Home Bancshares, Inc. (HOMB) Q2 2016 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated Second 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 and 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, William. Welcome to the second quarter 2016 earnings release and conference call. The regular team is with me today, Randy; Tracy; Brian; Kevin; Donna; and Jennifer and you’ll hear from each one of those people in a few minutes. That’s a bit sentimental, but it’s been ten years since we rang the bell in the United States the first time and had our first quarterly report to the public. Time has passed in a hurry, but there have been several highlights that occurred over time. First, I’d like to thank the investment community for believing in our vision. Many of you’ve been with us since our initial public offering. Look at our institutional ownership, they are the best made investors in the country and most have been with us since day one or a long time. I want to thank you for your loyalty, friendship and support for our company. But most of all, I want to thank you for your trust. There is no substitute for trust. We understand how important trust is. If trust is lost, it’s very difficult to get back. We’ve not always been perfect, but our commitment to the bank’s success has always been there, our commitment to be the best bank in the country and drive powerful returns. I don’t have to tell you this, but you invested in management and board that interests are aligned with the shareholder because we are a leader. We get the importance of that cannot be over stated, as a business management under a larger shareholder of Home, I want to thank those of you that have helped us along the way. You’ve made better bankers out of all of us. We understand how important it is to prioritize. Move flat into is important to the top of the list and don’t forget or they or it will forget you. Some interesting numbers over the past ten years I want to share with you. I want to rate number 68 return over the last 10 years of all Russell’s 2000 stocks, pretty impressive for [indiscernible] himself at 458%. Home is presently highest priced bank stock in the country at 3.6 times tangible. Almost ranked number two in the Narration Bank [ph] last year, up from number three. Home has never done a diluted deal, not one day we did not damn deals. Home is reporting its 21st record quarter in a row. Home was the fastest growing bank in the U.S. since 1996 and we didn’t open until 1999. We were up from $25 million to $946 billion. Home’s compound annual return since its IPO has been north of 20%. Since the IPO, Home has grown its assets from 2 billion to 9.6 billion and Home has grown its earnings from $15.9 million to $160 million plus. If we’re not the best, we’re certainly in the top three in the country of all 8,000 banks and I want to thank you again for your support. And as you can see, it’s not over another record quarter. There are some highlights from the recent quarter let’s talk about, but the one I think - actually there’s a bunch of great numbers in this quarter, but one I think is most impressive in this environment is the margin. We increased margin by 2 basis points for the quarter, not an easy task to accomplish in this environment. I thought it was coming because I’d seen our team work putting such effort into this. I thought we’d get it last quarter and we didn’t, but we got it this quarter. We were up from a gross margin of 481 to 483 and net accretion 422 to 424, pretty powerful numbers. Return on assets just keeps moving us - they just keep getting better. 183 ROA, the bar just continues to move in positive direction. And on the efficiency side it continues to improve to a record core 3684 efficiency. That’s a new record for us as I see it, as we strive for a new goal of 35. If we get 35 Brian, we can bring the whole inspiring [ph]. Record earnings of $0.31 EPS or $43.5 million control loan growth of $175 million and tenured expense control and strong asset quality. On the M&A side, having the highest bank stock in the country is both good and bad. The good side is we can use our currency to do smart accretive deals and grow the company. The bad side is that nearly all the half a point bank’s bottom had lost deployment because they paid too much for deals and the Street has taken their pants off. I hope we announce a deal to close in 2017, we’re still going to stay under 10 billion this year, but if not we’ll just continue to improve our performance towards our new goals of 35% efficiency and 2% ROA. And this other banker initially we want to visit that selling bank and last bank [ph] and he handed me a list of 17 banks that traded at two times tangible book. He said that’s what I made it to pay for the bank. He said I was a good salesman and I could fail out to the Street [ph] history and that’s a question I do bare. And he said, because his baby was prettier than the last one. I told him, it was far bigger than him and his baby. After analyzing the list of over payers, only two of the 17 were trading above the deal plus. There is a lesson to learn this for those who want to use their currency like Monopoly money. The lesson is there is a day of reckoning. Once you lose the frame, it can take years to get it back at best, maybe. I can assure you Home will not do that. We’d like to do a deal, but at our price that works for both the buyer and the seller, that allows the opportunity to increase the stock price. Most sellers just don’t get it. Bank Home would do a deal that would damage our currency is not going to happen. The lowest compound annual return in any of the 17 venues since 1998 is 18%. I don’t know anybody else in the country that can keep up with it. We give it and understand the advantage that stock gives Home in the market. We’ll protect it and it is not an accident that Home prides where it is. Stock buybacks were zero for the quarter from the Home alone sale during the month of June, but we’re in a self-imposed blackout period. I hate the business opportunity when Home was on sale to buy back company stocks. I will and have been with our attorney and was skeptic with our board of directors to do away with the blackout period for the company, not for officers and directors, but only for the company to buy back stock. The market took bank stocks down for some unknown reason and we couldn’t play. I hope to change that. I was so frustrated that bought another bank stock that for no reason in the market had taken down and made a great trade that made almost 20% in two weeks. These opportunities to get Home on sale become few and far between [ph] and I don’t like missing the sale. Allow share [ph], we’ve greater principle with the FDIC along share buyout, I probably expect, if it goes to press release in the next two or three weeks. Randy and we’ll take it to you for a better explanation of the numbers.

