Home BancShares Inc (HOMB) 2014 Q2 法說會逐字稿

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

(Operator Instructions)

The Company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page 3 of their Form 10-K filed with the SEC in February 2014.

(Operator Instructions)

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

Thanks, Jerry, and welcome to Home BancShares' second quarter 2014 earnings release and conference call. With me today is Randy Sims, CEO; Randy Mayor, CFO; Brian Davis, Chief Accounting Officer; Kevin Hester, Chief Lending Officer; Donna Townsell, Vice President of Corporate Efficiencies; and Tracy French, Regional President.

It was just a little over a year ago that we announced Home BancShares' largest acquisition ever, a [$20.9] billion Arkansas deal. The question on everyone's mind was, could Home integrate a big one as efficiently as they've done a dozen or so smaller transactions that they've done?

Are they prepared? Can they execute as efficiently? Do they have the experience? Do they have the people, and do they have the knowledge? I guess the best way to show that is to compare second quarter of 2013 just before Liberty with second quarter 2014 with Liberty, eight months later after closing and the integration of $2.9 [million] that was running a 0.8% ROA and efficiency ratio of almost 70% with some major asset quality concerns.

Here we go. June 30, 2013, we're all [crowing] around Conway. We're pretty proud. Home BancShares had done a strong 1.7% ROA, and after we'd brought Liberty in the deal we're proud to announce that we did a 1.7% for June 30 of 2014. Core ROA was 1.79% last year, 1.83% this year, and our pretax pre-provision ROA last year was a strong 2.85%, and this year is a 3.27%. Return on tangible common equity last year was a 16.97%, and this year is a 21.03%.

Efficiency ratio, Donna Townsend was [crowing] around here last year at this time with a 45.5% efficiency ratio. What I thought might happen has happened, we came out with a combined efficiency ratio of 41.09%.

Earnings were $17.7 million last year and $28.4 million this year, up $10.8 million. That is up 61%, earnings up 61%. I think it was 55% in the first quarter and 61%, even stronger this quarter. We went from $0.31 to $0.43, and I think we lacked $200,000 or $300,000, and that's a strong $0.43. That's not a weak $0.43.

While we did all this if you remember from about 2009 on, we didn't virtually make no loan loss reserve allocations. While this year we've added $13 million of loan loss, we've taken our loan loss reserve from 0.93% to 1.17%. That's over $6 million a quarter, and I'm pretty proud of the results with that.

Because of concern over the asset quality, the quality of the assets acquired in the Liberty transaction, we marked that portfolio over $100 million. That's the bad news.

The good news is that it may not be as bad as we expected. We've already taken many of these losses and resolved many of the issues that were outstanding. This may turn around to have a positive effect to earnings down the road.

That's what we do. We purchase companies with poor to moderate operating methods and transform them to high performing companies.

I want to thank the employees of the former Liberty Bank for their confidence and leadership. I know it's been a fast and tough eight months, but congrats to all of you. Keep your heads high. You have become one of the highest performing banks in the USA.

You made the transition from a poor performer to a great performer. I heard all of the naysayers, but the numbers don't lie. It is what it is. Congrats to all Liberty and Home BancShares employees. I love it when a plan comes together.

You've heard me say many times that you can't push loans. It's like pushing a rope. You can't make it happen. It either happens or it doesn't happen, and when it comes in, we'll get our fair share of it.

I've also heard that good things come to those who wait. Well, I guess it's our turn. We have a huge pipeline of approved loans, the largest pipeline in the Company's history, or that I can remember since we started keeping up with it.

When you think about it for a Company that doesn't involve itself in exotic, risky transactions, it's a very conservative Company that doesn't sell the future in terms and rate, even I am totally amazed at the size of this pipeline. From the looks at the next loan committee, it's not stopping there.

We're very busy on the acquisition front, hope to announce a couple more deals this year, in addition to Bud's Florida Traditions deal which should close soon. The future for Home has never been brighter. With Liberty under wraps, Florida Traditions in closing, a couple more deals this year, and the largest pipeline in the Company's history, I think we're in a very positive position for the future. Randy?

Thank you, Johnny. It has been a very busy quarter, and to add just a little more color to your highlights, let's start with Florida Traditions Bank. If you recall, we signed a Definitive Agreement in May with Florida Traditions located in Dade City, Florida. This gives us an additional eight branches and a great footprint to fill in between our Orlando and Tampa network.

I'm pleased to announce that as of today all approvals have been obtained in Florida Traditions branches will open up as Centennial Bank in the morning. There will be a press release this afternoon.

We are very excited about this addition to the Centennial family, and we welcome Bud Stalnaker and his banking team. Bud will be leading our Central Florida region as President, and as always, our first priority is to get the acquisition converted to our systems.

The Florida Traditions conversion will take place on September 26. Our conversion team and the bank staff started this process soon after the signing of the agreement.

I'm also pleased to announce that we will be opening a de novo branch in Naples, Florida, at the beginning of August. We have hired an experienced team lead by Brian [Kenny] who will be the Market President of Collier County.

Brian has more than 25 years of experience in both lending and market development with the last 10 years being in Naples. We are excited about this new market in our South Florida region.

Perhaps the best news that we currently have is exactly what Johnny talked about, we have the largest pipeline of loans in our history. While the timing of our closings didn't help much this quarter we really look forward to the good growth the remainder of the year.

