Home BancShares Inc (HOMB) 2014 Q1 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares, Inc., first-quarter 2014 earnings call. The purpose of this call is discuss the information and data provided in the quarterly earnings release issued this morning. The Company presenters will begin with prepared remarks, then entertain questions. (Operator Instructions).

The Company participants in this call are John Allison, Chairman; Randy Sims, Chief Executive Officer; Randy Mayor, Chief Financial Officer; Brian Davis, Chief Accounting Officer; Kevin Hester, Chief Lending Officer; and Donna Townsell, Vice President of Corporate Efficiency.

The Company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page 3 of their Form 10-K filed with the SEC in February 2014. 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, Gary, and welcome to Home BancShares' first-quarter earnings release and conference call.

It's been about three months since we've talked to you and the game-changing acquisition of Liberty Bank has led to a quarter of much improved performance and many new records.

In less than nine months from the announcement until the end of the quarter, our team, alongside some great and willing Liberty people, has transformed that operation into a strong earnings machine. Congrats to both teams, but especially our Home BancShares team, who brought our culture and operating efficiency to the Liberty acquisition. Change is difficult and we had plenty of resistance, but the numbers don't lie. It is what it is.

This team doesn't just talk about it; they do it. And let's just look at some of the highlights -- record earnings, up 55.8%, almost a $10 million increase in earnings for the first quarter; record EPS; record efficiency ratio; record revenue; record pretax, pre-provision ROA; strong GAAP ROA, much better than most people thought; good reserve build; improvement in asset quality; and good margins. Great job.

On the acquisition front, we are very busy and looking at many opportunities.

Randy, we will go to you for the more specific numbers and the rest of the gang.

Thank you, Johnny. It has been a very busy quarter, centered around the progress with the Liberty acquisition.

As I have stated last quarter, a key element was getting the conversion of Liberty completed before the end of last year in order to have a first quarter of combined results between the two institutions. And as Johnny has stated, record, record, record, record. It was a very good first quarter.

We are also back and extremely busy looking at banks and other growth opportunities, including de novo branching for the right strategic additions to our organization. And in addition, we're also evaluating our current branches for consolidation and have plans to close or merge four in Arkansas and two in Florida during the second quarter.

But let's get to the numbers because they were extremely good. It was another record quarterly profit of $27.3 million, or $0.42 diluted earnings per share, compared with income of $17.5 million, or $0.31 diluted earnings per share, over the same quarter in 2013. That is an increase of $9.8 million, or 55.8%, as Johnny told you.

Now included in those numbers is $849,000 of Liberty merger expenses, so if you exclude that amount, then our diluted earnings per share for the first quarter of 2014 was $0.43 per share. We are very pleased with income.

And now that makes 12 straight quarters of record earnings, when you exclude merger expenses, especially in the fourth quarter of 2013.

Our return on average assets, including all merger-related expenses, was 1.64% for the quarter, well above where we thought we might be. But let's exclude just the merger expenses again, and our ROA was a 1.67%. Our core return on average assets that include -- excludes intangibles, provision, merger expenses, and taxes was 3.26% for the quarter, as compared to 2.77% as of last quarter. Our return on average TCE, excluding intangible amortization for the year, was 21.48%. Great numbers.

Now, let's look at the internal ROAs. While the internal overall ROAs for the Arkansas banks dropped some, due to the Liberty transaction, we continue to see those same old legacy banks well over 2%. And as you are aware, we have -- we said it last quarter, our goal was to get the Liberty regions to an overall 1.5% internal ROA before the end of the second quarter.

And now, while there were a few Liberty branches that we merged into Arkansas regions that makes it a little confusing, we have calculated and I am pleased to announce that Liberty is well over the 1.5% ROA as of the end of this quarter, quite an improvement in a short period time.

Again, looking at and based upon our internal numbers, to be used for comparisons only, we are seeing ROAs in our Florida and Alabama regions average in excess of 1.5%. As with the last quarter, more improvement in Florida. It will be interesting to see the second-quarter results as we continue to make changes and improvements, especially with the Liberty regions.

As the Centennial Bank level and on internal analysis, 70% of all our assets are in Arkansas. 4% of our assets are in Alabama and 26% of the assets are in Florida.

