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Edited Transcript of HOMB earnings conference call or presentation 20-Apr-17 6:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Home BancShares Inc Earnings Call

CONWAY Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Home BancShares Inc earnings conference call or presentation Thursday, April 20, 2017 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian S. Davis

Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Director, CFO of Centennial Bank, Treasurer of Centennial Bank and Director of Centennial Bank

* C. Randall Sims

Home Bancshares, Inc. (Conway, AR) - CEO, President, Director and Director of Centennial Bank

* Jennifer C. Floyd

Home Bancshares, Inc. (Conway, AR) - CAO, IR Officer and CAO of Centennial Bank

* John Stephen Tipton

Home Bancshares, Inc. (Conway, AR) - COO and COO of Centennial Bank

* John W. Allison

Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank

* Kevin D. Hester

Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer, Chief Lending Officer of Centennial Bank and Director of Centennial Bank

* Tracy M. French

Home Bancshares, Inc. (Conway, AR) - Director, CEO of Centennial Bank, President of Centennial Bank and Director of Centennial Bank

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Conference Call Participants

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* Brady Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Brian Joseph Martin

FIG Partners, LLC, Research Division - VP and Research Analyst

* Matthew Covington Olney

Stephens Inc., Research Division - MD

* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD, Equity Research

* Stephen Kendall Scouten

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research

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Presentation

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Operator [1]

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Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated First 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 participants in this call are: John Allison, Chairman; Randy Sims, President and CEO, Home BancShares; Tracy French, President and CEO, Centennial Bank; Brian Davis, Chief Financial Officer; Jennifer Floyd, Chief Accounting Officer; Kevin Hester, Chief Lending Officer; and Stephen Tipton, Chief Operating Officer.

The company has asked me to remind everyone to refer to the cautionary note regarding forward-looking statements. You'll find this note on Page 3 of their Form 10-K filed with the SEC in February of 2017. (Operator Instructions) This conference is being recorded. (Operator Instructions)

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

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [2]

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Thank you, Jamie, and good afternoon to everyone. Welcome to Home BancShares' First Quarter 2017 Earnings Release and Conference Call.

As you heard the teams here, and you'll hear from all at the end of the day. Well, another one in the history book and another good one. I'm not going to steal Randy Sims' thunder today. I'll let him talk about it for a moment. But it was a busy quarter. And actually, it's the busiest, most stressful quarter of my entire business career. Bank of Commerce, Landmark, Stonegate crossing the $10 billion mark and meeting the $10 billion examiners, conversion, sub-debt offering, bank conferences plus meetings with both customers and the Stonegate management team. And somewhere in there, we threw a trip in to go to Cuba. And while all of that was going on, we still produced another record quarter for our shareholders.

As I said I'll save the thunder for Randy on the numbers. I'd like to welcome the new Stonegate shareholders to the Home BancShares family. And to the employees, I want to say, because of the quality of the organization you've built, Stonegate had many options. They could have stayed where they were. They may have sold to someone else. They had options that most banks don't have. We're honored that you chose Home BancShares to be your partner. With common culture and operating philosophy, this partnership could be, for the employees as well as to shareholders, the best trade that we've ever done.

Overall, on the business side, business is good. Asset quality continues to improve. Accretion was down a little bit for the mark, about $1 million. Net margin was up a tick. Gross margin was down a tick as we brought in Landmark and BOC. Revenues seem to be growing at a pretty good pace with good record, good revenues for the quarter. And April, we're taking a quick look in April, it looks strong. Loans were up just a tick. So CFG and New York operation had a good quarter, like they were up 30% pretax pre-provision while their loans dropped slightly.

So far, so good, Randy. It certainly appears that 2017 is shaping up to be another record year for Home BancShares. And I'll let you have it now.

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C. Randall Sims, Home Bancshares, Inc. (Conway, AR) - CEO, President, Director and Director of Centennial Bank [3]

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Thank you, Johnny. As he said, it was a good quarter and a really good start to 2017. And as Johnny went through everything that went on in the first quarter, I think we would all have to agree that it was a very, very busy quarter. It might have been the busiest quarter in the history of our bank.

We closed 9 holdings incorporated, and we also closed the Bank of Commerce. And of course, as who can forget, on March 27, we had a really great announcement in signing of the definitive agreement with Stonegate Bank that when completed, will be the largest acquisition in the history of our company. So quite a quarter, but it doesn't end there.

The first quarter of 2017 was the most profitable quarter in the history of our company. Again, now that is 24 consecutive quarters of record income and by my calculations, I got one of my grandkids to help me, that is 6 years, 6 solid years. Now I will admit the last couple of quarters have been very noisy with merger expenses and other nonfundamental items that's all detailed in our statements that has to be considered. However, 6 years of record income is quite an accomplishment that all shareholders can be proud of, and I congratulate our employees and their hard work to accomplish this milestone. I know you can't hear it over the phone, but there's fireworks that are going off all around the bank just like in the stadiums. So at any rate, there's only one thing to say, let's go for 7 years. And that's what we're going to try to do.

