Home BancShares Inc (HOMB) 2009 Q4 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares Inc. fourth quarter 2009 earnings call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The Company presenters will begin with prepared remarks and then entertain questions. (Operator Instructions)

The Company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page three of their Form 10-K filed with the SEC in March 2009. 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 conference over to your first presenter, Mr. Allison.

Thank you. Welcome to Home BancShares fourth quarter earnings release and conference call. With me today is the regular crew or suspects, whatever you call them. Randy Sims, our CEO. Ron Strother, our Chief Operating Officer. Randy Mayor, the Chief Financial Officer. And Brian Davis, Vice President Investor Relations.

It pleases me to report record 2009 income for both the fourth quarter as well as record income for the year. We earned $7.9 million in the fourth quarter and $26.8 million for the year. We accomplished this in very tough economic times as you all know. As well as during the time expensing almost $3 million on special FDIC assessments and merger expenses for the year. This was pure earnings, no one-time gains, no bond sales, no smoke and mirrors, just earnings 101.

The fourth quarter run rate was very strong as it came out running a little over $15 million for the quarter. And the December month -- the month of December run rate was about $5.6 million. Those run rates are a little bit inflated. The $5.6 million was a little inflated as we had some overaccruals during the year of about $450,000. But still according to an annualized run rate in excess of $60 million.

We talked about last time, the improvement in the first quarter and the second quarter. And the second quarter to the third quarter. We've had continued improvement third quarter to fourth quarter. However, we slowed down a little bit on those expenses as we think there's some opportunities on some failed bank transactions and we have not cut our data center and we have eliminated -- have not eliminated expenses right now in quick cutting expenses because we anticipate hopefully finding something in the future. Income was up and expenses were down. That's what we wanted. Noninterest expense was the lowest in many years. Many records were set for the Company in the fourth quarter and Randy Sims will talk about these in a few minutes.

On the asset quality side in the third quarter, nonperforming assets ticked down and likewise, we ticked reserves down. This quarter, nonperforming assets ticked up and likewise, so did our reserve. Overall, asset quality was a little better in Arkansas and a little worse in Florida but not significant either way. Presently with a war chest full of cash, your Company is actively engaged in failed bank opportunities. Due to confidentiality agreements, we can only say that we're poised to move on opportunities in our markets being Arkansas and surrounding states as well as Florida. I would like to congratulate this management team on a great year and I'll turn the show over to Randy Sims, CEO.

Thank you very much. This is a very special time for Home BancShares. Last quarter, we reported record results in several areas. I am pleased to announce the momentum has continued in the fourth quarter and once again, we've experienced record results. As Johnny stated, we had net income for the year of $26.8 million compared to $10.1 million for the year ended 2008. That is improvement in excess of 31% over the previous record set in 2007. From a quarter over quarter perspective, our net income increased $17.3 million from a loss of $9.4 million to income of $7.9 million. As you might recall, the loss in the last quarter of 2008 was due to the cleanup of problem loans primarily in Florida. This $7.9 million was a record quarter end and 8.3% improvement over the previous record during the first quarter of 2008.

Diluted EPS on a quarter over quarter perspective improved $0.74 from a loss of $0.45 to $0.29. Cash earnings also increased $17.3 million moving from a loss of $9.1 million to $8.2 million. Cash diluted EPS was up the same, $0.74 as diluted EPS. Net income on a link quarter basis also improved up $642,000 from $7.2 million to $7.9 million. Diluted EPS was down $0.04 from $0.32 to 28% -- $0.28. Cash earnings on a linked quarter basis improved in the same manner as net income up $641,000 from $7.5 million to $8.2 million. Cash diluted EPS was down the same $0.04 as diluted EPS. Cash diluted earnings per share for the year ended 2009 was $1.17 compared to $0.55 for the same period in 2008. This record improvement in net income was the direct result of our ability to increase margin while controlling expenses and improving our efficiency ratio.

