Greetings, ladies and gentlemen. Welcome to the Home Bancshares, Inc. second 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 your 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 also 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, Phil. Welcome to Home Bancshares, Inc.'s second quarter earnings release and conference call. I might add, the best quarter ever. Thanks for joining us today to learn more about the specifics of the second quarter results and the direction of the company for the rest of the year. We're going to kind of change up the presentation a little bit today, so don't be surprised. With me today is Randy Sims, CEO of the holding company, Home Bancshares, Inc.; Tracy French, CEO of the bank; Donna J. Townsell, Senior Vice President, Director of Investor Relations; Stephen Tipton, the Chief Operating Officer; Brian Davis, Chief Financial Officer; Jennifer Floyd, the Chief Accounting Officer; Kevin Hester, Chief Lending Officer; Chris Poulton, President of CCFG; and Dave Seleski, our new Director of Centennial Bank. They will all be available for Q&A later in the meeting.
Before I go to my remarks, I think, though, we should go to Randy Sims. I think he has something that he wants to say that, I don't know if it's new or not. Randy, have you got something you want to say?
Yes, sir. It was another most profitable quarter in the history of our company. That is now 29 consecutive quarters of record income. That's not the only record you're going to hear about today. As Johnny said, it is the best quarter in the history of our company, and I can't wait to hear all the results. Johnny?
Did you determine, did you get somebody to figure out how many years that is?
Yes. That is. How many years is that?
That's seven years.
Seven years and one month. I got a hold of.
One quarter. Seven years and one quarter.
One quarter, yes.
Not a month.
No, not a month. Seven years and one quarter. I consulted with the highest authority, my seven-year-old grandson.
Okay. We know that'll be correct. All right. Thanks, Randy. 29.
Number 29.
That's pretty good. I want to congratulate David Dury in his new role as Regional President of Florida. I also want to congratulate Dave Seleski as our newest board member of Centennial Bank Board of Directors, as well as a member, he'll be joining our Corporate Executive Loan Committee. In addition to that, I'd like to invite Excuse me, let's correct that. I'd like to welcome John Marshall from Shore Premier Finance and his team of people. Welcome to Home Bancshares. We released the numbers before the market opened, and I hope you're pleased with them because they are the best numbers in the company's history. By the way, these are real numbers, not false news. We did accomplish many objectives that we had targeted during the quarter. We asked our analysts what we needed to do to move the stock, and they told us.
We accomplished every objective target that we had. In 2016, we earned $177 million. In 2017, we earned $135 million, and that was after $60 million for hurricane reserve and deferred tax credit write-off. We'll talk more about hurricane reserves a little later in the presentation. We earned $150 million the first six months of this year. If you would indulge me, that we probably will earn another $150 million in the second six months. You add those numbers together, that's $612 million, or $3.54 a share in cash earnings that we've generated. The earnings included record, record, and the stock's still trading where it was in 2016 and below where it was in 2017. During December of 2016 and January of 2017, Home was trading over $28. Earnings are up and the stock is down. Somebody's wrong. Either we are or the market is.
I think this quarter dispelled all the rumors and the silly, ridiculous BS that some people want to spread to hold the stock down. I think the shorts have made their money, and the short interest is down to less than 5%. With the stock trading at 11x 2019 projected earnings, that's the projected earnings that the analysts have. That's not our corporate goal. There's virtually no room left for the shorts. You can't get blood from a turnip. I've come to believe that somebody has an axe to grind and is feeding incorrect information to our investors, and we're working hard to show the real results, and not allowing false news to control the audience. Our plan is still Home $2, and how do we get there?
With the surprisingly high prices paid for the last several deals, it appears that whole bank M&A may be beyond reach for disciplined acquirers. While imaginary earnbacks of tangible book reaching unrealistic numbers, the only way to accomplish these lofty numbers is with imaginary earnings numbers. We refuse to play that game, and our shareholders and analysts should appreciate our conservative nature. By the way, I don't want to be the one to bore you while wasting your time trying to convince you some deal is strategic when it's nothing but a phantom deal and we'll never have the earnback. Believe me, we know what a good deal looks like. We've done 21 so far, and they've all been accretive, accretive, and we call that triple A. Including the largest one we've ever done, the Stonegate transaction, about $3 billion. I was told we paid too much.
I was told we would never get the efficiencies to match up with ours. I was told we would stumble with the integration. I was told we would lose people. I was told we would lose customers. On the call with us today is Dave Seleski, and I'm going to let Dave Seleski report his feelings and give the State of the Union at the former Stonegate as he transitions to the Centennial board. Dave?
Thanks, Johnny. A lot of great things to report on. Really, the two groups got together. It was amazing through the conversion, how the two teams really came together in terms of. Often, conversions, you have difficulties and issues, and the team at Centennial did such a great job of pulling everything together, putting it together, and working with the Stonegate people. I think that both sides really learned to appreciate and pull together. A lot of that's evidenced by the fact we've had very good loan growth in Dade County, which is Miami, and also in Southwest Florida, particularly Naples and Fort Myers, as well as good deposit growth in West Palm Beach. I'm excited about my new role of being on the board of Centennial Bank, one of the best banks in the country.
I am looking forward to being on executive loan committee, continuing business development efforts, maintaining relationships with Stonegate customers, and potentially doing some more business with Cuba down the road. With that, I'll turn it back to you. Thanks.
Thanks, Dave. As you heard, it's quite to the contrary. After the February conversion, we had already accomplished much more savings by far than we had forecasted. As Dave said, very quick, very smooth, which resulted in record efficiency and quickly getting there. That is a sign of a good consolidator. I read a research report recently talking about the best consolidators in the bank space. They did not list Home Bancshares, Prosperity Bank OZK, Renasant, Pinnacle, First Financial Bankshares, or CenterState. I shared the names on the list with a big bank stock investor, and I didn't think he was ever going to stop laughing. I didn't think it was quite that humorous because we didn't make the list, and I think we are one of the best consolidators in the country, and so are those others. I think it takes the false news out of the Stonegate rumors.
