Greetings, ladies and gentlemen, and welcome to the Home Bancshares, Inc. 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. 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 2018. 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, Cole. Good afternoon, everyone. Welcome to Home Bancshares' third quarter earnings release and conference call. Our regular management team has gathered with me today, and you will hear from them later in the Q&A. You have seen the press release on the front page has changed, hopefully to provide a better and quicker way to present our information. The change came from our new investor relation lady, who you all know, Donna Townsell . 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 adversity. That is what is going on in the Panhandle of Florida today. Leadership is what it is all about. We have been kind of struggling because the phone service, finding our people. We have actually physically been going out to their address to check them. I think so far we have 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. 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 of some of the great stories coming out. I know there'll be more, but one of our customers from Pensacola, Florida, Rick Olsen, purchased, loaded, and delivered two box 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 Haynes, his family and employees were in dire need of help. He said to Tracy, Dave, and me, "I can do it," he did it. The entire Home Bancshares family owes a real sense of gratitude to Rick Olsen. Thank you, Rick, from all of us. Hyam Nix is one of our people who went to the branch the day of the storm, along with Joe Again, and they rode 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-through without computer power in order to accommodate our customers desperately in need of cash.
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. We didn't have a computer, we just had cell phones. I'm told that she said, "I'm with you, I'll keep this line open as long as you want." By the way, I think he went two or three days without a shower, I'm sure he was proud to get a shower at some point in time. Another story comes from James Hosman from Pensacola. He's the president of our Pensacola branch, and April Bergeron.
Kind of hard to say, Bergeron, loan administrator from Pensacola, with the assistance of Sean Courtney Mack and Alan Davis, a senior officer from Destin, have been running an almost daily shuttle service to the devastated area, delivering supplies. James says, quote, "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 old Coca-Cola syrup barrels, and after cleaning them out, filled them with much-needed gasoline, and were delivering the fuel to our people in the damaged area, while asking me at the same time, "What else can we do?" Wow. I know there are many other people on the Homes team doing wonderful things, and I hopefully will have many good stories 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, he said, "Six and a half hours, 10 firemen, one banker in Mexico Beach yields a sack of cash." 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 him six hours to get in. The chief said, "Usually, we're breaking in a place to save a life, 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 terms, 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 with just drive-throughs, most of them are in full operational mode, a few of them need electricity. Did 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, may not, if we're lucky. We're certainly not out of the woods yet, the sky is much clearer. However, there's still a 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. First, I think our CEO of the holding 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. Yes, let's turn to 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 five grandchildren, and I threw out the 30 consecutive quarters of record income, and they all came up with the same conclusion. Seven and a half years. Some of them had to carry the two and all that, but seven and a half years. You have it from authority, 7.5 years. The youngest one, six years old, said, "That's a long time." 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? With that, let's go back to Johnny and hear about the great results from this 30th consecutive seven-and-a-half-year record-breaking quarter.
Thank you, Randy. I agree, seven and a half years was a long time ago. We kind of give you some reflect back to what was going on seven and a half years ago. That's when the Navy SEALs killed Osama bin Laden. Ben Bernanke said, 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 QE. Herman Cain announced for president. You remember Herman, 99,999. Mitt Romney announced for president. Andy Rooney retired from "60 Minutes." The Dow had its worst week in three years, falling 6.14% as recession fears grow, Bank of America laid off 30,000 people. 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 million the first three quarters, and this is our first quarter ever to earn over $80 million." He went on to say that if we continue at this rate, the company will earn $300 million plus this year. That's right, and that's good enough for me. I just wanted to give you a report on buybacks. The company so far, we knew we were having a good year. We thought we'd buy the stock back. We bought back 2,165,731 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. While it's on sale, we're going to buy.
My comment during the fourth quarter earnings release was that Home was teed up for a power year, and that's exactly what has happened. We saw it coming. The $80 million quarter was even stronger than it appears when you realize that this was the first full quarter of Durbin. Coupled with the first quarter of Home $2 expenses, those expenses equated to about $3.7 million. In addition to having record earnings, we swallowed those expenses or swam upstream, as I said on the road. Payoffs continued to dull loan growth. It's not for a lack of loan origination. Home had record loan originations of $987 million for the quarter, with the legacy footprint accounting for 84% of that total.