Now to some of the numbers. For the first quarter of 2017, the company recorded a 13.1% increase in quarterly profit to $46.9 million compared to $41.4 million for the same period in 2016.

Diluted earnings per share for the first quarter of 2017 was $0.33 per share compared to $0.29 per share split-adjusted for 2016, representing an increase of $0.04 per share or 13.8% when compared to the same quarter in the prior year.

Excluding a $6.7 million charge of merger expenses associated with the recently completed acquisitions of Giant Holdings, Inc. and the Bank of Commerce offset by $3.8 million of the onetime nontaxable gain on the acquisition associated with commerce, diluted earnings per share for the first quarter of 2017 remained at $0.33 per share. Our return on average assets for the first quarter was 1.86% as compared to 1.79% in the first quarter of last year and 1.98% in the last quarter of 2016. As our new banks improve with efficiency and profitability, I think we can get back very close to that 2%, if not make it that our Chairman would like to see. Our core return on average assets, excluding intangible amortizations, provision for loan losses, merger expenses, gain on acquisitions, reduced provision for loan losses as a result of the significant loan recovery, loss on FDIC loss share buyout and income taxes, and I think that is a record for the number of exclusions that I have ever said in a report, was 3.31% for the quarter as compared to 3.27% for the same period in 2016. Our return on average TCE, excluding intangible amortization for the quarter was 20.08%.

So as of March 31, the Corporation is sitting at a little over $10.7 billion. Deposits ended at $7.57 billion as compared to $6.94 billion at 12/31/16. We have a great management team on hand to talk more about the results of the first quarter, so I'd like to start and turn it over to Centennial's CEO, Tracy French, to give us additional color in his comments on the performance of the first quarter.

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Director, CEO of Centennial Bank, President of Centennial Bank and Director of Centennial Bank [4]

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Thank you, Randy. First of all, I'd like to congratulate our Home BancShares and Centennial Bank staff reaching the $10 billion mark in assets during the first quarter and also look forward to working with these bankers as we start on the next $10 billion.

As you've heard or you will hear from others today, Home BancShares started the year with solid first quarter financial results. All regions continued to perform at high levels within our performance metrics.

In fact, they're doing so well, Johnny may have to raise the bar again. As Randy and Johnny mentioned, the first quarter was very active, that's to say the least. Our operations department efforts during the first quarter was the most active, I believe, in our company's history. This group is and has been the key to our company's success and our complements to all of them that they've shined again this quarter.

We'd like to also welcome Stonegate to our family. We look forward to working with Dave and their entire outstanding bankers in their bank.

Thanks, Randy. And now let's hear some more about the solid results in the first quarter.

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C. Randall Sims, Home Bancshares, Inc. (Conway, AR) - CEO, President, Director and Director of Centennial Bank [5]

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Thanks, Tracey. So the total number of active Centennial branches is 151, up 9 through our 2 acquisitions, 76 in Arkansas, 68 in Florida and 6 along the Alabama coast line and of course, 1 in New York.

So I would like to turn it over to Stephen Tipton, our Chief Operating Officer, who'll fill you in on some of our income efforts, efficiency and other operational things.

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John Stephen Tipton, Home Bancshares, Inc. (Conway, AR) - COO and COO of Centennial Bank [6]

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Thanks, Randy. As you all have mentioned, the first quarter of 2017 was a busy one even by Home BancShares' standards. I want to thank all of our project teams and operation teams that have been involved in these efforts. Our shareholders and customers benefit from your hard work and attention to detail.

I'm pleased to report a solid core efficiency ratio of 36.96% for Q1. While up slightly from the prior quarter, given the 2 acquisitions and normal items associated with the first quarter increase, we are encouraged by the continued expense control and focus on revenue in the legacy regions.

As you will hear, our core net interest margin increased 1 basis point for the quarter to 4.32%. We did see slight compression on the core NIM in March with the inclusion of the Landmark Bank and Bank of Commerce acquisitions, and our president in those regions have already gone to work to identify opportunities for improvement.

Switching to funding, core deposit relationships continue to be a daily focus for our region, and we're pleased to see nice growth in the low-cost and no-cost deposits for the quarter.

With that said, I'll turn it back over to Randy.

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C. Randall Sims, Home Bancshares, Inc. (Conway, AR) - CEO, President, Director and Director of Centennial Bank [7]

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Thanks, Stephen. Net interest income, margin, noninterest expense and other highlights will be covered by our CFO, Brian Davis. After that, Brian will pass it to Jennifer Floyd, our Chief Accounting Officer, to give us more information on our capital numbers.