Thank you, Johnny. The first quarter of 2016 produced great results and it did not change in the second quarter, it got better. As Johnny detailed we had a very good second quarter and combined with the first quarter, we’re very proud of our number and position as we move into the second half of the year. We have a great team on hand today to tell you about the second quarter, so let’s get into the numbers. I’ll start with net income. Net income for June 30, 2016 was 43.5 million, compared to 33.9 million for the second quarter of 2015 or a 28.3% increase or 9.6 million. Diluted earnings per share for this quarter were $0.31 per share compared to $0.25 per share and of course this is split adjusted for the same period in 2015. Combined with the first quarter, we are at $0.60 diluted earnings per share for the first half of the year. We were very pleased with our net income for this quarter as we continued the momentum from the first quarter, which leads me to my favorite part of the report, 21 consecutive quarters of record income for Home BancShares. Our 43.5 million this quarter is a 2.1 million or 5% increase compared to our previously reported first quarter of 2016. So as of June 30, the corporation is sitting a little less than $9.6 billion in assets. Deposits ended the quarter at 6.71 billion and deposits represented 20.7% of total deposits. Our return on average assets for the second quarter was 1.83%, compared to 1.72% for the second quarter of 2015. As Johnny stated earlier, we’re pleased to have crossed another milestone with an ROA in excess of 1.80% and it keeps growing, in fact our six months ending for 2016 with two quarters together with an ROA of 1.81%. All regions continued to improve with few exceptions. Congratulations to our entire group of bankers. Our core return on average asset that excludes intangibles, provisions, merger expenses and taxes was 3.33% for the quarter, as compared to 3.2% for the same period in 2015. Our return on average TCE excluding intangible, amortization for the quarter was 21.01%. These are strong numbers, in fact if you look at the last four or five quarters, our total revenue continues to climb upward as a result of strong organic loan growth and a consistent and disciplined margin that Johnny highlighted excluding accretion in the overall purchased loans. These combined with control of our expense and you get an outstanding efficiency ratio with the result of record income. Our success continues to be our progress and improvement in these key components, which will now be discussed in more detail by our management team. So I would like to turn it over to Centennial’s CEO, Tracy French to give a traditional color and his comments on the performance.

Thank you, Randy and Johnny for the phenomenal numbers that really goes back to our Presidents and group of talented bankers and the ability to execute second quarter and 2016 has proved to be the best yet. This group is the one to make it happen, hats off to them. They continue to focus on growth in loans, improving asset quality, developing low cost core deposits with increasing revenue from additional sources like mortgage lending just to name one. With this focus it has improved our net interest margin and made an impressive impact on net income. A few highlights which I would like to touch on, loan originations and that Kevin will cover in just a moment, increased over the second quarter from the first quarter, with our Arkansas footprint generating over half of that line. Our deposit gathering efforts continued to pay off. We saw an increase in our core demand accounts over the first half of the year and we would like to say congratulations to a couple of regions that’s the northeast Arkansas region, the north Florida region and the Alabama region for leading that chart. Also I would like to say, Chris and the CFG team had a solid quarter of origination. We’re pleased to see their loan growth mature and realize a few pay off like we discussed what happened last year. Our mortgage company has done a fantastic job implementing the sales plan over the past years and those numbers are really paying off today. I guess I get to say a little bit about the margin too as Johnny and Randy both have said, that it is phenomenal when you can grow loans like we have, grow deposits like we have while remaining disciplined on our loan underwriting and deposit pricing, so hats off beginning with that group that I mentioned a while ago. I heard Johnny say a couple of times, it’s great to see a plan along the hard work come together for the shareholders at Home BancShares. Randy?

Thanks, Tracy. So the total number active Centennial branches is 141 with 77 in Arkansas, 58 in Florida and six along the Alabama coastline. And in addition to that don’t forget about our New York office. But here to tell you more about branches and of course that strong efficiency ratio which we have a new build of 35% is Donna Townsell.

Thank you, Randy. I’m proud to report our efficiency ratio continues to remain strong and our team continues to set records with a new low efficiency ratio at 36.84%. I know you heard of that, but I just wanted to say it one more time. In the branch network, we recognized the sale of the Clermont branch in the second quarter and on the other side we took some write downs on previously closed branches to clean that up. In terms of openings and closings, we have one new branch decided to open in the third quarter. On the expense side of things, we continue to hope fairly level. We did see a small bounce in bonus accruals for the second quarter, but that’s the result of increased earnings which is a good situation to be in. Efficiency is an ongoing project at Home BancShares as you hear each quarter. We continue to evaluate our sales to see where we can make improvements. We’re currently reviewing all expense categories to the first six to see what we might be leaving on the table. For example, we just renegotiated our Arkansas janitorial contract and we expect a meaningful savings from that line item. We will continue to look at all categories for other improvements. We still have our eye on the price that 35% you heard about and I have the feeling that this team will get there. Randy?

