Greetings, ladies and gentlemen, and welcome to the Home Bancshares Incorporated Third Quarter 2018 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks then entertain questions. The company has asked me to remind everyone to refer to their cautionary note regarding forward looking statements. You will find this note on Page 3 of the Form 10 ks filed with the SEC in February 2018.
At this time, all participants are in a listen only mode and this conference is being recorded. It is now my pleasure to turn the call over to Mr. Allison.
Thank you, Kyle. Good afternoon, everyone, and welcome to Home Bancshares' 3rd quarter earnings release and conference call. Our regular management team has gathered with me today, and you'll hear from them later in the Q and A. You've seen the press release on the front page has changed, hopefully provide a better and quicker way to present our information. The change came from our new Investor Relations lady who you all know, Donna Townshelf.
So please let Donna know what we can do to improve from there. First, I want to wish our customers, employees and their families a speedy recovery from the devastating storm that hit the panhandle of Florida last week. There really are some amazing stories coming from that area from both our employees and customers stepping up to help each other, people helping people. Good people can become great people when faced with severe and that's what's going on in the Panhandle of Florida today. Leadership is what it's all about.
We have been kind of struggling because the phone service finding our people. So we've actually physically been going out to their address to check them. And I think so far, we've accounted for all but one.
They've all been accounted for.
They've all been accounted for. That's great. That's a new update for me. This storm was a bad one. And originally, some of our people had no food, no housing, no water and no clothes.
Well, the clothes they had were probably on their back and they were wet. We'll tell you a few stories and some of the great stories coming out. I know there'll be more, but one of the great one of our customers from Pensacola, Florida, Rick Olson, purchased, loaded and delivered 2 bob trucks full of last essential materials, including food, water, clothes, generators, fuel, chainsaws and medical supplies. He navigated the unnavigable that's kind of hard to say roads carrying plywood to place on the road that was washed away or damaged. He entered the places.
He was informed by law enforcement not to enter, not stopping because his friend and banker, Jim Haines, his family and employees were in dire need of help. He said to Tracy David and me, I can do it, and he did it. The entire Home Bank Purchases family owes a real sense of gratitude to Rick Olson, and thank you Rick from all of us. I am Nick is one of our people who went to the branch the day of the storm along with joy again and they wrote it out. He watched air conditioners being ripped from buildings, thrown in the air as though they were weightless.
After a couple of days, he opened the drive thru without computer power in order to accommodate our customers desperately in need of cash. And how he did that, he connected with a young lady by the name of Lindsay Trowell at our Jonesboro, Arkansas branch, who stayed with him on the phone the entire time to retrieve customer information. So we didn't have a computer, we just had cell phones. I'm told that she said, I'm with you and I'll keep this line open as long as you want. By the way, I think he went 2 or 3 days without a shower.
So I'm sure he was proud to get a shower at some point in time. Another story comes from James Hossman from Pensacola is the President of our Pensacola branch and April Bircheron, I'm hard to say, but Bircheron, loan administrator from Pensacola, with the assistance of Sean Courtney Mack and Allen Davis, a senior officer from Destin, have been running an almost daily shuttle service to the devastated area delivering supplies. James says, We are fortunate to have branches that did not sustain damage in the Pensacola area and we're close enough to provide assistance to our fellow bankers. During my conversation with James, I found out that he and his team had secured several Coca Cola syrup barrels. And after cleaning them out, filled them with much needed gasoline and we're delivering the fuel to our people in the damaged area, while asking me all at the same time, what else can we do?
Wow, I know there are many other people on the home team doing wonderful things, and hopefully we'll have many good stores in the future. Mexico Beach was the hardest hit. On a phone discussion with our area President, Donnie Gay earlier, he stated the branch is very badly damaged and probably a total loss. He quoted, said 6.5 hours, 10 firemen, 1 banker in Mexico Beach yields a sack of cash. And I said, what do you mean?
Well, he had 10 firemen in the branch helping him break into the vault to retrieve the money. With all the problems he encountered, Donnie could not say enough good things about the first responders. It took them 6 hours to get in. The chief said, usually, we're breaking in a place to save a lot, not a sack of cash. No one told any of these people or asked any of these great individuals to do these remarkable feats.
You cannot hide leadership in a crisis. It spews out. Leaders lead without even knowing. Great people do great things. I hope you can hear me on this call.
I just want all our people to understand that we're here for you, whatever you need, it does not matter. These are foxhole times, and any of these great people are welcome in my foxhole. Our property damage reports are indicating the damage may not be as bad as one would think after seeing the devastation on television. Donna told me just before I got on the call that 23 of our 27 branches are up and running from Pensacola to Apalachicola to Tallahassee. Some were just drive throughs, but most of them are in full operational mode and a few of them need electricity.
And do you tell me another one's coming on tomorrow?
Yes.
Another one's coming on tomorrow. Our branch in Panama City and Mexico Beach sustained more severe damages. From a reserve perspective, we have not incurred the losses in the keys that we expected and may not if we're lucky. We're certainly not out of the woods yet, but the sky is much clearer. However, there's still reason to be careful.
With the favorable results from the Keys thus far, we think an additional reserve may not be required. Circumstances could always change. For now, we're going to have the reserve applied to the Keys and the Panhandle. Let's switch to something more positive, the results for the quarter. But first, I think our CEO of the Hoeing Company, Mr.
Randy Sims, has a comment. Randy, I think you've got a comment. Is that correct?
Yes, sir. I just want
to say great stories and what a great team we have in the Panhandle. So yes, let's turn to something more exciting some exciting news. The number is now 30. That is 30 consecutive quarters of record income and the most profitable quarter in the history of our company. I had dinner last night with my 5 grandchildren and I threw out the 30 consecutive quarters of record income and they all came up with the same conclusion, 7.5 years.
They had some of them had to carry the 2 and all that, but 7.5 years. So you have it from authority, 7.5 years. The youngest one, 6 years old said, that's a long time. Well, it is a long time. And we just keep hitting quarter after quarter after quarter and having the most profitable quarters every single quarter.
I can't say enough, 30 straight quarters, what more evidence do you need that this is one of the most profitable banks in America? So with that, let's go back to Johnny and hear about the great results from this 30th consecutive 7.5 year record breaking quarter.
