Home Bancshares, Inc. (HOMB) Q1 2016 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated First Quarter 2016 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 three of their Form 10-K filed with the SEC in February 2016. 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.

Thank you very much. I’d like to thank each of you for joining us today, as the Company holds our first quarter 2016 earnings release and conference call. With me today is the usual suspects, you know all of them, Randy; Tracy; Donna; Brian; Kevin; and Jennifer. You will hear from each of them today. You will hear Randy in a minute talk about Home just completed 20th record quarter of earnings in a row that’s five years of solid performance. First quarter was really a pretty good quarter for the Company with the record EPS, record earnings, record revenues, record efficiency, record core ROA and record pretax pre-provision ROA. Other outstanding numbers for the quarter was loan growth. That pretty good loan growth for the quarter, how we had a huge payoff and I’ll let Kevin Hester talk more about that today. 33% increase in earnings, good expense control, margin remained flat at ex-accretion, non-interest expense was flat. If you pull out New York and look back last year, the non-interest expense was basically flat and we’re pretty proud of that; continued improvement on asset quality, good coverage on non-performing loans, reserve and non-performing. We continued to build reserves in both the fourth quarter and the first quarter of 2016. We believe that it’s prudent to see and in line with the length of this cycle, the slight kick up in construction loans coupled with low long-term energy prices. And as you remember, we had only a little over $30 million of total energy exposure. It is time to be a little more cautious. We’re seeing a few funny things done in the marketplace that makes us a little nervous, not any one thing; there is not any one thing, it’s just over time it’s been cumulative effect of some silly trades that wants to make more and more cautious. We’ve grown our lines of loan loss reserve almost $16 million from last year, reaching, I think the new high of $72 million. Even though charge-offs are down, loan growth is still good, when you add the credit marks to reserve, we’re just under 3%, will continue build when appropriate. I think the fourth quarter and the first quarter we put in 14.6 million. It’s our money, we’re just putting another cap to be cautious. Mark Twain said, it’s not what you know that gets you in trouble, it’s what you think you know that gets you in trouble. So, we think where we are at, we just want to be careful. And we bought back about 250,000 shares during the quarter and the market put our stock on sale. So, we took advantage of the opportunity and we will continue to back where the opportunity presents itself. On the branch closings, we’re continuing to analyze the branches and we’ll continue to close when appropriate and opportunistic. On the M&A, lots of banks for sale. I don’t know they really have a great price, but better said, we get lots of looks and lots of deals but we go back and forth -- only go back, excuse me, on the second visit, if we think the deal fits. So, these are works we’ve done, with no need waiting time and giving people false expectations. We have an M&A committee that filters our deals. We still have a letter of intent that’s out on the Florida bank and we’re trying to work through situations out there and hopefully we will get some resolution this quarter. On the loan loss discussion, it’s not as big a deal as it was one time. We’ve worked through that and we’ll be continuing to analyze it as we go forward. First quarter 2016 looks like a great start for Home, good loan growth coupled with strong efficiencies, good asset quality, stable margins, hard work and commitment from our team I think hopefully will lead us to our new goal of Home 250. In particular interest in the quarter, you pay attention to was the record revenue in spite of the accretion income down $2.5 million in the first quarter over the fourth quarter and one less day. So strong stable margin, good loan growth and good non-interest income more than overcame that. Randy, it’s your turn. You need to give advisor numbers.

Thank you, Johnny. First quarter of 2016 is over and in the books and as you shared, it was a good one for Home BancShares. I really believe we are hitting on all cylinders, and we have a great team on hand today to tell you about each area of the numbers. So, let’s get into them; I’ll start with net income. Net income for March 31, 2015 was $41.4 million, compared to $31.1 million for the first quarter of 2015 or a 33% increase or $10.3 million. Diluted earnings per share for the quarter were $0.59 per share compared to $0.46 per share for the same period in 2015. We were very pleased with our net income and our start to 2016, which leads me to my favorite part of the report, even though my Chairman beat me too it, that is now 20 consecutive quarters of record income for Home BancShares.

We should have drum beat for that.

Should have, may be next time we’ll do that or when we hit 25.

We really have a real drum.

Yes, we could have the horns back.

Horns would be good too.

We’ll have to think of something when we hit 25. But that is now 20 consecutive quarters and naturally you have to be proud of that. Our $41.4 million this quarter is a $4 million increase and 10.7% improvement compared to our previously reported fourth quarter of 2015. So improvement and increase is everywhere. And as Johnny said, records, records, records. Components that helped get us to this record income were strong organic loan growth, continued strong and consistent margin, excluding the accretion yield on purchase loans as well as the great efficiency ratio, all of which others will discuss in more detail. Our success continues to be our progress and improvement in these key components, resulting in greater net income and as I stated record income for 20 consecutive quarters. Can’t say it enough. So, I would like to turn it over to Tracy French to give us additional color and his comments on our performance.