Thanks, Donna. Net interest income, revenue, margin, non-interest expense and anything else you wanted to talk about will now be covered by our CFO Brian Davis. After that Brian will pass it to Jennifer Floyd, our Chief Accounting Officer to give us some information on our capital numbers. Brian?

Thanks, Randy. Second quarter was another impressive quarter for Home BancShares. Once again we were able to report significant earnings improvement. In the second quarter of 2016, we increased net income 2.1 million from 41.4 million in Q1 to 43.5 million Q2 for an annualized increase of 20%. Net interest income increased 3 million to 101 million in Q2 versus 98 million in Q1. Yield on loans increased slightly from 5.80 to 5.81on a linked quarter basis. Cost of loans experienced a slight increase from 44 basis points in Q1 to 45 basis points for Q2. As a result net interest margin on a fully taxable equivalent basis increased at 4.83% for Q2, compared to 4.81% for Q1. Because of the company’s significant number of historical acquisitions, our net interest margin was impacted by 11.0 million of accretion income for the fair value adjustments recorded in purchase accounting during Q2, compared to 10.7 million during Q1. Excluding the accretion income and the associated loan discounts, the company’s net interest margin for Q2 2016 was 4.24% on a non-GAAP basis, compared to 4.22% in Q1 2016. While the company’s yield on loans for Q2 2016 improved by 2 basis points to 5.09% on a non-GAAP basis, compared to 5.07% in Q1 2016. Non-interest income was up 2.3 million in Q2 2016, compared to Q1 2016. During the second quarter of 2016 there was a gain of 738,000 on the sale of our Clermont, Florida branch location and $108,000 gain on the sale of a piece of software acquired during almost recent acquisition. It was also another record quarter for our mortgage lending income with $618,000 increase from Q1 to Q2. Additionally, the second quarter included $925,000 recovery on other historical losses. Non-interest expense was up 1.9 million in Q2 2016, compared to Q1 2016. The second quarter of 2016 does include 1.2 million of reevaluation expense from our closed branches as we update the appraisals on a few of these facilities. Currently we have 14 vacant properties we are marketing with a book value of 7.7 million. Also, as we approach the 10 billion asset mark, we’re now incurring cost in preparation for the best which were about 230,000 in Q1 and Q2 this year. With that said, I’ll turn the call over to Jennifer.

Thanks, Brian. Now let’s take a look at our second quarter capital results. As of June 30 2016, we ended the quarter with 1.3 billion of capital and 57 million of cash as a parent company. During the second quarter of 2016, we paid our shareholder dividends of 12.3 million and completed a two for one soft split while retained earnings by 31.2 million. For the second quarter of 2016, our common equity Tier 1capital was 864.7 million, total Tier 1 capital was 923.7 million, total risk based capital was 998.1 million and risk rated assets were approximately 8.2 billion. As a result our common equity Tier 1 capital was 10.6%, compared to 10.4% at March 31. Our leverage ratio was 10.1%, compared to 10.0% at March 31. Tier 1capital was 11.3%, compared to 11.1% at March 31 and total risk based capital was 12.2%, compared to 12.1% at March 31. Some additional second quarter capital ratios include book value per common share, which was $9.01 compared to $8.75 at March 31. Tangible book value per common share was $6.18, compared to $5.91 at March 31 and $5.71at December 31. This represents an annualized increase of 16.55% after paying dividends. And finally our tangible common equity ratio was 9.4%, compared to 9.2% at March 31. Randy?

Thank you, Jennifer. I know everyone wants to hear about loans and I think we’ve got some pretty good results for the quarter. So let’s turn it to over to our Chief Lender, Kevin Hester.

Thanks, Randy. Our results from second quarter included organic loan growth of $173 million, which represents annualized growth rate of 10.2%. CRE loan growth in Florida, Arkansas and Alabama contributed 77% of this total with positive numbers being contributed by each geography. The two biggest contributors to this growth were CRE and C&I at roughly $90 million and $60 million respectively. Indications for third quarter growth were good and it should be in the general area as the quarter just ended. We believe that high asset quality is the key long-term financial success, to that end we sought to maintain a high level of asset quality and moderate credit risk by applying under writing standards which we believe are conservative. We are seeing the fruits of this approach in the measurements that we use surrounding asset quality. Both the non-covered, nonperforming loan and asset ratios decreased by two and three basis points respectively this quarter. As a result of the slight percentage improvement, the ALLL coverage of nonperforming, non-covered loans increased slightly to a 128%. Our nonperforming balances are still a bit elevated due to the level of problem loans acquired in the most recent acquisition, but all are being worked aggressively. Past dues improved 11 basis points to 1.03% and net charge-offs at 21 basis points were very close to the recent historic average. Allowance for loans losses as a percentage of non-covered loans remained at 1.03%. However, if you added all the acquisition discounts to the allowance for loan losses, the combined figure would be 2.56%, which continues to drop as we amortize the acquisition discounts. Congratulations to Michael Powell [ph] and his mortgage group as they continue to produce improvements in both yield and volume with three consecutive months of record closing volume and our first ever $70 million last month. Year-to-date closing volume is up 29% over the last year. Randy, with that, I’ll turn it back over to you.

