Home Bancshares, Inc. (HOMB) Q4 2016 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated Fourth 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 participants in this call are John Allison, Chairman; Randy Sims, President and CEO of Home BancShares; Tracy French, President and CEO, Centennial Bank; Brian Davis, Chief Financial Officer; Jennifer Floyd, Chief Accounting Officer; Kevin Hester, Chief Lending Officer; Stephen Tipton, Chief Operating Officer. The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on Page 3 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, Andrew. Welcome to the Home BancShares fourth quarter and year-end earnings released and conference call and you’ll hear from all the Executive Committee in a few minutes. Once again Home reported record earnings for both fourth quarter and the year-end 2017, and we’ll get to those numbers in a minute. We had to put out the accelerator on the M&A in 2016 because of Dodd-Frank, but expect to be more aggressive in 2017 and 2018. However, we continue to recognize the value of the deal done by Home compared to some of the silly deals that are done in the market. Update on pending deals Fort Lauderdale Landmark is progressing on schedule and is expected to be closed in the first quarter, And our bank in Sarasota, I believe Bank of Commerce, Tracy, isn't that correct?

Yes sir.

Deal, we’re waiting on the judge’s final approval there, is that about right. Anything new on that?

No, sir. Everything is still moving forward.

We continue to protect our valuable currency and maintain a disciplined pricing, we’ll continue to maintain our dilution or better said our non-dilution policy, when the company -- think about it, when the company reports a full year earn back to tangible book, that means it’s four years before the shareholder gets back to even-even. Kind of reminds me of Ground Hog Day where just same things keeps coming back. When I was in high school, I ran the mile. And it was 140 yards around the track and I ran around the track four times and if you had four-year earnback to tangible book, when you get back to fourth lap and you finish it, they say you’re at the starting point. So we don't dilute our shareholders. I understand the value of the trust that the investment community has placed in our management officers and executive officers of this company and I can assure you that our people place the same value on trust as I do, otherwise they wouldn’t be working here. We’ll continue to honor and protect the amazing confidence you’ve given this time, will not vary for any reasons, they will continue to stay the course. I pride myself as a fox hole guy whose word is his bond and can be totally counted on to do what he said. I hope you agree. The commitment of our people is amazing. On Monday, holiday, the executive branch was mostly in and busy working on quarter/yearend numbers, while also working on a couple of M&A deals. The drive of our people is pretty contagious. A special thanks to my assistant, Debbie King, who without being asked to come in was here all day and busy as a bee. And it’s the quality of the piece we have in this company, that are those that separate themselves from the pack and we have a couple of sayings in this company that I’m pretty proud of. One on them is, never go home and the other is; lead, follow or get out of the way. I want to say a special thanks to all of the people who make this the great company that it is. Let’s now go over the numbers. Earning I had said we had a record quarter and a record year. For the fourth quarter ROA, we had a goal of 2%, we did a 1.98, pretty close. Almost got there. A core ROA of 3.42, core efficiency ratio of 35.97, is that record? Brian, isn’t that about a record 35.97? Jennifer, 35.97? Congratulations, revenue was 135,216,000 and that beat the estimate by $7.7 million for the quarter. GAAP earnings were $0.35 versus $0.27 last year and I think analyst expectation for this year was $0.33 and we beat that too. Income was 48.6 million for the fourth quarter versus 37 million, that was an increase of 29.8%, Perhaps we could have done something to kick it over a little bit, to kick it to 30. 275 million of organic loan growth. Net interest margin excluding accretion continuing to go up. Congratulations to the team. It went from 4.25 to 4.31, that’s been a concentrated effort led by Stephen Tipton and his company, and congrats to him and the whole team. Good expense control and non-interest income was up year-over-year by $6.5 million. For the year, income up 28.2% earnings from 148 million to 177.1 million, 24.8% increased and EPS from $1 to $1.26. 750 million organic loan growth, loan loss reserve growing from 1.04 to 1.08 to a record 80 million loan loss reserve. And last, the non-performing stood at 1.27 versus 1.09. Stockholders equity grew $125 million. Revenue was up from 443 million in ’15 to $524 million in ’16, and we were up, we bear analyst expectations by $45.4 million [ph] for the quarter. Overall the beats for the quarter and the full year were revenue profits as well as organic loan growth and don’t forget the margin, nice job by all. We continue to fine tune the company and look for all areas that are not contributing properly in both people and departments. We continue to find opportunities for cost save and I think a 2.20 ROA is not out of the question. [Multiple Speakers]. Randy, I will turn it over to you.

