Home Bancshares, Inc. (HOMB) Q3 2015 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, welcome to the Home BancShares Incorporated Third Quarter 2015 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. [Operator Instructions] The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on Page 3 from their Form 10-K filed with the SEC in February of 2015. At this time, all participants are in a listen-only mode, and this conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to our first presenter, Mr. Allison. Please go ahead, sir.

Thank you, Dan. Welcome everyone to Home BancShares third quarter 2015 earnings release and conference call. Pretty much the same crew with me today Randy Sims, Tracy French, Donna Townsell, Kevin Hester, Brian Davis and Jennifer Floyd. You’ll be hearing from all of them today as they report. Great quarter, I hope you’ve seen the press release, looks to me like it's time to raise the performance bars to new levels again. Loan growth, efficiency, revenue, EPS earnings, margin all contributed to a great quarter. I think save [ph] record becomes one of our large investors recently said, you get on the phone, it's record, record, record, record, record, well that’s what we do every quarter, we try to have a record, record, record, every quarter. So we’re going to do our best today to go through this process without saying record. Powerful revenue growth coupled with controlled expenses was the key to the income increase. I’d like to welcome Bay City, we have a smart group of people and we look forward to working with them, we’ll be there next week I think, going for a meet and greet, just to meet their customers and more of the people. M&A is most busy and frustrating, it's frustrating from the point that the process kind of works like this, a guy comes in with no skill in the game and parachutes into Florida and pays some [indiscernible] that is exorbitant and creates dilution to the shareholders and he really doesn’t care because it's not his money. Then everyone thinks their baby [ph] is prettier than the next one and they expect that same crazy perhaps on the next deal and they want more for the baby. Don’t mean to be getting on the bankers, but the bankers brainwash a lot of these sellers with this stupid profits, put them in their head and when we present a realistic price they think we’re trying to steal their baby. That’s one thing on the bankers, sometimes it's not always the bankers, it’s the CEO, recently we had one from the [indiscernible] to make a deal, his question by the way, he’s going to report-six [ph] our way, his questions were, what about me, can I keep my car, do I have a car allowance, can I keep my country club, but still get six weeks of vacation, will you give me and six of my people a contract. It just goes on and on and we don’t do that because if you lock in that contract [ph] you have to -- there has to be change to move it from a report-six ROA. So you have to change the cursor or you get just lock in the same fields [ph]. And that is when the bankers starting with an unrealistic price and then added warrants and options on top of the purchase price, I said why did you do that? He said because the seller didn’t want to pay them and I thought well okay, we didn’t issue those, that’s an expense, I mean wow, we’re in and dated with good opportunities because we’re very disciplined with our M&A approach, what was compound annual returns since 1999 including the startup of this company and the worst number was still 17.3%. The problem is that if we pay too much there isn’t more. Someone wants to get a stupid price and then expects returns -- the same kind of returns in the future, that’s pretty funny. Most investment bankers most investment bankers don’t care about the deal, they’ve been paid and they’re off to the next deal. Instead of telling me how many deals they’ve done let’s look one year later at the deals and see how they worked out for both the seller and the buyer. It has to work with both parties. As we continue on the M&A process we probably will not be the highest price, but there is only a handful of really good M&A acquirers in the country and we’re considered one of those. American bankers recently, in the new recent articles about surprises, investors becoming surprised later in the deals. Investors are becoming more aware, great, finally because some of these deals when they’re announced are a little misleading. It’s a line of business and you better know what you’re doing. If you’re not doing 15 or 16 ROA, you probably need to fix yourself first. If you’re doing a 0.4 or 0.5 these guys probably need to fix themselves first because two wounded birds don’t make an eagle. Randy we will go to you for the numbers.

