Home BancShares Inc (HOMB) 2013 Q4 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares, Inc., fourth-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 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.

Thanks, Laura. Welcome, everyone, to Home BancShares fourth-quarter and year-end 2013 conference call and earnings release. With me today is the regular team -- Randy, Randy, Brian, Kevin, and Donna, and they will all give you their perspectives in a little bit on the fourth quarter and maybe some comments on the whole year.

First of all, I'd like to tell you -- like to announce that Bob Birch, one of our regional presidents, slipped and fell last week, and I guess you've heard of a rack of ribs. I think he broke a rack of ribs. So, Bob's in good shape. He's doing well, but he will be out for a couple weeks and we look forward to getting him back.

In the meantime, his number one guy, Gordon Silaski, has got that undertow and running the Company in Little Rock and Orlando.

Well, what a quarter. What a year it was. Game changing for Home. Let me take this opportunity to welcome all the shareholders of Liberty, all 8,764,242 shares. You are now part of one of the highest performing banking organizations in America. This Company is run for the benefit of its shareholders, the employees, the customers, and the communities in which we serve.

You'll see this management team as aggressive, smart, and experienced, with lots of skin in the game, and they will make the decisions that are in the best interest of all of us.

You probably saw in the report that we made one large -- we made a one-time -- large one-time charge of $17 million, plus, in the fourth quarter. That was primarily overpriced or redundant contracts, as well as long-term expensive commitments that were resolved by taking this charge. These expenses are over, and we will not carry them on our back into 2014.

I have to say that we are well on a way to completing our objectives for Liberty for 2014 and we're way ahead of schedule.

There is still a lot of crops in the field to harvest over the next year, and we're taking them one at a time. Some of the areas we have not addressed as of yet we will be addressing in the first three to six months of 2014, and some of our other team members will report about the expense saves thus far.

Because of where our data center was located, we lost some really good, talented people in different markets. We wish them the best in the future. We just couldn't have three catchers and three first basemen in the game at the same time.

But the quality of the Liberty employees that are still with us is superb, and I'm extremely impressed with their work ethic and their leadership. There is always disruptions as a result of mergers and acquisitions. We understand this because of our 13 previous deals at Home and our 20 previous deals we did at our former Company. We deal with these problems immediately, and then we move on for team building. Other than a few minor bumps in the road, this one has gone fairly smooth.

Liberty was a 0.8%, 0.9% ROA performer. None of our regions perform at those levels. Our Florida Keys operation is almost a 2%. Our Florida operation is running a 1.4%, and you remember those were failed banks; Alabama, a 1.6%; and Arkansas, 2%-plus. Once Liberty is brought to our minimum performance standards of 1.5%, I will calculate what -- excuse me, I'm not going to calculate, because our accountants don't like me to do that, but you can do the math on a 1.5% ROA, and that's just a starting point.

Well, margin efficiency and loan growth, how is it going? All I can say is good, good, good. I am very happy with the covered pools. That's been something that has been a question mark for all of us, and I think anybody who has done failed banks is concerned about what impacts that might make. But I'm very happy with the -- at this point, the positive impairments far outweigh the negative impairments. Keep your fingers crossed, but I think we're in good shape, so far, so good, and congrats to our loan team.

So far as deals, deals are everywhere. Arkansas and Florida, more in Florida than there are in Arkansas. Once Liberty is fixed, Home will move on to the next deal. If January results are what I'm expecting, I will become very active in the month of February.

In summary, it was a great year, it was a great quarter, and the ball is teed up for a great 2014.

We will go to Randy Sims now for more specifics on the numbers.

Thank you, Johnny.

To say the least, it was a very busy quarter. And as already discussed, Liberty Bank is now Centennial Bank. Let me just recap the acquisition real quick.

On June 25, the definitive agreement was signed between both banks. On August 30, both Boards approved the merger and the S-4 became effective. Then on October 23, the shareholder vote was taken, and on October 24, we closed the deal. Just less than a month and a half later, the system was converted on December 9, so less than six months from signing to conversion, quite a timetable for an acquisition over 6% -- 60% of our own size.

And in addition to completing the system conversion, we closed two Liberty branches and one Centennial branch in overlapping markets, basically across the street from one another, at the time of conversion.

From the beginning, it has been our goal to not only close the merger, but to also complete the conversion before the end of the year, and we got it done. Had we not completed the conversion in December, our next available date would have been in March, so we would have continued to run two backroom operations. Customer service would have suffered, and it would've cost us several million dollars in savings we now can enjoy in the first quarter.

It was a significant accomplishment that some did not think we could do. So I would like to say congratulations and thanks to all the conversion team members for an incredible effort. There is still much work to accomplish and there are still savings to get, but it will be exciting to see the financial results of the first quarter.

So, now let me talk about income and some of the key components of 2013 record numbers.

