarter loan growth appears to be somewhere between that post in the last two quarters.

While market conditions appear favorable in most of our markets and asset classes, it can't be ignored that the expansion phase of this business cycle is already 30 months longer than the post-World War II average of 58 months. We think that being selective in the latter part of this expansion phase, while probably dampening today's loan growth, will bear fruit when the end of cycle does occur.

Our asset quality ratios continue to be very strong, and all improved on both the quarter-over-quarter and a linked-quarter basis. Even with a nominal increase in non-accrual loans due to the end of loss share, both of the non-performing loan and non-performing asset ratios decreased slightly this quarter to the lowest level since before the Bay Cities Bank acquisition.

As a result of the slight percentage improvement in these ratios, the ALLL coverage of non-performing loans increased slightly to 127%. Our non-performing balances are still elevated due to the level of problem loans acquired in the most recent acquisition, in addition to loans that had been moved to non-covered after the end of loss share, but all are being worked aggressively.

Past dues improved 5 basis points to 1.03% and net charge-offs of 20 basis points were right on the recent historical average. The allowance of loan losses as a percentage of loans increased 4 basis points to 1.07%. And if you added all the acquisition discounts to the allowance for loan losses, the combined figure would be 2.55%, which continues to drop as we amortize the acquisition discounts and since we haven't had a recent acquisition.

I would like to take this opportunity to thank our Chairman for the ability to hold our second lender summit last month. The benefits of bringing over 200 lenders together in one location to talk about production, efficiency, teamwork, and vision are enormous. I want to thank all that were involved in the preparation and execution of that event. It was a great success. On that note, Randy, I will turn it back over to you.

Thanks, Kevin. Well, another good quarter. Let's just recap real quick.

I can't let you off without saying this one more time: record earnings for the 22nd consecutive quarter; ROA of 1.9%, excluding the loss share buy-out expense; a strong core efficiency ratio of 36.5%; a powerful margin; very good and improved non-interest income; loan growth of $90 million and great asset quality metrics; consistent and continued improvement in our major components. That really is what we are all about.

We look forward to continued improvement as we close out the year with the next quarter. With that, I will now turn it back over to our Chairman, Mr. Allison.

Well, since everyone's reported, I think we are ready for Q&A. Rocco, are you there?

(Operator Instructions)

Today's first question comes from Brady Gailey of KBW.

Good afternoon, guys.

Afternoon.

So commercial real estate can you just remind us or let us know where that finished at the end of the quarter as a percentage of regulatory capital?

Kevin will take that one.

We were at about 115% in the construction bucket and around [360]% in the overall which is basically flat over the last two quarters. Little bit of a decrease not much. I'd call it flat.

Okay. We have seen a lot of companies raise sub-debt to help get their CRE as a percentage of capital closer to 300% for those guys that are over. Is that something that is on your radar screen at all?

Not really. Someone said you're out of the bucket and we have been out of the bucket since year one. We continue to do what we do and we do a good job of commercial real estate and we are commercial real estate lenders. We will continue to keep on keeping on.

Okay. And then I think in the past you all talked about growing the CFG group by around $150 million per quarter. Obviously we have not seen that for the last couple of quarters. Can you update us on how you're thinking about CFG's growth going forward?

Well CFG, Chris and his Team will take what they give him. His profitability, he has not -- he had his own targets his own goals, growth targets. We didn't put any on him.

Our attitude is he takes what they give him. He can't push [a roll] -- he'll probably go into $1.5 billion and we'll probably stop at that point in time. At least catch a breath, back up and take a look at it. But his growth has been a little slower lately. But he said [quite a bit] of payoffs. Tracy or Kevin?

They certainly have had their payoffs just like the other regions have along the way. Right now it's a little over $900 million so end of the year probably in the $1 billion range.

He will be $1 billion or $1 billion plus. We've seen a pick up a little here lately. I think his fourth quarter as all of our fourth quarters appear at this point to be pretty strong.

Okay. And lastly for me, Johnny I think you have talked about this Florida deal at least the last two or three quarters. What is the hold up? Is it pricing?

And maybe not even necessarily for that deal but for M&A in general announced the deal well over a year, maybe a little over a year. Is it pricing or what is the main factor that is keeping you all away from [Internet]?

The main factor is $10 billion. We have had our foot off the accelerator and we didn't want to go over the $10 billion. I think you'll set see our foot go back on the accelerator in 2017 and 2018. You'll see things pick up.