Thank you, Johnny it’s a pleasure to be to report good results and as you stated another really good quarter. So let me just take -- give you a few details on Bay Cities as Johnny mentioned. First, as you are probably aware in June we announced the signing of the definitive agreement and a plan of merger for Home to acquire Florida Business BancGroup. The parent company of Bay Cities Bank headquartered in Tampa, Florida. Florida Business BancGroup operates six branches and a loan production office in the Tampa Bay area and in Sarasota, Florida. As of closing FBBI had approximately $542.4 million in total assets, $415.8 million in loans and $471.5 million in deposits. I am pleased to announce that Bay City’s Bank is now a part of Centennial Bank with the closing of this acquisition on October 1st. Next comes the conversion of systems in early November and that is a very important thing for us. So let’s get into some numbers, there was some exciting progress made in several areas that our team will talk about. I will start with net income, the most important item, a 30.6% increase in third quarter earnings to 35.7 million or $0.52 diluted earnings per share compared to 27.4 million or $0.41 diluted earnings per share for the same quarter in 2014. Excluding the $474,000 of merger expenses associated with the acquisition of Bay City Bank, our diluted earnings per share for the third quarter of 2015 was $0.53 per share. So that is now 18 consecutive quarters of record income for Home BancShares. Our 35.7 million this quarter can be compared to our previously reported profit of 33.9 million last quarter. Diluted earnings per share excluding intangible amortization for the third quarter was $0.53 per share compared to $0.42 diluted earnings per share excluding intangible amortization for the same period in 2014. The components that helped us to get to this record income was strong loan growth, strong revenue, a continued strong margin as well as great efficiencies. When you make progress in your key components the result should be greater net income and that is exactly what continues to happen to us. So I would like to turn it over to Centennial’s CEO, Tracy French at this time to give us a little additional color on our performance this past quarter. Tracy?

Thanks Randy it’s nice to hear those third quarter strong financial results. Our Company is performing well in all areas of our key performance ratios that others will share with you later on today. Our model, we started it the first year, it just gets better every day. This get better every day and it was our goal and it’s suddenly had been fulfilled for the first three quarters. While we’ve been busy maintaining our profitable and growth momentum, I would like to share with you a few items of our focus. Main focus this year was the revenue production; this certainly has been accomplished by the numbers you just spoke about and shown in the results today. The reason of all of this is all across the bank when you look at our loans, you look at our loan fees, you look at our mortgage, you look at our deposits, you look at all areas of the bank it’s coming from the excellent bankers that we have and they’ve performed to the levels of our expectations. I will leave the big number of the efficiency later for Donna to discuss. In reviewing the regions that we manage today it’s pretty simple and it makes you very proud. One month, one region will be the leader in our performance levels, then the next month another region steps up and takes the charge. All of our shareholders should be proud of this group as we are. One item that comes to my mind on a regular basis is the return on assets. The Arkansas region is discontinued for around 2 plus ROA [ph]. While our Florida markets have made improvements every quarter, I am not calling it a trend yet Jonny but the Florida markets combined in September did a 1.6 ROA. It certainly is in the results of the Central Florida and the North Florida efforts and the Southern parts of Florida that our loan growth has been very well. Pipelines of the unfunded loans that Kevin will provide later, has grown significantly in the Central Part and in the Panhandle and I’m looking forward to the Tampa markets as we welcome our Bay City bank acquisition to our team. The other item that’s working very well is our New York operation it certainly on course and the expectations that we planned when we met our group about this time last year and it's nice to see what they are arranging for the year 2016 later on. As Johnny mentioned earlier our due diligence team is active and we have several conversations ongoing with possible M&A opportunities. The shareholders can rest assured that our leadership is staying very disciplined with all the looks that we are getting. Our golden focus is to continue the double digit annualized returns to the shareholders. To provide this return not only to our older shareholders, but to our new ones and also to the future ones that we acquire. Randy, I would just like to end by telling our entire staff thank you for making the first three quarters a winner.

Well said, Tracy. Thank you. Now let's get to a few more numbers. I'll go through these quickly adding just a little more color. So as of September 30, the corporation is sitting at just a little over $8.5 billion in total assets. Our return on average assets for the third quarter was 1.72%, as compared to 1.56% for the third quarter, 2014. It is important to note this increase comes even though we have added acquisition with much lower ROA. Our return on average assets, excluding intangible amortization, was 1.83%. Our core return on average assets that excludes intangibles, provisions, merger expenses, and taxes, was 3.24% for the quarter. Our return on average TCE, excluding intangible amortization for the quarter was 19.76%. The total number of active Centennial branches is 144, with 80 in Arkansas, 58 in Florida, and six along the Alabama coastline, plus our loan production office in New York City. We continue to close inefficient branches across the footprint. But who better to tell you more about that and some exciting news, but Donna Townsell. So Donna let me turn it over to you.

