Home BancShares Inc (HOMB) 2014 Q3 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares, Incorporated third-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, 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)

And this conference is being recorded.

(Operator Instructions)

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

Thank you, Amy. Hello. Welcome to Home BancShares' third-quarter earnings release and conference call. With me today is pretty much the same team. I have both Randys, Kevin, Brian, Donna, and Tracy with me today. I don't really have a lot to say today. You've seen the numbers, and they pretty much speak for themselves. I'm just going to highlight a few of the performance numbers that I think are pretty outstanding.

We had an EPS $0.45 ex the merger expenses, and that was the target that we had, core efficiency ratio of 41.88%, core ROA of 1.69%. I told you last quarter I thought we could get $200 million worth of loan growth, and we beat that and did a little over $208 million loan growth for the quarter. We're pretty proud of that. We continue to build loan loss reserves. From at the at the end of the year of 0.92% we're to a 1.11% loan loss reserve today, and that's after adding Florida Traditions plus the loan growth. We continue to build reserves.

We continue to have improved asset quality. We completed the Florida Tradition transaction, and even though we completed that transaction, our team continued with good expense controls. We had record revenue for the quarter of $94.232 million. It probably came off the loan growth. A lot of the loan growth came in late in the quarter. Continued strong margin with a 5.26%. I wanted to point out something to you. The tangible book value December 31 was $7.94. And the tangible book value at 9/30 was $9.39. That's an increase of $1.45 in the first three quarters. That's 18.2% increase in three quarters, or an annualized rate of 24%. I think that's pretty good job for all who helped that happen.

I'm going to really go to Randy right now for the quarter, put more color on it. I really couldn't ask for any better performance for the quarter. Randy, I'm going to turn it over to you and let you get more specific on the numbers.

Thank you, Johnnie. As you said, it's been another very busy quarter. And so I'd just like to give you a few updates on our activities to start with. As you may recall, we added Florida Traditions this quarter, and their branches opened up at Centennial Bank on July the 18. We are very excited about this addition to the Centennial family. And as we have said in the past, our emphasis is to get that bank converted as quickly as possible after closing, and we did just that. The conversion was successfully completed the weekend of September 26. I want to say congratulations to our IT staff for a job very well done.

A lot of activity in the third quarter. Perhaps the best moves that you heard from our Chairman was our record-setting loan growth of $208 million. This loan growth certainly made a difference in our earnings, and we look forward to having those full earning balances on our books entering the fourth quarter, and you'll hear Kevin discuss this a little bit more in detail. So let's switch to acquisitions. We continue to be very busy looking at opportunities for more acquisitions. So heading that effort is Tracy French, who will add a little color. Tracy?

Sure, Randy. As we work toward the final stages of the second acquisition this year, our due diligence team continues to be very busy. The number of banks that we're communicating with or working with today are as many as we've ever had at this time.

We believe some of these will be some good fits for our Company if we can get the deal to make it a win/win for both shareholders. As our Chairman has said many times, it's finding the partner is not the most important part, but it's finding the right partner is the most important part. We're fortunate to have some good choices today. Now we just need to stay our course and make those right choices that makes the best return for our shareholder.

While some banks are out there going through the bidding process to bring in top dollars, sometimes it hasn't worked out to some of the shareholders in the past. And we're planning on staying our course, Randy, and bring one in that's going to give reward to both shareholders. Opportunities are ranging in all shapes and sizes from our markets, and I think our Chairman's also getting a few calls that come from the outside of some of the markets we're talking to today. So what the future holds, time will tell. Thank you.

Appreciate it, Tracy. Let's get to some numbers. I will go through these quickly, as Johnnie has highlighted the really good ones, and we'll give you a few more.

Our quarterly profit was $27.4 million, or $0.41 diluted earnings per share, compared with income of $18.4 million, or $0.33 diluted earnings per share for the same quarter in 2013. That is an increase of $9 million, or 49.1%. More importantly, excluding merger expenses associated with the recent completed Florida Traditions acquisition, of $3.8 million, diluted earnings per share for the third quarter, as our Chairman said, was $0.45 per share. That was a goal we wanted to reach for the third quarter. And that makes 14 straight quarters of reporting the most profitable quarter in the country -- in the Company's history of diluted earnings per share, excluding merger expenses. We are very pleased with the income for the third quarter.

Our return on average assets for the third quarter was 1.56% as compared to 1.7% for the second quarter 2014. But again, that included merger expenses. So if you just take out the merger expenses, then our return on assets was 1.69%. So we're pleased to see some consistency around that 1.70% mark, even with the addition of acquisition assets with lower returns. And I think that is an important point. Again, we believe a quick conversion is the key to realizing our bottom-line acquisition savings.