Thank you, Randy. I agree, 7.5 years was a long time ago. We kind of give you some reflect back to what was going on 7.5 years ago. That's when the Navy SEALs killed Osama Bin Laden. Ben Bernanke said in the 2011 economic growth has been weak in recent months, and he would not speculate as to when he would discontinue the Fed's monetary stimulus.
You remember QV? Herman Cain announced for President. You remember Herman 9999. Mitt Romney announced for President. Andy Rooney retired from 60 Minutes.
The Dow had its worst week in 3 years, falling 6.14% as recession fears grow and Bank of America laid off 30,000 people. Well, it seems like a long time ago. And after reflecting back on those times, it makes present times, however tricky, certainly much better time to be in the banking space. CEO, Tracy French walked up to me last week and commented, you know, boss, he said it's a good time to be in the banking business. We're making a ton of money, almost $230,000,000 the 1st 3 quarters, and this is our Q1 ever to earn over $80,000,000 He went on to say that if we continue at this rate, the company will earn $300,000,000 plus this year.
Well, that's right. And that's good enough for me. I just want to give you a report on buybacks. The company so far, we knew we're having a good year. We thought we'd buy the stock back.
We bought back 2,165 1,731 shares so far this year. Q1, we bought 303,000. Q2, we bought 345,000. Q3, we bought $1,214,000 and in October alone, we bought $302,000 If that's on sale, we're going to buy. My comment during the Q4 earnings release was that home was teed up for a power year, and that's exactly what is happening.
We saw it coming. The $80,000,000 quarter was even stronger than it appears when you realize that this was the Q1, full quarter of Durbin. Coupled with the Q1 of Home2 dollar expenses, those expenses equated to about 3,700,000 dollars So in addition to having record earnings, we swallowed those expenses or swam upstream, as I say, set on the road. Payoffs continued to dull loan growth. Average, not for a lack of loan origination, Home had record loan originations of 9 $87,000,000 for the quarter, with the legacy footprint accounting for 84% of that total.
If we've not had the payoffs in the last two quarters, we would have booked $1,900,000,000 that's $1,000,000,000 by the way, in loan and Home2 dollars would now be a reality and not something in the future. That's how close we are. Payoffs for the quarter. The bad news is New York had $400,000,000 of payoffs for the quarter. The good news is, is they made a lot of money when they get payoffs.
The strong profit took a little edge off of the payoffs. I thought, well, I don't like the payoffs, but the profit was very good. If you remember the life of CFG loans, it's about 36 months. Therefore, about a third or $500,000,000 will pay off every year, but we didn't expect it all to pay off in 1 quarter. However, New York's pipeline is they have about $300,000,000 in the pipeline.
They were down about $175,000,000 in loan totals with the big payoff, but as I said, they got about $300,000,000 in the pipe. The good news is that legacy had a good quarter and legacy was up 108,000,000 dollars Pretty proud of that. Everybody seemed to pitch in and do that. We ended up down about $60 plus 1,000,000 for the quarter, but it was a great quarter. Let's talk about earnings.
3rd quarter earnings were up 5.6% on a linked quarter basis or 72.8% year over year. That's adjusted for the $33,600,000 hurricane loss in the Keys hurricane reserve in the Keys and emerging expenses of $18,200,000 We had record earnings of $0.46 a share. Revenue was up $11,700,000 or 6% on a linked quarter basis and revenue year over year is up 60% and revenue for the 1st 3 quarters of this year is up 60%, pretty consistent. Listen to these numbers. Return on assets on a linked quarter basis was 2.14 for this quarter and 2.13 last quarter on a linked quarter basis.
Is that consistency? Return on assets for the first 3 quarters of this year of 2018 was 2.12. So that's pretty powerful earnings compared to last year, 2017, at 1.82%. But remember, you got to add back to that the $33,600,000 in hurricane reserve and the $18,000,000 in merger expenses. Return on tangible common equity on a linked quarter basis was 24.56 this quarter and 24.27 on a linked quarter basis.
That's consistency again. Return on tangible common equity for the 1st 3 quarters this year was 24.39 and versus last year at 15.06, but that again has the $33,000,000 hurricane reserve and the $18,000,000 emergency expense. Margin, let's go to margin. Someone said you can't I don't believe you can maintain your margin. Margin held up a little better than we anticipated.
It was down only one basis point to 4.46 versus 4.47 on a linked quarter basis. Margin year over year was up 6 basis points from 4.40 to 4.46. You remember Shore Premier was to be dilutive to margin by 3 or 4 basis points. But because New York's great quarter and a starting trend of increasing loan rates higher excuse me increasing loan rates higher into the legacy portfolio, we'll be able we have been able to keep our margin basically flat through the quarter. Asset quality remained excellent.
Our management team has been with me and myself. We've been traveling all over the country during the past several months, visiting investors, both existing prospective shareholders. I just thought I'd share some of the insights of the investor sentiment. The pessimism about banks is, I think, way over the top. We've seen worse times in this industry.
But here's some examples of some of them. Some of them are almost comical. Interest rates are going up and that's good for banks. Interest rates are going up and that's bad for banks. Banks need loan growth.
These are dangerous times for banks to have loan growth. If they're having loan growth, they must be doing something wrong. Cost of funds is going up and there's no way you can keep up with that on loans. Asset quality must get worse because it cannot get better. If you raise your rates, you must be getting adverse election.
You need to raise your rates to outrun the deposit beta. You're going to trade away the Trump tax gift. We must be in the last innings of this economic cycle. Again, when you listen to those things, everybody is looking for something. I don't know what their the market is pretty good, bank is pretty good, but everybody appears to be looking for something.
Even with the non bank competition for loans, the daily battle to increase spreads, regulatory environment with escalated M and A prices making acquisitions very difficult for disciplined acquirers, I'm sorry, those with strong business experience that have been here before will weather this situation and good operators will look back favorably on these times. Keep your good people close, shuck your weak ones, work hard, nobody said it would be easy. When our company continues to perform as it has, as Randy said, 30 consecutive quarter record quarters in a row with a 4.46 margin, a 37% efficiency ratio, a 2.14 ROI, increasing revenue, record earnings, expense control, fair dividend payout, fast capital growth, over 24% return on tangible common equity, a very experienced management team and a good probability of earning over $300,000,000 this year. Tell me what's wrong with that. Even if the drivers of the economy are beyond our control, we'll be fine and we'll continue to be one of the best as we have for many years.