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Director, CFO of Centennial Bank, Treasurer of Centennial Bank and Director of Centennial Bank [8]

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Thanks, Randy. The first quarter was a great quarter for our company. We recorded both GAAP and non-GAAP earnings of $0.33. The quarter included a bargain purchase gain of $3.8 million on our Bank of Commerce transaction and a $6.7 million of merger expenses on our 2 acquisitions. Since the bargain purchase gain was a nontaxable gain, the negative impact on earnings for these 2 items was only $538,000 after tax.

Net interest income increased $1.6 million to $104.8 million in Q1 versus $103.2 million in Q4. This increase is primarily the result of acquiring Giant Bank Holdings on February 23 and Bank of Commerce on February 28, offset by 2 less calendar days for net interest income for Q1 2017. Also during the first quarter, we had a 5 basis point decline in our GAAP net interest margin as a result of a declining accretion income for the fair value adjustments recorded in purchase accounting.

During Q1, total accretion income was $7.6 million compared to $8.7 million in Q4 for decline of $1.1 million. The decline was primarily the result of normal reduction in payoff accretion.

Excluding the accretion income and associated loan discounts, the company's net interest margin for Q1 2017 was 4.32% on a non-GAAP basis compared to 4.31% in Q4 2016.

Excluding the gain on the acquisition of Bank of Commerce, noninterest income was down $1.2 million in Q1 2017 compared to Q4 2016. There are several items worth noting. First, our mortgage lending income was lower by $1.3 million from Q4 to Q1. Secondly, other income was down because, in Q4, we have $561,000 of additional other income for an item, which was previously charged off. Thirdly, we had $716,000 lower in gains in Q1 versus Q4 for SBA, OREO and investment securities.

Excluding merger expenses, noninterest expense was up $1.4 million in Q1 2017 versus Q4 2016. The primary increase was related to the increase in costs associated with the 2 acquisitions completed in February 2017, plus we experienced $567,000 increase in noninterest expense in our CFG operation from Q4 to Q1, which was primarily related to incentive compensation from collected fees for loan payoffs and new originations.

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

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Jennifer C. Floyd, Home Bancshares, Inc. (Conway, AR) - CAO, IR Officer and CAO of Centennial Bank [9]

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Thank you, Brian. Let's take a look at our first quarter capital results. As of March 31, 2017, we ended the quarter with $1.4 billion of capital and $42 million of cash at the parent company.

During the first quarter of 2017, we paid out shareholder dividends of $12.7 million, while growing retained earnings by $34.2 million.

For the first quarter of 2017, our common equity Tier 1 capital was $1 billion, total Tier 1 capital was $1.06 billion, total risk-based capital was $1.14 billion and risk-weighted assets were approximately $8.8 billion. As a result, our common equity Tier 1 capital was 11.4% compared to 11.3% at December 31. Our leverage ratio was 10.9% compared to 10.6% at December 31. Tier 1 capital was 12.1% compared to 12% at December 31 and total risk-based capital was 13%, which remained consistent from December 31.

On April 3, 2017, we completed our underwritten public offering of $300 million of our 5.625% fixed to floating rate subordinated notes due in 2027. The notes were issued at 99.997% of par resulting in net proceeds after underwriting discounts of approximately $297.2 million, which will be classified as Tier 2 capital. As a result, our pro forma common equity Tier 1 ratio, leverage ratio and Tier 1 capital ratio remained flat when compared to March 31 and our pro forma total risk-based capital ratio increased to 16.2% from 13% at March 31.

Additional first quarter capital ratios include book value per common share, which was $10.05 compared to $9.45 at December 31. Our tangible book value per common share was $6.96 compared to $6.63 at December 31, which represents an annualized increase of 20.2% on a linked-quarter basis. And finally, our tangible common equity ratio was 9.7% compared to 9.9% at December 31.

Randy?

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C. Randall Sims, Home Bancshares, Inc. (Conway, AR) - CEO, President, Director and Director of Centennial Bank [10]

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Thank you, Jennifer. Good numbers. Let's turn to loans. I understand we have some pretty good asset quality numbers, so I will turn that over to our Chief Lender, Kevin Hester.

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer, Chief Lending Officer of Centennial Bank and Director of Centennial Bank [11]

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Thanks, Randy. As was previously mentioned, organic loan growth was basically flat in the first quarter. Community bank footprint actually produced about $43 million of loan growth in Q1, but accelerated payoffs reduced CCFG's outstanding balances by $27 million.

Within the community bank group, Florida provided all the growth this quarter. I think everyone is aware of the subordinated debt issuance that took place recently. From a lending perspective, the $250 million in capital was pushed down to the bank just after quarter end. It will have a positive effect on our CRE concentrations. It will initially push both ratios below the 100, 300 guidelines. And with enhanced risk management procedures in place, we'll provide room for significant CRE growth in the future.