Thank you, Randy. Well we did it, you heard for several quarters Johnny saying he wanted to see as three in front of the efficiency ratio and I'm very pleased today that I can announce we met the challenge and delivered at 39.30% core efficiency ratio for the third quarter. Our focus on efficiency began in 2008 when we started our [indiscernible]. We had a list of 240 initiatives and spent18 months implementing them. Since then tracking expenses has become part of the culture at Home BancShares. In seven years we have dropped our core efficiency from 59% to 39% while also acquiring 15 banks in that same time period. And we consider our non-interest expense which is 1.8 million higher than the third quarter of last year and that's really been due to setting up shop in New York and a decision to pay off some federal home loan borrowing and our new accrual for DFAST [ph] and we’re really basically running pretty flat on expenses and that further show our discipline has just become second nature. This team of bankers worked really hard to make this happen and while they love a good challenge it is possible that I will faint if Johnny request a two [ph] during this call. We continue to evaluate Brick & Mortar like the rest of the industry. In Q3 we closed five branches and four branches are scheduled for the fourth quarter. We are providing our market leaders with more analytical data than we have in the past to assist them in analyzing market needs. So I'd like to close by just saying congratulations to the whole Home BancShares family on this accomplishment. I actually think Johnny said we can celebrate today, which you heard we started already. He did say, we cannot afford to [indiscernible] and tomorrow is back to work. Randy?

I think Johnny, good job. Great job and congratulations on good news, you have been preaching that for a long time to our staff and we finally did it. In fact I could blow it can -- thanks I will. We better get back to the numbers, let’s switch to deposits. We ended the quarter at 5.95 billion. Timed deposits represented 22% at total deposits. And now let's look at net interest income margin. Non-interest expense all will be covered by CFO, Brain Davis, and after that Brain will pass it to Jennifer Floyd our Chief Accounting Officer to give us more information on our capital numbers. Brain?

Thanks Randy. Thanks for saying the few numbers so I didn’t have to follow directly behind Donna, first of all, because I don’t know if I’ll get a bunch of horns blown for mine, momentum from Q2 carried over to Q3 which allowed the company to report these impressive results for the third quarter of 2015. The net interest margin on a fully taxable equivalent basis was 5.03% for Q3 compared to 5.0% for Q2, 2015. The yield on loans improved slightly from 6.01% to 6.08% on a linked quarter basis. The effective yield on non-covered loans was 5.77% in Q3 versus 5.63% in Q2, whereas the effective yield on covered loans was 19.04% in Q3 versus 18.4% in Q2. The cost of funds did experience a slight increase from 36 basis points to 39 basis points for Q3 2015 as a result of our increased use of FHLB borrowings. Because of the company’s significant number of historical acquisitions our net interest margin has been impacted by accretion income for the fair value adjustments recorded in purchase accounting. Excluding these adjustments the company's margin for Q3 2014 was 4.24% on a non-GAAP basis. The provision for loan losses was 7.1% in Q3 2015 compared to 5.4 million in Q2 2015. While asset quality has remained stable since year-end, this increase is primarily related to the organic growth in our loans during the third quarter of 2015. Non-interest income was down 482,000 in Q3 2015 compared to Q2. This decrease is primarily associated with a significant decrease in our trust fees. The decrease in the trust fees is the result of a one-time receipt of 788,000 during Q2 related to 12 [indiscernible] that were recorded in our Trust Department. For the quarter we did experience an increase of 339,000 in service charges and we also experienced another record, an increase -- and a 177,000 increase in mortgage lending income. Excluding merger expenses, non-interest expense was up 669,000 in Q3 2015 compared to Q2. The primary increase was related to a strategic decision to pay off a few of our higher price FHLB advances, plus we are now incurring new costs in preparation of DFAST [ph]. With that said, I’ll turn the call over to Jennifer.

Thank you, Brian. Now I’d like to briefly review the third quarter capital results. As of September 30, 2015, our company ended the quarter with 1.91 billion of capital, and 67 million of cash as a parent company. During the third quarter of 2015, we paid out shareholder dividends of 10.2 million and grew retained earnings by 25.6 million. For the third quarter 2015, our common equity Tier 1 capital was 753.2 million, total Tier 1 capital was 812.2 million and total risk-based capital was 875.9 million. As a result, our leverage ratio was 10.3% compared to 10.4% at June 30th. Additional third quarter capital ratios include book value per common share which was $16.05 compared to $15.67 at June 30th. Tangible book value per common share was $11.03 compared to $10.61 at June 30th. And finally, our tangible common equity ratio was 9.2% compared to 9.3% at June 30th. Randy?

Thank you, Jennifer. You know we’ve talked about the key components to our net income numbers and certainly our loan growth has been so strong this year combine with equally strong asset quality numbers. So let's switch to our chief lender Kevin Hester who will give us more detail. Kevin?

