Greetings, ladies and gentlemen. Welcome to the Home Bancshares Incorporated 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. The company has asked me to remind everyone to refer to their cautionary note regarding forward looking statements.
You will find this note on Page 3 of their Form 10 ks filed with the SEC in February 2019. At this time, all participants are in a listen only mode and this conference is being recorded. 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 is with me, Brian, Jennifer, Donna, Tracy and Randy, pretty much the same crew.
So good morning and welcome to Home Bancshares' 2nd 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 hit we bumped a little bit. And that of the 51, there are 26 of them are record quarter record profit quarters in a row. That's why Home was named the best bank in America by Forbes for the 2nd time in a row.
We're not only proud of ourselves in being the best bank in America from 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. Our communities recognize the importance of excuse me, 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 3 quarters as you can see from the press release today, 5051.
Donna Townesel said, how do you want to present this time? Do you want to do these boxes or how do you want to use last quarter or the Q4. And they look so good. I said, let's show 3 quarters. These have not been easy times with rate uncertainties.
Think about it. In 'eighteen, we had a rate increase every quarter. Then told by experts, we're going to have 2 more in 'nineteen. Then told we're going to pause temporarily and now we're being told to expect 2 or 3 rate cuts. Who in the world are they listening to?
I think they're riding on a different financial roller coaster 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, and I quote, There is no way Trump can win. That was amazing and certainly comical. Both the Fed and Mad Al, I don't know how you say that, Mad Dog, Mad Al, whatever it is, did not listen to the right people.
Obviously, they've been taught they were talking when they should have been listening. But 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, to 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 plane and there's a major problem like an engine going out, don't panic, just fly the airplane. So 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 $10,000,000,000 the regulatory environment is like being on a different universe. Other than the risk management, hardly any of it has 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 effecting the 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 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 and 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 and 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, but there is no substitute for experience.
There is no substitute for experience. Reports from experienced people on the ground, The Fed should look at the models, select the quant data, 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 elitist think they know better and they must take care of the rest of us deplorable and Walmart shoppers. But 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 and the 2nd or 3rd fastest growing state in the country along with strong performance from our South Alabama operation coupled with a solid Arkansas market and 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 and 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 and A and loans is a proper position to ensure that we'll be around when the opportunities come again. We appreciate your support and let's talk about the highlights of the quarter.
We had a strong deposit month. Think it was $250,000,000 we averaged about $240,000,000 for the month and we did about what did we do? Steven, what we have last month in the quarter?
Q1 we were up almost 170,000,000 and we're a little over 720,000,000 in the last three quarters, linked quarters.
That's good. That's 720,000,000 in the last three quarters. Loan 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 and the Q4 we're at 430, the Q1 at 430, and we're 428 this quarter. But remember that the quarter had over 500,000. I don't know that you know that. Maybe I'm telling for the first time had over 500,000 dollars 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 Brown will talk more about that. Yes, well. Let's talk about the cost of funds. And I want you to go back with me 4 quarters, 3 quarters, 2 quarters and 1 quarter and I want you to listen to these numbers. 4 quarters ago, our cost of funds increased $6,192,000 3 quarters ago it dropped to $3,357,000 and then last quarter, quarter before last I guess it is now, $2,519,000 and this quarter $283,000 So 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, excuse me, the tangible assets 9.96 percent almost 10%, return on tangible common equity 21%, strong loan production over $1,000,000,000 worth of loan production, a $124,000 at 6.14. We had $512,000,000 worth of payoffs during the quarter at 5.54. So the production coming on with what went off at 60 basis points higher.
Great job by the team. Overall loan yields, I've been telling you we're going to push it. We started August last year, it's hard to turn the ship. But overall loan yields were up 3 basis points to 6.06. And those 3 basis points added $897,000 to income for the quarter.
That's even though average loans were down $30,000,000 I think we ended up $70,000,000 for the end of the quarter, but our average loans were down. But the interest income on the 3 basis points was 897,000 dollars 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-forty 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 spent $64,000,000 or 3,416,722 shares at 18.73. Last year, we bought 5,300,000 shares for 104,000,000,19.62 average. So we'll continue to be in the repurchase business. You will see loan ratings change in the Q this quarter. In the past, all credits that were construction or ag related automatically ready to fall, which lends to the conservative nature of our company.
