Home BancShares Inc (HOMB) 2016 Q4 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated fourth-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 participants in this call are John Allison, Chairman; Randy Sims, President and CEO, Home BancShares; Tracy French, President and CEO, Centennial Bank; Brian Davis, Chief Financial Officer; Jennifer Floyd, Chief Accounting Officer; Kevin Hester, Chief Lending Officer; Stephen Tipton, Chief Operating Officer.

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)

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

Thank you, Andrew.

Welcome to Home BancShares' fourth quarter and year-end earnings release and conference call. And you'll hear from all the Executive Committee in a few minutes. I may call it a Chief's Committee, as you introduced it, a Chief this, a Chief that. Felt like an Indian tribe.

Once again, Home reported record earnings for both fourth quarter and the year-end 2017, and we'll get to those numbers in a minute. We had our foot off the accelerator on the M&A in 2016 because of Dodd-Frank, but expect to be more aggressive in 2017 and 2018; however, we continue to recognize the value of a deal done by Home compared to some of the silly deals that are done in the market.

Update on pending deals, Fort Lauderdale Landmark is progressing on schedule and expected to close in the first quarter. And our bank in Sarasota, I believe Bank of Commerce, Tracy, isn't that correct? A deal waiting on the judge's final approval. Is that about right? Anything new on that?

No, sir. Everything is still moving forward.

We continue to protect our valuable currency and maintain our disciplined pricing. We'll continue to maintain our dilution or, better said, our non-dilution policy. When a company, think about it, when a company reports a four-year earnback to tangible book, that means it's four years before the shareholder gets back to even-even. It kind of reminds me of Groundhog Day, where the same thing keeps coming back. When I was in high school, I ran the mile. And it was 440 yards around the track. And I ran around the track four times. And if you did that, if you had four-year earnback to tangible book, when you get back the fourth lap, when you finish it, they tell you you're at the starting point. So we don't dilute our shareholders.

I understand the value of the trust that the investment community has placed in our management officers and executive officers of this Company, and I can assure you that our people place the same value on trust as I do. Otherwise, they wouldn't be working here. We'll continue to honor and protect the amazing confidence you've given this team, will not vary for any reason and will continue to stay the course. I pride myself as a fox hole guy whose word is his bond and can be totally counted on to do what he said. I hope you agree.

The commitment of our people is amazing. On Monday, holiday, the executive branch was mostly in and busy working on quarter/year-end numbers, while also working on a couple M&A deals. The drive of our people is pretty contagious.

A special thanks to my assistant, Debbie King, who without being asked to come in, was here all day and busy as a bee. That is the quality of the people we have in this company, those that separate themselves from the pack. We had a couple sayings in this Company that I'm pretty proud of. One of them is never go home and the other is lead, follow or get out of the way. I want to say a special thanks to all our people who make this the great Company that it is.

Let's now go to the numbers. Earlier, I said we had record quarter and a record year. For the fourth quarter ROA, we had a goal of 2%. We did a 1.98%. Pretty close, almost got there. Core ROA of 3.42%. Core efficiency ratio of 35.97%. Is that a record, Brian? Isn't that about a record, 35.97%, Jennifer, 35.97%?

Yes.

Congratulations. Revenue was $135. 216 million. That beat estimates by $7.7 million for the quarter. GAAP earnings were $0.35 versus $0.27 last year, and I think analysts expectation for this year was $0.33 and we beat that, too.

Income of $48.6 million for the fourth quarter versus $37 million, that was increase of 29.8%. It looks like we do have done something to kick it over a little bit, to kick it to 30%. If I'd really rushed that day, we'd ask you if you could find a few pennies back here in the bucket somewhere, Brian.

$275 million organic loan growth. Net interest margin, excluding accretion, continuing to go up. Congratulations to the team. It went from 4.25% to 4.31%. That's been a concentrated effort, led by Stephen Tipton and this Company, and congratulations to him and the whole team. Good expense control and non-interest income was up year-over-year by $6.5 million.

For the year, income up 28.2%, earnings from $138 million to $177.1 million, 24.8% increase in EPS from $1.01 to $1.26, $750 million organic loan growth, loan loss reserves grown from 1.04% to 1.08% to a record $80 million loan loss reserve. Allowance for non-performings to 1.27% versus 1.09%. Stockholders equity grew $125 million. Revenue was up from $443 million in 2015 to $524 million in 2016, and we were up, we beat analyst expectations by $25.4 million for the quarter.

Overall, the beats for the quarter and the full year were revenue profits, as well as organic loan growth, and don't forget the margin. Nice job by all.

We continue to fine tune the Company and look for all areas that are not contributing properly in both people and departments. We continue to find opportunities for cost save and I think a 2.20% ROA is not out of the question. Now without taking a breath, you're the first one on the executive team, Randy, I'll turn it over to you.

I should have expected that, 2.20% ROA. Well, we almost made it, too, so who knows. You could be right.

And thank you, Johnny, and what a great quarter to end a great year. You've gone over a lot of the numbers. I'm going to go real quick, but I, too, would like to say congratulations to all of our employees and directors for a very successful 2016. You have made a difference in our continued success.

