Home Bancshares, Inc. (HOMB) Q3 2019 Earnings Report, Transcript and Summary

Greetings ladies and gentlemen. Welcome to the Home BancShares Inc. Third Quarter 2019 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks, then entertain questions. [Operator Instructions]. The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on Page 3 of their Form 10-K filed with the SEC in February 2019. [Operator Instructions]. It is now my pleasure to turn the call over to Mr. Allison.

Thank you, Chuck. Good afternoon, everyone, and welcome to Home BancShares' Third Quarter 2019 Earnings Release and Conference Call. With me today is Tracy, and Chris and John are on the phone, Brian Davis, Jennifer, Randy, Donna, Kevin and Stephen, and they'll all be available after the presentation, some of them will be presenting today. The quarter is noisy. A lot of moving parts, including we chose to call a $47.5 million BOLI, the results of which we had a one-time $3.7 million tax associated with it. The yield was up, I don't remember exactly, 1 16, 1 19, so we decided to call it, we think we can do better with the money. There were elevated payouts in this quarter and will continue into the next several quarters. Several years ago, we instituted prepayments on many of our credit, and that decision has elevated our income for this quarter and will continue in the future. We will remained disciplined on both loan rates and terms, and not fall in the trap of being categorized as stupid banker. If we are correct, we think there is a little slowdown in the market, and we're not opposed to that. We normally originate about $852 million per quarter, but this quarter, we only originated $710 million, with New York doing $248 million of that at 6.52%, and legacy doing $462 million at 5.63%. There were less opportunities in most of our markets, and many banks are racing after those few deals that are out there. It appears to be a race to the dumbest because they're just giving the stuff away. With rates from both banks and shadow bank offering sub-4s, couple that with 10-year interest-only, add in a little non-rate course and give it 80% leverage and you've won that belt. Congratulations. You have just won the stupid award. The weak banks and bankers are collapsing on rates and terms like a pup tent in a hurricane. We're going to do the right thing here and not sacrifice our future for short-term bragging runs. We have made the decision to let $300 million to $400 million walk because the rate, term and leverage are not conducive to long-term profitability of our company. Higher leverage, longer terms, low rates is a risk that even most of the crowd appears to be following. Warren Buffett said, there is the tendency of executives to mindlessly imitate the behavior of others no matter how foolish it may be. Jamie Diamond's quote was, "one of the toughest jobs a CEO has is to look at the stupid stuff that other people are doing and not do it himself." These statements come from 2 American icons that have proven business and investing skills. We should all listen to these experts. I just want to give you a few of mine. Winners never quit and quitters never win. When the going gets tough, the tough gets going. Lead, follow or get out of the way, remain disciplined as hard as it may be. These are really dangerous times for banks. The Street, analysts, shareholders all apply pressure for growth, growth, growth. This is a time to move cautiously. Banks have spent the last 10 years building their balance sheet with quality high-yielding assets and we could destroy all the good we built in much less time than it took to build it. The Fed has dropped rates 50 basis points but the market has dropped 150 to 200 basis points. I can assure you, the cost to funds have not fallen as fast as loan rates, so we know what happens to profit. It's pretty simple. Banks should not sell our future for short-term bragging rights. However, it appears that banks are dropping their rates much faster than they run. This is a major sign of weakness and the quality of the producers and the relationship they have with their customers. Relationships are the most important ingredient in keeping customers in times like this. Some customers were disappointed regardless, but most will stay with you. This is the path that Home has chosen. We will not sell our future because of short run in the market -- short downturn in the market. Quite to the contrary, we've made this decision to build additional capital for the next year or 2. In the event that there really is a downturn, probably $150 million to $200 million earnings, that is if we're able to maintain our best-in-class profitability. We'll be working on continuing to improve our asset quality as good as it is, improve our operations, service our customers by spending more face time with them and work on efficiency. A little slowdown than the past, but if you sell your soul to the devil now, it will take a long time to get back just even, much less producing best-in-class numbers as this company is known nationally for. Now let's talk about the quarter, I'm pretty proud of the quarter. EPS of $0.44. Return on assets, 1.93% and efficiency of 39.16% and a net interest margin of 4.32%. and had little dues in it as $2.8 million in prepays had kind of juiced it up a little bit. I was telling Jimmy Hahn [ph] about that, and he said, "well, don't take that away from yourself, give yourself credit for that because you had the foresight to put the prepays in." So he said, "good job." So we got a lot of those in. You're going to see a lot of that rolling in over the next period of time. Deposit rates are coming down slowly and asset quality is as good as it's been. Nonperforming loans to loans at 0.54% and nonperforming assets to asset 0.45%. I don't remember when they've been that low. Good expense control. Loan yield -- excess loan yield 6.08% from 6.06%, and we grew tangible book by 15% year-over-year. I just looked over the last 5 years and I wanted to share with our shareholders. Over the past 5 years, we have grown tangible book from $4.95 to $8.83, that's a 78.38% increase, while at the same time buying back our stock with a value of $212 million, and that represents 10,842,000 shares. Had we not bought back stock, it would have increased our tangible book to 91.51% over the 5 years. We have paid dividends to our shareholders of $320 million, and we've earned over $1 billion. We have returned approximately 50% of our income to our shareholders through stock repurchase and dividends, not many banks could have accomplished these amazing task, while at the same time improving capital ratios. This speaks to the amazing profitability of this company. Good job by all. That's why Home is named Best Bank in America by Forbes for the second year in a row. Buying back stock, growing tangible book, paying a strong dividend, growing capital all at the same time. Certainly, this company has made the proper decisions for the long term for all involved, and I can assure you, we'll continue to do that in the future. Thank you for your support. And Brian Davis is going to cover more in depth on margin for us. Brian?

