Home BancShares Inc (HOMB) 2014 Q4 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated fourth-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. At this time, all participants are in listen-only mode, and this conference is being recorded.

(Operator Instructions)

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

Thanks, Ian, and welcome to Home BancShares' fourth-quarter and year-end Earnings Release and conference call. With me today is Randy Sims, our CEO of Home BancShares, Tracy French, the newly appointed CEO of Centennial Bank, Randy Mayor, CFO, Ryan Davis, Chief Accounting Officer, and Kevin Hester, our Senior Lending Officer.

2014 was the best year in the Company's history, and the fourth quarter was the best quarter ever. I told you over a year ago that the Liberty deal was a game changer, and it truly has been. Over the past six years, we have acquired failed banks, bankrupt banks, poaching selected assets and loans, i.e., Vision. We've bought some good banks, and we've bought some poor performers like Liberty. That's what we do. We fix them.

Liberty was the largest one that we've ever done, a $2.9 billion bank. Actually, had a little fluff in it. Wasn't quite that big. But, the jury was still out to see if our team could execute on one that size.

The verdict is in. Liberty Bank -- the best year they had ever had prior to us owning it was about $20 million, and the Company earned over $40 million the first year. So, we've got some pretty good highlights this year.

Record first-quarter earnings and 2014 income. First quarter was a little over $30,000,000.46. Year-end income was $113.2 million, or $1.70. And, that's after $6.2 million in merger expenses.

Core efficiency ratio, 40.15%. Best we've ever done. I saw some threes in some months. I thought we might see a three in front. We got awfully close.

Core ROA of 1.67, and great job on the expense control on non-interest expense was only up $1.8 million over last year. Organic loan growth over $300 million. Reduced charge-offs, improved asset quality. Stockholders' equity is now over $1 billion.

In 2014, we increased stockholders' equity $174 million, over 20%. Tangible book went from $7.94 to $9.90, that's an increase of 24.7%. And, we had record revenue for the year of $98.2 million. We had been flat over the last three quarters, but I guess the loan growth finally kicked in. We've run about 94 during those past three quarters.

Banks presently sell on a multiple of tangible book and a multiple of earnings per share. We grew your tangible book by 24.7%, and we grew your EPS by $0.43, or 32.3%. Bottom line, thus far we have done pretty smart deals, I think. And, our goal in every deal that we do is what we call Triple A at Home BancShares. That's accretive, accretive, accretive. That's accretive to book. That's accretive to tangible book, and that's accretive to EPS.

On the M&A side, I hope the quality of the deals in 2015 are better than they have been in the last couple of years. There's really been a bunch of silly deals done out there. The buyers are giving all the savings to the sellers. Major dilution to tangible book and long earnbacks, maybe, if not infinity.

We need to be aware if the bank is trading at 1.5 books, it pays 2.5 book -- that's dilutive to tangible book. If a bank's EPS is at $0.17 and they pay $0.30, that's dilutive to EPS. So, in closing, I hope we see smarter deals in 2015. We're certainly on the hunt. And, we look forward to another great year in 2015. Randy?

Thank you, Johnny. As we said, what a great quarter to end a great year. Congratulations to all of our employees for a very successful 2014. You have made a difference in our continued success. The fourth quarter of 2014 was the most profitable quarter in the history of our Company, as Johnny said, and that leads me to quote my favorite thing to say on this call. That it's now 15 consecutive quarters of record income.

And, on top of the record income, we also had another quarter of significant organic loan growth. It really was a wonderful year for us. We started 2014 with the largest and arguably the best acquisition in the history of our Company with Liberty Bank Shares in Arkansas.

And then, as you may recall, we added Florida Traditions in the third quarter. It really tied together our presence in central Florida. And, in the fourth quarter, we added Broward Bank of Commerce in Fort Lauderdale. All of these acquisitions were signed, closed, and converted in record times to enhance the earnings of the Corporation.

So, as of December 31, the Corporation is sitting at $7.4 billion in assets. And, as it was in 2014, we will continue to look at potential acquisitions, look for organic growth opportunities, and work to improve our existing markets in 2015. And, to get that done, I am very excited about the recent promotion of Tracy French as President and CEO of Centennial Bank. Tracy and I have been working very close together for months. This change will give us both more time to focus on different areas of the Corporation. Along with our existing management team, to take Home BancShares and Centennial Bank to greater levels of growth and profitability. To tell you a little bit more about the change and he may add a few comments on acquisitions, I will turn it over to Tracy.

Thank you, Randy. I look forward to continue working with you and our Board, the best staff in America throughout Centennial Bank. I'm very honored to be given this opportunity. I've been fortunate to work with this group for about 12 years now. With Home BancShares and Centennial Bank, I've witnessed the success of what it has done over the years. I'd say about 85% of the group I've worked with or around and look forward to working with the others and getting to meet them and know them better very soon.

You've set the bar pretty high. I guess you're going to set the bar a little higher later in the conversation today. The acquisition -- [why is it] still very busy. Our due diligence team continues to communicate -- actually has a meeting this afternoon with another opportunity. So, Johnny's keeping me busy there and look forward to continued success in expanding the Company if the right price and the right deal comes along. Thank you again for the opportunity. Look forward to the next 12 years working with you.

Thank you, Tracy. It is going to be really good, I think, for the Corporation and can't wait to get started in 2015. So, now let's get to the numbers. I will go through these very quickly since Johnny has already highlighted many of them and will just add a few more comments.

Our quarterly profit was a record $29.9 million, or $0.44 diluted earnings per share compared with income of $13 million, or $0.19 diluted earnings per share, the same quarter in 2013. That is an increase of $17 million, or 131%. Quite a change from 2013.

More importantly, excluding merger expenses, with our acquisitions in the fourth quarter of about $1.7 million, diluted earnings per share was $0.46 per share. That was the goal we wanted to reach for the fourth quarter, and we did it. Our return on average assets for the fourth quarter was 162 as compared to 156 for the third-quarter 2014. But again, that included merger expenses. So, if you take out the merger expenses, then our return on assets was 167.

Our return on average assets, excluding intangible amortization, was a 174. Our core return on average assets that excludes intangibles, provision, merger expenses, and taxes was 3.13% for the quarter -- all improvements over last quarter. Our return on average TCE, excluding intangible amortization for the quarter, was 18.72%.

