Greetings, ladies and gentlemen. Welcome to the Home Bancshares Incorporated First 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 and then entertain questions. You will find this note on Page 3 of their Form 10 ks filed with the SEC in February 2019.
At this time, It is now my pleasure to turn the call over to Mr. Allison.
Thank you, Gary, and welcome, everyone, to the Q1 2019 earnings release and conference call. First, I want to thank all of you for your support. Many of you have been with us a long time and been through the thick and the thin and the good and the bad, the good economic times and the bad economic times and some of the craziest times. For all of us at Home, we want to say thank you very much. Well, thank you very much and please join us in Home's 20th year celebration this year.
Things now are much clearer than they were when we reported in January of Q4 2018, which turned out to be one of the most bizarre quarters that we've experienced together since the 'eight crash when Bear Stearns, Lehman Brothers and the introduction of TARP. The difference was this time, however, the result was an enormous miscalculation of the market of the economic environment that led to a December panic in the stock market. Investors lost 100 of 1,000,000,000 of dollars including IRAs, 401s, just regular people lost their money and wealthy people as well, all because of incorrect and unclear guidance from the Fed. I originally was visiting with 1 money manager who at the end of September his fund was up $100,000,000 and he was feeling pretty good at that time. He lost the entire $100,000,000 by the end of December.
I don't blame Chairman Powell for the bad calls, but I blame those who were supposed to be the so called experts that were advising him. They need to get out of their ivory tower and get in the field and live it like we bankers that run top performing companies do that have their ears to the ground because all the money we have in the world is invested in our banks. Many of the best banks in America at bank conferences visit with each other and these bank conference was what's going on, why are bank prices disconnected from fundamentals? My business is good, but the regulators think it's too good and they see huge warning signs. We all said together that we don't see it.
They said it's been the regulator said it's been a long cycle. Liquidity is going to be a problem. Construction loans are a major problem. What are your deposit betas? Raising rates will continue and risk profiles are increasing.
I guess inflation was the so called name reason for the rate increases. Whatever the misconception was, it certainly had a slowing effect on the In addition to the cost of funds and causing a bank market stock market crash. In my opinion, banks overall are in the best shape they've been in, in my banking career. Strictly that reason is strictly because of the lessons learned in 'eight and 'nine. Loan to values are better than ever, strong equity in every deal.
You think about the immediate change from rate hike after rate hike, matter fact, 4 in a row in 'eighteen and when we're told there's more coming to stopping the rate hikes suddenly and turning around making 180 degree turn. That was extremely scary and confusion, although very welcome. Thank God they stopped or we would be in the middle of a severe crisis, all because someone was chasing a ghost. Unbelievable. How does a bank or a business manage with that kind of inconsistency and confusion?
We had people stop projects or at least postpone them until the sky clears, which is somewhat disappointing, which created the growth somewhat disappointing growth for this quarter. If business can build back confidence in the Fed, I think we can get back on solid business ground again very soon. I'm not involved in Fed appointments, but it's time for a businessman with real life experience has done something in his life to be appointed, someone with some common sense, someone who's built something that has survived some of the toughest business times since the Great Depression. I bet those who led Chairman Powell to the last decision will play hell getting him to make that same mistake again. We all learn from our mistakes and there is no substitute for experience.
And not all the members were totally on board with the bad decision last time, but it's probably not time to call names. It's over. Some poor people lost their money and will never recover, but most of us will live to fight another day. The S and P 500 total return was the worst since December of 1931 in the middle of excuse me, middle or start of the Great Depression. Bank stocks were slaughtered.
Why? You think about it, credit unions pay no taxes and they've grown beyond their guidelines. The unregulated shadow banking system, REITs, insurance company, fund managers who bank their lenders now, Amazon, PayPal, 1st to person payments. It was already tough to be in the banking space and it's even tougher. As one former lender said to me recently, who is now with a fund is lending money from a fund, he said, I won't go back there because this is much easier and I don't have to deal with examiners.
I told examiners they continue to push, they may be examining dinosaurs. Enough of this about stuff that's beyond our control, let's talk about what is within our control. We've all focused on them for the entire year of 2018, more particularly the Q4 of 2018 and the Q1 of 2019 because of the situations that were created. There has been some confusion over time over the Stonegate acquisition, the Shore acquisition, CCFG's extra revenue and legacy NIM. Hopefully, we'll make this presentation clear today.
Brian Davis will start first with us and he'll talk about the margin and present that for us. Followed will be Chris Poulton, who will talk about CCFG, his current business outlook and margin. And then John Marshall, who runs our marine component, Shore Premier Finance will give insight on his business. Tracy French and Stephen Tipton are on board to discuss the legacy group and Randy Sims will wrap it all together at the end with a combined report on Homebuyer shares. So before we go to the reports, let's talk about the quarter.
My opinion, the quarter was a solid and steady quarter. One thing was a highlight was the cost of fund pressure has subsided. We had continued to have escalations in January, but February March were only up 1 basis point each and that's positive. Margin was flat for the quarter. That's good news that we maintained our margin and hopefully you'll understand better how we do that.
Loan outlook is a little better for this quarter than started out last quarter. Expense control is it has been good. We had a couple of one timers on both sides, income and expense. We're seeing good increases in renewals and modifications that averaged 26 basis points on over $170,000,000 in March and yields on loan continue to expand despite reduction in accretion income. Let me say that again.
Yields on loans continue to expand despite reduction in accretion income. Legacy production yields exceeded legacy payoffs by 60 basis points in March. I'm going to say that again. Legacy production yields exceeded payoffs by 60 basis points. That's all good news.
On the stock buyback front, last year, we bought back $104,000,000 worth of stock in 2018. And so far, we stepped it up a little bit to Q1 and bought back $51,000,000 worth of stock. Last year, we bought back 5,307,000 shares in the Q1 and bought back 2,716,000 shares. You add those together and that's almost 5% of the total outstanding stock that we bought back in this period of time. Overall, I think it was a decent quarter and hopefully we'll have a good year coming on in 2019.
