Home BancShares Inc
NYSE:HOMB
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Home BancShares Inc
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Greetings, ladies and gentlemen. Welcome to the Home BancShares Inc. Fourth Quarter 2017 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks then entertain questions. [Operator Instructions]
The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page three of their Form 10-K filed with the SEC in February 2018. [Operator Instructions]
It is now my pleasure to turn the call over to our first presenter, Mr. Allison.
Thank you, Andrea and hello everyone. Good afternoon and welcome to Centennial Bank and Home BancShares 2017 fourth quarter and year-end earnings release and conference call.
Randy, we have a large group joining us today. Tracy French -- most of them are the usual suspects. So, that's Tracy French, Stephen Tipton, Kevin Hester, Jennifer Ford -- excuse me, Jennifer Floyd; Ron Davis, and Dave Seleski and Chris Poulton will be joining us today. Welcome everyone. Well, another one in the rearview mirror, 2017 is gone and what a year. The year yielded both good and bad. And Randy, I'm glad to say it's over and a new one is starting.
Let's cover a few significant events for 2017 because it was a really, really busy, busy year. Landmark, Bank of Commerce, $800 million Stonegate deal, crossing $10 billion, $300 million sub-debt issue; TCJA, the Tax Cut -- that's not John Allison, that's Tax Cuts and Jobs Act; Hurricane Irma, Donald Trump, first $60 million quarter ever, first $200 million year, Ray tax, pay off, $2.4 billion in total loan originations, elevation of the FinTech opportunities and creation of a new deposits are, Kelly Buchanan, and development of our first virtual branches.
All of this while trying to separate real news from fake news, in addition to looking for a Russian behind every tree. Whether you like Donald Trump or not, this man has single-handedly turned the country around by creating optimism and hope for the future. He's also created a lot of controversy, but the man is doing what he said he would do.
The burden of unnecessary rules and regulations have had business in a straitjacket for years. I'm told help us on the way, accomplished with the right people in the right places and we just need to drain the swamp over the next seven years.
The regulators mean well, but sometimes they fire the arrow in the wrong direction. The expectations for cut me over $10 billion is pretty amazing. The problem the last cycle was there was no skin in the game. Those that had equity in those deals worked hard to save their companies and those that didn't, just threw you the key.
I have a fear because the capital climates, but the regulators are forcing banks into more risky C&I loans and long-term fixed rate over occupied loans. And out of construction and development loans, that certainly have the risk, but properly documented with large equities can be far site -- can be a far safer place to loan money.
Our team, while navigating the hurdles, maintained strong core efficiency ratio for the fourth quarter of 37.35% and that's before the conversion of our largest acquisition ever. Major savings should be combined in branch closings as well as conversions. Much more to come during the quarter. Stay tuned.
This improvement, coupled with the tax cuts and hopefully, decent loan growth, make 2018 look like a power year for Home. The tax saves alone are over $53 million. I'm looking for ROAs in the 2.15 -- Tracy, kind of rolled his eyes, 2.10 to 2.25. How is that, Tracy? That better?
Sure.
The rewards are greater for those companies that are top-performing companies than they are, well they are also ran companies. Already running at 30% -- 37% efficiency ratio and return on assets of 1.69 before the conversion, well, I think that's great numbers.
I want to congratulate Kelly Buchanan as our new deposits [Indiscernible]. She's just had her first group meeting in Conway with 18 of our brightest people from all over the footprint. I expect two days working on their new opportunity -- two days creating our first deposit incentive program with the branch system. Kudos to a great bunch of advisers. They really impressed me. Good job, Kelly and group.
I'm announcing the company's new EPS goal today of a home $2 after looking what I believed to be a reasonable goal for the company and the participants. I think $2 is reasonable. Remember, this is a stretch goal. It's not a gimme, but it's certainly a reasonable goal. Some expense savings and loan growth, and bingo, there's $2.
We repurchased about 900,000 shares during the year and the reason we did that is because our stock was on sale. I think most analysts totally missed this investor opportunity that was presented. It was a layout to us. We saw the stock cheap and we bought it. We bought it and we'll continue to buy it when it's on sale.
Obviously, someone like it. Forbes ranked Home BancShares Best Bank in America of all banks between $8.8 billion and $2.7 trillion. What an amazing honor for our people. I want to thank the Home team for a job well done. Let's do it again in 2018. The ball is certainly teed -- excuse me, the ball is certainly teed up perfectly for a great year in 2018.
Randy, I'm looking forward to another powerful year breaking many more records. I turn it over to you.
Wow. Well said. Thank you, Johnny. As our Chairman emphasized, 2017 is now gone, and it's in the history books. And despite all the noise, as Johnny said, it was an incredible year for Home BancShares as it sets in motion the potential for a very successful 2018.
So, I think when we look back, 2017 will be remembered as a very significant year. And with that said, congratulations to all of our employees for a very successful year ago. You have all made a difference in our continued success.
2017 also marks the 19th year of full operations since opening our doors in Conway, Arkansas, on the first day of 1999. So guess what? We're starting our 20th year and what an adventure and success it has been for us all.
We started 2017 with the closing of the acquisition of Giant Holdings Inc. and the Bank of Commerce. And on March 27th, announced the signing of a definitive agreement with Stonegate Bank, the largest acquisition in the history of our company. And of course, that was closed on September 26.
And then also in September, we were reminded, despite all our technologies, most of nature remains unpredictable, as Hurricane Irma slammed into Florida and the footprint of Centennial Bank in South Florida and the Keys. But just as Florida knows how to deal with the aftermath of the hurricane, so do we. And a hurricane provision was established in the third quarter.