Our asset quality ratios continue to be strong with solid improvement on the linked-quarter basis. Nonperforming loan and nonperforming asset ratios were 0.75% and 0.71%, respectively, both improving by 10 basis points.

As I've indicated for the last couple of quarters, our nonperforming balances are still elevated due to a couple of large problem loans acquired in the Bay Cities Bank acquisition. Progress towards resolution of those loans is good, and one of them has actually been brought to very positive resolutions since quarter end. The ALLL coverage of nonperforming loans improved 9% to 136%. Past dues decreased 18 basis points to 0.95%, and this number has been very consistent for the past few quarters.

Lastly, the allowance for loan losses as a percentage of noncovered loans decreased 6 basis points to 1.02% of total loans due to the $462 million increase in loans this quarter. However, as mentioned above, 97% of this increase is purchased loans, which have a purchase discount associated to them.

Mortgage continues to improve on a quarter-over-quarter basis with closings up 17% and locks up 15% in the most profitable first quarter ever. The commercial pipelines improved over last quarter. However, payoffs are still a bit elevated. Overall, the second quarter is shaping up nicely.

On that note, Randy, I'll turn it back over to you.

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C. Randall Sims, Home Bancshares, Inc. (Conway, AR) - CEO, President, Director and Director of Centennial Bank [12]

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Thank you, Kevin. Well, another good quarter and another great start on the new year. Just to recap just a little bit, I can't go without saying it again, record earnings for the 24th consecutive quarter, 6 years, book it, 6 years record net interest income, quarterly ROI of 1.86%, a strong quarterly core efficiency ratio of 36.96%, still a very powerful margin, very good noninterest income and great asset quality metrics. Consistent and continued improvement in our major components and metrics plus growth from acquisitions, and we look forward to even more assets coming with Stonegate. That is what we're all about, and we look forward to continue improvement as we strive to break more records throughout 2017.

And with that, I will turn it back over to our Chairman, Mr. Allison.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [13]

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Thank you, everyone. Jamie, we're ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today comes from Brady Gailey from KBW.

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Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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So the CFG loan growth slowed, I know longer term you guys want to grow that up to $1.5 billion and then just kind of assess it from there. But how are you thinking about CFG loan growth for the balance of the year?

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [3]

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I'll take part of it, and then maybe Tracy or Stephen can jump in or Kevin. I think it's going to continue to grow. We had $70 million payoffs, I mean larger than we anticipated in all the hotel in New York, and that was really the difference, so -- in the quarter. But so far as being weak, I think we proved last 2 -- we proved 1 loan for New York the last -- it speaks the last 2 (inaudible). So we expect discounting. I mean New York's done what New York said it's going to do. New York said these loans are going to be 24- to 36-month loans, and it's doing just exactly what it set out to do. Stephen, you got a comment or Tracy?

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Director, CEO of Centennial Bank, President of Centennial Bank and Director of Centennial Bank [4]

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No, I agree with you there. The productions in the first quarter were still really good because they had the payoffs come in, which is the cycle that they're in. Been with them for 2 years now, and so the team and the unit there is doing exactly as the forecast in the past. They do have the West Coast operations kicking -- or set up a little bit today, probably we won't see much activity on that in the second quarter, but maybe in the third. But the production there should be (inaudible) a couple hundred million.

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Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [5]

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Okay. And then in fee income, if you look at other service charges and fees, it was up pretty notable linked quarter. I know you closed the 2 bank deals in February, which might have had a little impact, but was there anything notable that pushed that line item higher?

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Director, CFO of Centennial Bank, Treasurer of Centennial Bank and Director of Centennial Bank [6]

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This is Brian. There is. With CFG, you get the payoff fees. And so for the quarter, they're up about $400,000 in loan payoff fees from Q4. Also, annually, on our Mastercard, we get an annual incentive and we collected that in Q1. It comes around once a year at $615,000.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [7]

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The good news is we get payouts, and the bad news is we get paid off.

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Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [8]

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Yes, exactly. And then, finally, for me, I know you all have been guiding to accretive yield kind of coming down, which is exactly what it is in the quarter. Brian, any idea on how you think yield accretion will run for the rest of the year?

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Director, CFO of Centennial Bank, Treasurer of Centennial Bank and Director of Centennial Bank [9]

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Yes, we will take a look at that after quarter end. And if you just take the natural flow of that, it should come down about $500,000 a quarter. It may not fall that much in Q2 like it might in Q3 because we only have Landmark and Bank of Commerce in for 1 month. Those accreted about $170,000 for the quarter, and they'll probably have a little over $500,000. So we may lose $500,000 for Q2 and maybe pick up an extra $340,000. But after that, it all start ratcheting down about $500,000 a quarter.

