Home BancShares Inc (HOMB) 2018 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Home Bancshares, Inc. Third Quarter 2018 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 and then entertain questions. (Operator Instructions)

The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on Page 3 of their Form 10-K filed with the SEC in February 2018. (Operator Instructions) And this conference is being recorded. (Operator Instructions)

It is now my pleasure to turn the call over to Mr. Allison.

Thank you, Cole. Good afternoon, everyone, and welcome to the Home BancShares third quarter earnings release and conference call. The regular management team has gathered with me today, and you'll hear from them later in the Q&A.

You've seen the press release on the front page has changed to, hopefully, provide a better and quicker way to present information. The change came from my new Investor Relations lady, who you all know, Donna Townsell. So please let Donna know what we can do to improve from there.

First, I want to wish our customers, employees and their families a speedy recovery from the devastating storm that hit the Panhandle of Florida last week. There really are some amazing stories coming from that area from both our employees and customers stepping up to help each other. People helping people. Good people can become great people when faced with severe adversity, and that what's going on in the Panhandle of Florida today. Leadership is what's it's all about.

We have been kind of struggling, because of the phone service, finding our people. So we've actually physically been going out to their addresses to check them. And I think, so far, we've accounted for all but one?

They've all been accounted for.

They all have been accounted for. That's great. That's a new update for me. The storm was a bad one, and, originally, some of our people had no food, no housing, no water and no clothes. Well, the clothes they had were probably on their back, and they were wet. We'll tell you a few stories of some of the great stories coming out. I know there'll be more, but one of the great -- one of our customers from Pensacola, Florida, [Rick Olson], purchased, loaded and delivered 2 [bob] trucks full of life's essential materials, including food, water, clothes, generators, fuel, chainsaws and medical supplies. He navigated the unnavigable, that's kind of hard to say, roads, carrying plywood to place on the road that was washed away or damaged. He entered the places he was informed by law enforcement not to enter, not stopping because his friend and banker, [Jim Haines], his family and employees were in dire need of help. He said to Tracy, David and me, "I can do it," and he did it. The entire Home Bancshares family owes a real sense of gratitude to Rick Olson . And thank you, Rick, from all of us.

[Adam Nitz] is one of our people who went to the branch the day of the storm along with [Joe Agan], and they rode it out. He watched air conditioners being ripped from buildings, thrown in the air as though they were weightless. After a couple of days, he opened the draft [boot] without computer power in order to accommodate our customers desperately in need of cash. And how he did that, he connected with a young lady by the name of [Lindsay Trail] in our Jonesboro, Arkansas, branch who stayed with him on the phone the entire time to retrieve customer information. So we didn't have a computer, we just had cellphones. I'm told that she said, "I'm with you, and I'll keep this line open as long as you want." By the way, I think he went 2 or 3 days without a shower. So I'm sure he was proud to get a shower at some point in time.

Another story comes from [James Hussmann] from Pensacola -- that is the president of our Pensacola branch and [April Berseron], kind of hard to say, but [Berseron], loan administrator from Pensacola. With the assistance of [Sean, Courtney, Mack and Allen Davis], a senior officer from Destin, have been running an almost daily shuttle service through the devastated area, delivering supplies. [James] says, "We are fortunate to have branches that did not sustain damage in the Pensacola area, and we're close enough to provide assistance to our fellow bankers." During my conversation with James , I found out that he and his team had secured several old Coca-Cola syrup barrels. And after cleaning them out, filled them with much-needed gasoline and were delivering the fuel to our people in the damaged area, while asking me, all the same time, what else can we do? Wow.

I know there are many other people on the Home's team doing wonderful things, and hopefully, we'll have many good stories in the future.

Mexico Beach was the hardest hit. On a phone discussion with our area president, [Donny Gay], earlier, he stated the branch is very badly damaged and probably a total loss. He [quoted], said, "6.5 hours, 10 fireman, one banker in Mexico Beach yields a sack of cash." And I said, "What do you mean?" Well, he had 10 firemen in the branch, helping him break into the vault to retrieve the money. With all the problems he encountered, [Donny] could not say enough good things about the first responders. It took them 6 hours to get in. The chief said, usually, we're breaking in a place to save a life, not a sack of cash.

No one told any of these people or asked any of these great individuals to do these remarkable feats. You cannot hide leadership in a crisis. It spews out. Leaders lead without even knowing. Great people do great things. I hope you can hear me on this call. I just want all our people to understand that we're here for you whenever you need, it does not matter. These are foxhole times, and any of these great people are welcome in my foxhole.

Our property damage reports are indicating that damage may not be as bad as one would think after seeing the devastation on television. Donna told me just before I got on the call that 23 of our 27 branches are up and running from Pensacola to Apalachicola to Tallahassee. Some are just draft [boots], but most of them are in full operational mode, and a few of them need electricity. Did you tell me another one is coming on tomorrow?

Yes.

Another one is coming on tomorrow. Our branches in Panama City and Mexico Beach sustained more severe damages.

From a reserve perspective, we have not incurred the losses in the Keys that we expected, and may not, if we're lucky. We're certainly not out of the woods yet, but the sky is much clearer. However, there's still reason to be careful. With the favorable results from the Keys thus far, we think an additional reserve may not be required. Circumstances could always change. For now, we're going to have the reserve applied to the Keys and the Panhandle.

Let's switch to something more positive, the results for the quarter. But first, I think our CEO of the holding company, Mr. Randy Sims, has a comment.

Randy, I think you've got a comment. Is that correct?

Yes, sir. I just want to say, great stories and what a great team we have in the Panhandle. So yes, let's turn to something more -- some exciting news. The number is now 30. That is 30 consecutive quarters of record income and the most profitable quarter in the history of our company. I had dinner last night with my 5 grandchildren and I threw out the 30 consecutive quarters of record income, and they all came up with the same conclusion, 7.5 years. They had -- some of them had to carry the 2 and all of that, but 7.5 years. So you have it from authority, 7.5 years. The youngest one, 6 years old, said, that's a long time. Well, it is a long time. And we just keep hitting quarter after quarter after quarter and having the most profitable quarters every single quarter. I can't say enough. 30 straight quarters. What more evidence do you need that this is one of the most profitable banks in America?