The overall average internal ROA for the Arkansas, Alabama, and Florida banks continue to be strong and consistent with Arkansas still substantially leading the pack. We have been working on a new reporting methodology that has now been implemented, give each region an internal comparison on more of a core basis that actually points out the strengths and weaknesses. I believe this will be a very valuable tool to our managers as we begin 2015.

At the Centennial Bank level and on an internal analysis, 64% of all assets are in Arkansas. 4% of assets are in Alabama. Florida has actually gained on Arkansas in the last two quarters with good growth, increasing from 26% to 32% of the total assets, and a lot of that is due to the new Florida acquisitions. The total number of active Centennial branches is 150 with 82 in Arkansas, 61 in Florida, and 7 along the Alabama coastline. In 2014, we closed 9 branches, acquired 10 and opened 1 de novo branch in Naples, again, for a total of 150.

We ended the fourth quarter with a 41.87% efficiency ratio a as compared with the third quarter of 45.70%. Our core efficiency ratio was ever so close to getting a three as Johnny said in front of it at 40.15%, as compared to the third quarter at 41.88%. We'll have to try to see about that three some time next year.

This was very good improvement in both ratios. Consistency was the key to our success in 2014, and our core efficiency ratio averaged around 41%, allowing us to keep expenses in check. We continue to look for ways to improve this ratio as well as our overall profitability, and in 2015, we are implementing a grassroots effort towards meeting our strategic goals, using cross-functional teams, working together to improve the Bank. We've had success with this type of bottom-up team process in the past, and we look forward to setting new goals for the future. Donna Townsell, our VP for efficiency will be very involved in this project. In addition, we are making changes in both our investment and insurance efforts as well as continuing to examine the look and use of our branches as well as the use of our technology.

I'm going to switch to deposits. We ended the quarter at $5.42 billion, compared to $5.27 billion at the end of the third quarter 2014. Time deposits represented 24.3%, staying just barely under our 25% goal of total deposits. Net interest income, improvement in our margins, and non-interest expense -- I'll turn that 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 a little capital information. Let's switch to Randy.

Thanks, Randy. The net interest margin on the fully taxable equivalent basis was the same for Q4 as Q3 at 5.26%. Loan yields declined slightly from 6.47% to 6.41% while the investment yield increased from 2.67% to 2.78%. The yield on interest-bearing liabilities improved slightly from 0.39% to 0.36%. The effective yield on non-covered loans was 5.89% in Q4 versus 5.84% in Q3. And, the effective yield on covered loans was 16.53% in Q4 versus 17.23% in Q3.

The provision for loan loss for non-covered loans was $5.4 million in Q4 versus $4.2 million in Q3. The primary reason for the provision continues to be the building of the reserve for the new and renewed Liberty loans which did not have a reserve due to the acquisition accounting treatment.

Total non-interest income was down $620,000 from the prior quarter. Service charges were up $164,000. Mortgage lending was also up $440,000. The gain on sale of SBA loans declined $183,000. Gain on sale of OREOs decreased $266,000. And, the FDIC indemnification accretion increased $492,000, and miscellaneous other income items decreased $236,000.

Total non-interest expense increased $1.7 million. Salaries and benefits increased $543,000 with $357,000 of the addition resulting from the addition of the Broward Bank commerce staff during the quarter. Merger-related expenses decreased $2.1 million from the prior quarter. Overall, we were very pleased with the ROA of 1.62% and the core efficiency ratio of 40.15%. Brian?

Thanks, Randy. As of December 31, 2014, our Company reached a new milestone with over $1 billion of equity for the first time in our Company's history. In October, the Broward Bank acquisition was completed, and we issued $30.2 million of capital to their shareholders. Also, during the fourth quarter of 2014, we paid out shareholder dividends of $6.8 million, and grew retained earnings by $23.2 million.

For Q4 2014, our Tier 1 capital was $721.5 million. Total risk-based capital was $776.5 million, and risk-weighted assets were $5.7 billion. As a result, the leverage ratio was 10.3%, compared to 10.2% at 9/30. Tier 1 capital was 12.6% compared to 12.4% at September 30. And, total risk-based capital was 13.5% compared to 13.4% at September 30.

Additional capital ratios include book value per common share of $15.03, compared to $14.42 at 9/30. Tangible book value per common share was $9.90, compared to $9.39 at 9/30. Included in this increase is about $0.10 associated with the tangible book value increase from the Broward transaction. Lastly, the TCE ratio was 9.5%, compared to 9.1% at 9/30. Randy?

Thank you, Brian. As it has been mentioned, another strong quarter for loan growth and continued improvement in the already strong asset quality numbers. Who better to turn it over to than our Chief Lender, Kevin Hester, to give us more details.

Thanks, Randy. It was another great quarter on the lending side. We achieved solid organic loan growth while continuing to improve our already strong asset quality numbers. Led by a 10% improvement in our non-covered, non-performing asset ratio from 0.88% to 0.79%, all asset quality measures improved on a linked-quarter basis. The allowance for loan losses as a percentage of non-covered loans decreased slightly in the fourth quarter from 1.11% to 1.09%. This is due to the loan growth I mentioned and the Broward Bank of commerce acquisition. However, if you added all of the acquisition discounts to the allowance for loan losses, the combined figure would be 3.88%.

Non-covered real estate owned decreased 12% on a linked-quarter basis from $19.4 million to $17 million. This is the fourth consecutive quarterly drop since the Liberty Bank acquisition in fourth quarter 2013. Net charge-offs were up slightly to 23 basis points in the fourth quarter. But, the average for 2014 is still below 20 basis points for the quarter. Early stage delinquencies remain low at 1.24%.

Organic loan growth exceeded $100 million in the fourth quarter which would be very close to 10% growth on an annualized basis. This follows the third quarter which was the strongest since before the downturn. In fact, gross loan production was actually 20% stronger in the fourth quarter than in that record third quarter, but larger paydowns and refinancings held down that net growth number. In addition, there is a significant amount of unfunded construction activity that should fund during 2015.