We continue to make progress with the Liberty acquisition. Our branch staffing model is being worked, and significant improvement has been made within the last month with a goal to be within the guidelines in the third quarter.

We have also seen some branch closing during this quarter from the former Liberty regions. We're extremely busy looking at new acquisitions. There are more opportunities than we've ever seen before.

Like Florida Traditions, we are looking for the right strategic addition to our organization. Speaking of that, joining us today is Tracy French who's going to add a little more color on the acquisition efforts.

Thank you, Randy. Good afternoon, everyone. We continue to have several opportunities, and I have two due diligence teams set and ready to go. Our visits have gone well. We've actually added a few new ones over the past couple of weeks. These banks are in existing markets that we're currently in that would be a great tack-on, and some areas are markets that are in our regions that we cover as of today.

Most of the ones that we're working are nice, healthy banks. Most importantly they have good bankers. These banks have weathered the storm and are making profits today.

Our focus remains on any transaction to be triple A, as we call it accretive, accretive, accretive to earnings per share, book value, and an adjusted tangible book value. As we have seen in the past experience, if we stay that course it tends to be a win-win for both buyer and seller shareholders.

Price, or as I might say price expectations, have ticked up a bit mostly on deals that have been made that hasn't ended up well for both buyer and seller. I guess if you're the seller it turned out to be pretty good. Most banks are making better profits but still are below peers and are looking to be paid for what average peers or top performers are making.

Our goal is to take a good bank as Johnny mentioned earlier and make it a top performer for our shareholder, and our history has proven that. We are busy. Randy, with several opportunities and I believe we'll have a deal or two in time. Our plan is to stay disciplined with our strategy and that is to work with the banks that want to give a return to the shareholder in all deals, in other words make it a win-win for both shareholders in any transaction.

Thank you, Randy.

Thank you, Tracy. You've really been busy working in that area, and but now let's get to some numbers. I'll go through these quickly since Johnny has already highlighted many of them, but I'll give you a few more and a little more color.

As it was said it was another record quarterly profit of $28.4 million or $0.43 diluted earnings per share compared with income of $17.7 million or $0.31 diluted earnings per share for the same quarter in 2013. That is an increase as Johnny said of $10.8 million or 61%.

Diluted earnings per share excluding intangible amortization for the second quarter was $0.44 compared to $0.32 diluted earnings per share excluding intangible amortization for the same period in 2013. We are very pleased with our income as we've said throughout this presentation, but it is now 13 straight quarters of record earnings, excluding the merger expenses in the forth quarter of 2013, and we are very proud of that. Our metrics continue to improve.

Our return on average assets for the second quarter was the 1.7% as compared to 1.64% for the first quarter in 2014. Our return on average assets excluding intangible amortization was a 1.83%. Our core return on average assets that excludes intangibles, provision, merger expenses, bargain purchase gains, life insurance gains, and taxes which is a mouthful was 3.27% for the quarter as compared to June 30, 2013, of 2.93%.

Our return on average TCE excluding intangible amortization for the year was 21.2%. The overall internal ROA for the Arkansas banks was over 2% including all the former Liberty branches with the legacy banks from 2.25% to over 2.8%. Again, based upon 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, we're seeing good improvement in Florida. At the Centennial Bank level and on an internal analysis, 70% of all assets are in Arkansas, 4% of assets are in Alabama, and 26% of the assets are in Florida. The total number of active Centennial branches is 141 with 84 in Arkansas, 50 in Florida, and 7 along the Alabama coastline.

Of course, we need to talk about our efficiency ratio, as Johnny has already mentioned. We ended the fourth quarter with a 42.2% core efficiency ratio, and after the Liberty acquisition took it to another level with improvement to 41.4% in the first quarter.

I will now turn it over to Donna Townsell to talk about the efficiency ratio for this quarter.

Thank you, Randy. Well, if I was crowing last year I guess I'm strutting this year then, as I am proud to report that we were able to continue our excellent efficiency ratio of 41% from the first quarter. Some of our bigger efficiency gains this quarter include merger expenses dropping over $700,000 and salaries and benefits were also down over $100,000.

This quarter we were also able to close or merge four banks in Arkansas and two in Florida. You will see a little more of that activity as the year winds down.

As for Liberty we continue to make improvements in the contracted services area, still expecting about an additional $100,000 in annualized savings well into next year. Three of the four Arkansas branch mergers in Q1 that we mentioned were within the Liberty footprint, and we continued to focus on the staffing model for that region as well. This part of our franchise is doing very well for us at this stage in the game.

We also set up our branch review process during this last quarter, and we will now have a more structured way to help us set goals in local markets as well as track area growth, decline, and transactions. As we turn our focus to converting Florida Traditions, we are still reviewing various department processes, looking for automation opportunities that will allow us to continue to manage our growth in our back room operations.

Randy?

Thank you, Donna. Let's switch to deposits. We ended the quarter at $5.19 billion compared to $5.34 billion at the end of the first quarter of 2014. Time deposits represented 25.17% down a little from the 27.2% of total deposits at the end of the first quarter, and 29.8% at the end of 2013 as we continue to see improvement after the Liberty acquisition. We are very, very close to our goal to being under 25%.