And of course, we need to talk about our efficiency ratio. I again mentioned how important it was for us to get that conversion accomplished before year-end; otherwise, it would have been March and the expense of two big back-room operations. Well, here are the numbers.

We ended the fourth quarter with a 45.2% core efficiency ratio and 45.49% for the year of 2013, a great number for any banking organization. And where did we end the first quarter? How about 41.4%? Again, not bad for 90 days after taking on an acquisition 70% of your size.

And for more on that number, who better to turn to but Donna Townsell, our Vice President for Corporate Efficiency? Donna, great numbers.

Thank you, Randy.

For the first quarter of 2014, our core efficiency ratio was 41.4%, as you have already heard, which is compared to 45.2% in the fourth quarter of 2013.

In regards to Liberty, we picked the low-hanging fruit on the expense side to work on first, and as we mentioned at the end of Q4, we were already well past the halfway mark in our projected savings for this acquisition. The balance of the major cost saves for Liberty will take some time and you will continue to see improved efficiencies throughout the remainder of the calendar year.

I'd like to mention that savings like this don't just happen. I get to report on it, but it takes a cohesive team to complete an acquisition while still keeping the lights on, and what a great team we've got. To illustrate that we are able to keep the lights on, I'd like to report on efficiencies around the Company.

For purposes of this call, I rolled them up to a state level and should note that these are not actually quarter numbers, as some components roll up to the corporate level, so they cannot be pushed down to the regions.

So, that being said, at a bank level for Q1, Arkansas ran about a 35%, Alabama, 38%, and Florida, 59%. And I should remind you that Florida is where almost all of our ORE and special assets are. As we continue to clean that up, you will see that Florida is right in line with the rest of the group.

And I might add that Arkansas running at 35% validates why we chose the Liberty acquisition. We knew we could leverage our existing infrastructure, and frankly, we're bringing it into our expectations quicker than expected.

We have a well-documented project planned with pre- and post-conversion activity, and each group knows their role. It is much like scenes in a play. To swallow an acquisition as large as Liberty and reap half the cost saves in less than a year is a record for us, and as you have heard, we like to set records. We put a conversion plan together four years ago and it continues to work for us.

So to sum it up, we are pleased with our Liberty progress and with our legacy efficiency ratios for the first quarter. We will continue to police ourselves, keeping us poised for the next acquisition. Randy?

Thank you, Donna, well said.

Let's switch to deposits. We ended the quarter at $5.34 billion, compared to $5.39 billion as of year-end. Time deposits represented 27.23%, down a little from the 29.8% of total deposits as we begin to work with Liberty regions. We would like to see that dependency get down under 25%. Then that takes us to net interest income, margin, and non-interest expense.

As usual, I will turn it over to our CFO, Randy Mayor, to give you all the numbers. After that, Randy will pass it to Brian Davis to give us more information on our capital, so let's switch to Randy.

Thanks, Randy.

During the quarter, there was a positive impairment on four FDIC pools, which resulted in $2 million of additional interest income, a reduction of our non-interest income of $2.1 million, and $71,000 in non-interest expense in the FDIC true-up, so the net impact was $200,000 of expense for the quarter.

As a side note, the total positive impairment was $11.4 million, which will continue to be recognized as a yield adjustment over the weighted average life of the loans, whereas the reduction of the indemnification assets of $8.3 million will be recognized over the life of the loss share agreement.

The net interest margin improved from 5.09% in Q4 to 5.42% in Q1, primarily due to the loan yield improving from 6.50% to 6.88%. The yield on earning assets improved 39 basis points from 5.43% to 5.82%, while the yield on interest-bearing liabilities declined slightly from 0.41% to 0.40%.

In the non-interest income area, service charges increased $181,000, trust income increased $152,000, and insurance, which typically has a strong first quarter, increased by $638,000. Gains on the sale of OREO were at $539,000, while the FDIC indemnification contra income was $4.7 million for the quarter.

In the non-interest expense category, salaries and benefits continued to decline by $571,000, occupancy and equipment increased $556,000, and data processing increased $255,000. Advertising expense declined $131,000, while merger expenses declined $16.5 million. And state assessments increased $256,000 and other expenses in various categories increased $763,000.

As mentioned, our merger-adjusted ROA of 1.67 and a core efficiency ratio of 41.39% were very strong ratios for this quarter.