Thanks Randy, 90 days ago we were discussing the strongest loan growth quarter since the downturn with legacy loan growth of $280 million, that translating to about 23% increase on an annualized basis. This quarter we were able to improve on those gouty numbers with organic loan growth of $351 million. Thank you so much for that celebration. This growth with almost equally divided between the community banks [ph] branch and CCFG. We continue to see a number of very good lending opportunities throughout our group and that should increase with the addition of Bay Cities Bank from the Tampa side area which is one of the nation’s strongest MSAs. Both the non-covered, non-performing loan and asset ratios increased by about 10 basis points this quarter, but virtually all of that increase was due to non-performing covered loans reaching the end of their loss share agreement and becoming non-covered loans for us. It is possible we will experience this at the end of the fourth quarter with the remainder of our failed bank CNAs reaching the end of their five-year commercial loss share agreement. As a result, the ALLL coverage of non-performing, non-covered loans decreased but it's still solid at a 124%. Both net charge-offs and capacities remained low at 24 basis points and 1.09% respectively. The allowance for loan losses as a percentage of non-covered loans increased 1 basis points in the third quarter from 1.02% to 1.03%. However if you added all of the acquisition discount to the allowance per loan losses the combined figure with a 2.84%. Non-covered real estate owned increased 1.7 million on a linked quarter basis due to the covered to non-covered reclassification noted above. The mortgage area continues to improve profitability significantly quarter-over-quarter due to a combination of increased volume and improved margin. The focus on adding experienced producers in good parts of market has allowed us to increase volume at a time when refinances have declined due to the extended period of low mortgage rate. We continue to evaluate opportunities to expand our lending operations from both a product type and geographic perspective since we approached 10 billion in assets. I am glad to report that it was a great quarter and with that Randy, I’ll turn it back over to you.

Thank you, Kevin. Of all the conference call I have been on, I am going to have to say this was the most fun and we want to thank you for allowing us to have a little bit of fun and our celebration of three very good quarters for this [indiscernible] 2015. So let’s put together what has happened this quarter real quick. Another acquisition that adds to our Tampa Bay market closed in part of Centennial Bank. Record earnings for the 18th consecutive quarter, record revenues, good non-interest income, a consistent and strong efficiency ratio and with a three in front of it. A powerful margin, strong legacy loan growth and great asset quality metrics, consistent improvement in all the major components that has resulted in our consistent record earnings and that is what makes for another great quarter. And with that, I will now turn it back over to our Chairman, Mr. Allison.

Great quarter by all, that’s a really good quarter, I am actually very proud of that. I will not call the name of the large investor who didn’t want to see -- I noticed huge record Randy there a few times, but Brian you need to call me after this meeting and tell me whether you’d rather have the horns or whether you’d rather have records, we’ll do whatever you wish in the future, I think maybe records are better than horns. But anyway, Dan I think we’re ready for Q&A so you’ve got some people queued up, let’s go to it.

Thank you. We will now begin the question-and-answer session [Operator Instructions].

Dan this is John Allison, can you hear me?

Yes I can sir.

Am I live, I’ve got one more comment that I meant to make earlier, can I go with it now?

Please.

I just want to comment on the efficiency deal efficiency is simply a ratio of revenue and expenses and basically it’s an offensive team and a defensive team and we need both. I want to congratulate to all teams, the lenders, the loan assistance from the back office for a strong interest margin, strong loan growth, creating powerful revenue improvements over last year. On the defensive side we’ve lowered efficiency ratio over the last 7.5 years from 59 and change to 39 and change, great job, and while we did that we added 15 [indiscernible] interesting number that Brian did for me, assuming that 50% of the revenue -- 50% of the cheque [ph] was from revenue and 50% was from controlling expenses. The combined additional income is almost $100 million to Home BancShares annually that gives you a perspective of what that means to this corporation. And you think about it, Donna and Brian both touched on the expenses, the expenses for the third quarter of ’14 versus third quarter of ’15 with the adjustments Brian talked about were flat. And think about that, we added our New York office with 30 people, good job [indiscernible]. The goal of the sub-40 efficiency was very aggressive, but felt that our team could get it done. It’s a huge accomplishment for Home BancShares. As result of the tremendous effort on the defensive side I’m promoting our efficiency expert Donna Townsell to Senior Executive Vice President of both the Bank and the holding Company as of today. Donna congratulations on a good job and don’t let up [multiple speakers]. I won’t ask you for [multiple speakers] you can blow the whole -- I won’t answer you for a two in front of it, but 35 sure would look good. And we’re ready now.

Thank you. Our first question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.

