Greetings, ladies and gentlemen. Welcome to the Home Bancshares, Inc. third quarter 2019 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. Please note that if you would like to ask questions during the question and answer session, please press star then one on your touch-tone phone. If you decide you want to withdraw your question, please press star then two to remove yourself from the list. 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 three of their Form 10-K filed with the SEC in February 2019. At this time, all participants will be in a listen-only mode, and this conference is being recorded.
If you need operator assistance during the conference, please press star then zero. It is now my pleasure to turn the call over to Mr. Allison.
Thank you, Chuck. Good afternoon, everyone, and welcome to Home Bancshares' third quarter 2019 earnings release and conference call. With me today is Tracy, and Chris and John are on the phone, Brian Davis, Jennifer, Randy, Donna, Kevin, and Stephen. They'll all be available after the presentation. Some of them will be presenting today. The quarter was noisy. A lot of moving parts, including, we chose to call a $47.5 million BOLI, the result of which we had a one-time $3.7 million tax associated with it. The yield was, I don't remember exact, Trey, 116, 119? We decided to call it. We think we can do better with the money. There were elevated payoffs in this quarter and will continue into the next several quarters.
Several years ago, we instituted prepayments on many of our credit, and that decision has elevated our income for this quarter and will continue in the future. We will remain disciplined on both loan rates and terms and not fall in the trap of being categorized as stupid bankers. We are correct. We think there is a little slowdown in the market, and we're not opposed to that. We normally originate about $850 to $1 billion per quarter, but this quarter we only originated $710 million, with New York doing $248 million of that at 6.52%, and Legacy doing $462 million at 5.63%. There were less opportunities in most of our markets, and many banks are racing after those few deals that are out there. It appears to be a race to the dumbest, because they're just giving this stuff away.
With rates from both banks and shadow banks offering sub fours, couple that with 10-year interest only, add in a little non-recourse and give it 80% leverage, and you've won that deal. Congratulations. You have just won the stupid award. Excuse me. The weak banks and bankers are collapsing on rates and terms like a pup tent in a hurricane. We're going to do the right thing here and not sacrifice our future for short-term bragging rights. We have made the decision to let $300 million-$400 million walk because the rate, term, and leverage are not conducive to long-term profitability of our company. Higher leverage, longer terms, low rates is a recipe that most of the crowd appears to be following.
Warren Buffett said, "There is the tendency of executives to mindlessly imitate the behavior of others, no matter how foolish it may be." Jamie Dimon's quote was, "One of the toughest jobs a CEO has is to look at the stupid stuff that other people are doing and not do it himself." These statements come from two American icons that have proven business and investing skills. We should all listen to these experts. I just want to give you a few of mine. Winners never quit and quitters never win. When the going gets tough, the tough get going. Lead, follow, or get out of the way. Remain disciplined as hard as it may be. These are really dangerous times for banks. The street, analysts, shareholders, all apply pressure for growth. This is a time to move cautiously.
Banks have spent the last 10 years building their balance sheet with quality, high-yielding assets. We could destroy all the good we've built in much less time than it took to build it. The Fed has dropped rates 50 basis points. The market has dropped 150 to 200 basis points. I can assure you that cost of funds have not fallen as fast as loan rates. We know what happens to profit. It's pretty simple. Banks should not sell their future for short-term brag rights. However, it appears that banks are dropping their rates much faster than they want to. This is a major sign of weakness in the quality of the producers and the relationship they have with their customers. Relationships are the most important ingredient in keeping customers in times like this. Some customers will disappoint regardless. Most will stay with you.
This is the path that Home has chosen. We will not sell our future because of short downturn in the market. Quite to the contrary, we've made the decision to build additional capital for the next year or two in the event that there really is a downturn, probably $150 million-$200 million rise. That is, if we're able to maintain our best-in-class profitability. We'll be working on continuing to improve our asset quality as good as it is, improve our operations, service our customers by spending more face time with them, and work on efficiency. A little slowdown will pass, but if you sell your soul to the devil now, it'll take a long time to get back just even. Much less, produce your best-in-class numbers as this company is known nationally for. Now, let's talk about the quarter.
I'm pretty proud of the quarter. EPS of $0.44, return on assets, 1.93, and efficiency of 3,916, and a net interest margin of 432. That had a little juice in it as $2.8 million in prepays. It kind of juiced it up a little bit. I was telling Jimmy Hannah about that. He said, "Well, don't take that away from yourself. Give yourself credit for that because you had the foresight to put the prepays in." He said, "Good job." We got a lot of those in. You're going to see a lot of that rolling in over the next period of time. Deposit rates are coming down slowly. Asset quality is as good as it's been. Non-performing loans to loans at 0.54. Non-performing assets to assets at 0.45. I don't remember when they've been that low. Good expense control.
Catch this, loan yield 608 from 606, and we grew tangible book by 15% year-over-year. I just looked over the last five years, and I wanted to share with our shareholders. Over the past five years, we have grown tangible book from $4.95 to $8.83. That's a 78.38% increase. While at the same time, buying back our stock with a value of $212 million, and that represents 10,842,000 shares. Had we not bought back stock, it would have increased our tangible book to 91.51% over the five years. We have paid dividends to our shareholders of $320 million, and we've earned over a billion dollars. We have returned approximately 50% of our income to our shareholders through stock repurchase and dividends. Not many banks could have accomplished these amazing tasks, while at the same time improving capital ratios. This speaks to the amazing profitability of this company.
Good job, all. That's why Home is named Best Bank in America by Forbes for the second year in a row. Buying back stock, growing tangible book, paying a strong dividend, and growing capital all at the same time. Certainly, this company has made the proper decisions for the long term for all involved, and I can assure you we'll continue to do that in the future. Thank you for your support. Brian Davis is going to cover more in-depth on margin for us. Brian?