As I indicated in the last conference call, all of our regions are contributing to the strong loan production numbers, and we're excited about the opportunities we expect to see in 2015. As you can see, we ended 2014 on a very positive note in the lending area, and I want to thank everyone involved. It is the diligent effort of all of our lenders, assistants, and operations staffs that provides me the opportunity to report these very strong numbers to you. With that, Randy, I'll turn it back over to you.

Thank you, Kevin. Good report. Again, what a great 2014. Lots of growth, improvement, and changes to make us a much stronger Corporation. Record earnings and more improvement in already outstanding core efficiency ratio. Good loan growth and great asset quality metrics. In other words, another record-breaking year. But, we now have to turn our attention to 2015 and work to do even more. And, with that, I will now turn it back over to our Chairman, Mr. Allison.

Thank you very much. Thank all off for your reports. It sounded really good to me today. I think we'll go to Q&A now. Ed?

(Operator Instructions)

Our first question comes from Michael Rose of Raymond James. Please go ahead.

Hey, good afternoon. How are you?

Good, Michael.

First off, just want to say congratulations to Tracy. I'm glad you can finally trust him and given him the promotion.

I didn't say I trust him. (laughter)

Fair point. Fair point.

Thank you, Michael.

You're welcome. Just a couple questions here. First, maybe if we can dig into the margin a little bit. It was flat on a reported basis. If I'm doing my math right, I think the core margin was about [465] and that's up about 10 basis points sequentially. Can you just give us a sense for what drove that increase in the core margin? And then, what your expectations would be here as we move forward with the flattening of the yield curve?

This is Randy, Michael. There weren't really any significant changes in our impairment pools analysis that contributed to any of the fluctuation for the quarter. So, it was pretty consistent from that basis. It does fluctuate, depending on the activity in the loan pools, as they pay off or rework. So, we do have some of that fluctuation.

But overall, it was pretty consistent quarter to quarter, and we don't anticipate there being anything. Now, there always could be some different activity than what we've got kind of modeled. Going forward, it shouldn't vary too much. But, I would imagine there's still with the loan growth that came on, there will still be some pressure there on the margin a little bit.

Michael, I've got one thing to add. When we do our filings, we do those non-GAAP tables that are in the back of our 10-Q and 10-K. I'll go ahead and give you those numbers. While we haven't published them, we do have them ready. If you exclude all the purchase accounting entries that kind of juiced the margin, the yield on the loans for the quarter was 5%. And, the margin that we would actually have when you take out all the purchase accounting discount amortization, the margin was [420].

Okay. That's very helpful. And, what was it last quarter?

It was pretty close to that. I don't have that number here in front of me.

Okay. That's helpful. And then, if I can just ask about where the loan pipeline stands. Obviously, two very good quarters of organic growth. But, I just wanted to get a sense for -- A, are you backfilling it in the pipeline? Does it still remain strong? And then, B, if you could of talk about where the growth came from this quarter? By market or geography?

Hey, Michael, this is Kevin. On the pipeline, I would say where we sit right now first quarter is probably a little bit below fourth quarter last year. Even where we're at would not be a bad first quarter historically. Though that has generally been a down quarter for us.

From a geographic standpoint, it is really across the board as I've said in the comments. It's pretty much every region is contributing. Florida is certainly coming on from a lending standpoint.

As far as the type goes, I know there was a pretty good jump in the C&I lending group, but that's not really -- it's not a shift or a focus on that. We just had two or three deals that we were working on that happened to be in the pipeline that really jumped that balance up last quarter.

Okay. That's helpful. And, one final one from me. Just more broadly speaking, I know you don't have a lot of direct energy exposure. But, any comments on how from a second derivative impact, lower oil prices may impact you? Both positively and negatively. Thanks.

I think the world is throwing us all in the same basket. They don't seem to like banks right now. But, we have one energy loan, so-to-speak, and outside of that, we have some in the Fayetteville shale that are self-liquidating. They're on a factoring program, and they're self-liquidating. So, we have very little exposure.

Obviously, it has impacted Texas banks substantially. It seemed like it's impacted us. There appears to be a disconnect based on earnings and performance with bank stock prices. But, the downside to that is that it makes banks cheaper. So, from a an M&A perspective, it may be good for us. It could be positive.

So, we're going to continue to look as we have been. We're busy, and I don't -- the consumer is going to have more money in their pocket. Maybe they'll spend more. Retail sales could be up. That's probably a plus.

The downside to Texas, that remains -- downside in the oil business remains to be seen. I was around when oil went from $50 to $10 and remember that trade and those opportunities. If you remember over the last year or two, people said are you going to buy Texas. I said I'd rather buy in Texas at $50 a barrel oil than I had at $110.

The jury is still out on what happens there. We'll certainly watch it. If you remember in my past life at First Commercial with Tyler -- we bought Tyler [longingack] about $2 billion worth of liabilities in that market. So, we'll be looking at that.

From other perspective, it has got to make banks cheaper. If you're a publicly traded bank, you've had to get hammered in this market out here. Even if you perform the way we do. But, it has been my experience that the good things continue to be rewarded. So, hopefully, we'll continue to be rewarded and may put us in a better position long term to buy some of these or use our currency.

But, we still have all the handles to pull. We can increase dividends. We can buy back stock, or we can use that capital. As you can see, the Company is generating lots of capital in a hurry right now.

That's great color, Johnny. Thanks for taking my questions.

Our next question comes from Jon Arfstrom of RBC Capital. Please go ahead.

All right. Thanks. Good afternoon, everyone.

Hey, Jon.

Just a question just to follow up on your comment on deals. And, you want maybe more quality deals out there? What are you seeing in terms of quality and pricing? Have you seen it soften at all? Or, is it as competitive as ever?

I think it's too early for that. A banker was in yesterday -- nice guy -- came in yesterday and brought us a deal because his attitude was we could pay more. I said we're not going to do that. I looked at his debts, I said we're not going to do that. Because we can doesn't mean we will.

So, the reality is that there are some deals out there may make some sense. They have to have some hair on them to get a good deal. To get a good trade right now, you have to find something that's got a little something messy in it to work. The banks that are doing -- we're better at bad. Liberty was doing -- is a pretty poor performer doing about a 0.8, and we got it doing way over 150 now. You can see the upside.

We're kind of more guys that believe in bottom fishing out there and finding those deals that are -- banks that are not performing very well that give us so much upside. The Liberty deal gave us $0.40-something, almost $0.50 in upside EPS. That was a game changer. We're just looking for that next deal.

