Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated First 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 participants in this call today are John Allison, Chairman; Randy Sims, President and CEO of Home BancShares; Tracy French, President and CEO of Centennial Bank; Brian Davis, Chief Financial Officer; Jennifer Floyd, Chief Accounting Officer; Kevin Hester, Chief Lending Officer; Stephen Tipton, Chief Operating Officer; Chris Poulton, President, Centennial Commercial Finance Group; Dave Selesky, Regional President, and Donna Townsell, Director of Marketing. 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 on 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 our first presenter, Mr. Allison.
Thank you, Andrea. Good afternoon and welcome. Randy, I think this is the 47th time, yeah, I looked it up, it's the 47th time that we reported our earnings release and conference call since we did our initial public offering. How was the quarter, Randy? Is this another one for the record books?
I am happy and proud to announce 28 consecutive quarters of record income. Now, I have checked and verified with our accountants, and that's seven years. Can you believe it? Seven years.
You don't think they made a mistake, do you?
No. I also verified with my five-year-old grandson, and he said it was seven years, too. 28 consecutive quarters.
Does that.
Congratulations, everyone.
That's 28 including this quarter, right?
Yes, sir.
That's great. Well, congratulations, all of you, that have made Home BancShares, Centennial Bank to be the best bank in America of all banks, was named by Forbes in January of this year. This honor makes us all proud. I told you we're teeing up the ball for 2018. Here is another powerful record quarter. Not a bad start for 2018. You add to that the completed conversion of Stonegate and the closing of 12 branches. Think about the additional reduction in salaries associated with those closings in the first quarter. This will be the best year by far our company has ever had. I think it continues to get better. From the good news, Randy will go through most of the numbers, but here's just a list of good news.
Income up 55%, EPS over 27%, stable margin, great asset quality, record revenue, record ROA, strong efficiency ratio. When you see the efficiency ratio, I know that number, you can see we're gleaning the efficiencies out of Stonegate. Actually, the March of 31 days, non-interest expense was less than February. That's a good sign for the run rate coming in the second quarter. Strong loan loss reserves, completion of the Stonegate conversion. I think, Stephen, aren't we done pretty well?
Yes, sir.
Battle. Strong capital ratios. I couldn't pass using this number, Randy, a 23.33% return on average tangible common equity. That's a pretty powerful number.
Yes, sir.
We just completed a very successful lender conference. We had about 280 of our people there in Orlando. It was a great time for all. We got to know each other, got to spend time together, and get us on the same page. I guess if we had to look at bad news, I guess the loans were flat for the quarter, and mortgage was off just a little bit, but I think, Tracy, you told me they had a record lock in March?
Yes.
mm-hmm.
Yes, sir. March was an exceptional month for closing.
March was exceptional month, that bodes well for going into the second quarter. On the Florida Keys, the penny report shows, we've only taken one loss thus far, the penny report shows us off 22%. I was just down there for some time. Lots of help wanted signs, so far, so good, it'll be a while, I assume, before we know. It looks to me like it's a cash flow situation. On M&A, we're not doing any of that presently due to the stock price. We are talking to some companies. Home $2.00, with some reduction in expense, we need about $1 billion in loan growth. We have a tentative meeting scheduled in July. Donna Townsell, that right?
Yes, sir.
To kick off the $2.00 program. As you recall from the fourth quarter, Donna came in and had a Slurpee, just one Slurpee, and the rest of us looked at her. She didn't bring the rest of us one. I want to thank Michael Rose. He made a gallant attempt with a GoFundMe fund, attempting to provide refreshments for all of us, everyone in this room to have Slurpees. I think we're going to get a report from Donna shortly, so hang tight and don't miss that. On stock buybacks, year to date, we bought back 535,000 shares at $23.08, of which 303,000 of the shares was bought during the first quarter, with the balance bought with our 10b5 program that allows us to buy during the blackout. Correct?
Yes.
As a matter of fact, before we go, Randy, to the numbers, let's go to Donna. I think she's at the shareholder, getting set up for the shareholders meeting, and get a report on the Slurpee fund. Donna, are you there?
Yes, sir, I'm here. I'm happy to report on Michael Rose's Slurpee campaign. It was successful, because no one should drink Slurpees alone. I would've gotten you guys a bigger size, but I couldn't get Brian Hagler to commit. I hear he's been watching the Slurpee industry, waiting for prices to go down. Maybe they will next quarter. Since I'm in Little Rock setting up for tonight's shareholder meeting, I was hoping the Slurpees made it there safe and sound. Maybe you guys can confirm that for me. Also, I'd like to take this opportunity to invite everyone to join us at the Statehouse Convention Center tonight for our shareholders meeting. Doors open at 5:30 P.M., the meeting begins at 6:30 P.M.
Thank you for the update on the Slurpee report and the shareholder meeting. If Brian Hagler decides to get in and help us, we get a bigger size next time, please report that to me.
I'll do that. That'd be great.
That's all I have right now, Randy. I'm going to turn it over to you to run all the numbers.
Okay. Well, I was trying to slurp down my cherry one real quick. I will get to the numbers. Thank you, Johnny. As he stated, it was a powerful quarter for Home BancShares, not just a good, but a great start to 2018. While we did go over it, I'm going to say it again, the first quarter of 2018 was the most profitable quarter in the history of our company. Again, that is now 28 consecutive quarters of record income, seven years. I will admit the last few quarters have been noisy with merger expenses, the Tax Cuts and Jobs Act charge, other things, and other non-fundamental items. However, seven years of record income is quite an accomplishment that all our shareholders can be proud of, and I congratulate our employees and their hard work to accomplish this milestone.
