Home BancShares Inc (HOMB) 2017 Q2 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares, Inc. Second Quarter 2017 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 2017. (Operator Instructions) And 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, Carrie. Welcome to Home BancShares' Second Quarter 2017 Earnings Release and Conference Call. You'll hear from HOMB's management team today on the financial and operational performance and the other important numbers for the quarter. Q2 of '17 was another strong one for our shareholders as we've tacked up one more record quarter through our string of 24 record quarters, and I'll let Randy still talk more about that in a little bit.

Your company earned over $50 million for the first time. That was $6.6 million increase over the same time last year. But probably more importantly, excluding merger expenses, we are on $50.7 million, a $3.3 million increase over the first quarter of 2017 or annualized 27.7%, pretty impressive numbers.

Earnings climbed from $0.31 to $0.35 from this time last year, and from last quarter, $0.33 to $0.35. The company produced -- some pretty interesting numbers here. The company produced a 1.86% return on assets, and that's the same as we did last quarter. But what is significant about this quarter is that we had nearly 90 days of interest on our $300 million sub-debt, roughly $4.2 million of interest expense that was not in the first quarter. So our trivia number is -- and I love trivia -- is: What would we have run without the sub-debt? And that number is a 1.94%.So apples-to-apples, the company would have run a 1.94%, and that gives you an idea of how well your company is running. These strong numbers show how quickly your company has moved to capitalize on our operational efficiencies that this corporation has become very famous for.

There are limited efficiencies left in the landmark transaction until the Stonegate transaction closes, and there'll be substantial opportunity for additional consolidation savings on that merger. However, we still have substantial opportunities for cost saves on Bank of Commerce in both lease payments as well as salary reduction, and you'll see those in the third and fourth quarter.

All acquisitive companies have been told, asked or urged by the regulators to increase capital. Thus, we made the decision to use sub-debt rather than dilute our shareholders with an equity offer. Our plans are to retire that debt in less than 5 years, and this decision will not create shareholder dilution.

As you know, I'm the largest individual shareholder, and that number does not include my immediate family that has 2 million-plus shares of ownership, and that include our board and employees. The result is strong inside our ownership and, again, we do not dilute.

Additionally, good numbers. Revenue for the second quarter was $147 million versus last quarter at $140 million and December 31 at $135 million. We've grown over $12 million in revenue since December 31. That's what great companies do. Efficiency ratio has remained strong at 37.48% for the quarter versus 37.52% last year and 40.76% the first quarter this year. But we had some -- we had some -- are we having a bunch of merger expenses, Brian, in that last quarter?

That's correct, yes.

Good revenue growth with strong expense control leads to top-tier performance. As we acquired a problem, failed or even good banks, they all have performing and nonperforming loans, some have more than others, particularly Bay Cities and the Liberty Bank transaction. We've cleaned up about half of the Bay City garbage and hope to get most of the rest before the end of the year.

If you remember, we marked Liberty loans $100 million, or 5% of total loans. I think had we not locked in and they continued operating the same operational style, they would have been forced to recapitalize, sell or face even worse circumstances.

This has been a 3-year battle, but Davey and his management team has cleaned out the bad apples in the group, removing the poor managers and poor loan office. From a profitability perspective, the deal has been an absolute HOMB run and has been -- but the challenge has been quality from Day 1. It's not over, but congrats to the team, they've done a great job and come a long way.

While we review the challenges of the past and look at the present asset quality ratio, one only wonders what it would look like without the problems that we acquired through acquisitions. We still have more to charge off, but thanks to a great loan team, most are properly marked. HOMB's asset quality is very strong as good as it's ever been. Net charge-offs are at almost record low with 0.03% for the quarter. Reserves to nonperforming is 170.99% -- Jonesboro math we call that 171%, we round up here if it's good.

Nonperforming to loans was 0.60%; nonperforming to assets, 0.60%; and reserves to loan, a strong 1.02%. In addition to that, marks left remaining on the loans are $96 million or 1.22%.

Loans have been flat or slightly down this year. I don't want you to be overly concerned about the flat loan growth or lack of that the last 2 quarters. We originated $370 million this quarter and $400 million in Q1. We have large number of payouts, most were scheduled by us, but some surprises as they sold their businesses or their properties.

Actually, the quality of the loans we've seen in the last 6 months has not been very standard. It's just a hiccup in the cycle. Many businessmen are sitting on the sideline with lots of money to deploy just waiting for our unproductive Congress to take some action on health care and taxes. It's difficult for businessmen to operate sometimes. What is the capital gains. Where is that going to be? What is the corporate tax rate? What's the personnel wage? What happens to depreciation? Can we deduct state tax? What about home interest? Just for starters, the business world is waiting, while they squander the opportunities at hand. I agree with Jamie Diamond in his comments the other day.

Quite to the contrary, you might need to be more concerned with banks that might -- that are having large loan growth over the past 2 quarters. We take what the world gives us. We never press the loans row in unreasonable fashion or either own rate or return much less quality. The way to get in trouble is to push loans. I'll say, it's like pushing a rope. We're seeing lots of loans, but they don't pass the test. But this too shall pass. The key is to remain disciplined, hold the course, work on your loan problems, raise deposits, continue to bill enterprise risk management problems and try to be more efficient during these times. Look for new opportunities like FinTech, merge of branches and other creative ideas.

M&A were busy. It's time to lease 4 MDAs during the quarter and perform due diligence on one. As I've said earlier, the Stonegate transaction is progressing along pretty much the same trail as the other 19 transaction we've done.

Shift closed late third quarter, fourth quarter. We have our eyes on a couple of deals that may come together sooner rather than later. We remain extremely disciplined on our M&A strategy, no dilution to our shareholders. We never have and never will.

All transactions will be AAA, accretive, accretive, accretive. I think we're the ones who coined that.

Dividend increase. The board will be abiding, like this Friday, it's time to look at that again.

Stock repurchase. We've bought back over 400,000 shares during the quarter, and we'll continue in the future if HOMB's stock remains on sale. Our stock is underpriced and creates great bang opportunity for our shareholders.