If we'd not had the payoffs for the last two quarters, we would have booked $1.9 billion, that's billion, by the way, in loan, and Home $2 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 N.Y. had $400 million of payoffs for the quarter. The good news is they made a lot of money when they get payoffs. The strong profit took a little edge off of the payoffs. I thought, "I don't like the payoffs, but the profit was very good." If you remember, the life of CFG loans is about 36 months. Therefore, about a third or $500 million will pay off every year. We didn't expect it all to pay off in one quarter.
N.Y.'s pipeline is, they have about $300 million in the pipeline. They were down about $175 million in loan totals with the big payoff, as I said, they got about $300 million in the pipe. The good news is that Legacy had a good quarter, and Legacy was up $108 million. I'm pretty proud of that. Everybody seemed to pitch in and do that. We ended up down about $60+ million for the quarter, but it was a great quarter. Let's talk about earnings. Third quarter earnings were up 5.6% on a linked-quarter basis, or 72.8% year-over-year. That's adjusted for the $33.6 million hurricane loss in the Keys, or hurricane reserve in the Keys, and the merger expenses of $18.2 million. We had record earnings of $0.46 a share. Revenue was up $11.7 million, or 6% on a linked-quarter basis.
Revenue year-over-year is up 60%, revenue for the first three 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 three quarters of this year, of 2018, was 2.12%. That's pretty powerful earnings compared to last year, 2017, at 1.82%. Remember, you got to add back to that the $33.6 million in hurricane reserve and the $18 million 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 first three quarters of this year was 24.39, versus last year at 15.06, that again has the $33 million hurricane reserve and the $18 million of merger expenses. Margin. Let's go to margin. Someone said, "I don't believe you can maintain your margin." Margin held up a little better than we anticipated. It's down only one basis point to 446 versus 447 on a linked-quarter basis. Margin year-over-year was up six basis points from 440 to 446. You remember Shore Premier was to be dilutive to margin by three or four basis points. Because of New York's great quarter and a starting trend of increasing loan rates higher into the legacy portfolio, we have been able to keep our margin basically flat for the quarter. Asset quality remained excellent.
Our management team has been with me, myself, we've been traveling all over the country during the past several months, visiting investors, both existing shareholders and 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. Here's some examples, 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 selection. 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's looking for something. The market's pretty good, banks 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&A prices making acquisitions very difficult for disciplined acquirers, 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, check 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 record quarters in a row, with a 446 margin, a 37% efficiency ratio, a 214 ROA, 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 million 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 in 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 five of all banks anywhere. 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. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Brady Gailey with KBW. Please go ahead.
Hey, good afternoon, guys.
Hey, Brady. How are you?
Good. Glad to hear everybody is doing relatively okay down in the Panhandle. I know that was a doozy of a storm.
Absolutely.
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 if I like volatile. I think I like lumpy. Chris is with us on the phone. Chris, you with us?
I am. Thanks. Hi, Brady. Yeah. I think the way we usually think about the business is month to month, quarter to quarter is 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 months basis, we're up 20%. I think there's nothing that happened this quarter that makes me think differently about whether or not our portfolio will grow over time.
All right. 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.
Yeah, thanks. Yeah, that is something we're managing. There's really two things that'll do for us. One is very similar to L.A. It gives us access to maybe a couple different customers that we're not calling on today. The other it gives us is a good access to a high-quality talent base. A little bit to your question, too, about whether this is a CFG 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. We have been doing that on a limited basis over the past year. I think we'll use Dallas as an opportunity to formalize that a little bit.
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.
John, you mentioned the buybacks, which ticked off in the third quarter. You look at where your stock's at now, and it's even cheaper than what we saw last quarter. Should we think about you guys being fairly active on the buyback going forward, too, as long as the stock stays this 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 the well and get additional authorization, but we can get that. Someone asked me on the road recently, he said, "Are you spending your capital buying stock?" I said, "We didn't spend any of our capital." He said, "Well, I thought you'd bought back $45 million worth of stock." I said, "That's Donald Trump's money. That's what he gave us." We've spent a lot of Trump's money. We haven't spent any of ours yet.
Got it. Thanks for the color, guys.
You bet. Thank you.
Our next question comes from Stephen Scouten with Sandler O'Neill & Partners. Go ahead.
Hey, guys. Good afternoon.
Afternoon, Stephen.