With a few exceptions, the first quarter was relatively clean with little noise in the financials. This was very satisfying to see. I think the numbers you have already heard and will hear are a good picture of the makings of a very successful year, as our chairman stated. If you recall, last quarter, I ended by saying that 2017 was a very unusual year. Our best days as a corporation could be ahead of us in 2018. Our history is rich in acquisitions, changes, and decisions to ensure the long-term success of Home BancShares. I really believe the first quarter results are pretty good evidence. You are going to hear some really good numbers from our management team today. Just as a reminder, our three acquisitions in 2017 resulted in over $3.5 billion in total assets being added to our balance sheet after purchase accounting adjustments.
Most of that was with the Stonegate Bank acquisition. In February, we completed the conversion of Stonegate Bank systems and processes that not only consolidated our IT systems, but also consolidated many of the duplicate branches in our respective footprints. All of which have and will bring about savings to our bottom line. We are already seeing the impact to that bottom line in the first quarter, and I'm really looking forward to seeing the synergy of our combined operations in the coming months. With that being said, what better way to tell you about the progress at Stonegate Bank than to have our regional president, Dave Selesky, give us an update. Dave?
Thanks, Randy. I appreciate that. Yeah, the conversion's completed. It went very smoothly. We're continuing with integration, and really, 99% of the cost saves were realized in the month of March. Second quarter, you should see a clean run rate. More importantly, the lending teams of both banks are now consolidated in Naples, Fort Lauderdale, Tampa, and Sarasota. This was really the first deal of my banking career, while Stonegate Bank has done 10 acquisitions, and I think Home BancShares has done 23 or 24, where we were actually larger than the acquiring bank. We had about $3 billion in assets in this market versus the $2 billion of Centennial Bank. The challenge is always about the integration of people rather than systems, and the merging of cultures is sometimes difficult. I really believe that we've taken the best of both cultures and created a powerful force in Florida.
A few tangible examples of this is 10 out of approximately 20 are left of the Stonegate Bank branches existing, actually grew deposits in the first quarter in excess of $500,000. In all the mergers we've done, we've never seen it where we've actually grown deposits when we're going through a conversion and a merger. It usually goes the other way. Also, we've been able to increase approximately seven legacy corporate relationships on the lending side due to the higher lending limits of Centennial Bank. For the Stonegate Bank, actual legacy Stonegate Bank piece, we actually grew loans in the first quarter. I think this is all clear examples of where the two groups have come together and are really working as a team.
Our staff in Florida is working together with the goal of providing excellent customer service and while delivering a superior shareholder return, and I look forward in the future to reporting very positive results. With that, I'll turn it back over to Randy. Thanks.
Thanks, Dave. Now to some of the numbers. For the first quarter of 2018, the company recorded a 55.9% increase in quarterly profit to $73.1 million, compared to $46.9 million for the same period in 2017. I still remember being so excited in April when we finally became profitable when we first started this entire enterprise in 1999. Boss, can you believe we made a little bit of money in 1999, bang, $73 million. Who would have thought? $73 million in one quarter.
We can get better
I know. I know. That's what I've heard for the last 20 years. You have been absolutely right, and we can get better, and that is what it's all about. Our diluted earnings per share for the first quarter of 2018 was $0.42 per share, compared to $0.33 per share for 2017, representing a $0.09 per share, or 27.3%, when compared to the same quarter in the prior year. Our return on average assets for the first quarter was 2.08%, as compared to 1.86% in the first quarter of 2017. Our chairman has been looking for that 2%, we got it this quarter for you. Our return on average assets as adjusted was 3.07% for the first quarter. Our return on average TCE, excluding intangible amortization for the quarter, was 24.33%, as compared to 20.08% for the same quarter end in 2017.
As of March 31st, the corporation is sitting at a little over $14.3 billion in assets. Deposits ended at $10.4 billion, as compared to $7.6 billion at 3/31/2017. We have a great management team on hand to talk more about the results. I would like to turn it over to Centennial CEO, Tracy French, to give us additional color and his comments on our performance.
Randy, the first quarter results that you and Johnny have shared in 2018 are off to a great start. While it's generally a lighter quarter of activity for the quarter, this certainly has been one of the busiest we've been through. I just would like to take just a short second just to thank all and to compliment all of our staff members that have helped, worked, assisted through the Stonegate conversion, and I think we'll see the fruits of the labor going forward. Just a couple of numbers. As you certainly rattled off some, I was giving Johnny fist bumps on some of those. Just two things that popped up to me at the Centennial Bank level. Our ROA was 2.24%, and our efficiency ratio was 34%. I can remember as Johnny and I hit the road, several years ago when we started talking about Florida.
While the Arkansas regions are some of the best in the country, I'm pleased to report our original plan to get all the Florida regions up to those successful numbers has happened. I'm very proud to report that all the states that operate under Centennial Bank now have a 2% or better ROA. First time that's ever happened since I've been with the company. Thank you to all for making that happen. Now we can just sit back, Johnny, and watch and see what happens now that the company is all gelling on the same page. As you mentioned earlier, we just returned from the Lenders Credit Conference last week, not only was it very educational, it certainly was a great team-building opportunity for all.
As you all can imagine on the phone, our Chairman, John Allison, set out a few typical goals that sometimes people always fall out of the chairs. We did have about 100 new people there that day, and I saw about 50 of them drop out of their chairs when they heard some of these goals. The fun part about this company is every one of them was high-fiving on the way out and talking about how we will get those numbers done, Randy. We look forward to 2018 accomplishing the results there. Thank you, and thank you to our staff.
Thanks, Tracy. Great report. The total number of active Centennial branches is 158, with 76 in Arkansas, 76 in Florida, which is something there, same number, and five along the Alabama coastline, and of course, one in New York. I would now like to turn it over to Stephen Tipton, our Chief Operating Officer, who will fill you in on some of our income efforts, efficiency, and other key metrics.