What I'm seeing is not a lot of difference. What I saw yesterday was the highest price I had seen. I don't think that the dust has settled out there yet on bank prices. So, Tracy is still working on deals. Tracy, you got any comment on that? What you're seeing on the price of deals? It hasn't changed much, has it?

It really hasn't. I think you nailed it right on the head. The activity is still there. We're staying the course, but we're still busy.

Jon, when somebody is willing -- when their stock -- when they're willing to dilute their tangible book on an earnout that is long, and they're willing to dilute their EPS, the only way they can bid against us is do that. And, how silly is that? Why would a guy dilute himself 5% or 6% or 3%, and you look at the projections on the earnouts coming forward. The numbers they're using on the earnings going forward, and they're not realistic. At least the bidding that we've been in.

We just continue to hold our course. We continue to remain reasonable. We continue to look at a deal that if it doesn't move the needle, we're not playing. So, we continue to do that. And, if it makes stocks come down, we'll do more deals hopefully. Buyers come down -- we'll buy it back. I think Home is really sitting in a pretty good position right now. I don't know if that answers your question.

It does. It does. The other question, just on -- I know it's a ways off but on the $10 billion size. It seems like you have some optionality, and you mentioned a buyback. Are you just -- are you agnostic to this, and if a deal comes you'll take it. If not, you're going to figure out a way to increase shareholder returns and increase EPS one way or the other?

I think you answered your own question. I think you said it pretty well.

We're going to do what's in the best interest of shareholders. We're not scared to death to go over $10 billion, and they're making us do some things which is probably good for us now to get us ready for that because they expect us to do that. We're starting to spend some money on that behalf, forming committees and a lot of operations going on here. Discussion of operations. We haven't spent lots of money yet. But, we're spending some money on that. We're going to get ready for it. We find the right trade that makes sense, we'll go over it.

I've looked at a couple. They just barely get us over. I don't want to barely just get us over. It want to get us more than just barely over it. If they're good enough trades, if you find a deal like a Liberty, they're good enough trades you can afford to do those deals.

You mentioned the tech investments and branches and maybe that's for another call. But, just back on the bigger picture thing, without acquisitions you typically have some stretch goals for the Company. I don't know if this is for you or Sims, but you talked about Home $2 in the past. Is that something we should still look at as a stretch goal? Or, is there some other way to look at it? Or, something else that you're thinking about that may impede that.

I think it's realistic. I think that's where you're going to see us come out. They're all falling under the table here right now. (laughter)

I think the word stretch might be appropriate there. But, certainly, that's where we want to be. That is where we want to be. Now, can we get there next year? I don't know. That's going to depend a whole lot on loan growth and our ability to generate organic growth within our Company.

But, just as we're not slowing down on the acquisition side, we're not slowing down on looking at things internally, looking at branches, looking at ways to increase loan growth. I was very proud of Florida last year from the standpoint of matching up with Arkansas and generating loans and really coming around and starting to really have the look and feel of real regional banks back -- even though the days of -- when they failed are three or four years ago. But, they're really starting to gem and become real banks and produce for us and I look forward to that in 2015.

So, we're looking at all the levers as Johnny says. I like the way he terms levers. We're looking at everything. So, you're not going to see us laying back. You're going to see us reaching for that goal. It might be a little stretch, but that's certainly where we want to be.

Okay. All right. Great. Thank you.

We're $220,000 from the completion of the amortization on the first program that we started. We did the Home $2 and Home $2.50 before we split the stock. We like about $220,000 finishing that amortization up. When that's finished up -- I didn't want to create another one out there that started hitting the income statement again. That's about how much a month?

$60,000 a month.

$60,000 a month. The second one will still be out there amortizing, but we'll get rid of one. That first one. So, when we do that, you'll see us coming with a goal. And, as soon as that hits -- and I don't know when that is, probably within the first six months or around that time. Probably that will amortize out. We'll come back with the next program for the group. That gives you a guide where we're going, doesn't it?

That's very helpful. Thank you.

Thanks, Jon.

Our next question comes from Dave Bishop of Drexel Hamilton. Please go ahead.

Hey, good afternoon.

Hey, Dave.

I thought in the preamble in terms of targeting the efficiency ratio there you were sort of approaching the three handle there. Is that something that could enter into the lexicon as we think about modeling out into 2015?

They're shaking their head no. (laughter) I'm shaking my head yes. Let me tell you what they showed me. I look at every month. I saw one month with a three in front of it, and I saw, obviously -- which is kind of an average there. I saw two months with low fours. So, with a low four in front of it. So, I think we can get with a three in front of it. We'll keep pushing to try to get a three in front of it. That's my goal. To get something with a three in front of it.

I don't know where we go. When we got below -- we've got something with a four in front of it, I was pretty pleased. Then, we just kept pushing and pushing. Now we're down flat at about a 40. I told them I'd take a 39, 9, 9, 9, 9. Of course, I'm just selling at that point. Once we get to that point, we'd start pushing it down a little bit. See if we can do better. They'd say I'm never satisfied.

Why would you say that? (laughter) He's never satisfied, but neither are us. We're looking and doing and making some changes especially on the non-interest income side that I think is going to end up paying us some really good dividends down the road. There's a little infrastructure that we got to get through first. But, as I mentioned, we're making changes in insurance. We're making changes in our investment side. And, we brought on a head of our mortgage Company. We're making changes there. So, I'm really looking forward to seeing what our non-interest income can be this year versus last year. But, there is a little infrastructure we got to get through first before we really see the dividends come back to us. If that helps.

Yes, got it. Appreciate that color. And then, following up on Jon's question maybe a pending follow-up there in terms of M&A. Clearly, some of your peers out there are struggling with the burden of the regulatory thumbprint as it relates to Bank Secrecy Act and [I'm under] laundering any there? Does that put a shadow on your M&A efforts? Or, change the way you approach due diligence there in looking at potential targets? Has it caused you to walk away from any of the banks you've looked at from a compliance standpoint?

Well, we've looked at two with BSA problems. To say we walked away, we certainly walked away from one, and we didn't -- we're not really that aggressive on the second. But, our concern is that it could get contagious. So, we have -- we've kept our nose really clean. We work hard at that. And, we don't want to take a chance of something getting contagious.