Thanks, Mr. Allison. The third quarter was a good quarter for our net interest income and net interest margin. I'm pleased to report the third quarter net interest margin of 4.32% was up 4 basis points from the 4.28% for the second quarter. On a tax equivalent, we recorded net interest income of $144.2 million for Q3 2019 compared to $142.3 million for Q2 2019. During the second quarter of 2019, the interest rate environment began to decline. For example, the 10-year treasury went from 2.50% on March 31 to 1.64% on September 30. This decline has increased the prepayment speeds on our investment securities. As a result, we saw an increase in premium amortization of $515,000 from Q1 to Q2, then we saw an additional increase in premium amortization of $373,000 from Q2 to Q3. If the premium amortizations had remained flat from Q1 to Q3, our Q3 margin would have been an additional 3 basis points higher. Last year, we had a few large payoff events, which increased our margin. The first 6 months of 2019 did not include any additional income or large payoff events. However, in the third quarter of 2019, we had several interest income events primarily related to large payoffs. These events totaled $2.8 million of interest income, an increase to net interest margin by 8.4 basis points for the third quarter of 2019. Accretion income for the fair value adjustments recorded in purchase accounting was $8.5 million during Q3 compared to $9.2 million during Q2 for a decrease of $778,000. This decrease lowered our NAM by 2.5 basis points. Another positive for Q3 was that we were able to keep the yield on interest-earning assets flat, while lowering the cost of funds on interest-bearing deposits by 4 basis points from Q2. As a result, we reported an improvement of approximately $4,000 of additional net interest income per day for Q3 2019 when compared to Q2. With that said, I'll turn the call back to Mr. Allison.

Thank you, Brian. That's good stuff. Next, you're going to hear from Chris Poulton. Chris, how are you?

Yes, sir. Good afternoon. Thank you. As noted, our third quarter was highlighted by a lower ending loan balance in higher fee-related revenues. For the quarter, assets fell on what has become a bit of a seasonal trend. After positive net growth in Q2, we had $171 million of net portfolio decline. You may recall, we had similar results in Q2 and Q3 of 2018, with declines this quarter specifically driven largely by net payoffs, which totaled approximately $350 million. Specifically, payoffs on facilities and revolving lines made up about 40% of the total. These facilities typically increase and decrease over time, and we expect that at least some, if not all of this decrease, would be reversed over the coming months and quarters. Quarter-to-quarter increases and decreases in our overall portfolio are expected. And as we have discussed on prior calls, they are the future of our product line. Larger paydown quarters are also generally accompanied by higher fee-related income. Q3 was no exception as we collect an additional fee and interest income as a result of these movements in the portfolio. On the production side, year-to-date originations have been trending approximately $100 million ahead of last year, and we remain happy with the pipeline of expected closings between now and the end of the year. Right now, based on transactions and underwriting, CCFG has forecasted to have our highest year of production since joining Centennial Bank. With that, Johnny, I'll hand it back over to you.

Thank you, Chris. Good report. John? John Marshall, are you here?

Yes, sir. Good afternoon. Thank you, Mr. Allison, for the opportunity to provide this third quarter update on behalf of Shore Premier Finance. Net interest-earning assets increased $15 million in the quarter to reach $85 million in total growth since being acquired by Centennial Bank back in July 2018. The growth in the quarter may be attributed to a nice mix of robust retail originations, higher withdrawals on floor plan lines despite seasonal pullback in utilization rates and slightly reduced prepayment speeds. Retail application volume was flat compared to the second quarter but the dollar value was higher. We also booked an additional $14 million in floor plan lines, adding four new manufacturers that will result in increased future funding opportunities. I'm encouraged with the additional floor plan lines and the higher seasonal utilization in advance of the upcoming boat show season that will contribute to additional growth. To further stimulate growth, we're also introducing a new super yacht retail finance program. After months' research and due diligence, we believe there's a financing opportunity in the super yacht space defined as boats over 80 feet with whole values in excess of $7 million. We've observed the shift in consumer sentiment as the market bulls charge forward and recession appears to have been averted. For consumers to achieve a positive arbitrage between their portfolio returns and the cost of their boat loan, hence the following credit rate environment is also further fueling that fire. Additional good news is we are favorable to our income goals by 10%. Lower provision expense in the lean nature of our business with an efficiency rate below 30% have helped to boost profits. Across the $420 million retail portfolio, weighted average rates climbs 3 basis points in the quarter. However, variably priced commercial advances are more immediately reactive to the vagaries in the market and experienced a 24-basis point pullback in rates. Our contribution to the bank's net interest income continues to increase each month. Also favorable to target were our asset quarterly metrics, both compared to goal and prior quarter. 30-plus days delinquent loans reached a historical low of 20 basis point or $875,000. Nonperforming loans at quarter-end were just under $2 million, 6 basis points favorable to target. As a harbinger of future asset quality trends, retail originations in the quarter average FICO scores improved to 778, so a very high-quality paper, and we experienced no commercial delinquency. Overall, I'm pleased with the team's performance and encouraged as we move into the fourth quarter. With that, I'll conclude my remarks and turn the discussion back over to you, Mr. Allison.

Thank you, John. Good report. I like those past dues, 20 basis points, that's good stuff. We're going to go to Tracy and Stephen. I guess I'll go to you, Stacy, and you'll go to Stephen, right?