So with that, let's go back to Johnny and hear about the great results from this 30th consecutive 7.5-year record-breaking quarter.

Thank you, Randy. I agree, 7.5 years was a long time ago. It kind of gives you -- reflect back to what was going on 7.5 years ago. That's when the Navy Seals killed Osama Bin Laden. Ben Bernanke said, in -- the 2011 economic growth has been weak in recent months, and he would not speculate as to when he would discontinue the Fed's monetary stimulus. You remember [QE]? Herman Cain announced for President. You remember Herman [99999]. And Mitt Romney announced for President. Andy Rooney retired from 60 Minutes. The Dow had its worst week in 3 years, falling 6.14% as recession fears grow. And Bank of America laid off 30,000 people. Well, it seems like a long time ago. And after reflecting back on it -- on those times, it makes present times, however tricky, certainly a much better time to be in the banking space.

CEO, Tracy French, walked up to me last week and commented, "You know, boss," he said, "It's a good time be in the banking business. We're making a ton of money, almost $230 million the first 3 quarters, and this is our first quarter ever to earn over $80 million." He went on to say that if we continue at this rate, the company will earn $300 million-plus this year. Well, that's right, and that's good enough for me.

I just want to give you a report on buybacks. The company so far -- we knew we were having a good year, we thought we'd buy the stock back. We bought back 2,165,731 shares so far this year. Q1, we bought 303,000; Q2, we bought 345,000; Q3, we bought 1,214,000; and in October alone, we bought 302,000. While it's on sale, we're going to buy it.

My comment during the fourth quarter earnings release was that Home was teed up for a power year, and that's exactly what is happening. We saw it coming. The $80 million quarter was even stronger than it appears when you realize that this was the first quarter -- full quarter of Durbin, coupled with the first quarter of HOMB $2.00 expenses, those expenses equated to about $3.7 million. So in addition to having record earnings, we swallowed those expenses or swam upstream, as I say -- said on the road.

Payoffs continued to dull loan growth. However, it's not for a lack of loan origination. Home had record loan originations of $987 million for the quarter, with the legacy footprint accounting for 84% of that total. If we had not had the payoffs the last 2 quarters, we would have booked $1.9 billion, that's billion by the way, in loans, and HOMB $2.00 would now be a reality and not something in the future. That's how close we are.

Payoffs for the quarter. The bad news is New York had $400 million of payoffs for the quarter. The good news is, is they made a lot of money when they get payoffs. The strong profit took a little edge off of the payoffs. I thought, well, I don't like the payoffs but the profit was very good. If you remember, the life of CFG loans is about 36 months. Therefore, about 1/3 or $500 million will pay off every year, but we didn't expect that all will pay off in one quarter.

However, New York's pipeline is they have about $300 million in the pipeline. They were down about $175 million in loan totals with the big payoffs. But as I said, they got about $300 million in the pipe.

The good news is that legacy had a good quarter, and legacy was up $108 million. I'm pretty proud of that. Everybody seemed to pitch in to do that. We ended up down about $60-plus million for the quarter, but it was a great quarter.

Let's talk about earnings. Earnings -- third quarter earnings were up 5.6% on a linked-quarter basis or 72.8% year-over-year, and that's adjusted for the $33.6 million hurricane loss in the Keys -- hurricane reserve in the Keys and the merger expenses of $18.2 million.

We have record earnings of $0.46 a share. Revenue was up $11.7 million or 6% on a linked-quarter basis. And revenue year-over-year is up 60%, and revenue for the first 3 quarters of this year is up 60%. Pretty consistent.

Listen to these numbers. Return on assets on a linked-quarter basis was 2.14% for this quarter and 2.13% last quarter on a linked-quarter basis. Is that consistency? Return on assets for the first 3 quarters of this year of 2018 was 2.12%. So that's pretty powerful earnings compared to last year, 2017, at 1.82%. But remember, you got to add back to that the $33.6 million in hurricane reserve and the $18 million in merger expenses.

Return on tangible common equity on a linked-quarter basis was 24.56% this quarter and 24.27% on a linked-quarter basis. That's consistency again.

Return on tangible common equity for the first 3 quarters this year was 24.39%, and versus last year, 15.06%. But that, again, has the $33 million hurricane reserve and the $18 million of merger expenses.

Margin. Let's go to margin. Someone said, you can't -- I don't believe you can maintain your margin. Well, margin held up a little bit better than we anticipated. We're down only 1 basis point to 4.46% versus 4.47% on a linked-quarter basis. Margin year-over-year was up 6 basis points from 4.40% to 4.46%.

You remember, Shore Premier was to be dilutive to margin by 3 or 4 basis points. But because of New York's great quarter and a starting trend of increasing loan rates -- higher, excuse me, increasing loan rates higher into the legacy portfolio, we'll be able -- we have been able to keep our margin basically flat for the quarter. Asset quality remained excellent. Our management team has been with me and myself. We've been traveling all over the country during the past several months, visiting investors, both existing shareholders and prospective shareholders.

I just thought I'd share some of the insights of the investor sentiment. The pessimism about banks is, I think, way over the top. We've seen worse times in this industry. But here's some examples of some of them, and some of them are almost comical. Interest rates are going up and that's good for banks. Interest rates are going up and that's bad for banks. Banks need loan growth. These are dangerous times for banks to have loan growth. If they're having loan growth, they must be doing something wrong. Cost of funds is going up, and there's no way you can keep up with that on loans. Asset quality must get worse because it cannot get better. If you raise your rates, you must be getting adverse selection. You need to raise your rates to outrun the deposit beta. You're going to trade away the Trump tax gift. We must be in the last innings of this economic cycle. Again, when you listen to those things, everybody is looking for something. I don't know what their -- the market is pretty good, the bank is pretty good, but everybody appears to be looking for something. Even with the nonbank competition for loans, the daily battle to increase spreads, regulatory environment, with escalated M&A process making acquisitions very difficult for disciplined acquirers, I'm sorry, those with strong business experience that have been here before will weather this situation and good operators will look back favorably on these times. Keep your good people close, chuck your weak ones. Work hard. Nobody said it would be easy.