Our return on average assets, excluding intangible amortization, was 1.68%. Our core return on average assets that includes intangibles, provisions, merger expenses, and taxes was 3.08% for the quarter. Our return on average TCE, excluding intangible amortization, for the quarter was 18.46%. The overall average internal ROA for the Arkansas banks was 2%, including all the former Liberty branches. Again, based upon internal numbers only, to be used for comparisons only, we are seeing ROAs in our Florida region averaging excess of 1.5%. And we had good improvement in the Alabama region, showing an ROA of 1.75%.

On a core ROA basis, and again based upon internal numbers, all three regional states are averaging from 2.18% to over 2.60%. At the Centennial Bank level, and on an internal analysis, 66% of all assets are in Arkansas and 4% of the assets are in Alabama. Florida's gained on Arkansas in the last quarter, with good growth increasing from 26% to 30% of total assets, and they had a little help with the Florida Tradition acquisition.

The total number of active Centennial branches with the addition of 8 from Florida Traditions is 148, with 80 in Arkansas, 61 in Florida, and 7 along that good Alabama coastline. In the third quarter we closed and merged two former Liberty branches in Russellville and Dardenelle, Arkansas as we continue our branch study for more efficient operations, and you'll get a little more color on that from Donna. And as I announced last quarter, we now have opened a de novo branch in Naples, Florida as of August with an experienced local team of bankers led by Brian Tenney, who will be the Market President of Collier County. We are excited about this new market in our South Florida region.

And of course we need to talk about our efficiency ratio. As our Chairman said, we ended the third quarter with a 41.88% core efficiency ratio as compared with 2013 third quarter of 44.76%. And who to tell you more about that and how we accomplished it, but Donna Townsell, our VP for Corporate Efficiency. Donna?

Thank you, Randy. Well, some things are just worth repeating. Our core efficiency ratio has averaged 41.6% over the last three quarters. Considering all the other activity that has been going on while running the bank, staying consistently around 41% brings a sense of accomplishment to our organization. I feel like we're getting proficient as being efficient, and congratulations to everyone.

Here's a little information about how we accomplished that this quarter. We told you that by the end of this quarter we planned to have our Liberty footprint in line with the rest of the Company's staffing model, and we have done just that. I am proud to report that Northeast Arkansas and Northwest Arkansas have made great strides in their efficiencies through things such as staffing and contract negotiations, and we believe that they will be on par with their peer Arkansas regions very soon. In the third quarter, we closed two branches in north central market, as Randy just mentioned, and we are still working on efficiencies in that area, as well. The rest of the organization has held their own on efficiencies this quarter.

Our revenue and expense initiatives are not mutually exclusive, though. While we have been working in the Liberty market on expense control, we have also been working on growth opportunities. The change of an acquisition has really brought out some superstars who have stepped up. We have meshed together a strong leadership team of about 12 Liberty and Centennial employees. We are past the transition period, and the synergy is really there. Their loan growth is evidence of their motivation, with close to $100 million in loan growth this quarter from Northeast Arkansas and Northwest Arkansas.

Are there more efficiencies to gain from Liberty? We can always look, but that is true across the whole Company. I think everyone is really working hard together right now on the revenue side and that is what makes banking fun. Randy?

Great report, Donna. Let's switch to deposits.

We ended the quarter at $5.28 billion compared to $5.19 billion at the end of the second quarter 2014. Timed deposits represented 24.2% of total deposits, down 1% from the 25.2% of total deposits at the end of the second quarter, and 29.8% at the end of 2013 as we continue to make improvement. Our goal was to be under 25%, and we have now made it after the jump due to the large Liberty acquisition. So it looks like we need to set a lower goal.

Net interest income, improvement in our margin, and non-interest expense, I'll now turn it over as usual 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 capital.

So let's switch to Randy.

Thanks, Randy.

Our net interest margin on a fully taxable equivalent basis was 5.26% for the quarter, compared to 5.50% for Q2. The yield on interest-bearing liabilities was basically unchanged at 39 basis points in Q3 versus 38 basis points in Q2. The effective yield on our non-covered loans was 5.84% versus 6.08% in Q2, and was 17.23% versus 19.38% in Q2 for covered loans. The decline in yields resulted from a decline in the accretion income from Q2 to Q3.

Despite the increase in accretion income of $1.1 million from the re-evaluation of some Liberty pools, the overall accretion income was down $2.9 million from $16.4 million in Q2 to $13.5 million in Q3. In Q3 we also added the Florida Traditions portfolio and we incurred slightly lower rates associated with some of the loan growth during the quarter.