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Operator [10]

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Our next question comes from Michael Rose from Raymond James.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [11]

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Just a question on CFG and the expenses associated with the West Coast office. How much of that is in the run rate already? I mean, do you have the pieces in place? Just trying to get a sense from an expense perspective?

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Director, CEO of Centennial Bank, President of Centennial Bank and Director of Centennial Bank [12]

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Well, of course, the New York operation is in the run rate there. But budgeted ahead, we had to pick up some space to lease which is not that big of a challenge. It's 2 or 3 people over the period of a year. So that's really the -- probably the expense that we'd come across with the additional partner on the West Coast, Michael.

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C. Randall Sims, Home Bancshares, Inc. (Conway, AR) - CEO, President, Director and Director of Centennial Bank [13]

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Can you talk about the expense of L.A. is already in. Not much of it.

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Director, CEO of Centennial Bank, President of Centennial Bank and Director of Centennial Bank [14]

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Not any so far.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [15]

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Okay. So how much do you estimate that is just from a run rate perspective?

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Director, CEO of Centennial Bank, President of Centennial Bank and Director of Centennial Bank [16]

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$250,000.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [17]

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Okay, that's helpful. And then can you just tell us what the actual paydowns, the paydown amount in CFG in the quarter was and then what the production was?

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Director, CEO of Centennial Bank, President of Centennial Bank and Director of Centennial Bank [18]

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Yes, $215 million was the production for the quarter, with payoffs around $145 million. Michael, that's what you're looking for?

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [19]

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Yes, yes. No, that's very helpful. And do you have a sense for at least what the schedule paydowns or payoffs will run at over the next couple of quarters in that business?

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John Stephen Tipton, Home Bancshares, Inc. (Conway, AR) - COO and COO of Centennial Bank [20]

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Michael, this is Stephen. I'll take a part of that. I mean, as Tracy mentioned, I think payoffs were about $145 million, $146 million for the quarter. Johnny mentioned we had a $60 million or $70 million credit that's really -- a little surprise on timing. But beyond that, that's probably something you see in the $70 million to $90 million range going forward.

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Director, CEO of Centennial Bank, President of Centennial Bank and Director of Centennial Bank [21]

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Michael, if you remember, part of the cycle there with the New York operation was they generate and get paid off about 1/3 of a balance or start 1/3 every year, so they're in that cycle now. So they're producing loans, which are also getting the payoff loans. Maybe in this past quarter, the production does offset some of that.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [22]

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Actually, Michael, the first loan we made was CFG. If you remember, it was a pretzel factory in New York and it just -- that was 3, 4 months ago. It just paid off in full. What they said they were going to do, get permitting and take it down, clean it up and then get a construction loan, and they got a 75%. They leveraged that 75%. They did it and moved on down the road. So that's just exactly what we anticipated. We're very pleased with the way the operations is growing.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [23]

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Always good when it works out that way, right?

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [24]

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That's it. Yes, and he had (inaudible) powerful first quarter. He did $16 million pretax pre-provision the first 9 months. He did $40 million pretax pre-provision last year, and he did $13.1 million pretax pre-provision in the first quarter. So loans are off a little bit, but its income was pretty powerful.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [25]

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Okay, maybe just one more for me. With the 2 acquisitions that just closed, when do you expect to have all the cost saves realized?

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John Stephen Tipton, Home Bancshares, Inc. (Conway, AR) - COO and COO of Centennial Bank [26]

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It's Stephen, Michael. We converted Landmark in March. David Druey has done a great job integrating thus far. So I think we're good ways down the road there. We'll convert Bank of Commerce, May 12, and so we're operating a little duplication right now over the next 3 or 4 weeks or so. We'll have that integrated. I would expect to get that taken care of in Q2.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [27]

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Actually, I was in Fort Lauderdale and I went by Las Olas branch, and it's no longer there. That's how quick he moved. I mean, David Druey moves really pretty quickly. It was one he'd selected to close, and it was closed. I wouldn't -- I think -- I thought, I guess, I missed it. I went down the road and I totally went back, but it wasn't there. So good job on his part. So they get after pretty quick. They plan what they're going to do beforehand, and then they move in a hurry.

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Operator [28]

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And our next question comes from Stephen Scouten from Sandler O'Neill + Partners.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [29]

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Question just following up on that CFG production. I think you said $215 million and then $145 million of paydowns. What amount of the $215 million production was funded versus, I guess, what's unfunded? Is that kind of half and half? And what's kind of the normal trend there? Is that if you can lend any color there?