First of all, net income. The quarter is a little confusing with income as of year-end of $66.5 million, compared to $63 million for the year 2012. Diluted earnings per share ended at $1.14, compared to $1.11 per share for 2012. But this also included $18.4 million in merger expenses during the year 2013 with the Liberty acquisition. Excluding these expenses, net income was $77.7 million.

To complicate it a little more in comparing income to last year, there was a net total expense of $2 million for merger expenses and gain associated with our three acquisitions in 2012.

So, let's just throw out all of those merger expenses and look at the numbers on an equal operating basis.

With this in mind, we actually had diluted earnings per share of $1.33 for the year ended 2013, as compared to $1.13 for the year ended 2012, or an increase of $0.20 per share or a 17.7% increase.

For the fourth quarter of 2013, the Company recorded quarterly net income of $13 million, or $0.19 diluted earnings per share. Again, excluding the merger expenses, earnings per share for the fourth quarter was $0.37 per share, and that makes 11 straight quarters of record earnings, excluding the merger expenses in the fourth quarter.

Our return on average assets, including all merger-related expenses, was $1 -- I mean, 1.43% on a year-to-date basis. Our core return on average assets was 2.86% for the quarter and 2.91% for the year, as compared to the previous year of 2.72%. Our return on average TCE, excluding intangible amortization for the year, was 15.26%.

As Johnny said, the Arkansas banks continue to produce high-performance results, with internal ROAs averaging over 2.2% year to date. Again, based upon internal numbers to be used for comparisons only, we are seeing ROAs in our Florida regions average in excess of 1.4% and Alabama in excess of 1.6%, almost 1.7%, on a year-to-date basis.

The greatest improvement this year has been in Florida. It will be interesting to see the first-quarter results, with new regions coming on board reporting due to the Liberty transaction.

At the Centennial Bank level, and again on an internal analysis, 71% of all our assets are now in Arkansas after Liberty, 3% of the assets are in Alabama, and 26% of the assets are in Florida.

We ended the quarter with a 45.2% core efficiency ratio and 45.49% for the year. Keeping this in line has been a key component of our success the entire year. In fact, I will now turn it over to Donna Townsell, our VP for Corporate Efficiency, to give us a little update and progress that we made in this area.

Thanks, Randy.

For the fourth quarter of 2013, our core efficiency ratio was 45.2%, which is comparable to the 44.4% which we reported for the fourth quarter of 2012.

As expected, our biggest movement in the area of efficiency was in regards to the Liberty Bank conversion. Some specific areas for cost saves include consolidation of backroom operations across the board; vendor contracts, such as cancellation of redundant systems or renegotiations just for economies of scale, et cetera; maintenance contracts where we did some renegotiations for facility maintenance, things like that; salaries, due to attrition, job redundancies that was mentioned earlier.

We also were able to renegotiate some future sponsorship and donation commitments, and we consolidated a few branches in markets where we already had some overlap.

A rough estimate of cost saves is projected to have already hit $8 million, and as you know, we predicted about $10 million, so to be within striking distance at this stage in the game is very exciting.

We have rolled out consolidated products and fee schedules and we're still analyzing other changes, and we will now have a little breathing room where we can consider if other revenue initiatives would be beneficial this year. But our near-term goal is just to step back and look at post-conversion enterprise that we have now created and see what other efficiencies or enhancements that we can make that were not a result of the conversion. Randy?

Thank you, Donna. There has been a lot of hard work accomplished since the end of the year and prior to the end of the year.

So, switching to deposits, we ended the quarter at $5.4 billion, compared to $3.2 billion as of September 30, 2013. Time deposits represent 29.8% of our total deposits, up some due to the Liberty transaction.

So that brings us to net interest income, margin, and non-interest expense, and who better than our CFO, Randy Mayor, to give you all the numbers? After that, Randy will pass it on to Brian Davis to give us some information on our capital numbers. So, Randy?

Thanks, Randy.

As Randy has mentioned, there was a lot of noise in the quarter in the numbers. There was the $17.3 million in merger expenses related to the Liberty acquisition. There was a positive impairment on eight FDIC pools, which resulted in $1.8 million of additional interest income, which also produced a reduction of our non-interest income of $1.3 million for the quarter and $46,000 in non-interest expenses as FDIC true-up.

As a side note, the total positive impairment of those pools is $14.1 million, which will continue to be recognized as a yield adjustment over the weighted average life of the loans.

As a reminder, in Q3 we had a one-time positive adjustment related to the payoff of a particular pool, which resulted in $1.9 million of additional interest income, $1.5 million of indemnification asset expense, and $170,000 of true-up expense.

There was also a deterioration in five FDIC loss share pools this quarter, which resulted in a $3.9 million increase in provision for the allowance of loan losses on covered loans, with a $3.1 million offset to the indemnification asset, netting out to a $891,000 provision expense for covered loans.

The net interest margin declined from 5.41% in Q3 to 5.09% in Q4, primarily due to the acquisition of the Liberty asset starting on 10/24/13. The yield on earning assets declined 30 basis points, from 5.73% to 5.43%, while the yield on interest earning liabilities remained constant at 0.41%.