Brian, would you take and see if you can give us a good explanation of the margin?
I will. Thank you, Mr. Allison. The Q1 was a good quarter for our net interest income and net interest margin. On a tax equivalent basis, we recorded net interest income of $140,800,000 for Q1 2019 and $141,700,000 for Q4 2018.
Our net interest margin was 4.30 percent for both Q4 of 2018 and the Q1 of 2019. Before I go over our Q1 2019 numbers, I'd like to remind everyone about a few items from last year. Our CFG division does a great job of being opportunistic in obtaining additional interest income from payoff events. Last year, these events resulted in our net interest margin being increased by 3, 6, 12, and 0 basis points for the 1st, 2nd, 3rd and 4th quarters of 2018. The Q1 of 2019 does not include any additional interest income for payoff events from CFG.
Also, our acquisition of Shore Premier Financial is dilutive to our historical NIM by 3 basis points. Accretion income for the fair value adjustments recorded in purchase accounting was $9,100,000 during Q1 compared to $9,400,000 during Q4 for a decrease of 300,000 dollars The decrease of recognized accretion income when compared to the Q4 of 2018 is primarily due to normal accretion declines. Even though we had a decline in accretion income, we maintained a flat NIM from Q4 to Q1. Another positive was the impact of the change in rates and balances on our net interest income from Q4 2018 to Q1 2019. Those highlights are as follows.
1st, for the change in rates, the yield on interest earning assets increased 9 basis points. This equates to a $2,700,000 increase in interest income. The rate on average interest bearing liabilities increased 10 basis points. This equates to a $2,600,000 increase in interest expense, resulting in a total change from rates resulted in an improvement of $157,000 from Q4 2018 to Q1 2019. 2nd, the change in balances.
The average balance on interest earning assets increased $212,400,000 This equates to a $2,600,000 increase in interest income. The average balance on interest bearing liabilities increased $220,200,000 This equates to a $578,000 increase in interest expense. The total change from balances resulted in an improvement of $2,000,000 from Q4 twenty eighteen to Q1 2019. 3rd, because Q1 2019 only has 90 calendar days, this quarter had 2 last days versus last quarter. The loss of these two days equates to a lower net interest income for Q1 2019 of $3,000,000 In conclusion, even though the reported decline in net interest income was $857,000 if you adjust for the $3,000,000 related to the 2 less days, the change in both rates and balances resulted in an improvement of $2,200,000 from Q4 2018 to Q1 2019 or approximately $25,000 of additional net interest income per day.
With that said, I'll turn the call back over to Mr. Allison.
Thanks, Brian. It was a good job. Did a good job explaining that I think. Hopefully, everybody gets it. Chris, tell us what's going on in New York and what you say in your footprint.
I guess not only New York, everywhere, right?
Everywhere. Yes, sir. Thank you, Johnny. First, Q1 marked our 4th anniversary with Centennial Bank. And as you may or may not be aware, the traditional 4th anniversary get this fruit.
So I'm looking forward to receiving my fruit basket.
Do you have any specifics that you like in your fruit basket?
I don't like apples.
You don't
like it? You don't
like apples. Not the big apple. We'll make sure we get a fruit basket that there's apples.
Yes, exactly. On April 1, 2015, we Centennial Commercial Finance Group and temporary office space with a loan portfolio of $290,000,000 In the short four years that we've been with Centennial, we've transitioned to our permanent office in New York and established 2 additional LPOs in LA and Dallas. Over that same period of time, we've grown assets by $1,200,000,000 for an average annual growth of 50%. We've originated over 150 credits totaling $3,500,000,000 We generated $275,000,000 in revenue and delivered over $200,000,000 of pre tax income. We've delivered cumulative net ROAs in the high 2% range and current returns of over 3%.
All of this with 0 delinquencies and no non performing loans. Proud as we are of these accomplishments, I expect our best days remain ahead of us. After all the market turmoil at the end of the year, surprisingly Q1 turned out to be a nice quiet quarter. Transactions were down a bit across our markets as clients caught the breath and reassessed opportunities. This contributed to the delay in closings, but by the end of the quarter momentum appeared to pick up again.
We showed a slight decline in loans of $26,000,000 for the quarter, primarily driven by the repayment of a single larger maturing loan. Along with a quiet quarter came a relatively clean net interest margin. While our margin was down 16 basis points from Q4 to Q1, the quarter included very little accelerated yield. Historically, we've seen quarter to quarter margin variation of about 10 basis points or more due to the impact of various items including accelerations related to early repayment of loans and certain minimum interest payments. Quarter end and quarter out, CCFG's portfolios have continued to deliver above average returns with below average risk.
I would highlight that we closed the quarter with a healthy loan pipeline, approved but not closed loans stood at an all time high and we're seeing opportunity across several sectors, including a pickup in loan facilities. Competition from non bank lenders remains. However, it is important to note that while these funds provide competition to us, we also often partner on transactions. Have seen an uptick in these opportunities as well to work together within the capital stack. On the market side, New York remains an attractive market despite real estate value softening.
The current market demonstrates the value of a selective low leverage approach to building a portfolio. Our LA office has become a significant driver and continues to open up new opportunities for us, while our efforts in Dallas are starting to show up in our pipeline. Hope to share these results, the results of these efforts with you in the upcoming quarters. Until then, Johnny, I look forward to enjoying my fruit basket.
That's assuming that you get a fruit
basket, right? It's the traditional gift. The non traditional gift is appliances.
Appliance, so range, refrigerator. Vacuum. Vacuum.
We're a bank.
Toaster, that's right.
Toaster. Yes. I think I missed out on some gifts. So let's Google that. I want to Google that and see.
Well, I saw his message and I Googled it and he's right. Good job, Chris. Thanks for that. And you'll be able to after we wrap up here, we'll be open for Q and A and you'll be able to ask Chris questions if you'd like to. Now we have John Marshall from our Marine division who runs Premier Shore Premier Finance.
John, you will tell us what's going on with your side of the business.