The provision for loan loss for non-covered loans was $4.2 million in Q3 versus $6.1 million in Q2. The decline coming primarily as a result of less loans moving from purchase accounting to origination accounting for the loan loss reserve purposes.

Moving to non-interest income. As mentioned in the press release, we have been in discussions with the FDIC regarding the remaining loss share agreements associated with the Key West Bank. We have not been able to reach an agreement for buyout, so we have be began accreting the credit improvement, which was $186,000 for the quarter; the amortization of the indemnification asset, which was $1.1 million for the quarter; and the resulting true-up, which was $41,000 for the quarter. The net impacts to earnings for the quarter was approximately $1 million.

Other changes in the non-interest income category were a reduction in the gain on sale of premises; we had a $500,000 gain on the sale of a branch in Q2 and the reduction of $329,000 on the gain of sale of OREO properties in Q3 versus Q2.

In the non-interest expense category, salary and benefits increased by $555,000 from Q2 to Q3. However, with the addition of Florida Traditions' staff, expenses were added of $883,000 for the quarter. So our legacy expense was actually down $328,000. Also, merger expenses associated with the Florida Traditions increased $3.7 million from Q2 to Q3. Overall, we were pleased with the adjusted ROA of 1.69% and the core efficiency ratio of 41.88%.

Brian?

Thanks, Randy.

During the third quarter of 2014 we paid out dividends of $6.6 million and grew retained earnings by $20.7 million. For Q3 2014, our Tier 1 capital was $678.4 million, total risk-based capital was $731.3 million, and risk-weighted assets were $5.5 billion. As a result, the leverage ratio was 10.2% compared to 9.7% at 6/30, Tier 1 capital was 12.4% compared to 12.5% at 6/30, and the total risk-based capital was 13.4% compared to 13.5% at 6/30.

Additional capital ratios include book value per common share was $14.42 compared to $13.77 at 6/30. While tangible book value per common share was $9.39 compared to $8.83 at 6/30. And the TCE ratio was 9.1% at both September 30 and June 30. As we previously noted, the Florida Traditions bank acquisition was immediately accretive to tangible book value by $0.21, and was virtually neutral to the risk-based capital ratios.

Randy?

Thanks, Brian.

I'm sure everyone wants to hear a little more color on the record loan growth. I'll turn it over to Kevin Hester, our chief lender. Kevin?

Thanks, Randy. From a lending perspective this was a great quarter for the Company: maybe even a world-record quarter. Led by decline of 16 basis points in the non-covered, non-performing asset ratio from 1.04% to 0.88%, all asset quality measures improved on a linked-quarter basis. An equally strong 19-basis point drop occurred in the non-covered, non-performing loan ratio from 1.09% to 0.90%. Reversing the recent trend, our allowance for loan losses as a percentage of non-covered loans declined 6 basis points from 1.17% to 1.11% in the third quarter. This is due to the strong legacy loan growth and the Florida Traditions acquisition. However, if you add a division, Premier, Heritage, and now the Florida Traditions acquisition discounts to the allowance for loan losses, the combined figure would be 4.20%.

Non-covered real estate decreased 8% on a linked-quarter basis from $21 million to $19.4 million. This is the third consecutive quarterly drop since the Liberty acquisition in the fourth quarter of last year. For the third consecutive quarter, net charge-offs were less than 20 basis points. At 16 basis points, net charge-offs were the lowest level in 13 quarters. Early stage past dues continued to decline in the third quarter, posting a 17- basis point drop from 1.37% to 1.20%.

Of particular note in the third quarter, given our previous discussions about the loan pipeline, was the organic loan growth within the Company. At $208 million, or 20% on an annualized basis, it was exactly what we were expecting 90 days ago and was the largest quarter since before the downturn. Loan production is still expected to be strong in the fourth quarter, but there are projected pay-downs from a couple of large projects into nonrecourse financing.

In the third quarter we hired our first President of the mortgage division. I would like to welcome Michael Powell to our team, and in just a few weeks he's already making a difference. Volume is still strong, and we expect to add originators in several of our markets over the next few months. As my comments have indicated, it was a very positive quarter for all things related to lending. I'll give it back to you, Randy.

Great report.

Well, we're very pleased with the results of the third quarter, and we're looking forward to continued improvement in the fourth. We saw our 14th consecutive quarter of record earnings, excluding merger expenses, and more improvement in an already outstanding core efficiency ratio. We completed the conversion of the Florida Traditions acquisition, plus we opened a new branch in Naples. So it was another strong and active quarter in what has been a record-breaking year. And with that, I'll now turn it back over to our Chairman, Mr. Allison.