Thank you, Randy. I’m proud to say the momentum that we carried into 2016 resulted in improved financial performance in all of our regions in the first quarter. We achieved strong organic growth while maintaining, in most cases, we were strengthening our already conservative underwriting standards. The strength focus of our rising low cost core deposits in our market resulted in some nice gains for several regions, most notably our Northeast Arkansas, the Panhandle or as we call it North Florida now, Alabama and the Florida Keys. It’s nice to see that the hard work that was planned paid off. As I mentioned on the loan side, many of our markets saw strong increase in loan volume throughout the quarter. Arkansas showed solid growth in all markets, particularly in Northwest Arkansas this past quarter. The Panhandle or as North Florida we call it today, led the charge in Florida and grow with the South Florida and the Southeast Florida region made meaningful volume, and congratulations to all those regions. Central Florida, still amazing me to watch this team continue to build and improve on the valuable Central Florida footprint. Our local boards there have been a tremendous asset as well, thank you to all. I want to recognize our team in New York as we just had our one year anniversary with them. They continue to perform at or above our expectations, and we look forward to converting our current office to a branch in the second quarter. To close, I’d like mention a few financial metrics of our regions. Using our internal calculations and excluding the accretion income, our Arkansas regions continue to run their 3% core return on assets and operate very, very efficiently. Our combined Florida market did a 170 ROA for the first quarter, that’s up 146 from the fourth quarter. And we continue to see the efficiency ratio improve in most of those regions as they generate revenue as well. It’s fun to watch our regional presidents compete against each other on a regular monthly basis and I have no doubt we will continue to prove these already impressive numbers.

Great report, Tracy. So, let’s get to just a few more numbers. So, as of December 31st, the corporation was sitting at $9.4 billion with just a little rounding in total assets. Our return on average assets for the first quarter was 1.79% compared to 1.67% for the first quarter of 2015. All regions, as Tracy just went over, performed well and it’s good to see the great results in our key components. Congratulations to our entire group of bankers. Our core return on average assets that excludes intangibles, provision, merger expenses and taxes, was 3.27% for the quarter as compared to 3.04% for the same period in 2015. Our return on average TCE excluding intangible amortization for the quarter was 20.79%; these are strong numbers. The total number of active Centennial branches is now 142 with 77 in Arkansas, 59 in Florida, and 6 along the Alabama coastline, plus our loan production office in New York City. Speaking of New York, as Tracy informed us, we received approval this quarter to open a deposit only branch location in New York City during the second quarter. So, here to tell you more about branches and a strong efficiency ratio is Donna Townsell.

Thank you, Randy. As you know, we hit the goal of sub-40% efficiency ratio in the third quarter last year. We managed to drop it a little more in the fourth quarter with a 37.86% and we saw a slight improvement in the first quarter with our core efficiency ratio remaining strong at 37.52%. We have said it before, it was hard to get here and it is equally hard to stay here. However, operating at this ratio really separates Home BancShares from the past. As our revenue continues to tick up, we will continue to maintain a watchful eye on expenses. We completed the closure of four branches in the first quarter and we’ve already closed a branch this quarter. We will continue evaluating our branch network as well as our operating expenses in order to deliver an efficient product to our customers. Having already broken our previous sub-40 record, it looks like Home is on its way to meeting Johnny’s newest goal of 35%. Randy?

Thank you, Donna. Another great report. Let’s switch to deposits. We ended the quarter at $6.58 billion, time deposits represented 21.4% of total deposits. Net interest income margin and non-interest expense will all now be covered by Brian Davis. After that, Brian will pass it to Jennifer Floyd to give us more information on our capital numbers. Brian?

Thanks Randy. The first quarter was a great quarter for Home BancShares. Once again, we were able to report significant earnings improvements. During the first quarter of 2016, excluding merger expenses, we increased net income $2.2 million from $39.2 million in Q4 to $41.4 million in Q1 for an annualized increase of 23% on a linked quarter basis. Because of the Company’s significant number of historical acquisitions, our net interest margin was impacted by $10.7 million of accretion income for the fair value adjustments recorded in purchase accounting during Q1 compared to $13.2 million during Q4. Excluding this accretion income and the associated loan discounts, the Company’s net interest margin for Q1 2016 was 4.22% on a non-GAAP basis compared to 4.23% in Q4 2015. Net interest income decreased $2 million to $98.1 million in Q1 versus $101.1 million in Q4. This decline is a result of one less calendar day for net interest income and the $2.5 million decline in our accretion income. On a GAAP basis, the yield on loans declined from 5.95% to 5.80% on a linked quarter basis. Excluding the accretion income and the associated loan discounts, the Company’s yield on loans for Q1 2016 improved by 2 basis points to 5.07% on a non-GAAP basis compared to 5.05% in Q4 2015. Non-interest income was up $2.2 million in Q1 2016 compared to Q4 2015. This increase is associated with an improvement of $877,000 in our FDIC indemnification asset amortization and $594,000 of loan recoveries on our FDIC covered transactions and other purchase loans combined with a $459,000 increase in our mortgage lending income. Excluding merger expenses, non-interest expense improved $442,000 or about 1% in Q1 2016 compared to Q4 2015. During the first quarter, there were many cost savings achieved with the largest being related to the Bay Cities Bank acquisition on October 01, 2015. Also as we approached the 10 billion asset mark, we’re new costs in preparation for DFAST, which were about $230,000 in Q1 and $180,000 for Q4. With that said, I will turn the call over to Jennifer.

