Home BancShares Inc (HOMB) 2013 Q2 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares, Inc. second quarter 2013 earnings call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The Company presenters will begin with prepared remarks, then entertain questions.

(Operator Instructions)

The Company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page 3 of their Form 10-K filed with the SEC in March 2013. 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.

Thank you, Amy. Welcome to Home BancShares' second quarter earnings release and conference call.

With me today are the two Randys, Sims and Mayor, Donna Townsell, Brian Davis and Kevin Hester, and you'll be hearing from all of them. This has really been a busy quarter for our team, not only to maintain our strong and expected performance, but along with the announcement of the Liberty transaction, which added an additional $2.9 billion worth of assets. Having worked on the Liberty transaction for 10 years, I wasn't real sure it was going to come to fruition.

We continued to work on other opportunities -- more Florida opportunities and Arkansas. I think I told you at the end of the last conference call that we were leaving to go talk to seven banks in Florida, and we did, and we found some really great opportunities there. Maybe we'll get back to those at sometime. I wasn't sure the Liberty deal was going to close until it happened. It is kind of like a fading girlfriend that I had years ago. She would kind of fade in and fade out.

This one got -- would get hot, and then it would disappear. I'm just going to kind of cover some of the -- that's about as good an example as I could come up with. I don't remember her name though. (laughter)

I'm just going to hit a few highlights, and Randy Sims and the team will get more specific on the number, but we had a record ROA this quarter and also record core ROA. The numbers are really pretty nice. Efficiency ratio was extremely strong, and we had improvement in our legacy asset quality. Actually, we had asset quality numbers ticked up a little bit, but that's as a result of Tallahassee and Tampa, the two deals we did. And that's to be expected as we work through there.

Had a little loan growth, showed a little bit. I think the end of period was much stronger than the average, but Kevin will talk about that sometime today. Also pretty strong pipeline. Interest income remains strong, and the margin, as you'll see, remained very strong. And return on tangible common equity was again strong and earnings of $17 million, $0.31 a share.

Liberty, talking a little bit about the Liberty deal, it was a great fit for Home. They have great people, operating in great markets and great facilities, and truly is a game-changer deal for Home BancShares. Potentially, it's Home's best deal ever. Some -- that depends on some things, how long it takes to bring it to our standard and did we miss anything on the asset quality side at Liberty -- hopefully we didn't.

But I told you last quarter that we had more opportunities than we had time and money. And again, some of those deals are still out there.

Maybe Randy Mayor said -- Johnny, you waited eight days till you brought another one, but that's not really true. We're looking. We're looking at some opportunities and running some numbers. And my job is to focus on those deals that make the most sense for us long-term.

We didn't buy any stock this quarter because we were saving our money for a rainy day, and it looks like we found a rainy day. It looks like we found a deal. I think I told you last time we're going to keep our powder dry, and we did do that, and we will use our liquidity to help with this transaction, and Brian Davis will talk more about the numbers today on that.

On the dividend side, we have fallen -- our stocks run up, we're a little below our 1.5% kind of semi target that we had. We're not going to catch that up now, I don't think, because we need our money for these transactions. It's our intention to pay off $52.5 million of small business lending at Liberty once that transaction closes, and $30 million in cash. So we're kind of sitting on our cash right now.

But all in all, it was a great quarter. Great opportunity, with the Liberty deal that -- again, it was a game-changer deal that I've looked at for some time. I'll turn it over to our CEO, Randy Sims, for a better look at the numbers.

Thank you, Johnny. Well, as you said, a good quarter and a very exciting addition to Home BancShares.

Once again, this was the most profitable quarter in the history of our Company with an ROA of 1.71% that resulted in an increase in earnings of $111,000, or 0.6% above our previously reported earnings. Nine consecutive quarters of record earnings. And, as Johnny has already discussed, the big news is the acquisition of Liberty BancShares. Upon completion of the transaction, the combined company will have approximately $7.1 billion in total assets, $5.6 billion in deposits, $4.5 billion in loans, 151 branches, 186 ATMs, and 1500 employees across Arkansas, Florida, and southern Alabama.

The merger will significantly increase the Company's deposit market share, making it the second largest bank holding company headquartered in Arkansas. And there's some more. It is the largest in-state banking transaction in the history of Arkansas, and the combination will double the number of Arkansas branches for Centennial Bank from 46 to 92 locations. Centennial's strength is central and north central Arkansas, while Liberty's presence is northeast, northwest, and western Arkansas.

So the association of Liberty with Centennial is the perfect fit to provide more convenient locations to our Arkansas customers. We're on a fast track to get the transaction completed, closed and converted before the end of the year, if all goes to plan. Yet to be completed is the regulatory and shareholder approvals, and then of course, there is the back room and IT conversions.

However, as you have heard us say before, we believe the conversion is essential to the process of improving net income growth, so we're going to waste no time in trying to get it done. And in the case of Liberty, we are very optimistic the deal will be completed and approved, and we have already started the planning process for the conversions.