Non-interest income and non-interest expense numbers also saw significant changes as we continued to absorb the Liberty transaction. As Donna mentioned, there are a number of areas we have been working on and will continue to work to reduce expenses and take advantage of the economies of scale. Our ROA, excluding merger expenses, is 1.50% and the core efficiency ratio of 45.22% for the quarter were consistent, or maybe a little bit ahead, of our expectations and models for the Liberty transaction.

With that, I will turn it over to Brian.

Thanks, Randy.

During the fourth quarter of 2013, we paid out dividends of $4.9 million and grew our retained earnings by $8.1 million.

As part of the Liberty acquisition, we issued capital of $290.1 million. For Q4 2013, our Tier 1 capital was $549.5 million. Total risk-based capital was $593.3 million and risk-weighted assets were $5.1 billion.

As a result, the leverage ratio was 9.38%, compared to 11.50% at September 30. Tier 1 capital was 10.88%, compared to 14.20% at 9/30, and the total risk-based capital was 11.75%, compared to 15.41% at 9/30. As a result of our Liberty acquisition, these decreases in our risk-based capital ratios were consistent with our expected pro forma projections for the combined institutions.

Additionally, book value per common share was $12.92, compared to $9.69 at 9/30. Tangible book value per common share was $7.94, compared to $7.99 at September 30, and the TCE ratio was 8.0%, compared to 11.1% at 9/30. Randy?

Thank you, Brian. Let's switch to loans and our chief lender, Kevin Hester, who will update us on all those totals.

Thanks, Randy.

The acquisition of Liberty Bank provided $1.8 billion in loan growth in the fourth quarter, but also created some challenges in assessing progress and improving legacy asset quality. It also serves to reset the bar for assessing asset quality on the combined companies in the future.

Our noncovered, nonperforming asset ratio decreased slightly from 1.15% to 1.07%, as did our noncovered, nonperforming loan ratio, from 1.20% to 0.19%. The improvement in the nonperforming loan ratio is a combination of the improvement in the legacy calculation and the effect of the combination with Liberty NPLs, net of discount. The slight improvement in nonperforming asset ratio is due to the improvement on the legacy side.

Our allowance for loan losses as a percentage of noncovered loans declined from 1.58% to 0.93% and the allowance for loan loss coverage ratio declined from 132% to 102%. This is due to the addition of the $1.8 billion Liberty Bank loan portfolio with no corresponding addition to the ALLL. However, if you added the Vision, Premier, Heritage, and now Liberty acquisition discounts to the allowance for loan losses, the combined figure would be 4.89% of noncovered loans at December 31, 2013.

Noncovered real estate owned increased from $14.2 million to $30 million in this quarter, almost solely attributed to Liberty purchase. The share related to Arkansas property shifted from 71% to 86% on a linked-quarter basis.

Net charge-offs were 22 basis points in the fourth quarter, which is significantly below our average for the four previous quarters and the 48 basis points incurred in the linked quarter. Early-stage past-dues increased slightly, from 1.54% to 1.63%.

Legacy noncovered loans increased $46 million in the fourth quarter, which would equate to an annualized growth rate of 8%. This extends the trend of noncovered loan growth of 5% or more to five of the last six quarters. In addition, we experienced $33 million in loan growth from the Liberty Bank markets postacquisition, which would calculate to an annualized growth rate of 7%.

Combined, it was a strong quarter for loan growth for the bank. The pipeline is still solid, especially given that loan growth has been historically weak in the first quarter of recent years. By all measures, it was an excellent quarter in the lending area.

With that, I will conclude my remarks for this quarter. Back to you, Randy.

Thanks, Kevin.

This really was a special year for Home BancShares, with record income for the 11th consecutive quarter, the Liberty acquisition, a very consistent efficiency ratio around 45%, and a very strong interest margin, all the components that we need to move forward. We are very excited about 2014 and are all looking forward to the results in the first quarter.

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

You heard the reports. They sounded pretty good. Look forward to a first-quarter report with you. And Laura, I think we are ready for Q&A.

(Operator Instructions). Jon Arfstrom, RBC Capital Markets.

Lot of questions here to go into, but maybe just start out with Randy Mayor in terms of the margin. I know there's a lot of moving parts to piece all this together, and we've got a few more weeks coming in next quarter from Liberty, but can you give us a little bit of help on the margin in terms of some of the puts and takes and in terms of what you might expect early in 2014?

Yes, we would expect, as you said, a little more pressure bringing on their portfolio for the full quarter versus the other. Also have some of the FAS 91 marks coming in, so that's a little bit unpredictable, but I think we were [650] for this quarter. I would expect that to trend down a little bit, a little more pressure on there. Liability side, you can see that they were pretty consistent with where we are, so it's really on the loan side.