And then in the fourth quarter, we took a $36.9 million one-time charge due to the recently enacted Tax Cuts and Jobs Act. So, with this charge, plus the hurricane provision, as well as merger expenses, I can confidently say 2017 may have been the most unusual year in our history.
In addition to everything else I've mentioned, let's not forget the $300 million subordinated debt we issued in the underwritten public offering. These events are now closed out and gone with the end of the year. And with that, our team and management are very excited as we look forward to what can be accomplished in 2018.
Our three acquisitions in 2017 resulted in over $3.6 billion in total assets being added to our balance sheet. And in just a few short weeks, on the weekend of February 9th, we will complete the conversion of all Stonegate systems that will not only consolidate our IT systems, but also begin the process of the consolidation of duplicate branches in our respective footprints, which together will bring about anticipated savings to our bottom-line.
With that said, what better way to tell you more about how to transition of Stonegate is going than to have Regional President, Dave Seleski, give us an update on how things are going. Dave?
Thanks Randy. As I mentioned in the previous quarter call, the transitions are going extremely well. And for the most part, on the lending and credit side is completed. I think the best illustration of this is, since September 26, we've got over $100 million in new commitments approved to our customers and to prospects. And that's a real credit to everybody working together both on the Centennial side and the Stonegate side and I can see that momentum continuing additionally into 2018.
That is despite also, too, that our competition obviously, whenever you do these large mergers, is targeting our customers. And I feel like they've been very unsuccessful. The impact has been minimal.
A good illustration of this is 65% of our branches actually increased non-interest-bearing deposits in 2017, which is pretty incredible when you consider that you're going through a conversion and you're announcing you got different products and so on. It's a real credit to our people and the loyalty of our customers and I appreciate that.
Next step, obviously, is in a few weeks, when we do the conversion of the deposit side, we're looking forward to doing that and completing this transition. And from that, we should be able to go forward and increase our overall market share in Florida and look at to improve the overall franchise. So, we're really looking forward to it and looking -- really enjoying being a part of the team. Thanks.
Thanks Dave, that's great stuff. So, let's look at the review of the results of the quarter. Excluding the $36.9 million one-time Tax Cuts and Jobs Act, earnings for the fourth quarter was $60.2 million or $0.35 diluted earnings per share. That compares to $46.144 million for the same period of time in 2016. I know most of you have been waiting for it, so let me say it. That makes 27 consecutive quarters of record earnings for Home BancShares.
Naturally, that is calculated on the basis of fundamental net earnings. I have to say that little disclaimer. And I don't mind repeating myself again just to make sure I said it because I'm getting old, 27 consecutive quarters of record earnings. Everybody got that? Okay. 27.
Now, excluding the $36.9 million one-time TCJA charge, or $33.4 million of hurricane expense and $25.7 million of merger expenses associated with the 2017 acquisitions, offset by $3.8 million of one-time non-taxable gains in acquisitions, 2017 annual after-tax fundamental earnings were $204.8 million, an increase of 15.7%. That's the most important thing that I said in all of that, an increase of 15.7% from 2016 annual after-tax fundamental earnings of $177 million.
Our return on average assets for the fourth quarter was 0.66 as compared to 0.54 for the third quarter of 2017 and 1.98 for the same fourth quarter in 2016. Of course, with the noise of two straight quarters, a better comparison is our return on average assets. And here we go again, excluding intangible amortization, provision for loan losses, merger expenses, FDIC loss share buyout expense, reduced provision for loan losses as a result of the significant loan recovery, hurricane expenses, and income taxes. That result was 3.1% for the fourth quarter as compared to 2.94% for the third quarter and 3.23% on a quarter-over-quarter basis.
I think that number is a really good comparison when you get everything out of there, showing a very strong fourth quarter, excluding all the noise, and of course, with the acquisition of Stonegate.
Our return on average TCE, excluding intangible amortization for the quarter was 7.78%. So, as of December 31st, the corporation is sitting on almost $14.4 billion in assets. Deposits ended at $10.4 billion as compared to $6.9 billion at 12/31/16. There's more to come and we have a great management team on hand to talk about it.
So, I would like to turn it over to Centennial CEO, Tracy French, to give us his comments on our performance.
Well, after hearing Johnny's opening remarks and Dave's comments, your exceptional numbers, I just want to congratulate our entire staff for a meeting the expectations of what Home BancShares is all about.
Specifically, I'd like to say congratulations to our regions and identified North Florida, accounted region, our Northeast Arkansas region, and New York region for all producing core ROIs for 2017 of 3%.
Our regions continued to post exceptional numbers quarter-to-quarter. And with a loan production that we saw in the fourth quarter, I'm encouraged that will translate to even stronger revenue and net income for 2018.
I did have a few prepared remarks. But after hearing Johnny's opening remarks, I'm a little speechless at this time. But I do feel that 2018 is probably going to most be exciting ever for this company and we do look forward to that.
So, I think with that, Randy, I'll just let the rest of our talented group here give a little update on the numbers. Congratulations on the year for the success we've had.
Thanks Tracy. The total number of active Centennial branches is 171 versus 172 in the third quarter with 76 in Arkansas, 89 -- I mean, in the fourth quarter, with 76 in Arkansas, 89 in Florida, five along the Alabama Coastland, and of course, one in New York.
I'd now like to turn it over to Stephen Tipton, our Chief Operating Officer, who will fill you in on some of our income efforts, efficiency, and key operational stuff. Steve?
Thanks Randy. Thank you, Randy. As you'll hear, we posted a solid core net interest margin of 4.01% for the fourth quarter of 2017. Excluding CFG, legacy loan production for the quarter stood [ph] record of over $530 million at a rate of 5.35%.
