Home Bancshares' (HOMB) CEO Randy Sims on Q4 2015 Results - Earnings Call Transcript

| About: Home BancShares, (HOMB)

Home Bancshares, Inc. (NASDAQ:HOMB)

Q4 2015 Earnings Conference Call

January 21, 2016 2:00 PM ET

Executives

John Allison – Chairman

Randy Sims – President and Chief Executive Officer

Tracy French – President and Chief Executive Officer-Centennial Bank

Donna Townsell – Senior Executive Vice President

Brain Davis – Chief Financial Officer

Jennifer Floyd – Chief Accounting Officer

Kevin Hester – Chief Lending Officer

Analysts

Michael Rose – Raymond James

Stephen Scouten – Sandler ONeill

Jon Arfstrom – RBC Capital Markets

Matt Olney – Stephens

Brian Martin – FIG Partners

Brady Gailey – KBW

Joe Fenech – Hovde Group

Operator

Greetings, ladies and gentlemen, welcome to the Home Bancshares Incorporated Fourth Quarter 2015 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 participants in this call are John Allison, Chairman; Randy Sims, President and CEO of Home Bancshares; Tracy French, President and CEO of Centennial Bank; Brian Davis, Chief Financial Officer; Jennifer Floyd, Chief Accounting Officer; Kevin Hester, Chief Lending Officer; and Donna Townsell, Senior Executive Vice President.

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 2015, and in their third quarter Form 10-Q filed with the SEC in November 2015. At this time, all participants are in a listen-only mode and this conference is being recorded. [Operator Instructions]

It is now my pleasure to turn the call over to our first presenter, Mr. Allison.

John Allison

Thank you, Kerry. Welcome to Home Bancshares’ fourth quarter and year-end 2015 earnings report and release conference call today. Well, record quarter, record year both in earnings and in EPS. Your company continues to operate in the top bracket of performance in the country.

The highlights for the year kind of include and I’ll let Randy get more specific on the numbers. I’m just going to touch on some points here. We had a strong ROA. Pre-tax pre-provision ROA continued to grow and be strong. I kind of give you an indication. First quarter, we did 304 pre-tax pre-provision; second quarter, 320; third quarter, 324; and in the fourth quarter 327 pre-tax, pre-provision. Those are pretty strong numbers.

ROA continues to be strong. Efficiency, we hit new levels this year. Profitability was the best ever, continued to build a strong balance sheet, strong organic loan growth, and revenue continues to be picking up strength. Margin remains strong. I think it was off of few ticks and Brian and Jennifer will now talk about that, but it was just off of few ticks. Good expense control. Really, the real key this year has been the revenue ramp up in holding expenses.

Asset quality remained good except for, as always, when we buy new a new bank. We bought Tampa, and we've got to go in and clean that up – clean that mess up as always. We’ve got about $23 million worth of non-performing and past due loans are about 5% and it really was the only one that ticked up, but it pulled our totals up just a little bit, but we’ll get through that before too long as we always do. $23 million is something that we can deal with. The good news is the CEO and the CLO are no longer with us. The future for 2016 looks awfully bright for the company as we continue to hit better strides on both revenue and expense.

On the M&A side, we’re continuing to look at opportunities out there. Hopefully, we’ll bring home a couple of deals, but it certainly makes it more difficult as we’ve seen the beating that the companies have taken in the market. You saw where we filed a lawsuit on Bay Cities. We’re not a litigious company, but after review of that situation, we determined that the blatant disregard for our agreement had to be dealt with. And the size of that is Tom Broughton, CEO of ServisFirst, a good friend of mine, which made more – made the issue more complex.

We won’t make any further comment about this. We’ll let the attorneys handle the situation. As to the recent stock price, I think a lot – most people are blaming China. And I looked at our entire loan portfolio, and I didn’t find one loan to anybody in China. However, we did have a Wong Tang and a Tang Wong and Agoo somewhere, so they could be Chinese. I don’t know. We will evaluate them.

We’ll just keep our heads down, keep doing what we do. The reduction in the stock price, the hit that we’ve taken really has nothing to do with the performance of your company. I actually think it’s an opportunity for all of us to acquire some additional shares at these prices. I have a bunch of options that are coming up, and you’ll see me exercising those options and sitting on them here before too long because I think it’s a great time to do that. Overall, it was a great year. And I’ll let Randy take it from here and give the full quarter numbers and bring everybody in.

Randy Sims

Thank you, Johnny. Another year is over, and as you have stated, what a year it was for Home Bancshares. And it was a busy year. In the first quarter, we acquired the Doral Florida Panhandle operations in the FDIC failed bank transaction that added to our already strong presence in Panama City, as well as giving us a good increase in market share in Pensacola. We acquired $289 million of national commercial real estate loans and a related Doral transaction, and we started up the Centennial Commercial Finance Group in New York.

And on October 1st, we closed the acquisition of Florida Business BancGroup, the parent company of Bay Cities Bank in Tampa, Florida. The acquisition included six branch locations in the Tampa area and a loan production office in Sarasota, Florida. As of closing and including the effects of purchase accounting, FBBI had approximately $565 million in total assets, $408 million in loans, and $472 million in deposits; so a very busy year.

So let’s get to some of the numbers and I’ll start with net income, of course, the most important item. Net income for December 31, 2015 was $138.2 million, compared to $113.1 million for the year ended 2014; that’s a 22.2% increase. Diluted earnings per share for the year ended 2015 was $2.02 per share, compared to $1.70 per share for 2014. Excluding the $4.8 million of 2015 merger expenses associated with the 2015 acquisitions, diluted earnings per share for the year ended 2015 was $2.06 per share, compared to $1.76 for 2014, which also excluded merger expenses.