Consensus is almost $30 per share, and we're trading at about $24.50. We're slowly seeing regulatory release, make it sail through the crazy political process. That, coupled with tax relief, will create a bank run and freedom -- a big run and bank stock, and I think the odds are good that we'll see both of those this year. So good luck to the shorts.

Capital ratios are strong and improving. Tangible book value at June 30 were $7.23 versus $6.63 at December, up $0.60, 18.2% increase, pretty impressive. Margin declined due to mainly the sub-debt issues and a little extra liquidity. Additional trivia, margin would have been up without those 2 items: sub-debt, liquidity, apples-to-apples comparison. Loan-to-deposit ratio at the end of the year was 1.06%, directly the result of the strong loan growth that we had from CCFG, coupled with strong loan growth in our legacy footprint. At the end of the quarter, we're running 100%. Second quarter deposits had grown over $200 million.

The new program that Tracy French created on the deposit side is very creative. I said, "What is it, Tracy?" He said, "Let's ask for deposits." So we haven't asked for -- good job, Tracy. We haven't asked for deposits in years, and we suddenly started asking for deposits and here they come.

On the construction and CRE bucket, HOMB is running below about 100 and 300, with plenty of room to grow and looking for good opportunity, so we're back in the game. Randy, I know I've been windy today, but a great quarter, kind of a catch-your-breath quarter. We all need one once in a while. And as the asset quality improves, deposits grow and all the other factors are positive for the company. Your company is hitting on all cylinders and getting better every quarter.

We're ready for new opportunities that may come our way. Take it away, Randy.

Thank you, Johnny. Great comments and well covered. As he stated, it was a very good quarter. In fact, it was a great quarter and another landmark point in the history of our company. It's not just the fact that we've made over $50 million during the quarter or that earnings per share were $0.35 or the record net interest income or any of the other great achievements during the quarter. More than that, ladies and gentlemen, the second quarter 2017 was the most profitable quarter in the history of our company, and I get to say that again, because we keep saying again, again, and again. Now that is, drumroll, that's the drumroll, 25 consecutive quarters of record income.

That was a little weak. We'll get you a better drumroll next time.

Well, 25 deserves a better drumroll then.

Well, Mr. French was an all-state member of his band in high school, maybe he can do better than that.

I believe he's in Trombone, I don't know he could...

Well, the trombone would be good. Trombone, it would be.

But 25 consecutive quarters of record income, and I get to say that, and that is a great privilege to be able to say because that is just a fantastic achievement. And on top of that, we look forward to closing on our largest acquisition in the history of our company with Stonegate Bank, hopefully within the next quarter or early fourth. I can confidently say Home BancShares is again moving forward towards a very successful year. So quite a quarter, quite a year, over 6 years of record income, and I think all shareholders can be proud of what we're doing, and I congratulate our employees and their hard work.

Now to some of the numbers, and I'll be quick because many of them have been covered. For the second quarter of 2017, the company recorded a quarterly profit of $50.1 million compared to $43.5 million for the same period in 2016, a 15.1% increase. If you exclude merger expenses and gain on acquisitions, our earnings were $50.7 million, $3.3 million higher or 7% higher than the previous record earnings during the first quarter.

Diluted earnings per share for the second quarter of 2017 was $0.35 per share compared to 31% per share for 2016, representing an increase of $0.04 per share or 12.9% when compared to the same quarter in the prior year.

Excluding merger expenses, diluted earnings per share for the second quarter of 2017 remained at $0.35 per share. Our return on average assets for the second quarter was 1.86% as compared to 1.83% in the second quarter of 2016. Our return on average assets, excluding intangible amortization, as Johnny said, was 1.96%.

Our core return on average assets, excluding intangible amortization, provision for loan loss, merger expenses and income taxes was 3.19%. Our return on average TCE, excluding intangible amortization for the quarter was 20.09%.

So as of June 30, the Corporation is sitting at almost $10.9 billion. Deposits ended at $7.77 billion as compared to $6.94 billion at 12/31/16. We've got a great management team that's on hand to talk about more results of the second quarter. So let's get started with Centennial's CEO, Mr. Tracy French, to give additional color and his comments.

Randy, well, it's nice to hear that $50 million number for earnings. Your team of bankers continue to stay focused on getting better. The excellent financial results for our shareholders come from all regions of our company, and I'd like to share just a few of those numbers with you. The most ever, $102 million for the first half 2017 net income for Centennial Bank. The bank's overall return on assets of 2% for the month is up to 1.98% year-to-date for 6 months. Arkansas markets, which were led by (inaudible) in the Northeast Arkansas regions led, the way. The Florida markets are nearing the 1.9% ROA mark, which has led that north part of the region that is over 2% now. Our Alabama region has a strong 1.83% ROA, and our New York region is doing a 3% return on assets.

The bank efficiency ratios year-to-date stood at 34.33% with Conway leading the Arkansas regions at 32.69%. The Florida market is at 37.69%, and this was led, this year-to-date, by North Florida region standing at 34.25%.

Alabama's efficiency ratio was a strong 31.93%, and our New York operation is an amazing 26.13% efficiency ratio.

You've heard from Johnny and Randy, and you'll hear from others today on our reasons that our company is a top performer. A couple of points I would like to share are our asset quality numbers continue to improve from already very good numbers. Your group of bankers are getting it done. Loan originations remain very good with our focus on strong loan underwriting and yields to preserve our shareholder profits.

Our deposit growth has been good, with careful priority as our team stays focused daily on our net interest margin. CFG, our New York region, is performing as planned, with an exception that returns are better than planned, as. Noted earlier on the ROA and efficiency numbers note. The Los Angeles production office is open and is servicing our clients out West. The Stonegate transaction remains on course. Our broods in Stonegate are working well together, and we look forward to a nice, smooth landing in the second half of the year.

Stonegate Bank, as we knew, is an impressive bank. We are looking forward in joining forces with this outstanding group of bankers. So Randy, I'm not sure if you've used the R word yet, but I believe it's safe to say it now, and we'll give it our all and let you say it again next quarter. And you can get you drumroll fixed.

We're going to get a better drumroll next time. Thanks, Tracy. Great comment.

