Home BancShares Inc (HOMB) 2015 Q1 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares, Incorporated, first-quarter 2015 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 the 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 2015.

At this time, all participants are in a listen-only mode, and this conference is being recorded.

(Operator Instructions)

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

Thank you, Chad, and welcome to the first-quarter 2015 Home BancShares earnings release and conference call. With me today is Randy and Randy and Brian, Kevin, Tracy and Donna. Tracy is a little under the weather with us today. I don't know what he's going to say; he's got a little cold, but he's with us today.

This was an extremely busy quarter for the Group. I think it was as busy a quarter as we've had in years. We're working on three different merger-and-acquisition deals -- straight Home Banc deals: the Doral deal with our last bids that we did with both Banco Popular and Oriental. In addition to that, the JC Flowers deal that we did.

So, some time I'll go more in depth about the Puerto Rican deal. That was pretty interesting. Four Arkansas guys loading in an airplane and flying to Puerto Rico. That was a lot of fun; meeting people we didn't know, and signing alliance agreements, but we got it done and got something out of it. In addition to that, hiring our New York team to run our new operation there.

In spite of that, the Company had record earnings of $32.1 million, or $0.47 a share. Strong efficiency ratio, outstanding cost control by our Group, improved asset quality, margins remaining strong, $400 million in new deposits out of the Doral deal, $40 million in loans that we bought at a substantial discount, and made a little gain of $1.6 million. A little busy in our income statement this month, with the pluses and the minuses. And we just picked up $290 million in new loans in this quarter.

The creation of Centennial Commercial Finance Group -- we grew stockholders' equity by $24.3 million. We had record revenue; 140% coverage to non-performing. And to show you how well we've operated on the expense side, non-interest expense, ex-merger expenses, were $100,000 lower this year than they were last year, even after adding Florida [Tradition] and Broward, plus Doral in the fourth quarter.

So, I just say congrats to everybody. What a great quarter it was. We're extremely busy on the M&A side. I think you'll see us get some M&A deals this year.

We have completed our branch study. You've asked about that several times, and Donna Townsell will report on that today. So, overall, I'm a pretty happy camper. I'm looking forward to the next quarter.

I've been watching the income stream come in off of these new loans, and that's pretty sweet. When you're booking $300 million worth of loans at a 50% loan-to-value with a 6% coupon, that adds to income. That's pretty nice.

So, I think I'll turn it over to Randy Sims; and Randy -- go into more of the specifics and let everybody report. Randy?

Thank you, Johnny. It was really a good quarter for us to start off 2015. In fact, as Johnny stated, I can say it was the most profitable quarter in the history of our Company, and that leads me to quote my most favorite thing to say on these calls. That is now 16 consecutive quarters of record income for Home BancShares; a $1.2 million, or 4% increase, over our previously reported record profit last quarter.

On top of the record income, as Johnny alluded to, it was a very, very active quarter for us, and I'll just review a few of the following things that he talked about. We acquired the Doral Florida panhandle operations in the FDIC failed bank transaction that just adds to our already strong presence in Panama City, as well as giving us a good increase in market share in Pensacola. All five of their branches will be consolidated into existing Centennial branches. We acquired $289 million of national commercial real estate loans in a related Doral transaction, and we started up the new Centennial Commercial Finance Group in New York.

In addition to these transactions, as Johnny said, I can say without hesitation, the first quarter has been extremely busy as we continue our quest with potential acquisitions, organic growth opportunities, and working to improve our own existing markets.

So, let me get to the numbers. I'll go through these pretty quickly, and add a little color to them.

So, as of March 31, the Corporation is sitting at $7.5 billion in assets. Our quarterly profit was a record $31.1 million, or $0.46 diluted earnings per share, compared with income of $27.3 million, or $0.42 diluted earnings per share, the same quarter in 2014. That is an increase in income of $3.8 million, or 13.8%. However, excluding the special $918,000 of net provision for loan loss on covered loan pools, the diluted earnings per share for the first quarter of 2015 was $0.47 per share, taking net income to $32.102 million, which is where we wanted to end up. So, we made it.

Our return on average assets for the first quarter was 1.67%, as compared to 1.62% for the fourth-quarter 2014. Our return on average assets, excluding intangible amortization, was 1.79%. Our core return on average assets that excludes intangibles, provision, merger expenses, and taxes was 3.04% for the quarter -- all good numbers. Our return on average TCE, excluding intangible amortization for the quarter, was 18.99%.

We ended the first quarter with a 41.41% -- that's kind of an odd number to end on -- efficiency ratio as compared with the fourth quarter of 2014 of 41.87%. So, as Johnny said, improvement even in our efficiency -- our low efficiency ratio. Our core efficiency ratio was once again getting very close to that 3 in front of it at 40.84%. Consistency in this ratio was a key to our success in 2014, and our goal is the same for 2015, hoping to get under that 40%.

At the Centennial Bank level, and on an internal analysis, 63% of all assets are in Arkansas, 33% of the assets are in Florida, and 4% of the assets are in Alabama. The total number of active Centennial branches is 149, excluding the recent Doral branches, with 82 in Arkansas, 60 in Florida, and 7 along the Alabama coastline.

In the first quarter, we closed one branch in Longwood, Florida. We are continuing our efforts with the branch efficiency program. And here to tell you just a little bit more about that program, and our efforts to get to that little three number in front of the efficiency ratio, is Donna Townsell. Donna?

Thank you, Randy.