Thanks, Mr. Allison. The third quarter was a good quarter for our net interest income and net interest margin. I'm pleased to report the third quarter net interest margin of 4.32% was up four basis points from the 4.28% for the second quarter. On a tax equivalent basis, we recorded net interest income of $144.2 million for Q3 2019, compared to $142.3 million for Q2 2019. During the second quarter of 2019, the interest rate environment began to decline. For example, the 10-year Treasury went from 2.50% on March 31st to 1.64% on September 30th. This decline has increased the prepayment speeds on our investment securities. As a result, we saw an increase in premium amortization of $515,000 from Q1 to Q2. We saw an additional increase in premium amortization of $373,000 from Q2 to Q3.
If the premium amortizations had remained flat from Q1 to Q3, our Q3 margin would have been an additional three basis points higher. Last year, we had a few large payoff events, which increased our margin. The first six months of 2019 did not include any additional income for large payoff events. The third quarter of 2019, we had several interest income events, primarily related to large payoffs. These events totaled $2.8 million of interest income and increased the net interest margin by 8.4 basis points for the third quarter of 2019. Accretion income for the fair value adjustments recorded in purchase accounting was $8.5 million during Q3, compared to $9.2 million during Q2, for a decrease of $778,000. This decrease lowered our NIM by two and a half basis points.
Another positive for Q3 was that we were able to keep the yield on interest-earning assets flat while lowering the cost of funds on interest-bearing deposits by four basis points from Q2. As a result, we reported an improvement of approximately $4,000 of additional net interest income per day for Q3 2019 when compared to Q2. With that said, I'll turn the call back to Mr. Allison.
Thank you, Brian. That's good stuff. Next, we're going to hear from Chris Poulton. Chris, how are you?
Yes, sir. Good afternoon. Thank you. As noted, our third quarter was highlighted by a lower ending loan balance and higher fee related revenues. For the quarter, assets fell in what has become a bit of a seasonal trend. After positive net growth in Q2, we had $171 million of net portfolio decline. You may recall we had similar results in Q2 and Q3 of 2018, with declines this quarter specifically driven largely by net payoffs, which totaled approximately $350 million. Specifically, payoffs on facilities and revolving lines made up about 40% of the total. These facilities typically increase and decrease over time, and we expect that at least some, if not all of this decrease, would be reversed over the coming months and quarters.
Quarter-to-quarter increases and decreases in our overall portfolio are expected, and as we have discussed on prior calls, they are a feature of our product line. Larger paydown quarters are also generally accompanied by higher fee-related income. Q3 was no exception, as we collected additional fee and interest income as a result of these movements in the portfolio. On the production side, year-to-date originations have been trending approximately $100 million ahead of last year and remain happy with the pipeline of expected closings between now and the end of the year. Right now, based on transactions and underwriting, CCFG is forecasted to have our highest year of production since joining Centennial Bank. With that, Johnny, I'll hand it back over to you.
Thank you, Chris. Good report. John? John Marshall, are you here?
Yes, sir. Good afternoon.
Good afternoon.
Thank you, Mr. Allison, for the opportunity to provide this third quarter update on behalf of Shore Premier Finance. Net interest earning assets increased $15 million in the quarter to reach $85 million in total growth since being acquired by Centennial Bank back in July 2018. The growth in the quarter may be attributed to a nice mix of robust retail originations, higher draws on floor plan lines despite seasonal pullback in utilization rates, and slightly reduced prepayment speeds. Retail application volume was flat compared to the second quarter, but the dollar value was higher. We also booked an additional $14 million in floor plan lines, adding four new manufacturers that will result in increased future funding opportunities. I'm encouraged with the additional floor plan lines and the higher seasonal utilization in advance of the upcoming boat show season that'll contribute to additional growth.
To further stimulate growth, we're also introducing a new super yacht retail finance program. After months of research and due diligence, we believe there's a financing opportunity in the super yacht space, defined as boats over 80 feet with hull values in excess of $7 million. We've observed a shift in consumer sentiment as the market bulls charge forward and recession appears to have been averted for consumers to achieve a positive arbitrage between their portfolio returns and the cost of their boat loan. The falling credit rate environment is also further fueling that fire. Additional good news is we're favorable to our income goals by 10%. Lower provision expense and the lean nature of our business, with an efficiency rate below 30%, have helped to boost profits. Across the $420 million retail portfolio, weighted average rates climbed three basis points in the quarter.
Variably priced commercial advances are more immediately reactive to the vagaries in the market and experienced a 24 basis points pullback in rates. Our contribution to the bank's net interest income continues to increase each month. Favorable to target were our asset quarterly metrics, both compared to goal and prior quarter. 30-plus days delinquent loans reached a historical low of 20 basis points or $875,000. Non-performing loans at quarter end were just under $2 million, six basis points favorable to target. A harbinger of future asset quality trends, retail originations in the quarter average FICO scores improved to 778, so very high-quality paper, and we experienced no commercial delinquency. I'm pleased with the team's performance and encouraged as we move into the fourth quarter.
With that, I'll conclude my remarks and turn the discussion back over to you, Mr. Allison.
Thank you, John. Good report. I like those past dues, 20 basis points. That's good stuff. We're going to go to Tracy and Stephen. I guess I'll go to you, Tracy, and you'll go to Stephen, right?