From a quarter over quarter basis, our margin was up 36 basis points from 3.78% to 4.14%. Due to this margin improvement, we were able to increase net interest income $2.5 million from $21.6 million to $24.1 million. This was a quarter end record for the Company and improvement of 11.5%. Our emphasis throughout 2009 was to lower our cost of deposits and hold our loan rates firm. The entire Company was focused upon getting our margin above 4% and we were successful. As a result of our stock offering and as we anticipated in the fourth quarter, we did see a weakening in our margin on a linked quarter basis moving from our record third quarter 4.26% to 4.14%. We will continue to work hard to maintain our margin over our 4% goal as we continue to see opportunity on both sides of the balance sheet. On a quarter over quarter basis, our noninterest income had improvement of $5.7 million going from $1.7 million to $7.5 million.

On a link quarter, noninterest income was down some from $7.6 million to $7.5 million as the result of a slower fourth quarter in mortgage income. Fees and service charges have continued to stay strong throughout the year. In 2009, we completed our charter consolidations plus the implementation of the initiatives from our efficiency study we've named build a better bank or B3. These initiatives resulted in improvement on a quarter over quarter basis in noninterest expense of $3.8 million to a record low of $16.2 million.

Throughout 2009, we have seen marked improvement each quarter and the fourth quarter was no exception as noninterest expense improved $859,000 from $17.1 million. Consider the combined improvement of our margin plus noninterest expense and you can see why 2009 was a record year resulting in a very strong efficiency ratio. Our Chairman asked for something with a 4 in it and I'm proud to announce we finished the quarter with a record efficiency ratio of 48.39%. When you take out all of the noise and look at the efficiency ratio on a core basis, the trend is quite remarkable going back to March month end at 59.7% to June at 56.2%, 50% at the end of September. And 49.3% in the fourth quarter.

As we look to 2010 and our goal of growth through an assisted transaction with the FDIC, we anticipate continued improvement in efficiencies will slow as we have prepared our staff and project teams for conversion and acquisition. I believe Johnny mentioned that same fact. ROA was $1.17 for the quarter end showing improvement of 5 basis points on a linked quarter from 1.12%. Cash ROA also showed 5 basis points improvement ending at 1.24% from 1.19% on a linked quarter. These improvements have allowed us to meet net income goals and fund our provision for loan loss as we continue to clean up Florida.

On a linked quarter basis, we were up $300,000, providing over $3.9 million in the fourth quarter, consistent with our $3.6 million provision in the third. As a comparison to loans, our reserve is up 124 basis points quarter over quarter and 11 basis points on a linked quarter at 2.2%. Growth in loans was a little disappointing ending at $1.95 billion with a loss of $6 million on a quarter over quarter and a drop of $21 million on a linked quarter basis. Deposits was mixed dropping $13 million to $1.84 billion, but increasing quarter over quarter, $55 million on a linked quarter, largely due to increases in our Little Rock market and from our stock proceeds. Our loan to deposit ratio ended at 106.26%. Of course, liquidity has not been a problem due to our stock issuance and capital ratios. Our total common equity increased $132 million on a quarter over quarter and $18 million on a linked quarter to $415 million resulting in very strong capital ratios.

Turning to asset quality, our nonperforming asset ratio increased 70 basis points on a quarter over quarter basis. On a linked quarter basis, nonperforming assets increased 7 basis points to 2.12% from 2.05%. We continue to work hard with the ebb and flow of loans through the process and legal system in Florida. As I said at the start, this is a very special time for Home BancShares. We have had record results during 2009 in many areas.

Net income is strong and through it, we will continue with a strong provision to our reserve for loan losses as we work through the ebb and flow of cleaning up Florida loans. Our goal of having a 4% margin has been met and coupled with our efficiency study, has produced a record efficiency ratio each and every quarter. While the economy has been slow, we have been busy improving our metrics and training our employees in aspects of acquiring significant assets through assisted FDIC transactions. Home BancShares is in a unique position and poised for the opportunities that await us in 2010.

That pretty well covers my report. I will turn it over to Ron Strother, our President and COO. Ron, can you give us an update on the loans?