Thank you, Brian. Now, let’s review the first quarter capital results. As of March 31, 2016, we ended the quarter with $1.2 billion of capital and $60 million of cash at the parent Company. During the first quarter, we paid off shareholder dividend of $10.5 million while growing retained earnings by $30.9 million. For the first quarter 2016, our common equity Tier 1 capital was $801.4 million; total Tier 1 capital was $890.4 million and total risk based capital was $962.7 million with risk weighted assets of approximately $8 billion. As a result, our common equity Tier 1 capital was 10.4% compared to 10.5% at December 31st. Our leverage ratio was 10.0% compared to 9.9% at December 31st. Tier 1 capital was 11.1% compared to 11.3% at December 31st. And total risk based capital was 12.1% compared to 12.2% at December 31. The slight decline in our capital ratios is a result of the Company repurchasing 230,900 shares of common stock for approximately $8.8 million during the first quarter. Had we not repurchased these shares, our risk based capital ratios would have remained flat. Additional first quarter capital ratios include book value per common share which was $17.49 compared to $17.11 at December 31st. Tangible book value per common share was $11.81 compared to $11.41 at December 31st. And finally, our tangible common equity ratio was 9.2% compared to 9.0% at December 31st. Randy?

Thanks to both of you. Very good numbers and great information. So, let’s turn to the subject everyone wants to hear about, loan, another huge component to our net income numbers. So, let’s roll to Kevin Hester who is going to give us more details and color. Kevin?

Thanks Randy. As has been mentioned previously, organic loan growth of $213 million led a quarter full of good news on the lending side. This growth was 60% from CCFG and the rest more weighted towards Arkansas and Florida. CRE loan growth in Arkansas and Florida was offset by reclassifications of New York CRE to C&I loans due to the technicalities of the collateral were called for purposes. Second quarter loan production is very strong but a seasonal pay down and a large operating line, and a large construction loan pay off, as well as two CCFG exits could hold them grow. Both the non-covered non-performing loan and asset ratios decreased by 10 and 5 basis points respectively this quarter. As a result, the ALLL coverage of non-performing and non-covered loans increased by 15% to a 126%. Past dues remained low at 1.14% and net charge-offs at 15 basis points for the lowest since the second quarter of 2011. The allowance for loan losses, as a percentage of non-covered loans increased 2 basis points back to the third quarter of 2015 number of 1.03%. If you added all the acquisitions discounts to the allowance for loan losses, the combined figure would be 2.88%, which continues to drop as we advertize the acquisition discounts. Mortgage continues to shine with overall production up 31% and profitability up 180% quarter-over-quarter. Due to the fact that we choose to exceed both regulatory guidelines for CRE exposures, we had embarked on an effort to enhance our risk management practices. This includes a focus on cleaning up acquired loan coding, improving concentration analysis, undertaking sensitivity analysis at the portfolio level, and improving our market analysis. This will get us right into the DFAST environment where stress testing will be required. Randy, with that, I’ll turn it back over to you.

Great numbers, again, thank you, Kevin. A powerful start for 2016. Record earnings for the 20th consecutive quarter ending at almost -- I can just keep saying that over and over; I know your sick of hearing but a strong efficiency ratio of 37.5, a powerful margin, strong loan growth of $212 million and great asset quality metrics. Consistent improvement in our major components and metrics that results in another great quarter and that is the secret to our success. And with that, I’ll now turn it back over to our Chairman, Mr. Allison.

Thank you, good job everyone and we’re ready for Q&A.

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Matt Olney with Stephens. Please go ahead.

I wanted to start with the discussion of potentially terminating the loss share contract that you guys have. The impact of that loss share isn’t that big at this point but it sounds like something that’s still maybe on your mind right now?

It was -- when we had Key West before we got rid of the five-year loss share, was making a pretty good impact on the income statement, and we’ve worked through that. We attempted in our loss share back then, we thought that would help us. But it doesn’t make as big impact on Home today as it did in the -- I think they’re here now -- we are doing the analysis.

They’re here, this week and next and they are running some numbers to see whether it’s financially feasible for us to want to get out loss share.

So, I guess it’s something that one point in time I really wanted to get it done, this quarter we can get through it, but we saw most of the tough times, so it’s not a big deal as it was. Thanks for asking.