While this acquisition is the largest in Centennial history, there are some distinct advantages to both institutions in that the merger is of two similar sized Arkansas-based companies with comparable cultures and history, with very little overlap of markets, as Johnny talked about. In fact, both Liberty and Centennial initially met together to discuss best practices and processes during the early years of startup as banking organizations.

Both institutions are on the same FISIT system. This will eliminate a great deal of staff training that normally occurs with other conversions. Many of the supporting systems and IT architecture are similar. For example, we both use the same third party vendor for many of our ancillary software.

Branch operations and processes are very similar, and both institutions have instituted many of the same protocols through the use of the same systems. Both banks are organized in similar fashion and managed by market presidents and supported by the calling efforts of business development officers. Our lending culture is similar, especially in the area of processing. For example, we are both using the same loan offering memorandum. There are many more similarities, but this is just a few to show you that it will make a difference, as both institutions are merged together and it will be a little bit easier for us all.

And with that said, and even though it has been announced, I would like to welcome Davy Carter as he joins our executive team as a new regional president. Davy has been with our bank for many years and has had extensive experience with our acquisitions. He left us for a brief period to become Speaker of the House for the state of Arkansas, but has now returned to lead our efforts with the Liberty acquisition. We are very pleased to have him back and the leadership he will provide us.

Kind of switch, in other news, I would like to announce that on July 1, we opened a new branch in Seagrove, Florida, right in the middle of the very busy area known as 30A. If you're not familiar with this, it's the stretch of beach coastline that starts just outside of Sandestin and runs down through residential, condo and retail establishments. This positions us with a real presence in the most active area of the panhandle. In addition, this past Monday, we opened a new branch facility in Destin, moving from a location in a strip shopping center to a stand-alone branch bank right on Highway 98 in a great location.

Continuing with more organic growth, if you recall, I announced last quarter a new loan production office that was opened in Pensacola, Florida. I stated that we had hired a local team of experienced long-time bankers.

I am pleased to be able to announce the loan production office located in downtown Pensacola is now a full-service branch. And we have been having very good success with new accounts and a healthy loan pipeline in addition to over $8 million in loans already on the books. And Pensacola is expanding, with a second branch scheduled to open on July 22. We are very pleased with the initial results of our new presence in this town.

Okay. Let's switch to income and the key components of the record numbers that we hit this quarter.

First of all, net income. The quarter net income was $17.7 million, or $0.31 diluted earnings per common share, and don't forget the two-for-one stock split when looking at EPS. And that was compared to $15.5 million of net income, or $0.27 diluted earnings per common share for the same quarter of 2012.

The Company increased its second quarter earnings by $2.2 million, or 14%, for the three months ended June 30, 2013 compared to the same period of the previous year. Diluted earnings per common share excluding intangible amortization for the second quarter of 2013 was $0.32 compared to $0.28 diluted earnings per common share, again, excluding intangible amortization, which is split adjusted for the same period in 2012.

As stated earlier, return on assets ended at 1.71% compared to 1.53% at 6-30-12. Our ROA excluding intangible amortization ended at 1.80% as compared to 1.61% for the same quarter in 2012. Core ROA, again a record, as Johnny said, that excludes intangibles, provisions, merger expenses and taxes ended at 2.93%.

Our return on average TCE excluding intangible amortization was 16.65%, as compared to 16.05% for the same quarter in 2012. Our Arkansas banks continue to produce high performance results, and we are very pleased with the progress from Florida and especially Alabama. In fact, just based upon internal numbers and internal numbers alone, we are seeing ROAs in Florida in excess of 1.2% and Alabama in excess of 1.60% on a year-to-date basis.

At the Centennial bank level and on an internal analysis, 50% of all the assets are now in Arkansas, 5% of the assets are in Alabama, and 45% of the assets are in Florida. Contributing to these numbers was our ability to control our expenses and improve throughout the year. We ended the quarter with a 45% efficiency ratio, or improvement of 124 basis points from the same period in the previous year. We continue to be pleased with our efficiency ratio.

In fact, I'm going to turn it over to Donna Townsell, our VP for Corporate Efficiency, to give us a little more information on it. Donna?

Thank you, Randy. As I mentioned last quarter, we have six different internal teams that continue to focus on process improvements and cost savings ideas. They are about 50% finished with their list of 190 action items, and it seems also that the regions have almost created an internal competition to see who can report the best efficiency ratio each month. And that is evident by our quarter end number of 45%, a job well done by all.

We will work to complete our open action items while the Liberty transaction gets closed and converted. Once that's complete, we'll then be in a place to review opportunities.

Liberty is running about a 58% efficiency ratio. If we can get them to low or sub-50%s, we're looking at approximately $10.9 million in savings. So while it's too early to define any specific efficiencies regarding the Liberty transaction, we're very excited about the opportunity, and we will be ready to go when the time is right.