There was a 25.1% increase in the fourth quarter earnings to $37.4 million, compared to $29.9 million for the same quarter in 2014. Again, excluding the $2.9 million of merger expenses associated with Bay Cities and Tampa, our diluted earnings per share for the fourth quarter of 2015 was $0.56 per share. We were very pleased with that number and we’re very pleased with the net income in the fourth quarter. And as I love to say that is now 19 consecutive quarters of record income for Home Bancshares.

Our $37.4 million this quarter can be compared to our previously reported profit of $35.7 million last quarter, again a good increase. Components that helped us get to this record income were strong organic loan growth of $232 million, a continued strong margin as well as great efficiency ratio, which we will discuss in more detail. When you make progress in your key components, the results should be greater net income. And that is exactly what continues to happen for us not only in the last quarter, but throughout this year.

So, I’d like to turn it over to Centennial’s CEO, Tracy French, to give us additional color on our performance this quarter and for the year.

Tracy French

Thank you, Randy. It is exciting to speak about fourth quarter and the year 2015. As the numbers reflect, 2015 was a record year in many ways for Home Bancshares. First of all, I’d like to say hats off to our operations group, our support staff for the year we’ve had. We set forth some initiatives over the course of the year. We’ve made great strides in accomplishing specific goals.

This has been and will be a key to our success going forward in growing our company and taking care of our customers. Of all regions that played a huge role in our success for 2015, I’d like to just point out a few. Our North Florida operation has hit its stride in loan growth, with an increasing unfunded pipeline and successfully integrating the Doral acquisition as you mentioned.

The Florida Keys had its best year ever. The Arkansas region's continued to provide consistent, strong returns and low-cost funding amid a very competitive environment today. Our Central Florida operation has gone a little over breakeven to a high performer in our Company. Bud Stalnaker has transformed that operation with support of many others in a short period of time and that we know he will do the same in the Tampa market. Speaking of Tampa, we're very excited of our team there, along with the talented bankers from St. Petersburg and Sarasota.

Our new shareholders in the Tampa market are reaching out, asking what they can do to assist. When you get that combination working, it's going to be a win-win. Our Centennial Commercial Financial Group in New York is performing as planned and is really in nice position for 2016 run. I would like to end by saying I'm proud to report that we've seen double-digit organic loan growth while underwriting more conservatively than ever before.

We've seen double digit deposit growth without nine business and winning bids, and we've maintained our expense control as we've grown revenue to record levels. Home Bancshares is set for 2016. We’re about 21 days into it right now, so I need to get back to work. Thank you, Randy.

Randy Sims

Thank you, Tracy. It has been very satisfying to see our Florida markets mature and grow over the past few years. They’re doing a great job. Now let's get to just a few more numbers and I’ll then turn it over to other members of our team. So as of December 31, the corporation is sitting at just a little under $9.3 billion in total assets.

Our return on average assets for the fourth quarter was 1.62%. Excluding merger expenses, our return on average assets was 1.70%. Our year-to-date ROA excluding merger expenses was 1.71% as compared to a year-to-date 2014 ROA of 1.68%, which also included merger expenses. It is important to note this increase comes even though we have added acquisitions with much lower ROAs. Our core return on average assets that excludes intangibles, provision, merger expenses and taxes was 3.27% for the quarter.

Our return on average TCE excluding intangible amortization for the quarter was 19.07%. The total number of active Centennial branches is 146 with 79 in Arkansas, 61 in Florida, and 6 along the Alabama coastline, plus our loan production offices in New York City and now Sarasota. So that’s two more. We did a lot more – lot of work on our branches and improve our efficiency ratio to record levels this year, and I’d like to say congratulations to Donna Townsell, who is going to talk a little bit more about that.

Donna Townsell

Thank you, Randy. 2015 was a great year in the area of efficiency. We met our long-term goal of breaking 20% in the third quarter. We then continue to make great strides with the 37.86% in the fourth quarter and we closed 11 branches across our footprint in 2015. For 2016, we have five branches set to close in the first two quarters. We’ll open a deposit only branch in New York by the end of the first quarter, and something new for us, we are selling a branch. Mainstreet Community Bank made us an offer on our Clermont, Florida facility.

This location is over 40 miles from our nearest branch and for several years has been trending downwards in market share and profitability. So we’ll close that transaction in April, which will result in a nice gain for us. As you know, efficiency is a product of revenue versus expense. This group has rarely managed to keep expenses under control, and one of our biggest expense items in the whole year of 2015 was attributable to setting up the New York office.

Our legacy regional expenses have remained fairly level, which tells me it become second nature for our regions to manage their cost of doing business and really points to our extraordinary loan growth. With a 37.86% last quarter, we are well on our way to Johnny’s new goal of 35%. Randy?

Randy Sims

Thank you, Donna. Let’s switch to deposits. We ended the quarter at $6.4 billion. Time deposits represented 22% of total deposits. We’ll now go to net interest margin, net interest income and non-interest expense, all covered by our CFO, Brain Davis.

Brain Davis

Thanks, Randy. The fourth quarter completed a great year for Home Bancshares. Once again, we’re able to report impressive earnings improvements. During the fourth quarter of 2015, excluding merger expenses, we increased net income $3.2 million from $36.0 million in Q3 to $39.2 million in Q4. Net interest income increased $9 million to $100.1 million in Q4 versus $91.1 million in Q3. The acquisition of Bay Cities Bank put pressure on our loan yields and net interest margin due to their lower performance.