Alright, thanks for the update. And also as far as the loan to deposit ratio that continues to creep up, I think over 100% now. What’s the strategy on loan to deposit ratio and how comfortable are you operating here and is the opening of that New York City branch can be an important part to get that down?

I think it will. I think we are looking for a couple of $100 million from our customers coming at New York and I think that will help. Randy Sims says we’re not running hard enough. Randy likes to run about 110 [Multiple Speakers]

We’ve got plenty of capacity to fund us in the next year; we just a lot of broker -- and I’ll let Brian comment on that too. We are in great shape and we have some deposit growth this quarter. We have not had emphasis on the deposit growth in the past. All our regional presidents are in today and Tracy and Stephen will [indiscernible] a little bit about deposit growth. And they did get some last year and they will get more. Brain, do you want to comment on it?

Yes, I mean one of the things that I’m kind of in Randy Sims camp but I’m okay if it’s running little hot like that myself. One of the things that we have on our plate is that we have a lot of availability left at Federal Home Loan Bank and that’s just cheapest source of funds, no matter how you slice and dice. And we have well over $900 million available in availability on that and that’s before we get an additional availability for the loan growth we had in Q1. As far as broker deposits, we have in my opinion, fairly low amount of broker deposits, which is just a little lower 300 million and of that 300 million, 60 million of it is what I think is the traditional brokerage deposits, which is brokerage CDs because including in those broker deposits is part of our cedars program. So, we need to go get some more broker deposits and get that ratio down. We could easily do it but it’s hard to when FHLB’s got such good borrowing capacity. And I would add to that the fact that I really do think you’re going to see some growth in our deposits come about and it’s true. I’ve always liked high loan to deposit ratios because I feel like that’s like the engine is running at its full capacity. But I think in the next few quarters, you’re going to see some pretty good deposit growth. We’re actually talking with a few customers that there is some really great potential for some large deposits. And so, at this point in time, I feel very comfortable with where we are and what it’s going to look like for the rest of the year.

I’d be glad to follow-up a little bit there. I mean Johnny mentioned, our team really got focused on that. About this time last year whenever our New York operation came on board, we could see the loan growth was going to kick in. At that time, our organic organization was taking care of itself and the year Mr. Sims down there kept us challenging us to make sure that we have the core relationship and not the CDs. So, geared up and I think I said in my earlier remarks that several regions have done that. And with our newer acquisitions and the relationships that are developed there they’re out asking for the business. And as I told our regional presidents this morning that how nice it is to ask for the deposits and we’ve been very fortunate to get those so far this year. I don’t costs of funds were flat for the quarter. So obviously we’re not chasing anything.

Our next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Thanks. Good afternoon. Congratulations on the streak. Should we call it the streak, the earnings streak?

Thank you. We’re pretty proud of it.

Good. Just a follow-up on Matt’s question on the New York office. How soon will that office be taking deposits? I think at one point you talked about a second office as well and it kind of goes to this loan-to-deposit question. Just curious what your expectations are overall for that market?

John, this is Tracy. We’ve been approved by all the regulatory agencies to do that and Chris is developing his team right now. So, I’d see Chris this afternoon and get you a better answer but we’re anticipating that to be the second quarter.

Second quarter, yes. And we’ll do that one first and then a ground branch at some point in time in the future probably down here three or four months. Those Doral had in there were $500 million branches. So that would be a nice kick for us in that market.

Tracy, as long as you are front and center, you mentioned the Florida ROA at 170 that’s obviously a great number that you want to try to take up. But what are the pressure points there, how do you bring that up; is it lending or is it still expense work to do?

I think you have a combination of both there with some of the opportunities we’ve taken over, we’re still into some expense savings there. But certainly the revenue side is what’s driving it today and all of our regional leaders there are out making the loans, bringing in the opportunities again to cross sell our products. So, it’s revenue but there is always as Donna tell us, there is always room to work on that expense side.

It’s kind of fun and I’ve charted for the shareholders meeting, and I’ll get you a copy of this, Jon, charted the efficiency as it came down from the high 60s over the years. And it’s fun to watch it and you’ll see it come down, down, down and suddenly spike straight up. That’s when we bought -- the big spikes, when we bought six Florida banks at one-time and it spiked straight up. And then you’ll see it coming back down and you’ll see the Liberty purchase, and it really jumps on the Liberty purchase. So, that thing was pretty inefficient. It jumps straight up and starts coming down to the mid level. So, you track that based on acquisitions and when you go to 170 in Florida, after just swallowing Bay Cities, I’m pretty proud of our team. That’s pretty impressive.

And don’t forget, our mortgage company is really growing and a lot of the growth is coming in Florida and we are seeing some really good income come out of residential lending there.

Okay. That’s great.

Yes. Mortgage is doing great.

And then, Brian Davis, I guess we exchanged on the NIM a little bit, stated versus core, but how are you feeling about both of those, the stated versus core; and I guess my biggest interest is can that core NIM stay stable?