Last quarter, I also mentioned exploring ideas on revenue generation. We will probably not make any big moves on that front until we convert Liberty. They have some good products and services and we have some good products and services, so it makes good sense to look at our collective offerings and see what improvements we should make as a $7 billion organization. So we'll likely hold that initiative for 2014.

Randy?

Thanks, Donna.

Switching to deposits, we ended the quarter at $3.33 billion compared to $3.46 billion as of March 31, 2013. We continue to eliminate non-customer time deposits throughout the system of branches, and we'll do the same with our new acquisitions.

Time deposits represented 36.8% of total deposits as of the first quarter end of 2012. At the end of this quarter, it was 25.8%, and we still have a little work to be done with our Tampa and Tallahassee acquisitions.

I'm going to switch again to the most important component of our net income, net interest income, margin, and non-interest expense. And who better then to tell us about that than our CFO, Randy Mayor. After that, he'll pass it to Brian Davis to give us some information on our capital.

So let's go to Randy Mayor.

Thanks, Randy. As mentioned, our ROA remains strong for the quarter, improving slightly from 1.70% to 1.71%. Our core efficiency also improved 63 basis points from 46.39% to 45.76%. Net interest income increased slightly in the quarter, along with our net interest margin, which improved 3 basis points from 5.15% to 5.18%.

We did have some additional accretion income of $493,000 for the quarter, due to the closing out of a pool of loans associated with the Key West Bank acquisition. The NIM adjusted for this would have been 5.12%.

The yield on earning assets declined 4 basis points from 5.58% to 5.54%, while the yield on interest bearing liabilities improved 7 basis points from 0.52% to 0.45%. The yield on our non-covered loans declined from 6.11% to 6.04%, while the yield on covered loans increased from 10.3% to 10.78%. The yield on time deposits continued to improve, declining 7 basis points from 0.69% to 0.62%.

The average balance for non-covered loans increased approximately $6.5 million for the quarter, while ending balances increased almost $30 million. The average in ending balances for covered loans decreased approximately $28 million for the quarter.

Non-interest income improved $780,000, with service charges increasing $379,000, and mortgage lending income improving $247,000. Insurance commissions were down $235,000, which was offset somewhat by $231,000 return on a venture capital investment. We also saw gains of $379,000 on the sale of two branches in the Tallahassee area, and an increase in the gain on the sale of OREO of $355,000.

In the second quarter, we had an $111,000 gain on the sale of securities. The accretion of our FDIC indemnification asset reduced our non-interest income by $291,000 more in Q2 than in Q1, with $394,000 related to the Key West pool mentioned above. Also, if you recall, in Q1, we received a $326,000 death benefit related to a golden policy.

In the non-interest expense categories, we saw salaries and benefits remain consistent, while occupancy and equipment increased $300,000, which was offset by a reduction in data processing expense of $279,000 related to the lower processing costs due to the conversions of the Premier and Heritage acquisitions. Other expenses overall remained consistent, despite some changes within the particular categories. Advertising expense was down $573,000 for the quarter, and the reduction was offset by increased expenses in several of the other categories associated with the addition of Premier and Heritage. With the two-for-one stock split effective in Q2, we kind of had to retrain ourselves in thinking about EPS, but it also remained consistent at $0.31 per share for the quarter.

With that, I'll turn it over to Brian.

Thanks, Randy. During the second quarter of 2013, we paid out dividends of $4.2 million, and grew retained earnings by $13.4 million. For Q2 2013, our Tier 1 capital was $436.5 million.

Total risk-based capital was $475.4 million, and risk-weighted assets were $3.1 billion. As a result, the leverage ratio was 10.78% compared to 10.37% in the previous quarter. Tier 1 capital was 14.04% compared to 13.78% at 3-31, and the total risk-based capital was 15.29% compared to 15.04% at 3-31.

Additionally, during the second quarter of 2013, we completed our two-for-one stock split. As such, book value per common share was $9.49 compared to $9.40 at 3-31. Tangible book value per common share was $7.78 compared to $7.67 at 3-31, and the TCE ratio was 10.9% compared to 10.5% at 3-31.

Randy?

Thanks, Brian. Last on the list today is loans. With both the Premier and Heritage acquisitions, our asset quality metrics moved up a little, but we continued to post very strong numbers.

And the good news is a very healthy loan pipeline going into the third quarter. So with that, I'm going to turn it over to our Chief Lending Officer, Kevin Hester that will give you all the details. Kevin?

Thanks, Randy. I appreciate the opportunity to discuss our efforts in the lending area in the second quarter.

Our non-covered, nonperforming asset ratio increased slightly from 1.21% to 1.30%, as did our non-covered, nonperforming loan ratio from 1.12% to 1.33%. These increases were completely due to changes in the two most recent loan portfolios acquired.