Just the commercial finance group obviously had another good quarter and maybe you guys could just give us an idea of the types of deals you are approving and if you have any new thoughts on maximum potential size of that group, now that we’re a couple of quarters into it?

John, this is Kevin, we’re doing really the same kinds of deals we’ve talked about on the previous calls. The bridge type financing both in New York and outside of New York, and in the lines of credit to the Company -- to hedge funds and equity funds to buy distressed assets. So it’s a lot of the same stuff that we’ve been doing that we’ve seen and do in the past.

You asked about the potential there, I think we have about 29 people now, Tracy is that about right?

That’s correct.

We got about 29, we’ll probably be adding couple more maybe, but we think that and Chris’s team can take it now to $800 million or $900 million over the next period of time. So I think we’re pretty staffed up, there might be a little incremental increase but pretty well staffed up and ready to go we’re on the 23 now, I think they’re building out to 28 [indiscernible] and that shouldn’t -- I think some utility bills or something, that’s about all we’re lacking getting everything in for the last month.

Okay, and sits at about 500 million today, is my math right?

527 million.

527 million, okay.

And we’ve approved the 100 yesterday, so it’s pretty impressive.

And then I asked about this a couple of quarters ago but maybe give us an update on your thinking on funding some of the growth and I don’t mean just commercial finance but also the rest of the footprint your loan to deposit ratio’s up a little bit, you've talked a little bit about home loan bank borrowings but give us an idea of what you're seeing it for the next couple of quarters in terms of funding the growth?

Funding's become an important issue for Home BancShares, we actually set up a little funding for meeting we make everybody to talk about funding and we're trying to pull all the levers and they're a little bit diversified. We are partial to doing FHLB advances because that's the cheapest source of fund, as of today we have 650 million available, but we also have about 250 more million of that will become available on FHLB loans taking it to 900 million and that’s a product of our $350 million loan growth plus the $400 million worth of loans that we acquired on [indiscernible] through our base cities acquisition and so that will go up to 900 million. We have been little more aggressive in bidding on some public funds in Florida, we typically had really stayed with Arkansas but during Q3 we did bid on a $100 million worth of public funds in Florida, which has a low pledging rate compared to our Arkansas and we won that. There is another 100 million coming up for bid later this month that we’ll take a strong look at. We have ample room to do broker deposits, we only have 50,000 [million] of broker deposits and which is about 1% of our deposits and we met with our regulators just this week and asked them how they felt about that they said they don’t have any problems with us going to 15% to 20% not that we’re fixing to do that but it gives us a lot of room to get some deposits there. But that’s pretty much what we have on our bucket at this point time.

Okay good. And then I guess Tracy, Randy or Johnny, just on acquisition price and what do you think changes the acquisition pricing environment if anything?

Well this is my hot button but I think what if they understand that the spot that they're taking is the $10 bill and it's really worth $9 because the dilute in sales once the sellers figure that out, I'm doing my best to educate them but once the sellers figure that out then I think they'll reduce some of these deletions, they'll say they are going to have to earn back intangible book in four and a half years, can you imagine the real terms of that deal. If they are publishing four and a half years that's probably infinity, so I think that total deal in the call last time Brian Davis [Indiscernible] this amount for a while when did they get the return. And Brain came back and he said I don’t have enough callers. He said I ran it as far as I can run it and it never comes back to him. So that’s what we sell, one thing we have is the stock that is consistently powerful and a consistent company. We didn’t hit this performance levels overnight so that’s what we sell and e show charts we have a great chart we show it and it's all the competitors that bid against us versus Home BancShares and dependent on for the last eight years so dependent on which one you buy homes are 400% and the next one to us is up 110% and most of them are still down, so that's the most powerful thing we sell, we also show them the chart John that shows inside ownership, market cap and if you look you can track the inside ownership on these deals and see that our value of the company is far higher than those others. So we show return on assets, with common equity, we give them all this chart, and it really tells the tale. So somebody if we have to sell our story and that’s what we do [indiscernible] had a very astute group of investors, they had some funds in there, plus they had some very sharp directors that understood the value of Home BancShares stock. We may not have been the highest, but we got that bid, so I think they will be happy with this and when I said the lowest compound annual return was 17.3% I felt that's pretty hard and that's started that's from 1999 those of us that got in early. So that’s how I sell it, I think those in a real sharp investors understand that and we have the ability to sell that. But if we are not sophisticated enough [indiscernible] are getting $10 from ABC. And they went off and retaliate on that, but anyway.

Yes, okay good. Alright, thanks for the help.