Thanks, Randy. I'll start with margin and production. We're pleased to report a net interest margin of 4.46% for Q1, down only one basis point from Q4, despite a reduction in accretion income. Our loan production in Q1 was in excess of $575 million at over a 6% coupon. We're pleased with the trajectory here, particularly relative to the increase in the total cost of deposits, which includes non-interest-bearing deposits of eight basis points for the quarter. We continue to watch yields and costs on a daily basis and proud of what our teams have achieved. Switching to our efficiency efforts, I'm pleased to report an adjusted efficiency ratio of 37.97% in Q1, particularly in a short 90-day quarter. We're all excited to see the numbers for March and in April and begin to analyze the full effect of the synergies from the Stonegate merger.
After the consolidation of 12 branches in South and Central Florida in February, the total Florida branch count is now at 76, with 158 branch locations across our entire footprint. We are now two months removed from the Stonegate systems conversion and glad to see our teams in Florida playing offense again. With that, I'll turn it back over to you, Randy.
Thanks, Stephen. Good report. We'll now turn it over to our Chief Financial Officer, Brian Davis, to give us some more information on income, expense, and other highlights. After that, Brian will pass it to Jennifer Floyd, our Chief Accounting Officer, to give us some information on those capital numbers.
Thanks, Randy. The first quarter was a record-setting quarter for our company. We recorded $73.1 million of net income or $0.42 diluted earnings per share and a 2.08 ROA. The company benefited $12.1 million from the Tax Cuts and Jobs Act during the first quarter. The positive impact of the tax cut was $0.07 for both diluted earnings per share and tangible book value for Q1 and 34 basis points for ROA. Accretion income for the fair value adjustments recorded in purchase accounting was $10.6 million during Q1, compared to $12.4 million during Q4, for a decrease of $1.8 million. The decrease of recognized accretion income when compared to the fourth quarter of 2017 is primarily due to normal accretion declines of $1 million, and then $800,000 of lower accretion from lower payoffs. Stonegate accounted for $486,000 of the $800,000 decline in payoff accretion.
The net interest margin was 4.47% for Q4 2017, compared to 4.46% for Q1 2018. Since we had a $1.8 million decline in accretion income, we were pleased to report a NIM with only a one basis point decline from Q4 to Q1. Non-interest income was down $1.5 million in Q1 2018 compared to Q4 2017. There are several items worth noting. First, we did not have any gains or losses from investment security sales, compared to $1.2 million in the fourth quarter of 2017. Second, there was a $916,000 decline in mortgage revenues. Third, we received our annual incentive from Mastercard during the fourth quarter for $703,000. Lastly, other income in Q1 included $1.4 million of additional other income from items previously charged off. Excluding this $1.4 million of other income, diluted earnings per share would've been $0.41 for Q1 2018.
Non-interest expenses were relatively flat at $63 million for Q1 2018 compared to Q4 2017. During the first quarter of 2018, we completed our systems conversion and closed 12 branches. As a result, most of the cost savings associated with the system conversion and branch closures were achieved throughout various intervals throughout the quarter. The first quarter of 2018 included $1.8 million of non-interest expense that will not be reoccurring in the second quarter. This includes $1.1 million from salary, $300,000 from occupancy, and $400,000 from other non-interest expense categories. With that said, I'll turn the call over to Jennifer.
Thank you, Brian. As of March 31st, 2018, we ended the quarter with $2.2 billion of capital and $59 million of cash at the parent company. During the first quarter, we paid out shareholder dividends of $19.1 million, while growing retained earnings by $55 million. Also during the first quarter, the board of directors authorized an increase of five million in the number of shares of stock available for repurchase under our common stock repurchase program. Under this program, we purchased 303,637 shares of common stock at a weighted average price of $23.41 during the first quarter. For the first quarter, our Common Equity Tier 1 capital was $1.28 billion, total Tier 1 capital was $1.35 billion, total risk-based capital was $1.76 billion, and risk-weighted assets were approximately $11.3 billion. As a result, our capital ratios are as follows.
Common Equity Tier 1 capital was 11.3% at March 31st, compared to 10.9% at December 31st. Our leverage ratio was 10.2% compared to 10% at December 31st. Tier 1 capital was 12% at March 31st, compared to 11.5% at December 31st. Total risk-based capital was 15.6% compared to 15% at December 31st. Our book value per common share was $12.89, compared to $12.70 at December 31st. Tangible book value per common share was $7.27, compared to $7.07 at December 31. Finally, our tangible common equity ratio was 9.5% compared to 9.1% at December 31st. Randy?
Thanks, Jennifer. Okay, let's turn to loans. First up, I'm going to pass it to the President of our New York group, Chris Poulton, who will give us an update on how things are going there. Chris, how are we doing?
Thank you, Randy. Well, CCFG turned in a solid performance for the start of 2018. Total loan balances increased by $63 million. We ended the quarter at $1.5 billion in outstandings. During the quarter, we originated $250 million of new loans, with approximately $100 million of that funded during the quarter. Additionally, I wanted to take a moment to provide you an update on our Los Angeles loan production office. We opened that office a year ago. Since that time, we've originated about $150 million in new loans. We currently manage a portfolio of approximately $100 million in outstandings. This performance is in line with our expectations, and we continue to be pleased with our progress in this expanding market. Randy, I'll turn it back over to you.
Thank you, Chris. Great report. Let's switch to our Chief Lender, Kevin Hester, who will give us some more details and color on our portfolio. Kevin, great numbers. Tell us about everything.