Net interest income, improvement in our margin, and non-interest expense, I'll 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 numbers. Randy?

Thanks, Randy. Once again similar to Q1 we had a positive impairment in Q2 when several FDIC loss share pools were reevaluated. As a result, the Company will recognize approximately $23.4 million as an adjustment to yield over the weighted average life of these loans; $3.7 million of that was recognized in Q2.

The positive impairment reduced indemnification asset by $17.3 million with $3 million of that being recognized in Q2, and it also increased our FDIC true-up liability by $1.1 million with $42,000 of that recognized in the quarter. The $17.3 million will be amortized over the weighted average life of the loss share agreement and will be shown as a reduction to the FDIC indemnification non-interest income.

The $1.1 million will be expensed over the remaining true-up measurement date as other non-interest expense. The net income impact was an additional income of about $600,000.

The net interest margin improved slightly from 5.48% in Q1 to 5.5% in Q2. Loan yields were basically flat while the yield on interest bearing liabilities improved 2 basis points.

The provision for loan loss was $6.2 million in Q1 compared to $6.9 million in Q2 as we continue to build reserves for the Liberty loans. As you recall, due to the acquisition accounting guidance there was no reserve for loan losses carried over in the Liberty transaction. The loans were recorded at fair value but as new loans are generated, renewed, or pay off, it is necessary to establish an appropriate reserve balance to absorb the future credit losses.

In a non-interest income area service charges increased $574,000, trust income decreased $113,000, mortgage income increased $288,000, and insurance income decreased $482,000. Recall that our insurance department has a typically strong first quarter each year.

Dividends from investments increased $185,000, gains on the sale of OREO increased $320,000, and we sold a branch location for a $500,000 gain. The FDIC indemnification contra income mentioned earlier was $6.6 million for the quarter.

In the non-interest expense category as Donna gave you a little color on, salaries and benefits declined $120,000, and other operating expenses declined $642,000, primarily due to the merger expenses decline of $743,000. As mentioned, our ROA of 1.7% and a core efficiency ratio of 41.56% were strong ratios for the quarter.

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

Thanks, Randy. During the second quarter of 2014, we paid out dividends of $ 4.9 million and grew retained earnings by $23.5 million. For Q2 2014, our Tier 1 capital was $620.4 million. Total risk-based capital was $671.6 million, and risk weighted assets were $5 billion.

As a result, the leverage ratio was 9.71% compared to 9.08% at 3/31. Tier 1 capital was 12.53% compared to 11.67% at 3/31, and the total risk-based capital was 13.56% compared to 12.65% at March 31.

Additional capital improvements include book value per common share was $13.77 compared to $13.34 the previous quarter. Tangible book value per common share was $8.83 compared to $8.38 at 3/31, and the TCE ratio was 9.1% compared to 8.5% at 3/31. As Florida Traditions Bank is concerned the acquisition will be immediately accretive to tangible book value and will be virtually neutral to the risk-based capital ratios. Randy?

Thank you, Brian. Let's switch to loans and our Chief Lender, Kevin Hester. I'm sure everyone wants to hear more color on our loan pipeline, and he will also fill us in on asset quality and some other loan matters. Kevin?

Thanks, Randy. This quarter was rather quiet as it relates to asset quality. On the link quarter basis our non-covered non-performing asset ratio increased 1 basis point from 1.03% to 1.04%, and our non-covered non-performing loan ratio increased 6 basis points from 1.03% to 1.09%.

However compared to the same quarter a year ago, these ratios declined 22 basis points and 16 basis points, respectively. These ratios are solid and reflect our efforts to maintain strong asset quality.

Our allowance for loan losses as a percentage of non-covered loans increased from 1.07% to 1.17%. However, if you add the division [Premier] and Heritage acquisition discounts to the allowance for loan losses, the combined figure would be 4.8% of non-covered loans at quarter end.

Non-covered real estate owned decreased 11% on a linked quarter basis from $23.5 million to $21 million. The share related (inaudible) on properties dropped to 73%.

For the second consecutive quarter, net charge-offs were less than 20 basis points. At 18 basis points for the quarter, net charge-offs were the lowest level in the last 12 quarters. At 1.47%, early stage past dues were up 5 basis points on a linked quarter basis but down 28 basis points in a quarter-over-quarter basis.

Loan balances were effectively unchanged in the second quarter with a minimal increase in non-covered loans and equally minimal decrease in covered loans. However, as has been previously mentioned on the call, the loan pipeline is at its highest level ever. Secondary mortgage volume is solid, and we continued to develop new in-house mortgage products and programs for different segments of our customer base. We have completed another analysis of each of our loss share portfolios, and on an overall basis we are seeing continued improvement in the loss expectations of those loans.

This results in the accretion of some of the credit mark associated with these loans as well as an amortization of the associated FDIC indemnification assets. This is usually negative effect because of the mismatch of the timing of the amortization of the expense compared to the accretion of the income. Based on this recent analysis this mismatch is much less severe than we thought it could have been in the remaining period of the loss share agreements and will result in a positive effect over time.

We are evaluating a buyout of one of our loss share portfolios by the FDIC. If this were to occur it would create a one-time acceleration of the indemnification asset on that portfolio. Overall, the news on the lending side is good with continued solid asset quality and a very strong new loan pipeline. Randy, I'll turn it back to you.