With that, I will turn it over to Brian.

Thanks, Randy.

During the first quarter of 2014, we paid out dividends of $4.9 million and grew retained earnings by $22.5 million. For Q1 2014, our Tier 1 capital was $582.8 million, total risk-based capital was $631.8 million, and risk-weighted assets were $5.0 billion.

As a result, the leverage ratio was 9.08%, compared to 9.38% at 12/31. Tier 1 capital was 11.67, compared to 10.88 at year-end. Total risk-based capital was 12.65, compared to 11.75 at 12/31.

Additional and capital improvements include book value per common share was $13.34, compared to $12.92 at 12/31. Tangible book value per common share was $8.38, compared to $7.94 at year-end and the TCE ratio was 8.5%, compared to 8.0% at 12/31. Randy?

Thanks, Brian. We will now switch to our Chief Lender, Kevin Hester, who will fill us in on all loan matters.

Thanks, Randy. It was very easy for me to remember to ask that [quality] number for this quarter as the most significant ratios were all the same number, 103. The noncovered nonperforming loan ratio, 1.03%. The noncovered nonperforming asset ratio, 1.03%. The allowance for loan loss coverage of nonperforming noncovered loans, 103%. All very solid ratios, especially given the loan-loss coverage ratio that -- with the Liberty non-performers being covered without acquiring a corresponding loan-loss reserve.

Our allowance for loan losses as a percentage of noncovered loans increased from 0.93% to 1.07%. However, if you added the Vision, Premier, and Heritage acquisition discounts to the allowance for loan losses, the combined figure would be 4.86% of noncovered loans at quarter-end.

Noncovered real estate owned decreased 21% on a linked-quarter basis from $29.9 million to $23.5 million. The share-related Arkansas properties still remains above 80%.

For the second consecutive quarter, net charge-offs were less than half of the average of the previous four quarters. At 19 basis points, net charge-offs was the lowest level in 11 quarters. Early-stage past-dues declined a solid 21 basis points to the lowest point in six quarters, from 1.63% to 1.42%.

A decline in loan balances this quarter broke a recent trend of loan growth. A few large payoffs, plus a delay in some anticipated closings, led to this decline.

Unfunded commitments increased in the first quarter, and the second-quarter loan pipeline is back to the level seen in late 2013. A stronger focus on two specialized lending areas is also expected to pay dividends later this year.

Secondary mortgage is still strong, with closing volume up 20% quarter over quarter.

As we enter the final year of our commercial loss share arrangement on the first two failed bank acquisitions and we approach that point in the others, we are focused on the resolution of troubled loans and we are very pleased with the progress we've made over the past year. Our special assets group is very experienced and diligent, and the process for the wind-down of the commercial loss shares is in place.

With the starters on the field with the acquisitions in the Liberty regions and the headway we've made in our legacy markets, I'm very excited about the prospects and the lending area for the remainder of 2014.

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

Good report. Thank you, Kevin.

Sum it up, again, we are very pleased with our results for the first quarter and we look forward to continued improvement in the second quarter, as well as some possible new acquisitions. We saw our 12th consecutive quarter of record earnings, improvement in our margin, and a significant improvement in our core efficiency ratio one quarter after the largest acquisition in the history of our Company. Congratulations to all our employees. What a great job. Well done.

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

Thank you. Great quarter, guys. You might shed a little light, Kevin, on the pools, the Liberty pools. We put a couple of pools in there -- I think you call them 20s and 30s, and it appears to me at this point that the performance of those pools is much better than anticipated. You want to talk about that just a minute?

We have expected paydowns and you would expect paydowns in the accretion of the income that comes on that, but we have had some other paydowns as well, and they've been good, based on the experience we expected. I think we've had positive experience compared to what we anticipated in due diligence.

I think that's correct. I am pretty pleased with what we have seen thus far. We are going through all of those loans as we do renewals and things now, but so far, so good, much better than we anticipated.

So I guess, at that point in time, Gary, we are ready for Q&A.

(Operator Instructions). Brian Zabora, KBW.

Maybe just a question on M&A, just where you stand now? How is pricing and how are the conversations going?

I think I -- at a conference recently, I said we have signed a letter of intent on a deal. We will be talking more about that probably tomorrow, today or tomorrow, Brian.