Thanks, Randy. The earnings release discusses the fact that overall loan balances were basically flat in the first quarter. Legacy production was solid. Payoffs continue to be somewhat elevated. Florida was down $42 million due to a net decrease in ADC balances of about $115 million. We continue to see lots of opportunities in the legacy markets. We have recently been able to put together the elusive trio of conservative underwriting, strong yield, and growth in balances. We've always said that we will look for them in that order. A slight increase in non-performing loans increased the NPA and NPL ratios by five basis points each. Both are still below 50 basis points. The ALL coverage of non-performing loans remains high at 223%. Past dues increased two basis points to 0.68%. This number's been very consistent at 1% or below for the past few quarters.
Lastly, the allowance for loan losses remained flat at 1.07% of loans. As was mentioned earlier, mortgage closings were up 2% over the same quarter in 2017, and the yield on secondary market loans remained strong at 3.5%. Production in the second quarter is expected to be strong with March locks at a record $101 million. On that note, Randy, I'll turn it back to you.
Kelly, is that the biggest lock ever?
Biggest month for lock ever.
Biggest month for lock ever.
Yes.
That's good news.
Super news. Again, great and consistent asset quality numbers. Love to see that. Love it. A great start to another year. Let's just recap a second. Record earnings, how can I not say it again, for the 28th consecutive quarter. $73.1 million in income and $97 million in income before taxes. Good net interest income. A quarterly ROA of 2.08%, strong. A great quarterly efficiency ratio of 37.83%, just two months removed from the Stonegate conversion. A very powerful margin, very good non-interest income, and some of the best asset quality metrics we have seen consistently, as we have said. Consistent and solid improvement in our major components. If you look back at our history, there is no doubt we have a culture of high performance. That's what gets you rated the best bank in America.
That is what we're all about, we look forward to continued improvement as we strive to break more records throughout 2018. With that, I'll turn it back over to our chairman, Mr. Allison.
Well, when you consolidate all those numbers like that, Randy, put them all together in a couple of paragraphs right at the end, that's pretty powerful stuff. Good job by all, I think we're probably ready. Anybody else got any comments before we go to Q&A? Any comments, anybody? Anything on the Slurpees? You heard any update down in towns on the Slurpees?
I have not. Are you enjoying your Slurpee?
Tastes pretty good to me.
Tastes pretty good. I would like to have had a better one. If Hagler had stepped up, I'd have had a jumbo. Why didn't you get a jumbo, Hagler? I'm looking for that. Anyway, Andrea, I think we're ready to 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 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 Michael Rose of Raymond James. Please go ahead.
Hey, guys. How you doing?
We're doing great, Michael. We're enjoying our Slurpee. Thank you.
Well, because of this, you have to buy all our drinks at Gulf Stop now. That's the trade-off.
Okay. Well, the price is per diem. I raised it to $59. We can drink. Let's go.
I appreciate it, guys. That was good. Hey, just wanted to start off on deposits. When I look at SNL at current market rates, especially on money market rates, it looks like you guys are paying well above national and peer averages. Do you guys run any sort of specials there? I know the loan-to-deposit ratio is up around 100%, but is there any targeted deposit strategies that you guys are working on? Obviously, should we anticipate higher deposit costs as we move forward?
Hey, Michael, this is Stephen. No, most of that's still the same MO as it's been the last couple of quarters. We're still doing select negotiations in all of our markets with our customers. No targeted specials or anything today. It's still old-fashioned banking, one-on-one negotiations.
Well, Kelly Buchanan, who is our deposit czar, she's been in place about five weeks now. We're starting to see some results of that and the emphasis on deposits. How much did our cost of funds go up?
It was like 11 basis points for deposits.
11 basis points for deposits.
I'm struggling with what you said. You said that we're paying more on the money market than the national average. Is that what you said?
I was just looking at the data that's in SNL. Looked like the national average is around 10 basis points, and you guys are obviously quite a bit above that.
We're above 10 basis points. The pressure has not been too bad yet. I'm sure it's coming. We see some competitors advertising with billboards and advertising in our market. Some of these people have gotten themselves kind of behind the eight ball. They've agreed to fund a lot of loans, and they got to raise deposits. We're not in that position. We're pretty comfortable where we are. I think Dave Selesky group picked up a couple of hundred million that we're getting here pretty quick last week. That's a nice little kick to the deposit side. We're working on the deposit side, but it's not anything any different than we've always done.
Understood. Maybe just on loan growth, ex Chris's group this quarter, looks like loans were a little flattish. Was there any paydowns this quarter and maybe what do pipelines look like? What does competition look like? Any change from last quarter?
Actually, we had the biggest week in the corporation's history in March. We approved one day over $300 million. Well, that bode well. I'm going to quit forecasting deposits because we were up $120 million at the end of February, and I thought we were going to end up the quarter at $180 million to up $200 million. One of those was a line of credit, $70 million line of credit, which we had for a while. They paid it off. They'll pull it back up. That's what it's for. It's a line of credit. Averages, we were up almost $100 million on average balances. We were up most of the quarter. We're just continuing to do what we do. It'll come to us. We'll get our share. We'll get our fair share. In the meantime, we got good savings coming off of the Stonegate acquisition.
When you look at the March number and you annualize March, that still had some expenses in there. It's pretty powerful for the company going forward. We had all 276 lenders together. They know the charge. They understand the charge. Matter of fact, we have our presidents from Florida in with us today. They understand the charge and what we need to do. I told Chris to do about $300 million and the rest of the footprint to do $600 million, and that'll get us our number for $2 EPS. That's our goal. We'll get it. This group's never fallen down before. They know the new goal is $2, and they'll get it done.
All right. Maybe one more from me. At the outset, Johnny, you said that the M&A may be on the sidelines for now. You did raise the buyback authorization. How aggressive could we expect you guys to be in the next couple quarters or going forward? Thanks.
Well, we bought back, I think we announced 303,000 shares. We actually bought during the time, year to date, we bought 560,000 shares. We bought a quarter of a million in the blackout period. When they give it to us, we'll take it. We're out right now, but I wish we were in. I bought 20,000 today. If they're going to give it away, I'm going to buy it back.