From an M&A perspective on the banks that we talked to and we're looking at, we're not -- with the regulators, we're not concerned with that at this point in time. We think we do a pretty good job with that. We think they like what we do. That doesn't concern us. But, if they've got BSA problems, we're probably going to walk -- circle around them for a while and see if they can get some of those resolved. There may be a deal with some of those guys if you can get it resolved with the regulator on the front end that you can resolve some of those issues. Then, you can go in and make a deal and clean that up and improve it. Maybe have a good upside for the EPS. That's the reason we looked at the two that had the BSA problems. I said a while ago, to get a real deal -- you've got to find something that's a little dirty, and when you find something that's a little dirty if you can fix it without it getting contagious to the rest of your franchise then you might be able to make some money with it. Anybody else got a comment on that?

I think you hit it. You cannot let it infect you. But, if it is -- we have systems in place and any acquisition that we convert will go to those systems, and our systems are good ones. As Johnny said, we have very good reports from the regulators, and so if the bank could be cleaned up by converting them over to us without infecting us, then it would be an okay deal. But, if it's there and it's dirty, and it doesn't look like it's going to get cleaned up for a while, we're not going to be there. We may circle around it, like you said, but we're not going to be there.

We have a great relationship with our regulators, and we trust them. They trust us. If we're going out to do a deal, we go see them first and lay the pro forma out of what we think is going to happen and what it looks like and whether it's dirty or not dirty and what we've got to do to fix it. We lay all that out on the front end. We're not going to bite off more than we can chew. We're going to do the right size deals.

We're not going to do a deal for the sake of doing a deal. There's nothing wrong with being $7.5 billion, having good organic growth, paying a good dividend and buying back your stock. We don't have a gun to our head. We're going to do the what's the right thing to do, and we're not going to do stupid dilutive deals to our shareholders. You've heard my statement -- doing the dilutive deal is kind of like kissing your sister. You don't get anything out of that deal. That's kind of how I look at those deals.

Got it. Thanks.

Thanks.

Our next question comes from Kevin Reynolds of Wunderlich Securities. Please go ahead.

(laughter) By the way, I wanted to applaud you, Johnny, for keeping all those secret goals that you have secret from everybody else in the room and not spilling the beans on the call.

Okay, Kevin. Thank you for that. (laughter)

Most of my questions have been asked and answered. I was noticing that mortgage fee income was up nicely. Although it's still a small piece of the puzzle -- up nicely in the quarter in what's seasonally a weak quarter. I was curious, I guess that's re-fi driven? Wanted to sort of dig into it and see if there's something going on with maybe refinancing in Florida. Because I know that there were a lot of people that were in Florida that were under water in their homes and as the housing recovery took hold, it might take a little bit longer for them to actually participate in the re-fi wave.

And, I ask the question because I'm curious -- I think Michael asked earlier about the decline in energy prices. Is that going to be -- are there going to be some positives for you? I would think that lower gas prices might be a positive in Florida. If you could couple that with the potential to refinance with lower rates and higher valuations, could you have a double-barreled stimulus in the state of Florida that might lead to more economic activity and more organic loan growth?

Kevin, it's a little simpler than that. Part of it is the timing of purchases. We had a good purchase month. And, it's really more purchase-driven than it is refinance-driven. As Randy talked about, we've added MLOs in a lot of our Florida footprint over the last 12 months, and some of those are really beginning to come on and hit their production levels. So, it's a function of adding to the footprint, the timing of purchases, and it is a strong purchase market down there right now.

We hired -- Kevin was responsible of course for all lending. He hired somebody to run that mortgage department who really focuses 100% on mortgage where he's drawn back and forth. I think that's been a plus for us, and his total focus is mortgage. I think that's going to pay dividends for us. Florida is hot. Florida is good. Florida's market is really good.

I didn't discuss -- we had a little bit of an increase in margin. I think you're going to see that improve over time because of Michael's focus on mortgage. So, it's several factors. But, it's not as much refinance-related.

Okay. And then, one other question, going back to M&A. I know, Johnny, in your past, you had -- you made a lot of money in East Texas, and you talked about how bank valuations have to be coming down certainly on the public side. I would assume on the private side as well especially in Texas. If you had an opportunity to buy -- make one move into East Texas and expand over there for the first time with this Company at the right price or have one chance to just add critical mass in your Florida markets, if the opportunity -- . If the valuation and the economic benefit were the same but you could only choose one, would you rather be deeper in Florida? Or, maybe add the new markets in places like East Texas?

I'd probably go deeper in Florida. When you think about it, you have management on the ground. You have a great special assets department that's seen every kind of crap that they can deal with in these eight failed banks that we bought. They know what the property is worth. They understand -- they know which legal counsel to work with. We've got great management on the ground, depending on where the opportunity was.

So, if it's something that hits in the Panhandle or something in the Leys or -- it would be pretty easy to do those transactions. And, depending on whether management wanted to stay or not, we could take it or leave it because we have great management on the ground there. So, that's probably the reason we'd do Florida.

Now, wouldn't keep us from doing a Texas deal, I can tell you that. We did Texas before. It's very profitable for us. It made a lot of money. It would be -- as I said in the past, it could be a little distracting because somebody's got to go run Texas. Hopefully, if we buy the right deal down there, that it will be a good organization with good management because we would be depending on someone there. Does that answer your question, Kevin or make you confused?

It's easy to make me confused. But, that did answer the question. Thanks. (laughter)

Is that it? Is that the only one you had, Kevin?

Yes, that's all.

Thank you.

Kevin, you're the one that always asks about the disconnect in the performance of the Company and the stock price. You didn't ask it this time. I don't know why you didn't. It's a bigger disconnect that I've seen, I believe, in my banking career.

Our next question comes from Matt Olney of Stephens. Please go ahead.

Thanks. Good afternoon.

Hi, Matt, how are you?

I'm good, thank you. Hey, wanted to circle back on loan growth. We've now seen some pretty good organic loan growth the last few quarters. It seems like a while back you hired a team of commercial lenders in Florida, and that's not something you've done too often in the past. Can you talk about this [lipdow] strategy? Is this something that you'll consider doing in the future? Or, just more of a backup plan in case you can't find the M&A deals you're looking for?