Okay.

Tomorrow?

Tomorrow.

Tomorrow, we'll be talking more about that tomorrow.

We are looking at -- there are lots of opportunities and we are looking at lots of opportunities, some big and some small. Pricing is beginning to get a little stupid. It's just beginning to get a little stupid. We looked at some transactions we would like to do. We can't do them even with our stock as strong as our stock's been, so I don't know who can do them. If we can't do them, I don't know who can do them.

So, we're busy, and you just got to pass the ones that are -- that won't work for you and go to the ones that will.

Great, all right. And then, maybe on the Liberty footprint, are you seeing loan balances stabilize? Are you seeing growth? Maybe just what you're seeing on that side.

Let Kevin take that.

Hi, Brian, this is Kevin. Yes, we think that the loan balances are stabilizing. [Davey Carter] and Stephen Tipton are doing a great job going through that portfolio and working through the deals, and it's the first time through.

We don't like some, but some don't like us, and we will continue to work through those. Some of the pricing that we are seeing in that market is just really silly, but that's about two-thirds of the first-quarter decline. The rest of it is a great success story. We've got an Arkansas customer that sold their company, and it went from a $20 million, plus, loan to about a $30 million deposit almost overnight.

So you like to see -- you hate to lose the loan, but you like to see those stories. So, long answer to say yes, I think we are seeing those balances stabilize and we're actually making a good level of loans in those two regions.

This is Johnny. We probably expect Northeast to be flat to up next quarter. So, it's actually looking pretty good.

The pipeline looks pretty good. Some of those loans, we're not going to do dumb deals, and some people -- there are dumb bankers running around everywhere and doing dumb deals, so we're just not going to do those. We may be forced into doing a bucket of $150 million or $200 million in the -- we haven't done threes. We may be forced into doing $150 million to $200 million in threes, and I don't think that will make a lot of impact on us.

But we're seeing threes stuff fixed for seven and 10 years, and that's just -- it makes absolutely no sense. And that's not salesmanship or selling customer relationships. Anybody can give something away.

So, we see some of that from time to time. We are matching some of that stuff and we're going to continue to match it.

That's a big help. Thanks for taking my questions.

Jon Arfstrom, RBC Capital Markets.

Kevin, just to confirm one thing. I want to make sure I heard it right. You said two-thirds of the sequential decline in loans was Liberty runoff, approximately?

Approximately, yes.

Yes, okay, good. That helps.

And I guess for Kevin or Randy, just thinking about the margin here, you talked a little bit about loan payoffs. In that margin, is there -- would you say there's any temporary or one-time benefits from some of these early payoffs, or Randy, would you say this is a near-term run rate on the margin?

Jon, this is Randy, and specifically looking at the Liberty area, yes, the additional payoffs, it's kind of a cycle. I guess if there is a silver lining with the payoffs that some of that income comes to the bottom line, but you also in that -- as that is happening, we have to prepare -- we have put these loans on without a loan-loss reserve being over there, so we're also in the process of building that loan-loss reserve for potential charge-offs that come down the pike.

But I think the first quarter did see some acceleration in the income coming in from that because of these payoffs, and hopefully that will stabilize somewhat with the slowdown.

On the coverage side, we also -- those adjustments in those pools helped to kick the yield up on that.

Jon, this is Brian. On the Liberty loans, we have approximately -- when we bought the portfolio, we put about $1.6 billion of those loans as FASB 91, which means they weren't impaired loans, and they have a mark on those loans that is accreting back into income, and for the fourth quarter of 2013, it was $8.6 million of accretable income on the Liberty loans, which is going through margin, and that was for the first -- yes, for the first quarter of 2014. And for the fourth quarter of 2013, it was $3.4 million. So we had an additional $5.1 million of additional accretable income from those Liberty loans.

And a lot of that comes from payoffs when you have the mark on the loans and then it pays off.

What it's enabling us to do, Jon, is to build that reserve. It is enabling us -- we put $6.9 million in reserves, so we're not booking that into income, something that's nonsustainable. We are booking it into reserve because, as Kevin said, we have added all these loans. We have added no reserve.

On the Liberty transaction, of the $1.8 billion in loans, there was about $100 million in marks of some fashion put on those loans, so as those loans pay on a monthly basis, that accretes something into income, similar to the mark on the loss share loans. Does that clear it up?