Thank you, Kevin. Well that wraps up another good quarter and a very good first half of the year. To recap real quick, record earnings for the 21st consecutive quarter ending, a strong core efficiency ratio of 36.8, a powerful margin, very good non-interest income, strong loan growth of $172 million and great asset quality metrics. Consistent improvement in our major components and metrics that is what we are all about and we look forward to continued improvement for the second half of the year. That’s what we will be working on. And with that, I’ll now turn it back over to our Chairman, Mr. Allison.

Thank you, guys. It is time to report, it was actually being record quarter for us - kind of a bucket quarter, we cleaned up some memorial stuff that we had and some fixed assets at the holding company, we have some branches and we will clean that up. So that was really pretty positive for us. We could have blown the horns this quarter for 183 return on asset and margin increase, great performance of our mortgage historically and our record efficiency ratio. Efficiency is going a little bit too far around her though. I broke my phone and went down to AT&T to get me a new phone and they brought me one out, and then they told me that I was not an authorized signer for San Antonio Home BancShares. So I told Donna at this time got a little bit over the top, when I came back myself, I got a new phone by the way, I blew everybody up and I got one, so. Anyway, William I think we’re ready for questions and if you are ready, we are ready.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] And today’s first question comes from Brady Gaily of KBW. Please go ahead.

Hey good afternoon guys.

Hi, Brady.

You mentioned the termination of the loss share increment. I think we chattered up this before that, but it doesn’t move and I know it makes it a lot more simple for you all to work out those assets, but that doesn’t really move above the earnings needle very much right, it’s less than a handful of pennies.

It will be about more than half as we no longer have to amortize the indemnification assets and we should pick up about $1.5 million of pretax income on an annualized basis from now till 2020. The bigger impact might be we have a loan recovery. We no longer will have to share that with the FDIC and so they have been getting 80% of those recoveries. So we have a large loan recovery out there, we will have a much larger one time income pickup.

Now the first one is that is it’s about a - it’s a onetime payment. We have a onetime payment if we close in the third quarter which we anticipate this time we will have a onetime payment.

And it’s projected to be about $3.7 million at this point in time.

Okay so that I think in your K, you mentioned 7.5 to 12, so that’s declined below that level which is good.

Yeah.

And then on CFG, I notice that didn’t grow at the level that it has been growing the last year or so, here you are all talking about pay downs. Can you just give a little more color on the slower growth within CFG?

Yeah, this is Kevin and we did have a couple of pay downs in second quarter and more expected, we anticipated it 90 days ago. Production was still good maybe a little bit less than you probably saw our third or fourth quarter last year. But certainly still good production, just couple of pay offs that we were anticipating happening.

They had attempted to stiff on some of the really good customers because they were concerned about bloated balance sheet. So early on they came back those customers came back in a hurry. So that’s what ramped up quite a bit but that still did fine. Things were good too.

Okay and then lastly, I know you talked about the core margin being stable kind of from here on now, is that still the right way to look at that?

Only, Brian will tell you this is going down. So as Randy advised this is going down and then it goes up. So actually we think that, I am thinking our management team has really worked very diligently on this margin. The renewals and originations and I have thought we have seen it last quarters, I said we did get it last quarter. We got it this quarter. We are doing an excellent job and I think we will maintain that margin.

Okay. Alright thanks for the call and congrats on the 18 ROA, very impressive.

183 now, don’t miss those three basis for me.

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

Hey good afternoon guys, how are you?

Great Mike, how are you doing?

Good. Hey I just wanted to discuss just more generally that the CRE and construction guidelines and just kind of maybe where you stood at the end of the quarter, and kind of how you feel about maybe increasing those numbers if you hear any regulatory pressure things like that? Thanks.

It’s Kevin again, yeah. They actually went down a few basis points or a few percent in each of the categories this quarter like a 116 and 359 were the actual numbers. We fully intended to keep doing what we are doing with everything that we can to continue to show the examiners that we understand our risks that our exposures and I am not anticipating any difficulty there.

Okay that’s good.

We are just keeping up so.