The total number of active Centennial branches is 147 versus 151 in the first quarter, with 76 in Arkansas, 64 in Florida and 6 along that beautiful Alabama coastline and, of course, 1 in New York.

I would now like to turn it over to Stephen Tipton, our COO, who will fill you in on some of our income efforts, efficiency -- not efficiency because Tracy covered that well, but some key operational numbers.

Thanks, Randy. But you all have mentioned the second quarter of 2017 set many records. We're proud to continue to post such impressive performance metrics.

With the Bank of Commerce conversion completed in May, our project and implementation teams are now fully focused on the Stonegate acquisition, and as we Tracy mentioned, working with our peers in South Florida even as we speak today.

As you will hear, we posted a core net interest margin of 4.11% for the second quarter of 2017, and as Johnny mentioned, saw the full impact of the recent subordinated debt offering in our NAV in Q2. We're constantly monitoring loan yields and funding costs, and I'm pleased to see an increase in the core loan yield to 5.27% in June, up 8 basis points from March, month-end.

Switching to funding. Core deposit relationships continue to be a daily focus for our regions. We continue to see our calling efforts materialize as we saw $200 million in deposit growth in Q2, with nearly $90 million of that increase in noninterest-bearing balances.

Despite the recent rate hikes, we continue to hold the line on our stated deposit rates. Our cost to deposits only increased 4 basis points from March month end and, again, compare that to an 8 basis point increase on the core loan yield.

Moving to efficiency. I'm pleased to report a solid core efficiency ratio of 37.29% for Q2. Although up slightly from the prior quarter, a direct result of the 2 recent acquisitions, our president continued to focus on expense control and revenue growth in the legacy regions.

Bud Stalnaker in Central Florida and David Druey in Southeast Florida are quickly working to bring efficiencies out of the Bank of Commerce and Landmark acquisitions.

With that, Randy, I'll turn it back over to you.

Thank you, Stephen. You did cover efficiency some, and you can tell that this corporation hit some big, big factor in our overall successfulness. I would like -- now I'd like to turn it over to our CFO, Brian Davis, who covers net interest income, margin, noninterest expense and other highlights. After that, he will pass it to Jennifer Floyd, our Chief Accounting Officer, to give us some information on our capital numbers. Brian?

Thanks, Randy. The second quarter was a milestone quarter for our company. For the first time in our company's history, we recognized net income greater than $50 million for our quarter, plus we recorded both GAAP and non-GAAP earnings of $0.35.

Net interest income increased $2.5 million to $107.4 million in Q2 versus $104.8 million in Q1. The increase is primarily the result of the client Giant Bank Holdings on February 23 and Bank of Commerce on February 28.

During the second quarter, we had a 20 basis point decline when compared to Q1 in our GAAP net interest margin, primarily as a result of the issuance of $300 million of subordinated debts on April 3, 2017. The subordinated notes added approximately $4.2 million of additional interest expense when compared to the prior quarter.

Consequently, the addition of the subordinated notes negatively impacted net interest margin about 15 basis points. Also, the company made a strategic decision to keep excess cash liquidity on the books during the second quarter of 2017, resulting in a negative impact to the net interest margin of 7 basis points.

Accretion income for the fair value adjustments recorded in purchase accounting was $8.5 million during Q2 compared to $7.6 million during Q1 or an increase of $850,000. The increase of recognized accretion income when compared to the first quarter 2017 is primarily due to pay off accretion, increasing from $1.9 million to $2.6 million. Excluding the accretion income and the associated loan discounts of the company's net interest margin for Q2 2017 was 4.11% on a non-GAAP basis compared to 4.32% in Q1 2017.

Excluding the gain on acquisition of Bank of Commerce, noninterest income was up $1.8 million in Q2 2017 compared to Q1 2017. Excluding merger expenses, noninterest expense was up $1.8 million in Q2 2017 compared to Q1 2017. The primary increase was related to the increase in cost associated with the 2 acquisitions completed in February 2017.

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

Thank you, Brian. And now for our second quarter capital results. As of June 30, 2017, we ended the quarter with $1.5 billion of capital and $94 million of cash as a parent company. During the second quarter, we paid out shareholder dividends of $12.9 million, while growing retained earnings by $37.2 million.

During the second quarter, we utilized a portion of our proved stock repurchase program and repurchased 420,000 shares of common stock at a weighted average price of $24.51 per share.

On April 3, 2017, we completed our underwritten public offering of $300 million of our 5.625% fixed and floating rates subordinated notes due in 2027. The notes were issued at 99.997% of par, resulting in net proceeds after underwriting discounts of approximately $297.2 million, which is classified as Tier 2 capital.

For the second quarter 2017, our common equity Tier 1 capital was $1.03 billion, total Tier 1 capital was $1.09 billion, total risk-based capital was $1.47 billion and risk-weighted assets were approximately $8.8 billion. As a result, our common equity Tier 1 capital was 11.8% compared to 11.4% at March 31, our leverage ratio was 10.5% compared to 10.9% at March 31, tier 1 capital was 12.5% compared to 12.1% at March 31, and our total risk-based capital was 16.8% compared to 13% at March 31.

Some additional second quarter capital ratios include book value per common shares, which was $10.32 compared to $10.05 at March 31. Tangible book value per common share was $7.23 compared to $6.96 at March 31, which represents an annualized increase of 15.6% on a linked-quarter basis. And finally, our tangible common equity ratio was 9.9% compared to 9.7% at March 31. Randy?

Thank you, Jennifer. Let's turn to loans. You've heard several comments on our continued improvement in asset quality numbers. So let's switch to our Chief Lender, Kevin Hester, who's going to give us more detail.

Thank you, Randy. As was previously mentioned, organic loan growth was basically flat this quarter, which was largely due to the continuation of the elevated level of payoffs that we experienced in the first quarter.

As Johnny noted, some of the deals that we have seen recently seem to indicate that our desire for discipline in pricing and underwriting at this point is not shared by all lenders. Said differently, the risk versus reward proposition is harder, overall, to reconcile than it was earlier in the cycle when credit risks seemed to be lower.