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. 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, I know we've talked previously about TRUPS or the sub-debt, are there any other things you might explore today, given the different opportunity sets that are out there and 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 that we've been traveling so much, I'm thinking we better be like the squirrel and store nuts for the winter because there must be a hell of a storm coming here sometime before long. Or for the entire banking industry, it looks like. Coming back from the road, it's just amazing how pessimistic everybody is, and they're 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 six houses or the stripper with four condos. It just doesn't exist. I looked this morning as I walked my dog.
There was not a Russian 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 there's a Russian behind every tree. I think I'm going to go duck hunting for a while, Stephen. You just come hunt with me.
There you go. Sounds like a plan. It's about that time of year.
Yeah.
Oh, gosh. Yeah, no, I agree. Correct me if I'm wrong, but you're not really even seeing any signs today of any credit weakness, right? 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. Are you seeing any signs of weakness across your footprint yet?
We are not seeing any signs of weakness. What if it doubled? So what? If it doubled and margins got squeezed, and instead of making $310 million this year, we make $295. It's really just pretty amazing to me when I shake my head. I don't think our people Kevin, you 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 marketplace.
Yeah.
Tracy, did you hear anything?
No, sir.
Let me tell you something. You're talking about something like the biggest part of my worth is, and these people around this table's worth tied up in this stock. We're constantly asking the questions. We're looking for it, we just don't see it.
Yeah.
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, the Pizza Inn, Winn-Dixie, four or five of the big chains have not opened back up. It's just strange. It may just be they 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. Our past dues are great, as you can see. We may get through that. The Keys 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.
Yeah.
Hopefully, we didn't lose anybody. The good news is our people are healthy, and we didn't lose anybody in the Keys. I mean, in the Panhandle.
Right. No, that's great. Maybe one last one for me, just on the loan origination side. Obviously, $987 million origination is phenomenal. It's up quarter-over-quarter, which is great to see again. Obviously, net loan growth is still down with the paydown activity. Are you seeing anything as you forecast out your portfolio maturities, expected paydowns? Are you seeing any inflection point where we might see a lessening of the paydown activity and see more of these originations actually stick to the balance sheet and show net growth? I guess, can you speak to that in any way?
I can speak to it. That's a crystal ball. I would've lost my house and my boat, and my duck club. I would've bet against that. I just can't believe the amount of paydowns that we've experienced in the marketplace. It'll slow down. I read something today where they're anticipating a slowdown, but I really hadn't seen the inflection point. As I said on one call before, we have a slow paydown quarter one of these times, and we're going to be up $400 million or $500 million, and they're going to say, "Well, Home's taken off, and it's just strictly a matter of paydowns.
Stephen, I think it's the same story as we've said in the past. We do watch our payoffs, 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. To use an example of the construction loan that we shared with you in the past, construction loan actually gets paid off before completion, and they get to borrow a little bit more money out of it, no guarantees and those types of things. We've always projected those in the past, but thinking we'd keep them on the books for another nine months to 12 months, where now they are getting paid off a little bit quicker. That's still happening today.
Yeah. Okay. Thanks for the color, guys.
Aren't you seeing it everywhere, Stephen? Everybody's having the payoffs.
Yeah, 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. 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. You get your totals, and 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 million loan, and you do that, and somebody sells a $200 million property or $100 million property, and you get a payoff. It's like riding a wild bull.
Yeah. No, understood. Well, congrats on the $80 million, guys. Quite an accomplishment.
Thank you. Well, we're proud of it. Thank you.
Our next question comes from Jon Arfstrom from RBC Capital Markets. Please go ahead.
Thanks. Good afternoon.
Hey, Jon.
Hi, how are you, Jon?
Good. Doing well. Just a question on sentiment. You talked about investor sentiment, and I agree with you on that. Have you guys seen any changes in borrower sentiment one way or the other?
No. You mean negative, Jon?
Negative or positive, either way.
No, it's the same. It's pretty much the same. Nearly $1 billion worth of loan originations last quarter. We really haven't seen any change in sentiment. Just talking to one of our big borrowers today. Tracy and I went down to Sarasota about two months ago. Thought we'd generate somewhere around $50 million 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 talked to one of our big borrowers today, and he's got some more projects he wants to talk about. He said, "I'll come see y'all, or y'all come back to see me." I think we're going to take a crew down and visit with him for two or three days in the Sarasota area.
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 it going to do to Sarasota? He said he was 100% full last week, and he'd never been that full ever. 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 and vacationed, and some people are going on vacation, just switched from down there over to Sarasota. He said this is a slow time of year, and he said business is really, really good. Business is good in the Keys, particularly in Key West. South Florida's been good. Panhandle was great till it got blown away. You know what that'll be?