Got it, okay. And then maybe just switching to expenses for Donna outside of janitorial contracts in Arkansas which I can’t imagine cost that much. What are the areas might you be targeting for potential expense reductions? Thanks.

You would be proud how much it come to pay people to clean it very hot here. I mean that is just to give you an example that you know everyone out of it is sent and we take a look at. We have been able to see some savings this year so far from continued Telecom cleanups just. So many acquisitions we have had you can have things dangling out there. And we continue to clean things like that causing our phone lines no longer. All the granted we closed, lot of things that you don’t need there. Just also looking at other contracts, we have a lot of different things through FIS and our electronic banking world. So there is just always room for improvement each time these contracts come up for renewal.

Yeah actually, actually the expenses were pretty good if you really break them down because other expenses we had a charge on...

Broke down vacant properties.

Run down.

Vacant properties, we are in-charge in there. We had to hire accruals, sell our accruals because mortgage was up. Mortgage is making a lot more money so we have to accrue that and the companies were making more money and that was modest accruals. So really the expenses were flat or down for the quarter. You just had those different one timers in there.

So nothing kind of major structural changes just a lot of little things you guys continue to look at as you are always doing around on basis correct?

Correct and as you heard we limited Johnny’s cell phone plan. So that ought to help you.

And maybe just one more Johnny. What was the last stock that you bought a couple of weeks ago just curious?

It was so much actually bought. [Multiple Speakers]

Alright guys thanks for taking my questions.

And our next question today comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.

Alright thanks. Good afternoon.

Hi, John.

Good I have some cell phone questions for you Johnny but I will take them offline later. Do you have another new number or were you able to get the same number because I think you -

It’s the same number John.

Okay good, good. Can you guys give us a status on the New York Deposit taking office where you right on that?

We think we will be open in the third quarter. We are - deposit lately so to speak has been at corporate and at some of our branches and we are getting ready for that. I think we are about ready I am not sure Chris is all excited about it in New York. But we anticipate $200 million to $300 million from our customers. It will come in just for my customers now, so we will go would have to wait and see. That will help us a little bit deposit - loan deposit reached about a 104. Randy Sims is not happy there. He wants a 115 but. But anyway that will help a little bit with the loans and deposit ratio, so.

We will all approve and ready to go there. So it’s our making that happens than make it happen third quarter probably is the estimated date. I think we are rushing on.

Okay good. Maybe Brian Davis remind us of your latest thinking the revenue loss of going over 10 billion. I hear that you are going to hold off through the end of the year but maybe update us on that.

Yeah we are planning to go over 10 billion most likely in the first quarter. And so we will not have the Durbin loss until July 2018, which means that we will have about 17 months to kind of ramp up the balance sheet all set the Durbin money. We are anticipating that being about $6.5 million and we can grow the balance sheet easily and have to more than offset that. We are already incurring about $1 million of expense for DPAS. Under those dates we wouldn’t have to do the DPAS report really until 2019. So when we get down to the latter years of like 2019 we will probably have to double the amount of money we are spending on DPAS.

Okay good that’s helpful.

John if we don’t buy a deal, if we buy a deal and get a 150 ROA or $5 million dollar deal at 150 ROA that also is covered. And that will lower ROA a little bit.

When you run a 183 ROA then take a lot of assets to cover the numbers I just went over and just really half of you know 500 million in loan growth would cover all of the expense of going over for DPAS and for Durbin and other items associated with that.

Okay, seems like you need to get Donna something to work on. Are you? Yes exactly. Are you optimistic on it Johnny, I mean you vented various quarters about pricing and competition, but it does seem like some of the higher multiple stocks have come down and you’ve held yours, are you more optimistic you can get something done?

Well we’ve had 11, 10 out of a deal for some time and they had some situations on their side of the ball that created us not to be able to go forward that has been resolved, so maybe that will ease up, maybe that deal we’re going down this month, so maybe that going down to others. You saw one of the guys get done over two times tangible book and I took the bar down to 12%. So it’s just a typical story, it’s kind of set out there that that perhaps it’s two times tangible book and it didn’t work, I mean the numbers are not working and everybody’s getting killed and then Street’s taking the pants off, because it can’t get any, I mean it’s not accretive, accretive, accretive, it’s maybe accretive four years and four and a half years, maybe based on some assumptions. So we’re going to remain extremely disciplined and we know the power of our stock and what we can do with it, and we are not going to do anything stupid with it, and if it doesn’t work, we just move on, there’s lots, there are lots of opportunities, my hardest job John, when I said in my earlier remarks that the lowest compound annual return Home BancShares stock of any, but the gains when 18% compound annual return. The sellers if they don’t want just cash if they want to be part of something and they want to join with us, then that’s how we run this company. So that’s first class make sure however I think we’re making - I think we are making some progress itself.

Okay. All right thanks for help.

Thanks.

And our next question is from Stephen Scouten of Sandler O’Neill. Please go ahead.

Hey guys, good afternoon and lady, excuse me.

How are you?