Headwinds in a couple of asset classes, along with the uncertainty that Johnny mentioned earlier, are driving us to be even more judicious in our approach. Johnny also mentioned the strong asset quality ratios that continue to improve and currently sit at a level that's unparalleled in recent history. The nonperforming loan and nonperforming asset ratios, both at 60 basis points, improved by 15 basis points and 11 basis points, respectively.

I mentioned on the last call that our nonperforming balances were still elevated due to a couple of large problem loans acquired in the most recent acquisition. This quarter's asset quality improvement reflects a resolution in one of those loans, and we are progressing towards a possible third quarter resolution of another.

The ALLL coverage of nonperforming loans improved by 35 percentage points to a strong 171%. Past dues decreased 4 basis points to 0.91%, and this number has been very consistent for the past few quarters.

Lastly, the allowance for loan losses as a percentage of noncovered loans remained at 1.02%.

Mortgage continues to improve each quarter, with closings up 5% and locks up 7% year-over-year. In addition, the second quarter replaced the first quarter as the most profitable quarter ever, and the pending Stonegate acquisition would provide a very strong opportunity for this business unit.

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

Thank you, Kevin. Good stuff. Well, another good quarter. To recap just a second, record earnings for the 25th consecutive quarter; record net interest income; a quarterly ROI of 1.86%; a strong and powerful quarterly core efficiency ratio of 37.29; an excellent margin, very good noninterest income and continuing improvement with great asset quality numbers; consistent and continued improvement in our major components; and to top it off, all eyes are now on the closing of our largest acquisition in the third quarter, hopefully.

That is what we're all about: great numbers, continued growth and acquisitions as we strive to break more records throughout 2017 and the future. Stay tuned next quarter as we try to make it 26 straight quarters of record income. This is really getting fun.

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

Thank you, Randy. 24 was great. That was what? 6 years in a row. We had to get a mathematician to calculate how long -- how many years that was. That was great. Those numbers are powerful. I thank everyone for their support and joining us today. It's another great quarter. We have about 8 million shares short on this. And I don't know -- I guess it is stored on the wall and see if some of them stick because I can't imagine with all the companies in the U.S -- not too sure that Home BancShares will would be one of them. You take that, and couple with a strong performance with the rooming regulatory relief and tax relief, in addition to Stonegate, as you said, and it appears somebody's playing Russian roulette. That's not Trump's Russia, by the way. This is -- because the one they're playing would kill him. So good luck to you, boys, on the short. So anyway, Carrie, I think we're ready for -- I think we're ready for Q&A.

(Operator Instructions)

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

Yes, I can.

As I said, while they're putting that together, I left out a few comments that I'd like to add, if that's all right. I didn't give enough emphasis on CCFG this time. I just wanted to -- so we (inaudible) $67 million or 20% annualized. They had paydowns of about $93 million. That's about normal. That's about not where they should be on the growth side. Portfolio of that, $1.15 billion. Originations, they originated 10 loans for the quarter at $204 million, of which, they've funded $72 million of, that's about normal. We have -- as Tracy mentioned earlier, we have the Louisiana pipeline -- I mean, the Los Angeles-Lousiana -- Los Angeles pipeline -- office opened, and that pipeline firstly has about $200 million in the pipeline. So that's kicked off pretty well.

From a pricing perspective, our portfolio is now just shy of 7% in New York, rounded 6.92%. So that's pretty strong, and almost 100% of the book is flowing. Deposits have gone from about $100 million -- up to $100 million, and we expect maybe to get to $200 million.

For the quarter, the company had a pretty good performance, had $13 million pretax pre-provision and a pretax pre-provision return of assets of 4.8%. So that's a good job by all of the guys. We appreciate that. After the Stonegate transaction, we kind of put a throttle on (inaudible) New York to about 15% of our total loans, and that would allow New York the opportunity to go to about $2.1 billion. So that's pretty powerful stuff when you look at -- I think our group could probably take another, (inaudible), Tracy, 6.92? I think that would be pretty good. So I want to congratulate (inaudible) on a great job.

Carrie, you can go with questions now, please.

All right. Our first question comes from Brady Galey of KBW.

So we've been talking a lot about loan payoffs in your legacy market. I know CFG grew nicely in the second quarter. But is there any signs that payoffs will slow and you will start to see some more robust loan growth in your legacy markets going forward?

Brady, this is Kevin. I'll start it and let Johnny chime in if he wants to. Yes, we have had 2 quarters of elevated payoffs specifically in the legacy side. Early indications would be that third quarter looks more normal. It is 20 days in, but it looks more normal as far as payoffs go. We are looking at several large credits that could hit the third quarter. If a couple of those do, then it could turn a really good quarter into a great quarter. So early indications are it looks a little bit more normal, but...

And then, Johnny, as you near closing Stonegate, it sounds like you're back busy. Maybe you're never quite on that front. But you're back busy on the M&A front. Just remind us what types of banks you're looking for now? I know Stonegate was kind of a different sort of bank for you being high-quality. And then also, any sort of specific geography that you're interested in?

Well, we stay pretty much on our footprint. We do like Texas, we think Texas is a good state. What we've looked at on -- we've signed in the A zone, about half of that was then dent-and-scratch and about half of that was good. The due diligence -- when our due diligence team went out to complete due diligence, that's on a dent-and-scratch we were called in on, so we can get from her to what that is. So we're looking on both sides of The Street. We've played heavily, as you know, in the ring of dent-and-scratch for a long time. But in the Stonegate deal, it was a great transaction for us. So we're open to looking at transactions that are accretive to Home BancShares. And from a size perspective, we'd like to play in the $1 billion, $2 billion range. We think that's a good place for us to play. However, we would do selective transactions with -- but some of those bank spreads, they're also going to add $0.03, $0.04, $0.05, some are more to your EPS. And we've got, over the years, we've been pretty successful at that. So we're kind of open. We're open to whatever. We've always been open. When you look at the last 2 deals we've done, they've been all over the board, so we'll continue to look at opportunities like that. We've got another opportunity to pitch that now to a pretty good sized bank. But you just have to pick the ones that makes sense for you. Stonegate makes sense, in just -- when asked about the consolidation savings. So when you look at, the ROA x the -- when you pull out the $300 million sub-debt, that's pretty powerful when you go back to 1.94%. And we just brought those 2 banks into the poll. So we -- our team gets pretty efficient pretty quick, pretty proud of them. So we're looking at whatever comes up -- whatever comes up, this makes sense. We'll do anything that is accretive to this company and geographically fits. We probably wouldn't do a deal, a dent-and-scratch somewhere that didn't fit to our footprint.