Thank you.

Thanks to all for you for your reports today. I thought they were excellent reports. Interesting, our stock continues to go down, but I think we're following the market. The market's off another bunch today. It's a lot of volatility. Sometimes it's up, sometimes it's down, and it changes on a daily basis. Who knows what will happen today?

I guess, Amy, we're ready for Q&A.

Thank you.

(Operator Instructions)

Our first question comes from Michael Rose at Raymond James.

Hey, good afternoon, guys. How are you?

Hi, Michael.

Just want to get a sense on where the pipeline stands today. Obviously, this quarter's growth was great. Seems like, from what Donna said, about $100 million, or about half of the growth came from Northeast and Northwest Arkansas. But I'm just trying to get a sense for if the pipeline continues to backfill against the strong growth, and where you're seeing the most strength in the pipeline? Thanks.

This is Kevin. Fourth-quarter production is strong. It's probably not quite as strong as it was in mid-third quarter. We've got about probably three seven-figure pay-downs that we're expecting in the fourth quarter. A couple of them due to going to the non-recourse market, and then one that we've been expecting for probably 12 months that was scheduled.

We are building in some growth the next few quarters with the increase in construction. So, that's a good thing. The growth in the pipeline is coming from, really, from a lot of the regions. As you mentioned just a second ago, about a third of it was, in third quarter at least, was Northeast Arkansas. And then the rest of it was split really evenly between about five or six of the other regions. So, that's really encouraging.

Okay. (multiple speakers)

Big payoffs -- we've got some big payoffs coming. But it's holding pretty good. We started yesterday at 9:30 in the morning, and we finished loan committee -- senior executive loan committee -- about 12:45. We were in there for a little over three hours yesterday.

Has there been any changes in the type of credits that you're seeing? Are you seeing larger credits? Are you seeing more confidence among your borrowers, even with this -- what's going on with the markets?

Kevin -- I'll tell you, we are seeing an increase, as I said, in construction. And that's really for the last couple of quarters. And that's led probably in the panhandle of Florida, and then also in Northeast Arkansas. But other than that, not really a whole lot of difference. It's normal CRE and C&I lending.

Okay. Great.

A little pressure on -- we're writing in the 4.5%s is about where we're writing right now on that stuff. That put a little pressure on margin.

Okay. And then, one follow-up, if I can. Johnny, on acquisitions -- I think you've been looking at something in the neighborhood of 12 or 16 different deals, or something of the like. Is there any update to activity levels on the M&A front? Thanks.

It just continues on. The problem is that you got to pick the right one that makes the deal work. We're seeing deals done for the sake of deals right now. If you heard me speak about -- that's like kissing your sister. It doesn't do anything for anybody. And so, we're working aggressively. We've got a couple picked out that we want to do, that we think we can do, and hopefully we can bring those home sometime early next year. They're pretty good-sized transactions.

All right. Thanks, guys.

The next question comes from Jon Arfstrom at RBC Capital Markets.

Thanks, good afternoon.

Hi, Jon.

Stock's up 6%, Johnny. So, the market turned around. (laughter)

I went to eat with -- I was at the Governor's mansion last night having dinner with the Governor, and he said: How you doing? I said: Well, pretty good; I lost $6 million a while ago.

French threw some chum in the water that I guess I'll bite on. One of the comments he made was acquisitions outside of the current markets. And you've talked about it a little bit historically, but maybe -- should we read a little bit more into that?

We're looking. We've been invited to look, not with a group, but just one-on-one to kind of Howdy Doody in Texas. We've always said that we -- we've been in Texas before, and it might be a play. If we went outside our footprint, we might go out there. We're probably going to look in that state.

I don't know how -- you remember my statement, when it all went from 50 to 10, and Texas blew up; it was 110, now it's 83. I don't know if it's the time to be stepping into those waters.

I hear you. I remember that quote. Okay. I guess the other part, just -- this is -- I feel like I'm following up Michael's questions, but on loan growth you talked about back-end loaded. What is the magnitude of that, and how does that flow into Q4?

It's probably a couple of hundred million. And I would say, in fourth quarter, you're looking at [$50 million] to [$75 million] coming out of the construction side.

Okay. And then, I guess one other question on the Liberty -- the former Liberty footprint. Is that growth maybe just pivoting from cleaning up the Company, and focused internally to going out and beating the bushes for loans? Or would you say that that's what the market is giving you right now, and that could continue?