That will be one heck of a building boom that'll happen in that market. I think that'll be a pretty good boom for us for years to come.
You do need to remember that while the 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. 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. Outside of that, said things are really kind of back to normal. That area where all the tourists go and all that traffic goes, again, from Panama City Beach all the way to Pensacola, and farther, it's as it was. 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 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 on good?
Hey, Jon, this is Stephen. I can take a part of that.
Stephen's got good information on it, so I'm going to let Stephen do that.
I think Johnny talked in his comments about some of the tailwinds, I guess, we had from the New York payoffs, and obviously, a portion of that was all revenue. Some of that was in margin, some of that was in fee income. I would 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. 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 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. I think the 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 four range.
Yeah. I think I had said three to four basis point dilution. Stephen had told me that he had calculated almost seven basis points dilution. When you think about it, John, when you can't get loan growth, and you're about as efficient bank as there is in the country, how do you increase profitability? I just reflected back to the things that we did in 2008, 2009, and 2010, we increased rates. We deserve to have a rate increase, and all banks should be pushing up rates. We started pushing up rates, and when we had our Home $2 meeting in Miami, we talked about pushing up rates, and the trend has started. It took about six weeks, and then it started kicking in, and the trend has kicked in. I think we're going to be able to push up rates.
I had to draw a picture of it, John, on the board. I had to draw a picture of a six when I was at the meeting because nobody had ever seen a six, and I drew a seven. They had never seen one of those. I said, "Those are what you're going to be looking for, sixes and sevens." I said, "Get a good picture of that," because I said, "That's where we're headed." We're seeing sixes now. I haven't seen any sevens except Chris' group, but we're seeing sixes. 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, then we are starting the trend of moving rates up, and that is working, by the way.
Okay. Good. Thanks for the help.
You bet. Thank you.
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. 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 $9.8 million to $9 million. The impacts of Durbin is sitting in that line item. It's down just a little over $2.8 million for the quarter when you compare Q2 to Q3 for the Durbin impact for interchange fee income.
You kind of might ask the question, well, why isn't the other service charges and fees down more than that? That's because that's where the other fees from CFG is hitting for these payoffs, for the exit fees and everything there. There's approximately $2 million of that that came in this quarter.
Got it. Okay. That's helpful.
That's probably going to be a recurring item as Chris has booked. You want to comment on that, Chris?
Yeah. Some level of that is recurring. The portfolio, we've been here three, four years now. We have a steady stream of loans that will exit or pay off, and we anticipate that, and we do design our loans so that we make money when they're outstanding. We make money when they pay back. Some of that comes into the fee income line. 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.
Just for example, we're barely into the quarter, a little over half a month. They already have $1 million that they have booked. It's already on the ledger for a loan. I won't give the name of it. I was about to, but they have one that's got almost $1 million of this fee income.
It's become a budget item with Chris. I think he's budgeted $4 million-$6 million a year for those events.
That ties back to some of the expense increase that we saw, too. I don't know if we've talked about that yet. There's a corresponding payout, incentive payout on some of those fees that are collected back. It doesn't all flow to the bottom line.
Yeah, 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 why the jump. Jon, you're saying it was pretty much the exit fees from some of the correlating fees. Is that right?
Yeah. Matt, I'll give you a little more color on that. For example, the salary employee benefits is up $3.3 million. CFG has got increased compensation expense from acceleration of FASB 91 because some of the payouts were early. They've also got some incentive comp that was paid out, and that's $1.8 million of that $3.3 million increase in salary employee benefits. You throw in the fact that we started our Home $2 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 quarter of Q3, we booked $781,000 of expense related to the Home $2. We acquired Shore Premier Finance on the last business day of Q2, and their salary employee benefits for Shore, and that's $240,000.
We book our salary and employee benefits expense on a daily basis, there's one extra day in Q3, that's $379,000. If I add all that up, that accounts for $3.3 million of the $3,349,000 change in the salary employee benefits.
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?
If you've got the corresponding revenue on the top from CFG, we don't want the loans to pay off, but we sure do like the additional non-interest income that comes along with it. There could be some continuation of the acceleration of FASB 91 and the compensation expense. Shore's in there for a full quarter, and Home $2 was $781,000 for this quarter, and it'll be probably closer to $970,000. There might be another $200,000 for the Home $2. And that is just kind of a flat expense, the Home $2. 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 seven-year amortization, and right now it's straight line.