And our next question comes from Stephen Scouten of Sandler O'Neill. Please go ahead.

Hey, everyone good afternoon. Thanks for taking my questions here. Question for you on the expense front. Congratulations on the achievement that’s very impressive and what do you think -- I know John you said you like to see this 35 here one day but what's kind of the headwind as it pertains to the issue of crossing 10 billion in assets as it comes to increase regulatory expenses and then also on the Durbin front. Have you guys gotten any further around the map there and what the effect might be?

Yes, we do. We're estimating that the Durbin amendment will cost us a $1 million per billion. So if we grow over it organically that fees alone will cost us $10 million. Currently we're also estimating that the DFAST component of it will be about $2 million, we have begun spending a little bit of money on that, we have a $150,000 in Q3 that we spent this quarter plus as of yesterday we have our very first employee dedicated to DFAST be someone that came from a holding company that was already over 10 billion and has had exposure to it and so between him and the consulting firm that we've already signed up with that we spent the $150,000 with so far, that's how we’re going to get started on the DFAST.

And are you concerned that will take the efficiency ratio back up above 40% or is that unlikely to happen given the continued revenue growth [usually].

Well that depends on the next deal we get. So we get some scale in the next trade that we do. One other thing on the 10 billion, the Durbin amendment doesn’t kick in day one as you over 10 billion, so if we were to grow over it and let's say we just grew over it, you know next year without an acquisition that means it wouldn’t kick in until July 1st of 2017 and the way I look at it is if we could just grow to $11 billion, an extra million we’re running a 170 plus ROA then that would more than cover the lost revenue of the Durbin and the DFAST.

Okay, yes that makes sense. And saying a little bit more about the CFG group there, I know this was covered somewhat in the first question there but in terms of still the potential of that group for growth, is this level of growth that you saw this quarter would you expect it to be that or higher moving forward or is there a governor you are going to put on that growth at all at any point in time.

I don’t think there is a particularly governor. I think our charge to them was good credits. We want to see really-really good credits and as long as those are out there and that's what we're seeing I don’t think there is a governor. We've talked about a billion, they are half way to that, so you can see that over the next year or so.

Well I think when [Middle East] group that we met a year ago that we set out a plan and that plan’s been delivered right on track so far so, Steven will state good pace for the company and the group there so I think just to see what they can do.

They did a budget and they hit the budget right on the budget, so far so far so good and we are very pleased and they are really bright people who are doing a good job, so we are excited to have them in the family.

And there is tremendous over side on the credits that are coming before us, a lot of study, a lot of committees and so we feel pretty good about that.

And are any of those EB5 credits is that any of that bridge financing these EB5 loans?

There is a little bit there, we've seen more that in our own footprint than we have through the New York group.

Okay. And then one last one if I could on the level of provisioning, it seems maybe a little higher than I was expecting, is that just due to the higher accretion that you had from the loan pools and that just kind of more elevated due the elevation there in the accretion or is that more of a run rate type of number that we would expect to see.

I don't think it's a run rate number, we just had tremendous loan growth and we thought if was probably prudent to do. I like 150 reserve, we are not there yet and its lack of 150 reserve, I know Kevin says we don’t need a 150 reserve, but its lack of 150 reserve. So anyway when they turn around I try to put some more in there.

Fair enough, okay. Good stuff guys, I appreciate it. Congrats on a great quarter.

And our next question comes from Michael Rose of Raymond James. Please go ahead.

So Johnny I appreciate the comments on M&A and on the front end but I think we all know that Tracy’s per diem can't support a country club membership or a caller.

That's correct. To get to the 35 we won’t cut that per diem back. [Multiple Speakers]

[Multiple Speakers] [Indiscernible].

One of our investors he said that.

In all serious side so on the quarter deal today, obviously appreciate your comments on the front end in all seriousness, just what you are seeing out there in terms of what is pipeline look for acquisitions at this point. Obviously pricing is maybe get little frothy and then outside M&A just in Florida as well what are you seeing from the environment, every deck that I talked to is seeing really excellent growth and when I start to see that and other banks from out of state coming and doing acquisitions it really points to me that we could be nearing the inflection point in the economy, any comments?

Well I'll give you some comments. The loan committee met me the other day and it lasted four hours and it wasn’t that they were big loans we just [indiscernible] it took the committee a long time to say yes or no on those loans, I just want the quality that we had seen in the past and so Tracy said out to our people if we are not going to be interested in those kind of credit. So anyway the last meeting was good credits again but you are seeing a little late, I think some people are buying some of those really poor credits and I think they are trying to get competitive on the right some stuff you don't even want on your book. That's a little frustrating. Your question was on M&A, is that right?