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Director, CFO of Centennial Bank, Treasurer of Centennial Bank and Director of Centennial Bank [30]

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Yes, Steve, about 1/3 of the production funded, so about $65 million, $70 million of that $215 million Tracy mentioned funded, and then we had additional advances on current loans that paid up the balance. So you take about, for the quarter they were down about $20 million or so, $145 million in payoffs and $120 million in funding so split half-and-half between new money and additional fundings.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [31]

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Tell you why we actually had a pretty good quarter. We generate production, it was about $450 million with about $475 million in payoffs this quarter, so we (inaudible) if we didn't have the payoffs -- we would have really good growth so it's continuing on carrying as expected.

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Director, CFO of Centennial Bank, Treasurer of Centennial Bank and Director of Centennial Bank [32]

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Payoffs have been increasing over the last several quarters so I mean, with our construction lending that's going to happen so, in particular, with Chris, having more of that now than he did probably a year ago. You'll continue to see that.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [33]

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Yes. And where do you guys think you can get kind of net organic loan growth to here on a quarterly basis? Obviously, this quarter with the payoffs is a little lighter but you've been anywhere from $150 million to $275 million, I guess, over the last year or so. So any idea where you think that will shake out for the rest of the year? And especially now that you're below 300% CRE to risk-based capital, I mean, do you feel like you have a lot of runway to move that back up to 350% in time? Or what are your thoughts there?

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John Stephen Tipton, Home Bancshares, Inc. (Conway, AR) - COO and COO of Centennial Bank [34]

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Yes, over time. I mean, we're going to do what the market allows us to do. We're not going to push it. So I think it's going to be somewhere in between where we were this quarter and kind of what you saw fourth quarter. I don't see a fourth quarter right now happen but -- we'll continue to see things in our markets. And Chris is going to keep doing what he is doing, so I think the market still looks good and all the markets that we're in.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [35]

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Well, we're going to take what they give us as you know we don't push loans it's one thing we don't do in this company. We don't push it. We take what they give us. So I think, Stonegate had pretty flat quarter this quarter and we had a pretty flat quarter, but we hadn't had the payoffs we had some pretty good growth, so probably, in the $100 million range hopefully.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [36]

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Okay, that's great. That's great. And maybe last one for me, just on the NIM, what sort of benefit, Brian, do you think we can see from the March rate hike on the core NIM potentially? Or with the accelerated payoffs in CFG, did that kind of inhibit the upside given then that's where a lot of that sensitivity is? Or how are you thinking about the NIM for the remainder of the year as a result?

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Director, CFO of Centennial Bank, Treasurer of Centennial Bank and Director of Centennial Bank [37]

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Well, there's probably about 3 moving parts for this. We took down the $300 million of sub-debt on April 3. And as we crossed $10 billion, we're beginning to keep more liquidity on our books. And those -- neither one of those are positive to the NIM. The combined impact of doing that, I mean, we ran a fairly tight liquidity position when we were trying to standard $10 billion. But now that we're over $10 billion, we're going to probably, need to increase that liquidity position and the combined impact of that could be 15 basis points on a quarterly basis. I think Stephen kind of has some numbers that kind of impact from the loan side.

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John Stephen Tipton, Home Bancshares, Inc. (Conway, AR) - COO and COO of Centennial Bank [38]

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Yes, this is Stephen. To give you some color in how we're looking at kind of a standalone bank versus the timing of when the 2 acquisitions came in, in March. When I go back and compare loan yields and deposit cost kind of where we were at year-end, we saw loan yields up about 7 basis points. Core loan yields, ex-accretion of about 7 basis points and cost of deposits were up about 5. So yes, we saw some impact, a little impact from the December rate hike, obviously, not much from the March rate hike. Our variable-rate portfolio grew a little bit with the 2 acquisitions. We're just shy, I think of 40% now on the total portfolio in terms of what's variable. Yes, you probably still have another 1 or 2 rate hikes that need to happen to get the whole portfolio that's tied to prime moving. So we're seeing probably half of that bit of it in March. So I think, we've been successful thus far in being able to, as we've had to increase deposit costs sum. We've got to count on T-bills and various other indices that have trickled up a little bit. We've been able to outpace of that with loan yield so far.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [39]

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We're still -- Bank of Commerce and Landmark had higher cost of funds and more loan range and more yield, I think there was about 380. We ended up ticking up 1 basis point even after putting up $470 million on the book. So we'll be working on those see if we can get those rates up and improving over the period of time. And overall, so far, so good. It's been -- Stephen's group, lenders have done really, really a good job of monitoring this and you'll hear that rates are up 8 basis points. Cost of funds, up 6% since November. That's pretty good numbers, we're running in the right direction.

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Operator [40]

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And our next question comes from Matt Olney from Stephens Inc.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [41]

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I definitely heard 24 quarters in a row from here loud and clear. First question is for Brian. You mentioned the liquidity impact now that you're over $10 billion of assets. Can you specify kind of where you were? And is this where you want to get to or you continue build the liquidity impact even from here?