Most of the issues came from the heritage acquisition in Tampa, where maturities and changes in servicing philosophy have led to an increase in non-performings. This was not unexpected and has been experienced in most of our failed acquisitions. We are aggressively addressing each situation, and we anticipate an improvement in this area over the next couple of quarters.

Our allowance for loan losses as a percentage of non-covered loans declined slightly from 1.83% to 1.73%. However, if you added the Vision, Premier and Heritage acquisition discounts to the allowance for loan losses, the combined figure would be 4.99% of non-covered loans at June 30, 2013.

Non-covered real estate-owned decreased from $18.9 million to $16.0 million in this quarter. The share related to Arkansas properties increased from 65% to 67% on a linked quarter basis. Net charge-offs were 45 basis points in the second quarter, which is very close to our average for the four previous quarters.

We were able to generate a net increase in non-covered loans in the second quarter of $30 million, which equates to an annualized growth rate of 5%. This means that in three of the last four quarters, we've been able to generate non-covered loan growth of 5% or more on an annualized basis. We are encouraged by this trend, and our loan pipeline is as strong today as it was in late 2012.

One issue that we continue to face is seeing our loan approvals shot to other lenders who do not share our pricing discipline. We are remaining diligent in attempting to achieve loan growth without severely impacting our margin.

Secondary mortgage lending is particularly strong in 2013, with closed loans up 33% over the same period in 2012, which itself was a record year for our bank. While the recent uptick in rates can temper that somewhat, the improved coastal markets in Florida are providing a better than average level of purchases. This improves our probability of sustaining strong mortgage results into the latter periods of this interest rate cycle.

On the acquisition front, we are beginning to process the upcoming Liberty transaction, and we will be working with their lenders and staff over the next quarter to prepare for the anticipated closing. We are excited about this opportunity to combine our successful lending efforts.

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

Thank you, Kevin. This is really shaping up to be a great year for Home BancShares. Record income for the ninth consecutive quarter, branches opening, and, of course, the Liberty acquisition that will take us to over $7 billion in assets. We are very excited about this opportunity of adding a great banking organization, with very talented bankers to the Home BancShares family.

With that, I'll turn it back over to our Chairman, Mr. Allison. But before I do, I would like to say that the closing on Liberty is going to coincide with our 15th birthday as an organization. I just want to thank you, Mr. Allison, for your vision and where you're taking us -- and wow, $7 billion, who would ever think that out of Conway, Arkansas?

Thank you. We really didn't set out to do this, did we Randy?

No, sir, we didn't.

We were going to build a little small $300 million or $400 million bank in Conway, but in came the opportunities. So congrats to all. Amy, I think we're ready for Q&A.

(Operator Instructions)

Jon Arfstrom, RBC Capital Markets.

Hey. Couple of questions. But, you've all touched on Liberty and how excited you are. It's been a few weeks since the announcement. I'm just wondering, how is it going so far? Any fallout? Any positive surprises? Just some more detail would help.

Sure. Thanks. Actually, in the early stages, it appears to be going very well. We have filed an S-4, and the Liberty team really stepped up, kind of above and beyond being a private company; they are not familiar with all the requirements of a public company. But we were able to get it filed in 2.5 weeks, and we are proud of our team and their team. We'll take this with a deliberate process and use the best practices, regardless of where the people are or whether it's Liberty's practice or our practice. I think I said earlier we don't intend to slash and burn, but attrition kind of helped us along.

Remember, Liberty is really a good bank, and it's the largest one we've ever done. So we'll kind of take our time as we go through this. And the completion of the mergers is contingent upon the approvals, as you all know. While I appreciate the faith of the market, we still have to close this deal and then convert it. We're scheduled for late December -- early December. Excuse me.

Early.

Early December for conversion date. And if we miss that due to an FAS blackout, due to Christmas and end of the year accounting, that will cost the Company millions of dollars because we don't be able to get it done until late the fourth quarter or early the first quarter so. We're pushing hard for that December date. Hopefully we can get it done. I actually think the stock's gotten a little ahead of itself.

Don't get me wrong. This is a great deal, and I'm not throwing water on a burning flame, but sometimes I think you guys have more confidence than we have in ourselves. I expect, if the investment world liked this deal, that we would probably see some upside in the stock, but I didn't really think it would have quite this much. I really don't like it getting that far ahead, but we'll get it fixed over a period of time, and the answer to your question is overall, it's really good. And I don't think we've had any -- Randy Sims, any surprises that, positive or negative, other than the quality of the people is better than we -- we knew it was good, just better than we thought.

Yes, sir. I've been to all 49 branches as of yesterday, and very surprised with the talent of the people. Very nice branches, in great locations. So pretty high on that. But initially, we're just getting started, and we got a lot of dates to make.