When our company continues to perform as it has, as Randy said, 30 consecutive quarter -- record quarters in a row, with a 4.46% margin, a 37% efficiency ratio, a 2.14% ROA, increasing revenue, record earnings, expense control, fair dividend payout, fast capital growth, over 24% return on tangible common equity, a very experienced management team and a good probability of earning over $300 million this year, tell me what's wrong with that? Even if the drivers of the economy are beyond our control, we'll be fine, and we'll continue to be one of the best, as we have, for many years. Our performance ratios have always been best of class. Forbes ranked us the best bank in the country of all banks last year, very nice compliment, but this year's performance is much better than last year. We may not be the best bank in the country, but we're damn sure in the top 5 of all banks anywhere, and we'll continue to be there.

I want to thank you for your support and tell you how much we appreciate it. Your honor, I'm asking for summary judgment here. I rest my case.

Cole, we are ready for questions.

(Operator Instructions) And our first question comes from Brady Gailey with KBW.

Glad to hear everybody is doing relatively okay down in the Panhandle. I know that was doozy of a storm. Maybe we can start just with CFG. I know that, that can be volatile like we saw this quarter with some payoffs, but how are you thinking about the growth of CFG from here?

Well, I don't know about -- I don't know if I like volatile, I think I like lumpy. But I think Chris is with us on phone and -- but let's -- Chris, are you with us?

I am. I am. Thanks. Yes, I think the way that we usually think about the business is month-to-month, quarter-to-quarter, it's tough to sort of project whether or not you'll be up or down. We look at it more on a rolling 12-months basis. I think even after this quarter with the significant paydowns, if you look at us on a rolling 12-month basis, we're up 20%. So I think there's nothing that happened this quarter that makes me think differently about whether or not our portfolio will grow over time.

All right. And then I know you all mentioned in the press release how you're opening a new LPO in Dallas. Is that a CFG thing? Or is that a legacy home office?

Chris, go ahead.

Yes, thanks. So yes, that is something we're managing. There's really 2 thing that'll do for us. One, it's very similar to LA. It gives us access to maybe a couple of different customers that we're not calling on today. The other it gives us is a good access to a high-quality talent base. But a little bit to your question too, about whether this is a CCFG thing or a legacy footprint thing, the real answer in Dallas is probably both. There are some capabilities that we have in our group that can be shared, I think, well with legacy. And we have been doing that on a limited basis over the last -- over the past year. I think we'll use Dallas as an opportunity to formalize that a little bit. And so some of the work that we'll be doing out of Dallas will be to support the legacy footprint, in particular on some transactions that might look a little bit different than ours but certainly require some of those capabilities.

All right. And then, Johnny, you mentioned the buybacks, which ticked up in the third quarter. If you look at where your stock is at now, it's even cheaper than what we saw last quarter. So I mean, should we think about you guys being fairly active on the buyback going forward too, as long as the stock stays this cheap?

I would think so. I don't see any reason for us to change that. We have authorization. We may have to go back to the well and get additional authorization, but we can get that. So someone asked me on the road recently, said, "You'd be -- you're spending your capital buying stock." And I said, "We didn't spend any of our capital." And he said, "Well, I thought you'd bought back $45 million worth of stock." And I said, "That's Donald Trump's money, that's what he gave us." So we've spent a lot of Trump's money. We've haven't spent a lot -- any of ours yet. So...

And our next question comes from Stephen Scouten with Sandler O'Neill + Partners.

I think I appreciate a lot of what you're saying in the sense that you can't really control investor sentiment, and I totally agree with that. This has been kind of a brutal tape we've been dealing with for the last month or so. But I'm curious, with the capital that's continuing to build, you obviously just spoke about the buyback, but what other things do you think you'll start to investigate with the capital? Whether that be -- I know we've talked previously about TruPS or the sub debt. Are there any other things you might explore today, given the different opportunity sets that are out there and the investor -- investment community view of them?

Well it's just more accretive to us to buy back stock at this point in time. They're getting me so pessimistic out at The Street that -- we've been traveling so much. I'm thinking we better be like squirrels, storing nuts for when the winter comes. There must be a hell of a storm coming here some time before long, so -- or for the entire banking industry, it looks like. I mean, coming back from the road, it's just amazing how pessimistic everybody is. And it's beginning to make me little pessimistic. I -- again, we don't see it. We don't see it in our footprint. We don't see the crazy deals. We don't see the flippers. We don't see the schoolteacher with 6 houses or the stripper with 4 condos. So it just doesn't exist. I mean, I looked this morning as I walked my dog, there was not a Russian behind any of my trees in my yard. And I went around them twice. Just thought they might be quick. But for some reason, somebody thinks there's a Russian behind every tree. So I think I'm going to go duck hunting for a while so you can just come up with...

There you go. Sounds like a plan. It's about that time of year. Gosh, yes. No, I agree. I think -- I mean, correct me if I'm wrong, I mean, but you're not really even seeing any signs today of any credit weakness, right? I mean, it feels like everybody wants that to be coming, but to me, it feels like that's more of a 2020 event at the earliest right now. I mean, are you seeing any signs of weakness across your footprint yet?

We're not seeing any signs of weakness. I mean, what if it doubles? I mean, so what? I mean, it -- if it doubled and margins got squeezed and we only made -- instead of making $310 million this year, we make $295 million? It's really just pretty amazing to me when -- I shake my head. But I don't think our people -- Kevin, you seeing anything?

No, we're not seeing anything in any of our markets that gives us concern from an asset quality perspective and -- or from a market perspective.

Yes. No, that's what I think.

Tracy, do you hear anything?

No, sir.

Tracy is not -- I mean, we ask -- let me tell you something. You're talking about something -- biggest part of my worth is, and these people around this table's worth is tied up in the stock. We're constantly asking the questions. So we're looking for it, we just don't see it. I mean, even the Keys. I probably overkilled the Keys, may have. But we're not out of the woods yet, just like Marathon or Burger King, Wendy's, Pizza Inn, Winn-Dixie, 4 or 5 of the big chains have not opened back up. It's just strange. It may just be they don't -- can't hire the people. Maybe they're frightened with whether it's wind or flood in the marketplace to get their insurance, but they haven't opened back. But our past dues are great, as you can see. So we may get through that. The Keys people are extremely resilient. And they're not standing there with their hand out when the storm goes through. They're going to get a shovel to try to get the sand off the beach or get sand out of their house. So far, so good. We're -- hopefully, we didn't lose anybody. Good news is, our people are healthy, and we didn't lose anybody in the Keys so -- I mean, in the Panhandle.