Our performance ratios have always been best to class. Forbes ranked us the best bank in the country of all banks last year, very nice compliment, but this year's performance is much better than last year. We may not be the best bank in the country, but we're damn sure in the top 5 of all banks anywhere, and we'll continue to be there. I want to thank you for your support and tell you how much we appreciate it. Your Honor, I'm asking for summary judgment here.
I rest my case. Cole, we're ready for questions.
We will now begin the question and answer session. And our first question comes from Brady Gailey with KBW. Please go ahead.
Glad to hear everybody is doing relatively okay down the Panhandle. I know that was a doozy of a storm. Maybe we can start just with CFG. I know that can be volatile like we saw this quarter with some payoffs. But how are you thinking about the growth of CFG from here?
Well, I don't know about I don't know if I like volatile. I think I like lumpy. I think Chris is with us on the phone. And Chris, are you with us?
I am. I am. Thanks.
Hi, Brady. Yes, I think the way that we usually think about the business is month to month, quarter to quarter, it's tough to sort of project whether or not you'll be up or down. We look at it more on a rolling 12 months basis. I think even after this quarter with the significant pay downs, if you look at us on a rolling 12 month basis, we're up 20%. So I think there's nothing that happened this quarter that makes me think differently about whether or not our portfolio will grow over time.
And then I know you all mentioned in the press release how you're opening a new LPO in Dallas. Is that a CFG thing or is that a legacy home office? Chris, go ahead.
Yes, thanks. So yes, that is something we're managing. There's only 2 things that will do for us. 1 is very similar to LA. It gives us access to maybe a couple of different customers that we're not calling on today.
The other gives us a good access to a high quality talent base. But a little bit to your question too about whether this is a CCFG thing or a legacy footprint thing. The real answer in Dallas is probably both. There are some capabilities that we have in our group that can be shared, I think, well with legacy. And we have been doing that on a limited basis over the last over the past year.
I think we'll use Dallas as an opportunity to formalize that a little bit. And so some of the work that we'll be doing out of Dallas will be to support the legacy footprint, in particular on some transactions that might look a little bit different than ours, but certainly require some of those capabilities.
All right. And then Johnny, you mentioned the buybacks, which ticked off in the Q3. If you look at where your stock's at now, it's even cheaper than what we saw last quarter. So I mean, should we think about you guys being fairly active on the buyback going forward too as long as the stock stays as cheap?
I would think so. I don't see any reason for us to change that. We have authorization. We may have to go back to well and get additional authorization, but we can get that. So someone asked me on the road originally, he said, are you spending your capital buying stock?
And I said, we didn't spend any of our capital. They said, well, I thought you bought back $45,000,000 worth of stock. And I said, that's Donald Trump's money. That's what he gave us. So we spent a lot of Trump's money.
We haven't spent any of ours yet.
And our next question comes from Stephen Scouten with Sandler O'Neill and Partners. Please go ahead.
Hey guys, good afternoon. Good afternoon, Steven.
I think I appreciate a lot of what you're saying in the sense that you can't really control investor sentiment and I totally agree with that. This has been kind of a brutal tape we've been dealing with for the last month or so. But I'm curious with the capital that's continuing to build, you obviously just spoke about the buyback. But what other things do you think you'll start to investigate with the capital, whether that be know we've talked previously about TRUPS or the sub debt or are there any other things you might explore today, given the different opportunity sets that are out there in the investment community view of them?
Well, it's just more accretive to us to buy back stock at this point in time. They're getting me so pessimistic at the street as we've been traveling so much. I'm thinking we better be like the squirrels store nuts for the winter because it must be a hell of a storm coming here sometime before long. So or for the entire banking industry, it looks like. I mean coming back from the road, it's just amazing how pessimistic everybody is.
And then beginning to make me a little pessimistic. Again, we don't see it. We don't see it in our footprint. We don't see the crazy deals. We don't see the flippers.
We don't see the school teacher with 6 houses or the stripper with 4 condos. So it just doesn't exist. I mean, I looked this morning as I walked my dog, there was not a rush behind any of my trees in my yard. And I went around them twice. I just thought they might be quick.
But for some reason, somebody thinks it's just rushing behind every tree. So I think I'm going to go duck hunting for a while. So even you just come up with There you go.
There you go. Sounds like
a plan. It's about that time of year. It's about that time of year. Oh, gosh. Yes.
No, I agree. I think I mean, correct me if I'm wrong, I mean, but you're not really even seeing any signs today of any credit weakness, right? I mean, it feels like everybody wants that to be coming. But to me, it feels like that's more of a 2020 event at the earliest right now. I mean, are you seeing any signs of weakness across your footprint
yet?
We are not seeing any signs of weakness. I mean, what if it doubled? I mean, so what? I mean, if it doubled and margins got squeezed and we only made instead of making $310,000,000 this year, we make $295,000,000 It's really just pretty amazing to me when I shake my hand. But I don't think our people Kevin, you've seen anything?
No, we're not seeing anything in any of our markets that gives us concern from an asset quality perspective or from a market perspective. Yes.
Tracy, do you hear anything? Yes, sir. Tracy is not I mean, we ask let me tell you something. You talk about some of my biggest part of my worth is and these people around these staples were tied up in the stock. We're constantly asking the question.
So we're looking for it. We just don't see it. I mean, even the keys, I probably overkill the keys, may have. We're not out of the woods yet, just like Marathon. Burger King, Wendy's, Pizza Inn, Winn Dixie, 4, 5 of the big chains have not opened back up.
It's just strange. It may just be they don't can't hire the people. Maybe they're fighting with whether it's wind or flood in the marketplace to get their insurance, but they haven't opened back. But our pass throughs are great as you can see. So we may get through that.
The Keyes people are extremely resilient and they're not standing there with their hand out when the storm goes through. They're going to get a shovel to try to get the sand off the beach or get the sand out of their house. So far so good. We're hopefully, we didn't lose anybody. Good news is our people are healthy.