All right, Johnny. Thank you. To follow up on your outstanding report, of Home BancShares numbers and listening to Chris, Brian, John, I'm proud to discuss another strong quarter for Centennial Bank. For the quarter, Centennial Bank's return on assets was 2.08%, ran an efficiency ratio of 37% and continue with some strong revenue of $173 million. We continue to navigate through a challenging interest rate environment, obviously, with the last 2 rate decreases in the most -- in the recent quarter and potentially more on the horizon. Our bankers are focused on the long-term, cultivating relationships, while maximizing return for this company and our shareholders. Stephen will go over some details next, but I'd like to point out, we are pleased with our deposit growth over the year as the focus has been on core deposit relationships. On the loan front, as Johnny addressed earlier, our lenders have been working opportunities while staying with prudent underwriting, terms and rates. This has proven to work for our company over time, while not betting our future on near-term results. I like to congratulate our mortgage company led by Keith Little, along with his sales staff and his operations team for a very strong and busy, busy quarter. As I mentioned, I'm pleased to see the improvement in an already strong asset quality metrics. I want to compliment all our lending teams for their continued effort in this competitive landscape. I'm going to ask Stephen Tipton to give a little more detail on the loans and deposits. Stephen?

Thank you, Tracy. I'll give some color on production, payoffs and the balance sheet movement for the quarter. We saw Community Bank production at a little over $460 million in the third quarter, which includes $47 million of production from Shore Premier. As Johnny mentioned, the Community Bank footprint loan production slowed somewhat in Q3, but the contribution split remained consistent among the Arkansas, Florida and Alabama regions. As it has been mentioned, payoff volume increased to $721 million in the third quarter of 2019, which is a couple hundred million in excess of what we have seen in prior quarters. Chris has already highlighted the CCFG paydown and payoff activity, and the increased activity on the Community Bank side came primarily from Arkansas as several large development projects stabilized and moved to the permanent market a little sooner than expected. On the deposit side, we generally see some seasonality in the third quarter with the schools and municipalities we have in our footprint. We also saw customers with insurance monies flow out as the areas previously affected by hurricane Michael rebuild. As such, linked quarter balances declined $300 million, while year-over-year balance has increased $422 million. The growth in the first half of 2019 has allowed us to take a look at higher tier pricing on interest-bearing deposit balances. As we move forward, we'll continue to evaluate opportunities for pricing improvement, while managing the funding needs of the company. With that, I'll turn it back over to you, Mr. Allison.

Thank you very much. We'll go to Randy Sims for the wrap up. Randy?

Thank you, Johnny. Well, congratulations to everyone for another great, but as you heard, very noisy quarter. But even with the mix of transactions, as you heard from everyone, the numbers are once again very, very good. So let me just recap some of those strong numbers from Home BancShares and wrap this quarter up. We finished the quarter with total assets of $14,901,935,000. Income was $72.8 million, resulting in diluted earnings per share of $0.44 as compared to $0.43 from the last quarter, which meets our market expectation. Our ROA was very strong, up a little at 1.93%, but consistent with the last 2 quarters at 1.92%. More importantly, quarter end September produced a strong net interest margin at 4.32%, up 4 basis points from the last quarter at 4.28%. As you heard from our CFO, Brian Davis, there were very - there were several influencing variables on both sides of the equation, but it's safe to say, we're very pleased with the consistency of the NIM over the past several quarters that is a key factor in our high performance. On the other side, and once again, our profitability was helped by a very strong efficiency ratio of 39.16%, as we continue to control our cost. Average deposits for the quarter were up just a little at $11.17 billion, but down for the quarter on its ending balance at $11.05 billion, resulting in the loan-to-deposit ratio of $97.5 billion, up a little but consistent from $97.4 million at June 30. Average loans were down a little for the quarter at $10.9 billion versus $11 billion at June 30. However, ending loans were down $281 million for the quarter at $10.8 billion, indicative of our refusal to compromise our terms and rate for short-term gain. Our asset quality has and continues to be solid with all ratios at record lows, indicating a very optimistic and secure outlook. As you heard our Chairman, our tangible book value per common share non-GAAP was at $8.83. And you heard him talk about the tremendous growth in that value, especially over the last 5 years. We now have three quarters behind us and our strategy has not changed. Protect the margin for the future, avoid the crazy deals in the market, repurchase stock, grow tangible book, improve asset quality and control expenses. Consistency in our key metrics, this is what we do. And that pretty much wraps everything up, and I'll turn it back over to Mr. Allison.

Thank you, Randy. I appreciate it. I've got some really interesting charts here, but I really didn't have time to -- how many banks, 69 banks?

68.

68 banks, and they are -- where the parent is in the U.S., non-Puerto Rican banks and excluding Raymond James and Sallie Mae, and it ranks us over the time, over the last two years, a net margin return on assets, return on equity, tangible common equity versus tangible assets, dividend yield efficiency ratio, and just for everybody's benefit, Home just doesn't stand out in this -- with a high rating in every one of those categories, it makes me very proud, I appreciate every bankers on what they've done. And we'll continue to work hard. I wish I had more time to go over that. We may make some progress sheets for that when we travel in the future. Those are pretty important numbers. I think, at this point in time, does anybody have anything else? Chuck, are you ready for us to go to Q&A?

Yes.

[Operator Instructions]. The first question will come from Brett Rabatin of Piper Jaffray.