Right. No, that's great. And maybe one last one for me, just on the loan origination side. I mean, obviously, $987 million in originations is phenomenon. It's up quarter-over-quarter, which is great to see again. But obviously, net loan growth was still down with the paydown activity. Are you seeing anything as you forecast out your portfolio maturities, expected paydowns? Are you seeing any inflection point where we might see a lessening of the paydown activity and see more of this -- more of these originations actually stick to the balance sheet and show net growth? Or I guess, can you speak to that in any way?

I can speak to it. I didn't -- that's a crystal ball. That's just -- I wouldn't have ever. I mean, I would've lost my house and my boat and my duck club. I would've bet against that. I just can't believe the amount of paydowns that we've experienced in the marketplace. But it'll slow down. I read something today where they're anticipating a slowdown, but I really haven't seen the inflection point. We have -- as I said on one call before, we have a slow paydown quarter one of these times, and we're going to be up $400 million, $500 million and they're going to say, well, Home is taking off and it's just strictly a matter of paydowns. And we've...

I think it's the same story we've said in the past. We do watch our past, and there's a lot of credits that we make that we know are going to be paid off at a certain time. Over the past 15 months, naturally, those have come in and paid off a little bit earlier than normal. So use an example of the construction loan that we shared with you in the past. Construction loan that gets -- actually gets paid off before completion and they get to borrow a little bit more money out of that at no guarantees and those type of things. So we've always projected those in the past, but thinking we'd keep them on the books for another 9 months to 12 months, where now they are getting paid off a little bit quicker. And that's still happening today.

Aren't you seeing it everywhere, Stephen? Everybody is having the payoffs?

Yes, 100%, 100%. We're starting to hear some commentary that folks feel maybe early 2019, they see some of that abating. But I don't know, I mean, it feels like wishful thinking at this point, but I'm hopeful.

Well, it is -- it's hard to predict because you can look at the ones you know are going to pay off and then suddenly, somebody brings a new -- you kind of get your totals and you're running a -- you're rolling a forecast of what it looks like for the quarter. And that is probably the hardest thing to manage I've ever seen, because you get suddenly, somebody comes in with a good $50 million loan and you do that and somebody sells a $200 million property or a $100 million property, and you get a payoff. So it's like riding a wild bull.

Yes. No, understood. Well, congrats on the $80 million, guys. That's quite an accomplishment.

Thank you. Well, we're proud of it, thank you.

And our next question comes from Jon Arfstrom from RBC Capital Markets.

Just a quick question on sentiment. You talked about investor sentiment, and I agree with you on that. But any -- have you guys seen any changes in borrower sentiment, one way or the other?

No, no. I mean, you mean negative, Jon, or...?

Negative or positive, either way.

No, it's the same, we're -- it's pretty much the same, $900 million, nearly $1 billion worth of loan originations last quarter. We've seen -- we really haven't seen any change in sentiment. Just talked to one of our big borrowers today. Tracy and I went down to Sarasota about 2 months ago, we generate somewhere around $50 million in loans out of that trip and that's coming to fruition. It takes a while to get it all put together, but I just talked to one of our big borrowers today and he's got some more projects he wants to talk about. He said, "I'll come see y'all or y'all come back to see me." So I think we're going to take a crew down and visit with him for 2 or 3 days in the Sarasota area. So I asked him, I said, "What impact" -- we were talking about it at the board meeting the other day -- "did -- the impact in the Panhandle, what was it going to do to Sarasota?" And he said he was 100% full last weekend. He'd never been that full ever. So people who -- he said some of the people were from the Panhandle, that said, "We might as well get out of here." So they went to Sarasota on vacation. And some people are going on vacation, just switched from down there over to Sarasota. So he said that this is a slow time of the year and he said business is good, really, really good. So business is good in the Keys, particularly in Key West. South Florida has been good. Panhandle was great until it got blown away. And you know what that will be, that will be one heck of a building boom that will happen in that market. I think that'll be a pretty good boom for us for years to come.

But you do need to remember that the, while the storm did devastate Mexico Beach, that side of Panama City is named the Forgotten Coastline, and it's not the heavily populated tourist area of the Panhandle. The Panhandle from Panama City Beach on back to Pensacola was basically untouched. And so I talked to a lady staying at my house last night, and she said there were bikes -- people out on bicycles, the restaurants were full. The restaurants are struggling a little bit with workers, but outside of that, that things were really kind of back to normal. So that area where all the tourists go and all that traffic goes, again, from Panama City Beach all the way to Pensacola and farther is -- it's as it was. And you're going to still see people coming down there, and it's going to be packed.

That helps. Brian Davis, give us a little bit of help on the puts and takes on the margin. You talked -- you guys talked a little bit about the fees from CFG? Give us an idea what that was as well, and maybe a starting point?

Do you want me to do it, or you want to do it?

Jon, this is Stephen. I can take a part of that.

Stephen's got the information, so I'm going to let Stephen do it.

I think Johnny talked in his comments about some of the tailwinds I guess we had from the New York payoffs. And some of that, obviously, a portion of that was revenues, some of that was in margin, some of that was in fee income. I would say that kind of the general takeaway, one, is some of that will continue in future quarters. As we mentioned, you would expect some of that to be a little bit lumpy, I think was the word we used. I think the general takeaway was trying to normalize for some of that. We're seeing legacy yields begin to pull up. We had a good quarter -- a good month in September from a renewal standpoint. We had all our group together in July and began to see the fruits of that in September. So I think the legacy group, certainly, will continue to pull up in the future. I think trying to normalize for what we saw from New York, where we guided, I think, at the Q2 call, with the impact from Shore was where we landed in the low-4 range.