We didn't lose anybody in the key, so I mean in the panhandle.
Right. No, that's great. And maybe one last one for me. Just on the loan origination side, I mean obviously $987,000,000 originations is phenomenal. It's up quarter over quarter, which is great to see again.
But obviously, net loan growth was still down with the pay down activity. Are you seeing anything as you forecast out your portfolio maturities, expected pay downs? Are you seeing any inflection point where we might see a lessening of the pay down activity and see more of this more of these originations actually stick to the balance sheet and show net growth? Or I guess can you speak to that in any way?
I can speak to it. That's a crystal ball. That's just I wouldn't have ever I mean, I would have lost my house and my boat and my duck club. I would have bet against that. I just can't believe the amount of pay downs that we've experienced in the marketplace.
They will slow down. I read some today where they're anticipating a slowdown, but I really hadn't seen the inflection point. We have as I said on one call before, we have a slow pay down quarter one of these times, and we're going to be up $400,000,000 $500,000,000 and they're going to say more homes taken off, and it's strictly a matter of paydowns.
And even I think it's the same story as we've said in the past. We do watch our payouts and there's a lot of credits that we make that we know are going to be paid off at a certain time. Over the past 15 months, naturally those have come in and paid off a little bit earlier than normal. So use an example of the construction loan that we shared with you in the past. Construction loan gets actually gets paid off before completion and they get to borrow a little bit more money out of it, no guarantees and those type of things.
So we've always projected those in the past, but thinking we'd keep them on the books for another 9 months to 12 months for now they are getting paid off a little bit quicker. And that's still happening today.
Yes, yes.
Okay. Aren't you seeing it everywhere, Steven? Everybody's having the payoffs?
Yes, 100%. We're starting to hear some commentary that folks feel maybe early 2019, they see some of that abating, but I don't know. I mean, that feels like wishful thinking at this point, but I'm hopeful.
Well, it's hard to predict because you can look at the ones you know are going to pay off, And then suddenly, somebody brings a new you kind of get your totals and you're running that you're rolling a forecast of what it looks like for the quarter. And that is probably the hardest thing to manage I've ever seen because you got suddenly somebody comes in with a good $50,000,000 loan and you do that and somebody sells a $200,000,000 property or $100,000,000 property and you get a payoff. So it's like riding a wild bull.
Yes. No, understood. Well, congrats on the $80,000,000 guys. Quite a accomplishment.
Thank you. Well, we're proud of it. Thank you.
And our next question comes from Jon Arfstrom from RBC Capital Markets. Please go ahead.
Thanks. Good afternoon.
Hi, John.
Hi, how are you, John?
Good. Doing well. Just a question on sentiment. You talked about investor sentiment and I agree with you on that. But any have you guys seen any changes in borrower sentiment one way or the other?
No. No. I mean, you mean negative, John, or
Negative or positive, either way.
No, it's the same. It's pretty much the same, dollars 900,000,000,000 with loan originations last quarter. We've seen we really haven't seen any change in sentiment. Just one of our big borrowers today, Tracy and I went down to Sarasota back 2 months ago, but we generate somewhere around $50,000,000 in loans out of that trip, and that's coming to fruition. It takes a while to get it all put together, but I just stopped at 1 of our big bars today, and he's got some more projects he wants to talk about.
He said, I'll come see you all or you all come back to see me. So I think we're going to take a crew down and visit with him for 2 or 3 days in the Sarasota area. So I asked him, I said, what impact? We were talking about at the Board meeting the other day, did the impact in the Panhandle, what was he going to do to Sarasota? And he said he was 100% full last week, and he'd never been that full ever.
So people who he said some of the people were from the Panhandle that said we might as well get out of here. So they went to Sarasota on vacation and some people are going to vacation, just switch from down there over to Sarasota. So he said this is a slow time of the year and he said business is good, really, really good. So business is good in the Keys, particularly in Key West. South Florida has been good.
Panhandle was great. It won't get blown away. And you know what that will be. That will be one heck of a building boom that will happen in that market. I think that will be a pretty good boom for us for years to come.
But you do need to remember that the Swaddlers storm did devastate Mexico Beach. That side of Panama City is named the forgotten coastline and it's not the heavily populated tourist area of the Panhandle. The Panhandle from Panama City Beach on back to Pensacola was basically untouched. And so I talked to a lady staying at my house last night and she said there were people out on bicycles, the restaurants were full, the restaurants are struggling a little bit with workers, but outside of that, that things are really kind of back to normal. So that area where all the tourists goes and all that traffic goes, again from Panama City Beach all the way to Pensacola and farther is as it was.
And you're going to still see people coming down there and it's going to be packed.
Okay, good. Okay, that helps. Brian Davis, give us a little bit of help on the puts and takes on the margin. You talked you guys talked a little bit about the fees from CFG. Give us an idea of what that was as well and maybe a starting point?
Are you doing good? Are you doing good?
Hey, John, this is Steven. I can take
a part of that. Steven has got some information. I'm all asking Steven.
I think Johnny talked in his comments about some of the tailwinds, I guess, we had from the New York payoffs and some of that, obviously a portion of that was all revenue, some of that was in margin, some of that was in fee income. I'd say that kind of the general takeaway, one is some of that will continue in future quarters as we mentioned, you would expect some of that to be a little bit lumpy, I think was the word we used. But I think the general takeaway was trying to normalize for some of that. We're seeing legacy yields begin to pull up. We had a good quarter a good month in September from a renewal standpoint.
We had all our group together in July and began to see the fruits of that in September. So I think legacy group certainly will continue to pull up in the future. I think trying to normalize for what we saw from New York, where we guided, I think, at the Q2 call with the impact from shore was where we landed in the low 4 range.
Yes, we were I think I had said 3 to 4 basis points dilution. Stephen had told me that he had calculated almost 7 basis points dilution. So we started it, when you think about it, John, when you can't get loan growth and you're about a sufficient bank as there is in the country, so how do you increase profitability? And this reflected back to the things that we did in 'eight, 'nine and 'ten, we increased rates. And we deserve to have a rate increase and all banks should be pushing up rates.