We've had an initial very good success in getting the S-4 in as quick as we did, but as you said, we've got to make that December 6 conversion date, which means we've got to get regulatory approvals. We've got to get the SEC to sign off on the joint proxy. We've got to have shareholder meetings. And if we miss it, it is going to fall over until March because of processors and end of the year and just the timing of it. So we don't want to leave money on the table, and we're working as hard as we can to get there. But in all honesty, that could happen. But right now, things look great.

Okay.

I hope I balanced that.

Jon?

That's helpful. So plan A is to try to work hard and get it done on time. Plan B is we just -- I guess you're warning us and saying we got to be a little bit cautious with some of our assumptions.

That's, I think that's true. We want to get it in and get it done as quick as we can. And as Randy Mayor said, it was eight days before I brought him another deal to look at.

You're like when I put my kids on timeout. You're kind of sitting in the corner, you can't do anything.

I want to play. They don't let me play. (laughter)

Yes. Just, Kevin, maybe a question for you. Looks like it's commercial -- in terms of your growth, it's commercial and construction driven. Can you maybe walk through the characteristics and the geographies of where you're seeing some of that strength?

The pipeline is -- we were looking at it just a little bit before the meeting. And it's about 50/50 between Arkansas and Florida, and it's a mixture. In Florida, it's money coming out that's, kind of been on the sidelines. And you've got growth in construction going on down there. And in Arkansas, it's moving things around from other places in some cases. But it's, it's a mixture. It is real estate-related, and it is in both Arkansas and Florida.

Okay. All right. Thank you.

Michael Rose, Raymond James.

I think this question would be for Randy Mayor. Just wanting to get a sense on the margin this quarter. I think you mentioned there was $493,000 from the closeout of a pool. If I do the math, looks like that added 5 basis points to the margin this quarter. Can we just kind of get an update on the remaining accretion and what the kind of core NIM looks like and what it did quarter to quarter versus the reported NIM, and then how you think the Liberty deal could impact the margin on a go-forward basis. Thanks.

Sure. Yes, that was about $500,000 that did add into there. And it bumped up our yield somewhat. We continue -- if you take that out, I think we had on our non-covered the 6.04% which was down from 6.11% We continue to see some of the pricing pressures, as Kevin said, especially in Arkansas when we shifted loans around.

So -- and on the -- as far as the deposit side goes, we had some good improvement there. But I don't know that we could go much farther. I know Johnny's going to say I've been saying that for a long time, but I don't see much more room on the liability side to improve that, our -- we paid them off and that did help us somewhat this quarter. But I would expect that we continue to have some pressure on the margin as we move forward here, just from -- we don't have much room on the liability side to improve that. And the loan competition rates on the asset side.

This is Johnny. We're seeing -- we're still taking them one at a time, and we're not throwing the credit cards out. So we're fighting that battle, but we fight it every day. And there is -- you would think that with 10-year rates jumping the most they have jumped -- the fastest they have jumped in 26 years, somebody would recognize the fact we're probably going to have higher rates, and maybe sanity would return to the market, particularly in Arkansas. I suspect that's going to happen here before long, probably in the next 59 days. We're getting a lot of pressure. What did you say, Randy, it would have been down 5 basis points? Is that what you said?

It actually would have been down 3 basis points.

3 basis points it would have been down. Good question. It is a battle, and we are fighting it.

Okay, and that's a good segue to my follow-up. Looks like mortgage income quarter to quarter was stronger than I would have anticipated with that rise in rates. Can you comment there? And then also, maybe why insurance income was down quarter to quarter as well. Thanks.

From a mortgage standpoint, we're -- especially in the Florida market, we're in areas where things are picking back up, and you've got a lot of construction and a lot of purchase activity still taking place. So I think that's probably the benefit of our mortgage group, our mix, purchase versus refi has historically been better than the market. So I think the more people we're putting down the panhandle, it continues to be that way.

That was what I was going to add. We are -- we had beefed up our mortgage team, especially in the Florida market, and I think we're starting to see some of those results from additional hires.

And on the insurance question, typically the first quarter is a strong quarter for the insurance company, with annual renewals coming in. So that's nothing unusual.

That's the same, same as last year, Mike.

Great. Thanks for taking my questions.

All right. Thank you.

Matt Olney, Stephens.

Hey, on the expense side, can you remind me, did the second quarter get a full quarter benefit from those conversions of heritage and premier? I can't recall.

Not a full quarter. About two months worth, maybe not even quite two months worth. But, yes, close to two months worth. We've closed that out April 20, I believe, is our conversion date there.

And then Randy, what about these branch closings you talked about in the press release? Were those spread throughout the quarter? Are they weighted on one side of the quarter or the other?

They both closed at the very end of the quarter.

Okay, and then just a follow-up I guess for Johnny, the ROA around 1.70%, it's one of the top -- for all the banks in the country. I know it's something you're very proud of, keeping the ROA very high. Can you talk about the challenge and opportunity of returning that ROA to 1.70% post-Liberty, once you get everything combined?