Understood. All right. Enjoy the service, guys.
Thank you. Hey, that's great. Hopefully you get Hagler in next time, Michael.
Our next question comes from Brady Gailey of KBW. Please go ahead.
Hey, good afternoon. This is Mike Belmiss on for Brady Gailey.
Hey, Mike.
Hey. Just wanted to revisit loan growth. I know you guys had previously said that for the CCFG group, you were targeting about 15% of the total loan portfolio.
Assets.
If we do these kind of elevated pay downs, would you feel comfortable taking that number up a bit?
No, we're going to hold it to about 15% assets. It's not loans, it's 15% assets. We're going to hold it.
Got you. Sorry about that. Back on deposits, I know for the quarter, you guys finished at around 99% for the loan to deposit ratio. At what point do you feel more pressure to kind of get more aggressive on the funding side?
Well, we've always run in that 95%-100%. Actually, Randy Sims wants to run it 110. The regulators don't like us there. We're very comfortable here where we are at 100% loan to deposit. We have lots of capital. We can crank it on up if we need to crank it on up. We're comfortable here. We're just not going to do anything silly. We're going to remain patient on the loan side, and we're going to remain patient on the deposit side. The word around here is hold the course. Don't do anything silly.
Got you. One last question. Saw you guys close about 12 branches in Florida. Was that part of the plan cost saves, or was that kind of above and beyond what you initially thought?
Well, that was the plan.
Yeah. This is Dave Selesky. That was exactly the plan. We had closed one previously due to the hurricane in Naples. I think we told the street 13 branches, so that is our 13 branches.
Yeah, that was the plan for the cost saves. The cost saves, as you can see, the efficiency ratio was 37. It would have been in the 40s if we had not pulled Stonegate down to where we were. You can see what we have gleaned so far, and we are not done. That number is going to get better. It will have to get better. Actually, you annualize March, and I will not tell you what that looks like, but it is much more powerful than the quarter was.
Got you. Understood. Appreciate the color. Thanks.
Yeah, thanks.
Our next question comes from Will Curtiss of Piper Jaffray. Please go ahead.
Hey, good afternoon, everyone.
Hey, Will.
Maybe just real quick going back to payoffs. Can you talk about, I guess, the activity this quarter and how it may have compared to prior quarters and then to the extent that you can just discuss how that may have tracked over the course of the quarter?
We were up January and February about $120 million, $130 million, $140 million. That's when I thought we were going to have a pretty strong quarter. I didn't realize one of those was a line of credit of $70 million. They paid that off. We had some surprise payoffs. Overall, I actually thought we were going to be up. I'm not going to forecast loans anymore because I'm not very good at it. Randy Mayor for years kept saying that the margin was going down when it went up. I'm going to be quiet. I will tell you that March was the biggest approval month the corporation's ever had. I can't tell you that rolls into loan growth, but it was a pretty powerful month. Kevin?
Payoffs were back down to a more normal level. Production was solid. It wasn't earth-shattering, but it was good. The payoffs were just more weighted towards the end. Average was up, but ending balances were down.
I guess the good news in the picture is that averages were up about $95 million-$100 million, and interest income was up. That's the positive side of the quarter. I think Tracy told you guys, thought we're going to have loan growth. We thought we were going to have it too, it didn't work out. We'll get it. It's coming. We'll get it.
I understand. Johnny, I know you mentioned kind of in your prepared remarks about kind of South Florida activity and just curious, how maybe that's kind of progressed since the last call and are we starting to see some increase in rebuilding activity after the hurricane?
I think we're seeing lots of rebuilding activity in the Keys. I like our reserve, what we put back for the Keys. I'm beginning to believe we might not lose that kind of money in the Keys. It's really what happens to those customers. They're closing restaurants early because they don't have workers, and those workers are not there because they don't have housing. It kind of feeds upon itself. However, in spite of that, our Florida Keys operation had the best quarter by far it's ever had. Part of that was the Stonegate Bank piece that rolled in. It was a pretty powerful quarter for the Keys portion. As of right now, what are we seeing out there? We don't really think we've got two problem credits we're looking at.
They're not problems yet, but they appear they're going to be problems, but it doesn't look like there's any loss in them yet if the Keys comes back, which we suspected. I was there and the traffic was lots and lots of traffic. I didn't realize that we were off 22% till Teresa Condon sent me the PIN report, and I looked at that. I think Key West's going to be fine. I don't know about the rest of it yet, but I think we're well reserved. We will not know till the slow season, which is the fourth quarter.
Okay. Thank you very much.
You bet.
Our next question comes from Stephen Scouten of Sandler O'Neill + Partners. Please go ahead.
Hey, guys. How's everyone doing?
Doing great, Stephen.
Good. Hey, just following up on Will's question there. Has any of that hurricane reserve been released as of yet, or is that still all kind of unallocated reserve?
Has not been released.
All unallocated.
Great. Just thinking about loan growth a little bit more, do you think there's any specific catalyst that could kind of flip the script here and see you guys putting up some more material loan growth? Or do you think it is just what you said, Johnny, and it's just be patient, pay downs will eventually slow down a little bit more and more of this will materialize into net loan growth? Or is there something you change or something that changes in your markets that you're waiting on?
We're not going to change our underwriting standards. We're going to continue to do what we do. We're going to hold the course, and we're not going to give it away. If that causes us to be sit here a little bit and have a little slower loan growth, that'll be fine. There's something we can change. We can change underwriting standards and rates and terms, and as I told you last quarter, we can fill up an 18-wheeler with loans. That's just not how we run this company, and it's not how we've run the company in the past. We'll win. It's painful right now because they beat our stock up so bad. Look at the operation numbers. There's not anybody in the country running better operational numbers than what we're running. We'll get our piece of it.