So we've started pushing up rates and that when we had our Home $2.50 Home $2 meeting in Miami, we talked about pushing up rates and the trend has started and it didn't it took about 6 weeks and then it started kicking in and the trend has kicked in. So it's I think we're going to be able to push up rates. I had to draw a picture of John on the board, I had to draw a picture of a 6 when I was at the meeting because nobody had ever seen a 6 and I drew a 7. They had never seen one of those. So I said, those are what you're going to be looking for, 6s and 7s.
And I said, get a good picture of that because I said, that's where we're headed. So we're seeing 6s now. I haven't seen any 7s except Chris' group, but we're seeing 6s. So overall, it's pretty good. It was actually better.
CFG kicked in their income kicked in a little stronger for us. It helped hold the margin in. And then we are starting the trend of moving rates up. And that is working by the way.
Okay. Okay, good. Thanks for the help.
You bet. Thank you.
And our next question comes from Matt Olney from Stephens. Please go ahead.
Hey, thanks guys. Good afternoon.
Good afternoon, Matt. How are you?
I'm well. Thank you. I appreciate the update. I think a lot of my questions have been addressed, but I wanted to go over to fee income. Fee income looked pretty strong, especially with Durbin income coming out.
Can you just quantify that amount of Durbin? Was there anything else unusual in fee income? I think Stephen referenced some of those fees. Did some of those fees come into the fee income or were those all mostly in the interest income?
No, I'll take that one. Hey, Matt. If you look at other service charges and fees, it's down $750,000 from $9,800,000 to $9,000,000 The impact of Durbin is sitting in that line item. It's down just a little over $2,800,000 for the quarter when you compare Q2 to Q3 for the Durbin impact for interchange fee income. So you're kind of might ask the question, why isn't the other service charges and fees down more than that?
And that's because that's where the other fees from CFG is hitting for these payouts for the exit fees and everything there and there's approximately $2,000,000 of that came in this
quarter. Got it. Okay. That's That's probably
going to be a reoccurring item as Chris has booked. You want to comment on that, Chris?
Yes. This is I mean, in some level of that is recurring. I mean, the portfolio is we've been here 3, 4 years now. We have a sort of a steady stream of loans that will exit or pay off. And we anticipate that and we do design our loans so that we get we make money when they're outstanding, we make money when they pay back.
Some of that comes into the fee income line. So it may be elevated in certain quarters, but a good portion of that will continue. We've continued to see that going into this quarter as well.
And just for example, we're barely into the quarter, a little over half a month and they already have $1,000,000 that they have booked and is already on the ledger for a loan. I won't give the name of it, I was about to, but they have one. It's got almost $1,000,000 of this fee income.
So it's become a budget item with Chris. I think he's budgeting $4,000,000 to $6,000,000 a year for those events.
And that ties back to some of the expense increase that we saw, Tayo, if we've talked about that yet, but there's a corresponding payout, incentive payout on some of those fees that are collected back. So it doesn't all flow to the bottom line.
Yes. The expense actually, the total expense increase this quarter pretty much was the payout fees for the exit fees for his people.
Okay. That was my next question as far as on the expense side as far as kind of why the jump. And John, you're saying it was pretty much the exit fees from some of those correlating fees. Is that right?
Yes. Matt, I'll give you a little more color on that. I mean, for example, the salary employed benefits is up $3,300,000 CFG has got increased compensation expense from acceleration of FASB 91 because some of the payoffs were early. They've also got some incentive comp that was paid out and that's $1,800,000 of that $3,300,000 increase in salary employee benefits. Then you throw in the fact that we started our Home2 dollars program.
It was not started on July 1st, but it was started in July. It's running about $330,000 a month and for the month for the quarter of Q3, we booked $781,000 of expense dollars Also, we acquired Shore Financial on the last business day of Q2 and their salary and employee benefits for Shore and that's $240,000 and we booked our salary and employee benefits expense on a daily basis There's one extra day in Q3 and so that's $379,000 And if I add all that up, that accounts for $3,300,000 of the $3,349,000 change in the salary employed benefits.
And so Brian, when I think about the next few quarters, it sounds like most of, if not all of that jump will continue in the run rate. Is that fair to say?
Well, if you've got the corresponding revenue on the top from CFG, I mean, we don't want the loans to pay off, but we sure do like the additional noninterest income that comes along with it. So there could be some continuation of the acceleration of FASB 91 and the compensation expense. But Shore is in there for a full quarter and Home $2 was $7.81 for this quarter and it will be probably
closer to
$9.70 So there might be another $200,000 for the Home2 dollars And that's just kind of a flat expense, the Home2 dollars I don't view it going to bounce around much, at least for the short term, which when I say short term for the next year, we've got it on a 7 year amortization and right now it's straight line. And if it looks like that we might hit the $2 run rate quicker, we might have to accelerate it. If we are going to hit the $2 run rate a little longer, then we would probably decelerate it.
Got it. Okay. That's helpful, Brian. Thanks, guys. I appreciate the color.
You bet.
And our next question comes from Joe Pantgin from Hovde Group. Please go ahead.
Good afternoon, guys.
Hi,
Joe. Hey, Johnny, I know you've talked about the stock needing to be higher for you to consider deals, but the group's pulled back here too. So your comments still apply, just an update on that or are there a few one off opportunities that you see on the M and A front even with the stock price where it
is? Well, if it's a private bank, they still think their baby is worth 2.5x or 3x book. The problem is they don't if they're private, they haven't seen the adjustment in their stock price like all the rest of us public companies have seen the adjustment. So I'm not sure they're aware. It's going to take a couple of nice reasonable trades in the marketplace to get us back in the game.
I mean, we're trading at what, 2.7, 2.6 today times tangible. The problem is that we're running at 2.12, 14 ROA and we're trading it either we're underpriced or they're overpriced, so something's got to give somewhere in the market. It will straighten itself out at some point in time. But from a straight M and A perspective, we might look at something on the that can help us on the liquidity side at some point in time. You know we've looked at one forever, 6 year and a half, we've looked at it.
We may get more interested in it. But if the payoffs continue to come the way they're coming, there won't be any need to have additional
liquidity. Okay. That's helpful. And then maybe for Kevin Hester too and Johnny. But with the payoff activity generally, if you were to generalize it, is it the smart money you think selling from purchases maybe they made during the downturn, maybe just take this money off the table, is it higher rates?