As Johnny outlined, the fourth quarter of 2016 was the most profitable quarter in the history of our Company. For the fourth quarter of 2016, the Company recorded a 29.8% increase in quarterly profits, to $48.6 million, compared to $37.4 million for the same period in 2015. We increased quarterly earnings by $5 million on an 11.4% increase over our previously reported earnings of the last quarter.

Diluted earnings per share for the fourth quarter of 2016 was $0.35 per share, compared to $0.27 per share, split adjusted, for 2015, representing an increase of $0.08 per share, or 29.6%. It seems like we're 29 something and we need to get to that 30%. Excluding a $4.5 million reduced provision of loan losses as a result of the significant loan recovery offset by $433,000 in merger expenses associated with the upcoming acquisitions, diluted earnings per share for the fourth quarter of 2016 were $0.33 per share.

Now having said all that -- and Johnny didn't say this, I guess he left it for me -- comes my favorite part of this report.

I did.

That is now 23 consecutive quarters of record income, just shy of six years. And we'll make that six years next quarter. And on top of the record income for the fourth quarter, as Johnny also outlined, we also had the most profitable year in the history of our Company, with net income hitting $177 million, as compared to $138 million in 2015, for a 28.2% increase.

Diluted earnings per share for the year ended was $1.26 per share, compared to $1.01 per share, split adjusted, for 2015, representing an increase of $0.25 per share, or 24.8%, for the year ended 2016, when compared to the previous year. As I said, the most profitable year in the history of our Company. And did I mention that it was 23 consecutive quarters of record income?

I think we'll bring the horns next quarter. If we get 24, I believe we'll bring the horns.

Six years, we should. We should do something. And as our Chairman also outlined, we made and exceeded our goal of $1.25 in diluted earnings per share set at the first of the year, ending 2016 at $1.26.

Our return on average assets for the fourth quarter was 1.98%, as compared to 1.62% in the fourth quarter of 2015. So much in income, I can't get it out of my head. We are so close to that 2%, as the Chairman said, and all of us would love to see it happen. And it looks like we're going to go to 2.20%, at one point.

Our core return on average assets, excluding intangible amortization, provision for loan losses, merger expenses and income taxes, was 3.42% for the quarter, as compared to 3.27% for the same period in 2015. Our return on average TCE, excluding intangible amortization for the quarter, was 21.45%. So as of December 31, the Corporation is sitting a little over $9.8 billion. Deposits ended at $6.94 billion at the end of 2016, compared to $6.4 billion at 12-31-15.

And as I said, we have a great management team on hand to talk more about the success of this year. And so I would like to turn it over to Centennial CEO, Tracy French, to give us additional color and his comments on the performance. And I would like to say congratulations to Tracy for a great year for the Bank under your leadership.

Thanks for the kind words. And Johnny, I was getting ready to enjoy my victory cigar, but I didn't get a chance to fire that up, because it looked like before you put it out.

Maybe smoke one anyway. (Chuckling)

As you all have heard, and you'll certainly hear by others, our fourth quarter results capped off an impressive 2016. While our groups of bankers are taking care of our customers and provided the excellent service, they continue to focus on the return to our shareholder.

This just doesn't happen. It takes skill, leadership from all regions, and gifted talent from everyone working together for a common goal. While no region is the same, each accomplished, and in most cases, exceeds their goals in their own way, while making our Company a high performer, one of the metrics that we use.

Even while having our foot easing off the accelerator to manage not going over $10 billion -- and for those of you on the phone today, that's been hard to watch our Chairman during this time, if you know what I mean. We look forward and welcome our two new banks to Home BancShares, Landmark out of Fort Lauderdale and Bank of Commerce out of Sarasota; we are working to close the first quarter of 2017. Our Chairman and our due diligence team continue to be busy, they have been busy, and are busy for opportunities at this time.

Reviewing our internal bank numbers by regions made it clear as to why our Company had a successful 2016. All regions in Arkansas, Florida, New York and Alabama improved year-over-year. In fact, when you look at each state now, they're all running internally the performance metrics that our company has become to know, with Alabama getting a little bit of edge on our legacy banking states.

Congratulations to all regions in making this quarter and 2016 the success it was. This group and our Company look forward to a rewarding 2017 for our shareholders. Randy?

Thank you, Tracy. The total number of active Centennial branches is 142, with 76 in Arkansas, 59 in Florida, and 6 along the Alabama coastline, and of course, one in New York. So that's how we're kind of organized, at this point.

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

Thanks, Randy. The Q4 2016 results certainly confirm all the hard work of our bankers and department managers. Congratulations to each of them on a great year.

As has been mentioned, I'm pleased to report a core efficiency ratio for the fourth quarter of 35.97%. Great expense control and a continued focus on our core net interest margin by all of the regions has contributed to the improvement in our efficiency ratio over the course of this year.

We continue to focus on generating revenue that will further improve our efficiency ratio, and this quarter we were pleased to see contribution and improvement in both of our SBA and mortgage divisions, as were seen in prior quarter. We're proud to see balanced growth in the loan portfolio, both among our legacy states in the CFG operation and among the legacy states, and core deposit growth while continuing our discipline on loan and deposit pricing. As a result, as Mr. Allison mentioned, the core net interest margin improved again to 4.31% for Q4.