All right, John. Thank you. Follow up on your outstanding report of Home Bancshares numbers and listening to Chris, Brian, and John, I'm proud to discuss another strong quarter for Centennial Bank. For the quarter, Centennial Bank's return on assets was 2.08%. We ran an efficiency ratio of 37% and continue with some strong revenue at $173 million. We continue to navigate through a challenging interest rate environment, obviously, with the last two rate decreases in the recent quarter and potentially more on the horizon. Our bankers are focused on the long term, cultivating relationships while maximizing return for this company and our shareholders. Stephen will go over some details next, but I'd like to point out we are pleased with our deposit growth over the year as the focus has been on core deposit relationships.
On the loan front, as Johnny addressed earlier, our lenders have been busy working opportunities while staying with prudent underwriting terms and rates. This has proven to work for our company over time while not betting our future on near-term results. I'd like to congratulate our mortgage company, led by Keith Little, along with his sales staff and his operations team, for a very strong and busy quarter. As I mentioned, I'm pleased to see the improvement in an already strong asset quality metrics. I want to compliment all of our lending teams for their continued effort in this competitive landscape. I'm going to ask Stephen Tipton to give a little more detail on the loans and deposits. Stephen?
Thank you, Tracy. I'll give some color on production, payoffs, and the balance sheet movement for the quarter. We saw community bank production of a little over $460 million in the third quarter, which includes $47 million in production from Shore Premier. As Johnny mentioned, the community bank footprint loan production slowed somewhat in Q3, but the contribution split remained consistent among the Arkansas, Florida, and Alabama regions. As it has been mentioned, payoff volume increased to $721 million in the third quarter of 2019, which is $200 million in excess of what we have seen in prior quarters. Chris has already highlighted the CCFG paydown and payoff activity, and the increased activity on the community bank side came primarily from Arkansas, as several large development projects stabilized and moved to the permanent markets a little sooner than expected.
On the deposit side, we generally see some seasonality in the third quarter with the schools and municipalities we have in our footprint. We also saw customers with insurance monies flow out of as the areas previously affected by Hurricane Michael are rebuilt. As such, linked quarter balances declined $300 million, while year-over-year balances increased $422 million.
The growth in the first half of 2019 has allowed us to take a look at higher tier pricing on interest-bearing deposit balances. As we move forward, we'll continue to evaluate opportunities for pricing improvement while managing the funding needs of the company. With that, I'll turn it back over to you, Mr. Allison.
Thank you very much. We'll go to Randy Sims for the wrap-up. Randy?
Thank you, Johnny. Congratulations to everyone for another great, as you heard, very noisy quarter. Even with the mix of transactions, as you heard from everyone, the numbers are once again very, very good. Let me just recap some of those strong numbers from Home Bancshares and wrap this quarter up. We finished the quarter with total assets of $14,901,935,000. Income was $72.8 million, resulting in diluted earnings per share of $0.44 as compared to $0.43 from the last quarter, which meets our market expectations. Our ROA was very strong, up a little at 1.93%, but consistent with the last two quarters at 1.92%. More importantly, quarter end September produced a strong net interest margin at 4.32%, up four basis points from the last quarter at 4.28%.
As you heard from our CFO, Brian Davis, there were several influencing variables on both sides of the equation. It's safe to say, we're very pleased with the consistency of the NIM over the past several quarters. That is a key factor in our high performance. On the other side, once again, our profitability was helped by a very strong efficiency ratio of 39.16% as we continue to control our cost. Average deposits for the quarter were up just a little at $11.17 billion, but down for the quarter on its ending balance at $11.05 billion, resulting in a loan-to-deposit ratio of 97.5%, up a little, but consistent from 97.4% at June 30th. Average loans were down a little for the quarter at $10.9 billion versus $11 billion at June 30th.
However, ending loans were down $281 million for the quarter at $10.8 billion, indicative of our refusal to compromise our terms and rate for short-term gain. Our asset quality has and continues to be solid, with all ratios at record lows, indicating a very optimistic and secure outlook. As you heard our Chairman, our tangible book value per common share non-GAAP was at $8.83. You heard him talk about the tremendous growth in that value, especially over the last five years. We now have three quarters behind us, and our strategy has not changed. Protect the margin for the future, avoid the crazy deals in the market, repurchase stock, grow tangible book, improve asset quality, and control expenses. Consistency in our key metrics. This is what we do. That pretty much wraps everything up, and I'll turn it back over to Mr. Allison.
Thank you, Randy. I appreciate it. I've got some really interesting charts here, but I really didn't have time to How many banks, 69 banks?
68.
68 banks, they are where the parent is in the U.S., non-Puerto Rican banks, excluding Raymond James and Sallie Mae. It ranks us over the time, over the last two years in net margin, return on assets, return on equity, tangible common, equity versus tangible assets, dividend yield, efficiency ratio. Just for everybody's benefit, Home just stands out in this with a high rating in every one of those categories. It makes me very proud. I appreciate our bankers and what they've done, and we'll continue to work hard. I wish I had more time to go over that. We may make some travel sheets for that when we travel in the future. Those are pretty important numbers. I think at this point in time, does anybody have anything else? Chuck, are you ready for us to go to Q&A?
Yes. We'll now begin the Q&A session. To ask a question, you may press star, then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Brett Rabatin. The first question will come from Brett Rabatin of Piper Jaffray. Please go ahead, sir.
Good afternoon, everyone.
Afternoon, Brett.
Wanted to first ask, maybe Johnny, can you talk about, you talked about stability in the market. Can you maybe just give us a flavor for what you're walking away from a pricing or terms perspective, kind of give us some flavor of lines you're not willing to cross? Also wanted just to hear origination rates, kind of what you're expecting, kind of given where rates have gone relative to the current portfolio.