Thank you, Kevin, and I'd just like to comment based upon what we're seeing right now with that loss share buyout, it could be very advantageous to the Bank. We're looking forward to seeing how that turns out. I'd just like to say thanks to all of the employees, a great job with the results of the second quarter, and we look forward to continued improvement in the third quarter.

We saw our 13th consecutive quarter of record earnings, improvement in our margin, and outstanding core efficiency ratio. We've added another institution to our family in Florida Traditions and a new market to open soon in Naples. Quite a quarter. With that, I'll turn it back over to our Chairman, Mr. Allison.

Thanks, everyone. I hope you all enjoyed the reports. They are fun to give when they're like this. Jerry, I think we're ready for questions and looking forward to them.

(Operator Instructions)

Brian Zabora, KBW.

Thanks. Good afternoon.

Hello, Brian.

Could you give us a little bit more detail on the loan pipeline? Maybe magnitude of how much it's up versus last quarter or any details along those lines.

How much it's up from last quarter?

Right, or maybe the size of it now. Just any numbers around how much it's grown over the last quarter?

It's several hundred million dollars, and Kevin will comment on that.

Brian, it's probably up 50% over last quarter, or more, and changing daily. It literally is, we're adding things to it daily.

We had a loan committee yesterday. It was about $60 million to $70 million approved to give you an idea.

Are you seeing that across your footprint as far as demand, or are you seeing less competition? What do you think is driving this pretty sizeable increase?

It's a combination of factors, but I think it is across our footprint. It is just relationships that we've built, some of it through some of the problem assets that we've worked through; and smart money coming in and picking those up; and developing a relationship with those people into other deals. It is across the footprint.

Just lastly, how is the pricing on those transactions?

It depends on whether it's fixed or floating. But if it's fixed, we're getting in the low to mid-fours.

It's also customers that we've been working a long time. So some of the stuff that we've been working on for awhile has started to come to fruition.

Brian, we were having loan growth. We just had a run-off in the Liberty transaction. Some we wanted to run-off, and some we didn't. That's dropped to a dribble basically, or a trickle as you call it. And then all of a sudden, loan growth just jumped about 50%. It's not anything exotic. It's just sometimes it happens when it happens.

Thanks for taking my questions.

You bet.

Matt Olney, Stephens, Inc.

Hello. How are you?

Great, Matt. How are you?

Okay, I'm well, thank you.

I wanted to ask about the branch closings that were mentioned in the press release. Can you remind us the branch closings -- did those happen throughout the quarter? Could there be more branch closings in the future, or is that initiative now complete with these six?

Matt, this is Donna.

Yes, they did happen, the four that we mentioned in Arkansas. Three of them were in the Liberty footprint. They did happen in this quarter, but it was towards the end. So we're really seeing more of the benefit going forward from that.

You will continue to see more of that activity throughout the footprint. We did mention that we were going to do a better job of being structured on how we look at our branches. We, in fact, closed one last Friday that of course wouldn't have shown up in our last quarter's reports. So you will continue to see benefits from those closures.

One of the things that has really started moving in a greater way than we ever thought is this mobile banking. As we continue to see electronic transactions go up, and I guess you might say branch transactions drop, we're continually reevaluating our position on our branches, especially when they're pretty close together.

We've still got some branches that are close together, but to drive them is 30 or 45 minutes. Those have some unique characteristics. But we continue to evaluate and look at different parameters, and give the branches a chance to either improve or look at what type of savings that we might actually have. It's an ongoing effort, and we will continue it throughout the year. I hope that helps.

Getting back to the loan growth discussion, it sounds like you expect the run-off from the Liberty loans to slowdown. Is that a commentary for the third quarter? Or is that the next few quarters at some point it's going to slowdown?

No, I think we saw that it did slowdown in the second quarter. And we would expect that would continue going forward.

The slowdown will continue. It's down to a tickle right now. There night be a few more that go. But outside of that, I think we've got a few more we'd like to see go we can't get rid of.

As of right now that appears to be, it's a combination of factors. As Liberty slowed down, we were doing loan business before. And all of a sudden, the pipeline has just really moved up significantly. I guess it's based on lots of factors, but it is truly all the way across the footprint.

Thank you.

Thank you, Matt.

Kevin Reynolds, Wunderlich Securities.

Good afternoon, everybody.

Hello, Kevin.

Couple of questions. One is you mentioned in the press release, and you talked about it a little in your prepared remarks, the provision remaining elevated despite pretty strong asset quality. I guess it's reflecting renewals on the acquired loan book. How much of the $6.2 million would you say was renewals or changes in those loans that you acquired versus just brand new loans that were new originations for you in that Liberty footprint?

It was probably 75/25.

Okay, so a good portion of that was renewals on the loans, not just the loan growth that you might see, gross originations? Is that fair?

Let's take it 50/50. Let's leave it at 50/50. About half was originations and about half was renewals.

Got you.

That's probably a better number.

Then to talk about M&A, I know you said looking to do maybe a couple more deals or announce a couple more deals this year. Could you give us some more color on what those kinds of targets might look like -- size, range, or the nature of them? This last deal, while it was in the central part of the state, wasn't exactly in-market, specifically in-market. It was really a fill-in. What might the deals that you're looking at -- how might they be characterized?