We continue to make progress towards our two pending acquisitions, as been mentioned. We're excited about the talented bankers we've met in both of those markets and look forward to getting those acquisitions closed and converted as quickly as possible.

Back to you, Randy.

Thank you, Stephen. Net interest income, margin, non-interest expense and other highlights now covered by our CFO, Brian Davis, and after that, Brian will pass it on to Jennifer Floyd, our Chief Accounting Officer, to give us information on our capital numbers.

Brian, we'll start with you.

Thanks, Randy. 2016 was a great year for our Company. We had an internal goal of $1.25, which we were able to exceed by one penny. The fourth quarter of 2016 was also an exceptional quarter. We recorded GAAP earnings of $0.35, which was positively impacted by lower provision for loan loss. We were able to lower our provision for loan losses this quarter as a result of a substantial recovery from a large loan charged off in 2010.

During the fourth quarter, we had to overcome a decline in our GAAP net interest margin as a result of a significant decline in accretion income for the fair value adjustments recorded in purchase accounting. During Q4, total accretion income was $8.6 million, compared to $11.9 million in Q3, for a decline of $3.3 million. The decline was primarily the result of a significant reduction in payoff accretion from $4.3 million in Q3 2016 to $1.9 million in Q4 2016. As a result of this decline, net interest income was relatively flat from Q3 to Q4, at $103 million, and the yield on loans decreased from 5.84% to 5.69% on a linked quarter basis.

On the liability side, the cost of funds experienced a slight increase, from 46 basis points in Q3 to 48 basis points for Q4. As a result, the net interest margin on a fully taxable equivalent basis decreased 4.75% for Q4 compared to 4.86% for Q3.

Excluding the accretion income and the associated loan discounts, the Company's net interest margin for Q4 of 2016 was 4.31% on a non-GAAP basis, compared to 4.25% in Q3 2016, while the Company's yield on loans for Q4 2016 improved by 5 basis points, to 5.15% on a non-GAAP basis, compared to 5.10% in Q3 2016.

Non-interest income was up $1.8 million in Q4 2016 compared to Q3 2016. There are several items worth noting during the fourth quarter of 2016. First, we realized $644,000 in investment security gains, as we sold investments while we were managing our balance sheet.

Part of this was to keep us under $10 billion for the year-end. Secondly, we had $561,000 of additional other income for an item previously charged off. And third, we had $281,000 of additional gains on sale of SBA loans. Lastly, it was another record quarter for our mortgage lending income, with $191,000 increase from Q3 to Q4.

Excluding merger expenses and the FDIC loss share buyout expense, non-interest expense was down $116,000 in Q4 2016 compared to Q3 2016. The fourth quarter of 2016 includes a $430,000 of vacation accrual expense for implementing the fourth quarter 2016 changes in labor laws, requiring many of our employees to be moved from salary to hourly. This is offset by an approximate $400,000 reduction in FDIC assessment expense from the third quarter, due to the new FDIC calculation change.

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

Thank you, Brian. Let's take a look at our fourth quarter capital results.

As of December 31, 2016, we ended the quarter with $1.3 billion of capital and $54 million of cash at the parent company. During the fourth quarter of 2016, we paid out shareholder dividends of $12.6 million, while growing retained earnings by $35.9 million.

For the fourth quarter 2016, our common equity Tier 1 capital was $936.1 million, total Tier 1 capital was $995.1 million, and total risk-based capital was $1.08 billion. Total risk-weighted assets were approximately $8.3 billion.

As a result, our common equity Tier 1 capital was 11.3%, compared to 11% at September 30. Our leverage ratio was 10.6%, compared to 10.4% at September 30. Our Tier 1 capital was 12%, compared to 11.7% at September 30; and total risk-based capital was 12.9%, compared to 12.6% at September 30.

Our additional fourth quarter capital ratios include book value per common share, which was $9.43, compared to $9.22 at September 30. Our tangible book value per common share was $6.61, compared to $6.40 at September 30 and $5.71 at December 31, 2015. This represents an annualized increase of 13.05% on a linked quarter basis. And finally, our tangible common equity ratio was 9.9%, compared to 9.6% at September 30.

Randy?

Thank you, Jennifer.

So let's go to loans, another key component to our net income numbers. Our numbers continue to improve and we had a very good year in loan growth. And I'm going to turn it over to our Chief Lender, Kevin Hester, to tell us about our successful year.

Thanks, Randy.

As Johnny previously mentioned, organic loan growth was very strong in the fourth quarter, totaling $275 million, for an annualized growth rate of 15%. Our New York group represented $145 million of that growth, or 53%. The balance of the growth was evenly divided between Arkansas and Florida.

Since we have made a decision to operate over the 100/300 CRE guidelines over the past few years, we have experienced increased scrutiny from our regulators, as is promised by the 2006 CRE guidance. This has lead us to significant investments in analyzing our portfolio and our markets, which I believe has been beneficial to us. At 12-31-16, we were at 115% and 355%, which reflects virtually no change from the 12-31-15 numbers of 116% and 349%.

Our asset quality ratios continue to be very strong, with very little change on a linked quarter basis. Non-performing loan and non-performing asset ratios of 0.85 and 0.81%, respectively, remain at the lowest level since before the Bay Cities bank acquisition. As I said last quarter, our non-performing balances are still elevated a bit due to the level of problem loans acquired in the Bay Cities acquisition, and we added another to that list in the fourth quarter, but we see plans in place to resolve a significant amount of these additions during 2017.