Well, I think our initial goal is to move Liberty to a 1.50%. I think the bank's been running about a 0.86%. You kind of take it in increments, you can take it in steps, and it doesn't all happen overnight. And I may let Donna talk about what our plans are there. But we have to get our culture in. We have to make the changes. We have to clean up and streamline the balance sheet. There's a lot of things that need to be done.

We'll pay out the SBLF pretty quick. They have got about $56 million in trust preferreds that we'll start whacking away at and some pretty high priced federal home loan bonds, got some lower. The mix is pretty good, but they've got some high-priced federal home loan bonds we will start whacking away at. And then we'll just kind of grab the low-hanging fruit and start improvement. The truth is that it's going to take a while, and it's not going to be overnight. If the pressure gets off the margin side, which I hope it does and I expect it to do in the next quarter or two, then I believe that this team will -- I'm not going to be satisfied with the 1.50%, as you could imagine, or 1.70% coming out of Liberty.

We ought to be able to leverage our infrastructure in Arkansas and do better than that. But that will take a while, as it took us a while to get to 1% to 1.25% to 1.5% as it took Home as they went through their process of getting there. It's going to be a tough process to get there. You'll see some pretty quick savings coming out of Liberty and then there will be -- then it will be harder to get over a period of time. And I think -- I guess Donna, you'll organize your teams in there the same. You got any comment --?

Well, like you said, we've got to get it converted first. Then things that we'll go in and look at that we've implemented here are staffing models, timing, motion studies, making sure that we do those things efficient, as well as processes. We have standardized and centralized about everything we can. And so that's what we watch and continue to look for.

And they may have some things and practices that we don't do. So what we'll want to do is kind of throw them out on the table. Their products, their services and processes against ours and make sure that we can come together as a new organization. This is the largest one we've done. So we do anticipate it to take a little time.

Davy Carter's going to be running that arm for the Company, and he has our culture. Actually, the real operating guy, probably the question should have gone to Randy Sims. He's the real operating guy. After we signed with Liberty, I sent him a text. I said -- well, the dog caught the car. It's your turn now.

Well, I think I would just reiterate what I said earlier. When you add whatever it is, $2.8 billion in back room operations in that amount of assets, there's going to be economies of scale. But the questions as to where -- when that, those savings are going to come are unanswered. When will we get it closed? When can we get it converted? Until those two things happen, it's hard to say exactly how the savings are going to come and how Liberty's going to get to that 1.50% or greater than -- the expectations of our Chairman.

You know, Arkansas' running the 2.20%. I mean if we can leverage this infrastructure, those numbers get crazy, but that's way down the road. But anyway, you know we're not going to give up at 1.50%, Matt.

No, I wouldn't think so. I wouldn't think so. Thanks for the commentary, guys.

Matt, this is Randy. I had one clarification. You asked me on those branches. We actually closed the sale at the end of the quarter. But they were not operating for most of the quarter, if you're looking for additional operating expense improvement there. They were not operating for most of the quarter.

Okay. Thanks, Randy.

Andy Stapp, Merrion Capital.

You touched on the mix on refis purchased in your mortgage banking operations. Can you give me that mix?

Can you give him that mix?

The mix. It has been -- it was 60/40 refis in '11. It was 50/50 purchase. It was almost 50/50 mix in '12.

Okay. And do you think your yields on your securities will stabilize due to deceleration of the premium amortization?

On the securities portfolio? Yes, I think they will stabilize at about zero. I think that's about where we are. They have pretty well stabilized as far as what we -- what's going out and what we're replacing it with, but it's a very low yield there on that. We're not having any increase, and we're keeping pretty short, as Johnny said; at some point in time, we're going to be right with these rates. I can't tell you exactly when, but at some point, they will move. So we're still maintaining that philosophy, and Liberty also has a pretty big investment portfolio, and to be honest, their yields are down there right with ours. So both of them are pretty short, pretty conservative portfolios.

Okay. So you don't expect any more compression on those yields, then?

No, it's hard to get too much lower.

Okay.

I mean, I think we're all the way up to [1.70%] or something. That's awful.

Okay.

Don't flatter me.

Okay, and this is not a big item, but I notice your dividend income was up about double linked quarter. Just wondering what was driving that and if that's a good run rate going forward.

I think that would be that, our venture capital dividend was $231,000 for the quarter.

And we're in a venture capital fund. That comes sporadically. We've had a couple of paydays here lately.

I think one in fourth quarter and one in second quarter.

We've had it twice, but it's sort of a one-time item.

Yes. Came in the first quarter and the fourth quarter.

That's been, that's paying off. Appears to be a really good investment.

Good. That's all I had. Thanks, guys.

Brian Zabora, KBW.

Question on your FDIC covered loan runoff. It was a little higher this quarter. Is this a good run rate, or could it be faster than that, as you get further into the kind of solving the asset problems there?