Why Premier? Instead of doing an overpriced merger and acquisition deal, paying $300 million, $400 million, $600 million that might add $0.03 or $0.04, we decided to spend $20 million to add $0.035 to $0.04 to EPS. As the largest individual shareholder, it was a no-brainer for me. Think about it, we sit in the boat capital of America, Palm Beach, Fort Lauderdale, Miami, and the Florida Keys. This deal fits Home. It also provides a perfect vehicle to enter the high-end RV Prevost bus finance market. It was common sense for me. Continuing forward on Home to $2, this can be a nice contributor to that. Number one, loan growth is your number one problem, so say the analysts. Our lack of loan growth has not come from originations, but from payoffs totally.
I also told the world that the unfunded backlog was growing, indicating that the prospect for loan growth was looking up. It didn't happen the way I envisioned. I thought payoffs would slow down and originations remain steady. Magic would happen, and bingo, there we'd have loan growth magically. That's not exactly what happened. Even though the payoffs remained high at $609 million for the quarter at a rate of 513, we were able to generate $957.9 million at a rate of 566. I think the breakdown here is important, too. Of the 957, $775 million was legacy at 5.48, or 81% of what we originated. New York was $183 million at a rate of 6.53. The backlog is up with the legacy leading the way. We also had the largest payoff we've ever had. I don't know if we've ever had an $85 million payoff.
Kevin, have we ever had an $85 million payoff?
If we have, not very many.
It came out of Little Rock. One of our directors in Little Rock, in the multifamily housing business, and he took his multifamily company with a REIT public, and he paid us off. He's back. Great operator. He'll be back and do more business. In spite of that, we still were able to grow a little bit. The backlog here can be a little misleading because you really don't know when that loan is going to fund, but it's a good indicator of things to come. Number 2 was you'll have to sacrifice your rate in order to increase your loan volume. Another negative taken out, proof's in the numbers. We don't sacrifice rate for growth. We monitor the margin daily. Margin has increased, and new loan volume has even better rates. Remain disciplined and hold the course.
Number three, you'll be forced to give up your quality underwriting standards to grow. We don't do that. Another negative bites the dust. Remain disciplined. Hold the course. False news. Number four, Dave Seleski is leaving and taking the key people. False news. Nice try, but no cigar. Number five, your New York office is total construction lending business, and in the next cycle, you'll lose lots of money.
I said, "You mean the operation that made $16 million pre-tax, pre-provision the first year, and made $32 million pre-tax, pre-provision the second year, and $56 million pre-tax, pre-provision the third year, and should make around $70 million pre-tax, pre-provision this year that we paid zero for?" Well, let me just get Chris Poulton on and let Chris himself, who runs our most profitable region, give you the state of the union on this dangerous and risky business. Chris, are you here?
I am. Thank you, Johnny, Good afternoon.
Good afternoon.
Yeah. The quarter, Q2 reflects another nice solid quarter for us. It's been kind of nice flow, steady growth. As you described since we've joined, we closed the quarter to $1.65 billion. I think this quarter's results reflect the strength and diversity of the portfolio. Draws on existing facilities, which you pointed out, draws on existing facilities more than outpaced loan payoff. As a reminder, our loan portfolio consists of really four primary products. The first is multi-asset facilities, which are about a quarter of our total outstanding. The second is construction lending, which you mentioned, which is actually just about 35% or just under 35% of the total portfolio. We have a third product, which is single asset CRE loans. Those are about 20%. We have a small C&I portfolio at about 20% of the total portfolio.
I think with these product options, they allow us to adapt to the changing market dynamics. While specific market conditions may shift from quarter to quarter, we do generally maintain each product category at somewhere between 15%-35% of the total portfolio. Hopefully, that background helps a little bit, and I'll turn it back over to you, Johnny.
You bet. Thanks, Chris. That means his construction book is about 5.5% of our entire portfolios. I agree there were lots of problems with construction in the last cycle. The problem really wasn't exclusive to the asset class. It was the fact that nobody put any money in those deals. They were leveraged at 90%, 95%, 100% and 105%. They were construction millionaires with no equity. When the music stopped, they just throw the keys to the bank. I'm confident that CCFG will have a loss someday, but they've never lost a dime yet. They didn't lose any money in 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, and so far in 2018. I call BS on that one false news. We're about 92%-95% in the construction bucket today and a little over $300 million-$302 million, I think, in the CRE bucket.
We have approval with the board to go much higher. The reality was that at one time, during the failed bank purchase times, we were almost $500 million in the big bucket as we liquidated hundreds of millions of dollars of all asset classes in Florida. There is no substitute for experience. Our team cleaned up the ones we bought, we did due diligence on another 30 banks in Florida, and we liquidated troubled assets from Key West to Jacksonville, west to Pensacola, and down both coasts. We have all the line sheets on the banks that we looked at, and the intellectual knowledge we gleaned from that, it was and is still amazing. The big loss will be C&I, in my opinion, even though the regulators disagree. They're pushing the industry into these unrealistic terms and pricing, or we're pushing ourselves into those terms.
The regulators are telling we have to have them, and we're being pushed in that, and I'm concerned about that bucket, and I think that's the next blow-up. The yield curve may be signaling a recession. If that's the case, we're in one of the best positions in the country. We're low leverage, conservative underrated portfolio. I like our book of business. Next one was, "Oh, Johnny's made millions. He doesn't have the fire that he once had, and he's not as interested." Ask my people if that BS is even remotely correct. In addition, really ask them. In addition, ask the companies that have been traveling with me all over the country and will be traveling with me in the months coming up. I'm still hitting the road. I'm still hitting the road hard and selling the success of Home. The game is winning. I don't give up.