I should have expected that, 2.20 ROA. We almost made it in, so who knows, you could be right. Thank you Johnny and what a great quarter to end a great year. You’ve gone over a lot of the numbers, I’m going to go real quick, but I too would like to say congratulations to all of our employees and directors for a very successful 2016. You have made a difference in our continued success. As Johnny outlined, the fourth quarter of 2016 was the most profitable quarter in the history of our company. For the fourth quarter 2016, the company recorded a 29.8% increase in quarterly profit to $48.6 million compared to $37.4 million for the same period in 2015. We increased quarterly earnings by $5 million, or an 11.4% increase over our previously reported earnings of the last quarter. Diluted earnings per share for the fourth quarter of 2016 was $0.35 per share compared to $0.27 per share split adjusted for 2015, representing an increase of $0.08 per share or 29.6%. It seems like we’re 29-something and we need to get to that 30. Excluding a $4.5 million reduced provision of loan losses as a result of the significant loan recovery offset by $433,000 in merger expenses associated with the upcoming acquisitions, diluted earnings per share for the fourth quarter of 2016 was $0.33 per share. Now, having said all that and Johnny didn’t say this, I guess he left it for me, comes my favorite part of this report. That is now, 23 consecutive quarters of record income, just shy of six years and we’ll make that six years next quarter. And on top of the record income for the fourth quarter, as Johnny also outlined, we also had the most profitable year in the history of our company with net income hitting $177 million as compared to $138 million in 2015 for a 28.2% increase. Diluted earnings per share for the year ended was $1.26 per share compared to $1.01 per share, split adjusted for 2015, representing an increase of $0.25 per share or 24.8% for the year ended 2016 when compared to the previous year. As I said, the most profitable year in the history of our company. And did I mention that it was 23 consecutive quarters of record income.

I think if we’ll bring the horns back, or what next quarter, we hit 24, I believe we’ll bring the --.

Six years, we should, we should do something. And as our chairman also outlined, we made and exceeded our goal of $1.25 in diluted earnings per share set at the 1st of the year ending 2016 at $1.26. Our return on average assets for the fourth quarter was a $1.98 -- I mean our return on average assets for the fourth quarter was 1.98% as compared to 1.62% in the fourth quarter of 2015. So, so much in income I can’t get it out of my head. We're so close to that 2% as the Chairman said and all of us would love to see it happen. And it looks like we're going to go to 2.20 at one point. Our core return on average assets excluding intangible amortization, provision for loan losses, merger expenses and income taxes was 3.42% for the quarter as compared to 3.27% for the same period in 2015. Our return on average TCE excluding intangible amortization for the quarter was 21.45%. So, as of December 31st, the corporation is sitting a little over 9.8 billion. Deposits ended at 6.94 billion at the end of 2016 compared to 6.44 billion at 12/31/15. And as I said we have a great management team on hand to talk more about the success of this year. And so I would like to turn it over to Centennial’s CEO, Tracy French to give us additional color and his comments on the performance. And I would like to say congratulations to Tracy for a great year for the bank under your leadership.

Thanks for the kind words, and Johnny I was getting ready to enjoy my victory cigar, but I didn’t get a chance to fire that up [Multiple Speakers]. As I’ve heard and you'll certain to hear about others, our fourth quarter results capped off an impressive 2016. While our groups of bankers are taking care of our customers and providing an excellent service, they continue to focus on the return to our shareholders. This just doesn't happen, it takes skill, leadership from all regions and gifted talent, and everyone working together for a common goal. While no region is the same, each accomplished and in most cases exceeds their goals in their own way while making our company a high performer, one of the metrics that we use. Even while having our foot easing off the accelerator to manage not going over 10 billion and for those of you on the phone today, that's been hard to watch our Chairman during this time, if you know what I mean. We look forward and welcome our two new banks, the Home BancShares, Landmark, out of Fort Lauderdale, and Bank of Commerce out of Sarasota, who we're working to close the first quarter 2017. Our Chairman and our due diligence team continued to be busy, they have been busy and are busy for opportunities at this time. Reviewing our internal bank numbers by regions made it clear as to why our company had a successful 2016. All regions in Arkansas, Florida, New York and Alabama improved year-over-year, in fact when you look at each state now, they're all running internally, the performance metrics that our company has become to know, with Alabama getting a little bit of edge on our legacy banking states. Congratulations to all regions in making this quarter and 2016 the success it was. This group and our company look forward to a rewarding 2017 for our shareholders. Randy?

Thanks, Tracy. The total number of active Centennial branches is 142 with 76 in Arkansas, 59 in Florida and six along Alabama coast line and of course one in New York, so that's how we’re kind of organized at this point. And I would now like to turn it over to Stephen Tipton, our Chief Operating Officer, who will feel you in on some of our income efforts, efficiency and key operational matters, Stephen?

Thanks Randy. The Q4 2016 results certainly confirmed all the hard work of our bankers and department managers. Congratulations to each of them on a great year. As has been mentioned I'm pleased to report a core efficiency ratio for the fourth quarter of 35.97%. Great expense control and a continued focus on our core net interest margin by all of the regions has contributed to the improvement in our efficiency ratio over the course of this year. We continue to focus on generating revenue that will further improve our efficiency ratio, and this quarter we're pleased to see contribution and improvement in both of our SBA and mortgage divisions as were seeing in prior quarter. We're proud to see balanced growth in the loan portfolio both among our legacy states and the CFG operation and among the legacy states and core deposit growth while continuing our discipline on loan and deposit pricing. As a result, as Mr. Allison mentioned the core net interest margin improved again to 4.31% for Q4. We continue to make progress towards our two pending acquisitions as been mentioned. We're excited about the talented bankers we've met in both of those markets and look forward to getting those acquisitions closed and converted as quickly as possible. Back to you Randy.