If it looks like that we might hit the $2 run rate quicker, we might have to accelerate it. If we're going to hit the $2 run rate a little longer, we'd probably decelerate it.
Got it. Okay. That's helpful, Brian. Thanks, guys. I appreciate the color.
You bet.
Our next question comes from Joe Fenech 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. Do your comments still apply? Just an update on that, or are there a few one-off opportunities that you see on the M&A front, even with the stock price where it is?
If it's a private bank, they still think their baby's worth 2.5 or 3 times book. The problem is, 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. 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. We're trading at what, 2.7, 2.6 today, times tangible.
The problem is that we're running a 12, 14 ROA, we're trading it at 2.7, and you got banks running a 1 or a 120 trading at 220. Either we're underpriced or they're overpriced, so something's got to give somewhere in the market. It'll straighten itself out at some point in time. Excuse me, from a straight M&A perspective, we might look at something that can help us on the liquidity side at some point in time. We've looked at one for a year and a half. We looked at it. We may get more interested in it. 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. Then maybe for Kevin Hester too, and you, Johnny, with this 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. Some of it is the fact that you got a pretty good sized construction book and the legacy footprint that moves on a quarterly basis, then you've got rates going up, so there are people that are trying to lock in and get some fixed rates for the future. I think it's a mixture of a lot of things.
Yeah, we're actually trying to keep.
Okay.
What's the numbers on construction? 89?
Yeah. The CRE numbers are 89 in the construction bucket and.
Ninety-seven
97 in the overall bucket. We're staying right in there at that same number we've been at for the last two, three, four quarters.
We're planning on going above that, but we can't get above it. We get up a little bit, and we get knocked down. We get up a little bit, and we get knocked down. We've got to prove we'll go much higher than that.
Okay. Last one for me, guys. Johnny, these credit concerns that people have that maybe we're 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. 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 were you even taking losses at those types of LTVs in the crisis years?
Well, as you know, we bought more failed banks than anybody in Florida, and we liquidated billions of dollars worth of assets in that market, bad assets, and we didn't have five loans go below $0.50 on the dollar. The last five or six years, Home has pushed leverage 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 sit. If we have a downturn, I don't think it'll be anything like the last downturn. The regulators want to blame construction for all the downturn last time. It didn't have anything to do with construction. It had only to do with the amount of equity that was put into 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, they can get it for nothing down." I said, "Well, Randy, try to get us 10%. Can you get them?" "Well, they'll give us 10, Johnny. They got it done for nothing over here." What happened during those times when 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 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&I and owner-occupied. I'd be keeping my eye on C&I. I think that one is really getting frothy.
Okay. 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 N.Y.?
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's coming on. It's getting absorbed. Maybe takes a little longer to absorb. In general, it's a really healthy economy here in N.Y. People are working. People are making money. Wages are up. 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. I think it's been mentioned a little bit before too, we also aren't seeing banks reach. I think that's been helpful too. We haven't reached, and we haven't seen a lot of people reaching.
I think the good deals are getting done. We're not seeing a lot of the dumb deals get done. Right now, it's just sort of a nice little period of time where I think things are going pretty well, actually.
All right, great. Thank you guys.
Thank you.
Our next question comes from Aaron Cyganowicz from Citi. Please go ahead.
That's pretty good, Cole. You did that name pretty good.
Yeah, it was pretty close.
All right, Aaron.
Very good. Thanks. 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?
Stephen, you want that one? I can take that one. We primarily, with three deals, and you've heard the story, but I don't know if TheStreet heard the story. We have an internet bank called giantbank.com that we have about $100 million in. That is our internet bank for us, and it has a throttle on it, and you can 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 million last quarter. I don't know, does the average balances down $100 or was that just last total?
That was end of period.
End of period was down $100. We can be up or down $100 million at any time. That's going okay right now. I'm not sure how well that's going to work, but we're giving it a whirl to see how it works. The other initiative is, Johnny, you want to take the last part of that deal, we got the deposit accounts, those accounts, we got new accounts.
That's great. Yes, we have some new consumer accounts that we are opening. We've had one out for about 30 days. We've got about 1,600 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.
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 a deposit-rich area, and their deposits have not risen like ours have. They don't have I don't know if they have the pressures that we have, that the rest of the industry have. We are not running CD ads. We've never run a CD ad in years. Years ago, we ran them, but we hadn't run one in 10 years. We don't run CD ads. We don't react to that. We don't panic. We just went 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. That's how we're doing it.