I don't quit. I call BS false news. You heard my comments today. It's a shame that banks are not trading on performance and rationality. The herd, some of you, most of you, a few of you, I don't know who it is trading on BS speculation and rumors. What happened to the days of confidence and trusting in each other? We're known for telling it like it is. We've always done it, and we always will. I want to go back to days where investors say, "I'd love to own your stock, but you're just too pricey for our fund." These days, investors will say Home is a value stock, and I agree. Different from a lot of people, I don't think there's a Russian hiding behind every tree. Before we go on, I just want to touch a couple of numbers here.
Earnings were up 51.7% for the year, lowest efficiency ratio ever. I don't really know what else to say, except I think our stock has huge upside. We should be trading north of $30. I told you we need $1 billion in loan growth to hit $2. We don't need that much now. If we pay out $70 million worth of trust preferred and add the Shore acquisition, coupled with this quarter's loan growth, plus the opportunity to reprice $1.5 billion of loans over the next 12 months, that should move us much closer to the goal line. Hopefully, we'll see some additional loan growth coupled with some stock repurchase, and I believe we'll punch it across the goal line. Some more good news coming out, The Keys so far on the charge-offs, we charged one loan off for $500,000.
We have an ag ride loan that has some pretty good size exposure, but so far, so good. We are in the slow season in The Keys. Between now and the end of the year, we'll keep monitoring that loan book because if there's going to be a problem, I think it will show up between now and the end of the year. We'll be proactive and charge it off. If it's coming, I think it may come by the end of the year. In summary, this is great news, not false news. After reviewing the analyst's best recommendations and a thorough review by our management team, I believe this, no doubt, is by far the best quarter ever. I believe we hit on all 10.
I'm sure we'll have some naysayers who maybe not covered their short position, who will try to have a negative statement, but the world will know that's BS. We repurchase on stock repurchase, we bought back 350,000 shares during the quarter, and our 10b5, we bought another 175,000, I think. Isn't that right, Stephen?
That's right.
The plan is Home to $2. I think we'll get there. Thank you for listening to me today. We'll go to Q&A.
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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Once again, that's star then one to join the question queue. This time, we'll pause momentarily to assemble our roster. Okay, the first question comes from Will Curtis with Piper Jaffray & Company. Okay, please go ahead.
Hey, good afternoon, everyone.
Good afternoon.
Hey, Will.
Maybe wanted to get some color on the expense base. If I recall, there was maybe a couple million dollars of remaining savings that were expected to come through this quarter, but you also had a decent increase in other expenses. Just trying to get a sense for if this is a good run rate or if there's something else that we should consider as we kind of finish out the year.
Well, you think the efficiency ratio of 36 was a little high, Will?
It was really good, Johnny.
I think I'll let Brian talk about, we had a little carryover from the first quarter we missed, and that's what kind of kicked the expenses up a little bit.
Yeah. Once we crossed the 10 billion, the FDIC assessments went up, and we didn't get our first bill until June for the first quarter. If you look at our FDIC and state assessments, you'll see that it's up $1.2 million, but really it should only been up about $600,000. There's really a $600,000 one time true up on the accrual that ran through the second quarter. The $2.7 million that you see in expense would be about $2.1 million on a normalized quarter.
Okay, thanks. In terms of, I guess, thinking about the margin over the next couple of quarters, I think you obviously highlighted the new production yields that are higher, but the deposit costs are also moving higher as well. Is there anything that you guys can do to mitigate some of those pressures or possibly hold the margin where it is? I think you had mentioned maybe the trust preferreds, but just curious how you're kind of thinking about the margin.
Hey, Will, it's Stephen. I'll take that. Yeah, that is the trust, the trups that are out there's about $70 million that are floating rate that are in the mid-fours or so today. That's something that's kind of on our radar to look at taking down at some point, maybe towards the latter part of the year. Yeah, I guess we're very pleased with what we saw in the quarter. I know Johnny highlighted the loan production and what we saw there, but deposit costs are going up, but the loan production and the variable rate portion of the portfolio and what we've been able to do on renewals has more than offset what we've seen on the deposit side. I think we're extremely pleased with what we see there.
The Shore portfolio, just for modeling purposes, we show that will pull us down maybe three or four basis points once that's in for a full month or a full quarter. Kind of reset that, I think we are optimistic we can maintain there.
Okay. Just one quick clarification. Johnny, I think you said the backlog had been going down, but it's now starting to increase. Is that right?
That's correct. Tracy sent me a note a while back and said the unfunded backlog had gone down. We started paying more attention to it, and about March it took off and went up. It also grew at the end of this quarter by another $150 million over what it was. That's pretty good stuff. We approved, just to give you an idea of what's going on with loans right now, we approved $106 million yesterday. All $106 million was in the legacy footprint, and you'll probably see line share that'll fund this quarter. Things are okay. We look like we're going to be down. I'm not going to tell you we're going to have loan growth because I told you the first quarter we're going to have loan growth and we didn't. We were down. I no longer forecast loan growth, Will.
Maybe if I don't forecast it, we'll have loan growth. Kevin, you got anything on loans?
No, I think you covered it. The production yesterday was great. The production across the group is good, pipeline's strong. It's early in the quarter, a lot of things can still happen the rest of the quarter. Looking good.
I knew it couldn't stay there forever. We're generating way too much business. Things are too good for us to not have it at some point in time. When you look at that, of the $957 million, $775 was in legacy at $548. That bodes pretty well. Pretty good. Chris's down in New York's team had $183 at $653. That's a good indicator. If we can just hold our margin, we don't have to be cranking and trying to build our margin. If we can just hold it, running a 210, 215 ROA is not too bad. We're generating lots of cash. We're making lots of money. With the cash, we got to decide what we're going to do with it right now. M&A doesn't look very good, maybe find another deal somewhere. Enjoy the trip with you, Will.
Yeah, I had a good time. Thanks for the call, guys.
You bet. Bye.
Okay, the next question comes from Aaron Cyganiewicz with Citi. Please go ahead.
