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. Please note that if you would like to ask a question during the question-and-answer session, please press star then one on a touch-tone phone. If you decide you want to withdraw your question, please press star then two to remove yourself from the list. The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page three of their Form 10-K filed with the SEC in February 2019. At this time, all participants are in a listen-only mode, and this conference is being recorded.
If you need operator assistance during the conference, please press star then zero. It is now my pleasure to turn the call over to Mr. Allison.
Thank you, Gary. Welcome everyone to the first quarter 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, 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 the fourth quarter of 2018, which turned out to be one of the most bizarre quarters that we've experienced together since the 2008 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 hundreds of billions of dollars, including IRAs, 401(k)s. Just regular people lost their money and wealthy people as well, all because of incorrect and unclear guidance from the Fed. I recently was visiting with one money manager who, at the end of September, his fund was up $100 million, and he was feeling pretty good at that time. He lost the entire $100 million by the end of December. I don't blame Chairman Powell for the bad calls. 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. The 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. The regulators said it's been a long cycle. Liquidity's 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 economy, in addition to the cost of funds and causing a bank stock market crash. In my opinion, banks overall are in the best shape they've been in my banking career. That reason is strictly because of the lessons learned in 2008 and 2009. Loan-to-values are better than ever. Strong equity in every deal. When you think about the immediate change from rate hike after rate hike, matter of fact, 4 in a row in 2018, when we're told there's more coming, to stopping rate hikes suddenly and turning around, making a 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 cleared, which is somewhat disappointing, which created the 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 that's 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. There is no substitute for experience.
Not all the members were totally on board with the Fed decision last time. 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&P 500 total return was the worst since December 1931, in the middle or start of the Great Depression. Bank stocks were slaughtered. Why? You think about it, credit unions pay no taxes. They've grown beyond their guidelines. The unregulated shadow banking system, REITs, insurance companies, fund managers who think they're lenders now, Amazon, PayPal, person-to-person payments. It was already tough to be in the banking space. 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 if they continue to push, they may be examining dinosaurs. Haha. Enough of this about stuff that's beyond our control. Let's talk about what is within our control. We've all focused on NIM for the entire year of 2018, more particularly the fourth quarter of 2018 and the first quarter of 2019 because of the situation that we're creating. There has been some confusion over time over the Stonegate acquisition, the Shore acquisition, CCFGs, 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. Following will be Chris Poulton, who will talk about CCFG, his current business, outlook, and margin.
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. Randy Sims will wrap it all together at the end with a combined report on Home Bancshares. 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 and March were only up one 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 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 million in March. Yields on loans continued to expand despite reduction in accretion income. Let me say that again. Yields on loans continued 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 million worth of stock in 2018, and so far, we've stepped it up a little bit the first quarter and bought back $51 million worth of stock. Last year, we bought back 5,307,000 shares. In the first quarter, we bought back 2,716,000 shares.
You add those together, that's almost 5% of the total outstanding stock that we've bought back in this period of time. Overall, I think it was a decent quarter, hopefully, we'll have a good year coming on in 2019. Brian, would you take it and see if you can get us a good explanation of the margin?
Thank you, Mr. Allison. The first 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 $140.8 million for Q1 2019 and $141.7 million for Q4 2018. Our net interest margin was 4.30% for both the fourth quarter of 2018 and the first quarter of 2019. Before I go over our first quarter 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 first, second, third, and fourth quarters of 2018. The first quarter of 2019 does not include any additional interest income for payoff events from CCFG.
Our acquisition of Shore Premier Finance has diluted to our historical NIM by 3 basis points. Accretion income for the fair value adjustments recorded in purchase accounting was $9.1 million during Q1 compared to $9.4 million during Q4, for a decrease of $300,000. The decrease of recognized accretion income when compared to the fourth quarter 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. First, for the change in rates, the yield on interest-earning assets increased 9 basis points. This equates to a $2.7 million increase in interest income. The rate on average interest-bearing liabilities increased 10 basis points.
