Greetings, ladies and gentlemen. Welcome to the Home BancShares, Inc. second 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 a question during the question and answer session, please press Star, then one on a 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 are 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, Gary. Good morning to everyone. Kevin and Chris and John are at other locations with me today. They'll be on the phone, though. Stephen Tipton's with me, Brian, Jennifer, Donna, Tracy, and Randy. Pretty much the same crew. Good morning and welcome to Home Bancshares' second quarter 2019 earnings release and conference call. This is quarter number 52 since our initial public offering, and once again, Home produces another solid quarter. For the most part, the other 51 have been the same, except for a few quarters during the financial crisis times, we bumped a little bit. Of the 51, 26 of them are record profit quarters in a row. That's why Home was named the best bank in America by Forbes for the second time in a row.
We not only pride ourselves in being the best bank in America from an ROA and efficiency, return on tangible common equity, net interest margin, asset quality. We're the best in other important segments as well as helping our communities. We recognize the importance of supporting our communities in which we serve. We serve thousands of volunteer hours for our people. Our commitment to community reinvestment, fair lending, and diversity with both our money and time. We have presented three quarters, as you can see from the press release today, 50 and 51. Donna Townsell said, "How do you want to present this time? Do you want to do these boxes, or do you want to use the last quarter or the fourth quarter?" They look so good, I said, "Let's show three quarters." These have not been easy times with rate uncertainties. Think about it.
In 2018, we had a rate increase every quarter. Told by experts we're going to have two more in 2019. Told we're going to pause temporarily, now we're being told to expect two or three rate cuts. Who in the world are they listening to? I think they're riding on a different financial rollercoaster than the rest of us were riding. They missed this one about as far as they did Y2K. You remember that? Or as Rachel Maddow on MSNBC did on election night, I quote, "There is no way Trump can win." That was amazing and certainly comical. Both the Fed and Maddow, I don't know how you say that, Mad Dog, Maddow, whatever it is, did not listen to the right people. Obviously, they were talking when they should have been listening. Don't shoot the messenger. They're just following the law.
It's Congress that enacted the law and sent them to enforce it. It's another example of people who have no experience writing laws. In spite of the Fed's yo-yo interest rate, we have a responsibility to manage our assets in a manner that is in the best interest of our shareholder and communities we serve. The key is not to panic, but hold the course. They were obviously totally wrong again. These huge misses create a major loss of credibility for them. At the end of the day, your management's trying to operate profitably in the middle of this chaos. They say when you're piloting an airplane and there's a major problem like an engine going out, don't panic. Just fly the airplane. What we are doing is just running the bank and doing our best to ignore all the static.
Not complaining, that's our job, though it would be nice to have a little more stability. Couple that with going over $10 billion. The regulatory environment is like being on a different universe. Other than the risk management, hardly any of the new regulatory expectations are involved in safety and soundness. A prime example is BSA and AML. It really would be interesting to have Congress do a cost-effectiveness study of BSA and AML. I promise you the results would be breathtaking. The waste of money is almost criminal. There are much better uses of the money than waste it like this. Bankers throughout the country should rally together to get Congress to do a study. Sorry to be a little windy, we'll get back to trying to run a good bank.
We keep a sharp eye on the markets and listen to our guys and gals on the ground, plus personally visiting our customers and shareholders. There are far too many models being created, too many quants, too many intellectuals without real-life experience, not enough people-to-people on-the-ground interaction with regulators. They need to get out of their offices and listen to real people instead of talking to each other and those that have no business experience. One can always make an argument for the negative, whether real or perceived, there is no substitute for experience. There is no substitute for experience. Reports from experienced people on the ground that live in reality is an amazingly powerful source.
The Fed should look at the models, collect the quant data, and the opinions of all the inexperienced PhD intellectual people who have never been there, never been in the foxhole, and then ask those in the real world what's going on in the economy. Weigh heavily on those in the field and gather the information from different parts of the country. I get it. The elitists think they know better, and they must take care of the rest of us, deplorable and Walmart shoppers. Most of the time, we are by far more honest, more reliable, and the most reliable form of information they can get. We together have built a financially strong and solid banking organization that's located with a huge presence in the second or third fastest-growing state in the country.
Along with strong performance from our South Alabama operation, coupled with a solid Arkansas market, tack on our New York profit center. Your company remains best in class in all performance metrics. We continue to remain in a conservative mode on loans and M&A. While volatility continues to swirl around both politically and economically, we think not pushing the envelope, focusing on internal operations, and taking what the market gives us on both M&A and loans is a proper position to ensure that we'll be around when the opportunities come again. We appreciate your support. Let's talk about the highlights of the quarter. We had a strong deposit month. I think it was $250 million. We averaged about $240 million for the month. What did we do? Stephen, what did we have last month in the-
Q1, we were up almost $170 million. We're a little over $720 million in the last three quarters, I think.
That's good. That's $720 million the last three quarters. Excuse me. Loan-to-deposit ratio, we were 106%. Randy, we're down to 97.41%. We need to get some loans.
Way too low.
We have stable interest margin in the face of this chaos. I think you look at that, the fourth quarter, we're at $430,000 the first quarter we're at $430,000 and we're at $428,000 this quarter. Remember that the quarter had over $500,000. I don't know that you know that. Maybe I'm telling it for the first time. Had over $500,000 in expense on premium amortization write-down that was impacted by the margin because of the unexpected fall in interest rates, resulting in faster prepayment speeds on some of the securities. I think Brian will talk more about that.
Yeah, I will.
Let's talk about the cost of funds. I want you to go back with me four quarters, three quarters, two quarters, and one quarter, and I want you to listen to these numbers. Four quarters ago, our cost of funds increased to $6,192,000. Three quarters ago, it dropped to $3,357,000. Last quarter before last, I guess it is now, $2,519,000, and this quarter, $283,000. I think the cost of funds may be something that's not going to be as prevalent as it has been in the past. Strong asset quality, almost the best ever. Strong capital ratios, industry-leading ratios. Common equity to assets, 15.84%, and tangible common equity to tangible assets, 9.96%, almost 10%. Return on tangible common equity, 21%. Strong loan production, over $1 billion worth of loan production. $1,000,024,000 at 6.14%.