Well, sometimes it's a good time to book a lot of loans, sometimes it's not a good time to book a lot of loans. As the Fed dropped 50 basis points, I'm telling you, the lenders dropped 150 to 200, we're just not going to play at that level. We're beginning to see, as I said, it's a dangerous time. We're beginning to see loans in the threes. We're seeing 80% leverage. We're seeing non-recourse mixed in. It is a time to be very, very cautious. As I said in my remarks, banks are probably in the best financial condition that they've been in, ever, maybe. At least we are. To take a chance in these kind of markets and go back to 80% leverage, it just doesn't make any sense. We're just not going to do it.
We made the decision several years ago on some prepays, to put prepayment penalties in, and I think you'll see over the next quarter or two, we made the decision to let $300 million or $400 million leave. That's here presently right now, but we're not going to sell our future. You're seeing threes, you're seeing non-recourse, you're seeing high leverage, you're seeing things that we saw back before the '08 crash. We're just not going to play. This is my largest asset, and we're just going to protect our assets. We'll book the good loans, and we'll let the others go away.
Okay. That's good color. The other thing I was curious about, you obviously defended the margin well in 3Q with the help of the prepays. Can you maybe just talk about the go forward outlook? You'll be able to reduce funding costs, I assume, at a slightly higher pace going forward. Maybe just talk about how you think about the margin from here.
Hey, Brett. This is Stephen Tipton. I think Brian's got our updated ALCO models here today. It still shows a little downward pressure in a down 25 or down 50 environment, which is consistent with what we said last quarter. We're constantly working the funding side, the deposit side on where we're at. I saw a report yesterday where we had another $70 million or $80 million in balances that we lowered by 25 basis points. Some of it, that's a month post the last rate cut. Some of it is timing related on the deposit side, where we communicate these drops to the customers. At 96%, 97% loan to deposit, we are mindful of balances too. That gives a little color for you.
I'll add a little color on the ALCO perspective in that we are asset sensitive. One-year pricing gap's about 8.8%, which leaves us about $1.2 billion that is asset sensitive. If you just take the numbers out of the black box on the ALCO model, it would show that a 25 basis points decline could decrease the net interest income, everything held constant, about $2 million for a quarter or six basis points. If we went down 50 basis points, it'd be pretty much double that. It would be $4 million for the quarter, or potentially 12 basis points. That's assuming that we did nothing to change the mix coming out of the black box on the ALCO model.
I think when we traveled with you, when Don and I traveled with you saw the emphasis that we put on margin, and it has been top of mind. I think we're going to see downward pressure a little bit because of competition on that. We're trying to do the good ones and let the bad ones go by. Some of them are good credits, we're just not going to write at 3% non-recourse. We're just not going to do that. This too shall pass. We won't be here forever. To think you're going to lock in, we're seeing a lot of 15, 20, and 25 year stuff. Some banks, a lot of shadow banks, but they're locking themselves in for a long time with some of these credits.
We hate to see some of these go, but I think that we'll be better off in the long term, and we'll write at higher rates in the future.
Okay, great. Appreciate all the color, guys.
Thank you.
Our next question comes from Michael Rose with Raymond James. Please go ahead, sir.
Hey, guys. Good afternoon.
Hey, Michael.
Just wanted to circle back to the margin commentary. Obviously, seven basis points of prepays. It sounds like you expect some level of prepays going forward to kind of boost the margin. Should we think about a level that's something around that for the next couple quarters, just in terms of what you guys are expecting for prepays? I'm just trying to get at what's kind of the starting point for the NIM that we should consider, and then build in whatever we're going to build in terms of rates. Thanks.
I think you're going to see a pressure on the NIM coming in. The originations thus far this quarter have not been at the rates that I wanted them to be, so obviously, we have not originated a lot this quarter. However, the pipeline unfunded is the highest it's ever been. It's about two point-
$6.47 billion at the end of the quarter.
almost $2.5 billion, and that doesn't include Chris Poulton, and Chris has a very strong backlog. We have a good backlog to give us time to weather this storm, I think. Any other comments on the margin? We have a lot of prepays, and you can call it juice if you want to. I was looking for someone to give us credit for having enough foresight to put those prepays in, and Jimmy Hannah did. Thank you, Jimmy. We have a lot of prepays. You're going to see a lot of money rolling in the income pretty quick here in the fourth quarter, if all of this stuff gets paid off. There is substantial prepayments. When I'm talking substantial, I'm talking some big loans with some 4%, 5%, 6% prepayments in them. There'll be some substantial income coming in.
That kind of takes a little of the sting off of them moving it.
Right now-
Absolutely
Right now it's actually reoccurring non-reoccurring income.
Yep. No, I completely understand. No, it's a good thing you guys put that in. I just had a question. I don't think you guys addressed it in the prepared comments. I just wanted to get your thoughts on CECL. As I step back and I look at it, you kind of have two buckets of loans that are treated kind of unfairly, with the unfunded commitments and then the longer-dated marine portfolio. Can you give us some sort of expectation, if you have it, what kind of the day one hit might be under CECL, and how that might change your appetite to continue to grow CCFGs as you move forward? Thanks.
I'll take the part on the CECL. We have run our models, and we're at the point where our auditors, BKD, are in the process of auditing it. They've not given me their thumbs up, thumbs down opinion on it. They've been here a couple of weeks. We're also going through model validation. Once again, they're probably going to be done in a couple of weeks, but haven't gotten the final report on that. We're not prepared to actually give a number. We do anticipate that the ALLL will go up a little bit. Of course, that'll be a hit to capital. We do anticipate being able to take advantage of the three-year phase-in from a risk-based capital standpoint and phase it in over that.
As far as us originating or changing our lending, don't think that that's going to impact a lot on the way that we're doing our loans. We'll have to fund the ALLL as the loan portfolio grows and to be honest with you, for a lot of the history of this company, we have done all that already as we grew the loan, when we had a growing loan portfolio.