Just sort of anecdotally, what are you seeing and hearing in terms of these borrowers that are paying down or paying off? Is it really just all over the map?
It's mixed. I mean, some of
it is the fact that you got a pretty good size construction book in the legacy footprint that moves on a quarterly basis. And then you've got rates going up and so there are people that are trying to lock in and get some fixed rates for the future. So I think it's a mixture of a lot of things.
We're actually trying to what are the numbers on construction, 89?
Yes. The CRE numbers are 89 in the construction bucket and 2 97 in the overall bucket. So we're staying right in there at that same number we've been at the last 2, 3, 4 quarters.
That's not we really wanted we're planning on going above that, but we can't get above it. We're swimming we get up a little bit and we get knocked down. We get up a little bit and we get knocked down. So we got approval to go much higher than that.
Okay. And then last one for me, guys. Johnny, these credit concerns that people have that maybe were at the end of the cycle, your loan to value in that commercial real estate book, I think if I remember is in the upper 50s. So even if there is a setback in real estate and the economy just seems like it's difficult to see a scenario where people with a book like yours get burned in a material way. Is that fair?
Or I mean, were you even taking losses at those types of LTVs in the crisis years?
Well, we had as you know, we bought more failed banks than anybody in Florida. We liquidated $1,000,000,000 worth of assets in that market, bad assets, and we didn't have 5 loans go below $0.50 on the dollar. So the last 5 or 6 years, home has pushed leverage down, down, down to the point where 57% loan to value, pretty happy with that. That's a pretty good place to be. I think that's a great position for our corporation to set.
If we have a downturn, I don't think it will be anything like the last downturn. The regulators want to blame construction for all the downturn last time. It had a thing to do with construction. It had only to do with the amount of equity that was put in construction because there was no money in construction deals, none. I'm talking about 5% or I saw people draw out 105% on deals.
I just remember those days, Randy Sims would say, well, I can get it for nothing down. That's when Randy tried to us 10%. Can you get them done? I don't know, give us 10, Johnny. They got it done for nothing over here.
So what happened during those times when it the problem arose, they just pitched the keys because they didn't have any money in the deal anyway. It is totally different. Let me tell you, that ship left the port a long time ago and it is a totally different world today. There's money there's lots of money in these deals. It'll be a different cycle this time.
It may be a bump along. There may be some people getting some trouble on the construction side, but the regulators have pretty much pushed everybody into C and I and owner occupied. And I'd be keeping my own C and I. I think that one is really getting frothy.
Okay. And then, Chris, just, I guess, last one. Any sort of general comment, not necessarily on your own book, which is obviously performing really well, but just any general comment on kind of what you're seeing more broadly in the real estate market in New York?
No, I think it's been pretty low volatility for some period of time now. You see a little bit of pockets where the rental multifamily might be under a little bit of stress, but nothing significant. Supply is coming on. It's getting absorbed. It maybe takes a little longer to absorb.
But in general, it's a really healthy economy here in New York. People are working, people are making money, wages are up. So whenever you got people working and wages are up, the real estate tends to do pretty well. We see a pretty benign environment right now. And I think it's been mentioned a little bit before too.
We also aren't seeing banks reach. And so I think that's been helpful too. So we haven't reached and we haven't seen a lot of people reaching. So I think the good deals are getting done and we're not seeing a lot of the dumb deals get done. And right now it's just sort of a nice little period of time where I think things are going pretty well actually.
And our next question comes from Arren Cyganovich from Citi. Please go ahead.
That's pretty good, Cole. You did that name pretty good. Yes, it was pretty tough. How are you, Arren? Very good.
Thanks. So on the deposit side, you as well as many banks are seeing those costs increase a bit. Can you just talk about the competitive environment there and some of the efforts you've been doing to kind of grow in your legacy footprint a bit there? Well, Stephen, you want that one or I can take that one. We primarily with 3 deals and you've heard the story, but I don't know if the streets heard the story.
We have an Internet bank called giantbank.com We have about $100,000,000 in. That is our Internet bank for us and it has a throttle on it and you turn it up and get all the money you want. It's just expensive. That's one initiative that we set out on. The other initiative is Kelly Buchanan is our new deposit czar and she is working with the branches to generate deposits.
We were down about $100,000,000 last quarter. I don't know, does average balance is down $100,000,000 or was that just last total? That was in the period. End of period was down $100,000,000 We can be up or down $100,000,000 at any time. So that's going okay right now.
I'm not sure how well that's going to work, but we're giving it a whirl, see how it works. And the other initiative is, Donna, you want to take the last part of that deal? We got the deposit accounts, those accounts, we got new accounts.
Yes, we have some new consumer accounts that we are opening. We've had one out for about 30 days. We've got about 1600 accounts in that so far. Also just working with our lenders and getting them to ask for the deposits as well as the branch side to ask for the deposits.
And the third leg of that stool is that we've had our eye on a bank for a long time to go try to put a deal together on and it's in the deposit rich area and their deposits have not risen like ours have. And they don't have the I don't guess they have the pressures that we have, that the rest of the industry have. We're not running CD ads. We've never run a CD ad in years. Years ago, we ran them, but we haven't run 1 in 10 years.
We don't run CD ads. We don't react to that. We don't panic. We just one off the transaction and we got plenty of federal home loan borrowing. In the Shore deal, we just pulled up federal home loan borrowing, paid it off and went out and got the money for it and paid off Federal Home Loans.
So that's how we're doing it.
Aaron, this is Steven. I'll take the back half of that. And I think what you saw in the quarter here, there was a lot of seasonality to some of the deposit flow, particularly in Florida. We are talking with our division presidents, regional presidents on a daily, weekly basis and the Panhandle and some of the Southeast Florida area may have seen some declines linked quarter, but still show some really strong increase quarter over quarter. So I think we're still pleased with the approach that everybody's taken there to grow the base.
Great. Thank you.
Thank you.
And our next question comes from Michael Rose with Raymond James. Please go
ahead. Hey, guys. Good afternoon. How are you?
Hey, Michael.