Let me make this clear, there is no miss so there's no misunderstanding. This is an interim 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 discussion with the regulators, we agreed to take a look.
The approximate changes were $1,500,000,000 of the 4s moved to 3s and 2 credits totaling about $70,000,000 moved to a past credit 5. The balance remained in the 4, totally I recall. The 2 credits moving to a 5, 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. Apartment is now 68% occupied, expected to be in positive cash flow by the end of the year.
Probably did not need to move because of 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 flow as rentals, does not cash flow as rentals. He has over $12,000,000 liquidity, has agreed to sell one of his billings 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 a company that tells it like it is, good or bad. Sorry for you shorts, but it's kind of like the Trump Russian charade. There is no doubt there. And I think Christopher Steele is temporarily out of the manifesto business.
However, it appears that some of your pocket journalists are still around. You appear 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 help to get us a better understanding of how we looked at margin and operation. Brian started first last time and he will also be first today and cover the margin and the pieces impacting performance. Then we'll be followed by Chris Paulson, John Marshall, Tracy and Steven and then our Chairman, Randy Sims, will wrap it up and Kevin Hester will be on the phone for any questions.
So 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 know 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 $142,300,000 for Q2 twenty nineteen compared to $140,800,000 for Q1 twenty nineteen.
Our net interest margin was 4.28 percent for the Q2 of 2019 compared to 4.30 percent for the Q1 of 2019. As Mr. Allison mentioned, during the Q2 of 2019, the interest rate environment declined. For example, the 10 year treasury went from 2.50% on March 31 to 2.01% on June 30. 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 1st 6 months of 2019, they do not have any additional interest income for payoff events from CFG. Loan production was very strong during the Q2 of 2019.
We saw loan production of more than $1,000,000,000 at an average rate of 6 0.1%. This breaks down into $484,000,000 at an average rate of 6.3% for CFG and $538,000,000 at an average rate of 6.0 percent for the community banking footprint. We're 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 3 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 $9,200,000 during Q2 compared to $9,100,000 during Q1 for an increase of $100,000 In conclusion, even though reported margin declined 2 basis points, our daily net interest income of $1,500,000 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 8 $97,000,000
Yes. I checked my number while you were talking and I came up with $823,000,000 That's what Steven and I were siphoning on over here.
Well, it's 823, it's 8 something, right? So 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 Q2 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 Q2 we closed the majority of those loans and we originated just under $500,000,000 in new loan commitment.
To put that in perspective, we generally originate between $800,000,000 $1,000,000,000 in a given year. A little over half of those new commitments were funded during the quarter, which resulted in 2nd 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 LA. 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 I 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 Q2. Profitability grew in the 2nd quarter, and we continue to run ahead of budget. This may be attributed to asset growth of $5,100,000 stable margins and good expense management.
Our efficiency ratio remained below 30% for the quarter. Commercial and consumer loan originations totaled $34,200,000 an increase of 5 point $7,000,000 over the Q1 or up roughly 20%. In addition, dollars 11,000,000 in commercial commitments were approved and 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 July month to date.
The total combined portfolio was $448,900,000 at the end of the quarter compared to $443,800,000 at the end of Q1 $436,000,000 at the end of year end 2018. Since joining Centennial Bank in July 2018, interest earning assets are up $62,600,000 While we're not a financial center or a branch, marine related deposits have grown to $1,300,000 doubling in the 2nd 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 for commercial floor plans and to leverage these relationships for new retail referral sources. In addition, we received commercial and retail referrals from Centennial Bankers, particularly those scattered around the Florida market. And we 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 based marine loan brokers for the majority of our retail referrals. We continue to deepen and increase those relationships. We also anticipate launching a superyacht retail marine finance program in the Q3 this year. Growth has not been achieved at the expense of asset quality. Our delinquent loans were down substantially below $1,000,000 at the end of 2Q compared to $1,400,000 at the end of the Q1 $5,800,000 at the end of 2018.
Commercial commitments have all been freshly underwritten and approved through Centennial Bank's loan approval process and average retail borrower FICO scores at origination have climbed from 770 at the year end of 20 18 to 775 in the Q1 and it's been they've reached 777 in the 2nd 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 Q4 of 'eighteen of 5.01%, climbing to 5.52% in the Q1 of this year and then pulling back slightly to 5.37% last quarter. I expect continued downward pressure in the 3rd quarter.