Thanks Stephen. Net interest income, margin, non-interest expense and other highlights will be now covered by our CFO, Brian Davis and after that Brian will pass it on to Jennifer Floyd, our Chief Accounting Officer to give us information on our capital numbers. Brian, we'll start with you.

Thanks Randy. 2016 was a great year for our company. We had an internal goal of a $1.25 which we were able to exceed by $0.01. The fourth quarter of 2016 was also an exceptional quarter. We recorded GAAP earnings of $0.35 which was positively impacted by a lower provision for loan loss. We were able to lower our provision for loan losses this quarter as a result of a substantial recovery from a large loan charged off in 2010. During the fourth quarter we had to overcome a decline in our GAAP net interest margin as a result of a significant decline in accretion income for the fair value adjustments recorded in purchase accounting. During Q4 total accretion income was 8.6 million compared to 11.9 million in Q3 for a decline of 3.3 million. The decline was primarily the result of a significant reduction in payoff accretion from 4.3 million in Q3 2016 to 1.9 million in Q4 2016. As a result of this decline net interest income was relatively flat from Q3 to Q4 at 103 million and the yield on loans decreased from 5.84% to 5.69% on a linked quarter basis. On the liability side, the cost of funds experienced a slight increase from 46 basis points in Q3 to 48 basis points for Q4 as a result the net interest margin on a fully taxable equivalent basis decreased 4.75% for Q4 compared to 4.86% for Q3. Excluding the accretion income and the associated loan discount the company's net interest margin for Q4 2016 was 4.31% on the non-GAAP basis compared to 4.25% in Q3 2016, and the company's yield on loans for Q4 2016 improved by five basis points to 5.15% on a non-GAAP basis compared to 5.10% in Q3 2016. Non-interest income was up 1.8 million in Q4 2016 compared to Q3 2016. There are several items worth noting during the fourth quarter of 2016. First, we realized 644,000 in investment security gains as we sold investments while we were managing our balance sheet, part of this was to keep this under 10 billion for the yearend. Secondly, we have 561,000 of additional other income for an item previously charged off and third we had 281,000 of additional gains on sales of SBA loans. Lastly, it was another record quarter for our mortgage lending income with a $191,000 increase from Q3 to Q4. Excluding merger expenses and the FDIC loss share buyout expense, non-interest expense was down 116,000 in Q4 2016 compared to Q3 2016. The fourth quarter of 2016 includes a 430,000 of vacation accrual expense for implementing the fourth quarter 2016 changes in labor laws requiring many of our employees to be moved from salary to hourly. This is offset by an approximate $400,000 reduction in FDIC assessment exceptional expense from the third quarter due to the new FDIC calculation change. With that said I'll turn the call over to Jennifer.

Thank you Brian. Let's take a look at our fourth capital results. As of December 31st, 2016 we ended the quarter with 1.3 billion of capital and 54 million of cash as a parent company. During the fourth quarter of 2016 we paid out shareholder dividends of 12.6 million while growing retained earnings by 35.9 million. For the fourth quarter 2016 our common equity Tier 1 capital was 936.1 million, total Tier 1 capital was 995.1 million and total risk based capital was 1.08 billion. Total risk weighted assets were approximately 8.3 billion. As a result our common equity Tier 1 capital was 11.3% compared to 11% at September 30th. Our leverage ratio was 10.6% compared to 10.4% at September 30th. Our Tier 1 capital was 12% compared to 11.7% at September 30th, and total risk based capital was 12.9% compared to 12.6% at September 30th. Our additional fourth quarter capital ratios include book value per common share which was $9.43 compared to $9.22 at September 30th. Our tangible book value for common share was $6.61 compared to $6.40 at September 30th and $5.71 at December 31st, 2015. This represents an annualized increase of 13.05% on a linked quarter basis. And finally our intangible common equity ratio was 9.9% compared to 9.6% at September 30th. Randy?

Thank you Jennifer. So let's go to loans. Another key component to our net income numbers. Our numbers continue to improve and we had a very good year in loan growth and I'm going to turn it over Chief Lending, Kevin Hester to tell us about our successful year.