So I guess my question is, so in talking with larger banks and our BDC analysts and others in the industry, it seems like pay downs are going to be structural in nature. There's a lot of capital out there. So I guess my question really resides in you guys are about 10% of assets in your CFG portfolio. I know the goal is 15% or at least that's the cap. So I guess my question is, how can you guys actually grow this portfolio?
And then, I mean, does it really make sense to grow? And should you just actually take the capital and just buy back literally as much stock as you can? It seems like that may be the better trade off at this valuation level. Any comments would be appreciated. Thanks.
Michael, this is Steve. I know we've got Chris on the phone. I mean, I think he gave some comments early in the call just about what we would expect what he has seen in his long history of doing this and then what we've seen over the last 3 or 4 years that you're going to have some lumpiness or cyclical nature to the payoffs of the portfolio, but that over a longer term, you're going to see 20 plus percent in growth. And I think at least from our perspective, the way the deal flow he sees and the way that they structure credit that we we're not going to push a rope as we've always said, but I think we would continue to like to see Chris grow his portfolio at the pace that he has in the past.
I don't know that we have to. I'll let Chris talk about New York. But if you can't grow, it may not be a good time to grow. Grow. I'm beginning to believe that maybe the world thinks if you grow, you're in trouble.
And if you don't grow, you're in trouble. But if the pay down slow down, I mean, we've done over $1,900,000,000 in originations the last two quarters. If you need to grow, if we have a slowdown in pay downs, that's going to jump. I'm with you though. I don't I can't say that we're going to see a slowdown.
I don't know if we're going to see a slowdown on the pay downs. So if you can't grow and you're going to kind of tread water, so how do you increase profitability and that's moving rates. So we deserve I mean, if you roll along 5 years ago at 5% and it renews, to be fair, we ought to get $6.75 Well, they're trying to everybody's trying to come back and ride at $5.5 or $5.25 That's not really reasonable. We really deserve $675,000,000 So we're trying to push it. If the rest of the market will follow, I don't know.
If the rest of the market wants to give away the Trump deal, they'll give it away. But that's what our objective is right now, and that trend has started working for us. So I have given up on the fact that we may not be able to grow as fast as we anticipated growing or may not be able to grow. But that's okay. That's our tool.
We're going to make a lot of money. We're going to make $280,000,000 to $350,000,000 a year. We're going to sit here and clip coupons with that until it turns. And when it turns, it will be our turn. We'll be in good shape.
And if there is a cycle, if there is a downturn in cycle, we'll have lots we got lots of capital, we'll have lots more capital. We'll be in a great position to we knocked it out of the park in the last cycle when it went down. I suspect we'd do that again.
Well, Johnny, I think that's the point, right? I mean, you guys are growing. I mean, that's great, but you're growing in a lower multiple business. I think Ozark is a really good case study as to what the market's going to pay you for growth in that business. And I think it's a fantastic business and I completely agree with everything.
But from a credit perspective, the market is not assigning you any value for that. And if the other portfolios aren't really growing, I mean, why not just buy back as much stock as you can? I think that's the real question. I mean, you guys are 27 of tangible. I mean, what do you guys do to sustain and potentially grow that?
I'm not trying to be argumentative, but I mean, why aren't you guys buying back as much stock as you can if you can't if there's no attractive acquisition opportunities at this point? Well, we did. We acquisition opportunities at this point?
Well, we did. We bought a lot of stock the Q3. That was we stepped it up because the price continued to come down. But I don't know where the market is. I don't know where the market thinks we ought to be.
If the market thinks we ought to be $17 or $18 then I guess we need to let it we don't need to waste our money till it gets to be $17 $18 I don't need to be if I'm if somebody is so frigging negative on the market and on the banks and don't want to pay for the performance of this corporation, New York is 10% or 11%, you're right. It's a great business. They've never had a loss for us. You can call it what you want to call it, but most banks do similar things to what New York does. They just do it in New York and do it on a different scale.
And they're better underwriters than the rest of us are. But the truth is that they don't do much any different than what we do. So to value that business for less, I don't get that. I don't understand that. That makes absolutely no sense to me.
So how many companies are running a how many companies you got run the 2.12 ROI and a 37% efficiency ratio and a 24% return on tangible common equity? How many you got?
You. And I think that's the point. I mean, I think investors are looking for progress.
That's my point. Exactly.
So as capital builds here and if you're not going to do deals, maybe because there's not opportunities or maybe it's not the right time, I mean, why don't you double, triple the buyback and just do as much as you can as capital builds?
Well, what came first, the chicken or the egg? We do M and A deals. If the market wasn't so stupid and prices where they price us and not give us credit for what we deserve, in my opinion, then we'd be doing deals. But I'm not going to dilute our shareholders. We are a very disciplined acquirer.
We're a very disciplined lender. We don't push a rope. We don't force loans. We don't force deals. We don't have return earn backs on tangible books.
I don't think anybody gives a damn. I don't think it matters to anybody anywhere if you earn $0.50 or $0.60 I don't think it matters in this market right now. I think it's so the world is so negative that it doesn't make any difference. So I agree with you. I mean, we might as well find out where the world thinks Home Bank share stock ought to be and then we ought to buy a couple of $100,000,000 worth of it.
Hey, Johnny, I completely agree with you. So I'm with you. Thanks.
Thanks.
And our next question comes from Brian Martin from FIG Partners. Please go ahead.
Hey, guys. Hey, Brian.
You got me fired up, so get in there.
Hey, I hear that, Johnny. Hey, just are you seeing any Johnny on the M and A part, just going back to the capital, I mean, are you seeing the sentiment at all change for the sellers? I mean, in particular, let's say, the one you're looking at or others, but I mean, the world seems to be changing. I mean, right now, it sounds as though they're not changing as of yet or they've not changed yet.
I don't think it we're going to have a couple of deals, Brian. I think we got to have a couple of reasonable deals. We've had what have we had, 4 or 5 crazy deals here recently and high priced almost 3 times book. We've had those deals going. So I think we got to have something I think we got to have somebody do a reasonable deal or 2.
I'm not selling the market down a little bit. You know as well as I do, I remember when I sold my first commercial bank years ago, I heard about 3 times book and 3.25 and end up getting 4.11x book. And I didn't have enough sense at that time to recognize the fact what I was doing to the buyer. It was all about how much money we got. It wasn't about what kind of what the structure looked like at the end of the day.