The 3rd quarter growth outlook is mixed. While we've seen an uptick in application volume and retail originations, dealers are beginning to express some pessimism in 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 Q2 are 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 remained at 4.2% as it was the Q1, which is up from 4.18% at the end of last year. I also 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 7% little over 7% year to date. And Southeast Florida is up over 11% year to date. And 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. So congratulations to some of those and really congratulations to all and 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 percent and efficiency ratio of 36.45 percent with total revenue of $204,000,000 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 Ben mentioned, we saw another strong quarter of growth at $280,000,000 led by Southeast Florida region with over $120,000,000 in end of period growth. Johnny mentioned the interest rate environment today is quite different from where we were just 3 months ago and we will closely monitor the impact of declining interest 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. Als.
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 projects products such as fence 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. And with these improvements comes expense.
But as you heard, our numbers have remained strong. As Johnny stated, this is quarter 52 and our high performance has been consistent. So 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 $72,200,000 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 percent. 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 $3,000,000 for each and every quarter.
It's been a very strong quarter for deposit growth as you heard ending at 11 point $35,000,000,000 with an approximately $280,000,000 in growth resulting in a loan to positive ratio of 97.41 as compared to March 31 at 99.20. And 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. I understand.
And of course, as you have heard from others, we had over $1,000,000,000 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. And of course, strong capital ratios as always and you will always see that from Home Bancshares. We now have 2 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 Q3 and another opportunity to once again perform at a high level for our shareholders.
And that pretty much wraps things up.
Randy, thank you. It's interesting going over $10,000,000,000 and what we've been able to accomplish when you think about Durbin. That took $3,000,000 straight out of our pocket this quarter. And usually accretion is going down. So that's pulling out.
And then when you go to this next universe regulatory wise with the expense that we're incurring there and still be able to meet the numbers. I'm beginning to get a feel for why in the past that the analysts have lowered expectations for banks like us and multiples when you go over 10 because they think these guys will these people be able to keep up with can they keep up with the increased expenses? Can they keep up with losing Durbin? Can they keep up with us? And I wasn't sure we could do that.
We did it the Q1 and it was lack of breath of fresh air to me, we did it. Well, we did it a little easier this quarter than we did the Q1. So I see that now and there's some understanding for that. So I'm pretty pleased. I told somebody other day, so where are you?
And that's we're kind of treading water, but we're okay treading water. We got through the Q1's kind of relief into the Q2 and it was better in the 2nd quarter. So hopefully the Q3 will be better than the 2nd quarter. But 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. And I've told our people last August, we started pushing rates. Everybody didn't push rates. If you want to know what the quality of a bank is, ask them what their margin is. If they're giving stuff away, is it 310, 315?
Are they giving stuff away? They say we won't have good asset quality. All they got bad loans because they push 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 asked for the additional rate. We have we maintain that relationship. We visit with that customer.
And 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 price. So 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. Now what's going to happen now is the week will drop 50 basis points. The strong will try to continue. Matter of fact, we just got out of executive loan committee today and we were at 5.75, 6 and 6 in a quarter. So some of the week we'll drop those rates in a hurry.
We don't do that. We try to get the maximum we can get out of it. And our team does that and against all odds they continue to produce for the shareholders. I guess, Randy, if there's easy monkeys be doing it. But it's my pleasure and I mean that to work with such a great dedicated group of professionals Q and A.
We will now begin the question and answer session. Our first question comes from Brady Gailey with KBW. Please go ahead.
Hey, good afternoon, guys.
Hey, Brendon.
When you look at your net interest margin, you all have done a good job of holding that pretty steady around the 4.30 mark. But as we look forward with the yield curve doing what it's doing, and then I'm guessing we're going to see lower levels of yield accretion for you guys in the back half of this year and into 2020. Do you think that it's realistic that you could see some NIM slippage here or 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 and Stephen might chime in a little bit after that.
Then I'm going to give you the answer. And I'll follow-up from him, this is Brady. And then I might have some comments.
I'll start off with the accretion. We have been around $9,000,000 plus in accretion each quarter the last three quarters. I've really predicted it to go down into the $8,000,000 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.