As a result, the yield on loans declined slightly from 6.08% to 5.95% on a linked quarter basis, while the cost of funds experienced a slight increase from 39 basis points in Q3 to 40 basis points for Q4. As a result, the net interest margin on a fully taxable equivalent basis decreased to 4.95% for Q4 compared to 5.03% in Q3.

Because of the company’s significant number of historical acquisitions, our net interest margin was impacted by $13.2 million of accretion income for the fair value adjustments recorded in purchase accounting during Q4. Excluding the accretion income and the associated loan discounts, the company’s net interest margin for Q4 2015 was still an impressive 4.23% on a non-GAAP basis.

Non-interest income was up $711,000 in Q4 2015 compared to Q3. This increase is associated with improvements in the following. Revenue on service charges for NSF and interchange fees, gain on sale of SBA loans and an improvement in the indemnification asset amortization. These improvements were offset by decline in mortgage lending income and losses on OREO sales.

Excluding merger expanses, non-interest expense was up $2 million in Q4 of 2015 to Q3. The primary increase was related to the increased cost associated with the Bay Cities Bank acquisition on October 1, 2015. Also as a side note, as we approached the $10 billion asset mark, we’re now incurring new costs in preparation for DFAST, which were about 180,000 in Q4 and 150,000 for Q3.

With that said, I’ll turn the call over to Jennifer.

Jennifer Floyd

Thank you, Brian. I’d like to briefly review the fourth quarter capital results. As of December 31, 2015, our company ended the quarter with $1.2 billion of capital, and $69 million of cash at the parent company. During the fourth quarter of 2015, we paid out shareholder dividends of $10.5 million while growing retained earnings by $26.9 million.

For the fourth quarter 2015, our common equity Tier 1 capital was $809.5 million. Total Tier 1 capital was $868.5 million. Total risk-based capital was $937.7 million and risk weighted assets were approximately $7.7 billion. As a result, our common equity Tier 1 capital was 10.5% compared to 10.8% at September 30. Our leverage ratio was 9.9% compared to 10.3% at September 30. Tier 1 capital was 11.3%, compared to 11.7% at September 30, and total risk based capital was 12.2% compared to 12.6% at September 30.

Although, the acquisition of Florida Business BancGroup was accretive to tangible book value, our due diligence projected the slight negative impact to our risk based capital ratio. As we not completed the acquisition during the quarter, our risk based capital ratios would have remained flat. Additional fourth quarter capital ratios include book value per common shares, which was $17.11 compared to $16.05 at September 30. Tangible book value per common share was $11.41 compared to $11.03 at September 30. And finally, our tangible common equity ratio was 9% compared to 9.2% at September 30. Back to you Randy.

Randy Sims

Thank you, Jennifer. Let’s turn to loans, which is another key component to our net income numbers. Our loan growth has been strong this year and has been combined with equally strong asset quality numbers. So now let’s switch to our Chief Lender, Kevin Hester, who will give us more detail. Kevin, congratulations on a great year of loan growth.

Kevin Hester

Thank you, Randy. We completed a great 2015 on the lending side and posted organic loan growth of $232 million in the fourth quarter. This was on the heels of the best loan growth quarter for the company since the downturn. The top line is still strong, especially for the first quarter, which has historically been the slower quarter for us. Both the non-covered non-performing loan and asset ratios increased by few basis points this quarter. However, virtually all of this increase was due to the non-performing loans and assets acquired as a part of Bay Cities Bank transaction that took place during the quarter.

As a result, the ALLL coverage of non-performing, non-covered loans decreased, but is still solid at 111%. Both net charge-offs and past dues remained low at 19 basis points and 1.11% respectively. The allowance for loan losses as a percentage of non-covered loans decreased 2 basis points in the fourth quarter from 1.03% to 1.01%. However, if you added all the acquisition discounts to the allowance for loan losses, the combined figure would be 3.07%.

With loan closings of over $400 million, 2015 was a record year for our mortgage company in terms of both production and profitability, and they’re poised for an even better year in 2016. Specialty lending areas such as SBA and asset based lending will be a focus in 2016 as we have already and will continue to add experienced lenders to drive these opportunities.

Randy, thank you for the opportunity to report on the lending area for 2015. And with that, I’ll turn it back over to you.

Randy Sims

Thanks, Kevin. So when you look at 2015, you see four powerful quarters for our corporation. We had acquisitions that added to existing markets and we acquired an exciting new team in New York. Record earnings for the 19th consecutive quarter ending with income over our goal of $2 in EPS, a consistent and strong efficiency ratio and it had a three in front of it, a powerful margin, strong legacy loan growth, and great asset quality metrics. Consistent improvement in our major components that results in our consistent record earnings and that is what makes for another great successful year. So as we close out 2015, after starting all of this just 17 years ago, we look forward to what we can accomplish in 2016.

And with that, I’ll now turn it back over to our Chairman, Mr. Allison.

John Allison

Thanks, Randy. Thanks everyone. Great reports from everybody. Brian H., we didn't bring the horns and the kazoos today. So we left those out this time. I think everybody enjoyed those last time but they were a little loud. So, I think, Kerry, we're ready for Q&A, if you’re ready.

Question-and-Answer Session

Operator

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

Michael Rose

Hey, good afternoon, guys. How are you?

Randy Sims

We’re good. How are you doing?

Michael Rose

I’m good. Well, I was going to start with energy loans, but I figure you guys don't have any, so we can probably skip that.