Good afternoon. And thank you, Mr. Allison, for the invitation to participate in the earnings call. Overall, it was a positive quarter for Shore Premier Finance with acceptable asset growth, improving asset quality metrics and expanding margins. Market volatility and interest rate uncertainty have impacted buyer sentiment in the marine space.
The January recovery of the stock market inspired some investors to take some risk off the table and just pay cash for their boat purchase. Also anticipation of a slowing economy and the Fed's new dovish posture towards interest rates motivated some buyers just to defer their purchases altogether. As a result, retail applications and fundings were below expectations. However, attendance at recent boat shows in Miami and Palm Beach exceeded expectations and we're encouraged by a robust retail pipeline for the Q2. So let's take a look at the numbers.
In terms of soundness during the quarter, our average consumer origination FICO score increased from 770 to 775. We're only originating prime assets into the portfolio. For the existing retail portfolio, credit quality metrics meet expectations for an acceptable operating threshold. Commercial loans have been all freshly underwritten and assigned good quality designations. Only the highest tier manufacturers and their dealer networks are being prospected.
We are a lean team with an average efficiency ratio during the quarter close to 30%, of course profitability is driven by our margins. During the quarter, our retail loan average rates grew 51 basis points to 5.52%. That's a significant achievement in a soft market when all banks are clamoring for assets, but it's probably not sustainable. As the yield curve flattens out, we'll have to conform to market pricing. The good news is that the commercial side of our business is taking off and offers more attractive asset returns.
Advances on the commercial side were priced 37 basis points higher in the Q1 of 2019 than in the Q4 of 2018 growing to 6.17%. I'm hopeful that any softening rates on the consumer side in the second quarter will be offset by commercial advances. So our blended portfolio average rates will be flat to higher. Our combined portfolio closed the
quarter at $444,000,000
up just $8,000,000
in the quarter, but up $68,000,000 since being purchased by Centennial in July of 2018. We funded $28,000,000 of new loans in the quarter, but in addition to softer demand, we also experienced heavier payoffs of $20,000,000 After the strong showing at the Miami and Palm Beach shows, our momentum is building under the Centennial umbrella. March retail applications were up 36 percent by volume, 56% by a dollar over February, valued at roughly $30,000,000 Entering the spring buying season, I anticipate consumer 2nd quarter originations of about $35,000,000 and commercial advances of around $25,000,000 As we onboard more manufacturers and the dealers, we further solidify our position as their preferred financing partner with them as a new retail referral source. So on that note of optimism on the quarter to come, I conclude my thoughts on the quarter behind us. I thank you again, Mr.
Allison, and turn it back over to you.
Thanks. That's a good report. I went down to the Palm Beach Boat Show and met visited with John and that was and he had a little reception, a very successful reception, looks like they're on their way to another good year. Has it been a year yet since it's been quite a year yet. So John, I don't know what the anniversary present is.
Chris keeps us up to date on what the anniversary is. So you might update us on what we should do at year 1.
Thank you. I look forward to that.
Yes. And I'll ask Chris last year what he'd like to have this year. He set a bird of price. So we've been looking for vultures and those kind of birds for some time to see if we could present him with one of those. And I think we may have been successful, Chris, in working something up for you.
Thanks for that, John. Good report and you can ask him questions after we wrap up the presentation. Tracy French it's all about Centennial Bank.
Yes, sir. Thank you, Johnny. Pleased to report another solid quarter of profitability for Centennial Bank. If you've heard from others today, throughout the market chaos, Centennial Bank continues to perform with exceptional numbers. Our motto has always been stay the course.
Our focus here lately has been on net interest margin. Proud to say that when you take out CFG and Shore, the rest of Centennial Bank's net interest margin was 4.2%, that's up from 4.8% last quarter. The other thing we stayed the course on is asset quality. Our teams continue to improve the efforts in that along with sound underwriting of the loans that we're putting on the books today. Deposit growth has been very positive over the last 6 months and the overall return to the shareholders has been very good.
The quarter ended for Centennial Bank, we had an ROA of 2.11. Our efficiency ratio was 36.88. Our total revenue was $203,000,000 So staying the course has proved to be the right thing for Centennial Bank. What is typically a softer quarter for production, we saw over $500,000,000 from the Community Bank footprint, which far exceeds the production of a year ago. This speaks to the completed integration and opportunities from our southern part of Florida along with the steadiness of North Florida, the state of Arkansas and Alabama.
We continue to see strong deposit growth over the past 2 quarters from all of our regions as our plan Johnny was still asking for the business continues. I'm going to let Stephen Tipton give
a little more detail on the loans and deposits. Thanks, Tracy. As you mentioned, the loan production Presidents continue to work to increase the yield and we're pleased to see the Q1 production at 5.87 percent with 5 of our regions in excess of 6% for the quarter, all while maintaining our strict underwriting standards. Although overall ending balances were off slightly, we did see end of period growth in the Central Arkansas, Northeast Arkansas and North Florida regions. On the deposit side, we saw another strong quarter with total deposits increasing $168,000,000 in Q1 and up $443,000,000 over the past The Q1 growth comes primarily from our teams in Little Rock and each of our regions in our Florida footprint.
We are encouraged to see the increase in cost of funds flow here recently and believe we will see this trend continue as we operate in more of a flat interest rate environment. In Q1, non interest bearing deposits increased $118,000,000 While the Q1 typically has some seasonality, we're excited to see the growth and feel it is a direct correlation to our business development efforts and support from our commercial bankers and treasury services team. With that, Tracy, I'll turn it back over to you.
Thanks, Steven. Looking out over the past 12 months, we've had a reduction of accretion income, loss of revenue from the Durbin and our expansion of our back office functions at Centennial Bank. Net income matched Q1 of last year. That was a lot to overcome in 1 year. I must say that I'm pleased with where we stand today in the direction our company is going.
Before Johnny and Randy get a chance to identify, we did have our regional leaders in yesterday and discussed the quarters and what they're seeing in their markets. As we do on a regular basis in this company, the bar has been reset again to get better in all areas. Everyone is focused and excited to make 2019 another excellent year for Centennial Bank. Thank you, Johnny.