We announced our branch study a little over a year ago. We pulled a year's worth of data, and evaluated about 42 branches across the Enterprise. Many variables were considered, such as proximity to other branches, deposits, transactions, market share, profitability, et cetera. We've narrowed our current focus to about eight locations. Over the course of the next year, you will likely see us announce strategic consolidations where it improves efficiency, and maximizes customer service in certain markets.

In terms of cost, if we were to consolidate our current focus group, it could result in a one-time hit of close to $2 million. However, the good news is: That $2 million -- of that $2 million, about $800,000 is related to the write-off of goodwill, which will lower the impact to tangible book value, and the annual operational savings will be in the neighborhood of $1.5 million. In terms of overall bank efficiency, we're still running pretty flat with a 40% for the first quarter.

Randy?

Thank you, Donna. I also want to say that our new operations committee has started efforts on increasing fee income, as well as improving operational efficiencies. And we're very optimistic that there is a lot of opportunity for improvement. So, kudos to them on really getting after it, and we'll see what comes the rest of the year.

Switching to deposits, we ended the quarter at $5.9 billion compared to $5.42 billion at the end of the fourth-quarter 2014. The Doral Florida acquisition was approximately $466.3 million in deposits. Time deposits represent 24.6%, staying just barely under our 25% goal of total deposits. So, net interest income, margin, and non-interest expense.

I'll turn it over, as usual, to our CFO, Randy Mayor, to give you all the numbers and some color. And, after that, Randy, will pass it to Brian Davis to give us more information on our capital numbers. So, Randy?

Thanks, Randy. The first quarter is a little more challenging due to the fewer processing days, which impacts net interest margin and account activity charges, as well as the resetting of some limits related to certain payroll taxes, but overall, it was a good quarter.

Net interest margin on an FTE basis was 4.94% in Q1 compared to 5.26% for Q4 2014. Loan yields declined from 6.41% to 6.05%, mainly as a result of a slowdown in the accretion from the Liberty transaction of $2.9 million, and a reduction of $1.8 million related to the positive impairment on loans recorded in Q4 2014. Without the positive impairment in Q4, the yield would have been 6.23% compared to the 6.05% in Q1.

Investment yields increased from 2.78% in Q4 to 2.89% in Q1. And the effective yield on non-covered loans was 5.65% Q1 versus 5.89% in Q4, whereas the effective yield on covered loans was 14.65% in Q1 compared to 16.53% in Q4.

The yield on interest-bearing liabilities increased slightly from 0.36% to 0.37%, primarily as a result of the deposits acquired in the Doral transaction. In Q1 2015, there was a covered provision for loan loss of the $918,000, as Randy mentioned, related to the slight decline in asset quality of a couple of the covered loan pools. There was also a reduction in the provision of non-covered loans of $1.6 million from Q4 2014 due to the continued improvement in asset quality and the slowdown in loans migrating from purchase loan accounting to originated loan accounting from the Liberty transaction.

Total non-interest income was up $4.5 million from the prior quarter. Of this change, there was a bargain [merchant] gain, as Johnny mentioned, of $1.6 million, and a reduction in the amortization of the FDIC indemnification asset of $3.5 million. Adjusting for these two items, non-interest income decreased $659,000, with service charges decreasing $725,000. Trust fees actually increased $119,000. Mortgage lending income decreased $409,000. And the insurance commissions decreased $410,000, partially due to the sale of the Town and Country division that was located in Jonesboro, Arkansas.

Gain on sale of OREO increased $229,000; investment income increased $161,000; and other miscellaneous income increased $351,000. Total non-interest expense decreased $436,000. Salaries and benefits decreased $521,000. Occupancy expense decreased $271,000. DP expenses increased $577,000, and other operating expenses decreased by $221,000. Overall, the adjusted ROA of 1.67%, and core efficiency ratio of 40.84%, were good numbers for the quarter.

Thanks, Randy. As of March 31, 2015, our Company ended the quarter with $1.040 billion of capital, and $75 million of cash at the parent Company. During the first quarter of 2015, we paid out shareholder dividends of $8.4 million, and grew retained earnings by $22.7 million.

As of March 31, 2015, the Basel III rules are effective for the first time. Since this is the first quarter for the new rules, the final call report numbers could be slightly different than what I discuss today.

There's a new ratio under Basel III. It's the common equity Tier 1 capital ratio. It's the calculation of common equity Tier 1 capital divided by risk-weighted assets. Also, the risk-weighted asset calculation has become much more stringent, particularly for the acquisition, development, and construction commercial real estate loans. These loans previously were risk-weighted 100%, and now they are risk-weighted 150%.

For Q1 2015, our common equity Tier 1 capital was $686.4 million. Total Tier 1 capital was $745.4 million. Total risk-based capital was $801.9 million, and risk-weighted assets were approximately $6.1 billion. As a result, the new ratio, common equity Tier 1 capital, was 11.2%. The leverage ratio was 10.4% compared to 10.3% at 12/31. Tier 1 capital was 12.2% compared to 12.6% at 12/31, and the total risk-based capital was 13.1% compared to 13.5% at 12/31.

The projected decline in the Tier 1 capital and the total risk-based capital ratios was expected, and is directly related to the more stringent rules on risk-weighted assets. Additional capital ratios include book value per common share, which was $15.38, compared to $15.03 at 12/31; tangible book value per common share was $10.30, compared to $9.90 at 12/31; and lastly, the TCE ratio was 9.7% compared to 9.5% at 12/31.

Randy?

Thank you, Brian. Great reports from both of you.