Our loss history, Michael, over what we analyzed shows that the type of lending we do, we've really not lost a lot of money there. I think your question was asking if we'll change any of the different types of loans. As of what we've seen so far, that wouldn't happen.
Hey, Michael, this is Kevin Hester. The weighted average maturities for our portfolio are shorter than you might think, and even in the marine portfolio, those prepayment speeds have been in the, I want to say, three and four-year range out of that portfolio over time. It's not going to make as much difference as you might think.
Understood. Maybe just one more, just broadly on loan growth. It looks like loans could end flat. They're kind of down this year, and I understand why you've slowed that. It's twofold, right? It's prepayments and it's also being more prudent, not giving away the ship, which I understand. As we think about next year, if this dynamic continues to play out, I assume you'll take the same stance, and we should probably just kind of project a lower rate of growth. Is that a fair way to think about it? Thanks.
I hope not, but if the market stays like it is, then if the kind of credits we're looking at and the rates we're looking at on those credits now, if that continues into next year, we'll remain very conservative.
Oh, there's a lot of stupid awards to go around.
There's a lot of that. I get it. You think about it, what happened in 2005, 2006, and 2007, and 2008, nobody put any money in the deal, right? There was no money in any. They blamed construction, but really there was no money in them. We all, bankers learned their lesson in 2008, 2009, 2010, 2011 as we got kicked in the tail. We don't want to go back to that. We're not interested in that kind of business. It doesn't make any sense to loan money at 3%. That's just ridiculous. We're just going to keep, as I say, just hold steady here is what we're going to do.
No, I get it. We all like Johnny Prime better than the alternative. Thanks.
Yeah, we may go back to Johnny Prime.
Don't mention that, Michael.
Thanks a lot, guys.
That's what we did then. We just went to one rate and said, "Take it or leave it," right? Worked out pretty good for us. We're just being conservative. We're just being ultra conservative in a market. When you see the Fed drop 50 basis points and bankers drop 150 basis points to 200 basis points on loans, it was kind of crazy. It was almost like they turned out the wild animals at one point in time, and they were just running in different, "We got a quote for this," and so-and-so's going to do this. Tracy and I were in Orlando talking to this big developer, and he said, "Look," he said, "I'm getting three and a quarter, 7%.
I mean three and a quarter, seven-year non-recourse, three and a half, 10-year non-recourse." He said, I just looked him in the eye right then, I said, "Well, we don't do that. That's not what we do, and we're not going to do that." You just have to let them know you're not going to play that game. However, we may get that guy on the five. Tracy, you think?
I think you're right. Yep.
Anyway, relationships are extremely important right now. You're disappointed in some people. Most people stand up to the relationship.
No, I get it. Great color, guys. Thanks.
Thanks for your questions.
The next question will come from Brady Gailey of KBW. Please go ahead, sir.
Hey, good afternoon, guys.
Hey, Brady.
When you look at loan growth or I guess loan shrinkage for you guys, the payoffs, are they coming out of one specific geography? Is it CFG or Arkansas or Florida, or is it kind of across the entire Home Banc franchise?
We're going to let Chris talk to CFG, speak to his CFG. Chris, why don't you speak to that, and we'll speak to Legacy.
Sure. Hi, Brady. Yeah, no, for us, I think we see our normal level of payoffs. They come in different months, right? I don't know that we're seeing anything happen on payoffs that we haven't seen happen before. Our challenge is that convincing our customers to pay off in an even one-twelfth fashion over the year is a little tough to do, so some quarters get higher than others. The only, maybe a little difference this time was some of the elevation in payoff was in facilities, which is a little different in that we do have an expectation that those facilities remain outstanding and borrowers tend to reborrow.
We had one larger payoff that hit this quarter that was in a facility, and we'd have an anticipation that some of that'll get refunded back up over the next life of the facility, which is generally another year or two. That might have been a little different, but in general, I think we're seeing kind of the same things we normally see.
From our perspective, we have a multifamily builder that it's about $120 million. The decision was to let it go because it's 3.25% non-recourse. We don't do that. We're not going to do that. We hate to lose it, but there's also $4 million worth of prepays on it. That takes a little of the sting off when you got $4 million worth of prepays on one side. Another paydown that happened this quarter was one that we wanted to happen. It's a couple of multifamily units that was a classified credit that we thought was fine. The regulators didn't like it. We moved it. He was able to get financing elsewhere with another bank, much greater bank. They took it out. Some of this is by design that we've moved out.
I think someone asked about the two credits that we had, the two four credits that moved to fives, right? They moved to fives. However, it's fixing to pay off, it appears, and it has a prepayment on it. That one's gone. The other one was a complex in the Panhandle of Florida, there's been no change on it. We're not worried about that credit anyway, there's been no change on it. Some of it was us, and some of it was the market, and some of it was pricing for us to look at long-term fixed rate stuff, non-recourse. We're not ready to do that.
All right. If loan growth is not going to be robust, at least in the near term, I know Johnny, you've been able to successfully grow EPS via M&A. Do you look to M&A a little more aggressively now that loan growth is slowing here?
I think we do. I don't know what's going on, Brady, there's lots of banks coming at us. We've seen more banks in the last six weeks than I've seen in six or eight months coming at us. Some of them make sense, some of them don't make sense, but that could be a plus for us down the road. We're just starting to play with that. We really hadn't been real serious about M&A, but I think we're getting much more serious now. Wouldn't you guys say that, Tracy? Opportunities are definitely more now than what they have been, expectation's still a little rich for us. They're coming down, though. That's my point. The expectations are coming down a little bit.