We're on a $350 million deal right now, loans to look at. We got a lot of things going on. We'll get our piece. If pay downs have slowed, they did slow the first quarter. If pay downs slow, it'll be our turn. We'll get our piece of it.
Yeah.
There's been a lot of people in Florida that are selling their franchises. They're giving the stuff away, and they're being extremely aggressive. They're doing long-term fixed, they're doing 3% stuff. Until they clean them out, till we get them out of there, till they get their franchises sold, then that's difficult on our people. This too shall pass, and they'll get sold to somebody, those bigger ones will get sold to somebody. When they get sold, then maybe we'll have somebody that comes in next time that's got good sense, knows how to run a bank.
Do you guys go upmarket at all at this point now that you're larger than $10 billion with Stonegate and whatnot? Have you gone upmarket at all in terms of the size of loans that you're putting on the books?
I think, Dave, we've increased the size of six or seven of his customers. I don't know if they filled that up, but we've offered it to them.
Right. Yep. We've had six or seven customers we've increased our lending relationship. We've got a couple more we're looking at. It's going from like $20 million to $40 million or $45 million, $50 million. We're not talking $100 million type credits. There's some more capacity there. I think there's some more opportunity there as we go forward.
Our biggest credit is an Arkansas credit. Our largest credit in our system is an Arkansas credit.
Okay. Maybe one last one for me. I think somebody mentioned the 11 basis point move in the cost of interest-bearing deposits this quarter. Obviously, not a need to grow deposits all that rapidly without the loan growth. Once this loan growth does start to materialize and you do get that fair share, would we expect to see the cost of deposits ramp at an incrementally faster rate? Is that a 15, 20 basis point a quarter kind of move once you have to fund up the faster loan growth?
I don't think so. I think we'll just lag, and we'll continue to one-off, as Dave just did in one of his markets, brought us $200 million worth as a one-off deal. We're not advertising specials today. That's the problem. As I said, Stephen, these people who have big loan books they have to fund, they got to get a lot of deposits, and they're under the gun. We're not under the gun. We have the ability to fund our loan growth. If we need to, we can always raise some additional deposits. I mean, we'll be what, 97 with that $200 million coming in, 98. We've always run at about this level. Randy Sims, you want to run 110, don't you?
Absolutely. The examiner holds back on that. For 30 years, you got that engine running. If you got a big engine, why not run it fast? 100% is good. That's good. Don't apologize for that. We like that.
Yeah
Some of these banks that are desperate, that are advertising, they're advertising not even in their own markets. They're advertising huge rates. We're not there, and we're not going to get there.
Yeah. All right, guys. Thanks a lot. I know you're waiting on the loan growth, but that 23% ROTCE sure helps in the meantime. Congrats on that.
Hey, thank you. Yeah, we're proud of that.
Our next question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.
Thanks. Good afternoon.
Hi, Jon.
Couple of, I guess, follow-ups. Margin expectations, if you take out some of the purchase accounting noise, it seems like coupons are higher than your loan yields, and you're not that worried about deposit costs. You guys optimistic on the margin?
Hey, John, this is Stephen. I'll stick with what Johnny said earlier about what Mayor used to forecast. Yeah, I think if you look at where we're loaning money at today, north of six in Q1, and kind of where incremental deposit costs are, and we have to go pay, I think that still looks positive for the future.
Okay. Yeah, that was my impression. I guess, the buyback, Johnny, it sounds like with personal purchase, you're telling us something. You have the new authorization. It sounds like you're not interested, at least you can't get interested in acquisitions at this price. How aggressive do you want to be on the buyback?
Well, we're generating lots of capital. It was about $27 million increased earnings in the first quarter, about $14.5 million of that was organic increase in profitability, and the other 12 was Donald Trump. We spent Donald Trump's money this first year to date. We took that $12 million and bought the stock. As long as the stock stays where it is, in this range, we'll be extremely aggressive.
Okay.
Don't leave the impression that we're not talking to people and we're not planning for acquisitions.
Okay.
It's just, it takes a long time to court someone.
Yeah, we're engaged in conversations. We're not going to do it at DLC's levels.
Yeah. Okay. On the expenses, it sounds like you don't want to get too specific on it, but I look at it, and it looks like there's some non-recurring numbers in there as well. Maybe you're signaling a little better expense run rate than we're anticipating. Do you think you can get below $60 million for the second quarter?
I don't know. That's going to be tight to get there. We got about, coming out, I think it's about we carried in the quarter, $1.5 million-$2 million worth of additional expenses that are now gone.
Yeah, we closed all the branches. We unfortunately severed with 84 employees. When you add up the cost that we had with those employees that we had for various intervals throughout the quarter, it was about $1.1 million. That money will come out. We had a lot of them in January, quite a bit of them in February, most of them were gone in March. If you were just to reset the numbers from one quarter to the next, you'd have about $1.8 million of cost savings related to the Stonegate closures and conversions.
I don't know how much that was then left in. When I annualized my March, I don't know how much of that was left in. We picked up $1 million on one side out of a Stonegate settlement, we carried $600,000 or $700,000 worth of expenses on the other side. If the March run rate's anywhere near, we'll be well over $300 million on a run rate. I'm pretty excited about seeing what that looks like going forward.
Yeah. Okay. All right. Thank you.
Call me 10 April, maybe I'll have a smile on my face.
All right. Sounds good.
All right.
Our next question comes from Matt Olney of Stephens. Please go ahead.
Thanks. Good afternoon, guys.
Hi, Matt.
Going back to the discussion on organic loan growth, obviously, you guys don't want to change the underwriting standards. I'm curious if you guys would consider perhaps acquiring loan portfolios that would help you get to that $1 billion of loan growth that you've talked about getting.