Matt, this Tracy. I'll answer the question back to Florida. I assume that goes back to the Pensacola days and Blaze Adams and his crew working with Jim Haynes, they have had a great year this past year, creating the new loans. [Bud Stonecker] now has increased his staff with some outstanding talent, and they have also began to produce there. That really just started over the last quarter. On their behalf, the Northern Florida part has been going on throughout the year. All of them have done an excellent job.

Kevin, you got a comment?

To answer your question, we would look at that in other places as well. It has worked. If M&A is not going to be on the table, that would be how we would get organic loan growth, and we have a good template for it at Pensacola and going in and creating a branch there.

In a sense, we have done some of that recently with our new branch in Naples. That was a team that we lifted out, and they really hadn't had a chance to perform. We're looking forward to seeing what they can do in 2015.

Give you an example, Matt, this is Johnny. We started yesterday at 11.00 with a loan committee meeting, and we had to stop at 1. We started back at 2. And, I think we went to about 3, is that about right? About 3. So, there is pretty good loan demand.

As Kevin told you, we had a lot of payoffs the fourth quarter with the fourth quarter was better than the third quarter. Pretty amazing the numbers of loans that we booked, and we had some big payoffs. And, we got most of those -- I think we've got one of them left out there, a smaller one. $10 million or $12 million to get paid off. We don't see a lot of big payoffs out there. Maybe if we generate, have a good quarter on generation side, I think Kevin thinks we're up about 60 right now. That will change. That's just throwing a needle -- I mean, a needle in a wall, I guess, hair at a wall. We'll see what happens over the next two or three weeks or month.

Okay. That's great color. And then, Johnny, I believe you threw out the possibility of getting more active on a stock repurchase plan something that we haven't seen now for a few years. Is this something that we could see in 2015? And, how are you thinking about this in terms of timing of M&A deals?

Well, we're sitting on pretty good cash position right now at the holding Company. We'd probably allocate -- if we decided to do that, we would allocate X number of dollars to go buy stock back. If we decide to buy it and it's cheap, we just buy it. We kind of like we did in the past, Brian Davis headed that. We kind of move in and move out. If we thought it was the right time to do it, we'd buy it. If we thought it wasn't, we'd let it slide a little bit. I think we still have 870,000 shares left in our program to purchase if we choose to. I think we're in good shape there.

The dividend we got a little behind there from when we had that TARP money for several years. You'll probably see us looking at that again. That's -- as I said, we still got all the handles to pull. We're generating lots of capital in a hurry for our Company, and the Liberty deal took a lot of our cash when we did that deal. But, we're back to -- I don't know -- $60 million, $70 million. Somewhere in that -- cash somewhere in that range now. When we do a deal, we try to do a little cash and the rest stock. We'd rather use all stock -- but I'd rather use all cash -- but, it gets awful dilutive. I won't issue any more stock. I don't want to dilute anybody. Does that answer your question, Matt?

You did. Thank you. Appreciate it.

Our next question comes from Stephen Scouten of Sandler O'Neill. Please go ahead.

Hi. How you doing today?

We're doing good.

Good, good. Tracy, congrats again.

Other than our stock price is getting hammered, we're pretty happy with the performance.

Yes. It sounded like you might want to talk about that disconnect between the stock price and the performance, Johnny? What do you think apart from what you mentioned earlier being lumped in with everyone else, the oil trade? What do you think is really pushing these stocks? Just rates and oil?

I think it's rates and oil. I think they think that the rates are going to stay down forever, and that the banks are really going to get squeezed. That could happen, I'm sure. But, the consumer is going to have more money in its pocket, and the banks are -- as I said, the banks are going to get cheaper.

So, you know Wall Street. Wall Street loves you one day and hates you the next. I don't know when it will be. It will be maybe June or maybe March they'll love us again. They'll switch. They switch off the banks, switch in the banks. The big banks -- I think some of the big banks had some misses.

Didn't I see that? Big banks had some misses. I think that kind of set the stage for banks. We're really not in the same category with them. We're up 32% in earnings and growing tangible book value fast. We march to our own beat. I think the Street likes us and will recognize that at some point in time.

I think so. As you think about -- you were talking there a little bit about maybe a potential buyback one day if the pricing got attractive to you. Is there a particular metric that you think about when it comes to a buyback? Or, what's the point where that -- your stock really does look attractive to you to go out and use some of that cash?

It's kind of a gut feel. Just kind of a gut feel.

Fair enough. And, on the -- as it regards to rates and what you're seeing there, are you seeing further pressure on your new loan yields from a rate environment there? Are you still seeing 4.5% on new production, is that kind of the range?

That's pretty much it. We see some stupid stuff from time to time. People coming in, dropping down into the threes. We even saw a two. Actually, we saw a high one.

So, you see some dumb deals being done out there and -- but overall, we're still writing in the 4.5% range. That's about where we're writing our loans, and that's pretty fair. You do a fixed three-year, five-year fixed at 4.5%, or you do it -- fix it for a period of time and then float it after that. So, that's fair. But, you see people who don't have relationships in their marketplace and the only way they can get business is buy it. So, they think they're doing something by going in and buying the business.

Okay.

Doesn't make any sense, but they can beat themselves on the chest and tell you all that they grew loans $300 million this quarter. Well, the next thing is you've got to look at their margin.

Right.

We work on every loan one at a time.

Okay. And then, with that -- with holding steady on pricing there, you have talked a good bit about the organic growth opportunities and maybe there will be some seasonality here in 1Q. But, do you think that organic growth can stay in that 10% range? And, within that, what percentage of the opportunities -- whether it's new pipeline or the organic growth you saw in this most recent quarter were coming from Florida?

This is Kevin again. It is possible that it could stay around that 10% annualized. That would take pretty good production, and it would take not having a lot of paydowns that we looked at in the fourth quarter. And, you're going to have some of that from time to time with deals going to nonrecourse lenders, things like that. So, I would think that would be the upper end of the guidance. And then, how much of it's coming from Florida, it is probably -- it's probably 50% or more from Florida at this point.

We're seeing Florida kick up, and I think -- I like the diversification. I like the -- we're seeing some stuff in south Alabama happening too. There's a lot of residential going on over there. So, I kind of like our diversification because if one falls down a little bit, the other picks up. I suspect Florida will be extremely strong this year.