Thank you, Randy. As Johnny previously mentioned, organic loan growth was very strong in the fourth quarter totaled $275 million for an annualized growth rate of 15%. Our New York group represented $145 million of that growth or 53%. The balance of the growth was evenly divided between Arkansas and Florida. Since we’ve made the decision to operate over the 100-300 CRE guidelines over the past few years, we have experienced increased scrutiny from our regulators as is promised by the 2006 CRE guidance. This has led us to significant investments and analyzing our portfolio and our markets, which I believe has been beneficial to us. And 12/31/16, we were at 115% and 355%, which reflects virtually no change from the 12/31/15 numbers of 116% and 349%. Our asset quality ratios continue to be very strong with very little change on a linked-quarter basis. Non-performing loan and non-performing asset ratios were 0.85% and 0.81% respectively, remain at the lowest level since before the Bay Cities Bank acquisition. As I said last quarter, our non-performing balances are still elevated due to the level of problem loans acquired in the Bay Cities’ acquisition and we added another to that list in the fourth quarter, but we see plans in place to resolve a significant amount of these additions during 2017. The combination of the significant recovery mentioned earlier along with this addition to NPAs, kept the ALLL coverage of non-performing loans unchanged at 127%. Past dues increased 5 basis points to 1.04% and this number has been very consistent for the past few quarters. The allowance for loans losses as a percentage of non-covered loans increased 1 basis point to 1.08%, and if you added all the acquisition discounts to the allowance for loan losses, the combined figure would be 2.41%, which continues to drop as we amortize the acquisition discounts. The pending acquisitions will serve to add to this number over the next couple of quarters. Mortgage had its best year ever in every category in 2016 and SBA has contributed gains in four out of last five quarters. We continue to evaluate additional loan product opportunities and look forward to working on additional due-diligence opportunities. We are very positive about how 2017 is shaking up. On that note Randy, I’ll turn it back to you.

Thank you, Kevin for that good report. Well, another good quarter and another great year. To recap, record earnings for the 23rd consecutive quarter ending, I might have said that a couple of times. Record earnings for the year, quarterly ROA of 1.98, a strong record quarterly core efficiency ratio of 35.97, a powerful and improving margin, very good and improved non-interest income, another strong quarter of loan growth of 275 million and great asset quality metrics, consistent and continued improvement in these major components and metrics is our secret and our success. That is what we are all about and we look forward to continuing that improvement as we prepared to add our new acquisitions and strive to break even more records in 2017. And with that, I think I’ve said at all. I will now turn it back over to our Chairman, Mr. Allison.

Thank you and I thank all of you for your reports today. We’ll go to questions in a minute, but I’m looking forward, Randy, to hear you call out 24 consecutive quarter, that’s six years, that would be pretty impressive. I don’t really have anything to fuss about this quarter, I thought it was a great quarter all round for the company. Pretty pleased with everything everybody did, we seem to be getting better, we didn’t do a deal this year and you can see the improvement from I think it was 1.68 to a 1.98 on ROA. So we just continue to get better and better at what we’re doing and congrats to everyone, and Andrew, if you're ready to, I think we’re ready to go to Q&A

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Michael Rose of Raymond James. Please go ahead.

It sounds like you're doing good. But no horns, so hopefully next time. Just picked up on something on the press release that said that Chris Poulton's group is going to open up an office in Los Angeles. And wondering if you have some color there. Because I know at this point, I think about two-thirds of the customers are in the New York City Tri-State area, but two-thirds of the assets or loans are outside of that market. So does this portend a bigger entree into that specialized lending category?

Not really, Chris and his team were in Las Angeles, before when they had $1.5 billion or $2 billion worth of loans and I think Chris said he’s still got about 5% out there in that western fund in the US and he should have 10 or 15 and you talked to Chris about it and we’re in the process of putting together a group out there right now, I think we have hired a credit person, which is probably the smartest way to do that before we hire the lead sales person. But about three people is our plan, hopefully have that ready to go by the end of this first quarter.

I think we’ve already leased office space and we are moving ahead and Chris was looking for a couple of hundred million out of there total. So it’s not going to be a huge part of that, but Chris said the people from the west used to come to New York to get their money and over the past years they haven’t had to come to New York and if you want some business out there, you need to be there. Look think about it as probably a couple of hundred million office.

Okay. So I think you guys have previously talked about maybe that group getting up to $1.8 billion in outstandings, somewhere in that realm. Is that still hold true? Because if I look at their loans to percentage of total loans, it's about 15%. Is that where you want to keep it? Would you expand that percentage? Or how should we think about that going forward?

$1.5 billion has been out number and this will be -- you’ll have about a third of the book, we're in the rotation now about a third of the book, he’s a about 1.1 billion this year. His goal was to get to the 1 billion by the end of the year and it’s a good opportunity, he ended up about 1.1 billion. January has been flat, he’s going to have about $70 million, $80 million worth of pay-offs in January. He’s kind of looking -- he’s thinking of the third, as he set it up, a third of his book should pay off this year and then he should generate some additional business and the California generates a couple of hundred million for him. We’re going to go to about 1.5 billion and then we’re going to look at it. We'll just -- probably be a stop point is 1.5 billion, we might go to 1.6 billion or 1.7 billion, but we’re still evaluating. We get to that size and we’ll evaluate.

Okay. That's helpful. Maybe one for Brian. Just looking at the core margin, looks like it was up 6 bips sequentially. How should we think about the core margin into the first quarter and through the year, assuming you didn't get much of the December rate hike? And then do you have an estimate for purchase accounting accretion in 2017? Thanks.