Okay, so just some modest pressure is what -- if I read between the lines, that's what you are saying?

Yes, that would be a good summary.

Okay. Donna, a question for you on the cost saves, and those are impressive numbers, the $8 million that you already have. How does that compare to what you originally projected and also in terms of the timing of when you expected to get to $8 million?

It's pretty much on track, if not a little bit ahead, of what we thought.

We usually try to hit around the 33% in our models we run. We really may be close to that, if not a bit over. A lot of that is the low-hanging fruit we mentioned to you that would come quickly that happens with each conversion.

There are still some items out there that are usually anywhere from one to three months after conversion that we haven't even tapped into yet. So, I think you'll still continue to see some improvements just with the Liberty folks between now and the end of the first quarter. Not to mention, we are always looking at our whole branch network and our whole enterprise, so I think you'll continue to see a focus that -- the whole year.

Okay, okay, good. Then John, a question for you. You made the comment when Liberty is fixed. Then you talked about January. What do you need to see to start to move forward on acquisitions again?

The bottom line here is that forget all the failed banks [tala], and Florida, as Randy said, is running a 1.40% and Alabama, about a 1.70%, but the Arkansas bank is running 2.20%, north of 2.20%. We don't have any failed banks in that process.

Liberty is running 0.8%. That's less than 1%. Another way to say that is we're outperforming Liberty by 66.67%. We are well on our way to correcting those run rate problems, and the shareholders, employees, to me, deserve better.

So, our policies and operating procedures for Liberty will be the same as they have been in place for us forever. So the real key is to me, Jon, to nail your question, is what is Liberty going to do? Is it going to do a 1.5%, a 1.8%, a 2%, or a 2.20%? Or is the combined company even going to do better? And I think that we're going to be very impressed January, February, and March is what the process, the cost saves, have been, and we have some areas that I said we have not even touched.

So, you take that and you mix in a couple of deals with that, so I am hoping to, if you heard my presentation -- if January is where I think it is, you're going to see me really active in February and March.

So, they are out there. The deals are there. We just need to go wrap some of them up at our price. The deals will be done at our price. We're not going to get crazy and get pricey. They are going to be done at our price.

So, I just want to see Liberty -- you see the combined operation at a 45% efficiency ratio. That's pretty damn good, grabbing this thing when you pull out the one-times and get your hands on it. And just walked in -- Stephen Tipton just walked in, who has been working with Davy Carter in Jonesboro, and I will just let him give you a quick feel of what he is seeing in Jonesboro. He is probably going to end up ultimately spending more time up there.

Thanks, Johnny.

So as we mentioned earlier, we are about 40 days post conversion today. Our groups are beginning to take hold of our processes, procedures, underwriting philosophies, and all, and as Johnny mentioned, we will put the same processes and procedures in place up there that we have here.

Our management teams are working with the groups in northwest Arkansas and north-central Arkansas and the northeast part of the state, laying the groundwork there of our lending and retail and expense cultures. So the groundwork's started there, and we have seen some positive things already, as Donna mentioned.

Our legacy staff here has been engaged and on the ground in all parts of the state to help get those processes going quicker, and I think that's happening so far. The loan relationships, our executive loan committee has seen some great deals, some customers and players, I guess, that we've probably been familiar with over the years that we're now excited to call customers.

So, I think all in all we're really pleased with what we've seen so far.

That gives you a pretty good indication we're pretty happy with what happened thus far, doesn't it, Jon?

Yes, that does help. And then, just one quick one to confirm for Kevin Hester. The increase in OREO and nonperforming loans, just to clarify, there were a lot of things going on there, but that -- you are saying that is primarily attributable to Liberty?

Yes, legacy NPLs were down. Legacy NPAs were down a little bit, so any increase you are seeing there in raw dollars is based on Liberty.

Okay, great, thank you.

That will take us a little while. We will get that under tow. We will fix it and move on down the road.

Okay, thanks.

Michael Rose, Raymond James.

I just wanted to touch on some of the fee income components. Can you give us some color on the insurance line item and anything that might happen this quarter, any sort of seasonality?

And then, what was in -- any major changes in other fee income quarter to quarter, and I know it's a little complicated because of layering in the deal.

This is Randy. On the insurance, we acquired an insurance agency in the Liberty transaction, so you probably saw that income came in and started reporting to help us out there.

But we're monitoring that. It is kind of tough. It's early, and you got two strange months in November and December with the holidays in there to what I would call set a reasonable baseline.

So, I don't know that we are far enough along to figure out what our run rate is going to be on a combined entity in there. I don't think you saw any seasonality in the insurance. I think it was the two companies coming together.

Okay, and then, was there anything in other fee income?

There was -- the only thing I could think in there, there was one rebate that we got back from one of our check vendors of about $170,000, I believe.

Okay, and then, I guess, shifting to you, Johnny, following up on the M&A discussion, how should we think about future deals for you going forward? Is it still in Florida looking at some of the smaller banks that you were looking at previously, or now that you are bigger, have any of your size parameters changed at all?