We're kind of all over Florida right now. We're not on the East Coast. You'll probably see us get a little more active on the East Coast. The size of the deal, we would certainly love to do larger transactions. Particularly Brian Davis and Randy Mayor would appreciate us doing larger transactions instead of the string of smaller ones.

The problem is that the buyers and the sellers get stupid on the larger transactions, and both stocks go down. It seems like you draw a larger group of bankers that don't have enough skin in the game and don't care whether they dilute themselves in the bigger transactions, Kevin. It draws more attention, which brings in more people who are not spending their money but spending shareholders' money.

We just saw one of those deals in Florida a while back, and both stocks went down as a result of it. If we have to continue to play in the smaller ones, we will. We are on some larger transactions today, and hopefully we're trying both sides of that fence.

Tracy is the one that spends the most time. Primarily, he's in Florida.

Tracy, have you got some comments on what we're looking at?

There are several targets, and that goes both ways. We've reached out to some, and some are reaching out to us. And you talk about the size. Even if they were the ones that Randy and Brian don't want us to go at, they're in the market. So we are closely in or there. It could certainly could be accretive to some of the categories that we're looking for to build the portfolio.

Not only that, but you mentioned the other ones that are in that region down there that would certainly give us some newer markets that are out there.

Randy Mayor and myself have since come up with a scale to scale these things and prioritize them for what is the best and which ones benefit Home BancShares the most. It works pretty well, so we're looking from $2.5 billion down. Because we were already on some smaller transactions in the past, you may see some of those come out here this year.

We may start excluding the real small ones, but some of them make some sense. If they're in your market and you can close a couple of branches and they're already accretive, accretive, accretive, then you might as well tack on and muscle up.

Randy, do you have a comment on it?

Yes, what I'd say too to add is you mentioned the East Coast. And if it opens up a new market for us that we think that we can really add-on to and grow, we're viewing it as almost a de novo type operation. We get some branches. We get some management, and it's a little bit better.

Just as we've gone into the Naples market which is very close to our Marco Island branch and some of those on the West Coast, it makes sense. We're all over Florida right now -- all over Florida -- and just looking for the opportunities while maintaining that discipline of accretive, accretive, accretive. And that's what's going to drive our acquisitions.

Kevin, if I can ever educate these sellers to recognize the fact it's not important how much they get. They want -- Give me two times book. I say -- I can tell you who will pay you two times book. But last they did one, their stock went down and so did the stock of the company that was acquired.

It is the hardest thing to do, is to educate the seller that it doesn't matter. I mean, it does matter how much you get; but it's whose stock you get. I owned regions at 40, and it went to 2; so that's how that happens sometimes.

Didn't we all?

Yes.

Sorry about that. Thanks a lot.

Thank you, Kevin.

Michael Rose, Raymond James.

Hello. Good afternoon. How are you?

Hello, Michael. Are you in Chicago? Are you settled in Chicago?

I am settled in. Thank you for asking.

Just going back to the loan pipeline, so what really changed over the past three months? Is it more coming from market share takeaway? Or are you actually starting to see some real traction in places like Florida?

I think it is more the latter. I don't think it's market share takeaway. The things we're looking at are deals that are brand new deals that we're getting to look at. So I think it's just a development of relationships in the markets that we're in.

I think that's primarily it. Some guys you did a small deal for; and they bring a little bigger deal, and you just develop relations.

Kevin hit on something awhile ago. We've done pretty good out of some of these failed bank transactions, recovered assets. There have been buyers come in for those covered assets, and we've developed some relationships with really smart money that have come in and opened up that door to do business with them and more business with them. That's one of the leads of the deal.

And Arkansas stuck its head up here pretty good lately with some pretty good loan growth. So it's just everywhere.

Okay, that's helpful. Then just as a follow-up, can you break down the loan yields this quarter, covered versus non-covered, or acquired and what happened there? Then in the legacy portfolio, what are the new loan yields on average that you're putting on the books? Thanks.

I'll have to get Brian and Randy Mayor to give you that portion of it, but we're riding in the 4%s. That's where we're riding right now. We're in the fours -- 4.50%, 4.25%, 4.75%, 4.95%, some fixed for 3%, some fixed for 5%. We're staying relatively short. We're doing a little bit of variable.

We got a big approval yesterday on a variable loan. I don't know if it's time from a consumer's point of view to be variable. But we're remaining short on the loans as we do our investment portfolio, and I don't know who's covering that other.

I'll give him a couple numbers. The effective yield on the non-covered loans was 6.08%. And for the covered loans, it was 19.38% because that's where most of the additional accretion is going, is on those covered loans, which is why we have all of the additional indemnification asset amortization.

The average yield on the loans, as per GAAP, is 6.88%. And when you factor out all of the additional accretion marks that we have on the entire portfolio, the yield on that particular piece of it, which is really on a non-GAAP basis, would be at 5.10% for the quarter.

Okay, that's helpful. Hopefully, we get back to Johnny prime soon. Thanks you.

Thanks, yes. Thank you, Michael.

Jon Arfstrom, RBC Capital.

Thank you. Good afternoon.

Hello, Mr. Arftrom.

Close enough. I won't call you any names.

Okay.