Let's switch to loans. We have a very [projected] strong loan growth pipeline for the second quarter. I think we have -- are continuing to improve our already strong asset quality numbers. Plus, as I turn it over to Kevin Hester, our Chief Lending Officer, he's going to give you some information that I think everyone is wanting to hear on our New York start-up.

So, Kevin?

Thanks, Randy. The first quarter of 2015 is in the books. And even though it wasn't as flashy as the last couple of quarters, it was still very solid, especially as first quarters go, led by 7% improvement in our non-covered, non-performing loan ratio from 82 basis points to 76 basis points. All asset quality measures improved on a linked-quarter basis. When comparing quarter over quarter, both non-performing ratios have been reduced by 27%.

The allowance for loan losses as a percentage of non-covered loans decreased slightly in the first quarter from 1.09% to 1.07%. However, if you added all the acquisition discounts to the allowance for loan losses, the combined figure would be 3.70%. Quarter over quarter, the allowance for loan loss coverage of non-performing, non-covered loans improved from 103% to 141%.

Non-covered real estate owned increased just over $400,000 on a linked-quarter basis from $17 million to $17.4 million. This is the first increase in OREO since the Liberty Bank acquisition in the fourth quarter of 2013. Net charge-offs were 22 basis points in the first quarter, which is below the previous eight-quarter average of 30 basis points; and early-stage delinquencies remain low at 1.27%.

While non-covered loans grew over $100 million in the first quarter, only a small portion of that was organic growth. That's following a pattern that we've noted in previous first quarters. Looking forward, the pipeline is strong, as Randy had mentioned, and it looks like the next couple of quarters could provide organic growth like we experienced in late 2014.

Our mortgage President, [Michael Powell], has only been with us for two quarters, and we're already seeing an improved loan yield. Also, in March, we experienced the highest single month of [logged] volume in the Bank's history. Congratulations on those two accomplishments.

I also would like to take the opportunity to introduce Chris Poulton, the President of our newly formed Centennial Commercial Finance Group located in Manhattan. He and his team will be servicing the $289 million in loans that we recently acquired from JC Flowers that resulted from the failed Doral Bank, as well as handling new origination of similar credits.

During our due diligence process that lasted a couple of months, our management was very pleased with the underwriting and structure of their credit. Our executive loan committee will review and approve those credits after they have gone through the primary process. Our shareholders can rest assured that our approval process for these credits will remain strong.

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

Thank you, Kevin. Great report.

To sum it up, another acquisition that adds to our Panama City and Pensacola markets; plus a new opportunity in New York; record earnings for the 16th consecutive quarter; a consistent and strong efficiency ratio; great asset quality metrics. And I just can't wait to see what our team can do the rest of the year; prospects look really good.

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

Thanks, guys. I hope you all enjoyed the report as much as I enjoyed it. I thought it was pretty good overall.

We have bid three M&A deals this week, Randy? Or two this week, and really three, [Kevin]? We've bid about three M&A deals this week. We're on the hunt, so hopefully we'll bring some of those home here in the next quarter or two. I think that will work out.

Anyway, I guess it's time for questions. I think we can -- Chad, we can go to questions if you want to.

(Operator Instructions)

Our first question today comes from Michael Rose with Raymond James. We'll go with our second question. That is from Stephen Scouten with Sandler O'Neill.

Hi. How you doing this afternoon?

Fine, how are you?

Good, good. A couple questions maybe. Johnny, you sound incrementally maybe more excited than your recent public commentary around M&A. What are you seeing in terms of pricing, in terms of these due diligence? Are things maybe in the ballpark of where you're comfortable? And, any kind of frame-up you can on size of deals you are looking at currently?

Well, we're looking at from $250 million to about $1.5 billion. I'm optimistic we may bring some of them home. We're not going to get stupid like some of these people do. We're remaining very disciplined. We're looking at the deals, and we're selling that side of it as hard as we can.

When you really look at the chart of those that are bidding against us, particularly in the Florida market -- when you analyze the last 10 years of their performances compared to ours, only one of them is above the zero line. We're up 300%.

So, I think that the story is beginning to sell that it's not necessarily the price you get, it's the quality of the stock that you get and the performance. You can go back and look at those deals, and I listed our competitors here recently. We have more inside ownership in Home BancShares than all of our competitors combined. So, it's interesting to see. If you got skin in the game then you're spending your own money, and if you don't have skin in the game, you're spending other people's money.

So, it gets back to my comments about why in the hell would any CEO dilute themselves, but they continue to do it and continue to do it and it's pretty amazing to me. But, it's catching up with them, as we've seen the results come out lately from the prices they've paid and with the huge expectation to earnings they thought was coming out of the target that they didn't get and they're missing their numbers which makes sense. And, their stocks have gone down, and they will continue to go down as long as they do dilutive deals.

So, I think that's beginning to sell. I think that people are really beginning to look at that. Instead of investment bankers going out and saying, hey, I did 42 deals this month, what they need to do is look at the deals they did last year. We need to look at all these deals six months after the deal, nine months and a year after to see how the Street received those. So, anyway, I think people are beginning to understand that and it makes sense, and I hope I answered your question with that.

You did, thanks. And then maybe talking a little bit about organic growth, it sounded like you said the pipeline looks pretty strong heading into this quarter. But, can you talk a little bit about maybe what caused organic growth to be a little slower this quarter? And then, what you think is possible -- maybe even if you can talk about it separately from your legacy markets and then the New York City LPO?