Sorry, I was on mute. If you could talk a little bit more about the Shore Premier Finance business, some of the loan attributes, what kind of profitability you expect there. You mentioned it may have a modest NIM impact for the quarter.
Yeah, sure. Welcome. Nice to have you. Welcome aboard Home Bancshares team.
Thank you. You bet. This is Kevin Hester. I'll answer that one. As you know, probably about $380 million is what we brought over. It's about 1,200 loans. It's really traditional underwriting, which is kind of what I could get real comfortable with. It's getting personal financial statements, tax returns, verifying liquidity through bank statements. It's really traditional type underwriting as opposed to an automated type deal, which gave me a lot of comfort. We looked at virtually half the balances, about 300 loans. Very strong FICO scores, low DTI across the book, liquid borrowers. I'll give you one number here. The median reserves, cash reserves of the borrowers post-purchase is 42 months of their total P&I payments. If they owe $10,000 a month in P&I payments, they had a median of $420,000 in verified liquidity post-down payment. We're dealing with strong borrowers here.
Okay. What's the typical kind of organic growth rate you would expect within that category?
I think it's reasonable to say first year we could do $100 million. From there, it's going to be dependent upon how well we do the commercial side of it, which they had kind of backed off of a little bit. I think that would be the key moving from there. I believe it's reasonable to say $100 million the first year.
Okay. Lastly, I think in the press release, it stated that a lot of the loans were funded towards the end of the quarter. Is that going to have any positive impact on the NIM into 3Q that might offset some of the impact of Shore Finance?
Shore closed last day. Actually, Shore is going to dilute us a little bit, $0.03 or so. 3%.
Yeah, it could, Aaron. As we said, the bulk of the volume came in the last month or so, and we talk about what yields those are, but I still think our goal is to maintain.
The good news is, though, the interest income was up for the quarter, but I've been watching the run rate since then, and it's up significantly. All those loans got booked and Shore got booked, and the run rate is looking pretty good.
Good. All right. Thank you.
Thank you.
Okay, the next question comes from Brady Gailey with KBW. Please go ahead.
Hey, congrats on number 29, guys.
I don't know.
Hey, 29.
Yeah.
It's going to be even 30.
That's what I said, 29.
Yeah, even 30. That might be harder to figure out how many years.
I may start buying him a jersey every quarter.
There you go.
Hey, I wanted to ask, I know Durbin kicks in this quarter, and in the past, we've talked about, for HOME, that is roughly a $7 million pre-tax number on an annual basis. Call that, $1.7 million-$1.8 million of pre-tax fees lost per quarter. Is that still the right way to think about Durbin for you guys?
You're pretty close. We're watching it happen as we speak. We've been looking at it on a daily basis. It's real money we're losing. I probably would up that closer to a little over $2 million a quarter.
Pre-tax.
Pre-tax.
All right. Then, with Shore coming in, you saw the loan-to-deposit ratio tick up a little bit. I was just wondering, in 3Q and 4Q, are you going to be a little more aggressive on growing deposits to try to fund the Shore assets organically? Or how do you think about the slight tick up in the loan-to-deposit ratio?
Well, Randy Sims will tell you we need to run at 110. The regulators don't really appreciate it.
It's just that. I just can't. It hurts me to see 100.
He wants it higher.
I want that engine running.
Well, yeah. This is our first full quarter of Kelly Buchanan's deposit program. We're up, had pretty nice deposit growth. We have $2 billion worth of Federal Home Loan availability, we're not going to panic on deposits. We'll just pull that up. This is actually the first full quarter of our deposit program. It looked pretty good. I think the non-interest deposits were up $50 million. Tracy, can you tell me that?
That's correct, yeah.
That's good. It's beginning to take hold. The rewards for those branches that won this quarter, I think Tracy French and Kelly Buchanan are going to go and travel and congratulate those people. If some of you branch manager on the phone, you see Kelly Buchanan and Tracy French show up at your door with some balloons, probably don't care about that. You're going to take the check too, Tracy French?
Yes, sir. That's the main point.
This enthusiasm's really just starting. This is the first full quarter, and it looked like we had a pretty good quarter, so we'll try that. If you remember, there is one fairly deposit-rich franchise out there. We've had our eye on them for a while, and I may go visit them right after the latter part of August to see if there's anything to be done there.
All right, great. Thanks for the color, guys.
You bet.
The next question comes from Matt Olney with Stephens. Please go ahead.
Hey, thanks. Good afternoon, guys.
Good afternoon.
Afternoon.
I want to go back to the Shore acquisition. I guess there was a small part of that book was commercial in nature. Can you just talk more about your plans for the commercial side? What's the nature of those loans? Of that growth of $100 million the first year, at least your goal, will any of that be commercial, or is that pretty much all consumer, at least early on?
Yeah, the commercial side is floor plans for boat dealers that, primarily through a manufacturer's agreement, where we get a buyback agreement from the manufacturer. That's the plan there. Out of that first $100 million, yeah, there could be some of that. As I had said, they pretty much ramped that downward at the end of their previous relationship at the bank they were at before. We're basically starting that back up from scratch.
Okay, that's helpful. Then, on the purchase accounting accretion, maybe a question more for Brian, we've been hanging around this $10 million level now for the last few quarters. What's your outlook on this number the next few quarters?
It should be fairly close to the $10.6 million. One thing that did happen this quarter is that the payoff accretion was up. From the first quarter, it was up about $1.3 million. On the other hand, we're going to add Shore to the accretion bucket, and it should add about $900,000 per quarter. I look for next quarter to be over $10 million. It might start slipping down in Q4 and Q1 without any other acquisitions. We still have $112 million of accretable income to take in over the life of the loans.
Then lastly, I guess for Brian again, probably, on the fee income side, on the other fee income, anything unusual or that you would call out that might not be sustainable going forward?