No, they really hadn't changed. I like the bigger deals. I would like to be able to do -- I know our staff would appreciate us doing a larger deal than a group of small ones.

We did some small deals and we got pretty good at it and we made some good money with them. We turned them into real banks.

So, there are some smaller deals out there that tweak us, that look like if they are priced right, we can -- I hadn't just been in a position to give them a price yet, but we will -- I wouldn't be afraid to do another $2 billion deal if the opportunity came up. I pitched a guy not long ago that was about $2 billion. He said, come see me, but I hadn't had the opportunity to go see him.

But we will -- if January -- on the question of fee income, we will see a lot more in January. My expectations are figure -- mine are pretty high on the return on assets on Liberty. So I am hopeful, based on what I am seeing, efficiency ratios, it all has the opportunity to take off in February and get real busy.

Okay, and then just one final one, if I could. I'm sorry if I missed this, but what was the core loan growth, ex Liberty, in the quarter and is it trending better than it has in the past couple quarters? Thanks.

Ex Liberty, it was about $46 million. And it was spread throughout our footprint. Arkansas and Florida both had good gains. Alabama did as well.

And it was about what we expected for the quarter. Pipeline for first quarter is still strong, especially being that it's a first quarter of the year, which historically has not been as strong.

Great, thanks for taking my questions.

And when I look (multiple speakers) -- Michael, when I look at that, it's a lot of Florida right now. Lots and lots of Florida in this first-quarter pipeline, so that's good to see.

Is it more in the Keys or in the Panhandle?

Probably 20% is in the Keys and the balance is -- probably 70% in Florida, 30% in Arkansas, and of the 70%, probably 20%, 30% is in Keys and the balance is in the Panhandle. Looks pretty good. Good opportunities.

Great. Thanks for taking my questions.

Brian Zabora, KBW.

A question on provision expense. On the noncovered side, it was about $3.4 million, a bit higher than charge-offs. Was there anything with the Liberty deal that maybe elevated this or is this a good run rate we should think going forward with the strong expected loan growth?

We booked $1.6 billion in loans that we didn't get any reserve with, and I am one that didn't like to be below 1% on the loan-loss reserves, so we will probably feed it for a while here until we get comfortable with it.

It's 100% coverage of nonperforming, and as we clean up the Liberty portfolio, it will improve, but we always err -- you know us. We err with too much, rather than too little. So Kevin, you have any comments on that?

No, he said it the way it is. We're going to build that reserve back up a little bit to cover those that come across from the non-impaired, because they will come out of the reserve at some point. So, we will do that until we are comfortable.

Thank you. And then just on the funding side, you talked prior to the deal of maybe paying off troughs or FHLB borrowing from Liberty. Give us an update there of where you may stand as far as changing some of their borrowings.

We will start -- those high-priced borrowings, those Federal Home Loan Bank borrowings, we will start paying those down here before long.

We just hadn't got through those, but we will streamline. As we streamline Home's balance sheet, we will streamline Liberty's balance sheet the same way. We will do -- the trust preferreds, we will take out and we will pay down the Federal Home Loan borrowings.

Do you think this will be gradual through the year or something maybe as more of a near-term goal?

I think we will just gradually do it during the year. I think we'll just -- as we generate cash and have money, we will just pay them back (multiple speakers)

Thank you for taking my questions.

Matt Olney, Stephens.

Thanks for taking my question. Question for Kevin Hester. Kevin, I know in the past, you have talked about some larger paydowns that were on the horizon. Are most of those larger paydowns now behind you or do you expect to see more of these in 2014?

I think the largest of the ones we were looking at is behind us. There will always be some, and we factor those into our pipeline, but the one we were looking at at fourth quarter, we ended up keeping it.

Okay. And I guess for Johnny, your thoughts on capital and dividend? I know you increased the dividend at some point last year. What are your thoughts on increasing that dividend in 2014?

I think we ought to double the dividend (laughter). No, I -- we will just see.

We don't have the cash right now. We're going to build our cash reserves back up over the next period of time and deal with trust preferreds and Federal Home Loan borrowings, so we will sit for a little bit. But as soon, the minute, that we can move that up, we will do it. We will raise the dividend.

So it will probably be -- probably won't look at it again until midyear or third quarter. We'll take a look at it and see how the cash is holding out and what we are doing. I think that's the prudent thing for us to do.

And there are some deals out there, also, on top of that that they would like to have a little cash, like the Liberty deal, because they hadn't had any money in 10 or 12 or 13 years. So, that's part of the mix, too. I know you'd like to raise some capital for me, but we are not going to do that.

If you need some help, let us know. Thank you. (laughter)

Kevin Reynolds, Wunderlich Securities.

Most of my questions have been answered at this point. I guess I wanted to go back to Kevin real quick. You gave the organic loan growth core, ex Liberty, for the quarter. I think you said around $46 million. What was the number that you said was the Liberty growth after the acquisition -- or growth in the Liberty markets after the acquisitions?