Well, certainly, in Northeast Arkansas, those guys have really hit their stride the last 90 to 180 days. Northwest Arkansas really didn't miss a beat. So, it's a little bit of both.

Little bit of both. Okay. All right. Thanks, guys.

Thanks, Jon.

Next question comes from Stephen Scouten at Sandler O'Neill.

Thanks for taking my questions. Question for you on the NIM maybe a little bit here: The decline of 24 bps, was that more than you had anticipated, and does it change your thoughts about where your NIM will go moving forward? And also with that, I don't know, did you guys disclose the amount of accretion in the quarter?

Majority of the NIM decline is related to purchase accounting. We had -- for comparisons, we had $16.3 million of accretion income related to all of our historical acquisitions, from FDIC all the way through Liberty. It dropped $3 million this quarter to $13.3 million. And if you were to compare an apples-to-apples yield on the loans excluding purchase accounting accretion, we had a 5.10% yield on the loans last quarter, and we had a 5.08% this quarter.

Okay. And did you say new loan yields coming on at about 4.5%? Is that what I heard? Or was that a specific segment of the construction --

(multiple speakers) That's right, Steven, about 4.5%. The last quarter came on about 4.75%, 4.80%. This came on a little over 4.5% for this quarter. The $200 million -- it's about 4.5%.

One of the things that kind of counterbalanced that, that didn't show us dropping in our loan yield was the fact we brought on Florida Traditions.

Sure.

That held the mix up.

Okay. And then, one other question, just kind of maybe beating a dead horse on the expected loan growth from here. But on an organic basis with these -- a couple of these seven-figure pay-downs you're expecting, I guess, what's the net magnitude that you guys would expect? Can we see another $100 million in net growth, or should we be pretty conservative as we think about what 4Q is going to look like?

I think $100 million would be the top end of a range. It could be less than that. But I think $100 million would be optimistic, where we sit today. It is early in the quarter, so we do have things that materialize that happen quicker than we expect, but right now I'd say that's the [upper end] of the range.

Okay. Great. That's helpful, guys.

The next question comes from David Bishop at Drexel Hamilton.

Good afternoon, guys.

Good afternoon, David.

Question on the funding side this quarter -- the growth in borrowings there. Just curious in terms of the strategy and how we should think about funding of loan growth moving forward.

This is Randy. We did do some borrowings there to plug some holes. As you know, we've been working for quite a while to draw down or decrease some of Liberty's public fund reliance. We've kind of gotten to the point now where we're kind of leveling off on that. And then with the loan growth coming in on the other side, it changed us to a little bit a [borrow] position, which is what Randy Sims wants to be. He doesn't think zero is right; it needs to be negative.

Got the engine running hot when you borrow just a little bit.

So, that will probably level off, or you'll probably see that kind of volume sitting there for a while.

Okay. And then, in terms of the loan loss reserve, obviously purchase accounting plays a role. [Should] we think of that in terms of the build of that in the future -- is a dollar-amount targeting a better way to look at that, in terms of the increase on a quarterly basis?

Well, we're just building it. We're just continuing to build that reserve. When we did the Liberty transaction, if you remember, the reserve fell to 0.92%. And it just -- we've never operated at a 0.92% reserve. It may have been okay; it just didn't -- I didn't like that. We've always run around a 1.50%, and we're continuing to build reserves, and probably will until we get up in that -- somewhere around that range, and then we'll quit reserving.

And as you noted, David, when you bring in all the Liberty loans, there's no ALLL associated with it. But once those loans are due, you have to account for it in your ALLL. You have to put some provision over there, otherwise it would be short in your ALLL because you no longer have to discount on those loans, because they've gone from purchase accounting to originated accounting.

Great. Thank you.

Thanks.

Our next question comes from Brian Zabora at KBW.

Thanks, good afternoon.

Hi, Brian.

A question on Key West Bank loss share negotiations: Are you continuing to negotiate, or have you made a decision that you're maybe not going to pursue that any further with the FDIC?

It was really important to us to get that thing done in the third quarter, and things have dragged on and dragged on. And it's certainly not dead. We'll still consider it.

But we also took a pretty good amount of amortization towards that particular -- to the intangible asset, I'm sorry. And so, as we knock that down, it becomes a lot less attractive. So, if we don't hear something pretty soon, if we don't move forward pretty soon, then it's going to be very -- it's not going to be as attractive as it once was, and we might as well just go ahead and knock it down further and then enjoy the earnings as they flow through, over the life of the loans.

That makes sense.

We had about a $4-million [hit]. We've hit -- we bit off, the last two quarters, about half of that -- swallowing that $4 million. So, we only got about two more quarters to go, swallowing $1 million a quarter. I think that's about right, guys?