Yes, we were at the -- I think I had said 3 to 4 basis points dilution. Stephen had told me that he had calculated almost 7 basis points dilution. So we started -- when you think about it, Jon, you -- when you can't get loan growth and you're about as an efficient bank as there is in the country, so how do you increase profitability? And I just reflected back to the things that we did in '08, '09 and '10, we increased rates. And we deserved to have a rate increase, and all banks should be pushing up rates. So we started pushing up rates. And that -- when we had our Home $2.50 -- HOMB $2.00 meeting in Miami, we talked about pushing up rates, and the trend has started and it didn't -- it took about 6 weeks and then it started kicking in and the trend has kicked in. So it's -- I think we're going to be able to push up rates. I had to draw a picture of -- Jon, on the -- the board had to draw a picture of a 6 when I was at the meeting, because nobody ever seen a 6 and I drew a 7. They hadn't ever seen one of those. I said, "Those are what you are going to be looking for, is 6s and 7s." And I said, "Get a good picture of that because," I said, "That's where we're headed." So we're seeing 6s now. I haven't seen any 7s except Chris' group, but we're seeing 6s. So overall, it's pretty good. It was actually better. CFG kicked in, their income kicked in a little stronger for us, it helped hold that, hold the margin in and then we were starting the trend of moving rates up. And that is working, by the way.

And our next question comes from Matt Olney from Stephens.

I appreciate the update. I think a lot of my questions have been addressed. But I wanted to go over to fee income. Fee income looked pretty strong, especially with Durbin income coming out. Can you just quantify that amount of Durbin? Was there anything else unusual in fee income? I think Stephen referenced some of those fees, did some of those fees come into the fee income? Or were those all -- mostly in the interest income?

No, I'll take that one. Matt, if you look at other service charges and fees, it's down $750,000 from $9.8 million to $9 million. The impact of Durbin is sitting in that line item. It's down just a little over $2.8 million for the quarter when you compare Q2 to Q3 for the Durbin impact for interchange fee income. So you kind of would -- might ask the question, "Well, why isn't the other service charges and fees down more than that?" And that's because that's where the other fees from CFG is hitting for these payoffs, from the exit fees and everything there. And there is approximately $2 million of that, that came in this quarter.

Got it, okay. That's helpful.

That's probably going to be a reoccurring item as Chris has booked -- you want to comment on that, Chris?

Yes, I mean, some level of that is recurring. I mean, the portfolio is -- we've been here 3, 4 years now. We have a sort of a steady stream of loans that will -- that will exit or pay off. And we anticipate that, and we do design our loans so that we get -- we make money when they're outstanding; we make money when they pay back. Some of that comes into the fee income line. So it may be elevated in certain quarters, but a good portion of that will continue. We've continued to see that going into this quarter as well.

And just for example, we're barely into the quarter, a little over half a month, and they already have $1 million that they have booked and is already on the ledger for a loan -- I won't give the name of it, I was about to. But they have one that's got almost $1 million of this fee income.

So it's become a budget item with Chris. I think he is budgeting $4 million to $6 million a year for those, those events, so.

And that ties back to some of the expense increase that we saw, too. I don't know if we've talked about that yet. But there is a corresponding payout, incentive payout, on some of those fees that are collected back, so it doesn't offload to the bottom line.

Yes, the expense -- actually, the total expense increase this quarter pretty much was the payout fees, for the exit fees for his people.

Okay. That was my next question, as far as on the expense side, as far as kind of why the jump. And John, you're saying it was pretty much the exit fees from some of those correlating fees, is that right?

Yes, Matt, I'll give you a little more color on that. For example, the salary and employee benefits is up $3.3 million. CFG has got increased compensation and expense from acceleration of FASB 91, because some of the payoffs were early. They've also got some incentive comp that was paid out and that's $1.8 million of that $3.3 million increase in salary and employee benefits. Then you throw in the fact that we started our HOMB $2.00 program. It was not started on July 1, but it was started in July. It's running about $330,000 a month, and for the month -- for the quarter of Q3, we booked $781,000 of expense related to HOMB $2.00. Also, we acquired Shore Financial on the last business day of Q2. And there's salary and employee benefits for Shore, and that's $240,000. And we book our salary and employee benefits expense on a daily basis, and there's one extra day in Q3 and so that's $379,000. And if I add all of that up, that accounts for $3.3 million of the $3.349 million change in the salary and employee benefits.

And so Brian, when I think about the next few quarters, it sounds like most of, if not all of that jump, will continue in the run rate? Is that fair to say?

Well, if you've got the corresponding revenue on the top from CFG, I mean, we don't want the loans to pay off, but we sure do like the additional noninterest income that comes along with it. So there could be some continuation of the acceleration of FASB 91 in the compensation expense. But Shore is in there for a full quarter, and HOMB $2.00 was $781,000 for this quarter. And it will be probably closer to $970,000, so there might be another $200,000 for the HOMB $2.00. And that is just kind of a flat expense, the HOMB $2.00. I don't view it kind of bouncing around much, at least for the short term. Which, when I say short term, for the next year. We're -- we've got it on a 7-year amortization. And right now, it's straight line. And if it looks like we might hit the $2 run rate quicker, we might have to accelerate it. If we're going to hit the $2 run rate a little longer, then we'd probably decelerate it.

And our next question comes from Joe Fenech from Hovde Group.

Johnny, I know you've talked about the stock needing to be higher for you to consider deals, but the group's pulled back here, too. So do your comments still apply? Just an update on that. Or are there are a few one-off opportunities that you see on the M&A front, even with the stock price where it is?

Well, if it's a private bank, they still think their baby's worth 2.5x or 3x book. The problem is, they don't -- if they're private, they haven't seen adjustment in the stock price like all the rest of us public companies have seen the adjustment. So I'm not sure they're aware. It's going to take a couple of nice, reasonable trades in the marketplace to get us back in the game. I mean, we're trading at what, 2.7, 2.6 today, times tangible? The problem is that we're running at 2.12, 2.14 ROA and they're -- we're trading at 2.7, and you got banks running a 1 or 1.20, trading at 2, 2.20. So either we're underpriced or they're overpriced, so something has to give somewhere in the market. It'll straighten itself out at some point in time, but from a straight M&A perspective, we might look at something on the -- that can help us on the liquidity side at some point of time. We've looked at one forever, 6 -- for a 1.5 years, we've looked at it, we may get more interested in it. But if the payoffs continue to come the way they're coming, there won't be any need to have additional liquidity.