We would, and we're looking. We're actively engaged in due diligence as we speak, on about $350 million-$400 million. If it works out, it could be a lot of business for us. We kind of like the business, and we'll know more here. Stephen?
Yeah, in a couple of weeks. We're in the middle of.
We're in the middle of it. We're in the middle of it right now. It's about $350 million, $400 million. That'd give us a pretty good start. Chris is rolling pretty good. We just consolidated, and our partners just met each other in Orlando and kind of settled in. It's a process when you do such a big conversion as we have, and you're rolling in one of the best companies in the country, Stonegate Bank, into Centennial Bank. Everybody's got to figure out who's on first and what's on second, get settled in, and understand the philosophy, and agree on how we're going to go about this going forward. I think a lot of that's going on. Tracy, you agree with that?
I think it's 100% on, the integration's happening. Matt, when you look back over the regions that we had, we had two regions that got hit with a couple of large payoffs that one of them we knew was probably coming, one of them we didn't. When you look back over all the regions, there's been nice, little steady increase in loans. That's one of the things we recognized at the conference. A lot of our true community banks and where the bread and butter of the company is, they're constantly making the right progress and taking steps.
I think we had one large one that paid off out of the Northwest Arkansas region, and then the northern Florida region had a large one, too, of which the northern Florida region has had one heck of a run over the past few years, and the developments in what we had there. When you look back and the average of the loans would've been pretty solid, especially with the underwriting that our company's doing today. You can rest assured, Johnny's got us looking at all kinds of stuff.
I told him to bring it to committee. We got a strong balance sheet. I said, "Bring it to committee." If you got something that's big and we need to look at doing something a little different, bring it to us. Let us look at it. I'm not talking about it would be on the right side or the term side. It would not be on the underwriting side.
No, understood. Then on the capital side, do you guys have the updated CRE and C&D concentrations? I'm just trying to understand if that at all is a limiting factor for you guys when I think about-
No
your organic loan growth.
No, we're still just below the 100, 300, have been for the last two, three quarters.
No.
With the flat loan growth, it's stayed right there.
Yeah. The board's approved.
115
115 and 360. By the time we get there, it gives us about $1 billion worth of room. That's not limited to us. I just ask our people to bring us the best $1 billion worth of loans they can find.
Okay, guys. That's all from me. I appreciate the help, and I'll see you guys tonight at the meeting.
Okay. Thanks, Matt. Look forward to seeing you.
Our next question comes from Joe Fenech of Hovde Group. Please go ahead.
Hi. Afternoon, guys.
Hi, Joe.
I just have one question. Johnny, you're about as a student investor as anyone out there, so I thought I'd toss this one to you, maybe help us do our jobs here. I was looking back two years ago today, actually, Johnny, and the stock price was where it is now. When you see situations like that, it just struck me that there's usually a reason you can pretty clearly identify. With you guys, I looked at the forward multiple then, you were at 17 times earnings. Today, it's 12 times. Except back then, you were doing a 170 ROA at 20% ROTCE, and now you're at a 205 and a 23% return, as you mentioned earlier. It's sort of a head scratcher as to why, and even more so because there's been such a huge change in sentiment, as you know, towards the group.
Can you put on your investor hat for us maybe for a minute? What do you think the issue is? What do you think it'll take to get the stock price going here, what it should be doing based on the numbers you guys are putting up?
It's the damnest thing I've ever seen. I really don't know. It's pretty amazing. I have no idea. I mentioned one investor, and he said, "Well, there's kind of a battle going on with y'all," and I said, "What's the battle?" They said, "Well, not like You don't have near the battle that some other companies in Arkansas have." I don't know. If the world thinks that everything hangs on loan growth, it doesn't all hang on loan growth. Everybody's telling me, "Johnny, you got to have loan growth. You got to have loan growth." Well, Joe, you know how this one, this company is. In the long run, we'll win. In the long run, this company will win doing it the way we do it. I think there's no long-term look with a lot of investors anymore. It's short-term. What'd you do this quarter?
What'd you do next quarter? What are you going to do here? What'd you do today? That's not how this company was built. You heard Randy Sims, 28 record quarters in a row. I don't know anybody else. I guess there's somebody in the banking industry that can tout that, but they got us. We're going to get our $2 a share. We're going to be selling at a 10 multiple. Somebody will buy us at that point, if that's the case. Someone will be coming here trying to buy Home BancShares. I can't put my finger on it. I have no idea.
When you're on the road, Johnny, that's the one thing you're hearing from investors is the loan growth? Anything else that you're getting kind of pushback on?
Nope, it's loan growth. 99%, the rest of it is just window dressing, but that's it, loan growth.
You put it well. I like the way you read those numbers out, and that's exactly right.
Well, it's a five multiple PE contraction. It's amazing. The performance hasn't even stagnated. It's gotten better.
Absolutely.
It's going to get better. Let me tell you this, Q2 is going to be better.
Anyway, just wanted to see what you thought about it. Looking forward to seeing you guys in a couple of weeks at Gulf South.
You bet.
Take care.
Thanks, buddy. Appreciate you. Appreciate your support.
Our next question comes from Brian Martin of FIG Partners. Please go ahead.
Hey, guys.
Hey, Brian.
Hey, maybe one question for Stephen, just kind of going back to some of the discussion on deposits and the fact, just on the core margin. The core margin was up six or seven basis points linked quarter without loan growth and without really having to pay up for deposits, with the benefit of rates. When you guys look at, if in an environment where you do start to get some loan growth like you're expecting, Johnny, and you maybe have to pay a little bit more on the margin for deposits, would the expectation be with rates still heading higher, you can still drive some core margin expansion, maybe not what it was this quarter, but still, I guess, would you expect it to still be a positive trend or incremental benefit going forward on that margin number?