Yes, sir.

And it turns the other way -- it flips the other way. Had we done the loss share deal, it would have been a one-time hit. We got rid of all of that at one time, but since we hadn't gotten an answer back, a final answer back, we're only $2 million from solving that problem. You have about $2 million hanging out there to amortize over the next two quarters, and it flips the other direction. So, it gets very positive.

Exactly right. You said it a little better than I did. That's exactly right.

That's helpful. Thanks.

Donna, you mentioned a focus on revenues kind of going forward in your speech about efficiencies. Was there any one segment that you think there's a lot of opportunities? You talked about adding mortgage brokers, or any other fee income lines that we may see you focus on?

Just a variety of things, Brian. Cross-selling into other lines of business that we have access to; obviously, loan growth. We may [source] some new products.

The future of banking is going to look very different. We may just start looking into what that could take us to, and just retail sales efforts. Just a variety of those things together; mortgages, things like that, insurance. There's just a variety of things we could cross-sell there.

Our loans -- the average on that $208 million was $66 million booked for the quarter. So, you can see you got another $140 million that's going to carry into the fourth quarter that will give you a kick in there. And, as Donna said, talking about mortgage, we hired a new mortgage President who's headed that company up, heading our mortgage operation up, and we expect big and better things coming from that side.

In addition to that, we have made some other changes. We have changed our investment company, and they are going to be recruiting more brokers, and we're going to be growing that area. So, it will take a little while, but we hope good things come from that, too.

Great. Well, thanks for taking my questions.

Yes, sir.

The next question comes from Matt Olney at Stephens.

Hey, thanks, guys. I want to go back to M&A, and thinking now what you're doing on the East Coast of Florida with Broward Bank. Can you talk more about your appetite for growth all along that East Coast of Florida? Are there M&A targets on that side of the state, or is that going to be more of an organic loan growth buildout?

There's targets. There's lots of targets on the East Coast. Tracy's been working on a bunch, and I've been working on some. We've been working together on some. So, we like the East Coast of Florida. We're just not there, and we need to fill in over there.

Okay. And then, shifting over towards expenses, I think in the past you've talked about shrinking some of the legacy infrastructure around special assets and loss share. Can you quantify what that potential could be over the next few quarters?

Randy?

It's really hard to say, Matt. As we continue to get acquisitions, it prevents me from shrinking that staff because they get more loans to work with. But I will say that it is, and as we get closer to the end of these contracts, that it's getting -- the work is getting smaller and smaller, and we expect to see some savings from that, especially next year.

I think Randy Mayor, you were talking about, with Broward pulled out, we actually had decrease in -- we had (multiple speakers) less expenses by about --

Yes, about $325,000.

$325,000 less expenses for the quarter than we did the prior quarter.

Right. And some of that's coming from the Northeast Arkansas and the Liberty transaction still implementing our staffing models and reductions there.

We're continuing on the branch study. We'll probably close some more branches, so --

Thank you.

You bet.

The next question comes from Brian Martin at FIG Partners.

Hey, guys. Most of my stuff's been answered -- just maybe two things. The branch study, Johnny -- I guess, what's the timing of when you think you get more clarity on how many branches could potentially be closed, or what possibilities there are on that front?

I said it. Donna and I were emailing back and forth the other day about that. She was giving me a list of these branches and her evaluation on a bunch of them. And I said: If you'll go out there and close about five, you'll see that a bunch of changes happen in a hurry. I don't know if she's ready to do that; are you?

Well, I don't know about that. We just got the total running up about last quarter, the quarter before. We're still fine-tuning that, Brian. Even though they put a plan in place, you do have to give them a little time to try to implement that.

Johnny's right, we do need to make a plan and work the plan. But I don't think we're ready to give any kind of numbers, or even a prediction on that just yet.

Okay. And just maybe the last thing: The reserve build, Johnny -- what's the timing as far as kind of getting to where you think it needs to be? Is that a 2015 event? It's kind of done before that end of next year, or is it just the next couple of quarters? How should we be thinking about that?

I think it's an ongoing process, like everything in our efficiency study. Donna continues -- our team continues to work every day on efficiency in this Company. So, it's just an ongoing project that will continue on and on and on, and maybe we'll learn more and more as we go. Maybe we're closing a branch with $10 million worth of deposits in it today, and we're closing one next year with $15 million because it still makes sense to do that. I think it's an ongoing process. But I'd like to have it finished by mid-2016.