I'm quickly going to make a comment. We have the largest pipeline we've ever had, and Kevin Hester is going to talk more about that. I do want to tell you that we have approved our first New York loan. It was a $40 million takedown. We put in $20 million. They put in $20 million. So, it's 50% loan to value. It was a 6% coupon, and it's a short term loan and our people were on the ground. We went through the regular process, and we're very pleased with that. Having said that, I'm going to turn it over to Kevin so say what went on in the first quarter versus the fourth quarter and what he sees.

Stephen, in the first quarter it was really more related to being the seasonal production. We did about 75% of the new production that we did in the fourth quarter last year. We saw that coming. As we emptied the pipeline in fourth quarter, you could see that was the way that first quarter was shaping up a little bit. Throughout the first quarter though, that pipeline has been building back, and it's up to the same point that it was in August of last year before that strong third quarter. So, that's pretty much the answer.

I think Kevin said we did $400 million of originations. The fourth quarter -- we did $300 million in originations the first quarter. We had renewals -- we did --actually did $309 million originations in the first quarter and about $303 million worth of renewals. So, it wasn't we were asleep, it's just a lot of payoffs and a lot of activity going on.

But, interestingly, as Kevin described with me earlier, when we had the big loan growth awhile back, we had four or five big loans in there, and I thought they were one-offs. That's different from this loan growth. This $300 million-plus. This is -- there is one pretty good sized one in there and the rest of them are mixed around. So, it's all over the board. I think it -- I'm beginning to think it's maybe here to stay for awhile.

Okay, and then just following up on that in terms of the pace of forward loan growth. You've got nearly $300 million in loans that you acquired. You added $20 million. How quickly can you grow that portfolio? Or, how large and how quickly, I guess?

Are you talking about the New York portfolio?

Correct.

Well, these guys are pretty darn good. They've been around for awhile, and they've done lots of good business. They were pretty much a bright spot for Doral, and we're honored to have this team working for us now. They had -- they ran -- their sweet spot was about $1.3 billion, $1.4 billion is where they like to be. Over the years, a five-year run, I think they had $4 million worth of total charge-offs. We are not in any hurry. I won't -- someone said we can get it to $1 billion, and I said add me another $300 million to it that's excellent.

So, they have a lot of relationships and a lot of customers, and that's already coming back and there's six or eight more loans in the pipeline right now with them. I haven't seen those yet. Kevin just reiterated that to me this morning. I'm pretty pleased with that. We're not in a hurry. You know we don't do silly stuff, and we're going to protect ourselves and do a good job. But, I think what I see from their due diligence and their underwriting when they bring a loan to you, it's -- you've got to find something wrong with it because it's pretty strong.

We had done due diligence on this team. If you think about it, we bid on the entire North American operation, including Doral money, which was a CLO to try to win that North American operation. So, we had already done due diligence on all of these $1.3 billion worth of loans that they had. So, we already knew them. We're familiar with them so when this opportunity came up with JC Flowers, we moved on it.

We've got $300 million out there and add 6% kicking in $18 million. It cost about $8 million to run it. You can see what the numbers will be. If they get to $600 million and they maintain that margin as $36 million and if by chance over the years we can take it to $1 billion. That's kicking out $60 million in income to us, and basically, the costs are fixed on that side. It has a great opportunity for us. We'll take our time though. We are not in a hurry.

Thanks for taking my questions. I appreciate that.

Kevin had one more comment for you, Stephen.

I was going to say the best thing about it is they know what they are. They have a niche. They are disciplined like we are. They know what they are and they stick with it. It's easy to get your hands around that.

Congrats on the continued earnings growth. Appreciate it.

Thank you.

Our next question comes from Matt Olney with Stephens.

Hi, thanks. How are you?

Fine, Matt. How you doing?

I'm doing well. I want to go back to the -- .

Congrats on your new team you hired by the way down there.

Yes, I appreciate that. We're excited. We're growing quite a bit, and we're excited. I wanted to ask you about M&A and going back to your commentary about M&A going forward. It has already been a busy year for you between the LPO announcement, the loan acquisition, the branch deal. Any more commentary you can give us on what types of announcements that we should expect this year? Could there be more LPOs out there? Will it be more traditional M&A? What all is in the pipeline right now?

Well, it will be traditional M&A. I mean, we're on some transactions, three, of which we would like to bring all three of those home that add up to about $2 billion. Will we get them? I don't know. We're certainly the best bidder in the pack. We probably weren't the highest bidder in the pack, but we certainly are the best bidder in the pack. So, we'll see how that shakes out.

Another one is a real complicated transaction, and we thought two weeks ago we would be bringing it home and it got even more complicated. So, that one didn't come to the top. The other one -- we sent a bid in this week? Today, sent a bid in on today. So, they're primarily -- that can be -- that's Arkansas and Florida primarily. I think the announcement is coming, if we're successful, is that there will be M&A deals. We didn't -- we've got a big write-up that we took a page out of George [Crablin's] Bank of Ozark deal by going to New York. I didn't have any -- I mean George Gleason, I'm sorry. That didn't have anything to do with -- this just happened. That deal just happened. We honestly went there to review them, to try to do the alliance bid with the Puerto Rican banks and ran into these guys. We're very, very impressed with what they do and how they've done it and when we left there, we left there with the opinion we're going to put something together with this team and we've done that. So, we don't have anything. George did something in Los Angeles and Atlanta. We don't have anything in there, and we probably aren't going to. So, New York will probably be where we'll hang out.