Yes, both on M&A and then just the operating environment and what you're seeing in terms of new credits?

We have a lot of opportunities, we have -- we will meet -- first we have in Orlando, let me say this we were in Florida. We’re in Florida with two bags, 10 days ago, got another one seat up in Florida the [business] in the next 10 days, there is a lots of deals, lots and lots and lots of deals out there. You just have to move on. If you can’t, the expectations are sometimes well I think not saying not realistic, so we have to move on, it's just next, next, next, you don’t follow where we were. We remain strictly remain extremely disciplined on the acquisition side, we’re not going to do diluted deals. People come in and they [indiscernible] so we don’t play that game. The other question was -- operating plan is pretty good, actually other than that one week of kind of trashy loans, it's been good, times are good just about everywhere, I really don’t have a complain.

I will just add Michael to that, the loans that we’re seeing and that our group when we talked about it in the prepared remarks about across Florida, is just to give me fruits from our efforts that our teams have been doing for past several years. I mean it's coming back to our newer acquisitions that we’ve had, the loans that they are able to do now, our balance sheet that allows them to go and extend different credits, larger credits or little bit more to their existing customers that they have known in the past has happened in South Florida, it’s happened in Southeast Florida and it certainly happened in the Panhandle which most of those were some challenged institutions during that time, the group there in Panhandle has done really well in Alabama. So the credits that we’re still seeing today is generally some relationships that this company’s had in the past. So we feel pretty good on that. We hear from the competition or some of the things that whenever a customer comes to us a little bit thinner on credit underwriting a little bit more loan to values potentially that we haven’t changed our stance there and our bar are still come to us for the relationship that we developed over the years.

And I would just add especially on the Florida front, what you're seeing is all those failed institutions that we’ve bought over the years were the ones that were struggling. They are maturing more and more each and every quarter and the bankers are out, our name is getting out, our name is becoming the prevalent bank, the bank to go to and we’re seeing people come in and coming into our banks in numbers that before was then. So I am really proud of Florida and the maturing that its doing and you can say the same thing about Arkansas. We’re not the same Arkansas Bank will work three or four years ago, we are the Arkansas Bank with the footprints that we now have due to Liberty acquisition. So the entire corporation is maturing and you're seeing people come to continue because it is the place of production.

One more comment and we’ll move on is that you remember my comments when you all were concerned about our loan growth but I said you can’t push a row, you get yourself in trouble and when it comes we’ll get our fair share. So first you drive all the hard work, all the ground work that's been done out there and here it comes and we got great loan growth.

Alright, just one more quick one for me for Johnny. Have you guys been approached more recently by a larger bank, we've seen lots of deals more recently that maybe indicate that there could be some upstream movement in M&A? Thanks.

I think the question was have we been approached by a larger bank recently? Actually that’s yes, but we’re not interested in any bank at this point in time.

Let me say that we’ll be watching the best interest of shareholder but this one didn’t appear to be in the best interest of shareholders.

And our next question comes from Brian Zabora of KBW. Please go ahead.

Thanks, good afternoon. Question on pay downs, your last conference call you talked about expecting some sizeable unusual pay downs in third quarter. Did you see that at the same level that you expected and how the pay downs look for fourth quarter?

No we didn’t see a couple of those large pay downs did not occur as we thought they would in the third quarter, some of that was pushed out to forward and beyond and some just will not happen. So there will be some of that in the fourth quarter, that we really thought will happen in the third.

And then on the [FAC] identification, does that go -- I think Brian talked about in previous calls maybe that goes to 1 million in the fourth quarter is that essentially zero or close to zero in 2016?

No because we still have about 10 million of that left or so when we get down to the end of the year. I am estimating that it’s probably going to be about 2.3 million in amortization expense for all of 2016. So we’ll take a major decline because when it’s happening it's a five-year loss share is expiring for everything and so we still have [indiscernible] to have some loss share amortization in Q4, but after that all the five year loss share is done on all of our deals.

And our next question comes from Matt Olney of Stephens. Please go ahead.

As far as the margins, really great to see that maintain above 5% I am curious what the outlook on the margin is over the next few quarters?

Let me comment to that because Brian Davis followed the Randy Meyer philosophy, as the margins going down, down, down and it went up, up, up. And if you recall Brian [indiscernible] he says he’s going to follow that and he says going down and it went up, so I will let him answer later. But I don’t think that you can put much credibility to it, you really cant.