Let me just add to that -- piggyback a little bit. There's a lot of technology coming down the pipeline that's going to change the face of branches. If the consumer grabs a hold of that technology -- you've seen the Apple Pay announced and some of the other things. If they grab a hold of that technology, then it will always be a continual look at our branches and how many transactions they're doing, and what kind of branch do we really need? Certainly smaller, more efficient, and full of technology if things go the way everyone is predicting. So, I think you're going to see lots of changes in banking over the next five years, and it will all depend upon what the consumer accepts and where they go.

That's well put, Randy. I'm just back from Europe, and I'm looking at a branch in Europe and it has four ATMs in it and no personnel. And I'd tell you what the marquee was, but it was in Italian and I can't tell you -- I couldn't read it. But that was their branch. It was downtown Nice, France, and it had four ATMs in it and no live bodies.

Just to give you an example, we've had Internet banking for 15 years. We've had mobile banking for two years, and in those two years, mobile banking has far exceeded the number of transactions that we have seen as compared to the Internet banking, which is just -- that's eye-opening to me.

Okay. That's helpful. And just the reserve build, Johnny -- I guess that 1.11% level that we're at this quarter, to kind of get to an optimal level, if that's a 1.50% or 1.40% type of level, what's the timing on how long it takes to get there? Is that --

Brian, you think about it, we're at 1.15% or 1.17%, and then we did the Florida Traditions transaction, took us back to 1.11% even though we put $4 million in. I mean for the quarter. I can't answer that question; depends on the deals that we do in the future. We do another Liberty deal, it's going to pull -- a $2-billion deal -- it's going to pull that down to [beans] in a hurry. That's difficult to answer. I mean, we can't stop. If we stop -- if we just stop growing today -- we're not going to do that.

What kind of hides that, Brian, is that, like he just mentioned for Florida Traditions, what you can't see there is that there's an $8.5-million credit mark on the loans that we acquired from Florida Traditions. And under the good old accounting days, we would have had another $8.5 million in ALLL. But instead it's over there net of the loans. If we have losses, it will absorb those losses.

I don't know, what, it come out all-in about 4.30%, is that what you --?

4.20%.

4.20%. We've actually got, call it reserve, call it mark, call it whatever, we've got about a 4.20% reserve.

Correct.

Okay. And did I hear it right -- it sounded like some of the deals from an M&A standpoint more recently are a little bit larger rather than smaller. Is that -- ?

Yes, but we've seen -- you're talking about the loan deals?

No, just the -- ?

Yes, yes. Well, let me tell you. Tracy's done a good job, and he's got a bunch of great candidates. We're evaluating each one of those candidates.

But you got to find the one that moves the needle. Liberty moved the needle. You've got to find the next deal that moves the needle, and a lot of these deals don't move the needle. They just don't do anything for us, and why would we do them? Why would we do those trades? It didn't make any sense to do those -- to waste our time and effort to do something that doesn't do anything for us.

We're looking for those deals that make sense. We're known for doing good deals. We're known for doing smart deals. And we're just looking for the next trade. And we've got some staked out that make some sense and move the needle. If we can bring those home over the next six months or so, then I think you'll be pleased as an investor, and I'll be pleased as an investor also.

That's what we're trying to do. We're not doing deals for the sake of doing deals, and you're seeing people do deals for the sake of doing deals. And I don't understand that, but anyway.

Okay, I appreciate the color. Nice quarter, guys.

Thanks.

(Operator Instructions)

And our next question comes from Peyton Green at Sterne Agee.

Yes, good afternoon. I was just wondering maybe if you could comment a little bit, and I apologize if I missed this, but the indemnification asset is down about $59 million year over year. And I was just wondering maybe if you could comment over the next year what you expected the reduction to be versus the amortization component? I know it's hard to model, but just trying to get the right order of magnitude.

Okay. I guess I'll take a shot at it. (laughter) We're all pointing.

Yes, we're all pointing around the room.

Before he starts, I will tell you: The ones that are expiring, it's going to go to zero.

Thank you for stealing my thunder, Randy. Okay, sorry. We have a tremendous amount of our acquisitions -- in fact, all of them are pretty much winding down next year. Old Southern Bank has nothing but five-year loss share left. All the 10-year loss share is paid off. The indemnification asset will either be paid off by the government or written off by Home BancShares by March 12 of next year.

Key West is about 50/50. But as you know, we're knocking it down $1.1 million this quarter. And I'll do that the next couple of quarters. But it has about half of it left in 10-year loss share.