I don't know if everybody's afraid Elizabeth Warren's going to win and banks will be in big time trouble, but there's something going on out there that's generating. I don't know if it's regulators. I really don't know what it is, but there's something. They're coming at us faster than we anticipated them coming at us.
Johnny, just remind us, I know a lot of the deals you've done in the past have been scratch and dent. Is that still the focus? What is kind of the size range of targets that you would potentially look at, and then what geographies are most attractive to you?
I don't know if size is important. We did the Stonegate deal. From a shareholder value perspective, we didn't get anything out of that. That was a good lesson for us to learn. It is important in some markets to get the blessing of the shareholders of the organization. I think we probably would be looking at a smaller sized organization that gives us that wholesome local shareholder flair that you didn't get with Stonegate. Not that Stonegate wasn't a good trade for us. It turned out to be a good profitable trade for us and a great deposit market for us. We didn't get the rah-rah from the shareholders that we get on a smaller transaction. I think that's important to the value of the company because if it's heavily fund-owned, then it's just they're gone overnight, right?
They don't get their two and 20 or 20% or 50, whatever their pay is until they sell the stock and get paid. It's a good lesson for us to learn. The bottom line to it is, which one is the most accretive to EPS for Home Bancshares? That would probably be one that is somewhere around our markets because of the savings that we could generate. I still like Texas, and I've talked about it a lot, but we don't get a lot of savings out there. If we did a deal or two in and around Florida, I think we could pick up some good savings and probably pick up some shareholder value.
Great. Thanks, guys.
Thank you.
The next question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead, sir.
Hey, thanks. Good afternoon, everyone.
Hi, John.
Hey, just a quick follow-up on that, on Brady's question on number of banks coming at you. How was the quality of those companies in general? Quality of the loan books?
Well, I don't know until we get in.
Yep
I'd say from weak to good, I'd say they're across the board. Some of them had stumped their toes, and I guess they don't want to stump their toes, and I guess they just put up a for sale sign. It's just a matter of price. Obviously, this team, management team knows what to do with a failed bank. They bought seven or eight of them. It all has to do with the price of the bank and what it does to Home. I think overall, banks are in the best shape they've been in many years. I think most of them are good. It just depends on what it does. We're not going to do a deal for the sake of doing a deal.
We're going to do a deal that makes sense for our shareholders, and that is accretive to EPS for our shareholders and adds some additional value or maybe a different market. We can't get much savings if we go outside Florida or Alabama or Arkansas.
Okay.
Unless Chris wants to buy something in New York, and I don't think he's interested in doing that.
All right. You've been clear on your view on the Fed, but big picture thoughts on rates from any of you, is there like a directional bias that you're managing to in terms of your company? You think we're going lower or stay the same?
I think we're going lower. Some people think we're going to go negative. Maybe a quarter or two. I think we may see that. I don't know that it really reaches a point where it really doesn't stimulate. I think another quarter down or maybe two down will pretty much be the end of it. Some of the bankers, they've already gone there on their rates. As I said earlier, the rates dropped 50 basis points, and they dropped 150 to 200 basis points on their rates. It was kind of chaos out there for a little bit. We just got out. Sometimes it's a good time to hold them, sometimes it's a good time to fold them. This was not a good quarter to originate new loans based on competition and the silliness that was in the market.
Even though we did originate $710 million, a lot of it never got up to our executive loan committee because they flushed it before it ever got.
John, Randy Sims was telling me he was at a conference last month, and I think that question was asked to all the bankers in the room, and reevaluated those answers a year later, and they were all completely wrong.
That's exactly right. Every year, they ask questions on what are rates going to do, what's the most threatening thing to you, to the best bankers in America, I guess. Most of them were there. Every year, they've been 100% wrong the year later. I'm kind of the opinion after seeing that two or three years, we need to think what we don't want.
Right.
If rates are going down, maybe rates will go up. I don't know.
Yeah. Well, a year ago they went up, right? A year ago they went up.
Well, yeah, last year they were going up, Tipton told me that somebody called him and said, "You need to get ready, rates are going to go down." I thought, "Is Stephen buying that BS and bull?
Should have.
Huh? I should have. It worked. It was just the way the guy called it.
Yep.
I'm going to tell you that in this country right now, nobody really knows. Rates will probably go down a little bit, but who knows what'll happen after that. They could just as easily come back up.
Yeah. Okay.
We're kind of turning the needle just a little bit as the rates change and the Fed. You have a tendency, you want to twist that knob, but we're just tweaking it or doing nothing, and I think that's probably the best thing to do right now till you get a trend. I don't know what the trend is. It appears to me to be down, but that doesn't mean it'll go down.
Yep. Okay. I guess the last question, we kind of periodically bug you on Home $2, and obviously the rate environment has changed a little bit, but big picture goals for 2020. Do you have any thoughts on that, on where you'd like to be and take this?
I'd like to be the $2. We need $1 billion worth of loans. It's just tough to get right now. It's tough to get at a decent rate. It may push off Home $2 by another year in my mind. We'll get there. This has been interesting. All the goals we set in the past, we hit within 18 or 24 months. This has been an absolute battle getting here with all the changes and the payoffs and the rates and the rate movements. It's been interesting times. Overall, Home has returned to their shareholders over $500 million in the last five years. We earned $1 billion. We're running close to 2%. We've been able to manage our way through this crazy environment and produced still best-in-class results. Hopefully we can continue to do that in the future, John.
Yep. No, it's quality. I agree. Thanks for the help. Appreciate it.
You bet. Thank you.
The next question will come from Stephen Scouten with Sandler O'Neill. Please go ahead.
Hey, guys. How's everyone doing?