The Stonegate lending team has produced an additional $120 million for a total of over $650 million of origination in Q4 2017, all while considering our conservative underwriting philosophy. While we saw slight compression on the deposit portfolio in Q4, we continue to focus on core deposit relationships and monitor the loan to deposit ratio in our desired level.
Loan to efficiency, I'm pleased to report core efficiency ratio of 37.35% in Q4. Our President's focus on revenue, while maintaining expenses, continues to shine in our numbers.
The integration efforts with Stonegate are already underway and we are encouraged to see the cost savings materialize in the coming months. With the Stonegate conversion just over three weeks away, the operations teams here in Arkansas and at Florida are working tirelessly to ensure a smooth customer transition. I'd like to extend a special thank you to those staff members who are getting it done.
With that, I'll turn it back over to you, Randy.
Thanks Stephen. Good stuff. Here to break down more of the quarter and report on our net interest income margin, non-interest expense and other highlights as well as capital is our CFO, Brian Davis. After that, Brian will pass it to Jennifer Floyd, our Chief Accounting Officer, to give us information on the capital and our book value numbers as well as other things. Brian?
Thanks Randy. Excluding the $36.9 million revaluation of our DTA during the fourth quarter as a result of the Tax Cuts and Jobs Act that President Donald Trump signed into law on December 22nd, 2017, our earnings for the quarter were a record $60.2 million.
The impact of the tax cut was approximately $0.22 per diluted earnings per share for Q4 on the impact of a tax cut intangible book value was approximately $0.21 per share. The company historically had a marginal tax rate of 39.225% and a normalized effective tax rate of approximately 37.50%.
With these lower tax rates in place, the company will now benefit from a marginal tax rate of 26.135% and a normalized effective tax rate of approximately 24.40%. This will result in approximately eight month earn-back for the dilution of the tangible book value.
Accretion income for the fair value adjustment reported in purchase accounting was $12.4 million during Q4 compared to $17.2 million during Q3 for an increase of $5.2 million. The increase of recognized accretion when compared to the third quarter of 2017 is primarily due to additional Stonegate accretion of $5.4 million.
Payoff accretion was $3.3 million of the $12.4 million of total accretion. Excluding the accretion income and the associated loan discount, the company's net interest margin for Q4 2017 was 4.01% on a non-GAAP basis compared to 4.07% in Q3 2017.
Non-interest income was up $5.8 million in Q4 2017 compared to Q3. There are several items worth noting. First, Stonegate provided approximately $1.8 million of additional non-interest income.
Second, there was $1 million in additional gain on investment security sales for Q4. Third, we received our annual incentive from MasterCard during the fourth quarter for $703,000.
Fourth, there was other income -- was up in Q4 because we had $800,000 of additional other income for items previously charged off. And lastly, we disposed three of our vacant properties for a total loss of $1.3 million in Q4 and none -- $1.3 million in Q3 and none in Q4.
Excluding merger expenses and Hurricane Irma damage expense, non-interest expense was up $11.2 million in Q4 2017 compared to Q3 2017. This increase was primarily related to the increase in costs associated with our full quarter of Stonegate expenses.
With that said, I'll turn the call over to Jennifer.
Thank you, Brian. As of December 31st, 2017, we ended the quarter with $2.2 billion of capital and $44 million of cash at the parent company. During the fourth quarter of 2017, we paid out shareholder dividends of $19.1 million and additionally, during the fourth quarter, we utilized a portion of our approved stock repurchase program and repurchased 57,800 shares of common stock at a weighted average price of $22.26 per share.
For the fourth quarter 2017, our common equity Tier 1 capital was $1.24 billion, total Tier 1 capital was $1.31 billion, total risk-based capital was $1.72 billion, and risk-weighted assets were approximately $11.4 billion.
As a result, our capital ratios primarily remained flat when compared to September 30th as follows. Common equity Tier 1 capital was 10.9% at December 31st and September 30th; our leverage ratio was 10.0% compared to 13.2% at September 30th. This fluctuation was a result of the timing of the Stonegate acquisition at the end of Q3, which skewed our September 30th leverage ratio.
Tier 1 capital was 11.5% at December 30th and September 30th and our total risk-based capital was 15.0% compared to 15.1% at September 30th. Our additional fourth quarter capital ratios also remained fairly flat when compared to September 30th. Book value per common shares was $12.70 compared to $12.71 at September 30th.
Our tangible book value per common share was $7.07 compared to $7.06 at September 30th. Excluding the one-time Tax Cuts and Jobs Act charge, tangible book value per common share for the fourth quarter would have been $7.28.
And finally, our tangible common equity ratio was 9.1% compared to 9.2% at September 30th and excluding the one-time Tax Cuts and Jobs Act charge, tangible book value per common share would have been 27 basis points higher. Randy?
Thank you, Jennifer. Appreciate it. I am now going to pass it to President of our New York Group, Chris Poulton, who will give us an update on how things are going. Chris, how are we doing?
Randy, we're doing well. Thank you for asking. And I'm happy to report that we saw strong close to what was overall a good year for the CCFG platform. For the full year, we originated $818 million of loan and grew our portfolio by $295 million, a 26% growth rate for the year. We ended 2017 with $1.4 billion in assets, which represents partially 10% of total assets and remains well within our 15% target, providing us ample room for future growth.
For the fourth quarter, it proved to be our highest quarter for loan growth as we delivered $182 million of net growth on $230 million of new originations. Asset quality remains strong with no delinquent loans our NPAs, while margins have remained relatively steady. The strong loan demand in the fourth quarter also means that we closed the year with a robust pipeline, putting us on good footings to start 2018.
With that, Randy, I'll turn it back over to you.