Okay, that's helpful. And then maybe for Kevin Hester, too, and you, Johnny, but with this payoff activity generally, if you were to generalize it, is it the smart money, you think, selling from purchases maybe they made during the downturn, maybe just take this money off the table? Is it higher rates? Just sort of anecdotally, what are you seeing, hearing, in terms of these borrowers that are paying down or paying off? Or is it really just all over the map?

It's mixed. I mean, some of it is the fact that you got a pretty good sized construction book in the legacy footprint that moves on a quarterly basis, and then you got rates going up. And so there are people that are trying to lock in and get some fixed rates for the future. So I think it's a mixture of a lot of things.

Yes, we're actually trying to -- what's the number on construction, 89?

Yes, the CRE numbers are 89 in the construction bucket, and 297 in the overall bucket. So we're staying right in there at that same number we've been at for the last 2, 3, 4 quarters.

That's not -- that's -- we really wanted -- were planning on going above that, but we can't get above it. We're swimming, we get up a little bit, then we get knocked down; we get up a little bit, we get knocked down. So we got approval to go much higher than that.

Okay, and then last one for me, guys. Johnny, these credit concerns that people have, that maybe we're at the end of the cycle, your loan-to-value in that commercial real estate book, I think if I remember, is in the upper 50s. So even if there is a setback in real estate and the economy, it just seems like it's difficult to see a scenario where people with a book like yours get burned in a material way. Is that fair? Or I mean, were you even taking losses at those types of LTVs even in the crisis years?

Well, we had the, as you know, we bought more failed banks than anybody in Florida. We liquidated billions of dollars' worth of assets in that market, bad assets. And we didn't have 5 loans go below -- go below $0.50 on the dollar. So the last 5 or 6 years, Home has pushed leverage down, down, down to the point we're at 57% loan-to-value and pretty happy with that. That's a pretty good place to be. I think it's a great position for our corporation to sit. If we have a downturn, it's -- I don't think it will be anything like the last downturn. The regulators want to blame construction for all the downturn last time. It didn't have anything to do with construction; it had only to do with the amount of equity that was put into construction. Because there was no money in construction deals, none. I'm talking about 5%, or I saw people draw out 105% on deals. I just remember those days, Randy Sims would say, "Well, they can get it for nothing down." And I said, "Well, Randy, try to get us 10%, can you get them?" "They won't give us 10%, Johnny, they got it done for nothing over here." So what happened during those times, when it -- the problem arose, they just pitched the keys, because they didn't have any money in the deal anyway. It is totally different. Let me tell you, that ship left the port a long time ago and it is a totally different world today. There is money, there's lots of money in these deals. It will be a different cycle this time. It may be a bump along, and there may be some people getting into some trouble on the construction side, but the regulators have pretty much pushed everybody into C&I and owner-occupied and I'd be keeping my eye on C&I. I think that one is really getting frothy.

Okay. And then, Chris, just like, I guess, last one. Any sort of general comment, not necessarily in your own book, which obviously performing really well, but just any general comment on kind of what you're seeing more broadly in the real estate market in New York?

No, I think it's been pretty low volatility for some period of time now. We see a little bit of pockets where the rental multifamily might be under a little bit of stress, but nothing significant. Supply is coming on, it's getting absorbed, maybe taking longer to absorb. But in general, we -- it's a really healthy economy here in New York. People are working, people are making money, wages are up. So whenever you got people working and wages are up, the real estate tends to do pretty well. We see a pretty benign environment right now, and I think it's been mentioned a little bit before, too, we also aren't seeing banks reach. And so I think that's been helpful, too. So I've -- we haven't reached, and we haven't seen a lot of people reaching. So I think the good deals are getting done, and we're not seeing a lot of the dumb deals get done. And right now, it's just a sort of a nice little period of time where I think things are going pretty well, actually.

And our next question comes from Arren Cyganovich from Citi.

That's pretty good, Cole, you did that name pretty good.

Yes, that was pretty close. On the deposit side, you, as well as many banks, are seeing those costs increase a bit. Can you just talk about the competitive environment there and some of the efforts you've been doing to kind of grow in your legacy footprint a bit there?

Well, Stephen, you want that one? Or I can take that one. We, primarily, with 3 deals -- and you've heard the story, but I don't know if The Street's heard the story. We have an Internet bank called giantbank.com, that we have about $100 million in. That is an Internet bank for us, and it has a throttle on it and you can turn it up and get all the money you want, it's just expensive. That's one initiative that we set out on. And the other initiative is Kelly Buchanan is our new deposits czar, and she is working with the branches to generate deposits. We were down about $100 million last quarter. I don't know, was average balances down $100 million or was that just last total?

That was end of period.

End of period was down $100 million. Well, that -- we can be up or down $100 million at any time, so. So that's going okay right now. I'm not sure how well that's going to work, but we're giving it a whirl to see how it works. And the other initiative is -- Donna, you want to take the last part of that deal? We got the deposit accounts, those accounts, we get new accounts.

Yes, we have some new consumer accounts that we are opening. We've had one out for about 30 days, we've got about 1,600 accounts in that so far. Also, just working with our lenders and getting them to ask for the deposits as well as the branch side to ask for the deposits.

And the third leg of that stool is that we've had our eye on a bank for a long time to go try to put a deal together on and it's in a deposit-rich area. And their deposits have not risen like ours have. And they don't have the -- I don't guess they have the pressures that we have, that the rest of the industry have. We are not running CD ads. We've never run a CD ad in years. Years ago we ran them, but we haven't run one in 10 years. We don't run CD ads. We don't react to that. We don't panic. We just one-off the transaction, and we've got plenty of federal home loan borrowing. In the Shore deal, we just pulled up federal home loan borrowing, paid it off and went out and got the money for it and paid off federal home loans. So that's how we're doing it.

Yes, this is Stephen. I'll take the back half of that. I think what you saw in the quarter here, there was a lot of seasonality to some of the deposit flow, particularly in Florida. We're talking with our division presidents, regional presidents, on a daily, weekly basis in the Panhandle. And some of the Southeast Florida area may have seen some declines, linked quarter, but still show some really strong increase quarter-over-quarter. So I think we're still pleased with the approach that everybody is taking there to grow the base.