We had $512 million worth of payoffs during the quarter at 5.54%. The production coming on with what went off, that's 60 basis points higher. Great job by the team. Overall loan yields. I've been telling you we're going to push, and we started August of last year. It's hard to turn the ship, but overall loan yields were up three basis points to 6.06%. And those three basis points added $897,000 to income for the quarter. Even though average loans were down $30 million, I think we ended up up $70 million for the end of the quarter, but our average loans were down. The interest income on the three basis points was $897,000. Congratulations to our team. You give them a mission, and they seem to get it done.
We continue to maintain strong cost controls with a sub 40 efficiency ratio and a strong ROA of 1.92%. For our shareholders, we increased dividend $0.01 per quarter, and we continue to repurchase stock. In the last year and a half, we have bought back $168,400,000 worth of stock, 8,716,000 shares at an average price of $19.27. So far this year, we've spent $64 million for 3,416,722 shares at $18.73. Last year, we bought 5.3 million shares for $104 million, $19.62 average. We'll continue to be in the repurchase business. You will see loan ratings change in the queue this quarter. In the past, all credits that were construction or agg related automatically rated a four, which lends to the conservative nature of our company. Let me make this clear so there's no misunderstanding.
This is an internal policy and not a regulatory requirement. Actually, this was a nice change from the regulators. They actually thought we're being too hard on our sales. After discussing with the regulators, we agreed to take a look. The approximate changes were $1.5 billion of the four s moved to threes, and two credits totaling about $70 million moved to a pass credit five. The balance remained in the four, totally our call. The two credits move into a five. One was an apartment construction project on a university campus with one of our largest and oldest customers in the bank. The project was weather delayed and missed the starting school semester. The apartment is now 68% occupied and expected to be in positive cash flow by the end of the year.
Probably did not need to move because of the temporary nature and the quality of the customer, but we moved it. A condo project that's in one of our best markets, the owner decided to keep it as rental because he thinks it's in the best long-term interest of his family. As a result, the project does not cash flow as rentals. He has over $12 million of liquidity, has agreed to sell one of his buildings as a condo, and pay down the balance enough to cash flow the project. Neither credit has ever been past due, and management does not expect a loss on either credit. As always, this company is totally transparent and wanted to report the changes and allow time for discussions on the call if necessary. We pride ourselves being known as the company that tells it like it is, good or bad.
Sorry, few shorts, it's kind of like the Trump Russian charade. There is no bear there. I think Christopher Steele is temporarily out of the manifesto business. However, it appears that some of your pocket journalists are still around. You appeared to enjoy the boxes in last quarter's presentation, and reports directly from each person responsible for the line of business. Not sure we'll continue that in the future every quarter, but certainly helped to get us a better understanding of how we looked at margin and operation. Brian started first last time. He will also be first today and cover the margin and the pieces impacting performance. We'll be followed by Chris Poulton, John Marshall, Tracy, and Stephen, and then our chairman, Randy Sims, will wrap it up, and Kevin Hester will be on the phone for any questions.
At this point in time, I'm going to turn it over to Brian and see if you can keep us clear. You did a good job last time. I think everybody got it, Brian.
Okay. Well, thank you, Mr. Allison. The second quarter was a good quarter for our net interest income and net interest margin. On a tax equivalent basis, we recorded net interest income of $142.3 million for Q2 2019 compared to $140.8 million for Q1 2019. Our net interest margin was 4.28% for the second quarter of 2019 compared to 4.30% for the first quarter of 2019. As Mr. Allison mentioned, during the second quarter of 2019, the interest rate environment declined. For example, the 10-year Treasury went from 2.50% on March 31st to 2.01% on June 30th. This decline has increased the prepayment speeds on our investment securities. As a result, we saw an increased premium amortization of $515,000 from Q1 to Q2. If the premium amortizations had remained flat from Q1 to Q2, our Q2 margin would have been 4.30%, or unchanged from Q1 2019.
Last year, our CFG division had a few payoff events, which increased our margin. For the first six months of 2019, they do not have any additional interest income for payoff events from CFG. Loan production was very strong during the second quarter of 2019. We saw loan production of more than $1 billion at an average rate of 6.1%. This breaks down into $484 million at an average rate of 6.3% for CFG and $538 million at an average rate of 6.0% for the community banking footprint. We are pleased with these levels of production and rates while maintaining our strict underwriting standards. Another positive was the impact of the change in the yield on our loan portfolio. We were able to increase the yield on the loan portfolio by three basis points. This equates to a $823,000 improvement in loan interest income for Q2 when compared to Q1.
Accretion income for the fair value adjustments reported in purchase accounting was $9.2 million during Q2 compared to $9.1 million during Q1, for an increase of $100,000. In conclusion, even though reported margin declined two basis points, our daily net interest income of $1.5 million per day remained unchanged for Q2 compared to Q1. However, if the investment premium amortizations had remained flat from Q1 to Q2, we would have reported an improvement of approximately $5,000 of additional net interest income per day for Q2 2019. With that said, I will turn the call back over to Mr. Allison.
Did you say $823,000? I reported $897,000.
Yeah, I checked my number while you were talking, and I came up with $823,000. That's what Stephen and I were ciphering on over here.
Oh, y'all were, okay. Well, it's $823,000. It's eight something, right?
Yeah.
There's nothing wrong with that. That's good.
It's over $800,000.
It's over $800,000.
That's right.
Don't want to mislead the public. I guess next we go Chris Poulton. Chris, are you on?
Yes, sir. Thank you, and thank you, Johnny. The second quarter at CCFG was highlighted primarily by a significant increase in new loan production, which Brian just discussed. As you may recall, during last quarter's earnings call, I noted that our loan pipeline, specifically the approved but not closed loans, stood at an all-time high. I'm pleased to report that during the second quarter, we closed the majority of those loans and we originated just under $500 million in new loan commitments. To put that in perspective, we generally originate between $800 million and $1 billion in a given year. A little over half of those new commitments were funded during the quarter, which resulted in approximately $143 million of net loan growth for the second quarter.
Notably, just about half of the new production came out of the West Coast LPO, as we continue to see good progress from Garen Robinson and his team in L.A. While payoffs continued and will continue to be a feature of our portfolio, we do continue to see good opportunities in our respective markets and remain pleased with the potential loans in our pipeline. Thank you for the time, and I'll hand it back over to you, Johnny.