Thank you, Chris. Good report. Now last but not least, let's go to our Chief Lender, Kevin Hester, who will give us more details and colors on our loans.
Hey thanks Randy. As was indicated in the earnings release, we experienced organic loan growth of $45 million in the fourth quarter. Legacy loan production was the highest since the first quarter of 2016. However, legacy payoffs in the fourth quarter were almost $200 million above any other quarter in 2017, which served to mute overall growth.
The non-performing credit that we mentioned on the call in the quarter was resolved as expected and our asset quality ratios improved even more from the record third quarter numbers, excuse me.
The non-performing loan and non-performing asset ratios at 43 basis points and 44 basis points, respectively, are the lowest since the recession. Each enjoyed significant relative improvement on a linked-quarter basis and are down close to 50% when compared quarter-over-quarter.
The atypical coverage of non-performing loans jumped from 174% to 247%. Past dues decreased four basis points to 0.85% and this number has been very consistent at 1% or below for the past few quarters. Lastly, the allowance for loan losses as percentage of non-covered loans remain basically flat, decreasing two basis points to 1.07%.
Even with the negative effects of Hurricane Irma on late year activity, our mortgage group ended 2017 with production totaling $529 million, which equaled 2016, while the overall market reflected a significant decrease. Profitability was solid for this group, led by the strong 3.49% yield on sold loans.
On that note, Randy, I'll turn it back over to you.
Thank you, Kevin. Just to quickly recap, 27 consecutive quarters of record earnings. A strong quarterly core efficiency ratio of 37.35%, still a very powerful margin, very good non-interest income, and great and improving asset quality metrics.
This was mentioned last quarter in this call, but I think it's worth saying again as we start our 20th year of operation. The elements of our mission statement and community banking philosophy is a strong sense of community, exceptional customer service, shareholder focus, and high performing growth.
And as you examine 2017 and take out all the noise, you saw a year of our biggest acquisitions, very profitable quarters, and an unbelievable response by our employees to our customers and friends in those areas affected by the hurricane.
And I would add on top of all this, Johnny, when you are working so hard as a team to accomplish a mission, it is such an honor to be named and recognized the Number One Bank in America by Forbes. What a year.
And with that, I would say to you, stay tuned for 2018. The trigger has been pulled and we are off to the [Indiscernible]. I think our best days as a corporation are in front of us. It's going to be a very exciting year.
I will now turn it back over to our Chairman, Mr. Allison.
Thank you, Randy. I agree with you. I think 2018 -- I think I said in my remarks we're teed up and I really think we're teed up for 2018. I think we're looking good for 2018. I think you're going to get to say 28, 29 and 30 in a row.
I do, too.
I hope that's the case. I think we're set for that. So, Andrea, I think we are -- that's our prepared remarks and we're ready for questions.
We will now begin the question-and-answer session. [Operator Instructions]
Our first question comes from Brady Gailey of KBW. Please go ahead.
Hey good afternoon guys.
Hey Brady.
So Johnny, maybe we'll start with the $2 per share goal. Is that -- are you are assigning a specific year to that? Is that 2018 or 2019? Or is that just kind of you hoping the next couple of years that would be a good stretch goal?
Well, I mean, they didn’t get off bad, they probably can do it this year. Actually, that's probably a 2019, late 2019 goal for us. We did that -- look at the run rate for the quarter, at about $60 million, you don't have the Stonegate savings in there and you stack in another $53 million, $54 million, $55 million worth of tax saves, if you don't do anything else and it's -- I don't think I'm asking for too much. I think [Indiscernible] for this management team has been reasonable to where they can reach it and I think this will -- it's not a gimme, but I think it's [Indiscernible].
All right. That's helpful. And then if you look at loan growth, I mean for the quarter and just broadly for the year, I think if you back out the acquisitive growth, the organic loans grew -- they're honestly kind of flat. There might have been up like 1% for the year. I know that's lower than what you all normally do. I know payoffs are hard to forecast and hard to predict, but any idea what organic loan growth could be this year and next year?
I already told you we'll be at $250 million this quarter. We just had additional payoffs. So, we had a great quarter. I mean between New York and us, I think we did about $900 million worth of originations for the quarter. So, we're going to sneak up on a quarter when we don't have all of them payoffs, and we're going to bowl one out here for too long I think. It's just real commerce. It's real business.
A lot of construction allowance get taking to permanent. We have a lot of [Indiscernible] that get taken out, get taken to permit. New York had a great quarter. New York had a really good quarter, but we had about, I don't know, Chris had about, let him speak to that, $89 million worth of payoffs, too. But he just had exceptional quarter. Chris, do you want to comment on your quarter?
Johnny, yes. That number is right. Just under $100 million of payoffs, which is pretty normal for us. That's a pretty normal quarter. We had a pretty normal origination quarter, too. If you talk about -- about $230 million of origination.
What we had happened this quarter was we had more loans with funding in the quarter, a lot of -- you mentioned construction in some of our facilities, et cetera. We generally only fund about 40% or 50% of what we originate.
We actually funded closer to 70% of what we originated in the quarter and that -- I think that's what drove some of the bigger net gain. I think we continue to see that as we go forward, that we like that type of number around $70 million to $100 million a quarter type of growth.
All right. And then last for me. I know we have [Indiscernible] coming up this summer. I think, in the past, you all talked about that impact being around $6 million to $9 million a year. Is that kind of still the right way to think about that?
It is. We've got about $3.5 million that we probably will incur in 2018 and that will start to outburst through the end of the year.
Great. Thanks guys.
Thank you.
Our next question comes from Stephen Scouten of Sandler O'Neill and Partners. Please go ahead.
Hey guys, how are you doing?
Good.