Randy Sims

We’ve got a few. We've got a few, not many.

John Allison

I think we have $30 million, about half of that's on the business manager, and pays out on the contracts. So we don’t have a lot.

Michael Rose

Fair enough. I just wanted to get some thoughts on the capacity for the New York Group; you know having just recently met with Chris. Any updated thoughts on kind of what the capacity is, given another strong quarter of growth? Thanks.

John Allison

I think they closed the year at about 800…

Randy Sims

That’s a little over 700.

John Allison

A little over 700. I think our goal there was about 1.3 billion. We will go higher than that maybe, but I think that Chris and his team are on target for that this year and I would expect we will be somewhere in that range by December 31, may need to add another $500 million or $600 million. We will take a look at it then. I mean we’ve got a great team of people and they do an excellent job. We have a lot of confidence in them. So, we’ll be evaluating that. I mean they could get to 1.3 billion quickly. If they didn’t, then we will evaluate it sooner, but that’s kind of the goal we set out.

Not only – they have had a really good year in 2015 and they've had loan loss reserve all along right through the process. So you can see what happens if we go to 1.3 billion and kind of hold it there [indiscernible] the loan loss reserve continue to maintain that level. They get extremely – not that they're not, they're already extremely profitable. They become even more profitable.

Randy Sims

They put together a budget before we acquired them and they met it every single quarter, every single month, and that’s pretty much of what they’ve got planned for next year. And so, our expectations are that they will continue to meet the budget because that’s their track record so far.

Randy Sims

And one other thing on New York, they booked about $4.6 million in provision during 2015 and in the fourth quarter they booked about $2 million. So…

Michael Rose

Okay. That’s helpful. Just kind of speak on credit and the provision. I know, John, you’ve talked about building the reserve back closer to 1.5%. First, are you seeing anything on the credit side that's giving you any – so-to-speak, any concerns that you're seeing that the credit cycle turn may be here and then is the goal still to build up to that 1.5%?

John Allison

Well, you know, I like 1.5%. That's just personal with me. I just think that's – I think everybody ought to run a 150 loan loss reserve and I think it's healthy to do that. So far as the quality, we're not really seeing that – actually the asset quality actually improved pretty well throughout the system other than we've got about six or seven loans at the Tampa Group that are kind of messy.

We’ve got to get through those. Otherwise, the numbers would have been down. So I mean that’s pretty traditional for us. We go into a market and we make an acquisition and there's always something in there that we have to clean up and that's really it. We've got great team of people on the ground there and we will get this cleaned up over a period of time.

So far as – I'm seeing some people stretch on the deal. We had a deal the other day on a hotel deal and we were alone in – we approved it based on 50% loan to cost. It got done at 70%. We wouldn’t – congratulations to them. We wouldn't have done it at that level. We're taking – we're putting more equity, we're getting more skin in the game in our deals right now. Some stuff’s getting approved out there by other financial institutions that we under terms and conditions that we wouldn't do. But overall, so far as the loan committees are good, loan demand still remaining good. We're just a little more conservative in the market I guess and what we have been and we will continue to be that way over a period of time. So, I don’t – Kevin, do you got anything to add to that?

Kevin Hester

No. I think you covered it well. I’ve got – some people are telling me on the customer side that it's going to be a slow year for them because the deals are just harder to come by and more pricey for them to get into. So I think that that tells me that it's time to be careful.

John Allison

Some of our smart hotel guys have started selling rather than buying. When you see that happen, they recognize that the values have hit a point where it's time to sell. So we will just watch it and be careful. Well, that's why we're asking for more money in the game. That's why the loan we approved at 50% loan to cost rather than 70%, got done at 70%, congratulations. We feel good about the way we bid it, so…

Michael Rose

That’s helpful color. And then maybe just one more question for me.

John Allison

Okay.

Michael Rose

Johnny, how’s the M&A pipeline changed? I mean, have you seen a pick-up in inbound calls or have your efforts changed on the outbound side, now that bank stock prices have come down in recent weeks and months. Thanks.

John Allison

Well that's going to make it a little more difficult to do a transaction, I can tell you that, with the bank stock prices taking, the beating they've taken. Because if it's a private Company, they've taken a beating too, they don't realize it. I mean if our bank stock as well as this company's run by this team of people has taken a beating it's taken then a private Company is certainly taking the same beating. So, it makes it a little more difficult for us to do a deal. However, some of the people that are out there doing deals can't even do a deal anymore. I mean, excuse me – they shouldn't be doing a deal anymore.

I mean price is sort of deal last night, some of our competitors are trading at 6, 6 of book, 7 6 of book, 9 2 book and it’s just a whipping in the market. So they obviously – I guess they physically can do a deal, but it probably doesn't make economic sense for them to do a deal. So, we're still in position to do a deal. We will be cautious. We will be careful. We have [indiscernible] out on the deal now that we like, we like the people a lot. We think they're good people and we think maybe we might put that deal together here in the next month or so. So that’s the only thing that we really have that is cooking right now, but that one is working and that one could work out. And we will see. I ran the numbers on that one at 42 and now the stock's 36. So I had to run the numbers back at 36.

Michael Rose

All right. Thanks for taking my questions guys.

Operator

Our next question comes from Stephen Scouten of Sandler ONeill and Partners. Please go ahead.

Stephen Scouten

Hi, guys. How are you doing this afternoon?

John Allison

We’re doing great. It's rainy and nasty and overcast. We're about to go duck hunting when we finish here.