In fourth quarter, it was probably more than 50%. But, I would say going forward -- I don't know that it will consistently stay there.

Okay. Maybe one last question. This might be more for Donna. I know you had talked about a branch study last quarter that you were going through. I was wondering if you had any more concrete findings or determinations from that study? If you had any idea what -- of branch cuts that might be coming. I'm always surprised that you can work the efficiency ratio down lower. Curious as to what other opportunities there are there?

That's an ongoing and a never ending project that we continue to work. We have a standard that we're trying to get to on our branches, and the ones that are below that either have some time and have to come up with a plan to get above where they should be and to re-energize themselves. Or, however you want to say it, get to the standards that we have set. If not, they're going to become a clear candidate to close. As I quoted, we closed nine branches last year.

And, we're continuing to look at a list of things that make sense, whether it be from a location that maybe we're too close to one another, to just a nonperformance or a lack of traffic. We're looking at that. We're also looking at different ways -- you may see us dabble a little bit into some new technology in some of our branches to see how that works. We'll probably start out and test it in a few places. We're definitely paying attention to the branches. Looking at them and continually evaluating them. It is something that we look at every single quarter.

I told Randy, I said. They're aware we're doing branch studies. If you'll jump up and close about three real quick, you'll get everybody's attention. From there on, I think we'll either see improved performance, or we'll close the rest of them. We've got about 10 on the bubble, haven't we, Randy?

Yes, sir. That's about the number.

We've got about 10 on the bubble.

Thanks for answering my questions. I appreciate it.

Thank you.

Our next question comes from Brian Zabora of KBW. Please go ahead.

Thanks, good afternoon.

Good afternoon, Brian.

Question on the FDIC loss shares. Are you revisiting with the FDIC as far as maybe exiting? I know you talked about the one transaction that you thought about trying to exit, and it doesn't sound like that came to fruition. Are you revisiting with the FDIC, and maybe considering exiting some other ones?

Well, that one didn't come to fruition. But, the amortization is gone. That was the one we really wanted to get done. We're still talking to them. But, that one we were waiting on. It was really whacking us.

It's gone. That amortization has ended. We don't have to -- we were having to eat that $1 million a quarter, $900,000 a quarter every quarter. And, that's gone. We didn't get it done in time. So, it's not a as high priority for us today. But, we're talking about some other ones with the FDIC. So, we really wanted to get that one done about June of last year, and we didn't get it done. It's not a big deal anymore.

Okay. And then, on the deposit side, cost of funds down. Maybe you can go down to zero. I just wanted to see how much further you think you can move these cost of funds down?

This is Randy. Some of that was a little bit working through the acquisitions a little bit. We were able to lower that a little bit when we brought them on. So, we continue -- I'm with you -- every quarter I think I say we can't squeeze any more blood out of a turnip. It's like we do on the loan side. We work every one, and if there's not a core relationship there, we're not interested in just pricing the money. We'll continue to work that on a one-to-one basis just like we are on the other side of the balance sheet.

Just lastly, net charge-offs still very low, 23 basis points, up a little bit from last quarter. Was there any lumpiness in the quarter as far as the charge-off? Or, any sizable loss that you saw as far as maybe one or two loans that drove that increase?

There was one loan in the quarter. It was one of the larger ones. It was just the timing of working through the legal process, and we had it -- what we charged off was very close to what we had specifically allocated to it. The 3-basis-point increase for the quarter -- there was really more of it attributed to that than anything else.

All right. Thanks for taking my question.

Thank you.

Our next question comes from Brian Martin of FIG Partners. Please go ahead.

Hey, good afternoon.

Hi, Brian, how are you doing?

I'm good, thanks. Thanks for asking. Most things have been answered here. Talked about that branch study. Maybe just a couple things. The loans in the quarter -- can you talk about what the production was versus the payoffs as far as quantifying the payoffs? How significant were they in the fourth quarter?

I don't have the paydowns in front of me, the production was over $600 million. New production was over $600 million for the quarter. And, it was $450 million or so in the third quarter.

Okay. It was the production. All right. Perfect. And then, I guess just maybe back to Johnny for a minute on the M&A. Last quarter, maybe a quarter before that, you talked about the deals you're looking at -- you seemed to be more focused on larger deals. Even you had potentially looked at one that was solicited to you in Texas. Given what's happened, any news on that Texas acquisition as far as still looking at it? Or, just still the fact that you're more larger versus smaller? Does that seem the case today?

I had talked to on that larger acquisition in Texas, and I said oil was about $80 then. I said where do you get in trouble? He said $65. He said but I don't think it will get there. I think we probably are going to wait and let the dust settle in Florida -- I mean, in Texas -- before we go in there.

There's going to be some repercussions of this. There's going to be people losing their jobs. When they lose their jobs, there's going to be repossessions, and it's going to impact. I don't know how much. Texas is not as oil dependent today as it used to be. But, it's still got a lot of jobs created from the oil industry. A bunch of those are going to go away. I think we'll wait until the dust settles. We'll wait until the dust settles before we go in there.

Is there still a bit more of a focus on larger deals, do you think? Is that still the mindset, or -- ?

Look, we get -- Tracy has got 12, 14 deals teed up. They don't do anything for us. They don't -- they just don't move the needle. And, we're bigger now. But, to do a deal that adds a $0.01? We sell at 17 times earnings, that's $0.17. I mean, really? We're going to take all your headaches and your liabilities and responsibility.

I'm just not going to do that. It has got to add something to our EPS. It has got to move our needle. It has got to impact this Company. And, for us to take those headaches and liabilities on, we want to do that. It is certainly a focus of us -- our Company. Tracy has brought me some deals, and we run the numbers on them and it doesn't do anything. Does it, Tracy?

No, sir.

We just move on to next. if we can't find a deal that makes sense then we'll wait until they do make sense. They'll eventually come around. The deals will eventually come around. If we can still be rewarded for the power of our stock, it will give us an advantage in doing deals.

Would it be a surprise to you if you had to go to a new market? A new state? Let's say, outside of Florida this year as you wait for some of the opportunities in Florida to come to realization?