Obviously I’ll take the -- the accretion income was down, it was down due to the pay-off accretion, at pay point 6 million of accretion for the quarter. It should be a pretty good run-rate, it was down a lot more. I think for three quarters in a row I kept saying it was going to go down and it would go up, well heck I didn’t anticipate it going down that much [indiscernible]. But, typically the core accretion goes down a couple of hundred thousand every quarter and it’s hard to predict pay-off accretion. So, 8 million might be a good number for next quarter on accretion, the rate hike is helping us on our margin. We probably had a little bit of help on our margin because we had -- did run down our investment portfolio. We got a little nervous that we might actually get a little closer to 10 billion than we wanted. So we sold about $81 million worth of our investment securities, and then we quit purchasing investment securities in December and that’s probably affected our margin, not a lot, but maybe one, two basis points. But we’ve put those investments back on, we’ve already got 82 million in purchases completed so far in January, they’re not all booked yet because they’re still going to settle out in January. But, I still think we could have a little increase in the core margin. Steve?

Hi, Michael this is Stephen. To give you a little color on the loan book and on what we saw in the fourth quarter, about 25% of the variable rate loan book is tied to prime, and we still have a good portion of that that has floors above that probably need another rate hike or two before you see some improvement there. But 40% to 50% of the variable rate books tied to LIBORs, so we did see that I guess post-election, we saw two thirds of the quarter, some improvement there in the LIBOR book. So, that was part of the driver on the margin increase, along with our legacy portfolio. I’m looking here at legacy yields, our group there has been able to hold rates on renewals and they’ve been able to navigate through competition there and loans, so some good above market yields in the legacy markets.

I think our team deserves credit there, Stephen’s led that effort than it’s been a good effort. And we hock those renewals and look at the new loans and renewals and we started that, I guess this is the third or fourth quarter in a row that we kicked up our net margin. So, obviously we’re working on it, hopefully we keep to moving in the right direction.

Well, we know Stephen leaves no stone unturned, so I know he's working hard. Thanks for taking my question, guys.

You bet.

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

Congrats on 23 straight quarters. Very impressive.

Thank you. Hopefully can say 24 [Multiple Speakers]. Think about bringing the horns back or what do you think.

Absolutely, no question.

I bet we hit 24.

I just want to go back to the discussion on Chris Poulton's group, the CFG segment. Obviously, the loan balances, you disclosed that at $1.1 billion. That's a big move from a year ago. I'm just curious on my update on a few items. I think originally you were targeting loan yields around 6%. Any change in that over time? And LTVs around 50%, I believe that was the original intent. Can you talk about the overall loan book today versus where you expected it a year ago? Thanks.

On the LTV side, this is Kevin, their LTV is around 44%, all in, the last time I looked at it. Maybe that’s stayed around that number.

Think about it, we bought 300 million and we ended the year at 700 million. So, they grew 400 million, which was a substantial growth, 100-something percent. And then we ended the year at 700 million last year and we're at 1.1 billion this year, they grew 400 million this year, and primarily all of those are same customers that they've had since day one. So, it looks like a big number and if they grow to 1.5 billion next year, if they do, then the growth would be a 1.5 billion, that means it'd be 400 million over 1.1 billion. So it won't look as big. When you think about they were out of the market for so long because they were concerned about Doral's balance sheet and being able to fund, when they came back in the market they were able to pick up some stuff and that's where the quick growth came from, from our existing customers. So I would expect that to slow down and that’s -- evidently Chris thinks that’s slowing down a little bit, that’s why he’s going to West Coast. So any other comment?

I mean the loan yield really is the supply and demand of what they do there, activities good or bad, market can go up or down.

What is this yield, it's about 6, isn't it?

6.5.

So, he's seeing some opportunities here with some construction rate [ph] that is, he's been able to raise his rate on some of the loans.

Okay. That's helpful. And then just secondly, just in terms of credit quality overall, anything you're seeing out there from competition in your various markets that has changed at all, in terms of anybody getting more aggressive, any certain loan types or any geographies at all?

We’ve talked about that stuff in past quarters. I mean that’s -- there's nothing this quarter that really is any different. There is always a push to do things that are non-CRE because of the pressure of the CRE side, so that pricing is now lower than it really should be, but nothing this quarter that's really different than the past couple of quarters we talked about.

The next question comes from Stephen Scouten of Sandler O'Neil and Partners. Please go ahead.

Well, just my question, my first question would be around loan growth. You talked about maybe another $400 million in CFG. But maybe in the legacy markets, any thoughts about what you might be able to add to the balance sheet on that side?

We'll talk about the top line in total. As we're sitting today, projected new loan production is probably a little bit less then it's been the last couple of quarters, at this time in the quarter. Payoffs are a little bit higher than they have been at this time in the quarter and that's largely because we had some stuff moved from late '16 into '17 payoff and that made fourth quarter growth as you saw it was a little higher than we projected earlier in the quarter. And so that's pushing somebody pushed that growth into the fourth quarter that we would have expected to have seen in the first quarter. So, first quarter is a little flat right now.

And I think we're expecting about -- New York was expecting about $70 million worth of payoffs in December. They didn’t get them, they'll get in January.

So, this kind of moves around a little bit, so, actually -- probably $200 million quarter.

Okay. Makes sense. And then on the loan to deposit ratio, obviously that's moved up, around 105% now. Do you still feel comfortable it's going as high as 110%? Any issues on the deposit front and maybe progress in the New York office on the deposit side?