So there's a good chance that that might not be reoccurring. So we would have that pressure of 500,000 would equate to about 2 basis points on the NIM. If you look at the models that we have and we've disclosed these model numbers before for a SHOP 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. This upcoming
for FOMC.
Yes, the one that's coming up here at the end of the month should cost us according to the models about $2,000,000 of net interest income which could equate 6 basis points. But we're going to try to do things to try to improve on that.
Hey, Brady, this is Steve. And 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 month. I think we've indicated before we have a decent sized 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 good benefit from that July 1 on the quarterly reset. So 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 wildcard.
All right. And then 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 $10,000,000,000 in assets. I was just wondering how quarterly expenses have actually been going down in the last couple of quarters. So as you look to invest more in the expense infrastructure, do you think that will that have a notable impact on expense growth going forward?
Well, as you've seen, it hasn't so far. And we don't 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 become makes you more efficient. Some of that infrastructure is our people that again make you more efficient. So it's kind of looking into the future and saying, well, are your expenses going to go way up? Well, the expenses make investments in infrastructure to become more efficient and therefore try to keep our expenses down and even lower them.
But, yes, you could see some increase, but I would hope that it would be followed by decrease and as we improve things. And we don't make those investments without some realistic outcome of improvement and lower costs. That makes sense? I mean,
is that what you're looking for?
Yes. Thanks for the color. That's great.
Okay. I'm going to wrap this up for you. We're not going to let the expenses go up and margins go remain flat. Well, the tendency is for it to go down, right? I mean margin should in this environment go down.
We have about $2,800,000,000 where the loans are going to reprice. We're about 75% fixed. That's good for us or adjustable. We've got about $1,400,000,000 worth of funds that will adjust if they just prime. If they don't take prime down, they need to do that, that will help us.
It leaves us a gap of about $1,000,000,000 in there. And this team works very hard. We got a call from one of our top black regional presidents that you can mark me down 15 basis points already. I've already taken the cost of deposits down. So as we work like hell on the way up, we'll work like hell on the way down.
So it may be a little blip temporarily, but I don't think it's I don't think it will be a long term blip for us because this team has a way of fighting and fixing it as you well know. So 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. But 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. So 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. And that team is also looking at other areas of the bank. And I give you examples, but I'm not going to take the time to do that.
But 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. So we got 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. So I just want 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 and Partners. Please go ahead.
Hey guys, good afternoon. How are you all doing?
Good, Stephen. Congratulations on your 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. I'm curious if you guys are seeing any sort of inflection point on the payoff levels in Florida in particular. It sounds like that's where you're seeing a lot of the pay downs and production has been phenomenal.
So I'm just wondering if you think we might see sometime 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. Or Steven, if you want to go ahead.
No, please do.
Steve, the next two quarters at least, I don't think you're going to see that. We've got 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.
Steve, anything you can add?
No, I mean
I was going to say, if you look at the last three quarters, it's been around a little north of $500,000,000 and I think what Kevin mentioned we're seeing that plus a little bit forecasted. So things change. It can move around from quarter to quarter, but it's 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. And so it is somewhat difficult to get your arms around that.
But according to what the projection is, they're going to be down the next two quarters. But I've seen that many quarters before and it didn't turn out to be that way. So 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 $160,000,000 $150,000,000 $145,000,000 what was it?
Unfunded? Unfunded commitments were up about $145,000,000 from quarter
to quarter. 2.6 or? 2.35000000000. 2.35000000000. So it gives you an idea of what's coming.
Okay. Appreciate that. And Johnny, it sounds like you've been watching a lot of MSNBC lately. So with rates looking like they're going to go down here, what are you guys doing to prevent against some of these rate cuts? I mean 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 1,000,000 of dollars on the hedging process and get their head handed to them. The Fed says they're going it might be 90 days and they go up a half. So I think they so I think you got a dart board and it thought it hits up or down or a quarter or
a half.
I think they just thought dartboards what they've been doing. It looks like lately. So and 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 have I mean, we've got floors in place and significant force in place and 75% fixed or adjustable.
So I think we're really on a down down rate environment. I think we're in 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 thought to keep it to hold our margin on the way up. So I can assure you we'll fight to keep it on the way down.
I think I said that earlier. So I would be disappointed. I will be disappointed. You know how hard I push. I think we've got a shot, might go down a few ticks, but I think we've got a shot at holding it within range.