Just the Durbin, which is in the other service charges and fees. On the dividends, we had an equity investment that we've had for some time, and it did not pay us a dividend in Q1, but they caught it up in Q2, there's an extra $300,000 that was in the line item dividends, FHLB, Bankers Bank, and other. It's part of that other there. That's probably the only thing that might be a negative for next quarter would be that we wouldn't have two dividends from that equity investment.
Got it. Okay. Thank you, guys.
Thank you.
The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Thanks. Good afternoon.
Hi, Jon.
Hey. I like the new conference call format.
You do?
The John Allison manifesto, something like that.
I like it. It wasn't paid for. This one wasn't paid for by the Democrats. I got aggravated. I thought, "Well, when I saw it's not moving, why?" Who can do better than Home doing? I thought.
It's moving
I'll try something different.
Moved up a little bit. That's good.
Yeah.
The late quarter loan growth, I think, Randy, you talked about how you had some nice approvals coming through. Can you attribute that to anything? Has anything changed, or why do you think that happened?
This is Tracy. Just to add a little color for what Kevin and Johnny have pitched into that, it comes back to the Stonegate acquisition and settling in. Johnny and I have got off, had a couple trips that Dave had arranged with JC, one of our market presidents in the southern part of Florida, and we're getting some more opportunities that we're seeing come through. It's more of a timing issue with the Stonegate acquisition and the meshing together, as Seleski said in his earlier comments. We also see that over on the Sarasota side. Tyrone and Dennis are over on the Sarasota side that Bud is working with there, and we're beginning to get to know the customers and the comfortness of that and the credit underwriting and the things that we're doing.
It's just a little time, it took a little bit to see some of the legacy wing of our company do well. I think that's really what I see. The other regions across our company have always done extremely well, and they're continuing to go. The loan growth, I think we had eight out of the 11 regions grow this past month, and I'm speaking on a month, not a quarter. I think it's just really some of the timing issues that's finally happening, and the same thing on the deposit side, as we've been able to not only meet some great loan opportunities, these also have deposit opportunities.
Our management and team on the treasury services and the cash management is working well with the units in all those regions down there today. The customer base is getting comfortable with the way we do and realizing that we're here to take care of a customer. Now we're getting customers referring us to new potential customers from other banks. I think we're hopefully going to continue to see the fruits of all that labor.
That's good. Good to hear. On the payoffs, I know it's hard to predict this, do you still believe that payoffs could eventually slow? It was a big number this quarter.
What, the payoffs?
Yep.
It just continues on. I think if the REITs don't buy our entire portfolio, I think the REITs are going to buy a chunk of it. They just keep, I guess, they're running around with all this, with their pockets full of money, and trying to find assets to purchase, and they're paying some tremendous prices. Our guest house in Key West, Florida, great operator. She had 221 guest rooms. Somebody just walked in, paid her $110 million for it. Now, that's $500,000 a key, and that's stretching it. That's just too far, in our opinion. We had an opportunity to go back in that credit, John. We passed. We said, "No, we don't want it." The truth is, there can never be another hurricane, and you have to have escalating revenue about 5% or 10% a year.
There can't even be a wreck on the highway going in there, or you'll not be able to make your payments. These deals are just stretching. I say that, and the Casa Marina in Key West has been open three years now. They went from 100 and something thousand dollars a key to a million dollars a key, and we didn't play at a million dollars a key. We passed. That's been three years ago. It's still open, still operating. A REIT bought that. I don't know the payoffs. It's just probably good business, actually. In 2008 and 2009, nobody could pay off. They couldn't do anything. The book is, there is so much equity. Just like this lady in Key West, she owed us $27 million. She sold it for $110 million.
Wow.
Good for her. She'll do something else. She'll do something. This $85 million payoff this quarter was one of our directors in Little Rock who has a great multi-family housing business, good operator, knows what he's doing, and he took his REIT public. When he did that, he paid us off. He's going to build his company. He's a building kind of guy, so he'll be back. I think we're back to $30, $40 million right now with him. The payoffs, just that you can't really predict. I knew that $85 million would come sometime. I didn't know when it'd come, once he got his everything, his I's dotted and his T's crossed, he got his company when they took it public. That's just kind of the way it is. Now, in New York, we have a lot of facilities lines.
Even though everybody says it's all construction in New York, it's not, as you heard from Chris. It has a lot of lines. Somebody may have a $100 million line, and they may pull it up to the max and then pay it off two weeks from now. You look at the average loans for the quarter and see that the loans really didn't get booked till the end. The run rate's pretty sweet right now. If we can just keep building on this loan right now, we're actually generating so much capital, we're going to have to figure out what to do with it pretty quick. I think probably good use is those trust preferreds.
Okay. Appreciate that. One last one maybe for you, Brian. Just how extensive is the loan repricing on the $1.2 billion? Talk about the magnitude of that.
Hey, John, this is Steven. How are you?
Hey, good, Steven.
Good. The $1.5 billion that we have maturing over the next 12 months or so is coming off in the 515 range. It's about the same rate that we saw pay off in this last quarter. When you hear us talk about where our legacy loan yields are, we're working with the teams in the regions now to focus on that and get even better. We should see some nice improvement in that over the course of the next 12 months.
Yep. Okay. All right. Thanks.
Thanks, John.
The next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, guys. How are you?
Good.
Hey, Michael.
Arfstrom wanted me to tell you that it's fake news, not false news.
You tell Arfstrom it's my job to yell at you, I saw it all.
He didn't say that though.
Well, hopefully, you don't find any more of those Russians. Just wanted to talk about the competitive dynamics in Chris' group. You guys mentioned that obviously there's a lot of private equity money, REIT money sloshing around, and you have this, whether it's a target or aspirational goal to get his group up to about 15% of assets. Is that a goal? Is that a target? Maybe over what timeframe do you think you can get there?
I'll let Chris answer that.