Okay. That's great commentary, thanks. And then, Johnny, I think in the past, you've talked about trying to hit that $2 EPS level in 2015. Can you talk more about what has to happen in order to hit that $2 EPS number this year?

Well, I'll let Donna talk a little bit more about it. We'll let her talk about her branch -- what she's doing on the branch side and I've come down pretty hard on that. We're fixing to get some of these closed, and I think when she talks about the numbers, that's pretty significant savings for our Company.

I think the -- do we have to do another deal to get there? No. I think the little Florida deal we did was an accretive little transaction with $400 million in deposits and $44 million worth of loans. And then, no doubt this $280 million in loans is accretive. I'd like to see another deal or two, but I think we have what we need to get to the $2. We may not be on a run rate right now to get to $2, but I think we're really close to that so I don't think it will be long until we get there. I haven't announced this yet, but my new goal for the Company will be at home $2.50. That will be the new goal that we set for the Corporation, and I think that's achievable over the next period of time as we continue to do these trades.

You look at this deal -- this New York opportunity, and it has the ability to add $0.10, $0.15, $0.20, $0.30, $0.40, $0.50 to EPS, and you go out and spend $600 million for a bank, and it adds $0.12. We just continue -- this group continues to shop hard and see if we can dig in the ground -- see if we can't find a nugget. You didn't see anybody else show up in the Puerto Rican deal. We just dug that whole transaction out because of hard work and effort and aggressiveness and looking to find something, and we found something after we kept digging. So, I don't think you'll see any other big announcements other than I would like to announce those three deals this year. Hopefully, we can announce those three M&A deals and add about $2 billion to the bottom line.

Our next question comes from Brian Zabora with KBW.

Thanks. Good afternoon.

Hi, how you doing?

Just a question on the accretion. I know it's hard to forecast, but can you give us a sense of what it might look like the rest of the year? Do you expect any more step-downs like you saw in the first quarter? Or, could it level out? And, with everything going on with the Doral loans and maybe some cash on the balance sheet, what do you think about the margin going forward?

Brian, this is Brian Davis. As far as the accretion income, we had about $3.4 million of that this quarter, and it will go down next quarter probably about $1 million, maybe a little more to about $9.2 million. And then, if the projections hold true, it will probably fall to about $8.1 million in Q3 and $7.7 million in Q4. Offsetting that is going to be an improvement probably in our indemnification asset amortization. We whittled down about $10 million of that from quarter-end through amortization and collections from the FDIC, but we had about $4 million of that amortization in Q1. But, it will probably drop off to about $2.1 million next quarter. Stay about $2 million for Q3 and then about $1 million for Q4.

And, the drop-off from Q1 to Q2 is that we had a lot of indemnification asset amortization that was cranking on old Southern and some on Key West. But, there was a lot of it on old Southern and the five-year loss share for old Southern is over. So, there's virtually -- in fact there is no indemnification asset left for old Southern. Very small amount for Key West because it has some 10-year loss share. And then, you see this next stair step between Q3 and Q4 because Coastal Bayside will lose its five-year loss share, and that's pretty much how it will shape out for the rest of the year, Brian.

That's very helpful. Thoughts on the margin? You've got the 6% loans coming over from New York, but at the lower accretion, could we see a little bit more pressure on the margin in the next couple quarters?

Maybe, maybe not. The doral loans will help that, but when we start clipping $1 million a quarter off of the accretion, it may kind of counterbalance itself.

Okay, and then just lastly. Talking about the pipeline, it sounds like by size, it's pretty diversified. Is it also diversified by region as well?

Yes, it is diversified by region.

Thanks for taking my questions.

The next question comes from David Bishop with Drexel Hamilton.

Good afternoon, gentlemen.

Hi, David.

A question for you in terms of the quarter. The Doral branch system? How duplicative were the expenses this quarter for all of the branches and the expense run rate for that month?

We had them in there. We hadn't -- we closed it. I don't know if we closed it.

They are not in that original pipeline we talked about.

No, no. He's saying were those expenses from Doral. Those expenses were in the quarter.

Oh, yes.

The expenses from Doral were in the quarter also the branches.

They were only in there for one month though.

Just one month. I think they're set for July.

You're set to close those correct? I think you'd mentioned you are going to consolidate those?

That's correct.

Yes, the conversion is set for early July and all of those branches will be closed and handed back to the FDIC.

That's why I was bragging on the expense side. Actually, the Company was $100,000 less than it was this time last year and with the addition of these other banks and also Doral in for a month. So, good job by them.

Got it. And then, Johnny, I think you spoke about maybe looking on the fee income side, how to expand that. Any color in terms of thoughts of what you might be looking at there to jump start some of the fee income line items you have?

Well, that's a committee that is formed right now that I think Donna is running -- is looking at fee income side. I think our NSFs were off quite a bit for the quarter. I think that's a trend that's going on out there. It looks like that people are not writing as many high checks, darn it, as they used to write. But, anyway, we had a little reduction. We saw what our Jonesboro, Arkansas insurance agency, which was a pretty good sized agency. We got that in the Liberty deal, and the reason we did that was because of the age of the people that were running that Company, and we didn't have any youngsters in the Company and we felt like we needed to do that. So, we sold it, and I think we about broke even on it, didn't we, Randy? We broke even on that trade. So far as other initiatives, I don't -- Randy has got some ideas.