It was a little north of $30 million.

Okay, so about $75 million, $76 million or so in growth -- organic growth during the quarter?

Very close, yes.

It was $84 million on the combined entities.

Okay, okay. And then, I guess, looking out there, it seems over the last couple of months and listening to a few other conference calls out there, that activity has picked up a little bit, that maybe we and our customers feel a little bit better about the economy, although we are not giving it the all-clear signal.

If that's the case, do you get the sense here -- A, is that the case? B, beyond that, do you get the sense that competitive -- the competitive environment will become more intense for loans, or do you think that it's going to stabilize in here and maybe everybody gets back to a little bit more rational behavior when we get out there? What do you think is going to drive the activity as we head into 2014 on the organic side of things?

I think we are seeing people with a little more confidence, A. I think the answer to that is yes. We're seeing that. We're seeing opportunities out there. We are seeing entrepreneurs start to spend money and do deals, good entrepreneurs. Kevin, you want to answer the second part of that, what you think is going to --

If short-term rates go up, if something happens that causes our competitors to believe that rates are going up, then maybe we will see less pressure, but we all have a lot of liquidity. We are all looking for loans, so I don't see that changing as far as the competitive pressures on pricing. I don't see that changing, unless something happens that scares everybody out of what they're doing.

Okay.

There is going to be a bunch of them caught with their pants down, though, you know that. They're writing them in the high 2s and 3s, and they're going to get locked into that stuff for the next five, seven, and 10 years. And we didn't do that. We didn't play that game and we're not going to play that game, so I think we're in a pretty good position.

However, I haven't seen -- I have seen some people in the Jonesboro market try to do some stupid stuff lately, but I really hadn't seen much of -- I hadn't heard much out there. Actually, my comment is going to be it is a little better than it was. The competition is a little better than it was.

We are able to get -- of course, everybody is broke in Florida, but we are able to get pretty good rates in Florida. We are able to make some pretty nice trades there.

Okay, and then one last question for you, Johnny, on the M&A front. We will probably ask this 1 million different ways on this call here, but -- and you will probably avoid the answer 1 million different ways. But when you are looking at -- in terms of trying to pin you down as to what you're looking at and where and all, is there any reason, just kind of conceptually, why -- I understand that you don't like to give away your money and your shareholders' money in what might be a high priced deal, but if there is a deal out there that just absolutely makes sense and pushes you well down the field as an organization, with your currency and the fact that no one else really, or not too many people have a currency that is anywhere close to valued like yours, does it make sense at some point to go out there and put a price on some people that gets their attention and say, look, we are the partner that you want to align yourself with. Let's do this deal now instead of dancing around each other for the next 12, 18, 24 months. Just speed the process up and move down the field.

That's an interesting way to ask it, but the currency enables us to do some trades that other people can't do, and still reward our shareholders and be accretive to our deals.

I looked at a deal a while back. It was about $1.1 billion. It added $0.06. That didn't do anything for me. I couldn't hardly get the price of it right enough to make it be accretive to us.

The Liberty deal can add lots of income to this deal. But the answer to your question is maybe. I looked at one the other day in Florida that I just pulled up that needs to be sold, looked at the deal, and the numbers work. And it's in a market and it's an area and it helps build our franchise, and it's of the size that our management team would like.

So, you will see me -- if January is what I think it is, if our team has done what I think they've done, you'll see me really active in February and March. That doesn't mean I'll bring a deal home, but that means I will be knocking on the doors and seeing what makes sense in that market, and we're definitely going to do some deals in 2014, unless something crazy happens out there.

So, I don't know if that answers your question, but I heard what you said. And you know which -- you know some of those deals that are out there that makes some sense and I know some of those deals that are out there that could make some sense. And truthfully, in the best interest of some of those companies, they ought to hook with Home. If they hook with Home, they will benefit, Home will benefit, Home shareholders will benefit, and their shareholders will benefit.

Right, and Johnny, you and I have talked about it in the past, but the idea that taking one of these companies that just hypothetically likes to see itself as a consolidator of choice in a given market, but doesn't quite have the currency you do, why can't -- what is it that is keeping companies like that from seeing the logic of trading into you and then becoming your acquisition team with a stronger currency and still being the consolidators of choice in that given market (multiple speakers) because that's what we're trying to get to. What bridges that gap?

Ego, I guess. I guess ego. In the past, ego killed more deals than anything else ever killed, so I guess ego of a CEO, and maybe he hasn't made enough money and maybe he doesn't have enough stock options, or maybe he doesn't own enough stock and he doesn't want to sell today while he beefs up his portfolio. You see some of that.

So, sometimes their personal interest gets in the way of what's in the best interest of their shareholders. Some of these people, if you go to their shareholders and pitch them, I think you'd get a deal, rather than go with CEOs.