Yes, yes. So if I summarize it, I guess, net interest income may be a little bit elevated, along with the margin, but it didn't drop to the bottom line. So it's safe to say if margin probably comes down a bit, net interest income comes down a bit from Q1, but it may not be that big of a bottom-line impact. Is that the right way to think about it?

I think that's a good assumption. Basically, $7 million of the $8.5 million that came in off the Liberty deal went in reserve.

Okay, all right. I guess the next big question is on expenses, and it's pretty incredible you have been able to get this kind of savings so far. But when I look at the core and I carve out the merger expenses, I get $38 million to $39 million roughly in core expenses. What's possible from here? That has the full quarter of Liberty in it, and I guess, what's possible from here in terms of expenses?

We don't have a specific number. I'll let Donna talk about where she is in the cycle, but there is more to come out of Liberty. As she reached up and grabbed the apple off the tree, it was pretty easy to do, and it will be a little tougher because it is higher up. You got to get a ladder now. So, I will let Donna talk about what she is going to do.

Okay. Apparently, I am getting my ladder out of the shed now. Originally, we quoted about two years before we would see our full projected savings, but we have made significant progress in nine months that we are proud of.

For Liberty, specifically, there is more expense controls there. They won't be as big as the low-hanging fruit. For example, the branch study. We haven't looked at all their branches yet, and that's not just for Liberty. That will be enterprisewide. There is a movement with electronic medium and people don't go into branches as often.

So, we won't have branches just to have branches. We want to be efficient. So, we're not saying we're going to shut them down, we're just saying we are going to look at them to see what's the most efficient.

There's contracts out there yet to be worked. We took hold of the big ones originally, but there could still be some improvements in that area, so I think the rest of the year, you will definitely see some improvements made, and then we will have to see where we are at that point.

We haven't really addressed the retail side, but we are going to address the retail side, and that's what Donna is talking about. Or actually, we may close some branches. We're going to start looking, evaluating all Companywide branches below X millions of dollars, and some of them may be there for a reason, because we got a lot of transactions, but we're going to look at all of those. So, it may help the efficiency of the entire Company.

Okay. That's helpful, Donna. I am sure John will ask you to use your own ladder. You might not want to run that through expenses.

No, I'll buy my own, for sure. Good point.

Great job.

Thank you.

Michael Rose, Raymond James.

I heard Donna give the efficiency numbers by state. Florida is at 59. How do you think about getting it closer to where Arkansas and Alabama is? Do you need another deal? Do you need loan growth to pick up? What's the process or the algebra to get there?

You got to -- you do have to grow your loans into -- you got to grow into that footprint with the loan balances. I think that will certainly help, if we can do that.

I think, also, you've got the [sad] area down there. That's where our additional staffing is. As we work through these loans and work them down, hopefully that area will shrink and as we make progress on the (multiple speakers)

And they are making good progress, and we have had some that we are not replacing when we had some turnover. If we don't acquire something with a large amount of problems, you will continue to see that. If we make acquisitions that have a larger balance and special assets, then those we will hang on for a little while longer. But they are making good progress.

I think for your presentation, Donna was moving in that direction anyway.

That's exactly right. If you take that out and look at Florida, for example, south Florida's improvements they have made over the years, the rest of Florida is doing a great job. It's just that that's where the bulk of our ORE is, and Arkansas and Alabama don't get penalized with that.

We didn't get there -- we didn't get to this efficiency ratio overnight, and it takes a while to get there, as evidenced by south Florida continuing to improve their efficiency ratio, and once -- hopefully, the bad news is that we will get rid of all the sad loans and the good news is we get rid of all the sad loans. It is kind of a two-edged knife.

Yes, and this is Randy, in addition to that, we've got a couple of de novo branches that we've started up, but they are doing extremely well and they just need a little more time.

You take Pensacola. We are seeing loan growth out of there and we are very, very pleased with that. But in addition to the sad expense that will eventually go away, we've got some overcapacity in some of our branches, and that goes into us looking at all our branches for that overcapacity to see if it would be more efficient to combine a couple or whatever.

But also, we've got some start-up branches, not only there. We got one in Seagrove that are coming on that will continue to get better and better, and you will see that efficiency ratio start to get a little bit better and better as we go on down the road.