Good. Good. Hey a question on the Stonegate. You got the conversion coming up. How much of the cost saves? I guess, I think it was around like $65 million maybe in total cost savings had been realized so far? Or how much is kind of still left to come post conversion? And kind of when you think you'll see -- will most of this will be built in kind of 2Q numbers, I guess?
Most of the cost saves will happen after the conversion in February. We have about $10 million of annualized cost savings that we should be able to realize after the conversion. Obviously, most of those expenses will be in for all of January and a lot of February. So, you won't really realize a lot of that until -- exceeding the run rate until Q2.
Then we probably will try to wring out another $5 million, hopefully, out of that as over the next couple of quarters. We've kind of already got about $3.3 million that we've kind of already realized, and these are all annualized numbers that I'm talking about.
There's about $20 million out there pretax, and you'll see most of that, I told you last quarter, this is most of that's coming the second quarter, but just be a little bit lagging after that. I mean, most of it will be gone. Most of that savings will be generated at the end of the first quarter.
Okay. Yes, that makes sense. Okay. And then maybe thinking about the NIM a little bit. You mentioned the new, kind of deposit initiatives and kind of trying to set some goals and plans for growth there. Kind of what do the numbers look like today? That looked like deposit cost had a decent little jump this quarter even as actual deposits on a dollar basis ran down. So, I mean eight to 10 basis points a quarter? Is that something we're going to see for some time, especially in quarters where we have a rate hike? Or how do you think about deposit costs and how it weighed?
Well, I mean, Stonegate was basically flat. Their cost of funds was basically flat for the quarter and their yield picked up three basis points. And then for the legacy footprint, cost of funds went up, this is October-November. That's the first full month together. That's what we're comparing. And that was October-November, Stonegate was zero -- was flat on cost of funds and yes, it went up about three. And the legacy footprint saw some funds, October, November, wind up three basis points, and yield went up nine. So, overall, yield, what you're seeing when you see that the net yield come down, the quarter yield come down, it's actually up. When you take $3.73 billion and 3.7 in us that's what we, Stephen?
4.11.
About 4.11, and we come out at 4.01, you actually -- actually, the increase -- some of you all talk about it going that it actually did not go down, it actually went up. Stephen, you got a comment?
Yes, I think what we're saying is that you all understand the decline for 4.07, 4.01 really timing of the inclusion of Stonegate for a full quarter, where there were only in for four days in Q3. So, I think when you -- the best thing we can do is look to see what October look like and then track it out from there, which is what Johnny was saying. And from there, I think, overall, we saw deposit cost -- total deposit cost were up about three basis points in that time period and loan yields were up about nine. So...
We were -- our loans were written at -- for the quarter at 5.35 legacy and Stonegate's were 4.70, so that would give you an indication of where we are. Dave, what are you seeing on the loan yield side on your end?
Well, because we got a bigger balance sheet to work with, we're going back to customers and we're able to take a bigger part of the relationship. So, we're probably on about 50% of the relationships that were going for renewal, while we're increasing, which is significant amount of the $100 million in commitments, we're getting higher yields. So, I suspect our loan portfolio yield will go up. I don't -- we got a ways to go to catch up to Centennial's, but I think, overall, we're going to have a positive impact on the NIM going forward.
Okay. That's really helpful.
And Stephen, let me tell you, one more comment on loan growth is that Dave had some credits, and he didn't think [Indiscernible] criteria. He blew them out during the quarter, too. So, I think those needed to go [Indiscernible].
Okay. And kind of along that line on loan growth. I mean I know you mentioned, Johnny, you had some really good originations. And we can't really predict what the payoffs are going to be. But I mean are there any changes you guys are looking to make from a loan growth perspective to maybe -- if you assume pay downs kind of stay at this level for the foreseeable future, is there anything you can do to get those originations up even higher to drive some better net loan growth if they persist?
Yes. With lower underwriting standards and lower rates, we can crank up the risk level. We're not going to do that. I mean [Indiscernible] I mean, we're just -- we're good and fine. We got lots of good stuff coming down the road for Home BancShares. We don't have to give it away. We don't have to write-off that stuff. So, we're going to continue doing what we're doing. And we'll have our turn. I mean, we'll have turn. We'll catch a quarter or two this year.
My goal, the $2 to -- the Home $2 is based on $1 billion worth of loan growth. So, these guys all know that. I don't have to say much through them. They understand that. They know what that takes. That's about $6 million [Indiscernible] it’s a pretty damn close to [indiscernible]. Stonegate signing from that deal and the $50 million and they get pretty close to the $2.
Okay. Yes, that makes sense. I think you're absolutely right about the long-term thinking. Obviously, just I think -- it's just a question of what we build in for 2018. And if pay down stay here, is that kind of a 3% kind of growth world until maybe the markets normalize and pricing gets more rational. Is that fair if pay downs persisted?
Well, it's really not -- the process don't [Indiscernible]. You see a little -- not much. It's really underwriting. It's really more of the underwriting side of it than we get from enough change and are not going to change [Indiscernible]. You don't have discipline. We always change. We'll have our time. I mean when you're generating $900 million worth of loans a quarter, you're going to have a good quarter [Indiscernible] having $300 million, $400 million, $500 million a quarter.
Got you. All right Johnny, I appreciate the color guys. Thanks.
You bet. Thanks.
Our next question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.
Thanks. Good afternoon.
Hi Jon.
Hey. One more question on the payoffs. You talked about -- Chris and Dave had some bigger, larger than usual payoffs. But Kevin, do you have any color on what terms of what you saw in the legacy footprint?
Yes, I mean, it was across the board. We had -- and footprint, we had more than we had in the last three quarters before that. So, it was across the Board.