The combination of the significant recovery mentioned earlier, along with this addition to NPAs, kept the ALLL coverage of non-performing loans unchanged, at 127%. Past dues increased 5 basis points to 1.04%, and this number's been very consistent for the past few quarters.

Allowance for loan losses as a percentage of non-covered loans increased 1 basis point to 1.08%; and if you added all the acquisition discounts to the allowance for loan losses, the combined figure would be 2.41%, which continues to drop as we amortize the acquisition discounts. The pending acquisitions will serve to add to this number over the next couple of quarters.

Mortgage had its best year ever in every category in 2016 and SBA has contributed gains in four out of the last five quarters. We continue to evaluate additional loan product opportunities and look forward to working on additional due diligence opportunities. We are very positive about how 2017 is shaping up.

On that note, Randy, I'll turn it back to you.

Thank you, Kevin, for that good report.

Well, another good quarter and another great year. To recap, record earnings for the 23rd consecutive quarter ending -- I may have said that a couple times -- record earnings for the year, quarterly ROA of 1.98%, a strong record quarterly core efficiency ratio of 35.97%, a powerful and improving margin, very good in improved non-interest income, another strong quarter of loan growth of $275 million, and great asset quality metrics.

Consistent and continued improvement in these major components and metrics is our secret and our success. That is what we are all about, and we look forward to continuing that improvement as we prepare to add our new acquisitions and strive to break even more records in 2017. And with that, I think I've said it all.

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

Thank you, and thank all of you for your reports today. We will go to questions in a minute, but I'm looking forward to, Randy, to hearing you call out 24 consecutive quarters. That's six years. That would be pretty impressive.

I really don't have anything to fuss about this quarter. I thought it was a great quarter all around for the Company. Pretty pleased with everything everybody did. We seem to be getting better. We didn't do a deal this year. And you can see, the improvement from I think it was 1.68% to 1.98% on ROA. So we just continue to get better and better at what we're doing.

And congrats to everyone, and Andrew, if you're ready to go, I think we're ready to go to Q&A.

(Operator Instructions)

The first question comes from Michael Rose of Raymond James.

Hi. Good afternoon, guys. How are you?

We're good. How are you? We're having a solid day.

It sounds like you're doing good. But no horns, so hopefully next time.

Just picked up on something on the press release that said that Chris Poulton's group is going to open up an office in Los Angeles. And wondering if you have some color there. Because I know at this point, I think about two-thirds of the customers are in the New York City Tri-State area, but two-thirds of the assets or loans are outside of that market. So does this portend a bigger entree into that specialized lending category?

Not really. Chris and his team were in Los Angeles before, when they had $1.5 billion or $2 billion worth of loans. And I think Chris said he's got about, still got about 5% out there in that western part of the US, and he ought to have 10% or 15%. And Tracy, you've talked to Chris about it.

We're in the process of putting together a group out there right now. I think we have hired a credit person, which is probably the smartest way to do that, before we hire the lead sales person. But it could be about three people is our plan, hopefully have that ready to go by the end of this first quarter.

I think we've already leased office space and we're moving ahead. And Chris is looking for a couple hundred million out of there total. So it's not going to be a huge part of it. But Chris said the people from the West used to come to New York to get their money, and over the past years, they haven't had to come to New York, and that if you want some business out there, you need to be there. So think about it as probably a couple hundred million dollar office.

Okay. So I think you guys have previously talked about maybe that group getting up to $1.8 billion in outstandings, somewhere in that realm. Is that still hold true? Because if I look at their loans to percentage of total loans, it's about 15%. Is that where you want to keep it? Would you expand that percentage? Or how should we think about that going forward?

$1.5 billion has been our number. And this will be, he'll have about 33% of his book, we're in the rotation now, about one-third of his book, he's about $1.1 billion this year. His goal was to get to $1 billion by the end of the year, and he had some good opportunities and ended up about $1.1 billion.

January has been flat. He's going to have about $70 million, $80 million worth of payoffs in January. He's kind of looking, thinking one-third as he set it up, one-third of his book should pay off this year, and then he should generate some additional business, and if California generates a couple hundred million for him.

We're going to go to about $1.5 billion, and then we're going to look at it. We'll just probably be a stop point at $1.5 billion. It might go to $1.6 billion or $1.7 billion. But we're just going to evaluate it. We'll get to that size and we'll evaluate.

Okay. That's helpful. Maybe one for Brian. Just looking at the core margin, looks like it was up 6 bips sequentially. How should we think about the core margin into the first quarter and through the year, assuming you didn't get much of the December rate hike? And then do you have an estimate for purchase accounting accretion in 2017? Thanks.

Obviously, I'll take, the accretion income was down. It was down due to the payoff accretion at $8.6 million of accretion for the quarter. That should be a pretty good run rate. It was down a lot more.

I think, for three quarters in a row, I kept saying it was going to go down, and it would go up. Well, heck, I didn't anticipate it going down that much, went [out] to be right. But typically, the core accretion goes down a couple hundred thousand every quarter.