Well obviously core deposit growth is going to be one of our themes for 2017, and we're going to do everything to improve that, but 105% is as far as you were to ask me, Randy Sims, is way too low. I like that engine running hot, and I like the engine running hot because you make more money, but in this day and time the examiners are putting a little pressure and so we are going to make core deposit growth a very important thing for us in the coming year and everyone will be involved in it. So, hopefully it'll improve some, but it's a comfortable position.

Steve and we've been around that 105 here now for several months through the process, so we are having some good core deposit growth out there, you mentioned New York, I think they finished the year around 70 million with deposits and certainly we anticipate that can go up to a couple of hundred million. There's some other ideas working today that we feel very comfortable that we can maintain the deposit growth with the loan growth that we've seen so far. But it has not doubt, we even started -- I think Jonny said that about 18 months ago, we started asking for the business and that's done pretty well for us so far and it's serving us benefit and the growth we're seeing so far.

Okay. Maybe last one for me. Have you guys done some of the math around what happens to your effective tax rate if, say, the corporate tax rates go down to 20% or 25%, what degree of benefit you'll see there and what an earnback would be on any sort of impact to tangible book?

We have done that, we didn’t do it at those particular rates, I mean that we were tinkering with it, we were tinkering with it at 15%. It would basically cut our taxes in half because we still have state taxes in Florida and Arkansas, we would require a significant one-time charge for the DTA because our marginal tax rate has been 39.225, but then if we were doing the 15%, it would take it just north of 20%. So, we'd be looking at charging off about 48% of our DTA at a 15% tax rate. I don't have the exact examples for those other rates. [Multiple Speakers] It went to 25, it's not a 48% write off as a DTA, you don't get near as much tax savings.

It's a one-time write off, it's about -- if the numbers are right Brian, I asked that question to Brian and he sent me the numbers it would save us about $50 million.

So you'd earn it back pretty quickly, a year or maybe a little more?

Earn it back less than a year less than this year.

Yes, we'll earn it back less than a year.

Okay. Great. Well, thanks, guys. I appreciate the color.

I hope it happens, you'll hear a scream if it happens.

Tomorrow noon isn’t it?

Tomorrow at noon, I think tomorrow at noon he’s going to do it. Someone said might be 2’O clock before it gets --.

I said it can go from kazoos to like air horns at that point maybe.

Thanks Stephen.

The next question comes from Brady Gaily of KBW. Please go ahead.

So with you all crossing over 10, Durbin will come into play, I guess the back half of next year, 2018. I think in the past you've said Durbin could be anywhere between a $6.5 million and $9 million burden. Is that still the right way to think about Durbin?

That’s about right. Depends on which month you annualize it, but $6 million to $9 million a year is what it is. Hopefully I’ve seen some push, I’d love to see them do something with that. I see some of that push happening out there right now, but I don’t know if we can get that done. But we got 18 months to get it done, so some legislative change there would be sweet.

Yes. And then, Johnny, you've announced the two smaller Florida deals. Can you just give us an update on M&A, how conversations are going? It seems like there's been some pretty full prices paid here recently. Do you feel like M&A pricing might get a little frothy and you might not want to participate in it this year?

No, we’re going to participate. I guess it raised -- the water raised the level of all boats, you see seeing some two times tangible book deals, we’ve never done one. You heard my opening comments about what I feel about dilution. So we just never diluted, to say we’ll never dilute, I won’t say that, but you never say never. But we’re on some nice transaction right now, we’re working on some deals that may might see sense for the company and some larger deals and some smaller deals. So some smaller than Commerce, some the Liberty size, a little smaller than Liberty. So we’re on several transactions and I expect us to be a little more aggressive, our currency has held up pretty good, we’re still trading it four plus books. So I think you’ll see us active in ’17 and ’18.

Okay. All right. Great. Thanks for the color and congrats on number 23.

Thank you.

The next question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.

A few follow-up questions. Maybe start with what Brady was asking about on M&A. Are you finding, with maybe the increase in valuations, even though I would argue most of your potential sellers are private, are you seeing potential sellers more willing to engage in discussions with you?

I don’t know if there is any change in that. I don’t know if it’s -- Tracy or Stephen, I don’t know we’ve always been engaged in conversation, we’re also involved in something and we’re involved in stuff now. So I don’t see any difference plus or minus. I understand what you’re saying, are the private banks think they're worth more and they’re ready to make a deal now, I don’t know. The public banks certainly have grown up, so I don't -- I mean, I think that I saw Renaissance do a deal last night at 2.1. I haven’t seen them do that, but their stocks up and until the stock run up and I'm sure the stock -- I don’t know if they bought a private company. Did you see any difference Tracy, Stephen?

No, I think we’ve all been kind of anxious to see what happens. That activity I would say is probably as busy as it’s ever been, and it’s always been steady as we know. And communicating the price expectations not been alarming yet what we've seen, or we haven't given them that indication.

Okay

We probably could done a couple of billion or more last year, but we just didn’t want to step over that line.

Yes. Okay. I saw one last week at over 3 times tangible.

Yeah, Oregon/California deal, I saw that. They said it was accretive, I think it’s accretive in 2099.