This equates to a $2.6 million increase in interest expense, resulting in a total change from rates resulting in an improvement of $157,000 from Q4 2018 to Q1 2019. Second, the change in balances. The average balance on interest-earning assets increased to $212.4 million. This equates to a $2.6 million increase in interest income. The average balance on interest-bearing liabilities increased to $220.2 million. This equates to a $578,000 increase in interest expense. The total change from balances resulted in an improvement of $2 million from Q4 2018 to Q1 2019. Third, because Q1 2019 only has 90 calendar days, this quarter had two less days versus last quarter. The loss of these 2 days equates to a lower net interest income for Q1 2019 of $3 million.
In conclusion, even though the reported decline in net interest income was $857,000, if you adjust for the $3 million related to the two less days, the change in both rates and balances resulted in an improvement of $2.2 million 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. That was a good job. You did a good job explaining that, I think. Hopefully, everybody gets that. Chris, tell us what's going on in New York and what you see, and your footprint. I guess not only New York, everywhere, right?
Everywhere. Yes, sir. Thank you, Johnny. Well, first, Q1 marked our fourth anniversary with Centennial Bank. As you may or may not be aware, the traditional fourth anniversary gift is fruit. I'm looking forward to receiving my fruit basket.
Do you have any specifics that you'd like in your fruit basket?
I don't like apples.
You don't like apples?
Don't like apples.
You don't like apples. Not so big on apples. We'll make sure if we get a fruit basket that there's apples.
Yeah, exactly. On April 1st, 2015, we established Centennial Commercial Finance Group in temporary office space with a loan portfolio of $290 million. In the short four years that we've been with Centennial, we've transitioned to our permanent office in New York and established two additional LPOs in L.A. and Dallas. Over that same period of time, we've grown assets by $1.2 billion, or an average annual growth of 50%. We've originated over 150 credits totaling $3.5 billion. We've generated $275 million in revenue and delivered over $200 million 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 zero 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 their breath and reassessed opportunities. This contributed to a 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 million for the quarter, primarily driven by the repayment of a single larger maturing loan. Along with the 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 in 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. We've 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 L.A. 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 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.
Appliances. A range, a refrigerator, or something.
Vacuum.
Vacuum?
Yeah.
We're a bank.
Toaster. That's right.
Toaster?
Yeah.
You know, I think I missed out on some gifts. Where do I look? 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. You'll be able to, after we wrap up here, they'll be open for Q&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 Shore Premier Finance. John, you want to tell us what's going on with your side of the business?
Good afternoon, 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 second quarter. Let's take a look at the numbers.
In terms of soundness during the quarter, our average consumer origination FICO score increased from 770- 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're a lean team with an average efficiency ratio during the quarter close to 30%, but of course, profitability is driven by our margins. During the quarter, our retail loan average rate 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 first quarter of 2019 than in the fourth quarter of 2018, growing to 6.17%. I'm hopeful that any softening of 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 million, up just $8 million in the quarter, but up $68 million since being purchased by Centennial in July of 2018. We funded $28 million of new loans in the quarter, but in addition to softer demand, we also experienced heavier payoffs of $20 million.
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% by volume, 56% by dollar over February, valued at roughly $30 million. Entering the spring buying season, I anticipate consumer second quarter originations of about $35 million and commercial advances of around $25 million. 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. 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 visited with John, and he had a little reception, a very successful reception. Looked like they're on their way to another good year. Has it been a year yet since It's been quite a year. John, I don't know what the anniversary present is for one. Chris keeps us up to date on what the anniversary is, so you might update us on what we should do at year one.
Thank you. I look forward to that.
Yeah. I think I asked Chris last year what he'd like to have this year, and he said a bird of prey. 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. We've been 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, let's talk 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 C 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 stay the course on is asset quality. Our teams continue to show improved 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 six months, and the overall return to the shareholder 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 million. Staying the course has proven to be the right thing for Centennial Bank. What is typically a softer quarter for production, we saw over $500 million 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 two quarters from all of our regions. As our plan, Johnny, we're 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 in Q1 for the Community Bank Group was solid. Our presidents continue to work to increase the yield, and we're pleased to see the Q1 production at 5.87%, with five 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 million in Q1 and up $443 million over the past two quarters.