I agree with Mr. Allison I am going to follow the Randy Meyer philosophy, and I am going to say that it’s going down. If you held everything constant Matt, we are experiencing quite a bit of accretion income and in this quarter we had 2.1 million of additional accretion income that came in as we did some impairment testing and found out that we had some excess credit marks left over from our Heritage acquisition and our Premier acquisition. Those accretion numbers continue on in future quarters. But as the loan balances get smaller, the overall accretion goes down unless there is another layer. If you add up all of our accretion income, it should go down about 1.1 million for the next quarter, and that’s about 6 basis points. So from just from the accretion standpoint, I would be looking for it to be a little bit squeezed. Plus during the quarter, we layered about 300 million of FHLB borrowings. But in the beginning of the quarter [indiscernible] and that’s probably impacted our margin about $500,000 for this quarter and we’re probably impacted an additional $500,000 from where we headed in Q2, or about 1 million a quarter and that was 75 million layered four different ways at two year, three year, four year, and five year money, whereas we had it in over non-floating.

And then Johnny for you, I am curious how you’re thinking about capital right now. You still have the excess capital, you’ve worked through a portion of that as the loan growth. How do you think about your excess capital today versus a few months ago when your organic loan growth just wasn’t there as strong?

Well, we traditionally run about 30% on the dividend on that handle, so we’re probably are not going to pull that handle right now, we’re working on some deals that may take some cash. But as long as we have our tangible common equity in the non-passing as I can be, loan growth is fully down I think Jennifer said we went from tangible common equity from [93 to 92], that’s just the loan growth outstripping the capital and you will run the 172, we may do better though when you get to 2, when you get it up to 2 then we can run with that $380 million, $360 million worth of loans. So we are just watching it, we’re happy with the capital at this point in time, if we meet capital at some point we’ll do something to get it. But as of right now, I mean everybody is trying to sell us a deferred or sub debt, we don’t know what to do with it actually at this point. So probably just going to continue doing what we’ve been doing Matt.

Our next question comes from Brian Martin of FIG Partners. Please go ahead.

Maybe just one question for, maybe for Brian Davis, just talking about the importance of funding just kind of the -- kind of how you guys are thinking about the loan to deposit ratio as you go forward against -- any color on that can you give.

I mean we’re at 100 now, but I would be okay with going a little harder. I know our Mr. CEO down there Randy he would go super-hot at probably a 120 I don’t want to…

Absolutely. You’ve got to get that engine going.

Yes, and maybe I missed it but just the loan pipeline, you talked about the New York operations. Just to be kind of a legacy footprint, just where are you seeing strength there and just what does that pipeline look like relative to last quarter, the last couple of quarters?

It’s probably more like second quarter than third, it’s still strong and production is good and particularly in Florida as you heard on the call. But I would say it’s probably more like second quarter than it is third quarter.

However, third quarter started out a little slow too and it is cranked up and when you look at the revenues that came in, average loans was about [5.880] million and I think we ended up close to $6 million of loans at the end so we got a little kick in a lot of those closed late in the quarter.

And then just the last few things, maybe for you Johnny just the -- about the M&A maybe just any commentary on deal sizing, the people you guys are looking at today are they on the larger side on the smaller side? And then maybe just any commentary on your Home 250 target?

We’re looking on the east coast of Florida, we have David Drury who ran about 1.5 billion worth of assets for home and actually ran the most profitable region that we had and he's moved to Fort Lauderdale, so were looking for something in that area where we can get our $200 million, but he can run a $1 billion, $1.5 billion, maybe 2 billion, so we are looking in that market to see if we can find something that beats him up from a strategic point of view. Randy you have got any comments?

No I just think that we still have some holes in Florida that need to be filled and whether it's we bought or we organically grow into it this, those are our opportunities and so we are still looking hard at Florida and Florida is slightly big for us and we are trying to staying our footprint as much as we can, we have talent own the ground in those markets, Jim Heinz in the Pam house has taken other billion, I don’t think there is any doubt about that, he can take it. [Indiscernible] you've taken another half a billion and David can take a billion or so, so we got [indiscernible] could take another $1 billion, so we got talent on the ground and we are pretty comfortable with staying in that market.

This concludes our question-and-Answer Session. I'd would like to turn it back to you Mr. Allison for any closing remarks.

Thank you, Dan. We are not going to blow our horns, we are not going to horn up this afternoon so anyway first say everyone support and we will talk to you in early days. Thanks.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.