I would just say that the committee is examining every facet of our fee income. We're ramping up our investment side. There's a couple of nuggets out there that I want to see come to fruition before we say anything about it, but they're doing a really good job and the prospects are really good. I wouldn't project any major super increase, but certainly we're going to see some improvement in our fees and some of the things that we're doing.

Kevin talked about mortgage and some of the great things going on there, and I think you'll see our margin in mortgage continue to increase in our -- especially in our secondary markets and so good things coming about. A lot of hard work going into it for this quarter, and I think we'll start seeing results probably towards the end of the second quarter and the rest of the year.

Let me have Donna report a little bit. You asked about revenue, but let me talk about the expense side a little bit and let her talk about what we're doing on these branch closings.

Actually, the eight that we're looking at, we're really spending about $2.3 million to earn about $300,000 in income there. So, while I had earlier said our savings might could be around $1.5 million, that's conservative. It actually could be upwards of about $2 million, so that will definitely improve the efficiency ratio.

We're spending $40 to make $100 now, and we're spending $2.3 million to make $300,000 there. So, that will be -- maybe I'll get to see my 3 on the efficiency ratio, David, when we get all of this done. Once we do these 8, we're going to continue on and there may be 12 or 15 more by the time we're finished.

Then Donna, just housekeeping. I noticed the DP, data processing expense has spiked a little bit. Anything unusual in the quarter on that -- in that regards?

David, this is Randy Mayor. Yes, there were a couple things in there. Some of that is a little bit of the Doral expense, but not a whole lot of it. Most of it is that we hit a new level on our pricing for some of our electronic banking fees, so that will probably be close to the new norm going forward. There is not a lot of opportunity in there. We just clipped a new level on our asset sizes.

Legal was pretty heavy last month because of the Doral deal. We spent a lot of money on the legal expenses of that. That was pretty heavy for us. That won't be as heavy going forward.

Got it, thank you.

Our next question comes from Michael Rose with Raymond James.

Hi, good afternoon. I'm sorry about before. Just a question on the insurance revenue quarter to quarter. It's a step down. Does that relate to the sale of the insurance agency that you just mentioned?

Yes.

That's it. We sold that, and I won't go into that story, but we weren't making much money on that deal anyway. From the efficiency aspect, it was not efficient.

Michael, we got out of that deal with no gain or loss and the net bottom line profit was virtually zero, so what you're just seeing is the revenue side grossed up on the non-interest income.

Got it. And then, just looking at the mortgage income. I'm sorry if I missed it, but you were down about $400,000 and a lot of the industry is up this quarter. Is there any way to reconcile that?

It's timing. You've got timing of the purchases and when they get out of here. So, we're looking at from the yield standpoint, our yields are up. They're up today over where they were last year. Either this time or whatever measurement you use, our yield is better than it was, and that's directly related to we've got a person in Michael Powell that's managing that every day. That's his job. That's what he does. So you're going to see as purchases happen on a monthly or quarterly basis, that goes up and down, but overall the yield is better.

Okay.

How are we looking there, Kevin? How are we doing projection-wise?

As I mentioned in the earlier remarks, the -- we had the largest month in March of lock volume that we've ever had. It was close to -- I think it was almost $60 million in locks that we will be working through the pipeline to get closed this month and next month.

Got you. So, it's more of a timing issue?

It is more of a timing issue.

Okay, and then I think I heard at the outset of the call that Tracy's a little bit sick. Is that true? Is he okay?

He's okay. He's got a little cold and when he talks he coughs. And you've been around him, he talks a lot, so he coughs a lot. (laughter)

Michael, I'm doing very well. Thank you for asking.

Well, I talked to all the other analysts, and we started up a collection fund. And, similar to Ferris Bueller, we started a Save Tracy campaign. (laughter)

I'll match what you all put in there. Whatever you all bring in, I'll match it perfect. Thanks for that.

You're welcome. Thank you, guys.

Our next question comes from Jon Arfstrom with RBC.

Good afternoon.

Hi, Jon.

I thought maybe Tracy was down in Cuba now that the embargo is gone picking up new cigars. (laughter)

He started -- what is that course he takes? Rosetta Stone. So, he may be going down.

I know to take you with me, Jon, if that's the case.

A couple questions here. The $8 million you talked about in expenses in the New York office. How do you expect that to come in, I'm assuming there's some hiring that has to happen? And, will that hit the run rate by Q3?

It definitely will be a hiring process as we build up that operation up there. So, it will be a growing -- slow growing, I guess, as we bring those folks on.

How many do we have now, Kevin?

17 to 18. Somewhere in that number.

We've got 17 or 18 now?

Yes.

That's probably about the number for a while. That's probably where we are going to be, so I think that [teams] will board, and that probably will be the number.

We'll add a few more over the next few months, but this was the first level right here.

So, it should be close to being in the run rate when we see it next quarter?

I would say so. I would say so. (multiple speakers)

And, do the costs go up materially? Let's say if you take the portfolio from $300 million to $600 million or even $1 billion, do the costs go up?

Not really. Not significantly. You've got some variable there that will go up. I looked at the projection on the difference between the $300 million and $600 million and looked at those costs, and I might just -- Chris is on his way in now. He is going to be at our shareholders meeting tonight, and I'm anxious to talk to him about where those additional expenses are coming from.

I think there's another -- there's the potential for another $10 million to $12 million hedged over the course of time, but I think where we are right now, you could take this -- this could generate the first $300 million to $400 million.

Okay, good.

We'll take the people as they come along. There will be opportunities to pick up people that were part of his team maybe or would want to be part of his team, and we'll take those as they come.