If you plan on selling your stock, it doesn't make any difference. But if you plan on being a long term holder, it's important what it looks like at the end of the day. And 5 year, you're in back to tangible book and 4 year, that's all bullshit. You know that and I know that. Whoever tracks that, nobody tracks that, nobody keeps up with it, Nobody stays up with it.
And what ultimately happens is it gets lost in the fog. I looked at one the other day. One of the analysts sent me it was their tangible book value 11 years ago and their tangible book value today. They were only down $0.02 over 11 years. So they've had a great run.
I mean, they've diluted themselves into infinity for their shareholders. So we're not going to do that.
Okay. I got you. And just maybe one for Stephen. Just Stephen, going back to the core margin for just a minute, I guess it sounds as though that the level we're at today on the core margin ought to be sustainable and maybe trending higher if you're getting the better pricing as Johnny is alluding to. Just kind of want to make sure I get that right given that funding costs are still rising.
I guess maybe just those aren't offset to the better pricing. So it's a modest upward bias is how we think about the core margin and just kind of confirming that the current level is a good starting point.
Yes. I mean, it's going to bounce around some. It will be like you said, I think lumpy is a good word. It's going to be a little lumpy depending on the timing and the amount of the payoffs that we see, particularly from New York with some of the things that come there, but even with some of the legacy payoffs and what gets accelerated from an origination fee standpoint. So yes, I think we like to look at it in that low 4 range on an adjusted basis.
Okay. And the yields on the new originations versus the payoffs, given that it was mostly New York, was it I guess was there less of a difference this quarter, I
guess less favorable or Yes, it was actually upside down this quarter because you had more 7% payoffs or 6.5% payoffs out of New York than what we originated. So I think we originated about 5.5. I think our the $700,000,000 was in the $5.5 range, which was okay. We really didn't start getting the benefit of pushing up rates and start to see 6s until the end about a month before the quarter was So we're seeing that. We're starting to see that.
And I don't mean they're all going to book, but I don't know if I we did approve one meeting, dollars 133,000,000 at 6 in the quarter and that got approved. So that was the best of the group that we saw. But our people are trying. I mean, they're really, really trying. Tracy had he said one basis point is $1,250,000 And Mark, one of our guys in the Keys had a loan we approved at $550,000 He got $553,000,000 on the first one and a quarter of a point.
And he came back with the guy who wanted to buy another property and we approved it $550,000,000 He got $588.5 So he's in the program. He gets it. That was the first one was $12.50 It wasn't a lot of money, but that at least it said he was trying to get a few extra basis points. And on the last one, it's much more money than that. So our team gets it.
We're pushing rates. We did that in 'eight, 'nine and 'ten and worked out well. We'll see if it works out well here.
Okay. That's helpful. And just last thing, the number of shares, you said you may up the authorization, Johnny, but just the number of shares remaining on the current plan or if someone would know ballpark where that's at?
Stephen may, who knows?
Well, I really think what Mr. Allen Stump, we've got ample shares outstanding that we can repurchase. I mean, it's probably 900,000, 800,000 shares.
We've got about 8,000,000 shares available for the partners, Brian.
8,000,000. 8,000,000, yes, wrong. But what we're doing is we're getting
some guidance from the Board each quarter on the dollar amount of shares that they would like to see us buy back each quarter. And I really believe that's what Mr. Allison was referring
to. Yes.
Okay. And then just last housekeeping thing, Brian, just for you, the accretion outlook going forward, any change from kind of what you kind of articulated last quarter or just kind of the similar type of level we're at now that you've got Shore in there and
the other
The accretion has been fairly flat the last three quarters and it's hard to predict without a crystal ball. For example, I mean, Shore did have 861,000 of accretion. So we're up 75,000 in accretion, but without Shore, we would have been down about $800,000 in accretion. The good news is that the payoff accretion, which was about $3,900,000 last quarter is probably $3,100,000 this quarter. So we really didn't we made a little ground there.
You've got to believe that it's going to continue to fall off. We didn't fall off this last time because of the Shore acquisition, but we still have over about $105,000,000 of income that can be that will and can be accreted into income over the life of the loans and weighted average life of those loans is about 8 years.
I got you. Okay. And last one, Brian, just on the housekeeping. You said that the add the additional in the fee income this quarter was about related to the CFG benefit and the pay downs was about $2,000,000 and then the expense was $1,800,000 Is
that the
Yes. Yes, that's correct.
Okay. All right. That's all I had guys. Thanks for taking the question.
Thanks, Bryan.
And our next question is a follow-up from Michael Rose with Raymond James. Please go ahead.
Hey, guys. Just one follow-up question. Just given your outlook, when do you guys think you can get to the home $2 assuming pay downs lay flat? And I guess what goes in assumption wise and your targets into hitting that target? Thanks.
About $600,000,000 worth of loans. It's about what it is, about $600,000,000 worth of loans. And we didn't anticipate writing the new credits at the level we're riding. We assumed riding the new credits. We assumed increasing renewals, the rates on renewals, but we didn't assume increase in the rates on the new credits as much as we've increased those and it took $600,000,000 worth of loans.
So as I said, when I laid out the plan to our people, I didn't anticipate it probably won't happen exactly the way I laid it out. It will happen some way differently than that. So we'd be there today on a run rate basis. We've been able to book the last two quarters' worth of originations. To me, that's how close we are.
They got to slow down at some point in time when they do. To tell you when we can get there, I can't tell you. But I can tell you, we would have already been there on a run rate had we booked our last two quarters of originations. Okay. Thank you.
And this concludes our question and answer session. Would like to turn the conference back over to Mr. Allison for any closing remarks.
Thank you for listening to me today and us. It kind of went off a little bit. When you run a company like this and you see how hard everybody works in the company and you think that they deserve better, but it is what it is and we'll continue to do what we've done next quarter as we've done in the past 30 quarters. We hope so, Randy. 30 quarters.
30 quarters, and we hope it will be 31, and we'll work hard to do that. Whether anybody gives a care or not, we'll do it. So anyway, thanks. We'll talk to you in 90 days.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.