I would say it's kind of hard to tell because at this point, you're still working through a lot of the stuff that's in the litigation pipeline. It probably is a fair, a fair run rate. We are -- we're seeing a lot of things happen in several of the markets. I would say it's probably pretty fair.

And then, Johnny, you talked about your potential deals. Do you still feel like you're in the penalty box, either self- imposed or regulatory imposed for six months, or could it be something sooner than that, that you would take a look at something?

Depends on when we get it closed, but we're certainly self-imposed. We're not regulatory in a box. We're self-imposed. The regulation may put us in a box, but we're going to put ourselves in a box for a while. We'll continue to look at deals.

I was talking to one of the Florida banks Monday of this week. And we'll continue, if those deals are still around, when we get this one completed. But we probably won't be moving on anything of any size for some time till we get Liberty under our belt. If we get it converted in December, then you could look for us -- we ought to start seeing some improvements out of Liberty in the second quarter of next year. Probably some in the first quarter, and slightly in the first quarter and then start seeing continued improvement in the second, third and fourth quarter. And if these deals are still around, we'll be -- I'm going to continue to work them.

Okay. Thanks for taking my questions.

Brian Martin, FIG Partners.

One question, it's probably more for Randy. There was an earlier question about the margin, just kind of the impact. I think you talked a little bit about next quarter, second half of the year. As it relates to Liberty, can you give some color, some commentary on what your thoughts are on the margin relative to Liberty rolls into the fold? And then secondly, just on the conversion, when will you guys know as far as the timing goes, if this is likely to get done this year versus last year and maybe you can just quantify the impact, if you could, if it pushes back into next year.

I can quickly answer the one on the conversion. As soon as the SEC signs off on the S-4, we will know.

Okay, and when would you anticipate that?

When they get good and ready. (laughter) They have up to 30 days to review the S-4.

Okay.

And at that point in time, because of the size of the transaction, we anticipate there will be some SEC review comments. Now, whether those are all SEC review comments we can turn around and change the document and get it out in a couple of days and be done, that's sort of where he says I don't know. But we probably will not get a letter from them until the first of August.

But if they don't like our comments back, then that process can continue. So that's the real deal. I don't see the regulatory side of holding us up on the December 6 conversion date. But just getting the shareholder meetings, because then we have to have shareholder notice and it's just getting that approval. But I've got faith that it's going to happen, because we're starting the planning process on the conversion.

It's not uncommon -- we're not shooting for that as a goal, but it's not uncommon to have five amendments to your S-4. I mean we got our S-4 out in 2.5 weeks, and I've seen other ones where it took two months. We took it as a high priority and got that dude out there as fast as we can. Hopefully they won't take the full 30 days, and hopefully we follow good examples from other S-4s that are out there, and we'll be able to get it cleared up with one or maybe just two amendments. But until we see that first round of comments, we really don't know.

Okay. And the impact if it does push back into next year?

Well, I really just don't even want to think about it because I don't know, because you're talking March for a conversion date. That's the next one. And that's going to be several, several million dollars left on the table of potential savings in back room. We'll be running two back rooms, and we'll be paying the same vendor two prices, and I can go on and on. So I'm just trying to kind of put it out of my mind.

Okay, and then maybe the margin question for Randy.

Yes. Brian, they are in the mid 3.50%s on margin compared to our 5.15% or so. So they are definitely going to bring down the margin initially, and we're going to be -- we'll be working on that to try to improve that. But they have some, as Johnny said, some funding coming due, that has some higher yield on it, and they should be able to tweak that somewhat, and we'll be working as soon as we can with them to try to see what we can tweak here and there. So it is going to be a little bit more of a struggle. And again, a lot of that's because of their investment portfolio, which in my opinion, they have done a good job keeping it conservative and fairly short.

Okay. All right. Thanks very much, guys.

Kevin Reynolds, Wunderlich Securities.

Hey, Johnny. Most of my questions have been answered, but I figured I would jump in here anyway. Good quarter. Conceptually, I heard you talk about your stock price, and maybe it's gotten a little bit up there here in the last couple weeks. And I guess my question is, it's clearly a good deal. And you guys have done a great job navigating a challenging environment out there.

But what is it that -- I know you're confident in yourself, you're confident in your people. But what is it that worries you from here? Where do you sit back and say --gosh, these are the things that keep weighing on my mind? We've got to keep our eye on these items as we go forward over the next few quarters here, and then how do you sort of manage through those uncertainties out there?

I think I'll speak and let Randy speak, if he wants to. I think the asset quality side of it is my biggest concern. I think we were -- we've been a little more stricter on our credit than I think Liberty has been. Actually, the earnback period would be quicker if we find asset quality the way Kevin's team -- I think, Kevin, you looked at everything below, above -- what did you look at it, 2/3 of it?

Yes, right at 2/3.