I wanted to first ask maybe Johnny. Can you talk about -- you talked about stupidity in the market, can you maybe just give us some -- a flavor for what you're walking away from, from a pricing or terms perspective, kind of give us some flavor of lunge you're not willing to cross? And then also wanted just to hear origination rates, kind of what you're expecting, kind of given where rates have gone relative to the current portfolio?

Well, sometimes it's a good time to book a lot on loans, and sometimes it's not a good time to book a lot of loans. But as the Fed dropped 50 basis points, I'm telling you, the lenders dropped 150 to 200, and we're just not going to play at that level. And we're beginning to see it is -- as I said, it's a dangerous time. We're beginning to see loans in the 3s, we're seeing 80% leverage, we're seeing nonrecourse mixed in. It is a time to be very, very cautious. I mean, and as I've said in my remarks, banks are probably in the best financial condition that they've been in, in ever maybe, at least we are, and to take a chance in these kind of markets and go back to 80% leverage, it just doesn't make any sense. We're just not going to do it. We made the decision several years ago on some prepays, I mean, to put prepayment penalties in. And I think you'll see of the next quarter or 2, we made a decision to $300 million or $400 million leave that's here presently right now, but we're not going to go -- we're not going to sell our future. So you're seeing 3s, you're seeing nonrecourse, you're seeing high leverage, you're seeing things that we saw back before the '08 crash. And we're just not going to play. This is my largest asset, and we're just going to protect our assets. We'll book the good loans and we'll let the others go away.

Okay, that's good color. The other thing I was curious about, you obviously defended the margin well in 3Q with the help of the prepays. Can you maybe just talk about the kind of go-forward outlook. You'll be able to reduce funding cost, I assume, on a slightly higher pays going forward. Maybe just talk about how you think about the margin from here?

Brett, this is Stephen Tipton. I think Brian's got our updated outco models here today, I mean, it still shows a little downward pressure in a down 25 or down 50 environment, which is consistent with what we've said last quarter. We're constantly working the funding side, the deposit side on where you all saw our report yesterday where we had another $70 million or $80 million in balances that we lowered by 25 basis points. So some of it -- that's a month post the last rate cut. So some of it is timing related on the deposit side where we communicate these drops to the customers. But at 96%, 97% loan to deposit, we are mindful of balances, too. So that gives a little color for you.

I'll add a little color on the outco perspective in this. We are asset sensitive when we were pricing gaps about 8.8%, which leaves us about $1.2 billion that is asset sensitive. You just take the numbers out the black box on the outco model, it would show that a 25 basis points decline could decrease the net interest income. Everything held constant about $200 million for the quarter or 6 basis points. And if we went down 50 basis points, it'd be pretty much double that, it would be $4 million for the quarter or potentially 12 basis points. That's assuming that we did nothing to change the mix coming out of the black box on the outco model.

I think when we traveled with you, and Donna and I travel with you, you saw the emphasis that we put on margin, and it is -- has been top of mind. I think we're going to see downward pressure a little bit because of competition on that. We're trying to do the good ones and let the bad ones go by, or some of them are good credits, you just -- we're just not going to write at 3% nonrecourse. We're not going to do that. I mean this too shall pass, won't be here forever. And to think you're going to lock in -- I mean we're seeing a lot of 15-, 20- and 25-year stuff, some banks, a lot of shadow banks, but they're locking themselves in for a long time with some of these credits. And we hate to see some of these go, but I think that we'll be better off in the long term where we will write rates at higher rates in the future.

Our next question comes from Michael Rose with Raymond James.

I just wanted to circle back to the margin commentary. So obviously, 7 basis points of prepays, it sounds like you expect some level of prepays going forward to kind of boost the margin. So should we think about a level that's something around that for the next couple of quarters just in terms of what you guys are expecting for prepays? I'm just trying to get at what's kind of the starting point for the NIM that we should consider, and then build in whatever we're going to build in terms of rates?

I think you're going to see a pressure on the NIM coming in. At -- we have -- the originations thus far this quarter have not been at the rates that I wanted them to be. So that's it. Obviously, we have not originated a lot this quarter. However, the top line unfunded is the highest it's ever been. It's about 2 point...

$6.47 billion, I think...

Almost $2.5 billion, and that doesn't include Chris Poulton, and Chris has a very strong backlog. So we have a good backlog to give us time to weather the storm, I think. Any other comments on the margin? We have a lot of prepays and you can call it juice if you want to. I was looking for someone to give us credit for having enough foresight to put those prepays and [indiscernible]. So thank you Jimmy. But we have a lot of prepays, you're going to see a lot of money rolling in the income pretty quick here in the fourth quarter if all of this stuff gets paid off, because there is substantial prepayments. When I'm talking substantial, I'm talking some big loans with some 4%, 5%, 6% prepayments in them. So there'll be some substantial income coming in. So that kind of takes a little of the sting off of that movement.

Right now, it's actually reoccurring, non-reoccurring income.

No. I completely understand. It's a good thing you guys put that in. Just had a question, I don't think you guys addressed it in the prepared comments, just wanted to get your thoughts on CECL. So as I step back and I look at it, and you kind of have 2 buckets of loans that are treated kind of unfairly with the unfunded commitments, and then the longer-dated earning portfolio. Can you give us some sort of expectation, if you have it? What kind of the day 1 hit might be under CECL? And how that might change your appetite to continue to grow CFG as you move forward?