One thing to remember is that we are a bank made up of a lot of different communities and those communities drive the market. Those communities are is the market that we look at and that we serve. And then this up and down that goes up and down and whatever the Fed decides to do is disrupts that. I wish that the Fed would leave things alone and let the market do what it always does. But we have a little bit of advantage, I believe, because we serve small community markets and that those changes are not as drastic as what we see on a national level.
Makes sense. Maybe one last question for me. I'm curious what 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 have we kind of overbought the Q1. We spent more than I mean, we had about $180,000,000 I think somewhere in that range approved by the regulators and we spent $50 something million in the Q1 which was a little
We spent $52,000,000 in the Q1 and we spent $13,000,000 in the second quarter and you're right we had $188,000,000 approved from the regulators.
Yes. 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. So 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, we'll continue to be in that market.
And 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 a accounting question. So I just heard the comment around the unfunded commitments and obviously with Shore Premier Finance coming on, those two things, as 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?
I mean, when we get to CECL, I mean, we'll set whatever it is we need to set for the day one accounting mark, but I would not envision that it's going to change how we look at that at all. I mean 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 short finances is longer term. I think 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 the business we want to be in and be exposed to continue to be a part of.
But it wouldn't limit your necessarily limit your growth plans in either of those businesses?
I don't think so.
Is that
what I'm hearing?
Yes. Okay.
And I don't think the sorry if I missed it, but I don't think the M and A question has 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 and A landscape at this point and what you guys are seeing.
I did mention them in the remarks that we will remain conservative on M and A. We'll take what they give us on M and A and on the loan side. So 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 is, as I said last quarter is kind of off the table for us because it doesn't we're having difficulty finding somebody that has the quality. It's not MOE. I mean there's not 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. So I mean we've seen a couple of them and they want to run it. But quite honestly, they don't run near the performance that home bank shares run.
So 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 is running a 2 20 ROI and they want to be the boss, that's fine. But they're running a 1% ROI and want to be the boss, They probably not going to get hooked up with home banks here. So We're still looking Do what?
I was going
to say, sorry, I missed that in the prepared comments. No, it's okay. That's clear. One final question for me. We've heard a couple of banks talk about the lag effect on the downside if we do get a couple of rate cuts on deposit rates.
And 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 If you heard my comments, maybe you weren't on my comments, but I went back 4 quarters, it was $6,300,000 cost of fund increase and then I'm calling from memory, then $3,200,000 increase in cost of funds to 2.5 to $283,000 this quarter, which is a pretty good indication of what's happening there. So I looked at it yesterday and I looked at it today and it was flat. So what I'm seeing a lot, I'm seeing interest income up slightly.
I'm seeing interest expense down slightly. So 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 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%, but the lowest has been for a while. Is this a strategic change and are you going to operate here or will Randy get his way and we'll see this move back up?
The regulators like it. I don't think they like it. And we'll be somewhere in between.
That's probably a good answer. That's probably a good answer, somewhere in between. But the deposit been awfully strong 700 plus 1000000 in the last three quarters and it's I have to give Tracy Fritz credit for it because he established that new policy. If you all remember several years ago we started asking for it. So we're not stopping, J and A.
I'm sorry, we're not going to stop yet. We're not going to stop.
And then, Johnny, you mentioned you felt like you have some protection with some floors. Can you give us an idea of what point do those floors come on to play? How many bed cuts do we have to see?
Matt, this is Steve. I'll take that. We've got on the CCFG portfolio there's a couple of 100,000,000 today that are protected with the floors. Functionally all of the production and I think you hear Chris' 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 $150,000,000 or so on the community bank side that's protected today in a 25 basis point down rate scenario and then those numbers increase a little bit as if rates were to continue to go down. So we've got $350,000,000 or so that's protected today if they do lower rates into this month.
And Stephen, I would assume that if rates were to go down beyond 25 bps that 3.50 would increase. Is that fair?
Yes. 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 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 of quarters or not elevated the next couple of quarters? I missed that.
Yes. Stephen made an he mentioned a number of 500 last quarter and I think what we have and Johnny made the comment it is early, it's early in the Q3 and certainly for the Q4 things can change and these things can move in and out of quarters and up and down as you go through. But 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. And production has been strong. If we can maybe we can out produce it and that'd be a good thing.