Thank you, Randy. As we've discussed through the year, loan volume has not shown much growth. As Randy indicated in Q4 '09, it showed some seasonal paydowns on ag rite and a municipality that took its debt to the bond market. Resulting in a decrease of $21 million. Activity has begun to pick up in our Little Rock market and is showing a good pipeline; single family construction is showing some pickup as the employment base expands.

Let me touch on mix. Real estate loans continue to move up slightly. In the portfolio. Because of the ag rite showing the decrease, it is now 84.9%. Randy touched on the asset quality numbers. NPAs did move up about 7DP. Net chargeoffs were $2.1 million for the quarter. We put about $3.850 million into the provision for loan loss resulting in the allowance for loan loss moving up from a 209 to 220. As Randy indicated, the Florida credits continue to move through the collection process. The good news is we have entered the season and all indications are that activity is brisk. Randy, that concludes my comments.

Thank you, Ron. Good report. We will now switch to our CFO, Randy Mayor, to tell us a little more on the margin. As our Chairman has said before, Randy has been predicting a drop in margin for about five straight years. And guess what. He's finally right. Randy?

Well, I was finally correct. The net interest margin was down for the quarter. As we predicted last quarter's offering proceeds did have a negative impact on the margin as it declined 12 basis points from 426 Q3 to 414 Q4. Loan yields remained relatively stable at 6.03 down slightly from 6.05. Loan activity as has been mentioned was relatively slow for the quarter. Average balances declined about $20 million. Investment yields declined 15 basis points from 523 to 508. Most of this was the result of roll-off and replacement of bonds in the portfolio. Along with a little bit of increase in the portfolio as we tried to utilize some of the offering proceeds. However, we're still not really seeing anything attractive in that area and we continue to keep our position very short. Deposit yields continue to improve, interest bearing account yields improved 7 basis points from 0.68 to 0.61. Time deposit yields also improved 26 basis points from 252 to 226. We still see some opportunity for improvement in these yields as long as the market continues to price funds reasonably. However, we believe the magnitude of the opportunity does continue to decline.

Our home loan bank borrowings declined about $15 million for the quarter. We have approximately another $30 million that will mature during Q1 with an average rate around 3% which should provide some help in the margin. That wraps up my report, Randy.

Thank you. I think we've covered everything. So, I will turn it over to our Chairman to sum up the results of the fourth quarter. Johnny, did we leave anything out?

Randy, I think you guys covered it well. Good reports from you. Just kind of summarizing here. Our job is to continue to hit records, records, records. That's our job. We're getting that done. With a record quarterly net income, record annual net income, record annual diluted EPS, good job with the efficiency ratio, guys. You did show us a 4. I'm pleased with that. We need to hold it with a 4 in front of it. I'm afraid we may creep back up as we have stopped cutting expenses due to the fact that we're getting a little thin and we hope to acquire some additional assets here pretty quick.

Record net interest income looks good. The moves we made, the Company made has worked for us. Strong loan loss reserves up to 220 now. Probably the best capital position on the tangible common equity in the nation. So, we're pleased with that. Good year. Hope '10 is as good or better year. I hope we have an opportunity to pick up some assisted transactions because we're working on those now. I think we will be successful at some point in time. That wraps it up pretty well for me. At this point we're ready for question and answer, and if you're there and can queue us for Q&A we'll be ready to go.

Yes, sir. (Operator Instructions) The first question we have comes from Jon Arfstrom from RBC Capital. Please go ahead, sir.

Good afternoon, guys.

Hi, Jon.

Hey, Jon.

Nice job here. Nice job.

Thank you.

Couple of -- there is a lot of questions here that we can ask but I guess maybe starting out maybe Ron Strother on the loan pipeline. I understand some of the seasonal changes in it. But you talked a little bit about some -- the backlog strengthening a bit. Could you talk a little bit more about that in terms of what it is and where it is and how optimistic you are on that?