Thanks, Chris. Next up is John Marshall. Go ahead, John.
Good afternoon. Thank you, Mr. Allison, for the opportunity to provide an update on Shore Premier Finance in the second quarter. Profitability grew in the second quarter. We continue to run ahead of budget. This may be attributed to asset growth of $5.1 million, stable margins, and good expense management. Our efficiency ratio remained below 30% for the quarter. Commercial and consumer loan originations totaled $34.2 million, an increase of $5.7 million over the first quarter, or up roughly 20%. In addition, $11 million in commercial commitments were approved. Our pipeline of retail assets grew due to an increase in applications of 38% by volume, 34% by dollar. Portfolio growth has been stifled somewhat year to date by unusually high prepayment rates as consumers take market gains and reduce their personal debt. That trend appears to have abated in June and July month to date.
The total combined portfolio was $448.9 million at the end of the quarter, compared to $443.8 million at the end of Q1, and $436 million at the end of year end 2018. Since joining Centennial Bank in July 2018, interest earning assets are up $62.6 million. While we're not a financial center or a branch, marine related deposits have grown to $1.3 million, doubling in the second quarter. Our growth strategy for both commercial and retail is to add new manufacturers, both domestic builders and international, and their attendant distribution channels in North America, working with their dealer networks per commercial floor plans, and to leverage these relationships for new retail referral sources.
In addition, we receive commercial and retail referrals from Centennial bankers, particularly those scattered around the Florida market. We've had success in co-branding events at boat shows and marine industry trade shows with our parent, Centennial Bank. As always, we're also grateful for our broad base of marine loan brokers for the majority of our retail referrals. We continue to deepen and increase those relationships. We also anticipate launching a super yacht retail marine finance program in the third quarter of this year. Growth has not been achieved at the expense of asset quality. Our delinquent loans were down substantially below $1 million at the end of 2Q, compared to $1.4 million at the end of the first quarter and $5.8 million at the end of 2018.
Commercial commitments have all been freshly underwritten and approved through Centennial Bank's loan approval process. Average retail borrower FICO scores at origination have climbed from 770 at the year end of 2018 to 775 in the first quarter, and they've reached 777 in the second quarter. The commodity-type nature of the retail side of our business continues to put pressure on our margins. In addition, pressure came from recent Fed decisions and the market reactions to the Fed as it relates to the 10-year Treasury, an index that is commonly pegged by us and our competitors for establishing retail rates. We see that with an average origination rates in the fourth quarter of 2018 of 5.01%, climbing to 5.52% in the first quarter of this year, and then pulling back slightly to 5.37% last quarter. I expect continued downward pressure in the third quarter.
The third quarter growth outlook is mixed. While we've seen an uptick in application volume and retail originations, dealers are beginning to express some pessimism and tapering back their purchase orders. Nonetheless, I remain confident in our ability to achieve growth, profitability, and asset quality objectives. With that, I'll conclude my remarks, and I thank you.
Thank you, John. Tracy French?
Yes, sir. Good afternoon to you. Thanks, Johnny. As you may recall, last quarter, I mentioned our focus was going to be on net interest margin and improving asset quality. The numbers posted today for the second quarter show just that. We improved our loan yield, we've watched our deposit cost, and improved our non-performing loans. To give a little bit of shout-out to our community banking, our net interest margin remains at 4.2% as it was the first quarter, which is up from 4.18% at the end of last year. I'd like to give a little tip of the hat to some of our regions on the deposit growth that they've had. Little Rock market has been up about a little over 7% year to date, and Southeast Florida is up over 11% year to date.
An extra little shout-out to the North Florida market, as they are up in non-interest-bearing checking accounts 16.5% year to date. Congratulations to some of those, and really congratulations to all, as Stephen will give a little color on the deposits a little later. For the quarter, Centennial Bank had a return on assets of 2.1%. An efficiency ratio of 36.45% with total revenue of $204 million. As it has been mentioned, I am pleased to see the strong loan production from the community bank segment. I want to compliment our lending teams for their continued effort in this competitive landscape. Stephen, you want to give a little color on the loans and deposits?
Thank you, Tracy. As you and Brian mentioned, the community bank loan production for Q2 was strong with the contribution split fairly evenly between Arkansas and Florida. While payoff volume in the Florida portfolio continues to be elevated, we did see end-of-period loan growth for Arkansas and Alabama. On the deposit side, as has been mentioned, we saw another strong quarter of growth at $280 million, led by Southeast Florida region with over $120 million in end-of-period growth. Johnny mentioned the interest rate environment today is quite different from where we were just three months ago, and we will closely monitor the impact of potentially declining interest rates on both sides of the balance sheet. Our efforts are now focused on deposit pricing while maintaining core relationships. With that, I'll turn it back over to you, Mr. Allison.
Thank you. We'll go to Randy Sims, our chairman, and let him wrap it up.
Well, one way to wrap something up is to say congratulations to everyone for another good quarter. As you've heard from everyone, the numbers are, again, some of the best. We seem to always talk about the numbers, so I'd just like to take a minute to mention we are making improvements in many areas of the bank with the intent to strategically take our operational areas to a higher level that not only provides new capabilities for our customers, but also improves our infrastructure for future growth. Our IT division, that we rarely talk about, is busy concentrating on continuing to improve structure, as well as implementing new fintech initiatives. Along with operational and retail divisions, we've deployed Zelle person-to-person payments, implemented new functions within the mobile app, and completely updated our customer website.
We continue to add interactive teller machines in appropriate locations and new products such as Cents to Win, a prize-linked savings program, all to enhance the customer experience with the best in capabilities and products. In addition, the bank has taken on a new initiative of strengthening our internal structure, including operational areas, as well as taking our regulatory departments to new levels of experience and depth. These efforts and improvements position us to continue our goal of being a high-performing bank, not just now, but well into the future. It prepares us for whatever opportunity the market may provide. With these improvements comes expense. As you heard, our numbers have remained strong. As Johnny stated, this is quarter 52, and our high performance has been consistent. Let me just recap some of those strong numbers and wrap this quarter up.