There's two or three bigger deals in Florida that might make some sense. We're not afraid of Texas, and what we looked at yesterday was an adjacent state but not one we were in or are in. So, depending on -- you've got to pick out -- if you're not ready to make a move with some of your talent into those states if you buy a weak sister, you better be buying good management in those marketplaces. Because we went -- we've got strong management in Texas -- I mean, Florida.

You can imagine, we move in there, and it's just -- we tack it on to what our management team's down there. We got bad assets, we give it to our special assets department. It's pretty simple because you've got lots of management there. If we did another Arkansas deal, you've got lots of management here. That would be pretty easy to do. If the you go to another state it is going to be more expensive to do that than it is where we are. Particularly, if it's got some hair on it. Does that make sense to you, Brian?

Absolutely. Maybe one easy question or two easy questions. You talked about maybe spending a little bit more. It sounds like that was more on the fee income generation abilities. But, is that also compliance, and I guess that's a -- I guess does that push you to do a little more with the branch study? Those costs are -- . (multiple speakers)

Going towards $10 billion.

Yes. The regulators don't want you to be there -- start getting prepared when you're over $10 billion. They want you to be there when you hit $10 billion. There is some things that they're asking that they didn't used to ask for. And, they're not difficult things. But, sometimes it gets a little frustrating if you spend the extra money on something that you that may not necessarily want to spend it on.

But, as we've said before, we're going to keep in great compliance. We want that side of the bank not to worry about it, because we are in the acquisition business. So, we pay attention to that, and we are making moves towards becoming more sensitive to everything that they ask of us. And, you will see us spend a little extra money on that. Now, some of the infrastructure costs that I talked about were investments in new areas like the expansion of our investment Company and hiring new agents out there. So, those are also things that we're doing where I said we got to get through a little bit of the infrastructure before we see some of the dividends come back. We're doing that not only in our investments, but we're also doing that in our mortgage Company.

Okay. I appreciate the color. Maybe just a housekeeping for Brian, if you've got it. In the table in the Q, Brian, you give a number the purchase accounting accretion number? Do you have a ballpark of where that was this quarter?

You're talking about on the loans?

Just on the table, yes, for the reconciling to the core margin if you will -- the core loan yields.

The margin ended up [420], if you take out all the purchase accounting. Is that what you're asking?

Yes, that's fine. I can get it offline if I need it. 420 is the number, thank you very much.

420 for the margin. It was 5% for the yields. If you're wanting the gross numbers that were added back for the interest, it was $15.1 million.

Okay. That's perfect. I appreciate it. Thanks, Brian.

Our next question comes from Peyton Green of Sterne Agee. Please go ahead.

Yes, good afternoon. I was wondering if you could talk a little bit about the tolerance for higher loan-to-deposit ratio? And then, also maybe what your cash flow expectation is on the $1.4 billion in securities? And, what your -- how high you can -- or to what degree you can let that run off and fund loan growth in 2015?

This is Randy. I'll take the first one. The last one first, I guess. The duration of the portfolio is like 2.4, and we have maintained all through the low rate environment being pretty short overall. So, we use that cash flow, but the negative there is that a lot of that is pledged up for public-type funds. We really are trying to just keep that more consistent, and we'll either -- if we need to raise some rates to generate deposits to fund the loan growth we can do that. Or, we still look at alternatives like the FHLB area to be able to supplement that gap if there's a funding need there. Randy Sims always like to be on the borrowed side so we don't get too worried about it until we are borrowed for a little while in the FHLB area.

What was the first question?

Yes, how high will you lift the loan -- what's a comfort or a high water mark on the loan-to-deposit ratio before you change pricing and have to go on the offensive on the deposit side?

I think we can change that by raising our deposit rate.

I haven't seen that number yet. We just move forward -- march forward is all I can say on that is try to bring that to me if that's a problem, and we'll solve it.

We have -- if you look back a year ago, we were about 83%. I think we're 93% now. It has increased with these last couple quarters through loan growth. As you saw, the cost of funds went down so we can control a little bit better on the liability side if we need to on that.

No, no, I was going the alternative. I was thinking are you willing to go to 103% loan-to-deposit ratio? Is there a point where you have to say -- okay, we've got to raise pricing and go get more deposits to keep -- .

We don't mind going to 100%.

We've run over 100% before.

We ran over 100% for several years. So, we don't -- that doesn't bother us. As long as we can remain efficient, as long as we can maintain our high margin, we'll run it up a little bit. We've got a lot of room to go there right now, I think.

What Randy Mayor was saying was I like to be borrowed just a little bit. It's because everyone always says we're matching that loan pricing to our certain deposit or whatever. I go -- you're not matching unless you're borrowed just a little bit.

That's right. Randy likes to be borrowed.

All right. So, the borrowings -- what level are you comfortable with those increasing to as a percent of your funding? Looks like you're borrowing money overnight? Is that the bulk of the $200 million in growth -- linked-quarter was overnight? Or, are you terming any of that stuff out?

We are doing a little bit of both. Some of it's overnight. But, well it's a long term with floating, and you can pay it back every month. It's a little bit of a mixture of the various structures from the FHLB.

We don't want to cannibalize our market. We're playing with some markets out there with some different rates. We're playing with that. Should have it ready to go pretty quick. We're going to play with some markets rather than cannibalize our entire market.

Okay. That's great. And then, maybe the outlook for the indemnification asset amortization. What would you expect the amortization to be over 2015 -- kind of a base case?

What we have is we have about $28 million left in indemnification assets, and we have $19.5 million of it that if you split the $28 million out, you have $19 million of it that's already set to be amortized out. Most of that will come in 2015 but not all of it. And, we should be able to collect on the remaining $9 million. If not, then some of that will bleed over into the amortization for 2015. If that does happen, we would have additional credit marks that would then be moved over, and we'd be amortizing that into the yield.

Would you say -- out of the $19.5 million -- is two-thirds a good number to count in 2015 and the remaining one-third in 2016? Is that reasonable?

I'd probably go a little bit higher. I'd probably do about 80%.

Okay. Great. Wonderful. Thank you for taking my questions. Congratulations on a great quarter and a great year.

Thank you.

Thank you. We appreciate it.

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

Thank you for your support, and hopefully we'll have good news in about 90 days from now on the first-quarter numbers and we'll be talking to you then. Thank you.

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