The Q1 growth comes primarily from our teams in Little Rock and each of our regions in our Florida footprint. We're encouraged to see the increase in cost of funds slow 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 million. While the first quarter 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.
Thank you, Stephen. Looking out over the past 12 months, we've had a reduction of accretion income, a loss of revenue from the Durbin, and our expansion of our back office functions at Centennial Bank. Net income matched the first quarter of last year. That was a lot to overcome in one year. I must say that I'm pleased with where we stand today and the direction our company is going. Before John 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, John.
Thank you. The impact on Durbin this year or last year was how much in the first quarter?
It was about $3 million each quarter.
$3 million.
$3 million.
You think about the quarter.
That's just money sucked out.
Yeah.
It's gone.
The $3 million just taken right out of the income side of the balance sheet. You got, as we went over, 10-year regulatory expenses. 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. Pretty pleased with that. Randy, I am going to let you have it and take it and kind of wrap up.
Thank you, Johnny. That's well said about the Durbin cost. Just totally a burden to overcome after you hit that $10 billion 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. I think it is worth repeating. We have been trading between $18 and $19, but the last time we saw that price was the second quarter 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. 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 $71.4 million on revenue of $203.2 million, which resulted in an increase in our ROA to 1.92%, all of which beat the fourth quarter of 2018. More importantly, we were able to maintain our net interest margin at 4.30% 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 billion, with a little over $167 million 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 and March. Loan growth was slow, then declined, but increased slightly on an average basis, providing confidence for the second quarter. 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 Premier Finance 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 second quarter. We just turned 20 years old as a corporation. 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. That pretty much wraps things up. I'll turn it back to our chairman, Mr. John Allison.
Thank you. I think it overall was a really good report. I thought, when you think about a lot of bank stocks were hammering and went over $10 billion, I see that now. I didn't really see it back then, but the regulatory expenses are much higher. Then Durbin. The Durbin was just $3 million you think about, I mentioned that earlier, but still, when you think about that, you have to overcome that. As accretion's gone down, we've overcome all of that. The company's overcome all of that, I have to say good job to all. Anybody else have anything to mention? Anybody got any comments? John or Kevin, anything you got? You good?
Happy 20th.
Happy 20th. We ought to have those kazoos here and celebrating 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 four. Chris, I thought we'd spent all this money to get him a bird of prey, and he turned on us, and he's wanting a fruit basket. let's just say it's a blue diamond.
That's good.
Just call it a blue diamond.
That's good. I like that.
Did you find out what corn is?
China or platinum.
China or platinum.
Oh.
I guess maybe a big platinum bar or something. All right, Gary, thanks. Anybody else have anything else to offer? Gary, I think we're ready for Q&A.
We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Brady Gailey with KBW. Please go ahead.
Hey, good afternoon, guys.
Hey, Brady.
Maybe we can start with loan growth. If you take a step back and look at organic loan growth, it was about 1% in 2017. It was about 3% last year. It was kind of flat this quarter. At this point in the economic cycle, it still feels like you're feeling good about the economy, 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 fourth quarter was a little slow, I think he talked about all of that, you got those comments. Overall, if you're looking at our pipeline and you compare it to where we are in the past couple of quarters, this point in the same quarters, two quarters ago, payoffs are similar and production is up about 30% of what we're projecting to close through this quarter.
All right. Maybe on a consolidated basis, like low to mid-single digit loan growth for you guys?
It's early in the quarter, pipelines are what they are, the production side is stronger today than it has been the last couple of quarters, payoffs look similar.
It's like catching a greased pig. Last quarter, we looked like we're going to be down about $400 million early in the quarter, what it appeared. This quarter appears to be about flat. You think you got a hold of that, it really moves around. It looks better right now than it did going into the first quarter.