Okay. Just obviously, it keeps coming up. So, it seems unusually large. And I guess, would you guys call this a bit of an aberration in terms of the past levels for the quarter?
I hope over $600 million is an aberration because we've been in the $300 million to $400 million range in the past three quarters. If you go back down to that and production stays where it was, there's the quarter Johnny talked about.
Yes, okay.
We'll get one.
Yes. It feels good to me. The -- so loan growth and the margin are kind of the two bigger questions. But I guess, maybe -- and I think you've addressed it, but kind of the Keys and Southwest Florida, talk a little bit about the hurricane as you look back and talk a little bit about damage done. Is it all in the numbers and kind of rebuild potential is there?
The insurance checks are not coming at the speed we anticipated. They're getting -- as Nancy Pelosi would say, they're feeding them some crumbs. So, that's about all they're getting right now. And they are kind of aren't getting over the insurance.
My concern is I think I mentioned to you last time, it's where the people are and are they returning and they haven't really returned now on the loan -- executive loan call yesterday, we were talking to Mark [Indiscernible] in Key West and he was talking about the traffic coming back there now. And he said, I'm going to call it obnoxious, so that made me smile because people are starting to come back and occupancy is up. And Kevin can talk about that.
But you got a lot of workers. You got a lot of workers in those hotels. We didn't get much taken off the market there. On up the Keys, in Key [Indiscernible], they got hammered pretty bad there. A lot of rooms offline. So when you have to look through those occupancies, as Kevin shared with us yesterday and understand that there are hardly not even reporting [Indiscernible] they got hit so hard.
So, overall, it's going to be cash flow. My wife was gone there for a week, she said that the restaurants are closing up. She said why are you all closing And they said, we don't have workers. Our workers haven’t returned. So, that's -- the jury is certainly still out on the Keys and the impact. I think we -- Kevin we took about $2.5 million, $3 million this quarter on hurricane?
Yes. That's $3.5 million.
We had a big house, house actually got moved by the hurricane, probably end up being family making money of the insurance company on that and may not. But it was vacant, it was a repossession and it moved -- it shifted its own the foundations. So, we'll see how that comes out for us. We had another loss down there. But so far, so good. We've had -- we deferred -- how many customers we deferred?
Yes, over $200 million. And there's still some that are in the end of that first three months.
And some are asking to continue for another deferment.
Some of them asked.
It's a little early to know what's going to come out of that right now, but I'm pretty optimistic. We may -- so far, so good. We already think on our orange orchards, anything, nothing hedged there so far?
Haven't heard anything.
That's about it, Jon. What else -- you asked about the hurricane and what else did you ask?
Yes, that's what I was after. And -- so you just think it's a little bit too early to tell what's possible from maybe a construction lending point of view there?
I think it is -- they're not able to get their money right back. They've got their insurance checks.
I think it's -- it is all about the tourists coming back and this is the time that begins to happen. So, 90 days from now, we'll know a lot more than we know today.
I normally spend February, March down there. So, I'll be leaving for. I'll have a much better update on it at the end of the quarter.
Okay. All right. Thank you.
Thank you.
Our next question comes from Matt Olney of Stephens Inc. Please go ahead.
Hey thanks guys. How are you?
We good. Matt, how are you?
I am well. Thank you. Johnny, I'm curious what your updated thoughts are on capital right now. Within my model, you got a TCE building towards 10% later on this year. So, I'm curious what that means for capital deployment, whether it's dividend, buybacks or M&A?
Well, we got a lot of handles full, as you can see. And suddenly, we're going to have a lot of this income or this tax coming in, tax savings coming in. So -- but we have us for [Indiscernible] too. We got about $50 million of subordinated debt, but I would assume probably towards the third quarter or fourth quarter, we'd looked at a dividend increase. I think that makes sense. We traditionally done about third. We might be a build a little war chest for another acquisition or two.
We were on one just recently, and it got fold. We were -- I would say, [Indiscernible] we're in the middle of and we got pulled. So that may or may not come back up. We've been waiting out for several years, but we think it's coming at some point.
So, I think probably we'll -- you'll see us maybe kind of think about of sinking fund to pay off that debt. We founded a [Indiscernible] me and I like the debt gone off the balance sheet. The cost is about, what, $16 million a year?
Yes.
So, anyway, we're going to this to be capital $16 million expense towards and I'd like to get rid of that at some point in time. Loan growth also -- you have CRE growth and you have to be concerned about the capital ratios. And we'll go through or probably bouncing on the 300 right now. So, maybe a tick above it. So, we'll need the capital for that.
That's helpful. And then Johnny, going back to the $2 EPS goal. I think in the past, you've had the benefit of M&A to help you achieve your EPS goals. Do you like you need to have M&A in order to achieve this goal?
No, I don't feel like I have to. I don't feel like I have to have M&A to achieve this goal. I think it's -- they can get it. I mean $1 billion worth of loan growth burns in $50 million to get $20 million in savings and you get a little better somewhere else. They'll be able to stand on their head as a matter of fact. But I'm looking around the room and there's not a whole the agreement with me. You know how they do; they hide behind a long once in a while. I say here it is. Just do it.
We're trying to think through the Jonesboro map.
Yes, there in the Keys there. Jonesboro map, you know how it is. But margin is holding in there and we got a lot of people working worried about margin, I'm pretty proud of our margin. We actually grew the margin from when you combine Stonegate with us, we actually grew the margin. So, the support -- the day the margin going down, I think we got a little impact is going to be as everybody will on the tax bonds.