Okay. And then finally from me, with the sub-debt raised and with Stonegate, your CRE to capital goes sub-300%. I think the pro forma number is around 285%. Is that still the right way to think about your pro forma?

Yes, we're below -- the company is below both the 100% bucket and -- the 100% bucket and the 300% bucket. Actually, we're looking for opportunities right now, and Stonegate slightly improves those 2 buckets. So we're in good shape, good shape on loans, good shape on CRE, so we think -- probably -- as I said in my remarks, it's kind of a catch-your-breath quarter, which was pretty nice, and we got a lot of things accomplished. One thing, Kevin talked about some of those big loans that we had worked out over a period of time, we had another one payoff today that was about a $10 million bad terrible Liberty credit. We've got it worked out, we've got it going and that's another one that bit the dust. So one thing about the core on the loan side works a little slower, it really focuses on cleaning up these -- not that we don't focus on cleaning up these nonperforming. Just one more after another after another expense, and the run issue has been great in cleaning up those big bad credits. We've got one more big bad one out of Bay City as we think we'll clean up the third quarter, maybe the fourth quarter. And I'm trying to think if we've got another big bad one anywhere, that can't. It pretty well cleans up the big bad ones that have been in the entire portfolio. So it could be continued improvement there. We had, in asset quality, we've got a charge-off in Arkansas coming on, a deal that kind of surprise us. But outside of that, it's pretty good.

The next question comes from Michael Rose of Raymond James.

I just wanted to dig into the margin a little bit. So if I add back the sub-debt and excess liquidity, it looks like the core margin was up about a basis point. Any thoughts as we move into the third quarter? Obviously, the fourth quarter is going to be impacted by Stonegate, which, on the surface, looks like the margins are a little bit lower, and your guys -- then you guys -- so how should we think about the core margin with the June rate hike over the next few quarters in Stonegate?

That would be -- Stephen Tipton, he helps to pick almost everyday. Steve?

Michael, how are you? Yes, I think you hit what Brian said, and I think that's a good way to look at it, kind of ex sub-debt, that we were up slightly. And I think to see that trend continue, when you look at the loan yield increase kind of comparing March month end, which had both the prior 2 acquisitions, as I said earlier, we saw it at 8 basis points. Cost to deposits was up 4, give you some other exciting information on our side. Despite loan growth on the renewals side, we saw $150 million really kind of in May and June mature, and we modified and increased the rate about 20 basis points each month on those $150 million worth of loans. So we continue to see our core loan yield improve, and I think that -- you hit the June rate hike. We saw about $450 million or so change on the daily change, and then you'll see another couple hundred million move over the next few months.

Okay, that's helpful. And then just separately, obviously, good growth at CFG this quarter. You guys are starting to take deposits. Can you guys frame for me how you guys are thinking about (inaudible) and how that might come into play or unfold over the next couple of years, both in New York and then in California?

Mike, let me address that a little bit. I think we'll continue to work the commercial customer base that we have, and I think there's increasing opportunities there. You see that -- what we've been able to do over the last quarter in Chris' area in getting over 100. I think a comment was made that it would potentially get to 200, overtime, and that may present opportunities in -- out of the California office to raise deposits there. So I think we're very excited about what Chris is doing there, and that's really -- when you think about it, that's with no retail, no street presence. This is strictly working our core customer base.

I guess a follow-up to that is, would you guys consider either accelerated deposit strategies, hiring some deposit generators up there? Or would you consider acquisitions in either New York or California?

I don't think we're ready to look at California. We might be more comfortable with New York than we are California. But I think when we turn it over to the deposit side, we're looking at another opportunity on $300 million, $400 million worth of deposits. I mean we have really just started on the deposit side asking for deposits. So that's -- as I told somebody recently, that's kind of a hiccup, too, because -- I mean CFG had such a strong loan growth last year and the legacy had strong loan growth. We've always been able to core fund our growth, and we just kind of outgrew our core funding. It's catching up, so you could see that. And we're asking for deposits, so it's really not -- that's not my concern. My concern was -- my big concern of the quarter was how do we overcome that monster $300 million sub-debt. How do we overcome that, and when you swallow all the interest expense of that for a quarter in this company? And I have to say I'm very proud of the performance of our company for -- I mean not many companies after they swallow $300 million interest expense on the sub-debt and still maintain a 1.86 ROA. So I'll let somebody else, unless you got...

No, that does it for me.

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

So guys, tell me about the net interest margin and the liquidity deployment. Is that something that's going to hang around for a couple of quarters? Or is that 7 basis points -- would that run down -- that 7 basis point impact, would that run down over the next quarter or 2?

This is Brian. I'll take that. I mean we have made a decision to keep excess liquidity on our books, being a $10 million bank, is something we're going to have to do. We don't have as much choice in that. We can probably use some of it in some loans, but for the most part, most of it will hang around for the foreseeable future as a permanent -- because over time, they let us keep our liquidity ratio at 10%. Historically, we had it at 5%, so we're trying to increase the liquidity ratio as far as that strategic decision.

Okay. Sounds good. And then on the deposit side, with the increase you saw in the interest-bearing deposit cost quarter-over-quarter, is that -- was that an abnormally high run rate this quarter? Or I mean I know it was still below the increase in core loan yields, which is good. But I mean do you expect to see similar increases this quarter from the June hike or kind of what's at play there? Was any of that from the online deposit-gathering strategy? Or what sort of color can you lend there?