I do anticipate the core NIM to stay stable. It’s been stable for several quarters in a row; I think that it will stay that way. Will the GAAP NIM come down? Maybe a little bit. I mean we have over probably $100 million of additional accretable income to come over the life of the purchase portfolios. Obviously that can’t last forever and it by nature gets smaller each quarter. We had 10.7 this quarter; do I think it’s going to drop 2.5 million, again next quarter? No, I do not. Do I think it might drop a little bit? It might drop from 10.7 to 10. So, you could see a little bit of pressure on the GAAP NIM. But I think core NIM will stay pretty flat.

And to add a little bit to that, Jon, this management team is really watching the renewal process of this company. Somebody wraps below that mark; they will know why it’s -- we do very few loans below that but we do a lot of loans above that. So, this isn’t something that has just come about, they’ve been tracking that for some time and keeping up with it by region.

Our next question comes from Brady Gaily with KBW. Please go ahead.

So, you were active buying back some stock. If I ran the numbers right, it was around an average of 38 bucks a share that you repurchased your stock. Is that the stocks done better, it’s now in the low 40s? Are you still going to be active on the buyback or at this price point, do you become more neutral?

I’m a businessman that looks for opportunities and if Lowe’s has a sale, I go down to see what they got on sale; they had Home BancShares on sale. So, you don’t get many shots at Home BancShares on sale. And the only thing I’m aggravated about is we didn’t buy 1 million shares, we should have bought more but we started a little late and we actually bought in February and we got into our window. So, we didn’t feel like we needed to. When was that about the mid?

We started buying that stuff actually very end of January, maybe January 25th, I think. And we bought back 230,900 shares at a weighted average price of $38.26. So, when we started, the price was $34.

We should have bought -- instead of -- we were buying 10,000 shares a day, we should have bought 100,000 shares that day, and we’ll do better next time. But, when they put on the sale, we’ll buy it. So, I’d rather not tell the Street where I buy them and where I don’t buy them and where I’m interested and not interested.

Yes, I hear you. And then on M&A, you’ve mentioned the LOI on the Florida Bank for a couple times, do you think that you’re getting closer to announcing another M&A deal or is pricing kind of hanging you up for the near term?

Not really. The problem with most independent banks is they don’t realize they’ve been re-priced too. The Street got re-priced for some reason; the market took bank stocks down. They were hammering us in January and we just came off a record month, had the biggest month we ever had and I thought it doesn’t correlate very well. But the independent banks, private banks have been re-priced too and it takes a little while for that to sift through the process because obviously somebody re-priced us; if we get re-priced, they get re-priced. But there’s opportunities out there now. Somebody has brought a deal a couple weeks ago that looks like it’s got real possibilities for the corporation. And Tracy went down last week, I guess it was Tracy in Florida looking at another opportunity. And there are just lots of opportunities, just picking out the right one. As you watch out we’ve done over the years, we don’t get in a hurry and we don’t get excited and we are extremely patient on the M&A side, and when the opportunity comes, it’s kind of like New York opportunity. We paid nothing for that and had a pretax pre-provision last year of about $14 million and maybe $40 million this year. And we didn’t issue a pretax pre-provision; we didn’t issue a share for it. So we’re looking for those opportunities. And again, we won’t be doing deals for the sake of doing deal. And they either have to move our EPS needle or they don’t. If they don’t move it, then -- if you think about it, if somebody adds a penny a share to us and after cost saves, and we sell at 20 multiple, we aren’t going to do that; we won’t take on headaches and liabilities for $0.20. We may take it on if they give us $0.15, $0.18, $0.20 a share; we might do that. That’s what we are looking for. And we’re finding if we -- we have been successful over the years in finding those deals. If we look at the deals, Brady, we’ve done, we’ve done a 363 bankruptcy, we’ve done selected assets, we’ve done failed bank transactions, we’ve done a little bit of every kind of transaction that’s out there. So,. we’re looking for that next deal and we may have found one by now.

Our next question comes from Stephen Scouten with Sandler O’Neill. Please go ahead.

Just maybe just following up on Brady’s question there from an M&A front. Obviously you guys are starting to absorb these DFAST costs already and you’re getting close to $10 billion. I guess part one, are there anymore sizeable transactions that you’re looking at to help you absorb some of those costs? And maybe two, if a deal doesn’t come this year, do you think you’ll try to stay just under $10 billion to minimize the Durbin impact, or how do you think about that?

Yes, yes, and yes. Actually deals are getting late enough in the cycle that if we may push it into next year and our organic growth will take us -- just forecast, take us just around at $10 billion. But we aren’t going to jump out here and try to do a big deal for the sake of doing a big deal. The one deal -- we have a letter of intent out right now, as Brian said, we’ve absorbed most of the expenses on DFAST internally right now except for the Durbin amendment. So, we’re only a $400 million bank, I think it will pay Durbin. My point is I think it will pay Durbin. I’ve seen some people jump over the $10 billion and do it in a big fashion and do deals that really didn’t make any sense to me. So, we’re not going to do that. We are not going to -- if really to walk across it or you’ll probably see, it’s probably being a bit that happens in ‘17. You agree Brian?