And we're working on the Bayside and Coastal Community, which is July of next year. And then we have Wakulla and Gulf, which is in the fourth quarter of next year, where a lot of that will go away. We're monitoring it, and the reason we have the big amortization is because we realize that we have positive credit marks in there that we are accreting into income, and we're amortizing the offsetting indemnification asset. Do I have a crystal ball and tell you what it's going to look like? No, but it will be a whole lot less by the end of next year.

Okay. I guess I'm just trying to gauge. If it dropped $59 million [in 21], and that was amortization over the last year. Do you expect the same kind of ratio, or do you think it swings the other way, where you don't have as much amortization going forward, just as a ratio, I guess?

It probably is going to be about as much amortization because we're coming -- we're winding these things down, and the loans, for the most part, have performed better than was anticipated on day one. What's going to -- might possibly happen is that -- what we say around here: Good is good and good is bad and bad is bad. And what that means is: When we have an impairment on indemnification asset, we get to accrete the additional interest income, but the lives at this point left on the weighted average life of the loan portfolio is now going to be greater than the weighted average life on indemnification asset. So, you may have a little bit negative arbitrage on that between now and the end of next year.

Okay. Fair enough. And then --

But after that, it should be -- it's all gravy because then we don't have any indemnification left to write off, except for a little bit that's left on the 10-year loss share, and then we have five more years to correct it.

Sure, sure. With regard to M&A, how would you say pricing is moving? Certainly, if you're a publicly traded bank, you've seen a reduction in your valuation over the past few months. But the private guys, how are they -- are they knowledgeable? How would you describe the bid/ask gap, I guess?

It's probably running anywhere from [1.40] to -- for a bad bank -- there's not many bad banks left out there. Probably book of a bad bank to probably [1.40] to [1.80]. Looks like they're trying to push them to 2 -- looks like they're trying to push them up to a 2. There's not many people that can pay 2 and make it accretive.

Some people in the country that can do those deals with the power stocks -- five or six of us. But outside of that, they become dilutive, and you see them talking about dilution, and dilution to tangible book. And we haven't done any dilution to tangible book thus far. Ours have all been accretive. As I said earlier, we're on an annualized growth of tangible book of about 24% increase this year. We're at 18.2% right now through three quarters.

So, we're very disciplined on that side, and we're watching it. We'll let some people run out here and do deals for the sake of doing deals. And we'll just pass, and move to the next one. The biggest job that we have is to educate the seller that the deal has to make sense. If it works for the seller and it works for the buyer, then the combined entity shareholder gets rewarded, as you've seen our stock perform over the years, because we've been rewarded as a result of doing smart deals.

But there's lots of people just doing deals for the sake of doing deals. And their three year's earn-back or four-year earn-back or five-year earn-back on tangible, and that's all maybe with smoke and mirrors. So, we saw one recently, said it was a 3.5-year earn-back, and that's based on earning $20 million -- the target earning $20 million a year. And the target was earning $8 million. So, they got to take it from $8 million to $20 million to get a 3.5- year earn-back, or they may have an earn-back that lasts to infinity. And that's probably what they got.

That's how we look at it. We're trading about 15 times earnings. We think the target ought to trade at about 15 times earnings. The problem is, they're all going to expand their margin next year, and they're all going to grow loans, and they're all going to cut their expenses, and they're all going to do a [1.50%] ROA. The truth is, they never have and they never will. You've just got to let them run. If somebody wants to pay that price, let them pay it. We're not going to be the one to do it.

Okay, all right. Last question: What do you think the effect of lower long-term, and short-term rates for that matter, over the course of this year -- how much margin pressure would you expect to have over the next year from that?

We're pretty neutral on our position, and our modeling pretty much shows that. Maybe if they were to go down, which I thought couldn't happen, but has over the last couple days, we'd lose a little bit more compared to what happens when it goes up. But overall I think we're like 0.4 or 0.14 negative gap. So, our position is pretty good either way.

Okay. No, I guess I was just -- year to date, market rates are down kind of across the board. I was just wondering if you're seeing more competition on the loan pricing side maybe this quarter than you had a couple quarters ago.

Not really. We let them run for a while. We really didn't get in the 4% game for a while. We kind of stayed out of that. We weren't sure -- to maintain a 5% margin, and right in the 4%s, it's pretty difficult. We kind of stayed away from that.

Obviously, we got in the game, and you can see what happened to loan growth when we got in the game. It's up a couple hundred million dollars. We're still seeing some silly stuff out there, but you do -- mid-4%s is working pretty good.

Okay, great. Thank you.

Thanks.

At this time, we show no other questions. I would like to turn the conference back over to Mr. Allison for any closing remarks.

Thank you, Amy. And thanks, everyone, for your interest, and we'll talk to you in 90 days.

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