Well, I'll take the part on the CECL. I mean, when we have run our models and we're at the point where our auditors, BKD, are in the process of auditing it, they've not given me their thumbs up, thumbs down opinion on it, they've been here a couple of weeks. We're also going through a model validation. Once again, they're probably going to be done in a couple of weeks but haven't gotten the final report on that. So we're not prepared to actually give a number. I mean -- but we do anticipate that ALLL will go up a little bit. Of course, that will be a hit to capital. We do anticipate being able to take advantage of the 3-year phase in from a risk-based capital standpoint and phase it in over that. As far as us originating or changing our lending, don't think that, that's going to impact a lot of the way that we're doing our loans. I mean we'll have to fund ALLL as the loan portfolio grows. And -- but to be honest with you, for a lot of the history of this company, we have done that already as we grew the loan -- when we had a growing loan portfolio.

Our loss history, Michael, over what we analyze shows that the type of lending we do, we've really not lost of money there. I think your question was asking for a change in any of the different types of loans. And as of what we've seen so far, that wouldn't happen.

Michael, this Kevin Hester. The weighted average maturities for our portfolio are shorter than you might think. And even in the Marine portfolio, those prepayments speeds have been in the, I want to say, 3- and 4-year range out of that portfolio over time. So it's not going to make as much difference as you might think.

Understood. And maybe just one more, just broadband on loan growth, it looks like loans could end flat to kind of down this year. And I understand why you've slowed that, it's twofold, right? It's prepayments and it's also being more prudent, not giving away the ship, which I understand. As we think about next year, if this dynamic continues to play out, I assume you'll take the same stance, and we should probably just kind of project a lower rate of growth, is that a fair way to kind of think about it?

Well, I hope not. But if the market stays like it is, then -- I mean if the kind of credits we're looking at and the rates we're looking at on those credits now, if that continues into next year, we'll remain very conservative.

Well, there's a lot of stupid words thrown around, so...

There's a lot of that. I get it. You think about it, what happened in '05, '06 and '07 and '08, we feel like putting money in the deal, right? There was no money in any -- they blamed construction, but really, there was no money in them. All bankers learned our lesson in '08, '09, '10 and '11 as we got kicked in the tail. We just want to -- we don't want to go back to that. This is -- we're not interested in that kind of business. That doesn't make any sense to loan money at 3%. That's just ridiculous. So we're just going to keep, as I say, just hold steady here is what we're going to do.

No, I get it. We all like Johnny Prime better than the alternative.

Yes. We may go back to Johnny Prime.

Don't mention that, Michael.

That's what we did then, we just went to one rate and said, "take it or leave it," right? Worked out pretty good for us. We're just being conservative. We're just being ultra, ultra conservative in a market that is -- when you see the Fed drop 50 basis points and bankers drop 150 basis points and 200 basis points on loan, it was kind of crazy, it was almost like they turned out the wild animals at one point in time and they were just running in different -- we've got a quote for this and so and so is going to do this, and Tracy now, we're in Orlando talking to this big developer and he said, "look," he said, "I'm getting 3.25%, 7% -- I mean, 3.25%, 7-year nonrecourse, 3.5% 10-year nonrecourse," and he said -- I just looked him in the eye right then, I said, "well, we don't do that, that's not what we do and we're not going to do that." So you just have to let them know you're not going to play that game. However, we may get that guy on the fab, Tracy, you think.

I think you're right.

So anyways, you just got to get -- relationships are extremely important right now, we're disappointed in some people, but most people will stand up to the relationship.

Your next question will come from Brady Gailey of KBW.

When you look at loan growth or, I guess, loan shrinkage, if you guys -- the payoffs, are they coming out of one specific geography? Like is this CFG or Arkansas or Florida? Is it kind of across the entire Home Banc franchise?

We'll let Chris talk to CFG, speak to his CFG. Chris, won't you speak to that? And we'll speak to legacy.

Sure. Yes, no, I think we're seeing -- for us, I think we see our normal level of payoff. They come in different months, right? So I don't know that we're seeing anything happen on payoffs that we haven't seen happen before. Our challenge is that convincing our customers to pay off in an even 1 12 fashion over the years is a little tough to do. So some quarters get higher than others. But the only maybe a little difference this time was some of the elevation in payoff was in facilities, which is a little different in that we do have an expectation that those facilities remain outstanding and borrowers tend to reborrow. And so we had 1 larger payoff that hit this quarter that was in the facility, and we have an anticipation that some of that will get refunded back up over the next life of the facility, which is generally another year or 2. And so that might have been a little different. But in general, I think we're seeing it's kind of the same things we normally see.

From our perspective, we have a multifamily builder that's about $120 million, and the decision was to let it go because it's 3.25% nonrecourse. We don't do that, and we're not going to do that. And we hate to lose it, but there's also $4 million with prepays on it. So that takes a little of the sting off when you've got $4 million with the prepays on one side. Another paydown that happened this quarter was one that we wanted to happen. It's a multifamily, couple multifamily units that was a classified credit that we thought was fine but the regulators didn't like it. So we moved it. He was able to get financing elsewhere with another bank, much bigger bank, and they took it out. So not only -- some of this is by design that we moved out. I think someone asked about the credits, the two credits that we had, the two, four credits that moved to five [indiscernible] move to 5s. What happened is Kevin is ready to upgrade it but [indiscernible] a payoff it appears and it has a prepayment on it. So that was gone. The other one was a complex in the Panhandle Florida, and there's been no change on it. We're not worried about that credit anyway, but there's been no change on it. But some of it was us and some of it was the market and some of it was pricing, for us to look at long-term fixed-rate stuff, nonrecourse. We're just -- we're not ready to do that.

All right. So if loan growth is not going to be robust, at least in the near term, I know, Johnny, you've been able to successfully grow EPS via M&A. Do you look to M&A a little more aggressively now that loan growth is slowing here?