All right. Johnny, just some thoughts on buyback versus M&A. You've been buying back a decent amount of the company here. On the M&A side, I know it's tougher with your currency trading how it's trading, but do you think M&A is likely? Everybody's talking about MOEs nowadays, just given a couple of big MOEs that have been out there. Is that something that y'all would ever consider, an MOE?
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." Yes, if the right partner came along, we're open to what's in the best interest of the shareholder, period. We'll do that. I looked at a couple, had a couple brought to me. I couldn't get excited about them. 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, so you just kind of move on down the road.
It's difficult, as you can imagine, for us to find a partner that runs at the performance levels that we run at. We're open to any of that, but we will continue buying stock. We bought back $51 million worth the first quarter this year. In the last five quarters, we've bought back almost 5% of the company. 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 to buy it. When they want to leave it on sale, we're going to continue to buy it.
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, three years ago, if we'd mentioned doing an MOE, you would've all thrown rocks at us. Now everybody's all excited about MOE. I guess we need to see how they work out, these two big ones that were done to see how they work out. We're open to M&A, we're open to merger of equals, we're open to whatever. We'll continue to do what's in the best interest of shareholders.
Johnny, outside of the MOE, maybe back to the M&A that I think you've done, what, 40 deals over your career. When you look at more traditional bank M&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&A is never off the radar. It's not as attractive to us as it was. It all depends on the other side. We're swapping two cats for one dog, and we're seeing how that works out for us. 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 it either fits or it doesn't fit. If it doesn't fit, we just keep walking. We're in it. What did the guy, the Republican senator from Louisiana say, "Kennedy?" He said, "Doing nothing." We're not doing. 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, thanks.
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 maintained that the core margin flat this quarter. 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. We had 5% or 6% of our regions right over 6%. We drew a picture of a 6% and sent it out to all our regions so they could see what 1 looked like, and most of the regions have jumped on that. They've recognized what it is. We haven't seen any 7% yet, 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, increasing the margin. I thought we would've done it this quarter. Brian, you got any comments on that?
I've got the comment that it's always better to predict the margins going down because you always seem to be wrong. As a tradition, I remember we used to always say, "Margin's going down," and then the margin would go up. My personal opinion is that I think we can hold our margin. Chris Poulton here is with me, they have these payoff events. We didn't have any this quarter. It's unlikely that they would have 0 every quarter for the rest of the year, some of those could kick in, and that's real money. It's not an accrual, it's not an accretion. It's real cash that comes in, it's real impacts to the margin. Got Stephen sitting down here with me.
I know he's got some statistics, I'm going to 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. Hey, Matt. Yeah, 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, all the quarters prior. That's really with a little lesser contribution from CCFG, as Chris mentioned, in Q1. I would expect that to rebound some this quarter. We were at 587 on new production for the community bank segment. John mentioned payoffs, went off at basically five and a quarter. I would expect to continue to see the core loan yield go in that direction.
Yeah. Was it 60 basis points?
62.
That's pretty strong. 62 basis points up production over payoffs. 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 the ship, and a lot of events happen that you don't expect during the period of time. We have been focused on it, and I think we're winning the game, Matt.
Okay. Just to clarify, Stephen, you mentioned the 587 and the 525 just a 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 and payoffs were 574, there's still a positive spread between the two on what's coming on versus what paid off.
Okay, great. That's helpful.
Chris, you got any comments? Chris, you don't have any comment? Okay.
I was going to ask Chris about, I guess, some of the newer offices that are part of CCFG, 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 and fully staffed, or is there still more work to be done there?
The L.A. 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 moved him out there. He's a native of Southern California, and we'd always promised him if we did something, we'd eventually let him go out there. He's been out there a couple of months now. We're already seeing some real benefits from moving him out there and him taking some of his clients and things like that. Right now, L.A. ends up representing 15%-20% of what we do. That's about where it should be, and 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 we've made two hires in Dallas. They're both credit folks.