Stephen, this is Stephen. I'll take that. Not necessarily on the Internet-gathering strategy. I mean I think a good portion of it was what you've seen. We have some accounts that are tied to treasuries, and you've seen that ramp up a little bit. Maybe that flattens out short term. I know we had -- it seemed like over the course of the -- full course of the second quarter, you already had short-term T-bills pricing in the June net rate hike. So we'll see some movement there, but I think our success is back to the core accounts that we're bringing in, the non-interest-bearing growth that we had. I think we'd look to see that continue and help offset any increase in kind of the negotiated-type rates. We still haven't affected our stated rates, and we monitor that on a daily basis. We continue to see a good majority of our CDs renew at our stated rates, and I think we'll continue to watch the inflows and outflows as we set those rates.

Why don't I say one more comment on the excess liquidity. If we -- the amount of liquidity that we brought up hasn't hurt earnings per share or net income because we're earning about 1.25 on it, it's costing us just probably slightly lower. So it's probably very slightly accretive earnings per share. It's just a matter of having more cash and basically, you have a margin on that about 0.25 or less. So it's not hurting earnings on that. It's just keeping excess cash on our books for a better liquidity ratio.

Okay. Yes, that makes sense. Great. And then maybe last one for me. Just on the loan growth front, I mean, you guys have given some good color around pay downs and origination activity. But Johnny, you also mentioned now maybe you're back in the game. So was that to say that you needed to stay below the 100 and 300 for a period of time, and now, you're kind of ready to move forward and could extend back through that level? And really, what do you expect to see from a net growth perspective through the end of the year?

I don't know. We -- I mean we're real estate lenders and we've always been real estate lenders. And we ran 3.60 last year, but in past year, grew 4.20, 4.50, 4.80. We never lost any money in those times either. So we like that. So what I'm saying is we're looking for good real estate, good quality loans right now. We have a core -- in addition to what Kevin was talking about, we have over $0.25 billion worth of loans that have come to us recently that the large loans that we're looking at. And we'll probably close 2 of those loans. We'll close -- maybe close between now and the end of the year. And one of those loans may not close until the first of the year, but we have some really big credits that are out there. So that's another reason we need correct that deposits, so we'll make -- we've got -- it appears that -- I mean we've gotten really picky on loans (inaudible), not that we weren't picky in the past, we're just remaining picky. And seeing some structure on some loans and some loan to cost that we don't do or not going to do, it's not smart to do at this point. So like I said in my remarks, I'd be concerned about those having great loan growth in this kind of market. I mean if -- I think it will give Stonegate -- we, as I said earlier, we throttle -- try to keep New York throttled at about 15%. That will give them the ability to give about $2.1 billion. These 3 large loans are not in the New York pipeline either. They're in the legacy footprint pipeline that came to us because of several different reasons. I think you'll see, as Kevin said, it looks like this quarter's going to be back more normal, and you may see a pop this quarter if we hit one of these big loans and get 1 of these or 2 of these loans. So I think we're back to path. I think we're back on. We're just picky. Our asset quality is good and we just keep working on it and we don't want to put anything on the books. There will be a cycle someday but I don't know when it's coming. Appreciate your support, Stephen.

Our next question comes from Matt Olney of Stephens, Inc.

I want to go back to the loan pay down question, and I'm trying to understand how much of the pay downs is just a timing issue. That just seems random versus that competitive issue where competitors are getting more aggressive and perhaps refinancing some of your customers on deals that you just don't feel comfortable with.

I'll let Kevin take this but I have one comment. It's not going to customers. I mean I think I remember one loan that we lost to a customer in the last quarter. It's not going to customers. It's actual real business being transacted, scheduled pay downs. I mean right now, it's like we're up about $80 million or $90 million for what's going into this quarter only 20 days in, but we have -- we already have scheduled pay downs that we know of that are going to happen this quarter. We know how many loans that we have in the pipeline coming forward. So it's really -- it's just normal course of business, and it's not anything to panic about. Kevin?

I would agree. I mean we got $1 billion-plus in construction loans. So over time, you're going to see some of those move. As they complete, they're going to move department or they're going to move other places. So some of that has hit the last couple of quarters. And as Johnny has said before, some of our customers are selling things and moving into other, looking for other opportunities in the cycle and some just aren't finding deals that makes sense for their hurdles. So as they find things and get back in, some of these opportunities come back, like Johnny was talking about, some of the large credit. So I think it was more timing than anything else.

We did 2,000 loans last quarter. So I mean we're still busy on the loan side. It's just the pay off. I mean they have lots -- we have done a good job of protecting our assets. We've done a good job on the loan to value side. And some of those people were taking some money off the table and you can understand that. I mean some of -- we've got $0.40 or $0.50 on the dollar. I mean '08, '09, when (inaudible) bought some property and they've been sitting on all that forever and they paid them down even lower, they're taking some money off the table and selling that to somebody else. (inaudible), do you see anything...

I don't think -- I don't -- it's not anything to be making us nervous about. We get the opportunity on some of those that come in and, say, a particular loan we made 3 years ago that we stood them up on a 3- to 5-year renewal with their payout. We thought it'd be at least 4, 5 years to calmly put them in a position where they could sell, they did. And we got an opportunity to maybe help at higher loan rate than what we may have been comfortable with our underwriting, which is -- the good news is our lenders out there are taking care of the business, and that gives the chance for the -- to do the next loan that we were comfortable, was where we were at and underwrite it and still try to make a deal. But we didn't get it, and that's okay. We're satisfied with that.

Let me say this with the margin that we carry, one of the highest in the country. If we want a deal, we can get the deal. And if there ever a situation comes up on a competitive situation and we want to keep the loan, we'll keep the loan. Nobody can -- we can do whatever we want to do, whatever is in the best interest of this corporation. So we're not going to wait here and be plucked. Don't get off on that thought that we're going to be here and be plucked by somebody pulling something, we're not going to let that happen. That's not a reality. That's a good trust, somebody want to keep. We'll do what we need to do.

Okay. And Johnny, you also mentioned in the pipeline, there are a few larger loans. At this point, given your size at the bank, what is a larger loan for you guys?

Well, there's this 3 loans that are about $0.25 billion, so that's almost $0.25 billion. It's pretty good-sized loans.

And you said those were not in the New York office, is that right?