Aaron, this is Stephen, I'd take the back half of that. 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. 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. I think we're still pleased with the approach that everybody's taken there to grow the base.
Great. Thank you.
Thank you.
Our next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, guys. Good afternoon. How are you?
Hey, Michael.
Good.
I guess my question is, in talking with larger banks and our BDC analysts and others in the industry, it seems like paydowns are going to be structural in nature. There's a lot of capital out there. I guess my question really resides in, you guys are at about 10% of assets in your CFG portfolio. I know the goal is 15%, or at least that's the cap. I guess my question is, how can you guys actually grow this portfolio? Does it really make sense to grow? Should you just actually take the capital and just buy back literally as much stock as you can? Because it seems like that may be the better trade-off at this valuation level. Any comments would be appreciated. Thanks.
Michael, this is Stephen, I know we've got Chris on the phone. I think he gave some comments early in the call just about what we would expect or what he has seen in his long history of doing this, then what we've seen over the last three or four years, that you're going to have some lumpiness or cyclical nature to the payoffs of the portfolio. That, over a longer term, you're going to see, 20-plus% in growth. I think, at least from our perspective, the way the deal flow he sees and the way that they structure credit, that we're not going to push a rope, as we've always said. 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 let Chris talk about N.Y., if you can't grow, and it may not be a good time to 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. If the paydowns slow down, we've done over $1.9 billion in originations the last two quarters. I don't know if you need to grow. If we have a slowdown in paydowns, that's going to jump. I'm with you, though. 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 paydowns. If you can't grow and you're going to kind of tread water. How do you increase profitability? That's moving rates.
We deserve-- If you wrote a loan five years ago at 5% and it renews, to be fair, we ought to get 675. Well, everybody's trying to come back and ride at five and a half or five and a quarter. That's not really reasonable. We really deserve 675, 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. That's what our objective is right now, and that trend has started working for us. 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. That's okay. That's our tune. We're going to make a lot of money.
We're going to make $280 million-$350 million a year, we're going to sit here and clip coupons with that until it turns. When it turns, it'll be our turn. We'll be in good shape. If there is a cycle, if there is a downturning cycle, we got lots of capital, we'll have lots more capital, and 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.
Jon, I think that's the point, right? You guys are growing. That's great. You're growing in a lower multiple business. I think Ozarks is a really good case study as to what the market's going to pay you for growth in that business. I think it's a fantastic business, and I completely agree with everything. From a credit perspective, the market's not assigning any value for that. If the other portfolios aren't really growing, why not just buy back as much stock as you can? I think that's the real question. You guys are 2.7 of tangible. What do you guys do to sustain and potentially grow that? I'm not trying to be argumentative, why aren't you guys buying back as much stock as you can if there's no attractive acquisition opportunities at this point?
We did. We bought a lot of stock the third quarter. We stepped it up because the price continued to come down. 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, I guess we don't need to waste our money till it gets to be $17, $18. If somebody's so freaking 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, most banks do similar things to what New York does. They just do it in New York and do it on a different scale.
They're better underwriters than the rest of us are. The truth is that they don't do much any different than what we do. To value that business for less, I don't get that. I don't understand that. That makes absolutely no sense to me. How many companies you got running a 2.12 ROA and a 37% efficiency ratio and a 24% return on tangible common equity? How many you got?
You. I think that's the point. I think investors are looking for progress.
That's my point.
Exactly. As capital builds here, if you're not going to do deals, maybe because there's not opportunities or maybe it's not the right time, why don't you double, triple the buyback and just do as much as you can as capital builds?
What came first, the chicken or the egg? We'd do M&A deals. If the market wasn't so stupid and price us where they price us and not give us credit for what we deserve, in my opinion, then we'd be doing deals. 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 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 the world is so negative that it doesn't make any difference. I agree with you.
We might as well find out where the world thinks Home Bancshares stock ought to be, then we ought to buy $200 million worth of it.
Hey, Johnny, I completely agree with you. I'm with you. Thanks.
Thanks.
Our next question comes from Brian Martin from FIG Partners. Please go ahead.
Hey, guys.
Hey, Brian.
You got me fired up, get in there.
I hear that, Johnny. Hey. Are you seeing any, Johnny, on the M&A part, just going back to the capital, are you seeing the sentiment at all change for the sellers? In particular, let's say the one you're looking at or others, the world seems to be changing. Right now it sounds as though they're not changing as of yet, or they've not changed yet.