Thank you. And the impact on Durbin this year or last year was how much in the first quarter? It was about $3,000,000 each quarter. $3,000,000 You think about the quarter,
when you think about Just
money sucked out.
Yes, that $3,000,000 is taken right out of the income side of the balance sheet and you got as we went over 10, you have a lot more regulatory expenses. And I think the company overall has done really a good job of managing that and swallowing those expenses and still maintaining good income, good EPS. So pretty pleased with that. Randy, I'll let you have it and take it and kind of
wrap up. Thank you, Johnny. And that's well said about the Durbin costs, just totally a burden to overcome after you hit that $10,000,000,000 mark. As you stated in the beginning, Johnny, we continue to wonder how and why bank prices are so disconnected from the fundamentals. It almost seems like perception rules over performance and consistency.
I used this comparison last quarter and I think it's worth repeating. We have been trading between $18 $19 but the last time we saw that price was the Q2 of 2015 and our EPS that quarter was $0.25 Try comparing that to our EPS in this first quarter at $0.42 That makes no sense, no sense at all. But what does make sense is the good quarter we had. Just to recap, we finished the quarter with total assets of $15,179,501 Income was at $71,400,000 on revenue of 200 and $3,200,000 which resulted in an increase in our ROA to $192,000,000 all of which beat the Q4 of 2018. More importantly, we were able to maintain our net interest margin at 4.30 percent and achieve our expectations of $0.42 diluted earnings per share.
We are very proud of those numbers given the slowdown of the economy. As you heard in the numbers, we are working very hard on both sides of the balance sheet to maintain and hopefully increase our yields. Once again, our profitability was helped by a very strong efficiency ratio of 41.01% as we continue to control our cost. It was a very strong quarter for deposit growth ending at just over $11,000,000,000 with a little over 100 $167,000,000 in growth, resulting in a loan to deposit ratio of 99%. More importantly, with the pressure of rate hikes off, our cost of funds only went up one basis point in both February March.
Loan growth was slowed and declined, but increased slightly on an average basis, providing confidence for the Q2. Our asset quality has and continues to be solid, indicating a very optimistic and secure outlook for 2019. Our intention today was to break out our numbers in a more logical and intentional methodology to provide everyone with more detailed information in our community banking, Centennial CFG and Shore Financial Portfolios. You can tell from the reports, we are very confident in each of these areas in our first quarter results and anticipate a very good Q2. We just turned 20 years old as a corporation.
And throughout that time, we have remained true to our goal of stable and consistent high performance. I think the first quarter numbers are a good picture of the makings of a very successful year. And that pretty much wraps things up. I'll turn it back to our Chairman, Mr. Johnny Allis.
Thank you. I think overall it was a really good report. I thought when you think about a lot of bank stocks were hammering, they went over $10,000,000,000 I see that now. I didn't really see it back then, but the regulatory expenses are much higher. And
the Durbin, the Durbin
was just $3,000,000 you think about. I mentioned that earlier, but still when you think about that, you have to overcome that. And as accretion has gone down, we've and we've overcome all of that. The company has overcome all of that. And I have to say, good job to all.
And I think we're anybody else have anything to mention? Anybody got any comments? Donnie, Kevin, anything you got? You good?
Happy 20th.
Happy 20th.
We ought to have those gazous here and celebrated the 20th and a bottle of champagne or something.
So what's the gift for 20th anniversary? I don't know.
We'll have to look that up and see what the gift for 20th is. I just went to 4. Chris, I thought we'd spend all this money getting a bird of prey and he turned on us and he's won the fruit basket. So let's just say it's a blue dime. Just call it a blue dime.
That's good. I like that.
Did you find out in the 20th
China or platinum? China or platinum. So I guess maybe a big platinum bar or something. Gary, thanks. I think we're ready.
Anybody else have anything else to offer? Gary, I think we're ready for Q and A.
We will now begin the question and answer session. The first question comes from Brady Gailey with KBW. Please go ahead.
Maybe we can start with loan growth. If you look if you take a step back and look at organic loan growth, it was about 1% in 2017, it was 3% last year. That was kind of flat this quarter. At this point in the economic cycle, it still feels like you're feeling good about the economy, but what do you think is the appropriate way to think about loan growth for you guys going forward?
Hey Brady, this is Kevin Hester. I think you heard Chris' comments about his pipeline being really strong. I think he had a 4th quarter was a little slow and I think he talked about all of that. So you got those comments. But overall, if you're looking at our pipeline and you compare to where we are in the past couple of quarters, this point in the same quarter, 2 quarters ago, payoffs are similar and production is up about 30 percent of what we're projecting to close through this quarter.
All right. So maybe on a consolidated basis, like lowtomidsingledigit loan growth for you guys?
Yes. I mean, it's early in the quarter and pipelines are what they are, but the production side is stronger today than it has been the last couple of quarters and payoffs look similar.
It's like catching a greased pig. Last quarter, we had we look like we're going to be down about $400,000,000 early in the quarter, what it appeared. This quarter appears to be about flat, but it's you think you got a hold of that, it's really moves around, but it looks better right now than it did going into the Q1.
All right. And then Johnny, just some thoughts on buyback versus M and A. I mean, you've been buying back a decent amount of the company here. On the M and A side, I know it's tougher with your currency trading, how it's trading, but do you think M and A is likely? And then everybody is talking about MOEs nowadays just given a couple of big MOEs that have been out there.
But is that something that you all would ever consider an MOE?
Well, we have looked. You can imagine that there's people that have looked with us and brought us ideas. The problem is that they're not MOEs. Nobody runs at the performance levels that we run at. And when you look at these other banks, you think what are they doing?
They're not making any money. So yes, if the right partner came along, we're open to what's in the best interest of the shareholder period. You know we'll do that. I just hadn't I looked at a couple, had a couple brought to me. I just didn't I couldn't get excited about them.