I am doing well, I think you get that efficiency ratio lower John if you just paid for the phone yourself I think you can afford it.

Let me tell you, it goes a little further than that, I gave them my corporate credit card after that and they slapped it and they said, sorry sir, this card is no good. And I said, yes, I can tell you that card is good, and they swapped it again, it didn’t work.

Well, I just want to follow up on John’s question on M&A, first. You mentioned the deal that was done today and you’ve kind of put that threshold out there maybe two times above two times you don’t, you don’t seem to have much interest. But I mean were there ever be a deal you think that whether it’s the footprint that it’s in or just how profitable it is on a standalone basis maybe with still elevated expenses where you guys could come in there and layout your expense discipline on it and make some of that math work or is that just kind of a hard and fast threshold for you that you just don’t want to cross.

It’s really not a hard threshold I mean if you look at everybody’s done a deal over 10 times tangible growth and look like what happened to them. I’m just not ready to take that risk. So we will just continue to pick around now would be, the real driver is EPS, the rest of them went drifting, I know it makes good sense to say we’re in a new market and the trees are beautiful here, and the water is gorgeous, but the real grabber is return on assets with efficiency which rolls to EPS and I don’t cancel a book, it’s a multiple that people look at. But we’re trying to get more out of our assets than anybody else gets out of them. So we’ll continue to be cautious, would we do a deal over that? If I thought it would damage the currency we would not do, we won’t do the deal. So that is it and we take it deal by deal by deal, and we’re going down to look at two deals might be three deals, a couple of weeks and if they damage the currency, and they don’t want to apply then we’ll just move on. When you’re running to 183, you got to go with the two and we can continue to do the long growth that we’re doing presently, our plan as we get to 35% efficiency and a 2% ROI and lo and behold once again, unless we find an asteroid, if we find an asteroid we will do it. Any other comments, anybody else agree with that.

You said it all.

Very good, okay. You mentioned loan growth John you just kind. Did you think the mix of the loan growth you saw this quarter that 75, 25 and Kevin, obviously you comment as well is something that will repeat is the strength that you’re seeing on the legacy markets, is that something you think will continue and also what’s the pricing looking like there that allowed you to maintain those average loan yields?

This is Kevin. I think third quarter looks a lot like second quarter. New York probably moves closer to half of the increase, from a pricing perspective, I mean when things seem to have gotten flat again on the rent side, we were seeing some people do some crazy steps for a long period of time and we just still fight deal by deal and build relationships and we’re still winning deals but we’re not the lowest price in the deal. But it takes the right people to work from there. So we work at deal by deal and officer from officer, and they are fighting hard every day to get those extra basis points.

Okay. And just does that translate into the NIM, it sounds like you got I can keep the core NIM relatively stable for an extended period of time. But Brian trajectory, the accretion, if I’m not mistaken should still be down noticeably over the next 18 months to 24 months. Is that correct? And so your GAAP NIM will still trend down, will that be a reasonable expectation?

That is a reasonable expectation. We had $10.7 million in accretion income last quarter and we wound up with 11 million and I had projected that it was going to go down, believed it would go down. But as we did some of our credit impairment test on our purchased credit impaired loans, there were lots of, some of that had improved and we kind of released about $2.5 million worth of what was non-accretable discounts over to the accretable bucket. And we had 55,000 of additional accretion income that came in and will kind of hang around for about four or five more quarters. So the $11 million that we had would have been 10.5 million, if everything else is status quo. So there’s about $77 million right now of accretable income that’s on our books that we will recognize over the remaining life of the loan, so it can stay at 11 per quarter forever and so it should start trending down just because of the natural curve of it.

Okay, actually M&A covering it and I just want to make some of these deals you see have earned back tangible book at four plus years and they start a bunch of assumptions. That hasn’t scared the Street, I mean that really has to scare the Street, I mean thus far we haven’t ever done diluted deal not one day and don’t intend to. So if you start looking at those deals that are way out in, we don’t know what’s going to happen to perhaps what’s going to happen to market for 4.5 years. That’s pretty hard to forecast and I don’t want to be in that game.

Yeah. I think a lot of the numbers get lost by the time that four or five year time period comes around, so you never really know to be honest with you.

That’s probably, it will be good to go back and evaluate those figures at one year, two year, three year, four year and see where they are.

Honestly, the secret to our success historically has been that we go in, we bought, we do a deal and it’s a good deal, and maybe ROI drops down four or five basis points, six whatever, but then it pops up. So as you go out there and you pay way too much, you are not going to have it pop back up with your ROI, it’s going to take you a lot longer to get back up to where you were and that is the secret. If you go back and look at every one of us that has come true and that’s why we are at 183 today and that’s where we are going to stay.

It makes sense. I know it’s hard, but if you need a new CFO now you just let me know. Just came right, thanks to you all guys, I appreciate it.

I appreciate it.