I do agree. And if you have -- if you cross over in Q1 of 2017, it really gives you almost 18 months to grow your balance sheet and grow those earnings because you would not lose the Durbin money until July 1st of 2018. So, if we could grow to $11 billion in that 18 months, which would seem fairly reasonable to do, it would more than cover all of the lost Durbin money. We only need about $500 million in assets to cover the lost Durbin money.

And then on the CFG front, how much more room do you have to grow; can you remind me the balance of those loans with this additional $135 million and how much more room you comfortably have to grow into there?

We’re about this quarter $850 million; he ran $1.3 billion plus before; we set an internal goal here recently of about $1.3 billion. I’ll let Kevin and Tracy comment on this but we didn’t have a gun to his head on the $1.3 billion, just grow it to $1.3 billion when he finds that quality loan to put in the books then do that. Do I think he will grow it to $1.3 billion? I do. I think he’s got a lot of capacity left in his group, so that’s another $500 million or $600 million, so he will grow that. So we’re looking for that growth. And then after that, we will evaluate and determine and look at where the opportunities are. Kevin, you could comment on that.

I think, Johnny, you hit it on the head. We’ve set a goal; they look every quarter at how we’re going to get to that goal. We see getting there. And when we get there, we’ll stop and look at where we’re at and look at what the opportunities and move forward from there.

Stephen, just remember, April 1 is really the first year anniversary of us shaking the hand and getting everybody beginning to come across, and was able to do the purchase of $290 million of those loans. But a lot of those have gone. So, it’s really just in one year and we try to pick a little time to get it going. So I think the $1.3 billion number certainly is reachable. It’s just a matter of time. And Chris has been and his team are -- just like the rest of us here, we won’t push that rope but it’s certainly out there to get it, and it’s certainly reachable.

And if you think about the numbers, they did $14 million pretax pre-provision last year and they got a shot at 39.9, almost $40 million this year, so pretty powerful.

How about on the community bank side, maybe Kevin, can you comment on what kind of trends you’re seeing? I know, Johnny, actually you expressed maybe some tempered expectations about growth for the year last quarter but also sounds like Arkansas is performing pretty well. So, can you give us an idea of what you’re seeing in the community banking side there, and if you’re cautious or you feel like things could hum along pretty well?

I think the community bank footprint is doing well; the production is still strong. I mentioned it in the remarks, the pay downs that we’re looking at this quarter that may -- they may hold growth down a little bit but. If the rest of the quarter shakes out the way it looks here, you’d see a flip in the growth with being mostly footprint rather than CCFG. It is early in the quarter though and that could change between now and the end of the quarter, but it is footprint right now.

And then maybe one last one from me just. Kevin, you also spoke about kind of some increased internal oversight, given your CRE exposure. Is that all just kind of internal realization of what you need in preparing for DFAST or is there -- been any pushback from a regulatory standpoint on any of your exposure or anything that you think would make you need to slow down your growth from that concentration standpoint?

No, it was really DFAST. We brought, as we started bringing in the resources for that, we really started -- they’ve worked more on CRE than they have DFAST to this point, just getting ready for that. And then we’re comfortable with our CRE. We’re comfortable with what we’re doing. We know it’s going to be a focus when examiners come in next. They’ve told us that; we know it. So, we’re just trying to be prepared for it and also getting prepared for DFAST as well.

One thing they don’t ask is what your loan to cost or loan to value on your CRE. And we know New York is running 50% to 55% loan to cost on CRE. So, we like our CRE position. Things are really good right now. Don’t panic, we put next to money in reserve. It’s just how I operate. If things are really, really good, and when they’re that good and you’re making the money we are making, if we have the ability to feed reserves a little bit, let’s just feed them because it just -- some day we’re going to cycle again. I don’t know when that is; I don’t see it for the next 24 months but we will have a cycle again and those who are prepared for the cycle are much better off.

Yes, I agree. Well, congrats on the great quarter. The record quarter I should say. I think you might have set a record for how many times you said record, Johnny, but I like it.

And I probably did but I was pretty proud of it. I guess I could go back to horns; would you prefer that?

I like the horns personally, but...

Our next question comes from Michael Rose with Raymond James. Please go ahead.

I just wanted to touch on a topic I touched on last quarter which is the reserve build and obviously credit quality continues to perform well, Florida is doing really well. But, Johnny, you’ve talked about bringing the reserve up to 150 over time. And I think your remarks at the outset, what you don’t know or maybe what you don’t realize may ring true here, so is that kind of still the course of action over time?