So the egos roll in once in a while and somebody else wants to be the boss and they don't perform at the level we perform at. You just kind of move on down the road. So it's difficult, as you can imagine, for us to find a partner that runs at the performance levels that we run at. But we're open to any of that, but we will continue buying stock. We bought back $51,000,000 worth the Q1 this year.
We bought back in the last five quarters, we bought back almost 5% of the company. So we think that's a good use of funds right now. We'll continue to do that. Maybe not as heavy as we have been, but when the opportunity comes, we're going back. When it's on when they won't leave it on sale, we're going to continue to buy.
I've never seen an MOE that doesn't become an acquisition at some point.
If you think about it, good statement Randy. If you think about it, 3 years ago, if we mentioned to an MOE, you all thrown rocks at us and everybody is all excited about MOE. So, I guess we need to see how they work out of these 2 big ones that were done to see how they work out. But we're open to M and A. We're open to merger vehicles.
We're open to whatever. So we'll continue to look do what's in the best interest of the shareholder.
And then, I mean, Johnny, so outside of the MOE, I mean, maybe back to the M and A that you all I think you've done, what, 40 deals over your career. So I mean, when you look at more traditional bank M and A, you guys clearly buying somebody else. Again, with the currency trading, how it's trading, is that still a possibility or is that just kind of off the radar right now?
It's never off the radar. M and A is never off the radar. Even though we just it's not as attractive to us as it was. It all depends on the other side. We're swapping 2 cats for 1 dog and we're seeing how that works out for us.
I mean, that's really the deal. We're in the market. We're trying to figure out where something works for us and where something fits. And either fits or doesn't fit, if it doesn't fit, we just keep walking. We're in it.
If wanted to get the senator, Republican senator from Louisiana say Kennedy, he said, doing nothing and we're not doing, I mean, we're busy, but he said, doing nothing is hard to do because you never know when you're done.
On that note, I'll hush. How about that?
All right. Thanks, guys.
All right, Doug.
The next question comes from Matt Olney with Stephens. Please go ahead.
Hey, thanks guys. Good afternoon.
Hey, Matt. How are you?
Hey, I'm great. Thanks. Hey, I want to start on the margin. It's impressive that you maintain that the core margin is flat this quarter. And it sounds like the core loan yields have some nice upward momentum.
I'm curious what your expectations are for the core margin for the rest of 2019?
Well, actually, I'll let Brian talk a little bit about it. Actually, I was disappointed that the margin didn't increase more. I actually thought it would increase. I mean, we had 6 of our 5 or 6 of our regions right over 6%. So we grew a picture of a 6 and send it out to all our regions, so they can see what one look like.
And most of the regions have jumped on that. They've recognized what it is. We haven't seen these 7s yet, but overall, it's been pretty good. I think if we could control if we're heading in the right direction on cost of funds, if we're heading in the right direction, I believe we got a shot at picking up on the margin, increase the margin. I thought we would have done it this quarter.
But Brian, you got any comments on that?
I mean, I've got the comment that it's always better to predict the margins going down because you're always seem to be wrong. And so as a tradition, I remember we saw we said margins going down and then the margin would go up. My personal opinion is that I think we can hold our margin. Chris Bolton here is with me and they have these payoff events and we didn't have any this quarter. It's unlikely that they would have 0 every quarter for the rest of the year.
And so some of those could kick in and that's real money. It's not an accrual, it's not an accretion and it's real cash that comes in and it's real impacts to the margin. Got Stephen sitting down here with me. I know he's got some statistics and I might let him give a little color on the new loan yields for production and some of the deposit pricing because I know he's got a lot of numbers down there
too. Sure.
Hi, Matt. Yes, you're right on the production. The new yields on what we're putting on the books today, they were better in Q1 than they were in Q4 and all the quarters prior. And that's really with a little lesser contribution from CCFG as Chris mentioned in Q1 and I expect that to rebound some this quarter. So we were at $587,000,000 on new production for the Community Bank segment.
Johnny mentioned payoffs went off at basically 5.25%. So we're we I would expect to continue to see that the core loan yield go in that direction.
Yes. 60 basis points up, that's pretty strong, 62 basis points up production over a payoff. So that's pleasing. The numbers are moving in the right direction. I think I told you all back in August, we started this plan, implemented this plan.
It takes a while to turn to ship and a lot of events happen that you don't expect during the period of time. But we have been focused on it and I think we're winning the game, Matt.
Okay. And just to clarify, Stephen, you mentioned the $587,000,000 to $525,000,000 just few minutes ago. Was that just in the community bank or is that overall kind of corporate wide?
Just in the Community Bank segment. New production for Q1 was at $590,000,000 and payoffs were $574,000,000 so there's still a positive spread between the 2 on what's coming on versus what paid off.
Okay, great. That's helpful. Chris, do you
have any comments? You don't have a comment? Okay.
Well, I was
going to ask Chris about, I guess, some of the newer offices that are part of CFG, the Los Angeles office and the Dallas office. Just curious kind of what the update on those branches are? And are those fully built out, fully staffed? Or is there still more work to be done there?
So the LA office is a little more established. We're sort of finishing building that out. We actually just took Darren Robinson, who had been one of our directors in New York, and we him out there. He's a native of Southern California and we'd always promised him if we did something we eventually let him go out there. He's been out there a couple of months now.
We're already seeing some real benefits for moving him out there and taking some of his clients and things like that. So we right now LA ends up representing 15%, 20% of what we do. That's about where it should be. And so we're real happy about that. Dallas is really in its infancy.
As you may recall, we always start by hiring credit people first. And so we've made 2 hires in Dallas. They're both credit folks. You can get a lot of production, you hire salesperson first with no credit people out there, but you end up having to hire a lot more credit people after that. So we go ahead and start with credit folks, get that put in place.
We've got maybe $100,000,000 $150,000,000 in our pipeline coming out of Dallas right now. We'd expect that to be able to extend as we add some staff there. But it's ones and twos. We'll add another 1 or 2 people in each of those, but it's not going to be significantly higher than that.