We finished with total assets of $15,287,575,000. Income was $72.2 million, resulting in diluted earnings per share of $0.43 as compared to $0.42 from the last quarter, which meets market expectations. Our ROA was consistent and very strong with the last quarter at 1.92%. More importantly, we were able to achieve a strong net interest margin at 4.28%, down just a little from the last quarter at 4.30%. As you heard from the others, we are working very hard on both sides of the balance sheet to maintain the margin. Once again, our profitability was helped by a very strong efficiency ratio of 39.93%. It was good to see it under that 40% again as we continue to control our costs, but also make enhancements within our bank infrastructure.
I am very proud of this number given the improvements we have been making and the negative effect of Durbin estimated at $3 million for each and every quarter. It's been a very strong quarter for deposit growth, as you heard, ending at $11.35 billion with approximately $280 million in growth, resulting in a loan-to-deposit ratio of 97.41% as compared to March 31st at 99.20%. Yes, Mr. Allison, that's keeping that engine running really low, like 30 miles per hour. I like it when it runs hot and you're making a lot of money.
I understand.
Of course, as you have heard from others, we had over $1 billion in loan production at an average rate of 6.1%, which again, is one of the reasons why we're able to maintain a strong net interest margin. Our asset quality has and continues to be solid, indicating a very optimistic and secured outlook for 2019. Of course, strong capital ratios as always, and you will always see that from Home BancShares. We now have two quarters behind us, and I think you'd agree that once again, the results we've presented today are powerful numbers. We look forward to the third quarter and another opportunity to, once again, perform at a high level for our shareholders. That pretty much wraps things up.
Randy, thank you. It is interesting going over $10 billion and what we have been able to accomplish when you think about Durbin.
Yes.
It took $3 million straight out of our pocket this quarter. Usually, accretion is going down, so that is pulling out. Then when you go to this next universe, regulatory-wise, with the expense that we are incurring there
Still be able to meet the numbers. I am beginning to get a feel for why, in the past, that the analysts have lowered expectations for banks like us in multiples when you go over 10, because they think, "These guys, will these people be able to keep up? Can they keep up with the increased expenses? Can they keep up with losing Durbin? Can they keep up with that?" I was not sure we could do that. We did it the first quarter, and it was like a breath of fresh air to me. We did it. Well, we did it a little easier this quarter than we did the first quarter. I see that now, and there is some understanding for that. I am pretty pleased.
I told somebody the other day, they said, "Where are you?" I said, "We are kind of treading water, but we are okay treading water." We got through the first quarter, it is kind of relieved, into the second quarter, and it was better in the second quarter. Hopefully, the third quarter will be better than the second quarter. These reports were really good, and I want to congratulate this team of people. The one thing about our team is you give them a mission, and they get after it. They try to make it work. I told our people last August, we started pushing rates. Everybody did not push rates. If you want to know what the quality of a bank is, ask them what their margin is. If they are giving stuff away, is it 310, 315? Are they giving stuff away?
They say we won't have good asset quality. Oh, they got bad loans because they pushed that up. That's not correct at all. That's totally incorrect. We got the best asset quality we've ever had. It's as good as it is in the country. We just ask for the additional rate. We maintain that relationship. We visit with that customer. I think all that is so important to building the relationship. You hear people talk about relationship, but their relationship is that they give a cheap rate. We've never backed off on that, and our team had the mission, was given to them last August, and you can see what they've done with that. They've been able to continue to push rates. What's going to happen now is the weak will drop 50 basis points. The strong will try to continue.
Matter of fact, we just got out of an executive loan committee today, and we were at 5.75, 6, and 6.25. Some of the weak will drop those rates in a hurry. We don't do that. We try to get the maximum we can get out of it. Our team does that, and against all odds, they continue to produce for the shareholders. I guess, Randy, if it was easy, monkeys would be doing it. It's my pleasure, and I mean that, to work with such a great, dedicated group of professionals, and they get the job done. Congrats to you guys. Gary, I think we're ready for Q&A.
We will now begin the question and answer 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. Our first question comes from Brady Gailey with KBW. Please go ahead.
Hey, good afternoon, guys.
Hey, Brady.
As we look forward with the yield curve doing what it's doing, I'm guessing we're going to see lower levels of yield accretion for you guys the back half of this year and into 2020. Do you think that it's realistic that you could see some NIM slippage here? Do you think that maybe deposit costs start coming down, and you're able to hold it around this 430 level?
I'll take that, Stephen might chime in a little bit after that.
I'm going to give you the answer.
I'll follow up from him, Brady.
I might have some comments.
I'll start off with the accretion. We have been around $9 million plus in accretion each quarter, the last three quarters. I really predicted it to go down into the $8 million range this quarter. We did have an increase in payoff accretion. The payoff accretion was up about $500,000 this quarter from the previous quarter, there's a good chance that that may not be reoccurring. We would have that pressure. $500,000 would equate to about two basis points on the NIM. If you look at the models that we have, and we've disclosed these model numbers before for a shock analysis. I mean, we're really, for the most part, neutrally gapped, but we are technically slightly asset sensitive.
If you're asset sensitive and the models are correct, which we can do things to try to change the outlook from those models, it would show that we would have some margin compression.
FOMC
Yeah. The one that's coming up here at the end of the month should cost us, according to the models, about $2 million of net interest income, which could equate to six basis points. We're going to try to do things to try to improve on that.
Hey, Brady, this is Stephen. To tack on there, we spent a lot of time over the last month or so trying to identify on the deposit side what opportunities we expect we'll have if the Fed lowers a quarter at the end of the month. I think we've indicated before, we have a decent size bucket in the funding side that is tied to either LIBOR reference rates or tied to T-bill rates that have already started to come down a little bit. We saw some good benefit from that July 1 on the quarterly reset. We feel like we're trying to identify what we can match up on the funding side to the loan side as to what's variable rate, and then the investment portfolio may be kind of the wild card.
All right. My second question is on the expense side. It sounds like you guys have some continued investments that needs to be made in the infrastructure, just from being a bank that's over 10 billion in assets. I was just wondering how your quarterly expenses have actually been going down the last couple quarters. As you look to invest more in the expense infrastructure, will that have a notable impact on expense growth going forward?