They're not in New York office, no. Those came to us through our legacy footprint and through the company -- if I called the name you'd recognize the company -- so it's really good opportunities for our company. And 1 of them is -- actually 2 of them are really relationships, so just relationships that have been there for years. And we've worked those relationship to a point, and we will totally refinance their businesses and they brought them to us. So very nice. And they understand we're not giving it away. We don't give our loans away. These are not cheap rights. We're not breaking our -- we'll do them the way we need to do them, so we're doing them properly. There will be money -- if we put them on the books, they'll be money makers.

The next question comes from Peyton Green of Piper Jaffray.

Brian, I was wondering on the liquidity side, if you all continue to have success and going after and mining more deposit share in your existing markets, will you change how you manage maybe the mix of overnight funds relative to the bond portfolio and deploy more in the bond portfolio, which can help the yield?

We have done a little bit of that this quarter. During the third quarter, we really don't have to cross that bridge because we have a little over $200 million, like, $225 million. Our federal Home loan bank advance has matured. So if that were to be the case, we could take that strategy and evaluate where we want to go. But yes, we would deploy some -- we probably don't even need more cash like we have if we had excess liquidity compared to the bond portfolio. But I don't think that will happen in this quarter. We have to be somewhere where we have a couple of quarters in a row with that.

Okay. And then, Johnny or Tracy, I mean, how optimistic are you all about the deposit gathering opportunity? And would you expect that to ramp over the next couple of quarters or a couple of years? Maybe how could you characterize just the potential growth of that?

Let me talk, then I'll let Tracy have that. We don't have a gun to our head. So we don't have -- we got about $1 billion worth of commitments out there and we can easily do both. So what we don't want to do is rattle the ship. We don't want panic, remain disciplined. We've taken it from 1.06 to 1.00, and what happens to you when you start slamming that accelerator on the floor is -- I'm in Dallas the other day and I opened the newspaper and here's one of our competitors, has a giant ad in there, 1.50 CD rate. Well, you start cannibalizing your entire portfolio at that time. We don't intend to do that. So when we say ramping up, we're talking about quietly ramping up. We're talking about easing it up slowly and building over a period of time, not take it strong, aggressive. We don't have to do that. So we don't want to get ourselves in that position. I had a meeting yesterday on deposits. I was talking about them and I said, we're in great shape. We don't want to get behind the 8 ball. We want to stay where we are, stay ahead of the game, and we're working on that. I think Stephen visited with some of our compadres the other day, $200 million, $300 million worth of deposits that appear to be in that 1.30, 1.40 range if we want them. So...

That's right.

Is that right, Stephen?

That's right.

And up to $500 million. So these are 2, 3, 4 different deals. So yet no deposits. I think -- and they'll be core deposits. There will be real core deposits, right? I think we're in good shape on that. The only -- suddenly, all these big loans have come in here to us, and New York is ramping up, [we'll adjust to it as they] ramp up a little more. And we look like we're back on a normal pace on the pay downs and loan growth, so I think we need to grow our little deposits here. If we need to run 106 for a while when we do it, we're not going to panic. Tracy?

We're very fortunate to be in the markets that we are and having the deposit opportunities that are there. As Johnny mentioned, our strategy 1.5 years ago was (inaudible). We went at it that way and then the markets have gone into or able to go too soon, we hope, or just opportunities. We're already getting opportunities from, say, a Stonegate contact. Does not have all the money with them at this stage of the game. So we've just been very fortunate on that part. And we feel very -- we respect and understand the concerns of deposits, and we watch it everyday, I promise you.

No, I guess my point was just something Johnny mentioned earlier, the chargers weren't really asking for the deposits, and it just seems to me like if we can grow it $200 million, $300 million in a quarter in a quiet way, that helps you balance sheet growth from the other side of the balance sheet.

So we don't do that. Randy Sims was the hawk on running off high deposits. And anytime we bought a bike, he went through there and ran off. We want him out of there, they have relationships. So our strategy change is running off deposits, asking for them now. So it hadn't been -- and we expect that -- the inverse we set to Arkansas, we just picked up $70 million from them. We hadn't -- that's in Conway. We haven't been out asking for deposits. We're now asking for them.

The last few years, the strategy was to get rid of all your hot deposits, and those that didn't have relationships and many of the acquisitions that we had, had high rate CDs. But what we're going after now are core deposits that are reasonable rates or no rights at all. And we're asking for just business accounts and no -- noninterest bearing ads and just getting after it. But the answer to this was to get rid of all that hot money. And honestly, when we get another acquisition, if there's hot money in there, we'd probably run that off and reemphasize core deposits. So that's kind of been the strategy, and we had a lot of runoffs. And now that we're over $10 billion, we need our liquidity a little stronger and we're going to do that.

Okay. And the last question for me. The expense management has been absolutely phenomenal for years now. Is there something that just -- as you are over $10 billion in assets, is there anything from a lumpiness perspective that shows up in the second half of the year or first half of '18 that we should be aware of?

Expect us to continue to run just like we're running.

We were spending about $230,000 a quarter last year on DFAST. We had anticipated when we started that, that we probably be over before the end of last year. Now we've been able to kick that can down the road. We're not spending quite as much this year. It's probably running about $160,000 per quarter, and that won't be any effect for the second half of this year. We'll probably pick back up more to the $250,000 ranks next year because our guys are going to do a practice run on DFAST and try to do a practice mission to see where they need improvement. So we should be in good shape there.

I think the key is to watch our -- I think you're going to see us with some loan growth. I think we'll get a little more efficient as we bring out the efficiencies out of Bank of Commerce. We'll be moving on with Stonegate. I'm anxious to see their income this quarter, to see how it comes out and annualize that and then anticipate the market savings that will be generated through this acquisition, both on the personnel side as well as the facilities side because there's major, major savings coming out of this organization. So that will be pretty simple. That's the big thing. The company is running -- they'll continue to run just like it's running, and the big thing is Stonegate and that acquisition and how accretive that acquisition -- somebody made the statement the other day, they thought that deal was diluted. And I've made the statement I think they're delusional. So it is not diluted because we don't do diluted deals anyway. I got off the subject a little bit, but I felt I'd make that comment. Thanks, Peyton.