And it's hard to predict payoff accretion. So $8 million might be a good number for next quarter on accretion. The rate hike is helping us on our margin.

We probably had a little bit of help on our margin because we did run down our investment portfolio. We got a little nervous that we might actually get a little closer to $10 billion than we wanted, so we sold about $81 million worth of our investment securities and then we quit purchasing investment securities in December, and that probably affected our margin, not a lot, but maybe 1, 2 basis points.

But we put those investments back on. We've already got $82 million in purchases completed so far in January. They're not all booked yet, but they're still going to settle out in January. But I still think we could have a little increase in the core margin.

Michael, this is Stephen. To give you a little color on the loan book and on what we saw in the fourth quarter. About 25% of the variable rate loan book is tied to prime, so we still have a good portion of that that has floors above, that probably need another rate hike or two before you see some improvement there. About 40% to 50% of the variable rate book's tied to LIBOR, so we did see that, I guess post election, saw two-thirds of the quarter, some improvement there in the LIBOR book. So that was part of the driver on the margin increase.

Along with our legacy portfolio, I'm looking here at legacy yields, our group there has been able to hold rates on renewals up and they've been able to navigate through competition there and loans, so good above market yields in the legacy markets.

I think our team deserves credit there. Stephen's led that effort and it's been a good effort. And we hock those renewals and look at the new loans and renewals and we started that. I think this is the third or fourth quarter in a row that we kicked up our net margin. So obviously, we're working on it, hoping to keep it moving in the right direction.

Well, we know Stephen leaves no stone unturned, so I know he's working hard. (Laughter) Thanks for taking my question, guys.

You bet.

The next question comes from Matt Olney of Stephens.

Thanks, guys. Good afternoon.

Hi, Matt.

Congrats on 23 straight quarters. Very impressive.

Thank you. I hope we can say 24. Think about bringing the horns back, or what do you think?

Absolutely, no question. (Laughter)

I bet we hit 24. I don't know.

I just want to go back to the discussion on Chris Poulton's group, the CFG segment. Obviously, the loan balances, you disclosed that at $1.1 billion. That's a big move from a year ago.

I'm just curious on my update on a few items. I think originally you were targeting loan yields around 6%. Any change in that over time? And LTVs around 50%, I believe that was the original intent.

Can you talk about the overall loan book today versus where you expected it a year ago? Thanks.

On the LTV side -- this is Kevin -- their LTV is around 44% all-in, the last time I looked at it, so it's been staying around that number.

Think about it. We bought $300 million and we ended the year at $700 million, so they grew $400 million, which was substantial growth, 100-and-something percent. And then we ended the year at $700 million last year and we're $1.1 billion this year. They grew $400 million this year.

And primarily, all of those are the same customers that they've had since day one. So it looks like a big number. And if they grow to $1.5 billion next year, if they do, then the growth will be $1.5 billion -- it will be $400 million over $1.1 billion, so it won't look as big.

When you think about it, they were out of the market for so long, because they were concerned about Doral's balance sheet and being able to fund, when it came back into the market, they were able to pick up some stuff, and that's where the quick growth came from, from existing customers. So I would expect that to slow down. And evidently, Chris thinks that's slowing down a little bit. That's why he's going to the West Coast.

Any other comments?

His loan yield really is a supply and demand of what they do there, if the activity is good or bad, the market can go up or down.

What is his yield? It's about 6%, isn't it?

6.5%.

6.5%. So he's seen some opportunities here on some construction late that he's been able to raise his rate on some of the loans.

Okay. That's helpful. And then just secondly, just in terms of credit quality overall, anything you're seeing out there from competition in your various markets that has changed at all, in terms of anybody getting more aggressive, any certain loan types or any geographies at all?

We've talked about some that in past quarters. There's nothing this quarter that really is any different. There's always a push to do things that are non-CRE, because of the pressure on the CRE side. So that pricing is down lower than it really should be. But nothing, there's nothing this quarter that's really different than the past couple of quarters we talked about.

Okay. Thanks for the update, guys.

Thank you.

The next question comes from Stephen Scouten of Sandler O'Neill and Partners.

Hi, everybody. How are you doing today?

We're doing good. You're breaking up a little bit, Stephen.

Oh, sorry. How is that, any better?

No.

Okay. Maybe I'll go back in the queue and see if I can fix my phone over here.

Well, we heard you. You were a little clearer then.

Okay. Well, just my question, my first question would be around loan growth. You talked about maybe another $400 million in CFG. But maybe in the legacy markets, any thoughts about what you might be able to add to the balance sheet on that side?

Yes, we'll talk about the pipeline in total. As we're sitting today, projected new loan production's probably a little bit less than it's been the last couple quarters at this time in the quarter. Payoffs are a little bit higher than they've been at this time in the quarter, and that's largely because we had some stuff move from late 2016 into a 2017 payoff, and that made fourth quarter growth, as you saw, it was a little higher than we projected earlier in the quarter. And so that's pushing, it pushed some of that growth into the fourth quarter that we would have expected to have seen in the first quarter. So first quarter is a little flat right now.

I think we were expecting about -- New York was expecting about $70 million worth of payoffs in December. They didn't get them. They'll get them in January. So it kind of moves around a little bit. So actually, probably a $200 million quarter.