I think we got a little -- that will impact us a little bit. But outside of that, we're right -- I think Stonegate was at 4.70. We're at 5.35 on 900 -- I mean, on $690 million last month. And Chris is in this, high 6s, so I'd like to see margin go up in the future. So, that's not going to be a problem. As long as we got -- we don't get somebody out there on the deposit side as of right now, we haven't seen that.
And Johnny, sticking on that core margin discussion, I think what you're saying is that the legacy Home Bancorp margin would have been up around six bps this quarter, just nine bps in loan expansion, offset by three bps of our deposit costs. Am I interpreting that right, the legacy [Indiscernible] margin?
You're right. You're reading that right. Cost funds at three, and yields was up nine.
Got it. Okay.
That's it. It would've been up. I think what you're seeing when you -- people saw this margin down, our margin is not down. You take the 3.70 that Stonegate had and put it with ours and we're actually up. So, it's an improvement. I was -- when I saw that today, I was really disappointed that everybody missed that because I'm pushing it around here, by the way.
Understood. Thank you Johnny.
Thank you, Matt.
Our next question comes from Michael Rose of Raymond James. Please go ahead.
Hey good afternoon everyone. How are you?
Fine. How are you Michael?
I'm good. This might be the first time in history that Tracy French is left speechless. I'm very surprised by that.
Excuse me Michael, that's all show. He's doing that for show, but it doesn't work.
I know him too well. I absolutely know he's doing it for show. Just two quick questions. One kind of small question for Brian, what's your guys estimate for the effective tax rate this year?
24.4% on a normalized quarter.
Okay. That's helpful. And at the outset, Johnny, you talked about some expense initiatives to maybe help you get to that $2 target. What kinds of things are you guys looking at now you guys are clearly one of the most efficient banks in the country? I'm just trying to figure out what areas are left to pick apart? Thanks.
Well, Michael, you got -- Stonegate was running about one ROA, and we're running about 1.80 and we came out the quarter about 1.69, 1.70. So, it's my goal to get the company back to 1.80, 1.90 ROA. And you've got lots of consolidation savings coming out of Stonegate. If we don't do anything else, we got over $20 million pretax coming out of the Stonegate business.
So, that -- I mean, that's should be another $15 million of income the way I see it, so we're taxing about 25%. So, if we don't do anything else, we got that going. So, I think that, coupled with some loan growth, is continued improvement on the margin side, It's a tick here and a tick there. And I think we can get to the $2 -- the $2 is a reasonable number.
Okay. That's helpful. Maybe just one last one for me. Just back to the thoughts on M&A. I think I know the Florida [Indiscernible] bank you're talking about. But just outside of it -- that transaction, are you guys still potentially looking out of state? I know you talked about Texas in the past and that's still kind of in your bailiwick at this point? Thanks.
Well, always interested in mergers and acquisitions and we'll always look at them. But we're not going to do it when our stock [Indiscernible] Not going to do it with $23, $24 range, we're just not going to do that.
Even though it may be accretive, what does it look at the end of the day, what does it do for Home BancShares? If it does something for Home BancShares and the Home BancShares shareholders, we'll do it tomorrow. But if it doesn't, we won't do it. So, we're just not going to do one of those deals that's not accretive to us for the future.
By the way, one of your old friend is here. Just walked in the room, Donna Townsell is here. You want to say hello to your friend, Michael Rose?
Hello Michael.
Hey Donna, how are you?
She brought a big Slurpee, and she didn't bring us one.
Well, it's not in the budget.
Must be in her budget.
Hey guys thanks a lot for your time. Appreciate it.
I was just kidding.
We're surviving barely. But we'll survive. Thanks guys.
Our next question comes from Will Curtis of Piper Jaffray. Please go ahead.
Hey guys good afternoon.
Hey Will.
Let me see, I think most of this stuff probably been discussed quite a bit, but just want to make sure that I just get the message right in the core margins. So, the 4 -- going from 407 to 401 was more a function of the full quarter of Stonegate, is that correct?
That's correct.
Okay. And then in terms of kind of the go-forward from here, I mean, what's the expectation now that we've got the full quarter in there that you can hold it around the current levels and then obviously benefit from any rate hikes? Is that kind of the thought there?
I think that's a bit about $600 million that kicked up. Is that right, Stephen?
That's right. Yes, the rate hike in December we saw an immediate impact about $600 million in balance, seeing a couple hundred million since then. So, yes, you'll naturally have some of the deposit repriced. I think Johnny mentioned little impact on the tax reform on the tax-free municipals in the portfolio, but I think certainly the 4% range will be our goal.
Okay. And just last one--
I think we're in good shape there. I'd be disappointed. I told I don't know want to know what it is every day. Somebody figure out, tell me what is every day. I want to know what it is every day. I don't want to be challenged. Somebody will able to do that. Tell me every day what is it. Based on what I'm seeing on the loan side, it's got to be going up. It's got to be going up.
Okay. And then just lastly on the expenses. So, it sounds like the cost saves, we will see, I guess, of the benefits of the conversion in February. That will come through most likely in the second quarter. So, in terms of the first quarter, is that 63 level that we were at in the fourth quarter kind of the thought to hold it around where it is now and then you'll see the benefits in the following quarter?
You say 60, what is--
From expense standpoint.
From an expense standpoint. Yes, I think that's probably--
I mean the cost saves will be -- the first quarter will be started in the first quarter, but won't realizing it until you have full quarter in the second quarter.
Right.
Yes, we really -- I wish we had -- I wish we closed all of this and would have -- we know we don't get approval, which have been here December where it could really be a clean year for Home without dragging those expenses into the first quarter. But we didn't -- we were afraid that regulators might hold us up on a transaction, so we extended it out.