The acquisition we mentioned, we had some -- they had a problem or two, and we had a problem or two and we had to resolve, those problems those problems have been resolved. It is a good bank with good people. We are moving forward with due diligence on that at that bank and hopefully we will have something for you here before long.

All right great thanks for the color and congrats on another nice quarter.

Thank you, Brady.

And today's next question comes from Michael Rose of Raymond James. Please go ahead.

Good afternoon guys how are you doing?

Good Michael, how are you?

I am doing great thanks for asking. I just wanted to dig into the loan growth a little bit. Even if you exclude CFG it looked like the core business was a little bit lighter than perhaps I was looking for.

Was there any sort of paydown activity outside of CFG that we should be aware of or what happened as the growth slowed quarter to quarter.

Kevin.

Michael this is Kevin. It was a combination of production and payoffs. Production in third quarter was about 80% of what it was in the second quarter. And that is across the legacy group.

Payoffs were elevated a little bit across the group. So it was a combination of those two.

Any change in the pipeline since quarter end?

The pipeline is strong. We didn't get some stuff closed at the end of the third quarter that closed in the fourth quarter. The pipeline. Had to watch the pipeline and had to watch it real close as we didn't want to go over $10 billion.

It's a situation watching the pipeline right now. Watching what you're doing. Business is very good let me say that. It's continuing to be good. It was good.

Last year we had our meeting with our Senior -- with all our lenders, 278 people met in Pensacola, and I asked them did you all take a vacation in July and August? And it looked like it we were down in July and not much was happening there, and then August we jumped up $30 million and we ended up closing up $60 million.

I thought we would be over $100 million. I thought we had a shot at $120 million, $130 million. We didn't get it closed. It will close in the fourth quarter but overall the Company -- the business is very good.

Okay that is helpful. And maybe a follow-up, now you guys are out a loss share. How should we think about the impact depending on the margin going forward, not sure if there is a rate hike in December what that will do for you. How should we think about the trajectory of the margin over the next couple of quarters?

For the core margin we're doing a pretty good job of holding the core margin. I believe we can maintain the core margin that we have now maybe increase it a basis point or two. The GAAP margin maybe a little more of a struggle.

We've had in the first quarter we had $10.7 million of accretion income and I thought well it will probably go to $10 million in Q2 instead it went to $11 million. And then after the second quarter I thought it will probably come back to $10 million, well it went to $11.9 million in Q3. It can't continue to go up. From the accretion income. We had quite a bit of payoff accretion this quarter.

We had $3.4 million of our total accretion as payoff accretion. And then also we had some pool projects we did on several of our newer acquisitions including Liberty. And we were able to release about $2.5 million of additional accretion income that was on the non-accretable bucket into the accretable bucket and we recognize another $400,000 which is included in that $11.9 million.

I think we'll probably struggle to get back to the $11.9 million, might as well be consistent and predict that it goes down again, so if I'm wrong I'm wrong. All year long. (multiple speakers) Because of the accretion income I think it will be a struggle to continue with the GAAP margin going up.

That is helpful. Maybe one more for me. Johnny in the past you talked about building loan-loss reserve closer to $150 million over time.

Credit keeps getting better. Or remains relatively benign. How should we think about that ratio growing and provisioning going forward? Thanks.

We have kind of a rule of thumb around here. We cover charge-offs plus 1% loan growth and we have done a little construction in there so we kicked that up this quarter.

We did an extra $1 million reserve if you see we are $107 million, and we finished the Liberty deal we're at $0.92 million. If we'd ever quit buying banks we would get there, we keep buying banks. That reserve is $107 million. I think we have some recoveries coming, I thought we might have seen them by now.

I think they will come in the fourth quarter or the first quarter or two pretty good size recoveries that will go into loan-loss reserve which would be nice. We talked about CRE and if there is a risk to CRE maybe we need to be [on] reserve. Rather than do equity I think we need to be on reserves.

When we really have a good quarter like we did this quarter will put another $1 million in reserve for the quarter over and above our normal 1% rule and our charge-offs. You can look at us doing that if we do $200 million loan growth next quarter will put about $2 million in there plus the charge-offs.

That is kind of the way -- that is the rule of thumb. It's not guaranteed around here but when we get a chance to build reserves we build reserves. Just something healthy about a $150 million reserve and that is held for years and the $150 million reserve works. I guess when you take all the reserves were about [and march] we're about $255 million.

That is a good number to, but I just like a $150 million reserve. It's just always been how I've operated when I was at First Commercial Corporation. I understand we got rules and regulations about how to get there but that $150 million. I think everyone ought to have that $150 million regardless -- even though asset quality is great today and it gets better it won't always be here.