Stephen Scouten

There you go, it sounds good. You need to take Tracy with you. He sounds a little somber maybe you need to let him buy a banker too, I don’t know, he sounds down…

John Allison

He's going to cook. He’s going to cook the rolls and the potatoes and the steaks for us and…

Stephen Scouten

There you go. You get him some work, I appreciate that.

John Allison

Yes, okay.

Stephen Scouten

So guys, it sounds like from a loan growth perspective, you might be a little more conservative coming into next year just with everything you’re seeing. What does that look like for you guys especially from your legacy footprint? How are you thinking you might be able to grow that legacy book after looked like maybe $40 million this current quarter.

John Allison

Well, I think we're up about $120 million, most of that going into the first quarter, most of that's legacy right now. So we're just really scrutinizing the deals a little closer right now. You got another bank in there bidding against us. Most of the time, we will let them have it if it's silly. So, we haven't really been in this big loan growth, organic loan growth for a period of time and it's back right now. So just makes me a little nervous.

We’ll continue to build reserves when we have an opportunity to do that and we’ll remain conservative on the loan side. I mean we've got on that nearly – Kevin, you might answer it, but I think most of the loan growth at what appears to be the pipeline for the first quarter is really legacy right now. And that's not counting New York and [indiscernible] I guarantee we will bank on New York doing something this quarter.

Brian Davis

That is correct.

Stephen Scouten

Okay. And maybe on the expense front, I mean, obviously more great progress there on the efficiency ratio. What do you expect to see in terms of benefits from those incremental branch closures? And then I guess, Brian, you mentioned about $330,000 combined expenses relative to the $10 billion threshold that have already been built in. How much more of that should we see here in – coming in 2016? Is that like another $750,000 or so?

Brian Davis

Okay. I’ll let Donna go first, and I’ll answer the second half.

Donna Townsell

Okay. Hey, Stephen.

Stephen Scouten

Hey.

Donna Townsell

I don't really have a number I can give you at this time for our branch closures. We closed quite a few and some of them were late in the year. They all haven't sold yet. Some of them have facilities that were leased and we need to sell. Obviously, it tells our efficiency ratios that we are seeing some benefits from that. We will continue to look at things like that.

There are also other opportunities out there to manage expenses. There's a new thing going on now. We're exploring with the banker's bank. We might be able to exchange checks a little bit cheaper. There's other industry type things that we just always are looking for things in that nature for expense control.

Brian Davis

And as far as DFAST goes, we have gotten off to a pretty good start. We actually have two people now hired in the DFAST role area. The second one is our former CFO of all people, Randy Mayor, and he started back on the payroll working just before Christmas and has been helping out with our other hire that we’ve had in October, who’s also a former employee. So, I guess, anybody leaves the Company, they're just going to come back in the DFAST role.

But our former employees that you probably familiar with left us and went to work for a $10 billion plus financial institution up in New Jersey and was working in their area – working with DFAST. So, we’re in pretty good shape there and we’ll pick up probably, in my opinion, about $50,000 more per quarter. But then – that taught ought to be it for most of the year. We were at 180 and I could see it maybe being $2.30 for the quarter in expenses for each quarter going forward this year.

John Allison

And by the way on the expense side this quarter that was all Bay Cities, all the increase was Bay Cities.

Stephen Scouten

Okay. Yes, that makes sense. That makes sense. Okay. And then maybe one last one for me is Johnny, you’ve been talking about maybe now getting up to kind of Home $2.50 and it looks like maybe 2016 estimates don’t quite get you there. But how do you guys feel about consensus estimates I guess as you look at people’s expectations for the Bank nearing $2.50 in 2016 and kind of potentially blowing through that in 2017. I'm kind of surprised at the move in your stock today and wondering what your view is on market expectations for your forward earnings.

John Allison

Well, I think our expectations right now, our budget’s a little below – excuse me, the budget that the team came up with is a little below $2.50 – it’s in the little above – $2.40 a little, in that range, but that’s not Johnny budget. So, Johnny budget is we hit the $2.50. Now, we’ve got to stretch our legs a little bit to do that, but if you will look at the last quarter run rate and how much that picked up and how the pre-tax, pre-provision’s improving, then assuming we don’t have any a asset quality bumps, we don’t have to pay loan loss reserve, it’s just squirrely to me to look at the loan loss reserve down below 1%. It just doesn’t make any sense.

If we quit buying back sometime, we’d eventually build that backup. We keep buying back and how that’s treated. So that lowers the loan loss reserve. So we have added another $3 million this time over and above where I thought we had to be except we’re going to have some hit in Bay Cities, and we have one $7 million credit there that is a pretty squirrely credit. The first mortgage holder didn’t get paid. First mortgage holder didn’t get paid off. However, they issued the title policy. So I think we will eventually prevail, but it maybe a long time. We’re really looking at that loan because it just wasn’t handled very well. So other than that, actually things are really pretty good.

Stephen Scouten

Okay, thank you and I appreciate it.

John Allison

And as far as…

Stephen Scouten

Thank you and I appreciate it.

John Allison

I was just going to add…

Stephen Scouten

Go ahead.

John Allison

I was just going to add on with $2.50, each regional President will have their budget that’s at the $2.43 or whatever it is and they will get a second budget that has the requirements for $2.50. So we will see how they do during the year and see who really comes through and who knows how it will end up. But they will have two budgets in front of them.