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Director, CFO of Centennial Bank, Treasurer of Centennial Bank and Director of Centennial Bank [42]

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Well, I think it's pretty easy to get to where you want to be pretty fast. I mean, we were just keeping a lot of our excess liquidity off the balance sheet. But as we go over $10 billion, we're going to have to keep more of it on our balance sheet. And so we've been running about cash to total liabilities about 5%, and we may double that by the time we get down to June 30.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [43]

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Okay, that's helpful. And then as far as the deposit costs, you mentioned those ticked up and remain pretty low overall. Any commentary as far as what markets are seeing more pressure than other markets within your footprint?

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C. Randall Sims, Home Bancshares, Inc. (Conway, AR) - CEO, President, Director and Director of Centennial Bank [44]

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Well, not -- Northeast, Northwest Arkansas seeing a little pressure. Other than that, most of them are hanging in there, pretty good.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [45]

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We're doing a little bid into money now. We look at -- we just picked up large capital about $70 million, $80 million. We're kind of bidding for a little money throughout last (inaudible) the rest of the franchise and go out and select -- selectively bid on different pools of money.

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John Stephen Tipton, Home Bancshares, Inc. (Conway, AR) - COO and COO of Centennial Bank [46]

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Hi, Matt. This is Stephen. I'll add onto that. I think we saw about $160 million or so in organic ex-landmark BOC deposit growth for the quarter. About half of that was non-interest bearing. So yes, I think, we talked the last several quarters, our folks are back out asking for deposits and our loan committees are thinking about deposits as we look at loan opportunities. I think you'll start to see some of that translate into meaningful volume.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [47]

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The cost of funds ex-Bank of Commerce and Landmark was flat, wasn't it?

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John Stephen Tipton, Home Bancshares, Inc. (Conway, AR) - COO and COO of Centennial Bank [48]

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That's right.

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C. Randall Sims, Home Bancshares, Inc. (Conway, AR) - CEO, President, Director and Director of Centennial Bank [49]

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Cost of funds were flat ex-Bank of Commerce and Landmark. So you guys are still doing a good job on managing that side of it.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [50]

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Okay, interesting. I appreciate that. And then, Kevin, I think you mentioned the CRE and CND concentrations are now below the threshold with the sub-debt capital coming in early in the fourth quarter. If we were to layer in the Stonegate portfolio and their capital, could you give any idea of what the pro forma capital ratios would be with that book of business?

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer, Chief Lending Officer of Centennial Bank and Director of Centennial Bank [51]

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Yes, construction -- the construction will go down just a little bit, the total CRE will stay pretty close to the same.

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Director, CFO of Centennial Bank, Treasurer of Centennial Bank and Director of Centennial Bank [52]

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Yes, I think he's running, I think it's 80 (inaudible) year-end day it was at 80, and 302 to 304, so pretty minimal.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [53]

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We probably don't take it back up. We stress tested it. It's about as hard as you can stress test one. And I think we brought our ROA from 1.99 to 0.75 and what was the stress test? About 50?

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Director, CFO of Centennial Bank, Treasurer of Centennial Bank and Director of Centennial Bank [54]

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We generated about $75 million in loss.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [55]

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We generated about $75 million in total loss still generating capital during that quarter, so we're pretty pleased that we did at 360, that was based on 360 and so we're pretty pleased where we are.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [56]

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And Johnny, one more question. Any hesitation of moving that CRE back up before the deal closes? Or would you want to wait until 2018 to do that?

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Director, CFO of Centennial Bank, Treasurer of Centennial Bank and Director of Centennial Bank [57]

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I mean, I think with our internal generation of retained earnings, I don't know that that's a problem between here and there.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [58]

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Probably not a problem but we'll take what we can get. I mean, we'll take it when they give it to us. So if they give it to us, we will take it. Now we've raised our prices on construction because it is a limited resource in this country. And if the regulators keep pushing them like they're pushing, it's getting difficult on construction loans. One of Kevin's, large, large customers saying to him said, "Kevin, how much money would you loan me?" And Kevin said, "Why?", and he said, "I'm going to start making construction loans." He said everybody and nobody can get construction loans. So that thing is pretty tight and he's only got -- he's the only apple stand in town. When you got 25 apples you don't want to sell them under cost. So we're going to mark those apples up and see if we can make some additional money. We want to do construction. If we'll take the risk, we'll try to make the extra money.