We will cycle again sometime and those who have [good] will burn through that reserve first those who have good reserve levels will be rewarded. We learned that in the last cycle. It's a good lesson to learn and hopefully Home will be prepared for the next cycle.

Guys, thanks for taking my question.

Take care.

The next question comes from Jon Arfstrom of RBC. Please go ahead.

Thanks good afternoon everyone Maybe somewhat of a follow-up to Rose's questions, but I guess on the loan growth part of this Kevin, you talked about you made a comment about being selective in the latter part of the expansion. You starting to see anything that doesn't make sense or is it just healthy as can be at this point?

It's healthy but I mean you see competition do things from time to time. It's not across the board it's not in every market but it's here and there you see advanced rates creeping up and you see people going lower for longer than you have seen so for us it's just picking the deals that makes sense.

Okay. Okay good. And then maybe comment little bit on Florida health how you feel about the Florida economy at this point.

For us everything -- all the markets look good all the asset classes appear to be holding up and looking good. We're trying to watch that.

That is part of the work we have done in CRE the last 12 months. We've put a lot of effort in that reporting in the market analysis so we are really trying to watch that almost in real time nowadays. And everything looks -- there is nothing out there that looks crazy.

We are not seeing any crazy stuff. We are all looking for it. I think we're looking for it John and expecting it but we are not seeing it.

Okay, okay good. And then a question on CFG. You're almost at $1 billion and one number that stands out is the nonperforming level there which is zero.

I know you expected a pristine portfolio when the group came on board but have there been any close calls or is this just been a near perfect portfolio for you?

We had if you remember we bought a $296 million piece that Chris and his Team had originated that I think Flowers end up with and we bought it from Flowers. Chris had originated the whole $269 million piece. One of them went bankrupt. It was a Houston multifamily project. It filed bankruptcy. Tried to file bankruptcy.

And I thought well here we go we going to watch this. We were a $55 million senior piece in that transaction. There were five bids in bankruptcy court and the low bid was $110 million.

The bad news is we got paid off. The good news is we got paid off. And because of the structure they had with a mezzanine behind it the mezzanine was required to keep us current, it was current until -- (multiple speakers)

The mezzanine was required to keep us current so it was a great lesson and we think they are great underwriters and it was a great lesson to watch and see how well they underwrote that credit and because of the way they structured that and the capital stack we were well covered well taken care of and they had to keep us current.

So it's paid off. That is one of the unexpected payoffs that Chris has had since we started. But it was well underwritten. We're not seeing anything. They are so diligent if they see something they get out and get with the customer and restructure or do stuff they fix stuff, change stuff, get additional collateral they're lots of touch.

They only have 17 loans. Of the 17 they touch them a lot. Have to feel pretty good about watching them.

And the comment about being picky. We had an opportunity with that credit that paid off to stay in it at a lower level. And chose it, It was just the time to exit. That particular deal.

Chris said I think it's time to go. We've been here, we've done this, it's time to go. That was their call.

All right that helps guys. Thanks a lot.

You too.

Our next question today comes from Matt Olney of Stephens Incorporated. Please go ahead.

Thanks guys how are you?

Good, we are good. How are you doing Matt?

Doing great. I wanted to ask about expenses another great quarter of cost controls. Anything of note going forward here on the core expense outlook from the 3Q run rate?

We moved it on to the Head of Marketing and gave that to Tipton and he improved and all that -- no, that's not what happened at all. (Laughter) That's a [ney], as a matter of fact they going to hold it down and I will go get her and bring it back. I don't, we had just -- the Company is just hitting on all A's right now. Or 10 out of eight.

There's not anything there. I don't expect expenses to go up this quarter. I'm thinking that they hold where they are and we pick up another couple hundred million dollars worth of loans this quarter.

I think the efficiencies going to get better. I Think income is going to get better. If we have -- I think we have the capacity to swallow another billion dollars worth of loans with existing infrastructure that we have and the people that we have. Tracy you got a comment on that?

No sir. I know we just proved it over the past year. We've been a little quite on the M&A part so we are focused on it and there are things that Stephen and the Teams continue to focus on and by Johnny's answer I don't think we have a choice but make it better.

Stephen you see that side of it. Any comments?

I agree with Tracy. I think it's back to the leverage that we can still pull our existing loan teams and regions out in the footprint.

I think one of the keys, this is Randy, one of the keys is the fact that Stephen has put together a set of reports that we really hadn't ever had. So if something jumps up we are alerted to it much quicker.