That's fine. And then last one. Brian, do you think you can hold the -- the accretion income can stay between the first quarter and second quarter level over the second half of the year?

Actually, we had -- I'm not going to try to project where we'll be with Stonegate, but we had $2.6 million of payoff accretion, which is pretty high and don't really want to root for that because that means you've got loans paying off. It was up about $1 million from last quarter and a $2.6 million is comparable to what we did in first quarter of 2016. So if you just look at the amortization schedule on what it should do, it should, just by a natural flow, reduce probably $400,000, $500,000 a quarter. And it would be hard for us to believe that we're going to have $2.6 million in accretion. But who knows? I don't have the crystal ball to know who's going to come in and pay that off. So that's answer I kind of got for that.

The next question comes from Brian Martin of FIG Partners.

Say, just maybe a couple of things. Did I hear, I guess as far as the closing of the Stonegate deal, that it could be later this quarter? I guess any better time line on kind of how you're thinking about that?

Well, I think we will file the S-4 here pretty soon. Yes, I mean we've kind of been on track for an October 1 from day 1, and we're really kind of on that track. If we were able to pull the trigger, I guess, a little bit earlier, we might do that. But it fits nicely if you can do it at the first day of the quarter, especially a deal that size.

Okay. All right. Fair enough. And then just on the M&A front, Johnny. I guess given kind of the size of the Stonegate deal, I mean it sounds like you're looking at handful of items. I mean is it fair to think that they'd probably be on the smaller side rather than the larger side, given the integration and focus on Stonegate in the short term? Is that fair?

Maybe not. Maybe not fair. I think that Stonegate transaction is -- as you know, once we merge, we glean the efficiencies pretty quickly. And the cooperation between Stonegate and Centennial has been excellent. I think there'd been a lot of planning that's going into this merger and acquisition, and I think you're going to see that deal come together pretty fast. And once it does, I think you're going to see us glean the efficiency of that trade really quick. I mean within 90 days, this bunch really has rung out the efficiencies between the management team, Tracy and Dave, Steven involved in that deal. It appears to me that we're way down the road. This is not our first. We've done a bunch of these deals and so experienced in the field that we know what to look for and what not to look for. And Dave is a smart businessman, he gets smart people and this deal is rolling. It's going to be -- I think it's the deal to beat. I said a while ago, you could -- we get his quarterly earnings and kind of annualize those quarterly earnings and then figure out the major increase in savings that we'll get out. It's going to be pretty easy to forecast that deal. And I think we'll get there pretty fast. So as a result of how good I feel about that transaction, that's why I'm looking in the market. But I wouldn't be a -- there's a lot of deals out there for sale. Some of them fit you and some of them don't. Some of them don't make any sense, and we're just looking for the ones that make sense.

Okay. Fair enough. Just maybe last 1 or 2 things. You talked a fair amount about the payouts. Just kind of the loan production. If you look at the loan production in the last several quarters, has it been pretty consistent? I guess is that the way it sounds? I mean I know the payouts have impacted the net number, but the production numbers, have they've been reasonably similar quarter-to-quarter?

Kevin, do you want to take that?

Yes, I think we talked about the last -- also the last couple of quarters, we've seen deals that we just passed on from a quality perspective or a pricing perspective just didn't meet our standards. So I think -- I don't have the numbers in front of me, but I think the numbers were probably a little bit down over third and fourth quarter last year, but those were really, really strong quarters for us.

So we did, what, 3.65?

Yes, in the legacy footprint.

We did 3.65 in the legacy footprint. That doesn't include New York. New York did another a couple hundred millions. So we did about $0.5 billion this quarter. And last quarter, we did about $650 million, about $450 million and $200 million out of New York. So we did about $650 million. So it's all good. I mean -- and let me tell you something, we're looking at almost as many loans as we did when -- but they're squirming. The guys are -- the down payments. I mean the true equity that you're putting in is not -- some of that were not real equity. And I don't know if some people are buying those deals. We're just not buying off deals. We've taken executive loans this week. We've tabled, I think, 3 or 4 go back. I want to know where the money is coming from and I want to know how much skin they got in the game. I don't really need a lot of bull(expletive), a lot of smoke and mirrors. I want the real numbers, how much money they're putting in the deals. Some of them had some really pretty interesting ways of hiding their equity and how they put equity in those deals. So we're just -- we're pretty hard on that. We drive back a pretty hard bargain.

This is Stephen. If I can add a little color to that on the production side. When you look at kind of our 10 region legacy footprint area, you -- I wouldn't say there's a lack of production in any one area. I mean Southeast Florida, their production in Q2 was triple what it was in Q1. The Conway region here in Central Arkansas was almost double what it was in Q1. So you have some regions that have had some good opportunities. Alabama regions continues to put out $12 million to $15 million a quarter on production. So I think we have some regions that step up in place of the ones maybe that are a little slower from time to time.

Perfect. That's helpful. Just the last thing, maybe just still for you, Stephen, was the core margins that I hear, just kind of your thoughts. I know Brian commented about the accretion, but just the core margin and the likelihood that you're not going to significantly raise the deposit cost in the core margin, assuming the recent rate increases is generally kind of flat to up a little bit as -- at least over the next couple of quarters.

Yes. That's fair. I mean as we said, here we are, I guess, 3 rate hikes in the last 7 months. We've not had to adjust any of our stated rates yet. We've done it on a selected basis to retain, and we've done it on a selective basis to bring some new money in. But if we're continuing to bring in core business that's no-cost or low-cost, optimistic to see that -- you'll certainly see the deposit cost lag what we think we'll do on the loan side with the last rate hike and see loan yields outpace lending costs. Works for me. We're encouraged there.

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

Thank you for your support. Thank you for listening today. And hopefully, we'll -- maybe by the time we talk next time, we can put more color on the Stonegate transaction and maybe we'll have a little more color on the deals and opportunities, all M&A that we're looking at. I appreciate your support. Thanks to everybody and the Home BancShares team who's listening on this call today who participated in one of the best quarters ever in the company. And I suspect maybe next quarter will be as good or better. So thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.