Okay, all right, well, thanks a lot. Great quarter.

Brian Martin, FIG Partners.

Most stuff's been covered. Just a couple things here, just the -- maybe it was Johnny or Donna that talked about the cost savings that they haven't -- the opportunities you haven't touched yet. I guess it sounds still like there is some low-hanging fruit out there. Maybe just wondering if you can touch a little bit on that, what that is.

And then, maybe just as far as you talked about some of the branch realignments. How likely is it we will see some branch reductions this year as you guys go through the year looking at the transaction?

And maybe just the last question for Johnny on the -- when you look at the mix now with acquiring Liberty and going 75/25, Arkansas/Florida, how important is it for you to move that mix back toward getting a larger percentage in Florida? Is that a priority or just you're going to be where the profitability is?

No, I didn't -- you know me. That doesn't make me any difference. It's just wherever the money is. I will do another Arkansas deal if that's where the money is, or I will do a Florida deal. Show me the money.

If I see a deal that is going to be real accretive to Home, that deal is going to get raised up to top priority for me. So, I don't care whether it's Alabama or Florida or Arkansas, but we're probably going to stay in our lane, but it doesn't matter to me. Randy, you can comment on the other part of that question?

Sure, one of the things we haven't done yet is put our branch model into all of the branches that will be done. We've got to get a few months of transactions under our belt and see where that lies. That's a big -- could be a big saver and looking forward to doing that. Every market is looking for savings within themselves, from maintenance contracts on down.

But as far as looking at branches, we are evaluating not only Liberty branches, but we are evaluating our own branches to see if there are some branches that we ought to be closing and if there are some branches we ought to be opening.

We would love to be in Mobile, Alabama. We're just right across the bridge, and hit Daphne. There's no reason to not go across the bridge if we can find a good team like we did in Pensacola that can really add some good loans to the mix.

And one thing we haven't talked about in the Liberty deal is we have gotten a couple areas that they were doing just a really great job with, and we talked -- Randy may have talked about insurance, but we inherited also a very good trust department that -- we have had a few trust assets, but they have been with a third-party vendor/processor, and we will be able to take our assets, combine them with Liberty trust department, and we're going to see some income from that and, hopefully, some growth as we beef that up, even.

And we also got a great line of cash management business that we haven't mentioned either. So those are revenue areas that it really helped us down the road.

Then, bottom line, as Johnny kind of talked about it at the very first, we got, as we sit today, a great staff from Liberty that are dedicated to moving forward and making this a really great operation. We had some that decided to leave us, but the remaining staff that we have are just itching to go down the road and perform and be the best region in the group.

So, we're looking forward to really combining our efforts, and that is why at the first of the comments I emphasized so much about the conversion and why it was so important to get it done before the end of the year, because we are now on a combined-efforts basis with new regions looking forward to that first quarter and maybe, maybe even meeting some of the expectations that Johnny has at the end of January.

So, we're looking forward to it. It's going to be a fun 2014.

Donna, any comment?

No, actually, Randy said what I was going to say in regards to the staffing model and the branches, so thank you.

Yes, we ended up with three different insurance agencies, and we got to combine those and get some efficiencies out of that. We haven't touched that side of it yet, and Donna's retail side hasn't been touched yet, as we said. So, there is still lots of low-hanging fruit that we think that we can improve there.

We're at $9 million now. Is that about right?

$8 million, $9 million. Johnny math, somewhere in the ballpark.

Johnny math's got us at $9 million, and I want $12 million, so you can figure that out, and I want a 2%-plus ROA on the Liberty operation. So, that's -- if you want to know my expectations, that's -- we will get there, but we are not going to get there as quick. But I think January and February and March, I think we will have a pretty strong quarter.

Anybody surprised out there (multiple speakers)

Yes, anybody surprised I want a 2%-plus? Actually, the truth is if we run a 2.20%, we ought to get more efficient with Liberty. So, if you really want to know what I think, I think we can do better than that.

So, I hope January looks like it is because I'm anxious to get out on the road and a lot of people we need to go see and talk to.

Okay, and as far as capital, Johnny, sitting at 8% today and how much capacity you have to do additional deals, based on how quickly you're building it, can you just give a little color on that?

We didn't -- I always said we would go down to the 7%s if we found a deal that we liked and we liked the Liberty deal. And I think you'll see us building capital pretty quick here.

Okay. All right, thanks very much. Nice quarter.

Peyton Green, Sterne, Agee.

I was wondering, Johnny, if you could talk a little bit about what the potential runoff is on the Liberty portfolio. You mentioned that there was about $38 million of organic growth in pretty short order, but is there any, maybe, intentional runoff that you're going to work over the next two or three or four quarters, and what do you think the production capacity is versus when you acquired them?