I guess the other question just on the fee income. Would you consider selling some of the production rather than keeping it on the balance sheet?

I don't know why. I don't know why we would do that. They've done some of that. Chris has done a little of that from time to time, and some of that's brought [101, 102, 103]. I don't really see any need to do that unless we saw a weak one somewhere. If we ended up with something that turned weak, we might sell it.

That's not part of our thought process today. They've talked about securitizing and doing some other opportunities. Those are down the road. But, right now, we're looking for -- it's a portfolio for us.

They did the Doral money. They just didn't have the ability to fund Doral money, so they took the equity piece and did that. We bid on that, Jon, and we didn't get it, but I wish we had it. It threw off about $12 million to $14 million a year pretax income just for managing that Doral money. So, that was a pretty nice little piece of business. We bid it at $115 million, and I think it went out at $135 million or so.

Okay. How do you feel about loan-to-deposit ratio? Is there a limit? And do you -- it sounds like you have good organic pipeline, and you are going to have the New York loans coming on. Do you worry at all about funding it?

Well, not really. We had a good -- we've got lots of federal home loan bank borrowing capacity if we choose to do that. We could turn on the spigot if we wanted to. We don't have any brokered at all. We could pick up some brokered if we wanted to, and we haven't -- certainly haven't been aggressive on the deposit side. We've been truly relationship. If they don't have a checking account and loan business with us, we aren't just -- we aren't here just to book CDs. We don't do much of that. If we want to turn it on we could turn it on. You talk about running hot. We used to run -- we ran 105%, 107% loan to deposit fast. But, I think that deposits have grown a little bit, haven't they? Other than -- have we grown deposits other than -- .

They have grown a little bit, but it was a great match. We had $400 million, and we are still sitting on $300 million of the Doral deposits coming in. And, guess what? $300 million of loans have come in on the other side. So, we can play some different angles on that. Originally, I would probably FHLB some of it and broker some in and then see if we needed to raise some rates. But, we've got a pretty good deposit base that we can crank on if we need to.

Okay, good.

We've been on the New York branches. Those New York branches had about $500 million a piece in them. Pretty interesting. So, I don't think we're going into New York any time soon with a branch, but we would have liked to have had those.

Okay, just a couple more things. Just on the deal, one more on the deal. Out of curiosity, I know, Johnny, you're a big shareholder and so are a lot of your people on the Board. How big of a debate internally was the decision to go to New York? And, I'll say I think it's a good idea. It makes sense business-wise, but how big of a leap was this internally?

There was nobody opposed to this at all. Once they heard the story from the team that went to New York, the Board was 100% behind it. We've been blessed with the ability to read people pretty well, and this New York team is really, really impressive to us. So, can we be fooled? Of course, we can always be fooled, but we've been pretty good at judging people over a period of time. And, I think it was when Kevin and his team got through with the due diligence on this portfolio, Kevin said that it's as good as I've seen anywhere. So, that's a pretty -- and this isn't Kevin's first rodeo. He's only done about 45 due diligence so far, so I think he's a pretty good read of what's going on in the market. Tracy, you got any comments?

I think just to add, Jon, even though this happened over the past quarter, I don't know how many man hours was involved in all of this. Certainly, we started off with five or six of our senior lending staff and ended up with about four just spending several, several weeks, seven days a week. A lot of time, Johnny and I spent quite a bit of time with Chris. We kept our Board informed this entire time. We actually were bidding on it two different ways that we went at. So, our Board was fully aware And then, we started putting together the LPO and presented that and went over all of these discussions.

Our team has met all of this group over time. Kevin, I don't want to speak for you or Dave or Steve or whoever did all of the hard, hard work. But, the group opened up, and as far as due diligence performance, it was by far the most extensive and having several members of their staff involved and several members of our staff involved when certainly it was a lot of comfort level as we got. I think it's fair to say we didn't expect this when we kicked off and started going up there and kicking the tire, and it turned out to be something we think will be very good for Home BancShares.

Okay.

And, we're going to -- we'll take our time. We like our $300 million we bought, and we like the first loan we did. We've got seven or eight in the pipeline. I haven't seen those yet, but we'll look at those. When you're doing a 50% loan to deposit in market, we've got a guarantor on this $40 million we just did. So, they signed the note so they're experienced people. I'm pretty happy with it. I didn't physically myself touch the building, but our team did. Our people went from Arkansas and went up and saw it and touched it. But, these guys in New York have done this a bunch of times and have a good track record, a good track record with the customers. So I understand, Jon, where the concern is about risk in this deal. But, I'm pretty pleased with the 50% loan to value right now and the quality of these assets.

Some of the loans -- most of the loans we're looking at up there when we started looking at them, we see more secondary and third sources of repayment and ways to get out than we do in a lot of the community bank stuff that we do in our markets. But, that gave us a lot of comfort.

Good, and then, just last question. I know you have -- you're in the Fayetteville but you're kind of used to the fluctuations there. I'm thinking about this more from an M&A or a business opportunity perspective. Have you seen any oil and gas fallout in some of the companies that you're looking at? Is it something that you think you'll continue to look at, Johnny, maybe in Texas? Or, just maybe a broad brush whereas this is starting to create some opportunities that are interesting?