Yes, the Little Rock market has done a great job in cultivating some relationships, Jon, that have been out there for quite awhile. As the movement of some of the banks in Little Rock, those are paying off. And the single family side, because of the influx of HP up here and the smaller homes over in the northeast part of the state, those are coming to fruition at this point.

We're seeing our Little Rock bank [merge its] operation has probably the biggest backlog we've seen in the Company in awhile. So, whether we get them all closed or not remains to be seen. But it looks like Little Rock, we're seeing some good activity in Little Rock.

Okay. And the construction growth. Can you talk a little bit about what it is and where it is to help us understand that?

We have some projects here in Conway that are related to multifamily and those continue to fund out. They're very close to the university. And then on the single family side, there is a deficit of housing and the construction is coming from there.

We have two large projects in Conway.

That's primarily what you're seeing hold up there. As they pull their lines up on those.

It is still just next to nothing in terms of vacancy in Conway?

There is no vacancies in Conway.

Okay.

There are no vacancies in Conway.

Okay. That's great. In the P&L in some of the details, it looks like there was a small REO gain. I just -- maybe if you guys could expand a little bit on how you think your marks are in terms of your nonperformers, I know you're pretty aggressive on that but it is good to see some of the REO move at a gain. I'm curious about the marks. I'm curious how active you think you'll be in 2010 trying to move some of these out?

We have -- we rode it pretty hard this time last year, if you remember, Jon.

Yes, I remember.

And my statement was, I couldn't get the stopper out of the bathtub. It was filling up with nonperforming assets. I couldn't get the drain open to get it to REO to get it sold. We had a good flow in the third quarter and in the third quarter, we had a gain on OREO. It is not as significant as I wanted the gains to be. I thought we wrote them enough that we might have bigger gains. But we went through the slow time in Florida and we had a little gain this time. So, we're pretty aggressive on that. This quarter will be -- the first quarter of this year will be a lot of movement into OREO from out of nonperforming as we finally got through the court system with a bunch more in Florida. And on the bright side, we're in the good season down there and we're seeing more offers on our OREO stuff right now than we've seen in some time. That's because it is the season. We got through the tough season. The second -- the third quarter mainly it is the slow time. We picked up one nonperforming asset for about $2.8 million. So, that was really the switch in there. We were pretty pleased in the slow time and that's what we picked up. So, things are looking up there. We had a little cold spell. The cold spell hit Florida and hurt it a little bit. Prior to that, it was booming again. The Keys were absolutely booming. So, maybe they'll be back again this year.

Okay. Okay. Then just last question, any thoughts on TARP?

Well, no. Not really. It is hitting our EPS, hitting our income. I mean we're sitting on a lot of cash right now. We're sitting on -- we have lots of liquidity, about $150 million in liquidity and we've got that invested at 0.25. We're doing well on that, if you understand. But we don't want to go out too far because we are actively engaged in opportunities. So, we want to remain as liquid as we can. It will have a short term earnings impact but we may need that money. So, I guess you saw where we filed a $200 million shelf last Friday. We're really getting ourselves prepared for some opportunities.

Okay. Fair enough. Thanks, guys.

The next question we have comes from Andy Stapp of B. Riley.

Hi, guys, nice quarter.

Thanks, Andy. Good to have you with us.

Thank you. Could you provide some color on how early stage delinquencies and the watch list compared to Q3?

I don't know. Our officers did an absolutely outstanding job at quarter end, Andy, in reducing the past dues and what you're seeing is the movement through the process of those nonperformers and in the early stages, our guys did an excellent job.

Okay.

It was flat. Basically flat, Andy.

Okay. And did I understand you correctly I presume you're planning on building the reserves, going forward? Is that throughout the year or what are your thoughts on that?

Probably.

Probably?

Probably will. Once the skies clear, we'll probably run -- you'll probably see us running the $150 million, $160 million. We'll always err on the conservative side of loan loss reserves but we'll wait until the skies clear before we do anything else.

Okay. And give me a sense when you think NPLs might peak?