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Operator [59]

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(Operator Instructions) Our next question comes from Brian Martin.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP and Research Analyst [60]

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A couple things for me. Just the core loan growth outside of legacy growth outside of CFG. Were there also heavier payoffs in there in addition to what you saw in CFG? Is that kind of what you guys are saying? Maybe I missed that.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [61]

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Yes, not really. The payoff is not expected was out of CFG. And the footprint, it was fairly normal.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP and Research Analyst [62]

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Okay, certainly not -- I guess kind of the lower growth in the footprint outside of CFG, I guess anything in particular, is that more a function of rate or competition? What -- I guess, what given the health of the market, I guess what's kind of -- leading to the a little bit of the slower number there?

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C. Randall Sims, Home Bancshares, Inc. (Conway, AR) - CEO, President, Director and Director of Centennial Bank [63]

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I don't know that I can attribute it to anything in particular. I mean, we have seen -- we talk about some of the crazy stuff that we hear. We're having a few more those stories in last month or so than we've had in the last few months so maybe that's part of it. But it used to be first quarter was always a really slow quarter. I listened to some of the other calls and it hasn't been for some but generally it has been for us.

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John Stephen Tipton, Home Bancshares, Inc. (Conway, AR) - COO and COO of Centennial Bank [64]

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Let me echo Johnny's comments just now on construction. I mean, the last 120 days or so has certainly been a focus on risk and reward on pricing and we raised rates little on construction and that by nature is probably going -- it has the potential to slow it down a little bit.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP and Research Analyst [65]

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Okay, would you say you're more guarded today on the growth in the kind of the core bank than you were earlier based on trend what you're seeing in the market or that's incorrect.

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C. Randall Sims, Home Bancshares, Inc. (Conway, AR) - CEO, President, Director and Director of Centennial Bank [66]

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Incorrect. I mean we're more guarded today, I guess it appears we are more guarded and I don't know how much more guarded we are today than what we have been in the past. We've always done a pretty good job of underwriting and we continue to do that. We just tighten up on the construction side and decide we're going to get paid for it. And we tighten that up a little bit. We want more money in those deals and what we'll do is just thrust some real deals which has more money in them they're going to have to be in -- underwritten in a way that will likely be underwritten. Some of that is a little tough because it changes through our company. But as life goes on, we're up in the $10 billion. So we met the $10 billion regulators and they're a little different than the $9 billion regulator. I know who they are. I know them by name now. I think Tracy named them Bud.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP and Research Analyst [67]

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Okay, that's helpful. And just maybe a couple for Brian. The -- on the accretion and the accretable and non accretable yields remain, Brian. What was that at, at first quarter? How much is remaining in each of those buckets?

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Director, CFO of Centennial Bank, Treasurer of Centennial Bank and Director of Centennial Bank [68]

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Sure. We've got $64.5 million in the accretable and we've got $40 million in the non accretable.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP and Research Analyst [69]

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Okay. And then just the last things -- those -- the elevated benefit, I guess, if you will, in the service charge line as a result of the payoffs from CFG. Now that you guys talk about kind of the cycle maybe more into the cycle because they're 2 years in now, there was a benefit this quarter that hasn't been there may be in the past. But if payoffs continue given the cycle, should that number stay somewhat elevated? Maybe not at this level -- this quarter's level but higher than it has been over the past couple of years just given that dynamic now?

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Director, CFO of Centennial Bank, Treasurer of Centennial Bank and Director of Centennial Bank [70]

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Yes, I mean, the CFG increased, if they continue with their payoffs it would be there, but keep in mind that we had $615,000 in that line item that's just a Q1 only event that would come around next year at this time.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP and Research Analyst [71]

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Okay. All right, got you. Okay. And then just like you said in the liquidity (inaudible), the impact from that liquidity on the sub-debt, that impact this quarter would be about 15. If you do have any you think you would do it by June 30, that impact is about 15 basis points of the margin in the second quarter on the core basis?

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Director, CFO of Centennial Bank, Treasurer of Centennial Bank and Director of Centennial Bank [72]

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That's correct.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP and Research Analyst [73]

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Okay. And then last one was just the core loan yield this quarter, did you guys say it was at 7 basis points of the increase linked quarter?

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Director, CFO of Centennial Bank, Treasurer of Centennial Bank and Director of Centennial Bank [74]

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That's right.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [75]

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That's right. That's just ex-Landmark and BOC so when you add them in, it was never impactful, I guess about 3 basis points to the negative.

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Operator [76]

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(Operator Instructions) And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [77]

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Let me thank you, and thank you for listening, and joining our conference call today. And we'll talk to you in 90 days and hopefully we'll have number -- Sims, Mr. Sims, can say 25.

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C. Randall Sims, Home Bancshares, Inc. (Conway, AR) - CEO, President, Director and Director of Centennial Bank [78]

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Or I won't be here.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Founder, Chairman and Chairman of Centennial Bank [79]

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Bye.

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Operator [80]

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Ladies and gentlemen, that does include today's conference call. We do thank you for attending. You may now disconnect your lines.