Brian Davis, as long as your vocal cords are ready, what's the average life on that $25 million reclass? And how does that compare to the indemnification life?

$25 million --

$23 million reclass.

Oh.

The question is how quickly does it come in, I guess is what I'm asking.

Yes, it comes in. It mismatches a little bit because the indemnification asset expires. A lot of them start expiring next year, so that will come in between now and 2015. But the interest on it comes through about another year.

Another year, okay. Good.

It has basically a negative impact to this point. However, you heard Kevin Hester talk about possible selling and loss share. We have agreed to agree on some of that. And that may end up having a very positive effect long term for the Company by taking a one-time acceleration of $5 million or $6 million. Then from there on, that runs with the portfolio could be very positive for us. If we get that done, we'll I'm sure issue a press release on that before long.

The portfolio he's talking about, without giving too much away, it's got a lot of long-term loans in it. So when you start amortizing the yield, sometimes the loans don't mature until 2030. But the indemnification aspect is going to stay around until 2020. And so you get upside down on a positive event.

So we're interested in maybe possibly getting out of the loss share on that particular acquisition. If that's the case, we might have to take a one-time hit; but it would be positive going forward.

Plus, the fact on that portfolio -- both sides, I think both the FDIC and us, might have to work with each other for the next ten years.

Okay, good.

Randy Mayor, just in terms of the margin, it was another good quarter. But it seems like you had a one-time item in there. How are you feeling about the margin going forward?

I would expect, as Kevin was giving some of the loan rates there, that there will still will be a little pressure on that from the lending side. We continue to manage the deposit side, but there's just not much to save on that side. I would expect a little more pressure on there, with the caveat that it could fluctuate because of these one-time events, so to speak, that we're looking at.

Johnny, how are you feeling about the rate on the loans? I know you've talked a little bit about where they're at. But are you comfortable writing loans, as long as you don't change the structure in terms? Or is it just constantly pushing for more rate? How are you feeling about it?

I think it's really a rate deal. We don't really change our terms much. We don't vary from where we came from. It's really a rate deal, and we're really being -- on some of these transactions, as Kevin told you, this $200 million to $300 million worth of pipeline out there, it's really new stuff. We're getting looks at those deals through some relationships, and we're understanding how we have to price those deals.

I don't particularly like some of the pricing on some of those deals. But we don't want to lose that customer either. It should put -- I'm expecting some margin pressure. If you're running at a 6% yield, and you are going to book a bunch of 4.5%s, you know that yield is going to come down.

We don't have any long term fixed rate stuff on our books. We just don't have any to speak of, virtually none. It's three to five years. And I may do a ten-year fixed. I'm looking at a deal maybe on a ten-year fixed. That would be an exception rather than a rule. But it won't hurt us to do a little of that.

You've obviously gotten a few questions on the pipeline, and why it just showed up now. I guess this is for John or Randy or Kevin.

Does it feel like it's going to last? Does it feel like this is a permanent change? Or is it just something that turned on that maybe you're a little nervous about later in the year, sustaining it?

I have always said it wasn't here and it wasn't back, and we weren't going to push it. I may be changing my tune. I just may be changing my tune. It is so powerful right now that I hope it continues like it is. I don't believe I've ever seen anything in my business, banking career, as powerful as it is right now.

What I meant yesterday, we approved $65 million worth of credit. These loan committees now are lasting two, two-and-a-half, three hours long -- these senior executive loan committees. There's just millions and millions of dollars worth of credits on there. And it's a different world, Jon. I think it's here.

Kevin?

I would agree. We've got, as everybody said, it's very strong. And when we empty this out, will it fill back up that high again? I'm not sure, but I think it's better than it looked six to nine months ago for sure.

We finally had to institute time limits at the loan committee. And so everybody has got five minutes to introduce it, which means all the directors and the senior management have to do a lot of homework ahead of time. But that's the only way that we can really get through.

As long as the committees are lasting as long as they are -- and we've seen nothing that's changing that on the horizon right now -- this thing is continuing. And it's continuing to grow. Let me tell you, I was in with my wife in Colorado for two or three days. And I had already read my lesson, Jon. This was the week before last. I had already read my lesson Wednesday, Thursday, and Friday.

I'm getting ready for next Wednesday's loan committee, and I'm done with that. And Friday night or Saturday morning, I don't know when, they put a $65 million, 118-page loan on there; and I thought I was through. And we get to loan committee, and I haven't even read it. So there's just a lot going on.

You're going to have to come off the decaf, Johnny.

Just last question. Remind us of what kind of incentives you have out in terms of EPS hurdles for the people there, for the producers.

We haven't set the EPS hurdle yet. But the reason I hadn't quite set it yet is getting Liberty under tow, and then we'll look at it from there. We've got about $60,000 a month in amortization on Home $2.00 and Home $2.50. So we've got about $62,000 a month expense there. So I'm waiting until one of those runs down before we add program three. If I had to add program three today, it would be probably $2.05 to $2.10 a share.

Okay. Thanks a lot.

You bet. Thank you.

David Bishop, Drexel Hamilton.

Hello. Good afternoon.

Hello, David.

Good to have you back.

It's good to be back. And full disclosure, I do not own regions; so I just want to get that out of there.