And our next question comes from Michael Rose with Raymond James.

So I guess my question is, so it -- in talking with larger banks and our BDC analysts and others in the industry, it seems like paydowns are going to be structural in nature. There's a lot of capital out there. So I guess my question really resides in, you guys are about 10% of assets in your CFG portfolio. I know the goal is 15%, or at least that's the cap. So I guess my question is, how can you guys actually grow this portfolio? And then, I mean, does it really make sense to grow and should you just actually take the capital and just buy back literally as much stock as you can? Because it seems like that may be the better trade-off at this valuation level. Any comments would be appreciated.

Michael, this is Stephen. I know we've got Chris on the phone. I mean, he gave some comments early in the call just about what we would expect -- what he has seen in his long history of doing this, and what we've seen over the last 3 or 4 years, that you're going to have some lumpiness or cyclical nature to the payoffs of the portfolio, but that overall longer term, you're going to see 20-plus percent in growth. And I think, at least from our perspective, the way -- the deal flow he sees and the way that they structure credit, that we -- we're not going to push a rope, as we've always said. But I think we would continue to like to see Chris grow, grow his portfolio at the pace that he has in the past.

Now, I don't know that we have to -- I'll let Chris talk about New York, but if he can't grow -- and it may not be a good time to grow. I'm beginning to believe that maybe the world thinks if you grow, you're in trouble and if you don't grow, you're in trouble. But if the paydowns slow down, I mean, we've done over $1.9 billion in originations the last 2 quarters, [add up or down]. If you need to grow, if we have a slowdown in paydowns, that's going to jump. I'm with you, though, I don't -- I can't say that we're going to see a slowdown. I don't know that we're going to see a slowdown on the paydowns. So if you can't grow and you're going to kind of tread water, so how do you increase profitability? And that's moving rates. So we deserve -- I mean, if you wrote a loan 5 years ago at 5% and it renews, to be fair, we ought to get 6.75%. Well, they're trying to -- everybody is trying to come back and write it at 5.5% or 5.25%. That's not really reasonable. We really deserve 6.75%, so we're trying to push it. If the rest of the market will follow, I don't know. If the rest of the market wants to give away the Trump deal, they'll give it away. But what -- that's what our objective is right now, and that trend has started working for us. So I have given up on the fact that we may not be able to grow as fast as we anticipated growing, or may not be able to grow. But that's okay, that's all right, too. We're going to make a lot of money. We are going to make $280 million to $350 million a year and we're going to sit here and clip coupons with that until it turns. And when it turns, it will be our turn and we'll be in good shape. And if there is a cycle, if there is a downturn in cycle, we'll have lots -- we've got lots of capital and we'll have lots more capital. We'll be in a great position to -- we knocked it out of the park in the last cycle when it went down. I suspect we'd do that again.

Well, Johnny, I think that's the point, right? I mean, you guys are growing. I mean, that's great. But you're growing a lower multiple business. I think Ozark is a really good case study as to what the market's going to pay you for growth in that business. And I think it's a fantastic business, and I completely agree with everything, but from a credit perspective, the market's not assigning you any value for that. And if the other portfolios aren't really growing, I mean, why not just buy back as much stock as you can? I think that's the real question. I mean, you guys are 2.7 of tangible. I mean, what's -- what do you guys do to sustain and potentially grow that? I'm not trying to be argumentative, but I mean, why aren't you guys buying back as much stock as you can, if you can't -- if there's no attractive acquisition opportunities at this point?

Well, we did. We bought a lot of stock the third quarter. That was, we stepped it up, because it -- the price continued to come down. But I don't know where the market is. I don't know where the market thinks we ought to be. If the market thinks we ought to be $17 or $18, then I guess we need to let it -- we don't need to waste our money until it gets to be $17 or $18. I don't need to be -- if I'm -- if somebody is so freaking negative on the market and on the banks and don't want to pay for the performance of this corporation -- New York is 10% or 11%, you're right. It's a great business. They've never had a loss for us. You can call it what you want to call it, but most banks do similar things to what New York does. They just do it in New York and do it on a different scale. And they're better underwriters than the rest of us are. But the truth is that they don't do much any different than what we do. So to value that business for less, I don't get that, I don't understand that. That makes absolutely no sense to me. So how many companies are running at -- how many companies you got running at 2.12 ROA and a 37% efficiency ratio and a 24% return on tangible common equity? How many you got?

You. And I think that's the point. I mean, I think investors are looking for progress.

That's my point.

Exactly. So as capital builds here, and if you're not going to do deals, maybe because there's not opportunities, or maybe it's not the right time, I mean, why don't you double, triple the buyback and just do as much as you can as capital builds?

Well, what came first, the chicken or the egg? We do M&A deals. If the market wasn't so stupid and price us where they price us and not give us credit for what we deserve, in my opinion, then we'd be doing deals. But I'm not going to dilute our shareholders. We are very disciplined acquirers. We're a very disciplined lender. We don't push a rope. We don't force loans. We don't force deals. We don't have returns -- earnbacks on tangible books. I don't think anybody gives a damn. I don't think it matters to anybody anywhere if you earn $0.50 or $0.60. I don't think it matters in this market right now. I think it's so -- the world is so negative, that it doesn't make any difference. So I agree with you. I mean, we may as well find out where the world thinks Home BancShares stock ought to be and then we ought to buy a couple hundred million dollars' worth of it.

And our next question comes from Brian Martin from FIG Partners.

Are you seeing any -- Johnny, on the M&A part, just going back to the capital, I mean, are you seeing the sentiment at all change for the sellers, I mean, in particular, let's say the one you're looking at or others? But I mean, the world seems to be changing. I mean, right now, it sounds as though they are not changing as of yet, or they have not changed yet.