You can get a lot of production, you hire a salesperson first with no credit people out there, but you end up having to hire a lot more credit people after that. We go ahead and start with credit folks, get that put in place. We've got maybe $100 million- $150 million in our pipeline coming out of Dallas right now. We'd expect that to be able to extend as we add some staff there, b ut it's ones and twos. We'll add another one or two 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, Matt. 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. Your ending 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, this is Stephen. I'll take the first part of that. Yeah, and I think really to add a little more positive on that, the non-interest-bearing balances were up $118 million, and average balances in those categories were actually down about 20 or 25. We really didn't see a whole lot of benefit in spread in them 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.
I think it's really just a culmination of the efforts that we've put in place over the last year and a half, kind of post Stonegate Bank with our treasury management group, our business development officers down in Florida, and just general calling efforts. I think Tracy used a phrase that our new plan is just to ask for business or has been the case for the past few years, and I think you're finally seeing kind of a culmination of those efforts.
Okay. Just in terms of funding the growth going forward, are you guys doing any kind of deposit initiatives? 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 exception?
We're not seeing any ads. Ads are gone. You don't see any ads being run anywhere, or we haven't seen any recently. We had a deposit initiative program, and we put in place, and we were growing deposits, the cost of funds was growing faster than we could get the yield on the loans. We dropped that deposit program side and issued bonuses on cost of funds, and we've changed that, and I think that was a good move for us. I don't know if the timing just worked out February and 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.
That was our initiative, and I didn't think. It wasn't working. It was costing us money. 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, we fixed it. We moved on, and hopefully 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 life, business life. For 20 years, we've run about 100%. What we'll do in the future is what we did in the past.
If we fund $600 million worth, we need $600 million worth of funding, we'll pull up Federal Home Loan for $600 million, and then we'll go one off that transaction. We'll go find the $600 million. We won't panic. We won't run any ads. We'll just take our time, 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 in yesterday visit, and David Duryea out of Southern Florida was indicating the pricing of a deposit, the deposit can be turned up a little bit, and it's there. 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 second time from our acquisitions, the deposit size are much better. They're asking for that business and bringing it to us, and we've earned their confidence and 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 we're taking it up on that.
Okay. Appreciate the color there. Maybe just lastly, I want to make sure I'm clear on capital and just if your stock price stays here, is your primary MO to buy back stock to use the excess capital given your high profitability level?
That's correct.
That would be a yes. That'd 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, Jon.
Hey. Couple things here. Johnny, you were talking about loan production early on in your prepared comments, 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, I don't think it was a major issue. I think it was just a timing issue and confusion to the market. People that were going to do a project delayed. If you think about it, I think bank stocks had the second or third worst month since the Great Depression. A lot of people were scared and didn't know what was happening or what was going on. It's reasonable for a businessman to slow down or stop or back up or, as Chris said, catch his breath.
In that market. I think that the world's back. I think the Fed realizes what a mess they created, hopefully we won't see that kind of action again.
Okay. Good. One for you, Chris, somewhat related. You talked about the pipeline at an all-time high, and you also said 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, then are you seeing some of this pipeline pull through into Q2 and getting some of these deals booked?
Jon, yeah. That's sort of exactly what happened. We had a lower than normal production quarter. I think we did maybe $100 million- $150 million in production. We would generally do $800 million for the year, 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, that was really two transactions I would've expected to close in the first quarter. During the late fourth quarter, early first quarter, they did slow down a little bit because they were in the process of completing their capital stack, that created maybe a month or so delay. You have a six-week delay completing your capital stack, that sort of ends up with more than a six-week delay in actually getting your loan done, et cetera.
We would expect, yeah, maybe a little bit better pull-through in the second quarter off of those. That's certainly what we're projecting right now, we'll see where that goes for us in terms of what else happens in terms of pay-downs, et cetera. Yeah, we had less production in the first quarter than we'd expect. We'd expect to have higher production in the second quarter.