We're good, Stephen. Enjoyed spending time with your people in Atlanta the other day.
I heard that. You guys have both been in Atlanta and not come to see me, so we'll have to fix that.
Yeah. Well, you should've come out that day. It was really good. Maybe they had the top people out there. Maybe one or two there.
I don't know. We'll figure that out one day.
Let me tell you, it was extremely healthy. I really enjoyed that.
That's great.
I had a back problem and I had to leave, but I would've loved to have stayed another hour and had that interaction.
That's fantastic.
Thanks to them.
I'm glad you're here. Absolutely. Curious what you're thinking on share buybacks from here. You said you might build capital. I think you mentioned $100 million, $200 million. Are you thinking if you don't have the loan growth here in the near term, that you might just hold the capital and not do more buyback activity here in the near term?
No, we'll continue to buy back. We'll continue to be in the market buying stock. We may cut back on it somewhat at the amounts we've been buying. We think it may be prudent to store $150 million-$200 million. The worst thing could happen to us if we do that, and we got a sub-debt that's due in 30 months.
Yep, March of 2022.
March of 2022, we could pay way down on the sub-debt. Somehow they've never convinced me how that works. They count it as capital and it shows up on the balance sheet as debt. I don't understand how that works. I don't like debt. We're thinking that we might use the cash to pay down on that. We're kind of splitting that. If it's a $10 bill, we're kind of taking five and buying stock and about five and sticking back. We're blessed to have the kind of earnings multiple this company has, where you have that kind of money to be able to do those things.
We can pull all the handles, and I don't know if you heard my presentation, but we've earned over $1 billion in the last 5 years, and we've given back to our shareholders over $500 million in stock buybacks and dividends. While growing all, but growing tangible book by 78%, and our capital ratios at the same time. It's a pretty good money maker.
Yeah, absolutely. No, that's good. Is there a way to frame that up? You bought back maybe, I think it was about $105 million in 2018. You've bought back, looks like maybe about $75, $76 million this year so far. Is it $100 million a year?
That's probably right. That's probably close.
Something like that? Okay.
That's probably good for you.
Okay.
That's probably good.
Okay. On the expense side, one other follow-up there is this a good run rate in the quarter, or was there anything unusual in the salary line in particular? It looked like it jumped a couple million bucks this quarter.
A lot of that was the bonuses paid off of the New York. For the payoffs.
Okay. That would remain elevated as long as you continue to see payoffs, but if payoffs decline, that number would also come down a bit.
That's correct. The way Chris has his structured, that's part of his employee compensation, and the Legacy doesn't have ours structured that way. If these $120 million worth of multi-families pay off in the fourth quarter, there'll be about $4 million worth of fees, and there is no associated expense to that.
Okay. Got you. Very helpful. Okay. Then maybe just the last thing around the NIM. If I'm hearing everything you guys have said correctly, looks like maybe loan yields are down a little bit from what you've booked already this quarter. If loan growth does return a little bit, that would put more incremental pressure on your NIM, than it would if maybe you just pulled back and stayed flat. Is that a correct way to think about it?
I'm going to have to get Tipton in on that.
Is that a trick question, Stephen?
That's a trick question.
I think that's a trick question. If loan growth returns, that'll put more pressure on our NIMs, because we're riding at a lower rate. That's probably right.
In theory, yes.
Yep, I get it. In theory, that's probably right.
In this rate environment as we sit.
Right. Okay.
Yeah.
Yeah, it's that push-pull between making more money or having better margins and better return. That makes a lot of sense. Okay, guys. Well, perfect. Thank you guys for all the color.
All right, thank you.
The next question will come from Brian Martin with Janney Montgomery Scott. Please go ahead, sir.
Hey, guys.
Hey, Brian.
Hi, Brian.
Hey, Stephen, I guess maybe probably for you, but just going back to the margin for a minute, if you get another rate cut or two, just from the core margin perspective, it sounds like you still expect some continued pressure there on the way down. The more rate cuts you get, I guess, is your expectation that the deposit beta gets higher, so you get more benefit, I guess, or less impact?
Yeah, potentially. We talked this morning. On the deposit side, you had such a long period of zero rates, and they ran up and got in the 2% range, and everybody is excited to earn that. I think it'll take some time as that appears that this may pull back down. I'm finally seeing this past month on the deposit side, CD volumes and those type things, below the 2% range. Another rate cut or two, if people go back to looking for security over yield, that may help from a reduction on the rate side. We're still competitive environment on the deposit side, too, in all of our areas. You're seeing 2-plus percent adds out of competitors both here in Arkansas and in parts of Florida. That's just something we're having to manage around.
I think, the numbers that Brian gave from a modeling standpoint, I think are consistent with what we saw this quarter from a core perspective, if you strip out all the positive things we talked about.
Okay
Again, as Johnny said, I think in the environment that we're in, we'll take credit for those, and we're going to see those continue for foreseeable future.
Okay. Maybe, I guess, just in general, just kind of going to the efficiency ratio for a minute. It's at a great level. If we're in this environment where revenues are being pressured, is there a lot more you can do, or do you see other opportunities on the expense side? How should we think about kind of the efficiency as you go into next year? Is it kind of flattish? Is it up a touch? Does it drift up a little bit from where it's at in 2019 to 2020? Just kind of how are you thinking about that in general?
I'd just use a 40. I think 40 is fair. We've brought in lots of new people into the company over the last year or two, and we've maintained that. I think most of that, any spending from personnel, I don't see it right now. Randy, you about to see any additional major spending?
Not anything major. There's still a few areas that need a person here or there, and unless we have a lot of growth, I don't see that increasing. I think your 40% is right on the mark.