Randy Sims

We will certainly get enough legs under us for a couple quarters I would think to be at a run rate in that range. So the game is to string together two – four quarters of 62.5 cents, can be 64, 62 or whatever, as long as they string together four quarters at 250. I have a lot of confidence in this bunch. I believe they will get it done. And hopefully we will find another deal down the road. You can see our all the way dropped a little bit this quarter, that’s Bay Cities. So, it’s going to take us a little bit to pull that back up. Even though it was 170 after merger expenses. We probably would have been without Bay Cities, could have been in the 174, 175.

Stephen Scouten

Yes, that makes sense. Congrats on a great quarter guys and go ahead and get Tracy something to buy out there. He sounds a little bored. I’m worried about him.

Randy Sims

He needs to run what he’s got.

Tracy French

Thanks, Stephen.

Operator

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

Jon Arfstrom

Good afternoon everyone.

Randy Sims

Hey, Jon.

Jon Arfstrom

Couple questions here. Did you say the NPLs, there was $23 million that came in from the acquisition?

Kevin Hester

It was past dues and NPLs, combination.

Jon Arfstrom

Okay. And any estimate – Johnny, you just mentioned that was a little squirrely, that last credit, but any estimate in terms of timing on starting to work some of those balances down?

John Allison

I think that that the NPLs there – you’ve got to remember on the NPLs. Do you remember on those NPLs, I think they’re like $15 million, $16 million, the other are past dues. Not as concerned about the past due as I am about some of those big credits that are in there that are just – weren't handled – didn’t appear to be handle exactly properly. So loss on those could go from – probably from a low of $2 million to a high of – I guess conceivably we could have no loss but I don’t believe that’s going to happen. We could go from $2 million to probably $7 million or $8 million. You’re an accountant too. And so you know we didn’t get to bring over the ALLL. But we have marked those loans. We have about a $14 million mark against the entire loan portfolio.

Jon Arfstrom

Okay, okay. Good.

John Allison

Yes and I think we added up – Jon, I think we had enough time to look at those and we feel good about where our marks are with them. To answer your question of timing, I would say some of those it’s going to take the better part, probably the better part of 2016 to work through some of those.

Jon Arfstrom

Okay, okay.

Brian Davis

One of them kind of – the big one, the $7 million one kind of fell through the cracks and just actually been originated when we got there. We just finished due diligence when it got originated. Anyway, it was – we didn’t get to do a good due diligence only at after review of it, it’s not good. So hopefully it’s a title insurance issue. I think we’ll get paid maybe. You said how much, we may not lose a nickel on it but to be a long, drawn out battle.

Jon Arfstrom

Okay. Anything in Michael Rose asked about energy but anything in the Fayetteville – I know the activity’s lower there. Admittedly you never capitalized on growth on the upside so I think you probably good but any comments or thoughts on the health of the Fayetteville and your exposure there?

Randy Sims

Yes, a little bit. We've looked at – we have business manager that has about $15 million to $16 million I think on it that’s receivables. We finance – actually factor in the receivables. We’ve taken a look at that. We’ve mimicked, some of those receivables are insured. They are like our insurance company will insure those receivables for ABC Company up to $500,000 a count, $300,000 a count. So we’re paying a lot of attention to that. We’re looking at that. I don't think there's any loss in that business manager account. We have half that. The Fayetteville shale is really slow. Was at the country club last night, one of the guys been one of the Company’s a long time said I’ll find out tomorrow if I still have a job.

So the downside up here is that or the upside I guess it never really ramped up. If you remember we talked about that, Jon. It never exploded here.

Jon Arfstrom

Yes.

Randy Sims

It kind of gradually built up, up, up and kind of gradually slowed down, down, down. So I don’t think we got anything really $2 of natural gas, our companies can’t make any money. So I think that pretty well covers the deal. We got a customer out there that’s got some sophisticated equipment owes us around $5 million or $6 million on. Only oil company we’re actually in is a loan that is an oil company that loan 1% of up in North Dakota. We’re the participating credit on that one. Company’s done well and seeing the last P&L remain still made a lot of money, went from 800 barrels a day to 10,000 barrels a day. Given all for cash flow.

Tracy French

John this is Tracy just to add a little bit to that, I think the two regions basically in Arkansas that fell under the Fayetteville shale which is more the Conway and White County areas that we have, our two regional leaders have gone through and reviewed all their credits. And I think that number I heard a while ago, 30 some odd million, and about half of that probably comes out of that Fayetteville shale market.

And 75% of those loans are secured by real estate type holdings that are out there. So back to Johnny's point, our accounts receivable lending had kind of gone away anyway as the companies went down and we boxed that and watched that very close. So, I think it's – we're certainly on top of it and it appears that we've got some little risk out there, but it's insignificant compared to what our balances are.

Randy Sims

Now I think that total energy exposure is $37 million. Kevin, have you got anything to add?

Kevin Hester

No, I think you guys covered it very well.

Jon Arfstrom

Okay. Good. And then just now that Randy Mayor is back, I expect the margin to start going back up again.

Randy Sims

Let me tell you about the margin. I was a little disappointed that it didn't remain flat for the quarter and that's mainly Bay Cities coming into the loop. Past that, as Tracy said earlier, we did about $400 million in renewals and we wrote those at 4.88. And they're coming off in the 4.55 range, and then New York's writing at 6. So actually we might have been down 1 basis point without Bay City, but really a great quarter. When you got renewals coming back on at 4.88 to 5, you got New York writing in the 6s, the new loans are in that same range as renewals. So it's pretty good. I think margin's going to hang in there, maybe a little downward pressure, but not significant. As you heard Brian cost of funds went up 1 basis point. Right, Brian?

Brian Davis

That’s correct.