I don't think -- we are going to have a couple of deals, Brian. I think we are going to have a couple of reasonable deals. We had -- what did we have? Four, 5 crazy deals here recently, high-priced, almost 3x book. We've had those deals going. So I think we've got to have something that -- I think we've got to have somebody do a reasonable deal or 2, that'll settle the -- that might settle the market down a little bit. You know as well as I do, I remember when I sold my first commercial bank years ago, I heard about 3x book, and 3.25, and we ended up getting 4.11x book. And I didn't have enough sense at that time to recognize the fact what I was doing to the buyer. It was all about how much money we got. It wasn't about what the structure looked like at the end of the day. If you plan on selling your stock, it doesn't make any difference. But if you plan on being a long-term holder, it's important what it looks like at the end of the day. In 5, you earn back to tangible book, in 4 years, that's all bull(expletive). You know that and I know that. Whoever tracks that? Nobody tracks that. Nobody keeps up with it. Nobody stays up with it. And what ultimately happens is, it gets lost in the fog. I looked at one the other day, one of the analysts sent me, it was their tangible book value 11 years ago and their tangible book value today. They were only down $0.02 over 11 years, so they had a great run. I mean, they've diluted themselves into infinity for their shareholders, so we're not going to do that.

Okay, I got you. And just maybe one for Stephen. Stephen, going back to the core margin for just a minute, it didn't -- I guess, it sounds as though the level we're at today on the core margin ought to be sustainable and maybe trending higher, if you're getting the better pricing, as Johnny is alluding to. Just kind of want to make sure I got that right, just given that funding costs are still rising. I guess, maybe those are an offset to the better pricing, so it's a modest upward bias is how we think about the core margin? And just kind of confirming that the current level is a good starting point.

Yes, I mean, it's going to bounce around some. It'll be, like you said, I think lumpy is a good word. It's going to be a little lumpy depending on the timing and the amount of the payoffs that we see, particularly from New York with some of the things that come there, but even with some of the legacy payoffs and what gets accelerated from an origination fee standpoint. So yes, I think we like to look at it in that low 4 range on an adjusted basis.

Okay, and the yields on the new originations versus the payoffs, given that it was mostly New York, was it -- I guess, was there less of a difference this quarter? I guess, less favorable or...?

Yes, exactly. It was actually upside down this quarter, because you had more 7% payoffs or 6.5% payoffs out of New York than what we originated. So I think we originated about 5.5%. I think the $700 million was in the 5.5% range, which was okay. We really didn't start getting the benefit of pushing up rates and starting to see 6s until the end -- about a month before the quarter was over.

Yes.

So we're seeing that. We're starting to see that. Now that doesn't mean that they're all going to book, but I don't know if I -- we did approve, one meeting, $133 million at 6.25% and -- that got approved. So that was the best of the group that we saw. But I'm -- our people are trying. I mean, they're really, really trying. Tracy had the -- he -- in [Florida], he said, 1 basis point is $1,250,000, and [Mark], one of our guys in the Keys, had a loan we approved at 5.50%. He got 5.53% on the first one and 1/4 of a point. And he came back with a guy wanting to buy another property and we approved it at 5.50%. He got 5.88% and a 1/2 a point. So he's in the program, he gets it. That was -- the first one was $1,250. It wasn't a lot of money, but that -- at least, it set -- he was trying to get a few extra basis points. And on the last one, it was much more money than that. So we're -- our team gets it. We're pushing rates. We did that in '08, '09 and '10, and it worked out well. We'll see if it works out well here.

Okay, that's helpful. And just the last thing is the number of shares. You said you may up the authorization, Johnny, but just the number of shares remaining on the current plan, if someone would know, ballpark, where that's at?

Stephen may know, do you know? Who knows?

Well, I really think what Mr. Allison's talking about, we've got ample shares outstanding that we can repurchase. I mean, it's probably 900,000, 800,000 shares.

We've got about 8 million shares available for repurchase, Brian.

8 million.

Yes, that's what I meant, 8 million, yes. But what we're doing is we're getting some guidance from the board each quarter on the dollar amount of shares that they would like to see us buy back each quarter. And I really believe that's what Mr. Allison was referring to.

That was it.

Okay. And then just a last housekeeping thing, Brian, just for you, the accretion outlook going forward, any change from kind of what you kind of articulated last quarter, or just the kind of the similar type of level we're at, now that you've got Shore in there and the other...

The accretion's been fairly flat the last 3 quarters and it's hard to predict without a crystal ball. For example, I mean, Shore did have $861,000 of accretion. So we were up $75,000 in accretion, but without Shore, we would have been down about $800,000 in accretion. The good news is that the payoff accretion, which was about $3.9 million last quarter, is probably $3.1 million this quarter. So we really didn't -- we made a little ground there. You've got to believe that it's going to continue to fall off. We didn't fall off this last time because of the Shore acquisition, but we still have over about $105 million of income that can be -- that will and can be accreted into income over the life of the loans, and the weighted average life of those loans is about 8 years, so.

I got you. Okay, and last one, Brian, just on the housekeeping. You said that the add, the additional in the fee income this quarter was about -- related to the CFG benefit, and the paydowns was about $2 million and then the expense was $1.8 million. Is that the...?

Yes, that's correct.

And our next question is a follow-up from Michael Rose with Raymond James.

Just one follow-up question. Just given your outlook and when do you guys think you can get to the HOMB $2.00, assuming paydowns lay flat? And I guess what goes in, assumption-wise, in your targets, into hitting that target?

About $600 million worth of loans, is about what it is, about $600 million of loans. We didn't anticipate writing the new credits at the level we're writing. We assumed writing the new credits. We assumed increasing renewals, the rates on renewals, but we didn't assume increasing the rates on the new credits as much as we've increased those, and it took $600 million worth of loans. So as I said when I laid out the plan to our people, I didn't anticipate -- it probably won't happen exactly the way I laid it out. It will happen in some way differently than that. So we'd be there today on a run-rate basis if we'd been able to book the last 2 quarters' worth of originations. To me, that's how close we are. They got to slow down at some point in time. When they do, to tell you when we get there, I can't tell you, but I can tell you we would have already been there, on a run rate, had we booked our last 2 quarters of originations.

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

Thank you for listening to me today, and us, all of us. We kind of went off a little bit. When you run a company like this and you see how hard everybody works in the company and you think that they deserve better. But it is what it is, and we will continue to do what we've done next quarter, as we've done in the past 30 quarters, we hope so, Randy.

30 quarters.

And we hope it will be 31, and we'll work hard to do that, whether anybody gives a care or not, we'll do it, so. Anyway, thanks, and we'll talk to you in 90 days.

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