Well, as you've seen, it hasn't so far. We continue to do things to try to, as we're improving and putting some money into infrastructure, some of that infrastructure is software that makes you more efficient. Some of that infrastructure are people that, again, make you more efficient. It's kind of looking into the future and saying, well, are your expenses going to go way up? Well, the expenses may go up a little on the front end, but we make investments in infrastructure to become more efficient, and therefore try to keep our expenses down and even lower them. Yeah, you could see some increase, but I would hope that it would be followed by a decrease, and as we improve things. We don't make those investments without some realistic outcome of improvement, and lower costs. Does that make sense?
Is that what you're looking for?
Yeah. Thanks for the color. That's great.
I'm going to wrap this up for you. We're not going to let the expenses go up, and margins going to remain flat. Well, the tendency is for it to go down, right? Margins should, in this environment, go down. We have about $2.8 billion worth of loans that are going to reprice. We're about 75% fixed. That's good for us, or adjustable. We got about $1.4 billion worth of funds that'll adjust if they adjust prime. If they're going to take prime down, they need to do that. That'll help us. It leaves us a gap of about $1 billion in there, and this team works very hard. We got a call from one of our top flight regional presidents, said, "You can mark me down 15 basis points already."
I've already taken the cost of deposits down." As we work like hell on the way up, we'll work like hell on the way down. It may be a little blip temporarily, but I don't think it'll be a long-term blip for us because this team has a way of fighting and fixing it, as you well know. As we battle it hard on the way up, we'll battle it hard on the way down.
Can I say one more thing on the expenses? We are challenged by taking our regulatory group to another level, and we are meeting that challenge, and we are investing in that. At the same time, we have a strategic initiative on the other side, of people that are doing nothing but looking for ways to automate things.
As we invest in taking regulatory to another level, that team is looking to see where we can automate that to keep those costs down. That team is also looking at other areas of the bank, and I can give you examples, but I'm not going to take the time to do that. They also look and analyze where can we automate something that actually reduces our cost and the number of people that we have to have. While one thing is maybe making our expenses go up over here, we got another group over here that is trying to drive expenses down. I want you to know that we're working on both sides of that, and it has always been our goal to keep that efficiency ratio where everyone is proud of it.
The next question comes from Stephen Scouten with Sandler O'Neill + Partners. Please go ahead.
Hey, guys. Good afternoon. How y'all doing?
Good, Stephen. Congratulations on y'all recent trade.
Thank you, sir. Thank you. We'll see how it all plays out, but it should be a good direction for us, so thank you.
You think they're going to keep you?
I don't know. What do you think, Johnny?
I hope so.
I appreciate that. Time will tell, my friend. Time will tell. Hey, I'm curious if you guys are seeing any sort of inflection point on the payoff levels in Florida in particular. Sounds like that's where you're seeing a lot of the pay downs and production has been phenomenal. I'm just wondering if you think we might see some time here in the near future where more of that comes to the bottom line and grows the bank a little bit quicker.
This is Kevin. I can take that.
Okay.
Stephen, if you want to, go ahead.
No, please do.
Stephen, the next two quarters at least, I don't think you're going to see that. As we're looking in the pipeline, the next two quarters look like they're pretty heavy on the payoff side, as much as I'd like to report that they're not, that we do see pretty heavy movement in the next couple of quarters at least.
Stephen, anything you-
No, I was going to say, I just think if you look at the last three quarters, it's been a little north of $500 million, and I think what Kevin mentioned, we're seeing that plus a little bit forecasted. Things change, it can move around from quarter to quarter, but we're still seeing the volume there.
I think you heard me refer to it as a greased pig one day. It's hard to get your arms around that, and even though when I think it's not going to be as good, it's better, and when I think it's going to be better, it's not. It's somewhat difficult to get your arms around that. According to what the projection is, we're going to be down the next two quarters. I've seen that many quarters before, and it didn't turn out to be that way. That's a difficult one to forecast because you never know. If you know what's coming, and you never know what you're going to fund. I think our funding, we grew $160 million, $150 million, $145 million. What was it? Unfunded.
Unfunded commitments were up about $145 million from quarter-to-quarter.
To $2.6 billion or?
$2.35 billion.
$2.35 billion. It gives you an idea of what's coming.
Okay. Appreciate that. Johnny, sounds like you've been watching a lot of MSNBC lately. With rates looking like they're going to go down here, what are you guys doing to prevent against some of these rate cuts? Are you doing any hedging or otherwise to kind of put in protections just in case those guys are right?
We haven't done that. I watched some of our friends on the upside spend millions of dollars on the hedging process and get their head handed to them. The Fed says they're going down. It may be 90 days, and they go up a half. I think they got a dart board, and they throw it, and it hits up or down, or a quarter or a half. I think they just throw a dart board. It's what they've been doing, looks like lately. I don't watch too much MSNBC, but I did watch Comedy Hour on the night of the presidential election. I did do that. We got floors in place and, significant floors in place, and 75% fixed or adjustable. I think we're really on a down rate environment. I think we're in a pretty good position.
I actually think we're in a better position on the way down than we were on the way up, and we fought to hold our margin on the way up. I can assure you we'll fight to keep it on the way down. I think I said that earlier. I would be disappointed, I will be disappointed. You know how hard I push. I think we got a shot. It may go down a few ticks, but I think we got a shot to hold it within range.
One thing to remember is that we are a bank made up of a lot of different communities, those communities drive the market. Those communities is the market that we look at and that we serve. Then this up and down that goes up and down, and whatever the Fed decides to do, disrupts that. I wish that the Fed would leave things alone and let the market do what it always does. We have a little bit of advantage, I believe, because we serve small community markets, and those changes are not as drastic as what we see on a national level.
Makes sense. Maybe one last question from me. I'm curious what you expect on the pace of the buybacks or kind of how you think about that moving forward, if there's a capital level you might manage to, or if you think they might pick back up to the levels we saw in the previous two quarters versus a little bit less active this quarter.
Well, we kind of over-bought the first quarter. We had about $180 million, I think somewhere in that range, approved by our regulators. We spent $50 something million in the first quarter, which was a little
We spent $52 million in the first quarter. We spent $13 million in the second quarter. You're right, we had $188 million approved from the regulators.