I think we do. We have seen -- I don't know what's going on, Brady, but there's lots of banks coming at us. More -- we've seen more banks in the last 6 weeks than I've seen in 6 or 8 months coming at us. Some of them make sense, some of them don't make sense, but that could be a plus for us down the road. We're just starting to play with that. We've looked -- we really haven't been real serious about M&A, but I think we're getting much serious now. When you got us to see that Tracy, opportunities are definitely more now than what they had been, and expectation is still a little rich for us, but they're coming down though. That's not the point. Expectations are coming down a little bit. I don't know if everybody is afraid that the floor is going to win and banks will be in big time trouble or -- but there's something going on out there that's generating. I don't know if it's regulators, I really don't know what it is, but there's something, they're coming at us faster than we had anticipated them coming at us.

And Johnny, just remind us, like I know a lot of the deals you've done in the past have been scratch and dent, is that still the focus? And then what is kind of the size, range and -- of targets that you would potentially look at? And then what geographies are most attractive to you?

I don't know if size is important. We did the Stonegate deal, and from a shareholder value perspective, we didn't get anything out of that. It was a good lesson for us to learn. It is important in some markets to get the blessing of the shareholders of their organization. So I think we probably would be looking at a smaller-sized organization that gives us that wholesome local shareholder flair that you don't get with the -- that you didn't get with the Stonegate. So not that Stonegate weren't a good trade for us, it turned out to be a good, profitable trade for us and a great deposit market for us, but we didn't get the ra-ra from the shareholders that we'd get on a smaller transaction. I just think that's important to the value of the company because if it's heavily fund-owned, then it's just they're gone overnight, right? They don't get paid until they -- they don't get their 2 and 20 or 20% or 50, whatever they're paying us until they sell the stock and get paid, so it's a good lesson for us to learn. But the bottom line to it is, is which one is the most accretive to EPS for Home BancShares, and that would probably be one, it is somewhere around our markets because of the savings that we can generate. I still like Texas, and I talked about it a lot, but it's -- we don't get a lot of savings out there. If we did a day or two in and around Florida, I think we could pick up some good savings and probably pick up some shareholder value.

The next question comes from Jon Arfstrom from RBC Capital Markets.

Just a quick follow-up on that, on Brady's question on number of banks coming at you. How was the quality of those companies in general? Quality of the loan book?

Well, I don't know until we get in. But I'd say, from -- we've to do it, I'd say they're across the board. Some of them had stumped their toes and I guess they don't want to stump their toes, and I guess they just put up -- threw up a for sale sign. It's just a matter of price. I mean, obviously, this team, management team has a lot to do with a failed bank, they bought [indiscernible]. So it all has to do with the price of the bank and what it does to Home. But I think, overall, banks are in the best shape they've been in, in many, many, many years. So I think most of them are good. It just depends on what it does. We're not going to do a deal for the sake of doing a deal, we're going to do a deal that makes sense for our shareholders and that is accretive to EPS for our shareholders and add some additional value or maybe a different market. But we can't get much sight as we go outside Florida or Alabama or Arkansas, unless Chris wants to buy some in New York, and I don't think he's interested in doing that.

All right. Also you've been clear on your view on the Fed. But big picture thoughts on rates for many of you, is there like a directional bias that you're managing to in terms of your company? You think we're going lower or stay the same?

I think we're going lower. I don't -- some people think we're going to go negative, I don't -- maybe a quarter or two, I think we may see that. I don't know they really -- and it raises the point where it really didn't stimulate. So I think another quarter down or maybe two down will pretty much be the end of it. But some of the bankers are already -- they've already gone there on their rates. They went -- they dropped -- as I said earlier, rates dropped 50 basis points and they dropped 150 to 200 basis points on their rate. So it was kind of chaos out there for a little bit, we just got out. Sometimes it's good times, the whole of sometimes is a good time to fold. This was not a good time to -- not a good quarter to originate new loans based on competition and the silliness that was in the market. So even though we did originate $710 million, a lot of it never got up to our executive loan committee because they flushed it before it ever got here.

Jon, Randy Sims was telling me he's at a conference last month. I think that question was asked to all the bankers in the room and we evaluated those answers a year later, and they were all completely wrong.

That's exactly right. Every year, they ask questions on what our rate is going to do, what's the most threatening thing to you, yada yada, to a -- the best bankers in America, I guess. Most of them were there. And every year, they've been 100% wrong the year later. So I'm kind of the opinion after seeing that 2 or 3 years, we need to think what we don't want. So if rates are going down, maybe rates will go up, I don't know.

Yes. Well, a year ago, they went up, right? A year ago, they went up.

Well, yes, last year, they were going up and Tipton told me that somebody calling and they said, "you need to get ready, rates are going to go down." And I thought, is Stephen buying that BS? And boy, was [indiscernible]

I should have.

It worked. It was just the way the guy called it.

I'm going to tell you that in this country right now, nobody really knows. Things may go -- rates will probably go down a little bit, but who knows what will happen after that. They could just as easily come back up. We're just kind of -- we're kind of turning the needle just a little bit as the rates change in the Fed. You have a tendency you won't twist that knob, but we're just tweaking it or doing nothing. And I think it's probably the best thing to do right now till you get a trend. I know what the trend is, it appears to be down, but that doesn't mean it will go down.

Yes. Okay. And then I guess, the last question, we kind of periodically plug you on HOMB $2.00, and obviously, the rate environment has changed a little bit, but big picture goals for 2020, do you have any thoughts on that, on where you want to take us?