It's not 4.11 a book, Johnny, but it's close.

Okay, John.

A couple other follow-ups, too. In LA, this is probably assumed, but same type of product, you just need feet on the street to do the deals there, is that right?

I'm pretty impressed. He hired a credit manager first. I thought that was pretty shrewd on his part, teach him our culture.

Okay. And then a follow-up on the margin deposit part, Randy, maybe for you. But do you expect to have to raise deposit pricing? I know it's crept up a little bit. I don't know if that's mix, but you've obviously got the growth. I guess you talk about the deposit initiative, how do you get the deposits in the door? Is it simply price or is it some other things?

Well, I think it’s a combination. I don’t see us going out and raising prices throughout all our markets. I don’t think that’s going to happen. I think it’s -- we are going to systematically look at where we think we can raise deposits and the different type products and I think it was going to be a combination of a lot of different things. So we just need to do it smart and this company has been known for raising deposits and getting rid of deposits smart. So I think you’re going to see the same thing coming down the pipeline. There is no panic here, like I said 105 doesn’t faze me, I think it should be 110, unlike the regulators.

Okay. All right. That helps. Thanks, guys.

We’ll probably -- we might buy something that’s got some liquidity in it too, you never know. We might give emphasis to something. There's some smaller Arkansas banks that might have some kind of decent liquidity in them that we might be able to pick up.

Okay. That helps. Thank you.

I think you’ve seen New York at 200 million plus next year or this year. I think north of $200 million and so, I think you’ll see some deposits coming in up there.

Okay, okay. Good. Thanks.

Thanks Jon.

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

Just a couple easy things. Most of my stuff has been answered. But the mortgage outlook, this quarter was a nice, I think it was a record level you said, I get confused with all the records. But just the outlook for that going forward, given rates, maybe what part of the business is refinance versus purchase or how are you guys thinking about that business? And I guess the expectation seems on the SBA front that you continue to gain some momentum, that that should continue going forward. Just some outlook on those would be helpful.

Hi, Brian this is Kevin. I’ll take mortgage first. We have historically been higher purchased than refi throughout our history and I think Florida actually helped that as we moved into Florida, we were stronger purchase shop than we have been refi. So we’ve never been dependent upon that. We’re continuing to fill out our footprint with mortgage officers, so that’s where a lot of the strength is, and we have a pretty broad product package. So, we really think ’17 will be better than 2016. On SBA, it’s still small, so we’re still filling out our footprint there as well, as far as BDOs, and I would expect that ’17 could be better than ’16 in that area too.

Yes. Okay. Perfect. That's helpful. And then just a couple last things, maybe one for Brian on the accretion income. How much of that accretion income is left, Brian? Because I think you said it was 8.6 this quarter and maybe it trickles down a little bit per quarter the next couple quarters, but how much remains to be booked?

We did monitor that quite often and at the end of the December we had just slightly over 100 million left in accretion and 35.3 million that is non-accretable and 64.8 million is currently on accretable discount and if we have some positive tool impairments that we might have in 2017, part of that 35.3 million than it would move over into accretable.

Okay. Perfect. Okay. And then maybe just a question on the margin, whether it's for you or Steve, but you said that you were possibly optimistic that the core margin could go up a bit further from where we're at today. Is that a function of just the rate outlook? Is that what's driving that, your outlook there, or is there something else I'm missing?

Hi, Brian this is Stephen. I’ll take that. I think that it’s primarily driven on the loan yield side, I think the yields, the mix that we had between the legacy group and the CFG group. If assuming we’re able to hold deposit pricing at a level where we have been able to, I think there is -- we’re optimistic that we can continue to see that move forward.

Okay. And Stephen, you said, on the part that was variable rate, did you say that 40% -- I know you said 25% of the loans were variable rate, but some of them still had floors -- but then the part where you talked about LIBOR, did you say that 40% of the loans are based off LIBOR, or is it 40% of the variable rate?

40% of the variable rate book.

Okay.

So, the total floating rate is about 2.8 billion and we’re got about 1 billion, 2 billion tied to LIBOR.

And if I heard you right, not much benefit early on with this rate increase, just given the floors, but that should dissipate over time as you get another one or two?

Yeah. Not on the increases in prime. We seem to benefit as LIBOR has ticked up over the last 90 days or so, but on the Fed increases that’s been nominal thus far. You’ll see another one or two rate increases before we see the full benefit of that.

Okay. Perfect. And then just last one was just, maybe for Johnny, on the reserves. Can you give any color on, do we just assume you gradually build the reserve over time? I know your preference to have that number higher rather than lower, but given where credit's at, and it sounds like there's some improvement coming from the Bay City transaction. How are you thinking about the reserve, in general, going into 2017?

Well, I don’t -- I haven’t changed my belief, I still believe in strong loan loss reserves and asset quality is good, but when we build them, I think we continue to build them. So, I’m really a 150 reserve guy, If I quit buying banks someday, we might get it to 150, but we keep buying banks, it makes it difficult. But I’m proud of the fact we’ve got it to 80 million and we went from 104 to 108. We have recoveries the fourth quarter. So, it’s -- I just want to keep building it, there will be another cycle, I don’t know when it will be, I don’t -- as I told you last time I don’t see it, our people don’t see it, I don’t think it’s out there right now, but there will be another cycle and we just want to be prepared for that cycle. We were prepared last time and we’ll be prepared this time. So, we’ll continue to build reserves when we have an opportunity to build them.