Yeah. Townsell said if we got to 41, she'd come back and take it back over.
There's a memo going out in a minute. You better stay at 40.
Anyway, that was just a joke, but I think it's pretty solid around 40. It might tick a little over, tick a little below it, but I think it's pretty solid.
Okay. That, maybe for Brian, just that FDIC credit, I guess that comes back in what, mid next year? Is that how to think about that? Just kind of ballpark when we should start putting that back in?
No, the FDIC credit is a one-time bandit for us.
You saw the negative in the income statement. That's because we were able to reverse the accrual.
Yeah
Q2 not have to make really much of an accrual for Q3.
Okay. It's back in there then.
It goes back to its normal run rate, starting in Q4.
Okay, perfect. Okay.
Which is a little lower.
That's all I have. Thanks, guys.
Okay.
All right, thank you.
The next question will come from Matt Olney with Stephens. Please go ahead.
Hey, guys. Good afternoon.
Hey, Matt.
Hey, most of my questions have been addressed, but on the M&A discussion, it sounds like you're seeing lots of books out there.
Yeah.
I'm curious, do you think this is a buyer's market right now? I'm trying to get a better idea of what the pricing could be in an M&A transaction right now.
I'd say it's much more of a buyer's market than we've seen in the last three or four years.
Johnny, we've actually had some reach out to us some time ago that didn't participate, and they haven't done anything yet. Because of the higher price, maybe things are coming back.
We think they may be coming down a tick. As I've said to you, when I look at the universe and Home Bancshares trading at 2x tangible, and we're running a 2% ROA, and the guy who's wanting to do something is running a 1% ROA, and he trades at 1.8x or 1.9x in tangible. It has been frustrating to us to see the weaker sisters. There's no disparity between the best operators and the poor operators to speak of, really, unless they stump their toe. If they stump their toe, the market's punishing them right now. I don't know that you're going to see a lot more. There may be some more problems with asset quality. You hadn't seen many this quarter thus far, have you? People having asset quality problems?
Far it hasn't been as bad as it was last quarter.
Okay.
You mentioned Florida as a market you're looking at, and you've been buying in Florida for several years now, and I would think that you already know some of these banks pretty well. I'm curious, are some of these the same banks that you've danced with previously, or are the books down there that you're seeing are these new faces that you're less familiar with?
Actually, it's a little of both. It's a little of both.
Okay.
It's some that we danced with and didn't do anything, and then some that Actually, the last book we looked at was four banks this week, right?
I'm trying to think of the names. Two we had danced around with and two we had not. About half and half. I think the prices are going to get I don't know why everybody's in a hurry all of a sudden. Maybe it's the loan demand and rates and the difficulty of managing $15 billion or $20 billion assets in this kind of rollercoaster economy. Maybe they're just joining the house. Maybe they think Elizabeth Warren's going to win. I don't know what's happened, something is stirring this out there that when you ask them why they're thinking about selling, I don't know that you always get the right answer.
Mm-hmm. Got it. Then just switching gears, more of a modeling question. On the tax line item, you had some unusual movements this quarter. Any change to your expectations of that effective tax rate being around 24%?
Yeah, it should change a little bit. Our marginal rate had been 26.135%, with the Florida being a little bit lower and we having quite a bit of real estate down there in Florida, probably the marginal rate's now going to go to 25.819%. We had been running an effective tax rate of about 24.1%. I look for that to be about 300 basis points lower, down to about 23.8%.
Got it.
That's what I would've told you approximately. I think he did it right. I think he told you right.
Brian, what about on the purchase accounting accretion, a little of a step down in the third quarter. What's the outlook from here going into fourth quarter and then the CECL treatment for that going into 2020?
Okay. This last quarter, we had $8.5 million of accretion, and $6.2 million of that came from what I'll call just normal running off the normal accretion, and then we had $2.2 million of payoff accretion. What I've been witnessing is that about over the last year and a half, is that it seems to be tripping down a little over half a million dollars per quarter on average. I would not be surprised to see us, for total accretion, be below $8 million for Q4, maybe around $7 million, $8 million, $7 million, $9 million for accretion. As far as the change once CECL comes in, it really shouldn't change much because everything that we have that's out there on that is accreting continues to accrete.
The little bit of change we might have is that we've had some non-accretable discounts that we've decided that were no longer needed, and we've been able to move those over to accretable, and that piece of the puzzle will stop in 2020. We still have $78.4 million of accretable discounts on our books as of September 30th.
Got it. On the BOLI contract that was surrendered, what's the ongoing impact of that? Is that a few hundred thousand dollars in fee income that you were benefiting from each quarter that will now stop?
I mean, obviously in our non-interest income, we had an increase in cash value of life insurance. It was $714,000 for this quarter. $135,000 of that was related to the BOLI that we cashed in for this quarter. That will not be recurring in Q4 or Q1 or anytime in the future after that. We get our BOLI cash six months after surrender. We surrendered it late in September.
We actually think we should see a pickup there. We were yielding like 1.16% or something.
1.14.
$1.14. We can spend on our head and do better than that. That's why we called it.
Okay. Okay, guys. Great report. Thanks for your help.
You bet. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Mr. Allison for any closing remarks. Please go ahead.
Thanks, Chuck. I guess we'll see you in 90 days. We'll continue doing what we've done in the past of buying back stock and growing the tangible book value of the company, continue paying a strong dividend and growing capital at the same time. I would say that we're kind of becoming like, what is it? The Maytag guy, that you never had to just let him go. He's just reliable. I think Home's becoming the reliable company. We continue to hit good numbers and perform properly in these all different kinds of markets, and we look forward to talking to you all again in 90 days, and thanks for your support.