Okay. Makes sense. And then on the loan to deposit ratio, obviously that's moved up, around 105% now. Do you still feel comfortable it's going as high as 110%? Any issues on the deposit front and maybe progress in the New York office on the deposit side?

Well, obviously, core deposit growth is going to be one of our themes for 2017. And we're going to do everything to improve that. But 105% is, as far as if you were to ask me, Randy Sims, is way too low.

I like that engine running hot and I like the engine running hot because you make more money. But in this day and time, the examiners are putting a little pressure. And so we are going to make core deposit growth a very important thing for us in the coming year and everyone will be involved in it. So hopefully, it will improve some, but it's a comfortable position.

Stephen, we've been around that 105% here now for several months through the process, so we are having some good core deposit growth out there. You mentioned New York, I think they finished the year around $70 million with deposits, and certainly we anticipate that can go up to a couple hundred million. We have some other ideas working today that we feel very comfortable and we can maintain the deposit growth with the loan growth that we've seen so far. But it has, no doubt, I think Johnny said that about 18 months ago, we started asking for the business, and that's done pretty well for us so far and it certainly is benefiting the growth we're seeing so far.

Okay. Maybe last one for me. Have you guys done some of the math around what happens to your effective tax rate if, say, the corporate tax rates go down to 20% or 25%, what degree of benefit you'll see there and what an earnback would be on any sort of impact to tangible book?

We have done that. We didn't do it at those particular rates. The day we were tinkering with it, we were tinkering with it at 15%.

It would basically cut our taxes in half, because we still have state taxes in Florida and Arkansas. It would require a significant one-time charge for the DTA, because our marginal tax rate has been 39.225%, but when we were doing the 15%, it would take it just north of 20%.

So we'd be looking at charging off about 48% of our DTA at a 15% tax rate. I don't have the exact examples for those other rates.

And then switch to--

But if it went to 25%, it's not a 48% write-off of the DTA. You don't get near as much tax savings.

It's a one-time write-off. It's about, if the numbers are right, I asked that question of Brian and he sent me the numbers, it'd save us about $50 million a year, annually.

So you'd earn it back pretty quickly, a year or maybe a little more?

Earn it back less than a year.

Yes, earn it back less than a year.

Okay. Great. Well, thanks, guys. I appreciate the color.

I hope it happens. You'll hear us scream, if it happens.

Tomorrow at noon, isn't it?

Tomorrow at noon. I think tomorrow at noon he's going to do it. (Laughter)

Someone said might be 2:00 before he gets --

You can go from kazoos to air horns at that point, maybe.

(Laughter) Okay, we'll do that. Thanks, Stephen.

The next question comes from Brady Gailey of KBW.

Hi. Good afternoon, guys.

Hi. How are you doing, Brady?

Good. So with you all crossing over 10, Durbin will come into play, I guess the back half of next year, 2018. I think in the past you've said Durbin could be anywhere between a $6.5 million and $9 million burden. Is that still the right way to think about Durbin?

Well, that's about right. It depends on which month you annualize it. $6 million to $9 million a year is what it is.

So hopefully, I see some push. I'd love to see them do something with that. I see some of that push happening out there right now, but I don't know if we'll get that done. But we got 18 months to get it done, so if there's some legislation that changed, that would be sweet.

Yes. And then, Johnny, you've announced the two smaller Florida deals. Can you just give us an update on M&A, how conversations are going? It seems like there's been some pretty full prices paid here recently. Do you feel like M&A pricing might get a little frothy and you might not want to participate in it this year?

No, we're going to participate. I guess the water raised the level of all boats, you know? You're seeing some two times tangible book deals. We've never done one.

You heard my opening comments about what I feel about dilution, so we just never diluted. To say we'll never dilute, I'm going to say that, but you never say never. But we're on some nice transactions right now.

We're working on some deals that may make some sense for the Company, and some larger deals and some smaller deals. So some smaller than Commerce, some the Liberty size, a little smaller than Liberty.

So we're on several transactions and I expect us to be a little more aggressive. Our currency's held up pretty good. We're still trading at 4 plus book, so I think you'll see us active in 2017 and 2018.

Okay. All right. Great. Thanks for the color and congrats on number 23.

Thank you.

The next question comes from Jon Arfstrom of RBC Capital Markets.

Thanks. Good afternoon.

Good afternoon, Jon.

A few follow-up questions. Maybe start with what Brady was asking about on M&A. Are you finding, with maybe the increase in valuations, even though I would argue most of your potential sellers are private, are you seeing potential sellers more willing to engage in discussions with you?

I don't know if there's any change in that. I don't know if it's -- Tracy? Stephen? I don't know.

We've always been engaged in conversation. We're always involved in something, and we're involved in stuff now. So I don't see any difference plus or minus.

I understand what you're saying, the private banks think they're worth more and they're ready to make a deal now. The public banks, certainly have grown up. So I don't, I think that I just saw Renaissance do a deal last night at 2.1. I haven't seen them do that. But their stock's run up and I'm sure, I don't know, if they bought a private company.

Do you see any difference, Tracy, Stephen?

No, I think we'll all be anxious to see what happens. The activity, I would say, is probably as busy as it's ever been, and it's always been steady, as we know. And communicating, certainly the price expectation's not been alarming yet what we've seen, or we haven't given them that indication.