Right at 2/3 of it. I have some reservations about the asset quality side and did we miss it $10 million or $20 million? If we did, I haven't seen any signs of that yet. But if we did, we got enough room and there's enough earnings in the deal to fix it. So we'll get through that.

That's the only thing that keeps me up at night, is the asset quality. Their margin's quite a bit less than ours. We'll work on that, and we'll streamline the balance sheet. Donna's team will get in there on the efficiency side. I think we'll get it to our standard. I just -- my concern is how long it will take. And the good thing about the asset quality is that we know the markets that they are in. They are in markets that we're not in, but familiar Arkansas markets.

So we can fix it. It may take -- instead of taking six months to fix it, it may take a year and a half to fix it. But we'll fix it and we'll get through it, and then we'll get the efficiencies of the Company. In the meantime, working on the efficiencies and when we come out the other side of this deal, it ought to really be good. Randy Sims?

I don't know that I can add anything. I would say the asset quality issue is number one concern. We're going to try to get on that right away. The time line that I've already talked about is an immediate focus for us, too. When you look at Arkansas and the opportunity that this brings us going -- adding 49 more branches in basically no overlap, it may be the deal that's talked about for a long time. But getting it done and getting it in the barn, you might say, we've yet to get that done. So hopefully our next quarterly conference call, you'll -- everything will be laid out, and you'll know so much more because we'll know so much more and -- but right now, the two things -- once it's closed, asset quality will be the number one focus. Number one focus right now is to get it closed.

All right. Thanks a lot. Good quarter.

Joe Fenech, Sandler O'Neill.

Good afternoon, guys. Most of my questions were answered, but just had one more on the allowance. It's about 1.75% or so I guess of non-covered. Are you comfortable allowing that, Johnny, to drift down below the 1.50% or so if credit remains pretty good here? I'm talking about just for the legacy company. Or do you have a floor in mind that we won't see you breach no matter what happens with credit? What are your thoughts there?

Somewhere in the 1.50% range is fine with me. I think that's been -- we've stated that for years, that we'll let it drift down to the 1.50% range. Asset quality is really pretty decent right now. Saw a few little surprises. I think I told you back some time ago, we've got a hotel in Florida that we'll probably have to clean up somewhere. Florida real estate, I was talking to Kevin the other day. Kevin said talking about a piece in Orlando that we thought we would lose millions of dollars on. We're going to come out really good.

And another piece of real estate down there, he said I didn't have a bidder on it, now I got five bidders on it. So you're really seeing it turn. You're seeing that change and the real estate prices beginning to strengthen and the values go back up. Kevin just had an option in Florida and sold about 50 pieces of OREO property that were covered assets that we couldn't even get a bid on or hadn't basically gotten a bid on and forecasted a huge loss, and it didn't turn out like that. So it turned out better than we anticipated. So I think the market's with us right now helping pull those prices up, and I don't anticipate -- we had some one-time gains this quarter, so not that I moved one-time gains into the reserve, but we had someone-time gains. And I thought it was a good time to put a little cash in reserve.

Got it. Thanks, guys.

Michael Rose, Raymond James.

Hey, guys. Just one quick follow-up. Do you have an initial estimate for one-time charges that you expect to occur as related to the merger? Thanks.

I don't know yet. I don't know, but it's going to be pretty substantial. I don't guess -- we don't have an estimate on that yet.

We're still looking through everything, contracts and buyouts and what we can arrange and not arrange. So I can't give you a good number, but it will be sizable.

But I don't think it will be -- I think it will be on the low side of deals this side, this size, particularly because of the FAS contract and some of the common vendors, and I think it will be on the low side of the one-time charges.

A couple of the big charges that we'll have, Michael, are in the S-4. And that would include the two fairness opinions and then our broker fee. They are both in there, in the S-4 document. You'll find that we're paying the broker $800,000. That's disclosed in there. And our fairness opinions were running [$225,000] and [$230,000] apiece, so those are not real big numbers when you compare them back to some of the other deals that you've seen for a deal this size.

Fair enough.

What we're paying, I would appreciate everyone please reading through every page.

Yes, I plan to read all 272 pages tonight.

(laughter) Actually, I know our lawyers would like that because we treated them like a bunch of vampires. I had one lawyer come in and work on it at 6.00 and he would stay till they couldn't work till much past 7.00. Then another one would stay until about 2.00. So I don't think they worked on it 24 hours a day, but I know that one of them worked till 2.00 and one of them was there at 6.00 the next day working on it. So we got 20 hours a day out of our law firm. I'm sure the meter was running pretty high.

We haven't seen that.

Better them than me. Thanks for the follow-up.

That does conclude today's question and answer session. I would like to turn the conference back over to management for any closing remarks.

Well, thank you for your support. Hopefully we'll have more color on the Liberty transaction in 90 days, and maybe we'll have called a shareholders' meeting and maybe even have approval. So thanks for your support, and we'll talk to you in 90 days.

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