But unfortunately, we're just seeing 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. So 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 and maybe picking up a little bit in June July, but then 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 the dealers might be pulling back?
We've got a little bit of
a conflicting message coming out. We've seen volume increase from an application standpoint and from a funding standpoint. And the quality of those applications is measured by FICO scores is also improving. But in our conversations with our dealers, they're looking forward and 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 3rd quarter in the Q4 of this year or perhaps Q1 of next year. And 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 and it's more of a gut feeling.
So right now we've got sort of mixed signals. We've got retail buyers, consumers buying a lot more boats. But then we've got dealers appearing to pull back just a little
bit. Okay, good. That helps.
I'm hoping those 2 will offset each other and so it will be neutral for us and we'll continue to meet our growth goals.
Okay. Yes, 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?
Yes. 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.
But we continue to like to see what we're seeing through there. We review it once a week. I generally like to see about $1,000,000,000 in the pipeline, not all of that will make its way through, but as long as we have $1,000,000,000 plus in the pipeline, I usually feel pretty good about where we're headed. We have a little over $1,000,000,000 in the pipeline today. So I would say we continue to think there are interesting there's interesting opportunities and transactions out there.
I don't think that's changed. We certainly take, I would say, a shift towards a more defensive nature as it relates to both the pipeline and the portfolio. So I'll let go of the payoff sentiment. In our business, that's a good thing. Loans aren't supposed to be out there forever.
And while money is cheap and plentiful there's some of the credits we'd like them to go ahead and move on out.
And then 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. But 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.
Well, we haven't seen our portfolio still shows all businesses doing just fine. So whether that is a rate cut or not for the company wise, Donnie mentioned how we go out and ask for the deposits and it seemed to be working pretty well. I guess the secret here John, we've called all our variable rate customers last 2 days and they're all coming in signing new fixed rate loans next week. I'm just kidding. So we're going to ask them to come in and fix them up for that process.
But it's we work on the interest rates here every day and that's something that we've done for several years now. And when it goes up, it goes up. When it goes down, it goes down. So we're we feel like our company is positioned pretty well to work through whatever the challenges we get thrown out on interest rates. So 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 45 umbrellas deep all the way down as far as you can see it. There's no slowdown of the economy or any indicators of what's going on around where I am.
And everything that we hear in Conway and our markets is things are pretty good.
Okay. Need to put up some we have big crossing signs on the Panhandle. Yes.
Really?
That's 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. So I mean we're not seeing any disruption in the market anywhere as of right now. I think we could say.
The next question comes from Brett Rabatin with Piper Jaffray. Please go ahead.
Hey, guys. Good afternoon.
Hi, Brett.
I wanted to just go back to the margin for a second and from a filing perspective, about 60% of your book is variable. Can you give us how much might be LIBOR? And then the securities book is pretty small relative to earning assets. But just thinking about what you're doing in that book presently and then do yield pop back up going forward in that portfolio as well?
I'll let Steve and Brian talk about that. If you got that upside down, it's about 70%, 75% fixed or adjustable. Balance is variable. So we don't have much variable. Stephen?
Yes, Brad, 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 the rate for a period of time and then it will adjust 2 years from now, 3 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 2,800,000,000 dollars 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 $800,000,000 or $900,000,000 that's tied to Wall Street Journal Prime and then the balance of that would be tied to LIBOR. So 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. And then the securities book, any color there?
I mean it is what it is. I mean we've got $361,000,000 of it that's variable and repriced within the next 30 days and then after that it gets pretty small amounts.
Okay. And then the other question I wanted to ask is, this is the Q1 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 is 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?
Or 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 and we thought it was a good 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 around 150, I just think that's I think it's just a solid number. I understand we got always complicated measures of how we have calculate reserve today, but those were that 150 workforce and the worst financial crunch I've ever seen in my life. So we're running about 1 now and we got marks of about another 120, is that right?
So I'm not supposed to add those together, I guess you can. 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.
So we're just a believer. We had a good quarter. It looked like we kind of match charge off, close to charge off for the quarter and we just kind of look at it every quarter and see how it's going. But asset quality you're right. I mean I probably we probably could justify a 0.5 reserve, but we'll keep as much in there as we can.