Okay.

We probably could have done a couple billion or more last year, but we just didn't want to step over that line.

Yes. Okay. I saw one last week at over 3 times tangible.

Yes, Oregon/California deal, I saw that. And they said that it was accretive. I think it's accretive in 2099.

It's not 4.11 a book, Johnny, but it's close. (Laughter)

Okay. All right. Okay, Jon.

A couple other follow-ups, too. In LA, this is probably assumed, but same type of product, you just need feet on the street to do the deals there, is that right?

Yes.

I'm pretty impressed. He hired a credit manager first. I thought that was pretty shrewd on his part, teach him our culture.

Okay. And then a follow-up on the margin deposit part, Randy, maybe for you. But do you expect to have to raise deposit pricing? I know it's crept up a little bit. I don't know if that's mix, but you've obviously got the growth. I guess you talk about the deposit initiative, how do you get the deposits in the door? Is it simply price or is it some other things?

Well, I think it's a combination. I don't see us going out and raising prices throughout all our markets. I don't think that's going to happen.

I think we're going to systematically look at where we think we can raise deposits and the different type products, and I think it's going to be a combination of a lot of different things. So we just need to do it smart, and this Company has been known for raising deposits and getting rid of deposits smart, so I think you're going to see the same thing coming down the pipeline.

There's no panic here. Like I said, 105% doesn't save me. I think it should be 110%, unlike the regulators.

Okay. All right. That helps. Thanks, guys.

We might buy something that's got some liquidity in it, too. You never know.

That's true.

We might give emphasis to something. There's some smaller Arkansas banks that might have some, that have decent liquidity in them that we might be able to pick up.

Okay. That helps. Thank you.

I think you'll see New York at $200 million-plus next year, or this year. I think north of $200 million. So I think you'll see some deposits coming in up there.

Okay. Good. Thanks.

Thanks, John.

The next question comes from Brian Martin of FIG Partners.

Hi, guys. Nice quarter.

Thanks, Brian. How are you doing?

I'm good. Just a couple easy things. Most of my stuff has been answered.

But the mortgage outlook, this quarter was a nice, I think it was a record level you said, I get confused with all the records. But just the outlook for that going forward, given rates, maybe what part of the business is refinance versus purchase or how are you guys thinking about that business? And I guess the expectation seems on the SBA front that you continue to gain some momentum, that that should continue going forward. Just some outlook on those would be helpful.

Brian, this is Kevin. I'll take mortgage first. We have historically been higher purchased than refi throughout our history. And Florida actually helped that as we moved into Florida. We were stronger purchase shop than we had been refi. So we've never been dependent upon that.

We're continuing to fill out our footprint with mortgage officers. So that's where a lot of the strength is and we have a pretty broad product package, so we really think 2017 will be better than 2016.

On SBA, it's still small, so we're still filling out our footprint there, as well, as far as BDOs, and I would expect that 2017 could be better than 2016 in that area, too.

Yes. Okay. Perfect. That's helpful. And then just a couple last things, maybe one for Brian on the accretion income. How much of that accretion income is left, Brian? Because I think you said it was 8.6 this quarter and maybe it trickles down a little bit per quarter the next couple quarters, but how much remains to be booked?

You know, we do monitor that quite often. And at the end of December, we had just slightly over $100 million left in accretion, and $35.3 million of that is non-accretable and $64.8 million of that is currently on accretable discount. And if we have some positive pool impairments that we might have in 2017, part of that $35.3 million then would move over into accretable.

Okay. Perfect. Okay. And then maybe just a question on the margin, whether it's for you or Steve, but you said that you were possibly optimistic that the core margin could go up a bit further from where we're at today. Is that a function of just the rate outlook? Is that what's driving that, your outlook there, or is there something else I'm missing?

Brian, this is Stephen. I'll take that. I think that it's primarily driven on the loan yield side. I think the yield, the mix that we have between the legacy group and the CFG group, assuming we're able to hold deposit pricing at a level where we have been able to, I think we're optimistic that we can continue to see that move forward.

Okay. And Stephen, you said, on the part that was variable rate, did you say that 40% -- I know you said 25% of the loans were variable rate, but some of them still had floors -- but then the part where you talked about LIBOR, did you say that 40% of the loans are based off LIBOR, or is it 40% of the variable rate?

40% of the variable rate book. So total floating rate is about $2.8 billion and we've got about a $1.2 billion, $1.3 billion tied to LIBOR.

And if I heard you right, not much benefit early on with this rate increase, just given the floors, but that should dissipate over time as you get another one or two?

Yes, not on the increases in prime. We've seen some benefit as LIBOR's ticked up over the last 90 days or so. But on the Fed increases, that's been nominal thus far. You'll see another one or two rate increases before we see the full benefit of that.

Okay. Perfect. And then just last one was just, maybe for Johnny, on the reserves. Can you give any color on, do we just assume you gradually build the reserve over time? I know your preference to have that number higher rather than lower, but given where credit's at, and it sounds like there's some improvement coming from the Bay City transaction. How are you thinking about the reserve, in general, going into 2017?