But it should be that -- you should be able to get -- we'd be look at the run rate from the second, third, fourth quarter back through first quarter. Once we get all the conversion done and get the consolidation, get the branches closed; I think second quarter will start. The starts -- I think Home will start muscling out in the second quarter.
Okay. Thank you very much.
Thank you, Will.
Our next question comes from Brian Martin of FIG Partners. Please go ahead.
Hey guys.
Hi. I didn’t see you on there for a while. I didn’t know where you were Brian.
Yes, I apologize. I got delayed. So, may I ask a question here, if you've got already covered, I can go back in, I can look at it?
You can ask anything you want to ask.
Well, tell you what, maybe it's more for Stephen. But just on the margin, just going back to where you guys are out today, guys kind of explained kind of the difference in 407 and the 401. But just the puts and takes of what moves the margin higher, at least on the core side from today's levels, can you just give a little bit of thought? It sounds like there's more on the yield side from Stonegate. Am I understanding that right? Or just kind of -- what are the drivers moving that 401 level a little bit higher as you go forward. That more sounds like it's going.
Sure, I'll take that, it's Stephen. I think it's what Johnny said about production that you saw in Q4. I mean you saw $650 million worth of production at 5.25 and you saw New York increases, grew $240 million and nearly 7%. I mean I think we continue to underwrite the way we do and price loans that way we do and then pick up a little benefit, potentially from this last rate hike and any that occur in 2018. I think that potentially is possible for us.
And I think Stonegate was at 4.75, wasn't it?
That's right.
Stonegate was at 4.75. So, everything -- look, right, cost of fund, everything we're at far exceeds that. So, we'll be -- I don't have an accurate number other than to say, I think overall we're probably at six or seven basis points. In spite of the fact yield was down, I think the core margins went down, I think were up six or seven basis points after combining the two operations.
Okay. Got you. That's helpful. And then just maybe I missed it, but you guys seemed to have a couple different numbers on expense side. Maybe what Brian was mentioned versus kind of what you were talking about Johnny? But just on the expense savings, I get the timing of it it's just mostly in the second and then fully in the third, but when you look at the -- and some in the first, it sounds like coming, but one of you guys mentioned the $2.5 million number, which was $10 million annualized. And there was another one that -- maybe your number Johnny was like that $20 million number. What -- just the -- I guess, maybe my misunderstanding that's just the cost savings you expect that are still remaining out there? What does that number--?
I think we got about $3 million. We think we got about $40 million pretax left out there that nets about to $15 million after-tax. Brian was talking about $10 million and $5 million which was $15 million, I'm talking about $20 million overall, you tax that as $15 million. So, we're talking about the same number. So, about $15 million after-tax. And you'll see nearly all of that, I think, in -- we'll get most of that this quarter. It will be a little bit on drag out in the next quarter.
Okay.
But not much.
Okay.
95%.
Well, we got about $5 million that we'll probably work on in Q2.
Okay. $5 million. All right. That's helpful. Okay. And then Johnny, you mentioned -- I don't know if you said earlier on the call about M&A. I just heard what you just said recently on the comment that maybe one deal kind of went one way and may come back. But just as far as the -- and I know you guys are still looking, but I guess, as far as sellers' expectations or just the dialogue that's out there today, I guess, can you just comment a little bit just on what activity is out there today. Is it change at all? Or is it still pretty similar? I understand your--
No, no, it's not. We're just -- I think Dave had [Indiscernible] and we're not going to do it at these prices. We're just not going to do it that at these prices. So, Dave, you see any change in there? Are they still coming at you?
Okay.
No, I think there's still a lot of sellers in Florida. You're either a buyer or seller in Florida. It's all really sitting tight. So, there's still out there. Their price expectation seems to be about the same. So, there's been a couple of outliers along the way. But it's a little bit different dynamic now when you model it because you got the tax savings. If you can get more expense cuts, obviously, it's a little bit more accretive, your goodwill is going to be higher. So, I mean, you got to kind of rethink how you look at it and probably look at banks that you can get more cost saves out of them than traditionally a more efficient bank that you would buy.
Got you.
Yes, they've been coming in Dave and we're looked at some of [Indiscernible] do here at the stock at this level. And I have really -- and this team has been focused on the Stonegate savings and the tax saves and trying to grow the loan portfolio. So, we just had lot of pay off.
As I told them earlier, we'll surprise this quarter and have $200 million, $300 million, $400 million, $500 million a quarter and be off and running. [Indiscernible] Brian did grow his whole $2, that's the new goal. And we've been great and I think our team has hit every goal I've set out there in the past. And I'll see they'll do this one, too.
Keep cracking the whip. And the last thing for me just on the loan growth in the quarter, kind of netted down to the 45. You talked about what $650 million and then $240 million for Chris' group. The pay offs in the quarter, did you -- I guess, the net to that 45, what were the payoffs of the quarter in aggregate?
There were over $600 million.
Yes, Brian. Those origination numbers, some portion of those may not have yet funded. Those were booked both funded and unfunded commitments.
Okay. So, the $650 million and the $240 million originations and not all of that-- yes.
That's right.
Okay. And the $600 million were the pay offs in the quarter, so I can back into it. Okay. All right. Well, I appreciate the color guys. Thanks.
Thank you, Brian.
This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. John Allison for any closing remarks.
I just want to thank all of you for joining us today. We'll talk to you probably in 90 days. I think the company is in the best position that Home BancShares has been any in many, many, many years and look forward to a great 2018. And I look forward to them ringing the bell at $2 and hitting the bogey.
So, I don't know when they’ll do that, but probably won't be this year, but I get a shot at it in the next, we got a shot at it this year, they got work. So, anyway thanks -- they're laughing and rolling their eyes again. But anyway, thanks for your time. Appreciate it. Bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.