Well, I know Texas is a great state. Just as I told you before, I own part of an oil company, and we went from 600 barrels a day to 7,000 barrels a day. And, I looked at my P&L yesterday or the day before and my profit, our profit last month was $4 million. And, anything that we were drilling, we're completing. Anything that we have drilled, we fracked and we stopped. So, all I can tell you is that we've shutdown that process. So, we're going to live off our laurels, live off our cash flow from these wells. Month before last we got $37 a barrel so put that in perspective. It's not the market price, it's what you net. Last month, we got $40 and change, so that's what we got as an oil company.

And, you think about that and the repercussions that it had in Texas before were astronomical. And I know people say it's not as big a portion of the market as it used to be. I think they are saying 12%, but it went through Texas like a plague last time, and it didn't discriminate with Dallas or Austin or wherever. It went through the entire state. So, is that going to happen again? I doubt it's going to come to that extent, but there is going to be repercussions. Anybody that was primarily loaning those oil services is going to have -- depending on how much of their book, is involved in that segment of it, there is going to be repercussions.

And, one thing -- one domino falls to another domino to another domino, so are we going to Texas? We certainly will go to Texas at some point in time. We were in Texas before, and we'll probably go again. But, the conservative nature of this group is to -- we looked at a loan yesterday. It was a Texas loan and I was just hesitant -- very, very hesitant to make that loan in Texas even though it's customers we've done business with in the past, I'm just hesitant to make those Texas loans right now.

So, will we buy in Texas? Absolutely. Will we buy [the card]? No. Will we buy next year? Maybe. So, we have some down there we talked to, and I've talked to some of my analysts about some that they think we should take a look at. So, we're just not ready at this point to go in there. I think it's too early, and I may be missing the bet, but I think it's too early.

Okay, thanks for the help.

Next question is from Brian Martin of FIG Partners.

Maybe one question for Brian Davis. And, that was just what the core net interest margin was in the quarter, if you have that number, Brian?

It's the exact same as it was last quarter, it's [419] in Q4 and [419] in Q1 which is the question you're asking is, what was our margin without all accretion income, correct?

Yes, correct. Okay. Thanks, Brian, and maybe just one other one for Donna. The savings that you are anticipating with the closures? Can you give any sense of timing? Or, maybe I missed it when you said it earlier, just how that's going to unfold or the best color you can give on that?

Yes, Brian. You'll really see the lion's share of it this year. There may be one bleed over the first quarter next year, but we've planned to act on this. We've been researching it for is some time so I think you'll see us act on it this year.

Okay, and in earnest starting next quarter? Or, is it more a second-half event?

You'll probably see us start on it in the next quarter.

Okay, perfect. Maybe one for Johnny. On the New York office, the one loan that you booked, the 50% loan to value. Is that pretty typical of what you'd expect going forward in that portfolio? Or, is that an anomaly giving that much equity in the deal? Or, how do you see that going forward?

It's not an anomaly. The $300 million we bought was 50% on the value, and I'd ask Kevin, you looked at the whole $1.3 billion was traditionally pretty much all of it.

40% to 50% is a normal -- that again, they have a niche. They have a product and a loan type that they go after and are known to go after and that's their niche. They know what they are, and they stick with it.

Okay, perfect. I've got it, and then just maybe, Johnny, you mentioned a couple deals you have, at least are looking at seriously. You talked about the potential accretion that this New York deal brings, and you also mentioned that there's not a lot of interest to go to other markets around the country. I'm just curious, given the accretion and lack of dilution on this deal, and the fact that you can control your risk, why wouldn't this be more of an avenue you might pursue going forward versus maybe looking at more M&A -- traditional M&A, especially given that pricing is increasing or at least appears to be. The multiple is going higher?

Well, we didn't head to New York. We dug this one out. This is just -- what this Company does is fix problems and look for opportunities, and that's probably the key to this Company. And, this was an opportunity and we saw it and we stepped up to the opportunity and it's all people. It's all the quality of the people that you do business with, and these are quality people in New York City. So, do we have those kind of -- it takes a while to earn our trust and earn our confidence, and we don't just take pot shots across the world. We don't just jump and run, so if another opportunity came up in another market, or if Chris felt like that he had the right people in other markets, let's walk before we run here in New York and let's get us $600 million, $700 million, $800 million worth of good loans on the books.

And then, if we want to take a look at doing something in Atlanta or something, then we can take a look at it. So, I'm open to whatever makes sense. This bunch, if it's an opportunity that makes sense, it adds to EPS -- I think you heard my story. You go spend $600 million on a bank, and it adds $0.10 a share or $0.09 and you go do this transaction and it adds $0.35, $0.40 or $0.50, well it's -- it takes you out of the M&A game.

We aren't out of the M&A game. I want the world to know we're not out. We're in and we've got bids out on three banks right now. Will we get them all, I don't know. Will we get any of them? I don't know, because we're very disciplined on the pricing. But I believe, Brian, that our story of it's not what you get, it's the quality of the stock you get started to sell in the marketplace because you can look at these deals done six months, nine months later that were done and somebody paid a big price and diluted they hell out of the sales, and their stocks have all gone down. So, that's one of my -- I get on that horse and get to riding somewhere on it. (laughter)

I appreciate the color, Johnny. Thanks for the time.

You bet, thanks. Appreciate you. Take care.

This concludes our question-and-answer portion. I'd now like to turn the conference back over to management for any closing remarks.

I really don't have anything else to say. It's a great quarter. I look forward to growing our New York operations. Hope we can announce some M&A deals here in the next three, four months, and we'll talk to you in 90 days. I hope it's as good as this was, and I hope Randy Sims can make his favorite statement again, one more record quarter for the Company.

Absolutely.

All right, thank you.

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