And our next question ladies and gentlemen comes from Peyton Green of Piper Jaffray. Please go ahead.

Good afternoon. Couple questions, this is probably for Tracy and Kevin I guess, but in thinking about the overall growth of we’ll call it the footprint versus CFG, the loan growth rate improved to 9% in the second quarter versus 5% in the first and 3% in the fourth. What’s the true capacity of the footprint going forward? I know you guided towards kind of similar looking growth, but as that number keeps moving up, it would seem to be a pretty powerful driver of volume.

I think that what you saw in second quarter is it’s a reasonable thing that could occur from the footprint. Florida has really picked up in all of the markets. Arkansas still contributes, Alabama’s contributing, maybe it’s coming out of all geographies, so I think we’re beginning to see a lot of synergies with the group, turning to Florida, it has had a lot of movement within its people over the last year. But other than that we haven’t had an acquisition in 12 months and before that we’ve really got a lot of people who has been with us for a while. So we’re beginning to build the cultures here, and I think you could really see what happened in second quarter with the legacy footprint continue.

Just to add to that, if you go back we haven’t done an acquisition over the past year or so. So our team members and our leaders have been out in the field asking for the business and relationship. David Druey has been down in Southeast Florida now and of course his numbers as he continues to improve, but Central Florida has switched around some of its staff and CLO now and Scott in Tampa that is doing a really good job in the leadership that he’s bringing to the loans, they are getting to show up, they were also getting some pay options with some of the problem loans that were on there. And Jim has been in Northeast - he was from Arkansas, but he's really from the panhandle now. So the team has just been there status to ask for the business I used the word also some a couple years ago and really and truly believe that’s the difference and since in your bank today in the markets that are out there and what was there two years ago and the same with Alabama, Nancy is there and doing a good job working the customer relationships there and –that’s really it just good occasion or down so much time lot work no teams out working the people to that.

Okay.

We’re very particular in the market in our footprint, so I think we are extremely conservative, we could have written I mean we torn down lots and lots and lots, we see lots of stuff, we see lots and lots of stuff, turned down lots of stuff just the conservative nature on how we operate.

But I mean Johnny you don’t see anything to suggest that it’s going to slow down.

I don't see anything suggest it is going to slow down. I don’t care.

Peyton, John had used the word the other day, we talked about loan growth and we talked about controlled growth to what we’re doing. I mean there’s no doubt, our credit underwriting that we’re doing today is no different than we’ve always underwritten except require a little more money in a project and so forth. So there is a little bit of that controlled growth that John had said that we’re going down I think perfect as far as the word, because the growth opportunities are firmly there, because of our lenders and the leaders we’ve got out there certainly hustle and then bringing in opportunities.

We will make some deals, we want more money in the deal. We would make some deals because of that we are conservatives, we are asking for more and more and more money in the deals, and we will make some deals as a result of that. And we don’t give it away, we don’t regulatory, we don’t do things, we don’t do 20%, so.

And if we thought about the loan yield and the community bank versus the CFG side I mean what I know the overall execution loan yield was basically flat. But what kind loan yields are you seeing in the community bank?

We are writing in forwards, we are writing the forwards, that’s where we are writing. There had been a handful of exceptions in the trades, but I don’t know who’s going to three and six or seven months. But they are the [indiscernible] that legacy footprints in the form of Mathias and New York is in the center, so that’s going to have checks up.

Okay. And then last question -

You see where we’re getting the margin, I mean Stephen Tipton is pushing hard on renewals, our team in the field is pushing hard on renewals, to keep better we know the number is 425 or better. They’re pushing hard on that side and new originations, the same thought process, go back and we still try every loan one at a time. Some of these meetings are long, some of them start last, so you think all day long, but they are long, but we go back, we will get an extra quarter report, we push to get a little bit more on each deal.

Okay, great. And then Brian what was the accretion number in 2Q of ‘15?

The accretion number in Q2 of ‘15.

Well we will be looking forward –– and just - to your last question, they are looking, they’ve not planned it for.

Now that’s it, take me up. Thank you.

We will give that number in a minute as soon as we get it.

Thank you.

What it was about, down the next?

It was 11 million.

11 million, same as this quarter?

Yeah, it was down about 40 something thousand dollars.

Thank you. Our next question comes from Joe Fenech of Hovde Group. Please go ahead.

Afternoon guys. Hey most of my questions were answered, but just one more on the ROA target, Johnny. If there aren’t any more deals ever, obviously not likely but just assuming for a second there aren’t, if the reported margin eventually migrates down towards that core, is there another level of things you see that you can do within the company organically. Are there levers you can pull either revenue or expense and would that still enable you to keep that 2% ROA target over time and if not where do you think ROA settles in over time without deals?