Yeah. We're really evaluating what's in the best interest with all that capital rolling in right now, what's in the best interest of the company to slow down the buybacks, to maybe look at a sinking fund to pay off some debt at some point in time that's coming in the future. We're really in the process of evaluating that at this point in time. We'll continue to be in the buyback business. Not sure how much we'll be in, but we'll continue to be in that market. Sometimes we'll buy heavy, and sometimes we won't. If they put it on sale, we'll jump in there.
Very good. Thank you guys, appreciate the time. Congrats on the quarter.
Thanks.
The next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, good afternoon, guys. Just had an accounting question. I just heard the comment around the unfunded commitments, and obviously with Shore Premier Finance coming on, those two things, is my understanding, is they're treated pretty punitively under CECL. As we think about going into 2020, does this curtail your desire to continue to grow Shore Premier Finance or Chris' group up in New York?
When we get to CECL, we'll set whatever it is we need to set for the day one accounting mark. I would not envision that it's going to change how we look at that at all. That's just way of doing business. Michael, this is Stephen. I think maybe the comment there, just because.
I think contractually some of the shore finances is longer term. I don't think we would change our desire to be in that business, particularly with what John mentioned in the underwriting standards and what we're seeing today, just because of the accounting change. I think it's a business we want to be in and be exposed to, and continue to be a part of.
It wouldn't necessarily limit your growth plans in either of those businesses?
I don't think so.
Is that what I'm hearing?
Yeah.
Okay. Sorry if I missed it, but I don't think the M&A question's been asked, and I don't think Johnny mentioned it in the prepared remarks. I just wanted to get an update on your thoughts on the M&A landscape at this point, and what you guys are seeing.
I did mention them in the remarks, that we'll remain conservative on M&A. We'll take what they give us on M&A and on the loan side. I don't think this is time to be pressing the envelope, I think was what I said. We're continually looking. We're continually running models here with other banks. The MOE thing, as I said last quarter, is kind of off the table for us because we're having difficulty finding somebody that has the quality. It's not MOE. There's very few people that run a bank like we run a bank, and it's difficult to do an MOE, and particularly in light of who's going to ultimately run it at the end of the day. We've seen a couple of them, and they wanted to run it, but quite honestly, they don't run near the performance that Home BancShares runs.
Some of that is ego, who's going to run it and who's going to be the boss. I don't mind. If somebody's running a 220 ROA and they want to be the boss, that's fine. If they're running a 1% ROA and want to be the boss, they're probably not going to get to hook up with Home BancShares.
Okay.
We're still looking. Do what?
I was going to say, sorry, I missed that in the prepared comments.
No, that's okay.
That's clear. One final question from me. We've heard a couple banks talk about the lag effect on the downside if we do get a couple rate cuts on deposit rates. I guess my question is, do you think your interest-bearing deposit costs have peaked, should we get a rate cut?
I do. I think close. I think we're right at it. If you heard my comments, maybe you weren't on my comments, I went back four quarters, it was $6.3 million cost of fund increase. I'm calling from memory, then a $3.2 million increase in cost of funds to $2.5 million to $283,000 this quarter, which is a pretty good indication of what's happening there. I looked at it yesterday, or excuse me, I looked at it today, and it was flat. What I'm seeing, I like. I'm seeing interest income up slightly. I'm seeing interest expense down slightly. That's a good indicator for the company.
Okay. Sorry I missed some of that commentary in the beginning. Thanks for taking my questions.
I know you have a bunch of them. Have a bunch of calls right in this time.
The next question comes from Matt Olney with Stephens. Please go ahead.
Hey, guys. Good afternoon.
Hey, Matt.
Hey, I think Randy mentioned that the loan-to-deposit ratio is now at 97%, the lowest it's been for a while. Is this a strategic change, and are you going to operate here? Will Randy get his way and we'll see this move back up?
He'll get his way if you let him.
The regulators like it. I don't particularly like it. We'll be in somewhere in between.
That's probably a good answer. That's probably a good answer, somewhere in between. Deposits have been awfully strong, $700 million-plus the last three quarters. I have to give Chris the credit for it because he established that new policy. If you all remember, several years ago, we started asking for it.
We're not stopping, Danny. I'm sorry. We're not going to stop yet.
We're not going to stop.
We're not going to stop, so.
Johnny, you mentioned you felt like you have some protection with some floors. Can you give us an idea of at what point do those floors come more into play? How many Fed cuts do we have to see?
Matt, this is Steve. I can take that. We've got, on the CCFG portfolio, there's a couple hundred million today that are protected with the floors. Functionally, all of the production, I think you heard Chris's comments on how good his production was for the quarter, all of his production so far this year should be protected as it begins to fund, which, as you know, a good portion of his production has yet to fund. We've got about $150 million or so on the community bank side that's protected today in a 25 basis point down rate scenario, those numbers increase a little bit if rates were to continue to go down. We've got $350 or so that's protected today if they do lower rates into this month.
Stephen, I would assume that if rates were to go down beyond 25 basis points, that $350 would increase. Is that fair?
Yes, that's fair. I don't have those numbers in front of me here, but yes, that's fair.
Okay.
Okay, guys, that's all for me. Thanks for your help.
Don't bet the farm on that, Matt.
I wouldn't do that.
The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Thanks. Good afternoon.
Hi, Jon.
Hey. Kevin, can you go back over that? I was a little confused by the payoff information you were talking about. Were you saying it's elevated the next couple quarters or not elevated the next couple quarters? I missed that.
Yeah. Stephen mentioned a number of 500 last quarter. I think what we have, and Johnny made the comment, it is early. It's early in the third quarter. Certainly, for the fourth quarter, things can change, and these things can move in and out of quarters and up and down as you go through. As we've got it, as we're seeing it right now, the payoff numbers are even a little higher than what we saw last quarter. Production's been strong. Maybe we can outproduce it, and that'd be a good thing. Unfortunately, we're seeing people take things off the table and sell projects and move them to permanent, and it's just where it's at.
Okay. The message would be hoping for modest loan growth, working hard to get there, but probably seeing some repricing higher in yields as an offset. Is that fair?
I think that's fair.
Okay. Is John Marshall still on?
Hi, good afternoon. John's here.
Hey, John. You made a comment about consumer health, maybe picking up a little bit in June and July, you also talked about dealers pulling back. Can you expand on that a little bit and just let us know what you're seeing in terms of the consumer and why you think that dealers might be pulling back?