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 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 L.A. market specifically? I know New York maybe might be under some pressure with some people leaving the state as we look forward. 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 play in a different size sandbox, 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%-20% of our volume, and I'd expect Dallas at some point to contribute about 10% of our volume. At some point, somewhere between 20%-30% of our volume should come out of those offices. If you assume we do $800 million-$1 billion a year, that's a couple of hundred million dollars 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, 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. I know it's early, maybe switching gears a little bit, you know, One 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 31st. I'll just kind of give you a couple food for thought items that are at a pretty high level. We've been pretty acquisitive on the acquisition front, those acquired loans are not really embedded in the ALLL calculation. 25% of the loan balance is from acquired loans. When you look at it, those loans are being supported by credit discounts. To give a little more color on that, we have purchase credit-impaired loans that we've acquired, those have non-amortizing credit marks associated with it. The non-amortizing credit mark as of March 31st was $35.7 million. The way CECL works is if you have that purchase credit-impaired discount that's not amortizing, it will be added to your ALLL on day one.
That balance will come down as we have some charge-offs against it or as we decide we don't need it. If the impact was today and we were going to say that the CECL was effective April 1st, that would automatically increase our ALLL from $106 million- $142 million. That would leave $2.6 million of loans out there that aren't being accounted for in the ALLL. They'll have to have some kind of mark against it. We don't have a number. I joked with Stephen Tipton that if the question came out, I might just say that it's going to be somewhere down between $50 million and up $100 million. With us having purchase accounting on so much of this, it would seem logical that we'll have something a little higher.
It may not all go through equity because we've got so much of big balance from the Purchase Credit Impairments.
If I understand correctly, switching from PCI to PCD, 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.
Well, I mean. I don't. I mean, i f I knew the exact answer to that, then I'd have to know where the ALLL is going to be at the end.
Understood.
We're working on it, but we're not prepared today to give a projection of where it would be because it could vary wildly at this point in time.
Okay. Maybe just finally, there is a fair amount of exposure from both SunTrust and BB&T, particularly in Florida. How do you guys 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. Would 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 Duryea and his team has down there. He's working and putting strategies together to be able to do that. I can say that some of our deposit growth has trickled over from that, which you saw the increase that we've seen so far this year. Even, I think, in the loans committee yesterday, brought an entire relationship loans and deposits with the customer. How good and how that will be, I don't know, but we're going to certainly give it our effort to take care of it. Our services are ready for it, and I think our staff's ready for it, so we're excited about it.
Okay. Chris, congrats on your fruit basket. Four years, that's good. Today's my wife's 40th birthday. If I get her a fruit basket, I think she'd kill me.
Thanks, Michael.
The next question comes from Stephen Scouten with Sandler O'Neill & Partners. Please go ahead.
Hey, guys. Good afternoon.
Good afternoon, Stephen.
Hey, Brian, if I could follow up on that CECL commentary about the PCD loans. If I'm understanding it correctly, that $35.7 million today, like you said, would go into reserves, that would be money that would no longer flow through into accretion. Is that right? It would flow through the loan loss reserve as opposed to through accretion?
First off, that $35.7 is not part of the part that flows through accretion as it stands today.
Okay.
The only reason it would ever flow through accretion is that the quality of the loan's improved, we determine that we don't need that much credit, it would transfer from a non-amortizing purchase credit-impaired mark to an amortizing discount.
Got you. Okay. Helpful.
That's not part of any of our accretion period. All of the other discounts that are out there that are on our loans, then they stay, and they continue to amortize into infinity. CECL doesn't cancel any of the current accretion that we have going.
Okay, great. 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 $1.1 billion in originations. Can you give us an idea on where those originations were on a dollar basis, maybe in 1 Q, 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% up. How much we'll pull through and how much we'll 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. Yeah, no, that makes sense. In terms of that actual level of originations that you saw in 1 Q versus what I think was that $1.1 billion in 4 Q?
Yeah. Hey, Stephen, this is Stephen. I can take part of that. The production in Q1 was $541, and you're right, it was $1.1 billion in Q4. It was nine and change in Q3, if I recall. Yeah, I think, given Kevin's optimism and Chris's kind of backlog on his pipeline, would expect it to trend more towards kind of somewhere in between.
Okay. Have you guys given a number on what the current level of overall unfunded commitments are today?
It's about $2.2 billion, Stephen. It'll bounce around $100 million here and there, but it's relatively stable over the last quarter or two.