Randy Sims

That went up 1 basis point.

Jon Arfstrom

Yes, okay good. And then just last one, the New York office I'm assuming that's just to facilitate some of the New York business. Is that correct? Is there anything else behind that?

Randy Sims

Well, Chris ran under his wing. He had a couple of branches up there that were a couple of $500 million branches, about $1 billion worth of funding was provided out of those New York branches. So the truth is that Chris has got some customers that he'd like to bank and he's going to bank through that, but you'll probably see us on the ground with another one in the Manhattan area sometime in the next 12 to 18 months. So we'll have an on-the-ground branch in Manhattan really for funding purposes.

Jon Arfstrom

Okay. All right, thanks for the help everyone.

Randy Sims

Well, thanks.

Brian Davis

Thanks, John.

Operator

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

Matt Olney

Thanks. Hi, guys. How are you?

John Allison

Hi, Matt.

Randy Sims

We're going this afternoon. You want to go with us?

Matt Olney

Pick me up on your way, I'm in. Johnny, it was a few quarters ago on this call, I think we asked you about your appetite expanding the franchise into Texas and at that time Texas was doing okay. Oil was probably around 60, and a lot's changed since then. At this point I'm curious what your appetite of moving into Texas is? And are there any conversations going on in Texas with banks or is it just too soon for that?

John Allison

I think it’s too soon for us to have conversation with banks rights now. I don't know what we'd talk about if they had a big energy portfolio. So I think it's a little early for us to be talking to the TexasBank. Your banker has called me by the way and I've been out for a few days and I don't know what that's about, but maybe it is about a Texasbank because you guys are pretty active, your bankers are pretty active in Texas.

So we’ll just have to wait and see. I think there's going to be some opportunities there. I called $50 oil, I didn't call $28 oil. So this thing – my little oil company have one percent of its time to watch that mail, but I’m reading my mail of those little oil companies by reading my own mail and I'm anxious to see this month's P&L. I bet it's a loss. Even though we’ve got – we're producing from 800 – we’re now producing 10,000. We hit well the other day that's 3,000 barrels a day. So – but a $28, that doesn't get you too excited.

We just have to be careful. There's going to be some repercussions out of Texas. I'm just not sure of what they are. And I'm watching the Fayetteville shale here. And the little – Country club last night was a guy that did the drug testing and he did the – what else did he do daily? They drug tested them and they – to give them eye tests before they went to work in the oil fields, they did all that stuff and he said it’s really tough. He said I've laid off two more people and he said I may lay myself of tomorrow. So he said we just don’t have the activity because they’re not hiring new employees. So that's not a biggy, but it's a little company that banks with us. It probably did – probably ran through $1.5 million, $2 million a year through the bank.

Matt Olney

Remind me the previous franchise, the first commercial, how much presence did you guys have in Texas and where were you guys located there?

John Allison

We had about 3 billion in assets, 2.5 to 3 billion, and we were in East Texas [indiscernible] in that corner over there. If you remember those days, we just bought the liabilities. We didn't have any assets. We bought about $2 to $3 billion worth of liabilities for nothing basically. About a penny – I think we paid about a penny for it. And then we ultimately turned those into 1.50 ROA when we got the assets in there. Kevin went down there to kind of [indiscernible] down there. We got – we started – turning that into 1.50 ROA. We're kicking out lots of property out of that deal. That's what led us to – that was an experience that led us to going to Florida. So would we go somewhere else in Texas? Sure, we'd go to Houston or Dallas. And Randy Sims loves the cowboy, so he’s horsing to find something Dallas.

Kevin Hester

You bet.

John Allison

We'll just keep our eyes and ears open and this thing could – when you've got a rig coming on dumping 500 million barrels or 500,000, whatever it was, some huge amount of oil on the market once we cleared them that had another impact on oil. You've got Saudi Arabia pumping. You've got oil loss in the U.S. I don’t know can it go to 10, I don’t know, may be 10.

Matt Olney

Okay, guys, well thanks for the update and congrats on the quarter.

Randy Sims

Thank you. I appreciate it.

Operator

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

Brian Martin

Hi, guys.

Randy Sims

Hi, Brian.

Brian Martin

Say most of my stuff was answered. Maybe just one thought. That was Johnny, one point you talked about getting it at $7 billion to $10 billion range and getting super efficient and then looking at your options from there. Just sounds as though the game plan appears to cross the $10 billion and continue forward. I guess is that – does that seem like a fair assessment and just – I guess is that an indication on the deals that are still out there, or I guess what – is that the correct mindset I guess we take from what you're…

John Allison

If we organically we'll cross it if we continue to grow like we are, we'll cross it this year without a deal. And if we do a deal, we'll cross it a little quicker. So I think we'll cross it. Would I love to do something in the $2 billion to $3 billion range? I would. I'd love to do something in the $2 billion to $3 billion range to bring in – to take us to $12 billion or $13 billion. Just a matter if we can find those deals, those right deals to do. But I talked about getting lean at that, and just laying back and not do any deals, but we’re going to get there anyway through organic growth.

I mean if you look at New York, probably going to grow another 600 million or 700 million next year and then the legacy footprint is probably going to grow another 500 million or 600 million, 700 million, so you’re over that. I'd like to be nine, nine, nine, nine, nine at December 31, but if we can be there, we'll be there to give us a little more time to get ready for DFAST. But other than that we’re ready – I mean we’re spending the money, we are getting ready to go and is just part of the evolution.