When we have the ability to do that, we will do that. We will continue to build when appropriate. I mean we’re within the range of where Kevin needs us to be on the allowance for loan loss. I’m just a 150 guy and believe that’s the kind of month, kind of reserve you have to have. Actually, when you heard the conversation, put us in the marks around about 283, so I like that position. Again I’ve said just a while ago, we’re going to have a cycle again sometime and you prepare for those cycles when you don’t see any problems. And all I see is clear sailing out there which tells me we need to be on reserves.

And just maybe your comments on M&A about not doing a deal that’s maybe not going to move the needle. As I look at Florida and obviously you guys size; there’s probably not a lot of targets potentially left for you. Have you guys started to have discussions with potential partners out of state and maybe what does that geography encompass? Have you gone maybe as far as Texas or further or kind of how should we think about the longer term M&A opportunities for Home as you move forward? Thanks.

We’ll go to Texas at some point in time but it may be two to three quarters from now. I think this thing is deeper and longer than most people anticipate. But my people around here think I’m exaggerating the situation a little bit. But I think we’re going to see opportunities in Texas at some point in time, some of them are already there now but it is too early to move on Texas. Outside of that geography, we’re probably not going to go anywhere else right now. We’ll continue to build in Florida. I mean you’ve got four or five down there that needs a sale, pretty good sized companies that should be sold and put in the hands of strong operators to reward the shareholders properly for what they deserve. And you can look at them as well as I do; there’s some down there that hadn’t rewarded their shareholders in years and should be put in strong hands. And I think you’re seeing activists out there in today’s market. And some of these out, there may be some opportunities to come out of that. There should be because if you aren’t returning double digit returns to shareholders, you ought to put it in strong hands, sell it or put it somewhere where they can get that return. Any other comments from anybody here?

Well said.

Well, I think you should maybe send all those banks maybe a copy of Waiting for Godot. Thanks for taking my questions guys.

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

Most of my stuff has been answered here but just maybe two things. It sounded like Kevin mentioned that the growth in Arkansas was maybe a bit stronger than Florida, of late. Is there -- do you expect that to flip, as you go deeper into the year? I guess I’m not sure where the payoffs were in particular, if they were ones you were expecting were Florida or Arkansas. But just comments on the Florida outlook and then maybe just a little bit of color on the mortgage quarter like you alluded to was a very strong performance this quarter.

Yes, it goes back and forth between Arkansas and Florida. I would think Florida has more opportunity, the two largest MSAs that we deal that are there and certainly there’s probably more activity down there. So, you would think they have more opportunity. Right now, at this juncture, Arkansas is just a little bit ahead in this quarter. But it certainly could flip at any point. Mortgage, just strong activity, and we’ve got MLOs in the two biggest MSAs; we’ve added there, continue to add good people and just they’re doing a really good job.

Our next question comes from Joe Gladu with Merion Capital Group. Please go ahead.

Just a quick one, just two parts. In regards to branch closings, just wondering where they are likely to come from and just what the recent experience has been with branch closures in terms of how much deposits or business you’re losing with those?

Joe, we have some criteria Joe that we look at. So, it’s not like we are looking at just a certain market; we take all of our branches one in time and look at them in terms of profitability and proximity to other branches that we have. And in almost all cases, there has been some very close by that we transfer the deposit that we really haven’t had a big customer loss with that. In fact, our last branch that we closed this quarter was a unique situation; we actually sold that branch and actually had a number of customers request to stay with us and the closest branch there was about 40 miles away. So, I wouldn’t say loss of customer base has been an issue with that but we’ll continue to evaluate our networks.

Our next question comes from Peyton Green with Piper Jaffray. Please go ahead.

Maybe for Brian, I think you mentioned that only about $400 million asset size bank would be needed to really cover the DFAST Durbin cost. So, is that number you think down from the guidance you gave in the third and fourth quarter last year, in terms of the overall cost?

No, the overall cost. Well, the Durbin maybe is down a little bit. We’ve done a little bit more research on that and we had been kind of estimating that it was going to be about 1 million per 1 billion and then we’re probably down to 1 million per 1 billion on deposits. So, it was interpreted that it would be about $10 million for Durbin but now it’s more in the $6 million to $7 million range, so that is a true statement.

And then, Johnny, one for you, you mentioned early on in your comments that you’re seeing a collection of small things that suggest more caution. Is that -- how does that help you or how does that change how you look at operating this year versus maybe last?