Yeah. We've got a little bit of a conflicting message coming out. We've seen volume increase from an application standpoint from a funding standpoint, the quality of those applications as measured by FICO scores is also improving. In our conversations with our dealers, they're looking forward, they're pushing back on their manufacturers just a little bit in the amount of inventory that they're interested in holding as we move forward into, probably not the third quarter, maybe in the fourth quarter of this year, perhaps first quarter of next year. I don't know. I asked them what is it that they're seeing. Are there any cyclical indicators that would suggest that they want to hold less inventory? It's more of a gut feeling. Right now, we've got sort of mixed signals.
We've got retail buyers, consumers buying a lot more boats, we've got dealers appearing to pull back just a little bit.
Okay. Good. That helps. Thank you.
I'm hoping those two will offset each other, and so it'll be neutral for us, and we'll continue to meet our growth goals.
Okay. Yeah, good. I was just most interested in the narrative on why, but that helps me. Chris, maybe for you, pipelines and commitments obviously were very high. Do you see that continuing coming into Q3 and the rest of the year?
Yeah, good afternoon. We do. We like the pipeline still. We moved through a lot of our waiting to close stuff this past quarter, so that was nice. We continue to like to see what we're seeing through there. We review it once a week. I generally like to see about $1 billion in the pipeline. Not all of that'll make its way through. As long as we have a $1 billion plus in the pipeline, I usually feel pretty good about where we're headed. We have a little over $1 billion in the pipeline today, so I would say we continue to think there's interesting opportunities and transactions out there. I don't think that's changed. We certainly take a, I would say, a shift towards a more defensive nature as it relates to both the pipeline and the portfolio. I'll echo the payoff sentiment.
In our business, that's a good thing. Loans aren't supposed to be out there forever, and while money's cheap and plentiful, there's some of the credits we'd like them to go ahead and move on out.
Yep. Okay, fair enough. Maybe just a bigger picture question for, I don't know if it's Randy or Tracy or someone, but it sounds like you all don't feel like a rate cut is needed at all based on what you're saying. I'm just curious if you're seeing anything that bothers you or that's incrementally a little bit more troubling from an economic point of view or not. Thanks.
No, we haven't seen. Our portfolio still shows all businesses doing just fine. Whether that's a rate cut or not for the company-wise, Johnny mentioned how we go out and ask for the deposits, and it seems to be working pretty well. I guess the secret here, John, we've called all our variable rate customers the last two days, and they're all coming in to sign the new fixed rate loans next week. I'm just kidding on that.
I was going to say.
We're going to ask them to come in and fix them up for that process. We work on the interest rates here every day, and that's something that we've done for several years now. When it goes up, it goes up, when it goes down, it goes down. We feel like our company's positioned pretty well to work through whatever the challenges we get thrown at on interest rates. We'll go up or down.
Okay.
From a personal nature, I'll just tell you that, especially where I am in the beach areas and on the coastline, it is so dadgum crowded they need to put some fences up and keep people out. There are people that need to go home. I have never in my life seen it that crowded. Four and five umbrellas deep all the way down as far as you can see.
There's no slowdown of the economy or any indicators of what's going on around where I am. Everything that we hear in Conway and our markets is things are pretty good.
Okay.
We have.
crossing signs on the Panhandle.
Yeah.
Really?
No. Oh, I was a little slow on that one.
We stay really close to our markets and what's going on. Our people are on the ground living it. We're not seeing any disruption in the markets anywhere as of right now, I think we could say.
Okay, good. Thanks for all the help.
Thank you.
The next question comes from Brett Rabatin with Piper Jaffray. Please go ahead.
Hey, guys. Good afternoon.
Hi, Brett.
Wanted just to go back to the margin for a second. From a filing perspective, about 60% of your book is variable. Can you give us how much might be LIBOR? The securities book is pretty small relative to earning assets, but just thinking about what you're doing in that book presently, then do yields pop back up going forward in that portfolio as well?
I'll let Stephen and Brian talk about that, but you got that upside down. It's about 70%-75% fixed or adjustable. The balance is variable. We don't have much variable. Stephen,
Yeah, Brett, this is Stephen. I think what gets picked up in the filings are some of the, we'll call it, more adjustable type deals where we're fixing a rate for a period of time, then it will adjust two years from now, three years from now. Those sometimes get picked up as a variable rate. I think what we've identified that is subject to potentially move, say, in the next quarter or so, as a truly variable type note, is about $2.8 billion. Half of that or so is on the CCFG side that is subject to move above a floor. The other half would be on the community bank side. The majority of that is tied to LIBOR. We've got about $800 million-$900 million that's tied to Wall Street Journal prime, then the balance of that would be tied to LIBOR.
We've seen a little bit of movement there over the last couple of months in LIBOR, but that's where the portfolio stands as we see it.
Okay. The securities book, any color there?
It is what it is. We've got $361 million of it that's variable and repriced within the next 30 days, and then after that, it gets pretty small amounts.
Oh, okay. The other question I wanted to ask is, this is the first quarter in a while we've seen a provision from you guys, and your credit is obviously stellar, and I think that's one of the pitches for owning your company, in the next few years as credit should be better than peers. Could you give us maybe some thoughts on provisioning from here? Should we expect the standard 1% of new loan production? Maybe give us some color, if you can, on how you think about the provision going forward.
Well, we had an exceptional quarter this time. Much better than the quarter actually looked, we've always been reserve builders. We've always liked to have about 1% reserve, just kind of how the company's run. Actually, my past life, I ran a 150. I just think that's just a solid number. I understand we got all these complicated measures of how we have to calculate reserve today, but that 150 worked for us in the worst financial crunch I've ever seen in my life. We're running about one now, then we got marks of about another 120. Is that right? I'm not supposed to add those together. I guess you can't. To tell you where I think we are, and I think we're well reserved. See lots of people out here with 0.3 and 0.6 and 0.7 reserves.
If we have a crunch, that's not going to be enough. I don't care what the asset quality says, that won't be enough. We're just a believer. We had a good quarter. It looked like we kind of matched charge-off close to charge-offs for the quarter, and we just kind of look at it every quarter and see how it's going. Asset quality, you're right. We probably could justify a 0.50 reserve, but we'll keep as much in there as we can.