Okay. Great. Great update guys and I'll see you guys tonight.
You bet, man. Thanks. The next question comes from Brett Rabatin with Piper Jaffray. Please go ahead.
Hey, good afternoon.
Hey, Brett.
Wanted to ask, a lot of banks are continuing to struggle with DDA and your interim period DDA looked pretty nice this quarter. Can you maybe just talk about the deposit trends a little more in 1Q and what kind of affected the DDA in particular? And then any thought on funding the growth in the next few quarters as well?
Hey, Brett. Is Steven. I'll take the first part of that. Yes, and I think really to add a little more positive on that, the non interest bearing balances were up $118,000,000 and average balances in those categories were actually down about $20,000,000 or $25,000,000 So we really didn't see a whole lot of benefit on in spread and NIM in Q1 and would expect that to help out in Q2. When you look at the mix really every region in our Florida footprint showed nice increases there.
Our Central Arkansas group had some good increases. There's some seasonality, I guess, with tax refunds typically, but I guess there's some color on those being a little bit less than what they have been in the past. And I think it's really just it's a culmination of the efforts that we've put in place over the last year, year and a half kind of post Stonegate with our treasury management group, our business development officers down in Florida and just general calling efforts. I think Tracy used the phrase that our new plans just to ask for business has been the case for the past few years and I think you're finally seeing kind of a culmination of those efforts.
Okay. And then just in terms of funding the growth going forward, are you guys doing any kind of deposit initiatives? I mean, it seems like the deposit funding costs are getting a little more rational for the industry as rate expectations start to go the other direction. Are you guys seeing any pricing
sort of inception?
We're not seeing the ads. Ads are gone. You don't see any ads being run anywhere. We haven't seen any recently. We had a deposit initiative program that we put in place and it we were growing deposits, but the cost of funds was growing faster than we could get the yield on the loan.
So we dropped that deposit program side and issued bonuses on cost of funds and we've changed that. I think it was a good move forward. I don't know if the timing just worked out February March where we just had virtually no increase in cost of funds or just it was as a result of dropping the deposit initiative. We still have initiatives on the cost of funds. We still will bonus and reward our branches for those that have the lowest cost of funds.
So that was our initiative and I didn't think it wasn't working. It was cost us money. So I stopped that was my fault. I did it. I put it and I stopped it.
We've moved on to cost of funds. You look at something, you never know it till you live it and there is no substitute for experience and I made some mistakes with that and but we fixed it. We moved on and hopefully we're in the right we're heading in the right direction. Actually,
I like
it about 100. We've been about 100. We've run about 100 our entire business life for 20 years, we've run about 100%. So what we'll do in the future is what we did in the past. If we fund $600,000,000 worth, we need $600,000,000 worth of funding.
We'll pull up federal home loan and for $600,000,000 and then we'll go one off that transaction. We'll go find the $600,000,000 We won't panic. We won't run any ads. We'll just take our time and that's the way we've done it for 20 years. It's worked and we think it will continue to work.
We had our regional President yesterday visited David Duryea of Southern Florida was indicating the pricing of the deposits when the deposit can be turned up a little bit and it's there. But the thing that I continue to see or we all continue to see is our customer base whenever they are bringing that loan back in for the 2nd time from our acquisitions, the deposit size are much better. So they're asking for that business and bringing it to us. And we've earned their confidence from support with our treasury services area that has been a big boost for us. We actually have customers out referring us to opportunities for us.
So taking it up on that.
Okay. I appreciate the color there. And then maybe just lastly, I want to make sure I'm clear on capital and just if your stock price stays here, here, is your primary MO to buy back stock, use the excess capital given your high profitability level?
That's correct. That would be a yes. That would be a yes.
All right. Great. Thanks for the color.
The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Thanks. Good afternoon.
Hi, John.
Hey. Couple of things here. Johnny, you were talking about loan production early on in your prepared comments and you talked about projects stopping in the quarter because of maybe some of the economic news or the economic mood. How significant was that?
Well, it was I don't think it was a major issue. I think it was just the timing issue and confusion to the market. People that were going to do a project delayed. I mean, we did if you think about it, I think bank stocks had the 2nd or 3rd worst month since the Great Depression. So a lot of people were scared and didn't know what was happening and what was going on.
So I mean it's reasonable for a businessman to slow down or stop or back up or as Chris said, catch his breath in that market. So I think it's I think that the world's back, I think the Fed realizes what a mess they created and hopefully we won't see that kind of action again. Okay.
Okay, good. One for you, Chris, somewhat related. Would you you talked about the pipeline at an all time high, and you also said it was maybe it was a bit of a quiet quarter as well. Would you describe your quarter as a slower than usual quarter, is the first part? And then are you seeing some of this pipeline pull through into Q2 and getting some of these deals booked?
John, yes, that's sort of exactly what happened. We had a lower than normal production quarter. I think we did maybe 100,000,000 $150,000,000 in production. We would generally do $800,000,000 for the year, so that's lower than average. In particular, I sort of mentioned that we have kind of approved but not closed transactions that were sort of at an all time high for us.
And that was really 2 transactions I would have expected to close in the Q1, but during the late Q4, early Q1, they did slow down a little bit because they were in the process of completing their capital stack and that created maybe a month or so delay. You have a 6 week delay to clean your capital stack that sort of ends up with more than a 6 week delay and actually getting your loan done etcetera. So we would expect, yes, maybe a little bit better pull through in the second quarter off of those. That's certainly what we're projecting right now. And we'll see where that goes for us in terms of what else happens in terms of pay downs, etcetera.
But yes, we had less production in the Q1 than we'd expect. We'd expect to have higher production in the Q2.
Okay, good. That helps. That's all I had. Thank you.
Thanks, John.
The next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, good afternoon guys. How are you doing?
Good afternoon. How are you, Michael?