The Regional Presidents are alerted to it much quicker and we can try to fix it or see what's going on.

And we will react quickly to those situations as you know.

Okay that's helpful. And then on the deposit side I think this is the quarter where you're taking in some deposits up in New York I'm curious how that is progressing relative to your expectations so far.

It's going good. We have certainly increased our deposit base up there. We've not had to raise interest rates to attract anything.

That wasn't the plan from the start. The team there was really going after the customer base that we currently have so that's in place today. It's a little over $50 million.

A little over $50 million in deposits primarily from the customers that we have. That we are doing business with. Some of the 17 customers that we are doing business with.

And we haven't raised the cost of funds, by the way if that's what you're (inaudible).

Got it. Thanks guys. Great quarter.

Our next question comes from Peyton of Green Piper Jaffray. Please go ahead.

Yes, good afternoon. With regard to the expense outlook, maybe not necessarily the fourth quarter Johnny but as you get into 2017, and you are going to cross $10 billion in assets are there opportunities to maybe spend more to generate stronger growth and stronger revenue growth? Or is the capacity really still there to drive the incremental billion.

I think we have, I don't think we need to spend any more money at this time. If we get our acquisition closed that will be a nice piece of business for us a day in a nice bank and good operations and good people.

I think that will be an accretive transaction to us. We don't do diluted transactions. I think our team has $1 billion, actually I think they probably have a couple billion dollars worth of capacity presently without spending a lot of extra money. They just keep on keeping on and I don't see anything -- Tracy, Stephen?

No sir. I think you're right. The additions are the things we could add throughout 2017. What we've done this past year they've been able to produce the revenue to offset the additional cost that was in there and actually making the numbers for us in all of our other profit centers that we have today.

Okay.

The answer to that is we feel pretty good where we are. Business is good. We are pretty happy. We have a smile on our face around this table.

Okay great. And then I guess with regard to the footprint lending, it had a nice trajectory up over the last three quarters.

But a note pulled back in the third quarter and I know the third quarter can be seasonally a more challenging quarter. Thinking through, it grew loans $43 million in the fourth quarter of last year $77 million in the first, $130 million in the second and I know you want to stay below $10 million as of December 31.

How would you characterize what you think the volume might be out of the footprint side?

Somewhere in between the numbers that you had there. The upper and lower number you had it's in between those two. It's better than last quarter and probably not that $100 million for the quarter that you mentioned there.

Okay. And then Brian would you just bring down cash and securities if you had good growth out of the footprint and CFG?

That is correct. We are changing some of the pledging requirements right now and using our line of credit with Federal Home Loan Bank to secure some pledging off away from some of our investment portfolio and if we need to sell $100 million of our investment portfolio in November or December we will have that freed up and be able to do that. At that point time would pay down Federal Home Loan Bank advances and shrink the balance sheet $100 million.

Okay. And I guess the excess, the overnight liquidity piece is about $175 million. You think that goes back down to a more normal $50 million?

We did have some excess liquidity on the balance sheet probably $100 million at the end of this last quarter.

We could have paid it down but the only place I could have paid it down was some Federal Home Loan Bank advances that were not ready to mature between now and the end of Thanksgiving we have $155 million of Federal Home Loan Bank advances that just mature and so we used up all of our excess liquidity if we have any at that point in time and then we will run pretty tight on our cash position between then and the end of the year.

Okay. Great. And then maybe stepping back as you kind of have worked through a very strong year the outlook seems a little bit muddled nationally. Not necessarily in your markets.

What do you see. Do you see the opportunity set for you getting better in 2017 versus 2016? Or?

Well the key is hold the course. Don't panic and don't jump and move. The Company is performing extremely well. We are more active on the M&A side.

We visited with a $2 billion bank and a $7 billion bank recently so we are more active on that side once we cross the $10 billion then we cross the $10 billion we move on from there. I think nobody has better opportunities in this entire market than Home BancShares with the power of Home BancShares stock.

We still do smart transactions. We will not do a dumb transaction. You see what happens to people pay too much for deals and it's obvious they get their pants taken off. Were not going to do that.

The opportunities for this Company on both the organic growth side coupled with the M&A side I think are as good as they had ever been or as I have ever seen it in history of this Corporation. I don't think you'll see homes slowing down.

I think when you're running a community bank right [just a] Community Banking magazine said were the fastest growing community bank in America and I think you will see us continue that path in the future. I don't see anything stopping us. I don't see anything holding us back.