Hey, Michael. It's Chris. As it relates to, is it a goal or a target? I view it more as a limit, probably. We're happy where we're at. The universe expands, we grow. I expect we'll continue to do so. I don't think there's any particular timescale attached to that. We like what we're seeing in the market right now. I like where the pipeline's at. Growth for us is going to look a lot like what pays back, what doesn't, and what time period it does. It's always tough to say quarter to quarter. I think year-over-year on a rolling 12-month period of time, I think we've seen the book grows pretty well. Eventually, it'll settle into sort of that somewhere between 8% and 15% growth rate type thing. I would say we'll continue to grow a little bit here.
We may have a quarter or two where it flattens out, but that doesn't really mean much to us. We like the deals that are coming in competitively.
We certainly see a lot of competition out there. Don't forget the private equity money that's out there that's investing is actually our customer.
Those are good points, Chris. Maybe just one on the pace of share repurchases. Obviously, in your manifesto, Johnny, you mentioned the price of the stock. Could you look to get a little bit more aggressive here?
Well, I actually had backed up on repurchases, and the stock went back on sale, and I couldn't stand it, so we started buying again. We bought You get those numbers?
We bought about 825,000 shares year to date.
Okay. Yeah, we could. I actually was going to get out of the market a little bit and I wondered if we were putting some upward pressure on the stock, just get out, and if the world wanted to sell at 21, we'd go buy a block. We'd buy five million shares.
Okay.
It got pretty cheap, we filed our 10b5 for the quarter, we were able to pick up 170-
75,000
175,000 in the 10b5. I don't like being. It seems like the market kind of beats us up around earnings time, in the past we couldn't play because we didn't have the 10b5 file. We filed it, we've been able to acquire good blocks of stock at a really good price.
Okay.
As for the question is, probably. We're going to be sitting on so much cash. I think we want to pay off the trust preferred first. I think we get that towards the end of the year. Hopefully, we'll have enough cash generated. I think Steven said we'd have over 100 million.
We should, yes.
Somewhere in that range.
100, 110.
by the end of the year. Is that right? You're shaking your head too.
Yeah.
Our shareholders probably deserve a little kick too. They've been awfully good to us, so a little increase for the shareholders wouldn't hurt on the dividend side. We haven't done that yet because we've got a board meeting tomorrow, maybe they'll discuss it. I want to get back even with the play. We had $32 million deferred tax credit that we took at the end of last year. Is that right, Brian? Was it 32?
36.
36. I want to get back. I want to get that earnings back felt like we were back square before we went out to do something else. When you're running at a run rate north of $300 million for the year, we're generating lots of money right now.
Understood. Maybe one last one for me. You guys took a big provision for the storms a couple of quarters ago. Sorry if I missed it, but any plans to release any of that anytime soon, or is the expectation just to kind of grow into it? Thanks.
Well, we had $140 million of deferment in the Keys. We now have $1.4 million deferred in the Keys. We charged off one property of $500,000 thus far. We have an agri loan that we're watching. Seems to be okay, but could have up to a $6 million exposure. We're in the slow season now, so I think if we got any problems that are going to pop up, I think we'll see them between now and the end of the year. This is the time that we used to see some of those people struggle in the Keys. With the hurricane on top of that, let's see what happens over a period of time. I'm the kind of guy, you know me, I like a 1% or better reserve, so I'm not ready to roll it. It doesn't matter to me.
We have to justify the reserve, to me, it's our money, it's shareholder money, just happens to be in another account. If we need to bring it back in, we will. If we don't, we won't.
All right. Thanks, guys.
Thank you.
Okay, the next question comes from Stephen Scouten with Sandler O'Neill & Partners. Please go ahead.
Hey, guys. How you doing?
Good. Stephen, how are you doing?
Good. Good, John.
Are you going to come up to ASU to play, to the football game with us?
If they can stay in the top 25, it might make sense. We'll see.
Yeah, I got it. They won't be there long, I hope.
We'll see. Have them beat Alabama for the rest of the country. We'll all be fans from then on.
Just watch out.
Yeah.
Watch out.
Good ask.
If I'm hearing you correctly, Johnny, it seems like you think the stock is a little cheap. That seems to be the message I'm hearing.
You got it. It worked. My doctor, they work.
Yeah.
Manifesto.
Manifesto.
I guess is some of that driven by. Obviously, consensus numbers are like $1.90 for 2019. You seem to sound pretty confident around $2. Is that $2, you truly believe that's going to be a 2019 number and that estimates are a little low on you still and that you'll have that kind of 13%-14% earnings growth in 2019?
I don't know if it will be $2 in 2019, but I certainly expect one quarter, I think, for the run rate to start hitting around $0.50 during.
Okay
during the year, somewhere during that year.
Okay.
We got $1.5 billion, Steven. We got $1.5 billion to reprice over the next 12 months or so. That's good. Loan growth, back loans building on loan growth. We're holding our margin. The run rate looks really good to me right now once these loans all got booked. They got booked late in the quarter. That looks good. Expenses are under control. I think we're teed up. It really falls.
Yeah.
It's a cost of funds deal. It really is. It really a cost of deposit deal. What happens on the cost of deposits over the next period of time, what we do to manage those deposits. We can buy Fed funds to fund these, but that's at 2%. We need something less than that. I think our cost of funds At the end of June, we were-
We were up 11 basis points on total deposit cost for the quarter.
We're up 11 basis points, loans are up 12, right?
That's right, yeah.
That's okay. If we can hold that. The only thing that'll dilute us a little bit is our new boat finance platform. They think we can run about a 180, 185 ROA out of that, so that'd dilute our ROA a little bit. It's a pretty sweet little business for us, and I think we can grow it over a period of time.
Yeah. No, that's fair. The efficiency ratio, as you noted, it's pretty good, I guess. You run a pretty clean bank.
Thanks.
Really? Somebody was busting at me while I was listening.