Okay, that's great color. And just as a follow-up, switching gears to loan pipelines and what you're seeing out of each of your markets. I think you said two-thirds of the decline in loans was from Liberty this quarter, meaning a third was from maybe your core portfolio. Can you talk about what you are seeing and if the weather impacted this quarter, and then, how pipelines are shaping up into the second quarter? Thanks.

Yes, I haven't noticed the weather. I don't think that's a big concern to us.

But I think the central Florida, south Florida, both of those have good pipelines. Northeast Arkansas has got a good pipeline. I think we feel like that may be flat for another quarter there, but they are booking a good amount of loans. Northwest Arkansas is doing well. Really, all of our regions are contributing, and that is where we need it to be.

All right, guys. Thanks for taking my questions.

Matt Olney, Stephens.

Going back to the M&A discussion, Johnny, you mentioned deals you are looking at. Some are large, some are small. Remind us your sweet spot for M&A deals and how small you would go on a deal.

Our letter-of-intent deal is only about a $300 million deal, but if we close that deal, it's really pretty strategic. You will see how that deal works for us.

We will go to $200 million to $300 million to $400 million. If the big ones get out of price range that don't make any sense and you have to go to the smaller ones, then that's what we will do. We will go wherever the deal is. You know we're pretty disciplined on price and we just draw a line.

We are on a deal now that's a big deal. We bid on it. We're going to bid on it, I guess tomorrow, next week, or sometime. I don't know. It's a deal that's out there. If we decide to. I don't know that we will, but we are trying to make that deal work. We're just trying to make it -- we're trying to figure out a way to make it work, and short of a bunch of assumptions that are too aggressive, it doesn't work.

So you just got to -- I hate to say this, but when you get an investment banker involved in the deals, whatever it takes to get them to sign up on the bottom line, get them to sign up and promise them the moon and try to produce, and you can't turn chicken into chicken salad.

It's pretty obvious from this quarter of what we can do with a larger transaction. I think that goes without saying. But on the other side, if you do a $300 million, a $500 million, a $600 million, that adds up over time and you're going to get the same result; it is just going to be a longer period of time.

So, we are still back to the same old story. We are looking for those deals that really make strategic sense for us and where we ought to be. And if it's a small deal that makes sense, we should do it. But we can do more with a larger transaction in a shorter period of time.

So are there any markets within your footprint where M&A pricing is still reasonable or is your commentary throughout your footprint?

No, no, that's not correct. There are still reasonable deals out there.

It's kind of -- you kind of prioritize and try to figure out where you want to be, and you know about where their price range is, what they're looking at. And then you just see a -- while you're working on those deals, suddenly here's a bigger one that maybe is more in our sweet spot, as Randy said, and you drop those smaller ones to move to a big one. It just draws you to it. And then you get there and you work it and you can't make it work, so you go back to the smaller ones.

So, you just remain disciplined and continue to look. Tracy French probably has, I don't know, six or seven for us to look at right now. Kevin is doing due diligence here in the next couple of weeks on another one. So, we are busy. We are very busy, trying not to waste our time.

I was with a guy the other day and he said, come do due diligence, and I said, no. You give me a price and let me decide whether we want to play or not, and I said, we don't waste your time or my time either because if you are out there too far out, then you will be wasting my time and your time. So, you give me a price, and if we think it's worthy of us coming to look, we will come look. That sounds rude and obnoxious, but there are so many of them out there, you have to draw that line.

Thanks, guys.

Brian Martin, FIG Partners.

Maybe just back to the question on the payoffs that you guys touched on earlier, and I think it was Brian that mentioned the $3.5 million versus the $8.5 million this quarter. Can you talk about how likely it is you think those debts have a level to continue, and maybe just how you are thinking about that relative to the reserve build, where you would like to see the reserves trend to as you go forward?

Where we want it to settle? Is that what you are asking? Where we want that reserve level to settle? (multiple speakers)

Yes.

The [103]? In our past life, we ran a [150]. Years ago, we ran a 150 reserve and that was sufficient. As you can see, asset quality is improving and charge-offs are down, so we are probably heading towards that. We don't believe in funny money income, so I would rather build our reserve while we got all this accretion coming in. If we can do that, and, Kevin, have you got --

That would be another $20 million to get to 150. That would be roughly another $22 million, and there is certainly that there. It would probably take us all year to get there under normal circumstances, but we haven't picked a number. But as Johnny said, 150 has been a number we have been comfortable with in good times where we are headed, we hope.