But the transaction -- the only thing holding us back would be price and it's on the M&A side. You how disciplined we are. If it's not accretive, accretive, accretive then we don't do it.

Okay great. Thanks for the color. I really appreciate.

Our next question comes from Joe Fenech of [Hotley] Group.

Afternoon guys. Most of my questions are answered. Just a quick one. You touched on your last response you mentioned a whole range of potential acquisition candidates. $8 billion I think you said down to a couple hundred million dollars. If you could draw it up what is the perfect profile of a home target. I'm not asking for specific bank but what is the size range, is it a fixer-upper, is it Florida, what is the profile of the bank you would fit perfectly in 2017 for you guys?

That's pretty tough Joe. You go by a bank that's doing $180 million [ROA], excuse me, you don't see any banks doing that. Go by a bank that's doing a $110 million or $120 million ROA. You look at the upside of that there's not a lot of upside for Home BancShares.

You go by more on the $2 billion in our footprint and it's doing a $0.3 billion or $0.4 billion and you have something that will move your needle. If it's a little dirty that doesn't bother us. That is where we have made a lot of money.

We have David Drury that runs South Florida who ran as you've heard the story ran Arkansas, part of Arkansas, and was the most profitable, most efficient operator we had in the Company. He's running a bank in Florida that we bought in Fort Lauderdale. It's a $180 ROA, I mean a $180 million bank. And he's kicking out 2% ROA.

David needs another $1 billion worth of assets. So if we can find another $1 billion worth of assets geographically in that market for David, that makes lots and lots of sense for us.

The truth is that Jim in the Panhandle who has now outside of New York. New York is the most -- we had [11 rigs] since New York is the most profitable region and number two is the Panhandle of Florida run by Jim Haynes and his Team in Florida. And they have really done an amazing job and ranked second in profitability in the Company. We would like to see Jim and his Team get some more assets. We think there are some opportunities down there.

We think Theresa [Condits] that runs the Keys can take some more assets. Davy Carter who took over the Liberty deal, we are looking at a trade or two for Davy that could make some sense. He could take on another $1 billion worth of assets.

All of the people -- we have capabilities everywhere. But if it's $2 billion -- depends geographically number one where it is and which person we're handing that off to and what is it do for, I'd prefer one if it was doing a $[44.5] million because we'll get it to a $180 million or a $190 million, this bunch will get it there pretty quick.

That moves the needle. I think that pretty well describes it. Anywhere from zero to $8 billion. I don't know if we are ready for $8 billion today. They are all passed out in here. Something in the $2 billion range I guess would fit us.

(Multiple speakers) Good stuff. I appreciate it. Thanks.

Our next question today comes from Brian Martin of FIG Partners. Go ahead.

Hey guys.

Hey Brian.

Maybe just a couple of things here, just follow-ups. Just on the CRE concentration you guys talked about earlier Johnny do you have any internal targets? I know you're going to operate where you do, but internally are there targets you have that you don't want to exceed?

I don't know that. We have a much higher target than where we are today that our Board has approved. I guess you have to look at the portfolio and realize that years ago with HP CRE in the game now and with the quality of the portfolio and the equity that's in these deals maintaining good capital ratios, maintaining good loan-loss reserves.

I think that you can go on up. I think it makes all the sense in the world. I'm not afraid to do that. I guess that is my point, I'm not afraid to do that. Kevin?

We are continuing to generate enough internal capital that we keep to offset the last couple of quarters. And we're watching the markets, looking at our underwriting and continuing to be conservative, even more conservative as we go along.

I am comfortable going up from the levels that we are at. How much further, I mean I don't want to draw a line there. I think we'll keep looking at the market analysis and we will keep looking at our market underwriting and the deals that we're looking at and we will make that decision as we go.

I feel at 120% and 360% I'm comfortable going up from there. Knowing what we know today.

Brian our CRE Team has put a tremendous amount of effort in over the past 18 months supporting data that not only is great for our Board of Directors to see on a regular basis as we present to them. Our regulators get to see that.

Our loan committee that Johnny talks about all the time which has been on the Loan Committee since its inception, are familiar with all the credits and types of credits that we've done. They make adjustments throughout the year. We don't have a cookie-cut formula to do.

If we think we need some equity in there, if we have a commercial loans that we say, hey, that percentage may be a little high for the guidance that we're there, we take it seriously, we focus on it and make that credit that makes it safe for the Company.

Watching Kevin and the CRE Team over the past 18 months specifically, the data and information that our Board is receiving and our Management is receiving and our Leaders that Johnny just mentioned a while ago in the field, we certainly respect it and watch it.