Okay. Just lastly, I want to go back to capital for a second. You've mentioned buybacks. Let's say you're not involved in M&A in the next few quarters, and you're really profitable. What do you do with capital if buybacks are not sort of enough in terms of what you're thinking about managing capital? What do you do as capital continues to accumulate?
Well, we have some trust preferred out there, and we also have $300 million worth of sub-debt. It counts as capital, but it's still debt. We're debt averse at Home BancShares. We don't like debt. We don't like debt that counts as capital. We don't think that's the right way to treat that. We did raise $300 million, and it would be our effort to pay that off at some point in time or start accumulating money to take a dent in it. I think there's how many months? 33 months left, Brian?
We've had it 27 months. We got 33 months till it gets to where we start losing part of the capital treatment. After five years, it's callable, and then we only get 80% capital treatment.
We'll continue. Brian fusses at me about dilution on buying back stock, and I understand it is dilutive, but it has been one of the best uses of capital for our company for some time. As I said, what we bought back, 8.7 million shares in the last 18 months at $168 million worth. Particularly if they want to take us down, the price down, we'll be an active buyer.
Okay. I appreciate all the color.
Thank you.
The next question comes from Brian Martin with Janney Montgomery Scott. Please go ahead.
Hey, guys.
Hey, how are you, Brian? You've changed jobs? Are you Janney Montgomery? Huh?
Sounds like Stephen as well. His comments echo that. Hey, you guys have covered a lot of this, but just maybe for Stephen, you talked about the variable rate and fixed rate. How about on the funding side, on the market-sensitive deposits, what's the level those are currently that could adjust in the next quarter or so, Stephen?
Sure. I think Johnny mentioned, maybe in the first part of the Q&A, but we've got about $1.5 billion or so that are tied to some index, either Treasuries, LIBOR, or Wall Street Journal prime that functionally should float 100% beta with that as it changes. We've got another billion-ish or so that we've identified kind of, we'll call it market, top of the market type rates that we can affect over time. That's our task, and I think it's what Tracy and Johnny both mentioned, we'll work to work those rates down if we see the Fed make a move on the 31st.
Okay. It sounds as though, just kind of hearing all the commentary on margin, that I guess you'd probably think it's fair to say that the core margin kind of ex-accretion is probably, I guess, maybe near a bottom if you do get a rate decrease, given kind of the initiatives, maybe it's, as Johnny said, a couple of ticks lower, but shouldn't be materially lower in a down rate environment, I guess. Is that, in summary, kind of a fair statement?
I think that's a fair statement.
Yeah, as Brian mentioned, the models show that it could put a little bit of pressure on it, but I think that's based on the assumptions that we have, and we're evaluating all of that now to see if we can do better than that.
Okay. All right. I think it was Brian said it was, what, six basis points if you get a 25, that's what the model shows should be on a 25 basis point decrease?
Yeah.
That is correct, Brian.
Okay. The last two for me was just the, Johnny, you talked about the buyback versus the debt repayment. How quickly could you do something on the debt repayment? Or I guess, is that more near term, or is that a little bit longer term, given you got a couple of years on the capital treatment?
Yeah, it's non-callable. This is Stephen, Brian. It's non-callable till 2022.
Okay.
We issued in 2017.
We got 33 months until that comes up, Brian. If we start accumulating, the problem's going to be with me. We start accumulating, I told him, I said, "You're sitting on $150 million or $200 million, and the deal comes up," I said, "Your biggest problem's going to be me," because we may let, depends on what the next deal looks like compared to what paying down the debt looks like. In most instances, if we do a deal, we've never done a dilutive deal. They've always been accretive. Our stock's creeped back up a little bit, getting back at the 2.20x, 2.30x tangible book. We just took a look at, how many? 296, Donna? Banks?
I think so.
I think we ranked sixth or seventh when you take out the non-banks, so to speak, in margin in the country. We're pretty proud of that. I told earlier in the call, I said, "If you want to judge a bank, ask them what their margin is. Find out whether they're real banks or whether they're giving away." Brian, Randy Sims and I really believe in those models. Just kidding. We're going to prove them wrong once again.
That's right.
That's just what the model says, assuming that the other guys around the table do nothing except just let it roll out.
Well,
Exactly right.
We just have to go on vacation, let the models do it, and go on vacation versus actually let our community do it.
They don't know all those customers are coming in, they're picking.
Well, the model looked about that way on the way up, too. We're pretty much flat. I think we could be in better shape on the way down. We'll see.
Yeah. The last couple, just on the pipelines, you talked about the payoffs, Johnny, but just as far as the production, I guess your sense, there's a pretty wide swing in from one Q to two Q in the production volume. I guess, does one of them feel more realistic, or do you think the production volume is maybe somewhere in between and in the back half of the year?
Well, the first quarter, you had shock and awe from the Fed in December. It shook the world. Wouldn't I tell you, the S&P 500 Total Return Fund had the worst month since 1929. That was a major error, and it shook everything. I think it took a while to recover back. I'm optimistic that production will be better. I think New York started funding some this quarter, but they'll have a lot to fund as time comes on, and we're up $100, and we've got about $2.3 billion, and you'll see some of that funding. I suspect we may be down a little bit, and I'm going to tell you that we may be down a little bit on loans this quarter. The reason I'm telling you that is the last time I said we'd be up, we were down.
I'm going to tell you we're down, and maybe we'll be up.
Okay. Just lastly was on the expenses. I guess it sounds like they could move up a tick from here based on what Randy was saying. Just kind of looking, thinking about the efficiency, I guess, we're at here around this 40% level, I guess, is that something you expect to be able to maintain, or could that tick up a little bit, and then, as Randy said, you get the benefits, and it ratchet back down a little bit?
We've always had a good efficiency ratio. It's gone below 40, up a little 40. A little bit above 40. Don't look for any major changes in that. I'm just telling you. We're doing some really good things for the bank and for the future. We're spending the money to take our regulatory areas up to the level that not only the regulators want, but that need to be done. Don't take so much from what I said.
Yeah. I got you. All right. Thanks, guys. Nice quarter.
You bet. Thank you very much.
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, Gary, and thank everyone for your participation in our call, and we'll talk to you in, what, three months? Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.