Well, I didn't change my belief. I still believe in strong loan loss reserves and asset quality is good. But when we can build them, I think we continue to build them. So I'm really a 150 reserve guy. If I quit buying banks some day, we might get it to 150, but we keep buying banks, it makes it difficult. But I'm proud of the fact we've got it to $80 million, and we went from 104% to 108% and we had net recoveries the fourth quarter, so I just want to keep building it.

There will be another cycle. I don't know when it will be. As I told you last time, I don't see it, our people don't see it, I don't think it's out there right now, but there will be another cycle and we just want to be prepared for that cycle. We were prepared last time for it. We want to be prepared this time. So we'll continue to build reserves when we have an opportunity to build them.

Okay. Perfect. That's all I had, guys. Thanks.

Thank you.

The next question comes from Peyton Green of Piper Jaffray.

Okay. Great. Thank you. Just a question on the interest rate sensitivity, just to make sure that your comments were clear, Stephen. But you think that it's another 25 to 50 move up in Fed funds before you really start to see asset sensitivity kick in? Is that right, from the earning asset side?

Well, particularly on the loans that are tied to prime. We saw a couple hundred million dollars worth of loans move over the last 60 days, 80 days or so, since, well, I guess over the last 30 days, since the rate increased. But yes, we still got a good portion of those that have floors above where rates are at today.

Okay. And then maybe from the liability side, competitively, are you starting to see any deposit pricing pressure, particularly maybe in Florida? And what do you think you'll have to do to grow, at the margin, deposits 10%? Will you have to increase rates more than last year or do you think you can still manage it with the level of increase in interest bearing deposit costs that you saw in 2016?

Sure. This is Stephen. I'll take the first part of that.

I think we've been successful thus far in not having to go out and buy money and raise rates. We've been successful in having our loan teams having had a continued focus in our loan committees every week that's top of buying and one of the first questions that get asked in looking at credits is what deposit relationships will come with that. And that's generally your loan cost funds.

So from a competitive standpoint, we're seeing that in Arkansas, with some competitors here that are buying money. You're seeing that in selective areas in Florida. But I think a lot of that's still relationship driven and can bring in some of the core low cost money that way.

Tracy. Said earlier, we've been watching this now for about a year and a half and the asking part has turned out really well. I was paying attention the last month in our lending committee, as Stephen mentioned, where they may have presented a loan a year ago on a customer that didn't have any deposits in the bank, and this time they present a nice credit and there's $1 million sitting in the bank. So the asking part is paying off, and those are generally at the lower cost.

We're cautious and we keep saying, well, it's going to start costing us a little more. We run our models internally anticipating a little bit of cost increase. But so far, we've been able to hustle and it's paid off, and hopefully that will continue.

But we've seen some pricing out there that checking accounts have been tied to the T-bills or things like that have picked up a little bit through some of our networks that we have. But internally so far, it's not happened, and if we keep doing our jobs and focus and asking the customer for just the relationships, I think we'll be able to hold on to that for a little while longer.

Okay. And then on--

We're up 2 basis points, two ticks --

For deposits.

Deposit counts. Yes.

We're up 2 ticks, 2 basis points for the quarter. I think we're holding it pretty good.

Absolutely. And then on the lending side, are you seeing any more competition for loan yields? I know with CSG, he's been able to hold pricing and probably improve it a little. But in the community bank side, how is the pricing competition?

It's pretty good right now. It's better. It's better than, you still see an outlier once in awhile, but it's better.

Construction, everybody is getting hammered on construction. So construction, whoever's going to do construction is going to pay more money. That's just the way it's going to be. It's just going to be, we've set a floor on construction here.

Of course, New York's always had a floor on construction. And we hear lots of banks are setting floors out there on construction. So you're going to see that portion of it, I think you'll see that portion of it go up, those rates go up.

You know, you've got New York and we look at our renewals here and if they were last quarter, they were at 4.1% and renewals this time are 4.05%, we're not going to accept that. We want them to be, we want to be 4.2%, 4.25% or 4.3% on the renewals. We don't like loans being booked on our books that's below our average yield.

So we're staying on top of that and pushing it. And I don't know, I think Kevin sent out something on construction the other day. So here's the floor on construction. You bring construction loans in, this is the floor.

Peyton, our lenders work extremely hard building the relationships that they have. They earn their business in that aspect, so they know they can get the service provided and they're willing to pay that.

We do hear those come in every so often, somebody does a high 3% for seven years every now and then, and they are some competitors, but it's ones and twos along the way, and our customer may go do that deal and that's fine. We know they'll be back and sometimes they come back because they didn't quite get the 3.9% for seven years, it didn't quite work out the way they thought it would be. And then our turnaround time, due to the professionalism of our staff and our lenders and the support we give them, we're still providing good service at a decent price.

Okay. Great. Thank you very much for taking the questions.

Good to talk to you.

Take care, Peyton.

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

Thank you, Andrew. Appreciate your support. As I told you in my opening remarks, thank you for all the years of support. And if I look at our institutional investors, it makes me feel good, because most of you have been with us since day one. So I expect and certainly hope I hear Randy Sims blow the horn and say six years in a row, or 24 in a row, whatever you're going to say, Randy. I hope we hear that next quarter.

So I will be disappointed if we do not do that.

Somehow, I think we'll get that done. So again, thank you very much for your support and we'll talk to you in 90 days.

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