I don’t know if we look forward going backwards, I think there is enough levers there, I don’t see it going backwards. I wouldn’t be half a perfect with backwards, we continue to strive to improve here and then I think 2% is a pretty powerful ROA. You can look back over several quarters, and we were 1.60, 1.65, 1.70, 1.71, 1.75, 1.81, 1.83, this certainly just continues to leverage out. And I mean from the loan side, we continue to wrap loans from where we add them, and do what we are doing. I don’t see any reason why I can’t get there and can’t stay there.

So just a continuous improvement that you have been showing over the past several years keeps going and that you get to that target, you think that you can get to that target regardless.

I do and this bunch never quits. I mean they never quit working on the revenue side or the efficiency side, this never quits, it has become the culture as you know of this company, it just never stops. Everybody is looking all the time for opportunities and options, I think Tracy bolded down the top 40 expenditures this month that we are reviewing all top 40 expenditures, yeah I was taking my phone bill, cut my phone bills. Just to add on that, the things that I feel comfortable out is Johnny was preparing for the call yesterday when he was making the 2% efficiency, so I didn’t sleep at all last night. Now it wasn’t because I was worried of the call but just thinking of opportunities we could do. We have got our bankers and our markets today that are in Arkansas, Alabama, Florida, New York which increased the opportunities are there to do several things that our company is ready to do those. But we got bankers now reaching out for our leaders in those markets today that would bring in another network of customers potentially. They can come in to our credit quality culture and I think that’s definitely there, and there are few other line item type business managers and other option that we have done really done within the past and with small scale that Kevin is working with Matt Neeley on that to bring that to surface that can be a real line item just like mortgage is done for us past year. So we certainly are checking the boxes, things that we know that we can be good at that could make a line item to the company. Same thing on the deposit side, we have been asking for the business and this has happened and it has come in and now we have created some associated banking products that we are working with today. So that will allow the deposit base to come out, so we will do the fashion block and attack them in banking, but we will get the right people in right place and we are able to expand and do some different type of services. A new case, something - I asked the pricing deposits were growing pretty good, what you are doing? He said, yes the deposits.

Okay good stuff guys, thanks.

Thank you.

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

Hey guys. Most of my stuff has been answered. Just two things, Johnny you have the deals you seen recently or I guess certainly sound a bit more optimistic, can you paint color on the size and growth of it a bit more, is it a smaller variety or more of a larger variety and then just a second question was just for Brian, I think unless the comment about the FDIC loss just kind of the mechanics of how the impacts, EPS going and earnings going forward, if you could just run through that that would be helpful, thanks.

The deals that we are looking at our smaller, I think smaller, I mean they are $400 million, $500 million, $600 million bills, there is one that’s about $300 million, and then we are looking at one. We are growing and one, it’s a larger transaction. So it’s just a mix of bag, we need to fill out some areas and we are looking in those areas. So that’s - if it’s a $200 million bank it’s really, Brian Davis doesn’t want to do that and I can understand that. If it’s $1 billion we can look at it, I mean we will do the $300 million, $400 million, $500 million bank, if they are holding in the market place, we think it’s a growing market, and growth in there. If you could see the P&L, David Druey turned in for the last month, and $200 million bank for Rotterdam, I mean he is running at 2% ROA, and we just need to get him some more assets, I mean if we get him some more assets, I think he will make money with those assets. So I mean if you look at little bankers, $200 million to 2% ROA, you remember David ran $1.5 billion, and our concern was run our best return on assets, and have most powerful region that we have had. We need to get in some more assets in that market and let him go there. So what do we got to do to get himself more, Brian you got to build upon this.

Yeah, you were asking about a little bit of more color on the FDIC loss share early compensation buyout. Now the mechanics of it is that we will write FDIC a check and we will write off 8.1 million of our indemnification asset along with a few other receivables that are kind of buried in other assets, but we have been accruing for the true up all along and we have 11.4 million of true up on our books. So when we net that all out, we think that the answer on a pre-tax basis will be about one time loss or about $3.7 million. And that will be in Q3 is a onetime charge but what will happen over in the income statement and non-interest income we no longer have the FDIC amortization, and it was 410,000 this quarter, but it should be about 1.5 because it kind of wretches it down a little bit as you go along, should be about 1.5 million improvement on an annualized basis by not having that expense. Now we could pick up even more expense because we have been sharing all of the recoveries with FDIC for the most part 80:20, so if we would have $1 million recovery, this wouldn’t be something that we would be putting back into that, but that will just goes to other income because it was a charge off part of our acquisition. So in that scenario instead of having $200,000 other income item, we have $1 million, but those would just become one off basis as there is no guarantee we would get them, but we believe that it could be some out there, but the future will tell on those, but the run rate should improve 1.5 million on an annualized basis for the amortization of the ROA.

I got you. Okay thanks and nice quarter guys.

Thank you.

Ladies and gentlemen, 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 attendance today. Hopefully we will be blowing the horns next quarter. So we will be speaking with you in 90 days. Thank you.

Thank you, sir. Today’s conference has now concluded. We thank you all for attending today’s presentation. You may disconnect your lines.