Good. Maybe just back to Chris. Can you just kind of try to size the opportunity for the Dallas and the LA market specifically? I know New York maybe might be under some pressure with some people leaving the state as we look forward. But one of your competitors in the space that obviously does some of the largest projects said that they would expect that their unfunded balance of closed loans to actually decline through the year.
I know you guys plan a different size sandbox. So just trying to kind of set the opportunity, what the opportunity set is from your vantage point as we move forward. Thanks.
No worries, Michael. In general, we expect L. A. To contribute somewhere around 15% to 20% of our volume and I'd expect Dallas at some point to contribute about 10% of our volume. So at some point somewhere between 20% to 30% of our volume should come out of those offices.
So if you assume we do $800,000,000 to $1,000,000,000 a year, that's a couple of $100,000,000 a year coming out of both of those. I think L. A. Because it covers a larger swath of territory across all the West Coast probably is a little bit bigger opportunity from dollars perspective. Dallas is a nice fill in for us.
We're under penetrated in that market, but that's a tough market. Dallas in particular is a tough market. I'm not sure that most of the volume out of the Dallas office is going to come from Dallas proper.
Understood. That's helpful. And I know it's early, so maybe switching gears a little bit, but 1 national bank actually gave a pretty wide range for their initial day one CECL expectation. Are you guys willing to put any sort of numbers around what the day one impact could be?
No, not at this point. We are planning on running parallel starting March 31. I'll just kind of give you a couple of food for thought items that are at a pretty high level. We've been pretty acquisitive on the acquisition front and those acquired loans are not really embedded in the ALLL calculation. 25% of the loan balances from acquired loans.
So when you look at it, those loans are being supported by credit discounts. And to give a little more color on that, we have purchase credit impaired loans that we've acquired and those have non amortizing credit marks associated with it. And the non amortizing credit mark as of March 31 was $35,700,000 The way CECL works is if you have that purchase credit compared discount is non amortizing, it
will be added to your ALLL
on day 1. Now that balance will come down as we have some charge offs against it or as we decide we don't need it. But if the impact was today and we were going to say that the CECL was affected April 1, that would automatically increase our ALLL from $106,000,000 to $142,000,000 And then that would leave $2,600,000 of loans out there that aren't being accounted for in the ALLL. They'll have to have some kind of mark against it. But we don't have a number.
I joked with Steve and Tifton that if the question came on, I might just say that it's going to be somewhere down between $50,000,000 and up $100,000,000 But with us having purchased accounting on so much of this, it would seem logical that we'll have something a little higher, but it may not all go through equity because we've got so much of big bounce from the purchase credit impaired.
So if I understand correctly, switching from PCI to PCD, there will it sounds like there will be an impact. Do you have an estimate for what the capital impact might be? I assume it's minimal, but
Well, I mean, I don't. I mean, if I knew the exact answer to that, then I'd have to know where the ALLL was going to be at the end. Understood. We're working on it. We're not even prepared today to give a projection of where it would be because it could vary wildly at this point in time.
Okay. And then maybe just finally, there is a fair amount of exposure from both SunTrust and BB and T, particularly in Florida. How do you guys kind of size up the opportunity as we move forward? Kelly King today was saying that they've lost very, very few people, but we're certainly hearing different stories from a lot of the banks within the region. So we'd love to get your viewpoint there as what you think the opportunity is.
Thanks.
We certainly think there's some opportunity there. We have had the fortunate to bring across a few staff members in the southern part of Florida. David Drew and his team has down there. He's working and put strategies together to be able to do that. I can say that some of our deposit growth has trickled over from that, what you saw the increase that we've seen so far this year.
Even I think in the loans committee yesterday, we brought an entire relationship with loans and deposits with the customer. So how good and how that would be, I don't know, but we're going to certainly give it our effort to take care of our our services are ready for it. So and I think our staff is ready for it. So we're excited about it.
Okay. Chris, congrats on your fruit basket. 4 years. Today is my wife's 40th birthday. If I got her fruit basket, I think
The next question comes from Stephen Scouten with Sandler O'Neill and Partners. Please go ahead.
Hey, guys. Good afternoon.
Good afternoon, Stephen.
Hey, Brian, if I could follow-up on that commentary about the PCD loans. So that if I'm understanding it correctly, that $35,700,000 today, like you said, would go into reserves, but that would be money that would no longer flow through into accretion, is that right? And it would flow through the loan loss reserve as opposed to through accretion?
First off, that $35,700,000 is not part of the part that flows through accretion as it stands today. The only reason we would ever flow through accretion is that the quality of the loans improved and we determined that we don't need that much credit and it would transfer from a non amortizing purchasing credit impaired mark to an amortizing
Got you. Okay.
Help. That's not part of any of our accretion period. All of the other discounts that are out there that are on our loans that they stay and they continue to amortize into Infinity. So Stifel doesn't cancel any of the current accretion that we have going.
Okay, great. Great. And then just going back to the production levels, I think I heard Kevin you say that originations were maybe expected to be 30% higher relative to a couple of quarters ago. And I think the number given last quarter was around $1,100,000,000 in originations. So can you give us an idea on where those originations were a dollar basis maybe in 1Q and kind of what sort of numbers you think potentially could occur in the next couple of quarters?
Let me clarify my comment. The comment was the pipeline today compared to the pipeline at the beginning of each of the last two quarters is about 30%. How much will pull through and how much will add on to that the rest of the quarter will determine what our production is. I'm just encouraged that the level of the pipeline is higher today than it has been at the beginning of the last two quarters.
Okay. Yes. No, that makes sense. And then in terms of that actual level of originations that you saw in 1Q versus what I think was that $1,100,000,000 in 4Q?
Yes. Hi, Steven. This is Steven. I'll take part of that. Production in Q1 was $541,000,000 and you're right, it was $1,100,000,000 in Q4, it was $9,000,000 and change in Q3, if I recall.
So I think given Kevin's optimism and Chris's kind of backlog on his pipeline would expect it to trend more towards somewhere in between.
Okay. And have you guys given a number on what the current level of overall unfunded commitments are today?