We got to have a couple of deals, Brian.
Yep. Okay.
I think we got to have a couple of reasonable deals. We've had, what have we had? Four or five crazy deals hit her recently and high priced, almost three times book. We've had those deals going. I think we got to have somebody do a reasonable deal or two. That'll settle the market down a little bit.
Yeah.
You know as well as I do, I remember when I sold my first commercial bank years ago, I heard about three times book and three and a quarter, and we end up getting 4.11 times book. 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 the structure looked like at the end of the day. If you plan on selling your stock, it doesn't make any difference. If you plan on being a long-term holder, it's important what it looks like at the end of the day. In five year earn back to tangible book, in four years, 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.
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. They've had a great run. They've diluted themselves into infinity for their shareholders, we're not going to do that.
Okay. I got you. Just maybe one for Stephen. Stephen, going back to the core margin for just a minute. I guess it sounds as though 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's alluding to. Just kind of want to make sure I get that right, just given that funding costs are still rising. I guess maybe it's 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.
Yeah. It's going to bounce around some. It'll be, like you said, I think lumpy is a good word. It's going to be a little lumpy depending on the-
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. Yeah, I think we like to look at it in that low four range on an adjusted basis.
Okay. The yields on the new originations versus the payoffs, given that it was mostly New York, I guess, was there less of a difference this quarter? I guess, less favorable, or-
Yeah, 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. I think we originated about five and a half. I think the $700 million was in the five and a half range, which was okay. We really didn't start getting the benefit of pushing up rates and starting to see sixes until about a month before the quarter was over.
Yeah.
We're starting to see that. That doesn't mean they're all going to book, but I don't know if I. We did approve, one meeting, $133 million at six and a quarter, and that got approved. That was the best of the group that we saw. Our people are trying. They're really trying. Tracy, he said one basis point's a $1,250,000. Martin, one of our guys in the Keys, had a loan we approved at 550. He got 553 on the first one and a quarter of a point. He came back with a guy wanting to buy another property, and we approved it at 550. He got 588 and a half a point. He's in the program. He gets it. The first one was $1,250.
It wasn't a lot of money, but at least it set. He was trying to get a few extra basis points. On the last one, it's much more money, Matt. 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.
That's helpful. Just the last thing is, 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. Do you know? Who knows?
I really think what Mr. Allison's talking about, we've got ample shares outstanding that we can repurchase. It's probably 900,000, 800,000 shares.
We've got about 8 million shares available for repurchase, Brian.
8 million.
8 million. Yeah, wrong. 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.
That's it.
Okay, just last housekeeping thing, Brian, just for you, the accretion outlook going forward, any change from what you kind of articulated last quarter or just kind of the similar type of level we're at now that you got Shore in there and the other-
The accretion's been fairly flat the last three quarters, it's hard to predict without a crystal ball. For example, Shore did have $861,000 of accretion. We were up $75,000 in accretion, but without Shore, we would've been down about $800,000 in accretion. The good news is that the payoff accretion, which was about $3.9 million last quarter, is probably $3.1 million this quarter. 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 million of income that will and can be accreted into income over the life of the loans, and the weighted average life of those loans is about eight years.
I got you. Okay, last one, Brian, just on the housekeeping. You said the additional in the fee income this quarter was about related to the CFG benefit, the paydowns was about $2 million, the expense was one eight. Is that the-
Yes. That's correct.
Okay. All right. That's all I had, guys. Thanks for taking the question.
Thanks.
Same, Brian.
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 paydowns lay flat, and I guess what goes in, assumption-wise, in your targets into hitting that target? Thanks.
About $600 million worth of loans. It's about what it is, about $600 million worth of loans. We didn't anticipate riding 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 increasing the rates on the new credits as much as we've increased those, and it took $600 million worth of loans. As I said, when I laid out the plan to our people, it probably won't happen exactly the way I laid it out. It'll happen some way differently than that. We'd be there today on a run rate basis if we'd 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've already been there on a run rate had we booked our last two quarters of originations.
Okay. Thank you.
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 for listening to me today. Us, all of us. Kind of went off a little bit. When you run a company like this and you see how hard everybody works in the company, you think that they deserve better. 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, we hope it'll be 31, we'll work hard to do that. Whether anybody gives a care or not, we'll do it. 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.