Stephen, I think so. That's certainly the plan. You heard what we said about how you incrementally expand loan growth, but I think we continue the course of charging the rates that we are, getting the fees that we're getting and then what it costs to fund it. I don't see any change in the course of our business.
Okay. Still a positive trend, maybe just a little bit less than what we saw in the current quarter on that trend. How about just on the loan growth side, Johnny? I guess, without giving up the underwriting, which obviously we know you've talked about and won't do, but are there hiring opportunities where you can bring more people on who could take business or move market share? Is that something you're considering, or I guess it seems like more the angle you look at maybe this loan purchase as opposed to trying to find some talent that could help move market share. I guess, is that an option as well?
I guess that's an option. I think our people are as good as there is. I don't think there's anybody. I'm not out looking for loan people because I think our people are the best. They understand what we want, and they try to bring that to us. I don't need hot dogs that wrote $600 million worth of loans last year at 3.5% and beating themselves on the chest. These guys understand what it takes to make money in this corporation and what we need to do, and they bring those loans. Now, if they got something that they really want that's a long-term relationship with a big customer, well, they got a bullet. They have bullets, we'll give them bullets.
If it's a great customer, has a long-term future with this corporation and wants to have good deposits with us, we can do whatever we need to do. I told them that last night. I said, "You guys got bullets. If you need a bullet, use it. Just make sure it's a good bullet." Actually, I thought we'd be up the first quarter. We may be up the second quarter, who knows? I'm not forecasting anymore because I got egg on my face the first quarter. I just knew we'd be up $200 plus million, and we ended up flat for the quarter. New York had a great quarter. We'll get it. We'll get our piece of it.
Yep, I got it. I guess I don't disagree with people are the best. It just seems like there may be an opportunity like you're looking at with this loan purchase that if you put a couple more bodies out there, it helps, too. I guess maybe just the other one was, on the expense side, I think last quarter you guys talked about the remaining portion of the expense savings to capture from Stonegate being about $10 million pre-tax. I guess I'm just wondering, if you guys aren't giving a lot of guidance on the expense, how much is remaining to be captured from Stonegate? How much was recovered, I guess, taken in this quarter versus how much remains out there so we can kind of think about how that plays out?
Are there any offsets on the expense side where you're adding to expenses this quarter that will be somewhat of a headwind?
No, there are no new expenses being added. I think I shared with you that, I'm not going to give you the exact numbers, February was higher non-interest expense than March. If you analyze March, it's somewhere around $300 million. You can kind of play with that yourself and figure that out. I think it's about $1.8 million, Brian, thinks to $2 million during the quarter that flushed out here by the end of March. I'm not sure. I know we carried some of that in March, even though March was a powerful month. We carried some of that into March, but I don't know exactly how many dollars. When did you actually close them, Dave? When did you shut the branches?
It was February 9th.
A lot of those leases were paid through March.
Leases were paid through March. Okay. Yeah, you'll see that savings roll in, and I'm pretty excited about it. I ran my ROA on March, just on a March month, and it's worth looking at.
Okay. I appreciate it. Thanks, Johnny. Then maybe just the last two things, just maybe one for Brian on the accretion, just kind of how to think about that big picture. Was it a little bit of a stair step down this quarter, I guess? Is that kind of how we think about it, and how much remains out there that needs to be brought back in?
We've got $88 million of accretable income left on our books, that can come in over the next four or five years. The March accretion actually was the highest accretion month that we had, and that was the first month that we had all of Stonegate 100% loaded on the system. We had to manually make some estimates for January and February. I'm optimistic that we won't really have much more of a stair step down on accretion. If it is, I'd look for it to be a smaller stair step than the one that we had this quarter. To add a little color on one of your questions about cost savings, we were estimating $10 million of cost saves. We actually got closer to $11 million, and $1.8 million of that was what was expensed during the first quarter.
I got you. That's helpful. Just the last thing, Johnny, as it goes back to M&A, you kind of talked about it, but I guess we all kind of know that banks are sold, not bought. Given where we are in the cycle, if something were to come up, I guess it sounds as though you just pass on it at this point, if they're dead set on getting something sold, I guess you'd probably err on the side of passing on something at this point. Is that how we think about it until you see a rebound in the-
Yeah, I think that's good. We like something that's kind of messed up. We like those kind of deals, except for Stonegate. I don't know if we'll get it. It's our kind of deal, though, we're working hard on some different opportunities out there. We're working on that $350 million worth of loans. We're working on a pretty nasty bank, and maybe in a different geographical area, but we're looking at it. The accountants and attorneys and everybody's on top of the game on that. That might work out for us. Then we're still looking at one that's pretty deposit-rich and just haven't had the ability to get to. If our stock gets back where it ought to be, we'll go after that deposit-rich franchise.
The world won't have to be asking me the questions about the deposits, because we'll have plenty access to them. Anyways, overall, I thought it was a great quarter. They took our stock down to $0.60, and I thought, "If they're that stupid, I'll just buy it." I did. I bought stock, and we're out right now. If we weren't out, the company would be under both feet.
Right. Okay. Look, I appreciate the color, guys. Thanks. Nice quarter.
Hey, thanks. Appreciate it.
This concludes our question and answer session. I would like to turn the conference back over to Mr. Allison for any closing remarks.
Andrea, thank you. You were a good host, and maybe we'll get you a Slurpee next time. Thanks, everyone, for joining the conference. We appreciate your support, and we'll hopefully have a little loan growth next quarter, maybe. We can put it together. More importantly, pay attention to the numbers. This company is hitting on all eight except for the loan side, and that side will come, and if not, we'll go buy some loans. Anyway, thank you for your support and your attendance, and we'll talk to you in 90 days.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.