It just makes me a little more cautious and that’s just a gut, that’s just a businessman’s gut when you see cumulative effect of people doing these loan transactions that these cheap rates with long term fixed rate deals that are done with little or no down. It just kind of makes you shake your head and think did they forget or did they never learn? And so, we just don’t do those trades, cost us some business. Ours will be clean; there will be lots of money in the deals. Just enough of it, and I’m seeing enough of it. And things are so good right now that it’s a good time. I think it’s just a good time to be careful. That’s just a businessman’s gut there, thinking about building our reserves and protecting ourselves for the future. There’s really nothing, as I said, there’s nothing really big; it’s a cumulative effect of a bunch of silly little deals that I’ve seen over a period of time and we hear about them. Our regionals will call in, somebody in Orlando wanted the other day loan in home loans 100%, 100% -- they’re putting nothing in it, 100%. We start seeing that stuff. Plus what you got? You’ve got a lot of these guys with these blank checks that raised all this capital and they are about six or seven years old now, the funds ready to cash out, they are ready to roll. So, these guys are cranking that volume, they are cranking up the volume, so they can pump up the sale. And probably the most important thing that a buyer can do today is kind of wave the past loans and go in and look at what they’ve written over the last year, year and a half because it’s a pump up to sell and lots of those specs. And if you’re going to go look, you go look at something like that, probably need to totally focus on the last year, year and a half to that pump. We walk in and talk to people and they say we just hired a new loan team and we’re going $300 million a quarter. And I look at them and I say I wish you hadn’t said that. I just really wish you hadn’t said that because you don’t know these people, this new loan team and that kind of stuff just makes me nervous. Kevin?

Johnny, two things we’ve talked about; operators that we trust, people that are our customers, we see selling rather buying and the deals that they generally do are harder to come by today as they were two years ago and that is a little bit scary.

That’s right. We’ve got some great customers and friends in our portfolio, and when they turn the seller here recently because of the prices, got my attention and Kevin’s too. That’s the kind of thing just leading us down the road.

Our next question comes from Joe Fenech with Hovde Group. Please go ahead.

Most of my questions were answered; I apologize if I missed the answer to this one. Can you talk about where you think, Brian, the amortization of the IA settles out over the next few quarters? I know it bounces around but it was way down this quarter, just trying to get a sense of where you see that near term.

The run rate you have this quarter is the run rate we should have for the foreseeable future, unless we’re able to get out of loss share. And if we are able to get out of loss share, it will go to zero because it will accelerate all of the amortization in one quarter. And that could be $7 million accelerating in one quarter. But, if the run rate you have now is good and the reason that it dropped is because we finished up the five year loss share on those IAs, so the only thing we’ve got left is the 10-year loss share.

And I think the takeaway from this quarter, Joe, is that even though accretion dropped $2.5 million in the quarter and we had one less day in the quarter, that we overcame that in the revenue side. And I think we had $124 million in total revenue for the quarter. So that was -- and that’s the biggest drop that I believe we’ve had or we’ve seen, that I’ve seen in accretion income and we overcame it and ended up performing pretty well, I thought.

And then, Johnny, just a big picture question for you; you just mentioned a little while ago that you don’t see anything on the credit side of things for maybe up to 24 months. What do you see generally in economy, just kind of big picture or not seeing that sort of gives you the confidence that that next cycle is that far off?

Well, one thing that I don’t like that I do like. Two sides of the coin is that I’m seeing a lot of payoffs, businesses sell. I’m seeing trades happen in the marketplace. And as Tracy comments that’s real business happening out there. That’s real trades and real business. So, this quarter, I think we’re looking at a couple hundred million dollars worth of payoffs that we anticipate that are really -- it’s not refinances; it’s really sales to a new buyer somewhere. Well, that’s pretty healthy stuff. As you know there’s no substitute for experience but I remember in ‘08, ‘09, ‘10, ‘11, there wasn’t much of that going on, except the guys going around and cherry picking the really sweet deals. But we’re seeing a lot of activity in the business world while the buying and selling and swapping and trading. So that’s a good indication as far as I’m concerned. I don’t really like it from the loss of loans. We had a great loan on the books that Kevin put together back some time ago about a $45 million or $50 million payoff we got last quarter, but it was smart money that came in that did a deal, picked something up, cherry picked an asset, fixed the asset and turned around and flipped it. So, that’s real business and we’re seeing a lot of that happen. So that’s what gives me the encouragement that things are pretty clear out there. Plus, I don’t see any cracks on the asset quality side of our Company, at this point in time. I don’t see any. So, I’m sure at some point in time, we’ll have some cracks of the asset quality but as of right now, it’s pretty good.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Allison for any closing remarks.

Thank you for your support. We appreciate you joining us today. We’ll hopefully have another good quarter to report to you, next quarter. We will talk in about, is it 91 days next quarter; so, we’ll get that extra day. We’ll get that extra day and hopefully we’ll have margin -- margin will stay flat and revenue up. This team is working very hard. We had our regional presidents in today, and Tracy and Stephen were working with them today and talking about their areas of what they can do to improve in their areas. And hopefully Donna will show us a 35 someday. If we can just keep our hands on and our foot on the throat of the expenses, I think the revenue side continue to rev up over a period of time, and we may see that someday. So, again, thank you for your support. And we’ll talk to you in 91 days.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.