Brian Davis

I mean Brian, if you think about the numbers, we're running easily 1.70% ROA. And so if you can grow the company by $500 million, it will functionally pay for the Durbin and the DFAST. I mean, if you grow $500 million that gives you about $8.5 million on an after-tax basis and we're kind of estimating that Durbin and DFAST might cost us $12 million. And when you tax effect that, you're down close to $8.5 million.

Brian Martin

Got you. Okay. I was going to ask about the impact. So $12 million total with Durbin and DFAST.

Brian Davis

Right. And we're able just to grow over it. We get more profits out of our assets because we're running the 1.70% plus ROA. We don't have to have the assets as much assets to go over to cover the cost of that.

John Allison

The real ramp-up this year has been on the revenue side. Expenses have stayed fairly stable, but the real ramp-up has been on the revenue side. And I think incrementally Chris in New York and his team might need to add two, three more people, but outside of that, I don't see any more FTEs coming on. So if we can grow organically another $1 million this year, it would be pretty strong for us. We might move that ROA up.

Brian Davis

And one thing for just clarification because people may be interested that $12 million is probably about $10 million for Durbin and about $2 million for DFAST and that $10 million for Durbin will be a one-time cost when it comes into effect because that's just all lost interchange fees and it would come into effect, my projection is July 1, 2017. If Mr. Allison's correct we'll grow over, the $10 billion maybe in the third quarter, and that means we'd be over at the end of the year and then it would go into effect after six months after you cross year end at $10 billion. We're at $10.1 billion at the end of the year. We're probably looking to sell something.

John Allison

Yes we will. I think [indiscernible] the end of the year, that’s pretty smart on their part.

Brian Martin

Yes, I got you. Thanks for the color. And then maybe just the last thing, just anything that – any color you can give on the SBA, USDA kind of initiatives, I guess what the thought is there, just kind of the ramp-up there?

Randy Sims

Kevin, do you want to add?

Kevin Hester

Yes, this is Kevin. We've got our people largely in place and just trying to fill out our footprint and have producers within the larger areas of the footprint. So that's what you'll see in 2016. We’re above breakeven for the whole operation in the fourth quarter and already have enough to sell the first quarter to do that as well. So you'll just see us continue to try to fill out the larger area of the footprint with producers.

Brian Martin

I got you. Okay thanks very much guys. Nice quarter.

Randy Sims

Thank you.

Operator

And our next question comes from Brady Gailey of KBW. Please go ahead.

Brady Gailey

Hi, good afternoon guys.

John Allison

Hi, Brady. Looking forward to working with you.

Brady Gailey

Yes, thank you. Thank you. I was wondering about the yield accretion. It's been $13 million in the last couple of quarters. Is that a good run rate as we look towards 2016 or do you think we'll see some downside in that number?

Brian Davis

From a theoretical standpoint, it really can't go up without us having another acquisition. I had thought that it might go down this quarter but we had a couple of large loans payoff in our Northeast Arkansas market and we generated some accretion income about $650,000. And we probably are going to have some of that again this quarter because we've already had some in January. But from a theoretical sense when your first quarter out's always your highest. I can see that begin to trickle down. It might trickle down $1 million for next quarter, and then you just kind of have to look at it see where it is on a quarter-by-quarter basis. Now it shouldn't just be $13.2 million quarter-after-quarter. It was more kind of a coincidence that it was at for the last couple of quarters, last two quarters.

Brady Gailey

Okay. And then with the New York operations, you're opening the office there. There's $1 billion of funding that used to with this old group from Doral. How much of that funding do you think you can actually move to Home?

Brian Davis

You're talking about from how much deposits they can generate or…

Brady Gailey

Exactly deposits.

John Allison

I think they can generate is that – Chris is not – it seems like a couple of $100 million out there just in [indiscernible] wrapping I was making $200 million to $300 million or so.

Brady Gailey

Okay. Then on the asset side of what they're doing up there, that's $700 million in loans. Can you just give us an update on what the composition of those loans are?

Brian Davis

Pretty much as we started, the bridge loans. We've done a little – stepped a little bit out of the bridge loan area but primarily it's about the same. Kevin, you want to run with that one?

Kevin Hester

Yes it’s – I was looking here. I had a spreadsheet of that. I think that it's probably – I can't find that. It's about half on the bridge side and they've got a little bit of C&I that they've done, about $100 million or so over the year and about $500 million of that is CRE. Got a little bit of construction, about $100 million, a little bit of multifamily out of that $700 million.

Brady Gailey

All right great, thank you guys.

Kevin Hester

Thank you.

Brian Davis

Thank you, Brady.

Operator

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

Joe Fenech

Hey guys good afternoon. All my questions were answered. Thanks a lot. Good luck on the hunt today.

Randy Sims

You know you want to come, Joe?

Joe Fenech

Pretty big detour if you guys come pick me up but I’d love to.

Randy Sims

All right thanks, thank you.

Joe Fenech

Have a good one.

John Allison

You too.

Operator

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

John Allison

Well, again, thank you. We’ll talk to you in about 90 days. I notice that the stock’s off to $1.07 while we’ve been speaking so I don’t know. We’re just going to keep our heads down, keep doing what we’re doing out there, Tracy.

Tracy French

Absolutely. It’s been a pretty darn good year, we’re set ready to go into 2016. Yes we’re set for a good 2016. So this too shall pass, but is an opportunity for everyone looks to me like. You’ll see me in there in the next week or two when they file a form on me next week, I think.

Randy Sims

Window opens Monday.

Tracy French

Window opens Monday. Anyway, all right well, thank you and we’ll talk to you in 90 days.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day.

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