It's about 2,200,000,000 dollars Stephen, and that's it will bounce around $100,000,000 here and there, but it's relatively stable over the last quarter or 2.
Okay. Okay. And Johnny, maybe just jumping back on the M and A side of things. I mean, I know your stock isn't where you'd want it to be. But that said, it's still 2.4 times tangible books.
It's still much more powerful than most peers, quite frankly. So I guess what would it take whether it be in terms of the math around the deal or where your stock would need to be where you would get maybe a little bit more aggressive as a potential buyer?
Well, the seller expectations have to come down. They the problem with the private bank sector, non public, is that they all saw 2 times book and that's all it's in their head and they don't realize that their price fluctuates as our price fluctuates. What we can pay, there's a limit to what home can pay. So once that becomes more realistic and they get down to a 1.50 times book and we're at 2.4, 2.5, then we do a transaction, that makes some sense. So it's really it's not as much the price of our stock, it's the expectations of the seller.
And as you know, we have just we're not going to dilute our shareholders. We never have, we never will. So that is a factor that prohibits us from doing a transaction, most transactions in the two time book range because it dilutes our shareholders. So we're not going to do that. We're always open though, Steve.
We're always open to a deal we found the right deal. And I looked at a couple of MOEs. I mean, I ran I've never run the numbers on MOE. I ran the numbers and looked at them and I actually learned from the process. I didn't I wasn't sure how to ultimately somebody's got to buy somebody, right, in that transaction.
Somebody got to somebody's stock is going to prevail at the end of the day. And that was that we run it we run them both ways to see if A bought B and or B bought A and took a look at them to see how they look. It was an interesting exercise. But we didn't as I said earlier, on an MOE, this bunch has done such a good job, not me, but this bunch has done such a good job. There's very few people that run-in the league that performance that this company runs in.
Yes, for sure. That makes sense. Okay. Well, congrats on the quarter. Congrats on 20 years.
And I'm voting for a platinum duck call that you guys can all bring.
I'll tell you what, I'll have one of those made and I'll wear it around my neck and you come up with me next year.
There you go. Sounds good. Thanks guys. I appreciate it.
You bet. Thank you. The
next question comes from Brian Martin with FIG Partners. Please go ahead.
Hey, guys.
Hi, Brian.
Hey, I wanted to just ask maybe for Kevin, just going back to your comments, Kevin, about the optimism with the last two quarters, the pipeline being higher. And is there anything you can point to that is and maybe I missed it in your comments earlier, but about what's driving that improvement in the last couple of quarters?
I mean, you've heard Chris' comments, so there's some there. But within the footprint, we're just seeing a lot of good opportunities. The Southeast and South Florida group, Central Florida there, we have strong loan committees going there, talking about lots of loans each week. The Arkansas guys, Northeast Arkansas has got a large pipeline. So it comes from several different areas as it has to be able to get production to a high level.
Brian, you may have a little overlap from the Q4 too. Chris's pipeline has built up, as he said, a couple of big credits he has there. They're working on the capital stack and with the disruption that happened in December probably threw some people off. And so you may see what the size of that backlog may be a result of the situation happening in December in the market.
Got you. Okay. That's helpful. And then just your comment on the deposit, I guess, costs slowing, at least particularly in February March, I mean, I guess, do you guys feel like you're kind of getting near an inflection point with the Fed is on hold that the deposit costs are close to stabilizing? I guess just relative to the initiatives, I guess, that
you may
be doing, I know it doesn't sound like there's anything going on right now other than just asking for more business. But I mean, how comfortable do you feel like those trends that you saw in February March and the deposit side will stick?
Well, actually some of our banks have had a little reduction. Some of them have
had gone down, cost funds
have gone down a tick
or 2. So we're optimistic.
We're extremely optimistic that this could hold for us. Okay. So would you Everybody saw billboards and ads and everywhere you went you were seeing an ad and people running the price money up everywhere that just it's went away. It just I mean, I feel it. I feel that it's gone away.
I hope I'm right.
Yes. And would you do you feel is optimistic, Johnny, that you can have at least 2 or 3 more quarters of improving loan yields? I mean, it sounds like there's at least 1 or 2 out there, but just kind of conversely to the on the deposit side?
I do. I do. Okay. Our people are doing really a good job. I mean, we had 4 of the regions over 6%.
This last quarter, that's pretty good stuff. I mean, there let me tell you, our guys get it. They get it. They understand it. And they're trying to move the yields up.
You see where loans are maturing and being renewed at, you see where the production is kind of relative to the core yield and everything's north of where the core loan yield sits today. So it can't do anything but go up.
Yes. It has been a battle. And but as I said earlier, I think we're winning.
Yes. Okay. Well, it sounds great. And just the last one for me was just on the buyback. What remind me what is left on the authorization you guys have?
I know it sounds like maybe a little less aggressive in the near term here, but what's left on the buyback? And would you expect to complete that within, I guess, have you stated kind of what your thought is on when you complete that?
I mean the total number of shares authorized by the Board at March 31 was 7,200,000 shares that were left. That's a considerable amount left.
Yes, we've got a considerable amount left. If we need to raise that, I think our Board is in concert with raising it. We need to do that. So it still is the best used funds. It is dilutive, but it still to me is the best use of funds.
I mean, we bought back nearly 5% of the stock. That's a pretty good slug of stock. So we paid out 1 $104,000,000 in buybacks last year and paid $76,000,000 in dividends. So it was about $180,000,000 that went for our shareholders.
Okay. All
right. So I guess bottom line, continue to keep something in our outlook, but maybe just a little less aggressive than you have been?
Depends on the price of the stock. We'll move when we need to move and when we think it's an opportunity.
Okay. All right.
That's all I had.
Brian, they've called you, it sounds like.
Yes. We call them and told them where it worked.
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. Thank you for joining us again today. We'll talk to you in 90 days from now, hopefully again. Hopefully, the Q2 will be as happy as we were with the Q1, maybe a little better, maybe margin continue to stay flat or increase a
little bit, yields on loans kick up
a little bit. We appreciate your support and thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.