Yeah. I am curious, how much of the cost saves from Stonegate might still be left in there to come out? Could we see some improvement even beyond what's already a pretty impressive number? Is there still a little room based on those remaining cost saves?
I don't think so.
How much?
We've gotten about 50%. We model that at 33. We normally hit 50 on everything. We're about 50 on this one, maybe a little above 50. We've done really about all we could do there. I was looking for the expenses to go down this quarter too, and I went back for one-timers, and we had that FDIC deal we missed the first quarter. I guess that was the biggest item in the one-timers for the quarter. I think we've been at $63 million for the last three quarters, so I'd have to say it's pretty fixed. If we can stack on another $600 million-$700 million worth of loans in here, that'd be pretty good.
Yeah, for sure. Okay. Maybe last one from me, just on capital build, and you mentioned the TRUP. Are there any other items, would you think about without DFAST now, and presumably that'll give you some relief on what capital you have to hold. Do you think any about the sub-debt that you raised? With the rate you're paying on that, is there any thought to paying down some of that in addition to the TRUPs or-
Absolutely. Matter of fact, we evaluated, Jennifer Floyd ran the numbers for me on that. If we just put it in pure investments at an assumed rate, if we bought back the TRUPs, if we bought back stock, or if we bought back some of the subordinated debt. Actually, the most accretive to us is buying back the stock, but the capital treatment on the trust preferred, we get treated differently over $15 billion with an acquisition.
Sure. Yep.
We think it makes more sense to knock that out. Now, that's about $0.02, a little over $0.02. It's about $0.01 a 1 million shares to EPS if we buy back stock. It's about $0.02 on buying back subordinated debt. The boats platform as it is today is going to add about $0.04, and then the TRUPs will add about $0.02. As you can see, I'm counting pennies to get to my $2. And I am. Well, I truly am.
Yeah.
Someone said we weren't going to get there, and I said, "Well, we damn sure are, believe me." We're going to get there, so it's my mission for the next period of time to get there.
Okay.
In a conservative manner, though. We're not going to do anything crazy to get there.
Okay.
You're right, we looked at all those. We can pull all those handles, and we probably will pull some of all of them.
Is that the biggest benefit kind of tangibly from the changes in the regulatory environment right now? Is it just that you probably have a little more leeway around how you manage that excess capital and what you do with it, and thinking about all these different possibilities? Is that the easiest tangible benefit, or are there other things we're not thinking about?
Well, we're generating lots of capital, on a monthly basis. Someone said something to Brian Davis one day about what he's going to do on capital, and he said, "Different than most people, we run about a 2% ROA. We make a lot of money.
That's correct.
Absolutely.
Isn't that correct?
Yeah.
You got any comment on the capital deal, or Jennifer, you want to make a comment?
The comment was, we do a capital raise every quarter.
That's right. We do a capital raise every. Yeah.
With the retained earnings.
Right.
Yeah.
We're at $76 million. That's a run rate of $304. The loans weren't back booked until late in the quarter, you didn't really get any benefit of our boat portfolio. I think you're going to see us come out I think things are going to get a little stronger for us here if the run rate holds where it is. The key, as I said earlier, is the cost of funds. We got to manage that.
Yeah. Okay. That's really helpful, guys. Thanks so much for the color, congrats on a great quarter.
You bet. Now look, if we stay at 25, Austin, we'll get you down for a ball game.
There we go. I look forward to it.
All right. Thanks.
Okay, the next question comes from Brian Martin. Please go ahead.
Hey, guys.
Hey, Brian.
Hey, how you doing, Brian?
Hey, not too bad. Hey, nice quarter, guys. Just a couple follow-ups or just a couple things that maybe The deposit strength in the quarter, Johnny, I guess you talked about just this new initiative. I guess, is that the biggest driver of this? I guess, do you feel like some of this is sustainable as you go forward based on kind of the initiatives you've put in place with that? Maybe not at the same level, but just kind of prospectively looking at deposit growth?
You know what? I'm plowing new ground. We've never gone out for deposits ever. I really don't have an answer. I'm pleased with what I'm seeing there, but I really don't have an answer to that. This is the first I would expect it to get better. That's just how I look at things as a business person. I would expect it to get better. Will it or not? I don't know whether it will or not, but if we can grow deposits $600 million or $700 million or $1 billion a year, there's nothing wrong with that. That's about what we need in loan growth to do what we need to do. I'd be a pretty happy camper there.
Right. Okay. All right, just going back to your Home to $2 target, Johnny, I guess it seemed like initially it was kind of talking about the $1 billion in loan growth. You kind of threw a couple other wrinkles in there this quarter with, I guess, potentially, the TRUP and obviously, the acquisition this quarter. Is there anything else, I guess, if we're thinking about just how to kind of sketch out how you'd get there? It's the acquisition, I guess it's potentially doing something on the TRUPs. It's the, I think you said, was it $1.5 billion in loan repricing? Is there anything else I'm missing as you kind of think about that?
No, I think you're right on. We have our Home to $2 meeting in Miami at the end of this month, all the participants will be at the meeting, and it'll be laid out. This whole program will be laid out. The charge will be given to them. We have a two-day meeting down there. I think it'll be fun for everybody. We'll be talking about margins, we'll be talking about loans, we'll be talking about rates, we'll be talking about all the factors that impact that, then we're going to show them the pathway to $2.
Okay.
I'm digging, looking for the right thing to do there. Once we came up on the TRUPs and we realized that capital treatment, look what that saves us. We could buy 1 million shares back, and I think that's $0.01. Isn't that what that is?
That's right. Mm-hmm.
A $0.01 a share? We could pull that trigger, and I will if I have to. We're going to $2. We're generating lots of capital. We're kind of sitting on that money right now, to decide where we want to spend it and where's the best way to spend it. Probably the TRUPs at the end of the year, and then we'll hopefully generate it again. One reason I hadn't increased the dividend to our shareholders yet is because I want to hit all of those buttons out there to try to drive us towards $2. My point is that we'll buy back stock, and we bought the Boat portfolio platform, and that adds $0.04, and here's what the company's doing to help you get there. I need you to give me $600 million worth of loans or $700 million worth of loans at these prices.