A quick question for you. I noticed a little bit of run-off on the commercial portfolio. Curious of that. Was that out of the Liberty franchise, or was that that one customer that's in and out on a larger scale sometimes? If so, did that mask some core origination volume that we just didn't see from the reported numbers?

I think it's what we've talked about before about Liberty. And those run-offs have masked their production that we've done the first half of the year. I think that does look like maybe we hadn't had the production. We have had production, but the run-off's been higher than we expected.

Was that your question, David?

Yes, just trying to get a sense, what was happening there at the core with the margin, whether there was that loan production activity -- just reading between the lines. And with the provisioning there, it seems like -- obviously, there is some growth there to have to reserve for. So, yes, that answered the question.

Let me say this. Could we have lived with the 1% reserve? Maybe. We just have always run in the 1.50% reserve or better, as you know. When we dumped in Liberty and we dropped down to a 0.92%, 0.93%, it just didn't look good to me. We just started building reserves, and I'm glad we are. I'm glad we're building reserves.

The Liberty portfolio is a little -- maybe knock on wood -- we aren't through it yet, but we marked it $100 million as I said earlier. I think we may lose $50 million to $60 million on it, and we've taken a bunch of that already. It may be a little better, but we're going to probably continue to build our loan loss reserve here for a period of time, up to in the $140 million to $150 million range, I'd say. And then we might take a breather.

Actually, we got all this loan growth coming on right now. If we book to $300 million, you need $4.5 million reserve for it, the way we look at it. So we're out in front of it. We're out in front of the game. It wasn't a reflection on asset quality. It was really concern about the Liberty portfolio.

David, as a reminder on the Liberty transaction, we had about $1.6 billion of loans that were not impaired. But we still marked it about $60 million. That's money that's being accreted in on FASB 91, and that money there was what we started with. But it's beginning to bleed down, and those loans are transferring from purchased accounting into what I call originated accounting.

If you bring all those loans over and try to have to account for them in your ALLL, you don't have any mark to cover them. Whereas what's remaining on that portfolio that started at $1.6 billion, we tell have a lot of FASB 91 discount that we can count as having coverage on those ratios for those loans.

I can interpret what he just said. We like the run rate to be a real run rate.

Yes, that's right.

Appreciate the interpretation.

You're not looking at a phantom run rate. You're looking at a real run rate.

Appreciate the color.

Thank you.

Peyton Green, Sterne Agee.

Hi, all. Good afternoon. Three questions.

Maybe if you can talk, Johnny, about the amount of expense that it takes to service the covered loans. And if you were able to get out of a loss share situation, how quickly could you change what expense you incurred to monitor and get those portfolios the way you want them?

We'll let Randy Sims, who's the hawk on that.

We have had continued meetings with our special assets department. And most of the expense, of course, is still in Florida. We are seeing that start to draw-down a little bit and come down a little bit.

But as we continue to add acquisitions, we are increasing our loans. So it's really a factor of our acquisitions and whether or not we continue to add banks that need additional carrying that disallows us from being able to eliminate some of our staffing on the special asset side.

You look at the Liberty transaction we had to add a couple people in Arkansas. At the same time, we lost two or three in Florida. So we ended up the same.

All of the regions get charged based upon a formula on how good their asset quality is. And so there's a real incentive for them to continue to improve and even help out on the special asset side. I know, as an example, South Florida saw their income go up and their special assets go down because of their improved asset quality.

We are continuing to make efforts. But that cost, which at one-time was well over $2 million, is starting to drop. But it is truly a factor of the special asset portfolio and what we continue to add from the acquisitions.

I hope that answers your question.

This is Randy.

Partially.

This is Randy Mayor.

I would say, remember we have six different acquisitions that we're dealing with. This is a very small one, so it's not going to have an immediate impact or a big savings for us right off the bat.

No, I guess my question is, if you've got $37 million give or take in total expense for the quarter, is it $2 million a quarter that you're racking up if you take all the loss share deals? I'm just trying to get a ballpark number of what might come out over time. If you do a live bank deal, odds are the portfolio is a lot better shape and maybe somewhat closer to how you do credit. It's a lot easier to assimilate, I would think, than a truly broken bank. That's where I was trying to go, is what kind of efficiency you might be able to get?

I think it's about $2.5 million a year cost if we went to zero. What are we spending -- $2.5 million or $3 million?

On special assets, yes.

On special assets, I think it's now under $2 million. I'd say about $1.8 million just in that special asset allocation. If that's what you're wanting, it's about $1.8 million.

I'd like to see it a lot less. But again, if we continue to add portfolios that need a little help, then it's going to remain where it is, whether it's Arkansas or Florida.

We've got a pretty powerful team there. They do a really good job. And as we acquire more banks and live bank transactions and we have problem loans, we'll just hand them to them. We'll just let them deal with them.

Our goal is when we go into convert a bank, not only do we convert the accounting system, but we take all the special assets out of that bank so that it is a good performing bank. And the staff can concentrate on the retail side and start bringing in new loans and not have to worry about that. Those loans immediately transfer.

Now, in this last acquisition, Florida Traditions, they're a very clean institution. That's not going to add anything. There are savings when we buy something that is very, very clean. So we are continuing to evaluate that special asset team. And we're continuing to see some savings though it may be a little bit slow -- for me.