Okay. John, maybe just jumping back on the M&A side of things. I know your stock isn't where you'd want it to be, but that said, it's still 2.4x tangible books. It's still much more powerful than most peers, quite frankly. I guess what would it take, whether it be in terms of the math around a deal or where your stock would need to be, where you would get maybe a little bit more aggressive as a potential buyer?
Well, you know, the seller expectations have to come down. The problem with the private bank sector, non-public, is that they all saw 2 times book, and that's all that'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. 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 can do a transaction. It makes some sense. It's not as much the price of our stock, it's the expectations of the seller. As you know, we're not going to dilute our shareholders. We never have, we never will. That is a factor that prohibits us from doing a transaction, most transactions in the two-time book range because it dilutes our shareholders. We're not going to do that.
We're always open, though, Stephen. We're always open to a deal. We find the right deal. I looked at a couple of MOEs. I'd never run the numbers on MOE. I ran the numbers and looked at them.
I actually learned from the process. Ultimately, somebody's got to buy somebody, right? In that transaction.
Yep.
Somebody's stock's going to prevail at the end of the day.
Yep.
We'd run them both ways to see if A bought B or B bought A, and took a look at them to see how they looked. It was an interesting exercise, but 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 of performance that this company runs in.
Yeah, for sure. No, that makes sense. Okay. Congrats on the quarter. Congrats on 20 years. I'm voting for a platinum duck call that you guys can all bring.
I tell you what, I'll have one of those made, and I'll wear it around my neck, and you come hunt with me next year.
There you go. Sounds good. Thanks, guys. I appreciate it.
You bet. Thank you.
Platinum duck. That was a good one.
The next question comes from Brian Martin with FIG Partners. Please go ahead.
Hey, guys.
Hey, Brian.
Hey, I want 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. Is there anything you can point to that is, or maybe I missed it in your comments earlier, but about what's driving that improvement the last couple of quarters?
You've heard Chris's comments, so there's some there.
Right.
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. 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 fourth quarter, 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, it probably threw some people off. You may see with the size of that backlog may be a result of the situation that happened in December in the market.
Got you. Okay, that's helpful. Just your comment on the deposit, I guess, cost slowing, at least particularly in February or March. 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. How comfortable do you feel like those trends that you saw in February and March on the deposit side will stick?
Well, actually, some of our banks have had a little reduction. Some of them have actually gone down. Cost of funds have gone down a tick or two. We're optimistic. We're extremely optimistic that this could hold for us.
Okay.
Everybody, you saw billboards and ads, and everywhere you went, you were seeing an ad and people running to price money up everywhere. That just went away. I feel it. I feel that it's gone away. Hope I'm right.
Yeah. Do you feel as optimistic, John, that you can have at least two or three more quarters of improving loan yield? It sounds like there's at least one or two out there, but just kind of conversely on the deposit side?
I do.
Okay.
Our people are doing really a good job. We had four of the regions over 6% this last quarter. That's pretty good stuff. Let me tell you, our guys get it. They get it, they understand it, and they're trying to move the yields up.
Yeah, you see where loans are maturing and being renewed at. You see where new 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.
Yeah.
It has been a battle. As I said earlier, I think we're winning.
Yeah. Okay. Well, it sounds great. Just the last one from me was just on the buyback. 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?
The total number of shares authorized by the board at March 31st was 7.2 million shares that were left.
Okay.
That's a considerable amount left.
Yeah, we got a considerable amount left. If we need to raise that, I think our board is in concert with raising it, if we need to do that. It still is the best use of funds. It is dilutive, but it still, to me, is the best use of funds. We bought back nearly 5% of the stock. That's a pretty good slug of the stock. We paid out $104 million in buybacks last year and paid, what, $76 million in dividends. It was about $180 million that went for our shareholders.
Okay. All right. 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.
Okay.
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.
Yeah.
The police are on their way. We called them and told them where you are.
That's right, they're coming. All right. I appreciate it, guys. Thanks.
Bye.
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 second quarter, we'll be as happy as we were with the first quarter, 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.