Yes. I'd like to beat the $2. I just don't think -- we need $1 billion worth of loans and it's just tough to get right now. It's tough to get a decent rate, so it might push out HOMB $2.00 by another year, in my mind, but we'll get there. This has been interesting. It's been interesting. We -- normally, all the goals we said in the past, we hit within, I think, 10 or 24 months, and this has been an absolute battle getting here with all the changes and the payoffs and the rates and the rate movements. It's been interesting times. But overall, Home has returned to their shareholders over $500 million in the last five years, we earned $1 billion and we've run in close to 2%. So we've been able to manage our way through this crazy environment and produced still best-in-class results. So hopefully, we can continue to do that in the future, Jon.

The next question will come from Stephen Scouten with Sandler O'Neill.

Curious what you're thinking on share buybacks from here? You said you might build capital, I think you mentioned $100 million, $200 million. Are you thinking if you don't have the loan growth here in the near term, that you might just hold the capital and not do more buyback activity here in the near term?

No. We'll continue to buy back. We'll continue to be in the market buying stock. We may cut back on it somewhat the way -- at the amounts we've been buying. We think it may be prudent to store $150 million to $200 million. The worst thing that can happen to us, if we do that, we've got a sub debt that's due in 30 months.

March of '22.

March of '22. We could pay way down the dub debt. Somehow, they've never convinced me how that works. They're counting just capital, and it shows up on the balance sheet as debt. So I don't understand how that works. I don't like debt. So we're thinking that, that might be, we might use the cash to pay down on that. We're kind of split in that. If it's $10 bill, we're kind of taking $5 and buying stock at about $5 and sticking back. Always blessed to have the kind of earnings this multiple that this company has where you have that kind of money to be able to do those things. I mean we'd pull all the handles. I don't know if you heard my presentation, but we've earned over $1 billion in the last 5 years, and we've given back to our shareholders over $500 million in stock buybacks and dividends. So while growing all that growing tangible book by 78% and our capital ratios at the same time. So it's a pretty good money maker.

Yes. Absolutely. That's good. Is there a way to frame that up? I mean, obviously, you bought back maybe, I think, it was about $105 million in 2018, you bought back looks like maybe about $75 million, $76 million this year so far, is it $100 million a year over the...

That's probably close. It's probably good for you. That's probably good.

Okay. And then kind on the expense side, one of their kind of follow-up there is, is this a good run rate in the quarter? Was there anything unusual in the salary line and particularly looked like it jumped a couple million bucks this quarter?

A lot of that was the bonus is paid off of the -- for the payoffs.

Okay. So that would remain elevated as long as you continue to see payoffs. But if payoffs decline, that number would also come down a bit?

That's correct. But the way Chris has his structured, that's part of his employee compensation, and we don't have -- the legacy doesn't have our structure that way. So there will be -- if these $120 million worth of most the families pay off in the fourth quarter, it will be about $4 million worth of fees, and there is no associated expense planned.

Okay. Got you. Very helpful. Okay. And then maybe just the last thing around the NIM. If I'm hearing everything you guys have said correctly, looks like maybe loan yields are down a little bit from what you've looked already this quarter. So if loan growth does return a little bit, that would put more incremental pressure on your NIM than it would if maybe you just pulled back and stayed flat, is that the correct way to think about?

Good questions. If loan growth returns, that'll put more pressure on our NIM because we're riding at lower rates. That's probably right.

Yes, I get it. In theory, that's probably right.

In this rate environment as we sit.

Yes.

So that's push/pull between making more money or having better margins and better returns.

The next question will come from Brian Martin with Janney Montgomery.

Stephen, I guess, maybe probably for you. But just going back to the margin for a minute, I guess. I guess if you get another rate cut or two, I guess, just kind of from the core margin perspective, I mean, I guess, do you expect -- I guess it sounds like you still expect some continued pressure there on the way down, but I guess, do you expect -- the more rate cuts you get, I guess, is your expectation that the beta, the deposit beta gets higher, so you get, I guess, more benefit, I guess, or less impact?

Yes, potentially. I mean we talked this morning. I mean I think, you had such -- on the deposit side, you had such a long period of 0 rates, and they ran up and gotten to 2% range and everybody is excited to earn that. I mean I think it will take some time as that appears that this may pull back down. I mean we're seeing -- finally seeing this past month on the deposit side, CD volumes and those type of things below the 2% range. So another rate cut or 2 if that -- people kind of go back to looking for security over yield. That may help from a reduction on the rate side. But it's still -- we're still competitive environment on the deposit side too in all of our areas. We're on -- you're seeing 2-plus-percent adds at our competitors, both here in Arkansas and in parts of Florida. So that's just something we're having to manage around. And I think the numbers that Brian gave from a modeling standpoint, I think, are consistent with what we saw this quarter from a core perspective if you strip out all the deposit things we talked about. But again, as Johnny said, I think, in the environment that we're in, you're just -- we'll take credit for those and we're going to see those continue for the foreseeable future.

Okay. So maybe, I guess, just in general, just kind of going to the efficiency ratio. I mean it's at a great level. I mean if we're in this environment where revenues are being pressured, I mean, is there a lot more that -- is there a lot more you can do or do you see other opportunities on the expense side? How should we think about kind of the efficiency as you go into next year? I mean is it kind of flattish? Is it up a touch? Does it drift off a little bit from where it's at in '19 to '20? Just kind of how you're thinking about that in general?