We take a look and if we are at a certain percentage today and we get an opportunity to make a group or secure some loans on that, that goes to the Board, we present it and we can adjust that figure as it [goes]. It still comes back to, is it a good, well written, underwritten credit.

We just sent out our loan officers in Pensacola. Great meeting. Getting everyone on the same page. We look at national trends, multifamily, picking up a little delinquency on multifamily. What else was there guys?

We all know the hospitality market is reaching out were demand and supply are going to cross so you have to watch out, especially in the markets that we are in.

Office, delinquency on office was picking up a little bit. With we show them the national trends and told them not that we wouldn't loan in that field, we wouldn't loan in there but we will loan there but we will continue to loan in there, let's just get more equity in the deal.

Our attitude is, is that if we loan on a hotel and we can rent our hotel for $40 per night and still cash flow it at our [basis] in there, then it's worth an opportunity for us to go forward. Where other people have to give $130, $140 per night we went ours at $40 a night and it will still cash flow for us. If we take it back.

That is kind of how we are looking at it. We will continue to loan into those markets. We just want more money in the deal, want more protection, call it more insurance, call it more conservativeness but that is what we're looking at.

I got you that is helpful. And the last couple of things. Johnny you talked initially about crawling over the $10 billion versus leaping. And later on it seems like you are holding out for a target that has more scale.

I guess, is that the way you're thinking about it? The latter, going with more scale than the smaller deals as you get more aggressive in 2017 and 2018?

We will take what they give us. Brian if they give us a deal in a marketplace that Davy Drury or Jim Haynes or Theresa or [Buddy it] or David, we will take a strong look at the deal. But I don't care about the size it's what the trade is and what it does for us.

You see people buying $2 billion and $3 billion and $4 billion deals. They don't do anything for them. They don't have EPS. Actually they could possibly dilute or they have to get one hell of an ROA out of those new assets just to get even.

That puts you behind the eight ball to start. I like to be in front of the eight ball on the deal. If it's a $400 million deal or a $600 million or an $800 million or a $2 billion or a $5 billion and we did [leave] with a $5 billion and a $8 billion and a $2 billion.

Would we do any of those? I don't know. It depends on the one that makes the most sense that moves the needle that is the geographic fit for us.

I know I'm not really answering your question but I can't. There is no -- it is not cookie-cutter. It's not a cookie-cutter.

Okay I got you. And the last thing maybe one for Brian. You talked about the cost, the expenses from crossing the $10 billion Brian, I think there are $230,000 this quarter.

What do those ramp-up to in 2017? Is it just a steady increase from where we are at? (multiple speakers)

No. That's not really right. When we cross in the first quarter of 2017 that means were not going to have to file our first DFAST report until July 1, 2019. And asked my DFAST Team to do a practice run and have it ready for July of 2018.

But for next year it should be $1 million. That should be about all that it costs us for prepping for DFAST. I'm not anticipating much of an increase for next year.

He keeps talking about, you got a million dollars and I said what is that? I don't know. You could have another million dollars.

Well then we've got $1 million built into our run rate now and I think we'll have million dollars in our run rate next year. And then the year we have to go live we have to do some validation of models and things like that. So the cost will start piling up on [than]. So when we actually have to do the live transmission is will probably run it up from $1 million a year to $2 million a year. That's not next year.

Yes, I got you. I appreciate the time. Nice quarter guys.

This concludes our question-and-answer session. I'm going to turn the conference back over to Mr. Allison for any closing remarks.

Thanks Rocco. Thank you all for your participation and your support of this Company. We work hard we will continue to be working hard we are looking for the next trade. The Company is performing extremely well better than it has ever performed in the history of this Company. As Randy Sims said -- Randy did you say -- what is that you said?

22 consecutive quarters of record income.

How many years is that?

Let's see.

That is 5.5. (multiple speakers) (laughter)

I'm so old I needed to get my calculator. (multiple speakers) (laughter) Four into 22. Anyway, thank you hopefully next quarter will be 23 and then when we hit 24 that will be six years.

We'll send cakes out to everyone on the 25.

When we break the 35% efficiency I don't know if we have the Red Wolf fan or the UCA band or the Razorback fighting band coming in to play but we are not going to do horns. Brian doesn't want horns. So we won't do horns. We'll do something. Anyway thank you support. We will talk to you all later.

Thank you. Today's conference has now concluded. We thank you all for coming to today's presentation. You may all disconnect and have a wonderful day.