Okay, and then Johnny, you mentioned --

There's probably more savings coming on these branch closing than on that end of it. Go ahead. I'm sorry.

Okay, great. Thank you. On the $60 million or $70 million on the loans that you mentioned were approved in committee yesterday, what's the normal pull-through rate on that and timing? If you get $60 million or $70 million approved, do you hope to book 60% of them over a 60-day period? Or how should we think about that?

There's probably about half of that that could close pretty quick. It looks like, of the $60 million we approved yesterday, it could close this quarter. All of it could close this quarter. Another $31 million we just discussed yesterday that we didn't approve or disapprove that's coming to committee next week, that could close in a matter of 45 days, probably 30 days. These are deals. Some of these are up, they're large deals that are up now. One large loan Kevin has he thinks will close in the next month -- right, Kevin?

Yes.

Good credit?

Yes.

I'm optimistic these deals could happen. If you're trying to give us credit for it, you might give us half a quarter credit for it.

Okay, but it could easily be a $40 million to $50 million loan growth quarter, ignoring run-off, just on the legacy portfolio. Is that fair?

I would be very disappointed. I'd be very disappointed if it wasn't way over $100 million and closer to $200 million.

Wow, okay.

I'm the optimistic guy.

Oh, my. [multiple speakers]

Yes, there's the closing; and there's the funding. Some of this stuff is construction.

At the same time, we've got some deals that we've closed. And the owners' money was used first; and now they're starting to fund. We've got one big deal in the Panhandle that's that way. So we are very optimistic about it.

Maybe not quite that optimistic, but we're optimistic.

Okay, great. Then last question is, what was the balance of Liberty loans at the second quarter, first quarter, and fourth quarter?

I don't know -- about $150 million probably. I don't know. We'll get it. I'll have Brian Davis or Randy Mayor or Kevin get it. I don't know.

Okay, that's great. Thank you all very much for taking the questions.

You bet, Peyton. Thank you.

Brian Martin, FIG Partners.

Hello.

Hello, Brian.

Maybe one question for Brian Davis.

Just the last quarter, I guess the purchased accounting accretion, I think, Brian gave was like a 5% number on the yields. What was the dollar amount of the purchased accounting accretion, Brian, this quarter? Do you have that? I think it was around $15 million last quarter.

Yes, it's $16.4 million this quarter.

Okay, $16.4 million. That 5% you talked about on the call, compares to like a 4% and 4.25% level last quarter?

No, the 5.10% that I gave was just the yield on the loans.

I've got you. Okay, perfect.

Then just maybe the last two things. Maybe a question for Donna. The Liberty savings, is everything effectively complete at this point as far as the expense savings as it relates to Liberty, or just minimal left at this point?

No, Brian. We really had estimated anywhere from 18 to 24 months before we thought we would be complete. I don't know if that's too aggressive, but that's what we've been saying.

While we have said we think we're well over half, we've still got more work coming in regards to just looking at contracts still that haven't been renegotiated. We're looking at branches, still working on staffing models. So there are various pieces to that puzzle. But, no, we are not comfortable in saying we're complete.

Okay, and then maybe--

Mr. Allison doesn't want to say we're complete.

No, we're not complete.

I've got you. Perfect.

The last two things. The team of lenders you guys brought on in Naples, can you just give a little background on those? And the last question was just the potential buyout, timing wise, how quickly could something like that happen?

How quickly is Naples going to be open? Is that what you're saying?

No, the team of lenders was the question on Naples, if you can give a little color on those. And then just the buyout of the loss share agreement -- how quickly could something like that happen?

As far as the buyout of the loss share agreement, there are some steps that you have to go through. One of which is the FDIC has to come in and take it and look at our audit and come up with their own opinion of our offer. I think our offer is a very aggressive, good one; but we're in the process of scheduling that time right now.

I don't know -- Randy Mayor, how long do you think?

Yes, they went through a preliminary timeline. I would say a month at the earliest. That would be if everything went as fast as it could because it's got to go through Washington and some other approval levels.

But certainly, we would hope to have a decision on that this next quarter.

That was it. That's perfect, thanks. Then the team of lenders in Naples?

We not only have hired a team of lenders, but we've also hired some good retail people. So we're hiring on both sides. But Brian Tenney is a ten-year lender out of Naples. He's been there quite a long time with a competitor bank, and he is already started. He's already there, and he's already working customers.

We hope to have that open the first of August. We actually are looking at a soft opening at the end of July. But our team is already working and trying to bring over some relationships, as we speak.

Okay.

I hope that answers your questions. I can't really give you -- we're going to add this many amount of loans in this time period. Bit we'll update everybody next quarter with how it's going and the initial success of the opening and where we are with it.

Okay, perfect. I appreciate it. Thanks very much.

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.

I'd like to thank everyone for their participation today. And I'm pretty proud of the quarter. I hope you all are. I see that the stock hasn't reflected it. But anyway, the performance of the Company, earnings up $10.8 million, or 61%, is pretty powerful.

One thing I didn't mention is that March was the best month of the quarter and was the best month in the Company history. And another item is that our Jonesboro Board has been formed. We have our new Jonesboro, Arkansas Board. It looks like the who's who of Jonesboro.

In closing, thank you. And we appreciate the support. We'll talk to you in 90 days.

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