I'd just use 40. I think 40 is fair. I mean we brought in lots of new people into the company over the last year or two, and we've maintained that, I think most of that. Any spending from First now, I don't see it right now or any. You've see any additional major spending?

Not anything major. There's still a few areas that need a person here or there. And unless we have a lot of growth, I don't see that increasing. I think your 40% is right on the mark.

Yes. So Townsell said, if we got to 41%, she'd come back and take it back over.

It's the memo going out in a minute. Stay at 40%.

So anyway, that was just a joke. I think it's pretty solid around 40%, it might take a little over, take a little below that, but I think it's pretty solid.

Okay. And maybe for Brian, just that FDIC credit, I guess, that comes back in what, mid next year, is that how to think about that or just kind of ballpark when we should start putting that back in?

No. The FDIC credit is a one-time event for us. So you saw the negative in the income statement, that's because we were able to reverse the accrual for Q2, and then I'll have to make really much of an accrual for Q3. So it goes back to its normal run rate starting in Q4.

The next question will come from Matt Olney with Stephens.

Most of my questions have been addressed. But on the M&A discussion, it sounds like you're seeing lots of books out there. I'm curious, do you think this is a buyer's market right now? I'm trying to get a better idea of what the pricing could be in an M&A transaction right now.

I'd say it's much more of a buyer's market than we've seen in the last 3 or 4 years.

John, we've actually had some reach out to us some time ago that didn't participate and they hadn't done anything yet because of the higher price, but things are coming down. We think they may be coming down a tick. As I've said to you, when I look at the universe and homes trying to 2x tangible and we're running the 2% ROA and the guy who's wanting to do something is running a 1% ROA, and he trades, he's traded 1.8% or 1.9% intangible. So it's been frustrating to us to see the weaker sisters. There's no disparity between the best operators and the poor operators to speak of, really, unless they stump their toe. And if they stump their toe, then the market's punishing them right now. But I don't know that you're going to see a lot more -- there may be some more problems with asset quality, not -- you hadn't seen many this quarter thus far, have you, people having asset quality problems?

So far, it hasn't been as bad as it was last quarter. But you mentioned Florida as a market you're looking at and you've been buying in Florida for several years now, and I would think that you already know some of these banks pretty well. So I'm curious, are some of these the same banks that you danced with previously or are the books down there that you're seeing these new faces that you're less familiar with?

Actually, it's a little of both. It's a little of both. It's some that we danced with and didn't do anything and then some that -- actually, the last book we looked at was 4 banks this week, right? And I'm trying to think of the names. Two we had danced around with and 2 we have not. So about half and half. But I think that prices are going to get -- I don't know why everybody is in a hurry all of a sudden. Maybe it's the loan demand and rates and the difficulty of managing $15 million to $20 million assets in this kind of roller coaster economy. Maybe they're just going to house, maybe they think [indiscernible] is going to win. I don't know what's happening, but something is starting this out there that when you ask them why they're thinking about selling, I don't know that you're always getting the right answer.

Got it. And then just switching gears, more of a modeling question. On the tax line item, you had some unusual movements this quarter. Any change to your expectations of that effective tax rate being around 24%?

Yes. It should change a little bit. Our marginal rate had been 26.135%. But with the Florida being a little bit lower and we having quite a bit of real estate down there in Florida, it's probably the marginal rates now going to go to 25.819%. We had been running an effective tax rate of about 24.1%, I look for that to be about 300 basis points lower down to about 23.8%.

Got it.

That's what I would have told you, probably. I think you did right. I think he told you right.

And Brian, what about on the purchase accounting accretion, a little of a step down in the third quarter, what's the outlook from here going into fourth quarter and then the seasonal treatment for that going into 2020?

Okay. This last quarter, we had $8.5 million of accretion, and $6.2 million of that came from what I'll call just normal running off the normal accretion. And then we had $2.2 million of payoff accretion. What I've been witnessing is that about -- over the last 1.5 years is that it seems to be tripping down a little over $0.5 million per quarter on average. I would not be surprised to see us for total accretion be below $8 million for Q4, maybe around $7.8 million, $7.9 million for accretion. As far as the change when seasonal comes in, it really shouldn't change much because everything that we have that's out there on -- that is accreting continues to accrete. The little bit of change we might have is that we've had some non-accretable discounts that we've decided that were no longer needed and we've been able to move those over to accretable, and that piece of the puzzle will stop in 2020. But we still have $78.4 million of accretable discounts on our books as of September 30.

Got it. And then on the BOLI contract that was surrendered, what's the ongoing impact of that? Is that a few hundred thousand dollars in fee income that you were benefiting from each quarter that will now stop?

Obviously, in our non-interest income, we had increase in cash value of life insurances. It was $714,000 for this quarter. $135,000 of that was related to the BOLI that we cashed in for this quarter. That will not be reoccurring in Q4 or Q1 or any time in the future after that. We get our BOLI cash 6 months after surrender, and we surrendered it late in September.

So we actually think we should see a pick up later. I mean, we were yielding like 1.16 or something.

1.14.

1.14. I mean, we spend on our [indiscernible] better than that. So that's why we called it.

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

Thanks, Chuck. I guess we'll see you in 90 days. We'll continue doing what we've done in the past of buying back stock and growing the tangible book value of the company, continue paying a strong dividend and growing capital at the same time. So I would say that we're kind of becoming like, what is it, the [indiscernible] guys that you'd never had to just let them go, they're just reliable, because I think Home is becoming a reliable company. So we continue to hit good numbers and perform profitably in these all different kinds of markets, and we look forward to talking to you all again in 90 days, and thanks for your support.

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