Oh, we've seen a little deterioration. We had about $1.5 million credit in Arkansas that went nonperforming for the quarter. We've seen a little deterioration in Arkansas; as good as it has been, it has been virtually nothing. We've seen a little deterioration here. We're just continuing to ebb and flow in Florida. So, I think I may call that -- I may be -- if you've heard me present in the past, I said I want to look at the first quarter of '10. So, we may be -- we may be approaching something there. We may be getting closer.

Okay, great.

Just like the one that popped up in Florida, I didn't expect that one to pop up and it did. That was really -- last year, they were popping up right and left. This year, they're just popping up occasionally.

Right. Right. And could you provide some color on your outlook for the net interest margin going forward?

Randy, you want to talk about that?

Yes. We still see a little bit of opportunity for improvement as I said in my remarks there.

Right.

Just, for instance, most of it still is coming from the time deposit side. We have about $700 million at 2% coming off over the next 12 months. We've written in the last quarter or so about a 154 average rate. So, there is still a little bit of improvement on the time deposit side. Loan side is pretty much just trying to hold it consistent there.

Okay. And then as the fed begins to increase rates, are you sufficiently asset sensitive to offset the impact of interest rate floors and loans?

We're a little over 12% asset sensitive now. So, we're positioned for rates to go up if and when.

Even at the outset, you should get a boost in your margin?

Yes, we do have some loans that are floored that won't get that pickup. But that's only about $250 million. We still should come out positive if the rates go up.

Okay, great. Thank you.

The next question we have comes from Matt Olney from Stephens Inc.

Hi, guys. Great quarter. I wanted to discuss the NPL inflow. It was pretty modest in 4Q and I think Johnny mentioned maybe a $2.8 million credit in Florida. Maybe another one in Arkansas. Any more color there in terms of where the credits are or what kind of credits they were?

The Florida credit was a mixed use credit. Beautiful piece of property. Somebody ought to buy that. It has -- it's right on the ocean, it's a little house on the ocean, swimming pool, putting green and a gorgeous dock. And in front of that is an apartment house. In front of that is a commercial building. So, it is income producing so it is a pretty nice piece of property. That's what we picked up in Florida.

The $1.5 million Arkansas credit was really a C&I loan. We may charge that off the first quarter of this year. Maybe, maybe not. We've got security. It was on a shopping center that looked like it was going to fail and then they've had really some great tenants come in recently. So, maybe it will work. Maybe it won't work. I don't know. If it works, it appears right now, it is going to work. But it may be later when it comes to fruition. So, we'll probably charge it and get rid of it. We already had $1 million reserve on it. We took last year. And we thought it might heal up.

We're looking for a secondary source.

We're looking for a secondary source of repayment on that deal. That's it. That was the two credits for the quarter.

It doesn't sound like there were any new themes that were concerning that weren't there before at all?

No.

These have been identified, Matt.

These have been identified. Both of these credits have been identified by our asset quality and our loan team and our management team. We had specific reserves -- actually, the one in Florida. We had a specific reserve on.

Okay, great. And then secondly, I think Johnny touched on this in his opening remarks. How concerned are you about cutting too much fat so that when growth does come back, you may not be prepared for it. Can you give us some more color on that?

I'm not concerned about cutting too much fat so when growth comes back we're not prepared for it. If we were to acquire $1 billion or $2 billion worth of additional assets, then we've got a team of about -- our deployment team is about 70 people. So, we would cut -- count it to the bone there. We're getting pretty close. We said well, we better hold up here a little bit. So, we have. That's the reason you didn't see as drastic a cut in the fourth quarter as -- drastic improvement in the fourth quarter as you saw in the first and second and third quarters because we just backed up a little bit to be prepared to hopefully have an opportunity in the future.

Sounds good. Thanks guys.

The next question we have comes from Dave Bishop of Stifel Nicolaus.

Good morning, afternoon, gentlemen.

Thanks for joining us.

Thank you for having me. In the opening remarks, Johnny, I think you spoke about the run rate for expenses. Was there some sort of reversal that occurred in the fourth quarter?