The bad part of the Liberty portfolio we would like to run off tomorrow, but I think Kevin and his team have marked it properly, credit pools, and -- I don't -- when you think about it, Jonesboro is my hometown, and Davy Carter, who is running that region, is a ASU graduate. We just went to the GoDaddy Bowl, and there was Centennial Bank supporting all over that deal. We reconnected, particularly me, I reconnected with hundreds of people I hadn't seen in years.

Our people connected. It was a great activity for -- if there ever was any question about Centennial Bank's commitment to northeast Arkansas and Arkansas state, I think it will go away because I expect more business. And some of my friends came up that said we didn't do business with Liberty, but we're bringing business over to you.

So my expectation -- I am sure we're going to have some runoff. Somebody will leave, but we hadn't seen it yet. It may happen.

The bad news is that the bad loans that we got up there, nobody would take them, so they are not going to run off anywhere.

So, I actually think we're going to grow that market. Quite to the contrary of thinking we're going to lose, my expectations are we're going to grow it.

Okay, so you think net growth is a reasonable expectation for (multiple speakers)

Yes, I think it is. I think it's a reasonable expectation.

Okay. And then with regard to consolidating the insurance operations and affecting some of the revenue opportunities that you want to do on the trust and cash management, when do you think -- what's a realistic timeframe for that? Is it six to 12 months or is it a little longer than that?

No, we don't -- six to 12 months, when you are my age, that looks like it's forever. So, we're going to do this in a quarter. We are fixing to fix this deal.

We're going to get out -- no need procrastinating. The insurance deal has got to be fixed and put together. That's been given to me. Donna Townsell, myself, and Randy Mayor have that. That's our new responsibility. So, I have been duck hunting a little bit, but duck season ends in a few days, so they are fixing to see my smiling face in their offices pretty quick.

I think we just got a meeting notice for right after this call, Mayor.

(Laughter). Anyway, no, we're not going to procrastinate. We're going to get them done. It's like we do everything else. It needs to be done, fix it, and move on.

Okay, fair enough. Thank you very much for the color.

Eric Grubelich, Highlander Bank Holdings.

Just if you could back up to, I think, a comment that was made probably about 20 or so minutes ago. You were talking about the margin, and I think the comment was that you are seeing more from the loan side of Liberty as maybe a little bit of a pressure point on the net interest margin.

I was just curious. Is there something about the portfolio that you brought on that is maybe not as flexible on the pricing side if rates move up there, or is it something else?

It was about 60 basis points for the quarter, reduction in the legacy portfolio, including -- and that was primarily because of Liberty.

They just wrote at lower rates. We have always held at higher rates and they write at lower rates, so we will add our part to that, but the cost of funds was about the same. Brian, you got any comment on that?

I think when -- I'm speaking for Randy here, but we wanted to raise -- I think he said that he thought that it might come down from [650] was that Liberty was only in the numbers for two months and eight days, so since they had a little bit lower effective rate on their loans, it naturally would have to bring a little more pressure to the margin because they will then be in there for 90 days in this quarter versus two months and eight days. And so, that naturally will bring down the rate on that, while the deposits were priced about the same.

But it goes back to Johnny's comment. Their portfolio was yielding less than ours, so it is going to --

It is what it is.

It's going to drag our overall yield down.

That's exactly right. We held ours up over the time, and we will go to work on pulling that one up.

No, no, that's what I thought you were implying. So going forward with the way that the rates are derived on new loans that you make with customers, you are going to pull what they were doing to your standards of performance is what you are trying to do, right?

Right. Absent competition, we will bring them to our standards.

Okay, that's great. And just maybe if you could just give us a little bit of an idea last couple of quarters, what do the note rates look like for your bread-and-butter commercial real estate lending right now?

We're in the 5%s.

Okay.

We're in the 5%s. We have done some 4%s. I told them the other day, watching a 10-year that came in with a 4.5% or a 4-3/8% or something, I said those days are over. I said that stuff, that's past tense. We need to be doing 5%s.

No doubt the 10-year is moving up, but I guess it's still around 3%, and these guys were loaning fixed for 10 years at 3%. So, a lot of people going to get burned on that stuff.

It's moving up. It's going to move up, so you might as well recognize it and get ready for it and move up with it. So, that's what we're doing. They are not bringing the 4.25%s, 4.5%s back to the committee now. We are pushing up, trying to push to 5%s. Not getting all 5%s; we are getting some 4.75% stuff, but we're pushing -- trying to push up.

Okay, thanks very much. That was great. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to John Allison for any closing remarks.

Thank you, Laura. Thank you for your interest in our Company. Been a great year. 2013 was a great and exciting year for this Company, and I think 2014 will be the same. So, I don't anticipate any changes, other than continue with our foot on the accelerator, get Liberty fixed, get it to a 1.50% to 1.70% to 2% to a 2.20%. It ought to do better than that. But anyway, they pass out around here when I say that.

But anyway, I think we're headed in the right direction. I think it will be a great 2014, and hopefully we can find some people out there that are interested in joining this -- jumping on this train going down the tracks. So, we will talk to you in 90 days and thanks for your support.

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