Here's what we're doing to help you get there. The sooner we get there, the sooner y'all get to your payday. I believe we'll get it done. They've never let me down before.
Right. Okay.
I'm penning it. I'm penning it to get there. A penny here and two pennies there. Some people got us to a $1.80 this year, and I've got us, in my mind, at about a $1.88, $1.89, without any new loan growth. If the company does a good enough job to get us a $0.10, I expect our people to get us the next $0.10.
Right. Okay. The loan growth is still in that $0.5 billion range if you take out the Boat portfolio, I guess the growth going forward, that's kind of what you're thinking about.
At about a $0.5 billion. That's correct.
Yep. Okay. All right, just the last two things. On the M&A side, it just feels unlikely at this point, as long as the stock stays on sale, just seems like it's less interesting. It seems consistent, or is that still accurate?
Yeah. When we're at 3.5 times tangible or four times tangible, it made a lot more sense to us. We're looking at some stuff. Once they jumped to two times tangible book, it kind of took us out of the game, and they all think they're worth two times tangible book. However, some of that's coming back to reality. One just traded recently at about a 170, and another one's out there at about a 170. Those are coming back a little bit in the right way.
Okay.
Would we play there? It probably makes sense if we're in the 160-170 range, and we're at three and change, that probably makes sense.
Okay, perfect. Maybe the last one for Stephen, maybe I just misunderstood or didn't hear it properly, but the impact of the Boat portfolio seemed like, was it $0.03 or three basis points? I think it was three basis points in the margin. Is that what you're suggesting, Stephen?
Yeah, three to four. Yes. Three to four basis points.
Okay. Your hope would be, with that factored in third quarter, that the other items you've mentioned as far as repricing on the loan side and the rates going up should hopefully get you enough to offset that, or at least that's how you're kind of thinking about it preliminarily.
Potentially. I think it'd be our goal.
That'd be our goal.
Okay.
We just need to maintain. I don't know how many companies you cover that run a 210 or 212, 13 ROA, we just need to maintain. The efficiency was at 36. Had we gotten that revenue in earlier in the quarter, you might've seen a five out there. Might've seen a 35. It'll be fun to watch it next quarter and see what it does with the new ramp-up in the revenue side.
Okay. Understood. Maybe just big picture, Johnny, I guess the originations this quarter were so strong. Is there any commentary you can just give on whether the kind of granularity, the geographic kind of breakdown of it or just kind of what buckets it falls in? Just a little bit of color on that would be helpful.
Actually, Arkansas led this time. Arkansas was pretty strong this time. It took a while. We had to get settled in. The Stonegate people had to get settled in with us. We had to get settled in with them. I think we're past all that today, and they're back to work. Matter of fact, we had an executive loan committee two or three weeks ago, and every loan came out of the Stonegate footprint. That deal's working. That deal's coming. They're working everywhere. We approved $106 million yesterday. Of that, about $65 million of it we'll fund for sure this quarter, and maybe as high as 80% of that. It's just customers we do business with, and he had paid us off on some stuff, and then he got on a $60 million deal, and he brought it back to us. That's just how it works.
We had an $85 million payoff with our good director at Little Rock, and then he's back on another multi-family deal, and he's $30, $40 million. That's just how it works. It's real commerce, real business going on. Tracy, you got-
I was just going to say exactly what you said, Johnny. The bulk of that growth, it came from the Arkansas channel, and that was our team just taking care of the customer. That was one of those surprise payoffs a couple of months ago. Most of this credit takes a little while to underwrite and make sure it gets done correctly. That's really just the hustle of, in this case, our North Arkansas group got out and followed back up over the customers that had paid us off in the prior quarter.
Yeah. You probably remember me talking about a hangar loan. We picked up a hangar loan in Oklahoma City, a $40 million hangar loan. Well, he paid it down to about $36 million, $37 million. Somebody walked, offered him $47 million, he sold it. That hurt, right? Because it comes off the books. He gave us a $36 million multi-family deal, and he's got a $112 million deal going out there right now, he said, "I'm going to bring it to y'all." It's just the relationship with those customers, and I don't know if you were on the phone when Tracy French talked about our trip with Dave Seleski down to Florida, and JC and those people, and going over to Sarasota and visiting with Dennis and that bunch, and Bud. I'm not sure that we didn't turn over $150 million worth of loans that potentially could be coming down.
I know part of it, Dennis has got a term sheet out to them. I think it's ready to go to them now on some opportunities. I think before I retire, I'm going to become a loan officer and travel the country and book loans.
That'd be okay, Brian. His detail on underwriting is a little more challenging. He understands a good loan and not a good loan. Underwriting these things takes a lot of work.
I know.
Obviously, you can buy one.
That's right. You can buy one of the RVs, Johnny, and travel the country. I appreciate the update, guys.
Yeah, thanks for your support.
Okay. 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, everyone. It's been a fun day. I think everybody got a good, clear picture. Our group's happy here. Things at Home are good. As I said, the run rate's picking up. Things look pretty good for Home. We're driving towards our goal of Home to $2. Once we get back from Florida, I can give you more information when I see you, but I think that'll be a good trip with our people and getting everybody acquainted on the new plan and the direction we're heading. Anybody got anything else to say?
Good job by the group.
Good job by everybody. Ms. IR, do you have anything? Ms. New IR, do you have anything?
No, I don't.
Ms. Past IR, it's kind of transition IR. Do you have anything?
Nothing.
Okay. Well, we'll talk to you in 90 days. Thanks.
I have something.
Oh, Randy Sims, I'm sorry.
It was 29 consecutive quarters. That means it'd be 30 next quarter if we do it. Just thought we'd end on that.
That's great. Thanks. Everybody have a good day. Bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.