We had -- it was a -- the December month was right at about $5.7 million on core basis. That was about $350,000 hot that we had some accruals that we had done during the year that we had overaccrued. We rolled those in the fourth quarter. So, the actual run rate on a core basis was in the 5.2, 5.3 range for the month.

Okay. Will we see the typical sort of true up or re-upping of FICA taxes, social security and such in the first quarter. Will we see pressure on maybe salaries and such as you start accruing again?

Yes, probably a little bit.

Okay. And maybe this is probably an obvious answer here but you alluded to the shelf offering there. Has your appetite or capacity sort of increased as of late now that you've seen some of these deals come through the pipeline? Can we expect maybe a -- if something does get done here, multiple deals, or something a little bit more sizable than maybe you've contemplated before?

We have -- let's see how I answer this, I'm under confidentiality. I'm trying to figure out how to answer this. Without getting myself in trouble. We have a nice number -- we have the ability to reach out and pick up several billion dollars worth of assets. And there are some pretty good size transactions that are out there that we qualify for. And in the event that we qualified for those big transactions, the regulators Mac asked us to -- asked us if we have the ability to raise capital and we want to be prepared to hit the street and raise the capital if we need be. Does that answer your question?

And then a follow-up question there in terms of the -- you mentioned in terms of Florida, maybe some of the court systems freeing up there a little bit. Are you seeing sort of the backlog in terms of foreclosures or just bankruptcies? Sort of plugging through the systems that's starting to peak or trickle down or reaching some sort of flow here?

You can see we would like to have it on OREO where we can sell it. Kevin Hester who heads our loan team, as I said earlier, talked about the number of offers that we are seeing come in right now in the peak season. We just got to get this stuff from nonperforming into OREO. And it should be a pretty good quarter for us move in this quarter. We should be able to move a lot of it in this quarter.

The next question comes from Derek Hewett of KBW.

Good quarter, guys.

Thanks, Derek.

A quick question on restructured loans. I know that part of the business and we really haven't seen any kind of material migration into NPL status, is that still the case? And kind of directionally, where do you see those restructured loans coming in after the fourth quarter?

I think we had -- I think the loan that came in was restructured. Was that right, Kevin? It was restructured. The $2.8 million in Florida was restructured. The $1.5 million that came in from Arkansas was not. So, it is holding pretty good. The reconstructed loans actually are doing pretty well. You don't need a good ocean front piece of property, do you?

I'm not in the market currently.

Okay.

And then could you provide just a breakout by geography in terms of where the OREO assets are?

I've got that. OREO asset, the $16 million that we have in OREO. $10.6 of it is in Florida and $5.8 million of it is in Arkansas. As far as the renegotiated loans, I will add one more piece of color in that I was looking at what we probably have in our call report unless they change the number on me, it is probably going to be down about $1 million from the last quarter.

Okay. Wonderful. Thank you very much.

The next question we have comes from Kevin Reynolds of Wunderlich Securities.

Hey, Kevin.

Good quarter. John, I have a quick question for you. I've heard you say confidentiality agreement a number of times. You may not be able to answer but I'm going to try it anyway. You said pretty quick and significant assets and acquisitions. Can you help me sort of tighten up what pretty quick means? So that I can figure out whether I need to stay late tomorrow or I might be able to take a weekend off?

So, all you want to know is if we're bidding and what we're bidding and what our bid is and how we're going to get it.

Yes, pretty much.

You're not going to get that one. I just want you to know that we're in the game. We're actively engaged.

All right. Thanks a lot. Good quarter.

Thank you.

Gentlemen, we're showing no further questions at this time. Would you like me to give the instructions again?

No. That's fine. If nobody has any questions, I just would like to say it was a pretty good clean quarter. I appreciate -- we had a lot of people on the call today. I appreciate your attendance. I appreciate your support. And I appreciate this management team, what a job they've done this year and what we're expecting (inaudible). Hopefully the first six months will be some exciting times for this Company and we look forward to talking to you in 90 days. Thank you.

Thank you, gentlemen for your time. The conference is now concluded. We thank you for attending today's presentation. At this time you may disconnect your lines.