Brian, we came out last quarter with a 0.92. I haven't seen us with a 0.92 reserve (multiple speakers). Of course, we've stacked on -- purchased $3 billion worth of loans, and it's just a number that didn't look good to me. The 0.92 didn't make me -- I don't like that number. I don't like being 0.92. It really takes anything -- 0.75 would probably cover it, but if we were at 150 we just -- I'm not sure we are totally out of the woods in this economic cycle yet. We are probably better off having too much than too little.

I think you also need to keep in mind that there's marks on there, so Kevin, I think you are [4086] or whatever that number was, when you add the marks to what the reserve is there. Brian, I think maybe you're looking a little bit, I think, with that $8.5 million that Brian talking about, I think that was about $100 million worth of payoffs coming out of that $1.6 billion portfolio. So as that slows down, you would probably see that build slow down a little bit, too.

Okay. All right, and maybe just a couple of other questions. You talked about potential branch closings, I guess. Is your sense that would be just a branch here, a branch there? There is no overhaul relative to the branch system, but just as you look through it. Is that fair to say?

No, there is no general overhaul at all. We're just cutting a line on a kind of a formula of how many transactions, how many non -- we are throwing out time deposits. We are looking at core accounts and seeing if we've got some small, small branches that really don't make any sense, and maybe closing those.

So, it's going to be a process where we start at the very bottom to see. I think there is a few of them out there that just don't make sense, so not some general overhaul or a getting rid of a ton of them.

Okay, all right. Then maybe just two last things. You talked about the loan portfolio later in the year or maybe picking up with a new segment. Maybe Kevin can just touch on that, can you give any color?

Say that again. Say that again.

I thought that you mentioned that -- maybe Kevin mentioned in his prepared remarks about a new potential loan segment or something you are thinking about later in the year that would pick up that (multiple speakers) or is that --

For us, it would be SBA, and we've got an Accounts Receivable product we call Business Manager, and we're going to focus on that as a Company, roll that out to Florida and other -- and to the Liberty branches that have not had that.

Okay, and then (multiple speakers)

They are both very profitable products that we have had for some time in the Centennial organization.

Okay, and the internal ROA for all of Arkansas, where was that with Liberty and the legacy combined this quarter? Did you give that?

It was about a 2, wasn't it?

It was a 2.

2%.

2%.

And that's with Liberty?

Yes.

Right, okay. And the cost (multiple speakers)

Now remember, that's internal. It doesn't include some holding company expenses. It's just an internal comparison.

Okay. In the (multiple speakers)

(multiple speakers). I am sorry to interrupt you.

That's all right. And maybe just remind me, Donna, at announcement, your projected cost saves versus what you have achieved thus far, where do you stand on those two numbers?

I think we had reported last quarter, we were a little over the halfway mark, so I really don't want to get locked into a number of what we think is left, but originally, we were hoping somewhere around a $10 million range, give or take, so --

Okay (multiple speakers)

We -- on the ROA side, we were able to -- the game plan was to get Liberty to a 150. We feel like, as Randy said, we have exceeded that in the first quarter, and it's already over that, so as you remember in the last call, I said if we see Liberty doing that on our way to getting it to a 150, but it's running north of 150 now, and I'm back on the road shopping and that's what we're doing. We're back on the road shopping.

Okay. All right, thanks for the time, guys. Good quarter.

Kevin Reynolds, Wunderlich Securities.

Most of my questions have been answered. Good quarter, guys. I will toss this out. This is something that Randy said on the call, but I will also open it up to Johnny to discuss it as well. But Randy, I think you said that you were looking forward to some possible new acquisitions, as opposed to just a possible acquisition. Does that imply that you all feel -- would feel comfortable doing two at one time or having two in the pipeline at one time that have both been announced, or do you feel like you would need to do one, kind of squeeze out profitability on it before you got to the next one?

No, I think that you are out there harvesting. You got a bag. You ought to fill the bag up. So we've got, without doubt, one of the best conversion teams, I think you could say, after the Liberty results in America, and bring them on. We would love to have a couple in the pipeline.