Okay. Perfect. That’s all I had guys. Thanks.

The next question comes from Peyton Green of Piper Jaffray. Please go ahead.

Okay. Great. Thank you. Just a question on the interest rate sensitivity, just to make sure that your comments were clear, Stephen. But you think that it's another 25 to 50 move up in Fed funds before you really start to see asset sensitivity kick in? Is that right, from the earning asset side?

Well particularly on the loans that are time to prime.

Okay.

We saw a couple of hundred million dollars worth of loans move over the last 60 days, 80 days or so, since -- well I guess over the last 30 days, since the rate increase. But we still got a good portion of those that have floors above were rates are at today.

Okay. And then maybe from the liability side, competitively, are you starting to see any deposit pricing pressure, particularly maybe in Florida? And what do you think you'll have to do to grow, at the margin, deposits 10%? Will you have to increase rates more than last year or do you think you can still manage it with the level of increase in interest bearing deposit costs that you saw in ’16?

Sure, this is Stephen, I’ll take the first part of that. I think we’ve been successful thus far in not having to go out and buy money and raise rates. We have been successful in having our loan teams, having had a continued focus on our low committees every week, that’s top of mind for and one of the first questions that can get asked in looking at credits is, what deposit relationships will come with that and that’s generally your lower cost funds. So, from the competitive standpoint we’re seeing that in Arkansas with some competitors here that are buying money, you’re seeing that in selective areas in Florida. But, I think a lot of that is still relationship driven and converting in some of the core low cost money in that way.

Peyton its Tracy, as said earlier we’ve been watching this now for about a year and a half and the asking part has turned out really well. I was paying attention to last month and our lending committees as Stephen mentioned where they may have presented a loan a year ago on a customer that didn’t have any deposits in the bank and this time they present on a nice credit and there was a million dollars sitting in the banks. So, the asking part is paying off and those are nearly at the lower cost. We’re cautious and we keep saying well that’s going to start costing us a little more. We run our models internally anticipating a little bit of cost increase, but so far we’ve been able to just hustle and it’s paid off and hopefully that will continue. But we’re seeing some pricing out there that checking accounts have been tied to the T-bills or things like that have picked up a little bit through some of our networks that we have, but internally so far it’s not happened and if we keep doing our jobs and focus and asking the customer for just the relationships, I think we’ll be able to hold on to that for a little while longer. [Multiple Speakers] We were 2 basis points, 2 ticks deposits.

Or deposits.

Deposit counts.

Yeah.

We’re up 2 ticks -- 2 basis points for the quarter. I think we’re holding that out pretty good. [Multiple Speakers].

Absolutely. And then on the lending side, are you seeing any more competition for loan yields? I know with CSG, he's been able to hold pricing and probably improve it a little. But in the community bank side, how is the pricing competition?

It’s pretty good right now. It's better. It's better than, you still see an outlier once in a while, but it’s better. Constructed, everybody’s getting hammered on construction. So construction, whoever’s going to do construction is going to pay more money. It’s just the way it’s going to be, there is just going to be -- we’ve said a floor on construction here, of course New York has always had a floor on construction and we here lot of banks are setting floors out of their own construction. So if you want to see that portion of it, I think you'll see that portion of it go up, those rates go up. You got New York, I mean what we’re doing, we look at our renewals here and if they were -- last quarter they were at 4.10 and this -- renewal this time were 4.05, we’re not going to accept that. We want them to be 4.20, 4.25 or 4.30 on renewals. We don’t like loans beings booked on our books, it’s below our average yield. So we’re staying on top of that and pushing it and I don't know, I think Kevin sent out something on construction the other day. So here is the floor, we can start, you bring construction loans in, this is the floor.

Peyton, I mean our lenders have worked extremely hard building the relations that they have, they earned their business in that aspects, so they know they can get the service provided and they’re willing to pay that. We do here those come in, ever so often somebody does a high 3%, for seven years every now and then and they are some competitors, but it’s 1s and 2s along the way and our customer may go do that deal and that’s fine, we know they’ll be back and sometimes they come back because they didn’t quite get the 3.9% for seven years, it didn’t quite work out the way they thought it would be. And then our turnaround time due to the professionalism of our staff and our lenders and the support that we give them. We’re still providing good service at a decent price.

Okay. Great. Thank you very much for taking the questions.

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

Thanks Andrew. Appreciate your support, as I told you in my opening remarks, thank you for all the years of support. And if I look at our institutional investors it makes me feel good because most of you have been with us since day one. So I expect and certainly hope, I here Randy Sims blow the horn and say six year in a row or 24 in a row, whatever you’re going to say Randy I hope we hear that next quarter. So I will be disappointed if we do not do that. So I think we’ll get that done. So again thank you very much for your support and we’ll talk to you in 90 days.

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