Okay. And then 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 and 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 deferred out there and we also have $300,000,000 worth of sub debt. So I mean it counts as capital, but it's still debt. So I mean we're debt abursed at Home Bank shares. 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. But we did raise $300,000,000 and it would be our effort to pay that off at some point in time or start accumulating money to take a dent in. I think there's how many months, 33 months left Brian? We've had
it 27 months. We've got 33 months till it gets to where we start losing part of the capital treatment after 5 years is callable and then we only get 80% capital treatment.
But we'll continue, Brian fusses at me about dilution on buyback stock and I understand it is dilutive, but it has been one of the best uses of capital for our company for some time. And as I said, what we bought back 8,700,000 shares in the last 18 months and $168,000,000 worth. So 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. Hi. How are you, Brian? You've changed jobs. Jamie Montgomery.
Sounds like Stephen as well. So his comments echo that. So you guys have covered a lot of this, but just the maybe for Stephen, just on the you talked about the variable rate and fixed rate. How about on the funding side? The market sensitive deposits, what's the level those are currently that could adjust in the next quarter?
So Stephen?
I think Johnny mentioned maybe in the first part of the Q and A, but we've got about a $1,500,000,000 or so that are tied to some index either treasuries, LIBOR or Wall Street Journal Prime that functionally should flow 100% beta with that as it changes and then we've got another $1,000,000,000 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. So that's our task and I think 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. And it sounds as though just kind of hearing all the comments on margin that I guess you'd probably think it's fair to say that the core margin kind of actually accretion is probably, I guess, maybe near a bottom if you do get a rate decrease given kind of the initiatives, maybe as Johnny said, a couple ticks lower, but shouldn't be materially lower in a lower in a down rate environment. I guess is that kind of in summary kind of a fair statement?
I think it's a fair statement. I think that
Yes, as Brian mentioned, I mean, 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. And I think it was Brian said it was what, 6 basis points. If you get a 25 that's what the model shows should be on a 25 basis point decrease?
Yes. That is correct, Bob.
Okay. And the last 2 for me was just the Johnny, you talked about the buyback versus a debt repayment. I mean, 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?
Yes, it's non callable. This is Stephen, Brian. It's non callable till 'twenty two.
Okay. We
issued in 'seventeen. We got 33 months until that comes up Brian said. So I mean if we start the problem is going to be with me. I mean we start accumulating that total my failure. You're sitting on $150,000,000 or $200,000,000 and the deal comes up.
I said, I'm going to be your biggest problem is 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. So in most senses, if we do a deal, we've never done a diluted deal. We've always been accretive. So and our stocks creep back up a little bit, getting back at the 220, 230 times tangible book. We just took a look at how many 296 banks?
I think we rank 6th or 7th when you take out the non bank, so to speak, in margin in the country. So we're pretty proud of that. As again 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 given or not. Hey, Brian, Randy Simpson, I really believe in those models. We're going to improve them wrong once again.
That's right.
And last That's just what the model says
assuming that the other guys around the
table do nothing except just let
it roll out. Well, the model
is exactly right. We just have to go on vacation, let the models do it and go on vacation versus actually let our community.
They don't do all those stuff coming in. Well, the model looked about that way on the way up to we're pretty much flat. I think we're we may we could be in better shape on the way down. We'll see.
Yes. And the last couple just on the pipelines, you talked about the payoffs, Johnny, but as far as the production, I mean, I guess your sense, I mean, there's a pretty wide swing in from 1Q to 2Q in the production volume. I guess does one of them feel more realistic or do you think it's the production volumes maybe somewhere in between and then in the back half of the year?
Well, you had the Q1 you had shock and all from the Fed in December. I mean it shook the world. Would that tell you the S and P 500 Total Return Fund had the worst month since 1929. I mean there was just that was a major error and it shook everything. So I think it took a while to recover back.
So I'm optimistic that production will be production will be better. I mean I think New York funded 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 $2,300,000,000 and you'll see some of that funding. So 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. And the reason I'm telling you that is the last time I said we'd be up, we were down.
So I'm going to tell you we're down and maybe we'll be up.
Okay. And just lastly was the on the expenses. I guess it sounds like they could move up a tick from here based on what Randy was saying. But just kind of looking thinking about the efficiency, I guess, where it's 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. And we're spending the money to take our regulatory areas up to the level that not only the regularities won't, but that need to be done.
So I don't take so much from what I said.
Yes. 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, 3 months. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.