It really gets down to the point of pricing and negotiating, and of course, we've got one of the best to do that in our Chairman.

We wouldn't do two Libertys. We wouldn't -- but we would do a Liberty and a $300 million or $400 million one.

Okay.

Let me just add to that is we have done two before. We did Premier and Heritage at the same time, if you remember in our history. And we just had them scheduled, as far as the conversion, one after the other. So I think Johnny is right. I wouldn't say we'd do two giant ones at one time, but certainly if you had a small one, a medium-sized one, or whatever, we're still wanting to grow.

Okay, and I know -- you target -- you say you are targeting Florida, and there's a lot of different places you could be in Florida and a lot of different places that you currently are in Florida. Do you have any preference right now for -- if you had to prioritize the metro markets in Florida, could you do that for us on this call, just give us an idea of which markets you prefer more than others right now, given your size and where you need to achieve more critical mass?

I think that we like from Orlando south and then from Orlando north. (laughter)

Some of these guys we're looking at may be public, Kevin. And if I give you an area, I know what you're going to do. You're going straight in there and see who the people are.

We're pretty happy with -- we are probably -- you probably -- we're looking at a de novo branch in the Naples area. We are probably going to do that if it works out and we get the right leases on that deal.

We're really looking where it makes the most sense. Just like Liberty, we were on seven or eight Florida deals, and here came Liberty, and we dropped them and moved to Liberty. So, we're going to do the deals that make the most sense for us. If we're able to get the one that I talked about on the letter of intent, if that works, it's a real strategic move for us and makes lots of sense.

So, would we beef up south Florida? We would. And would we beef up in Orlando? We would. In Tampa? We would. We like those areas. We are not on the East Coast. We have tried to be there a couple of times, but we haven't gotten there, so maybe we are better off playing on the West Coast.

We get more mass on the West Coast, it looks like right now.

And when you talk about possible south Florida, are you still a little bit -- how should I say, a little bit nervous if you pick up the phone, call somebody, and they answer the phone by saying hola?

I don't know what that means.

Well, what I mean is (multiple speakers)

Yes, I got -- yes, yes, no. We're okay there. We looked at one down -- we looked at a deal down there the other day that had three or four branches, and one of them happened to be in that area where they would answer the phone hola, but it wasn't a big deal to us.

Okay, all right. Thanks a lot and good quarter.

(Operator Instructions). Nathan Race, Sterne, Agee.

Just wanted to follow up on the credit quality discussion. And just thinking about provisioning going forward. Give us (multiple speakers)

I can't -- can you speak up, please?

Sorry, guys. Just a follow-up on the credit quality question and provisioning going forward, can you give us a sense of what we can expect, both on the noncovered and covered provision going forward? I understand there was some churn within the acquired portfolio this quarter and you had to provision for that appropriately, but if you could just give us an idea of what to expect going forward, I'd appreciate it.

We're going to evaluate our asset quality as we continue forward, but as I said earlier, we have always run at about -- in our past, we always ran about a 150 reserve and that's our comfort level, and that's where we have always been. So we're building towards the 150 reserve and I think Kevin said that's another $22 million. It will probably take us the rest of the year to build to that.

And then we will probably quit. Or if we determine we need to quit and we need a 140, then we'll just stop at 140, or if Kevin determines that some -- we are having some deterioration, we need to go to 160, so I would say the range is 140 to 160. Kevin, do you agree it's pretty close?

Asset quality, you have seen the numbers there. They have been very stable the last few quarters, and the biggest question is what happens going forward with Liberty. It's a new portfolio to us and it's big compared -- as relative to the total. So we just have to see how it matures and how it plays out.

We stacked on $3 billion worth of loans with no reserve, basically. We got marks on them. That's where the accretion is coming from. We got marks on them, but we -- it just looks funny when we came out the fourth quarter with a 0.92 reserve. That's just not a level that this group has been comfortable with.

So, we are headed towards a 150. We may pull up at 140 or we may go to 160, but probably in the 150 range is where we will end up.

Okay, great. Thanks, guys.

As there are no further questions, 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, Gary, and thank all of you for your participation in the Company. Thanks for your help and your support. We will talk to you in 90 days and hopefully we will have a deal or two done between now and then. Thank you.

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